International Financial Management-1

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Assignment – A

 

Ques 1. What is the need of International Financial Management? List out the difference between domestic Finance & International Finance.

 

Ques 2. i) An investor has two options to choose from: a) $ 7000 after 1 year b)$ 10000 after 3years.Assuming the discount rate of 9% which alternative he should opt for?

ii) A person would need USD 5000, 6 years from now. How much should he deposit each year in his bank account, if yearly interest rate is 10 %?

 

Ques3. Zain corporation ltd is trying to decide on replacement decision of its current manually operated machine with a fully automatic version. The existing machine was purchased ten years ago. It has a book value of $ 140000 and remaining life of 10 years salvage value $40000. The machine has recently begun causing problems with breakdown and its costing the company $ 20000 per year in maintenance expenses. The company had been offered $ 100000 for the old machinery as a trade-in on the automatic model which has a deliver price of $ 220000. It is expected to have a ten year life & a salvage value of $ 20000. The new machine will require installation modifications costing $ 40000 to the existing facilities, but it is estimated to have cost savings in materials of $ 80000 per year. Maintenance costs are included in the purchase contract and are borne by machine manufacturer. The tax rate is 40 % .Find out the relevant cash flows

 

 

Ques 4a) You have a choice of accepting either of two

 

Cash flows
Year Alternative I (in USD) Alternative II ( in USD)
1 6000 11000
2 6000 9000
3 6000 7000
4 6000 5000
5 6000 3000
lump sum amount
at the time zero (outflows) 24500 28000

 

Calculate the payback period and give your opinion that which project is better.

b) Why is the consideration of time important in financial decision making? How can time be adjusted?

 

Ques 5. Rico Ltd & Sico Ltd are in the same risk class & are identical in all respects except that the company Rico uses debt while company Sico does not use debt. The levered firm has USD 900000 debentures carrying 12 % rate of interest. Both the firms earn 20 % operating profit on their total assets of value USD 25 lacs. The company is in tax bracket of 35% & capitalization rate of 15% on all equity shares.

You are required to compute the value of both the firms using Net Income approach.

 

 

Assignment – B

Ques 1.

i) What are the factors affecting the capital structure of the company?

ii) The company raised preference share capital of $ 100000 by the issue of 10% preference share of $ 10 each. The floatation cost is 1%. Find out the cost of preference share capital issued at i) 10% premium ii) 10% discount

 

Ques 2. A company has the following amount and specific costs of each type of capital:

 

Types of Capital Book Value ( in $) Market Value Specific Costs
Preference 100000 110000 8%
Equity 600000 1200000 13%
Retained Earnings 200000
Debt 400000 380000 5%
Total 1300000 1690000

 

Determine the weighted average cost of capital using

a) Book value weights

b) Market value weights.

How are they different? Can you think of a situation where the WACC would be the same using either of the weights?

 

Ques 3 Calculate the degree of operating leverage (DOL), degree of financial leverage (DFL), degree of combined leverage (DCL), for the following firms:

 

Firm A Firm B Firm C
Output(units) 90000 35000 200000
Fixed Costs (USD) 10000 16000 2000
Variable cost per unit 0.2 1.5 0.02
Interest on borrowed funds 4000 8000
Selling price per unit 0.6 5 0.1

Case Study

 

Merck International is a pharmaceutical company. It is not currently selling its product in India. However it is proposing t establish a manufacturing facility in India in near future.

The Company to be set up in India is to be a wholly owned affiliate of Merck International which will provide all funds needed to build the manufacturing facility. Total initial investment is estimated at Rs.50,000,000. Working capital requirements estimated at Rs. 5,000,000, would be provided by the local financial institution at 8 percent per annum, repayable in five equal installments beginning on 31st December of the first year of operation. In the absence of this concessional facility, Merck would have financed these requirements by a loan from its bankers in United States at 15 percent per annum.

The cost of the entire manufacturing facility is to be depreciated over the five years period in straight line method basis. At the end of fifth year of its operation all remaining assets would be taken over by a public corporation to be designated by the government of India with no compensation.

 

Sales and selling price are presented in the table below:-

Year Sales in Units Unit Price(Rs)
1 2,00,000 1,000
2 2,25,000 1,500
3 2,50,000 1,800
4 2,75,000 2,000
5 3,00,000 2,200

Variable costs are Rs. 600 per unit in year 1 and are expected to rise by 15% each year.

Fixed Cost other than depreciation are Rs. 20 million in year 1 and is expected to rise by 10% per year.

 

Other Information:

All profit after tax realized by the affiliate are transferable to the parent company at the end of each year. Depreciation funds are to be blocked until the end of year 5. These funds may be invested in local money market instruments, fetching a tax-free return of 15%. When the operating assets are turned over a local corporation, the balance of these funds including interest may be repatriated.

The income tax rate in India is 48% but there are no with holding tax on transfer of dividends. Dividends received by Merck International in the United states would be subject to 50% tax.

 

Merck International uses a 20% weighted average cost of capital for evaluating domestic projects similar to the ones planned in India. For Foreign projects in developing countries a 6% political premium is added.

 

Calculate the NPV and IRR for the project from the standpoint of the parent company. What are your recommendations for the proposal?

Assignment – C

 

 

1. __________ is concerned with the maximization of a firm’s earnings after taxes.

 

a) Shareholder wealth maximization

 

b) Profit maximization

 

c) Stakeholder maximization

 

d) EPS maximization

 

 

2. Which of the following statements is correct regarding profit maximization as the primary goal of the firm?

 

a) Profit maximization considers the firm’s risk level.

 

b) Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future profits.

 

c) Profit maximization does consider the impact on individual shareholder’s EPS.

d) Profit maximization is concerned more with maximizing net income than the stock price.

 

3. You need to understand financial management even if you have no intention of becoming a financial manager. One reason is that the successful manager of the not-too-distant future will need to be much more of a __________ who has the knowledge and ability to move not just vertically within an organization but horizontally as well. Developing __________ will be the rule, not the exception.

 

a) Specialist; specialties

 

b) Generalist; general business skills

 

c) Technician; quantitative skills

 

d) Team player; cross-functional capabilities

 

 

4. What one is not the decision of financial management?

 

a) Asset management decision

 

b) Financing decision

 

c) Investment decision

 

d) Dividend decision

 

 

 

5. Which of the following statements is not correct regarding earnings per share (EPS) maximization as the primary goal of the firm?

 

a) EPS maximization ignores the firm’s risk level.

 

b) EPS maximization does not specify the timing or duration of expected EPS.

 

c) EPS maximization naturally requires all earnings to be retained.

 

d) EPS maximization is concerned with maximizing net income

 

6. Money has time value because

a. Money in hand today is more certain than money to be got tomorrow.

b. The value of money -gets discounted as time goes by.

c. The value of money gets compounded as time goes by.

d. Both (a) and (b) above.

e. Both (a) and (c) above.

 

7. In order to find the value in 1995 of a sum of $ 100 invested in 1993 at X% interest

a. The FVIFA table should be used.

b. The PVIFA table should be used.

c. The FVIF table should be used.

d. The PVIF table should be used.

e. Both FVIFA and FVIF tables can be used.

 

 

8. The relationship between effective rate of interest (r) and nominal rate of interest (i) is best represented by

a) i = (1 + 1)-mmr

b) r = (1 + 1)-nnr

c) r = (1 + 1)-mmr

d) Both (a) and (c) above

f) None of the above.

 

 

9. If you invest $ 10,000 today for a period of 5 years, what will be the maturity value if the interest rate is?

(a) 8% (b) 10% (c) 12% (d) 15%

 

 

10.. You are considering investing $ 1,500 at an interest rate of 5% compounded annually for 2 years or investing the $1,500 at 7% per year simple interest rate for 2 years. Which option is better?

(A) Simple Interest by $56.25

(B) Compound Interest by $114.05

(C) Compound Interest by $52.75

(D) Simple Interest by $75.19

 

 

11. What will be the amount accumulated by $ 9,000 in 9 years if it is compounded at a rate of 9% per year?

(A) F = $ 18,229.30

(B) F = $ 19,547.04

(C) F = $ 20,978.22

(D) F = $ 19,055

 

 

12. If Rs300 is invested now, Rs500 two years from now, and Rs700 four years from now at an interest rate of 3% compounded annually, what will be the total amount in 10 years?

(A) F = Rs 1,872.40

(B) F = Rs 1,540.27

(C) F = Rs 1,975.11

(D) F = Rs 1,801.36

 

 

13. An individual deposits an annual bonus into a savings account that pays 5% interest compounded annually. The size of the bonus increases by Rs200 each year and the initial bonus amount at t=1 was Rs250. Determine how much will be in the account immediately after the fifth deposit.

(A) F = Rs3019.59

(B) F = Rs3483.89

(C) F = Rs2953.94

(D) F = Rs2752.95

 

14. What is the equal-payment series for 10 years that is equivalent to a payment series of Rs 15,000 at the end of the first year (t=1) decreasing by Rs300 each year over 10 years? Interest is 9% compounded annually

(A) A = Rs 7120.85

(B) A = Rs 10,118.72

(C) A = Rs 12,929.01

(D) A = Rs 13,860.66

 

 

 

 

15. the time value of money in the present year will be

i) less than the value of future year

ii) more than the value of the future year

iii) will be the same in future year

iv) will be in negative

 

16. Which is the best measure of capital budgeting?

i) Payback period

ii) Annual rate of return

iii) Profitability index

iv) NPV

 

17. When we want to go to future value of a lump sum amount, we use;

i) present value factor tables

ii) present value annuity factor tables

ii) compounded value factor tables

iv) compounded value annuity factor tables

 

18. When we want to come to the present value from future value of a lump sum amount, we use;

i) present value factor tables

ii) present value annuity factor tables

ii) compounded value factor tables

iv) compounded value annuity factor tables

 

19. When we want to go to future value of an Annuity, we use;

i) present value factor tables

ii) present value annuity factor tables

ii) compounded value factor tables

iv) compounded value annuity factor tables

 

 

20. When we want to come to the present value from future value of an Annuity, we use;

i) present value factor tables

ii) present value annuity factor tables

ii) compounded value factor tables

iv) compounded value annuity factor tables

 

 

 

21. Capital Budgeting means;

i) Budgeting of the capital for investments in the long term Fixed assets

ii) Financing of the capital for investments in the long term Fixed assets

iii) Mitigating the losses

iv) Preparing cash budgets

 

22. In capital budgeting, when money is going out of the firm, it is called

i) Cash outflow

ii) Cash inflow

iii) Dividend

iv) Interest received

 

23. the mutually exclusive decisions are those,

i) acceptance of one proposal will automatically reject the the other proposal

ii) acceptance of both the two proposals

iii) rejection of all the proposals

iv) does not include any proposal

 

24. In capital budgeting, when money is coming in the firm, it is called

i) Cash outflow

ii) Cash inflow

iii) Dividend

iv) Interest foregone

 

25. Which of the following is not the reason for Time Preference of money?

i) Future uncertainties

ii) Investment opportunities

iii) Interest income

iv) The value of money will remain the same every time

 

26. Capital structure of a firm means:

i) The proportion of Debt & equity

ii) Structure of financing ratio

ii) Cash & capital proportion

iii) Drawings by the owner

 

27. Which of the following is not a factor effecting capital structure?

i) Flexibility

ii) Control

iii) Size

iv) Profitability ratios

 

28. The Operating Leverage gives the relationship between

i) Sales revenue & EBIT of the firm

ii) EBIT & EPS of the firm

iii) Sales Revenue & EPS of the firm

iv) None of above

 

29. The Financial Leverage gives the relationship between

i) Sales revenue & EBIT of the firm

ii) EBIT & EPS of the firm

iii) Sales Revenue & EPS of the firm

iv) None of above

 

30. The Combined Leverage gives the relationship between

i) Sales revenue & EBIT of the firm

ii) EBIT & EPS of the firm

iii) Sales Revenue & EPS of the firm

iv) None of above

 

31. The operating profit is same as:

i) Net profit

ii) EBIT

iii) Gross profit

iv) None of the above

 

32. The EBIT is :

i) Earnings before interest on taxes

ii) Earnings before interest & taxes

iii) Earnings before income & taxes

iv) Earnings before income tax

 

33. EPS is:

i) Earnings per share

ii) Earnings profits

iii) Earnings per sales

iv) Earnings per year

 

34. The weighted average cost of capital is calculated :

i) on market value but not book value

ii) on both market value & book value

iii) on book value but not market value

iv) none of the above

 

35. The cost of Debt is always calculated

i) Before tax

ii) After tax

iii) After dividend

iv) Before interest

 

36. The cost of equity takes into account the

i) The market price of the share

ii) The book value of the share

iii) The last years dividend

iv) all the above

 

37. The cost of Retained Earnings is same as :

i) Cost of Equity

ii) Cost of Debt

iii) Cost of preference shares

iv) All of the above

 

38. The optimum capital structure is the one with
i) highest value of the firm

ii) Lowest value of the firm
iii) highest shares in numbers

iv) highest debt

 

39. International Finance is

i) Same as domestic finance

ii) different from domestic finance

iii) not so relevant

iv) is used while shutting down of a firm

 

40. Which of the following is not a function of finance Manager?

i) Financing the capital decisions

ii) investing the capital in profitable projects

iii) distributing the capital among different suppliers of products

iv) Dividend decision

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