|Time Allowed : 3 Hours||Full Marks : 100|
|Answer Question No. 1 which is compulsory carrying 20 marks and any five from the rest.|
|1.||(a)||State whether the following statements are True or False:||1x6=6|
|(i)||If there are no anticipated excess earnings over normal earnings, then the goodwill of the business, on the basis of super profit method will be zero.(True/False)||(0)|
|(ii)||Under yield method of valuation of equity shares if the expected rate of return is less than the normal rate of return, the paid up value of shares increases proportionately.(True/False)||(0)|
|(iii)||In Industries where the investors expect a high normal rate of return, the price earnings ratio will be high.(True/False)||(0)|
|(iv)||Firms with higher operating margins, lower reinvestment rates and lower costs of capital will trade at lower value–to–sales multiples.(True/False)||(0)|
|(v)||Market price of firms with high revenue ratios and low profit margins are considered by investors as overvalued.(True/False)||(0)|
|(vi)||The Intrinsic value of a share decreases after a bonus issue.(True/False)||(0)|
|(b)||Fill in the blanks by filling the appropriate word given in the brackets:||1x8=8|
|(iii)||If a company’s share is priced at Rs. 20 and EPS is Rs. 5, then P/E ratio will be ______ (0.25/4/400)||(0)|
|(iv)||Dividend yield ratio is equal to dividend per share divided by ______ and the quotient multiplied by 100. (EPS/Market Price per equity share)||(0)|
|(v)||If EPS of a company is Rs. 15 and the P/E ratio of other similar company is Rs. 10, then market value of the share of this company will be Rs. ______. (150/1.5/.67)||(0)|
|(vi)||If firms defer taxes, the taxes paid in the current period will be at a rate ______ than the marginal tax rate. (Lower/Higher)||(0)|
|(vii)||In valuing firms where there is a reasonable chance of changing corporate control, the value from ______ model does not provide the better estimate of value. (Dividend discount/Free cash flow to equity)||(0)|
|(viii)||Price–sales ratio is a better multiple than price earnings ratio for ______ firms. (Young start up firms/Cyclical firms)||(0)|
|(c)||Attempt all the questions by selecting the correct option:||2x3=6|
|(i)|| The optimal polity for liquidation or divestiture of poor investment is |
|(ii)|| In the valuation of a business if price to sales ratio of ABC Ltd. is 0.35 and revenue is Rs. 150 lakh, then the market value of equity of ABC Ltd. will be |
|(iii)|| Identify which of the following is not a financial liability: |
|2.||(a)|| Efficient Ltd. wants to acquire Healthy Ltd. by exchanging 0.5 of its shares for each share of Healthy Ltd. Relevant financial data are as follows: |
|(b)||Smart Solution is a small software firm with high growth rate. It has existing assets in which it has capital invested of Rs. 100 lakh. The other information about Smart Solution is as follows: |
The after tax operating income on assets in place is Rs. 15 lakh. This return on capital of 15% is expected to be sustained in the future. Cost of capital of Smart Solution is 10%.
At the beginning of each of the next five years Smart Solution is expected to make new investments of Rs. 10 lakh each. These investments are also expected to earn 15% as a return on capital, and the cost of capital is expected to remain 10%.
After the year 5, Smart Solution will continue to make investments, and earnings will grow 5% a year, but the new investments will have a return on capital of only 10%, which is also the cost of capital.
All assets and investments are expected to have infinite lives. The assets in place and the investments made in the first five years will make 15% a year in perpetuity, with no growth.
Based on the information given estimate the value of Smart Solution. How much of this value comes from the EVA and how much from capital invested?
|3.|| A Company has been making a machine to order for a customer but the customer has, however, since gone into liquidation and there are no prospects that any money will be obtained from the winding up of his company. |
Costs incurred to–data in manufacturing the machine are Rs. 50,000 and progress payments of Rs. 15,000 have been received from the customer prior to the liquidation.
The sales department has found another company willing to buy the machine for Rs. 34,000 once it is completed.
To complete the work, the following costs have to be incurred:
|4.||(a)||Explain how would you value a business and the component of value that is attributable to the key person?||6||(0)|
|(b)|| Dr. Rao is a young dentist. He is interested in buying a dental practice located in Shivajinagar, Bangalore. |
The dentist who owns the practice has built it up over the past one decade, and the practice generated a revenue of Rs. 5,00,000 last year. The cost associated with running this practice last year include the following:
The annual rent for the chamber with full facilities last year was Rs. 50,000 and is expected to grow 3% for the next 10 years.
Employee expenses amounted to Rs. 1,50,000 last year, and are expected to grow 3% a year for the next 10 years
The cost of medical insurance last year was Rs. 60,000 and is expected to grwo 3% a year for the next 10 years.
Rentals of medical equipment cost Rs. 40,000 last year, and this expense is expected to grow at 3% for the next 10 years.
Tax rate on the income is 40%.
The cost of Capital is 10%.
|5.||(a)||Distinguish between dividend discount model (DDM) and Free Cash Flow to Equity (FCFE) model.||8||(0)|
|(b)|| Missile Ltd. is an aerospace company. They have been researching into new ways of manufacturing their products. The cost and results of a recent project "Alpha" are as follow: |
Development began in January 2004, but it was only it July 2004 that it became apparent that the process would be successful and that it would save the company a lot of money.
|6.||(a)||What are the determinants of option?||7||(0)|
|(b)||ABC Ltd. had earnings and dividends in the long term is expected to be 6%. The return on equity at ABC Ltd. is expected to be 14%. The beta for ABC Ltd. is 0.80, and the risk–free rate is 6%. (market risk premium is 4%). Based on the information find out the price–to–book value ratio of ABC Ltd.||5||(0)|
|(c)||Briefly discuss reasons for the existence of alpha values and whether or not the same alpha values should be expected to exist in a year’s time.||4||(0)|
|7.||(a)|| The following figures are collected from the annual report of Hajela Ltd: |
What should be the approximate dividend pay–out ratio so as to keep the share price at Rs. 42 by using Walter model?
|(b)||Will increasing economic value added cause market value of shares to increase||5||(0)|
|8.||(a)||Why do investors prefer enterprise value to EBITDA multiple to other earnings multiple?||8||(0)|
|(b)||In finance theory, it is often assumed that stock markets in the USA and the UK are semi–strong form efficient. Explain this assumption and its implications for financial managers.||8||(0)|