IBS535 FM - I (A) / 0806

Semester I Mid Semester (Make-up) Examinations Class of 2008 IBS535 Financial Management - I Part A
Q. Call rate is? a. b. c. d. e. Q. Interest paid on call loan Asked rate of interest for a term deposit Sale price of a bond Negotiated rate for which the debenture is sold Interest rate for large bank borrowings.

Which is not a finance function? a. b. c. d. e. Capital budgeting decision Capital structure decision Investment decision Dividend decision Production decision

Q.

The maximum number of share holders/members in a private ltd company is a. b. c. d. e. 50 2 9 75 49

Q.

Why is a corporate form of business advantageous? a. b. c. d. e. It generally has a limited liability It generally has a broad base capital It has a perpetual life It is easy to liquidate (a), (b) and (c)

Q. The market value of a firm is dependent on a. b. c. d. e. The capital structure decision The dividend decision The cost minimization decision All the above Value of the inventory 1

IBS535 FM - I (A) / 0806 Q. The apex financial institution that promotes the agricultural finance is? a. b. c. d. e. Q. NABARD IDBI HUDCO HDFC NHB

Yield for the Treasury bill with face value of Rs.100, sold at Rs.80 and mature on 60 days will be a. b. c. d. e. 2.362 1.520 3.668 10.88 1.529

Q.

The money lent for 2 to 15 days in the money market is called as a. b. c. d. e. Notice money Call money Term loan Demand loan None of the above

Q.

The maturity period of a certificate of deposit is issued by a bank is a. b. c. d. e. Not less than 7 days and not more than 12 months Not less than 20 days and not more than 360 days Not less than 15 days and not more than 12 months Not less than 18 days only Not less than 15 days only

Q.

Which one is not a correct day period for a treasury bill? a. b. c. d. e. 014 28 91 30 364

IBS535 FM - I (A) / 0806 Q. The first mutual fund in India is a. b. c. d. e. Q. BGFL UTI KOTAK MAHINDRA ICICI Prudential None of the above

If 364-day T-bill is issued at FV of 100 rupees at a yield of 11.5 %, then the issue price will be a. b. c. d. e. Rs.88.50 Rs.89.69 Rs.89.71 Rs.89.78 Rs.89.88

Q.

Which of the following are assets of a bank? a. b. c. d. e. Loans given on term scheme Capital refinance done by the bank Lending to DFIs All the above None of the above

Q.

A schedule bank can be a. b. c. d. e. Only a Public sector bank Only a private sector bank Either private or public sector bank A bank which is formed under schedule VIII, of the banking regulation act Both (c) and (d) above

Q.

If a loan of Rs.3,00,000 is to be repaid in 6 annual installments with a coupon rate of 12 % p.a then the equated annual installment will a. b. c. d. e. Rs.71,967 Rs.72, 975 Rs.74, 005 Rs.75, 995 Rs.76, 004

IBS535 FM - I (A) / 0806 Q. The difference between the effective rate of return of a bond with a coupon rate of 12 % when compounded monthly and quarterly is a. b. c. d. e. Q. 0.03 0.10 0.13 0.19 0.25

Capital market differs from money market a. b. c. d. e. Capital markets are regulated while money market are not The maturity of securities in the capital are long term while in the money market it is short term Limited companies operate in the money market Money market is unorganized None of the above

Q.

Money market deals with a. b. c. d. e. Mortgage loans Certificate of deposits Deposited with RBI under CRR FD receipts Both (a) and (b) above

Q.

Who amongst these are not parts of the secondary stock market? a. b. c. d. e. Investing Public SEBI Companies Brokers Underwriters

Q.

The nominal rate of interest is equal to a. b. c. d. e. Real rate + risk premium inflation Real rate + risk premium + Inflation Real Rate Risk premium + Inflation Real rate risk premium inflation Real rate

IBS535 FM - I (A) / 0806 Q. A risk free stock has a beta of a. b. c. d. e. Q. -1 .0 0.50 +1 Infinite

Which of the following is not an assumption under CAPM? a. b. c. d. e. Investors make their investment decision on a single period horizon If the perceived risk is high, a risk averse investor expects higher return The investor is not limited by their wealth and price of the asset Assets can be brought at the going market price CAPM is based on all the above assumptions

Q.

If an investor has to double an amount at K% interest rate then the period of doubling will be a. b. c. d. e. 72/K 0.35+69/K Log2/Log (1+k) 2 Both (a) and (b) above

Q.

If a compounding is done twice a year then the effective rate of interest will be equal to a. b. c. d. e. 2 x normal rate of return Normal rate of Interest/2 (1+normal rate of interest/2)2 {(1+normal rate of interest)/2}2
-1 -1

(1+normal rate of interst/2) x 2 -1

Q.

Which of the following is/ are true? a. b. c. d. e. Inverse of FVIF is PVIF Inverse of FVIFA is PVIFA Inverse of capital recovery factor is FVIFA PVIFA is the product of inverse of FVIFA and PVIF None of them has any relation

IBS535 FM - I (A) / 0806 Q. Which of the following is a specific risk factor? a. b. c. d. e. Q. Market risk Inflation risk Interest rate risk Financial risk None of the above

Risk premium in the capital asset pricing model (CAPM) is given by a. b. c. d. e. Rf Km- Rf (Km-Rf) Km (Rf-Km)

Q.

The risk arising out of the uncertainty of the time element and the price concession in selling a security is called a. b. c. d. e. Price risk Market risk Trading risk Liquidity risk Financial risk

Q.

Which of the following is not a diversifiable risk factor? a. b. c. d. e. Company strike Bankruptcy of major supplier Death of a key officer in the company Unexpected entry of new competitor into the market None of the above

Q.

Other things remain unchanged; a security is to be bought if a. b. c. d. e. The required rate of return is less than expected rate of return The expected rate of return is less than required rate of return Security has beta of less than one The security has a large amount of floating stock in the market Security has beta of more than one

IBS535 FM - I (A) / 0806

Part B
Problems testing, Conceptual Understanding and Application Analytical Ability, Caselets, Situational Analysis
1. Write short notes on the following: a. b. c. d. e. Nature and Objectives of Finance Function Commercial Paper Hire Purchase Finance Security Market Line YTM (5 x 5 = 25 marks) Suggested Answer: As per text description. 2. Dheeraj has a portfolio of 8 securities, each with a market value of Rs.5000. The current beta of the portfolio is 1.28 and the beta of the riskiest security is 1.75. Mr. Dheeraj wishes to reduce his portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security? (10 marks) Suggested Answer: Current beta of portfolio = 1.28 Market value of portfolio = Rs. 40000 Weight of each security in portfolio = 5000/ 40000 Sum of beta = 1.28 x 8 = 10.24 Beta of portfolio required is = 1.15 Sum of new portfolio beta = 1.15 x 8 = 9.20 10.24 1.75 + X = 9.20, X = 9.20 8.49 = 0.71 Thus the beta of the replacement security = 0.71 3. M/s XYZ company has a sequel of steady fall in the earning and dividend due to bad performance of business. The rate of fall is 6% per annum. If the annual dividend of the previous year was Rs.14 and the required rate of return is 18 per cent what is the current price of the equity share of the firm? (10 marks) Suggested Answer: Earning and dividend are declining at a rate of 6%p.a. So the growth rate(g) may be taken as g=0.06. The dividend for the previous year was Rs. 14 and g= 0.06)=Rs.13.16 Po=D1 (1+g)/(Ke-g)=13.16*0.94/0.24=51.54 7 - 0.06, the value of D1= Rs.14(1=1/8

IBS535 FM - I (A) / 0806 4. A Bond of Funds Intermediary Limited has a par value of Rs.100, coupon rate of 8% and five years maturity. Find out the value of the bond today, if the required rate of return is 10%. (5 marks) Suggested Answer: Vaue of the bond=PVIFA(10,5)*8+PVIF(10,5)*100 = 3.791*8+0.621*100 =92.43

IBS535 FM - I (A) / 0806

Part C
Case Analysis / Applications of concepts
5. Himanshu takes a loan of Rs.1,00,000 which is to be repaid in five equal annual installments as per the loan agreement. The applicable rate of interest is 15%. He thinks that he shall have to arrange about Rs.30,000 every year. Knowing that it shall be difficult for him to raise this much amount at one point in time, he opts for A Recurring Deposit Scheme. This RD has the following features: a. b. c. The deposits are to be made at the end of each month for 12 months, The maturity date of the RD is end of the 12th month, Interest payable is 12% and The interest is compounded on a monthly basis. The amount of the annual installment Himanshu has to pay, The amount he has to deposit every month in the RD and State any assumptions for successful completion of this arrangement. (7 + 8 + 5 = 20 marks) Suggested Answer: We shall solve this problem by finding the annual installment by using the formula A=100000/PVIFA(15,5) where A is the annual repayment obligation=29833. This amount has to be equal to MI * FVIFA(1,12) Therefore MI=29833/12.683=2352 The assumptions to be made are: The scheme is not withdrawn The scheme is not altered to his disadvantage including reduction in the interest rates offered for the RD.

You are required to do the following: