Regn. No.

INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

PGDBA
FINANCIAL MANAGEMENT
END-TERM EXAMINATION
MARKS: 50
TIME ALLOWED: 1 HOUR

1. Suppose that the spot price of oil is USD 80 per

barrel. The quoted one-year futures price of oil is
Rs.75 per barrel. The one year USD interest rate is
5%. The storage cost of oil is 3% per annum. Assume
no margin requirements. Is there an arbitrage
opportunity? How much per barrel?

2. You have just been given the following information on

Dodger Corp and the S&P 500.
Year
Dodger Corp Price ($)
S&P 500 (Value$)
1979
40
150
1980
36
150
1981
34.2
145.5
1982
20.52*
160.05
1983
22.57
163.25
1984

22.34

159.99

* Stock split 2:1

a. What is your beta estimate for this firm?
b. What portion of total variance is systematic and
what portion is
Unsystematic?
What is the required rate of return on Dodger Corp?
(Rf=7%, E(Rm)-Rf=8%)
3. You run a regression of monthly returns of XYZ corporation
on the S&P 500
index and come up with the following output (All data was
entered in percent):
Intercept of the regression = 0.0015
X-coefficient of the regression = 1.50
Standard error of X-coefficient = 0.25
R squared = 0.40
There are one million shares outstanding, and the current
market price is $ 30.
The firm has $ 30 million in debt outstanding. (The firm has a
tax rate of 40%)
a. What would an investor in XYZ's stock require as a
return, if the current
6-month T.Bill rate is 6%?
b. What proportion of this firm's risk is diversifiable?

c. Assume now that XYZ has three divisions, of equal size

(in market value
terms). It plans to divest itself of one of the divisions (with a
beta of 1.0)
for $ 20 million in cash and acquire another firm (which has
a beta of 2.0) for $ 50 million (It will borrow $ 30 million to
complete this acquisition).
What will the beta of XYZ be after this acquisition?
4. You have been asked to analyse a capital budgeting project,
where the initial investment is $ 100,000, and the project is
expected to generate $ 30,000 in real pre-tax cash flow
savings each year for the next 5 years. The initial investment
is depreciable, straight line, over 5 years to a salvage value
of zero. The tax rate is 30% and the nominal discount rate is
10%. If the net present value of this project is $10,705,
estimate the expected inflation rate.
5. A stock is currently selling for $22. Consider a call option on
the stock with an exercise price of $15. At the expiration
date of the call option, which is 1 year from now, the stock
can either have a price of $32 or a price of $18. The risk free
rate of interest is 6 percent per annum. What is the current
price of the call?
6. XYZ has a target capital structure of 40% debt and 60% equity. The company
proposes to issue a deep discount bond to raise the debt and the companys
tax rate is 35%. The bond will be issued at 60% discount to its nominal value
and will have a maturity of 10 years. XYZs CFO has calculated the companys
WACC as 9.96%. What is the companys cost of equity?

7. If current P/E ratio of a firm is 13.8; risk-free rate is 5.45%

per annum, market risk premium is 7% and equity beta of
the firm is 0.65, how much is its perpetual growth rate?

8. The standard deviation of return of security Y is 20%

and of market portfolio 15%. Calculate beta of Y if

the correlation between the returns of Y and the

market is 0.40.
9. The standard deviation of HLLs return is 3.86% and that of
the market is 3.39%. The covariance of their returns is
0.00086. How much is the systematic risk of HLLs stock
returns? How much is the unsystematic risk?
10.
Suppose you have an investment with the following
expected cash flows:
Year

End of year cash

flows (Rs.)
0
-10,000
1
3,000
2
3,000
3
6,000
If you invest in the above project and each time you receive a
cash inflow you stuff it under your
mattress, what will be your
IRR (Internal Rate of Returns)?