- JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
End Semester Examinations – OCTOBER 2014
m.com – III semester
STRATEGIC FINANCIAL MANAGEMENT
Duration: 3 Hrs Max. Marks: 100
Section – A
- Answer any SEVEN Each carries 5 marks. (7 x 5 = 35)
- Write a short note on “Functions of Strategic Financial Management”.
- Write a short note on “Financial Planning”
- Explain the factors/determinants for determining Dividend Policy?
- Explain the traditional methods of Valuation.
- Following information of Zoya Limited is given:
Balance sheet as at 31st March, 2014
| Liabilities | Amount (Rs. mn) | Assets | Amount (Rs. mn) |
| Equity | 100 | Fixed assets | 140 |
| Debt | 100 | Net current assets | 60 |
| 200 | 200 |
Income statement for the year ending 31st March, 2011
| Net sales | 300 |
| Cost of goods sold | 258 |
| PBIT | 42 |
| Interest | 12 |
| PBT | 30 |
| Tax (30%) | 9 |
| PAT | 21 |
Company’s cost of equity is 18%. The interest rate on debt (pre-tax) 12%, Calculate the Economic Value Added (EVA) of the company.
- Write short notes on reasons for merger.
- Give a brief note on Future Growth Value.
- Explain stock refunding as strategic planning.
- Explain the process of Shareholder Value Creation.
- Write a note on Balanced Score Card.
Section – B
- Answer any THREE Each carries 15 marks. (3 x 15 = 45)
11) Explain dividend policies, Employee stock options and Indexed options and Buyback of shares as a value based management.
12) Explain five waves of merger and antitakeover strategies and defenses.
13) K. Ltd. is considering acquiring N. Ltd., the following information is available:
Company Profit after tax Number of Equity Shares Market value per share
- Ltd. 50,00,000 10,00,000 200.00
- Ltd. 15,00,000 2,50,000 160.00
Exchange of equity shares for acquisition is based on current market value as above.
There is no synergy advantage available Find the earning per share for company K. Ltd. after merger. Find the exchange ratio so that shareholders of N. Ltd. would not be at a loss.
14) Write a note on Valuation of Intangible & Knowledge Assets.
15) Bring out the implications of Demergers.
Section – C
- Compulsory Case study. ( 20 marks)
16.
- Mr. PRATHEEK established the following spread on the Delta Corporation’s stock :
- Purchased one 3-month call option with a premium of Rs.30 and an exercise price of Rs.550.
- Purchased one 3-month put option with a premium of Rs.5 and an exercise price ofRs.450.
Delta Corporation’s stock is currently selling at Rs.500. Determine profit or loss, if the price of Delta Corporation’s:
- Remains at Rs.500 after 3 months.
- Falls at Rs.350 after 3 months.
- Rises to Rs.600.Assume the size option is 100 shares of Delta Corporation.
- XL Ispat Ltd. has made an issue of 14 per cent non-convertible debentures on January 1, 2014. These debentures have a face value of Rs.100 and is currently traded in the market at a price of Rs.90.Interest on these NCDs will be paid through post-dated cheques dated June 30 and December 31. Interest payments for the first 3 years will be paid in advance through post-dated cheques while for the last 2 years post-dated cheques will be issued at the third year. The bond is redeemable at par on December 31, 2011 at the end of 5 years.
Required:
- Estimate the current yield at the YTM of the bond.
- Calculate the duration of the NCD.
- Assuming that intermediate coupon payments are, not available for reinvestment calculate the realized yield on the NCD.
(10+10)
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SCHEME
m.coM- III semester
SUB: STRATEGIC FINANCIAL MANAGEMENT
Duration: 3 Hrs Max. Marks: 100
Section – A
- Strategic Financial Management is the portfolio constituent of the corporate strategic plan-that embraces the optimum investment and financing decisions required to attain the overall specified objectives. In this connection, it is necessary to distinguish between strategic, tactical and operational financial planning. While strategy is a long-term course of action, tactics are intermediate plan, while operational are short-term functions. Senior management decides strategy, middle levels decides tactics and operational are looked after line management. Irrespective of the time horizon, the investment and financial decisions functions involve the following functions
– Continual search for best investment opportunities
– Selection of the best profitable opportunities
– Determination of optimal mix of funds for the opportunities
– Establishment of systems for internal controls
– Analysis of results for future decision-making.
- Financial planning is the backbone of the business planning and corporate planning. It helps in defining the feasible area of operation for all types of activities and thereby defines the overall planning framework. Financial planning is a systematic approach whereby the financial planner helps the customer to maximize his existing financial resources by utilizing financial tools to achieve his financial goals. Financial planning is simple mathematics. There are 3 major components:
Financial Resources (FR)
Financial Tools (FT)
Financial Goals (FG)
Financial Planning: FR + FT = FG
- The factors are
Legal Considerations
Stability of Earnings
Opportunities for Reinvestment and Growth:
Cash flow
Level of Inflation in the Economy
Effect on Market Prices
Tax Considerations
- EPS, RDI, EBIT, ROCE etc.
- EVA is computed as:
NOPAT = PBIT (1-t) = 42 (1-0.30) = 29.4
Post tax cost of debt = 0.12 (1-0.30) = 0.084
WACC = (0.5 x 0.18) + (0.5 x 0.084) = 0.132
ROC = NOPAT / CAPITAL = 29.4/200 = 0.147
1) EVA = NOPAT – (WACC x CAPITAL)
= 29.4 – (0.132 x 200) = Rs. 3 million
2) EVA = (ROC – WACC) x CAPITAL
= (0.147 – 0.132) x 200 = Rs. 3 million
3) EVA = [PAT + INT (1-t)] – WACC x CAPITAL
= 21+ 12 (1-0.30)] – 0.132 x 200 = Rs. 3 million
4) EVA = PAT – (kE x EQUITY)
= 21 – (0.18 x 100) = Rs. 3 million
- Tax advantages, Increases liquidity for owners, Gaining access to funds, Growth, Diversification, Related diversification, Synergistic benefits, Protection against a hostile takeover, Acquisition of required managerial skills, assets or technology.
- A social unit of people that is structured and managed to meet a need or to pursue collective goals is called an “Organization”. Organizational Structure consists of activities such as task allocation, coordination and supervision, which are directed towards the achievement of organizational goals. A business organization makes changes in personnel and departments and change how workers and departments report to one another to meet market conditions. • Some companies shift organizational structure to expand to serve growing markets & other companies reorganize downsize or eliminate departments to conserve overhead.
- A bond that retires another bond before the first bond matures. A company may issue a refunding bond for a number of reasons, butmainly because of a decline in interestrates, which reduces the cost of funding. Refunding bonds deprive bondholders of the firstbond from future coupon payments to which they would otherwise of have been entitled. Most bonds are nonrefundable.
- Shareholder Value is driven by Long-term Free Cash Flows Shareholder Value is created when Long-term Returns, Cost of Capital and vice versa Stock price => market’s interpretation of value Stocks could be undervalued or overvalued. Profitability, Capital Efficiency, Growth, Real Options, Cost of Capital.
- Most companies have a performance measurement system that includes financial measures as well as non financial measures. The balanced scorecard approach pioneered by Robert Kaplan, David Norton and others to develop an integrated performance measurement system, The balanced scorecard is a strategy driven.The balanced scorecard covers four important perspectives in a business. They are:Financial, Customers, Internal business, Innovation & Learning. The balanced scorecard represents a linked a series of objectives and measures.
- A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.
- There are two main categories of buyers of companies: strategic buyers and financial buyers. Strategic buyers are corporations who want to acquire another company for strategic business reasons. Financial buyers are buyers who want to acquire another company purely as a financial investment. Financial buyers are typically LBO (Leveraged Buyout) Funds or other private equity funds.
- Earning per share for company K. Ltd. after Merger : Exchange Ratio 160 : 200 = 4: 5 That is 4 shares of K. Ltd. for every 5 shares of N. Ltd.
Total number of shares to be issued = 4/5 × 2,50,000 = 2,00,000 shares
Total number of shares of K. Ltd. and N .Ltd.= 10,00,000 K. Ltd.+ 2,00,000 N. Ltd 12,00,000
Total profit after Tax = Rs. 50,00,000 K. Ltd. Rs. 15,00,000 N Ltd. Rs. 65,00,000
E.P.S. (Earning per share) of K. Ltd. after Merger = Rs.12,00,000/65,00,000 = Rs.5.42 Per Share
To find the Exchange Ratio so that shareholders of N. Ltd. would not be at a Loss:
Present Earnings per share for company K. Ltd.= Rs.5.00 Rs.10,00,000 Rs.50,00,000
Present Earnings Per share for company N. Ltd.= Rs.6.00 Rs.2,50,000 Rs.15,00,000
Exchange Ratio should be 6 shares of K. Ltd. for every 5 shares of N Ltd.
Shares to be issued to N. Ltd.= 2,50,0006/5 = 3,00,000 Shares
Total No. of Shares of K.Ltd. and N. Ltd.= 10,00,000 K. Ltd. + 3,00,000 N. Ltd =13,00,000
E.P.S. After Merger 13,00,000/65,00,000 = Rs.5.00 Per Share
Total Earnings Available to Shareholders of N. Ltd. after Merger = Rs.3,00,000 × Rs.5.00 = Rs.15,00,000
This is equal to Earnings prior Merger for N. Ltd.
Exchange Ratio on the Basis of Earnings per Share is recommended.
- Despite the relatively high value of knowledge, determining a precise figure for the value of knowledge has proven very difficult. One of the reasons that precise measures for the value of knowledge are in short supply is that knowledge, being an intangible, is often lumped in with other intangibles in valuation approaches. Another problem stems from not being able to distinguish between the effects of different knowledge assets.1. Determine an estimate of annual earnings. This can be, for example, an average of the past three years 2. Determine the expected earnings from tangible capital 3. Determine the expected earnings from intangibles. This is arrived at by subtracting earnings due to tangible capital from total earnings.4. Discount the figure in Step 3 to arrive at the present value of intangible capital.
- A demerger is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components.[1] It is the converse of a merger or acquisition. A demerger can take place through a spin-off by distributed or transferring the shares in a subsidiary holding the business to company shareholders carrying out the demerger. The demerger can also occur by transferring the relevant business to a new company or business to which then that company’s shareholders are issued shares of. In contrast, divestment can also “undo” a merger or acquisition, but the assets are sold off rather than retained under a renamed corporate entity. Demergers can be undertaken for various business and non-business reasons, such as government intervention, by way of anti-trust law, or through decartelization.
- Solution
- Total premium paid on purchasing a call and put option
= (Rs.30 per share × 100) + (Rs.5 per share × 100).
= 3,000 + 500 = Rs.3,500
In this case, X exercises neither the call option nor the put optionas both will result in a loss for him.
Ending value = – Rs.3,500 + zero gain= – Rs.3,500
i.e Net loss = Rs.3,500
Since the price of the stock is below the exercise price of the call, the call will not be exercised. Only put is valuable and is exercised.
Total premium paid = Rs.3,500
Ending value = – Rs.3,500 + Rs.[(450 – 350) × 100]
= – Rs.3,500 + Rs.10,000 = Rs.6,500
Net gain = Rs.6,500
In this situation, the put is worthless, since the price of the stock exceeds the put’s exercise price. Only call option is valuable and is exercised.
Total premium paid = Rs.3,500
Ending value = -3,500 +[(600 – 550) × 100]
Net Gain = -3,500 + 5,000 = Rs.1,500
- Current yield =14/90 = 0.1555 or 15.55%
YTM can be determined from the following equation
14 × PVIFA (YTM, 5) + 100 × PVIF (YTM, 5) = 90
YTM = 17.14%
The duration can be calculated as follows:
| Year | CashFlow | PV at 17.14% | Proportion of NCD value | Proportion of NCDvalue × time
|
| 1 | 14 | 11.952 | 0.1328 | 0.1328 |
| 2 | 14 | 10.203 | 0.1134 | 0.2268 |
| 3 | 14 | 8.710 | 0.0968 | 0.2904 |
| 4 | 14 | 7.435 | 0.826 | 0.3304 |
| 5 | 114 | 51685 | 0.5744 | 2.8720 |
| 89.985 | 3.8524 |
Duration = 3.8524 years.
Realized Yield can be calculated as follows:
90
(1 R)
(14 * 5) + 100/(1+R)5 = 90
(1+R)5 =170/90
R= 0.1356 or 13.56%
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