Question 1--Forex

On April 3, 2016, a Bank quotes the following:

Spot exchange Rate (US$ 1) INR 66.2525 INR 67.5945
2 months' swap points 70 90
3 months' swap points 160 186
In a spot transaction, delivery is made after two days.
Assume spot date as April 5, 2016.
Assume 1 swap point = 0.0001.
You are required to:
(i) ascertain swap points for 2 months and 15 days. (For June 20, 2016)
(ii) determine foreign exchange rate of June 20, 2016 and
(iii) compute the annual rate of premium/discount of US$ on INR,on average
rate.

Question 2—Bond Valuation

A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each
bond is convertible into 20 equity shares of the company A Ltd. The prevailing
interest rate for similar credit rating bond is 8%. The convertible bond has 5
years maturity. It is redeemable at par at Rs. 100.
The relevant present value table is as follows:
Present value t1 t2 t3 t4 t5
PVIF0.14, t 0.877 0.769 0.675 0.592 0.519
PVIR0.08, t 0.926 0.857 0.794 0.735 0.681
You are required to estimate:
(Calculations be made upto 3 decimal places)
(i) Current market price of the bond, assuming it being equal to its fundamental
value,
(ii) minimum market price of equity share at which bond holder should exercise
conversion option; and
(iii) durations of the bond
Question 3—Forex/ Derivative
LMN Ltd. is an export oriented business house based in Mumbai. The Company
invoices in customer's currency. The receipt of US $ 6,00,000 is due on 1st
September, 2016.

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 Market information as at 1st June 2016 is:
Exchange Rates US$ Exchange Rate Contract Size
US$/Rs.
Spot 0.01471 Currency Futures
1 Month Forward 0.01464 June 0.01456 Rs. 30,00,000
3 Months 0.01458 September 0.01449
Forward

Initial Margin (Rs) Interest Rates in India %

June 12,000 8.00 p.a.
September 16,000 8.50 p.a.

On 1st September, 2016, the spot rate US $/Rs is 0.01461 and currency future
rate is US $/Rs 0.01462.
It may be assumed that variation in Margin would be settled on the maturity of
the futures contract.
Which of the following methods would be most advantageous for LMN Ltd.
(i) using Forward Contract,
(ii) using Currency Futures; and
(iii) not hedging Currency Risks
Show the calculations and comment.
Question 4—Forex/Derivative
On 10th July, an importer entered into a forward contract with bank for US $
50,000 due to 10th September at an exchange rate of Rs. 66.8400. The bank
covered its position in the interbank market at Rs. 66.6800.
How the bank would react if the customer requests on 20th September:
(i) to cancel the contract?
(ii) to execute the contract?
(iii) to extend the contract with due date to fall on 10th November?
The exchange rates for US$ in the interbank market were as below:
10th September 20th September
Spot US$1= 66.1500/1700 65.9600/9900
Spot/September 66.2800/3200 66.1200/1800
Spot/October 66.4100/4300 66.2500/3300
Spot/November 66.5600/6100 66.4000/4900
Exchange margin was 0.1% on buying and selling.
Interest on outlay of funds was 12% p.a.

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 You are required to show the calculations to:
(i) cancel the contract,
(ii) execute the contract, and
(iii) extend the contract as above

Question 5--Portfolio
Details about portfolio of shares of an investor is as below:
Shares No. of shares Price per share Beta
(lakh)
A Ltd. 3.00 Rs. 500 1.40
B Ltd. 4.00 Rs. 750 1.20
C Ltd. 2.00 Rs. 250 1.60
The investor thinks that the risk of portfolio is very high and wants to reduce the
portfolio beta to 0.91. He is considering two below mentioned alternative
strategies:
(i) Dispose off a part of his existing portfolio to acquire risk free securities, or
(ii) Take appropriate position on Nifty Futures which are currently traded at
Rs. 8125 and each Nifty points is worth Rs. 200.
You are required to determine:
(1) portfolio beta,
(2) the value of risk free securities to be acquired,
(3) the number of shares of each company to be disposed off,
(4) the number of Nifty contracts to be bought/sold; and
(5) the value of portfolio beta for 2% rise in Nifty.
Question 6--Portfolio
The returns of market portfolio for a period of four years are as under:
Year % Return of Stock B % Return on Market
Portfolio
1 10 8
2 12 10
3 9 9
4 3 -1

For stock B, you are required to determine:

(i) characteristic line; and
(ii) the Systematic and Unsystematic risk.
Question 7—Portfolio

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 Mr. Abhishek is interested in investing Rs. 2,00,000 for which he is considering
following three alternatives:
(i) Invest Rs. 2,00,000 in Mutual Fund X (MFX)
(ii) Invest Rs. 2,00,000 in Mutual Fund Y (MFY)
(iii) Invest Rs. 1,20,000 in Mutual Fund X (MFX) and Rs. 80,000 in Mutual
Fund Y (MFY)
Average annual return earned by MFX and MFY is 15% and 14% respectively.
Risk free rate of return is 10% and market rate of return is 12%.
Covariance of returns of MFX, MFY and market portfolio Mix are as follows:
MFX MFY Mix
MFX 4.800 4.300 3.370
MFY 4.300 4.250 2.800
M 3.370 2.800 3.100
You are required to calculate:
(i) variance of return from MFX, MFY and market return,
(ii) portfolio return, beta, portfolio variance and portfolio standard deviation,
(iii) expected return, systematic risk and unsystematic risk; and
(iv) Sharpe ratio, Treynor ratio and Alpha of MFX, MFY and Portfolio Mix
Question 8—Capital Budgeting
KLM Ltd. requires Rs. 15,00,000 for a new project.
Useful life of project is 3 years.
Salvage value - NIL
Depreciation is Rs. 5,00,000 p.a.
Given below are projected revenues and costs (excluding depreciation) ignoring
inflation:
Year 1 2 3
Revenue in Rs. 10,00,000 13,00,000 14,00,000
Costs in Rs. 5,00,000 6,00,000 6,50,000

Applicable tax rate is 35%. Assume cost of capital to be 14% (after tax). The
inflation rates for revenues and costs are as under:
Year Revenue % Costs %
1 9 10
2 8 9
3 6 7
PVF at 14%, for 3 years = 0.877, 0.769 and 0.675

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 Show amount to the nearest rupee in calculations.
You are required to calculate act present value of the project.
Question 9—Factoring
Projected sales for the next year of Z Ltd. isRs. 1000 Cr. The company manages
its accounts receivables internally. Its present annual cost of sales ledger
administration is Rs. 11 Cr. The company finances its investment on debtors
through a mix of bank credit and own long term funds in the ratio of 60 : 40.
Current cost of bank credit and long term funds are 10% and 12% respectively.
The past experience indicates that bad debt losses are 1.5% on total sales.
The company has a credit policy of 2/10, net 30. On an average, 40% of
receivables are collected within the discount period and rest are collected 70
days after the invoice date. Over the years, gross profit is maintained at 20% and
the same is expected to be continued in future.
To enable the management focus on promotional activities and get rid of
escalating cost associated with in house management of debtors, the company is
considering the possibility of availing the services of Fairgrowth Factors Ltd. for
managing receivables of the company.
According to the proposal of the factor, it would pay advance to the tune of 85%
of receivables with 20% interest and 81% of receivables with 21% interest for
the recourse and non-recourse agreements respectively. The proposal provides
for guaranteed payment within 30 days from the date of invoice. The factoring
commission would be 4% without recourse and 2% with recourse.
If the company goes for the factoring arrangement, the staff would be under
burdened and concentrate more on promotional activities and consequently
additional sales of Rs. 100 Cr. would be achieved. Assume that all sales of the
company are credit sales and the year is 360 days.
You are required to:
(i) calculate cost of in house management of receivables,
(ii) compute cost of Fairgrowth Factors Ltd. proposal (with recourse and
without recourse),
(iii) calculate net benefits under recourse factoring and non-recourse factoring;
and
(iv) decide the best option for the company.
Question 10--Forex

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 A company is considering hedging its foreign exchange risk. It has made a
purchase on 1st July, 2016 for which it has to make a payment of US$ 60,000 on
December 31, 2016. The present exchange rate is 1 US $ = Rs. 65. It can
purchase forward 1 $ at Rs. 64. The company will have to make an upfront
premium @ 2% of the forward amount purchased. The cost of funds to the
company is 12% per annum.
In the following situations, compute the profit/loss the company will make if it
hedges its foreign exchange risk with the exchange rate on 31st December, 2016
as:
(i) Rs. 68 per US $
(ii) Rs. 62 per US $
(iii) Rs. 70 per US $
(iv) Rs. 65 per US $
Question 11—Valuation of Share
XN Ltd. reported a profit of Rs. 100.32 lakhs after 34% tax for the financial
Year 2015-2016. An analysis of the account reveals that the income included
extraordinary items of Rs. 14 lakhs and an extraordinary loss of Rs. 5 lakhs. The
existing operations, except for the extraordinary items, are expected to continue
in future. Further, a new product is launched and the expectations are as under:
Particulars Amount Rs. in lakhs
Sales 70
Material Costs 20
Labour Costs 16
Fixed Costs 10
The company has 50,00,000 Equity Shares of Rs. 10 each and 80,000, 9%
Preference Shares of Rs. 100 each with P/E Ratio being 6 times.
You are required to:
(i) compute the value of the business. Assume costs of capital to be 12%
(after tax), and
(ii) determine the market price per equity shares
Question 12—Capital Budgeting
The municipal corporation of a city with mass population is planning to
construct a flyover that will replace the intersection of two busy highways X and
Y. Average traffic per day is 10,000 vehicles on highway X and 8,000 vehicles
on highway Y. 70% of the vehicles are private and rest are commercial vehicles.

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 The flow of traffic across and between aforesaid highways is controlled by
traffic lights. Due to heavy flow, 50% of traffic on each of the highways is
delayed. Average loss of time due to delay is 1.3 minute in highway X and 1.2
minute in highway Y. The cost of time delayed is estimated to be Rs. 80 per
hour for commercial vehicle and Rs. 30 for private vehicle.
The cost of stop and start is estimated to be Rs. 1.20 for commercial vehicle and
Rs. 0.80 for private vehicle. The cost of operating the traffic lights is Rs. 80,000
a year. One policeman is required to be posted for 3 hours a day at the crossing
which costs Rs. 150 per hour.
Due to failure to obey traffic signals, eight fatal accidents and sixty non-fatal
accidents occurred in last 4 years. On an average, insurance settlements per fatal
and non-fatal accidents are Rs. 5,00,000 and Rs. 15,000 respectively.
To eliminate the delay of traffic and the accidents caused due to traffic light
violations, the flyover has been designed. It will add a quarter of kilometer to
the distance of 20% of total traffic. No posting of policeman will be required at
the flyover. The flyover will require investment of Rs. 3 Cr. Extra maintenance
cost would be Rs. 70,000 a year.

The incremental operating cost for commercial vehicle will be Rs. 5 per km and
Rs. 2 for non-commercial vehicle. Expected economic life of the flyover is 30
years having no salvage value. The cost of capital for the project is 8%
(corresponding capital recovery rate is 0.0888).
You are required to calculate:
(i) total net benefits to users,
(ii) annual cost to the state; and
(iii) benefit cost ratio
Question 13--Forex
EFD Ltd. is an export business house. The company prepares invoice in
customers' currency. Its debtor of US$ 10,000,000 is due on April 1, 2015.
Market information as at January 1, 2015 is:
Exchange rates US$/INR Currency Futures US$/INR
Spot 0.016667 Contract size: Rs. 24,816,975
1-month forward 0.016529 1-month 0.016519
3-months forward 0.016129 3-month 0.016118

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 Initial Margin Interest rates in India
1-Month Rs. 17,500 6.5%
3-Months Rs. 22,500 7%

On April 1, 2015 the spot rate US$/INR is 0.016136 and currency future rate is
0.016134. Which of the following methods would be most advantageous to EFD
Ltd?
(i) Using forward contract
(ii) Using currency futures
(iii) Not hedging the currency risk
Question 14--Factoring
PQR Ltd. has credit sales of Rs. 165 crores during the financial year 2014-15
and its average collection period is 65 days. The past experience suggests that
bad debt losses are 4.28% of credit sales.
Administration cost incurred in collection of its receivables is Rs. 12,35,000 p.a.
A factor is prepared to buy the company's receivables by charging 1.95%
commission. The factor will pay advance on receivables to the company at an
interest rate of 16% p.a. after withholding 15% as reserve.
Estimate the effective cost of factoring to the company assuming 360 days in a
year.
Question 15—Dividend Policy
The following information is collected from the annual reports of J Ltd:
Profit before tax Rs 2.50 crore
Tax rate 40 percent
Retention ratio 40 percent
Number of outstanding shares 50,00,000
Equity capitalization rate 12 percent
Rate of return on investment 15 percent
What should be the market price per share according to Gordon's model of
dividend policy?
Question 16—Valuation of Business
R Ltd. and S Ltd. are companies that operate in the same industry. The financial
statements of both the companies for the current financial year are as follows:
Balance Sheet
Particulars R. Ltd. (Rs.) S. Ltd (Rs.)
Equity & Liabilities
Shareholders Fund

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 Equity Capital (Rs. 10 each) 20,00,000 16,00,000
Retained earnings 4,00,000 -
Non-current Liabilities
16% Long term Debt 10,00,000 6,00,000
Current Liabilities 14,00,000 8,00,000
Total 48,00,000 30,00,000
Assets
Non-current Assets 20,00,000 10,00,000
Current Assets 28,00,000 20,00,000
Total 48,00,000 30,00,000

Income Statement
Particulars R. Ltd. (Rs.) S. Ltd (Rs.)
A. Net Sales 69,00,000 34,00,000
B. Cost of Goods sold 55,20,000 27,20,000
C. Gross Profit (A-B) 13,80,000 6,80,000
D. Operating Expenses 4,00,000 2,00,000
E. Interest 1,60,000 96,000
F. Earning before taxes [C-(D+E)] 8,20,000 3,84,000
G. Taxes @ 35% 2,87,000 1,34,000
H. Earning After Tax (EAT) 5,33,000 2,49,600
Additional Information:
No. of equity shares 2,00,000 1,60,000
Dividend payment Ratio (D/P) 20% 30%
Market price per share Rs. 50 Rs. 20
Assume that both companies are in the process of negotiating a merger through
exchange of Equity shares:
You are required to:
(i) Decompose the share price of both the companies into EPS & P/E
components. Also segregate their EPS figures into Return On Equity
(ROE) and Book Value/Intrinsic Value per share components.
(ii) Estimate future EPS growth rate for both the companies.
(iii) Based on expected operating synergies, R Ltd. estimated that the intrinsic
value of S Ltd. Equity share would be Rs. 25 per share on its acquisition.
You are required to develop a range of justifiable Equity Share Exchange
ratios that can be offered by R Ltd. to the shareholders of S Ltd. Based on
your analysis on parts (i) and (ii), would you expect the negotiated terms to
be closer to the upper or the lower exchange ratio limits and why?
Question 17-- Portfolio
Following are the details of a portfolio consisting of three shares:

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 Shar Portfolio Beta Expected return in % Total variance
e weight
A 0.20 0.40 14 0.015
B 0.50 0.50 15 0.025
C 0.30 1.10 21 0.100
Standard Deviation of Market Portfolio Returns = 10%
You are given the following additional data:
Covariance (A, B) = 0.030
Covariance (A, C) = 0.020
Covariance (B, C) = 0.040
Calculate the following:
(i) The Portfolio Beta
(ii) Residual variance of each of the three shares
(iii) Portfolio variance using Sharpe Index Model
(iv) Portfolio variance (on the basis of modern portfolio theory given by
Markowitz)
Question 18—Capital Budgeting
A manufacturing unit engaged in the production of automobile parts in
considering a proposal of purchasing one of the two plants, details of which are
given below:
Particulars Plant A Plant B
Cost Rs. 20,00,000 Rs. 38,00,000
Installation Charges Rs. 4,00,000 Rs. 2,00,000
Life 20 years 15 years
Scrap value after full life Rs. 4,00,000 Rs. 4,00,000
Output per minute (units) 200 400
The annual costs of the two plants are as follows:
Particulars Plant A Plant B
Running hours per annum 2,500 2,500
Costs: (In Rs.) (In Rs.)
Wages 1,00,000 1,40,000
Indirect materials 4,80,000 6,00,000
Repairs 80,000 1,00,000
Power 2,40,000 2,80,000
Fixed costs 60,000 80,000
Will it be advantageous to buy Plant A or Plant B? Substantiate your answer
will the help of comparative unit cost of the plants. Assume interest on capital at
10 percent. Make other relevant assumptions:
Note: 10 percent interest tables
20 Years 15 Years

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 Present value of Rs. 1 0.1486 0.2394
Annuity of Rs. 1 (capital recovery factor with 10% 0.1175 0.1315
interest)

Question 19--Forex
An importer booked a forward contract with his bank on 10th April for USD
2,00,000 due to 10th June @ Rs. 64.4000. The bank covered its position in the
market at Rs. 64.2800.
The exchange rates for dollar in the interbank market o 10th June and 20th June
were:
10th June 20th June
Spot USD 1= Rs. 63.8000/8200 Rs. 63.6800/7200
Sport/June Rs. 63.9200/9500 Rs. 63.8000/8500
July Rs. 64.0500/0900 Rs. 63.9300/9900
August Rs. 64.3000/3500 Rs. 64.1800/2500
September Rs. 64.6000/6600 Rs. 64.4800/5600
Exchange Margin 0.10% and interest on outlay of funds @ 12%. The importer
requested on 20th June for extension of contract with due data on 10th August.
Rates rounded to 4 decimal in multiples of 0.0025.
On 10th June, Bank Swaps by selling spot and buying one month forward.
Calculate:
(i) Cancellation rate
(ii) Amount payable on Rs. 2,00,000
(iii) Swap loss
(iv) Interest on outlay of funds, if any
(v) New contract rate
(vi) Total Cost

Question 20--Leasing
R Ltd., requires a machine for 5 years. There are two alternatives either to take it
on lease or buy. The company is reluctant to invest initial amount for the project
and approaches their bankers. Bankers are ready to finance 100% of its initial
required amount at 15% rate of interest for any of the alternatives.
Under lease option, upfront Security deposit of Rs. 5,00,000/- is payable to
lessor which is equal to cost of machine. Out of which, 40% shall be adjusted
equally against annual lease rent. At the end of life of the machine, expected

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 scrap value will be at book value after providing, depreciation @ 20% on
written down value basis.

Under buying option, loan repayment is in equal annual installments of principal

amount, which is equal to annual lease rent charges. However in case of bank
finance for lease option, repayment of principal amount equal to lease rent its
adjusted every year, and the balance at the end of 5th year.

Assume Income tax rate is 30%, interest is payable at the end of every year and
discount rate is @ 15% p.a. The following discounting factors are given:
Year 1 2 3 4 5
Factor 0.8696 0.7562 0.6576 0.5718 0.4972
Which option would you suggest on the basis of net present value? (8 Marks)

Question 21—Mutual Fund

There are two Mutual Fund viz. D Mutual Fund Ltd. and K Mutual Fund Ltd.
Each having close ended equity schemes.
NAV as on 31-12-2014 of equity schemes of D Mutual Fund Ltd. is Rs. 70.71
(consisting 99% equity and remaining cash balance) and that of K Mutual Fund
Ltd. is 62.60 (Consisting 96% equity and balance in cash).
Following is the other information:

Particular Equity Schemes

D Mutual Fund Ltd. K Mutual Fund Lt.
Sharpe Ratio 2 3.3
Treynor Ratio 15 15
Standard deviation 11.25 5
There is no change in portfolios during the next month and annual average cost
is Rs. 3 per unit for the schemes of both the Mutual Funds.
If Share Market goes down by 5% within a month, calculate expected NAV
after a month for the schemes of both the Mutual Funds.
For calculation, consider 12 months in a year and ignore number of days for
particular month.

Question 22--Portfolio
A is an investor and having in its Portfolio Shares worth Rs. 1,20,000 at current
price and Cash Rs. 10,00,000. The Beta (ß) of Share Portfolio is 1.4. After four
months the price of shares dropped by 1.8%.

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 You are required to determine:
(i) Current Portfolio Beta and
(ii) Portfolio Beta after four months - if A on current date goes for long
position on Rs. 1,30,00,000 Nifty futures.
Show calculations in Rs. Lakhs with four decimal points.

Question 23—Dividend Policy

You are requested to find out the approximate dividend payment ratio as to have
the Share Price at Rs. 55 by using Walter Model, based on following
information available for a company.
Amount Rs.
Net Profit 50 lakhs
Outstanding 10% Preference Shares 80 lakhs
Number of Equity Shares 5 lakhs
Return on Investment 15%
Cost of Capital (after Tax) (Ke) 12%

Question 24—Derivative/Capital Budgeting

Ram Chemical is in production Line of Chemicals and considering a proposal of
building new plant to produce pesticides. The Present Value (PV) of new
proposals is Rs. 150 crores (After considering scrap value at the end of life of
project). Since this is a new product market, survey indicates following variation
in Present Value (PV):
Condition Favorable in first year
PV will increase 30% from original estimate
Condition sluggish in first yearPV will decrease by 40% from original
Figures.
In addition Rama Chemical has a option to abandon the project at the end of
Year and dispose it at Rs. 100 crores. If risk free rate of interest is 8%, what will
be present value of put option?

Question 25—Capital Budgeting

A USA based company is planning to set up a software development unit in
India. Software developed at the Indian unit will be bought back by the US
parent at a transfer price of US $200 Lakhs. The unit will remain in existence in
India for one year; the software is expected to get developed within this time
frame.

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 The US based company will be subject to corporate tax of 30% and a
withholding tax of 10% in India and will not be eligible for tax credit in the US.
The software developed will be sold in the US market for US $ 240 lakhs. Other
estimates are as follows:
Rent for fully furnished unit with necessary hardware in Rs. 20,00,000
India Rs. 600 per man
Man power cost (160 software professional will be working hour
for 10 hours each day) Rs. 24,00,000
Administrative and other costs
Advice the US Company on the financial viability of the project. The rupee-
dollar rate is Rs. 67/$. Assume 1=360 days.
Question 26—Bond Valuation
Bank A enter into a Repo for 14 days with Bank B in 10% Government of India
Bonds 2018 @ 5.65% for Rs. 8 crore. Assuming that clean price be Rs. 99.42
and initial Margin be 2% and days of accrued interest be 262 days. You are
required to determine.
(i) Dirty Price
(ii) Repayment at maturity (consider 360 days in a year)
Question 27--Portfolio
A Stock costing Rs. 150 pays no dividends. The possible prices at which the
stock may be sold for at the end of the year with the respective probabilities are:
Price ↓ (in Rs.) Probability ↓
130 0.2
150 0.1
160 0.1
165 0.3
175 0.1
180 0.2
Total 1.0
You are required to:
(i) calculate the Expected Return,
(ii) calculate the Standard Deviation (σ) of Returns.
Show calculations upto three decimal points.
Question 28—Bond Valuation
RC Ltd. is able to issue commercial paper of Rs. 50,00,000 every 4 months at a
rate of 15% p.a. The cost of placement of commercial paper issue is Rs. 2,000
per issue. RC Ltd. is required to maintain line of credit Rs. 2,00,000 in bank
balance. The applicable income tax rate for RC Ltd. is 30%. What is the cost of

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 funds (after taxes) to RC Ltd. for commercial paper issue? The maturity of
commercial paper is four months.
Question 29--Leasing
SD Ltd. wants to purchase a machine worth Rs. 25,00,000. It has two options:
Either (i) to acquire the Asset by taking a Bank Loan @ 12% p.a. repayable in 5
yearly instalments of Rs. 5,00,000 each plus interest or, (ii) to lease the Asset at
yearly rental of Rs. 7,00,000 for five years.
In both the cases, the instalment is payable at the end of the year.
The Company discounts its Cash Flows @ 14% (after tax).
Depreciation is to be taken at 20% on Written Down Value Method (WDV)
The company's tax rate is 34%.
You are required to advise which of the financial options is to be exercised and
reason thereof.
Year 1 2 3 4 5
Present Value Factor 0.877 0.769 0.67 0.592 0.519 (Total
(PVF) 14% 5 3.432)
Show Amount to the nearest Rupee.
Question 30—Bond Valuation
P Ltd. has current earnings of Rs. 6 per share with 10,00,000 shares outstanding.
The company plans to issue 80,000, 8% convertible preference shares of Rs. 100
each at par. The preference shares are convertible into 2 equity shares for each
preference share held. The equity share has a current market price of Rs. 42 per
share. Calculate.
(i) What is preference share's conversion value?
(ii) What is conversion premium?
(iii) Assuming that total earnings remain the same, calculate the effect of the
issue on the basic earning per share (A) before conversion (B) after
conversion.
(iv) If profits after tax increases by Rs. 20 lakhs what will be the basic EPS,
(A) before conversion and (B) on a fully diluted basis?
Question 31--Factoring
AC Co. Ltd has a turnover of Rs. 1600 Lakhs and is expecting growth of
17.90% for the next year. Average credit period is 100 days. The Bad Debt
losses are about 1.50% on sales. The administrative cost for collecting

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 receivable is Rs. 8,00,000. The AC Co. Ltd decides to make use of Factoring
Services by FS Ltd. on term as under:
(i) that the factor will charge commission of 1.75%
(ii) 15% Risk with recourse and
(iii) Pay an advance on receivables to AC Co. Ltd. at 14% p.a. interest after
withholding 10% as reserve.
You are required to calculate the effective cost of factoring to AC Co. Ltd. for
the year.
Assume 360 days in a year.
Show amount in Lakhs of Rs. with two decimal points.
Question 32--Portfolio
The five portfolios of a mutual fund experienced following result during last 10
years periods:
Portfolio Average annual Standard Correlation with the market
return % deviation return
A 20.0 2.3 0.8869
B 17.0 1.8 0.6667
C 18.0 1.6 0.600
D 16.0 1.8 0.867
E 13.5 1.9 0.5437
Market risk : 1.2
Market rate of return : 14.3%
Risk free rate : 10.1%
Beta may be calculated only upto two decimal. Rank the portfolio using
JENSEN'S ALPHA method.
Question 33—Valuation of Business--Restructuring
The following is the Balance Sheet of XYZ Ltd. as at 31st March, 2016:
Liabilities Rs. in Assets Rs. in
lakhs lakhs
Equity Shares of Rs. 10 500 Land and Buildings 150
each Plant and Machinery 200
11% Preference Shares of 100 Furniture and Fixtures 60
Rs. 10 each 100 Inventory 60
12% Debentures Sundry Debtors 50
Debentures Interest 12 Cash at Bank 50
accrued and Payable 60 Preliminary Expenses 15
Loan from Bank 300 Cost of Issue of
Trade Creditors Debentures 7
Profit and Loss Account 480
1,072 1,072

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 The Company's performance is not good and has suffered sizable losses during
the last few years. The Company can be nursed back to health with proper
financial restructuring. As such, the following scheme is prepared:
(i) Equity Shares are to be reduced to Rs. 2 per share, fully paid-up.
(ii) Preference Shares are to be reduced (with coupon Rate of 9%) to equal
number of Shares of Rs. 5 each, fully paid-up.
(iii) Debentures holders have agreed to forgo the accrued interest due to them
and for the future the rate of interest on Debentures to be 10%.
(iv) Trade Creditors will forgo 20% of the amount due to them.
(v) The Company to issue 50 Lakh Shares at Rs. 2 each to be paid fully on
Application. The entire amount is fully subscribed by Promoters.
(vi) Land and Building to be revalued at Rs. 350 Lakhs. Plant and Machinery
value to be taken at Rs. 150 Lakhs and a provision of Rs. 5 Lakhs to be
made for Bad and Doubtful Debts.
You are required to:
(1) show the impact of Financial Restructuring on the Company's activities.
(2) prepare the fresh Balance Sheet after the reconstruction is completed on
the basis of above proposals.
Question 34--Forex
An importer requested his bank to extend for Forward contract of US $ 25,000
which is due to maturity on 31-10-2015 for a further periods of six month. The
other details are as under:
Contract rate US $ 1 = Rs. 61.00
The US $ quoted on 31-10-2015
Spot :Rs. 60.3200/60.6300
Six month premium: 0.86% / 0.98%
Margin money for buying and selling rate are 0.086% and 0.15% respectively.
Compute
(1) Cost to importer in respect to extension of forward contract.
(2) New Forward contract rate.
Question 35—Mutual Fund
SBI mutual fund has a NAV of Rs. 8.50 at the beginning of the year. At the end
of the year NAV increase to Rs. 9.10. Meanwhile fund distributes Rs. 0.90 as
dividend and Rs. 0.75 as capital gains.

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 (i) What is the fund's return during the year?
(ii) Had these distributions been re-invested at an average NAV of Rs.8.75
assuming 200 units were purchased originally. What is the return?
Question 36--Forex
A call option on gold with exercise price Rs. 26,000 per ten gram and three
months to expire is being traded at a premium of Rs. 1,010 per ten gram. It is
expected that in three months time the spot price might change to Rs. 27,300 or
24,700 per ten gram. At present this option is at-the-money and the rate of
interest with simple compounding is 12% per annum. Is the current premium for
the option justified? Evaluate the option and comments.

Question 38--Forex
The rate of inflation in USA is likely to be 3% per annum and in India it is likely
to be 6.5%. The current spot rate of US $ in India in Rs. 43.40. Find the
expected rate of US$ in India after one year and 3 years from now using
purchasing power parity theory.
Question 39--Leasing
ABC Computers Ltd. is desiring to install a "Software Developing Unit" costing
Rs. 60 lacs. In order to leverage its tax position, it has requested the vendor to
quote for a three year lease with rentals payable at the end of each year but in a
diminishing manner such that they are in the ratio of 3:2:1. Depreciation can be
assumed to be on WDV basis @ 25% and the vendor's marginal tax rate is 35%.
The target rate of return for the vendor is 10%. You are required to find out the
year wise rental the vendor is required to quote to ABC Computer Limited.

Question 40—Capital Budgeting

Indian Newsprint Ltd. (INL) a leading manufacturer of newsprint in the country,
is planning to start manufacturing card board unit. Planning & Strategy division
of the company has placed before the board of directors the "Dental Project
Repot" of the card board unit. The report inter alia, includes the following cash
flow:
(Fig in Rs. Lakhs)
Year Cost of the plant Recurring cost Savings
0 1000

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 1 400 1200
2 500 1400
The cost of the capital is 9%.
You are required to measure the sensitivity of the project to changes in the
levels of plant value, recurring cost and savings (considering each factor at a
time) such that the NPV becomes zero. The present value factor at 9% are given
below:
Year PVF 9%
0 1
1 0.917
2 0.842
Advise the board of directors which factor is the most sensitive to affect the
acceptability of the project?
Question 41--Forex
Bharat Bank Ltd. has entered into a plain vanilla swap through on Overnight
Index Swap (OIS) on a principal of Rs. 1 crore and agreed to receive MIBOR
overnight floating rate for a fixed payment on the principal. The swap was
entered into on Monday, 10th July 2017 and was to commence on and from 11th
July 2017 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
8.75%, 9.15%, 9.12% 8.95%, 8.98% and 9.15%
If Bharat Bank Ltd. received Rs. 417 net on settlement, calculate fixed rate and
interest under both legs.
Notes:
(i) Sunday is holiday
(ii) Work in rounded rupee and avoid decimal working
(iii) Consider 365 days in a year.

Question 42—Mutual Fund

A reputed financial institution of the country floated a Mutual fund having a
corpus of Rs. 10 crores consisting of 1 crore units of Rs. 10 each. Mr. Vijay
invested Rs. 10,000 for 1000 units of Rs. 10 each on 1st July 2014. For the
financial year ended 31st March 2015, the fund declared a dividend of 10% and
Mr. Vijay found that his annualized yield from the fund was 153.33%. The
mutual fund during the financial year ended 31st March 2016, declared a

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 dividend of 20%. Mr. Vijay has reinvested the entire dividend in acquiring units
of the mutual fund at its appropriate NAV. On 31st March 2017 Mr. Vijay
redeemed all his balances of 1129.61 units when his annualized yields was
73.52%.
You are required to find out NAV as on 31st March 2015, 31st March 2016 and
31st March 2017.
Question 43--Forex
A textile manufacturer has taken floating interest rate loan of Rs. 40,00,000 on
1st April, 2012. The rate of interest at the inception of loan is 8.5% p.a. interest
is to be paid every year on 31st March, and the duration of loan is four years. In
the month of October 2012, the Central Bank of the country releases following
projections about the interest rates likely to prevail in future.
(i) On 31st March, 2013, at 8.75%; on 31st March, 2014 at 10% on 31st
March, 201? at 10.5% and on 31st March, 2016 at 7.75%. Show how this
borrowing can hedge the risk arising out of expected rise in the rate of
interest when he wants to peg his interst cost at 8.50% p.a.
(ii) Assume that the premium negotiated by both the parties is 0.75% to be
paid on 1st October, 2012 and the actual rate of interest on the respective
due dates happens to be as; on 31st March, 2013 at 10.2%; on 31st March,
2014 at 11.5%; on 31st March, 2015 at 9.25%; on 31st March, 2016 at
9.0% and 8.25%. Show how the settlement will be executed on the
perspective interest due dates.

Question 44—Valuation of Business

East Co. Ltd. is studying the possible acquisition of Fost Co. Ltd. by way of
merger. The following data are available in respect of the companies.
East Co. Ltd. Fost Co. Ltd.
Earning after tax (Rs.) 2,00,000 60,000
No. of equity shares 40,000 10,000
Market value per share (Rs.) 15 12
(i) If the merger goes through by change of equity share and the exchange
ratio is based on the current market price, what are the new earnings per
share for East Co. Ltd.?

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 (ii) Fort Co. Ltd. wants to be sure that the merger will not diminish the
earnings available to its shareholders. What should be the exchange ratio
in that case?
Question 45—Forex/Derivative
JKL Ltd. is an export business hose. The company prepares invoice in
customers' currency.
Its debtors of US $ 20,000,000 is due to April 1, 2017.
Market information as at January 1, 2017 is:
Exchange rate US$/INR Currency Future US$/INR
Spot 0.016667 Contract size: 31,021,218
1-month forward 0.016529 1-month 0.016519
3-month forward 0.016129 3-month 0.016118

Initial Margin Interest rates in India

1-month Rs. 32,500 7%
3-month Rs. 50,000 8%
On April 1, 2017 the spot rate US$/INR is 0.016136 and currency future rate is
0.016134.
Which of the following methods would be most advantageous to JKL Ltd.?
(i) Using forward contract.
(ii) Using currency futures
(iii) Not hedging the currency risk
Question 46—Capital Budgeting
Rahim Enterprises is a manufacturer and exporter of woolen garments to
European countries. Their business is expanding day by day and in the previous
financial year the company has registered a 25% growth in export business. The
company is in the process of considering a new investment project. It is an all
equity financed company with 10,00,000 equity shares of face value of Rs. 50
per share. The current issue price of this share is Rs. 125 ex-divided. Annual
earning areRs. 25 per share and in the absence of new investments will remain
constant in perpetuity. All earnings are distributed at present. A new investment
is available which will cost Rs. 1,75,00,000 in one year's time and will produce
annual cash inflows thereafter of Rs. 50,00,000. Analyse the effect of the new
project on dividend payments and the share price.

Question 47--Portfolio

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 The return of security 'L' and security 'K' for the past five years are given below:
Year Security-L Security-K
Return % Return %
2012 10 11
2013 04 -06
2014 05 13
2015 11 08
2016 15 14
Calculate the risk and return of portfolio consisting above information.

Question 48—Bond Valuation

Sea Rock Ltd. has an excess cash of Rs. 30,00,000 which it wants to invest in
short-term marketable securities.
(i) Expenses resulting to investment will be Rs. 45,000. The securities
invested will have an annual yield of 10%. The company seeks your
advice as to the period of investment so as to earn a pre-tax income of 6%.
(ii) Also find the minimum period for the company to break-even its
investment expenditure. Ignore time value of money.
Question 49--Forex
Following information is given:
Exchange rates : Canadian dollar 0.666 per DM (spot)
Canadian dollar 0.671 per DM (3-months)
Interest rates: DM 7.5% p.a.
Canadian Dollar - 9.5% p.a.
To take the possible arbitrage gains, what operations would be carried out?

Question 50--Portfolio
Consider the following information on two stock, X and Y.
Year 2016 2017
Return on X (%) 10 16
Return on Y (%) 12 18
You are required to calculate:
(i) The expected return on a portfolio containing X and Y in the proportion of
40% and 60% respectively.
(ii) The Standard Deviation of return from each of the two stocks.
(iii) The Covariance of returns from the two stocks.

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 (iv) The Correlation coefficient between the returns of the two stocks.
(v) The risk of a portfolio containing X and Y in the proportion of 40% and
60%.

Question 51—Bond Valuation

Sabanam Ltd. has issued convertible debentures with coupon rate 11%. Each
debenture has an option to convert to 16 equity shares at any time until the date
of maturity. Debentures will be redeemed at Rs. 100 on maturity of 5 years. An
investors generally requires a rate of return of 8% p.a. on a 5-year security. As
an advisor, when will you advise the investor to exercise conversion for given
market prices of the equity share of (i) Rs. 5, (ii) Rs. 6 and (iii) Rs. 7.10.
Cumulative PV factor for 8% for 5 years : 3.993
P.V. factor for 8% for year 5 : 0.681

Question 53—Mutual Fund

SG Mutual Fund Company has the following assets under it on the close of
business on:
Total No. of Units issued by the Mutual Fund is 6,00,000.
Company No. of Shares 1st August 2nd August
2017 2017 Market
Market Price price per share
per share (Rs.) (Rs.)
Q Ltd. 2,000 200.00 205.00
R Ltd. 30,000 312.40 360.00
S Ltd. 40,000 180.60 191.55
T Ltd. 60,000 505.10 503.90
(i) Calculate Net Assets Value (NAV) of the Fund.
(iii) Following information is also given:
Assuming that Mr. Zubin, an investor, submits a cheque of Rs. 30,00,000
to the Mutual Fund and the Fund Manager of this entity purchases 8,000
shares of R Ltd; and the balance amount is held in Bank. In such a case,
what would be the position of the Fund?
(iii) Calculate new NAV of the Fund as on 2nd August, 2017.

Question 54—Valuation of Business

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 An established company is going to be demerged in two separate entities. The
valuation of the company is done by well-known analyst. He has estimated a
value of Rs.5,000 lakhs, based on the expected free cash flow for next year of
Rs. 200 lakhs and an expected growth rate of 5%. While going through the
valuation procedure, it was found that the analyst has made the mistake of using
the book values of debt and equity in his calculation. While you do not know the
book value weight he used, you have been provided with the following
information: 8
(i) The market value of equity is 4 times the book value of equity, while the
market value of debt is equal to the book value of debt.
(ii) Company has a cost of equity of 12%.
(iii) After tax cost of debt is 6%.
You are required to advise the correct value of the company.

Question 55—Derivative
Mr. K.K. purchased a 3-month call option for 100 shares in PQR Ltd. at a
premium of Rs. 40 per share, with an exercise price of Rs. 560. He also
purchased a 3-month put option for 100 shares of the same company at a
premium of Rs. 10 per share with an exercise price of Rs. 460. The market price
of the share on the date of Mr. KK's purchase of options, is Rs. 500. Compute
the profit or loss that Mr. K.K would make assuming that the market price falls
to Rs. 360 at the end of 3 months.

Question 56—Forex (SWAP)

Punjab Bank has entered into a plain vanilla swap through on Overnight Index
Swap (OIS) on a principal of Rs. 2 crore and agreed to receive MIBOR
overnight floating rate for a fixed payment on the principal. The swap was
entered into on Monday, 24th July, 2017 and was to commence on 25th July,
2017 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
8.70%, 9.10%, 9.12%, 8.95%, 8.98% and 9.10%
If Punjab Bank received Rs. 507 net on settlement, calculate Fixed rate and
interest under both legs.
Notes:

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 (i) Sunday is a Holiday.
(ii) Workout in rounded rupees and avoid decimal working.
(iii) Consider a year consists of 365 days.
Question 57—Bond Valuation
Omega Ltd. is interested in expanding its operation and planning to install
manufacturing plant at US. For the proposed project, it requires a fund of $10
million (net of issue expenses or flotation cost). The estimated flotation cost is
2%. To finance this project, it proposes to issue GDRs.
As a financial consultant, you are requested to compute the number of GDRs to
be issued and cost of the GDR with the help of following additional information:
(i) Expected market price of share at the time of issue of GDR is Rs. 250
(Face Value being Rs. 100)
(ii) 2 shares shall underlay each GDR and shall be priced at 4% discount to
market price.
(iii) Expected exchange rate Rs. 64/$
(iv) Dividend expected to be paid is 15% with growth rate 12%.
Question 58—Portfolio/ Mixed
Neel holds Rs. 1 crore shares of XY Ltd. whose market price standard deviation
is 2% per day. Assuming 252 trading days in a year, determine maximum loss
level over the period of 1 trading day and 10 trading days with 99% confidence
level. Assuming share price are normally for level of 99%, the equivalent Z
score from Normal table of Cumulative Area shall be 2.33.

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