FIN AL (NEW COURSE)

GROUp.: Pf D""~-2
Roll No............................. STRATEGIC FI '\NCIAJ,
MOV 201U MANAGEMENf
Total No. of Questions - 7. Total No. of Printed Pages - 7

Time Allowed - 3 Hours Maximum Marks - 100

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Answers to questions are to be given only in English except in the case of candidates who have
opted for Hindi Medium. If a candidate has not opted for Hindi medium, his answers in Hindi
will not be valued.

Question No.1 is compulsory.

Attempt any five questions from the remaining six questions.
. Working notes should form part of the answer.

Marks

1. (a) Amal Ltd. has been maintaining a growth rate of 12% in dividends. The 5
company has paid dividend @ ~ 3 per share. The rate of return on market
portfolio is 15% and the risk-free rate of return in the market has been observed.
as 10%. The beta co-efficient of the company's share is 1.2.
You are required to calculate the expected rate of return on the company's
shares as per CAPM model and the equilibrium price per share by dividend
growth model.

(b) From the following particulars, calculate the effective rate"of interest p.a. as 5
well as the total cost of funds to Bhaskar Ltd., which is planning a CP issue:
Issue Price ofCP - ~ 97,550
Face Value - ~ 1;00,000
Maturity Period - 3 Months
Issue Expenses:
Brokerage - 0.15% for 3 months
Rating Charges - 0.50%p.a.
Stamp Duty - 0.175% for 3 months

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(c) Equity share of PQR Ltd. is presently quoted at ~ 320. The Market Price of the
share after 6 months has the following probability distribution:
Market Price ~ 180 260 280 320 400 .
Probability 0.1 0.2 0.5 0.1 0.1

A put option with a strike price of~ 300 can be written.

You are required to find out expected valu~ of option at maturity (i.e. 6 months)

Calculate Market Price of: 5

(d)

(i) 10% Government of India security currently quoted at ~ 110, but interest
rate is expected to go up by 1%.

(ii) A bond with 7.5% coupon interest, Face Value ~ 10,000 & term to
maturity of 2 years, presently yielding 6%. Interest payable half yearly.

2. (a) Derivative Bank entered into a plain vanilla swap through an OIS (Overnight 8

Index Swap) on a principal of ~ 10 crores and agreed to receive MillOR

overnight floating rate for a fixed payment on the principal. The swap was

entered into on Monday, 2ndAugust, 2010 and was ~ocommence on 3rdAugust,

2010 and run for a period of7 days.
Respective MillOR rates for Tuesday to Monday were.:
7.75%,8.15%,8.12%, 7.95%, 7.98%, 8.15%
If Derivative Bank received ~ 317 net on settlement, calculate Fixed rate and

interest under both legs.

Notes:

(i) Sunday is Holiday.

(ii) Work in rounded rupees and avoid decimal working.

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(b) MK Ltd. is considering acqu~ring NN Ltd.. The following infonnation is 8

available:
,
Company Earnings after No. of Equity Market Value
tax (f) Shares Per Share ()

MK Ltd. 60,00,000 12,00,000 200.00

NN Ltd. 18,00,000 3,00,000 160.00

Exchange
. of equity
. shares for acquisition is based on current market value as
above. There is no synergy advantage available.

(i) Find the earning per share for company MK Ltd. after merger, and

(ii) Find the exchange ratio so that shareholders ofNN Ltd. would not be at a
loss.

3. (a) Delta Ltd.'s current financial year's income statement reports itsnetincome as 8

~ 15,00,000. Delta's marginal tax rate is 40% and its interest expense for the
year was ~ 15,00,000. The company has ~ 1,00,00,000 of invested capital, of

which 60% is debt. In addition, Delta Ltd. tries to maintain a Wdghted Average
Cost of Capital (WACC) of 12.6%.

(i) Compute the operating income or EBIT earned by Delta Ltd. in the
current year.

(ii) What is Delta Ltd.'s Economic Value Added (EVA) for the current year?

(iii) Delta Ltd. has 2,50,000 equity shares outstanding. According to the EVA
you computed in (ii), how much can Delta pay in dividend per share
before the value of the company would start to decrease? If Delta does
not pay any dividends, what would you expect to happen to the value of
the company?

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(b) A dealer quotes "All-in-Cost" for a generic swap at 8% against six months libor 8

flat. If the notionalprincipalamountof swapis f 6,00,000,- 4

t

(i) Calculate semi-annual fixed payment.

(ii) Find the first floating rate payment for (i) above, if the six-month period
from the effective date of swap to the settlement date comprises 181 days
and that the corresponding libor was 6% on the effective date of swap.

(iii) In (ii) above, if the settlement is on 'NET' basis, how much the fixed rate
payer would pay to the floating rate payer? Generic swap is based on
30/360 days.

4. (a) A valuation done of an established company by a well-known analyst has 8

estimated a value of f 500 lakhs, based on the expected free cash flow for next

year of f 20 lakhs and an expected growth rate of 5%.

While going through the valuation procedure, you found that the analyst

has made the mistake of using the book values' of debt and equity in his

calculation. While you do not know the book value weights he used, you have

been provided with the following information:

(i) Company has a cost of equity of 12%,

(ii) After tax cost of debt is 6%,

(iii) The market value of equity is three times the book value of equity, while
the market value of debt is equal to the book value of debt.

You are required to estimate the correct value of the company.

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(b) Rahul Ltd. has surplus cash of ~ 100 lakhs and wants to distribute 27% of it to 8
the shareholders. The company decides to buyback shares. The Finance
Manager of the company estimates that its share price after re-purchase is likely
.
to be 10%abovethe buybackprice - if the buybackroute is taken. The number
..

of shares outstanding at present is 10 lakhs and the current EPS is ~ 3.

You are required to determine:

(i) The price at which the shares can be re-purchased, if the market
capitalization of the company should be ~ 210 lakhs after buyback,

(ii) The number of shares that can be re-purchased, and

(iii) The impact of share re-purchase on the EPS, assuming that net income is
the same.

5. (a) Consider the following information on two stocks X and Y : 8

Year Return on X (%) Return on Y (%)
2008 12 10
2009 18 16
You are required to determine:

(i) The expected return on a portfolio containing X and Y in the proportion

of 60% and 40% respectively.

(ii) The standard deviation of return from each of the two stocks.

(iii) The covariance of returns from the two stocks.

(iv) Correlation co-efficient between the returns ofthe two stocks.

(v) The risk of portfolio containing X and Y in the proportion of 60% and
40%.

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(b) Shashi Co. Ltd. has projected the following cash flows from a project under 8
~
evaluation:

Year , 0 1 2 3

f (in lakhs) (72) 30 40 30

The above cash flows have been made at expected prices after recognizing
inflation. The firm's cost of capital is 10%. The expected annual rate of
inflation is 5%. Show how the viability of the project is to be evaluated. PVF at
10% for l' - 3 years are 0.909,0.826 and 0.751.

6. (a) Given the following information: 8

Exchange rate - Canadian Doll~ 0.666 per DM (Spot)

Canadian Dollar 0.671 per DM (3 months)
Interest rates - DM 8% p.a.
Canadian Dollar 10% p.a.
What operations would be carried out to earn the possible arbitrag~ gains?

(b) The following information relates to Maya Ltd. : 8

Earnings of the company f 10,00,000

Dividend payout ratio 60%

No. of shares outstanding 2,00,000

Rate of return on investment 15%

Equity capitalization rate 12%

(i) What would be the market value per share as per Walter's model ?

(ii) What is the optimum dividend payout ratio according t~ Walter's model
and the market value of company's share at that payout ratio?

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7. Answer any four from the following:
(a) (i) What is the meaning ofNBFC ? 4
(ii) What are the different categories ofNBFCs ?
(iii) Explain briefly the regulation ofNBFCs under RBI Act. .
(b) Explain the concept 'Zero date of a Project' in project management. 4

(c) Give the meaning of 'Caps, Floors and Collars' options. 4

(d) Distinguish between Open-ended and Close-ended Schemes. 4

(e) Explain CAMEL model in credit rating. 4

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