This Paper has 34 answerable questions with 0 answered.
F—P12(AFM)
Revised Syllabus 2008 |
| Time Allowed : 3 Hours | Full Marks : 100 |
| The figures in the margin on the right side indicate full marks. |
Answer Question No. 1 (Part A) which is compulsory and
answer any five questions from Part B. |
Please answer all bits of a question at one place.
Working notes should form part of the answer. |
| PART A (25 Marks) |
| Marks |
| 1. | (a) | In each of the questions given below, one out of four is correct. Indicate the correct answer (1 mark) and give your workings/reasons briefly (=1 mark). | 2x7=14 | |
| | | (i) | ZENEETH LTD. is a manufacturing company having asset turnover ratio of 2 and debt – asset ratio of 0.60 for the year ended 31st March, 2009. If its net profit margin is 5 per cent, the Return on Equity (ROE) of the company will be | (A) | 20% | | (B) | 25% | | (C) | 16.7% | | (D) | Data insufficient |
| | (0) |
| | | (ii) | The degree of operating leverage and degree of financial leverage of VINTEX LTD. are 2.00 and 1.5 respectively. What will be the percentage change in EPS, if the sale increases by 10%? | (A) | 10% increase | | (B) | 15% increase | | (C) | 30% increase | | (D) | insufficient information |
| | (0) |
| | | (iii) | The spot and 6 months forward rates of US $ in relation to the rupee (Re/$) are Rs. 48.95/49.13 and Rs. 49.85/49.96 respectively. What will be the annualised margin (premium with respect to bid price)? | (A) | 4.10% | | (B) | 4.00% | | (C) | 3.68% | | (D) | None of (A), (B) and (C) |
| | (0) |
| | | (iv) | ASHRIN LTD. has an EPS of Rs. 3 last year and it paid out 60% of its earnings as dividends that year. The growth rate in earnings and dividends in the long term is expected to be 6%. If the required rate of return on equity for Ashrin Ltd. is 14%. What would be its P/E ratio? | (A) | 8.20 | | (B) | 7.95 | | (C) | 7.00 | | (D) | 6.50 |
| | (0) |
| | | (v) | The current spot rate for the US dollar is Rs.50. The expected inflation rate is 6 per cent in India and 2.5 per cent in the US. What will be the expected sport rate of the US dollar a year hence? | (A) | Rs.52.50 | | (B) | Rs.52.00 | | (C) | Rs.51.71 | | (D) | None of (A), (B) and (C) |
| | (0) |
| | | (vi) | Two firms PREETI LTD. and similar in all respects except that mahati Ltd. uses Rs.10,00,000 debt in its capital structure. If the corporate tax rate for these firms is 40%, the value of Mahati Ltd. exceeds that of Preeti Ltd. by | (A) | Rs.4,00,000 | | (B) | Rs.6,00,000 | | (C) | Rs.6,20,000 | | (D) | Rs.7,00,000 |
| | (0) |
| | | (vii) | The stock of ANUSA LTD. has a beta of 0.95 and an expected return of 13.60 per cent. The market portfolio has an expected return of 14.00per cent. Based on CAPM what would be the risk premium for Anusa Ltd.’s stock? | (A) | 7.60% | | (B) | 6.00% | | (C) | 5.54% | | (D) | None of (A), (B) and (C) |
| | (0) |
| | (b) | Choose the most appropriate one from the stated options and write it down (only indicate A, B, C, D as you think correct) (=1 mark each) | 1x6=6 | |
| | | (i) | Which of the following statements is most correct? | (A) | The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR. | | (B) | The NPV method assumes that cash flows will be reinvested at the risk free rate while the IRR method assumes reinvestment at the IRR. | | (C) | The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate. | | (D) | The NPV method does not consider the inflation premium. |
| | (0) |
| | | (ii) | A decrease in a firm’s willingness to pay dividends is likely to result from and increase in its | (A) | Earnings stability | | (B) | Access to capital markets | | (C) | Profitable investment opportunities | | (D) | Collection of accounts receivable |
| | (0) |
| | | (iii) | Which of the following statements is true in respect to the mobilization of funds by a finance Manager | (A) | Assessing the costs and benefits of a project under consideration. | | (B) | Interacting with banking agencies for procuring funds. | | (C) | Appraisal of investment proposals given by various departments. | | (D) | Deciding the optionum quantity of raw materials to be ordered for procurement. |
| | (0) |
| | | (iv) | Which of the following tools for managing the risk is used in case of an interest rate swap? | (A) | Avoidance | | (B) | Loss control | | (C) | Separation | | (D) | Transfer |
| | (0) |
| | | (v) | Variable rate investors are the typical user of | (A) | Interest rate caps | | (B) | Interest rate collars | | (C) | Both (A) and (B) | | (D) | Interest rate floors. |
| | (0) |
| | | (vi) | Which of the following is not an issue considered as part of economical appraisal of projects? | (A) | Impact of the project on income distribution in the society. | | (B) | Impact of the project on the wealth of the shareholders. | | (C) | Impact of the project on the level of savings and investment in the society. | | (D) | Impact of the project in creating self-sufficiency in the society. |
| | (0) |
| | (c) | Mention whether the following statements are True or False | 1x5=5 | |
| | | (i) | Feasibility Report is used when a project is completed to ascertain its feasibility. | | (0) |
| | | (ii) | A Consular Invoice is issued by the seller of foreign goods from all foreign countries. | | (0) |
| | | (iii) | Euro–currency market is composed of several large Banks that accept deposits and provide loans in various currencies. | | (0) |
| | | (iv) | Working Capital Management is primarily concerned with striking a balance between liquidity and profitability. | | (0) |
| | | (v) | Sensitivity Analysis is about estimating the impact of market fluctuations on project profitability. | | (0) |
| 2. | (a) | What are the criticisms of Capital Assets Pricing Model (CAPM)? | 5 | (0) |
| | (b) | The capital structure of HILSON LTD. as on March 31, 2009 is given below: | (Amount in Rs. Lakh) | Equity shares (Rs.10 per share)
Reserves and surplus
8% Preference shares (Rs.100 per share)
10% Debentures (Rs.100 per debenture)
11% Term loans | 540
360
180
180
540
1,800 | All these securities are traded in the Capital Market.
Recent Prices are: |
Ex–dividend equity share price
Ex–dividend 8% preference share price
Ex–interest 10% debenture market value | Rs.
15
120
103 |
Additionally the following information are available:
Company’s Equity Beta – 1.06
Yield on long term treasury Bonds – 8%
Stock market risk premium – 6%
The debentures are redeemable after 3 years and interest is payable annually.
The Income–tax rate applicable to the company is 35%
Required:
Using the information in the case, determine the Weighted Average Cost of Capital (WACC) of Hilson Ltd. based on market value weights
Note: | (i) | Ignore flotation costs and transaction costs. | | (ii) | Extracted from the table of P.V.: Interest rate
PVIFA (3 years)
PVIF (3 years) | 8%
2.577
0.794 | 9%
2.531
0.772 | 10%
2.487
0.751 | 11%
2.444
0.731 |
|
| 1+1+1+2+5
=10 | (0) |
| 3. | (a) | Does interest rate parity imply that interest rates are the same in all countries? Also explain why purchasing power parity might fail to hold. | 3+2=5 | (0) |
| | (b) | X COMPANY LTD. and Y COMPANY LTD. both wish to raise US 40M dollar’s loan for five years. X Company Ltd. has the choice of issuing fixed rate debt at 7.50% or floating rate debt at LIBOR + 25 basis points. On the other. Y Company Ltd. which has a lower credit rating, can issue fixed rate debt of the same maturity at 8.45% or floating rate at LIBOR + 37 basis points. X Company Ltd. prefers to issue floating rate debt and Y Company Ltd. prefers fixed rate debt with a lower coupon. City Bank is in the process of arranging an interest rate swap between these two companies.
X Company Ltd. negotiates to pay the Bank a floating rate of LIBOR flat while the Bank agrees to pay X Company Ltd. a fixed rate of 7.60%.
Y Company Ltd. agrees to pay the Bank a fixed rate of 7.75% while the Bank pays Y Company Ltd. a floating rate of LIBOR flat.
Required: | (i) | With a schematic diagram, show how the swap deal can be structured. |
| (ii) | What are interest saving by each company? |
| (iii) | How much would City Bank receive? |
| 4+5+1=10 | (0) |
| 4. | (a) | Comment on the emerging role of the financial Manager in India. | 5 | (0) |
| | (b) | MINTEX LTD. gives you the following information for the year ended 31st March, 2009. | (i) | Sales for the year totaled Rs.96,00,000. The company sells goods for cash only | | (ii) | Cost of goods sold was 60% of sales. Closing inventory was higher than opening inventory by Rs.20,000. | | (iii) | Tax paid amounted to Rs.7,00,000. Other expenses totaled Rs.21,45,000. Outstanding expenses on 31st March, 2008 and 31st March, 2009 totalled Rs.82,000 and Rs.91,000 respectively. | | (iv) | New machinery and furniture costing Rs.10,50,000 in all were purchased. One equipment was sold for Rs.20,000. | | (v) | A rights issue was made of 50,000 shares of Rs.10 each at a premium of Rs.3 per share. The entire money was received with applications. | | (vi) | Dividends totaling Rs.4,00,000 were distributed among the shareholders. | | (vii) | Cash in hand and at Bank as at 31st March, 2008 and 31st March, 2009 totalled Rs. 2,10,000 and Rs.4,14,000 respectively. |
You are required to prepare cash flow statement for the year ended 31st March, 2009 using the direct method. | 7+3=10 | (0) |
| 5. | (a) | How does financial leverage increase the potential reward to the shareholders? | 5 | (0) |
| | (b) | VEDIKA LTD. with a limited investment funds of Rs.6,00,000 is evaluating the desirability of 5 (five) investment proposals. There profiles are summarized below: | Project | Investment
Rs. | Annual cash flow(after tax)
Rs. | Life (in year) | M
N
O
P
Q | 1,00,000
2,00,000
2,40,000
3,00,000
4,00,000 | 36,000
1,00,000
60,000
80,000
60,000 | 10
4
8
16
25 |
Project N and Q are mutually exclusive. The cot of funds is 10 per cent.
Required:
Find out the feasible combination of projects and rank them on the basis of Net Present Value (NPV).
Note: Extracted from the table: Year
PVIFA at 10% | 10
6.145 | 4
3.170 | 8
5.335 | 16
7.824 | 25
9.077 |
| 8+2=10 | (0) |
| 6. | (a) | Describe briefly the main features of venture capital. | 5 | (0) |
| | (b) | The FERGUSON SYSTEMS was trading at Rs.134 on April 3, 2009 and call option exercisable in three months time had a strike price of Rs.130.
The following are the other parameters of the options: | • | The annualized standard deviation in Ferguson Systems stock price over the previous was 60%. | | • | The annualized Treasury Bill rate corresponding to this option life is 8%. |
Requirements: | (i) | Compute the value of a three month CALL option on the stock of Ferguson System using Black and Scholes model. |
| (ii) | What would be the value of PUT? |
| (iii) | If this CALL option is priced at Rs.15 what investment strategy would you adopt? |
| (iv) | If this PUT is available in the market at Rs.14 what investment strategy would you adopt? |
Note: Extracted from the tables: | (1) | Natural logarithms: In (0.9701) =–0.0303
In (1.0308) = 0.0303 | | (2) | Value of e–x; e–0.02 = 0.9802, e–0.016 0.9841 | | (3) | For N(X): where X≥ 0 : N(0.3177) = 0.6246
: N(0.0177) = 0.5071
: where x ≤ 0 : N (– 0.3177) = 0.3754
: N(–0.0177) = 0.4929 |
|
| 7+1+1+1=10 | (0) |
| 7. | (a) | What are the commonly employed measures of financial performance? | 5 | (0) |
| | (b) | MULTIFORUM LTD. is expected to grow at a higher rate for four years; thereafter the growth rate will fall and stabilize at a lower level. The following information is available: | Bas year (year = 0) information | Revenues
EBIT
Capital Expenditure
Depreciation
Working capital as a percentage of revenues
Corporate tax rate (for all time)
Paid-up equity capital (Rs.10par)
Market value of debt | Rs.1,500 lakh
Rs.250 lakh
Rs. 175 lakh
Rs.125 lakh
25%
30%
Rs.200 lakh
Rs.600 lakh | | Inputs for the High Growth period | •Length of high growth phase
• Growth rate in revenues, depreciation, EBIT and capital expenditure
•Working capital as a per cent of revenues
•Cost of debt (post–tax)
•Debt–equity ratio etc.
•Cost of equity | 4 years
20%
25%
9.10%
1 : 1
18.90% | | Inputs for the stable period | •Expected growth rate in revenues and EBIT
•Working capital as a percentage of revenues
•Cost of debt (post–tax)
•Debt–equity ratio etc.
•Cost of equity | 10%
25%
8.5%
2 : 3
16% |
Requirements: | (i) | What is the value of Multiforum Ltd. in terms of forecaste free cash flows? |
| (ii) | Calculate the value of shareholders. |
Note: Extracted from the table of present value of Re 1: Year
PVIF at 13%
PVIF at 14% | 0
1.000
1.000 | 1
0.885
0.877 | 2
0.783
0.769 | 3
0.693
0.675 | 4
0.613
0.592 |
|
| (5+4)+1=10 | (0) |
| 8. | Write short notes on any three of the following: | | |
| | (a) | Financial Planning Environment; | 5 | (0) |
| | (b) | Leveraged Buy-outs (LBO’s); | 5 | (0) |
| | (c) | Balanced Scorecard; | 5 | (0) |
| | (d) | Bill of Entry. | 5 | (0) |
