PART -B

CHANDRABALI SAHA 21PGDM027

Q1) A company Zeta has just declared a dividend of Rs 6 per share. The company is expected to increase its
dividend per share at 12% pa for the next 3 years and thereafter reach a stable growth rate of 5% . The
current financial information of the company are as follows

 The stock is currently trading at Rs 90 per share

 Face value of share Rs 10

 Number of outstanding shares 50 million
 NOPAT for the year Rs 400 million
 Shareholders equity at the beginning of the year Rs 5 billion
 Beta of the company 1.2
 Yield of 10 year Government bond – 6.5%
 Credit rating of the bond – AA
 Credit risk premium for AA rated bonds – 250 bps
 Par value of outstanding bonds – Rs 500 million
 Face value per bond – Rs 1000
 Coupon rate = 10% pa payable yearly
 Remaining maturity of the bonds = 3 years
 The bond will be redeemed at par on maturity
 Equity risk premium for India – 7%
 Marginal tax rate is 25%
Solution - Required return rate (ke) = Risk free rate + Beta * (Equity market premium)
= 6.5 + 1.2 * (7)
= 14.9 %

As per the Dividend discount model ,

D1 = 6 * (1+.12) = 6.72
D2 = 6 * (1+.12)^2 = 7.52
D3 = 6 * (1+.12)^3 = 8.42

P3 = D3 * (1+g) / (r-g)
 = 8.42 * (1 + .05) / (0.149 - .05)
= 8.42 * 10.60
= 89.30

Current Share Price = 6.72/(1+0.149) + 7.52/(1+0.149)^2 + (8.42+ 89.30)/ (1+0.149)^3

= 5.84 + 5.69 + 64.45
= 75.98

The intrinsic value of the share is Rs 75.98 and since the current market price is Rs 90 hence the share
is undervalued.
Q2) Using the same information as given in problem 1 , calculate the market value of the bonds .
Assume the yield to maturity = risk free rate + credit risk premium
Face value 1000
Coupon = 10% p.a.
Coupon amount = 100
Time period = 3
YTM = 6.5% + 2.5% = 9%

Value of bond = 100/(1.09) + 100/(1.09)^2 + 100/(1.09)^3 + 1000/(1.09)^3

= 91.743 + 84.175 + 77.220 + 772.200
= 1025.33

Q3 ) In the context of the Russia- Ukraine event , identify the different financial risks which an Indian
importer from Russia /Ukraine faces and an Indian exporter to Russia /Ukraine faces . Also, identify
the hedging strategies which the Indian importer and exporter can deploy to mitigate his financial
risks
The immediate impact of India will be limited to the scope of trade between the two countries. It wouldn't
make much of a difference because Russia's share of India's overall exports is only about 1%. In fact,
defence accounts for a large amount of imports, and the government can devise ways to keep the agreements
going. Nonetheless, the indirect impact—via the markets—is a key source of concern.
India's Russian Exporter:
India's biggest exports to Russia are pharmaceuticals, organic chemicals, auto components, and electronics.
In contrast, India's bilateral trade with Ukraine is estimated to reach $3.1 billion in 2021. Last year,
pharmaceuticals, agrochemicals, food goods, and other things totaled $510 million in exports.
So very less export has very less financial risk.
Indian importer from Russia /Ukraine:
The top item of India’s imports from Russia is crude oil, followed by coal and petroleum products. But
India’s imports of crude oil from Russia are just 2.3% of its total crude oil imports,
But there are still pockets of concern. For instance, coking coal imports are likely to be affected which is a
concern for steel-makers, s Russia and Ukraine both provide steel semis for export in the global market,
There is a likelihood of shortage of semis for producing finished steel globally, Steel semis refer to semi-
finished products like ingots, billets,
There are also concerns over shipments of sunflower oil. Shipments of more than 3,50,000 tonnes of
sunflower oil to India, the world’s biggest buyer, are at risk as Russia’s attack on Ukraine disrupts logistics
and loadings at some ports, Bloomberg reported. On the flip side, India could benefit from higher wheat
exports as some of Russia's stock goes off the market.
 Inflation is the initial point of contact. Since the verbal onslaught began in early February,
commodity prices have begun to rise. The impact of the battle on crude oil is probably the most
evident, but it has also pushed up prices of metals, gas, and edible oils at a time when it was believed
that prices would stabilise this year after a bull run in 2021. Manufacturers in India, for example,
have been progressively increasing prices and passing on rising input costs since late December.
With this new wave of price hikes, the pressure will intensify across the board. Since November, the
Indian government has refrained from raising fuel prices, citing state elections as a reason. Even
without the conflict, this wave of price increases was inevitable. The current circumstances are
simply exacerbating the problem.
 The second cause of concern is the rupee. Since the commencement of the war, currency markets all
around the world have been extraordinarily turbulent. A combination of war and sanctions has
resulted in currency devaluation, and the rupee has not been spared. This comes as the current
account balance has turned to the negative, and as oil prices climb, a higher CAD is expected.
 Third, bond yields have grown more volatile as a result of the rising demand for dollars. On
expectations that the Fed will not hike rates in these circumstances, yields have been falling.
However, signs that this will continue as inflationary fears intensify are driving rates higher. As a
result, investors have been kept guessing by daily bond yield fluctuation In India, though, the way is
clear: upwards. The RBI was expected to keep interest rates unchanged this year in line with its
credit strategy. As a result, the 10-year bond reverted to 6.7 percent.
 Finally, those conducting business with Russia are anxious about payment. The absence of Russia
from SWIFT has put exporters in a bind. To make matters worse, shipping companies are wary of
sending goods to Russia. All entities in other nations are affected as counter-parties to these
transactions in an attempt to hurt Russia. At the government level, India can enter into a rupee-rouble
agreement, but getting roubles for exports may not be as tempting to private enterprises..
 To keep the rupee stable, the RBI may have to use more sell-buy swaps. Uncertainty and a smidgeon
of volatility will eventually lead to increased central bank action.