PROGRAM - MBA
SUBJECT CODE & NAME - MF0010 & SECURITY
ANALYSIS AND PORTFOLIO MANAGEMENT
1. Financial markets bring the
providers and users in direct contact without any intermediary. Financial
markets permits the businesses and governments to raise the funds needed by
sale of securities. Describe the money market/capital market – features and its
composition.
A. Money market- features and composition
The money
market facilitates interaction
between supply and
demand of short-term funds,
with maturity of
a year or
less. Most money
market transactions are made
in marketable securities
which are short-term
debt instruments such as T-bills and commercial paper.
Money (currency)
is not actually
traded in the
money markets. The securities traded in the money market are
short-term with high liquidity and low-risk. They are called ‘money
equivalents’.
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2. Risk is the likelihood that
your investment will either earn money or lose money. Explain the factors that
affect risk.
Mr. Rahul invests in equity shares of Wipro. Its anticipated returns and
associated probabilities are given below:
|
Return
|
-15
|
-10
|
5
|
10
|
15
|
20
|
30
|
|
Probability
|
0.05
|
0.10
|
0.15
|
0.25
|
0.30
|
0.10
|
0.05
|
You are required to calculate the expected ROR and risk in terms of standard
deviation.
A. Explanation of all the 4
factors that affect risk
The common risk factors
are:
Business
risk:
As a security
holder you get
dividends, interest or principal (on maturity in case of
securities like bonds) from the firm. But there is a possibility that the firm
may not be able to pay you due to poor financial performance.
This possibility is
termed as business
risk. The poor financial
performance could be due to
economic slowdown, poor demand for the firm’s goods and services
and large operating expenses. Such a
performance affects the equity and the debt holder. The
equity
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3. Explain the business cycle and
leading coincidental & lagging indicators. Analyse the issues in
fundamental analysis.
A Explanation of business
cycle-leading coincidental and lagging indicators
Business cycle and
leading coincidental and lagging indicators
All economies
experience recurrent periods
of expansion and
contraction. This recurring pattern
of recession and
recovery is called
business cycle. The business
cycle consists of
expansionary and recessionary
periods. When business activity
reaches a high
point, it peaks. A
low point on the
cycle is
called trough. Troughs
represent the end
of a recession
and the beginning of an
expansion. Peaks represent the end of an expansion and the beginning of a
recession.
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4. Discuss the implications of EMH
for security analysis and portfolio management.
A. Implications for active and
passive investment
Proponents of EMH often
advocate passive as opposed to active investment strategies. Active management
is the art of stock-picking and market-timing. The policy
of passive investors
is to buy
and hold a
broad-based market index. Passive
investors spend neither
on market research,
on frequent purchase nor on sale
of shares.
The
efficient market debate plays an important role in the decision between active and
passive investing. Active
managers argue that
less efficient markets provide
the opportunity for
skilful managers to
outperform the market. However,
it is important to realise that a majority of active
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5. Explain about the interest rate
risk and the two components in it.
An investor is considering the purchase of a share of XYZ Ltd. If his
required rate of return is 10%, the year-end expected dividend is Rs. 5 and
year-end price is expected to be Rs. 24, Compute the value of the share.
Interest
rate risk: The
cash flows from
a bond (coupon
payments and principal repayment) remain fixed though interest rate keeps changing. As a result, the value of a bond fluctuates. Thus
interest rate risk arises because the changes in the market interest rates
affect the value of the bond. The return
on a bond comes from coupons payments, the
interest earned from re-investing
coupons (interest on interest), and capital gains. Since coupon payments are
fixed, a change in the interest rates affects interest on interest and capital gains or losses. An increase in
interest rates decreases the price
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6. Elucidate the risk and returns of foreign investing. Analyse
international listing.
A. Explanation of all the points
in risks and returns from foreign investing
International
investing provides superior returns adjusted for risk. Allocating some portion of one's portfolio to foreign
assets provides better risk-cover than a
portfolio of only
domestic assets. International
equities also offer access to
a broader spectrum
of economies and
opportunities that can provide for
further diversification benefits.
Some of the
best performing companies
in the world
like General Electric,
Exxon Mobil and
Microsoft have shares that are
listed on overseas
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PROGRAM - MBA
SUBJECT CODE & NAME - MF0011 & MERGERS AND
ACQUISITIONS
1. Elaborate on the basic steps in
organizing a merger and explain on the five stage model of mergers and
acquisitions.
Explanation of basic steps in organizing a merger
Mergers and
acquisitions are normally decided after thorough examination of all facts and
aspects. Like capital budgeting decisions, these are difficult to reverse once
they are put through, and so the organisation has to be meticulous.
The steps in an exercise
of organising an acquisition are as follows:
Step 1:
Pre-acquisition review: The preeminent reason for acquisition is growth, and in
this step the company management reviews the company’s growth plans,
alternatives to achieving the growth, and
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2. Synergy is the additional value
that is generated by the combination of two or more than two firms creating
opportunities.
Explain the role of industry life cycle and pre requisites for creation of synergy.
Explanation of the role of industry life cycle
Industry lifecycle has
a crucial impact on mergers and acquisitions. The different stages of industry
lifecycle are:
Fragmentation Stage:
The first stage of the new industry is referred to as fragmentation. In this
stage, the new industry develops the business. The entrepreneur plans on how to
introduce new products or services into the market. The twin problems of
innovation and invention are overcome by the entrepreneur at this stage.
Shake-out:
In the industry lifecycle, the second stage is the shake-out stage. A new
industry emerges in this stage and it is at this stage, competitors begin realising
business opportunities in the emerging
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3. Corporate restructuring is a
broad based business initiative that results in major change of size,
ownership, control and/or management.
Write down the characteristics of corporate restructuring and explain the
types of corporate restructuring.
Explanation of characteristics of corporate restructuring
The key characteristics
of corporate restructuring are:
·
Selling
or closing of
unprofitable divisions from
its core business, thereby achieving staff reduction
and a stronger balance sheet.
·
Revamping of corporate management.
·
Sale of underutilised assets such as
patents/brands.
·
Outsourcing
of operations like
payroll and technical
support to a more efficient third
party.
·
Moving of operations like manufacturing to
lower-cost locations.
·
Reorganisation of major functions like sales,
marketing and distribution
·
Renegotiation of labour contracts at reduced
costs.
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4. Leveraged Buyouts (LBO) is a
financing technique of purchasing a private company with the help of borrowed
or debt capital.
Explain the modes of LBO financing and governance aspects of LBOs.
Explanation of modes of LBOs
There are many types of
financing used in an LBO. These include the following (in order of their risk):
1. Senior
debt: The debt that is at the topmost rank amongst all the other debts and
equity capital in the business is the senior debt. A typical structure of a
bank loan is up to three trenches: ‘A’, ‘B’ and ‘C’. Specific assets of the
company generally secure the debt, which implies that if there is a breach in
the obligations under the loan agreement, the lender automatically takes over
the assets; therefore the cost of debt is lower. Usually the obligations are
quite stringent. A syndicate of banks and specialised funds generally hold the
bank loans. Most of the times,the terms of senior debt in an LBO requires debt
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5. Joint Ventures (JV) have become
an important strategic option for many businesses. Give the meaning of JV with
example. Explain the characteristics of Joint Ventures. Also explain the
Rationale for Joint Ventures and alternatives to JV’s as expansion strategy
options with example.
Meaning of JV with example
The term
‘JV’ is an
umbrella term which
describes the commercial arrangement between
two or more
economically independent entities.
In practice, the legal form of a JV is likely to be determined by a
number of factors including the nature and size of enterprise, the anticipated
length of the venture, the identity and location of the partners and their
commercial and financial objectives.
Example
Mahindra &
Mahindra and Renault
decided to join
forces to produce
and commercialise Logan in
India. The JV
is a 51:49
partnership between Mahindra &
Mahindra and Renault.
The state-of-the-art Logan
facility in Nashik offers a body
shop, stamping shop, a paint shop with top quality pretreatment and an assembly
line specific for Logan.
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6. Amalgamation is the nature of
merger is an amalgamation/consolidation which satisfies/ meets the following
conditions. Explain the two methods of amalgamation.
Explain the treatment of Goodwill arising on Amalgamation and treatment
of reserves of amalgamation. Explanation of two methods of amalgamation
Explanation of treatment of goodwill arising in amalgamation
Amalgamation
Goodwill represents a payment made in expectancy income for the future and is
appropriate to treat this like an asset which needs to be amortised to income
on a systematic basis over its useful life. As a nature of goodwill, it is hard
to evaluate its useful life with rational conviction. Such estimation is
therefore made on a prudent basis. Accordingly, it is considered suitable to
amortise goodwill over a period which does not exceed five years unless a
longer period could be justified. Factors which may be considered in estimating
the useful life of goodwill arising on amalgamation
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Master of Business Administration-
MBA Semester 3
MF0012 – Taxation Management
Q1. Explain the objectives of tax
planning. Discuss the factors to be considered in tax planning.
Objectives of Tax Planning: The prime objectives of tax planning
are:
a. Reduction of tax liability by utilising the
benefits available in the tax laws.
b. Informed and pragmatic financial decisions: A
person adds the dimension of tax incidence in his decision-making on financial
matters, and this helps him optimise his decisions.
c. Multi-dimensional
investment decisions: In a democratic welfare state like India the
government requires substantial investment in infrastructure, education and
healthcare. The tax laws give attractive benefits to investors in these areas;
and by taking up these investments one can contribute to nation-building and at
the same
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Q2. Explain the categories in Capital
assets.
Mr.
C acquired a plot of land on 15th June, 1993 for 10,00,000 and sold it on 5th
January, 2010 for 41,00,000. The expenses of transfer were 1,00,000. Mr. C made
the following investments on 4th February, 2010 from the proceeds of the plot.
a)
Bonds of Rural Electrification Corporation redeemable after a period of three
years, 12,00,000.
b)
Deposits under Capital Gain Scheme for purchase of a residential house 8,00,000
(he does not own any house).
Compute
the capital gain chargeable to tax for the AY2010-11.
Answer:
Categories of capital assets
For taxation purposes, the capital assets have been, divided into
(a) short-term capital assets and (b) long-term capital assets.
(a) Short-term capital assets: According to Section
2(42A), a short-term capital asset means a capital asset held by an assessee
for not more than:
a. 12 months before its transfer in case of company shares,
(equity or preference), or any other security listed in a recognized stock
exchange, or units of UTI and mutual funds or a zero coupon bond, and
b. 36 months before its transfer in the case of any other asset
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Q3.
Explain major considerations in capital structure planning. Write about the
dividend policy and factors affecting dividend decisions.
Major considerations in capital structure planning
Broadly, the following factors would be worth considering, while
planning the capital structure.
1. Risk of two kinds, that is, financial risk and business
risk: In the context of capital structure planning, financial risk is
more relevant. Financial risk is of two types:
(a)
Risk of cash illiquidity: As a firm raises more debt, its risk of
cash illiquidity increases. This is for two reasons. First, higher proportion
of debt in the capital structure increases the commitments of the company with
regard to fixed charges that is, interest on borrowed capital and instalments
in which it has to be repaid. If
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Q4. X Ltd. has Unit C which is not
functioning satisfactorily. The following are the details of its fixed assets:
Asset
The
written down value (WDV) is Rs. 25
lakh for the machinery, and Rs.15 lakh for the plant. The liabilities on this
Unit on 31st March, 2011 are Rs.35 lakh.
The
following are two options as on 31st March, 2011:
Option
1: Slump sale to Y Ltd for a consideration of 85 lakh.
Option
2: Individual sale of assets as follows: Land Rs.48
lakh, goodwill Rs.20
lakh, machinery Rs.32 lakh, Plant Rs.17 lakh.
The
other units derive taxable income and there is no carry forward of loss or
depreciation for the company as a whole. Unit C was
started on 1st January, 2005. Which option would you choose, and why?
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Q5.
Explain the Service Tax Law in India and concept of negative list. Write about
the exemptions and rebates in Service Tax Law.
Service Tax Law in India: Service tax was introduced in India in
1994 by Chapter V of the Finance Act, 1994. It was imposed on an initial set of
three services in 1994 and the scope of the service tax has since been expanded
continuously by subsequent Finance Acts.
There is no separate Service Tax Act, but all pronouncements
relating to service tax are in the annual Finance Acts. Service Tax Rules, 1994
were enacted to begin with, and with notifications from time to time the law
has been amended and updated.
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Q6. What do you understand by customs
duty? Explain the taxable events for imported,warehoused and exported goods.
List down the types of duties in customs.
An importer imports goods for
subsequent sale in India at $10,000 on assessable value basis. Relevant
exchange rate and rate of duty are as follows.
Calculate
assessable value and customs duty.
Answer:
Customs Duty: Customs duty is
the duty imposed on goods imported into the country. In the years before
globalisation it was difficult to import goods on account of stiff duty rates
and procedures, especially for less developed and developing nations like
India. Ajoke used to be that the word ‘customs’ was said to come from Sanskrit
‘kashtam’ meaning difficulty.
But the
origin of the word is something else. Centuries ago, it was customary for a
trader coming to sell his/her wares in a particular kingdom to offer gifts to
the king,
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PROGRAM – MBA
SUBJECT CODE & NAME - MF0013 & INTERNAL AUDIT
& CONTROL
1. Define and explain the term
auditing. “Personal qualities of an auditor are important for the successful
conduct of audit”. Comment
A. Definition of auditing
Auditing
is as old as accounting. The word ‘audit’ has been derived from the Latin word
‘audire’ meaning ‘to hear’, ‘listen’ or ‘give credence to’. In ancient times
the person authorized to check the accounts of an estate
did the job by hearing the
business records from the record-keepers. There is historical evidence that
household accounts of early rulers were kept by at least two persons, independently
of one another, to keep a
check on mistakes and misappropriations. In the Mauryan, Greek
and Roman
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2. Write the key objectives of a
good internal audit system. Narrate the points of dissimilarities between external
audit and internal audit.
A. Key objectives of a good
internal audit system
The key objectives of a
good internal audit system are:
1. Evaluation
of accounting controls:
Ensuring that the
checks and balances in
the accounting processes
are effective and
provide the required accounting
controls.
2. Compliance with policies and procedures: Verifying
compliance with the policies and
procedures laid down
for key activities
and reporting acts of omission
and commission.
For example,
if a purchase
order for capital
equipment of any
value requires the Purchase department to get at least 3 quotes, internal audit have to
check if this
rule has been
followed in all
cases, and report exceptions.
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3. Give the role of internal
auditor in the Company’s Management. List down the duties of auditor Under
Section 581ZG.
A. Role of internal auditor
in the company’s management
The specific
contributions that an internal auditor can make include:
1. Review of internal control systems: The
internal auditor should review the
internal control systems
of the organisation.
He should determine whether the existing control
systems are appropriate and commensurate with
the objectives, size, etc. of the organisation. For example a small company cannot
afford a separate
credit control department
and so it will
need strong controls
in the
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4. The effectiveness of the
internal control system can be ensured if the important aspects of the
company’s operations are kept in mind.
Explain the characteristics of an effective internal control system.
Write the elements of internal control.
A. Characteristics of an
effective internal control system
The effectiveness
of the internal
control system can
be ensured if the
following aspects of the
company’s operations are
kept in mind and
done properly:
1. How
the organisation structure
is planned: For
strong internal controls, the
organisation structure should have the following features:
·
Freedom of
operation at every
level of the
hierarchy, subject to overall
company guidelines and
achievement of company’s
overall objectives.
·
Clear demarcation
between the performance
of the activity
and its recording,
especially in matters involving money
handling and fixed assets.
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5. Describe general EDP controls. Explain the appraisal of accounting
system and related internal control.
A. General EDP controls
(a) Organisational and
operational controls
·
relate to plan of
the organisation and operation of EDP activities;
·
emphasise segregation
of EDP department
from source and
user departments; and
·
also lays
stress on segregation of
functions within the
EDP department.
(b) System development and documentation control
·
are designed to
monitor, design, test and document the system and programmes
constituting each application;
·
include:
(i) Participation
by user groups
and accounting and
internal auditing staff in system design;
(ii) Joint system testing and approval by user department and EDP personnel; and
(iii) Documentation creation and maintenance.
(c) Hardware controls
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6. Explain the internal control
systems in insurance companies. Write down about the reporting internal control
weaknesses.
A. Internal control systems
in insurance companies
Internal control system in banks
Different factors
influence the internal control structure of any organisation: size, complexity
and risk profile of its operations. In
this regard an effective internal control system for a bank should consider the
following aspects:
1. Control
environment: Control environment
is the foundation
of an internal control system. It
includes and reflects the factors
that influence the control consciousness
of its people. As per Auditing and
Assurance Standard 6 issued
by ICAI (AAS6),
control environment is
the overall attitude, awareness
and actions of directors and management about the internal control system and
its
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