Financial Services - 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.
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Question 1 (17 marks)HiSpeed Ltd. plans to manufacture cross-cou.docx
Question 1 (17 marks)
HiSpeed Ltd. plans to manufacture cross-country skiing equipment. Its cash flows are highly dependent on the weather in early winter. HiSpeed operates under ideal conditions of uncertainty. On August 1, 2014, the beginning of its first year in business, HiSpeed acquires equipment to be used in its operations. The equipment will last two years, at which time its salvage value will be zero. The company finances the equipment purchase by issuing common shares.
HiSpeed’s annual net cash flows will be $800 if the weather is snowy and $300 if it is not snowy. Assume that cash flows are received at year end. In each year, the objective probability that the weather is snowy is 0.7 and 0.3 that it is not snowy. The interest rate in the economy is 3% in both years.
HiSpeed will pay a dividend of $50 at the end of each year of operation.
Required
a. (9 marks)
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b. (2 marks)
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c. (6 marks)
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Chapter 8 Question # 1, 2, 7, 8, and 9.
1. Bond Investment Decision Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
2. How Interest Rates Affect Bond Prices Explain the impact of a decline in interest rates on:
a. An investor’s required rate of return.
b. The present value of existing bonds.
c. The prices of existing bonds.
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8. Bond Price Sensitivity Is the price of a longterm bond more or less sensitive to a change in interest
rates than to the price of a short-term security? Why?
9. Required Return on Bonds Why does the required rate of return for a particular bond change
over time?
Assignment 6
Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22.
2. Mortgage Rates and Risk What is the general relationship between mortgage rates and long-term
government security rates? Explain how mortgage lenders can be affected by interest rate movements.
Also explain how they can insulate against interest rate movements.
3. ARMs How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate
mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest
rate risk.
4. Mortgage Maturities Why is the 15-year mortgage attractive to homeowners? Is the interest rate
risk to the financial institution higher for a 15-year or a 30-year mortgage? Why?
10. Exposure to Interest Rate Movements Mortgage lenders with fixed-rate mortgages should
benefit when interest rates decline, yet research has shown that this favorable impact is dampened.
By what?
11. Mortgage Valuation Describe the factors that affect mortgage prices.
12. Selling Mortgages Explain why some financial institutions prefer to sell the mortgages they originate.
16. Mortgage-Backed Securities Describe how mortgage-backed securities (MBS) are used.
22. Subprime versus Prime Mortgage Problems How did the repayment of subprime mortgages
compare to that of prime mortgages during the credit crisis?
dq board is not up
week 9 assingments
Chapter 13 #1, 2, 3, 4, 7, 12, 14,16,17, and 19
1. Futures Contracts Describe the general characteristics of a futures contract. How does a clearinghouse
facilitate the trading of financial futures contracts?
2. Futures Pricing How does the price of a financial futures contract change as the market price
of the security it represents changes? Why?
3. Hedging with Futures Explain why some futures contracts may be more suitable than others
for hedging exposure to interest rate risk.
4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect
interest rates to increase? Explain.
7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than
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Question 1 (17 marks)
HiSpeed Ltd. plans to manufacture cross-country skiing equipment. Its cash flows are highly dependent on the weather in early winter. HiSpeed operates under ideal conditions of uncertainty. On August 1, 2014, the beginning of its first year in business, HiSpeed acquires equipment to be used in its operations. The equipment will last two years, at which time its salvage value will be zero. The company finances the equipment purchase by issuing common shares.
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HiSpeed will pay a dividend of $50 at the end of each year of operation.
Required
a. (9 marks)
In 2014, the weather is snowy. Prepare a statement of financial position as at July 31, 2015, the end of HiSpeed’s first year of operations, and an income statement for the year.
b. (2 marks)
What timing of revenue recognition is implicit in the income statement you have prepared in part (a)? When ideal conditions do not hold, is this timing of revenue recognition relevant? Is it reliable? Explain.
c. (6 marks)
Assume that HiSpeed paid the present value you calculated in part (a) for its equipment. Calculate HiSpeed’s net income for the year ended July 31, 2015 on a historical cost basis, assuming that equipment is depreciated on a straight-line basis. Under the more realistic assumption that ideal conditions do not hold, which measure of net income is most relevant? Which is most reliable? Why?
Question 2 (18 marks)
Prem has $2,000 that he wishes to invest for one year. He has narrowed his choices down to one of the following two actions:
i: Buy bonds of X Ltd., a company that has a very high debt-to-equity ratio. These bonds pay 8% interest, unless X defaults, in which case Prem will receive no interest but will recover his principal. (a1)
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b. (9 marks)
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1. Bond Investment Decision Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.
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below its par value? Explain.
8. Bond Price Sensitivity Is the price of a longterm bond more or less sensitive to a change in interest
rates than to the price of a short-term security? Why?
9. Required Return on Bonds Why does the required rate of return for a particular bond change
over time?
Assignment 6
Chapter 9 Question #s 2, 3, 4, 10, 11, 12, 16, 22.
2. Mortgage Rates and Risk What is the general relationship between mortgage rates and long-term
government security rates? Explain how mortgage lenders can be affected by interest rate movements.
Also explain how they can insulate against interest rate movements.
3. ARMs How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate
mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest
rate risk.
4. Mortgage Maturities Why is the 15-year mortgage attractive to homeowners? Is the interest rate
risk to the financial institution higher for a 15-year or a 30-year mortgage? Why?
10. Exposure to Interest Rate Movements Mortgage lenders with fixed-rate mortgages should
benefit when interest rates decline, yet research has shown that this favorable impact is dampened.
By what?
11. Mortgage Valuation Describe the factors that affect mortgage prices.
12. Selling Mortgages Explain why some financial institutions prefer to sell the mortgages they originate.
16. Mortgage-Backed Securities Describe how mortgage-backed securities (MBS) are used.
22. Subprime versus Prime Mortgage Problems How did the repayment of subprime mortgages
compare to that of prime mortgages during the credit crisis?
dq board is not up
week 9 assingments
Chapter 13 #1, 2, 3, 4, 7, 12, 14,16,17, and 19
1. Futures Contracts Describe the general characteristics of a futures contract. How does a clearinghouse
facilitate the trading of financial futures contracts?
2. Futures Pricing How does the price of a financial futures contract change as the market price
of the security it represents changes? Why?
3. Hedging with Futures Explain why some futures contracts may be more suitable than others
for hedging exposure to interest rate risk.
4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect
interest rates to increase? Explain.
7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than
rate-sensitive liabilities. Would it be more likely to be adversely affected by an incr ...
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Financial Services - 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.
- 1. Need Answer Sheet of this Question paper, contact aravind.banakar@gmail.com www.mbacasestudyanswers.com ARAVIND – 09901366442 – 09902787224 Financial Services Multiple Choices: 1. NBFS stands for ___________ 2. ALCO is a decision making unit responsible for balance sheet planning from risk return perspective. (T/F) 3. A contract of „Indemnity‟ is one whereby: 4. The transaction between the lessor and the lessee being a demand sale is called__________ 5. Which of the following is comes under mutual funds? 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 a. First sale b. Second sale c. Third sale d. Fourth sale Open-end funds Closed-end funds
- 2. Both (a) & (b) None 6. Concept of leasing involves: a. Lessor b. Lessee c. None d. All 7. CRISIL stands for____________ 8. ____________are issued by the government for period ranging from 14 days to 364 days through regular auctions. a. Treasury Bills b. Commercial Papers c. Call Money Market d. None 9. The practice of discounting accommodation bills is known as _____________ 10. HUDCO stands for _____________ Part Two: 1. Explain about SEBI guidelines to merchant bankers. 2. List the different types of Factoring. 3. Write a short note on venture capital in India. 4. Write a short note on Depositories.
- 3. Case let 1 Required The CFO of Sunlight Industries seeks your advice as a financial consultants on the alternative proposals. What advice would you give? Why? Calculations can be upto one digit only. Case let 2 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 A‟s 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
- 4. 1. What do you mean by money market? Discuss money market instruments in detail. 2. What is leasing? Explain about the advantages and disadvantages of lease finance. Need Answer Sheet of this Question paper, contact aravind.banakar@gmail.com www.mbacasestudyanswers.com ARAVIND – 09901366442 – 09902787224