| 1. | (a) | State whether the following statements are True or False: | 1x6=6 | |
| | | (i) | Under DCF method, in general, higher the risk level, higher will be the discount rate. [True/False]. | | (0) |
| | | (ii) | Land and Building is an example of financial asset. (True/False) | | (0) |
| | | (iii) | Market value per share is expected to be lower that the book–value per share in case of profitable and growing firms. (True/False) | | (0) |
| | | (iv) | Firms tend to be more profitable when there is higher real growth in the underlying market than when there is lower real growth. (True/False) | | (0) |
| | | (v) | A lower discount rate would be applied to the cash flows of the government bond. (True/False) | | (0) |
| | | (vi) | Variable dividend feature makes the calculation of share value difficult.. (True/False) | | (0) |
| | (b) | Fill in the blanks by filling the appropriate word(s) given in the brackets: | 1x8=8 | |
| | | (i) | In _________, a firm separates out assets or a division, creates shares with claims on these assets, and sells them to the public. (Spin–off, Split–up, Equity carve out.) | | (0) |
| | | (ii) | _________ Companies have volatile earnings and high–growth potential choose low-debt ratios. (Telephone, Software) | | (0) |
| | | (iii) | Organizational Capital is a _________ component of intellectual Capital. (Primary, Secondary) | | (0) |
| | | (iv) | _________ measures the variation of distribution for the expected returns. (Standard deviation, Regression) | | (0) |
| | | (v) | Shares of listed companies which are traded on the Stock Exchange are _________ (Quoted, Unquoted) | | (0) |
| | | (vi) | A negative economic Value Added indicates that the firm is_________ value. (Creating, Destroying) | | (0) |
| | | (vii) | An investment is risk free when actual returns are always _________ the expected returns. (less than, equal to, more than) | | (0) |
| | | (viii) | In valuating a firm, the _________ tax rate should be applied to earnings of every period, (marginal, effective, average) | | (0) |
| | (c) | Attempt all the questions by selecting the correct option: | 3x2=6 | |
| | | (i) | Gordon growth model using dividend capitalization is based on the assumption— | (a) | Retained earnings represent the only source of financing. | (Yes/No) | | (b) | Rate of return is not constant. | (Yes/No) | | (c) | The company has perpetual life. | (Yes/No) |
| | (0) |
| | | (ii) | In a standard normal distribution _______ % of the values are contained within plus or minus 2 standard deviations of the mean. | (1) | 68.3% | (2) | 90.9% | (3) | 95.5% | (4) | 99.7% |
| | (0) |
| 2. | (a) | Small Events Inc. has recently paid a dividend of Rs. 3.50 per share. The dividends are growing at 10% p.a. and the equity capitalization rate applicable to the company is 12%. Find out the implicit PE ratio if the EPS of the company is Rs. 7. | 6 | (0) |
| | (b) | A share of the face value of Rs. 100 has current market price of Rs. 480. Annual expected dividend is 30%. During the 5th year, the shareholder is expecting a bonus in the ratio of 1:5. Dividend rate is expected to be maintained on the expanded capital base. The shareholder intends to retain the share till the end of the 8th year. At the time the value of share is expected to be Rs. 1,000. Incidental expenses at the time of purchase and sale are estimated at 5% on the market price. There is no tax on dividend income and capital gain. The shareholder expects a minimum return of 15% per annum. Should he buy the share? What is the maximum price he can pay for the share? Show complete working. | 10 | (0) |
| 3. | (a) | How would you value a real estate? | 6 | (0) |
| | (b) | When will Economic Value Added increase? | 5 | (0) |
| | (c) | What are the different levels of market efficiency? | 5 | (0) |
| 4. | (a) | What are the RBI guidelines for valuation of shares in care of disinvestment by foreign investors? | 8 | (0) |
| | (b) | What is the methodology of ‘Brand’ valuation? | 10 | (0) |
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| 5. | (a) | What is Price–Book Value Ratio? What are the two measurement issues that you have to confront in computing this multiple? How return on equity and cost of equity can influence this ratio? | 10 | (0) |
| | (b) | Xem Ltd. had earning per share of Rs. 11.04 in 2007 and paid a dividend of Rs. 7 per share. The growth rate in earnings and dividends in the long–term is expected to be 5%. The return on equity at Xem Ltd. is expected to be 13.66%. The beta for Xem Ltd. is 0.80 and the risk–free treasury bond rate is 6%, while risk premium is 4%. Based on the information calculate Price to Book Value Ratio. | 6 | (0) |
| 6. | (a) | In valuating a firm should you use the marginal or effective tax rate? | 5 | (0) |
| | (b) | Smart Air Ltd. is a telecommunications firm that generate Rs. 300 lakh in pre-tax operating income, and reinvested Rs. 60 lakh in the most recent financial year. As a result of tax deferrals, the firm has an effective tax rate of 20%, while its marginal tax rate is 40%. Both the operating income and the reinvestment are expected to grow 10% a year for 5-year and 5% thereafter. The firm's cost of capital is 9% and is expected to remain unchanged over time. Estimate the value of Smart Air Ltd. using the different assumptions about tax rates. | (i) | The effective tax rate — 20% is to be considered. | | (ii) | The marginal tax rate — 40% is to be considered. |
| 11 | (0) |
| 7. | Nimbus Ltd. has 1,000 shares of Rs. 10 each raised at a premium of Rs. 15 per share. The company’s retained earnings are Rs. 5,52,500. The company’s stock sells for Rs. 20 per share. | (a) | If a 10% stock dividend is declared how many new shares would be issued? What would be the market price after the stock dividend? How would the equity account change? |
| (b) | If the company instead declares a 5 : 1 stock split, how many shares will be outstanding? What would be new par value? What would be the new market price? |
| (c) | Suppose if the company declares a 1 : 4 reverse split, how many shares will be outstanding? What would be the new par value? What would be the new market value? |
| 6+5+5 | (0) |
| 8. | XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd’s share are currently traded at Rs. 25. It has 2,00,000 shares outstanding and its earning after taxes (EAT) amount to Rs. 4,00,000. ABC Ltd., has 1,00,000 shares outstanding its current market price is Rs. 12.50 and its EAT is Rs. 1,00,000. The merger will be effected by means of a Stock Swap (exchange). ABC Ltd. has agreed to plan under which XYZ Ltd., will offer the current market value of ABC Ltd’s; shares. | (a) | What is the pre–merger earnings per share (EPS) and P/E ratios of both the companies? | | (b) | If ABC Ltd.’s P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ Ltd.’s post merger EPS be? | | (c) | What must the exchange ratio be for XYZ Ltd.’s pre–merger and post–merger EPS to be the same? |
| 16 | (0) |
