Jagannath International Management School, Kalkaji
(Please write your Roll No. immediately) Roll No. __________
Mid Term Examination
II-Trimester PGDM December 2022
Batch 2022-24
Paper Code: FIN201
Subject: Financial Management
Time: 2 Hours M. Marks: 20
Note: i) Q. No. 1 is compulsory and carries 8 Marks. Q. No. 2 to 4 Attempt any two questions from the
remaining which carry 4 Marks each.
Q.5 is Compulsory and carries 4 Marks.
Q1. a) Mr. Sameer has planned to purchase a flat, whose present cost is Rs.15 lakh. He has approached
City Home Finance, which has agreed to finance 80% of the cost of the flat. As he, presently, has Rs.1
lakh only which is not sufficient to purchase the flat, he deferred his plan of purchase for three years and
deposited the amount he had in a bank. Mr. Sameer planned to save annually for the next three years and
purchase the flat with the bank finance of 80%, at the end of three years. The rate of interest that can be
earned on the bank deposits is 8% p.a. and the cost of the flat is expected to escalate by 5% p.a. Compute
the amount that Mr. Sameer has to save annually assuming the first deposit being made today. (5 Marks)
b) An executive is about to retire at the age of 60. His employer has offered him two post retirement
options: i) Rs.2000000 lump sum, ii) Rs.250000 per annum for 10 years. Assuming 10% interest, which is
a better option? (3 Marks)
Q2. A prospective investor is evaluating the share of Alpha Automobiles Company Ltd. He is considering
three scenarios. Under the first scenario the company will maintain to pay its current dividend per share
without any increase or decrease. Another possibility is that the dividend will grow at an annual rate of 6%
in perpetuity. Yet another scenario is that the dividend will grow at a high rate of 12% per year for the first
three years, a medium rate of 7% for the next three years and thereafter, at a constant rate of 4%
perpetually. The last year’s dividend is Rs.3 and the current market price of the share is Rs.80. If the
investor’s required rate of return is 10%, calculate the value of the share under each of the assumptions.
Should the share be purchased? (4 Marks)
Q3. a). What is the value of a 10-year, Rs1,000 par value bond with a 10 percent annual coupon if its
required return is 10 percent? What is the value of a 13 percent coupon bond that is otherwise identical to
the bond? Would we now have a discount or a premium bond? (2 Marks)
b). What is the yield to maturity on a 10-year, 9 percent, annual coupon, Rs1,000 par value bond that sells
for Rs887.00? That sells for Rs1,134.20? What does the fact that it sells at a discount or at a premium tells
you about the relationship between yield and the price? (2 Marks)
Q4. Calmex is situated in North India. It specializes in manufacturing overhead water tanks. The
management of Calmex has identified a niche market in certain Southern cities that need a particular size
of water tank, not currently manufactured by the company. The company is therefore thinking of
producing a new type of water tank. The survey of the company’s marketing department reveals that the
company could sell 120000 such tanks each year for the next six years at a price of Rs. 800 each. The
company’s current facilities cannot be used to manufacture the new-size tanks. Therefore, it will have to
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Jagannath International Management School, Kalkaji
buy new machinery. A manufacturer has offered two options to the company. The first option is that the
company could buy four small machines with the capacity of manufacturing 30000 tanks each at Rs. 10
million each. The machine operation and manufacturing costs excluding depreciation of each tank will be
Rs. 500. Alternatively, Calmex can buy a larger machine with a capacity of 120000 tanks per annum for
Rs. 84 million. The machine operation and manufacturing costs excluding depreciation of each tank will
be Rs. 400. The company has a required rate of return of 12%. The tax rate applicable to the company is
40%. Machines under both the options have a useful life of 6 years each with no salvage value. The
method of depreciation followed by the company is straight line method. Kindly advise which option
should the company accept? (4 Marks)
Q5. Arrow Ltd.’s Share is currently selling at Rs.410. You being the securities Analyst need to comment
on the valuation of Arrow Ltd.’s Stock. The following information is given to you:- (4 Marks)
- Face Value Rs.10
- Last Dividend paid Rs.9 per share
- Beta of the stock is 1.5
- Return on SENSEX – 15% per annum
- Risk free rate of return – 6.5%
- Growth rate of the company – 12%
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