MODEL TEST PAPER 8

FINAL COURSE: GROUP – I

PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
Time Allowed – 3 Hours Maximum Marks – 100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case Scenario based MCQs (30 Marks)
Part I is compulsory.
Case Scenario I
Bank A is in need of fund for a period of 14 days. To meet this financial need on
20th September 2023 Bank A enters into an agreement with Bank B under which
it will sell 10% Government of India Bonds issued on 1st January 2023 @ 5.65%
for ₹ 8 crore (Face value is ₹ 10,000 per Bond).
The clean price of same Bond is ₹ 9,942 and the Initial Margin be 2% and the
maturity date of Bond is 31st December 2028. Consider 360 days in a year and
interest is payable annually.
Based on above Case Scenario, answer the following questions:
1. The arrangement entered between Bank A and Bank B will be called
……….
(a) Call Money Arrangement
(b) Commercial Bill Arrangement
(c) Commercial Paper
(d) Repurchase Option
2. Dirty Price of the Bond will approximately be……………………….
(a) ₹ 10,353
(b) ₹ 10,670
(c) ₹ 10,499

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 (d) ₹ 10,816
3. The start proceeds of the transaction shall be approximately
……………….
(a) ₹ 8,38,36,804
(b) ₹ 8,36,53,000
(c) ₹ 8,58,36,804
(d) ₹ 8,48,52,585
4. The second leg of the transaction shall be approximately.……………….
(a) ₹ 8,38,36,804
(b) ₹ 8,36,53,000
(c) ₹ 8,58,36,804
(d) ₹ 8,48,52,585
5. The amount of Accrued Interest per Bond shall be approximately
……………
(a) ₹ 728
(b) ₹ 720
(c) ₹ 734
(d) ₹ 714 (5 x 2 = 10 Marks)
Case Scenario II
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 31 st 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 dividend 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.

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Based on above Case Scenario, answer the following questions:
6. The Opening NAV of the Asset Management Company shall be …………
(a) ₹ 20.24
(b) ₹ 19.96
(c) ₹ 18.75
(d) ₹ 17.65
7. The Number of the units purchased shall be ………………….
(a) 18750
(b) 17500
(c) 20450
(d) 20000
8. Original amount of the investment shall be ………………
(a) ₹ 4,00,000
(b) ₹ 6,50,000
(c) ₹ 3,55,000
(d) ₹ 5,65,000
9. Which of the following statement about Expense ratio is/ are incorrect:
(i) It is the percentage of income that were spent to run a mutual fund.
(ii) It includes advisory fees, travel costs, registrar fees, custodian fees,
etc.
(iii) It includes Brokerage costs for trading of Portfolio.
(iv) High Expense Ratio can seriously undermine the performance of a
mutual fund scheme.
(a) (i), (ii), (iii)
(b) (i), (iii)
(c) only (iii)
(d) only (i)

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10. …………………considers and uses downside deviation instead of total
standard deviation in denominator.
(a) Expense Ratio
(b) Sharpe Ratio
(c) Treynor Ratio
(d) Sortino Ratio (5 x 2 = 10 Marks)
Case Scenario III
You as an investor had purchased a 4-month European Call Option on the
equity shares of X Ltd. for ₹ 10, of which the current market price is ₹ 132 per
share and the exercise price ₹ 150. You expect the price to range between
₹ 120 to ₹ 190. The expected share price of X Ltd. and related probability is
given below:
Expected Price (₹) 120 140 160 180 190
Probability 0.05 0.20 0.50 0.10 0.15

Based on above case scenario answer the following questions:

11. Expected price of share of X Ltd. at the end of 4 months shall be…….
(a) ₹ 160.00
(b) ₹ 160.50
(c) ₹ 158.00
(d) ₹ 140.00
12. Suppose if the exercise price prevails at the end of 4 months the Value of
Call Option shall be…………
(a) ₹0
(b) ₹ 18
(c) ₹ 10
(d) ₹ 14
13. In case the option is held to its maturity, the expected value of the call
option shall be……………
(a) ₹0
(b) ₹ 18

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 (c) ₹ 10
(d) ₹ 14
14. In the given different scenarios of expected prices of share of X Ltd. at
the time of maturity the option shall be in-the-money in ……………
scenarios.
(a) two
(b) three
(c) five
(d) In none of the scenario
15. In the given different scenarios of expected prices of share of X Ltd. at
the time of maturity the option shall be at-the-money in ……………
scenarios.
(a) two
(b) three
(c) five
(d) In none of the scenario (5 x 2 = 10 Marks)

PART – II DESCRIPTIVE QUESTIONS

Question No.1 is compulsory. Candidates are required to answer
any four questions from the remaining five questions.
Working notes should form part of the answers.
Maximum Marks – 70 Marks
1. (a) 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
take a maximum possible exposure in the market where Value at
Risk (VaR) should not exceed the balance lying in his bank account.
The standard deviation of index of the same market is 1.5 per cent
per day. The required confidence level is 99 per cent.

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 Given
Standard Normal Probabilities
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890
2.3 .9893 .9896 .9998 .9901 .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 exposure

investor can take in the market. (8 Marks)
(b) MNP Ltd. has declared and paid annual dividend of ₹ 4 per share.
It is expected to grow @ 20% for the next two years and 10%
thereafter. The required rate of return of equity investors is 15%.
Compute the current price at which equity shares should sell.
Note: Use PVF upto 4 decimal points and round off calculation upto
2 decimal points. (2 Marks)

(c) Explain the concept of Unicorn. (4 Marks)

2. (a) Mr. H as Treasure for your bank working under you sold HK$ 10
million value Spot to your customer at ₹ 10.55/ HK$ and covered
yourself in the London market on the same day when the exchange
rates were:
US$ 1 = HK$ 7.8880 / 7.8920
Local interbank market rates for US$ were:
Spot US$ 1 = ₹ 82.70 / 82.85
Required:
(i) Calculate Cover Rate
(ii) Calculate Profit or loss in the transaction
(iii) Do you agree with the views of the Internal Auditor that Mr. H
has a speculative nature?
Note: Ignore brokerage. (6 Marks)

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 (b) PFL is already in production of Fertilizer is considering a proposal
of building a new plant to produce pesticides. The Net Present
Value of proposal is ₹ 200 crore without the abandonment option.
However, if market conditions for pesticide turns out to be
favourable the NPV of proposal shall increase by 30%. On the other
hand, market conditions remain sluggish the NPV of the proposal
shall be reduced by 40%. In case company is not interested in
continuation of the project it can be disposed of for ₹ 160 crore.

If the risk-free rate of interest is 8% then what will be value of

abandonment option. (4 Marks)
(c) Explain the various Qualitative factors that need to be taken into
account in addition to Quantitative Factors to evaluate the
performance of any Mutual Fund. (4 Marks)
3. (a) Mr. A owns a portfolio with the following characteristics:
Security X Security Y Risk Free
security
Factor 1 sensitivity 0.80 1.50 0
(λ1)
Factor 2 sensitivity 0.60 1.20 0
(λ2)
Expected Return* 15% 20% 10%

* Generated by a two-factor model.

Required:
(i) Compute the sensitivity of Mr. A’s portfolio to the two factors
if Mr. A has ₹ 3,00,000 to invest and sells short ₹ 1,50,000 of
security Y and purchases ₹ 4,50,000 of security X.
(ii) Compute the sensitivity of the portfolio to the two factors if Mr.
A borrows ₹ 3,00,000 at the risk free rate and invests the
amount he borrows along with the original amount of
₹ 3,00,000 in security X and Y in the same proportion as
described in part (i).

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 (iii) Suppose Mr. D, one of the friend of Mr. A says the expected
return premium of factor 2 is zero. Do you agree with this
statement. Substantiate your answer with required
calculations. (6 Marks)
(b) There is a privately held company X Pvt. Ltd that is operating into
the retail space, and is now scouting for angel investors. The
unleveraged beta based on the industry in which it operates is 1.8,
and the average debt to equity ratio of X Pvt. Ltd. is hovering at
40:60. The rate of return provided by risk free GOI Bonds is 5%.
The rate of market return for the industry is 11%. The FCFs for the
next 3 years are as follows:

Year 1 Year 2 Year 3

Free Cash Flows (₹ Crore) 10 12 15

The pre-tax cost of debt is 12%. Assume a tax regime of 30%.

Determine the potential value to be placed for X Pvt. Ltd, based on
above-mentioned FCFs.
Note: Use PVF and round off calculations upto 3 decimal points.
(4 Marks)
(c) Either
Explain various types of Swaps. (4 Marks)
(c) Or
Explain briefly principles of an Active Portfolio Strategy (APS).
(4 Marks)
4. (a) BDR Ltd. is an Indian export business house. The company
prepares invoice in customers' currency. It has debtors amounting
US$ 10 Million which are due to be received on April 1, 2023.
Market information as at January 1, 2023 is:
Exchange rates US$/INR Currency Futures US$/
INR
Spot 0.012500 Contract size:
₹ 32,816,474
1-month forward 0.012422 1-month 0.012417

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 3-months forward 0.012195 3-month 0.012189
Initial Margin Interest rates in India
1-Month ₹ 22,500 6.5%
3-Months ₹ 27,500 7%

On April 1, 2023, the spot rate US$/INR is 0.012199 and Currency

Futures rate is 0.012198.
Advise which of the following methods would be most advantageous
to BDR Ltd. or keep the exposure unhedged.
(i) Using forward contract
(ii) Using currency futures. (8 Marks)
(b) A convertible bond with a face value of ₹ 5,000 is issued at ₹ 6,750
with a coupon rate of 10.5%. The conversion rate is 14 shares per
bond. The current market price of the bond and share is ₹ 7,375 and
₹ 400 respectively.
Determine:
(i) Stock Value of Bond.
(ii) The premium over conversion value. (2 Marks)
(c) Although rating agency is secondary to the process of securitization
but it plays a vital role. Explain. (4 Marks)
5. (a) During the audit of the Weak Bank (W), RBI suggested that the Bank
should either merge with another bank or may close down. Strong
Bank (S) has submitted a proposal for the merger of Weak Bank
with itself. The relevant information and Balance Sheets of both the
companies are as follows:
Particulars Weak Strong Assigned
Bank Bank Weights
(W) (S) (%)
Gross NPA (%) 8 1 30%
Capital Adequacy Ratio 5 16 28%
(CAR)
Market price per Share 12 96 32%
(MPS) (`)

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 Book value 10%
Trading on Stock Irregular Frequent
Exchange

Balance Sheets (₹ in Lakhs)

Particulars Weak Strong
Bank Bank (S)
(W)
Paid-up Share Capital (₹ 10/share) 300 1000
Reserves & Surplus 160 11000
Deposits 8000 88000
Other Liabilities 1780 5000
Total Liabilities 10240 105000
Cash in Hand & with RBI 800 5000
Balance with Other Banks - 4000
Investments 2200 38000
Advances 7000 54000
Other Assets 140 4000
Preliminary Expenses 100 -
Total Assets 10240 105000

You are required to prepare the Balance Sheet after the merger duly
supported by adequate workings. (10 Marks)
(b) The SWIFT plays an important role in Foreign Exchange dealings.
Explain. (4 Marks)
6. (a) XYZ Ltd. is considering taking up one of the two projects-Project-X
and Project-Y. Both the projects having same life require equal
investment of ₹ 1600 lakhs each. Both are estimated to have almost
the same yield. As the company is new to this type of business, the
cash flow arising from the projects cannot be estimated with
certainty. An attempt was therefore, made to use probability to
analyse the pattern of cash flow from other projects during the first
year of operations. This pattern is likely to continue during the life
of these projects. The results of the analysis are as follows:

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 Project X
Cash Flow (in ₹ Lakh) Probability
220 0.10
260 0.20
300 0.40
340 0.20
380 0.10
Project Y
Cash Flow (in ₹ Lakh) Probability
180 0.10
260 0.25
340 0.30
420 0.25
500 0.10

Required:
Evaluate which of the two projects bears more risk for every percent
of expected return. (6 Marks)
(b) The following data pertains to HPS Inc. engaged in software
consultancy business as on 31 December 2023:
($ Million)
Income from consultancy 1870.00
EBIT 360.00
Less: Interest on Loan 36.00
EBT 324.00
Tax @ 35% 113.40
210.60

Balance Sheet ($ Million)

Liabilities Amount Assets Amount
Equity Stock (20 200 Land and Building 400
million share @ $ Computers & Softwares 590
10 each)
Reserves & Surplus 650 Current Assets:

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 Loans 360 Debtors 300
Current Liabilities 360 Bank 200
Cash 80 580
1570 1570

With the above information and following assumption you are

required to compute
(i) Economic Value Added
(ii) Market Value Added.
Assuming that:
(1) WACC is 12%.
(2) The share of company currently quoted at $ 50 each.
(4 Marks)
(c) Explain Venture Capital Method of valuing Startups. (4 Marks)

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