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

I Select the correct answer: (Time ½ minute for each question) 30*1/3=10 marks
1.Starting to invest early for retirement increases the benefits of compound interest.
a. True

b. Fals
e

2. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of
the periods.

a. True
b. False

3. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed
its future value.

a. True
b. False

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

a. True
b. False

5. A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These
bonds provide compensation to investors in the form of capital appreciation.

a. True
b. False

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6. Junk bonds are high-risk, high-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 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 greater than its coupon interest rate and will remain above
that rate, then the market value of the bond will always be below 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 less risky than its
common stock but riskier than its bonds.

a. True
b. False

11. If a stock’s market price exceeds its intrinsic value as seen by the marginal investor, then the investor
will sell 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 for a bond.

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 a. True
b. False

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

a. True
b. False

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

a. True
b. False

15. The cost of preferred 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%. An increase in the debt ratio to 60% would have to decrease the weighted average
cost of capital (WACC).

a. True
b. False

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

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 not 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 equates the present value of the cash outflows (or

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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 cost of capital 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 provides
information about a project’s liquidity and risk.

a. True
b. False

22. The regular payback method is deficient in that it does not take account of cash flows beyond the payback
period.

a. True
b. False

23. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of
capital (it’s WACC).

a. True
b. False

24. If an investment project would make use of land which the firm currently owns, the project should be
charged with the opportunity cost of the land.

a. True
b. False

25. A firm’s business 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

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 b. False

26. Other things held constant, firms with more stable and predictable 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. Business risk is affected by a firm’s operations.
a. True
b. False
29. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the

project should be accepted.

a. True
b. False

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

regulated than proprietorships and partnerships.

a. True
b. False

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

A. In a loan amortization table, the interest column shows interest amount which keeps on
decreasing every year? Why?
B. How is opportunity cost concept used in Time Value Money and where is it shown
on the time line?
C. How is a call provision advantageous to the bond issuer and disadvantageous to
the investor?
D. Explain pre-emptive right and how is it advantageous for an equity shareholder.
E. Total returns on an equity shares are made up of dividend yield and capital gain

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 yield. Explain.
F. Why is WACC is called the hurdle rate while evaluating projects?

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

i. Starting next year, you will need $1,000 annually for 4 years to complete your
Education. Your uncle deposits an amount today in a bank paying 10% annual
interest, which will provide the needed $1,000 payments every year for the
next 4 years. (Draw the time line))
a. How large must the deposit be?
b. How much will be in the account immediately after you make the first
withdrawal?

ii. A requires Rs.10 lakhs rupees,10 years from now for his daughter’s wedding.
Canara Bank offers him 2 options to get the amount. (Draw the time lines).
Option 1: make a fixed time deposit now. (Deposit lumpsum amount now)
Option 2: Start a recurring deposit 1 year from now.
The bank offers 8% interest per annum. What is the amount to be paid under each of the
each of the above options?

iii. Thomas Bros is expected to pay a $1.50 per share dividend at the end of the
year. (that is, D1=$ 1.50). The dividend is expected to grow at a constant rate
of 8% a year. The required rate of return on the stock is 15%. What is the
stock’s current value per share?
If the share is available for $18 in the market will you buy it?

iv. Fee Founders has preference shares outstanding that sells for $50 a share and
pays a dividend of $5 at the end of each year. What is the required rate of
return on preference share?

v. The HIJ bond has a current price of $800, a maturity value of $1,000, and matures in
5 years. If interest is paid semi-annually and the 8%, what is the bond's annual
coupon rate? (Draw the timeline)

vi. Patton Paints Corporation has a target capital structure of 40% debt and 60%
Common equity and no 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%.
Calculate the weighted average cost of capital for the corporation.

vii. Project P has a cost or cash outflow of $10,000 and cash inflow of $4,000 per
annum for the first 3 years and $5,000 in the 4th year. The project’s cost of
capital is 10%.
Calculate P’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

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 payback period as well as NPV?

viii. A company’s fixed operating costs are $500,000, its variable costs are $3 per
unit, and the product’s sales price is $4 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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