Financial Management Questions with Answers – 2023 Spring, (BBA/BI/TT)

Financial Management Questions

Section “A”

Very Short Answer Questions

1. What is corporate governance?

2. What do you mean by cash Break-even point?

3. What is the stock repurchase?

4. Define investment bankers. List out the key functions of investment bankers.

5. How cash conversion cycle can be reduced?

6. Briefly explain the motive of holding cash.

7. What is a forward contract?

8. What are the key objectives of merger and acquisition?

9. What do you understand by inventory conversion period?

10. What is the right offering?

Section “B”

Descriptive Answer Questions

11. The following relationship exists for Kumari Entreprises. Each unit of output is sold for Rs. 45; the fixed costs are Rs. 175,000 of which Rs. 110,000 is annual depreciation; variable costs are Rs. 20 per unit. The firm has 10% debenture Rs. 200,000 and 15% preferred stock Rs. 100,000. The firm is in 40% tax rate.

a) Calculate the accounting break-even point both in units and rupee.
b) What should be the level of sales in units to achieve a target profit of Rs. 400,000?
c) Calculate the cash break-even quantity. Why do you calculate cash BEP if you have an accounting BEP figure?
d) Assume the company is operating at a level of 4,500 units. Are creditors likely to seek the liquidation of the company if it is slow in paying its bills?
e) Calculate the financial break-even in rupees and quantities.

12. The mercantile company has the following shareholders’ equity account:

The current market price of the stock is Rs. 60 per share.
What will happen to this account and to the number of shares outstanding with (1) a 20% stock dividend? (2) a 2-for-1 stock split? (3) a 1-for-2 reverse stock split?

13. Apple Corporation, wishes to acquire a generator with which the firm can operate its daily operation during load shedding. The firm can lease the asset at an annual lease rent of Rs. 65,000 per year payable at the beginning of the year or it can purchase the asset at a cost Rs. 200,000. The machine has a useful life of 4 years, after with an expected salvage value of Rs. 25,000. The depreciation value of machine from year 1 through 4 would be calculated as 33 percent, 45 percent, 15 percent, and 7 percent of the cost of the asset. The firm can borrow at an annual interest rate of 12%. The firm is in 25 percent tax bracket.

a) What is the company’s PV cost of leasing?
b) What is the company’s PV cost of owning? Should the truck be leased or purchased?

14. RC corporation is attempting to analyze its efficiency in working Capital management. It has sales of Rs. 360,000 this year of which 80 percent are on credit. The investment is receivables for the firm is worth for Rs. 50,000. The cost of goods sold which includes the material and labour costs are 60 percent of sales (assumes all purchase are on credit). The firm has Rs. 60,000 investment in inventories and an average account payable of Rs. 30,000. Assume 360 days a year.

a) What are the firms’s day’s sales outstanding, inventory conversion period, and payable deferral period?
b) What is the length of the firm’s cash conversion cycle?
c) What amount of working capital must it finance?
d) What is the working capital turnover of the firm?

15. The stocks of H. Company and L. Products Company are expected to have the following probability distributions with respect to market price per share 6 months hence.

Options exist for each of these stocks, and both have an exercise price of Rs 35 and an expiration date 6 months from now.
a) What is the expected value of market price per share 6 months hence for the two companies?
b) What is the expected value of option price for the two options at expiration, assuming the options are held to this time?

16. What is agency problem? What are the issues in the conflict of interest between stockholders and managers and how can they be resolved?

17. What is financial distress? Describe the key reasons of financial distress. How can we address it? Explain.

Section “C”

Case Analysis

18. a) The Bharatpur Bakery buys and then sells as bread 2,450,000 kg annually. The wheat must be purchased in multiples of 1,000 kg. Ordering cost, which includes grain elevator removal charge of Rs. 350 is Rs. 500 per order. Annual carrying costs are 2 percent of the purchase price of Rs. 25 per kg. The company maintains a safety stock of Rs. 200,000 kg. The delivery time is 1 week, Assume 50 weeks in a year.

i) What is the economic order quantity?
ii) Calculate the total cost of inventory including safety stock.
iii) At what inventory level should a reorder be placed to prevent withdrawal of the safety stock?
iv) The wheat processor agrees to pay the elevator removal charges if the company will purchase wheat in quantities of 500,000 kg. Would it be advantageous to company order this alternative quantity?

b) Mina Textile company has 21 retail clothing outlets scattered throughout the country. Each outlet sends an average of Rs. 2.500 daily to the head office in Biratnagar, through checks drawn on local banks. On average it takes six days before the company’s Biratanager bank collects the checks. The company is considering an electronic funds transfer arrangement that would completely eliminate the float.

i) What amount of funds will be released?
ii) What amount will be released on a net basis if each local bank requires an increase in compensating balances of Rs. 7,500 to offset the loss of float?
iii) Suppose that the company could earn 15 percent interest on the net released funds in Part (b). If the cost per electronic transfer were Rs. 5 and reach store averaged 250 transfer per year, would the proposed arrangement be worthwhile? (Assume that the cost of issuing checks on local banks is negligible.)

c) Ram Spinning Mills sells on terms of 2/10, net 30. Total sales for the year are Rs 1,825,000. 40 percent of the customers pay on the tenth day and take the discount, the other 60 percent pay on average 40 days after their purchases. Assume 360 days a year.

i) What is the DSO?
ii) What is the average amount of receivables?
iii) What would happen to average receivables if the firm toughened its collection policy with the result that all non-discount customers paid on the 30th day?