6 Additional Q in 5th Edition Book PDF

Additional Questions and
th
Answers in 5 Edition book
[CA Nagendra Sah]
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Additional Q in 5th Edition book Page 3
Chapter - 2
FOREIGN EXCHANGE EXPOSURE

AND RISK MANAGEMENT
PREMIUM/DISCOUNT, LOSS/GAIN, FORWARD CONTRACT HEDGE
Question No. 2J [July-2021-New-8M]
XP Pharma Ltd., has acquired an export order for 10 million for formulations to a European company. The Company
has also planned to import bulk drugs worth  5 million from a company in UK. The proceeds of exports will be
realized in 3 months from now and the payments for imports will be due after 6 months from now. The invoicing
of these exports and imports can be done in any currency i.e. Dollar, Euro or Pounds sterling at company's choice.
The following market quotes are available.
Spot Rate j
Annualized Premium
/$ 67.10/67.20 $ - 7%
/Euro 63.15/63.20 Euro – 6%
/Pound 88.65/88.75 Pound – 5%
Advice XP Pharma Ltd. about invoicing in which currency.
(Calculation should be upto three decimal places).
Solution: (i)

(ii)
CROSS RATE
Question No. 6I [MTP-May-2021-New/Old-10M]
On 1st February 2020, XYZ Ltd. a laptop manufacturer imported a particular type of Memory Chips from SKH
Semiconductor of South Korea. The payment is due in one month from the date of Invoice, amounting to 1190
Million South Korean Won (SKW).
Following Spot Exchange Rates (1st February) are quoted in two different markets:
USD/ INR 75.00/ 75.50 in Mumbai
USD/ SKW 1190.00/ 1190.75 in New York
Since hedging of Foreign Exchange Risk was part of company’s strategic policy and no contract for hedging in
SKW was available at any in-shore market, it approached an off-shore Non- Deliverable Forward (NDF) Market
for hedging the same risk.
In NDF Market a dealer quoted one-month USD/ SKW at 1190.00/1190.50 for notional amount of USD 100,000
to be settled at reference rate declared by Bank of Korea.
After 1 month (1st March 2020) the dealer agreed for SKW 1185/ USD as rate for settlement and on the same day
the Spot Rates in the above markets were as follows:
USD/ INR 75.50/ 75.75 in Mumbai
USD/ SKW 1188.00/ 1188.50 in New York
Analyze the position of company under each of the following cases, comparing with Spot Position of 1st February:
(i) Do Nothing.
(ii) Opting for NDF Contract.
Note: Both Rs./ SKW Rate and final payment (to be computed in Rs. Lakh) to be rounded off upto 4 decimal
points.
Solution: (i)

(ii)
RETURN FROM FOREIGN SECURITY

Question No. 9.3 [July-2021-Old-6M]
Mr. Mammen, an Indian investor invests in a listed bond in USA. If the price of the bond at the beginning of the
year is USD 100 and it is USD 103 at the end of the year. The coupon rate is 3% payable annually.
Find the return on investment in terms of home country currency if:
(i) USD is Flat.
(ii) USD appreciates during the year by 3%.
(iii) USD depreciates during the year by 3%.
(iv) Indian Rupee appreciates during the year by 5%.
(v) Will your answer differ if Mr. Mammen invests in the bond just before the interest payable.
Solution:

EARLY DELIVERY/EXECUTION OF FORWARD CONTRACT

Question No. 18.1 [July-May-2021-Old-10M] [Same as Q.No. 18A-only point (ii) is extra]
On 1st October, 2020 Mr. Guru, an exporter, enters into a forward contract with the Bank to sell USD 1,00,000 on
31st December 2020 at INR/USD 75.40. However, at the request of the importer, Mr. Guru received the amount
on 30th November, 2020. Mr. Guru requested the bank take delivery of the remittance on 30th November, 2020
i.e., before due date.
The inter-bank rate on 30th November 2020 was as follows:
Spot INR/USD 75.22-75.27
One Month Premium 10/15
Assume 365 days in a year.
(i) If bank agrees to take early delivery, then what will be net inflow to Mr. Guru assuming that the
prevailing prime lending rate is 18%. Per annum.
(ii) If Mr. Guru can deploy these funds in USD, he gets return at the rate of 3% per annum. Which is better?
Why?
Solution: (i)

(ii)
Question No. 18.2 [MTP-May-2021-New-8M]

On 1 October 2019 Mr. X an exporter enters into a forward contract with a BNP Bank to sell US$ 1,00,000 on 31
December 2019 at Rs. 70.40/$ and bank simultaneously entered into a cover deal at Rs. 70.60/$. However, due to
the request of the importer, Mr. X received amount on 28 November 2019. Mr. X requested the bank to take delivery
of the remittance on 30 November 2019 i.e., before due date. The inter-banking rates on 28 November 2019 were
as follows:
Spot 70.22/70.27
One Month Swap Points 15/10
If bank agrees to take early delivery, then determine the net inflow to Mr. X assuming that the prevailing prime
lending rate is 10% and deposit rate is 5%.
Note:
(i) While exchange rates to be considered up to two decimal points the amount to be rounded off to Rupees
i.e., no paisa shall be involved in computation of any amount.
(ii) Assume 365 days a year
Solution: Bank will buy from customer at the agreed rate of Rs. 70.40. In addition to the same if bank will
charge/ pay swap difference and interest on outlay/inlay in funds.
(i)

(ii)
(iii)
(iv)

Chapter - 3
MUTUAL FUND
RETURN FROM DIVIDEND REINVESTMENT PLAN
Question No. 3B [July-2021-Old-5M]
The Asset Management Company of the mutual fund (MF) has declared a dividend of 9.98% on the units under
the dividend reinvestment plan for the year ended 31 st March, 2021. The investors are issued additional units
for the dividend at the rate of closing Net Asset Value (NAV) for the year as per the conditions of the scheme.
The closing NAV was  24.95 as on 31st March, 2021. An investor Mr. X who is having 20,800 units at the
year-end has made an investment in the units before the declaration of the dividend and at the rate of opening
NAV plus an entry load of 0.04. The NAV has appreciated by 25% during the year.
Assume the face value of the unit as 10.00.
You are required to calculate:
(i) Opening NAV; (ii) Number of the units purchased; (iii) Original amount of the investment.
Solution: (i)
(ii)

(iii)
NAV AND RETURN

Question No. 5.7 [July-2021-Old-4M] [Same as bonus plan of Q. 5.6]
M/s. Strong an AMC has floated a dividend bonus plan on 1 st April, 2016 at a certain net asset value (NAV).
The fund has a robust growth and has declared a bonus of 1:5 (1 bonus unit for 5 right units held) on 30 th
September, 2017 and a second bonus of 1:4 (1 bonus unit for 4 right units held) on 30 th September 2019. The
fund, as on 31st March 2021, has generated an average yield of 17.5%.
Mr. Optimistic has made an investment of 16 lakhs in the plan before the declaration of the first bonus and
remain invested thereafter.
The following information is also available:
Date 01.04.2016 30.09.2017 30.09.2019 31.03.2021
NAV () ? 85 92 100
You are required to advise to Mr. Optimistic the opening NAV, which is required by him to calculate the
capital appreciation.
Solution:

Chapter - 4
Derivative Analysis and Valuation
No New Question Added
Chapter - 5
PORTFOLIO MANAGEMENT
CAPITAL ASSETS PRICING MODEL
Question No. 6AA [July-2021-Old-10M]
Mr. X is having 1 lakh shares of M/s. Kannyaka Ltd. The beta of the company is 1.40.
Mr. Y a financial advisor has suggested having the following portfolio:
Security Beta % Holding
S 1.20 10
K 0.75 10
P 0.40 30
D 1.40 50
100
Market Return is 12%
Risk free rate is 8%
You are required to calculate the following for the present investment and suggested portfolio:
(i) What is the expected return based on CAPM and also
(1) If the market goes up by 2.5%?
(2) If the market goes down by 2.5%
(3) If the market gives Negative Returns of 2.5%
(ii) If the probability of market giving negative return is more, please advise Mr. X whether to continue the
holdings of M/s. Kannyaka Ltd. or to buy the portfolio as per the suggestion of Mr. Y. If so, why?

Solution:
Portfolio Beta is 1.015
(i)

(iii) If the probability of market giving negative return is more, It is advisable to Mr. X to buy the
portfolio suggested by Mr. Y because Beta of the porrtfolio is less than of Kannayaka Ltd.
CONSTRUCTION OF PORTFOLIO AS PER INVESTMENT OBJECTIVE

Question No. 13E [RTP-May-2021-New]
The Following data relate to A Ltd.’s Portfolio:
Shares X ltd Y ltd Z ltd
No. of Shares (lakh) 6 8 4
Price per share () 1000 1500 500
Beta 1.50 1.30 1.70
The CEO is of opinion that the portfolio is carrying a very high risk as compared to the market risk and hence
interested to reduce the portfolio’s systematic risk to 0.95. Treasury Manager has suggested two below mentioned
alternative strategies:
(i) Dispose off a part of his existing portfolio to acquire risk free securities, or
(ii) Take appropriate position on Nifty Futures, currently trading at 8250 and each Nifty points
multiplier is  210.
You are required to:
(a) Interpret the opinion of CEO, whether it is correct or not.
(b) Calculate the existing systematic risk of the portfolio
(c) Advise the value of risk-free securities to be acquired,
(d) Advise the number of shares of each company to be disposed off,
(e) Advise the position to be taken in Nifty Futures and determine the number of Nifty contracts to be
bought/sold; and
(f) Calculate the new systematic risk of portfolio if the company has taken position in Nifty Futures and there is
2% rise in Nifty.
Note: Make calculations in  lakh and upto 2 decimal points.
Solution: Yes, the apprehension of CEO is correct as the current portfolio is more riskier than market as
(a) the beta (Systematic Risk) of market portfolio is as computed as follows:

(b) Since the Beta of existing portfolio is 1.40, the systematic risk of the current portfolio is 1.40.
(c)
Shares to be disposed off to reduce beta (20000 × 32%)  6,400 lakh and Risk Free securities
to be acquired for the same amount.
(d)
(e)
(f)

Chapter – 6
SECURITY VALUATION
BOND DURATION, BOND VOLATILITY & BOND CONVEXITY
An investor has recently purchased substantial number of 7 year 6.75%, 1,000 bond with 5% premium payable
on maturity at a required Yield to Maturity (YTM) of 9%. However, due to a financial crunch he is looking to sell
these bonds and has got a proposal from another investor, who is willing to purchase these bonds by shelling out a
maximum amount of  897 per bond. Investors follow intrinsic value method for valuation of bonds.
(i) You are required to determine
(1) The Market Price, Duration and Volatility of the bond and
(2) Required YTM of the new investor
(ii) What is relationship between the price of the bond and YTM?
Period (t) 1 2 3 4 5 6 7
PVIF (9%, t) 0.917 0.842 0.772 0.708 0.650 0.596 0.547
Solution: (i)

(ii) Relationship between the price of the bond & YTM is opposite or inverse.

VALUE OF EQUITY SHARE [CONSTANT DIV GROWTH, PE MULTIPLE APPROACH]

Question No. 20Q [July-2021-Old-5M]
NM Ltd. (NML) is aspiring to enter the capital market in a three years' time. The Board wants to attain the target
price of 70 for its shares at the end of three years. The present value of its shares is  52.03. The dividend is
expected to grow at a rate of 15% for the next three years. NML uses dividend growth model for its projections.
The required rate of return is 15%.
You are required to calculate the amount of dividend to be declared by the board in the base year so as to achieve
the target price.
Period (t) 1 2 3
PVIF (15%, t) 0.8696 0.7561 0.6575
Solution:
Question No. 20.12 [MTP-May-2021-New-8M]

You are interested in buying some equity stocks of RK Ltd. The company has 3 divisions operating in different
industries. Division A captures 10% of its industries sales which is forecasted to be Rs. 50 crores for the industry.
Division B and C captures 30% and 2% of their respective industry's sales, which are expected to be Rs. 20 crore
and Rs. 8.5 crore respectively. Division A traditionally had a 5% net income margin, whereas divisions B and C
had 8% and 10% net income margin respectively. RK Ltd. has 3,00,000 shares of equity stock outstanding, which
sell at Rs. 250.
The company has not paid dividend since it started its business 10 years ago. However, from the market sources
you come to know that RK Ltd. will start paying dividend in 3 years’ time and the pay-out ratio is 30%. Expecting
this dividend, you would like to hold the stock for 5 years. By analysing the past financial statements, you have
determined that RK Ltd.'s required rate of return is 18% and that P/E ratio of 10 for the next year and on ending P/E
ratio of 20 at the end of the fifth year are appropriate.
Evaluate:
(i) Whether you will be in purchasing RK Ltd. equity at this time based on your one-year forecast?
(ii) Price you will like to pay for the stock of RK Ltd if you expect earnings to grow @ 15% continuously.
Ignore taxation.
PV factors are given below:
Years 1 2 3 4 5
PVIF@ 18% 0.847 0.718 0.609 0.516 0.437

Solution:
(i)
(ii)
SHARE PRICE AFTER BUYBACK AND BONUS ISSUE

SM Limited has a market capitalization of  3,000 crore and the current earnings per share (EPS) is  200 with a
price earnings ratio (PER) of 15. The Board of directors is considering a proposal to buy back 20% of the shares
at a premium which can be supported by the financials of the company. The Boards expects post buy back market
price per share (MPS) of  3057. Post buy back PER will remain same. The company proposes to fund the buy
back by availing 8% bank loan since available resources are committed for expansion plans.
Applicable income tax rate is 30%.
(i) The interest amount which can be paid for availing the bank loan,
(ii) The loan amount to be raised and
(iii) The premium per share and percentage premium paid over the current MPS.
Solution:
COST OF GDR
M/s. Raghu Ltd. is interested in expanding its operation and planning to. install manufacturing plant at US. It
requires 8.82 million USD (net of issue expenses/ floatation cost) to fund the proposed project. GDRs are
proposed to be issued to finance this project. The estimated floatation cost of GDRs is 2%.
Additional information:
(i) Expected market price of share at the time of issue of GDR is 360 (Face Value 100)
(ii) Each GDR will represent two underlying Shares.
(iii) The issue shall be priced at 10% discount to the market price.
(iv) Expected exchange rate is 1NR/USD 72.
(v) Dividend is expected to be paid at the rate of 20% with growth rate of 12%.
(1) You, as a financial consultant, are required to compute the number of GDRs to be issued and cost of
the GDR.
(2) What is your suggestion if the company receives an offer from a US Bank willing to provide an
equivalent loan with an interest rate of 12%?
(3) How much company can save by choosing the option as recommended by you?

Solution:
EARNING BASED MODEL (GORDON’S MODEL, WALTER MODEL)

Question No. 25.8 [RTP-May-2021-Old] [Similar to Q.25A]
The following information pertains to Golden Ltd:
Profit before tax  75 Crore

Tax rate 30%
Equity Capitalization Rate 15%
Return on investment (ROI) 18%
Retention ratio 80%
Number of shares outstanding 75,00,000
The market price of the share of the company in the bull market was somewhere around  2100 per share. Advice,
whether the share of the Golden Ltd. should be purchased or not. Further, also suggest the form of Market prevalent
as per EMH Theory.
Note: Use Gordon’s Growth Model.

Solution:
RIGHT ISSUE
Question No. 27C [July-2021-Old-4M]
Aggressive Ltd., is proposing to fund its expansion plan of 12 crore by making a rights issue. The current
market price (CMP) is  40. The Board is willing to offer a discount of 20% on the CMP for the rights issue. The
Board is also desirous that the fall in Ex - right price of the shares be restricted to 10% of CMP.
(i) The number of new equity shares to be offered for each rights held,
(ii) Theoretical value of right and
(iii) The total number of equity shares to be issued.
Solution: (i)
(ii) Theoretical Value of Right =  36 -  32 =  4

(iii) No. of equity share to be issued =  12 𝐶𝑟𝑜𝑟𝑒 = 37,50,000 or 0.375 shares
 32

Chapter-6 [Unit-III]
MONEY MARKET INSTRUMENTS
MONEY MARKET INSTRUMENTS

Question No – 32K [July-2021-Old-5M]
The Bank BK enters into a Repo for 9 days with Bank NE in 6% Government bonds 2022 for an amount of  2
crores. The other relevant details are as follows:
First Leg Payment (Start Proceed)  2,00,06,750

Second Leg Payment (Repayment Proceed)  2,00,31,759
Initial Margin 1.25%
Days of accrued interest 240
Assume 360 days in a year.
(i) Repo Rate
(ii) Dirty Price and
(iii) Clean Price.
Solution: (i)

(ii)
(iii)
Chapter - 7
MERGERS, ACQUISITIONS &
CORPORATE RESTRUCTURING
Question No. 41 [July-2021-New-8M]
Long Ltd., is planning to acquire Tall Ltd., with the following data available for both the companies:
Long Ltd Tall Ltd
Expected EPS  12 5
Expected DPS  10 3
No. of Shares 30,00,000 18,00,000
Current Market Price of Share  180  50
As per an estimate Tall Ltd., is expected to have steady growth of earnings and dividends to the tune of 6% per
annum. However, under the new management the growth rate is likely to be enhanced to 8% per annum without
additional investment.
You are required to:
(i) Calculate the net cost of acquisition by Long Ltd., if  60 is paid for each share of Tall Ltd.
(ii) If the agreed exchange ratio is one share of Long Ltd., for every three shares of Tall Ltd., in lieu of
the cash acquisition as per (i) above, what will be the net cost of acquisition?
(iii) Calculate Gain from acquisition.

Solution: (i)
(ii)
(iii)

Chapter - 8
INTEREST RATE RISK MANAGEMENT
CALCULATION OF FORWARD INTEREST RATE

Question No. 1.4 (Similar to 1B) [MTP-May-2021-New/Old-8M]
ABC Ltd. wants to issue 9% Bonds redeemable in 5 years at its face value of Rs. 1,000 each.
The annual spot yield curve for similar risk class of Bond is as follows:
Year Interest Rate
1 12%
2 11.62%
3 11.33%
4 11.06%
5 10.80%
(i) Evaluate the expected market price of the Bond if it has a Beta value of 1.10 due to its popularity because
of lesser risk.
(ii) Interpret the nature of the above yield curve and reasons for the same.
Note: Use PV Factors upto 4 decimal points and value in Rs. upto 2 decimal points.
Solution: (i)

(ii) The given yield curve is inverted yield curve.

The main reason for this shape of curve is expectation for forthcoming recession when investors
are more interested in Short-term rates over the long term.
INTEREST RATE FUTURE

Question No. 4B [MTP-May-2021-New-8M]
In March 2020, XYZ Bank sold some 7% Interest Rate Futures underlying Notional 7.50% Coupon Bonds. The
exchange provides following details of eligible securities that can be delivered:
Security Quoted Price of Bonds Conversion Factor
7.96 GOI 2023 1037.40 1.0370
6.55 GOI 2025 926.40 0.9060
6.80 GOI 2029 877.50 0.9195
6.85 GOI 2026 972.30 0.9643
8.44 GOI 2027 1146.30 1.1734
8.85 GOI 2028 1201.70 1.2428
Recommend the Security that should be delivered by the XYZ Bank if Future Settlement Price is 1000.
Solution: The XYZ Bank shall choose those CTD (Cheapest-to-Deliver) Bonds from the basket of
deliverable Bonds which gives maximum profit computed as follows:
Profit = Future Settlement Price × Conversion Factor – Quoted Spot Price of Deliverable Bond
Accordingly, the profit of each bond shall be computed as follows:
Since maximum profit to the Bank is in case of 6.80 GOI 2029, same should be opted for.

Chapter - 9
CORPORATE VALUATION
VALUE OF COMPANY/SHARE
Question No. 1I [RTP-May-2021-New/Old]
Sun Ltd. recently made a profit of  200 crore and paid out  80 crores (slightly higher than the average paid in
the industry to which it pertains). The average PE ratio of this industry is 9. The estimated beta of Sun Ltd. is 1.2.
As per Balance Sheet of Sun Ltd., the shareholder’s fund is  450 crore and number of shares is 10 crores. In case
the company is liquidated, building would fetch  200 crores more than book value and stock would realize  50
crores less.
The other data for the industry is as follows:
Projected Dividend Growth 4%
Risk Free Rate of Return 6%
Market Rate of Return 11%
Calculate the valuation of Sun Ltd. using

(a) P/E Ratio
(b) Dividend Growth Model
(c) Book Value
(d) Net Realizable Value
Solution:

Chapter - 10
INTERNATIONAL FINANCIAL
MANAGEMENT
Chapter - 11
SECURITY ANALYSIS
Chapter - 12
RISK MANAGEMENT

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Additional Questions and

Stay connected on YouTube and Telegram for future updates:

// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

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FOREIGN EXCHANGE EXPOSURE

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RETURN FROM FOREIGN SECURITY

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EARLY DELIVERY/EXECUTION OF FORWARD CONTRACT

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Question No. 18.2 [MTP-May-2021-New-8M]

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NAV AND RETURN

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Portfolio Beta is 1.015

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CONSTRUCTION OF PORTFOLIO AS PER INVESTMENT OBJECTIVE

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VALUE OF EQUITY SHARE [CONSTANT DIV GROWTH, PE MULTIPLE APPROACH]

Question No. 20.12 [MTP-May-2021-New-8M]

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SHARE PRICE AFTER BUYBACK AND BONUS ISSUE

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EARNING BASED MODEL (GORDON’S MODEL, WALTER MODEL)

Profit before tax  75 Crore

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(ii) Theoretical Value of Right =  36 -  32 =  4

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MONEY MARKET INSTRUMENTS

First Leg Payment (Start Proceed)  2,00,06,750

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INTEREST RATE RISK MANAGEMENT

CALCULATION OF FORWARD INTEREST RATE

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(ii) The given yield curve is inverted yield curve.

INTEREST RATE FUTURE

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Calculate the valuation of Sun Ltd. using

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