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Pinnacle Academy
Mock Test Series for
May 2016 C A Final Examination
2nd Floor Florence Classic, 10, Ashapuri Society,
Besides Unnati Vidhyalay, Opp. VUDA Flats, Jain Derasar Rd., Akota, Vadodara-20
Time Allowed-3 hours
SFM Mock
Test 3
th
Maximum Marks- 100
16 April 2016
Q 1 is compulsory.
Answer any 5 from the remaining.
Q1
(a)
A Ltd. is considering Rs.50 crores 3 year interest rate swap. The company is
interested in borrowing at floating rate. However, due to its good credit rating, it has
a comparative edge over lower rated companies in fixed rate market as well. It can
borrow at fixed rate of 6.25% p.a. or floating rate of MIBOR + 0.75%.
Presently, MIBOR is 5.25% but is expected to change in 6 months due to political
situation in the country. X Ltd., an intermediary bank has agreed to arrange a swap.
The bank will offset the swap risk with a counter party, B Ltd., a comparative lower
credit rated company, which could borrow at fixed rate of 7.25% and floating rate of
MIBOR + 1.25%. X Ltd. shall charge Rs.12,00,000 p.a. as its fee from each party.
A Ltd. been the dominating company shall obtain 60% of any arbitrage saving
(before payment of fees) from the swap. Fees payable to the bank is tax deductible.
Tax rate is 30%.
You are required to-
i.
Evaluate whether the proposal is beneficial for both the parties or not
ii.
Assuming MIBOR increases to 5.75% immediately 6 months from now and shall
prevail over the swap period, determine present value of savings from the swap for A
Ltd. Assume, interest payments are made semi-annually in arrears. Use the then
prevailing interest rate as the discount rate.
(14 Marks)
(b)
Seawell Corporation, a manufacturer of do-it-yourself hardware and house wares
reported earnings per share of Rs.2.10 in 2003 on which it paid dividend of Re.0.69.
Earnings are expected to grow 15 % a year from 2003 to 2008 during which period
the payout ratio shall remain unchanged. After 2008 the earnings growth shall drop
to stable 6% and the payout shall increase to 65% of earnings. Currently the beta of
firm is 1.4 and beta shall be 1.1 after 2008. Market risk premium is 5.5% and
Treasury bill rate is 6.25%.
i. What is the expected price of the stock at the end of 2008?
ii. What is the value of the stock as on today using the two-stage dividend discount
model?
(6 Marks)
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Q2
(a)
(b)
Suppose, Mr. X purchases T-Bill for Rs.9,940 maturing in 91 days for Rs.10,000.
What would be the annualized investment rate for Mr. X (365 days) and annualized
discount rate for the government investment (360 days)?
(4 Marks)
On 1st April 2009 Fair Return mutual fund has following assets and prices at 4.00
p.m.:
Shares
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
No. of units of the fund
No. of Shares
10,000
50,000
10,000
1,00,000
30,000
MPS (Rs.)
19.70
482.60
264.40
674.90
25.90
8,00,000
Please calculate:
i.
NAV of the fund
ii.
Assuming, Mr. X a HNI sends a cheque of Rs.50,00,000 to the fund and fund
manager purchases 18,000 shares of C Ltd. and balance is held in bank. What shall
be the position of the fund?
iii.
Now, suppose on 2nd April 2009 at 4.00 p.m. market prices are as under:
Shares
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
What is the new NAV?
(c)
Q3
(a)
i.
ii.
MPS (Rs.)
20.30
513.70
290.80
671.90
44.20
(10 Marks)
A firm has an equity beta of 1.30 and is currently financed by 25 % debt and 75 %
equity. What will be the new equity beta if the company changes its financing policy
to 33 % debt and 67 % equity?
(2 Marks)
ABC Ltd. has divisions A, B and C. Division C has recently reported an annual
operating profit of Rs.20,20,00,000. The figure arrived at after charging Rs.3 crores
full cost of advertisement expenditure for launching a new product. However,
benefits of this expenditure is expected to last for 3 years. Cost of capital of division
C is 11 % and cost of debt is 8%. Net assets (invested capital) of division C as per
latest balance sheet is Rs.60 crores, but replacement cost of these assets is
estimated at Rs.84 crores. Compute EVA of division C making suitable adjustments
to historical accounting books.
Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant,
Aloe Vera. Average earnings of the company averages Rs.12 lakhs after tax largely
on the strength of its patented beauty cream for removing pimples. The patent has
eight years to run and Herbal has been offered Rs.40 lakhs for the patent rights.
Herbal’s assets include Rs.20 lakhs of working capital and Rs.80 lakhs of PPE. The
patent is not shown in books. Cost of capital of Herbal is 15%. Compute EVA of
Herbal Gyan.
(8 Marks)
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(b)
Mr. V decides to short sell 1,000 shares of ABC Ltd. when it was selling at a yearly
high of Rs.56. His broker requested him to deposit a margin of 45% and commission
of Rs.1,550. While the share had been short sold, ABC Ltd. paid a dividend of Rs.2.5
per share. At the end of one year, Mr. V buys 1,000 shares of ABC Ltd. at Rs.45 to
close out the position and was charged a commission of Rs.1,450. You are required
to calculate the return on investment for Mr. V.
(6 Marks)
(c)
Suppose government pays Rs.5,000 on maturity for 91 days T-Bill. If Mr. Y is
desirous to earn an annualized return of 3.5% (360 days), then how much should he
pay?
(2 Marks)
Q4
(a)
Zaz plc. a UK company is in the process of negotiating an order amounting to Є2.8
million with a large German retailer on 6 months credit. If successful, this will be the
first time that Zaz shall export goods to highly competitive German market. Zaz is
considering following 3 alternatives for managing the transaction risk before the
order is finalized:
i.
Mr. Peter, the marketing head, has suggested that in order to remove transaction
risk completely, Zaz should invoice the German firm in Sterling using the current spot
rate.
ii.
Mr. Wilson, CEO, is doubtful about Mr. Peter’s proposal and suggested an
alternative of invoicing the German firm in Є and using forward exchange contract to
hedge the transaction risk.
iii.
Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice the German firm
in Є, but she is of the opinion that Zaz should use 6-months futures contracts (do not
over-hedge) to hedge transaction risk.
Following data is available:
Spot rate
6 months swap points
6 months futures contract currently trading at
6 months futures contract size
Spot rate and 6 months futures rate
(b)
i.
ii.
iii.
Є 1.1960 – Є 1.1970 / £
60 / 55
Є 1.1943 / £
£ 62,500
Є 1.1873 / £
You are required to calculate sterling receipts (rounded off up to 4 digits after
decimal point) in millions for Zaz plc under each of the above three proposals and
suggest the most appropriate proposal.
(8 Marks)
Write short notes on (any two):
Green Shoe Option
Efficient Market Hypothesis
Functions of Merchant Bankers
(8 Marks)
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Q5
(a)
Following returns are expected for different macro economic conditions:
Stock
Him Ice Ltd.
Kalahari Biotech
Puma Softech
Current
MPS
12
18
60
Rates of return (%) under
macro economic conditions
Recession
Moderate Growth
Boom
- 12
15
35
20
12
-5
18
20
15
Is it possible to construct an arbitrage portfolio that requires zero investment and yet
produces positive returns under all macro-economic conditions? If yes, construct
such portfolio and show the pay-offs under different economic scenarios.
(8 Marks)
(b)
Following details are assembled for two securities and the sensex this year:
Possible Scenario
Bull Run Intensifies
Current Bull Run Continues
Bull Run Slows Down
Bears Return Back
Probability
Sensex
Return
Infosys
Return
Cipla
Return
0.15
0.50
0.30
0.05
50
40
30
10
60
55
20
10
25
19
15
5
For a portfolio consisting of equal investments in each of the above stocks determine
beta, return, risk and alpha.
(8 Marks)
Q6
(a)
You have entered into a contract of buying 100 shares at a futures price of Rs.800
per share. The day-end prices thereby are Rs.810, Rs.805, Rs.795, Rs.800, Rs.815,
Rs.825 and on date of maturity Rs.810.
The initial deposit provided to the exchange is Rs.2,000 and during no time till
maturity your drawings of gains should result into net deposit amount falling below
Rs.1,000.
What is the net amount payable or receivable on the date of maturity?
(4 Marks)
(b)
Index Futures on the Natex exist in multiplies of 100 and are standardized contracts
for one month period only. The current price of the Natex is 7500. A futures contract
on the Natex can be purchased for 7575.
Out of the five hundred stocks in the Natex, three hundred forty stocks are expected
to pay dividends in the next one month. Risk free rate is 6%. The annualized
dividend yield on Natex is 8%. Based on the given information you are required to
calculate the fair value of Natex future contract. Should one purchase or sell futures
on Natex? If on maturity the index turns out to be 7600, what shall be the gain or
loss? Use Cost-of-Carry Model.
(6 Marks)
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(c)
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:
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?
Q7
(a)
(b)
(6 Marks)
A bond has a face value of Rs.100 paying interest at 9 % and redeemable at par
after 3 years from now. The current yield is 8 %. Calculate duration of the given bond
at (i) current yield, (ii) 9 % and (iii) 7 %. What relationship do you establish between
yield and duration?
(8 Marks)
The face value of a bond is Rs.100 and is currently quoted at a premium of 5%. It
has a maturity period of 5 years during which it shall pay interest at 10%, 11%, 12%,
13% and 14% each year respectively and shall be redeemed at 5% discount. The
prevailing market interest rate is 10%. Calculate yield to maturity and decide whether
the bond is worth purchasing.
(8 Marks)
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Solution of
SFM Mock Test 3
Conducted on 16th April 2016
Q1
(a)
(i) Evaluation of Interest Rate Swap Agreement:
Quality Spread is determined as under:
Firm
Desired
Actual
Market
Cost
Market
Cost
A Ltd. Floating MIBOR + 0.75%
Fixed
6.25%
B Ltd.
Fixed
7.25%
Floating MIBOR + 1.25%
Total
MIBOR + 8%
MIBOR + 7.5%
Quality spread = MIBOR + 8 % - MIBOR – 7.5% = 0.5%.
A shall receive 60 % i.e. 0.3% and B shall receive balance 0.2%.
(2 Marks)
Evaluation from view point of A Ltd.:
Amount
(Rs.)
Savings on loan (Rs.50 crores X 0.3%)
15,00,000
Post tax benefit (15,00,000 X 70%)
(A) 10,50,000
Charges payable to bank
Post tax charges (12,00,000 X 70%)
(B)
Net Benefit (A – B)
12,00,000
8,40,000
2,10,000
(4 Marks)
Evaluation from view point of B Ltd.:
Savings on loan (Rs.50 crores X 0.2%)
Post tax benefit (10,00,000 X 70%)
(A)
Amount
(Rs.)
10,00,000
7,00,000
Charges payable to bank
Post tax charges (12,00,000 X 70%)
12,00,000
8,40,000
Net Benefit (A – B)
(B)
(1,40,000)
Conclusion: Interest rate swap is not beneficial to both the parties.
(3 Marks)
Solution prepared by
CA. Ashish Lalaji
(ii) A Ltd. is receiving benefit of 0.3% due to swap. Hence, post-swap the effective
cost for A Ltd. is MIBOR + .75 % - .3% i.e. MIBOR + .45%. At MIBOR of 5.25%, A
Ltd. is paying interest at 5.25 + .45 i.e. 5.7%. If MIBOR rises to 5.75% then after six
months A Ltd. shall pay interest at 5.75 + .45 i.e. 6.2%.
(2 Marks)
Half yearly savings due to swap = 15,00,000 X ½ = Rs.7,50,000.
Half yearly discount rates:
1st period of six months:
5.7 / 2 i.e. 2.85%
Rest of the six months:
6.2 / 2 i.e. 3.1%
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Six
Months
1
2
3
4
5
6
Savings
PVF
PV
7,50,000 0.972 (2.85%)
7,50,000
0.941 (3.1%)
7,50,000
0.912 (3.1%)
7,50,000
0.885 (3.1%)
7,50,000
0.858 (3.1%)
7,50,000
0.833 (3.1%)
PV of Savings
40,50,750
40,50,750
(3 Marks)
(b)
Calculation of Cost of Equity (ke):
High Growth Phase:
Ke = 6.25 + 1.4 (5.5) = 13.95 %
Stable Growth Phase:
Ke = 6.25 + 1.1 (5.5) = 12.30 %
(1 Mark)
Projection of EPS and DPS:
Year
EPS
DPS
2003 2004 2005 2006 2007 2008 2009
(Base)
2.1 2.42 2.78
3.19
3.67
4.22 4.47
.69 .794 .913 1.049 1.207 1.388 2.91
(i) Calculation of Expected Price at the end of 2008:
This is nothing but the continuing value of dividend.
P2008 = D2009 / ke – g = 2.91 / 12.3 % - 6 % = Rs.46.19
(2 Marks)
(ii) Calculation of Expected Price as on today:
Year
DPS
2004
.794
2005
.913
2006 1.049
2007 1.207
2008 1.388
2008 46.19
PVF
(13.95%)
.878
.770
.676
.593
.521
PV
.697
.703
.709
.716
.723
3.548
.521 24.064
27.612
(3 Marks)
Q2
(a)
Annualised return from T-Bill = 10,000 – 9,940 / 9,940 X 365 / 91 X 100 = 2.42%
Annualised Discount rate = 10,000 – 9,940 / 10,000 X 360 / 91 X 100 = 2.37%
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
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(b)
(i) NAV of the fund:
Shares
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
No. of Shares MPS (Rs.) Market Value
10,000
19.70
1,97,000
50,000
482.60
2,41,30,000
10,000
264.40
26,44,000
1,00,000
674.90
6,74,90,000
30,000
25.90
7,77,000
9,52,38,000
No. of units of the fund
8,00,000
NAV
119.05
(3 Marks)
Solution prepared by
CA. Ashish Lalaji
(ii) Revised Position of the Fund:
Shares
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
Cash
No. of Shares MPS (Rs.) Market Value
10,000
19.70
1,97,000
50,000
482.60
2,41,30,000
28,000
264.40
74,03,200
1,00,000
674.90
6,74,90,000
30,000
25.90
7,77,000
2,40,800
10,02,38,000
No. of units of the fund
8,42,000*
* 8,00,000 + 8,00,000 / 119.05 i.e. 8,00,000 + 42,000
(4 Marks)
(iii) NAV of the fund on 2
nd
April 2009:
Shares
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
Cash
No. of Shares MPS (Rs.) Market Value
10,000
20.30
2,03,000
50,000
513.70
2,56,85,000
28,000
290.80
81,42,400
1,00,000
671.90
67,19,000
30,000
44.20
13,26,000
2,40,800
10,27,87,200
No. of units of the fund
8,42,000
NAV
122.08
(3 Marks)
(c)
Calculation of Current Asset Beta:
Asset Beta = 1.30 (0.75) + 0 (0.25) = 0.975
Calculation of Revised Equity Beta:
It seems the company is raising more of debt and retiring part of equity. This shall
amount to internal change in capital structure without corresponding change in total
capital employed and hence the asset beta shall remain unchanged.
0.975 = Equity beta (0.67) + 0 (0.33)
i.e. Equity beta = 0.975 / 0.67 = 1.4552 ~ 1.46
Note: The increase in equity beta demonstrates the increase in financial risk of
equity shareholders due to more employment of debt.
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Q3
(a)
(i)
Historical cost profit is adjusted as under:
Operating Profit
Add: Cost of unutilized advertisement expenditure
20,20,00,000
2,00,00,000
22,20,00,000
Invested capital at replacement cost is Rs.84 crores.
EVA = 22.2 – (84 X 11%) = Rs.12.96 crores
(4 Marks)
(ii)
Total capital employed = 80 + 20 + Patent 40 i.e. Rs.140 lakhs.
EVA = 12 – (140 X 15%) = (Rs.9 lakhs)
EVA of Herbal Gyan is negative.
(4 Marks)
(b)
Margin paid on short selling = 1,000 X 56 i.e. 56,000 X 45% i.e. Rs.25,200
Thus, money blocked due to short selling = 25,200 + Commission 1,550
= Rs.26,750
Due to short selling dividend of Rs.2,500 is foregone. This shall be an opportunity
cost. Shares are purchased at the end of the year for Rs.45,000. Again, commission
of Rs.1,450 is charged.
Thus, profit on short selling is –
56,000 – 45,000 – Dividend foregone 2,500 – Commissions (1,550 + 1,450)
i.e. Rs.5,500.
Return on investment = 5,500 / 26,750 i.e. 20.56 %
(6 Marks)
(c)
Amount to be paid = 5,000 / 1 + (0.035 X 91 / 360 = Rs.4,956.63
(2 Marks)
Q4
(a)
Exchange rates are tabulated as under:
1 Є per £ (Indirect quote for UK Firm)
Spot
Swap Points
6 months forward rate
1.1960
.0060
1.1900
1.1970
.0055
1.1915
1 £ per Є (Direct quote for UK Firm)
Spot
6 months forward rate
Bid Rate
0.8354
0.8393
Offer Rate
0.8361
0.8403
(i) Value of deal in euros is 2.8 million. One needs to find that amount in pounds,
which if sold right now shall result into receipt of EUR 2.8 million. If pound is sold
then bank shall buy at bid rate. Hence. GBP receipt shall be –
2.8 X .8354 i.e. £ 2.3391 million
2.8 X .8354 i.e. £ 2.3391 million
(2 Marks)
(ii) 6 months forward exchange contract should be acquired to sell EUR. Such
contract is available at EUR 0.8393 per GBP. Hence, GBP receipt shall be –
2.8 X .8393 i.e. £ 2.3500 million
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
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(iii) 6 months futures rate as direct quote is: EUR 0.8373 per GBP
Standard size of 1 contract in EUR = 62,500 / 0.8373 i.e. EUR 74,645
No. of contracts required = 2.8 / 0.074645 = 37.51 i.e. 37 contracts as over-hedging
is to be avoided.
Gain / Loss for futures is determined as under –
Spot rate after 6 months
Contracted futures rate for selling
Loss per unit
X Contract size (74,645 X 37) (in millions)
Total Loss (GBP in millions)
0.8422
0.8373
0.0049
2.7619
0.0135
Actual sale of EUR 2.8 million shall be done in the spot market after 6 months. Thus,
GBP receipt is –
2.8 X .8422 i.e. 2.3582 – Loss on futures 0.0135 i.e. £ 2.3447 million
(4 Marks)
Recommendation:
Forward Contract in view of highest GBP receipts after 6 months.
(b)
(i) Green Shoe Option (GSO):
Green Shoe Option (GSO) means an option available to the company issuing
securities to the public to allocate shares in excess of the public issue and operating
a post-listing price stabilising mechanism through a stabilising agent.
SEBI inserted a new Chapter No. VIII-A, with effect from August 14, 2003, in the
SEBI (Disclosure and Investors Protection) Regulations, 2000 to deal with the GSO.
The GSO is available to a company which is issuing equity shares through bookbuilding mechanism for stabilising the post-listing price of the shares.
The following is the mechanism of GSO:
I.
The Company shall appoint one of the leading book runners as the Stabilising Agent
(SA), who will be responsible for the price stabilising process.
II.
The promoters of the company will enter into an agreement with SA to lend some of
their shares to the latter, not exceeding 15% of the total issue size.
III.
The borrowed shares shall be in the dematerialised form. These shares will be kept
in a separate GSO Demat A/c.
IV.
In case of over subscription, the allocation of these share shall be on pro-rata basis
to all applicants.
V.
The money received from allotment of these shares shall also be kept in a ‘GSO
Bank A/c’, distinct from the issue account , and the amount will be used for buying
shares from the market during the stabilization period.
VI.
The shares bought from the market by SA for stabilization shall be credited to GSO
Demat Account.
VII.
These shares shall be returned to the promoters within 2 days of closure of
stabilisation process.
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VIII.
In order to stabilise post-listing prices, the SA shall determine the timing and quantity
of shares to be bought.
IX.
If at the expiry of the stabilisation period, the SA does not purchase shares to the
extent of over-allocated shares, then shares to the extent of shortfall will be allotted
by the company to the GSO Demat A/c multiplied by the issue price. Amount left in
the GSO Bank A/c (after meeting expenses of SA), shall be transferred to the
Investors Protection Fund.
In April, 2004, the ICICI Bank Ltd. Became the first Indian company to offer GSO.
(ii) Efficient Market Hypothesis:
This theory attempts to explain why stock prices follow a random walk. It
concludes that randomness of stock price is a result of efficient market, which leads
to following observations:
•
•
•
Information is freely and instantaneously available to all market participants
Keen competition among market participants more or less ensures that
market will reflect intrinsic values i.e. current price reflects all currently
available information
Price changes due to availability of new information which is unrelated to
previous information and hence price change is unpredictable
Forms of Efficiency:
There are three levels of market efficiency depending upon what exactly is the
information on which the stock price is based on. These are:
Weak form Efficiency: Current stock price is based on record of past stock prices
Semi-Strong form Efficiency: Current stock price is based on record of past stock
prices and also all publicly available information
Strong form Efficiency: Current stock price is based on record of past stock prices
and also all information available – publicly as well as privately.
Challenges to Efficient Market Theory:
There are certain factors that do not allow capital markets to become efficient. These
are:
1. Non-availability information:
For an efficient market, information should be available instantaneously. It should be
rapidly transmitted to all market participants. Information available to the managers
of the company should be available event to participants of stock market. However,
in reality there is a calculated attempt by many companies to circulate misinformation
or to hide critically important information.
2. Limited information processing capabilities:
The information processing capability of humans is limited. There is generation of
millions of new bits of information every second but the same cannot be
comprehended and analysed instantaneously. Thus, there is time lag between
availability of information and its actual interpretation. Also, human emotions of fear
and greed create anxiety and uncertainty making accurate processing of information
difficult.
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3. Irrational behaviour: Many market participants buy and sell shares largely on the
basis of hit or miss tactics rather than informed beliefs. This further makes the
market inefficient.
4. Monopolistic Influence: In an efficient market, no single buyer or seller should
be able to influence stock price. However, practically it is observed that powerful
institutions and stock market brokers have great influence over market participants.
This also erodes the efficiency of the market.
(iii) Functions of Merchant Bankers:
The basic function of merchant banker or investment banker is marketing of
corporate and other securities. In the process, he performs a number of services
concerning various aspects of marketing, viz., origination, underwriting, and
distribution, of securities. During the regime of erstwhile Controller of Capital Issues
in India, when new issues were priced at a significant discount to their market prices,
the merchant banker’s job was limited to ensuring press coverage and dispatching
subscription forms to every corner of the country. Now, merchant bankers are
designing innovative instruments and perform a number of other services both for
the issuing companies as well as the investors. The activities or services performed
by merchant bankers, in India, today include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Q5
(a)
Project promotion services.
Project finance.
Management and marketing of new issues.
Underwriting of new issues.
Syndication of credit.
Leasing services.
Corporate advisory services.
Providing venture capital.
Operating mutual funds and off shore funds.
Investment management or portfolio management services.
Bought out deals.
Providing assistance for technical and financial collaborations and joint ventures.
Management of and dealing in commercial paper.
Investment services for non-resident Indians.
Calculation of Expected MPS under different macro economic conditions:
Stock
Current
MPS
Him Ice Ltd.
12
Kalahari Biotech
18
Puma Softech
60
Expected MPS
macro economic conditions
Recession
Moderate
Boom
Growth
12 – 12% i.e.
12 + 15% i.e.
12 + 35% i.e.
10.56
13.80
16.20
18 + 20% i.e.
18 + 12% i.e.
18 -5 % i.e.
21.60
20.16
17.10
60 + 18% i.e.
60 + 20% i.e.
60 + 15% i.e.
70.80
72.00
69.00
(2 Marks)
The above calculations clearly show that only Puma Softech produces positive
return under all macro economic conditions. Him Ice loses value under recession
and Kalahari loses value under boom conditions. Thus, more of Puma Softech
should be purchased and such purchases should be financed from sale of Him Ice
and Kalahari.
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Current MPS of Him Ice is Rs.12 and that of Kalahari is Rs.18. However, 1 share of
Puma costs Rs.60. Thus, Rs.60 has to be arranged from sale of Him Ice and
Kalahari. This is done by selling two shares of Him Ice for Rs.24 and 2 shares of
Kalahari for Rs.36 to arrange total Rs.60 to buy 1 share of Puma.
(2 Marks)
Solution prepared by
CA. Ashish Lalaji
Calculation of Net Pay-off of Portfolio as designed above:
Stock
No. of
shares
Investment
-2
-2
-24
-36
1
60
Nil
Him Ice Ltd.
Kalahari
Biotech
Puma Softech
Net Pay-off
Expected MPS
macro economic conditions
Recession
Moderate
Boom
Growth
-21.12*
-27.60
-32.40
-43.20
-40.32
-34.20
70.80
+6.48
72.00
+4.08
69.00
+2.40
* 10.56 X 2 and so on.
(4 Marks)
Conclusion:
The designed portfolio generates positive return under every market scenario. It is
indeed arbitrage portfolio since return is increasing without increase in risk.
(b)
Statistical Table for Calculation of Beta of Infosys
60
55
20
10
43
43
43
43
0.15
0.5
0.3
0.05
50
40
30
10
37
37
37
37
17
12
-23
-33
13
3
-7
-27
43.35
72.00
158.70
54.45
328.50
25.35
4.50
14.70
36.45
81.00
33.15
18.00
48.30
44.55
144.00
(2 Marks)
Statistical Table for Calculation of Beta of Cipla
25
19
15
5
18
18
18
18
0.15
0.5
0.3
0.05
7
1
-3
-13
13
3
-7
-27
7.35
0.50
2.70
8.45
19.00
13.65
1.50
6.30
17.55
39.00
(1 Mark)
Statistical Table for Calculation of Covariance between Infosys and Cipla
0.15
0.5
0.3
0.05
17
12
-23
-33
7
1
-3
-13
17.85
6.00
20.70
21.45
66.00
(1 Mark)
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Return: Infosys: 43 %; Cipla: 18 %
Risk: Infosys: 18.12 % Cipla: 4.36 %
Beta: Infosys: 144 / 81 = 1.78; Cipla: 39 / 81 = 0.48
Alpha: Infosys: 43 – 1.78 (37) = - 22.86%; Cipla: 18 – 0.48 (37) = 0.24 %
(2 Marks)
Portfolio Return = 43 (0.5) + 18 (0.5) = 30.50 %
Portfolio Beta = 1.78 (0.5) + 0.48 (0.5) = 1.13
Portfolio Alpha = -22.86 (0.5) + 0.24 (0.5) = -11.31 %
Portfolio Variance = 328.5 (0.5)2 + 19 (0.5)2 + 2 (0.5) (0.5) (66) = 119.875
Portfolio Standard Deviation = 10.95 %
(2 Marks)
Q6
(a)
Calculation of MTM margin and Net Deposit
Day
0
1
2
3
4
5
6
7
Day-end
Price
--810
805
795
800
815
825
810
Futures
Price
--800
810
805
795
800
815
825
MTM
Margin
1,000
(500)
(1,000)
500
1,500
1,000
(1,500)
Deposit
Withdrawal
2,000
--500
1,000
---------
--1,000
----500
1,000
-----
Net
Deposit
2,000
1,000
1,500
2,500
2,000
1,000*
1,000
1,000
On date of maturity, MTM margin is Rs.1,500. Thus, Rs.1,500 is payable, while the
net deposit is Rs.1,000. Hence, net Rs.500 is payable.
*The gain is Rs.1,500. Hence, Rs.1,500 should be withdrawn. But it is stated in
question that net deposit on account of withdrawals of gains should not fall below
Rs.1,000. Hence, only Rs.1,000 has been withdrawn.
(4 Marks)
(b)
Fair Futures Price = 7500 + [7500 X 6 % X 1 / 12] – [7500 X 8 % X 340 / 500] =
7129.50. As the actual futures price (7575) is higher than fair futures price (7129.5)
futures are currently overpriced and hence an investor should sell Natex futures.
(2 Marks)
Spot Index Value
Contracted futures price to sell
Profit per unit
X No. of units
Total Profit booked
7600
7575
(25)
100
(Rs.2,500)
(4 Marks)
(c)
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
(1 Mark)
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
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Standard Deviation: Project A: Rs.1,549; Project B: Rs.775
(2 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%
(1 Mark)
NPVA = 4,000 (3.240) – 5,000 = Rs.7,960
NPVB = 4,000 (3.387) – 5,000 = Rs.8,548
(2 Marks)
Project B should be selected.
Solution prepared by
Q7
(a)
CA. Ashish Lalaji
Calculation of Duration at different probable yields:
Year
Cash
Inflow
PVF
(8%)
1
2
3
9
9
109
.926
.857
.794
Duration when yield
Duration when yield
Duration when yield
PV
(8%)
Year
PVF
PV
Year
PVF
PV
Year
X PV (9%) (9%)
X PV (7%) (7%)
X PV
(8%)
(9%)
(7%)
8.33
8.33
.917 8.25
8.25
.935
8.42
8.42
7.71 15.42 .842 7.58
15.16 .873
7.86
15.71
86.55 259.65 .772 84.15 252.45 .816
88.94 266.83
102.59 283.40
99.98 275.86
105.22 290.96
is 8 % = 2.762 years
is 9 % = 2.759 years
is 7 % = 2.765 years
Conclusion: Duration decreases as yield increases and vice versa.
(8 Marks)
(b)
Calculation of Yield to Maturity (YTM):
Year
1
2
3
4
5
Cash
Inflows
10
11
12
13
109
PVF (10%)
0.909
0.826
0.751
0.683
0.621
Σ PVCI
Σ PVCO
NPV
PV
(10%)
9.09
9.09
9.02
8.88
67.68
103.76
105.00
-1.24
PVF
(5%) PV (5%)
0.952
9.52
0.907
9.98
0.864
10.37
0.823
10.70
0.784
85.40
Σ PVCI 125.97
Σ PVCO 105.00
NPV 20.97
YTM = 5% + [20.97 / 20.97 – (-1.24)] X 5 = 9.72%
As the YTM is lower than the current prevailing market interest rate of 10%, the bond
is not worth buying.
(8 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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Dear Student,
Examiner’s observations on assessment of Answer books for this test
have been enumerated hereunder. A glance at these comments may help
you elevate your marks in the Final Examination.Hope you reap the
benefits of one more student friendly step taken by Pinnacle Academy.
Sharing with you the observations of the evaluator.
Yours lovingly
CA. Ashish Lalaji
Observations on evaluation of Answer Books for FMQuestion Paper Dated; 16-April16
1(a)
- This question has been least attempted, and not answered comprehensively by majority who
attempted.
1 (b)
- Some students applied growth rate to year 2003 and started calculation from 2003 which went
wrong.
2 (a)
- Most of all students rightly calculated Annualised Investment Rate, but majority students
wrongly calculated Annualised Discount Rate using Rs 9,940 as denominator.
2 (b)
- Most of all students solved it correctly. A few student were incorrect in calculating Additional
Units 42,000.
2 (c)
- While many students solved it correctly, a few students mentioned incorrect answers without
systematic calculation.
3 (a)
- Satisfactory.
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3 (b)
- Satisfactory, except for students who did not calculated Total Capital Employed of Rs 140 lacs
correctly.
3 (c)
- Answered correctly by most of all.
4 (a)
- Calculations for Option (i) and (ii) were satisfactory. For Option (iii) some students were
incorrect in calculating Loss on futures.
4 (b)
- Students were conceptually clear about topics but answers should be more comprehensive.
5 (a)
- Satisfactory.
5 (b)
- Some students gave equal weight to Sensex while calculating Portfolio Return & Beta which is
incorrect. Sensex is only a benchmark for portfolio analysis.
6 (a)
- Most of all students were incorrect in arriving at Net Deposit Balance at end of each day.
6 (b)
- Majority students were incorrect in calculating Fair Futures Price as they multiplied dividend
rate with 1/12 instead of 340/500.
6 (c)
- Satisfactory.
7 (a)
- While most of all students were correct in calculation of PV and Duration, majority students
calculated duration upto 2 digits which appears equal for all cases and hence could not
conclude inverse relationship between Yield and Duration.
7 (b)
- Satisfactory except for some students who considered PVCO as 100 instead of 105.
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