Roll No

Total No. of Questions 7

Nov- 13 - SFM

Total No. of Printed pages 11

Time Allowed 3 hours

Maximum Marks 100

KBC
Answers are to be given only in English except in the case of the candidates who have opted for
Hindi medium. If a candidate has not opted for Hindi Medium his/ her answers in Hindi will
Not be valued
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Working notes should form part of the answers

MARKS
1.

(a)

ABC Ltd. issued 9% 5 year Bonds of t 1,000/-each having a maturity of 3

years. The present rate of interest is 12% for one year tenure. It is expected
that Forward rate of interest for one year tenure is going to fall by 75basis
points and further b 50 basis points for every next year in future for the same
tenure. This bond has a beta value of 1.02 and is more popular in the market
due to less credit risk.

PRAVINN MAHAJAN

Calculate

CA-IPCC-Cost/FM, Final SFM

(i)

Intrinsic value of bond

(ii)

Expected price of bond in the market

KBC

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P.T.O

(2)
KBC
b

MARKS

A trader is having in its portfolio shares worth ` 85 Iakhs at current price and

cash ` 1.5 lakhs. The beta of share portfolio is 1.6. After 3 months the price of
shares dropped by 3.2%.

PRAVINN MAHAJAN

Determine :

CA-IPCC-Cost/FM, Final SFM

(i)

Current portfolio beta.

(ii)

Portfolio beta after 3 months if the trader on current date goes for long

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position on ` 100 lakh Nifty futures .

c.

You, a foreign exchange dealer of your bank, are informed that your bank has 5
sold a T.T. on Copenhagen for Danish Kroner 10,00,000 at the rate of Danish
Kroner 1 = ` 6.5150. You are required 10 cover the transaction either in
London or New York market. The rate on that date are as under :
Mumbai - London

` 74.3000

` 74 .3200

London - New York

` 49.2500

` 49.2625

London - Copenhagen

DKK 11.4200

DKK 11.4350

New York - Copenhagen

DKK 07.5610

DKK 07.5840

In which market will you cover the transaction, London or New York and
what will be the exchange profit or loss on the transaction ? Ignore brokerages.
d.

On 01-07-2010, Mr. X invested ` 50,000/- at initial offer in Mutual Funds at a

face value of ` 10 each per unit. On 31-03-2011, a dividend wai paid @ 10%
and annualized yield was 120%. On 31-03-2012 20% dividend and capital
gain of ` 0.60 per unit was given. Mr. X redeemed ail his 6271.98 units when
his annualized yield was 7 1.50% over the period of holding.
Calculate NAV as on 31-03-2011, 31-03-2012 and 31-03-2013.
For calculation consider a year of 12 months.

(3)
KBC
(a)

MARKS

Mr. Ram is holding the following securities:

Particulars of

Cost

Securities

Dividends

8
Market Price Beta

Equity Shares :
Gold Ltd.

11,000

1,800

12,000

0.6

Silver Ltd.

16,000

1,000

17,200

0.8

CA-IPCC-Cost/FM, Final SFM

Bronze Ltd.

12,000

800

18000

0.6

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GOI Bonds

40,000

4,000

37,500

1.0

PRAVINN MAHAJAN

Calculate;
(i)

Expected rate of return in each case, using the Capital Asset Pricing
Model (CAPM).

(ii)

(b)

Average rate of return, if risk free rate of return is 14%.

An American firm is under obligation to pay interests of Can$ 1010000 and

Can$ 705000 on 31st July and 30th September respectively. The Firm is risk
averse and its policy is to hedge the risks involved in all foreign currency
transactions. "The Finance Manager of the firm is thinking of hedging the risk
considering two methods i.e. fixed forward or option contracts .
It is now June 30. Following quotations regarding rates of exchange. US$ per
Can$, from the firm's bank were obtained :
Spot
0.9284 - 0.9288

1 Month Forward
0.9301

KBC

3 Months Forward
0.9356

P.T.O

(4)
KBC

MARKS

Price for a Can$ / US$ option on a U.S. stock exchange (cents per Can$,
payable on purchase of the option, contract size Can$ 50000) are as follows :
Strike Price

Calls

Puts

(US $ / Can $)

July

Sept.

July

Sept.

0.93

1.56

2.56

0.88

1.75

0.94

1.02

NA

NA

NA

0.95

0.65

1.64

1.92

2.34

According to the suggestion of finance manager if options are to be used, one

Month option should be bought at a strike price of 94 cents and three month
option at a strike price of 95cents and for the remainder uncovered by the
options the firm would bear the risk itself. For this it would us forward rate
as the best estimate of pot, Transaction costs tire ignored.
Recommend, which of the above two method would be appropriate for the
American firm to hedge its foreign exchange risk on the two interest
payments.

PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244

3.

(a)

ABC Ltd. is contemplating having an access to a machine for a period of 5

10

years. The company can have the use of the machine for the stipulated period
through leasing arrangement or the requisite amount can be borrowed to buy
the machine. In case of leasing, the company received a proposal to pay
annual end of year rent of ` 2.4 lakhs for a period of 5 years.

KBC

P.T.O

(5)
KBC

MARKS

In case of purchase (which costs ` 10,00,000/-) the company would have a

12%, 5 year loan to be paid in equated installments, each installment
becoming due at the beginning of each year. It is estimated that the machine
can be sold for ` 2,00,000/ at the end of 5th year. The company use straight
line method of depreciation. Corporate tax rate is 30%. Post tax cost of capital
of ABC Ltd. is 10%.
You are required to advice
(i)

Whether the machine should be bought or taken on lease.

(ii)

Analyse the financial viability from the point of view of the lessor
assuming 12% post tax cost of capital.

PV of `1@ 10% for 5 years

(b)

PV of `1 @ 12% for 5 years

.909

.893

.826

.797

.751

.712

.683

.636

.621

.567

PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244

MIs Atlantic Company Limited with a turnover of ` 4.80 crores is expecting

growth of 25% for forthcoming year. Average credit period is 90 days . The
past experience shows that bad debt losses are 1.75% on sales. The
Company's administering cost for collecting receivables is ` 6,00,000/-.

KBC

P.T.O

(6)
KBC

MARKS

It has decided to take factoring services of Pacific Factors on terms that factor
will buy receivables by charging 2% commission and 20% risk with recourse.
The Factor will pay advance on receivables to the firm at 16% interest rate
per annum after withholding 10% as reserve.
Calculate the effective cost of factoring to the firm, (Assume 360 days in a
year)

PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244

4.

(a)

Trupti Co. Ltd. promoted by a Multinational group INTERNATIONAL

INC' is listed on stock exchange holding 84% i.e. 63 lakhs shares.

Profit after Tax is ` 4.80 crores.
Free Float Market Capitalization is ` 19.20 crores .
As per the SEBI guidelines promoters have to restrict their holding to 75% to
avoid delisting from the stock exchange. Board of Directors has decided not
to delist the share but to comply with the SEBI guidelines by issuing Bonus
shares to minority shareholders while maintaining the same P/E ratio.
Calculate
(i)

P/E Ratio

(ii)

Bonus Ratio

(iii)

Market price of share before and after the issue of bonus shares

(iv)

Free Float Market capitalization of the company after the bonus shares.

KBC

PTO

(7)
KBC
(b)

MARKS

The Easygoing Company Limited is considering a new project with initial

Investment, for a product 'Survival". It is estimated that IRR of the project is

16% having an estimated life of 5 years.
Financial Manager has studied the project with sensitivity analysis and
informed that annual sensitivity is 7.8416%, whereas cost of capital
(discount rate) sensitivity is 60%.
PRAVINN MAHAJAN

Other information available are:

CA-IPCC-Cost/FM, Final SFM

Profit Volume Ratio (PN) is 70%,

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Variable cost ` 60/- per unit

Annual Cash Flow ` 57,500/-

Ignore Depreciation on initial investment and impact of taxation.

Calculate
(i)

Initial Investment of the Project

(ii)

Net Present Value of the Project

(iii)

Annual Fixed Cost

(iv)

Estimated annual unit of sales

(v)

Break Even Units

Cumulative Discounting Factor for 5 years

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127

KBC

PTO

(8)
KBC
5.

(a)

MARKS

M/s Tiger Ltd. wants to acquire M/s Leopard Ltd. The balance sheet of

10

Leopard Ltd. as on 31st March 2012 is as follows :

Liabilities
Equity Capital

Assets
Cash

`
50,000

70,000

(70,000 shares)

7,00,000

Retained Earnings

3,00,000

Debtors

12% Debentures

3,00,000

Inventories

2,00,000

Plants & Eqpt.

13,00,000

Creditors and other

Liabilities

3,20,000
16,20,000

16,20,000

Additional information :
(i)

Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every
two shares. External liabilities are expected to be settled at ` 5,00,000.
Shares of Tiger Ltd. would be issued at its current price of ` 15 per
share. Debenture holders will get 13% convertible debentures in the
purchasing company for the same amount. Debtors and inventories are
expected to realize ` 2,00,000.

(ii)

Tiger Ltd. has decided to operate the business of Leopard Ltd. as a

separate division. The division Likely to give cash flows (after tax) to
the extent of ` 5,00,000 per year for 6 year . Tiger Ltd. has planned
that after 6 years, this division would be demerged and disposed of for
PRAVINN MAHAJAN

` 2,00000.
(iii)

The company s cost of capital is 16%.

KBC

CA-IPCC-Cost/FM, Final SFM

9871255244

(9)
KBC

MARKS

Make a report to the Board of the company advising them about the financial
feasibility of this acquisition.
Net present vaIues for 16% for `1 are as follows:

(b)

Years

PV

.862

.743

.643

.552

.476

.410

Ram buys 10,000 shares of X Ltd. at a price of ` 22 per share whose beta

value is 1.5 and sells 5000 shares of A Ltd. at a price of ` 40 per share
having a beta value of 2. He obtains a complete hedge by Nifty futures at `
1,000 each. He closes out his position at the closing price of the next day
when the share of X Ltd. dropped by 2%, share of A Ltd. appreciated by 3%
and Nifty futures dropped by, 1.5%.
What is the overall profit / loss to Ram ?

PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244

6.

(a)

A share of Tension-free Economy Ltd. is currently quoted at a price earnings

ratio of 7.5 times. The retained earning being 37.5% is `3 per share.
Calculate
(i)

The company's cost of equity if investors expected rate of return is

12%.

(ii)

Market price of share, if anticipated growth rate is 13% per annum with
same cost of capital.

(iii)

Market price per share, if the company's cost of capital is 18% and
anticipated growth rate is 15% per annum, assuming other conditions
remaining the same.
KBC

P.T.O

(10)
KBC
(b)

Marks

Your bank's London office has surplus funds to the extent of USD 5,00,000
for a period of 3 months. The cost of the funds to the bank is 4% p.a. It
proposes to invest these funds in London, New York or Frankfurt and obtain
the best yield, without any exchange risk to the bank. The following rates of
interest are available at the three centres for investment of domestic funds
there at for a period of 3 months.
London

5% p.a.

New York

8% p.a.

Frankfurt

3% p.a.

PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244

The market rates in London for US dollars and Euro are as under;
London on New York
Spot

1.5350/90

1 month

15/18

2 month

30/35

3 month

80/85

London on Frankfurt
Spot

1.8260/90

1 month

60/55

2 month

95/90

3 month

145/140

At which centre, will the investment be made & what will be the net gain (to
the nearest pound) to the bank on the invested funds ?

KBC

(11)
KBC
7.

Marks

Write short notes on any four of the following:

4x4

(a)

Explain the concept, 'Zero date of a Project' in project management

= 16

(b)

XYZ Bank, Amsterdam, wants to purchase Rupees 25 million against for

funding their Nostro account and they have credited LORO account with
Bank of London, London.
Calculate the amount of 's credited. Ongoing inter-bank rates are per $,
$ 61.3625/3700 & per , $ 1.5260/70.

(c)

What is an Exchange Traded Fund? What are its key features?

(d)

What is an equity curve out? How does it differ from a spin off?

(e)

What is money market? What are its features? What kind of inefficiencies it
is suffering from ?
PRAVINN MAHAJAN
CA-IPCC-Cost/FM, Final SFM
9871255244