| ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS) | ||||||||||||||||||||||||||||||||||||||||||||
| END SEMESTER EXAMINATION – SEPT/OCT. 2015 | ||||||||||||||||||||||||||||||||||||||||||||
| M.COM– I SEMESTER | ||||||||||||||||||||||||||||||||||||||||||||
| P1 15 MC 102 : ADVANCED FINANCIAL MANAGEMENT | ||||||||||||||||||||||||||||||||||||||||||||
| Duration: 3 Hours Max. Marks: 100 | ||||||||||||||||||||||||||||||||||||||||||||
| SECTION – A | ||||||||||||||||||||||||||||||||||||||||||||
| I. | Answer any SEVEN questions. Each carries 5 marks. (7×5=35) | |||||||||||||||||||||||||||||||||||||||||||
| 1. | A bank has offered to you an annuity of Rs. 1800 for 10 years if you invest Rs. 12000 today. What rate of return would you earn? | |||||||||||||||||||||||||||||||||||||||||||
| 2. | An investor holds two equity shares x and y in equal proportion with the following risk and return characteristics
E ( Rx) = 24% , E ( Ry) = 19%, Std devn x = 28%, Std devn y = 23%, The returns of these securities have a positive correlation of 0.6. You are required to calculate the portfolio return and risk. Further, suppose that the investor wants to reduce the portfolio risk to 15%. How much should the correlation be to bring the portfolio risk to the desired level?
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| 3. | The following are the returns during 5 years on a market portfolio of shares and AAA bonds. Calculate the realized risk premium of shares over bonds in each year
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| 4. | What is the balance in an account at the end of 10 years if Rs. 2500 is deposited today and the account earns 4% interest compounded annually? | |||||||||||||||||||||||||||||||||||||||||||
| 5. | A company is considering the following six projects. You are required to calculate the profitability index for each project and rank them. Which project would you choose if the total available funds are Rs 8,000,000?
Rs. in 1000
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| 6. | The expected value of the probability distribution of the possible net present value for a project is Rs. 30000 and the standard deviation about the expected value Rs. 15000. Assuming a normal distribution, what is the probability that the NPV will be?
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| 7. | Explain the assumptions and implications of the NI approach and NOI approach. Illustrate your answer with hypothetical examples. | |||||||||||||||||||||||||||||||||||||||||||
| 8. | “Risk analysis is an essential feature of investment decision making process”. What are the major risk factors and how will you control them? | |||||||||||||||||||||||||||||||||||||||||||
| 9. | What is capital market efficiency? Explain the types of market efficiency | |||||||||||||||||||||||||||||||||||||||||||
| 10. | The Indian Yatch company has developed a new cabin cruiser which they have earmarked for the medium to large boat market. A market analysis has a 30% probability of annual sales being 5,000 boats a 40% probability of 4,000 annual sales and a 30% probability of 3,000 annual sales. This company can go into limited production, where variable costs are Rs. 10,000 per boat, and fixed costs are Rs. 8,00,000 annually. Alternatively they can go into full scale production where variable costs are Rs. 9000 per boat and fixed costs are Rs. 50,00,000 annually. If the new boat is to be sold for Rs. 11,000 should the company go into limited or full scale production when their objective is to maximize the expected profits? | |||||||||||||||||||||||||||||||||||||||||||
| SECTION – B | ||||||||||||||||||||||||||||||||||||||||||||
| II. | Answer any THREE questions. Each carries 15 marks. (3×15=45) | |||||||||||||||||||||||||||||||||||||||||||
| 11. | P ltd has an expected return of 22% and standard deviation of 40%. Q ltd has an expected return of 24% and standard deviation of 38%. P has a beta of 0.86 and Q 1.24. The correlation between the returns of P and Q is 0.72. The standard deviation of the market return is 20% .
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| 12. | A company is considering investing in a new product with an expected life of 3 years. It is estimated that if the demand for the product is favorable in the first year, then it is certain to be favorable in the subsequent years. And if it is low in the first year, it would remain low in years 2 and 3. The company feels that cash flows over time are perfectly correlated. The cost of the project is Rs. 50,000 and the possible cash flows for three years are
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| 13. | XY ltd wants to install a new machine in the place of an existing old one which has become obsolete. The company made extensive enquiries and from the replies received, short listed two offers. The two models differ in cost output and anticipated net revenue. The estimated life of both the machines is five years. There will be only negligible salvage value at the end of the fifth year. Further details are as follows
(Rs in 1000)
The company’s cost of is 16%. You are required to make an appraisal of the two offers and advise the firm by using the following
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| 14. | A ltd has to choice between three projects X Y and Z. the following information has been estimated
Rs. In 1000
Probabilities are D1 =0.6, D2 = 0.2, D3 = 0.2 Which projects should be undertaken if decision is made by expected value approach? Calculate the expected value of perfect information. |
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| 15. | Dry twigs and fresh blossoms ltd is always discarding old lines and introducing new lines of products and is at present three alternative promotional plans for ushering in new products. Various combinations of prices, development expenditure and promotional outlays are involved in these plans. High, medium and low forecast of revenues under each plan have been formulated and their respective probabilities of occurrence have been estimated. These budgeted revenues and probabilities along with other relevant data are summarized as under:-
The company’s cost of capital is 12%and the income tax is 40%. Investment in promotional programmes will be amortized by the straight line method. The company will have net taxable income each, regardless of the success or failure of the new products.
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| SECTION – C | ||||||||||||||||||||||||||||||||||||||||||||
| III. | Case Study (1×20=20) | |||||||||||||||||||||||||||||||||||||||||||
| 16. | GSPC is a fast growing profitable company. The company is situated in Western India. Its sales are expected to grow about three times from Rs. 360 million in 2009 to Rs.1100 million in 2010. The company is considering of commissioning a 35 km pipeline between two areas to carry gas to a state electricity board. The project will cost Rs. 250 million. The pipeline will have a capacity of 2.5 MMSCM. The company will enter into a contract with the state electricity board to supply gas. The revenue from the sale of SEB is expected to be Rs.120 million per annum. The pipeline will also be used for transporting of LNG to other users in the area. This is expected to bring additional revenue of Rs. 80 million per annum. The company management considers the useful life of the pipeline to be 20 years. The financial manager estimates cash profit to sales ratio of 20% per annum for the first 12 years of the projects operations and 17% per annum for the remaining life of the project. The project has no salvage value. The project being backward areas is exempt from paying any taxes. The company requires a rate of return of 15% from the project.
a. What is the projects pay back and return on investment? b. Compute NPV. c. Should the project be accepted? Why?
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