Examination Paper: Banking and Financial Services Management
5
IIBM Institute of Business Management
IIBM Institute of Business Management
Examination Paper MM.100
Financial Services
Section A: Objective Type (30 marks)
•This section consists of Multiple Choices/Fill in the blanks/True-False & Short Answer type
questions.
•Answer all the questions.
•Part One questions carries 1 mark each & Part Two questions carries 5 marks each.
Part One:
Multiple Choices:
1. NBFS stands for …………………………………………………………………………
2. ALCO is a decision making unit responsible for balance sheet planning from risk return
perspective. (T/F)
3. A contract of ‘Indemnity’ is one whereby:
a. A person tries to use the other’s property
b. A person promises to save the other’s property from loss caused.
c. A person tries to trick the property of other for some other person.
d. None of the above
4. The transaction between the lessor and the lessee being a demand sale is called:
a. First sale
b. Second sale
c. Third sale
d. Fourth sale
5. If the net present value of leasing be ‘a’ and net advantage of leasing be ‘b’ then decision
criterion is given by:
a. a/b
b. a+b
c. b/a
d. a-b
6. Break even lease rental BERL has NAL value equal to:
a. 1
b. 2
c. 0
d. 0.5
7. The right under which an unpaid seller who is in possession of the goods is entitled to retain them
until payment of the price is done is termed as ………………………………………
Examination Paper: Banking and Financial Services Management
6
IIBM Institute of Business Management
8. If the no of level investments be ‘t’, total no of level installments be ‘n’ and total charge for
credit be ‘c’ then the interest rebate is given by…………………………………………
9. The practice of discounting accommodation bills is known as ………………………..
10. HUDCO stands for
………………………………………………………………………………………………………
Part Two:
1. What do you understand by “Lock-in period”.
2. Write a short note “Hybrid Debt Capital Instruments”.
3. What do you understand by “Bipartite Lease”?
4. What is “Suit for Quantum Meruit”?
END OF SECTION A
Section B: Caselets (40 marks)
•This section consists of Caselets.
•Answer all the questions.
•Each Caselet carries 20 marks.
•Detailed information should form the part of your answer (Word limit 150 to 200 words).
Caselet 1
Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit
department. The cost of sales ledger administration stands at Rs 9 crores annually. It supplies
chemicals to heavy industries. These chemicals are used as raw material for further use of is directly
sold to industrial units for consumption. There is good demand for both the types of uses. For the
direct consumers, the company has a credit policy of 2/10, net 30. Past experience of the company
has been that on average 40 per cent of the customers avail of the discount while the balance of the
receivables are collected on average 75 days after the invoice date. Sunlight Industries also has small
dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total
sales.
Sunlight Industries finances its investment in debtors through a mix of bank credit and own longterm
funds in the ratio of 60:40. The current cost of bank credit and long-term funds are 12 per cent
and 15 per cent respectively.
There has been a consistent rise in the sales of the company due to its proactive measures in cost
reduction and maintaining good relations with dealers and customers. The projected sales for the
next year are Rs 800 crore, up 15 per cent from last year. Gross profiles have been maintained at a
healthy 22 per cent over the years and are expected to continue in future.
With escalating cost associated with the in-house management of debtors coupled with the need
to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight
Industries is examining the possibility of outsourcing its factoring service for managing its
Examination Paper: Banking and Financial Services Management
7
IIBM Institute of Business Management
receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals, the
details of which are given below, are available for Anita’s consideration.
Proposal from Canbank Factors Ltd: The main elements of the proposal are: (i) Guaranteed
payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse
arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per
cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with
resource.
Proposal from Indbank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent
with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per
cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and
with resource 1.8 per cent.
The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement,
his staff would be able to exclusively focus on sales promotion which would result in additional
sales of Rs 75 crores.
Question:
1. The CFO of Sunlight Industries seeks your advice as a financial consultant on the alternative
proposals. What advice would you give? Why? Calculations can be up to one digit only.
Caselet 2
Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms
operate in the same industry.
BALANCE SHEETS
Particulars Firm A Firm B
Total current assets Rs 14,00,000 Rs 10,00,000
Total fixed assets (net) 10,00,000 5,00,000
_____________ __________
Total assets 24,00,000 15,00,000
_____________ ___________
Equity capital (of Rs 10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 _
14% Long-term debt 5,00,000 3,00,000
Total current liabilities 7,00,000 4,00,000
_____________ ___________
24,00,000 15,00,000
Examination Paper: Banking and Financial Services Management
8
IIBM Institute of Business Management
INCOME STATEMENTS
Net sales Rs 34,50,000 Rs 17,00,000
Cost of goods sold 27,60,000 13,60,000
__________ ___________
Gross profit 6,90,000 3,40,000
Operating expenses 2,96,923 1,45,692
Interest 70,000 42,000
__________ ___________
Earnings before taxes (EBT) 3,23,077 1,52,308
Taxes (0.35) 1,13,077 53,308
Earnings after taxes (EAT) 2,10,000 99,000
Additional information: __________________________________
Number of equity shares 1,00,000 80,000
Dividend payment (D/P) ratio 0.40 0.60
Market price per share (MPS) Rs 40 Rs 15
__________________________________
Assume that the two firms are in the process of negotiating a merger through an exchange of equity
shares. You have been asked to assist in establishing equitable exchange terms, and are required to:
(i) Decompose the share prices of both the companies into EPS and P/E components, and also segregate
their EPS figures into return on equity (ROE) and book value of intrinsic value per share (BVPS)
components.
(ii) Estimate future EPS growth rates for each firm.
(iii) Based on expected operating synergies, A Ltd estimates that the intrinsic value of T’s equity share
would be Rs 20 per share on its acquisition. You are required to develop a range of justifiable equity
share exchange ratios that can be offered by A Ltd’s shareholders. Based on your analysis in parts (i)
and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio
limits? Why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4 : 1 being offered by A Ltd. Indicate
the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.
(v) Based on a 0.4 :1 exchange ratio, and assuming that A’s pre-merger P/E ratio will continue after the
merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger
market prices.
END OF SECTION B
Examination Paper: Banking and Financial Services Management
9
IIBM Institute of Business Management
Section C: Applied Theory (30 marks)
•This section consists of Applied Theory Questions.
•Answer all the questions.
•Each question carries 15 marks.
•Detailed information should form the part of your answer (Word limit 200 to 250 words).
1. The Hypothetical Finance Ltd has structured a hire-purchase deal. The required to make a down
payment of 20 per cent of the investment cost. The hire-term is four years with quarterly payment
in advance. The flat rate of interest is 13 per cent. The finance company would charge a frontended
documentation and service fee and allow rebate for prompt payment @ 0.5 per cent and 1
per cent of investment outlay respectively.
Assuming after paying 24th installment, a hirer wishes the purchase option, what is the interest
rebate according to (i) actuarial method, (ii) rule of 78 method and, (iii) SLM?
2. The Hypothetical Finance Ltd (HFL) has structured a hire-purchase deal for the Hypothetical
Industries Ltd (HIL) at a (flat) rate of interest of 13 per cent. The payment would be made in 36
equal monthly installments in arrears. The HIL is required to make a cash down payment of 20
per cent.
Assume that after paying the 24th installment, the HIL wishes to repay the outstanding amount
and purchase the equipment. What is the interest rebate per Rs 1,000 of investment cost,
according to the ERI/IRR method?
END OF SECTION C
S-2-210311
5
IIBM Institute of Business Management
IIBM Institute of Business Management
Examination Paper MM.100
Financial Services
Section A: Objective Type (30 marks)
•This section consists of Multiple Choices/Fill in the blanks/True-False & Short Answer type
questions.
•Answer all the questions.
•Part One questions carries 1 mark each & Part Two questions carries 5 marks each.
Part One:
Multiple Choices:
1. NBFS stands for …………………………………………………………………………
2. ALCO is a decision making unit responsible for balance sheet planning from risk return
perspective. (T/F)
3. A contract of ‘Indemnity’ is one whereby:
a. A person tries to use the other’s property
b. A person promises to save the other’s property from loss caused.
c. A person tries to trick the property of other for some other person.
d. None of the above
4. The transaction between the lessor and the lessee being a demand sale is called:
a. First sale
b. Second sale
c. Third sale
d. Fourth sale
5. If the net present value of leasing be ‘a’ and net advantage of leasing be ‘b’ then decision
criterion is given by:
a. a/b
b. a+b
c. b/a
d. a-b
6. Break even lease rental BERL has NAL value equal to:
a. 1
b. 2
c. 0
d. 0.5
7. The right under which an unpaid seller who is in possession of the goods is entitled to retain them
until payment of the price is done is termed as ………………………………………
Examination Paper: Banking and Financial Services Management
6
IIBM Institute of Business Management
8. If the no of level investments be ‘t’, total no of level installments be ‘n’ and total charge for
credit be ‘c’ then the interest rebate is given by…………………………………………
9. The practice of discounting accommodation bills is known as ………………………..
10. HUDCO stands for
………………………………………………………………………………………………………
Part Two:
1. What do you understand by “Lock-in period”.
2. Write a short note “Hybrid Debt Capital Instruments”.
3. What do you understand by “Bipartite Lease”?
4. What is “Suit for Quantum Meruit”?
END OF SECTION A
Section B: Caselets (40 marks)
•This section consists of Caselets.
•Answer all the questions.
•Each Caselet carries 20 marks.
•Detailed information should form the part of your answer (Word limit 150 to 200 words).
Caselet 1
Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit
department. The cost of sales ledger administration stands at Rs 9 crores annually. It supplies
chemicals to heavy industries. These chemicals are used as raw material for further use of is directly
sold to industrial units for consumption. There is good demand for both the types of uses. For the
direct consumers, the company has a credit policy of 2/10, net 30. Past experience of the company
has been that on average 40 per cent of the customers avail of the discount while the balance of the
receivables are collected on average 75 days after the invoice date. Sunlight Industries also has small
dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total
sales.
Sunlight Industries finances its investment in debtors through a mix of bank credit and own longterm
funds in the ratio of 60:40. The current cost of bank credit and long-term funds are 12 per cent
and 15 per cent respectively.
There has been a consistent rise in the sales of the company due to its proactive measures in cost
reduction and maintaining good relations with dealers and customers. The projected sales for the
next year are Rs 800 crore, up 15 per cent from last year. Gross profiles have been maintained at a
healthy 22 per cent over the years and are expected to continue in future.
With escalating cost associated with the in-house management of debtors coupled with the need
to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight
Industries is examining the possibility of outsourcing its factoring service for managing its
Examination Paper: Banking and Financial Services Management
7
IIBM Institute of Business Management
receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals, the
details of which are given below, are available for Anita’s consideration.
Proposal from Canbank Factors Ltd: The main elements of the proposal are: (i) Guaranteed
payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse
arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per
cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with
resource.
Proposal from Indbank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent
with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per
cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and
with resource 1.8 per cent.
The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement,
his staff would be able to exclusively focus on sales promotion which would result in additional
sales of Rs 75 crores.
Question:
1. The CFO of Sunlight Industries seeks your advice as a financial consultant on the alternative
proposals. What advice would you give? Why? Calculations can be up to one digit only.
Caselet 2
Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms
operate in the same industry.
BALANCE SHEETS
Particulars Firm A Firm B
Total current assets Rs 14,00,000 Rs 10,00,000
Total fixed assets (net) 10,00,000 5,00,000
_____________ __________
Total assets 24,00,000 15,00,000
_____________ ___________
Equity capital (of Rs 10 each) 10,00,000 8,00,000
Retained earnings 2,00,000 _
14% Long-term debt 5,00,000 3,00,000
Total current liabilities 7,00,000 4,00,000
_____________ ___________
24,00,000 15,00,000
Examination Paper: Banking and Financial Services Management
8
IIBM Institute of Business Management
INCOME STATEMENTS
Net sales Rs 34,50,000 Rs 17,00,000
Cost of goods sold 27,60,000 13,60,000
__________ ___________
Gross profit 6,90,000 3,40,000
Operating expenses 2,96,923 1,45,692
Interest 70,000 42,000
__________ ___________
Earnings before taxes (EBT) 3,23,077 1,52,308
Taxes (0.35) 1,13,077 53,308
Earnings after taxes (EAT) 2,10,000 99,000
Additional information: __________________________________
Number of equity shares 1,00,000 80,000
Dividend payment (D/P) ratio 0.40 0.60
Market price per share (MPS) Rs 40 Rs 15
__________________________________
Assume that the two firms are in the process of negotiating a merger through an exchange of equity
shares. You have been asked to assist in establishing equitable exchange terms, and are required to:
(i) Decompose the share prices of both the companies into EPS and P/E components, and also segregate
their EPS figures into return on equity (ROE) and book value of intrinsic value per share (BVPS)
components.
(ii) Estimate future EPS growth rates for each firm.
(iii) Based on expected operating synergies, A Ltd estimates that the intrinsic value of T’s equity share
would be Rs 20 per share on its acquisition. You are required to develop a range of justifiable equity
share exchange ratios that can be offered by A Ltd’s shareholders. Based on your analysis in parts (i)
and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio
limits? Why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4 : 1 being offered by A Ltd. Indicate
the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.
(v) Based on a 0.4 :1 exchange ratio, and assuming that A’s pre-merger P/E ratio will continue after the
merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre-merger
market prices.
END OF SECTION B
Examination Paper: Banking and Financial Services Management
9
IIBM Institute of Business Management
Section C: Applied Theory (30 marks)
•This section consists of Applied Theory Questions.
•Answer all the questions.
•Each question carries 15 marks.
•Detailed information should form the part of your answer (Word limit 200 to 250 words).
1. The Hypothetical Finance Ltd has structured a hire-purchase deal. The required to make a down
payment of 20 per cent of the investment cost. The hire-term is four years with quarterly payment
in advance. The flat rate of interest is 13 per cent. The finance company would charge a frontended
documentation and service fee and allow rebate for prompt payment @ 0.5 per cent and 1
per cent of investment outlay respectively.
Assuming after paying 24th installment, a hirer wishes the purchase option, what is the interest
rebate according to (i) actuarial method, (ii) rule of 78 method and, (iii) SLM?
2. The Hypothetical Finance Ltd (HFL) has structured a hire-purchase deal for the Hypothetical
Industries Ltd (HIL) at a (flat) rate of interest of 13 per cent. The payment would be made in 36
equal monthly installments in arrears. The HIL is required to make a cash down payment of 20
per cent.
Assume that after paying the 24th installment, the HIL wishes to repay the outstanding amount
and purchase the equipment. What is the interest rebate per Rs 1,000 of investment cost,
according to the ERI/IRR method?
END OF SECTION C
S-2-210311
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