2. | (a) | An investor purchased Reliance November Futures (600 shares Tick size) at Rs. 1,150 and write a Rs. 1,190 November call option at a premium of Rs. 10 (600 shares Tick size). As on November 25, Spot price rises and so the Futures price and the call premium. Futures price rises to Rs. 1,180 and Call premium rises to Rs. 16. Brokerage is 0.045% for the transaction value of Futures and Strike price net of Call premium for option. Find out the profit/(Loss) of the investor, if he/she settles the transaction on that date and at stated prices. (Assuming no transaction taxes and Service taxes exist). | 7+9=16 | (0) |
| (b) | Poineer Technology Ltd. is foreseeing a growth rate of 12% per annum in the next 2 years. The growth rate is likely to fall to 10% for the third year and fourth year. After that the growth rate is expected to stabilize at 8% per annum. If the last dividend paid was Rs. 1.50 per share and the investor' required rate of return is 16%, what would be the intrinsic value per equity share of Poineer Technology Ltd. as of date? Note: You may use the following table: Years | 0 | 1 | 2 | 3 | 4 | 5 | P.V. Interest Factors at 16% | 1.00 | 0.86 | 0.74 | 0.64 | 0.55 | 0.48 | | | (0) |
3. | (a) | Briefly explain the salient features of non–recourse project financing. | 5 | (0) |
| (b) | Distinguish between: | 4+4+3 | |
| | (i) | Factoring and Forfaiting, | | (0) |
| | (ii) | Forward contract and Futures contract, | | (0) |
| | (iii) | Economic value added and Accounting profit. | | (0) |
4. | (a) | GGC Ltd. is considering investment in a new equipment costing $ 30 lakh. The equipment is likely to provide a cash flow after taxes of $ 10 lakh per year for 6 years. The unlevered cost of equity capital of the company is 16 percent. The company intends to finance the project with 60 per cent debt, which will bear an interest rate of 12 per cent. The loan will be repaid in equal annual principal payments at the end of each of the 6 years. Flotation costs on financing will be $ 1 lakh and the company is in a 30 per cent tax bracket. What is the adjusted present value of the project? Is the project acceptable? Note: Extracted from the TABLE of PV of Re. 1. (i) | PVIF at 12% for 0 to 6 years are: 1.000, 0.8928, 0.7972, 0.7118, 0.6355, 0.5674, 0.5066: | (ii) | PVIFA for 6 years at 16% = 3.6847. | | 8+8=16 | (0) |
| (b) | In 2000 AT & T acquired NCR after a hotly contested takeover for approximately $ 110 per share. The free cash flows of the two firms-before and after merger-were projected as following: ($ million) | Firm/Years | Free Cash Flows | Terminal Value∗ | 1 | 2 | 3 | 4 | 5 | AT & T | 4,684 | 4,918 | 5,164 | 5,422 | 5,693 | 82,756 | NCR | 471 | 509 | 550 | 594 | 641 | 8,102 | Combined (Post-merger) | 5,195 | 5,558 | 5,948 | 6,364 | 6,809 | 97,672 | ∗ Terminal value as at the end of the 5th year. |
Cost of equity and debt of the individual firms and the combined firm (after merger) were estimated as given under: | AT & T | NCR | Combined | Cost of equity | 14.23% | 15.33% | 14.34% | Cost of debt | .40% | 6.00% | 5.42% | Debt/(Debt + Equity) | 21% | 9% | 20% |
At the time of merger deal NCR had 70.6 million outstanding shares and $537 million worth of outstanding debt. (a) | What is the minimum price per share AT & T could have offered to NCR? | (b) | Do you think that the price paid by AT & T was justiflable? Give reasons. (Support your answers in (a) and (b) above with necessary calculations.) |
Note: You may use the formula: | | for determining PVIF at r (rate for cost of capital). | | | (0) |
5. | (a) | Given the following information: Spot rate 3 month forward rate 3 month interest rate in USA 3 month interest rate in India | : : : : | Rs. 46.88/$ Rs. 47.28/$ 7% per annum 9% per annum |
Assuming no transaction cost or taxes exist, what operation would be carried out to take the possible arbitrage gain? Assume Rs. 10 million/$ 10 million borrowings (as case may be ) to explain your answer. | (2+5+1) +(3+5) =16 | (0) |
| (b) | NBA Bank Ltd. transacted on August 19, 2006 the following: (1) | Sold $ 1000000 two months forward to Alpha Manufacturing Co.Ltd. at Rs. 44.50; | (2) | Purchase EURO 1000000 two months forward from Beta Trading Co. Ltd. at Rs. 47.20. |
On October 19, 2006, both the customers approached the Bank. Alpha Manufacturing Co. wants the forward contract to be cancelled while Beta Trading Co wants the contract to be extended by one month. The following exchange rates prevailed on that day: | Rs./$ | Rs./EURO | spot | 44.60/65 | 47.75/85 | One month Forward | 44.75/85 | 48.00/48.20 |
Based on the above information (ignore interest etc.,) you are required to (i) | Calculate the amount to be paid to or recovered from Alpha Manufacturing co. due to the cancellation of the forward contract. | (ii) | Calculate the amount to be paid to or recovered from Beta Trading Company due to the extension of the forward contract. | | | (0) |
6. | (a) | Briefly explain the objectives of "Portfolio Management". | 4+6+6=16 | (0) |
| (b) | You are running a portfolio management business and have assembled the following portfolio for Client–B. Scrip | Value (Rs.) | Beta | Infosys Hind. Liver Reliance Tata Motors Pfizer | 5 lakh 4 lakh 6 lakh 3 lakh 2 lakh | 1.21 0.97 1.40 1.32 1.25 |
Client–B insists that the portfolio should comprise the above 5 scrips alone and that each scrip should be at least 10% of the total portfolio value. You project the Sensex which is currently 11400 to move to 11800 by the end of 3 months and to 12200 by the end of 6 months. (i) | What will be the value of your portfolio at the end of 3 months and 6 months? | (ii) | What could you do to improve the portfolio performance give your view on the market? | | | (0) |
| (c) | The annual turnover of VIBGYOR Limited is Rs. 12 million of which 80% is on credit. Debtors are allowed one month to clear off the dues. ALLBANK Factors Ltd. (a factor company) is willing to advance 90% of the bill raise on credit for a fee of 2% a month plus a commission of 3% on the total amount of debts. vibgyor Ltd. as a result of this arrangement, is likely to save Rs. 43,200 annually in management cost and avoid bad debts at 1% on the credit sales. A scheduled bank has come forward to make an advance equal to 90% of the debts at an interest rate of 12 per cent p.a. However its processing fee will be at 2 per cent on the debts. Should the company avail of the factoring service or the offer of the bank? Give reasons. | | (0) |
7. | (a) | MULTISOFT LIMITED is expected to grow at a higher rate of 4 years; thereafter the growth rate will fall and stabilize at a lower level. The following information has been assembled: Base your (year–0) Information | Revenues EBIT Capital Expenditure Depreciation Working Capital as a percentage of revenues Corporate Tax rate (for all time) Paid–up Equity Capital (Rs. 10 par) Market Value of Debt | Rs. 3,000 million Rs. 500 million Rs. 350 million Rs. 250 million 25% 30% Rs. 400 million Rs. 1,200 million |
Inputs for the High Growth period | Length of high growth period Growth rate in revenues, depreciation, EBIT and Capital Expenditure Working Capital as a percentage of revenues Cost of Debt (Pre–tax) Debt–Equity ratio Risk–free rate Market risk premium Equity beta | 4 years
20% 25% 13 1 : 1 11% 7% 1.129 |
Inputs for the stable growth period | Expected growth rate in revenues and EBIT Capital expenditure are offset by depreciation Working Capital as a percentage of revenues Cost of Debt (Pre–tax) Risk–free rate Market risk premium Equity beta Debt–Equity ratio | 10% – 25% 12.14% 10% 6% 1.00 2:3 |
Requirements: (i) | What is the Weighted Average Cost of Capital (WACC) for the high growth period and the stable growth period? | (ii) | What is the value of Multisoft Ltd. Note: Extracted from the table of present value of Re. 1: |
PVIF | Year at 13% at 14% at 15% | 0 1.000 1.000 1.000 | 1 0.885 0.877 0.870 | 2 0.783 0.769 0.756 | 3 0.693 0.675 0.658 | 4 0.613 0.592 0.572 | | 13+3=16 | (0) |
| (b) | Explain what is meant by Free Cash Flow. | | (0) |
8. | MULTIPLEX LIMITED is considering a capital investment for which the following detailed information is available: (i) | Cost of the project is estimated to be Rs. 435 crores which includes: (a) contingencies of Rs. 30 crores; (b) margin money for working capital of Rs. 10.5 crores; (c) interest during construction of Rs. 31 crores and (d) capital Issue expenses of Rs. 13.5 crores. | (ii) | Incremental investment on working capital is estimated to be: | | | | (Rs. crores) | Year | 0 | 1 | 2 | 3 | Inc. WC | 10.5 | 32.3 | 7.0 | 5.6 |
| (iii) | Salvage value has been estimated to be Rs. 80 crores. | (iv) | The operational cash flows are projected as follows: (Rs. crores) | Year | PBIDT | Taxation | Interest | 1 | 42 | 8 | 25 | 2 | 111 | 6 | 46 | 3 | 125 | 9 | 36 | 4 | 125 | 14 | 37 | 5 | 125 | 33 | 16 | 6 | 125 | 39 | 11 | 7 | 125 | 44 | 5 | 8 | 125 | 47 | 1 | 9 | 125 | 48 | 0 | 10 | 125 | 48 | 0 |
| (v) | Project will be financed with a debt of Rs. 268 crores and the remaining through equity capital. The overall cost of financing the project would be 13 percent. Calculate NPV of the cash flows. Is this project financially viable? Note: Extracted from the table of PV of Re. 1. PVIF at 13% for 0 to 10 years are: 1.000, 0.885, 0.783, 0.693, 0.613, 0.543, 0.480, 0.425, 0.376, 0.333 and 0.294. | | 16 | (0) |