Advanced Financial Management - November 2017 MTP

Current future price of the index 4 = 5000 + 5000 (0.09-0.06) = 5000 + 12 50 = 5,050  Price of the future contract = Rs.50 х 5,050 = Rs.2,52,500 (ii) Hedge ratio = 1010000 1.5 = 6 contracts 252500 Index after there months turns out to be 4500 Future price will be = 4500 + 4500 (0.09-0.06) × 1 = 4,511.25 12 Therefore, Gain from the short futures position is = 6 х (5050 – 4511.25) х 50…

(a) The annual change in cash flows through entering into a factoring agreement is: Savings Amount in (Rs.) Administration cost saved Amount in (Rs.) 1,00,000 Existing average debtors [Rs. 1,00,00,000/365) x 80 days] 21,91,781 Average New Debtors 16,43,836 [(Rs. 1,00,00,000/365) x 60 days] Reduction in debtors Cost there of @80% 5,47,945 4,38,356 Add: Interest saving @15% p.a. on. Rs. 4,38,356 Add: Bad Debts saved @.005 of 65,753 Rs. 1,00,00,000 Total Less: Annual charges @2% of Rs. 1,00,00,000 Net annual benefits…

PV factor closest to 4.00 in 8 years is 4.078 at 18% Thus IRR = 18% Note: Students may also arrive at the answer of 18.63% instead of 18% if exact calculation are made as follows:PV factor in 8 years at 19% is 3.9544 Interpolating for 4.00 IRR = 18%  4.0776 - 4.000  18.63% 4.0776 - 3.9544 (ii) Desired lease rent to earn 20% IRR before expenses and taxes: Lease Rent = 5,00,000 5,00,000 = Rs. 1,30,310.14 p.a.…

Invoicing in £ will produce = € 2.8 million = £ 2.340 million 1.1965 (b) Proposal of Mr. Wilson Forward Rate = €1.1970-0.0055 = 1.1915 Using Forward Market hedge Sterling receipt would be = £ 2.35 million (c) Proposal of Ms. Karen € 2.8 million 1.1915 The equivalent sterling of the order placed based on future price (€1.1943) € 2.8 million = £ 2,344,470 (rounded off) 1.1943 Number of Contracts = £2,344,470 = 37 Contracts (to the nearest whole 62,500…

Calculation of Interest Payment on 9% Debentures PVAF (9%,6) = 4.486 Annual Installment = Rs. 22.50 crore = Rs. 5.0156 crore 4.486 Balance Outstanding (Rs. Crore) Interest (Rs. Crore) Installment (Rs. Crore) 1 22.5000 2.025 5.0156 2.9906 19.5094 2 19.5094 1.756 5.0156 3.2596 16.2498 3 16.2498 1.462 5.0156 3.5536 12.6962 4 12.6962 1.143 5.0156 3.8726 8.8236 Principal Balance Repayment (Rs. Crore) (Rs. Crore) Statement showing Value of Equity Particulars 2013-14 (Rs. Crore) 2014-15 (Rs. Crore) 2015-16 (Rs. Crore) 2016-17 (Rs.…

(*) i.e. interest for two days. Note: Alternatively, answer can also be calculated on the basis of 360 days in a year. (b) (A) Cash Outflow (i) (ii) Rs. In case machine is upgraded: Upgradation Cost 10,00,000 In case new machine installed: 20,00,000 Add: Installation cost 50,000 Total Cost 20,50,000 Less: Disposal of old machine Rs. 50,000 – 40% tax 30,000 Total Cash Outflow 20,20,000 Working Note: (i) Depreciation – in case machine is upgraded Rs. 10,00,000 ÷ 5 =…

(a) Many investment managers and stock market analysts believe that stock market prices can never be predicted because they are not a result of any underlying factors but are mere statistical ups and downs. This hypothesis is known as Random Walk hypothesis which states that the behaviour of stock market prices is unpredictable and that there is no relationship between the present prices of the shares and their future prices. Proponents of this hypothesis argue that stock market prices are…

(b) Decision Tree showing pay off Year 0 Year 1 Pay off 130 0 60 80-60 = 20 100 First of all we shall calculate probability of high demand (p) using risk neutral method as follows: 8% = p x 30% + (1-p) x (-40%) 0.08 = 0.30 p - 0.40 + 0.40p p= 0.48 0.70 = 0.686 The value of abandonment option will be as follows: Expected Payoff at Year 1 = p x 0 + [(1-p) x 20]…