A94002/F:Strategic Investment and Financial Decisions Teaching Plan for 2014-16 Batch UNIT CONTENT NO.OF CLASSES REFERENCES I Introduction: Concept of Risk and Uncertainty 1 Financial Risk analysis in Investment Decisions 1 Management , Risk Adjusted Rate of Return and Certainty Equivalence 2 by Probability Distribution of Cash Flows 1 Decision Tree Sensitivity Analysis 2 Monte Carlo Approach 1 Investment Decisions under Capital constraints 2 Capital Rationing Vs. Portfolio 1 Portfolio risk and Diversified projects 1 12 II Types of Investments and Disinvestments Project Abandonment Decisions 1 Evidence of IRR 1 I M Pandey Multiple IRR 1 Pure, Simple and Mixed Investments 1 Adjusted NPV 2 Impact on Inflation on Capital Budgeting 1 7 III Critical analysis of appraisal techniques Discounted payback, post payback 2 Surplus life and surplus payback, Bail-out payback 1 Return on Investment 1 Equivalent annual cost 1 Single period constraints, Multi-period capital constraints and unresolved problem 2 Prasanna Chnadra NPV Mean Variance analysis 2 Hertz simulation and hiller approaches 1 Significance of information and data bank in project selection 1 11 IV Strategic analysis of selected investment decisions Lease financing 1 Leasing vs operating risk and Borrowing vs procuring 1 Hire Purchase and installment decisions 1 Lease risk management 2 Leasing as a financing decision 2 Advantages of leasing 1 Leasing decision in practice 2 10
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A94002/F:Strategic Investment and Financial Decisions
Teaching Plan for 2014-16 Batch
UNIT CONTENT NO.OF
CLASSES
REFERENCES
I Introduction:
Concept of Risk and Uncertainty 1 Financial
Risk analysis in Investment Decisions 1 Management ,
Risk Adjusted Rate of Return and Certainty
Equivalence
2 by
Probability Distribution of Cash Flows 1
Decision Tree Sensitivity Analysis 2
Monte Carlo Approach 1
Investment Decisions under Capital constraints 2
Capital Rationing Vs. Portfolio 1
Portfolio risk and Diversified projects 1
12
II Types of Investments and Disinvestments
Project Abandonment Decisions 1
Evidence of IRR 1 I M Pandey
Multiple IRR 1
Pure, Simple and Mixed Investments 1
Adjusted NPV 2
Impact on Inflation on Capital Budgeting 1
7
III Critical analysis of appraisal techniques
Discounted payback, post payback 2
Surplus life and surplus payback, Bail-out payback 1
Return on Investment 1
Equivalent annual cost 1
Single period constraints, Multi-period capital
constraints and unresolved problem
2 Prasanna
Chnadra
NPV Mean Variance analysis 2
Hertz simulation and hiller approaches 1
Significance of information and data bank in project
selection
1
11
IV Strategic analysis of selected investment decisions
Lease financing 1
Leasing vs operating risk and Borrowing vs procuring 1
Hire Purchase and installment decisions 1
Lease risk management 2
Leasing as a financing decision 2
Advantages of leasing 1
Leasing decision in practice 2
10
V Financing decisions:
Mergers and Acquisitions basic issues 1
Strategy, diversification 1
Theories of mergers 2
Types of mergers 1
Cost of mergers 2
Govt. guidelines for takeover 1 M Y Khan &
Problems on mergers and acquisitions & Cases 5 P K Jain
13
Total Number of Classes: 53
Name of the Faculty: Dr. G. Sabitha
Course Material
Unit I
Short Answer Questions:
1. Define the concept of Risk & Uncertainty
2. What is Decision Tree Analysis
3. What is Investment Decision
4. Types of Investment Decisions
5. What is Capital Rationing
6. What is Certainty Equivalent Approach
Long Answer Questions
1. Explain the Investment Process
2. Explain the Risk Evaluation Approaches?
3. A Company uses Certainty Equivalent Approach in its Evaluation of risky investments.
The company has now to make a choice between two proposals X and Y. the necessary
information‟s is as follows
Year, t
Proposal X Proposal Y
Cash
Flow
Prob Cash Flow Prob
0 (40000) 1.00 (30000) 1.00
1 20000 0.90 15000 0.95
2 18000 0.8 12000 0.8
3 12000 0.8 10000 .75
4 10000 0.6 5000 0.70
4. Suppose there is a project which initial cost of Rs20000 (cost at t=0). Is is expected to
generate net cash flows during the first 3 years with the probability as shown below:
Expected Cash flows
Year I Year II Year III
Probability Net Cash
Flows
Probability Net Cash
Flows
Probability Net Cash
Flows
0.10 6000 0.10 4000 0.10 2000
0.25 8000 0.25 6000 0.25 4000
0.30 10000 0.30 8000 0.30 6000
0.25 12000 0.25 10000 0.25 8000
0.10 14000 0.10 12000 0.10 10000
5. Explain about the Sensitivity Analysis
6. Define Monte Carlo Approach to Simulation. Explain the steps of Monte Carlo
Simulation Approach.
7. Explain the Methods of Capital Rationing.
8. Calculate portfolio return and risk form the following information. The portfolio consists
of equal weights of security X and Y
Rx(%) 12 14 12 16 13
Ry(%) 20 22 25 18 23
Unit II:
Short Answer Questions:
1. What is Disinvestment
2. Extended Yield Method
3. Adjusted NPV
4. Advantages of Modified IRR
5. Project Abandonment Decisions
Long Answer Questions
1. Explain briefly about Lorie Savage Paradox
2. A company wishes to evaluate Project R using the decision rule with a 10 % hurdle rate
Year 0 1 2 3
Cash Flow -100 +50 +80 -10
3. Differentiate between Simple, Pure & Mixed Investment
4. A Project to produce solar heaters requires a Rs.10million investment. It the project is
financed on all equity bases, the after tax cash flows are Rs1.8 million for 10 years. The
cost of unlevered equity for such a solar heater project is 12%. The firm intends to raise
Rs.5 million in debt financing that will be rapid in equal installments in 10 years. The
interest rate on the debt is 8%. Is the project worthwhile.
5. Explain the impact of inflation on Cash Flows
Unit III:
Short Answer Questions:
1. What is investment Appraisal
2. Advantages of Return on investment
3. Equivalent Annual Cost
4. Terminal Value Method
5. Multiple period Capital Constraints
Long Answer Questions
1. Explain the model of Hertz‟s Simulation
2. Project A costs Rs 2 lakhs and project B costs Rs.3 lakhs both have a ten year life. Uniform
cash receipts expected are A Rs. 40,000 p.a. and B Rs.80, 000 p.a. salvage values expected
are Rs. 1,40,000 declining at an annual rate of Rs.20,000 and B Rs 1,60,000 declining at an
annual rate of Rs.40,000
3. A Project cost Ts. 25,000 and has a scrap value of Ts.5000 after 5 years. The net profit
before depreciation and taxes for the five years period are expected to be Rs5000, Rs.6000,
Rs.7000, Rs.8000, Rs.10,000. Calculate the ARR assuming 50% rate of tax and
depreciation on straight line method.
4. Describe briefly on Hiller‟s Approach.
5. Project A and Project B require an investment of Rs.20, 00,000 each the life of both
projects is five years. The information about projected cash inflows and probabilities is
given below.
Project
A
Probability Project
B
Probability
Optimistic 8,00,000 0.4 7,00,000 0.2
Moderate 7,00,000 0.2 7,00,000 0.1
Poor 7,00,000 0.3 7,00,000 0.4
Pessimistic 7,00,000 0.1 7,00,000 0.3
1.0 1.0
You are required to calculate NPV and rank the Projects. The cost of capital of the
company is10% P.a.
Unit IV:
Short Answer Questions
1. What is Lease Financing
2. Operating Risk
3. Hire Purchasing
4. What is Equity in finance
5. Merger and Acquisition
Long Answer Questions:
1. Explain the evaluation of Leasing
2. Tapro Ltd. Can purchase an asset for Rs2500. The asset has a salvage value of Rs.500 at
the end of its life of 5 years. The firm charges depreciation at 16% on the asset value as
the fixed line method. If the asset is purchased, the firm‟s revenues will increase by
Rs1500 per year and will raise its operating expenses and interest by Rs.700 per year.
The company is taxed at 50% and has a cost of capital of 10%
Alternatively the firm can lease the asset for an annual rental of Rs.650. the incremental
revenue will be the same at Rs1500 per year and the increase in firms expected non
depreciation expenses is Rs.600 per year. Evaluate the Proposal.
3. Distinguish between Leasing and Borrowing
4. Explain how mergers and Acquisitions is evaluated in capital budgeting
5. Explain the dividend discount model with an example.
Unit V:
Short Answer Questions
1. What is Financing Decision
2. International Capital Structure
3. Hamada Model of Market Risk
4. Agency Cost
5. Signal Model
Long Answer Questions:
1. Explain the model of Modigliani and Miller Model
2. Explain the various methods of determine the financial structure of subsidiary
3. Explain briefly about the Trade off Models
4. Write about the Miller Model and its Importance
5. Describe briefly about the Signaling model
Unit I :Case on Capital Budgeting
The investment Detective:
The essence of capital budgeting and resource allocation is a search for good investments in
which to place the firm‟s capital. The process can be simple when viewed in purely mechanical
terms, but a number of subtle issues can obscure the best investment choices. The capital-
budgeting analyst, therefore, is necessarily a detective who must winnow bad evidence from
good. Much of the challenge is in knowing what quantitative analysis to generate in the first
place.
Suppose you are a new capital-budgeting analyst for a company considering investments in the
eight projects listed inExhibit 1. The chief financial officer of your company has asked you to
rank the projects and recommend the “four best” that the company should accept.
In this assignment, only the quantitative considerations are relevant. No other project
characteristics are deciding factors in the selection, except that management has determined that
projects 7 and 8 are mutually exclusive.
All the projects require the same initial investment, $2 million. Moreover, all are believed to be
of the same risk class. The firm‟s weighted average cost of capital has neven been estimated. In
the past, analysts have simply assumed that 10% was an appropriate discount rate (although
certain officers of the company have recently asserted that the discount rate should be much
higher.)
To stimulate your analysis, consider the following questions:
1. Can you rank the projects simply by inspecting the cash flows?
2. What criteria might you use to rank the projects? Which quantitative ranking methods are
better? Why?
3. What is the ranking you found by using quantitative methods? Does this ranking differ
from the ranking obtained by simple inspection of the cash flows?
4. What kinds of real investment projects have cash flows similar to those in Exhibit 1?