JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW

POST GRADUATE DIPLOMA IN MANAGEMENT

2nd Trimester (Batch 2020-22)
END TERM EXAMINATIONS

Course Name Corporate Finance Course Code FIN201

Max. Time 2 hours Max. Marks 40

Instructions: Attempt all questions

1. You manage a risky portfolio which comprises of 50% investment in Stock X, 30% investment in
Stock Y and 20% investment in Stock Z. The betas of Stock X, Stock Y and Stock Z are 0.80, 1.00 and
1.25 respectively. The risk-free rate of interest is 5% per annum and expected market return is 20%
per annum.
a. Without doing any computations, explain which stock(s) will have expected return
of more than 20%?
b. Without doing any computations, explain which stock(s) will have expected return
of less than 20%?
c. Without doing any computations, explain which stock(s) will have expected return
of equal to 20%?
d. What is the expected return on your portfolio as per CAPM model? Explain why
expected on your portfolio is more than expected return on Stock X. Also explain
why expected on your portfolio is less than expected return on Stock Z.
e. One of your clients Mr. Alpha chooses to invest 60% of his investments in your fund
and 40% in a risk-free asset, whereas another client of yours Mr. Gamma chooses to
invest 40% of his investments in your fund and 60% in a risk-free asset. What is the
expected return on Alpha’s portfolio as per CAPM model? What is the return on
Gamma’s portfolio as per CAPM model? Explain who (Alpha or Gamma) has a
higher degree of risk aversion.
(1+1+1+2+3)

2. Omega borrows Rs. 33,10,000 to finance the expenditure of his son’s education. The loan is
to be repaid in three equal payments at the end of each of the next three years. The lender
charges rate of interest at the rate of 10% per annum, compounded annually on the balance
at the beginning of each year.
a. What is the amount of each payment Omega makes?
b. How much interest was included in each payment? How much repayment of
principal was included in each payment?
c. Why does the amount of repayment of principal increase over time?
(1+2+1)

3. You are a financial analyst for Kappa Limited. The Finance Controller of Kappa Limited
has asked you to analyze the two proposed capital investments: Project A and Project B.
Each project requires an initial investment of Rs. 120 crores. The cost of capital of Project
A is 15% and of Project B is 16%. The projects’ expected net cash flows are as follows:

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 Year Expected Net Cash Flows (Rs. Crores)

Project A Project B
0 -120 -120
1 54 35
2 54 50
3 54 80

a. Which project has higher risk? Explain

b. Calculate each project’s payback period. Interpret the values of payback period of the two
projects.
c. Calculate each project’s net present value (NPV). Interpret the values of NPV of the two
projects.
d. Explain whether the internal rate of the two projects will be more or less than the cost of
capital of the two projects
e. Which project or projects should be accepted if they are independent? Explain.
f. Which project should be accepted if they are mutually exclusive? Explain.
(1+2+2+1+1+1)

4. You have been asked by Finance Controller of Vega Limited to evaluate the existing capital
structure of Vega Limited and suggest the optimal capital structure. As on March 31, 2020,
Vega Limited had a debt-equity ratio of 3:2. The current beta of Vega Limited is 1.20.
During the accounting year 2019-20, Vega Limited earned profit before interest and tax
(PBIT) of Rs. 1000 crores. The corporate tax rate is 30%. The risk-free rate of interest is 5%
per annum and the expected market risk premium is 10%. The following table summarizes
the interest rates at different levels of debt for Vega Limited.
Debt Ratio Interest Rate on Debt
0% 8%
20% 8.5%
40% 9%
60% 10%
80% 12%

a. Estimate the optimal capital debt ratio, using the cost of capital approach.
b. Explain what recommendations you will give to Finance Controller of Vega Limited
regarding the change in capital structure of Vega Limited.
(5+2)

5. Lambda Limited has a target debt-equity ratio of 1:2. The company anticipates that its
capital budget for the accounting year 2020-21 (upcoming year) will be Rs. 900 crores. If
Lambda reports net income (profit after tax) of Rs. 1000 crores during the accounting year
2019-20 and it follows a residual dividend payout policy, what will be its dividend payout
ratio for the current year? Interpret your answer.
(3)

6. Rho Limited has a net income (PAT) of Rs. 1500 crores and it has 120 crores shares of
common stock outstanding. The company’s stock currently trades at price to earning ratio of
5. The company is considering a plan where it will use available cash to repurchase 20% of
its shares in the open market. The repurchase is expected to have no effect either on net
income or the company’s P/E ratio. What is the impact of stock purchase on earning per

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 share of Rho Limited? What will be its stock price following the stock repurchase? Explain
your answer.
(3)

7. The following information is extracted from the financial records Eta Limited for the year
ended December 31, 2020.
Sales = Rs. 2520 crores
Cost of Goods Sold = Rs. 2160 Crores
Accounts Receivable as on January 1, 2020 = Rs. 130 crores.
Accounts Receivables as on December 31, 2020 = Rs. 150 crores.
Inventories as on January 1, 2020 = Rs. 106 crores
Inventories as on December 31, 2020 = Rs. 110 crores
Accounts Payable as on January 1, 2020 = Rs. 46 crores
Accounts Payable as on December 31, 2020 = Rs. 50 crores
Working capital investment (in the form of bank borrowings) at the rate of interest of 10%
per annum, to finance current working capital requirements = Rs. 90 crores
a. What is the duration of operating cycle of Eta Limted? Interpret the value of the
duration of the operating cycle.
b. What is the duration of cash cycle of Eta Limited? Interpret the value of the duration of
the cash cycle.
c. If management of Eta Limited decides to reduce the cash cycle to 15 days, what is the
expected savings in interest costs? Explain your answer.

(3+2+2)

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