Roll No.

: JI/2019-21/0008
Name: Akshat Jain
Batch: 2019-21
Trimester: 3rd
Course Code: FIN301
Course Title: Advanced Corporate Finance
Date: 13-04-2020
Day: Monday
Start Time: 10:00 AM

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Ans 2:
Determining whether a Swap Deal can be effected
Existing Aggregate = 8% + (L + 3%) = L+ 11%
Revised Aggregate = (L + 1%) + 12% = L + 13%
Revised – Existing = (L+13%) -(L+11%) = 2%
Total Profit = 2%
Less- Commission= 1%
Profit= 1%

Profit to each party-

A = 0.5%
B = 0.5%
Effective Cost to A = L+1%-0.5% = L+0.5%
Effective Cost to B = 12%-0.5% = 11.5%

A (Fixed Leg):
The Swap Bank shall borrow from A on Notional Basis at the same rate that A pays to his
bank, i.e. 8%.
Thereby Swap Bank shall reimburse the interest of same amount to A that he has paid to his
bank.
In turn, A shall borrow from the Swap Bank on Notional basis at an interest rate which is
0.5% lower than the rate offered by his bank, i.e. L+0.5%
With this arrangement, A could convert his Fixed Rate loan into a Floating Rate Loan, that
too at lower rate.
LIBOR= 15% View point of A

Interest paid to own bank (Actual)

10000000*8% 80000
Interest received from Swap bank (Notional)
10000000*8% 80000
Interest Paid to Swap Bank (Notional)
10000000*15.5% 155000

Net paid to Swap Bank (Actual) 75000

B (Floating Leg):
The Swap Bank shall borrow from B on Notional Basis at the same rate that B pays to his
bank, i.e. L+3%
Thereby Swap Bank shall reimburse the interest of same amount to B that he has paid to his
bank.
In turn, B shall borrow from the Swap Bank on Notional basis at an interest rate which is
0.5% lower than the rate offered by his bank, i.e. 11.5%

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With this arrangement, Krishna could convert his Floating Rate loan into a Fixed Rate Loan,
that too at lower rate.
LIBOR = 15% View point of B
Interest paid to own bank (Actual)
10000000*18% 180000
Interest received from Swap bank (Notional)
10000000*18% 180000
Interest Paid to Swap Bank (Notional)
10000000*11.5% 115000

Net received from Swap Bank (Actual) 65000

Income of SWAP bank:

Received from A = 65000
Paid to B = 55000
Profit = 10000 (1% of 10L)

Ans 1
Rajesh will take Long Position under Put option and Short Position under Call option-

(a)
Exercise price (X) = 3250
Call Premium (C) = 100
Short Call = Min (X-S,0) + C

When S = 3000
Min (3250-3000,0) + 100
= 100
Total amount received = 3000+100 = 3100

When S = 3250
Min (3250-3250,0) + 100
= 100
Total amount received = 3250+100 = 3250

When S = 3500
Min (3250-3500,0) + 100
= -150
But Rajat will but at 3250 which will make profit of-
3250+100 = 3350

(b)
Exercise price (X) = 2750
Put Premium (P) = 100
Long Put = Max (X-S,0) - P

When S = 2500
Max (2750-2500,0) - 100

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= 150
Total amount received = 2750+150 = 2900

When S = 3200
Max (2750-3200,0) - 100
= -100
Total amount received = 3200-100 = 3100

( c)
Protective Collar strategy would be used:
In this Mr. Rajesh would buy Put Option and at the same time will write Call Option, the
strategy will save his stock from the low market price.
Advantages:
Unlimited Profit Minimum amount he will receive is 5500000
No risk of lower market prices.
Premium given received became zero.

Ans 3:
Optimal Hedge Ratio= rΔsΔf * σΔs/ σΔf
= 0.928 * 1.96%/1.64%
= 1.109
No. of contract = 2926/10 = 292.6
= 292.6 * 1.109
= 324.49 Contracts

Ans 4:
Rajat Spa herbal
EPS 22.5 9.5
Book value per share 115 130
MPS 252 77

(a)
Exchange ratio (BVPS)
= BVPS of Spa / BVPS of Rajat
= 130/115
= 1.13
Exchange Ratio (EPS)
= 9.5/22.5
= 0.42
Exchange Ratio (MPS)
= 77/252
= 0.30
= 1.13+0.42+0.30 / 3
= 0.61

(b)
PAT = (630+66.5) * 1.05
= 731.325
731.325/(28+x10) = 22.5

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X = 0.64

(c)
Earnings = 630+66.5 = 696.5
= 696.5/(28+0.33*7)
= 23.41

(d)
Max exchange ratio = (-S1/S2) + ((E1+E2)*PE12)/P1S2))
= 1.92 approx

(e)
Min exchange ratio = P2S1/ (PE12)(E1+E2)(1+S)-P2S2
= 0.229 approx

(f)
(-S1/S2)+ ((E1+E2)*x/P1S2)) = P2S1 / ((x(E1+E2)(1+s)-P2S2))
= 26.97

(g)
PVR= 252*28M = 7056M
PVS= 77*7M = 539M
Benefit = Rs.1000 million
PVRS=7056+539+1000 = 8595M
Exchange ratio = 1:3
The share of Spa Limited in the combined entity will be 2.33 / 28+2.33 = 0.076
True cost To Rajat Limited for acquiring Spa Limited
Cost=PVRS-PVS= 0.076 x 8595 - 596= Rs.114.22

(h)
Limitation of EPS as the basis of determining exchange ratio:
 The growth rate of two companies are different which EPS will not take into
consideration
 The risk involves in both the companies are different which EPS will not account:

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