The value of the abandonment option is 0125 100000 110 4 Rs 8538 Note Students

The value of the abandonment option is 0125 100000

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The value of the abandonment option is: 0.125 × (1,00,000) / (1.10) 4 = Rs. 8,538 Note: Students may also assume that the price of the gold remains at Rs. 5,000 to solve the question. Question 2 (a) Calculate economic value added (EVA) with the help of the following information of Hypothetical Limited: Financial leverage : 1.4 times
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PAPER – 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS 29 Capital structure : Equity Capital Rs. 170 lakhs Reserves and surplus Rs. 130 lakhs 10% Debentures Rs. 400 lakhs Cost of Equity : 17.5% Income Tax Rate : 30%. (b) A has invested in three Mutual Fund Schemes as per detailed below: MF A MF B MF C Date of investment 01.12.2003 01.01.2004 01.03.2004 Amount of investment Rs. 50,000 Rs. 1,00,000 Rs. 50,000 Net Asset Value (NAV) at entry date Rs. 10.50 Rs. 10 Rs. 10 Dividend received upto 31.03.2004 Rs. 950 Rs. 1,500 Nil NAV as at 31.03.2004 Rs. 10.40 Rs. 10.10 Rs. 9.80 Required: What is the effective yield on per annum basis in respect of each of the three schemes to Mr. A upto 31.03.2004? ( c) Explain the term ‘Exposure Netting’, with an example. (d) Distinguish between Money market and Capital Market. (6 + 6 + 5 + 3 = 20 marks) Answer (a) Financial Leverage = PBIT/PBT 1.4 = PBIT / (PBIT – Interest) 1.4 = PBIT / (PBIT – 40) 1.4 (PBIT – 40) = PBIT 1.4 PBIT – 56 = PBIT 1.4 PBIT – PBIT = 56 0.4 PBIT = 56 or lakhs 140 Rs. 0.4 56 PBIT = = NOPAT = PBIT – Tax = Rs. 140 lakhs (1 – 0.30) = Rs. 98 lakhs. Weighted average cost of capital (WACC) = 17.5% × (300 / 700)+ (1 – 0.30) × (10%) × (400 / 700) = 11.5%
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FINAL EXAMINATION : NOVEMBER, 2004 30 EVA = NOPAT – (WACC × Total Capital) = Rs. 98 lakhs – 0.115 × Rs. 700 lakhs = Rs. 17.5 lakhs (b) Scheme Investment Unit Nos. Unit NAV 31.3.2004 Total NAV 31.3.2004 Rs. Rs. Rs. MFA 50,000 4761.905 10.40 49,523.812 MFB 1,00,000 10,000 10.10 1,01,000 MFC 50,000 5,000 9.80 49,000 Scheme NAV (+) / (–) Dividend Received Total Yield Number of days Effective Yield (% P.A.) Rs. Rs. Rs. MFA (–)476.188 950 473.812 122 2.835% MFB (+)1,000 1,500 2,500 91 10.027% MFC (–)1,000 Nil (–)1,000 31 (–)24% (c) Exposure Netting refers to offsetting exposures in one currency with Exposures in the same or another currency, where exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure. The objective of the exercise is to offset the likely loss in one exposure by likely gain in another. This is a manner of hedging forex exposures though different from forward and option contracts. This method is similar to portfolio approach in handling systematic risk. For example, let us assume that a company has an export receivables of US$ 10,000 due 3 months hence, if not covered by forward contract, here is a currency exposure to US$. Further, the same company imports US$ 10,000 worth of goods/commodities and therefore also builds up a reverse exposure. The company may strategically decide to leave both exposures open and not covered by forward, it would be doing an exercise in exposure netting. Despite the difficulties in managing currency risk, corporates can now take some concrete steps towards implementing risk mitigating measures, which will reduce both actual and future exposures. For years now, banking transactions have been based on the principle of netting. Where only the difference of the summed transactions between the parties is actually transferred. This is called settlement netting. Strictly speaking in banking terms this is known as settlement risk. Exposure netting occurs where
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