Birla Institute of Technology and Science-Pilani, Hyderabad Campus

First Semester: 2014-15

FUNDAMENTALS OF FINANCE & ACCOUNTING ECONF212
Comprehensive examination (Closed book)
Time: Three Hours Date: 12th December, 2014 Max Marks: 40
Weightage: 40%
Instructions:
1. Answer all questions.
2. All sub-parts of a question must be answered together else they would
not be evaluated.
1. Answer the following: (1+1+1+2) Marks
i. What is a balance sheet?
ii. What is a profit and loss statement?
iii. What is a cash flow statement?
iv. What is a loss? Is it an asset or liability, explain.

2. Ward consulting has prepared the following trial balance as on december 31 2005.
(5) Marks

Please prepare the balance sheet as on 31 st December 2005 and the income statement for the
month of December 2005.

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3. From the following financial statements of M/s Sunny Ltd. calculate. 1) Current Ratio 2) Liquid
Ratio 3) Gross Profit Ratio 4) Net Profit Ratio 5) Net Profit to Capital Employed Ratio 6) Fixed
Assets Turnover Ratio 7) Sales to Capital Ratio 8) Debtors Turnover Ratio. (10) Marks

4. Answer the following questions: (1+1+1+1+1+1+1+3) Marks

i. What is a derivative?
ii. What are the differences between a forward and a future?
iii. What is an option?
iv. What is the difference between a European option and an American option?
v. What are the global indices derivatives traded in India?
vi. What is spot price?
vii. What is strike price?

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 viii. NIFTY spot price is 8573.
a. 8600 strike price December call option is trading at 85. What are the intrinsic value
and time value of this option?
b. 8600 strike price December put option is trading at 78. What are the intrinsic value
and time value of this option?
c. If you buy the above options and do not trade in them, when would they be settled?

5. Read the following news report and answer the given questions: (50 words max. each part)

“India’s central bank chief, pursuing a campaign to strengthen independence, took one of
his biggest steps yet in pushing the nation’s government to rein in a fiscal deficit with a
signal that lower interest rates depend on budget tightening.
Reserve Bank of India Governor Raghuram Rajan held the main rate at 8 percent yesterday
and said he may cut it early in 2015, while not necessarily at the next scheduled policy
review Feb. 3. Rebuffing calls for a cut, the decision had analysts speculating whether he’d
reduce the rate before or after the government’s annual budget, anticipated in late
February.
“Since Rajan became head of the RBI we see the central bank independence increasing, and
he’s certainly done a lot to boost that,” said Per Hammarlund, chief emerging-markets
strategist at Skandinaviska Enskilda Banken AB in Stockholm. Among central bankers, “he’s
one of the few now definitely in a position where he can speak out more forcefully against
the government.”
Rajan’s willingness to reject pressure to lower borrowing costs strengthens his credibility in
a campaign to rein in one of Asia’s fastest inflation rates, as Prime Minister Narendra Modi
pushes to boost growth. Finance Minister Arun Jaitley called for a rate cut last month,
saying it would provide a “good fillip” to the economy as he works to narrow the fiscal
deficit to a seven-year low.
‘Confident in Realization’
The central bank will have more confidence that the government is meeting its fiscal targets
next year, Rajan told analysts yesterday. “We can be confident in expectation, but then we
will be confident in realization when we actually see that happen,” he said.
Policy change depends on “encouraging” fiscal signs and retreating inflationary
expectations. The central bank doesn’t “intend to flip flop,” once it moves, he said.
Consumer prices rose 5.52 percent in October from a year earlier, the slowest pace since
the index was created in January 2012. The benchmark stock index and rupee have been
among the world’s best performers this year.
Deutsche Bank AG, Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc.
said yesterday they predict a first cut after the budget. Goldman Sachs Group Inc. sees a

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 reduction either in February or March, while BNP Paribas SA says the reduction may occur
before the budget.
Revenue Shortages
A tax revenue shortage makes it difficult to shrink the fiscal gap to 4.1 percent of gross
domestic product in the year through March from 4.5 percent previously, Jaitley said Nov.
21. The government hasn’t begun stake sales accounting for 8 percent of the shortfall and
much of the savings are through short-term spending cuts.
The April-October fiscal deficit was about 90 percent of the full-year target, government
data show. Failure to meet the goal may cause foreign investors to withdraw and a weaker
rupee would fuel inflation, said Christian Maggio, head of emerging markets research at TD
Securities in London. Rajan, 51, vowed to defeat inflation once and for all when he took
office 15 months ago. The former International Monetary Fund chief economist raised the
repo rate three times and has backed a proposal for inflation targeting.
Cut Carrot?
The Finance Ministry is “looking forward” to the central bank supporting growth, it said in a
statement yesterday after the decision. The 1934 Reserve Bank of India Act says the federal
government may direct the central bank on what it considers public interest. The governor
has the authority to veto his advisers on rates. Continued benign price data may prompt
Rajan to cut before Feb. 3, Richard Iley, an analyst at BNP Paribas SA, wrote in a report
yesterday. A quarter-point cut would be a “carrot” for Jaitley to deliver a tight budget, he
said.
Investors are seeking reaffirmation of Jaitley’s pledge to narrow the deficit to 3 percent of
GDP by 2017, as well as progress on a goods-and-services tax and raising foreign investment
caps. While Modi has scrapped some petroleum handouts, they account for a quarter of
India’s subsidy bill.
The more Jaitley succeeds in curbing subsidies, the more room Rajan will have to lower
rates, according to Sonal Varma, an economist at Nomura, who predicts a cut in April.
“In any economy, monetary and fiscal policy have to be aligned,” Varma said by phone in
Mumbai yesterday. “It’s always an implicit thing. This time they explicitly stated this to
anchor the timing of the policy action.”
i. Who is Rajan and what is he trying to achieve?
ii. What is the relation between subsidies and interest rate?
iii. Who may be offered a carrot and for what?
iv. What is the context in which flip flop is used?
v. Based on this report when do you expect interest rates to change? Give reason.

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