Course Outline

Course Title: Business Finance Course No: BS (A&F): FIN 158

Class: BS (A &F), BS (Commerce) Course No: BS (Commerce): FIN 158
B.Com (Annual system) B.Com (Annual system): Part I, Paper X

Course Objectives:

To develop:
1. understanding of an integrated perspective for the inter-relation between financial
markets, financial institutions and management
2. competence about the latest approaches/tools to critically examine and measure
the performance of business concerns
3. skills to solve investment and financial problems in the light of specified goals of
the firm

Course Contents:

Topic Source Section

o Career opportunities in finance Ch 1, Book 2 A
o Forms of business organization Ch 1, Book 3
o Goals of the corporation
o Agency relationships

o Balance sheet Ch 2, Book 2 A

o Income statement Ch 13, Book 3
o Statement of cash flows (FASB Opinion No.
95) (IAS 7)
o Accounting income vs. cash flow
o Personal taxes
o Corporate taxes

o Ratio analysis Ch 3, Book 2 A

o Du Pont system Ch 14, Book 3
o Effects of improving ratios
o Limitations of ratio analysis
o Qualitative factors

o Forecasting sales Ch 4, Book 2 A

o Projecting the assets needed to support sales Ch 14, Book 3
o Projecting internally generated funds

o Projecting outside funds needed Ch 4, Book 2 A

o Deciding how to raise funds Ch 14, Book 3
o Seeing the effects of a plan on ratios
 o Stand-alone risk Ch 12, Book 3 B
o Portfolio risk Ch 13, Book 2
o Risk & return: CAPM/SML

o Future value Ch 9, Book 2 B

o Present value Ch 9, Book 3
o Rates of return
o Amortization

o Key features of bonds Ch 15, Book 1 C

o Bond valuation Ch 10, Book 2
o Measuring yield
o Assessing risk

o Features of common stock Ch 17, Book 2 C

o Determining common stock values Ch 14, Book 1
o Bonus/Right shares

o Efficient markets Ch 10, Book 2 C

o Preferred stock Ch 14, Book 2
o Sources of capital

o Component costs Ch 11, Book 2 C

o Adjusting for flotation costs Ch 18, Book 3
o Adjusting for risk

Recommended Text:

1. Peirson, Grahem & Brown, Rob (1998), Business Finance, McGraw Hill, Sydney.
2. Block, Stanely B. & Hirt, Geoffroy A, (2002), Business Finance, Irwin Book,
3. Melicher, W.R & Norton, A.E, (2005), Finance, John Wiley and Sons, Inc.
 MODEL PAPER FOR B.COM PART 1
ANNUAL EXAMINATION SYSTEM 2009 & ONWARDS
BUSINESS FINANCE

OBJECTIVE PART TIME ALLOWED = 30 MINUTES MAX MARKS = 30

INSTRUCTIONS TO CANDIDATES:
• This paper comprises 30 MCQ’s.

• Each MCQ carries 1 mark.

• Please encircle the correct option only.

• Cutting, overwriting and use of ink remover is not allowed.

1. The claim of the equity holders is:

A. Residual in nature
B. Equal as that of creditors.
C. Preferable to that of creditors.
D. None of the above

2. Interest bearing assets include:

A. a Fixed income securities
B. convertible bonds
C. debenture only
D. options

3. Which of the followings is return paid to shareholders out of profit of a company?

A. profit
B. dividend
C. bonus shares
D. ex-gratia

4. ------------- assume the risk of buying newly issued securities from a company and reselling
them to investors:
A. speculators
B. arbitrators
C. underwriters
D. hedgers

5. The board of directors of a company are :

A. selected by the top management
B. nominated by the president/CEO
C. nominated from the winning group
D. elected by getting votes directly from the shareholders just like MNAs.

6. Shares of stock given to management for meeting stated performance goals are called:
A. right shares
B. compensatory shares
C. performance shares
D. bonus shares

7. An intermediary that channels the savings of individuals, businesses and governments into
loans or investment is:
A. an underwriter
B. a broker dealing in shares
C. a Commercial bank
D. a specialized financial institution.

8. The sale of a new security issue, typically bonds or preferred stocks directly to an investor or
group of investors is termed as:
A. public offering
B. private placement
C. placing at stock exchange
D. straight forward placement

9. A commercial bank typically can be termed as a part of:

A. money market
B. capital market
C. both a & b
D. secondary market

10. The bonds whose stated interest rate is adjusted periodically within stated limits in response
to changes in specified money market or capital market are:
A. flexible bonds
B. swinging rate bonds
C. floating rate bonds
D. put able bonds

11. If a firm has earned an after tax profit of 10% and its assets turnover is 3 times, then its
return on equity is
A. 3%
B. 10%
C. 15%
D. None of the above

12. The interest theory suggesting that for any given issuer, long-term interest rates tended to be
higher than short-term rates is known as
A. normal interest theory
B. interest expectation theory
C. liquidity preference theory
D. asset expectation theory.

13. The market in which corporations and governments typically issue bonds denominated in
dollars and sell them to investors located outside US is usually known as:
A. A foreign bond market
B. an international bond market
C. Eurobond market
D. Cross-border market

14. If the interest is compounded more frequently than yearly then:

A. nominal rate and effective annual rate would be same
B. real rate and effective annual rate would be same
 C. nominal rate and effective annual rate would be different.
D. none of the above
15. Study of how individual prepare for financial emergency/protect against premature deaths
and property loses, and accumulate wealth can be named as:
A. Financial Planning
B. Personal Planning
C. Business Finance
D. Financial Management

NOTE: Only 15 MCQ’s (5 MCQ’s from each section) are provided for specimen purposes. Actual paper
will comprise 30 MCQ’s (10 MCQ’s from each section)

MODEL PAPER FOR B.COM PART 1

ANNUAL EXAMINATION SYSTEM 2009 & ONWARDS
BUSINESS FINANCE

SUBJECTIVE PART TIME ALLOWED = 90 MINUTES MAX MARKS = 45

INSTRUCTIONS TO CANDIDATES:

• This paper comprises of 3 Sections

• Attempt only one question from each section.

• Each question carries 15 marks.

SECTION A (Attempt any one of two)

Question No 1:

The Rehman Company has the following current assets and current liabilities for the year 2006 and 2007

2006 2007
Rs. Rs.
Cash and marketable securities 50,000 50,000
Account receivable 300,000 350,000
Inventories 350,000 500,000
Total Current Assets 700,000 900,000
Accounts payable 200,000 250,000
Bank Loan 0 150,000
Accruals 150,000 200,000
Total Current liabilities 350,000 600,000

Additional Information:

Cost of goods sold 1,000,000 1,200,000

Required:

a) Compare the current ratios between the two years and give your comments thereon.
b) Compare the asset test ratios for the two years and give your comments thereon.
c) Calculate and compare inventory turnover for the two years and give your comments thereon.
Question No2: Star, Inc., expects sales of Rs.100,000 during each of the next 3 months. It will make
monthly purchases of Rs.60,000 during this time. Wages and salaries are Rs.10,000 per month plus 5 % of
sale. Star expects to make a tax payment of Rs.20,000 in the next month and a Rs.15,000 Purchase of fixed
assets in the second month and to receive Rs.8,000 in cash from the sale of an asset in the third month. All
sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero.

Required: construct a cash budget for the next 3 months.

SECTION B (Attempt any one of two)

Question No 3: Ali Chemicals wishes to accumulate funds to provide a retirement annuity for its one of the
employees, Mr. Zaid, going to retire at the end of 12years. On retirement, he will be entitled to receive an
annual end of the year payment of Rs.65,000 for 15 years. If he dies after 10 years of the retirement, the
payments will be passed on to his family members. During the accumulation period, Ali Chemicals wants
to fund the annuity by making equal annual end-of-year deposits into an account earning an interest of
10%. From the beginning of distribution period, Ali Chemicals plans to move the accumulated monies into
an account earning 125 per year. At the end of the distribution period, the account balance will be zero.
a. How large a sum must Ali Chemicals accumulate by the end of year 12 to provide for 15 –year,
Rs.65,000 annuity?
b. How large must Ali Chemicals’ equal annual end-of-year deposits into the account be over the 12
year accumulation period to fund fully Mr. Zaid’s retirement annuity?
c. How much would Ali Chemicals have to deposit annually during the accumulation period if Mr.
Zaid’s retirement annuity were a perpetuity keeping all other terms as stated initially?

Question No 4:

Solar Designs is considering an investment in an expanded product line. Two possible types of expansion
are being considered. After investigating the possible outcomes, the company made the estimates shown in
the following table:

Expansion A Expansion B

Initial investment Rs. 12,000 Rs.12,000

Annual rate of return:

Optimistic 24% 30%
Most likely 20% 20%
Pessimistic 16% 10%

Required:
a) Determine the range of the rates of return for each of the two projects.
b) Which project is less risky? Why?
c) If you were making the investment decision, which one would you choose? Why?
d) Assume that expansion B’s most likely outcome is 21% per year and all other facts remains the
same. Does this change your answer to part c? Why?
 SECTION C (Attempt any one of two)

Question No 5: City corp. has a dividend of Rs.0.50. The dividend is growing at a 6 percent rate over
time. Based on the stock’s risk, investors require an 11 percent rate of return.
a. Using the constant dividend growth model, what should the stock’s price be?
b. Estimate the firm’s dividends for the next 10 years and find their present value. What proportion of the
stock’s price is based upon dividends that are expected to occur more than 10 years into the future?
c. What proportion of the firm’s price is based upon dividends that are expected to occur more than 5
years?

Question No 6: Assume a Rs.1000 face value bond has a coupon rate of 8.5%, pays interest semiannually,
and has an 8year life. If investors are willing to accept a 10.25% rate of return on bonds of similar quality,
what is the present worth of this bond?
If a bond with the same par value and coupon rate as that of the above noted bond has 14 years until
maturity and investors use a 10.25% discount rate to value this bond, by how much should its price differ
from the above bond?