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NMIMS – Strategic Financial Management

Question 1:

A manager in a bank appraising a project found from sensitivity analysis that a project is too risky with respect to the selling price assumed. To this the Director of the firm stated that he believed in scenario analysis to make a judgement about the risk of the project and asked the manager of the bank to consider scenarios rather than sensitivity. Was the Director right in his suggestion? (10 marks)

Question 2:

Nurta Pharmaceuticals current earnings per share is Rs. 20, which is distributed to its shareholders. The required rate of return for the shareholders is 20%, and the market price of the share is Rs. 100. Nutra Pharmaceuticals has three business opportunities. Option 1 is to make a product that gives 25% return, Option 2 is expansion of current product that would give 20%, Option 3 is to produce a product that would give 15% return.

Assume all products are scale able, mutually exclusive and are funded only through equity. To fund the projects, the only option is to reduce the dividend payout to 50%, i.e dividend would reduce from Rs. 20 per share to Rs. 10 per share. The retained part of the dividend would be used to fund the selected project. Determine the growth rate (g = b*ROE) for each of the options and the new share price (assuming constant growth). Comment on the new share price for each of the model. (10 marks)

Question 3:

3a: Shaurya Ltd issues bonds with a face value of INR 100, coupon rate 5% (annual coupon payment) that matures in 4 years. Compute the Yield to Maturity (YTM) assuming the current market price of the bond is INR 96. (5 marks)

Question 3b:

Based on the details given below, compute the profit or loss incurred in the transaction assuming Mohan purchases one call option contract of Asus Ltd:

Number of shares in the option contract: 100 shares

Strike price: Rs. 300

Option cost: Rs.2000 Current market price of Asus Ltd on option expiry date: Rs.350 (5 marks)