Department of Commerce, Bahauddin Zakariya University, Multan

Midterm Examination: (BSA&F 5th semester Morning )

Subject: Financial Management Marks: 30 Time:90Minuts
Instructions for the exam
1. Please provide your answer as handwritten.
2. Write your name and roll number on top of each answer sheet which must be numbered(e.g.,1/4).
3. Answer your question by providing “answer to question 1” for example. Do not reproduce question pl.
4. The maximum number of answer sheets should not exceed SIX (6).
5. Having finished the exam, scan it and send it by email at exam office and cc to sshahidmalik@bzu.edu.pk
6. Do not submit your paper in the group.
7. The answer sheet should reach within 15 minutes after the exam time is over.
8. If the exam is not submitted within 15 minutes, you will be awarded zero marks.

Question 01 : [10 Marks]

[A]Define agency costs, and explain why firms incur them. How can management structure management
compensation to minimize agency problems?

[B]What role do financial markets play in our economy? What are primary and secondary markets? What
relationship exists between financial institutions and financial markets? What types of securities traded in money
and capital markets

Question 02: [05+05 Marks]

[A]; Assume that your father is now 50 years old, that he plans to retire in 10 years, and that he expects to live for
25 years after he retires, that is, until he is 85. He currently earns $40,000 per year and would like the same
annual income during retirement. His retirement income will begin the day he retires, 10 years from today, and he
will then get 24 additional annual payments at the beginning of each year. He currently has $100,000 saved up
and he expects to earn a return on his savings of 8% per year, annual compounding. To the nearest dollar, how
much must he save during each of the next 10 years (with deposits being made at the end of each year) to meet
his retirement goal?

[B]Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10
percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be
doubled. This could be accomplished (1) by increasing the profit margin to 12 percent and (2) by increasing debt
utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit
margin, would be required to double the ROE.

Question 03: [02+2+06 Marks]

[A] (I) Describe interest rate fundamentals, the term structure of interest rates, and risk premiums
(2) Define bond; floating-rate bonds, zero coupon bonds, corporate Bond and foreign Bond
[B] Mark Goldsmith’s broker has shown him two bonds. Each has a maturity of 5 years, a par value of $1,000,
and a yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annually. Bond B has a coupon
interest rate of 14% paid annually.
a). Calculate the selling price for each of the bonds.
b). Mark has $20,000 to invest. Judging on the basis of the price of the bonds, how many of either one could
Mark purchase if he were to choose it over the other? .
c). Calculate the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that
Mark could buy with his $20,000.
d). Assume that Mark will reinvest the interest payments as they are paid (at the end of each year) and that his
rate of return on the reinvestment is only 10%. For each bond, calculate the value of the principal payment plus
the value of Mark’s reinvestment account at the end of the 5 years.
e). Why are the two values calculated in part d different? If Mark were worried that he would earn less than the
12% yield to maturity on the reinvested interest payments, which of these two bonds would be a better choice?