Fin 201 (sec 7)
Q 1. When it
comes to picking the best supplier based on their credit terms you are supposed
to calculate their EARs. And the supplier with the lowest EAR is the best
option for you. If you calculate both EAR and APR you will lose some points
because APR is irrelevant in this case. If you fail to give me the decision or
if your decision is wrong because of calculation mistake you will also lose some
points.
Q2. Firms speed up the collection of payment and
slow down the disbursements because of the’ time value of money’. The earlier
you receive the money you can reinvest that somewhere else and earn some interest
from it. Same principal goes for disbursements. You want to pay as late as
possible and use the money somewhere else to earn some interest.
Q3. Between line of
credit and commercial paper you are supposed to use Line of credit. Even though
in your case commercial paper has a lower EAR, you cannot use money raised from commercial
paper in capital expenditure. If your decision is wrong you will get 50-60%
marks. If your decision is right but the explanation is wrong again you will
lose points.
Q4. You need to
calculate the NPVs and the higher NPV is better. In your case the proposed
policy results in higher NPV
Q5. When you prepare
the cash budget you need to include all the expenditures except depreciation.
Depreciation is a non-cash expenditure and you should know it from your
previous finance and accounting courses. If you fail to include any of the
other relevant expenditures you will lose some points.
The main reason for
preparing the cash budget is to know how much money you will have for
investment purpose (in case of cash surplus) and how much money you need to
borrow to meet the requirement (incase of cash deficit). This is the prime
reason which you should cover in your discussion.
Fin 201 (sec 8)
Q1. You are supposed
to calculate the NPV and the highest NPV will result in the best option. But in
your problem both the NPVs are supposed to be negative. So you can not suggest
any of them because both will result in net loss.
Q2. The bank which
requires you to maintain a compensating balance of 10% will result in higher
simple interest rate. Your objective is to find the cheapest source of
financing. So you should pick the bank which does not require you to maintain
the compensating balance. You have to explain it properly with your available variables
given in the question. (X and I)
Q3. For the cash
budget problem all receipts and disbursements are made on cash basis only. Apart
from that it’s quite a straight forward question.
Q4. Between line of
credit and commercial paper you are supposed to use Line of credit. Even though
commercial paper has a lower EAR, you cannot use money raised from commercial
paper in capital expenditure. If your decision is wrong you will get 50-60%
marks. If your decision is right but the explanation is wrong again you will
lose points.
Q 5. When it
comes to picking the best supplier based on their credit terms you are supposed
to calculate their EARs. And the supplier with the lowest EAR is the best
option for you. If you calculate both EAR and APR you will lose some points
because APR is irrelevant in this case. If you fail to give me the decision or
if your decision is wrong because of calculation mistake you will lose some
points.
Fin 101
Q1. For the first two
years the growth rates of the company are 50% and 25%. And then it will come
down to a normal growth rate of 6% perpetually. You need to use the dividend
discount model to calculate the firm’s share price.
Q2. For bonds the
interest is a fixed amount that you will earn regardless of the firm’s financial
performance. But in-case of a stock you can only assume how much of income the
company will be able to earn and how much of it they will pay as dividend. But
you can never be sure since dividend payment on common stocks is not fixed.
Q3. There is not much
to explain on this one, a very straight forward question. The rate of return
from your investment in this problem is 0.
Q4. Not much to explain here either.
Q5. LRP, MRP, DRP and
IP. These are the four risk premiums that you need to include in your calculation of
interest rate.
Q6. False. According
the Liquidity preference theory short term bonds should have lower interest
rate.
Fin 425
Q1. If your analyst
is solely using CAPM to figure out which are the undervalued stocks then you
should not listen to his/her advice because you also know that DSE doesn’t have
any form of efficiency. That means you can predict the future price looking at the
past trend, in other words past trend is likely to repeat in future regardless
of a firms fundamental performance. So CAPM will not result in accurate
prediction.
Q2. Calculate the beta which is supposed to be negative.
Q3. For a portfolio
with two assets you are supposed to use Standard deviation which is a measure
of total risk (systematic and unsystematic). Since its not a well diversified
portfolio you cannot use beta.
Q4. This is a very
straightforward question so not much to explain here. It was pretty much what
we did in the class.
Q5. When you draw the
capital allocation line you need to show me the slope of the line and where your company belongs on that line. And since it is on the line it is not under
or overvalued rather its fairly priced.
I will be available in my room from 12 pm- 2.30 pm tomorrow (25/08) and 8.30 am-2pm on Tuesday (26/08). If you have any query regarding the final exam you can consult with me during that time.
