LOYOLA-INTERNATIONAL ACADEMIC

COLLABORATION
LOYOLA COLLEGE CHENNAI – 600 034
BBA-FRANCE – END SEMESTER EXAMINATION
II SEMESTER – APRIL 2021
BBA 237 – FINANCIAL MANAGEMENT I

Date : 04/05/2021 Dept. No. Max. : 50 Marks

Time : 9 A.M. – 10.30 A.M.

1. Select the correct answer:((Time ½ minute for each question) 30*1/3=10

marks
1.Starting to invest early for retirement does not increases the benefits of compound interest.
a. True

b. Fals
e

2. Time lines can be constructed for uneven cashflows where the payments occur at different timepoint of

a. True
b. False

3. Disregarding risk, if money has time value, the present value of a given sum will not exceed its future value.

a. True
b. False

4. The present value of a future sum increases as either the discount rate or the number of periods per year decreases, other things held constant.

a. True
b. False

5. A zero coupon bond is a bond that pays no interest during its duration and is offered at discount to its face value. These bonds provide
compensation to investors in the form of capital appreciation.

a. True
b. False

6. Junk bonds are low-risk, low-yield debt instruments.

a. True
b. False

7. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to

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default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

a. True
b. False

8. If the required rate of return on a bond (rd) is less than its coupon interest rate and will remain below that rate, then the market value of the
bond will always be above its par value until the bond matures, at which time its market value will equal its par value.

a. True
b. False

9. The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim
against the company versus a contractual obligation for a bond.

a. True
b. False

10. From an investor’s perspective, a firm’s preferred stock is generally considered to be riskier than its common stock but less risker than
bonds.

a. True
b. False

11. If a stock’s market price falls below its intrinsic value as seen by the marginal investor, then the investor will buy the stock.

a. True
b. False

12. The dividends associated with equity shares are more difficult to estimate than interest related to bonds because shareholders have a residual
claim against the company versus a contractual obligation enjoyed by the bondholders.

a. True
b. False

13. The weighted average cost of capital reflect the average cost of the various sources of investor-supplied funds
including retained earnings a firm uses to acquire assets.

a. True
b. False

14. The after-tax cost of debt, which is lower than the before-tax cost, is used as the component cost of debt for purposes of developing the firm’s
WACC.

a. True
b. False

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15. The cost of equity stock to a firm must be adjusted to an after-tax figure.

a. True
b. False

16. Suppose the debt ratio is 50%, the interest rate on new debt is 8%, the current cost of equity is 16%, and the tax rate is 40%. A decrease in the
debt ratio to 40% would increase the weighted average cost of capital (WACC).

a. True
b. False

17. “Equity Capital” is sometimes defined as funds supplied to a firm by owners.

a. True
b. False

18. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should
be summed to determine the value of a capital budgeting project.

a. True
b. False

19. The internal rate of return is that discount rate that does not equates the present value of the cash outflows (or costs) with the present value of
the cash inflows.

a. True
b. False

20. The NPV method’s assumption that cash inflows are reinvested at the WACC is generally more reasonable than the IRR’s assumption that
cash flows are reinvested at the IRR.

a. True
b. False

21. One advantage of the payback method for evaluating potential investments is that it takes into consideration time value of money.

a. True
b. False

22. The regular payback method does not take into account cash flows occurring beyond the payback period.

a. True
b. False
23. A firm should never accept a project if the returns expected from the project are below the firm’s cost of capital (it’s WACC).

a. True
b. False

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24. If an investment project would make use of land which the firm currently owns, the project should not be charged with the opportunity cost of the
land.

a. True
b. False

25. A firm’s financial risk is largely determined by the financial characteristics of its industry,

especially by the amount of debt the average firm in the industry uses.

a. True
b. False

26. Other things held constant, firms with unstable and unpredictable sales tend to use more debt than firms with less stable sales.

a. True
b. False

27. Other things held constant, the higher a firm’s tax rate, the more logical it is for the firm to

use debt.

a. True
b. False
28. Financial risk is affected by a firm’s operations.
a. True
b. False
29. A basic rule in capital budgeting is that if a project has a positive NPV then the project

should be accepted.

a. True
b. False

30. An advantage of the company form of business is that companies are generally more regulated

than proprietorships and partnerships.

a. True
b. False

2. Answer any 4 questions in 4-5 lines only 4*2.5=10 Marks

A. In a loan amortization table, the principal repayment column shows amount which keeps

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 on increasing every year? Why?
B. Why does an annuity due has a higher future value than an ordinary annuity?
C. Which bond is riskier for an investor an ordinary bond or a bond with a call provision?
Explain.
D. Explain the following statement: Whereas a bond contains a promise to pay interest, a
equity share typically provides an expectation of, but no promise of, dividends, plus capital
expectation.
E. Is a tax adjustment made to the cost of preferred stock?. Explain.
F. Differentiate between independent and mutually exclusive project and NPV acceptance and
rejection rule for them.

3. Answer any 6 questions only. Show formula used clearly. 6*5=30 Marks

i. X takes a car loan of Rs.5,50,000/- at 10% interest per annum, repayable in 5

equal annual Instalments. What is the amount of instalment payable?
If he decides to settle the loan after paying the 3rd instalment, how much should
he pay?

ii. At the time of his retirement Z is offered 2 options –

Option 1: Receive Rs.2 lakhs on the date of retirement and Rs.1,50,000/- per
annum for the next 6 years.
Option 2: Receive Rs.4 lakhs on the date of retirement and Rs.5 lakhs at the end
of 4 years and Rs.7 lakhs at the end of 6 years.
Which option should he opt for, if his expected rate of return is 10% per
annum?

iii. John Bros is expected to pay a $2.50 per share dividend at the end of the year.
(that is, D1=$ 2.50). The dividend is expected to grow at a constant rate of 5% a year.
The required rate of return on the share is 12%. What is the share’s current value?
If the share is available for $18 in the market will you buy it?

iv. Infosys Inc has preference shares outstanding that sells for $150 a share and pays a
dividend of $15 at the end of each year. What is the required rate of return on the
preference share?

v. The XYZ bond has a current price of $900, a maturity value of $1,000, and matures in
5 years. If interest is paid annually and the required rate of return is 10%, what is the
bond's annual coupon rate? (Draw the timeline)

vi. Asian Paints Corporation has a target capital structure of 40% debt and 50% common
equity and 10% preference shares. It’s before tax cost of debt is 12% and its marginal
tax rate is 40%. The cost of common equity is 10%. The cost of preference shares is 15%
Calculate the weighted average cost of capital for the corporation?

vii. Project Q has a cost or cash outflow of $20,000 and cash inflow of $5,000 per annum
for the first 3 years and $10,000 in the 4th year. The project’s cost of capital is 10%.
Calculate Q’s payback period, NPV and IRR. If the company requires a payback period
of 3 years or less, state whether the project would be accepted both under payback
period as well as NPV?

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viii. A company’s fixed operating costs are $400,000, its variable costs are $4 per unit, and
the product’s sales price is $6 per unit. What is the company’s breakeven point; that is
at what unit sales volume will its income equal its cost?

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