KRDTop100SFM PDF

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About the Author
Kunal Doshi is a Chartered Financial Analyst from CFA Institute, USA and
also from ICFAI, Hyderabad along with Advanced Diploma in Finance. He
has an industry experience of more than 5 years having worked with J. P.
Morgan, Dalal & Broacha and SBICAP Securities in the field of research
and advisory of financial products like Mutual Funds, Fixed Income, IPOs,
Commodities and Currencies. A financial planner, practitioner and a
regular visiting faculty at colleges & institutes, he has also been in the
GD/PI Panels of JBIMS, MET, etc.
In last 6 Years, he has been teaching at various institutes for the courses
of Chartered Accountancy, Chartered Financial Analyst, Company
Secretary and other graduation courses of Mumbai University, Warwick
Business School, UK etc. He has helped organisations in their Training
Programmes for financial planning and conducted Career-Solution
Workshops for institutions & trusts to help students across communities.
About the Book
This book contains 100 must-do problems with hand written solutions
which are shortlisted to enable quick revision from examination
perspective. They are comprehensive in terms of concept coverage and
frequently asked by the institute. There could be several other important
questions in the syllabus. However, the thought behind curating this book
was to keep it crisp. It reflects the author’s method of simplifying the
solutions while giving an insight into his exhaustive study material.
Although most of the questions are from ICAI Study Material, Practise
Manual, Supplementary, etc., the sums are also taken from the author’s
classroom examples and references from other Institutes like CFA and
FRM. This book is an abridged version of the author’s soon-to-be-launched
book having more than 500 solved practical problems along with a
detailed explanation of concepts and formulae.
Finally, as part of the continuous process of upgrading and learning, if

there are any queries, corrections or doubts you can always give us your
feedback. We hope this book is timely and useful to your preparations. We
would be pleased if you could share this with your friends and
colleagues appearing for the upcoming examinations. Thank you for your
motivation!
CA-FINAL STRATEGIC FINANCIAL MANAGEMENT
MUTUAL FUNDS
1. Based on the fall info; determine the NAV of a regular income scheme on per units basis:
` in Crores
Listed shares at Cost (ex-divided) 20

Cash in hand 1.23
Bonds and debentures at cost 4.3
Of these, bonds not listed and quoted 1
Other fixed interest securities at cost 4.5
Dividend accrued 0.8
Amount payable
Number of units (on shares
` 10 face value) 206.32
Lacs
Expenditure
Current accrued
realizable value of fixed income securities 0.75
106.5
of face value of ` 100
The listed shares were purchased when index was 1,000
Present index is 2,300
Value of listed bonds and debentures at NAV date 8
There has been a diminution of 20% in unlisted bonds and debentures. Other fixed
interest securities are at cost.
2. A Mutual Fund Co. has the following assets under it on the close of business as on:
Company No. of Shares 1st February 2012 2nd February 2012
Market price per share ` Market price per share `
L Ltd 20,000 20.00 20.50

M Ltd 30,000 312.40 360.00
N Ltd 20,000 361.20 383.10
P Ltd 60,000 505.10 503.90
Total No. of Units 6,00,000
i) Calculate Net Assets Value (NAV) of the Fund.
ii) Following information is given:
Assuming one Mr. A, submits a cheque of ` 30,00,000 to the Mutual Fund and the Fund
manager of this company purchases 8,000 shares of M Ltd; and the balance amount is held
in Bank. In such a case, what would be the position of the Fund?
iii) Find new NAV of the Fund as on 2nd February 2012.
1 KUNAL DOSHI, CFA Contact : 9920546547

3. A has invested in three mutual fund schemes as per details given below:
MF A MF B MF C
Date on investment 1.12.03 1.1.04 1.03.04
Amount of investment ` 50000 ` 1 lakh ` 50000
NAV at entry date ` 10.50 ` 10.00 ` 10.00
Dividend received up to 31.3.04 ` 950 ` 1500 Nil
NAV as on 31/3/04 ` 10.40 ` 10.10 ` 9.80
Required:
What is the effective yield on per annum basis in respect of each of the three scheme to Mr. A
up to 31.3.04?
4. A Mutual fund has a NAV of ` 8.50 at the beginning of the year. At the end of the year NAV
increases to ` 9.10. Meanwhile fund distributes ` 0.90 as dividend & ` 0.75 as capital gains.
a) What is the fund’s return during the year?
b) Assuming that the investor had 200 units and also assuming that the distribution been
re-invested at an average NAV of ` 8.75, what is the return?
5. Mr. X on 1.7.2000, during the initial offer of some MF, invested in 10,000 units having FV of `10
for each unit. On 31.3.2001 the dividend operated by the MF was 10% and Mr. X found that his
annualized yield as 153.33%. On 31.12.2002, 20% dividend was given. On 31.3.2003 Mr. X
redeemed all his balance of 11, 296.11 units when his annualized yield was 73.52%. What are
the NAVs as on 31.3.2001, 31.12.2002 and 31.3.2003?
6. Five portfolios experienced the following results during a 7- year period:

Portfolio Average Annual Standard Correlation with the
Return (Rp) (%) Deviation (Sp) market returns (r)
A 19.0 2.5 0.840
B 15.0 2.0 0.540
C 15.0 0.8 0.975
D 17.5 2.0 0.750
E 17.1 1.8 0.600
Market Risk (σm) 1.2
Market rate of Return (Rm) 14.0
Risk-free Rate (Rf) 9.0
Rank the portfolios using (a) Sharpe’s method, (b) Treynor’s method and (c) Jensen’s Alpha
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PORTFOLIO MANAGEMENT
1. Consider two securities A and B, with expected returns of 5% and 25% respectively. They carry
standard deviations of 5% and 30% respectively. Answer the following:
a) How to find the lowest possible risk the portfolio can take for any given weights?
b) How to find the lowest possible risk the portfolio can take for a given correlation?
c) Find the point of minimum risk when correlation is 0. What is the return of the portfolio at
this point?
d) Find the point of minimum risk when correlation is 0.5. What is the return of the portfolio at
this point?
e) For a perfectly correlated situation between two stocks, what should be the weights for zero
risk? What is the return of the portfolio at this point?
f) For a correlation of -1, what should be the weights for zero risk? What is the return of
the portfolio at this point?
2. X Co, Ltd, invested on 1.4.2009 in certain equity shares as below:

Name of Co No of Shares Cost (`)
M Ltd 1,000 (` 100 each) 2,00,000
N Ltd 500 (` 10 each) 1,50,000
In September, 2009, 10% dividend was paid out by M Ltd. and in October, 2009, 30% dividend
paid out by N Ltd. On 31.3.2010 market quotations showed a value of ` 220 and ` 290 per share
for M Ltd. and N Ltd. respectively.
On 1.4.2010, investment advisors indicate (a) that the dividends from M Ltd. and N Ltd. for the
year ending 31.3.2011 are likely to be 20% and 35%, respectively and (b) that the probabilities of
market quotations on 31.3.2011 are as below:
Probability Factor Price/Share of M Ltd Price/Share of N Ltd

0.2 220 290
0.5 250 310
0.3 280 330
You are required to:
(i) Calculate the average return from the portfolio for the year ended 31.3.2010;
(ii) Calculate the expected average return from the portfolio for the year 2010-11; and
(ii) Advise X Co. Ltd., of the comparative risk in the two investments by calculating the
standard deviation in each case.

3. A Ltd. has an expected return of 22% and standard deviation of 40%. B Ltd. has an expected
return of 24% and standard deviation of 38%. A Ltd. has a beta of 0.86 and B Ltd. a beta of
1.24. The correlation coefficient between the return of A Ltd. and B Ltd. is 0.72. The standard
deviation of market return is 20% suggest:
i) Is investing in B Ltd. better than investing in A Ltd.?
ii) If you invest 30% in B Ltd. and 70% in A Ltd. what is your expected rate of return
and portfolio standard deviation?
iii) What is the market portfolio expected rate and how much is the risk-free rate?
iv) What is the beta of portfolio if A Ltd. weight is 70% and B Ltd. weight is 30%?
4. You are given the following information about ABC Ltd.

Year ABC Ltd Market Index Market Dividend % Irf
Average Price Dividend per Share
2000 242 20 1812 4 6%
2001 279 25 1950 5 5%
2002 305 30 2258 6 4%
2003 322 35 2220 7 5%
Find Expected return using CAPM.
5. Mr. Ram is holding the following securities:

Securities Cost Dividend Interest Market Price Beta β
Gold Ltd 11,000 1,800 12,000 0.6
Silver Ltd 16,000 1,000 17,200 0.8
Bronze Ltd 12,000 800 18,000 0.6
GOI Bonds 40,000 4,000 37,500 0.01
Average return of the portfolio is 15.7%, calculate:
1. Expected rate of return in each, using the Capital Asset Pricing Model (CAPM).
2. Risk free rate of return.
6. A Portfolio Manager (PM) has the following four stocks in his portfolio:
Security No of Shares Market Price per Share β
VSL 10,000 50 0.9
CSL 5,000 20 1.0
SML 8,000 25 1.5
APL 2,000 200 1.2

Compute the following:

i) Portfolio beta.
ii) If the PM seeks to reduce the beta to 0.8, how much risk free investment should he bring in?
iii) If the PM seeks to increase the beta to 1.2, how much risk free investment should he
bring in?
7. The rate of return on security of the Co. X & market portfolio for 10 periods are given below:
Period Return of security X (%) Return on Market Portfolio (%)

1 20 22
2 22 20
3 25 18
4 21 16
5 18 20
6 -5 8
7 17 -6
8 19 5
9 -7 6
10 20 11
i) What is the beta (Slope) of security X?
ii) What is the characteristic line for security X?
iii) Decompose Total Risk into Systematic and Unsystematic Risk.
8. Following are the details of a portfolio consisting of three shares:

Share Portfolio Weight Beta Expected Return in % Total Variance
A 0.20 0.40 14 0.015
B 0.50 0.50 15 0.025
C 0.30 1.10 21 0.100
Standard Deviation of Market Portfolio Returns = 10%
You are given the following additional data:
Covariance (A, B) = 0.030
Covariance (A, C) = 0.020
Covariance (B, C) = 0.040

Calculate the following:

i) The Portfolio Beta
ii) Residual variance of each of the three shares
iii) Portfolio variance using Sharpe Index Model
iv) Portfolio variance (on the basis of modern portfolio theory given by Markowitz)
9. A study by a Mutual fund has revealed the following data in respect of three securities:
Security σ (%) Correlation with Index, PM
A 20 0.60
B 18 0.95
C 12 0.75
The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.

i) What is the sensitivity of returns of each stock with respect to the market?
ii) What is the covariance’s among the various stocks?
iii) What would be the risk of portfolio consisting of all the three stocks equally?
iv) What is the beta of the portfolio consisting of equal investment in each stock?
v) What is the total, systematic and unsystematic risk of the portfolio in (IV)?
10. Mr. Tamarind intends to invest in equity shares of a company the value of which depends
upon various parameters as mentioned below:
Factor Beta Expected Value In % Actual Value In
GNP 1.20 7.70 7.70
Inflation 1.75 5.50 7.00
Interest Rate 1.30 7.75 9.00
Stock Market Index 1.70 10.00 12.00
Industrial Production 1.00 7.00 7.50
If the risk free rate of interest be 9.25%, how much is the return of the share under Arbitrage
Pricing Theory?
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SECURITY ANALYSIS - EQUITY VALUATION
1) Beta of XYZ Ltd. is 1.4 and the Co. is expected to generate a growth rate of 8%. The last
dividend paid was ` 4/- per share the return on G-Sec is 10%. While the return on market
portfolio is 15%. Calculate the IV of the share and comment if the actual or market price of
the share is currently `36/-
2) ABC Ltd has cost of equity of 12% and it is expected to pay a dividend of 0.4 next year. The
dividend is expected to grow at 15% thereafter for the next 4 years. And then, 7% forever.
Calculate the intrinsic value of share.
3) The following financial data relates to XYZ Ltd.

Year Earnings Per Share (`) Dividend Per Share (`) Share Price (`)
2004 42 17 252
2005 46 18 184
2006 51 20 255
2007 55 22 275
2008 62 25 372
A firm of market analysts which specializes in the industry in which XYZ Ltd. operates has
recently re-evaluated the company's future prospects. The analysts estimate that XYZ Ltd.
earnings and dividend will grow at 25% for the next three years. Thereafter, earnings are
likely to increase at a lower rate of 10%. If this reduction in earnings growth occurs, the
analysts consider that the dividend payout ratio will be increased to 50%.
XYZ Ltd. is all equity financed and has 10 lakh ordinary shares in issue. The tax rate of 33% is
not expected to change in the foreseeable future. Calculate the estimated share price; and the
P/E ratio by using dividend valuation model. For this purpose, you can assume a constant
post-tax cost of capital of 18%.
4) Seawell Corporation, a manufacturer of do-it-yourself hardware and housewares,

reported earnings per share of € 2.10 in 2003, on which it paid dividends per share of
€0.69. Earnings are expected to grow 15% a year from 2004 to 2008, during this period
the dividend payout ratio is expected to remain unchanged. After 2008, the earnings
growth rate is expected to drop to a stable rate of 6%, and the payout ratio is expected
to increase to 65% of earnings. The firm has a beta of 1.40 currently, and is expected to
have a beta of 1.10 after 2008. The market risk premium is 5.5%. The Treasury bond rate
is 6.25%.

(a) What is the expected price of the stock at the end of 2008?
(b) What is the value of the stock, using the two-stage dividend discount model?
5) Piyush Loonker and Associates presently pay a dividend of ` 1.00 per share and has a
share price of ` 20.00.
i) If the dividend were expected to grow at the rate of 12% per annum forever, what is
the firm’s expected or required return on equity using a dividend discount model
approach?
ii) Instead of this situation in part (i) suppose that the dividend were expected to grow at a
rate of 20% per annum for 5 year and 10% per year thereafter. Now, what is the
firm’s expected or required return on equity?
6) ABC Co. currently sells for `32.50 per share. In an attempt to determine ABC’s fair price, the
analyst has estimated following information.
Debit Pref. Shares Equity
Before tax of return 7% 6.8% 11%
Co’s target capital Structure 30% 15% 55%
Market Value 145mn 65mn -
ABC’s FCFF for current year is 28 million and is expected to grow at a constant rate of 4%.
Tax rate is 35% and ABC has 8 million shares outstanding. Calculate the value of ABC’s share
and explain whether it should be brought or sold.
7) A valuation done of an established company by a well-known analyst has estimated a value

of ` 500 lakhs, based on the expected free cash flow for next year of ` 20 lakhs and an
expected growth rate of 5%.
While going through the valuation procedure, you found that the analyst has made the
mistake of using the book values of debt and equity in his calculation. While you do not
know the book value weights he used. You have been provided with the following
information:
i) Company has a cost of equity of 12%,
ii) After tax cost of debt is 6%,
iii) The market value of equity is three times the book value of equity, while the market value of
debt is equal to the book value of debt.
You are required to estimate the correct value of the company.

8) Delta Ltd’s current financial statement reports its net income as 15 lacs. Tax rate is 40% and
interest expense was 15 lacs. The company has ` 1 crore of invested capital of which 60% is in
debt. Delta Ltd tries to maintain. WACC of 12.6 % compute EVA for the company.
9) A co. has current earnings of ` 3 per share with 5, 00,000 shares outstanding. The co. plans
to issue 40,000 7% convertible pref. shares of ` 50/- each. The shares a r e convertible into two
equity shares for every preference shares held. The equity shares have market price of ` 21.
a) Calculate conversion ratio, conversion value & conversion premium.
b) Assuming total earnings remain same calculate the effect on EPS before conversion and
after conversion.
c) If PAT increase by ` 10,00,000 what is the basic EPS and diluted EPS.
d) Calculate in part b, the conversion ratio such that there is no impact on EPS.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

SECURITY ANALYSIS - BOND VALUATION
1. VHP Company has sold ` 1000, 12% perpetual debentures 10 years ago. Interest rates have
risen since then, so that debentures of this company are now selling at 15% yield basis.
Determine the current indicated / expected market price of the debentures. Would you like to
buy the debentures for ` 700?
Now assume that the debentures of the company are selling at ` 825. Moreover, if the 12%, D
1000 debentures are not perpetual & have 8 years to run to maturity, compute the
approximate effective yield an investor would earn on his investment.
2. ABC Ltd. recently issued 15- years bonds. The bonds have a coupon rate of 7.5 percent and
pays interest semi-annually. The bonds are callable in 5 years at a call price equal to 13
percent premium to par value. The par value of the bonds is ` 1,000. If the yield to maturity is
6 percent, what is the price of the bond today and what is yield to call?
3. Jagat Industries Ltd. (JIL) has raised ` 50 crore through an issue of 9% bond. Each bond has a
face value of ` 500 and 10 years term to maturity. As per the terms of the issue each bond is
redeemable in four equal installment starting from the end of 7th year. You are required to
find out the price of the bond if YTM is 13%. And what is the current yield?
4. The following is the yield structure of AAA rated debenture:

Period Yield%
3 months 8.5%
6 months 9.25%
1 year 10.5%
2 years 11.25%
3 years & above 12%
a) Based on the expectation theory calculate the implicit one – year forward rates in year 2
and years 3.
b) If the interest rate increases by 50 basis points, what will be the percentage change in
the price of the bond having a maturity of 5 years? Assume that the bond is fairly priced
at the moment at `. 1,000.

5. The following data are available for a bond:

Face Value ` 1,000
Coupon Rate 16%
Year of Maturity 6
Redemption Value ` 1,000
Yield to Maturity 17%
What are the current market price, duration and volatility (Modified Duration) of this bond?
Calculate the expected market price, if we witness in increase in required yield by 75 basis
points.
6. Consider a firm is expected to have a liability of ` 1 million on 7 years. Assume that the
treasury manager of the company has decided to immunize his obligation by investing in 10
years 8% zero coupon bonds and 5 year 10% coupon bonds. What value of investment would
be made in the zero coupon bonds (zeros), if the expects yield is 8%
7) A firm has a bond outstanding ` 3, 00, 00,000. The bond has 12 years remaining until
maturity, has a 12.5 per cent coupon and is callable at ` 1,050 per bond; it had flotation costs
of ` 4, 20,000, which are being amortized at ` 30,000 annually. The flotation costs for a new
issue will be ` 9, 00,000 and the current interest rate will be 10 per cent. The after tax cost of
the debt is 6 per cent. Should the firm refund the outstanding debt? Show detailed working
Consider Corporate Income-tax rate at 50%.
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MONEY MARKETS
1. A money market instrument with face value of D 100 and discount yield of 6% will mature in
45 days. You are required to calculate:
i) Current price of the instrument
ii) Bond equivalent yield
iii) Effective annual return
2 Calculate the Current price and the Bond equivalent yield (using simple compounding) of a
money market instrument with face value of ` 100 and discount yield of 8% in 90 days. Take 1
year = 360 days.
3. From the following particulars, calculate the effective rate of interest p.a. as well as the total
cost of funds to Bhaskar Ltd., which is planning a CP issue:
Issue Price of CP `. 97,550
Face Value `. 1,00,000
Maturity Period 3 Months
Issue Expenses
Brokerage 0.15% for 3 months
Rating Charges 0.50% p.a.
Stamp duty 0.175% for 3 months
4. AXY Ltd. Is able to issue commercial paper of ` 50,00,000 every 4 months at a rate of 12.5% p.a.
The cost of placement of commercial paper issue is ` 2,500 per issue. AXY Ltd. Is required to
maintain line of credit ` 1,50,000 in bank balance. The applicable income tax rate for AXY Ltd.
Is 30%. What is the cost of funds (after taxes) to AXY Ltd. For commercial paper issue? The
maturity of commercial paper is four months.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

MERGERS AND ACQUISITIONS
1. The following is the pre-merger and post-merger relating to a firm a (acquiring firm) and firm
B (target firm):
Pre-merger A Pre-merger B Post-merger A
Earnings ` 2,00,000 ` 1,00,000 ` 3,50,000
No. of shares 50,000 10,000 ?
EPS `4 ` 10 ?
Market price ` 40 ` 100 ?
PE Ratio 10 10 10
Value of the firm ` .20,00,000 10,00,000 35,00,000
The firm A after merger is not expected to have any growth in earnings expect that there is a
synergy of ` 50,000 in earning generated by the merger. Firm A is considering to issue: (i)
20,000 shares (ii) 37,500 shares, or (iii) 30,000 shares to acquire firm B. Critically evaluate the
proposal from the point of view of the worth of shareholders. How the expected growth in
earnings of the two firms will affect the decision?
2. AFC Ltd. wishes to acquire BCD Ltd. The shares issued by the two companies are 10,00,000
and 5,00,000 respectively:
i) Calculate the increase in the total value of BCD Ltd. resulting from the acquisition on
the basis of the following conditions:
Current expected growth rate of BCD Ltd. 7%
Expected growth rate under control of AFC Ltd., (without any 8%
additional capital investment and without any change in risk of
operations)
Current Market price per share of AFC Ltd. ` 100
Current Market price per share of BCD Ltd. ` 20
Current Dividend per share of BCD Ltd. `0.60
ii) On the basis of aforesaid conditions calculate the gain or loss to shareholders of both the
companies, if AFC Ltd. were to offer one of its shares for every four shares of BCD Ltd.
Calculate the gain to the shareholders of both the Companies, if AFC Ltd. pays `22 for
each share of BCD Ltd., assuming the P/E Ratio of AFC Ltd. does not change after the
merger. EPS of AFC Ltd. is `8 and that of BCD is `2.50. It is assumed that AFC Ltd.
invests its cash to earn 10%.

3. The following information relating to the acquiring Company Abhiman Ltd. and the target
Company Abhishek Ltd. are available. Both the Companies are promoted by Multinational
Company, Trident Ltd. The promoter’s holding is 50% and 60% respectively in Abhiman Ltd.
and Abhishek Ltd.:
Abhiman Ltd. Abhishek Ltd.
Share capital (`.) 200 lakh 100 lakh
Free Reserve and Surplus (`.) 800 lakh 500 lakh
Paid up Value per share (`.) 100 10
Free float Market Capitalization (`.) 400 lakh 128 lakh
P/E Ratio (times) 10 4
Trident Ltd. is interested to do justice to the shareholders of both the Companies. For the swap
ratio weights are assigned to different parameters by the Board of Directors as follows:
Book Value 25%
EPS (Earning per share) 50%
Market price 25%
a) What is the swap ratio based on above weights?

b) What is the Book Value, EPS and expected Market price of Abhiman Ltd. after acquisition of
Abhishek Ltd.(assuming PE ratio of Abhiman Ltd. remains uncharged & all assets &
liabilities of Abhishek Ltd. are taken over at book value).
c) Calculate:
i) Promoter’s revised holding in the Abhiman Ltd.
ii) Free float market capitalization.
iii) Also calculate No. of Shares, Earning per Share (EPS) and book Value (B.V.), if after
acquisition of Abhishek Ltd., Abhiman Ltd. decided to:
a) Issue Bonus Shares in the ratio of 1:2; and
b) Spilt the stock (share) as ` 5 each fully paid.
4. Bank 'R' was established in 2005 and doing banking in India. The bank is facing DO OR
DIES situation. There are problems of Gross NPA (Non- Performing Assets) at 40% &
CAR/CRAR (Capital Adequacy Ratio/ Capital Risk Weight Asset Ratio) at 4%. The net worth of
the bank is not good. Shares are not traded regularly. Last week, it was traded @ ` 8 per
share.

RBI Audit suggested that bank has either to liquidate or to merge with other bank. Bank 'P' is
professionally managed bank with low gross NPA of 5%. It has Net NPA as 0% and CAR at 16%.
Its share is quoted in the market @ ` 128 per share. The board of directors of bank 'P' has
submitted a proposal to RBI for takeo ver of bank 'R' on the basis of share exchange
ratio.
The Balance Sheet details of both the banks are as follows:
Bank ‘`’ Amt. in ` Bank ‘P’ Amt. In ` lacs
Paid up share capital 140 500
Reserves & Surplus 70 5,500
Deposits 4,000 40,000
Other liabilities 890 2,500
Total Liabilities 5,100 48,500
Cash in hand & with RBI 400 2,500
Balance with other banks - 2,000
Investments 1,100 15,000
Advances 3,500 27,000
Other Assets 100 2,000
Total Assets 5,100 48,500
It was decided to issue shares at Book Value of Bank 'P' to the shareholders of Bank 'R'.
All assets and liabilities are to be taken over at Book Value.
For the swap ratio, weights assigned to different parameters are as follows:
Gross NPA 30%
CAR 20%
Market price 40%
Book value 10%
a) What is the swap ratio based on above weights? How many shares are to be issued?
b) How many shares are to be issued?
c) Prepare Balance Sheet after merger
d) Calculate CAR & Gross NPA % of Bank 'P' after merger.
5) Two companies are identical in all respect except capital structure. One company AB Ltd. has a
debt equity ratio of 1:4 and its equity has a β value of 1.1. The other company XY Ltd. has a
debt equity ratio of 3:4. Income tax is 30%. Estimate β value of XY Ltd. given the above

6. ABC, a large business house is planning to sell its wholly owned subsidiary KLM. Another
large business entity XYZ has expressed its interest in making a bid for KLM. XYZ expects
that after acquisition the annual earning of KLM will increase by 10%. Following information,
ignoring any potential synergistic benefits arising out of possible acquisitions, are available:
i) Profit after tax for KLM for the financial year which has just ended is estimated to be ` 10
crore.
ii) KLM’s after tax profit has an increasing trend of 7% each year and the same is expected to
continue.
iii) Estimate post tax market return is 10% and risk free rate is 4%. These rates are expected to
continue.
iv) Corporate tax rate is 30%.
XYZ ABC Proxy entity for KLM in the same
line of business
No. of shares 100 lakhs 80 lakhs -
Current share price `. 287 `. 375 -
Dividend pay out 40% 50%
Debt: Equity at market values 1:2 1:3 1:4
P/E ratio 10 13 12
Equity beta 1 1.1 1.1
Assume gearing level of KLM to be the same as for ABC and a debt beta of zero.
You are required to calculate:
a) Appropriate cost of equity for KLM based on the data available for the proxy entity.
b) A range of values for KLM both before and after any potential synergistic benefits to
XYZ of the acquisition.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

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FOREIGN EXCHANGE
1. An Importer from Canada bought goods worth 2.5 million USD, below were the rates quoted in
his local bank: C$ / US$ = 1.1250 – 1.1290 ` / US$ = 62.40 – 63.00
i) Identify whether the rates quoted are direct or indirect
ii) Convert Direct into Indirect or Vice Versa
iii) Calculate the amount to be paid by Canadian Importer.
2. On January 28, 2005, an importer customer requested a bank to remit Singapore dollar
(SGD) 25,00,000 under an irrevocable LC. However due to bank strikes, the bank could affect
the remittance only on February 4, 2005. The interbank market rates were as follows:
January 28 February 4
Bombay US $ 1 ` 45.85/45.90 ` 45.91/45.97
London Pound 1 US$ 1.7840/1.7850 US$ 1.7765/1.7775
Pound 1 SGD 3.1575/3.1590 SGD 3.1380/3.1390
The bank wishes to retain an exchange margin of 0.125%. How much does the customer stand to
gain or loss due to the delay? (Calculate rate in multiples of.0001)
3. You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T.
on Copenhagen for Danish Kroner 10,00,000 at the rate of Danish Kroner 1 = INR 6.5150. You
are required to cover the transaction either in London or New York market. The rates on that
date are as under:
Mumbai – London INR 74.3000 INR 74.3200
Mumbai – New York INR 49.2500 INR 49.2625
London – Copenhagen DKK 11.4200 DKK 11.4350
New York – Copenhagen DKK 07.5670 DKK 07.5840
In which market will you cover the transaction, London or New York, and what will be the
exchange profit or loss on the transaction? Ignore brokerages.
4. The following rates appear in the foreign exchange market:

Spot rate 2 Months Forward
`/US $ ` 45.80/46.05 ` 46.50/47.00
a) How many dollars should a firm sell to get ` 5 Crore after 2 months?
b) How many rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market?
c) Assume the firm has US $ 50,000. How many rupees, will be received on conversion today?

5. Z Ltd. Importing goods worth USD 2 Million requires 90 days to make the payment. The
overseas supplier has offered a 60 days Interest Free Credit & an additional credit of 30 days
@ interest of 8% p.a. The Bank of the Z Ltd. Offers a 30 days loan @ 10% pa & their
quote for foreign exchange is as follows:
Spot $ = 56.50 `
60 days forward = 57.10 `
90 days forward = 57.50 `
You are required to evaluate the following options:
i) Pay the suppliers in 60 days or
ii) Avail the suppliers’ offer of 90 days credit
6. Sun Ltd. is planning to import equipment from Japan at the cost of ¥ 3,400 Lakhs. The Co.
may avail a loan at 18% p.a. with quarterly rests. With which it can import the equipment. The Co.
has also an offer from Osaka Branch of an Indian based Bank extending credit of 180
days @ 2% p.a. against opening an irrevocable LC. Present exchange rate ` 100 = ¥ 340, 180
days forward rate ` 100 = ¥ 345, Commission charges for LC are @ 2% per 12 months. Advise
the Co whether the offer from foreign branch should be accepted.
7. Given spot exchange rate $ 1 = FF 7.05. Complete missing entries.

3 months 6 months 1 year
$ Int. rate (annual) 11.5% 12.25% E
FF int. rate (annual) 19.5% C 20%
forward franc per $ A D 7.52
forward dollar premium % B 6.3% F
8. The US dollar is selling in India at ` 55.50. If the interest rate for a 6 months borrowing in India
is 10% per annum and the corresponding rate in USA is 4%.
a. Do you expect that US dollar will be at a premium or at discount in the Indian Forex Market?
b. What will be the expected 6-months forward rate for US dollar in India? and
c. What will be the rate of forward premium or discount?
9. Ascertain expected future spot after one year, for Australia dollars in UK, given the
following information:
1. Inflation rate in Australia is 3%
2. Current spot rate is £ 1 = Australia is A$ 2
3. Risk free interest rate in UK is 9% while in Australia is 7%.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

FOREX RISK MANAGEMENT
1. X Ltd. An Indian company has an export exposure of 10 million yen value September end. Yen
is not directly quoted against rupee. The current spot rates are USD/` 41.79 and
USD/JPY = 129.75. It is estimated that yen will depreciate to 144 level and rupee to depreciate
against dollar to 43. Forward rate for September 2005 USD/Yen = 137.35 and USD/ ` 42.89. You
are required:
a) To calculate the expected loss if hedging is not done. How the position will change with
company taking forward cover?
b) If the spot rate on 30th September 2005was eventually USD/ Yen = 137.85 and USD/ ` 42.78.
Is the decision to take forward cover justified?
2. A company operating in Japan has today affected sales to an Indian company, the payment
being due 3 months from the date of invoice. The invoice amount is 108 lakhs yen. At today’s
spot rate, it is equivalent to ` 30 lakhs. It is anticipated that the exchange rate will decline by
10% over the 3 months period and in order to protect the yen payments, the importer process to
take appropriate action in the foreign exchange market. The 3 months forward rate is
presently quoted as 3.3 yen per rupee. You are required to calculate the expected loss and to
show how it can be hedged by a forward contract.
3. An importer requests his bank to extend the forward contract for US$ 20,000 which is due for
maturity on 30th October, 2010, for a further period of 3 months. He agrees to pay the required
margin money for such extension of the contract.
Contracted Rate – US$ 1= ` 42.32
The US Dollar quoted on 30-10-2010:-
Spot – 41.5000/41.5200
3 months’ Premium -0.87% /0.93%
Margin money for buying and selling rate is 0.075% and 0.20% respectively. Compute:
i) The cost to the importer in respect of the extension of the forward contract, and
ii) The rate of new forward contract.

4. An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three

months. Exchange rates in London are:
Spot Rate ($/£) 1.5865 – 1.5905
3-month Forward Rate ($/£) 1.6100 – 1.6140
Rates of interest in Money Market:
Deposit Loan
$ 7% 9%
£ 5% 8%
Compute and show how a money market hedge can be put in place. Compare and
contrast the outcome with a forward contract.
5. A bank enters into a forward purchase TT covering an export bill for Swiss Francs 1,00,000 at
` 32.4000 due 25th April and covered itself for same delivery in the local interbank market at `
32.4000. However, on 25th March, exporter sought for cancellation of the contract as the tenor
of the bill is changed.
In Singapore market, Swiss Francs were quoted against dollars as under:
Spot USD 1 = Sw. Fcs 1.5076/1.5120
One month forward 1.5150/1.5160
Two months forward 1.5250/1.5270
Three months forward 1.5415/1.5445
And in the interbank market US dollars were quoted as under:

Spot USD 1 = ` 49.4302/4455
Spot/April .4100/.4200
Spot /May .4300/.4400
Spot/June .4500/.4600
Calculate the cancellation charges, payable by the customer if exchange margin required by
the bank is 0.10% on buying and selling.

6. An importer booked a forward contract with his bank on 10th April for USD 2,00,000 due on
10th June @ ` 64.4000. The bank covered its position in the market at ` 64.2800. The exchange
rates for dollar in the interbank market on 10th June and 20th June were:
10th June 20th June
Spot USD 1 = ` 63.8000/8200 ` 63.6800/7200
Spot/June ` 63.9200/9500 ` 63.8000/8500
July ` 64.0500/0900 ` 63.9300/9900
August ` 64.3000/3500 ` 64.1800/2500
September ` 64.6000/6600 ` 64.4800/5600
Exchange Margin 0.10% and interest on outlay of funds @ 12%. The importer requested on 20 th
June for extension of contract with due date on 10th August.
Rates rounded to 4 decimal in multiples of 0.0025
On 10th June, Bank Swaps by selling spot and buying one month forward.
Calculate:
i) Cancellation rate
ii) Amount payable on $ 2,00,000
iii) Swap loss
iv) Interest on outlay of funds, if any
v) New contract rate
vi) Total Cost
7. XYZ Ltd. is an export oriented business house based in Mumbai. The Company invoices in
customers’ currency. Its receipt of US $ 1, 00,000 is due on September 1, 2009.
Market information as at June 1, 2009 is:
Exchange Rates US $/ ` Currency Futures US $/ Contract size ` 4,72,000
Spot 0.02140 June 0.02126
1 Month Forward 0.02136 September 0.02118
3 Months Forward 0.02127
Initial Margin Interest Rates in India

June ` 10,000 7.50%
September ` 15,000 8.00%

On September 1, 2009, the spot rate US $Re. is 0.02133 and currency future rate is 0.02134.
Comment which of the following methods would be most advantageous for XYZ Ltd.
a) Using forward contract
b) Using currency futures
c) Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the
futures contract.
8. Amte Ltd. has bought Swiss auto parts two months ago. Amte Ltd. Will need S. Fr. 100,000 in
180 days Amte Ltd. wants to hedge its currency risk. Amte Ltd. Considers a. a forward hedge, b
a money market hedge c. an option hedge or d. no hedge. Its analysts develop the following
information, which can be used to assess the alternative solutions:
a) Spot rate of SFr. as of today 0.68 $ / SFr
b) 180-day forward rate of S. Fr. as of today 0.70 $ / SFr
c) Interest rates are as follows:
d) Deposit rates: 9% in Switzerland, and 13% in the U.S.
e) Borrowing rates: 10% in Switzerland, and 14% in the U.S.
f) A call option on SFr. that expires in 180 days has an exercise price of 0.70$/SFr. and a
premium of $ 0.02.
g) A put option on SFr. that expires in 180 days has an exercise price of 0.71$/SFr. and a
premium of $ 0.03.
h) Amte Ltd. Uses the following distributions of exchange rates, in 180 days, to evaluate the
hedging techniques:
+ 180 0.67 0.70 0.75
Probability 0.30 0.50 0.20
~*~*~*~*~BEST OF LUCK~*~*~*~*

DERIVATIVES
1. Calculate 3 Months future price for gold, if currently gold trades at ` 26,000 per 10 gm in spot
market 3 Months cost of carry is 15% p.a.
a. Storage cost is ` 1,000
b. Storage cost is 12% p.a.
c. Storage cost is 1% p.m.
2. The share of X Ltd., is currently selling for ` 300. Risk free interest rate is 0.8% per month. A
three months futures contract is selling for ` 312. Develop an arbitrage strategy and show
what your risk less profit will be 3 months hence assuming that X Ltd. will not pay any dividend
in the next three months.
3. A company is long on 10 mt copper. @ ` 474/kg [Spot]. What is the ` value of copper position? A
copper future contract is available for tenure of 3 months. Current Interest rates are 15% &
each contract underlies 1 mt of copper. To store 1 kg of copper it would cost ` 4 for 3 months.
What is the value of copper future & what is the value of each Copper future contract.
- 0.0375
e 0.0375 = 1.0382 e = 0.9635
4. Suppose that X bought 1 contract of Andhra Bank Futures (each underlying 2300 equity shares)
for ` 62.80 per share. The initial margin is 50%. The maintenance margin is 40%. Suppose that
the stock price drops to ` 50 per share.
a) Does X need to put additional funds to his account?
b) What is the break-even price Andhra Bank can fall before X receives a margin call?
c) Suppose that the price rises to ` 70. What is X’s rate of return on his investment?
5. An Investor has a stock of Axis Bank trading in the spot at ` 1500, total quantity is 1,000.
3 Months Axis futures is trading at ` 1200 with lot size of 50. 3 Months Index futures is trading
at ` 5,000 with lot size of 25. The β of Axis is 1.5. Calculate the number of contracts & the
1. Result of hedging in the below cases:
2. Using stock futures, if the investors desire to completely hedge the portfolio.
3. Using index futures, if the investors desire to completely hedge the portfolio.
Using index futures, if the investors desire to adjust the risk equivalent to that of the market.

6. BSE Index 5000

Value of Portfolio ` 10, 10,000
Risk free interest rate 9% p.a.
Dividends yield on Index 6% p.a.
Beta of the portfolio 1.5
We assume that a futures contract on the BSE index with four months maturity is used to
hedge the value of portfolio over next three months. One futures contract is for delivery 50
times the index.
Based on the above information calculate:
a. Price of futures contract
b. The gain on short futures position if index turns out to be 4500 in three months.
7. On Jan 1, 2013, investor has portfolio of 5 shares given as below:

Shares Price No. of shares β
A 349.30 5,000 1.15
B 480.50 7,000 0.40
C 593.52 8,000 0.90
D 734.70 10,000 0.95
E 824.85 2,000 0.85
The cost of capital of Investor is 10.5% p.a. You are required to calculate.
a) β of the portfolio.
b) Theoretical Value of NIFTY futures for Feb, 2013 assuming 365 days.
c) The no. of Contracts of NIFTY futures that the Investors need to sell to get a full hedge
until February for its portfolio. The current value of NIFTY is 5900 & NIFTY Futures has
minimum trade lot requirement of 200 units. Assume that the futures are trading at their
fair price.
d) The no. of futures contract the investors should hedge if he desires to reduce the β of
portfolio to 0.60.
ln (1.105) = 0.0998
e 0.015858 = 1.01598
8. A call option on Fag Bearings, a non-dividend paying stock, currently trades for ` 40.
Expiration date of the option is February 25 of next year. The exercise price of option is `45.
d. If this is an American option, on what dates can the option be exercised?
e. If this is European option on what dates can the option be exercised?
f. Suppose the current price of Fag Bearings is ` 35 per share, is this option worthless?

9. You as an investor purchased 4 Months call option of X Ltd. at ` 10 at which current MP is ` 132
& Exercise price is ` 150. You expect price to range between 120 to 190 The expected share price
of X Ltd. & relative probability are given below:
Expected price 120 140 160 180 190

Probability 0.05 0.20 0.50 0.10 0.15
Calculate the following:
a. Expected share price at the end of 4 Months.
b. Value of call option at the end of 4 Months if exercise price prevails
c. In case of the option is held till maturity, what will be the expected value of the call option.
10. Suppose an investor has portfolio of Reliance trading at ` 800 with Quantity of 1,000 shares. It
has β of 1.5. An investor expects market to fall by 10%. He uses put option to hedge the portfolio.
The put Option has of 0.5 & is trading at a price of ` 100. Lot size = 100.
Calculate:
a. No. of option contacts to be hedged along with the strategy.
b. Explain the impact on overall hedged portfolio if investor’s expectations come true.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

INTEREST RATE RISK MANAGEMENT

1. XYZ Inc. issues a £ 10 million floating rate loan on July 1, 2013 with resetting of coupon rate
every 6 months equal to LIBOR + 50 bp. XYZ is interested in a collar strategy by selling a Floor
and buying a Cap. XYZ buys the 3 years Cap and sell 3 years Floor as per the following details
on July 1, 2013:
Notional Principal Amount $ 10 million
Reference Rate 6 months LIBOR
Strike Rate 4% for Floor and 7% for Cap
Premium 0*
* Since Premium paid for Cap = Premium received for Floor

Using the following data you are required to determine:
vii) Effective interest paid out at each reset date,
viii) The average overall effective rate of interest p.a.
Reset Date LIBOR (%)

31-12-2013 6.00
30-06-2014 7.00
31-12-2014 5.00
30-06-2015 3.75
31-12-2015 3.25
30-06-2016 4.25
2. TM Fincorp has bought a 6x9 ` 100 crore Forward Rate Agreement (FRA) at 5.25%. On fixing
date reference rate i.e. MIBOR turns out be as follows:
Period Rate (%)
3 months 5.50
6 months 5.70
9 months 5.85
You are required to determine:
• Profit/Loss to TM Fincorp. In terms of basis points.
• The settlement amount.
(Assume 360 days in a year)

3. Suppose a dealer quotes all-in-cost for a generic SWAP @ 8% against 6 m LIBOR swap. If the NP
of the swap is ` 600,000:
i) Calculate semiannual fixed rate payment.
ii) Find the first floating rate payment for [part i] above, if the 6m period from the effective
date of SWAP to the settlement date comprises of 181 days & the corresponding LIBOR was
6% on the effective date of SWAP.
iii) In the above [part ii] if the settlement is on Net Basis, how much the fix rate payer will pay
to the floating rate payer.
Generic Swap is based on (30 x 360) days.
4. Derivative Bank entered into a plain vanilla swap through on OIS (Overnight Index Swap) on a
principal of ` 10 crores and agreed to receive MIBOR overnight floating rate for a fixed
payment on the principal. The swap was entered into on Monday, 2 nd August, 2010 and was to
commence on 3rd August, 2010 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
7.75%, 8.15%, 8.12%, 7.95%, 7.98%, 8.15%
If Derivative Bank received ` 317 net on settlement, calculate fixed rate and interest under both
legs.
Notes:
i) Sunday is Holiday.
ii) Work in rounded rupees and avoid decimal working.
~*~*~*~*~BEST OF LUCK~*~*~*~*~

INTERNATIONAL FINANCIAL MANAGEMENT
1. A USA based company is planning to set up a software development unit in India.

Software developed at the Indian unit will be bought back by the US parent at a transfer
price of US $10 million. The unit will remain in existence in India for one year; the
software is expected to get developed within this time frame.
The US based company will be subject to corporate tax of 30 per cent and a withholding tax
of 10 per cent in India and will not be eligible for tax credit in the US. The software
developed will be sold in the US market for US $ 12.0 million. Other estimates are as follows:
Rent for fully furnished unit with necessary hardware in India ` 15,00,000
Man power cost (80 software professional will be working for 10 ` 400 per man hour
hours each day)
Administrative and other costs ` 12,00,000
Advise the US Company on the financial viability of the project. The rupee-dollar rate is
D48/$.
2. XY Limited is engaged in large retail business in India. It is contemplating for expansion

into a country of Africa by acquiring a group of stores having the same line of operation
as that of India.
The exchange rate for the currency of the proposed African country is extremely volatile.
Rate of inflation is presently 40% a year. Inflation in India is currently 10% a year.
Management of XY Limited expects these rates likely to continue for the foreseeable future.
Estimated projected cash flows, in real terms, in India as well as African country for the
first three years of the project are as follows:
Year – 0 Year – 1 Year – 2 Year - 3
Cash flows in Indian D (000) -50,000 -1,500 -2,000 -2,500
Cash flows in African Rands (000) -2,00,000 +50,000 +70,000 +90,000

XY Ltd. assumes the year 3 nominal cash flows will continue to be earned each year
indefinitely. It evaluates all investments using nominal cash flows and a nominal
discounting rate. The present exchange rate is African Rand 6 to ` 1.
You are required to calculate the NPV of the proposed investment considering the
following:
(i) African Rand cash flows are converted into rupees and discounted at a risk
adjusted rate.
(ii) All cash flows for these projects will be discounted at a rate of 20% to reflect it’s
high risk.
(iii) Ignore taxation.
Year - 1 Year - 2 Year - 3

PVIF @ 20% .833 .694 .579
~*~*~*~*~BEST OF LUCK~*~*~*~*~

PROJECT FINANCING
A) Capital Budgeting - BASIC
1. A company is considering the replacement of its existing machine obsolete and unable to meet
the rapidly rising demand for its product. The company is faced with two alternatives: to buy
machine A which is similar to its existing machine or to go in for machine B which is more
expensive and has much greater capacity, the cash flow at the present level of operation
under the two alternatives are as follows:
Machine Immediate Cash flow (in Lakhs `) Cash flow (in lakh of `) at the end of year
I II III IV V
A 25 - 5 20 14 14
B 40 10 14 16 17 15
The company‘s cost of capital is 10%. The finance manager tries to appraise the machines by
calculating the following:
a) Net Present Value,
b) Profitability index;
c) Payback period; and
d) Discounted payback period
At the end of his discounted calculation, however, the finance manager is unable to advice up
his mind as to which machine to recommend. You are required to make this calculations &
advice the finance manager about the proposed investment.
NOTE: Present Value of `.1 at 10% discount rate is as follows
Year 0 1 2 3 4 5
P.V 1.00 0.91 0.83 0.75 0.68 0.62
2. There are 2 machines available in market where details are as follows:

A B
Cost 100,000 130,000
Life 2 Year 2 Year
Annual Operating Cost 12,000 8,000
Salvage 15,000 40,000
COC 10% 10%
Tax 40% 40%
Depreciation is based on SLM. Evaluate which Machine should be selected & what should be
savings in case of same?

3. ABC Chemicals is evaluating two alternative systems for waste disposal, System A and
System B, which have lives of 6 year and 4 year respectively. The initial investment outlay
and annual operating costs for the two systems are expected to be as follows:
System A System B
Initial Investment ` 5 milllion ` 4 million
Outlay Annual Operating ` 1.5 million ` 1.6 million
Costs Salvage value ` 1 million ` 0.5 million
If the hurdle rate is 15%, which system should ABC Chemicals choose? The PVF@ 15% for the six
year are as below:
Year 1 2 3 4 5 6
PVIF 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
4. A machine used on a production line must be replaced at least every four year. Costs
incurred to run the machine according to its age are:
Age of the Machine (year)

0 1 2 3 4
Purchase price (in `) 60,000
Maintenance (in `) 16,000 18,000 20,000 20,000
Repair (in `) 0 4,000 8,000 16,000
Scrap Value (in `) 32,000 24,000 16,000 8,000
Future replacement will be with identical machine with same cost. Revenue is unaffected by
the age of the machine. Ignoring inflation and tax, determine the optimum replacement cycle.
PV factor of the cost of capital of 15% for the respective four year are 0.8696, 0.7561, 0.6575 and
0.5718.
5. A firm has projected the following cash flows from a project under evaluation:
Year `. Lakhs
0 70
1 30
2 40
3 30
The given cash flows have been made at expected prices after recognizing inflation. The firms
cost of capital is 10%. The expected annual rate of inflation is 5%. Show how the viability of the
project is to be evaluated.

6. A company is setting up a project at a cost of `. 300lakhs. It has to decide whether to locate

the plant in a forward area (FA) or backward area (BA), locating in backward area
means cash subside of `15 lakh from the central govt. Besides, the taxable profit to the extent
of 20% is exempt for 10 year in BA; the project envisages the borrowing of `. 200 lakhs in
either case. The cost of following will be 12% in forwarded area and 10% in backward area.
However, the revenue costs are bound to be higher in Backward Area. The borrowings have
to be repaid in 4 equal installments beginning from the end of the 4th year. With the help of
the following information and by using DCF techniques you are required to suggest the proper
location of the project.
Year Profit loss before interest and depreciation Present value Factor
(` In lakhs) (at 15%)
FA BA
1 (6.0) (50.00) 0.87
2 34.00 (20.00) 0.76
3 54.00 10.00 0.66
4 74.00 20.00 0.57
5 108.00 45.00 0.50
6 142.00 100.00 0.43
7 156.00 155.00 0.38
8 230.00 190.00 0.33
9 330.00 230.00 0.28
10 430.00 330.00 0.25
The annual depreciation may be taken at ` 30 Lakhs; interest on borrowing may be worked
out at the respective rates. The average rate of tax may be taken at 50%.
7. A large profit making company is considering the installation of a machine to process the
waste produced by one of its existing manufacturing process to be converted into a
marketable product. At present, the waste is removed by a contractor for disposal on
payment by the company of ` 50 Lakhs per annum for the next four year. The contract can
be terminated upon the installation of the aforesaid machine on payment of a compensation
of ` 30 Lakhs before processing operations starts. This compensation is not allowed as
deduction for tax purposes. The machine required for carrying out the processing will cost `
200 Lakhs to be financed by a loan repayable in 4 equal installments commencing from the
end of the year 1. The interest rate is 16% per annum. At the end of the fourth year, the
machine can be sold for ` 20 Lakhs and the cost of dismantling and removal will be ` 15

Lakhs Sales and direct costs of the product emerging from waste processing for 4 year
are estimated as under:
Year 1 2 3 4
Sales 322 322 418 418
Material consumption 30 40 85 85
Wages 75 75 85 100
Other expenses 40 45 54 70
Factory overheads 55 60 110 145
Depreciation (as per IT rules) 50 38 28 21
Initial stock of material required before commencement of the processing operation is `.20
Lakhs at the start of the year 1. The stock levels of the materials to be maintained at the end
of the year 1, 2 and 3 will be `55 Lakhs and the stocks at the end of year 4 will be NIL. The
storage of the materials will utilize space which would otherwise have been rented out for `.
10 Lakhs per annum Labor cost includes wages of 40 worker, whose transfer to this process
will reduce idle time payments of `15 Lakhs, in year 1 and `10 Lakhs in year 2. Factory
overheads include apportionment of general factory overheads except to the extent of
insurance charges of ` 30 Lakhs per annum payable on this venture. The company’s tax rate
is 50%. Present value factor for four year are as under:
Year 1 2 3 4
Present value factor 0.870 0.756 0.658 0.572
Advise the management in the desirability of installing the machine for processing the waste.
All calculation should form the part of answer.
~*~*~*~*~BEST OF LUCK~*~*~*~*

B) Capital Budgeting – Risk Analysis
1) ABC and Co. is considering the two mutually exclusive X and Y. The company uses a
certainly equivalent approach to evaluate the proposals. the estimated cash flows and
certainty equivalent for both machines are as follows:
Which machine should be bought, if the risk free discount rate is 5 percent?
Year Machine X Machine Y

Cash flow Certainty Cash flow Certainty
`. `.
Equivalent Equivalent
0 (30,000) 1.00 (40,000) 1.00
1 15,000 0.95 25,000 0.90
2 15,000 0.85 20,000 0.80
3 10,000 0.70 15,000 0.70
4 10,000 0.65 10,000 0.60
2) New Projects Ltd. is evaluating 3 projects, P-I, P-II, P-III. Following information is available in
respect of these projects:
P-I P-II P-III

Cost ` 15,00,000 ` 11,00,000 ` 19,00,000
Inflows- Year 1 6,00,000 6,00,000 4,00,000
Year 2 6,00,000 4,00,000 6,00,000
Year 3 6,00,000 5,00,000 8,00,000
Year 4 6,00,000 2,00,000 12,00,000
Risk Index 1.80 1.00 0.60
Minimum required rate of return of the firm is 15% and applicable tax rate is 40%. The risk
free interest rate is 10%. Required:
i) Find out the risk-adjusted discount rate (RADR) for these projects.
ii) Which project is the best?
3. Zero chance Ltd. Company manufactures gaming machines and is exploring the possibility
of making and selling a new machine.
Estimates have been made of the net cash flow (` in million) of the project, and of their
variability expressed as the standard deviation of the cash flows, as follows:
Year 0 1 2 3 4 5
Most likely value of the net cash flow (5) 1.3 1.8 2.1 1.4 1.7
Standard deviation 0 0.13 0.19 0.34 0.34 0.46
As an alternative to the risky investment in the new machine, Zero chance Ltd. is able to

invest the ` 5 million initial costs on the money markets, for which it would receive a five-
year annuity of ` 1.31926 million per year, commencing after one year.
The money market investment is virtually risk – free.
REQUIRED:
a) Calculate the NPV of the new machine project, using the risk free return as the discount
rate.
b) Calculate the standard deviation of the new machine project’s NPV.
c) Zero chance Ltd. has rules of thumb when analyzing risky investments. Its rules are
that the risky investment must have a most likely NPV of at least ` 1 million and that
there must be at least an 85% chance obtaining a positive NPV.
REQUIRED:
Assess the risky investments according to Zero chance Ltd.’s decision rules and recommend
whether it should be initiated.
4. Following are the estimates of the net cash flows and probability of a new project of M/s X
Ltd.:
Year P=0.3 P=0.5 P=0.2
Initial investment 0 4,00,000 4,00,000 4,00,000
Estimated net after tax cash inflows per year 1 to 5 1,00,000 1,10,000 1,20,000
Estimated salvage value (after tax) 5 20,000 50,000 60,000
Required rate of return from the project is 10%. Find:

i) The expected NPV of the project.
ii) The best case and the worst case NPVs.
iii) The probability of occurrence of the worst case if the cash flows are perfectly
dependent overtime and independent overtime.
iv) Standard deviation and coefficient of variation assuming that there are only three
streams of cash flow, which are represented by each column of the table with the given
probabilities.
v) Coefficient of variation of X Ltd. on its average project which is in the range of 0.95 to
1.0. If the coefficient of variation of the project is found to be less risky than average,
100 basis points are deducted from the Company’s cost of Capital.
Should the project be accepted by X Ltd?

5. The Easygoing Company Limited is considering a new project with initial investment, for a
product “Survival”. It is estimated that IRR of the project is 16% having an estimated life of 5
year. Financial Manager has studied that project with sensitivity analysis and informed that
annual fixed cost sensitivity is 7.8416%, whereas cost of capital (discount rate) sensitivity is
60%. Other information available is:
Profit Volume Ratio (P/V) is 70%, Variable cost ` 60/- per unit Annual Cash Flow ` 57,500/-
Ignore Depreciation on initial investment and impact of taxation. Calculate
i) Initial Investment of the Project
ii) Net Present Value of the Project
iii) Annual Fixed Cost
iv) Estimated annual unit of sales
(v) Break Even Units Cumulative Discounting Factor for 5 year.
8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%

3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127
~*~*~*~*~BEST OF LUCK~*~*~*~*
C) Leasing Decisions
1) Sundaram Ltd. discounts its cash flows at 16% and is in the tax bracket of 35%. For the
acquisition of a machinery worth ` 10,00,000, it has two options – either to acquire the
asset by taking a bank loan @ 15% p.a. repayable in 5 yearly installments of ` 2,00,000
each plus interest or to lease the asset at yearly rentals of ` 3,34,000 for five (5) year. In
both the cases, the installment is payable at the end of the year. Depreciation is to be
applied at the rate of 15% using ‘written down value’ (WDV) method. You are required to
advise which of the financing options is to be exercised and why.
Year 1 2 3 4 5
P.V factor @ 16% 0.862 0.743 0.641 0.552 0.476
2) XYZ Ltd. requires an equipment costing `10,00,000; the same will be utilized over a period
of 5 year. It has two financing options in this regard:
i) Arrangement of a loan of ` 10,00,000 at an interest rate of 13 percent per annum; the
loan being repayable in 5 equal year end installments; the equipment can be sold at
the end of fifth year for ` 1,00,000.

ii) Leasing the equipment for a period of five year at an early rental of ` 3,30,000 payable
at the year end.
The rate of depreciation is 15 percent on Written down Value (WDV) basis, income tax rate
is 35 percent and discount rate is 12 percent.
Advise which of the financing options should XYZ Ltd. exercise and why?
3. M/s Gama & Co. is planning of installing a power saving machine and are considering
buying or leasing alternative. The machine is subject to straight-line method of
depreciation. Gama & Co. can raise debt at 14% payable in five equal annual
installments of ` 1,78,858 each, at the beginning of the year. In case of leasing, the
company would be required to pay an annual end of year rent of 25% of the cost of
machine for 5 years.
The Company is in 40% tax bracket. The salvage value is estimated at ` 24,998 at the end
of 5 years.
Evaluate the two alternatives and advise the company by considering after tax cost of
debt concept under both alternatives.
P.V. factors 0.9225, 0.8510, 0.7851, 0.7242, and 0.6681 respectively for 1 to 5 years.
4. Engineer Ltd. is in the business of manufacturing nut bolts. Some more product lines are
being planned to be added to the existing system. The machinery required may be bought
or may be taken on lease. The cost of machine is ` 20,00,000 having a useful life of 5 year
with the salvage value of ` 4,00,000 (consider short term capital loss/gain for the Income
tax). The full purchase value of machine can be financed by bank loan at the rate of 20%
interest repayable in five equal installments falling due at the end of each year.
Alternatively, the machine can be procured on a 5 year lease, year-end lease rentals
being ` 6, 00,000 per annum. The Company follows the written down value method of
depreciation at the rate of 25 per cent. Company’s tax rate is 35 per cent and cost of
capital is 14 per cent.
i) Advise the company which option it should choose – lease or borrow.
ii) Assess the proposal from the lessor’s point of view examining whether
leasing the machine is financially viable at 14 per cent cost of capital.
Detailed working notes should be given.
5. ABC Ltd. sells computer services to its clients. The company has recently completed a
feasibility study and decided to acquire an additional computer, the details of which
are as follows:
1) The purchase price of the computer is ` 2, 30,000; maintenance, property taxes and
insurance will be ` 20,000 per year. The additional expenses to operate t he computer

are estimated at ` 80,000. If the computer is rented from the owner, the annual
rent will be ` 85, 000, plus 5% of annual billings. The rent is due on the last day of
each year.
2) Due to competitive conditions, the company feels that it will be necessary to replace
the computer at the end of three year with a more advanced model. Its resale value is
estimated at ` 1, 10,000.
3) The corporate income tax rate is 50% and the straight line method of depreciation is
followed.
~*~*~*~*~BEST OF LUCK~*~*~*~*

FACTORING
1. A Ltd. has a total sale of ` 3.2 crores and its average collection period are 90 days. The past
experience indicates that bad-debt losses are 1.5% on Sales. The expenditure incurred by the
firm in administering its receivable collection efforts are ` 5, 00,000. A factor is prepared to
buy the firm’s receivables by charging 2% Commission. The factor will pay advance on
receivables to the firm at an interest rate of 18% p.a. after withholding 10% as reserve.
Calculate the effective cost of factoring to the Firm.
2. MSN Ltd. has total sales of ` 4.50 crores and its average collection period are 120 days. The
past experience indicates that bad debt losses are 2% on sales. The expenditure incurred by
the company in administering its receivable collection efforts are ` 6,00,000. A Factor is
prepared to buy the company’s receivables by charging 2% commission. The factor will pay
advance on receivables to the company at an interest rate of 18% per annum after
withholding 10 % as reserve. Calculate effective cost of factoring to the company.
3. Beans talk Ltd. manages its accounts receivable internally by its sales and credit
department. The cost of sales ledger administration stands at ` 10 crores annually. The
company has a credit policy of 2/10, net 30. Past experience of the company has been that
on an average 40 percent of the customers avail of the discount by paying within10 days
while the balance of the receivables are collected on average 90 days after the invoice
date. Bad debts of the company are currently 1.5 percent of total sales. The projected
sales for the next year are ` 1,000 crores.
Beans talk Ltd. finances its investment in debtors through a mix of bank credit and own
long- t e r m funds in the ratio of 70:30. The current cost of bank credit and long- t e r m
funds are 13 percent and 15 percent respectively.
With escalating cost associated with the in house management of debtors coupled with the
need to unburden the management with the task so as to focus on sales promotion, the
Company is examining the possibility of outsourcing its factoring service for managing
its receivable and has two proposals on hand with a guaranteed payment within 30 days.
The main elements of the Proposal from Fine bank Factors Ltd. are:
 Advance, 88 percent and 84% for the re course and none course arrangements.
 Discount charge in advance, 21 % for with re course and 22 % without recourse.
 Commission, 4.5 % without recourse and 2.5 percent with recourse. The main elements of the
Proposal from Rough bank Factors Ltd. are:
 Advance, 84 percent with recourse and 80 percent without recourse respectively.

 Discount charge upfront without recourse 21 & and with recourse 20 %.

 Commission upfront, without recourse 3.6 percent and with recourse 1.8 percent.
The opinion of the Chief Marketing Manager is that in the context of the fact or in
arrangement, his staff would be able exclusively focus on sales promotion which would
result in additional sales of 10% of projected sales. Kindly advice as a financial
consultant on the alternative proposals what advice would you give? Why?
~*~*~*~*~BEST OF LUCK~*~*~*~*

DIVIDEND POLICY
1. From the following information, ascertain whether the firm is following an optimal dividend
policy. Dividend paid (`):1,60,000; prices earnings (P/E) ratio = 10, PAT (`): 600,000, No. of
shares Outstanding of ` 100 each = 40,000. The firm is expected to maintain its rate of
return on fresh investment. What should be the P/E ratio at which dividend policy will have
no effect on the value of the share? Will your decision change if the P/E ratio is 5 instead of 10?
2. Mathew Information Ltd. had declared last year a dividend of ` 10 per share. Given that
management is keen to keep the payout ratio at 70%. This year the total earnings for the
company is ` 10 Crs. for 20,00,000 shareholders. If the company adjusts its speed of passing on
the dividend to shareholders as soon as earnings are booked to the extent of 50%, what will
be the dividend as per Linter’s Model that will be declared by Mathew Information Ltd. this
year?
3. Diamond Engineering Co. has 10,00,000 equity share outstanding at the start of the
accounting year 2003. The ruling market price per share is `150. The board of directors of
the company contemplates declaring ` 8 per share as dividend at the end of the year. The
rate of capitalization appropriate to the risk-class to which the company belongs is 12%
a) Based on Modigliani-Miller Approach, calculate the market price per share of the Co. when
the contemplated dividend is 1) declared 2) not declared.
b) How many new shares are to be issued by the company at the end of the accounting year
on the assumption that the net income for the year is ` 2 Crores? Investment budget is `
4 Crores and (1) the above dividends are distributed and (2) they are not distributed.
c) Show that the total market value of the shares at the end of the accounting year will
remain the same whether dividends are either distributed or not distributed.
d) Also find out the current market value of the firm under both the situations.
4. Abhishek Ltd. has a surplus cash of ` 80 lakhs and wants to distribute 30% of it to the
shareholders. The Co. decides to buy back shares. The finance manager of the Co. estimates
that its share price after repurchase is likely to be 10% above the buyback price, if the buyback
route is taken. The no. of shares outstanding at present is 10 lakhs and the current EPS is ` 3.
You are required to determine:
a) The price at which the shares can be repurchased if the market capitalization of the
company should be ` 180 lakhs after buyback.
b) The number of shares that can be repurchased.
c) The impact of share repurchase on the EPS, assuming the net income is same.

~*~*~*~*~BEST OF LUCK~*~*~*~*

TESTIMONIALS
“It was a jourey. From movie rating to CRISIL rating. From Zomato reviews to Stock Analysts reports. From discussing Cricket to
discussing Bitcoins.The various concepts linked with practical scenarios helped me not only to grasp syllabus related things
easily but also helped me to understand and analyse various practical things. Yes, academically Kunal Sir’s teachings has helped
me drastically. Not only in CA Final but also in CS Professional I was able to touch the 70 line. But as it is rightly said that educa-
tion is what remains when what has been learned has been forgotten, every concept learned with him is still fresh in my mind.
It was a great journey from being an AMATEUR to an ANALYST! Now, not only I am able to add CA prefix to my name but also
able to understand things in a broad spectrum. Things such as Brexit, SAARC relations, Investment Models, Currency devalua-
tion, Cut motions, Subprime Crisis and many other things which earlier were like Chinese for me. Lots of thanks to Kunal Sir. A
teacher who not just taught how to solve sums but who instilled a love for learning.”
Pratik Chowkekar
I was always scared of SFM and never thought I would score 81 in SFM. All thanks to Kunal Sir, the best SFM professor. His
global financial and political knowledge is very good. He will teach the more important thing in SFM paper that is how to read
the question and evaluate the answer. Thank you so much sir.
Alina Lopes
Attempted 80 marks SFM paper and scored 69. I have done Kunal sir's fast track course for SFM. And since then SFM became
my favourite subject. His teaching is totally different. I mean, he doesn't just stick to the syllabus. Learning from him is like you
are virtually entering into the market and dealing everything there. He doesn't just make your concepts clear but he also makes
sure that you become proficient in its practical aspect too. That is one of the reason, why I learnt SFM from him. The finance
subject becomes so easy that you can explain it to anyone. Most important, I attempted the paper of 80 marks and I scored 69.
The subject helped me to save my group and also to earn the CA prefix!
Anagha Patil
Best professor ever! Kunal sir makes the complicated concept so easy that you can solve any problem easily. He focuses on the
basics and that’s the best part. I scored 76 marks in SFM just because of him. My true idol Thanks a lot Kunal Sir..!!
Preksha Patel
Kunal sir's explanation of concepts was amazing and made SFM a cakewalk. I was a person who knew nothing and after
attending sir's 1 month batch there was a drastic change as I could completely connect the subject to the practical world.
Hence proved that the punch-line "from amateur to analyst" holds true. Thanks a lot sir as scoring 72 made me achieve my
dream of CA. In short, by joining Kunal Sir’s class there's an assured guarantee that one's future is in safe hands.
Alina Lopes
Kunal sir's SFM class makes you fall in love with the subject. I have attended his pendrive classes. He explains even the
complicated topics in simple and clear manner. His examples and ability to connect the topics to current market scenarios
makes the class interesting. He also teaches how to analysis and understand the questions. Special care is taken with regard
to presentation of answers and to improve speed. After attending the classes you become confident to face the exams. Thank
you sir for helping me score 73 in SFM.
Christeena Sebastian
By any chance you happened to be a math phobic or person who dislikes numbers, then Kunal Sir is the right person to go to
for SFM. I repose great trust in the teaching skills of Kunal Sir, solely because he knows his subject in enough depths to make
students understand it easily. I was a CS student, however, studied SFM with CA students and I passed this subject in one go.
Be sincere in your efforts and Sir is ready to help you pass with flying colours.
Niyati Panchal
Thanks for making this subject so much fun and easy. I scored 72 in SFM and had attended a fast track course. Awesome
conceptual clarity with best study material ever!
Smruti Shah
Kunal Sir's method of teaching is brilliant, he teaches the most complicated concepts in the simplest way possible. He contin-
uously links current affairs with SFM which makes studying and understanding the subject even more interesting. His focus
is to make sure that all his students think like analysts which ultimately helps scoring an exemption in SFM believable. Kunal
sir's teaching is highly recommended to every student aiming an exemption and best understanding of the subject
Yuti Mehta Sanghvi
Lots of Thanks to Kunal Sir, Despite May18 SFM being tricky paper, I managed to clear my CA with very good marks in SFM.
All the topics of SFM are superbly taught by giving in depth knowledge of the subject linking it with practical examples of
share markets, various economic policies etc. which made flow of learning very practical & making SFM concepts very strong.
Kunal sir is really a good motivator and equal attention is given to each & every student. He encourages involvement and
participation of every student to make SFM topics lively and easy to remember
Kevin Lodaya
Special thanks to Kunal Doshi sir got exemption in SFM by just revising once for 3 days. He is the best teacher for SFM. His
approach towards giving practical knowledge of stock markets, proving you the formula with their derivation makes it easy to
understand and remember the concepts. He proves the tag line of becoming amateur to analyst!
Smita Shah
Kunal Doshi Sir is the one you should go to if you not only want to score good in SFM but also learn new things. His teaching
style is very impressive and he won't let you feel bored anytime. Also he is just a call away just in case you want to clear your
doubts or even in exam time. He is also available on whatsapp which not every teacher does.
Sahil Kapoor
For Forex and Derivatives, No one comes close to Kunal Sir. Conceptually well versed and one will fall in love with the subject.
I just loved it, SFM plays a very big part for aggregate. Just join Kunal Sir’s class and love the journey! Definitely Good Marks
will follow.
Ashwin Sundaram
His conceptual teaching, linking a particular topic with the current market scenario, constant motivation, student wise atten-
tion and instant reply to all the doubts and queries of any student is something that will help you to achieve great marks in
SFM. Also the current affair updates with the international market make it interesting learning with Kunal Sir.
Jesal Chavda
Kunal Sir's methods of teaching makes us understand the toughest of concepts in a very simple way and he makes sure to
relate it with current affairs and also encourages to come up with different topics for discussion. If it’s SFM, it's definitely Kunal
Doshi.
Riddhi Dhakan

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About the Book

Finally, as part of the continuous process of upgrading and learning, if

Listed shares at Cost (ex-divided) 20

L Ltd 20,000 20.00 20.50

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6. Five portfolios experienced the following results during a 7- year period:

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2. X Co, Ltd, invested on 1.4.2009 in certain equity shares as below:

Probability Factor Price/Share of M Ltd Price/Share of N Ltd

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4. You are given the following information about ABC Ltd.

5. Mr. Ram is holding the following securities:

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Compute the following:

Period Return of security X (%) Return on Market Portfolio (%)

8. Following are the details of a portfolio consisting of three shares:

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Calculate the following:

The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.

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SECURITY ANALYSIS - EQUITY VALUATION

3) The following financial data relates to XYZ Ltd.

4) Seawell Corporation, a manufacturer of do-it-yourself hardware and housewares,

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7) A valuation done of an established company by a well-known analyst has estimated a value

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SECURITY ANALYSIS - BOND VALUATION

4. The following is the yield structure of AAA rated debenture:

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5. The following data are available for a bond:

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MERGERS AND ACQUISITIONS

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a) What is the swap ratio based on above weights?

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4. The following rates appear in the foreign exchange market:

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7. Given spot exchange rate $ 1 = FF 7.05. Complete missing entries.

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FOREX RISK MANAGEMENT

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4. An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three

And in the interbank market US dollars were quoted as under:

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Initial Margin Interest Rates in India

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6. BSE Index 5000

7. On Jan 1, 2013, investor has portfolio of 5 shares given as below:

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Expected price 120 140 160 180 190

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INTEREST RATE RISK MANAGEMENT

* Since Premium paid for Cap = Premium received for Floor

Reset Date LIBOR (%)

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