Downloaded from www.ashishlalaji.net
Pinnacle Academy
Mock Tests for
November 2015 C A Final Examination
201-202, Florence Classic, Besides Unnati Vidhyalay,
10, Ashapuri Society, Jain Derasar Rd., Akota, Vadodara-20. ph: 98258 561 55
Strategic Financial Management Mock Test 3
Conducted on 12th October 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-3 hours
Maximum Marks- 100
Q 1 is compulsory.
Answer any 5 from the remaining.
Q1
(a)
XYZ Ltd. is considering a project for which the following estimates are available:
Initial cost of the project
Sales price/unit
Cost/unit
Sales volumes
Year 1
Year 2
Year 3
Discount rate 10% p.a.
10,00,000
60
40
20000 units
30000 units
30000 units
Determine NPV. You are required to measure the sensitivity of the project in relation
to each of the following parameters such that NPV becomes zero:
(i) Sales price/unit
(iii) Sales volume
(v) Project lifetime
(ii) Unit cost
(iv) Initial outlay and
Taxation may be ignored.
(b)
(10 Marks)
BidTown Chemicals has received a notice from Pollution Control Board of their city
to get installed wastage affluent plant to improve waste generation. The cost of
installation of plant is Rs.50 lakhs with a life span of 4 years. After 4 years the plant
shall be disposed at 10% of its installation cost.
Due to installation of plant there shall be an incremental cash flow estimated at
Rs.20 lakh p.a. for four years.
The company has two options to acquire plant:
1
Downloaded from www.ashishlalaji.net
(i)
Borrow funds at 10% (pre-tax) from a bank and acquire machine. The loan is
repayable in 4 equal annual instalments
(ii)
Obtain a finance lease of Rs.20 lakhs payable at the end of the year
At present the company is ungeared with beta 3. If company takes the loan the D/E
ratio of company would become 0.3. Company is in tax bracket of 40%.
Depreciation is allowable at 25% as per WDV method. Risk free rate is 6% and
market return is 8%. Ignore tax gain on loss due to disposal of plant.
Suggest mode of acquisition of the affluent plant.
(10 Marks)
Q2
(a)
XY Ltd. has under its consideration a project with an initial investment of
Rs.1,00,000. Three probable cash inflow scenarios with their probabilities of
occurrence have been estimated as below:
Annual Cash Inflow (Rs.)
Probability (Pi)
20,000
0.1
30,000
0.7
40,000
0.2
The project life is 5 years and desired rate of return is 20%. Estimated terminal
values for the project assets under the three probability alternatives are Rs.0, 20,000
and 30,000 respectively.
Required:
i.
ii.
iii.
iv.
Expected NPV
Financial viability of the project
Best Case NPV and its probability of occurrence
Worst Case NPV and its probability of occurrence
(10 Marks)
(b)
Dual Company is analyzing the possibility of undertaking any one of the following
two mutually exclusive proposals:
Economic State
Good
Normal
Bad
Probability
0.3
0.4
0.3
Project A
6,000
4,000
2,000
Project B
5,000
4,000
3,000
Other parameters:
Initial Cost
Expected Life
1.0
1.0
5,000
4 years
5,000
4 years
The company wishes to use risk-adjusted discount rate method for the purpose of
analyzing the proposals.
The risk-adjusted discount rate is selected as under:
2
Downloaded from www.ashishlalaji.net
Coefficient of Variation
0.00-0.15
0.15-0.20
0.20-0.30
0.30-0.40
0.40-0.50
0.50 and above
Cut-off rate
6%
7%
8%
9%
10%
11%
Suggest which proposal is acceptable?
Q3
(a)
(6 Marks)
Consider following information in respect of security X:
Equilibrium return
Market return
7 % Treasury Bond (face value of Rs.100) trading at
Covariance of Market return and Security return
Coefficient of correlation
15%
15%
Rs.140
225%
0.75
Determine standard deviation of market return and security return.
(6 marks)
(b)
Following details are available:
X
Y
Sensex
Return Variance Beta Correlation
15 %
6.30 %
0.71
0.424
25 %
5.86 %
0.27
6%
2.25 %
Calculate systematic and unsystematic risk for both the shares. If equal amount is
invested in both the shares, what is the portfolio beta, variance and standard
deviation?
(10 Marks)
Q4
(a)
Amazon Ltd. wishes to take over Nile Ltd. Following details are available:
% Shareholding of Promoters
Share Capital
Free Reserves
Paid up value per share
Free Float Market Capitalization
PE Ratio (times)
Amazon Ltd.
50%
Rs.200 lakhs
Rs.900 lakhs
Rs.100
Rs.500 lakhs
10
Nile Ltd.
60%
Rs.100 lakhs
Rs.600 lakhs
Rs.10
Rs.156 lakhs
4
For swap ratio, 25 % weight is assigned to BVPS, 50 % to EPS and 25 % to MPS.
Determine (i) swap ratio and (ii) EPS and MPS of Amazon Ltd. after merger
assuming PE ratio of Amazon Ltd. prevails even after merger.
(8 Marks)
3
Downloaded from www.ashishlalaji.net
(b)
i.
ii.
A Ltd. has currently 10 lakh shares outstanding. It has surplus cash of Rs.315 lakhs
of which it wants to distribute 50% to its shareholders. The company has decided to
buy back its own shares using the surplus cash at a buy back price of Rs.105. This
buy back price is 5% higher than theoretical buy back price. The current EPS of the
company is Rs.12 per share. After the buy back the PE multiple shall rise to 8.5
times. You are required to determine:
Pre-buyback MPS, Market Capitalisation and PE Multiple
Post-buyback MPS, Market Capitalisation and EPS
(8 Marks)
Q5
(a)
A company has decided to take a 3-year floating rate loan of $250 million to finance
a project. The loan is indexed to 6-month LIBOR with a spread of 100 bp. The
LIBOR for first reset period is 5.75%. A 3-year interest rate cap with a face value of
$250 million and a strike price of 7% is available for a premium of 3.75%. Calculate
effective cost of the capped loan for the following LIBOR on the next 5 rollover dates:
5.5%, 6%, 6.25%, 6.5% and 6.75%. Fixed interest rate is 7%. For the purpose of
your calculations, premium cost should be amortized over a period of 2.5 year using
fixed interest rate as discount rate. Show the effective cost of the capped loan.
(8 Marks)
(b)
Multiplex Limited is considering a capital investment for which following information
is available:
(i) Cost of the project is estimated to be Rs.435 crores which includes:
(a) Contingencies of Rs.30 crores
(b) Margin money for working capital of Rs.10.5 crores
(c) Interest during construction of Rs.31 crores
(d) Capital issue expenses of Rs.13.5 crores
(ii) Incremental investment on working capital is estimated to be:
(Rs. in crores)
Year
Incremental Working Capital
0
10.5
1
32.3
2
7.0
3
5.6
(iii) Salvage value is Rs.80 crores
(iv) The operating cash flows are projected as under:
(Rs. in crores)
Year
1
2
3
4
5
6
7
8
9
10
PBIT
42
111
125
125
125
125
125
125
125
125
Tax
8
6
9
14
33
39
44
47
48
48
Interest
25
46
36
37
16
11
5
1
0
0
4
Downloaded from www.ashishlalaji.net
Project will be financed with a debt of Rs.268 crores and remaining through equity.
The overall cost of capital is 13%. Calculate NPV. Is the project viable? Ignore
depreciation.
(8 Marks)
Q6
(a)
You are given the following details related to historical performance of capital
markets and Jupiter Fund, a common stock mutual fund:
Year
Jupiter Fund
Beta
Return on
Jupiter Fund
Return on
Market Index
Return on
Treasury Bills
1
2
3
4
5
.9
.95
1
.8
.8
-2.99
22.01
-22.4
29.72
0.48
-8.5
14.31
-14.66
37.2
-7.18
6.58
4.39
6.93
5.8
5.12
Required:
i.
Compute Jupiter Fund’s average beta over the five-year period. What investment
percentages in the market index and treasury bills are required in order to produce a
beta equal to the fund’s average beta?
ii.
Compute the year-by-year returns that would have been earned on a portfolio
invested in the market index and treasury bills in the proportion calculated in (a)
above.
iii.
Compute the year-by-year returns that would have been earned on a portfolio
invested in the market index and treasury bills in the proportion needed to match to
the fund’s beta year-by-year.
iv.
Comment on performance of Jupiter Fund vis-à-vis the Market Index based on
Treynor’s Ratio using averages of past five years.
(2 + 2 + 2 +2 = 8 marks)
(b)
An import house in India has bought goods from Switzerland for CHF 10,00,000. The
exporter has given the Indian company two options:
(i) Pay immediately without any interest charge
(ii) Pay after 3 months with interest of 5 % p.a.
The importer’s bank charges 14 % p.a. on overdrafts. Exchange rates are expected
as under:
Spot (CHF / INR)
3-months forward:
30.00 / 30.50
31.10 / 31.60
What should the company do?
(c)
(4 Marks)
Suppose a dealer quotes ‘All-in-cost’ for a generic swap at 8% against six month
LIBOR flat. If the notional principal amount of swap is Rs.5,00,000 –
5
Downloaded from www.ashishlalaji.net
i. Calculate semi-annual fixed payment.
ii. Find the first floating rate payment for (i) above if the six month period from the
effective date of swap to the settlement date comprises 181 days and that the
corresponding LIBOR was 6% on the effective date of swap.
iii. In (ii) above, if the settlement is on ‘Net’ basis, how much the fixed rate payer would
pay to the floating rate payer?
Generic swap is based on 30 / 360 days basis.
Q7
(4 Marks)
Distinguish between (any four):
(i)
(ii)
(iii)
(iv)
(v)
Open Ended and Close Ended Schemes of Mutual Funds
Commercial and Investment Banking
NPV and IRR
Factoring and Bills Discounting
SML and CML
(16 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
6
Downloaded from www.ashishlalaji.net
Solution of
SFM Mock Test 3
Conducted on 12th October 2015
Q1
(a)
Calculation of NPV of the Project:
Year
Sales
Units
Contribution
per unit
1
2
3
20,000
30,000
30,000
20
20
20
Total
Cash
Inflow
4,00,000
6,00,000
6,00,000
PVF
(10%)
PV
.909
3,63,600
.826
4,95,600
.751
4,56,600
ΣPVCI 13,09,800
Less: ΣPVCO 10,00,000
NPV
3,09,800
(2 Marks)
Measuring Sensitivity of each given factor: [Such that NPV is rendered zero]
(i) Sales price per unit:
PV of existing sales value
= 20,000 X 60 X .909 + 30,000 X 60 X (.826 + .751)
= Rs.39,29,400
If sales value reduces by Rs.3,09,800 in PV terms then NPV shall be rendered zero
i.e. % reduction of 7.88 %
(2 Marks)
Alternate Solution:
Let the sale price per unit be Rs.X
Calculation of NPV of the Project:
Year
Sales
Units
Contribution
per unit
1
2
3
20,000
30,000
30,000
X – 40
X – 40
X – 40
Total
Cash
Inflow
20,000X – 8,00,000
30,000X – 12,00,000
30,000X – 12,00,000
PVF
(10%)
PV
.909
.826
.751
ΣPVCI
18,180X – 7,27,200
24,780X – 9,91,200
22,530X – 9,01,200
65,490X – 26,19,600
As NPV is to be set as zero, ΣPVCI = ΣPVCO
i.e. 65,409X – 26,19,600 = 10,00,000
i.e. X = Rs.55.34
Thus, if selling price per unit falls from Rs.60 to Rs.55.34 i.e. fall of 7.77 % then NPV
shall be rendered zero.
Solution prepared by
CA. Ashish Lalaji
7
Downloaded from www.ashishlalaji.net
(ii) Unit Cost:
PV of existing production cost = 20,000 X 40 X .909 + 30,000 X 40 X (.826 + .751)
= Rs.26,19,600
If production costs increase by Rs.3,09,800 in PV terms then NPV shall be rendered
zero i.e. % rise of 11.83 %
(2 Marks)
Alternate Solution:
Let the unit cost be Rs.X
Calculation of NPV of the Project:
Year
Sales
Units
Contribution
per unit
1
2
3
20,000
30,000
30,000
60 – X
60 – X
60 – X
Total
Cash
Inflow
12,00,000 – 20,000X
18,00,000 – 30,000X
18,00,000 – 30,000X
PVF
(10%)
PV
.909
.826
.751
ΣPVCI
10,90,800 – 18,180X
14,86,800 – 24,780X
13,51,800 – 22,530X
39,29,400 – 65,490X
As NPV is to be set as zero, ΣPVCI = ΣPVCO
i.e. 39,29,400 – 65,490X = 10,00,000
i.e. X = Rs.44.73
Thus, if unit cost increases from Rs.40 to Rs.44.73 i.e. rise of 11.83% then NPV
shall be rendered zero.
(iii) Sales Volume:
ΣPVCI is Rs.13,09,800. Change in sales volume should be such that ΣPVCI reduces
by Rs.3,09,800 i.e. by 23.65 % to render NPV to zero.
(1 Marks)
(iv) Initial Outlay:
ΣPVCI is Rs.13,09,800. Change in initial outlay should be such that ΣPVCO
increases by Rs.3,09,800 i.e. by 30.98 % to render NPV to zero.
(1 Marks)
(v) Project Life time:
ΣPVCI for first two years is –
4,00,000 X .909 + 6,00,000 X .826 = 8,59,200.
Thus, NPV is: 8,59,200 – 10,00,000 i.e. (1,40,800)
i.e. PV of cash inflow in year 3 has to be Rs.1,40,800 to make NPV zero.
Now, PV of cash inflow in year 3 is: 6,00,000 X .751 i.e. Rs.4,50,600
Thus, period required to recover Rs.1,40,800 is: 1,40,800 / 4,50,600 i.e. 0.313 year.
i.e. project life time should reduce from 3 years to 2.313 years i.e. by 22.9 % to
render NPV to zero.
(2 Marks)
Net Pay-off is determined as under –
(a)
(b)
(c)
(d)
(e)
Spot price on June 25 in F & O Market
Strike Price of Long Put
Gain per $
Deal size ($)
Total Gain (Rs.) (Cash inflow)
50.95
51.00
0.05
1,46,025
7,301
8
Downloaded from www.ashishlalaji.net
Options are cash settled. Actual sale of USD shall take place at then prevailing spot
rate in cash market i.e. Rs.50.85 / $
Receipt on June 25 = (1,50,000 X 50.85) + 7,301 – 29,205 – 657 = Rs.76,04,939
(4 Marks)
(b)
Determination of Cost of Equity (ke):
Ungeared (i.e. unlevered):
Ke = 6 + 3 (8 – 6) = 12 %
Geared (i.e. levered):
Unlevered Beta is 3 and D / E ratio after leverage shall be 0.3
Levered Beta
Levered Beta
Unlevered Beta = ----------------------- i.e. 3 = ----------------------1 + (D / E) (1 – t)
1 + (0.3) (1 – 0.4)
i.e. Levered Beta = 3 (1.18) = 3.54
Ke = 6 + 3.54 (8 – 6) = 13.08 %; say 13%.
(2 Marks)
(i) Analysis of Leasing Alternative:
No borrowing shall be arranged. Hence, the company shall remain unlevered /
ungeared. Thus, appropriate discount rate shall be 12%.
Year
Lease
Rent
Tax
Savings
@ 40%
Net
Cash
Outflow
PVF
(12%)
PV
1 – 4 20,00,000 8,00,000 12,00,000 3.037
36,44,400
∑PVCO 36,44,400
(3 Marks)
(ii) Analysis of Borrowing Alternative:
Equated Annual Instalment = 50,00,000 / 3.17 = Rs.15,77,287
Loan Repayment Schedule:
Year
1
2
3
4
Loan o/s
At beginning
Interest
@ 10%
50,00,000 5,00,000
39,22,713 3,92,271
27,37,697 2,73,770
14,34,180 1,43,107*
Total Instalment
Dues
Paid
55,00,000
43,14,984
30,11,467
15,77,287
Loan O/s
At end
15,77,287 39,22,713
15,77,287 27,37,697
15,77,287 14,34,180
15,77,287 ------------* Balancing figure
(2 Marks)
Financial Analysis:
Borrowing shall be arranged. Hence, the company shall be levered / geared.
Thus, appropriate discount rate shall be 13%.
9
Downloaded from www.ashishlalaji.net
Year Instalment
Paid
Tax Savings @ 40%
Depreciation
1
15,77,287
2
15,77,287
3
15,77,287
4
15,77,287
4 Salvage Value
Recommendation:
Net
Cash
Outflow
PVF
(13%)
PV
Interest
5,00,000 2,00,000
3,75,000 1,56,908
2,81,250 1,09,508
2,10,938
57,243
8,77,287
10,45,379
11,86,529
13,09,106
(5,00,000)
.885
7,76,399
.783
8,18,532
.693
8,22,265
.613
8,02,482
.613 (3,06,500)
∑PVCO 29,13,178
Borrowing alternative in view of lower ∑PVCO.
(3 Marks)
Q2
(a)
(i) and (ii)
Year
CFAT
Pi
1 – 5 20,000
30,000
40,000
5
-------20,000
30,000
0.1
0.7
0.2
0.1
0.7
0.2
Expected
CFAT
PVF
(20%)
Expected
PV
31,000
2.991
92,721
20,000
0.402
8,040
PVCI
Less: PVCO
Expected
NPV
1,00,761
1,00,000
761
Project is financially viable in view of positive Expected NPV.
(4 Marks)
(iii)
Determination of Best Case NPV:
Best NPV shall be possible at highest CFAT:
Year
CFAT
PVF Expected
(20%)
PV
1 – 5 40,000 2.991
1,19,640
5
30,000 0.402
12,060
PVCI
1,31,700
PVCO
1,00,000
NPV
31,700
The above is possible at probability of 0.2. Hence, expected base case NPV is
Rs.6,340 (31,700 X 0.2)
(3 Marks)
Solution prepared by
CA. Ashish Lalaji
10
Downloaded from www.ashishlalaji.net
(iv)
Determination of Worst Case NPV:
Worst NPV shall be possible at least CFAT:
Year
CFAT
PVF Expected
(20%)
PV
1 – 5 20,000 2.991
59,820
5
--------- 0.402
--------PVCI
59,820
PVCO
1,00,000
NPV
(40,180)
The above is possible at probability of 0.1. Hence, expected worst case NPV is
(Rs.4,018) (40,180 X 0.1)
(3 Marks)
(b)
Expected CFAT for A: 6,000 (0.3) + 4,000 (0.4) + 2,000 (0.3) = Rs.4,000
Expected CFAT for B: 5,000 (0.3) + 4,000 (0.4) + 3,000 (0.3) = Rs.4,000
Determination of Standard Deviation and CV:
Project A
CFAT Expected Pi [a – b]2 . c
CFAT
(a)
(b)
(c)
(d)
6,000
4,000
.3 12,00,000
4,000
4,000
.4
0
2,000
4,000
.3 1,200,000
24,00,000
Project B
CFAT Expected Pi [a – b]2 . c
CFAT
(a)
(b)
(c)
(d)
5,000
4,000
.3
3,00,000
4,000
4,000
.4
0
3,000
4,000
.3
3,00,000
6,00,000
Standard Deviation: Project A: Rs.1,549; Project B: Rs.775
(3 Marks)
C.V.: Project A: 0.39: So discount rate applicable is 9%
C.V.: Project B: 0.19: So discount rate applicable is 7%
(2 Marks)
NPVA = 4,000 (3.240) – 5,000 = Rs.7,960
NPVB = 4,000 (3.387) – 5,000 = Rs.8,548
(1 Mark)
Project B should be selected.
Q3
(a)
Interest on Treasury Bond = 100 X 7% = Rs.7
Risk free rate of return = 7 / 140 i.e. 5%
(1 Mark)
Equilibrium return of 15% is deemed to be as per CAPM.
E(r) = Rf + βs (Km – Rf)
15 = 5 + βs (15 – 5)
10 = 10βs
βs = 1
(1 Mark)
Now, Beta = Cov (s,m) / Market Variance
1 = 225 / Market Variance
Market Variance = 225%
Market Standard Deviation = Under root of 225% i.e. 15%
(2 Marks)
11
Downloaded from www.ashishlalaji.net
Beta =
Correlation Coefficient X Security Standard Deviation
-----------------------------------------------------------------------Market Standard Deviation
1 = 0.75 X Security Standard Deviation / 15
Security Standard Deviation = 15 / 0.75 = 20%
(2 Marks)
(b)
Segregation of Risk into systematic and unsystematic is a feature of Market
Model / Sharpe’s Single Index Model. Hence, the question has been solved
applying market model.
Systematic Risk = Square of Beta X Market Variance
Unsystematic Risk = Total Variance – Systematic Risk
Security X:
Systematic Risk = (0.71)2 X 2.25 = 1.1342
Unsystematic Risk = 6.3 – 1.1342 = 5.1658
(3 Marks)
Security Y:
Systematic Risk = (0.27)2 X 2.25 = 0.1640
Unsystematic Risk = 5.86 – 0.1640 = 5.6960
(3 Marks)
Determination of Portfolio Beta and Risk:
Portfolio Beta = .71 + .27 / 2 = 0.49
Portfolio Variance = βp2.Market Variance + ∑Residuary Variance. W2
Portfolio Variance = (0.49)2 (2.25) + (5.1658) (.5)2 + 5.6960 (.5)2
Portfolio Variance = 3.2557
Portfolio Standard Deviation = 1.8 %
(2 Marks)
Alternate Approach:
Systematic Risk = Square of Correlation Coefficient X Security Variance
Unsystematic Risk = Total Variance – Systematic Risk
Note: Correlation coefficient in the above formula should be between security and
market. The correlation coefficient given in the question of 0.424 is between the two
securities. Hence, correlation coefficient between security and market needs to be
calculated.
Beta =
Correlation Coefficient X Security Standard Deviation
-----------------------------------------------------------------------Market Standard Deviation
Security X:
0.71 = Correlation Coefficient X Under root of 6.3 / Under root of 2.25
0.71 = Correlation Coefficient X 2.51 / 1.5
Correlation Coefficient = 0.4243
Systematic Risk = (0.4243)2 X 6.3 = 1.1342
Unsystematic Risk = 6.3 – 1.1342 = 5.1658
12
Downloaded from www.ashishlalaji.net
Security Y:
0.27 = Correlation Coefficient X Under root of 5.86 / Under root of 2.25
0.27 = Correlation Coefficient X 2.42 / 1.5
Correlation Coefficient = 0.1674
Systematic Risk = (0.1674)2 X 5.86 = 0.1642
Unsystematic Risk = 5.86 – 0.1642 = 5.6958
Q4
(a)
(i) Calculation of Pre-merger BVPS:
(a) Share Capital
(b) Free Reserves
(c) Equity Funds
(d) No. of equity shares
(e) BVPS (c / d)
Amazon Ltd. Nile Ltd.
200
100
900
600
1,100
700
2
10
550
70
Share exchange ratio based on BVPS = 70 / 550 = 0.1273
(2 Marks)
Calculation of Pre-merger EPS:
Amazon Ltd. Nile Ltd.
(a) Free Float Market Capitalisation
500
156
(b) Non Promoter Holding
50%
40%
(c) Total Market Capitalisation (a / b)
1,000
390
(d) No. of equity shares
2
10
(e) MPS (c / d)
500
39
(f) PE Ratio
10
4
(g) EPS (e / f)
50
9.75
Share exchange ratio based on EPS = 9.75 / 50 = 0.195
(2 Marks)
Share exchange ratio based on MPS = 39 / 500 = 0.078
Agreed Swap Ratio = 0.1273 (.25) + 0.195 (.50) + 0.078 (.25) = 0.1488
(1 Mark)
(ii)
New shares issued = 10 X .1488 = 1.488 lakhs
Post Merger EPS = (2 X 50) + (10 X 9.75) / 2 + 1.488 = Rs.56.62
Post Merger MPS = 56.62 X 10 = Rs.566.20
(3 Marks)
(b)
(i)
Actual buy back price = 1.05 (Theoretical Buy Back Price)
i.e. Theoretical buy back price = 105 / 1.05 = Rs.100
Now, cash to be distributed to buy back shares = 315 X 50% i.e. Rs.157.5 lakhs.
Thus, no. of shares repurchased = 157.5 / 105 = 1.5 lakh shares.
Now, Theoretical buy back price = MN / N – n
i.e. 100 = M(10) / 10 – 1.5
i.e. M = Rs.85.
Thus, pre-buy-back MPS is Rs.85
Pre-buy back Market Capitalisation = 85 X 10 lakh shares = Rs.850 lakhs
Pre-buy back PE multiple = 85 / 12 = 7.08 times
(6 Marks)
13
Downloaded from www.ashishlalaji.net
(ii)
Post-buy back EPS = 12 X 10 / 8.5 lakh shares = Rs.14.12
Post-buy back MPS = 14.12 X PE ratio 8.5 = Rs.120.02
Post-buy back Market Capitalisation = 120.02 X 8.5 lakh shares = Rs.1,020 lakhs
(2 Marks)
Q5
(a)
The given loan is indexed to 6-month LIBOR. Thus, reset period is 6 months. Loan is
for 3 years; so this will comprise 6 reset dates.
Upfront premium paid = 250 X 3.75% = $ 9.375 million
7 % is to be used for discounting above premium for the purpose of amortization.
Reset period is 6 months i.e. discount rate for six months shall be 3.5%. Loan is for 3
years but amortization is to be carried out over 2.5 years i.e. for 5 time periods of six
months.
Upfront premium
9.375
Amortization charge of premium = -------------------------- = -------- = $ 2.0764 million
PVF (3.5%, 5)
4.515
(2 Marks)
Analysis of Cap:
Reset LIBOR
Period
1
2
3
4
5
6
5.75%
5.5%
6%
6.25%
6.5%
6.75%
Actual
Cap
Difference
Borrowing
Strike Recovered
Rate
Rate From Bank
(LIBOR + 1%)
6.75%
6.5%
7%
7.25%
7.5%
7.75%
7%
7%
7%
7%
7%
7%
------0.25%
0.5%
0.75%
(2 Marks)
Determination of Effective Cost of Capped Loan:
Reset
Period
1
2
3
4
5
6
Actual
Actual
Receipt Effective Premium Effective
Borrowing
Interest
From
Interest Amortized
Cost
Rate
Paid for
Cap
Paid
Of Cap
(LIBOR + 1%) 6 months
6.75%
8.4375*
----8.4375
2.0764
10.5139
6.5%
8.1250
----8.1250
2.0764
10.2014
7%
8.7500
----8.7500
2.0764
10.8264
7.25%
9.0625 0.3125**
8.7500
2.0764
10.8264
7.5%
9.3750
0.6250
8.7500
2.0764
10.8264
7.75%
9.6875
0.9375
8.7500
--------8.7500
* 250 X 6.75% X 6 / 12 and so on
** 250 X 0.25 % X 6 / 12 and so on
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
14
Downloaded from www.ashishlalaji.net
(b)
Determination of PV of Cash Outflows:
Amount
(Rs. in crores)
435.00
10.50
31.00
13.50
380.00
10.5
37.95
428.45
Project cost as given
Less: Margin Money
Interest during construction
Capital issue expenses
Add: Initial working capital
PV of additional working capital
∑PVCO
(2 Marks)
Determination of PV of Additional Working Capital:
(Rs. in crores)
Year
1
2
3
Amount
(Rs.)
32.3
7.0
5.6
PVF
(13%)
.885
.783
.693
PV
(Rs.)
28.59
5.48
3.88
37.95
(1 Marks)
Calculation of Net Present Value (NPV)
Year
1
2
3
4
5
6
7
8
9
10
10
10
(Rs. in crores)
Tax CFAT PVF (13%)
PV
8
34
.885
30.09
6
105
.783
82.22
9
116
.693
80.39
14
111
.613
68.04
33
92
.543
49.96
39
86
.480
41.28
44
81
.425
34.43
47
78
.376
29.33
48
77
.333
25.64
48
77
.295
22.72
∑PVCI (Operating) 464.10
Salvage Value
80
.295
23.60
Release of Working Capital 55.40
.295
16.34
∑PVCI 504.04
Less: ∑PVCO 428.45
NPV
75.59
PBIT
42
111
125
125
125
125
125
125
125
125
Conclusion: Project is financially viable as it produces positive NPV.
Q6
(a)
(i)
(4 Marks)
(1 Mark)
Average Beta of Jupiter Fund = 4.45 / 5 = 0.89
Market Index has beta of 1 and T – Bill has beta of 0.
βp = βMP.W MP + βRf.W Rf
i.e. 0.89 = 1 (W MP) + 0 (1 - W MP)
i.e. W MP = 0.89
15
Downloaded from www.ashishlalaji.net
Thus, if 89 % is invested in market portfolio and 11 % in Treasury Bill one shall have
a portfolio that has beta equivalent to that of Jupiter Fund.
(2 Marks)
(ii)
Determination of Portfolio Return if 89% is invested in Market Portfolio and
11% in Treasury Bills:
Year
Return on
Market Index
Return on
Treasury Bills
Portfolio
Return
1
2
3
4
5
-8.5
14.31
-14.66
37.2
-7.18
6.58
4.39
6.93
5.8
5.12
- 6.8412%*
13.2188%
-12.2851%
33.746%
-5.827%
* - 8.5 (.89) + 6.58 (.11) and so on
(2 Marks)
(iii)
Determination of Portfolio Return if funds are invested in Market Portfolio and
Treasury Bills to Match Yearly Beta of Mutual Fund:
Year
Jupiter
Fund
Beta
Proportion
Invested in
Market
Index
Proportion
Invested in
T - Bill
Return on
Market
Index
Return
on
T - Bill
Portfolio
Return
1
2
3
4
5
.9
.95
1
.8
.8
.9
.95
1
.8
.8
.1
.05
--.2
.2
-8.5
14.31
-14.66
37.2
-7.18
6.58
4.39
6.93
5.8
5.12
-6.992%
13.814%
-14.66%
30.92%
-4.72%
(2 Marks)
(iv)
Performance of Mutual Fund vis-à-vis Market based on Treynor’s Ratio:
Average return of Fund: 26.82 / 5 = 5.364%
Average return of Market: 21.17 / 5 = 4.234%
Average return of T-Bill: 28.82 / 5 = 5.764%
Mutual Fund:
5.364 – 5.764 / 0.89 = -0.4494
Market:
4.234 – 5.764 / 1 = -1.53
Performance of Mutual Fund is better than market in view of higher Treynor’s Ratio.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
16
Downloaded from www.ashishlalaji.net
(b)
(i) Pay immediately:
Amount paid spot for settlement of dues [10,00,000 X 30.50]
3,05,00,000
Add: Overdraft interest [3,05,00,000 X 14% X 3/12]
Total amount paid
10,67,500
3,15,67,500
(2 marks)
(ii) Pay after 3 months:
Interest shall be charged by exporter of SF 12,500 [10,00,000 X 5% X 3/12].
Thus, amount paid of SF 10,12,500 at 3 m fwd of Rs.31.60 / SF i.e.
Rs.3,19,95,000.
Recommendation: Pay immediately.
(2 marks)
(c)
(i) Semi-annual fixed payment = 5,00,000 X 8% X 180 / 360 = Rs.20,000
(ii) Semi-annual floating payment = 5,00,000 X 6% X 181 / 360 = Rs.15,083
(iii) Net amount payable by fixed to floating payer = 20,000 – 15,083 = Rs.4,917
(1½ + 1½ + 1 Marks)
Q7
(i)
Open Ended Schemes
Close Ended Schemes
These schemes do not have
any maturity period.
These schemes are for a stipulated maturity period
normally 5 to 10 years.
These schemes are available
for subscription and repurchase
on a continuous basis.
These schemes are open for subscription only during
specified period at the time of launch of the scheme.
Investor can buy and sell units
conveniently from the mutual
fund at any point of time.
Investor can buy units only at the time of initial issue
from the mutual fund. Subsequently units shall be
purchased and sold on stock exchange where the
scheme is listed.
NAV of these schemes is
declared on daily basis.
NAV of these schemes is declared normally on a
weekly basis.
The key feature of these
schemes is its liquidity.
Liquidity is provided to these schemes by getting them
listed on a stock exchange.
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
17
Downloaded from www.ashishlalaji.net
(ii)
Commercial Banking
Investment Banking
A commercial bank accepts deposits
from the general public and provides
loan to consumers and companies in
need of cash.
An investment bank acts as an intermediary,
matching sellers of stock and bonds with
buyers of stock and bonds.
A commercial bank has an inventory of
cash deposits readily available which it
can utilize for loaning purpose.
An investment bank does not have any
inventory of cash deposits. Hence, an I-bank
spends considerable time finding investors in
order to obtain capital for its client.
A commercial bank accepts deposits at
a lower rate and loans them at a higher
rate of interest. This is the principal
source of its income.
An I-bank makes money by charging the client
a small percentage of the total capital raised.
This fee is known as “underwriting discount”.
Clients of a commercial bank can range
from a small dry cleaner on the street to
large multi-national companies.
Clients of I-bank are companies that intend to
sell stock or bonds to raise capital.
(iii) NPV and IRR
1. Net Present Value method fits into definition of wealth. As such, Net Present
Value represents the net wealth generated by any project or proposal. Internal
rate of return (IRR) of a project does not necessarily signify wealth generation.
2. Selection of proposals with positive NPV results into maximization of wealth of
the owners of the firm. On the other hand, selection of proposals on the basis
of higher IRR does not necessarily increase the wealth of the owners of the
firm.
3. The NPV method is based on the assumption that the future cash flows shall
be reinvested at the cost of capital of the firm; while the IRR method is based
on the assumption that the future cash flows shall be reinvested at the IRR
itself. The reinvestment rate assumption of NPV is more superior to IRR.
4. NPV is an absolute figure; while IRR is expressed in percentage. This is the
reason that why IRR is intuitionally more appealing than NPV criterion.
5. IRR is capable of assuming multiple roots. In such a case, a single proposal
may have more than one IRR. NPV has no such problem.
Solution prepared by
CA. Ashish Lalaji
18
Downloaded from www.ashishlalaji.net
(iv) Factoring and Bills Discounting:
1. The scope of factoring services is wide. It does not simply include financing
against invoices of trade bills. It also includes services of books maintenance,
asset management, customer credit analysis, consultancy and many other
value-added services. Bills discounting is narrow in its scope since it only
covers financing services.
2. In case of non-recourse factoring deals, even the risk of bad debts can be
transferred to the factor. Such facility is not available at the time of bills
discounting.
3. Factoring services are a sophisticated method of managing book debts, while
bills discounting is a traditional method of borrowing funds from commercial
banks.
4. Factoring agreements can provide for advance payment on book debts. No
such provision is made in case of bills discounting.
5. The parties involved in factoring agreements are factor, client and debtor; while
the parties involved in bills discounting are drawer, drawee and payee.
6. Bills discounting is covered by the Negotiable Instruments. Factoring services
are not covered by any Act.
7. In case of bills discounting grace period of three days is allowed. No such
grace time is allowed in case of factoring.
(v) SML and CML:
1. CML depicts linear relationship between expected return and total risk of all
efficient portfolios; while SML depicts linear relationship between expected
return and systematic risk of all portfolios (i.e. both efficient and inefficient)
2. Since CML is obtained for well-diversified portfolios, its measure of risk is the
total risk of the portfolios; while for SML, the beta is used as the measure of
systematic risk of the portfolios.
3. Portfolios lying on the CML have their returns perfectly positively correlated
with the market return i.e. rsm or correlation coefficient is +1; while portfolios
lying on the SML are considered to be efficiently priced.
4. SML explains the basic theme of CAPM; while CML is considered to be a
special case of CAPM.
Solution prepared by
CA. Ashish Lalaji
19