Regn. No. INDIAN INSTITUTE OF MANAGEMENT CALCUTTAPGDBAFINANCIAL MANAGEMENTEND-TERM EXAMINATIONMARKS: 50TIME 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:YearEnd 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)?