| 1. | (a) | State whether the following statements are true or false: | 1x5=5 | |
| | | (i) | Divestitures represent the sale of a part of a total undertaking. | | (0) |
| | | (ii) | In a reverse merger a smaller company acquires a larger company. | | (0) |
| | | (iii) | Stock Dividends and Stock Splits may increase the stock price but not the value of the business. | | (0) |
| | | (iv) | Under discounted cash flow model of asset valuation, estimated cash flows during life of the asset are not required. | | (0) |
| | | (v) | Buying the units of mutual funds is an indirect investment. | | (0) |
| | (b) | Fill in the blanks by using words/phrases given in the brackets: | 1x10=10 | |
| | | (i) | In case of Deep Discount Bond, the issue price is always _____________the face value. (less than/more than) | | (0) |
| | | (ii) | While valuing the leasehold land of a company, one _____________subject it to amortization. (should/should not) | | (0) |
| | | (iii) | Market value per share is expected to be ____________than the book value per share in case of profitable and growing firms. (higher/lower) | | (0) |
| | | (iv) | The risk in holding a government bond is ___________________the risk associated with a debenture issued by a company. (more than/less than) | | (0) |
| | | (v) | The risk that the cash flows will not be delivered is called ___________(liquidity risk/default risk) | | (0) |
| | | (vi) | A ratio between the market value of a company to the replacement value of its assets is known as ______________Ratio (Market value to Book value/Market value to Replacement value/Tobin’s Q/Price to Book value). | | (0) |
| | | (vii) | The cost of a patent should be amortised over the legal life or the useful life, whichever is ____________(shorter/longer) | | (0) |
| | | (viii) | In a debt for equity swap, a firm replacing equity with debt ______________its leverage ratio. (increases/decreases) | | (0) |
| | | (ix) | Specific risk of a firm is also called as ______________risk. (systematic/non–systematic) | | (0) |
| | | (x) | Revaluation of assets is undertaken to attract investors by indicating to them _____________value of the asset. (current/future) | | (0) |
| | (c) | In each of the questions given below one out of the four options is correct. Indicate the correct answer: | 2x5=10 | |
| | | (i) | Estimated fair value of an asset is based on the __________________value of operating cash flows. | (a) | current | | (b) | discounted | | (c) | future | | (d) | none of these |
| | (0) |
| | | (ii) | A theory that explains why the total value from the combination resulted from a merger is greater than the sum of the value of the component companies operating independently is known as ___________theory. | (a) | hubris | | (b) | agency | | (c) | operating | | (d) | synergy |
| | (0) |
| | | (iii) | A firm’s current assets and current liabilities are 1600 and 1000 respectively. How much can it borrow on a short–term basis without reducing the current ratio below 1.25? | (a) | Rs.1,000 | | (b) | Rs.1,200 | | (c) | Rs.1,400 | | (d) | Rs.1,600 |
| | (0) |
| | | (iv) | Identify which of the following is not a financial liability | (a) | X Ltd. has 1 lakh Rs. 10 ordinary shares issued | | (b) | X Ltd. has 1 lakh 8% Rs. 10 redeemable preference shares issued | | (c) | X Ltd. has Rs. 2,00,000 of 6% bonds issued | | (d) | Both (a) and (b) |
| | (0) |
| | | (v) | RICO LTD has PAT of Rs. 40.20 lakh with extra ordinary income of Rs.7.00 lakh. If the cost of capital is 20% and the applicable tax rate is 40% the value of Rico Ltd will be: | (a) | Rs.250 lakh | | (b) | Rs.180 lakh | | (c) | Rs.150 lakh | | (d) | Insufficient information |
| | (0) |
| 2. | (a) | Why do many mergers fail? | 5 | (0) |
| | (b) | Why do Companies want to measure intellectual capital? | 5 | (0) |
| | (c) | Discuss Synergy with reference to merger. | 5 | (0) |
| 3. | (a) | ABC LTD’s Shares are currently selling at Rs. 13 per share. There are 10,00,000 Shares outstanding. The firm is planning to raise Rs. 20 lakhs to finance a new project to be started soon at Bangalore. You are required to calculate the ex–right price of shares and the value of a right, if: | (i) | The firm offers one right share for every two shares held | | (ii) | The firm offers one right share for every four shares held | | (iii) | How does the shareholder’s wealth change from (i) to (ii) above? How does right issue increases shareholder’s wealth? . |
| 9 | (0) |
| | (b) | The following data are available for a bond: Face Value
Coupon rate
Years to Maturity
Redemption Value
Yield to Maturity
Calculate the current market price of the bond. | Rs. 1,000
16%
6
Rs. 1,000
17% |
PV Factor @ 17% year wise (lst yr 0.855, 2nd yr 0.730, 3rd yr 0.624, 4th yr 0.534, 5th yr 0.456, 6th yr 0.390) | 6 | (0) |
| 4. | X Ltd. is investigating the acquisition of Y Ltd. Y Ltd.’s balance sheet is given below: | Y Ltd: Balance Sheet (Rs. in crore) | | 10% Cumulative preference shares | | 100 | | Ordinary share capital (30 crore shares @ Rs. 10 per share) | | 300 | | Reserves & Surplus | | 150 | | 14% Debentures | | 80 | | Current Liabilities | | 100 | | Total | | 730 | | Net fixed assets | | 275 | | Investments | | 50 | | Current assets | | | | Stock | 190 | | | Book debts | 150 | | | Cash & Bank | 65 | 405 | | Total | | 730 |
X Ltd. proposed to offer the following to Y Ltd. | (a) | 10% cumulative preference shares of Rs.100 crore in X Ltd. for paying 10% cumulative preference capital of Y Ltd. | | (b) | 12% convertible debentures of Rs. 84 crore in X Ltd. to redeem 14% debentures of Y Ltd. | | (c) | One ordinary share of X Ltd. for every three shares held by Y Ltd.’s shareholders, the market price being Rs. 42 for X Ltd.’s shares and Rs. 20 for Y Ltd.’s shares. |
After acquisition, X Ltd. is expected to dispose of Y Ltd.’s stock for Rs. 150 crore, book debts for Rs. 102 crore and investments for Rs. 55 crore. It would pay entire current liabilities. What is the cost of acquisition to X Ltd.? If X Ltd.’ s required rate of return is 20% how much should be the annual after–tax cash flows from Y Ltd.’ s acquisition assuming a time horizon of 8 years and a zero salvage value? Would your answer change if there is a salvage value of Rs. 30 crore after 8 years? Given, Present Value of Rs.1 discounted @ 20% cumulative for 1 to 8 years = 3.837 and Present Value of Rs.1 in 8th year discounted @ 20% = 0.233. | 15 | (0) |
|
| 5. | (a) | Print plus Publishers Ltd. has been approached by another publisher Welldone Ltd. which is interested in buying the copyright of the book ‘Portfolio Management’ . To estimate the value of the copyright, the following assumptions are made: | (i) | The book is to generate Rs. 1,50,000 in after–tax cash flows each year for the next three years and Rs. 1,00,000 a year for the subsequent two years. These are the flows after payment of author royalties, promotional expenses and production costs. | | (ii) | About 40% of these cash flows are from large organisations that place bulk orders and considered predictable and stable. The cost of capital applied to these cash flows is 7%. | | (iii) | The remaining 60% of the cash flows are to the general public and this segment of the cash flows is considered much more volatile. The cost of capital applied, to these cash flows is 10%. |
Based on the information given above, estimate the value of the copyright. | 7 | (0) |
| | (b) | What are the different methods of valuing self–generated brands? | 8 | (0) |
| 6. | (a) | From the following information taken from the books of Progressive Ltd. relating to staff and community benefits, prepare a statement showing value of benefits to staff and community at large, as required under Corporate Social Reporting. | | Rs. | Environmental Improvements
Medical Facilities to staff and family
Training Programmes conducted in–house
Generation of Job Opportunities in the locality
Municipal Taxes paid
Increase in cost of living in the vicinity due to a thermal power station
Concessional transport, water supply to staff
Extra work put in by company staff and officers for drought relief
Leave encashment and leave travel benefits
Educational facilities for children of staff members
Subsidised canteen facilities on premises
Generation of business in the district | 20,10,000
45,00,000
10,25,000
60,75,000
10,70,000
16,55,000
11,25,000
18,50,000
52,00,000
21,60,000
14,40,000
25,00,000 |
| 6 | (0) |
| | (b) | You have been provided the following financial data pertaining to RITZ LTD, an Engineering company. | Year ended March 31 | 2012 | 2011 | 2010 | | Profit before Interest and Tax (Rs. million) | 3396 | 2310 | 1785 | | Non–branded Income (Rs. million) | 335 | 125 | 112 | | Inflation factor | 1,000 | 1.064 | 1,132 | | Weightage factor | 3 | 2 | 1 | | Average Capital Employed (ACE) (Rs. million) | 6550 | | | | Remuneration to Capital (8% of Avg. Capital employed) | 8% | | | | Corporate Tax rate | 35% | | | | Brand Multiple Applied | 23.20 | | |
You are required to calculate the BRAND VALUATION of RITZ LTD. | 9 | (0) |
| 7. | (a) | Discuss the major aspects and decision Rules of the Discounted Cash Flow (DCF) Model. | 5 | (0) |
| | (b) | The following is provided in relation to VASUDA LTD and MASHIT LTD. | | VASUDA LTD | MASHIT LTD | | Market Price per Share | Rs. 60 | Rs. 20 | | No. of Shares | 600000 | 200000 | | Market Value of the Firm | Rs. 360 lakh | Rs. 40 lakh |
Firm Yasuda Ltd. intends to acquire firm Mashit Ltd. The market price per share of Mashit Ltd. has increased by Rs. 4 because of rumours that Mashit Ltd. might get a favourable merger offer. Yasuda Ltd. assumes that by combining the two firms it will save in costs by Rs. 20 lakh. Yasuda Ltd. has two options: | (i) | Pay Rs.70 lakhs cash for Mashit Ltd | | (ii) | Offer 125000 shares of Yasuda Ltd. instead of Rs. 70 lakh to the shareholders of Mashit Ltd.
You are required to calculate: |
| (a) | The cost of the cash offer if Mashit Ltd.’s market price reflects, only its value as a separate entity. |
| (b) | Cost of cash offer if Mashit Ltd.’s market price reflects the value of the merger announcement |
| (c) | Apparent cost of the stock offer. |
| (d) | True cost of the stock offer. |
| 2+2
+3+3 | (0) |
| 8. | The following information is provided in relation to the acquiring Company MARKET LTD. and the Target Company TRITON LTD. | | MARKET LTD | TRITON LTD. | | Earning after Tax (Rs.) | 2000 lakh | 400 lakh | | Number of shares outstanding | 200 lakh | 100 lakh | | P/E Ratio | 10 | 5 |
Required | (a) | What is the Swap Ratio in terms of current market prices? |
| (b) | What is the EPS of Market Ltd. after acquisition? |
| (c) | What is the expected Market Price per Share of Market Ltd. after acquisition assuming that PIE ratio of Market Ltd. remain unchanged? |
| (d) | Determine the Market value of the Merged Company. |
| (e) | Calculate Gain/Loss for shareholders of the two erstwhile independent companies after acquisition. |
| 4+3+2
+2+4 | (0) |
