FIN622 Final Term Past Papers Set 2

Current Papers Solved By · FIN 622 SUBJECTIVE PAPERS · BY ADNAN AWAN · 1) Systemic and unsystematic risk(3 M) · • SYSTEMATIC

• Economy-wide sources of Risk that effect all the stocks being traded in market. Systematic risk influences large number of assets and is also known as market risk.
• Systematic Risk is measured by Beta Coefficient or Beta.
• Beta measures the systematic risk inherent in an asset relative to the market as whole.

• Systematic Risk:

• Systematic risks are unanticipated that effects all the assets to some degree. It is no diversifiable.

••UNSYSTEMATIC

• It affects only specific assets or a firm. it is also known as Diversifiable or Unique or Asset- specific Risk.

It can be eliminated by Diversification therefore; a Portfolio with many assets has almost zero

Unsystematic Risk

• Unsystematic Risk or Unique Risk:

• It affects only specific assets or a firm. it is also known as Diversifiable or Unique or Asset- specific Risk. It can be eliminated by Diversification therefore, a Portfolio with many assets has almost zero Unsystematic Risk.

2. Capital ratio for investment (5)

A situation where a company has scarcity of funds to invest in potential opportunities and these opportunities are compared with one another in order to allocate resources most effectively and efficiently.

Q49. Explain the main features of a forward rate agreement. (3 marks)

Features of forward rate agreement

It is in between bank and client for fixing future interest rate on notional amount of loan. The loan is for an affirmed period starting on a particular time in future. The size of the notional loan or deposit is decided between the bank and the client. forward rate agreement are cash settled. On settlement date buyer and seller must settle the agreement. The FRA rate for three months loan/deposit starting in a 6 months’ time is normally expressed as 6v9 FRA. The buyer of a FRA agrees to pay fixed interest rate on notional loan. At the same buyer will receive interest on notional loan at standard rate of interest. On the other side, seller of FRA agrees to pay interest on the notional amount at benchmark rate and receives interest at a fixed rate.

Q50. Management buyouts are similar in all major legal aspects to any other acquisition of a company. The particular nature of the MBO lies in the (3 marks)

position of the buyers as managers of the company and the practical consequences that follow from that. In particular, the due diligence process is likely to be limited as the buyers already have full knowledge of the company available to them. The seller is also unlikely to give any but the most basic warranties to the management, on the basis that the management knows more about the company than the sellers do and therefore the sellers should not have to warrant the state of the company. In many cases, the company will already be a private company, but if it is public then the management will take it private.

Management Buy in (MBI) occurs when a manager or a management team from outside the company raises the necessary finance buys it and becomes the company's new management. A management buy-in team often competes with other purchasers in the search for a suitable business. Usually, a manager will lead the team with significant experience at managing director level. The difference to a management buy-out is in the position of the purchaser: in the case of a buy-out, they are already working for the company. In the case of a buy-in, however, the manager or management team is from another source.

Q51. Assume that a bookstore uses up cash at a steady rate of Rs.300,000 (5 marks)

per year. The interest rate is 3% and each sale of securities costs Rs.20. Determine the optimal cash balance for the bookstore.

Answer Page#95

Q = √ 2 FS / i Where: S = is the amount of cash to be used in each period F = fixed cost of obtaining new funds i = interest cost of holding cash Q = quantity of cash to be held per period.

Q = √ 2 FS / i

= √ [(2 ﾗ 20 ﾗ 300,000) / 0.03] = √ [12000000 / 0.03] = √ 400000000

= Rs. 20000

Optimal level of cash = √(2FT / I)

= √ [(2 ﾗ 20 ﾗ 300,000) / 0.03] = √ [12000000 / 0.03] = √ 400000000

= Rs. 20000

Q52. Firm A wants to acquire a private limited company operating in the (5 marks)

same industry. What procedure would be followed by the Firm A to acquire the target company?

Q53. Why exchange rates of two currencies fluctuate? Explain briefly (5 marks)

Following are some factors for fluctuation:

Answer

Relative interest rates: One factor that affects exchange rates is the size of the differential between the real interest rates available to investors in the respective countries. The real interest rate is simply the nominal interest rate available to an investor in a high quality short-term investment subtracted by the country's inflation rate. Trade imbalances: The size of any trade deficit between two countries will also affect those countries' currency exchange rates. This is because they result in an imbalance of currency reserves among the trading partners. Political stability: If a country's government becomes unstable due to political gridlock, votes of no confidence, revolution or civil war, confidence can quickly be lost. People become less willing to accept paper currency in exchange for their goods and services, primarily because they're unsure whether they'll be able to pass the paper along to the next person. Government involvement: The relative value of a country's currency is of great importance to its government. The value of a country's currency affects the wealth of its citizens, the competitiveness of domestically produced goods, the relative cost of the country's labor, and the country's ability to compete. As a result, governments often try to influence the relative value of their country's currencies in a number of different ways, including altering their monetary and fiscal policies, and by directly intervening in the currency markets.