ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

MERGER AND ACQUISITIONS

1. The following is the Balance-sheet of Grape Fruit Company Ltd as at March 31st, 2019.
Liabilities (` in lakhs) Assets (` in lakhs)
Equity shares of ` 100 each 600 Land and Building 200
14% preference shares of Plant and Machinery 300
` 100/- each 200
13% Debentures 200 Furniture and Fixtures 50
Debenture interest accrued Inventory 150
and payable 26
Loan from bank 74 Sundry debtors 70
Trade creditors 340 Cash at bank 130
Preliminary expenses 10
Cost of issue of
debentures 5
Profit and Loss account 525
1,440 1,440
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:
i. Equity shares are to be reduced to ` 25/- per share, fully paid up;
ii. Preference shares are to be reduced (with coupon rate of 10%) to equal number of
shares of ` 50 each, fully paid up.
iii. 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.
iv. Trade creditors will forego 25 percent of the amount due to them.
v. The company issues 6 lakh of equity shares at ` 25 each and the entire sum was to
be paid on application. The entire amount was fully subscribed by promoters.
vi. Land and Building was to be revalued at ` 450 lakhs, Plant and Machinery was to
be written down by ` 120 lakhs and a provision of `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.

Sol.
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

a. Impact of Financial Restructuring

i. Benefits to Grape Fruit Ltd.
` in lakhs
(1) Reduction of liabilities payable
Reduction in equity share capital (6 lakh shares × `75 per share) 450
Reduction in preference share capital (2 lakh shares × `50 per share) 100
Waiver of outstanding debenture Interest 26
Waiver from trade creditors (`340 lakhs × 0.25) 85
661
(2) Revaluation of Assets
Appreciation of Land and Building (`450 lakhs - ` 200 lakhs) 250
Total (X) 911

ii. Amount of ` 911 lakhs utilized to write off losses, fictious assets and over-valued assets.
Writing off profit and loss account 525
Cost of issue of debentures 5
Preliminary expenses 10
Provision for bad and doubtful debts 15
Revaluation of Plant and Machinery (`300 lakhs – `180 lakhs) 120
Total (Y) 675
Capital Reserve (X) – (Y) 236

b. Balance sheet of Grape Fruit Ltd as at 31st March 2019 (after re-construction)
(` in lakhs)
Liabilities Amount Assets Amount
12 lakhs equity shares of 300 Land & Building 450
` 25/- each
10% Preference shares of ` 100 Plant & Machinery 180
50/- each
Capital Reserve 236 Furnitures & Fixtures 50
9% Debentures 200 Inventory 150
Loan from Bank 74 Sundry debtors 70
Trade Creditors 255 Prov. for Doubtful Debts -15 55
Cash-at-Bank (Balancing
figure)* 280
1,165 1,165
*Opening Balance of ` 130/- lakhs + Sale proceeds from issue of new equity shares
` 150/- lakhs.
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

2.. Snake Ltd. is taking over Lizard Ltd, both are listed companies. The PE Ratio of Lizard
Ltd. has been low as 4 and high as 7 and is currently 5. Lizard Ltd.`s previous year EPS
was ` 3.40 and current expected EPS this year to be ` 4.00.
Determine the different range of values of shares using P/E Model. (6 Marks)
Sol. The range of values using P/E Ratio and EPS either historic or projected are as follows.
EPS Value (`) P/E Ratio Value Value of Shares

Historic 3.40 Lowest 4 13.60

Historic 3.40 Current 5 17.00
Historic 3.40 Highest 7 23.80
Expected 4.00 Lowest 4 16.00
Expected 4.00 Current 5 20.00
Expected 4.00 Highest 7 28.00

3. 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. (8 Marks)
Sol.
(i) Net cost of acquisition shall be computed as follows:
Cash Paid for the shares of Tall Ltd. (` 60 × 18,00,000) ` 10,80,00,000
Less: Value of Tall Ltd., as a separate entity (18,00,000 × ` 50) ` 9,00,00,000
Net Cost of acquisition of Tall Ltd. ` 1,80,00,000

(ii) Net Cost of acquisition in case of exchange of shares:

Exchange ratio = 1 share of long Ltd for every 3 shares of Tall Ltd.
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Number of shares to be issued in Long Ltd. (18,00,000/3) = 6,00,000 shares

Total no. of shares in Long Ltd. after merger = 36,00,000
(30,00,000 + 6,00,000)
Calculation of cost of Equity of Tall Ltd. = D1/P0 + g
Growth rate under new management after acquisition = ` 3/50 + 0.06 = 12%
Value of Merged company assuming perpetual growth = 8%
Value of merged company
(` 180 × 30,00,000) + (` 3/ (0.12 - 0.08) × 18,00,000 = ` 67,50,00,000
= 54,00,00,000 + (75 × 18,00,000)
Value per share of merged company = ` 187.50 per share
(67,50,00,000/36,00,000)
Calculation of net cost of acquisition
Gross cost of acquisition (6,00,000 × 187.50) 11,25,00,000
Less: CMP (18,00,000 × 50) 9,00,00,000
Net Cost of acquisition 2,25,00,000

Alternatively, Net Cost of Acquisition can also be computed as follows:

No. of shares issued to shareholders of Tall Ltd. in the ratio of 1:3 6,00,000
Existing price of one share of Long Ltd. ` 180
Value of consideration paid for acquisition of Tall Ltd. ` 10,80,00,000
Less: Existing Value of Tall Ltd., as a separate entity ` 9,00,00,000
Net Cost of acquisition of Tall Ltd. ` 1,80,00,000

(iii) Calculation of gain from acquisition:

Total Earnings of Long Ltd. (` 12 × 30,00,000) ` 3,60,00,000
Total Earnings of Tall Ltd. (` 5 × 18,00,000) ` 90,00,000
Combined Earnings ` 4,50,00,000
PE Ratio of Long Ltd. (180/12) 15
Value of Long Ltd. after acquisition ` 67,50,00,000
Less: Value of two companies separately
Long Ltd. (` 180 × 30,00,000) ` 54,00,00,000
Tall Ltd. (` 50 × 18,00,000) ` 9,00,00,000 ` 63,00,00,000
Gain from Acquisition ` 4,50,00,000

4. Big Ltd. (BL), a listed company, is enjoying a price earnings ratio (PER) of 15 on an
Earnings Per Share (EPS) of? 5. The Total number of outstanding shares are 2,00,000.
BL is proposing to acquire Small Pvt. Ltd. (SPL) an unlisted company by issuing shares
in the ratio 4:5 i.e. for 5 shares of SPL 4 shares of BL will be issued. The outstanding
shares of SPL are 50,000. SPL will be listed before the actual merger to discover its value.
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

The EPS of the merged entity will be 5.5. *

No other information is available for SPL.
You are required to calculate :
(i) Pre-merger EPS of SPL.
(ii) Expected Market Price per Share of SPL at the time of listing, if it expects a PER
of 10 and,
(iii) Number of shares of BL to be issued to SPL if pre-merger EPS of BL is to be
maintained. (8 Marks)
(MAY 23 EXAMS)

5. ICL is proposing to take over SVL with an objective to diversify. ICL's profit after tax
(PAT) has grown @ 18 per cent per annum and SVL's PAT is grown @ 15 per cent per
annum. Both the companies pay dividend regularly. The summarized Profit & Loss
Account of both the companies are as follows:
` in Crores
Particulars ICL SVL
Net Sales 4,545 1,500
PBlT 2,980 720
Interest 750 25
Provision for Tax 1,440 445
PAT 790 250
Dividends 235 125

ICL SVL
Fixed Assets
Land & Building (Net) 720 190
Plant & Machinery (Net) 900 350
Furniture & Fixtures (Net) 30 1,650 10 550
Current Assets 775 580
Less: Current Liabilities
Creditors 230 130
Overdrafts 35 10
Provision for Tax 145 50
Provision for dividends 60 470 50 240
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Net Assets 1,955 890

Paid up Share Capital (` 10 250 125
per share)
Reserves and Surplus 1,050 1,300 660 785
Borrowing 655 105
Capital Employed 1,955 890

Market Price Share (`) 52 75

ICL's Land & Buildings are stated at current prices. SVL's Land & Buildings are revalued
three years ago. There has been an increase of 30 per cent per year in the value of Land
& Buildings.
SVL is expected to grow @ 18 per cent each year, after merger.
ICL's Management wants to determine the premium on the shares over the current market
price which can be paid on the acquisition of SVL.
You are required to determine the premium using:
(i) Net Worth adjusted for the current value of Land & Buildings plus the estimated
average profit after tax (PAT) for the next five years.
(ii) The dividend growth formula.
(iii) ICL will push forward which method during the course of negotiations?
Period (t) 1 2 3 4 5
FVIF (30%, 1.300 1.690 2.197 2.856 3.713
t)
FVIF (15%, 1.15 2.4725 3.9938 5.7424 7.7537
t)
(12 Marks)
Sol.
(i) Computation of Premium (Net Worth Formula):

Amount ` in Crores
Total Assets (Fixed assets + Current Assets) = (550 + 580) 1130
Less: Liabilities (Current Liabilities + Borrowings) = (240 + 105) 345
Net Assets Value 785
Current Value of Land after growing for three years @ 30% = 190 × 2.197 417.43

Less: Book Value 190.00

Increase in the Value of land 227.43
Adjusted NAV (785 + 227.43) 1012.43
Current Profit after Tax (@15 % for 5 years i.e. 250 × 7.7537 1938.43
Average Profit for 1 year = 1938.43/5 387.69
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Total Value of Firm (1012.43 + 387.69) 1400.12

Total Market Value = No of shares × MPS = 12.50 × 75 937.50
Premium (Total Value – Market Value) 462.62
Premium (%) = 462.62/937.50 * 100 49.35%

(ii) Computation of Premium (Dividend Growth Formula):

Existing Growth Rate 0.15
125 10
DPS=
12.50
MPS 75
æ D1 ö 0.3033
Cost of Equity ç + g ÷ = [(10 × 1.15/75) + 0.15]
è MP ø
Expected growth rate after merger 0.18
Expected Market Price = 10 × [1.18 / (0.3033 - 0.18)] 95.70
Premium over current market price (95.70 - 75)/ 75 × 100 27.60%

Alternatively, if given figure of dividend is considered as D1 then Premium over Current

Market Price shall be computed as follows:

æ D1 ö æ 10 ö 0.2833
Cost of Equity ç + g÷ ç + 0.15 ÷
è P ø è 75 ø

Expected Growth Rate after Merger 0.18

Expected Market Price 10.00 / (0.2833 – 0.18) 96.81
Premium over Current Market Price
(96.81 - 75)/ 75 × 100 29.08%
During the course of negotiations, ICL will push forward valuation based on Growth
Rate Method as it will lead to least cash outflow.

6. Teer Ltd. is considering acquisition of Nishana Ltd. CFO of Teer Ltd. is of opinion that
Nishana Ltd. will be able to generate operating cash flows (after deducting necessary
capital expenditure) of `10 crore per annum for 5years.
The following additional information was not considered in the above estimations.
i. Office premises of Nishana Ltd. can be disposed of and its staff can be relocated in
Teer Ltd.’s office not impacting the operating cash flows of either businesses.
However, this action will generate an immediate capital gain of ` 20 crore.
ii. Synergy Gain of ` 2 crore per annum is expected to be accrued from the proposed
acquisition.
iii. Nishana Ltd. has outstanding Debentures having a market value of ` 15 crore. It
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

has no other debts.

iv. It is also estimated that after 5 years if necessary, Nishana Ltd. can also be
disposed of for an amount equal to five times its operating annual cashflow.
Calculate the maximum price to be paid for Nishana Ltd. if cost of capital of Teer Ltd. is
20%. Ignore any type of taxation.
Sol. Calculation of Maximum Price to be paid for the acquisition of Nishana Ltd.
(` Crore)
Year 0 1 2 3 4 5
Operating cash flow - 10.00 10.00 10.00 10.00 10.00
Gain on Sale of office 20.00 - - - - -
premises
Synergy Benefits - 2.00 2.00 2.00 2.00 2.00
Disposal of Nishana - - - - - 50.00
Ltd.
Net cash flow 20.00 12.00 12.00 12.00 12.00 62.00
PVF @ 20% 1 0.833 0.694 0.579 0.482 0.402
Present value 20.00 10.00 8.324 6.948 5.784 24.924
Total of Present value 75.984
Less: Market Value of Debentures (15.000)
60.984
Thus, the maximum price to be paid for acquisition of Nishana Ltd. ` 60.984 crore.

7. Strong Ltd., (SL), an all equity financed, conglomerate is in need to borrow `2,000 crore
to finance expansion of its crore current operations. However, SL is susceptible to raise the
amount from the market. The CFO has suggested for divesting one of the two nonprime units
to reduce the overall borrowings from the market. The following data, after internal due
diligence, has been placed for consideration of the Board:
(` in cores)
Particulars Unit Unit 2
Reported Profit After Tax 147 140
Extra Ordinary Gains 16 8
Extra Ordinary Losses 20 12
Expected Profit from the launch of the new product 56 12
Price Earnings Ratio 10 12.5
Corporate Tax Rate (%) 30 30
You are required to advise the Borad on the following:
(i) The price at which the units can be divested,
(ii) The unit which can be divested so as to minimise the borrowings from the market and
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

(iii) The amount of borrowing. (10

Marks)
(10 Marks)

Sol.
(i) Price at which units can be Divested
(` Crore)
Particulars Unit I Unit II
Reported Profit after Tax (a) 147 140
Reported profit before Tax [(a) /0.70] 210 200
Less: Extra Ordinary Gains 16 8
Add: Extra Ordinary Losses 20 12
214 204
Profit from New Product 56 12
Profit before Tax 270 216
Less : Tax @ 30% 81 64.80
Future Maintainable Profit after Tax (b) 189 151.20
PE Ratio 10 12.5
Relevant Capitalization Factor æ 1 ö
(c) 10% 8%
ç ÷
è PE Ratio ø

Price of Unit [(b) / (c)] 1890 1890

(ii) The unit I can be divested as it has lower PE Ratio.

(i) The amount of borrowing ` 2000 crore - ` 1890 crore = ` 110 crore

8. Alfa Ltd. wants to acquire Beta Ltd. and has offered a swap ratio of 1 : 2 (0.5 shares for
every one share of Beta Ltd.). Following information is provided:
Alfa Ltd. Beta Ltd.
Profit after tax (` 18,00,000 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (`) 3 2
PE Ratio 10 times 7 times
Market price per share (` 30 14
(i) You are required to determine:
(a) the number of equity shares to be issued by Alfa Ltd. for acquisition of Beta Ltd.
(b) the EPS of Alfa Ltd. after the acquisition.
(c) the equivalent earnings per share of Beta Ltd.
(d) the expected market price per share of Alfa Ltd.* after the acquisition, if PE increases to
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

12 times.
(e) the market value of the merged firm.
(ii) If you are the shareholder of Beta Ltd and holding 100 shares, will you be interested to
sell your stake ? Why? (8 Marks)
Sol.
(ii) (i)
(a) The number of shares to be issued by Alfa Ltd.:
The Exchange ratio is 0.5
So, new Shares = 1,80,000 x 0.5 = 90,000 shares.
(b) EPS of Alfa Ltd. after acquisition:
Total Earnings (` 18,00,000 + ` 3,60,000) ` 21,60,000 ` 21,60,000
No. of Shares (6,00,000 + 90,000) 6,90,000 ` 6,90,000
EPS (` 21,60,000)/61901000) ` 3.13 ` 3.13
(c) Equivalent EPS of Beta Ltd.:
No. of new Shares 0.5 0.5
EPS ` 3.13 3.13
Equivalent EPS (` 3.13 x 0.5) ` 1.57 or ` 1.56 ` 1.57 or ` 1.56
(d) New Market Price of Alfa Ltd. (P/E = 12):
Revised P/E Ratio of Alfa Ltd. 12 times 12 times
Expected EPS after merger ` 3.13 ` 3.13
Expected Market Price (` 3.13 x 12) ` 37.56 ` 37.56
(e) Market Value of merged firm:
Total number of Shares 6,90,000 6,90,000
Expected Market Price ` 37.56
Total value (6,90,000 x 37.56) ` 2,59,16,400
(iii)
(iv) (ii)
Present market Value of share of Beta Ltd. (100 × ` 14) ` 1,400
Revised market price of each share of Alfa Ltd. after Merger ` 37.56
Equivalent No. of Alfa Ltd. share in exchange of Beta Ltd. (0.50 × 100) 50
Equivalent Value of Alfa Ltd. share in exchange of Beta Ltd. ` 1,878
(100 × 0.50 × ` 37.56)
Increase in Market Value (` 1,878 - ` 1,400) ` 478
2,136.61
= ` 30,523 Cr.
0.15 - 0.08
(v)
(vi) No, I am not agreed to sell the stake as there is increase in market value.

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ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

MUTUAL FUNDS

1. A company has a choice of investments between several different equity oriented mutual
funds.
The company has an amount of ` 100 lakhs to invest. The details of the mutual funds are
as follows:
Mutual Funds A B C D E
Beta 1.5 1.0 0.8 2.0 0.7
PLAN I
If the company invests 20% of its investments in each of the first two mutual funds (A
and B) and balance in equal amounts in the mutual funds C, D and E, what is the beta of
the portfolio ?

PLAN II
If the company invests 15% of its investment in C, 15% in A, 10% in E and the balance
in equal amounts in the other two mutual funds, what is the beta of the portfolio?
If the expected return of market portfolio is 12% at a beta factor of 1.0, what will be the
expected return on the portfolio in both the plans given above? (8 Marks)

Sol. Plan I: Investment in A and B at 20 % each and balance in equal proportion in C, D,

and E.
Mutual Fund Proportion of Beta
Proportion × Fund beta
Investment
A 0.2 1.50 0.30
B 0.2 1.00 0.20
C 0.2 0.80 0.16
D 0.2 2.00 0.40
E 0.2 0.70 0.14
Portfolio beta 1.20

Plan II : Investment in A at 15%, C at 15% and E at 10% and balance in equal proportion
in B and D:
Mutual Fund Proportion of Beta
Proportion × Fund beta
Investment
A 0.15 1.50 0.225
B 0.30 1.00 0.300
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

C 0.15 0.80 0.120

D 0.30 2.00 0.600
E 0.10 0.70 0.070
Portfolio Beta 1.315

Expected return = Market return × Portfolio Beta

Plan Return
I 12% × 1.20 = 14.40%
II 12% × 1.315 = 15.78%

2. M/s. Strong an AMC has floated a dividend bonus plan on 1st 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 30th September, 2017 and a second bonus of 1:4 (1
bonus unit for 4 right units held) on 30th 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. (4 Marks)
Sol.
Particulars

(a) Amount invested by Mr. Optimistic as on 01/04/2016 ` 16,00,000

(b) Gain during 5 years (16,00,000 x 17.5% × 5 years) ` 14,00,000
(c) Value of investment as on 31/03/2021 (a + b) ` 30,00,000
(d) NAV as on 31/03/2021 ` 100 per Unit
æcö 30000 Units
(e) Total number of units as on 31/03/2021 ç ÷
èdø
4 24000 Units
Total units before second bonus = 30,000 ×
5
5 20000 Units
Total units before first bonus = 24,000 ×
6
NAV as on 01/04/2016 = 16,00,000/ 20000 ` 80 per Unit

3. M/S Enterprise, an Asset management Company (AMC) on 1.04.2016 has floated a

scheme “Dividend Plan”. Mr. X, an investor, has invested in the scheme. Dividend is
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

given in the form of units. The details (except the issue price) are as follows:
Date Dividend (%) NAV
1.04.2016 ?
31.03.2018 20 48
31.03.2019 25 50
31.03.2020 30 45
31.03.2021* - 49
Initial Investment (` ` 18,40,000
Average Profit (` over 5 years ` 54,576
* In the Question Paper printed as 31.0.2021
You are required to calculate the issue price of the scheme as on 01.04.2016 to ascertain
the capital appreciation. Assume face value of units as ` 10/- (5Marks)

Sol.
Particulars '
(a) Amount invested by Mr. X 18,40,000
(b) Gains during 5 year [ '54,576 × 5] 2,72,880
(c) Value of investment as on 31/3/21 21,12,880
(a) + (b)
(d) NAV as on 31.03.21 ` 49 per unit
(e) Total Number of units as on 31.03.21 ` 43,120
units
Let us as assume N, be the no. of units om 31.03.2020 then
` 10 × N1 × 0.30
+ N1 = 43,120
45
N1
+ N1 = 43,120
15
N1 = 40,425
Now let us assume N2 be number of units on 31.03.19, then
` 10 × N 2 × 0.25
+ N2 = 40,425
50
N2
+ N2 = 40,425
20
N2 = 38,500
Now let us assume N3 be number of units on 31.03.18, then
` 10 × N3 × 0.20
+ N3 = 38,500
48
N3
+ N3 = 38,500
24
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

N3 = 36,960
18,40,000
NAV as on 1.04.16 = = ` 49.7g
36,960
Thus, issue price of unit is ` 49.78

4. M/S. Corpus an AMC, on 1.04.2015 has floated two schemes viz. Dividend Plan and
Bonus Plan. Mr. X, an investor has invested in both the schemes. The following details
(except the issue price) are available:
Date Dividend Bonus Ratio NAV
(%) Dividend Bonus Plan
Plan
1.04.2015 ? ?
31.12.2016 1 :4 (One unit on 4 units 47 40
held)
31.03.2017 12 48 42
31.03.2018 10 50 39
31.12.2018 1 :5 (One unit on 5 units 46 43
held)
31.03.2019 15 45 42
31.03.2020 - - 49 44

Additional details
Investment (`) ` 9,20,000 ` 10,00,000
Average Profit (`) ` 27, 748.60
Average Yield (%) 6.40
You are required to calculate the issue price of both the schemes as on 1.04.2015.
(10 Marks.
Sol.
(i) Dividend Plan
(a) Average Annual gain over a period of 5 Years 27748.60
(b) Total gain over a period of 5 years (a*5) 138743
(c) Initial Investment 920000
(d) Total value of investment (b + c) 1058743
(e) NAV as on 31.3.2020 49
(f) Number of units at the end of the period as on 31.03.2019 (d/e) 21607
1 2 3 4 = (2*3) 5 6 = 1/ (4 7
+ 5)*4
Period Units Rate Unit Dividend NAV New Balance
held valu Units* Units Pre
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

e Dividend

31.03.2019 21607 0.15 10 1.5 45 697 20910

31.03.2018 20910 0.1 10 1 50 410 20500
31.03.2017 20500 0.12 10 1.2 48 500 20000
Issue Price as on 01 04.2015 Investment 920000/ Units purchased 20000 (c/i) = ` 46
* Let the units issued be X
X = (Closing Units/NAV + Dividend) × Dividend

(ii) Bonus Plan

(a) Average Yield 0.064
(b) Investment 1000000
(c) Gain over a period of 5 years (a*b*5) 320000
(d) Market Value as on 31.03.2019 (b + c) 1320000
(e) NAV as on 31.03.2020 44
(f) Total units as on 31.03.2020 (d/e) 30000
(g) No of units as on 31.03.2018 Pre bonus = 30000*5/ (5 + 1) 25000
(h) No of units as on 31.12.2016 Pre bonus = 25000*4/ (4 + 1) 20000
(i) Issue Price as on 01.04.2015 Investment 1000000/ Units
purchased 20000 (b/h) 50

5. The following are the details of three mutual funds of MFL:

Growth Balanced Regular Market
Fund Fund Fund
Average Return (%) 7 6 5 9
Variance 92.16 54.76 40.96 57.76
Coefficient of
Determination 0.3025 0.6561 0.9604
The yield on 182 days Treasury Bill is 9 per cent per annum.
You are required to:
(i) Rank the funds as per Sharpe's measure.
(ii) Rank the funds as per Treynor's measure.
(iii) Compare the performance with the market. (8 Marks)
Sol.
Conversion as on 30-09-2020 0.013 ` 220.7692
Gain ` 20.7692
The equivalent amount is same in both the options so ICL is indifferent.
However, USD is more stable, and Treasury Bills are risk free, so investment in Treasury
Bills (USD) is suggested.
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Growth Fund Balanced Regular Fund Mark

Fund et
Average Return (%) 7 6 5 9
Variance 92.16 54.76 40.96 57.76
Std. Deviation 9.60 7.40 6.40 7.60
Coefficient Determination of 0.3025 0.6561 0.9604
Coefficient Correlation of 0.55 0.81 0.98
Beta (β) 9.60 7.40 6.40
× 0.55 = × 0.81 = × 0.98 =
7.60 7.60 7.60
0.695 0.789 0.825

(i) Ranking of Funds as per Sharpe Ratio

Expected Return - Risk Free Rate of Return
Sharpe Ratio =
Standard Deviation
Growth Fund Balanced Fund Regular Fund
Sharpe Ratio 7-9 6-9 5-9
= - 0.208 = - 0.405 = - 0.625
9.60 7.40 6.40
Ranking 1 2 3

(ii) Ranking of Funds as per Treynor Ratio

Expected Return - Risk Free Rate of Return
Treynor Ratio =
Beta
Growth Fund Balanced Fund Regular Fund
Treynor Ratio 7-9 6-9 5-9
= - 2.878 = - 3.802 = - 4.84
0.695 0.789 0.825
Ranking 1 2 3

(iii) Comparison of performance with the Market

Sharpe Ratio 9-9
=0
7.60
Treynor Ratio 9-9
=0
1
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Thus, the performance of funds is very poor since all values are negative as compared to
market performance.

6. The following particulars relating to S Fund Schemes:

Value
Particulars
(in ` Crores)
1. Investment in Shares (at cost)
a. Pharmaceuticals companies 158
b. Construction Industries 62
c. Service Sector Companies 112
d. IT Companies 68
e. Real Estate Companies 20
2. Investment in Bonds (Fixed Income)
a. Listed Bonds (8000, 14% Bonds of ? 15,000 each) 24
b. Unlisted Bonds 14
3. No. of Units outstanding (crores) 8.4
4. Expenses Payable 7
5. Cash and Cash equivalents 3
6. Market expectations on listed bonds 8.842%

The fund has incurred the following expenses:

Consultancy and Management fees ` 520 Lakhs
Office Expenses ` 180 Lakhs
Advertisement Expenses ` 48 Lakhs
Particulars relating to each sector are as follows:
Sector Index on Purchase date Index on Valuation date
Pharmaceutical companies 300 500
Construction Industries 275 490
Service Sector Companies 285 500
IT Companies 270 515
Real Estate Companies 265 440

Required:
(i) Calculate the Net Asset Value of the fund
(ii) Calculate the Net Asset Value per unit
(iii) Determine the Net return (Annualized), if the period of consideration is 4 years,
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

and the fund has distributed ` 2 per unit per year as cash dividend during the same
period.

Note: Calculate figure in ` Crore upto 3 decimal points.

Sol.
(i) Calculation of NAV of the Fund (in ` Crore)
1. Value of Shares
a. Pharmaceutical Companies 500 263.333
158 ×
300
b. Construction Companies 490 110.473
62 ×
275
c. Service Sector Companies 500 196.491
112 ×
285
d. IT Companies 515 129.704
68 ×
270
e. Real Estate Companies 440 33.208
20 ×
265
Investment in Bonds
a. Listed Bonds 14 38.00
× 64
8.842
b. Unlisted Bonds 14.000
3. Cash and Cash Equivalents 3.00
788.209
Less : Expense payable 7.000
NAV of the Fund 781.209

(ii) NAV of the Fund per Unit

NAV of the Fund ` 781.209 crore
Number of Units 8.40 crore
NAV Per Unit (` 781.209 crore/ 8.40 crore) ` 93.00

(iii) Net Return

Initial Cost Per Unit
Investment in Shares ` 420 crore
Bonds ` 38 crore ` 458 crore
Number of Units 8.40 crore
Cost Per Unit ` 54.42
Return
Capital Gain (` 93.00 - ` 54.52) ` 38.48
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Dividend `4x2 ` 8.00

` 46.48
Annualised Return 56.48 1 21.31 %
×
54.52 4

7. Mr. D had invested in three mutual funds (MF) as per the following details:
Particulars MF `A` MF `B` MF `C`
Amount of Investment 2,00,000 5,00,000 4,00,000
NAV at the time of purchase 10.00 25.00 20.00
Dividend Yield up to 31.03.2022 3% 5% 4%
NAV as on 31.03.2022 10.50 22.80 20.80
Annualized Yield as on 9.733% - 11.185% 15%
31.03.2022
Assume 1 Year = 365 Days.
Mr. D has misplaced the documents of his investments. You are required to help Mr. D
to find out the following:
(i) Number of units allotted in each scheme,
(ii) Value of his investments as on 31.03.2022,
(iii) Holding period of his investments in number of days as on 31.03.2022
(iv) Dates of original investments
(v) Total Return on investments,
(vi) Assuming past performance of all three schemes will continue for next one year,
what action the investor should take? What will be the expected return for the next
one year after the above action?
(vii) Will your answer as above point no. (vi) changes if the Mutual fund charges exit
load of 5% if the investment is redeemed within one year? If so, advise the investor
what and when the action to be taken to optimise the returns. (8 Marks)
Sol.
(i) Number of Units in each Scheme
MF ‘A’ 2,00,000 = 20,000
10.00
MF ‘B’ 5,00,000 = 20,000
25.00
MF ‘C’ 4,00,000 = 20,000
20.00

(ii) Value of Investment on 31.03.2022

ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

MF `A` = 20,000 × ` 10.50 ` 2,10,000

MF `B` = 20,000 × ` 22.80 ` 4,56,000
MF `C` = 20,000 × ` 20.80 ` 4,16,000
Total ` 10,82,000

(iii) Yield on each Fund

Capital Yield Dividend Yield Total Yield (%)
MF `A` ` 2,10,000 ` 6,000 ` 16,000.00 8.00
- ` 2,00,000
= ` 10,000
MF `B` ` 4,56,000 ` 25,000 - ` 19,000.00 -3.80
- ` 5,00,000
= - ` 44,000
MF `C` ` 4,16,000 ` 16,000 ` 32,000.00 8.00
- ` 4,00,000
= ` 16,000
Total ` 29,000.00
No. of Days Investment Held
MF `A` MF `B` MF `C`
Period of Holding 8.00 -3.80 8.00
× 365 = 300 × 365 = × 365 = 195
(Days) 9.733 -11.185 15.00
days 124 days days
(iv) Date of Original Investment 04.06.21 27.11.21 17.09.21
(v) Total Yield = × 100 = 2.636%
(vi) If past of all three schemes will continue for next one year, the investor should redeem
the units of MFs `A` and `B` and invest the proceeds in MF `C`. The expected return
next will be 15%.
(vii) If the Mutual funds are charging exit load of 5%, if investment is redeemed within one
year, then investor should get redeemed units of MF `B` now and units of MF `A` after
65 days.

8. Mr. Potential has made investments in two mutual funds. The 8 following information is
available :
Mutual Fund Smart Growth

Jensen Alpha 1.10% 1.50%

Treynor`s Ratio 0.0714 0.0775 *

Actual Return 8.50% 9.10%

ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Risk Premium 4%
You are required to calculate :
(i) Beta (P) for both the funds
(ii) Risk free Rate
(iii) Security Market Line (8 Marks)

MISCELLAENEOUS

1. The Balance Sheet of M/s. Sundry Ltd. as on 31-03-2020 is follows: (` in lakhs)

Liabilities ` Assets `
Share Capital 300 Fixed Assets 600
Reserves 200 Inventory 500
Long Term Loan 400 Receivables 240
Short Term Loan 300 Cash 60
Payables & Provisions 200
Total 1,400 Total 1,400
Sales for the year was ` 600 lakhs. The sales are expected to grow by 20% during the
year. The profit margin and dividend pay-out ratio are expected to be 4% and 50%
respectively.
The company further desires that during the current year Sales to Short Term Loan and
Payables and Provision should be in the ratio of 4 : 3. Ratio of fixed assets to Long Term
Loans should be 1.5. Debt Equity Ratio should not exceed 1.5.
You are required to determine:
(i) The amount of External Fund Requirement (EFR)
(ii) The amount to be raised from Short Term, Long Term and Equity funds.
(8 Marks)
Sol.
(i) External Funds Requirement (EFR): (` in lakhs)
`
Expected sales (` 600 + 20% of ` 600) 720.00
Profit margin @ 4% 28.80
Dividend payout ratio @ 50% 14.40
Balance to be ploughed back (A) 14.40
Additional funds required (` 1400 - ` 200*) × 0.20 (B) 240.00
Balance to be met from external source (B - A) 225.60

As current liabilities shall also be increased proportionately with increase in sales.

(ii) Amount to be raised from different sources with following conditions:

ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

Ø Sales to short term loans and payables provisions 4:3

Ø Ratio of fixed assets to long term loans 1.5
Ø Debt equity ratio should not exceed 1.5

(1) Amount to be raised from short term funds:

(` in lakhs)
New amount of short-term loans and payables & 450
æ3 ö
provision ç × 600 ÷
è4 ø
Less: Existing Amount of short-term loans and payables 500
& provision
Amount to be raised from short term funds Nil

(2) Amount to be raised from Long term funds:

(` in lakhs)
New fixed assets (` 600 + 20% of ` 600) 720
New long-term loans (`720/1.5) 480
Less: Existing long-term loans 400
Amount to be raised from Long term funds 80

(3) Amount to be raised from equity funds:

(` in lakhs)
Amount to be raised from external sources 225.60
Less: Amount to be raised from short term funds -—
Less: Amount to be raised from Long term funds 80.00
Balance amount to be raised from equity funds 145.60

Alternative Solution
(i) External Funds Requirement (EFR)
æ TA P ö
EFR = ç - ÷ × DS - N × Projected Sales × (1 - D)
è S Sø
Where,
TA = Total Assets
S = Current Sales
P = Payables and Provisions
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

DS = Change in Sales
N = Net Profit Margin Ratio
D = Dividend Payout Ratio
Accordingly,
æ 1400 200 ö
EFR = ç - ÷ × 120 - 0.04 × 720 × 0.5
è 600 600 ø
= ` 225.6 lakhs
(ii) Funds to be raised from Various Sources
(1) Short Term Funds
Let X be the new Short-Term Loan then meeting the given condition the Additional
Requirement shall be computed as follows:
4 600 × 1.2
=
3 200 × 1.2 + X
X = 300.00
Short-Term Loans required `300.00 lakhs
Less: Existing ` 300.00 lakhs
Additional requirement 0.00 lakhs

(2) Long term funds

Let Y be the new Long -Term Loans then meeting the given condition the Additional
Requirement shall be computed as follows:
FA
1.5 =
Long term loans
600 × 1.2
1.5 =
Y
Y = 480
New Long Term Loans `480.00 Lakhs
Existing `400.00 Lakhs
Additional `80.00 Lakhs

(3) Equity to be raised

EFR ` 225.60 Lakhs
Less: Short Term Loans 0.00 Lakhs
Long term ` 80.00 Lakhs
Equity to be raised ` 145.60 Lakhs

Debt
New DER =
Shareholder's Fund
ARCHANA KHETAN MERGERS AND MUTUAL FUNDS

480
=
300 + 145.60 + (1.2 × 200)
= 0.70
Condition satisfied.
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