Dilution of Financial Interest - Financial, Treasury and Forex Management - Exam, Exams of Financial Management

Download Dilution of Financial Interest - Financial, Treasury and Forex Management - Exam and more Exams Financial Management in PDF only on Docsity! 1/2008/FTFM P. T. O. : 1 : 334 Roll No.......................... Time allowed : 3 hours Maximum marks : 100 Total number of questions : 7 Total number of printed pages : 7 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. Attempt any four of the following : (i) “Financial leverage is a fair weather friend.” Discuss. (ii) “The risk of the portfolio which combines both a risky and a risk-free asset will be reduced to the standard deviation of the risky security, weighted for its proportionate value in the portfolio.” Do you agree ? Discuss. (iii) “Alpha is an indicator of the extent to which the actual return of a stock deviates from those predicted by its beta value.” Discuss. (iv) “An investor suffers dilution of financial interest when he does not exercise his pre-emptive rights.” Comment. (v) “Derivatives are mainly used to control risk to increase returns.” Comment. (5 marks each) 2. (a) An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three months. Exchange rates in London are : Spot Rate ($/£) 1.5865 – 1.5905 3-Month Forward Rate ($/£) 1.6100 – 1.6140 Rates of Interest in Money Market : Deposit Loan $ 7% 9% £ 5% 8% Compute and show how a money-market hedge can be put in place. Compare and contrast the outcome with a forward contract. (12 marks) : 2 : 1/2008/FTFM Contd... 334 (b) Elite Ltd. manufactures a product from a raw material, which is purchased at Rs.100 per kg. The company incurs a handling cost of Rs.300 plus freight of Rs.325 per order. The incremental carrying cost of inventory of raw material is Re.0.50 per kg. per month. In addition, the annual cost of working capital finance on the investment in inventory of raw material is Rs.4 per kg. The annual production of the product is 1,00,000 units and 2 units are obtained from one kg. of raw material. Required — (i) Calculate the economic order quantity (EOQ) of raw materials. (ii) Advise how frequently the orders for procurement of raw materials should be placed. (iii) If the company proposes to rationalise placement of orders for procurement of raw materials on quarterly basis, what percentage of discount in the price of raw materials should be negotiated ? (8 marks) 3. (a) At different levels of financing, a firm’s weighted average cost of capital (WACC) is as follows : Alternative Level of WACC NPV Financing (%) (Rs.) (Rs.) 1 12,00,000 10 5,00,000 2 18,00,000 12 9,00,000 3 28,00,000 16 15,00,000 4 36,00,000 21 13,00,000 Find out — (i) Value added at each level of financing. (ii) The optimal size of capital budget. (iii) Weighted average cost of capital at optimal level. (2 marks each) (b) Efficient Motors Ltd. (EML), a producer of turbine generators is in this situation : Earning before interest and taxes (EBIT) = Rs.40 lakh; Tax rate (T) = 35%; Debt outstanding (D) = Rs.20 lakh; Rate of interest = 10%; Cost of equity (Ke) = 15%; Shares of stock outstanding (No.) = 6,00,000; and Book value per share = Rs.10. Since EML’s product market is stable and the company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the EML’s earnings per share (EPS) and its price per share P0 ? 1/2008/FTFM P. T. O. : 5 : 334 7. Write notes on any four of the following : (i) Gilt-edged primary market (ii) Essential elements of forex management (iii) Yield curve and treasury management (iv) Securitisation of financial assets (v) Participants in derivatives market. (5 marks each) ——o—— : 6 : 1/2008/FTFM Contd... 334 T A B L E – 1 : P R E SE N T V A L U E O F R U P E E O N E R A T E Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 5% 0. 95 24 0. 90 70 0. 86 38 0. 82 27 0. 78 35 0. 74 62 0. 71 07 0. 67 68 0. 64 46 0. 61 39 0. 58 47 0. 55 68 0. 53 03 0. 50 51 0. 48 10 6% 0. 94 34 0. 89 00 0. 83 96 0. 79 21 0. 74 73 0. 70 50 0. 66 51 0. 62 74 0. 59 19 0. 55 84 0. 52 68 0. 49 70 0. 46 88 0. 44 23 0. 41 73 7% 0. 93 46 0. 87 34 0. 81 63 0. 76 29 0. 71 30 0. 66 63 0. 62 27 0. 58 20 0. 54 39 0. 50 83 0. 47 51 0. 44 40 0. 41 50 0. 38 78 0. 36 24 8% 0. 92 59 0. 85 73 0. 79 38 0. 73 50 0. 68 06 0. 63 02 0. 58 35 0. 54 03 0. 50 02 0. 46 32 0. 42 89 0. 39 71 0. 36 77 0. 34 05 0. 31 52 9% 0. 91 74 0. 84 17 0. 77 22 0. 70 84 0. 64 99 0. 59 63 0. 54 70 0. 50 19 0. 46 04 0. 42 24 0. 38 75 0. 35 55 0. 32 62 0. 29 92 0. 27 45 10 % 0. 90 91 0. 82 64 0. 75 13 0. 68 30 0. 62 09 0. 56 45 0. 51 32 0. 46 65 0. 42 41 0. 38 55 0. 35 05 0. 31 86 0. 28 97 0. 26 33 0. 23 94 11 % 0. 90 09 0. 81 16 0. 73 12 0. 65 87 0. 59 35 0. 53 46 0. 48 17 0. 43 39 0. 39 09 0. 35 22 0. 31 73 0. 28 58 0. 25 75 0. 23 20 0. 20 90 12 % 0. 89 29 0. 79 72 0. 71 18 0. 63 55 0. 56 74 0. 50 66 0. 45 23 0. 40 39 0. 36 06 0. 32 20 0. 28 75 0. 25 67 0. 22 92 0. 20 46 0. 18 27 13 % 0. 88 50 0. 78 31 0. 69 31 0. 61 33 0. 54 28 0. 48 03 0. 42 51 0. 37 62 0. 33 29 0. 29 46 0. 26 07 0. 23 07 0. 20 42 0. 18 07 0. 15 99 14 % 0. 87 72 0. 76 95 0. 67 50 0. 59 21 0. 51 94 0. 45 56 0. 39 96 0. 35 06 0. 30 75 0. 26 97 0. 23 66 0. 20 76 0. 18 21 0. 15 97 0. 14 01 15 % 0. 86 96 0. 75 61 0. 65 75 0. 57 18 0. 49 72 0. 43 23 0. 37 59 0. 32 69 0. 28 43 0. 24 72 0. 21 49 0. 18 69 0. 16 25 0. 14 13 0. 12 29 16 % 0. 86 21 0. 74 32 0. 64 07 0. 55 23 0. 47 61 0. 41 04 0. 35 38 0. 30 50 0. 26 30 0. 22 67 0. 19 54 0. 16 85 0. 14 52 0. 12 52 0. 10 79 17 % 0. 85 47 0. 73 05 0. 62 44 0. 53 37 0. 45 61 0. 38 98 0. 33 32 0. 28 48 0. 24 34 0. 20 80 0. 17 78 0. 15 20 0. 12 99 0. 11 10 0. 09 49 18 % 0. 84 75 0. 71 82 0. 60 86 0. 51 58 0. 43 71 0. 37 04 0. 31 39 0. 26 60 0. 22 55 0. 19 11 0. 16 19 0. 13 72 0. 11 63 0. 09 85 0. 08 35 19 % 0. 84 03 0. 70 62 0. 59 34 0. 49 87 0. 41 90 0. 35 21 0. 29 59 0. 24 87 0. 20 90 0. 17 56 0. 14 76 0. 12 40 0. 10 42 0. 08 76 0. 07 36 20 % 0. 83 33 0. 69 44 0. 57 87 0. 48 23 0. 40 19 0. 33 49 0. 27 91 0. 23 26 0. 19 38 0. 16 15 0. 13 46 0. 11 22 0. 09 35 0. 07 79 0. 06 49 21 % 0. 82 64 0. 68 30 0. 56 45 0. 46 65 0. 38 55 0. 31 86 0. 26 33 0. 21 76 0. 17 99 0. 14 86 0. 12 28 0. 10 15 0. 08 39 0. 06 93 0. 05 73 22 % 0. 81 97 0. 67 19 0. 55 07 0. 45 14 0. 37 00 0. 30 33 0. 24 86 0. 20 38 0. 16 70 0. 13 69 0. 11 22 0. 09 20 0. 07 54 0. 06 18 0. 05 07 23 % 0. 81 30 0. 66 10 0. 53 74 0. 43 69 0. 35 52 0. 28 88 0. 23 48 0. 19 09 0. 15 52 0. 12 62 0. 10 26 0. 08 34 0. 06 78 0. 05 51 0. 04 48 24 % 0. 80 65 0. 65 04 0. 52 45 0. 42 30 0. 34 11 0. 27 51 0. 22 18 0. 17 89 0. 14 43 0. 11 64 0. 09 38 0. 07 57 0. 06 10 0. 04 92 0. 03 97 25 % 0. 80 00 0. 64 00 0. 51 20 0. 40 96 0. 32 77 0. 26 21 0. 20 97 0. 16 78 0. 13 42 0. 10 74 0. 08 59 0. 06 87 0. 05 50 0. 04 40 0. 03 52 1/2008/FTFM P. T. O. : 7 : 334 T A B L E – 2 : P R E SE N T V A L U E O F A N A N N U IT Y O F R U P E E O N E R A T E Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R Y E A R 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 5% 0. 95 24 1. 85 94 2. 72 32 3. 54 60 4. 32 95 5. 07 57 5. 78 64 6. 46 32 7. 10 78 7. 72 17 8. 30 64 8. 86 33 9. 39 36 9. 89 86 10 .3 79 7 6% 0. 94 34 1. 83 34 2. 67 30 3. 46 51 4. 21 24 4. 91 73 5. 58 24 6. 20 98 6. 80 17 7. 36 01 7. 88 69 8. 38 38 8. 85 27 9. 29 50 9. 71 22 7% 0. 93 46 1. 80 80 2. 62 43 3. 38 72 4. 10 02 4. 76 65 5. 38 93 5. 97 13 6. 51 52 7. 02 36 7. 49 87 7. 94 27 8. 35 77 8. 74 55 9. 10 79 8% 0. 92 59 1. 78 33 2. 57 71 3. 31 21 3. 99 27 4. 62 29 5. 20 64 5. 74 66 6. 24 69 6. 71 01 7. 13 90 7. 53 61 7. 90 38 8. 24 42 8. 55 95 9% 0. 91 74 1. 75 91 2. 53 13 3. 23 97 3. 88 97 4. 48 59 5. 03 30 5. 53 48 5. 99 52 6. 41 77 6. 80 52 7. 16 07 7. 48 69 7. 78 62 8. 06 07 10 % 0. 90 91 1. 73 55 2. 48 69 3. 16 99 3. 79 08 4. 35 53 4. 86 84 5. 33 49 5. 75 90 6. 14 46 6. 49 51 6. 81 37 7. 10 34 7. 36 67 7. 60 61 11 % 0. 90 09 1. 71 25 2. 44 37 3. 10 24 3. 69 59 4. 23 05 4. 71 22 5. 14 61 5. 53 70 5. 88 92 6. 20 65 6. 49 24 6. 74 99 6. 98 19 7. 19 09 12 % 0. 89 29 1. 69 01 2. 40 18 3. 03 73 3. 60 48 4. 11 14 4. 56 38 4. 96 76 5. 32 82 5. 65 02 5. 93 77 6. 19 44 6. 42 35 6. 62 82 6. 81 09 13 % 0. 88 50 1. 66 81 2. 36 12 2. 97 45 3. 51 72 3. 99 75 4. 42 26 4. 79 88 5. 13 17 5. 42 62 5. 68 69 5. 91 76 6. 12 18 6. 30 25 6. 46 24 14 % 0. 87 72 1. 64 67 2. 32 16 2. 91 37 3. 43 31 3. 88 87 4. 28 83 4. 63 89 4. 94 64 5. 21 61 5. 45 27 5. 66 03 5. 84 24 6. 00 21 6. 14 22 15 % 0. 86 96 1. 62 57 2. 28 32 2. 85 50 3. 35 22 3. 78 45 4. 16 04 4. 48 73 4. 77 16 5. 01 88 5. 23 37 5. 42 06 5. 58 31 5. 72 45 5. 84 74 16 % 0. 86 21 1. 60 52 2. 24 59 2. 79 82 3. 27 43 3. 68 47 4. 03 86 4. 34 36 4. 60 65 4. 83 32 5. 02 86 5. 19 71 5. 34 23 5. 46 75 5. 57 55 17 % 0. 85 47 1. 58 52 2. 20 96 2. 74 32 3. 19 93 3. 58 92 3. 92 24 4. 20 72 4. 45 06 4. 65 86 4. 83 64 4. 98 84 5. 11 83 5. 22 93 5. 32 42 18 % 0. 84 75 1. 56 56 2. 17 43 2. 69 01 3. 12 72 3. 49 76 3. 81 15 4. 07 76 4. 30 30 4. 49 41 4. 65 60 4. 79 32 4. 90 95 5. 00 81 5. 09 16 19 % 0. 84 03 1. 54 65 2. 13 99 2. 63 86 3. 05 76 3. 40 98 3. 70 57 3. 95 44 4. 16 33 4. 33 89 4. 48 65 4. 61 05 4. 71 47 4. 80 23 4. 87 59 20 % 0. 83 33 1. 52 78 2. 10 65 2. 58 87 2. 99 06 3. 32 55 3. 60 46 3. 83 72 4. 03 10 4. 19 25 4. 32 71 4. 43 92 4. 53 27 4. 61 06 4. 67 55 21 % 0. 82 64 1. 50 95 2. 07 39 2. 54 04 2. 92 60 3. 24 46 3. 50 79 3. 72 56 3. 90 54 4. 05 41 4. 17 69 4. 27 84 4. 36 24 4. 43 17 4. 48 90 22 % 0. 81 97 1. 49 15 2. 04 22 2. 49 36 2. 86 36 3. 16 69 3. 41 55 3. 61 93 3. 78 63 3. 92 32 4. 03 54 4. 12 74 4. 20 28 4. 26 46 4. 31 52 23 % 0. 81 30 1. 47 40 2. 01 14 2. 44 83 2. 80 35 3. 09 23 3. 32 70 3. 51 79 3. 67 31 3. 79 93 3. 90 18 3. 98 52 4. 05 30 4. 10 82 4. 15 30 24 % 0. 80 65 1. 45 68 1. 98 13 2. 40 43 2. 74 54 3. 02 05 3. 24 23 3. 42 12 3. 56 55 3. 68 19 3. 77 57 3. 85 14 3. 91 24 3. 96 16 4. 00 13 25 % 0. 80 00 1. 44 00 1. 95 20 2. 36 16 2. 68 93 2. 95 14 3. 16 11 3. 32 89 3. 46 31 3. 57 05 3. 65 64 3. 72 51 3. 78 01 3. 82 41 3. 85 93