NEB Class 12 Management Finance Question Paper 2082 (Set A) Nepal

Any two responsibilities of a financial manager:

1. Investment decision (capital budgeting) — deciding where and how much of the firm's funds should be invested in long-term and short-term assets.
2. Financing decision — deciding the best mix of sources of funds (debt and equity) to raise the required capital at the lowest cost.

(Other acceptable points: dividend decision, managing working capital/liquidity, financial planning and control.)

The Balance Sheet (Statement of Financial Position) shows the financial position of a business at a particular date by listing its assets, liabilities and capital (owner's equity).

The fixed assets turnover ratio measures how efficiently a firm uses its fixed assets to generate sales. It is the ratio of net sales to net fixed assets:

A higher ratio indicates more efficient utilisation of fixed assets in generating sales.

Any two advantages of short-term debt:

1. Lower cost — short-term debt usually carries a lower interest rate than long-term debt, reducing the cost of financing.
2. Flexibility and easy availability — it can be arranged quickly and adjusted to seasonal/temporary needs, and repaid when no longer required.

(Other acceptable points: no long-term commitment, faster to obtain, useful for meeting working-capital needs.)

Any two features of an optimal capital structure:

1. Minimum cost of capital — the mix of debt and equity that minimises the overall (weighted average) cost of capital.
2. Maximum value of the firm — it maximises the market value of the firm and the wealth of shareholders.

(Other acceptable points: appropriate balance of risk and return, sufficient flexibility, maintains solvency/control.)

Two differences between preferred stock and common stock:

(Preferred shareholders also get priority over common shareholders in repayment at liquidation.)

Any two characteristics of a bond:

1. Fixed face (par) value and maturity — a bond has a stated par value repayable on a fixed maturity date.
2. Fixed periodic interest (coupon) — it pays a fixed rate of interest (coupon) to the bondholder regardless of the firm's profit.

(Other acceptable points: it represents debt/borrowing, bondholders are creditors not owners, usually secured, has no voting rights.)

An investment decision (capital budgeting decision) is the decision of selecting the assets or projects in which a firm will invest its funds. It involves identifying, evaluating and choosing long-term investment proposals that are expected to generate returns over future periods, so as to maximise the value of the firm.

A forward rate is the exchange rate agreed today for the purchase or sale of a currency to be delivered (settled) at a specified future date. It is the rate quoted for a forward foreign-exchange transaction, fixing now the rate at which currencies will be exchanged later.

Business finance and economics are closely interrelated; financial management draws heavily on both microeconomics and macroeconomics.

• Microeconomic principles: Concepts such as marginal analysis, supply and demand, pricing, cost–benefit analysis, opportunity cost, and risk–return trade-off are used in financial decisions like investment, financing and pricing.
• Macroeconomic environment: Finance operates within the economy — interest rates, inflation, money supply, fiscal and monetary policy, economic growth and the capital market directly affect a firm's cost of capital, availability of funds and investment decisions.
• Resource allocation: Economics studies efficient allocation of scarce resources; business finance applies this to allocate the firm's limited funds among competing investment alternatives.
• Decision-making tools: Tools of economics (marginal cost = marginal revenue, time value of money, discounting) are the foundation of financial techniques such as NPV, IRR and capital budgeting.

Thus, business finance is regarded as an applied branch of economics, using economic theory and tools to make sound financial decisions for the firm.

An income statement (profit and loss account) is prepared to determine the net profit or loss of a business for a given period by matching revenues against expenses.

Steps / format:

1. Start with Net Sales (Revenue).
2. Deduct Cost of Goods Sold (COGS) to get Gross Profit.
3. Deduct operating expenses (administrative, selling, depreciation) to get Operating Profit (EBIT).
4. Deduct interest to get Profit Before Tax (EBT).
5. Deduct tax to get Net Profit After Tax.

Suitable example:

Five types of investment proposals:

1. Replacement proposals — investments made to replace old, worn-out or obsolete assets with new ones to maintain efficiency and reduce costs.
2. Expansion proposals — investments to increase the existing capacity or scale of operations (e.g., adding plant or machinery to produce more of the same product).
3. Diversification proposals — investments to add new products or enter new markets/lines of business to spread risk.
4. Modernisation proposals — investments in advanced technology or improved methods to lower operating costs and improve quality.
5. Research and development / strategic proposals — long-term investments in R&D, safety, or statutory/regulatory compliance that may not give direct measurable returns but are necessary.

(Investment proposals may also be classified as mutually exclusive, independent, and contingent (dependent) proposals.)

Five factors influencing dividend decision:

1. Profitability and stability of earnings — firms with high and stable profits can pay higher and more regular dividends than those with fluctuating earnings.
2. Liquidity (cash position) — dividends are paid in cash, so adequate cash/liquidity is necessary even if profits are high.
3. Investment / growth opportunities — firms with profitable expansion opportunities retain more earnings and pay lower dividends.
4. Legal and contractual restrictions — company law and loan/debenture covenants may restrict the amount that can be paid as dividend.
5. Shareholders' expectations and tax position — the preferences of shareholders for current income vs capital gains and their tax considerations influence the dividend payout.

(Other acceptable factors: access to capital markets, control considerations, stability of dividend policy, inflation.)

A multinational corporation (MNC) is a company that owns or controls production/service facilities in more than one country. Its role in the development of a country includes:

1. Inflow of foreign capital and investment — MNCs bring foreign direct investment, supplementing domestic savings and capital for development.
2. Transfer of technology and skills — they introduce advanced technology, management techniques and know-how to the host country.
3. Employment generation — they create direct and indirect employment opportunities, raising income levels.
4. Growth of exports and foreign exchange — MNCs expand exports and earn foreign exchange, improving the balance of payments.
5. Industrial and infrastructure development — they help establish industries, improve infrastructure, and increase competition, efficiency and the variety/quality of goods available to consumers.

(However, MNCs may also have drawbacks such as profit repatriation, dependence and competition with local firms.)

Main question — Ordinary (common) share:

An ordinary share represents a unit of ownership in a company. Ordinary shareholders are the real owners of the company who bear the ultimate risk and are entitled to the residual profit and assets after all other claims are met.

Five features of ordinary shares:

1. Ownership and control — ordinary shareholders are the owners of the company and have voting rights to elect directors and control management.
2. Residual claim on income — they receive dividends only after preference shareholders and creditors are paid; dividend is not fixed.
3. Residual claim on assets — at liquidation they are paid last, after all liabilities and preference shares.
4. Limited liability — their liability is limited to the unpaid amount on the shares they hold.
5. No maturity / permanent capital — ordinary share capital is not repayable during the life of the company; it is permanent capital.

OR alternative:

a) Value of perpetual bond: Annual coupon $= 12\% \times 1,000 = \text{Rs. }120$; required return $= 15\%$.

b) Value of stock at present (Gordon growth model): Last dividend $D_0 = \text{Rs. }20$, growth $g = 8\%$, required return $k_e = 14\%$.