BF 6701 : Financial Management Comprehensive Examination Guideline

Transcription

1 BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and calculation are all chapters that I have provided lectures 3) For essay questions, you are required to express concepts or ideas related to financial principles together with giving some examples to clarify your understanding 4) For calculation question, you are required to show computation in detail with confirmed final answer Example of questions : 1) The greater the profit is always resulted in greater operating cash flows in a certain accounting period Do you think this statement is correct? Give justification. 2) By holding all other factors constant, the company that has a negative profit (loss) is usually resulted in an increase in debt-to-equity ratio do you think this statement is correct? Give justification 3) Many times, financial managers face tradeoff between management of company s profitability and liquidity position. Give Discussion 4) Explain how the concept of cash cycle helps financial manager in managing the company s liquidity position. 5) Explain how efficient use of assets as measured by assets turnover and higher profit margin could enhance the company s return on equity (ROE) 6) Cash flow statement of ZXZ Company for the month ended is shown below:

2 By investigating the three consecutive months company s cash flows, do you think there is (are) any mismanagement that could lead the company to liquidity problems. If so, identify TWO cash flow related activities that may cause the liquidity problems in the future. 7) Explain how the use of financial leverage, as measured by debt-to-equity (D/E) ratio, could increase company financial risk and potential return to shareholders. 8) Weighted Average Cost of Capital (WACC) 8.1 The company has two sources of capital. One is equity which cost the company 18%. Another is debt as a result of bond issuing which has coupon interest rate of 12%. The company maintains its debt-to-equity (D/E) ratio at 2/3 and subject to 30% corporate income tax. Calculate the company s WACC 8.2 Why the company s Weighted Average Cost of Capital (WACC) plays important role in company s investment projects decision. 9) Bank A offers a lending rate of 6% compounded annually whilst Bank B offers a lending rate of 5.75% compounded monthly. If you were a borrower which bank you prefer to borrow? Show Calculation

3 10) Present value of $10,000 has grown to the future value of $299, in 30 years. How much is the effective annual percentage rate (EAR) (annual compound interest rate)? Show Calculation 11) You are now 40 years old and have accumulated $50,000 in your saving account. You will add $1,000 at the end of each month to your saving account which pays an interest rate of 6% per year compounded semiannually. How much the amount of money you will have in next 20 years? Show Calculation 12) You invest in a certain project with an initial investment that requires you to invest today amount of Baht 200,000. The investment project yields Baht 30,000 to you every year for next 8 years. With these cash flows information, you calculate a Net Present Value (NPV) of the project using 7% discount rate. As a result, the NPV of the project turned negative (NPV is less than zero). Do you think the project s Internal Rate of Return (IRR) would be greater or less than 7%? Why? Give justification. 13) You have invested in common stock of ABC Company which paid $3 dividend last year. You have estimated the company long-term earnings growth would be 5% annually. Assuming that your minimum required rate of return for investment in common stock of ABC Company is 10%, how much would fair value of the common stock of ABC Company? If common stock of ABC Company is now trading at $40, should you invest? 14) The Internal Rate of Return (IRR) method is most applicable to the investment project that has no interim cash inflow in finding effective rate of return of the project Do you think this statement is correct? Give discussion 15) Project A has NPV of $20,000 and 13% IRR while Project B has NPV of $25,000 and 11% IRR. We prefer Project B to A. What is a rationale behind the Net Present Value (NPV) method is superior to the Internal Rate of Return (IRR) method in project ranking for investment decision. 16) Explain how the Modified Internal Rate of Return (MIRR) method can be used to correct the problem associated with IRR?

4 17) Project Z Year Cash flow 0-150, , , , , ,000 Calculate the Modified Internal Rate of Return (MIRR) of the Project Z given 3% reinvestment rate. 18) You have bought a car cost 1,500,000 Baht partially financed by a certain leasing company. You and the leasing company come up with the payment plan as follows : Do you think you would actually be charged more than 2% per annum (effective interest rate is greater than 2% per annum)? Give justification without supporting calculation. 19) A $1000 face value bond with 4% annually paid coupon interest which has 5-year time to maturity is trading at $1020. How much is it yield to maturity (YTM). Show calculation.

5 20) Explain the consequences of macroeconomic and company specific factors, for example, central bank policy rate, inflation, government financial risk, exchange rate, and company credit rating could affect price of corporate bond.