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CA FINAL (Nov 2024)

GROUP I – PAPER 2
ADVANCED FINANCIAL MANAGEMENT
(Series 1)
Time Allowed: - 3 Hours Maximum Marks: 100

This question paper comprises two parts, Part I and Part II.
Part I comprises MCQ & Part II comprises questions which require descriptive answers.

PART – I (MCQs)
All MCQs are compulsory

Question no. 1-15 carry 2 marks each

This Case Scenario contains MCQ 1-5
A study by Narang Mutual fund has revealed the following data in respect of three securities:

Security σ2 Coefficient of determination with Index

A 400 0.3600
B 324 0.9025
C 144 0.5625

The standard deviation of market portfolio is observed to be 15%.

You are required to answer the following:
1. What is the sensitivity of returns of each stock with respect to the market?
(a) A = 0.60, B = 0.90, C = 0.84
(b) A = 0.60, B = 0.95, C = 0.75
(c) A = 0.80, B = 1.14, C = 0.60
(d) A = 0.80, B = 1.10, C = 0.75
2. What are the covariances among the various stocks?
(a) COVAB = 205.20, COVBC = 108.00, COVAC = 153.90
(b) COVAB = 205.20, COVBC = 153.90, COVAC = 108.00
(c) COVAB = 400.00, COVBC = 324.00, COVAC = 144.00
(d) COVAB = 400.00, COVBC = 205.20, COVAC = 108.00
3. What would be risk of portfolio in terms of variance consisting of all three stocks equally?
(a) 200.244
(b) 14.151
(c) 289.333
(d) 17.010
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4. What is the beta of the portfolio consisting of equal investment in each stock?
(a) 0.8467
(b) 0.8567
(c) 0.8667
(d) 0.8767
5. What is the unsystematic risk of the portfolio in (4)?
(a) 161.302
(b) 200.244
(c) 14.151
(d) 38.942

This Case Scenario contains MCQ 6-10

Z has to remit USD$ 1,00,000 for her daughter’s education on 4 th April 2025. Accordingly, she has
booked a forward contract with his bank on 4th January 2025 @ ₹ 73.8775. The Bank has covered its
position in the market @ ₹ 73.7575.
The exchange rates for USD$ in the interbank market on 4th, 7th and 14th April 2025 were:

4th April ₹ 7th April ₹ 14th April ₹

Spot USD 1 = 73.2775/73.2975 73.1575/73.1975 73.1375/73.1775
Spot/April 73.3975/73.4275 73.2775/73.3275 73.2575/73.3075
May 73.7775/73.8250 73.6575/73.7275 73.6375/73.7050
June 74.0700/74.1325 73.9575/74.0675 73.9500/74.0525

Exchange margin of 0.10 percent and interest outlay of funds @ 12 percent are applicable. The remitter,
due to rescheduling of the semester, has requested on 14 th April 2025 for extension of contract with
due date on 14th June 2025.
You are required to answer the following:
6. Cancellation amount payable on $ 1,00,000
(a) ₹ 73.0850
(b) ₹ 73,87,750
(c) ₹ 73,08,500
(d) ₹ 79,250
7. Swap Loss on $ 1,00,000
(a) ₹ 0.1500
(b) ₹ 15,000
(c) ₹ 0.4800
(d) ₹ 48,000
8. Cash Outlay of funds on 4th April for $ 1,00,000
(a) ₹ 0.4800
(b) ₹ 48,000
(c) ₹ 47
(d) None of the above
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9. New Contract Rate for extension
(a) ₹ 74.0525
(b) ₹ 74.1266
(c) ₹ 74.1275
(d) ₹ 73.9500
10. Total Cost to Z in this process
(a) ₹ 79,250
(b) ₹ 15,000
(c) ₹ 47
(d) ₹ 94,297

This Case Scenario contains MCQ 11-15

On 1st July 2025 Mr. P has made the following investment:

Name of Company No. of Equity Share Beta Value Purchase Price per Equity Share
ML Ltd 1,000 1.25 ₹ 700

He wants to hold the investment till end of September 2025 with an expectation of huge dividends to be
announced in the AGM.
On the date of investment, September Nifty Futures are quoting at ₹ 17,500 and tradeable with lot size
of 50 for each contract.
You are required to answer the following:
11. Advise Mr. P how to hedge his market exposure
(a) Mr. P should take short position in the Nifty Futures
(b) Mr. P should take long position in the Nifty Futures
(c) Mr. P should short ML Ltd. stock and invest in in the Nifty Futures
(d) Mr. P should borrow money from risk free securities and invest in ML Ltd. stock
12. Calculate the number of future contracts to be bought/sold
(a) 1 sold
(b) 1 bought
(c) 50 sold
(d) 50 bought
13. Calculate the profit on Nifty Futures on expiry if share of ML Ltd. falls by 5%
(a) ₹ 43,750
(b) ₹ 54,687.50
(c) ₹ 35,000
(d) ₹ 87,500
14. Calculate the overall profit or loss of Mr. P during the expiry of September 2025 futures if
share of ML Ltd. falls by 5%
(a) ₹ 43,750
(b) ₹ 54,687.50

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 (c) Nil
(d) None of the above
15. Is it possible stock as well as nifty to raise or fall at the same percentage?
(a) Yes, because of unsystematic risk i.e. Beta may not be the same as of market
(b) No, because of systematic risk i.e. Beta may not be the same as of market
(c) Yes, because of systematic risk i.e. Beta may be the same as of market
(d) None of the above

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 PART – II (Descriptive Answers)
This part comprises 6 questions. Question No. 1 is compulsory. Attempt any
4 questions out of the remaining 5 questions.

Marks
1 (a) Sun Moon Mutual Fund (Approved Mutual Fund) sponsored open-ended equity 8
oriented scheme “Chanakya Opportunity Fund”. There were three plans viz. ‘A’ –
Dividend Re-investment Plan, ‘B’ – Bonus Plan & ‘C’ – Growth Plan.
At the time of Initial Public Offer on 1.4.2015, Mr. Anand, Mr. Bacchan & Mrs.
Charu, three investors invested ₹ 1,00,000 each at face value of ₹ 10 per unit &
chosen ‘B’, ‘C’ & ‘A’ Plan respectively.
The History of the Fund is as follows:

Dividend Bonus Net Asset Value per Unit (₹)

Date
% Ratio Plan A Plan B Plan C
28.07.2019 20 30.70 31.40 33.42
31.03.2020 70 5:4 58.42 31.05 70.05
31.10.2023 40 42.18 25.02 56.15
15.03.2024 25 46.45 29.10 64.28
31.03.2024 1:3 42.18 20.05 60.12
24.03.2025 40 1:4 48.10 19.95 72.40
31.07.2025 53.75 22.98 82.07

On 31st July, 2025, all three investors redeemed all the balance units.
Consider the following:
1. Long-term capital gain is exempt from Income tax.
2. Short-term capital gain is subject to 10% Income tax.
3. Security Transaction Tax 0.2% only on sale/redemption of units.
4. Ignore Education Cess.
You are required to calculate Effective Yield per annum (annual rate of return) of
each of the investors.
Note: Make calculation on months basis.

1 (b) ABC Ltd. has ₹ 300 million, 12 per cent bonds outstanding with six years 6
remaining to maturity. Since interest rates are falling, ABC Ltd. is contemplating of
refunding these bonds with a ₹ 300 million issue of 6 year bonds carrying a
coupon rate of 10 per cent. Issue cost of the new bond will be ₹ 6 million and the
call premium is 4 per cent. ₹ 9 million being the unamortized portion of issue cost
of old bonds can be written off no sooner the old bonds are called off. Marginal tax
rate of ABC Ltd. is 30 per cent. You are required to analyse the bond refunding
decision.
Note: Present all amounts in ₹ million

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2 (a) Following are the estimates of the net cash flows and probability of a new project 8
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 1 to 5 1,00,000 1,10,000 1,20,000
inflows per year
Estimated salvage value (after 5 20,000 50,000 60,000
tax)

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?

2 (b) P Ltd. is contemplating to borrow an amount of ₹ 50 crores for a period of 3 6

months in the coming 6 months’ time from now. The current rate of interest is 8%
per annum but it may go up in 6 months’ time. The company wants to hedge itself
against the likely increase in interest rate.
The Company's Bankers quoted an FRA (Forward Rate Agreement) at 8.30% per
annum.
Compute the effect of FRA and actual effective rate of interest cost to the
company, if the actual rate of interest during consideration period happens to be
(i) 8.60% p.a., or (ii) 7.80% p.a.
(Show your workings on the basis of months)

3 (a) An American firm is under obligation to pay interests of Can$ 10,10,000 and Can$ 8
7,05,000 on 31st July and 30th September respectively. The firm is risk averse and
its policy is to hedge the risk involved in all foreign exchange transactions. The
finance manager of the firm is thinking of hedging the risk considering two
methods i.e. Fixed forward or Option contracts.
It is now June 30. Following quotations regarding rate of exchange, US$ per Can$,
from the firm’s bank were obtained:

Spot 1 Month Forward 3 Months Forward

0.9284 – 0.9288 0.9301 0.9356

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 Price for a US$/Can$ option on a U.S. stock exchange (cents per Can$, payable on
purchase of the option, contract size Can$ 50,000) are as follows:

Strike Price Calls Puts

(US$/Can$) July Sept. July Sept.
0.93 1.56 2.56 0.88 1.75
0.94 1.02 NA NA NA
0.95 0.65 1.64 1.92 2.34

According to the suggestion of finance manager if options are to be used, one

month option should be bought at a strike price of 94 cents and three month
option at a strike price of 95 cents and for the remainder uncovered by the
options the firm would bear the risk itself. For this, it would use forward rate as
the best estimate of spot. Transaction costs are ignored.
Recommend, which of the above two methods would be appropriate for the
American firm to hedge its foreign exchange risk on the two interest payments.

3 (b) Eagle Ltd. reported a profit of ₹ 77 lakhs after 30% tax for the financial year 2024- 6
25. An analysis of the accounts revealed that the income included extraordinary
items of ₹ 8 lakhs and an extraordinary loss of ₹ 10 lakhs. The existing operations,
except for the extraordinary items, are expected to continue in the future. In
addition, the results of the launch of a new product are expected to be as follows:

₹ in lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10

You are required to:

(i) Calculate the value of the business, given that the capitalization rate is 14%.
(ii) Determine the market price per equity share, with Eagle Ltd.’s share capital
being comprised of 1,00,000 at 13% preference shares of ₹ 100 each and
50,00,000 equity shares of ₹ 10 each and the P/E ratio being 10 times.
Note: Present calculations in ₹ lakh

4 (a) During the audit of the Weak Bank (W), RBI has suggested that the Bank should 8
either merge with another bank or may close down. Strong Bank (S) has
submitted a proposal of merger of Weak Bank with itself. The relevant
information and Balance Sheets of both the companies are as under:

Particulars Weak Strong Assigned

Bank (W) Bank (S) Weights (%)
Gross NPA (%) 40 5 30
Capital Adequacy Ratio (CAR) 5 16 28

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 [Total Capital/ Risk Weight Asset]
Market price per Share (MPS) 12 96 32
Book value 10
Trading on Stock Exchange Irregular Frequent

Balance Sheet (₹ in Lakhs)

Particulars Weak Bank (W) Strong Bank (S)

Paid up Share Capital (₹ 10 per share) 150 500
Reserves & Surplus 80 5,500
Deposits 4,000 44,000
Other Liabilities 890 2,500
Total Liabilities 5,120 52,500
Cash in Hand & with RBI 400 2,500
Balance with Other Banks - 2,000
Investments 1,100 19,000
Advances 3,500 27,000
Other Assets 70 2,000
Preliminary Expenses 50 –
Total Assets 5,120 52,500

You are required to

(a) Calculate Swap ratio based on the above weights:
(b) Ascertain the number of Shares to be issued to Weak Bank;
(c) Prepare Balance Sheet after merger; and
(d) Calculate CAR and Gross NPA of Strong Bank after merger.

4 (b) Your client is holding the following securities: 6

Securities Cost (₹) Dividends (₹) Market price (₹) Beta

Equity Shares:
Gold Ltd. 10,000 1,725 9,800 0.6
Silver Ltd. 15,000 1,000 16,200 0.8
Bronze Ltd. 14,000 700 20,000 0.6
GOI Bonds 36,000 3,600 34,500 0.01

Simple average return of the portfolio is 15.7%, calculate:

(i) Expected rate of return in each, using the Capital Asset Pricing Model
(CAPM).
(ii) Risk free rate of return.

5 (a) The Bank BK enters into a Repo for 9 days with Bank NE in 6% Government bonds 5

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 2025 for an amount of ₹ 2 crore. 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.

Calculate:
(1) Repo Rate
(2) Dirty Price and
(3) Clean Price

5 (b) A USA based company is planning to set up a software development unit in India. 5
Software developed at the Indian unit will be bought back by the US parent at a
transfer price of US$ 10 millions. 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 30t and a withholding
tax of 10 per cent in India and will be eligible for tax credit in India. The software
developed will be sold in the US market and many companies are ready to acquire
the same. Other estimates are as follows:

Rent for fully furnished unit with necessary hardware in ₹ 18,75,000

India
Manpower cost (80 software professional will be ₹ 500 per man hour
working for 10 hours each day)
Administrative and other costs ₹ 15,00,000

Advise the US Company the minimum amount it should charge from the
prospective buyer. The rupee-dollar rate is ₹ 60/$.
Note: Assume 365 days a year.

5 (c) ‘Venture Capital Financing is a unique way of financing Startup’. Discuss. 4

6 (a) Mr. Alex, a practicing Chartered Accountant, can earn a return of 15 percent by 5
investing in equity shares on his own. He is considering a recently announced
equity based mutual fund scheme in which initial expenses are 6 percent and
annual recurring expenses are 2 percent.
(i) How much should the mutual fund earn to provide Mr. Alex a return of 15
percent per annum?
(ii) Mr. Alex's current Annual Professional Income is ₹ 40 Lakhs. His portfolio
value is ₹ 50 Lakhs and now he is spending 10% of his time to manage his
portfolio. If he spends this time on profession, his professional income will
go up in same proportion. He is thinking to invest his entire portfolio into a
Multicap Fund, assuming fund's NAV will grow at 13% per annum
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 (including dividend).
You are requested to advise Mr. Alex, whether he can invest the portfolio into
Multicap Funds? If so, what is the net financial benefit?

6 (b) ABC Ltd. is considering a project X, which is normally distributed and has mean 5
return of ₹ 2 crore with Standard Deviation of ₹ 1.60 crore.
In case ABC Ltd. loses on any project more than ₹ 1.00 crore there will be financial
difficulties. Determine the probability the company will be in financial difficulty.
Given: Standard Normal Distribution Table (Z-Score) providing area between
Mean and Z score

Z Score Area
1.85 0.4678
1.86 0.4686
1.87 0.4693
1.88 0.4699
1.89 0.4706

6 (c) Discuss briefly the steps in securitization mechanism. 4

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