• A company has ` 7 crore available for investment. It has evaluated its options and has found that only four investment projects given below have positive NPV. All these investments are divisible and get proportional NPVs.
Project Initial Investment (` crore) NPV (` crore) PI
W 6.00 1.80 1.30
X 3.00 0.60 1.20
Y 2.00 0.50 1.25
Z 2.50 1.50 1.60

Which investment projects should be selected?

  • Project W in full and X in part
    • Project Z in full and W in part
    • Project W in full and Z in part
    • Project Z and Y in full and X in part

           Answer is (B)

Justification: Project Z in full and W in part All 4  projects  have positive NPV.  So  PI  is  the  selection criteria. Higher the  PI,  greater  is the return for  every  rupee  of  investment. Z  has highest  and W has 2nd highest PI. So, option B is selected.

  • An investor is bullish about X Ltd. which trades in the spot market at ` 1,150. He buys two call option contracts with three months (one contract is 100 shares) with a strike price of ` 1,195 at a premium of ` 35 per share. Three months later, the share is selling at ` 1,240.

Net profit/loss of the investor on the position will be (A)  1,000

(B) ` 16,000

(C) ` 11,000

(D)  2,000

Answer is (D) Justification :

Investor’s Profit = (Spot Price Strike Price Premium) × No of Contracts × Lot Size = (` 1,240 – ` 1,195 – ` 35) × 2 × 100 = ` 2,000

  • Duhita Ltd. intends to buy an equipment. Quotes are obtained for two different makes A and B as given below:
  Cost (` Million) Estimate life (years)
A 4.5 10
B 6.00 15

Ignoring the operations and maintenance costs which will be almost the same for A and B, which one would be chapter? The company’s cost of capital is 10%

[Given: PVIFA (10%, 10 yrs.) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]

  • A) will be cheaper
  • B) will be cheaper
  • C) Cost will be the same
  • D) They are not comparable and therefore nothing can be said about which is cheaper.

Answer is (A)         Justification:

Equivalent annual cost of Make – A = 45,00,000 ÷ 6.1446 = ` 7,32,350 Equivalent annual cost of Make – B = 60,00,000 ÷ 7.6061 = ` 7,88,841

  • BLC Ltd. a valued customer engaged in import business, is in need to remit EURO 1 million to his European exporter. The spot rate of `/US$ is ` 65.47/65.57 and that of US$/EURO is $ 0.8053/0.8057. What rate will a banker quote to BLC Ltd. if the bank’s margin is 0.50%?

(A) ` 53.09

(B) ` 53.067

(C) ` 53.01

(D) ` 52.99

Answer is (A)

Justification:

BLC Ltd. needs EURO to pay for import. BLC Ltd. will purchase EUROS.

Hence bank would quote for selling

= (` 65.57 x 0.8057) + (0.5% commission)

= (` 52.83 x 1.005) = ` 53.09/ EURO

  • Given for a project:

Annual Cash inflow = ` 80,000, Useful life = 4 years Undiscounted Pay-Back period = 2.855 years What is the cost of the project?

(A) ` 1,12,084

(B) ` 2,28,400

(C) ` 9,13,600

(D) None of the above

Answer is (B)

Justification:

Pay-back period = Cost of project / Annual cash inflow

So, Cost of project    = Annual cash inflow x Pay-back period

= 80,000 x 2.855 = ` 2,28,400

  • A project had an equity beta of 1.4 and is to be financed by a combination of 25% Debt and 75% Equity. Assume Debt Beta as zero, Rf = 12% and Rm = 18%.

Hence, the required rate of return of the project is (A) 16.72%

(B) 18.30%

(C) 17.45%

(D) 12.00%

     Answer is (B)

Justification:

We know, BP    = [ β EQUITY x {E / (D + E)}] + [ β DEBT x {D / (D + E)}]

= (1.4 x 0.75) + (0 x 0.25) = 1.05

Rate of return of the project        = Rp = Rf + Bp (Rm – Rf)

= 12% + 1.05 (18% – 12%)

= 12%+ 6.30%

= 18.30%

  • An Indian Company is planning to invest in the US. The annual rates of inflation are 8% in India and 3% in USA. If the spot rate is currently ` 60.50/$, what spot rate can you expect after 5 years, assuming the inflation rates will remain the same over 5 years?

 (A) ` 88.89

(B) ` 54.95

(C) ` 76.68

(D) ` 76.10

(C)` 76.68

Justification :

F = S x [(1 + rA)n/ (1+ rB)n];      or, F(`/$) = 60.50 x [1 + 0.08)5 / (1+ 0.03)5]

= 60.50 x 1.267455 = `76.68

  • Which of the following securities is most liquid?
    • Money Market instruments
    • Capital Market instruments
    • Gilt-edged securities
    • Index futures

Answer is(C)

Justification:

Gilt-edged securities. Of all securities given, gilt edged securities are considered as most liquid because they are Government bonds and have active secondary market.

  • While  plotting a graph with risk on  X-axis and expected return on Y-axis, a line drawn with co-ordinates (0, rf) and (β, rm) is called
    • Security Market Line
    • Characteristic Line
    • Capital Market Line
    • CAPM Line

Answer is (A) Justification:

Security Market Line simply represents the average or normal trade-off between risk and return for a group of securities where risk is measured typically in terms of the securities betas.

  • If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might
    • Lower the bank rate
    • Increase the Cash Reserve Ration
    • Decrease the SLR
    • Buy Government securities in the open market.

Answer is (B)

Justification:

If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might increase bank rate, increase Cash Reserve Ratio, increase SLR, sell Government securities in the open market.

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