CA Final May 2025 Suggested Answers Paper 2 Advanced Financial Management

FOR CA FINAL EXAM PREPARATION

CA Final 2025
Suggested Answers ·
Paper 2 Advanced
Financial Management
EXAM YEAR TYPE

CA Final 2025 Suggested Answers
SUBJECT DATE

Paper 2 Advanced Financial Management May 2025

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 2 : ADVANCED FINANCIAL
MANAGEMENT
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PART – I Multiple Choice Questions

l a
g Researchers have estimated the rate of returns for Stock A, Stock B and
Case Scenario -I a
aEquity
Market Portfolio under each state of the economy is as under:
Economy Probability Return on Return on Market
Stock A (%) Stock B (%) Portfolio (%)
Boom 0.3 16 19 18
Normal 0.4 14 16 15

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Recession 0.3 -9 -7 -8

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. the covariance between Stock B and
The risk-free rate of return is expected to be 8%. The covariance between Stock
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e that the CAPM framework is valid in this
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A and the Market Portfolio is 122.70, while

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the Market Portfolio is 125.40. Assume

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market.
From the information given above, choose the correct answer to the question No.
1 to 5.
1. What is the expected rate of return (percentage) for Stocks A and B?
(A) 7.70% and 9.00%
(B) 10% and 9.00%

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(C) 7.70% and 10%

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(D) 13.1% and 14.20%
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c. o 2. What will be the variance of market portfolio? se
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s em (A) 38.4
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gla (B) - 4.8 a
a (C) 126.8
(D) 125.4

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

3. What will be the beta of Stock A and Stock B respectively?
(A) 0.9542 and 1.00
(B) 0.9862 and 1.24
(C) 0.9785 and 1.00
(D) 0.9785 and 1.24
4. Required rate of return of Stock A is _________ and Stock B is _________.
(A) 8.9785 % and 9%
(B) 9% and 8.978%
(C) 8.9875% and 9%
(D) 8.9785% and 10.4%
5. Based on calculated Alpha of Stock A and Stock B in the above case scenario,
which of the following statements is correct for purchase or sale of Stock A
and Stock B?
(A) Stock A has a positive alpha, and Stock B has a negative alpha. This
indicates that Stock A is underpriced and Stock B is overpriced.
Therefore, purchase Stock A and sell Stock B.
(B) Both Stock A and Stock B have positive alpha values, suggesting they are
underpriced. Therefore, purchase both stocks.
(C) Stock A has a negative alpha, while Stock B has a positive alpha. This
means Stock A is overpriced and Stock B is underpriced. Therefore, sell
Stock A and purchase Stock B.
(D) Both Stock A and Stock B have negative alpha values, indicating they are
overpriced. Therefore, sell both stocks. (5 × 2 = 10 Marks)
Case Scenario - II
Steady Mutual Fund has the following assets in Scheme - Star Gold at the close
of business as on 31 st March, 2025:
Company No. of Shares (units) Market Price per share (` )
A Ltd. 20,000 25
B Ltd. 30,000 350
C Ltd. 38,000 290
D Ltd. 50,000 400

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

The total numbers of units of Scheme - Star Gold are 20 lakhs. The Scheme - Star
Gold has accrued expenses of ` 2,00,000 and other liabilities of ` 2,50,000.

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From the information given above, choose the correct answer to the question No.

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6 to 8:

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6.
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Total gross value of the Scheme - Star Gold is -
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(A) ` 325.00 lakhs
l(B) ` 420.20 lakhs ag
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a (C) ` 480.40 lakhs
(D) ` 520.30 lakhs
7. Total net value of the Scheme - Star Gold is -
(A) ` 422.70 lakhs
(B) ` 420.70 lakhs

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(C) ` 415.70 lakhs
(D) ` 424.70 lakhs c. o
8. NAV per unit of the Scheme- Star m
s e Gold is-
(A) ` 21.135
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(B) ` 21.035 a
(C) ` 20.785
(D) ` 21.235 (3 × 2 = 6 Marks)
Case Scenario - III
Mr. X, an investor buys the stocks of WBL Limited worth ` 21,60,000 due to very
strong fundamentals. Since last 3 months, the market sentiment is weak and

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witnessed a significant volatility and considered to remain weak for about the

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next three months. Keeping in the mind volatility in the market, Mr. X is planning
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to hedge his portfolio in the future market. The Beta of WBL stock is 1.3 and the

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current value of NIFTY is 2250 and 3 months future is selling at 2310. The current

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market price of the WBL stock is ` 240. Each Nifty future can be trade in units of

ag 240 only.
Assume there is no transaction cost and M to M Margin.

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

From the information given above, choose the correct answer to the question No.
9 to 11:
9. Number of future contract to be buy/sell to hedge WBL stock against expected
fall in the market (rounded of contracts) -
(A) Buy 6 future contracts
(B) Sell 5 future contracts
(C) Buy 5 future contracts
(D) Sell 6 future contracts
10. If Nifty index fall by 10% from 2250 to 2025 and WBL stock falls to ` 212,
what will be Net Gain/Loss if portfolio was hedged on NIFTY future?
(A) Net Gain ` 3,42,000
(B) Net Gain ` 3,02,100
(C) Net Gain ` 50,100
(D) Net Gain ` 90,000
11. If NIFTY index rises by 6% from 2250 to 2385 and WBL stock rises to ` 255,
what will be Net Gain/Loss when portfolio was in hedged?
(A) Net Loss ` 90,000
(B) Net Gain ` 45,000
(C) Net Gain ` 1,35,000
(D) Net Gain ` 90,000 (3 × 2 = 6 Marks)
Case Scenario - IV
ABC Ltd., a UK firm, has a receivable $ 20 Million due in 6 months. The company
wants to cover full exposure. Following information are available:
Spot rate 1$ = £ 0.7720 / £ 0.7840
6 months forward rate 1$ = £ 0.7910 / £ 0.8040
Interest rates are as follows:

US UK
6 months deposit rate 4.50% p.a. 5.50% p.a.
6 months borrowing rate 6.00% p.a. 7.50% p.a.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Following options on pound are available:

Option Strike rate Price
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Call
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£ 0.8100 £ 0.01
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Put
.co £ 0.8100 £ 0.02
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ABC Limited has forecasted the spot rates for 6 months as follows:
l Rates of 1$ ag
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Future Probability
£ 0.7800 30%.
£ 0.8100 50%
£ 0.8300 20%

From the information given above, choose the correct answer to the question No.
12 to 15:

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12. What will be the total expected value of option hedge in pounds, if the
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full exposure of 20 Million is covered?
(A) £ 16.125 million
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(B) £ 16.50 million
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(C) £ 15.88 million
(D) £ 15.70 million
13. If ABC Ltd. is using forward hedge strategy, what will be total proceed in
pound?
(A) £ 15.40 million

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(B) £ 15.88 million

m (C) £ 16.125 million .
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em (D) £ 15.82 million
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14. What will be expected spot rate at the end of 6 monthsg and expected cost

ag (proceed) if no hedge strategy is adopted by the company?
(A) £ 0.805/$, £ 16.10 million
(B) £ 0.85/$, £ 15.8 million

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(C) £ 0.7720/$, £ 15.44 million
(D) £ 0.7910/$, £ 15.82 million
15. Identify which option gives the highest proceed.
(A) Option hedge
(B) Forward hedge
(C) Money market hedge
(D) No hedge (4 × 2 = 8 Marks)
ANSWER TO PART – I CASE SCENARIO BASED MCQS

1. Option C

2. Option D

3. Option C

4. Option A

5. Option C

6. Option B

7. Option C

8. Option C

9. Option B

10. Option D

11. Option B

12. Option C

13. Option D

14. Option A

15. Option D

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

PART – II Descriptive Questions
Question No.1 is compulsory.
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Candidates are also required to answer any four from the remaining five

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questions.
. notes should form part of the respective answer.
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Question 1
(a)g Following details are available for PQR Ltd.:
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Current Dividend = ` 3.50
Cost of Equity = 12.50%
Growth Rate = 2%

You required to -
(i) Calculate Price of Share of PQR Ltd.
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(ii) Is PQR Ltd.'s Share over-valued if the Share Price = ` 45, ROE = 8% and

emthe P/E Multiple Approach and Earnings
EPS = ` 2.75?

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Show your calculations using both
Growth Model.
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(b) With the help of the following
(6 Marks)
information of PND Ltd., compute the
Economic Value Added:
Equity Share Capital ` 100 Lakhs
Reserves and Surplus ` 200 Lakhs
8% Debentures ` 300 Lakhs
Cost of Equity = 15%

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Financial Leverage = 1.5 times

c. o Income Tax Rate = 25%
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e (4 Marks)
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a them in India and
ag (c) Mr. PK imports raw materials from China, processes
manufactures finished goods which are then sold in the American market. In
this transaction what types of risk faced by Mr. PK? (4 Marks)

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Answer
(a) (i) Present Value of the stock of PQR Ltd. is:-
Vo = 3.50(1.02)/0.125-0.02 = ` 34.00
(ii) (A) Value of stock under the PE Multiple Approach

Particulars
Actual Stock Price ` 45.00
Return on equity 8%
EPS ` 2.75
PE Multiple (1/Return on Equity) = 1/8% 12.50
Market Price per Share ` 34.38

Since, Actual Stock Price is higher, hence it is overvalued.
(B) Value of the Stock under the Earnings Growth Model

Particulars
Actual Stock Price ` 45.00
Return on equity 8%
EPS ` 2.75
Growth Rate 2%
Market Price per Share [EPS ×(1+g)]/(Ke – g) ` 46.75
= ` 2.75 × 1.02/0.06

Since, Actual Stock Price is lower, hence it is undervalued.
(b) Financial Leverage = PBIT/PBT
1.5 = PBIT / (PBIT – Interest)
1.5 = PBIT / (PBIT – 24)
1.5 (PBIT – 24) = PBIT
1.5 PBIT – 36 = PBIT
1.5 PBIT – PBIT = 36
0.5 PBIT = 36
or = ` 72 lakhs

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

NOPAT = PBIT – Tax = ` 72 lakhs (1 – 0.25) = ` 54 lakhs.
Weighted Average Cost of Capital (WACC)
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= 15%  (300 / 600) + (1 – 0.25)  (8%)  (300 / 600) = 10.50%

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EVA = NOPAT – (WACC  Total Capital)
EVA =m s e
s e= - ` 9 lakhs
` 54 lakhs – 0.105  ` 600 lakhs
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lIn this transaction, possible types of risks are:
EVA
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(c)
(i) Currency Risk (Exchange Rate Risk): Since raw materials imported
from China and finished goods sold in the USA, fluctuation in exchange
rates between Yuan, Indian rupee and US Dollar could impact cost and
revenue.
(ii) Political and Trade Risk: Changes in trade policies, tariffs, or political
instability in China, India, or the U.S. may affect the cost and availability

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of raw materials or access to markets.

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(iii) Market Risk: The demand for the finished products in the US may

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fluctuate, affecting sales and profitability.

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(iv) Regulatory Risk – Mr. PK must comply with various regulations in each
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country, including import/export laws, quality standards, and customs
regulations.
Question 2
(a)

Security Standard Deviation (a) Weights (w)
R 20% 0.8
S 50%
o m 0.2
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c. o Calculation upto two decimal place.

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e Portfolio
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From the information given above, you are required to calculate

las Standard Deviations, if-
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ag (i) Securities returns are independent.
(ii) Securities returns are perfectly negatively correlated.
(iii) Securities returns are perfectly positively correlated. (6 Marks)

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(b) Mr. X gets the following 2-way quotes in the foreign exchange market:
Spot 2-months Forward
`/US$
` 86.00/` 86.20 ` 88.00/88.40
Calculation upto two decimal place.
You are required to calculate -
I. How many US Dollars should Mr. X sell to get ` 40,00,000 after 2
months?
II. How many Rupees Mr. X is required to pay to obtain US$ 3,00,000 in the
spot market?
III. Assume that Mr. X has US$ 75,000 in current account earning no interest.
Return on Investment (ROI) on rupee investment is 12% per annum.
Should Mr. X convert the US$ now or 2 months later?
(4 Marks)
(c) Identify the role of CFOs in addition to traditional role in post pandemic time.
(4 Marks)
Answer
(a) (i) Portfolio Variance and Standard Deviation of Portfolio if securities
returns are independent:

σ p2 = x12σ12 + x 22σ 22

Accordingly,
Variance ( σP2 ) = (0.80)2(20)2 + (0.20)2(50)2

Variance ( σP2 ) = 256 + 100 = 356

Standard Deviation ( σP ) = 356 = 18.87%

(ii) Portfolio Variance and Standard Deviation of Portfolio if securities
returns are perfectly negatively related:

σ p2 = (x1σ1 - x 2σ 2 )2

σ p = x1σ1 - x 2σ 2

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Accordingly,
Variance ( σP2 ) = (0.80x20 - 0.20x50)2
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Variance ( σP2 ) = (6)2 = 36
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Standard Deviation ( σ ) = 36 = 6%
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P

g la returns are perfectly positively related:
(iii) Portfolio Variance and Standard Deviation of Portfolio if
a
securities

a
σ p2 = (x 1σ1 + x 2 σ 2 )
2

σ p = x 1σ 1 + x 2 σ 2
Accordingly,

Variance ( σP2 ) = (0.80x20 + 0.20x50)2

Variance ( σP2 ) = (26)2 = 676
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Standard Deviation ( σ ) = 676 .= 26%
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P

(b) (i) US $ required to get ` 40alakhs after 2 months at the Rate of ` 88/$
` 40,00,000 a gl
∴ = US $ 45454.55
` 88
(ii) ` required to get US$ 3,00,000 now at the rate of ` 86.20/$
US $ 3,00,000 × ` 86.20 = ` 2,58,60,000
(iii) Encashing US $ 75,000 Now Vs 2 month later
Proceed if we can encash in open mkt $ 75000 × ` 86 = ` 64,50,000

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Opportunity gain= ` 1,29,000

c. o Likely sum at end of 2 months
se
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` 65,79,000

s em Proceeds if we can encash by forward rate :
g la ` 66,00,000
gla $ 75000 × ` 88.00
a
a It is better to encash the proceeds after 2 months and get opportunity
gain.

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Alternative Solution to Sub Part (iii)
Forward Premium:
Forward bid rate = ` 88.00, Spot bid rate = ` 86.00.
Premium = (Forward rate − Spot rate) ÷ Spot rate × (12/2) × 100
(annualized %).
Premium = (` 88.00 − ` 86.00) ÷ ` 86.00 × 6 = (2/86) × 6 = 0.023256
× 6 × 100 (annualized %).
= 13.95% p.a.
INR Interest Rate: 12% p.a.
Comparison:
Forward premium (13.95%) > INR interest rate (12%).
This indicates the forward rate offers a better return than investing INR,
favoring conversion after 2 months.
(c) In post-pandemic time their role has been advanced in the following areas
in addition to traditional role:
a. Risk Management: Now a days the CFOs are expected to look after
the overall functioning of the framework of Risk Management system
of an organisation.
b. Supply Chain: Post pandemic supply chain management system has
been posing the challenge for the company to maintain the sustainable
growth. Since CFOs are care takers of finance of the company,
considering the financial viability of the Supply Chain Management
their role has now become more critical.
c. Mergers, acquisitions, and Corporate Restructuring: Since in recent
period to maintain the growth and capture the market share there has
been a spate of Mergers and Acquisitions and hence the role of CFOs
has become more crucial because these are strategic decision and any
error in them can lead to collapse of the whole business.
d. Environmental, Social and Governance (ESG) Financing: With the
evolving of the concept of ESG their role has been shifted from
traditional financing to sustainability financing.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Question 3
(a) BC Ltd. is contemplating on buying a new machine at ` 70,00,000 with an
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additional working capital requirement of ` 10,00,000. The machine is

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expected to have an economic useful life of 5 years, with no salvage value.

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The company follows the straight line method of depreciation and same is

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accepted for tax purposes. The machine is expected to generate an
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incremental increase in the before tax cash operating income of ` 25,00,000
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(in real terms) per year for a period of 5 years. The relevant tax rate is 35%.
Inflation is expected to be 6% per year and the firms cost of capital in real
term is 10% per year. Assuming that the working capital requirement will
remain unchanged throughout the period, in spite of inflation.
Advise the company whether the machine should be purchased or not.
Show your NPV calculation in real term.
Calculation upto two decimal place.

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PV Factor at 10% & 6% are as under –

PV factor 1
m . 2 3 4 5

s e0.826
a
At 10% 0.909 0.751 0.683 0.621
0.943l
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At 6% 0.890 0.840 0.792 0.747

(6 Marks)
(b) Mr. X has excess cash of ` 50 lakhs which he wants to invest in short-term
marketable securities.
Expenditure relating to this investment will be ` 1,25,000 and the securities
invested will have an annual yield of 9%.
Mr. X seeks your advice -

o m
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(i)
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as to the period of investment so as to earn a pre-tax income of 5%.

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(c) Mr. J believes that the market has demonstrated a weak type of efficiency.
Explain the various types of tests that can be used to prove the weak form of
efficient market theory. (4 Marks)

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Answer
(a) Working Notes:
1. Cash Outflow (Initial Outlay) = ` 70,00,000 + ` 10,00,000 = ` 80,00,000
2. Cash Flow After Tax and Present Value
Particulars (`)
Incremental cash operating income 25,00,000
Less: Taxes (0.35) 8,75,000
CFAT 16,25,000
Cum. PV Factor for 5 years at 10% 3.790
Present value 61,58,750

3. PV of tax shield due to Depreciation
Tax saving due to Depreciation per year 14,00,000
Tax rate 35%
Tax saving per year for five years 4,90,000

PV of tax shield due to depreciation
Years Tax saving Inflation Real Tax PVF @ PV (`)
(Nominal) Factor at 6% Saving 10%
1 4,90,000 0.943 4,62,070 0.909 4,20,021.63
2 4,90,000 0.890 4,36,100 0.826 3,60,218.60
3 4,90,000 0.840 4,11,600 0.751 3,09,111.60
4 4,90,000 0.792 3,88,080 0.683 2,65,058.64
5 4,90,000 0.747 3,66,030 0.621 2,27,304.63
Present Value of tax shield due to Depreciation 15,81,715.10

4. PV of Release of Working Capital
(`)
Release of Working Capital at the end of 5 year th
10,00,000
Inflation Factor at 6% at the end of 5 year th
0.747
Cash Inflow in real terms 7,47,000
PVF @ 10% at the end of 5 year th
0.621
Present Value of Inflow 4,63,887

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Calculation of NPV
Particulars Present Value (`)
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Initial Outlay (80,00,000)
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Present Value of CFAT 61,58,750

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a
Present Value tax shield on Dep 15,81,715.10

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a
Present Value Release of Working 4,63,887
l 2,04,352.10 a
ag Recommendation: The Company should purchase the machine as the
NPV of real cash flow is positive.
(b) (i) Pre-tax Income required on investment of ` 50,00,000
Let the period of Investment be ‘P’ and return required on investment
` 2,50,000 (` 50,00,000 x 5%)
Accordingly,

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9 P
(` 50,00,000 x x ) – ` 1,25,000 = ` 2,50,000

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100 12
P = 10 months
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(ii) Break-Even its investment expenditure
9 P
(` 50,00,000 x x ) – ` 1,25,000 = 0
100 12
P = 3.33 months or 3 months 10 days
(c) Three types of tests can be employed to empirically verify the weak form of
Efficient Market Theory- Serial Correlation Test, Run Test and Filter Rule Test.
(a) Serial Correlation Test: To test for randomness in stock price changes,
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one has to look at serial correlation. For this purpose, price change in
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one period has to be correlated with price change in some other
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period. Price changes are considered to be serially independent. Serial

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correlation studies employing different stocks, different time lags and
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different time period have been conducted to detect serial correlation

ag 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.

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(b) 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.
+ + −−− + − + −−
/ / / / /
1 2 3 4 5 6
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.
(c) 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 4
(a) Peacock Inc., a US based company, is planning to set up software
development unit in India. The unit will remain in existence in India for one
year and the software is expected to get developed within this time frame.
Software developed will be bought back by the US parent at a transfer price
of USD 4 Million. The software developed will be sold in the US for USD 6
Million. Other estimates are as under:
(i) Rent for fully furnished unit with necessary hardware in India is
` 25,00,000.
(ii) Manpower Cost - 120 software professionals will be working for 10
hours@ ` 275 per man-hour each day for 350 effective days in the year.
(iii) Administrative and Other Costs is ` 50,00,000
(iv) The rupee-dollar rate is ` 84 per USD.

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Peacock Inc. will enjoy the following privileges in India:
A. All profits can be repatriated.
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B. No withholding taxes.

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C.
. c
Corporate taxes @20 percent on earnings.
s e
e
Assume m 365 days in year.
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Advise Peacock Inc. on the financial viability of the project. (6 Marks)

a per Share (EPS) of ` 5. The total numbers of outstanding shares are 2,80,000.
(b) GL Ltd. is having a Price Earnings Ratio (P/E Ratio) of 16 times and Earnings

FL Ltd. another company is also in the same industry. The GL Ltd. is in
negotiation for acquisition of the FL Ltd. by issuing shares in the ratio of 4:5,
i.e., for 5·shares of FL Ltd., 4 shares of GL Ltd. will be issued. The outstanding
shares of FL Ltd. are 50,000. The EPS of the merged entity will be ` 5.4.
You are required to calculate-

o m
c
(i) Pre-merger EPS of FL Ltd.

m. issued to FL Ltd. if pre-merger EPS of
GL Ltd. is to be maintained. e
(ii) Number of shares of GL Ltd. to be

a s (4 Marks)
(c) "Tokenization is some extentl resembles the process of securitization." In the
ag discuss similarities of tokenization and
reference of this statement,
securitization. (4 Marks)
OR
A venture capital fund manager provides funding at various stages of
business growth, taking into consideration factors such as the investment
horizon, risk perception, and the specific activities to be financed. You are
required to complete the risk matrix provided below:
m
m
Financial stage Locking Period Risk Perception
.co
Activity to be

c. o se
m Financed

em la
Seed money

las Start up
a g
ag Second stage
Fourth stage
(4 Marks)

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Answer
(a) Proforma profit and loss account of the Indian software development unit
` `
Revenue (USD 4 million x ` 84) 33,60,00,000
Less: Costs:
Rent 25,00,000
Manpower (350 x 120 x 10 x ` 275) 11,55,00,000
Administrative and other costs 50,00,000 12,30,00,000
Earnings before tax (EBT) 21,30,00,000
Less: Tax 4,26,00,000
Earnings after tax (EAT) 17,04,00,000
Repatriation amount (in rupees) 17,04,00,000
Repatriation amount (in dollars) $ 20,28,571.43 or
$ 20,28,571
Or $ 2.029 or
$ 2.03 Million

Advise: The cost of development software in India for the US based
company is $ 1.971 or $ 1.97 million. As the USA based Company is
expected to sell the software in the US at $ 6.00 million, it is advised to
develop the software in India.
(b) (i) Pre Merger EPS

No. of shares to be issued by GL to FL (50,000 x 4/5) 40,000
Existing number of shares of GL 2,80,000
Total no. of shares Post Merger 3,20,000
EPS (Post Merger) ` 5.40
Post-Merger (Total Earning) ` 17,28,000
Less: Pre-Merger Earning of BL (2,80,000 x 5) ` 14,00,000
Pre-Merger Earning of FL ` 3,28,000
Number of shares of FL (Existing) 50,000
EPS (` 3,20,000/50,000) ` 6.56

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(ii) Number of shares to be issued to FL to maintain Pre-Merger EPS
5.00 = 17,28,000/(2,80,000 + X)
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14,00,000 + 5X = 17,28,000

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X = 65,600
s e
m
eEPS.
Thus, 65,600 shares to be issued by GL to FL to maintain pre-merger
l a
s
la Alternatively, it can also be computed as follows: a g
g
a Swap Ratio if EPS before merger is maintained by GL
Then, Swap Ratio = 6.56 / 5 = 1.312
Number of shares of GL is to be issued to FL is 50000 shares x 1.312
= 65,600 shares
(c) Following are some similarities between Tokenization and Securitization:

m
(i) Liquidity: First and foremost both Securitization and Tokenization

c. o
inject liquidity in the market for the assets which are otherwise illiquid

em to diversify their portfolio thus
assets.
(ii) Diversification: Both helpsinvestors
g la returns.
a
managing risk and optimizing
(iii) Trading: Both are tradable hence helps to generate wealth.
(iv) New Opportunities: Both provide opportunities for financial
institutions and related agencies to earn income through collection of
fees.
OR
(c)

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Financial Locking Risk Activity to be financed

c. o m
Stage Period Perception
For supporting ae concept or
em
Seed Money 7-10 Extreme
l s
a for product
las g
a and involves
idea or R&D

ag development
low level of financing.

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Start Up 5-9 Very High Initializing prototypes
operations or developing
products and its marketing.
Second Stage 3-5 Sufficiently high Expanding market and
growing working capital
needs though not earning
profit.
Fourth Stage 1-3 Low Facilitating public issue i.e.
going public. Also called
Bridge Financing.

Question 5
(a) On 1st April, an open-ended scheme of Progressive Mutual Fund had 800
Lakh units outstanding with Net Asset Value (NAV) of ` 44.30 per unit. At the
end of April, it issued 16 Lakh units at opening NAV plus 2% load, adjusted
for dividend equalization. At the end of May, 8 Lakh units were repurchased
at opening NAV less 2% exit load adjusted for dividend equalization. At the
end of June, 60% of its available income was distributed as dividend.
In respect of April-June quarter, the following additional information is
available:

Particulars ` in Lakh
Portfolio Value Appreciation 965.280
Income of April 49.440
Income for May 75.070
Income for June 93.710

Calculation upto 4 decimal place.
You are required to calculate-
(i) Income available after distribution of dividend.
(ii) Issue price at the end of April.
(iii) Repurchased price at the end of May.
(iv) Net Asset Value (NAV) per unit as on 30th June. (7 Marks)

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

(b) ZIO is a small-to-medium-sized privately held company specializing in
electrical equipment manufacturing and is seeking additional investors. Below
are key financial indicators to assist in evaluating the investment potential:
m
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• Break-even Achieved: The Company has reached its break-even point
.
this year.
m s e
s eEBITDA: ` 110 Lakh, including an extraordinary gain of ` 16 Lakh. l a
la ag
•

ag
• Pending Adjustments: ` 38 Lakh in preliminary sales promotion costs are
yet to be written off.
• Unlevered Beta: 1.5 (based on the industry benchmark).
• Capital Structure: Debt-to-Equity Ratio of 30:70.
• Risk-Free Rate: 6% (based on liquid bonds).
• Market Rate of Return: 12% (internal industry assessment).

m
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• Equity Value (EV): The EV is to be taken at a multiple of 8 on EBITDA.

m next three years are as follows:
• The pre-tax cost of debt is 12.45% and assume a tax regime of 30%.
The Future Cash Flows (FCFs) forethe
la s
a g Year 1 Year 2 Year 3
Future cash flows (` in Lakh) 150 200 220

Future cash flows are discounted at Weighted Average Cost of Capital
(WACC)
PV Factor at 15% & 14% are as under -

1 2 3

o m
m .c
PV Factor at 15% 0.870 0.756 0.658

c. o PV Factor at 14% 0.877 0.769 0.675
s em
s em Calculation upto 2 decimal places.
g la
gla a on ZIO Company.
a
You are required to calculate potential value to be placed
(7 Marks)

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Answer
(a) Calculation of Income available after Distribution of Dividend
Units Per Total
(Lakh) Unit (`) (` In lakh)
Income from April 800 0.0618 49.4400
Add: Dividend equalization collected 16 0.0618 0.9888
on issue
816 0.0618 50.4288
Add: Income from May 0.0920 75.0700
816 0.1538 125.4988
Less: Dividend equalization paid on 8 0.1538 (1.2304)
repurchase
808 0.1538 124.2684
Add: Income from June 0.1160 93.7100
808 0.2698 217.9784
Less: Dividend Paid 0.1619 (130.7870)
808 0.1079 87.1914

Calculation of Issue Price at the end of April
`
Opening NAV 44.3000
Add: Entry Load 2% of ` 44.3000 0.8860
45.1860
Add: Dividend Equalization paid on Issue Price 0.0618
45.2478
Calculation of Repurchase Price at the end of May
`
Opening NAV 44.3000
Less: Exit Load 2% of ` 44.3000 (0.8860)
43.4140
Add: Dividend Equalization paid on Issue Price 0.1538
43.5678

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Closing NAV

` (Lakh)
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Opening Net Asset Value (` 44.30 × 800) 35440.0000

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Issue of.Fresh Units (16 × 45.2478)
Portfolio Value Appreciation 965.2800

s e
em Received (49.440 + 75.070 + 93.710) a
723.9648

s l
la ag
Income 218.2200

g
a Less: Units repurchased (8 × 43.5678) -348.5424
37347.4648

Income Distributed -130.7870 (-479.3294)
Closing Net Asset Value 36868.1354
Closing Units (800 + 16 – 8) lakh 808 lakh
∴ Closing NAV as on 30 th
June ` 45.6289
(b) The levered beta of the company will be 1.5[1+(1-0.3)*30/70)] = 1.95

m
c. o
The adjusted EBITDA would be ` 110 Lakh –` 16 Lakh – ` 38 Lakh
= ` 56 Lakh

s em` 56 Lakh obtained above = ` 448 Lakh
The EV will be multiple of 8 on the

g la with CAPM = R + β (R – R )
= 6% + 1.95 (12% - 6%)a
The Cost of equity in accordance f m f

= 17.70%
The WACC = Cost of Equity + Cost of Debt
= 17.70 (70/100) + 12.45 (1-0.3) (30/100) = 15.00%
Finally, the future cash flows can be discounted at the WACC obtained
above as under –
Y1 Y2 Y3

o m
c
Future Cash flows 150 200 220
m . 0.658
c. o m
Discount factor 0.870 0.756
151.20 e
em PVs of cash flows 130.50
la s 144.76

las Value of the Firm
a g 426.46

ag Question 6
(a) On 31 December, 2024, Mr. RS has taken a long position of 2 lots of Nifty
st

Futures at price 25,400. One lot of Nifty Future is 50 units.

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Margins:
(i) Initial margin required is 10% of contract value.
(ii) Maintenance margin required is 80% of initial margin.
The closing prices of Nifty Future for 5 days are given below:
Date Closing price of Nifty Future
01 January, 2025 25,520
02 January, 2025 25,390
03 January, 2025 25,250
04 January, 2025 24,800
05 January, 2025 25,100

Evaluate the following:
I. Daily balances in margin account and payment on margin calls, if any.
II. If contract squared off on 5th January 2025, gain or loss to Mr. RS
III. If Mr. RS taken the short position, gain or loss to Mr. RS. (7 Marks)
(b) DEF Ltd. has implemented a strategy to manage its exposure to fluctuating
interest rates by engaging in both interest rate caps and floors.
The company has purchased $ 50,00,000 (i.e. call options on interest rates)
cap of 8% at a premium of 0.75% of the face value to protects against rising
interest rates. $ 50,00,000 (i.e. put options on interest rates) floor of 5% is
also available at a premium of 0.85% of face value.
You are required to analyze the following situation:
(i) If Interest rate rise to 10 percent, what is the amount received by DEF
Ltd.? What are the net savings from the cap?
(ii) If DEF Ltd. also purchases a floor, what are net savings if interest rate
rises to 10%?
(iii) Calculate net savings if interest rates fall to 4 percent considering cap &
floor both purchase.
(iv) If DEF Limited has purchases the cap and sell the floor and there is price
rise is 11%, what will be net saving to the company? (7 Marks)

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SUGGESTED ANSWER FINAL EXAMINATION: MAY 2025

Answer
(a) (i) Contract Size (` 25,400 x 50 x 2) = ` 25,40,000
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Initial Margin (10% of 25,40,000) = ` 2,54,000

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Maintenance Margin (80% of 2,54,000) = ` 2,03,200
s e m
e m l a
a s Statement showing the daily balances in Margin A/c and margin call if any,
g
l Call a
ag Day Change in Future value
(`)
Margin A/c
Money
(`) (`)
31/12/24 ----- 2,54,000
01/01/25 (` 25,520 - ` 25,400) x 50 x 2 = 12,000 2,66,000
02/01/25 (` 25,390 - ` 25,520) x 50 x 2 = -13,000 2,53,000
03/01/25 (` 25,250 - ` 25,390) x 50 x 2 = - 14,000 2,39,000
04/01/25 (` 24,800 - ` 25,250) x 50 x 2 = - 45,000 2,54,000 60,000

om
05/01/25 (` 25,100 - ` 24,800) x 50 x 2 = 30,000 2,84,000

. c
em
(ii) Gain or Loss of Mr. RS squared off position on 05/01/2025

l a s (`)
Ending margin
Less: Initial Margin a g 2,84,000
2,54,000
Profit 30,000
Less: Margin Call 60,000
Net Loss (30,000)
(iii) Gain/ Loss if Mr. R has taken Short Position
Day Change in Future value (`) Margin A/c Call
m
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Money

m .
c. o
(`) (`)

em
em s
31/12/24 ----- 2,54,000 -

s
01/01/25 (` 25,400 - ` 25,520) x 50 x 2 = - 12,000
l a
g 2,55,000
2,42,000 -

gla 02/01/25 (` 25,520 - ` 25,390) x 50 x 2 = 13,000
a -

a 03/01/25 (` 25,390 - ` 25,250) x 50 x 2 = 14,000 2,69,000 -
04/01/25 (` 25,250 - ` 24,800) x 50 x 2 = 45,000 3,14,000 -
05/01/25 (` 24,800 - ` 25,100) x 50 x 2 = - 30,000 2,84,000 -

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SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Profit or Loss on Short Position
(`)
Ending margin 2,84,000
Less: Initial Margin 2,54,000
Profit 30,000

(b) (i) Premium for purchasing the Cap = 0.0075 × $ 50,00,000 = $ 37,500
If interest rate rises to 10%, Cap purchase receive (10% - 8% = 2%) i.e.,
$ 50,00,000 × 2/100 = $ 1,00,000,
= ($ 1,00,000 - $ 37,500) = $ 62,500
Net saving = $ 62,500
(ii) Purchase Floor, premium for Floor = 0.0085 × $ 50,00,000 = $ 42,500
and
Total premium will be $ 37,500 + $ 42,500 = $ 80,000 and
= ($ 50,00,000 × 0.02) − $ 80,000 = $ 20,000
Net saving = $ 20,000
(iii) If interest rate falls to 4 percent, there will be no payoff from the Cap,
but there will be payoff from Floor.
However, the total premium ($ 37,500 + $ 42,500) = $ 80,000 is the
cost.
Payoff from floor $ 50,00,000 × 0.01 (5% – 4% = 1%) = $ 50,000
= $ 50,000 − $ 80,000 = ($ 30,000)
Net loss = ($ 30,000)
(iv) Sell the Floor, company will receive 0.0085 × $ 50,00,000 = $ 42,500
and pay premium for Cap 0.0075 × $ 50,00,000 = $ 37,500, net
premium receiving will be $ 42,500 − $ 37,500 = $ 5,000
If interest rate rises to 11%, Cap purchase receive = 0.03 × $ 50,00,000
= $ 1,50,000
= $ 1,50,000 + $ 5,000 = $ 1,55,000
Net saving = $ 1,55,000

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