Strategic Financial Management DEC 2024

Description

Strategic Financial Management

December 2024 Examination

 

 

Q1. Gadgets Limited, a mid-sized manufacturing firm, has consistently paid dividends to its shareholders for the past decade. However, the company faced a substantial drop in sales in the last fiscal year due to market saturation and heightened competition. The board of directors is now debating whether to maintain the current dividend payout, reduce it, or reinvest the earnings back into the business to explore new product lines and markets.

As a financial analyst, you are tasked with analyzing the implications of maintaining, reducing, or eliminating the dividend payout for Gadgets Limited. Consider the potential impact on shareholder perception, company growth, and financial health.    (10 marks)

Ans 1.

Introduction

Gadgets Limited, a mid-sized manufacturing firm, has enjoyed a strong relationship with its shareholders, consistently paying dividends for the past decade. However, recent challenges, including market saturation and increased competition, have led to a significant drop in sales, raising concerns about the company’s ability to sustain its current dividend payout. The board of directors is now faced with a critical decision: whether to maintain, reduce, or eliminate the dividend payout in favor of reinvesting earnings into exploring new product lines and markets. This dilemma highlights the tension between maintaining shareholder satisfaction through dividends and fostering long-term growth

 

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Q2. What are the primary challenges Indian companies face in cross-border mergers and acquisitions (M&A), and what strategies can these firms’ device to mitigate these challenges?     (10 marks)

Ans 2.

Introduction

Cross-border mergers and acquisitions (M&A) have become an essential strategy for Indian companies to expand globally, access new markets, acquire cutting-edge technology, and enhance competitiveness. However, entering foreign markets through M&A presents numerous challenges that can undermine the success of the transaction. Indian companies face a unique set of hurdles when engaging

 

 

 

Q3a. An investor purchases a European put option on Quick Limited’s stock with the Strike Price (K) of INR 50. The put option premium is INR 5, and the stock price on the expiration date is INR 40. What is the payoff from the put option at expiration? What is the profit or loss from the put option for the investor?    (5 marks)

Ans 3a.

Introduction

A European put option grants the holder the right to sell an underlying asset at a predetermined strike price on the option’s expiration date. The investor in this scenario has purchased a put option on Quick Limited’s stock with a strike price of INR 50 and a premium of INR 5. The stock price on the expiration date is INR 40. To assess the investment’s success, we need to calculate both the option’s

 

 

Q3b. Gamma Ltd. is contemplating an investment of INR 1,00,000 in a new project. The company has projected the cash flows for the next three years and their corresponding probabilities as followsThe company estimates the following cash flows over the next three years along with their associated probabilities:

Year	Cash Flow (₹)	Probability
1	30,000	0.2
2	50,000	0.5
3	80,000	0.3

 

 

1. Calculate the expected cash flow for the project over the three years.
2. Determine the project’s Net Present Value if the discount rate is 10%.
   

 

 

Ans 3b.

Introduction

Gamma Ltd. is considering a new investment of INR 1,00,000, and the company has projected varying cash flows for the next three years with associated probabilities. To evaluate the financial viability of this project, it’s crucial to calculate the expected cash flow for each year and determine the project’s Net Present Value (NPV). The NPV calculation will consider a discount rate of 10%, which helps