This Paper has 33 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. |
Answer Question No. 1 from Part A which is compulsory and
another five questions from Part B. |
| Please answer all parts of a question at one place. |
| Working Notes should form part of the answer. |
| PART A |
| Marks |
| 1. | (a) | In each of the cases given below, one out of four alternatives is correct. Indicate the correct answer (= 1 mark) and give you workings/reasons briefly (= 1 mark). | 4x2 | |
| | | (i) | KOTEK LTD. decides to issue one right share for every two share held. The right shares are priced at Rs. 30 each a d the present cum–right price of the company’s share in the stock exchange is Rs. 45. The fair value of the right is | (A) | Rs. 15 | (B) | Rs. 30 | (C) | Rs. 5 | (D) | None of (A), (B) or (C) |
| | (0) |
| | | (ii) | SMALL ENTERPRISE intends to invest in commercial paper (CP). It has received the following quotes from a primafy dealer:
Bid : 12.70%
Ask : 12.50% If the maturity period of the CP is 45 days, the investment amount (rounded up to nearest rupee) for every Rs. 5 lakh of face value will be (assuming day count basis as ‘actual/365’) | (A) | Rs. 4,92,412 | (B) | Rs. 4,92,295 | (C) | Rs. 4,37,500 | (D) | None of (A), (B) or (C) |
| | (0) |
| | | (iii) | MFG LTD. intends to buy speciality equipment. Quotes are obtained for two different makes as given below | Cost (Rs. million) | Estimated life (Years) | Make X
Make Y | 4.5
6.0 | 10
15 |
Ignoring the operations and maintenance costs which will be almost the same for Make X and Make Y, which one would be cheaper? Company’s cost of capital is 10%.
[Annuity factor (10%, 10 years) : 6.1446 and Annuity factor (10%, 15 years) : 7.6061] (A)
(B)
(C)
(D) | Make X will be cheaper
Make Y will be cheaper
Cost will be the same
None of (A), (B) or (C) |
| | (0) |
| | | (iv) | Capital cost of a project is estimated to be Rs. 65 crore which includes Customs Duty of Rs. 6 crore and Rs. 40 crore of foreign currency components. The economic cost of the project is
(Shadow exchange rate may be calculated by adding 20 per cent. Premium to the market exchange rate.) (A)
(B)
(C)
(D) | Rs. 73 crore
Rs. 59 crore
Rs. 67 crore
None of (A), (B) or (C) |
| | (0) |
| | (b) | From the following, choose the most appropriate answer (only indicate A, B, C, D as you think appropriate); | 4x1 | |
| | | (i) | A debt instrument is rated AA (SO) by CRISIL. This means (A)
(B)
(C)
(D) | High safety
Adequate safety with structured obligation
Highest safety with structured obligation
None of (A), (B) or (C) |
| | (0) |
| | | (ii) | It is quite common for banks to go in for issuing subordinated debt. The reason is (A)
(B)
(C) | Bank needs to raise funds for on–lending.
Subordinated debt is treated as quasi–equity,
Subordinated debt does not increase debt–equity ratio. | | (D) | Subordinated debt is included under Tiers I and II capital for the purpose of determining capital adequacy of the bank. |
| | (0) |
| | | (iii) | Is there any difference between cash credit and overdraft facilities from bank? | (A) | Both are same. | | (B) | Overdraft operates against hypothecation of inventory and sumdry debtors but cash credit requires no security. | | (C) | Cash credit operates against hypothecation of inventory and debtors while overdraft requires pledge of securities, insurance policies, etc. | | (D) | Cash credit operates against hypothecation of inventory and receivables while bank overdraft requires no security. |
| | (0) |
| | | (iv) | Level 2 ADR is required to meet the following condition. (A)
(B)
(C)
(D) | ADR must comply with GAAP
ADR mush be registered with SEC and comply with GAAP and listing requirements of the exchange.
ADR much comply with GAAP and listing requirements of the exchange.
None of (A), (B) or (C). |
| | (0) |
| | (c) | State whether the following statements are True or False | 8x1 | |
| | | (i) | If the bank’s parlance, net working capital represents margin money. | | (0) |
| | | (ii) | The put–call parity formula does not work for American options. | | (0) |
| | | (iii) | Commercial Paper is now an alternative source of financing. | | (0) |
| | | (iv) | When cash flows are discounted at IRR, Net Present Value becomes zero. | | (0) |
| | | (v) | Money market instruments are secured negotiable instruments. | | (0) |
| | | (vi) | Bonds with credit enhancement mechanism (LC, escrow account, etc.) are called structured obligation. | | (0) |
| | | (vii) | GDR may be converted into underlying shares and vice versa. | | (0) |
| | | (viii) | Proportionate stockholding is unchanged after the bonus issue. | | (0) |
| 2. | Rishab Ltd. is faced with a decision to purchase or acquire on lease a mini car. The cost of the mini car is Rs. 1,26,965. It has a life of 5 years. The mini car can be obtained on lease by paying equal lease rentals annually. The leasing company desires a return of 10% on the gross value of the asset. Rishab Ltd. can also obtain 100% finance from its regular banking channel. The rate of interest will be 15% p.a. and the loan will be paid in five annual equal installments, inclusive of interest. The effective tax rate of the company is 40%. For the purpose of taxation, it is to be assumed that the asset will be written off over a period of 5 years on a straight line basis. | (a) | Advise Rishab Ltd. about the method of acquiring the car. | | (b) | What should be the annual lease rental to be charged by the leasing company to match the loan option?
For your exercise, use the following discount factors: | Discount | Years | Rate
10%
15%
9% | 1
0.91
0.87
0.92 | 2
0.83
0.76
0.84 | 3
0.75
0.66
0.77 | 4
0.68
0.57
0.71 | 5
0.62
0.49
0.65 |
|
Assumption: Loan installment is repaid at the beginning of the year at par with lease rentals. | 16 | (0) |
| 3. | (a) | XYZ Ltd. has taken a 6–month loan from its foreign collaborators for US $ 2 million. Interest payable on maturity is at LIBOR plus 1%. Current 6–month LIBOR is 2%. Enquiries regarding exchange rates with the company’s bank elicit the following information: Spot US $ I
6–months forword | Rs. 48.5275
Rs. 48.4575 |
| (i) | What would be the company’s commitment in rupees, if it enters into a forward contract? |
| (ii) | Will you advise the company to do so? Explain, giving reasons. |
| 6+4 | (0) |
| | (b) | A company, operating in Japan, has today effected sales to an Indian company, the payment being due 3–months from the date of invoice. The invoice amount is 108 lakh yen. At today’s spot rate. it is equivalent to Rs. 30 lakh. It is anticipated that the exchange rate will decline by 10% over the 3–month period and, in order to protect the yen payments, the importer decides to take appropriate action in the foreign exchange market. The 3–month forward rate is presently quoted as 3.3 yen per rupee. You are required to calculate the expected loss and to show how it can be hedged by a forward contract. | 3+3 | (0) |
| 4. | (a) | On 1st April, 3 months’ interest rate in the US and Germany are 6.5% and 4.5% p.a. ‘respectively. The $/€ spot rate is 0.7901. What would be the forward rate for Euro for delivery on 30th June? | 4+4+8 | (0) |
| | (b) | In international money market (IMM), an international forward bid for December, 15 on pound sterling is $1.2816. At the same time, the price of IMM sterling future for delivery on December, 15 is $ 1.2806. The contract size of pound sterling is £ 62,500. How could the dealer use arbitrage to profit from this situation and how much profit in earned? | | (0) |
| | (c) | Distinguish between forward contract and futures contract. | | (0) |
| 5. | (a) | Explain, if brief, the risk–return relationship. | 4+(6+6) | (0) |
| | (b) | The following questions relate to the Sharpe and Markowitz methodology. The following data on four stocks are given: | Stock | Markowitz
Expected
Return | Alpha
(%) | Variance | Correlation Matrix∗ | Market | Systematic
(%)2 | unsystematic
(%)2 | A | B | C | D | A
B
C
D | 17%
13%
9%
7% | –0.06
0.10
0.00
–0.14 | 5
2
3
3 | 4
6
1
2 | 1 | 0.4
1.0 | 0.7
0.6
1.0 | 0.2
0.5
0.9
1.0 | 0.74
0.50
0.87
0.78 |
∗For example, correlation of returns between B and C is 0.6; between B and market is 0.50. | (i) | Markowitz would argue that a portfolio consisting of equal rupee investments in stocks A, B, C and D should provide an expected return of 11.5% and an expected risk (Standard Deviation of return) of 2.52@. Do you agree or disagree? Why? | | (ii) | Suppose the market is expected to have a return (over a forward period) of 12% with a return variance of 6% squared. Calculate the expected return and risk for a portfolio consisting of equal portions of stocks A and C. |
| | (0) |
| 6. | (a) | The earnings per share of a company are Rs. 20. The company is considering to adopt payout ratios of 20%, 40% or 60%. What will be the market values of the company’s share using Walter’s model. | (i) | If it is given that the retained earnings of the company earn a return of 20% and the cost of capital of the company is 10%, and | | (ii) | If the productivity of the retained earnings of the company is 15%? |
| 5+3 | (0) |
| | (b) | ABC LTD. and XYZ LTD. are two fast–growing companies. They are close competitors. The primary difference between these two companies from the financial management perspective is their dividend policy. ABC LTD. tries to maintain a non–decreasing dividend per share, while XYZ LTD. maintains a constant dividend payment ratio. Their recent earnings per share (EPS), dividend per share (DPS), and average share price are as follows: Year
1
2
3 | ABC LTD. | XYZ LTD. | | EPZ | DPA | Average Share Price | EPZ | DPA | Average Share Price | | Rs. | Rs. | Rs. | Rs. | Rs. | Rs. | 8.54
6.89
10.56 | 1.00
1.25
1.50 | 75.60
89.45
92.40 | 8.75
6.50
10.11 | 0.90
1.10
1.65 | 65.00
54.78
100.00 |
You are required to ascertain the (i) average dividend payout ratio and (ii) price earnings ratio for all the years for both the companies. | 4+4 | (0) |
| 7. | Intergraph Solutions has the existing sales of Rs. 18,60,000. The current customers are drawn from the companies having ‘elevated’ or ‘excellent’ credit rating and consequently bad debt is nil. With partially liberalised credit standards, the company’s sales are likely to go up by Rs. 5,70,000, the mix of new customers being 54% and 42% from the groups rated ‘fair’ and ‘imperfect’ respectively. The average collection period is likely to be 55 days and the incidence of a bad debt losses is likely to be 20% or the new customers. The contribution to sales ratio for Intergraph Solutions is 25% and the cost of funds is 20%. You are required to | (a) | Calculate the additional contribution from increased sales and additional receivables. |
| (b) | Calculate the additional investment in receivables and cost of financing the additional investment in receivables. |
| (c) | Calculate the total additional cost and net additional benefits, and |
| (d) | Calculate the profits on total sales after relaxing the credit standards, assuming that the collection period will be 45 days on an average for all customers. |
| 4x4 | (0) |
| 8. | Write short notes on any four of the following: | 4x4 | |
| | (a) | Exposure Netting; | | (0) |
| | (b) | International Factoring; | | (0) |
| | (c) | Financial Swaps; | | (0) |
| | (d) | Global Depository Receipt; | | (0) |
| | (e) | Convertibility of the Indian Rupee; | | (0) |
| | (f) | Financial Planning. | | (0) |
