SOLUTION CA FINAL SFM NOV 15 PRACTICAL QUESTIONS BY CA PRAVIIN MAHAJAN

Solution to CA FINAL SFM NOV 15 by CA PRAVIIN MAHAJAN

1 CA PRAVIIN MAHAJAN SFM CLASSES 9871 255 244

Q1a A bank enters into a forward purchase TT covering an export bill for Swiss francs 1,00,000 at 32.4000 due on

25th April and covered itself for same delivery in the local inter bank market at 32.4200. However on 25th

March, exporter sought for cancellation of contract as the tenor of the bill is changed

In singapore market, swiss Francs were quoted against US dollars as under : 5 Marks

Spot USD 1 = Sw.Fcs 1.5076/1.5120

One month forward 1.5150/1.5160

Two month forward 1.5250/1.5270

Three month forward 1.5415/1.5445

And in the inter bank market US dollars were quoted as under:

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

Comment - Simple ques of Cancellation of forward contract . DONE IN CLASS

Ans Bank made forward contract to purchase SF 1,00,000 @ 32.40 on 25th april. On 25th march customer

approached bank to cancell contract. For cancellation bank will sell 1,00,000 $ to customer at one month

forward rate

For cancellation Bank will sell SF 1,00,000 at

=

$ x

$

= 49.42 + 0.1

100 x 49.42 x

1

1.5150

= 32.6531

Statement of cancellation charges payable by customer

Purchase of 1,00,000 SF by bank @ 32.40 32,40,000

Sale of 1,00,000 SF @ 32.6531 32,65,310

Gain to bank payable by customer 25,310

b. The following data is available for a bond

Face value 1,000

Coupon rate 11%

Years to maturity 6 5 marks

Redemption value 1,000

Yield to maturity 15%

(Round off your answer to 3 decimals )

Calculate the following in respect of the bond

1. Current market price 2. Duration of the bond 3. Volatality of the bond

4. Expected market price if increase in required yield is by 100 basis points

5. Expected market price if decrease in required yield is by 75 basis points



Comment : Simple question of bond duration. Q38, pg 8.7. DONE IN CLASS

Ans. Statement of Expected MP and duration of bond

Year Cash flows Factor15% PV Year PV x year

1 11 0.870 9.57 1 9.57

2 11 0.756 8.316 2 16.632

3 11 0.658 7.238 3 21.714

4 11 0.572 6.292 4 25.168

5 11 0.497 5.467 5 27.335

6 11 + 1000 0.432 436.752 6 2620.512

473.635 2720.931

1. Current market price of bond is present value of all future cash outflows in form of interest

and redemption value i.e 473.635

2. Duration of bond

2720.931

473.635 = 5.74 years

3. volatality of bond

1 + =

5.74

1.15 = 4.99%

For 1% change in ytm there is 4.99% change in price.

4. If YTM increases, market price decreases

IF YTM increases by 100 basis points i.e 1% MP will decrease by 4.99%

So MP will be 473.635 0.0499 of 473.635 = 450

5. If YTM decrease by 75 basis points i.e 0.75%, MP will increase by 4.99 x 0.75= 3.7425 %

473.635 + 3.7425 % of 473.635 = 491.36

c. Mr Dayal is interested in purchasing equity share of ABC Ltd which are currently selling @ 600 each. He

expects that price of share may go upto 780 or may go down to 480 in three months. The chances of

occuring such variations are 60% and 40% respectively. A call option on shares of ABC Ltd can be excersised at

the end of three months with a strike price of 630.

1. What combination of share and option should Mr dayal select if he wants a perfect hedge?

2. What should be the value of option today (the risk free rate is 10% p.a) 5 marks

3. What is the expected rate of return on option.

Comment : It is the simple question of binomial model same as Q 42 of derivatives of our

book. Since probability of high price and low price is given, so vl use risk neutralisation model. But hedge ratio is computed acc to binomial model. DONE IN CLASS



Ans 1. Hedge ratio

=

780 630

780 480 = 0.5 or 50%

2. Value of option . +

1+

(780 630 ) 0.6 + 0 0.4

(1 + 0.025) = 87.80

3. expected rate of return on option=

x 100

(780 630 ) 0.6 + 0 0.4

87.8 =

2.5

3 x 12 = 10%

or

( )

x 100

{[(0.6 780) + (0.4 480) ] 630 } 87.80

87.80 x 100 = 263% loss

Or

Expected rate of return on call is computed when call is exercised. When call is not exercised

rate of return is 0. Entire amount paid ir registered as a loss

[(780 630) 87.8

87.8 x 100 = 70.84%

d XYZ an indian firm, will need to pay JAPANESE YEN (JY) 5,00,000 on 30th June. In order to hedge the risk .

involved in foreign currency transaction, the firm is considering two alternative methods i.e forward market

cover and currency options contract.

On 1st april, following quotations (JY/INR) are made available

Spot 3 months forward

1.9516/1.9711 1.9726/1.9923

The prices for forex currency option are as follows

Strike price JY 2.125

Call option (June) JY 0.047

Put option (June) JY 0.098 5 marks

For excess or balance of JY covered, the firm would use forward rate as future spot rate

You are required to recommend cheaper hedging alternative for XYZ.

Comment : This is the question of currency option with INDIRECT QUOTE. Q 91 c, pg 3.23 . If students are habitual of coverting direct quote into indirect quote, answer will not be correct. So it is

utmost importance that student should be able to do and read indirect quote as it is. DONE IN CLASS

Ans XYZ, an indian firm has to buy 5,00,000 JY on 30th june

Since quote is JY/, relevant rate is bid rate

Co. has 2 options



1. Hedge through currency options

Call option gives right to buy

Put option gives right to sell

Since co. has to buy JY (sell ) so co. will buy put option

JY to be bought 5,00,000

Re to be sold 5,00,000

2.125 = 2,35,294.12

Premium JY 0.098 / sold

Statement of payment

Premium payable in JY 2,35,294.12 x 0.098 23,059 JY

Premium payable in 23,059 / 1.9516 11,815

paid for purchase of 5,00,000 JY 2,35,294.12

Total payment 2,47,109.12

2. Hedge through forward market

Co. will book a forward contract today to buy 5,00,000 JY on 30th june @ JY 1.9726/

Co. will pay 5,00,000/1.9726 = 2,53,472.57

Q2a The following information is provided relating to the acquiring Company Eltd and the target company H ltd.

Particulars E Ltd H Ltd

Number of shares (FV 10 each) 20 lakhs 15 lakhs

Market capitalisation 1000 Lakhs 1500 Lakhs

PE ratio (Times) 10.00 5.00

Reserves and surplus in 600.00 Lakhs 330.00 Lakhs

Promoters Holding (No. of shares) 9.50 Lakhs 10.00 Lakhs

The Board of directors of both the companies have decided to give a fair deal to the shareholders. Accordingly,

the weights are decided as 40%, 25% and 35% respectively for earnings, book value and market price of share

of each company for swap ratio.

Calculate the following: 10 Marks

1. Market price per share, earning per share and Book value per share

2. Swap ratio

3. Promoters holding percentage after acquisition

4. EPS of E Ltd after acquisition of H Ltd

5. Expected market price per share and Market capitalisation of E Ltd after acquisition assumingPE ratio

of E ltd remains unchanged

6. Free flow market capitalisation of merged firm.

Comment : Simple question of Merger and acquisition. Q8 pg 4.3. DONE IN CLASS



Ans 1. MP per share Mkt cap / no. of shares

E 1000 lakh/20 lakh = 50

H 1500 lakh/ 15 lakh = 100 Exch ratio 2:1

EPS MP/PE ratio

E 50/10 = 5

H 100/5 = 20 Exch Ratio 4:1

Book Value per share sh cap + Res & sur / No. of shares

E 1000 + 600 / 20 = 80

H 1500 + 330 / 15 = 122 Exch ratio 1.525:1

2. Swap ratio WEarn ExchEarn + WBV ExchBV + WMP ExchMP 0.4 x 4 + 0.25 x 1.525 + 0.35 x 2

= 2.68125 : 1

No. of shares issued = 15 lakh x 2.68125 = 40.21875 lakh

3. Promoters holding percentage after acquisition

Shares of E ltd after acquisition 60.21875 lakh

Shares held by promoters of E ltd before acq 9.50 lakh

Shares issued to promoters of H ltd In acq 10 x 2.68125 = 26.8125 lakh

Total promoters holding 36.3125 lakh

% of promoters holding after acq 36.3125

60.21875 = 60.30%

4. Post merger EPS = earnings after acq/ No. of sh after acq

= 5 20 + 20 15

60.21875 = 8.6424

5. Post merger MP assuming PE ratio after Merger of E is same i.e 10

= Post merger PE x Post merger EPS

= 10 x 8.6424

= 86.424

Post merger Market cap = 86.424 x 60.21875

= 5204.345 lakh

6. Free float market cap of merged firm = Total market cap Promoters holding

= 5204.345 - 36.3125 x 86.424

= 2066.0735 lakh

Q2b Mr A will need 1,00,000 after 2 years for which he wants to make one time necessary investment now. He

has a choice of 2 types of bonds. Their details are below:

Bond X Bond Y

Face value 1000 1000 6 Marks

Coupon 7% payable annually 8% payable annually

Years to maturity 1 4

Current price 972.73 936.52

Current yield 10% 10%

Advise Mr A whether he should invest all his money in one type of bond or he should buy both the bonds and

if, so, in which quantity. Assume that there will not be any call risk or default risk



Comment : Very simple question of BOND IMMUNISATION. Extensively covered in class

Q46, pg 8.8. DONE IN CLASS

Ans duration of liability is 2 years

Duration of bond X 1070 0.9091

972.73 = 1 yr

Duration of Bond Y 80 x 0.909 x 1 + 80 x 0.826 x 2 + 80 X 0.751 x 3 + 1080 x 0.683 x 4

936.52

72.72 + 132.16 + 180.24 + 2950.56

936.52 =

3335.68

936.52 = 3.562

For immunisation Duration of liablity portfolio i.e 2 should match with duration of bond portfolio

Duration of bond portfolio is weighted average of duration of each bond in portfolio

WX DX + WY DY = 2

X . 1 + (1 - x ) 3.562 = 2

X + 3.562 - 3.562 x = 2

2.562x = 3.562 2

X = 1.562

2.562 = 0.61

Thus investment in Bond X is 61% and in Bond Y is 39%

Q3a On 1st April, 2015 an investor has a portfolio consisting of eight securities as shown below

Security Market price No. of shares value

A 29.40 400 0.59

B 318.70 800 1.32

C 660.20 150 0.87

D 5.20 300 0.35

E 281.90 400 1.16

F 275.40 750 1.24

G 514.60 300 1.05

H 170.50 900 0.76

The cost of capital for the investor is 20% p.a continuosly compounded. The investor fears a fall in the

prices in the prices of the shares in the near future. Accordingly, he approaches you for the advice to protect

the interest of his portfolio.

You can make use of the following information

1. The current Nifty value is 8500 8 Marks

2. Nifty futures can be traded in units of 25 only

3. Futures for may are currently quoted at 8700 and Futures for june are being quoted at 8850

You are required to calculate :

i. The beta of his portfolio



ii. The theoretical value of the futures contracts expiring in may and june

(Given e0.03= 1.03045, e0.04= 1.04081, e0.05 = 1.05127)

iii. The number of Nifty contracts that he would have to sell if he desires to hedge until june in each

of the following cases:

(A) His total portfolio

(B) 50% of his portfolio

(C) 120% of his portfolio

Comment : Lengthy but very simple and basic question of Derivatives.

Q97 pg2.9. similar to May 13. DONE IN CLASS

Ans i. Statement of Portfolio

Security Market price No. of Value value Value x

shares of share

A 29.40 400 11,760 0.59 6938.4

B 318.70 800 2,54,960 1.32 2,21,815.2

C 660.20 150 99,030 0.87 86,156.1

D 5.20 300 1560 0.35 546

E 281.90 400 1,12,760 1.16 1,30,801.6

F 275.40 750 2,06,550 1.24 2,56,122

G 514.60 300 1,54,380 1.05 1,62,099

H 170.50 900 1,53,450 0.76 1,16,622

9,94,450 9,81,100.3

Portfolio = 9,81,100.3

9,94,450 = 0.99

ii. Theoretical value of futures = CMP ert

value of May futures = 8500 e0.20 x 2/12

= 8500 e0.03

= 8500 x 1.03045

= 8758.825

Value of June futures = 8500 e0.20 x 3/12

= 8500 e0.05

= 8500 x 1.05127

= 8935.795

iii. Current market price of june future 8850

Each nifty contract is of 25 units

No. of contracts to be sold if



A. Full hedge is needed

Value of Nifty futures sold = 9,81,100.3 x 0.99 = 9,71,289.297

No. of Nifty units sold = 9,71,289.297 / 8850 = 109.75

No. of NIFTY contracts = 109.75 / 25 = 4.39

B. 50% hedge is needed

Value of Nifty futures sold = 9,81,100.3 x 0.99 x .5 = 4,85,644.65



C. 120% hedge is needed

Value of Nifty futures sold = 9,81,100.3 x 0.99x 1.2 = 9,71,289.297



b. The finance manager of ABC corporation is analyzing firms policy regarding computers which are now being

leased on yearly basis on rental amounting to 1,08,000 per year. The computers can be bought for

5,00,000. The purchase would be financed by 16% and the loan is repayable in 4 equal annual installments.

On account of rapid technological progress in the computer industry, it is suggested that a 4-year economic

life should be used instead of a 10-year physical life. It is estimated that the computers would be sold for

2,00,000 at the end of 4 years. 8 marks

The company uses the straight line method of depreciation . Corporate tax rate is 35%.

a. Whether the equipment be bought or be taken on lease.

b. Analyze the financial viability from the point of view of the lessor, assuming 14% cost of capital.

c. Determine the minimum lease rent at which lessor would break even.

Comment : Lengthy but simple question of leasing

Q5 Pg 7.2. DONE IN CLASS

Ans ABC corporation is analysing its policy of leasing or purchasing a computer costing 5,00,000

If computers are taken on lease

Company will pay annual lease rent of 1,08,000

Statement of cash outflow if asset is taken on lease

Particulars Amount period factor PV

16(1-0.35)=10.4%

Lease Rent 1,08,000 1-4e 3.143 3,39,444

Tax saving on lease rent (37,800) 1-4e 3.143 (1,18,805)

PV of cash outflow 2,20,639

If asset is purchased

Co. will purchase the asset by borrowing from bank @ 16%, repayable in 4 equal annual installments

Amount of each installment

Installment x factor = loan

Inst x 2.798 = 5,00,000



Inst = 1,78,699

Statement of Principal and interest

Installment Interest Principal loan o/s tax sav on int

1,78,699 80,000 98699 4,01,301 28,000

1,78,699 64,208 1,14,491 2,86,810 22,473

1,78,699 45,890 1,32,809 1,54,001 16,062

1,78,699 24,698 1,54,001 - 8644

Statement of cash outflow if asset is purchased

Particulars Amount period factor 10.4% PV

Installment 1,78,699 1-4e 3.143 5,61,651

Tax saving on interest 28,000 1e 0.906 (25,368)

22,473 2e 0.820 (18,428)

16,062 3e 0.743 (11,934)

8,644 4e 0.673 (5,817)

Tax saving on dep

5,00,000 2,00,000

4 x 0.35 26,250 1-4e 3.143 (82,504)

Salvage value 2,00,000 4e 0.673 (1,34,600)

2,83,000

Since cash outflow is lower if asset is taken on lease, so leasing is better

Ii. Evaluation of proposal from point of view of lessor if expected rate of return is 14%

Statement of NPV

Particulars Amount period Factor14% Pv

Asset purchased 5,00,000 0 1 (5,00,000)

Lease rent recd

Net of tax 1,08,000 x .65 70,200 1-4e 2.914 2,04,563

Tax sav on depn 26,250 1-4e 2.914 76,493

Salvage value 2,00,000 4e 0.592 1,18,400

(1,00,544)

Since NPV is negative, so leasing is not feasible

iii. Minimum lease rentals for lessor to break even at 14%

Statement of NPV

Particulars Amount period Factor14% Pv

Asset purchased 5,00,000 0 1 (5,00,000)

Lease rent recd

Net of tax X x .65 0.65x 1-4e 2.914 1.8941x

Tax sav on depn 26,250 1-4e 2.914 76,493

Salvage value 2,00,000 4e 0.592 1,18,400

0

1,94,893 + 1.8941x = 5,00,000

X = 3,05,107

1.8941 = 1,61,083



Q4a XYZ ltd, a company based in India, manufactures very high quality modern furniture and sells to a

small number of retail outlets in India and Nepal. It is facing tough competition. Recent studies on

marketability of products have clearly indicated that customer is now more interested in variety and

choice rather than exclusivity and exceptional quality. Since the cost of quality wood in India is very

high, the company is reviewing the proposal for import of woods in bulk from Nepalese supplier.

The estimate of net Indian and Nepalese currency (NC) cash flows for this proposal is shown below:

Net cash flows (in Millions)

Year 0 1 2 3

NC -25,000 2,600 3,800 4,100

Indian 0 2,869 4,200 4,600

The following information is relevant : 8 marks

i. XYZ evaluates all investments by using discount rate of 9% p.a. All nepalese customers are

invoiced in NC. NC cash flows are converted to Indian () at the forward rate and discounted

at the Indian rate.

ii. Inflation rates in Nepal and India are expected to be 9% and 8% p.a respectively. The current

exchange is 1 = NC 1.6

Assuming that you are the finance manager of XYZ Ltd, calculate the NPV and Modified IRR of the

proposal.

You may use the following values with respect to discount factor 1 @ 9%

Year 1 2 3

Present Value 0.917 0.842 0.772

Future Value 1.188 1.090 1

Comment : Simple question of fischer effect, foreign exchange.

Q122, Pg 3.35, May 13. DONE IN CLASS

Ans Question is silent if nepalese and Indian cash flows are real or money cash flows. So it can be

assumed Cash flows given are Real cash flows . Alternatively it can be assumed that cash

flows given are Money cash flows

I Assuming cash flows Given are Real cash flows

Statement of Money cash flows

NC Real CF Inflation9% NC Money CF Real CF Inflation8% Money CF

-25,000 1 -25,000 0 1 0

2600 1.09 2834 2869 1.08 3099

3800 (1.09)2 4515 4200 (1.08)2 4899

4100 (1.09)3 5310 4600 (1.08)3 5795

Statement of conversion of NC cash flows into cash flows

Year NC CF Rate Indian CF

0 -25,000 1.6 -15,625

1 2834 1.6 x 1.09

1.08 1755



2 4515 1.6 x (1.09)2

(1.08)2 2770

3 5310 1.6 x (1.09)3

(1.08)3 3228

Statement of NPV

Particulars Amount period Factor 9% PV

Cash Flows 15,625 0 1 (15,625)

Cash Inflows 1755

3099

4854 1 0.917 4451

2770

4899

7669 2 0.842 6457

3228

5795

9023 3 0.772 6966

NPV 2249

II Alternatively Assuming Cash flows given are Money cash flows

Statement of conversion of NC cash flows into cash flows

Year NC CF Rate Indian CF

0 -25,000 1.6 -15,625

1 2600 1.6 x 1.09

1.08 1610

2 3800 1.6 x (1.09)2

(1.08)2 2331

3 4100 1.6 x (1.09)3

(1.08)3 2492

Statement of NPV

Particulars Amount period Factor 9% PV

Cash Flows 15,625 0 1 (15,625)

Cash Inflows 1610

2869

4479 1 0.917 4107

2331

4200

6531 2 0.842 5499

2492

4600

7092 3 0.772 5475

NPV (544)



Modified IRR

IRR assumes that all intermediate cash flows of project are reinvested at the rate of IRR. To rectify this flaw of

IRR Modified IRR is computed. Modified IRR assumes that all positive cash flows are reinvested at cost of

capital

(If cash flows given are Real cash flows)

- Compute future value of cash flows assuming cash flows are reinvested at cost of capital

Invested for remaining period in the project Maturities

4854 earned at the end of 1st year invested for 2 years 4854 (1.09)2 5766

7669 earned at the end of 2nd year invested for 1 year 7669 (1.09) 8359

9023 earned at the end of 3rd year not reinvested 9023

23,148

- Investment(1+r)N = Sum of all maturities

15,625 (1+r)3 = 23,148

R = 23,148

15,625

3 - 1

R = 14%

(If cash flows given are money cash flows)

Invested for remaining period in the project Maturities

4479 earned at the end of 1st year invested for 2 years 4479 (1.09)2 5321

6531 earned at the end of 2nd year invested for 1 year 6531 (1.09) 7119

7092 earned at the end of 3rd year not reinvested 7092

19532

- Investment(1+r)N = Sum of all maturities

15,625 (1+r)3 = 19,532

R = 19,532

15,625

3 - 1

R = 7.73%

Q4b Mr X on 1.7.2012 during the initial public offer of a mutual fund invested 1,00,000 at face value of 10. On

31.03.2013, the MF declared a dividend of 10% when Mr X calculated that his holding period rate of return

was 115%. On 31.3.2014, MF again declared a dividend of 20%. On 31.3.2015, Mr X redeemed all his

investment which had accumulated to 11,296.11 units when his holding period return was 202.17%

Calculate The NAV as on 31.03.2013, 31.03.2014, 31.03.2015 8 marks

Comment : This is a typical ques of Mutual Fund which is Q2 of our book. This ques also came in nov 13, Q1d P21. Only difference is that in this ques Holding period rate of return is

given instead of annual yield, making this ques much simpler

Ans:



1.07.12--------9 m----------31.03.13--------------12 M-----------31.03.14------------12m-----31.3.15

10,000 units @10 10% div 20% div

HPRR 115% HPRR 202.17%

11,296.11 units

NAV on 31.03.13

HPRR on 31.03.13 = 115%

= + ( )

= 1.15

1 + ( 10)

10 = 1.15

Cl NAV (NAV on 31.03.13) = 20.5

NAV on 31.03.14

All dividend received is reinvested

Units purchased on 31.03.13 10,000

20.5 = 487.80

Total units on 31.03.13 = 10,487.80

Dividend received on 31.03 14 = 10,487.8 x 10 x 0.2 = 20,976

Total units on 31.03.14 = 11,296.11 units

Units purchased on 31.03.14 = 11,296.11 10,487.8 = 808.31

NAV on 31.03.14 = 20,976

808.31 = 25.95

NAV on 31.03.15

HPRR on 31.03.15 = 202.17%

Value of investment on 1.7.12 = 1,00,000

Return on investment 2,02,170

Value of investment on 31.03.15 = 3,02,170

Number of units on 31,03,15 = 11,296.11

NAV on 31.03.15 = 3.02,170

11,296.11 = 26.75

Q5a ABC Ltd., a US Firm will need 5,00,000 in 180 days. In this connection, the following information is available:

Spot rate 1 = $ 2.00

180 days forward rate of as of today is $ 1.96

Interest rates are as follows US UK

180 days deposit rate 5.0% 4.5%

180 days borrowing rate 5.5% 5.0%

A call option on that expires in 180 days has an exercise price of $ 1.97 and a premium of $ 0.04

ABC Ltd. has forecasted the spot rates for 180 days as below:



Future rate Probability

$ 1.91 30%

$1.95 50% 8 Marks

$ 2.05 20%

Which of the following strategies would be cheaper to ABC Ltd?

i. Forward contract

ii. A money market hedge

iii. A call option contract

iv. No hedging option

Comment : Simple question of currency options.Q95 pg 3.24. DONE IN CLASS

Ans US firm has to buy 5,00,000 after 180 days

Since quote is $

, relevant rate is Ask rate

Company has following options

1. Hedge through currency options

Company will buy call options today, to buy 5,00,000 after 180 days @ $ 1.97 / .

Statement of payment

Premium paid ($ 0.04 / )

Amount paid ( 5,00,000 x 0.04 ) 20,000 $

Due date

EP $ 1.97 /

MP 1.91 x 0.30 + 1.95 x 0.5 + 2.05 x 0.20

= $ 1.958

MP < EP , call will not be exercised

US firm will purchase from market @ $ 1.958 /

Amount paid 5,00,000 x 1.958 9,79,000 $

9,99,000 $

2. Money market hedge

Process ($ borrow, deposit )

1. Deposit present value of 5,00,000 , co. will deposit 4,88,998

5,00,000

1.0225

2. To deposit 4,88,998 co. will borrow $

$ to borrowed is ascertained is ascertained by converting

4,88,998 @ spot rate of $ 2 /

$ borrowed 4,88,998 x 2 = $ 9,77,996

3. $ payable after 180 days @ 5.57

9,77,996 x 1.0275 $ 10,04,891



3.. Forward market hedge

Co. will book a forward contract today to buy 5,00,000 after 180 days

@ 1.96 /

$ payable 5,00,000 x 1.96 $ 9,80,000

4.. No Hedging

Co. will buy 5,00,000 after 180 days at spot after 180 days of

$ 1.958 /

$ payable 5,00,000 x 1.958 $ 9,79,000

Since amount payable is least if no hedging is done, so no hedging is better.

Q5b On 1st April, an open ended scheme of Mutual fund had 300 lakh units outstanding with Net assets

value (NAV) of 18.75, At the end of April, it issued 6 lakh units at openning NAV plus 2% load, adjusted for

dividend equalisation. At the end of May, 3 lakh units were repurchased at openning NAV less 2% exit load

adjusted for dividend equalisation. At the end of june, 70% of its available income was distributed.

In respect of april-june quarter, the following additional information are available:

in lakh

Portfolio value appreciation 425.47

Income of april 22.950 8 MARKS

Income for May 34.425

Income for June 45.450

You are required to calculate

i. Income available for distribution

ii. Issue price at the end of april

iii. Repurchase price at the end of May and

iv. NAV as on 30th June.

COMMENT : Childish question of mutual fund. QUES BASED ON NAV AND ENTRY AND EXIT LOAD.

DONE IN CLASS

Ans i. Income available for distribution is income of april, may and june

22.95 + 34.425 + 45.45 = 102.825

Income distributed = 102.825 x 0.7 = 71.9775

ii. Issue price at the end of april = Op NAV + 2%

= 18.75 + 0.02 x 18.75

= 19.125

iii. Repurchase price = Op NAV 2 %

= 18.75 0.02 x 18.75

= 18.375

iv. NAV as on 30th June

Value of Net assets on 1st April 300 lakh x 18.75 5625 lakh

+ cash received on issue of 6 lakh units 6 x 19.125 114.75 lakh

- cash paid on repurchase of 3 lakh units 3 x 18.375 (55.125 lakh)



+ Income of april, may and june 102.825lakh

- income distributed (71.9775 lakh)

+ appreciation in value of portfolio 425.47 lakh

Net assets at end of june (after adj of changes in cash and

Appreciatin in value of investments 6140.9425

No. of units at the end of june 300 + 6 3 303 lakh

NAV at end of june 20.267

Q6a XYZ Ltd wants to purchase ABC Ltd by exchanging 0.7 of its share for each share of ABC Ltd. relevant financial

data are as follows:

Equity share outstanding 10,00,000 4,00,000

EPS )) 40 28

Market price per share () 250 160 10 MARKS

i. Illustrate the impact of merger on EPS of both the companies

ii. The management of ABC Ltd has quoted a share exchange ratio of 1:1 for merger. Assuming PE

ratio of XYZ Ltd will remain unchanged after the merger, what will be the gain from merger for

ABC Ltd

iii. What will be the gain / loss to the share holders of XYZ Ltd?

iv. Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd

Comment : Again utmost simple ques of Merger. Examiner aiways use one point in ques, which we

extensively discussed and proved in class, i.e PE ratio after merger is given

Ans i. Exchange ratio proposed by XYZ Ltd 0.7:1

No. of shares issued to shareholders of ABC Ltd = 4,00,000 x 0.7 = 2,80,000

Statement of Impact On EPS of share holders of both companies

XYZ ABC

Pre Merger EPS 40 28

Post Merger EPS 40 x 10 lakh + 28 x 4 lakh 1 x 0.7 x 40

12.80 lakh = 28

= 40

Thus if exchange ratio is 0.7:1, Post and pre merger EPS of share holders of both companies

will remain same

ii. If exchange ratio is 1:1 and PE ratio of XYZ remain same

No. of share issued 4,00,000

Post merger EPS 512

14 = 36.57

EPS to Share holder of ABC 1 x 1 x 36.57 = 36.57

EPS of shareholder of ABC increases by 36.57 28 = 8.57 per share

Total increase in EPS 4 lakh x 8.57 = 34.28 lakh

Post merger MPS = Post merger PE x Post Merger EPS



= 250

40 x 36.57 = 228.5625

Post merger Price to SH of ABC = 1 X 1 X 228.5625 = 228.5625

Wealth of Share holder of ABC also increased by (228.5625 160) = 68.5625 per share

Total increase in wealth 4 lakh x 68.5625 = 274.25 lakh

iii. Gain or loss to shareholder of XYZ (if exchange ratio is 1:1)

Pre merger EPS 40

Post merger EPS 36.57

Reduction in EPS per share 3.43

Total reduction in earnings 3.43 x 10 lakh = 34.30 lakh

Pre merger MPS 250

Post Merger MPS 228.5625

Reduction in MPS per share 21.4375

Reduction in total wealth of SH of XYZ 10 lakh x 21.4375 = 214.375 lakh

iv. Maximum exchange ratio acceptable to Share holders of XYZ

Post Merger PE 6.25

Post mrger Value of Firm = Total earnings x Post merger PE

= 512 lakh x 6.25

= 3200 lakh

Value Retained by XYZ (its pre merger value) = 10 lakh x 250

= 2500 lakh

Value given to SH of ABC = 3200 2500 lakh

= 1300 lakh

Shares given to ABC = 1300 / 250 = 5.2 lakh

Max exchange ratio = 5.2

4 = 1.3 :1

Q6b X Ltd is a shoes manufacturing company, it is all equity financed and has a paid up capital of 10,00,000 ( 10

per share)

X Ltd has hired Swastika consultants to analyse the future earnings . The report of Swastika consultants states

as follows:

i. The earnings and dividend will grow at 25% for the next 2 years

ii. Earnings are likely to grow at the rate of 10% from 3rd year and onwards

iii. Further , if there is a reduction in earnings growth, DP ratio will increase to 50%

The other data related to the company are as follows: 6 MARKS

Year EPS() Net Dividend per share() Share price ()

2010 6.30 2.52 63.00

2011 7.00 2.80 46.00

2012 7.70 3.08 63.75

2013 8.40 3.36 68.75

2014 9.60 3.84 93.00



You may assume that the tax rate is 30% ( not expected to change in future) and post tax cost of capital is

15%.

By using the dividend valuation model , calculate

i. Expected market price per share

ii. PE Ratio.

Comment : Simple question of dividend. Based on current market price is present value of all

future dividends

Ans i. Current market price is present value of all future dividends

Statement of EPS and Dividend

Year EPS Dividend per share

2015 9.6 (1.25) = 12 3.84(1.25) = 4.8

2016 12(1.25) = 15 4.8 (1.25) = 6

2017 15 (1.1) = 16.5 50% of 16.5 = 8.25

Statement of CMP

Year Cash flow Factor 15% PV

2015 - 1 4.8 0.870 4.176

2016 - 2 6 0.756 4.536

2017 - 3 2 8.25

0.15 0.10 = 165 0.756 124.74

133.452

ii. PE ratio =

=

133.452

9.6 = 13.90125 times

SOLUTION CA FINAL SFM NOV 15 PRACTICAL QUESTIONS BY CA PRAVIIN MAHAJAN

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Transcript of SOLUTION CA FINAL SFM NOV 15 PRACTICAL QUESTIONS BY CA PRAVIIN MAHAJAN