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CS PP - Module II _ Financial Treasury and Forex Management - June2012

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0% found this document useful (0 votes)
11 views

CS PP - Module II _ Financial Treasury and Forex Management - June2012

Uploaded by

nehag9054
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Roll No………

Time allowed : 3 hours Maximum marks : 100


Total number of questions : 7 Total number of printed pages : 8
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 years are annexed.
1. Comment on any four of the following:
(i) NPV decision rule does not hold true in the situation of capital rationing. (5)

(ii) Risk is always associated with receivables. (0)

(iii) The strategy for effective cash management in any firm has a core component of operating cycle. (0)

(iv) Treasury function is supplemental and complemental to the finance function in a firm. (0)

(v) Capital Asset Pricing Model (CAPM) is a tool to work out cost of equity. (0)

(5 marks each)
2. (a) During a 5 year period, the relevant results for the aggregate market are that the riskfree rate (rf) is 8% and the (0)

return on market (rm) is 14%. For that period, the results of five portfolio managers are as follows :
Portfolio Actual Average Beta (β )
Manager Return (%)
A 13 0.80
B 14 1.05
C 17 1.25
D 13 0.90
E 15 0.95
Using CAPM model, you are required to —
(i) Calculate the expected rate of return for each portfolio manager and compare the actual returns with the
expected returns; and
(ii) Based upon your calculations, select the portfolio manager with the best performance.
(6 marks)
(b) You are given the following information : (0)

Spot rate (1 US $) = Rs.48.0123


180 days forward rate (1 US $) = Rs.48.8190
Annualised interest rate for 6 months = 12%
(Rs.) = 8%
Annualised interest rate for 6 months
(US $)
Is there any arbitrage possibility ? If yes, how can an arbitrageur take advantage of the situation if he is willing to
borrow Rs. 40,00,000 or US $83,312 ?

(4 marks)
(c) The following information is related to Sunrise Ltd: (0)

Rs.
Sales
4,00,000
Less : Variable expenses
1,40,000
35%
2,60,000
Contribution
1,80,000
Less : Fixed expenses
80,000
EBIT
10,000
Less: Interest
70,000
Taxable income
You are required to submit the following to management of the company :
(i) What percentage will taxable income increase, if the sales increase by 6% ? Use combined leverage.
(2 marks)
(ii) What percentage will EBIT increase, if there is a 10% increase in sales ? Use operating leverage.
(1 mark)
(iii) What percentage will taxable income increase, if EBIT increases by 6% ? Use financial leverage.
(1 mark)
(d) Priyanka Ltd. requires 2,000 units of an item annually. The cost of the item per unit is Rs. 20 and ordering cost is (0)

Rs. 50 per order. If the carrying cost is 25% of the cost of item, find the optimum lot size.
If the company purchases in lots of 1,000 or more units of the item, it gets a rebate of 3%. Should the company
accept the offer ?
(6 marks)
3. (a) Maxwell Ltd. is operating in electronic equipments development and its sales and earnings before interest and (0)

taxes for the current year were Rs. 70,00,000 and Rs. 18,00,000 respectively. During the year, interest expense
was Rs. 16,000 and preference dividend was Rs. 20,000. These fixed charges are expected to continue for the
next year. The company is thinking to diversify its operations which will require Rs. 7,00,000 and is expected to
increase EBIT by Rs. 4,00,000 to Rs. 22,00,000.
The company has the following three financing alternatives under its consideration :
Alternative– : Issue 10,000 equity shares at Rs. 70 per share. The company has currently 80,000 shares of
1 common stock outstanding.
Alternative– : Issue Rs. 7,00,000, 15 years 15% debentures. Sinking fund payments on these debentures will
2 commence after 15 years.
Alternative– : Issue Rs. 7,00,000, 14% preference shares.
3
You are required to calculate —
(i) The EPS at the expected earnings before interest and taxes level of Rs. 22,00,000 for each financing
alternative.
(ii) The equivalency level of earnings before interest and taxes between the debt and common stock
alternatives.
(iii) The equivalency level of earnings before interest and taxes between the preference shares and common
stock alternatives.
Assume 30% income–tax rate.
(12 marks)
(b) Identify the profit or loss (ignoring dealing cost and interest) in each of the following cases : (0)

(i) A put option with exercise price of Rs. 250 is bought for a premium of Rs. 42. The price of underlying share
is Rs. 189 at the expiry date.
(ii) A put option with an exercise price of Rs.300 is written for a premium of Rs. 57. The price of the underlying
share is Rs. 314 at the expiry date.
(4 marks)
(c) Sawan Ltd. currently has sales of Rs. 30,00,000 with an average collection period of two months. At present, no (0)

discounts are offered to the customers. The management of the company is thinking to allow a discount of 2% on
cash sales which will result as under :
(i) The average collection period would reduce to one month.
(ii) 50% of customers would take advantage of 2% discount.
The company would normally require a 25% return on its investment.
Advise the management whether to extend the discount on cash sales.
(4 marks)
4. Distinguish between any four of the following:
(i) ‘Financial distress’ and ‘insolvency ’ (0)

(ii) ‘Open ended mutual funds’ and ‘ Cloe ended mutual funds.’ (0)

(iii) ‘Accounting exposure’ and ‘ economic exposure’. (0)

(iv) ‘Semi–strong form of efficient market hypothesis’ and ‘ strong form of efficient market hypothesis’. (0)

(v) ‘Factoring’ and ‘ bill discounting’ (0)

(5 marks each)
5. (a) Vivek is holding 1,000 shares of Right Choice Ltd. The current rate of dividend paid by the company is Rs. 5 per (0)

share and the share is being sold at Rs.50 per share in the market. However, several factors are likely to change
during the course of the year as indicated below :
Exisiting Revised
Risk free rate 14% 12%
Market risk premium 8% 6%
Beta (β) value 1.42 1.27
Expected growth rate 6% 10%
In view of above factors, whether Vivek should buy, hold or sell the shares and why ?
(6 marks)
(b) Ruta Max Ltd. and Buta Max Ltd. operate in the same risk class and are identical in all respect except that Ruta (0)

Max Ltd. uses debt financing while Buta Max Ltd. does not opt for debt financing.
Ruta Max Ltd. has Rs.25,00,000 debentures carrying coupon rate of 10%. Both the companies earn 20% profit
before interest and taxes on their total assets of Rs.50 lakh. Assume perfect capital markets and rational investors
and so on. The capitalisation rate for an all equity company is 15%. The corporate tax rate is 30%.

You are required to compute the value of both companies according to net income (NI) and net operating income
(NOI) approach.
(8 marks)
(c) Touch Wood Ltd. has a portfolio of capital projects which yield an average expected rate of return of 15% per (0)

annum. This return is subject to risk and this is estimated as a standard deviation of probabilities of expected
returns of 2.5%. The risk free rate of interest is 6% per annum. Three projects have come up for consideration by
Board of directors and these are designated as project A, B and C. Details of the estimates made for them appear
below :
Project
A B C
Expected return (%) 12 10 8
Risk (standard deviation of
probability distribution) 1% 1.4% 2.4%
Co–efficient of correlation of
project + + −
returns with portfolio returns 0.58 0.94 0.1
Determine in each case whether you would recommend acceptance of the project. Since all the three projects
promise a yield less than the expected on the current portfolio, one member of Board of directors asks why they
should be considered at all. How would you answer him ?
(6 marks)
6. Ice Decor Ltd. sells goods at a uniform rate of gross profit of 20% on sales including depreciation as part of cost of (0)

production. Its annual figures for the current year are as under :
Rs.
Sales (at 2 months’ credit)
Materials consumed (suppliers’ credit 2 months)
Wages paid (monthly at the beginning of the 24,00,000
subsequent month) 6,00,000
Manufacturing expenses (cash expenses are paid — 4,80,000
one month in arrear) 6,00,000
Administration expenses (cash expenses are paid — 1,50,000
one month in arrear) 75,000
Sales promotion expenses (paid quarterly in
advance)
The company keeps one month stock each of raw materials and finished goods. A minimum cash balance of Rs.80,000
is always kept. The company wants to adopt a 10% safety margin in the maintenance of working capital. The company
has no work–in–progress.
Find out the requirement of working capital of the company on cash cost basis.
(20 marks)
7. Write notes on any four of the following:
(i) External commercial borrowings (0)

(ii) Financial viability of a project (0)

(iii) Counter party risk (0)

(iv) Optimal capital structure (0)

(v) Zero coupon convertible notes. (0)

(5 marks each)
TABLE 1 : PRESENT VALUE OF RUPEE ONE
RATE Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
5% 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 0.5847 0.5568 0.5303 0.5051 0.4810
6% 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 0.5268 0.4970 0.4688 0.4423 0.4173
7% 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 0.4751 0.4440 0.4150 0.3878 0.3624
8% 0.9259 0.8573 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632 0.4289 0.3971 0.3677 0.3405 0.3152
9% 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224 0.3875 0.3555 0.3262 0.2992 0.2745
10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.3505 0.3186 0.2897 0.2633 0.2394
11% 0.9009 0.8116 0.7312 0.6587 0.5935 0.5346 0.4817 0.4339 0.3909 0.3522 0.3173 0.2858 0.2575 0.2320 0.2090
12% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2875 0.2567 0.2292 0.2046 0.1827
13% 0.8850 0.7831 0.6931 0.6133 0.5428 0.4803 0.4251 0.3762 0.3329 0.2946 0.2607 0.2307 0.2042 0.1807 0.1599
14% 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 0.3506 0.3075 0.2697 0.2366 0.2076 0.1821 0.1597 0.1401
15% 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 0.2149 0.1869 0.1625 0.1413 0.1229
16% 0.8621 0.7432 0.6407 0.5523 0.4761 0.4104 0.3538 0.3050 0.2630 0.2267 0.1954 0.1685 0.1452 0.1252 0.1079
17% 0.8547 0.7305 0.6244 0.5337 0.4561 0.3898 0.3332 0.2848 0.2434 0.2080 0.1778 0.1520 0.1299 0.1110 0.0949
18% 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.2660 0.2255 0.1911 0.1619 0.1372 0.1163 0.0985 0.0835
19% 0.8403 0.7062 0.5934 0.4987 0.4190 0.3521 0.2959 0.2487 0.2090 0.1756 0.1476 0.1240 0.1042 0.0876 0.0736
20% 0.8333 0.6944 0.5787 0.4823 0.4019 0.3349 0.2791 0.2326 0.1938 0.1615 0.1346 0.1122 0.0935 0.0779 0.0649
21% 0.8264 0.6830 0.5645 0.4665 0.3855 0.3186 0.2633 0.2176 0.1799 0.1486 0.1228 0.1015 0.0839 0.0693 0.0573
22% 0.8197 0.6719 0.5507 0.4514 0.3700 0.3033 0.2486 0.2038 0.1670 0.1369 0.1122 0.0920 0.0754 0.0618 0.0507
23% 0.8130 0.6610 0.5374 0.4369 0.3552 0.2888 0.2348 0.1909 0.1552 0.1262 0.1026 0.0834 0.0678 0.0551 0.0448
24% 0.8065 0.6504 0.5245 0.4230 0.3411 0.2751 0.2218 0.1789 0.1443 0.1164 0.0938 0.0757 0.0610 0.0492 0.0397
25% 0.8000 0.6400 0.5120 0.4096 0.3277 0.2621 0.2097 0.1678 0.1342 0.1074 0.0859 0.0687 0.0550 0.0440 0.0352
TABLE – 2 : PRESENT VALUE OF AN ANNUITY OF RUPEE ONE
RATE Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
5% 0.9524 1.8594 2.7232 3.5460 4.3295 5.0757 5.7864 6.4632 7.1078 7.7217 8.3064 8.8633 9.3936 9.8986 10.3797
6% 0.9434 1.8334 2.6730 3.4651 4.2124 4.9173 5.5824 6.2098 6.8017 7.3601 7.8869 8.3838 8.8527 9.2950 9.7122
7% 0.9346 1.8080 2.6243 3.3872 4.1002 4.7665 5.3893 5.9713 6.5152 7.0236 7.4987 7.9427 8.3577 8.7455 9.1079
8% 0.9259 1.7833 2.5771 3.3121 3.9927 4.6229 5.2064 5.7466 6.2469 6.7101 7.1390 7.5361 7.9038 8.2442 8.5595
9% 0.9174 1.7591 2.5313 3.2397 3.8897 4.4859 5.0330 5.5348 5.9952 6.4177 6.8052 7.1607 7.4869 7.7862 8.0607
10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 6.4951 6.8137 7.1034 7.3667 7.6061
11% 0.9009 1.7125 2.4437 3.1024 3.6959 4.2305 4.7122 5.1461 5.5370 5.8892 6.2065 6.4924 6.7499 6.9819 7.1909
12% 0.8929 1.6901 2.4018 3.0373 3.6048 4.1114 4.5638 4.9676 5.3282 5.6502 5.9377 6.1944 6.4235 6.6282 6.8109
13% 0.8850 1.6681 2.3612 2.9745 3.5172 3.9975 4.4226 4.7988 5.1317 5.4262 5.6869 5.9176 6.1218 6.3025 6.4624
14% 0.8772 1.6467 2.3216 2.9137 3.4331 3.8887 4.2883 4.6389 4.9464 5.2161 5.4527 5.6603 5.8424 6.0021 6.1422
15% 0.8696 1.6257 2.2832 2.8550 3.3522 3.7845 4.1604 4.4873 4.7716 5.0188 5.2337 5.4206 5.5831 5.7245 5.8474
16% 0.8621 1.6052 2.2459 2.7982 3.2743 3.6847 4.0386 4.3436 4.6065 4.8332 5.0286 5.1971 5.3423 5.4675 5.5755
17% 0.8547 1.5852 2.2096 2.7432 3.1993 3.5892 3.9224 4.2072 4.4506 4.6586 4.8364 4.9884 5.1183 5.2293 5.3242
18% 0.8475 1.5656 2.1743 2.6901 3.1272 3.4976 3.8115 4.0776 4.3030 4.4941 4.6560 4.7932 4.9095 5.0081 5.0916
19% 0.8403 1.5465 2.1399 2.6386 3.0576 3.4098 3.7057 3.9544 4.1633 4.3389 4.4865 4.6105 4.7147 4.8023 4.8759
20% 0.8333 1.5278 2.1065 2.5887 2.9906 3.3255 3.6046 3.8372 4.0310 4.1925 4.3271 4.4392 4.5327 4.6106 4.6755
21% 0.8264 1.5095 2.0739 2.5404 2.9260 3.2446 3.5079 3.7256 3.9054 4.0541 4.1769 4.2784 4.3624 4.4317 4.4890
22% 0.8197 1.4915 2.0422 2.4936 2.8636 3.1669 3.4155 3.6193 3.7863 3.9232 4.0354 4.1274 4.2028 4.2646 4.3152
23% 0.8130 1.4740 2.0114 2.4483 2.8035 3.0923 3.3270 3.5179 3.6731 3.7993 3.9018 3.9852 4.0530 4.1082 4.1530
24% 0.8065 1.4568 1.9813 2.4043 2.7454 3.0205 3.2423 3.4212 3.5655 3.6819 3.7757 3.8514 3.9124 3.9616 4.0013
25% 0.8000 1.4400 1.9520 2.3616 2.6893 2.9514 3.1611 3.3289 3.4631 3.5705 3.6564 3.7251 3.7801 3.8241 3.8593

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