Mock Test Paper - Series II: April, 2024

Date of Paper: 3 April, 2024

Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
Time Allowed – 3 Hours Maximum Marks – 100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case Scenario based MCQs (30 Marks)
Part I is compulsory.
Case Scenario I
During one business meeting at XYZ Ltd., one of the member pointed out that while
evaluating the performance of any company one should not only see its Operating
Income but should also analyse its Capital structure as well. Weighted Average
Cost of Capital changes on the basis of capital structure keeping all other factors
unchanged.
He presented data relating to 3 companies Alpha Ltd., Beta Ltd. and Gama Ltd.
whose operating Income are equal, but their capital structure is different.
The following information relating to these 3 companies is as follows:
(in ` 000)
Alpha Ltd. Beta Ltd. Gama Ltd.
Total invested capital 20,00,000 20,00,000 20,00,000
Debt/Assets ratio 0.8 0.5 0.2
Shares outstanding 61,000 83,000 1,00,000
Pre tax Cost of Debt 16% 13% 15%
Cost of Equity 26% 22% 20%
Operating Income (EBIT) 5,00,000 5,00,000 5,00,000
The Tax rate is uniform 35% in all cases. The industry PE ratio is 11X.
Based on above case scenario, choose the most appropriate answer of the following:
1. The weighted average cost of capital of Alpha Ltd. shall approximately be
………………..
(a) 13.520%
(b) 15.225%
(c) 17.950%
(d) 18.000%

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2. The Economic Valued Added (EVA) for Beta Ltd. is…………….
(a) ` 54600 Thousand
(b) ` 20500 Thousand
(c) (-) ` 34000 Thousand
(d) ` 21500 Thousand
3. The price per share of Gama Ltd. shall be ……………..
(a) ` 28.60
(b) ` 31.90
(c) ` 31.46
(d) ` 29.45
4. The estimated market capitalisation for Alpha Ltd. is…………….
(a) ` 26,47,700 Thousand
(b) ` 31,46,000 Thousand
(c) ` 17,44,600 Thousand
(d) ` 23,73,800 Thousand
5. Earning per share of Beta Ltd. is……………..
(a) ` 2.60
(b) ` 2.90
(c) ` 2.86
(d) ` 2.15 (5 x 2 = 10 Marks)
Case Scenario II
On 1 October 2023 Mr. X an exporter enters into a forward contract with a BNP
Bank to sell US$ 1,00,000 on 31 December 2023 at ` 85.40/$. However, due to the
request of the importer, Mr. X received the amount on 28 November 2023. Mr. X
requested the bank the take delivery of the remittance on 30 November 2023 i.e.,
before due date. The inter-banking rates on 28 November 2023 was as follows:
Spot ` 85.22/85.27
One Month Premium 10/15
Note: (1) Consider 365 days in a year.
(2) Prevailing Prime Lending Rate is 12%
Based on above case scenario, choose the most appropriate answer of the following:
6. The bank may accept the request of customer of delivery before due date of
forward contract provided the customer is ready to bear the loss if any
consisting of…………
(a) Swap Difference
(b) Interest on Outlay of Fund
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 (c) Swap Difference Plus Interest on Outlay of Fund
(d) Fixed Charges Plus Swap Difference and Interest on Outlay of Fund
7. In case of early delivery bank shall charge interest on outlay of fund at a rate
not less than……………..
(a) 8%
(b) 10%
(c) 12%
(d) 18%
8. Swap Difference for US$ 1,00,000 is………………..
(a) ` 5,000
(b) ` 20,000
(c) ` 18,000
(d) ` 8,000
9. Interest on outlay of funds shall be approximately………………….
(a) ` 92 payable by X
(b) ` 183 payable by X
(c) ` 183 payable by Bank
(d) ` 122 payable by Bank
10. Net inflow to Mr. X is approximately……………..
(a) ` 85,42,183
(b) ` 85,20,000
(c) ` 85,19,817
(d) ` 85,40,000 (5 x 2 = 10 Marks)
Case Scenario III
A US parent company has subsidiaries in France, Germany, UK and Italy. The
amounts due to and from the affiliates is converted into a common currency viz. US
dollar and entered in the following matrix.
Inter Subsidiary Payments Matrix (US $ Thousands)
Paying affiliate
France Germany UK Italy Total
France --- 80 120 200 400
Receiving

Germany 120 --- 80 160 360

affiliate

UK 160 120 --- 140 420

Italy 200 60 120 --- 380
Total 480 260 320 500 1560

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The treasurer of US Parent company is suggesting that by applying Multilateral Netting
system the company can save a lot of transfer/ exchange costs. The company’s Board
agreed with Treasurer’s proposal.
From the above case scenario, choose the most appropriate answer of following
MCQs.
11. Before applying Multilateral Netting it is necessary to apply……………….
(a) Unilateral Netting
(b) Bilateral Netting
(c) Multilateral Netting
(d) Interest Rate Swapping
12. Through Multinational Netting these transfers will be reduced to
……………………….
(a) $ 50,000
(b) $ 100,000
(c) $ 150,000
(d) $ 200,000
13. The Net Payment/ Net Receipts for France after netting off shall
be…………….
(a) Net Receipt $ 40,000
(b) Net Payment $ 80,000
(c) Net Payment $ 40,000
(d) Net Receipt $ 80,000
14. The Net Payment/ Net Receipts for Italy after netting off shall be…………….
(a) Net Receipt $ 60,000
(b) Net Payment $ 120,000
(c) Net Payment $ 60,000
(d) Net Receipt $ 120,000
15. Suppose if the transfer charges are 0.01% of the amount transferred then by
applying multilateral netting techniques there will be reduction in overall cost
of transfer by …………..
(a) US $ 136
(b) US $ 156
(c) US $ 1,360
(d) US $ 1,560 (5 x 2 = 10 Marks)

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 PART – II DESCRIPTIVE QUESTIONS
Question No.1 is compulsory. Candidates are required to answer any
four questions from the remaining five questions.
Working notes should form part of the answers.
Maximum Marks – 70 Marks
1. (a) You as an investor had purchased a 4-month call option on the equity
shares of ABC Ltd. of ` 10, of which the current market price is ` 660 per
share and the exercise price ` 750. You expect the price to range
between ` 600 to ` 950. The expected share price of ABC Ltd. and
related probability is given below:
Expected Price (`) 600 700 800 900 950
Probability 0.05 0.20 0.50 0.10 0.15
Evaluate the following:
(i) Expected Share price at the end of 4 months.
(ii) Value of Call Option at the end of 4 months if the exercise price
prevails.
(iii) In case the option is held to its maturity, estimate expected value
of the call option? (6 Marks)
(b) Share of Beta Ltd. is being quoted at a Price-Earning ratio of 10 times.
In the coming year the company is expected to retain ` 10 per share
which is 45% of its Earning Per Share.
You are required to evaluate:
(i) The cost of equity to the company if the market expects a growth
rate of 10% p.a.
(ii) If the anticipated growth rate is 12% per annum, calculate the
indicative market price with the same cost of capital. (4 Marks)
(c) Why is there a need for succession planning in business? Explain.
(4 Marks)
2. (a) On January 28, 2023, an importer customer requested a Bank to remit
Singapore Dollar (SGD) 2,500,000 under an irrevocable Letter of Credit
(LC). However, due to unavoidable factors, the Bank could affect the
remittances only on February 4, 2023. The inter-bank market rates were
as follows:
January 28, 2023 February 4, 2023
US$ 1= ` 80.91/80.97 ` 80.85/80.90
GBP £ 1 = US$ 1.7765/1.7775 US$ 1.7840/1.7850
GBP £ 1 = SGD 2. 1380/2.1390 SGD 2.1575/2.1590
The Bank wishes to retain an exchange margin of 0.125% on `/ SGD.

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 Required:
Estimate how much does the customer stand to gain or lose due to the
delay?
(Note: Calculate the rate in multiples of 0.0001) (6 Marks)
(b) Bank A enter into a Repo for 14 days with Bank B in 10% Government
of India Bonds 2028 @ 5.65% for ` 8 crore. Assuming that clean price
(the price that does not have accrued interest) be ` 99.42 and initial
Margin be 3% and days of accrued interest be 272 days.
You are required to calculate:
(i) Dirty Price
(ii) Approximate Repayment amount at maturity.
Note: (1) Consider 360 days in a year.
(2) Round off calculations upto 2 decimals points. (4 Marks)
(c) What are the parameters to identify currency risk? List out the ways to
minimize such risk. (4 Marks)
3. (a) Suppose that economy A is growing rapidly, and you are managing a
global equity fund and so far you have invested only in developed-
country stocks only. Now you have decided to add stocks of economy A
to your portfolio. The table below shows the expected rates of return,
standard deviations, and correlation coefficients (all estimates are for
aggregate stock market of developed countries and stock market of
Economy A).
Developed Stocks of
Country Economy
Stocks A
Expected rate of return (annualized 20 30
percentage)
Risk [Annualized Standard Deviation (%)] 16 30
Correlation Coefficient ( ) between stock 0.30
of two economies
Assuming the risk-free interest rate to be 6%, you are required to
determine:
(i) What percentage of your portfolio should you allocate to stocks of
Economy A if you want to increase the expected rate of return on
your portfolio by 1%?
(ii) What will be the standard deviation of your portfolio assuming that
stocks of Economy A are included in the portfolio as calculated
above?

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 (iii) Also show how well the Fund will be compensated for the risk
undertaken due to inclusion of stocks of Economy A in the portfolio?
(6 Marks)
(b) An investor has two portfolios known to be on minimum variance set for
a population of three securities X, Y and Z having below mentioned
weights:
WX WY WZ
Portfolio A 0.30 0.40 0.30
Portfolio B 0.20 0.50 0.30
Calculate the weight for each stock for a portfolio constructed by
investing ` 10,00,000 in portfolio A and ` 6,00,000 in portfolio B.
(4 Marks)
(c) Either
Briefly explain Blockchain transaction. List the risks associated with
Blockchain. (4 Marks)
(c) Or
Explain briefly the financial measures that help in evaluation of
performance of any Mutual Fund. (4 Marks)
4. (a) Your client is holding the following securities:
Particulars of Cost Dividends/ Market price at Beta
Securities Interest the end of
holding period
` ` `
Equity Shares:
G Ltd. 20,000 1,450 19,600 0.6
S Ltd. 30,000 1,000 30,400 0.8
B Ltd. 28,000 1,400 32,000 0.6
GOI Bonds 72,000 5,060 71,980 0.01
Evaluate:
(i) Risk free rate of return.
(ii) Expected rate of return of each security (except GOI Bond), using
the Capital Asset Pricing Model (CAPM).
Note: (1) Use weighted average Beta in calculations.
(2) Round off calculations upto 3 decimal points. (6 Marks)
(b) XYZ Plan, a hedge fund currently has assets of ` 40 crore. Mr. A, the
manager of fund charges fee of 0.10% of portfolio asset. In addition to it
he charges an incentive fee of 2%. The incentive will be linked to gross
return each year in excess of the portfolio maximum value since the
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 inception of fund. The maximum value the fund achieved so far since
inception of fund about one and half year ago was ` 42 crores.
Evaluate:
(i) Benchmark Return to make Mr. A eligible for incentive fee.
(ii) The fee payable to Mr. A if return on the fund this year turns out to
be :
(1) 29% (2) 4.5% (4 Marks)
(c) What do you mean by Corporate Level Strategy. Also explain three basic
questions Corporate Level Strategy should be able to answer.
(4 Marks)
5. (a) T plc wants to acquire L plc. The balance sheet of L plc as on 31 st March
2022 is as follows:
Liabilities £ Assets £
Equity Capital (35,00,000 35,00,000 Cash 2,50,000
shares)
Retained earnings 15,00,000 Debtors 3,50,000
12% Debentures 15,00,000 Inventories 10,00,000
Creditors and other 16,00,000 Plants & Eqpt. 65,00,000
liabilities
81,00,000 81,00,000
Additional Information:
(i) Shareholders of L plc will get one share in T plc for every two
shares. External liabilities are expected to be settled at £ 2.50
Million. Shares of T plc would be issued at its current price of £ 1.50
per share. Debenture holders will get 13% convertible debentures
in the purchasing company for the same amount. Debtors and
inventories are expected to realize £ 1 Million.
(ii) T plc has decided to operate the business of L plc as a separate
division. The division is likely to give cash flows (after tax) to the
extent of £ 2.50 Million per year for 6 years. T plc has planned that,
after 6 years, this division would be demerged and disposed of for
£ 1 Million.
(iii) The company’s cost of capital is 16%.
Advise the Board of the company about the financial feasibility of this
acquisition.
Net present values for 16% for £ 1 are as follows:
Years 1 2 3 4 5 6
PV 0.862 0.743 0.641 0.552 0.476 0.410
(6 Marks)

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 (b) A mutual fund company introduces two schemes i.e. Dividend plan
(Plan-D) and Bonus plan (Plan-B). The face value of the unit is ` 10. On
1-4-2018 Mr. K invested ` 2,00,000 each in Plan-D and Plan-B when the
NAV was ` 38.20 and ` 35.60 respectively. Both the plans matured on
31-3-2023.
Particulars of dividend and bonus declared over the period are as
follows:
Date Dividend Bonus Net Asset Value (`)
% Ratio Plan D Plan B
30-09-2018 10 --- 39.10 35.60
30-06-2019 --- 1:5 41.15 36.25
31-03-2020 15 --- 44.20 33.10
15-09-2021 13 --- 45.05 37.25
30-10-2021 --- 1:8 42.70 38.30
27-03-2022 16 --- 44.80 39.10
11-04-2022 --- 1:10 40.25 38.90
31-03-2023 --- --- 40.40 39.70
Evaluate the Effective Yield Per Annum in respect of the above two
plans.
Note:
1. Use following PV Factors:
PVIF (2%,5) = 0.9057, PVIF (4%,5) = 0.8219, PVIF (8%,5)
= 0.6806, PVIF (13%,5) = 0.5428
2. Round off calculations upto 2 decimal points. (8 Marks)
6. (a) R Ltd. is considering a project with the following Cash flows:
in `
Years Cost of Plant Recurring Cost Savings
0 20,000
1 8,000 24,000
2 10,000 28,000
The cost of capital is 9%.
Evaluate the sensitivity of the project in respect of all factors except time
such that:
(i) NPV become zero and
(ii) adversely varying factors value by 10%.

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 The P.V. factor at 9% are as under:
Year Factor
0 1
1 0.917
2 0.842
Note: Round off calculation upto 2 decimal points. (8 Marks)
(b) Bank entered a plain vanilla swap through on OIS (Overnight Index
Swap) on a principal of ` 20 crores and agreed to receive MIBOR
overnight floating rate for a fixed payment on the principal. The swap
was entered into on Monday, 2nd August 2020 and was to commence
on 3rd August 2020 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
7.75%, 8.15%, 8.12%, 7.95%, 7.98% and 8.15%.
If Bank received ` 634 net on settlement, calculate the applicable Fixed
rate for the same swap period.
Notes:
(i) Sunday is Holiday.
(ii) Work in rounded rupees and avoid decimal working.
(iii) Consider 365 days a year. (6 Marks)

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Mock Test Paper - Series II: April, 2024
Date of Paper: 3 April, 2024
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (a)
2. Option (b)
3 Option (c)
4. Option (c)
5. Option (b)
6. Option (d)
7. Option (c)
8. Option (b)
9. Option (b)
10. Option (c)
11. Option (b)
12. Option (d)
13. Option (b)
14. Option (b)
15. Option (a)

ANSWERS OF PART – II DESCRIPTIVE QUESTIONS

1. (a) (i) Expected Share Price
= ` 600 X 0.05 + ` 700 X 0.20 + ` 800 X 0.50 + ` 900 X 0.10 +
` 950 X 0.15
= ` 30 + ` 140 + ` 400 + ` 90 + ` 142.50 = ` 802.50
(ii) Value of Call Option
= ` 750 - ` 750 = Nil
(iii) If the option is held till maturity the expected Value of Call
Option
Expected price Value of call Probability (P) CP
(X) (C)
` 600 0 0.05 0
` 700 0 0.20 0
` 800 ` 50 0.50 ` 25
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` 900 ` 150 0.10 ` 15
` 950 ` 200 0.15 ` 30
Total ` 70
* If the stock price goes below ` 750, option is not exercised at all.
(b) (i) Cost of Capital
Retained earnings (45%) ` 10 per share
Dividend (55%) ` 12.22 per share
EPS (100%) ` 22.22 per share
P/E Ratio 10 times
Market price ` 22.22  10 = ` 222.20
Cost of equity capital
12.22
=  
Div
100 + Growth % =  100 + 10% = 15.50%
 Pr ice  222.20

 Dividend 
(ii) Market Price =  
 Cost of Ca pital(% ) - Growth Rate(% ) 
` 12.22
= = ` 349.14 per share
(15.50 -12.00)%

(c) Need for succession planning in business is explained below: -

❖ Risk mitigation – If existing leader quits, then searches can
take six-nine months for suitable candidate to close. Keeping an
organization without leader can invite disruption, uncertainty,
conflict and endangers future competitiveness.
❖ Cause removal – If the existing leader is culpable of gross
negligence, fraud, willful misconduct, or material breach while
discharging duties and has been barred from undertaking further
activities by court, arbitral tribunal, management, stakeholders or
any other agency.
❖ Talent pipeline – Succession planning keep employees
motivated and determined as it can help them obtaining more
visibility around career paths expected, which would help in
retaining the knowledge bank created by company over a period
of time and leverage upon the same.
❖ Conflict Resolution Mechanism – This planning is very helpful
in promoting open and transparent communication and
settlement of conflicts.
❖ Aligning – In family owned business succession planning helps
to align with the culture, vision, direction and values of the
business.

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2. (a) On January 28, 2023, the importer customer requested to remit SGD
25 lakhs.
To consider sell rate for the bank:
US $= ` 80.97
Pound 1 = US$ 1.7775
Pound 1 = SGD 3.1380
Rs. 80.97 * 1.7775
Therefore, SGD 1 =
SGD 2.1380
SGD 1 = ` 67.3172
Add: Exchange margin (0.125%) ` 0.0841
` 67.4013
On February 4, 2023 the rates are
US $= ` 80.90
Pound 1 = US$ 1.7850
Pound 1 = SGD 2.1575
Rs. 80.90 * 1.7850
Therefore, SGD 1 =
SGD 2.1575
SGD 1 = ` 66.9323
Add: Exchange margin (0.125%) ` 0.0837
` 67.0160
Hence, Gain to the importer
= SGD 25,00,000 (` 67.4013 – ` 67.0160) = ` 9,63,250
(b) (i) Dirty Price
= Clean Price + Interest Accrued
10 272
= 99.42 + 100× × 360 = 106.98
100

(ii) First Leg (Start Proceed)

Dirty Price 100 - Initial Margin
= Nominal Value x ×
100 100
106.98 100-3
= `8,00,00,000 x × = ` 8,30,16,480
100 100

Second Leg (Repayment at Maturity) = Start Proceed x

No. of days
(1+ Repo rate × )
360
14
= ` 8,30,16,480 x (1+ 0.0565 × ) = ` 8,31,98,885.65 (Approx.)
360

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(c) Some of the parameters to identity the currency risk are as follows:
(i) Government Action: The Government action of any country has
visual impact in its currency. For example, the UK Govt. decision
to divorce from European Union i.e. Brexit brought the pound to
its lowest since 1980’s.
(ii) Nominal Interest Rate: As per interest rate parity (IRP) the
currency exchange rate depends on the nominal interest of that
country.
(iii) Inflation Rate: Purchasing power parity theory discussed in later
chapters impact the value of currency.
(iv) Natural Calamities: Any natural calamity can have negative
impact.
(v) War, Coup, Rebellion etc.: All these actions can have far
reaching impact on currency’s exchange rates.
(vi) Change of Government: The change of government and its
attitude towards foreign investment also helps to identify the
currency risk.
Ways to minimize such risk are:-
(1) Money Market Hedging.
(2) Currency Options.
(3) Forward Contract.
(4) Make Invoice in Home Currency.
3. (a) (i) Let the weight of stocks of Economy A be expressed as w, then
(1- w) × 20% + w × 30% = 21%
i.e. w = 0.1 or 10%.
(ii) Variance of portfolio shall be:
(0.9)2 (0.16) 2 + (0.1)2 (0.30) 2+ 2(0.9) (0.1) (0.16) (0.30) (0.30) =
0.02423
Standard deviation is (0.02423) ½ = 0.15565 or 15.56%.
(iii) The Sharpe ratio will improve by approximately 0.09, as shown
below:
Expected Return - RiskFreeRateof Return
Sharpe Ratio =
Standard Deviation
20 − 6
Investment in stock of developed countries only: = 0.875
16
21 − 6
Investment with inclusion of stocks of Economy A: = 0.964
15.56

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(b) Investment committed to each security would be:-
X Y Z Total
(`) (`) (`) (`)
Portfolio A 3,00,000 4,00,000 3,00,000 10,00,000
Portfolio B 1,20,000 3,00,000 1,80,000 6,00,000
Combined Portfolio 4,20,000 7,00,000 4,80,000 16,00,000
 Stock weights 0.2625 0.4375 0.3000
Or 0.26 Or 0.44 Or 0.30
(c) Blockchain, sometimes referred to as Distributed Ledger Technology
(DLT) is a shared, peer-to-peer, and decentralized open ledger of
transactions system with no trusted third parties in between. This
ledger database has every entry as permanent as it is an append-only
database which cannot be changed or altered. All transactions are fully
irreversible with any change in the transaction being recorded as a new
transaction.
Some of the risk associated with the use blockchain technology are as
follows:
(i) With the use of blockchain, organizations need to consider risks
with a wider perspective as different members of a particular
blockchain may have different risk appetite/risk tolerances that
may further lead to conflict when monitoring controls are
designed for a blockchain. There may be questions about who is
responsible for managing risks if no one party is in-charge, and
how proper accountability is to be achieved in a blockchain.
(ii) The reliability of financial transactions is dependent on the
underlying technology and if this underlying consensus
mechanism has been tampered with, it could render the financial
information stored in the ledger to be inaccurate and unreliable.
(iii) In the absence of any central authority to administer and enforce
protocol amendments, there could be a challenge in the
development and maintenance of process control activities and
in such case, users of public blockchains find difficult to obtain
an understanding of the general IT controls implemented and the
effectiveness of these controls.
(iv) As blockchain involves humongous data getting updated
frequently, risk related to information overload could potentially
challenge the level of monitoring required. Furthermore, to find
competent people to design and perform effective monitoring
controls may again prove to be difficult.
OR
Financial Measures: - There are some financial measures that help in
evaluation of performance of any Mutual Fund which are as follows:

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(a) Expense Ratio: - Discussed in earlier section, it ultimately impacts
the return of a Mutual Fund Scheme.
(b) Sharpe Ratio: - As discussed in the chapter on Portfolio
Management, this ratio measures the Mutual Fund’s performance
measured against the total risk (both systematic and
unsystematic) taken.
(c) Treynor Ratio: - As discussed in the chapter on Portfolio
Management, beta measures the volatility of return of a security
vis-à-vis to the market, in mutual funds the Beta of a mutual fund
measures volatility of a fund’s return to return from its Benchmark.
Treynor Ratio measures performance of a mutual fund against the
systematic risk it has taken.
(d) Sortino Ratio: - A variation of Sharpe Ratio that considers and
uses downside deviation instead of total standard deviation in
denominator.
4. (a)
Particulars Cost ` Market Capital Dividend/
of Securities Price gain Interest
G Ltd. 20,000 19,600 −400 1,450
S Ltd. 30,000 30,400 400 1,000
B Ltd. 28,000 32,000 4,000 1,400
GOI Bonds 72,000 71,980 −20 5,060
Total 1,50,000 1,53,980 3,980 8,910
(i) Risk free return [Return on Govt. Security (GOI Bond)]
5,060 + ( 72,000 – 71,980)
= 7%
72,000
(ii) Weighted Average of Beta
0.6 x 19,600/1,53,980 + 0.8 x 30,400/1,53,980 + 0.60 x
32,000/1,53,980 + 0.01 x 71,980/1,53,980
= 0.076 + 0.158 + 0.125 + 0.005 = 0.364
Average Return on Portfolio
(8,910+3,980) / 1,50,000 x 100% = 8.593%
Market Return
8.593% = 7% + (Rm – 7%) x 0.364
Rm = 11.376%
Expected Rate of Return for each security is
Rate of Return = Rf + β (Rm – Rf)
G Ltd. = 7.000% + 0.6 (11.376% – 7.000%) = 9.626%

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S Ltd. = 7.000% + 0.8 (11.376% – 7.000%) = 10.501%
B Ltd. = 7.000% + 0.6 (11.376% – 7.000%) = 9.626%
(b) (i) Benchmark Return = (42 crore - 40 crore) / 40 crore x 100%
= 5%
(ii) (1) If return is 29%
`
Fixed fee (A) 0.10% of ` 40 crore 4,00,000
New Fund Value (1.29 x ` 40 crore) 51.60 crore
Excess Value of best achieved (51.60 9.60 crore
crore – 42.00 crore)
Incentive Fee (2% of 9.60 crores) (B) 19,20,000
Total Fee (A)+(B) 23,20,000
(2) If return is 4.5%
`
Fixed (A) 0.10% of ` 40 crore 4,00,000
New Fund Value (1.045 x ` 40 crore) 41.80 crore
Excess Value of best achieved (41.80 (` 0.20
crore – 42.00 crore) crore)
Incentive Fee (as does not exceed best Nil
achieved) (B)
Total Fee (A)+(B) 4,00,000
(c) Corporate level strategy fundamentally is concerned with selection of
businesses in which a company should compete and with the
development and coordination of that portfolio of businesses.
Corporate level strategy should be able to answer three basic
questions:
Suitability Whether the strategy would work for the
accomplishment of common objective of the company.
Feasibility Determines the kind and number of resources required
to formulate and implement the strategy.
Acceptability It is concerned with the stakeholders’ satisfaction and
can be financial and non-financial.
5. (a) Calculation of Purchase Consideration
£
Issue of Share 17,50,000 x £1.50 26,25,000
External Liabilities settled 25,00,000
13% Debentures 15,00,000
66,25,000
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Less: Realization of Debtors and Inventories 10,00,000
Cash 2,50,000
53,75,000
Net Present Value = PV of Cash Inflow + PV of Demerger of L plc –
Cash Outflow
= £ 25,00,000 PVAF(16%,6) + £ 10,00,000 PVF(16%, 6) – £ 53,75,000
= £ 25,00,000 x 3.684 + £ 10,00,000 x 0.410 – £ 53,75,000
= £ 92,10,000 + £ 4,10,000 – £ 53,75,000
= £ 42,45,000
Since NPV of the decision is positive it is advantageous to acquire L
plc.
(b) Plan – D
2,00,000
Unit acquired = = 5235.60
38.20
Date Units held Dividend Re- New Total Units
investment Units
Rate
% Amount
01.04.2018 5235.60
30.09.2018 5235.60 10 5235.60 39.10 133.90 5369.50
31.03.2020 5369.50 15 8054.25 44.20 182.22 5551.72
15.09.2021 5551.72 13 7217.24 45.05 160.20 5711.92
27.03.2022 5711.92 16 9139.07 44.80 204.00 5915.92
31.03.2023 Maturity (` 40.40 X 5915.92) ` 2,39,003.17
Value
Less: Cost of Acquisition ` 2,00,000.00
Total Gain ` 39,003.17

` 39,003.17 1
 Approximate Effective Yield =  100 = 3.90%
` 2,00,000 5

Now more accurate effective yield can be computed by using the IRR
method as follows:
NPV at 4% = - ` 2,00,000 + ` 1,96,436.71 = - ` 3,563.29
NPV at 2% = - ` 2,00,000 + ` 2,16,465.17 = ` 16,465.17
NPV at LR 16465.17
IRR= LR + (HR-LR) = 2% + (4% − 2%)
NPV at LR-NPV at HR 16465.17—3563.29

= 3.64%

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Plan – B
Date Particulars Calculation No. of NAV (`)
Working Units
01.04.2018 Investment ` 2,00,000/35.60 = 5617.98 35.60
30.06.2019 Bonus 5617.98/5 = 1123.60 36.25
6741.58
30.10.2021 " 6741.58/8 = 842.70 38.30
7584.28
11.04.2022 " 7584.28/10 = 758.43 38.90
8342.71
31.03.2023 Maturity Value 8342.71 x ` 39.70 = 3,31,205.59
Less: Investment 2,00,000.00
Gain 1,31,205.59
1,31,205.59 1
 Approximate Effective Yield = x x100 = 13.12%
2,00,000 5

Now more accurate effective yield can be computed by using the IRR
method as follows:
NPV at 13% = - ` 2,00,000 + ` 1,79,778.39 = - ` 20,221.61
NPV at 8% = - ` 2,00,000 + ` 2,25,418.52 = ` 25,418.52
NPV at LR 25418.52
IRR= LR + (HR - LR) = 8% + (13% − 8%)
NPV at LR - NPV at HR 25418.52 − (−20221.61)

= 10.78%
6. (a) Working Note :
Year 1 Running Cost ` 8,000 x 0.917 = (` 7,336)
Savings ` 24,000 x 0.917 = ` 22,008
Year 2 Running Cost ` 10,000 x 0.842 = (` 8,420)
Savings ` 28,000 x 0.842 = ` 23,576
` 29,828
Year 0 Less: P.V. of Cash ` 20,000 x 1 ` 20,000
Outflow
NPV ` 9,828
(i) Sensitivity Analysis (by making NPV Zero)
(1) Increase of Plant Value by ` 9,828
9,828
 x 100 = 49.14%
20,000

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(2) Increase of Running Cost by ` 9,828
9828 9828
= x 100 = 62.38%
7336 + 8420 15756
(3) Fall in Saving by ` 9,828
9,828 9,828
= x 100 = 21.56%
22,008 + 23,576 45,584

Hence, savings factor is the most sensitive to affect the

acceptability of the project as in comparison of other two factors a
slight % change in this fact shall more affect the NPV than others.
(ii) Sensitivity Analysis if there is a variation of 10% in the
factors.
(1) If the initial project cost is varied adversely by say 10%.
NPV (Revised) (` 9,828 – ` 2,000) = ` 7,828
` 9,828 - ` 7,828
Change in NPV = = 20.35%
` 9,828

(2) If Annual Running Cost is varied by say 10%.

NPV (Revised) (` 9828 – ` 800 X 0.917 – ` 1000 X 0.843)
= ` 9828 – ` 733.6 – ` 843 = ` 8251.4
` 9,828 - ` 8251.40
Change in NPV = = 16.04%
` 9,828

(3) If Saving is varied by say 10%.

NPV (Revised) (` 9,828 – ` 2400 X 0.917 – ` 2800 X 0.843)
= ` 9,828 – ` 2,200.80 – ` 2,360.40 = ` 5,266.80
` 9828 - ` 5266.80
Change in NPV x 100% = 46.41%
` 9828
Hence, savings factor is the most sensitive to affect the
acceptability of the project.
(b)
Day Principal (`) MIBOR (%) Interest (`)
Tuesday 20,00,00,000 7.75 42,466
Wednesday 20,00,42,466 8.15 44,667
Thursday 20,00,87,133 8.12 44,513
Friday 20,01,31,646 7.95 43,590
Saturday & Sunday (*) 20,01,75,236 7.98 87,529
Monday 20,02,62,765 8.15 44,716
Total Interest @ Floating 3,07,481

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Less: Net Received 634
Expected Interest @ fixed 3,06,847
Thus, Fixed Rate of 0.08
Interest
Shall be approx. 8%
(*) i.e. interest for two days.

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