Hall Ticket No Question Paper Code: CMB419
INSTITUTE OF AERONAUTICAL ENGINEERING
(Autonomous)
MBA IV Semester End Examinations (Regular) May/June, 2018
Regulation: IARE-R16
Strategic Investment and Financing Decision

Time: 3 Hours (Elective Finance) Max Marks: 70
Answer ONE Question from each Unit
All Questions Carry Equal Marks
All parts of the question must be answered in one place only
UNIT I
1. What is risk? Explain different types of risks associated with equity investment.
M/s. Khan and Co., a Mumbai based company issues a pure discount bond of Rs.1000/- face
value for Rs.520/- for a period of five years. As a investor, compute the interest rate of the bond
and suggest whether it is an attractive investment for an investor who is seeking 15% return.

2. Differentiate disclosed and undisclosed orders and Explain about stop loss orders
Mr. Naveen is evaluating two stocks shown in Table
Table 1
Stock A Stock B
Return Probability Return Probability
-30 20 -10 10
0 40 0 25
30 30 10 40
70 10 20 25
Advice Mr.Naveen based on risk of the stock.
UNIT II
3. Define capital budgeting. Explain the advantages of net present value and payback period
methods.
Mr. Vijay an investor, has furnished following information about the two investment alternatives
shown in Table 2. Evaluate based on
i. Expected return
ii. Standard deviation
iii. Standard deviation and expected return.
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Table 2
Probability Return
Security "A" Security "B"
0.5 4 0
0.4 2 3
0.1 0 3
Suggest which one is good for investment.
4. The earnings per share of a company is Rs.10/- It has an IRR of 15% and capitalization rate of
its risk class is 12.5%. If Walters Model is used
i. What would be the optimum payout ratio of the firm?
ii. What would be the price of the share at this payout?

An investor holds shares of "XYZ" company bought at Rs.335/- and present price is Rs.421/-.
The dividend paid is 35%. Compute the dividend yield and holding period return, if face value
of the share is Rs.10/-.
UNIT III
5. What are government bonds? Explain any five features of government bonds.
A perpetual bond Rs.100/- is currently selling for Rs.95/-. The coupon rate of interest is 13.5%
and appropriate discount rate is 15%. Calculate the value of the bond. Should it be bought?
What is its yield to maturity?

6. Explain Maculay's bond duration concept with an example.
Mr.Amit a safe investor decides to invest in a bond. He is evaluating a bond, Bond "A" with
coupon having maturity period of four years. The face value is Rs.1000/-. The bond currently
yields 10%. Evaluate and advice Mr.Amit based on Maculay's Duration.
UNIT IV
7. Discuss Walters the relevance theory of dividend which supports the argument that dividend
decision has an impact shareholders value and value of the firm.
A company expects to pay a dividend of Rs.7/- per share next year that is expected to grow at
6%. It retains 30% of earning. Assume a capitalization rate of you are required to calculate
i. Expected earnings per share.
ii. Return on equity.

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8. Explain dividend model and state its assumptions.
The return of ABC Company at present is 21%. This is assumed to continue for next four years
after that it is assumed to have a growth rate of 10% indefinitely. The dividend paid for the
recent year is 32%. The required rate of return is 20% and present price is Rs.60/-. Compute
the estimated price assuming two stage model.
UNIT V
9. Define portfolio management. Explain the objectives of portfolio management.
Information shown in Table 3 is available regarding performance of three mutual funds namely
B and C respectively. Rank them with Sharpe's and Treynor's Index.
Table 3
Funds Rp Sd Beta
A 25.38 4 0.23
B 25.11 9.01 0.56
C 25.01 3.55 0.59
10. Explain the capital asset pricing model theory. State its underlying assumptions.
Mr.Kiran is having units in mutual fund for the past three years as shown in Table 4. Advice
him to evaluate the fund's performance by comparing it to market using Treynors Index.
Table 4
Particulars Fund Market
Return 70.66 41.40
Standard Deviation 41.31 19.44
Risk free rate 12 12
Beta 1.12