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Appendix
CA Final Gr . I
(Solution upto May - 2012 & Questions of Nov - 2012 included)
Paper - 2 : Strategic Financial Management
Chapter - 2 : Project Planning and Capital Budgeting
2012 - May [2] (a)
Working Notes First of all we shall calculate cash flows for each replacement cycle as follows: One Year Replacement Cycle
`
Year
Replacement
Cost
Maintenance &
Repair
Residual
Value
Net Cash
Flow
0
(60,000)
-
-
(60,000)
1
-
(16,000)
32,000
16,000 Two Years Replacement Cycle
`
Year
Replacement
Cost
Maintenance &
Repair
Residual Value
Net Cash
Flow
0
(60,000)
-
-
(60,000)
1
-
(16,000)
-
(16,000)
2
-
(22,000)
24,000
2,000 Three Years Replacement Cycle
`
Year
Replacement
Cost
Maintenance &
Repair
Residual
Value
Net cash
Flow
0 (60,000) - - (60,000)
1
-
(16,000)
-
(16,000)
2
-
(22,000)
-
(22,000)
3
-
(28,000)
16,000
(12,000)
Four Years Replacement Cycle
`
Year
Replacement
Cost
Maintenance &
Repair
Residual
Value
Net Cash
Flow
0
(60,000)
-
-
(60,000)
1
-
(16,000)
-
(16,000)
2
-
(22,000)
-
(22,000)
3
-
(28,000)
-
(28,000)
4
-
(36,000)
8,000
(28,000)
NPV for each replacement cycles
1Year
2 Years
3 Years
4 Years
Year
PVF@
15%
Cash
Flows
PV
Cash
Flows
PV
Cash
Flows
PV
Cash
Flows
PV
0
1
-60,000
-60,000
-60,000
-60,000
-60,000
-60,000
-60,000
-60,000
1
0.8696
16,000
13,914
-16,000
-13,914
-16,000
-13,914
-16,000
-13,914
2
0.7561
-
-
2,000
1,512
-22,000
-16,634
-22,000
-16,634
3
0.6575
-
-
-
0
-12,000
-7,890
-28,000
-18,410
4
0.5718
-
-
-
0
0
-28,000
-16,010
-46,086
-72,402
-98,438
-1,24,968
Equivalent Annual Cost (EAC) per annum using Capital Recovery Factor
Replacement Cycles
EAC (`)
1 Year
46,086 0,8696
52,997
2 Years
72,402 1.6257
44,536
3 Years
98,438 2.2832
43,114
4 Years
1,24,968
2.855
43,772
Appendix CA Final Gr. I Paper - 2 I-3
Since EAC is least in case of replacement cycle of 3 years hence machine should be replaced after every three years. Chapter - 4 : Dividend Decisions
2012 - May [2] (b) (i) As per Dividend Discount Model approach the firm’s expected or required
return on equity is computed as follows:
Ke =Expecteddividendattheendofyear1(D
1)
CurrentMarketPrice(P0)
+ Expected Growth Rate of Dividend
Therefore, Ke =3.36
146 + 7.5%
= 0.0230 + 0.075 = 0.098
Or. Ke = 9.80%
(ii) When rate of return of retained earnings (r) is 10% and retention ratio (b) is 60%, new growth rate will be as
follows.
g = br i.e.
= 0.10 0.60 = 0.06
Thus dividend will also get changed and to calculate this, first we shall calculate previous retention ratio (b1)
and then EPS assuming that rate of return on retained earnings (r) is same.
With previous Growth Rate of 7.5% and r = 10% the retention ratio comes out to be:
0.075 = b1 x 0.10
b1 = 0.75 and payout ratio = 0.25
With 0.25 payout ratio the EPS will be as follows:
3.36
0.25 = 13.44
With new 0.40 (1 - 0.60) payout ratio the new dividend will be
D1 = 13.44 0.40 = 5.376
Accordingly new Ke will be
Ke =5.376
146 + 6.0%
or, Ke = 9.68 %
2012 - May [3] (b) First set us calculate cost of Equity (Ke)/PE Ratio
Appendix CA Final Gr. I Paper - 2 I-4
D1=19,20,000
12,00,000 = 1.6
P0 = 10
Ke =D
P =Rs.1.6
10 = 16%
P/E =10
1.6 = 6.25
Now we shall compute NPV of the project
NPV = -8,00,000
(1+0.16) +-8,00,000
(1+0.16)2 +
3,60,000
0.16
1
(1+0.16)3
= - 6,89,655 - 5,94,530 + 14,41,480
= 1,57,295
As NPV of the project is positive , the value of the firm will increase by ` 1,57,295 and spread over the number of
shares and the market price per share will increase by 13 paisa.
2012 - May [4] (b)
Internal Rate of Return (r) = 0.20
Dividend (D) = 1.80
Earnings Per share (E) = 1.80
0.36 = 5
Price of share (P) = 5 7.25 = 36.25
P =
D+r
Ke
(E-D)
Ke
36.25 =
1.80+0.20(5-1.80)
Ke
Ke
36.25 Ke = 1.80 + 0.20(3.20)
Ke
36.25 Ke = 1.80 +0.64
Ke
36.25 Ke2 = 1.80 ke + 0.64
Ke = -b±rootb2-4ac
2a
Appendix CA Final Gr. I Paper - 2 I-5
= -1.80±root(1.80)2-4´(-36.25)´0.64
2´(-36.25)
= -1.80±root3.24+92.80
-72.50
Ke = 16%
Since the firm is a growing firm, then 100% payout ratio will give limiting value of share
P =
1.80+0.20(5-5)
0.16
0.16
= 1.80
1.16
= `11.25
Thus limiting value is `11.25
Chapter - 5 : Indian Capital Market and Security Analysis
2012 - May [1] {C} (b), (d)
(b) The duration of future contract is 4 months. The average yield during this period will be:
3%+3%+4%+3%
4 = 3.25%
As per Cost to Carry model the future price will be
F = Se(rf-D)t
Where S = Spot Price
rf = Risk Free interest
D = Dividend Yield
t = Time Period
Accordingly, future price will be
= ` 2,200 e(0.08-0.0325) 4/12
= ` 2,200 e0.01583
= ` 2,200 1.01593.
= ` 2235.05
(d) The optional hedge ratio to minimize the variance of Hedger’s position is given by:
H = pσS
σF
Where
σS = Standard deviation of S
σF = Standard deviation of F
Appendix CA Final Gr. I Paper - 2 I-6
p = coefficient of correlation between S and F
H = Hedge Ratio
S = change in Spot price.
F = Change in Future price.
Accordingly
H = 0.75 0.04
0.06 = 0.5
No. of contract to be short = 10 x 0.5 = 5
Amount = 5,000 x ` 474 = ` 23,70,000
2012 - May [4] (a)
Maximum decline in one month = 5,326-4793.40
5,326 100 = 10%
(1) Immediately to start with
Investment in equity = Multiplier (Portfolio value - Floor value)
= 2 (3,00,000 - 2,70,000) = ` 60,000
Indira may invest ` 60,000 in equity and balance in risk free securities.
(2) After 10 days
Value of equity = 60,000 x 5122.96/5326 = ` 57,713
Value of risk free investment = ` 2,40,000
Total value of portfolio = ` 2,97,713
Investment in equity = Multiplier (Portfolio value - Floor value)
= 2 (2,97,713 - 2,70,000) = ` 55,426
Revised Portfolio:
Equity = ` 55,426
Risk Free Securities = ` 2,97,713 - ` 55,426 = ` 2,42,287
(3) After another 10 days
Value of equity = 55,426 x 5539.04/5122.96 = ` 59,928
Value of risk free investment = ` 2,42,287
Total value of portfolio = ` 3,02,215
Investment in equity = Multiplier (Portfolio value - Floor value)
= 2 (3,02,215 - 2,70,000) = ` 64,430
Revised Portfolio:
Equity = ` 64,430
Appendix CA Final Gr. I Paper - 2 I-7
Risk Free Securities = ` 3,02,215 - ` 64,430 = ` 2,37,785
The investor should off-load ` 4,502 of risk free securities and divert to Equity.
2012 - May [6] (a)
p = ert-d
u-d
ert = e0.036
d = 411/421 = 0.976
u = 592/421 = 1.406
p = e0.036-0.976
1.406-0.976 =
1.037-0.976
0.43
0.061
0.43 = 0.1418
Thus probability of rise in price 0.1418
2012 - May [7] (a), (b)
(a) Zero coupon bonds issued by banks, Govt and pvt sector companies are those which do not pay interest during
the life of the bonds. Instead, they are issued at discounted price to their face value, which is the amount a bond will
be worth when it matures or comes due. When it matures. the investor will receive a lumpsum amount equal to the
initial investment plus interest that has been accrued on the investment made. The maturity dates on zero coupon
bonds are usually long term which allows an investor for a long range planning. Bonds issued by corporate sector
carry a potentially higher degree of risk, depending on the financial strength of the issuer and longer maturity
period, but they also provide an opportunity to achieve a higher return.
(b) A swap is a contractual agreement between two parties to exchange, future payment streams based on
differences in the returns to different securities or changes in the price of some underlying item. The most common
type of swap agreement is the interest rate swap. In it the parities to the agreement, agree to exchange payments
indexed to two different interest rates. Total payments are determined by the specified notional principal amount of
the swap, which is never actually exchanged. Financial intermediaries, such as banks, pension funds, and insurance
companies, as well as non- financial firms use interest rate swaps to effectively change the maturity of outstanding
debt or that of an interest- bearing asset.
Chapter - 6 : Portfolio Theory 2012 - May [5] (b)
The variance of Security’s Return
σ2 = βi2 σ2
m + σ2ei
Accordingly variance of various securities
σ2
Weight (w)
σ2 X w L
(1.60)2 (18)2 + 72 =
878.44
0.25
219.61
Appendix CA Final Gr. I Paper - 2 I-8
M (1.15)2 (18) 2 + 112 = 549.49 0.30 164.85 N
(1.40)2 (18)2 + 32 =
644.04
0.25
161.01
K
(1.00)2 (18)2 + 92 =
405.00
0.20
81
Variance
626.47
SD =Root626.47 = 25.03
Chapter - 8 : Mutual Funds 2012 - May [6] (b)
(i) NAV of the Fund.
=
Error!
=Rs.4,73,02,000
6,00,000 = ` 7,88,366 rounded to ` 78.84
(ii) The revised position of fund shall be as follows:
Shares
No. of Shares
Price
Amount (`)
L Ltd.
M Ltd.
N Ltd.
P Ltd.
Cash
20,000
38,000
20,000
60,000
20.00
312.40
361.20
505.10
4,00,000
1,18,71,200
72,24,000
3,03,06,000
5,00,800
5,03,02,000
No. of units of fund = 6,00,000 +30,00,000
78.8366 = 6,38,053
(iii) On 2nd February 2012, the NAV of fund will be as follows:
Shares
No. of Shares
Price
Amount (`)
L Ltd.
M Ltd.
N Ltd.
P Ltd.
Cash
20,000
38,000
20,000
60,000
20.50
360.00
383.10
503.90
4,10,000
1,36,80,000
76,62,000
3,02,34,000
5,00,800
5,24,86,800
Appendix CA Final Gr. I Paper - 2 I-9
NAV as on 2nd February 2012 = Rs.5,24,86,800
6,38,053 = ` 82.26 per
unit
Chapter - 9 : Money Market Operations
2012 - May [1] {C} (a)
Effective Interest Rate =
Facevalue-IssuePrice
IssuePrice
12
MaturityPeriod
100
= 1,00,000-98,000
98,000 12
4 100
= 0.02041 3 100
= 6.123% say 6.12%
Effective Interest Rate = 6.12% p.a.
Cost of Funds to the company
Effective Interest 6.12%
Brokerage 0.10%
Rating Charges 0.60%
Stamp Duty 0.15%
Cost of Funds 6.97%
Note: In the question it has not been mentioned whether issue expenses related to a year or 4 months. Here we
assume that these expenses is pertains to a year, but you can also consider them as expenses for 4 months and solve
the question accordingly.
2012 - May [7] (c)
The Inter Bank Participation Certificates are short- term instruments to even-out the short-term liquidity within the banking
system. The primary objective is to provide some degree of flexibility in the credit portfolio of banks and to smoothen the
consortium arrangements. These are issued by scheduled commercial bank and can be subscribed to by any commercial
bank. It is issued against an underlying advance, classified standard and the aggregate amount of participation in any
account time issue. During the currency of the participation, the aggregate amount of participation should be covered by the
outstanding balance in account.
The scheme is beneficial both to the issuing and participating banks. The issuing bank can secure funds against
advances without actually diluting its asset- mix. A bank having the highest loans to total asset ratio and liquidity bind can
square the situation by issuing IBPCs. To the lender, it provides an opportunity to deploy the short-term surplus funds in a
secured and profitable manner.
The interest rate on IBPC is freely determined in the market. The certificates are neither transferable nor prematurely
redeemable by the issuing bank. In the case of the bank issuing IBPC with risk, the aggregate amount of participation would
be reduced from the aggregate advance outstanding.
Appendix CA Final Gr. I Paper - 2
I-10
The participation can be issued in two types, viz. with and without risk to the lender. While the participation without
it can be issued for a period not exceeding 90 days. Participation is now with risk for a period between 91 days and 180
days.
Chapter - 10 : FDI, FII and International Financial Management 2012 - May [7] (d)
Netting is a technique of optimising cash flow movements with the combined efforts of the subsidiaries thereby reducing
administrative and transaction costs resulting from currency conversion. There is a co-ordinated international interchange
of materials, finished products and parts among the different units of MNC with many subsidiaries buying/ selling from/ to
each other. Netting helps in minimising the total volume of inter-company fund flow.
Advantages derived from netting:
(i) Improves cash flow forecasting since net cash transfers are made at the end of each period.
(ii) Reduces the number of cross-border transactions between subsidiaries thereby decreasing the overall
administrative costs of such cash transfers.
(iii) Gives an accurate report and settles accounts through co-ordinated efforts among all subsidiaries.
(iv) Reduces the need for foreign exchange conversion and hence decreases transaction costs associated with
foreign exchange conversion.
Chapter - 11 : Foreign Exchange Exposure and Risk Management
2012 - May [1] {C} (c) Assumption : (i) If investor is from US then there will be no impact of appreciation in $, (ii) If investor is from any
other nation then there will be impact of $ appreciation on his returns.
First we shall compute return on bond which will be common for both investors.
Return = (Priceatend-Priceatbegining)+Interest
Priceatbegining
= (5,250-5,000)+350
5,000
= 250+350
5,000 = 0.12 say 12%
(i) For US investor the return shall be 12% and there will be no impact of appreciation in $.
(ii) If $ appreciate by 2% then return for non- US investor shall be:
Return 1.02 = 0.12 1.02 = 0. 1224 i.e. 12.24%
Alternatively it can also be considered that $ appreciation will be applicable to the amount of principal as
well. The answer therefore could also be
(1 + 0.12) (1 + 0.02) - 1 = 1.12 1.02 - 1 = 0.1424 i.e.14.24%
Appendix CA Final Gr. I Paper - 2
I-11
2012 - May [5] (a)
(i) Coverage of payable and receivable in forward Market
Amount payable after 3 months $ 7,00,000
Forward Rate ` 48.45
Payable Amount (`) (A) ` 3,39,15,000
Amount receivable after 2 months $ 4,50,000
Forward Rate ` 48.40
Receivable Amount (`) (B) ` 2,17,80,000
Interest @ 12% p.a. for 1 month (C) ` 2,17,800
Net Amount Payable in (`) (A) - (B) - (C) ` 1,19,17,200
(ii) Assuming that since the forward contract for receivable was already booked it shall be cancelled if we lag the
receivables. Accordingly any profit/ loss on cancellation of contract shall also be calculated and shall be
adjusted as follows:
Amount Payable ($) $ 7,00,000
Amount receivable after 3 months $ 4,50,000
Net Amount payable $ 2,50,000
Applicable Rate ` 48.45
Amount payable in (`) (A) ` 1,21,12,500
Profit on cancellation of Farward cost ` 2,70,000
(48.90 - 48.30) 4,50,000 (B)
Thus net amount payable in (`) (A) +(B) ` 1,18,42,500
Since net payable amount is least in case of second option, hence the company should lag receivables.
2012 - May [7] (e)
In interbank transactions ,foreign exchange is transferred from one account to another account and from one centre to
another centre. Therefore, the banks maintain three types of current accounts in order to facilitate quick transfer of funds in
different currencies. Namely Nostro, Vostro and Loro accounts. It means “our”, “your” and “their” A bank’s foreign currency
account maintained by the bank in a foreign country and in the home currency of that country is known as Nostro Account
or “our account with you”. Vostro account is the local currency account maintained by a foreign bank/branch. It is also
called “your account with us”. The Loro account is an account wherein a bank remits funds in foreign currency to another
bank for credit to an account of a third bank.
Chapter - 12 : Mergers, Acquisition Restructuring & Business Valuation
2012 - May [3] (a) (i) Pre- merger EPS and P/E retios of LMN Ltd. and XYZ Ltd.
Particulars
LMN Ltd
XYZ Ltd.
Appendix CA Final Gr. I Paper - 2
I-12
Earnings after taxes Number of shares outstanding EPS Market Price per share P/E Ratio (times)
6,00,000 3,00,000 2 30 15
1,60,000 1,60,000
1 15 15
(ii) Current Market Price of XYZ Ltd. if P/F ratio is 9.6 = ` 1 9.6 = ` 9.60
Exchange ratio = 30
9.60 = 3.125
Post merger EPS of LMN Ltd.
= 6,00,000+1,60,000
3,00,000+(1,60,0003.125)
=7,60,000
3,51,200 = 2.16
(iii) Desired Exchange Ratio
Total number of shares in post-merged company
= Post-mergerearnings
pre-mergerEPSofLMNLtd. =7,60,000
2 = 3,80,000
Number of shares required to be issued to XYZ Ltd
= 3,80,000 - 3,00,000 = 80,000
Therefore, the exchange ratio should be
80,000 :1,60,000
=80,000
1,60,000 = 0.50
Question Paper of Nov., 2012
Chapter - 1 Financial Policy and Corporate Strategy
2012 - Nov [7] Answer the following :
(a) Interface of Financial Policy and Strategic Management. (4 marks)
Chapter - 4 : Dividend Decisions
2012 - Nov [1] {C} (a) X Ltd. earns ` 6 per share having a capitalization rate of 10 percent and has a return
on investment of 20%. According to Walter’s model, what should be the price of the share at 25% dividend payout ?(5 marks)
2012 - Nov [5] (a) Following Financial Data for Platinum Ltd. are available :
For the year 2011 : (` in lakhs)
Appendix CA Final Gr. I Paper - 2
I-13
Equity Shares (` 10 each) 100
8% Debentures 125
10% Bonds 50
Reserves and Surplus 200
Total Assets 500
Assets Turnover Ratio 1.1
Effective Tax Rate 30%
Operating Margin 10%
Required rate of return of investors 15%
Dividend payout ratio 20%
Current market price of shares ` 13
You are required to :
(i) Draw income statement for the year
(ii) Calculate the sustainable growth rate
(iii) Compute the fair price of the company’s share using dividend discount model, and
(iv) Draw your opinion on investment in the company’s share at current price.
(8 marks)
2012 - Nov [6] (b) Given the following information :
Current Dividend
` 5.00
Discount Rate
10%
Growth rate
2%
(i) Calculate the present value of the stock.
(ii) Is the stock over valued if the price is ` 40, ROE = 8% and EPS = ` 3.00. Show your calculations under the PE
Multiple approach and Earnings Growth model. (8 marks)
Chapter - 5 : Indian Capital Market and Security Analysis
2012 - Nov [3] (a) You as an investor had purchased a 4 month call option on the equity shares of X Ltd. of ` 10, of which
the current market price is ` 132 and the exercise price ` 150. You expect the price to range between ` 120 to ` 190. The
expected share price of X Ltd. and related probability is given below: Expected Price (`)
120
140
160
180
190
Probability
.05
.20
.50
.10
.15
Compute the following:
Appendix CA Final Gr. I Paper - 2
I-14
1.Expected Share price at the end of 4 months.
2.Value of Call Option at the end of 4 months, if the exercise price prevails.
3.In case the option is held to its maturity, what will be the expected value of the call option? (8 marks)
Chapter - 6 : Portfolio Theory
2012 - Nov [4] (b) Mr. FedUp wants to invest an amount of ` 520 lakhs and had approached his Portfolio Manager. The
Portfolio Manager had advised Mr. FedUp to invest in the following manner :
Security
Moderate
Better
Good
Very Good
Best
Amount (in ` lakhs)
60
80
100
120
160
Beta
0.5
1.00
0.80
1.20
1.50
You are required to advise Mr. FedUp in regard to the following, using Capital Asset Pricing Methodology :
(i) Expected return on the portfolio, if the Government Securities are at 8% and the NIFTY is yielding 10%.
(ii) Advisability of replacing Security ‘Better’ with NIFTY. (8 marks)
Chapter - 7 : Financial Services in India
2012 - Nov [7] Answer the following :
(d) Advantages of holding securities in ‘Demat’ form (4 marks)
Chapter - 8 : Mutual Funds
2012 - Nov [1] {C} (c) The following information is extracted from Steady Mutual Fund’s Scheme:
— Asset Value at the beginning of the month - ` 65.78
— Annualised return - 15% — Distributions made in the nature of Income
& Capital gain (per unit respectively) - ` 0.50 and ` 0.32
You are required to : 1. Calculate the month end net asset value of the mutual fund scheme
(limit your answers to two decimals). 2. Provide a brief comment on the month end NAV. (5 marks) Chapter - 9 : Money Market Operations 2012 - Nov [1] {C} (b) Calculate the Current price and the Bond equivalent yield (using simple compounding) of a money
market instrument with face value of ` 100 and discount yield of 8% in 90 days. Take 1 year = 360 days. (5 marks)
2012 - Nov [7] Answer the following :
(b) Commercial Paper (4 marks)
Appendix CA Final Gr. I Paper - 2
I-15
Chapter - 10 : FDI, FII and International Financial Management
2012 - Nov [7] Answer the following :
(c) American Depository Receipt (4 marks)
Chapter - 11 : Foreign Exchange Exposure and Risk Management 2012 - Nov [1] {C} (d) The US dollar is selling in India at ` 55.50. If the interest rate for a 6 months
borrowing in India is 10% per annum and the corresponding rate in USA is 4%: (i) Do you expect that US dollar will be at a premium or at discount in the Indian
Forex Market ? (ii) What will be the expected 6 - months forward rate for US dollar in India? and (iii) What will be the rate of forward premium or discount ? (5 marks) 2012 - Nov [3] (b) Z Ltd. importing goods worth USD 2 million, requires 90 days to make the payment. The overseas
supplier has offered a 60 days interest free credit period and for additional credit for 30 days an interest of 8% per annum.
The bankers of Z Ltd offer a 30 days loan at 10% per annum and their quote for foreign exchange is as follows:
` Spot 1 USD - 56.50
60 days forward for 1 USD - 57.10
90 days forward for 1 USD - 57.50
You are required to evaluate the following options :
(I) Pay the supplier in 60 days, or
(II) Avail the supplier’s offer of 90 days credit. (8 marks)
Chapter - 12 : Mergers, Acquisition Restructuring & Business Valuation
2012 - Nov [2] (a) H Ltd. agrees to buy over the business of B Ltd. effective 1st April, 2012.
The summarized Balance Sheets of H Ltd. and B Ltd. as on 31st March 2012 are as follows :
Balance Sheet as at 31st March, 2012
(in Crores of Rupees) Liabilities:
H Ltd.
B Ltd.
Paid up Share Capital :
— Equity Shares of ` 100 each
350.00
— Equity Shares of ` 10 each
6.50
Reserves & Surplus
950.00
25.00
Total
1,300.00
31.50
Appendix CA Final Gr. I Paper - 2
I-16
Assets: Net Fixed Assets
220.00
0.50
Net Current Assets
1,020.00
29.00
Deferred Tax Asset
60.00
2.00
Total
1,300.00
31.50
H Ltd. proposes to buy out B Ltd. and the following information is provided to you as part of the scheme of buying:
1.The weighted average post tax maintainable profits of H Ltd. and B Ltd. for the last 4 years are ` 300 crores and 10 crores
respectively.
2.Both the companies envisage a capitalization rate of 8%.
3.H Ltd. has a contingent liability of ` 300 crores as on 31st March, 2012.
4.H Ltd. to issue shares of ` 100 each to the shareholders of B Ltd. in terms of the exchange ratio as arrived on a Fair Value
basis. (Please consider weights of 1 and 3 for the value of shares arrived on Net Asset basis and Earnings
capitalization method respectively for both H Ltd. and B Ltd.)
You are required to arrive at the value of the shares of both H Ltd. and B Ltd. under:
(i) Net Asset Value Method
(ii) Earnings Capitalisation Method
(iii) Exchange ratio of shares of H Ltd. to be issued to the shareholders of B Ltd. on a Fair value basis (taking into
consideration the assumption mentioned in point 4 above) (12 marks)
2012 - Nov [4] (a) Eagle Ltd. reported a profit of ` 77 lakhs after 30% tax for the financial year 2011-12. An analysis of the
accounts revealed that the income included extraordinary items of ` 8 lakhs and an extraordinary loss of ` 10 lakhs. The
existing operations, except for the extraordinary items, are expected to continue in the future. In addition, the results of the
launch of a new product are expected to be as follows :
` in lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10
You are required to :
(i) Calculate the value of the business, given that the capitalization rate is 14%.
(ii) Determine the market price per equity share, with Eagle Ltd.’s share capital being comprised of 1,00,000 13%
preference shares of ` 100 each and 50,00,000 equity shares of ` 10 each and the P/E ratio being 10 times.
(8 marks) 2012 - Nov [6] (a) Yes Ltd. Wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are given below :(` in lakhs)
Appendix CA Final Gr. I Paper - 2
I-17
Year
1
2
3
4
5
Yes Ltd.
175
200
320
340
350
Merged Entity
400
450
525
590
620
Earnings would have witnessed 5% constant growth rate without merger and 6% with merger on account of economies of
operations after 5 years in each case. The cost of capital is 15%.
The number of shares outstanding in both the companies before the merger is the same and the companies agree to an
exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd.
PV factor at 15% for years 1-5 are 0.870, 0.756, 0.658, 0.572, 0.497 respectively.
Yor are required to :
(i) Compute the Value of Yes Ltd. before and after merger.
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd. (8 marks)
2012 - Nov [7] Answer the following :
(e) Synergy in the context of Mergers and Acquisitions. (4 marks)
Chapter - 13 : Miscellaneous
2012 - Nov [2] (b) With the help of the following information of Jatayu Limited compute the Economic Value Added:
Capital Structure : Equity capital ` 160 lakhs
Reserves and Surplus ` 140 lakhs
10% Debentures ` 400 lakhs
Cost of equity : 14%
Financial Leverage : 1.5 times
Income Tax Rate : 30% (4 marks)
2012 - Nov [5] (b)Tiger Ltd. is presently working with an Earning Before Interest and Taxes (EBIT) of ` 90 lakhs. Its present
borrowings are as follows :
` in lakhs
12% term loan 300
Working capital borrowings :
From Bank at 15% 200
Public Deposit at 11% 100
The sales of the company are growing and to support this, the company proposes to obtain additional borrowing of `
100 lakhs expected to cost 16%. The increase in EBIT is expected to be 15%.