Nmims Moolyankan Quiz 2011

MOOLYANKAN- The Valuation Game

Rules and Guidelines

1. Answers to the quiz need to be sent by 10:45 PM to

[email protected].

2. The questions carry negative marks (1/4th of the marks carried by the

question).

3. All questions have just one correct answer.

4. Please submit your answers in the link provided.

5. Avoid sending multiple entries. Only the first entry sent by the team shall

be evaluated .

6. In case of a tie, the entry received earlier shall be considered .

1. An investor bought a 10-year, 10% annual coupon bond at par, face value of $1000, and then sold

it 3.5 years later at a yield of 8%. Calculate the dirty price and clean price?

A) 1147.44, 1197.45

B) 1097.45, 1147.44

C) 1147.44, 1097.45

D) 1197.45, 1147.44

2. Mr.Thakur enters into a 5 year Rs.10 lakh quarterly swap as the fixed payer and will receive the

index return on the BSE Sensex. The fixed rate is 8% and the index is currently at 16,500. At the end

of the next four quarters index level are 17160, 16302, 17280 and 17480. In which quarter will

Mr.Thakur receive the maximum?

A) First

B) Second

C) Third

D) Fourth

3. The probabilities that a venture capitalist investment will fail given that it has survived all prior

periods, are:

1st year 10% 2nd year 12% 3rd year 19% 4th year 5%

An investment of Rs. 5,00,000 is expected to return Rs. 20,00,000 if the venture survives until the

end of fourth year. The expected annual compound rate of return on this investment is

approximately:

A) 25%

B) 34%

C) 26%

D) 37%

4. An European call and a European put on the same underlying asset and an exercise price of $45.

Both the options would expire in 6 months and are both selling for $4. The underlying asset is selling

at $43 and the rate of return on 1 year T Bill is 6%.According to put-call parity, which set of

transactions would be necessary to take advantage of mispricing?

A) Sell the call, sell a T-Bill equal to present value of $45, buy the put and buy the underlying asset.

B) Sell the call, buy a T-Bill equal to present value of $45, buy the put and sell the underlying asset.

C) Buy the call, sell a T-Bill equal to present value of $45, sell the put and buy the underlying asset.

D) None of the above.

5. A fixed income portfolio manager is analysing a security to add in his portfolio. The bond has an

option adjusted spread (OAS) equal to 23% and Z-Spread equal to 0.15%.The manager believes the

bond is a good investment but he is concerned whether his portfolio is dominated by callable bonds.

Hence, the manager will buy only if the bond is not callable. Should the manager add the bond to the

portfolio?

A) No, the positive option cost implies the bond is callable.

B) No, the positive option cost implies the bond is putable.

C) No, the negative option cost implies the bond is callable.

D) No, the negative option cost implies the bond is putable.

6. An investor enters into futures (short) contract to sell January cotton for Rs 50 per Kg on the

commodity exchange. The size of futures contract is 5000 Kg. Initial margin is Rs 40,000 and

maintenance margin is Rs 30,000. Which of the following scenarios will lead to margin call to

investor?

A) When the price per kg of cotton is Rs 100 per kg.

B) When the price per kg of cotton is 55 per kg.

C) When the price per kg of cotton is 52 per kg.

D) Margin call will not take place as maintenance margin is well below the initial margin.

7. Which of the following options will have a low gamma value?

i. Deep in the money call and put ii. Deep out of the money call and put iii. In the money call iv. Out of the money put

A) Only (ii) above

B) Both (i) and (iii) above

C) Both (i) and (iv) above

D) Only (i), (iii) and (iv) above

8. An increase in volume associated with a decrease in open interest on futures exchange indicates

that:

A) Many operators are squaring up their positions

B) The price of underlying asset is likely to increase

C) The price of the underlying assets are unlikely to change

D) Both (A) and (C) above

9. A 25-year old lady wants an early retirement in 25 years at the age of 50. She expects to earn

12.5% on her investments till her retirement and 10% thereafter. How much must she deposit at the

end of each year for the next 25 years so that she can withdraw Rs 25,000 per year at the beginning

of each year for the 30 years from age 50 to 80?

A) 1767

B) 1800

C) 2164

D) 1901

10. Calculate bank discount yield, holding period yield, effective annual yield and money market

yield for a $1000 T-bill with 100 days to maturity and a discount of $10

A) 3.60%, 1.01%, 3.70%, 3.64%

B) 3.60%, 1.01%, 3.64%, 3.70%

C) 1.01%, 3.60%, 3.70%, 3.64%

D) 3.60%, 3.64%, 3.70%, 1.01%

11. A Portfolio manager has a Bond position worth USD 100 million. The position has a modified duration of eight years and a convexity of 150 years. Assume that the term structure is flat. By how much does the value of the position change if the interest rates increase by 25 basis points? A) $2046.875 B) $2187.500 C) $1953.125 D) $1906.250

12. Which of the following statements is most correct?

A) If two firms pay the same interest rate on their debt and have the same rate of return on assets, and if that ROA is positive, the firm with the higher debt ratio will also have a higher rate of return on common equity.

B) One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is weak initially.

C) Generally, firms with high profit margins have high asset turnover ratios, and firms with low profit margins have low turnover ratios; This is exactly as shown in the Du Pont equation.

D) All of the statements above are correct.

13. An investor purchases Tata motors for Rs 160 at the start of year 2010 and another share for Rs

170 at start of the year 2011. At the end of both the years the stock paid dividend of Rs 4. Also, at

the end of year 2011, the investor sold the shares for Rs 180. The money weighted rate of return and

time-weighted rate of return on investment is:

A) 8.41%, 8.49%

B) 8.41%, 8.75%

C) 8.49%, 8.75%

D) 8.49%, 8.41%

14. Skylarks batteries recently paid a dividend of $1.35 a share. It has a payout ratio of 67%, a ROE of

23% and an expected growth rate in earning and dividends for the foreseeable future of 7.6%.

Shareholders require a return of 14% on investment. The justified price to book value multiple is

closest to:

A. 1.22

B. 1.19

C. 2.41

D. 2.45

15. Prem wants to forecast FCFE of Devil Broking, for the year of 2005. The sales amount of Devil is Rs 100 million in 2004. After careful research and evaluation, he expects sales growth rate to be 30% for 2005, net income margin to be 25% for 2005. The company intends to finance incremental fixed and working capital investments with 60% debt - the target debt ratio. Incremental FC (Investment in FC - Depreciation) to be 40% of sales increase. Incremental WC to be 30% of sales increase.

What is the expected FCFE? A. Rs. 11.9 mn B. Rs. -1.1 mn C. Rs. 24.1 mn D. Rs. -5.8 mn 16. There are a number of different risk and return models in finance used to compute the cost of equity. If you use these models to estimate costs of equity for private or closely held firms, the cost of equity A. Is unaffected B. Is underestimated C. Is overestimated

17. If two stocks (A and B) have the same positive P/E, and stock A has a lower P/S, we can conclude that: A. A has a higher net profit margin. B. B has a higher net profit margin. C. We cannot conclude anything as P/S and P/E are unrelated.

18. The leading P/E ratio will decrease if the ____ increases. 1. dividend payout ratio. 2. earnings retention ratio. 3. required rate of return. 4. earnings growth rate. A) 1 &4 B) 2 & 3 C) 1 & 3 19. Picholas Hiramal is a healthcare firm. Its owner Mr.Gattani is considering investing in a new business - cosmetics. PH has 250 million shares outstanding trading at Rs220 per share; its stock has a beta of 1.18. The firm has Rs10.9 billion in interest bearing debt outstanding (in market and book value terms), and has operating lease commitments of Rs 3.17 billion each year for the next 5 years. The long term treasury bond rate is 6.5% and the market risk premium is 6%. The unlevered beta for other cosmetics firms is 1.05. If the pre-tax cost of borrowing for PH is 7%, estimate the cost of capital that you would use to analyze this project (Tax rate 30%)

A) 11.83% B) 12.27% C) 11.75% D) 11.53%

20. Praveen Polymers, is an unlevered firm having total assets of Rs.46,00,000 (all represented by equity) and the firm’s equity capitalization rate is 12%. The firm has an EBIT of Rs.12,00,000 subject to corporate tax @ 45%. There is another firm Nahlad Ltd., also having assets of Rs.46,00,000 and alike in all respects of Praveen Polymers, except that Nahlad Ltd., has issued 13.5% debt of Rs.10,00,000. The value of the firm Nahlad Ltd., as per MM hypothesis is: A) 21,083,333 B.) 21,533,333 C ) 21,803,333 D) 21,589,583 21. CST Technologies, a computer manufacturer, announces that it will be acquiring Meytas computers. CST Technologies had a beta of 1.40 prior to the merger and a market value of equity of Rs. 18bn and Rs. 6bn in debt outstanding. Meytas Computers had a beta of 1.60 prior to the merger and a market value of equity of Rs. 10bn and Rs. 2bn in debt outstanding. Both firms have a 40% tax rate. i) Estimate the unlevered beta of the combined firm. ii) If you were told that the combined firm's levered beta will be 1.10, after the acquisition, how much debt did CST Technologies use to acquire Meytas Computers? [Assume that CST will assume Meytas Computers existing debt. A) 5.16, 0.81 B) 5. 16, 0.82 C) 5.06, 0.82 D) 5.06, 0.81

22. Capple Ltd has the option of either buying an asset worth Rs. 10mn or leasing it for a period of 5 years . The company may take a bank loan for the entire amount repayable in 4 equal instalments with an interest of 12% p.a or else it may lease it at an amount of Rs. 2.5mn p.a. What option should they select and what is the difference between the two options? A) Buy, Rs. -2,96,687 B) Lease, -2,96,687 C) Buy, 2,96,687 D) Lease, 2,96,687 23.Assume a 4 factor APT holds and you have estimated the following parameters of the company: Rf : 6% β1: 1.8 β2 : 1.2 β3: 0.75 β4: 0.35 E(R1) : 7.80% E(R2) : 6.30% E(R3) : 9% E(R4) : 5.50% a) What would be the expected return of the stock? b) If the actual parameters turn out to be: R1, R2, R3, and R4 at 7.5%, 4.5%, 9.6% and 12%, what will be the "surprise" return on the stocks? A) 11.18, 0.035 B) 11.68, 0.025 C) 11.68, 0.25 D) 11.68, 0.15 24. What would be the impact of the following factors on a put option? i) Decrease in strike price ii)Increase in dividends paid iii) Decrease in interest rates iv) Decrease in time to expiration A) Decrease, Increase, Increase, Decrease, Increase B) Decrease, Decrease, Increase, Decrease, Increase C) Increase, Increase, Decrease, Decrease, Increase

D) Increase, Increase, Increase, Decrease, Increase

25.The difference between the YTM of a bond adjusted for its call option futures and the YTM on treasuries of equivalent maturity is : A) Option spread B)Adjusted spread C)Spread D) Option adjusted spread 26. Often the stake acquired by a raider is brought back by the company at a substantial premium over the price paid. In return, the raider signs an agreement not to acquire shares in the company for a specific time period. What is this agreement called? A) Repurchase agreement B)Non-compete agreement C)Standstill agreement D) Share Buyback agreement 27. A three-year bond with an 8 percent coupon has a yield to maturity of 9 percent. Current spot rates are as follows: 1-Year: 6.5% 2-Year: 7.0% 3-Year: 9.2% Using the arbitrage-free valuation approach, should the bond be purchased at $980.00? (assume annual, rather than semi-annual interest payments). A) Yes, the bond is undervalued by approximately $15.42. B) No, the bond is overvalued by approximately $18.60. C) No, the bond is overvalued by approximately $5.60. D) Yes, the bond is undervalued by approximately $24.50.

28. Using the constant growth model, an increase in the required rate of return from 15 to 17 percent combined with an increase in the growth rate from 7 to 9 percent would cause the price to A. Rise more than 2% B. Rise less than 2%. C. Remain constant. D. Fall more than 2%. 29. Discounted cash flow valuation is based upon the notion that the value of an asset is the present value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of those cash flows. Specify whether the following statements about discounted cash flow valuation are true or false, assuming that all variables are constant except for the variable discussed below: • As the discount rate increases, the value of an asset increases. • As the uncertainty about the expected cash flows increases, the value of an asset increases. • An asset with an infinite life (i.e., it is expected to last forever) will have an infinite value. A) True, False, False B) True, True, False C) False, False, True D) False, False, False 30. You have been asked to estimate the beta of a high-technology firm which has three divisions with the following characteristics Personal Computers (Division1), 1.6 (Beta), $100 million (Market value) Software (Division2), 2.0 (Beta), $150 million (Market value) Computer Mainframe (Division3), 1.2 (Beta), $250 million (Market value) What is the beta of the equity of the firm? A) 1.52 B) 1.6 C) 1.44 D) 1.2

31. Which of the following statements concerning arbitrage-free bond prices is False? A) Credit spreads are affected by time to maturity. B) The riskier the bond, the greater is its credit spread C) It is not possible to strip coupons from U.S. Treasuries and resell them D) The determination of spot rates is usually done using risk-free securities. 32. At age 20 you save $100 and invest it at a nominal interest rate of 8%. At age 65, you will have $3,192. Given the expected inflation is 5% per year over these years, what is the real future value? A) $380 B) $290 C) $630 D) $355 33. Computer Associates makes software that enables computers to run more efficiently. It is still in its high-growth phase and has the following financial characteristics: Return on Assets 25% Dividend Payout Ratio 7% Debt/Equity Ratio 10% Interest rate on Debt 8.5% Corporate tax rate 40% It is expected to become a stable firm in ten years. What is the expected growth rate for the high-growth phase? A) 25.1% B) 23.9% C) 27.08% D) 18.5%

34. When valuing of a banking and insurance company, which is the best measure used:

A) P/E

B) P/BV

C) P/CASH FLOW

D) P/SALES

35. In the black scholes model N(d1) = 0.42 for a 3 month call option on Panasonic Ltd. Common stock . If the stock price falls by $1, price of the call option will A) Decrease by less than the increase in the price of the put option B) Increase by more than the decrease in the price of the put option C )Decrease by the same amount as the increase in the price of the put option D )Remain unchanged 36. Which one of the following cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return (%) Standard Deviation (%) A) W 15 36 B) X 12 15 C) Z 5 7 D) Y 9 21

37. If there is zero correlation among the securities of a portfolio, the resulting graph will be a/an A) Straight line with negative slope of 45 degrees B) Hyperbola C) Circle D) Ellipse

38. The stock price is currently $80. Stock price will move up by 15% or down by certain amount each period . The value of two period call option with an exercise price of $62 if the risk free rate is 4% per period is closest to: A) $19.17 B) $22.99 C) $27.11 D) $26.5

39. A put option with an exercise price of $45 is trading for $3.50. Current stock price is $45. What is the most likely effect on the options delta and gamma if the stock price increases to $50

A) Both Delta and gamma would increase B)Delta would decrease and gamma would increase C)Delta would increase and gamma would decrease D) Delta and gamma would decrease

40. A stock is currently priced at $30 and is expected to pay a dividend of $0.30, 20 days and 60 days

from now. Contract price for a 60 day forward contract when the interest rate is 5% is closest to:

A) $29.46 B) $29.70 C) $29.94 D) $29.64