JUNE 2014 EXAMINATION

FM 06/eFM 06

MANAGEMENT OF FINANCIAL SERVICES

Time: Three Hours Maximum Marks: 100

Note:

1. The paper is divided in three sections: SECTION-A, SECTION-B and SECTION-C.

2. There are seven questions in SECTION-A. Students are required to attempt ANY FOUR.
3. SECTION-B has five questions, attempt ANY THREE.
4. All the questions of SECTION-C (Case Study) are compulsory.

Section-A (10 Marks each)

1. Can the Indian financial system be called financial dualism? Why or why not?

2. LT Overseas Ltd. Has recently leased machinery costing Rs. 390 lakh on the following
terms:
Lease term : 5 years
Lease Rental: Rs. 300/ Rs. 1000 per annum

The incremental borrowing rate for MIC is 18%. Can the transaction be classified as a
finance lease if the useful life of the equipment is six years?

3. What is financial instrument? How do you differentiate between a cash instrument and
a derivative instrument?

4. A cooperative bank wishes to buy 91 days Treasury bills maturing on Dec 6 , 2012 on Oct
12, 2011. The rate quoted by the seller is Rs. 99.1489 per Rs. 100 face values. What is
the yield to maturity?

5. The interbank rates are provided as under:

EUR / USD rate is 1.4435
GBP / USD rate is 1.6308
What is the EUR/GBP rate?

6. What is the difference between green field’s investment and brown field investments?

7. Explain the exit strategies of a venture capitalist?

June 2014/FM 06 Page 1 of 3

 Section-B (15 Marks each)
8. What are the different methods of issuing securities in the primary market?

9. Categorize (money Vs capital market) and write short notes on:

a) Certificate of deposit
b) Bankers acceptance
c) T-Bills

10. Why was the RBI formed? Explain 5 functions that it performs?

11. Explain the role of the following in international capital market:

a) Lead and Co-managers
b) Agents and trustees
c) Lawyers and Auditors

12. Explain the following mutual funds:

a) Gilt funds
b) Index funds
c) Load funds
How do we calculate the operational efficiency of a mutual fund?

Section-C (15 Marks)

Case Study (Compulsory)
13. The global recession of 2008 had hit our company “ Rafatlal Manufacturing” more than
we had anticipated. We had lost many of our major customers over the period of two
years. The financial statements had taken a huge dip.

The board had advised the management to go on a cost saving mode. All capital
expenditure decisions were put on hold. However the production department had been
able to convince management on replacing a few machines. They insisted that these
machines would be more efficient. Thus would save on to operational costs.

Our new CFO Mr. Raghu Ram was known to take all decisions after due diligence. He was
asked to prepare a report and recommend whether the machines should be leased or
purchased. Mr. Raghu after having discussed basic modalities about the machines had
given me the responsibility to present report on one of the machines, the testing
machine.

The testing machine was to cost Rs. 3,50,000. The equipment has an estimated
economic life of 5 years. As per the Income tax rule, we could write down depreciation
of 25 percent. The lease rentals offered by the company Rs. 1,20,000 per year.

June 2014/FM 06 Page 2 of 3

 Mr. Raghu has asked us to assume that the company’s marginal corporate tax rate is 50
per cent. I was aware that the company before tax borrowing rate for “Rafatlal
manufacturing “is 16 percent. Ignoring the tax shields on depreciation after 5 years I was
asked to advice whether the company should lease or purchase the testing machine.

Rate PV factor PV factor PV factor PV factor PV factor

Yr 1 Yr2 Yr 3 Yr 4 Yr 5

16% .862 .743 .641 .552 .476

8% .926 .857 .794 .735 .681

Rate PVFA PVFA PVFA PVFA PVFA

Yr 1 Yr2 Yr 3 Yr 4 Yr 5

16% .862 1.566 2.174 2.690 3.127

8% .926 1.783 2.577 3.312 3.993

June 2014/FM 06 Page 3 of 3