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SM6102 End Sem 18-19

The document provides information and questions for a financial management exam. It includes multiple choice and calculation questions related to stock valuation, portfolio risk, net present value, internal rate of return, weighted average cost of capital, and other capital budgeting topics.

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Rakshim Singh
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17 views2 pages

SM6102 End Sem 18-19

The document provides information and questions for a financial management exam. It includes multiple choice and calculation questions related to stock valuation, portfolio risk, net present value, internal rate of return, weighted average cost of capital, and other capital budgeting topics.

Uploaded by

Rakshim Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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National Institute of Technology Rourkela

Financial Management End-Sem Examination


Maximum marks: 50 Date : 24th April 2019

1. Write your roll number on question paper here - ____________________________________.


Do not share the question paper or stationery. In case of insufficient data, make necessary
assumptions and clearly state them.

2. IndiaPlaza started in 2012 as an equity financed business. Its sensitivity to stock markets was
believed to be βE = 1.5 when interest rates were rF = 10% and market returns were rm = 18%.
Subsequently in 2015, the company took loan at 11% interest for 30% of all capital. Later on
in 2018, 50% of firm value at 12% interest rate. Calculate the following (2x8 = 16 marks) –
a) Expected returns on equity initially
b) Expected returns on equity in 2015-2018
c) Expected returns on equity after 2018
d) Cost of capital in 2015-2018, if taxes were ignored
e) Cost of capital after 2018, if taxes were ignored
f) Cost of capital before 2015, if income tax rate was 20%
g) Cost of capital in 2015-2018, if income tax rate was 20%
h) Cost of capital after 2018, if income tax rate was 20%

3. Answer following multiple choice questions by writing the most appropriate option on answer
sheet (1x8 = 8 marks)
a. The portion of the risk that can be eliminated by diversification is called unique risk/
market risk.
b. Diversification reduces risk because prices of different securities do not move exactly
together. TRUE/FALSE.
c. Maximum diversification is obtained by combining two stocks with a correlation
coefficient equal to: +1.0 / 0.0 / –1.0 / +0.5
d. A stock with a beta of 1.2 would be expected to increase 20%/120% faster than the market
in up markets/down markets.
e. Since gold is held as an investment but pays no cash dividends, today's price equals the
present value of its forecasted future price. TRUE/FALSE/Can’t Say.
f. All future cash flows from a firm can be treated to belong to shareholders / lenders /
taxman (government).
g. Time value of money is recognized in calculation of NPV / IRR / Payback Ratio.
h. A large company in a mature (low growth) industry is likely to keep high cash / average
cash / low cash against its cyclical cash requirements.

4. Refer to table below which shows a portfolio comprised of two assets. What is the portfolio
standard deviation, if the correlation coefficient of their returns is 0.5 (4 marks)

Particulars Asset A Asset B


Returns 10% 20%
Standard Deviation of 15% 25%
Expected returns
Amount Invested 75000 25000

5. IRB Limited is a large company involved in construction and maintenance of national highways.
The company is currently licensed to own and operate a part of NH8 between Surat and Dahisar
(Mumbai). Modern construction of six-lane highway for entire 240 kms under IRB project was
completed in 2009, and the company enjoys the rights to collect tolls till end of year 2023. The
expected toll collections (net of incidental expenses) are given in table below -

Year 2019 2020 2021 2022 2023


Net Cash Flow (Rs million) 2812.1 2926.9 3639.1 4010.0 3551.9
Source: Valuation report provided by IRB managed trust (2018).

What is the internal rate of return from the project, if the initial investment (made in year 2009)
was worth 10,000 million today. (5 marks)

Due to financial difficulties, the company wishes to sell its rights to collect toll and raise funds. If
WACC for IRB is 12%, what is a fair net-present-value at the beginning of year 2019. (5 marks)

6. Write short notes on any three of the following – (3 x 4 = 12 marks)


a. Efficient frontier
b. CAPM
c. Cash conversion cycle
d. WACC
e. Capital Budgeting

***

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