Financial Management 2- The US inflation rate is expected to be Rs.3 per cent annually and that of India is expected to be 4.5 per cent annually. The current spot

The US inflation rate is expected

Financial Management 2


Q1. a) Mr. Nimish holds the following portfolio. (10 marks) Share Beta Investment

Alpha 0.9 Rs.12, 00,000

Beta 1.5  Rs. 3, 50,000

Carrot 1.0  Rs. 1, 00,000

What is the expected rate of return on his portfolio, if the risk rate is 7 per cent and the expected return on the market portfolio is 16 per cent?

Q1.b) A share is selling for Rs.60 on which a dividend of Rs.4 per share is expected at the end of the year. The expected market price after dividend declaration is to be Rs.70. Compute the following: – (10 marks)

(i) The return on investment ® in shares.

(ii) Dividend yield

(iii) Capital Gain Yield

Q2.  DIC Ltd. provides the following data: (20 marks)

Comparative trial balance

March 31 year 2 ,March 31 year 1,  Increase(Decrease)

Debit Balance 20 10 10

Cash Rs.190 Rs. 90 Rs.100

Working capital (other than cash) 100 200 (100)

Investment (Long term) 500 400 100

Building and equipment 40 50 (10)

Total 850 750 100

Credit Accumulated Depreciation 200 160 40

Bonds 150 100 50

Reserves 350 350 —

Equity Shares 150 140 10

Total 850 750 100

Income Statement for the period ending March 31, year 2 (Amount in Rs lakh)

Sales Rs.1000 Cost of Goods Sold 500

Selling Expense Rs.50

Administrative Expenses 50 100

Operating Income 400

Other charges

Gain on sale of building and equipment Rs 5

Loss on sale of investments (10)

Interest (6)

Taxes (189) (200)

Net Income after taxes 200

Notes: (a) The depreciation charged for the year was Rs.60 Lakh

(b) The Book value of the building and equipment disposed was Rs 10 Lakh

(c)Prepare a Cash Flow Statement (Based on AS-3)

Q3. a) A. Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a component X which is purchased at Rs.20. For every finished product one unit of component is required. The ordering cost is Rs.120 per order and the holding cost is 10 percent per annum. (10 marks)

You are required to calculate:

(i) Economic order quantity

(ii) If the minimum lot size to be supplied is 4, 000 units, what is the extra cost, the company has to incur?

(iii) What is the minimum carrying cost, the company has to incur?

Q3.b) Master Tools Ltd. Is currently operating its business at 75% level, producing 38275 units of a tools component and proposes to increase capacity utilization in the coming year by 33 1/3 % over the existing level of production. (10 marks)

The following data has been supplied: (1)Unit cost structure of the product at current level:Rs,Raw Material 5,Wages 2, Overheads 3, Fixed Overhead 2 ,Profit 3

(i) Raw Material will remain in stores for 1 month before issued for production. Material will remain in process for further 1 month. Suppliers grant 4 months credit to the company.

(ii) Finished goods remain in godown for 2 months

(iii) Debtors are allowed credit for 2 months.

(iv) Lag in wages and overheads payments in 1 month, and these expenses accrue evenly

throughout the production cycle.

(v) No increase either in cost of inputs or selling price is envisaged

You are required to prepare a Projected Profitability statement and the Working Capital Requirement at new level, assuming that a minimum cash balance of Rs.20000 has to be maintained.

Q4. A stock is currently trading for Rs.29. The risk less interest is 7 % p.a continuously compounded. Estimate the value of European call option with a strike price of Rs.30 and a time of expiration of 4 months. The standard deviation of the stock’s annual return is 0.45. Apply BS model. (20 marks)

Q5. Following is the EPS record of AB Ltd over the past 10 years. (20 marks)

Year EPS    Year   EPS

10    Rs.30     5       Rs.16

9        20         4       15

8        19          3      14

7        18         2        18

6         17       1        12

(i) Determine the annual dividend paid each year in the following cases:

(a) If the firm’s dividend policy is based on a constant dividend payout ratio of 40 per cent for all years

(b) If the firm pays at Rs 10 per share, and increases it to Rs 12 per share when earnings exceed Rs.14 per share for the previous 2 consecutive years.

(c) If the firm pays dividend at Rs 7 per share each except when EPS exceeds Rs 14 per share, when an extra dividend equal to 80 per centof earnings beyond Rs.14 would be paid.

(ii) Which type of dividend policy will you recommended to the company and why?

Q6. a) A US MNC has its subsidiary in India. The subsidiary has issued 15 pr cent preference shares of the face value of Rs.100, to be redeemed at year-end 9. Flotation costs are expected to be 5 per cent; these costs can be amortized for tax purpose during 8 years at a uniform rate. The corporate tax rate is 35 per cent. Determine the costs of preference shares from the perspective of the subsidiary. (10 marks)

b) The US inflation rate is expected to be Rs.3 per cent annually and that of India is expected to be 4.5 per cent annually. The current spot rate of US $ in India is Rs.47.4060/US $. (10 marks) .Find the expected rate of US $ in India after one year and after 5 years from now using purchase power theory of exchange rate.

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