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Financial Management and Application

The document contains instructions for a final exam in financial management and application. It lists 5 questions regarding financial accounting concepts like shareholder equity, credit terms, capital structure, cost of capital, and capital budgeting. Students are instructed to answer the questions in writing and submit their responses on Blackboard before the deadline. They are advised to follow word limits, check their work, and avoid plagiarism.

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Ahmed Khan Warsi
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165 views4 pages

Financial Management and Application

The document contains instructions for a final exam in financial management and application. It lists 5 questions regarding financial accounting concepts like shareholder equity, credit terms, capital structure, cost of capital, and capital budgeting. Students are instructed to answer the questions in writing and submit their responses on Blackboard before the deadline. They are advised to follow word limits, check their work, and avoid plagiarism.

Uploaded by

Ahmed Khan Warsi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Final Exam Summer - 2021

Student Name: Reg. ID:


Instructor: Fahim Qazi Program : BBA
Subject: Financial management and application Max. Marks:40

Department of Business Administration

Please follow the instructions carefully:


1. Write your answers in a hand written form and upload the file before the due date on
black board .
2. Answer scripts can be uploaded on black board any time before its deadline.
Therefore, do not wait for the last hour to avoid any unforeseen problems.
3. Submission of answer copy will be considered acceptable through black board only.
Therefore, do not submit your document through email or any other medium.
4. Follow the requirements of the word limit and the marking criteria while writing your
answers.
5. Provide relevant, original and conceptual answers, as this exam aims to test your
ability to examine, explain, modify or develop concepts discussed in class.
6. Do not copy answers from the internet or other sources. The plagiarism of your answers
may be checked through Turnitin.
7. Recheck your answers before the submission on black board to correct any content or
language related errors
Q#1 (08 marks)

The HASF company shareholder’s equity account as of December 2010 is as follow

Common stock (10 per value 100,000 share) 1,000,000

Additional paid in capital 300,000

Retained earnings s 1,000,000

Currently company is under pressure from shareholders to pay some dividends cash balance is 100,000
all of which is needed for transactions purposes the stock is trading for 15 a share

 Reformulate the share holder’s equity account if the company pays a 15% stock dividends
 Reformulate the share holder’s equity account if the company pays a 25% stock dividends
 Find out EPS in both cases if net income is 500,000

Q#2( 08 )

Details Present Plan Plan A Plan B


Credit term 2/10 n /30 2/10 n/ 40 2/10 n / 60
sales 75 millions 5% 7%
Amount received in 25% 25% 25%
discount period
Investment cost 10 % of receivables 10 % of change in 10 % of sales
receivables receivables
Profit rate 25 % of sales 25 % of sales 25 % of sales
Bad debts cost 2 % of sales 2 % of sales 2 % of sales
Cash Sales 10 millions 10 millions 10 millions

Should company change the credit term or not

Q#3( 08 )ASF and Company is planning to introduce a new line of products that would involve increasing
its current assets by 40 million its existing and new assets structures are
Details Existing New
Current assets 25 40
Fixed assets 175 175
Total assets 200 215
Its existing financial structure which includes financing certain new fixed assets but not the 15 million
increases in current assets is

A/c Payable 15% of total equity


Accrued wages 10% of total equity
Long-term debts old 15% 25% of total equity
Equity 50% of total equity

According to the vice president of finance for ASF once the new products are in production and
distribution a/c payable and accrued wages will increase to 10 % of original value respectively and will
finance part of the increased working capital requirement. Remaining will have to be raised by
borrowing on a bank credit line at 10% and borrowing on a 10-year note form an insurance company at
a 12% interest rate. For the coming year ASF expects earnings before interest and taxes 15
% of total assets after the new product and tax rate 50%

Required

Company is considering three alternatives for financing working capital requirements the conservative
approach would in financing with all financing with in long term debts the middle of the road approach
would use 50% form long term and 50% from short term. The aggressive approach would alternative
entail borrowing on the credit line. Evaluate the return on equity for each alternative .Which alternative
would you recommend Why?

Q#4( 08 ) The following balances appear in the balance sheet of HASF ltd

Equity shares of RS 5 each 800,000

10% Pref. Shares of RS 10 each 500,000

Retained earning 600,000

12% Debentures 1,000,000


The company is expected to earn an ebit of 900,000 annually and the tax rate is 40% the current market
prices of the equity and preference shares are RS.12.50 and 8 respectively. However, the debentures are
being traded at par. Find out the cost of debentures, cost of retained earnings. cost of preference share,
cost of common equity and Weight average cost of capital

Other information

Growth rate 10 %

Flotation cost 10%

Rate of dividends on common stock 10%

Q#5 ( 08 marks ) HASF company ltd has two financial options in respect of procuring an equipment for
utilizing the same for 5-year costing Rs1000,000. The two options are

Option # 1 borrows 1,000,000 at an interest rate of 15% the loan is repayable at 5-year end instalments
the equipment could be sold at the end of its 5-year economic life at realizable value of RS 100,000.

Option# 2 lease in the asset for a period of 5 years at yearly rental of 330,000 payables at end. The
company has to pay income tax 50% and has a discounting rate of 16%. Evaluate the two options and
give your opinion

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