CA FINAL

ADVANCE FINANCIAL MANAGEMENT

Full Test-1

QUESTION PAPER

(TOTAL MARKS 100)

Q-1. Case Study 1

Finco Enterprises Ltd., a prominent player in the dynamic Indian financial services market,
navigates a complex and ever-changing landscape with strategic acumen. As of March 31,
2023, the company holds a robust portfolio valued at Rs. 20,00,000, reflective of its diverse
financial instruments and investments. In a calculated move to optimize risk exposure, Finco
Enterprises has decided to divest 30% of its portfolio holdings, underlining its commitment
to prudent risk management and portfolio diversification.

Among the various assets in its portfolio, Finco Enterprises holds a significant stake in ABC
Limited, with 5,000 shares. The decision to divest a portion of these shares aligns with the
company's broader strategy to mitigate market fluctuations and enhance its overall risk-
adjusted returns.

In the realm of foreign exchange, Finco Enterprises engages in forward contracts to manage
currency risk. The initial plan involved selling USD 1,00,000 on December 31, 2020, at an
exchange rate of INR/USD 75.40. However, responding to the importer's request, the
company received the remittance on November 30, 2020, ahead of the due date. This
dynamic adjustment showcases the company's flexibility and client-centric approach. The
inter-bank exchange rates on November 30, 2020, with a spot rate of 75.22-75.27 and a
one-month premium of 10/15, provide valuable context for understanding the intricacies of
Finco Enterprises' foreign exchange transactions. Use interest rate as 18%

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The company is not only active in equity and foreign exchange markets but also strategically
engages in interest rate derivative transactions. With 6-month and 12-month LIBOR rates at
9.60% per annum and 9% per annum, respectively, Finco Enterprises navigates the nuances
of interest rate fluctuations. The contrast between the fair Forward Rate Agreement (FRA)
rate for the period from month 6 to 12 (8.00% per annum) and the actual FRA rate (10.50%-
11.00%) showcases the company's ability to make informed decisions amid changing
interest rate dynamics.

Operating in a highly competitive industry, Finco Enterprises pays meticulous attention to its
capital structure, maintaining a capital gearing ratio of 0.75. The equilibrium of equity share
capital (Rs. 100), reserves and surplus (Rs. 50), preference capital (Rs. 100), and debt (Rs.
200) underscores the company's commitment to financial resilience. The sensitivity of the
required return for the industry, subject to a 2 basis point change for every 1 basis point
deviation in the capital gearing ratio, reflects Finco Enterprises' strategic approach to
balancing risk and return. Required return of industry = 10%.

In addition to its financial instruments, Finco Enterprises adopts a forward-looking approach

through cash flow forecasting. The probability analysis, with a 40% chance of generating a
cash flow of Rs. 50,000 in year 1, and a subsequent 20% probability of achieving a cash flow
of Rs. 24,000 in year 2, provides the company with valuable insights for resource allocation
and strategic planning.

In conclusion, Finco Enterprises Ltd.'s multifaceted approach to financial management

encompasses equity investments, foreign exchange transactions, interest rate derivatives,
and meticulous cash flow forecasting. The company's proactive strategies, combined with its
adaptability to market dynamics, position it as a resilient player in the competitive financial
services industry. This comprehensive case study highlights Finco Enterprises' commitment
to strategic decision-making and risk optimization in pursuit of sustained financial success.

MCQs:

1. How many shares of ABC Limited will Finco Enterprises hold in its new portfolio after
reducing risk?

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 a. 3,500 shares

b. 1,500 shares

c. 5,000 shares

d. Nil

2. How much interest would the bank charge or pay to Finco Enterprises for the early
remittance?

a. Rs. 197 (Finco Enterprises will pay the bank)

b. Rs. 197 (The bank will pay Finco Enterprises)

c. Rs. 275 (Finco Enterprises will pay the bank)

d. Rs. 275 (The bank will pay Finco Enterprises)

3. How can Finco Enterprises exploit the arbitrage opportunity based on the given LIBOR
and FRA rates?

a. Borrow for 12 months at 9% per annum and invest for 6 months at 9.60% and the
remaining 6 months at the actual FRA rate of 11.00%

b. Borrow for 12 months at 9% per annum and invest for 6 months at 9.60% and the
remaining 6 months at the actual FRA rate of 10.50%

c. Invest for 12 months at 9% per annum and borrow for 6 months at 9.60% and the
remaining 6 months at the actual FRA rate of 11.00%

d. Invest for 12 months at 9% per annum and borrow for 6 months at 9.60% and the
remaining 6 months at the actual FRA rate of 10.50%

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4. What is the required return for Finco Enterprises given the industry's capital gearing ratio
and the company's higher gearing?

a. 12.50%

b. 11.25%

c. 8.75%

d. 7.50%

5. What is the probability of Finco Enterprises generating a cash flow of Rs. 24,000 in year 2?

a. 20%

b. 80%

c. 8%

d. 40%

(2×5=10 Marks)

Case Study 2

Xeta Corp., a multinational conglomerate with a diverse portfolio spanning technology,

manufacturing, and financial services, stands at the forefront of the global business
landscape. With a market capitalization of Rs. 40,00,000 and a listing on the national stock
exchange, the company is a prominent player in the eyes of investors, analysts, and
stakeholders alike.

The conglomerate's structure includes a 40 percent stake held by its promoters,

contributing to a robust governance framework. However, recent allegations of excessive
remuneration for top management, particularly the promoters and their family members,

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have cast a shadow on the company's governance practices. It has been reported that the
promoters have received an excess remuneration of Rs. 2,00,000 per year, and the present
value of these payments over an infinite period is estimated at Rs. 15,00,000. Such
revelations have sparked concerns among shareholders and prompted discussions about
potential shifts in the ownership structure, including the possibility of the promoters
relinquishing their controlling interest.

The outstanding shares of Xeta Corp. total 1,00,000, reflecting a widely held company with a
broad shareholder base. The ownership dynamics and the ongoing discussions about
excessive remuneration underscore the importance of corporate governance and the
delicate balance between promoter control and shareholder interests. Shareholders and
industry observers are keenly watching how these discussions unfold, as they could have
far-reaching implications for the company's direction and its standing in the financial
markets.

In addition to internal matters, Xeta Corp. has been proactive in pursuing growth
opportunities through strategic mergers and acquisitions. The recent acquisition of Target
Co., a smaller player in the same industry, for a consideration of Rs. 112.50 lacs, showcases
the company's commitment to expansion and market dominance. The valuation at the time
of the merger, with Xeta Corp. valued at Rs. 540 lacs and Target Co. at Rs. 90 lacs, highlights
the strategic decision-making and financial acumen driving such moves. The synergy gain of
Rs. 45 lacs adds another layer to the narrative, emphasizing the potential benefits derived
from the amalgamation of complementary businesses.

The exchange ratio of 1:3 in the merger, meaning that for every one share of Target Co., its
shareholders received three shares of Xeta Corp., is a crucial factor in understanding the
distribution of ownership and the impact on the consolidated entity. This aspect is of
particular interest to existing shareholders, as it directly influences their stake in the newly
formed entity and, consequently, their voice in corporate matters.

The acquisition of Target Co. has undoubtedly triggered interest in the financial markets,
leading stakeholders to evaluate the potential impact on Xeta Corp.'s overall valuation and
market standing. The company's reputation for strong financial performance in the industry

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enhances the significance of this strategic move. Investors are closely monitoring
developments, seeking insights into how the integration process unfolds and the synergies
translate into tangible value for the shareholders.

Against this backdrop, Xeta Corp.'s investment team, led by experienced technical analysts,
plays a pivotal role in navigating the complexities of the stock market and managing the
company's investment portfolio. These professionals employ sophisticated analytical
techniques, including the use of moving averages, to identify signals that inform buy or sell
decisions. The recent observation that the stock price of one of their portfolio companies,
Company XYZ, crossed above its 50-day moving average, is a testament to the team's
vigilance in identifying potential opportunities and risks in the market.

Moreover, the analysts at Xeta Corp. have been actively engaged in portfolio analysis and
risk management exercises. The co-variance calculation of Security A and Security B in the
portfolio, reported at 0.0200, sheds light on the degree of their joint variability. This metric
is crucial for understanding how these securities move in relation to each other and how
their interaction contributes to overall portfolio risk. The standard deviations (SD) of
Security A (0.40) and Security B (0.20) provide insights into the individual risk levels of these
securities, essential for constructing a well-balanced and diversified portfolio.

The investment team's interest in determining the correlation coefficient between Security
A and Security B further emphasizes their commitment to risk management. The correlation
coefficient, which measures the degree to which the prices of two securities move in
relation to each other, is a critical tool for achieving optimal diversification and reducing
overall portfolio risk. By exploring the interdependence of these securities, the team can
make informed decisions about portfolio construction and asset allocation.

Beyond direct equity holdings, Xeta Corp. diversifies its investments through undiversified
funds – namely, Fund A, Fund B, and Fund C. These funds play a crucial role in the overall
portfolio, contributing to the company's risk-return profile. The Sharpe Ratios of these funds
(1.5, 1.65, and 1.25, respectively) provide a measure of their risk-adjusted performance,
indicating how well they generate returns relative to the level of risk taken. The Treynor
Ratios (8, 9, and 10, respectively) assess their returns in relation to systematic risk, offering

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additional insights into the funds' ability to generate excess returns compared to a risk-free
rate.

The investment team is currently in the process of ranking these undiversified funds based
on their performance metrics. This ranking will inform decisions regarding the allocation of
resources within the portfolio, emphasizing a strategic approach to risk and return
management. The nuanced evaluation of these funds is crucial, considering the diverse risk
profiles and return expectations associated with each.

In conclusion, the intricate narrative of Xeta Corp.'s corporate journey unfolds against the
backdrop of governance discussions, strategic acquisitions, and meticulous investment
strategies. The company's commitment to sound financial practices and its ability to adapt
to market dynamics position it as a key player in the global business environment. The
interplay between internal governance issues, market trends, and portfolio management
showcases the multifaceted decision-making process that defines Xeta Corp.'s pursuit of
sustained success in the competitive global business landscape. The ongoing developments,
including discussions about promoter control, the impact of the Target Co. acquisition, and
the strategic decisions made by the investment team, all contribute to the rich tapestry of
Xeta Corp.'s corporate narrative.

MCQs:

6. A technical analyst at Xeta Corp. is using moving averages to identify potential buy or sell
signals. The analyst observes that the stock price of Company XYZ has recently crossed
above its 50-day moving average. Which interpretation is most likely based on this
observation?

a. Bullish signal indicating a potential uptrend in the stock.

b. Bearish signal indicating a potential downtrend in the stock.

c. Neutral signal indicating the stock is likely to trade sideways.

d. Inconclusive signal requiring further analysis of other indicators.

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7. What is the correlation coefficient between Security A and Security B in Xeta Corp.'s
portfolio, given the following information:

Co-variance of Security A and B = 0.0200

SD of Security A = 0.40

SD of Security B = 0.20

a. +0.10

b. +0.05

c. +0.50

d. +0.25

8. Given the following information about Xeta Corp.'s investment in undiversified funds:

Sharpe Ratio of Fund A = 1.5

Sharpe Ratio of Fund B = 1.65

Sharpe Ratio of Fund C = 1.25

Treynor ratio of Fund A = 8

Treynor Ratio of Fund B = 9

Treynor Ratio of Fund C = 10

Rank the above three funds in terms of preference.

a. C, A, and B

b. B, A, and C

c. A, B, and C

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d. C, B, and A

9. Given the current market capitalization of Xeta Corp. is Rs. 40,00,000, and the promoters
hold a 40 percent stake in the company, what should be the minimum price per share paid
by the company for the promoters to relinquish their controlling interest, considering the
excess remuneration of Rs. 2,00,000 per year with a present value of Rs. 15,00,000 for an
infinite period?

a. Rs. 40 per share

b. Rs. 45 per share

c. Rs. 77.50 per share

d. Rs. 80.00 per share

10. Consider the following information regarding Xeta Corp.'s acquisition of Target Co.:

Value of Xeta Corp. (Acquiring Company) = Rs. 540 lacs

Value of Target Co. (Target Company) = Rs. 90 lacs

Synergy gain from the merger = Rs. 45 lacs

Number of shares of Xeta Corp. = 30 lacs

Number of shares of Target Co. = 18 lacs

Exchange ratio = 1:3

How much was the consideration paid by Xeta Corp. for the acquisition of Target Co.?

a. Rs. 180 lacs

b. Rs. 225 lacs

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c. Rs. 112.50 lacs

d. Rs. 90 lacs

(2×5=10 Marks)

MCQs

11. As a financial consultant, Mr. Thompson is advising his client, Ms. Martinez, on effective
financial planning. He explains the critical components of financial planning and its impact
on an individual's life goals. Ms. Martinez is particularly interested in the outcomes of
financial planning for corporate entities. Mr. Thompson outlines the following scenarios:
Which of the following statements accurately reflects an outcome of financial planning for
corporate entities?

A) Financial planning focuses exclusively on individual goals and does not offer relevant
insights for corporate performance evaluation.

B) Financial planning for corporate entities involves setting personal financial goals for top
executives to align with the company's mission.

C) Financial planning leads to the establishment of financial objectives that are not required
to be consistent with the corporate mission and objectives.

D) Financial planning for corporate entities results in financial decision-making, measures

like ratio analysis, and evaluation of corporate performance.

12. Kamleshwara is a financial analyst working for a major investment firm. She is tasked
with assessing the potential risks associated with the firm's investment portfolios. She
decides to use VAR (Value at Risk) to measure the maximum possible loss that the portfolios
might experience within a specific time period and confidence level. She selects a
confidence level of 95% and a time horizon of one week for her analysis. Kamleshwara

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calculates that the VAR for a particular portfolio is ₹500,000. What does this ₹500,000 VAR
value represent in the context of Kamleshwara's analysis?

A) The expected return of the portfolio over the next week.

B) The average loss the portfolio is likely to experience over the next week.

C) The maximum possible loss the portfolio might experience over the next week with 95%
confidence.

D) The total value of the portfolio over the next week.

13. ABC Limited is evaluating a new piece of equipment that will automatically install power
windows in cars coming off the production line. The equipment cost is Rs.35,00,000, and the
firm estimates that the present value of the annual cost savings from installing the
equipment is Rs.28,00,000. The production manager is also considering purchasing a
module that will allow the equipment to be used for company’s SUV production. The
additional module represents a real option with a cost of Rs.11,00,000. The production
manager estimates that adding the module would give cost savings of an additional
Rs.20,00,000. What is the NPV of the project before and after considering the real option?

a. -7,00,000 and 2,00,000

b. -7,00,000 and 18,00,000

c. 13,00,000 and 2,00,000

d. -7,00,000 and 9,00,000

14. Assume you are attempting to estimate the equilibrium expected return for a portfolio
using a two-factor arbitrage pricing theory (APT) model. One factor is changes in the 30-year
T-bond rate and the other factor is the percentage growth in gross national product (GNP).
Assume that you have estimated the risk premium for the interest rate factor to be 0.02,

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and the risk premium on the GNP factor to be 0.03. The sensitivity of the portfolio to the
interest rate factor is -1.2 and the portfolios sensitivity to the GNP factor is 0.80. Given a risk
free rate equal to 0.03, what is the expected return for the asset?

a. 5.0%.

b. 7.0%

c. 2.4%.

d. 3.0%.

15. What differentiates the investment strategies of Hedge Funds from traditional mutual
funds and index funds?

a. Hedge Funds primarily focus on passive investing, aiming to replicate specific market
indices, whereas traditional mutual funds and index funds employ active trading strategies
to generate alpha.

b. Hedge Funds utilize leverage and derivatives extensively to amplify returns and manage
risk, whereas traditional mutual funds and index funds do not engage in such advanced
strategies.

c. Both Hedge Funds and traditional mutual funds follow a long-only investment approach,
while index funds adopt a short-selling strategy to profit from declining markets.

d. Hedge Funds exclusively invest in high-risk assets, such as cryptocurrencies and startup
companies, while traditional mutual funds and index funds prioritize low-risk securities

16. Company A has issued 10% bonds of Rs.50,00,000. Investor A has purchased bonds
worth Rs.10,00,000 but is worried about the risk of default. He therefore wants protection
against the risk of default and hence has purchased protection from Axis Bank in terms of

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CDS contract. Company A has defaulted and the recovery rate is 25%. How much is the cash
settlement amount to be paid by Axis Bank to Investor A?

a. Rs.37,50,000

b. Rs.10,00,000

c. Rs.50,00,000

d. Rs.7,50,000

17. Rohan is a financial analyst who is evaluating forward rates for different currencies. He
notices that the forward rate for USD/INR is greater than the spot rate, while the forward
rate for EUR/INR is less than the spot rate. What can Rohan conclude from these
observations, and how can he express the premium or discount in percentage terms for
both currencies? 55: Assumed spot rate for USD/INR, 60: Assumed forward rate for USD/INR

A) Rohan can conclude that USD is at a premium and EUR is at a discount. The premium for
USD is 18.18% and the discount for EUR is 16.61%.

B) Rohan can conclude that USD is at a discount and EUR is at a premium. The discount for
USD is 16.61% and the premium for EUR is 18.18%.

C) Rohan can conclude that both USD and EUR are at a premium. The premium for both
currencies is 18.18%.

D) Rohan can conclude that both USD and EUR are at a discount. The discount for both
currencies is 16.61%.

18. Rahul, a financial analyst, is exploring various methods of hedging interest rate risk for
his company. He's particularly intrigued by the concept of "Interest Rate Collars" and wants
to test his understanding of this hedging strategy. Which of the following statements
accurately describes the concept of an "Interest Rate Collar"?

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A) An Interest Rate Collar involves the purchase of a Floor and the simultaneous purchase of
a Cap to protect against interest rate fluctuations on both the high and low sides.

B) An Interest Rate Collar involves the purchase of a Cap and the simultaneous purchase of a
Floor to protect against interest rate fluctuations on both the high and low sides.

C) An Interest Rate Collar involves the purchase of a Cap and the simultaneous sale of a
Floor to limit exposure to interest rate fluctuations on the high side.

D) An Interest Rate Collar involves the purchase of a Floor and the simultaneous sale of a
Cap to limit exposure to interest rate fluctuations on the low side.

19. Amit, a financial analyst, is evaluating the performance of "IndianGrowth Corp" using
various financial performance metrics. He's particularly interested in understanding the
concepts of Market Value Added (MVA) and Shareholder Value Analysis (SVA) to assess the
company's performance more comprehensively. While discussing MVA and SVA with his
colleague Priya, Amit learns that MVA represents the market's perception of a company's
true value added, and it is derived from the difference between the current market value
and invested capital. On the other hand, SVA goes beyond historical figures like NOPAT and
takes into account future earnings, cash flows, and investment opportunities. Which of the
following statements accurately reflects the primary difference between MVA and SVA?

A) MVA is solely concerned with historical financial metrics, while SVA incorporates future
earnings and investment opportunities into its analysis.

B) MVA focuses on the market's view of a company's value added, while SVA primarily
evaluates the efficiency of a company's management in generating returns.

C) MVA and SVA are identical concepts, just described differently in different contexts.

D) MVA and SVA both prioritize accounting-based metrics over market-based metrics in
their evaluations.

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20. Pre-merger MPS of A Limited = Rs.100; Pre-merger MPS of B Limited = Rs.200; A is
acquiring B Limited and the expected post-merger MPS is Rs.150. Exchange ratio agreed is
2:1. What is the gain/loss per share for A Limited and B Limited shareholders?

a. Gain of Rs.50 and Gain of Rs.100

b. Gain of Rs.50 and loss of Rs.50

c. Gain of Rs.50 and loss of Rs.100

d. Gain of Rs.100 and Gain of Rs.50

(1×10=10 Marks)

Descriptive Questions

Question 1 is compulsory; attempt any four from the rest five questions

Q-1. (a) An investor is holding 5,000 shares of X Ltd. Current year dividend rate is Rs.
3/share. Market price of the share is Rs. 40 each. The investor is concerned about several
factors which are likely to change during the next financial year as indicated below:

Particulars Current Year Next Year

Dividend paid/anticipated per share (Rs.) 3 2.5

Risk free rate 12% 10%

Market Risk premium 5% 4%

Beta Value 1.3 1.4

Expected growth 9% 7%

In view of the above, advise whether the investor should buy, hold or sell the shares.

(6 Marks)

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Q-2. (b) Mr. A has invested in three Mutual Fund (MF) schemes as per the details given
below:

Particulars MF ‘A’ MF ‘B’ MF ‘C’

Date of Investment 01-11-2015 01-02-2016 01-03-2016

Amount of Investment 1,00,000 2,00,000 2,00,000

(Rs.)

Net Asset Value at entry 10.30 10.00 10.10

date (Rs.)

Dividend Received up to 2850 4500 Nil

31-3-2016 (Rs.)

NAV as on 31-3-2016 (Rs.) 10.25 10.15 10.00

Assume 1 year = 365 days. Show the amount of rupees up to two decimal points.

You are required to find out the effective yield (up to three decimal points) on per annum
basis in respect of each of the above three Mutual Fund (MF) schemes up to 31-3-2016.

(4 Marks)

Q-1. (c) "The journey of an organization begins with money and ultimately ends with
money." Explain this statement to clearly understand the intersection between strategic
management and financial policy.

(4 Marks)

Q-2 (a) Closing values of BSE Sensex from 6th to 17th day of the month of January of the
year 200X were as follows

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Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30
days simple moving average of Sensex can be assumed as 15,000. The value of exponent for
30 days EMA is 0.062. Give detailed analysis on the basis of your calculations

(6 Marks)

Q-2. (b) Supreme Limited is interested in expanding its business and planning to install
manufacturing plant in US, for which it requires funds of $ 1 million, net of issue expenses
which amount to 1.5% of the issue size. To finance this project, it proposes to issue GDRs. As
a financial consultant, you are required to compute the number of GDRs to be issued and
cost of the GDR with the help of following additional information.

(i) The expected market price of the share at the time of issue of GDR is ₹ 1065.25.(Face
Value being Rs. 100)

(ii) 3 shares shall underlay each GDR and priced at 5% discount to the market price.

(iii) 30% dividend is expected to be paid with a growth rate of 7%.

(iv) Expected exchange rate is ₹ 69$

(4 Marks)

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Q-2 (c) The following information is extracted from Steady Mutual Fund’s Scheme:

Asset Value at the beginning of the month Rs. 65.78

Annualized return 15%

Distributions made in the nature of Income (per unit) Rs. 0.50

Distributions made in the nature of Capital gain (per unit) Rs. 0.32

You are required to:

1. Calculate the month end net asset value of the mutual fund scheme (limit ^our answers
to two decimals).

2. Provide a brief comment on the month end NAV.

(4 Marks)

Q-3. (a) IM is an American firm having its subsidiary in Japan and JI is a Japanese firm having
its subsidiary in USA. They face the following interest rates:

Company IM JI

USD floating rate Libor + 0.5% Libor + 2.5%

JPY fixed rate 4% 4.25%

IM wishes to borrow USD at floating rate and JI JY at fixed rate. The amount required by
both the companies is same at the current Exchange Rate. A financial institution requires 75
basis points as commission for arranging swap. The companies agree to share the
benefit/loss equally.

You are required to find out

(i) Whether a beneficial swap can be arranged?

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(ii) What rate of interest for both IM and JI?

(10 Marks)

Q-3.(b) What makes an organization sustainable? State the specific steps.

(4 Marks)

OR

Q-3. (b) Discuss briefly the primary participants in the process of Securitization.

(4 Marks)

Q-4. (a) Mr. X established the following spread on the Delta Corporation’s stock:

(i) Purchased one 3-month Call option with a premium of ₹ 30 and an , exercise price of ₹
550.

(ii) Purchased one 3-month Put option with a premium of ₹ 5 and an exercise price of ₹ 450.

Delta Corporation’s stock is currently selling at ₹ 500. Determine profit or loss, if the price of
Delta Corporation’s :

(i) remains at ₹ 500 after 3 months.

(ii) falls at ₹ 350 after 3 months.

(iii) rises to ₹ 600.

Assume the size of option is 100 shares of Delta Corporation.

(6 Marks)

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Q-4. (b) Elrond Limited plans to acquire Doom Limited. The relevant financial details of the
two firms prior to the merger announcement are:

Elrond Limited Doom Limited

Market price per share ₹ 50 ₹ 25

Number of outstanding shares 20 lakhs 10 lakhs

The merger is expected to generate gains, which have a present value of ₹ 200 lakhs. The
exchange ratio agreed to 0.5.

What is the true cost of the merger from the point of view of Elrond Limited?

(4 Marks)

Q-4. (c) What do you mean by Foreign Currency Convertible Bonds (FCCBs)? What are the
advantages of FCCBs?

(4 Marks)

Q-5. (a) Consider the following information on two stocks, A and B.

Year Return on A (%) Return on B (%)

2006 10 12

2007 16 18

You are required to determine:

(i) The expected return on a portfolio containing A and B in the proportion of 40% and 60%
respectively.

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(ii) The Standard Deviation of return from each of the two stocks.

(iii) The covariance of returns from the two stocks.

(iv) Correlation coefficient between the returns of the two stocks.

(v) The risk of a portfolio containing A and B in the proportion of 40% and 60%.

(8 Marks)

Q-5. (b) Mr. A is thinking of buying shares at ₹ 500 each having face value of ₹ 100. He is
expecting a bonus at the ratio of 1:5 during the fourth year. Annual expected dividend is
20% and the same rate is expected to be maintained on the expanded capital base. He
intends to sell the shares at the end of seventh year at an expected price of ₹ 900 each.
Incidental expenses for purchase and sale of shares are estimated to be 5% of the market
price. He expects a minimum return of 12% per annum. Should Mr. A buy the share? If so,
what maximum price should he pay for each share? Assume no tax on dividend income and
capital gain.

(6 Marks)

Q-6.(a) Apex Enterprises is interested in assessing the cash flows associated with the
replacement of the old machine by a new machine. The old machine has a book value of
Rs.90,000 which can be sold for the same amount. It has a remaining life of 5 years, after
which the salvage value is expected to be 'nil'. It is being depreciated annually @ 10% using
the written down value method.

The new machine costs Rs.4 lakhs, and has a resale value of Rs.2.5 lakhs at the end of 5
years. The new machine is expected to save manufacturing costs of Rs.1 lakh p,a.
Investment in working capital remains same. The tax rate applicable to the firm is 50%.

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You, as a Project Analyst, are required to work out the incremental cash flows associated
with the replacement of the old machine and to prepare a statement to be presented to the
management for consideration.

(8 Marks)

Q-6.(b) An investor is considering the purchase of the following Bond:

Face Value ₹ 100

Coupon rate 11%

Maturity 3 years

(i) If he wants a yield of 13%, what is the maximum price he should be ready to pay for?

(ii) If the Bond is selling for ₹ 97.60, what would be his yield?

(6 Marks)

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