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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Do you find that the quantum of RBI’s intervention has some sort of relation with the FIIs’ investment or with turnover in the foreign exchange market?
Why has RBI gone for only buying USD and not for selling it?
Do you find any relation between RBI intervention and the INR/USD exchange rate?
How does inflow of foreign investment influence the exchange rate of INR/USD?
The exchange rate in two markets is as follows:New York: $ 1.9800 – 10/£London: $ 1.9700 – 10/£Find out how arbitrageurs will make gains.
A pound options call contract has strike rate of $ 1.820/£ and a premium of $ 0.08. Spot rate on maturity is $ 1.830/£. Find gain/loss to options buyer/options seller.
Suppose spot rate on April 1 is 1.785/£. Pound futures contract is sold at $ 1.790 for June delivery and at $ 1.785 for September delivery. Expecting that pound will depreciate fast after June, a
Presently, the spot rate is Rs 44.50/US $. A speculator feels that, after a week, US dollar should appreciate to Rs 44.60. What should he do if he has Rs 10,000 at his disposal?
Find out the amount of profit out of covered interest arbitrage if interest rate in India and the USA is respectively 9% and 4.50% and spot and the 6-month forward exchange rates are respectively Rs
If interest rate in India and the USA is 9.06% and 6% and if spot exchange rate is Rs 43.91/US $, find the exchange rate during the next year.
If the rate of inflation in India and the USA is 7% and 4% respectively and if interest rate in the USA is 6%, find the interest rate in India.
If exchange rate at the end of 2006–07 is Rs 43.91/US $ and if the rate of inflation in India and USA during 2007–08 is respectively 7% and 4%. Find:(i) inflation rate differential between the
Find Rs/€ exchange rate if Rs 43.93 – 43.95/US $ and € 0.83 – 0.84/US $.
Find the one-month forward rate of US dollar if spot rate is Rs 45.00 and the forward premium is 12%.
Find out the forward rate differential if spot rate of US $ is Rs 40.00 and one-month forward rate is Rs 40.80.
Consider the following bid-ask prices: Rs 40 – 40.40/ US $. Find the bid-ask spread.
If indirect quote is US $ 0.025/Re, how can this exchange rate be shown under direct quote?
If direct quote is Rs 39/US $, how can this exchange rate be presented under indirect quote?
If the inflation rate in India and the USA is respectively 7% and 4% and if interest rate in the USA is 6%, find the interest rate is India based on Fisher's equation.
Based on the PPP theory, what will be the exchange rate after 2 years if the present exchange rate is Rs 45/US $ and the inflation rate in India and the USA is respectively 8% and 5%?
Calculate the 3 month forward rate (using the Interest Rate Parity Theory) if the spot rate is Rs 45/US $ and the interest rate in India and the USA is respectively 8% and 5%.
If the nominal interest rate is 15% and rate of inflation is 6%, find out the real interest rate.
Find out the cross rate for SF/Euro if, Euro 4.25 – 4.28/US $ and SF 65.20 – 65.30/US $.
Find out the bid-ask spread if the exchange rate is Rs 45.00 – 45.50/US $.
If a direct quote is Rs 45/US $, how can this rate be presented in an indirect quote?
If the rate of exchange is:US $ 2.0000 – 2.0100/£ in New York US $ 1.9800 – 1.9810/£ in London Explain how an arbitrageur would gain.
Three one-month forward deals were contracted respectively on the 27, 28 and 29 January 2004. What would be the settlement date?
Choose the most suitable answer.(a) Sterilised intervention by the monetary authorities is expected to:(i) increase the money supply in the country(ii) bear no ultimate effect on the money
Mark true or false.(a) Disparity between the real exchange rate and the nominal exchange rate does exist in the pegged exchange rate regime.(b) Pegged exchange rate regime has insulation
Write notes on:(a) Direct and indirect quote(b) Spread between buying and selling rates(c) Forward rate differentials(d) Currency arbitrage in spot and forward markets
What are the different types of currency options contracts? Explain how the buyers and the sellers of options benefit from the option deals.
Discuss the features of the market for currency futures.
Hedging in the forward market is like a double-edged sword. Explain.
Describe the distinguishing features of the foreign exchange market. Who are the major participants in it?
Discuss the Interest rate parity theory and its role in determining the forward exchange rate.
Discuss the Fisher Effect and explain its relevance to exchange rate determination.
Describe how the inflation rate differential influences the exchange rate.
Floating exchange rates are determined by the market forces of supply and demand.Explain.
What do you mean by cross rates? How are they determined?
Distinguish between independent floating and managed floating. Explain how the monetary authorities intervene in the foreign exchange market to stabilise the exchange rates.
Distinguish between a pegged exchange rate regime and a floating exchange rate regime. Is the latter superior to the pegged exchange rate regime?
What are the markets for derivatives?• Currency futures located normally at stock exchanges where a fixed amount of currency is traded for a fixed delivery.• Currency options that may be a part
Distinguish between arbitrage, hedging and speculation.• Arbitrage means making profits out of varying exchange rates in different markets on a particular point of time.• Hedging means minimising
Who are the major participants in the foreign exchange market?• Arbitrageurs• Hedgers• Speculators• Non-banking entities exchanging currencies to honour their obligations
Mention the features of foreign exchange market.• Over-the-counter• Round-the-clock• Convertible currencies are bought and sold• Spot and forward market
How is exchange rate determined in forward market?• It is the interest rate parity theory which explains that interest rate differential is equal to forward rate differential.• If the two
What are the factors influencing exchange rate?• Inflation rate• Interest rate• Market intervention by the central bank• Psyche of the participants
How is exchange rate determined in spot market?• Exchange rate is determined by the forces of supply and demand. Greater the demand, higher is the value of currency. Greater the supply, the lower
What are the different types of exchange rate quotes?• Direct and indirect• Buying/bid and selling/offer quote• Spot rate and forward rate quote• Cross rate quote
Distinguish between independent and managed floating.• Independent floating, as opposed to managed floating, does not have market intervention by monetary authorities, normally central bank of the
Distinguish between pegged exchange rate and floating exchange rate regimes.• In a pegged exchange rate regime, the value of a currency is fixed in terms of other currency or basket of
Sagar & Co. is liquidated owing to heavy losses shown in the following balance sheet.Liabilities Amount Rs Assets Amount Rs 8,000 preference shares of Rs 40 each 3,20,000 Land & building 1,00,000
Shares surrendered and not re-issued are to be cancelled.Prepare the re-organised balance sheet.
The claims of the unsecured creditors shall be reduced by 80% and for the balance, equity shares of Rs 5 are to be given.
Income tax liability is to be met.
Debenture-holders’ claim to be reduced to Rs 2,30,000 that will be satisfied by the issue of participating preference shares.
Of the surrendered shares, 46,000 shares of Rs 5 each are to be converted into 10% participating preference shares of Rs 5 fully-paid.
After sub-division, 95% of the holding will be surrendered by the shareholders.
Each share shall be sub-divided into 20 fully-paid equity shares of Rs 5 each.
The B/S of ABC & Co. as on 31st March 2007 is as follows:The re-organisation scheme approved by the court is as follows:
A company has run into financial distress. It has Rs 1,50,000 as outstanding debt and Rs 75,000 as the value of current assets. The creditors are agreeable to share the value of current assets. What
At the time of liquidation, the balance sheet of a company is as follows:Amount (Rs)Total assets…. 15,00,000 Liabilities:Secured creditors 2,00,000 Unsecured creditors 1,00,000 Preference share
A company is forced into liquidation. At the time of liquidation, its balance sheet is as follows:Amount (Rs)Total assets…. 35,00,000 Liabilities:Secured creditors 5,00,000 Unsecured creditors
Choose the most suitable answer.(a) Insolvency occurs when:(i) liabilities exceed the value of assets(ii) liabilities are lower than the value of assets(iii) the firm is short of desired liquidity(b)
Mark true or false.(a) Financial distress occurs when the IRR is greater than the cost of capital.(b) Insolvency occurs when cash in the firm is not sufficient to meet contractual obligations at a
Explain liquidation of a company. Is it always preferable to financial reorganisation?
Describe financial reorganisation. What are the steps taken in this respect?
“Measures to handle corporate financial distress vary from one case to the other”.Discuss. Explain in this context the role of contingency plans and voluntary settlements.
Explain how corporate financial distress is predicted.
Distinguish between economic failure and financial failure.
What are the modes of handling failure?• Contingency planning• Voluntary settlements – Extension, Composition and Voluntary liquidation• Re-organisation of capital• Liquidation by court
What are the determinants of the mode of handling failure?• Nature of failure• Extent of failure• Choice of different parties related to the firm
How do you anticipate financial distress?• Weak financial ratios• Weak management incentives• Weak strategic factors
What are the different types of corporate financial distress?• Economic failure• Financial failure on account of illiquidity• Financial failure on account of insolvency
Company A is acquiring Company B. The former pays 0.5 of its shares to the shareholders in the target company for each share held by them. The financial variables of the two companies are as
If the operating profit of the merged firm rises by Rs 75,000 and the acquiring firm pays Rs 2 per share more than the market value of the share in the target company, find the NPV of gains to
The financial variables of the acquiring company, A and the target company, B are given hereunder.Company A Company B EPS (Rs) 15 17.50 Price of shares (Rs) 100 80 P/E ratio 6.67 4.57 No. of shares
Company A decides to acquire Company B in the expectation that the latter will improve its value by Rs 20 lakh over and above its 10 lakh shares selling at Rs 10 each. It gives Rs 12 per share as
Company A with 10 lakh outstanding shares of Rs 40 each acquires Company B which has 5 lakh outstanding shares of Rs 20 each. Their P/E ratio is 10 and 8 respectively.Find the price-earning ratio of
Company A with 10 lakh outstanding shares of Rs 40 each acquires Company B which has 5 lakh outstanding shares of Rs 20 each. The latter will be ready for acquisition only when it gains at least Rs
A is acquiring B and pays 40% premium for B’s shares. The financial position of the two companies prior to acquisition is given here respectively in the second and third columns below. Fill in the
Firm A has a taxable income of Rs 1,40,000 and Firm B has incurred a loss of Rs????20,000.The tax rate is 30%. Find out if there is any tax saving as a sequel to the merger of A and B.
Firm X is acquiring Firm Y. The financial position of the two firms is as follows:Firm X Firm Y Present earnings (Rs) 40,000 18,000 Shares (no.) 10,000 6,000 EPS (Rs) 4 3 MPS (Rs) 60 30 P/E ratio 15
Choose the most suitable answer.(a) Horizontal combinations occur among firms involved in:(i) a similar line of business activities(ii) different stages of production of the same final product(iii)
Mark true or false.(a) In equity carve-outs, the subsidiary’s shares are not sold to the public in general.(b) Pure divestitures may be voluntary as well as compulsory.(c) In the case of
Mention in brief the accounting procedure related to M&As.
Distinguish between pure divestiture, spin-offs and equity carve-outs.
Describe the features of the M&A regulations prevalent in India.
What are the modes of payment of the consideration value? Explain their relative merits and demerits.
How is consideration value determined? Explain how the gains from acquisition are shared by the acquiring firm and the target firm.
Corporate combinations have certain motives behind them. Explain.
Explain the different forms of combination.
What is equity carve-out?• Parent company sells the share of the subsidiary to the public in general and not to the existing shareholders.
What do you mean by spin-offs?• Parent company distributes the shares of the subsidiary among the existing shareholders.
What is pure divestiture?• Parent company sells a part of the operations of the subsidiary to a third party.
What are the provisions of the Indian Companies Act?• Acquisition only up to 25% shares of the target company• Related information to be supplied to the stock exchange and to the central
What are the modes of merger financing?• Cash payment• Exchange of equity shares• Preference shares and debentures• Deferred payment plan
How do you determine the consideration value?• The purpose is to raise the post-merger value of the firm.• The ceiling price is represented by the product of P/E ratio of the acquiring firm and
What are the gains from and costs of M&As?• Gains in terms of increased profit• Cost in terms of paying consideration value in excess of MPS in the target firm
What are the motivations behind combination?• Reaping synergistic advantages• Enjoying monopoly power• Reaping diversification benefits• Increased debt capacity• Tax saving• Reaping gains

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