This Paper has

**38**answerable questions with**0**answered.F—P12(AFM)Syllabus 2008 | |

Time Allowed : 3 Hours | Full Marks : 100 |

The figures in the margin on the right side indicate full marks. |

Answer Question No. 1 (Part A) which is compulsory and five questions from Part B. |

All parts of a question are to be answered at the same place.Working notes should form part of the answer. |

PART A (25 Marks) |

Marks |

1. | (a) | In each of the questions given below, one out of four is correct. Indicate the correct answer (1 mark each). | 10x1 | |||||||||||

(i) | Which of the following statement is most correct?
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(ii) | Stock A and Stock B each has an expected return of 15 per cent., a standard deviation of 20 per cent and a beta of 1.2. The returns of the two stocks are not perfectly correlated. The correlation coefficient is 0.6. You have put together a portfolio which is 50 per cent. Stock A and 50 per cent. Stock B which of the following statements is most correct?
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(iii) | Stock A has a beta of 1.5 and Stock B has a beta of 0.5, Which of the following statements must be true about these securities? (Assume market equilibrium.)
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(iv) | There are call options on the common stock of XYZ Corporatopm. Which of the following describes best the factors affecting the value of these call options?
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(v) | Essar Steel Ltd. uses the GAPM to calculate the cost of equity capital. The company’s capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company’s WACC?
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(vi) | Assume that a project has normal cash flows i.e., the initial cash flow is negative and all other cash flows are positive. Which of the following statements is most correct?
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(vii) | Which of the following statements is correct?
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(viii) | You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
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(ix) | Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or as a partnership?
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(x) | The Bombay Stock Exchange is primarily
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(b) | For each of the questions given below, one out of four answers is correct. Indicate the correct answer (1 mark each) and give your workings/reasons briefly (1 mark). | 5x2 | ||||||||||||

(i) | The spot USD/Yen = 190 Yen and one–year forward rate of USD/Yen = 120 Yen. The prime rate in US is 15%. What should the Japanese prime rate be?
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(ii) | The spot USD/INR = 43.70 and six–month forward premium is 40 paise (= Rs. 0.40). The annualized forward premium will be
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(iii) | Tata Ltd. has a target capital structure of 40% debt and 60% equity for one of its new subsidiaries. The yield to maturity of the company’s outstanding bonds is 9% and the tax rate is 40%. The CFO has calculated the company’s WACC as 9.96%. The company’s equity cost of capital is
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(iv) | Airtel Communications is trying to estimate the first–year operating cash flow (at t = 1) for a proposed project. The finance staff has collected the following information
The company faces a 40% tax rate. The project’s operation cash flow for the first year (t = 1) is
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(v) | Reliance Ltd. has an ROA of 10% and a Profit Margin of 2%. The company’s total Asset Turnover is
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(c) | State whether the following statements is True or False | 5x1 | ||||||||||||

(i) | Real options are most valuable when the underlying source of risk is very low. | (0) | ||||||||||||

(ii) | Given two mutually–exclusive projects and a zero cost of capital, the payback method and the NPV method of selecting investments will always lead to the same decision on which project to undertake. | (0) | ||||||||||||

(iii) | A firm’s capital structure can never affects its free cash flows. | (0) | ||||||||||||

(iv) | In a world with no taxes, MM Hypothesis shows that the capital structure of a firm does not affect the value of the firm. However, when taxes are considered, MM Hypothesis shows a positive relationship between debt and value. | (0) | ||||||||||||

(v) | The major advantage of a regular partnership or a corporation as a form of business is that both offer limited liability that their owners, whereas a proprietorship does not. | (0) |

PART B (75 Marks) |

2. | (a) | Complete the balance sheet and sales information in the table below for Godrej Industries using the following financial data: Debt Ratio : 50% Quick Ratio : 0.80X Total Assets Turnover : 1.5X Days Sales Outstanding : 36.5 days Gross Profit Martin on Sales : 25% Inventory Turnover Ratio : 5X (All calculations are based on 365 days.)
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(b) | Profit Margin and Turnover Ratio vary from one industry to another. what difference would you expect to find between a grocery chain such as Big Bazar and steel company such as Tata steel? | 5 | (0) | |||||||||||||||||||||||||||||||

3. | (a) | The Hyundai Instrument Corporation is trying to determine the effect of its Inventory Turnover Ratio and Days Sales Outstanding (DSO) on its cash–flow cycle. The Hyundai Corporation’s sales last year (all on credit) were Rs. 1,50,000 and it earned a net profit of 6%. Its Inventory Turnover Ratio was 5 and DSO was 36.5 days. The firm had fixed assets totaling Rs. 35,000. Hyundai had fixed assets totaling Rs. 35,000 and its payable deferral period is 40 days. Calculate Hyundai Instrument Corporation’s
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(b) | Portfolio A consists of a one–year zero–coupon bond with a face value of Rs. 2,000 and a 10–year zero–coupon bond with a face value of Rs. 6,000. Portfolio B consists of a 5.95–year zero–coupon bond with a face value of Rs. 5,000. The current yield on all bonds is 10% per annum. Show, using continous or discrete compounding, that both the portfolios have the same duration and that the percentage changes in the value of the two portfolios for a 0.1% per annum increase in yields are the same.
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4. | (a) | What are the main stages in the Capital Budgeting process? | 5 | (0) | ||||||||||||||||||||||||||||||

(b) | AB Ltd. is considering to buy an equipment and it has two options. The cost o the equipment is Rs. 1,00,000.
The salvage value of the equipment at the end of five year period will be zero. The company uses straight line depreciation. Assume tax @ 40%. Discounting factors are:
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5. | (a) | What is meant by Public–Private Partnership in projects involving infrastructure projects? | 5 | (0) | ||||||||||||||||||||||||||||||

(b) | XYZ Ltd. is considering two mutually–exclusive projects. Both require an initial cash outlay of Rs. 10,000 each for machinery and have a life of 5 years. The company’s required rate of return is 10% and it pays tax at 50%. The projects will be depreciated on a straight–line basis. The net cash flows (before taxes) expected to be generated by the projects and the present value (PV) factor (at 10%) are as follows:
You are required to calculate
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6. | (a) | What is meant by Balanced Score Card? | 5 | (0) | ||||||||||||||||||||||||||||||

(b) | Calculate the value of the share of a company, if its beta is 1.5, the previous dividend was Rs. 2 per share, and the growth rate is expected to be 8%. The risk–free return is 10% and the market portfolio earns a return of 15%. | 5 | (0) | |||||||||||||||||||||||||||||||

(c) | The risk–free return is 6% and the return on market portfolio is 10%. If the required rate of return on stock is 13%, calculate beta. | 5 | (0) | |||||||||||||||||||||||||||||||

7. | (a) | Unilever’s subsidiary in India, Hindusthan Lever, procures most of its soaps from a Japanese company. Because of the shortage of working capital in India, payments terms for the Indian importers are typically 180 days or more. Hindusthan Lever wishes to hedge a 8.5 million Japanese Yen payable. Although options are not available on the Indian Rupee (Rs.), forward rates are available against the Yen. Additionally, a common practice in India is, for companies like Hindusthan Lever, to work with a currency agent who will, in this case, lock in the current spot exchange for a 4.85 fee. Using the following data, recommend a hedging strategy.
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(b) | Explain how the outcome from using a basic interest rate swap to hedge borrowing costs will generally differ from using an interest rate cap and an interest rate collar as hedges. Why is there a difference? | 5 | (0) | |||||||||||||||||||||||||||||||

8. | Write short notes on any three of the following: | 3x5 | ||||||||||||||||||||||||||||||||

(a) | Off Balance Sheet Financing; | (0) | ||||||||||||||||||||||||||||||||

(b) | Convertible Security; | (0) | ||||||||||||||||||||||||||||||||

(c) | Operating & Financial Leverage; | (0) | ||||||||||||||||||||||||||||||||

(d) | Break–even Point; | (0) | ||||||||||||||||||||||||||||||||

(e) | Du Pont Chart. | (0) |