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Appendix
CA Final Gr. I
(Solution of May - 2013 & Question of Nov - 2013)
Paper - 2 : Strategic Financial Management
Chapter:- 2 Project Planning and Capital Budgeting
2013 - May [1] {C} (c)
At present 10 unit apartments shall yield a profit of 200 lakh (` 800 lakhs ! ` 600 lakhs)
and 15 unit apartments shall yield a profit of ` 175 lakh (` 1,200 lakhs ! ` 1,025 lakhs).
Thus 10 units apartment is the best alternative if Ramesh has to construct now.
Whereas, Ramesh waits for 1 year his pay-off will be as follows:
Market Conditions
Buoyant Market

Sluggish Market

10 unit apartments

` 91 lakhs X 10 ! ` 600
lakhs = ` 310 lakhs

` 75 lakhs X 10 ! ` 600
lakhs = ` 150 lakhs

15 unit apartments

` 91 lakhs X 15 ! ` 1,025
lakhs = ` 340 lakhs

` 75 lakhs X 15 ! ` 1,025
lakhs = ` 100 lakhs

Therefore if the market conditions turnout to be buoyant the best alternative is 15 units
apartments and net pay-off will be ` 340 lakhs and if market turnout to be sluggish the
best alternative is the 10 unit apartments and net pay-off shall be ` 150 lakhs.
In order to determine the value of vacant plot we shall use Binomial Model (Risk Neutral
Method) of option valuation as follows:

I-1

I-2

App endix C A Fina l Gr. I Paper - 2

Alternative Method:
You can also calculate these values as follows (Sale Value + Rent):
If market is buoyant then possible outcome = ` 91 lakh + ` 7 lakh = ` 98 lakhs
If market is sluggish then possible outcome = ` 75 lakh + ` 7 lakh = ` 82 lakhs
Let p be the probability of buoyant condition then with the given risk-free rate of interest
of 10% the following condition should be satisfied:
` 80 lakhs =
p=

i.e. 0.375

Thus 1-p = 0.625

Expected cash flow next year
0.375 ` 340 lakhs + 0.625 X ` 150 lakhs = ` 221.25 lakhs
Present Value of expected cash flow:
` 221.25 lakhs (0.909) = ` 201.12 lakhs
Therefore the value of vacant plot is ` 201.12 lakhs
Since the current value of vacant land is more than profit from 10 unit apartments now
the land should be kept vacant.
2013 - May [2] (a)
(i) Computation of Expected NPV:
(` in lakhs)
Year I
CFAT

Year II

P CFP CFAT

12
15
18
32

0.1
0.2
0.4
0.3
or

1.2
3.0
7.2
9.6
21.

Year III

P CFP CFAT

12
18
30
40

0.1
0.3
0.4
0.2
or

1.2
5.4
12
8
26.60

18
20
32
45

CFP

0.2
0.5
0.2
0.1

3.6
10
6.4
4.5
or

24.50

I-3

App endix C A Fina l Gr. I Paper - 2

NPV (` in lakhs)

PV factor @ 7% Total PV (` in lakhs)

21
26.60
24.50

0.935
0.873
0.816
PV of cash inflow
Less: Cash outflow
NPV

19.635
23.222
19.992
62.849
40.000
22.849

(ii) Possible deviation in the expected value

Year I
P1
12
15
18
32

F1 =

! 21
! 21
! 21
! 21

!9
!6
!3
11

81
36
9
121

0.1
0.2
0.4
0.3

P1
8.10
7.2
3.6
36.30
55.20

= 7.43

Year II
P2
12
18
30
40

! 26.60
! 26.60
! 26.60
! 26.60

F2 =

!14.60
! 8.60
3.40
13.40

213.16
73.96
11.56
179.56

0.1
0.3
0.4
0.2

P2
21.32
22.19
4.62
35.91
84.04

= 9.17

Year III
P3
18
20
32
45

F3 =

! 24.50
! 24.50
! 24.50
! 24.50
= 8.48

!6.50
!4.50
7.50
20.50

42.25
20.25
56.25
420.25

0.2
0.5
0.2
0.1

P3
8.45
10.13
11.25
42.03
71.86

I-4

App endix C A Fina l Gr. I Paper - 2

Standard deviation about the expected value:

= 12.6574
2013 - May [5] (b)
Calculation of NPV:
Year
Inflation factor in India
Inflation factor in Africa
Exchange Rate (as per IRP)
Cash Flows in ` 000
Real
Nominal (1)
Cash Flows in African Rand 000
Real
Nominal
In Indian `000 (2)
Net Cash Flow in ` 000 (1)+(2)
PVF@20%
PV

0
1.00
1.00
6.00

1
1.10
1.40
7.6364

2
1.21
1.96
9.7190

-50,000
-50,000

-1,500
-1,650

-2,000
-2,500
-2,420 -3,327.50

-2,00,000
-2,00,000
-33,333
-83,333
1
-83,333

50,000
70,000
9,167
7,517
0.833
6,262

70,000
1,37,200
14,117
11,697
0.694
8,118

3
1.331
2.744
12.3696

90,000
2,46,960
19,965
16,637
0.579
9,633

NPV of 3 years = - 59,320 (` 000)

NPV of Terminal Value =

0.579 = 48,164 (` 000)

Total NPV of the Project = -59,320 (` 000) + 48,164 (` 000) = -11,156 (` 000)
Chapter:- 4 Dividend Decisions
2013 - May [3] (b)
As per MM model, the current market price of equity share is:
P0 =

(D 1 + P 1)
(i)

If the dividend is declared:

100 =

(15 + P1)

100 =
110 = 15 + P1
P 1 = 110 ! 15 = ` 95
The market price of the equity share at the end of the year would be ` 95.

App endix C A Fina l Gr. I Paper - 2

I-5

(ii) If the dividend is not declared:

100 =

(0 + P1)

100 =
P 1 = ` 110
The Market price of the equity share at the end of the year would be ` 110.
(iii) If the firm pays dividend of ` 15 per share out of total profits of ` 6,00,000 and
plans to make new investment of ` 12,00,000, the number of shares to be
issued may be found as follows:
Total Earnings
` 6,00,000
- Dividend paid
` 1,50,000
Retained earnings
` 4,50,000
Total funds required
` 12,00,000
Fresh funds to be raised
` 7,50,000
Market price of the share
` 95
Number of shares to be issued (` 7,50,000 / ` 95)
7,894.74
or, the firm would issue 7895 shares at the rate of ` 95
2013 - May [4] (a)
(i) Expected dividend for next 3 years.
Year 1 (D 1) ` 14.00 (1.09) = ` 15.26
Year 2 (D 2) ` 14.00 (1.09)2 = `16.63
Year 3 (D 3) ` 14.00 (1.09)3 = ` 18.13
Required rate of return = 13% (Ke)
Market price of share after 3 years = (P 3) = ` 360
The present value of share
P0 =
P0 =

+
+

+
+

P 0 = 15.26 (0.885) + 16.63 (0.783) + 18.13 (0.693) + 360 (0.693)

P 0 = 13.50 + 13.02 + 12.56 + 249.48
P 0 = ` 288.56

I-6

App endix C A Fina l Gr. I Paper - 2

(ii)

When the growth rate 9% is achieved for indefinite period, then maximum price
of share should Mr. A willing be to pay is
P0

(iii)

= ` 381.50

Assuming that conditions mentioned above remain same, the price expected
after 3 years will be:
P3 =

= ` 494

Chapter:- 5 Indian Capital Market and Security Analysis

2013 - May [5] (a)
1. Computation of initial outlay:
` (lakhs)
(a) Face value
200.00
Add: Call premium
10.00
Cost of calling old bonds
210.00
(b) Gross proceed of new issue
200.00
Less: Issue costs
2.50
Net proceeds of new issue
197.50
(c). Tax savings on call premium
and unamortized cost 0.30 (10 + 3)
` 3.90 lakhs
Therefore, Initial outlay = ` 210 lakhs - ` 197.50 lakhs - ` 3.90 lakhs
= ` 8.60 lakhs
2. Computation of net present value of refunding the bond:
Saving in annual interest expenses
` (lakhs)
[` 200 x (0.11 - 0.09)]
4.000
Less:-Tax saving on interest and amortization 0.30 x [4+(3-2.5)/10]
1.215
Annual net cash saving
2.785
PVIFA (7%, 10 years)
7.024
Present value of net annual cash saving
` 19.56 lakhs
Less:- Initial outlay
` 8.60 lakhs
Net present value of refunding the bond
` 10.96 lakhs
Decision, Since the NPV of refunding the bond is favarable, the bonds should be
refunded.
2013 - May [6] (b)
Final settlement amount shall be computed by using formula:
=

App endix C A Fina l Gr. I Paper - 2

I-7

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,

When actual rate of interest after 6 months happens to be 9.60%

=
=

= ` 4,39,453

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

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

= ` 7,33,855

Therefore, Parker & Co. will pay banker a sum of ` 7,33,855

Note:

It might be possible that you may solve the question on the basis of days
instead of months (as considered in above calculations).
Further there may be also possibility that the FRA days and Day Count
convention may be taken in various plausible combinations such as 90
days/360 days, 90 days/365 days, 91 days/360 days or 91days/365 days.

I-8

App endix C A Fina l Gr. I Paper - 2

Chapter:- 6 Portfolio Theory

2013 - May [2] (b)
(i) Computation of Portfolio Beta
Security
A
B
C
D
E

Price of No. of
the Stock shares
349.30
480.50
593.52
734.70
824.85

5,000
7,000
8,000
10,000
2,000

Value
17,46,500
33,63,500
47,48,160
73,47,000
16,49,700

Weightage Beta Weighted

Wi
Bi
Beta
0.093
0.178
0.252
0.390
0.087

1.15
0.40
0.90
0.95
0.85

1,88,54,860

0.107
0.071
0.227
0.370
0.074
0.849

Portfolio Beta = 0.849

(ii) Computation of Theoretical Value of Future Contract
Cost of Capital = 10.5% p.a. Accordingly, the Continuously Compounded Rate
of Interest in (1.105) = 0.0998
For February 2013 contract, t = 58/365 = 0.1589
Further F = Sert
F = ` 5,900e(0.0998)(0.1589)
F = ` 5,900e0.015858
F = 5,900 1.01598 = ` 5,994.28
(iii) When total portfolio is to be hedged:
=
=

Portfolio Beta
0.849 = 13.35 contracts say 13 or 14 contracts

(iv) When total portfolio beta is to be reduced to 0.6:

Number of Contracts to be sold =
=

= 3.92 contracts

4 contracts

Chapter:- 7 Financial Services in India

2013 - May [7] (a)
Credit rating:

Credit rating is a symbolic indication of the current opinion regarding the relative
capability of a corporate entity to service its debt obligations in time with reference
to the instrument being rated.

I-9

App endix C A Fina l Gr. I Paper - 2

Credit rating enables the investor to differentiate between instruments on the basis
of their underlying credit quality.

To facilitate simple and easy understanding, credit rating is expressed in

alphabetical or alphanumerical symbols.

Therefore, Credit Rating is:

(i) an expression of opinion of a rating agency.
(ii) the opinion is as on a specific date.
(iii) the opinion is in regard to a debt instrument.
(iv) the opinion depends on the probability of interest and principal obligations
being met timely.
(v) the opinion is dependent on risk evaluation.
Credit rating aims:
(i) to provide superior information to the investors at a low cost;
(ii) to provide a sound basis for proper risk-return structure;
(iii) to subject borrowers to a healthy discipline and
(iv) to assist in the framing of public policy guidelines on institutional investment.
In India the rating coverage is a recent origin, beginning 1988 when the first rating
agency CRISIL was established. At present there are few other rating agencies like:
(i) Investment Information and Credit Rating Agency of India (ICRA).
(ii) Duff & Phelps Credit Rating India Pvt. Ltd. (DCRI)
(iii) Fitch Ratings India (P) Ltd.
(iv) ONICRA Credit Rating Agency of India Ltd.
(v) Credit Rating Information Services of India Ltd. (CRISIL).
(vi) Credit Analysis and Research Limited (CARE).
Chapter:- 8 Mutual Funds
2013 - May [3] (a)
(i) Computation of NPV :
Scheme

Investment

Unit Nos. Unit NAV Total NAV 31.7.2011

(Investment/NAV at 31.7.2011 (Unit Nos. + Unit NAV
entry date)
as on 31.7.2011)

`
MF A
MF B
MF C

12,00,000
4,00,000
2,50,000

1,17,073.17
39,408.87
25,000

10.20
10.25
9.90

11,94,146.33
4,03,940.92
2,47,500.00

I-10

App endix C A Fina l Gr. I Paper - 2

(ii) Computation of Effective Yield :

Scheme

NAV (+)/(!) Dividend Total Yield Number

(NAV as on Received Change in of days
31.7.2011NAV +
Investment)
Dividend
`

MF A
MF B
MF C

(!)5,853.67
(+)3,940.92
(!)2,500

Effective Yield (%
p.a.) (Total
Yield/Investment)
(365/No. of days)
100

`
23,000
6,000
Nil

17,146.33
9,940.92
(!)2,500

2013 - May [4] (b)

(i) Calculation of NPV:
Particulars
Opening Bank (200 - 185 -12)
Add: Proceeds from sale of securities
Add: Dividend received
Deduct:
Cost of securities purchased
Fund management expenses paid (90% of 8)
Capital gains distributed = 80% of (63 - 60)
Dividend distributed = 80% of 2.00
Closing Bank
Closing market value of portfolio
Less: Arrears of expenses
Closing Net Assets
Number of units (Lakhs)
Closing NAV per unit
(ii) Rate of Earning (Per Unit):
Particulars
Income received (` 2.40 + ` 1.60)/20
Loss: Loss on disposal (` 200 - ` 198)/20
Net earning
Initial investment
Rate of earning (monthly)
Rate of earning (Annual)

`
122
92
31

4.275%
9.86%
(!)11.77%

Amount in Amount in Amount in

` lakhs
` lakhs
` lakhs
3.00
63.00
2.00

68.00

56.00
7.20
2.40
1.60

67.20
0.80
198.00
198.80
0.80
198.00
20
9.90
Amount
` 0.20
` 0.10
` 0.10
` 10.00
1%
12%

App endix C A Fina l Gr. I Paper - 2

I-11

Chapter:- 9 Money Market Operations

2013 - May [7] (b), (c)
(b) Asset Securitisation:

It is a method of recycling of funds. It is especially beneficial to financial

intermediaries to support the lending volumes.

Assets generating steady cash flows are packaged together and against this
assets pool market securities can be issued.

The process can be classified in the following three functions.

1. Origination function: A borrower seeks a loan from finance company,
bank or housing company. On the basis of credit worthiness repayment
schedule is structured over the life of the loan.
2. Pooling function: Loans or receivables are clubbed together to create
an underlying pool of assets. This pool is transferred in favour of a SPV
(Special Purpose Vehicle), which acts as a trustee for the investor. Once,
the assets are transferred they are held in the organizers portfolios.
3. Securitisation function: It is the SPVs job to structure and issue the
securities on the basis of asset pool. The securities carry coupon and an
expected maturity, which can be asset based or mortgage based. These
are generally sold to investors through merchant bankers. The investors
interested in this type of securities are generally institutional investors like
mutual fund, insurance companies etc. The originator usually keeps the
spread.
Basically, the process of securitisation is without recourse i.e. the investor bears
the credit risk of default and the issuer is under an obligation to pay to investors
only if the cash flows are received by issuer from the collateral.
(c) Call Money:

The Call Money is a part of the money market where, day to day surplus
funds, mostly of banks, are traded. Moreover, the call money market is most
liquid of all short-term money market segments.

The maturity period of call loans vary from 1 to 14 days. The money that is lent
for one day in call money market is also known as overnight money.

The interest paid on call loans are known as the call rates.

The call rate is expected to freely reflect the day-to-day lack of funds.

These rates vary from day-to-day and within the day, often from hour-to-hour.
High rates indicate the tightness of liquidity in the financial system while low
rates indicate an easy liquidity position in the market.

In India, call money is lent mainly to even out the short-term mismatches of
assets and liabilities and to meet CRR requirement of banks.

The short-term mismatches arise due to variation in maturities i.e. the deposits
mobilized are deployed by the bank at a longer maturity to earn more returns
and duration of withdrawal of deposits by customers vary.

Therefore, the banks borrow from call money markets to meet short-term
maturity mismatches.

App endix C A Fina l Gr. I Paper - 2

I-12

The banks borrow from call money market to meet the cash Reserve Ratio
(CRR) requirements that they should maintain with RBI every fortnight and is
computed as a percentage of Net Demand and Time Liabilities (NDTL).

Chapter:- 10 FDI, FII and International Financial Management

2013 - May [7] (d)
Euro Convertible Bonds:

Euro convertible are bonds issued by Indian companies in foreign market with the
option to convert them into pre-determined number of equity shares of the
company.

Usually price of equity shares at the time of conversion will fetch premium. The
Bonds carry fixed rate of interest.

The issue of bonds may carry two options:

Call option:

Under this the issuer can call the bonds for redemption before the date of maturity.
Where the issuers share price has appreciated substantially, i.e., far in excess of
the redemption value of bonds, the issuer company can exercise the option.

This call option forces the investors to convert the bonds into equity.

Usually, such a case arises when the share prices reach a stage near 130% to
150% of the conversion price.
Put option:

It put option enables the buyer of the bond a right to sell his bonds to the issuer
company at a pre-determined price and date.

The payment of interest and the redemption of the bonds will be made by the
issuer-company in US dollars.
Chapter:- 11 Foreign Exchange Exposure and Risk Management
2013 - May [1] {C} (a), (d)
(a) The bank (Dealer) covered itself by buying from the London market at market
selling rate.
Rupee - US Dollar selling rate
=
` 55.20
US Dollar - Hong Kong Dollar
= HK $ 7.9250
Rupee - Hong Kong cross rate (` 55.20 / 7.9250)
=
` 6.9653
Gain / Loss to the Bank
Amount received from customer (HK$ 40,00,000) ` 7.15
` 2,86,00,000
Amount paid on cover deal (HK$ 40,00,000 ` 6.9653)
` 2,78,61,200
Gain to Bank
` 7,38,800
Alternatively:
Gain to bank = 40,00,000 (` 7.15 ! ` 6.9653) = ` 7,38,800

I-13

App endix C A Fina l Gr. I Paper - 2

(d) Step 1 : First of all we shall calculate premium payable to bank as follows:
P=

Where
P = Premium
A = Principal Amount
rp = Rate of Premium
i= Fixed Rate of Interest
t = Time
=

=
= 40,861
Step 2 : Now we see the net payment received from bank
Reset
Period

Additional
Amount
interest due to received from
rise in interest
bank
rate

Premium paid
Net Amt.
to bank
Received from
bank

1
2
3

75,000
112,500
150,000

75,000
112,500
150,000

40,861
40,861
40,861

34,139
71,639
109,139

TOTAL

337,500

337,500

122,583

214,917

Therefore, from above it can be seen that interest rate risk amount of 337,500
reduced by 214,917 by using of Cap option.
Note: Here, all solution has been worked out for four decimal points. But it may be
possible that you may compute upto three decimal points or may use different
basis. In such situation their answer is likely to be different.

I-14

App endix C A Fina l Gr. I Paper - 2

Chapter:- 12 Mergers, Acquisition Restructuring & Business Valuation

2013 - May [1] {C} (b)
Valuation based on Market Price
Market Price per share
` 440.00
Thus value of total business is (3.10 crore x ` 440)
` 1,364.00 Crore
Valuation based on Discounted Cash Flow
Present Value of cash flows
(` 460 Crore x 0.893) + (` 600 Crore X 0.797) +
(` 740 Crore X 0.712) =
` 1,415.86 Crore
Value of per share (` 1415.86 Crore / 3.10 Crore)
` 456.73 per share
Range of valuation
Minimum
Maximum

Per Share (`)

Total (` Crore)

440.00
456.73

1364.00
1415.86

2013 - May [6] (a)

(i) Pre Merger Market Value of Share (in unit)
P/E Ratio X EPS
Longitude Ltd. ` 8 X 15 = ` 120.00
Latitude Ltd. ` 5 X 10 = ` 50.00
(ii) (1) Maximum exchange ratio without dilution of EPS
Pre Merger PAT of Longitude Ltd.
Pre Merger PAT of Latitude Ltd.
Combined PAT
Longitude Ltd. s EPS
Maximum number of shares of Longitude after merger
(` 200 lakhs/` 8)
Existing number of shares
Maximum number of shares to be exchanged
Maximum share exchange ratio 10:16 or 5:8

` 140 Lakhs
` 60 Lakhs
` 200 Lakhs
`8
25 Lakhs
15 Lakhs
10 Lakhs

App endix C A Fina l Gr. I Paper - 2

I-15

(2) Maximum exchange ratio without dilution of Market Price Per Share
Pre Merger Market Capitalization of Longitude Ltd.
(` 120 15 Lakhs)
Pre Merger Market Capitalization of Latitude Ltd.
(` 50 16 Lakhs)
Combined Market Capitalization
Current Market Price of share of Longitude Ltd.
Maximum number of shares to be exchanged of
Longitude (surviving company) (` 2600 Lakhs/` 120)
Current Number of Shares of Longitude Ltd.
Maximum number of shares to be exchanged (Lakhs)

` 1800 Lakhs
` 800 Lakhs
` 2600 Lakhs
` 120
21.67 Lakhs
15.00 Lakhs
6.67 Lakhs

Maximum share exchange ratio 6.67:16 or 0.4169:1

Alternatively:
Since in the question figures given of PAT of both companies are not
matching with figures of EPS X Number of Shares.
Therefore, you can compute PAT by using this formula then alternative
answer shall be as follows:
(1) Maximum exchange ratio without dilution of EPS
Pre Merger PAT of Longitude Ltd.
Pre Merger PAT of Latitude Ltd.
Combined PAT
Longitude Ltd.s EPS
Maximum number of shares of Longitude after
merger (` 200 lakhs/` 8)
Existing number of shares
Maximum number of shares to be exchanged

` 120 Lakhs
` 80 Lakhs
` 200 Lakhs
`8
25 Lakhs
15 Lakhs
10 Lakhs

Maximum share exchange ratio 10:16 or 5:8

(2) Maximum exchange ratio without dilution of Market Price Per Share
Pre Merger Market Capitalization of Longitude Ltd.
(` 120 15 Lakhs)
Pre Merger Market Capitalization of Latitude Ltd.
(` 50 16 Lakhs)
Combined Market Capitalization
Current Market Price of share of Longitude Ltd.
Maximum number of shares to be exchanged of

` 1800 Lakhs
` 800 Lakhs
` 2600 Lakhs
` 120

I-16

App endix C A Fina l Gr. I Paper - 2

Longitude (surviving company) (` 2600 Lakhs/` 120)

Current Number of Shares of Longitude Ltd.
Maximum number of shares to be exchanged
(Lakhs)

21.67 Lakhs
15.00 Lakhs
6.67 Lakhs

Maximum share exchange ratio 6.67:16 or 0.4169:1

2013 - May [7] (e)
Please refer 2008 - Nov [6] (i) on page no.382

Question Paper of Nov - 2013

Chapter:- 2 Project Planning and Capital Budgeting
2013 - Nov [4] (b) The Easygoing Company Limited is considering a new project with
initial investment, for a product "Survival". It is estimated that IRR of the project is 16%
having an estimated life of 5 years.
Financial Manager has studied the project with sensitivity analysis and informed that
annual fixed cost sensitivity is 7.8416%, whereas cost of capital (discount rate)
sensitivity is 60%.
Other information available are:
Profit Volume Ratio (P/V) is 70%,
Variable cost ` 60/- per unit
Annual Cash Flow ` 57,500/Ignore Depreciation on initial investment and impact of taxation.
Calculate
(i) Initial Investment of the Project
(ii) Net Present Value of the Project
(iii) Annual Fixed Cost
(iv) Estimated annual unit of sales
(v) Break Even Units
Cumulative Discounting Factor for 5 years
8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127
(8 marks)
2013 - Nov [7] Write short notes on the following:
(a) Explain the concept, Zero date of a Project in project management.

(4 marks)

App endix C A Fina l Gr. I Paper - 2

I-17

Chapter:- 3 Lease and Hire Purchase

2013 - Nov [3] (a) ABC Ltd. is contemplating having an access to a machine for a
period of 5 years. The company can have the use of the machine for the stipulated
period through leasing arrangement or the requisite amount can be borrowed to buy the
machine. In case of leasing, the company received a proposal to pay annual end of year
rent of ` 2.4 lakhs for a period of 5 years.
In case of purchase (which costs ` 10,00,000/-) the company would have a 12%, 5 year
loan to be paid in equated installments, each installment becoming due at the beginning
of each year. It is estimated that the machine can be sold for ` 2,00,000/- at the end of
5 th year. The company uses straight line method of depreciation. Corporate tax rate is
30%. Post tax cost of capital of ABC Ltd. is 10%.
You are required to advice
(i) Whether the machine should be bought or taken on lease.
(ii) Analyse the financial viability from the point of view of the lessor assuming 12%
post tax cost of capital.
PV of ` 1 @ 10% for 5 years
PV of ` 1 @ 12% for 5 years
1
.909
.893
2
.826
.797
3
.751
.712
4
.683
.636
5
.621
.567
(10 marks)
Chapter:- 4 Dividend Decisions
2013 - Nov [6](a) A share of Tension - free Economy Ltd. is currently quoted at a price
earnings ratio of 7.5 times. The retained earning being 37.5% is ` 3 per share.
Calculate
(i) The company's cost of equity, if investors' expected rate of return is 12%.
(ii) Market price of share, if anticipated growth rate is 13% per annum with same
cost of capital.
(iii) Market price per share, if the company's cost of capital is 18% and anticipated
growth rate is 15% per annum, assuming other conditions remaining the
same.
(8 marks)
Chapter:- 5 Indian Capital Market and Security Analysis
2013 - Nov [1] {C} (a) ABC Ltd. issued 9%, 5 year Bonds of ` 1,000/- each having a
maturity of 3 years. The present rate of interest is 12% for one year tenure. It is
expected that Forward rate of interest for one year tenure is going to fall by 75 basis
points and further by 50 basis points for every next year in future for the same tenure.
This bond has a beta value of 1.02 and is more popular in the market due to less credit
risk.

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App endix C A Fina l Gr. I Paper - 2

Calculate
(i) Intrinsic value of bond
(ii) Expected price of bond in the market

(5 marks)

2013 - Nov [4] (a) Trupti Co. Ltd. promoted by a Multinational group INTERNATIONAL
INC is listed on stock exchange holding 84% i.e. 63 lakhs shares.
Profit after Tax is ` 4.80 crores.
Free Float Market Capitalization is ` 19.20 crores.
As per the SEBI guidelines promoters have to restrict their holding to 75% to avoid
delisting from the stock exchange. Board of Directors has decided not to delist the share
but to comply with the SEBI guidelines by issuing Bonus shares to minority
shareholders while maintaining the same P/E ratio.
Calculate
(i) P/E Ratio
(ii) Bonus Ratio
(iii) Market price of share before and after the issue of bonus shares
(iv) Free Float Market capitalization of the company after the bonus shares.
(8 marks)
2013 - Nov [5] (b) Ram buys 10,000 shares of X Ltd. at a price of ` 22 per share whose
beta value is 1.5 and sells 5,000 shares of A Ltd. at a price of ` 40 per share having a
beta value of 2. He obtains a complete hedge by Nifty futures at ` 1,000 each. He
closes out his position at the closing price of the next day when the share of X Ltd.
dropped by 2%, share of A Ltd. appreciated by 3% and Nifty futures dropped by 1.5%.
What is the overall profit / loss to Ram?
(6 marks)
Chapter:- 6 Portfolio Theory
2013 - Nov [1] {C} (b) A trader is having in its portfolio shares worth ` 85 lakhs at
current price and cash ` 15 lakhs. The beta of share portfolio is 1.6. After 3 months the
price of shares dropped by 3.2%.
Determine:
(i) Current portfolio beta.
(ii) Portfolio beta after 3 months if the trader on current date goes for long position
on ` 100 lakhs Nifty futures.
(5 marks)
2013 - Nov [2] (a) Mr. Ram is holding the following securities :
Particulars of
Securities
Equity Shares:
Gold Ltd.

Cost

Dividends

Market Price

11,000

1,800

12,000

Beta

0.6

App endix C A Fina l Gr. I Paper - 2

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Silver Ltd.
16,000
1,000
17,200
0.8
Bronze Ltd.
12,000
800
18,000
0.6
GOI Bonds
40,000
4,000
37,500
1.0
Calculate:
(i) Expected rate of return in each case, using the Capital Asset Pricing Model
(CAPM).
(ii) Average rate of return, if risk free rate of return is 14%.
(8 marks)
Chapter:- 7 Financial Services in India
2013 - Nov [3] (b) M/s Atlantic Company Limited with a turnover of ` 4.80 crores is
expecting growth of 25% for forthcoming year. Average credit period is 90 days. The
past experience shows that bad debt losses are 1.75% on sales. The Companys
administering cost for collecting receivables is ` 6,00,000/-.
It has decided to take factoring services of Pacific Factors on terms that factor will buy
receivables by charging 2% commission and 20% risk with recourse.
The Factor will pay advance on receivables to the firm at 16% interest rate per annum
after withholding 10% as reserve.
Calculate the effective cost of factoring to the firm. (Assume 360 days in a year)
(6 marks)
Chapter:- 8 Mutual Funds
2013 - Nov [1] {C} (d) On 01-07-2010, Mr. X invested ` 50,000/- at initial offer in Mutual
Funds at a face value of ` 10 each per unit. On 31-03-2011, a dividend was paid @
10% and annualized yield was 120%. On 31-03-2012, 20% dividend and capital gain
of ` 0.60 per unit was given. Mr. X redeemed all his 6271.98 units when his annualized
yield was 71.50% over the period of holding.
Calculate NAV as on 31-03-2011, 31-03-2012 and 31-03-2013.
For calculations consider a year of 12 months.
(5 marks)
2013 - Nov [7] Write short notes on the following:
(c) What is an Exchange Traded Fund? What are its key features?
(4 marks)
Chapter:- 9 Money Market Operations
2013 - Nov [7] Write short notes on the following:
(e) What is money market? What are its features? What kind of inefficiencies it is
suffering from?
(4 marks)
Chapter:- 11 Foreign Exchange Exposure and Risk Management
2013 - Nov [1] {C} (c) You, a foreign exchange dealer of your bank, are informed that
your bank has sold a T.T. on Copenhagen for Danish Kroner 10,00,000 at the rate of
Danish Kroner 1 = ` 6.5150. You are required to cover the transaction either in London
or New York market. The rates on that date are as under:

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App endix C A Fina l Gr. I Paper - 2

Mumbai - London

` 74.3000

` 74.3200

London - New York

` 49.2500

` 49.2625

London - Copenhagen

DKK 11.4200

DKK 11.4350

New York - Copenhagen

DKK 07.5670

DKK 07.5840

In which market will you cover the transaction, London or New York, and what will be
the exchange profit or loss on the transaction? Ignore brokerages.
(5 marks)
2013 - Nov [2] (b) An American firm is under obligation to pay interests of Can$
1010000 and Can$ 705000 on 31 st 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 firms bank were obtained :
Spot
0.9284 - 0.9288

1 Month Forward
0.9301

3 Months Forward
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 this, 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)
2013 - Nov [6] (b) Your banks London office has surplus funds to the extent of USD
5,00,000/- for a period of 3 months. The cost of the funds to the bank is 4% p.a. It
proposes to invest these funds in London, New York or Frankfurt and obtain the best
yield, without any exchange risk to the bank. The following rates of interest are available
at the three centres for investment of domestic funds there at for a period of 3 months.
London
5% p.a.
New York
8% p.a.
Frankfurt
3% p.a.

I-21

App endix C A Fina l Gr. I Paper - 2

The market rates in London for US dollars and Euro are as under:
London on New York
Spot
1.5350/90
1 month
15/18
2 month
30/35
3 month
80/85
London on Frankfurt
Spot
1.8260/90
1 month
60/55
2 month
95/90
3 month
145/140
At which centre, will the investment be made & what will be the net gain (to the nearest
pound) to the bank on the invested funds?
(8 marks)
2013 - Nov [7] (b) XYZ Bank, Amsterdam, wants to purchase Rupees 25 million against
for funding their Nostro account and they have credited LORO account with Bank of
London, London.
Calculate the amount of s credited. Ongoing inter-bank rates are per $,
` 61.3625/3700 & per , $ 1.5260/70.
(4 marks)
Chapter:- 12 Mergers, Acquisition Restructuring & Business Valuation
2013 - Nov [5](a) M/s Tiger Ltd. wants to acquire M/s Leopard Ltd. The balance sheet
of Leopard Ltd. as on 31st March, 2012 is as follows:
Liabilities

Assets

Equity Capital (70,000 shares)

7,00,000 Cash

50,000

Retained earnings

3,00,000 Debtors

70,000

12% Debentures

3,00,000 Inventories

Creditors and other liabilities

3,20,000 Plants & Eqpt.

16,20,000

2,00,000
13,00,000
16,20,000

Additional information:
(i) Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every two
shares. External liabilities are expected to be settled at ` 5,00,000. Shares of
Tiger Ltd. would be issued at its current price of ` 15 per share. Debentureholders will get 13% convertible debentures in the purchasing company for the
same amount. Debtors and inventories are expected to realize ` 2,00,000.

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App endix C A Fina l Gr. I Paper - 2

(ii)

Tiger Ltd. has decided to operate the business of Leopard Ltd. as a separate
division. The division is likely to give cash flows (after tax) to the extent of
` 5,00,000 per year for 6 years. Tiger Ltd. has planned that, after 6 years, this
division would be demerged and disposed of for ` 2,00,000.
(iii) The company's cost of capital is 16%.
Make a report to the Board of the company advising them about the financial feasibility
of this acquisition.
Net present values for 16% for ` 1 are as follows:
Years

PV

.862

.743

.641

.552

.476

.410
(10 marks)

2013 - Nov [7] Write short notes on the following:

(d) What is an equity curve out? How does it differ from a spin off?

Shuchita Prakashan (P) Ltd.

25/19, L.I.C. Colony, Tagore Town,
Allahabad - 211002
Visit us : www.shuchita.com

(4 marks)

App endix C A Fina l Gr. I Paper - 2

FOR NOTES

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App endix C A Fina l Gr. I Paper - 2

FOR NOTES

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