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Examination Paper: Banking and Financial Services Management

IIBM Institute of Business Management

Examination Paper

MM.100

Principles and Practices of Banking

Section A: Objective Type (30 marks)

This section consists of Multiple Choice questions & Short Answer type questions. Answer all the questions. Part One questions carries 1 mark each & Part Two questions carries 4 marks each.

Part One:

Multiple Choices:

1. Frequency of First Tranche Returns is:

a. Weekly

b. Monthly

c. Monthly/quarterly

d. Monthly/quarterly/half-yearly

2. An order for winding up a banking company can be issued by:

a. The High Court

b. The RBI

c. The Central Government

d. The Supreme court

3. Who shall be natural guardian in case of married minor girl?

a. Father

b. Brother in law

c. Father-in-law

d. Husband

4. X a partner in the firm XYZ Co. wants to open a Bank account in the firms name. It will require signatures of:

a. All partners

b. Any one of the partner

c. Managing partner only

d. Sleeping partner not required

5. Public limited companies should have minimum shareholders, before Opening Bank account.

a. 11

b. 7

c. 5

d. 15

IIBM Institute of Business Management

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Examination Paper: Banking and Financial Services Management

6. If the beneficiary is government then the Expiry of guarantee is governed by the law of limitationranging from 3 years to:

a. 15 years

b. 30 years

c. 20 years

d. 10 years

7. Charge created on LIC Policy is:

a. Lien

b. Hypothecation

c. Pledge

d. Assignment

8. The device that combines the parallel input data into single serial output data is known as:

a. Switcher

b. Multiplexer

c. Encoder

d. Front end processor

9. In market skimming pricing strategy:

a. Initially price is lower and then it is increased

b. Initial price is high and is maintained high

c. Initial price is low and is maintained low

d. Initially price is higher and then it is reduced

10. The marketing personnel need information ………… intervals.

a. At yearly

b. At quarterly

c. At monthly

d. On a continuous basis and regular

Part Two:

1. Explain „Cryptographyand the need of keys. Convince.

2. Define the term obscenityused in E-commerce.

3. What do you understand by Real time accessement?

4. What Marketing mixconveys in modern marketing theory? Explain in short.

5. Write a note on Labelingin product development.

END OF SECTION A

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Examination Paper: Banking and Financial Services Management

Section B: Caselets (40 marks)

This section consists of Caselets. Answer all the questions. Each Caselet carries 20 marks. Detailed information should form the part of your answer (Word limit 150 to 200 words).

Caselet 1

There is a lacuna in the present T-Bill auction system of RBI. The dealers (investors) are subject to what is called the Winners Curse‟. The value of a T-Bill to a dealer is the price it can fetch in the secondary market. This is an unobserved random value, which is likely to be common to all dealers. It is quite unlike the works of art which the Sotheby‟s would place at an auction. The price of Mona Lisa, say, to an avid collector of Da Vinci‟s paintings, would be more than what a Picasso collector would value it. In sharp contrast, market participants are likely to agree on the price of a T-Bill in the secondary market. Now winning an auction in a discriminatory price method may not be profitable. For, it would mean that the winner has overestimated the T-Bill value.

Questions:

1. How does the winner in such an auction become the loser due to the winner curse‟?

2. Explain the role of primary dealers in the money market.

Caselet 2

In a bid to familiarize banks, exporters and other financial bodies with Forfeiting‟, the State Bank of India (SBI) will soon be setting up a three-man cell at its international division in Mumbai for advisory purposes. According to Mr. D. Ian Guild, Senior Advisor, Forfeiting & Syndications Group, Standard Bank, the cell was being set up after a series of meetings with the bank, and is essentially aimed at spreading the message of Forfeiting as an effective trade financing mechanism to increase exports. Suggesting that forfeiting was the ideal springboard for effecting a quantum jump in exports in the medium-term, Mr. Guild said he was confident of aggregating forfeiting business of $100 millions in 1998 and $250 millions in 1999 in the country. Since its introduction in 1992, Exim Bank had facilitated 69 forfeiting transactions valued at around $75 millions, with credit periods ranging between 90 days and seven years, and covering the export of goods ranging from textiles to plant and machinery. The RBI has now permitted all commercial banks to act as facilitators for forfeiting transactions. Mr. Guild pointed out that forfeiting has not really taken off in India because exporters and commercial banks lacked the knowledge of the mechanics of the scheme. In India, the real challenge would be to motivate small and medium exporters to use the forfeiting route for exports to countries which may not be able to buy on cash terms. Mr. S. Bhattacharya, deputy general manager, Exim Bank, Calcutta, said: Payment defaults by overseas buyers were an integral part of cross-border business and export credit insurance has not been a comprehensive answer to this problem. Forfeiting offered an alternative solution, especially to exporters wishing to penetrate difficult markets for the first time, he pointed out. Some of the top international forfeiters in the world have stopped accepting forfeiting documents involving Pakistan and Russia, according to Mr. Amitabh Mehta, Trader and Originator, Forfeiting and Syndications

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Examination Paper: Banking and Financial Services Management

group, Standard Bank London Ltd. (SBLL). According to Mr. Mehta, forfeiting transactions involving Pakistan could not be carried out due to poor performance of the banks there. In addition, the financial status of Pakistan following the nuclear blasts has made it impossible to carry out the transactions. Similarly, transactions with Russia are being totally rejected by forfeiting due to the current economic turmoil. Joining the list with Pakistan and Russia are Iraq, Sudan and Nigeria, he added. Commenting on the Indian situation, Mr. Mehta said, With its sound banking system, the country is well placed in the international scene. In fact, there is tremendous potential for forfeiting in the years to come,he said. According to him, even after the nuclear tests conducted by India, the top forfeiters were not worried and continued to accept forfeiting papers to be transacted with India.

Questions:

1. Discuss the mechanism of forfeiting and the role played by banks in forfeiting transactions.

2. How does forfeiting differ from factoring?

END OF SECTION B

Section C: Applied Theory (30 marks)

This section consists of Applied Theory Questions. Answer all the questions. Each question carries 15 marks. Detailed information should form the part of your answer (Word limit 200 to 250 words).

1. Government securities are referred to as gift-edged securities‟, as they are absolutely secured. RBI, being the banker to the Government, issues different types of paper on behalf of the latter, to cater various requirements. Discuss the various types of Government securities that are issued by the RBI.

2. A sound regularly framework in regulating capital markets is expected to provide transparency, maintain market integrity, fairness and ensure investor protection. However, lack of adequate regulations can lead to manipulations which endanger the integrity of the market and damage the confidence of investors and market participants in India?

END OF SECTION C

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Examination Paper: Banking and Financial Services Management

IIBM Institute of Business Management

Examination Paper

Financial Services

MM.100

Section A: Objective Type (30 marks)

This section consists of Multiple Choices/Fill in the blanks/True-False & Short Answer type

questions.

Answer all the questions. Part One questions carries 1 mark each & Part Two questions carries 5 marks each.

Part One:

Multiple Choices:

1.

NBFS stands for …………………………………………………………………………

2.

ALCO is a decision making unit responsible perspective. (T/F)

for balance sheet planning

from risk return

3.

A contract of Indemnityis one whereby:

a. A person tries to use the other‟s property

b. A person promises to save the other‟s property from loss caused.

 

c. A person tries to trick the property of other for some other person.

d. None of the above

4.

The transaction between the lessor and the lessee being a demand sale is called:

 

a. First sale

b. Second sale

c. Third sale

d. Fourth sale

5.

If the net present value of leasing be aand net advantage of leasing be bthen decision criterion is given by:

a. a/b

b. a+b

c. b/a

d. a-b

6.

Break even lease rental BERL has NAL value equal to:

 

a. 1

b. 2

c. 0

d. 0.5

7.

The right under which an unpaid seller who is in possession of the goods is entitled to retain them until payment of the price is done is termed as ………………………………………

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Examination Paper: Banking and Financial Services Management

8. If the no of level investments be „t‟, total no of level installments be nand total charge for credit be cthen the interest rebate is given by…………………………………………

9. The practice of discounting accommodation bills is known as ………………………

10. HUDCO stands for ………………………………………………………………………………………………………

Part Two:

1. What do you understand by “Lock-in period.

2. Write a short note Hybrid Debt Capital Instruments”.

3. What do you understand by Bipartite Lease”?

4. What is “Suit for Quantum Meruit”?

END OF SECTION A

Section B: Caselets (40 marks)

This section consists of Caselets. Answer all the questions. Each Caselet carries 20 marks. Detailed information should form the part of your answer (Word limit 150 to 200 words).

Caselet 1

Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit department. The cost of sales ledger administration stands at Rs 9 crores annually. It supplies chemicals to heavy industries. These chemicals are used as raw material for further use of is directly sold to industrial units for consumption. There is good demand for both the types of uses. For the direct consumers, the company has a credit policy of 2/10, net 30. Past experience of the company has been that on average 40 per cent of the customers avail of the discount while the balance of the receivables are collected on average 75 days after the invoice date. Sunlight Industries also has small dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total sales. Sunlight Industries finances its investment in debtors through a mix of bank credit and own long- term funds in the ratio of 60:40. The current cost of bank credit and long-term funds are 12 per cent and 15 per cent respectively. There has been a consistent rise in the sales of the company due to its proactive measures in cost reduction and maintaining good relations with dealers and customers. The projected sales for the next year are Rs 800 crore, up 15 per cent from last year. Gross profiles have been maintained at a healthy 22 per cent over the years and are expected to continue in future. With escalating cost associated with the in-house management of debtors coupled with the need to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight Industries is examining the possibility of outsourcing its factoring service for managing its

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Examination Paper: Banking and Financial Services Management

receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals, the details of which are given below, are available for Anita‟s consideration. Proposal from Canbank Factors Ltd: The main elements of the proposal are: (i) Guaranteed payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with resource. Proposal from Indbank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and with resource 1.8 per cent. The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement, his staff would be able to exclusively focus on sales promotion which would result in additional sales of Rs 75 crores.

Question:

1. The CFO of Sunlight Industries seeks your advice as a financial consultant on the alternative proposals. What advice would you give? Why? Calculations can be up to one digit only.

Caselet 2

Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms operate in the same industry.

BALANCE SHEETS

Particulars

Firm A

Firm B

Total current assets Total fixed assets (net)

Rs 14,00,000

R

10,00,000

10,00,000

5,00,000

Total assets

24,00,000

15,00,000

Equity capital (of Rs 10 each) Retained earnings 14% Long-term debt Total current liabilities

10,00,000

8,00,000

2,00,000

_

5,00,000

3,00,000

7,00,000

4,00,000

 

24,00,000

15,00,000

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Examination Paper: Banking and Financial Services Management

INCOME STATEMENTS

Net sales Cost of goods sold

Rs 34,50,000

Rs 17,00,000

27,60,000

13,60,000

Gross profit Operating expenses Interest

6,90,000

3,40,000

2,96,923

1,45,692

70,000

42,000

Earnings before taxes (EBT) Taxes (0.35) Earnings after taxes (EAT)

3,23,077

1,52,308

1,13,077

53,308

2,10,000

99,000

Additional information:

Number of equity shares Dividend payment (D/P) ratio Market price per share (MPS)

1,00,000

80,000

0.40

0.60

Rs 40

Rs 15

Assume that the two firms are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms, and are required to:

(i)

Decompose the share prices of both the companies into EPS and P/E components, and also segregate their EPS figures into return on equity (ROE) and book value of intrinsic value per share (BVPS) components.

(ii)

Estimate future EPS growth rates for each firm.

(iii)

Based on expected operating synergies, A Ltd estimates that the intrinsic value of T‟s equity share would be Rs 20 per share on its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by A Ltd‟s shareholders. Based on your analysis in parts (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits? Why?

(iv)

Calculate the post-merger EPS based on an exchange ratio of 0.4 : 1 being offered by A Ltd. Indicate the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.

(v)

Based on a 0.4 :1 exchange ratio, and assuming that As pre-merger P/E ratio will continue after the merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger market prices.

END OF SECTION B

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Examination Paper: Banking and Financial Services Management

Section C: Applied Theory (30 marks)

This section consists of Applied Theory Questions. Answer all the questions. Each question carries 15 marks. Detailed information should form the part of your answer (Word limit 200 to 250 words).

1. The Hypothetical Finance Ltd has structured a hire-purchase deal. The required to make a down payment of 20 per cent of the investment cost. The hire-term is four years with quarterly payment in advance. The flat rate of interest is 13 per cent. The finance company would charge a front- ended documentation and service fee and allow rebate for prompt payment @ 0.5 per cent and 1 per cent of investment outlay respectively. Assuming after paying 24 th installment, a hirer wishes the purchase option, what is the interest rebate according to (i) actuarial method, (ii) rule of 78 method and, (iii) SLM?

2. The Hypothetical Finance Ltd (HFL) has structured a hire-purchase deal for the Hypothetical Industries Ltd (HIL) at a (flat) rate of interest of 13 per cent. The payment would be made in 36 equal monthly installments in arrears. The HIL is required to make a cash down payment of 20 per cent. Assume that after paying the 24 th installment, the HIL wishes to repay the outstanding amount and purchase the equipment. What is the interest rebate per Rs 1,000 of investment cost, according to the ERI/IRR method?

END OF SECTION C

IIBM Institute of Business Management

S-2-210311

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