Question Paper Investment Banking and Financial Services – I : April 2002 Part A : Basic Concepts (30 Points) • • • • 1.
The role of the Depository in the capital market is a. b. c. d. e.
2.
This part consists of questions with serial number 1 - 30. Answer all questions. Each question carries one point. Maximum time for answering Part A is 30 Minutes.
Corporate advisory services Market making in Government securities To subscribe to unsubscribed portion of the securities To ensure exchange in currencies To hold the securities in electronic form on behalf of the investors.
Which of the following is/are true regarding accounting of lease transaction as per Accounting Standard 19 of ICAI? I.
The lessor has to capitalize the leased asset in its books at the fair market value of the asset. II. Only finance charges of the lease rentals have to be debited to profit & loss account in the books of the lessee. III. The lessor must show the net investment in lease as a current asset in the balance sheet. a. b. c. d. e.
3.
Which of the following is not an objective of the lender of funds in the credit market? a. b. c. d. e.
4.
Maximum spreads Minimum terms and conditions attached with the usage of the funds Adequate coverage for the various risk exposures Satisfy the statutory reserve requirements Satisfy the capital adequacy norms.
Hindustan Factors Ltd. gives an advance of 80% against receivables worth Rs.10,00,000 purchased from Aniket Ltd. payable after 90 days. The advance carries an interest rate of 17% per annum compounded quarterly and the factoring commission is 1.8% of the value of factored receivables. Both the interest and commission are collected up-front. The amount actually made available to Ankit Ltd. is a. b. c. d. e.
5.
Only (I) above Only (II) above Only (III) above Both (I) and (II) above Both (II) and (III) above.
Rs.7,28,000 Rs.7,48,000 Rs.7,66,000 Rs.7,82,000 Rs.8,00,000.
Which of the following is a banking sector security? a. b. c. d. e.
Certificate of Deposit Commercial Paper Factorization Bill Inter-Corporate Deposit None of the above.
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6.
Which of the following statements is false? a.
b. c. d. e. 7.
Which of the following statements describe the Gensaki rate? a. b. c. d. e.
8.
It is the short-term bench market rate used in Japanese markets It is the bench mark rate used to price the Samurai bonds It is the long-term prime rate used in the Swiss markets It is the treasury rate used in the US market None of the above.
Which of the following is/are the benefit(s) of CMO to the issuer? a. b. c. d. e.
9.
In advance factoring, the factor provides an advance between 35-40 % of the value of the receivables received and the balance is paid upon collection or on the guaranteed payment date In recourse factoring, the factor purchases the receivables on the condition that the loss arising on account of irrecoverable receivables will be borne by the client In maturity factoring, the factor does not make any advance payment Bank participation factoring is an extension of advance factoring None of the above.
Compared to pass through securities, funds can be raised more cheaply due to segmentation Wider diversification of investor base can be achieved More efficient use of collateralization than mortgage backed bonds Both (b) and (c) above All (a), (b) and (c) above.
The face value of a 14 days T-Bill is Rs.100. If the purchase price is Rs.99.50, then the yield on such a bill is a. b. c. d. e.
10.7% 12.5% 13.1% 14.0% 15.2%.
10. Which of the following is false with respect to real estate investment? a. b. c. d. e.
It requires substantial outlay of funds Transaction cost tend to be higher It is a good hedge against inflation Tax treatment is not favorable for real estate investments It is a durable investment.
11. Which of the following is/are true regarding issue of debentures? I. II.
Credit rating is mandatory for an issue of debentures irrespective of the maturity period Appointment of Debenture Trustee is mandatory if the maturity period exceeds 15 months III. Creation of Debenture Redemption Reserve is optional in case of debenture issue whose maturity period is 15 months.
a. b. c. d. e.
Only (II) above Only (III) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above.
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12. Which of the following venture capital financing is provided to a company which is intending to go public within six months? a. b. c. d. e.
Bridge financing Seed financing Start-up financing First stage financing Mezzanine financing.
13. Which of the following statements regarding treasury bills is/are not true? I. II.
Capital depreciation in these bills is very high Individuals and private firms are not allowed to participate in the auctions on competitive bidding III. These bills are issued in the form of promissory notes.
a. b. c. d. e.
Only (II) above Only (III) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above.
14. The maximum amount of general provisions/loss reserves that can be included in the Tier II capital while computing capital adequacy ratio of a leasing company is a. b. c. d. e.
1.00 percent of Tier I capital 1.25 percent of Tier I capital 1.25 percent of Tier II capital excluding the general provisions and reserves 1.25 percent of risk weighted assets 1.00 percent of risk weighted assets.
15. Which of the following is/are true regarding financial intermediaries? I. The intermediaries in the capital market include underwriters, primary dealers, etc. II. The cost of lending and borrowing reduces due to the presence of intermediaries III. If the markets are not well regulated the presence of intermediaries increases the risks to the investors a. b. c. d. e.
Only (I) above Only (III) above Both (I) and (III) above Both (II) and (III) above None of the above.
16. First Class Leasing Company has leased an equipment costing Rs.50 lakhs for a monthly rental of Rs.26 ptpm payable monthly in advance for 5 years. The add on yield on the lease transaction is a. b. c. d. e.
10.00% 11.20% 15.00% 19.53% 20.00%.
17. The networth of ABC Ltd., a registered underwriter is Rs.25 lakhs. The maximum total outstanding underwriting obligation at any point of time can be a. b. c. d. e.
Rs.250 lakhs Rs.400 lakhs Rs.500 lakhs Rs.825 lakhs No limit.
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18. Given the flat rate of interest of 13% repayment period of 3 years, frequency of payment being quarterly in advance, which of the following will reflect the annual percentage rate? a. b. c. d. e.
14.00% 16.00% 23.80% 24.00% 28.36%
19. Which of the following is true regarding repo transactions? a. b. c. d. e.
A reverse repo is an agreement which involves a sale of security with an undertaking to buy back the same security at a predetermined future date and price A repo transaction is generally done for instruments with long maturities Provident funds are eligible to participate in repo auctions but are not eligible to participate in a reverse repo auction Unlike call loans, repos are secured in nature RBI enters into reverse repos to suck out liquidity from the system.
20. Which of the following statements is/are true regarding hire purchase? I. The title to the goods is transferred to the hirer on the payment of the first installment II. The hirer has to indemnify the owner against any loss that results from his negligence III. Some occasional delays in payment over the hire period does not empower the owner to terminate the contract a. b. c. d. e.
Only (I) above Only (II) above Both (I) and (II) above Both (II) and (III) above All (I), (II) and (III) of the above.
21. In book building way of issuing equity shares, at least ___% of the issue size is reserved for allocation to individual investors applying up to 10 tradable lots through the syndicate member. a. b. c. d. e.
5 10 15 20 25.
22. Aditya has taken a consumer loan of Rs.45,000 for a period of 2 years. If the total charge for credit is 10,800, the flat rate of interest is a. b. c. d. e.
12% 14% 15% 18% 24%.
23. Ankita Toys is listed on Kolkata Stock Exchange. The minimum net worth it should have if it seeks listing on Mumbai Stock Exchange is a. b. c. d. e.
Rs.10 crore Rs.20 crore Rs.25 crore Rs.50 crore There is no such stipulation.
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24. Das Agro Equipments has leased an equipment costing Rs.20 lakhs for a period of 4 years at an annual lease rental of Rs.410 ptpa payable annually in advance. The opportunity cost of debt of the company is 15% and cost of capital is 18%. If the applicable tax rate is 35%, according to equivalent loan model, the amount of debt that will be raised in lieu of lease is equal to a. b. c. d. e.
Rs.20.00 lakhs Rs.22.06 lakhs Rs.23.41 lakhs Rs.26.92 lakhs Rs.28.68 lakhs.
25. Which of the following is/are true regarding risk exposure in money market instruments? a. b. c. d. e.
As the maturity of money market instruments is short, these instruments are not exposed to reinvestment risk All the money market instruments including government securities are considered as risk free Compared to long term securities, money market instruments have minimal inflation risk The interest rate risk is minimum in the money market Both (a) and (d) above.
26. A ‘Bow Tie’ arrangement is a. b. c. d. e.
Intended to protect both the borrower and the lender against volatile interest rates Designed in such a way that the interest rate charged is generally higher than the market rate A medium-term loan and provides bridge finance till the real estate developer obtains the financing of a more permanent nature Made to cover the difference between the bank loan for construction and total cost of the project Both (a) and (b) above.
27. Vijay Limited is planning a rights issue of equity shares in the ratio of 1 right share for every 5 shares held. If the current market price of the share is Rs.45 and ex-rights price should not fall below Rs.43, subscription price should be more than a. b. c. d. e.
Rs.10 Rs.30 Rs.33 Rs.42 Rs.44.
28. Which of the following is/are the feature/s of a charge card? a. b. c. d. e.
There are no interest charges collected by the issuer from the holder. The discount collected from the member establishments is the principle source of income for the issuer. The cardholder has to make a consolidated payment to the issuer for all purchases effected during a specified period. Both (a) and (b) above. All (a), (b) and (c) of the above.
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29. Following data pertains to Small Time Equipments Ltd. which is planning to take an equipment on lease. P.V. of loan payments Rs.10,00,000 P.V. of lease payments Rs.9,50,000 P.V. of lease related tax shields Rs.3,30,000 P.V. of loan related tax shields Rs.3,50,000 P.V. of residual value Rs.25,000 The financial advantage arising out of the lease transaction as per BHW Model is Rs.______. a. – 50,000 b. – 45,000 c. – 5,000 d. 45,000 e. 50,000. 30. The required amount of successful bids by a primary dealer who participated in the bidding of treasury bills is Rs.400 crores. The commitment to aggregate bidding would have been a. b. c. d. e.
Rs.1,000 crores Rs.1,200 crores Rs.1,400 crores Rs.1,600 crores Rs.2,000 crores. END OF PART A
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Part B : Problems (50 Points) • • • • • 1.
This part consists of questions with serial number 1 – 5. Answer all questions. Points are indicated against each question. Detailed workings should form part of your answer. Do not spend more than 110 - 120 minutes on Part B.
On November 3, 2001 RBI issued a tender notification for 91-day T-Bill for Rs.500 crore. There are three competitive bidders namely, A, B, and C, who responded to the notification of T-Bills and submitted sealed tenders to the RBI. The overall amount quoted through the tender is Rs.1,960 crore. The following table shows the details of the bid submitted by the three bidders. Name of the bidder A A A A B B B B C C C C
Price (Rs.) 98.90 98.80 98.60 98.25 98.95 98.85 98.60 98.40 98.55 98.45 98.25 98.20
Amount (Rs. in crore) 75 125 150 180 80 120 200 250 90 140 250 300
You are required to a. Determine the cut-off point and compute the basis of allotment of the T-Bills b. Compute the weighted average yield of the issue c. Determine the price to be paid by the non competitive bidders d. Compute the average yield for the successful bidders. (5 + 4 + 1 + 2 = 12 points) 2.
Zenith Exports Ltd. has proposed to expand its operations for which it requires funds of $5 million, net of issue expenses, which amounts to 2% of the issue size. It proposes to raise the funds through a GDR issue. It considers the following factors in pricing the issue: • • • •
The expected domestic price of the share is Rs.225, while the face value is Rs.10 3 shares underlie each GDR Underlying shares are priced at 10% discount to the market price Expected exchange rate is Rs.48/$
You are required to compute a. b. c.
The number of GDRs to be issued Cost of GDR to the company if the dividend expected to be paid in the current year is 25% with a growth rate of 25% Gain/loss to a holder of 200 GDRs, if the company proposes a rights issue after the GDR issue in the ratio of 1:4 at a subscription price of Rs.150 per share. Assume the GDR holder exercises the rights and sells his entire holdings at the prevailing GDR price, which will be at a premium of 25% to the prevailing ex-rights domestic price.
Assume the Rs/$ exchange rate at the time of rights issue and sale by GDR holder to be Rs.50/$. (2 + 2 + 4 = 8 points)
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3.
Trisala Textiles Ltd. wants to import some five high quality sewing machines, which would give a much better quality in the inter lock stitching of the garments they are dealing in. Following are the particulars of the sewing machines: Cost of equipment Rs.50 lakhs Tax relevant rate of depreciation 40% Useful life 6 years Estimated net salvage value after 6 years Negligible Trisala received a lease proposal from Premiere Leasing Ltd. to structure a finance lease at a rental of Rs.30 ptpm payable at the beginning of every month. Premiere Leasing requires a minimum return of 14% on its lease portfolio and is in the tax bracket of 30%. Following table shows some more relevant data of Trisala: Marginal cost of debt (pre-tax) 18% Marginal cost of capital 15% Marginal tax rate 30% You are required to a. i. Determine the breakeven rentals of Trisala Textiles and Premiere Leasing ii. Comment on the spread available between the two break even rentals. b. If the discussed sewing machines are available indigenously, and Trisala has to pay a CST of 4% on the basic price of Rs.50 lakhs and Premiere has to pay 10% CST on the basic price, comment on the spread available between the break even rentals of Trisala Textiles and Premiere Leasing. (13 + 2 + 3 = 18 points)
4.
The following table shows the offer price and current price of 4 scrips listed at BSE and the value of SENSEX on the relevant dates. Offer Price/ Initial position Current price/position
A Rs.12 Rs.12
B Rs.25 Rs.28
C Rs.45 Rs.34
D Rs.65 Rs.58
SENSEX 3843 3400
You are required to determine which of the scrips are oversubscribed and which of them are undersubscribed. (5 points) 5.
Nagarjuna Finance Ltd. offers finance for its borrowers on the following terms and conditions: Rate of interest Repayment period Frequency of payment Down payment
14% 4 years Monthly in arrears 25%
Rama has availed the facility for Rs.16,000 for acquiring a domestic equipment on the above terms and conditions. The equipment will be used for personal use. Immediately after paying the 36th installment, he wishes to repay the outstanding loan and purchase the equipment. You are required to compute a.
The minimum interest rebate as per the stipulations of the Hire Purchase Act, 1972.
b.
The effective rate of interest on the completed transaction assuming the company offers the rebate according to (a) above. (2 + 5 = 7 points)
END OF PART B
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Part C : Applied Theory (20 Points) • • • •
6.
This part consists of questions with serial number 6 - 7. Answer all questions. Points are indicated against each question. Do not spend more than 25 -30 minutes on Part C.
Often it is said that the process of factoring and forfaiting are similar in many ways. Evaluate how a forfaiting transaction is similar to that of factoring and in what areas it is different from factoring. (10 points)
7.
Indian Depository Receipts is a mechanism to enable Indians to own overseas stock. What are Indian Depository Receipts and discuss the advantages of the same. (10 points)
END OF PART C END OF QUESTION PAPER
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Suggested Answers Investment Banking and Financial Services – I : April 2002 Part A : Basic Concepts 1.
Answer : (e) Reason : Depositories are set up to hold securities in electronic form on behalf of the investor. The other services mentioned are not performed by the depositories. Market making in government securities is performed by primary dealers, corporate advisory services is generally done by merchant bankers, underwriters subscribe the unsubscribed portion of securities and exchange in foreign currencies is generally done by foreign exchange dealers. Hence (e) is true.
2.
Answer : (e) Reason : As per the Accounting Standard 19 of ICAI, the lessee has to capitalize the leased assets in its books at the fair market value of the asset. Hence Statement I is not true. As the leased asset is capitalized in the books of the lessee, only the finance charges portion of the lease rental is charged to the profit and loss account in its books and the leased asset is shown as a current asset in the books of the lessor at the net amount in lease. Hence, Statements II and III are true.
3.
Answer : (b) Reason : Except (b) all others are the objectives of the lenders in the credit market. Generally, borrowers look at minimum terms and conditions attached with the usage of the funds.
4.
Answer : (b) Reason : Receivables factored = Rs.10,00,000 × 0.8 = Rs.8,00,000 Less: Interest = 0.17 × 8,00,000 × ¼ = Rs. 34,000 Less: Commission = 0.018 × 10,00,000 = Rs. 18,000 Amount actually received = Rs.7,48,000 Answer : (a) Reason : CDs are issued by banks in the form of usance promissory notes. Except (a) others are securities/bills issued or created by corporates.
5.
6.
7.
Answer : (a) Reason : In advance factoring, the factor makes an advance of 75-85 per cent of the value of the receivables factored. Hence, statement (a) is not correct. If the loss arising on account of irrecoverable receivables is borne by the client the factoring arrangement is referred to as recourse factoring and if it is borne by the factor it is referred to as non-recourse. Hence, statement (b) is true. As against advance factoring, in maturity factoring the factor does not provide any advance to the client but makes the payment either on a guaranteed payment date or on the date of collection. Hence, statement (c) is true. Bank participating factoring is an extension of advance factoring wherein a bank participates in the transaction by providing an advance to the client against the reserves maintained by the factor. Hence, statement (d) is also true. Answer : (a) Reason : Gensaki rate is the short-term bench market rate used in Japanese markets.
8.
Answer : (e) Reason : All the given alternatives are considered as the benefits of CMO to an issuer.
9.
Answer : (c) Reason : Yield on the treasury bill is calculated as follows: =
Face value 365 100 365 − 1 × ×100 ×100 = − 1 × 99.5 14 Purchase price 14 13.1 %
= 10. Answer : (d) Reason : Real estate investment has lot of tax benefits attached to it. Hence statement (d) is not true.
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11. Answer : (c) Reason : According to the Clarification XXVI to the SEBI Guidelines for Disclosure and Investor Protection, no public or rights of debt instruments (including convertible securities) irrespective of their maturity or conversion period shall be made unless credit rating by at least one approved credit rating agency is obtained and disclosed in the offer document. Hence statement I is true. Appointment of Debenture Trustee is mandatory if the maturity period exceeds 18 months and not 15 months as given in statement II. Hence, II is not true. Debenture Redemption Reserve should be compulsorily created if the maturity period of the debentures exceeds 18 months and hence it is optional if the maturity is 15 months. Hence, the correct answer is (c). 12. Answer : (a) Reason : Bridge financing is provided to a company which is intending to go public within six months. 13. Answer : (c) Reason : Of the given statements only III is true. Statement I is not correct since there is negligible or no capital depreciation in treasury bills and Statement II is not correct since only eligible provident funds, State governments and Nepal Rastra Bank are allowed to participate in non-competitive bidding and all the other investors including individuals are allowed to participate in competitive bidding. 14. Answer : (d) Reason : According to the RBI guidelines regarding capital adequacy requirements, general provisions and loss reserves are included in Tier II capital but are admitted upto 1.25 per cent of the risk weighted assets. 15. Answer : (b) Reason : Statement I is not true because primary dealers are the intermediaries in the money market and not capital market. Statement II is not true because intermediaries though ease the funds flow process taking place in the financial markets, increases the costs of lending and borrowing in the market. To prevent any misappropriation of the lender’s funds and to reduce the risks of the investors, a well regulated environment has to be developed. Hence statement III is true and answer is (b). 16. Answer : (b) Reason : Add on yield is calculated as follows: {(0.026 × 50 ×12 × 5) – 50}/[5 ×50] = 11.2 % 17. Answer : (c) Reason : The total outstanding underwriting obligation of an underwriter at any point of time cannot exceed 20 times its networth. Hence, if the networth of the underwriter is Rs. 25 lakhs, the total underwriting obligation cannot exceed 20 times of Rs.25 lakhs i.e. Rs.500 lakhs. 18. Answer : (e) Reason : Annual percentage rate in case of advance payments is equal to n/(n-1) × 2F where n is the number of instalments and F is the flat rate of interest. Hence in the given question APR is equal to 12/11 × 2 × 13 = 28.36%. 19. Answer : (d) Reason : An agreement which involves a sale of security with an undertaking to buy back the same security at a predetermined future date and price is termed as a repo whereas a reverse repo involves a purchase of security with an undertaking to sell the same. Hence, (a) is not correct. Repo transactions are generally done for short term and hence (b) is also not correct. Provident funds are not eligible to participate in the repo auctions and hence (c) is also not correct. When RBI undertakes reverse repos, it purchases the securities with an undertaking to sell the same and thus increases the liquidity in the money market. Hence, (e) is also not correct. In a repo transaction, the underlying security is held with the lender of the funds and hence a repo transaction is considered as a secured transaction whereas the borrowings in the call money market are unsecured in nature. 20. Answer : (d) Reason : In an hire purchase agreement, the title to goods is transferred to the hirer only when the hirer exercises the option of purchasing the asset or on the payment of the last installment. Hence, I is not true. The hire agreement expressly provides that the hirer has to indemnify the owner for any loss due to the hirer’s negligence. Hence, statement II is true. Though the payment of the hire rentals on the time agreed is an implied obligation of the hirer some occasional delays in payment does not empower the owner to terminate the contract. Hence III is also true. 11
21. Answer : (c) Reason : In the book-building method of equity issue minimum 15% of the issue size should be reserved to individual investors applying upto 10 tradeable lots. This is apart from the 10% of the issue offered to the public reserved for individual investors who had not participated in the bidding process. 22. Answer : (a) Reason : The total charge for credit is calculated as Loan Amount × Flat rate of interest × number of years. Hence, in the given question flat rate of interest is equal to 10,800/(45000 × 2) = 12% 23. Answer : (b) Reason : The minimum networth required by the companies intending to list its securities on the Mumbai Stock Exchange is Rs20 crores irrespective of where it is already listed. 24. Answer : (d) Reason : As per the equivalent loan model of lease evaluation, the amount of debt that is raised in lieu of debt is considered to be equal to the present value of lease rentals computed at the pre-tax cost of debt. In the given case present value of lease rentals is computed as 0.41 × 20 × PVIFA(15%,4) × 1.15 which is equal to Rs.26.92 lakhs. 25. Answer : (c) Reason : All money market instruments though short term in nature are exposed to reinvestment risk i.e., the risk of reinvesting the redeemed funds at a lower rate in case of falling interest rate scenario. Hence, (a) is not true. Except for government securities other securities have the probability of default by the borrower in the repayment of the principal and/or interest. Hence, (b) is not true. As money market instruments are short term in nature the inflation risk is considered to be minimal as compared to long term securities. Hence, (c) is true. Generally, interest rate risk is at a higher level in case of money market instruments. Hence (d) is not true. 26. Answer : (a) Reason : A Bow Tie arrangement is designed to protect both the borrower and the lender against the volatile interest rates i.e. though a maximum rate is mentioned in the documentation if the market rate exceeds the ceiling rate agreed upon the additional amount will be payable as a balloon payment to the principal at maturity. 27. Answer : (c) Reason : In the given case, ex-rights price should be equal to or more than Rs.43 i.e. [NP0 + S}/[N+1] should be more than or equal to 43, where N is the number of shares required to subscribe for 1 right share i.e. 5, P0 is the current market price i.e. 45 and S is the Subscription price per right share. NPo + S 5 × 45 + S ≥ 43 = N +1 5 +1 225 + S ≥ 258 S ≥ 33 28. Answer : (e) Reason : Charge card is a type of a plastic card where the cardholder has to make a consolidated payment to the issuer for all the purchases made during a specified period. As such interest is not charged by the issuer and the principal source of the issuer is the discount collected from the member establishments. Hence, all the statements given are correct. 29. Answer : (e) Reason : As per the BHW model of lease evaluation financial advantage of lease is calculated as Initial Investment (or PV of loan payments) – PV of lease payments. Hence, in the given question, financial advantage of lease is equal to Rs.50,000. 30. Answer : (a) Reason : According to RBI, the minimum success ratio for PDs is 40% in case of T-Bills. Hence, if the required amount of successful bids is Rs.400 Crores, the aggregate bid commitment will be 400/0.4 = Rs.1000 Crores. 12
Part B : Problems 1.
a.
Determination of the cut-off point Sl. Name of Price (Rs) Amount Cumulative amount No. the bidder (in Rs. crore) (in Rs. crore) 1 B 98.95 80 80 2 A 98.90 75 155 3 B 98.85 120 275 4 A 98.80 125 400 5 B 200 98.60 600 ← Cut-Off Price 6 A 150 98.60 750 7 C 98.55 90 840 8 C 98.45 140 980 9 B 98.40 250 1230 10 C 98.25 250 1480 11 A 98.25 180 1660 12 C 98.20 300 1960 The cut-off price comes to be Rs.98.60. Below this point, amount of bids is short by Rs.100 crore and at this point it has a surplus of Rs.250 crore. The first 4 bids given by A and B are accepted completely, and the next quote given by the bidders being the same, the RBI allots T-Bills proportionately. The fully accepted bids are: Name of the bidder Price Quoted Approved amount (Rs.) (in Rs. crore) A 98.90 75 A 98.80 125 B 98.95 80 B 98.85 120 400 TOTAL At the cut off price, RBI allots the 2 bidders proportionately in the following manner Name of the bidder Price (Rs) Amount Proportionate amount (in Rs. crore) allotted (in Rs. crore) A 98.60 150 43 B 98.60 200 57 350 100 Total allotted = 400 + 100 = Rs.100 = Rs.500 crores. b. Computation of weighted average yield for the issue Proportion Wt. Price Yield Wt. Yield Name of the Price(Rs.) Amount bidder A 98.90 75 0.150 14.84 0.0446 0.00669 98.80 125 0.250 24.70 0.0487 0.01218 98.60 43 0.086 8.48 0.0570 0.00490 B 98.95 80 0.160 15.83 0.0426 0.00680 98.85 120 0.240 23.72 0.0467 0.01121 98.60 57 0.114 11.24 0.0570 0.00650 1.000 98.81 0.04828 Face value 365 Yield is calculated as − 1 × Pr ice 91 c. d.
The non competitive bidders would have to pay weighted average cut off price, which is obtained by taking the average of prices, which comes to be Rs.98.81 (as calculated in the table). Computation of average yield of A 75 125 43 Yield = 0.0446 × + 0.0487 × + 0.0570 × = 4.89% 243 243 243 Computation of average yield of B 80 120 57 Yield = 0.0426 × + 0.0467 × + 0.0570 × = 4.77% 257 257 257 13
2.
a.
b.
c.
3.
a.
Expected domestic price per share Expected domestic price per GDR = 225 × 3 × 0.90 In US Dollars at an exchange rate of Rs.48/$ Computation of number of GDRs to be issued: Amount to be raised = $5 million/(1-0.02) Number of GDRs to be issued = 5102041/12.656 Computation of cost of GDR to the company: Price of GDR, Po Expected dividend, D1 = Rs10 × 0.25 × 1.25 × 3 Growth rate = g = 25% Flotation cost of issuing GDR, f Cost of GDR = D1/Po(1-f) + g Computation of gain/loss to a holder of 200 GDRs Initial investment of the investor = 200 × $12.656 Number of rights obtainable = 200 × 3 × 1/4 Investment in 150 shares = 150 × 150 Investment in dollars at an exchange rate of Rs.50 Total investment Ex-rights price = {225 × 4 + 150} / {4+1} Total divestment value = (200 × 3 + 150) × 210 × 1.25 Divestment value in dollars at an ex rate of Rs.50 The gain of the investor = 3937.50 – 2981.25 i.
= = =
Rs.225 607.50Rs. $12.656
= =
$5,102,041 403,132
= =
Rs.607.50 Rs.9.375
= = =
2% 9.375/{607.50(1-0.02)} + 0.25 26.57%
= = = = = = = = =
$2,531.20 150 Rs.22,500 $450.00 $2,981.25 Rs.210. Rs.1,96,875 3,937.50 $956.25
Let us work with an investment cost of Rs.1000. The break even rental of Trisala (LB) can be computed as follows: A. Investment Cost = Rs.1000 B. Present Value of Lease Rentals = 12LB x PVIFAm(18, 6) = 12LB × i/d12 × PVIFA(18,6) = 12 LB × 1.0950 × 3.498 = Rs.45.964LB C. Present Value Of Tax Shields on Lease Rentals = 12LB × PVIFA (15, 6) × 0.30 = Rs.13.622LB D. Present value of Tax Shields forgone on depreciation = {400 × PVIF(15,1) + 240 × PVIF(15,2) + 144 × PVIF(15,3) + 86.4 × PVIF(15,4) + 51.84 × PVIF(15,5) + 31.104 × PVIF(15,6)} × 0.3 is equal to Rs.213.844 (Displaced) Debt Repayment Schedule (Rs.) Interest Capital Equated Annual Adjusted PVIF@ Year Amount O/s content content Installment Interest 15% @ 18% 1 45.964 LB 8.274 LB 4.866 LB 13.14 LB 7.134 LB 0.870 2 41.098 LB 7.398 LB 5.742 LB 13.14 LB 6.258 LB 0.756 3 35.356 LB 6.364 LB 6.776 LB 13.14 LB 5.224 LB 0.658 4 28.580 LB 5.144 LB 7.996 LB 13.14 LB 4.004 LB 0.572 5 20.584 LB 3.705 LB 9.435 LB 13.14 LB 2.565 LB 0.497 6 11.149 LB 2.007 LB 11.133 LB 13.14 LB 0.867 LB 0.432 Equated Annual Installment = 12 LB × 1.095 = Rs.13.14 LB Adjustment Factor = 13.14 LB – 12 LB = Rs.1.14 LB
14
PV 6.207 LB 4.731 LB 3.437 LB 2.290 LB 1.275 LB 0.375 LB 18.315 LB
E.
b.
4.
PV of Interest tax shield foregone = 18.315 LB × 0.3 = Rs.5.495 LB
Setting the NAL of the lease proposal to be zero we get A–B+C–D–E=0 OR, 1000 – 45.964LB + 13.622LB – 213.844 – 5.495LB = 0 37.837 LB = 786.156 LB = 20.777 Therefore, the breakeven rental of Trisala is equal to Rs.20.777 ptpm The breakeven cost of Premiere will be as follows: F. Initial Investment = Rs.1000 G. Present value of lease receipts = 12LB' × PVIFAm (14,6) = 12LB' × i/d12 × PVIFA(14,5) = 12LB' × 1.0743 × 3.889 = Rs.50.135LB' H. Present value of tax liability on lease receipts = 12LB' × 0.3 x PVIFA(14,6) = Rs.14.000 LB' I. Present value of depreciation tax shields = {400 × PVIF(14,1) + 240 x PVIF(14,2) + 144 × PVIF(14,3) + 86.4 × PVIF(14,4) + 51.84 × PVIF(14,5) + 31.104 × PVIF(14,6)} × 0.3 is equal to Rs.217.439 The break even rental can be obtained from the following equation 0=–F+G–H+I OR, 0 = –1000 + 50.135LB' – 14.00LB' + 217.439 = 782.561 36.135 LB′ LB′ = Rs.21.657 Therefore, the breakeven rental of Premiere is equal to Rs.21.657 ptpm ii. On an investment of Rs.50 lakhs, the maximum lease rental Trisala will be willing to pay is Rs.1.039 lakhs per month, while the minimum lease rental Premiere will be willing to accept is Rs.Rs.1.083 lakhs per month. Since the break even rental required by Premiere is more than the maximum lease rental Trisala is willing to pay , there is no positive spread and a bargaining area does not exist. If Trisala has to pay a CST of 4% on the basic price, its investment becomes Rs.52 lakhs In this case, the monthly break even rental will be = Rs.1.080 lakhs p.m. If Premiere has to pay a CST of 10% on the basic price, its investment becomes Rs.55 lakhs In this case, the monthly break even rental will be = Rs.1.191 lakhs p.m. Clearly, there is no spread available between the break even rentals of Trisala and Premiere, which in turn implies that there is no room for negotiating a lease package that is financially attractive from the points of view of both the lessor and the lessee.
Return to the stock is given by Rit = {Pit/Pio – 1} × 100 where, Pit = price of the stock i in period t and Pio = offer price of stock i Return to the Market Index is given by Rmt = {Pmt/Pmo - 1} × 100 Adjusted return, ARit = Rit – Rmt If this is positive then the stock is underpriced and if this is negative, then the stock is over priced. A
B
C
D
SENSEX
Po
12
25
45
65
3843
Pt
12
28
34
58
3400
Rt
0.00%
12.00%
-24.44%
-10.77%
-11.53%
ARit
11.53%
23.53%
-12.92%
0.76%
Positive
Positive
Negative
Positive
Underpriced
Underpriced
Overpriced
Underpriced
15
5.
a.
Investment = Rs.16000 The Hire Purchase Act, 1972 defines the following formula for calculating the minimum interest rebate as: Interest rebate = 2/3 × t/n × D Amount of loan = 75% of 16000 = Rs.12000 Where, t = number of level installments that are not due and outstanding n = total number of level installments D = total charge for credit Given t = 12 n = 12 x 4 = 48 D = HP amount x Interest rate x Number of years = 12000 x 14% × 4 = Rs.6720 2 12 Interest rebate = × × 6720 = Rs.1120 3 48
b.
A.
B.
C.
loan amount = Rs.12,000 12,000 + 6,720 = Rs.390 Equated Installments = 48 PV of Installments paid = 390 PVIFAi,36 Amount payable on the day of prepayment = 390 × 12 – 1120 = Rs.3,560 PV of prepayment = 3,560 PVIFi,36 Effective interest is ‘i’ in the following equation: A–B–C=0 12000 – 390 PVIFAi, 36 – 3560 PVIFi, 36 = 0 Let i = 1% 12,000 – 390 × 30.108 – 3,560 × 0.699 = – 2230.56 Let i = 2% 12,000 – 390 × 25,489 – 3,560 × 0.490 = 314.89 i is between 1% and 2% By interpolation −2,230.56 i = 1+ − 2,230.56 − 314.89 = 1.876% p.m. = 24.99% p.a.
Part C: Applied Theory 6.
In international trade transactions, forfaiting is a common form of financing export-related receivables. Under this arrangement: 1. The exporter sells the goods to the importer on a deferred payment basis spread over 3-5 years. 2. The importer draws a series of promissory notes in favor of the exporter for the payments to be made inclusive of interest charges. 3. The promissory notes are avalled or guaranteed by a reputed international bank which can also be the importer's banker. (An aval is an endorsement on the promissory notes by the guaranteeing bank that it covers any default of payment by the buyer). 4. The exporter sells the avalled notes to a forfaiter (which can be exporter's banker) at a discount and without recourse. The discount rate applied by the forfaiter will depend upon the terms of the promissory notes, the currencies in which they are denominated, the credit rating of the avalling bank, the country risk of the importer, and the prevailing market rate of interest on medium-term loans. 5. The forfaiter may hold these notes till maturity or sell these notes to groups of investors interested in taking up such high-yielding unsecured paper. 16
The mechanics of forfaiting is graphically presented in Fig.1. C
Exporter
Importer
Forfaiter
Avalling Bank
HOLD TILL MATURITY
SELL TO GROUP OF INVESTORS TRADE IN SECONDARY MARKET
Figure 1: Mechanics of Forfaiting A. B. C. D. E. F.
Promissory notes sent for avalling to the importer's bank Avalled notes returned to the importer Avalled notes sent to exporter Avalled notes sold at a discount to a fortfaiter on a non-recourse basis Exporter obtains finance Fortfaiter holds the notes till maturity or securitizes these notes and sells the short-term paper either to a group of investors or to investors at large in the secondary market. Thus, we find that a forfaiting transaction resembles a cross-border factoring transaction with features of non-recourse and advance payment. But then the two transactions are not identical. The important differences are Factoring vs. Farfaiting Basis of difference Extent of Finance Creditworthiness Services Provided Maturity
7.
Factoring
Forfaiting
Usually 80% of the value of the invoice is considered for advance Factor does the credit rating of the counterparty in case of a non-recourse factoring transaction Day to day administration of sales and other allied services are provided Advances are short-term in nature
100% Financing The forfaiting bank relies on the credibility of the avalling bank No services are provided Advances are generally medium-term
Indian Depository Receipt/Share (IDS) is a mechanism to enable Indians to own overseas stock i.e. derivative Indian securities, where the underlying asset is the equity share in an overseas company. IDSs have several applications, foremost that it would enable Indians to invest in the equity and accordingly share the growth of overseas companies. More importantly, it would provide domestic companies seeking mergers or acquisitions, an alternative security (to ADSs/GDSs or cash) to settle such a transaction. 17
The significant advantages of IDS are, they: • •
Increase the number of available potential targets, both in terms of quality and strategic fit; Provide an engine for high velocity growth by increasing the flexibility to the merged/combined company’s capital structure;
• •
Maintain the competitiveness of Indian bourses as a preferred/necessary destination among global stockmarkets for international listing; Prepare the local markets for closer operational integration with counterparts overseas;
• • •
Provide experience prior to capital convertibility; Grow the pool of foreign currency assets belonging to the nation; Channel additional non-resident Indian investment into India;
• •
Reduce the flight of domestic capital overseas through invisible, un-administrable modes; Provide Indian investors an opportunity to participate in the growth of world-class Indian companies; and Allow Indian stakeholders to participate in global companies with significant (by local standards) Indian operations partaking of international profits and not just that of an MNC’s domestic operations.
•
18