NEB Class 12 · Past paper
The complete NEB Class 12 2080 exam paper for Business Finance, all 14 questions with solved model answers.
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What do you understand by finance? Write in brief about financial decision and investment decision. [2 + 3 = 5]
Finance Finance is the branch of study concerned with the procurement of funds and their effective utilisation to achieve the objectives of a firm. In a business it means arranging money required for the firm and using it in a way that m...
What do you understand by financial market? Distinguish capital market with money market. [2 + 3 = 5]
Financial market A financial market is a mechanism through which financial assets such as shares, bonds and other securities are created and traded between the suppliers and the users of funds. It brings savers and borrowers together and...
Define financial statement. Write in brief about the statements included in financial statement. [4 + 6 = 10]
Definition of financial statement
Financial statements are the formal records that summarise the financial position and financial performance of a firm for an accounting period. They are prepared from the books of accounts at the end of the period and are used by management, investors, creditors and other parties to make economic decisions.
Statements included in financial statements
Balance sheet (position statement): shows the assets, liabilities and owners' equity of the firm on a particular date. It reveals the financial position, that is what the firm owns and owes, and follows the identity $\text{Assets} = \text{Liabilities} + \text{Capital}$.
Income statement (profit and loss account): shows the revenues, expenses and the resulting net profit or loss over the accounting period. It measures the operating performance and profitability of the firm.
Cash flow statement: shows the inflows and outflows of cash classified into operating, investing and financing activities, explaining how the cash balance changed during the period.
Statement of retained earnings (changes in equity): shows how the retained earnings and owners' equity changed during the period due to profit, dividends and other adjustments.
Together, these statements give a complete picture of the profitability, financial position and cash movement of the firm.
Following are the two alternative credit terms offered by P. Company: (a) 2/10 net 30 (b) 3/15 net 30. Assume 360 days in a year. Required: (a) What is the approximate annual cost under each alternative? (b) What would be the effective annual cost of not taking discount? (c) Which alternative would you prefer and why? [4 + 4 + 2 = 10]
Given: 360 days a year. Cost of trade credit (cost of forgoing the cash discount):
$$\text{Cost} = \frac{d}{100 - d} \times \frac{360}{N - D}$$
(a) Approximate (nominal) annual cost of each alternative
Term (a) 2/10 net 30:
$$ \begin{aligned} \frac{2}{98} \times \frac{360}{30 - 10} &= 0.020408 \times 18 \ &= 0.3673 \ &= 36.73% \end{aligned} $$
Term (b) 3/15 net 30:
$$ \begin{aligned} \frac{3}{97} \times \frac{360}{30 - 15} &= 0.030928 \times 24 \ &= 0.7423 \ &= 74.23% \end{aligned} $$
(b) Effective annual cost of not taking discount
$$\text{EAR} = \left(1 + \frac{d}{100-d}\right)^{\frac{360}{N-D}} - 1$$
Term (a):
$$ \begin{aligned} (1 + 0.020408)^{18} - 1 &= 1.4386 - 1 \ &= 0.4386 \ &= 43.86% \end{aligned} $$
Term (b):
$$ \begin{aligned} (1 + 0.030928)^{24} - 1 &= 2.0772 - 1 \ &= 1.0772 \ &= 107.72% \end{aligned} $$
(c) Preference
If the discount is not taken, trade credit becomes a source of short term finance. Term (a) 2/10 net 30 should be preferred because its cost of forgoing the discount (36.73% nominal, 43.86% effective) is much lower than that of term (b) 3/15 net 30 (74.23% nominal, 107.72% effective). In other words, under 3/15 net 30 the discount is so valuable that it should almost always be taken, while 2/10 net 30 offers cheaper trade credit if the firm chooses to delay payment.
What do you understand by preferred stock? State its features. [2 + 3 = 5]
Preferred stock Preferred (preference) stock is a type of long term security that carries a preferential right over ordinary shares in two respects: it receives dividend before ordinary shareholders, and in the event of winding up it get...
Following data are provided as: Ordinary share 8,000 shares; Par value per share Rs. 100; Retained Earning Rs. 4,00,000; Debenture Rs. 3,00,000. Required: (a) Total book value of equity (b) Book value per share. [3 + 2 = 5]
Given: ordinary shares $= 8,000$ of Rs. 100 each; Retained earning $= Rs.,4,00,000$. Debenture is debt, so it is excluded from the book value of equity.
(a) Total book value of equity
$$ \begin{aligned} \text{Paid up ordinary capital} &= 8,000 \times 100 = 8,00,000\ \text{Book value of equity} &= 8,00,000 + 4,00,000 = Rs.,12,00,000 \end{aligned} $$
(b) Book value per share
$$ \begin{aligned} \text{BVPS} &= \frac{12{,}00{,}000}{8{,}000} \ &= Rs.,150 \end{aligned} $$
The information related to the issue of Rs. 100 per share are as under: Ordinary share 4,000; Dividend per share Rs. 20; Flotation cost Rs. 5 per share. Required: Cost of equity share if these shares are (a) Issued at 10% discount (b) Issued at 10% premium. [2 + 3 = 5]
Given: face value $= Rs.,100$, dividend per share $D = Rs.,20$, flotation cost $F = Rs.,5$ per share. No growth rate is given, so the zero growth model applies: $$Ke = \frac{D}{\text{Net proceeds}}$$ (a) Issued at 10% discount $$ \beg...
The cash flow of A.G. company are as under: Year 0 = Rs. 50,000 (investment); Year 1 = Rs. 16,000; Year 2 = Rs. 20,000; Year 3 = Rs. 20,000; Year 4 = Rs. 15,000. Cost of capital @12%. Required: (a) Pay-Back Period (b) Net present value (c) Internal rate of return. [3 + 3 + 4 = 10]
Given: initial investment $= Rs.,50,000$, cost of capital $= 12%$.
(a) Payback period
| Year | Cash flow | Cumulative |
|---|---|---|
| 1 | 16,000 | 16,000 |
| 2 | 20,000 | 36,000 |
| 3 | 20,000 | 56,000 |
Rs. 50,000 is recovered during year 3.
$$ \begin{aligned} \text{Unrecovered at start of year 3} &= 50{,}000 - 36{,}000 \ &= 14{,}000 \ \text{Payback} &= 2 + \frac{14{,}000}{20{,}000} \ &= 2.7\text{ years} \end{aligned} $$
(b) Net present value (at 12%)
$$ \begin{aligned} PV &= \frac{16,000}{1.12} + \frac{20,000}{1.12^2} + \frac{20,000}{1.12^3} + \frac{15,000}{1.12^4}\ &= 14,285.71 + 15,943.88 + 14,235.60 + 9,532.15\ &= 53,997.34\[4pt] NPV &= 53,997.34 - 50,000 = Rs.,3,997.34 \end{aligned} $$
(c) Internal rate of return
IRR is the rate at which $NPV = 0$. Since NPV is positive at 12%, try higher rates.
At 15%, $PV = 50,762$, so $NPV = +762$. At 16%, $PV = 49,754$, so $NPV = -246$.
Interpolating between 15% and 16%:
$$ \begin{aligned} IRR &= 15% + \frac{762}{762 + 246}\times 1% \ &= 15% + 0.76% \ &= 15.76% \end{aligned} $$
Since IRR (15.76%) is greater than the cost of capital (12%), the project is acceptable.
(a) What is working capital? Write about its determinants. [5] (b) The following information are provided of A.G. company: Sales per day 4,000 units; Selling price per unit Rs. 40; Inventory conversion period 18 days; Receivable conversion period 25 days; Payable deferred period 12 days. Required: (i) Cash conversion cycle (ii) Working capital. [5]
(a) Working capital and its determinants
Working capital is the capital required to finance the day to day operations of a firm. In gross terms it is the total investment in current assets, and in net terms it is the excess of current assets over current liabilities:
$$\text{Net working capital} = \text{Current assets} - \text{Current liabilities}$$
Determinants of working capital:
(b) Given:
$$ \begin{aligned} \text{daily sales value} &= 4{,}000 \times 40 \ &= Rs.,1{,}60{,}000 \end{aligned} $$
ICP $= 18$ days, RCP $= 25$ days, PDP $= 12$ days.
(i) Cash conversion cycle
$$ \begin{aligned} CCC &= ICP + RCP - PDP \ &= 18 + 25 - 12 \ &= 31\text{ days} \end{aligned} $$
(ii) Working capital
$$ \begin{aligned} \text{Working capital} &= CCC \times \text{daily sales} \ &= 31 \times 1{,}60{,}000 \ &= Rs.,49{,}60{,}000 \end{aligned} $$
A.B. company provides the following information: Ashar: Sales Rs. 4,00,000, Purchase Rs. 1,50,000, Wages Rs. 40,000, Other expenses Rs. 10,000. Shrawan: Sales Rs. 5,00,000, Purchase Rs. 1,80,000, Wages Rs. 45,000, Other expenses Rs. 12,000. Bhadra: Sales Rs. 6,00,000, Purchase Rs. 2,20,000, Wages Rs. 44,000, Other expenses Rs. 8,000. Sales of Jestha Rs. 5,00,000. Additional information: (a) 10% sales are for cash. 60% of credit sales collected in the same month and balance in next month. (b) Opening cash balance of Ashadh was Rs. 20,000. (c) Purchase, wages and other expenses are paid in the same month. Required: Cash budget for 3 months ending Bhadra. [10]
Working note: collection from sales
Cash sales $= 10%$ of the month's sales (collected in the same month). Credit sales $= 90%$; of these 60% are collected in the same month and 40% in the next month.
$$ \begin{aligned} \text{Collection} &= (0.10\times\text{current sales}) + 0.60\times(0.90\times\text{current}) + 0.40\times(0.90\times\text{previous}) \ \text{Ashar} &= 40,000 + 0.60\times 3,60,000 + 0.40\times 4,50,000\ &= 40,000 + 2,16,000 + 1,80,000 = 4,36,000\ \text{Shrawan} &= 50,000 + 0.60\times 4,50,000 + 0.40\times 3,60,000\ &= 50,000 + 2,70,000 + 1,44,000 = 4,64,000\ \text{Bhadra} &= 60,000 + 0.60\times 5,40,000 + 0.40\times 4,50,000\ &= 60,000 + 3,24,000 + 1,80,000 = 5,64,000 \end{aligned} $$
(Jestha credit sales $= 0.90\times 5{,}00{,}000 = 4{,}50{,}000$, of which 40% is collected in Ashar.)
Cash payments (purchase + wages + other, paid same month):
$$ \begin{aligned} \text{Ashar} &= 1{,}50{,}000 + 40{,}000 + 10{,}000 \ &= 2{,}00{,}000 \ \text{Shrawan} &= 1{,}80{,}000 + 45{,}000 + 12{,}000 \ &= 2{,}37{,}000 \ \text{Bhadra} &= 2{,}20{,}000 + 44{,}000 + 8{,}000 \ &= 2{,}72{,}000 \end{aligned} $$
Cash budget for 3 months ending Bhadra
| Particulars | Ashar | Shrawan | Bhadra |
|---|---|---|---|
| Opening balance | 20,000 | 2,56,000 | 4,83,000 |
| Add: Cash collections | 4,36,000 | 4,64,000 | 5,64,000 |
| Total cash available | 4,56,000 | 7,20,000 | 10,47,000 |
| Less: Cash payments | 2,00,000 | 2,37,000 | 2,72,000 |
| Closing balance | 2,56,000 | 4,83,000 | 7,75,000 |
The closing cash balance at the end of Bhadra is Rs. 7,75,000.
Following information are given: Annual sales Rs. 9,00,000; Cash sales 20%; Days sales outstanding 24 days; Days in a year 360 days. Required: (a) Average Receivable (b) Average receivable if days sales outstanding is 30 days. [2.5 + 2.5 = 5]
Given: annual sales $= Rs.,9,00,000$, cash sales $= 20%$, so credit sales $= 80%$. Receivables arise only from credit sales. $$ \begin{aligned} \text{Credit sales} &= 0.80 \times 9{,}00{,}000 \ &= Rs.,7{,}20{,}000 \ \text{Credit sa...
Following information of a company: Annual requirement 40,000 Kg; Ordering cost per order Rs. 400; Carrying cost per Kg per year Rs. 2. Required: (a) Economic order quantity (b) Number of order of EOQ. [3 + 2 = 5]
Given: annual requirement $A = 40,000$ kg; ordering cost $O = Rs.,400$; carrying cost $C = Rs.,2$ per kg per year. (a) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,000 \times 400}{2}}...
Describe any five factors that affect dividend decision. [5]
Factors affecting dividend decision
Liquidity (cash) position: payment of cash dividend requires cash. A profitable firm with weak liquidity may pay a low dividend to conserve cash.
Stability of earnings: firms with stable and predictable earnings can pay higher and more regular dividends, whereas firms with fluctuating earnings tend to keep dividends low.
Investment (growth) opportunities: a firm with many profitable investment opportunities retains more profit for reinvestment and pays a smaller dividend, while a firm with few opportunities distributes more.
Legal and contractual constraints: legal provisions (dividends only out of profit) and loan covenants may restrict the amount of dividend a firm can pay.
Access to capital market: firms that can easily raise external funds can afford to pay higher dividends, whereas firms with limited access retain more earnings.
(Other factors include the desire to maintain control, shareholders' expectations and the effect of taxation.)
Define multinational company. Write about spot rate and cross rate. [2 + 4 + 4 = 10]
Multinational company (MNC)
A multinational company is a business organisation that owns, controls and operates production or service facilities in more than one country. It has its head office in one country (the home country) and carries out operations through branches or subsidiaries in several other countries (host countries). It operates across national boundaries, deals in many currencies and faces different political, legal and economic environments.
Spot rate
The spot rate is the exchange rate at which one currency is exchanged for another for immediate delivery (settlement usually within two business days). It is the current market rate of exchange.
Example: if $1 = Rs.,133$ today, then Rs. 133 per US dollar is the spot rate.
Cross rate
A cross rate is an exchange rate between two currencies that is derived indirectly from their rates against a common third currency (usually the US dollar), when the two currencies are not directly quoted against each other.
Example: if $1 = Rs.,133$ (Nepali rupee) and $1 = ₹,83$ (Indian rupee), then the cross rate between the Nepali rupee and the Indian rupee is:
$$ \begin{aligned} 1\text{ INR} &= \frac{Rs.,133}{83} \ &= Rs.,1.60 \end{aligned} $$
Definition of financial statement
Financial statements are the formal records that summarise the financial position and financial performance of a firm for an accounting period. They are prepared from the books of accounts at the end of the period and are used by management, investors, creditors and other parties to make economic decisions.
Statements included in financial statements
Balance sheet (position statement): shows the assets, liabilities and owners' equity of the firm on a particular date. It reveals the financial position, that is what the firm owns and owes, and follows the identity .
Income statement (profit and loss account): shows the revenues, expenses and the resulting net profit or loss over the accounting period. It measures the operating performance and profitability of the firm.
Cash flow statement: shows the inflows and outflows of cash classified into operating, investing and financing activities, explaining how the cash balance changed during the period.
Statement of retained earnings (changes in equity): shows how the retained earnings and owners' equity changed during the period due to profit, dividends and other adjustments.
Together, these statements give a complete picture of the profitability, financial position and cash movement of the firm.
Given: 360 days a year. Cost of trade credit (cost of forgoing the cash discount):
(a) Approximate (nominal) annual cost of each alternative
Term (a) 2/10 net 30:
Term (b) 3/15 net 30:
(b) Effective annual cost of not taking discount
Term (a):
Term (b):
(c) Preference
If the discount is not taken, trade credit becomes a source of short term finance. Term (a) 2/10 net 30 should be preferred because its cost of forgoing the discount (36.73% nominal, 43.86% effective) is much lower than that of term (b) 3/15 net 30 (74.23% nominal, 107.72% effective). In other words, under 3/15 net 30 the discount is so valuable that it should almost always be taken, while 2/10 net 30 offers cheaper trade credit if the firm chooses to delay payment.
Given: ordinary shares of Rs. 100 each; Retained earning . Debenture is debt, so it is excluded from the book value of equity.
(a) Total book value of equity
(b) Book value per share
Given: face value , dividend per share , flotation cost per share. No growth rate is given, so the zero growth model applies: (a) Issued at 10% discount $$ \beg...
Given: initial investment , cost of capital .
(a) Payback period
| Year | Cash flow | Cumulative |
|---|---|---|
| 1 | 16,000 | 16,000 |
| 2 | 20,000 | 36,000 |
| 3 | 20,000 | 56,000 |
Rs. 50,000 is recovered during year 3.
(b) Net present value (at 12%)
(c) Internal rate of return
IRR is the rate at which . Since NPV is positive at 12%, try higher rates.
At 15%, , so . At 16%, , so .
Interpolating between 15% and 16%:
Since IRR (15.76%) is greater than the cost of capital (12%), the project is acceptable.
(a) Working capital and its determinants
Working capital is the capital required to finance the day to day operations of a firm. In gross terms it is the total investment in current assets, and in net terms it is the excess of current assets over current liabilities:
Determinants of working capital:
(b) Given:
ICP days, RCP days, PDP days.
(i) Cash conversion cycle
(ii) Working capital
Working note: collection from sales
Cash sales of the month's sales (collected in the same month). Credit sales ; of these 60% are collected in the same month and 40% in the next month.
(Jestha credit sales , of which 40% is collected in Ashar.)
Cash payments (purchase + wages + other, paid same month):
Cash budget for 3 months ending Bhadra
| Particulars | Ashar | Shrawan | Bhadra |
|---|---|---|---|
| Opening balance | 20,000 | 2,56,000 | 4,83,000 |
| Add: Cash collections | 4,36,000 | 4,64,000 | 5,64,000 |
| Total cash available | 4,56,000 | 7,20,000 | 10,47,000 |
| Less: Cash payments | 2,00,000 | 2,37,000 | 2,72,000 |
| Closing balance | 2,56,000 | 4,83,000 | 7,75,000 |
The closing cash balance at the end of Bhadra is Rs. 7,75,000.
Given: annual sales , cash sales , so credit sales . Receivables arise only from credit sales. $$ \begin{aligned} \text{Credit sales} &= 0.80 \times 9{,}00{,}000 \ &= Rs.,7{,}20{,}000 \ \text{Credit sa...
Given: annual requirement kg; ordering cost ; carrying cost per kg per year. (a) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,000 \times 400}{2}}...
Multinational company (MNC)
A multinational company is a business organisation that owns, controls and operates production or service facilities in more than one country. It has its head office in one country (the home country) and carries out operations through branches or subsidiaries in several other countries (host countries). It operates across national boundaries, deals in many currencies and faces different political, legal and economic environments.
Spot rate
The spot rate is the exchange rate at which one currency is exchanged for another for immediate delivery (settlement usually within two business days). It is the current market rate of exchange.
Example: if today, then Rs. 133 per US dollar is the spot rate.
Cross rate
A cross rate is an exchange rate between two currencies that is derived indirectly from their rates against a common third currency (usually the US dollar), when the two currencies are not directly quoted against each other.
Example: if (Nepali rupee) and (Indian rupee), then the cross rate between the Nepali rupee and the Indian rupee is: