| 1. | (a) | In each of the cases given below, one out of four alternatives answers is correct. Indicate the correct answer (= 1 mark) and give you workings/reasons briefly (= 1 mark): | 2x5=10 | |
| | | (i) | A company earned an EBIT margin of 15% on Rs.1,000 crores in the last year. The company is expecting a drop in sales by 10% at the end of current fiscal year. Given that the operating leverage is 2.0, the expected EBIT would be | A. | Rs.150 crores | | B. | Rs.120 crores | | C. | Rs.135 crores | | D. | None of the above |
| | (0) |
| | | (ii) | The stock of a company is valued at Rs.20 per share with an expectation that the company will generate free cash flows to equity capital of Rs.4 per share in perpetuity. Implied cost of Equity would be | A. | 20% | | B. | 15% | | C. | 30% | | D. | None of the above |
| | (0) |
| | | (iii) | A company had paid dividend @ Rs.4 per share last year. The growth of the dividends from the company is estimated at 8% p.a. and the required rate of return for investors in equity is 18.5%, the estimated market price of the equity shares would be | A. | Rs.25.10 | | B. | Rs.41.10 | | C. | Rs.29.10 | | D. | None of the above |
| | (0) |
| | | (iv) | The net sales of a company are Rs.15 crores, EBIT as % of sales is 12%, capital employed comprises Rs.5 crore of equity, Rs.1 crore 13% Preference Shares and Rs.3 crore of debt at 15%. Company’s profit is subject to tax @ 40%. Return on equity in this case would be | A. | 13% | | B. | 12% | | C. | 13.6% | | D. | None of the above |
| | (0) |
| | | (v) | The following rates appear in the exchange market: | | Spot Rate | 2 month forward | | Re./US $ | Rs.45.80/46.05 | Rs.46.50/Rs.47 |
Dollars required to be sold to get Rs.5 crore after 2 months would be | A. | $ 1075269 | | B. | $ 1063830 | | C. | $ 1069519 | | D. | None of the above |
| | (0) |
| | (b) | From the following choose the most appropriate answer (only indicate A, B, C, D as you think appropriate): | 1x5=5 | |
| | | (i) | Bonds with credit enhancement mechanism (LC, escrow account, etc.) are called | A. | Subordinated bonds | | B. | Discount bonds | | C. | Structured obligations | | D. | None of (A), (B), (C) |
| | (0) |
| | | (ii) | The sustainable growth rate of a company depends on | A. | Increase in dividend payout ratio | | B. | Increase in profit retention rate and ROE | | C. | Increase in ROE | | D. | None of (A), (B), (C) |
| | (0) |
| | | (iii) | Free cash flow to debt and equity means | A. | Cash is available for financing incremental working capital | | B. | Cash is available for financing additional investment on plant & machinery | | C. | Cash is available for meeting financial flows like debt servicing, dividend payment, etc. | | D. | None of (A), (B), (C) |
| | (0) |
| | | (iv) | A shareholder has received bonus shares in the proportion of 1:1. Her stake holding position after bonus issue | A. | Remains the same with more shares being available for trading | | B. | Increases with more shares being available for trading | | C. | Remains the same | | D. | None of (A), (B), (C) |
| | (0) |
| | | (v) | The risk arising due to uncertainty about the time element and the price concession in selling a security is called | A. | Price Risk | | B. | Market Risk | | C. | Trading Risk | | D. | Liquidity Risk |
| | (0) |
| | (c) | State whether the following statements are True or False | 1x5=5 | |
| | | (i) | Dividend is a taxable income in the hands of shareholders. | | (0) |
| | | (ii) | In India, share bought under buy back arrangement may be held as investment. | | (0) |
| | | (iii) | Current tax as shown in profit and loss account is a cash item. | | (0) |
| | | (iv) | Levered beta is greater than un–levered beta. | | (0) |
| | | (v) | Commercial paper is an independent source of working capital financing. | | (0) |
| 2. | (a) | PQR Ltd. has total sales of Rs.4.50 crores and its average collection period is 120 days. The past experience indicates that bad debt losses are 2 per cent on sales. The expenditure incurred by the company in administering its receivable collection efforts are Rs.6,00,000. A Factor is prepared to buy the company’s receivables by charging 2 per cent commission. The Factor will pay advance on receivables to the company at an interest rate of 18 per cent per annum after withholding 10 per cent as reserve. You are required to calculate effective cost of factoring to the company. | 8 | (0) |
| | (b) | An importer in U.K. will have to settle an invoice ∈ 1,000,000 after 3 months. He has following information:
3 Month interest rate
Spot ∈ / £
3 months Forward ∈ / £ |
∈ – 4%. £ – 3.5%
1.4542 / 1.4560
1.4550 / 1.4560 |
What would you recommend for covering the exposure? Forward or Money market? | 8 | (0) |
| 3. | (a) | What is the difference between ‘economic value added’ and ‘accounting profit’ ? which one should we use to measure performance of a company? Why? Explain the key strategies for enhancing EVA of a company? | 6 | (0) |
| | (b) | A company expects to generate the following net income and incur the following capex in the next five years: | Rs. crores | | year | 1 | 2 | 3 | 4 | 5 | | NP | 75 | 60 | 45 | 40 | 25 | | Capex | 40 | 45 | 55 | 47 | 50 |
The total number of outstanding shares are 18,00,000 and the current dividend is Rs.6.50 per share. | (i) | Determine the dividend per share if the firm follows a residual dividend policy. |
| (ii) | Determine the external financing needed if the current dividend is maintained. |
| (iii) | Determine the external financing require if the company maintains a 50% dividend payout ratio. |
| (iv) | Under which of the above is the external requirement of funds maximized? |
| 2.1/2
x4=10 | (0) |
| 4. | (a) | From the following financial data of Company A and Company B:
Prepare the income statements. | Company A
Rs. | Company B
Rs. | Variable Cost
Fixed Cost
Interest Expenses
Financial Leverage
Operating Leverage
Income tax rate
Sales | 56,000
20,000
12,000
5:1
–
30%
– | 60% of sales
–
9,000
–
4:1
30%
1,05,000 |
| 8 | (0) |
| | (b) | A hospital is considering to purchase a diagnostic machine costing Rs.80,000. The projected life of the machine is 8 years and has an expected salvage value of Rs.6,000 at the end of 8 years. The annual operating cost of the machine is Rs.7,500. It is expected to generate revenues of Rs.40,000 per year for eight years. Presently, the hospital is outsourcing the diagnostic work and is earning commission income of Rs.12,000 per annum; net of taxes. Required:
Whether it would be profitable for the hospital to purchase the machine. Give your recommendation under: | (i) | Net Present Value method; | | (ii) | Profitability Index method. |
PV factors at 10% are given below: Year 1
0.909 | Year 2
0.826 | Year 3
0.751 | Year 4
0.683 | Year 5
0.621 | Year 6
0.564 | Year 7
0.513 | Year 8
0.467 |
Assume: Tax Rate = 30%. | 8 | (0) |
|
| 5. | (a) | The shares of Eastern Pharmaceutical Ltd.(EPL) have a beta of 1.5 and the return on the market portfolio is 16%. The risk free rate of return is 8%. The company has recently paid a dividend of Rs.3 per share and the dividends are expected to grow at the rate of 5%. The current market price of the equity share of EPL is Rs.15.75. Assume that the CAPM is applicable. Currently the share price is not at equilibrium. If the market adjusts in such a way that the share is valued at its equilibrium price then what will be the change in the market value of an investment in 1,000 shares of the company? | 8 | (0) |
| | (b) | Consider the following: Provision for contingencies
Loans and advances given
Stipulated amount for Provident Fund
Short–term investments
The following changes have occurred during the year:
Increase in provision for contingencies
Increase in the stipulated amount of Provident Fund
Loan and advances (taken)
Decrease in short–term investments | =
=
=
=
=
=
=
= | Rs.30,000
Rs.20,00,000
Rs.10,00,000
Rs.30,00,000
Rs.20,000
Rs.10,00,000
Rs.10,00,000
Rs.20,00,000 |
Based on above changes, calculate the impact of the above items on net new working capital. | 8 | (0) |
| 6. | The following information is available regarding Manubhai Chemical Ltd.: | (Rs. in lakhs) | EBIT
Interest on debenture @ 8.5%
Interest on term loan @ 12%
Income tax @ 40%
Number of equity shares 15 lakhs
Market price per share Rs.20 (Face Value Rs.10) | 75
1.275
1.92
28.7 |
The company has undistributed reserves and surplus of Rs.40 lakhs. It is in need of Rs.50 lakhs to pay off debentures and to modernise plants. The company is considering the following two options: | (a) | Raising the entire amount as term loan @ 12.5%. | | (b) | Issuing 1.5 lakh shares at Rs.15 per share and the rest of the amount in the form of term loan @ 12.5% p.a. |
As a result of modernisation, the return on capital employed is likely to improve by 3%. In case the total amount is raised in the form of loans, the P/E ratio of the company is likely to decrease by 5%. You are required to: | (i) | Calculate the market price share under the two options and advise which option is to be selected. | (ii) | Find out the indifference level of EBIT. |
| 16 | (0) |
| 7. | (a) | You are a FOREX Officer in Finetime Bank Ltd. One of your customers has imported 5,000 computer components @ US $ 25 each. Now they are enjoying overdraft limit with you for which the applicable rate is 20% p.a. They have option to settle the import bill immediately or in three months time. They have following options: | (i) | Pay in three months time with overseas interest at 18% and cover the exchange risk forward for 3 months. | | (ii) | Settle now at the current spot rate and pay interest on the overdraft for 3 months. Current rates: Mumbai – Spot Rs./$ 34.50 – 34.75
3 months swap 0.40/0.50 |
You have to advise them keeping in view which method will be cheaper to them duly ignoring exchange commission. | 8 | (0) |
| | (b) | On 1st January Bank ‘B’ entered into a forward purchase contract for USD 2,50,000 with one of its export customers at a rate of Rs.46.60 delivery 1st April and covers itself by forward sale to the market at a rate of Rs.46.65. On the due date, the customer failed to execute the contract. On 16th April, the contract is cancelled by the bank.
The rates prevailing on 1st April and 16th April are as follows: On 1st April Interbank TT rates Rs./$ 46.75/80
1 month forward – 46.90/95
Merchant TT rates – 46.67/90
16th April Interbank TT rates Rs./$ 47.10/15
Merchant TT rates – 47.05/20
Interest on outlay of funds is 16% p.a. |
What are the cancellation charges payable by customer? | 8 | (0) |
| 8. | Write short notes on any four from the following: | 4x4=16 | |
| | (a) | Operating Cycle; | | (0) |
| | (b) | Drawbacks of investing in Mutual Funds; | | (0) |
| | (c) | Types of Arbitrage; | | (0) |
| | (d) | Interest Rate Cap; | | (0) |
| | (e) | Long Put Option; | | (0) |
| | (f) | Libor | | (0) |
