Archana Khetan TEST SERIES

TEST- 2

NEW SCHEME FINAL COURSE – GROUP I

PAPER 2: STRATEGIC FINANCIAL MANAGEMENT
Syllabus 100%
Question 1 is compulsory.
The students may attempt any four out of the remaining five questions
All the workings shall form a part of part of your answer.
Maximum Time: 3 hours Maximum Marks: 100
1. a. XYZ Ltd. has imported goods to the extent of US$ 8 Million. The payment terms
are as under:
1. 1% discount if full amount is paid immediately or
2. 60 days interest free credit. However, in case of a further delay up to 30
days, interest at the rate of 8% p.a. will be charged for additional days after
60 days. M/s XYZ Ltd. has ` 25 Lakh available and for remaining it has an
offer from bank for a loan up to 90 days @ 9.0% p.a.
The quotes for foreign exchange are as follows:
Spot Rate INR/ US$ (buying) ` 66.98
60 days Forward Rate INR/ US$ (buying) ` 67.16
90 days Forward Rate INR/ US$ (buying) ` 68.03
Advise which one of the following options would be better for XYZ Ltd.
i. Pay immediately after utilizing cash available and for balance amount take
90 days loan from bank.
ii. Pay the supplier on 60th day and avail bank’s loan (after utilizing cash) for
30 days.
iii. Avail supplier offer of 90 days credit and utilize cash available.
Further presume that the cash available with XYZ Ltd. will fetch a return of 4%
p.a. in India till it is utilized.
Assume year has 360 days. Ignore Taxation.
Compute your working upto four decimals and cash flows in ` in Crore.
(8 Marks)

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TEST SERIES B KHETAN EDUCATION
b. Following are the yields on Zero Coupon Bonds (ZCB) having a face value of `
1,000
Maturity (Years) Yield to Maturity (YTM)
1 10%
2 11%
3 12%
Assume that the term structure of interest rate will remain the same.
You are required to
i. Calculate the implied one year forward rates
ii. Expected Yield to Maturity and prices of one year and two year Zero Coupon
Bonds at the end of the first year.
(8 Marks)

c. Explain the difference between Forward and Future Contract. (4 Marks)

2. a. SAM Ltd. has just paid a dividend of ` 2 per share and it is expected to grow
@ 6% p.a. After paying dividend, the Board declared to take up a project by
retaining the next three annual dividends. It is expected that this project is of same
risk as the existing projects. The results of this project will start coming from the
4th year onward from now. The dividends will then be ` 2.50 per share and will
grow @ 7% p.a.
An investor has 1,000 shares in SAM Ltd. and wants a receipt of at least ` 2,000
p.a. from this investment.
Interpret how the market value of the share is affected by the decision of the
Board. Also advise as to how the investor can maintain his target receipt from the
investment for first 3 years and improved income thereafter, given that the cost
of capital of the firm is 8%. (8 Marks)

b. The current spot exchange rate is $1.35/£ and the three-month forward rate is
$1.30/£. According to your analysis of the exchange rate, you are quite confident
that the spot exchange rate will be $1.32/£ after 3 months.
i. Suppose you want to speculate in the forward market then what course of
action would be required and what is the expected dollar Profit (Loss) from
this speculation?
ii What would be your Profit (Loss) in Dollar terms on the position taken as
per your speculation if the spot exchange rate turns out to be $1.26/£.
Assume that you would like to buy or sell £10,00,000.
(8 Marks)

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Archana Khetan TEST SERIES

c. Discuss briefly the problems faced in the growth of Securitization of Instruments

in Indian context.
(4 Marks)

3. a. There are two Mutual Funds viz. D Mutual Fund Ltd. and K Mutual Fund Ltd.
Each having close ended equity schemes.
NAV as on 31-12-2019 of equity schemes of D Mutual Fund Ltd. is ` 70.71 (consisting
99% equity and remaining cash balance) and that of K Mutual Fund Ltd. is 62.50
(consisting 96% equity and balance in cash).
Following is the other information:
Particular Equity Schemes
D Mutual Fund Ltd. K Mutual Fund Ltd.
Sharpe Ratio 2.00 3.3
Treynor Ratio 15.00 15.0
Standard deviation 11.25 5.0
There is no change in portfolios during the next month and annual average cost is ` 3
per unit for the schemes of both the Mutual Funds.
If Share Market goes down by 5% within a month, calculate expected NAV after a month
for the schemes of both the Mutual Funds.
For calculation, consider 12 months in a year and ignore number of days for particular
month.
(8 Marks)

b. The following are the financial statements of A Ltd., and B Ltd. for the financial
year ended 31st March, 2020. Both the companies are working in the same industry.
Balance Sheets (`)
Particulars A Ltd. B Ltd.
Total Current Assets 15,00,000 12,00,000
Total Net Fixed Assets 12,00,000 6,00,000
Total Assets 27,00,000 18,00,000
Equity Capital (Face Value ` 10) 10,00,000 8,00,000
Retained Earnings 3,00,000 ---
14% Long Term Debt 7,00,000 5,00,000
Total Current Liabilities 7,00,000 5,00,000
Total Liabilities 27,00,000 18,00,000
Income Statement (`)
Particulars A Ltd. B Ltd.
Net Sales 33,10,000 16,60,000

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TEST SERIES B KHETAN EDUCATION
Gross Profit 6,90,000 3,40,000
Operating Expenses 2,00,000 1,00,000
Interest 98,000 70,000
EBT 3,92,000 1,70,000
Tax @ 30% 1,17,600 51,000
PAT 2,74,400 1,19,000
Additional information :
Dividend Pay-out Ratio 40% 60%
Market Price per Share 40 15
You are required to calculate:
i. Earnings Per share (EPS), Profit Earning Ratio (PER), Return on Equity
(ROE) and Book Value Per Share (BVPS) for both the firms.
ii. Estimate future EPS growth rate for both the firms.
iii. If on acquisition of B Ltd. by A Ltd., intrinsic value of B Ltd., will be ` 20
per share, develop range of justifiable Exchange Ratio (ER) that can be
offered by A Ltd., to shareholders of B Ltd.
iv. Based on your analysis in (i) and (ii) whether the negotiated ratio will be close
to upper or lower range. Justify.
v. Post-merger EPS on an ER of 0.4: 1. What will be immediate accretion or
dilution to EPS to the shareholders of both the firms?
vi. Post-Merger MPS on the basis of ER of 0.4 : 1

(8 Marks)

c. Examine briefly the various innovative methods of funding the Startups.

(4 Marks)

4. a. Mr. SG sold five 4-Month Nifty Futures on 1st February 2020 for ` 9,00,000. At
the time of closing of trading on the last Thursday of May 2020 (expiry), Index turned
out to be 2,100. The contract multiplier is 75.
Based on the above information calculate:
i. The price of one Future Contract on 1st February 2020.
ii Approximate Nifty Sensex on 1st February 2020 if the Price of Future Contract
on same date was theoretically correct. On the same day Risk Free Rate of Interest
and Dividend Yield on Index was 9% and 6% p.a. respectively.
iii. The maximum Contango/ Backwardation.
iv. The pay-off of the transaction.
Note: Carry out calculations on month basis
(8 Marks)

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Archana Khetan TEST SERIES

.
b. You are interested in buying some equity stocks of RK Ltd. The company has 3
divisions operating in different industries. Division A captures 10% of its industries
sales which is forecasted to be ` 50 crore for the industry. Division B and C captures
30% and 2% of their respective industry's sales, which are expected to be ` 20 crore
and ` 8.5 crore respectively. Division A traditionally had a 5% net income margin,
whereas divisions B and C had 8% and 10% net income margin respectively. RK
Ltd. has 3,00,000 shares of equity stock outstanding, which sell at ` 250.
The company has not paid dividend since it started its business 10 years ago.
However, from the market sources you come to know that RK Ltd. will start paying
dividend in 3 years time and the pay-out ratio is 30%. Expecting this dividend, you
would like to hold the stock for 5 year. By analysing the past financial statements,
you have determined that RK Ltd.'s required rate of return is 18% and that P/E ratio
of 10 for the next year and on ending P/E ratio of 20 at the end of the fifth year are
appropriate (8 Marks)

c. Differentiate between Economic Value Added (EVA) and Market Value Added
(MVA) (4 Marks)

5. a. Eager Ltd. has a market capitalization of ` 1,500 crores and the current market price
of its share is ` 1,500. It made a PAT of ` 200 crores and the Board is considering
a proposal to buy back 20% of the shares at a premium of 10% to the current market
price. It plans to fund this through a 16% bank loan. The company's corporate tax
rate is 30%. Calculate the post buy back Earnings Per Share (EPS).

b. ABC Ltd. is intending to acquire XYZ Ltd. by way of merger and the following
information is available in respect of these companies:
ABC Ltd. XYZ Ltd.
Total Earnings (E) (in lakh) ` 1200 ` 400
Number of outstanding shares (S) (in lakh) 400 200
Price earnings ratio (P/E) 8 7
a.Determine the maximum exchange ratio acceptable to the shareholders of ABC
Ltd., if the P/E ratio of the combined firm is expected to be 8?
b. Determine the minimum exchange ratio acceptable to the shareholders XYZ Ltd.,
if the P/E ratio of the combined firm is expected to be 10?
Note : Make calculation in lakh multiples and compute ratio upto 4 decimal points.

(8 Marks)

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TEST SERIES B KHETAN EDUCATION
c. An individual attempts to found and build a company from personal finances or from the
operating revenues of the new company. What this method is called? Discuss any two
methods. (4 Marks)

6. a.Following are the details of a portfolio consisting of three shares:

Share Portfolio Beta Expected Total variance
weight return in %
X 0.30 0.30 13 0.015
Y 0.40 0.40 16 0.025
Z 0.30 1.10 21 0.100
Standard Deviation of Market Portfolio Returns = 10%
You are given the following additional data:
Covariance (X, Y) = 0.030
Covariance (X, Z) = 0.020
Cova1riance (Y, Z) = 0.040
Calculate:
i. The Portfolio Beta
ii. Residual variance of each of the three shares
iii. Portfolio variance using Sharpe Index Model
iv. Portfolio variance (on the basis of modern portfolio theory given by Markowitz)
(8 )
b. Consider a two year American call option with a strike price of ` 50 on a stock the current
price of which is also ` 50. Assume that there are two time periods of one year and in each year
the stock price can move up or down by equal percentage of 20%. The risk free interest rate is
8%. Using binominal option model, calculate the probability of price moving up and down.
Also draw a two step binomial tree showing prices and payoffs at each node.
(8)

c. DISTINGUISH between Primary participants and secondary participants in

securitization ? (4 )

*ALL THE BEST*

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