| 1. | (a) | LMN & Co. plans to issue Commercial Paper (CP) of Rs. 1,00,000 at a price of Rs. 98,000. | Maturity Period : | 4 Months | | Expenses for issue of CP are : | (i)
(ii)
(iii) | Brokerage
Rating Charges
Stamp Duty | 0.10%
0.60% and
0.15% |
Find the effective interest rate per annum and the cost of Fund. | 5 | (0) |
| | (b) | On 31–8–2011, the value of stock index was Rs. 2,200. The risk free rate of return has been 8% per annum. The dividend yield on this Stock Index is as under: | Month | Dividend paid | January
February
March
April
May
June
July
August
September
October
November
December | 3%
4%
3%
3%
4%
3%
3%
4%
3%
3%
4%
3% |
Assuming that interest is continuously compounded daily, find out the future price of contract deliverable on 31–12–2011.
Given: e0.01583 = 1.01593 | 5 | (0) |
| | (c) | The price of a bond just before a year of maturity is $ 5,000. Its redemption value is $ 5,250 at the end of the said period. interest is $ 350 p.a. The Dollar appreciates by 2% during the said period. Calculate the rate of return. | 5 | (0) |
| | (d) | A company is long on 10 MT of copper @ Rs. 474 per kg (spot) and intends to remain so for the ensuing quarter. The standard deviation of changes of its spot and future prices are 4% and 6% respectively, having correlation coefficient of 0.75.
What is its hedge ratio? What is the amount of the copper future it should short to achieve a perfect hedge? | 5 | (0) |
| 2. | (a) | A machine used on a production line must be replaced at least every four years. Costs incurred to run the machine according to its age are: | Age of the Machine (years) | | 0 | 1 | 2 | 3 | 4 | Purchase price (in Rs.)
Maintenance (in Rs.)
Repair (in Rs.)
Scrap Value (in Rs.) | 60,000 |
16,000
0
32,000 |
18,000
4,000
24,000 |
20,000
8,000
16,000 |
20,000
16,000
8,000 |
Future replacement will be with identical machine with same cost. Revenue is unaffected by the age of the machine. Ignoring inflation and tax, determine the optimum replacement cycle. PV factors of the cost of capital of 15% for the respective four years are 0.8696, 0.7561, 0.6575 and 0.5718. | 10 | (0) |
| | (b) | In December, 2011 AB Co.’s share was sold for Rs. 146 per share. A long term earnings growth rate of 7.5% is anticipated. AB Co. is expected to pay dividend of Rs. 3.36 per share. | (i) | What rate of return an investor can expect to earn assuming that dividends are expected to grow along with earnings at 7.5% per year in perpetuity? |
| (ii) | It is expected that AB Co. will earn about 10% on book Equity and shall retain 60% of earnings. In this case, whether, there would be any change in growth rate and cost of Equity? |
| 6 | (0) |
| 3. | (a) | LMN Ltd is considering merger with XYZ Ltd. LMN Ltd’s shares are currently traded at Rs. 30.00 per share. It has 3,00,000 shares outstanding. Its earnings after taxes (EAT) amount to Rs. 6,00,000. XYZ Ltd has 1,60,000 shares outstanding and its current market price is Rs. 15.00 per share and its earnings after taxes (EAT) amount to Rs. 1,60,000. The merger is decided to be effected by means of a stock swap (exchange). XYZ Ltd has agreed to a proposal by which LMN Ltd will offer the current market value of XYZ Ltd’s shares.
Find out: | (i) | The pre–merger earnings per share (EPS) and price/earnings (P/E) ratios of both the companies. |
| (ii) | If XYZ Ltd’s PIE Ratio is 9.6, what is its current Market Price? What is the Exchange Ratio? What will LMN Ltd’s post–merger EPS be? |
| (iii) | What should be the exchange ratio, if LMN Ltd’s pre–merger and postmerger EPS are to be the same? |
| 8 | (0) |
| | (b) | DEF Ltd has been regularly paying a dividend of Rs. 19,20,000 per annum for several years and it is expected that same dividend would continue at this level in near future. There are 12,00,000 equity shares of Rs. 10 each and the share is traded at par. The company has an opportunity to invest Rs. 8,00,000 in one year’s time as well as further Rs. 8,00,000 in two year’s time in a project as it is estimated that the project will generate cash inflow of Rs. 3,60,000 per annum in three year’s time which will continue for ever. This investment is possible if dividend is reduced for next two years. Whether the company should accept the project? Also analyze the effect on the market price of the share, if the company decides to accept the project. | 8 | (0) |
| 4. | (a) | Indira has a fund of Rs. 3 lacs which she wants to invest in share market with rebalancing target after every 10 days to start with for a period of one month from now. The present NIFTY is 5326. The minimum NIFTY within a month can at most be 4793.4. She wants to know as to how she should rebalance her portfolio under the following situations, according to the theory of Constant. Proportion Portfolio Insurance Policy, using "2" as the multiplier: | (1) | Immediately to start with. | | (2) | 10 days later–being the 1st day of rebalancing if NIFTY falls to 5122.96 | | (3) | 10 days further from the above date if the NIFTY touches 5539.04. |
For the sake of simplicity, assume that the value of her equity component will change in tandem with that of the NIFTY and the risk free securities in which she is going to invest will have no Beta. | 8 | (0) |
| | (b) | X Ltd has an internal rate of return @ 20%. It has declared dividend @ 18% on its equity shares, having face value of Rs. 10 each. The payout ratio is 36% and Price Earning Ratio is 7.25. Find the cost of equity according to Walter’s Model and hence determine the limiting value of its shares in case the payout ratio is varied as per the said model. | 8 | (0) |
|
| 5. | (a) | NP and Co. has imported goods for US $ 7,00,000. The amount is payable after three months.The company has also exported goods for US $ 4,50,000 and this amount is receivable in two months. For receivable amount a forward contract is already taken at Rs. 48.90. | The market rates for Rs. and Dollar are as under: | Spot
Two months
Three months | Rs. 48.50/70
25/30 points
40/45 points |
The company wants to cover the risk and it has two options as under: | (A) | To cover payables in the forward market and |
| (B) | To lag the receivables. by one month and cover the risk only for the net amount. No interest for delaying the receivables is earned. |
Evaluate both the options if the cost of Rupee Funds is 12%. Which option is preferable? | 8 | (0) |
| | (b) | A has portfolio having following features: | Security | β | Random Error σei | Weight | L
M
N
K | 1.60
1.15
1.40
1.00 | 7
11
3
9 | 0.25
0.30
0.25
0.20 |
You are required to find out the risk of the portfolio if the standard deviation of the market index (σm) is 18%. | 8 | (0) |
| 6. | (a) | Sumana wanted to buy shares of EIL which has a range of Rs. 411 to Rs. 592 a month later. The present price per share is Rs. 421. Her broker informs her that the price of this share can sore up to Rs. 522 within a month or so, so that she should buy a one month CALL of EIL. In order to be prudent in buying the call, the share price should be more than or at least Rs. 522 the assurance of which could not be given by her broker. Though she understands the uncertainty of the market, she wants to know the probability of attaining the share price Rs. 592 so that buying of a one month CALL of EIL at the execution price of Rs. 522 is justified. Advice her. Take the risk free interest to be 3.60% and e0.036 = 1.037. | 8 | (0) |
| | (b) | A Mutual Fund Co. has the following assets under it on the close of business as on: | | 1st February 2012 | 2nd February 2012 | | Company | No. of
Shares | Market price per share
Rs. | Market price per share
Rs. | L Ltd
M Ltd
N Ltd
P Ltd | 20,000
30,000
20,000
60,000 | 20.00
312.40
361.20
505.10 | 20.50
360.00
383.10
503.90 | | Total No. of Units 6,00,000 |
| (i) | Calculate Net Assets Value (NAV) of the Fund. | | (ii) | Following information is given: | | Assuming one Mr. A, submits a cheque of Rs. 30,00,000 to the Mutual Fund and the Fund manager of this company purchases 8,000 shares of M Ltd; and the balance amount is held in Bank. In such a case, what would be the position of the Fund? | | (iii) | Find new NAV of the Fund as on 2nd February 2012 |
| 8 | (0) |
| 7. | Write short notes on any four of the following: | 4x4=16 | |
| | (a) | Zero coupon bonds | | (0) |
| | (b) | Interest swap | | (0) |
| | (c) | Inter–Bank Participation Certificate. | | (0) |
| | (d) | Meaning and Advantages of Netting | | (0) |
| | (e) | Nostro, Vostro and Loro Accounts. | | (0) |
