Professional Documents
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Q 4B CH 13 Doom LTD
Q 4B CH 13 Doom LTD
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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ii
The subject of Financial Management has acquired a critical significance now -a-days, due to
recent surge in globalization and massive cross border flow of capital. The study of this
subject opens new opportunities for Chartered Accountancy students. The paper stresses the
importance of applying the knowledge and techniques of financial management to the
planning, operating and monitoring of the finance function in particular as well as the
organization in general. Further, this paper not only focuses on these aspects at the domestic
level but also at the international level as well.
The students are expected to cover the entire syllabus and also do practice on their own while
going through this practice manual. Students are also advised to update themselves with the
latest changes in the financial sector. For this they may refer to academic updates in the
monthly journal ‘The Chartered Accountant’, Students’ Journal published by the Board of
Studies, financial newspapers etc.
The main aim of this Supplementary is provide an updation to the Practice Manual and Study
Module (January 2015 Edition), so that students who already had referred this edition for their
study can easily upgrade their knowledge. The main features of this Supplementary are as
follows:
Section A: This Section covers fresh questions along with their answers also covering
questions from November, 2014 & May, 2015 Final Examinations in the respective
chapters.
Section B: This Section covers the replacement of answers of few Questions and
Illustrations in the respective chapters of both Study Module and Practice Manual.
Section C: This Section is mainly a Rectification Section, concentrating mainly on
insertion of corrections/ alternative solutions in the Questions/ Illust rations as well as in
their Answers of both Practice Manual and Study Module. Some text of Study Module
has also been replaced.
In case you need any further clarification/guidance, please send your queries at email -id:
ashish.gupta@icai.in or write to the Director of Studies, The Institute of Chartered Accountants
of India, A-29, Sector-62, Noida-201 309.
iii
A.2
A.3
A.4
A.5
A.6
Which option would you suggest on the basis of net present values?
Answer
Cash outflow under borrow and buy option
Working Notes:
1. Calculation of Interest Amount
Year Repayment of Principal Interest (`) Closing
Principal (`) Outstanding Balance
(`) (`)
1 1,00,000 5,00,000 75,000 4,00,000
2 1,00,000 4,00,000 60,000 3,00,000
A.7
A.8
A.9
A.10
9 + P1
150 =
1.10
165 = 9 + P 1
P1 = 165 – 9 = ` 156
The market price of the equity share at the end of the year would be ` 156.
(b) If the dividend is not declared:
1
150 = × (0 + P )
1+ 0.10 1
A.11
A.12
A.13
A.14
A.15
A.16
Answer
(a) The pay-off of each leg shall be computed as follows:
Cap Receipt
Max {0, [Notional principal x (LIBOR on Reset date – Cap Strike Rate) x
Number of days in the settlement period }
365
Floor Pay-off
Max {0, [Notional principal x (Floor Strike Rate – LIBOR on Reset date) x
Number of days in the settlement period }
365
Statement showing effective interest on each re-set date
Reset Date LIBOR Days Interest Cap Floor EffectiveInterest
(%) Paymen Receipts Pay
t ($) ($) -off
LIBOR+0.50% ($)
31-12-2013 6.00 184 3,27,671 0 0 3,27,671
30-06-2014 7.00 181 3,71,918 24,795 0 3,47,123
31-12-2014 5.00 184 2,77,260 0 0 2,77,260
30-06-2015 3.75 181 2,10,753 0 0 2,10,753
31-12-2015 3.25 184 1,89,041 0 12,603 2,01,644
30-06-2016 4.25 182 2,36,849 0 0 2,36,849
Total 1096 16,01,300
A.17
A.18
Question 7
Two companies ABC Ltd. and XYZ Ltd. approach the DEF Bank for FRA (Forward Rate
Agreement). They want to borrow a sum of ` 100crores after 2 years for a period of 1 year.
Bank has calculated Yield Curve of both companies as follows:
Year XYZ Ltd. ABC Ltd.*
1 3.86 4.12
2 4.20 5.48
3 4.48 5.78
A.19
Premium (Cost of Option) ` 100 crores X 0.1% ` 0.10 crores ` 0.10 crores
4.60 crores 5.14 crores
Question 8
Following information is available in respect of expected dividend, market price and market
condition after one year.
A.20
A.21
A.22
A.23
A.24
A.25
A.26
A.27
A.28
A.29
A.30
Question 9
The risk free rate of return Rf is 9 percent. The expected rate of return on the market portfolio
Rm is 13 percent. The expected rate of growth for the dividend of Platinum Ltd. is 7 percent.
The last dividend paid on the equity stock of firm A was ` 2.00. The beta of Platinum Ltd.
equity stock is 1.2.
(i) What is the equilibrium price of the equity stock of Platinum Ltd.?
(ii) How would the equilibrium price change when
The inflation premium increases by 2 percent?
The expected growth rate increases by 3 percent?
The beta of Platinum Ltd. equity rises to 1.3?
Answer
(i) Equilibrium priceof Equity using CAPM
= 9% + 1.2(13% - 9%)
= 9% + 4.8%= 13.8%
D1 2.00(1.07) 2.14
P= = = = ` 31.47
ke - g 0.138- 0.07 0.068
(ii) New Equilibrium price of Equity using CAPM
= 9.18% + 1.3(13% - 9.18%)
= 9.18% + 4.966%= 14.146%
D1 2.00(1.10) 2.20
P= = = = ` 53.06
ke - g 0.14146- 0.10 0.04146
A.31
A.32
A.33
βB2 σ M
2
= (0.50) 2(0.01) = 0.0025
A.34
A.35
σ2m = 225
σm = 225 = 15%
(ii) Standard Deviation of Security Return
X X
βX = Xm = 0.75 =1
m 15
15
σX = = 20%
0.75
Question 3
Assuming that shares of ABC Ltd. and XYZ Ltd. are correctly priced according to Capital Asset
Pricing Model. The expected return from and Beta of these shares are as follows:
Share Beta Expected return
ABC 1.2 19.8%
XYZ 0.9 17.1%
You are required to derive Security Market Line.
Answer
CAPM = Rf+ β (Rm –Rf)
According
RABC = Rf+1.2 (Rm – Rf) = 19.8
RXYZ = Rf+ 0.9 (Rm – Rf) = 17.1
19.8 = Rf+1.2 (Rm – Rf) ------(1)
A.36
Assuming the risk-free interest rate to be 3%, you are required to determine:
a) What percentage of your portfolio should you allocate to stocks of Economy A if you want
to increase the expected rate of return on your portfolio by 0.5%?
b) What will be the standard deviation of your portfolio assuming that stocks of Economy A
are included in the portfolio as calculated above?
c) Also show how well the Fund will be compensated for the risk undertaken due to
inclusion of stocks of Economy A in the portfolio?
A.37
A.38
A.39
A.40
A.41
A.42
A.43
A.44
A.45
A.46
A.47
Question 3
There are two Mutual Funds viz. D Mutual Fund Ltd. and K Mutual Fund Ltd. Each having
close ended equity schemes.
NAV as on 31-12-2014 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:
Equity Schemes
Particular
D Mutual Fund Ltd. K Mutual Fund Ltd.
Sharpe Ratio 2 3.3
Treynor Ratio 15 15
Standard deviation 11.25 5
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.
Answer
Working Notes:
(i) Decomposition of Funds in Equity and Cash Components
A.48
A.49
Question 4
On 1st April 2009 Fair Return Mutual Fund has the following assets and prices at 4.00 p.m.
Shares No. of Shares Market Price Per Share (`)
A Ltd. 10000 19.70
B Ltd. 50000 482.60
C Ltd. 10000 264.40
D Ltd. 100000 674.90
E Ltd. 30000 25.90
No. of units of funds 8,00,000
Please calculate:
(a) NAV of the Fund on 1st April 2009.
(b) Assuming that on 1st April 2009, Mr. X, a HNI, send a cheque of ` 50,00,000 to the Fund
and Fund Manager immediately purchases 18000 shares of C Ltd. and balance is held in
bank. Then what will be position of fund.
(c) Now suppose on 2 April 2009 at 4.00 p.m. the market price of shares is as follows:
Shares `
A Ltd. 20.30
B Ltd. 513.70
C Ltd. 290.80
D Ltd. 671.90
E Ltd. 44.20
Then what will be new NAV.
A.50
5000000
No. of units of fund = 800000 = 842000
119.0475
(c) On 2nd April 2009, the NAV of fund will be as follows:
Shares No. of shares Price Amount (`)
A Ltd. 10000 20.30 2,03,000
B Ltd. 50000 513.70 2,56,85,000
C Ltd. 28000 290.80 81,42,400
D Ltd. 100000 671.90 6,71,90,000
E Ltd. 30000 44.20 13,26,000
Cash 2,40,800
10,27,87,200
` 10,27,87,200
NAV as on 2nd April 2009 = = ` 122.075 per unit
842000
Question 5
ANP Plan, a hedge fund currently has assets of ` 20 crore. CA. X, the manager of fund
charges fee of 0.10% of portfolio asset. In addition to it he charges incentive fee of 2 %. The
incentive will be linked to gross return each year in excess of the portfolio maximum value
A.51
A.52
A.53
A.54
A.55
A.56
A.57
A.58
A.59
A.60
Answer
Individual Basis
Interest Amt. after 91 Conversion in £
days
Holland £502,414.71
€ 725,000 x 0.02 x 91/360 = € 3,665.28 € 728,665.28 (728,665.28 x 0.6895)
Switzerland £432,651.51
CHF 998,077 x 0.005 x 91/360 = CHF 1,261.46 CHF 999,338.46 (999,338.46÷2.3098)
UK
£ 75,000 x 0.01 x 91/36 = £ 189.58 £ 75,189.83 £ 75,189.83
Total GBP at 91 days £ 1,010,256.05
Swap to Sterling
Sell € 7,25,000 (Spot at 0.6858) buy £ £ 4,97,205.00
Sell CHF 9,98,077(Spot at 2.3326) buy £ £ 4,27,881.76
Independent GBP amount £ 75,000.00
£ 1,000,086.76
A.61
Question 6
Zazplc, a UK Company is in the process of negotiating an order amounting €2.8 million with a
large German retailer on 6 month’s credit. If successful, this will be first time for Zaz has
exported goods into the highly competitive German Market. The Zaz is considering following 3
alternatives for managing the transaction risk before the order is finalized.
(a) Mr. Peter the Marketing head has suggested that in order to remove transaction risk
completely Zaz should invoice the German firm in Sterling using the current €/£ average
spot rate to calculate the invoice amount.
(b) Mr. Wilson, CE is doubtful about Mr. Peter’s proposal and suggested an alternative of
invoicing the German firm in € and using a forward exchange contract to hedge the
transaction risk.
(c) Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice the German first in
€, but she is of opinion that Zaz should use sufficient 6 month sterling further contracts
(to the nearest whole number) to hedge the transaction risk.
Following data is available
Sport Rate € 1.1960 - €1.1970/£
6 months forward premium 0.60 – 0.55 Euro Cents.
6 month further contract is currently trading at € 1.1943/£
6 month future contract size is £62,500
After 6 month Spot rate and future rate € 1.1873/£
You are required to
(a) Calculate (to the nearest £) the £ receipt for Zazplc, under each of 3 above proposals.
(b) In your opinion which alternative you consider to be most appropriate.
Answer
(i) Receipt under three proposals
(a) Proposal of Mr. Peter
€ 2.8 million
Invoicing in £ will produce = = £ 2.340 million
1.1965
A.62
A.63
A.64
A.65
A.66
A.67
A.68
A.69
Impact on EPS
`
Cauliflower Ltd. shareholders
EPS before merger 5.00
EPS after merger 5.00
Increase/ Decrease in EPS 0.00
Cabbage Ltd.' Shareholders
EPS before merger 3.00
EPS after the merger 5.00 x 3/5 3.00
Increase/ Decrease in EPS 0.00
(ii) Merger effect on EPS with share exchange ratio of 1 : 2
Total earnings after merger ` 34,00,000
No. of shares post merger 5,00,000 + 1,50,000 (0.5 × 3,00,000) 6,50,000
EPS (34,00,000 ÷ 6,50,000) 5.23
Impact on EPS
`
Cauliflower Ltd. shareholders
EPS before merger 5.00
A.70
Question 4
R Ltd. and S Ltd. are companies that operate in the same industry. The financial statements of
both the companies for the current financial year are as follows:
Balance Sheet
Particulars R. Ltd. (` ) S. Ltd (` )
Equity & Liabilities
Shareholders Fund
Equity Capital (` 10 each) 20,00,000 16,00,000
Retained earnings 4,00,000 -
Non-current Liabilities
16% Long term Debt 10,00,000 6,00,000
Current Liabilities 14,00,000 8,00,000
Total 48,00,000 30,00,000
Assets
Non-current Assets 20,00,000 10,00,000
Current Assets 28,00,000 20,00,000
Total 48,00,000 30,00,000
Income Statement
Particulars R. Ltd. (` ) S. Ltd. (` )
A. Net Sales 69,00,000 34,00,000
B. Cost of Goods sold 55,20,000 27,20,000
C. Gross Profit (A-B) 13,80,000 6,80,00
D. Operating Expenses 4,00,000 2,00,000
E. Interest 1,60,000 96,000
F. Earnings before taxes [C-(D+E)] 8,20,000 3,84,000
G. Taxes @ 35% 2,87,000 1,34,400
H. Earnings After Tax (EAT) 5,33,000 2,49,600
A.71
A.72
A.73
A.74
Question 6
Personal Computer Division of Distress Ltd., a computer hardware manufacturing company
has started facing financial difficulties for the last 2 to 3 years. The management of the
division headed by Mr. Smith is interested in a buyout on 1 April 2013. Howeve r, to make this
buy-out successful there is an urgent need to attract substantial funds from venture capitalists.
Ven Cap, a European venture capitalist firm has shown its interest to finance the proposed
buy-out. Distress Ltd. is interested to sell the division for ` 180 crore and Mr. Smith is of
opinion that an additional amount of ` 85 crore shall be required to make this division viable.
The expected financing pattern shall be as follows:
A.75
Applicable tax rate is 35% and it is expected that it shall remain unchanged at least for 5 -6
years. In order to attract VenCap, Mr. Smith stated that book value of equity shall increase by
20% during above 4 years. Although, VenCap has shown their interest in investment but are
doubtful about the projections of growth in the value as per projections of Mr. Smith. Further
VenCap also demanded that warrants should be convertible in 18 shares instead of 10 as
proposed by Mr. Smith.
You are required to determine whether or not the book value of equity is expected to grow by
20% per year. Further if you have been appointed by Mr. Smith as advisor then whether you
would suggest to accept the demand of VenCap of 18 shares instead of 10 or not.
Answer
Working Notes
Calculation of Interest Payment on 9% Debentures
PVAF (9%,6) = 4.486
` 22.50 crore
Annual Installment = = ` 5.0156 crore
4.486
A.76
A.77
Additional Information:
(a) Its variable expenses is 40% of sales revenue and fixed operating expenses (cash) are
estimated to be as follows:
Period Amount ($ Million)
1- 4 years 1.6
5-8 years 2
(b) An additional advertisement and sales promotion campaign shall be launched requiring
expenditure as per following details:
Period Amount ($ Million)
1 year 0.50
2-3 years 1.50
A.78
(c) Fixed assets are subject to depreciation at 15% as per WDV method.
(d) The company has planned additional capital expenditures (in the beginning of each year)
for the coming 8 years as follows:
Period Amount ($ Million)
1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00
(e) Investment in Working Capital is estimated to be 20% of Revenue.
(f) Applicable tax rate for the company is 30%.
(g) Cost of Equity is estimated to be 16%.
(h) The Free Cash Flow of the firm is expected to grow at 5% per annuam after 8 years.
With above information you are require to determine the:
(i) Value of Firm
(ii) Value of Equity
Answer
Working Notes:
(i) Determination of Weighted Average Cost of Capital
Sources of Cost (%) Proportions Weights Weighted Cost
funds
Equity Stock 16 12/20 0.60 9.60
12% Bonds 12%(1-0.30) = 8.40 8/20 0.40 3.36
12.96 say 13
A.79
A.80
A.81
Question 8
The Nishan Ltd. has 35,000 shares of equity stock outstanding with a book value of Rs.20 per share.
It owes debt ` 15,00,000 at an interest rate of 12%. Selected financial results are as follows.
Income and Cash Flow Capital
EBIT ` 80,000 Debt ` 1,500,000
Interest 1,80,000 Equity 7,00,000
EBT (` 1,00,000) ` 2,200,000
Tax 0
EAT (` 1,00,000)
Depreciation ` 50,000
Principal repayment (` 75,000)
Cash Flow (` 1,25,000)
Restructure the financial line items shown assuming a composition in which creditors agree to
convert two thirds of their debt into equity at book value. Assume Nishan will pay tax at a rate
of 15% on income after the restructuring, and that principal repayments are reduced
proportionately with debt. Who will control the company and by how big a margin after the
restructuring?
Answer
Creditors would convert ` 10,00,000 in debt to equity by accepting
` 1,000,000/` 20= 50,000 shares of stock.
The remaining ` 500,000 of debt would generate interest of
` 500,000 0.12 = ` 60,000
A.82
A.83
A.84
A.85
Chapter 2: Question 14
Please replace the Answer placed at Page No. 2.21 with the following one
Please replace the Answer placed at Page No. 3.17 with the following one
B.2
* Balancing Figure
Schedule of Cash Outflows: Debt Alternative
(Amount in `)
(1) (2) (3) (4) (5) (6) (7) (8)
End Debt Interest Dep Tax Shield Cash PV PV
of Payment [(3)+(4)]0.5 outflows factors
year (2) – (5) @ 5%
0 66,578 0 0 0 66,578 1.000 66,578
1 66,578 38,342 50,000 44,171 22,407 0.952 21,331
2 66,578 35,519 50,000 42,759 23,819 0.907 21,604
3. 66,578 32,413 50,000 41,206 25,372 0.864 21,921
4 66,578 28,996 50,000 39,498 27,080 0.823 22,287
5 66,578 25,238 50,000 37,619 28,959 0.784 22,704
6 66,578 21,104 50,000 35,552 31,026 0.746 23,145
7 66,578 16,557 50,000 33,279 33,299 0.711 23,676
8 66,578 11,555 50,000 30,777 35,801 0.677 24,237
9 66,578 6,056 50,000 28,028 38,550 0.645 24,865
10 - 0 50,000 25,000 (-25,000) 0.614 (-15,350)
Total present value of Outflows 2,56,998
B.3
Please replace the Answer placed at Page No. 4.15 with the following one
B.4
Please replace the Answer placed at Page No. 4.22 with the following one
B.5
Please replace the Answer placed at Page No. 5.67 with the following one
B.6
Please replace the Answer placed at Page No. 6.63 with the following one
` 7 12
(i) Current yield = = 0.1555 or 15.55%
` 90 6
YTM can be determined from the following equation
7 × PVIFA (YTM, 10) + 100 × PVIF (YTM, 10) = 90
Let us discount the cash flows using two discount rates 7.50% and 9% as follows:
Year Cash Flows PVF@7.50% PV@7.50% PVF@9% PV@9%
0 -90 1 -90 1 -90
1 7 0.930 6.51 0.917 6.419
2 7 0.865 6.055 0.842 5.894
3 7 0.805 5.635 0.772 5.404
4 7 0.749 5.243 0.708 4.956
5 7 0.697 4.879 0.650 4.550
6 7 0.648 4.536 0.596 4.172
7 7 0.603 4.221 0.547 3.829
8 7 0.561 3.927 0.502 3.514
9 7 0.522 3.654 0.460 3.220
10 107 0.485 51.90 0.422 45.154
6.560 -2.888
B.7
6.560
7.50% + 1.50% =7.50% + 1.041%
9.448
YTM = 8.541% say 8.54%
Note: Students can also compute the YTM using rates other than 15% and 18%.
(ii) The duration can be calculated as follows:
Year Cash PVF@ PV @ Proportion of Proportion of NCD
Flow 8.54% 8.54% NCD value value × time
1 7 0.921 6.447 0.0717 0.0717
2 7 0.849 5.943 0.0661 0.1322
3 7 0.782 5.474 0.0608 0.1824
4 7 0.721 5.047 0.0561 0.2244
5 7 0.664 4.648 0.0517 0.2585
6 7 0.612 4.284 0.0476 0.2856
7 7 0.563 3.941 0.0438 0.3066
8 7 0.519 3.633 0.0404 0.3232
9 7 0.478 3.346 0.0372 0.3348
10 107 0.441 47.187 0.5246 5.2460
89.95 7.3654
Duration = 7.3654 half years i.e. 3.683 years.
(iii) Realized Yield can be calculated as follows:
(7 10) 100
90
(1 R)10
170
(1 + R)10 =
90
1/10
170
R= - 1 = 0.06380 or 6.380% for half yearly and 12.76% annually.
90
B.8
Please replace the Answer placed at Page No. 9.23 with the following one
Please replace the Answer placed at Page No. 12.54 with the following one
(i) Straddle is a portfolio of a CALL & a PUT option with identical Strike Price. A trader will
be selling a Call option & a Put option with Strike Price of USD per EURO.
He will receive premium of $ 0.035 + $ 0.040 = $ 0.075
At the expiry of three months Spot rate is 1.2900 i.e. higher than Strike Price. Hence,
buyer of the Call option will exercise the option, but buyer of Put option will allow the
option to lapse.
B.9
Please replace the Answer placed at Page No. 13.38 with the following one
B.10
B.11
Chapter 2: Illustration 19
Please replace the Answer placed at Page No. 2.60 with the following one.
(Note: In the question also please replace the figure of ` 25 crore with ` 2.50 crore)
Here we shall evaluate NPV in two possible situations:
(1) As on Today
` 21 lakhs
At cost of Capital of 10%, the value of saving forever = = ` 2.10 crore
0.10
NPV = ` 2.10 crore - ` 2.50 crore = - ` 0.40 crore
Since NPV is negative, it does not worth to accept the project.
(2) After one Year
After one year these are two possible situations, either rate of electricity decreas es or
increase.
The position of saving will be as follows:
` 35 lakh
If price of electricity increase the NPV = - ` 2.5 crore = ` 0.10 crore
0.10
` 35 lakh
Value of saving forever = ` 21 lakh + = ` 3.71 crore
0.10
3.71
And Rate of Return will be - 1 = 0.484 is 48.40%
2.50
If the price of electricity decreases, then value of saving forever will be
12 lakh
= 21 lakh + = 1.41 crore
0.10
1.41
and Rate of Return will be - 1 = - 0.4360 i.e. – 43.60%
2.50
B.12
Thus, it shall be advisable to wait and see as NPV may turn out to be positive after one year.
Chapter 3: Illustration 1
Please replace the Answer of part (a) placed at Page No. 3.5 with the following one.
Please replace the Answer of part (a) placed at Page No. 3.17 with the following one.
Let BELR be L. Since at BELR the NAL will be zero, we shall first compute NAL and will be put it
equal to zero to compute BELR.
NAL
Initial Outlay ` 1800 lakh
Less: - Present Value of Lease Rent (W1) 2.210 L
B.13
B.14
Please replace the Answer of part (a) placed at Page No. 7.65 with the following one.
First of all we shall unlever the beta of the pureplay firms as follows:
βU = L
[1 (1 - T) D / E]
0.921+0.774+0.774+0.837
Average βU = = 0.827
4
B.15
βL = βU [1+ (1 – T) D / E]
= RF + βL [E(RM) – RF]
D E
Ko = K d (1 T) Ke
V V
Ko = 15.97%
The project’s WACC (K o) i.e. 15.97% can be used to calculate to discount the project.
Chapter 13: Illustration 1
Please replace the Answer placed at Page No. 13.25 with the following one.
(Note: In the question also please replace the figure of ` 4.92 crore with ` 7.92 crore)
Present Value of Free Cash Flows
(` in crore)
Years
2013 2014 2015 2016 2017 2018 2019 2020
Free Cash Flow 13.75 6.27 7.37 7.66 6.04 5.69 6.35 7.05
PVF@15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327
Present Value 11.96 4.74 4.85 4.38 3.00 2.46 2.39 2.31
Total 36.09
B.16
= ` 155.1 crore
Present value of terminal value = 155.1 × PVIF (15%, 8)
= 155.1 × 0.327 = 50.72 crore
Total value = ` (36.09 + 50.72) = ` 86.81 crore
Value of Equity = ` 86.81 crore – ` 7.92 crore = ` 78.89 crore
Approach 2: Terminal Value is a Stable Perpetuity
Free cashflow
Terminal value = FCF / k
Discount rate
7.05
` 47crores
0.15
Value of the firm = ` 36.09 crore + ` 47.00 crore x 0.327 = ` 51.46 crore
B.17
In the Answer of question in the second line of first table please read the figure of ‘10,000’ as
‘-10,000’.
Page No. 2.62 (Question 37 – Chapter 2)
In the Answer of question in the fifth line (cash flow column) of second table please read the
figure of ’25,0000’ as ‘25,000’.
Page No. 6.12 (Question 3 – Chapter 6)
In the Answer of question in first paragraph please ignore the line ‘As already discussed in the
previous chapter,’ and ‘Let us study the theory once again but in detail ’in the beginning and at
the end respectively.
Page No. 6.20 (Question 9 – Chapter 6)
Please insert following alternative answers in the (i) and (ii) parts .
(i) ` 10 – ` 4 = ` 6
(ii) ` 12 – ` 8 = ` 4
Page No. 6.21 (Question 10 – Chapter 6)
Please read the table in part (b) of the answer after proper alignment as follows:
(%)
Normal return expected 9.60
Add: Risk premium for low interest and fixed dividend coverage 0.84
Add: Risk premium for high interest gearing ratio 0.36
10.80
In the first line of the answer of part (v) please read ‘(0.8467)2 (15)2’ as ‘(0.8467) 2 (15)2’.
Page No. 7.44 (Question 31 – Chapter 7)
80.87 80.78
Please read in (ii) part of the answer as .
4 4
Page No. 8.10 (Question 8 – Chapter 8)
In the end of the Answer of question please read the ‘Effective rate of interest to the firm’ as
‘Effective Cost of Factoring to the firm’.
Page No. 9.22 (Question 21 – Chapter 9)
In the answer please read the heading of the table as ‘Adjusted Values’ instead o f ‘Adjustment
Value’.
Page No. 9.33 (Question 29 – Chapter 9)
In the answer please read the heading of the table as ‘Adjusted Values’ instead of ‘Adjustment
Value’.
Page No. 10.16 (Question 17 – Chapter 10)
C.2
Please insert following solution as alternative solution of part (iii) of the question, had it is
assumed that if 18 future contract are purchased for hedging instead of 17 contract as
provided in original solution.
Amount payable USD 3,64,897
Unit in Options contract GBP 12,500
Value in USD at strike rate of 1.70 (GBP 12,500 x 1.70) USD 21,250
Number of contracts USD 3,64,897/ USD 21,250 17.17
Exposure covered USD 21,250 x 18 USD 3,82,500
Exposure Excess covered by Future ( USD 3,64,897 – USD 3,82,500) USD 17,603
Options premium 18 x GBP 12,500 x 0.096 USD 21,600
Premium in GBP (USD 21,600 x 0.64033) GBP 13,831
Total payment in currency option
Payment under option (18 x 12,500) GBP 2,25,000
C.3
In the first line of the answer of part (i) please read ‘2400 [€ 500 × S$ 51.50 – (S$ 800 × `
27.25 + ` 1,000 + ` 1,500)]’ as ‘2400 [€ 500 × ` 51.50 – (S$ 800 × ` 27.25 + ` 1,000 + `
1,500)]’
Page No. 13.65 (Question 42 – Chapter 13)
Please insert following solution as alternative solution of part (a) of the question.
Let ER be the swap ratio then,
24 ×10,00,000 + 40 ×15,00,000 +80,00,000 + 30,00,000
40 =
15,00,000 +10,00,000 × ER
ER = 0.875
40
MP = PE x EPS x ER = x ` 4 x 0.875 = ` 35
4
C.4
In the formula of Modified duration please read ‘n = Number of comp ounding period per year
or number of period i.e. 2 for semi-annual and 4 for quarter etc.’ instead of ‘n = Number of
compounding period per year’
Page No. 9.15 (Chapter 9)
Please replace the answer of part (a) of the Illustration ‘109.7333’with ‘109.1533’.
Page No. 12.23 (Chapter 12)
Please replace the text of Extension, Cancellation and Early Delivery of Forward Contract with
following text.
Whenever any forward contract is entered into normally it meets any of the following three
fates.
(A) Delivery under the Contract
(B) Cancellation of the Contract
(C) Extension of the Contract
Further above of fates of forward contract can further classified into following sub -categories.
(A) Delivery under the Contract
(i) Delivery on Due Date
(ii) Early Delivery
(iii) Late Delivery
(B) Cancellation of the Contract
(i) Cancellation on Due Date
(ii) Early Cancellation
C.5
C.6
C.7
C.8
C.9
C.10
C.11
Please replace the answer of part (c) of the Illustration 12 ‘ ` 9,80,000’with ‘` 98,000’.
C.12