Test Series: August, 2018

MOCK TEST PAPER –1

FINAL (NEW) COURSE: GROUP – I
PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT

Question No. 1 is compulsory. Attempt any four questions from the remaining five questions. Working
notes should form part of the answer.

Time Allowed – 3 Hours Maximum Marks – 100

1. (a) Following information is provided relating to the acquiring company Mani Ltd. and the target
company Ratnam Ltd:
Mani Ltd. Ratnam Ltd.
Earnings after tax (Rs. lakhs) 2,000 4,000
No. of shares outstanding (lakhs) 200 1,000
P/E ratio (No. of times) 10 5
Required:
(i) What is the swap ratio based on current market prices?
(ii) What is the EPS of Mani Ltd. after the acquisition?
(iii) What is the expected market price per share of Mani Ltd. after the acquisition, assuming its
P/E ratio is adversely affected by 10%?
(iv) Determine the market value of the merged Co.
(v) Calculate gain/loss for the shareholders of the two independent entities, due to the merger.
(8 Marks)
(b) Following information relates to AKC Ltd. which manufactures some parts of an electronics
device which are exported to USA, Japan and Europe on 90 days credit terms.
Cost and Sales information:
Japan USA Europe
Variable cost per unit Rs.225 Rs.395 Rs.510
Export sale price per unit Yen 650 US$10.23 Euro 11.99
Receipts from sale due in 90 days Yen 78,00,000 US$1,02,300 Euro 95,920
Foreign exchange rate information:
Yen/Rs. US$/Rs. Euro/Rs.
Spot market 2.417-2.437 0.0214-0.0217 0.0177-0.0180
3 months forward 2.397-2.427 0.0213-0.0216 0.0176-0.0178
3 months spot 2.423-2.459 0.02144-0.02156 0.0177-0.0179
Advice AKC Ltd. by calculating average contribution to sales ratio whether it should hedge it’s
foreign currency risk or not. (8 Marks)
(c) Explain any four key elements for a well-functioning financial system. (4 Marks)

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2. (a) 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) (10 Marks)
(b) Mr. A will need Rs. 1,00,000 after two years for which he wants to make one time necessary
investment now. He has a choice of two types of bonds. Their details are as below:
Bond X Bond Y
Face value Rs. 1,000 Rs. 1,000
Coupon 7% payable annually 8% payable annually
Years to maturity 1 4
Current price Rs. 972.73 Rs. 936.52
Current yield 10% 10%
Advice Mr. A whether he should invest all his money in one type of bond or he should buy both
the bonds and, if so, in which quantity? Assume that there will not be any call risk or default risk.
(6 Marks)
(c) Explain Balancing Financial vis-à-vis Sustainable Growth. (4 Marks)
3. (a) Using the chop-shop approach (or Break-up value approach), assign a value for Cranberry Ltd.
whose stock is currently trading at a total market price of €4 million. For Cranberry Ltd, the
accounting data set forth three business segments: consumer wholesale, retail and general
centers. Data for the firm’s three segments are as follows:
Business Segment Segment Sales Segment Assets Segment Operating Income

Wholesale €225,000 €600,000 €75,000

Retail €720,000 €500,000 €150,000
General € 2,500,000 €4,000,000 €700,000
Industry data for “pure-play” firms have been compiled and are summarized as follows:
Business Capitalization/Sales Capitalization/Assets Capitalization/Operating
Segment Income
Wholesale 0.85 0.7 9
Retail 1.2 0.7 8
General 0.8 0.7 4
(5 Marks)
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 (b) On 1st April, an open ended scheme of mutual fund had 300 lakh units outstanding with Net
Assets Value (NAV) of Rs. 18.75. At the end of April, it issued 6 lakh units at opening NAV plus
2% load, adjusted for dividend equalization. At the end of May, 3 Lakh units were repurchased at
opening NAV less 2% exit load adjusted for dividend equalization. At the end of June, 70% of its
available income was distributed.
In respect of April-June quarter, the following additional information are available:
Rs. in lakh
Portfolio value appreciation 425.47
Income of April 22.950
Income for May 34.425
Income for June 45.450
You are required to calculate
(i) Income available for distribution;
(ii) Issue price at the end of April;
(iii) repurchase price at the end of May; and
(iv) net asset value (NAV) as on 30 th June. (10 Marks)
(c) Discuss the types of Commodity Swaps. (5 Marks)
4. (a) The following is the Balance-sheet of Grape Fruit Company Ltd as at March 31 st, 2011.
Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)
Equity shares of Rs. 100 each 600 Land and Building 200
14% preference shares of 200 Plant and Machinery 300
Rs. 100/- each
13% Debentures 200 Furniture and Fixtures 50
Debenture interest accrued 26 Inventory 150
and payable
Loan from bank 74 Sundry debtors 70
Trade creditors 340 Cash at bank 130
Preliminary expenses 10
Cost of issue of 5
debentures
Profit and Loss account 525
1440 1440
The Company did not perform well and has suffered sizable losses during the last few years.
However, it is felt that the company could be nursed back to health by proper financial
restructuring. Consequently the following scheme of reconstruction has been drawn up :
(1) Equity shares are to be reduced to Rs. 25/- per share, fully paid up;
(2) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares
of Rs. 50 each, fully paid up.
(3) Debenture holders have agreed to forgo the accrued interest due to them. In the future, the
rate of interest on debentures is to be reduced to 9 percent.
(4) Trade creditors will forego 25 percent of the amount due to them.

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 (5) The company issues 6 lakh of equity shares at Rs. 25 each and the entire sum was to be
paid on application. The entire amount was fully subscribed by promoters.
(6) Land and Building was to be revalued at Rs. 450 lakhs, Plant and Machinery was to be
written down by Rs. 120 lakhs and a provision of Rs.15 lakhs had to be made for bad and
doubtful debts.
Required:
(i) Show the impact of financial restructuring on the company’s activities.
(ii) Prepare the fresh balance sheet after the reconstructions is completed on the basis of the
above proposals. (8 Marks)
(b) Sumana wanted to buy shares of ElL which has a range of Rs. 411 to Rs. 592 a month later. The
present price per share is Rs. 421. Her broker informs her that the price of this share can sore up
to Rs. 522 within a month or so, so that she should buy a one month CALL of ElL. In order to be
prudent in buying the call, the share price should be more than or at least Rs. 522 the assurance
of which could not be given by her broker.
Though she understands the uncertainty of the market, she wants to know the probability of
attaining the share price Rs. 592 so that buying of a one month CALL of EIL at the execution
price of Rs. 522 is justified. Advice her. Take the risk free interest to be 3.60% and
e 0.036 = 1.037. (4 Marks)
(c) Explain Asset Allocation Strategies. (4 Marks)
(d) Explain different constituents of International Financial Centre (IFC). (4 Marks)
5. (a) GHI Ltd., AAA rated company has issued, fully convertible bonds on the following terms, a year
ago:
Face value of bond Rs. 1000
Coupon (interest rate) 8.5%
Time to Maturity (remaining) 3 years
Interest Payment Annual, at the end of year
Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
Current market price per share Rs. 45
Market price of convertible bond Rs. 1175
AAA rated company can issue plain vanilla bonds without conversion option at an interest rate of
9.5%.
Required: Calculate as of today:
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium.
(iv) Percentage of downside risk.
(v) Conversion Parity Price.
t 1 2 3
PVIF0.095, t 0.9132 0.8340 0.7617
(8 Marks)

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 (b) XYZ Limited borrows £ 15 Million of six months LIBOR + 10.00% for a period of 24 months.
The company anticipates a rise in LIBOR, hence it proposes to buy a Cap Option from its
Bankers at the strike rate of 8.00%. The lump sum premium is 1.00% for the entire reset
periods and the fixed rate of interest is 7.00% per annum. The actual position of LIBOR during
the forthcoming reset period is as under:
Reset Period LIBOR
1 9.00%
2 9.50%
3 10.00%
You are required to show how far interest rate risk is hedged through Cap Option.
For calculation, work out figures at each stage up to four decimal points and amount nearest to
£. It should be part of working notes. (8 Marks)
(c) Explain various stages of Venture Capital Funding. (4 Marks)
6. (a) 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 flowsin Indian -50,000 -1,500 -2,000 -2,500
Rs. (000)
Cash flows in African -2,00,000 +50,000 +70,000 +90,000
Rands (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 Rs. 1.
You are required to calculate the net present value 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
(8 Marks)
(b) Explain the features of Value-at-Risk (VaR). (4 Marks)
(c) Discuss briefly the primary participants in the process of Securitization. (4 Marks)
OR
Explain the features of ‘Securitization’.
5

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 (d) Calculate the value of share from the following information:
Profit of the company Rs. 290 crores
Equity capital of company Rs. 1,300 crores
Par value of share Rs. 40 each
Debt ratio of company (Debt/ Debt + Equity) 27%
Long run growth rate of the company 8%
Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share Rs. 47
Depreciation per share Rs. 39
Change in Working capital Rs. 3.45 per share
(4 Marks)

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