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Jagannath University

Department of Finance
MBA, 6th Batch l't Semester Final Exam-2017
Course Code: FIN-5101 Title: Modern Finance theory
TotalTime: 3.0 Hours Total Mark: 60
(Answer any four out of the following questions. l!.8 right mangins indicate the full marks.)

,) a) Expound Fisher's Separatlon theorem with respect to fundamental results of finance theory
and assumptions.
b) Explain Fisher's separation theorem simplifled example with a capital market and without a
capital market. 6
c) Describe Fisher's Formal Approach with production possibility curve. 5

2. a) What is market opportunity Line? How optimal policy is achieved through market opportunity
Line? 5
b) lllustrate the implications for financial decision making in relation to investment decision and
the financing decision. 5
c) State Investors' Reactions to Managers' Decisions. 5

3. 2) Define Mean-Variance Analysis. Explain assumptions necessary for mean-variance efficiency

a na lysis.
b) What do you mean by efficient portfolios? You are examining three international indices.
.'. -::
'. lt; :x:::l:d re:..:ri and standard deviation of a portfolio composed of 50% French
equities, 25% English equities, and 25% German equities? Also find out coefficient of
Correlation with
Portfolio Exp. Std. Dev French English German
French 7.028 L4.447 7

Enelish 0.724 5.870 0.2390 t

i German -0.077 7.431 0.2894 0.s830 t
c) Describe the efficient frontier. Consider a 10 -asset portfolio with average variance of O.O225 5
and average covarlance of 0.04. What will be the variance of such a portfolio?

4. a) Write short notes on :Ji) put option ,

!i!) call option , iii) Option Contracts , (iv) Futures
Contracts andJv) ln the money and out ofthe money. 4
.41 lllustrate the factors affecting call options. 5
-c) State Binomial Option Pricing. 3
)) We wish to value a 3-month call option with an exercise price of S10.25. The current share 3
price is S10 and the risk-free interest rate is 1,.5% p.m, Three time periods of
1 month each. lt is assumed that at the end of each month, the share price can move to only
one of tr,vo values. Evaluate the above problem.

5. a) "lf utility" of expected wealth

is less than the expected utility of wealth, then the investor is risk 2
averse"- Do you agree? Justify your answer graphically.
b) Assume that you have a logarithmic utility function fort wealth U(W) = ln (W) and that you are 6
faced with an equal chance of wlnning or losing tk. 1000. How much will you pay to avoid risk if
your current level of wealth is tk. 10000? How much would you pay if your current level of
r.realth is tk. 1000000?
c) Assume that an investor with initial wealth of BDT. 20000 hai a logarithmic-utitity function
for wealth U (W) =ln (W). He is faced an uncertainty: 80% chance of losing BDT. 1000 and 20%
chance of losing BDT. 100@. What is difference in the risk premium under Markowitz and
Pratt-Arrow model?

a) "NPV and IRR will always favor the same project" - Do you agree? lf not, which one we should
choose to maximize shareholder wealth? Justifu your answer with respect to three aspects

b) "All individuals always make completely rational decisions if they follow the axioms of cardinal
utility". Explain these axioms and justifo the statement.

Arsume the gamble, where anyone can get S30 with probability 20% and $S wittr probability
80%. The expected (average) rralue is S10. You are ass'rgned to select risk lover, risk averse and
risk neutral student from the following students. Suppose that the utllity function of Marketing
studeng Finance student and Accounting student are U (W) =ln (W), U (W) =O.O+*W2 and U
(W) = 0.5+W respectively. Now comment about their risk tolerance. j.",'

*-t .. _-
Department of Finance '
Jagannath University
MBA (6th Batch) 1't Semester Final Examination,2oLG
Course Code: FIN-5102; Course Title: Corporate Capital Budgeting
Total Marks: 60, Time: 3.00 hours

D iou .r;:e to ons'iler oll parts of eoch question sequentiolly, Answer ony 4 (four) from the following questions,

Questionf 1 (5+4+6)
a) Llst the main categories of financing choices. What is the primary consideration in choosing a financing
b) Give an example of a situation in which you would know the cash flows involved and would want to find
the effective rate of return.
c) You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive 520,000
at the end of each year for the 30 years between retirement and death (a psychic told you would die
exactly 30 years after you retire). You know that you will be able to earn t7% per year during the 3O-year
retirement period.
(i) How large a fund will you need when you retire in 20 years to provide the 30-year; 520,000
retirement annuity?
(ii) Horv much rvill you need today as a single amount to provide the fund calculated in part (i)if you
earn only 9% per year during the 20 years preceding retirement?
(iii) lvhat effect would an increase in the rate you can earn both during and prior to retirement have
on the values found in parts (i) and (ii)? Explain.

/ q,F6,
au-eati6n* 2 (5+5+3)

:"/ " a)al Describe the capital budgeting process and distinguish among the various categories of capital projects.
b) !

Briefly explain NPV profile with an example. An investment of Tk. 20,000 will create a perpetual after-tax
cash flor,v of Tk. 2,000. The required rate of return is 8 percent. What is the investment's profitability
i ndex?

\, -;) )ear : 0 ;1',213 | 4 NPV rRR (7")

I t ''
ProiectA -50 i 20 20 20 20 13.40 27.86
\'r Pro B -50 0 0 0 100 18.30 18.92

Trvo projects are independent. For both projects, the required rate of return is 10 percent. Which
investment decision recognizes value additivity principle? - Explain it using the above information.

bnf 3 (7+8)
Derek lndustries currently has assets on its balance sheet of Tk.200 million that are financed with 70%
equity and 30% debt. The executive management team at Derek ls considering a major expansion that
rvould require raising additional capital. Rosanna, the CEO of Derek, has put together the following
schedule for the costs of debt and equity:
Amount of new After-tax Cost of Amount of new EquitY Cost of Equity
)ebtlin millions Debt (in millions)
Tk. 0 to Tk. 49 4.0% Tk. 0 to Tk. 99 7.0%
Tk. 50 to Tk.99 I 4.2% Tk. 100 to Tk. 199 8.0%
Ik. 100 to Tk. 149 4.5% Tk. 200 to Tk. 299 9.O%

Calculate the break points for Derek lndustries and graph the marginalcost of capital schedule'
0) Omni Corporation is considering a project that requires a Tk.500,000 cash outlay and is expected to
produce cash florvs of Tk. 160,000 per year for the next four years. Omni's tax rate is 35%, and the
before-tax cost of debt is 6.5%. The current share price for Omni's stock is Tk.36 per share, and the
current dlvidend is Tk. 1,5 per share. Omni's expected growth rate is 5%. Assume that Omni finances the
project rvith 60% equity and 40% debt capital and the flotation costs for equity are 4.5%. Calculate-
i. Appropriate discount rate for the project
ii. Dollar amount of flotation costs
iii. NPV of the project

stion# 4 (8+7)
a) Heer Enterprises needs someone to supply it with 150,000 cartons of machine screws per year to
support its manufacturing needs over the next five years, and you've decided to bid on the contract. lt
rvill cost you $840,000 to install the equipment necessary to start production; you'll depreciate this cost
straight-line to zero over the project's life. You estimate that in five years, this equipment can be
salvaged for 560,000. Your fixed production costs will be 5290,000 per year, and your variable
production costs should be SA.SO per carton. You also need an initial investment in net working capital
of 565,000. lf your tax rate is 36 percent and you require a 13 percent return on your investment, what
bid price should you submit?
b) Eads lndustries is considering'the purchase of a new machine for the production of latex. Machine A
costs S2,600,000 andwill [ast for six years. Variable costs are 35 percent of sales, and fixed costs are
5160,000 per year. Machine B costs 54,900,000 and will last for nine years. Variable costs for this
machine arej0 percent of sales and fixed costs are S100,000 per year. The sales for each machine will
be 59 million per year. The required return is 10 percent, and the tax rate is 34 percent. Both machines
rvill be depreciated on a straight-line basis. lf the company plans to replace the machine when it wears
out on a perpetual basis, which machine should you choose?

estion$ 5 (s+10)
a) For what purposes is the cost of capital used? Why should a company face a marginal cost of capital
Schedule instead of a single weighted average cost of capital?
b) Edna Recording Studios, lnc., reported earnings available to common stock of 54,200,000 last year. From
that, the company paid a Dividend of St.Z0 on each of its 1,000,000 common shares outstanding, The
capital structure of the company includes40/o debt,10% preferred stock, and 50%
conimon stock. lt is taxed at a rate of 40%.
. lf the market price of the common stock is S+O and dividends are expected to grow at a rate of
5:. per year for the foreseeable future, what is the company's cost of retained earnings
: t=rc':g?
='3-=:'3r cos*s on re,...'sha:'es of common stock amount to $1.00 per share, what is the
cc:r3ar','s cost o: new common stock finoncing?
- lti- The company can issue 52.00 dividend preferred stock for a market price of 525.00 per share.
Flotation costs would amount to 53.00 per share. What is the cost of preferred stockfinoncing?
i'v. The company can issue $1,000-par-value, 10% coupon, 5-year bonds thatcanbesoldforsl,2OO
. each. Flotation costs would amount to 525.00 per bond. Use the estimation formula to figure

Question# 5 (6+9)
a D;fferentiate between real options and managerialoptions. A project costs Tk. 200 and has a future cash
flov, ofTk.44peryearforever. lf youwaitoneyear,theprojectwill costfk.24O becauseof inflation,but
the cash flows will be Tk.48 per year forever. lf these are only two options, and the relevant discount
rate is 12 percent, what should you do? What is the value of the option to wait?
b) We are examining a new project. We expect to sell 7,000 units per year at Tk. 65 net cash flow apiece for
the next 10 years. ln other words, the annual operating cash flow is projected to be Tk. 455,000. The
relevant discount rate is 16 percent, and the initial investment required is Tk, 1,800,000,
i. After the first year, the project can be dismantled and sold for Tk. 1,400,000. lf expected sales
are revised based on the first year's performance, when would it make sense to abandon the
investment? In other words, at what level of expected sales would it make sense to abandon
the project?
ii. Explain horv the Tk. 1,400,000 abandonment value can be viewed as the opportunity cost of
keeping the project in one year.
iii. Suppose you think that it is likely that expected sales will be revised upward to 9,000 units if the
first year is a success and revised downward to 4,000 units if the first year is not a success. lf
success and failure are equally Iikely, what is the NPV of the project? Consider the possibility of
abandonment in answering. What is the value of the option to abandon?

Good Luck
Jugannath UmiveE"sity
Department of Finance
MBA 1't Semester Final Examination _2016
Title: International Financial Management
Time: 3 hours Code: FII{ 5104
Ful! Marks: 60
G.P.t Anss,er un
each question should be answered consecutively.)
right margin indicate frU murt lTi.ffi
b) Explain why unfavorable economic o. political
.o,rJl,iom affect the MNCs cash flows, 05
required rate of return and valuation?
c) Briefly explain how charlges in various economic
factors affect the Bangladesh current 05
account balance?

nal Business,,. Illustrate the statement. 0S

New Zealand), you must decide how to
00 New Zeal3nd dollars 90 days from now. put
optlons are available for a preuium of 07
$.03 per u,it and an exercise p.i". or $.49 per New
Zealand dollar. The forecasted spot rate of
the NZ$ in 90 days follows:

Future Spot Rate Probabili

s.3 8
dollars LU ue r\iusrveo rn yu oali s.
tior.rs, create a robability distribution for U.S.

Lrltinational corporation.
llion and debt of USD g00 million with a cost
of 05
5%.The flotation cost of collecting both debt and
i' calculate the cost of capital of the MNC a the present
ii' \\trat would be the cost of capital of the MNC if it
increases 56% eq,ityfrom the
c) sues bonds rvith a coLtpou rnterest rate of
he index is l2vo.lBM has a beta of 1.50.
bond is 2%o. Tl.te target debt_equity ratio o
Lrnder the following situations:
ii' by using market uei-9ht if the rrarket price of the
share increases by I0%.
I "h
4.2\ Assume the following information:
Spot rate of l:S t .OO
180-day forward rate of !:$i.56
180-day British interest rate-- 4o/o
180-day U.S. interest rate: 3o/o
Based on this information. is covered interest arbitrage by U.S. investors feasible (assume that
U.S. investors use their oun fund)? Explain.
b) Explain how, ,vou could detennine '*'hether PPP exists. Describe a limitation in testing whether
PPP holds. Differentiate absolute PPP fr-orr-r relative PPP.
c) Assume that the Canadian dollars spot rate is $.85 and that the Canadian and US inflation rate
are similar then assume that Canada experience 4% inflation and U.S. face 3%o. According to
PPP u'hat will be the nerv value of tlre Canadian dollar after it adjust to the inflationary

"\5.a) \\'trat are the Motives for FDI.

b) Diamond Bank expects that the Sirrgapore dollar will depreciate against the U.S. dollar from
its spot rate of $.43 to $.42 in 60 davs. The following interbank lending and borrowin{ rates
Currency Lending Rate
t' U.S Dollar
a re Dollar

Diamond Bank considers borrorr in-r l{) rrriilion Singapore dollars in the interbank market and
inr-estine the funds in U.S. dollars for 60 rlar,s. Est'mate the profits (or losses) that could be
earned from this strateg)'. Should Diarn. rrl Bank pursue this strategy?
c) Assume Poland's curr€nc.v- (the zloty t is u,orth $.17 and the Japanese yen is worth
5.008- What_ffthg_gross ra-te ol !h-e 7.iot,v rvith lespect to yen? That is, how many yen ,03
equal a zloq?

6. a) \\hy'is 'Official Resen'es Accouut' es-.-iiiirl in the balance of payments? How does it differ 03
from Current Account and Capital Acc,' rl?
b) Differentiate balance of trade frorn balrnct'of payments. Why is balance ofpaymenls essential 03
to understand the international fiuancial 1'osition of a country?
c) Consider the follou'ing transactions: 09
i. Lports of conrmodities flrr(runting to USD 4000 million;
ii. Exports of courmodities anrorrnting to USD 2500 million;
iii. Erpenditures by foreign tor; i::t in Bangladesh amoqnting to USD 150 million;
ir,. Commodities received fl-oir ,,tlrer countries as gift value equivaldnt to USD 250
\,. Services received by Barrr:lr, 'tslri people amounting to USD 100 mi[ion;
vi. Expenditures rnade bv llrrrr,:llcleshi people for treatment abroadi amouRting to
USD 200 million;
vii. Imports of cornrrodities i,' ii:'l!) 3000 million: payment is made in goldSy the
government of Banglaclcsl' -

viii. Exports of conrrnodities li-' .D 3500 million: payment is received in gold.

1. Maintain accountinS lccrl is o1'the transactions;
2. Report them iu tlre sl, n'.',:t of balance of payments.
Jagannath UniversitY
DePartment of Finance
MBA Z"d Semester 16tt' Batch)

for the

the concept of "Standard error" in 5'0

I a) Explain the meaning and significance of 5.0
' samPling analYsis'
b) \ltrat should be the samPle if a e
items is to be drawn to estimate
rvith 95.5% probability? What would 5'0
is assumed t-o be infinite in the given case?

of the hotel's guests who
'oy ..,
wants to be 95Yo confident that the
d for this
value' What is the
=3% of the true
with control 4'0
a) H,"#lr[],"" after-only with contror design from before-and-after
-. *'ith examPle'
strata so that
: -\ ce:tain population is divided into five
-'.- - l'-''-"-'--\-- = lr-trlrl.-\-. = 1800''\r, =
1700 and N' = 2500
Reqecire s:zndard 'jerranons are as tbllows:
6' =l'6,6, =2'0,5) - 4'4'4 :4'8 &6' =6'9
the fust tl /o strata is Rs 4 per
and further the expected sampling cost in
the sampling cost is-Rs 6 per
Inten,ierv and in the remaining tiree strata
tn,.*i.,,Howshourd"'^.rt':t1'.:fi ',i,!3f:f,"31,i,[ilLiTil"
oity tne aiferences in sffatLtm variabiliry
bility as well as the differences in stratum 4.0
Sampling costs. 3.0
the criteria of a goodness
c) Differentiate measurement from scaling' Explain
Of a measurement scaie'
Given is the following informatton:
(i) Universe rvith N:i0.000'
containers on the bas s of past
iiU i-lun.. of weight of the cereal of the sample fo1 true
Records: 8 kg. oetermine the size limatingthe true
be within 0'4 kg' of the
rf eight of the co-ntainers if the esfirnate shoutd
,tverage rveight with 95% probabiliry'
if infrnite universe is assumed?
ttiij ilf,". rroJtd b. tf,e-J. it tt,e sampte from One-tailed tests'
4a) \\'hat is hypothesis? Differentiate r*'-tuittd tests
b) Definethelevelofsi-*rrificance.ExplainTypeIaldTlpeIIerrols.2.5
produced'15 or Iess pounds of waste 2'5
c) A certair chemical pio".r, is saidio have deviation of 5 ibs' 5'0
material for every60 lbs. batch rvith a corresponding st rdard
test for P = 16 lbs' If we raise the
increased. Compute the power of the

ofsignificance to 20 per cent,

then how the power of the test for p: 16 lbs. would be affected?
d) Suppose that a public corporation has agreed to advertise through a local
newspaper if it can be established that the newspaper circulation reaches 50
more than 60% of the corporation's customers.- What llo and H oshould
be established for this problem deciding on the basis of a sample of
customers tvhether or not the corporation should advertise in the local
newspaper? If a sample of size 100 is collected and 1% level of
Significance is taken, what is the critical value for making a decision
rvhether or not to advertise? Would it make any difference if we take
a sample of 25 in place of 100 for our purpose? If so, explain'
--5 a) Define Chi- Square test. Explain the conditions for the application of Chi Square
test. 5.0
b) he table shows the data obtained d ur
ven below snows outbreak of small 5.0
Attacked Not attacked Total
Vaccinated 31 469 500
Not Vaccinated 185 1315 r500
Total 216 1784 2000
Test the effectiveness of vaccination in preventing the attack from smallpox. Test
y,'our result rvith the help of X2 at 5o/o level of significance.
c) A college is running post-graduate classes in five subjects with equal number of 5.0
students. The total number of absentees in these five classes is 75. Test the
hipothesis that these classes are alike in absenteeism if the actual absentees in
each re ru tbllous:
Histor.v : 19
PhilosophY : l8
Economics : 15
Commerce : 12
Chemistrv : 1l
6a) \\hat do you mean by analysis of variance (ANOVAX 2.0
b) Sare the basic principle of .A.\OVA. 3.0
ci Set up ={\OVA uble for the follo*ing information relating three drugs 10.0
testing to -iudge the effectiveness in reducing blood pressure for three
different groups of people:
-rrmormt of Blood Pressrne Reduction in Millimeters of

Gror.p of People x Y Z
-!1. t4 l0 ll
l5 9 10
B t2 7 t0
ll 8 11
C l0 I1 8
1l t1 7

Do the dmgs act differently?

Are the different groups of people affected differently?
Is the interaction terrn significant?
Answer the above questions taking a significant level of 5%.