ADVANCED FINANCIAL MANAGEMENT CA.

DINESH JAIN

ADVANCED FINANCIAL MANAGEMENT

RTP MAY 2024
BY CA. DINESH JAIN

DEDICATED TO MY LOVABLE FATHER

[RAMESH JAIN]

BHARADWAJ INSTITUTE (CHENNAI) 1

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
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BHARADWAJ INSTITUTE (CHENNAI) 2

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Question No.1 [Same as Question No.42 of Chapter 6 (Edition Two)]
Two friend Mr. A and Mr. N were discussing about the risks of market. While Mr. A is sort of risk averse,
Mr. N is an aggressive investor and believes in taking risk. Mr. N said we cannot diversify the market risk at
all, and he quoted the Modern Portfolio Approach. Both friends analyze the market data for the few months
and came out with expected returns on two stocks for a particular market.
Market Return Aggressive Defensive
7% 4% 9%
25% 40% 18%

Based on above scenario, answer the following questions:

Question No.1: The Beta of Defensive stock is
a. 2 b. 0.5
c. 4 d. 1
Question No.2: If the market return is equally likely to be 7% or 25% then expected return of Aggressive
stock shall be
a. 18% b. 13.50%
c. 22% d. 11%
Question No.3: The Alpha of the Defensive stocks is
a. -10% b. 22%
c. 5.50% d. 12%
Question No.4: The Modern Portfolio Theory was propounded by
a. William Sharpe b. Black Scholes
c. Stephen Ross d. Harry Markowitz
Question No.5: As per Capital Market Line (CML) Theory the Portfolios lying on the CML over the market
portfolio are called
a) Lending Portfolios b) Borrowing Portfolios
c) Diversified Portfolios d) Risk-free Portfolios
Answer:
• Question No.1 = 0.50 Times
• Question No.2 = 22%
• Question No.3 = 5.50%
• Question No.4 = Harry Markowitz
• Question No.5 =Borrowing Portfolio
Note: ICAI answer to this is wrong and it is mentioned as diversified portfolio. B represents market
portfolio in below diagram and hence portfolio above market portfolio is borrowing portfolio in CML

WN 1: Computation table for Beta:

Security Defensive:
Aggressive Market
Prob Return Product Deviation 𝐏𝐝𝟐 Return Product Deviation 𝐏𝐝𝟐 𝐏𝐝𝐛 𝐝𝐦
0.5 4 2 -18 162 7 3.5 -9 40.5 20.25
0.5 40 20 18 162 25 12.5 9 40.5 20.25
Total 22 324 16 81 40.5

Particulars Calculation Amount

BHARADWAJ INSTITUTE (CHENNAI) 3
ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
1. Beta of Defensive (40.50/81) 0.50 Times
2. Expected return of defensive WN 1 13.50%
3. Required return of Defensive Beta x Rm = 0.50 x 16% 8.00%
4. Alpha of Defensive stock 13.50% - 8.00% +5.50%
5. Expected return of Aggressive 0.50 x 4 + 0.50 x 40 22%

Question No.2 [same as Question No.17 of Chapter 8 (Edition Two)]

Mr. X on 1.7.2021, during the initial offer of some Mutual Fund invested in 10,000 units having face value of
Rs. 10 for each unit. On 31.3.2022, the dividend paid by the M.F. was 10% and Mr. X found that his annualized
yield was 153.33%. On 31.3.2023, 20% dividend was given. On 31.3.2024, Mr. X redeemed all his balance of
11,296.11 units when his annualized yield was 73.52%
Based on above scenario, answer the following questions:
Question No.1: NAV per unit of the Fund as on 31.03.2022 shall be approximately
a. 19.50 b. 20.50
c. 21.50 d. 22.50
Question No.2: Total number of units as on 31.03.2022 shall be approximately
a. 10487.80 units b. 12585.65 units
c. 9465.35 units d. 11575.40 units
Question No.3: Total Dividend received by Mr. X as on 31.03.2023 shall be
a. Rs. 20,625.50 b. Rs. 20,870.45
c. Rs.20,975.60 d. Rs.21,565.75
Question No.4: NAV per unit as on 31.03.2023 shall be approximately
a. Rs.24.65 b. Rs.24.85
c. Rs.25.95 d. Rs.26.45
Question No.5: NAV as on 31.03.2024 shall be approximately
a) Rs.20.50 b) Rs.25.95
c) Rs.26.75 d) Rs.27.20
Answer:
• Question No.1 = 20.50
• Question No.2 = 10,487.80 units
• Question No.3 = Rs.20,975.60
• Question No.4 = Rs.25.95
• Question No.5 = Rs.26.75

WN 1: Computation of NAV as on 31.03.2022

• The investor has earned an annualized yield of 153.33% for 1.7.2021 to 31.3.2022
• He has invested for a period of 9 months. The holding period return for 9 months is calculated below:
9
Holding Period Return = Annual Return x ( )
12
9
Holding Period Return = 153.33% x ( ) = 115%
12
Particulars Calculation Amount
1. Amount of investment 1,00,000
2. Holding period return (in %) 115%
3. Holding period return (in Rs.) 1,00,000 x 115% 1,15,000
4. Value of investment as on 31.03.2022 2,15,000
5. No of units 1,00,000 10,000
10
6. NAV per unit before dividend payment 𝟐, 𝟏𝟓, 𝟎𝟎𝟎 21.50
𝟏𝟎
7. Less: Dividend 10 x 10% 1.00
8. NAV per unit post dividend payment 21.50 – 1.00 20.50

WN 2: Calculation of units as on 31.03.2022, Dividend on 31.3.2023 and NAV as on 31.3.2023:

BHARADWAJ INSTITUTE (CHENNAI) 4

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Particulars Calculation Amount
1. Dividend paid on 31.03.2022 10,000 x 1 10,000
2. Units allotted 10,000 487.80
( )
20.50
3. Total units post dividend re-investment 10,487.80
4. Dividend as on 31.3.2023 10,487.80 x 10 x 20% 20,975.60
5. Units allotted as on 31.3.2023 (Note 1) 11,296.11 – 10,487.80 808.31
6. NAV/unit as on 31.3.2023 𝟐𝟎, 𝟗𝟕𝟓. 𝟔𝟎 25.95
( )
𝟖𝟎𝟖. 𝟑𝟏
Note 1:
• The company has redeemed 11,296.11 units as on 31.03.2024. However, it had 10,487.80 units as on
31.03.2022. Hence extra units would have been allotted on 31.3.2023 due to dividend re-investment

WN 3: Computation of NAV as on 31.03.2024:

• Mr. X has earned an annualized yield of 73.52%. He has invested from 1.7.2021 to 31.3.2024 and the
investment period is 33 months
• Holding period return for 33 months is calculated below:
9
Holding Period Return = Annual Return x ( )
12
33
Holding Period Return = 73.52% x ( ) = 202.18%
12
Particulars Calculation Amount
1. Amount of investment 1,00,000
2. Holding period return (in %) 202.18%
3. Holding period return (in Rs.) 1,00,000 x 202.18% 2,02,180
4. Value of investment as on 31.03.2024 3,02,180
5. No of units 11,296.11
6. NAV as on 31.03.2024 𝟑, 𝟎𝟐, 𝟏𝟖𝟎 26.75
𝟏𝟏, 𝟐𝟗𝟔. 𝟏𝟏

Question No.3 [Similar to question No.50 of Chapter 9 (Edition Two)]

Mr. H is holding 100 equity shares of V Ltd. which is being quoted at Rs. 2,100 per share. He is interested in
hedging downside risk of his holding as he is going to sell them after 2 months. A 2-month Call option is
available at a premium of Rs. 60 per share and a 2-month put option is available at a premium of Rs. 50 per
share. The strike price in both cases is Rs. 2,200. You are required to:
a) Suggest the position Mr. H should take in the option market to hedge his holding in the V Ltd.
b) Calculate his final position if after 2 months i.e., on the day of exercise the actual market price of per
share of V Ltd. happens to be Rs. 2000, Rs. 2100, Rs. 2200, Rs. 2300 and Rs. 2400.
Answer:
Part 1: Hedging the downside risk of his holding:
• Since Mr. H holds 100 equity shares, he should buy equal no. of Put option i.e. 100 put options in
the same stock to hedge his position. Total Premium amount to be paid = 50 x 100 Put = Rs.5,000
Part 2: Final Position on the day of exercise:
Price 2,000 2,100 2,200 2,300 2,400
Exercise price 2,200 2,200 2,200 2,200 2,200
Action Exercise Exercise Lapse Lapse Lapse
GPO 20,000 10,000 0 0 0
Premium -5,00 -5,000 -5,000 -5,000 -5,000
NPO 15,000 5,000 -5,000 -5,000 -5,000
Realization from open market sale 2,00,000 2,10,000 2,20,000 2,30,000 2,40,000
Final position of Mr. H 2,15,000 2,15,000 2,15,000 2,25,000 2,35,000
Thus, from above table it can be observed in any case the value of holding of Mr. H in V Ltd. shall not go
below Rs.2,150 per share.

BHARADWAJ INSTITUTE (CHENNAI) 5

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Question No.4 [Similar to Question No.63 of Chapter 6 (Edition Two)]
Mr. S has a portfolio of Rs. 50 lacs which he wants to invest in share market with rebalancing target after
every 15 days to start with for a period of one month from now. The present NIFTY is 17025. The minimum
NIFTY within a month can at most be 15322.50. He wants to know as to how he should rebalance his portfolio
under the following situations, according to the theory of Constant Proportion Portfolio Insurance Policy,
using "2" as the multiplier:
a) Immediately to start with.
b) 15 days later-being the 1st day of rebalancing if NIFTY falls to 16321.89.
c) 15 days further from the above date if the NIFTY touches 17512.14.

Note:
1. Assume that the value of his equity component will change in tandem with that of the NIFTY.
2. Round off calculations upto whole numbers.
Answer:
WN 1: Computation of investment in equity on day 0
Particulars Calculation Amount
Maximum decline in NIFTY 17,025 − 15,322.50 10%
17,025
Floor value 50,00,000 – 10% 45,00,000
Investment in equity 2 x [50,00,000 – 45,00,000] 10,00,000

WN 2: Rebalancing of portfolio:
Particulars Equity Bond Total
Day 0 10,00,000 40,00,000 50,00,000
Day 15:
Before rebalancing 9,58,701 40,00,000 49,58,701
After rebalancing 9,17,402 40,41,299 49,58,701
Day 30:
Before rebalancing 9,84,302 40,41,299 50,25,601
After rebalancing 10,51,202 39,74,399 50,25,601
Note:
Day 15:
16,321.89
• Value of equity on day 15 = 10,00,000 x = 9,58,701
17,025
• Value of portfolio will be Rs.49,58,701. We need to rebalance the same as per CPPI
• Investment in equity = 2 x [49,58,701– 45,00,000] = 9,17,402

Day 30
17,512.14
• Value of equity on day 30 = 9,17,402 x = 9,84,302
16,321.89
• Value of portfolio will be Rs.50,25,596. We need to rebalance the same as per CPPI
• Investment in equity = 2 x [50,25,596 – 45,00,000] = 10,51,192

Question No.5 [Same as Question No.7 of Chapter 13 (Edition Two)]

Compute EVA of X Ltd. with the help of following information:
Particulars Amount in lacs
Revenue from operations 1,500
Direct expenses -585
Indirect expenses -300
Profit before interest and tax 615
Interest -15
Profit before tax 600
Tax -180
Profit after tax 420
Balance sheet

BHARADWAJ INSTITUTE (CHENNAI) 6

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Shareholder funds
Equity share capital 1,050
Reserves and surplus 150
Long term borrowings 150
Current Liabilities 600
Total liabilities 1,950
Assets
Non-current assets 1,500
Current assets 450
Assume that Bad Debts provision of Rs. 30 Lac is included in the SGA, and same amount is reduced from the
trade receivables in current assets. Also assume that the pre-tax Cost of Debt is 12% and Equity shareholder’s
expected return is 10%. Note: Make calculation in Rs. lac and round off up to 2 decimal points.
Answer:
WN 1: Computation of NOPAT:
Particulars Calculation Amount (in lacs)
Profit after tax 420
Add: Interest (net of tax) 15 x 70% 10.50
Add: Non-cash expenses 30
NOPAT 460.50
• EVA adjustments state that non-cash expenses (bad debt provision) need to be added back to profit.
It is assumed that there is no tax impact due to bad debt provision adjustment.

WN 2: Computation of WACC:
Source Cost Weight Product
Debt 8.40 150 12.60
(12% x 70%)
Equity 10.00 1,200 120.00
Total 9.82% 1,350 132.60
Sum of Products 132.60
WACC = = = 9.82%
Sum of weights 1,350
Note:
• Equity can alternatively be adjusted to give effect to the bad debt provision. Any non-cash item will
be added to profits and will also finally get added to the equity of the company

WN 3: Computation of EVA:
• EVA = NOPAT – (Capital employed x WACC)
• EVA = 460.50 lacs – (1,380 x 9.82%)
• EVA = 460.50 lacs – 135.52 lacs
• EVA = Rs.324.98 lacs

Question No.6 [Similar to Question No.53 of Chapter 10 (Edition Two)]

PKR Ltd. has made purchases worth USD 8,00,000 on 1st May 2020 for which it has to make a payment on
1st November 2020. The present exchange rate is INR/USD 75. The company can purchase forward dollars
at INR/USD 74. The company will have to make an upfront premium @ 1 per cent of the forward amount
purchased.

The company can hedge its position with the following expected rate of USD in foreign exchange market on
1st May 2020:

PKR Ltd. has made purchases worth USD 8,00,000 on 1st May 2020 for which it has to make a payment on
1st November 2020. The present exchange rate is INR/USD 75. The company can purchase forward dollars
at INR/USD 74. The company will have to make an upfront premium @ 1 per cent of the forward amount
purchased.

BHARADWAJ INSTITUTE (CHENNAI) 7

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
The company can hedge its position with the following expected rate of USD in foreign exchange market on
1st May 2020:
Exchange Rate Probability
INR/USD 77 0.15
INR/USD 71 0.25
INR/USD 79 0.20
INR/USD 74 0.40
You are required to advise the company for a suitable cover for risk assuming that the cost of funds to PKR
Ltd. is 10 per cent per annum.
Answer:
WN 1: Computation of cover rate:
Particulars Amount
Forward Rate INR 74.00/USD
Forward premium (74 x 1%) INR 0.74/USD
Interest on forward premium (0.74 x 10% x (6/12)) INR 0.037/USD
Cover rate INR 74.777/USD
• Outflow under forward contract = 8,00,000 x 74.777 = Rs.5,98,21,600

WN 2: Computation of outflow if cover was not taken

• Expected spot rate = (77 x 0.15) + (71 x 0.25) + (79 x 0.20) + (74 x 0.40) = 74.70
• Outflow if hedging was not done = 8,00,000 x 74.70 = 5,97,60,000

Conclusion:
• Outflow is lower by Rs.61,600 under forward contract and hence company should go ahead with
forward contract.

Question No.7 [Same as Question No.81 of Chapter 10 (Edition Two)]

You as a dealer of foreign exchange have the following position in GBP on October 31, 2009:
GBP
Balance in the Nostro Account Credit 2,00,000
Opening position overbought 1,00,000
Purchased a bill on Zurich 1,60,000
Sold forward TT 1,20,000
Forward purchase contract cancelled 60,000
Remitted by TT 1,50,000
Draft on Zurich cancelled 60,000
Decide the steps would you take, if you are required to maintain a credit Balance of GBP 65,000 in the Nostro
A/c and keep as oversold position on GBP 20,000?
Answer:
WN 1: Exchange position account (GBP):
Particulars Purchase/ Sales/
Inflow Outflow
Opening balance 1,00,000
Purchase of bill 1,60,000
Forward sale 1,20,000
Cancellation of forward purchase 60,000
Remittance by TT 1,50,000
Cancellation of demand draft 60,000
Total 3,20,000 3,30,000
Purchase of GBP 15,000 -
Revised total 3,35,000 3,30,000
Closing balance overbought 5,000

WN 2: Cash position account (GBP):

Particulars Receipt/ Payment/

BHARADWAJ INSTITUTE (CHENNAI) 8

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Inflow Outflow
Opening balance 2,00,000
Remittance by TT 1,50,000
Purchase of GBP 15,000
Total 2,15,000 1,50,000
Closing balance 65,000

Analysis on exchange position:

• The company needs closing cash position 65,000. There was GBP 50,000 and now they can buy GBP
15,000 in spot market to make the balance as 65,000.
• The closing balance is overbought position of 5,000 in exchange position.
• The company wants an oversold position of GBP 20,000. The company can do a forward sale of GBP
25,000 to make the oversold position as 20,000

Question No.8 [Same as Question No.13 of Chapter 3 (Edition Two)]

JB Consultancy Group has determined relative utilities of cash flows of two forthcoming projects of its client
company as follows:
Cash flow -1,50,000 -1,00,000 -40,000 0 150000 1,00,000 50,000 10,000
Utilities -100 -60 -3 0 40 30 20 10
The distribution of cash flows of project A and Project B are as follows:
Project A
Cash flow -1,50,000 -1,00,000 1,50,000 1,00,000 50,000
Probability 0.10 0.20 0.40 0.20 0.10
Project B
Cash flow -1,00,000 -40,000 1,50,000 50,000 1,00,000
Probability 0.1 0.15 0.4 0.25 0.10
Which project should be selected and why?
Answer:
Project A
Cash flow -1,50,000 -1,00,000 1,50,000 1,00,000 50,000
Probability 0.10 0.20 0.40 0.20 0.10
Utility -100 -60 40 30 20
Expected utility -10 -12 16 6 2
Project B
Cash flow -1,00,000 -40,000 1,50,000 50,000 1,00,000
Probability 0.1 0.15 0.4 0.25 0.10
Utility -60 -3 40 20 30
Expected utility -6 -0.45 16 5 3
• Total utility value of project A = 2
• Total utility value of project B = 17.55
• Project B should be selected as its expected utility is more

Question No.9 [Same as Question No.25 of Chapter 12 (Edition Two)

B Bank Ltd. has entered into a plain vanilla swap through on Overnight Index Swap (OIS) on a principal of -
Rs. 10 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%.

BHARADWAJ INSTITUTE (CHENNAI) 9

ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
If B Bank Ltd. received Rs. 4,170 net on settlement, calculate fixed rate and interest under both legs.
Note:
• Sunday is a holiday
• Work in rounded rupees and avoid decimal working
• Consider 365 days in a year.
Answer:
WN 1: Computation of interest to be paid by floating rate payer:
Date ROI Opening balance Interest Closing balance
July 11 (Tuesday) 8.75% 10,00,00,000 23,973 10,00,23,973
July 12 (Wednesday) 9.15% 10,00,23,973 25,075 10,00,49,048
July 13 (Thursday) 9.12% 10,00,49,048 24,999 10,00,74,047
July 14 (Friday) 8.95% 10,00,74,047 24,539 10,00,98,586
July 15 (Saturday) 8.98% 10,00,98,586 49,254 10,01,47,840
July 17 (Monday) 9.15% 10,01,47,840 25,106 10,01,72,946
Total 1,72,946
• Interest under floating leg = Rs.1,72,946
• Derivative bank is paying fixed rate and receiving floating rate. Under net settlement they are
receiving Rs.4,170. This is possible if interest under fixed leg is lower than interest under floating leg
• Interest under fixed leg = 1,72,946 – 4,170 = 1,68,776

Computation of fixed rate:

7
Interest under fixed leg = 10 Crores x ROI x ( ) = 1,68,776
365

𝟑𝟔𝟓 𝟏
𝐑𝐎𝐈 = 𝟏, 𝟔𝟖, 𝟕𝟕𝟔 𝐱 ( )𝐱 ( ) = 𝟎. 𝟎𝟖𝟖𝟎(𝐨𝐫)𝟖. 𝟖𝟎%
𝟕 𝟏𝟎 𝐂𝐫𝐨𝐫𝐞𝐬

Question No.10 [Similar to Question No.116 of Chapter 5 (Edition Two)]

The Bank PK enters into a Repo for 9 days with Bank JJ in 6% Government Bonds 2022 for an amount of Rs.
20 crore. The other relevant details are as follows:
First Leg Payment (Start Proceeds) Rs.20,00,67,500
Second Leg Payment (Repayment proceeds) Rs.20,03,17,590
Initial margin 1.25%
Days of accrued interest 240
Assume 360 days in a year.
You are required to calculate:
(i) Repo Rate
(ii) Dirty Price and
(iii) Clean Price
Answer:
WN 1: Computation of Repo Rate:
Particulars Amount
Start proceeds 20,00,67,500
End proceeds 20,03,17,590
Interest for repo period (9 days) 2,50,090

9
Interest on repo = 20,00,67,500 x Rate x
360
2,50,090 x 40 = 20,00,67,500 x Rate
𝟐, 𝟓𝟎, 𝟎𝟗𝟎 𝒙 𝟒𝟎
𝑹𝒂𝒕𝒆 = = 𝟎. 𝟎𝟓𝟎𝟎 (𝒐𝒓)𝟓. 𝟎𝟎%
𝟐𝟎, 𝟎𝟎, 𝟔𝟕, 𝟓𝟎𝟎
• Hence Repo Rate = 5.00%

WN 2: Computation of Dirty Price:

Dirty Price
Start Proceeds = 20,00,00,000 x x 98.75%
100
BHARADWAJ INSTITUTE (CHENNAI) 10
ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
Dirty Price
20,00,67,500 = 19,75,00,000 x
100
20,00,67,500
Dirty Price = x 100 = Rs. 101.30
19,75,00,000

WN 3: Computation of Clean Price:

Dirty Price = Clean Price + Accrued Interest
240
Accrued interest = 100 x 6% x = 4.00
360
Clean Price = 101.30 – 4.00 = Rs.97.30

Question No.11 [Same as Question No.38 of Chapter 5 (Edition Two)]

Mr. A is holding 10,000 shares of face value of Rs.100 each of M/s. ABC Ltd. He wants to hold these shares
for long term and have no intention to sell.
On 1st January 2020, M/s XYZ Ltd. Has made short sales of M/s. ABC Ltd.’s shares and approached Mr.
A to lend his shares under Stock Lending Scheme with following terms:
• Shares to be borrowed for 3 months from 01-01-2020 to 31-03-2020,
• Lending Charges/Fees of 1% to be paid every month on the closing price of the stock quoted in
Stock Exchange and
• Bank Guarantee will be provided as collateral for the value as on 01-01-2020.

Other Information:
• Cost of Bank Guarantee is 8% per annum,
• On 29-02-2020 M/s XYZ Ltd., declared dividend of 25%,
• On 29-02-2020 M/s. ABC Ltd.’s share quoted in Stock Exchange on various dates are as follows:
Date Share Price in Scenario -1 Bullish Share Price in Scenario – 2 Bearish
01-01-2020 1,000 1,000
31-01-2020 1,020 980
29-02-2020 1,040 960
31-03-2020 1,050 940
You are required to find out:
(i) Earning of Mr. A through Stock Lending Scheme in both the scenarios,
(ii) Total Earnings of Mr. A during 01-01-2020 to 31-03-2020 in both the scenarios,
(iii) What is the Profit or loss to M/s. XYZ by shorting the shares using through Stock Lending Scheme in
both the scenarios?
Answer:
WN 1: Computation of Earning of Mr.A through stock lending scheme:
Particulars Scenario – 1 Scenario – 2
January Month 102,000 98,000
[10,000 shares x 1,020 x 1%] [10,000 shares x 980 x 1%]
February Month 1,04,000 96,000
[10,000 shares x 1,040 x 1%] [10,000 shares x 960 x 1%]
March Month 1,05,000 94,000
[10,000 shares x 1,050 x 1%] [10,000 shares x 940 x 1%]
Total earning from Lending 3,11,000 2,88,000

WN 2: Computation of total earning of Mr.A:

Particulars Scenario – 1 Scenario - 2
Earning from lending 3,11,000 2,88,000
Dividend income 2,50,000 2,50,000
[10,000 x 25] [10,000 x 25]
Total earning of Mr.A 5,61,000 5,38,000

WN 3: Profit/loss to XYZ Limited:

Particulars Scenario – 1 Scenario – 2
Profit/loss on short-sell -5,00,000 6,00,000
BHARADWAJ INSTITUTE (CHENNAI) 11
ADVANCED FINANCIAL MANAGEMENT CA. DINESH JAIN
[1,000 – 1,050] x 10,000 [1,000 – 940] x 10,000
Lending fees [WN 1] -3,11,000 -2,88,000
Bank guarantee charges -2,00,000 -2,00,000
[10,000 shares x 1,000] x 8% x (3/12)
Profit/loss to XYZ Limited -10,11,000 1,12,000

Question No.12 [Same as Question No.2 of Chapter 14 (Edition Two)]

Long Ltd., is planning to acquire Tall Ltd., with the following data available for both the companies:
Particulars Long Limited Tall Limited
Expected EPS 12 5
Expected DPS 10 3
No of shares 30,00,000 18,00,000
Current market price per share 180 50
As per an estimate Tall Ltd., is expected to have steady growth of earnings and dividends to the tune of 6%
per annum. However, under the new management the growth rate is likely to be enhanced to 8% per annum
without additional investment.
You are required to:
(i) Calculate the net cost of acquisition by Long Ltd., if Rs. 60 is paid for each share of Tall Ltd.
(ii) If the agreed exchange ratio is one share of Long Ltd., for every three shares of Tall Ltd., in lieu
of the cash acquisition as per (i) above, what will be the net cost of acquisition?
(iii) Calculate Gain from acquisition.
Answer:
WN 1: Computation of net cost of acquisition in case of cash consideration:
Particulars Calculation Amount
Consideration paid 18,00,000 x 60 10,80,00,000
Less: Value of Tall Limited 18,00,000 x 50 (9,00,00,000)
Net cost of acquisition 1,80,00,000

WN 2: Computation of net cost of acquisition in case of share consideration:

Note 1: Valuation of merged entity:
Particulars Calculation Amount
Value of Long Limited 30,00,000 x 180 54,00,00,000
Value of Tall Limited under new management Note 2 13,50,00,000
Total value of merged entity 67,50,00,000
No of shares post-merger 30,00,000 + 6,00,000 36,00,000
Value per share 67,50,00,000 187.50
36,00,000
Amount of consideration paid 187.50 x 6,00,000 11,25,00,000

Note 2: Value of Tall Limited business with increase in growth rate:

Particulars Calculation Amount
Existing cost of equity 3 12.00%
+ 6%
50
Growth rate under new management 8.00%
Value per share under new management 3 75.00
12% − 8%
No of shares 18,00,000
Value of Tall Limited 13,50,00,000

Note 3: Net cost of acquisition:

Particulars Calculation Amount
Consideration paid Note 1 11,25,00,000
Less: Value of Tall Limited 18,00,000 x 50 (9,00,00,000)
Net cost of acquisition 2,25,00,000

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WN 3: Gain from acquisition:
Particulars Calculation Amount
Post-merger Value Note 1 of WN 2 67,50,00,000
Less: Pre-merger value 54,00,00,000 + 9,00,00,000 (63,00,00,000)
Gain from acquisition 4,50,00,000

Question No.13 [Same as Question No.30 of Chapter 3 (Edition Two)]

The Management of a multinational company TL Ltd. is engaged in construction of Infrastructure Project. A
proposal to construct a Toll Road in Nepal is under consideration of the Management.

The following information is available:

• The initial investment will be in purchase of equipment costing USD 250 lakhs. The economic life of
the equipment is 10 years. The depreciation on the equipment will be charged on straight line
method.
• EBIDTA to be collected from the Toll Road is projected to be USD 33 lakhs per annum for a period
of 20 years.
• To encourage investment Nepalese government is offering a 15 year term loan of USD 150 lakhs at
an interest rate of 6 per cent per annum. The interest is to be paid annually. The loan will be repaid
at the end of 15 year in one tranche.
• The required rate of return for the project under all equity financing is 12 per cent per annum.
• Post tax cost of debt is 5.6 per cent per annum. Corporate Tax Rate is 30 per cent. All cash Flows will
be in USD. Ignore inflation.

You are required to advise the management on the viability of the proposal by using Adjusted Net Present
Value method.
Given PVIFA (12%, 10) = 5.650, PVIFA (12%, 20) = 7.469, PVIFA (8%,15) = 8.559, PVIF (8%, 15) = 0.315

Note: Make calculations in USD Lakhs and round off them upto 3 decimal points.
Answer:
Adjusted NPV = Base case NPV – Issue costs + PV of financing benefits

WN 1: Computation of Base case NPV:

• Base case NPV of the project is computed as if the project is solely funded out of equity.

Computation of cash flows:

Particulars Year 1 to 10 Year 11 to 20
EBITDA 33.00 33.00
Less: Depreciation -25.00 -
EBIT/EBT 8.00 33.00
Less: Tax @ 30% -2.40 -9.90
EAT 5.60 23.10
Add: Depreciation 25.00 -
CFAT 30.60 23.10

Base Case NPV computation:

(in lacs)
Year Cash flow PVF @ 12% DCF
0 -250.00 1.000 -250.000
1 to 10 30.60 5.650 172.89
11 to 20 23.10 1.819 42.019
Base Case NPV -35.091

WN 2: PV of financing benefits:
ICAI Solution in Nov 2024 RTP – Incorrect solution according to me

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Particulars Period USD lacs PVF @ 8% PV (USD Lacs)
Tax saving on interest 1 to 15 2.70 8.559 23.109
PV of financing benefit 23.109
• Adjusted Present Value of the Project = Base NPV + PV of Tax Shield on Interest
• APV = - US$ 35.091 + US $ 23.109 lakh = - US$ 11.982 lakh
• Advise: Since APV is negative, TL Ltd. should not accept the project.
ICAI Solution in Nov 2020 Suggested answers – Logical solution according to me:
• In this case the normal interest rate on borrowing is 8% (5.6/70%). However, the company has
borrowed loan at 6 percent and hence company saves interest of 2 percent as well as get tax saving
on interest. The same is being calculated as under:
Particulars Period USD lacs PVF @ 8% PV (USD Lacs)
Loan 0 150.00 1.000 150.000
Interest 1 to 15 (9.00) 8.559 (77.031)
Tax saving on interest 1 to 15 2.70 8.559 23.109
Repayment of principal 15 (150.00) 0.315 (47.250)
PV of financing benefit 48.828
WN 3: Adjusted NPV
• Adjusted NPV = Base case NPV + PV of financing benefits
• Adjusted NPV = -35.091 + 48.828 = 13.737 lacs
• The company can go ahead with the project as the adjusted NPV is positive at USD 13.737 lacs

Question No.14 [Same as Question No.21 of Chapter 4 (Edition Two)]

Explain the types of tests that can be employed to empirically verify the weak form of Efficient Market
Theory.
Answer:
• Serial Correlation Test: To test for randomness in stock price changes, one has to look at serial
correlation. For this purpose, price change in one period has to be correlated with price change in
some other period. Price changes are considered to be serially independent. Serial correlation studies
employing different stocks, different time lags and different time period have been conducted to
detect serial correlation but no significant serial correlation could be discovered. These studies were
carried on short term trends viz. daily, weekly, fortnightly and monthly and not in long term trends
in stock prices as in such cases. Stock prices tend to move upwards.
• Run Test: Given a series of stock price changes each price change is designated + if it represents an
increase and – if it represents a decrease. The resulting series may be -,+, - , -, - , +, +. A run occurs
when there is no difference between the sign of two changes. When the sign of change differs, the
run ends and new run begins. To test a series of price change for independence, the number of runs
in that series is compared with a number of runs in a purely random series of the size and in the
process determines whether it is statistically different. By and large, the result of these studies
strongly supports the Random Walk Model.
• Filter Rules Test: If the price of stock increases by at least N% buy and hold it until its price decreases
by at least N% from a subsequent high. When the price decreases at least N% or more, sell it. If the
behaviour of stock price changes is random, filter rules should not apply in such a buy and hold
strategy. By and large, studies suggest that filter rules do not out perform a single buy and hold
strategy particular after considering commission on transaction.

Question No.15 [Similar to Question No.17 of Chapter 15 (Edition Two)]

Explain the concept of ‘Unicorn’. Also mention the name of the startup became the India’s first Unicorn.
Answer:
A Unicorn is a privately held start-up company which has achieved a valuation US$ 1 billion. This term was
coined by venture capitalist Aileen Lee, first time in 2013. Unicorn, a mythical animal represents the statistical
rarity of successful ventures. A start-up is referred as a Unicorn if it has following features:
• A privately held start-up.
• Valuation of start-up reaches US$ 1 Billion.
• Emphasis is on the rarity of success of such start-up.

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• Other common features are new ideas, disruptive innovation, consumer focus, high on technology
etc.

However, it is important to note that in case the valuation of any start up slips below US$ 1 billion it can lose
its status of ‘Unicorn’. Hence a start-up may be Unicorn at one point of time and may not be at another point
of time.

In September 2011, InMobi, an ad-tech startup, became the first Unicorn of India. SoftBank invested US$ 200
million in InMobi valuing the mobile advertising company at over US$ 1 billion, making it India’s first
unicorn.

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