Detailed information should form the part of your answer (Word limit 200 to 250 words). PRODUCTION AND OPERATION MANAGEMENT. Section A: Multiple choices: 1. If the number of restrictions on sources be ‘a’ and the number of restrictions on destinations be ‘b’ then with the use of ‘stepping stone procedure’, the number of ‘used cells’ will be a. a+b+1 b. a+b+2 c. a-b-1 d. a+b-1 2. Value of smoothing coefficient ‘α’ lies a. Between 1 and ∞ b. Between 0 and 1 c. Between -1 and 1 d. Between 1 and 2 3. Forecasting error is a. The difference between forecasted demand and actual demand b. The ratio of forecasted demand and actual demand c. The difference between the standard forecast demand and the evaluated forecast demand d. Ratio of standard forecast demand and the evaluated forecast demand 4. For forecasting the analyzers plot the demand data on a time scale, study the plot and then look for the consistent patterns. Now what does the high noise mean to these patterns a. Many of the point lie away from the pattern b. Most of the points lie close to the pattern c. All the points lie on the pattern d. None 5. Payback period is a. The length of time after which the production starts b. The length of time after which the selling starts c. The length of time required to recover the investment d. The length of time for which firm bears replacement of the good. 6. Salvage value is the income from a. Selling an asset b. Buying an asset c. Bargaining in selling d. Price raised stock 7. On total factor basis ‘Productivity’ is given by x/y, where ‘y’ is a. Labor + Capital +Materials b. Labor + Capital + Materials + Energy c. Capital d. Capital + Materials 8. Economic efficiency is given by a. Input /output b. Input /100 c. (Output-input)/input d. Output /input 9. This implies an effective management that ensures an organization’s long- term commitment to the continuous improvement of quality. a. Quality management b. Strategic management c. Total quality management d. Operations management 10. This techniques for improving productivity involves analyzing the operations of the product or service, estimate the value of each operation, and modifying (or) improving that operation so that the cost is lowered. a. Value engineering b. Time-event network c. Work simplifications d. Quality circles ================================================================ Caselet 1 COMPANY BACKGROUND The Bronson Insurance Group was originally founded in 1900 in Auxvasse, Missouri, by James Bronson. The Bronson Group owns a variety of companies that underwrite personal and commercial insurance policies. Annual sales of the Bronson Group are $100 million. In recent years, the company has suffered operating losses. In 1990, the company was heavily invested in computer hardware and software. One of the problems the Bronson Group faced (as well as many insurance companies) was a conflict between established manual procedures and the relatively recent (within the past 20 years) introduction of computer equipment. This conflict was illustrated by the fact that much information was captured on computer but paper files were still kept for practical and legal reasons. FILE CLERKS The file department employed 20 file clerks who pulled files from stacks, refilled used files, and delivered files to various departments including commercial lines, personal lines, and claims. Once a file clerk received the file. Clerks delivered files to underwriters on an hourly basis throughout the day. The average file clerk was paid $8,300 per year. One special file clerk was used full time to search for requested files that another file clerk had not been able to find in the expected place. It was estimated that 40 percent of the requested files were these “no hit” files requiring a search. Often these “no hit” files were eventually found stacked in the requester’s office. The primary “customers” of the file clerks were underwriters and claims attorneys. UNDERWRITING Company management and operations analysts were consistently told that the greatest problem in the company was the inability of file clerks to supply files in a speedy fashion. The entire company from top to bottom viewed the productivity and effectiveness of the department as unacceptable. An underwriter used 20-50 files per day. Because of their distrust of the files department, underwriters tended to hoard often used files. A count by operations analysts found that each underwriter kept from 100-200 files in his or her office at any one time. An underwriter would request a file by computer and work on other business until the file was received. Benson employed 25 underwriters. MANAGEMENT INFORMATION SYSTEM Upper management was deeply concerned about this problem. The MIS department had suggested using video disks as a possible solution. A video disk system was found that would be sufficient for companies needs at a cost of about $12 million. It was estimated that the system would take two years to install and make compatible with existing information systems. Another, less attractive was using microfilm. A microfilm system would require underwriters to go to a single keyboard to request paper copies of files. The cost of a microfilm system was $5 million. 1. What do you recommend? Should the company implement one of the new technologies? Why or why not? 2. An operations analyst suggested that company employees shared a “dump on the clerks” mentality. Explain. =============================================================== Caselet 2 Harrison T. Wenk III is 43, married, and has two children, ages 10 and 14. He has a master’s degree in education and teachers junior high school music in a small town in Ohio. Harrison’s father passed away two months ago, leaving his only child an unusual business opportunity. According to his father’s will, Harrison has 12 months to become active in the family food-catering business, Kare- Full Katering, Inc., or it will be sold to two key employees for a reasonable and fair price. If Harrison becomes involved, the two employees have the option to purchase a significant, but less than majority, interest in the firm. Harrison’s only involvement with this business, which his grandfather established, was as an hourly employee during high school and college summers. He is confident that he could learn and perhaps enjoy the marketing side of the business, and that he could retain the long-time head of accounting/finance. But he would never really enjoy day-to- day operations. In fact, he doesn’t understand what operations management really involves. In 1991 Kare-Full Katering, Inc. had $3.75 million in sales in central Ohio. Net profit after taxes was $ 105,000, the eleventh consecutive year of profitable operations and the seventeenth in the last 20 years. There are 210 employees in this labor-intense business. Institutional contracts account for over 70 percent of sales and include partial food services for three colleges, six commercial establishments) primarily manufacturing plants and banks), two long -term care facilities, and five grade schools. Some customer location employs a permanent operations manager; others are served from the main kitchens of Kare-Full Katering. Harrison believes that if he becomes active in the business, one of the two key employees, the vice president of operations, will leave the firm.Harrison has decided to complete the final two months of this school year and then spend the summer around Kare-Full Katering – as well as institutions with their own food services – to assess whether he wants to become involved in the business. He is particularly interested in finding out as much as possible about operations. Harrison believes he owes it to his wife and children to fairly evaluate this opportunity. 1. Prepare a worksheet of operations activities that Harrison should inquire about this summer. 2. If you were Harrison, what would you do? Why?. Business Communication Section A: Objective Type Multiple choices: 1. __________is an essential function of Business Organizations: a. Information b. Communication c. Power d. None of the above 2. Physiological Barriers of listening are: a. Hearing impairment b. Physical conditions c. Prejudices d. All of the above 3. Which presentation tend to make you speak more quickly than usual: a. Electronic b. Oral c. Both ‘a’ and ‘b’ d. None of the above 4. What is the main function of Business Communication: a. Sincerity b. Positive language c. Persuasion d. Ethical standard 5. The responsibilities of the office manager in a firm that produces electronics spares is: a. Everything in the office runs efficiently b. Furniture and other equipment in the office is adequate c. Processing all the incoming official mail and responding to some d. All of the above 6. Labov’s Storytelling Model based on: a. Communication through speech b. Language learning c. Group Discussions d. None of the above 7. Diagonal Communication is basically the: a. Communication across boundaries b. Communication between the CEO and the managers c. Communication through body language d. Communication within a department 8. How to make Oral Communication Effective? a. By Clarity b. By Brevity c. By Right words d. All of the above 9. Direct Eye contact of more than 10 seconds can create: a. Discomfort & Anxiety b. Emotional relationship between listeners and speakers c. Excitement d. None of the above 10. Encoding means: a. Transmission b. Perception c. Ideation d. None of the above ==================================================== Case let 1 Mr. and Mrs. Sharma went to Woodlands Apparel to buy a shirt. Mr. Sharma did not read the price tag on the piece selected by him. At the counter, while making the payment he asked for the price. Rs. 950 was the answer. Meanwhile, Mrs. Sharma, who was still shopping came back and joined her husband. She was glad that he had selected a nice black shirt for himself. She pointed out that there was a 25% discount on that item. The counter person nodded in agreement. Mr. Sharma was thrilled to hear that “It means the price of this shirt is just Rs. 712. That’s fantastic”, said Mr. Sharma. He decided to buy one more shirt in blue color. In no time, he returned with the second shirt and asked them to be packed. When he received the cash memo for payment, he was astonished to find that he had to pay Rs. 1,900 and Rs. 1,424. Mr. Sharma could hardly reconcile himself to the fact that the counter person had quoted the discounted price which was Rs. 950. The original price printed on the price tag was Rs. 1,266. Questions 1. What should Mr. Sharma have done to avoid the misunderstanding? 2. Discuss the main features involved in this case. ============================================================== Case let 2 I don’t want to speak to you. Connect me to your boss in the US,” hissed the American on the phone. The young girl at a Bangalore call centre tried to be as polite as she could. At another call centre, another day, another young girl had a Londoner unleashing himself on her, “Young lady, do you know that because of you Indians we are losing jobs?” The outsourcing backlash is getting ugly. Handling irate callers is the new brief for the young men and women taking calls at these outsourced job centers. Supervisors tell them to be ‘cool’. Avinash Vashistha, managing partner of NEOIT, a leading US-based consultancy firm says, “Companies involved in outsourcing both in the US and India are already getting a lot of hate mail against outsourcing and it is hardly surprising that some people should behave like this on the telephone.” Vashistha says Indian call centres should train their operators how to handle such calls. Indeed, the furor raised by the Western media over job losses because of outsourcing has made ordinary citizens there sensitive to the fact that their calls are being taken not from their midst, but in countries such as India and the Philippines. The angry outbursts the operators face border on the racist and sexist, says the manager of a call centre in Hyderabad. But operators and senior executives of call centres refuse to go on record for fear of kicking up a controversy that might result in their companies’ losing clients overseas. “It’s happening often enough and so let’s face it,” says a senior executive of a Gurgaon call centre, adding, “This doesn’t have any impact on business.” Questions 1. Suppose you are working as an operator in a call centre in India and receiving calls from Americans and Londoners. How would you handle such calls? 2. Do you agree with the view such abusive happenings on the telephone do not have any impact on business? Indian Foreign Trade Section A: Objective Type Part One: 1. Which of the following is NOT an initiative for attracting a higher Quantum of FDI? a. Further Liberalization of Foreign Trade Policy b. Rationalisation of Labour Policy c. Development of Infrastructure d. Increase in Joint ventures 2. ECB stands for ______________________________ 3. The textile and garment exports have been affected due to __________________ 4. _____ is a popular export inductive scheme. 5. To overcome many of the problems associated with the advance licensing system this scheme was introduced a. Passbook Scheme b. EPGC Scheme c. Post Export Duty Exemption Scheme d. Duty Drawback Scheme 6. Which of the following is a potential Export product a. Automobile Products b. Leather Products c. Agricultural Products d. Engineering Products 7. To give a special trust for export of computer software which of the following scheme was developed a. DEPB Scheme b. EPCG Scheme c. EOU/EPI Scheme d. Duty Exemption scheme 8. It is a bilateral agreement between two countries to purchase specific amounts of each other’s products over a specified period of time a. Swap b. Switch c. Clearing d. Evidence Accounts 9. TRIPS stands for ____________________________ 10. Foreign Investment Promotion Board does not consist which of the following member a. Secretary Minister of External Affairs b. Industry Secretary - Chairman c. Foreign Investment Minister d. Finance Secretary ============================================= Caselet 1 An American World Wide Corporation has decided to expand aggressively in Asia. It plans to source much of its raw materials and subcontracting there and manufacture and market throughout Asia, from Japan in the north to New Zealand in the South. You were appointed to organize and direct this major new effort and one question was where to locate the regional headquarters for the Asian Division (ADR). After considerable study, you selected the island nation of Luau. Luau’s advantages are several. It is about equidistant between New Zealand and Japan. It was a British Colony, so the main language is English. It has a relatively efficient telephone and telegraph system and good air service to all the major Asian destinations in which you are interested and to the United states, as well. Not least important, the Luau government is delighted to have your company locate and invest there. It has made very attractive tax concessions to the company and to its personnel who will move there. The company moves in, leases one large building and puts out invitations to bid on the construction of a large building which will be its permanent headquarters. Now as you begin to work much more with the private banking and business people of luau and less with government officials, you begin to be more aware of luau characteristics about which you had not thought much previously. Almost all of the middle and upper management personnel in the business and finance sector are of Chinese extraction. The native population of luau, which is the majority, is a Micronesian race. On enquiry why the Chinese are dominant in banking and business; while the Micronesians stay with farming, fishing, government and manual labor, you are told that this is the way it developed historically. The Chinese enjoy and are good at banking and business; while the native Luauans do not like those activities and have stayed with their traditional pastimes. The two groups buy and sell from and to each other, but there are almost no social relations and very little business or professional overlap between the groups. Occasionally, some of the Micronesians study abroad and some work abroad for periods; when they return they frequently go to work in a bank or business or take a government position. You must staff your headquarters with middle and lower management people and with clerical help. You find that the only applicants for the jobs are Chinese, and you select the best available. They are quite satisfactory, and the operation gets off to a good start. Then as the months pass, you notice a gradual change of attitude towards you and the company among the government officials and among the people in general. They have become less friendly, more evasive, and less co-operative. You ask your Chinese staff about it, but they have noticed nothing unusual. Required Q. Give some suggestions to improve the Government and Public Relations? ====================================================== Caselet 2 Vertex, the tenth largest bank in the world has promoted world – class institutions in India. A few of such institutions built by Vertex are National Stock Exchange, The National Securities Depository Services Limited, Stock Holding Corporation of India etc. vertex is a strategic investor in a plethora of institutions, which have revolutionized the Indian Financial Markets. Vertex promoted Vertex Bank to make the formal foray of the Vertex group into commercial banking. The birth of Vertex Bank took place after RBI issued guidelines to for the entry of new private sector banks in January 19, 1993. Subsequently, Vertex as promoters sought permission to establish a commercial bank and retained KPMG a management consultant of international repute to prepare the groundwork for establishing a commercial Bank. Vertex successfully completed its public issue in February 1999, which led to its paid – up capital expanding to Rs. 1400 million. The promoters holding consequent to this public issue stood reduced to 71% with Vertex holding 57% and SIDBI 14% of the paid –up capital of Vertex Bank. This was in line with the requirement of RBI which stipulated that eventually the promoters holding should be bought down to 40%. Banking as a whole was undergoing a change in India. With the retail – banking sector expected to grow at a rate of 30%, players were focusing more and more on the retail sector. In 2000, there was a corporate shift in the emphasis of Vertex bank from corporate banking to retail Banking. This shift was mainly initiated due to the change in the top management at corporate office and also due to a paradigm shift in the global banking industry from corporate banking to retail Banking. The bank felt the need to provide its retail clients with complete banking solutions under one roof top penetrate the retail sector. In line with the change in emphasis, Vertex Bank decided to divide the functions of Rajendra Pillai who was earlier looking after both corporate and retail services, by appointing a young and dynamic management graduate Sanjay Singh to head the retail banking segment. The following were some of the measures adopted by the bank for promoting its retail products. Product: The bank introduced a wide array of retail banking products in order to penetrate the retail – banking segment. Earlier, the bank had concentrated on big retail clients. Only clients having a minimum balance of Rs. 25,000 were allowed to open a savings account. However, the minimum balance requirement was lowered to Rs. 5,000. The first category consisted of clients having an average quarterly balance of Rs 5 lakh and above, and the second category consisted of customers having an average quarterly balance of Rs. 25 lakh and above. These preferred customers were provided special facilities like home delivery of demand drafts. The facilities were higher in the first category of clients. State – of –the – art technology was used in the banking services by introducing ATMs, Internet banking, demat services, International debit cards with multiple currency facility options available globally etc. Direct Tax Payments: The Reserve Bank of India has authorized Vertex bank to conduct all government transactions pertaining to the Central and State Government ministries and non – civil ministers e.g. Indian Railways Income tax etc. Investment Options: Bank helped clients to invest in government bonds, relief bonds, Suvidha bonds,insurance policies etc. ATMs: Vertex bank had set up 7 ATMs in Indore at prominent locations to facilitate better customer service. The cost of availing an ATM card facility entailed an annual charge of Rs. 99. From their inception, ATMs were being used merely as cash dispensing machines. Just four years back, people were apprehensive of using ATMs for cheque/cash deposit. They feared the loss/ misuse of their cheques/cash, if they deposited it in the ATMs. Demat Account: The bank offer the demat account dealing in physical securities. The demat account took care of all customers worries involved in portfolio management which was facilitated electronically. Debit Cards: All the account holders of the bank were issued debit cards. These cards could be used for ATM transactions and for payment of the purchase made at several retail outlets. The bank did not provide any Credit Card facilities. World Currency Card: This card was exclusively designed for international travelers’ needs. From a single card, customers can make payments/withdrawls in five foreign currencies. Cards: This card was issued to Vertex saving Account holders and had a minimum limit of Gift Rs. 51,000. The card enabled clients to make payment at various gift stores throughout the country. Home Loans: The bank offered home loans at a competitive interest rates for purchase, construction, refinance, extension etc. Phone Banking and Mobile Phone Banking: Banking services such as updated balance, details of last five transactions, request for cheque book etc, were offered free of cost. Internet Banking: All banking solutions were offered on the Vertex Website www.vertexbank.com. The bank believed in providing anywhere anytime banking to its customers. Promotion: The corporate office was promoting the retail products through nationwide ad campaigns. These campaigns used billboards and hoardings mounted on kiosks. These campaigns were highly innovative using animals for promoting major themes of customized services. The bank was, however, not using any electronic media for advertising and used sales promotion for selling some of the products like gift cards. Initially, the branch was allowed a promotional budget of Rs. 2 – 3 lacs in order to establish itself in the market. Distribution: In order to support Sanjay Singh, a marketing team was appointed which consisted of two young sales managers and 20 marketing executives who operated in the field. These marketing representatives engaged in direct marketing included personal selling. The sales force was totally target – oriented and various incentives were provided to the star performers. HR Policies: In order to develop and motivate the sales force the bank had come up with key result areas like budgets, star performance incentives etc. under this activity each employee’s performance was appraised through a unique five – tier performance appraisal system. The employee was also given a certificate of appreciation for his excellent performance. For creating a sense of belongingness, the birthdays of employees were celebrated by flashing their name and birthday greetings on the Intranet. The employee was also presented with a bouquet. The bank had been able to increase its retail customers from 20,000 to 40,000 in Indore. The contribution of retail services to the annual profits had increased from Rs. 73 Crores to Rs. 123 Crores nationwide and from 1.50 Crores to 3.5 Crores for the Indore branch. Vertex bank as a whole had the lowest Non Performing Assets (NPA) amongst private banks namely 0.2% and was known for its efficiency. The Indore branch had established itself as number one private banks in terms of overall profitability. In the present scenario, Sanjay Singh wondered whether the strategies adopted for penetrating the retail market were sufficient to retain current customers and attract new ones. With aggressive promotional strategies followed by other banks and the proposed entry of Citicorp, he pondered on whether the current strategies would continue to be effective in the long run. Questions Q 1. Discuss the measures adopted by the bank for promoting its retail products? Q2. Evaluate the impact of strategies on financial performance of the firm? Foreign Exchange Management Section A: Objective Type Part One: 1. It is established to help countries in reconstructing their economies in the post World War II? a. International Monetary Fund b. World Bank c. International Finance Corporation d. International Development Association 2. The exchange rates which is variable between currencies and determined by demand and supply a. Floating Exchange Rate System b. Free Float d. Managed float c. Fixed Exchange Rate System 3. The branches which do not maintain independent foreign currency accounts but have powers to operate the accounts falls under a. Category A b. Category C c. Category B d. Category D 4. _____ quote is given by a bank to its retail customers a. Merchant Quote b. American Quote c. Interbank Quote d. European Quote 5. To take the base rate and add the appropriate margin to it is an a. Spot TT Buying Rate b. Forward TT Buying Rate c. Spot TT Selling Rate d. Forward TT Selling Rate 6. Which of the following is not an assumption to Law of One Price a. Movement of Goods b. No Tariffs d. Relative Form of PPP c. No Transaction Costs 7. The approach in which the value of a currency is determined by the relative demand and supply of money and, the relative demand and supply of bonds is a. The Monetary Approach b. The Asset Approach c. Exchange Rate Volatility Approach d. The Portfolio Balance Approach 8. Which of the following is the most important currency in the world after the collapse of Bretten Woods a. Yen b. Sterling c. US Dollar d. DM 9. Option Forward is a a. Forward Contract entered along with buying a call option. b. Forward Contract entered along with writing a put option c. Forward Contract entered by buying or selling at a future date. d. Forward Contract entered by buying or selling over a period. 10. Hedging aims to a. Increase Profits b. Maximize Profits c. Reduce Costs d. Minimize Risk ================================================ Caselet 1 International asset swaps can be used to achieve international diversification without eroding the level of foreign exchange reserves and weakening local market development. These asset swaps demand limited foreign currency flows, which implies that there is a need for only net gains or losses to be exchanged. Asset swaps protect foreign investors from market manipulation and expropriation risk and have much lower transaction costs than outright investments. In spite of all this, asset swaps are constrained by the attractiveness of local markets to foreign investors, and by various regulatory issues covering counter-party risk, collateral considerations, accounting, valuation, and reporting rules. Institutional investors, especially pension funds and life insurance companies, are becoming the major participants in the financial systems of many developing countries. In some cases like Egypt, Malaysia or Sri Lanka, the sector is dominated by public agencies, but in several countries, including Argentina, Brazil, Chile, Cyprus, Hungary, Mauritius and especially South Africa private institutions play a prominent role in the accumulation of long-term financial resources. But in most developing countries, pension funds and other institutional investors operate under strict limitations on their foreign investments, mainly because of the shortage of foreign exchange reserves and the fear of capital flight. The imposition of exchange controls on investment in foreign assets affects the financial performance of pension funds and insurance companies. Exchange controls prevent an international diversification of risk and a reduction in the exposure of contractual savings institutions to domestic currency and market risk. Pension funds and other institutional investors in most developing countries are not generally allowed to invest overseas. Even OECD countries, until the early 1980s, used to apply tight quantitative restrictions on overseas investments by local institutions. The most common rationale for such restrictions is to reduce the risk of capital ‘flight’, especially institutionalized capital flight. Another rationale is to invest the locally mobilized long-term savings ‘at home’ to stimulate the development of local capital markets and enhance employment opportunities for the same workers. Even in the absence of legal limitations on foreign investing by local institutional investors, there are other significant barriers—the most important are risk of expropriation by foreign governments and transaction costs. These costs can be so large that they may offset any diversification benefits that would otherwise accrue, especially when relatively low volumes of funds are involved. International diversification improves the risk/return trade-off of investment portfolios by reducing the exposure to cyclical and long-term structural shifts in local economic performance. In the US, where the large local economy is highly diversified and where presence of global corporations provides an indirect avenue of international diversification, overseas assets are less than 12% of total assets, although this represents a significant increase over time. Removing exchange controls and fully integrating with international capital markets should be the ultimate objective of policy in all developing countries. However, complete removal of exchange controls is often constrained by the paucity of foreign exchange reserves and the fear of stimulating capital flight, especially if confidence in future stability is low. Asset swaps are clearly a second best option compared to the lifting of exchange controls. Developing countries should consider authorizing their institutional investors to engage in international asset swaps. But they should authorize to use properly designed swap contracts, preferably based on the basket of liquid securities, permit only global investment banks to act as counter-parties, require use of global custodians, properly monitor credit risk, maintain adequate collateral, and adopt market-to-market valuation rules. Questions Q 1. How does the international asset swap mechanism work? Explain. Q2. Discuss the various benefits of international asset swaps. ===================================================== Caselet 2 The RBI held the view, for long, that strong exchange reserves need to be maintained, due to the bad experience India had to go through in 1991. It has been a widely known policy of the RBI to keep accumulating dollar reserves, whenever there are strong inflows of foreign funds, which also ensures that the rupee does not appreciate much. The policy has, over the years, resulted in the foreign exchange reserves increasing to over $100 billion. However, this policy has also led to the RBI being criticized for interfering in the foreign exchange markets too often. Several justifications have been given for this policy. The first one, as mentioned in the opening sentence, is the lack of confidence in the international architecture. That is, the liquidity support available to a country when it suffers from Balance of Payments problems could be inadequate, not available when needed urgently, or be set with political preconditions not acceptable to the country facing the problems. The second reason is often the desire to contain the risks that may arise from external shocks. External private capital often comes in when the country is doing well and exits at the first indication of trouble. Having large reserves is essential to contain the panic conditions that prevail in the markets in such situations. The third reason is the opportunity created by the current excessive liquidity in the international financial markets and the associated low interest rates. If the interest rates escalate later, capital may again reverse its direction, and flow to the markets in the developed countries. Reserves accumulated at present will be helpful to withstand such shocks later. The final reason, which is no less important, is that foreign currency reserves are required to withstand the periodical volatility in the foreign exchange markets. The markets of emerging economies are less efficient and cannot be depended upon to make automatic adjustments to correct the volatility in the markets. Similarly, a politically sensitive event like the Pokhran blasts or skirmishes with Pakistan on the border can cause a lot of Non-Resident Indians (NRIs) who are currently pumping money into the country to withdraw it over night. Such swings in sentiment can play havoc with the exchange rates, and the government will be called on to play a stabilizing role in such a situation. The consistent accumulation of dollars has been often stopping the rupee from appreciating, though there have been strong inflows of the dollar, on numerable counts in the past. The resultant liquidity released into the system used to be sterilized by the RBI through issue of government securities. To an extent, the inclination of the banks to invest in government securities beyond the statutory requirements has come in handy for the RBI in achieving stability in the exchange rate of the rupee. However, the situation changed from early last year (2003), when the rupee started appreciating against the dollar. At the same time, the rupee has been depreciating against other major currencies like the Euro and Yen, indicating that the appreciation is basically due to the weakness of the dollar against these currencies. The RBI, this time, chose to allow some amount of appreciation of the rupee, against dollar. The appreciation gained momentum due to inflows of dollars continuing, with the NRIs encouraged by the gain of the rupee. Added to this, the prices of crude oil fell, easing the pressure on the need for payments for oil imports. With the fear of losing out due to further improvement in the rupee exchange rate, exporters also rushed to remit the dollars to India, pushing the exchange rate further up. The sustained positive current account balance also appears to have had its impact in generating positive sentiments for the rupee. It has been alleged, however, that most of the fund flows to India are to gain from the arbitrage. Investors always prefer to invest in a currency that is appreciating, so that they can gain from the interest and also from the appreciation if the currency. However, this argument is refuted on several counts. The spread on the NRI deposits is capped at 2.5% and is often not more than forward premium on the dollar in the Indian market. The investment by the FIIs in debt funds is limited to $1 billion, all the FIIs put together. This cap prevents them from making any meaningful arbitrage gains. The variability in interest rates in the two currencies involved, keeping in view the narrow spreads, can add risk to the seemingly risk-less arbitrage. In view of these arguments, it can be said that the flow of dollars into India is driven by factors other than the strength of the rupee and the resultant opportunities for arbitrage. Questions - Q 1. What measures according to you the RBI should take to manage rupee-dollar exchange rates? Q2. Do you think appreciation of rupee against dollar have any significant adverse impact on the Indian economy? Discuss. Principles and Practices of Banking Section A: Objective Type Part One: Multiple Choices: 1. Frequency of First Tranche Returns is: a. Weekly b. Monthly c. Monthly/quarterly d. Monthly/quarterly/half-yearly 2. An order for winding up a banking company can be issued by: a. The High Court b. The RBI c. The Central Government d. The Supreme court 3. Who shall be natural guardian in case of married minor girl? a. Father b. Brother in law c. Father-in-law d. Husband 4. X a partner in the firm XYZ Co. wants to open a Bank account in the firm‟s name. It will require signatures of: a. All partners b. Any one of the partner c. Managing partner only d. Sleeping partner not required 5. Public limited companies should have minimum shareholders, before Opening Bank account. a. 11 b. 7 c. 5 d. 15 6. If the beneficiary is government then the Expiry of guarantee is governed by the „law of limitation‟ ranging from 3 years to: a. 15 years b. 30 years c. 20 years d. 10 years 7. Charge created on LIC Policy is: a. Lien b. Hypothecation c. Pledge d. Assignment 8. The device that combines the parallel input data into single serial output data is known as: a. Switcher b. Multiplexer c. Encoder d. Front end processor 9. In market skimming pricing strategy: a. Initially price is lower and then it is increased b. Initial price is high and is maintained high c. Initial price is low and is maintained low d. Initially price is higher and then it is reduced 10. The marketing personnel need information ………… intervals. a. At yearly b. At quarterly c. At monthly d. On a continuous basis and regular Caselet 1 There is a lacuna in the present T-Bill auction system of RBI. The dealers (investors) are subject to what is called the „Winners Curse‟. The value of a T-Bill to a dealer is the price it can fetch in the secondary market. This is an unobserved random value, which is likely to be common to all dealers. It is quite unlike the works of art which the Sotheby‟s would place at an auction. The price of Mona Lisa, say, to an avid collector of Da Vinci‟s paintings, would be more than what a Picasso collector would value it. In sharp contrast, market participants are likely to agree on the price of a T-Bill in the secondary market. Now winning an auction in a discriminatory price method may not be profitable. For, it would mean that the winner has overestimated the T-Bill value. Questions: 1. How does the winner in such an auction become the loser due to the „winner curse‟? 2. Explain the role of primary dealers in the money market. ================================================================ Caselet 2 In a bid to familiarize banks, exporters and other financial bodies with „Forfeiting‟, the State Bank of India (SBI) will soon be setting up a three-man cell at its international division in Mumbai for advisory purposes. According to Mr. D. Ian Guild, Senior Advisor, Forfeiting & Syndications Group, Standard Bank, the cell was being set up after a series of meetings with the bank, and is essentially aimed at spreading the message of Forfeiting as an effective trade financing mechanism to increase exports. Suggesting that forfeiting was the ideal springboard for effecting a quantum jump in exports in the medium-term, Mr. Guild said he was confident of aggregating forfeiting business of $100 millions in 1998 and $250 millions in 1999 in the country. Since its introduction in 1992, Exim Bank had facilitated 69 forfeiting transactions valued at around $75 millions, with credit periods ranging between 90 days and seven years, and covering the export of goods ranging from textiles to plant and machinery. The RBI has now permitted all commercial banks to act as facilitators for forfeiting transactions. Mr. Guild pointed out that forfeiting has not really taken off in India because exporters and commercial banks lacked the knowledge of the mechanics of the scheme. In India, the real challenge would be to motivate small and medium exporters to use the forfeiting route for exports to countries which may not be able to buy on cash terms. Mr. S. Bhattacharya, deputy general manager, Exim Bank, Calcutta, said: “Payment defaults by overseas buyers were an integral part of cross-border business and export credit insurance has not been a comprehensive answer to this problem”. Forfeiting offered an alternative solution, especially to exporters wishing to penetrate difficult markets for the first time, he pointed out. Some of the top international forfeiters in the world have stopped accepting forfeiting documents involving Pakistan and Russia, according to Mr. Amitabh Mehta, Trader and Originator, Forfeiting and Syndications group, Standard Bank London Ltd. (SBLL). According to Mr. Mehta, forfeiting transactions involving Pakistan could not be carried out due to poor performance of the banks there. In addition, the financial status of Pakistan following the nuclear blasts has made it impossible to carry out the transactions. Similarly, transactions with Russia are being totally rejected by forfeiting due to the current economic turmoil. Joining the list with Pakistan and Russia are Iraq, Sudan and Nigeria, he added. Commenting on the Indian situation, Mr. Mehta said, “With its sound banking system, the country is well placed in the international scene. In fact, there is tremendous potential for forfeiting in the years to come,” he said. According to him, even after the nuclear tests conducted by India, the top forfeiters were not worried and continued to accept forfeiting papers to be transacted with India. Questions: 1. Discuss the mechanism of forfeiting and the role played by banks in forfeiting transactions. 2. How does forfeiting differ from factoring? =================================================================== Financial Services Section A: Objective Type Part One: Multiple Choices: 1. NBFS stands for ………………………………………………………………………… 2. ALCO is a decision making unit responsible for balance sheet planning from risk return perspective. (T/F) 3. A contract of „Indemnity‟ is one whereby: a. A person tries to use the other‟s property b. A person promises to save the other‟s property from loss caused. c. A person tries to trick the property of other for some other person. d. None of the above 4. The transaction between the lessor and the lessee being a demand sale is called: a. First sale b. Second sale c. Third sale d. Fourth sale 5. If the net present value of leasing be „a‟ and net advantage of leasing be „b‟ then decision criterion is given by: a. a/b b. a+b c. b/a d. a-b 6. Break even lease rental BERL has NAL value equal to: a. 1 b. 2 c. 0 d. 0.5 7. The right under which an unpaid seller who is in possession of the goods is entitled to retain them until payment of the price is done is termed as ……………………………………… 8. If the no of level investments be „t‟, total no of level installments be „n‟ and total charge for credit be „c‟ then the interest rebate is given by………………………………………… 9. The practice of discounting accommodation bills is known as ……………………….. 10. HUDCO stands for ……………………………………………………………………………………………………… Caselet 1 Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit department. The cost of sales ledger administration stands at Rs 9 crores annually. It supplies chemicals to heavy industries. These chemicals are used as raw material for further use of is directly sold to industrial units for consumption. There is good demand for both the types of uses. For the direct consumers, the company has a credit policy of 2/10, net 30. Past experience of the company has been that on average 40 per cent of the customers avail of the discount while the balance of the receivables are collected on average 75 days after the invoice date. Sunlight Industries also has small dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total sales. Sunlight Industries finances its investment in debtors through a mix of bank credit and own longterm funds in the ratio of 60:40. The current cost of bank credit and long-term funds are 12 per cent and 15 per cent respectively. There has been a consistent rise in the sales of the company due to its proactive measures in cost reduction and maintaining good relations with dealers and customers. The projected sales for the next year are Rs 800 crore, up 15 per cent from last year. Gross profiles have been maintained at a healthy 22 per cent over the years and are expected to continue in future. With escalating cost associated with the in-house management of debtors coupled with the need to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight Industries is examining the possibility of outsourcing its factoring service for managing its receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals, the details of which are given below, are available for Anita‟s consideration. Proposal from Canbank Factors Ltd: The main elements of the proposal are: (i) Guaranteed payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with resource. Proposal from Indbank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and with resource 1.8 per cent. The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement, his staff would be able to exclusively focus on sales promotion which would result in additional sales of Rs 75 crores. Question: 1. The CFO of Sunlight Industries seeks your advice as a financial consultant on the alternative proposals. What advice would you give? Why? Calculations can be up to one digit only. ================================================================= Caselet 2 Following are the financial statements for A Ltd and T Ltd for the current financial year. Both firms operate in the same industry. BALANCE SHEETS Particulars Firm A Firm B Total current assets Rs 14,00,000 Rs 10,00,000 Total fixed assets (net) 10,00,000 5,00,000 _____________ __________ Total assets 24,00,000 15,00,000 _____________ ___________ Equity capital (of Rs 10 each) 10,00,000 8,00,000 Retained earnings 2,00,000 _ 14% Long-term debt 5,00,000 3,00,000 Total current liabilities 7,00,000 4,00,000 _____________ ___________ 24,00,000 15,00,000 INCOME STATEMENTS Net sales Rs 34,50,000 Rs 17,00,000 Cost of goods sold 27,60,000 13,60,000 __________ ___________ Gross profit 6,90,000 3,40,000 Operating expenses 2,96,923 1,45,692 Interest 70,000 42,000 __________ ___________ Earnings before taxes (EBT) 3,23,077 1,52,308 Taxes (0.35) 1,13,077 53,308 Earnings after taxes (EAT) 2,10,000 99,000 Additional information: __________________________________ Number of equity shares 1,00,000 80,000 Dividend payment (D/P) ratio 0.40 0.60 Market price per share (MPS) Rs 40 Rs 15 __________________________________ Assume that the two firms are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms, and are required to: (i) Decompose the share prices of both the companies into EPS and P/E components, and also segregate their EPS figures into return on equity (ROE) and book value of intrinsic value per share (BVPS) components. (ii) Estimate future EPS growth rates for each firm. (iii) Based on expected operating synergies, A Ltd estimates that the intrinsic value of T‟s equity share would be Rs 20 per share on its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by A Ltd‟s shareholders. Based on your analysis in parts (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits? Why? (iv) Calculate the post-merger EPS based on an exchange ratio of 0.4 : 1 being offered by A Ltd. Indicate the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders. (v) Based on a 0.4 :1 exchange ratio, and assuming that A‟s pre-merger P/E ratio will continue after the merger, estimate the post-merger market price. Show the resulting accretion or dilution in pre- merger market prices.
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