| 1. | (a) | Following are the estimates of the net cash flows and probability of a new project of M/s X Ltd.: | Year | P=0.3 | P=0.5 | P=0.2 | Initial investment
Estimated net after tax cash inflows per year
Estimated salvage value (after tax) | 0
1 to 5
5 | 4,00,000
1,00,000
20,000 | 4,00,000
1,10,000
50,000 | 4,00,000
1,20,000
60,000 |
Required rate of return from the project is 10%. Find: | (i) | the expected NPV of the project. | | (ii) | the best case and the worst case NPVs. | | (iii) | the probability of occurrence of the worst case if the cash flows are
(a) perfectly dependent overtime
(b) independent overtime. | | (iv) | Standard deviation and coefficient of variation assuming that there are only three streams of cash flow, which are represented by each column of the table with the given probabilities. | | (v) | Coefficient of variation of X Ltd. on its average project which is in the range of 0.95 to 1.0. If the coefficient of variation of the project is found to be less riskier than average, 100 basis points are deducted from the Company’s cost of Capital Should the project be accepted by X Ltd ? |
| 16 | (0) |
| | (b) | What is a re–financing? Briefly explain indicating at least two institutions which offer such re–financing. | 4 | (0) |
| 2. | (a) | ABC Ltd. has 50,000 outstanding shares. The current market price per share is Rs.100 each. It hopes to make a net income of Rs.5,00,000 at the end of current year. The Company’s Board is considering a dividend of Rs.5 per share at the end of current financial year. The company needs to raise Rs.10,00,000 for an approved investment expenditure. The company belongs to a risk class for which the capitalization rate is 10%. Show, how does the M–M approach affect the value of firm if the dividends are paid or not paid. | 6 | (0) |
| | (b) | Mr. X on 1.7.2000, during the initial offer of some Mutual Fund invested in 10,000 units having face value of Rs.10 for each unit. On 31.3.2001 the dividend operated by the M.F. was 10% and Mr. X found that his annualized yield was 153.33%. On 31.12.2002, 20% dividend was given. On 31.3.2003 Mr. X redeemed all his balance of 11,296.11 units when his annualized yield was 73.52%. What are the NAVs as on 31.3.2001, 31.12.2002 and 31.3.2003? | 6 | (0) |
| | (c) | How tax considerations are relevant in the context of a dividend decision of a company? | 4 | (0) |
| | (d) | Explain briefly the advantages of holding securities in ‘demat’ form rather than in physical form. | 4 | (0) |
| 3. | (a) | XYZ Ltd. is an export oriented business house based in Mumbai. The Company invoices in customer’s currency. Its receipt of US $ 1,00,000 is due on September 1, 2005. Market information as at June 1, 2005. | Exchange Rates | | Currency Futures | | | US. $/Rs. | | US. $/Rs. | Contact size | Rs.4,72,00 | Spot
1 Month Forward
3 Months Forward | 0.02140
0.02136
0.02127 | June
September | 0.02126
0.02118 | |
June
September | Initial Margin
Rs.10,000
Rs.15,000 | Interest Rates in India
7.50%
8.00% |
On September 1, 2005 the spot rate US $Re. is 0.02133 and currency future rate is 0.02134. Comment which of the following methods would be most advantageous for XYZ Ltd.
(a) Using forward contract
(b) Using currency futures
(c) Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the futures contract. | 10 | (0) |
| | (b) | | Spot rat | 1 US $ = Rs.48.0123 | | 180 days Forward rate for | 1 US $ = Rs.48.8190 | | Annualised interest rate for 6 months – Rupee = 12% | | Annualised interest rate for 6 months – US $ = 8% |
Is there any arbitrage possibility? If yes how an arbitrageur can take advantage of the situation, if he is willing to borrow Rs.40,00,000 or US $83,312. | 5 | (0) |
| | (c) | ABC Ltd. is considering a project in US, which will involve an initial investment of US $ 1,10,00,000. The project will have 5 years of life. Current spot exchange rate is Rs.48 per US $. The risk free rate in US is 8% and the same in India is 12%. Cash inflow from the project are as follows: Year
1
2
3
4
5 | Cash inflow
US $ 20,00,000
US $ 25,00,000
US $ 30,00,000
US $ 40,00,000
US $ 50,00,000 |
Calculate the NPV of the project using foreign currency approach. Required rate of return on this project is 14%. | 5 | (0) |
| 4. | (a) | From the following data for certain stock, find the value of a call option: Price of stock now
Exercise price
Standard deviation of continuously compounded
annual return
Maturity period
Annual interest rate | =
=
=
=
= | Rs.80
Rs.75
0.40
6 months
12% |
| Given |
Number of S.D. from Mean, (z)
0.25
0.30
0.55
0.60 |
Area of the left or right (one tail)
0.4013
0.3821
0.2912
0.2578 | e0.12x0.05
In 1.0667 | = 1.0060
= 0.0645 | |
| 8 | (0) |
| | (b) | Following are the details of cash inflows and outflows in foreign currency denominations of MNP Co. an Indian export firm, which have no foreign subsidiaries: | Currency | Inflow | Outflow | Spot rate | Forward rate | US $
French Franc (FFr)
U.K. £
Japanese Yen | 4,00,00,000
2,00,00,000
3,00,00,000
1,50,00,000 | 2,00,00,000
80,00,000
2,00,00,000
2,50,00,000 | 48.01
7.45
75.57
3.20 | 48.82
8.12
75.98
2.40 |
| (i) | Determine the net exposure of each foreign currency in terms of Rupees. | | (ii) | Are any of the exposure positions offsetting to some extent? |
| 4 | (0) |
| | (c) | X Co., Ltd., invested on 1.4.2005 in certain equity shares as below: Name of Co
M Ltd.
N Ltd. | No. of shares
1,000 (Rs.100 each)
500 (Rs.10 each) | Cost (Rs.)
2,00,000
1,50,000 |
In September, 2005, 10% dividend was paid out by M Ltd. and in October, 2005, 30% dividend paid out by N Ltd. On 31.3.2006 market quotations showed a value of Rs.220 and Rs.290 per share for M Ltd. and N Ltd. respectively. On 1.4.2006, investment advisors indicate (a) that the dividends from M Ltd. and N Ltd. for the year ending 31.3.2007 are likely to be 20% and 35%, respectively and (b) that the probabilities of market quotations on 31.3.2007 are as below: Probability factor
0.2
0.5
0.3 | Price/share of M Ltd.
220
250
280 | Price/share of N Ltd.
290
310
330 |
You are required to: | (i) | Calculate the average return from the portfolio for the year ended 31.3.2006; | | (ii) | Calculate the expected average return from the portfolio for the year 2006-07; and | | (iii) | Advise X Co. Ltd., of the comparative risk in the two investments by calculating the standard deviation in each case. |
| 8 | (0) |
|
| 5. | (a) | AB Ltd., is planning to acquire and absorb the running business of XY Ltd. The valuation is to be based on the recommendation of merchant bankers and the consideration is to be discharged in the form of equity shares to be issued by AB Ltd. As on 31.3.2006, the paid up capital of AB Ltd. consists of 80 lakhs shares of Rs.10 each. The highest and the lowest market quotation during the last 6 months were Rs.570 and Rs.430. For the purpose of the exchange, the price per share is to be reckoned as the average of the highest and lowest market price during the last 6 months ended on 31.3.06.
XY Ltd.’s Balance Sheet as at 31.3.2006 is summarised below: | Rs. lakhs | Sources
Share Capital | 20 lakhs equity shares of Rs.10 each fully paid
10 lakhs equity shares of Rs.10 each, Rs.5 paid | 200
50 | Loans
Total
Uses | 100
350 | Fixed Assets (Net)
Net Current Assets | 150
200
350 |
An independent firm of merchant bankers engaged for the negotiation, have produced the following estimates of cash flows from the business of XY Ltd.: Year ended
31.3.07
31.3.08
31.3.09
31.3.10
31.3.11 | By way of
after tax earnings for equity
do
do
do
do
terminal value estimate | Rs. lakhs
105
120
125
120
100
200 |
It is the recommendation of the merchant banker that the business of XY Ltd. may be valued on the basis of the average of (i) Aggregate of discounted cash flows at 8% and (ii) Net assets value. Present value factors at 8% for years | 1–5: | 0.93 | 0.86 | 0.79 | 0.74 | 0.68 |
You are required to: | (i) | Calculate the total value of the business of XY Ltd. | | (ii) | The number of shares to be issued by AB Ltd.; and | | (iii) | The basis of allocation of the shares among the shareholders of XY Ltd. |
| 12 | (0) |
| | (b) | The 6–months forward price of a security is Rs.208.18. The borrowing rate is 8% per annum payable with monthly rests. What should be the spot price? | 4 | (0) |
| | (c) | An Indian company is desirous of obtaining foreign technology. Write a brief note explaining the important financial considerations it should take into account in this context. | 4 | (0) |
| 6. | (a) | Discuss the various kinds of Systematic and Unsystematic risk. | 6 | (0) |
| | (b) | A firm has a sales of Rs.6 crores, Variable cost Rs.3.5 crores and Fixed cost of Rs.0.65 crores. The firm has debt and equity resources worth of Rs.7 crores and 10 crores respectively. With the data given show: | (ii) | EBIT if sales decline to Rs.4 crores. |
| (iii) | If the industry‘s assets turnover is 4 times, does the firm has high or low asset turnover? The cost of debt is 10%, ignore taxation. |
| 2+2+2 | (0) |
| | (c) | What are the characteristic features of Financial and Operating Lease? | 4 | (0) |
| | (d) | Write short note on Inter Bank Participation Certificate. | 4 | (0) |
