| 1. | (a) | State whether the following statements are True or False: | 1x6 | |
| | | (i) | Zero Coupon bonds have no coupon rate, hence no yield. (True/False) | | (0) |
| | | (ii) | Floating rate loans have interest payments that increase as market rates fall and fall as rates rise. (True/False). | | (0) |
| | | (iii) | Existence of storing form of market efficiency requires a well developed stock exchange network. (True/False) | | (0) |
| | | (iv) | Gordon’s model and constant growth model are one and the same. (True/False) | | (0) |
| | | (v) | In Walter’s model the value of equity share depends upon the dividend payout ratio. (True/False) | | (0) |
| | | (vi) | The dividend discount model generally tends to undervalue stocks when the overall market is depressed. (True/False) | | (0) |
| | (b) | Fill in the blanks by filling the appropriate word(s) given in the brackets: | 1x6=6 | |
| | | (i) | In a finance lease the _________ assumes some of the risks of ownership and enjoys some of the benefits. (lessor/lessee). | | (0) |
| | | (ii) | The value of the patent does not show up if it is _________ generated. (internally/externally). | | (0) |
| | | (iii) | The risk that the cash flows will not be delivered is called _________ (liquidity risk/default risk) | | (0) |
| | | (iv) | Normal yield curves indicate that short term borrowing costs are _________ long term borrowing costs. (above/below). | | (0) |
| | | (v) | Organizational capital is a _________ component of intellectual capital. (primary/secondary) | | (0) |
| | | (vi) | When the projected economic income flows are non–constant _________ method of valuation is used. (direct capitalization/yield capitalization). | | (0) |
| | (c) | Attempt all the questions by selecting the correct option: | 2x4 | |
| | | (i) | Firms that intend to buy only a small percentage of the outstanding stock can buy them in the market, in a process called | A. | Repurchase tender offer. | B. | Open market purchase | C. | Privately negotiated repurchases. |
| | (0) |
| | | (ii) | Which of the following is not an input in calculating cash flow return on investment? | A. | Gross investment | B. | The salvage value of the asset | C. | Commercial life of the asset. |
| | (0) |
| | | (iii) | If the divestiture value is grater than the present value of the expected cash flows, the value of the divesting firm will | A. | Increase on the divestiture | B. | Decrease on the divestiture | C. | Remains same on the divestiture. |
| | (0) |
| | | (iv) | Which of the following is not a direct cost of bankruptcy? | A. | Rise in legal and administrative costs. | | B. | Present value effects of delays in paying out the cash flows. | | C. | The loss in revenue that may occur due to the customer's perception that the firm is in trouble. |
| | (0) |
| 2. | (a) | Write short notes on any four of the following: | 4x4 | |
| | | (i) | Equity Carve–Outs (ECOs); | | (0) |
| | | (ii) | Tracking Stocks; | | (0) |
| | | (iii) | Limitations of Economic Value Added; | | (0) |
| | | (iv) | Financial Synergy and Operating Synergy; | | (0) |
| | | (v) | Repurchase Agreement (REPO); | | (0) |
| | | (vi) | Option–linked Bonds. | | (0) |
| 3. | (a) | What are the salient features of Accounting Standard (AS — 26)? | 8 | (0) |
| | (b) | Discuss the various methods of valuing goodwill in a firm. | 8 | (0) |
| 4. | Alpha Tech Ltd. is being acquired by Beta Tech Ltd., on a share exchange basis. The following information of Alpha Tech Ltd. and Beta Tech Ltd. is given: | | Beta Tech Ltd. | Alpha Tech Ltd. | | Earning After Tax (EAT) (Rs. in lakhs) | 50 | 20 | | Number of shares outstanding (in lakhs) | 10 | 05 | | Earning per share | Rs. 5 | Rs. 4 | | Price–Earnings Ratio | 12 | 7.5 |
Based on the above information, calculate:
(a) Pre–merger market value per share.
(b) The maximum exchange ratio Beta Tech should offer without the dilution of (i) EPS (ii) Market value per share. | 2+7+7=16 | (0) |
|
| 5. | (a) | Many Pharmaceutical firms have historically been able to maintain high returns on equity and earn surplus returns. Many have argued that this is due to the protection the patent system offers them against competition. Why would patents lead to higher returns on equity and capital? Assume that a law is passed weakening patent protection against competition. What implications would this law have for the profitability of pharmaceutical firms? In the absence of patent protection, what differential advantages would a pharma firm have over its competitors? | 8 | (0) |
| | (b) | The following table summarizes returns on equity and betas of major software firm in 2007: | Firm | Return on Equity — 2007 | Beta | Cost of Equity | | Info soft | 14% | 1.20 | 14.6% | | STS | 16% | 1.10 | 14.05% | | Softech | 11.5% | 1.15 | 14.33% |
Estimate the differential between return on equity and cost of equity in 2007. What conclusions would you draw about project choice of these companies in 2007? What concerns would you have about using this approach to measure project equality? | 8 | (0) |
| 6. | Kitkat Ltd. made an investment of Rs. 65,000 in a new machine that is expected to bring in the following cash flows in years 1 and 2: | Amount/Rs. | | Cash flow
Year 1 | Cash flow
Year 2 | Residual
Value | Favourable (60%)
Unfavourable (40%) | 52,000
26,000 | 39,000
19,500 | 2,600
1,300 |
Should the environment turn out to be unfavourable, the company will dispose off the machine for a value of Rs. 32,500 at the end of year 1. They can nevertheless continue with the machine, if they so choose. Reckoning the cost of capital at 15%, evaluate the overall investment decision, and decide the course of action for the owner of the project.
[Note: Discounting/PV factor for Year 1 = 0.870, Year 2 = 0.756] | 16 | (0) |
| 7. | A review of the results of the first quarter of the year by the top management of Sweat and Struggle Ltd., a company which makes only one product, revealed the following information: Sales (Units)
Loss (Rs.)
Fixed Costs (For the year Rs. 1,20,000) (Rs.)
Variable Cost per unit (Rs.) | 10,000
10,000
30,000
8 |
The finance manager, feeling perturbed, suggested that the company should at least break–even in the second quarter by a drive for increasing sales. For this the company should introduce a better packaging which will increase its cost by Re. 0.50 per unit. The sales manager has a different proposal. For the second quarter, additional sales promotion expenses can be incurred to the extent of Rs. 5,000 and profit of Rs. 5,000 can be aimed at during the period with increased sales. The production manager feels otherwise. To improve the demand, the selling price per unit has to be reduced by 3%. As a result the sales volume can be increased to attain a profit level of Rs. 4,000 for the quarter. You, as a cost accountant, are asked by the managing director, to evaluate these three proposals and calculate the additional sales volume that would be required in each case so that he can arrive at a decision. | 16 | (0) |
| 8. | (a) | A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases and higher earnings per share. Explain: | (i) | Will earnings per share always increase after such an action? Will the higher earnings per share always translate into a higher stock price? |
| (ii) | Under what conditions will such a transaction lead to a higher price? |
| 4+4 | (0) |
| | (b) | In recent years, firms have started looking at equity alternatives to common stock. Why might a firm use warrants rather that common stock to raise equity? Explain. | 8 | (0) |
