CA Final May 2024 Suggested Answers Paper 2 Advanced Financial Management

FOR CA FINAL EXAM PREPARATION

CA Final 2024
Suggested Answers ·
Paper 2 Advanced
Financial Management
EXAM YEAR TYPE

CA Final 2024 Suggested Answers
SUBJECT DATE

Paper 2 Advanced Financial Management May 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

m
m .co
c. o

e m
em l a s
s a g

PAPER – 2 : ADVANCED FINANCIAL
MANAGEMENT
m
m c. o
.co s em
m
e l a
a s are also required to answer any four from the remaining five ag
Question No.1 is compulsory.

l
ag
Candidates
questions.
Working notes should form part of the respective answer.
Question 1
(a) An investor is holding 1,000 shares of X Ltd., Current Year dividend rate is `
3 per share. Market price of the share is ` 35 each. The investor is concerned
about several factors which are likely to change during the next financial

m Current
year as indicated below:
Particulars
. co Next Financial

s em Year Year

g l a
Dividend paid / anticipated per share (`) 3.00 3.25
Risk Free Rate a 11% 12%
Market Risk Premium 4% 5%
Beta Value 1.5 1.6
Expected growth 8% 10%

Advise the investor to take further action, whether to BUY, HOLD or SELL the
shares, based on the above information. (6 Marks)

o m
c
(b) Mr. Kar has invested in three mutual fund schemes as per details below:

m MFY .
c. o m
e 1,00,000
MFX MFZ

em
Amount of investment (`) 5,50,000 s
la6,000
4,20,000

las Dividend received up to 31.03.2023 (`) 10,000
a g Nil

ag NAV as on 31.03.2023 (`) 11.50 11.00 9.50
Effective yield p.a. as on 31.03.2023 19.345% 22.59% -36.50%
Holding period 120 days 100 days 50 days

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 1 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

You are required to calculate Net Asset Value (NAV) at the time of purchase
assuming 365 days in a year. (4 Marks)
(c) "The starting point of an organisation is money and the end point of that
organization is also money". Explain the statement to clearly understand this
interface of strategic management and financial policy. (4 Marks)
Answer
(a) On the basis of existing and revised factors, rate of return and price of
share is to be calculated.
Existing rate of return
= Rf + Beta (R m – Rf)
= 11% + 1.5 (4%) = 17.00%
Revised rate of return
= 12% + 1.6 (5%) = 20.00%
Price of share (original)
D (1 + g) 3 (1.08) 3.24
P = = = = ` 36.00
o K -g 0.17 - 0.08 0.09
e

Price of share (Revised)
3.25 (1.10) 3.575
P = = = ` 35.75
o 0.20 - 0.10 0.10
Advice- As the existing market price of the share is ` 35, Current
Equilibrium Price of the share ` 36 and Revised Price ` 35.75 are almost
equal. Under this situation investor should hold the share.
(b)
MFX MFY MFZ

A. Amt. of Investment 550,000 420,000 1,00,000

B. Effective Yield p.a. 19.345% 22.59% -36.50%

C. Period of Holding 120 Days 100 Days 50 days

D. Return for Holding Period 34,980 25,993.97 - 5000

E. Dividend Received 10,000 6,000 -

2

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 2 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

F. Total Gain in NAV(D - E) 24,980 19993.97 -5,000

m
G. Total NAV at End of Holding

c. o
5,74,980 4,39,993.97 95,000
m
Period (A + F)

.co
H. NAV (p.u.) as on 31.3.23 11.50 11.00 9.50
s em
m
e No. of Units (G/H) l a
s g
49,998.26 39,999.45 10,000

laJ. NAV (p.u.) at the time of
I.
a
ag Purchase (A/I) 11.00 10.50 10.00

Alternative Solution
MFX
550000
(11.50- X) × + 10000
X 0.19345
= × 120
550000 365

m
co
6325000
Or - 550000 + 10000 = 0.0636 x 550000
.
em
X

s
6325000
Or X = 574980
g l a
6325000 a
Or X = 574980 = 11.00
MFY
420000
(11.00- Y) × + 6000
Y 0.2259
= × 100
420000 365

m
4620000

co
Or - 420000 + 6000 = 0.062 x 420000

m .
Y

c. o se
m
4620000
Or = 440040

em la
Y

las 4620000
a g
g
Or Y = = 10.50

a
440040

3

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 3 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

MFZ
100000
(9.50- Z) ×
Z - 0.3650
= × 50
100000 365
950000
Or - 100000 = - 0.05 x 100000
Z
950000
Or = 95000
Z
950000
Or Z = = 10.00
95000
(c) No organization can run an existing business and promote a new expansion
project without a suitable internally mobilized financial base or both i.e.
internally and externally mobilized financial base.
Sources of finance and capital structure are the most important dimensions
of a strategic plan. The need for fund mobilization to support the expansion
activity of firm is very vital for any organization. The generation of funds
may arise out of ownership capital and or borrowed capital.
Along with the mobilization of funds, policy makers should decide on the
capital structure to indicate the desired mix of equity capital and debt
capital.
Another important dimension of strategic management and financial policy
interface is the investment and fund allocation decisions. A planner has to
frame policies for regulating investments in fixed assets and for restraining
of current assets. In fact, project evaluation and project selection are the
two most important jobs under fund allocation. Planner’s task is to make
the best possible allocation under resource constraints.
Dividend policy is yet another area for making financial policy decisions
affecting the strategic performance of the company. A close interface is
needed to frame the policy to be beneficial for all. Dividend policy decision
deals with the extent of earnings to be distributed as dividend and the
extent of earnings to be retained for future expansion scheme of the firm.
Stability of the dividend payment is a desirable consideration that can have
a positive impact on share prices.

4

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 4 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Thus, the financial policy of a company cannot be worked out in isolation
of other functional policies. It has a wider appeal and closer link with the

m
c. o
overall organizational performance and direction of growth. These policies

m
being related to external awareness about the firm, especially the

.co
awareness of the investors about the firm, in respect of its internal
s em
em
performance. There is always a process of evaluation active in the minds of
l a
a s
the current and future stake holders of the company.
l a g
a(a)g The Closing values of NSE Nifty from 2 January, 2024 to 12 *January, 2024
Question 2
nd th

were as follows:

Days Date Day Nifty
1 2 TUE 21,742
2 3 WED 21,665

m 21,462
3 4 THU 21,517
4 5 FRI
c o
. No Trading
SATm
5 6
s e
l a
ag MON
6 7 SUN No Trading
7 8 21,238
8 9 TUE 21,182
9 10 WED 20,997
10 11 THU 20,926
11 12 FRI 20,901

You are required to:
m
m .co
(i) Calculate Exponential Moving Average (EMA) of Nifty during the above

c. o m
period. The previous day exponential moving average of Nifty can be

em (ii) Give brief analysis on the basis of your calculations. la
assumed as 21,500, The value of exponent for 31 days EMA is 0.062
se
las * In question paper mistakenly, it got typed as 11 . a
g (6 Marks)

ag th

(b) XY Ltd., is interested in expanding its operation and planning to install a unit
at US. For the proposed project, it requires a fund of $ 15 million (net of issue
expenses/floatation cost). The estimated floatation cost is 3%. To finance the

5

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 5 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

project it proposes to issue GDRs.
You as a financial consultant is required to compute the number of GDRs, to
be issued and cost of the GDR with the help of following additional
information.
(i) Expected market price of share at the time of issue of GDR is ` 350 (Face
Value ` 100).
(ii) 3 shares shall underly each GDR and shall be priced at 6% discount to
market price.
(iii) Expected Exchange Rate ` 84/$.
(iv) Dividend expected to be paid is 10% with growth rate of 8%.
(4 Marks)
(c) Mr. A, has invested in the Growrich Mutual Fund's Scheme. The details of the
Mutual Fund Scheme are given below:

Asset Value at the beginning of the month ` 78.50
Annualized Return 16%
Distribution made in the nature of Income and Capital ` 0.40 & ` 0.30
Gain (per unit respectively)

You are required to:
(i) Calculate the month end Net Asset Value of the Growrich Mutual Fund
Scheme (Round off to 2 decimals)
(ii) Comment briefly on the Month end NAV. (4 Marks)
Answer
(a) (i)
5
2
1 3 EMA
EMA for 4
Date Nifty Previous Day 1-2 3x0.062 2±4
2 21742 21500.00 242.00 15.00 21515.00
3 21665 21515.00 150.00 9.30 21524.30
4 21517 21524.30 -7.30 -0.45 21523.85

6

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 6 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

5 21462 21523.85 -61.85 -3.83 21520.02

m
8 21238 21520.02 -282.02 -17.49 21502.53

m
9 21182 21502.53 -320.53 -19.87 21482.66
c. o
c. o 20997 s em
m
10 21482.66 -485.66 -30.11 21452.55

s e 11 l a
la ag
20926 21452.55 -526.55 -32.65 21419.90

ag
12 20901 21419.90 -518.90 -32.17 21387.73

(ii) Conclusion – The market is bearish. The market is likely to remain
bearish for short term to medium term if other factors remain the same.
On the basis of this indicator (EMA) the investors/brokers can take
short position.
(b) Net Issue Size = $15 million
$15 Million
m
co
Gross Issue = = $ 15.464 million

.
0.97

e`m84)
Issue Price per GDR in ` (350 x 3 x 94%) ` 987
s
lxa3)
Issue Price per GDR in $ (` 987/ $ 11.75

a g
Dividend Per GDR (D ) (` 10 1 ` 30
Net Proceeds Per GDR (` 987 x 0.97) ` 957.39
$15.464 million
(i) Number of GDR to be issued = 1.316085 million
$11.75
30.00
(ii) Cost of GDR to XY Ltd. Ke = +0.08 =11.13%
957.39

m
(c) (i) Calculation of NAV at the end of month:

m .co
c. o
Given Annual Return = 16%
m
em se
Hence Monthly Return = 1.33% (r)

s g la
la
(NAVt - NAVt -1 ) + It +G t
a
r=

g
NAVt -1
a (NAVt - ` 78.50)+` 0.40+` 0.30
0.0133 =
` 78.50

7

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 7 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

1.04405 = NAVt - ` 77.80
NAVt = ` 78.84
(ii) COMMENT- Closing NAV is increased by ` 0.34 i.e. (` 78.84 – ` 78.50).
So, there is slight change in NAV.
Question 3
(a) A manufacturer of electronic components has taken floating interest rate
loan of ` 2 Crore on 1 st April, 2023. The rate of interest at the inception of
loan is 9% per annum. Interest is to be paid every year on 31 st March.
In the month of October 2023, the Central Bank of the country releases the
following projections about the interest rates likely to prevail in future.
(i) On 31 st March, 2024 – 9.25%
On 31 st March, 2025 – 9.50%
On 31 st March, 2026 – 10.00%
On 31 st March, 2027 – 9.00%
On 31st March, 2028 – 8.25%
You are required to show how the borrower can hedge the risk using
Option Cap arising out of expected rise in the rate of interest when he
wants to peg his interest cost at 9% per annum.
(ii) Assume that the premium negotiated by both the parties is 0.80% to be
paid at once on 1 st October, 2023 and the actual rate of interest on the
respective due dates happens to be as:
On 31 st March, 2024 – 9.50%
On 31 st March, 2025 – 11.00%
On 31 st March, 2026 – 9.25%
On 31 st March, 2027 – 9.00%
On 31 st March, 2028 – 8.50%
You are required to show how the settlement will be executed on the
perspective interest due dates.
(iii) State whether this option is advantageous when compared to Interest
Rate Collar option. Explain. (10 Marks)

8

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 8 of 23

m
m .co
c. o

e m
em l a s
s ag
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(b) Apart from the support from government, there are quite a few other reasons
why India became a sustainable environment for start-up to thrive in

m
c. o
What are the other reasons?

o m m
.c
OR

s e
emWhat are the similarities of Tokenization and Securitization? l a
(b) "Tokenization, to some extent resembles the process of Securitization." Is it

la s
True?
(4 Marks)a
g
g
aAnswer
(a) (i) As borrower does not want to pay more than 9.00% p.a., on this loan
where the rate of interest is likely to rise beyond this, hence, he has to
hedge the risk by entering into an agreement to buy interest rate caps
with the following parameters:
• Notional Principal: ` 200,00,000/-

o m
c
• Strike rate: 9.00% p.a.

m . declared by Central Bank. or the
e to this loan.
• Reference rate: Rate of interest

a s
rate of interest applicable

a gl
• Calculation and settlement date: 31 March every year
st
st

• Duration of the caps: till 31 March 2028
• Premium for caps: Negotiable between both the parties
To purchase the caps this borrower is required to pay the premium
upfront at the time of buying caps. The payment of such premium will
entitle him with right to receive the compensation from the seller of
the caps as soon as the rate of interest on this loan rises above 9.00%.
m
co
The compensation will be at the rate of the difference between the rate
m .
c. o m
of none of the cases the cost of this loan will rise above 9.00%

em se
calculated on ` 2,00,00,000. This implies that in none of the cases the

s la
cost of this loan will rise above 9.00%. This hedging benefit is received

la a
at the respective interest due dates at the cost of premium to be paidg
ag only once.
(ii) The payment of this premium will entitle the buyer of the caps to
receive the compensation from the seller of the caps whereas the buyer

9

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 9 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

will not have obligation. The compensation received by the buyer of
caps will be as follows:
Date Interest Option Payment Settlement / Net
Rate of Compensation Interest
Interest Amount ` `
`
31.03.2024 9.50% Exercise 19,00,000 1,00,000 18,00,000
31.03.2025 11.00% Exercise 22,00,000 4,00,000 18,00,000
31.03.2026 9.25% Exercise 18,50,000 50,000 18,00,000
31.03.2027 9.00% Lapse* 18,00,000 ----- 18,00,000
31.03.2028 8.50% Lapse* 17,00,000 ----- 17,00,000

* Since actual rate of interest ≤ Strike Rate.
Conclusion: From the discussion above it can be said that the overall
interest cost for the borrower shall not exceed 9%.
(iii) Comparing to Interest Rate Collar, Cap Option appears to be better
because even though Collar may not involve initial outflow of cash on
account of Premium but selling Put Option at 9% can lead to cash
outflow if interest rate goes below 9%.
(b) Apart from the support from government, there are quite a few other
reasons why India became such a sustainable environment for start-ups to
thrive in. Some of the major reasons are:
(i) The Pool of Talent - Our country has a big pool of talent. There are
millions of students graduating from colleges and B-schools every
year. Many of these students use their knowledge and skills to begin
their own ventures, and that has contributed to the startup growth in
India. In the past, much of this talent was attracted to only the big
companies, but now that is slowly changing.
(ii) Cost Effective Workforce - India is a young country with over 10
million people joining the workforce every year. The workforce is also
cost effective. So, compared to some other countries, the cost of
setting up and running a business is comparatively lower.

10

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 10 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(iii) Increasing use of the Internet - India has the world’s second-highest
population, and after the introduction of affordable telecom services,

m
c. o
the usage of internet has increased significantly. It has even reached

m
the rural areas. India has the second-largest internet user base after

.co
China, and companies as well as start-ups are leveraging this easy
s em
e m
access to the internet.
l a
l a s
(iv) Technology - Technology has made the various processes of business
ag
ag
very quick, simple and efficient. There have been major developments
in software and hardware systems due to which data storage and
recording has become an easy task. Indian startups are now
increasingly working in areas of artificial intelligence and blockchain
technologies which is adding to the growth of business.
(v) Variety of Funding Options Available - Earlier there were only some
very traditional methods available for acquiring funds for a new
business model, which included borrowing from the bank or borrowing

m
co
from family and friends. However, this concept has now changed. There

.
are numerous options and opportunities available. Start-up owners can

s em
approach angel investors, venture capitalists, seed funding stage

l a
investors, etc. The easing of Foreign Direct Investment norms and

g
a
opening up of majority of sectors to 100% automatic route has also
opened the floodgates for foreign funding in the Indian start-up
ecosystem.
OR
(b) Yes, to some extent Tokenization resembles the process of Securitization
as it is a process of converting tangible and intangible assets into
blockchain tokens. Digitally representing anything has recently acquired a
lot of traction. It can be effective in conventional industries like real estate,
m
c. o
artwork etc.

m
c. o (i) Liquidity: - First and foremost both Securitization andem
Following are some similarities between Tokenization and Securitization:

em inject liquidity in the market for the assets which arela
s Tokenization

las a g otherwise illiquid

ag
assets.
(ii) Diversification: - Both help investors to diversify their portfolio thus
managing risk and optimizing returns.

11

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 11 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

(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.
Question 4
(a) The market received some information about ABC Lad's tie up with a
Multinational Company. This has induced the market price to move up. If the
information is false, the ABC Ltd.'s stock price will probably fall dramatically.
To protect from this, an investor has bought the call and put options.
He purchased one 3 month's call with a striking price of ` 45 for ` 3 premium
and paid ` 2 per share premium for a 3 month's put with a striking price of
` 42.
Assume 100 shares for call and put option.
You are required:
(i) To determine the investor's position if the tie up offer bids the price of
ABC Ltd.'s stock up to ` 44 in 3 months.
(ii) To determine the investor's position of the tie up offer program fails and
the price of the stocks falls to ` 34 in 3 months.
(iii) To determine the investor's position if the tie up offer program is
successful and the price of the stocks rise up to ` 46 in 3 months.
(6 Marks)
(b) PQ Ltd., plans to acquire RS Ltd. The relevant financial details of the two firms
prior to the merger announcement are:
PQ Ltd., RS Ltd.,
Market price per share ` 100 ` 50
Number of outstanding shares 20,00,000 10,00,000

The merger is expected to generate gains, which have a present value of
` 300 lakhs. The exchange ratio agreed to is 0.5.
You are required to calculate the true cost of the merger from the point of
view of PQ Ltd. (4 Marks)

12

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 12 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(c) What do you mean by lnternational Financial Centre (Gift City)? What are
the benefits of IFC? (4 Marks)

m
c. o
Answer

o m m
c
= (` 3. per share × 100) + (` 2 per share × 100).
(a) Total premium paid on purchasing a call and put option

m s e
s=e` 300 + ` 200 = ` 500 g l a
l a a
ag (i) Inas this case, investor exercises neither the call option nor the put option
both will result in a loss for him.
Ending value = - ` 500 + zero gain = - ` 500
i.e. Net loss = ` 500
(ii) Since the price of the stock is below the exercise price of the call, the
call will not be exercised. Only put is valuable and is exercised.

m
Total premium paid = ` 500

. co
Ending value = – ` 500 + ` [(42 – 34) × 100] = – ` 500 + ` 800 = ` 300
i.e. Net gain = ` 300
s em
g l a
(iii) In this situation, the put is worthless, since the price of the stock

a
exceeds the put’s exercise price. Only call option is valuable and is
exercised.
Total premium paid = ` 500
Ending value = - 500 + [(46 – 45) × 100] = - 500 + 100 = - ` 400
i.e. Net Loss = ` 400
(b) Shareholders of RS Ltd. will get 5 lakh share of PQ Ltd., so they will get:

m
5 lakh

co
= = 20% of shares PQ Ltd.

m .
20 lakh+5 lakh

c. o The value of PQ Ltd. after merger will be:
se
m
s em = ` 100 x 20 lakh + ` 50 x 10 lakh + ` 300 lakh
g la
gla = ` 2000 lakh + ` 500 lakh + ` 300 lakh = ` 2800 lakh a
a True Cost of Merger will be:
(` 2800 x 20%) ` 560 lakhs – ` 500 lakhs = ` 60 lakh

13

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 13 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

(c) International Financial Centre (IFC) is the financial center that caters to the
needs of the customers outside their own jurisdiction. Broadly, speaking
IFC is a hub that deals with flow of funds, financial products and financial
services even though in own land but with different set of regulations and
laws.
Thus, these centers provide flexibility in currency trading, insurance,
banking and other financial services. This flexible regime attracts foreign
investors which is of potential benefit not only to the stakeholders but as
well as for the country hosting IFC itself.
There are numberless direct and indirect benefits of setting up IFC but
some major benefits emanating from establishing IFC are as follows:
(i) Opportunity for qualified professionals working outside India come
here and practice their profession.
(ii) A platform for qualified and talented professionals to pursue global
opportunities without leaving their homeland.
(iii) Stops Brain Drain from India.
(iv) Bringing back those financial services transactions presently carried
out abroad by overseas financial institutions/entities or branches or
subsidiaries of Indian Financial Market.
(v) Trading of complicated financial derivative can be started from India.
Question 5
(a) An investor has decided to invest Rs. 1,00,000 in the shares of X Ltd. and Y
Ltd. The desired returns from the shares of the two companies along with
their probabilities are as follows:

Probability X Ltd (%) Y Ltd (%)
0.20 -5 15
0.50 10 25
0.30 15 -10

You are required to:
(i) Calculate the risk and return of investment in individual shares.
(ii) Compare the risk and return of these two shares with a portfolio of these
shares in equal proportions.
14

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 14 of 23

m
m .co
c. o

e m
em l a s
s ag
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(iii) Find out the proportion of each of the above shares to formulate a
minimum risk portfolio. (8 Marks)

m
c. o
(b) XY Ltd., paid a dividend of ` 3 for the current year. The dividend is expected

m
co m
to grow at 30% for the next 5 years and at 15% per annum thereafter. The

.
return on 182 days T-bills is 12% per annum and the market return is
m s e
s e
expected to be around 16% with a variance of 24%.
l a
g a
lYou are required to:
The Co-Variance of XY's return with that of the market return* is 30%.
ag
a
(i) Calculate the Required Rate of Return
(ii) Calculate the Intrinsic Value of the Stock
The PVF at 17% is given below:

Year 1 2 3 4 5
PVF (17%) 0.855 0.731 0.624 0.534 0.456

o m
c
. got typed as value.
(6 Marks)

e m
s
* In question paper mistakenly, return

l a
ag
Answer
(a) (i)

Probability X Ltd. (%) Y Ltd. (%) 1X2 (%) 1X3 (%)
(1) (2) (3) (4) (5)
0.20 -5 15 - 1.00 3.00
0.50 10 25 5.00 12.50
0.30 15 -10 4.50 - 3.00

o m
m c
Hence the expected return from X Ltd. = 8.50% and Y Ltd. is .12.50%
Average return 8.50 12.50

c. o s em
s em l a
la ag
Probabilit (X- X ) (X - X) 1X3 2
(Y -Y) (Y-Y) (1)X(6) 2

g
y

a (1) (2) (3) (4) (5) (6)
0.20 -13.50 182.25 36.45 2.50 6.25 1.25
0.50 1.50 2.25 1.125 12.50 156.25 78.125

15

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 15 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

0.30 6.50 42.25 12.675 -22.50 506.25 151.875
50.25 231.25

 2 X = 50.25(%)2 ;  X = 7.09%
 2 Y = 231.25(%) 2 ;  Y = 15.21%
(ii) In order to find risk of portfolio of two shares, the covariance between
the two is necessary here.

Probability (X-X) (Y-Y) 2X3 1X4
(1) (2) (3) (4) (5)
0.20 -13.50 2.50 -33.75 -6.75
0.50 1.50 12.50 18.75 9.375
0.30 6.50 -22.50 -146.25 -43.875
-41.25

 2P = (0.52 x 50.25) + (0.5 2 x 231.25) + 2 x (-41.25) x 0.5 x 0.5
 2P = 12.563 + 57.813 – 20.625
 2P = 49.751 or 49.75(%)
P = 49.75 = 7.053% or 7.05%
E (Rp) = (0.5 x 8.50) + (0.5 x 12.50) = 10.50%

Return Risk Return to Risk Ratio Ranking
of CV
X Ltd. 8.50% 7.09 1.20 2
Y Ltd. 12.50% 15.21 0.82 3
Portfolio 10.50% 7.05 1.48 1

Risk of the portfolio is reduced by combining two shares.
(iii) For constructing the minimum risk portfolio the condition to be satisfied is
σ 2X - rXY σ Xσ Y σ 2X - Cov XY
Y= or =
σ 2X + σ 2Y - 2rXY σ Xσ Y σ 2X + σ 2Y - 2Cov XY

σX = Std. Deviation of X Ltd.
σY = Std. Deviation of Y Ltd.

16

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 16 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

rXY= Coefficient of Correlation between X Ltd. and Y Ltd.
Cov. XY = Covariance between X Ltd. and Y Ltd.
m
m c. o
Therefore,

c. o50.25 +50.25 - (- 41.25) 91.50
s e m
m
% Y Ltd. = = = 0.2514 or 25.14% or 25%

e l a
364
s
231.25 - [2×(-41.25)]

lXaLtd. = 74.86% or 75% a g
g
Y Ltd. = 25.14% or 25%

a
Alternatively, it can also be computed as follows:
For constructing the minimum risk portfolio the condition to be satisfied is
σ 2Y - rXY σ Xσ Y σ 2Y - Cov XY
X= or =
σ 2X + σ 2Y - 2rXY σ Xσ Y σ 2X + σ 2Y - 2Cov XY

σX = Std. Deviation of X Ltd.

o m
c
. X Ltd. and Y Ltd.
σY = Std. Deviation of Y Ltd.

m
XeLtd. and Y Ltd.
r = Coefficient of Correlation between
XY

= Covariance between s
Cov. XY

gl a
Therefore,
a
231.25 - (-41.25) 272.50
% X Ltd. = = = 0.7486
50.25 + 231.25 - [2×(-41.25)] 364

or 74.86% or 75%
Y Ltd. = 25.14% or 25%
X Ltd. = 74.86% or 75%

m
co
Covariance of Market Return and Security Return

m .
(b) (i) β

c. o
Variance of Market Return
m
em se
30%

la
β= = 1.25

s g
20%

gla Required Rate of Return = Rf + β(Rm - Rf) a
a = 12% + 1.25(16% - 12%)
= 12% + 5.00% = 17.00%

17

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 17 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

(ii) Intrinsic Value

Year Dividend (`) PVF (17%,n) Present Value (`)
1 3.90 0.855 3.33
2 5.07 0.731 3.71
3 6.59 0.624 4.11
4 8.57 0.534 4.58
5 11.14 0.456 5.08
20.81

11.14 × 1.15
PV of Terminal Value = × 0.456 = ` 292.09
0.17 - 0.15
Intrinsic Value = ` 20.81 + ` 292.09 = ` 312.90
Question 6
(a) A machine used on a production line must be replaced at least every four
years. Costs incurred to run the machine according to its age are:
Age of the Machine (Years)
0 1 2 3 4
Purchase Price (in `) 1,00,000
Maintenance (in `) 18,000 20,000 22,000 24,000
Repairs (in `) 0 3,000 6,000 10,000
Scrap Value (in `) 35,000 23,000 12,000 6,000

Future replacement will be with identical machine having same cost. Revenue
is unaffected by the age of the machine. Ignore Inflation and tax and
determine the optimum replacement cycle.
PV factors of the cost of capital of 15% for the respective four years are:

Year 1 2 3 4
PVF (15%) 0.8696 0.7561 0.6575 0.5718
(8 Marks)
(b) The equity shares of XYZ Ltd., are currently being traded at ` 34 per share in
the market.

18

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 18 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

XYZ Ltd., has total 10,00,000 equity shares outstanding in number and
promoters equity holding in the company is 30%

m
c. o
ABC Ltd., wishes to acquire XYZ Ltd., because of likely synergies. The

m
co m
estimated present value of these synergies is ` 1,00,00,000.

m . s e
a
Further ABC Ltd., feels that management of XYZ Ltd., has been overpaid. With

s e l
ag
better motivation, lower salaries and fewer perks for the top management,

l a
ag
will lead to savings of ` 5,00,000 per annum. Top management with their
families are promoters of XYZ Ltd., Present value of these savings would add
` 25,00,000 in value to the acquisition.
Following additional information is available regarding ABC Ltd.,

Earnings per share `5
Total number of shares outstanding 15,00,000
Market price of equity share ` 30

m
co
You are required to:

.
em
(i) Calculate the maximum price per equity share which ABC Ltd., can offer

s
to pay for XYZ Ltd.

g l a
a
(ii) Calculate the minimum price per equity share at which the management
of XYZ Ltd., will be willing to offer their controlling interest. (6 Marks)
Answer
(a) Working Notes:
First of all, we shall calculate cash flows for each replacement cycle as
follows:
One Year Replacement Cycle `

m
c. o
Year Replacement Maintenance & Residual Net cash
m
c. o em(1,00,000)
Cost Repair Value Flow

em
0 (1,00,000) - -
s
la 17,000
las 1 - (18,000)
a g
35,000

ag

19

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 19 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

Two Year Replacement Cycle `

Year Replacement Maintenance & Residual Net cash
Cost Repair Value Flow
0 (1,00,000) - - (1,00,000)
1 - (18,000) - (18,000)
2 - (23,000) 23,000 -

Three Year Replacement Cycle `

Year Replacement Maintenance & Residual Net cash
Cost Repair Value Flow
0 (1,00,000) - - (1,00,000)
1 - (18,000) - (18,000)
2 - (23,000) - (23,000)
3 - (28,000) 12,000 (16,000)
`
Four Year Replacement Cycle
Year Replacement Maintenance & Residual Net cash
Cost Repair Value Flow
0 (1,00,000) - - (1,00,000)
1 - (18,000) - (18,000)
2 - (23,000) - (23,000)
3 - (28,000) - (28,000)
4 - (34,000) 6,000 (28,000)

20

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 20 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

Now we shall calculate NPV for each replacement cycles.

m

-15,653

-17,390

-18,410

-16,010
-1,00,000

-1,67,463
m c. o
.co m
PV

m s e
4 Years

se l a
l a ag
ag -18,000

-23,000

-28,000

-28,000
-1,00,000 -1,00,000
Flows
Cash

0
-15,653

-17,390

-10,520

-1,43,563
PV
3 Years

-18,000

-23,000

-16,000
-1,00,000
Cash Flows

m
. co
s em
l a
-15,653
-1,00,000

-1,15,653
-

-

-

ag
PV
2 Years

-18,000
-1,00,000 -1,00,000

-

-

-
Flows
Cash

-85,217
14,783

-

-

-

m
PV

m .co
1 Year

c. o se
m
17,000
-1,00,000

-

-

-

em la
Flows
Cash

las a g
ag
0.8696

0.7561

0.6575

0.5718
Year PVF@
15%
1
0

1

2

3

4

21

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 21 of 23

SUGGESTED ANSWER FINAL EXAMINATION: MAY 2024

Replacement Cycles EAC (`)
1 Year 85,217 97,995.63
0.8696
2 Years 1,15,653 71,140.43
1.6257
3 Years 1,43,563 62,877.98
2.2832
4 Years 1,67,463 58,656.04
2.855

Since EAC is least in case of replacement cycle of 4 years hence
machine should be replaced after every fourth year.
(b) (i) Calculation of maximum price per share at which ABC Ltd. can offer to
pay for XYZ Ltd.’s share

Market Value (10,00,000 x ` 34) ` 3,40,00,000
Synergy Gain ` 1,00,00,000
Saving of Overpayment ` 25,00,000
` 4,65,00,000
Maximum Price (` 4,65,00,000/10,00,000) ` 46.50

Alternatively, it can also be computed as follows:
Let ER be the swap ratio then,
34 ×10,00,000 + 30 ×15,00,000 + 1,00,00,000 + 25,00,000
30 =
15,00,000 + 10,00,000 × ER
ER = 1.55
30
MP = PE x EPS x ER = x ` 5 x 1.55 = ` 46.50
5
Or
MP = Market Price of Share of XYZ Ltd. x 1.55 = ` 30.00 x 1.55
= ` 46.50

22

For more Question Papers, Sample Papers, Notes & Syllabus visit Page 22 of 23

m
m .co
c. o

e m
em l a s
s a g
SUGGESTED ANSWER ADVANCED FINANCIAL MANAGEMENT

(ii) Calculation of minimum price per share at which the management of
XYZ Ltd.’s will be willing to offer for their controlling interest

m
c. o
Value of XYZ Ltd.’s Management Holding (30% of ` 1,02,00,000
m
co m
10,00,000 x ` 34)

m . s e
a
Add: PV of loss of remuneration to top management ` 25,00,000

s e l
a
l No. of Shares ag
` 1,27,00,000

g
a Minimum Price (` 1,27,00,000/3,00,000)
3,00,000
` 42.33

m
. co
s em
g l a
a

m
m .co
c. o se
m
s em g la
gla a
a

23

m .
.co s e m
e m l a
l a s a g
ag For more Question Papers, Sample Papers, Notes & Syllabus visit Page 23 of 23