FORE School of Management, New Delhi

Post Graduate Diploma in Management (FMG-29, IMG-14, FM-03 and BDA-01)

Term End Examination (Term-3)
Course Name: Financial Markets, Institutions and Services
Time: 2 Hours Max Marks: 100
Instructions: a. This question paper contains 2 Pages
b. Possession and use of cell phone is prohibited
c. Use of calculator including financial calculator is allowed
d. Be brief and to the point in the response
e. State assumptions made, if any
g. Marks are indicated in the right hand parenthesis against each question

1.1. Why do startups need venture capitalists? And how do venture capitalists make money?
Offer your views particularly detailing the concept, the business model, the revenue model, and
the venture capital cycle of a venture capital firm. 10
1.2.Wellness Enterprises, a startup, has 64 lakh common shares and 36 lakh preferred shares
outstanding. Currently the preferred shareholders are holding shares issued at Rs. 150-lakh in
Wellness Enterprises. As per the term sheet the preferred shares carries participating liquidation
preference rights with a total liquidation preference of three times the original issuance price.
10
Based on the information provided above:
 Explain the concept of liquidity preference in the context of venture capital, and
 Determine the pay-off the common shareholders and preferred shareholders with receive,
assuming the Wellness Start Up is acquired at an enterprise value of (a) ₹ 420 lakhs, (b)
₹ 600 lakhs and (c) ₹1200 lakhs respectively.
 What do think will happen to the relative proportion of allocation of pay-off between
common shareholders and preferred shareholders as the enterprise value increases
steeply, say to ₹2100 lakhs.
1.3. Excel Venture Fund (EVF) is considering 12 million investments in Wellness Enterprises
(WE) that expects to require no further capital through year five. WE present has 300,000 shares
outstanding before the investment. WE expect to earn ₹ 9 million in year three, and should be
comparable to companies commanding price-earnings ratio (PER) of about 21. EVF expects to
exit this investment at that point through sale of its holding. Assume further that EVF requires a
45% projected internal rate of return (IRR) on project of this risk. 10
Calculate (a) percentage of WE stocks EVC will own, (b) number of new shares WE will issue to
EVF for investment of ₹ 150 million (c) price per share EVF will pay at the time of investing
funds, and (d) pre-money and post-money valuation of WE.
2.1. Describe the characteristics and classification of commodity markets. Why and how are
commodities traded? What is the role of hedgers and speculators in the commodities market? 10
2.2. Two commodity market speculators-one bullish and one bearish- choose to take opposite
positions of 3 kg in April at ₹48000 per 10 grams. Both maintain accounts at Sun Brokerage
Limited that allow them to trade at minimum margins. Both would be required to put up ₹720000
as initial cash margin to open their positions. Traders are aware that the exchange also set
₹600000 as the maintenance requirement for their contracts. The minimum lot for gold is 1 kg
meaning each of the speculator has bought/sold 3 contracts. Considering that gold prices
fluctuates, any adverse price movement will put one of the speculators into margin call territory.
Calculate how much each of the speculators have to deposit/can withdraw if April aluminium
prices (a) rises to 49250 per 10 grams, (b) crashes to ₹ 46500 per 10 grams respectively and the
funds speculators need to bring to meet the margin requirements, if any. (1 Kg= 1000 grams). 10
3.1. Assume an investor requires to pay 98.75 for a 91-day T-bill with 100 par value. 6

 The annualized yield will be…

 Calculate the yield if the T Bill is traded at Rs.98.96 after 18 days.
3.2. Sun Asset Reconstruction Company (SARC) plans to sell three-year bonds with face value of
₹ 450 million at issue price of 64% of face value, in lieu of portfolio of debt acquired under debt
resolution arrangement. 9
 What type of bond the SARC is selling and why? Give reasons.
 Calculate the amount SARC will receive upfront and the yield on the bond. Describe how
SARC will record the transactions in its balance sheet, the statement of profit and loss
account and the statement of cash flows right from the time of issuance, until redemption
of bonds on maturity.
4. The COVID-19 pandemic has come as shocker for the housing finance companies in general
and Evergreen Housing Finance business in particular. The company is facing liquidity crunch
due to its excessive reliance on short-term funding sources as well as possible higher
default/deferment in loan payments. The Direct Finance of Evergreen realizes the financial
fragility of the company, and thinking about leveraging the existing home loan portfolio to raise
funds as an alternative to sustain its growth plan. 15
 Considering the scenario described above, do you think securitization of home loan
portfolio can actually act as an enabler to resolve problems faced by Evergreen Housing
Finance? Offer your comments.
 Illustrate the securitization process using the deal diagram depicting the various stages of
securitization and the roles played by each of the participant in the securitization deal.

5.1. Sunbeam Auto Lamps (SAL) signed a contract of ₹900 lakhs with Maruti Suzuki Limited to
supply automotive lights during the financial year 2020-21. After signing the contract, the
management realized that they are is “long on order and short on cash” and seeking solutions to
execute the order on time. 15
In view of the situation described above and as a representative of India Factors:
 Explain the package of facilities, your company would like to offer to SAL to enable
them to get out of “long on order short on cash” situation. List out the documents, and the
implications of each of the documents, that India Factors will need at the time of
sanctioning and releasing the funds to SAL. 8
 Assume that factoring arrangement with India Factoring is in place to release 90% of
invoice value as pre-advance on with recourse basis. India Factors recovers finance
charge of 15% per annum and 0.10 % of invoice value as factoring fee, at the time of
releasing pre-advance. Calculate (i) the amount India Factors will release to SAL at pre-
advance stage, and on receipt of final payment on despatching first lot of automotive
lamps amounting to ₹90 lakhs on 60 days’ credit basis. (ii) the effective annualized cost
of factoring to SAL. (for calculation purposes you may assume 360 days in a year). 7
5.2. Based on the barter transaction details given below, determine the net gain/loss, an office
furniture manufacture can make by availing bartering facility through India Barter House. 5
 Cost per unit : ₹60000
 MRP (Selling price) per unit :₹90000
 Discount on cash sales : 15% on MRP
 Number of units sold : 30
 India Barter Exchange House fee : 9% on MRP