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Question Paper

Investment Banking & Financial Services – I (261) : April 2003


Part A : Basic Concepts (30 Points)
• This part consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one point.
• Maximum time for answering Part A is 30 Minutes.

1. Madnani Brokerage Services Pvt. Ltd. is a SEBI registered broker. Their base minimum
capital is Rs.25 crore and they have an additional capital of Rs.15 crore. The maximum intra-
day trading limit in share dealings for Madnani Brokerage Services Ltd. as specified by SEBI
is
a. Rs. 13.333 crore
b. Rs. 133.33 crore
c. Rs. 833.33 crore
d. Rs.1333.33 crore
e. There is no such maximum upper limit of intra-day trading specified by SEBI.
2. Which of the following statements is not true?
a. BSE On-line Trading (BOLT) is a mixture of both quote and order driven system
b. The NSE trading system is order driven while the OTCEI system is quote driven
c. The trading on NSE commences every Thursday and concludes on the following
Wednesday
d. The National Securities Clearing Corporation (NSCC) assumes the counter-party risk in
all trading deals made on the exchange
e. None of the above.
3. A Hire Purchase or a Leasing Company desirous to accept public deposits should have a
minimum capital adequacy ratio of
a. 9.0%
b. 10.0%
c. 10.5%
d. 15.0%
e. There is no such mandatory maintenance of capital adequacy requirement for a hire
purchase or leasing company for accepting public deposits.
4. The following data pertains to Lavanya Leasing Services Ltd:
P.V. of loan payments Rs.40,00,000
P.V. of lease payments Rs.38,00,000
P.V. of lease related tax shields Rs.16,00,000
P.V. of loan related tax shields Rs.14,00,000
P.V. of residual value Rs.1,00,000
The operating advantage arising out of the lease transaction as per BHW model is
a. – Rs.2,00,000
b. – Rs.1,00,000
c. Nil
d. Rs.1,00,000
e. Rs.2,00,000.

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5. IPO Lock-up is
a. The restriction by the SEC prohibiting an issuing company from offering shares due to
non-compliance with some statutory requirements
b. The restriction by the SEBI prohibiting an issuing company from offering shares due to
excessive road shows in which the issuing company and the lead managers lure the
investors unethically
c. A legally binding contract between the underwriters and insiders of the company not
allowing them to sell any shares of a company for a certain specified period of time
d. A situation in which there is not much trading activity in a stock after it is issued to the
public
e. A situation in which a company is postponing its public offering process due to
unfavorable market conditions.
6. Pulakit Industries Ltd. came up with a rights issue on March 1, 2003. The earliest Pulakit can
come up with a bonus issue is
a. May 1, 2003
b. August 1, 2003
c. November 1, 2003
d. March 1, 2004
e. August 1, 2004.
7. MindMart Plus Limited is issuing CPs worth Rs.2,00,00,000 for 6 months. The rating charges
and stamp duty payable by MindMart is
a. Rs.12,500 and Rs.12,500 respectively
b. Rs.25,000 and Rs.25,000 respectively
c. Rs.25,000 and Rs.37,500 respectively
d. Rs.50,000 and Rs.37,500 respectively
e. Rs.50,000 and Rs.50,000 respectively.
8. Which of the following statements is false?
a. Jumbo CDs are issued by savings and loan associates in large volumes such as $100000
and above
b. Asian Dollar CDs carry both floating and fixed interest rates based on the current level
of the Singapore Inter-bank Offer Rate (SIBOR) and paid at New York clearing house
c. In Installment CDs, target level for the amount is built-up in the account by allowing the
customers to make a small initial deposit.
d. Yankee CDs are issued by foreign banks such as Japanese, Canadian and US
institutions in UK who usually have offices in UK cities
e. Bear and Bull CDs, whose returns are linked to stock market performance, allow
depositors to seek variable equity like returns.
9. Which of the following is / are true regarding accounting of a lease transaction in the books
of lessor as per Accounting Standard 19 of the Institute of the Chartered Accountants of
India?
I. The lessor must record the finance lease as a receivable in the balance sheet at an
amount equal to the net investment in the lease.
II. The lessor must bifurcate the lease rental into two components - (i) the capital
component; and (ii) the interest component.
III. The pattern of recognizing the finance income must also reflect the uncertainties
associated with the collectibility of lease rentals, expectations of the future rates of
interest, etc. particularly for long-term leases.
a. Only (I) above
b. Only (III) above
c. Both (I) and (II) above
d. Both (I) and (III) above
e. All (I), (II) and (III) above.

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10. Meridian Financial Services Company Ltd, a company engaged in hire purchase earns
Rs.1,00,000 as interest in the fiscal year 2002-03. The service tax payable on the interest
earned by Meridian for the fiscal year 2002-03 is
a. Rs.2,000
b. Rs.2,500
c. Rs.3,000
d. Rs.5,000
e. Rs.7,500.
11. Which of the following statements is not true?
a. Use of collateral is efficient in case of Mortgage Backed Bonds whereas in case of
CMOs it is relatively inefficient
b. Cash flows are more predictable in Mortgage Backed Bonds whereas in Mortgage Pass
Through Certificates it is relatively uncertain
c. Treasury Bills have limited capital market investor spectrum whereas CMOs have wide
investor spectrum across mortgage and capital markets
d. Mortgage backed bonds are mostly AA or AAA rated whereas ratings of CMOs are
mostly AAA
e. Liquidity of Mortgage Backed Bonds is adequate whereas liquidity for Mortgage Pass
Through Certificates is good especially for GNMAs.
12. Which of the following statement(s) is/are true regarding instruments in the international
markets?
I. Foreign bonds are the bonds floated in the domestic market denominated in
domestic currency by non-resident entities
II. Yen denominated bonds issued in the US are Euro (dollar) bonds
III. Euro commercial papers issued with maturity of upto one year are underwritten
and secured
IV. Note Issuance Facilities are underwritten and have maturity of upto one year

a. Both (I) and (II) above


b. Both (I) and (III) above
c. Both (I) and (IV) above
d. Both (II) and (IV) above
e. Both (III) and (IV) above.
13. Which of the following is/are feature(s) of Euro convertible bonds?
I. They are quasi-equity issues made outside domestic market
II. They provide the holder with an option to convert the instrument from debt to
equity
III. Euro convertible bonds cannot be converted into GDRs.

a. Only (I) above


b. Only (II) above
c. Only (III) above
d. Both (I) and (II) above
e. Both (II) and (III) above.
14. Mr.Srikanth wanted to take a loan of Rs.2,50,000 from LIC Housing Finance. The aggregate
value of the home is Rs.3,00,000. The building is 70% completed. The land component is
estimated to be 25%. Mr.Srikanth contributed Rs.75,000 as borrower’s contribution.
Cumulative disbursement made till this point is Rs.60,000. How much amount should be
disbursed by LHF?
a. Rs.95,700
b. Rs.96,500
c. Rs.97,500
d. Rs.97,700
e. Rs.97,900.

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15. M/s Novice Financial Services Ltd. (NFSL) has recently structured a five year leveraged
lease transaction involving an investment cost of Rs.140 crore with itself as the equity
participant and Arora commercial Bank as the loan participant funding the investment in the
ratio of 2:5. The loan is to be repaid in the five equated annual installments of Rs.30.54
crores each. The gross yield of NFSL is 24% per annum. The amount of lease rental (per
thousand per annum) payable at the end of every year for such a lease transaction is
a. 300.05 ptpa
b. 322.23 ptpa
c. 329.23 ptpa
d. 342.23 ptpa
e. 346.23 ptpa.
16. Which of the following is not true with regard to Mortgage Backed Securitization and Asset
Backed Securitization?
a. The former is backed by easily traceable immovable asset whereas the latter is backed
by movable assets, which may not be easily traceable
b. The former takes into consideration appreciation in the value of assets whereas the latter
takes into consideration depreciation in the value of assets
c. Legal hassles are relatively less in Asset Backed Securitization
d. Mortgage Backed Securitization gives high yields to the investors whereas Asset
Backed Securitization gives low yields to the investors
e. None of the above.
17. Which of the following is/are true regarding Supplier Guarantee Factoring?
a. The customer places an import order with the distributor
b. The distributor seeks the approval of the factor for extending credit to the customer
c. The factor makes an advance payment to the distributor
d. Both (a) and (b) above
e. All (a), (b) and (c) above.
18. Which of the following is/are true regarding the appointment of intermediaries in a public
issue of Rs.200 crs?
I. The maximum number of co-managers is 4.
II. An associate company of the issuer company cannot be appointed as a consultant
to the issue.
III. Appointment of brokers to the issue is not mandatory as per SEBI guidelines.
a. Only (II) above
b. Only (III) above
c. Both (I) and (II) above
d. Both (I) and (III) above
e. All (I), (II) and (III) above.
19. While calculating the capital adequacy ratio for a primary dealer the risk weight (in terms of
percent of market value) of a government security with a balance maturity of 4 years as on
the date of reporting is
a. 15
b. 20
c. 25
d. 30
e. 40.

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20. Which of the following is/are true regarding public deposits of manufacturing companies?
I. The company can accept public deposits to be repaid on notice.
II. A security deposit received from an employee can be defined as a public deposit.
III. Public deposit can be prepaid only after a period of 3 months from the date of deposit.
a. Only (I) above
b. Only (III) above
c. Both (I) and (III) above
d. Both (II) and (III) above
e. Both (I) and (II) above.
21. Which of the following statements is/are not true regarding promoter’s contribution in case
of listed companies?
I. Promoters have to ensure post-issue shareholding of 20% of the
post-issue capital.
II. Bonus shares issued out of revaluation reserves during the preceding 3 accounting
years forms part of promoter’s contribution.
III. The excess of promoter’s contribution in the proposed issue over the minimum
specified contribution attracts a lock-in period of 3 years.
a. Only (I) above
b. Only (III) above
c. Both (I) and (III) above
d. Both (II) and (III) above
e. None of the above.
22. In the absence of confiscation, the cash flows to an overseas investor are expected to be
Rs.15 lakh. If the probability of confiscation in each year is 0.1, then the expected cash flow
in year 6 after adjusting for this probability is
a. Rs.6.97 lakhs
b. Rs.7.03 lakhs
c. Rs.7.97 lakhs
d. Rs.8.97 lakhs
e. Rs.9.97 lakhs.
23. Consider the following data regarding the consumer finance provided by M/s. Ganga Finance
Ltd.:
Amount of loan Rs.2000
EMI, payable monthly in advance Rs.104
Repayment period 2 years
Effective rate of interest p.a. 26.82%
If a borrower wishes to repay after making the 12th payment, the interest rebate as per the
effective rate of interest method is
a. Rs. 96.80
b. Rs.118.80
c. Rs.126.20
d. Rs.127.40
e. Rs.148.20.
24. Under which of the following situations, replacement cost is a appropriate measure?
I. When Economic value > Replacement cost > Realization value
II. When Economic value > Realization value > Replacement cost
III. When Replacement cost > Economic value > Realization value
a. Only (I) above
b. Only (II) above
c. All (I), (II) and (III) above
d. Both (I) and (II) above
e. Both (II) and (III) above.

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25. Which of the following is/are not true regarding factoring?
I. Credit insurance is more cost-effective than non-recourse factoring if the firms
does not want help with regard to collection and finance.
II. In bill discounting and invoice discounting notice of assignment is not necessary.
III. In both factoring and forfaiting, the factor/forfaiter takes on the responsibilities of
receivables accounting, etc.
a. Only (I) above
b. Only (III) above
c. Both (II) and (III) above
d. Both (I) and (II) above
e. None of the above.
26. Which of the following is not an internal credit enhancement technique in case of
securitisation?
a. Over collateralization
b. Cash collateral
c. Letter of credit
d. Credit trenching
e. Triggered amortization.
27. Which of the following is/are not true regarding the insurance provided on the bank deposits
by the Deposit Insurance and Credit Guarantee corporation (DICGC)?
I. The maximum insurance cover is Rs.1,00,000 for each depositor.
II. The premium payable for the insurance is at the rate of 3 paise per half-year for
every 100 rupees.
III. The premium is payable by the depositor.
a. Only (I) above
b. Only (III) above
c. Both (I) and (III) above
d. Both (II) and (III) above
e. Both (I) and (II) above.
28. Sujana Gilts Ltd., a primary dealer in the Indian money market, participated in the T-Bills
auction during the year. If the successful bids to be maintained by Sujana Gilts Ltd., is given
as Rs.675 cr., then what is the commitment of Sujana Gilts Ltd., to aggregate bidding?
a. Rs.1,587.5
b. Rs.1,687.5
c. Rs.1,787.5
d. Rs.1,887.5
e. Rs.1,987.5.

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29. Consider the following extract of balance sheet of M/s. Z Ltd. for the year 2002:
Rs. lakhs
Net worth 90
Long term debt 30
Current liabilities 60
Fixed assets 60
Inventory 40
Receivables 90
Cash 10

M/s. F Ltd. has agreed to factor the receivables of M/s. Z ltd. and give an advance of 80% of
receivables. If 50% of the additional cash is utilized to reduce current liabilities the current
ratio before and after factoring respectively will be
a. 1.67; 3.67
b. 2.33; 4.33
c. 1.67; 4.33
d. 2.33; 6.33
e. 2.33; 1.92.
30. M/s. Niha Pharma Ltd. (NPL) has developed a medicine which needs to be commercialized.
It requires Rs.5.6 crores to start production and market the same. It expects to generate
revenues from the end of second year with a net profit margin of 20%. The revenues in the
second year are expected to be Rs.40 crores with a growth rate of 20% p.a. Intelli Venture
Fund (IVF) is interested in funding NPL and disinvest at the end of 5th year to earn a rate of
return of 70% p.a.. Assume firms with comparable sales, profitability and risk profiles as
NPL are trading at 13 times the earnings and that there is no further dilution in the equity
stake of NPL. The percentage ownership of IVF in NPL to earn the desired yield is
a. 8.24%
b. 44.24%
c. 46.91%
d. 53.09%
e. 55.76%.

END OF PART A

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Part B : Problems (50 Points)
• This part consists of questions with serial number 1 - 5
• Answer all questions.
• Points are indicated against each question.
• Detailed workings should form part of your answer.
• Do not spend more than 110 - 120 minutes on Part B.
1. Mahesh Industries Ltd. (MIL) a small scale unit, is contemplating to sale and lease back an asset which was
purchased at Rs.30 lakhs three years back by raising a term loan carrying an interest rate of 16% p.a. The
remaining useful life of the asset is five years at the end of which it will have a salvage value of Rs.4 lakhs.
The tax relevant rate of depreciation is 25%.
MIL has approached two leasing companies for the same, the details of which are as follows:
Company Lease quote
First Leasing Company (FLC) Rs.24 ptpm payable quarterly in advance over a period
of 5 years
Best Leasing Company (BLC) Rs.20 ptpm payable monthly in arrears over a period of
5 years

Additional Information:
• FLC requires a gross yield of 24% p.a. on this lease transaction. Its cost of capital is 10% and is in the
tax bracket of 20%.
• BLC wishes to structure the sale and lease back in such a way that it earns an IRR of 2% over the cost
of capital. Its cost of capital is 12% and is in the tax bracket of 30%.
• MIL follows a debt equity ratio of 1.8:1. Its cost of equity is 19.04% and it is in the tax bracket of 30%.
You are required to:
a. Determine the maximum purchase price that FLC can pay for the asset.
b. Determine the maximum purchase price that BLC can pay for the asset.
c. Determine, of the two, which lease quote is more favorable to MIL.
(2 + 6 = 8 = 16 points)
2. Saubhagya Entertainment Ltd. is a leading producer of entertainment software. Saubhagya intends to
expand its production expertise to meet the growing demand in the domestic and the international
entertainment market. For this it wants to finance its expansion mainly through the ECB route. The
company has received the following offer from the Citibank, New York. HSBC has agreed to provide
guarantee cover on this loan. The terms and conditions of the loan is as follows:
Amount $ 40 million
Maturity 8 years
Drawdown $ 20 million on January 01, 2003
$ 20 million on January 01, 2004
Interest 200 BP over LIMEAN payable annually
Management fee 20 BP
Underwriting fee 30 BP
Commitment fee 15 BP (payable at the beginning of the year)
Agency fee $ 30000 per annum (payable at the beginning of the year)
Guarantee fee 60 BP (payable at the end of the year)
Amortization 4 equal installments at the end of 5th, 6th, 7th and 8th year

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The expected $ LIBOR and LIBID, as per a survey conducted by US Bond Research Institute, is as follows:
Year LIBOR (%) LIBID (%)
2003 2.50 2.40
2004 3.00 2.85
2005 4.00 3.75
2006 3.75 3.55
2007 3.85 3.50
2008 3.10 3.00
2009 3.05 2.85
2010 3.00 2.75
2011 2.80 2.50
The future Rs/$ exchange rates as predicted by one of the leading forex analysts is as follows:
Year Rs./$
2003 48.13
2004 48.96
2005 49.57
2006 50.75
2007 50.98
2008 51.24
2009 51.86
2010 52.75
2011 53.48
Saubhagya has also received a loan proposal from IDBI for the same amount for 8 years @ 7.25%.
You are required to advise Saubhagya on which route to opt for raising the required fund. Show all the
relevant computations.
(10 points)
3. M/s Marigold Cements LTd. (MCL) is intending to expand its operations and requires
Rs.200 lakhs for the same. MCL has planned to finance the expansion through a right issue during June
2003. The following relevant information has been extracted from the financial statements of MCL for the
year ended March 2003:
Particulars Rs. lakhs
Equity share capital (15 lakh equity shares of Rs.10 each) 150
Reserves and surplus 50
14% Fully Convertible Debentures 50
10% Term loan from FIs 200
Earnings before interest and taxes 150
Effective tax rate 35%
The following additional information is available:
i. MCL has issued 14% FCDs of the face value of Rs.100 each during January 2003. Each FCD of
Rs.60 is converted into 2 equity shares of Rs.30 each during September 2003. The balance of Rs.40
will be converted into one equity share of Rs.40 at the end of June 2004. The interest is payable semi-
annually on March 31 and September 30 every year. The first interest payment is made on March 31,
2003 for a period of 3 months.

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ii. Due to expansion the finance manager expects MCL’s EBIT to increase by 25% next year.
iii. The equity shares of MCL are trading at 7 times its earings.
You are required to determine
a. The maximum rights ratio if MCL wishes not to dilute its EPS by more than 20% after the rights
issue.
b. Ex-rights price of the share of MCL assuming the rights ratio as calculated in (a) above.
(6 + 2 = 8 points)
4. M/s Sunder Bank Ltd. offers traditional and non-traditional mortgage loans for purchase of residential
properties. Under Pledged Account Mortgages, it requires the borrower to deposit certain amount in a
savings account. It also required the borrower to make graduated payments, which increase at the rate of
5% p.a., for the first four years and equated payments thereafter which are equal to the EMIs under
Traditional Mortgage.
Mr. Prabhu has approached the bank for a home loan of Rs.10 lakhs for a period of 15 years. Assume under
Pledged Account Mortgages the bank requires Mr. Prabhu to make equated monthly payments of Rs.8,765
during the first year. Assume the payments during a year are equal.
You are required to:
a. Determine the EMIs and the interest rate if the loan is given under Traditional Mortgage.
b. Determine the amount of deposit to be made by the borrower in the pledged savings account under the
Pledged Account Mortgages. Assume the deposit carries an interest of 6% p.a. compounded monthly and that
the balance in the pledged savings account becomes zero at the end of the third year.
(4 + 4 = 8 points)
5. Parimal Papers is a medium sized paper mill based at Baroda. During the year 2002-03 it had a sales
turnover of Rs.90 lakhs and expects it to increase by 10% during the year 2003-04.
Currently Parimal follows credit terms of 2/10, net 60 days. 30% of the customers pay on the 10 day and
the balance accepts the bills drawn by Parimal with a usance period of 60 days. However, only 90% of the
bills receivable would be honored within 60 days and the balance pay within 90 days. Parimal Papers has a
policy of availing short-term bank finance at an interest rate of 11% p.a. for funding 75% of the receivables
and the rest is sourced from own funds of the company at an effective cost (in pre-tax terms) of 19% p.a.
Parimal spends around Rs.85000 for the purpose of collection of dues, ledger administration and credit
monitoring. Bad debts amount to 1% of the credit sales.
The General Manager of Fantastic Financial Services, which offers both bill discounting and advance non-
recourse factoring for working capital financing to small and medium sized companies approached the
Managing Director of Parimal Papers for availing working capital financing from them.
The terms and conditions of Fantastic Financials under bill discounting option are as follows:
• Discount charge is 12% p.a.
• On the 60th day, the payment day of the bills, the bank agrees to extend the time of unpaid bills to 90
days charging an interest of 2%, which the company would be collecting from the customers.
The terms and conditions of Fantastic Financials under advance non-recourse factoring option are as
follows:
• Discount charge is 17% p.a. and commission is 1.5%
• Advance payment as proportion of factored receivables is 90%
• Agreed payment time is 45 days
The Managing Director of Parimal Papers is unable to decide which alternative to opt for.
You are required to evaluate the cost benefit analysis of existing working capital financing, bill
discounting and factoring and suggest the alternative of working capital financing to the Managing Director
of Parimal Papers.
(Assume 360 days in a year)
(8 points)

END OF PART B

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Part C : Applied Theory (20 Points)
• This part consists of questions with serial number 6 - 7.
• Answer all questions.
• Points are indicated against each question.
• Do not spend more than 25 -30 minutes on Part C.

6. The Commercial Paper market abroad is very dynamic and is seeing continuous innovations. Discuss the
latest innovations in CPs in foreign markets.
(10 points)
7. Tata Finance Co. has launched Smart Fleet Card, a co-branded card with Bharat Petroleum Corporation
Ltd., which aimed at truck fleet operators who can use them as pre-paid cards or credit cards to pay for fuel
and lubricants at BPCL outlets.
State the advantages of such co-branded cards to the partners of the card business. Also, state the factors a
customer has to consider while choosing a co-branded card.
(5 + 5 = 10 points)
END OF PART C

END OF QUESTION PAPER

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Suggested Answers
Investment Banking & Financial Services – I (261) : April 2003
Part A : Basic Concepts
1. Answer : (d)
Reason : The maximum intra-day trading limit for a broker as prescribed by SEBI is 33 1/3 times of the
sum of the base minimum capital and additional capital. Hence the maximum intra-day trade
limit for Madnani Brokerage Services Ltd. is 33 1/3 times of the sum of the base minimum
capital and additional capital = 33 1/3 times of Rs.25 crore and Rs.15 crore = Rs.1333.2 crore.
Hence (d) is the answer.
2. Answer : (c)
Reason : BSE On-line Trading (BOLT) is a mixture of both quote and order driven system. The NSE
trading system is order driven while the OTCEI system is quote driven. The National Securities
Clearing Corporation (NSCC) assumes the counter-party risk in all trading deals made on the
exchange. The trading on NSE commences every Wednesday and concludes on the following
Tuesday. Hence (c) is the answer.
3. Answer : (d)
Reason : A Hire Purchase or a Leasing Company to accept public deposits, should have a minimum
capital adequacy ratio of 15%. Hence (d) is the answer.
4. Answer : (d)
Reason : The operating advantage arising out of the lease transaction as per BHW model is OA (L) = P.V.
of lease related tax shields – P.V. of loan related tax shields – P.V. of Residual value
= 1600000 – 1400000 – 100000 = Rs.100000. Hence (d) is the answer.
5. Answer : (c)
Reason : A legally binding contract that is set by the underwriters of an IPO to restrict certain individuals
like the insiders from trading in the shares of the company is known as IPO lock-up. This is
usually for a period of 180 days after the IPO. When the lock-up period expires, restricted people
are permitted to sell their shares. Hence (c) is the answer.
6. Answer : (d)
Reason : As per the SEBI Guidelines, no bonus issue should be made within 12 months from the date of a
rights issue. Hence if Pulakit Industries comes up with a rights issue on March 1, 2003, the
earliest that it can come up with a bonus issue is March 1, 2004. Hence (d) is the correct answer.
7. Answer : (e)
Reason : CP is a short-term, unsecured usance promissory note issued at a discount to face value by well-
known or reputed companies, who carry a high credit rating and have a strong financial
background. The various expenses related to CPs are brokerage expenses, rating charges and
stamp duty. The rating charges of a CP issue are 0.5% per annum. The stamp-duty for a CP is as
follows:
Period Stamp duty
Up to 3 months 0.125%
Above 3 months – up to 6 months 0.250%
Above 6 months – up to 9 months 0.375%
Above 9 months – up to 1 year 0.500%
Hence for a CP of 6 months, the rating charges will be (0.5%/12) x 6 = 0.250% and stamp
duties will be 0.250%, both calculated on the face value of the CP. Hence, the rating charges of
this CP of Rs.20000000 will be 0.250% of Rs.20000000 = Rs.50000 and stamp duties payable
for this CP will be 0.250% of Rs.20000000 = Rs.50000. Hence, (e) is the answer.
8. Answer : (d)
Reason : Jumbo CDs are issued by savings and loan associates in large volumes such as $100000 and
above. Asian Dollar CDs carry both floating and fixed interest rates based on the current level of
the Singapore Inter-bank Offer Rate (SIBOR) and paid at New York clearing house. In
Installment CDs, target level for the amount is built-up in the account by allowing the customers
to make a small initial deposit. Yankee CDs are issued by foreign banks such as Japanese,

12
Canadian and European institutions in the US who usually have offices in US cities. Bear and
Bull CDs, whose returns are linked to stock market performance, allow depositors to seek
variable equity like returns. (d) is false and hence is the answer.
9. Answer : (e)
Reason : All of the following are true regarding accounting of a lease transaction in the books of lessor as
per Accounting Standard 19 of the Institute of the Chartered Accountants of India which states
that
i. The lessor must record the finance lease as a receivable in the balance sheet at an amount
equal to the net investment in the lease.
ii. The lessor must bifurcate the lease rental into two components - (i) the capital component;
and (ii) the interest component.
iii. The pattern of recognizing the finance income must also reflect the uncertainties associated
with the collectibility of lease rentals, expectations of the future rates of interest, etc.
particularly for long-term leases.
Hence (e) is the answer.
10. Answer : (d)
Reason : The service tax payable on the interest earned by the hire purchase companies is 5%. Therefore,
service tax payable by Meridian for the fiscal year 2002-03 = 5% of Rs.100000 = Rs.5000.
Hence (d) is the correct answer.
11. Answer : (a)
Reason : Use of collateral is inefficient in case of Mortgage Backed Bonds whereas in case of CMOs it is
relatively efficient. Hence (a) is he answer.
Cash flows are more predictable in Mortgage Backed Bonds whereas in Mortgage Pass Through
Certificates it is relatively uncertain. Treasury Bills have limited capital market investor
spectrum whereas CMOs have wide investor spectrum across mortgage and capital markets.
Credit rating of Mortgage backed bonds are mostly AA or AAA whereas ratings of CMOs are
mostly AAA. Liquidity of Mortgage Backed Bonds is adequate whereas liquidity for Mortgage
Pass Through Certificates is good especially for GNMAs. Hence (a) is the answer.
12. Answer : (c)
Reason : Foreign bonds are the bonds floated in the domestic market denominated in domestic currency
by non-resident entities. Yen denominated bond issued in UK is a Euro (Yen) bond. Euro-
commercial paper issued with maturity of upto one year are not underwritten and are unsecured.
Note issuance facilities are underwritten and have maturity of upto one year. Therefore
statements (I) and (IV) are true and statements (II) and (III) are false. Hence (c) is the right
choice.
13. Answer : (d)
Reason : A Euro convertible Bond is issued for investment in Europe. It is a quasi-equity issue made
outside the domestic market and provides the holder with the option to convert the instrument
from debt to equity. The Euro convertible Bonds can be converted into GDRs. Therefore
statements (I) and (II) are true and statement (III) is false. Hence (d) is the right choice.
14. Answer : (c)
Reason : Disbursement (RD) = AV × CC/100 × PC/100 + AV × LC/100 – BC – CM
Given :
AV = 3,00,000
PC = 70%
LC = 25%
CC = 1 – LC = 75%
BC = Rs.75,000
CM = Rs.60,000
RD = 3,00,000 × 75/100 × 70/100 + 3,00,000 × 25/100 – 75,000 – 60,000
= Rs.97,500

13
15. Answer : (b)
Reason : Amount of lease rental is the value of ‘L’ in the following:
2
(L–30.54) PVIFA24,5 = 140 ×
7
123.832
L= = 45.112
2.745
45.112
LR ptpa = ×1, 000 = Rs.322.23 ptpa.
140
16. Answer : (d)
Reason : Mortgage Backed Securitization is backed by easily traceable immovable asset whereas Asset
Backed Securitization is backed by movable assets, which may not be easily traceable. Mortgage
Backed Securitization takes into consideration appreciation in the value of assets whereas Asset
Backed Securitization takes into consideration depreciation in the value of assets. Legal hassles
are relatively less in Asset Backed Securitization. Mortgage Backed Securitization gives low
yields to the investors whereas Asset Backed Securitization gives high yields to the investors.
Hence (d) is the answer.
17. Answer : (d)
Reason : In a Supplier Guarantee Factoring - The customer places an import order with the distributor, the
distributor seeks the approval of the factor for extending credit to the customer and instead of
making an advance payment to the distributor against the customer’s account that has been
factored, the factor pays the supplier directly for the invoice value of the goods supplied. Hence
(d) is the correct answer.
18. Answer : (d)
Reason : According to SEBI, the number of co-managers cannot exceed the number of lead managers
appointed for that issue. For an issue of Rs.200 crs, the maximum number of lead managers that
can be appointed is 4 and hence co-managers for the issue cannot exceed 4. Hence, (I) is true.
An associate company of the issuer company cannot be appointed either as lead manager or co-
manager but can be appointed as an underwritter or a consultant or an advisor to the issue.
Hence (II) is not correct.
Any member of any recognized stock exchange can be appointed as broker to the issue.
Appointment of brokers to the issue is not mandatory according to SEBI. Hence , (III) is correct
and the answer is (d).
19. Answer : (b)
Reason : While calculating the capital adequacy ratio for a primary dealer the risk weight (in terms of %
of market value) of a government security with a balance maturity of 4 years as on date of
reporting is 20.
20. Answer : (b)
Reason : According to the companies (Acceptance of Deposit) Rules, 1975, no deposit repayable on
demand or on notice can be accepted by a company, a security deposit received from an
employee cannot be termed as public deposit and a public deposit can be prepaid only after a
period of 3 months from the date of deposit. Hence, only (III) is correct and (b) is the answer.
21. Answer : (d)
Reason : According to SEBI guidelines, a promoter of listed company has to participate either to the
extent of 20% of the proposed issue or ensure post issue shareholding of 20% of the post-issue
capital. Hence, (I) is true. Bonus shares issued out of revaluation reserves during the preceding
3 accounting years are not included in the promoter’s contributions. Hence, (II) is not true. In
case the promoter’s contribution in the proposed issue exceeds the minimum specified
contribution such excess will attract only one-year lock-period. Hence, (III) is also not true and
(d) is the answer.
22. Answer : (c)
Reason : CF after considering probability of confiscation = (1 – p)tCFt = (1 – 0.1)6 × 15 = Rs.7.97 lakhs

14
23. Answer : (c)
Reason : Effective rate of interest = 26.82 p.a.
= (1.2682)1/12 – 1 = 2% p.m.
Total amount due = 104 x 12 = Rs.1,248
PV of installment due at the end of 12th month = (1.02) 104PVIFA2%,12 = Rs.1,121.80
Interest Rebate = 1,248 – 1,121.80 = Rs.126.20.
24. Answer : (d)
Reason : Under situations (I) and (II), the loss suffered by the firm on deprivation is the replacement cost.
Under situation (III), the firm will not be keen on replacing the deprived asset because
replacement cost exceeds economic value. Hence the loss suffered by the firm if it is deprived of
the asset is the economic value of the asset. Hence, only in (I) and (II) situations, RC is the
appropriate measure and (d) is the answer.
25. Answer : (b)
Reason : While the factor takes on the responsibilities of receivables accounting, monitoring and
collections, the forfaiter does not assume any of these responsibilities. Hence, (III) is not true
and the answer is (b). In invoice discounting the factoring arrangement is confidential which
means there is no question of notice of assignment. Hence, (II) is true. Credit insurance takes
the responsibilities of granting credit and bad debts and hence is similar to non-recourse in this
respect. Thus for a firm which does not want the help with regard to collection and finance it is
more cost effective than factoring. Hence, (I) is true.
26. Answer : (c)
Reason : Letter of credit is provided by a third party for securitization structures with credit ratings below
the level sought for the issue. Hence, this is an external credit enhancement technique and (c) is
the answer.
27. Answer : (d)
Reason : The Scheduled Commercial Banks, Cooperative Banks and Regional Rural Banks do accept
deposits from general public as part of their normal banking activity. In order to protect the
interest of the depositors, it was considered necessary to have the scheme of insuring the bank
deposits. The scheme was originally undertaken by Deposit Insurance Corporation which was
subsequently merged to become DICGC. As of now all banks have to take the insurance cover
on the deposits accepted by them.
The premium payable for the insurance is at the rate of 2.5 paise per half-year for every 1000
rupees and the same is paid by the bank on behalf of the depositors. The deposit will have an
insurance cover for the actual amount of the deposit, subject to a maximum of Rs.1,00,000 for
each depositor irrespective of the number and amount of deposits one has with a bank. Hence,
(II) and (III) are not true and (d) is the answer.
28. Answer : (b)
Reason : The minimum success ratio for the PDs is 40% for T-Bills. Since the successful bids to be
maintained by the company is given as Rs.Rs.675 cr., the company’s commitment to aggregate
bidding is given by Rs.675/0.4 cr. = Rs.1687.5
29. Answer : (b)
Reason : On factoring, 80% of receivables is converted into cash. Given that 50% of cash received
through factoring is utilized for reducing current liabilities, changed current assets =
40 + 90 x 0.2 + 10 +90 x 0.8 x 0.5 = Rs.104 lakhs.
Changed current liabilities = 60 – 90 x 0.8 x 0.5 = Rs.24 lakhs
104
Hence, post factoring current ratio = = 4.33
24
40 + 90 + 10
Pre-factoring current ratio = = 2.33
60

15
Hence, (b) is the answer.
30. Answer : (b)
Reason : Expected PAT during second year = 40 x 0.2 = Rs.8 crores
Growth rate = 20% p.a.
Required return of IVF = 70% p.a.
Hence, the future value of investment of Rs.5.6 crores = 5.6(1.7)5 = Rs.79.512 crores.
MV of NPL at the end of fifth year = 8(1.2)3 x 13 = Rs.179.712 crores.
79.512
Percentage ownership of IVF in NPL = = 44.24%
179.712

16
Part B : Problems
1. a. FLC : Required gross yield is 24% p.a.
Let the purchase price be Rs.P lakhs
The maximum purchase price is the value of P at which the following equation is equal to zero.
– P + 0.024 × 12 × P × i/d4 PVIFAi,5 + 4PVIFi,5 = 0 at i = 24%
– P + 0.024 × 12 × P × 1.146 × 2.745 + 4 × 0.341 = 0
– P + 0.906P + 1.364 = 0
1.364
P = = Rs.14.511 lakhs.
0.094
Maximum purchase price of FLC = Rs.14.511 lakhs
b. BLC : Required IRR = 12 + 2 = 14%
At IRR, NPV(lease) = 0
– Initial Investment + PV of lease rentals – PV of tax on lease rentals + PV of DTS + PV of NSV = 0
A. Let initial Investment be Rs.B lakhs
B. PV of lease rentals = 0.02 × 12 × i/i12 × PVIFA14,5 × B = 0.875B lakhs
C. PV of tax on lease rentals = 0.02 × 12 × B PVIFA14,5 × 0.3 = 0.2472B lakhs
D. PV of DTS
WDV at the inception of lease = Rs.12.656 lakhs
Year Depreciation (Rs. lakhs) PV (Rs. lakhs)
1 3.164 2.775
2 2.373 1.825
3 1.780 1.202
4 1.335 0.790
5 1.001 0.520
7.112
PV of DTS = 7.112 × 0.3 = Rs.2.134 lakhs
E. PV of NSV = 4 PVIF14,5 = Rs.2.076 lakhs
–A+B–C+D+E = 0
– B + 0.875B – 0.247B + 2.134 + 2.076 = 0
4.21
B = = Rs.11.317 lakhs.
0.372
c. Of the lease quoted, the lease quote at which NAL is more that will be favourable to lessee.
NAL = Initial Investment – PV of LR + PV of TS on LR – PV of DTS – PV of ITS – PV of NSV
Of the factors, the relevant factors for comparison are initial price of sale, present value of lease
rentals, PV of tax on lease rentals and PV of interest tax shields foregone.
1.8 1
Cost of capital of MIL = ×16 × 0.7 + × 19.04 = 14
2.8 2.8
FLC: BLC
Relevant factors of NAL
Rs. in lakhs Rs. in lakhs
A. Initial price of sale 14.511 11.317
B. PV of lease rentals 0.024 × 12 × 14.511 × 0.02 × 12 × 11.317 ×
PVIFA16,5 × i/d4 = 15.025 PVIFA16,5 × i/i12 = 9.527
C. PV of tax shield on lease 0.024 × 12 × 14.511 × 0.020 × 12 × 11.317 ×
rentals PVIFA14,5 × 0.3 PVIFA14,5 × 0.3
= 4.304 = 2.797
D. PV of Interest shield (Note 1) 4.420 × 0.3 = 1.326 3.014 × 0.3 = 0.904
NAL (apart from depreciation
tax shield and NSV)
= A–B+C–D 2.464 3.683

17
As the sum of the relevant factors of NAL is more in case of BLC, BLC is more favourable
Note 1: Interest tax shield
Rs. in lakhs
Adjusted Interest PV of Adjusted
Balance Outstanding Interest @ 16% Principal Portion
Year ** Interest
FLC BLC FLC BLC FLC BLC FLC BLC FLC BLC
1 15.025 9.527 2.404 1.524 2.185 1.386 1.994 1.330 1.749 1.166
2 12.840 8.141 2.054 1.303 2.535 1.607 1.644 1.109 1.264 0.853
3 10.305 6.534 1.649 1.045 2.940 1.865 1.239 0.851 0.836 0.574
4 7.365 4.669 1.178 0.747 3.411 2.163 0.768 0.553 0.455 0.314
5 3.954 2.506 0.633 0.401 3.956 2.509 0.223 0.207 0.116 0.107
** Adjustment Factor:
FLC BLC
Equated Annual Installment 4.589 2.91
Actual annual payment 4.179 2.716
Adjustment factor 0.41 0.194

2.

Year LIBOR LIBID LIMEAN Interest rate


2003 2.50% 2.40% 2.45% 4.45%
2004 3.00% 2.85% 2.93% 4.93%
2005 4.00% 3.75% 3.88% 5.88%
2006 3.75% 3.55% 3.65% 5.65%
2007 3.85% 3.50% 3.68% 5.68%
2008 3.10% 3.00% 3.05% 5.05%
2009 3.05% 2.85% 2.95% 4.95%
2010 3.00% 2.75% 2.88% 4.88%
2011 2.80% 2.50% 2.65% 4.65%

18
(Amount in million $)

Upfront 31.12.2003 31.12.2004 31.12.2005 31.12.2006 31.12.2007 31.12.2008 31.12.2009 31.12.2010

Drawdown 20.0000 20.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Interesrt 0.0000 0.8900 1.9700 2.3500 2.2600 2.2700 1.5150 0.9900 0.4875

Amortization 0.0000 0.0000 0.0000 0.0000 0.0000 10.0000 10.0000 10.0000 10.0000

Management fee 0.0800 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Underwriting fee 0.1200 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Commitment fee 0.0300 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Agency fee 0.0300 0.0300 0.0300 0.0300 0.0300 0.0300 0.0300 0.0300 0.0000

Guarantee fee 0.0000 0.1200 0.2400 0.2400 0.2400 0.2400 0.1800 0.1200 0.0600

Net Cash Flow in $ 19.7400 18.9600 -2.2400 -2.6200 -2.5300 -12.5400 -11.7250 -11.1400 -10.5475

Exchange rate (Rs./$) 48.1300 48.9600 49.5700 50.7500 50.9800 51.2400 51.8600 52.7500 53.4800

Net Cash Flow in


million Rs. 950.0862 928.2816 -111.0368 -132.9650 -128.9794 -642.5496 -608.0585 -587.6350 -564.0803

Effective cost of borrowing to Saubhagya is the IRR of the above cash flow = 7.48%
As the company is getting the amount indegineously at cheaper rate of 7.25%, it should accept the loan from
IDBI. Moreover, for a rupee loan taken from IDBI, there is no exchange risk involved as in the case of ECB.

3. (a) EPS for the year 2002-2003:


Particulars Rs. lakhs
EBIT 150.00
Interest on FCDs (0.25 x 0.14 x 50) 1.75
Interest on Term loan (0.1 x 200) 20.00
EBT 128.25
EAT 128.25 x 0.65 83.363
Number of shares (in lakhs) 15
83.363
EPS (in Rs.) = 5.56
15
EAT for the year 2003-2004:
Particulars Rs. lakhs
Expected EBIT = 150 (1.25) 187.50
Interest on FCDs (0.5 x 0.14 x 50 + 0.5 x 0.4 x 0.14 x 50) 4.90
Interest on Term loan (0.1 x 200) 20.00
EBT 162.60
EAT 105.69
Minimum required EPS = 5.56 x 0.8 = Rs.4.448
105.69
∴ Maximum number of shares MCL can have = = Rs.23.761 lakhs
4.448
Existing shares = 15 lakhs.
Rs.50,00,000
Shares on conversion during September 2003 = × 2 = 1, 00, 000
Rs.100
Maximum number of shares through rights issue = 23.761 – [15 + 1] = 7.761 lakh shares

19
Number of shares eligible for rights share:
Existing shares 15,00,000
Shares on conversion during September 2003 1,00,000
Shares to be converted during June 2004 50,000
16,50,000
16.5
Maximum rights ratio = = 2.1(approximately)
7.761
A shareholder owning 2.1 shares is entitled to one right share.
200
b. Subscription price = = Rs.25.77
7.761
Existing market price = 5.56 x 7 = Rs.38.92
2.1× 38.92 × +25.77
Ex-rights price = = Rs.34.68.
2.1 + 1

4. a. First monthly payment under pledged account mortgages loan = Rs.8,765


From the fourth year, the EMI of PAMs are equal to EMIs under Traditional loans. During these four
years, the installments increase at the rate of 5% p.a.
Hence, EMIs from the fourth year under PAMs /EMIs under traditional loan
= 8,765 × (1.05)3 = Rs.10,147
Interest rate under traditional loan is the value of r in the following:
10,147 PVIFAr,180 = Rs.10,00,000
PVIFAr,180 = 98.551
At r = 1%, PVIFA1%,180 = 83.322
At r = 0.5% PVIFA0.5%,180 = 118.504
By interpolation,
118.504 − 98.551
r = 0.5 + × 0.5
118.504 − 83.322
= 0.78% = 9.77%p.a.
b. The amount to be drawn from savings account will be as follows: (Rs.)
EMI under
EMI under Drawings from
Year Traditional
PAM savings A/c
Mortgage
1 10,147 8,765 1,382
2 10,147 9,203 944
3 10,147 9,663 484
4-15 10,147 10,147 –
Amount to be deposited in savings account
= 1382PVIFA0.5%,12 + 944PVIFA0.5%,12 PVIF0.5%, 12 + 484PVIFA0.5%, 12 PVIF0.5%, 24
= PVIFA0.5%, 12 [1382 + 944PVIF0.5%, 12 + 484PVIF0.5%, 24]
= 11.619 [1382 + 944 × 0.942 + 484× 0.887]
= Rs.31,320.

5. Total sales = 90 x 1.1 = Rs.99 lakhs


Cost of existing system:
A. Cash Discount = 0.02 x 0.30 x 99 = Rs.0.594 lakhs
B. Bad debts = 0.01 x 99 = Rs.0.99 lakhs
C. Administration expenses = Rs.0.85 lakhs

20
Average collection period = 0.3 x 10 + 0.7 [.90 x 60 + 0.1 x 90] = 47 days
47 47
D. Cost of own funds = 0.11 x 0.75 x 99 x + 0.19 x 0.25 x 99 x = Rs.1.68 lakhs
360 360
Total costs of existing partern of working capital finance = A + B + C + D = 4.114.
Bill discounting is another way of financing debts in the form of bills. As management of bills receivable is
maintained by the company all the costs other than costs of funds associated with in-house manaement have
to be borne apart from the discount charge of bill discounting. Thus,
Costs of bill discounting includes:
E. Cash discount (same as above) = Rs.0.594 lakhs
F. Bad debts (same as above) = Rs.0.99 lakhs
G. Administrative expenses (same as above) = Rs.0.85 lakhs
H. Discount charge = 0.12 x 0.7 x 99 x 60/360 = Rs.1.386lakhs
Total costs of bill discounting = E + F + G + H = Rs.3.82 lakhs
Costs of factoring:
I. Commission = 0.015 x 99 = Rs.1.485 lakhs
J. Discount = 0.17 x 45/360 x 99 x 0.90 = Rs.1.893 lakhs
K. Cost of own funds = 0.19 x 45/360 x 99 x 0.10 = Rs.0.235 lakhs
Total Costs of factoring = I + J + K = Rs.3.613 lakhs
As factoring costs are less than that of existing system and bill discounting, factoring should be preferred.

21
Part C: Applied Theory

6. The CP market is continually seeing innovations. The following are a few innovations that are seen in
foreign markets.
Master note is a new financial paper issued by finance companies to bank trust departments and other
permanent money market investors. In an arranged agreement, the investing firm notifies the issuing
company as to how much paper it will purchase on that particular day, and issuing company in turn issues a
paper on the maximum agreed amount. The interest on daily papers are pooled and are taken by the
investors during the current month.
Medium-term notes are unsecured obligations, papers with a maturity period of 9-10 months. These are
issued by investment grade corporations at a fixed interest rate. These papers suit companies with
substantial quantities of medium-term assets as these papers have longer maturities when compared to
conventional CPs and IOUs.
Asset-backed commercial paper gives credit at a lower interest rate to the corporates. This paper is nothing
but, a pool of loans or credit receivables made into packages. These packages are issued in the form of a
paper, and these loans or receivables are removed from the issuing companies’ balance sheet and are placed
in a special-purpose entity (SPE). SPE issued the commercial paper to cover discount price and uses the
proceeds for purchase of the receivables. The issuing customer usually services the underlying receivables,
collects interest and principal payments and passes the funds to SPE. In the process a bank is chosen for
servicing the receivables supporting the paper issue.

7. Co-branded card is the card issued by a card issuer who has a strategic partnership with a commercial
entity. For example, Standard Chartered-Railway credit card, Jet-Citibank, etc.
Benefits to the partners: The card issuer can increase its customer base and can build loyalty. The merchant
establishment gains in terms of brand image and business that might otherwise have not come its way.
Customers benefit as they gain value from two organizations i.e. from the card issuer and the merchant
establishment i.e. more value for same price.
A customer has to opt for a co-branded card only when he is sure to derive the relevant benefit from it i.e. a
customer can choose a Jet-Citibank card if he is a frequent flier and Bharat-Bob card can be opted by a
person who spends substantial amounts on petrol. A customer opting for a co-branded card should also
check whether the card offers true value for money. He should check whether a co-branded card is costing
more than the normal card if so whether the card is giving the added benefits or not.

22