solution to may 19 new ca final sfm by ca praviin … · solution to may 19 new ca final sfm by ca...

CA PRAVIIN MAHAJAN SFM CLASSES 1/30, Lalita Park, Laxmi Nagar, near laxmi nagar 9354 720 515 Gurudwara, Opposite Metro Pillar 24, NewDelhi

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SOLUTION TO MAY 19 NEW CA FINAL SFM

By CA PRAVIIN MAHAJAN

(Practical Questions)

Conclusion: New syllabus paper for SFM was relative simple with almost all

repetitive questions, barring 1 question of External commercial borrowing and

new adjustments in couple of questions. Distinction can be easily claimed in

this paper.

Questions Chapter Marks

Q1a Corporate val ( Val of business)

Economic value added 8

Q1b Security val (Dividend) 8

Q1c Theory 4

Q2a Merger and Acquisition 8

Q2b security valuation

“ Buy Back of Shares” 8

Q2c Theory 4

Q3a Portfolio Management 8

Q3b Derivative 8

Q3c Theory 4

Q4a Mutual Fund 8

Q4b Corporate Valuation 8

Q4c Theory 4

Q5a Derivative 8

Q5b Forex 8

Q5c Theory 4

Q6a Forex 8

Q6b Forex

“ International financial Management” 8

Q6c Theory 4

Chapter wise coverage

1. Derivative 16

2. Forex 24

3. Corporate Valuation 16

4. Security Valuation 16

5. Mutual Fund 8

6. Portfolio Management 8

7. Merger and Acquisition 8


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Q1a. Compute economic value added (EVA) of Goodluck Limited. from the following

information

Profit and loss statement

Particulars Rs (in lacs)

a Income

Revenue from operations 2000

b Expenses

Direct expenses 800

Indirect expenses 400

c. Profit before interest and tax (a – b) 800

d. interest 30

e. profit before tax (c – b) 770

f Tax 231

g Profit after tax (e – f) 539

Balance sheet

Particulars Rs in lakh

Equity and liabilities

a Shareholders fund

Equity share capital 1000

Reserves and surplus 600

b Non current liabilities

Long term borrowings 200

c Current liabilities 800

Total 2600

Assets :

a. Non current assets 2000

b. Current assets 600

Total 2600

Other information

i. Cost of debt is 15% ii. cost of equity (i.e shareholders expected return) is 12% iii. tax rate is 30% iv. bad debts provision of Rs 40 lacs is included in indirect expenses and Rs 40

lacs reduced from receivables in current assets

Author’sNote : Simple question of EVA with adjustment of Provisions

Answer: EVA = EBIT ( 1 – Tax rate) - WACC x Capital Employed

Adjusted EBIT = EBIT + Provision for Bad debts

= 800 + 40

= 840


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Capital employed = Equity share capital + reserves + Provisions +

long term borrowings

= 1000 + 600 + 40 + 200

= 1840

WACC = WE KE + WD Kd

= 1640

1840 x 12 +

200

1840 x 15

= 12.33 %

EVA = 840 ( 1 – 0.30) - 0.1233 x 1840

= 588 - 226.87

= 361.13

b. The shares of G Limited are currently being traded at Rs 46.The company published

its results for the year ended 31st March 2019 and declared a dividend of Rs 5. The

company made a return of 15% on its capital and expect that to be the norm in which

it operates. G limited also expects the dividends to grow at 10% for the first three

years and thereafter at 5%

You are required to advise whether the share of the company is being traded at a

premium or discount

PVIF at 15% for the next 3 years is 0.870 , 0.75 6 and 0.658 respectively.

Author’s Note: Simple question of dividend.

Answer: P0 = Rs 46

D0 = Rs 5 g = 1 - 3years = 10%

Ke = 15% 4 and above = 5%

Intrinsic value of share is present value of all future cash outflows.

P0 = Present value of dividend from + Present value of CMP

1 to 3 years at end of 4th year.

Statement of Market Price

Period Dividend Factor Present value

1 5.5 0.870 4.785

2 6.05 0.756 4.574

3 6.66 0.658 4.382

4 6.993

0.15 − 0.05 = 69.93 0.658 46.014

Current Market Price 59.76

Since MP < Intrinsic value, so investor should purchase the share

c. State the important features of national pension scheme. (NPS)


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2a Given is the following information

Day limited Night limited

Net earnings Rs 5 crores Rs 3.5 crores

No. of equity shares 10 lakh 7 Lakh

The shares of day Limited and night Limited trade at 20 and 15 times their

respective PE ratios.

Day limited considers taking over night Limited by paying Rs 55 crores considering that the market price of Night Limited reflects its true value. It is considering both the following options. i. takeover is funded entirely in cash ii. takeover is funded entirely in stock You are required to calculate the cost of the takeover and advise day Limited on the best alternative. Author’s Note : Basic question of True cost of Merger, Merger and Acquisition

Answer :

PE ratio of Night Ltd = 15

EPS of Night 3.5 𝑐𝑟𝑜𝑟𝑒𝑠

7 𝑙𝑎𝑘ℎ = 50

MP of night PE x EPS = 15 x 50 = 750 Market cap of Night = 7lakh x 750 = 52 .50 crore PE ratio of Day Ltd = 20

EPS of Day Ltd 5 𝑐𝑟𝑜𝑟𝑒𝑠

10𝑙𝑎𝑘ℎ = 50

MP of Day Ltd = 20 x 50 = 1000 If takeover is funded entirely in cash True Cost of Merger = Amount paid to - Pre value of

vendor company vendor company = 55 crore - 52.5 crore = 2.5 crore If takeover is funded entirely in stock

True Cost of Merger = Amount paid to - Pre value of vendor company vendor company

= 55 crore - 52.5 crore = 2.5 crore

Day Ltd Paid 55 crores, whether it is by cash or by stock, so true cost of merger will be same.


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b. ABB Limited has a surplus cash balance of rupees 180 lacs and wants to distribute 50% of it to the equity shareholders. The company decides to buy back equity shares. The company estimates that its equity share price after re-purchase is likely to be 15% above the buyback price, if the buyback route is taken other information is as under:

i. number of equity shares outstanding at present (face value Rs 10

each) is 20 lacs

ii. The current EPS is Rs 5

You are required to calculate the following

i. the price at which the equity shares can be repurchased if market

capitalisation of the company should be rupees 400 lacs after buyback

ii. number of equity shares that can be reproduced 3 the impact of equity

shares repurchase on the EPS assuming that the net income remains

unchanged

Author’s note: Simple repetitive question of Buy back of shares from security

valuation.

Answer Surplus cash = 180 lacs

Distributed = 50% of 180 lac = 90 lac

a. Market cap after buyback = No. of shares after Buyback x MP after buyback . .

400 lac = ( 20,00,000 - 90,00,000

𝑥 ) 1.15x

400 lac = 23 lac x – 103.5 lac

296.5 lac = 23 lac x

X = 12.891

a. No. of shares bought = 90,00,000

12.891 = 6,98,145 shares

b. EPS after buyback = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝑁𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘

= 20 𝑙𝑎𝑐 𝑋 5

20,00,000−6,98,145 = 7.681

After buyback EPS per share is increased by 2.681/5 = 53.62%

c. List the main applications of value at risk VAR.

3a Following are the details of a Portfolio consisting of three shares

Shares portfolio beta expected total

weight Return Variance

X Limited 0.3 0.5 15 0.020

Y Limited 0.5 0.60 16 0.010

Z Limited 0.2 1.20 20 0.120

Standard deviation of market portfolio return is 12%

You are required to compute the following

1 the portfolio beta

2 residual variance of each of the three shares

3 portfolio variance using Sharpe index model.


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Author’s Note: Simple question of Portfolio management

Answer:

i. Beta of portfolio is weighted average of Beta of each security in portfolio

Statement of Portfolio Beta

Shares weight Beta W x Beta

X 0.3 0.50 0.15

Y 0.5 0.6 0.30

Z 0.2 1.20 0.24

0.69

ii. Residual variance of Each of 3 shares

Residual variance = Total variance - Systematic Risk ( β2. σ2M)

X = 0.020 x 100 x 100 - 0.52 + 122 = 164

Y = 0.010 x 100 x 100 - 0.62 + 122 = 48.16

Z = 0.120 x 100 x 100 - 1.202 + 122 = 992.64

iii. Portfolio Variance = Systematic Risk Portfolio + Unsystematic risk

Portfolio

= β2𝜎𝑀2 + 𝑊𝑋

2USRx + 𝑊𝑌2USRy + 𝑊𝑍

2USRZ

=0.692 x 122 + 0.32 164 + 0.52 x 48.16 + 0.22 x 992.64

= 68.56 + 14.76 + 12.04 + 39.71

= 135.07

b. Mr John established the following spread on the TTK Limited stock:

i. Purchased one 3 month put option with a premium of Rs15 and an exercise

price of rupees 900.

ii. Purchased one 3 month call option with a premium of Rs 90 and exercise

price of Rs 1100.

TTK Limited stock is currently selling at Rs 1,000. Calculate gain or loss if the price of

stock of TTK Limited

i. Rs 1000 after 3 months

ii. Falls to Rs 700 after 3 months

iii. Reasons to Rs 1200 after 3 months assume the size of option is 200 shares

of TTK Limited

Author’s Note: Simple repetitive question of derivative. Q14 of Book, Pg 1.9

Answer

Call Put

Period 3 month 3 month

Strike price 1100 900

Premium 90 15


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i. If Price of TTK remains Rs 1000 after 3 months

Statement of Profit/Loss

Rs

Premium Paid

Call 90

Put 15

Call MP 1000

EP 1100

Since MP < EP, call will lapse -

Put MP 1000

EP 900

Since EP< MP,Put will lapse -

Loss of investor 105

Total loss on 1200 options 1200 x 105 1,26,000

ii. If Price of TTK after 3 months is 700

Statement of Profit/loss

Premium Paid Rs

Call 90

Put 15

Call MP 700

EP 1100

Since MP < EP, call will Lapse -

Put EP 900

MP 700

Since EP > MP, Holder will exercise Put. Holder

will buy share from market @ 700 and sell to

writer at 900. Profit on Put 200

Net Profit 95

Total Profit on 1200 options 1200 x 95 1,14,000

iii. If Market Price of TTK after 3 months is 1200

Statement of Profit/Loss

Rs

Premium Paid

Call 90

Put 15

Call

MP 1200

EP 1100

Since MP > EP, Holder will exercise

Call. Holder will buy share from writer for Rs 1100

And sell in market for 1200. Profit on call 100

Loss to investor 5

Total loss on 1200 option 1200 x 5 6000


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c. Briefly explain the steps involved in the mechanism of securitization.

4a A mutual fund company introduces to schemes - Dividend plan and Bonus plan the

face value of the unit is Rs10 on 1-4 -2014. Mr R invested Rs Lakh in Dividend plan

and Rs10 lakh in bonus plan. The NAV of dividend plan is Rs 46 and NAV of Bonus

plan is Rs 42. Both the plans matured on 31-03-2019. The particulars of dividend and

bonus declared over the period are as follows;

Date Dividend Bonus NAV of NAV of

% ratio dividend plan bonus plan

Rs Rs

31-12- 2014 12% - 47.0 42.0

30-09-2015 1:4 48.0 43.0

31-03- 2016 15% - 49.5 41.5

30-09-2017 1:6 50.0 44.0

31-03-2018 10% - 48.0 43.5

31-03-2019 - 49.0 44.0

You are required to calculate the effective yield per annum in respect of the above

two plans.

Author’s Note: Simple Repetitive question of Mutual Fund From Manual.

Answer:

Plan A : Dividend Plan

Amount Invested: Rs 5,00,000

NAV on date of Investment Rs 46

Number of Units purchased 10,869.57

Statement of Units in hand on 31-03-19

Date Op.Units Dividend NAV Units purchased Cl Units

1/4/14 - - 46 10,869.57 10,869.57

31/12/14 10,869.57 13,043.48 47 277.52 11,147.09

31/03/16 11,147.09 16,720.64 49.5 337.79 11,484.88

31/03/18 11,484.88 11,484.88 48 239.27 11,724.15

Statement of annual return

Cash received on sale of units 11,724.15 x 49 574483.35

Cost of Investments 5,00,000

Profit 74,483.35

Rate of Return = 74,483.35

5,00,000 x 100 x

1

5 = 2.98% p.a

Plan B: Bonus Plan

Amount Invested 1,00,000

NAV 42

Units Purchased 23,809.52


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Statement of Units on 31/03/19

Date Op Units Bonus Cl Units

1/4/14 - - 23,809.52

30/9/15 23,809.52 5952.38 29761.9

30/09/17 29761.9 4960.32 34,722.22

Statement of Annual Return

Cash received on sale of units 34,722.22 x 44 1527778

Cost of Investment 10,00,000

5,27,778

Rate of return = 5,27,778

10,00,000 x 100 x

1

5 = 10.56 % p.a

b. Following financial informations are available of XP Limited for the year 2018

Equity share capital (Rs10 each) Rs 200 lakh

Reserve and surplus Rs 600 lakh

10% debentures (Rs 100 Each) Rs 350 lakh

Total Assets Rs 1200 lakh

Asset turnover ratio 2 times

Tax rate 30%

Operating margin 10 %

Dividend pay-out ratio 20%

Current market price per equity share Rs 28

Required rate of return of investors 18%

You are required to

i. prepare income statement for the year 2018

ii. determine its sustainable growth rate

iii. determine the fair price of companies share using dividend discount

model

iv. give your opinion on investment in the companies share at current

price

Author’s note: Simple repetitive question of corporate valuation. Q5 , Pg 9.3

Answer:

i Statement of Income

Total Assets 1200 lakh

Asset Turnover Ratio 2 times

Sales 1200 x 2 2400 lakh

EBIT 2400 x 0.1 240 lakh

Interest 10% x 350 35 lakh

EBT 205 Lakh

Tax 30% 61.5

EAT 143.5

Shares 20 lakh

EPS 7.175

DP ratio 20%

DPS 1.435


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ii. Growth rate = b.r

= 0.8 x 143.5

800

= 14.35 %

iii P0 = 𝑑1

𝑘𝐸 − g

= 1.435 (1.1435)

0.18 − 0.1435

= Rs 44.96

iv Since MP < Intrinsic value so share should be purchased

c. Explain briefly the sources for funding a Start-up

Q5a Rice trader has planned to sell 22000 kg of rice after 3 months from now. The spot

price of the rice is Rs 60 per kg and 3 months future on the same is trading at Rs 59

per kg. Size of the contract is 1000 kg. The price is expected to fall as low as Rs 56

per kg, 3 months hence. What the trader can do to mitigate its risk of reduced profit?

If it decides to make use of future market, what would be the effective realised price

for its sale when after 3 months spot price is Rs 57 per kg and future contract price

for 3 months is Rs 58 per kg ?

Author’s Note : Simple question of Derivative. Q49, Pg 2.12 of book

Answer:

i. To Mitigate the risk of reduced profit, trader can sell wheat future

today @ Rs 59/Kg and buy wheat future after 3 months @

reduced price

ii. Statement of Realised price of wheat

Sale of 22,000 Kg of wheat at spot rate

after 3 months 22,000 x 57 12,54,000

Future

22,000 kg wheat future sold @ 59 12,98,000

@22,000 Kg wheat future bought

22,000 x 58 12,76,000 22,000

Realised Price of Wheat 12,76,000

i.e Rs 58/ Kg

22 wheat future contract sold.


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b. On 1st January 2019 Global Limited an exporter entered into a forward contract with

BBC Bank to sell US $ 2,00,000 on 31st March 2019 at rupees 71.50 /$. However

due to the request of the importer, Global Limited received the amount on 28

February 2019. Global Limited requested the bank to take delivery of the remittance

on 2nd March 2019. The inter banking rates on 28th February 2019 were as follows:

Spot rate Rs 71.20 / 71.25

one month premium 5/10

If Bank agrees to take early delivery then what will be the net inflow to global Limited

assuming that the prevailing Prime lending rate is 15%. Assume 365 days in a year.

Author’s Note : Simple question of Early delivery

Answer:

On 1st Jan, Indian company entered into 3 months forward contract to sell 2,00,000 $,

@ Rs 71.90 due on 31st March. Company requested to bank to receive $ on 2nd

march.

Swap Loss

Bank will sell 2,00,000 $ to wholesale bank @ Rs 71.20 Rs 142,40,000

Bank will Buy 2,00,000 $ from whole sale bank

@ 1 month forward rate of 71.25 + 0.10 Rs 142,70,000

Swap Loss 30,000

Interest on cash outflow

Bank bought 2,00,000 $ from Co. on 2nd march @ 71.5 143,00,000

Bank sold 2,00,000 $ to whole sale bank on 2nd march

@ 71.20 142,40,000

Cash outflow 60,000

Interest on outflow of funds

60,000 x 0.15 x 29

365 49.31

Statement of Net Inflow to Global Ltd

Cash received on sale of 2,00,000 @ 71.5 Rs 143,00,000

Swap Loss Rs 30,000

Interest on outflow Rs 49.31

142,69,950.69

c. State the benefits of listing to a small and medium Enterprise

Q6a Sun limited an Indian company will need $ 5,00,000 in 90 days. In this

connection following information is given below:

$ 1 - Rs 71

90 days forward rate of $1 as of today = Rs 73

Interest rates are as follows:

Particulars US India

90 days deposit rate 2.50% 4.00 %

90 days borrowing rate 4.00 % 6.00%

A call option on $ that expires in 90 days has an exercise price of Rs 74 and a

premium of Rs 0.10. Sun limited has forecasted the spot rates for 90 days as

below:


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future rate probability

Rs 72.50 25%

Rs 73 50 50%

Rs 74.50 25%

Which of the following strategies would be the most preferable to Sun Limited:

i. A forward contract

ii. A money market Hedge

iii. an option contract

iv. No hedging

Show your calculations in each case.

Author’s Note : Simple repetitive question of forex covered in manual and in

class.

Answer: Indian company needs $ 5,00,000 in 90 days. Since quote is 𝑅𝑒

$, so

relevant rate is ASK rate.

Company has 4 options.

I hedge through forward market.

Company will book a forward contract today to buy 5,00,000 $ after 3

months @ 90 day forward rate of Rs 73/$. Company will pay

5,00,000 x 73 = Rs 365,00,000

ii. Hedge through Money Market

F𝐴

𝐵 = S

𝐴

𝐵 x

1 + 𝑟𝐴

1 + 𝑟𝐵

= 71 x 1 + 0.06 𝑋

90

360

1 + 0.025 𝑋 90

360

= 71 x 1.015

1.00625

= 71.62

Indian company will pay 5,00,000 x 71.617391 = 35808695.5 Rs

5,00,000 x 71 x 1.015

1.00625

Steps in Money market hedge (Re borrow,$ deposit)

1. Company will deposit present value of 5,00,000 $ for 90 days @ 2.5%

pa. Co will deposit 5,00,000

1.00625 = $ 496894. 41

2. Company will convert $ 496894.41 in Rs @ spot rate of Rs 71/$

496894.41 x 71 = Rs 35279503

3. Company will borrow Rs 352,79,503 for 90 days @ 6% p.a

Co will pay 352,79,503 x 1.015

= 358,08695


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iii. Hedge through currency options

call gives right to buy $. Since company has to buy $,company will buy

call option.

Statement of payment

Premium paid 5,00,000 x 0.10 Rs 50,000

Interest on premium 50,000 x 0.06 x 90

360 Rs 750

Due date

MP EP applicable payable prob paid

72.5 74 72.5 362,50,000 0.25 9062500

73 74 73 365,00,000 0.5 18250000

74.5 74 74 370,00,000 0.25 92,50,000 36562500

366,13,250

Iv No hedging

Company will buy 5,00,000 $ after 90 days @ spot rate after 90 days

Company will pay 5,00,000 ( 72.5 x 0.25 + 73 x 0.5 + 74.5 x 0.25)

= 5,00,000 x 73.25

= 366,25,000

Since payment is least in hedge through money market, so money market

hedge is better.

b. K currently operates from 4 different buildings and wants to consolidate its operations into one building which is expected to cost Rs 90 crores. The board of K Ltd. had approved the above plan and to fund the above cost, agreed to avail an external commercial borrowings (ECB) of GBP 10 m from G Bank Limited on the following conditions:

The loan will be availed on 1st April 2019 with interest payable half yearly rest

Average loan maturity life will be 3.4 years with an overall tenure of 5 years

Upfront fee of 1.20 %

interest cost is GBP 6 months Libor + margin of 2.50%

The 6- month LIBOR is expected to be 1.0 5%

K Limited also entered into a GBP - INR Hedge at 1 GBP = I NR 90 to cover the exposure on account of the above ECB loan and the cost of the hedge is coming to 4.00 % per annum As a finance manager, given the above information and taking 1 GBP= INR 90; i. Calculate the overall cost both in percentage and rupee terms on annual

basis ii. What is the cost of hedging in rupee terms ? iii. If K limited wants to pursue an aggressive approach what would be the

net gain/ loss for K Limited if the INR depreciates / appreciates against GBP by 10% at the end of 5 years assuming that loan is repaid in GBP at the end of 5 years

Ignore time value and Taxes and calculate to 2 decimal.


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Author’s Note: A new Question on External commercial borrowings Answer:

i. Loan required in Rs 90 Cr Loan required in GBP 10Mil Up Front fee 1.20% i.e 1,20,000 GBP i.e 1,20,000 x 90 = 108,00,000 Rs Amortisation of fee p.a 108,00,000/5 = 21,60,000 Interest rate 1.05 + 2.5 % i.e 3.55% Interest cost p.a 0.355 x 90 cr = 3.195 cr Anuual Cost in Rs 3.195 + .216 = 3.411 cr

Annual cost in % 3.411

90 x 100 = 3.79% p.a

ii. Cost of Hedging 4% p.a i.e 4% of 90 cr = 3.6 cr

iii. If K ltd take aggressive approach, ie no hedging, K ill repay 10mil GBP

loan @ spot rate after 5 years. If Re Depreciates 10% after 5 years, Spot rate after 5 years will be

90

.90 = Rs 100 / GBP

Company will pay 100,00,000 x 100 = 100,00,00,000 = Rs 100 cr Loss to Co. Rs 10 cr If Re appreciates 10% after 5 years, Spot rate after 5 years will be

90

1.1 = Rs 81.82 / GBP

Co will pay 100,00,000 x 81.82 = 81,82,00,000 Gain to company is Rs 8,18,00,000

c. Discuss briefly the important constituents of International Financial Centre IFC OR

What are the differences between Islamic finance and conventional Finance

solution to may 19 new ca final sfm by ca praviin … · solution to may 19 new ca final sfm by ca...

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