Jimma University

College of business and economics

Department of Accounting and Finance

Group Assignment on Financial management course for MPMF students AGARO

COMPUS

Submission Date: 29/06/ 2023 G.C

Total mark it holds: 35%
Email: tganfure@gmail.com
N.B: THE GROUP SHOULD NOT CONTAIN MORE THAN 4 MEMBERS

Part I: Briefly discuss the following question and write your final answer that fits
the objective of the question

1. Discuss what financial management is and how financial management related to project
management?
2. Why wealth maximization of financial management goal is by far better than profit
maximization of financial management? Discuss it.
3. Discuss the guidelines of capita budgeting decisions with its necessary steps.
4. Discuss the modern approach scope (functions) of financial management and differentiate
how it differs from the traditional functions of financial management
5. Compare and contrast the difference between Modigliani and Miller’s (MM) theory, Bird in
Hand Theory, Clientele effect theory, Tax differential theory, and information signaling theory
of dividends.
6. Separately define what capital structure, Leverage, differentiate the difference between
operational leverage and capital Leverage.
7. What is the effect of stock splits on dividend payout? What are the advantages and
disadvantages of stock splits?
Part Two: show the necessary steps and write the correct answer for each of the
following quantitative questions.

1. Tujube company issued 12% debentures (debt instrument) of the face value of Birr 1,000
redeemable at par after15 years. Assume the floatation cost incurred is 5% and the company
operates in a country where the tax rate is 35%. Accordingly, calculate the cost of debt when;
a. When debentures are issued at par
b. When debentures are issued at 9%

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 c. When debentures are issued at 14%
2. Bravo electronic corporation which has no debt outstanding and a total market value of
$150,000. Earnings before interest and taxes (EBIT) are proposed to be $14,000 if economic
conditions are normal. If there is a strong expansion in the economy, then EBIT will be 30%
higher than during normal condition. If there is a recession, then EBIT will be 60% lower than
during normal economic condition. Bravo is considering a $60,000 debt issue with a 5%
interest rate. The proceeds will be used to repurchase shares of stock. There are currently
2,500 shares outstanding.
Required:
a) If the corporation assumes no taxes, calculate earnings per share [EPS] under
each of the three economic scenarios before any debt is issued.
b) Repeat part (a) assuming that Bravo goes through with debt financing and 60,000$
worth of debt. Then, calculate the number of shares outstanding?
3. Fatuma Ahmed deposits 2,500 birrs annually into the Awash ban, earning 7% compounded
semi-annually. Due to a change in employment, these deposits stop after 10 years, but the
account continues to earn interest until Fatuma retires 20 years after the last deposit is made.
How much is in the account when Fatuma retires?
4. A company issues 10,000 equity shares of $100 each at a premium of 10%. The company
has been paying 25% dividends to equity shareholders for the past five years and expects to
maintain the same in the future also.
Required:
a) Compute the cost of equity capital.
b) Will it make any difference if the market price of equity share is $ 175?
5. Assume that Bekele has a plan of setting up a fund for his son, Borut, to go to college. Bekele
has figured that he will need Birr 80,000 by the time he is old enough to go to college. He
found an account that pays 6% compounded monthly. How much will Bekele’s monthly
payment be to get his son Borut set up for college in 20 years? How much interest will the
account accrue?
6. Airport Company is considering investing in two new vans that are expected to generate
combined cash inflows of Birr 16,000 per year. The van’s combined purchase price is Birr
52,000. The expected life and salvage value of each is five years and Birr 12,000,
respectively. Airport Plane has an average cost of capital of 14 percent.
Required:
A. Calculate the net present value of the investment opportunity.
B. Indicate whether the investment opportunity is expected to earn a return that is
above or below the cost of capital and
C. Show your decision (accepted or rejected).
7. Assume that Samsung Corporation is currently paying $2 per share in dividends and
investors expect dividends to grow at the rate of 7 percent a year for the foreseeable future.
For investments at this risk level, if the investors require a return of 12 percent a year, what
is the estimated value of Samsung today?

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8. NUM Corporation is reviewing its capital budget for the upcoming year. It has paid a
$3.00 dividend per share (DPS) for the past several years, and its shareholders
expect the dividend to remain constant for the next several years. The company’s
target capital structure is 60 percent equity and 40 percent debt; it has 1,000,000
shares of common equity outstanding; and its net income is $8 million. The company
forecasts that it would require $10 million to fund all of its profitable (positive NPV)
projects for the upcoming year.
a) If NUM Corporation follows the residual dividend model, how much retained
earnings will it need to fund its capital budget?
b) If NUM Corporation follows the residual dividend model, what will be the
company’s dividend per share and payout ratio for the upcoming year?
c) If BTM Corporation maintains its current $3.00 DPS for next year, how much
retained earnings will be available for the firm’s capital budget?
d) Can the company maintain its current capital structure, maintain the $3.00 DPS,
and maintain a $10 million capital budget without having to raise new common
stock?
e) Suppose that NUM Corporation’s management is firmly opposed to cutting the
dividend, that is, it wishes to maintain the $3.00 dividend for the next year. Also,
assume that the company was committed to funding all profitable projects and
was willing to issue more debt (along with the available retained earnings) to
help finance the company’s capital budget. Assume that the resulting change in
capital structure has a minimal impact on the company’s composite cost of
capital, so that the capital budget remains at $10 million. What portion of this
year’s capital budget would have to be financed with debt?
f) Suppose once again that NUM Corporation’s management wants to maintain
the $3 dividend per share (DPS). In addition, the company wants to maintain its
target capital structure (60 percent equity, 40 percent debt) and maintain its $10
million capital budget. What is the minimum dollar amount of new common stock
that the company would have to issue in order to meet each of its objectives?
9. Assume that Nigatu corporation has equity of $240 million and debt capital of $120 million.
Treasury bills that mature in one year yield 5% per year, and the expected return on the
market portfolio over the next year is 15%. The beta of Nigatu’s equity is 0.90. assume again
that the firm pays no taxes. Required:
A. What is Nigatu’s debt to equity ratio?
B. What is Nigatu’s weighted average cost of capital?
10. Ethiopian insurance company makes an original Ocean screen Bolt that wholesales for Birr
8. Each screen Bolt latch has a variable operating cost of 4 birrs. Fixed costs are Birr 80,000
per year. The firm pays Birr 18,000 interest and preferred dividends of Birr 14,000 per year.
At this point, the firm is selling 38,000 bolts per year and is taxed at a rate of 25%.
A. Calculate the firms’ ocean screen Bolt’s operating breakeven point.

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 B. On basis of the firm’s current sales of 38,000 units per year and its interest and
preferred dividend costs, calculate its EBIT and earnings available for common.
C. Calculate the firm’s degree of operating leverage (DOL)
D. Calculate the firm’s degree of financial leverage (DFL)
E. Calculate the firm’s degree of total leverage (DTL)
11. The Vib Company and the Kon Company are identical in every respect except that Veblen
is not levered. The market value of Konta Company’s 6% bonds is $1,000,000. Financial
information for the two firms appears here. All earnings streams are perpetuities. Neither firm
pays taxes. Both firms distribute all earnings available to common stockholders immediately.
Vib Kon
EBIT 360,000 360,000
Interest --------- 72,000
Stock 2,400,000 1,968,000
Debt -------- 1,000,000
Price of a share 12 birr

Required;
a) An investor who can borrow at 6% a year wishes to purchase 5% of Konta’s equity.
Can he increase his dollar return by purchasing 5% of Vibro’s equity if he borrows
so that the initial net costs of the two strategies are the same?
b) Given the two investment strategies in (a), which will investors choose?
12. Dallol company has a 20-year, 5% coupon bond rated A+ grade in the capital market.
Assume that your broker indicates that the yield-to-maturity of similarly rated 15-year
corporate bonds is 5%. If the coupon payments on this bond are compounded semiannually,
what should be the price of this bond?
13. Assume that the Ethiopian government has recently issued a renaissance Dam bond with
1000-birr face value, 12 years, 7% coupon rate compounded quarterly. If your investment
advisor has told you that the yield-to-maturity on this bond is 6%. What should be the price
of this bond?
14. MUHE company’s stock is expected to pay a dividend of birr 4 at the end of one year. After
this, the dividends are expected to grow at the rate of 5% per year forever. The required
return on the stock is 12%. What's the price of the stock according to the dividend discount
model?
15. Dunamis corporation has a share capital of Birr 100,000 divided into share of birr 10
each. It has a major expansion program requiring an investment of another Birr
50,000. The Management corporation is considering the following alternatives for
raising this amount:
❖ Issue of 5,000 equity shares of birr 10 each
❖ Issue of 5000, 12% preference shares of Birr 10 each
❖ Issue of 10% debentures of Birr 50,000
Required: it the company’s present Earnings Before Interest and Tax (EBIT) are
Birr 40,000 per annum subject to tax 50 percent, calculate the effect of the above
financial plan on the earnings per share presuming:

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 a) EBIT continues to be the same even after expansion
b) EBIT increases by Birr 10,000

FROM READING ASSIGNMENT

16. Assume that you can invest in any of the following three securities today and hold them for
one year. However, there is uncertainty about how well your investments will do over the
ensuing year. Thus, the uncertainty is represented by the three economic states of nature
that can potentially occur with probabilities, and the returns for each security in the three
states of nature are given in the table below;

Economic Probabilities Stock- Stock- Moody’s

state (in %) C D Market
Return
Recession 25% 14 10 5%
Normal 45% 32 40 10%
Expansion 30% 36 28 15%

Required;
A. Calculate the expected returns for stock-C and stock-D
B. The variances of stock-C and stock-D’s returns
C. The standard deviation of stock-C and stock-D’s returns
D. Assume if you invest 60% of your capital in stock C and 40% in stock D,
calculate the portfolio return of your investment.
E. Assume if you invest 60% of your capital in stock C and 40% in Moody’s
market, calculate the portfolio return of your investment.

THE END!!!