IMT-86: INTERNATIONAL FINANCIAL MANAGEMENT
CASE STUDY-1
Blue Dart, an India based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is Rs. 10 million. The firm forecasts total cash inflows of Rs. 4 million per year for 2 years, Rs. 6 million for the next two years, and then a possible terminal value of Rs. 8 million. In addition, due to political risk factors, Blue Dart believes that there is a 50 percent chance that the gross
terminal value will be only Rs. 2 million and that there is a 50 percent chance that it will be Rs. 8 million. However, the government of the host country will block 20 percent of all cash flows. Thus, cash flows that can be repatriated are 80 percent of those projected. Blue Darts’ cost of capital is 15 percent, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?
CASE STUDY-2
Hindustan Construction Corporation arranged a two-year, $1,000,000 loan to fund a foreign project. The loan is denominated in Mexican pesos, carries a 10 percent nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately dropped to 5.10 (pesos per dollars) before the first payment came due. The loan carried no exchange rate protection and was not hedged by Hindustan Construction Corporation in the foreign exchange market.
Thus, Hindustan Construction Corporation must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Hindustan Construction Corporation end up paying on the foreign loan?
IMT-41 INDIAN FINANCIAL SERVICE
CASE STUDY - I
XYZ Ltd is considering acquiring an additional computer to supplement its time-share computer services to its
clients. It has two options:
a. To purchase the computer for Rs 22,00,000
b. To lease the computer for 3 years from a leasing company for Rs 5,00,000 as annual lease rent plus 10
per cent of gross time-share service revenue. The agreement also requires an additional payment of
Rs 6,00,000 at the end of the third year. Lease rents are payable at the end and the computer reverts
to the lessor after the contract period.
The company estimates that the computer under review now will be worth Rs 10 lakh at the end of the third year. Forecast revenues are:
Year R s
1 22,50,000
2 25,00,000
3 27,50,000
Annual operating costs (excluding depreciation/ lease rent of computers) are estimated at Rs 9,00,000 with an additional Rs 1,00,000 for start-up and training costs at the beginning of the first year. These costs are to be borne by the lessee. XYZ Ltd borrows funds at 16 per cent interest to finance the acquisition of the computer;
repayments are to be made according to the following schedule:
Year end Principal (Rs) Interest (Rs) Total (Rs)
1 5,00,000 3,52,000 8,52,000
2 8,50,000 2,72,000 11,22,000
3 8,50,000 1,36,000 9,86,000
The company uses the straight-line method to depreciate its assets and pays 50 per cent tax on its income.
Question
The management of XYZ Ltd approaches you, as a finance manager, for advice. Which alternative would you
recommend and why?
Note: Present value factor at 8 per cent and 16 per cent rate of discount:
Year 8 per cent 16 per cent
1 0.926 0.862
2 0.875 0.743
3 0.794 0.641
IMT-79 ECONOMIC ENVIRONMENT OF INDIA
CASE STUDY-II
Opportunity
The Indian economy is on a bull run and has recently achieved a landmark Gross Domestic Product (GDP) of US$ 1 trillion. After witnessing a lull in the initial years of the current decade, India staged a comeback. Over the last five years, India's GDP more than doubled to US$ 1 trillion, at a Compound Annual Growth Rate (CAGR) of
16 per cent. A higher GDP growth rate combined with a lower population growth rate has led to an accelerated growth in per capita GDP. The economy today is strong and vibrant owing to the liberalization of government policies, an increase in foreign direct investment, increased global competitiveness, investment in infrastructure
and growth in domestic as well as international demand for Indian goods and services. India ranks fourth in terms of Purchasing Power Parity, after the USA, China and Japan. India is home to the youngest population in the world where half its citizens are under the age of 25. This growing working population in India is providing the "fire- power" to the growth of our economy. The Next Trillion Dollar (NTD) era: 2007 to 2012
According to Motilal Oswal's 12th Wealth Creation Study, released in December 2007, in the next five years India's GDP will hit US$ 2 trillion (assuming the current rate Re/US$ parity). The growth rate in the NTD era will almost be same as that of the last five years. However, given the high base, the GDP added in the next five years will be more than that added in the last 30 years, and twice that of the last five years. The report talks the
three types exponentialities in the NTD era:
1. The Macroeconomic Exponentialities
• Consumption, government expenditure, private capex and the external sector
2. Exponential Growth in key industries
• Engineering and construction, financial services, wireless telecom, cars, cement and steel.
3. Exponentiality in Corporate Profits
With all the capex plans, India is taking the much-needed firm step forward to sustain its GDP growth rate. Rising private sector participation in the Indian economy and easy access to capital (both domestic and foreign) are the two key drivers of exponentiality in India's corporate sector sales and profits. The report expects corporate profits as a per cent of GDP to rise from 5 per cent in 2007 to 7.8 per cent in the NTD era.
Questions:
1. Define GDP and per capita GDP. How are they measured?
2. 'A higher GDP growth rate combined with a lower population growth rate has led to an accelerated
growth in per capita GDP.' Analyse the statement in view of the growth rate achieved by the Indian
economy since 1994.
1. Explain the 'exponentialities' in the NTD, as stated by the M
IMT-07 WORKING CAPITAL MANAGEMENT
Q-1
The Divya Paints ltd. is currently following a centralized collection system. Most of it customers are located
in the cities of Northen India. The remittances mailed by customers to the central location take four days to
reach. Before depositing the remittances in the bank the firm loses two days in processing them. The daily
average collection of the firm is Rs. 1,00,000.
The company is thanking of establishing a lock-box system. It is expected that such a system will reduce
mailing time by one day and processing time by one day.
I) Find out the reduction in cash balances expected to result from the adoption of the lockbox system.
II) Determine the opportunity cost of the present centralized collection system if the interest
rate is assumed to be 18 per cent.
III) Should the lock-box system be established if its annual cost is Rs. 24500 ?
Q-2
Performa cost sheet of ABC Company provides the following data:
Costs (Per Unit) Rs.
Raw Material 52.00
Direct labour 19.50
Overheads 39.00
Total cost P.U. 110.50
Profit 19.50
Selling Price 130.00
Following additional information is also available
Average raw material in stock : One month
Average material in process : Half a month
Credit allowed by suppliers : One month
Credit allowed to customers : Two months
Time lag in payments of wages : One and half week
Overheads : One month
1/4th of sales are on cash basis, cash balance is expected to be Rs. 1,20,000/-
Q-3
ABC and company buys and uses a component at Rs. 10/- per unit. The annual requirement is 2000
units. Carrying cost of inventory is 10% per annum and ordering cost is Rs. 40 per order. The purchase
manager argues that as ordering cost is high, it is advantageous to place a single order for the entire
annual requirement. He also says that if the order of 2000 units place at a time, there is a 3% discount
from supplier. Evaluate the proposal and make your recommendation.
CASE STUDY - I
Better deals ltd. having an annual turnover of Rs. 80 lacs, 25% of which are cash sales. Normal credit allowed
to debtors is 30 days. To increase the market share from present level, the marketing manager proposed to
liberalise the credit policy which is as under :-
Proposal Credit Period Expected credit sales
Plan - I 60 days Rs. 70 lacs
Plan - II 90 days Rs. 75 lacs
The product yield an average contribution of 25% on sales. The fixed cost amount to Rs. 5,00,000 per annum.
The company expects a pre-tax return of 20% on capital employed. The bad debts of the company has been
from 1% to 1.5% in case of proposal I and 2% in case of Proposal II. As a finance manager, you are requested
to evaluate the proposal and comment.
CASE STUDY-2
RMT ltd are on verge of commencing commercial production for which the following projections are available for
first 12 months of operations.
I) Sales and production :1 machine per month
II) Average selling price: :Basic price Rs. 40,00,000
Excise duty at 10%
Value Added tax (VAT) at 5%
III. Material cost 60% of basic sales price
IV. Employment cost: Category Number Monthly Cost
Manager 8 Rs. 10,000 each
Supervisor 10 Rs. 6,500 each
Worker 50 Rs. 4,000 each
V) Power and Fuel : Rs. 6, 00,000 per month
VI) Factory Overheads : Rs. 75,000 per month
VII) Selling Overheads : Rs: 1, 00,000 per month
VIII) Sales Collection 30 days
IX) Material cost payment: 70% in the same month and balance in next month.
X) Production time: 30 days
XI) Entire work force is engaged from day 1 of the commercial production and payment to employees is made in
the next month. For other expenses the company has a credit of 1 month. VAT is payable in the next month
of sales.
XII) The Bank has allowed the company a borrowing limit of Rs. 45,00,000 on which interest at the rate of 15%
is charged every, quarter, which is calculated based on average drawing of each quarter and is payable at
the beginning of the next quarter.
Questions:
A) Prepare a cash budge for the 5 months (Jan to May) and give your comment. You may make relevant
assumptions if any.
B) What are the motives of an organization for holding cash?
IMT-25 OPERATION RESEARCH
Q-1
Consider a small plant which makes two types of automobile parts, say A and B. It buys castings that are machines, bored and polished. The capacity of machining is 25 per hour for A and 24 per hour for B, capacity of boring is 28 per hour for A and 35 per hour for B, and the capacity of polishing is 35 per hour for A and 25 per hour for B. Castings for part A cost Rs 2 and sell for Rs. 5 each and those for part B cost Rs.3 and sell for Rs. 6 each. The three machines have running costs of Rs. 20, Rs. 14 and Rs.17.50 per hour. Assuming that any combination of parts A and B can be sold, formulate this
problem as an LP model to determine the product mix which would maximizes profit
Q-2
Solve the following Linear Programming Problem?
Maximize P = 10q + 9r
5q + 4r < 14
4q + 5r ≤ 9
7q – 9r ≤ 11
Q-3
Solve the following integer programming problem using Gomory’s cutting plane algorithm.
Maximize Z = x1 + x2
Subject to the constraints
(i) 3x1 + 2x2 ≤ 5, (ii) x2< 2
And x1,x2 ≥ 0 and are integers
Q-4
Determine an initial basic feasible solution to the following transportation problem by using (a) the least cost method, and (b) Vogel’s approximate method..
Destination
D1 D2 D3 D4 Supply
S1 1 2 1 4 30
Source S2 3 3 2 1 50
S3 4 2 5 9 20
Demand 20 40 30 10
Q-6
In a toy manufacturing company suppose the product acceptance probabilities are not known but the
following data is known:
Anticipated First Year Profit (000 Rs)
Product Line
_____________________________
Product Full Partial Minimal
Acceptance
Good 8 70 50
Fair 50 45 40
Poor - 25 -10 0
Determine the optimal decision under each of the following decision criteria and show how you arrived at
it: (a) Maximax, (b) Maximin,(c) Equal likelihood and (d) Minimax regret
IMT-59 FINANCIAL MANAGEMENT
Q-1
A company expects to pay a dividend of Rs 7/-, next year that is expected to grow at 6%. It retains 30%
of earnings. Assume a capitalization rate of 10%. You are required to:
(a) Calculate the expected earnings per share.
(b) Return on equity.
(c) The value of growth opportunities
Q-2
Sun Ltd has current sales of Rs 6 crore. Sales are expected to grow to Rs 8 crore next year. Sun currently has accounts receivables of Rs 90 lakh, inventories of Rs 1.5 crore and net fixed assets of Rs 2.1crore. These assets are expected to grow at the same rate as sales over the next year. The accounts payable is expected to increase from its current level of Rs 1.5 crore to Rs 1.9 crore next year. Sun wants to increase its cash balance at the end of next year by Rs 30 lakh over its current cash balance. Earnings after taxes next year are forecasted to be Rs 1.2 crore. Sun plans to pay Rs 20 lakh in dividend. Its marginal tax rate is 40 %. How much external financing is required by the firm next year?
CASE STUDY-II
The senior executives of Laxmi Rice Mills Ltd have decided to replace the existing coal-fired furnace in the paddy boiling section with a new furnace. The capital cost of the new furnace is Rs 1 lakh. It would serve for ten years, at the end of which its residual value would be negligible. The book value of the present furnace is Rs 15,000, and it could be used for another ten years with only minor repairs. If scrapped now, it would fetch Rs
10,000. However, after ten more years of use, it would not fetch any amount if scrapped.
The main advantage of the new furnace is that it does not depend on coal, as the supplies of coal are becoming increasingly erratic in recent years. On a conservative estimate, the new furnace would result in a saving of Rs 25,000 per annum on account of eliminated coal cost. However, the cost of electricity and other operating expenses are likely to go up by Rs 8000 and Rs 4000 per annum respectively. The husk, (a by-product during
the normal milling operations) at 3000 metric tonne of paddy milled per year, is adequate for operating the new furnace. On an average, for every metric tonne of paddy milled, the husk content is 20 per cent. At present, the husk is sold at a price of Rs 50 per metric tonne. Once the new furnace is installed, the husk would be diverted for own use. 'White Ash', which constitutes about 5 per cent of the husk burnt in the new furnace, would be
collected in a separate ash pit, as it has a considerable demand in the refractory industry. It could be easily sold at a price of Rs 1500 per metric tonne. The new furnace requires a motor of 15 HP, which costs Rs 1 lakh—excluding the capital cost of the furnace. A
15 HP motor is lying idle with the polishing section of the mill that could fetch Rs 3000 on sale; it has a net book value of Rs 5000. The motor could be used for the furnace. At the end of ten years, it would be scrapped at zero residual value. All the assets of the company are in the same block. Depreciation will be calculated on the straight-line method, and the same is assumed to be acceptable for tax purposes as well. The applicable tax rate is 35 per cent and the cost of capital is 12 per cent.
You are required to:
(a) Formulate the incremental net profit after tax cash flows associated with the replacement project.
(b) Calculate the project's Net Present Value.
(c) Give your recommendations.
CASE STUDY-1
1. An investor can use different Option strategies for Risk management. Given below are some of the strategies being contemplated by a person. You are required to calculate
(i) Risk neutral position
(ii) Maximum pay off and
(iii) minimum Loss under each strategy:
(a) Mr. XYZ is bullish about ABC Ltd stock. He buys ABC Ltd. at current market price of Rs. 4000 on 4th July. To protect against fall in the price of ABC Ltd. , he buys an ABC Ltd. put option with a strike price Rs. 3900 (OTM) at a premium of Rs. 143.80 expiring on 31st July.
(b) Mr. XYZ is bearish on Nifty on 24th June; When the Nifty is at 2694. He buys a put option with a strike price of Rs. 2600 at a premium of Rs. 52, expiring on 31st July.
(c) Mr. XYZ is bullish on Nifty when it is at 4191.10. He sells a put option with a strike price of Rs. 4100 at a premium of Rs. 170.50 expiring on 31st July.
(d) Nifty is at 4450 on 27th April. An investor, Mr. A enters a long straddle by buying a May Rs. 4500 Nifty put for Rs. 85 and a May Rs. 4500 Nifty call for Rs. 122.
(e) Suppose Nifty is at 4500 in May. An investor, Mr. A, executes a short strangle by selling a Rs. 4300 Nifty put for a premium of Rs. 23 and a Rs. 4700 Nifty call for Rs. 43.
CASE STUDY-2
2. XYZ Ltd holds fixed rate bonds with coupon rate of 7%. ABC Ltd is a recipient of floating rate interest through floating rate bonds with coupons rate of LIBOR + 2%. Both apprehend a fluctuation in interest rate in the coming years. ABC Ltd and XYZ Ltd enter into a swap arrangement through a dealer on the following terms:
- ABC Ltd to pay floating rate interest of LIBOR + 2%
- ABC Ltd to receive from dealer fixed interest of 6.5%
- XYZ ltd to pay a fixed interest of 7%
- XYZ Ltd to receive from the dealer a floating rate of LIBOR + 2%
Show the cash flow position of all the three parties.
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