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(b) |
KPR is evaluating six capital investments projects. The company has allocated Rs.20,00,000 for capital budgeting purposes. The relevant particulars of the projects, which are independent of one another, are as follows:
Project | Investment needed Rs. | Profitability index |
P1 | 10,00,000 | 1.21 |
P2 | 3,00,000 | 0.94 |
P3 | 7,00,000 | 1.20 |
P4 | 9,00,000 | 1.18 |
P5 | 4,00,000 | 1.20 |
P6 | 8,00,000 | 1.05 |
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12 |
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If there is strict capital rationing. Which of the projects should be undertaken? |
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3. |
Star Transport Company decided on 1April, 2003 to lease a bus from the manufacturer. The fair value on that date was Rs.7,73,125. the economic life of the bus is three years. Its expected residual value is zero. The asset is to be depreciated on a straight line basis. According to lease terms, annual lease rentals of Rs.3,00,000 are payable at the end of each year. The payments do include maintenance and insurance charges, which are covered by a separate contract. The interest rate implicit in the annual lease payment is 85. The company’s accounts are closed on 31st March.
Required:
(i) | Calculate interest expense and year-end liability under finance lease method. |
(ii) | Show the profit and loss account impact of the lease under finance lease method. |
(iii) | Calculate year –end asset account balance under finance lease method. |
(iv) | If the lease were accounted for as an operating lease, what would be its financial statement impact. |
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4x4 |
4. |
(a) |
Calculate profits and losses from the following transactions:
(i) | Mr. X writes a call option to purchase share at an exercise price of Rs.60 for a premium of Rs.12 per share. The share price rises to Rs.62 by e time the option expires. |
(ii) | Mr. Y buys a put option at an exercise price of Rs.80 for a premium of Rs.8.50 per share. The share price falls to Rs.60 by the time the option expires. |
(iii) | Mr. Z writes a put at an exercise price of Rs.80 for a premium ofRs.11 per share. The price of the share rises to Rs.96 by the time the option expires. |
(iv) | Mr. XY writes a put option with an exercise price of Rs.70 for premium of Rs.8 per share. The price falls to Rs. 48 by the time the option expires. |
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6 |
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(b) |
Describe in brief, the simple and complex option trading strategies. |
6 |
|
(c) |
The intrinsic value of an option is a function of several variables. What are those variables? |
4 |
5. |
The summarized balance sheet of Punam Ltd. as at 31st March,2004 was as follows: |
16 |
| |
| Rs. | | | Rs. |
Equity shares of Rs.10 each Reserves 6% Debentures Current Liabilities |
5,00,000 15,00,000 9,00,000 7,00,000
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Fixed assets at cost Less deprecation Current assets |
|
24,00,000
12,00,000 |
| 36,00,000 | | | 36,00,000 |
| |
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Other relevant information:
(i) | The current equity share price is Rs.50. |
(ii) | The debenture which are redeemable at par in ten year’s time, have a current market price of Rs.80 each (face value Rs.100 each) |
(iii) | The company pay tax at the rate fo 40%. |
(iv) | Debenture interest is payable at the end of the year. |
(v) | The company’s cost of equity I s15%. |
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|
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There is a proposal to alter the capital structure of the company. The board of directors is considering whether to repurchase equity shares with proceeds from issue of new debentures. It is proposed to issue Rs.5,00,000 new debentures at pat and to use funds tp repurchase equally shares. The board believes that the market price of the existing equity shares or debentures will not change as a result of the proposed issue of new debentures. |
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It may be assumed that the repurchase of equity shares is permissible under the present company legislation. |
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You are required to evaluate the likely effect on the weighted average cost of capital of the company if the proposed scheme of alteration of capital structure is given effect to. How will your evaluation change if the company does not expect to pay taxes in the foreseeable future?
Do you consider it reasonable on the part of the board to believe that the market price of the company’s existing equity shares and debentures will not change even if the capital structure is altered?
Give reasons for your answer
Note: Extract from the PV table |
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| |
PV factor of an annuity of Re. 1 for 10 years: |
nterest rate PV factor | 6% 7.36 | 8% 6.71 | 10% 6.15 |
PV factor for Re. 1 to be received or paid at the end of year 10: |
nterest rate PV factor | 6% 0.56 | 8% 0.46 | 10% 0.39 |
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