{ un. 5321-C8.

(FURTHER Fii,,iVlSED COURSE)

BB'8528
I

(3 Hours)

Total Marks : 60

N.B. (1) The question paper has two sections : A and B. Students must attempt questions from only one of these two seciions. (2) Total five quostions are to be attempted. All five questions must be either from Section A or from Section B. (3) On the top of the answer sheet tlre students must mention which section they ira're
(4)

chosen. Correct and to-tl're-point answers to theoretical questions will be assessed like practical problems. 'Thus, students atternpting more theoretical questions will not be at a disadvantage. (5) lf students attempt more than fir,+ questions, only first five will be considered. (6) All questions carry equal marks. Se,;t:ir:n A

1,

Elite lndia Ltd., a four year young company, is growing rapidly. Presently it ha.3C,0C0 12 equity shares of Rs.50 each and 1O% derbentures of Rs' 20,C0,000' The summary of income statement for Iact year is given below :Sales

Less

'

50,00,000
V, Expenses
F. Expenses

25,00,000 9,00,000

EBIT lnterest EBT Tax (35%)

PA:I-

34,00,000 16,00,000 2,00,000 '14,00,000 4,90,000

9.10.C00
--=+ I t.,JO

Tha company further wants to expand its activities for which it is planning to rnake an addi,tional investment of Rs. 20,00,000' There are two financing options : either 40,000 equity sh::res oi Rs. 50 each, or debt funds of Rs. 20,00,000. at 12% interest' The company wants to assess its position for two levels of sales projections for next year :,riz. Rs. 70,00,000 and Rs, '1,20,00.000. The r-atio of variable expenses to sales will rernain the same next year and fixed expenses will be Rs, 13,00,000 ai Rs.70,0O,OOO sale:; and Rs.26,00,000 at Rs. 1,20,00'000 sirles' For both the levels of sales projections the P/E ratio is expecteo to be 2'5 in case of debt option arrd 3 in case of equity optiott. lf the objeilive of the cornpany is to maxiniize the market price of its shares then which financing oplion'should it go Jor if tiie sailrs are Fis. ;'0,00,000 and if the sales are Rs. 1,20,00,000 ?,

estimate 12 A comparry, wantg,to assess the feasibilii', cf a new proiect. li is not able to the'saies ieuenue and expenses and is noi ciear aboui sen-qi',ir.'ity analysis. Using the oi'ojer:t hypotheticai figures explain io the cornpany ltow it can do teilsibility anaiysis of for three diffeient levels viz. Pessimistic, expected and optimistic'
J.

Lre useci Explain with examples any two methods crt corpoi'ate valuation which.c;;r.n calculate the value of a comPanY.

to

12

Eixplain the various financing options in respect of infrastruc'ture

projects'

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? 12 Whai are the benefits to investors because cf the existenr:e of financial intermediaries system ? Explain' Which i.re the important financial intermediarries in the lndian Jinancial ITURN ervF-R

Con. 5321-BB-8528'08'

6. (a) Explain the important functions

(b)

of an investnl,.+nt banker and his role ln priP21',r

i-5go

1?-

management. Explain, in brief, the process and nrethodolr.'3y foliowed by a rating agency to rate a financial instrument

7.

What are the possible causes of an industrial Lrnit becoming a sick unit to you, can be a typical revival programme to rerrive a sicl< unit ?

? What, according

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Answer any two of the following :--_ (a) Eiplain the role of SEBI, in brief, as th,: regulator of financial ma.rkets (b) Explain in simpie worCs Financial lrtteresi Rate Swaps'' (c) Explain offshoreiortshore inslruments i. rd multiple option bonds.

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9'Explaininbrief,anythree,ofthefoilowing',-_/,.'^''o.;

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(a) Dut; diligence I ",,') (b) FiPB arid joint venture fcrmulation f; ,lt ,, ,.,.,, .,', ;i :t-.,..1'-,*';d:)]1' (c) Loan sYndication ,.'.ii,':' (d) Process of bond valuation 1;-';'''':-''*':' (e) Procedure of IPO
r.

(f)

Any five factors which determine the capital slructure of a company

Section

.,

,,\'r.,e balance sheet

of lnternational Trade Ltd. as on 31 st March, 2008 is as under

Rs.
on

12

Lia'bilities E:cluity CliPiial (i-ls. iu Pt:t si'ra:i:, 10"/" Long Term debt Retained Earnings Current Liabilities

Assets
BuilCing
nlil
_

150
1,'

120
.).,

60i

Stork Debtors Cash

50

20.
5

300

The total assets turnover ratio of the compa::,/ is 3, its frxed cperaiing cost is 1/6 of sales and variable operating cost is 5o'/' of saies. The corporate iax raie is 35%. '/ou are required to (i) calculate the operating, financial anc.l combiiied ler.,erage (ii) Calc.rlate the nrarket price of the share if the P/E multiple is 2'5 (iii) Caicuiate the level of EBIT if the EPI: is (a) Rs 15 (b) Rs' 25'
:

The existing capital structure of Texiile lndia Equity shares of Rs. 1OO each Retained Earnings 9"k f l F-lci5,llurt i)llareJ V10 Pre-ierence shares
77o

as unclet
Rs,

:-

12

40,00'000
1C'00,000 25,00,0C0 25,00,000

Debentures

i I

it is considering The cctnpany wants to raise Fls. 25,C0,C00 for iis expansion prcject for vrhich the ,,ollowinr; ootions :_(a) lssue of 20000 equity shares at a pri-imium oi Rs. 25 per share or (b) issue of 109r. prefei"ence shares or (.) lssue of 97o debentures' as new iunds) and Company's return on capital employed is 12'% (on existing a.s well corpcrale tax raie is 35%. ;n case c,f the above three'options woulri ite 16, 13 It is expecteo that the P/E muliiples and wl''i ? and 12 ;'espectii'ely. Suggest the conrnilny, ,'.lirich alternative it shouid select

Con.

5321;88-8528-08.

3
1

3, (a) ABC Co. LtC. lras ngt present value olnet assets Rs,

QQ

lac.which includes cash balanc

of Rs. 10lac. lt ha-S!a9&!_gq!flyShele.s and no preference capital or debt funds. The company has to make the decision about declaring dividend. At the same time ii is aiso exploring the possibility of investlng in a neW project. The company has tlrree options :(i) Do not declare any divider d and invest the available cash of Rs. 10 lac in the nbw project, The present value of the future cash flows generated by this project is Rs. 20 lac, or (ii) Pav Rs. 10 pershare as dividend. This wil!take awa)/the entire cash balance

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of

Rs;.

'i0

lac.

and also invest in a new project through a fresh eQlrit! issue of 1 lac shares of Rs. 10 each. This investmeni will have the salte effect on the company as in the first option, i.e. Rs. 20 lac NPV from the project, Give your recommendation to the Oompany as to which is the best option if the Company wants to maximize the sh;lrehc,ider value, lb) The following information is availablel in respect of a company pLVl (t.A Capitalisation rate (Ke) = 0.12 vy-:EPS = Rs.15 Rate of return on investment (r) : (i) 0.15 (ii) 0.10. The Company wants to know the effect on the market price of its shares under thr,l two possibilities of r (i,e,0"15 and 9.16r) undertheiwo options (i) if it does not declare any dividend and (ii) if itdeclares Rs, 15 as dividend. Using \:Valter's model explain the results obtained by you.
:
I

(iii) Pay tiividend as suggestecl in the second cption

or

?-(.a w'a

statement artd balani:g ille' c' i-ve-Sj.i;---t.".- -'=-' inConie .c;trlt,ement '.'

i'r+'E' :r;=----

[-_:

Sales

interest cn investments Profit on sale of old assets Iotal Income Less Manufacturing cost Admn. Cost Selling and distribution Depreciation Lross on sale of an old M/C EBIT l-ess : lnterest EB-f Less : Tax (3C%)
:

8C

60

50 30

__

5 -_.

325
190 20

PAT

--' 51 :tll i| |
Assets
tsuilding

t/u

EPS 119 lacl5 lac P/E'ratio

,ls/23.8

Balance Sheet
L:iabilities Equity Capitai (Hs. 10 share) Reiained earnrngs Long term loan Creditors Prcvisions

--

nr.

-l
I I

P.^
IU
tz-

Macirinery Stor:x
Deblor.s

7Ql
6

Bank

Con.

532"1-88-8528-08.

''1

Tire cost c,f eqLrity and cost of debt is 10% ar o l2ok respectively. The compaly pavs 30% corporate tax. From the information given you are reqLrired:c calculate ihe EVA, Also, calcuiate N4VA. on the basis of Market Value r:f equity carpiial

5.
d

Describe tiie important sources of financing long term projects which can be used by ther 12/' indian cornpanies. lf they approach the financi;rl institutions for long term finances, rvhai important norms ang poiicies financial institutior,s would apply to provide such finarccs ?

The Balance Sheet for tl-re cu;'rent year of a company is given belovr (All the figu;'es in Rs. lac) ..Equitl' CaPitai Fetained Earr:ings 'lerm Loan
Slhort Terrn Borrowings
rl red ito rs iO0 120 160

are

12

lv{achinery
Fu rn itu re

,J,J

30
100

12f;
100
4A

Eills Receivab!es Debtors

Stoci<

60
1

Provisions

ai'l

t3ank

40 640

640

Rs. 600 : l')ales V. Expenses Rs, 560 Flsi. 160 F. Expenses are the projections foi"ihe nexr yeat The foilowing ", )4 The sales are expected to be Rs. 1 000''(2f
Cther' Information

, e;<pense.s will increase by 25",/n,' No char,ge in the ratio c'f vario.bll exoenses 10 sales. Y_{A---.:l.:'.,';-.'1'.',.c,l:'1":iili1i,'i1.'--l'.)' e;lr. :'?iII-'r. ' - I;a) \jc-c latlg'.j 'i: :'i.e(i ils.,dlo ,1 lC' ,,iCf Sa.'X bala;iCe anqother Cuiier,|. a6sets',',,;1, i:r-'teaSe i;'l pl-.,'tt;t,i"jn tc s:1le:. rax io be orovided at 35%. This,,,,'ill be tirs cnl!'provis;io,'i :le>:i !'eai. (B) Crecjitors ','u'iii iticrease in propcrtir',, to saies "]:) you are :eqr-rired tc Irepare the projeciei , rcorr']e siatement and balz,nce sheet cf th: company folihe nexl Year. lf the company is reouired to raise funCs (r.e. if liability side is less) lney rvill be raise d in the grder oi shor'. ternt borrowings, tern loa.n and if requited, equity capital. lt.is a 'l policy ot the cornpanV',-. rnaintain curreni ;'i.i;o of minirnunr 1'25 aild ensure iirat i le irno terrn loans c.ic n' r exceed 40'k c:t tcti: li)ng te;'tn funds' lt tite asisei siclo is l:',: ths;n tl-re difierence ''rr oe considere<J ai cirsh ':ralance availa[!e.
F:.
\/',4

"'

li-l1r:;.n:l,tiicn S':r'iices .:f lndia l.td, Fxp,!ain tire importani funciicns cf ejther Cl..i:iit F.la.ting -js i-:ri ir(;ilA)' 1Cr?lSlL) or information and Crr'i:ii Rati:-,; ,:ier1l:

12

Which are the important finrrncial ,nteri,r(i,Jiiii'ie$ irl the lnclian iinancial s/s are they beneiiciail to ihe invest"rs ? ixpli'"ii-,.

or-1-r

? )out

t2

:xpiain iir bi'ief. a:,ty tl;l'.' r:' ii''e tciiowing; .-(.1) l:-':pcriar,t iina': :i;i de'i'.rati' es (i-:) N4Ot! )el'i,'3{-1'1 !,i)ver:lrTren'i anc }SU (c) \,i)r'rt'tie c,apite.i frtnciirrl-i !n lnoia " ici) Ileviiral r-,f a s;cl< utrit ano vlsiiiilr' :'rrtdy ie: Fier;ulatic':r oi i'l:'trtciai markets li-, ',',iia 1i) lr:.)ceol'ro tttl':.i:i'-:i,'c io iFjOs

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