Higher National Diploma in Business Administration Second Year, First Semester Examination 2014 BA Business Finance

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1 [All Rights Reserved] SLIATE SRI LANKA INSTITUTE OF ADVANCED TECHNOLOGICAL EDUCATION (Established in the Ministry of Higher Education, vide in Act No. 29 of 1995) Higher National Diploma in Business Administration Second Year, First Semester Examination 2014 BA Business Finance Instructions for Candidates: No. of questions : 6 Answer only 5 questions No. of pages : 5 Time : 3 hours 01. Define the scope of financial management. What role should the financial manager play in a modern enterprise? What is the capital asset pricing model? How do you calculate the cost of equity using the CAPM framework? (iii) What factors influence the beta of a share? (iv) What is an ordinary share? How does it differ from a preference share and a debenture? 02. Suppose you have just celebrated your 19 th birthday. Uncle Sarath has set up a trust fund for you that will pay you Rs when you turn 30. If the relevant discount rate is 09%, how much is this fund worth today? Assume that you deposited Rs today in an account, which will pay 15% interest on a ten year deposit. How much would the deposit grow at the end of ten years?

2 (iii) You ve been offered an investment that will pay you 09% interest per year. If you invest Rs today, how long will you have to wait to earn Rs.30000? And Rs ? (iv) A first-round draft choice quarter back has been signed to a three-year, for Rs.25 million contract. The details are provide for an immediate cash bonus of Rs.2 million. The player is to receive Rs.5 million in salary at the end of the first year, Rs.8 million the next, and Rs.10 million at the end of the last year. Assuming a 15% discount rate, is this package worth Rs.25 million? How much is it worth? (v) You are looking into an investment that will pay you Rs per year for the next 10 years. If you require a 15% return, what is the most you would pay for this investment? 03. a) What is the difference between nominal return and a real return? b) hat is meant by the fisher effect? (iii) A Sigma Industries bond has a 10% coupon rate and Rs.1000 face value. Interest is paid semiannually, and the bond has 20 years to be matured. If investors require a 12 % yield, what is the bond s value? What is the effective annual yield on the bond? The Ruwan Company has just paid a cash dividend of Rs.2 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year, what is the current value of the stock? What will the stock be worth in five years time? 2

3 (iv) Suppose you borrow Rs You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14% per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan? 04. Mr. Peris has invested his wealth in two assets X and Y. These assets have following possible returns with associated probability. Economic States Probability of State of Economy Rate of Return if State Occurs Return on Stock X Return on Stock Y Recession Severe Recession Stagnation Growth Boom Calculate the expected rate of return and standard deviations for these two securities. (10 marks) Suppose Mr Peris has Rs. 200,000 total. If his puts Rs 150,000 in assets X and remain in assets Y. what will be the expected return and standard deviations of your portfolio (Corrxy = 0.66)? (7 marks) (iii) Calculate the covariance between the asset X and assets Y. (3 marks) 3

4 05. The dividends of ABC engineering over the last five years were as follows. Year Dividends The company is financed entirely by equity and there are 200,000 shares in issue, each with a market value of RS in a) What is the growth rate over the last four years? (04 marks) b) What is the cost of equity? (04 marks) The Max ltd has the following capital structure. Common shares ( shares) 8 million 10% preference shares 2 million 14% debentures 6 million The common share of the company sells is Rs It is expected that the company will pay next year a dividend of Rs 4.00 per share, which will grow at 7% forever. The preference share s market price is 120 and the debenture s market value is Rs. 95 for each Rs Assuming a 50% tax rate, you are required to calculate WACC. (12 marks) [Total 20 marks] 4

5 06. a) What are the elements of a capital structure? (2 Marks) b) What are the features of an appropriate capital structure? (3 Marks) Consider the following two mutually exclusive investments. Project A Project B Basic Investment (Rs) 1,750,000 2,650,000 Scrap value of the end of the 150, ,000 project (Rs) Net cash flows year Rs Rs 1 600,000 1,030, , , , , , , , ,000 Cost of capital of the company is 12% per annum. a) Calculate the Net present value (NPV) of each project and select the best project to be implemented according to NPV. (8 marks) b) Calculate IRR for selected project. (4 marks) c) Explain the merits and demerits of the time-adjusted methods of evaluating the investment projects. (3 marks) [Total 20 marks] Year 12% 15% 20%

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