CORPORATE FINANCE BBS 4TH YEAR

BBS 4th Year
FIN 250: - FUNDAMENTALS OF CORPORATE FINANCE
IMPORTANT QUESTION WITH MARKS
OVERALL SYALLBUS DISCUSS;

CHAPTER 1: FUNDAMENTAL OF CORPORATE FINANCE (2 /4 Marks)
CHAPTER 2: SHORT-TERM FINANCING (Practical: - 2/10/15 Marks).
CHAPTER 3: - TERM LOANS AND LEASE FINANCING. (THEORY 10 MARKS/ PRACTICAL: -

2/10 MARKS).
CHAPTER 4: - LONG TERM FINANCING ;( THEORY 10 / PRACTICAL 10/15 MARKS).
UNIT 5: - HYBRID FINANCING: PREFERRED STOCK, WARRANTS AND

CONVERTIBLES.(THEORY: - 10 MARKS/PRACTICAL: - 2/10 MARKS)
CHAPTER 6: - FINANCIAL PLANNING AND FORECASTING.(PRACTICAL 10 MARKS)
CHAPTER 7: - CAPITAL STRUCTURE DECISION.(THEORY;2 MARKS/ PRACTICAL : - 2/10

MARKS).
CHAPTER 8: - INTERNATIONAL CORPORATE FINANCE.(THEORY;2 MARKS/ PRACTICAL;

2/10/15 MARKS)
CHAPTER 9: - MERGER AND ACQUISITION.(THEORY; 2/10/15 MARKS )
CHAPTER 1: FUNDAMENTAL OF CORPORATE FINANCE (2 /4 Marks)

1. Why might conflict arise between stockholders and debt holders? (2)
2. What is an agency relationship? (2)
3. Mention four responsibilities of financial manager. (2)
4. Why should the financial manager work together with other functional managers? (2)
5. What do you mean by agency problem between shareholders and creditors? (2)
6. How does the goal of stock price maximization benefit the society? (2)
7. Define Corporate Social responsibility with example.
▶ Corporate social responsibility is a management concept whereby companies
integrate social and environmental concerns in their business operations and
interactions with their stakeholders.
▶ The examples of CSR are as follows: -
a. Improving labor policies.
b. Participating in Fairtrade.
c. Community and virtual volunteering.
8. What do you mean by agency problem? List out the parties involved in agency
problem.
▶ The conflict of interest between the shareholders and managers, and
shareholders and creditors is known as agency problem.
OR,
Agency problem is the conflict of interests between the principal and the agent.
▶ The following are the parties involved in agency problem are as follows:-
a. Shareholders.
b. Managers.
c. Creditors.
9. Why should the financial manager work together with other functional manager?
▶ Financial Manager Work together with other functional manager because of all
functional decisions have financial implications.
10. What do you mean by agency problem between shareholders and creditors?
▶ In the agency problem, creditors are viewed as principal and the shareholders
as the agent. There is conflict of interests between shareholders, through
managers, and creditors.
▶ Conflict of interest between shareholders and creditors arises when the
managers make decisions for shareholders make decisions for shareholders
value by ignoring the interest of creditors.
11. How the goal of stock price maximization does benefit the society?
▶ Stock price maximization requires efficient, low cost businesses that produce
high-quality goods and service at the lowest possible cost.
▶ Stock price maximization requires that consumers want and need, so the profit
motive leads to new technology, to new products and to new jobs.
12. How do you resolve the agency problem between shareholders and creditors?
▶ We can resolve the agency problem between shareholders and creditors
through following points:-
a. Protective terms and conditions for creditors.
b. Compensate creditors for increased risk.
13. What is corporate governance?
▶ Corporate governance is the combination of rules, processes and laws by which
businesses are operated, regulated and controlled.
▶ Corporate governance includes balancing the interests of the many
stakeholders in a corporation including its shareholders, management,
customers, suppliers, government and community as a whole.
14. Why might conflicts arise between stockholders and bondholders?

▶ Bondholders generally receive fixed payment regardless of how well the
company does, while stockholders do better when the company does better.
15. Corporate Finance: - It is also known as business finance. It refers to the management
of financial resources of a business entity.
16. Addresses of issues of corporate finance.

a. Investment decision.
b. Financing decision.
c. Working capital management.
d. Dividend decision.
17. Financial Manager: - The person who is responsible for a investment, financing,
dividend and working capital management decision is known as financial manager.
18. Responsibilities of Financial Manager’s.

a. Analysis of Investment Decision.
b. Analysis of Financing Decision.
c. Analysis of Dividend Policy Decision.
d. Analysis of Financial Condition of the firm.
e. Analysis of Financial Markets.
f. Analysis of the financial aspects of all decisions.
19. Principles of managerial actions to maximize shareholders.

a. Investment Principle.
b. Financing Principle.
c. Dividend Principle.
20. Functional Areas of Corporate Finance.

a. Relationship with Marketing Department.
b. Relationship with Production Department.
c. Relationship with Human Resource Department.
21. Mechanism to resolve the conflict of interest between shareholders and managers.
a. Managerial compensate.
b. Direct intervention by shareholders.
c. The threat of firing.
d. The threat of hostile takeover.
22. Ethics: - It refers to the moral principles that control or influence a person’s behavior.
23. Business Ethics: - It is also known as managerial ethics, a company attitude and
conduct towards its employees, customers, community and stockholders is known as
business ethics.
CHAPTER 2: SHORT-TERM FINANCING (Practical : - 2/10/15 Marks).

1) Short-Term Financing: - It refers to the short term liabilities or obligations that should
be paid within one year or less than one year.
2) Advantages of Short-term financing.

- Less costly, flexibility, speed, restriction, and collateral.
3) Disadvantages of short-term financing.

- High risk, limited use of fund and limited amount of financing.
4) Sources of Short-term Financing.

A. Secured sources
B. Unsecured Sources
5) Accruals: - It refers to the short-term liabilities for the services that have been provided
to the firm but payment has not yet been made.
6) Deferred Income: - It refers to the funds received by the firm for goods and service,
which has not yet been provided.
7) Trade Credit: - It is also known as accounts payable, refers to the credit that a firm
gets from its suppliers of goods.
8) Credit Terms: - It state that the credit period, size of the cash discount offered, the
discount period, and beginning date of the discount period and credit period.
Note:
- Net 30:- The invoice or bill must be paid within 30 days.
- Net 10, EOM: - All goods shipped before the end of the month must be paid for by
the 10th of the following month.
- 2/10, net 30: - It provide a discount of 2%, if payment is made within 10 days of
the invoice date otherwise payment is due in 30 days.
- Net 30, Jan 1: - Net credit period is 30 days and credit period begins from.
9) Advantages of Trade Credit.

- Flexible.
- Formal Agreement.
- Continuous sources of financing.
- Collateral is not required.
10)Commercial paper: - It refers to the short-term, unsecured negotiable promissory note

issued by a company to raise funds from money market.
11)Advantages of Commercial Paper.

- Cheaper.
- Does not require compensating balance.
- Large amount of credit needs.
- Creditworthy firms.
- Frequently offer valuable advice to the firm.
- Collateral may not be required.
12)Disadvantages of commercial Paper.

- Least flexible.
- High risky.
- Not suitable for medium or small size firms.
13)Short-terms Bank Loans: - The loan which has the maturity of 1 year less than 1 year is
known as short-terms bank loans.
14)Forms of Loans.
- Transaction loan.
- Line of credit
- Revolving credit arrangement.
15)Features of Short-term bank loans.

- Maturity.
- Compensating Balance.
- Promissory Note.
- Interest payment.
- Security.
16)Transaction loan: - It is the made for a specific purpose and period of time.
17)Simple Interest Loan: - If the borrower receives principle amount of loan at the
beginning and pays interest and principle amount of loan at the end of the maturity
period of loan is known as simple/collect basis/regular loan.
18)Discount Interest Loan: - A loan in which the interest is calculated on the amount
borrowed and is paid in advance is known as discount interest loan.
19)Compensating Balance: - It refers to the portion of loan amount that must be

maintained in the account throughout the loan period.
20)Add-On Interest: - It refers to the interest is charged on initial loan and then added to
the loan amount and loan including interest is payable in equal installment.
21)Line of Credit: - An informal arrangement between bank and borrower in which a bank
agrees to lend up to a specified amount of fund is known as line of credit.
22)Revolving Credit Agreement: - It refers to the legal commitment by a bank to extend

credit up to a stated amount.
23)Choosing a bank.
- Cost, Flexibility, Loyalty to customers, Advice and Counsel, Specialization, Reliability
and Restriction.
24)Inventory Financing: - A firm’s specific assets that are pledged to ensure payment a
loan is known as Inventory Financing.
25)Floating Liens: - A general or blanket lien against the firm’s entire inventory is known
as floating liens.
26)Chattel Mortgage: - A lien on inventory as collateral which cannot be sold without the
lenders’ consent.
27)Trust Receipt Loan: - It refers to the short-term trade financing offered by the bank
under which loan is settled when the goods used as collateral are sold.
28)Field Warehouse Receipt: - A receipt for inventory segregated and stored on the
borrowers’ premises but under the control of an independent warehousing company is
known as field warehouse receipt.
29)Terminal Warehouse Receipt: - A receipt for the deposit of inventory in a public

warehouse that a lender holds as collateral for a loan.
30)Factor: - It is a financial institutions or a professional that purchases account

receivables of others firms.
31)Factoring: - It is an agreement between the company and the factor.
32)Factors to be considered in short-term financing.

- Cost of financing.
- Amount of financing.
- Period of financing.
- Use of fund.
- Requirement of collateral.
Practical Questions.(2/10/15 Marks).
1. What is the annual percentage cost of trade credit (based a 360-day basis)
under the credit terms of 2/10, net 40? (2) Ans: - 24.48%.
2. What is the annual percentage cost of trade credit (based a 360-day basis)
under the credit terms of 2/10, net 70? (2) Ans: - 12.24%.
3. Dabur Nepal wishes to borrow Rs. 100000 for one year from NNL. The annual
interest rate of the loan is 10 percent. The interest is paid on a discount basis
and 10 percent compensating balance is required. What is the effective interest
rate for the Dabur Nepal? (2) Ans: - 12.5%.
4. The Pawlowski supply company needs to increase its working capital by Rs.
4.4millian. the following three financing alternatives are available (assume a
365-day year):
I. Fogo cash discounts (granted on a basis of “3/10, net 30”) and pay on
the final due date.
II. Borrow Rs 5 million from a bank at 15 percent interest. This alternative
would necessitate maintaining a 12 percent compensating balance.
III. Issue Rs. 4.7 million of six-month. Commercial paper has no stipulated
interest rate. It is sold at a discount, and the amount of the discount
determines the interest cost to the issuer.
Assume that the firm would prefer the flexibility of bank financing,
provide the additional cost of this flexibility was no more than 2 percent
per annum.
a. Calculate the annual percentage cost for each alternative.
b. Which alternative should pawlowski consider select? Why?
c. What additional qualitative factor should pawlowski consider
before reaching a decision? (15)
Ans: - 56.44%, 17.05%, 13.64%.
5. Weathers Catering supply, Inc., estimates that because of the seasonal nature
of its business, it will require an additional Rs. 2000000 for six months. Weather
Catering supply, Inc. has the following four options available for raising the
needed funds.
a. State the Bank has offered to lend the funds at a 9 percent annual rate
subject to a 10% Compensating balance. The principal of loans would
be payable at maturity as a single sum.
b. Frost finance Co. has offered to lend the funds at a 9 percent annual rate
with discount loan term. The principal of loans would be payable at
maturity as a single sum.
c. Forgo the trade discount of 2/10, net 40 on Rs 2000000 of purchases.
d. Issue Rs 2000000 of 180 day commercial paper at a 9.5 percent per
annum interest rate. The total transaction fee, including the cost of back
credit line, on using commercial paper is 0.5 percent of the amount of
the issue.
I. Calculate the cost of each financing alternative.
II. Is the source with the lowest expected cost necessarily the one
to select? Why or why not? (15)
Ans: - 10.25%, 9.64%, 27.43% and 10.25%.
THEORY QUESTIONS;
1. Define short term financing with its types.

2. Difference between short term and long term financing with its examples.
3. Merits and demerits of short term financing.
4. Sources of short term financing.
5. Define Trade credit with its :
- Credit terms 2/10 net 30.
- Net 30
- Net 10 ,EOM
- 2/10 net 30 EOM
- 2/10 net 30 MOM
- Net 30 Jan 1
6. Does the size of invoice affect the APC of Trade credit?

7. Define Commercial Paper with its :
- Features
- Types
8. Different forms of inventory financing.

9. Different between Line of Credit and Revolving credit Arrangement.
10. Use of security in short term financing.
11. Why does a firm need short term financing?
12. How does the compensating balance affect APC of bank loan?
13. What are the forms of bank loan?
14. What is factoring arrangement?
15. How does firm use accruals as a short-term financing?
16. List out the factors to be considered while choosing appropriate source of short-term
financing?
17. Choosing a bank.
18. What are the advantages and disadvantages of stretching the credit period?
19. Compute the following formula:
- Accruals
- APC on Trade Credit
- EAR on Trade Credit
- Cost of Commercial paper with its APC
- APC under simple interest, Discounted loan, Add-on-loan,
compensating balance
- Cost of Inventory Backed loan with its APC
- Line of Credit with its APC
- Revolving Credit arrangement with its APC and EIR
- Pledging with its APC
- Cost of Factoring with its APC
- Discount when invoice is given
Some Practical Question:
1. A company has twice a month accruals of Rs 50000. The firm is considering

changing the twice a monthly payments into monthly accruals to reduce the cost of
writing cheques. The firm has a 10% opportunity cost. Compute benefits from
changing in accruals payment time.
2. Find out the cost of trade credit and Effective annual rate :
a. Credits terms 2/10 net 30 and discount is not taken.
b. Credits terms 2/10 net 30 and discount is not taken. However, the amount is paid
10 days late.
c. Credits terms 2/10 net 30 and discount is not taken. However, the amount is paid
20th days without any discount.
d. Credit terms 2/15 net 60 and if company does not take discount and pays on due
date.
- If company does not take discount and pays on 40th day.
- If company stretches the credit period by 10 days.
- If company actually pays on 25th day and still take the discount.
3. The credit terms are 2/15 net 45 and discount is not taken.
a. Calculate APC if the amount of credit purchase (invoice) is Rs 100000.
4. SDT Industry Pvt.Ltd. estimates that due to the seasonal nature of its business, it will
require an additional Rs20000o of cash for the month of July. The industry has four
options available to provide the needed funds.
a. Issue Rs20000 of 30-day commercial paper at a 12% per annum interest rate. The
transacting cost on issuing the paper is 0.75% of the face value.
b. Issue Rs200000 of 60-daty commercial paper at a 14% per annum interest rate. The
transaction cost on issuing the paper is 1% of the face value. Since the funds are
required for on July 30 days, the excess funds (Rs200000) can be invested in 13%
per annum marketable securities for the month of August. The total transaction fee
on purchasing and selling the marketable securities is o.5% of the face value.
c. Issue Rs20000 of 30-day commercial paper at a price of Rs200000.
d. Forego the July trade discount of 2/10 net 40 on Rs200000 of accounts payable.
a. You are required to compute the APC of financial arrangement and suggest
which financial arrangement results in the lowest cost.
b. Is the source with the lowest expected cost necessarily the sources to select?
Why or why not?
5. Gorkha Enterprise intends to borrow Rs120000 from a bank to support its short term
financial requirements. The bank will charge 10% interest on discount basis. Find out
the APC of this bank loan.
6. Dhangadhi Enterprise intends to borrow Rs120000 to support its short-term financial
requirements. The loan will be repaid in one year Rs132000 together with interest.
Find out the APC of this bank loan.
7. Find out the APC of an installment loan of Rs100000 payable on 12-monthly

installments on which interest rate is 12%.
8. Suppose there is a Rs10000 add-on loan with a 12% nominal rate or 1% per month to
be repaid in 36 installments. Calculate the Total interest to be paid over the life of the
loan, total principal to be paid, periodic payments and effective rate.
9. Find out the APC of a loan of Rs100000 taken for one year in the following
alternatives:
Alternative 1: Interest rate is 12%, simple basis and the CB is 20%
Alternative 2: Interest rate is 10%, discount basis and the CB is 20%
10. SDT co. ha a one year line of credit agreement for Rs200000 with Laxmi Bank Ltd. On
which interest rate is 12% and commitment fee is 1%. Find the cost of line of credit if
the fund is used (a) For 6 months and (b) for 11 months.
11. SDT co borrowed Rs100000 for three months from Laxmi Bank Ltd. The loan was
made at a simple annual interest rate of 12 %.
a. What is the EIR?
b. What is the EIR if loan requires a 20% CB, if the loan requires discount interest but
no CB and if loan requires discount interest and 20% CB?
c. What is EIR if the Laxmi Bank Ltd required SDT Co to repay the loan adding
interest in three equal monthly installments without any CB?
12. SDT Co ha has a weekly payroll of Rs600000. The firm is considering changing twice
a month payroll to reduce the cost of writing checks and similar expenses which
Rs1000 per payroll. The firm has a 10% opportunity cost.
a. What is average accrual under present payroll system?
b. What is a total annual payroll expense under present payroll system?
c. What will be average accruals under proposed plan?
d. What will be total annual payroll expenses under proposed plan?
e. What will be total annual savings if wages were paid twice a month instead of
weekly?
13. SDT Co wishes to borrow Rs500000 for one year. It has the following alternatives
available to it.
a. A 15% loan on a collect basis with no compensating balance requirement.
b. A 12% loan on a discount basis with 10% CB required.
c. A 10% loan on a discount basis with 15% CB required.
Which alternative should the SDT co choose if it is concerned with the effective
interest rate?
14. The SDT Co intends to borrow Rs450000 to support its short-term financing
requirements during the next year. The company is evaluating its financing options at
the bank where it maintains its checking account. SDT Co checking account on the
average holds the balance of Rs50000. It can be used to satisfy any CB requirements
the bank might impose. The financing alternatives offered by the bank include:
Alternative 1: A discount interest loan with a simple interest of 14% and no CB
requirement.
Alternative 2: A 12% simple interest loan that has a 15% CB requirements.
Alternative 3: Rs1 million revolving line of credit with simple interest of 12% paid on
the amount borrowed and a 1% commitment fee.
a. Compute the EIR of each financing alternative assuming SDT Co borrows
Rs450000. Which alternative should it use?
b. For each alternative, how much would SDT Co have to borrow in order to have
Rs450000 available for use (to pay the firms bills)?
15. The SDT Co needs to increase its working capital by Rs 10 million. It has decided that
there are essentially three alternatives of financing available.
a. Forgo cash discounts, granted on a basis of 3/10 net 30.
b. Borrow from the bank at 15%. This alternative would necessitate maintaining a
12% CB.
c. Issue commercial paper at 12%. The cost of placing the issue would be
Rs100000 each 6 months.
Assuming that the firm would prefer the flexibility of bank financing provided the
additional cost of this flexibility is no more than 2%, which alternative should SDT
Co select?
16. The SDT Co is able to sell Rs1 million of commercial paper every 3 months at a rate
of 10% and a placement cost of Rs3000 per issue. The dealers require SDT to
maintain bank lines of credit demanding Rs100000 in bank balances, which
otherwise would not be held. SDT has a 40% tax rate. What does the fund from
commercial paper SDT after taxes?
17. SDT Co has a monthly payroll of Rs300000. The firm is considering changing twice a
month payroll system. The firm has a 10% opportunity cost. What is the cost of
changing payroll system?
18. SDT Co wishes to borrow Rs100000 for the 1 year. It must choose one of the
following alternatives.
a. 9% loan on a collect basis, with face value due at end.
b. 8.4% loan on a discounted basis, with face value due at the end.
c. 6% loan on an- add on basis, with equal quarterly payments required on the initial
face value.
Which alternative has the lowest effective yield, using annual compounding for
the first two and quarterly compounding for the last?
19. SDT CO needs to raise Rs 500000 for one year to supply working capital to a new
store. It buys from its suppliers on term 3/10 net 90 pays on the 10th day and takes
discounts. It could forgo discounts pay the bill on 90th day and get Rs500000 in the
form of costly trade credit. Alternatively, it could borrow from its bank on a 12%
discount interest rate basis. What is the effective annual interest rate of the lower
cost source?
20. SDT Ltd. Has a Rs5million revolving credit agreement with Nepal Bank Ltd. Being a
favored customer, the rate is set at 1% over the banks cost of funds, where the cost is
the rate on negotiable certificates of deposit. In addition, there is a ½ % commitment
fee on the unused portion of the revolving credit.
a. If the CD rate is expected to average 9% for the coming year and if the company
expects to utilize on average 60% of the total commitment, what is the expected
annual rupee cost of this credit arrangement?
b. What is the percentage cost if on average only 20% of the total commitment is
utilized?
CHAPTER 3: - TERM LOANS AND LEASE FINANCING.

(THEORY 10 MARKS/ PRACTICAL: - 2/10 MARKS).
THEORY QUESTION;
a. What is term loans? What are its features?

b. Define loan repayment schedule.
c. Define lease financing. What are its merits and demerits?
d. What are the forms of lease financing?
e. Describe about the lease financing in Nepal.
f. Difference between operating and financial lease.
PRACTICAL QUESTIONS;
A. Suppose you borrowed Rs.3, 00,000 on a student loan at a rate of 10%

and must repay it in three equal installments at the end of each of the
next 3 years. How large would your payment be?
Ans: - Rs.1, 20,632.11.
B. Hari is interested in buying a motor bike. He is applying for Rs.1,
25,000, 3 year loan. The loan will be fully amortized over the next 3
years. Current interest rate is 12%. How much should be paid by Hari
for the yearly installment of loan? Ans: - Rs.52,044.30
C. What will be annual installment for the loan for Rs.5, 00,000? If interest
rate is 10% and that the loan period is 3 years.
Ans: - Rs.2, 01,053.52.
THEORY QUESTIONS;
1. What is term loan?

2. What is amortized schedule?
3. List out the types of corporate bond with explain.
4. What do you means by call provision?
5. What is the role of trustee?
6. Why does a company issue floating rate bond?
7. Define junk bonds.
8. Discuss the basic instruments of long –term financing.
9. What do you mean by participating feature of preferred stock?
10. What is cumulative feature of preferred stock?
11. Why does a company include conversion feature in its preferred stock?
12. What is indenture? List out major restrictive convents that are included in indenture.
13. Differences between:
- Term loan and Bonds
- Common stock and Bonds
- Common stock and preferred stock
14. Explain the merits and demerits of long-term debt.

15. Preferred stock is hybrid form of long-term financing.
16. Describe various types of preferred stocks.
17. Discuss the merits and demerits of preferred stock from company point of view.
18. List any eight securities in order of highest to lowest risk.
19. Why does company issue so many different types of securities?
20. What is bond? Point out its features and types.
21. What is indexed bond?
22. What are the factors influencing long-term debt decisions.
23. Define sinking funds.
24. Point out the debt contract features
25. Point out the three major advantages over public offerings.
26. List out the sources of long-term funds.
27. Point out the merits and demerits of long-term financing.
- Amortization loan – if installment payment at end of period
- If installment payments at beginning of period
- Equal principal payment loan
- Loan amortization schedule at the end of period
- Loan amortization schedule at the beginning of period

- Loan amount
- Offer price of the preferred stock
- No. of preferred stock to be issued
- Price of bonds
- No. of zero coupon bonds
- After-tax cost of bonds
- After-tax return
Some Practical problems:
1. SDT Co. is planning to borrow Rs 10000000 from Deepika bank. The interest rate of
bank loan is 10% and the loan period is 5 years. What will be annual installment for the
loan?
2. SDT Co. offers auto loan at 12% annual interest rate for five years payable in equal
monthly installments. If you borrow Rs1000000 in auto loan, what is your equal
monthly installment (EMI)?
3. Set up an amortization schedule for Rs 1million 3 year, 9 % loan.
4. What effects would each of the following items have on the interest rate a firm must
pay on a new issue of long-term debt? Indicate whether each factor would tend to rise
(+), lower (-) or have an in determine effect (o) on the interest rate and then explain why.
a. The firm uses bonds rather than term loan.
b. The firm uses non-subordinated debentures rather than first mortgage bonds.
c. The firm makes its convertible bonds non-convertible into common stock.
d. The firm sells income bonds rather than debentures.
e. The firm uses subordinated debentures rather than non-subordinated debentures.
f. The firm makes its bonds convertible into common stock.
g. The firm puts a call provision on its new issue of bonds.
h. The firm makes its debentures subordinated to its bank debt. What will the effect
be
a. On the cost of the debentures?
b. On the cost of the bank debt?
5. The SDT Co. needs to raise Rs 9.5 million for capital improvements. One possibility is a
new preferred stock issue of 8% dividend Rs 100 per value stock that would pay 9% to
inventors. Floatation costs for an issue this size amount to 5% of the total amount of
preferred stock sold. These costs are deducted from the gross proceeds in determine
the net proceeds to the company.(ignore tax)
a. At what price per share will the preferred stocks be sold to investors?
b. How many shares must be issued to raise Rs9.5 million for the SDT Co?
6. Sunil-Deepika family is interested in buying a home. The family is applying for
Rs125000, 3 year loan. Under the term of the loan, they will receive Rs125000 today to
purchase their home. The loan will be fully amortized over the next 3 years. Current
interest rate is 12%. Interest is compounded quarterly and all payments are due at the
beginning of the quarter.
a. What is the quarterly loan payment?
b. Prepare loan amortization schedule.
c. How much could sunil-deepika family borrow today if they were willing to have
Rs1200 monthly payment? (assume payment is made at the end of month and the
length of the loan remains same)
7. Sunil and Deepika are thinking about buying a car. The cost of car is Rs1000000 and
Sunil and Deepika have to make down payment 20% of total price. Remaining amount
will be paid in 5 equal year-end annual payments. The interest rate is 8.5%. Compute
annual payment and set up loan amortization schedule.
CHAPTER 4: - LONG TERM FINANCING ;( THEORY 10 /

PRACTICAL 10/15 MARKS).
THEORY QUESTIONS;
1. Define Voting rights.
2. Define Book value.
3. Define Net Worth.
4. Define Treasury Stock.
5. What is common stock? Explain its features.
6. What are the legal rights and privileges of common stockholders?
7. Merits and demerits of Common stock.
8. Point out the Investment Banking Process.
9. What are the common stock values?
10. What are the common stock values?
11. Define Intrinsic and market value.
12. Who is an investment banker? And it’s Functions.
13. List out the investment banking process.
14. What is right offering?
15. What is prospectus?
16. Explain the methods of selling securities.
17. A private placement is preferable to a public issue? Give reason.
18. Explain the primary reasons for the existence the preemptive rights?
19. List out the different ranking types of securities.
20. Difference between common stock and debt financing.
21. Why might a company have a rights offerings rather than a general cash offer?
22. What are the advantages of rights offering?
- Non-Cumulative Voting.
- Cumulative Voting
- Shareholders Equity Account
- No. of issues common stock
- No. of o/s shares
- Remaining shares issued without the approval of shareholders

- Book value per share
- Net worth
- New Net worth
- No. of new shares to be issued
- No. of rights required to purchase a new share(#)
- Value of right (Vr)
- New market price of share after right offering (Pe)
- Value of Ex-right (Vr)
- Ex-right price (Pe)
- Shareholders wealth after exercise of right
- Shareholders wealth after sell of right
- Shareholders wealth after partial exercise and sell of right
- Ignorance of right offering
- Gain or loss to underwriters- Gross proceed
- Cost of issuing securities
THEORY:
1. Why preferred stock is hybrid form of long-term financing? Describe the merits and
demerits of preferred stock financing.
▶ Preferred stock is hybrid form of financing because of combined features of
both debt and common stock.
▶ The merits of preferred stock financing are as follows;
a. Fixed financial cost.
b. No dilution of control.
c. Creditworthiness.
d. Less legal obligation.
e. Conservation of mortgage-able assets.
f. Steady income.
g. Prior right to income and assets.
h. Tax benefit
▶ The demerits of preferred stock financing are as follows;
a. High cost.
b. No tax saving.
c. Prior right.
d. Limited return.
e. High risk.
f. No control.
g. No enforceable legal right.
2. What are the features of term loan? Describe the major sources of term loan in Nepal.
▶ The features of term loan are as follows;
a. Principal amount.
b. Fixed maturity.
c. Interest rate.
d. Direct negotiation with the lender.
e. Tie up with collateral.
f. Fixed repayment schedule.
g. Restrictive covenants.
▶ The major sources of term loan in Nepal are as follows;
a. Short-term loan.
b. Intermediate- term loan.
c. Long-term loan.
3. Amortized loan;
▶ A term loan which is scheduled to be repaid in equal periodic payment is
known as amortized loan.
▶ These payments provide the lender with a specified interest return and
repayments of the principal over a specified period.
▶ Lenders use a loan amortization schedule to determine periodic equal
payments or installment and the allocation of each payment to interest
and principal.
4. Advantages and Disadvantages of Long-Term Debt Financing.

▶ Advantages;
a. Less costly.
b. Flexibility.
c. No control.
d. Fixed cash cost.
e. Tax Saving.
▶ Disadvantages;
a. Risky.
b. Restrictive covenants.
c. Creditworthy.
d. Repayment of debt.
e. Fixed maturity date.
f. Limited use.
5. Bonds;
▶ It is one of the popular debt capital instruments of long-term financing.
▶ It is a long-term security or long-term promissory note.
▶ It also repays the principal on maturity to the holder of the bond.
▶ The security or long term promissory note, issued by borrower, promising to pay
interest and principal, as per contract is known as bonds.
6. Features of Bonds;
a. Par value: - The stated price that is redeemed to bondholder at maturity is known
as par value.
b. Coupon interest rate: - The fixed interest rate at which bondholders are paid at the
end of each period is known as coupon interest rate.
c. Maturity: - Generally bonds are issued with finite maturity. Maturity date is the
specified date on which the principal amount (par Value) is repaid.
d. Indenture: - An indenture is a legal document or contract that contains terms and
condition of bond issue. It includes details of debt issue, description of property
pledged, and the methods of principal repayment, restrictions placed on the firm by
the lenders, rights and responsibilities of both borrower and lender.
e. Call provisions: - The special provision in the indenture that gives the issuer the
right to call the bonds prior to maturity at call price is known as call provisions is
known as call provisions. Generally, a company pays the bondholders an amount
greater than the par value if they are called before maturity. The amount that is paid
to the bondholder is called call price and the excess amount over par value is
known as call premium.
f. Trustee: - A trustee is the representative of the bondholders, who deals with the
issuing company. Trustee is responsible for ensuring that all terms and covenants
set forth in the indenture are fulfilled by the issuing company.
g. Sinking fund: - A provision in a bond contract that facilitates the orderly retirement
of the bond is known as sinking fund.
7. Types of Corporate Bonds.

- Mortgage Bond.
- Debenture.
- Subordinated Debenture.
- Income Bond.
- Convertible Bond.
- Callable and Putable Bonds.
- Indexed Bond.
8. Income Bond: - An income bond is a bond where the payment of interest is contingent
upon sufficient earning of the firm.
9. Mortgage Bond: - A bond secured by fixed assets of issuing firm’s property. First
mortgage bonds are senior in priority to claims of second mortgage bonds.
10. Convertible Bonds: - A bond that can be converted into specified number of shares of
common stock within stipulated period of time.
11. Types of Bond Innovation.

- Zero coupon Bond.
- Floating Rate Bond.
- Junk Bond.
12. Zero Coupon Bond: - It is a bond that pays no annual interest but is sold at a discount
below par, thus compensating investors in the form of capital appreciation.
13. Floating Rate Bond: - A bond whose interest rate fluctuates. Generally interest rate in
bond is tied to the treasury bond of equal maturity.
14. Junk Bonds: - A high-risk high yield bond rated below investment grade and generally
used to finance mergers, leveraged buy outs.
15. Ranking of Different Types of Securities.

- T-Bill. – T-Bond. – Floating rate notes. – First Mortgage Bond. – Second
Mortgage Bond.
- Debenture non-callable. – Debenture Callable. – Subordinated Debenture.
- Income Bond. – Preferred Stock Cumulative. – Preferred stock non-cumulative.
- Convertible Preferred Stock. – Common stock. – Warrant.
Some Practical Problems:
1. SDT Co. will elect 11 directors in the next annual general meeting. There are 12000
voting shares.
a. How many shares will be required to elect a director with certainty if the voting is
non-cumulative and cumulative?
b. If a group of shareholders has 4000 shares, how many directors can they elect
under cumulative voting?
2. Consider the following SDT Co for the year 2077:

Authorized common stocks: 200000 shares
Issued common stocks: 50000 shares
Par value: Rs10 per share
Issued price: Rs25 per share
Retained earnings: Rs800000
Treasury stocks: 5000 shares@Rs10
Required: Common stockholders’ equity account in the balance sheet.
3. The authorized share capital of SDT Bank is 100000 shares. The equity is currently
shown in the Banks book as follows:
Common stock (Rs0.5 par value) Rs40000
Additional paid-in-capital 10000
Retained earnings 30000
Common equity 80000
Treasury stocks (2000 shares) 5000
Net common equity Rs75000
a. How many shares are issued?
b. How many shares are outstanding?
c. How many more shares can be issued without approval of shareholders?
d. Suppose the bank issues 10000 shares at Rs2 a share, which of the above
figures would be changed?
e. Suppose instead the bank bought back (repurchased) 5000 shares at Rs5 a
share, which of the above figures would be changed?
4. SDT Corporation had the following balance sheet at the end of 2077:
Assets Amount Liabilities and Equity Amount
Current assets 150000 Accounts payable 21000
Fixed assets 179000 Notes payable 24000
Long-term debt 50000
Common stock(10000 authorised,6000 120000

outstanding)
Retained earning 114000
Total assets 329000 Total liabilities and equity 329000
a. What is the book value per share of SDT Co?

b. What would be the new book value per share if SDT Co sold the remaining
authorized shares at net price of Rs40?
c. What is the difference between book value and market price of share?
5. SDT Co. has 10000 shares of Rs10 each. The company is planning to raise Rs20000 as
additional fund through right offering. The subscription price is Rs20; whereas the
current market price per share is Rs25.50.
a. How many new shares should be issued?
b. How many rights will be required to purchase a new share?
c. What is the value of a right?
d. What will be the new market price after right offering?
e. What is the value of ex-right?
6. SDT Co. right on price is Rs144 and subscription price is Rs120. Two rights are
required to purchase one new share of common stock.
a. What is the value of rights?
b. What is the ex-right price?
c. What is the theoretical value of a right when the stock is trading on ex-rights?
7. SDT Co. and an underwriters agreed on a new offering of shares on the following
terms:
Price to public Rs10
Number of shares 100000
Proceeds to issuer Rs700000
The out-pocket expenses incurred by the under writer in the design and distribution of
the issue were Rs200000.
a. What profit or loss would the underwriter incur in the issue were sold to the
public at an average price of Rs10?
8. SDT Co. stock currently sells for Rs30 per share. There are 1000000 shares currently
outstanding. The Co. announces plan to raise Rs2980800 by offering shares to public
at a price of Rs30 per share.
a. If the underwriting spread is 8% how many shares will the company need to
issue in order to be left with net proceeds of Rs2980800?
b. If other administrative costs are Rs60000 how many shares will the company
need to issue in order to be left with net proceeds of Rs2980800.What is the
amount of the total direct costs of the issue?
9. SDT Co. stockholders have authorized management to issue a total of 4 million shares
and management thus far actually has issued 2.5 million shares. Each share has a par
value of Rs10. During 2021 SDT Co. earned Rs62 million, paid Rs29 in dividends and
retained Rs33million.SDT Co. equity accounts as of December 31( million of rupees)
are as follows:
Particulars 2022(Rs) 2021(Rs)
Common stock (4 million 25 25

shares authorized,2.5 million
shares outstanding, Rs10
par)
Additional paid in capital 105 105
Retained earnings 293 260
Total common stockholders’ 423 390

equity (net worth)
Book value per share 169.2 156
Suppose SDT CO. sold 0.2 million shares, with the company netting Rs25 per share.
Construct a statement of the equity accounts to reflect this sale.
10. As one of the minority shareholders of SDT Co. Ltd., Mr. Sunil is dissatisfied with the
current operation of the company. He feels that if he could gain membership on the
company board of directors, he could purse the company to make improvements. The
problem is that current management controls 75% of the stock. He controls only 7%,
and the balance is held by other minority shareholders. There are a total of 500000
voting shares. Ten directors will be elected at the annual stockholder meeting.
a. If voting is non-cumulative, can Mr. Sunil elect himself as directors?
b. Suppose he is able to persuade all the minority shareholders that he should be
elected. If voting is non-cumulative, can they elect him?
c. If voting is cumulative, can he elect himself as a director?
d. What percent of the minority shares other than his own will he needs to have voted
for him to be certain of election?
e. What is the numbers of directors the minority shareholders can elect with certainty?
11. The SDT Co. whose stock price now is Rs150 needs to raise Rs14.5 million in common
stock. Underwriters have informed SDT management that it must price the new issue
to the public at Rs120 per share to ensure the shares will be sold. The underwriters
compensation will be 5% of the of the issue price. SDT also will incur expenses in the
amount of Rs300000. How many shares must SDT sell to net Rs14.5 million after
underwriting commission and flotation expenses?
12. The SDT Co is selling for Rs150 per share. The company issues rights that allow the
holders to subscribe for one additional share of stock at Rs120 a share, for each five
shares held. Compute the theoretical value of:
a. A right when the stock is selling rights-on.
b. One share of stock when it goes ex-rights.
c. A right when it goes ex-rights and the actual market price goes to Rs147.5 per
share.
13. SDT Co total assets consist of 490 shares of DST Co and Rs2000 in cash. DST Co. now
offers stockholders one additional share at a price of Rs20 for each 5 shares held. The
current market price of the stock is Rs35.
a. What is the value of each right?
b. Prepare statements showing SDT Co total assets after the offering for each of this
alternative course of action.
1. He exercises all his rights.
2. He sells all his rights.
3. He sells 400 rights and exercises 90 rights.
4. He neither sells nor exercises the rights.
14. SDT Co. plans to raise an additional rupee of 10 million through rights offerings.
Current market price of the company is Rs250. It has 200000 shares outstanding.
Stockholders are offered a new share at a price of Rs100 each.
Required:
a. How many new shares will have to be sold to raise required funds?
b. How many rights will be required to purchase a new share?
c. What will be theoretical value of rights?
d. Calculate ex-rights price.
e. Mr. Sunil Thapa total assets consist of 100 shares of SDT Co. and cash balance of
Rs15000. Prepare statements of Mr.Thapa total assets before rights offerings.
f. Prepare statement showing Mr. Thapa total assets after rights offerings for each of
these courses of action if,
1. He sells all his rights.
2. He exercises all his rights.
3. He sells 60 rights and exercise 40 rights.
15. SDT Co. must include decide between a public issue of intermediate term notes and
the private placement of this debt with an insurance company. In both cases the funds
needed are Rs6million for 6 years with no principal repayment until the final maturity of
the notes. With a public issue the interest rate will be 15% the underwriting spread will
be Rs10 per notes, and the notes will be priced to the public art Rs1000 each. To
realize Rs6million in proceeds, the company will need to issue some additional notes to
offset the spread. Legal printing and other initial costs come under to Rs195000 with
the public issue. For the private issue, the interest rate will be 15.5% and initial costs
will come to only Rs20000.
a. Ignoring the time value of money, which method has the higher total costs over the
6 years? In words, which method would be helped if we do not consider the time
value of money?
b. What if the maturity was 12 years and all other things stayed the same?
16. SDT Co. has 5 million shares outstanding and the firm charter provides for a
cumulative voting procedures. The company has nine directors up for re-election. What
is the minimum number of shares needed to ensure the election of one director?
17. The SDT Co. is considering an equity issue to finance a new project. A total of Rs15
million in new equity is needed. If the direct costs are estimated at 7% of the amount
raised how large does the issue need to be? What is the floatation cost in rupees?
18. SDT Co. authorized, issued and treasury stocks are 100000, 80000 and 10000
respectively. Number of outstanding share for the company is…..
19. The SDT Co., whose stock is now Rs30 needs to raise Rs15 million in common stock
for expansion? Underwriters have informed company management that it must price
the new issue to the public at less than Rs30 per share because of a downward sloping
demand curve and given the following terms of issues:
a. Issue price per share Rs27.53.
b. Underwriter’s compensation 7% of the issue price.
c. Underwriters additional expenses Rs360000.
d. Underwriters required profit 10% from total proceeds.
Calculation the number of common stock to be issued after fulfilling above terms.
20. The stock of the SDT Co. is selling for Rs50 per share. The company than issues rights
to subscribe to one new share at Rs40 for each five rights held.
a. What is the theoretical value of a right when the stock is selling rights-on?
b. What is the theoretical value of one share of stock when it goes ex-rights?
c. What is the theoretical value of a right when the stock sells ex-rights at Rs50?
d. Sunil Thapa has Rs1000 at the time National stock goes ex-rights at rs50 per share.
He feels that the price of the stock will rise to Rs60 by the time the rights expire.
Compute his rate of return on his Rs1000 if he (1) buys SDT Co. stock at Rs50 or (2)
buys the rights at the price computed in part c, assuming his price expectations are
valid.
e. Do you think investment in rights is riskier than the investment in stock of the same
company? Justify.
21. SDT Co. has 1750000 shares of authorized common stock each having Rs1 par value.
Over the years it has issued 1532000 shares but presently 63000 are held as treasury
stock. The additional paid in capital of the company is presently Rs5314000.
a. How many shares are now outstanding?
b. If the company were able to sell stock at Rs19 per share, what is maximum amount
it could raise under its existing authorization, including treasury shares?
c. What would be its common stock and additional paid in capital account after the
financing?
22. The SDT Co. has fixed assets with a book value of Rs700 and a appraised market value
of about Rs1000. Net working capital is Rs400 on the books but approximately Rs600
would be realized if all current accounts were liquidated. The company has Rs500 in
long term; both book value and market value. What is the book value of the equity?
What is the market value of equity?
23. SDT Co. established one-year back decided to raise Rs15 million in common stock. The
merchant banker, performing as an underwriters, advised the company that it must
priced the new issue to the public at Rs90 per share through similar Co. share price is
Rs94 per share in the market . The underwriter’s compensation will be 5% of the issue
price. Company will also incur expenses in the amount of Rs 400000. In addition to the
underwriter’s compensation, underwriters also required a profit of 20% of total net
proceeds of the stock. How many shares must company sell to net Rs15 million after
deducting underwriter’s compensation, required profits and floating expenses?
24. IF SDT Co. issues 700000 new shares of common stock to existing shareholders at a
price of Rs 90 a share, what would you expect the price of the common stock , if it were
Rs120 a share before the issue? There were 2300000 shares outstanding before the
new shares were issued.
25. SDT Co. is planning a capital expansion next year is response to the rapidly increasing
demand for its products. It estimates that I will need Rs15million and plans to issue
preferred stock to finance the expansion. The preferred stock will have a par value of
Rs100 and pays 10% dividend. SDT Co. does not plan to retire the preferred stock in the
foreseeable future. It was found that similar issues the preferred stock with same
characteristics and risk are yielding 13%, assume that the floatation costs are zero.
a. What is the current market price of the preferred stock?
b. How many shares must it issues to finance the planned expansion?
c. If floatation cots were 5% of the total proceeds received from the preferred stock
investors, how many shares must it issue to finance planned expansion?
26. Suppose a company has 100000 shares of common stock o/s. current market price of
the stock is Rs275 per share. The company is planning to raise Rs10000000 through
rights offering. Financial manager has decided to set subscription price of Rs200 per
share.
a. How many new shares must be issued to raise Rs10000000?
b. How many rights will be required to buy one new share?
c. What is the dilution effect of right issue?
d. What is value of a right?
e. What will be the ex-right price of stock?
27. The stock of the SDT Co. is selling for Rs150 per share. The company issues rights that
allow the holders to subscribe for one additional share of stock at Rs120 a share, for
each five shares held.
a. Compute the value of right when the stock is selling rights-on.
b. Compute the value of one share of stock when it goes ex-rights.
c. Compute the value of a right when stock goes ex-rights and the actual market price
goes to Rs147.5 per share.
28. The market price of the stock SDT Co. is Rs500 per share and there are 1 million shares
o/s. Supposes that the management of this company is considering a rights offering in
connection with the issuance of 500000 new shares. The term of the rights offering are
as follows: for two rights and Rs300 subscription price, a new share can be bought.
a. What would the share price be after rights offering?
b. What is the value of one right?
c. Demonstrate the effect on economic well-being of the initial shareholders as a
result of the right offering.
29. SDT Co. recently decided to make rights offering of its shares. The terms are as follows:
holder of each five shares can have the rights to purchase one additional share at a
price of Rs100. The current market price is Rs130 per share.
a. Determine the value of each right.
b. At the time of rights offering your total assets consist of 300 shares of this stock
with Rs11000 in cash. What would happen to your total assets after the rights
offering if you exercise all the rights?
c. What would happen to your total assets if you do not exercise the rights but let it
expire?
UNIT 5: - HYBRID FINANCING: PREFERRED STOCK, WARRANTS AND

CONVERTIBLES.(THEORY: - 10 MARKS/PRACTICAL: - 2/10 MARKS)
THEORY QUESTIONS;
A. What are warrants? What are the reasons for using warrants?
B. What is convertible? Explain the reasons for using convertibles.
C. Difference between warrants and convertibles.
D. Define conversion ratio, conversion value, conversion price, straight bond value,
minimum price of convertibles and conversion premium.
E. What are the features of warrant and convertible?
- Value of call option
- Value of Put Option
- Pay-off position on call option and Put option
- Break-even price of call option and put option
- Rate of Return of call option and put option
- Future Contract
- Future value
THEORY;
1. What are the major rights and privileges of common stockholders? Explain.
▶ The major rights and privileges of common stockholders are as follows;
a. Right to amend the charter of the company.
b. Right to adopt and amend by-laws.
c. Right to elect the directors.
d. Right to authorize the sale of fixed assets.
e. Right to enter into merger.
f. Right to issue preferred stock, debentures, bonds and other securities.
g. Right to vote in shareholder’s meetings.
h. Right to attend in shareholder’s meetings.
i. Right to sell share certificates.
j. Right to inspect the corporate books.
k. Right to share residual income and assets.
l. Preemptive right.
2. Explain the meaning and functions of investment banking.

▶ A financial institution that underwrites new securities for resale is known as
investment bankers. Investment bankers bring together suppliers and users of
long-term funds in a capital market and thereby play a key role in the security
offering process.
▶ The functions of investment banking are as follows;
a. Underwriting.
b. Distributing.
c. Advising.
d. Making a market.
3. What are the advantages of public offering?

▶ The advantages of public offering are as follows;
a. Increased in liquidity.
b. Possibility of diversification.
c. Increase in potential market.
d. Facilitates merger.
e. Facilitates increase in value of firm.
f. Helpful in raising further capital.
4. What are the advantages of common stock financing?

▶ The advantages of common stock financing are as follows;
a. No fixed amount.
b. No fixed maturity.
c. Increase in creditworthiness.
d. Easy to issue.
e. Ownership.
f. Higher expected rate of return.
g. Lowers tax.
h. Protects value in case of high inflation.
5. What are the disadvantages of common stock financing?

▶ The disadvantages of common stock financing are as follows;
a. High cost of financing.
b. High flotation cost.
c. High cost of capital.
d. Dilution of control and income.
e. Uncertain income to investors.
f. Not tax deductible payments.
6. Why is common stock a desirable form of financing?

▶ Common stock a desirable form of financing because of following reasons;
a. Returns.
b. Voting rights.
c. Limited legal liability.
d. Liquidity.
7. What is pre-emptive right? What are primary reasons for the existence of pre-emptive
rights?
▶ Pre-emptive right is a privilege offered to existing shareholder for buying a
specified number of shares of the company’s stocks before the stocks are
offered to outsiders for sale.
▶ The primary reasons for the existence of pre-emptive rights are as follows;
a. It protects the power of control of present shareholders as rights’ offering
entitles the stockholders to maintain their proportionate ownership in the
corporation when new issues are made.
b. It allows the existing shareholders to protect against the dilution of their
wealth or ownership and earnings.
c. Use of rights offering to raise new equity capital may be easier and less
costly than a public offering of the stock.
8. What are the features of common stock?

▶ The features of common stock are as follows;
a. Par value.
b. No fixed dividend.
c. No fixed maturity.
d. Limited liability.
e. Voting right.
f. Preemptive rights.
g. Claim on assets and income.
9. Why market value per share would be different from book value per share? Give
reasons.
▶ Market value per share is determined by demand and supply of shares where
book value per share is determined by the total book value of equity and
number of outstanding shares. Thus, market value of share is affected by future
earnings of the firm but book value depends upon historical data.
10. What are the advantages of right offering?

▶ The advantages of right offering are as follows;
a. Protect the power of control of present shareholders.
b. Protects stockholders against dilution of wealth.
c. Less costly.
11. Common Stock: - Securities that represents the ownership in the company is known as
common stock.
12. Authorized Share: - The number of shares of common stock that a firm’s corporate
charter allows to issue.
13. Issued Share: - The number of shares of common stock that have been offered by the
company to sell.
14. Treasury Stock: - The number of outstanding stock that have been purchased and held
by the firm.
15. Proxy: - It is a legal document giving one person the authority to represent on behalf of
others.
16. Equity Account in Balance Sheet.

Common Stock
Additional Paid in Capital
Retained Earnings
Total common stockholder Equity ( Net Worth)
Book Value (Net Worth) per share
17. Retained Earnings: - It is the amount of profit retained in the firm for reinvestment.
18. Net Worth: - It refers to the owner’s contribution to the firm by making investment in
stock or forgoing dividends.
19. Cumulative Voting System: - A voting system in which stockholders can accumulate
the votes and cast all of them for one director or divide them among more than one
director.
20. Non-Cumulative Voting System: - A voting system in which each common share
carries one vote for each director to be elected.
21. Private Placement: - The sale of an entire issue of on registered securities directly to
one purchaser or a group of purchasers.
22. Advantages of Private Placement.

- Less time to raise funds.
- Suitable for small company.
- Flotation costs can be reduced by eliminating underwriting costs.
23. Important Dates in Rights Issue Procedure.

- Declaration Date.
- Ex-Right Date.
- Date of Record.
- Expiration Date.
24. Subscription Price: - In a right offering, the subscription price is the price at which
existing shareholders are allowed to purchase one new share.
25. Investment Banking Process.

- Selecting the investment banker.
- Discussion with investment banker.
- Underwriting syndicate.
- Forming a selling group.
- Fulfilling the legal requirement.
- Pricing the issue.
- Distributing the issue.
- Stabilizing the price.
1. Under water technology stock is currently trading at Rs.300 a share. What is the value
of call option if exercise price is Rs.250? Ans: - Rs.50.
2. Mt.Everest Company plans to issue 8% coupon, Rs.1000 par value, and 15-year
convertible bond at par value. The bond is callable at Rs.1100. The bond may be
converted into 25 shares of stock. Current market price of stock is Rs.32 per share. The
stock price is expected to grow at a rate of 10% per year. Interest rate on similar risk
non-convertible bond is 10%. The bonds are expected to be called when conversion
value reaches 141.75% of par value.
a. What is conversion value?
b. Compute initial conversion premium.
c. Compute the straight bond value today and at the end of year 4.
d. Compute initial conversion value and conversion value at the end of
year 4.
e. Compute the minimum price of convertible bond today and at the
end of year 4.
3. The common stock of the Subisu Company earns Rs.2.50 per share, has a dividend
payout of two-thirds and sells at a P/E ratio of 16. Subisu wishes to offer Rs.10 million
of 9%, 20-year convertible debentures with an initial conversion premium of 20% and a
call price of 105. Subisu currently has 1 million common shares outstanding and has a
50% tax rate.
i. What is the conversion price?
ii. What is the conversion ratio per Rs.1, 000 debentures?
iii. What is the initial conversion value of each debenture?
iv. How many new shares of common must be issued if all
debentures are converted?
v. If Subisu can increase operating earnings by Rs.1 million per
year with the proceeds of the debenture issued, compute the
new RPS and earning retained before and after conversion.
4. The common stock of Subisu is selling for Rs.100 and its Rs.1, 000 face values, 8%
coupon convertible subordinated bond is priced at Rs.1, 010. Conversion ratio is 8 and
the bond matures in 2014.
i. Calculate conversion price.
ii. Calculate conversion value.
iii. Calculate the premium.
5. A company has warrants outstanding that allow the holder to purchase 3 shares of
stock for a total of Rs.60 for each warrant. Currently , the market price per share of the
company common is Rs.18. Investors hold the following probabilistic beliefs about the
stock 6 months hence:
MPS Rs.16 18 20 22 24
Probability 0.15 0.20 0.30 0.20 0.15
(i) What is the present theoretical value of the warrant?

(ii) What is the expected value of stock price 6 months hence?
(iii) What is the theoretical value of the warrant 6 months hence?
6. The Subisu company has warrants outstanding that expire in 3 years. Each warrants
entitles the holder to purchase one share of common stock at an exercise price of
Rs.40 per share. Determine the formula value and premium over the formula value if
the respective prices of common stock and warrants are;
(i) Rs.32 per share and Rs.1.50 per warrant.
(ii) Rs.40 per share and Rs.3.50 per warrant.
(iii) Rs.48 per share and Rs.10 per warrant.
7. The stock of SDT Co. sells for Rs60 a share, and the option has an exercise price of
Rs50 a share. What is the theoretical value of the call option?
8. A company current market price of stock is Rs50 per share and the value of call option
is Rs10. What is the exercise price of the stock?
9. Market price per share of SDT stock is Rs300. A call option on this stock with an
exercise price of Rs270 is selling at Rs50. What is the theoretical value and premium of
the call option?
10. A stock is currently selling at Rs500 per share. The strike price of call option on this
stock is Rs400. The market price of call option is Rs80. If you buy this call option, what
kind of return would you realize?
11. Sunil buys a put option on a stock at Rs20. The market price of underlying stock is
Rs200 and the exercise price of put is Rs230. What is the rate of return to Sunil as a put
holder?
12. The stock of SDT Co. is expected to have the following probability distribution with
respect to market price per share after 6 months.
Probability of occurrences 0.15 0.20 0.30 0.20 0.15

Stock price(Rs) 34 38 40 42 46
Options exist for stock and an exercise price is RS38 and expiration date of 6-months.
a. What is the expected value of market price after 6-months for stock?
b. What is the expected value of option at expiration date?
13. Given the following data, determine the value of call option at the expiration date:
Option Market price per share at the expiration Exercise price of the option
date(Rs) (Rs)
A 120 125
B 150 140
C 180 150
D 200 175
8. Mr. Thapa is currently bearish on the common stock investment in Katmandu Bank.
Stock current price is Rs375 and a 3-month put with an exercise price of Rs375 is
selling at a premium of Rs10. Ignore commission and taxes.
a. If Thapa purchases the put and the price of the stock falls to Rs350 after three
months, how much return will he make?
b. What return would he make if the price rises to Rs400?
9. A call option on SDT stock has an exercise price of Rs210. It is selling for a premium of
Rs10. SDT stock price is currently Rs220.
a. If you buy one call contract, how much will you be paying? Assume each contract is
for 100 shares of common stock.
b. Suppose you buy the call option today and hold it until expiration. What is your
gain/loss given the following possible prices for SDT stock: Rs190, Rs200, RS210,
Rs220 and Rs230?
c. What is the break-even stock price on this call option?
10. An investor purchased 1-year structured note of Rs100000. The issuer has protected
the principal but interest rate depends upon the stock market index. The stock market
index was 200 at the time of purchase of the structured note.
a. What will be the future value of the note if the stock reaches to 225 at the end of
year1?
11. On Dec20, 2020, the call on the common stock of SDT Co. was traded with an Rs900
exercise price. You bought the call option on this stock at Rs13.75 on Dec20, 2020.
The optioned stock price had just fallen to Rs830 per share. However, on Dec27, 2020,
in the short time before the optioned expired, the price of the stock increased to
Rs1087.5.
a. What was the value of call option when stock price rise to Rs1087.5?
b. What was your rate of return on call investment when stock price rise to Rs1087.5?
12. Mr.Thapa has purchased 100 call options on SDT Co. Stock. Each call option entitles
him to purchase one stock of the company at a price of Rs120. The option premium for
one call option is Rs3. Currently the SDT Co shares are trading at Rs118 at the Bombay
stock Exchanges. The expiration period of the options is 3 months. If the stock price of
the SDT Co. becomes Rs180 at the expiration date, calculate the total profit earned by
Mr.Thapa.
13. A farmer signed a futures contract to sell 10000kgs of orange at Rs25 per Kg to Real
Juice. If ultimate market price is Rs20.
a. What will be the gain or loss to the farmer in futures contract deal?
b. What will be the loss or gain to the Real juice in buying the orange from farmer?
14. You buy a put option of SDT Common stock at Rs14. The exercise price of put is Rs120.
If the market price of underlying share of common stock is Rs100, what is the gain to
you as a put buyer?
15. A call option on SDT stock is currently priced at Rs12.5. its strike price is Rs112 and
the market price per share of common stock is Rs130. If you buy one call option on this
stock, what kind of return would you realize?
16. AS an investor you are bullish on the stock of SDT Co.Ltd. consequently you purchase a
6-month call on this stock with an exercise price of Rs500 for Rs26. The current price
of the stock is Rs500. How much would the price of this stock need to increase in 6
months for you to make a 10% rate of return on your investment? Ignore commission
charges and taxes.
17. As an owner of 500 shares of SDT stock, you are considering writing call options on
your shares which would have the following terms:
Strike price=Rs3000
Premium=Rs180
Maturity=3 months. If you did write the options, what return would you make on your
investment over 3 months if the price of the stock rise from its current price of Rs2700
to Rs3000?
18. Sunil has an option to buy 100 shares of SDT Co.Ltd. at Rs2940 and her option expires
on September 30,2020. He paid Rs5 per share as option premium for 100 shares. Price
of SDT Co Ltd. went up to Rs2975 in august. He bought 100 shares for Rs2940 and
sold them for Rs2975 in the secondary market. What is her total profit? What is her rate
of return on her investment?
19. Refer to question no.18. Instead of buying call option on the shares of SDT Co.Ltd,
suppose Sunil bought 100 shares at 2940 from the secondary markets and sold them
for Rs2975 a share.
a. How much he invested in 100 shares of SDT Co.Ltd?
b. How much he received after selling her 100 shares at Rs2975 per share?
c. How much profit he earned in buying and selling 100 shares in the secondary
markets?
d. What is the rate of return on her investment (ignore the transaction cost)?
e. What conclusion do you draw from question no. 18 and 19 regarding the leverage
of options?
20. You have a call option to buy 100 shares of SDT Co.Ltd at Rs2750 before or on
october30. You paid Rs10 per share to option writer. Currently shares of SDT Co.Ltd are
selling at Rs2800 a share.
a. What is the intrinsic or fundamental value of your options on the shares of
SDTCo.Ltd?
b. What will be the value of your option if the market price of the shares drops to
Rs2740?
c. What will be your maximum loss on your investment?
d. When you will be in no loss and no gain position?
e. Should you exercise your option when you are in no loss and no gain position? Why?
21. You decide to go long 2 USD contract at 107.29 per USD. Each contract is of $20000.
You are required to deposit Rs5000 as initial margin requirement for each contract.
After one week, the USD appreciates and the exchange rate goes to 110.89.
a. What is the underlying value of your currency futures contract?
b. What is your total investment in your currency futures contract?
c. What will be value of your contracts after appreciation of USD?
d. What will be your earning after appreciation of the USD?
e. What will be rate of return on your investment?
22. Sunil decided to short sell two July Treasury bond contract at 112-00. Each contract is
for T-bills of Rs1000000. He paid Rs10000 per contract to make initial deposit. Market
interest- rate e increased and value of interest –rate futures dropped to 110-00. He
decided to purchase two interests –rate futures to cover the short position at this rate.
a. How much he received by short selling his two interest rate futures?
b. How much he paid to recover his short selling of two futures contract?
c. How much he got the profit by going on short selling of his futures?
d. What is his rate of return on his investment?
23. Sunil bought NEPSE stock-index futures at 1509.39. he deposited an initial margin of
Rs10500. After one week NEPSE index moved to 1522.25. Suppose the amount of
underlying cash is set a multiple of Rs200 for NEPSE index.
a. How much did Sunil earn profit from stock-index futures?
b. What I his rate of return on his investment?
24. Sunil has an option to sell 100 shares of SDT Co.Ltd. at Rs2940 and his option expires
on August30,2020. He paid option premium of Rs5 per share. Price of SDT Co.Ltd.
dropped to Rs2925 in August. He bought 100 shares for Rs2925 from the secondary
market and sold them for Rs2940 to option writer.
a. How much he earned by exercising his right to sell 100 shares to option writer?
b. What is his rate of return on his investment?
c. Suppose price of the SDT Co.Ltd. Did not drop below Rs2940 during the option
maturity period. Did he exercise his options? If she did not, why?
d. If he did not exercise his options and let it expires, what is her limit of loss in her
investment?
25. Shares of SDT Co.Ltd. is selling at Rs679. Suppose strike prices of an option written on
stocks are set in Rs20 increment for stock selling below Rs500, Rs30 increment for
stock selling in between Rs500 and Rs1000 and Rs50 for stock selling for more than
Rs1000. What will be the possible strike price of an option written on the shares of SDT
Co.Ltd.?
26. Sunil buys a stock-index call option written on NEPSE stock-index. The strike price of
the option is 1345.53. Currently, NEPSE index has soared up to 1357.14 and this call is
trading at 15.90. Stock-index is converted into cash on scale of 1 point equal to Rs100.
a. What is the intrinsic value of the option?
b. What is the time premium of this option?
CHAPTER 6: - FINANCIAL PLANNING AND

FORECASTING.(PRACTICAL 10 MARKS)
THEORY QUESTIONS;
1. State the key elements of a firm’s strategic plan.

2. Why operating plan is important for a corporation?
3. Differences between operating and financial plan.
4. Point out the objectives and importance of Financial Planning.
5. Point out the process of financial planning and strategic planning.
6. Why is an accurate sales forecast important for financial planning?
7. Is it possible for SFN to be Negative? If so, what would that indicate?
8. Factors affect the AFN.
9. State the relationship between days sales outstanding and AFN.
10. Difference between strategic and operating plan.
11. Define sales forecast
12. Define financial forecasting and its methods.
13. What are the assumptions of percentage of sales method of financial forecasting?
14. Compute the following Formula:

- Days sales Outstanding
- Internal growth rate (g)
- Sustainable growth rate (gs)
- Return on assets (ROA)
- Return on Equity (ROE)
- Retention Ratio (RR)
- D/P Ratio
- Income statement
- Preparation of Pro-forma Balance sheet
- R/E in current year
15. Compute the AFN formula:

- S1
- Change in sales
- Capital intensity Ratio
- Spontaneous Liability to sales ratio
- Profit margin
- Retention Ratio
- Addition to R/E
- Determine the Additional Fund Needed (AFN)
- Percentage of External Funds Requirements (PEFR) with AFN
16. Compute the Capacity Adjustment:

- Full capacity sales
- Calculation of % of assets to which excess capacity exits (A1)

- Calculation of % of assets to which excess capacity doesn’t
exists (A2)
- Calculation of % of liabilities varying with sales (L)
- Calculation of Additional Retained Earning
- Target Fixed to sales Ratio
- Required Fixed Assets
- Increase in Fixed Assets
- Regression equation
- Inventory Turnover Ratio
THEORY;
1) Strategy: - It refers to the unified, comprehensive and integrated plan that relates the
strategic advantages of the firm to the challenges of the environment.
2) Strategic Plans: - The streams of long-term plans to help achieve corporate objective.
3) Strategic Planning: - The process in which strategists determine objective and make
strategic decisions is known as strategic planning.
4) Elements of Strategic Plans.

- Corporate Purpose.
- Corporate Scope.
- Corporate Objective.
- Corporate Strategies.
5) Operational Plans: - A detailed guideline that helps in effective implementation of

corporate strategies is known as operational plans.
6) Financial Plans: - A plans that spells out future financial course of actions, budgets
and capital expenditure required for execution of operating plans is known as financial
plans.
7) Importance of Financial Plans.

- Increase your savings.
- Enjoy a better standard of living.
- Be prepared for emergencies.
- Attain peace of mind.
8) Process/Steps of Financial Plan.

- Step #1 - Decide on Your Life Goals.
- Step #2 - Know Your Current Situation.
- Step #3 - Evaluate Investment Alternatives.
- Step #4 - Set up The Investment Plan.
9) Sales Forecast: - A forecast of firm’s unit and rupee sales for some future period is
known as sales forecast.
10)Factors to be considered while developing sales forecasts.
- Dividend sales forecast based on historical growth.
- Level of economic activity and overall demand for the product.
- Market share for each product line in each market.
- In case of foreign sales, change in foreign currency exchange rate/currency
fluctuations, trade agreements, governmental policies etc.
- Effect of change of inflation in the consumer’s purchasing power and price of
products.
- Adverting campaigns, promotional discounts, credit terms etc.
11)Methods of Sales Forecasts.

A. Qualitative Methods.
- Executive Opinion Method.
- Delphi Method.
- Sales Force Composite Method.
- Survey of Buyer’s Intentions.
B. Quantitative Methods.
- Time Series Analysis.
- Market Test Method.
- Regression Analysis.
12)Financial Forecasting: - A process of projecting future financial requirements of the

firm is known as financial forecasting.
13)Process/Steps of Financial Forecasting.

- Forecast targeted sales level.
- Project the assets needed to support sales.
- Project internally generated funds.
- Project outside funds needed.
- Decide how to raise funds.
- See effects of plan on ratios and stock price.
14)Capital Intensity Ratio: - The amount of assets required per rupee of sales is known as
capital intensity ratio.
15)Spontaneously Generated Funds: - The funds generated due to the spontaneous

increase in accounts payables and accruals.
16)Forecasted Financial Statements: - The financial statements that project the change in
financial position and performance of the firm over a period.
17)If the AFN is Negative: - Then the firm has more financing than it needed and it will
have different other alternatives such as (I) pay off debt. (ii) Buy back stock. (iii) Buy
short-term investments. Or it indicates that excess capital is predicted.
18)If the AFN is Positive: - Then the firm must secure additional financing.
19)Analyzing the Effects of Changes in Ratios.

- Higher dividend payout ratio increase AFN due to less retained earnings.
- Higher Profit Margin Decrease AFN due to higher profits, more retained earnings.
- Higher Capital Intensity Ratio increase AFN due to need more assets for projected
sales.
- Pay suppliers in 60 days, rather than 30 days decrease AFN due to trade creditors
supply more capital increases and so on.
Some Practical Problem:
1. Consider the following balance sheet and income statement of a company to the
current year.
Balance Sheet
Liabilities Rs Assets Rs
Current liabilities 1000 Current assets 1800
Long-term debt 3600 Net fixed assets 4400
Shareholders’ equity 1600
Total Liabilities 6200 Total assets 6200
Income Statement
Particulars Amount (RS)
Sales 8500
Less: costs 7750
Earnings before tax 750
Less: 34% tax 255
Net Income 495.00
Less: Dividend 165.20
Addition to R/E 329.80
Required:
a. Internal growth rate
b. Sustainable growth rate
2. The balance sheet of SDT Co. for 2020 is given as below:
Liabilities and Equity Amount (Rs) Assets Amount(Rs)

Account payable 80 Cash 20
Accruals 20 Account receivable 200
Notes payable 100 Inventory 280
Total current liabilities 200 Total current assets 500
Common stock 500
Total liabilities and equity 1000 Total Fixed assets 1000
SDT Co. profit margin is 4%. The sales for 2015 are Rs2000 and are expected to increase by
25% in next year. The company pays 50% dividend out of the profit. (A). Find the additional
fund needed by using formula method. (b) Percentage of External Financial Requirement
method (PEFR).
3. The Balance sheet of SDT Co for 2020 is given as below:
Liabilities and equity Amount (Rs) Assets Amount (Rs)
Accounts payable 80 Cash 20
Accruals 20 Account receivable 200
Notes payable 100 Inventory 280
Total current liabilities 200 Total current assets 500
Common stock 500

Total liabilities and equity 1000 Total Fixed assets 1000
SDT Co. profit margin is 4%. The sales for 2014 are Rs2000 and are expected to increase by
25% in next year. The company pays 50%dividend out of the profit.
Required: Additional Fund needed by preparing projected balance sheet for 2020
4. Consider the following data relating to inventories and sales during last five years as
shown below:
Year Inventories Sales
2011 10000 2300000
2012 15000 3100000
2013 17000 3490000
2014 19000 4250000
2015 23000 4980000
Required: forecasted level of inventory in 2016 where sales is Rs6250 thousand.
5. The Balance sheet of SDT Co. as of Dec31,2020 is shown below:

Balance sheet as of 31, 2020
Assets Amount (Rs) Liabilities and equity Amount (Rs)
Cash 10000 Account payable 7000
Account receivable 15000 Accruals 3000
Inventories 25000 Notes payable 10000

Total current assets 50000 Total current liabilities 20000
Net fixed assets 75000 Long-term debt 30000
Common stock 50000
Total Fixed assets 125000 Total liabilities and Equity 125000
Sales in 2020 were Rs100000 which are expected to increase by 25% or to Rs125000
in 2021. All assets are utilized to full capacity. The profit margin of the firm is 10% and
the firm is expected to maintain a retention ratio of 30%.
a. What is the capital intensity ratio of the firm?
b. What is the additional investment need in assets?
c. Determine the addition amount of spontaneous financing.
d. Determine the addition to retained earnings.
e. What is the additional fund needed (AFN) of the firm?
f. What is the percentage external financing requirement of the firm?
6. SDT Ltd. Sales are expected to increase to increase from Rs3 million in 2020 to Rs6
million in 2021. Total assets of the firm are Rs4 million at the end of 2020. The firm
was operating at full capacity so that its assets must grow spontaneously with sales.
At the end of 2020, the firm has Rs0.75 million in current liabilities including notes
payable ofRs0.15 million. The after-tax profit margin is forecasted to be 4%, and the
firm pays 50% of its earnings as dividend.
a. What is the firm AFN for 2021? What is the PEFR for the firm?
b. If the firm pays no dividend in 2021, what will be AFN? What will be the PEFR?
c. Why this part (a) and (b) are different in calculation?
7. A firm has the following relationships. The ratio of assets to sales is 55%. Liabilities
that increase spontaneously with sales are 20%. The profit margin on sales after taxes
is 6%. The firm’s dividend payout is 40%.
a. If the firm’s growth rate on sales is 16% per annum, what percentage of the sales
increase in any year must be finance externally?
b. If the firms growth rate on sales increases to 25% per annum, what percentage of
the sales increase in any year must be financed externally?
c. How will your answer to part (a) change if the profit margin increases to 8%?
d. How will your answer to part (b) change if the dividend payout is reduced to 30%?
e. If the ratio of assets to sales and ratio of liabilities to sales are 0.55 and o.15
respectively, profit margin increases from 6% to 8% and dividend payout ratio is
20%, at what growth rate in sales will the external financing requirements
percentages be exactly zero.
8. SDT Ltd.2020 financial statement are shown below:

Balance sheet as of Dec31, 2020
(Thousands of rupees)
Assets Amount Liabilities and equity Amount (Rs)

(Rs)
Cash 1080 Accounts payable 4320
Receivables 6480 Accruals 2880
Inventory 9000 Notes payable 2100

Net fixed assets 12600 Mortgage bonds 3500
Common stock 3500
Income statement for year ended Dec31, 2020 (Thousands of Rupees)
Sales Rs36000
Less: operating costs 32440
Earnings before interest and taxes 3560
Less: Interest 560
Earnings before taxes 3000
Less: taxes (40%) 1200
Net Income 1800
Dividends (45%) 810
Addition to retained earnings 990
Suppose 2021 sales are projected to increase by 15% over 2020 sales. Determine the
AFN. Assume that the company was operating at full capacity in 2020, that it cannot
sell off any of its fixed assets, and that any required financing will be borrowed as
notes payable. Also, assume that assets, spontaneous liabilities, and operating costs
are expected to increase in proportion to sales. Use the projected financial statement
method to develop a pro-forma balance sheet and income statement for Dec31, 2021.
Use the pro-forma income statement to determine the addition to retained earnings.
f. Assume that the company was operating at full capacity in 2020 with regard to
all items expect fixed assets: fixed assets in 2020 were being utilized to only 75%
of capacity. By what percentage could 2021 sales increase over 2020 sales without
the need for an increase in fixed assets?
9. The summarized financial statements of a corporation are given below:
Assets 150000 Notes payable 50000
Owners equity 100000
Total Rs150000 Total Rs150000
Income statement for year ended Dec31, 2020
Sales 25000
Less: costs 18000
EBT 7000
Less: Taxes@40% 2800
Net Income 4200
Assets and costs are proportional to sales, but notes payable and equity are not. A
dividend of Rs2940 was paid and the firm wishes to maintain a constant payout ratio.
Next year’s sales are projected to be Rs37500.
a. What is the AFN? Use pro-forma income statement to determine addition to
retained earnings.
b. Prepare pro-forma balance sheet for 2021.
10. SDT Co. balance sheet is given below:
Assets Amount (Rs) Liabilities and Equity Amount (Rs)
Cash 80000 Account payable 200000
Account receivable 400000 Accruals 90000
Net fixed assets 1000000 Common stock 900000
Total Fixed Assets 2000000 Total liabilities and Equity 2000000
Sales are expected to increase from Rs4000000 in 2020 to Rs6000000 in 2021. Firms
after tax profit margin is forecasted to be 10% and its payout ratio will be 80%.
a. What is the firm AFN for the year 2021 if company is running at full capacity?
b. Prepare SDT Co. pro-forma balance sheet as of Dec31, 2021.
11. The 2020 balance sheet and income statement for SDT Ltd are given below:
Balance Sheet as of Dec31, 2020
Cash Rs4000 Account payable 2000
Receivables 6000 Accruals 1000
Net Fixed assets 20000 Long-term debt 10000
Common stock 15000

Income statement for the year ended Dec31, 2020
Sales 75000
Less: operating costs 60000
EBIT 15000
Less: Interest 2000
EBT 13000
Less: Taxes @40% 5200
Net Income 7800
Per share data:
- Common stock price Rs25
- Earnings per share Rs5.2
- Dividend per share Rs4.16
a. The firm operated at full capacity in 2020. It expects sales to increase by 10%
during 2021 and expects 2021 DPS to increase to Rs4.70. use the projected
financial statement method to determine how much outside financing is required,
developing the firm’s pro-forma balance sheet and income statement and use AFN
as the balancing Item.
b. If the firm must maintain a current ratio of 4 times and a debt ratio of 37.5%,
how much financing will be obtained using notes payable, long-term debt and
common stock?
c. If the profit margin were to remain at 5% and the D/P ratio were to remain 60%,
at what growth rate in sales in 2020 would the additional financing requirements be
exactly Zero?
12. SDT Co. has Rs5 billion in sales and Rs1.7 billion in fixed assets. Currently, the
company fixed assets are operating at 90% of capacity.
a. What level of sales could the company have obtained if it had been operating at
full capacity?
b. What is company target fixed assets/sales ratio?
c. If the company sales increase 12%, how large an increase in fixed assets would
the company need in order to meet its target fixed assets/sales ratio?
13. SDT Ltd. Has Rs300 million in sales. The company expects that its sales will increase
12% this year. Company CEO uses a simple linear regression to forecast the company
inventory level of projected sales. On the basis of recent history, the estimated
relationship between inventories and sales (in million of rupees) is:
Inventories = Rs25+0.125 (sales)
14. At-year-end 2015, total assets of SDT Co. were Rs1.2 million and accounts payable
were Rs375000. Sales, which in 2020 were Rs2.5 million, are expected to increase by
25% in 2016. Total assets and account payable are proportional to sales, and that
relationship will be maintained. The firm typically uses no current liabilities other than
accounts payable. Common stock amounted to Rs425000 in 2020, retained earnings
were Rs295000. The firm plans to sell new common stock in the amount of Rs75000.
The firm’s profit margin on sales is 6%: 60% of earnings will be retained.
a. What was the firm’s total debt in 2020?
b. How much new, long-term debt financing will be needed in2021?
15. SDT Co. sales in 2020 were Rs7200000. The percentage of sales of each balance
sheet item except notes payable, mortgage bonds and common stock is given below:
Cash 4% Account payable 15%
Receivables 25% Accruals 5%
Inventory 30% Profit Margin 5%
Net fixed assets 50%
The D/P ratio is 60%; the chaitra31, 2020 balance sheet account for R/E was
Rs148000; and both common stock and mortgage bonds are constant and equal to the
amounts shown on the following balance sheet.
a. Complete the firm’s chaitra 31, 2020 balance sheet.
Balance sheet as of Chaitra31, 2020
Accounts payable - Cash -
Notes payable 68400 Receivables -
Accruals - Inventories -
Mortgage bonds 10000 Net fixed assets -
Common stock 400000
Retained earnings -
Total - Total -
b. Assume that the company was operating at full capacity in 2020 with regard to
all items except fixed assets. If the FA had been used to full capacity the fixed
assets/sales ratio would have been 40% in 2020. By what percentage could sales in
2021 increase over 2020 sales without the need for an increase in fixed assets?
c. Now suppose that 2021 sales increase over 2020 sales by 20%. How much
additional external capital will be required? Assume that part (b) conditions hold
and that any required financing is borrowed as notes payable.
16. If Firms sales are expected to increase from Rs5million in 2020 to Rs6million in2021.
Total assets of the firms were Rs4 million at the end of 2020. What is the required
increase in assets?
17. Firms sales are expected to grow from Rs500000 to Rs700000. The after-tax profit
margin is forecasted to be 4%, and the firm pays 40% of its earnings as dividend. What
is the addition to R/E?
CHAPTER 7: - CAPITAL STRUCTURE DECISION.(THEORY;2

MARKS/ PRACTICAL : - 2/10 MARKS).
THEORY;
1. Difference between Financial and capital structure.

2. State the good and bad effects of using the leverage.
3. What does EPS indifference point show?
4. A firm has a DOL/DFL of 3.5 at Q units .what does this indicate?
5. Calculate the BEP (quantity) point given the following information.
The firm has Rs1000000 in FC. The firm produces only one product and anticipates
selling each unit forRs25 with variable cost of Rs5 per unit.
6. Factors affecting capital structure.
7. Optimal Capital Structure
8. EBIT-EPS analysis and effect of financial leverage.
9. Define leverage. Explain its types.
10. What is trade-off theory of capital structure?
11. What is the pecking order theory of capital structure?
12. What is the signaling theory of capital structure?
13. Point out the theories of capital structure.
14. Compute the following Formula:
- ROE
- Equity
- Current Dividend per share (Do)
- Po
- Pre-tax income (EBIT)
- Equal profit sales
- Selling price per unit
- Variable cost per unit
- EBIT(1-T)
- EBIT
- Income statement
- Equity-Debt: EPS=
- Equity-P.S: EPS=
- Equity-Debt-P.S: EPS=
- BEP
- Debt to equity ratio(D/E)
- After tax cost of debt (Kdt)
- Expected stock price(Po)
- Ke
- WACC
- Expected EPS when probability is given
- SD of EPS when probability is given
- When there is no P.S calculate the EPS indifference
- When there is P.S calculate the EPS indifference
- Beta levered and beta unlevered
- Income statement showing various leverages
- Computation of DOL,DFL and combined leverage

- New EBIT
- %change in EBIT
THEORY: -
1) Financial Structure: - It refers to the mixture of overall components of liabilities side of

balance sheet.
2) Capital Structure: - It refers to the mixture or combination of long term sources of
funds.
3) Optimal Capital Structure: - The mix of debt and equity capital that results to minimum
weighted average cost of capital is known as optimal capital structure. It is the one
that minimizes cost of capital and maximizes the value of a firm.
4) EPS Indifference Point: - It is the level of sales at which EPS under two financing
alternatives remain equal.
5) Leverage: - It refers to the use of fixed cost in an attempt to increase profitability.
6) Operating Leverage: - It shows the responsiveness of change in operating profit to the

change in sales.
- The responsiveness of change in EBIT to the change in sales.
7) The degree of operating leverage is 5 times then it implies that if sale increases by
10% the EBIT will increase by 5 times of it or by 50%.
8) Financial Leverage: - The responsiveness of change in EPS to the change in operating

income/ change in EBIT.
9) If the DFL is 5 times it implies that 1% change in EBIT brings a 5% change in EBT, EAT,
and EPS.
- An increase in EBIT increase EBT and a decrease in EBIT decrease EBT.
10)Total Leverage/Combined Leverage: - The combination of operating and financial

leverage that measure the responsiveness of change in EPS to the change in sales.
11)If the DCL or DTL is 2 times it implies that 1% increase in sales brings 2 % increase in
EBT or Net Income or EPS.
12)Types of risk in leverage.

- Business risk. – Finance risk. – Market Risk. – Interest Rate Risk.
1. A company’s sales, variable costs and fixed cost are Rs.75, 00,000, Rs.45, 00,000 and
Rs.15, 00,000 respectively. Calculate the degree of operating leverage. Ans: - 2 times.
2. Rise Against Corporation is comparing two different capital structures an all equity
plan (plan I) and a levered plan (Plan II). Under Plan I, the company would have 2,
10,000 shares of stock outstanding. Under plan II, there would be 1, 50,000 shares of
stock outstanding and Rs.2.28 million in debt outstanding. The interest rate on the debt
is 8%, and there are no taxes.
A. If EBIT is Rs.5, 00,000, which plan will result in the higher EPS?
B. If EBIT is Rs.7, 50,000, which plan will result in the higher EPS?
C. What is the break-even EBIT?
3. Destin Corp. is comparing two different capital structures. Plan I would result in 10,000
shares of stock and Rs.90, 000 in debt. Plan II would result in 7,600 shares of stock and
Rs.1, 98,000 in debt. The interest rate on the debt is 10%. Assuming that the corporate
tax rate is 40%.
A. Compare both of these plans to an all-equity plan assuming that EBIT will be Rs.48,
000. The all-equity plan would result in 12,000 shares of stock outstanding. Which of
three plans has the highest EPS? The Lowest?
B. What are the break-even levels of EBIT for each plan as compared to that for an all
equity plan?
4. David Baseball Bat Company currently has Rs.30, 00,000 in debt outstanding, bearing
an interest rate of 12%. It wishes to finance a Rs.40,00,000 million expansion program
and is considering three alternatives: additional debt at 14% interest (option 1),
Preferred stock with a 12% dividend (option 2), and the sale of common stock at
Rs.100 per share (option 3). The company currently has 8,00,000 shares of common
stock outstanding and is in a 40% tax bracket.
A. If EBIT are currently Rs.15, 00,000. What would be EPS for the three alternatives
assuming no immediate increase in operating profit?
B. Determine the indifference point between the debt plan and the common stock
plan.
5. SDT Co. has a DOL of 2 times at its current production and sales level of 10000 units.
The resulting operating profit is Rs1000.
a. If sales were expected to increase by 20% from the current 10000 unit sales
position, what would be the resulting operating profit?
b. At the company new sales position of 12000 units, what is the firm’s new DOL
figure?
6. SDT Ltd.has fixed operating costs of Rs10 million and a variable cost ratio of 0.65. The
firm has Rs20 million, 10% bank loan and Rs6 million, 12% bond issue outstanding. The
firm has 1million shares of Rs5 (dividend) preferred stock and 2 million shares of
common stock (Rs100 par value). SDT marginal tax rate is 30%. Sales are expected to
be Rs80 million.
a. Compute the SDT DOL at Rs 80 million sales levels.
b. Compute SDT DFL at Rs 80 million sales levels.
c. If sales decline to Rs76 million, forecast SDT- EPS.
7. SDT Co.Ltd. Has a current capital structure consisting of Rs250000 of 16% debt and
2000 shares of common stock. The firm pays taxes at the rate of 40%.
a. Using EBIT values of Rs80000 and Rs120000, determine the associated EPS.
b. Using Rs80000 EBIT as a base, calculate the DFL.
8. Intel computer produces small computers that sell for Rs80000. Intel’s FC are
Rs800000 and; VC =Rs40000. It produces 50 computers and sells each year. Intel’s
assets (all equity financed) are Rs1000000. Intel can change its production process,
which needs additional Rs600000 to investment and Rs200000 to Fixed operating
costs. This change will (1) reduce VC per unit by Rs4000 and (2) increase output by 20
units, but (3) the sales price on all units will have to be lowered to Rs70000 to permit
increased output also. Intel uses no debt, and its average cost of capital is 15%.
a. Should Intel make the change?
b. Would Intel’s DOL increase or decrease if it made the change?
9. Suppose SDT Co. has decided in favor of a capital restricting that involves increasing
its existing Rs80 million in debt to Rs125 million. The interest rate on the debt is 9%
and is not expected to change. The firm currently has 10 million shares outstanding,
and the price per share is Rs45. If the reconstructing is expected to increase the ROE to
12%, what is the minimum level of EBIT that management must be expecting? Ignore
taxes.
10. The capital structure of the SDT Co. Ltd. Consist of an ordinary share capital of
Rs1000000 (shares of Rs100 par value) and Rs1000000 of 10% debentures. The unit
sales increased by 20% from 100000 units to 120000 units the selling price is Rs10 per
unit, variable cost amount is Rs6 per unit and FC amount of Rs200000. The income tax
rate is assumed to be 35%. You are required to calculate:
a. The % increase in EPS.
b. The DFL and DOL at both units.
c. Comment on the behavior of DOL and DFL in relation o increase of production
from 100000 to 120000 units.
11. Give the following information from S and D.

Firm S: BEP in units=25000; FC=Rs80000; Total revenue at BEP=Rs200000
Firm D: BEP in units=30000; FC=Rs120000; Total revenue at BEP=Rs240000
a. Which firm has the higher operating leverage at any given level of sales? Explain.
b. At what level of sales in units, do both firms earn the same operating profit?
c. If both the company require an after tax profit of Rs36000; what is the target
unit of sales required in each company? Assume corporate tax rate is 40%.
12. A company presently capitalized with Rs500000 consisting of 5000shares of common
stock of Rs100 each. Additional finance of Rs500000 is required for an expansion
program. Following possible financing plans are under consideration.
Plan 1: Equity financing by issuing Rs100 per share.
Plan 2: 50% through equity of Rs 100 per share and remaining through debt carrying
12% interest. The corporate tax rate is 50%.
a. Calculate the indifference point in EBIT between given plans.
b. Prepare income statement and calculate EPS under each plan.
13. Compute the following income statement of SDT co. of 2020.

INCOME STATEMENT
Particulars Amount (Rs)
Sales 4500000
Less: variables costs (3000000)
Contribution Margin (CM) 1500000
Less: Fixed cost (500000)
EBIT/ operating profit 1000000
Less :Interest (300000)
EBT 700000
Less: Tax@40% (280000)
Net Income (NI) 420000
Less: Preferred dividend (20000)
Net Income to common stockholders 400000
No. of common stocks 10000
EPS 40
a. Calculate the DOL in units, % and times.

b. Calculate the DFL and DCL.
c. Find out the EPS of the companies if EBIT of the companies increase or
decrease by 25%.
d. If sales increase by 20%, by what % would EBT or Net Income increase?
14. Firm S is trying to estimate its optimal capital structure. Its current capital structure
consists of 40% debt and 60% equity; however, management believes the firm should
use more debt. The risk-free rate is 6%, the market risk premium is 4%, and the firm’s
tax rate is 40%. Currently, its cost of equity is 12%, which is determined on the basis of
the CAPM. What would be its estimated cost of equity if it were to change its capital
structure from its present capital structure to 50% debt and 50% equity?
15. SDT Co. has a capital structure consisting of 20% debt and 80% equity. SDT debt
capacity has an 8% yield to maturity. The risk-free rate is 5%, and the market risk
premium is 6%. Using the CAPM, SDT estimates that its cost of equity is currently
12.5%. The company has a 40% tax rate.
a. What is SDTs current WACC?
b. What is the current beta on SDT common stock?
c. What would SDT beta be if the company had no debt in its capital structure?
16. Firm S is considering following two alternative capital structures:
Capital structure 1 Capital structure 2
Common equity Rs1500000 Rs1000000
Debentures …………………. Rs500000
The BVPS of equity is Rs100. The firm pays 10% interest on debenture. Assuming the
firm is in 50% corporate tax bracket; determine the indifference point EBIT between two
capital structures and the EPS at the indifference point.
17. SDT is considering evaluating its next year’s ROE under different leverage ratios. SDT
total assets are Rs21 million, and its tax rate is 40%. The company is able to estimate
next year’s EBIT for three possible states of the economy: Rs6.3 million with a 0.2
probability, Rs4.2 million with a 0.5 probability, and Rs1.05 million with a 0.3 probability.
Calculate SDT expected ROE, SD and coefficient of variation for each of the following
leverage ratio and interpret the results.
Leverage (Debt to total assets ratio) Interest Rate
0% -
10% 9%
60% 14%
18. The SDT Co. and the DST Co. are identical except for their leverage ratios and the
interest rate on debt. Each has Rs10 million in assets, each earned Rs 2million before
interest and taxes in 2020 and each has a 405 corporate tax rate. SDT however has a
leverage ratio (debt/total assets) of 30% and pays 10% interest on its debt, while DST
has a 50% leverage ratio, pays 12% interest on debt.
a. Calculate the rate of return on equity for each firm.
b. Observing that DST has a higher return on equity, SDYT treasurer decides to
raise the leverage ratio from 30 to 60%. This will increase SDT interest rate on debt
to 15%. Calculate the new rate or return on equity for SDT.
19. SDT Co. is entirely equity financed. At present it has100000 shares outstanding.
Market price per share is Rs10. There are three possible state of economy: Slump,
Normal and Boom. Operating profit under slump, normal, and boom economy will be
Rs75000, Rs125000 and Rs175000 respectively.
Required:
a. Compute EPS and ROE if company is all equity financed.
b. Suppose company issues Rs500000 of new 10% debt and uses the proceed to
repurchase and retire common stock, what will be EPS and ROE?
20. SDT Co. sales are Rs50000 and total cost includes Rs20000 FC and Rs20000 variable
cost.
Required:
a. DOL
b. % change in EBIT if sales increase or decrease by 20%.
21. SDT Co. has Rs100 million in assets, which is financed with Rs20 million of debt and
Rs80 million in equity? If the firm’s beta is currently 1.5 and its tax rate is 40%, what is
the unlevered beta?
22. A firm has DOL of 2 times and DFL of 2.5 times. Its EBIT is currently Rs20000 and net
income is Rs9000. What is DTL? If sales increases by 10%, what will be its new EBIT
and net income?
23. SDT Co. is considering measuring the sensitivity of its operating income and net
income to change in sales. If sales of the SDT increase by 10%, EBIT increase by 25%
and in turn net income increases by 50%. What are its DOL and DFL?
24. SDT investments have EBIT of Rs220000, fixed operating cost of Rs130000, interest
expenses of Rs50000, and P.D of Rs30000. It pays taxes at the rate of 40%. What is its
DTL? If the firm has EPS of Rs5 and sales increases by 10%, what will be its new EPS?
25. A firm has the following projections for EPS and the stock price at various debt levels:
Debt Ratio Projected EPS Projected stock price
20% Rs10 Rs120
30% 10.5 135
40% 11.25 130
50% 11 125
Assuming that firm uses only debt and equity, what is its optimal capital structure?
26. Suppose a firm has unlevered beta of 0.8. If RF=5%, market risk premium=6%. What will
is its cost of equity if unlevered?
CHAPTER 8: - INTERNATIONAL CORPORATE

FINANCE.(THEORY;2 MARKS/ PRACTICAL; 2/10/15 MARKS)
THEORY;
1) Multinational Corporation/ Multinational Company/ Global Corporation: - It refers to

the company that operates at least in two or more than in two countries. Example; coco-
cola company.
2) Features of Multinational Corporation.

- Giant Size.
- International Operation.
- Professional Management.
- Centralized Control.
- Oligopolistic Powers.
- Sophisticated Technology.
3) Reasons for Company Going Global.

- New Markets.
- Raw Materials.
- New Technology.
- Production Efficiency.
- Political and regulatory Hurdles.
- Diversification of Risk.
4) Difference between Multinational Vs Domestic Financial Management.

- Different currency denomination.
- Economic and legal ramification.
- Language Difference’s.
- Cultural Differences.
- Role of Government.
- Political Risk.
5) Exchange Rates: - The price of one currency in terms of another is called the exchange
rate. It specifies the number of units of a given currency that can be purchased with
one unit of another currency.
6) Direct Quotation: - The exchange rate stated in the term of the national currency.
7) Indirect Quotation: - The exchange rate stated in term of given foreign currency.
8) Cross Rate: - It refers to the exchange rate between two currencies based on the rate of
each of them with a third currency is known as cross rate.
9) Spot Rate: - The rate paid for delivery of the currencies on the trading spot is known as
spot rate.
10)Forward Rate: - An agreed exchange rate at which two currencies will be exchanged at
some future date is known as forward rate.
11)Interest Rate Parity: - The relationship between spot rate and forward exchange rate
can be expressed through a concept, popularly known as interest rate parity.
- The Interest Rate Parity States, “that the interest rate differential between two
countries equal to the percentage difference between the forward exchange rate
and spot exchange rate”.
12)Purchasing Power Parity: - It is referred as the law of one price state that if two assets
are equivalent in all economically relevant respects, then they should have the same
market price regardless of where it is purchased.
- Purchasing Power Parity refers to the theory of exchange rate determination and a
way to compare the average costs of goods and services between countries.
13)Types of International Credit Markets.

- Euro credit markets.
- Euro bond markets.
- Foreign Bonds Markets.
14)Eurobonds: - Long term bonds issued and sold outside the country of the currency in
which they are denominated is known as Eurobonds.
15)Foreign Bonds: - Long term bonds issued by firms and governments outside the issuer’
s home country and are usually denominated in the currency of the country in which
they are issued rather than in their domestic currency is known as foreign bonds.
16)International stock Markets: - Those markets where stocks of foreign corporations are
traded.
17)International capital budgeting decision is different from domestic capital budgeting

decisions in following respects.
- Cash flows.
- Exchange risks.
18)Note: -
- Currency exchange rate in Nepal is expressed in direct quote system.
- If spot rate expressed in home currency is higher than the forward rate, the home
currency is said to be trading at a premium in a forward market.
- Upon comparison between spot rate and forward rate of two currencies, if one is
trading at premium than it implies that other is trading at discount in the forward
markets.
- Forward rate is at discount if the interest rate in the home country is higher than
in the foreign currency.
- Purchasing power parity postulates that the exchange rate adjusts to keep
purchasing power constant among the countries. According to this principle, a
commodity should costs the same regardless of the currency used to purchase
and the country where it is purchased.
CHAPTER 9: - MERGER AND ACQUISITION.(THEORY; 2/10/15

MARKS )
THEORY:
1) Merger: - It refers to the combination of two or more than two firms to form a single
firm. OR, Mergers refers to any combination that forms one economic unit from two or
more previous one. Example in case of Nepal is Banks.
2) Acquisition’s: - It refers to the process of acquiring the assets in the course of the
merger. In the general sense, it refers to acquiring the ownership in the property. OR, it
refers to the acquisition of assets by one corporation from another corporation.
3) Rationale/Importance/Significance/Benefits/Motives/Reasons of Merger and

Acquisition.
- Financial synergy for lower cost of capital

- Improving company’s performance and accelerate growth
- Economies of scale
- Diversification for higher growth products or markets
- To increase market share and positioning giving broader market access
- Strategic realignment and technological change
- Tax considerations
- Undervalued target
- Diversification of risk
4) Synergy: - The condition wherein the whole is greater than the sum of its parts is called
synergy. Synergy is also called the ‘2 plus 2 equals to 5 effects’. Synergistic effects
may arise from the following four sources:
- Operating Economics.
- Financial Economics.
- Differential Economics.
- Increased Market Power.
5) Types of Mergers.
- Horizontal Mergers.
- Vertical Mergers.
- Conglomerate Mergers.
- Congeneric Mergers.
6) Horizontal Mergers: - It refers to the combination of two or more firms dealing in
similar lines of business activities. The main purpose of this merger is to obtain
economy of scale in production and operation by eliminating duplication of facilities,
reducing competition, reduction of cost, increase in stock price and expansion in
market segments. E.g.; merger between National Finance Limited and Narayani
Finance Limited.
7) Vertical Mergers: - It refers to the combination of two or more firms involved in
different stages of production or distribution. An example of a vertical merger would be
a steel producer’s acquisition of one of its own suppliers, such as an iron or coal
mining firm, or an oil producer’s acquisition of a petrochemical firm that uses oil as a
raw material. The main purpose of this type of merger is to increase profitability.
Vertical mergers take two forms; Forward Integration and Backward Integration.
8) Conglomerate Mergers: - It refers to the combination in which a firm established in
one industry combines with a firm from an unrelated industry. An example of
conglomerate merger is merging of cement manufacturing business with
manufacturing business of electronic products.
9) Congeneric Mergers: - It means “allied in nature or action”. Hence, It refers to the
merger of firms in the same general industry but for which no customer or supplier
relationship exits.
10)Acquiring Company: - In merger, the firm which seeks to acquire another firm is called
acquiring company.
11)Target Company: - The one that seeks to be acquired is called Target Company.
12)Friendly Takeover: - In M&A transactions, a friendly takeover is the acquisition of a
target company by an acquirer/bidder with the consent or approval of the management
and board of directors of the target company.
13)Hostile Takeover: - A hostile takeover, in mergers and acquisitions (M&A), is the
acquisition of a target company by another company (referred to as the acquirer) by
going directly to the target company’s shareholders, either by making a tender offer or
through a proxy vote. The difference between a hostile and a friendly takeover is that, in
a hostile takeover, the target company’s board of directors do not approve of the
transaction.
14)Merger Analysis: - A process of analysis that involves valuing the target firm, setting
the bid price and setting the post-merger issues.
15)Methods of Valuing the Target Firms.

- Discounted Cash Flow Analysis.
- Market Multiple Analyses.
16)Financial Merger: - A merger in which firms involves is not operated as a single unit
and no operating economies are expected.
17)Operating Merger: - A merger in which firms involves are integrated and operated as a
single unit and synergistic benefits are expected.
18)Equity Residual Method: - A method of valuing target firm using residual net cash
flows that belong to the shareholders of acquiring firm.
19)Market Multiple Analyses: - It is the method of valuing a target firm that applies a
market determined multiple to net income, earning per share, sales, and book value and
so on.
20)Bid Price: - The price which the acquiring firm agrees to pay the target firm on
acquisition.
21)Role of Investment Bankers.

- Arranging Mergers.
- Developing defensive tactics.
- Financing mergers.
- Arbitrage operations.
- Establishing fair value.
22)Some Defensive Tactics are;

- Poison pill, white knight, greenmail, crown jewels etc.
23)Corporate Alliances: - It is also called strategic alliance. It is a strategic way to join the
forces of two or more companies in a cooperative deal. The objective of corporate
alliances is to share resources, information, capabilities and innovation and technology.
Examples; Alliances of Apple with Motorola, Sony, Phillips, and AT and T, Eli Lilly etc.
24)Private Equity Investment: - It refers to the asset class consisting of equity securities
and debt in operating companies that are not publicly traded on a stock exchange.
25)Leveraged Buyouts: - A situation in which a small group of investors borrows heavily

to buy all the shares of a company is called leveraged buyouts.
26)Discounted Cash Flow Analysis: - It is an important tool in analyzing mergers and

acquisitions. The acquiring firm should appraise merger as a capital budgeting
decision.
27)Different Aspects of Merger Analysis.
- Valuing the Target Firm
- Setting Bid Price.
- Post-Merger Control.
28)Difference between Merger and Acquisition.
BASIS MERGER ACQUISITION
Meaning The merger means the fusion of When one entity purchases the
two or more than two companies business of another entity, it is
voluntarily to form a new company. known as Acquisition.
Formation of a new Yes No
company
Nature of Decision The mutual decision of the Friendly or hostile decision of

companies acquiring and acquired companies.
Going through mergers.
Minimum number of 3 2
companies involved
Purpose To decrease competition and For Instantaneous growth
increase
Operational efficiency.
Size of Business Generally, the size of merging The size of the acquiring company
companies is more or less same. will be more than the size of
acquired company.
Legal Formalities More Less
******** BEST OF LUCK *********

BY.MR.SUNIL THAPA.

CORPORATE FINANCE BBS 4TH YEAR

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CORPORATE FINANCE BBS 4TH YEAR

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BBS 4th Year

FIN 250: - FUNDAMENTALS OF CORPORATE FINANCE

IMPORTANT QUESTION WITH MARKS

OVERALL SYALLBUS DISCUSS;

CHAPTER 2: SHORT-TERM FINANCING (Practical: - 2/10/15 Marks).

CHAPTER 3: - TERM LOANS AND LEASE FINANCING. (THEORY 10 MARKS/ PRACTICAL: -

CHAPTER 4: - LONG TERM FINANCING ;( THEORY 10 / PRACTICAL 10/15 MARKS).

UNIT 5: - HYBRID FINANCING: PREFERRED STOCK, WARRANTS AND

CHAPTER 6: - FINANCIAL PLANNING AND FORECASTING.(PRACTICAL 10 MARKS)

CHAPTER 7: - CAPITAL STRUCTURE DECISION.(THEORY;2 MARKS/ PRACTICAL : - 2/10

CHAPTER 8: - INTERNATIONAL CORPORATE FINANCE.(THEORY;2 MARKS/ PRACTICAL;

CHAPTER 9: - MERGER AND ACQUISITION.(THEORY; 2/10/15 MARKS )

CHAPTER 1: FUNDAMENTAL OF CORPORATE FINANCE (2 /4 Marks)

14. Why might conflicts arise between stockholders and bondholders?

16. Addresses of issues of corporate finance.

18. Responsibilities of Financial Manager’s.

19. Principles of managerial actions to maximize shareholders.

20. Functional Areas of Corporate Finance.

CHAPTER 2: SHORT-TERM FINANCING (Practical : - 2/10/15 Marks).

2) Advantages of Short-term financing.

3) Disadvantages of short-term financing.

4) Sources of Short-term Financing.

9) Advantages of Trade Credit.

10)Commercial paper: - It refers to the short-term, unsecured negotiable promissory note

11)Advantages of Commercial Paper.

12)Disadvantages of commercial Paper.

15)Features of Short-term bank loans.

19)Compensating Balance: - It refers to the portion of loan amount that must be

22)Revolving Credit Agreement: - It refers to the legal commitment by a bank to extend

29)Terminal Warehouse Receipt: - A receipt for the deposit of inventory in a public

30)Factor: - It is a financial institutions or a professional that purchases account

31)Factoring: - It is an agreement between the company and the factor.

32)Factors to be considered in short-term financing.

Practical Questions.(2/10/15 Marks).

1. Define short term financing with its types.

- 2/10 net 30 EOM

- 2/10 net 30 MOM

6. Does the size of invoice affect the APC of Trade credit?

8. Different forms of inventory financing.

- APC on Trade Credit

- EAR on Trade Credit

- Cost of Commercial paper with its APC

- APC under simple interest, Discounted loan, Add-on-loan,

- Line of Credit with its APC

- Revolving Credit arrangement with its APC and EIR

- Pledging with its APC

- Cost of Factoring with its APC

- Discount when invoice is given

Some Practical Question:

1. A company has twice a month accruals of Rs 50000. The firm is considering

- If company stretches the credit period by 10 days.

7. Find out the APC of an installment loan of Rs100000 payable on 12-monthly

CHAPTER 3: - TERM LOANS AND LEASE FINANCING.

a. What is term loans? What are its features?

A. Suppose you borrowed Rs.3, 00,000 on a student loan at a rate of 10%

1. What is term loan?

- Common stock and Bonds

- Common stock and preferred stock

14. Explain the merits and demerits of long-term debt.

- If installment payments at beginning of period

- Equal principal payment loan

- Loan amortization schedule at the end of period

- Loan amortization schedule at the beginning of period

- Offer price of the preferred stock