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How risky is an undiversified portfolio with

beta of 3.0 ?
The beta coefficient of ABC is 1.4. Company
has maintained growth rate of 8% in
dividends and earnings. Last dividend per
share was Rs.4 per share. The return on
GOI securities is 10% while return on
market is 15%. Current price of share is
Rs.36. Would you advise buying this?

A company is considering replacing one of its


machines. Machine is 4 years old, current
salvage value is Rs.2,00,000, remaining life 6
years. Machine was initially purchased for
Rs.10 lakhs, depreciation 20% WDV. New
machine 15 lakhs same rate of depreciation,
salvage value 1,50,000 and additional wkg
capital of 1 lakh. Increase in annual revenues
5 lakh , variable cost to volume ratio is 30%,
fixed cost to remain same, tax35%, cost of
capital 10%.

A company decides to go for a


machine costing 1 crore, economic
life of 6 years at the end of which it
will fetch net salvage value Rs 10
lakhs. 40% WDV for tax purposes.
Marginal tax rate is 35%. Can borrow
1 crore @ 15.4%. Should buy or
lease?

Scenario Analysis
A company is looking to invest 20 million in a
new project, for next ten years expects sales
of 18 million, variable costs 66.67%, fixed
costs 1 million, depreciation 2 million. Assume
no salvage value, tax rate 33.3%. What if
investment goes upto 24 million, sales drops
to 15 million, vc is upto 70% and fixed cost
increases to 1.3. What if investment goes
down to 18 million, sales increases to 21
million, vc comes down to 65% and fixed costs
decreases by 0.8.

You run a regression of monthly returns. Output is


intercept of regression is 0.06%, slope of
regression is 0.46. There are 20 million shares
outstanding, book value is Rs.2 per share, Firm
has 20 million debt outstanding. Tax rate is 36%.
If firm has 3 divisions , equal investment in each,
plans to divest in one for 20 million and invest 50
million in another. It will borrow 30 million to
complete this. The division it is divesting in has
average unlevered beta of 0.20, division it is
acquiring has beta of 0.80, what is beta of firm
after acquisition.

MNC Capital Budgeting


A US company is considering investing 50,000,000 INR in India to create
a wholly owned mfg plant. Annual sales Rs.30 million, Cash operating
expenses Rs. 17 million, depreciation Rs. 1 million. Income before
interest and taxes Rs.12 million, Indian taxes 50%. Net income Rs. 6
million, add back dep 1million, annual CF Rs. 7 million. Initial investment
will be made on Dec 31 2014. CFs successive Dec 31 every year. Annual
cash dividends to US company 75% of accounting income. The US
corporate tax is 40%, and indian corporate tax rate is 50%. Because
Indian tax rate is greater than US tax rate, annual dividends paid to US
company will not be subject to additional taxes in the US. There are no
capital gains on final sale. US company uses 14% on domestic
investment , but will add 6% because of greater risk perception.
Info abt exchange rates
2014 60
2015 64
2016 68

Bond Management
The management of bond portfolios
historically passive. Buy and Hold
wherein investors objectives are
predictable returns, low management
costs, diversification. In recent years,
active strategy. People are searching
for incremental returns in the bond
market, thus, coupon rate, maturity ,
judgements based on yield curve
become important.

Duration
Weighted average measure of a bonds life. Time
periods in which bonds generate cashflows are weighted
according to relative sizes of PV of those flows.
Calculate Duration of a 7% coupon, 3 year bond priced
at 100. 2.81 years
Why should I calculate duration: because direct
relationship between bond duration and interest rate
senstivity helps in choosing those bonds which have
maximum sensitivity when managers are expecting a
decline in rates. Better measure of time structure of
bonds. If I think interest rates are going to fall 6 months
later, which bonds should I buy today ?

Two risks Price Risk and


Reinvestment Risk are affected
differently by changes in market
rates. Suppose you are holding a
bond, interest rates fall, prices
increase, price change is positive but
reinvestment opportunities reduce.
Duration is that time period in which
price risk and coupon reinvestment
risk are equal but opposite.

Cash Flows
Existing factory has enough space for one more
product. Plant & Machinery for Rs.400 million
required. This outlay will be over a period of
one year, 50% right in the beginning and 50%
in year 1. plant will commence operations after
one year. Requirement towards gross working
capital is 200 million. This is required after one
year once operations start. Proposed scheme of
financing is 200 million of equity, 200 million of
term loan, 100 million of working capital
advance, Rs.100 million of trade credit.

Term loan is repaid in 8 equal installments of


25 million each. First installment is due after
18 months. Interest rate on loan is 14%. Level
of working capital advance and trade
creditors will remain at 100 million each, till
they are paid back. Working capital advance
is at 12%. Revenue 750 million, costs
excluding depreciation is 525 million,
depreciation 25% WDV. Net salvage value
100 million. Recovery of working capital at
book value. Tax 30%.

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