financial management - me - Business Finance
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._balance_sheet_2018_and_2019.pdf
._income_statmement_2018_and_2019.pdf
open_book_exams_paper____spring_2020.docx
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College of Banking and Financial Studies
DEGREE: B.Sc. ACCOUNTING, AUDITING AND FINANCE / BBA
SEMESTER: Spring 2020
Student Name
Student Number
Semester
Spring 2020
MARKS
100
Weightage
50\%
Unit title
Financial Management (UG 038)
Exam Paper Issue Date
May 14, 2020
Type of Assessment
OPEN BOOK EXAM
Submission Deadline
May 24, 2020
Assessor:
Dr. Anand S. / Ms. Marium Hussain
Internal Verifier:
Dr. Salman Nusrat
Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020
Page 1
Instructions to candidates:
1. This assessment is Open Book exam which is a substitute of your Final exam. It is to be
completed Individually.
2. Kindly include your Name and Student Number in the heading page above.
3. This Assessment accounts for 50\% of the total marks available for this Module.
4. Answer all the questions.
5. You are expected to show all your workings clearly wherever needed.
6. Please start each answer on fresh page.
2. Plagiarism is a form of cheating in which students use the work of others and present it as
their own. Do not allow another student to copy your work and then submit it under
their own name. The college considers this form of cheating as a serious offence.
7. This assessment is mostly based on computations, implications, consequences,
viewpoints, critical analysis and case study questions. Please limit your discussions,
viewpoints or critical analysis around 1200 words. All your calculations should be
shown in full into the main body of your answer.
8. Please be aware that your work will be submitted through Turnitin. You must only
submit your own work including correct citations and references for any external
materials used in your work.
Class ID: 24155846
Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020
Enrolment Key: Sem2
Page 2
Section A – THREE questions (compulsory) to be attempted
60 marks weightage
1.
You have been provided Income Statement and Financial Position Statement of Oman
Cement Company SAOG for the year 2018 and 2019 in separate columns. You are
required to evaluate the Working Capital position of this company for the year 2018 and
2019 based on following calculations:
(i)
Liquidity position of the company (current ratio and quick ratio). What is your
view about status of liquidity position of Oman Cement Company?
(ii)
Cash Operating Cycle in a tabular form (as shown in ppt slide number 10 of
working capital management) and present Cash Operating Cycle in a diagram
for both years separately (as shown in class ppt slide number 9 of working
capital management).
(iii)
Based on the above calculation, give your overall view on working capital
situation of Oman Cement Company between the year 2018 and 2019. What are
your suggestions to Oman Cement Company for strengthening Working Capital
Management?
(5 + 10 + 5 = Total 20 Marks)
2.
“Hassen Constructions SAOG”, the company is situated in Al Khuwair. The
organization is specialised in the manufacturing of building materials that are used in
construction sites.
Currently the company’s capital structure (total capital) is ungeared. However, the
owners of Hassen constructions is planning to change their capital structure into a
leverage (geared) capital structure as they believe having a debt component in its
capital structure will be beneficial to the organization.
The company total capital is RO 300 million which is an equity-based capital structure.
The company has two share buyback options available to move into a leverage(geared)
capital structure.
Option 1
The company has an option in converting 30\% of its equity capital to debt capital at an
interest rate of 7\%.
Option 2
The company has an option of converting 50\% of its equity capital to debt capital at an
interest rate of 7.5\%
Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020
Page 3
To evaluate the impact on the alternative policies the financial accountant of the
company has presented the following data to evaluate the impact on ROE in the current
capital structure and the above two given options.
The financial accountant believes that based on the sales forecast the sales could be
either weak, average or strong. The probability for the market to be weak is 0.3, average
0.5 and strong 0.2.
The profits before interest and tax (PBIT) , if the market is considered to be weak is RO
30 million, if the market is average the PBIT is 50\% greater than the market is weak and
if the market is considered to be strong it is 75\% greater than if the market is average.
The current applicable tax rate is 25\%
Required:
a) Calculate expected annual return on equity (ROE) under each option (the current,
option I and option II)
b) Calculate expected average annual return on equity (ROE) considering all options
together.
c) Evaluate the benefits and drawbacks of Hassen constructions in to changing their
capital structure from and equity based to leverage. And, advise which of the three
options (current or option I or option II) that Hassan Construction SAOG should go
for under a normal situation? And substantiate your advice with suitable reasons.
d) Evaluate the factors that Hassen construction should consider when evaluating its
capital structure policy.
(10 + 4 + 3 + 3) = Total 20 Marks)
3.
Scenario analysis
(i)
You are leading a role of Chief Financial Officer of a Cement Company in
Oman. Your company has huge current profit of RO 10 million and presently
having a plan to capital investment of RO 8 in the next financial year. The
company is willing to continue capital structure of debt 25\% and Equity 75\% in
the future. How much of the RO 10 million should your company pay out as
dividends? And what would be the dividend payout ratio of your company?
(ii)
In case you retain huge amount of profit of your company for long term
investment, what financial decision do you take – to pay high cash dividend? Or
to issue bonus share (stock dividend)? And explain why?
(iii)
Presently, your company’s Face Value of Equity Share RO 10 and Market Value
of your Share in MSM is RO 25 per share. In order to increase the trading
volume and market liquidity of your company stock, will you suggest the
management to go for stock split? Explain your management about concept of
Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020
Page 4
(iv)
stock slip with the advantage of splitting the stock of your company with the
current scenario.
Given the current scenario COVID 19 and its impact on Cement sector in the
near future, what are the factors that you consider affecting the dividend policy
of your company? Critically evaluate and justify.
(5 + 4+ 4 + 7 = Total 20 marks)
Section B- ONE question (compulsory)
4.
40 marks weightage
Salalah Chemical Company is considering two proposals for long term investment. Both
will operate for 5 years, but due to limitation on capital the company can accept only one
out two projects. The following information is available relating to :
Methanol
project
RO
(100,000)
60,000
50,000
40,000
30,000
25,000
10,000
Initial investment
Operating Profit before depreciation year 1
Operating Profit before depreciation year 2
Operating Profit before depreciation year 3
Operating Profit before depreciation year 4
Operating Profit before depreciation year 5
Scrap value at the end of 5 years
Fertilizer
Project
RO
(100,000)
54,000
46,000
40,000
36,000
25,000
10,000
The company’s standard payback period is 2.5 years and standard ARR is 12\%. The cost of
capital is 10\%?
Required:
(i)
(ii)
(iii)
Calculate Accounting Rate of Return for both Methanol and Fertilizer project.
Calculate Payback Period of Project Methanol and Fertilizer.
Calculate the NPV of Methanol and Fertilizer project.
Year
PV Factor
@ 10\%
(iv)
(v)
(vi)
1
0.909
2
0.826
3
0.751
4
0.683
5
0.621
Calculate Profitability Index for both projects.
Calculate IRR of Methanol and Fertilizer project
• NPV is negative RO 1,956 @ 40\% for Menthol Project
• NPV is negative RO 5,359 @ 40\% for Fertilizer Project
Present the overall results of above in a table and recommend one best proposal to
management. Give recommendation for your recommendation.
(10+6+8+3+9+4 = Total 40 Marks)
Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020
Page 5
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