INTRODUCTION TO FINANCIAL MA i A9EMENT

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liT Kharagpur

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End-semester Examination (Spring, 201~-1;3J , >;: ... BM40002: INTRODUCTION TO FINANCIAL MA!'iA9EMENT Duration: 3 Hours; M~ximum Marks: 75 · ·

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ANSWER ALL QUESTIONS . ~ Important: If necessary, make and state suitable assumptions w!fhout Wf!!tingfor clariJ!~at~IJ. k

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Question 1: -~ f• ·:t· Stocks A and'B have expected return of5% and 10% standard deviation of 10% imd20% respectivlly. The covariance between the returns on the two stocks is .001. Suppose and investor h~l~s a po~foli~ consisting of only stock A and stock B. • ·, · a. Find the portfolio weights, XA and X 8 , such that the variance ofherpor.t;fulip is tpinim~zed.•What is the expected return on such minimum variance portfqlio?. . . . _, ~.... ·. b. If the covariance between the returns on the two stocks is -0.02, what will be variance ofthe. -~ r minimul)1 variance portfolio? . ' t c. Ignore your answer in (a) and (b). Suppose the returns on stocks A and Bas above have ~ correlation wjth return on market portfolio as 0.6 and 0.8 re~pectively. Tlie retufn on rqarke! portfolio has a standard deviation of 12%. If the investor inve~ts 39% e~ch.in Stqcl.~.'.

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Questio~ 4:

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A firm lias applied for working capital finance from a commercialbank.You are requested by the bank to prepare in es\imate of the working capital requirements of the firm. You may add 10 pyr cent to your estimatedI figiire to account for exigencies. The following is the firm's projected profit and loss account: • . !it ~ *' ~

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Profit & Loss Account Rs. *Co'st of goods sold: . Sales{; 25,00,000 Materials used . . 18,00,000 Wages and other manufacturing expenses Cost of goods sold*.: .: 7,00,000 Depreciation Gross profit .• · Administrative expenses· .... 1,50,000 Selling expenses •. .:.:·: . ,, . 1.20,000 Less: Stock of finished goods.[ 10% of the ~;t~~ t. • '·.-·.~~: • product not yet sold .. 4,30,000 Cost of goods sold Profit before tax 1,20,000 Tax provision 110.000 ~rofitafter tax

Rs. 9,00,000 8,00,000 3,00,000 20,00,000 2,00,000

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18.00.000

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The figJres given above. rel~te ~ni~ to the goods that have been finished, and not to work in progress; goods e~ual to 10 pe~ cenfefthe year's.production [in terms of physical units] are in progress on an average'!fequiring .full~ mli~~rla:l b_pt only 50 per cent of other expenses. The firm has a policy of keeping one andihalftnonth's cons~p.ti?n ofmaferial in stock. All expenses are paid one month in arrear. ~

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Suppliers of material 'grant two months credit; sales are 25 per cent cash while remaining ~ol