This Paper has 16 answerable questions with 0 answered.
| Roll No……… | |
| Total No. of Questions— 6] | [Total No. of Printed Pages—4 |
| Time Allowed : 3 Hours | Maximum Marks : 100 |
| Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued. |
| Answer any five Questions |
| All working notes should form part of the answer |
| Wherever appropriate, suitable assumptions should be made. |
| Present value/Annuity tables would be supplied on demand. |
| Marks |
| 1. | (a) | What sort of investor normally views the variance (or Standard Deviation) of an individual security’s return as the security’s proper measure of risk? | 3 | (0) |
| | (b) | What sort of investor rationally views the beta of a security as the security’s proper measure of risk? In answering the question, explain the concept of beta. | 7 | (0) |
| | (c) | A & Co. is contemplating whether to replace an existing machine or to spend money on overhauling it. A & Co. currently pays no taxes. The replacement machine costs Rs. 90,000 now and requires maintenance of Rs. 10,000 at the end of every year for eight years. At the end of eight years it would have a salvage value of Rs. 20,000 and would be sold. The existing machine requires increasing amounts of maintenance each year and its salvage value falls each year as follows: Year
| Maintenance
(Rs.) | Salvage
(Rs.) | Present
1
2
3
4 | 0
10,000
20,000
30,000
40,000 | 40,000
25,000
15,000
10,000
0 |
The opportunity cost of capital for A & Co. is 15%. Required:
When should the company replace the machine?
(Notes : Present value of an annuity of Rs. 1 per period for 8 years at interest rate of 15% : 4.4873; present value of Re. 1 to be received after 8 years at interest rate of 15% : 0.3269) | 10 | (0) |
| 2. | (a) | Explain briefly Capital Rationing. | 4 | (0) |
| | (b) | A firm has an investment proposal, requiring an outlay of Rs. 80,000. The investment proposal is expected to have two years economic life with no salvage value. In year 1, there is a 0.4 probability that cash inflow after tax will be Rs. 50,000 and 0.6 probability that cash inflow after tax will be Rs. 60,000. The probability assigned to cash inflow after tax for the year 2 are as follows : | The cash in year 1 | Rs. 50,000 | | Rs. 60,000 | | The cash in year 2 | | Probability | | Probability | | Rs. 24,000
Rs. 32,000
Rs. 44,000 | 0.2
0.3
0.5 | Rs. 40,000
Rs. 50,000
Rs. 60,000 | 0.4
0.5
0.1 |
The firm uses a 10% discount rate for this type of investment.
Required : | (i) | Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). | | (ii) | What net present value will the project yield, if worst outcome is released? What is the probability of occurrence of this NPV? | | (iii) | What will be the best and the probability of that occurrence? | | (iv) | Will the project be accepted? |
(Note : 10% discount factor 1 year 0.909; 2 year 0.826) | 16 | (0) |
| 3. | (a) | The following data relates to ABC Ltd.’s share prices : Current price per share
Price per share in the futures market–6 months | Rs. 180
Rs. 195 |
| (i) | Calculate the theoretical minimum price of a 6 month–forward contract. | | (ii) | Explain if any arbitraging opportunities exist. |
| 6 | (0) |
| | (b) | Following is the data regarding six securities: | U | V | W | X | Y | Z | | Return(%) | 10 | 10 | 15 | 5 | 11 | 10 | | Risk (%) (Standard deviation) | 5 | 6 | 13 | 5 | 6 | 7 |
| (i) | Which of three securities will be selected? | | (ii) | Assuming perfect correlation, analyse whether it is preferable to invest 80% in security U and 20% in security W or to invest 100% in Y. |
| 8 | (0) |
| | (c) | Explain what is meant by ’Debt securitisation’. | 6 | (0) |
| 4. | (a) | There is a 9% 5–year bond issue in the market. The issue price is Rs. 90 and the redemption price Rs. 105. For an investor with marginal income tax tare of 30% and capital gains tax rate of 10% (assuming no indexation), what is the post–tax yield to maturity? | 4 | (0) |
| | (b) | The United States Dollar is selling in India at Rs. 45.50. If the interest rate for a 6–month borrowing in India is 8% per annum and the corresponding rate in USA is 2%. | (i) | do you expect United States Dollar to be at a premium or at discount in the Indian forward market; | | (ii) | what is the expected 6–month forward rate for United States Dollar in India; and | | (iii) | what is the rate of forward premium or discount? |
| 10 | (0) |
| | (c) | Explain briefly the Net Asset Value (NAV) of a Mutual Fund Scheme. | 4 | (0) |
| | (d) | Explain briefly ‘Call Money’ in the context of financial market. | 2 | (0) |
|
| 5. | Your company is considering to acquire an additional computer to supplement its time–share computer services to its clients. It has two options. | (i) | To purchase the computer for Rs. 22 lakhs. | | (ii) | To lease the computer for three years from a leasing company for Rs. 5 lakhs as annual lease rent plus 10% of gross time–share service revenue. The agreement also requires an additional payment of Rs. 6 lakhs at the end of third year. Lease rents are payable at the year–end, and the computer reverts to the lessor after the contract period. |
The company estimates that the computer under review will be worth Rs. 10 lakhs at the end of third year.
Forecast Revenues are : Year
Amount (Rs. in lakhs | 1
22.5. | 2
25 | 3
27.5 |
Annual operating costs excluding depreciation/lease rent of computer are estimated at Rs. 9 lakhs with an additional Rs. 1 lakh for start up and training costs at the beginning of the first year. These costs are to be borne by the lessee. Your company will borrow at 16% interest to finance the acquisition of the computer. Repayments are to be made according to the following schedule : Year end
Principal (Rs’000)
Interest (Rs’000) | 1
500
352 | 2
850
272 | 3
850
136 |
The company uses straight line method (SLM) to depreciate its assets and pays 50% tax on its income. The management approaches you to advice. Which alternative would be recommended and why?
Note : The PV factor at 8% and 16% rates of discount are : Year
8%
16% | 1
0.926
0.862 | 2
0.857
0.743 | 3
0.794
0.641 |
| 20 | (0) |
| 6. | (a) | ABC Ltd. is intending to acquire XYZ Ltd. by merger and the following information is available in respect of the companies :
Number of equity shares
Earnings after tax (Rs.)
Market value per share (Rs.) | ABC Ltd.
10,00,000
50,00,000
42 | XYZ Ltd.
6,00,000
18,00,000
28 |
Required : | (i) | What is the present EPS of both the companies? | | (ii) | If the proposed merger takes place, what would be the new earning per share for ABC Ltd. ? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. | | (iii) | What should be exchange ratio, if XYZ Ltd. wants to ensure the earnings to members as before the merger takes place? |
| 8 | (0) |
| | (b) | Write short notes on the following : | 2x6=12 | |
| | | (i) | Global Depository Receipts; and | | (0) |
| | | (ii) | Stock Lending Scheme. | | (0) |
