FEDERAL URDU UNIVERSITY OF ARTS, SCIENCES & TECHNOLOGY.

M.B.A. (2 Years Program) 2 nd Semester, 2021 (Colleges)

Financial Management
Time: Hrs.
Maximum Marks: 60
Passing Marks: 30
Instructions: PAPER CODE: 530702015
(i) Attempt any five questions. All questions carry equal marks.

1. Distinguish between primary and secondary markets. Distinguish between money and capital markets
2. What do you understand by analysis and interpretation of financial statements? Discuss its importance.
Why is the analysis of trends in financial ratios important?
3. The following are exercises in present values:

(a). $100 at the end of three years is worth how much today, assuming a discount rate of (i) 100 percent? (ii)
10 percent? (iii) 0 percent?
(b). What is the aggregate pres ent value of $500 received at the end of each of the next three years,
assuming a discount rate of (i) 4 percent? (ii) 25 percent?
( c). $100 is received at the end of one year, $500 at the end of two years, and $1,000 at the end of three
years. What is the aggregate present value of these receipts, assuming a discount rate of (i) 4 percent? (ii) 25
percent?
(d.) $1,000 is to be received at the end of one year, $500 at the end of two years, and $100 at the end of
three years. What is the aggregate present value of these receipts assuming a discount rate of (i) 4 percent?
(ii) 25 percent?
( e). Compare your solutions in Part (c) with those in Part (d) and explain the reason for the differences

4. The current market price of the shares of A Ltd. is Rs. 95. The floatation costs are Rs. 5 per share
amounts to Rs. 4.50 and is expected to grow at a rate of 7%. You are required to calculate the cost of
equity share capital.
5. Emerson Cammack wishes to purchase an annuity contract that will pay him $7,000 a year for the rest of
his life. The Zhilo Life Insurance Company figures that his life expectancy is 20 years, based on its
actuary tables. The company imputes a compound annual interest rate of 6 percent in its annuity
contracts. (a). How much will Cammack have to pay for the annuity? (b). How much would he have to
pay if the interest rate were 8 percent?(C). How much would he have to pay if the interest rate were 18
percent?
6. ERizXlairorn Industries has $40 million in shareholders’ equity and sales of $150 million last year. a. Its
target ratios are assets to sales, 0.40; net profit margin, 0.07; debt to equity, 0.50; and earnings retention,
0.60. If these ratios correspond to steady state, what is its sustainable growth rate? b. What would be the
sustainable growth rate next year if the company moved from steady state and had the following targets?
Assets-to-sales ratio, 0.42; net profit margin, 0.06; debt-to-equity ratio, 0.45; dividend of $5 million; and
no new equity financing.
7. On January 1, 2018, Von Company entered into two non-cancellable leases of new machines for use in
its manufacturing operations. The first lease does not contain a bargain purchase option and the lease
term is equal to 80% of the estimated economic life of the machine. The second lease contains a bargain
purchase option and the lease term is equal to 50% of the estimated economic life of the machine. You
are required to :

a. Explain the justification for requiring lessees to capitalize certain long -term leases. Do not limit your
discussion to the specific criteria for classifying a lease as a capital lease.

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 b. Describe how a lessee accounts for a capital lease at inception.
c. Explain how a lessee records each minimum lease payment for a capital lease.
d. Explain how Von should classify each of the two leases. Provide justification
8. Prepare a cash budget for the Ace Manufacturing Company, indicating receipts and disbursements for May,
June, and July. The firm wishes to maintain at all times a minimum cash balance of $20,000. Determine
whethe r or not borrowing will be necessary during the period, and if it is, when and for how much. As of April
30, the firm had a balance of $20,000 in cash.

ACTUAL SALES FORECASTED SALES

January $50,000 May $ 70 ,000
February 50,000 June 80,000
March 60,000 July 100,000
April 60,000 l August 100,000

Accounts receivable: 50 percent of total sales are for cash. The remaining 50 percent will be collected equally
during the following two months (the firm incurs a negligible bad -debt loss).
Cost of goods m anufactured: 70 percent of sales: 90 percent of this cost is paid the following month and the
remaining 10 percent one more month later.
Selling, general, and administrative expenses: $10,000 per month plus 10 percent of sales. All of these expenses
are p aid during the month of incurrence.
Interest payments: A semiannual interest payment on $150,000 of bonds outstanding (12 percent coupon) is
paid during July. An annual $50,000 sinking -fund payment is also made at that time.
Dividends: A $10,000 dividend payment will be declared and made in July.
Capital expenditures: $40,000 will be invested in plant and equipment in June.
Taxes: Income tax payments of $1,000 will be made in July.

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