This Paper has 23 answerable questions with 2 answered.
F–14(AFM)
Revised Syllabus |
| Time Allowed : 3 Hours | Full Marks : 100 |
| Part A is compulsory and answer another five questions from Part B. |
PART A
Attempt all the questions, each carrying 2 marks |
| Marks |
| 1. | Indicate the correct answer using small alphabet (a, b, c or d): | | |
| | (i) | A company is planning to issue a 8% debentures of Rs. 100 each. Market rate of bond yield for the same maturity is 7%. The debenture will be issued at | (a) | Premium | (b) | Discount | (c) | Par | (d) | none of (a), (b), (c) |
| | (1) |
| | (ii) | Market yield of Government securities has reduced, so the bond price will | (a) | Increase | (b) | Decrease | (c) | Remain Unchanged | (d) | none of (a), (b), (c) |
| | (1) |
| | (iii) | It is quite common for banks to issue subordinated debt. The reasons are | (a) | Fund raising | (b) | It is treated as quasi–equity | | (c) | It does increase debt–equity ratio | (d) | It is included in Tier II capital for the purpose of determining capital adequacy |
| | (0) |
| | (iv) | Using CAPM approach find out the cost of equity of a company whose beta is 1.5. The company wants to use 6% risk free rate and 12% market return. Its correct cost of equity should be | (a) | 15% | (b) | 12% | (c) | 9% | (d) | 18% |
| | (0) |
| | (v) | What rate should a bank quote for a sale of 3 month forward exchange contract for US $ 1 million given interbank quote spot US $ 45.02.04 and forward premium 20–25 p? | (a) | 45.29 | (b) | 45.22 | (c) | 45.27 | (d) | 45.24 |
| | (0) |
| | (vi) | The net present value method of capital budgeting assumes that cash flows are re–invested at | (a) | Risk free rate | (b) | Internal rate of return | | (c) | Discount rate used in the analysis | (d) | Cost of debt. |
| | (0) |
| | (vii) | A firm producing and selling in domestic market may face the following risk when the economy is open: | (a) | Translation risk | (b) | Operating risk | | (c) | Transaction risk | (d) | None of the above. |
| | (0) |
| | (viii) | High interest rates often tend to be associated with | (a) | Under developed countries | (b) | Developed countries | | (c) | Appreciating currencies | (d) | Depreciating currencies. |
| | (0) |
| | (ix) | Which of the following is not an assumption of capital asset pricing model (CAPM)? | (a) | Investors are risk–averse | (b) | There exists perfect competition | | (c) | Dividend payout ratio is nil | (d) | No taxes or transaction costs are involved. |
| | (0) |
| | (x) | Which of the following is/are basic pre–conditions for interest arbitrage theory? | (a) | Free capital mobility | (b) | No taxes | | (c) | No government restrictions in borrowing in foreign currency | (d) | All of the above. |
| | (0) |
| 2. | (a) | "The interest factor is the basic factor in arriving at the forward rate". Explain the statement in the context of forward margin in a free exchange market. | 8 | (0) |
| | (b) | | (i) | Interest rates for 3 months in US and Canada are as follows: | | Currency | Borrow | Invest | | US $
Can. $ | 4%
4.5% | 2.5%
3.5% | | (ii) | Can. $/US $ spot | 1.235-1.240 | | 3m forward | 1.255-1.260 |
Advise the currency in which borrowing and lending for 3 months needs to be done for a US company. Take 3 months = 90/360 fraction of a year. | 2x4=8 | (0) |
| 3. | As an investment manager, you are given the following information: | 1 | 2 | 3 | 4 | 5 | Investment in
Equity shares of | Initial Price
Rs. | Dividends
Rs. | Market Price at the end of
of the year
Rs. | Beta risk
factor | A Cement Ltd.
Steel Ltd.
Liquor Ltd.
B. Govt of India Bonds | 25
35
45
1000 | 2
2
2
140 | 50
60
135
1005 | 0.8
0.7
0.5
0.99 |
Risk–free return may be taken at 14%.
You are required to calculate:- | (i) | Expected rate of returns of portfolio in each using capital asset pricing model (CAPM). |
| (ii) | Average return of portfolio. |
| 8+8 | (0) |
| 4. | You are required to write adequate notes explaining your understanding of: | 8+8 | |
| | (a) | ‘A company being over–capitalized’. How can the situation arise, and what are the consequences thereof? | | (0) |
| | (b) | ‘A company over–trading’. What are its causes and consequences, and what warning signals can be determined from an analysis of its profit & loss account and balance sheet? | | (0) |
| 5. | (a) | An import house in India has bought goods from Switzerland for SF 10,00,000. The exporter has given the Indian company two options: | (i) | Pay immediately the bill for SF 10,00,000; | | (ii) | Pay after 3 months, with interest @ 5% p.a. |
The importer's bank charges 14% on overdrafts. If the exchange rates are as follows, what should the company do? Spot (Rs./SF)
3–month (Rs./SF) | : 30,00/30.50
: 31.10/31.60 |
| 8+8 | (0) |
| | (b) | Current stock price is Rs. 100, strike price of call option Rs. 100, option premium Rs. 5. Find out break even price at which three will be no loss no profit for a call buyer. Find out pay off of the call option buyer if stock price remains subdued at Rs. 100.
Draw profit/loss diagrams of call writer and call buyer. | | (0) |
| 6. | An analysis intends to value an IT company in terms of the future cash generating capacity. He has projected the following after–tax cash flows. | Year | 1 | 2 | 3 | 4 | 5 | | Cash flows (Rs. Million) | 166 | 45 | 60 | 81 | 110 |
It is further estimated that beyond the 5th year, cash flows will perpetuate at a constant growth rate of 7% p.a. mainly on account of inflation. The perpetual cash flow is estimated to be Rs. 968 million at the end of 5th year. | (i) | What is the value of the company based on expected future cash flows? You may assume a cost of capital of 20% for your calculation. | | (ii) | The company has outstanding debt of Rs. 342 million and cash/bank balance at Rs. 256 million. Calculate shareholder value, if the number of outstanding shares 15.15 million. | | (iii) | The company has received a take over bid of Rs. 190 per share. Is it a good offer? |
| 16 | (0) |
| 7. | Distinguish between: | 6+5+5 | |
| | (a) | GDR and ADR | | (0) |
| | (b) | Foreign bond and Eurobond | | (0) |
| | (c) | Forward and Future contract. | | (0) |
| 8. | (a) | Bansali textile has annual sales of Rs. 200 crores. About 80% of its sales is on credit, and the average collection period is 90 days. The company's bad debts as the past trend reveals, are around 0.9% of credit sales. The company's annual cost of administering credit sales is Rs. 75 lakhs. It is possible to save Rs. 55 Lakhs, put of the bad debts and sales administering costs, if the company avails of full–factor service from a factoring company. The company has approached a factoring company and got the following terms: Advance payment
Discount Rate
Commission for service | : 80%
: 14% p.a.
: 10% (to be paid upfront) |
| (i) | What will be the effective cost of factoring on an annual basis (assume 360 days in a year)? | | (ii) | Bansali Textile can borrow the advance payment offered by the factoring company from a bank at 14% p.a. Should the company avail of the factoring service? Give reasons. |
| 8+8 | (0) |
| | (b) | Briefly explain fortaiting as means of financing export receivables. | | (0) |
