This Paper has 22 answerable questions with 0 answered.
F–14(AFM)
Revised Syllabus |
| Time Allowed : 3 Hours | Full Marks : 100 |
| The figures in the margin on the right side indicate full marks |
| Part A is compulsory and answer another five from part B. |
PART A
Attempt all ten questions, each carrying 2 marks. |
| Marks |
| 1. | (a) | What is EBITDA? | (i) | Earnings before interest, tax, debt and amortisation. | | (ii) | Earnings before inter–company transactions, tax debt and annual charges. | | (iii) | Extraordinary income before interest, tax depreciation and annual charges. | | (iv) | Earnings before interest, tax, depreciation and amortisation. |
| | (0) |
| | (b) | Consider the following information relating to Shiva Ltd: Net worth
Total assets
Long–term debt
Current liabilities | :
:
:
: | Rs. 250 lac
Rs. 600 lac
Rs. 200 lac
Rs. 150 lac |
The debt–equity ratio of the company is | (i) | 0.583 | (ii) | 0.333 | (iii) | 0.800 | (iv) | 1.400 |
| | (0) |
| | (c) | The average daily sales of a company are Rs. 5 lac. The company normally keeps a cash balance of Rs. 80,000. If the weighted operating cycle of the company is 45 days, its working capital requirement will be | (i) | Rs. 112.9 lac | (ii) | Rs. 113.3 lac | (iii) | Rs. 5.8 lac | (iv) | Rs. 225.8 lac |
| | (0) |
| | (d) | Exchange rate system where the central bank intervenes to smoothen out exchange rate fluctuations is known as | (i) | free float | (ii) | managed float | (iii) | fixed rate system | (iv) | floating rate system. |
| | (0) |
| | (e) | The beta of portfolio is equal to | (i) | the beta of the market portfolio | | (ii) | the arithmetic average of the individual security betas | | (iii) | the weighted average of the individual security betas | | (iv) | individual security betas adjusted for correlation. |
| | (0) |
| | (f) | X Ltd. has sales of Rs. 2200; total fixed cost of Rs. 570; variable cost of Rs. 1540; raw material consumed of Rs. 1,100; No. of units sold 22,000. What shall be the BEP (in unit) if raw material price is reduced by 2%? | (i) | 18.387 | (ii) | 18.560 | (iii) | 18.750 | (iv) | 19.000. |
| | (0) |
| | (g) | An Indian bank wants to fund their Nostro a/c with a US correspondent by US $5,00,000 against INRS when inter–bank rate is US $ 1 = Rs. 47.20/50. The deal is struck and the overseas bank's Vostro a/c that is being maintained with the Indian bank will be credited by | (i) | Rs. 23,600,000 | (ii) | Rs. 23,750,000 | (iii) | Rs. 23,675,000 | (iv) | Rs. 23,712,500. |
| | (0) |
| | (h) | Mr. X, a valued customer engaged in import business, is in spot need to remit US $ 10,00,000 to his US Exporter. What rate you, as a banker, will quote to Mr. X when interbank spot rate is US $ 1 = Rs. 46.95/10 and bank margin is 0.20%? | (i) | Rs. 47.0439 | (ii) | Rs. 47.1190 | (iii) | Rs. 47.0058 | (iv) | Rs. 47.1942 |
| | (0) |
| | (i) | The stock of ABC Ltd. sells for Rs. 240. The present value of exercise price and the value of call option are Rs. 217.40 and Rs. 39,60 respectively. What is the value of put option? | (i) | Rs. 16.50 | (ii) | 22.00 | (iii) | 17.00 | (iv) | 18.00 |
| | (0) |
| | (j) | Petro Tech has issued some warrants that allow the holder to purchase, with one warrant, one equity share at Rs. 28.50. If the equity share is selling at Rs. 37.50, what would be the minimum price?
[Assume Exercise Ratio = 1) | (i) | Rs. 15.00 | (ii) | Rs. 9.00 | (iii) | Rs. 8.50 | (iv) | Rs. 10.00 |
| | (0) |
| 2. | (a) | Some years ago Shibaji Ltd. sub–divided its capital into ordinary shares of Re. 1 each. Presently the company has annual earnings before interest and tax of Rs. 1.5 crore. These earnings are expected to remain constant. The market price of the company's ordinary shares is Rs. 3.44 per share–cum–div. and the debentures Rs. 105.50 per debenture ex–interest. An interim dividend of 24 paise per share has been declared. Tax rate is 30% and all available earnings are distributed as dividends.
Shibaji's long–term capital structure is shown below:
Ordinary shares (Re. 1 par value)
Reserves | Rs. '000
12,500
24,300 |
16% debenture 31.12.2004 (Rs. 100 par value) | 36,800
23,697 | | 60,497 |
Required:
Calculate the cost of capital of Shibaji Ltd. according to the traditional theory of capital structure as on 31st December 2004. Market value of equity and debt should be applied as weights. | 10+2x3
=16 | (0) |
| | (b) | Akbar Ltd. is an all equity company with an equilibrium market value of Rs. 32.5 million and a cost of capital of 18% per year. The company proposes to repurchase Rs. 5 million of equity and to replace it with 13% irredeemable loan stock. | Akbar‘s earnings before interest and tax are expected to be constant for the foreseeable future. The company‘s tax rate is 30%. All profits are paid out as dividends | | Required: | | Using the assumptions of Modigliani and Miller explain and demonstrate how this change in capital structure will effect. |
| (iii) | the cost of capital of Akbar Ltd |
| | (0) |
| 3. | The following data relate to Steady Limited: Year ending
31 March
2000
2001
2002
2003
2004 | Net earnings
per share
Rs.
28
27
27
26
25 | Net dividend
per share
Rs.
16.80
17.60
18.00
19.00
20.00 |
There are 10 lakh equity shares issued and the majority of these shares are owned by private investors. There is no debt in the capital structure.
The company has been experiencing difficult trading conditions over the past few years. In the current year, net earnings are likely to be Rs. 2 crore, which will be just sufficient to pay a maintained dividend of Rs. 20 per share.
Required:
comment on the company's
(a) dividend policy between 1999–2000 and 2003–2004 and
(b) on its possible consequences for earnings. | 8+8=16 | (0) |
| 4. | | (a) | An investor purchased Reliance November Future (600 share Tick size) at Rs. 542 and write a Rs. 580 November call option at a premium of Rs. 6(600 shares Tick size). As on November 20 spot price rises and so the future price and the call premium. Future price rises to Rs. 575 and call premium rises to Rs. 12. Find out profit/loss of the investor, if he/she settles the transaction on that date and at stated prices. Brokerage is 0.05% for the transaction value of futures and strike price net of call premium for option. |
| (b) | Why did the investor write a call? Why did he/she buy a call subsequently? To settle the written call he/she needed to buy a call. |
| (c) | Do you think the strategy taken by investor was logical? |
| 8+4+4=16 | (0) |
| 5. | (a) | Outline the main factors that a multinational company should consider before deciding whether or not to use a tax haven | 6+10=16 | (0) |
| | (b) | Relyonus Ltd. has manufacturing subsidiaries in three overseas countries: | Country | Corporate tax | Proposed net
dividend
Rs. '000 | Subsidiary 1
Subsidiary 2
Subsidiary 3 | Mars
Jupiter
Venus | 40%
35%
20% | 1,000
1,600
8,000 |
The Indian corporate tax rate is 30%. There are no taxes in the tax haven country.
Bilateral tax treaties exist between India and the countries where each of the subsidiaries is located, which allow a tax credit against Indian corporate tax liability up to a maximum of the Indian tax liability. This tax credit may be assumed to be available even when dividends are channelled via a tax haven. Indian corporate taxation on overseas earnings may be assumed to be based upon the total dividends remitted to India (grossed up by one minus the relevant national tax rate (s) from each overseas country).
Required
Evaluate whether or not Relyonus would benefit from using a tax haven holding company through which dividends would be channelled. | | (0) |
| 6. | (a) | Donald Enterprises has warrants issued that allow the holder to purchase 4 shares of a stock for a total of Rs. 80 for each warrant. Currently, the market price per share of Donald equity is Rs. 16. Investors hold the following probabilistic benefits about the stock 6 months hence: Market price per share
Probability | Rs. 10
.10 | Rs. 16
.20 | Rs. 20
.30 | Rs. 23
.25 | Rs. 2
.1 |
You are required to answer the following: | (i) | What is the present theoretical value of the warrant? |
| (ii) | What is the expected value of the stock price 6 months hence? |
| (iii) | What is expected value of theoretical value of the warrant 6 months hence? |
| (iv) | Would you expect the present market price of the warrant to equal its theoretical value? If not, why no |
| 2x4+8=16 | (0) |
| | (b) | What do you understand by Foreign Exchange Risk? State the different types of Foreign Exchange exposure? | | (0) |
| 7. | (a) | Define Arbitrage operation. Explain with example the types of Arbitrage. | (2+4)+
10=16 | (0) |
| | (b) | The annual interest rate is 5% in the United States and 8% in the UK. The spot exchange rate is £/$ = 1.50 and forward exchange rate, with one year maturity, is £/$ = 1.48 In view of the fact that the arbitrager can borrow $ 10,00,000 at current spot rate, what would be the arbitrager profit or loss? | | (0) |
| 8. | (a) | Distinguish between International factoring and International forfeiting. | 6+10=16 | (0) |
| | (b) | Hindustan Products Ltd. is considering the revision of its credit policy with a view to increasing its sales and profits. Currently all its sales are on credit and the customers are given one month's time to settle the dues. It has a contribution on 40% on sales and it can raise additional funds at a cost of 20% per annum. The marketing director of the company has given the following options with draft estimates for consideration. | Particulars | Current Option | Option–I | Option–II | Option–III | (a) Sales (Rs. lac)
(b) Credit period (methods)
(c) Bad Debts (% of sales)
(d) Cost of Administration (Rs. lac) | 200
1
2
1.20 | 210
1.5
2.5
1.30 | 220
2
3
1.50 | 250
3
5
3.00 | | Advise the company to take the right decision. |
| | (0) |
