|2.||(a)||"Cost of capital is used by a company as a minimum benchmark for its yield".–Comment. Also enumerate the applications of cost of capital in managerial decisions. ||5|| (0) |
| ||(b)||National Textile Corporation belongs to a risk–class for which the appropriate PE ratio is 15. It currently has 75,000 outstanding shares selling at Rs. 150 each. The corporation is contemplating declaration of dividend @ Rs. 12 per share at the end of the current fiscal year, which has just started. Given the assumption of Modigliani – Miller approach, answer the following questions: |
| (i) || What will be the price of the share at the end of the year, if: |
(a) dividend is not declared?
(b) dividend is declared?
| (ii) || Assuming that the corporation pays dividend, has net income of Rs. 7,50,000 and makes new invesments of Rs. 15,00,000 during the period, how many new shares must be issued? |
| (iii) || What would be the current value of the corporation, if: |
(a) divident is declared?
(b) dividend is not declared?
| (0) |
|3.||(a)||The turnover of Bengal Polymers Limited is Rs. 60 lakhs of which 80% is on credit. Debtors are allowed one month to clear off the dues. A factor is willing to advance 90% of the bills raised on credit for a fee of 2% per month plus a commission of 4% on the total amount of debts. The company, as a result of this arrangement, is likely to save Rs. 21,600 annually in management costs and avoid bad debts at 1 % on the credit sales. |
A scheduled bank has come forward to make an advance equal to 90% of the debts at interest rate of 18% per annum. However, its processing fee will be 2% on the debts. Advise management of the company whether it should avail services of a factor or accept offer from the bank.
|10|| (0) |
| ||(b)||Explain briefly what is meant by Capital Asset Pricing Model (CAPM)? ||5|| (0) |
|4.||(a)||Precision Instruments Limited manufactures ball bearings. The company plans to add some more product lines and so, it has decided to acquire a machine costing Rs. 50 lakhs having a useful life 5 years, with salvage value of Rs. 10 lakhs. Consider short–term capital loss/gain for income tax. The full purchase value of the machine can be financed by bank loan at the rate of 10% interest per annum repayable in five equal instalments falling due at the end of each year. Alternatively, the machine can be procured on a 5 year lease, year–end lease rentals being Rs. 12.50 lakhs per annum. The company follows the written down value method of depreciation at the rate of 25 per cent. The company is in 30% tax bracket. |
Note: Extracts from the PV TABLE:
| (i) || What is the present value (PV) of cash outflow for each of these financing alternatives using the after–tax cost of debt? |
| (ii) || Which of the two alternatives is preferable? |
| (i) || PVIF at 7% for 0 to 5 years are: |
1.000, 0.9346, 0.8734, 0.8163, 0.7629, 0.7130
| (ii) || PVIF at 10% for 0 to 5 years are: |
1.000, 0.9091, 0.8264, 0.7513, 0.6830, 0.6209
| (iii) || PVIFA for 5 years at 10% = 3.7908 |
| (iv) || PVIFA for 5 years at 7% = 4.1002 ||10|| (0) |
| ||(b)||Briefly explain the salient features of non–recourse project financing. ||5|| (0) |
|5.||(a)||The Balance Sheet of Southern Real Estates Limited as on 31st March, 2011 and 31st March, 2012 are given below: |
From the records, the following further information is available:
| Share Capital (ordi- |
nary,ofRs. 100 each)
Reserves and surplus
Secured loan from Bank
Provision for Taxation
| Fixed Assets |
Cast at Bank
| ||7,48,450||10,12,000|| ||7,48,450||10,12,000|
| (i) || Reserves and surplus position: |
| Rs. |
| Balance as on 1st April, 2011 || 1,48,000 |
| + Net profit for the year || 1,98,500 |
| 3,46,500 |
| − Dividend || 34,500 |
| 3,12,000 |
| (ii) || The accumulated depreciation on fixed assets as on 31.3.2012 was Rs. 1,80,000 and as on 31.3.2011 was Rs. 1,60,000. Machinery costing Rs. 20,000, which was depreciated to the extent of 50% was discarded and written off in 2012. Depreciation for the year ending 31.3.2012 amounted to Rs. 30,000. |
| (iii) || Investment costing Rs. 5,000 was sold during the year ending 31.3.2012 for Rs. 4,800 and Government Securities of the face value of Rs. 4,000 were purchased during the year for Rs. 3,750. |
You are required to prepare the following:
| (i) || Statement showing changes in working capital. |
| (ii) || Statement of sources and application of funds. ||10|| (0) |
| ||(b)||Explain the following terms in one or two sentences: |
| (i) || Gross working capital. |
| (ii) || Net working capital. |
| (iii) || Working capital gap. ||1.5+1.5|
| (0) |
|6.||(a)||The following information is available for a call option: |
You are required to calculate value of put option.
| Time to Expiration || : || 3 months |
| Risk–free Rate || : || 8% |
| Exercise Price || : || ∈ 65 |
| Stock Price || : || ∈ 70 |
| Call Price || : || ∈ 12 ||4|| (0) |
| ||(b)||An Indian importer has to settle a bill for US $ 1,50,000. There are two options available: |
Option A—Pay immediately by drawing from the bank overdraft account bearing interest @ 15% p.a.
Option B—Pay after 3 months with interest @ 5% p.a. in foreign currency.
The exchange rates are as under:
Spot (Rs./US $) = Rs. 50.50/ Rs. 51.00
3 months (Rs./US $) = Rs. 51.50/ Rs. 52.00
Evaluate the two options and advise.
|7|| (0) |
| ||(c)||The total asset turnover ratio and total asset to net–worth ratio of ABC Limited are 1.75 and 2 respectively. If the net–profit margin of the company is 8%, what will be its Return On Equity (ROE)? ||2|| (0) |
| ||(d)||The degree of operating leverage of XYZ Limited is increased by 30%. What will be the change in the degree of total leverage, if the degree of financial leverage is decreased by 20%? ||2|| (0) |
|7.||(a)||How are currency swaps different from interest swaps? Explain. ||5|| (0) |
| ||(b)||On September 1,2011, the Rs./$ spot rate in New York is Rs. 51.90 and December £ futures are trading at $ 1.5950. The Rs./£ spot rate on that day is Rs. 78.90. |
Neel Corporation has a 3–month sterling receivable of £ 1,00,000.
You are given that the standard size of sterling futures contracts is £ 62,500 and Neel Corporation decides to hedge its risk by trading in two sterling futures contracts. By December 1,2011 the spot dollar has appreciated to Rs. 52.80, while the spot pound sterling has depreciated to Rs. 78.20. If December futures are trading at £ 1.5720, what is the profit or loss incurred by Neel Corporation?
|10|| (0) |
|8.||Write short notes on (any three): ||5x3=15|| |
| ||(a)||Asset Securitisation; || || (0) |
| ||(b)||Foreign Collaboration; || || (0) |
| ||(c)||Money Market Hedge; || || (0) |
| ||(d)||Sensitivity Analysis. || || (0) |