Finance Notes

III.
Financial Management
§ An overview of Financial Management
Introduction and significance of financial markets, Differentiation between real assets
and financial assets, Types of Financial Markets, Role of capital and money markets in
economic development, Organizational goals and shareholder wealth maximization
perspective
§ Time Value of Money
Cost of money and the factors effecting the cost, Interest rate fundamentals and
determinants of market interest rate, Role of Time value of money in finance, Concept
of future value and present value, Making timelines, Annuities, Perpetuities and mixed
stream of cash flows, with and without growth, Present value and future value of cash
flow streams, Compounding Interest; discrete and continuous, Loan amortization
§ Analysis and Interpretation of Financial Statements
Reading the financial statements, Horizontal and vertical analysis including common
size, ratio, comparative and index number trend analysis, Forecasting financials for
future decision making, Evaluating credit, management, profitability, risk etc using
financial statements
§ Risk, Return and Introduction to Pricing
Measures of Risks and return, Investment return and expected rate of return,
Standalone risk: standard deviation and coefficient of variation, Risk aversion and
required rate of return, Portfolio risk: Diversifiable vs. Market risk, Security Market Line
and CAPM, Calculating WACC, Discounting process for price determination, Relevant
risk and return for valuation
§ Cash flow and Budgeting
Significance of budgeting, Making cash budgets, Making financial forecasts, Difference
between profit and cash flow, Read and analyze Statement of Cash flow.
§ Capital Budgeting
Significance of Capital budgeting, Cash flow calculations: incremental cash flows,
Capital budgeting decision rules: NPV, IRR, MIRR, Return, Finding optimal capital
structure, calculating appropriate discount rate, Capital Rationing
2018
2017
Discuss the three common capital budgeting decision techniques with examples and formulas.
2016: Discuss the features of the various types of Financial Markets.
2015
Q. No. 7. Discuss the nature and scope of FINANCE and FINANCIAL MANAGEMENT and
also its role in financial efficiency.
(20)
Q. No. 8. What is the importance of port folio Management and describe different types of
investment and financial securities?
2013
Q.8. (a) You wish to borrow $10,000 for three years. The bank agrees to lend this amount if you are
willing
to pay them $16,000 at the end of three years. What is the implicit rate of interest implied if it is
applied (i) on annually (ii) semiannully (to the nearest whole percent)?
(b) An investment of $10,000 will return $130 per year forever. What is its internal rate of return?
(10)
(10)
Q.9. Sapphire Corporation is considering cash outlay of $800,000 for acquisition of new equipment.
The useful life is four years and the firm assesses zero residual value at the end of four years.
After-tax cash inflow of $200,000 are expected in year 1, $250,000 in year 2, $300,000 in year 3,
$400,000 in year 4. The company falls in the tax bracket of 50%.
(i) If the required rate of return is 15 percent, what is the net present value
of the project? Is the project acceptable?
(ii) What is the internal rate of return?
(10)
(05)
(05)
Q.10. A stock currently sells for $50 per share. The market requires a 13% return on the firm’s stock.
If the company maintains a constant 5% growth rate in dividends, what was the most recent
dividend per share paid on the stock?
2012
Q. 8. Describe main features of financial management. Discuss role of Finance Manager
in any organization. (10+10=20)
Q. 9. Do adjusting entries affect Income Statement Accounts, Balance Sheet Accounts, or
both? Discuss. (20)
Q. 10. How the Financial Statements are analysed and interpreted through ratio analysis.
2011
Q.8. Describe the main features of the Main Methods of Evaluation of attractiveness of
various
investment proposals.
(20)
Q.9. A company is evaluating the following three investment proposals:
(1) Produce a new line of aluminium trays.
(2) Expand its existing cooker line to include several new sizes.
(3) Develop a new higher-quality line of cookers.
If only the project in question is undertaken, the expected present values and the amounts of
investment required are:
If projects 1 and 2 are jointly undertaken, there will be no economies; the investment
required and present values will simply be the sum of the parts. With projects 1 and 3,
economies are possible in investment because one of the machines acquired can be used in
both
production processes. The total investment required for projects 1 and 3 combined is
Rs.440,000. If projects 2 and 3 are undertaken, there are economies to be achieved in
marketing
and producing the products but not in investment. The expected present value of future cash
flows for projects 2 and 3 is Rs.620,000. If all three projects are undertaken simultaneously,
the
economies noted will still hold. However, a Rs.125,000 extension on the plant will be
necessary,
as space is not available for all three projects. Which project or projects should be chosen?
(20)
Q.10. DP Company presently has Rs.3 million in debt outstanding bearing an interest rate of
12
percent. It wishes to finance a Rs.4 million expansion program and is considering three
alternatives: additional debt at 14 percent interest, preferred stock with a 12 percent dividend,
and the sale of common stock at Rs.16 per share. The company presently has 800,000 shares
of
common stock outstanding and is in a 40 percent tax bracket.
(i) If earnings before interest and taxes are presently Rs.1.5 million, what would be
earnings per share for the three alternatives, assuming no immediate increase in
profitability?
(ii) Develop a break-even, or indifference chart for these alternatives. What are the
approximate indifference points? To check one of these points, what is the
indifference point mathematically between debt and common?
(iii) Which alternative do you prefer? How much would EBIT need to increase before the
next alternative would be best?
2010
Q.6. Discuss the major functions of the “financial manager”. Explain why judging the efficiency of any
financial decision required the existence of a financial goal? (20)
Q.7. Explain types of long-term debt instruments and also discuss the advantages and disadvantages of
issuing/buying the three types of long-term securities from the perspective of both the issuer and
investor.

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