CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
1
SOLUTION TO MAY 19 OLD CA FINAL SFM(Practical ques)
By CA PRAVIIN MAHAJAN
Conclusion : This paper Is a wake up call, as it is not possible now to prepare subject by doing
only important questions. Full coverage of ALL ICAI MATERIAL ( PRACTISE MANUAL , RTP’s,
MTP’s, PAST PAPERS) with all technical questions is necessary,as technical questions of every
are chapter is asked.
Questions of chapters like dividend are also put up with new points. Topics which were not
asked from Last 10 years are asked ( FIRM BETA in Portfolio, Conventional Interest rate
swaps),which we extensively cover in class. Rest were repetitive lengthy questions
Still 70 – 75 can be easily claimed with average prepration. Little bit extra effort could get
more better marks.
This paper is perfect example, that its very important to identify which questions are to be
attempted first, to claim exemption as early as possible in given 3 hours. So Besides
prepration for content in subject, training is also needed for how to see and approach
question paper in exam. Attempting MOCK TESTS will be fruitfull.
Questions Chapter Marks
Q1a Capital Budgeting 5
Q1b Derivative “Futures” 5
Q1c Mutual Funds 5
Q1d Forex 5
Q2a Portfoilo management (Firm Beta) 8
Q2b Corporate Valuation 8
Q3a Forex 8
Q3b Dividend (Security valuation) 8
Q4a forex 8
Q4b Leasing 8
Q5a Potfolio Management 8
Q5b Merger and acquisition 8
Q6a Factoring 8
Q6b Mutual Fund 8
Chapter wise coverage
1. Derivative 5
2. Forex 21
3. Corporate Valuation 8
4. Security Valuation (dividend) 8
5. Mutual Fund 13
6. Portfolio Management 16
7. Merger and Acquisition 8
8. Capital Budgeting 5
9. Leasing 5
10. Factoring 8
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
2
Q1a SS Company is considering the replacement of its existing machine with a new machine. The
Purchase price of the new machine is Rs 26 lakhs and its expected life is 8 years. The company
follows straight line method of depreciation on the original investment (scrap value is not
considered for the purpose of depreciation. The other expenses to be incurred for the new
machine are as under:
i. Installation charges Rs 9,000
ii. Fees paid to consultant for his advise to buy the new machine Rs 6,000
iii. Additional working capital required Rs17,000. (will be released after 8 years)
The written down value of the existing machine is Rs 76,000 and its cash salvage value is Rs
12,500. The dismantling of this machine would cost Rs 4,500. The Annual earnings (before tax
but after depreciation ) from the new machine would amount to Rs 3,15,000.Income tax rate is
35%. The company’s required rate of return is 13%.
You are required to advise on the viability of the proposal.
Author’s Note: Simple question of replacement in capital budgeting.
Answer:
Note : Fees paid to consultant for his advice to buy new machine is sunk cost
Statement of NPV
Cash outflow Amount Period Factor Present val
Purchase price 26,00,000
Installation 9,000
26,09,000
Sale of Old 12,500
Dismantle (4500)
Tax sav on
Cap loss
(76-8)0.35 23,800 (31,800) 25,77,200 0 1 25,77,200
Additional working cap 17,000 0 1 17,000
Cash Inflow
Operating cash inflow 5,30,875 1 – 4 4.8 25,48,200
Release ofworking cap 17,000 4e 0.376 6,392
Net Present value (39,608)
Since NPV is negative so Replacement is not feasible.
Statement of operating cash inflows
1 2 3 4
PBT 3,15,000 3,15,00 3,15,000 3,15,000
PAT 2,04,750 2,04,750 2,04,750 2,04,750
Depn 3,26,125 3,26,125 3,26,125 3,26,125
Cash inflows 5,30,875 5,30,875 5,30,875 5,30,875
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
3
b. On April 1,2019,kasi has a portfolio consisting of 4 securities as shown below:
Security A K S P
Market Price Rs 48.5 Rs 332.68 Rs 13.99 Rs 292.82
No of shares 673 480 721 358
Β value 0.74 1.28 0.54 0.46
Cost of capital is 16% p.a compounded continuously. Kasi fears fall in prices of shares in future.
Accordingly he approaches you for the advice to protect the interest of his portfolio.
You can make use of the following information:
i. The current nifty value is 9380
ii. Nifty futures can be traded in the units of 25 only.
iii. Futures for September are currently quoted at 9540 and futures for October curre ntly
quoted at 9820.
You are required to calculate :
i. The Beta of his portfolio
ii. Theoretical value of futures for contracts expiring in September and October
(Given e0.067 = 1.0693, e0.08 = 1.0833, e0.093 = 1.0975)
iii. The number of nifty contract that he would have to sell,if he desires to hedge 150% of
portfolio until October.
Author’s Note: It is little typical question of derivative, but repetitive (Q3A NOV 15) so it is
simple. Though it is lengthy and carry more weight than 5 marks. Q38 “FUTURES” Pg 2.9in Book.
Answer:
i. β of portfolio is weighted average of β of each security in portfolio. Statement of Portfolio β
Security value of shares β value x β
A 32640.5 0.74 24153.97
K 159686.4 1.28 204398.59
S 10086.79 0.54 5446.87
P 104829.56 0.46 48221.60
307243.25 282221.03
Β of Portfolio = 282221.03
307243.25 = 0.92
ii. Theoretical value of future = CMP ert
Expiring in September = 9380 e0.16 x 6/12
= 9380 e0.08
= 9380 (1.0833)
= 10,161.35
Expiring in October = 9380 e0.16 x 7/12
= 9380 e0.0933
= 9380 (1.0975) = 10,294.55
iii. %age of hedge required = 150%
Index futures to be sold = 307243.25 x 1.50 x 0.92
= 423995.65
Index units sold = 423995.65/10,294.55
= 41.186
Index futures contract sold = 41.186 / 25 = 1.65 contracts
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
4
c. The following particulars relating to Vishnu fund scheme :
Particulars Value (Rs incrore)
1. Investment in shares at cost
a. Pharmaceutical companies 79
b. Construction Industries 31
c. Service sector companies 56
d. IT companies 34
e. Real estate companies 10
2. Investment in bonds (fixed income)
a. Listed bonds ( 8,000, 14% bonds of Rs 15,000 each) 12
b. Unlisted bonds 7
3. No.of units outstanding (crores) 4.2
4. Expenses payable 3.5
5. Cash and cash equivalents 1.5
6. Market expectations on listed bonds 8.842%
Particulars relating to each sector are as follows:
Sector Index on purchase date Index on valuation date
Pharmaceutical co 260 465
Construction industries 210 450
Service sector companies 275 480
IT companies 240 495
Real estate companies 255 410
The fund has incurred the following expenses
Consultancy and management fees Rs 480 lacs
Office expenses Rs 150 lacs
Advertisement expenses Rs 38 lacs
You are required to calculate the following
i. Net asset value of the fund
ii. Net Asset value per unit
iii. If the period of consideration is 2 years and the fund has distributed Rs 3 per unit
per year as cash dividend, ascertain the net return (annualised) iv. Ascertain the expense ratio.
Author’s Note: Very good question omutul fund. 1st and 2nd part is very simple. But 3rd
and 4th part are to be done very carefully.
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
5
Answer: Statement of Net asset value of Fund
Market value of Investments
Pharmaceutical company 79 x465
260 141.29
Construction industries 31 x 450
210 66.43
Service sector companies 56 x 480
275 97.75
IT companies 34 x 495
240 80.44
Real Estate companies 10 x 410
255 16.08
Listed bonds 15000 𝑋 0.14
0.08842 x 8000 19
Unlisted Bonds 7
Expenses payable (3.5)
Cash 1.5
NET ASSETS 425.99
ii. Net Asset Value per unit = 425.99
4.2 = 101.43
iii. Statement of Opening net Assets in Beginning
Investment in shares
Pharma 79
Construction 31
Service sector 56
IT companies 34
Real estate companies 10
Invested in Listed bonds 12
Unlisted bonds 7
Cash
1.5 + ( 4.8 + 1.5 + .38 – 3.5 + 6 x 4.2) 29.88
258.88
NAV 258.88
4.2 = 61.64
Return for 2 years = dividend + cl NAV - OP NAV
Op NAV
= 6 + 101.43 −61.64
61.64 = 74.29%
= 37.14% p.a
Iv Expense Ratio = 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑟 𝑁𝐴𝑉 𝑜𝑛 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
= 6.68
258.88 x 100
= 2.58%
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
6
d. DSE is an export oriented business in Kolkata. DSE Ltd. invoices in customers currency. Its
receipts of US $ 3,00,000 is due on july 1st 2019.
Market information as at 1st April 19
Exchange rates Currency Futures
US $/Rs US $/Rs
Spot 0.0154 April 0.0155 Contract size
1 Month forward 0.0150 July 0.0151 = Rs 6,40,000
3 month forward 0.0147
Initial Margin Interest rates in India
April Rs 13,000 9%
July Rs 24,000 8.5%
On July, the spot rate US $ / Rs is 0.0146 and currency future rate is 0.0147. Comment which of
the following methods would be most advantageous for DSE Ltd.
i. Using forward contract.
ii. Using currency futures
iii. Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the futures
contract.
Author’s Note : Simple, extremely repetitive question of currency futures. It is included in “List of SUPER 30 favourite questions”. Q164 Foreign exchange risk management,Pg 3.50
Answer
Indian company has to receive $ 3,00,000 after 3 months on July 1st.
Company has 3 options
i) ForwardMarket hedge
Company will book a forward contract today to sell 3,00,000 $ after 3 months @ $
0.0147/ Re
Company will receive = 3,00,000
0.0147 = Rs 204,08,163
ii) Hedge through currency futures
Statement of receipt
Re received on sale of 3,00,000 $ on 1st july at spot rate in july
3,00,000
0.0146 Rs 205,47,945
Futures
Re future to be bought = 3,00,000
0.0151= 198,67,550
Rs 198,67,550 Re future bought $ 3,00,000
Rs 198,67,550 Re future sold @ $ 0.0147 $2,92,053
Loss on currency futures 7,947 $
Loss on currency futures in Rs 7947
0.0146 Rs (5,44,315)
Interest on initial margin 19867550
640000 x 24000 x 0.085 x 3/12 Rs (15,382)
Net Re received 19988248
iii. No Hedging
Company will sell 3,00,000 $ after 3months at spotrate after 3 months
3,00,000
0.0146 = 205,47,945
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
7
Q2a Equity of kGF Ltd (KGFL) is Rs 410 crores, its debt is worth Rs 170 crores. Printer Division
segments value is attributable to 74%, which has an asset Beta (βP) of 1.45, balance value is
applied on spares and consumable division, which has an asset Beta βSC of 1.20. KGFL debt Beta (βD) is 0.24 .
You are required to calculate:
i. Equity Beta (βE),
ii. Ascertain Equity Beta (βE). If KGF Ltd decides to change its Debt equity position by
raising further debt and buying back of equity to have its debt equity ratio at 1.90.
assume that the present debt Beta (βD1) is 0.35 and any further funds raised by way of
debt will have a Beta (βD2) of 0.40.
iii. Whether the new Equity Beta (βE) justifies increase in the value of equity on account of
leverage?
Author’s Note: Simple basic question of Firm/ Asset β.
Answer:
β weight β
Market value of equity 410 cr Printer Division 0.74 1.45
Market value of Debt 0.24 170 cr Spares Division 0.26 1.20
i. Asset β of company is weighted Average of β of Printer and Spares division.
Asset β = WP βP + WS βS
= 0.74 x 1.45 + 0.26 x 1.20
= 1.073 + 0.312
= 1.385
Asset β of company is Weighted average of equity β and Debt β
Asset β = WEβE + WDβD
1.385 = 410
580 x βE +
170
580 x 0.24
βE = (1.385 - 0.0703) 580
410
= 1.860
ii. Debt Equity Proportion is changed.
New Debt equity ratio 1.9 : 1
Existing capital 580 crore
New debt is raised to buy back equity, so Existing capital will be maintained
Debt before buy back 170 crore
Total debt after buyback 1.9
2.9 x 580 = 380 crore
New debt raised 210 cr
Total Equity after Buy back 200 crore
Current debt β 0.35
Debt β of further debt raised 0.40
Total debt β = 170
380 x 0.35 +
210
380 x 0.4 (question mentions, there are 2 debt β)
= 0.16 + 0.22
= 0.38
If composition of capital structure changes, Asset β remain same i.e 1.385
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
8
Asset β = WE βE + WD βD
1.385 = 200
580 x βE +
380
580 x 0.38
βE = (1.385 - 0.25) 580
200 = 3.29
iii. Since βE is increased , cost of equity (by CAPM) will increase, it will reduce value of
Equity. (suggestions are invited for solution of this part)
b. The closing price of LX Ltd is Rs 24 per share as on 31st march 2019 on NSE Ltd. The Price
earnings ratio was 6. It was found that an amount of Rs 24 lakh as income and an extraordinary
loss of Rs 9 lakh were included in the books of accounts. The existing operations except for the
extraordinary items are expected to continue in future. Further the company has launched a
new product during the year with the following expectations.
(Rs in lakhs)
Sales 150
Material cost 40
Labour cost 34
Fixed cost 24
The company has 5,00,000 equity shares of Rs 10 each and 1,00,000 9% preference shares of Rs
100 each. The price earning ratio is 6 times. Post tax cost of capital is 10 % p.a. Tax rate is
34%.You are required to determine :
i. Existing profit from old operations
ii. The value of business.
Author’s Note : It is a simple repetitive question, generally carries weight of 5 marks. In this
attempt it is of 8 marks, though its not a complete question. Value of share is not asked in
question. It is included in the “list of SUPER 30 FAVOURITE QUESTIONS”. In Our book it is Q2
of valuation of business (corporate valuation) Pg 9.1.
i. Statement of Existing profit from Old operations
PERatio 6
Closing Market Price 24
EPS 24
6 4
Profit For Equity 4 x 5,00,000 20,00,000
Prefrence dividend 9,00,000
Profit after tax 29,00,000
Profit before Tax 29,00,000
0.66 43,93,939
+ Extraordinary Loss 9,00,000
- Extraordinary Income (24,00,000)
+ Profit from launch of new product
Sales 150
Material cost 40
Labour cost 34
Fixed cost 24 52,00,000
Profit before tax 80,93,939
Profit afer tax 80,93,939(0.66) 53,42,000
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
9
Existing profit from old operations Rs 53,42,000
ii. Value of business 53,42,000
0.1 = Rs 534,20,000
Q3a IM is an American firm having its subsidiary in Japan and JI is a japanese firm having its
subsidiary in USA. They face the following interest rates
IM JI
USD Floating rate LIBOR + 0.5% LIBOR + 2.5%
JPY Fixed rate 4% 4.25%
IM wishes to borrow USD at floating rate and JI JY at fixed rate. The amount required by both
the companies is same at the current Exchange rate. A financial institution requires 75 basis
points as commission for arranging Swap. The companies agrees to share the benefits/loss
equally.
You are required to find out
i. Whether a beneficial swap can be arranged ?
ii. What rate of interest for both IM and JI ?
Author’s Note : Simple basic question of Interest rate swaps. Examiner drafted question
smartly, so student should take this question as question of currency swap, but preference of
companies in Fixed and floating rate is given, so question of interest rate swap.
Q126 a foreign exchange risk management, pg 3.34 of book.
Answer IM JI
USD Floating rate LIBOR + 0.5% LIBOR + 2.5%
JPY Fixed rate 4% 4.25%
Prefrence $ Floating rate JY at Fixed rate
IM fluctuating $ JI FixedJY
L + 0.5% 4.25
4% Intermediary L+ 2.5%
4%
Recd. = L + 0.5% + 4.25 = L + 4.75 L + 2.5%
Paid = 4 + L + 2.5 = L + 6.5
Benefit of Swap 1.75
Share of I 0.75
P 0.5
Bank Q 0.5 Bank Fixed JY Fluctuating $
i. Since IM need $ loan at fluctuating rate and JI needs JY loan at Fixed rate, a swap will
be arranged in which IM will borrow JY at fixed rate and JI willborrow $ at fluctuating rate.
Interest according to own prefrence = L + 0.5 + 4.25
Interest under swap = 4 + L + 2.5
Benefit of swap = L + 0.5 - ( 4 + L + 2.5 ) = 1.75 %
Share of Intermediary = 0.75
Share of IM = 0.5
Share of JY = 0.5
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
10
ii. Cost to each Party = Paid to I - Recd from I + paid to bank - Share in benefit from swap
IM = L + 0.5 - 4 % + 4% - 0.5 = L
JY = 4.25 - ( L + 2.5 ) + ( L + 2.5 ) – 0.5 = 3.75
b. An investor is considering purchasing the equity shares of LX Limited whose current market
price (CMP) is 150. The company is proposing a dividend of Rs 6 for the next year. LX is expected
to grow at 18 % per annum for the next 4 years. The growth will decline linearly to 14 percent
per annum after first four years. Thereafter, it will stabilize at 14 % per annum in finitely the
required rate of return is 18% per annum infinitely. You are required to determine
i. the intrinsic value of one share
ii. whether it is worth to purchase the share at this price
t 1 2 3 4 5 6 7
PVIF 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.266
Author’s note: Simple basic question of dividend with different growth rates. No technical point.
Answer : P0 = 150
D1 = 6
g = 1- 4 yrs = 18%
5 = 17%
6 = 16%
7 = 15%
8 and above = 14%
Ke = 18%
i. Intrinsic value of share is present value of all future cash outflows i.e dividend
Intrinsic value of share = Present value of + CMP at end of
Dividend from 1- 7years 7th year
Statement of Intrinsic value
Year Dividend factor (18%) Present value
1 6 0.847 5.082
2 7.08 0.718 5.083
3 8.35 0.609 5.085
4 9.85 0.516 5.083
5 11.52 0.437 5.034
6 13.36 0.370 4.943
7 15.36 0.314 4.823
8 7 17.51
0.18 − 0.14 = 437.75 0.314 137.45
172.583
ii. Current Market price of share is 150. Since Market price is less than intrinsic value,
investor should buy the share.
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
11
Q4a KGF banks Sydney branch has surplus funds of USD $ 7,00,000 for a period of 2 months.Cost of
funds to the bank is 6% per annum. They propose to invest these funds in Sydney, New York or
Tokyo and obtain the best yield, without any exchange risk. The following rates of interest are
available at the three centres for investment of domestic funds there for a period of 2 months.
Sydney 7.5 % per annum
New York 8% per annum
Tokyo 4% per annum
The market rates in Australia for US dollars and Yen are as under
Sydney on New York
spot 0.7 100 / 0.7 300
1 month 10 /20
2 months 25/30
Sydney on Tokyo
spot 79.090/ 79.2 000
1 month 40 / 30
2 months 55 / 50
At which centre, will the investment be made and what will be the net gain to the bank on the
invested funds.
Author’snote : Question is ofcash management “Forex”. Question is technical but it is in manual
and earlier came in Nov 13. Q156 in book Pg 156. This ques is comparatively simple as it does
not ask answer in specific currency. Done in class
Answer
Company has Idle fund of $ 7,00,000 @ 6%p.a. Company can invest this fund in Sydney,New
York or Australia.
If invested in Sydney
Amount to be invested in A$ 7,00,000
0.7300 9,58,904 A $
A$ in hand after 2 months with interest
9,58,904 ( 1 + 0.075 x 2
12 ) 9,70,890 A$
$ in hand after 2 months 9,70,890 ( 0.7100 + 0.0025) 6,91,759 $
$ Payable after 2 months 7,00,000 ( 1 + .06 x 2
12) 7,07,000 $
Loss in $ if investment is made in Sydney 15,241 $
If Invested in Newyork
$ Invested 7,00,000 $
$ In hand after 2 months 7,00,000 ( 1 + .08 x 2
12 ) 7,09,333 $
$ Payable after 2 months 7,07,000 $
Profit in $ If investment is made in Newyork 2,333 $
If Investment in Tokyo
Yen tobe invested 7,00,000 ( 79.09 x 1
0.7300 ) 758,39,726 ¥
Yen in hand after 2 months
758, 39, 726 ( 1 + .04 x 2
12) 763,45,324 ¥
$ in hand after 2 months
763,45,324 x 1
79.2− .0050 𝑋 1
(0.7100 + .0025 )
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
12
763,45,324 x 1
111.15 686,867.51 $
$payable after 2 months 7,07,000 $
Loss in $ if invstement is made in Tokyo 20,132 $
Since $ profit is higher if investment is made in newyork, so newyork center is better for
investment.
b. M / s Shantilal Limited is in the business of manufacturing products. Company decided to install
a machine under considering buying or leasing option. The machine is subjected to straight line
method of depreciation. M / S Shantilal Limited can raise a Debt at 16% payable in four equal
annual installments of Rs 1, 68, 589 each, at the beginning of the Year.
In case of leasing, the company would require to pay an annual rent at the end of the year @
30% of cost of machine for 4 years. The company is in 45% tax bracket. The Salvage value is
estimated at Rs 12,412 at the end of the 4 years.
Advise which of the financing options Shantilal Limited should exercise and why?
N 1 2 3 4
PVIF(8.8,n) 0.919 0.845 0.776 0.714
PVIF(16,n) 0.862 0.743 0.640 0.552
Author’s note : Simple basic question of Leasing. It’s a question of manual. Q27 of book.
Answer : Company is considering to acquire a machine. Co.has 2 options
To purchase the asset by borrowing from bank. Co will anuual instalment of Rs 1,68,589 at the
beginning of each year for 4 years.
Cost of machine = 1,68,589 x (2.246 + 1)
= 5,47,240
Statement of principal and interest
Installment Interest Principal Loan O/s tax saving on int
1,68,589 - 1,68,689 3,78,551 -
1,68,589 60,568 1,08,021 2,70,530 27,256
1,68,589 43,285 1,25,304 1,45,226 19,478
1,68,589 23,363 1,45,226 - 10,513
Statement of cash outflows if asset is purchased
Cash flows amount period Factor 8.8% Present val
Installment 1,68,589 0 1 1,68,589
1,68,589 1-3 2.540 4,28,216
Taxsaving on interest 27,256 1e 0.919 (25,048)
19,478 2e 0.845 (16,459)
10,513 3e 0.776 (8158)
Tax saving on
Depreciation
547,240 - 12,412 x 0.45 60,168 1- 4e 3.254 (1,95,787)
4
Salvage value 12,412 4e 0.714 (8862)
3,42,491
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
13
Option 2 : To acquire asset on lease.
Company will pay annual lease rent of 30% of cost i.e 5,47,240 i.e 1,64,172
Statement of cash outflow if asset acquired on lease
Cash Flow Amount Period Factor Present value
Lease Rent 1,64,172 1- 4e 3.254 5,34,216
Tax saving on lease rnt 73,877 1 – 4e 3.254 2,40,396
Net cash outflow 2,93,820
Since Present value of cash outflow is lower in lease proposal, so lease option should be
excersised.
Q5a Ms Preeti, a school teacher, after retirement has built up a Portfolio of rupees 1,20,000 which is
as follows:
stock number of shares market price per share beta
ABC Limited 1000 50 0.9
DLF Limited 500 20 1.0
GHI Limited 800 25 1.5
jkl Limited 200 200 1.2
Her portfolio consultant Sri Vijay has advised her to bring down the beta to0.8.
You are required to compute:
i. present portfolio beta
ii. how much risk free investment should he brought in, to reduce the beta to 0.8 ?
Author’s Note: Very simple question of derivative. Full concept is covered in Q35 Futures, Pg 2.8
Answer:
i. β of portfolio is weighted average of β ofeach security in portfolio.
Statement of Portfolio β
Stock Value of shares β Value x β
ABC 50,000 0.9 45,000
DEF 10,000 1 10,000
GHI 20,000 1.5 30,000
JKL 40,000 1.2 48,000
1,20,000 1,33,000
Portfolio β = 1,33,000
1,20,000 = 1.108
iii. portfolio β to be reduced to 1.108
WRISKY βRISKY + WRF βRF = 0.8
x 1.108 + ( 1 –x) 0 = 0.8
x = 0.8
1.108
= 0.72
Weight of Rf = 1- 0.72
= 0.28
If vaue of Total Portfolio is to be changed
Value of portfolio after purchaseof risk free investment = 1,20,000
0.72 = 1,66,667
Value of Risk Free investments to be brought in = 46,667
Value of Risky investment = 1,20,000
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
14
If Value of totalportfolio is to maintain to 1,20,000
Value of risk Free investment to be brought in 1,20,000 x 0.28 = 33,600
Value of Risky investment 1,20,000 x 0.72 = 86,400
b. R limited and S Limited operating in same industry are not experiencing any Rapid growth but
providing a steady stream of earnings. R limited’s management is interested in acquisition of S
Limited due to its excess plant capacity. Share of S Limited is trading in market at Rs 3.20 each.
Other data relating to S Limited is as follows:
Balance sheet of S Limited
liabilities amount assets amount
current liabilities 1, 59, 80,000 current assets 2, 48, 75, 000
long term liabilities 1, 28, 00,000 other assets 94,00,000
reserve and surplus 2, 79, 95, 000 property plants and
equipments 3, 45, 00 000
share capital 1, 20,00,000
(80 lacs shares of Rs 1.5 each)
Total 6, 87, 75, 000 Total 6, 87 75, 000
Particulars R limited Rs S Limited Rs combined entity Rs
Profit after tax 86, 50 000 49, 72 000 1, 21, 85, 000
residual net cash flows per year 90 10 000 54, 87 000 1, 85, 00, 000
Required return on equity 13.75 % 13.05 % 12.5%
You are required to compute the following
i. minimum price per share as Limited should accept from R Limited
ii. maximum price per share R Limited shall be willing to offer to S Limited
iii. floor value per share of Limited, whether it shall play any role in decision for its
acquisition by R Limited.
Author’s Note: Little technical question of Merger and acquisition. It carries understanding of new
concept. First appeared in MAY 15 RTP,now also part of manual, done specifically in class. Q61, Pg
4.29 in book.
Answer: R S Combined
MP per share 3.2
Number ofshares 80lakh
Paidupvalue per share 1.5
Reserves 279,95,000
PAT 86,50,000 49,72,000 121,85,000
Net cash flows per year 90,10,000 54,87,000 185,00,000
Ke 13.75 13.05 12.5
i. Minimum Price per share payable by R to S Ltd
Minimum Value payable by R to S is Pre merger value to S Ltd, But if Pre Merger
value is value is less than bookvalue, R will pay Book value to S.
PreValue Of S Ltd 80,00,000 x 3.2 256,00,000
Book Value of S Ltd 80,00,000 x 1.5 + 279,95,000 399,95,000
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
15
Minimum price per share payable to Sltd = 399,95,000
80,00,000
= 4.99 or 5/share
ii. Maximum Price per share payable to S Ltd
Value of combined firm after acquisition
(Present value of all future cash inflows of combined firm) = 185,00,000
0.125
= 1480,00,000
Pre value of R Ltd 90,10,000
0.1375 655,27,273
Value given to sLtd 824,72,727
Value Per share 824,72,727
80,00,000 10.31
iii. Floor value of SLtd is Pre merger Market Cap = 80lac x 3.2
= 256,00,000
It is not used in decision to acquire S, as market cap of S is less than book value
of S.
Q6a XL Limited comma who is dealing in computer software is having credit sales of rupees
2,10,00,000 with average receivables of Rs 35, 00, 000.Bad debts are 0.9 % on sales. With an eye
to save time on collection of receivables XL Limited is considering a proposal to appoint a factor.
The following information is available:
Particulars Recourse Non-recourse
Average reduction in collection 30 30
of receivables days
reduction in bad debts by 0.3% 0.3%
saving in administration cost Rs 40000 40000
Advance 80% 80%
interest on advance 2% higher than current OD interest of 7% p.a
factor fee 0.60 percent 1.25%
assume 360 days in a year.
You are required to evaluate the proposal
Author’s Note: Very simple question of Factoring. Similar types of questions extensively solved in
class.
Answer:
Credit sales 210,00,000
Average debtor’s 35,00,000
Average debtor after factoring 210
360 x 30
= 17,50,000
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
16
Statement of Evaluation of With recourse factoring proposal
As compared to in house management
Saving in Interest on reduction in average debtors
(35,00,000 - 17,50,000) 0.07 1,22,500
Saving In bad debts 0.003 x 210,00,000 63,000
Saving In administration cost 40,000
Comission to factor 0.006 x 210,00,000 ( 1,26,000)
Interest paid to factor
( 17.5 x 0.8 - 35 x 0.006) 0.02 (27,580)
Net savings 71,920
Statement of Evaluation of Without recourse factoring proposal
As compared to in house management
Saving in Interest on reduction in average debtors
(35,00,000 - 17,50,000) 0.07 1,22,500
Saving In bad debts 0.009 x 210,00,000 1,89,000
Saving In administration cost 40,000
Comission to factor 0.0125 x 210,00,000 ( 1,26,000)
Interest paid to factor
( 17.5 x 0.8 - 35 x 0.0125) 0.02 (27,125)
Net savings 1,98,375
Since savings in factoring without recourse is higher, so factoring without recourse is better.
b. Mutual Fund has two schemes i.e. Dividend plan (plan A) and Bonus (plan B). The face value of the
unit is Rs 10. On 01 /0 4/2016 Mr Anand invested Rs 5,00,000 each in plan A and plan B when the
NAV was Rs 46 and Rs 43.50 respectively. Both the plans matured on 31/ 03 / 2019 .
Particulars of the dividend and bonus declared over the period are as follows
Date Dividend % bonus ratio net asset value Rs
plan A plan B
30 / 06 / 2016 15% 46.80 44.00
31 / 08 / 2016 1:6 47.20 45.40
31 / 03 / 2017 10% 48.00 46.60
17 / 09 / 2017 1:8 48.40 47.00
21 / 11 / 2017 14% 49.60 47.20
25/ 02 / 2018 15% 50.00 47.8 0
31 / 03 / 2018 1:10 50.50 48. 80
30/ 06 / 2018 12% 51.80 49.00
31 / 03 / 2019 52.40 50.00
You are required to calculate the effective yield per annum in respective of the above two plans
Author’s note: Simple question of mutul fund from manual, done in class
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
17
Answer:
Plan A (Dividend plan)
Amount Invested 5,00,000
NAV Rs 46
Units Purchased 10,869.57 units
Statement of Units in hand on 31/03/19
Date op Units Dividend NAV Units purchased Cl units
1/04/16 - - 46 10,869.57 10,869.57
30-06-16 10,869.57 16,304.36 46.80 348.38 11,217.95
31-03-17 11,217.95 11,217.95 48 233.71 11,451.66
21-11-17 11,451.66 16,032.32 49.60 323.23 11,774.89
25-02-18 11,774.89 17,662.34 50 353.25 12,128.14
30-06-18 12,128.14 14,553.77 51.80 280.96 12,409.10
Statement of annual return
Cash received on sale of 12,409.10 units 6,50,236.84
Amount invested 5,00,000
Return 1,50,236.84
% of return = 1,50,236.84
5,00,000 x 100 x
1
3 = 10.01 % p.a
Plan B Bonus Plan
Amount Invested 5,00,000
NAV 43.5
Units purchased 11,494.25
Statement of units in hand on 31/03/19
Date Op units Bonus Cl units
1-04-16 - - 11,494.25
31-08-16 11,494.25 1915.71 13,409.96
17-09-17 13,409.96 1676.25 15,086.21
31-03-18 15,086.21 1508.62 16,594.83
Statement of annual return
Cash Received on sale of 16,594.83 @ 50 8,29,741.5
Amount Invested 5,00,000
Profit 3,29,741.5
Annual return = 3,29,741.5
5,00,000 x 100 x
1
3 = 21.98 %
Q7 Write short notes on any four of the following
a. limitations of credit rating
b. exposure netting
c. explain Carve out and it's different from spin off
d. explain briefly debt/asset securitization and its process.
e. what makes an organisation suitable question mark state the specific steps
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
18
CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi
19