**32**answerable questions with

**0**answered.

F—P18(BVM)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 which is compulsory carrying 25 marks and any five from the rest. |

Marks |

1. | (a) | State whether the following statements are true or false: | 1x5=5 | |||||||||||||||||||||||||

(i) | One of the reasons of differences between Basic EPS and Diluted EPS is the presence of ESOPs in the Balance Sheet of a company. | (0) | ||||||||||||||||||||||||||

(ii) | DCF Analysis requires the revenue and expenses of the past. | (0) | ||||||||||||||||||||||||||

(iii) | Dividend yield is the dividend per share as a percentage of the market value of operating Cash Flows. | (0) | ||||||||||||||||||||||||||

(iv) | Corporate brands and service brands are often perceived to be interchangeable. | (0) | ||||||||||||||||||||||||||

(v) | Intrinsic value and market price of equity shares are always equal. | (0) | ||||||||||||||||||||||||||

(b) | Fill in the blanks by using the words/phrases given in the brackets: | 1x10=10 | ||||||||||||||||||||||||||

(i) | For calculating the value of an equity share by yield method, it is ____________ to know capital employed, (essential/not essential) | (0) | ||||||||||||||||||||||||||

(ii) | One way to increase EVA is to maintain the same operating income with ____________ capital, (more/less) | (0) | ||||||||||||||||||||||||||

(iii) | Post merger control and the ______________ are two of the most important issues in agreeing on the terms of a merger, (negotiated price/calculated price) | (0) | ||||||||||||||||||||||||||

(iv) | In a company form of business, the wealth created is reflected in the ____________ of its shares, (dividend growth/market value) | (0) | ||||||||||||||||||||||||||

(v) | X Ltd. has its income of Rs. 135 lakhs by utilizing capital base of Rs. 1,000 lakhs. If the average cost of capital is 10%, then the EVA turns upto Rs. ___________ . (3.50 lakhs/35 lakhs) | (0) | ||||||||||||||||||||||||||

(vi) | A ____________ is essentially a container for a customer’s complete experience with the offer and the company. (Goodwill/Brand) | (0) | ||||||||||||||||||||||||||

(vii) | In recent past, the RBI has increased its benchmark rates to control inflation in India. One of the consequences of it on the valuation of companies in India will be that their valuations will ____________. (increase/decrease) | (0) | ||||||||||||||||||||||||||

(viii) | The calculation of Weighted Average Cost of Capital (WACC) is based on the assumption that the weights of equity and debt will be based on their respective market values and __________ capital structure, (ideal/ present as per current Balance Sheet/target) | (0) | ||||||||||||||||||||||||||

(ix) | A valuation model used in Human Resource Accounting which is based on the present value of all benefits which an employee can get from a company till he/she remained employed with it is known as ______________. (Flamholtz Stochastic Rewards Valuation Model/Lev and Schwartz Model/Hekimiari and Jones Model) | (0) | ||||||||||||||||||||||||||

(x) | ________________ is a research process whose purpose in mergers and acquisition is to support, valuation process, arm the negotiator, test the accuracy of representations and warranties contained in the merger agreement, fulfill disclosure requirements and inform the planners of post–merger integration. (Certification/ Authorization/Due Diligence) | (0) | ||||||||||||||||||||||||||

(c) | In each of the questions given below one out of the four options is correct. Indicate the correct answer: | 2x5=10 | ||||||||||||||||||||||||||

(i) | XYZ Limited just paid a dividend of 20% on a Rs.10 face value share. It is expected that the dividend is to grow in future at a constant rate of 8%. If its current trading price is Rs.45, then cost of equity as per the Dividend Discount Model will be:
| (0) | ||||||||||||||||||||||||||

(ii) | Given 12 per cent expected rate of return on a suitable market index, with a standard deviation of 20 per cent, and a risk–free rate of 8 per cent, the required rate of return on a share whose beta is 0.8 using CAPM will be
| (0) | ||||||||||||||||||||||||||

(iii) | Company X has declared a dividend of Rs.2 per share. From its financial statements, it is estimated that Return on Equity is 20%. The shareholders are expecting 20% return from the company’s share. If the Dividend Payout Ratio is 50%, then the Present Value of the Growth Opportunities will be
| (0) | ||||||||||||||||||||||||||

(iv) | Firm Specific Risk is also called as
| (0) | ||||||||||||||||||||||||||

(v) | A strategy of Anti–takeover under which the acquirer puts pressure on the management of the target company by threatening to make an open offer is known as
| (0) | ||||||||||||||||||||||||||

2. | (a) | Why do companies want to measure Intellectual Capital? | 5 | (0) | ||||||||||||||||||||||||

(b) | Discuss the ‘Balanced Scorecard’ as a measurement approach of Intellectual Capital. | 10 | (0) | |||||||||||||||||||||||||

3. | (a) | While evaluating a capital project, a company is considering an option to buy a business from a third party at the cost of Rs.50 crores. It is expected that in next one year, the value of such business will increase to Rs.60 crores with probability 70% or decline to Rs.45 crores with probability of 30%. The company may enter into an agreement with a party to sell the said business at Rs.48 crores after one year if the company so desires. Assuming that this real option is like a European Call, with the strike price of the underlying real asset is Rs.48 crores and the risk free interest rate is 9% p.a. Determine the value of this real option. | 5 | (0) | ||||||||||||||||||||||||

(b) | Mr. S. K. Sinha had purchased 500 shares of the Company X at the rate of Rs.60 per share. He held the shares for 2 years and got a dividend of 15% and 20% in the first year, and second year respectively on the face value of Rs.10 each share. At the end of the second year, the shares are sold at the rate of Rs.75 per share. Determine the effective rate of return per year which Mr. Sinha has earned on this share. | 4 | (0) | |||||||||||||||||||||||||

(c) | The following information along with other necessary information has been extracted from the Annual Report–2010 of Strongman Limited:
Other Information:
Assuming that the Constant Dividend Growth Model is an appropriate model for determining the value of the company’s share, you are required to use the above information and determine the value of the company’s share. | 6 | (0) | |||||||||||||||||||||||||

4. | Mr. Sudershan Bose is given the task of estimating the weighted average cost of capital (WACC) of the company in which he is working. For that, it is decided that debt/equity ratio is to be estimated on the basis of market values of equity and debt. For that, he has collected necessary information from the Annual Report–2009–10 of the company along with other information that are given below:
Other Information:
You are required to determine the Debt/Equity Ratio of the company based on the above information and by taking the market values of debt and equity. | 15 | (0) | |||||||||||||||||||||||||

5. | Company–Aggressive has decided to takeover.Company–Soft Target and merge it with itself. In this respect, you have been provided the following information:
It is decided that the exchange ratio would be based on the market prices of these two companies and there would not be any cash payment, all settlement would be by issuing equity shares of Company–Aggressive to the shareholders of Company–Soft Target. You are required to determine the following:
| 4+2+ 4+2 +2+1 | (0) | |||||||||||||||||||||||||

6. | Soft–Tech International Limited has identified a target company, Sunshine India Ltd. and asked Value Search Consultant Pvt. Limited to provide necessary valuation of the business of the target company. The target company identified is from Karnataka and is located in Mysore. On the basis of the past financial records, Value Search Consultant Pvt. Limited has projected necessary financials for the company for the next five years which are given below:
The Cost of capital for the company is estimated to be 16%. Assuming that the free cash flows of the target company will grow at a constant rate of 12% forever after 2015, you are required to determine the value of the business based on the free cash flows. | 15 | (0) | |||||||||||||||||||||||||

7. | (a) | A Company–X is contemplating the purchase of another Company–Y. Company–X is having 6 lakhs shares outstanding having a current market price of Rs.50 per share, while Company–Y has 4 lakhs shares outstanding having a current market price of Rs.25 per share. The Earning Per Share (EPS) of Company–X is Rs.4 while that of the Company–Y is Rs.2.25 per share. Company–X in consultation with Company–Y is considering the following two alternative ways to determining the exchange ratio:
Suggest which alternative way Company–X should use to determine the exchange ratio so that after the merger increase in the EPS of Company–X is higher. | 8 | (0) | ||||||||||||||||||||||||

(b) | Consider Company A and Company B. Both have recently announced their annual results and as per the reported results, both are having PAT of Rs.160 lakhs and 40 lakhs equity shares outstanding,
Assume that both the companies are having a retention ratio of 50% and identical in all other aspects. Calculate P/E Ratios and comment on their relative valuation. | 7 | (0) | |||||||||||||||||||||||||

8. | (a) | Discuss in brief the various perspectives of Financial Engineering. | 5 | (0) | ||||||||||||||||||||||||

(b) | H Ltd. and Z Ltd. have the same levels of business risk and their market values and earnings are summarized below:
You are required to calculate: The post tax cost of equity, cost of debt and weighted average cost of capital of both the companies. Assume that the income tax rate on the company is 35% including Education Cess etc. and the additional tax on dividend distribution is 20%. | 10 | (0) |