NATIONAL UNIVERSITY OF MODERN LANGUAGES, Islamabad

Department of Economics
END TERM EXAM, Spring 2021
Shift : Morning
th
Class: BS E & F (5 Semester) Total Marks: 30
Paper: Financial Management Time Allowed: 2 Hrs
Course Code: BECF-316 Instructor: Z M Akhtar
Attempt all questions. Your answers must be constructive and precise.
Q 1. (a) The economy of finance is all about the budgeting of capital and the cost which is borne on (2)
raising it. Why is it important for the firms to estimate the cost of capital before budgeting of
capital?
(b) The managers at Khawaja Corporation are about to recommend their final capital budget for (5)
next year. They have a self imposed budget limit of Rs 100,000. Five independent projects
are being considered. Mr. Ali the CEO has minimum financial analysis experience and relies
on his managers to recommend the projects that will increase the value of the firm by the
greatest amount. Given the following summary of the five projects, which ones should the
managers recommend?
Initial Cash Present Value of
Projects
Outlay Cash inflows
Project A (10,000) 14,000
Project B (25,000) 28,600
Project C (35,000) 38,250
Project D (40,000) 42,500
Project E (20,000) 22,100
(c) What is the decision rule for accepting or rejecting proposed projects when using net present (2)
value?
Q 2. (a) Razzaq Ibrahim, the founder of Ibrahim Leasing Corporation, thinks that the optimal capital (5)
structure of his company is 30 percent debt, 15 percent preferred stock, and the rest common
equity. If the company is in the 40 percent tax bracket, what is the weighted average cost of
capital given that: Yield to maturity of its debt is 10 percent
New preferred stock will have a face value of Rs. 30 and a dividend of Rs. 2 per share
Price of common stock is currently Rs. 100 per share and new common stock can be issued at
the same price. The expected dividend in one year is Rs. 4 per share and the growth rate is 6
percent. (Assume floatation costs are zero )
(b) Describe the sources of capital and how firms raise capital. (2)
(c) How do tax considerations affect the cost of debt and the cost of equity? (2)
Q 3. (a) What is Dividend? Discuss its different forms. (3)
(b) Mr. Zubair is a Director of Al-Rushd Enterprises. He is of the view that this year such sort (4)
of dividend policy should be designed which will boost the confidence of shareholders.
What should be his suggested points that may lead to devise a successful strategic dividend
policy?
(c) STOCK DIVIDEND STOCK SPLIT (5)
3% stock dividend issued 6 for 5 stock split
Before After Before After
Stock Stock Stock Stock
Dividend Dividend Split Split
No. of shares 1,000,000 ? No of Shares 4 Million ?
EPS 1 ? MPS 40 ?
MPS 20 ? EPS 1.5 ?
P/E ratio ? ? DPS 0.5 ?
MV Equity ? ? DY ? ?
P/E ratio ? ?
MV Equity ? ?
You are required to find the missing figures “?”. Your answers must be justified by proper
workings on the answer sheet.