SFM Prelims

Answer all questions. Each question carries 15 marks. Attempt any 2 sub questions from Q 1-4. All questions in Q5 have to be answered.

Q1 a. A company declared a dividend of Rs 2 per share now. It is foreseeing a growth rate of 10% for the next 2 years, 12% for 2 years post that and the growth rate would drop by 10% each year for the next 2 years hence. Post that the growth rate would be stable to 15% for ever. The required rate of return is 16%. Calculate the intrinsic value of the share.

Q1 b. A company has 5 lakhs shares outstanding. Current price is Rs 200 each. The board has recommended a dividend of Rs 10 per share. The capitalization rate is 12%. Based on MM method, calculate the price of the share when dividend is declared and not declared. Also calculate the number of additional shares to be issued (if dividend is declared and not declared) if the net income is 2 crs and the investment budget is 5 crs.

Q 1 c What is XBRL and who are the users of the same.

Q2 a. What is capital rationing and what are the advantages and disadvantages of the same

Q2 b. A company plans to invest Rs 1 lac in a machine with an expected life of 2 years with salvage value of Rs 10000. In the first year, there is 50% probability that the inflow would be Rs 70000 and 50% probability that the inflow would be Rs 50000. The inflows for the second year are Rs 50000, Rs 70000 and Rs 80000 with a probability of 0.2, 0.3 and 0.5. The firm uses a 10% discount factor. Construct a decision tree and evaluate the proposal under NPV method.

Q 2 c A company plans to invest into either of the 2 machines. The probability and the respective inflows are given. You are supposed to run the risk analysis and calculate the Co efficient of variation to ascertain which project to be chosen

X (Inflow)Â Â Â Â Â Â Â Â 25000Â 40000Â 50000Â 75000Â 100000

X ProbÂ Â Â Â Â Â Â Â Â Â Â Â Â 0.2Â Â Â Â Â Â 0.1Â Â Â Â Â Â 0.3Â Â Â Â Â Â 0.2Â Â Â Â Â Â 0.2

Y (Inflow)Â Â Â Â Â Â Â Â 30000Â 35000Â 60000Â 60000Â 120000

Y ProbÂ Â Â Â Â Â Â Â Â Â Â Â Â 0.1Â Â Â Â Â Â 0.1Â Â Â Â Â Â 0.2Â Â Â Â Â Â 0.2Â Â Â Â Â Â 0.4

Q3 a Based on the information below, calculate the EVA of ABC Ltd for a 3 year period. All figures in Lakhs

Year |
1 |
2 |
3 |

Capital Employed |
3000 | 3500 | 4000 |

Operating profits |
850 | 1250 | 1600 |

Tax (Rs) |
80 | 70 | 120 |

Debt as a % of capital |
40 | 35 | 15 |

Beta |
1.1 | 1.2 | 1.3 |

Risk free rate |
12.5 | 12.5 | 12.5 |

Return of market |
22.5 | 22.5 | 22.5 |

Cost of debt (post tax) |
19 | 19 | 20 |

Q3 b. Dhrishti Ltd is planningÂ to take over Sarvesh Ltd. The following information is given

DhrishtiÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Sarvesh

PATÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 400

No of sharesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 200Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 100

PEÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 20Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5

- Calculate the market price of both companies
- Find the swap ratio on the existing MPS
- What is the current EPS
- What would be the combined EPS post merger assuming the acquisition takes place by MPS
- What is the value of the merged entity

Q 3 c Â Why do companies merge.

Q4 a. What are various approaches to manage working capital requirement

Q4 b. A company is planning to sell 1lakh units at Rs 100 per unit. RM is 50%, Overheads is 30%, wages is 10%. Raw material, process and FG are in stock for 2 months. 20% sales and 10% purchases are cash and the rest are settled after 3 months. Wages are paid after 1 month. Cash balance of 2 month wage bill needs to be maintained. Assume core CA are 40% of CA. compute the working capital requirement as per MPBF norms laid down by Tandon committee.

Q 4 c On 31^{st} March 2015, BOI had a balance of Rs 200 crs in rebate on bill exchanged account. During the year ended 2016, bank discounted bills of exchange of 10000 crs charging 18% per annum, average period of discount was 85 days. Of these bills worth 5000 crs were due for realization after March 2016 with an average period of 40 days.Â Pass the necessary journal entries and prepareÂ Discount on bills of exchange and Rebate on bill discount account.

Q5. Venissa wishes to put up a chemical plant with an investment of 500 lakhs. The working capital requirement would be additional Rs 100 lakhs. She expects sales to be 300 lakhs, 350 lakhs, 350 lakhs, 400 lakhs and 200 lakhs for the next 5 years. The scrap value of the plant at the end of 5 years for the residual value after a 20% depreciation on WDV. Tax rate is 40% and PV ratio is 40%. Evaluate the feasibility of this proposal at 10% discounting factor. Also help her in evaluation of the proposal if

- Cost of plant increase by 10% (others things constant)
- Additional plant costing 100 lakhs with no scrap value and life of 3 years to be set up at the end of 2
^{nd}year. - The last 2 years sales reduces by 20% due to competition

Source:- Vipin Saboo Tutorials

For any further clarifications, please contact Prof Vipin Saboo on 9820779873

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can plz give solution on Q1 a,Q2b,Q5.

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