Institute of Actuaries of India 2008 CT-2 Finance and Financial Reporting - Question Paper

systematic risk
[2]

Q. 11) discuss how tax might influence the shareholders' preference for debt financing
versus equity financing in the company's gearing decision.
[5]

Q. 12) a) Who are the main stakeholders in an organization and why might their
interest conflict? [5]
b) In ABC proprietary company all share holders seek to be as rich as possible in
such situation what is the objective of financial managers? [1.5]
c) Capital Markets give info that will help the financial manager to
take the decisions – explain. [3.5]

Q. 13) a) What is the meaning of the word "quotation"? List all the methods of
obtaining quotation. [3]
b) Company P Ltd has borrowed at variable interest rates and wants to protect
itself against increase in market interest rates-
i) What type of choices would they use? [0.5]
ii) How will these choices minimize the above risk? [2.5]
c) Neeta is considering buying shares in Company P Ltd, but is concerned by the
fact that the company has a large number of choices outstanding that might
dilute her investment-
i) discuss what is meant by dilution in this context, and [2]
ii) discuss how it might affect Neeta's investment. [2]


Q. 14) a) Hilliard Corp. wants to compute its weighted avg. cost of capital (WACC).
The company's CFO has collected the subsequent information:
• The company's long-term bonds currently offer a yield to maturity of eight percent.
• The company's stock price is $32 per share (P0 = $32).
• The company recently paid a dividend of $2 per share (D0 = $2.00).
• The dividend is expected to grow at a constant rate of six percent a year (g = 6%).
• The company pays a 10 percent flotation cost whenever it problems new common
stock (F = 10%).
• The company's target capital structure is 75 percent equity and 25 percent debt.

Earning:   Approval pending.