CS Final :: Financial Tresurs & Forex Management : June 2004

Roll No…………………
Time allowed : 3 hours Maximum marks : 100
Total number of questions : 7 Total number of printed pages : 4

Note:1. Answer FIVE questions including Question No. 1 which is compulsory. All working notes should be shown
    distinctly.
2. Tables showing the present value of Re. 1 and the present value of an annuity of Re. 1 for 15 yrs. are annexed.
 
1. (a) "A high EPS may not always maximise the stock price." Do you agree ? Discuss.
(b) List out the benefits of issuing bonus shares.
(c)

"Stability in payment of dividends has a marked bearing on the market price of the shares of a corporate firm." Explain the statement.
(d) Describe the responsibilities of treasury manager.
(4 marks each)
2. (a) The capital structure of Asha Ltd. is as under :
Rs.
Equity shares of Rs. 100 each40,00,000
Retained earnings20,00,000
8% Preference shares24,00,000
7% Debentures16,00,000
1,00,00,000

The company earns 12% on its capital. The tax rate applicable is 35%. The company requires a sum of Rs.50,00,000 for which following options are available to it
(i)Issue of 40,000 equity shares at a premium of Rs.25 per share.
(ii) Issue of 9% preference shares,
(iii) Issue of 8% debentures.

It is estimated that the P/E ratios in the cases of equity share, preference share and debenture financing would be 22.5, 18.5 and 15.2 respectively. Which of the three financing alternatives would you recommend and why ?
(8 marks)
(b) Shivalik Ltd. is currently considering a project which will yield the following returns over a period of time :
YearGross Yield
(Rs.)
1
2
3
4
5		 1,00,000
1,00,000
90,000
90,000
80,000

Initial investment in the machinery works to Rs.2,50,000 and depreciation to be charged on machinery would be 25% per annum on written down value basis with its residual value in the fifth year. Scrap value at the end of 5th year is nil. Income-tax rate applicable is 35%. If average cost of capital is 12%, advise the management whether project should be accepted as per internal rate of return method.
(8 marks)
P.T.O

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334

(c)

The following direct quotes have been observed from the forex market :
(i)Rs./UK $:43.70
(ii)Rs./UK £:77.02
(iii)Rs./Euro:53.50
(iv)Forward rate (60 days) for the Euro is Rs.54.50/Euro
(v)DM/Dollar:1.578 (overseas)

Find —(1)
(2)
(3)		 Indirect quotes in respect of (i) to (iii).
Forward discount on the Indian Rupee.
Cross rates for Rupee/DM.
(4 marks)
3. (a)

Prudent Ltd., manufacturers of LPG cylinders, requires 10 Indica Cars for use of its officers. Two alternative options are under consideration (a) Option-I : Outright purchase financed by Tata Finance Ltd. @ 6% p.a. — interest to be repaid in three equal year-end instalments; (b) Option-II: To acquire them on operating lease basis at an annual beginning of the year charges of Rs.4,50,000 per year for 3 years. Petrol cost of Rs.2 per km. is to be borne by Prudent Ltd. itself.

The following further information has been gathered in respect of one car :

Finance required will amount to Rs.3,59,120 of which Rs.3,42,500 is cost of the car, Rs.5,000 as processing charges and Rs.l 1,620 as registration charges. All these costs are to be capitalised.
Beginning of the year insurance charges will amount to Rs. 10,000; Rs.8,000 and Rs.6,000 respectively over the 3 years' useful life.

–Each car will run 36,500 Kms. annually.
–In case the company opts for Option-I, the year-end maintenance cost will amount to Rs.5,000, Rs.7,000 and Rs.9,000 for first, second and third year respectively
At the end of the third year, each car will have a residual value of Rs.89,120. The company follows straight line method (SLM) of depreciation.

–In case the company decides to own the cars, it will have to hire the services of one driver for each car on contract basis from an agency @ Rs.50,000 for the first year, Rs.70,000 for the second year, and Rs.90,000 for the third year to be paid in the beginning of each year.
The finance of Rs.3,59,120 from Tata Finance Ltd. will be re-paid by Prudent Ltd. in 3 equal instalments comprised of principal and interest
Income-tax rate may be assumed to be 35%.
You are required to compute the following :
(i)Yearly instalment of loan repayment,
(ii)Break-up of instalment into principal and interest.
(iii)Yearly expenses for tax shield over t0 to t3 period under both the options.
(iv)Tax shield per year under both options
(v)Cash outflow over tQ to t3 period under both the options
(vi)Effective cash outflow after tax shield.
(vii)Present value of cash outflows over the period of 3 years under both options.
(viii)Annual cost/burden under both options and your recommendation on whether to lease or buy the car.
(20 marks)
Contind...

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334

4. (a)

The current market price of the equity shares of Bharat Bank Ltd. is Rs.190 per share. It may be either Rs.250 or Rs.140 after a year. A call option with a strike price of Rs.180 (time 1 year) is available. The rate of interest applicable to the investor is 9%. Rahul wants to create a replicating portfolio in order to maintain his pay off on the call option for 100 shares.
Find out (i) hedge ratio; (ii) amount of borrowing; (iii) fair value of the call; and (iv) his cash flow position after a year.
(10 marks)
(b)

"Depreciation is a non-cash item of an expense and it is said that it is a source of finance." Explain the statement.
(4 marks)
(c)

"It is possible for an investor to construct a zero-risk portfolio of two securities which are perfectly negatively correlated." State, giving brief reasons, whether the statement is true.
(4 marks)
(d)

Following information is available in respect of the return from Reliance's stock under different economic conditions :
Economic
Condition
Good
Average
Bad
Poor		 Return
(%)
20
16
10
4		 Probability
 
0.2
0.4
0.2
0.2

Find out the expected return of the stock and risk associated with it.
(2 marks)
5. (a)

If the use of financial leverage magnifies the earnings per share under the favourable economic conditions, why do companies not employ very large amount of debt in their capital structure ?
(5 marks)
(b) Discuss the foreign sources of finance available to the .corporate sector.
(5 marks)
(c) Discuss in brief the factors to be considered while evaluating the technical feasibility of a project.
(5 marks)
(d) Discuss in brief the attributes of debt securitisation.
(5 marks)
Contind...

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334

6. (a) The balance sheet of Glaxy Ltd. as on 31st March, 2004 is as follows :
LiabilitiesRs. in Lakhs AssetsRs. in Lakhs
Share capital
Reserves
Long-term debt
Short-term debt
Payables
Provisions		 400
300
700
400
100
100
2,000		 Fixed assets
Inventories
Receivables
Cash and bank		 900
500
400
200


2,000

The current year sales were Rs. 1,200 lakh. For the next year ending 31st March, 2005, sales and assets are expected to increase by 20%. The net profit margin after taxes and dividend payout are expected to be 10% and 50% respectively
You are required to determine for the year 2004-05 :
(i)the external fund requirement.
(7 marks)
(ii)the mode of raising funds given the following parameters :
(a)current ratio should be 1.5.
(b)ratio of fixed assets to long-term loans should be 1.5.
(c)long-term debt to equity ratio should not exceed 0.9.
(d)the funds are to be raised in the order of (i) short- term bank borrowings; (ii) long-term loans; and (iii) equities.
(8 marks)
(b) Distinguish between the hedging and conservative approaches to financing of working capital.
(5 marks)
7. Write short notes on the following :
  (i) Straddle
 (ii) Syundicated loans
(iii) Methods of venture capital financing
(iv) Assumptions underlying technical analysis.
(5 marks each)

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