1. operating cash flow of Rs. 200,000. Net working capital has decreased by Rs.

50,000
and there is a net capital spending of Rs. 0 during the year. Calculate total cash flow.
(3marks)

Solution:

Total cash flow=200000-(-50000)

total cash flow =250,000

2. SNK company find the profitability index dividend 2 and price= 200 (3marks)

solution= 2/200=0.01=1answer
3. How a firm s overall cost of capital is calculated ?

We know that a firm’s overall cost of capital will reflect the required return on the firm’s assets as a
whole.

 Given that a firms uses both debt and equity capital, this overall cost of capital will be a
mixture of the returns needed to compensate its creditors and stockholders.
 Cost of capital will reflect
 Cost of equity capital
 Cost of debt capital
4. Define the following terms:

(i) Dealer

An agent who buys and sells securities from a maintained inventory It stands ready to buy securities
from investors wishing to sell them and sells securities to investors wishing to buy them

(ii) Broker

An agent who arranges security transactions among investors, matching investors wishing to buy
securities with investors wishing to sell securities They do not buy or sell securities for their own
accounts. Facilitating trades others is their business

5. BC Manufacturing Company
Year ended December 31, 2009

• Sales Rs.80,000,000

• Gross profit margin 80%

• Operating profit margin 35%

• Net profit margin 8%

• Return on total assets 16%

• Return on common equity 20%

• Total assets turnover 2

• Average collection period 70 days

  Requirement no 1.

Calculate the value for Gross profit?

2. Solution

a) Gross profit = sale - cost of goods sold

b) Gross profit = 80,000,000 – 160,00,000

c) Gross profit = 64,000,000

 Requirement no 2.

Calculate the value for Cost of goods sold?

4. Solution

a) Gross profit margin ratio = (revenue – cost of goods sold)/revenue

b) 8/100 = (80,000,000 – cost of goods sold)/80,000,000

c) 8/100 * 80,000,000 = 80,000,000 – cost of goods sold

d) 64000000 = 80,000,000 – cost of goods sold

e) Cost of goods sold = 80,000,000-640,00,000

f) Cost of Goods Sold = 160,00,000

 Requirement no 3.

Calculate the value for operating profit margin?

6. Solution

a) Operating profit margin = operating income / revenue

b) 35/100 = operating income / 80,000,000

c) 35/100 *80,000,000 = operating income

d) Operating income = 280,00,000

  Requirement no 4.

Calculate the value for Operating expenses?

8 Solution

a) Operating expenses = (gross profit – operating income)

b) Operating expenses = 640,00,000 – 280,00,000

c) Operating expenses = 360,00,000

d) Net profit margin = Net profit(after tax) / revenue * 100

e) 0.8 = Net profit (after tax) / 80,000,000

f) 0.8*80,000,000 = Net profit (after tax)

g) Net profit (after tax) = 64,00,000

 Requirement no 5.

Calculate the value for Earnings available for common stockholders?

10. Solution

a) Earnings available for common stockholders = Net profit (after tax) = 6400000

b) Return on assets = Net income / Total assets

c) 16/100 = 28000000 / Total assets

 Requirement no 6.

Calculate the value for total assets?

14 Solution

a) Since operating income is also called net income

b) Total assets = 280,00,000 / (16/100)

c) Total assets = 1750,00,000

 Requirement no 7.

Calculate the return on common equity?

16 Solution

a) Return on Common Equity = Net income(after tax) / share holder’s equity

b) 20/100 = 64,00,000 / share holder’s equity

c) Share Holder’s Equity = 6400000 / 0.2

d) Share Holder’s Equity = 32000000

e) Total Asset turnover = Sales / Average Total Assets

f) 2 = 80,000,000 / Average Total Assets

g) Average Total Assets = 80,000,000 / 2

h) Average Total Assets = 400,00,000

 Requirement no 8.

Calculate the Account Receivable, assuming 360 days in a financial year?

18. Solution

a) Average Collection Period = (Days * Account Receivable)/Credit Sale

b) We assume total sale as Credit Sale

c) 7 days = (360 * Account Receivable) /80,000,000

d) 80,000,000 * 7 = 360 * Account Receivable

e) 80,000,000 * 7 / 360 = account receivable

f) Account Receivable = 15,55,555

1. What is the basic goal of a corporation?

The traditional answer is that the managers of the corporation are obliged to make efforts
to maximize shareholder wealth. Alternatively, the goal of the financial manager is to
maximize the current value per share of the existing stock.
2. What is the difference between Gross Working Capital and Net Working Capital?
 The term Gross Working Capital refers to total current assets whereas Net Working Capital is
equal to total current assets minus total current liabilities.
3. What role a Financial Manager is supposed to play ?
To create value, the financial manager should: - try to make smart investment decisions. - try
to make smart financing decisions.
4. How many kinds are there of business structures?
There are three main kinds of business structures: - Sole-proprietorship - Partnership –
Corporation
5. What kind of roles Treasure and Controller play under Chief Financial Officer (CFO)?
A treasurer plays role of a financial manager whereas a controller plays role of an
accountant.
6. Is Finance important for other areas of the firm?
Yes, Finance is as important for other areas as it is for the finance section of a firm.
7. What are the four basic areas of Finance?
Four basic areas of Finance include: - Business Finance - Investment - Financial Institution -
International Finance
8. What ultimate objective should be achieved by making a capital structure?
The ultimate objective while making a capital structure is to maximize the overall value of
the firm.
9. What is meant by the term "Capital Budgeting"?
Capital Budgeting is the process of planning expenditures on assets whose cash flows are
expected to extend beyond one year. In other words, the process of planning and managing
a firm's long-term investments.
10. How the business structure "Sole-Proprietorship" will be defined?
A sole proprietorship is a business owned and operated by one individual.
11. How the business structure "Partnership" will be defined?
An unincorporated business owned by two or more persons.
12. How the business structure "Corporation" will be defined?
A legal entity created by a state, separate and distinct from its owners and managers, having
unlimited life, easy transferability of ownership, and limited liability.

13. Syntax Corporation:

Given Information:
Debentures (D) $ 3.26 Billion
Common shares (E) $ 6.52 Billion
Total Capital Structure including debt and equity (V) $ 9.78 Billion
Return on common stock 13.0 %

Return on debenture 9.5 %

Corporate Tax 39 %

Weighted average cost of capital (WACC) ?

Weighted average cost of capital = (Equity / Total Capital) *Cost of Retained earning +
(Debt / Total Capital) * Cost of debt (1 – Corporate tax rate)
WACC = (E/V) * Re + (D/V) *Rd (1 – T)
= ($ 6.52 billion / $ 9.78 billion)* 13% + ($ 3.26 billion / $ 9.78 billion)*9.5 %( 1 – 39%)
 = (.6667)*.13 + (.3333)*.095(.61)
= .086671 + .019314
= .105985
= 10.5985%
= 10.60%
The total weighted average cost of capital for Syntax Corporation is 10.60%.It means the
Syntax Corporation must have to earn 10.60% on its assets.

14. Each of the following mutually exclusive investment projects involves an initial outlay
of Rs. 240,000. The estimated net cash flows for the projects are as follows:

Year Cash Flows (Rs.)

Project A Project B
1 140,000 20,000
2 80,000 40,000
3 60,000 60,000
4 20,000 100,000
5 20,000 180,000

The company’s required rate of return is 11 percent.

Required:
Calculate the NPV and IRR for both projects. Which project should be chosen and Why?

PROJECT A:

Net Present Value (NPV):

NPV = - I o + [CF1/(1+r)] + [CF2/(1+r)2] + [CF3/(1+r)3] + [CF4/(1+r)4] + [CF5/(1+r)5]

= - 240,000 + [ 140,000 / (1.11) ] + [ 80,000 / (1.11)2 ] + [ 60,000 / (1.11)3 ]

+ [ 20,000 / (1.11)4 ] + [ 20,000 / (1.11)5 ]

= -240,000 + ( 140,000 / 1.11) + ( 80,000 / 1.2321 ) + ( 60,000 / 1.3676 )

+ ( 20,000 / 1.5181 ) + (20,000 / 1.6851 )

= - 240,000 + 126,126 + 64,930 + 43,872 + 13,174 + 11869

= - 240,000 + 259,971

NPV = Rs. 19,971

Internal Rate of Return (IRR):

IRR can be calculated by trial and error method:

At 11 % discount rate:
 NPV = Rs. 19,971 (calculated above)

At 13 % discount rate:
NPV = - 240,000+[140,000/(1.13)]+[80,000/(1.13)2]+[60,000/(1.13)3]+[20,000/
(1.13)4]+[20,000/(1.13)5]
= - 240,000 + 123,894 + 62,652 + 41,583 + 12,266 + 10,855
= - 240,000 + 251,250
= Rs. 11,250

At 15 % discount rate:
NPV = - 240,000+[140,000/(1.15)]+[80,000/(1.15)2]+[60,000/(1.15)3]+[20,000/
(1.15)4]+[20,000/(1.15)5]
= - 240,000 + 121,739 + 60,491 + 39,450 + 11,435 + 9,944
= - 240,000 + 243,059
= Rs. 3,059

At 17 % discount rate:
NPV = - 240,000+[140,000/(1.17)]+[80,000/(1.17)2]+[60,000/(1.17)3]+[20,000/
(1.17)4]+[20,000/(1.17)5]
= - 240,000 + 119,658 + 58,441 + 37,463 + 10,673 + 9,122
= - 240,000 + 235,357
= Rs. - 4643

NPV appears to be zero between 15% and 17%, so IRR is somewhere in that range. With a
little effort we can find that the IRR is about 15.79 %

IRR = Lower discount Rate + Difference between the two discount rates x (NPV at lower
discounted rate / absolute difference between the NPVs of the two discount rates)
= 15 + ( 17 – 15 ) x ( 3,059 / (3,059 – ( - 4643 ))
= 15 + 2 x ( 3,059 / 7,702 )
= 15 + 2 x 0.3972
= 15 + 0.7944
IRR = 15.79 %

15. Greme Smith has to receive $200,000 five years from now and $100,000 seven years
from now from an investment he has made. The nominal rate of interest prevailing is
12% per annum. Calculate the aggregate present value of both future cash flows for
Mr. Smith.

Solution:
C1 = $ 200,000 t1 = 5 years
C2 = $ 100,000 t2 = 7 years
r = 12% p.a.

Aggregate Present Value =?

Calculate the present value for the first cash inflow;

PV0 = C1 / (1+ r) t1
 PV0 = 200,000 / (1+0.12)5
PV0 = 200,000 / (1.12)5
PV0 = 200,000 / 1.762
PV0 = $ 113,507.38

Now calculate the present value for the second cash inflow;

PV0 = C2 / (1+ r) t2
PV0 = 100,000 / (1+0.12)7
PV0 = 100,000 / (1.12)7
PV0 = 100,000 / 2.210
PV0 = $ 45,228.4

The aggregate present value = $ 113,507.38 + $ 45,228.4

= $ 158735.78

16. Zig Zag Company has outstanding Rs.1, 000- face –value bond with a 16 percent
coupon rate and 6 years remaining until final maturity. Interest payments are made
quarterly.

Required:

What would be the value of this bond if your nominal annual required rate of return is as
follows?

i) 12 percent

ii) 15 percent

iii) 18 percent?

Solution:

Coupon of bond =C = 1,000* 0.16 = Rs. 160

As payments are made quarterly so,
C = 160 / 4 = 40

(i) 12 %

As payments are made quarterly,

r = r / 4 = 0.12 / 4 = 0.03
t = t x 4 = 6 x 4 = 24

Value of Bond= C x [1-{1/ (1+r)} t]/r + F/ (1+r) t

= 40 x [1- 1 / (1+0.03) 24]/0.03 + 1000/ (1+0.03) 24

 = 40 x (1- 0.4919)/0.03 + 1000 / 2.0328

= 40 x 0.5081/0.03 + 491.932
= 40 x 16.9367 + 491.932

= 677.467 + 491.932

= Rs. 1169.399

17. Why finance is important for business firm? (Give answer with reference to the
importance of finance in different departments of a firm). (5)

Answer:
Finance is as important for the other areas of the business as it is important for the Finance
division of the firm. it is as much important for the marketing department, for general
manger and for the accountant as it is for the financial manger like;
Marketing manager must need to know the budget to undertake the activities of the
project; they must need to look at the expenditures and revenues of the particular project.

Marketers have to make the cost-benefit analysis; they have to cover the aspects like,
 the impact of the project on the other product of the firm
 the future benefits of the project.

Marketing research needs funds along with the personal efforts of the researchers, surveys
undertaking need money. They must decide about the distribution channel, they select the
channel in cost perspective. What price would be charged to the final product? All these
questions have to answer by the marketing manager.

So the marketing manger’s major decisions revolve around the finance. Management
decisions either relevant to marketing, human resource management or finance all need to
know finance.

18. What is difference between a controller and a treasurer? (3)

Answer:
Controller has the responsibility of the Accounting section (Head of the Accounting Section)
prepare financial statements. Treasurer is the head of the Finance section and plays the role
of financial manager. Look at from where to generate funds and how to invest them.