CHAPTER

CA Mayank Kothari
2
RISK MANAGEMENT
Question 1
On Tuesday morning (before opening of the capital market) an investor, while going through his bank
statement, has observed that an amount of ₹7 lakhs is lying in his bank account. This amount is available
for use from Tuesday till Friday. The Bank requires a minimum balance of ₹1000 all the time. The
investor desires to make a maximum possible investment where Value at Risk (VaR) should not exceed
the balance lying in his bank account. The standard deviation of market price of the security is 1.5 per
cent per day. The required confidence level is 99 per cent.
Given
Standard Normal Probabilities
z 0.00 .01 .02 .03 0.04 .05 .06 .07 .08 .09
2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890
2.3 .9893 .9896 .9998 .9801 .9904 .9906 .9909 .9911 .9913 .9916
2.4 .9918 .9920 .9922 .9923 .9925 .9929 .9931 .9932 .9934 .9936
You are required to determine the maximum possible investment.
Nov 20 (4 Marks)
Answer:

Particulars Amount (₹)

Amount available in bank account 7,00,000
Minimum balance to be kept 1,000
Available amount which can be used for potential investment for 4 days 6,99,000
Maximum Loss for 4 days at 99% level 6,99,000
Maximum Loss for 1 day at 99 % level = Maximum Loss for 4 days / 3,49,500
√No. of days = 699000/√4
Z Score at 99% Level 2.33
Volatility in terms of Rupees (Maximum Loss/ Z Score at 99% level) 1,50,000
= 349500/ 2.33
Maximum Possible Investment (Volatility in Rupees/ Std. Deviation) 1,00,00,000
= 150000/.015

Question 2
Mr. Bull is a rational risk taker. He takes his position in a single stock for 4 days in a week. He does not
take a position on Friday to avoid weekend effect and takes position only for four days in a week i.e.
Monday to Thursday. He transfers the amount on Monday morning and withdraws the balance on Friday
CA Mayank Kothari

morning. He desires to make a maximum investment where Value At Risk (VAR) should not exceed the
balance lying in his bank account. The position by his manager, as per standing instructions, is taken on
the free balance lying in the bank account in the morning on each Monday.
On Monday morning (before opening of the capital market) he has transferred an amount of ₹11 Crore
to his bank account. A fixed deposit also matured on this Monday. The maturity amount of ₹63,42,560
was also credited to his account by the bank in the morning of the Monday. However, Mr. Bull received
the intimation of the same in the evening. The bank needs a minimum balance of ₹1,000 all the time.
The value of Z score, at the required confidence level of 99 percent is 2.33.
The other information with respect to stocks X and Y, which are under consideration for this week, is as
under:
X Y
Return Probability Return Probability
6 0.10 4 0.10
7 0.25 6 0.20
8 0.30 8 0.40
9 0.25 10 0.20
10 0.10 12 0.10
You are required to recommend a single stock, where maximum investment can be made.
May 23 (8 Marks)
Answer:
(a) Working Notes:
(1) Security X
Return (1) Prob. (2) (1) × (2) Dev. Dev.2 Dev.2 × Prob.
6 0.10 0.60 -2 4 0.40
7 0.25 1.75 1 1 0.25
8 0.30 2.40 0 0 0
9 0.25 2.25 1 1 0.25
10 0.10 1.00 2 4 0.40
8.00 1.30
Expected Return (Rx) = 8.00%
Variance (σ2X ) = 1.30
Standard Deviation ( σX ) = √1.30 = 𝟏. 𝟏𝟒
(2) Security Y
Return (1) Prob. (2) (1) × (2) Dev. Dev.2 Dev.2 × Prob.
4 0.10 0.40 -4 16 1.60
6 0.20 1.20 -2 4 0.80
8 0.40 3.20 0 0 0
10 0.20 2.00 2 4 0.80
12 0.10 1.20 4 16 1.60
8.00 4.80
Expected Return (RY) = 8.00%
CA Mayank Kothari

Variance (σ2Y ) = 4.80

Standard Deviation ( σY ) = √4.80 = 2.19
No. of X Y
days
Amount Transferred ₹110000000 ₹110000000
Maturity Proceeds of Fixed Deposit ₹6342560 ₹6342560
Amount available in bank account ₹116342560 ₹116342560
Minimum balance to be kept ₹1000 ₹1000
Available amount which can be used for potential ₹116341560 ₹116341560
investment for 4 days
Maximum loss for 4 days at 99% Level 4 ₹116341560 ₹116341560
Maximum loss for 1 day at 99% level
=
Maximum loss for 4 days/ √No. of days = 1 ₹58170780 ₹58170780

116341560/ √4
Z Score at 99% level 2.33 2.33
Volatility in terms of ₹ ₹24966000 ₹24966000
(Maximum Loss/Z Score at 99% Level)
Standard Deviation 0.0114 0.0219
Maximum Investment (Volatility in terms of ₹ ₹2190000000 ₹1140000000
/ SD)

Recommendation: Position should be taken in X.

CA Mayank Kothari
CHAPTER 5
SECURITY VALUATION
Question 1
NM Ltd. (NML) is aspiring to enter the capital market in a three years' time. The Board wants to attain
the target price of ₹70 for its shares at the end of three years. The present value of its shares is ₹52.03.
The dividend is expected to grow at a rate of 15% for the next three years.
NML uses dividend growth model for its projections.
The required rate of return is 15%.
You are required to calculate the amount of dividend to be declared by the board in the base year so as
to achieve the target price.
Period (t) 1 2 3
PVIF (15%, t) 0.8696 0.7561 0.6575
July 21 (5 Marks)
Answer:
PV of Share = PV of Dividends upto 3 years + PV of Target price of share after 3 years
₹52.03 = PV of Stream of Dividend upto 3 years + 70.00 × 0.6575
PV of Stream of Dividend upto 3 years = ₹52.03 – ₹ 46.03 = ₹6
Let Base Dividend is D0, then
₹6 = D0 (1+g) × PVIF (15%,1) + D0 (1 + g)2 PVIF (15%,2) + D0 (1+g)3 PVIF(15%,3)
₹6 = D0 (1.15) × 0.8696 + D0 (1.15)2 × 0.7561 + D0 (1.15)3 ×0.6575
₹6 = D0 + D0 + D0 = 3D0
D0 = ₹2
Thus, Company should declare a dividend of ₹ 2 in base year.

Question 2
Aggressive Ltd., is proposing to fund its expansion plan of ₹12 crore by making a rights issue. The
current market price (CMP) is ₹40. The Board is willing to offer a discount of 20% on the CMP for the
rights issue. The Board is also desirous that the fall in Ex – right price of the shares be restricted to 10%
of CMP.
You are required to calculate:
(i) The number of new equity shares to be offered for each rights held,
(ii) Theoretical value of right and
(iii) The total number of equity shares to be issued.
July 21 (4 Marks), MTP Oct 22 (8 Marks)
Answer:
(i) Number of new equity shares to be offered for each rights head
Subscription Price
CA Mayank Kothari

= ₹40 × 0.80
= ₹32 per share
Ex Right Price to be restricted to
= ₹40 × 0.90
= ₹36
Let R be the ratio in which right share to be issued then
₹40 + ₹32 × R
₹36=
1+R
36 + 36R = ₹40 + 32R
R=1
Thus, 1 equity share be offered for each share held.
(ii) Theoretical Value of right = ₹36 – ₹ 32 = ₹4
(iii)
₹12 Crore
No. of equity share to be issued= = 37,50,000 or 0.375 shares
₹32

Question 3
Find the current market price of a bond having face value ₹1,00,000 redeemable after 6 year maturity
with YTM at 16% payable annually and duration 4.3202 years. Given 1.166 = 2.4364.
Answer:
The formula for the duration of a coupon bond is as follows:
1+YTM (1+YTM)+t(c-YTM)
D= -
YTM c (1+YTM)t -1 +YTM
Where YTM = Yield to Maturity
c = Coupon Rate
t = Years to Maturity
Accordingly, since YTM = 0.16 and t = 6
1.16 1.16+6(c 0.16)
4.3202 = -
0.16 c (1.16)6 -1 +0.16
1.16+(6c- 0.96)
4.3202 = 7.25-
1.4364c+0.16
1.16+6c- 0.96
= 2.9298
1.4364c+0.16
0.2 + 6c = 4.20836472 c + 0.468768
1.79163528c = 0.268768
c = 0.150012674
c = 0.15
Where c = Coupon rate
CA Mayank Kothari

Therefore, current price

= ₹(1,00,000/- × 0.15 × 3.685 + 1,00,000/- × 0.410) = ₹96,275/-
Alternatively, it can also be calculated as follows:
Let x be annual coupon payment. Accordingly, the duration (D) of the Bond shall be
Year CF PVIF 16% PV (CF) PV (CF) PV(CF) x year
1 X 0.862 0.862x 0.862x
2 X 0.743 0.743x 1.486x
3 X 0.641 0.641x 1.923x
4 X 0.552 0.552x 2.208x
5 X 0.476 0.476x 2.38x
6 X +100000 0.410 0.410x + 41000 2.46x + 246000
3.684x + 41000 11.319x +246000

11.319x+246000
4.3202 =
3.684x+41000
x = ₹14,983 i.e. 14.98% say 15%
Accordingly, current price of the Bond shall be:
= 1,00,000 × 0.15 × PVAF (16%, 6) + 1,00,000 × PVF (16%, 6)
= 15,000 × 3.685 + 1,00,000 × 0.410
= ₹96,275

Question 4
A bond is held for a period of 45 days. The current discount yield is 6 per cent per annum. It is expected
that current yield will increase by 200 basis points and current market price will come down by ₹2.50.
Calculate:
(i) Face value of the Bond and
(ii) Bond Equivalent Yield
May 18 (4 Marks)
Answer:
(i) Face Value of the Bond
(a) Current Market Price* 45 days 6 0.9925
(b) Current Market Price* 45 days 8 0.9900
(c) Difference in Price Per Unit (a) – (b) 0.0025
(d) Difference in Price ₹ 2.50
(e) Face Value of Bond (d)/ (c) ₹ 1,000
(f) Current Market Price (a) × (e) 6 ₹ 992.50
CA Mayank Kothari

(g) Current Market Price (b) × (e) 8 ₹990.00

* 1 – [(Discount Rate/ 100) × (45/360)]
(ii) Bond Equivalent Yield
At the rate of 6% 1,000 - 992.50 360 6.05
× × 100 †
992.50 45
At the rate of 8% 1,000 - 990.00 360 8.08
× × 100 †
990.00 45
Alternative Solution if 365 days a year are assumed
(i) Face Value of the Bond

%
(a) Current Market Price* 45 days 6 0.9926
(b) Current Market Price* 45 days 8 0.9901
(c) Difference in Price Per Unit (a) – (b) 0.0025
(d) Difference in Price ₹2.50
(e) Face Value of Bond (d)/ (c) ₹1,000
(f) Current Market Price (a) × (e) 6 ₹992.60
(g) Current Market Price (b) × (e) 8 ₹990.10
* 1 – [(Discount Rate/ 100) × (45/365)]
(ii) Bond Equivalent Yield
At the rate of 6% 1,000 - 992.60 365 6.05
× × 100 †
992.60 45
At the rate of 8% 1,000 - 990.10 365 8.11
× × 100 †
990.10 45
FV-CV 365
† × × 100
CV 45

Question 5
The Bank BK enters into a Repo for 9 days with Bank NE in 6% Government bonds 2022 for an
amount of ₹2 crore. The other relevant details are as follows:
First Leg Payment (Start Proceed) ₹2,00,06,750
Second Leg Payment (Repayment Proceed) ₹2,00,31,759
Initial Margin 1.25%
Days of accrued interest 240
Assume 360 days in a year.
You are required to calculate:
(i) Repo Rate
CA Mayank Kothari

(ii) Dirty Price and

(iii) Clean Price July 21 (5 Marks), MTP Oct 22 (8 Marks)

Answer:
(i)
No. of Days
Second Leg = Start Proceed × (1 + Repo Rate × )
360
9
₹2,00,31,759 = ₹2,00,06,750 × (1+ Repo Rate × )
360

Repo Rate = 0.05 = 5%

(ii)
Dirty Price 100-Initial Margin
First Leg (Start Proceed)= Nominal Value × ×
100 100
Dirty Price 100-125
₹2,00,06,750 = ₹2,00,00,000× ×
100 100
10003.375 = 98.75 × Dirty Price
Dirty Price = ₹101.30

(iii) Dirty Price = Clean Price + Interest Accrued

240
101.30 = Clean Price + 100× × 6%
360
Clean Price = ₹97.30
CA Mayank Kothari
CHAPTER 6
PORTFOLIO MANAGEMENT
Question 1
On the basis of the given information, Mr. XLY wants to create a portfolio that is equally as risky as
the market and has ₹20,00,000 to invest. The details of the assets are as follows:
Asset Investment (₹) Beta
Stock A 4,00,000 0.70
Stock B 5,00,000 1.10
Stock C ? 1.60
Debenture (D) ? 0

How do you recommend and interpret the risk scenario and investment in all the securities?
MTP Apr 24 (6 Marks), MTP Apr 23 (8 Marks)
Answer:
Let WA, WB, WC and WD be the weights of Stock A, B, C and Debenture respectively.
WA = 4,00,000 ÷ 20,00,000 = 0.20
WB = 5,00,000 ÷ 20,00,000 = 0.25
Now = WC + WD = 1 – WA – WB = 0.55
It is given in the question that Portfolio should be as risky as that of the market. It means Beta of the
portfolio should be 1.
Hence,
WA (0.7) + WB (1.1) + WC (1.6) + WD (0) = 1
0.2 × 0.7 + 0.25 × 1.1 + 1.6WC + WD × 0 = 1
0.14 + 0.275 + 1.6WC + 0 = 1
1.6WC = 1 – 0.415
1.6 WC = 0.585
WC = 0.585 /1.6 = 0.3656
Weight of Debenture (WD) = 1- 0.2 – 0.25 – 0.3656 = 0.1844
Hence, Amount invested in Stock C = 0.3656 × 20,00,000 = ₹7,31,200
Amount invested in Debenture D = 0.1844 × 20,00,000 = ₹3,68,800
Thus, amount to be invested in Stock (C) is ₹ 7,31,200 and in Debenture is ₹3,68,800.
CA Mayank Kothari
CHAPTER 8
MUTUAL FUNDS
Question 1
Mr. Y has invested in the three mutual funds (MF) as per the following details:
Particulars MF ‘X’ MF ‘Y’ MF ‘Z’
Amount of Investment (₹) 2,00,000 4,00,000 2,00,000
Net Assets Value (NAV) at the time of purchase (₹) 10.30 10.10 10
Dividend Received up to 31.03.2018 (₹) 6,000 0 5,000
NAV as on 31.03.2018 (₹) 10.25 10 10.20
Effective Yield per annum as on 31.03.2018 (percent) 9.66 -11.66 24.15

Assume 1 Year = 365 days

Mr. Y has misplaced the documents of his investment. Help him in finding the date of his original
investment after ascertaining the following:
(i) Number of units in each scheme;
(ii) Total NAV;
(iii) Total Yield; and
(iv) Number of days investment held.
May 18 (8 Marks), MTP Apr 19 (8 Marks), MTP Oct 20 (8 Marks), MTP Oct 20 (8 Marks), StudyMat
Answer:
(i) Number of Units in each Scheme
2,00,000
MF ‘X’ = 19,417.48
10.30

4,00,000
MF ‘Y’ = 39,603.96
10.10

2,00,000
MF ’Z’ = 20,000.00
10.00

(ii) Total NAV on 31.03.2018

MF ‘X’ = 19,417.48 × ₹ 10.25 ₹1,99,029.17
MF ‘Y’ = 39,603.96 × ₹ 10.00 ₹3,96,039.60
MF ‘Z’ = 20,000.00 × ₹10.20 ₹2,04,000.00
Total ₹7,99,068.77
CA Mayank Kothari

(iii) Total Yield

Capital Yield Dividend Yield Total
MF ‘X’ ₹1,99,029.17- ₹ 2,00,000 = - ₹ 970.83 ₹6,000 ₹5,029.17
MF ‘Y’ ₹3,96,039.60 - ₹4,00,000 = - ₹3,960.40 Nil - ₹3,960.40
MF ‘Z’ ₹2,04,000 - ₹2,00,000 = ₹4,000 ₹5,000 ₹9,000.00
Total ₹10,068.77
10,068.77
Total Yield = × 100 = 1.2586%
8,00,000

(iv) No. of Days Investment Held

MF ‘X’ MF ‘Y’ MF ‘Z’
Let No. of days be X Y Z
Initial Investment (₹) 2,00,000 4,00,000 2,00,000
Yield (₹) 5,029.17 -3,960.40 9,000.00
Yield (%) 2.5146 - 0.9901 4.5
Period of Holding (Days) 2.5146 -0.9901 4.5
× 365 = 95 Days × 365 = 31 Days × 365 = 68 Days
9.66 -11.66 24.15

Date of Original Investment 26.12.17 28.02.18 22.01.18

Question 2
Mr. S has invested in 3 different Mutual Fund Schemes. The following are the details of the same:
Particulars Scheme A Scheme B Scheme C
Date of Investment 01-06-2022 01-07-2022 01-08-2022
Net Asset Value at Entry Date ₹11.00 ₹10.50 ₹12.00
Dividend received upto 31-03-23 (₹) 12,500.00 17,000.00 4,000.00
Unit NAV at 31-03-23 (₹) 11.25 11.48 10.80
Increase / (Decrease) in NAV (₹) 22,727.27 93,333.33 (50,000.00)
Effective Rate of Yield per annum 4.2296% 14.6978% (-) 13.8190%
Ignore Entry/Exit load expenditure.
Assume 365 days in a year. Round off the investment to nearest ₹100.
You are required to calculate:
i. The amount of investments made initially by Mr. S in these schemes.
ii. Number of units invested in the three schemes by Mr. S.
Advise also whether he can continue to hold this investment or can he redeem now.
Nov 23 (8 Marks)
Answer:
(i) Calculation of amount of investment made initially by Mr. S:
CA Mayank Kothari

Particulars Scheme A Scheme B Scheme C

(a) Period of Investment 304 days 274 days 243 days
(b) Effective Yield p.a. 4.2296% 14.6978% (-) 13.8190%
(c) Effective Yield for holding period 3.5227% 11.0334% (-) 9.2000%
(d) Dividend Received ₹12,500 ₹17,000 ₹4000
(e) Increase /Decrease of NAV ₹22,727.27 ₹93,333.33 (₹50,000)
(f) Total Yield (d+e) ₹35,227.27 ₹1,10,333.33 (₹46,000)
(g) Initial Investment (f/c) ₹10,00,000 ₹10,00,000 ₹5,00,000
(h) NAV on date of Investment ₹11.00 ₹10.50 ₹12.00

(ii) Units invested in three schemes by Mr. S

Particulars Scheme A Scheme B Scheme C
Initial Investment ₹10,00,000 ₹10,00,000 ₹5,00,000
NAV on date of Investment ₹11.00 ₹10.50 ₹12.00
Units of Investment 90,909.09 95,238.10 41,666.67
Or 90,909 95,238 41,667

Advise: He should continue to investment in Scheme B and get redeemed both schemes A and C
and invest their proceeds in Scheme B.

Question 3
Mr. Kar has invested in three mutual fund schemes as per details below:
MFX MFY MFZ
Amount of investment (₹) 5,50,000 4,20,000 1,00,000
Dividend received up to 31.03.2023 (₹) 10,000 6,000 Nil
NAV as on 31.03.2023 (₹) 11.50 11.00 9.50
Effective yield p.a. as on 31.03.2023 19.345% 22.59% —36.50%
Holding period 120 days 100 days 50 days
You are required to calculate Net Asset Value (NAV) at the time of purchase assuming 365 days in a
year.
May 24 (4 Marks)
Answer:
Formula
The formula to calculate the NAV at the time of purchase is derived from the effective yield formula:
Closing NAV + Dividend Received − Opening NAV 365
Effective Yield = ( )×( ) × 100
Opening NAV Holding Period
CA Mayank Kothari

Rearranging this formula to solve for the Opening NAV gives:

Closing NAV + Dividends Received
Opening NAV =
Effective Yield Holding Period
1 + ( x )
100 365

Calculations
1. Mutual Fund MFX
- Amount of Investment: ₹5,50,000
- Dividends Received: ₹10,000
- NAV on 31.03.2023: ₹11.50
- Effective Yield: 19.345% - Holding Period: 120 days
10000
11.50 +
550000/11.50
Opening NAV =
19.345 120
1 + 100 x 365
Calculating the dividends per unit:
Dividends per Unit = 10,000 / (5,50,000 / 11.50) = 0.209
NAV at Purchase for MFX = (11.50 + 0.209) / (1 + 0.0635) = 11.01

2. Mutual Fund MFY

- Amount of Investment: ₹4,20,000
- Dividends Received: ₹6,000
- NAV on 31.03.2023: ₹11.00
- Effective Yield: 22.59%
- Holding Period: 100 days
Using the formula:
6000
11.00 +
420000/11.00
Opening NAV =
22.59 100
1 + 100 ×
365
Calculating the dividends per unit:
Dividends per Unit = 6,000 / (4,20,000 / 11.00) = 0.157
Plug in the values:
NAV at Purchase for MFY = (11.00 + 0.157) / (1 + 0.0619) = 10.51

3. Mutual Fund MFZ

- Amount of Investment: ₹1,00,000
- Dividends Received: Nil
- NAV on 31.03.2023: ₹9.50
- Effective Yield: -36.50%
- Holding Period: 50 days
CA Mayank Kothari

9.50
Opening NAV =
−36.50 50
1 + 100 x 365
NAV at Purchase for MFZ = 9.50 / 0.95 = 10.00
Summary
- NAV at Purchase for MFX: ₹11.01
- NAV at Purchase for MFY: ₹10.51
- NAV at Purchase for MFZ: ₹10.00

Question 4
M/s. Enterprise, an Asset Management Company (AMC) on 1.04.2016 has floated a scheme “Dividend
Plan”. Mr. X, an investor, has invested in the scheme. Dividend is given in the form of units. The
details (except the issue price) are as follows:
Date Dividend (%) NAV
1.04.2016 ?
31.03.2018 20 48
31.03.2019 25 50
31.03.2020 30 45
31.03.2021 - 49
Initial Investment (₹) ₹18,40,000
Average Profit (₹) over 5 years ₹54,576
You are required to calculate the issue price of the scheme as on 01.04.2016 to ascertain the capital
appreciation. Assume face value of units as ₹10/-
Dec 21 (5 Marks)
Answer:
Particulars ₹
(a) Amount invested by Mr. X 18,40,000
(b) Gains during 5 year [₹54,576 × 5] 2,72,880
(c) Value of investment as on 31/3/21 (a) + (b) 21,12,880
(d) NAV as on 31.03.21 ₹49 per unit
(e) Total Number of units as on 31.03.21 ₹43,120 units
Let us as assume N, be the no. of units on 31.03.2020 then
₹10×N1 ×0.30
= +N1 =43,120
45
N1
+N1 =43,120
15
N1 =40,425
Now let us assume N2 be number of units on 31.03.19, then
CA Mayank Kothari

₹10×N2 ×0.25
= +N2 =40,425
50
N2
+N2 =40,425
20
N2 =38,500
Now let us assume N3 be number of units on 31.03.18, then
₹10×N3 ×0.20
= +N3 =38,500
48
N3
+N3 =38,500
24
N3 =36,960
18,40,000
NAV as on 1.04.16 = =₹49.78
36,960
Thus, issue price of unit is ₹49.78

Question 5
M/S. Promising, an AMC, on 01.04.2018 has floated two schemes viz. Dividend Reinvestment Plan and
Bonus Plan. Mr. X, an investor has invested in both the schemes. Mr. X, while submitting the tax papers,
returned a capital loss on both the plans. Tax officials, suspicious on the claim of Mr. X, decided to
launch an investigation and were able to collect the following details (except the issue price):
Date Dividend (%) Bonus Ratio NAV (₹)
Dividend Reinvestment Plan Bonus Plan
01.04.2018 ? ?
31.12.2019 1:5 58 70
31.03.2020 12 60 72
31.03.2021 10 68 75
31.03.2022 15 75 66
31.12.2022* 1:3 70 60
31.03.2023 80 71
* In question paper this row got typed before the row of values of 31.03.2022.
Additional details Dividend Reinvestment Plan Bonus Plan
Investment (₹) ₹10,80,000 ₹10,00,000
Average Profit (₹) ₹1,21,824
Average Yield (%) 8.40%
Assume face value of unit as ₹10.
You are required to assist the tax officials to calculate the issue price of both the schemes as on
01.04.2018. May 23 (8 Marks), Nov 20 (10 Marks), RTP May 23
CA Mayank Kothari

Answer:
i. Dividend Plan
(a) Average Annual gain over a period of 5 Years ₹1,21,824
(b) Total gain over a period of 5 years (a*5) ₹6,09,120
(c) Initial Investment ₹10,80,000
(d) Total value of investment (b+c) ₹16,89,120
(e) NAV as on 31.3.2023 ₹80
(f) Number of units at the end of the period as on 31.03.2022 (d/e) 21114

1 2 3 4 = (2*3) 5 6 = [1/(4+5)]*4 7
Period Units Rate Unit Dividend NAV New Units* Balance Units
Held value Pre Dividend
31.03.2022 21114 0.15 10 1.50 75 414 20700
31.03.2021 20700 0.10 10 1.00 68 300 20400
31.03.2020 20400 0.12 10 1.20 60 400 20000
Issue Price as on 01.04.2018
Investment 1080000/ Units purchased 20000 (c/i) = ₹54
* Let the units issued be X
X = (Closing Units/NAV + Dividend) × Dividend
Alternatively, it can also be computed as follows:
Dividend Plan
Average Profit = ₹121,824
Total Gain = ₹121,824 × 5 = ₹6,09,120
Cost of Acquisition = ₹10,80,000
Maturity Value = ₹16,89,120 (₹6,09,120 + ₹10,80,000)
On 31.03.23 since the NAV of the Fund is ₹80 the units redeemed are:
16,89,120
= 21114
80
Let X be the NAV on 01.04.18
1080000
Thus, units acquired on 01.04.18 =
X
1080000
⌊ × 1.2⌋ 21600
Units added on 31.03.2020 = X =⌊ ⌋
60 X
1080000 21600
⌊ + X ⌋ 16200
Units added on 31.03.2021 = X =
68 X
1080000 21600 16200 1.5 22356
Units added on 31.03.2022 = ⌊ + + ⌋× =
X X X 75 X
CA Mayank Kothari

Thus, total units can be shown as follows:

1080000 21600 16200 22356
⌊ + + + ⌋ = 21114
X X X X
X = 54, Thus, the issue Price of units under Dividend Plan shall be ₹54
ii. Bonus Plan
(a) Average Yield 0.084
(b) Investment ₹10,00,000
(c) Gain over a period of 5 years (a*b*5) ₹4,20,000
(d) Market Value as on 31.03.2023 (b + c) ₹14,20,000
(e) NAV as on 31.03.2023 71
(f) Total units as on 31.03.2023 (d/e) 20000
(g) No of units as on 31.03.2022 Pre bonus = 20000*3/ (3 + 1) 15000
(h) No of units as on 31.12.2019 Pre bonus = 15000*5/ (5 + 1) 12500
(i) Issue Price as on 01.04.2019
Investment ₹10,00,000/ Units purchased 12500 (b/h) ₹80
Alternatively, it can also be computed as follows:
Units on 01.04.2018 X
Units after bonus on 31.12.2019 (1:5) 1.20X
Units after bonus on 31.12.2022 (1:3) 1.60X
Average yield 0.084
Investment ₹10,00,000
Gain for 5 years (10,00,000 × 0.084 × 5) ₹4,20,000
Total Value (₹10,00,000 + ₹4,20,000) ₹14,20,000
Where, 1.6X × ₹71 = ₹14,20,000
Therefore, X = 12,500 units
Issue Price on 01.04.2018 = ₹10,00,000 / 12,500 units = ₹80
Alternatively, it can also be computed as follows:
Average Yield = 8.40%
Investment = ₹10,00,000
Gain over a period of 5 years = ₹10,00,000*0.084*5 = ₹4,20,000
Thus, Maturity Value on 31.03.23 shall be ₹14,20,000
14,20,000
No. of units = = 20,000
71
Now let B be the NAV on 01.04.18 then
10,00,000
Units acquired on 01.04.18 =
B
10,00,000 1 2,00,000
Units added on 31.12.19 = × =
B 5 B
CA Mayank Kothari

12,00,000 1 4,00,000
Units added on 31.12.21 = × =
B 3 B
Thus, total units can be shown as follows:
1000000 200000 400000
⌊ + + ⌋ = 20000
B B B
B = ₹80
Thus, the issue Price of units under Bonus Plan shall be ₹80

Question 6
M/s. Strong an AMC has floated a dividend bonus plan on 1st April, 2016 at a certain net asset value
(NAV). The fund has a robust growth and has declared a bonus of 1: 5 (1 bonus unit for 5 right units
held) on 30th September 2017 and a second bonus of 1 : 4 (1 bonus unit for 4 right units held) on 30th
September 2019.The fund, as on 31st March 2021, has generated an average yield of 17.5%.
Mr. Optimistic has made an investment of ₹15 lakhs in the plan before the declaration of the first bonus
and remain invested thereafter.
The following information is also available:
Period (t) 01.04.2016 30.09.2017 30.09.2019 31.03.2021
NAV (₹) ? 85 92 100
You are required to advice to Mr. Optimistic the opening NAV, which is required by him to calculate
the capital appreciation.
July 21 (4 Marks), MTP Oct 22 (4 Marks)
Answer:
Particulars
(a) Amount invested by Mr. Optimistic as on 01/04/2016 ₹15,00,000
(b) Gain during 5 years (15,00,000 × 17.5% × 5 years) ₹13,12,500
(c) Value of investment as on 31/03/2021 (a + b) ₹28,12,500
(d) NAV as on 31/03/2021 ₹100 per Unit
(e) Total number of units as on 31/03/2021 (c/d) 28125 Units
Total units before second bonus = 28125× 4/5 22500 Units
Total units before first bonus = 22500 × 5/6 18750 Units
NAV as on 01/04/2016 = 15,00,000/18750 ₹80 per Unit

Question 7
The Asset Management Company of the mutual fund (MF) has declared a dividend of 9.98% on the units
under the dividend reinvestment plan for the year ended 31st March, 2021. The investors are issued
additional units for the dividend at the rate of closing Net Asset Value (NAV) for the year as per the
conditions of the scheme. The closing NAV was ₹24.95 as on 31st March, 2021. An investor Mr. X who
is having 20,800 units at the year-end has made an investment in the units before the declaration of the
CA Mayank Kothari

dividend and at the rate of opening NAV plus an entry load of ₹0.04. The NAV has appreciated by 25%
during the year.
Assume the face value of the unit as ₹10.00.
You are required to calculate:
(i) Opening NAV,
(ii) Number of the units purchased,
(iii) Original amount of the investment. July 21 (5 Marks), MTP Oct 22 (4 Marks)

Answer:
(i) Let N be the opening NAV, then
N (1 + 0.25) = ₹24.95
N = ₹19.96
i.e., beginning NAV = ₹19.96

(ii) Let X be the number of units purchased

Then ending units = 20,800
Accordingly,
0.998X
20800 = X +
24.95
24.05X + 0.998X
20800=
24.95
X = 20000
Thus, number of units to be purchased = 20,000

(iii) Original amount of investment

Initial NAV ₹19.96
Entry Load ₹0.04
₹20.00
Number of funds purchased 20,000
Amount of Investment ₹4,00,000
CA Mayank Kothari
CHAPTER 9
DERIVATIVES ANALYSIS & VALUATION
Question 1
Mr. SG sold five 4-Month Nifty Futures on 1st February 2020 for ₹9,00,000. At the time of closing of
trading on the last Thursday of May 2020 (expiry), Index turned out to be 2100. The contract multiplier
is 75.
Based on the above information calculate:
(a) The price of one Future Contract on 1st February 2020.
(b) Approximate Nifty on 1st February 2020 if the Price of Future Contract on same date was
theoretically correct. On the same day Risk Free Rate of Interest and Dividend Yield on Index was
9% and 6% p.a. respectively.
(c) The maximum Contango/ Backwardation.
(d) The pay-off of the transaction.
Note: Carry out calculation on month basis.
RTP Nov 20
Answer:
(i) The price of one Future Contract
Let X be the Price of Future Contract. Accordingly,
No. of Contracts = Contract Value / Price of one Future Contract
₹9,00,000
5=
X
X (Price of One Future Contract) = ₹1,80,000
(ii)
₹1,80,000
Current Future price of the index = = 2400
75
Let Y be the current Nifty Index (on 1st February 2020) then
4
Accordingly, Y+Y(0.09-0.06) = 2400
12
2400
and Y = = 2376.24
1.01
Hence Nifty Index on 1st February 2020 shall be approximately 2376.

(iii) To determine whether the market is in Contango/ Backwardation first we shall compute Basis as
follows:
Basis = Spot Price - Future Price
If Basis is negative the market is said to be in Contango and when it is positive the market is said
to be Backwardation.
CA Mayank Kothari

Since current Spot Price is 2376 and Nifty Futures is 2400, the Basis is negative and hence there
is Contango Market and maximum Contango shall be 24 (2400 – 2376).

(iv) Pay off on the Future transaction shall be [(2400 – 2100) × 375] = ₹112500
The Future seller gains if the Spot Price is less than Futures Contract price as position shall be
reversed at same Spot price. Therefore, Mr. SG has gained ₹1,12,500/- on the Short position
taken.

Question 2
A future contract on BSE Index with 4 months maturity is used to hedge the value of the portfolio over
the next 3 months. One future contract for delivery is 50 times of the index.
The following information is available:
Value of the portfolio ₹1,16,00,000
BSE Sensex on 1st January 2022 58580
st
(Anticipated on 1 September 2021)
BSE Sensex on 1st January 2022 56641.25
(Anticipated on 1st December 2021)
Dividend Yield of Index 6% p.a.
181 days’ treasury bills offers a rate of interest 9% p.a.
Beta of the portfolio 1.5
You are required to calculate:
(i) The present value of the Sensex as on 1st September 2021
(ii) Turned out value of the Sensex as on 1st December 2021
(iii) The number of contracts to hedge the portfolio. Dec 21 (8 Marks)

Answer:
(i) Let X be the present value of the Sensex as the 1st September, 2021
4
58,580 = X + X 9% - 6% ×
12
X
58,580 = X+
100
X = 58,000
Thus, the present value of Sensex as on 1st September 2021 is 58,000

(ii) Let turned out value of Sensex on 1st Dec. 2021 is Y, then
1
56,641.25 = Y + Y 9% - 6% ×
12
Y
56,641.25 = Y+
100
CA Mayank Kothari

Y = 56,500
Thus, turned out value of Sensex on 1st December 2021 is 56,500

(iii) No. of Contract to the Hedge Portfolio

₹1,16,00,000×1.50
= =5.95 Say 6 Contracts
58,580×50

Question 3
Mr. Careless was employed with ABC Portfolio Consultants. The work profile of Mr. Careless involves
advising the clients about taking position in Future Market to obtain hedge in the position they are
holding. Mr. ZZZ, their regular client purchased 100,000 shares of X Inc. at a price of $22 and sold
50,000 shares of A plc for $40 each having beta 2. Mr. Careless advised Mr. ZZZ to take short position
in Index Future trading at $1,000 each contract.
Though Mr. Careless noted the name of A plc along with its beta value during discussion with Mr. ZZZ
but forgot to record the beta value of X Inc.
On next day Mr. ZZZ closed out his position when:
 Share price of X Inc. dropped by 2%
 Share price of A plc appreciated by 3%
 Index Future dropped by 1.5%
Mr. ZZZ, informed Mr. Careless that he has made a loss of $114,500 due to the position taken. Since
record of Mr. Careless was incomplete, he approached you to help him to find the number of contracts
of Future contract he advised Mr. ZZZ to be short to obtain a complete hedge and beta value of X Inc.
You are required to find these values. RTP May 15
Answer:
Let the number of contracts in Index future be y and Beta of X Inc. be x. Then,
100,000 × 22 × x -50,000 × 40 × 2
= -y*
1,000
* Negative (-) sign indicates the sale (short) position
2,200,000x – 4,000,000 = -1,000y
Cash Outlay (Outflow)

Purchase of 100,000 shares of X Inc. at a price of $22(100,000 × 22) 2,200,000

Sale of 50,000 shares of A plc for $40 (50,000 × 40) – 2,000,000

Short Position in Index Futures (1,000 × y) -1,000y*

Net 200,000 – 1,000y

* Negative (-) sign indicates the inflow due to sale (short) position
CA Mayank Kothari

Cash Inflow
Sale of 100,000 shares of X Inc. (100,000 × 22 × 0.98) 2,156,000

Purchase of 50,000 shares of A plc (50,000 × 40 × 1.03) – 2,060,000

Long Position in Index Futures (1,000 × y × 0.985) -985y

Net 96,000 – 985y

* Negative (-) sign indicates the outflow due to purchase (long) position
Position on Close Out
(200,000 - 1,000y) – (96,000 - 985y) = 114,500
y = -700
Thus, number of future contract short is 700
Beta of X Inc. can be calculated as follows:
2,200,000x – 4,000,000 = -1000 × 700
2,200,000x = 3,300,000
x = 1.5
Thus, Beta of X Inc. shall be 1.5
CA Mayank Kothari
CHAPTER 13
BUSINESS VALUATION
Question 1
Fragrance Ltd. has reported a Net Operating Profit after Tax (NOPAT) to Capital Employed as 2.5%
plus Weighted Average Cost of Capital (WACC) for the year 31st March 2021. Economic Value added
is ₹4 crore as on 31st March 2021.
You are required to calculate:
(i) The amount of Capital Employed
(ii) NOPAT , if WACC is 10%
Dec 21 (4 Marks)
Answer:
(i) EVA = NOPAT - WACC × Capital Employed
₹4 Crore = NOPAT - WACC × Capital Employed
₹4 Crore = [WACC + 0.025] Capital Employed - WACC × Capital Employed
₹4 Crore = Capital Employed [0.025]
Capital Employed = ₹160 Crore

(ii) NOPAT if WACC is 10%

₹4 Crore = NOPAT – 0.10 × ₹160 core
NOPAT = ₹20 crore