MODEL TEST PAPER - 7

FINAL COURSE: GROUP – I

PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
Time Allowed – 3 Hours Maximum Marks – 100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case Scenario based MCQs (30 Marks)
Part I is compulsory.
Case Scenario I
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:
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

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 (d) ₹ 4.00
3. The equivalent earnings per share of DNF Ltd. would be………..
(a) ₹1
(b) ₹ 1.50
(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
5. If AES Ltd. PE multiple remains unchanged then, the market value of the
merged firm would be……….
(a) ₹ 4,14,00,000
(b) ₹ 4,88,28,000
(c) ₹ 3,75,60,000
(d) ₹ 4,31,94,000 (5 x 2 = 10 Marks)
Case Scenario II
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%

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Based on above case scenario, choose the most appropriate answer of the
following:
6. 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
7. In case of early delivery bank shall charge interest on outlay of fund at a
rate not less than……………..
(a) 8%
(b) 10%
(c) 12%
(d) 18%
8. Swap Difference for US$ 1,00,000 is………………..
(a) ₹ 5,000
(b) ₹ 20,000
(c) ₹ 18,000
(d) ₹ 8,000
9. 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
10. Net inflow to Mr. X is approximately……………..
(a) ₹ 85,42,183
(b) ₹ 85,20,000
(c) ₹ 85,19,817

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 (d) ₹ 85,40,000 (5 x 2 = 10 Marks)
Case Scenario III
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.
Inter Subsidiary Payments Matrix (US $ Thousands)
Paying affiliate
France Germany UK Italy Total
France --- 80 120 200 400
Receiving

Germany 120 --- 80 160 360

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 above case scenario, choose the most appropriate answer of following
MCQs.
11. Before applying Multilateral Netting it is necessary to apply……………….
(a) Unilateral Netting
(b) Bilateral Netting
(c) Multilateral Netting
(d) Interest Rate Swapping
12. Through Multinational Netting these transfers will be reduced to
……………………….
(a) $ 50,000
(b) $ 100,000
(c) $ 150,000
(d) $ 200,000

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13. The Net Payment/ Net Receipts for France after netting off shall
be…………….
(a) Net Receipt $ 40,000
(b) Net Payment $ 80,000
(c) Net Payment $ 40,000
(d) Net Receipt $ 80,000
14. 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
15. 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 (5 x 2 = 10 Marks)
PART – II DESCRIPTIVE QUESTIONS
Question No.1 is compulsory. Candidates are required to answer
any four questions from the remaining five questions.
Working notes should form part of the answers.
Maximum Marks – 70 Marks
1. (a) You as an investor had purchased a 4-month call option on the
equity shares of ABC Ltd. of ₹ 10, of which the current market price
is ₹ 660 per share and the exercise price ₹ 750. You expect the
price to range between ₹ 600 to ₹ 950. The expected share price of
ABC Ltd. and related probability is given below:

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 Expected Price (₹) 600 700 800 900 950
Probability 0.05 0.20 0.50 0.10 0.15

Evaluate the following:

(i) Expected Share price at the end of 4 months.
(ii) Value of Call Option at the end of 4 months if the exercise
price prevails.
(iii) In case the option is held to its maturity, estimate expected
value of the call option? (6 Marks)
(b) Share of Beta Ltd. is being quoted at a Price-Earning ratio of 10
times. In the coming year the company is expected to retain ₹ 10
per share which is 45% of its Earning Per Share.
You are required to evaluate:
(i) The cost of equity to the company if the market expects a
growth rate of 10% p.a.
(ii) If the anticipated growth rate is 12% per annum, calculate
the indicative market price with the same cost of capital.
(4 Marks)
(c) Why is there a need for succession planning in business? Explain.
(4 Marks)
2. (a) On January 28, 2023, an importer customer requested a Bank to
remit Singapore Dollar (SGD) 2,500,000 under an irrevocable Letter
of Credit (LC). However, due to unavoidable factors, the Bank could
affect the remittances only on February 4, 2023. The inter-bank
market rates were as follows:
January 28, 2023 February 4, 2023
US$ 1= ₹ 80.91/80.97 ₹ 80.85/80.90
GBP £ 1 = US$ 1.7765/1.7775 US$ 1.7840/1.7850
GBP £ 1 = SGD 2. 1380/2.1390 SGD 2.1575/2.1590

The Bank wishes to retain an exchange margin of 0.125% on

₹/ SGD.

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 Required:
Estimate how much does the customer stand to gain or lose due to
the delay?
(Note: Calculate the rate in multiples of 0.0001) (6 Marks)
(b) Bank A enter into a Repo for 14 days with Bank B in 10%
Government of India Bonds 2028 @ 5.65% for ₹ 8 crore. Assuming
that clean price (the price that does not have accrued interest) be
₹ 99.42 and initial Margin be 3% and days of accrued interest be
272 days.
You are required to calculate:
(i) Dirty Price
(ii) Approximate Repayment amount at maturity.
Note: (1) Consider 360 days in a year.
(2) Round off calculations upto 2 decimals points. (4 Marks)
(c) What are the parameters to identify currency risk? List out the ways
to minimize such risk. (4 Marks)
3. (a) Suppose that economy A is growing rapidly, and you are managing
a global equity fund and so far you have invested only in developed-
country stocks only. Now you have decided to add stocks of
economy A to your portfolio. The table below shows the expected
rates of return, standard deviations, and correlation coefficients (all
estimates are for aggregate stock market of developed countries
and stock market of Economy A).
Developed Stocks of
Country Economy
Stocks A
Expected rate of return (annualized 20 30
percentage)
Risk [Annualized Standard 16 30
Deviation (%)]
Correlation Coefficient (ρ) between 0.30
stock of two economies

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 Assuming the risk-free interest rate to be 6%, you are required to
determine:
(i) What percentage of your portfolio should you allocate to
stocks of Economy A if you want to increase the expected rate
of return on your portfolio by 1%?
(ii) What will be the standard deviation of your portfolio assuming
that stocks of Economy A are included in the portfolio as
calculated above?
(iii) Also show how well the Fund will be compensated for the risk
undertaken due to inclusion of stocks of Economy A in the
portfolio? (6 Marks)
(b) An investor has two portfolios known to be on minimum variance set
for a population of three securities X, Y and Z having below
mentioned weights:
WX WY WZ
Portfolio A 0.30 0.40 0.30
Portfolio B 0.20 0.50 0.30

Calculate the weight for each stock for a portfolio constructed by

investing ₹ 10,00,000 in portfolio A and ₹ 6,00,000 in portfolio B.
(4 Marks)
(c) Either
Briefly explain Blockchain transaction. List the risks associated with
Blockchain. (4 Marks)
(c) Or
Explain briefly the financial measures that help in evaluation of
performance of any Mutual Fund. (4 Marks)
4. (a) Your client is holding the following securities:
Particulars of Cost Dividends/I Market price at Beta
Securities nterest the end of
holding period
₹ ₹ ₹
Equity Shares:
G Ltd. 20,000 1,450 19,600 0.6

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 S Ltd. 30,000 1,000 30,400 0.8
B Ltd. 28,000 1,400 32,000 0.6
GOI Bonds 72,000 5,060 71,980 0.01

Evaluate:
(i) Risk free rate of return.
(ii) Expected rate of return of each security (except GOI Bond),
using the Capital Asset Pricing Model (CAPM).
Note: (1) Use weighted average Beta in calculations.
(2) Round off calculations upto 3 decimal points. (6 Marks)
(b) XYZ Plan, a hedge fund currently has assets of ₹ 40 crore. Mr. A,
the manager of fund charges fee of 0.10% of portfolio asset. In
addition to it he charges an incentive fee of 2%. The incentive will
be linked to gross return each year in excess of the portfolio
maximum value since the inception of fund. The maximum value the
fund achieved so far since inception of fund about one and half year
ago was ₹ 42 crores.
Evaluate:
(i) Benchmark Return to make Mr. A eligible for incentive fee.
(ii) The fee payable to Mr. A if return on the fund this year turns
out to be :
(1) 29% (2) 4.5% (4 Marks)
(c) What do you mean by Corporate Level Strategy. Also explain three
basic questions Corporate Level Strategy should be able to answer.
(4 Marks)
5. (a) T plc wants to acquire L plc. The balance sheet of L plc as on 31st
March 2022 is as follows:
Liabilities £ Assets £
Equity Capital 35,00,000 Cash 2,50,000
(35,00,000 shares)
Retained earnings 15,00,000 Debtors 3,50,000
12% Debentures 15,00,000 Inventories 10,00,000

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 Creditors and other 16,00,000 Plants & 65,00,000
liabilities Eqpt.
81,00,000 81,00,000

Additional Information:
(i) Shareholders of L plc will get one share in T plc for every two
shares. External liabilities are expected to be settled at £ 2.50
Million. Shares of T plc would be issued at its current price of
£ 1.50 per share. Debenture holders will get 13% convertible
debentures in the purchasing company for the same amount.
Debtors and inventories are expected to realize £ 1 Million.
(ii) T plc has decided to operate the business of L plc as a
separate division. The division is likely to give cash flows
(after tax) to the extent of £ 2.50 Million per year for 6 years.
T plc has planned that, after 6 years, this division would be
demerged and disposed of for £ 1 Million.
(iii) The company’s cost of capital is 16%.
Advise the Board of the company about the financial feasibility of
this acquisition.
Net present values for 16% for £ 1 are as follows:
Years 1 2 3 4 5 6
PV 0.862 0.743 0.641 0.552 0.476 0.410
(6 Marks)
(b) A mutual fund company introduces two schemes i.e. Dividend plan
(Plan-D) and Bonus plan (Plan-B). The face value of the unit is
₹ 10. On 1-4-2018 Mr. K invested ₹ 2,00,000 each in Plan-D and
Plan-B when the NAV was ₹ 38.20 and ₹ 35.60 respectively. Both
the plans matured on 31-3-2023.
Particulars of dividend and bonus declared over the period are as
follows:
Date Dividend Bonu Net Asset Value
s (₹)
% Ratio Plan D Plan B
30-09-2018 10 --- 39.10 35.60

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 30-06-2019 --- 1:5 41.15 36.25
31-03-2020 15 --- 44.20 33.10
15-09-2021 13 --- 45.05 37.25
30-10-2021 --- 1:8 42.70 38.30
27-03-2022 16 --- 44.80 39.10
11-04-2022 --- 1:10 40.25 38.90
31-03-2023 --- --- 40.40 39.70

Evaluate the Effective Yield Per Annum in respect of the above two
plans.
Note:
1. Use following PV Factors:
PVIF (2%,5) = 0.9057, PVIF (4%,5) = 0.8219, PVIF (8%,5)
= 0.6806, PVIF (13%,5) = 0.5428
2. Round off calculations upto 2 decimal points. (8 Marks)
6. (a) R Ltd. is considering a project with the following Cash flows:
in ₹
Years Cost of Plant Recurring Cost Savings
0 20,000
1 8,000 24,000
2 10,000 28,000

The cost of capital is 9%.

Evaluate the sensitivity of the project in respect of all factors except
time such that:
(i) NPV become zero and
(ii) adversely varying factors value by 10%.
The P.V. factor at 9% are as under:
Year Factor
0 1
1 0.917
2 0.842

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 Note: Round off calculation upto 2 decimal points. (8 Marks)
(b) Bank entered a plain vanilla swap through on OIS (Overnight Index
Swap) on a principal of ₹ 20 crores and agreed to receive MIBOR
overnight floating rate for a fixed payment on the principal. The
swap was entered into on Monday, 2nd August 2020 and was to
commence on 3rd August 2020 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
7.75%, 8.15%, 8.12%, 7.95%, 7.98% and 8.15%.
If Bank received ₹ 634 net on settlement, calculate the applicable
Fixed rate for the same swap period.
Notes:
(i) Sunday is Holiday.
(ii) Work in rounded rupees and avoid decimal working.
(iii) Consider 365 days a year. (6 Marks)

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