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FINANCIAL MANAGEMENT (191)
CHECKLIST
SEMESTER: AUTUMN, 2010
This packet comprises the following material:
1. Text Books (one)
2. Course Outline
3. Assignment No. 1 and 2
4. Assignment Forms (2 sets)
5. Schedule for Submitting the Assignments.
Please contact at the address given below, if you find anything missing in the packet.
Mailing Officer,
Mailing Section, Block No. 28,
Allama Iqbal Open University,
H-8, ISLAMABAD.
Phone: 051-9057611-12
Nadia Rashid
Course Coordinator
ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD
(Department of Business Administration)
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Note: Prepare your assignment as per the guidelines and it may be re-evaluated by the Quality Assurance Cell, Department of Business Administration at any time.
Course: Financial Management (191) Semester: Autumn 2010
Level: BBA Total Marks: 100
Pass Marks: 40
ASSIGNMENT No. 1
Q. 1 Differentiate between the following terms with examples.
(i) Financing decision and dividend decision
(ii) Treasurer and controller
(iii) Book value and market value
(iv) Perpetual bonds and zero coupon bonds (20)
Q. 2 (a) A stock has a beta of 1.30 and an expected return of 17 percent. A risk-free asset currently earns 5 percent.
i. What is the expected return on a portfolio that is equally invested in the two assets?
ii. If a portfolio of the two assets has a beta of 0.75, what are the portfolio weights?
iii. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?
iv. If a portfolio of the two assets has a beta of 2.60, what are the portfolio weights? How do you interpret the weights for the two assets in this case, Explain. (12)
a) What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is the decision necessarily correct?
b) If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
c) Over what range of discount rates would the company choose project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain. (20)
Q. 4 Discuss in detail the various kinds of real options. Also describe how they differ from one another. Support your answer with examples. (20)
Q. 5 (a) Discuss the impact of share repurchase on a company’s debt ratio. (8)
(b) ABC corporation currently has 250,000 shares of stock outstanding that sell for Rs.75 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:
i. ABC co. has a five-for-three stock split?
ii. ABC co. has a 15 percent stock dividend?
iii. ABC co. has a 42.5 percent stock dividend?
iv. ABC co. has a four-for-seven reverse stock split? (12)
ASSIGNMENT No. 2
Total Marks: 100
Q. 1 Discuss in detail credit and collection policies of a financial institution of
Pakistan. (20)
Q. 2 Discuss the features of lease financing. How does a financial lease differ from an
operational lease. Support your answer with examples. (20)
Q. 3 (a) What do you understand by private placement? Critically evaluate its features and developments in the market. (10)
(b) The stock of Hilal Corporation is selling for Rs.50 per share. The company then issues rights which allow holders to subscribe for one new share at Rs.40 for each five rights held.
i. What is the theoretical value of a right if the stock is selling “rights-on”?
ii. What is the theoretical value of one share of stock when it goes “ex-rights”?
iii. What is the theoretical value of a right if the stock sells “ex-rights” at Rs.50? (10)
Q. 4 Discuss in detail kinds of exchange rate risk exposure. How these exposures can be managed. Support your answer with examples. (20)
Q. 5 (a) What are the five groups of ratios? Give two or three examples of each kind. (8)
(b) Consider the following balance sheets for the Phillip Corporation. Calculate the changes in the various accounts and where applicable, identify the change as a source or use of cash. What were the major sources and uses of cash? Did the company become more or less liquid during the year? What happened to cash during the year? (12)
FINANCIAL MANAGEMENT
Course Outline (BBA-191)
UNIT 1: BASIC FOUNDATION OF FINANCIAL MANAGEMENT
– Creation of Value
– Investment Decision
– Financing Decision
– Dividend Decision Financial Management
– Valuation in financial Management
– The Time Value of Money
– Present Values
– Internal Rate of Return (ERR) or Yield
– Bond Returns
– The Return from a Stock Investment Dividend Discount Models
– Measuring Risk – The Standard Deviation
UNIT 2: MARKET RISK, RETURNS AND VALUATION
– Efficient Financial Markets
– Security Portfolios
– Multiple Security Portfolio Analysis and Selection
– Capital Asset Pricing Model
– Expected Return for Individual Security
– Certain Issues with the CAPM
– Multi Variable and Factor Valuation
– Extended CAPM
– Factor Models in General
– Arbitrage Pricing Theory
– Option Valuation
UNIT 3: INVESTMENT IN ASSETS AND REQUIRED RETURNS
– Principles of Capital Investment
– Methods for Evaluation
– NPV versus IRR
– Depreciation and Other Refinements in Cash-Flow Information
– Capital Rationing
– Inflation and Capital Budgeting Information to Analyze an Acquisition
– Quantifying Risk and its Appraisal
– Total Risk for Multiple Investments
– Real Options in Capital Investments
UNIT 4: FINANCING AND DIVIDEND POLICIES
– Theory of Capital Structure
– Introduction to the Theory
– Modigliani-Miller Position
– Taxes and Capital Structure
– Effect of Bankruptcy Costs
– Other Imperfections
– Financial signaling
– Making, Capital Structure Decisions
– EBIT-EPS Analysis
– Cash-Flow Ability to Service Debt
– Other Methods of Analysis
– Timing and Flexibility
– Dividend Policy: Theory and Practice
– Procedural Aspects of Paying Dividends
– Dividend Payout Irrelevance
– Arguments for Dividend Payout Mattering
– Financial Signaling
– Empirical Testing and Implications for Payout
– Share Repurchase
– Stock Dividends and Stock Splits
– Managerial Considerations as to Dividend Policy
UNIT 5: LIQUIDITY AND WORKING CAPITAL MANAGMEMENT
– Liquid Assets and Liability Structuring
– Liquidity and Its Role
– Receivables and Inventories Liability Structure
– Management of Cash and Marketable Securities
– The Function of Cash Management
– Managing Collections and Control of Disbursements
– Electronic Funds Transfers
– Investment in Marketable Securities
– Credit and-collection Policies
– Evaluating the Credit Applicant
– Inventory Management and Control
– Uncertainty and Safety Stock
– Inventory and the Financial Manager
UNIT 6: FOUNDATIONS FOR LONGER-TERM FINANCING
– The Purchase of Financial Markets
– Nomination and Real Rates of Return
– Yield Curves and Their Use
– Pricing Default Risk off Treasuries
– Features of a Lease
– Accounting and Tax Treatment of Leases
– Return to the Lessor
– To Lease or to Buy/Borrow Decisions
UNIT 7: INVESTMENT MANAGEMENT
– Public Offering of Securities
– Selling, Common Stock through a Rights Issue
– Initial Financing
– Information Effects
– Private Placements
– Preferred Stock
– Option Financing: Warrants, Convertibles, and Exchangeable
– The Use of Warrants
– Convertible Securities
– Value of convertible Securities
– Exchangeable Debt
– Managing Financial Risk
– Derivative Securities Heading Risk
– Futures Markets
– Forward and Option Contracts
– Interest–Rate Swaps
– Currency and Commodity Contracts
UNIT 8: INTERNATIONAL FINANCIAL MANAGEMENT
– Background concept of International Financial Management
– Types of Exposure Translation Exposure Transactions Exposure
– Economic Exposure
– Currency Market Hedges
– Macro Factors Governing Exchange Rate Behavior
– Structuring International Trade Transactions
UNIT 9: TOOLS OF FINANCIAL ANALYSIS AND CONTROL
– Financial Ratio Analysis
– Liquidity Ratios
– Debt Ratios
– Coverage Ratios Profitability Ratios
– Market-Value Ratios
– Predictive Power of financial Ratios Financial Planning
– Methods of Analysis
– Source and Use of Funds
– Cash Budgeting
– Pro forms Statements
– Sustainable Growth Modeling
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