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MSO402 Mid Sem Exam 2024-25
1. Years: Today 1 2 3 4 5 10 11 12
Rs40,000 Rs40,000 Rs 40,000 Rs40,000

Rs40,000 Rs40,000 Rs40,000 Rs40,000
a. In it, at the 6% column, 12-year row, we find the factor of 8.384. Using that factor, we get the PV
= Rs335,360 = 8.384 × Rs40,000. Thus, on purely a cost-savings financial basis, the most you
should pay today for the automated sprinkler system is Rs335,360.
b. The appropriate table factor is now 7.36, which when multiplied by Rs48,000 gives rise to a new
PV amount of Rs353,280. Clearly, this situation wherein more cash is received sooner vis-à-vis the
base case scenario gives rise to a higher PV even though the total cash savings (Rs480,000 =
Rs48,000 × 10 years) is the same as in the base case (Rs480,000 = Rs40,000 × 12 years).
c. Graphically, the facts of this scenario may be depicted as follows:
Option 2 is better, because of higher PV.

2. Decision on NPV and IRR does not always coincide with each other particularly during mutually
exclusive projects, in atleast three cases:
(i) The cash flow pattern of the projects may differ.
(ii) Scale of Investment

(iii) Different project life-span:
2
σ 2−Cov12
3. (a) Minimum Variance Portfolio: w min1 = 2 2
σ 1 +σ 2−2Cov 12
2
40 −0.25 X 30 X 40
w minA = 2 2 = 0.6842 w minB =1−0.6842=0.3157
30 + 40 −2 X 0.25 X 30 X 40
(b) E(Rp) = 0.6842 X 20 + 0.3157 X 25 = 13.684% + 7.8925% = 21.5765%

σ P= √ (0.6842 ¿ ¿ 2 X 302+ 0.31572 X 402 +2 X 0.25 X 0.6842 X 0.3157 X 30 X 40)=26.65 % ¿
(c) Yes, if two conditions are met. i. correlation is -1, ii. WA= 0.5714
(d) Systematic risk and Idiosyncratic risk…explain.
(e) Market returns through CAPM model:

Ri = Rf + (Rm- Rf) X Bi
Solve the simultaneous equations: let (Rm-Rf) = b and Rf = a, we get Rf = 0.078 or 7.8% and Rm
=22.145%.
Stock A underperforms as its returns is less than the market and Stock B outperforms.
(f) Rp = Rf + (Rm- Rf) X Bp

0.215765 = 0.07845 + 0.143 x Bp
Bp = 0.96
Beta of the portfolio denotes the systematic risk, which cannot be reduced.
4. (a) Investor is using information related to the financial data of the company. S/he should perform
fundamental analysis for this. Then the markets are semi-strong form efficient if he could beat the
market using this set of information.
(b) If the BPCL closed at Rs 4800 per share at the end of 2024. It paid annual dividends of Rs 120
per share. The dividend yield = 120/4800= 2.5%. If dividend% remains the same for 2025, then
0.9% i.e., remaining expected returns should come from capital gain. Such that at the end of 2025,
the stock price should be Rs 4,843.2.
Or
EPS = 8; DPS = 4
PV till 11th year (using DDF)= 38.74
PV beyond 11th year (using Gordon’s model) = 35.15
Intrinsic value = 38.74 + 35.15 = 73.85
The share is undervalued and may be bought.
(c) Diversification is “not to lay eggs in one basket”; specifies how well an investor is willing to
eliminate or reduce the portfolio risk to the minimum. Example: NSE 500 stocks where specific
weights are given for different stocks belonging to different industries.
5. (a) International bonds: Eurobond or Foreign bond

Foreign Bond: Indian corporations issuing bonds denominated in foreign currencies.
Yankee Bonds
Samurai Bonds
Bulldog Bonds
Euro Bonds – Indian corporations issue rupee-denominated bonds in foreign countries.
Eurodollar
Euroyen
Advantage of Eurobond: high degree of flexibility as they offer issuers the ability to choose the
country of issuance based on the regulatory landscape, interest rates, and depth of the market.
Liquidity and low-cost advantages.
97.5 97.5 1597.5

(b)(i) P0= + + =Rs .1584.69
1.03 1.042 1.0453
(ii) This graph is yield curve graph. The economic expansion or inflation is predicted from this
graph as the short-term yields are less than the long-term yields.
(iii) The bond price is more than the face value of the bond. It is traded at a premium because the
bond is offering a higher interest rate of 6.5% than the yield of the bond. The issuers will charge a
higher price for issuing this bond.
(c) Duration is not always less than the maturity, with a special case of Zero-Coupon bond. For
zero -coupon bonds, are issued without any coupon rate. There is only one cash flows that is
possible at the end of the maturity. Therefore, there is only one cash flow that is discounted from its
maturity to the present time. So, in this case, the duration is equal to maturity.
(d) Life Insurance Corporation (YTM) = (1000/950)^0.2 -1=1.0311%
Max Life Insurance Company (YTM) = (1000/900)^0.2-1= 2.129%
A bond related to Max life insurance company was issued at a discount as it has credit risk and
liquidity risk.

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MSO402 Mid Sem Exam 2024-25

Rs40,000 Rs40,000 Rs 40,000 Rs40,000

Option 2 is better, because of higher PV.

(ii) Scale of Investment

(b) E(Rp) = 0.6842 X 20 + 0.3157 X 25 = 13.684% + 7.8925% = 21.5765%

(d) Systematic risk and Idiosyncratic risk…explain.

(e) Market returns through CAPM model:

(f) Rp = Rf + (Rm- Rf) X Bp

5. (a) International bonds: Eurobond or Foreign bond

97.5 97.5 1597.5

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