CASE SCENARIOS 11

CASE SCENARIO 8

AES Ltd. wants to acquire DNF Ltd. and has offered a swap ratio of 1:2 (0.5
shares for every one share of DNF Ltd.). Following information is provided:

AES Ltd. DNF Ltd.

Profit after tax ` 36,00,000 ` 7,20,000
Equity shares outstanding (Nos.) 12,00,000 3,60,000
PE Ratio 10 times 7 times
Market price per share ` 30 ` 14
From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. The number of equity shares to be issued by AES Ltd. for acquisition of

DNF Ltd. would be………………
(a) 1,68,000
(b) 1,80,000
(c) 2,40,000
(d) 3,00,000
2. The EPS of AES Ltd. after the acquisition would be………………
(a) `2
(b) `3
(c) ` 3.13
(d) ` 4.00
3. The equivalent earnings per share of DNF Ltd. would be………..
(a) `1
(b) ` 1.50
12 ADVANCED FINANCIAL MANAGEMENT

(c) ` 1.57
(d) ` 2.00
4. If AES Ltd. PE multiple remains unchanged then its expected market price
per share after the acquisition would be………………
(a) ` 14
(b) ` 30
(c) ` 31.30
(d) ` 40.00

CASE SCENARIO 9

During one business meeting at XYZ Ltd., one of the member pointed out that
while evaluating the performance of any company one should not only see its
Operating Income but should also analyse its Capital structure as well.
Weighted Average Cost of Capital changes on the basis of capital structure
keeping all other factors unchanged.

He presented data relating to 3 companies Alpha Ltd., Beta Ltd. and Gama Ltd.
whose operating Income are equal, but their capital structure is different.
The following information relating to these 3 companies is as follows:

(in ` 000)

Alpha Ltd. Beta Ltd. Gama Ltd.

Total invested capital 20,00,000 20,00,000 20,00,000
Debt/Assets ratio 0.8 0.5 0.2
Shares outstanding 61,000 83,000 1,00,000
Pre tax Cost of Debt 16% 13% 15%
Cost of Equity 26% 22% 20%
Operating Income (EBIT) 5,00,000 5,00,000 5,00,000
The Tax rate is uniform 35% in all cases. The industry PE ratio is 11X.
 CASE SCENARIOS 13

From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. The weighted average cost of capital of Alpha Ltd. shall approximately be

…………….
(a) 13.520%
(b) 15.225%
(c) 17.950%
(d) 18.000%
2. The Economic Valued Added (EVA) of Beta Ltd. is…………….
(a) ` 54600 Thousand
(b) ` 20500 Thousand
(c) (-) ` 34000 Thousand
(d) ` 21500 Thousand
3. The price per share of Gama Ltd. shall be ……………..
(a) ` 28.60
(b) ` 31.90
(c) ` 31.46
(d) ` 29.45
4. The estimated market capitalisation of Alpha Ltd. is…………….
(a) ` 26,47,700 Thousand
(b) ` 31,46,000 Thousand
(c) ` 17,44,600 Thousand
(d) ` 23,73,800 Thousand
5. Earning per share of Beta Ltd. approximately is……………..
(a) ` 2.60
(b) ` 2.90
(c) ` 2.86
(d) ` 2.15
14 ADVANCED FINANCIAL MANAGEMENT

CASE SCENARIO 10

On 1 October 2023 Mr. X an exporter enters into a forward contract with a BNP
Bank to sell US$ 1,00,000 on 31 December 2023 at ` 85.40/$. However, due to
the request of the importer, Mr. X received the amount on 28 November 2023.
Mr. X requested the bank the take delivery of the remittance on 30 November
2023 i.e., before due date. The inter-banking rates on 28 November 2023 was
as follows:
Spot ` 85.22/85.27
One Month Premium 10/15
Note:
1. Consider 365 days in a year.
2. Prevailing Prime Lending Rate is 12%

From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. The bank may accept the request of customer of delivery before due date
of forward contract provided the customer is ready to bear the loss if any
consisting of…………
(a) Swap Difference
(b) Interest on Outlay of Fund
(c) Swap Difference Plus Interest on Outlay of Fund
(d) Fixed Charges Plus Swap Difference and Interest on Outlay of Fund
2. In case of early delivery bank shall charge interest on outlay of fund at a
rate not less than……………..
(a) 8%
(b) 10%
 CASE SCENARIOS 15

(c) 12%
(d) 18%

3. Swap Difference for US$ 1,00,000 is………………..

(a) ` 5,000
(b) ` 20,000

(c) ` 18,000
(d) ` 8,000
4. Interest on outlay of funds shall be approximately………………….
(a) ` 92 payable by X
(b) ` 183 payable by X
(c) ` 183 payable by Bank

(d) ` 122 payable by Bank

5. Net inflow to Mr. X is approximately……………..
(a) ` 85,42,183
(b) ` 85,20,000
(c) ` 85,19,817
(d) ` 85,40,000

CASE SCENARIO 11

A US parent company has subsidiaries in France, Germany, UK and Italy. The

amounts due to and from the affiliates is converted into a common currency
viz. US dollar and entered in the following matrix.
16 ADVANCED FINANCIAL MANAGEMENT

Inter Subsidiary Payments Matrix (US $ Thousands)

Paying affiliate
France Germany UK Italy Total
France --- 80 120 200 400
Germany 120 --- 80 160 360
Receiving
affiliate

UK 160 120 --- 140 420

Italy 200 60 120 --- 380
Total 480 260 320 500 1560
The treasurer of US Parent company is suggesting that by applying Multilateral
Netting system the company can save a lot of transfer/ exchange costs. The
company’s Board agreed with Treasurer’s proposal.
From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. Before applying Multilateral Netting it is necessary to apply……………….

(a) Unilateral Netting

(b) Bilateral Netting
(c) Multilateral Netting

(d) Interest Rate Swapping

2. Through Multinational Netting these transfers will be reduced to …………….
(a) $ 50,000
(b) $ 100,000
(c) $ 150,000
(d) $ 200,000

3. The Net Payment/ Net Receipts for France after netting off shall be………….
(a) Net Receipt $ 40,000
(b) Net Payment $ 80,000
 CASE SCENARIOS 17

(c) Net Payment $ 40,000

(d) Net Receipt $ 80,000

4. The Net Payment/ Net Receipts for Italy after netting off shall be…………….
(a) Net Receipt $ 60,000
(b) Net Payment $ 120,000

(c) Net Payment $ 60,000

(d) Net Receipt $ 120,000
5. Suppose if the transfer charges are 0.01% of the amount transferred then
by applying multilateral netting techniques there will be reduction in
overall cost of transfer by …………..
(a) US $ 136

(b) US $ 156
(c) US $ 1,360
(d) US $ 1,560

CASE SCENARIO 12

XYZ Ltd. needs funds for a short tenure. Some functional level manager
suggested about the bank credit/ overdraft option. On conforming from
Finance Department, it was found that company exhausted its credit limits due
to meeting recent contingency fund requirements. Then CA X, CFO suggested
the idea of floating Commercial papers by XYZ Ltd.
Accordingly, XYZ Ltd. is planning to issue Commercial Paper (CP), the details of
which is given below:

Issue Price of CP ` 97,550

Face Value ` 1,00,000
Maturity Period 3 Months
Issue Expense
18 ADVANCED FINANCIAL MANAGEMENT

Brokerage 0.15% for 3 months

Rating charges 0.50% p.a.
Stamp Duty 0.175% for 3 months
From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTION

1. The Bond Equivalent yield for an investor of the same Commercial Paper
shall be approximately……………..
(a) 2.51%
(b) 10.05%
(c) 7.53%

(d) 11.05%
2. The Effective Interest Rate per annum of same CP shall approximately
be…………………

(a) 10.44%
(b) 10.05%
(c) 2.51%

(d) 11.05%
3. Based on effective interest rate the total annual cost of funds to the
company shall approximately be………………………

(a) 11.27%
(b) 11.85%
(c) 12.24%

(d) 10.88%
4. Which of the following instruments cannot be used by a bank to meet its
short-term funding requirements?
(a) Call/Notice Money
 CASE SCENARIOS 19

(b) Commercial Paper

(c) Certificate of Deposit

(d) Repurchase Agreement (Repo)

5. The period of Commercial Paper ranges from……………….
(a) 14 days to 364 days

(b) 3 months to 6 months

(c) 7 days to 1 year
(d) 1 year to 3 years

CASE SCENARIO 13

Grow More Ltd. an NBFC is in the need of funds and hence it sold its receivables
to MAC Financial Corporation (MFC) for ` 100 million. MFC created a trust for
this purpose called General Investment Trust (GIT) through which it issued
securities carrying a different level of risk and return to the investors. Further,
this structure also permits the GIT to reinvest surplus funds for short term as
per their requirement.

MFC also appointed a third party, Safeguard Pvt. Ltd. (SPL) to collect the
payment due from obligor(s) and passes it to GIT. It will also follow up with
defaulting obligor and if required initiate appropriate legal action against them.

From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. The securitized instrument issued for ` 100 million by the GIT falls under
category of ……….
(a) Pass Through certificate (PTCs)
(b) Pay Through Security (PTS)
20 ADVANCED FINANCIAL MANAGEMENT

(c) Stripped Security

(d) Debt Fund.

2. In the above scenario, the Originator is………………….

(a) Grow More Ltd.
(b) MAC Financial Corporation (MFC)

(c) General Investment Trust (GIT)

(d) Safeguard Pvt. Ltd.
3. In the above scenario, the General Investment Trust (GIT) is
a/an………………….
(a) Obligor
(b) Originator
(c) Special Purpose Vehicle (SPV)
(d) Receiving and Paying Agent (RPA)
4. In the above scenario, the Safeguard Pvt. Ltd. (SPL) is a/an………………

(a) Obligor
(b) Originator
(c) Special Purpose Vehicle (SPV)

(d) Receiving and Paying Agent (RPA)

5. Which of the following statement holds true?
(a) When Yield to Maturity in market rises, prices of Principle Only (PO)
Securities tend to rise.
(b) When Yield to Maturity in market rises, prices of Principle Only (PO)
Securities tend to fall.
(c) When Yield to Maturity in market falls, prices of Principle Only (PO)
Securities tend to fall.
(d) When Yield to Maturity in market falls, prices of Principle Only (PO)
Securities remain the same.
 CASE SCENARIOS 21

CASE SCENARIO 14

You are a financial analyst at a prominent investment firm and have been tasked
with empirically verifying the weak form of Efficient Market Hypothesis (EMH)
Theory for the XYZ Stock Index, a collection of diverse stocks. You decided to
conduct three different tests to assess whether the stock market follows the
principles of the weak form of EMH.
Test 1
For the past five years, you collected daily price changes of the stocks in the
XYZ Stock Index. You calculated correlation coefficients for different lag periods
and analyzed whether past price changes exhibit any significant correlation with
future price changes. You considered price changes to be serially independent.
The results indicated that most auto correlation coefficients are close to zero
and statistically insignificant, suggesting those past price changes do not
predict future price changes.
Test 2

You further investigated the randomness of price changes in the XYZ Stock
Index. Analyzing the sequence of daily price changes, you count the number of
runs where price changes are consistently positive or negative. Upon comparing
the observed number of runs with the expected number based on randomness,
you find that they align closely, supporting the idea that price changes follow a
random pattern.

Test 3
To examine the efficacy of trading strategies based on historical price trends,
you implemented a simple trading rule for the XYZ Stock Index. The rule
involves buying when the price crosses a moving average of 5% threshold and
selling when it crosses another 7% threshold. Over a period of testing, you
computed the returns generated by the trading strategy. The results revealed
that the returns are not consistently better than random chance, implying that
past price trends do not reliably predict future price movements.
22 ADVANCED FINANCIAL MANAGEMENT

Conclusion:
After conducting the three tests the evidence supports the weak form of
Efficient Market Theory for the XYZ Stock Index you concluded that past price
trends do not reliably predict future price movements.
From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. Test 1 is …………………

(a) Serial Correlation test

(b) Filter Rules test
(c) Run test

(d) Variance Ratio test

2. Test 2 is ………………….
(a) Serial Correlation test

(b) Filter Rules test

(c) Run test
(d) Variance Ratio test

3. Test 3 is ………………
(a) Serial Correlation test
(b) Filter Rules test
(c) Run test
(d) Variance Ratio test.
4. The Filter Rule Test should not be applied for buy and hold strategy if………
(a) the behavior of stock price changes is predictable.
(b) the behavior of stock price changes is random.
 CASE SCENARIOS 23

(c) the behavior of stock price changes is correlated.

(d) the behavior of stock price changes is random.

5. Results of your studies support the……………

(a) Semi-strong EMH Theory
(b) Strong EMH Theory

(c) Random Walk Theory

(d) Markowitz Theory

CASE SCENARIO 15

Bank A is in need of fund for a period of 14 days. To meet this financial need
on 20th September 2023 Bank A enters into an agreement with Bank B under
which it will sell 10% Government of India Bonds issued on 1st January 2023 @
5.65% for ` 8 crore (Face value is ` 10,000 per Bond).

The clean price of same Bond is ` 9,942 and the Initial Margin be 2% and the
maturity date of Bond is 31st December 2028. Consider 360 days in a year and
interest is payable annually.

Based on above Case Scenario, answer the following questions:

MULTIPLE CHOICE QUESTIONS

1. The arrangement entered between Bank A and Bank B will be called ………
(a) Call Money Arrangement
(b) Commercial Bill Arrangement
(c) Commercial Paper
(d) Repurchase Agreement

2. Dirty Price of the Bond will approximately be……………………….

(a) ` 10,353
(b) ` 10,670
24 ADVANCED FINANCIAL MANAGEMENT

(c) ` 10,499
(d) ` 10,816

3. The start proceeds of the transaction shall be approximately ………………….

(a) ` 8,38,36,604
(b) ` 8,36,52,800

(c) ` 8,58,36,804
(d) ` 8,48,52,585
4. The second leg of the transaction shall be approximately.……………….
(a) ` 8,38,36,604
(b) ` 8,36,52,800
(c) ` 8,58,36,804

(d) ` 8,48,52,585
5. The amount of Accrued Interest per Bond shall be approximately ……………
(a) ` 728
(b) ` 720
(c) ` 734
(d) ` 714

CASE SCENARIO 16

Two friends Mr. A and Mr. N were discussing about the risks of market. While
Mr. A is sort of risk averse, Mr. N is an aggressive investor and believes in taking
risk.
Mr. N said we cannot diversify the market risk at all and he quoted the Modern
Portfolio Approach. Both of these friends analyse the market data for the few
month and came out with expected returns on two stocks for a particular
market.
 CASE SCENARIOS 25

Market Return Aggressive Defensive

7% 4% 9%
25% 40% 18%
From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. The Beta of Defensive stock is…………

(a) 2
(b) 0.50
(c) 4

(d) 1
2. Expected return of Aggressive stock if the market return is equally likely
to be 7% or 25% shall be……..

(a) 18%
(b) 13.5%
(c) 22%
(d) 11%
3. The Alpha of the Defensive stocks is……………….
(a) -10%

(b) 22%
(c) 5.5%
(d) 12%
4. The Modern Portfolio Theory is propounded by …………………
(a) William Sharpe
(b) Black Scholes
26 ADVANCED FINANCIAL MANAGEMENT

(c) Stephen Ross

(d) Harry Markowitz

5. As per Capital Market Line (CML) Theory the Portfolios lying on the CML
over the market portfolio are called ……………….
(a) Lending Portfolio

(b) Borrowing Portfolio

(c) Diversified Portfolio
(d) Risk- Free Portfolio

CASE SCENARIO 17

Mr. X on 1st July 2021, during the initial offer of some Mutual Fund invested in
10,000 units having face value of ` 10 for each unit. On 31st March 2022, the
dividend paid by the M.F. was 10% and Mr. X found that his annualized yield
was 153.33%. On 31st December 2023, 20% dividend was given. On 31st March
2024, Mr. X redeemed all his balance of 11,296.11 units when his annualized
yield was 73.52%.

From the information given above, choose the correct answer to the following
questions:

MULTIPLE CHOICE QUESTIONS

1. NAV as on 31/03/2022 shall be approximately………………

(a) ` 19.50
(b) ` 20.50
(c) ` 21.50
(d) ` 22.50
2. Total number of units as on 31/03/2022 shall be approximately………….
(a) 10487.80 units