MOOLYANKAN – THE VALUATION GAME

Rules and Guidelines

1. The quiz is open for all students in management institutes across India
2. Participation has to be in teams of 3
3. Multiple teams from the same college are allowed; however, one participant
cannot be a part of multiple teams
4. Answers should be sent by email to finomenon.paragana@gmail.com
5. The subject line of the email should be
Moolyankan_InstituteName_TeamName
6. The name of the Excel file containing the answers should be
Moolyankan_Answers_InstituteName_TeamName. Please fill in the
required details in the Excel file (template already sent earlier)
7. Responses sent after 10:45 PM will not be accepted
8. Multiple answer sheets from the same team will not be accepted. In case
such an event occurs, only the first entry will be considered
9. All questions have only one correct answer. Only the correct option needs to
be mentioned against the question number
10.All questions carry 1 mark. ¼ marks would be deducted for every
wrong answer
11.Results would be declared on Thursday, November 6, 2008 by 9:00 PM
12. In case of a tie, the answer sheet received earlier would be considered
13. The decision of the organisers and the judges shall be final and binding
14. For more details on the event, or any other query, please log on to
www.paragana.com or contact any of the following:
Nihal Kumar nihalkumar@gmail.com Mob: +91 9867107400
Sonal Sancheti sonalsancheti@gmail.com Mob: +91 9769383284
Varun Goel vgoel84@gmail.com Mob: +91 9833940247

Finomenon Cell – NMIMS University, Mumbai Page 1

Qs.1: Rama is a 34 year old nurse earning Rs. 35,000 per year. She is thinking of taking
an MBA degree in health systems management which would enable her to become a
hospital administrator and earn Rs. 5,000 more per year than she is earning now. The
MBA requires 2 years of full time work and costs Rs. 30,000 per year. Using an inflation
rate of 6% and a discount rate of 8%, calculate the NPV and deduce if the MBA
financially worthwhile if she plans to work to age 60?

a. Rs.62095
b. Rs.62607
c. -Rs.61605
d. -Rs.60189

Qs.2: Which of the following statements about duration is TRUE?

a. The result of the formula for effective duration is for a 0.01% change in interest rates.

b. A bond’s percentage change in price and dollar change in price are both tied to the
underlying price volatility.

c. The formula for effective duration is: (price when yields fall - price when yields rise) / (initial
price * change in yield expressed as a decimal).
d. For a given change in interest rates, the greater the duration, the lower the price volatility.

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Qs.3: Ashoka Limited has a ROE equal to 24%, while Chanakya Enterprises has an ROE
of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8.
Ashoka Ltd. has an asset turnover ratio of 0.9, while Chanakya Enterprises has an asset
turnover ratio equal to 0.4. From this we know that:
a. Ashoka Limited has a higher profit margin than Chanakya Enterprises
b. Chanakya Enterprises has a higher profit margin than Ashoka Limited
c. Ashoka Limited and Chanakya Enterprises have the same profit margin
d. Ashoka Limited has a higher equity multiplier than Chanakya Enterprises
e. You need more information to say anything about the firm's profit margin

Qs.4: Assume that the duration of a bond is 5.47 and its current price is 98.63. Which of
the following is a good estimate of the bond price change if interest rates increase by
2%?

a. -10.79
b.-10.94
c. 10.79
d.10.94

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Qs.5: Rahul is trying to estimate the expected free cash flow next year for Gupta Sons, a
leading wine and spirits producer. In 2007, Gupta Sons had after-tax operating income
of Rs. 235 million; book value of equity of Rs.730 million and book value of debt of
Rs.210 million. Assume that Rahul expects after-tax operating income to grow 10% in
2008, and no change in the firm’s after-tax return on capital. Estimate the free cash flow
to the firm in 2008.

a. Rs.155.1 million
b. Rs.153.4 million
c. Rs.132.1 million
d. Rs.158.5 million

Qs.6: Amit has been hired to estimate the beta for PeroSof, a firm that produces
entertainment software. The stock is currently trading at Rs.40 per share, and there
are 250 million shares outstanding; the firm has no debt outstanding. PeroSof also has
Rs. 2 billion in cash that it has accumulated over time. The average beta for
entertainment software firms is 1.50, and that the average debt/equity ratio of these
firms is 10%. (Assume that the cash balances at these firms are negligible and that the
marginal tax rate is 40% for all firms). Estimate Perosof’s current beta.

a. 1.42
b. 1.13
c. 1.49
d. 1.08

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Qs.7: Dayaram Solutions manufactures automobile equipment. The firm reported net
income of Rs. 25 million for the most recent financial year. It raised no new equity during
the course of the year, and the book value of equity increased from Rs.125
million at the beginning of the year to Rs.145 million at the end of the year. Based on
these fundamentals, estimate the expected growth rate in earnings per share for Dayaram
Solutions.

a. 14%
b. 15%
c. 16%
d. 20%

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Qs.8: Mr. Duggal is an investment banker. He is trying to estimate the implied equity risk
premium to use for an emerging market and has following information:
 The equity index for the market is currently trading at 10,500
 Based upon earnings in the just completed financial year, the market trades at a P/E
multiple of 10
 Earnings are expected to grow 5% a year in perpetuity and firms are expected to pay
out 60% of their earnings as dividends in perpetuity.
 Risk free rate for the market is 5.2%.
Estimate the implied equity risk premium for the emerging market, using the information
supplied in the problem.

a. 8.2%
b. 6.1%
c. 5.8%
d. 7.0%

Qs.9: If you capitalize operating leases and treat them as debt, which of the following
will always occur?
a. The cost of equity will increase because of the higher debt ratio
b. The operating income will increase because you will be adding back operating lease
expenses
c. The debt ratio will increase
d. The return on capital will go up
e. None of the above

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Qs.10: The primary reason for capitalizing R&D expenses is the following:
a. To reward companies that invest a lot in R&D
b. To punish companies that invest a lot in R&D
c. To measure the free cash flow to the firm more precisely
d. To get a higher return on capital
e. To get a better sense of how much the company is reinvesting for future growth
f. None of the above

Qs.11: For most companies, the effective tax rate is lower than the marginal tax
rate. For such companies, using the effective tax rate (instead of the marginal tax
rate) in perpetuity to compute the after tax operating income will result in which
of the following?
a. Value of the company is overstated
b. Value of the company is understated
c. No effect on the value of the company

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Qs.12: If a company grows primarily through acquisitions, and one tries to estimate the
cash flows to the firm, which of the following estimation choices is likely to yield
the best estimate of value?
a. Ignore the growth from acquisitions when computing projected earnings and include
acquisitions in forecasted capital expenditures
b. Count the growth from acquisitions when computing projected earnings and exclude
acquisitions in forecasted capital expenditures
c. Ignore the growth from acquisitions when computing projected earnings and exclude
acquisitions in forecasted capital expenditures
d. Count the growth from acquisitions when computing projected earnings and include
acquisitions in forecasted capital expenditures
e. None of the above

Qs.13: The current dividend yield on the share of XYZ Ltd. is 6%. The face value of the
share is Rs. 20. The book value to face value multiple is 5.8. The net worth of the
company is 232000000. If the dividend rate is 50%, then the price per share and total
market capitalization are as follows:

a. Rs. 116.33 and Rs. 333340000

b. Rs. 145.45 and Rs. 444460000
c. Rs. 156.75 and Rs. 555645000
d. Rs.166.67 and Rs. 333340000
e. Rs. 166.67 and Rs. 444460000

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Qs.14: Compared to a producer, the consumer is most likely to pay largest part of a tax
increase if the elasticity of demand and elasticity of supply respectively, are more:

a. elastic, elastic
b. inelastic, elastic
c. inelastic, elastic
d. elastic, inelastic

Qs.15: At yield levels that are close to the bond’s coupon rate, is the price of an option-
free bond higher than the price of an otherwise identical:

Callable bond? Putable bond?

a. NO NO
b. YES YES
c. YES NO
d. NO YES

Qs.16: If the security’s return plots below the SML, then it can be said that

a. It is overpriced
b. The required rate of return is much lower than the actual rate of return
c. The investors would try to buy more of the security
d. It is a defensive security
e. Both (a) and (b) above

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Qs.17: If investors expect the inflation rate to fall in future and they expect themselves to
become less risk-averse then:

a. SML shifts up and the slope increases

b. SML shifts up and the slope decreases
c. SML shifts down and the slope increases
d. SML shifts down and the slope decreases
e. SML does not change as the above changes offset each other

Qs.18: Which one of the following cannot lie on the efficient frontier as described by
Markowitz?

Portfolio Expected Return (%) Standard Deviation (%)

a. W 15 36
b. X 12 15
c. Z 5 7
d. Y 9 21

Qs.19: Reliable Capital has debt/equity ratio of 40/60. A comparable firm Unique
Capital has debt/equity ratio of 60/40 and its beta is 0.89. What will be the beta of
Reliable Capital?

a. 0.593
b. 1.33
c. 0.356
d. 0.53

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Qs.20: Assume security A with a beta of 1.1 is being considered at a time when risk free
rate of return is 5% and market return is expected to be 14%. What is the required rate of
return according to Capital Asset Pricing Model?
a. 18.9
b. 21.9
c. 14.9
d. 16.9

Qs.21: Both portfolio X and Y are well diversified. The risk free rate is 5% and the return
for the market is 15%.

Portfolio Expected Return Beta

X 17% 1.2
Y 15% 0.2

Which of the following about portfolio X and Y is true?

Portfolio X Portfolio Y

a. Overvalued Undervalued
b. Fairly valued Fairly valued
c. Undervalued Undervalued
d. Fairly valued Undervalued

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 Qs.22 Which of the following statements about the Security market line (SML) are true?

I. The SML provides a benchmark for evaluating investment performance

II. The SML leads to investors to invest in the same portfolio of the risky assets.
III. The SML is a graphic representation between expected return and beta
IV. Properly valued assets plot exactly on the SML

a. I and III only

b. II and IV only
c. I, II, and IV only
d. I, III ad IV only

Qs.23: Nikhil invests Rs.100 in a complete portfolio. The complete portfolio comprises a
risky asset with an expected rate of return of 15% and a standard deviation of 15% and a
Treasury bill with a rate of return of 8%. A portfolio that has an expected value at the
end of the period of Rs.120 could be formed if Nikhil:

a. Invests Rs.100 in the risky asset

b. Invests Rs.60 in the risky asset and Rs.40 in the risk-free asset
c. Borrows Rs.42.86 at the risk-free rate and invests Rs.142.86 in the risky asset
d. Borrows Rs.71.43 at the risk-free rate and invests Rs. 171.43 in the risky asset
e. Invests Rs.71.43 at the risk-free rate and borrows Rs. 171.43 in the risky asset

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Qs. 24: Consider the following statements about bond volatility

Statement 1: “If interest rates increase dramatically, callable bonds can exhibit negative
convexity

Statement 2: “The higher the level of interest rates, the lower the price volatility of a
bond to changes in interest rates

Are the statements most likely correct or incorrect?

a. Both statements are incorrect

b. Statement 1 is incorrect, but Statement 2 is correct
c. Statement 1 is correct but Statement 2 is incorrect
d. Both statements are correct

Qs.25: The constant growth model of equity valuation assumes that:

I. The dividends paid by the company remain constant

II. The dividends paid by the company grow at a constant rate of growth
III. The cost of equity may be less than or equal to the growth rate
IV. The growth rate is less than the cost of equity

Which of the above statements are true?

a. I and III
b. II only
c. II and IV
d. I and IV

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Qs.26: If the slope of the Security Market Line (SML) = 0, which of the following is/are
true?

a. Expected rate of return is equal to risk free rate of return

b. Market return is equal to risk free rate of return
c. Risk free rate of return is equal to zero
d. Both (a) and (b)

Qs.27: If there is zero correlation among the securities of a portfolio, the resulting graph
will be a/an

a. Straight line with slope of 45 degrees

b. Straight line with negative slope of 45 degrees
c. Hyperbola
d. Circle
e. Ellipse

Qs.28: Which of the following does not contribute to systematic risk?

a. Change in the interest rates

b. Change in the level of government spending
c. Emergence of a new competitor
d. Change in industrial policy
e. Both (b) and (d)

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Qs.29: The opening balance of sundry debtors of a firm is Rs.55000 and closing balance
is Rs.45000. The total sales are Rs.2000000 out of which credit sales account for 75 per
cent. The average collection period for the firm is (Assume 360 days in a year)

a. 10 days
b. 12 days
c. 15 days
d. 21 days
e. 25 days

Qs.30: The estimated annual usage of boxes for a packaging firm is 45,000 units. The
cost per box is Rs.6 and the ordering cost is Rs.150 per order. The inventory carrying
cost is estimated at 25% of unit value per annum. The economic order quantity is
a. 1000 units
b. 1500 units
c. 1750 units
d. 2200 units
e. 3000 units

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Qs.31: In order to take decision on the credit proposal of a customer, the Finance
Manager is making the profitability estimate as follows. The probability that a customer
would not repay the loan is 20%. The revenue and cost of sales are Rs.40,000 and
Rs.20,000 respectively. What is the expected profit/loss from extending credit to the
customer?

a. Gain of Rs.12000
b. Gain of Rs. 16000
c. Gain of Rs. 20000
d. Loss of Rs. 4000
e. No profit, no loss

Qs.32: Which of the following statements is not true?

a. Realized yield approach emphasizes that the past returns on a security are taken as a
proxy for the return required by the investors in the future
b. The return earned by the investors according to the bond yield plus risk premium
approach is equal to the yield on the long-term bonds plus a risk premium
c. The earnings price ratio approach emphasizes that the cost of equity is the ratio of the
expected EPS for the next year and the current market price per share
d. Cost of external equity is to the extent of certain floatation costs involved in raising
equity from the market
e. Cost of retained earnings is always less than the cost of new issue of common stock

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 Qs.33: Skilled Engineering Ltd., has earned a profit before interest and tax of Rs.24
lakh. The company’s capital structure includes 50,000, 14% debentures of Rs.100
each. The overall capitalization rate of the firm is 15%. As per the net operating
income approach, the equity capitalization rate of the company is:

a. 14.10%
b. 14.39%
c. 15.23%
d. 15.45%
e. 16.35%

Qs.34: Bhairavi Overseas Ltd., (BOL) is intending to acquire substantial shares in

Surabhi Projects Ltd., (SPL) to acquire control in the company. The beta factor of
SPL’s shares is 1.5 and the current market price of its each share is Rs.88. The
company is consistently paying a dividend of Rs.17 per share every year and is
expected to pay the same amount even in the future. The risk-free rate is 9% and the
market rate of return is 15%. How much extra amount should BOL pay for each share
over the current market price so that the price of the share of SPL is at equilibrium as
per the CAPM approach? (Correct to the nearest integer)

a. Rs. 4
b. Rs. 5
c. Rs. 6
d. Rs. 8
e. Rs. 10

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 Qs.35: Arundhati Ltd., is an unlevered firm having total assets of Rs.2500000 (all
represented by equity) and the firm’s equity capitalization rate is 10%. The firm has an
EBIT of Rs.500000 subject to corporate tax @ 50%. There is another firm Bhargava
Ltd., also having assets of Rs.2500000 and alike in all respects of Arundhati Ltd.,
except that Bhargava Ltd., has issued 12% debt of Rs.10,00,000. The value of the firm
Bhargava Ltd., as per MM hypothesis is:

a. Rs. 10 lakh
b. Rs. 15 lakh
c. Rs. 20 lakh
d. Rs. 25 lakh
e. Rs. 30 lakh

Qs.36: Consider the following data for Karthik Industries Ltd.:

Earnings Per Share (EPS) - Rs.10

Dividend Payout Ratio - 40%

Equity Capitalization Rate - 15%

Rate of Return on Investments - 16%

If the number of shares outstanding for the firm is 100000, the market value of equity
of the firm as per Walter’s Model for dividend policy is:

a. Rs.69.33 lakh
b. Rs.71.66 lakh
c. Rs.78.70 lakh
d. Rs.80.37 lakh
e. Rs.85.33 lakh

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Qs.37: The face value of a T-Bill is Rs.100. Mr. Arun made a bid for a 364-day T-Bill
yielding 6.46% p.a. and maturing after 182 days. The price paid by Mr. Arun for this bill
is (Assume 365 days a year):

a. Rs.92.84
b. Rs.94.56
c. Rs.95.65
d. Rs.96.88
e. Rs.98.76

Qs.38: Sudarshan plans to buy a Hyundai Santro costing Rs.450000 and goes for a motor
vehicle loan being offered by ICICI Bank. The rules of the bank require him to make a
down payment of Rs.45000. The remaining amount would be financed by them and the
repayment can be done over five years. The interest rate offered by the bank is 12%
compounded monthly. If he accepts this proposal, the equated monthly payment and the
effective annual interest rates respectively are:
a. Rs. 6,750; 12.12%
b. Rs. 8,760; 12.68%
c. Rs. 9,008; 12.68%
d. Rs.10,008; 12.88%
e. Rs.10,567; 12.98%.

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Qs. 39: Consider the following information:
Standard deviation of security ‘P’ 13.5%
Standard deviation of the returns on the market index 12.0%
Return on the market 14.0%
Correlation coefficient between stock ‘P’ and the market 0.75
Risk-free rate of return 8.0%
Alpha of the stock ‘P’ is
a. -0.85%
b. -1.28%
c. Zero
d. 1.28%
e. 1.65%.

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Qs.40: The Balance sheet of Kulbhushan Steels Ltd. is as follows:

Liabilities (Rs.) Assets (Rs.)

Equity share capital 60000 Fixed assets 150000
Retained earnings 20000 Current assets 50000
10% Long-term debt 80000
Current liabilities 40000
Total 200000 Total 200000

The company’s total assets turnover ratio is 3, its fixed operating costs are Rs.100000
and its variable operating cost ratio is 40%. The income-tax rate is 40%. The face value
of the company’s shares is Rs.10. What is the company’s total leverage and if the sales of
the company increase by 45%, the new EPS of the company would be:

a. 1.29; Rs.32.67
b. 1.36; Rs.32.67
c. 1.43; Rs.39.67
d. 1.43; Rs.41.42
e. 1.56; Rs.49.32

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Qs.41: A bond of face value Rs.1000 is currently quoting in the market at Rs.1062. The
coupon rate of the bond is 14% payable semi-annually. The remaining maturity of the
bond is five years and the principal is repayable at two equal installments at the end of
the 4th and 5th year from now. The yield to maturity of the bond is 12.16%. What would
be the new price of the bond, if the YTM for similar type of bonds increases by 2%?

a. Rs.945.49
b. Rs.956.39
c. Rs.978.39
d. Rs.987.59
e. Rs.995.29

Qs.42: Projected net capital expenditures and financing decisions are most important as
a component of a firm’s:

a. Pro-forma income statement

b. Expected operating cash flows
c. Long-term cash flow forecast
d. Balance of payments

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Qs.43: Which of the following sources of short-term liquidity is considered reliable
enough that it can be listed in the footnotes to a firm’s financial statements as a source of
liquidity?

a. Factoring agreement
b. Revolving line of credit
c. Blanket lien
d. Uncommitted line of credit

Qs.44: MC Pandey, a bond investor is concerned about price volatility. All else equal,
which of the following fixed-coupon bonds would he most likely buy?

a. 10 years maturity and a 6.5% coupon

b. 15 years to maturity and an 8.5% coupon
c. 10 years to maturity and an 8.5% coupon
d. 15 years to maturity and a 6.5% coupon

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Qs.45: The structure of interest rates results from all the following EXCEPT:

a. Viewing each bond coupon payment as a separate zero coupon bond

b. Viewing a bond's cash flows as having maturities ranging from the next coupon payment to
the final payment at maturity
c. Assuming that individual discount rates do not change by the same amount
d. Creating the yield curve by plotting term to maturity against the coupon rate.

Qs.46: Which of the following is the most appropriate strategy for a fixed income
portfolio manager under the anticipation of an economic expansion?

a. Purchase corporate bonds and sell treasury bonds

b. Sell corporate bonds and purchase treasury bonds
c. Enter a pay-fixed, receive-floating rate swap
d. Enter a pay-floating, receive-fixed rate swap

Qs.47: An analyst has got the following information about a company:

 Quick ratio of 0.25
 Cash ratio of 0.20
 Rs.2 million in marketable securities
 Rs.10 million in cash
What is the company’s receivables balance?
a. 3 million
b. 5 million
c. 2 million
d. 1 million

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Qs.48: The process that ensures that two securities positions with identical future
payoffs, regardless of future events, will have the same price is called:

a. Exchange parity
b. The Law of One price
c. Payoff Parity
d. Arbitrage

Qs.49: Assume that the value of a put option with a strike price of Rs.100 and six months
remaining to maturity is Rs.5. For a stock price of Rs.110 and an interest rate of 6
percent, what is the value of the corresponding call option with the same strike price and
same expiration as the put option. Which of the following is closest to the correct
answer?

a. Rs.11.99
b. Rs.12.74
c. Rs.17.87
d. Rs.15.00

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Qs.50: For an economy operating at full employment, if actual inflation is less than
expected inflation, what will most likely be the effects on the unemployment rate in the
short run and in the long run?

Short Run Long Run

a. Increase Increase
b. Decrease No effect
c. Decrease Decrease
d. Increase No effect

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