CA Final September 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 September 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

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Casel a
Scenario -I
aP Ltd. is considering a new project with the following details:
Initial project cost ` 4,80,000
Annual projected sales ` 4,00,000
Annual projected variable cost ` 1,60,000
Annual projected fixed cost ` 60,000
Project life
m 4 years
Cost of capital c. o10% p.a.
s em= 3.169 and @ 11% = 3.103
laon initial project cost and taxation.
Consider Cumm. PVF for 4 years @ 10%

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Note: (a) Ignore depreciation
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(b) Calculation up to 2 decimal places.
From the information given above, choose the correct answer to the following
question No. 1 to 3:
1. If initial project cost is varied adversely by 10%, what is the percentage
change in NPV?
(A) 42.42%
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m (C) 53.09%
(B) 52.80%
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se (2 Marks)
s em (D) 63.09%
g l a
gla a is the percentage
a
2. If annual cash inflow is varied adversely by 10%, what
change in NPV?
(A) 33.38%
(B) 53.09%

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FINAL EXAMINATION: SEPTEMBER 2025

(C) 63.09%
(D) 52.80% (2 Marks)
3. If cost of capital is varied adversely by 10%, what is the percentage change
in NPV?
(A) 11.00%
(B) 12.10%
(C) 13.14%
(D) 14.45% (2 Marks)
Case Scenario - II
Fair Return Mutual Fund made an issue of 5,00,000 units @ ` 10 each on
1st April 2024. No entry load was charged. The fund made the following
investments:

Particulars (`)
25,000 Equity Shares of ` 100 each @ ` 160 40,00,000
7% Government Securities (At Par) 4,00,000
9% Debentures (Unlisted) (At Par) 2,50,000
10% Debentures (Listed) (At Par) 2,50,000
49,00,000

During the year dividend of ` 6,00,000 were received on equity shares. Interest
on all types of debt securities was received as and when due. Operating expenses
paid during the year amounted to ` 2,50,000.
At the end of the year equity shares and 10% debentures are quoted at 175% and
90% respectively of the face value. Other investments are valued at par.
From the information given above, choose the correct answer to the following
question No. 4 to 6:
4. What is net cash balance of the Mutual Fund at the end of the year?
(A) ` 1,00,000
(B) ` 7,00,000
(C) ` 7,75,500

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(D) ` 5,25,500 (2 Marks)
5. What is Total Net Assets Value (NAV) of the Mutual Fund at the end of the
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year?

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(A) ` 52,50,000

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(C)se` 57,75,500
a
(B) ` 50,25,000

a ` 49,00,500 g l
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a6. If the Mutual Fund distributes a dividend of ` 0.60 per unit during the year
(2 Marks)

to the unit holders, the NAV per unit at the end of the year will be
(A) ` 11.551
(B) ` 10.951
(C) ` 10.051

om
(D) ` 12.751 (2 Marks)
Case Scenario - III
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s em established the following strategy on
HHM & Co., is a famous consultant. It has
the stock of PLS Ltd:
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(a) Purchased one 3-month acall option with a premium of ` 25 and an exercise
price of ` 750.
(b) Purchased one 3-month put option with a premium of ` 8 and an exercise
price of ` 600.
The stock of PLS Ltd is currently selling at ` 680. The option size is 100 shares of PLS
Ltd.

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From the information given above, choose the correct answer to the following

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question No. 7 to 9:
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s e ` 680 after 3

em months?
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(A) Net loss of ` 3,300

a (B) Net gain of ` 3,300
(C) Net gain of ` 6,700
(D) Net loss of ` 6,700 (2 Marks)
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FINAL EXAMINATION: SEPTEMBER 2025

8. What is the Net gain or loss, if the price of the stock falls to ` 500 after 3
months?
(A) Net loss of ` 3,300
(B) Net gain of ` 3,300
(C) Net gain of ` 6,700
(D) Net loss of ` 6,700 (2 Marks)
9. What is the Net gain or loss, if the price of the stock rises to ` 820?
(A) Net loss of ` 3,700
(B) Net gain of ` 3,700
(C) Net gain of ` 10,300
(D) Net loss of ` 10,300 (2 Marks)
Case Scenario-IV
On 3rd April, 2025, Royal Bank quotes the following:

Bid Ask
Spot Exchange Rate (US$ 1) ` 84.2525 ` 85.5945
2 months’ swap points 60 80
3 months’ swap points 150 178

In a spot transaction, delivery is made after two days.
Assume spot date as 5th April, 2025 and 1 swap point = 0.0001.
Calculation up to 4 decimal places.
From the information given above, choose the correct answer to the following
question No. 10 to 12:
10. The swap points for 2 months & 15 days (i.e., for 20th June, 2025) will be
(A) Bid – 90 and Ask – 98
(B) Bid – 105 and Ask – 129
(C) Bid – 98 and Ask – 90
(D) Bid – 129 and Ask – 105 (2 Marks)

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11. Foreign exchange rate for 20th June, 2025 will be
(A) Bid – ` 85.2525 and Ask – ` 84.5945
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(B) Bid – ` 84.5945 and Ask – ` 85.2525

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(C) Bid – ` 84.2630 and Ask – ` 85.6074
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(D) Bid – 85.6074 and Ask – 84.2630 (2 Marks)
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` `

g l`awill be
12. On an average rate, the annual rate of premium/discount of US $ on Indian
a
a (A) Bid – 0.0498% and Ask – 0.0524% (Premium)
(B) Bid – 0.0598% and Ask – 0.0723% (Discount)
(C) Bid – 0.0723% and Ask – 0.0598 % (Premium)
(D) Bid – 0.0598% and Ask – 0.0723% (Premium) (2 Marks)
Case Scenario - V

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ABC Ltd. is planning to acquire XYZ Ltd. The following information is available in
this respect:

s em Price Per Share (`) P/E Ratio
12,00,000 la
Company No. of Shars Market
ABC Ltd.
XYZ Ltd. a g
4,00,000
16
20
20 times
10 times

ABC Ltd. plans to acquire the whole of XYZ Ltd. by issuing shares at its market
price of ` 16. It is expected that the price of ABC Ltd. share will remain constant
after this acquisition. Purchase Consideration is ` 80,00,000.
Calculation up to 2 decimal places.
From the information given above, choose the correct answer to the following
question No. 13 to 15:
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em (A) ` 0.8 & ` 2.0
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las (B) ` 2.0 & ` 0.8
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ag (C) ` 0.8 & ` 1.04
(D) ` 1.04 & ` 0.8 (2 Marks)

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FINAL EXAMINATION: SEPTEMBER 2025

14. EPS of ABC Ltd. after acquisition is
(A) ` 0.84
(B) ` 0.96
(C) ` 1.04
(D) ` 1.14 (2 Marks)
15. P/E Ratio of ABC Ltd. after acquisition is
(A) 20 times
(B) 15.38 times
(C) 10 times
(D) 14.55 times (2 Marks)
ANSWER TO PART – I CASE SCENARIO BASED MCQS

MCQ No. Correct Option
1. Option C
2. Option C
3. Option C
4. Option D
5. Option C
6. Option B
7. Option A
8. Option C
9. Option B
10. Option B
11. Option C
12. Option D
13. Option A
14. Option C
15. Option B

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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
a(a)g PN Limited submits the following details for the financial year ended on
31 March 2025:
st

Number of Equity Shares 1,50,000
Current market price per share ` 12
10% Debts ` 2,00,000
Cash and Cash Equivalents ` 5,00,000
Gross Profit
m ` 12,00,000
c. o & Interest)
Indirect Expenses (Excluding Depreciation ` 5,00,000
Depreciation
s em ` 30,000

g la
Market rate of return a
Risk-free rate of return 7%
16%
Beta of the Company 0.8
Applicable Tax Rate 20%
On the basis of above details, you are required to calculate the following:
(i) Cost of Equity of the company using CAPM.

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(ii) Earnings Per Share (EPS) of the company.

m (iv) Enterprise Value of the company.
(iii) Equity Value of the company if applicable EBIDTA multiple is 4.
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se (6 Marks)
s em Calculation up to 2 decimal points.
g l a
gla (b) KK Ltd. operating in Japan has today affected sales a
to an Indian company
a LM Limited, the payment being due in 3 months from the date of invoice. The
invoice amount is 855 lakh yen which at today's spot rate is equivalent to
` 500 lakh. Looking to the present market conditions, it is anticipated that

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FINAL EXAMINATION: SEPTEMBER 2025

the exchange rate will decline by 10% over the 3 months period. In order to
protect the yen payments, the importer proposes to take appropriate action
in the foreign exchange market. The 3 months forward rate is presently
quoted as 1.68 yen per rupee.
You are required to
(i) Calculate the Expected Gain/(Loss) under present situation.
(ii) Calculate the Expected Gain/(Loss) if hedged by forward contract.
(iii) Recommend which option from above (i) and (ii) will best for the
company.
Calculation up to 3 decimal points. (4 Marks)
(c) List the steps involved in Business Succession Strategy. (4 Marks)
Answer
(a) (i) Cost of Equity using CAPM
7% + 0.8(16% - 7%) = 14.20%
(ii) Earning Per Share (EPS) (`)

Gross Profit 12,00,000
Less: Indirect Expenses 5,00,000
EBIDTA 7,00,000
Less: Depreciation 30,000
6,70,000
Less: Interest on Debt (10% on ` 2,00,000) 20,000
6,50,000
Less: Tax @ 20% 1,30,000
Profit After Tax (PAT) 5,20,000
Number of Equity Shares 1,50,000
Earnings Per Share (EPS) 3.47

(iii) Equity Value of the Company

EBITDA ` 7,00,000
EBITDA multiple 4

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Capitalized Value ` 28,00,000
Less: Outstanding Debts ` 2,00,000
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Equity Value ` 26,00,000

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(iv) Enterprise Value of company
s em
mNumber of Equity Shares
e Current Market Price (CMP) l a
l a s 1,50,000
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ag
` 12
Market Capitalization ` 18,00,000
Add: Outstanding Debts ` 2,00,000
Less: Cash and Cash Equivalent ` 5,00,000
Enterprise Value ` 15,00,000
(b) Spot rate of ` 1 against yen = 855 lakhs yen/` 500 lakhs = 1.71 yen
3 months forward rate of ` 1 against yen = 1.68 yen

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Anticipated decline in Exchange rate = 10%.

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Expected spot rate after 3 months = 1.71 yen – 10% of 1.71
= 1.71 yen – 0.171 yen
l a s
= 1.539 yen per rupee
a g
` (in lakhs)
Present cost of 855 lakhs yen 500.000
Cost after 3 months: 855 lakhs yen/ 1.539 yen 555.556
Expected exchange loss 55.556
If the expected exchange rate risk is hedged by a Forward contract:

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Present cost 500.000

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Cost after 3 months if forward contract is taken
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855 lakhs yen/ 1.68 yen 508.929

s g la
la
Expected loss 8.929
Suggestion: If the exchange rate risk is not covered a
ag with forward contract,
the expected exchange loss is ` 55.556 lakhs. This could be reduced to
` 8.929 lakhs if it is covered with Forward contract. Hence, taking forward
contract is suggested.

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FINAL EXAMINATION: SEPTEMBER 2025

(c) Following steps are involved in Business Succession Strategy:
Step 1 – Evaluate key leadership positions: - To evaluate which roles are
critical, risk or impact assessment can be performed. Generally, these are
such positions which would bring transformation to the entire business or
create strategic direction for the organization.
Step 2 – Map competencies required for above positions: - In this step,
one needs to identify qualifications, behavioral and technical competencies
required to perform the role successfully.
Step 3 – Identify competencies of current workforce: - Identifying what
are possible internal options that can deliver results as expected in Step-2,
and also if there is a need for training and development of certain skills
required. The organization should also place weight on whether is there a
need to search outside the organization.
Step 4 – Bridge Leader: - In family owned business appointment of an
outsider as ‘bridge leaders’ will help to develop the business and prepare
young family members for leadership role.
Question 2
(a) Mr. X is holding 2,000 shares of PQR Ltd. Presently, dividend being paid by
the company is ` 2.50 per share and the share is being sold at ` 45 per share
in the market. Mr. X is concerned about several factors which are likely to be
changed during the course of the year as indicated below:

Particulars Existing Revised
Risk-free rate of return 10% 8%
Market risk premium 6% 4%
Beta value 1.30 1.20
Expected growth rate 4% 6%
In view of the above changing factors, ADVISE whether Mr. X should buy,
hold or sell the shares.
Calculation up to 2 decimal points. (6 Marks)
(b) BM & Co. is considering to borrow an amount of ` 80 crore for a period of 3
months in the coming 6 months time from now. The current rate of interest
is 7% per annum but it may go up in 6 months time. The company wants to
hedge itself against the likely increase in interest rate.

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The company's Bankers quoted an FRA (Forward Rate Agreement) at 7.30%
per annum.

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You are required to-
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Compute the final settlement amount if the actual rate of interest during

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consideration period happens to be (i) 7.60% p.a. and (ii) 6.80% p.a.

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(Show your workings on the basis of months)
a
a(c)g Identify the key points that make an organization financially sustainable.
Calculation up to 4 decimal place. (4 Marks)

(4 Marks)
Answer
(a) On the basis of existing and revised factors, rate of return and price of share
is to be calculated.

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Existing rate of return

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= Rf + Beta (Rm – Rf)

la s
= 10% + 1.3 (6%) = 17.80%
Revised rate of return
a g
= 8% + 1.2 (4%) = 12.80%
Price of share (original)
D (1 + g) 2.50 (1.04) 2.60
Po = Ke - g
= 0.178 - 0.04 = 0.138
= ` 18.84

Price of share (Revised)
2.50 (1.06) 2.65

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Po = = = ` 38.97

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0.128 - 0.06 0.068

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Advise:

e mto current
em equilibrium price of ` 18.84 and revised equity price a
1. Market price of share of ` 45 is higher in comparison
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of ` 38.97.

ag 2. Under this situation investor should sell the share.
Alternatively, if Dividend is considered as expected dividend then the
solution will be as follows:

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FINAL EXAMINATION: SEPTEMBER 2025

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 (Rm – Rf)
= 10% + 1.3 (6%) = 17.80%
Revised rate of return
= 8% + 1.2 (4%) = 12.80%
Price of share (original)
D (1 + g) 2.50 2.50
Po = Ke - g
= 0.178 - 0.04 = 0.138
= ` 18.12

Price of share (Revised)
2.50 2.50
Po = = = ` 36.76
0.128 - 0.06 0.068

Advise:
1. Market price of share of ` 45 is higher in comparison to current
equilibrium price of ` 18.12 and revised equity price of ` 36.76.
2. Under this situation investor should sell the share.
(b) Final settlement amount shall be computed by using formula:
(N)(RR - FR)(dtm/DY)
=
[1 + RR(dtm/DY)]
Where,
N = the notional principal amount of the agreement;
RR = Reference Rate for the maturity specified by the contract
prevailing on the contract settlement date;
FR = Agreed-upon Forward Rate; and
Dtm= maturity of the forward rate, specified in days (FRA Days)
DY = Day count basis applicable to money market transactions which
could be 360 or 365 days.
Accordingly,
If actual rate of interest after 6 months happens to be 7.60%

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(` 80 crore)(0.076-0.073)(3/12)
=
[1 + 0.076(3/12)]
(` 80 crore)(0.00075)
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= = 0.0589 crore or 5,88,812.56 or
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` `
1.019

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` 5,88,812.5613
e m
eorm` 5,88,812.5613.
Thus, banker will pay BM & Co. a sum of ` 0.0589 crore or ` 5,88,812.56
l a s
s
la If actual rate of interest after 6 months happens to be 6.80% a g
ag
(` 80 crore)(0.068-0.073)(3/12)
=
[1 + 0.068(3/12)]
(` 80 crore)(-0.00125)
= = - ` 0.0932 crore or - ` 9,83,284.17 or -
1.017
` 9,83,284.1691
Thus BM & Co. will pay banker a sum of ` 0.0932 crore or ` 9,83,284.17

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or ` 9,83,284.1691.

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(c) The key point that make an organization financially sustainable are as
follows:
s em
(i)
l a
g of generating income;
have more than one source of income;
(ii) have more than oneaway
(iii) do strategic, action and financial planning regularly;
(iv) have adequate financial systems;
(v) have a good public image;
(vi) be clear about its values (value clarity); and
(vii) have financial autonomy.

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Question 3
Ltd. has ` 600 Lakh 12% Debenture outstanding with 5 years .remaining
c. o (a) toTK redemption. s em
em l a 10% Debenture
Since interest rates are decreasing, company is planning to

las g
a Premium paid on
redeem these debentures with a ` 600 Lakh issue of 5 years

ag at par. Issue cost of 10% Debenture will be ` 10 Lakh.
redemption of 12% Debenture is 5%. Tax rate applicable to company is 20%.
You are required to advise on the 12% Debenture Redemption Decision.
PVF @ 10% & 8% are as under –

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FINAL EXAMINATION: SEPTEMBER 2025

Rate 1 2 3 4 5
8% 0.93 0.86 0.79 0.74 0.68
10% 0.91 0.83 0.75 0.68 0.62

Calculation up to 2 decimal points. (6 Marks)
(b) Mr. DK has 1,000 units of AM Mutual Fund. NAV of it is ` 17.50 per unit and
` 18.90 per unit at the beginning and at the end of the year respectively. The
Mutual Fund has given two options:
Option I: Pay ` 1.50 per unit as dividend and ` 1.20 per unit as a capital
gain, or
Option II: Reinvest these distributions at an average NAV of ` 17.30 per unit.
You are required to compute the holding period return percentage for both
the options and select which option is preferable.
Calculation up to 2 decimal points. (4 Marks)
(c) State the risks associated with the use of Blockchain Technology. (4 Marks)
Answer
(a) (i) Calculation of initial outlay:- ` (Lakh)
a. Face value 600
Add: Call premium 30
Less: Tax on Premium of Redemption 6
Cost of calling old bonds 624
b. Gross proceed of new issue 600
Less: Issue costs 10
Net proceeds of new issue 590
∴ Initial outlay = ` 624 Lakh – ` 590 Lakh = ` 34 Lakh
(ii) Calculation of net present value of refunding the bond:
Saving in annual interest expenses ` (Lakh)
[600 x (0.12 – 0.10)] 12.00
Less: Tax saving on interest (0.20 x 12) 2.40

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Add: Tax Saving on Issue Exp. (10/5) x 0.20 0.40
Annual net cash saving 10.00
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PVIFA (8%, 5 years) 4.0
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∴Present value of net annual cash saving ` 40.00 Lakh
s em
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eLess: Initial outlay l a
s
la Net present value of refunding the bond
` 34.00 Lakh
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ag Decision: 12% Debentures should be redeemed and new 10% Debentures
` 6.00 Lakh

should be issued because NPV of Bond Refunding decision is positive.
Alternative Solution: Since in the Question specifically nothing has been
mentioned about the writing off Issue Expenses for 10% Debentures, if
students have assumed it to be written off at the time of issue in one go
then solution will be as follows:

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(i) Calculation of initial outlay:- ` (Lakh)
a. Face value
s em 600
Add: Call premium
g l a 30
a
Less: Tax on Premium of Redemption 6
Cost of calling old bonds 624
b. Gross proceed of new issue 600
Less: Issue costs 10
Add: Tax Saving on Issue Expenses 2
Net proceeds of new issue
o
592
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m ∴ Initial outlay = ` 624 Lakh – ` 592 Lakh = ` 32 Lakh .c
c. o s em
s em la ` (Lakh)
(ii) Calculation of net present value of refunding the bond:-
g
gla Saving in annual interest expenses
a
a [600 x (0.12 – 0.10)] 12.00
Less: Tax saving on interest (0.20 x 12) 2.40
Annual net cash saving 9.60
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FINAL EXAMINATION: SEPTEMBER 2025

PVIFA (8%, 5 years) 4.0
∴Present value of net annual cash saving ` 38.40 Lakh
Less: Initial outlay ` 32.00 Lakh
Net present value of refunding the bond ` 6.40 Lakh
Decision: 12% Debentures should be redeemed and new 10% Debentures
should be issued because NPV of Bond Refunding decision is positive.
(b) (i) Returns for the year
(All changes on a Per -Unit Basis) (`)
Change in Price ` 18.90 – ` 17.50 = 1.40
Dividends received 1.50
Capital gains distribution 1.20
Total reward 4.10
4.10
Holding period reward: ×100 = 23.43%
17.50
Alternative Solution (`)
Opening Asset Value:
Price paid at the year beginning (1000 x ` 17.50) 17,500
Closing Fund Assets:
NAV on Closing date 1000 unit x ` 18.90 18,900
Dividend Payable 1000 units x ` 1.50 1,500
Capital Gain Distribution 1000 units x ` 1.20 1,200
Total 21,600

Return = (Closing Fund Assets – Opening Asset Value)/Opening Asset
Value
= [(` 21,600 – ` 17,500)/ ` 17,500] x 100 = 23.43%
(ii) Distribution Reinvested at an average NAV of ` 17.30
Distribution reinvested = Dividend ` 1,500 + Capital Gain ` 1,200
= ` 2,700
Additional Units (Distribution/ Average NAV) ` 2,700/ ` 17.30 = 156.07
units

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Total no. of units = 1,000 + 156.07 = 1,156.07 units
Total NAV on closing date = (1,156.07 units x ` 18.90) = ` 21,849.72
m
c. o
Price paid at the year beginning (1000 x ` 17.50) = ` 17,500

o m m
.c
Return = (` 21,849.72 - ` 17,500)/ ` 17,500 = 0.2486 or 24.86%
s e
m basis.
eunit
Note: Alternatively above computation can also be done based on per
l a
s
la Conclusion: Since the holding period reward is more in terms ofa g
g
a percentage in option-two i.e., reinvestment of distributions at an
average NAV of ` 17.30 per unit, this option is preferable.
(c) Some of the risk associated with the use blockchain technology are as
follows:
(i) With the use of blockchain, organizations need to consider risks with a
wider perspective as different members of a particular blockchain may

m
have different risk appetite/risk tolerances that may further lead to

. co
conflict when monitoring controls are designed for a blockchain. There

em
may be questions about who is responsible for managing risks if no

a s
one party is in-charge, and how proper accountability is to be achieved
l
g
in a blockchain.
a
(ii) The reliability of financial transactions is dependent on the underlying
technology and if this underlying consensus mechanism has been
tampered with, it could render the financial information stored in the
ledger to be inaccurate and unreliable.
(iii) In the absence of any central authority to administer and enforce
protocol amendments, there could be a challenge in the development
and maintenance of process control activities and in such case, users

m
c. o
of public blockchains find difficult to obtain an understanding of the

m
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general IT controls implemented and the effectiveness of these
controls.
s emfrequently,
s em la challenge the
(iv) As blockchain involves humongous data getting updated
g
gla a competent people
risk related to information overload could potentially

a level of monitoring required. Furthermore, to find
to design and perform effective monitoring controls may again prove
to be difficult.

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FINAL EXAMINATION: SEPTEMBER 2025

Question 4
(a) The following details are given for TC Limited and PC Limited stocks and
Nifty Index for a period of one year:

TC Limited PC Limited Nifty Index
Average return 0.12 0.18 0.6
Variance of return 5.8 4.8 2.10
Beta (β) 0.8 0.7
Proportion of allocated fund 50% 50%

You are required to
(i) Calculate the systematic and unsystematic risk for the companies' stocks.
(ii) Calculate portfolio risk.
(iii) If the proportion of fund allocation is changed to 60:40 for TC Limited
and PC Limited respectively. Advise whether it is preferable or not.
Calculation up to 3 decimal points. (6 Marks)
(b) Mr. SK buys 5,000 shares of P Ltd. @ ` 50 per share whose beta value is 1.5
and sells 2,500 shares of Q Ltd. @ ` 80 per share having a beta value of 2.
He obtains a complete hedge by Nifty Futures at ` 1,000 each.
He closes out his position at the closing price of the next day when the share
of P Ltd. has fallen by 2%, share of Q Ltd. appreciated by 5% and Nifty Futures
has dropped by 2.50%.
You are required to compute the overall profit or loss to Mr. SK from these
set of transactions. (4 Marks)
(c) 'Technical Analysis has several supporters as well several critics.' In this
context state the favourable and unfavourable arguments of Technical
Analysis.
OR
(c) List the parameters to identify the currency risk. (4 Marks)

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Answer
(a) (i) Calculation of Systematic Risk and Unsystematic Risk of
m
TC Ltd.
m c. o
c. o
Systematic Risk = 𝛽𝛽 𝜎𝜎 = (0.8) (2.10) = 1.344
2 2 2

s em
m a
𝑀𝑀

se ag
l
Unsystematic Risk = Total Risk – Systematic Risk

g la = 5.80 – 1.344 = 4.456
a PC Ltd.
Systematic Risk = 𝛽𝛽 2 𝜎𝜎𝑀𝑀
2
= (0.7)2(2.10) = 1.029
Unsystematic Risk = Total Risk – Systematic Risk
= 4.80 – 1.029 = 3.771
(ii) Portfolio Risk

m
Covariance of returns between any two stocks = 𝛽𝛽1 𝛽𝛽2 𝜎𝜎𝑚𝑚

co
2

.
Accordingly, Covariance of returns between TC Ltd. and PC Ltd. shall be:

s em
a
= 0.8 x 0.7 x 2.10 = 1.176

g l
a
and the Portfolio Risk shall be:
𝜎𝜎𝑃𝑃2 = (0.50)2(5.80) + (0.50)2(4.80) + 2 x 1.176 x 0.50 x 0.50
𝜎𝜎𝑃𝑃2 = 1.45 + 1.20 + 0.588 = 3.238
𝜎𝜎𝑃𝑃 = √3.238 = 1.80
(iii) If Fund allocation is changed to 60% and 40% then Portfolio Risk shall
be

m
𝜎𝜎𝑃𝑃2 = (0.60)2(5.80) + (0.40)2(4.80) + 2 x 1.176 x 0.60 x 0.40

m .co
c. o
𝜎𝜎𝑃𝑃2 = 2.088 + 0.768 + 0.565 = 3.421
m
em
𝜎𝜎𝑃𝑃 = √3.421 = 1.85
la se
las a g
Exiting Return (50:50) = 0.50 X 0.12 +0.50 X 0.18 = 0.06 + 0.09 = 0.15

ag or 15%
New Proportion Return (60:40) = 0.60 X 0.12 +0.40 X 0.18 = 0.072 +
0.072 = 0.144 or 14.40%

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FINAL EXAMINATION: SEPTEMBER 2025

It is not advisable to change the allocated fund ratio as return is
decreased from 15% to 14.40% and portfolio risk is increased from
3.238 (or 1.80) to 3.421 or 3.420 (or 1.85).
Alternatively, it can also be advised based on Coefficient of
Variation as follows:
Exiting = (Standard Deviation/ Mean) x 100 = (1.80/ 15) x 100 = 12%
Proposed = (Standard Deviation/ Mean) x 100 = (1.85/ 14.40) x 100
= 12.85%
Since volatility for per unit of return is higher in case of proposed
allocation it is not advised.
(b) No. of the Future Contract to be obtained to get a complete hedge
5000 × 50 × 1.50 − 2500 × 80 × 2
1000
3,75,000-4,00,000
= = - 25 contracts or 25 contracts
1,000
Thus, by purchasing 25 Nifty Futures contracts Mr. SK can obtain a
complete hedge.
Cash Outlay
= 5000 x ` 50 – 2500 x ` 80 + 25 x ` 1,000
= ` 2,50,000 – ` 2,00,000 + ` 25,000 = ` 75,000
Cash Inflow at Close Out
= 5000 x ` 50 x 0.98 – 2500 x ` 80 x 1.05 + 25 x ` 1,000 x 0.975
= ` 2,45,000 – ` 2,10,000 + ` 24,375 = ` 59,375
Gain/ Loss
= ` 59,375 – ` 75,000 = - ` 15,625 (Loss)
(c) Favourable arguments for Technical Analysis are as follows:
(a) Under influence of crowd psychology trend persist for some time. Tools
of technical analysis help in identifying these trends early and help in
investment decision making.

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(b) Shift in demand and supply are gradual rather than instantaneous.
Technical analysis helps in detecting this shift rather early and hence
provides clues to future price movements.
m
m c. o
co
(c) Fundamental information about a company is observed and

. em
s
assimilated by the market over a period of time. Hence price movement

e m
tends to continue more or less in same direction till the information is
l a
l a s fully assimilated in the stock price.
a g
ag Unfavorable arguments for Technical Analysis are as follows:
(a) Most technical analysts are not able to offer a convincing explanation
for the tools employed by them.
(b) Empirical evidence in support of random walk hypothesis cast its
shadow over the usefulness of technical analysis.
(c) By the time an uptrend and down trend may have been signalled by
technical analysis it may already have taken place.

m
co
(d) Ultimately technical analysis must be a self-defeating proposition. With
.
em
more and more people employing it, the value of such analysis tends

sOR
to decline.
(c)
g l a
a
Some of the parameters to identity the currency risk are as follows:
(i) Government Action: The Government action of any country has visual
impact in its currency. For example, the UK Govt. decision to divorce
from European Union i.e. Brexit brought the pound to its lowest since
1980’s.
(ii) Nominal Interest Rate: As per interest rate parity (IRP) the currency
exchange rate depends on the nominal interest of that country.
m
m c. o
(iii) Inflation Rate: Purchasing power parity theory impact the value of

c. o currency.

s em impact.
em a far reaching
lhave
(iv) Natural Calamities: Any natural calamity can have negative

las a
(v) War, Coup, Rebellion etc.: All these actions can g
ag impact on currency’s exchange rates.
(vi) Change of Government: The change of government and its attitude
towards foreign investment also helps to identify the currency risk.

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FINAL EXAMINATION: SEPTEMBER 2025

Question 5
(a) Sun Ltd. manufactures high-quality modern furniture and sells to retail
outlets in India and Nepal. Since the cost of quality wood in India is very
high, the company is reviewing the proposal for import of wood in bulk from
Nepalese supplier. The estimate of net Indian (`) and the Nepalese Currency
(NC) cash flows for this proposal is as follows:
Net Cash Flow (in millions)
Year 0 1 2 3
NC (75.000) 7.800 11.400 12.300
Indian (`) 0 8.607 12.600 13.800

Other information is as under:
(i) Sun Ltd. evaluates all investments by using a discount rate of 8% per
annum. All Nepalese customers are invoiced in NC. NC cash flows are
converted to Indian currency (`) at the forward rate and discounted at
the Indian rate.
(ii) Inflation rates in Nepal and India are expected to be 8% and 6% per
annum respectively.
The current exchange rate is ` 1 = NC 1.60.
You are required to Compute the Net Present Value (NPV) of the proposal
and show your recommendation.
PVF @ 8%

Year 1 2 3
PVF 0.926 0.857 0.794
Calculation up to 3 decimal points. (7 Marks)
(b) In 2024, Mr. Raj, an investor made a lump sum investment in an equity
mutual fund that had an entry load of ` 0.05 per unit. By the end of the year,
the NAV appreciated by 13.60%. Additionally, the fund declared a total
capital gain and dividend of ` 5.00 per unit, which were reinvested at a
year-end NAV of ` 25. As a result, the investor held 15,000 units at
year-end.
The fund also charges an exit load of 1% if redeemed within 1 year. The
investor is in the 20% tax bracket. Inflation rate during the year is 4.50%.

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You are to required to
(i) Calculate the number of units purchased by Mr. Raj at the beginning of
m
c. o
the investment.
m
.co m
(ii) Calculate the NAV per unit and the total investment amount made by

m s e
a
Mr. Raj at the beginning of the year.
(iii)seAppraise the return percentage and the real return percentage, if l
l a a g
ag Calculation up to 2 decimal points.
Mr. Raj decided to exit the investment at the end of the year.
(7 Marks)
Answer
(a) Working Notes:
(i) Computation of Forward Rates
End of Year NC NC/`

om
1.08
1 NC 1.60 x1.06 1.630
2
. c 1.08
1.661

em
NC 1.630 x1.06

a s
1.08
3 NC 1.661 x1.06 1.692
l
ag in Indian Rupees
(ii) NC Cash Flows converted
Year NC (Million) Conversion Rate ` (Million)
0 -75.000 1.600 -46.875
1 7.800 1.630 4.785
2 11.400 1.661 6.863
3 12.300 1.692 7.270

m
Net Present Value (` Million)

m c. o PV
c. o
Year Cash Flow in Cash Flow Total PVF
India in Nepal
s em- 46.875
@ 8%

s em 0 --- - 46.875 - 46.875
gla0.926 12.401
1.000

gla 1 8.607 4.785 13.392
a 0.857
a 2
3
12.600
13.800
6.863
7.270
19.463
21.070 0.794
16.680
16.730
- 1.064

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FINAL EXAMINATION: SEPTEMBER 2025

Decision: Since NPV of the project is negative project should not be
accepted.
(b) (i) Let X be the number of units purchased at the beginning of the year,
then
5.00
X+ x X = 15000
25.00
X = 12,500 units
Thus, 12,500 units was purchased by Mr. Raj at the beginning of
investment.
(ii) Let NAV per unit in the beginning of the year is N then
N X 1.1360 = 25, N = ` 22.01
Thus, NAV per unit at the beginning of the year is ` 22.01 and total
investment made by Mr. Raj is:
= (` 22.01 + ` 0.05) x 12,500 = ` 2,75,750
(iii) If Mr. Raj decided to exit then Return and Real Return in percentage
terms shall be computed as follows:

NAV at the end ` 25
No. of Units 15000
Amount Redeemable ` 3,75,000
Less: Exit Load ` 3,750
Amount Received on Redemption of Units ` 3,71,250
Total Amount Realized ` 3,71,250
Less: Initial Investment ` 2,75,750
Return ` 95,500
Less: Tax @ 20% ` 19,100
Net Return ` 76,400
Return in Percentage Terms (` 76,400/ ` 2,75,750) 27.71%
Real Return in Percentage Terms (27.71%/1.045) 26.52%
1+0.2771 22.21%
Or Real Return -1=
1+0.045

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Question 6
(a) ABC Ltd.'s share is currently traded at the price of ` 192.50 per share.
m
c. o
Mr. Roni is planning to purchase the shares of the company. For this purpose,

m
co
he has taken the services of a financial analyst to know whether the price of

. em
s
ABC Ltd. is fairly priced. The analyst has assembled the following
m
eThe before-tax required rates of return on ABC Ltd. debt, preferred stock, g
information:
l a
a s
l and common stock are 8.60%, 11%, and 13%, respectively. a
g
•

a
• The company's target capital structure is 20% debt, 30% preferred stock and
50% Common stock.
• The market value of the company's debt is ` 275 million and its preferred
stock are valued at ` 120 million.
• ABC Ltd.'s free cash flow to the firm (FCFF) for the year just ended is ` 125
million. FCFF is expected to grow at a constant rate of 8% for the foreseeable

o m
c
future.

m .
e common shares.
• The tax rate is 30%.

l a s
• ABC Ltd. has 20 million outstanding
You are required to -
ag
(i) As a financial analyst, on the basis of value per share, advise Mr. Roni
whether he should purchase the shares of the company at market price
or not.
(ii) Assume, we are to get same value of equity as calculated in (i) for using
FCFE approach, calculate free cash flow to the equity (FCFE) for the year
just ended, if FCFE is expected to grow at a constant rate of 8.50% for
the foreseeable future.
o m
m .c
c. o (b) Quick & Smart Inc. is a leading software development company m
Calculation up to 2 decimal points. (7 Marks)

m s e in the UK. It
s e a
has a substantial portfolio of its trade in various countrieslincluding
g
la
the USA.
It has recently invoiced a USA customer the sum aof USD ($) 75,00,000
ag receivable in one year's time. Quick & Smart Inc.'s Chief Finance Officer
(CFO) is considering two alternatives for hedging the exchange risk:

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FINAL EXAMINATION: SEPTEMBER 2025

Alternative I: Borrowing present value of USD ($) 75,00,000 now for one
year, converting the amount into GBP (£), and repaying the loan out of
eventual receipts.
Alternative II: Entering into a 12 month forward exchange contract with the
company's bank to sell the USD ($) 75,00,000.
The spot exchange rate is GBP (£) 1 = USD ($) 1.3288
The 12 month forward exchange rate is GBP (£) 1 = USD ($) 1.3128
Interest rates for 12 months are = USA 4.50%; and UK 5%.
You are required to -
Calculate net proceeds in GBP (£) under both the alternatives and advise the
company.
Note: Ignore bank commission and decimals. (7 Marks)
Answer
(a) Working Notes:
(I) Calculation of WACC
= 8.60% (1 – 0.30) x 20% + 11% x 30% + 13% x 50%
= 1.20% + 3.30% + 6.50% = 11%
(II) Value of Firm based on FCFF
` 125Million(1.08) `135Million
= = = ` 4500 Million
0.11-0.08 0.03
(i) To decide whether the value of share is justified let us compute
the value per share based on FCFF as follows:

Value of Firm ` 4500 Million
Less: Value of Company’s Debt ` 275 Million
Less: Value of Company’s Preferred Stock ` 120 Million
Value of Equity Shares ` 4105 Million
No. of Equity Shares 20 Million
Value of Per Equity Share ` 205.25
Advise: Mr. Roni should purchase share at this price as it is
underpriced.

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(ii) Computation of Free Cash Flow to Equity
Value of one Equity Share as per FCFF ` 205.25
m
c. o
Accordingly, by using Growth Model formula we can find the FCFE

om FCFE(1.085)
c.205.25
per share as follows:
em
em l a s
s
=

la FCFE per share = ` 8.51 ag
0.13-0.085

ag No. of Equity Shares outstanding 20 million
FCFE of the ABC Ltd. shall be ` 8.51 x 20 million = ` 170.20 million
Alternatively, this calculation can be made on the total capital
instead of per share basis as follows:
FCFE(1.085)
4105 =
0.13-0.085

m
FCFE = ` 170.25 million
(b) Alternative I c. o
Borrowing PV of US$ 75,00,000e(US$m 75,00,000/ 1.045)
s
Converting it into GBP (£) lataSpot Rate
$ 71,77,033

ag
$ 1.3288
Converted Amount £ 54,01,139
Add: Interest on the same @ 5% £ 2,70,057
£ 56,71,196
Alternative II

Applicable Forward Rate of 1 £ $ 1.3128
Amount Receivable in $ after one year $ 75,00,000
m
m
Amount receivable in £ after
c. o £ 57,12,980

c. o m company
Advise: Since amount receivable is higher under alternative IIethe
s
s em should opt for it.
g la
gla a
a

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