CA.

DINESH JAIN STRATEGIC FINANCIAL MANAGEMENT

ANSWERS TO STRATEGIC
FINANCIAL MANAGEMENT (OLD
and NEW) Question Bank (Chapter wise
compilation of last 14 RTP and
Suggested Answers)

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Important Links to connect with faculty:

About the faculty:

❖ Dinesh Jain is a Chartered Accountant and is currently working in India’s premier
credit rating agency
❖ Rank holder in all three levels of Chartered Accountancy – CA Final (Rank 3), CA
IPCC (Rank 9) and CA CPT (Rank 24)
❖ He takes classes for both CA Inter and CA Final. Enriches student’s knowledge on
Cost Accounting and Str. Has an experience of eight years in teaching.
❖ Focuses extensively on conceptual clarity which has enabled multiple students
securing exemption in his subjects

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TABLE OF CONTENTS
Break-up of Syllabus: .............................................................................................5
Topic 1: Basics of Capital Budgeting ...................................................................7
Topic 2: Investment Decision ................................................................................9
Topic 3: Replacement Decision and Life Disparity .........................................17
Topic 4: Long term funds versus equity approach ........................................... 23
Topic 5: Capital Rationing and Adjusted Present Value ................................. 26
Topic 6: Inflation in Capital Budgeting ............................................................. 28
Topic 7: Risk Analysis in Capital Budgeting - Basics ...................................... 30
Topic 8: RADR Versus CEF ................................................................................. 36
Topic 9: Sensitivity Analysis, Scenario Analysis, Simulation and Decision
Tree ......................................................................................................................... 38
Topic 11: Leasing Decision – Lessor Evaluation ............................................... 45
Topic 12: Leasing Decision – Lessee Evaluation............................................... 50
Topic 13: Dividend Decision ............................................................................... 70
Topic 14: Valuation of Futures ............................................................................ 90
Topic 15: Hedging with Futures .........................................................................93
Topic 16: Maintenance Margin and Open Interest......................................... 103
Topic 18: Option Strategies ............................................................................... 104
Topic 19: Option Valuation ............................................................................... 107
Topic 21: Interest rate futures and options ...................................................... 114
Topic 22: Forward Rate Agreements ................................................................ 117
Topic 23: Interest Rate Swaps ........................................................................... 121
Topic 24: Rights Issue and Buyback................................................................. 124
Topic 25: Valuation of Shares ........................................................................... 127
Topic 26: Valuation of Convertible Instruments ............................................ 135
Topic 27: Economic Value Added ..................................................................... 138
Topic 28: Bond Valuation .................................................................................. 142
Topic 29: Basics of Portfolio Theory................................................................. 162
Topic 30: Optimum Weights for Risk Reduction ........................................... 168
Topic 31: Security and Portfolio Beta ............................................................... 170
Topic 32: Systematic and Unsystematic Risk .................................................. 183
Topic 33: Characteristic line, CML and SML .................................................. 187
Topic 34: Factor Sensitivity Analysis and Arbitrage Pricing Theory ........... 190
Topic 35: Beta and Leverage .............................................................................. 192
Topic 36: Portfolio Strategies ............................................................................ 194
Topic 37: Financial Services .............................................................................. 195
Topic 38:MF Return ............................................................................................ 205
Topic 39: Calculation of NAV ........................................................................... 209
Topic 40: Mutual Funds – Performance Evaluation ....................................... 216
Topic 41: Money Market Operations ............................................................... 219
Topic 42: International Capital Budgeting ...................................................... 226
Topic 43: Basics of International Finance ........................................................ 234
Topic 44: Premium/Discount and Appreciation/Depreciation ..................... 238
Topic 45: IRPT and PPT ..................................................................................... 240
Topic 46: Arbitrage ............................................................................................. 244
Topic 48: Leading and Lagging ......................................................................... 246
Topic 49: Netting ................................................................................................. 249
Topic 50: Forward Contract ............................................................................... 250
Topic 51: Money Market Hedge ....................................................................... 259
Topic 52: Exchange Position Versus Cash Position ........................................ 261
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Topic 54: Currency Swaps ................................................................................. 262
Topic 55: Multiple Forex Hedging Strategies ................................................. 265
Topic 56: Synergy gain and swap ratio ............................................................ 277
Topic 57: Valuation of Business ....................................................................... 299

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Break-up of Syllabus:
S.N Old New
Topic
o Syllabus Syllabus
Not
1 Basics of capital budgeting Chapter 2
included
Not
2 Investment decision Chapter 2
included
Not
3 Replacement decision and life disparity Chapter 2
included
Not
4 Long term funds versus equity approach Chapter 2
included
Not
5 Capital rationing and adjusted present value Chapter 2
included
Not
6 Inflation in capital budgeting Chapter 2
included
Not
7 Risk analysis in capital budgeting - Basics Chapter 2
included
Not
8 RADR versus CEF Chapter 2
included
Sensitivity analysis, scenario analysis, simulation and Not
9 Chapter 2
decision tree included
Not
10 Option in capital budgeting Chapter 2
included
Not
11 Leasing decision - Lessor evaluation Chapter 3
included
Not
12 Leasing decision - Lessee evaluation Chapter 3
included
13 Dividend decision Chapter 4 Extra topic
14 Valuation of futures Chapter 5 Chapter 9
15 Hedging with futures Chapter 5 Chapter 9
16 Maintenance margin and open interest Chapter 5 Chapter 9
17 Basics of option Chapter 5 Chapter 9
18 Option strategies Chapter 5 Chapter 9
19 Option valuation Chapter 5 Chapter 9
20 Delta hedging Chapter 5 Chapter 9
21 Interest rate futures and options Chapter 5 Chapter 12
22 Forward rate agreements Chapter 5 Chapter 12
23 Interest rate swap Chapter 5 Chapter 12
24 Rights issue and buyback Chapter 6 Chapter 5
25 Valuation of shares Chapter 6 Chapter 5
26 Valuation of convertible instruments Chapter 6 Chapter 5
27 Economic value added Chapter 6 Chapter 13
28 Bond valuation Chapter 6 Chapter 5
29 Basics of portfolio theory Chapter 7 Chapter 6
30 Optimum weights for risk reduction Chapter 7 Chapter 6
31 Security and portfolio Beta Chapter 7 Chapter 6
32 Systematic and unsystematic risk Chapter 7 Chapter 6
33 Characteristic line, CML and SML Chapter 7 Chapter 6

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S.N Old New
Topic
o Syllabus Syllabus
34 Factor sensitivity analysis and Arbitrage pricing theory Chapter 7 Chapter 6
35 Beta and leverage Chapter 7 Chapter 6
36 Portfolio strategies Chapter 7 Chapter 6
Not
37 Financial services Chapter 8
included
38 MF return Chapter 9 Chapter 8
39 Calculation of NAV Chapter 9 Chapter 8
40 Mutual Funds - Performance Evaluation Chapter 9 Chapter 8
Not
41 Money Market operations Chapter 10
included
42 International capital budgeting Chapter 11 Chapter 11
43 Basics of international finance Chapter 12 Chapter 10
44 Premium/ discount and appreciation/ depreciation Chapter 12 Chapter 10
45 IRPT and PPT Chapter 12 Chapter 10
46 Arbitrage Chapter 12 Chapter 10
47 Currency invoicing Chapter 12 Chapter 10
48 Leading and lagging Chapter 12 Chapter 10
49 Netting Chapter 12 Chapter 10
50 Forward contract Chapter 12 Chapter 10
51 Money market hedge Chapter 12 Chapter 10
52 Exchange position and cash position Chapter 12 Chapter 10
53 Currency futures and options Chapter 12 Chapter 10
54 Currency swaps Chapter 12 Chapter 10
55 Multiple forex hedging strategies Chapter 12 Chapter 10
56 Synergy gain and swap ratio Chapter 13 Chapter 14
57 Valuation of business Chapter 13 Chapter 13
Not
58 Value at Risk Chapter 3
included
Not
59 Enterprise valuation Chapter 13
included
Not
60 Market value added and shareholder value added Chapter 13
included
Total

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Topic 1: Basics of Capital Budgeting

1. Techniques of capital budgeting:

WN 1: Initial outflow
Particulars Machine A Machine B
Purchase price -5,00,000 -5,00,000
Salvage value of old machine 1,00,000 1,00,000
Utilities -50,000 -1,80,000
Initial outflow -4,50,000 -5,80,000

WN 2: Cash flow analysis of Machine A:

Cash
Year flow CCF PVF @ 10% DCF CDCF
0 -450000 -450000 1.0000 -450000 -450000
1 100000 -350000 0.8696 86957 -363043
2 150000 -200000 0.7561 113422 -249622
3 180000 -20000 0.6575 118353 -131269
4 200000 180000 0.5718 114351 -16918
5 220000 400000 0.4972 109379 92461

WN 3: Cash flow analysis of Machine B:

Cash
Year flow CCF PVF @ 10% DCF CDCF
0 -580000 -580000 1.0000 -580000 -580000
1 200000 -380000 0.8696 173913 -406087
2 210000 -170000 0.7561 158790 -247297
3 180000 10000 0.6575 118353 -128944
4 170000 180000 0.5718 97198 -31746
5 100000 280000 0.4972 49718 17972

WN 4: Solution
Particulars Machine A Machine B
Payback Method 3.10 years 2.94 years
ARR on initial investment 17.78% 9.66%
ARR on original investment 32.00% 17.50%
Discounted payback 4.15 years 4.64 years
NPV Rs.92,461 Rs.17,972
Profitability Index 1.21 Times 1.03 Times

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2. Techniques of capital budgeting

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Topic 2: Investment Decision

1. Acceptance of Project
Answer:
WN 1: Initial outflow:
Amount
Particulars (in lacs)
Capital expenditure -120
Working capital -15
-135

WN 2: In-between flows
Particulars 1 2 3 4 5 6 7 8
Units 0.8 1.2 3 3 3 2 2 2
Sales 80 120 300 300 300 200 200 200
Contribution 48 72 180 180 180 120 120 120
Less: FC -16 -16 -16 -16 -16 -16 -16 -16
Less: Advertisement -30 -15 -10 -10 -10 -4 -4 -4
PBDT 2 41 154 154 154 100 100 100
Less: Depn -15 -15 -16.5 -16.5 -16.5 -16.5 -16.5 -16.5
PBT -13 26 137.5 137.5 137.5 83.5 83.5 83.5
Tax 6.5 -13 -68.75 -68.75 -68.75 -41.75 -41.75 -41.75
PAT -6.5 13 68.75 68.75 68.75 41.75 41.75 41.75
Add: Depn 15 15 16.5 16.5 16.5 16.5 16.5 16.5
CFAT 8.5 28 85.25 85.25 85.25 58.25 58.25 58.25
Less: Purchase of new machine -10
Revised CFAT 8.5 18 85.25 85.25 85.25 58.25 58.25 58.25

WN 3: Terminal flow
Amount
Particulars (in lacs)
NSV of machine 1 0
NSV of machine 2 1
Recapture of WC 15
Terminal flow 16

WN 4: Calculation of NPV
Year CF PVF @ 12% DCF
0 -135 1.000 -135.00
1 8.5 0.893 7.59
2 18 0.797 14.35
3 85.25 0.712 60.68
4 85.25 0.636 54.18
5 85.25 0.567 48.37
6 58.25 0.507 29.51
7 58.25 0.452 26.35
8 74.25 0.404 29.99
136.02
Conclusion:
The company should go ahead with project as it results in positive NPV of Rs.136 lacs

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2. Evaluation of cost reduction project
Answer:

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3. Investment decision – Relevance of interest cost (November 2014):
Answer:

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4. Investment decision – cost benefit ratio – November 2016
Answer:

5. Venture capital investment – May 2015 RTP

Answer:

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6. Impact of NPV on Market Price – May 2012
Answer:

7. Calculation of utility value – Practice Problem - May 2017 RTP

Answer:

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Topic 3: Replacement Decision and Life Disparity

1. Concept of EAC – May 2015

Answer:

2. Concept of EAC – May 2014

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3. Optimum replacement time – May 2012

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]

4. Optimum replacement time – November 2016 RTP, May 2014 RTP

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5. Optimum life – November 2014 RTP

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6. Optimum replacement time – November 2013 RTP

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Topic 4: Long term funds versus equity approach

1. Project IRR and Equity IRR:

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Topic 5: Capital Rationing and Adjusted Present Value

1. Capital rationing (May 2015 RTP)

Answer:

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Topic 6: Inflation in Capital Budgeting

1. Inflation (May 2013 RTP)

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2. Inflation (May 2016 RTP)

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Topic 7: Risk Analysis in Capital Budgeting - Basics

1. Calculation of NPV and Standard Deviation

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2. Hillier’s model – May 2018 RTP, May 2018

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3. Hillier’s model – November 2016 RTP, November 2018 RTP

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4. Best-case and worst-case NPV – November 2015 RTP

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Topic 8: RADR Versus CEF

1. Risk Adjusted Discount Rate – May 2016

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2. Certainty equivalent approach:

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Topic 9: Sensitivity Analysis, Scenario Analysis, Simulation and Decision Tree

1. Sensitivity analysis – May 2014 RTP

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2. Sensitivity analysis – November 2013

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3. Sensitivity analysis – May 2018 RTP

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4. Decision tree (May 2016 RTP)

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Topic 11: Leasing Decision – Lessor Evaluation

1. Fixing lease rental (May 2012 RTP)

WN 1: Computation of IRR
Year CF
0 -4,00,000
1 1,50,000
2 1,50,000
3 1,50,000
4 1,50,000
IRR 18.45%

WN 2: Computation of equated lease rentals:

Year Cash flow PVF @ 20% DCF
0 -4,00,000 1 -4,00,000
1 to 4 X 2.589 2.589X
0
Lease rentals = 4,00,000/2.589 = Rs.1,54,500

WN 3: Computation of lease rentals with 10 percent step-up increase:

Year Cash flow PVF @ 20% DCF
0 -4,00,000 1 -4,00,000
1 X 0.833 0.833X
2 1.1X 0.694 0.764X
3 1.21X 0.579 0.700X
4 1.331 0.482 0.642X
0
Lease rentals = 4,00,000/2.939 = Rs.1,36,100

WN 4: Computation of lease rentals under ballooned payment structure

Year Cash flow PVF @ 20% DCF
0 -4,00,000 1 -4,00,000
1 1,00,000 0.833 83,300
2 1,00,000 0.694 69,400
3 X 0.579 0.579X
4 1.1X 0.482 0.530X
0
1.109X – 2,47,300 = 0 ; X = 2,22,994

WN 5: Computation of lease rentals under 2-year deferment period:

Year Cash flow PVF @ 20% DCF
0 -4,00,000 1 -4,00,000
1 0 0.833 0
2 0 0.694 0
3 X 0.579 0.579X
4 X 0.482 0.482X
0
1.061X – 4,00,000 = 0 ; X = 3,77,000

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2. Fixing break-even lease rental – May 2016 RTP

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3. Calculation of lease rental – November 2017 RTP

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4. Fixing of break-even rental – May 2014 RTP

5. Fixing of lease rental – May 2018 (OLD)

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Topic 12: Leasing Decision – Lessee Evaluation

1. Choice of lease – May 2017 RTP

2. Lease Versus Buy – Discounting rate same as after tax cost of debt – November 2013

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3. Lease versus buy – November 2012 RTP

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4. Lease versus buy – May 2017

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5. Lease versus buy – November 2014 RTP

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6. Lease versus buy – November 2013 RTP

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7. Lease versus buy – May 2013 RTP

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8. Sale and leaseback – May 2016

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9. Lease versus buy – November 2015

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10. Lease versus Buy – May 2018 RTP

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11. Lease versus Buy – November 2016 RTP, May 2015

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12. Sensitivity analysis in lease versus loan – November 2015 RTP

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13. Lessor and Lessee evaluation – November 2018 RTP

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Topic 13: Dividend Decision
Question No.1 (May 2017 RTP, November 2013 RTP, May 2018)

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Question No.2 (May 2016 RTP, November 2014 RTP, May 2013 RTP)

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Question No.3 (November 2015 RTP)

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Question No.4 (May 2014 RTP)

Question No.5 (November 2012 RTP)

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Question No.6 (May 2016)

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Question No.7 (May 2015)

Question No.8 (November 2014)

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Question No.9 (November 2014)

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Question No.10 (May 2013)

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Question No.11 (November 2012)

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Question No.12 (November 2012)

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Question No.13 (May 2012, November 2018 RTP)

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Question No.14 (May 2012)

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Question No.15 (May 2017)

Question No.16 (November 2017 RTP)

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Question No.17 (May 2018 RTP)

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Question No.18 – November 2017

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Question No.19 – November 2018 RTP

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Question No.20 – Nov 2018

Question No.21 – Nov 2018

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Topic 14: Valuation of Futures

1. Pricing future [May 2012 RTP]

2. Valuation of futures – May 2015 RTP

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3. Calculation of fair futures price – November 2012 RTP

4. Calculation of interest rate – November 2013 RTP

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5. Pricing future and arbitrage opportunity – November 2017 RTP

6. Futures pricing and arbitrage opportunity – November 2018 RTP

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Topic 15: Hedging with Futures

1. Hedging with futures – May 2016 RTP

2. Hedging with futures – November 2014 RTP

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3. Hedging with futures – November 2016 RTP

4. Portfolio beta and futures impact – May 2017

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5. Hedge ratio – May 2017 RTP

6. Hedging with futures – May 2017 RTP

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7. Hedging with futures – May 2013

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8. Hedging with futures – November 2016

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9. Hedging with futures – November 2015

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10. Hedging with futures – November 2014 RTP

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11. Hedging with futures – May 2015 RTP

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12. Profit/loss calculation on futures – May 2013 RTP

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13. Swap arrangement – May 2018 RTP

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Topic 16: Maintenance Margin and Open Interest

1. Maintenance of margin – Mark to Market – May 2015 RTP, Nov 2018 RTP

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Topic 18: Option Strategies

1. Application of option strategy:

➢ It is assumed that the given option is call option
➢ The option writer will receive premium of Rs.3.75 on writing 30-day option. The
option writer will lose money if the price is above Rs.60
➢ The option writer will lose Rs.5 if the loss is Rs.8.75 at Gross payoff level. Hence the
writer will lose Rs.5 if the price is Rs.68.75. Similarly loss would be Rs.10 if the price is
Rs.73.75

2. Payoff for option strategy – November 2012 RTP

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3. Payoff for option – May 2016, Nov 2018 RTP

4. Option strategy – May 2018 RTP, May 2018

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5. Option strategy – November 2018 RTP

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Topic 19: Option Valuation

1. Put call parity

Three month call and three month put are available on Multan Ltd’s stock. The exercise price
is Rs.100. The CCRFI is 12% p.a.
i. If the put rules at Rs.5, and the share is worth Rs.95, Compute the value of the call.
ii. If the put quotes Rs.3 and the call is worth Rs.4 what is the share worth?
iii. If the market price of the call is Rs.8 and the market price of the share is Rs.102, what
is the value of the put?
iv. Rework the above three scenarios in case dividend of Rs.1 is to be paid at the end of
first month.
Part (i)
➢ Share + Put = Call + PV of exercise Price
➢ 95 + 5 = Call + PV of Rs.100
➢ 95 + 5 = Call + 97.04
➢ Call = Rs.2.96

Part (ii)
➢ Share + Put = Call + PV of exercise Price
➢ Share + 3 = 4 + 97.04
➢ Share = Rs.98.04

Part (iii)
➢ Share + Put = Call + PV of exercise Price
➢ 102 + Put = 8 + 97.04
➢ Put = 3.04

Part (iv)
➢ PV of dividend income is Rs.0.99
➢ Call value will fall by 0.99 due to dividend income and hence value of call would be
Rs.1.97
➢ Share value will increase by 0.99 due to dividend income and hence revised share price
would be Rs.99.03
➢ Put value will increase by Rs.0.99 due to dividend income and hence value of put will
be Rs.4.03

2. Risk Neutral model – May 2013 RTP

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3. Calculation of probability of price rise – May 2012

4. Valuation of option – May 2013

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5. Valuation of option – May 2016 RTP

6. Valuation of option – May 2017 RTP

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7. Miscellaneous – Expected value – November 2012

8. Option valuation – November 2017

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9. Option valuation – November 2015

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10. Option valuation – Nov 2019 RTP:

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Topic 21: Interest rate futures and options

1. Interest rate caps and floors – May 2013 RTP

2. Interest rate caps and floors – May 2013 RTP

3. Interest rate caps and floors – May 2014 RTP

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4. Caps – November 2016 RTP

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Topic 22: Forward Rate Agreements

1. FRA – May 2013, November 2018 RTP

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2. FRA (May 2017 RTP)

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3. FRA – November 2014 RTP

4. FRA – May 2014 RTP

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Topic 23: Interest Rate Swaps

1. Interest rate swap – November 2016 RTP

2. Interest rate swaps – November 2017 RTP

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3. Evaluation of interest swap arrangement – November 2015 RTP

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4. Calculation of interest rate (May 2017 RTP, May 2018)

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Topic 24: Rights Issue and Buyback

1. Rights issue – November 2014 RTP, Nov 2018 RTP

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2. Rights issue – May 2014 RTP

3. Buyback of shares – November 2013 RTP

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Topic 25: Valuation of Shares

1. Valuation of share – Beta and cost of equity – May 2017 RTP

Existing ke = Rf + Beta (Rm – Rf) = 9% + 1.5(13%-9%) = 15%
New ke = Rf + Beta (Rm – Rf) = 9% + 1.75(13%-9%) = 16%
Share price as per existing Ke = D1/(Ke-G) = 2.14/ (0.15-0.07) = Rs.26.75
Share price as per new Ke = 2.14/ (0.16 – 0.07) = Rs.23.78

2. Step-up growth model – November 2015

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3. Valuation of share – May 2014

4. Valuation of share – dividend discount model – May 2013, Nov 2018 RTP

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5. Valuation of shares – November 2013

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6. Subjective assessment of cost of equity – May 2017 RTP

7. Valuation of share – Free cash flow approach – November 2014 RTP

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8. Valuation of share – May 2016 RTP

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9. Valuation of shares – November 2015 RTP

10. Calculation of Number of GDR and Cost of GDR – November 2014, May 2018

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11. Valuation of share:

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12. Valuation of share – Nov 2019 RTP

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Topic 26: Valuation of Convertible Instruments

1. Issue of convertible preference shares – May 2017

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2. Convertible bond – May 2017 RTP, May 2018

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3. Convertible bond – November 2016 RTP

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Topic 27: Economic Value Added

1. Calculation of EVA - November 2012

2. Calculation of EVA – May 2014

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3. Calculation of EVA – May 2015 RTP

4. Concept of EVA dividend – November 2015 RTP

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5. Calculation of EVA – November 2013 RTP

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6. Calculation of EVA – May 2018

7. Calculation of EVA – May 2018 (Old)

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Topic 28: Bond Valuation

1. Bond valuation – May 2016

2. Calculation of Minimum Price – May 2015 RTP

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3. Convertible bonds – November 2016

4. Bond valuation – November 2013

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5. Duration and volatility (November 2015 – 5 Marks)

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6. Duration (May 2012 RTP)

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7. Portfolio creation based on duration – November 2015

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8. Bond refunding - November 2016 RTP

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9. Bond refunding – May 2014 RTP

10. Calculation of duration – May 2014 RTP

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11. Bond refunding – May 2013

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12. Bond valuation – May 2015

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13. Portfolio valuation – May 2017 RTP

14. Miscellaneous - Calculation of forward rates – November 2015 RTP

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15. Calculation of forward rates – November 2016 RTP

16. Portfolio valuation – November 2017 RTP

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17. Miscellaneous – November 2012

18. Calculation of Exponential Moving Average – May 2017 RTP, May 2018

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19. Valuation of bond with option of extension of life– November 2018 RTP

20. Valuation of convertible debentures – May 2018

21. Intrinsic value of bond – May 2019 RTP

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22. Computation of bond spread:

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23. Bond valuation – Nov 2018:

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Topic 29: Basics of Portfolio Theory

1. Calculation of expected return and standard deviation – May 2017

Price Probability Return ER d pd2
115 0.1 -4.17 -0.42 -11.25 12.66
120 0.1 0.00 0.00 -7.08 5.02
125 0.2 4.17 0.83 -2.92 1.70
130 0.3 8.33 2.50 1.25 0.47
135 0.2 12.50 2.50 5.42 5.87
140 0.1 16.67 1.67 9.58 9.18
7.08 34.90
➢ Expected return = 7.08%
➢ Standard deviation = Square root (34.90) = 5.91%

2. Calculation of standard deviation – November 2012 RTP

3. Efficient portfolio – November 2017 RTP

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4. Share buy/Sell decision – May 2016

Particulars Existing scenario Revised scenario
Cost of equity (Rf + Beta (Rm-Rf) 20.40% 15%
Growth rate 5% 9%
Dividend of year 1 2.10 2.18
Fair market price (D1/(ke-G) 13.64 36.33
Valuation Over-valued Under-valued
Action Sell Buy

5. Valuation of share – May 2016

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6. Valuation of share – November 2014

7. Calculation of risk and return – November 2017

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8. Valuation of share and CAPM – November 2014, May 2018

9. Portfolio return and standard deviation:

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10. Portfolio Basics – May 2018

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Topic 30: Optimum Weights for Risk Reduction

1. Risk reduction – November 2012 RTP

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Topic 31: Security and Portfolio Beta

1. Risk premium calculation – May 2016 RTP

2. Standard deviation calculation – May 2013 RTP

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3. Portfolio calculation – November 2016

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4. Portfolio Beta – November 2012, November 2018 RTP

5. Portfolio Beta – May 2014 RTP

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6. Modification in portfolio Beta – November 2016 RTP

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7. Portfolio Beta – May 2017 RTP, November 2018 RTP

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8. Calculation of Beta – May 2015 RTP

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9. Return for portfolio using CAPM – May 2015, May 2018

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10. Return of portfolio using CAPM – November 2013, May 2018

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11. Beta calculation – May 2016 RTP

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12. Beta calculation – May 2017

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13. Share buy/sell decision – November 2015 RTP

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Topic 32: Systematic and Unsystematic Risk

1. Systematic and unsystematic risk – November 2015 RTP

2. Systematic and unsystematic risk – May 2016 RTP

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3. Portfolio Beta – May 2015

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4. Portfolio standard deviation – November 2016 RTP

WN 1: Computation of Portfolio Beta
Random
Security Beta Error, Weight
σ€i Product
A 1.5 6 0.3 0.45
B 1.1 10 0.2 0.22
C 1.3 4 0.2 0.26
D 0.8 12 0.2 0.16
E 0.9 7 0.1 0.09
1.18

Portfolio Variance = Systematic Risk + Unsystematic Risk

Systematic Risk = (Beta x Beta x SD of Market x SD of Market)
Systematic Risk = (1.18 x 1.18 x 20 x 20) = 556.96
Unsystematic Risk = Weighted average of individual unsystematic risks (random error)
Unsystematic Risk = (6 x 0.3)2 +(10 x 0.2)2 + (4 x 0.2)2 +(12 x 0.2)2 +(7 x 0.1)2
Unsystematic Risk = 14.13
Portfolio Variance = 556.96 + 14.13 = 571.09
Portfolio Risk (SD) = 23.9%

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5. Portfolio Return and Beta:

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Topic 33: Characteristic line, CML and SML

1. Characteristic line – November 2016

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2. Characteristic line – May 2015 RTP

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3. Security market line& capital market line– May 2014 RTP

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Topic 34: Factor Sensitivity Analysis and Arbitrage Pricing Theory

1. Arbitrage pricing theory – May 2013 RTP

2. Arbitrage pricing theory:

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3. Computation of return premium:

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Topic 35: Beta and Leverage

1. Beta calculation – May 2015 RTP

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2. Beta calculation through Proxy – November 2017 RTP

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Topic 36: Portfolio Strategies

1. Portfolio re-balancing – May 2012

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Topic 37: Financial Services
Question No.1 (November 2016 RTP, May 2013 RTP, November 2012 RTP)

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Question No.2 (May 2016 RTP)

Question No.3 (May 2016 RTP)

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Question No.4 (May 2016 RTP)

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Question No.5 (November 2015 RTP, November 2013)

Question No.6 (May 2015 RTP)

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Question No.7 (November 2014 RTP)

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Question No.8 (May 2013 RTP)

Question No.9 (November 2016)

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Question No.10 (May 2015)

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Question No.11 (November 2014)

Question No.12 (May 2014)

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Question No.13 (May 2017)

Question No.14 (May 2018 RTP)

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Question No.15 (May 2018 (OLD)

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Topic 38:MF Return

1. Calculation of return – May 2013 RTP

WN 1: Calculation of required return of MF:
Particulars Calculation Amount
Return of Mr. A on own 16%
investing
Target return for MF Own return + Recurring expense (%) 18.43%
1 – Initial expense (%)
16% + 1.5%
94.5%
16.93% + 1.5%

WN 2: Calculation of target expense ratio:

Particulars Calculation Amount
Return of Mr. A on own 16%
investing
Target expense ratio 18 % = Own return + Recurring expense 1.07%
(assumed as X) (%)
1 – Initial expense (%)
18% = 16% +X
94.5%
18% = 16.93% + X X = 1.07%

WN 3: Calculation of target initial expense ratio:

Particulars Calculation Amount
Return of Mr. A on own 16%
investing
Target initial expense ratio 18 % = Own return + Recurring expense 3.03%
(assumed as X) (%)
1 – Initial expense (%)
18% = 16% +1.5%
1-X
16.5% = 16% 16.5% - 16.5%x =
16%
1-X
0.5% = 16.5%x X = 3.03%

2. Calculation of return – November 2017 RTP

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3. Calculation of return – May 2016 RTP

Dividend Reinvestment
Particulars
payout of dividend

No. of units purchased 300 300

No of units received from dividend
54
reinvestment (Amount of dividend / 12.50)
Total units at the end of the year 300 354
Amount invested 3675 3675
Dividend income and Capital gain distribution 675
Value of units at the end of the year 3900 4602
Holding period return (in Rs.) 900 927
Holding period return (%) 24.49% 25.22%

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4. Calculation of front-end load and back-end load – May 2018

5. Calculation of fee payable – Nov 2019 RTP

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6. Calculation of NAV – Nov 2018

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Topic 39: Calculation of NAV

1. NAV calculation – November 2013 RTP, May 2018

WN 1: Computation of NAV as on April 1, 2009
Market Market
No of Price value of
Shares shares
shares Per
share (in lacs)
A Limited 10000 19.7 1.97
B Limited 50000 482.6 241.3
C Limited 10000 264.4 26.44
D Limited 100000 674.9 674.9
E Limited 30000 25.9 7.77
Total value of assets 952.38
No of units 8
NAV 119.0475

WN 2: Revised Position as on April 1, 2009

Market value of shares

Shares No of shares Market Price Per share
(in lacs)
A Limited 10000 19.7 1.97
B Limited 50000 482.6 241.3
C Limited 28000 264.4 74.032
D Limited 100000 674.9 674.9
E Limited 30000 25.9 7.77
Cash (50 lacs - value of C purchased) 2.408
Total value of assets 1002.38
No of units (8 lacs + (50 lacs/119.05) 8.4200
NAV 119.0475

WN 3: NAV as on April 2, 2009

Market value of shares

Shares No of shares Market Price Per share

(in lacs)
A Limited 10000 20.3 2.03
B Limited 50000 513.7 256.85
C Limited 28000 290.8 81.424
D Limited 100000 671.9 671.9
E Limited 30000 44.2 13.26
Cash (50 lacs - value of C purchased) 2.408
Total value of assets 1027.872
No of units (8 lacs + (50 lacs/119.05) 8.42
NAV 122.0751

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2. Return calculation - November 2012 RTP

3. Missing NAV – November 2015

WN 1: Calculation of NAV as on 31.03.2008
Particulars Amount
Annualized yield as on 31.03.2008 153.33%
Proportionate return for nine months of 1.7.2007 to 31.03.2008 (153.33% * 9 ÷ 12) 115.00%
Total return for nine months (1,00,000 * 115%) 115,000
Less: Dividend declared as on 31.03.2008 (1,00,000 * 10%) 10,000
Net capital appreciation for nine months 105,000
Total NAV of 10,000 units (Original investment + Capital appreciation) 205,000
NAV per unit (2,05,000/10,000) 20.5
Units received through dividend reinvestment (10,000/20.50) 487.80
Total units as on 31.03.2008 10,487.80

WN 2: Calculation of NAV as on 31.12.2009

Particulars Amount
Dividend income as on 31.12.2009 (10487.80*10*20%) 20,975.60
Total units as on 31.03.2010 11,296.11
Total units as on 31.03.2008 10,487.80
Incremental units allotted on 31.12.2009 (11,296.11 – 10,487.80) 808.31
NAV as on 31.12.2009 (20,975.60/808.31) 25.95

WN 3: Calculation of NAV as on 31.03.2010

Particulars Amount
Annualized yield for 1.7.2007 to 31.03.2010 73.52%
Holding Period 33 Months
Holding Period return (73.52% * 33 ÷ 12) 202.18%
Total returns for holding period (1,00,000 * 202.18%) 202,180
Value of investment as on 31.03.2010 302,180
No of units 11,296.11
NAV per unit 26.75

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4. Calculation of NAV – May 2017 RTP

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5. Calculation of NAV – November 2016 RTP, November 2018 RTP

6. Calculation of NAV and repurchase price - November 2015, November 2018 RTP

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7. Calculation of NAV – November 2014 RTP

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8. Reverse working – Mutual Fund – May 2018 (old)

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Topic 40: Mutual Funds – Performance Evaluation

1. Calculation of Jensen Alpha – May 2017

2. Sharpe & Treynor ratio – May 2016, November 2018 RTP

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3. Calculation of Expected NAV – May 2015

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Topic 41: Money Market Operations

Question No.1 (May 2016 RTP)

Question No.2 (November 2015 RTP)

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Question No.3 (November 2014 RTP, May 2014 RTP, November 2012 RTP, Nov 2018 RTP)

Question No.4 (November 2013 RTP)

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Question No.5 (November 2014, November 2017 RTP)

Question No.6 (May 2014, May 2017)

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Question No.7 (May 2014)

Question No.8 (November 2012)

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Question No.9 (May 2012)

Question No.10 (May 2017)

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Question No.11 (May 2018 RTP)

Question NO.12 (May 2018(OLD)

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Topic 42: International Capital Budgeting
1. International capital budgeting – May 2013 RTP

2. International capital budgeting – November 2015

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3. International capital budgeting – November 2012 RTP

4. International capital budgeting

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5. International capital budgeting – November 2015 RTP

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6. International capital budgeting – May 2017 RTP, November 2018 RTP

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7. International financial management:

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Topic 43: Basics of International Finance

1. Cross rate – May 2017 RTP, November 2018 RTP

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2. Advice on hedging – November 2015 RTP

3. Cross rates – May 2013

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4. Calculation of profit/loss – November 2013

5. Calculation of security return – May 2012

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6. Calculation of rate to be quoted – May 2018(old)

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Topic 44: Premium/Discount and Appreciation/Depreciation

1. Appreciation/depreciation – November 2016

2. Forward gain/loss – November 2014 RTP

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3. Covering an exchange transaction – November 2014

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Topic 45: IRPT and PPT

1. IRPT– November 2012

2. IRPT – May 2013 RTP

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3. IRPT and PPT – November 2017

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4. Calculation of profit/loss – May 2016

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Topic 46: Arbitrage

1. Time arbitrage – May 2016, May 2018

2. Asymetrical rates – May 2016 RTP

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3. Triangular arbitrage – May 2017 RTP

4. Triangular arbitrage – November 2014 RTP

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Topic 48: Leading and Lagging

1. Leading and lagging – November 2012

2. Leading and lagging – May 2015

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3. Leading and lagging – November 2014

4. Leading and lagging – May 2015 RTP

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Topic 49: Netting

1. Netting – November 2015 RTP

2. Computation of net exposure:

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Topic 50: Forward Contract

1. FC – Importer – November 2012 RTP

2. Calculation of profit/loss – November 2016

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3. Decision on forward cover – May 2014, Nov 2018 RTP

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4. Early cancellation (November 2015 – 5 Marks)

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5. Leading and lagging& FC-Cancellation – May 2012, May 2018 RTP

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6. Roll over – importer – May 2015 RTP

7. Cash discount and cost calculation – November 2017 RTP

8. Customer not appearing on due date - May 2015, May 2018

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9. Customer not appearing on due date – November 2016

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10. Rate of discount:

11. Early honour:

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Topic 51: Money Market Hedge

1. MMH exporter
WN 1: Calculation of receipt under Money Market Hedge and forward contract
Dollar asset 3,50,000 after 3 months
To create Matching liability
Day 0
Take USD Loan (3,50,000/1.0225) 342,298.29 USD
Convert into GBP (342,298.29/1.5905) 215,214.27 GBP
Invest GBP 215,214.27 GBP
Day 90
Receive money from customer 350,000.00 USD
Repay loan 350,000.00 USD
GBP maturity under MMH (Deposit + 1.25%) 217,904.44 GBP

GBP receipt under forward contract route 216,852.54 GBP

WN 2: Calculation of receipt under Money Market Hedge with taxes

Dollar asset 3,50,000 after 3 months
To create Matching liability
Day 0
Take USD Loan (3,50,000/1.0135) 345,337.94 USD
Convert into GBP (342,298.29/1.5905) 217,125.39 GBP
Invest GBP 217,125.39 GBP
Day 90
Receive money from customer 350,000.00 USD
Repay loan 350,000.00 USD
GBP maturity under MMH (Deposit + 0.875%) 219,025.24 GBP

2. MMH exporter - November 2012 RTP

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3. Money Market Hedge:

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Topic 52: Exchange Position Versus Cash Position

1. Exchange position versus cash position – May 2013 RTP

2.Nostro, Vostro and Loro account – November 2013 RTP

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Topic 54: Currency Swaps

1. Structuring a swap arrangement:

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2. Hedging currency exposure – May 2013 RTP

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Topic 55: Multiple Forex Hedging Strategies

1. Comprehensive – November 2015

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2. Comprehensive – November 2016 RTP

3. Comprehensive – November 2016 RTP

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4. Comprehensive – November 2015 RTP

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5. Options versus forward contracts – November 2013

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6. FC versus option – November 2015

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7. Forward contract versus money market hedge – May 2015 RTP

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8. Multiple forex hedging strategies – November 2017

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9. Investment decision – November 2013, May 2018 RTP

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10. Comprehensive question – November 2018 RTP

11. Investment decision – Nov 2018

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Topic 56: Synergy gain and swap ratio

1. Swap ratio – May 2016 RTP

2. Swap ratio – May 2014 RTP

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3. Swap ratio – November 2012 RTP

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4. Calculation of synergy gain – May 2016, Nov 2018 RTP

5. Swap ratio – November 2015

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6. Swap ratio and synergy gain – November 2015

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7. Swap ratio – May 2013

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8. Swap ratio – November 2014

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9. Impact of merger – November 2015 RTP

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10. Calculation of true cost of merger – November 2014

11. Calculation of value of companies – May 2015 RTP

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12. Calculation of available liquidity – May 2015 RTP

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13. Calculation of free float market cap – November 2013, May 2018

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14. Swap ratio – May 2012

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15. Fixing swap ratio – May 2015

16. Swap ratio – May 2018 RTP, May 2018

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17. Swap ratio – November 2017

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18. Fixing swap ratio – May 2015, May 2018

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19. Synergy gain:

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Topic 57: Valuation of Business

1. Valuation of strategy – May 2017 RTP

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2. Valuation of strategy – May 2016

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3. Valuation of business – November 2016

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4. Valuation of business (November 2018 RTP)

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5. Calculation of minimum, maximum and floor value – May 2015 RTP

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6. Calculation of FCFF and valuation – May 2014

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7. Calculation of beta of combined entity – November 2016 RTP

8. Net assets valuations and earnings capitalization – November 2012

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9. Net assets method and earnings capitalization method – May 2017 RTP

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10. Business valuation – November 2014 RTP, November 2018 RTP

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11. Valuation based on WACC – November 2013

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12. Range of valuation – May 2013

13. Valuation of debt and equity – May 2013 RTP

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14. Consideration for promoters – May 2014

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15. Valuation of firm and valuation of equity – November 2012 RTP

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16. Corporate restructuring – November 2014 RTP, November 2018 RTP

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17. Financial restructuring – May 2017

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18. Valuation as per different methods – November 2017 RTP, Nov 2018 RTP

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19. Cash flow based valuation – November 2017 RTP

20. Valuation and allocation of shares – November 2017 RTP

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21. Chop-shop approach – May 2018 RTP

22. Impact of wrong WACC on valuation – November 2014, November 2018

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23. Valuation with WACC – November 2014 RTP

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