Pre‐Board Examination
February 2017
Subject: Financial Management 2 FM: 100
Program: BBA; Semester V PM: 50
Subject Code: BBK2233 Time: 3hrs
 
Candidates are required to give their answer in their own words as far as practicable.
Attempt all Questions.
Group A
Answer ALL questions briefly 2*10 = 20
1. Define short term financing.
2. The current market price per share of Suvatara Company is $345 per share. If the company declares 15%
stock dividend. What will be market price share after stock dividend?
3. What is compensating balance? What effect does a compensating balance requirement have on the
effective interest rate on a loan?
4. What is term loan?
5. What is cumulative feature of preferred stock?
6. You have just borrowed $ 100,000 for 3 years, 10 percent loan. Loan is to repaid in annual end of the
year payment. What will be your annual payment?
7. List any eight securities in order of highest to lowest risk.
8. Define residual dividend policy.
9. What is warrant?
10. What is stock split and reverse stock split?
Group B
Answer ANY FOUR questions 4*5=20
11. Axel telecommunication has a target capital structure that consists of 70 percent debt and 30 percent
equity. The company anticipates that its capital budget for the upcoming year will be $ 3,000,000. If
Axel reports net income of $ 2,000,000 and it follows a residual dividend payout policy, what will be its
dividend payout ratio?
12. What is the difference between free trade credit and costly trade credit?
13. Ezzell Corporation issued preferred stock with a stated dividend of 10 percent of par. Preferred stock of
these types currently yields 8 percent, and the par value is $100. Assume dividend are paid annually.
a) What is the value of Ezzell’s preferred stock?
b) Suppose interest rate level rise to the point where the preferred stock now yields 12 percent. What
would be the value of Ezzell’s preferred stock?
14. Hannon Home products, inc recently issued $430,000 worth of 8 percent convertible debenture. Each
convertible bond has a face value of $1000. Each convertible bond can be converted into 24.25 shares
of common stock anytime before maturity. The stock price is $ 31.25 and the market value of each bond is $1,180.
a) What is the conversion ratio?
b) What is the conversion price?
c) What is the conversion premium?
d) What is the conversion value?
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 15. What are the dividend policies that the firm can follow? Explain.
16. Surya Company wishes to borrow $500,000 for one year. It has the following alternatives available to
it.
a) A 15 percent loan on a collect basis with no compensating balance requirement.
b) A 12 percent loan on a discount basis with 10 percent compensating balance required.
c) A 10 percent loan on a discount basis with 15 percent compensating balance required.
d) Which alternative should Surya Company choose if it is concerned with the effective interest rate?
Group C
Answer ANY THREE questions 3*10=30
17. i) What are convertible securities? Explain the feature of convertible securities.
ii) The Reliance Company has warrants outstanding that expire in three years. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $40 per share. Determine
theoretical value and premium over the theoretical value if the respective prices of common stock and
warrants are $50 per share and $12per warrant.
18. United Construction Company planning to purchase a truck. Price of the truck in the market is planning
$1,200,000. The company has no sufficient money (cash) to purchase the truck. So, it is planning to
borrow loan from Everest bank. Hence, it provides loan of $1,200,000. The loan is to be repaid in equal
installment at the end of the each of the next 5 years and interest rate is 12 percent.
a) Set up an amortization schedule for the loan.
b) Set up an amortization if the loan is repayable in five equal installments payable at the beginning of
each year.
19. i) Compare and contrast a line of credit and revolving credit arrangement.
ii) Shikhar Company purchases raw material on term of 2/ 10 net 30. A review of the company’s records
by the owner, Mr Karki revealed that payments are usually made 15 days after purchases are
received. When asked why the firm did not take advantage of its discounts, the bookkeeper, Mr
Thapa replied that it costs only 2 percent for these funds, whereas a bank loan would cost the firm
12 percent.
a) What mistakes is Mr Thapa making?
b) What is the real cost of not taking advantage of the discount?
c) If the firm could not borrow from the bank and were forced to resort to the use of trade credit
funds, what suggestion might be made to Mr thapa that would reduce the annual interest cost?
20. Morang Corporation has following shareholder equity account.
Common stock ($8 per value) $2,000,000
Additional paid in capital $1,600,000
Retained earnings $8,400,000
Shareholders’ equity $12,000,000
The current market price of stock is $60 per share.
What will happen to this account and to number of shares outstanding with
a) a 20% “small percentage” of stock dividend
b) a stock 2 for 1 stock split
c) a 1 for 2 reverse stock splits?
Group D
Read the given Case and answer the following 30
21.
i. The BT Company has been growing rapidly during for last five years. The BT Company has some other
good investment opportunities for which it needs additional long term funds amounted to $1,000,000.
The company plans to raise required fund through debenture with warrant. The debenture with warrant
will carry a 7 percent coupon and entitle each holder of a $1,000 debenture to buy 5 share of common

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 stock at $120. Company’s EBIT rate is 20 percent of total assets and marginal tax rate is 40 percent. BT
Company has the following balance sheet.
Current assets 1,000,000 Current Liabilities (free) 500,000
Fixed assets 1,500,000 Common stock ($ 100 par) 1,000,000
Retained earnings 1,000,000
Total assets 2,500,000 Total claims 2,500,000
a) Number of debenture to be issued to raise funds.
b) Number of new share to be issued if all warrants are exercised.
c) Balance sheet of BT Company before and after the exercise of warrants.
d) Earnings per share before and after the exercise of warrants.
e) Market price per share before and after the exercise of warrants if P/E ratio is 10.
ii. ABC Company must arrange financing for its working capital requirement of $1, 00,000 for the coming
year. It can
a) Borrow from its bank on a simple interest basis (interest payable at the end of the loan) for one
year at 12 percent simple rate.
b) Borrow on a 3 month, renewable loan at an 11.5 percent simple rate
c) Borrow on an installment loan basis at a 6 percent add on rate with 12 end of month payments.
d) Obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. It
buys on term 1/15 net 60.
i) What is the effective cost (not the approximate cost) of the least expensive type of credit
assuming 365 days per year?
ii) Is the source with the lowest expected cost necessarily the source to select? Why or why not?

 All the Best 

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