Financial Management

MBA-3rd Term
Final Exam

Total marks: 75

Note: Attempt any five questions from the questions given below:

Q1. What is Financial Management? Explain the decision functions of financial

management and contrast the objective of maximizing earnings with that of
maximizing wealth.

Q2.a. Earl E. Bird has decided to start saving, for his retirement. Beginning on his
twenty-first birthday, Earl plans to invest $2,000 each birthday into a savings
investment earning a 7 percent compound annual rate of interest. He will continue
this savings program for a total of 10 years and then stop making payments. But
his savings will continue to compound at 7 percent for 35 more years, until Earl
retires at age 65. Iyana Waite also plans to invest $2,000 a year, on each birthday,
at 7 percent, and will do so for a total of 35 years. However, she will not begin her
contributions until her thirty-first birthday. How much will Earl’s and Iyana’s
savings programs be worth at the retirement age of 65? Who is better off
financially at retirement, and by how much?
b. What is an annuity? Briefly discuss different type of annuities.

Q3.a. Delphi products corporation currently pays a dividend of $2 per share, and this
dividend is expected to grow at a 15% annual interest rate for three years, then at
a 10% rate for the next three years, after which it is expected to grow at a 5% rate
for every. What value would you place on the stock if an 18% rate of return was
required?
b. A 20-year bond has a coupon interest rate of 8 percent and another bond of the
same maturity has a coupon rate of 15 percent. If the bonds are alike in all other
respects, which ill have the greater relative market price decline if the market
interest rate increase sharply? Why?

Q4.a. Salt Lake City Services, Inc., provides maintenance services for commercial
buildings. Presently, the beta on its common stock is 1.08. the risk-free rate is
now 10% and the expected return on market portfolio is 15%. It is January 1, and
the company is expected to pay a $2 per share dividend at the end of the year, and
the dividend is expected to grow a compound annual rate of 11% for many years
to come. Based on CAPM and other assumptions you might make, what dollar
value would you place on one share of this common stock?
b. What is meant by undervalued and overvalued stocks? Explain with the help on
an example.

Q5. Two mutually exclusive projects have projected cash flows as follows:
 END OF YEAR
1 2 3 4
Project A -$2,000 $1,000 $1,000 $1,000
Project B -2,000 0 0 6,000

a. Determine the internal rate of return for each project.

b. Determine the net present value of each project at discount rate (i) of 10, 20
and 30 percent.
c. Which project will you select? Why?

Q6. Hi-Grade Regulator Company currently has 100,000 shares of common stock
outstanding with a market price of $60 per share. It also has $2 million in 6
percent bonds (Debt). The company is considering a $3 million expansion
program that it can finance with all common stock at $60 a share (Option1), or
bonds at 8 percent interest (Option2).
a. For an expected EBIT of $1 million after the expansion program, calculate the
earnings per share for each alternative. Assume a tax rate of 50%.
b. Construct an EBIT-EPS chart. Calculate the indifference point between
alternatives. What is your interpretation on them?

Q7. Write a brief note on any three of the following:

a. Public issue and private placement
b. Primary and Secondary market
c. Debentures and Junk bonds
d. Stock dividend and stock splits

Q8. Enoch-Arden Corporation has earnings before interest and taxes of $3 million and
a 40% tax rate. It is able to borrow at an interest rate of 14%, whereas its equity
capitalization rate in the absence of borrowing is 18 percent. The earnings of the
company are not expected to grow. Suppose the corporate tax rate applied is 40%.
a. Calculate the value of firm with no financial leverage and when $4million
debt is issued.
b. Calculate the cost of capital (WACC) for both the cases.