Duration : 2 hours Total Marks : 30

Term-II

Instructions:
All Questions are compulsary.

Please read questions carefully in following sheets and work on the attached data to give answers. All formula need
to maintained in excel.

Every Student is required to save workbook with their Roll number and FULL name and upload in the submission
link provided in the Moodle itself. eg. ROLL NUMBER_Full Name.

Use of Excel worksheet or Scientific calculator is allowed in exam.

ers. All formula need

n the submission
Case 1: Malaysian Paints (India) Limited has paid a dividend of 30 per cent on its shares of Rs 10 each in the curren
dividend is expected to grow at 5 per cent annum. The required rate of return of the company is 15 per cent. Mala
a large number of multinational companies have started their operations in India in the same line of business. The
of diversifying the activities of the company. In a quarterly meeting of the Board, a special executive committee con
director was formed. The special committee was chaired by the CMD of the company. The special executive comm
suggested the following alternative courses of action for the consideration of the Board:

(i) To increase the dividend growth rate to 6 per cent, and lower the required rate of return to 14 per cent.

(ii) To increase the dividend growth rate to 7 per cent and raise the required rate of return to 17 per cent.

(iii) To raise the required rate of return to 16 per cent and reduce the growth rate of dividend to 4 per cent.

(iv) To increase the dividend growth rate to 8 per cent and increase the required rate of return to 17 per cent.

You are the finance manager of the company. The Board of Directors has confidence in your abilities because, in t
The Board has requested you to suggest, with calculations, the most suitable course of action for the comp
shareholders wealth). State your assumptions if any. (8 Marks)

Given Choski expectation (i) (ii) (iii)

Dividend rate 0.3 0.3 0.3 0.3
face value 10 10 10 10
Growth rate of
dividend 5% 6% 7% 4%
Required rate of
return 15% 14% 17% 16%

After analysing all the given alternatives the (i) alternative is recommended, i.e. increasing the dividend growth rate
s of Rs 10 each in the current financial year. In the opinion of Choksi, finance director, the
mpany is 15 per cent. Malaysian Paints is facing tough competition in the market because
e same line of business. Therefore, the management of the company is seriously thinking
cial executive committee consisting of finance director, marketing director and production
The special executive committee had a brain-storming session and a series of meetings. It
:

urn to 14 per cent.

urn to 17 per cent.

idend to 4 per cent.

return to 17 per cent.

n your abilities because, in the past, you have helped the Board in making such decisions.
rse of action for the company (assuming the firm has an objective of maximising its
(8 Marks)

(iv) Alternatives Share price

0.3 Choski expectation ₹ 31.50
10

8% (i) ₹ 39.75

17% (ii) ₹ 32.10

(iii) ₹ 26.00
(iv) ₹ 36.00

ing the dividend growth rate to 6 per cent and lowering the required rate of return to 14 percent as this is likely to bring the maximum pri
to bring the maximum price for equity shares
Case 2: While preparing a project report on behalf of a client you have collected the following facts. Estimate the net w
Add 10 per cent to your computed figure to allow contingencies:

Additional information: Selling price, Rs 200 per unit Level of activity, 1,04,000 units of production per annum Raw
progress (assume 50 per cent completion stage in respect of conversion costs and 100 per cent completion in resp
goods in stock, average 4 weeks Credit allowed by suppliers, average 4 weeks Credit allowed to debtors, average 8 w
weeks Cash at bank is expected to be, Rs 25,000. You may assume that production is carried on evenly throughout th
accrue similarly. All sales are on credit basis only. ( 5 Marks for current assets , 2 Marks for Current liability es
(8 Marks)

Amount
Current assets:
Raw materials in stock, average 4 weeks ₹ 640,000.00
WIP, average 2 weeks
(a) Raw material ₹ 320,000.00
(b) Direct labor ₹ 60,000.00
(c) Overheads ₹ 120,000.00
Finished goods stock, average 4 weeks ₹ 1,360,000.00
Debtors, average 8 weeks ₹ 2,720,000.00
Cash at bank ₹ 25,000.00
Total Current Assets ₹ 5,245,000.00

Current Liabilities
Creditors, average 4 weeks ₹ 640,000.00
Delay in wage payment, average 1.5 weeks ₹ 90,000.00
Total Current Liabilities ₹ 730,000.00

Net Working Capital (Current Assets - Current

Liabilities) ₹ 4,515,000.00
Add 10% contingencies ₹ 4,966,500.00
ing facts. Estimate the net working capital required for that project.

roduction per annum Raw materials in stock, average 4 weeks Work in

er cent completion in respect of materials), average 2 weeks Finished
wed to debtors, average 8 weeks Lag in payment of wages, average 1.5
ed on evenly throughout the year (52 weeks) and wages and overheads
rks for Current liability estimation and 1 NWC)
Question3:

ABC Ltd paid a dividend of Rs 4 per share at the end of the year. It is expected to grow by 8 per cent
each year for the next 4 years. The market price of the shares is expected to be Rs 60 at the end of 4 years.
Assuming 12 per cent required rate of return of investors, at what price should the shares of ABC Ltd sell?
(5 Marks)

Given
Div 4 Year Dividend growth Expected Price
Div G 0.08 1 4.32 3.86
n 4 2 4.67 3.72
r 0.12 3 5.04 3.59
mp at the end 60 4 5.44 3.46
38.13
Share Price ABC should sell at 52.75
years.
sell?
Case 4: The BSES Rajdhani Ltd supplies power to homes and businesses in India. Its pricing is regulated by the Electricity
average annual cash flows available to the equity holders during the 5-year period 2006-10 were Rs 551crore and the av
period amounted to Rs 506 crore. The earnings per share (EPS) and the dividends per share (DPS) in 2009 were Rs 3.13 a
out ratio being 70 per cent. The return on equity averaged 11.63 per cent.

The management of the BSES has appointed Richa Singh as a financial consultant to compute the value of its shares. Rich
distributors like BSES is 0.90. Similarly, the risk free rate and the market risk premium rate are 5.4 per cent and 4 per cent
of the BSES Ltd?
(5 Marks)

DPS (D0) 2.19 P0= D1/(Ke-g)

EPS 3.13
Dividend P 70% Ke 9.00%
Rf 5.40% g 3.489%
Rm-Rf 4%
Beta 0.9 P0 ₹ 41.125
ROE 11.63%
 is regulated by the Electricity Regulatory Commission (ERC). The BSES’s
0 were Rs 551crore and the average annual dividends during the same
e (DPS) in 2009 were Rs 3.13 and Rs 2.19 respectively, the dividend pay-

te the value of its shares. Richa Singh estimates that the beta for power
are 5.4 per cent and 4 per cent respectively. What is the per share value
Valuing an emerging market company with developed market exposure: ARP steel is a Brazilian company that derived about 5
revenues in Brazil in 2008 and rest in North America. T-Bill rate is 3%, equity risk premium for Brazil was 4.75%. For ARP steel
unlevered beta of 1.01 for steel companies listed globally, using the argument that steel is a commodity that is bought and so
market. ARP has a very high market debt to equity ratio (138.89%)
1) Calculate levered beta for the company using bottom up approach. (marginal tax rate for Brazil is 34%)
(2)
2) Calculate cost of equity of ARP. (2)

1 Levered Beta = Unlevered Beta*(1+(1-t)D/E)

=1.01(1+(1-0.34)1.3889)
=1.01(1+(0.66)1.3889)
Answer 1.93584074

2 Cost of Equity (ke) = Rf+β(Rm-Rf)

Here, Rf=3%, Rm-Rf= Equity Risk Premium = 4.75%, β equity = 1.935
So, ke =
12.19%
Answer ke = 12.19%
pany that derived about 51% of its
was 4.75%. For ARP steel we use average
dity that is bought and sold on a world

34%)