BBA Winter 2017 - 18 Examination

Semester: V Date:
Subject Code: Time: (2hr:30min)
Subject Name: Advance Financial Management-I Total Marks: 60

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 Q.1
Do as Directed.

A).
Multiple choice type questions/Fill in the blanks. (Each of 1 mark)
(05)

1. Derivatives do not have their own ___________.

a) Value
) Dividend

b) interest rate
d) none of the above

2Modigliani and Miller argue that the dividend decision __________.

a) is irrelevant as the value of the firm is based on the earning power of its assets
c)is relevant as the value of the firm is not based just on the earning power of its assets

b)s relevant as cash outflow always influences other firm decisions

d) all of the above

3 ABC Ltd. has retention ratio is 0.40 and return on equity is 20.5% then growth retention model would
be________________.

a) 9%

c) 8.5%

b) 20.9%
d) 8.2%

4. Cost of Capital is the _____________ required rate of return expected by investors.

a) maximum
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) minimum
 0.9
2
1,20,000
0.7
80,000
0.8
3
1,80,000
0.5
2,00,000
0.6
Calculate NPV of both the projects and answer which Project should be acceptable to the company ?

A).

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 Gordon’s belief of all investments being financed by retained earnings is faulty. This reflects sub-optimum
investment and dividend policies.

Summary

Gordon’s theory of dividend policy is one of the prominent theories in the valuation of the company. Though it
comes with its own limitations, it is a widely accepted model to determine the market price of the share using the
forecasted dividends.

Q.4
Attempt any two questions. (Each of 7.5 mark)
(15)

Using following information calculate weighted average cost of capital of ABC Ltd using book value and market
value of capital.
Type of Capital
Book Value
Market Value
Specific Cost (%)
Debt
6,00,000
5,50,000
5
Preference Share
4,50,000 Page 4 of 5
4,80,000
8
Equity Share
 Legal rules governing payment of dividends:

It is illegal to pay a dividend, if after its payment; the capital would be impaired (reduced). This requirement
might be met if only capital surplus existed. An upward revaluation of assets, however, would create a capital
surplus, but at the same time might operate as a fraud on creditors and for that reason is illegal.

Basically the dividend laws were intended to protect creditors and therefore prohibit payment of a dividend if a
corporation is insolvent or if the dividend payment will cause insolvency.

The corporate laws must be taken into consideration by the directors before they declare a dividend. The
company can postpone the distribution of dividend in cash, which may be conserved for strengthening the
financial condition of the company by declaring stock dividend or bonus shares.

To sum up, the decision with regard to dividend policy rests on the judgement of the management, since it is not
a contractual obligation like interest. The formulation of dividend policy requires a balanced financial judgement
by judiciously weighting the different factors affecting the policy.

Stock dividend or bonus shares:A stock dividend is a distribution of additional shares of stock to existing
shareholders on a pro-rata basis i.e. so much stock for each share of stock held. Thus, a 10% stock dividend
would give a holder of ICQ shares, as additional 10 shares, whereas a 250% stock dividend would give him 250
additional shares. A stock dividend has no immediate effect upon assets.

4. Face Value of Bond being sold by GAMA Ltd. Is Rs. 100 , coupon rate of bond is 8% and maturity is after 10
years.
. If interest is paid annually , find out the value of bond when required rate of return is (i.)7% and (ii) 8% (iii)
10%. Indicate for each case whether the bond is selling at a discount,at par or at premium.
b.Using 10% required rate of return , what would be the value of bond if interest is paid semiannually ?

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