June 2018 SFM Paper

(i) A company has ₹7 crore available for investment and has identified four investment projects with positive NPVs. All investments are divisible, and their NPVs are proportional. Which investment projects should be selected?

(ii) An investor is optimistic about X Ltd., which is trading at ₹1,150 in the spot market. He purchases two call option contracts (100 shares per contract) with a strike price of ₹1,195 at a premium of ₹35 per share. If, after three months, the share price rises to ₹1,240, what will be his net profit/loss?

(iii) Duhita Ltd. plans to purchase an equipment and has received two quotes: Make A costs ₹4.5 million with a lifespan of 10 years, while Make B costs ₹6 million with a lifespan of 15 years. Given a cost of capital of 10%, which option is cheaper? (PVIFA for 10 years = 6.1446, PVIFA for 15 years = 7.6061)

(iv) BLC Ltd., an importer, needs to remit EURO 1 million to a European exporter. Given the spot rate of ₹/US$ at ₹65.47/65.57 and US$/EURO at $0.8053/0.8057, and considering a bank margin of 0.50%, what rate will the banker quote?

(v) A project has an annual cash inflow of ₹80,000 with a useful life of 4 years. If the undiscounted payback period is 2.855 years, what is the cost of the project?

(vi) A project has an equity beta of 1.4 and is financed with 25% debt and 75% equity. Assuming debt beta as zero, risk-free rate (Rf) as 12%, and market return (Rm) as 18%, what is the required rate of return for the project?

(vii) An Indian company is considering an investment in the US. Given an inflation rate of 8% in India and 3% in the US, if the current spot rate is ₹60.50/$, what will be the expected spot rate after 5 years?

(viii) Which of the following securities is the most liquid?

(ix) On a graph with risk on the X-axis and expected return on the Y-axis, the line passing through (0, Rf) and (β, Rm) is called:

(x) If the RBI aims to reduce the money supply as part of its anti-inflation policy, which of the following actions might it take?