CS Final :: Financial Tresurs & Forex Management : June 2005

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)“Treasury management has both macro and micro aspects.” Comment.
(b)

“There are legal constraints on payment of dividends.” Discuss it in the light of statutory framework existing in India.

(c)Describe the main objectives of syndication of Euro currency loans.
(d)State with reasons whether the investment, financing and dividend decisions are inter-related.
(5 marks each)
2. (a) The following figures are made available to you :
Rs.
Profit for the year (before interest and taxes)18,00,000
Less : Interest on secured debentures at 15% p.a. (debentures were issued 3 months after the commencement of the year)
1,12,500
Net profit for the year16,87,500
Less : Income-tax at 35%5,90,625
Profit after tax 10,96,875
Number of equity shares of Rs.10 each1,00,000
Market quotation of an equity share (Rs.) 109.70
(10 marks)

The company has accumulated revenue reserves of Rs.12,00,000. The company is examining a project calling for an investment obligation of Rs.10,00,000. This investment is expected to earn the same rate of return as funds already employed.
You are informed that a debt-equity ratio (debt divided by debt plus equity) higher than 60% will cause the price-earnings ratio to come down by 25% and the interest rate on additional borrowings will cost the company 300 basis points more than on their current borrowings on secured debentures.
You are required to advise the company on the probable price of the equity share, if —
(i)The additional investments were to be raised by way of loans; or
(ii)The additional investments were to be raised by way of equity.
P.T.O

( 2 )

334
(b)

Celina Ltd. wishes to borrow US Dollars at a fixed rate of interest. Priyanka Ltd. wishes to borrow Japanese Yen at a fixed rate of interest. The amounts required by the two companies are roughly the same at current exchange rate. The companies have been quoted the following interest rates:

Celina Ltd.
Priyanka Ltd.		 Yen
4.0%
5.5%		 Dollar
8.6%
9.0%

(10 marks)

Design a swap that will net a bank, acting as intermediary, 50 basis points per annum. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is assumed by the bank.
3. (a)

Given below is the information extracted from the books of Rosa Ltd. at the end of the financial year 2003–04 :
Net sales
Debt-assets ratio
Debtors turnover ratio based on net sales
Inventory turnover ratio
Fixed assets turnover ratio
Net profit margin
Gross profit margin
Return on investment		 Rs.2,00,000
0.6
2.0
1.25
0.80
5%
25%
2%

(10 marks)
Balance Sheet as at 31st March, 2004
Liabilities Rs. Assets Rs.
Equity
Long term debts
Short term debts

Total		 ?
?
1,00,000

?		 Net fixed assets
Inventory
Debtors
Cash
Total		 ?
?
?
?
?
You are required to find out working capital available with the company.
(b) Following is the data relating to Azad Ltd. and Bharat Ltd. belonging to the same risk class:

No. of equity shares
Market price per share (Rs.)
6% Debentures (Rs.)
Profit before interest (Rs.)
Dividend payout ratio		 Azad Ltd.
1,50,000
15
8,00,000
2,00,000
100%		 Bharat Ltd.
9,00,000
9
—
2,00,000
You are required to find out working capital available with the company.
(10 marks)
Contind...

( 3 )

334
4. (a) “In the case of private enterprises, social cost benefit analysis for capital project has no relevance.” Discuss.
(5 marks)
(b)

“To keep the risk within manageable limits, a firm which has high degree of operating leverage should have low financial leverage and vice-versa.” Comment.
(5 marks)
(c) Write a note on ‘Sharpe Index Model’.
(5 marks)
(d) Describe the mechanics involved in factoring.
(5 marks)
5. (a) Determine the risk adjusted net present value of the following projects :

Net cash outlay (Rs.)
Project life (Years)
Annual cash inflow (Rs.)
Coefficient of variation		 Project-A
1,00,000
5
30,000
0.4		 Project-B
1,20,000
5
42,000
0.8		 Project-C
2,10,000
5
70,000
1.2
The company selects the risk adjusted rate of discount on the basis of coefficient of variation
Coefficient of
Variation		Risk Adjusted
Rate of Discount
0.0
04
0.8
1.2
1.6
2.0
More than 2.0		 10%
12%
14%
16%
18%
22%
25%
(10 marks)
(b) Vijay Ltd. has got to have the following capital structure:
Rs.
Ordinary share capital
8% Preference shares
Free reserves
9% Debentures
Total		 60,00,000
10,00,000
35,00,000
5,00,000
1,10,00,000

In addition to above, the bankers had sanctioned a cash credit limit of Rs.10,00,000 with interest chargeable @ 10% per annum with the condition that in case the company fails to utilise the cash credit limit in full, bank would recover commitment charges @ 8%.
The cash credit limit as such could be utilised on an average to the extent of 80% only. Among other obligations, the company has to ensure —
(i)Payment of all interest;
(ii)Dividend pay-out ratio of 60%; and
(iii)Dividend of 12% to equity shareholders.

You are required to calculate company’s overall rate of return on capital employed assuming income-tax rate to be 35%. Also indicate cost of capital after tax.
(10 marks)
Contind...

( 4 )

334
6. (a)

Uday is an entrepreneur and has recently set up production unit of cotton shirts. He currently sells 1,00,000 shirts in a year at Rs.500 each. His variable cost to produce the shirt is Rs.300 each and he has Rs.1,20,00,000 as fixed costs. His sales to assets ratio is 4 times, and 30% of his assets are financed by 10% debt, with the balance being financed by equity shares of Rs.100 each. The tax rate applicable is 40%.
His newly appointed finance manager Urvashi feels that Uday is doing it all wrong. She feels that by reducing the price to Rs.450 per shirt, she could increase her sales volume of shirts by 30%. Fixed costs would remain constant, and variable costs would remain unchanged. Her sales to asset ratio would be 4.68 times. Furthermore, she could increase her debt to assets ratio to 50% with the balance in shares. It is assumed that the interest rate would go up 1% and that the price of shares would remain constant.
(i)Compute the EPS under the Uday and Urvashi plans. Is Urvashi’s perception right ?
(ii)

Uday’s partner does not think that fixed costs would remain constant under Urvashi’s plan, but they would go up by 15%. If this is the case, should Uday shift to Urvashi’s plan based on earnings per share ?

(iii)What is the effect on the total risk of the firm on switching from one plan to another ?
(15 marks)
(b) Discuss the various products (tools) available in the forex market to cover exchange rate risks.
(5 marks)
7. Write short notes on the following :
(i)Portfolio management
(ii)Measures for development of venture capital industry in India
(iii)Mark-to-market settlement of index futures
(iv)Limitations of Markowitz model.
(5 marks each)

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