Advanced Financial Management - Nov 2022 RTP

Rahul Ltd. has surplus cash of ` 100 lakhs and wants to distribute 27% of it to the shareholders. The company decides to buy back shares. The Finance Manager of the company estimates that its share price after re-purchase is likely to be 10% above the buyback price-if the buyback route is taken. The number of shares outstanding at present is 10 lakhs and the current EPS is ` 3. You are required to determine: (i) The price at which…

Ltd. has ` 300 million, 12 per cent bonds outstanding with six years remaining to maturity. Since interest rates are falling, ABC Ltd. is contemplating of refunding these bonds with a ` 300 million issue of 6 year bonds carrying a coupon rate of 10 per cent. Issue cost of the new bond will be ` 6 million and the call premium is 4 per cent. ` 9 million being the unamortized portion of issue cost of old bonds can…

Amal Ltd. has been maintaining a growth rate of 12% in dividends. The company has paid dividend @ ` 3 per share. The rate of return on market portfolio is 15% and the risk -free rate of return in the market has been observed as10%. The beta co-efficient of the company’s share is 1.2. You are required to calculate the expected rate of return on the company’s shares as per CAPM model and the equilibrium price per share by dividend…

A Ltd. has an expected return of 22% and Standard deviation of 40%. B Ltd. has an expected return of 24% and Standard deviation of 38%. A Ltd. has a beta of 0.86 and B Ltd. a beta of 1.24. The correlation coefficient between the return of A Ltd. and B Ltd. is 0.72. The Standard deviation of the market return is 20%. Suggest: (i) Is investing in B Ltd. better than investing in A Ltd.? (ii) If you invest…

Mutual Fund issued 20 lakh units at ` 10 per unit. Relevant initial expenses involved were ` 12 lakhs. It invested the fund so raised in capital market instruments to build a portfolio of ` 185 lakhs. During the month of April 2012 it disposed off some of the instruments costing ` 60 lakhs for ` 63 lakhs and used the proceeds in purchasing securities for ` 56 lakhs. Fund management expenses for the month of April 2012 was `…

Mr. Dayal is interested in purchasing equity shares of ABC Ltd. which are currently selling at ` 600 each. He expects that price of share may go upto ` 780 or may go down to ` 480 in three months. The chances of occurring such variations are 60% and 40% respectively. A call option on the shares of ABC Ltd. can be exercised at the end of three months with a strike price of ` 630. (i) What combination of…

Ram buys 10,000 shares of X Ltd. at a price of ` 22 per share whose beta value is 1.5 and sells 5,000 shares of A Ltd. at a price of ` 40 per share having a beta value of 2. He obtains a complete hedge by Nifty futures at ` 1,000 each. He closes out his position at the closing price of the next day when the share of X Ltd. dropped by 2%, share of A Ltd. appreciated…

A Ltd. of U.K. has imported some chemical worth of USD 3,64,897 from one of the U.S. suppliers. The amount is payable in six months’ time. The relevant spot and forward rates are: Spot rate USD 1.5617-1.5673 6 months’ forward rate USD 1.5455 –1.5609 The borrowing rates in U.K. and U.S. are 7% and 6% respectively and the deposit rates are 5.5% and 4.5% respectively. PAPER 2: STRATEGIC FINANCIAL MANAGEMENT 3 Currency options are available under which one option contract…