|Time Allowed : 3 Hours||Full Marks : 100|
|The figures in the margin on the right side indicate full marks.|
|Answer Question No. 1 (carrying 20 marks) and any five|
each carrying 16 marks) from the rest.
|Please:||(1) write answers to all the parts of a question together. |
(2) open a new page for answer to a new question.
(3) do not attempt more than the requisite number of questions.
(4) tick mark the front page of the answer–book to indicate the questions attempted.
|1.||(a)||State if each of the following statements is T (true) or F (false)||1x10|
|(i)||Value drivers for a business are the drivers of cash flow;||(0)|
|(ii)||Under DCF valuation approach, the discount rates are risk–adjusted;||(0)|
|(iii)||Required rate of return and coupon rate on bond are inversely related;||(0)|
|(iv)||Dow theory assumes that no individual investor can affect the market;||(0)|
|(v)||Intangible asset valuation can be compared with Mathematics and Economics, not with Physics and Chemistry;||(0)|
|(vi)||Option pricing models cannot be used to value long–term options on non–traded assets;||(0)|
|(vii)||Recently, RBI has increased its repo rate by 25 basis point. As a consequence, the risk premium of the equity should increase and thus, the cost of equity;||(0)|
|(viii)||Higher economic value added (EVA) of a company in a year implies higher profit after tax(PAT);||(0)|
|(ix)||Share returns are independent of each other in an efficient stock market;||(0)|
|(x)||Since a call provides a right to buy unlike a put which provide a right to sell, the value of a call is always higher than that of a put.||(0)|
|(b)||Fill in the gap with the appropriate word(s) given in brackets after each statement below:||1x5|
|(i)||If a bond’s current yield is higher than its yield–to–maturity, then it is trading in the market at _____________[a discount/par/a premium].||(0)|
|(ii)||The higher is the strike price of a call option, the ________________ will be the value of that (call) option [higher/lower].||(0)|
|(iii)||Wiser business decisions are possible when managers are serious in creating _______________ value [asset/shareholder].||(0)|
|(iv)||Stock dividends and stock splits may _______________ the stock price but not the value of the business[decrease/increase].||(0)|
|(v)||Internally generated goodwill is _________________ as an asset [not recognized/recognized].||(0)|
|(c)|| Link the following two sets of words as considered to be most appropriate: |
Note: Your answer should be of the form: say, “8 m” i.e., one digit from Set A followed by one small letter from Set B.
|2.||(a)||You are a private firm in the waste disposal industry in which the rest of your competitors are publicly traded. |
|(b)||(i)||Why do patents lead to higher returns on equity and capital of global pharmaceutical firm?||3||(0)|
|(ii)||Because of withdrawal of patent protection, resulting from the passing of a recent law, if any, what differential advantages would a pharmaceutical firm have over its competitors?||3||(0)|
|(iii)||What type of firms are likely to succeed under this changed scenario?||2||(0)|
|3.|| H Ltd. and its subsidiary, S Ltd. are dependent upon an outside supplier, O Ltd. for certain essential components. In conjunction with a scheme of co–ordinated production, H Ltd. and O Ltd. enter into an agreement involving each company in the acquisition of a quarter share in the other’s authorised share capital by means of an exchange of shares. The terms of the agreement are as follows: |
You are required to compute (i) the value of the shares according to the terms of the agreement, and (ii) to present the final settlement, showing all workings. Ignore taxation.
|4.||(a)||Bharat Ltd. is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth in earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of Bharat Ltd. has been advised that if it were to take over firms with a lower PE ratio than its own, using a share–for–share exchange, then it could increase its reported earnings per share. China Ltd. has been suggested as a possible target for a take–over, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price of Rs.15. Bharat Ltd. has 5,00,000 shares in issue with a share price of Rs.12. You are required to calculate the change in earnings per share of Bharat Ltd., if it acquires the whole of China Ltd., by issuing shares at its market price of Rs.12. Assume the price of Bharat Ltd. shares remains constant.||10||(0)|
|(b)||Raghuvans & Co. earns Rs.8 per share having capitalization rate of 10 per cent and has a return on investments at the rate of 20 per cent. According to Walter’s model, what should be the price per share at 25 per cent dividend payout ratio? Is this the optimum payout ratio as per Walter?||6||(0)|
|5.||(a)|| Vedika Enterprises is engaged in the business of ship building. It has issued a bond whose current market price is Rs.120. The bond issued has following features: |
|(b)|| Government of India is planning to issue a deep discount (zero coupon) bond with the face value of Rs.25,000 payable at the end of 10 years. The planned yield for the investors is 12%. |
|6.||(a)||Laxmi Technology Ltd. is a listed company whose shares are selling at Rs.230 currently. The expectations of the market about the future price of the share is Rs.280. If the current dividend is Rs.7 per share, what dividend do you expect for the coming year?||6||(0)|
|(b)||Zee Ltd. has just paid a dividend of Rs.13 per share. As a part of its major reorganisation of its operation it has stated that it does not intend to pay any dividend for the next two years. In three years’ time it will commence paying dividend at Rs.10 per share and the Directors have indicated that they expect to achieve dividend growth at 12% p.a. thereafter. |
If the reorganisation does not take place dividend will be paid in the next two years and the expected dividend growth will remain at the present level of 6% p.a. The firm’s cost of equity is 18% (i.e., the return expected by the equity investors) and will be unaffected by the reorganisation.
Calculate the value of the firm’s shares in both the situations.
|7.||(a)|| Hajela Entertainers Ltd. has 10,00,000 shares of Rs.10 each with market price of Rs.50 per share. It has also issued bonds for Rs.4 crore @ 12% per annum. It is considering an expansion plan and needs to mobilize Rs.5 crore. |
The alternatives being considered are:
The company is in tax bracket of 35% (inclusive of education Cess etc.). If the company is hopeful of generating an EBIT of Rs.2.50 crore after expansion, which method of financing is the best from shareholders view point?
What more information is required if the market price of equity shares is the criterion for decision making?
|(b)|| Calculate Economic Value Added (EVA) with the help of the following information of Hypothetical Limited: |
|8.||Write short notes on any four of the following:||4x4|
|(a)||Limitation of two–stage Dividend discount model;||(0)|
|(b)||Disadvantage of Dividend yield model;||(0)|
|(c)||Limitation of EVA (Economic Value Added);||(0)|
|(d)||Convertible Loan Stock;||(0)|
|(e)||Valuation of know–how;||(0)|
|(f)||Derivative products in risk management.||(0)|