Test Series: October 2023

CharteredStudies MOCK TEST PAPER 2

FINAL COURSE: GROUP – I
PAPER – 2: STRATEGIC FINANCIAL MANAGEMENT
Question No. 1 is compulsory. Attempt any four questions from the remaining five questions.
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Working notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100
1. (a) VK Ltd. is an Indian company which is planning to set up a manufacturing plant through its
subsidiary in the small country Farland, (where hitherto it was exporting) in view of growing
demand for its product and competition from other MNCs. The currency of Farland is the Farroh
(Fr.).
An initial investment of Fr. 80 million in plant and machinery would be required. In addition to that
the initial investment in working capital of Fr. 6 million would be also required which shall be
financed through a loan from a local bank of Farland, at interest rate of 10% p.a. The working
capital shall also be subject to inflation. At the end of 5 years, the subsidiary would be taken over
by the Govt. of Farland for a price of Fr. 2 million. The part of the proceeds would be used to pay
off the bank loan.
It is expected that subsidiary shall produce Net Cash Flows from Operations of Fr. 30 million per
year at current price level over the five-year period, before allowing for Farland inflation of 8% per
year. Depreciation on Plant and Machinery shall be charged at 20% per year on straight line
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basis. As a result of setting up the subsidiary, VK Ltd. expects to lose after-tax export income
from Farland of INR 8,00,000 per year in current price terms, before allowing for India inflation of
3%. Profits in Farland are taxed at a rate of 20% after allowing deduction for interest and
depreciation. All after-tax cash profits are remitted to the India at the end of each year. Indian tax
@ 30% is charged on profit earned, but due to tax treaty between Farland and the India the tax
paid in Farland is allowed to be set off against any India Tax liability. Taxation is paid in the year
in which the liability arises. VK Ltd. requires foreign investments to be discounted at 12%. The
current exchange rate is Fr.2.5/INR and the Farroh is expected to depreciate against INR by 5%
per year.
Advise should VK Ltd. undertake the investment in Farland or not.
Note:- 1. Present Figures in thousands multiple.
2. Round off all calculations.
3. PVF @12%
Year 1 2 3 4 5
PVF 0.893 0.797 0.712 0.636
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(10 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. Assume that clean price (the price that does not have accrued interest)
be ` 99.42 and initial Margin be 2% and days of accrued interest be 262 days. You are required
to determine:
(i) Dirty Price
(ii) Repayment at maturity. (consider 360 days in a year) (6 Marks)

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(c) What do you mean by term “Counter Party Risk”. Explain various hints that may provide an
indicator of the same risk. (4 Marks)
2. (a) AB Ltd., is planning to acquire and absorb the running business of XY Ltd. The valuation is to be
based on the recommendation of merchant bankers and the consideration is to be disc harged in
the form of equity shares to be issued by AB Ltd. As on 31.3.2020, the paid up capital of AB Ltd.
consists of 80 lakhs shares of ` 10 each. The highest and the lowest market quotation per share
during the last 6 months were ` 570 and ` 430. For the purpose of the exchange, the price per
share is to be reckoned as the average of the highest and lowest market price during th e last 6
months ended on 31.3.2020.
XY Ltd.’s Balance Sheet as at 31.3.2020 is summarised below:
` lakhs
Sources
Share Capital
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20 lakhs equity shares of `10 each fully paid 200
10 lakhs equity shares of `10 each, `5 paid 50
Loans 100
Total 350
Uses
Fixed Assets (Net) 150
Net Current Assets 200
350
An independent firm of merchant bankers engaged for the negotiation, have produced the
following estimates of cash flows from the business of XY Ltd.:
Year ended By way of CharteredStudies ` lakhs
31.3.21 after tax earnings for equity 105
31.3.22 do 120
31.3.23 Do 125
31.3.24 Do 120
31.3.25 Do 100
Terminal Value estimate 200

It is the recommendation of the merchant banker that the business of XY Ltd. may be valued on
the basis of the average of (i) Aggregate of discounted cash flows at 8% and (ii) Net assets
value. Present value factors at 8% for years
1-5: 0.93 0.86 0.79 0.74 0.68

You are required to:

(i) Calculate the total value of the business of XY Ltd.
(ii) The number of shares to be issued by AB Ltd.; and
(iii) The basis of allocation of the shares among the shareholders of XY Ltd. (8 Marks)

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 (b) On January 1, 2013 an investor has a portfolio of 5 shares as given below:
Security Price No. of Shares
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Beta
A 349.30 5,000 1.15
B 480.50 7,000 0.40
C 593.52 8,000 0.90
D 734.70 10,000 0.95
E 824.85 2,000 0.85
The cost of capital to the investor is 10.5% per annum.
You are required to calculate:
(i) The beta of his portfolio.
(ii) The theoretical value of the NIFTY futures for February 2013.
(iii) The number of contracts of NIFTY the investor needs to sell to get a full hedge until
February for his portfolio if the current value of NIFTY is 5900 and NIFTY futures have a
minimum trade lot requirement of 200 units. Assume that the futures are trading at their fair
value.
(iv) The number of future contracts the investor should trade if he desires to reduce the beta of
his portfolios to 0.6. CharteredStudies

No. of days in a year be treated as 365.

Given: In (1.105) = 0.0998 and e(0.015858) = 1.01598 (8 Marks)
(c) Beside the primary participants other parties are too involved in the process of securitization.
Explain them briefly. (4 Marks)
OR
Explain the advantages and Limitation of Capital Asset Pricing Model (CAPM). (4 Marks)
3. (a) M/s. Strong an AMC has floated a dividend bonus plan on 1st April, 2016 at a certain net asset
value (NAV). The fund has a robust growth and has declared a bonus of 1:5 (1 bonus unit for 5
right units held) on 30th September, 2017 and a second bonus of 1:4 (1 bonus unit for 4 right
units held) on 30th September 2019. The fund, as on 31st March 2021, has generated an
average yield of 17.5%.
Mr. Optimistic has made an investment of ` 16 lakhs in the plan before the declaration of the first
bonus and remain invested thereafter.
The following information is also available :
Date 01.04.2016 30.09.2017 30.09.2019 31.03.2021
NAV (`) ? 85 92 100
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You are required to advise to Mr. Optimistic the opening NAV, which is required by him to
calculate the capital appreciation. (8 Marks)
(b) Hari is holding 100 equity shares of VCC Ltd. which is being quoted at `210 per share. He is
interested in hedging downside risk of his holding as he is going to sell them after 2 month. A
2-month Call option is available at a premium of ` 6 per share and a 2- month put option is
available at a premium of ` 5 per share. The strike price in both cases is ` 220.You are required
to:
(i) Suggest the position Hari should take in the option market to hedge his holding in the VCC Ltd.
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 (ii) Calculate his final position after 2 months if after 2 months i.e. on the day of exercise the
actual market price of per share of VCC Ltd. happens to be ` 200, ` 210, ` 220, ` 230 and
` 240. (8 marks)
(c) What makes an organization sustainable as well as financially sustainable?
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4. (a) Following information is related to the Convertible Bond of A Ltd. which is currently priced at
` 1060 per Bond:
(1) Conversion Parity Price - ` 53
(2) Conversion Premium – 10.41667%
(3) Percentage of Downside Risk with respect to Straight Value of Bond – 12.766%
Calculate:
(i) No. of shares on Conversion.
(ii) Current Market Price Per Share of A Ltd.
(iii) Straight Value of Bond (6 Marks)
(b) XP Pharma Ltd., has acquired an export order for ` 10 million for formulations to a European
company. The Company has also planned to import bulk drugs worth ` 5 million from a company
in UK. The proceeds of exports will be realized in 3 months from now and the payments for
imports will be due after 6 months from now. The invoicing of these exports and imports ca n be
done in any currency i.e. Dollar, Euro or Pounds sterling at company's choice. The f ollowing
market quotes are available.
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Spot Rate Annualised Premium
`/$ 67.10/67.20 $ - 7%
` /Euro 63.15/63.20 Euro - 6%
` /Pound 88.65/88.75 Pound - 5%
Advice XP Pharma Ltd. about invoicing in which currency.
(Calculation should be upto three decimal places). (10 Marks)
(c) Explain briefly the various factors that affects the value of option. (4 Marks)
5. (a) Indira has a fund of ` 3 lacs which she wants to invest in share market with rebalancing target
after every 10 days to start with for a period of one month from now. She has 3 close friends who
have advised following different strategies:
(i) Buy and Hold strategy CharteredStudies

(ii) Constant Ratio

(iii) CPPI
Suppose she immediately starts with investment in Bonds (non-fluctuating) and Equity and
decides to rebalance her portfolio after each 10 days and to invest in Nifty as equity component
changes in tandem with that of Nifty. Further, Bond has no Beta.
As on date (i.e. beginning of month) Nifty is 5326 and minimum Nifty within a month can be most
be 4793.40. If she chooses CPPI she will use “2” as the multiplier. If she chooses Constant Ratio
plan she will maintain the ratio of 60:40 in Equity and Bonds respectively. Further, portfolio will be
rebalanced each time Nifty is changed by 5% as compared to the previous Nifty.

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 You are required to evaluate Portfolio Position of Indira under each of the Strategies suggested
by her friends and highlight the course of action to be taken if in the coming month after a gap of
10 days Nifty happened:
(1) 10 days later-being the 1st day of rebalancing if NIFTY falls to 5122.96.
(2) 10 days further from the above CharteredStudies
date if the NIFTY touches 5539.04. (10 Marks)
(b) A bank enters into a forward purchase TT covering an export bill for Swiss Fra ncs 1,00,000 at
` 32.4000 due 25 th April and covered itself for same delivery in the local inter bank market at
` 32.4200. However, on 25 th March, exporter sought for cancellation of the contract as the tenor
of the bill is changed.
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In Singapore market, Swiss Francs were quoted against dollars as under:

Spot USD 1 = Sw. Fcs. 1.5076/1.5120
One month forward 1.5150/ 1.5160
Two months forward 1.5250 / 1.5270
Three months forward 1.5415/ 1.5445
and in the interbank market US dollars were quoted as under:
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Spot USD 1 = ` 49.4302/4455
Spot / April 4100/4200
Spot/May 4300/4400
Spot/June 4500/4600
Calculate the cancellation charges, payable by the customer if exchange margin required by the
bank is 0.10% on buying and selling. (6 Marks)
(c) How Peer to Peer funding different from Crowd Funding ? (4 Marks)
6. (a) H Ltd. agrees to buy over the business of B Ltd. effective 1 st April, 2012.The summarized
Balance Sheets of H Ltd. and B Ltd. as on 31 st March 2012 are as follows:
Balance sheet as at 31 st March, 2012 (In Crores of Rupees)
H. Ltd B. Ltd.
Liabilities:
Paid up Share Capital
- Equity Shares of `100 each 350.00
- Equity Shares of `10 each CharteredStudies 6.50
Reserve & Surplus
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950.00 25.00
Total 1,300.00 31.50
Assets:
Net Fixed Assets 220.00 0.50
Net Current Assets 1,020.00 29.00
Deferred Tax Assets 60.00 2.00
Total 1,300.00 31.50

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 H Ltd. proposes to buy out B Ltd. and the following information is provided to you as part of the
scheme of buying: CharteredStudies

(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
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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.) (8 Marks)
(b) Derivative Bank entered into a plain vanilla swap through on OIS (Overnight Index Swap) on a
principal of ` 10 crores and agreed to receive MIBOR overnight floating rate for a fixed payment
on the principal. The swap was entered into on Monday, 2 nd August, 2010 and was to commence
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on 3 August, 2010 and run for a period of 7 days.
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Respective MIBOR rates for Tuesday to Monday were:

7.75%, 8.15%, 8.12%, 7.95%, 7.98%, 8.15%.
If Derivative Bank received ` 317 net on settlement, calculate Fixed rate and interest under both
legs.
Notes:
(i) Sunday is Holiday.
(ii) Work in rounded rupees and avoid decimal working. (8 Marks)
(c) State the characteristics of Venture Capital financing. (4 Marks)
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