Advanced Financial Management (Elective P-Ii – Finance)

1. JOSEPHS COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – OCTOBER 2014

B.B.M. – V SEMESTER

 ADVANCED FINANCIAL MANAGEMENT (ELECTIVE P-II – FINANCE)

 

Duration: 3 Hours                                                                                       Max. Marks: 100

SECTION – A

 

1. Answer ALL the questions. Each carries 2 marks.                                       (10 x 2 =20)

 

1. A company wishes to earn real rate of 10% from its project, when the inflation recorded is 6%. What is the nominal rate the company would earn? Now if company earns 15% nominal rate, does it amount to real rate return of 10% or more?
2. Write the Irving fisher model for Risk adjusted discount rate
3. Explain the concept of synergy with an example
4. What is the difference between a merger and a takeover
5. A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt and 70% equity (assume debt beta =0) calculate project beta. Assume Rf = 10%, Rm = 18%
6. Ashoka builders Ltd have an issued and paid capital of 500000 shares of Rs. 10 each.  The company declared a dividend of Rs. 12.50 lakhs during the last five years and expects to maintain the same level of dividends in future.  The control and ownership of the company is lying in the few hands of directors and their family members.  The average dividend yield for listed companies in the same line of business is 18%.  Calculate the value 3000 shares in the company.
7. Write a short note on Pricing Multiples
8. Write the meaning of Hostile takeover and Bail out takeovers
9. What is time value of money? Explain the concept of discounting and compounding
10. What is the meaning of risk and uncertainty

 

SECTION – B

1. Answer any FOUR Each carries 5 marks.                                   (4×5=20)

 

11. Determine the risk adjusted net present value of the following project

Particulars	A	B	C
Net cash outlay (Rs) Project life Annual cash inflow (Rs) Co efficient of variation	1,00,000 5 years 30,000 0.4	1,20,000 5 years 42,000 0.8	2,10,000 5 years 70,000 1.2

 

Co efficient  of variation	Risk adjusted rate of discount	PV factors 1 to 5 years at risk adjusted rate of discount
0 0.4 0.8 1.2 1.6 2 More than 2.0	10% 12% 14% 16% 18% 22% 25%	3.791 3.605 3.433 3.274 3.127 2.864 2.689

 

 

12. You expect to receive (in nominal terms) the following cash flows, 250, (422) and 1067. What is the present value, if the real discount rate is 5% and inflation is expected to be 4%, 3.5% and 5% for the following years?

 

13. Fast run automobiles spares l td is considering investment in one of the three mutually exclusive projects Zeta 10, Meta 10 and Neta 10. The company’s Cost of capital is 15% and the risk free rate of return is 10%.  The income tax rate for the company is 40%.  FASL has gathered the following basic cash flow and risk index data for each project

Project	Zeta 10	Meta 10	Neta 10
Initial Investment Cash Inflows After tax for year 1 2 3 4 Risk Index	15,00,000   6,00,000 6,00,000 6,00,000 6,00,000 1.80	11,00,000   6,00,000 4,00,000 5,00,000 2,00,000 1.00	19,00,000   4,00,000 6,00,000 8,00,000 12,00,000 0.60

 

Using the risk adjusted discount rate; determine the risk adjusted NPV for each of the project.  Which project should be accepted by the company?  Give reasons

Hint: RADR = Rf + (Ri * (Ko – Rf))

 

14. How would a finance manager respond under uncertainty? Explain the tools and methods used by the finance manager under uncertainty.

 

15. How do you ascertain the value of share under Capital Asset Pricing Model? Explain the concept in context of a private company valuation with required assumptions and formulas.

 

16. Explain the concept of feasibility report.

 

SECTION – C

 

III)      Answer any THREE questions.    Each carries 15 marks.                    (3×15=45)

 

17. A firm has an investment proposal requiring an outlay of Rs. 40,000.  The investment proposal is expected to have 2 years economic life with no salvage value.  In Year 1, there is a 0.4 probability that cash flow after tax will be Rs. 25000 and 0.6 probabilities that cash inflow after tax will be Rs. 30,000.  The probability assigned to cash flow after tax for the year 2 is as follows:

The cash inflow year 1	Rs. 25000		Rs. 30000
The cash inflow year 2 with probabilities	12000 16000 22000	0.2 0.3 0.5	20000 25000 30000	0.4 0.5 0.1

The firm uses a 10% discount rate for this type of investment

Required

• Construct a decision tree for the proposed investment project
• What net present value will the project yield if worst outcome is released? What is the probability of occurrence of this NPV?
• What will be the best and the probability of that occurrence
• Will the project be accepted?

 

18. The initial investment outlay for a capital investment project consists of Rs. 100 lakhs for plant and machinery and Rs. 40 lakhs for working capital. Other details are summarized below

• Sales 1 lakh units for years 1-5
• Selling price Rs. 120 per units of output
• Variable cost Rs. 60 per units of output
• Fixed overheads (excluding depreciation) Rs. 15 lakhs per year for years 1-5
• Rate of depreciation on plant and machinery : equal to the WDV at the end of year 5
• Applicable tax rate 40%
• Time horizon 5 Years
• Post tax cut off rate 12%

 

Required

• Indicate the financial viability of the project by calculating the NPV
• Determine the sensitivity of the project’s NPV under each of the following condition

1. Decrease in selling price by 5%
2. Increase in variable cost by 10%
3. Increase in cost of plant and machinery by 10%

 

19. ABC ltd is considering with XYZ ltd. There are no gains from merging.  Complete the following table if ABC wishes an EPS of Rs. 2.8 after the merger

	ABC ltd	XYZ ltd	Merged entity
Earnings after tax Outstanding shares Market price per share EPS (Rs) P E ratio Total market value	Rs. 0.1 million 50000 Rs. 20 2 10 Rs. 1000000	Rs. 0.25 million 100000 Rs. 12.5 2.5 5 Rs. 1250000	? ? ? 2.8 ? ?

• Complete the above table
• Calculate the exchange ratio viz. no of shares of ABC given to XYZ shareholders
• What is the cost of merger to ABC ltd?

 

20. What are the micro and macro considerations to be taken in view in project planning? Write short notes on Technical appraisal of projects?
21. Salvations and Solutions have been in IT business for six years and enjoy a favorable market reputation.  Corporate tax is 30%.  They anticipate that the demand for IT solutions would increase sizably since many foreign firms are setting up their BPO shops in India.   For an expansion project, they propose to invest Rs.22 crores to be funded by new debt and equity on 50/50 basis.  Enquiries with merchant bankers reveal that funds can be raised as under:

 

Debt	Rate %
First Rs. 5 crores Next Rs. 5 crores All additional funds Equity Risk gradation by company	10% 12% 15.72% 12% 2% over WACC

• Compute the appropriate risk adjusted discount rate
• What should be target breakeven level of net annual cash flow after tax for the company if the life of the project is four years?

 

SECTION – D

 

1. IV) Case study- Compulsory questions. (15 marks)

 

22. a) ABC and Co has the following information relating to an investment proposal.  The initial outlay of Rs. 24, 00,000 is expected at year 0 with a life of 4 years.  The firm has an average profit after tax of Rs. 8, 40,000 is expected.  Assuming that the real discount rate is 5% calculate

 

• NPV of the project given that there is no inflation
• NPV given that there is inflation of 5% and the annual profit keep pace with the inflation

 

 

 

 

 

 

1. b) The relevant financial details of two firms just prior to a merger announcement are as follows:

	Amit ltd	Bakshi Ltd
Market price per share No of shares Market value of the firm	Rs. 65 8,00,000 Rs. 520,00,000	Rs. 30 5,00,000 Rs. 150,00,000

 

            The merger is expected to bring gains which have a present value of

Rs. 120, 00,000.  Amit ltd offers 246000 shares in exchange for 500000 shares to the shareholders of firm Bakshi ltd.  Assuming that the market values of the two firms just before the merger announcement is equal to their present values as separate.  Calculate the NPV to AMIT LTD AND Bakshi ltd respectively.