CA (FINAL-New Syllabus)

ADVANCED FINANCIAL MANAGEMENT

FULL SYLLABUS

TEST PAPER- 12 MARKS- 100

SUGGESTED ANSWERS DURATION- 3 Hours

INSTRUCTIONS:

1. All the questions are compulsory.

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 Part A (70 Marks)

Question No.1 is compulsory.

Candidates are also required to answer any four from the remaining five
questions.

Working notes should form part of the respective answer.

QUESTION 1
(a) High Growth Ltd. (HGL) was having an excellent growth over a number of years.
The Board of Directors is considering a proposal to reward its shareholders by
buying back 20% shares at a premium. The premium is to be paid by raising a loan
from the Bank. The interest on loan is to be serviced by internal accruals as
supported by the financials of HGL. The company has a market capitalization of `
15,000 crore and the current Earnings Per Share (EPS) is ` 600 with a Price
Earnings Ratio (PER) of 25. The Board expects a post buy back Market Price per
Share (MPS) of ` 10,000. The PER, post buy back, will remain the same. The loan
can be availed at an interest rate of 16 % p.a.

Applicable corporate tax rate is 30%. You are required to calculate:

i. The interest amount which can be paid for availing the bank loan.
ii. The loan amount to be raised.
iii. Buy back premium per share. (8 marks)

(b) Export Ltd., an export oriented unit invoices in the currency of the importer. It is
expecting a receipt of USD 2,40,000 on 1st August, 2022 for the goods exported on
1st May, 2022.

The following information is available as on 1st May, 2022:

Exchange Rates Currency Futures Contract Size

USD/INR USD/INR

Spot 0.0125 May 0.0126

1 Month Forward 0.0124 July 0.0125 ` 6,40,000/-

3 Months Forward 0.0123

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Initial Margin Interest Rates in India

May ` 15,000 9%

August ` 26,000 8.5%

On 1st August, 2022 the spot rate USD/INR is 0.0126 and currency future rate is
0.0125

Suggest a suitable approach to Export Ltd. that would be most advantageous out of
the following methods.

i. Forward Contract
ii. Currency Futures
iii. No hedge

Assume that the variation in margin would be settled on the maturity of the futures
contract. (6 marks)

ANSWER 1 (a)

(i) The interest amount which can be paid for availing the bank loan Current Market
Price per Share = ` 600 × 25 = ` 15,000

No. of Shares before Buyback = Market Capitalisation / Market Price of Share

= 15,000 crore / 15,000 = 1 crore

No. of Shares proposed to Buyback = 20% of 1 crore = 20 lakh Total No. of Share
after Buyback = 1 crore – 20 lakh = 80 lakh Post Buy back Market Price per Share =
` 10,000

PE Ratio = 25

Post Buyback EPS= 10000/ 25 = 400

EAT before Buyback = ` 600 × 1 crore = ` 600 crore

EBT before Buyback = 600/ (1-0.30) = ` 857.1429 crore

EAT after Buyback = ` 400.00 × 80 lakh = ` 320 crore

EBT after Buyback = 320 / ( 1- 0.30) =` 457.1429 crore

Interest which can be paid for availing bank loan:

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 EBT before Buyback ` 857.1429 crore

(-) EBT after Buyback ` 457.1429 crore

` 400.0000 crore

Alternatively, it can also be computed as follows:

Pre Buy back Market Capitalization (A) ` 15000 crore

Pre Buy back EPS (B) ` 600

Pre Buy back PER (C) 25

Pre Buy back Market Price Per Share (` 600x 5) D = B X C ` 15000

Pre Buy back No. of Shares (A)/ (D) 1 Crore

Post Buy back EPS (A) (` 10000/ 25) ` 400

Post Buy back No. of shares (B) 80 Lakh

Post Buy back Earning (C) = (A) X (B) ` 320 crore

Pre Buy back Earning 1 Crore X ` 600 (D) ` 600 crore

Post Tax Earning available for interest payment (D) – (C) ` 280 Crore

Pre- Tax amount of Interest 280crore ` 400 Crore

1 0.30

ii. Loan Amount raised = 400 crore / 0.16 = ` 2500 crore

iii. Buyback Premium per Share

Amount of Loan for Buyback of 20 % Shares = ` 2500 crore No. of Shares Buyback
= 20 Lakh

Buyback price per Share = ` 2500 Crore/ 20 Lakh = ` 12500 Market Price after
Buyback = ` 10000

Buyback Premium Per Share = ` 12500 – ` 10000 = ` 2500

Alternatively, it can also be computed as follows:

Amount of Loan (A) ` 2500 crore

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No. of Shares to be bought back (B) 20 Lakh

Price Per Share to be paid (C) = (A)/ (B) ` 12,500

Post Buy back Share Price (D) ` 10,000

Buy Back Premium per share (C) – (D) ` 2,500

ANSWER 1 (b)

Receipts using a forward contract

USD 2,40,000/0.0123 = ` 1,95,12,195
Receipts using currency futures
The number of contracts needed is (USD = 30
2,40,000/0.0125)/6,40,000
Initial margin payable is 30 contracts x ` 26,000 = ` 7,80,000
On August 1, 2022 Close at 0.0125
Receipts = USD 2,40,000/0.0126 = ` 1,90,47,619
Less: Interest Cost – (7,80,000 x 0.085 x 3/12) = ` 16,575
Net Receipts ` 1,90,31,044

QUESTION 2

(a) Mr. D had invested in three mutual funds (MF) as per the following details:

Particulars MF ‘A’ MF ‘B’ MF ‘C’

Amount of Investment 2,00,000 5,00,000 4,00,000

NAV at the time of purchase 10.00 25.00 20.00

Dividend Yield up to 31.03.2022 3% 5% 4%

NAV as on 31.03.2022 10.50 22.80 20.80

Annualized Yield as on 31.03.2022 9.733% - 11.185% 15%

Assume 1 Year = 365 Days.

Mr. D has misplaced the documents of his investments. You are required to help Mr.
D to find out the following:

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 i. Number of units allotted in each scheme,
ii. Value of his investments as on 31.03.2022,
iii. Holding period of his investments in number of days as on 31.03.2022
iv. Dates of original investments
v. Total Return on investments,
vi. Assuming past performance of all three schemes will continue for next one
year, what action the investor should take? What will be the expected return
for the next one year after the above action?
vii. Will your answer as above point no. (vi) changes if the Mutual fund charges
exit load of 5% if the investment is redeemed within one year? If so, advise
the investor what and when the action to be taken to optimise the returns.

(8 marks)

(b) Calculate the value of share from the following Information:

Profit of the company (After tax) ` 560 crores

Equity share capital of the Company ` 1900 crores

Par value of share ` 50 each

Debt ratio (Debt/Debt + Equity) 43%

Long run growth rate of the company 7%

Beta 0.1 (Risk free Interest rate) 9.5%

Market return 12.6%

Capital expenditure per share ` 53

Depreciation per share ` 45

Increase in working capital ` 4.62 per share

(6 marks)

ANSWER 2 (a)

i. Number of Units in each Scheme

MF ‘A’ ` 2,00,000 = 20,000

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 ` 10.00

MF ‘B’ ` 5,00,000 = 20,000

` 25.00

MF ‘C’ ` 4,00,000 = 20,000

` 20.00

ii. Value of Investment on 31.03.2022

MF ‘A’ = 20,000 x ` 10.50 ` 2,10,000

MF ‘B’ = 20,000 x ` 22.80 ` 4,56,000

MF ‘C’ = 20,000 x ` 20.80 ` 4,16,000

Total ` 10,82,000

iii. Yield on each Fund

Capital Yield Dividend Yield Total Yield (%)

MF ‘A’ ` 2,10,000 - ` 2,00,000 ` 6,000 ` 16,000.00 8.00

= ` 10,000

MF ‘B’ ` 4,56,000 - ` 5,00,000 ` 25,000 - ` 19,000.00 -3.80

= - ` 44,000

MF ‘C’ ` 4,16,000 - ` 4,00,000 ` 16,000 ` 32,000.00 8.00

= ` 16,000

Total ` 29,000.00

No. of Days Investment Held

MF ‘A’ MF ‘B’ MF ‘C’

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Period of Holding 8.00 365 3.80 365 8.00 365
(Days)
9.733 11.185 15.00

= 300 Days = 124 Days = 195 Days

iv. Date of Original Investment 04.06.21 27.11.21 17.09.21

v. Total Yield = 29,000 / 11,00,000 *100 = 2.636%

vi. If past of all three schemes will continue for next one year, the investor
should redeem the units of MFs ‘A’ and ‘B’ and invest the proceeds in MF
‘C’. The expected return next will be 15%.
vii. If the Mutual funds are charging exit load of 5%, if investment is redeemed
within one year, then investor should get redeemed units of MF ‘B’ now
and units of MF ‘A’ after 65 days.

ANSWER 2 (b)

No. of Shares = 1900 crores / 50 = 38 crores

EPS = PAT / No of Shares

= 560 crores / 38 crores= 14.737

Cost of Equity = Rf + ß (Rm – Rf)

= 9.5 + 0.1 (12.6 – 9.5) = 9.81%

FCFE = Net income – [(1-b) (capex – dep) + (1-b) ( ΔWC )]

FCFE = 14.737 – [(1-0.43) (53-45) + (1-0.43) (4.62)]

= 14.737 – [4.56 + 2.6334] = 7.5436

P0 = FCFE (1+g) /K e – g = 7.5436 (1.07)/ 0.0981 – 0.077 = 287.23

QUESTION 3

(a) Details about long term portfolio of shares of an investor is as below:

Shares No. of shares (Lakh) Market Price per share Beta

K Ltd. 6 250 1.4

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 L Ltd. 8 375 1.2

M Ltd. 4 125 1.6

The investor thinks that the risk of portfolio is very high and wants to reduce the
portfolio beta to 0.91.

He is considering below mentioned alternative strategies:

i. Dispose a part of his existing portfolio to acquire risk free securities, or

ii. Take appropriate position on Nifty Futures which are currently traded at 16250
and each Nifty points is worth `100.

You are required to determine:

i. portfolio beta,
ii. the value of risk-free securities to be acquired,
iii. the number of shares of each company to be disposed off,
iv. the number of Nifty contracts to be bought/sold,
v. the value of portfolio beta for 1% rise in Nifty. (8 marks)

(b) Ms. Sreenidhi is learning the portfolio management techniques and wants to test
one of the techniques she has developed on KIFS Equity Fund and compare the
gains and losses from the technique with those from a passive buy and hold
strategy.

The KIFS Equity Fund consists of equities only and the ending NAVs of the fund she
constructed for the last 10 months are given below:

Month Ending NAV (`/unit)

Jan-22 100

Feb-22 78

Mar-22 92

Apr-22 86

May-22 102

Jun-22 98

Jul-22 100

Aug-22 102

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Sep-22 118

Oct-22 120

Assume

i. Sreenidhi had invested a notional amount of ` 5 lakhs equally in the equity

fund and a conservative portfolio (of bonds) in the beginning of January 2022
and the total portfolio was being rebalanced each time the NAV of the fund
increased or decreased by 15% compared to the NAV of previous month.
ii. There is no income earned from the conservative portfolio during the period.
iii. There is no taxation and entry/exit loads.

You are required to determine:

i. Value of the portfolio for each level of NAV following the Constant Ratio Plan.
ii. Whether there are any errors in the technique developed by Sreenidhi? If so
briefly explain. (6 marks)

ANSWER 3 (a)

Shares No. of shares Market Price (1)× (2) % to total ß (x) w*x
(lakhs) (1) of Per Share (w)
(2) (` lakhs)

K Ltd. 6.00 250.00 1,500.00 0.30 1.40 0.42

L Ltd. 8.00 375.00 3,000.00 0.60 1.20 0.72

M Ltd. 4.00 125.00 500.00 0.10 1.60 0.16

5,000.00 1.00 1.30

i. Portfolio beta 1.30

ii. Required Beta 0.91

Let the proportion of risk free securities for target beta 0.91 = p

0.91 = 0 × p + 1.30 (1 – p)

p = 0.30 i.e. 30%

Shares to be disposed off to reduce beta (5000 × 30%) ` 1,500 lakh and Risk Free
securities to be acquired.

iii. Number of shares of each company to be disposed off

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Shares % to total Proportionate Market Price No. of Shares to be
(w) Per Share (b) disposed off (Lakh)
Amount (` lakhs) (a) (a/b)

K Ltd. 0.30 450.00 250.00 1.80

L Ltd. 0.60 900.00 375.00 2.40

M Ltd. 0.10 150.00 125.00 1.20

iv. Number of Nifty Contract to be sold

(1.30- 0.91) * 5000 lakh / 16,250 * 100 = 120 contracts

v. 1% rises in Nifty is accompanied by 1% x 1.30 i.e. 1.30% rise for portfolio of

shares

` Lakh

Current Value of Portfolio of Shares 5,000

Value of Portfolio after rise 5,065

Mark-to-Market Margin paid (16250 × 0.01 × ` 100 × 120) 19.50

Value of the portfolio after rise of Nifty 5,045.50

% change in value of portfolio (5,045.50 – 5,000)/ 5,000 0.91%

% rise in the value of Nifty 1%

Beta 0.91

ANSWER 3 (b)

i. Constant Ratio Plan:

Stock Value of Value of Total value Revaluation Total No. of

Portfolio Conservative aggressive of Constant Action units in
NAV Portfolio Portfolio Ratio Plan aggressive
portfolio
(`) (`) (`) (`)

100 2,50,000.00 2,50,000.00 5,00,000.00 - 2500

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78 2,50,000.00 1,95,000.00 4,45,000.00 - 2500

2,22,500.00 2,22,500.00 4,45,000.00 Buy 352.56 2852.56

units

92 2,22,500.00 2,62,435.52 4,84,935.52 - 2852.56

2,42,467.76 2,42,467.76 4,84,935.52 Sell 217.04 2635.52

units

86 2,42,467.76 2,26,654.72 4,69,122.48 - 2635.52

102 2,42,467.76 2,68,823.04 5,11,290.80 - 2635.52

2,55,645.40 2,55,646.40 5,11,290.80 Sell 129.19 2506.33

units

98 2,55,645.40 2,45,620.34 5,01,265.74 - 2506.33

100 2,55,645.40 2,50,633.00 5,06,278.40 - 2506.33

102 2,55,645.40 2,55,645.66 5,11,291.06 - 2506.33

118 2,55,645.40 2,95,746.94 5,51,392.34 - 2506.33

2,75,696.17 2,75,696.17 5,51,392.34 Sell 169.92 2336.41

units

120 2,75,696.17 2,80,369.20 5,56,065.37 - 2336.41

Hence, the ending value of the mechanical strategy is ` 5,56,065.37 and buy & hold
strategy is (`2,50,000+ 2,500 X `120 = `5,50,000)

(ii) Though the value of portfolio as per technique is lesser than Buy & Hold Strategy
but there is no error as if market has been bearish then the value of much lesser
under Buy & Hold Strategy.

QUESTION 4

(a) An American firm is under obligation to pay interests of Can$ 10,10,000 and
Can$ 7,05,000 on 31st July and 30th September respectively. The Firm is risk
averse and its policy is to hedge the risks involved in all foreign currency
transactions. The Finance Manager of the firm is thinking of hedging the risk
considering two methods i.e. fixed forward or option contracts.

It is now June 30. Following quotations regarding rates of exchange, US$ per Can$,
from the firm’s bank were obtained:
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Spot 1 Month Forward 3 Months Forward

0.9284-0.9288 0.9301 0.9356

Price for a Can$ /US$ option on a U.S. stock exchange (cents per Can$, payable on
purchase of the option, contract size Can$ 50000) are as follows:

Strike Price Calls Puts

(US$/Can$) July Sept. July Sept.

0.93 1.56 2.56 0.88 1.75

0.94 1.02 NA NA NA

0.95 0.65 1.64 1.92 2.34

According to the suggestion of finance manager if options are to be used, one month
option should be bought at a strike price of 94 cents and three month option at a
strike price of 95 cents and for the remainder uncovered by the options the firm
would bear the risk itself. For th is, it would use forward rate as the best estimate of
spot. Transaction costs are ignored.

RECOMMEND, which of the above two methods would be appropriate for the
American firm to hedge its foreign exchange risk on the two interest payments.

(8 marks)

(b) The following are the data on five mutual funds:

Fund Return Standard Deviation Beta

A 18 5 1.25

B 12 7 0.75

C 15 10 1.40

D 14 9 0.98

E 19 6 1.50

COMPUTE Reward to Volatility Ratio and rank these portfolios using:

 Sharpe method and

 Treynor's method

Assume the risk free rate is 9%. (6 marks)

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ANSWER 4 (a)

Forward Market Cover

Hedge the risk by buying Can$ in 1 and 3 months time will be: July - 1010000
X 0.9301 = US $ 939401

Sept. -705000 X 0.9356 = US $ 659598

Option Contracts

July Payment= 1010000/ 50,000 = 20.20 September Payment=705000/ 50,000

= 14.10

Company would like to take out 20 contracts for July and 14 contracts for September
respectively. Therefore costs, if the options were exercised, will be:

July Sept.

Can $ US $ Can $ US $

Covered by Contracts 1000000 940000 700000 665000

Balance bought at spot rate 10000 9301 5000 4678

Option Costs:

Can $ 50000 x 20 x 0.0102 10200 ---

Can $ 50000 x 14 x 0.0164 --- 11480

Total cost in US $ of using Option 959501 681158

Contract

Decision: As the firm is stated as risk averse and the money due to be paid is
certain, a fixed forward contract, being the cheapest alternative in the both the
cases, would be recommended.

ANSWER 4 (b)

Sharpe Ratio S = (Rp – Rf)/σp Treynor Ratio T = (Rp – Rf)/βp Where,

Rp = Return on Fund Rf = Risk-free rate

σp = Standard deviation of Fund

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βp = Beta of Fund Reward to Variability (Sharpe Ratio)

Mutual Fund Rp Rf Rp – Rf σp Reward to Ranking

Variability

A 18 9 9 5 1.80 1

B 12 9 3 7 0.43 5

C 15 9 6 10 0.60 3

D 14 9 5 9 0.55 4

E 19 9 10 6 1.67 2

Reward to Volatility (Treynor Ratio)

Mutual Fund Rp Rf Rp – Rf βp Reward to Ranking

Volatility

A 18 9 9 1.25 7.20 1

B 12 9 3 0.75 4.00 5

C 15 9 6 1.40 4.28 4

D 14 9 5 0.98 5.10 3

E 19 9 10 1.50 6.67 2

QUESTION 5

(a) r. X is having 1 lakh shares of M/s. Kannyaka Ltd. The beta of the company is
1.40. Mr. Y a financial advisor has suggested for having the following portfolio:

Security Beta % holding

SKP 1.20 10

D 0.75 10

0.40 30

1.40 50

100

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Market Return is 12% Risk free rate is 8% Required:

1. CALCULATE the expected return based on CAPM for the present investment
and suggested portfolio and also in the following scenarios
1. If the market return goes up by 2.5%.
2. If the market return goes down by 2.5%
2. ADVISE Mr. X whether to continue the holdings of M/s. Kannyaka Ltd. or to
buy the portfolio as per the suggestion of Mr. Y if the probability of market
giving negative return is more. (8 marks)

(b) M/s. Parker & Co. is contemplating to borrow an amount of `60 crores for a
Period of 3 months in the coming 6 month's time from now. The current rate of
interest is 9% p.a., but it may go up in 6 month’s time. The company wants to hedge
itself against the likely increase in interest rate.

The Company's Bankers quoted an FRA (Forward Rate Agreement) at 9.30% p.a.

CALCULATE the Final settlement amount, if the actual rate of interest after 6 months
happens to be: (i) 9.60% p.a. and (ii) 8.80% p.a.

Note: Make calculations on months basis. (6 marks)

ANSWER 5 (a)

(i) Working Notes -

Calculation of Portfolio Beta suggested by Mr. Y

Security Beta Wt. of Holding Beta x Wt. of Holding

S 1.20 0.10 0.120

K 0.75 0.10 0.075

P 0.40 0.30 0.120

D 1.40 0.50 0.700

Total 1.00 1.015

Portfolio Beta is 1.015

Calculation of Expected Return based on CAPM at present situation-

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Particulars Risk Free Beta Market Risk Beta X Expected
Rate (Rf) Return Premium = Risk Return
Premium
Rm-Rf

a b c d e=d-b f=cxe g=b+f

Kannyaka Ltd. 8% 1.400 12% 4% 5.600% 13.60%

Portfolio 8% 1.015 12% 4% 4.060% 12.06%

1. Calculation of Expected Return based on CAPM if market goes up by

2.5%:

Particulars Risk Beta Market Risk Beta X Risk Expected

Free Return Premium= Premium Return
Rate (Rf)
Rm- Rf

a b c d e=d-b f=cXe g=b+f

Kannyaka Ltd. 8% 1.400 14.50% 6.5 9.100% 17.10%

Portfolio 8% 1.015 14.50% 6.5 6.598% 14.60%

2. Calculation of Expected Return based on CAPM if market goes down by

2.5%:

Particulars Risk Beta Market Risk Beta X Risk Expected

Free Return Premium= Premium Return
Rate(Rf) Rm - Rf

a b c d e=d-b f=cXe g=b+f

Kannyaka Ltd. 8% 1.400 9.50% 1.50% 2.100% 10.10%

Portfolio 8% 1.015 9.50% 1.50% 1.523% 9.52%

ii. Advice: If the probability of market giving negative return is more, it is

advisable to Mr. X to buy the portfolio suggested by Mr. Y because Beta of
the portfolio is less than of Kannyaka Ltd.

ANSWER 5 (b)

Final settlement amount shall be computed by using formula:

= (N)(RR- FR)(dtm/DY) / [1 +RR (dtm/ DY)}

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Where,

N = the notional principal amount of the agreement;

RR = Reference Rate for the maturity specified by the contract prevailing on the
contract settlement date;

FR = Agreed-upon Forward Rate; and

dtm = maturity of the forward rate, specified in days (FRA Days)

DY = Day count basis applicable to money market transactions which could be 360
or 365 days.

Accordingly,

If actual rate of interest after 6 months happens to be 9 .60%

(60 crore) (0.096 – 0.093) (3/12) /[1+ 0.096 (3/12)] =4,39,453

Thus banker will pay Parker & Co. a sum of ` 4,39,453

If actual rate of interest after 6 months happens to be 8.80%

= (60 crore) (0.088- 0.093) (3/12) / [1+0.088 (3/12)] = 7,33,855

Thus Parker & Co. will pay banker a sum of ` 7,33,855 .19 or ` 7,33,855

QUESTION 6

(a) Following are the details of X Ltd. and Y Ltd.:

Particulars X Ltd. Y Ltd.

Dividend per Share `4 `4

Growth Rate 10% 10%

Beta 0.9 1.2

Current Market Price per Share ` 150 ` 70

Other Information:

Risk Free Rate of Return 7%

Market Rate of Return 14%

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 i. Calculate the price of shares of both the companies.
ii. Write the comment on the valuation on the basis of price calculated and
current market price.
iii. As an investor what course of action should be followed? (8 marks)

(b) Company X is forced to choose between two machines A and B. The two
machines are designed differently but have identical capacity and do exactly the
same job. Machine A costs ` 1,50,000 and will last for 3 years. It costs ` 40,000 per
year to run. Machine B is an ‘economy’ model costing only ` 1,00,000, but will last
only for 2 years, and costs ` 60,000 per year to run. These are real cash flows. The
costs are forecasted in rupees of constant purchasing power. Ignore tax. Opportunity
cost of capital is 10 per cent. Which machine company X should buy? (6 marks)

ANSWER 6 (a)

i. Calculation of Prices of shares of both companies

X Ltd. Y Ltd.

Beta 0.9 1.20

Cost of Equity using CAPM 7% + 0.9 [14% - 7%] 7% + 1.20 [14% - 7%]

= 13.30% = 15.40%

Growth Rate 10% 10%

Price of Share 4×1.10 = 4.40 4×1.10 = 4.40

0.133-0.10 0.033 0.154-0.10 0.054

= ` 133.33 = ` 81.48

(ii) and (iii)

Name of Current Market Value of the Valuation Action of the

Company Price Share Investor

X Ltd. ` 150.00 ` 133.33 Overvalued/ Not to Invest/ to be

overpriced sold

Y Ltd. ` 70.00 ` 81.48 Undervalued/ Invest/ to be

under-priced purchased

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Alternatively, if the given figure of Dividend is considered as Dividend Expected (D1)
then solution will be as follows

X Ltd. Y Ltd.

Beta 0.9 1.20

Cost of Equity using CAPM 7% + 0.9[14% - 7%] 7% + 1.20[14% - 7%]

= 13.30% = 15.40%

Growth Rate 10% 10%

Price of Share 4.00 = 4.00 4.00 = 4.00

0.133- 0.10 0.033 0.154- 0.10 0.054

= ` 121.21 = ` 74.07

(ii) and (iii)

Name of Current Market Value of the Valuation Action of the

Company Price Share Investor

X Ltd. ` 150.00 ` 121.21 Overvalued / Not to Invest/to be

overpriced sold

Y Ltd. ` 70.00 ` 74.07 Undervalued / Invest/to be

under-priced purchased

ANSWER 6 (b)

Statement showing the evaluation of two machines

Machines A B

Purchase cost (`): (i) 1,50,000 1,00,000

Life of machines (years) 3 2

Running cost of machine per year (`): (ii) 40,000 60,000

Cumulative present value factor for 1-3 years @ 10% (iii) 2.486

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Cumulative present value factor for 1-2 years @ 10% (iv) 1.735

Present value of running cost of machines (`): (v) 99,440 1,04,100

[(ii) (iii)] [(ii) (iv)]

Cash outflow of machines (`): (vi) = (i) + (v) 2,49,440 2,04,100

Equivalent present value of annual cash outflow 1,00,338 1,17,637

[(vi) (iii)] [(vi) (iv)]

Decision: Company X should buy machine A since its equivalent cash outflow is less
than machine B.

PART-B (2 marks each x 15 =30 marks)

1. EPS = Rs.10; Payout ratio = 25%; Cost of equity = 10%; Return on equity = 5%.
What is the price of share as per Walter's model?

a) Rs.100

b) Rs.200

c) Rs.175

d) Rs.62.50

2. XYZ Corporation issued a bond with a coupon rate of 7% and a maturity of 20

years. However, due to declining interest rates, the company decides to refund the
bond by issuing a new bond at a lower coupon rate. Which of the following
statements is true regarding bond refunding?

a) Bond refunding increases the company's overall interest expense.

b) Bond refunding reduces the company's future interest payments.

c) Bond refunding requires the company to retire the existing bond before issuing a
new one.

d) Bond refunding increases the credit risk of the company.

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3. The expected rate of return is 1.5 times the 16% expected rate of return from the
market. What is the beta if the risk free rate is 8%?

a) 3 Times

b) 4 Times

c) 2 Times

d) 1.5 Times

4. Pre-tax cost of debt = 12%; Cost of equity = 16%; Debt/equity ratio = 0.4 Times.
Compute WACC if tax rate is 25%?

a) 14.40 percent

b) 13.20 percent

c) 14 percent

d) 14.86 percent

5. Cash flows of Company A = 25 lacs; Cash flows of company B = 20 lacs; Merger

will lead to annual cash flows of 60 lacs due to synergy gain. Pre-merger cost of
capital of A Limited = 10%; Pre-merger cost of capital of B Limited = 20%; Post-
merger cost of Capital of merged entity = 8%. A Limited has acquired B Limited.
Consideration paid for acquisition is Rs.150 lacs. How much is the gain for
shareholders of B Limited?

a) 150 lacs

b) 130 lacs

c) 50 lacs

d) 80 lacs

6. The current price of a flat is Rs.100 lacs. The price can either go up to Rs.110 lacs
or Rs.95 lacs by end of one year. Expected annual rental income of flat is 2 lacs.
Risk-free rate of return is 8% per annum. What is the probability of price increasing
to Rs.110 lacs?

a) 86.67%

b) 73.33%

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c) 50.00%

d) 80.00%

7. Exercise price of put option = 100; CMP of underlying asset = 80; CMP of put
option = 45; How much is the time value of option?

a) 20

b) 25

c) 45

d) 0

8. T & L Ltd has submitted its bid along with bid bond guarantee of its bank for
Green-house gas construction project in Australia with expected cash flows spread
over next 3 years. Though its pricing is very competitive, it is not sure of securing it
due to other factors. But if secured, it has a huge exchange risk in the invoicing
currency viz.: AUD. It can opt for the following derivative product to protect itself.

a) Forward contract

b) Futures contract

c) Option contract

d) Swaps

9. An Indian Company buys a 6 month call on 10 lakh USD with a strike price of Rs.
50/$ and a premium of Re. 1/$. The opportunity cost of money is 12% p.a. At what
spot rate on the date of maturity of options contract would the Indian Company gain?

a) > Rs.50 per USD

b) < Rs.50 per USD

c) > Rs.51.06 per USD

d) < Rs.51.06 per USD

10. A Decacorn is a privately held start-up company which has achieved a valuation
of -----------
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a) Rs.100 crores

b) Rs.1,000 crores

c) USD 10 Million

d) USD 10 Billion

11. Value of Acquiring Company (A Limited) = Rs.540 lacs; Value of Target

Company (B Limited) = Rs.90 lacs. Synergy gain from merger = Rs.45 lacs; No of
shares of A Limited = 30 lacs; No of shares of B Limited = 18 lacs; Exchange ratio =
1:3. How much is the consideration paid?

a) Rs.180 lacs

b) Rs.225 lacs

c) Rs.112.50 lacs

d) Rs.90 lacs

12. When using the Venture Capital Method, which factor contributes to a higher
valuation for the startup?

a) Higher risk associated with the startup's industry

b) Lower expected future earnings

c) Longer time to exit

d) Higher projected exit multiple

13. Bank’s interest-sensitive assets = Rs.100 Crores; Bank’s interest sensitive

liabilities = Rs.80 Crores.

Interest rates will increase by 1%. How much is the impact on earnings of bank?

a) Increase in NII by Rs.1 crore

b) Decrease in NII by Rs.1 crore

c) Increase in NII by Rs.20 lacs

d) Decrease in NII by Rs.20 lacs

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14. A project will generate cash flows of USD 20,00,000 in year 1, USD 40,00,000 in
year 2 and USD 60,00,000 in year 3. Initial investment is USD 80,00,000. There are
restrictions on repatriation of funds and only 50% of profits can be repatriated in
each year and the balance cash flows can be repatriated on completion of project.
Non-repatriated amount can be invested in fixed deposit giving return of 2%. Cost of
capital is 10%. How much is the NPV of the project?

a) USD 16,28,000 (Positive)

b) USD 13,20,000 (Positive)

c) USD 13,80,380 (Positive)

d) Negative NPV

15. Call option Delta = 0.60 Times; Option Gamma is 0.0010. How much would be
the new Put Delta if the price of the underlying asset decline by Rs.1?

a) -0.3990 Times

b) 0.6010 Times

c) 0.5990 Times

d) -0.4010 Times

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