Free of Cost ISBN : 978-93-5034-729-4 CA Final Gr. I Appendix (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 10 unit apartments ` 91 lakhs X 10 ` 600 lakhs = ` 310 lakhs 15 unit apartments ` 91 lakhs X 15 ` 1,025 lakhs = ` 340 lakhs Sluggish Market ` 75 lakhs X 10 ` 600 lakhs = ` 150 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
Appendix CA Final Gr. I Paper - 2 I-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 Year II Year III CFAT P CF P CFAT P CF P CFAT P CF P 12 15 18 32 0.1 0.2 0.4 0.3 1.2 3.0 7.2 9.6 12 18 30 40 0.1 0.3 0.4 0.2 1.2 5.4 12 8 18 20 32 45 0.2 0.5 0.2 0.1 3.6 10 6.4 4.5 or 21. or 26.60 or 24.50
Appendix CA Final Gr. I Paper - 2 I-3 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 P 1 P 1 12 21 15 21 18 21 32 21 9 6 3 11 81 36 9 121 0.1 0.2 0.4 0.3 8.10 7.2 3.6 36.30 55.20 1 = = 7.43 Year II P 2 P 2 12 26.60 18 26.60 30 26.60 40 26.60 14.60 8.60 3.40 13.40 213.16 73.96 11.56 179.56 0.1 0.3 0.4 0.2 21.32 22.19 4.62 35.91 84.04 2 = = 9.17 Year III P 3 P 3 18 24.50 20 24.50 32 24.50 45 24.50 6.50 4.50 7.50 20.50 42.25 20.25 56.25 420.25 0.2 0.5 0.2 0.1 8.45 10.13 11.25 42.03 71.86 3 = = 8.48
Appendix CA Final Gr. I Paper - 2 I-4 Standard deviation about the expected value: = 12.6574 2013 - May [5] (b) Calculation of NPV: Year 0 1 2 3 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 NPV of 3 years = - 59,320 (` 000) 1.00 1.00 6.00-50,000-50,000-2,00,000-2,00,000-33,333-83,333 1-83,333 1.10 1.40 7.6364-1,500-1,650 50,000 70,000 9,167 7,517 0.833 6,262 NPV of Terminal Value = 0.579 = 48,164 (` 000) 1.21 1.96 9.7190-2,000-2,420 70,000 1,37,200 14,117 11,697 0.694 8,118 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: P 0 = (D 1 + P 1 ) 1.331 2.744 12.3696-2,500-3,327.50 90,000 2,46,960 19,965 16,637 0.579 9,633 (i) If the dividend is declared: 100 = (15 + P 1 ) 100 = 110 = 15 + P 1 P 1 = 110 15 = ` 95 The market price of the equity share at the end of the year would be ` 95.
Appendix CA Final Gr. I Paper - 2 I-5 (ii) If the dividend is not declared: 100 = (0 + P 1 ) 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 P 0 = + + + P 0 = + + + 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
Appendix CA Final Gr. I Paper - 2 I-6 (ii) When the growth rate 9% is achieved for indefinite period, then maximum price of share should Mr. A willing be to pay is P 0 = = = ` 381.50 (iii) Assuming that conditions mentioned above remain same, the price expected after 3 years will be: P 3 = = = = = ` 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: =
Appendix CA Final 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.
Appendix CA Final Gr. I Paper - 2 I-8 Chapter:- 6 Portfolio Theory 2013 - May [2] (b) (i) Computation of Portfolio Beta Security A B C D E Price of the Stock 349.30 480.50 593.52 734.70 824.85 No. of shares 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 W i 0.093 0.178 0.252 0.390 0.087 Beta B i 1.15 0.40 0.90 0.95 0.85 Weighted Beta 0.107 0.071 0.227 0.370 0.074 1,88,54,860 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 = Se rt F = ` 5,900e (0.0998)(0.1589) F = ` 5,900e 0.015858 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.
Appendix CA Final Gr. I Paper - 2 I-9 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. (Investment/NAV at entry date) MF A MF B MF C 12,00,000 4,00,000 2,50,000 Unit NAV 31.7.2011 Total NAV 31.7.2011 (Unit Nos. + Unit NAV as on 31.7.2011) ` ` ` 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
Appendix CA Final Gr. I Paper - 2 I-10 (ii) Computation of Effective Yield : Scheme MF A MF B MF C NAV (+)/( ) (NAV as on 31.7.2011- Investment) ( )5,853.67 (+)3,940.92 ( )2,500 2013 - May [4] (b) (i) Calculation of NPV: Particulars Dividend Received Total Yield Change in NAV + Dividend Number of days 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 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 Amount in ` lakhs 3.00 63.00 2.00 56.00 7.20 2.40 1.60 Amount in ` lakhs 68.00 67.20 4.275% 9.86% ( )11.77% Amount in ` lakhs 0.80 198.00 198.80 0.80 198.00 20 9.90 Amount ` 0.20 ` 0.10 ` 0.10 ` 10.00 1% 12%
Appendix CA Final 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 SPV s 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.
Appendix CA Final 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 issuer s 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
Appendix CA Final Gr. I Paper - 2 I-13 (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 1 2 3 Reset Period Additional interest due to rise in interest rate 75,000 112,500 150,000 Amount received from bank 75,000 112,500 150,000 Premium paid to bank 40,861 40,861 40,861 Net Amt. Received from bank 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.
Appendix CA Final Gr. I Paper - 2 I-14 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 (`) 440.00 456.73 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 Total (` Crore) 1364.00 1415.86 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
Appendix CA Final 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
Appendix CA Final Gr. I Paper - 2 I-16 Longitude (surviving company) (` 2600 Lakhs/` 120) Current Number of Shares of Longitude Ltd. Maximum number of shares to be exchanged (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 21.67 Lakhs 15.00 Lakhs 6.67 Lakhs 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)
Appendix CA Final 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.
Appendix CA Final Gr. I Paper - 2 I-18 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 Cost Dividends Market Price Beta Securities ` ` ` Equity Shares: Gold Ltd. 11,000 1,800 12,000 0.6
Appendix CA Final Gr. I Paper - 2 I-19 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 Company s 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:
Appendix CA Final Gr. I Paper - 2 I-20 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 30 th 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$, from the firm s bank were obtained : Spot 1 Month Forward 3 Months Forward 0.9284-0.9288 0.9301 0.9356 Price for a Can$ / 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 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 bank s 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.
Appendix CA Final Gr. I Paper - 2 I-21 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 31 st 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 2,00,000 Creditors and other liabilities 3,20,000 Plants & Eqpt. 13,00,000 16,20,000 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.
Appendix CA Final Gr. I Paper - 2 I-22 (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 1 2 3 4 5 6 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? (4 marks) Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town, Allahabad - 211002 Visit us : www.shuchita.com
Appendix CA Final Gr. I Paper - 2 I-23 FOR NOTES
Appendix CA Final Gr. I Paper - 2 I-24 FOR NOTES