Financial Management and International Finance December 2009

F—P12(AFM)
Syllabus 2008
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Answer Question No.1 from Part A which is compulsory and five questions from Part B.
Working notes should form part of the answer.
(ii) open a new page for answer to a new question.
PART A (25 Marks)
Marks
1. (a) In each of the cases given below, one out of four alternatives is correct. Indicate the correct answer (=1 mark) and give your workings/reasons briefly in support of your answer (=1 mark): 2×7=14
(i) The Board of Director of MOULIN LTD. (ML) is dissatisfied with last year’s ROE of 15%. If the net profit margin and asset turnover ratio remain unchanged at 10% and 1.25 respectively, by how much must the asset to equity increase to achieve 20% of ROE?
(A) Must increase by 0.6
(B) Must increase by 0.5
(C) Must increase by 0.4
(D) Insufficient information
(0)
(ii) The rates available in the Kolkata market are:
Rs./\$
�/\$ Spot 46.75/78
0.5285/86
If an Indian importer requires pounds, the rate quoted to him is

(A) Rs.88.46/�
(B) Rs.88.51/�
(C) Rs.88.64/�
(D) None of (A), (B), (C)
(0)
(iii) The degree of operating leverage of SHEETAL LTD. Is increased by 30 per cent. What will be the change in the degree of total leverage, if the degree of financial leverage is decreased by 20 per cent?
(A) 2% decrease
(B) 3% increase
(C) 4% increase
(D) Data insufficient
(0)
(iv) MARISON LTD. An Indian company is planning to invest in the USA. The rates of inflation are 8% in India and 3% in USA. If the spot rate is currently Rs.46.50/\$, what spot rate can the company expect after 5 years?
(A) Rs.57.93/\$
(B) Rs.58.94/\$
(C) Rs.59.00/\$
(D) Rs.59.13/\$
(0)
(v) The current price of a share of RONEX LTD. Is Rs.55. The company is planning to issue one right share for every four equity shares. If the company targets that the ex–rights value of a share shall not fall below Rs.52, the subscription price for one rights share should be more than or equal to
(A) Rs.50
(B) Rs.48
(C) Rs.40
(D) None of (A), (B), (C)
(0)
(vi) ASHLEEN LTD. Is to pay dividend of Rs.3.00 at the end of the year and expected to grow at 12% per year forever. If the required rate of return on the company stock is 15 per cent per annum, its intrinsic value will be
(A) Rs.100
(B) Rs.110
(C) Rs.115
(D) None of (A),(B),(C)
(0)
(vii) The earning power of SYNTEX LTD. is 0.30. If the average of total assets and interest expenses are Rs. 2,00,000 and Rs. 15,000 respectively, the interest coverage ratio will be
(A) 1.5
(B) 3.00
(C) 4.00
(D) None of (A), (B), (C)
(0)
(b) Choose the most appropriate on from the stated options and write it down [only indicate A, B, C, D as you think correct (=1 mark each)]: 1×6
(i) Which one of the following would describe commercial paper most appropriately?
(A) Unsecured long–term notes as loan
(B) Unsecured short–term loan notes
(C) Secured short–term loan notes
(D) Secured long–term loan notes
(0)
(ii) Hedging through forward, futures, swaps etc. is an example of
(A) Risk avoidance
(B) Risk sharing
(C) Risk transfer
(D) None of the above
(0)
(iii) In which of the following appraisals by the financial institutions, is the schedule of implementing the whole project critically studied?
(A) Market appraisal
(B) Technical appraisal
(C) Financial appraisal
(D) Economical appraisal
(0)
(iv) Which of the following is a correct sequence of life cycle of a project?
(A) Planning, selection, scheduling, termination
(B) Planning, implementation, control, evaluation
(C) Selection, scheduling, implementation, evaluation, control
(D) Planning, implementation, control, evaluation
(0)
(v) When cost of capital of a project is equal to its Internal Rate of Return (IRR)
(A) The NPV will be zero
(B) The NPV will be+ve
(C) The NPV will be -ve
(D) Benefit cost ratio will be zero
(0)
(vi) A transaction where two currencies are exchanged by the parties involved, only to be exchanged back later is termed as
(A) Forward contract
(B) Option contract
(C) Currency swap
(D) Future contract
(0)
(c) Mention whether the following statements are True (T) or False (F): 1×5=5
(i) TRIPS is an international agreement on intellectual property rights. (0)
(ii) In the Bank’s parlance, net working capital represents margin money. (0)
(iii) GDR may be converted into underlying shares and vice–versa. (0)
(iv) The changes if foreign exchange reserve and reserves of monetary gold held by the monetary authority will be recorded in Capital account of the BOP statement. (0)
(v) Portfolio Balance Approach assumes that the Purchasing Power Parity (PPP)holds good. (0)
PART B (75 Marks)
2. (a) Explain how the combined effect of operating and financial leverages provide the risk profile of an organization. 5 (0)
(b) The Balance Sheets of MAGNAVISION LTD. As on 31.03.2008 and 31.03.2009 are given below:
31.03.2008 31.03.2009
Assets
Land & Buildings
Investments
Inventory
Accounts Receivable
Cash & Bank Balances 8,00,000
1,00,000
4,80,000
4,20,000
2,98,000 6,40,000
1,20,000
4,20,000
9,10,000
3,94,000
Total Assets 20,98,000 24,84,000
Liabilities
Share Capital
Reserves
P & L Account
Term Loan
Current Liabilities 9,00,000
6,00,000
1,12,000
Nil
4,86,000 9,00,000
6,20,000
1,36,000
5,40,000
2,88,000
Total Liabilities 20,98,000 24,84,000
The following details are provided:

(i) Dividend paid during the year 2008-09 was Rs.80,000.
(ii) Net profit for the year 2008–09 was Rs.1,24,000 after charging depreciation on fixed assets amounting to Rs.1,40,000.
(iii) Investments worth Rs.16,000 were sold during the year 2008–09 for Rs.17,000. No revaluation of the investments was carried out at the year–end.
(iv) Fixed assets were sold at a profit of Rs.4,000 during the year and the profit is included in the net profit for the year ending 31.03.2009.
You are require to prepare the Statement of Changes in Working Capital and the Funds Flow Statement for the year ended 31st March, 2009.

3+4+3

10 (0)
3. (a) Explain briefly the functions performed by the Securities & Exchange Board of India (SEBI). 5 (0)
(b) ANKIT LTD. A manufacturing company produces 25,000 litres of special lubricants in its plant. The existing plant is not fully depreciated for tax purposes and has a book value of Rs.3 lakh (it was bought for Rs.6 lakh six years ago). The cost of the product is as under:
Cost/litre (Rs.)
Variable Costs
15.00
75.00
It is expected that the old machine can be used for further period of 10 years by carrying out suitable repairs at a cost of Rs.2 lakh annually.

A manufacturer of machinery is offering a new machine with the latest technology at Rs.10 lakh after trading off the old plant (machine) for Rs.1 lakh. The projected cost of the product will then be:

Cost/Litre (Rs.)
Variable Costs
20.00
65.00
The fixed overheads are allocations from other department plus the depreciation of plant and machinery.

The old machine can be sold for Rs.2 lakh in the open market. The new machine is expected to last for 10 years at the end of which, its salvage value will be Rs.1 lakh. Rate of corporate taxation is 50%. For tax purposes, the cost of the new machine and that of the old one may be depreciated in 10 years. The minimum rate of return expected is 10%

It is also anticipated that in future the demand for the product will remain at 25,000 litres.
Advise whether the new machine can be purchased. Ignore capital gain taxes.
[Given: PVIFA(10%, 10 years) = 6.145, PVIF(10%, 10 years) = 0.386.]

5+3+2

5+3+2
=10 (0)
4. The key information pertaining to the proposed new financing plans of ADVENTURE LTD. Is given below:
Sources of Funds Financing Plan I Financing Plan II
Equity
Preference Shares
Debentures 15,000 shares of Rs.100 each
12%, 25,000 shares of Rs.100 each
Rs.5,00,000 at a coupon rate of 10% 30,000 shares of Rs.100 each

Rs.15,00,000, coupon rate 11%
The corporate tax rate is 35 per cent.
Required:

(a) Determine the two EBIT–EPS coordinates for each financial plan.
(b) Determine the
(i) Indifference point; and
(ii) Financial break–even point for each financing plan.
(c) Which plan has more financial risk and why?
(d) Indicate over what EBIT range, if any, one plan is better than the other.
(e) If the firm is fairly certain that its EBIT will be Rs. 12,50,000, which plan would you recommend, and why?
(3+4)+3+2+(1×3)=15
15 (0)
5. (a) What are the differences between warrants and convertible debentures? 5 (0)
(b) The equity share of AMTREX LTD. Is quoted at Rs.210. A 3– month call option is available at a premium of Rs.6 per share and a 3 – month put option is available at a premium of RS.5 per share.
(i) Ascertain the net pay–offs to the option holder of a call option and a put option, given that:
(1) The strike price in both cases is Rs.220; and
(2) The share price on the exercise day is Rs.200, Rs.210, Rs.220, RS.230 and Rs.240 respectively.
(ii) Also indicate the price range at which the call and the put options may be gainfully exercised.
4+4+2

10 (0)
6. (a) What is meant by Balanced Scorecard? 5 (0)
(b) A financial analyst has been asked to appraise NETWORKS LTD., an IT company in terms of the future cash generating capacity. He has projected the following after–tax cash flows:
Year 1 2 3 4 5
Cash Flows
(Rs.in lakh) 352 96 128 172 234
It is further estimated that beyond 5th year, cash flows will perpetuate at a constant growth rate of 7% per annum, mainly on account of inflation. The perpetuate cash flow is estimated to be Rs.2,052 lakh at the end of the 5th year.
Additionally the following information are available:

(1) The cost of capital is 20%.
(2) The company has outstanding debt of Rs.724 lakh and cash/bank balance of Rs.542 lakh.
(3) The number of outstanding shares of the company is 30.30 lakh.
Requirements:
(i) What is the value of NETWORKS LTD. In terms of expected future cash flows? [6]
(ii) Calculate the value of shareholders. [2]
(iii) The company has received a take over bid of Rs.402 per share. Is it good offer? [2]
[Give: (PVIF at 20% for year 1 to 5): 0.833, 0.694, 0.579, 0.482, 0.402.] 6+2+2=10 (0)
7. (a) VATSAN LTD. Is considering a project with the following expected cash flows;
Initial investment:Rs.1,00,000.
Year 1 2 3
Expected Cash Inflows (Rs.) 70,000 60,000 45,000
Due to uncertainty of future cash flows, the management decides to reduce the cash inflows to certainty equivalent (CE) by taking only 80% for 1st year, 70% for 2nd year and 60% for 3rd year respectively.
The cost of capital is 10%.
Required:
Is it worthwhile to take up the project?

5 (0)
(b) WILSON LTD. An Indian company has a payable of US \$ 1,00,000 due in 3 months. The Company is considering to cover the payable through the following alternatives:
(i) Forward contract;
(ii) Money market; and
(iii) Option.
The following information is available with the company:
Exchange rate:

Spot
3–m Forward Rs./\$ 45.50/45.55
40/45
Interest rates(%) : Per Annum
US
India 4.5/5.0 (Deposit/Borrow)
10.0/11.0 (Deposit/Borrow)
Call option on \$ with a strike price of Rs.46.00 is available at a premium of Rs.0.10/\$. Put option on \$ with a strike price of Rs.46.00 is available with a premium of Rs.0.05/\$.
Treasury department of the company forecasted the future spot rate after 3 months to be:

Spot rate after 3–m Probability
Rs.45.60/\$
Rs.46.00/\$
Rs.46.40/\$ 0.10
0.60
0.30
You are required to suggest the best alternative of hedging.

(1+3+4)
+2=10 (0)
8. Write short notes on any three of the following:
(a) Currency Futures; 5 (0)
(b) Measures of Non–Financial Performance; 5 (0)
(c) Foreign Direct Investment; 5 (0)
(d) Balance of Payment. 5 (0)