O.P.

Jindal Global University

Jindal Global Law School
End-term Examination

Course Name : Corporate Finance

Course Code : L-CB-0016
Programme : BBA LLB
Duration : 3hrs
Maximum Marks : 50

This question paper has (7) printed pages only.

Instructions to students:

 This is a take-home examination.

 Please do not write your name, JGU Id or any identification text inside your submission document.
 Please ensure that your submission strictly adheres to JGU plagiarism/ Similarity guidelines.
 Sharing of the answer scripts with each other is not permissible unless results are declared.
 The submissions submitted as drafts on UMS will not be considered for evaluation. Students should
make sure the submission submitted on UMS are properly submitted.
 Ensure the submissions are done in a compatible file format pdf, xls, docs etc.
 Kindly adhere to the duration/timelines of the examinations. Submission outside the permitted time-
window may attract marks based penalty, grade drop or non-evaluation.
__________________________________________________________________________________________

 This Paper has two parts; Part A and Part B

 Answer any two questions from Part A and any two from Part B.
 Part A each question is of 5 marks or adds up to 5 marks. Total Marks for Part A is 10 marks.
 Part B each question is of 20 marks or adds up to 20 marks. Total Marks for Part B is 40 marks.
 Both parts need to be answered; in case more questions are answered only the first two will be
considered for assessments.
 Theory questions and in certain cases numerical questions may have various answers or
approaches. Please answer on your own without plagiarism of any form.
 Answers should contain references and examples where needed.

JGLS [End-term Examination – Spring’2022] Page 1

Part A

Q 1. Information about two bonds is provided below –

Type A:
5% bonds having a par value of INR 10,000 and maturity period being 8 years.
Type B:
7% bonds having a par value of INR 10,000 and maturity period of 9 years.

There are two friends, Brandt and Gudjohnsen; each interested to invest an amount of INR 10,00,000
separately, but in a particular type of bond only. While rating the above two type of bonds, Brandt believes that
type A is better as it has a lesser time period of investment required. On the other hand, Gudjohnsen believes
that type B is better as it has a higher rate of return.

As a student of corporate finance, provide your view point about which out of the two investors are taking the
right approach to compare bonds. Also, illustrate which of the two bonds would be providing a better return.
(2.5 + 2.5 = 5 Marks)

Q 2. The Shipson Company has just sold a large machine to Baltimore Inc., on an installment contract. The
contract calls for Baltimore to make payments of $ 5,000 every six months (semiannually). For 10 years,
Shipson would like its cash now and ask its bank to discount the contract and pay the present (discounted)
value. Baltimore is a good credit risk, so the bank is willing to discount the contract at 14% compounded
semiannually. How much will the Shipson receive?
(5 Marks)
Q 3. Compute the profitability index for a project with the following cash flows. If the cost of the capital is
9%, is the project acceptable on a standalone basis?

CF0 CF1 CF2 CF3

($4,500) $1,500 $2,000 $1,600
(5 Marks)
Q 4. X ltd. just paid a dividend of $1.55 per share. The required rate of return is 8% and the perpetual
dividend growth rate is 2.2%. At what price should this stock sell for five years from today? If the stock is
currently trading at $32.15, what would you recommend?
(5 Marks)

JGLS [End-term Examination – Spring’2022] Page 2

Part B

Q 1. (a) (i) A 10 year preference share of face value INR 500 has been floated by Martial Munich Ltd. The firm
confirms to pay a dividend of 12 percent to be calculated on a quarterly basis. The preference share is
redeemable at a premium of INR 20 percent. You are required to calculate the present value of this preference
share if an investor’s required rate of return is 16 percent.
Also, at what required rate of return of the investor, will the present value of all the future inflows be equivalent
to the cash outflow?
(4+1 = 5 Marks)

(ii) A firm named Boomerang Pvt Ltd. has 6 different projects: G – L up for review. Information with
respect to these projects have been given below –

Year Project G Project H Project I Project J Project K Project L

0 - 1000 - 1000 - 1000 - 1000 - 1000 - 1000
1 1000 100 400 500 400 500
2 200 300 500 400 500
3 300 200 500 400 10000
4 400 100 400
5 500 500 400

Payback 1.0 4.0 4.0 2.0 2.5 2.0

period
NPV -90.91 65.26 140.60 243.43 516.31 7380.92
(all figures are in crores)

The firm has a required rate of return is 10 percent.

As a student of corporate finance, you are required to explain on how the payback period technique provides
misleading information about the following situations –
1) Project G.
2) Project H vs Project I.
3) Project J vs Project K.
4) Project J vs Project L.

However, there are situations where the payback period is useful. Provide an example where payback period is
useful or efficient as a decision-making concept in Finance.
(2 + 3 Marks)

JGLS [End-term Examination – Spring’2022] Page 3

(b) Comment extensively on the relationship between a firm’s goal, financial management and the capital
budgeting process.
(10 Marks)

Q 2. (a) Ms. Shawshank owns two portfolios with two different brokerage firms namely Edelweiss and Angel
Broking.

Following are the details:

Expected rate of return Standard deviation

Edelweiss portfolio
Asset X 20 14
Asset Y 25 11

Angel Broking portfolio

Asset P 20 14
Asset Q 20 11
Answer the following questions based on your analysis with proper explanations:
• 1) Which asset is riskier in the portfolio of Angel Broking?
• 2) Which asset is riskier in the portfolio of Edelweiss?
• 3) Which portfolio is riskier out of the two?
(Provide a critique where necessary)
(2 + 2 + 2 Marks)

(b) The Delhi Investments Corporation has fixed the following cash outflows for investors belonging to
either of the NCR cities –

Time period Noida Gurgaon

1 40,00,000 18,00,000
2 35,00,000 20,00,000
3 24,00,000 24,00,000
4 20,00,000 35,00,000
5 18,00,000 40,00,000

Time period, as evident is 5 years and the rate of return is similar for both the type of investors which is 10%
per annum.
Compute and illustrate towards which type of investors, is the Delhi Investments Corporation biased !?!

JGLS [End-term Examination – Spring’2022] Page 4

(Assume that amounts are deposited at the beginning of the due year)
(4 Marks)

(c) In the subject of finance, what is the most commonly accepted goal/aim for a firm? How does the
concept of net present value of a project relate to this goal?
(10 Marks)

Q 3. (a) (i)Perform a fundamental analysis using top down approach of a firm which is in any of the
following industries –
o Entertainment
o Transport
o Manufacturing
o Tourism
o Food processing
o Telecommunications
o Electronics

(ii) Out of the Top-down, Bottom-up or Market sizing analysis, can any one approach be deemed as fool
proof to pick the right/best stocks? Why/why not?
(8 + 2 Marks)

(b) Address the following situations with a yes/no followed by a brief explanation –
• i. Scrooge McDuck has just qualified his chartered accountant examination finals and is hired by a
firm Zizou Arts Ltd. Within the first 1.5 years’ time, he got promoted as the CFO of the firm. Not many
approved of the same. The firm Zizou Arts Ltd. follows the ‘net income approach’, when it comes to dealing
with the valuation of their firm.
Scrooge McDuck has been wanting to increase the composition of debt in the firm’s capital structure. He
believes that such change would help reduce the firm’s WACC. Is the young CFO correct in such analysis?
• ii. The board members (5 out of 7 of them) are concerned about such change in the capital structure.
They believe that such change would cause a reduction in the value of equity as well, and that would go down
negatively among the equity shareholders. Are the board members’ concern correct?

Nevertheless, Scrooge McDuck was fired and in no time, he was hired as CFO, by a new firm League of
Nations Pvt Ltd. This firm follows the ‘net income operating approach’.

• iii. Herein also, Scrooge McDuck wanted to increase debt in the capital structure. He was under the
impression that, such change would help the firm reduce its WACC. Is the CFO correct in such interpretation?

• iv. Some of the board members were concerned about such decision and hence they thought to take
a second opinion of a financial strategist named Irene Adler. She was an MBA in finance from a renowned
institute. On studying such reports, she claimed that such increase in debt composition for this firm which
follows ‘net income operating approach’ would lead to decrease in the cost of equity (K e). Is her observation
right/wrong?
(2.5 + 2.5 + 2.5 + 2.5 = 10 Marks)
JGLS [End-term Examination – Spring’2022] Page 5
Q 4.(a) Zylon Corporation’s stock is selling for $ 48 a share, according to the Wall Street Journal. We have
heard a rumour that the firm will make an exciting new product announcement next week. By studying the
industry, we have concluded that this new product will support an overall company growth rate of 20% for
about the next two years. After that we feel that the growth will slow rapidly and level off at about 6%. The
firm currently pays an annual dividend of $2, which can be expected to grow with the company. The rate of
return on stock like Zylon is approximately 10%. State with good reasons if Zylon a good buy at $48?
(10 Marks)
(b) Explain the following with examples or critiques where important:

(a) Capital Budgeting Process.

(b) Forecasting Incremental Earnings
(c) Diversification in Stock Portfolios.
(d) Weighted Average cost of Capital (WACC)

(2.5 X 4 = 10 Marks)

Q 5 (a) The Xavier Motor Company makes outdoor power equipment including lawn mowers and garden
tractors and is considering two diversification ventures. The first involves manufacturing a larger, more
powerful tractor than the firm has made until now. Market research indicates a substantial demand for more
powerful equipment, and some competitors are already moving in that direction. The second opportunity
involves building snowblowers. The manufacturing and engineering technology required for making
snowblowers is essentially the same as that for building the garden equipment, but Xavier has never made
snowblowers before. Management wants to make a decision based on only five years of projected cash flows,
because it feels the future beyond that time is too vague to form a basis for current decisions. In other words, if
a project isn't expected to earn enough to justify itself in five years, management considers it too risky. Working
with representatives from the marketing, engineering, and manufacturing departments, a financial analyst has
put together a set of projected incremental cash flows for each project. Xavier’s cost of capital is 9%

XAVIER’S MOTOR COMPANY PROJECT ESTIMATES ($000)

YEAR TRACTOR SNOWBALL
0 ($ 3,000) ($3,500)
1 (250) (700)
2 500 800
3 1,000 1,200
4 1,500 2,000
5 1,500 2,000

A financial analysis of the project situation should provide answers to the following questions.

JGLS [End-term Examination – Spring’2022] Page 6

 i. If these projects were being considered on a stand-alone basis, would either or both be
acceptable?
ii. If Xavier can raise no more than $5 million for new projects, which of these projects should be
chosen?
iii. If Xavier’s management was willing to consider two more years of projected cash flow, and the
contributions continued at the level of the last two years, which project should be chosen?
(15 Marks)

(b) Explain briefly “The Tradeoff Theory” (5 Marks)

Q 6. Explain the KuU (Known, unknown, Unknowable) concept in Risk management in Finance? How is this
framework/concept better than traditional risk management methods? (Illustrate with an example)
(10 +10 Marks)

Q 7. a. Various commentators have said that the ESG (Environment, Society and Governance) criteria is a ‘feel
good’ scam; to what extent to do agree with the commentators (provide critique or illustrate). (6 Marks)
b. What is Financial Gradients? And to what extent do you think ‘Financing’ decision frameworks like
Financial Gradients (or others) help in mitigating the risks brought to our attention in the ESG discourse.
(4 + 10 = 14 Marks)

JGLS [End-term Examination – Spring’2022] Page 7