SOLUTION TO MAY 19 OLD CA FINAL …...CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi 1 SOLUTION

CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi

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SOLUTION TO MAY 19 OLD CA FINAL SFM(Practical ques)

By CA PRAVIIN MAHAJAN

Conclusion : This paper Is a wake up call, as it is not possible now to prepare subject by doing

only important questions. Full coverage of ALL ICAI MATERIAL ( PRACTISE MANUAL , RTP’s,

MTP’s, PAST PAPERS) with all technical questions is necessary,as technical questions of every

are chapter is asked.

Questions of chapters like dividend are also put up with new points. Topics which were not

asked from Last 10 years are asked ( FIRM BETA in Portfolio, Conventional Interest rate

swaps),which we extensively cover in class. Rest were repetitive lengthy questions

Still 70 – 75 can be easily claimed with average prepration. Little bit extra effort could get

more better marks.

This paper is perfect example, that its very important to identify which questions are to be

attempted first, to claim exemption as early as possible in given 3 hours. So Besides

prepration for content in subject, training is also needed for how to see and approach

question paper in exam. Attempting MOCK TESTS will be fruitfull.

Questions Chapter Marks

Q1a Capital Budgeting 5

Q1b Derivative “Futures” 5

Q1c Mutual Funds 5

Q1d Forex 5

Q2a Portfoilo management (Firm Beta) 8

Q2b Corporate Valuation 8

Q3a Forex 8

Q3b Dividend (Security valuation) 8

Q4a forex 8

Q4b Leasing 8

Q5a Potfolio Management 8

Q5b Merger and acquisition 8

Q6a Factoring 8

Q6b Mutual Fund 8

Chapter wise coverage

1. Derivative 5

2. Forex 21

3. Corporate Valuation 8

4. Security Valuation (dividend) 8

5. Mutual Fund 13

6. Portfolio Management 16

7. Merger and Acquisition 8

8. Capital Budgeting 5

9. Leasing 5

10. Factoring 8


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Q1a SS Company is considering the replacement of its existing machine with a new machine. The

Purchase price of the new machine is Rs 26 lakhs and its expected life is 8 years. The company

follows straight line method of depreciation on the original investment (scrap value is not

considered for the purpose of depreciation. The other expenses to be incurred for the new

machine are as under:

i. Installation charges Rs 9,000

ii. Fees paid to consultant for his advise to buy the new machine Rs 6,000

iii. Additional working capital required Rs17,000. (will be released after 8 years)

The written down value of the existing machine is Rs 76,000 and its cash salvage value is Rs

12,500. The dismantling of this machine would cost Rs 4,500. The Annual earnings (before tax

but after depreciation ) from the new machine would amount to Rs 3,15,000.Income tax rate is

35%. The company’s required rate of return is 13%.

You are required to advise on the viability of the proposal.

Author’s Note: Simple question of replacement in capital budgeting.

Answer:

Note : Fees paid to consultant for his advice to buy new machine is sunk cost

Statement of NPV

Cash outflow Amount Period Factor Present val

Purchase price 26,00,000

Installation 9,000

26,09,000

Sale of Old 12,500

Dismantle (4500)

Tax sav on

Cap loss

(76-8)0.35 23,800 (31,800) 25,77,200 0 1 25,77,200

Additional working cap 17,000 0 1 17,000

Cash Inflow

Operating cash inflow 5,30,875 1 – 4 4.8 25,48,200

Release ofworking cap 17,000 4e 0.376 6,392

Net Present value (39,608)

Since NPV is negative so Replacement is not feasible.

Statement of operating cash inflows

1 2 3 4

PBT 3,15,000 3,15,00 3,15,000 3,15,000

PAT 2,04,750 2,04,750 2,04,750 2,04,750

Depn 3,26,125 3,26,125 3,26,125 3,26,125

Cash inflows 5,30,875 5,30,875 5,30,875 5,30,875


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b. On April 1,2019,kasi has a portfolio consisting of 4 securities as shown below:

Security A K S P

Market Price Rs 48.5 Rs 332.68 Rs 13.99 Rs 292.82

No of shares 673 480 721 358

Β value 0.74 1.28 0.54 0.46

Cost of capital is 16% p.a compounded continuously. Kasi fears fall in prices of shares in future.

Accordingly he approaches you for the advice to protect the interest of his portfolio.

You can make use of the following information:

i. The current nifty value is 9380

ii. Nifty futures can be traded in the units of 25 only.

iii. Futures for September are currently quoted at 9540 and futures for October curre ntly

quoted at 9820.

You are required to calculate :

i. The Beta of his portfolio

ii. Theoretical value of futures for contracts expiring in September and October

(Given e0.067 = 1.0693, e0.08 = 1.0833, e0.093 = 1.0975)

iii. The number of nifty contract that he would have to sell,if he desires to hedge 150% of

portfolio until October.

Author’s Note: It is little typical question of derivative, but repetitive (Q3A NOV 15) so it is

simple. Though it is lengthy and carry more weight than 5 marks. Q38 “FUTURES” Pg 2.9in Book.

Answer:

i. β of portfolio is weighted average of β of each security in portfolio. Statement of Portfolio β

Security value of shares β value x β

A 32640.5 0.74 24153.97

K 159686.4 1.28 204398.59

S 10086.79 0.54 5446.87

P 104829.56 0.46 48221.60

307243.25 282221.03

Β of Portfolio = 282221.03

307243.25 = 0.92

ii. Theoretical value of future = CMP ert

Expiring in September = 9380 e0.16 x 6/12

= 9380 e0.08

= 9380 (1.0833)

= 10,161.35

Expiring in October = 9380 e0.16 x 7/12

= 9380 e0.0933

= 9380 (1.0975) = 10,294.55

iii. %age of hedge required = 150%

Index futures to be sold = 307243.25 x 1.50 x 0.92

= 423995.65

Index units sold = 423995.65/10,294.55

= 41.186

Index futures contract sold = 41.186 / 25 = 1.65 contracts


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c. The following particulars relating to Vishnu fund scheme :

Particulars Value (Rs incrore)

1. Investment in shares at cost

a. Pharmaceutical companies 79

b. Construction Industries 31

c. Service sector companies 56

d. IT companies 34

e. Real estate companies 10

2. Investment in bonds (fixed income)

a. Listed bonds ( 8,000, 14% bonds of Rs 15,000 each) 12

b. Unlisted bonds 7

3. No.of units outstanding (crores) 4.2

4. Expenses payable 3.5

5. Cash and cash equivalents 1.5

6. Market expectations on listed bonds 8.842%

Particulars relating to each sector are as follows:

Sector Index on purchase date Index on valuation date

Pharmaceutical co 260 465

Construction industries 210 450

Service sector companies 275 480

IT companies 240 495

Real estate companies 255 410

The fund has incurred the following expenses

Consultancy and management fees Rs 480 lacs

Office expenses Rs 150 lacs

Advertisement expenses Rs 38 lacs

You are required to calculate the following

i. Net asset value of the fund

ii. Net Asset value per unit

iii. If the period of consideration is 2 years and the fund has distributed Rs 3 per unit

per year as cash dividend, ascertain the net return (annualised) iv. Ascertain the expense ratio.

Author’s Note: Very good question omutul fund. 1st and 2nd part is very simple. But 3rd

and 4th part are to be done very carefully.


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Answer: Statement of Net asset value of Fund

Market value of Investments

Pharmaceutical company 79 x465

260 141.29

Construction industries 31 x 450

210 66.43

Service sector companies 56 x 480

275 97.75

IT companies 34 x 495

240 80.44

Real Estate companies 10 x 410

255 16.08

Listed bonds 15000 𝑋 0.14

0.08842 x 8000 19

Unlisted Bonds 7

Expenses payable (3.5)

Cash 1.5

NET ASSETS 425.99

ii. Net Asset Value per unit = 425.99

4.2 = 101.43

iii. Statement of Opening net Assets in Beginning

Investment in shares

Pharma 79

Construction 31

Service sector 56

IT companies 34

Real estate companies 10

Invested in Listed bonds 12

Unlisted bonds 7

Cash

1.5 + ( 4.8 + 1.5 + .38 – 3.5 + 6 x 4.2) 29.88

258.88

NAV 258.88

4.2 = 61.64

Return for 2 years = dividend + cl NAV - OP NAV

Op NAV

= 6 + 101.43 −61.64

61.64 = 74.29%

= 37.14% p.a

Iv Expense Ratio = 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑟 𝑁𝐴𝑉 𝑜𝑛 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

= 6.68

258.88 x 100

= 2.58%


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d. DSE is an export oriented business in Kolkata. DSE Ltd. invoices in customers currency. Its

receipts of US $ 3,00,000 is due on july 1st 2019.

Market information as at 1st April 19

Exchange rates Currency Futures

US $/Rs US $/Rs

Spot 0.0154 April 0.0155 Contract size

1 Month forward 0.0150 July 0.0151 = Rs 6,40,000

3 month forward 0.0147

Initial Margin Interest rates in India

April Rs 13,000 9%

July Rs 24,000 8.5%

On July, the spot rate US $ / Rs is 0.0146 and currency future rate is 0.0147. Comment which of

the following methods would be most advantageous for DSE Ltd.

i. Using forward contract.

ii. Using currency futures

iii. Not hedging currency risks.

It may be assumed that variation in margin would be settled on the maturity of the futures

contract.

Author’s Note : Simple, extremely repetitive question of currency futures. It is included in “List of SUPER 30 favourite questions”. Q164 Foreign exchange risk management,Pg 3.50

Answer

Indian company has to receive $ 3,00,000 after 3 months on July 1st.

Company has 3 options

i) ForwardMarket hedge

Company will book a forward contract today to sell 3,00,000 $ after 3 months @ $

0.0147/ Re

Company will receive = 3,00,000

0.0147 = Rs 204,08,163

ii) Hedge through currency futures

Statement of receipt

Re received on sale of 3,00,000 $ on 1st july at spot rate in july

3,00,000

0.0146 Rs 205,47,945

Futures

Re future to be bought = 3,00,000

0.0151= 198,67,550

Rs 198,67,550 Re future bought $ 3,00,000

Rs 198,67,550 Re future sold @ $ 0.0147 $2,92,053

Loss on currency futures 7,947 $

Loss on currency futures in Rs 7947

0.0146 Rs (5,44,315)

Interest on initial margin 19867550

640000 x 24000 x 0.085 x 3/12 Rs (15,382)

Net Re received 19988248

iii. No Hedging

Company will sell 3,00,000 $ after 3months at spotrate after 3 months

3,00,000

0.0146 = 205,47,945


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Q2a Equity of kGF Ltd (KGFL) is Rs 410 crores, its debt is worth Rs 170 crores. Printer Division

segments value is attributable to 74%, which has an asset Beta (βP) of 1.45, balance value is

applied on spares and consumable division, which has an asset Beta βSC of 1.20. KGFL debt Beta (βD) is 0.24 .

You are required to calculate:

i. Equity Beta (βE),

ii. Ascertain Equity Beta (βE). If KGF Ltd decides to change its Debt equity position by

raising further debt and buying back of equity to have its debt equity ratio at 1.90.

assume that the present debt Beta (βD1) is 0.35 and any further funds raised by way of

debt will have a Beta (βD2) of 0.40.

iii. Whether the new Equity Beta (βE) justifies increase in the value of equity on account of

leverage?

Author’s Note: Simple basic question of Firm/ Asset β.

Answer:

β weight β

Market value of equity 410 cr Printer Division 0.74 1.45

Market value of Debt 0.24 170 cr Spares Division 0.26 1.20

i. Asset β of company is weighted Average of β of Printer and Spares division.

Asset β = WP βP + WS βS

= 0.74 x 1.45 + 0.26 x 1.20

= 1.073 + 0.312

= 1.385

Asset β of company is Weighted average of equity β and Debt β

Asset β = WEβE + WDβD

1.385 = 410

580 x βE +

170

580 x 0.24

βE = (1.385 - 0.0703) 580

410

= 1.860

ii. Debt Equity Proportion is changed.

New Debt equity ratio 1.9 : 1

Existing capital 580 crore

New debt is raised to buy back equity, so Existing capital will be maintained

Debt before buy back 170 crore

Total debt after buyback 1.9

2.9 x 580 = 380 crore

New debt raised 210 cr

Total Equity after Buy back 200 crore

Current debt β 0.35

Debt β of further debt raised 0.40

Total debt β = 170

380 x 0.35 +

210

380 x 0.4 (question mentions, there are 2 debt β)

= 0.16 + 0.22

= 0.38

If composition of capital structure changes, Asset β remain same i.e 1.385


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Asset β = WE βE + WD βD

1.385 = 200

580 x βE +

380

580 x 0.38

βE = (1.385 - 0.25) 580

200 = 3.29

iii. Since βE is increased , cost of equity (by CAPM) will increase, it will reduce value of

Equity. (suggestions are invited for solution of this part)

b. The closing price of LX Ltd is Rs 24 per share as on 31st march 2019 on NSE Ltd. The Price

earnings ratio was 6. It was found that an amount of Rs 24 lakh as income and an extraordinary

loss of Rs 9 lakh were included in the books of accounts. The existing operations except for the

extraordinary items are expected to continue in future. Further the company has launched a

new product during the year with the following expectations.

(Rs in lakhs)

Sales 150

Material cost 40

Labour cost 34

Fixed cost 24

The company has 5,00,000 equity shares of Rs 10 each and 1,00,000 9% preference shares of Rs

100 each. The price earning ratio is 6 times. Post tax cost of capital is 10 % p.a. Tax rate is

34%.You are required to determine :

i. Existing profit from old operations

ii. The value of business.

Author’s Note : It is a simple repetitive question, generally carries weight of 5 marks. In this

attempt it is of 8 marks, though its not a complete question. Value of share is not asked in

question. It is included in the “list of SUPER 30 FAVOURITE QUESTIONS”. In Our book it is Q2

of valuation of business (corporate valuation) Pg 9.1.

i. Statement of Existing profit from Old operations

PERatio 6

Closing Market Price 24

EPS 24

6 4

Profit For Equity 4 x 5,00,000 20,00,000

Prefrence dividend 9,00,000

Profit after tax 29,00,000

Profit before Tax 29,00,000

0.66 43,93,939

+ Extraordinary Loss 9,00,000

- Extraordinary Income (24,00,000)

+ Profit from launch of new product

Sales 150

Material cost 40

Labour cost 34

Fixed cost 24 52,00,000

Profit before tax 80,93,939

Profit afer tax 80,93,939(0.66) 53,42,000


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Existing profit from old operations Rs 53,42,000

ii. Value of business 53,42,000

0.1 = Rs 534,20,000

Q3a 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

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 agrees to share the benefits/loss

equally.

You are required to find out

i. Whether a beneficial swap can be arranged ?

ii. What rate of interest for both IM and JI ?

Author’s Note : Simple basic question of Interest rate swaps. Examiner drafted question

smartly, so student should take this question as question of currency swap, but preference of

companies in Fixed and floating rate is given, so question of interest rate swap.

Q126 a foreign exchange risk management, pg 3.34 of book.

Answer IM JI

USD Floating rate LIBOR + 0.5% LIBOR + 2.5%

JPY Fixed rate 4% 4.25%

Prefrence $ Floating rate JY at Fixed rate

IM fluctuating $ JI FixedJY

L + 0.5% 4.25

4% Intermediary L+ 2.5%

4%

Recd. = L + 0.5% + 4.25 = L + 4.75 L + 2.5%

Paid = 4 + L + 2.5 = L + 6.5

Benefit of Swap 1.75

Share of I 0.75

P 0.5

Bank Q 0.5 Bank Fixed JY Fluctuating $

i. Since IM need $ loan at fluctuating rate and JI needs JY loan at Fixed rate, a swap will

be arranged in which IM will borrow JY at fixed rate and JI willborrow $ at fluctuating rate.

Interest according to own prefrence = L + 0.5 + 4.25

Interest under swap = 4 + L + 2.5

Benefit of swap = L + 0.5 - ( 4 + L + 2.5 ) = 1.75 %

Share of Intermediary = 0.75

Share of IM = 0.5

Share of JY = 0.5


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ii. Cost to each Party = Paid to I - Recd from I + paid to bank - Share in benefit from swap

IM = L + 0.5 - 4 % + 4% - 0.5 = L

JY = 4.25 - ( L + 2.5 ) + ( L + 2.5 ) – 0.5 = 3.75

b. An investor is considering purchasing the equity shares of LX Limited whose current market

price (CMP) is 150. The company is proposing a dividend of Rs 6 for the next year. LX is expected

to grow at 18 % per annum for the next 4 years. The growth will decline linearly to 14 percent

per annum after first four years. Thereafter, it will stabilize at 14 % per annum in finitely the

required rate of return is 18% per annum infinitely. You are required to determine

i. the intrinsic value of one share

ii. whether it is worth to purchase the share at this price

t 1 2 3 4 5 6 7

PVIF 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.266

Author’s note: Simple basic question of dividend with different growth rates. No technical point.

Answer : P0 = 150

D1 = 6

g = 1- 4 yrs = 18%

5 = 17%

6 = 16%

7 = 15%

8 and above = 14%

Ke = 18%

i. Intrinsic value of share is present value of all future cash outflows i.e dividend

Intrinsic value of share = Present value of + CMP at end of

Dividend from 1- 7years 7th year

Statement of Intrinsic value

Year Dividend factor (18%) Present value

1 6 0.847 5.082

2 7.08 0.718 5.083

3 8.35 0.609 5.085

4 9.85 0.516 5.083

5 11.52 0.437 5.034

6 13.36 0.370 4.943

7 15.36 0.314 4.823

8 7 17.51

0.18 − 0.14 = 437.75 0.314 137.45

172.583

ii. Current Market price of share is 150. Since Market price is less than intrinsic value,

investor should buy the share.


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Q4a KGF banks Sydney branch has surplus funds of USD $ 7,00,000 for a period of 2 months.Cost of

funds to the bank is 6% per annum. They propose to invest these funds in Sydney, New York or

Tokyo and obtain the best yield, without any exchange risk. The following rates of interest are

available at the three centres for investment of domestic funds there for a period of 2 months.

Sydney 7.5 % per annum

New York 8% per annum

Tokyo 4% per annum

The market rates in Australia for US dollars and Yen are as under

Sydney on New York

spot 0.7 100 / 0.7 300

1 month 10 /20

2 months 25/30

Sydney on Tokyo

spot 79.090/ 79.2 000

1 month 40 / 30

2 months 55 / 50

At which centre, will the investment be made and what will be the net gain to the bank on the

invested funds.

Author’snote : Question is ofcash management “Forex”. Question is technical but it is in manual

and earlier came in Nov 13. Q156 in book Pg 156. This ques is comparatively simple as it does

not ask answer in specific currency. Done in class

Answer

Company has Idle fund of $ 7,00,000 @ 6%p.a. Company can invest this fund in Sydney,New

York or Australia.

If invested in Sydney

Amount to be invested in A$ 7,00,000

0.7300 9,58,904 A $

A$ in hand after 2 months with interest

9,58,904 ( 1 + 0.075 x 2

12 ) 9,70,890 A$

$ in hand after 2 months 9,70,890 ( 0.7100 + 0.0025) 6,91,759 $

$ Payable after 2 months 7,00,000 ( 1 + .06 x 2

12) 7,07,000 $

Loss in $ if investment is made in Sydney 15,241 $

If Invested in Newyork

$ Invested 7,00,000 $

$ In hand after 2 months 7,00,000 ( 1 + .08 x 2

12 ) 7,09,333 $

$ Payable after 2 months 7,07,000 $

Profit in $ If investment is made in Newyork 2,333 $

If Investment in Tokyo

Yen tobe invested 7,00,000 ( 79.09 x 1

0.7300 ) 758,39,726 ¥

Yen in hand after 2 months

758, 39, 726 ( 1 + .04 x 2

12) 763,45,324 ¥

$ in hand after 2 months

763,45,324 x 1

79.2− .0050 𝑋 1

(0.7100 + .0025 )


12

763,45,324 x 1

111.15 686,867.51 $

$payable after 2 months 7,07,000 $

Loss in $ if invstement is made in Tokyo 20,132 $

Since $ profit is higher if investment is made in newyork, so newyork center is better for

investment.

b. M / s Shantilal Limited is in the business of manufacturing products. Company decided to install

a machine under considering buying or leasing option. The machine is subjected to straight line

method of depreciation. M / S Shantilal Limited can raise a Debt at 16% payable in four equal

annual installments of Rs 1, 68, 589 each, at the beginning of the Year.

In case of leasing, the company would require to pay an annual rent at the end of the year @

30% of cost of machine for 4 years. The company is in 45% tax bracket. The Salvage value is

estimated at Rs 12,412 at the end of the 4 years.

Advise which of the financing options Shantilal Limited should exercise and why?

N 1 2 3 4

PVIF(8.8,n) 0.919 0.845 0.776 0.714

PVIF(16,n) 0.862 0.743 0.640 0.552

Author’s note : Simple basic question of Leasing. It’s a question of manual. Q27 of book.

Answer : Company is considering to acquire a machine. Co.has 2 options

To purchase the asset by borrowing from bank. Co will anuual instalment of Rs 1,68,589 at the

beginning of each year for 4 years.

Cost of machine = 1,68,589 x (2.246 + 1)

= 5,47,240

Statement of principal and interest

Installment Interest Principal Loan O/s tax saving on int

1,68,589 - 1,68,689 3,78,551 -

1,68,589 60,568 1,08,021 2,70,530 27,256

1,68,589 43,285 1,25,304 1,45,226 19,478

1,68,589 23,363 1,45,226 - 10,513

Statement of cash outflows if asset is purchased

Cash flows amount period Factor 8.8% Present val

Installment 1,68,589 0 1 1,68,589

1,68,589 1-3 2.540 4,28,216

Taxsaving on interest 27,256 1e 0.919 (25,048)

19,478 2e 0.845 (16,459)

10,513 3e 0.776 (8158)

Tax saving on

Depreciation

547,240 - 12,412 x 0.45 60,168 1- 4e 3.254 (1,95,787)

4

Salvage value 12,412 4e 0.714 (8862)

3,42,491


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Option 2 : To acquire asset on lease.

Company will pay annual lease rent of 30% of cost i.e 5,47,240 i.e 1,64,172

Statement of cash outflow if asset acquired on lease

Cash Flow Amount Period Factor Present value

Lease Rent 1,64,172 1- 4e 3.254 5,34,216

Tax saving on lease rnt 73,877 1 – 4e 3.254 2,40,396

Net cash outflow 2,93,820

Since Present value of cash outflow is lower in lease proposal, so lease option should be

excersised.

Q5a Ms Preeti, a school teacher, after retirement has built up a Portfolio of rupees 1,20,000 which is

as follows:

stock number of shares market price per share beta

ABC Limited 1000 50 0.9

DLF Limited 500 20 1.0

GHI Limited 800 25 1.5

jkl Limited 200 200 1.2

Her portfolio consultant Sri Vijay has advised her to bring down the beta to0.8.

You are required to compute:

i. present portfolio beta

ii. how much risk free investment should he brought in, to reduce the beta to 0.8 ?

Author’s Note: Very simple question of derivative. Full concept is covered in Q35 Futures, Pg 2.8

Answer:

i. β of portfolio is weighted average of β ofeach security in portfolio.

Statement of Portfolio β

Stock Value of shares β Value x β

ABC 50,000 0.9 45,000

DEF 10,000 1 10,000

GHI 20,000 1.5 30,000

JKL 40,000 1.2 48,000

1,20,000 1,33,000

Portfolio β = 1,33,000

1,20,000 = 1.108

iii. portfolio β to be reduced to 1.108

WRISKY βRISKY + WRF βRF = 0.8

x 1.108 + ( 1 –x) 0 = 0.8

x = 0.8

1.108

= 0.72

Weight of Rf = 1- 0.72

= 0.28

If vaue of Total Portfolio is to be changed

Value of portfolio after purchaseof risk free investment = 1,20,000

0.72 = 1,66,667

Value of Risk Free investments to be brought in = 46,667

Value of Risky investment = 1,20,000


14

If Value of totalportfolio is to maintain to 1,20,000

Value of risk Free investment to be brought in 1,20,000 x 0.28 = 33,600

Value of Risky investment 1,20,000 x 0.72 = 86,400

b. R limited and S Limited operating in same industry are not experiencing any Rapid growth but

providing a steady stream of earnings. R limited’s management is interested in acquisition of S

Limited due to its excess plant capacity. Share of S Limited is trading in market at Rs 3.20 each.

Other data relating to S Limited is as follows:

Balance sheet of S Limited

liabilities amount assets amount

current liabilities 1, 59, 80,000 current assets 2, 48, 75, 000

long term liabilities 1, 28, 00,000 other assets 94,00,000

reserve and surplus 2, 79, 95, 000 property plants and

equipments 3, 45, 00 000

share capital 1, 20,00,000

(80 lacs shares of Rs 1.5 each)

Total 6, 87, 75, 000 Total 6, 87 75, 000

Particulars R limited Rs S Limited Rs combined entity Rs

Profit after tax 86, 50 000 49, 72 000 1, 21, 85, 000

residual net cash flows per year 90 10 000 54, 87 000 1, 85, 00, 000

Required return on equity 13.75 % 13.05 % 12.5%

You are required to compute the following

i. minimum price per share as Limited should accept from R Limited

ii. maximum price per share R Limited shall be willing to offer to S Limited

iii. floor value per share of Limited, whether it shall play any role in decision for its

acquisition by R Limited.

Author’s Note: Little technical question of Merger and acquisition. It carries understanding of new

concept. First appeared in MAY 15 RTP,now also part of manual, done specifically in class. Q61, Pg

4.29 in book.

Answer: R S Combined

MP per share 3.2

Number ofshares 80lakh

Paidupvalue per share 1.5

Reserves 279,95,000

PAT 86,50,000 49,72,000 121,85,000

Net cash flows per year 90,10,000 54,87,000 185,00,000

Ke 13.75 13.05 12.5

i. Minimum Price per share payable by R to S Ltd

Minimum Value payable by R to S is Pre merger value to S Ltd, But if Pre Merger

value is value is less than bookvalue, R will pay Book value to S.

PreValue Of S Ltd 80,00,000 x 3.2 256,00,000

Book Value of S Ltd 80,00,000 x 1.5 + 279,95,000 399,95,000


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Minimum price per share payable to Sltd = 399,95,000

80,00,000

= 4.99 or 5/share

ii. Maximum Price per share payable to S Ltd

Value of combined firm after acquisition

(Present value of all future cash inflows of combined firm) = 185,00,000

0.125

= 1480,00,000

Pre value of R Ltd 90,10,000

0.1375 655,27,273

Value given to sLtd 824,72,727

Value Per share 824,72,727

80,00,000 10.31

iii. Floor value of SLtd is Pre merger Market Cap = 80lac x 3.2

= 256,00,000

It is not used in decision to acquire S, as market cap of S is less than book value

of S.

Q6a XL Limited comma who is dealing in computer software is having credit sales of rupees

2,10,00,000 with average receivables of Rs 35, 00, 000.Bad debts are 0.9 % on sales. With an eye

to save time on collection of receivables XL Limited is considering a proposal to appoint a factor.

The following information is available:

Particulars Recourse Non-recourse

Average reduction in collection 30 30

of receivables days

reduction in bad debts by 0.3% 0.3%

saving in administration cost Rs 40000 40000

Advance 80% 80%

interest on advance 2% higher than current OD interest of 7% p.a

factor fee 0.60 percent 1.25%

assume 360 days in a year.

You are required to evaluate the proposal

Author’s Note: Very simple question of Factoring. Similar types of questions extensively solved in

class.

Answer:

Credit sales 210,00,000

Average debtor’s 35,00,000

Average debtor after factoring 210

360 x 30

= 17,50,000


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Statement of Evaluation of With recourse factoring proposal

As compared to in house management

Saving in Interest on reduction in average debtors

(35,00,000 - 17,50,000) 0.07 1,22,500

Saving In bad debts 0.003 x 210,00,000 63,000

Saving In administration cost 40,000

Comission to factor 0.006 x 210,00,000 ( 1,26,000)

Interest paid to factor

( 17.5 x 0.8 - 35 x 0.006) 0.02 (27,580)

Net savings 71,920

Statement of Evaluation of Without recourse factoring proposal

As compared to in house management

Saving in Interest on reduction in average debtors

(35,00,000 - 17,50,000) 0.07 1,22,500

Saving In bad debts 0.009 x 210,00,000 1,89,000

Saving In administration cost 40,000

Comission to factor 0.0125 x 210,00,000 ( 1,26,000)

Interest paid to factor

( 17.5 x 0.8 - 35 x 0.0125) 0.02 (27,125)

Net savings 1,98,375

Since savings in factoring without recourse is higher, so factoring without recourse is better.

b. Mutual Fund has two schemes i.e. Dividend plan (plan A) and Bonus (plan B). The face value of the

unit is Rs 10. On 01 /0 4/2016 Mr Anand invested Rs 5,00,000 each in plan A and plan B when the

NAV was Rs 46 and Rs 43.50 respectively. Both the plans matured on 31/ 03 / 2019 .

Particulars of the dividend and bonus declared over the period are as follows

Date Dividend % bonus ratio net asset value Rs

plan A plan B

30 / 06 / 2016 15% 46.80 44.00

31 / 08 / 2016 1:6 47.20 45.40

31 / 03 / 2017 10% 48.00 46.60

17 / 09 / 2017 1:8 48.40 47.00

21 / 11 / 2017 14% 49.60 47.20

25/ 02 / 2018 15% 50.00 47.8 0

31 / 03 / 2018 1:10 50.50 48. 80

30/ 06 / 2018 12% 51.80 49.00

31 / 03 / 2019 52.40 50.00

You are required to calculate the effective yield per annum in respective of the above two plans

Author’s note: Simple question of mutul fund from manual, done in class


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Answer:

Plan A (Dividend plan)

Amount Invested 5,00,000

NAV Rs 46

Units Purchased 10,869.57 units

Statement of Units in hand on 31/03/19

Date op Units Dividend NAV Units purchased Cl units

1/04/16 - - 46 10,869.57 10,869.57

30-06-16 10,869.57 16,304.36 46.80 348.38 11,217.95

31-03-17 11,217.95 11,217.95 48 233.71 11,451.66

21-11-17 11,451.66 16,032.32 49.60 323.23 11,774.89

25-02-18 11,774.89 17,662.34 50 353.25 12,128.14

30-06-18 12,128.14 14,553.77 51.80 280.96 12,409.10

Statement of annual return

Cash received on sale of 12,409.10 units 6,50,236.84

Amount invested 5,00,000

Return 1,50,236.84

% of return = 1,50,236.84

5,00,000 x 100 x

1

3 = 10.01 % p.a

Plan B Bonus Plan


NAV 43.5

Units purchased 11,494.25

Statement of units in hand on 31/03/19

Date Op units Bonus Cl units

1-04-16 - - 11,494.25

31-08-16 11,494.25 1915.71 13,409.96

17-09-17 13,409.96 1676.25 15,086.21

31-03-18 15,086.21 1508.62 16,594.83

Statement of annual return

Cash Received on sale of 16,594.83 @ 50 8,29,741.5


Profit 3,29,741.5

Annual return = 3,29,741.5

5,00,000 x 100 x

1

3 = 21.98 %

Q7 Write short notes on any four of the following

a. limitations of credit rating

b. exposure netting

c. explain Carve out and it's different from spin off

d. explain briefly debt/asset securitization and its process.

e. what makes an organisation suitable question mark state the specific steps


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Documents

SOLUTION TO MAY 19 OLD CA FINAL …...CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi 1 SOLUTION