Ph.

9911442626
Wherever you go, go with all your heart CA Aaditya Jain

INTRODUCING MCQ TEST SERIES

EXCLUSIVELY FOR CMA FINAL STUDENTS
BY INDIA’S NO.1 FINANCE FACULTY

AADITYA JAIN

AADITYA JAIN
THE BEST SFM FACULTY OF INDIA
TARGET 100% PLUS CRORE PLUS
SALARY
9911442626
 Ph. 9911442626
Wherever you go, go with all your heart 2 CA Aaditya Jain
MCQ Set 1
QUESTION NO.1: A safety mutual fund that had a net asset value of ‘ 20 at the beginning of a month, made
income and capital gain distribution of ‘0.06 and ‘ 0.04 respectively per unit during the month and then ended the
month with a net asset value of ‘ 20.25. The monthly return is: (A)2.25% (B) 1.75% (C)1.25% (D)1.65%

QUESTION NO.2: Mr. Ravi is planning to purchase the shares of X Ltd. which had paid a dividend of ‘ 2 per share
last year. Dividends are growing at a rate of 10%. What price would Mr. Ravi be willing to pay for X Ltd.’s shares
if he expects a rate of return of 20%? (A)‘22 (B)‘24 (C)‘20 (D)‘21

QUESTION NO.3: The spot price of securities of X Ltd. is ‘160. With no dividend and no carrying cost, compute the
theoretical forward price of the securities for 1 month. You may assume a risk free interest rate of 9% p.a.
(A)‘160 (B)‘162.75 (C)‘161.20 (D)‘159.20

QUESTION NO.4: It is given that ‘/£ quote is ‘94.30 – 95.20 and that ‘/$ quote is 66.25 – 66.45. What would be the
$/£ quote? (A)1.42:1.44 (B)1.44:1.42 (C)1.44:1.52 (D)1.52:1.44

QUESTION NO.5: When are call options and put options said to be ‘in the money’ in the futures market?
(A) In call options when strike price is above the price of underlying futures, call option is‘in the money’. In put
options, when the strike price is below the price of underlying futures put option ‘is in the money’.
(B) In call options when strike price is below the price of underlying futures, call option is‘in the money’. In put
options, when the strike price is above the price of underlying futures put option ‘is in the money’.
(C) None of the above (D) Both the above.

QUESTION NO.6: A firm has an equity beta of 1.40 and is currently financed by 25% debt and 75% equity. What
will be the company’s equity beta if the company changes its financing policy to 33% debt and 67% equity?
[Assume corporate tax at 35% and zero debt beta] (A)1.62 (B)1.72 (C)1.42 (D)1.52

QUESTION NO.7: XYZ Ltd. has a uniform income that accrues in a 4-year business cycle. It has an average EPS of
‘ 20 (per share of ‘ 100) over its business cycle. Find out the cost of equity capital, if market price is ‘ 175.
(A)11.43% (B)12.43% (C)10.43% (D)13.43%

QUESTION NO.8: Calculate Sharpe ratio from the following information :

Return - 13 ; Risk (ó) - 16 ; Beta (â) - 0.90 ; Risk free rate - 10 (A)0.18 (B)0.16 (C)0.19 (D) 0.17

QUESTION NO.9: Compute the theoretical forward price of the following security for 6 months :
Spot Price (Sx) - ‘160 ; Risk free interest rate - 9% ; [Given: e0.045 = 1.046028]
(A)‘168.3645 (B)‘ 167.3645 (C)‘166.3645 (D)‘165.3645

QUESTION NO.10: A project had an equity beta of 1.3 and was going to be financed by a combination of 30% debt
and 70% equity. Assuming debt-beta to be zero, calculate the project beta and return from the project taking risk
free rate of return to be 10% and return on market portfolio of 18%.
(A) 14.28% (B) 17.28% (C) 15.28% (D) 16.28%

Answer:
(i) (B) Capital Appreciation = Closing NAV – Opening NAV = ‘20.25 – ‘20 = ‘0.25
Total return = Capital Appreciation + Income + Capital Gain = 0.25 + 0.06 + 0.04 = ‘0.35
Monthly Return = Total Return/Opening NAV = 0.35 / 20 = 0.0175 = 1.75%
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(ii) (A) P0 = D1 / (Ke – g) or P0 = 2.20 / (0.20 – 0.10) = ‘22 ; Working Note : D1 = D0 (1+g) = 2 (1+0.10) = ‘2.20

(iii) (C) Theoretical forward price of security of X Ltd = ‘160 × e 0.09 × 0.0833 = ‘160 × e 0.0075 = ‘160 × 1.007528 =
‘161.20

(iv) (A) The rate for $/£ is to be calculated. The formula is –

$/£ = Re / £bid : Re / £ask = 94.30 : 95.20 = 1.4190 : 1.4370
Re / $ Re / $
66.45 66.25
bid ask
Or, 1.42 : 1.44

(v) (B) In call options when strike price is below the price of underlying futures, call option is ‘in the money’.
In put options, when the strike price is above the price of underlying futures put option ‘is in the money’.

(vi) (D) Debt Beta is 0, since it is not given.

Asset beta = [Equity Beta × Equity] / [Equity + Debt × (1 -tax)] +[Debt Beta × Debt (1- tax)] / [Equity + Debt × (1
tax)] = {(1.40 × 0.75) / [ 0.75 + 0.25 × (1 - 0.35)] } + 0 = 1.1507.
Company’s Beta = [Equity Beta × Equity] / [Equity + Debt × (1 -tax)] + {[ Debt Beta × Debt (1- tax)] / [Equity + Debt
x (1 -tax)]} or 1.1507 = Equity Beta × 0.67 / [ 0.67 + 0.33 (1 - 0.35)] + 0 ; or Equity Beta = 1.52.

(vii) (A) KE = [Earnings per share / Market price per share]×100=[‘ 20 / ‘175] × 100 = 11.43%.

(viii) (C) Sharpe’s ratio = (RP - RF) / Standard Deviation = [ 13 - 10 ] / 16 = 0.19

(ix) (B) Forward price of securities = ‘160 × e(009)(0.50) = ‘160 × e0.045= ‘ 160 × 1.046028 = ‘ 167.3645.

(x) (B) Bp is to be ascertained as -= [ Equity Beta + E / (D +E) ] + [ Debt Beta+ E /(D + E)] = (1.30 × 0.70) + (0 × 0.3)
=0.91
Computation of return from the project = RF + Beta(RM - RF) = 0.10 + 0.91 × ( 0.18 - 0.10) = 0.1728 = 17.28 %.

MCQ Set 2
QUESTION NO.1: X Ltd. issued ‘ 100, 12% Debentures 5 years ago. Interest rates have risen since then, so that
debentures of the company are now selling at 15% yield basis. What is the current expected market price of the
debentures? (A) ‘ 75 (B)‘ 80 (C) ‘ 90 (D) ‘ 85

QUESTION NO.2: Given:

Last year AADITYA JAIN
Current year
Sales unit 2,000THE BEST SFM FACULTY2,800 OF INDIA
Selling price per unit ‘ 10 TARGET 100% PLUS ‘ 10 CRORE PLUS
EPS ‘ 9.60 ‘ 38.40
SALARY
What is the Degree of Combined Leverage? (A) 6-5 (B)5-6 (C) 7-5 (D) 5-7
9911442626
QUESTION NO.3: MI Ltd. has annual sales of ‘ 365 lacs. The company has investment opportunities in the money
market to earn a return of 15% per annum. If the company could reduce its float by 3 days, what would be the
increase in company’s total return? (Assume 1 year = 365 days) (A) ‘ 45,000 (B)‘ 40,000 (C) ‘ 54,000 (D) ‘46,000

QUESTION NO.4: In the inter-bank market, the DM is quoting ‘ 21-50. If the bank charges 0.125% commission for
 Ph. 9911442626
Wherever you go, go with all your heart 4 CA Aaditya Jain
TT selling, what is the TT selling rate? (A) 21-47 / DM (B)‘ 21-53 / DM (C) 22-78 / DM (D) ‘ 23-45 / DM

QUESTION NO.5: The required rate of return on equity is 24% and cost of debt is 12%. The company has a capital
structure mix of 80% of equity and 20% debt. What is the overall rate of return, the company should earn? Assume
no tax. (A) 21-6% (B)14-4% (C) 18-6% (D) 17-22%

QUESTION NO.6: Consider the following quotes:

Spot (Euro/Pound) = 1.6543 / 1.6557; Spot (Pound / NZ’s) = 0.2786 / 0.2800
Calculate the % spread on the Euro/Pound Rate. (A) 0.0805% (B) 0.0080% (C) 0.8501% (D) 0.0850%

QUESTION NO.7: Initial Investment ‘ 20 lakh. Expected annual cash flows ‘ 6 lakh for 10 years. Cost of capital @
15%. What is the Profitability Index? The cumulative discounting factor @ 15% for 10 years = 5.019.
(A) 1.51 (B) 1.15 (C) 5.15 (D) 0.151

QUESTION NO.8: The following details relate to an investment proposal of XYZ Ltd.
Investment outlay— ‘ 100 lakhs ; Lease Rentals are payable at ‘ 180 per ‘ 1,000 ; Term of lease—8 years Cost of
capital—12%. What is the present value of lease rentals, if lease rentals are payable at the end of the year?
[Given PV factors at 12% for years (1-8) is 4.9676. (A) ‘ 98,14,680 (B)‘ 89,41,680 (C) 94,18,860 (D) ‘ 96,84,190

QUESTION NO.9: An investor wrote a naked call option. The premium was ‘ 2.50 per share and the market price
and exercise price of the share are ‘ 37 and ‘ 41 respectively. The contract being for 100 shares, what is the
amount of margin under First Method, that is required to be deposited with the clearing house?
(A) 590 (B)‘250 (C) ‘ 740 (D) ‘ 400

QUESTION NO.10: An investor buys a call option contract for a premium of ‘ 200. The exercise price is ‘ 20 and
the current market price of the share is ‘ 17. If the share price after three months reaches ‘ 25, what is the profit
made by the option holder on exercising the option? Contract is for 100 shares. Ignore the transaction charges.
(A) 290 (B)‘250 (C) ‘ 300 (D) ‘ 400

Answer:
(i) (B) Market value of Debentures = Interest on Debenture / Current Yield Rate = 12 / 0.15 = ‘80

(ii) (C) Degree of Combined leverage = Change in EPS / EPS / Change In Sales/ Sales = [(38.40 - 9.60) / 9.60] /
(28,000 - 20,000)/ 20,000 = 3 / 40 = 7.5

(iii) (A) Average sales per day = ‘3.65 lakhs / 365 days ; Increase in Total Returns = ‘1 lakhs @ 3days × 15% =
‘45,000.

(iv) (A) TT selling rate = 21.50 (1 – 0.00125) = ‘21.47 / DM

(v) (A) Rate of return on equity fund = 24% × 0.80 = 19.2

Cost of debt is = 12% × 0.20 = 2.4
Overall rate of return Co. should earn 21.6
1.6557 - 1.6543
(vi) (D) % spread on Euro/Pound rate =  100 =0.0850%
1.6543

(vii) (A) P.V. of inflows = 6.00 × 5.019 = ‘30.114 lakhs

 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
Profitability Index = P.V.of inflow s / P.V.of outflow s = 30.114 / 20 = 1.51

(viii) (B) P. V. of lease rentals = ‘18 lakhs × PVI FA (12%, 8) ; = ‘18 lakhs × 4.9676 ; = ‘89,41,680

(ix) (A) Margin = (Option premium × 100) + {100 × 0.20 (market value of the share)} – {100 × (Exercise price –
market price)} ; = (2.50 × 100) + {100 × (0.20 × 37)} – 100 × (41 – 37) =‘590

(x) (C) Assuming in call option, the total outgo = Premium + Exercise Price = ‘ 200 + (‘ 20×100) = ‘ 2,200.
After 3 months, if the share price is ‘ 2,500, the net profit = ‘ 2,500 – ‘ 2,200 = ‘ 300.

MCQ Set 3
QUESTION NO.1: Unlevered beta and effective tax rate of S Ltd is 0.8 and 35 percent respectively. The company
intends to undertake a project with 60 percent debt financing. Assuming risk free rate of 7.5 % and market
premium 8 %, calculate cost of equity (rounded up to two decimal points)
(A) 13.90% (B) 20.14% (C) 16.40% (D) none of (A), (B) or (C)

QUESTION NO.2: The spot and 6 months forward rates of US $ in relation to the rupee(‘/$) are ‘40.9542 /
41.1255 and ‘41.8550 / 9650 respectively. What will be the annualized forward margin(premium with respect
to Bid Price)? (A) 4.10% (B) 4.40% (C) 4.50% (D) None of (A), (B) or (C)

QUESTION NO.3: A mutual Fund had a Net Asset Value (NAV) of ‘72 at the beginning of the year. During the year,
a sum of ‘6 was distributed as Dividend besides ‘ 4 as Capital Gain distributions. At the end of the year, NAV was
‘ 84. Total return for the year is : (A) 30.56% (B) 31.56% (C) 40.56% (D) 41.56%

QUESTION NO.4: The standard deviation of Greaves Ltd. Stock is 24% and its correlation coefficient with market
portfolio is 0.5. The expected return on market is 16% with the standard deviation of 20%. If the risk free return is
6%, what will be the required rate of return on Greaves Ltd. Script? (A) 12% (B) 11% (C) 13% (D)
11.5%

QUESTION NO.5: Your customer requests you to book a sale forward exchange contract for US $ 2 million delivery
3rd month. The quotes are: Spot US $ 1= ‘48.050/0.060 1month margin= 0.0850/.0900 ; 2 month margin=0.2650/
0.2700 ; 3 month margin=0.5300/0.5350 ; You are required to make an exchange profit of 0.125%. Ignore telex
charges and brokerage. (A) ‘120000 (B) ‘230000 (C) ‘75000 (D) ‘100000

QUESTION NO.6: The Sterling is trading at ‘1.6100 today. Inflation in UK is 4%and that in USA is 3%. What could
be spot rate($/£) after 2 years? (A) 1.5792 (B) 1.5892 (C) 1.5992 (D) 1.5939

QUESTION NO.7: The capital structure of aAADITYA

company is asJAIN
under: 300000 Equity shares of ‘10 each ; 32000, 12%
Preference shares of ‘100 each
THE General
BESTReserve
SFM‘1500000
FACULTY ; Securities Premium Account ‘500000 ; 25000, 14%
OF INDIA
Fully Secured Debentures of ‘100 each Term Loan of ‘1300000. Based on these, the leverage of the company is:
TARGET 100% PLUS CRORE PLUS
(A) 60.22% (B) 58.33% (C) 55.21% (D) 62.10%
SALARY
9911442626
QUESTION NO.8: Historically, when the market return changed 10%, the return on stock of Arihant Ltd changed
by 16%. If variance of market is 257.81, what would be the systematic risk for Arihant Ltd?
(A) 320% (B) 480% (C) 660% (D) Insufficient information.

QUESTION NO.9: The beta co-efficient of equity stock of ARISTO LTD is 1.6. The risk free rate of return is 12% and
the required rate of return is 15% on the market portfolio. If dividend expected during the coming year ‘2.50 and
 Ph. 9911442626
Wherever you go, go with all your heart 6 CA Aaditya Jain
the growth rate of dividend and earnings is 8%, at what price the stock of ARISTO LTD. Can be sold (based on
CAPM)? (A) ‘12.50 (B) ‘16.80 (C) ‘28.41 (D) Insufficient Information.

QUESTION NO.10: The ratio of current assets (‘3,00,000) to current liabilities (‘2,00,000) is 1.5 : 1. The accountant
of this firm is interested in maintaining a current ratio of 2 : 1 by paying some part of current liabilities. Hence, the
amount of current liabilities which must be paid for this purpose is :
(A) ‘1,00,000 (B) ‘2,00,000 (C) ‘ 2,50,000 (D) ‘ 1,50,000

Answers:
(i) (B) Levered beta= 0.8 x [1 + (1- 0.35) x (60 / 40)] = 1.58 ; Cost of Equity = 7.5 + 1.58 x 8 = 20.14

(ii) (B) [(‘ 41.8550 - ‘40.9542) / ‘40.9542] x 12 / 6 x 100 ; = 0.04399 x 100=43.99 i. e 4.40% per annum

(iii) (A) Capital Appreciation = Closing NAV- Opening NAV = 84 - 72 = ‘12.

Return = [Cash Dividend + Capital Appreciation + Capital gain] / Opening NAV ;
= [6 + 4 + 12] / 72 = 22 / 72 = 0.3056 = 30.56%

(iv) (A) Given, Rf (risk free return) = 6% ; Rm (market return )= 16% ; S.D. of market return = 20% ;
S.D. of Greaves stock = 24% ; correlation coefficient of Greaves with the market = - 0.5
Beta of Greaves stock = 0.5 x 0.24 x 0.20 / (0.20)2 = 0.6
The required return = Rf + Beta of Greaves stock (Rm - Rf) ; = 6% + 0.6 (16-6)% =12%

(v) (A) 3 month interbank rate(ask) with margin= ‘(48.060+0.5350) ; = ‘48.5950 ; With exchange profit @
0.125%, the quote will be ‘48.5950 × 1.00125 = ‘48.66 Profit = ‘(48.66 - 48.60)*2m USD= ‘120000.

(vi) (A) S ($ / £)= F($ / £) x (1 + r$)2 / (1 + r£)2 ; =1.61 x (1 + 0.03)2 / (1 + 0.04)2 ; = 1.5792

(vii) (B) a. Fixed Income Funds= ‘(32,00,000 + 25,00,000 +13,00,000)

b. Equity Funds= ‘(30,00,000 +15,00,000 + 5,00,000) Leverage=a / (a + b)= ‘70,00,000 / ‘120,00,000 = 58.33%

(viii) (C) 10% increase in Market return resulted in 16% increase in Arihant Ltd. Stock. Thus the Beta for Arihant
Ltd. Stock is 1.60 (i. e 16% / 10%) ; Now Systematic Risk is = (1.60)2 (257.81) = 659.99% = 660%

(ix) (C) Expected rate of Return (CAPM) ; Re = Rf + Beta (Rm - Rf) ; = 12% + 1.6(15% - 12%) = 12% + 4.8% = 16.85%
Price of stock (Dividend Growth Formula)
Re = D1 / (P0+g) ; 0.168 = 2.50 / (Po + 0.08) ; Or, 0.168 - 0.08 = 2.50 / Po ; Or, Po = 2.50 / 0.088 = ‘28.41

(x) (A) Current Ratio = Current Asset / Current Liabilities = 300000-X / 200000 - X = 2 ; Or, (300000 - X)
= 2 (200000 - X); Or, X = 100000

MCQ Set 4
QUESTION NO.1: Dividend-Payers Ltd. has a stable income and stable dividend policy. The average annual
dividend payout is ‘ 27 per share (Face Value = ‘100). You are required to find out: Dividend payout in year 2, if the
company were to have an expected market price of ‘160 per share at the existing cost of equity. [The market price
in year 1 is ‘ 150] (A) ‘28.88 (B) ‘ 26.86 (C) ‘28.80 (D) ‘ 26.98

QUESTION NO.2: The interest rate in Germany is 11 per cent and the expected inflation rate is 5 per cent. The
British interest rate is 9 per cent. How much is the expected inflation rate in Britain?
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(A) 3.0%` (B) 3.1% (C) 4.5% (D) 2.9%

QUESTION NO.3: A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt
and 70% equity (assume debt beta = 0). Hence, the required rate of return of the project is (assume Rf = 10% and
Rm =18%) (A) 16.27% (B) 17.26% (C) 16.72% (D) 12.76%

QUESTION NO.4: Consider the following quotes.

Spot (Euro / Pound) = 1.6543 / 1.6557 Spot (Pound / NZ$) = 0.2786 / 0.2800
Calculate the % spread on the Euro/Pound Rate. (A) 0.085% (B) 0.0085% (C) 0.85% (D) 0.00085%

QUESTION NO.5: A company has expected Net Operating Income – ‘ 2,40,000; 10% Debt – ‘7,20,000 and Equity
Capitalisation rate - 20% what is the weighted average cost of capital for the company?
(A) 0.15385 (B) 0.13585 (C) 0.18351 (D) 0.15531

QUESTION NO.6: The price of Swedish Krones is $ 0.14 today. If it appreciates by 10% today, how many Krones a
dollar will buy tomorrow? (A) 6.49351 (B) 4.69351 (C) 3.49513 (D) 5.64913

QUESTION NO.7: A firm has sales of ‘75,00,000 variable cost of ‘42,00,000 and fixed cost of ‘6,00,000.It has a
debt of ‘45,00,000 at 9% interest and equity of ‘55,00,000. At what level of sales, the EBIT of the firm will be equal
to zero? (A) ‘28,48,500 (B) ‘28,84,500 (C) ‘22,84,500 (D) ‘26,48,500

QUESTION NO.8: E Limited has earnings before interest and taxes (EBIT) of ‘ 10 million at a cost of 7%., Cost of
equity is 12.5%. Ignore taxes. What is the overall cost of capital?
(A) 11.26% (B) 11.62% (C) 16.12% (D) 12.61%

QUESTION NO.9: The following various currency quotes are available from the State Bank of India:
‘/£ 81.31 / 81.33 : £ / $ 0.6491 / 0.6498 : $ / ¥ 0.01098 / 0.01102
The rate at which yen(¥) can be purchased with rupees will be: (A) 1.5270 (B) 1.5890 (C) 0.5824 (D) 0.7824

QUESTION NO.10: The dollar is currently trading at ‘ 40. If rupee depreciates by 10%, what will be the spot rate?
(A) ‘ 0.0525 (B) ‘ 0.0552 (C) ‘ 0.0225 (D) ‘ 0.0522

Answers:
(i) (C) Ke = 27 / 150 × 100 = 18% ; Ke = DPS / 160 = 18% ; DPS = 160 × 18% = ‘28.80

(ii) (B) If purchasing power parity holds, then the British inflations rate will be:
1.09  1.05
1.11 / 1.09 = 1.05 /1+ iB ; Or iB =  1 = 0.031 or 3.1%
1.11 AADITYA JAIN
THE BEST SFM FACULTY OF INDIA
 E   D 
(iii) (C) Beta   Beta Equity TARGET
    Beta Debt PLUS
100%   =CRORE
(1.2 × 0.70)PLUS
+ (0 × 0.30) = 0.84
 D E   DE 
SALARY
Required Rate of Return = Rf + Beta (Rm – Rf) = 10% + 0.84 (18% -10 %) = 10% + 6.72% = 16.72%
9911442626
1.6557 - 1.6543
(iv) (A) The % spread on Euro/Pound =  100 = 0.085%
1.6543
2,40,000 - 72,000(I)
(v) (A) Market value of equity (S) =  84,000
0.20
 Ph. 9911442626
Wherever you go, go with all your heart 8 CA Aaditya Jain
N0I 2,40,000
Total value of firm (V) = S + D = 840000 + 720000 = 1560000 ; Ko    0.15385
V 15,60,000
(vi) (A) The price of Swedish krones = $0.14 ; At 10% appreciation, it will be worth = $0.154
A dollar will buy 1 / 0.154 = 6.49351 krones tomorrow

(vii) (C) EBIT to became zero means 100% reduction in EBIT;

F. Leverage = EBIT / EBT = 2700000 / 2295000 = 1.1764
O. Leverage = Contribution / EBIT = 3300000 / 2700000 = 1.2222 ; Combined Leverage = 1.1764 × 1.2222 = 1.438
Sales have to drop by 100 / 1.438 = 69.54% ; New Sales will be = 7500000 × (1-0.6954) = ‘2284500 (approx)

(viii) (A) Market Value of equity (S) = (EBIT-1) / ke =(‘10,000,-1,400,000) / 0.125 ; = ‘68,800,000
Total value of Firm(V) = S + D = ‘68,800,000 + ‘20,000,000 = ‘88,800,000
Overall cost of capital (Ko) = (EBIT-1) / V =‘ 10,000,000 / ‘88,800,000 = 11.26%

(ix) (C) 81.33 × 0.6498 × 0.01102 = 0.5824

(x) (C) Re quote : ‘1 = $1 / 40 = 0.25 ; If rupee depreciates by 10%, then = 0.025 – 0.0025 = ‘0.0225

MCQ Set 5
QUESTION NO.1: You are a forex dealer in India. Rates of rupee and Euro in the international market are US $
0.01962905 and US $ 1.335603 respectively. What will be your direct quote of € (euro) to your customer?
(A) ‘ 69.5900 (B) ‘ 68.0420 (C) ‘ 65.1010 (D) ‘ 70.905

QUESTION NO.2: Marison Ltd. is planning to invest in USA. The rates of inflation are 8 % in India and 3 % in USA.
If spot rate is currently ‘46.50/$, what spot rate can the company expect after 5 years?
(A) ‘57.93/$ (B) ‘58.94/$ (C) ‘59.00/$ (D) ‘59/.13/$

QUESTION NO.3: The Beta co-efficient of equity stock of ECOBOARD LTD. Is 1.6. The risk free rate of return is
12% and the required rate of return is 18% on the market portfolio. If dividend expected during coming year is
‘2.50 and the growth rate of dividend and earnings is 8%, at what price the stock of ECOBOARD ltd. Can be sold
(based on CAPM)? (A) ‘18.38 (B) ‘15.60 (C) ‘12.50 (D) None of the above

QUESTION NO.4: The spot USD/Yen=190 Yen and one year forward rate of USD/Yen =210Yen. The prime rate in
US is 15%. What should be Japanese prime rate be? (A) 20.11% (B) 25.22% (C) 27.11% (D) 29.55%

QUESTION NO.5: Which of the following investment avenues has the least risk associated with it?
(A) Corporate fixed deposits (B) Deposits in commercial banks
(C) Public Provident Fund (D) Non convertible zero coupon bond.

QUESTION NO.6: Consider the following data: Rate of inflation=5.1% Beta=0.85 ; Real rate of return=4.2%
Market return=12.6% ; The risk premium for the above security will be:
(A) 2.5% (B) 2.65% (C) 2.805% (D) 2.95%

QUESTION NO.7: Covariance between a stock and a market index and variance of market index are 33.56 and
19.15 respectively. The Beta of stock is: (A) 1.55 (B) 1.75 (C) 1.85 (D) 1.95

QUESTION NO.8: The face value of a 364 day T-Bill is ‘100. If purchase price is‘86, then the yield on such a bill is
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(A) 12.5% (B) 13.36% (C) 16.32% (D) 6.56%

QUESTION NO.9: A company has obtained quotes from two different manufacturers for an equipment.
The details are as follows:
Product Cost (Million) Estimated life (years)
Make X 4.50 10
Make Y 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The company’s cost of capital is 10%.
[Given: PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) Make X will be cheaper (B) Make Y will be cheaper
(C) Cost will be the same (D) None of the above

QUESTION NO.10: The stock of ABC Ltd sells for ‘ 240. The present value of exercise price and value of call
option are ‘217.40 and ‘ 39.60 respectively. What is the value of put option?
(A) ‘ 16.50 (B) ‘ 22.00 (C) ‘17.00 (D) ‘18.00

Answer:
(i) (B) Rs. / US $ = 1 / 0.01962905 = ‘ 50.9449 ; Now, US$ / € = 1.335603
Therefore, The direct quote of € in India will be — Rs. / € = Rs. / $ x $ / € = ‘ 50.9449 × 1.335603 = ‘ 68.0420

(ii) (B) E (Rs. / $) = 46.50 x [(1.08)5 / (1.03)5 =46.5(1.08 / 1.03)5 = 46.50 x 1.267455 = ‘58.94
Hence expected rate = ‘58.94 / $

(iii) (A) Expected return(By CAPM) ; Re=Rf+ Beta (Rm-Rf) =12% + 1.6(18%-12%) =12% + 9.6% =21.6%
Price of stock (Dividend growth formula) ; Re = D1 / Po + g ; 0.216 = 2.50 / Po + 0.08 ; .216-.08 = 2.50 / P0 ;
.136=2.50 / Po ; Po= 2.50 / 0.136 = ‘18.38

(iv) (C) From Interest Rate parity ; (¥210 / $) / (¥190 / $) = (1 + i¥) / 1.15 ; Or, i¥ = 27.11%

(v) (C) PPF Account can be opened in a Head Post Office or branch of SBI or subsidiaries. The rate of interest on
these accounts is determined by Central Government.

(vi) (C) Risk free return= Real rate of return + Rate of inflation = 5.1 + 4.2=9.3 ; Risk Premium = Beta (Rm-Rf)=
0.85(12.6 - 9.3) = 2.805

(vii) (B) Beta = Covsm / Variance m =33.56 / 19.15 = 1.75

(viii) (C) [‘(100 - 86) / ‘86] x 365 / 364 x 100 = 16.32% JAIN
AADITYA
THE BEST SFM FACULTY OF INDIA
(ix) (A) Make X - Purchase cost = ‘ 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = ‘ 0.73235 million
TARGET 100% PLUS CRORE PLUS
Make Y - Purchase cost = ‘ 6.00 million ; Equivalent annual cost = 6.00 / 7.6061 = ‘0.78884 million
SALARY
Therefore, equivalent annual cost of make X is lower than make Y, make X is suggested to purchase.
9911442626
(x) (C) Value of put option = Value of Call option + PV of exercise price – Stock price= ‘(39.60 + 217.40 - 240) = ‘ 17

MCQ Set 6
QUESTION NO.1: An investor buys a call option contract for a premium of ‘ 200. The exercise price is ‘ 20 and the
current market price of the share is ‘ 17. If the share price after three months reaches ‘ 25, what is the profit made
 Ph. 9911442626
Wherever you go, go with all your heart 10 CA Aaditya Jain
by the option holder on exercising the option? Contract is for 100 shares. Ignore the transaction charges.
(A) ‘ 200 (B) ‘ 250 (C) ‘ 300` (D) ‘ 350

QUESTION NO.2: One year euro interest rate is 3% (compounded quarterly); One year rupee interest rate is 6 %
(compounded quarterly); The forward six months exchange rate is ‘58.82 / euro. According to interest rate parity,
the spot exchange rate is: (A) ‘57.96 (B) ‘58.10 (C) ‘58.60 (D) None of the above

QUESTION NO.3: ANGEL LTD, an export customer who relied on the inter bank rate of Rs. / $ 46.50 / 10 requested
his banker to purchase a bill for USD 80000. What is the rate to be quoted to ANGEL LTD if the banker wants a
margin of 0.08? (A) ‘46.40 (B) ‘46.46 (C) ‘46.60 (D) None of the above.

QUESTION NO.4: The net profit margin, total assets turnover ratio and total assets to networth of a company are
5%, 1.5 and 2.0 respectively. The ROE of the company will be: (A) 5% (B) 15% (C) 7.5% (D) 10%

QUESTION NO.5: Following information is available regarding a mutual fund:

Return : 13 : Risk (S.D.) 16 : Beta : 0.90 : Risk free rate : 10 ; Sharpe ratio and Treynor’s ratio are:
(A) 0.17, 3.33 (B) 0.10, 3.33 (C) 0.25, 3.33 (D) 0.19, 3.33

QUESTION NO.6: Calculate P/E ratio, if dividend payout ratio is 55%, ROE is 16% and the required rate of return
is 14%. (A) 8.09 (B) 8.64 (C) 9.12 (D) 9.45

QUESTION NO.7: The co-efficient of co-relation between returns of SPARK LTD and SENSEX is 1.10. The expected
returns on the stock of Spark and Sensex are 18% and 14.37% respectively. The return on 182 day T –Bill is 6.31%.
What would be standard deviation of the returns of Spark if the standard deviation of Sensex’s return is 17%
(A) 20.12% (B) 22.41% (C) 26.46% (D) Insufficient data.

QUESTION NO.8: The stock is currently selling at ‘270. The call option to buy the stock at ‘265 costs ‘12. What is
the Time Value of the option? (A) ‘13 (B) ‘5 (C) ‘17 (D) ‘7

QUESTION NO.9: The spot Value Of Nifty is 4430. An investor bought a one month Nifty for 4410 call option for
a premium of ‘12. The option is: (A) In the money (B) At the money (C) Out of the money (D) Insufficient data.

QUESTION NO.10: LEENZA LTD. Currently pays a dividend of ‘4 per share that is expected to grow at rate of 10%
for the next year after which it is expected to grow at rate of 7% forever. What value would you place on the stock
of this company if a rate of 15% return is required? (Round off your answer to the nearest integer).(Given PVIF(15%
1 year=0.8696) (A) ‘53.05 (B) ‘55.00 (C) ‘58.10 (D) None of the above.

Answer:
(i) (C) Assuming in call option, the total outgo = Premium + Exercise Price = ‘ 200 + (‘ 20×100) = ‘ 2,200.
After 3 months, if the share price is ‘ 2,500, the net profit = ‘ 2,500 – ‘ 2,200 = ‘ 300.

(ii) (A) 58.82 / Spot rate = [(1+ (.06 / 4)]2 / [(1+(.03 / 4)]2 ; Spot rate=58.82 x (1+.03 / 4)2 x 1 / (1+.06 / 4)2
=58.82 x (1.015) x (1 / 1.030) =‘ 57.96

(iii) (C) Profit margin of 0.08% is deducted from bid rate.

That is 46.50 x .0008 = ‘0.04 ; Spot bid rate = ‘46.50 - .0.04 = ‘46.46.

(iv) (B) ROE= PAT / Sales x Sales / Total Assets x Total Assets / Networth; Therefore ROE= 0.05 x 1.5 x 2=0.15
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(v) (D) Sharpe’s ratio = (RP - RF) / S.D. = [ 13 -10 ] / 16 = 0.19 ; Treynor’s ratio = (RP - RF) / Beta = [13 -10] / 0.90 =
3.33

(vi) (A) Growth rate = Retention ratio x ROE ; = 0.45 x 0.16 ; = 0.072 ; P/E=0.55 / (0.14 - 0.072) = 0.55 / 0.068
= 8.08

(vii) (B) 0.18=Rf + Beta (Rm- Rf) ; = 0.18 = 0.0631 + Beta (0.1437-0.0631) ; Or, 0.0806 Beta = 0.1169; Or, Beta =
0.1169 / 0.0806 = 1.45 ; Again Beta = S.D. iPim / S.D.m ; Or, S.D. i = Beta S.D. m / Pim= (1.45 x 0.17 / 1.1) = 22.42%

(viii) (D) Time Value of Option = Call premium-Intrinsic Value=(‘265 + ‘12) - (‘270) = ‘7

(ix) (A) Spot Value > Exercise Price / Strike Value=> In the money ; ‘4430>‘4410

(x) (B) The present value of dividend stream to an investor is given as:— ‘4(1.10) * 0.8696 = ‘3.826
D2 =‘4 x 1.10 x 1.07 = ‘4.708 ; Price share = 4.708 / (0.15-0.07) x 0.8696 + ‘3.826 = ‘55.00

MCQ Set 7
QUESTION NO.1: Given that the strike price is ‘240, the current stock price is ‘225, and risk-free interest rate is
5% p. a., calculate the theoretical minimum price of a put option after 6 months.
(A) 9.07 (B) 10.07 (C) 11.07 (D) 12.07

QUESTION NO.2: An investor holds two equity shares A and B in equal proportion with the following risk and
return: E (RA) = 26% ; S.D.A = = 20% ; E(RB) = 22% ; S.D.B = 24%
The returns of these securities have a positive correlation of 0.7. Calculate the portfolio return and risk.
(A) 25% (expected return), 29% risk (B) 24% (expected return), 30% risk
(C) 24% (expected return), 20.30% risk (D) 25% (expected return), 20.30% risk

QUESTION NO.3: The foreign exchange market prices for US dollar ($) against Indian rupees (‘) are quoted as
under: Buying Selling
Spot 65.30 65.50
Three months’ forward 66.35 67.20
Calculate the cost of the forward cover. (A) 8.33% (B) 8.22% (C) 8.11% (D) 8.00%

QUESTION NO.4: S invested in a mutual fund when the NAV was ‘13.50 per unit. 90 days later, the NAV was ‘12.45
per unit. During the period S got a cash dividend of ‘1.25 per unit and capital gain distribution of ‘ 0.25. Calculate
the annualized return. (A) 16.51% (B) 15.51% (C) 14.51% (D) 13.51%

QUESTION NO.5: Presently, the company’s AADITYAshare price is JAIN

‘ 120. After 6 months, the price will be either ‘150 with
a probability of 0-8 or ‘ 110 with a probability of 0-2. A European call option exists with an exercise price of ‘ 130.
THE BEST SFM FACULTY OF INDIA
What will be the expected value of call option at maturity date? (A) ‘ 20 (B) ‘ 16 (C) ‘ 18 (D) ‘10
TARGET 100% PLUS CRORE PLUS
SALARY
QUESTION NO.6: Consider the following quotes:
9911442626
Spot (Euro/Pound) = 1-3904 — 1-3908 Spot (Pound/NZ $) = 0-5020 — 0-5040
What will be the possible % spread on the cross rate between Euro and NZ $?
(A) 0.40 (B) 0.39 (C) 0.41 (D) 0.43

QUESTION NO.7: A project had an equity beta of 1.4 and was going to be financed by a combination of 25% Debt
and 75% Equity (Assume Debt Beta as zero). Hence, the required rate of return of the project is (Assume Rf = 12%
 Ph. 9911442626
Wherever you go, go with all your heart 12 CA Aaditya Jain
and Rm = 18%). (A) 16.72% (B) 18.30% (C) 17.45% (D) 12.00%

QUESTION NO.8: Given for a project: Annual Cash inflow ‘80,000 Useful life 4 years Pay-Back period 2.855 years
What is the cost of the project? (A) ‘ 2,28,500 (B) ‘ 2,28,400 (C) ‘ 2,28,600 (D) ‘ 2,28,700

QUESTION NO.9: Government securities are free from:

(A) Default risk (B) Purchasing power risk (C) Interest rate risk (D) Re-investment risk

QUESTION NO.10: Beta of a security measures its

(A) Diversifiable risk (B) Market risk (C) Financial risk (D) None of the above.

Answer:
(i) (A) Exercise Price :- ‘ 240; Current Stock Price :- ‘ 225 ; Risk free rate of return :- 5% of 0.05
Time in year (t) :- 6 / 12 : 0.5 ; Theoretical Minimum Price = Present Value of Exercise Price – Current Stock Price.
= 240 × e-rt – 225 ; = (240 ÷ 1.02532) – 225 = 234.07 – 225 = 9.07

(ii) (C) Computation of Expected Return:

E (RP) = Proportion of A × E (RA) + Proportion of B × E (RB) = 26(.5) + 22(.5) = 13 + 11 = 24%
Computation of Portfolio Risk

Standard DeviationPortfolio  WA2  σA2  WB2  σB2  2WAWBσAσBr

 0.502  202  0.502  242  2  20  24  0.50  0.50 = 20.30%
1.05 12
(iii) (B) When customer is buying dollar under three month forward cover :   100  6.33%
67.20 3
1.70 12
When customer is selling dollar under three month forward cover:   100  10.12%
67.20 3
6.33%  10.12%
Cost of forward cover will be:  8.22%
2
(iv) (D) Returns =1.25 + 0.25 – 1.05 = 0.45 ; Return ÷ Opening NAV = 0.45 / 13.50 = 0.033 = 3.33%
3.33  365
Annualised return = = 13.51% p.a.
90
(v) (B) Expected value of call option
Expected share price (‘) Exercise price (‘) Call value (‘) Probability Call option value (‘)

150 130 20 0.8 16

110 130 0 0.2 0_
16
(vi) (D) The % spread on Cross rate between the Euro and NZ $. Let us find out the Cross rate first.
SPOT (Euro / NZ$) = (0.5020 × 1.3904) : (0.5040 × 1.3908) = 0.6980 : 0.7010
So, % Spread on Euro to NZ$ = [(0 / 7010 – 0.6980) / 0.6980] × 100 = 0.4298 = 0.43.

(vii) (B) We know, BP = [Beta Equity × {E / (D+E)}] + [Beta Debt × {D / (D + E)}] ; = (1.4 × 0.75) + (0 × 0.25) = 1.05;
Rate of return of the Project :- RP = RF + Bp (RM – RF) = 12% + 1.05 (18% – 12%) = 12% + 6.30% = 18.30%
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(viii) (B) Pay-back period = Cost of project / Annual cash inflow
So, Cost of project = Annual cash inflow × Pay-back period = 80,000 × 2.855 = ‘2,28,400

(ix) (A) Government securities are free from default risk since government does not default payment.

(x) (B) Beta of a security measures its vulnerability of security to market risk. In other words, beta measures the
market risk or non-diversifiable risk.

MCQ Set 8
QUESTION NO.1: A mutual Fund had a Net Asset Value (NAV) of ‘72 at the beginning of the year. During the
year, a sum of ‘6 was distributed as Dividend besides ‘ 4 as Capital Gain distributions. At the end of the year, NAV
was ‘ 84. Total return for the year is: (A) 33.65% (B) 30.56% (C) 32.65% (D) 31.46%

QUESTION NO.2: The following two types of securities are available in the market for investment
Security Return % Standard Deviation%
Gilt-edge Security 7 0
Equity 25 30
Using the above two securities, if you are planning to invest ‘1,00,000 to construct a portfolio with a standard
deviation of 24%, what is the return of such portfolio? (A) 21700 (B) 21600 (C) 21500 (D) ‘21400

QUESTION NO.3: A characteristic line is formed by regressing

(A) Stock prices with market index (B) Beta with required rate of return
(C) Standard deviation with required rate of return (D) Stock returns with market returns

QUESTION NO.4: Which of the following is not a source of systematic risk?

(A) Market risk (B) Interest rate risk (C) Purchasing power risk (D) Financial risk

QUESTION NO.5: A Call Option at a strike price of ‘ 280 is selling at a premium of ‘23. At what share price on
maturity will it break-even for the buyer of the option? (A)‘303/- (B)‘257/- (C)‘300/- (D)‘280/-

QUESTION NO.6: Consider the following quotes: Spot (Euro/Pound) = 1.6543 / 1.6557 ; Spot (Pound/NZ’s) =
0.2786 / 0.2800. (A)0.0805% (B)0.0080% (C)0.8501% (D)0.0850%

QUESTION NO.7: Initial Investment ‘20 lakh. Expected annual cash flows ‘6 lakh for 10 years. Cost of capital
@15%. What is the Profitability Index? The cumulative discounting factor @ 15% for 10 years = 5.019.
(A) 1.51 (B) 1.15 (C) 5.15 (D) 0.151
AADITYA JAIN
QUESTION NO.8: The following details relate to an investment proposal of XYZ Ltd. ; Investment outlay— ‘ 100
THE BEST SFM FACULTY OF INDIA
lakhs ; Lease Rentals are payable at ‘ 180 per ‘ 1,000 ; Term of lease—8 years ; Cost of capital—12%
What is the present value of TARGET
lease rentals,100%
if leasePLUS CRORE
rentals are payablePLUS
at the end of the year? [Given PV factors
at 12% for years (1-8) is 4.9676. (A)‘ 98,14,680 SALARY
(B) ‘ 89,41,680 (C)‘ 94,18,860 (D)‘ 96,84,190
9911442626
QUESTION NO.9: Following information is available regarding a mutual fund: Return : 13 ; Risk : 16 ; Beta - 0.90
; Risk free rate- 10; Calculate Sharpe Ratio. (A) 0.18 (B) 0.19 (C) 0.20 (D) 0.21

QUESTION NO.10: A project had an equity beta of 1.3 and was going to be financed by a combination of 30% debt
and 70% equity. Assuming debt-beta to be zero, calculate the project beta and return from the project taking risk
 Ph. 9911442626
Wherever you go, go with all your heart 14 CA Aaditya Jain
free rate of return to be 10% and return on market portfolio of 18%.
(A)17.28% (B)18.28% (C)19.28% (D) 16.28%

Answer:
(i) (B) Capital Appreciation = Closing NAV- Opening NAV = 84 - 72 = ‘12.
Return = [Cash Dividend +Capital Gain + Capital Appreciation] / Opening NAV =[6+4+12] / 72 = 22 / 72
= 0.3056 = 30.56%.

(ii) (D) Since, Standard Deviation of Gilt-edged security is 0 and its co-relation with the Equity is also 0.
The formula will reduce to: σp  W2σ2; Or 24%  W2  30% Or, w2 =24% / 30% = 0.24 / 0.30 = 0.8
We also know, Return of portfolio [RP] = W1R1 + W2R2 = (1 – W2) R1 + W2R2
=(1 – 0.8) × 7% + 0.8 × 25% = (0.2 × 0.07) + (0.8 × 0.25) = 0.214
Therefore, return in Rupees = 1,00,000 × 0.214 = ‘21,400

(iii) (C) Characteristic Line is a graph depicting the relationship between Security’ Returns and Market Index
Returns.

(iv)(D) Financial risks arises when companies resort to financial leverage or use of debt financing. The more the
company resorts to debt finance, the greater is the financial risk. Financial risk is an unsystematic risk, which can
be diversified.

(v)(A) To recover Call Option Premium of ‘ 23, the share price on the date of expiration should rise to [‘ 23 + ‘ 280]
= ‘ 303. The buyer of the Call Option would be at break-even if the share price (S1 ) ends up at ‘ 303.
1.6557 - 1.6543
(vi) (D) % spread on Euro/ Pound rate =  100
1.6543
P.V. of Inflows 30.114
(vii) (A) P: v. of inflows = 6.00 × 5.019 = ‘30.114 lakhs; Profitability Index =   1.51
P.V. of Outflows 20

(viii)(B) P. V. of lease rentals = ‘18 lakhs × PVI FA (12%, 8) ; = ‘18 lakhs × 4.9676 ; = ‘89,41,680

(ix)(B) Sharpe’s ratio = (RP - RF) /  = [ 13 -10 ] / 16 = 0.19

(x)(A) Bp is to be ascertained as = [ Beta equity + E / (D +E) ] + [ Beta debt + E /(D + E)] = (1.30 × 0.70) + (0 × 0.3)
= 0.91 ; Computation of return from the project = RF + Bp (RM - RF) = 0.10 + 0.91 × (0.18 - 0.10) = 0.1728 = 17.28 %.

MCQ Set 9
QUESTION NO.1: The dividend decisions are concerned with:
(A) determination of quantum of profits to be distribute to the owners (B) the frequency of such payments
(C) the amounts to be retained by the firm (D) all of the above

QUESTION NO.2: The shares of B Ltd. are trading at ‘370. If put option with a strike price of ‘380 are priced at ’20,
the intrinsic value and time value of the options respectively are:
(A) ‘ 8, ‘ 8 (B) ‘ 10, ‘ 10 (C) ‘ 8, ‘ 10 (D) Incomplete information

QUESTION NO.3: The dollar is currently trading at ’40. If rupee depreciates by 10%, what will be the spot rate?
(A) ‘0.0525 (B) ‘0.0552 (C) ‘0.0225 (D) ‘0.0522
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.4: A company issue commercial paper for ‘ 3 crores with a maturity period of 90 days. The interest
rate is 11% p.a. The net amount received by the company will be :
(A) ‘2.94 crores (B) ‘2.92 crores (C) ‘2.85 crores (D) ‘3.08 crores

QUESTION NO.5: The NAV of each unit of a close-end fund at the beginning of the year was ’18. By the end of the
year its NAV equals ’18.50. At the beginning of the year each unit was selling at a 2% premium to NAV and by the
end of the year each unit is selling at a 4% discount to NAV. If the closed-end fund paid year end distribution of
income of ‘2.50 on each unit,the rate of return to the investor in the fund during the year would be
(A) 10.35% (B) 11.51% (C) 11.95% (D) None of the above

QUESTION NO.6:The face value of a 364-day T-bill is ‘100. If the purchase price is ’86 then the yield on such a bill
is (A) 12.45% (B) 13.36% (C) 16.32% (D) 16.56%

QUESTION NO.7: A financial lease is preferred in the situation:

(A) when the long-term stability of asset is uncertain
(B) When the lessee want to own the asset but does not have enough funds to invest
(C) when the asset is subject to rapid obsolescence (D) none of the above

QUESTION NO.8: About 50 items are required every day for a machine. A fixed cost of ‘ 50 per order is incurred
for placing an order. The inventory carrying cost per item amounts to ‘ 0.02 per day. The lead period is 32 days.
Compute reorder level. (A) 1,200 items (B) 1,400 items (C) 1,600 items (D) 1,800 items

QUESTION NO.9: ABC Ltd. has a debt-equity mix of 30/70. If ABC Ltd.’s debt beta for its activity (or projects) is
1.21, what is the beta for its equity ? (A) 1.65 (B) 1.60 (C) 1.52 (D) None of the above

QUESTION NO.10: An Indian company is planning to invest in US. The US inflation rate is expected to be 3% and
that of India is expected to be 8% annually. If the spot rate currently is ‘ 45/ US$, what spot rate can you expect
after 5 years ? (A) ’59.09/US$ (B) ’57.00/US$ (C) ’57.04/US$ (D) ’57.13/US$

(B) State if each of the following sentences is T (=true) or F (= false):

(i) Risk under transaction exposure can be minimized using Money Market Hedge.
(ii) Flexibility is one among the performance indicators of the organisation.
(iii) Swapping from fixed to floating may save the original borrower if interest rates decline.
(iv) Profitability Index is the profit expected in capital budgeting.
(v) In CAPM, systematic risk is the risk that cannot be eliminated by diversification, it being common to all firms.

Answer: (A)
(i) (D) All the above AADITYA JAIN
THE BEST SFM FACULTY OF INDIA
(ii) (D) (380 +20) -370= 30
TARGET 100% PLUS CRORE PLUS
(iii) (C) Dollar direct quoted to be converted toSALARY
Indirect as 1 / 40=0.025.
9911442626
Dollar trading at 0.025 depreciates by 10% = (0.025-0.0025) = 0.0225

(iv) (B) Interest @ 11% p.a. for 90 days on ‘1 = 0.11x 90 / 365 = 0.0271233 ; Amount after 90 days = 1 +
0.0271233 = 1.0271233 ; Net amount received = ‘ 3,00,00,000 / 1.0271233 = ‘ 2,92,07,788 say ‘ 2.92 crores

(v) (A) Price at the beginning of the year (18 x 1.02) = ’18.36 ; Price of unit at the end of the year 18.50 x (1- .04)
 Ph. 9911442626
Wherever you go, go with all your heart 16 CA Aaditya Jain
= ’17.76 Price of the fund fell by (17.76 - 18.36) = - 0.60 ; Rate of return = (2.50 - 0.60) / 18.36 = 10.35%

(vi) (C) - ‘(100 -86) / (’86) x 365/364 x 100 = 16.32%

(vii) (B)

(viii) (C) Reorder level = Maximum usage per day x Maximum lead time= 50 items per day x 32 days = 1,600 items

(ix) (B) Betaa = Betad(D/V) + Betae(E/V) ; 1.21 = (0.30 x 0.3) + (Betae x 0.7) ; 1.21 = 0.09 + 0.7 Betae; ; Betae = 1.12
/ 0.7 = 1.60

(x) (C) According to Purchase Power Parity, spot rate after 5 years = ‘ 45 x [(1 + 0.08)/ (1 + 0.03)]5 = 45 x 1.2675
= ‘ 57.04

Answer: (B) (i) True ; (ii) True ; (iii) True ; (iv) False ; (v) True

MCQ Set 10
QUESTION NO.1: The average daily sales of a company are ‘ 5 lac. The company normally keeps a cash balance
of ‘ 80,000.If the weighted operating cycle of the company is 45 days, its working capital will be:
(A) ‘ 112.9 lac; (B) ‘ 113.3 lac; (C) ‘ 5.8 lac; (D) ‘ 225.8 lac.

QUESTION NO.2: The Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) of Araska
Ltd. are 3 and 1.67 respectively. If the management of the company targets to increase the EPS by 10%, by how
much percentage should sales volume be increased? (Rounded off your answer to the nearest integer.)
(A) 5.00 %; (B) 3.00 %; (C) 2.00 %; (D) 4.00 %.

QUESTION NO.3: The following various currency quotes are available from a leading bank:
‘/£ 75.31/75.33 £ / $ 0.6391 / 0.6398 $ /¥ 0.01048 / 0.01052. The rate at which yen (¥) can be purchased with
rupees will be: (A) ‘ 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) None of the above.

QUESTION NO.4: The P/V ratio of a firm dealing in precision instruments is 50% and margin of safety is 40%.
Calculate net profit, if the sales volume is ‘ 12,50,000. (A) ‘ 25,000; (B) ‘ 1,25,000; (C) ‘ 2,50,000; (D) ‘ 1,50,000.

QUESTION NO.5: Xee Ltd. paid a dividend of ‘4.00 per share for the year 2013-14. If the expected growth rate is
12% and the rate of return is 20%, the intrinsic value for its share would be: (A)‘ 50; (B)‘ 200; (C)‘ 100; (D)‘ 55.

QUESTION NO.6: The stock of Blue Company sells for ‘ 120. The present value of exercise price and the value of
a call option are ‘ 108.70 and ‘ 19.80 respectively. Hence the value of the put option is:
(A) ‘ 8.50 (B) ‘ 9.00 (C) ‘ 10 (D) Zero

QUESTION NO.7: The spot and 6 month forward rates of $ in relation to rupee are ’60.34 / 72 and 61.02/ 66
respectively. What would be the annualized forward margin (premium with respect to bid price)?
(A) 15.32% (B) 12.32% (C) 13.52% (D) 15.23%

QUESTION NO.8: The total asset - turnover ratio and total asset to net- worth ratio of a company are 2.10 and
2.50 respectively. If the net profit margin of the company is 6%, what would be the return on equity?
(A) 30.50% (B) 31.50% (C) 30.00% (D) 32.50%
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.9: Calculate the price of 3 months ADS futures, if ADS (FV ‘ 10) quotes ‘ 440 on NSE and 3
months future price quotes at ‘ 430 and the 1 month borrowing rate is given as 15% and the expected annual
dividend yield is 25% per annum payable before expiry. (A) ‘ 454 (B) ‘ 464 (C) ‘ 444 (D) ‘ 450

QUESTION NO.10: S Limited earns ‘ 6 per share, has capitalisation rate of 10% and has a return on investment at
the rate of 20%. According to Walter’s model, what should be the price per share at 30% dividend payout ratio?
(A) 120 (B) 102 (C) 112 (D) 106

Answer: (A)
(i) (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash balance
= Sales per day x weighted operating cycle+ cash balance requirement = ‘ 5 lac x 45 + ‘ 0.80 lac = ‘ 225.80 lac.

(ii) (C) DTL =DOL x DFL = 3 x 1.67 = 5.01 Therefore, as per the concept of DTL, in order to increase the EPS by 10%
the sales volume will be increased by 10 - 5.01 = 2%

(iii) (A) To purchase (¥) we need to have a quote of (¥) in terms of We need only the ASK quote.
ASK (‘ / ¥ ) = ASK (‘/ £) x ASK ( £ /$) x ASK ($/ ¥) = 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)

(iv) (C) Margin of Safety ‘ 12,50,000 @40% ‘ 5,00,000

BEP Sales ‘ 12,50,000 - ‘ 5,00,000 ‘ 7,50,000
Fixed cost [BEP (s) x p/v ratio] ‘ 7,50,000 x 50% ‘ 3,75,000
Contribution ‘ 12,50,000 x 50% ‘ 6,25,000
Profit ‘ 6,25,000 - ‘ 3,75,000 ‘ 2,50,000

Dividend 4
(v) (A) Price    Rs.50
Cost of Capital - Growth Rate 0.20  0.12

(vi) (A) Value of put option= Value of call option+PV of exercise price - Stock price =‘ 19.80 +‘ 108.70 -‘ 120 =‘ 8.50

(vii) (C) Forward Margin (premium with respect to bid price) ; = [(61.02 - 60.34) - 60.34] x 12 x 100 = 13.52%

Profit after Tax Sales Total Assets

(viii) (B) Return on Equity ( ROE)    = 0.06 x 2.10 x2.50 = 0.315 = 31.5%
Sales Total Assets Net Worth

(ix) (A) Future Price = Spot Price + Cost of Carry- Dividend = 440 + (440 x 0.15 x 0.25) - (10 x 0.25)
= 440 + 16.50 - 2.50 = 454 ; The future price is ‘ 454 which is now quoted at ‘ 430 in the exchange. The fair value
AADITYA JAIN
of Futures is more than the actual future price.
THE BEST r
SFM FACULTY 0.20
OF INDIA
TARGET D  (E  D) 1.80
100% PLUS0.10  (6
CRORE  1.80)PLUS
(x) (B) Market Value of Share (P)  Ke 
Ke SALARY 0.10
9911442626
(B) State whether the following statements are true or false:
(i) The amount of cheques issued by a company not yet paid out is referred to as net float.
(ii) Annual capital charge method is used for evaluating projects having different life spans.
(iii) According to Modigliani and Miller Theory on dividends, dividend pay-out ratio is irrelevant for all firms.
(iv) Simulation is done for capturing the different possible outcomes and determining the probability of a particular
 Ph. 9911442626
Wherever you go, go with all your heart 18 CA Aaditya Jain
event happening.
(v) A call option is the right to sell, whereas a put option is a right to buy.

Answer: (B)
(i) False ; Net float is the total amount of float in a bank account. It is calculated by subtracting the disbursement
float money spent but not yet taken out of the account from the collection float money deposited but not yet
cleared. The net float, when added to or subtracted from the previous balance, shows how much money is in the
bank account. The net float is important when an account holder deal primarily in cheques.

(ii) True ; Annual capital charge provided basis of comparing projects whose life span are otherwise different.

(iii) True ; According to MM approach it is earning potentiality and investment policy of firm rather than pattern
of distribution of earning that affects value of firm.

(iv) True ; Simulation is the imitation of the operation of a real-world process or system over time. The act of
simulating something first requires that a model be developed; this model represents the key characteristics or
behaviours of the selected physical or abstract system or process. The model represents the system itself,
whereas the simulation represents the operation of the system over time.

(v) False ; Call Options give the option buyer the right to buy the underlying asset. Put Options give the option
buyer the right to sell the underlying asset.

MCQ Set 11
QUESTION NO.1: Calculate the price of 3 months ADS futures, if ADS (FV ’10) quotes ‘ 440 on NSE and 3 months
future price quotes at ‘430 and the 1 month borrowing rate is given as 15% and the expected annual dividend
yield is 25% per annum payable before expiry. (A) ‘ 454 (B) ‘ 464 (C) ‘ 444 (D) ‘ 450

QUESTION NO.2: RBI sold a 91 days T-Bill of face value of ‘ 100 at an yield of 7%. What was the issue price?
(A) ‘ 98.00 (B) ‘ 98.08 (C) ‘ 98.18 (D) 98.28

QUESTION NO.3: A one day repo is entered into on Jan 10, 2013 on an 11.99% 2014 security, maturing on April 7,
2014. The face value of the transaction is ‘ 5 Crores. The price of the security is ‘ 115.00. Assume that RBI has lent
securities in the first leg to PNB. If the repo rate is 6%, what is the settlement amount on Jan 10, 2013? [Use 360
days convention] (A) ‘ 5,90,45,161 (B) ‘ 5,90,55,261 (C) ‘ 5,90,65,361 (D) ‘ 5,90,75,461

QUESTION NO.4: The P/V ratio of a firm dealing in precision instruments is 50% and margin of safety is 40%.
Calculate net profit, if the sales volume is ‘ 12,50,000. (A) ‘ 25,000 (B) ‘ 1,25,000 (C) ‘ 2,50,000 (D) ‘ 1,50,000

QUESTION NO.5: The value of a share of MN Ltd. after right issue was found to be ’75/-. The theoretical value of
the right is ‘ 5. The number of existing shares required for a rights share is 2. The subscription price at which were
issued were: (A) ‘ 22.50 (B) ‘ 40.00 (C) ‘ 65.00 (D) ‘ 82.00

(b) Write if each of the following sentences is T (true) or F (false)

(i) While designing the capital structure of a business the earnings capacity becomes a less important factor
than the each flow ability.
(ii) An operating lease is one where a significant part of risk-bearing burden is on the lessee.
(iii) Swapping from fixed to floating may save the original borrower if interest rates decline.
(iv) LIBOR for treasury bill rate is the example of basis swaps.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(v) TRIPS are the international agreement on intellectual property rights.

Answer : (A)
(i) (A) Future Price = Spot Price + Cost of Carry- Dividend = 440 + (440 x 0.15 x 0.25) - (10 x 0.25)
= 440 + 16.50 - 2.50 = 454 ; The future price is ‘454 which is now quoted at ‘430 in the exchange. The fair value
of Futures is more than the actual future price. So, no arbitrage opportunities exist.

(ii) (D) Issue price of T-bill is at discounted value and redeemed at face value.
Maturity Period - 91 days ; Face Value - ‘ 100 ; Yield Rate - 7% or 0.07
Let the issue price of T-Bill be ‘x’.
100  x 365 100  x
Then, 0.07    100 ; 0.07   4.011
x 91 x
0. 07x = 401.10 - 4.011x ; .081x = 401.10 ; X = 401.10/4.081 = 98.28 , The issue price of T-Bill was ‘ 98.28.

(iii) (C) In the first leg RBI has lent securities and receives money from PNB
Stage I:
G Sec pays bi-annual coupons; Interests are paid on April 7 & October 7 ; G Sec Maturity on April 7, 2014;
Days elapsed from October 8, 2012 till Jan 10, 2013 = 24 + 30 + 31 + 9 = 94 days
Accrued Interest: 5 Crores x 0.1199 x 94 / 360 = ‘ 1565361
Transaction Value = ‘ 5 Crores x 115 / 100 = ‘ 57500000
Total Settlement amount = ‘ 59065361 = Money receive by RBI from PNB

(iv) (C) Margin of Safety 12,50,000 @40% ‘ 5,00,000

BEP Sales 12,50,000 - 5,00,000 ‘ 7,50,000
Fixed cost [BEP (s) x p/v ratio] 7,50,000 x 50% ‘ 3,75,000
Contribution 12,50,000 x 50% ‘ 6,25,000
Profit 6,25,000 - 3,75,000 ‘ 2,50,000

(v) (C) Theoretical value of a right (Vt)= (P-S) / N+1= Rs. 5 ; where, N =2
or, P-S = 5 (2+1) ; or, P=15+ S Equation (i)
Value of share after right (V0 ) =NP + S where V0= ‘ 75
or, 75 = (2P + S) / 3 ; or, 2P + S =3 x 75 ; or, 2P + S = 225 Equation (ii)
Putting value of P in equation (ii), we get 2 P + S = 225 ; Or, 2(15+S)+ S = 225 ; Or, 30 + 3S = 225
Or, S = (225-30) / 3 ; Or, S = 65.

Answer: (B) (i) True ; (ii) False ; (iii) True ; (iv) False ; (v ) True
AADITYA JAIN
MCQ Set 12
THE BEST
QUESTION NO.1: High proportion SFM
of gearing FACULTY OF INDIA
will increase:
(A) Financial risk TARGET
(B) Business risk 100% PLUS CRORE
(C) Cost of fundsPLUS (D) Shareholders equity
SALARY
QUESTION NO.2: The financial data furnished9911442626
for A Ltd. for the year ended 31st March, 2013, as follows:
Operating leverage = 3 : 1; Financial leverage = 2 : 1; Interest charges p.a. is ‘ 12 lakhs, Corporate tax rate is 40%.
The variable cost as % of sales is 60%. The EBIT of the company is:
(A) ‘ 24 lakhs (B) ‘ 22. Lakhs (C) ‘ 32 lakhs (D) ‘ 18 lakhs

QUESTION NO.3: Modern Ltd.’s share beta factor is 1.40. The risk free rate of interest of government securities
 Ph. 9911442626
Wherever you go, go with all your heart 20 CA Aaditya Jain
is 9%. The expected rate of return on the company equity shares is 16%. The cost of equity capital based on CAPM
is: (A) 9% (B) 16% (C) 18.8% (D) 15.8%

QUESTION NO.4: If EBIT is less than financial break-even point then:

(A) EPS will be positive (B) EPS will be negative
(C) there will be no impact on EPS (D) Cost of debt raises

QUESTION NO.5: BKC Ltd. has profits before interest and taxes of ‘ 3,00,000. The applicable tax
rate is 40%. Its required rate of return on equity in the absence of borrowing is 18%. In the bsence of personal
taxes, the value of the company in an MM world with no leverage is:
(A) ‘ 10,00,000 (B) ‘ 11,60,000 (C) ‘ 12,60,000 (D) ‘ 14,00,000

QUESTION NO.6: The dividend decisions are concerned with:

(A) determination of quantum of profits to be distributed to the owners (B) the frequency of such payments
(C) the amounts to be retained by the firm (D) all of the above

QUESTION NO.7: A financial lease is preferred in the situation:

(A) when the long-term stability of asset is uncertain
(B) When the lessee want to own the asset but does not have enough funds to invest
(C) when the asset is subject to rapid obsolescence (D) none of the above

QUESTION NO.8: About 50 items are required every day for a machine. A fixed cost of ‘ 50 per order is incurred
for placing an order. The inventory carrying cost per item amounts to ‘ 0. 02 per day. The lead period is 32 days.
Compute reorder level. (A) 1,200 items (B) 1,400 items (C) 1,600 items (D) 1,800 items

QUESTION NO.9: The stock of Pioneer company sells for ‘ 120. The present value of exercise price and the value
of a call option are ‘ 108.70 and ‘ 19.80 respectively. Hence the value of the put option is:
(A) ‘ 8.50 (B) ‘ 9.00 (C) ‘ 11.00 (D) ‘ 8.25

QUESTION NO.10: Currency swap is a method of:

(A) speculating the foreign exchange (B) hedging against foreign exchange risk
(C) making money by banks (D) exchanging one currency for another

(B) State if each of the following sentences is T (=true) or F (= false):

(i) Corporate tax rate does not affect cost of debt.
(ii) IRR and NPV always give the same profitability ranking.
(iii) If Profitability Index is 1, cash inflow and cash outflow would be equal.
(iv) An investor expecting a fall in interest rates buys a floor and also a cap.
(v) Commercial paper introduced by RBI in early 1990, is ‘a secured promissory note’ tied to any specific transaction.

Answer: (A)
(i) (A) Financial risk

(ii) (A) Financial leverage = 2 (given) EBIT

EBIT EBIT
2 ;  2 ; 2 EBIT - 24 = EBIT ; EBIT = ’24 lakhs
EBIT  INTEREST EBIT - 12
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(iii) (C) Ke = 9% + 1.40 (16% - 9%) = 18.8%

(iv) (B) EPS will be negative

3,00,000  0.6
(v) (A) Company Value   10 ,00 ,000
0.18
(vi) (D) all of the above

(vii) (B) When the lessee want to own the asset but does not have enough funds to invest

(viii) (C) Reorder level = Maximum usage per day x Maximum lead time = 50 items per day x 32 days = 1,600 items

(ix) (A) Value of put option= Value of call option + P.V. of exercise price - Stock price =‘ 19.80 +‘ 108.70 - 120 =‘ 8.50

(x) (C) hedging against foreign exchange risk

Answer: (B)
(i) False: Debt may be perpetual or redeemable debt, while calculating cost of debt, the corporate tax rate effect
the formula as follows-
(a) Perpetual / irredeemable debt:
d (after tax) = 1 / P(1-t) ; Where, t = tax rate, P = net proceeds and kd = Cost of debt, I= Interest
I  1/n(P  NP)
(b) Redeemable debt: (after tax) ; Kd   (1  t)
1/2(P  NP)
(ii) False: When evaluating mutually exclusive projects, the one with the highest IRR may not be the one with
best NPV. The conflict between NPV and IRR for evaluation of mutually exclusive projects is due to reinvestment
assumption: (a) NPV assumes Cash flows reinvested at the Cost of Capital. (b) IRR assumes Cash flows
reinvested at the internal rate of return.

(iii) True: We know that Profitability Index (PI) = PV of Cash Inflow/ PV of Cash Outflow. So, if P1 is 1, then cash
inflow and cash outflow would be equal.

(iv) True: A Cap provides variable rate borrowers with protection against raising interest rates while also retaining
the advantages of lower or falling interest rate. Floors are used to obtain certainty for investments and budgeting
by setting minimum interest rate on investments

(v) False: Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise funds for a short
period, generally varying from a few days to a few months
AADITYA JAIN
THE BEST SFMMCQ FACULTY
Set 13 OF INDIA
QUESTION NO.1: What is theTARGET
opportunity100% PLUS
cost of not takingCRORE
a discount,PLUS
when the credit terms are 2 / 20 net 45?
Assume 1 year = 360 days (A) 24.9% SALARY (B) 29.4% (C) 22.9% (D) 29.2%
9911442626
QUESTION NO.2: E Limited has earnings before interest and taxes (EBIT) of ‘ 10 million at a cost of 7%., Cost of
equity is 12.5%. Ignore taxes. Calculate the overall cost of capital.
(A) 11.26% (B) 11.62% (C) 16.12% (D) 12.61%

QUESTION NO.3: S Limited earns ‘ 6 per share, has capitalisation rate of 10% and has a return on investment at
 Ph. 9911442626
Wherever you go, go with all your heart 22 CA Aaditya Jain
the rate of 20%. According to Walter’s model, calculate the price per share at 30% dividend payout ratio.
(A) ‘120 (B) ‘102 (C) ‘112 (D) ‘106

QUESTION NO.4: On January 1, 2014, X Limited’s begining inventory was ‘4,00,000. During 2014, X Ltd. purchased
’19,00,000 of additional inventory. On December 31, 2014, X Ltd.’s ending inventory was ‘5,00,000. Calculate the
X Ltd.’s operating cycle in 2014, if it is assumed that the average collection period is 42 days. (1 year =365 days).
(A) 123.3 days (B) 132.3 days (C) 126.3 days (D) 133.3 days

QUESTION NO.5: From the following, what is the amount of sales of A Ltd.? ; Financial Leverage — 3:1;
Interest—’200; Operating Leverage — 4 : 1; Variable Cost as a % of sales — 66.67%.
(A) ‘3,600 (B) ‘6,300 (C) ‘6,030 (D) ‘3,060

QUESTION NO.6: The dollar is currently trading at ’40. If rupee depreciates by 10%, what will be the spot rate?
(A) ‘0.0525 (B) ‘0.0552 (C) ‘0.0225 (D) ‘0.0522

QUESTION NO.7: If the following rates are prevailing: Euro/$ : 1.1916/1.1925 and $/£ : 1.42/1.47 what will be
the corss rate between Euro/Pound? (A) 1.6921 / 1.750 (B) 1.7530 / 1.6921 (C) 1.6921 / 1.1925(D) 1.7530/1.1916

QUESTION NO.8: A company has expected Net Operating Income - ‘ 2,40,000; 10% Debt - ‘7,20,000 and Equity
Capitalisation rate - 20% what is the weighted average cost of capital for the company?
(A) 0.15385 (B) 0.13585 (C) 0.18351 (D) 0.15531

QUESTION NO.9: The P/V ratio of a firm dealing in precision instruments is 50% and margin of safety is 40%.
Calculate net profit, if the sales volume is ‘ 50,00,000. (A)‘ 1,00,000 (B) ‘ 5,00,000 (C)‘ 10,00,000 (D)‘ 6,00,000

(B) State if each of the following sentences is T (= true) or F (= false):

(i) Deterministic model of financial planning yield multiple — point estimate.
(ii) Risk under transaction exposure can be minimized using Money Market Hedge.
(iii) Flexibility is one among the performance indicators of the organisation.
(iv) A project is a “One-shot” major undertaking.
(v) Fund Managers use futures as a more economical way of achieving their portfolio goals.
(vi) The profit or loss associated with converting foreign currency dominated assets/liabilities in reporting currency
is called Economic Exposure.
(vii) TRIMs are the rules; a country applies to the domestic regulations to promote Foreign investment, often as
a part of an Industrial Policy.
Answer: (A)
Disc % 360 2 360
(i) (B) Opportunit y Cost      29.4%
100 - Disc % N 98 25

EBIT  1  10,000,000  1,400,000

(ii) (A) Market value of Equity (S) =  68,800,000
Ke 0.125
Total value of Firm (V) = S+ D = ’68,800,000 + ’20,000,000 = = ‘88,800,000
Overall cost of capital (K0) = EBIT - 1/ V = ’10,000,000 / ’88,800,000 = = 11.26%
r 0.20
D (E  D) 1.80  (6  1.80)
(iii) (B) Market Value of Share (P)  Ke  0.10 = ‘102
Ke 0.10
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(iv) (D) Cost of goods sold = ‘(4,00,000 + 1,900,000 - 500,000) = ‘1,800,000 ; Inventory turnover = Rs. 1800000/
450000 = 4 ; Average age of Inventory = 365 / 4 = 91.3 days
Operating cycle = Average age inventory + Average Collection Period = 91.3 = 42 = 133.3 days

(v) (A) Financial Leverage = EBIT / EBT = 3 / 1 ; EBIT = 3EBT ; EBIT - 200 = EBT ; EBIT = 3[EBIT - 200] ; EBIT = ‘300
SV 4
Operating Leverage = 
EBIT 1
S - V = 4 EBIT = 4 X 300 = 1200
1200
 Sales   Rs.3600
(100 - 66.67%)S = 1200 ; 1
33
3
(vi) (C) Re quote : Re.1 = $1 / 40 = 0.25 ; If rupee depreciates by 10%, then = 0.025 - 0.0025 = ‘0.0225

(vii) (A) Bid (Euro / £) = Bid (Euro / $) x Bid ($ / £)

Bid rate for Euro / £ = 1.1916 x 1.42 = 1.6921 ; Ask rate for Euro / £ = 1.1925 x 1.47 = 1.7530
Quote as Euro/ £ = 1.6921/1.7530

2,40,000 - 72,000(I)
(viii) (A) Market value of equity (S) =  84,000
0.20
N0I 2,40,000
Total value of firm (V) = S + D = 840000 + 720000 = 1560000 ; Ko    0.15385
V 15,60,000

(ix) (C) Margin of Safety = 50,00,000@40% = ‘2000000

BEP Sales = 50,00,000 - 20,00,000 = ’30,00,000
Fixed cost = BEP (s) x P / V ratio = 30,00,000@50% = 15,00,000
Contribution = 5000000 x 50 / 100 = 25,00,000
Profit = 25,00,000 - 15,00,000 = ‘10,00,000

Answer: (B): (i) False (ii) True (iii) True (iv) True (v) True (vi) False (vii) True

MCQ Set 14
QUESTION NO.1: Dividend-Payers Ltd. has a stable income and stable dividend policy. The average annual
dividend payout is ‘ 27 per share (Face Value = ‘100). You are required to find out Dividend payout in year 2, if the
company were to have an expected market price of ‘160 per share at the existing cost of equity.
[The market price in year 1 is ‘ 150] (A) ‘ 28.88 (B) ‘ 26.86 (C) ‘ 28.80 (D) ‘ 26.98
AADITYA JAIN
QUESTION NO.2: The ratio THE BEST
of current assetsSFM FACULTY
(‘ 3,00,000) to currentOF INDIA
liabilities (‘2,00,000) is 1.5 : 1. The accountant
TARGET
of this firm is interested in maintaining 100%ratio
a current PLUSof 2 : 1CRORE
by paying PLUS
some part of current liabilities. Hence, the
amount of current liabilities which must be paidSALARY for this purpose is:
(A) 1,00,000 (B) ‘ 2,00,000 (C) ‘ 2,50,000
9911442626 (D) ‘ 1,50,000

QUESTION NO.3: The interest rate in Germany is 11 per cent and the expected inflation rate is 5 per cent. The
British interest rate is 9 per cent. How much is the expected inflation rate in Britain?
(A) 3.0% (B) 3.1% (C) 4.5% (D) 2.9%
 Ph. 9911442626
Wherever you go, go with all your heart 24 CA Aaditya Jain
QUESTION NO.4: Annual usage of a firm is 3,60,000 units and 2 to 4 days are taken in receiving delivery of
inventory after placing an order. Calculate Re-order level, if the reasonable expected stock out is 100 units per
day. (Assume 1 year = 360 days) (A) 3000 units (B) 3300 units (C) 2500 units` (D) 3500 units

QUESTION NO.5: A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt
and 70% equity (assume debt beta = 0). Hence, the required rate of return of the project is (assume Rf = 10% and
Rm =18%) (A) 16.27% (B) 17.26% (C) 16.72% (D) 12.76%

QUESTION NO.6: M/s. Fine Dress Ltd. has sales of ‘800 lakhs and the variable costs amount to 62.5% of sales.
The Company has fixed cost of ‘ 100 lakhs. If the sales of the Company increase by 5% from the existing level,
what will be the per cent change in the EBIT? (A) 7.5% (B) 8.7% (C) 7.9% (D) 10.9%

QUESTION NO.7: Consider the following quotes.; Spot (Euro/Pound) = 1.6543/1.6557; Spot (Pound/NZ$) = 0.2786/
0.2800. Calculate the % spread on the Euro/Pound Rate. (A) 0.085% (B) 0.0085% (C) 0.85% (D) 0.00085%

(B) Match the descriptions to the ‘Four kinds of Float’ with reference to management of cash:
Descriptions:
(i) The time when a cheque is being processed by post office, Messanger service or other means of delivery.
(ii) The time required to sort, record and deposit the cheque after it has been received by the company.
(iii) The time from the deposit of cheque to the crediting of funds in the seller’s account.
(iv) The time between the sale and the mailing of the invoice.
Four kinds of Float—Management of cash:
(A) Billing Float
(B) Banking processing Float
(C) Cheque processing Float
(D) Mailing Float

(c) State if each of the following sentences is T (= true) or F (= false):

(i) Basic lease period refers to the period during which the lease is irrevocable.
(ii) LIBOR for treasury bill rate is the example of basis swaps.
(iii) Provision for taxation is an external source of financing.
(iv) TRIPS are the international agreement on intellectual property rights.
(v) The ROE of an unlevered firm is higher than the ROE of a levered firm, when the ROI is lower than the cost of
debt.
(vi) If IRR is less than the firm’s cost of capital, the project should be rejected.
(vii) There is no need for calculating separate cost for retained earnings, when cost of equity capital is calculated
on the basis of the market value of equity shares.
(viii) In CAPM, systematic risk is the risk that cannot be eliminated by diversification, it being common to all
firms.
(ix) Interest rate swap is an exchange of interest payments between two parties.

Answer: (A)
(i) (C) Ke = 27 / 150 × 100 = 18% ; Ke = DPS / 160 = 18% ; DPS = 160 × 18% = ‘28.80

(ii) (A) Current Ratio = Current Asset / Current Liabilities = 300000-X / 200000-X =2 ; Or, (300000 - X) =2(200000-
X); Or, X =100000

(iii) (B) If purchasing power parity holds, then the British inflations rate will be:
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
1.09  1.05
1.11 / 1.09 = 1.05 /1+ iB ; Or iB =  1 = 0.031 or 3.1%
1.11

(iv) (B) Safety Stock = 100 x 3 = 300 units

Re- order level = (Normal Daily Usage x Normal Lead Time) + Safety Stock = (1000 x 3) + 300 = 3300 units

 E   D 
(v) (C) Beta   Beta Equity     Beta Debt   = (1.2 × 0.70) + (0 × 0.30) = 0.84
 D E   DE 
Required Rate of Return = Rf + Beta (Rm – Rf) = 10% + 0.84 (18% -10 %) = 10% + 6.72% = 16.72%

Contribution Sales  VC 800  0.625(800)

(vi) (A) DOL    = 1.5
EBIT Sales  VC  Fixed Cost 800  0.625(800)  100
Which is given by 1% increase in sales. Therefore, by 5% increase in sales,
Change in EBIT will be by 1.5 x 5% = 7.5%

1.6557 - 1.6543
(vii) (A) The % spread on Euro/Pound =  100 = 0.085%
1.6543
Answer: (B)
(i) D Mailing Float; (ii) C Cheque Processing Float ; (iii) B Banking Processing Float (iv) A Billing Float

Answer: (C): (i) True ; (ii) True ; (iii) False ; (iv) True ; (v) True ; (vi) True ; (vii) True ; (viii) True ; (ix) True

MCQ Set 15
QUESTION NO.1: If the risk free rate of interest (Rf) is 10%, and expected return on market portfolio (Rm) is 15%,
ascertain expected return of the portfolio if portfolio beta is 0.30. (A) 10.5% (B) 11.5% (C) 12.5% (D) 13.5%

QUESTION NO.2: 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 andAADITYA
amount nearest JAIN
to £. It should be part of working notes.
(A) £ 30,861 THE
(B) £ 40,861BEST SFM FACULTY
(C) £ 50,861OF INDIA (D) £ 60,861
TARGET 100% PLUS CRORE PLUS
QUESTION NO.3: ABC Ltd. issued 9%, 5 year bonds of f 1,000/- each having a maturity of 3 years. The present
SALARY
rate of interest is 12% for one year tenure. It is9911442626
expected that Forward rate of interest for one year tenure is going
to fall by 75 basis points and further by 50 basis points for every next year in further for the same tenure. This
bond has a beta value of 1.02 and is more popular in the market due to less credit risk. What will be the Intrinsic
value of bond. (A) ‘ 832.00 (B) ‘ 582.68 (C) ‘ 798.28 (D) ‘ 942.48

QUESTION NO.4: The following data is available for a bond: Face Value - ‘ 1,000 ; Coupon Rate - 11% ; Years
 Ph. 9911442626
Wherever you go, go with all your heart 26 CA Aaditya Jain
to Maturity - 6; Redemption Value - ‘ 1,000 ; Yield to Maturity - 15% ; Round-off your answer to 3 decimals) ;
What will be the Current Market Price. (A) ‘634.48 (B) ‘734.48 (C) ‘834.48 (D) ‘934.48

QUESTION NO.5: Mr. Dayal is interested in purchasing equity shares of ABC Ltd. which are currently selling at ‘
600 each. He expects that price of share may go upto’ 780 or may go down to ‘480 in three months.
What combination of share and option should Mr. Dayal select if he wants a perfect hedge?
(A) 0.50 share (B) 0.70 share (C) 0.90 share (D) 1.00 share

QUESTION NO.6: A is an investor and having in its Portfolio Shares worth ‘1,20,00,000 at current price and Cash
’10,00,000. The Beta of Share Portfolio is 1.4. What will be the current portfolio beta?
(A) 1.3025 (B) 1.2923 (C) 2.3025 (D) 2.2923

QUESTION NO.7: Mr. Paresh can earn a return of 16 per cent by investing in equity shares on his own. Now he is
considering a recently announced equity based mutual fund scheme in which initial expenses are 5.7 per cent
and annual recurring expenses are 1.7 per cent. How much should the mutual fund earn to provide Mr. Kiran a
return of 16 per cent? (A) 15.67% (B) 16.67% (C) 17.67% (D) 18.67%

QUESTION NO.8: There are two projects, Project A & B. From the given data please. Suggest which project will be
selected? Project A Project B
Investment 5000000 7500000
Net Cash Inflow 6250000 9150000
K = 10%. (A) Project A (B) Project B (C) A & B both (D) None of the above

QUESTION NO.9: Consider a 10 year, 12% coupon bond with a par value of ‘ 10,000. Assume that the required
yield on this bond is 13%. Find out the value of the bond. (A) ‘ 2,601.1 (B) ‘9461.2 (C) ‘4,601.1 (D) ‘5,601.1

QUESTION NO.10: Government securities are free from

(A) Default risk (B) Purchasing power risk (C) Interest rate risk (D) Re-Investment risk

Answer:
(i) (B) Expected Return on Portfolio, Rp= Rf + p x (Rm - Rf) = 10% + 0.30(15%-10%) = 11.5%
(ii) (B) First of all we shall calculate premium payable to bank as follows:
rp
P A
 1  ; Where, P = Premium; A = Principal Amount; rp = Rate of Premium; i = Fixed Rate of
1  i  i  1  it 
 
Interest ; t = Time
0.01
  £15,000,000
 1  = £40,861
1  0.035  0.035  1.0354 
 

(iii) (D) Intrinsic value of Bond :

PV of Interest + PV of Maturity Value of Bond ; Forward rate of interests :- 1st Year - 12% ; 2nd Year - 11.25% ;
3rd Year -10.75%
90 90 90
PV of interest =  
1  0.12 1  0.121  0.1125 1  0.121  0.11251  0.1075 = ‘ 217.81
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
1000
PV of Maturity Value of Bond =
1  0.121  0.11251  0.1075 = ’ 724.677
Intrinsic value of Bond = ‘ 217.81 + ‘ 724.67 = ‘ 942.48

 Disc. Or Prem. 
Coupon Interest   
 Years Left 
(iv) (C) Calculation of Market Price: YTM = Face Value  Market Value
2
Discount or premium - YTM is more than coupon rate, market price is less than Face Value i.e. at discount.

 1,000  X  
110   
 6 
Let x be the market price: 0.15  ; X = ‘ 834.48
1,000  X
2
(v) (A) To compute perfect hedge we shall compute Hedge Ratio as follows:
C1  C2 150  0 150
Hedge Ratio =    0.50 ; Mr. Dayal should purchase 0.50 share for every 1 call option.
S1  S2 780  480 300

(vi) (B) Current Portfolio : Current Beta for share = 1.4 ; Beta for cash = 0
120 Lakhs 10 Lakhs
Current portfolio beta =  1.4  0   1.2923
130 Lakhs 130 Lakhs

(vii) (D) Let the Return on Mutual Funds be ‘ X

Investor’s Expectation denotes the Return from the amount invested.
Inventor' s Expectation
Returns from mutual funds =  Annual Recurring Expenses
100  Issue Expenses
16
X=  1.7  18.67%
100  5.7%
Return that the Mutual Fund should earn so as to provide a return of 16% = 18.67%

(viii) (B) At first, NPV and IRR of the projects are calculated and it has been found that, NPVa< NPVb ; IRRa > IRRb
The above results indicate that there is a conflict in ranking of the projects under NPV and IRR. Such conflict is
mainly due to the difference in the initial investment of the projects and it can be resolved using incremental
AADITYA JAIN
approach as follows.
Differential Cash Outflows =THE BEST
25,00,000 SFM FACULTY
; Differential OF INDIA
Net Cash Inflows = 29,00,000
We know that IRR is the discountTARGET 100%Present
rate at which PLUSValue CRORE
of Cash PLUS
Inflows are equal to the Present Value of
Cash Outflows. So, 25,00,000 = 29,00,000 / (1 +SALARYr)1 ; Or, 1 + r = 29,00,000 / 25,00,000 ; Or, r = 1.16 - 1 = 0.16
IRR (r) of the differential cash flows = 16%, which is greater than Cost of Capital (k).
9911442626
Therefore, Project with higher non-discounted cash inflows, i.e., Project B would be selected.

(ix) (B) The cash flows for this bond are as follows: 10 annual coupon payments of ‘ 1200 ; ’10,000 principal
repayment 10 years from now
The value of the bond is: P = 1200 X (PVIFA 13%, 10 years) + 10,000 x (PVIF 13%, 10 years)
 Ph. 9911442626
Wherever you go, go with all your heart 28 CA Aaditya Jain
P = 1200 x 5.426 + 10,000 x 0.295; P = 6511.2 + 2950 P = ‘9461.2

(x) (A) Government securities are free from default risk since government does not default payment.

MCQ Set 16
QUESTION NO.1: Buenos Aires Limited has 10 lakh equity shares outstanding at the beginning of the year 2013.
The current market price per share is ‘ 150. The current market price per share is ‘ 150. The company is contemplating
a dividend of ‘ 9 per share. The rate of capitalization, appropriate to its risk class, is 10%. Based on MM approach,
calculate the market price of the share of the company when Dividend is declared :
(A) 156 (B) 166 (C) 176 (D) 186

QUESTION NO.2: Sea Rock Ltd. has an excess cash of ‘ 30,00,000 which it wants to invest in short-term marketable
securities. Expenses resulting to investment will be ‘ 45,000. The securities invested will have an annual yield of
10%. The company seeks your advice as to the period of investments so as to earn a pre-tax income of 6%.
(A) 5 months (B) 6 months (C) 9 months (D) 12 months

QUESTION NO.3: Rishav holds two equity shares A and B in equal proportion with the following risk and return:
E(Ra) = 26% ; S.D.a = 20% ; E(Rb) = 22% ; S.D.b = 24%. The returns of these securities have a positive correlation
of 0.7. Calculate the portfolio return and risk. (A) 25% (expected return), 29% risk (B) 24% (expected
return), 30% risk (C) 24% (expected return), 20.30% risk (D) 25% (expected return), 20.30% risk

QUESTION NO.4: Consider the following quotes: Spot (Euro / Pound) = 1.3904 - 1.3908 ; Spot (Pound / NZ $) =
0.5020 - 0.5040 ; What will be the possible % spread on the cross rate between Euro and NZ $?
(A) 0.40 (B) 0.39 (C) 0.41 (D) 0.43

QUESTION NO.5: Following information is available regarding a mutual fund: Return - 13 ; Risk - 16 ; Beta - 0.90;
Risk free rate - 10. Calculate Sharpe ratio. (A) 80. (B) 90. (C) 0.20. (D) 0.21

QUESTION NO.6: The risk free return is 8 per cent and the return on market portfolio is 14 per cent. If the
last dividend on Share ‘A’ was 2.00 and assuming that its dividend and earnings are expected to grow at the
constant rate of 5 per cent. The beta of share ‘A’ is 2.50. Compute the intrinsic value of share A.
(A) 7.60. (B) 11.67 (C) 7.62. (D) 7.63.

QUESTION NO.7: What is the price of a European put option on a non-dividend-paying stock when the stock price
is ’69, the strike price is ‘ 70, the risk-free interest rate is 5% per annum, the volatility is 35% per annum, and the
time to maturity is six months? (A) 3.40 (B) 6.40 (C) 4.50 (D) 5.40

QUESTION NO.8: A characteristic line is formed by regressing

(A) Stock prices with market index (B) Beta with required rate of return
(C) Standard deviation with required rate of return (D) Stock returns with market returns

QUESTION NO.9: Beta of a security measures its

(A) Diversifiable risk (B) Market risk (C) Financial risk (D) None of the above

QUESTION NO.10: The February Pepper future traded at 16.80, the February 18.00 call at 0.45 and the February
18.00 put at 0.58. Both are options on the February future. Find out whether any arbitrage opportunity exists.
(A) Arbitrage opportunity exists (B) Does not exists
Answer:
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(i) (A) As per MM model, the current market price of equity share is:
1 1
Po  x D1  P1 ; If the dividend is declared: 150   9  P1 = ‘156
1  ke 1  0.10

(ii) (C) Pre-tax income required on investment of ‘ 30,00,000 is ‘ 1,80,000.

Let the period of investment be ‘P’ for return required on investment ‘1,80,000 (’30,00,000 x 6%)
 10 P 
Accordingly,  '30,00,000     45,000  1,80,000 ; P = 9 months.
 100 12 
(iii) (C) Computation of Expected Return:
E (RP) = Proportion of A × E (RA) + Proportion of B × E (RB) = 26(.5) + 22(.5) = 13 + 11 = 24%
Computation of Portfolio Risk

Standard DeviationPortfolio  WA2  σA2  WB2  σB2  2WAWBσAσBr

 0.502  202  0.502  242  2  20  24  0.50  0.50 = 20.30%

(iv) (D) The % spread on Cross rate between the Euro and NZ $. Let us find out the Cross rate first.
SPOT (Euro / NZ ) = (0.5020 x 1.3904) : (0.5040 x 1.3908) = 0.6980 : 0.7010
So, % Spread on Euro to NZ $ = [(0 / 7010 - 0.6980) / 0.6980] x 100 = 0.4298 = 0.43.

(v) (B) Sharpe’s ratio = (Rp - Rf) / S.D. = [13 - 10] / 16 = 0.19

(vi) (B) Beta of Share - 2.5 ; Market Return - 14% ; Risk Free Rate of Return - 8% ; Growth rate of Dividends - 5%
; Last Year’s dividend - `2
(1) Computation of Expected Return
Expected Return [E(Ra)] = Rf + [Pa x (Rm- Rf)]; = 0.08 + [2.5 x (0.14 - 0.08)] = 0.08 + 2.5 (0.14 - 0.08) = 0.08 + 0.15
= 0.23 i.e., Ke = 23%
(2) Intrinsic Value of share = D1 / (Ke - g) = Do x (1+ g) / (Ke - g) = 2 x (1+0.05) - (0.23 - 0.05) = ‘ 11.67
The Intrinsic Value of share A is ‘ 11.67.

(vii) (B) In this case, SO = 69, K = 70, r = 0.05, S.D. = 0.35 and T = 0.5
In60 / 70   0.35 2  2 0.5
D1   0.166 ; D2  D1  0.35 0.5  0.0809
0.35 0.5
The price of the European put is :- 70e-0.05 x 0.5 N(0.0809) - 69 N (-0.1666)
= 70e-005x05 x 0.5323 - 69 x 0.4338 = 6.40.
AADITYA JAIN
(viii) (C) Characteristic Line is a graph depicting the relationship between Security Returns and Market Index
THE BEST SFM FACULTY OF INDIA
Returns.
TARGET 100% PLUS CRORE PLUS
SALARY
(ix) (B) Beta of a security measures its vulnerability of security to market risk. In other words, beta measures the
market risk or non-diversifiable risk. 9911442626

(x) (A) Arbitrage opportunity exists ; (i) Cost of future = ’16.80 ;

(ii) Cost of Pepper = Present Value of Exercise Price + Value of Call -Value of Put ; = ’18 + ‘0.45 - ‘0.58 = ‘ 17.87

MCQ Set 17
 Ph. 9911442626
Wherever you go, go with all your heart 30 CA Aaditya Jain
QUESTION NO.1: A mutual fund has an NAV of ’12.50 per unit at the beginning of the year. At the end of the year
the NAV increases to ’13.40. In the meanwhile, the Fund distributes ‘ 0.85 as dividend and ‘ 0.70 as capital gains.
What will be the fund’s rate of return during the year? (A) 18.6% (B) 19.6% (C) 20.6% (D) 21.6%

QUESTION NO.2: Which of the following is not a source of systematic risk?

(A) Market Risk (B) Interest rate risk (C) Purchasing power risk (D) Financial risk

QUESTION NO.3: A project had an equity beta of 1.40 and was going to be financed by a combination of 30%
debt and 70% equity. Assuming debt-beta to be zero, the project beta is: (A) 0.68 (B) 0.78 (C) 0.88 (D) 0.98

QUESTION NO.4: CNX Nifty is currently quoting at 9200. Each lot is 55. An investor purchases a March Futures
contract at 9300. He has been asked to pay 7% margin. What amount of initial margin is required to be deposited
by him? To what level Nifty futures should be increased to get a gain of 6%?
A. ‘ 35805, 9339.05 (B) ‘ 35000, 9939.05 (C) ‘36805, 9539 (D) ‘ 40000, 9400

QUESTION NO.5: The stock of ABC Ltd. sells for ‘ 240. The present value of exercise price and the value of call
option are ‘ 217.40 and ‘ 39.60 respectively. What is the value of put option?
(A) ‘ 16.50 (B) ‘ 22.00 (C) ‘ 17.00 (D) 18.00

QUESTION NO.6: An investor holds two equity shares A and B in equal proportion with the following risk and
return: E (Ra) = 26% ; S.D.a = 20% ; E(Rb) = 22% ; S.D.b = 24%. The returns of these securities have a positive
correlation of 0.7. The portfolio risk will be:- (A) 20.30% (B) 21.67% (C) 19.49% (D) 17.15%

QUESTION NO.7: From the following quotes of a bank, determine the rate at which Yen can be purchased with
Rupees. Rs. / £ Sterling: 75.31 - 33 ; £ Sterling / Dollar ($): 1.563 - 65; Dollar ($) / Yen (¥): 1.048 / 52 [per 100 Yen]
(A) 124.02 (B) 142.02 (C) ‘ 412.02 (D) ‘ 214.02

QUESTION NO.8: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows: Make X :- Cost ‘ 4.5 million with estimated life of 10 years ; Make Y :- Cost ‘ 6.0 million with
estimated life of 15 years ; Ignore maintenance and operation cost. Which one would be cheaper? Company’s
cost of capital is 10%. PVIFA (10%, 10) = 6.1446 ; PVIFA (10%, 15) = 7.6061
(A) Make X will be cheaper (B) Make Y will be cheaper
(C) Cost will be the same (D) None of the above

QUESTION NO.9: Consider the following for Strong Ltd. Return on Govt. Securities = 12%; Share beta = 1.5;
Market return = 16% ; Based on CAPM, cost of equity will be: (A) 28% (B) 22% (C) 18% (D) 12%

QUESTION NO.10: The 6-month forward rate for US dollar against rupee is quoted at ‘ 49.50 as opposed to a spot
price of ‘ 48.85. The forward premium on US dollar is: (A) 1.50% (B) 3.08% (C) 3.05% (D) 3.03%

Answer:
(i) (B) 19.6%

(ii) (D) Financial risks arise when companies resort to financial leverage or use of debt financing. The more the
company resorts to debt finance, the greater is the financial risk. Financial risk is an unsystematic risk, which can
be diversified.

(iii) (D) Project beta = equity beta x weight of equity + debt beta x weight of debt = 1.4 x 70% + 0 x 30% = 0.98.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
Here taxation has been ignored in calculating weights as the rate is not given.

(iv) (A) Initial margin = (7% x 9300 x 55) = 35805 ; Gain = 6% ; Return (6% of Initial margin) = 2148 ; Return per unit
= 2148 / 55 = 39.05 ; Index value should rise to = 9300 + 39.05 = 9339.05

(v) (C) Value of call option + P.V of exercise price = Spot rate - Value of put option ; Or, 39.60 + 217.40 = 240 +
Value of put option Value of put option = ‘ 17

(vi) (A) Portfolio variance = 202 x 0.52 + 242 x 0.52 + 2 x 0.5 x 0.5 x 20 x 24 x 0.7 = 412 ; Portfolio risk = 412 =
20.30%

(vii) (A) Ask (Rs./ ¥) = Ask (Rs. / £) x Ask (£ / $) x Ask ($ / ¥) = 75.33 x 1.565 x 1.052 = ‘ 124.02

(viii) (A) Equivalent annuity = Cost / PVIFA ; Equivalent Annuity for X = 4.5 million / PVIFA (10%, 10) = 4500000 /
6.1446 = ‘ 732350 ; Equivalent Annuity for Y = 6 million / PVIFA (10%, 15) = 6000000 / 7.6061 = ‘ 788840;
So, X is cheaper.

(ix) (A) Cost of equity = Rf + Beta (Rm- Rf) = 12+1.5(16-12) = 18%

Forward Rate - Spot Rate 12 49.5 - 48.55 12

(x) (D) Forward premium (annualized) =   100    100  2.66%
Spot Rate 6 48.55 6

MCQ Set 18
QUESTION NO.1: Liquidity risk is a financial risk due to uncertain liquidity. What can this cause to happen?
(A) A firm’s credit rating fall. (B) A firm experiences sudden unexpected cash outflow.
(C) A firm’s market experiences a loss in liquidity. (D) All of the above.

QUESTION NO.2: What is inflation rate?

(A) The increase in prices of goods and services in the economy.
(B) The risk that the value of assets or income will decrease.
(C) The risk that inflation will get out of control to become hyperinflation.
(D) The risk that is due to uncertainty of inflation.

QUESTION NO.3: What are the four options for dealing with a risk?
(A) Accept, Mitigate, Transfer and Avoid. (B) Accept, Insure, Transfer and Avoid.
(C) Accept, Mitigate, Reduce and Avoid. (D) Situation, Task, Action and Result.
AADITYA JAIN
QUESTION NO.4: A portfolio THE
comprisesBESTtwo securities and the expected
SFM FACULTY OF return
INDIA on them is 12% and 16% respectively.
Determine return of portfolio if first security constitutes 40% of total portfolio.
TARGET 100% PLUS CRORE PLUS
(A) 12.4% (B) 13.4% (C) 14.4% (D) 15.4%
SALARY
QUESTION NO.5: An option dealer took short9911442626
positions in a call and a put options on dollar at the strike price of
’47.00. He received premiums of ‘2.50 for each option. For the dealer to make a gain in this option strategy, price
should remain in the range of (A) ’44.50 to ’47.00 (B) ’47.00 to ’49.50 (C) ’44.50 to ’49.50 (D) ’42.00 to ’52.00

QUESTION NO.6: What rate should a bank quote for a sale of 3 month forward exchange contract for US $1
million given interbank quote spot US $ 1= ’45.02- 04 and forward premium 20-25 point?
 Ph. 9911442626
Wherever you go, go with all your heart 32 CA Aaditya Jain
(A) ’45.29 (B) ’45.22 (C) ‘45.27 (D) ’45.24

QUESTION NO.7: By using the constant growth formula, find out the cost of equity of a company which has
growth rate of 5%, last year’s dividend ‘1 and CMP of company’s equity share is ’20.
(A) ’10.25 (B) ’10.00 (C) ‘8.25 (D) ’12.00

QUESTION NO.8: Consider the following of Target Ltd: Standard deviation of share = 4%, Correlation coefficient
= 0.8, Market standard deviation = 2.5%. Based on CAPM, the Beta coefficient of the company’s share (which is
traded in the stock market) is equal to:- (A) 1.50 (B) 1.28 (C) 1.00 (D) 0.50

QUESTION NO.9: The probability distribution of NPV is given below:

NPV (‘) Probability
30,000 0.1
60,000 0.3
1,20,000 0.4
1,50,000 0.2
If the cost of the project is ‘3,00,000, the Profitability Index is :- (A) 1.23 (B) .1.33 (C) 1.43 (D) 1.53

QUESTION NO.10: The following are the data on two Mutual Funds: Fund Return % Beta Vreedhi ‘141.40 Mitra
‘161.50 . If the risk-free rate is 6%, the Treynor’s ratios are:-
(A) 5.71, 6.67 (B) 5.67, 6.71 (C) 6.71, 5.67 (D) 5.76, 6.76

Answer:
(i) (D) Funding liquidity risk is a financial risk due to uncertain liquidity. An institution might lose liquidity if its
credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties
to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it
depends are subject to loss of liquidity.

(ii) (A) Inflation rate signifies the rate of increase in the prices of goods and services.
(iii) (A) There are basically three options, viz. Accept Transfer, Mitigate and Avoid.

(iv) (C) Portfolio return = 0.4 x 12 + 0.6 x 16 = 14.4%

(v) (D) He has initially received ‘ (2.50 + 2.50) = ‘ 5.00 ; When spot price is less than ‘ 47 put option is exercised
and call option is not exercised and vice versa. Thus, the price should remain in the range of (47-5) to (47+5) i.e.
‘ 42 to ‘ 52 to ensure gain to the option writer.

(vi) (A) Spot quote is US $ 1 = ‘ 45.02 - 45.04 and forward premium is 20-25.
So, forward quote will be = ‘ (45.02 + 0.20) - (45.04 + .0.25) i.e. ‘ 45.22 - 45.29.
So, bank will quote ‘ 45.29 to sell a 3 month forward buying contract.

(vii) (A) Cost of equity = Expected dividend/Current Market Price + Growth rate = 1 (1+.05) / 20 + 0.05 = 10.25%

(viii) (B) Beta = Covariance / variance of market return

Covariance S.D. of Stock Return S.D. of Stock Return
  Correlatio n 
S.D. of Market Return  S.D. of Stock Return S.D. of Market Return S.D. of Market Return
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
0.04
0.8   1.28
0.025

(ix) (B) Expected NPV = 30000 x 0.1 + 60000 x 0.3 + 120000 x 0.4 + 150000 x 0.2 = 99000 ;
Cost of the project = 300000; Total PV = 300000 + 99000 = 399000; So, PI = 399000 / 300000 = 1.33

(x) (A) Treynor ratio for Vreedhi = (14- 6) / 1.4 = 5.71 and for Mitra = (16-6) / 1.5 = 6.67

MCQ Set 19
QUESTION NO.1: Which of the following is not an investment constraint?
(A) Liquidity (B) The absence of the need for regular income.
(C) The preferred time horizon (D) Risk tolerance.

QUESTION NO.2: It is given that Rs. / £ quote is ‘100.68 – 102.95 and Rs. / $ quote is ‘61.86 – 62.87. What would
be the $ / £ quote? It is given that Rs./ £ quote is ‘100.68 – 102.95 and Rs./ $ quote is ‘61.86 – 62.87. What would
be the $ / £ quote? (A) $1.6014 - $ 1.6642 (B) $1.6014 - $1.6542 (C) $1.6014 - $6352 (D) $1.6014 - $6252

QUESTION NO.3: The theoretical forward price of the following security for 6 months is: Spot Price (Sx)- ‘160;
Risk free interest rate 9% ; [Given: e0.045 = 1.046028] (A) 166.3645 (B) ‘167.4645 (C) ‘ 167.3645 (D)‘166.4656

QUESTION NO.4: A project had an equity beta of 1.3 and was going to be financed by a combination of 30% debt
and 70% equity. Assuming debt-beta to be zero, the project beta is: (A) 0.81 (B) 0.71 (C) 0.51 (D) 0.9

QUESTION NO.5: An investor buys a call option contract for a premium of ‘ 150. The exercise price is ‘ 15 and the
current market price of the share is ‘ 12. If the share price after three months reaches ‘ 20, what is the profit made
by the option holder on exercising the option? Contract is for 100 shares. Ignore the transaction charges.
(A) ‘450 (B) ‘350 (C)‘ 375 (D) ‘475

QUESTION NO.6: Mr. X can earn a return of 18% by investing in equity shares on his own. Now he is considering
recently announced equity based mutual fund scheme in which initial expenses are 6.70% and annual recurring
expenses are 1.7%. How much should the mutual fund earn to provide Mr. X a return of 18 per cent?
(A) 22 (B) 19 (C) 24 (D) 21

QUESTION NO.7: CNX Nifty is currently quoting at 9100. Each lot is 75. An investor purchases a May Futures
contract at 9200. He has been asked to pay 5% margin. What amount of initial margin is he required to deposit?
To what level NIFTY futures should in increase to get a gain of 4%? (A) 9318.4 (B) 9218.4 (C) 9218.5 (D) 9118.4

AADITYA
QUESTION NO.8: P Ltd. has an EPS of ‘ 75 per JAIN Payout Ratio is 30%. Earnings and dividends of
share. Its Dividend
the company are expected to grow at 6% per annum.
THE BEST SFM FACULTY Find out theOF
costINDIA
of equity capital if its market price is ‘ 300
per share. (A) 11.5% (B) 12.5% 100% PLUS
TARGET (C) 13.5%
CRORE PLUS (D) 14.5%
SALARY
QUESTION NO.9: An investor has three alternatives of varying investment values. The data available for each of
these alternatives are given below: 9911442626
Alternative Expected Return (%) Standard Deviation of Return
I 23 8.00
II 20 9.50
III 18 5.00
Which alternative would be the best if coefficient of variation is used?
 Ph. 9911442626
Wherever you go, go with all your heart 34 CA Aaditya Jain
(A) Alternative III is the best as its co-efficient of variation is the lowest.
(B) Alternative II is the best as its co-efficient of variation is the lowest.
(C) Alternative I is the best as its co-efficient of variation is the lowest.
(D) None.

QUESTION NO.10: A student ordered a book from USA on 01-05-2018 for $ 90, when the spot rate was ‘68.50/$.
Payment was made ten days later, on 11-05-2018 when the book was delivered. By this time, the rupee had
appreciated by 10%. How much did it cost the student in Rupees? (Ignore transaction and delivery cost).
(A) ‘5304.55 (B) ‘5404.55 (C) ‘5504.55 (D) ‘ 5604.55

Answer:
(i) (B) The absence of the need for regular income. The investment constraints for investments are liquidity, age,
need for regular income, time horizon, risk tolerance and tax liability.

(ii) (A) The synthetic rate for $ / £ is to be calculated. Here, rupee, the price currency (i.e. common currency) is
the cheapest among the three currencies involved in the quotes.
The formula is: $ / £ = [(Rs. / £ bld) / (Rs. / $ ask)]: [(Rs. / £ ask)/(Rs. / $ bid )] = [100.68 / 62.87]: [102.95 / 61.86]
= 1.6014 : 1.6642; So, $ / £ = $ 1.6014 - $ 1.6642

(iii) (C) Forward price of securities = ‘ 160 × e (009) (0.50) = ‘ 160 × e 0.045 = ‘ 160 × 1.046028 = ‘ 167.3645.

(iv) (D) BetaP is to be ascertained as = [ BetaE + E / (D +E) ] + [ BetaD + E / (D + E)] = (1.30 × 0.70) + (0 × 0.3) = 0.91

(v) (B) Assuming in call option, the total outgo Premium + Exercise Price = ‘ 150 + (‘ 15 × 100) = ‘ 1650;
After 3 months, if share price is ‘ 2000, the net profit = 2000 – 1650 = ‘ 350.

(vi) (D) Let the return on mutual fund be ‘ x. Investors expectation denotes the return from the amount invested.
Investor's Expectation 18
Return from mutual funds =  Annual Recurring Expenses ; Or, X   1.7 = 21%
100 - Issue Expenses  (100 - 6.7)%
Hence, Mutual fund should earn so as to provide a return of 18% = 21%.

(vii) (B) Initial margin = (5% x 9200 x 75) = 34500; Gain = 4% ; Return (4% of Initial Margin) = 1380;
Return per unit = 1380 / 75 = 18.4; Index value should rise to = 9200 + 18.4 = 9218.4

Dividend Per Share 75  30%

(viii) (C) Ke  Market Price Per Share  g  300  6%  13.5%

(ix) (A) The Co-efficient of Variation is the ratio of standard deviation to mean.
Alternative Expected Return (%) Standard Deviation of Return (%) Co-efficient of Variation
I 23 8 0.35
II 20 9.5 0.48
III 18 5 0.28
Alternative III is the best as its co-efficient of variation is the lowest.
(x) (D) Rupee is appreciating by 10% ; Value of dollar is =68.5 / (1+10% ) × 90 = ‘ 5604.55

MCQ Set 20
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.1: Which of the following securities is not a part of money market?
(A) Commercial Paper (B) Call money (C) 91 day Treasury bill (D) 5 year Public Deposit.

QUESTION NO.2: Which of the following assumption is wrong under MM approach?

(A) Capital market is perfect. (B) There is no transaction cost.
(C) The dividend payout ratio is 0%. (D) There are no corporate taxes.

QUESTION NO.3: The aim of foreign exchange risk management is :

(A) To maximize profits. (B) To know with certainty the quantum of future cash flows.
(C) To minimize losses. (D) To earn a minimum level of profit.

QUESTION NO.4: Z Ltd. Is a manufacturing company having asset turnover ratio of 2 and debt- asset ratio of 0.60
for the year ended 31st March ,2009 . If its net profit margin is 5%, the Return on Equity (ROE) of the company will
be : (A) 20% (B) 25% (C) 16.7% (D) data insufficient.

QUESTION NO.5: Which of the following conditions indicate that short term funds have been put to long term
use? (A) Current Ratio is less than 1.00 (B) Quick Ratio is less than 1.00
(C) Total debt to Equity ratio is more than 1.00 (D) Net working Capital is positive.

QUESTION NO.6: A company has paid Rs. 3 as current dividend, the growth rate of dividend paid by the company
is 8%. If the cost of equity is 12%, the price of the company’s share in nearest Rs. three year hence will be :
(A) Rs. 100 (B) Rs. 118 (C) Rs. 110 (D) 102

QUESTION NO.7: An Indian company is planning to invest in US. The US inflation rate is expected to be 3% and
that of India is expected to be 8% annually. If spot rate currently is Rs. 45 / US $, what spot rate you expect after
5 years? (A) Rs.56.09 / US $ (B) Rs. 57.00 / US $ (C) Rs. 57.04 / US $ (D) 57.13 / US $.

QUESTION NO.8: The average daily sales of a company are Rs. 5 lac.The company normally keeps a cash balance
of Rs. 80000.If the weighted operating cycle of the company is 45 days, its working capital will be
(A) Rs.112.9 lac. (B) Rs. 113.3 lac (C) Rs. 5.8 lac (D) Rs. 225.8 lac.

QUESTION NO.9: An Indian bank wants to find their Nostro A/c with a US correspondent by US $ 500000 against
INRS when interbank rate is US $ 1= Rs.47.20 / 50 . The deal is struck and the overseas bank’s Vostro A/c that is
being maintained with the India bank will be credited by :
(A) Rs. 23,600,000 (B) Rs. 23,750,000 (C) Rs. 23,675,000 (D) Rs. 23,712,500

QUESTION NO.10: The stock of ABC Ltd sells for Rs. 240. The present value of exercise price and value of call
option are Rs. 217.40 and Rs. 39.60 respectively.
AADITYA What isJAIN
the value of put option?
(A) Rs. 16.50 (B) Rs. 22.00 (C) Rs.17.00 (D) Rs.18.00
THE BEST SFM FACULTY OF INDIA
Answer 1. TARGET 100% PLUS CRORE PLUS
SALARY
(i) (D) 5 year deposit has maturity of more than 1 year. Hence it is not a security in the money market.
9911442626
(ii) (C) As per MM approach the dividend payout ratio is 100%, i.e there are no retained earnings.

(iii) (B) To know with certainty the quantum of future cash flows.
 Ph. 9911442626
Wherever you go, go with all your heart 36 CA Aaditya Jain
 Net profit   Sales   Avg. Assets 
(iv) (B) According to Du-Pont Analysis, ROE         
 Sales   Avg. Assets   Avg. Equity 
Avg. Assets 1
  2.50 ; ROE = 0.05 x 2 x 2.5 = 0.25 i.e 25%.
Avg. Equity (1  0.60)

(v) (A) Current Ratio less than 1 indicates use of Current Assets in funding long term liabilities.

(vi) (D) P3 = D4 / Ke - g = Do (1+g)4 / Ke - g = 3 (1+0.08)4 / 0.12-0.08 = 3 x (1.360) / 0.04=4.08 / 0.04 = Rs. 102/-

(vii) (C) According to purchase power parity, spot rate after 5 years
= Rs. 45 x [(1+.08) / (1+.03)] = 45 [1.469 / 1.159] = 45 x 1.2675 = 57.04.

(viii) (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash balance
= Sales per day x weighted operating cycle+ cash balance requirement = Rs.5 lac x 45 + ‘ 0.80 lac = Rs. 225.80 lac.

(ix) (A) Rs. 47.20 x 5,00,000 = Rs. 2,36,00,000.

(x) (C) Value of put option = Value of Call option + PV of exercise price - Stock price = Rs. (39.60 + 217.40 - 240) =
Rs. 17.
MCQ Set 21
QUESTION NO.1: Bidhan purchased a second hand machine for Rs. 8,000 on April, 2008 and spent Rs. 3,500 on
overhauling and installation. Depreciation is written-off 10% p.a. on original cost. On June 30, 2011, the machine
was found to be unsuitable and sold for Rs. 6,500. What is the loss to be written -off?
(A) Rs. 1,265.80 (B) Rs. 1,262.50 (C) Rs. 1,309.80 (D) Rs. 1,350.05

QUESTION NO.2: Surya Ltd. has issued 30,000 irredeemable 14% debentures of Rs. 150 each. The cost of floatation
of debentures is 5% of the total issued amount. The company’s taxation rate is 40%. The cost of debentures is :
(A) 8.95% (B) 7.64% (C) 9.86% (D) 8.84%

QUESTION NO.3: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows : Product Cost (Rs. Million) Estimated life (years)
Make A 4.50 10
Make B 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper ? The company’s cost of capital is 10%.
[Given : PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) Make A will be cheaper (B) Make B will be cheaper (C) Cost will be the same (D) None of the above.

QUESTION NO.4: ABC Ltd. has a debt-equity mix of 30 / 70. If ABC Ltd.’s debt beta is 0.3 and for its activity (or
projects) is 1.21, what is the beta for its equity? (A) 1.65 (B) 1.60 (C) 1.52 (D) None of the above

QUESTION NO.5: Anand Ltd. announced a rights issue of four shares of Rs. 100 each at a premium of 160% for
every five shares held by the existing shareholders. The market value of the shares at the time of rights issue is
Rs. 395. The value of right is : (A) Rs. 90 (B) Rs. 80 (C) Rs. 60 (D) Rs. 55

QUESTION NO.6: A company is planning to issue a discount bond with a par value of Rs. 1,000, implicit interest
rate of 11.5% and a redemption period of 5 years. The company also intends to offer an early bird incentive of
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
1.5%. The issue price (rounded up to nearest rupee) will be [Given : PVIF (11.5%, 5 years) = 0.5803]
(A) Rs. 580 (B) Rs. 572 (C) Rs. 543 (D) Rs. 490

QUESTION NO.7: ABC Ltd.’s share price at present is Rs. 120. After 6 months, the price will be either Rs. 150 with
a probability of 0.8 or Rs. 110 with a probability of 0.2. A European call option exists with an exercise price of Rs.
130. The expected value of the call option at maturity date will be : (A) Rs. 16 (B) Rs. 20 (C) Rs. 10 (D) Zero

QUESTION NO.8: An investor has Rs. 5,00,000 to invest. What will be his expected risk premium in investing in
equity versus risk-free securities in the following conditions :
Investment Probability Expected return
Equity 0.6 Rs. 2,00,000
0.4 (-) Rs. 1,50,000
Risk-free security 1.0 Rs. 25,000
(A) Rs. 35,000 (B) Rs. 45,000 (C) Rs. 60,000 (D) Rs. 85,000

QUESTION NO.9: Exchange rate system where the central bank intervenes to smoothen out exchange rate
fluctuations is known as : (A) Free float (B) Managed float (C) Fixed rate system (D) Floating rate system

QUESTION NO.10: Variable rate investors are the typical users of :

(A) Interest rate caps (B) Interest rate collars (C) Both (A) and (B) (D) Interest rate floors

Answer:
(i) (B) Particulars Rs.
Cost of machine (8,000 + 3,500) 11,500.00
Less :Depreciation @ 10% (1-4-2008 to 31-3-2011) (Rs. 11,500 x 10 / 100 x 3 years) 3,450.00
Book value as on 1-4-2011 8,050.00
Less : Depreciation @ 10% (1-4-2011 to 30-6-2011) (Rs. 11,500 x 10 / 100 x 3 / 12) 287.50
Book value as on 30-6-2011 7,762.50
Sale value 6,500.00
Loss on sale of machine 1,262.50

(ii) (D) Particulars Rs.

Total issued amount (30,000 x Rs. 150) 45,00,000
Less : Floatation cost (Rs. 45,00,000 x 5 / 100) 2,25,000
Net proceeds from issue 42,75,000
Annual interest charge = Rs. 45,00,000 x 14 / 100 = Rs. 6,30,000
I(1  t) 6,30,000(1  0.40)
Kd    8.84% AADITYA JAIN
NP 42,75,000
THE BEST SFM FACULTY OF INDIA
(iii) (A) Make A TARGET 100% PLUS CRORE PLUS
SALARY
Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make B 9911442626
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make A is lower than make B, make A is suggested to purchase.

(iv) (B) bA = bd (D / V) + be (E / V); 1.21 = (0.30 x 0.3) + (be x 0.7) ; be = 1.60

 Ph. 9911442626
Wherever you go, go with all your heart 38 CA Aaditya Jain
r(M  S)
(v) (C) Value of right =
Nr
Where, r = number of rights issued = 4 ; N = Number of equity shares = 5 ; M = Market price = Rs. 395 ; S = Issue
4(395  260)
price of rights = Rs. 100 + (Rs. 100 × 160%) = Rs. 260 ; Value of right =  Rs.260
54
(vi) (B) Bo = Bn × PVIF (K%, n years) ; Where, Bn = Rs. 1,000; n = 5 years; K% = 11.5% ; incentive = 0.015 ; Bo =
Rs. 1,000 × 0.5803 = Rs. 580.30 ; Issue price will be= Rs. 580.30 (1 – 0.015) = Rs. 571.60 or Rs. 572

(vii) (A) Expected value of call option

Expected share price (Rs.) Exercise price (Rs.) Call value (Rs.) Probability Call option value (Rs.)
150 130 20 0.8 16
110 130 0 0.2 0
16

(viii) (A) Expected premium = (0.6 x Rs. 2,00,000) + [0.4 x (-) Rs. 1,50,000] - Rs. 25,000
= Rs. 1,20,000 - Rs. 60,000 - Rs. 25,000 ; = Rs. 35,000

(ix) (B) Managed float

(x) (D) Interest rate floors

MCQ Set 22
QUESTION NO.1: Money market hedge involves—
(A) Borrowing in foreign currency in case of exports (B) Investing in foreign currency in case of imports
(C) Both A and B (D) Neither of the above

QUESTION NO.2: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows : Product Cost (‘ Million) Estimated life (years)
Make X 4.50 10
Make Y 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The company’s cost of capital is 10%.
(A) Make X will be cheaper (B) Make Y will be cheaper (C) Cost will be the same (D) None of the above
QUESTION NO.3: An Indian company is planning to invest in US. The US inflation rate is expected to be 3% and
that of India is expected to be 8% annually. If the spot rate currently is ‘ 45 / US$, what spot rate can you expect
after 5 years? (A) ‘ 59.09 / US$ (B) ‘ 57.00 / US$ (C) ‘ 57.04/ US$ (D) ‘ 57.13 / US$

QUESTION NO.4: ABC Ltd. has a debt-equity mix of 30 / 70. If ABC Ltd.’s debt beta is 0.3 & for its activity (or
projects) is 1.21, what is the beta for its equity? (A) 1.65 (B) 1.60 (C) 1.52 (D) None of the above

QUESTION NO.5: ABC Ltd. intends to invest ‘ 50 lakhs in commercial paper (CP) and has received the following
quotes from a prima dealer : Bid 5.30%, Ask 5.00%. If the maturity period of the CP is 45 days, the investment
amount (rounded upto nearest rupee) will be (Assume day count basis as “actual / 365”).
(A) ‘ 49,67,541 (B) ‘ 49,68,454 (C) ‘ 49,69,367 (D) None of the above

QUESTION NO.6: The equity shares of MNP Ltd. are selling at ‘ 240 each. At the end of the holding period the
share is expected to be worth any one of the following values :
Price ‘220 ‘250 ‘ 250
Probability 0.3 0.4 0.3
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
A European call option with exercise price of ‘ 240 will (ignoring time value of money) be worth :
(A) ‘ 16 (B) ‘ 15 (C) ‘ 14 (D) ‘ 18

QUESTION NO.7: On April 1, 3 months interest rate in the US$ and Germany DM are 6.5% and 4.5% per annum
respectively. The US$ / DM spot rate in 0.6560. What would be the forward rate for DM for delivery on 30th June?
(A) US$ 0.6592 / DM (B) US$ 0.6528 / DM (C) US$ 0.6430 / DM (D) US$ 0.6525 / DM

QUESTION NO.8: Which of the following is not an assumption of Black and Scholes Model (BSM)?
(A) The risk-free rate of interest is known (B) No imperfection exist in writing an option
(C) Only European options are considered (D) Dividend is paid on the shares

QUESTION NO.9: A company issue commercial paper for ‘ 3 crores with a maturity period of 90 days. The interest
rate is 11% p.a. The net amount received by the company will be :
(A) ‘ 2.94 crores (B) ‘ 2.92 crores (C) ‘ 2.85 crores (D) ‘ 3.08 crores

QUESTION NO.10: A share of Sun Ltd. is currently quoted at ‘ 55. The retained earning per share being 40% is ‘ 4
per share. If the investors expect annual growth rate of 10%, what would be the cost of equity of Sun Ltd.?
(A) 20.5% (B) 21.0% (C) 22.0% (D) 23.5%

Answer:
(i) (C) Importer will have FC liability and settle the same with maturity proceeds of FC asset created. Exporter will
get the asset value from overseas customer and settle FC liability there itself.

(ii) (A) Make A

Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make B
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make A is lower than make B, make A is suggested to purchase.

(iii) (C) According to Purchase Power Parity, spot rate after 5 years = ‘ 45 x [(1 + 0.08) / (1 + 0.03)]5 = 45 x 1.2675
= ‘ 57.04

(iv) (B) bA = bd (D / V) + be (E / V); 1.21 = (0.30 x 0.3) + (be x 0.7) ; be = 1.60

F -P 365 50,00,000 - P 365

(v) (C) Interest Yield    100 ; 0.05    49,69,367
P Maturity Period P 45
The investment amount will be ‘ 49,69,367
AADITYA JAIN
(vi) (A) Vo = (0.3 x 0) + 0.4 (‘THE
250 - BEST SFM
‘ 240) + 0.3 FACULTY
(‘ 280 OF INDIA
- ‘ 240) = ‘ 16
TARGET 100% PLUS CRORE PLUS
(vii) (A) Using Interest Rate Parity Forward rateSALARY
after 3 months = US$ 0.6592 / DM
9911442626
(viii) (D) Dividend is paid on the shares

(ix) (B) Interest @ 11% p.a. for 90 days on Re 1 = 0.0271233 ; Amount after 90 days = 1 + 0.0271233 = 1.0271233
Net amount received = ‘ 3,00,00,000 / 1.0271233 = ‘ 2,92,07,788 say ‘ 2.92 crores
 Ph. 9911442626
Wherever you go, go with all your heart 40 CA Aaditya Jain
(x) (C) Retained earnings per share = ‘ 4 ; EPS = ‘ 4 x 100 / 40 = ‘ 10 ; Dividend = ‘ 10 x 60 / 100 = ‘ 6
Cost of equity (K ) = D° (1 + g) / Po + g = 6 (1 + 0.10) / 55 + 0.10 = 0.22 or 22%

MCQ Set 23
QUESTION NO.1: Eureka Ltd. has a debt-equity mix of 30 / 70. If Eureka Ltd.’s debt beta for its activity (or
projects) is 1.21, what is the beta for its equity? (A) 1.65 (B) 1.60 (C) 1.52 (D) None of the above

QUESTION NO.2: Nigam Ltd.’s share price at present is ‘ 120. After 6 months, the price will be either ‘ 150 with a
probability of 0.8 or ‘ 110 with a probability of 0.2. A European call option exists with an exercise price of ‘ 130.
The expected value of the call option at maturity date will be : (A) ‘ 16 (B) ‘ 20 (C) ‘ 10 (D) Zero

QUESTION NO.3: Swarup purchased a second hand machine for ‘ 8,000 on April, 2008 and spent ‘ 3,500 on
overhauling and installation. Depreciation is written-off 10% p.a. on original cost. On June 30, 2011, the machine
was found to be unsuitable and sold for ‘ 6,500. What is the loss to be written -off?
(A) ‘ 1,265.80 (B) ‘ 1,262.50 (C) ‘ 1,309.80 (D) ‘ 1,350.05

QUESTION NO.4: Surya Ltd. has obtained quotes from two different manufacturers for an equipment. The
details are as follows : Product Cost (Rs. Million) Estimated life (years)
Make A 4.50 10
Make B 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The company’s cost of capital is 10%.
[Given: PVIFA (10%, 10 years) =6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) Make A will be cheaper (B) Make B will be cheaper (C) Cost will be the same (D) None of the above.

QUESTION NO.5: An investor has ‘ 5,00,000 to invest. What will be his expected risk premium in investing in
equity versus risk-free securities in the following conditions :
Investment Probability Expected return
Equity 0.6 ‘ 2,00,000
0.4 (-) ‘ 1,50,000
Risk-free security 1.0 ‘ 25,000
(A) ‘ 35,000 (B) ‘ 45,000 (C) ‘ 60,000 (D) ‘ 85,000

QUESTION NO.6: The value of a share of MN Ltd. after right issue was found to be ‘ 75/-. The theoretical value of
the right is ‘ 5. The number of existing shares required for a rights share is 2. The subscription price at which were
issued were: (A) ‘ 22.50 (B) ‘ 40.00 (C) ‘ 65.00 (D) ‘ 82.00

QUESTION NO.7: HP Leasing Company expects a minimum yield of 10% on its investment in the leasing business.
It proposes to lease a machine costing ‘ 5,00,000 for ten years. If yearly lease payments are received in advance
, the lease rental to be charged by the company for lease will be :
(A) ‘ 81372 (B) ‘ 73975 (C) ‘ 72,370 (D) None of (A), (B), (C).

QUESTION NO.8: The aim of foreign exchange risk management is :

(A) To maximize profits. (B) To know with certainty the quantum of future cash flows.
(C) To minimize losses. (D) To earn a minimum level of profit.

QUESTION NO.9: The average daily sales of a company are ‘ 5 lac. The company normally keeps a cash balance
of ‘ 80000.If the weighted operating cycle of the company is 45 days, its working capital will be
(A) ‘112.9 lac. (B) ‘ 113.3 lac (C) 5.8 lac (D) 225.8 lac.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.10: The following various currency quotes are available from a leading bank:
Rs. / £:- 75.31 / 75 .33 ; £ / $ :- 0.6391 / 0.6398 ; $ /¥ :- 0.01048 / 0.01052. The rate at which yen (¥) can be
purchased with rupees will be:- (A) Re. 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) .None of the above.

Answer: (A)
(i) (B) bA = bd (D / V) + be (E / V); 1.21 = (0.30 x 0.3) + (be x 0.7) ; be = 1.60

(ii) (A) Expected value of call option

Expected share price (Rs.) Exercise price (Rs.) Call value (Rs.) Probability Call option value (Rs.)
150 130 20 0.8 16
110 130 0 0.2 0
16
(iii) (B) ‘Particulars Rs.
Cost of machine (8,000 + 3,500) 11,500.00
Less :Depreciation @ 10% (1-4-2008 to 31-3-2011) (Rs. 11,500 x 10 / 100 x 3 years) 3,450.00
Book value as on 1-4-2011 8,050.00
Less : Depreciation @ 10% (1-4-2011 to 30-6-2011) (Rs. 11,500 x 10 / 100 x 3 / 12) 287.50
Book value as on 30-6-2011 7,762.50
Sale value 6,500.00
Loss on sale of machine 1,262.50

(iv) (A) Make A

Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make B
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make A is lower than make B, make A is suggested to purchase.

(v) (A) Expected premium = (0.6 x ‘ 2,00,000) + [0.4 x (-) ‘ 1,50,000] - ‘ 25,000 ;
= ‘ 1,20,000 - ‘ 60,000 - ‘ 25,000 ; = ‘ 35,000

(vi) (C) Theoretical value of a right (Vt) = (P-S) / N+1 = ’ 5 where, N = 2

or, P- S = 5(2+1); or, P = 15 + S Equation (i)
Value of share after right (Vo ) = NP + S where, Vo = ‘ 75
Or, 75 = (2P + S) / 3 ; Or, 2P + S = 3 x 75 ; Or, 2P + S = 225 Equation (ii)
Putting value of P in equation (ii), we get 2 P + S = 225 ; Or, 2(15 + S) + S = 225 ; Or, 30 + 3S = 225;
Or, S = (225-30) / 3 ; Or, S =65.

(vii) (B) Let , lease rental per annum be , AADITYA

x JAIN
‘ 500000 = x + x / (1+0.1) + x / (1+0.1) + ........... + x / (1+0.1)9
2
THE BEST SFM FACULTY OF INDIA
= x + 5.759 x = 6.759 x ; Or, x = ‘ 500000 / 6.759 = ‘ 73975.
TARGET 100% PLUS CRORE PLUS
(viii) (B) To know with certainty the quantum ofSALARY
future cash flows.
9911442626
(ix) (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal. Cash balance
= Sales per day x weighted operating cycle+ cash balance requirement = ‘ 5 lac x 45 + ‘ 0.80 lac = ‘ 225.80 lac.

(x) (A) To purchase (¥) we need to have a quote of (¥) in terms of Rs. we need only the ASK quote.
ASK (Rs. / ¥) = ASK (Rs. / £) x ASK (£ /$) x ASK ($/ ¥)
 Ph. 9911442626
Wherever you go, go with all your heart 42 CA Aaditya Jain
= 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)

(B) Choose the most appropriate one from the stated options and write it down [ only indicate A, B, C, D as
you think correct :

QUESTION NO.1: Which of the following is a correct sequence of life cycle of a project?
(A) Planning, selection, scheduling, termination (B) Planning, implementation, control, evaluation
(C) Selection, scheduling, implementation, evaluation, control (D) Planning, implementation, control, evaluation

QUESTION NO.2: Which one of the following would describe commercial paper most appropriately?
(A) Unsecured long - term notes as loan (B) Unsecured short - term loan notes
(C) Secured short - term loan notes (D) Secured long - term loan notes

QUESTION NO.3: Short -term portfolio investments are recorded in which head of Balance of Payment (BOP)
account? (A) Investment Income (B) Current Accounts (C) Capital Account (D) Reserves

QUESTION NO.4: The internal rate of return can be said to be based on the assumption that the intermediate
cash flows are (A) Re-invested at a rate equal to the internal rate of return of the firm.
(B) Re-invested at the cost of capital of the firm. (C) Perfectly certain (D) Highly variable

QUESTION NO.5: The traditional view of financial management looks at:

(A) Arrangement of short-term and long-term funds from financial institutions.
(B) Mobilisation of funds through financial instruments (C) Orientation of Finance function with accounting
function (D) All of the above

QUESTION NO.6: Which of the following institutions has international monetary co-operation as its primary
concern? (A) World Bank (B) Bank of international settlement (C) IMF (D) IDA

QUESTION NO.7: Exchange rate system where the central bank intervenes to smoothen out exchange rate
fluctuations is known as :
(A) Free float (B) Managed float (C) Fixed rate system (D) Floating rate system
QUESTION NO.8: Variable rate investors are the typical users of:
(A) Internal rate floors (B) Interest rate caps (C) Interest rate collars (D) Both (B) and (C)

QUESTION NO.9: In using debt-equity ratio in capital structure decisions, there is an optimal capital structure
where : (A) The WACC is minimum (B) The cost of debt is lowest
(C) The cost savings are highest (D) The marginal tax benefit is equal to marginal cost of financial distress

QUESTION NO.10: Buying and selling call and put option with different strike prices and different expiration
dates are called : (A) Butterfly spread (B) Diagonal spread (C) Vertical spread (D) Short hedge

Answer: (B) (i) (C) ; (ii) (B) ; (iii) (C) ; (iv) (A) ; (v) (D) ; (vi) (C) ; (vii) (B) ; (viii) (A) ; (ix) (D) ; (ix) (B)

QUESTION NO.C: Mention whether the following statements are True (T) or False (F):
(i) The key issue of the theory of capital structure is to examine whether a business can change its value and
cost of capital by changing its capital structure.
(ii) Leading and netting are internal hedging techniques whereas swap is an external technique for hedging
(iii) TRIPS is an international agreement on intellectual property rights.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(iv) GDR may be converted into underlying shares and vice-versa.
(v) Portfolio Balance Approach assumes that the Purchasing Power Parity (PPP) holds good.

Answer: (C) (i) True ; (ii) True ; (iii) True ; (iv) True ; (v) False

MCQ Set 24
QUESTION NO.1 : Money market hedge involves-
(A) Borrowing in foreign currency in case of exports; (B) Investing in foreign currency in case of imports;
(C) Both A and B. (D) Neither of the above

QUESTION NO.2: The value of a share of MN Ltd. after right issue was found to be ‘ 75 /-. The theoretical value
of the right is ‘ 5. The number of existing shares required for a rights share is 2. The subscription price at which
the shares were issued were : (A) ‘ 22.50 (B) ‘ 40.00 (C) ‘ 65.00 (D) ‘ 82.00

QUESTION NO.3: HP Leasing Company expects a minimum yield of 10% on its investment in the leasing business.
It proposes to lease a machine costing ‘ 5,00,000 for ten years. If yearly lease payments are received in advance,
the lease rental to be charged by the company for lease will be :
(A) ‘ 81,372 (B) ‘ 73,975 (C) ‘ 72,370 (D) None of (A) , (B) , (C).

QUESTION NO.4: The aim of foreign exchange risk management is :

(A) To maximize profits. (B) To know with certainty the quantum of future cash flows.
(C) To minimize losses. (D) To earn a minimum level of profit.

QUESTION NO.5: The average daily sales of a company are ‘ 5 lac.The company normally keeps a cash balance of
‘ 80,000. If the weighted operating cycle of the company is 45 days, its working capital will be—
(A) ‘ 112.9 lac. (B) ‘ 113.3 lac (C) ‘ 5.8 lac (D) ‘ 225.8 lac.

QUESTION NO.6: Which of the following is/are basic precondition/s for interest arbitrage theory?
(A) Free capital mobility (B) No taxes
(C) No government restrictions on borrowing in foreign currency (D) All of the above.

QUESTION NO.7: The following various currency quotes are available from a leading bank :
Rs. / £ :- 75.31 / 75 .33 ; £ / $ :- 0.6391 / 0.6398 ; $ / ¥ :- 0.01048 / 0.01052
The rate at which yen (¥ ) can be purchased with rupees will be-
(A) Re. 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) None of the above.

QUESTION NO.8: ABC Ltd. is selling its products on credit basis and its customers are associated with 5% credit
risk. The annual turnover is expected at ‘ 5,00,000
AADITYAif creditJAIN
is extended with cost of sales at 75% of sale value. The
cost of capital of the company is 15%. The net profit of the company is :
THE BEST SFM FACULTY OF INDIA
(A) ‘ 1,25,000 (B) ‘ 77,670 (C) ‘ 88,430 (D) ‘ 1,10,500
TARGET 100% PLUS CRORE PLUS
QUESTION NO.9: An investor has ‘ 5,00,000 toSALARY invest. What will be his expected risk premium in investing in
9911442626
equity versus risk-free securities in the following conditions :
Investment Probability Expected return
Equity 0.6 ‘ 2,00,000
0.4 (-) ‘ 1,50,000
Risk-free security 1.0 ‘ 25,000
(A) ‘ 35,000 (B) ‘ 45,000 (C) ‘ 60,000 (D) ‘ 85,000
 Ph. 9911442626
Wherever you go, go with all your heart 44 CA Aaditya Jain
QUESTION NO.10: Eurodollar deposit means :
(A) Dollar deposit outside USA (B) Dollar deposit beyond the control of monetary authority
(C) Dollar deposit in the US and outside US (D) None of the above.

Answer 1.
(i) (C) Importer will have FC liability and settle the same with maturity proceeds of FC asset created. Exporter will
get the asset value from overseas customer and settle FC liability there itself.

(ii) (C) Theoretical value of a right (Vt) = (P-S) / N+1 = ’ 5 where, N = 2

or, P- S = 5(2+1); or, P = 15 + S Equation (i)
Value of share after right (Vo ) = NP + S where, Vo = ‘ 75
Or, 75 = (2P + S) / 3 ; Or, 2P + S = 3 x 75 ; Or, 2P + S = 225 Equation (ii)
Putting value of P in equation (ii), we get 2 P + S = 225 ; Or, 2(15 + S) + S = 225 ; Or, 30 + 3S = 225;
Or, S = (225-30) / 3 ; Or, S =65.

(iii) (B) Let , lease rental per annum be , x

‘ 500000 = x + x / (1+0.1) + x / (1+0.1)2 + ........... + x / (1+0.1)9
= x + 5.759 x = 6.759 x ; Or, x = ‘ 500000 / 6.759 = ‘ 73975.

(iv) (B) To know with certainty the quantum of future cash flows.

(v) (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash balance
= Sales per day x weighted operating cycle + cash balance requirement = ‘ 5 lac x 45 + ‘ 0.80 lac = ‘ 225.80 lac.

(vi) (D) All of the above

(vii) (A) To purchase (¥) we need to have a quote of (¥) in terms of Rs. we need only the ASK quote.
ASK (Rs. / ¥) = ASK (Rs. / £) x ASK (£ /$) x ASK ($/ ¥)
= 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)

(viii) (B) Profitability of credit sales (Rs.)

Credit sales 5,00,000
Less : Cost of sales (` 5,00,000 × 75 / 100) 3,75,000
1,25,000
Less : Cost of granting credit
Default risk (` 5,00,000 × 5 / 100) 25,000
Opportunity cost (` 5,00,000 × 60 / 365 × 15 / 100) 12,330
Administration cost (` 5,00,000 × 2/100) 10,000
47,330
Net profit 77,670

(ix) (A) Expected premium = (0.6 x ‘ 2,00,000) + [0.4 x (-) ‘ 1,50,000] - ‘ 25,000 = ‘ 1,20,000 - ‘ 60,000 - ‘ 25,000
= ‘ 35,000

(x) (B) Dollar deposit beyond the control of monetary authority.

MCQ Set 25
QUESTION NO.1 : The traditional view of financial management looks at :
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(A) Arrangement of short-term and long-term funds from financial institutions.
(B) Mobilisation of funds through financial instruments
(C) Orientation of Finance function with Accounting function
(D) All of the above

QUESTION NO.2: A firm seeks to increase its current ratio from 1.5 before its closing date of the accounts. The
action that would make it possible is : (A) Delaying payment of salaries (B) Increase charge for depreciation
(C) Making cash payment to creditors (D) Selling marketable securities for cash at book value.

QUESTION NO.3: The dividends distributed to the shareholders and taxes paid during the year are shown as
application of funds when provision for dividends and provision for taxes are treated as :
(A) Current liabilities (B) Non-current liabilities (C) Fund items (D) Non-fund items

QUESTION NO.4: In using debt-equity ratio in capital structure decisions, there is an optimal capital structure
where : (A) The WACC is minimum (B) The cost of debt is lowest (C) The cost savings are highest (D) The
marginal tax benefit is equal to marginal cost of financial distress

QUESTION NO.5: Where the firm has sufficient profits from its existing operations, the loss on the new project
will: (A) Cause overall loss (B) Reduce the overall taxation liability (C) Increase WACC (D) Increase cost of debt

QUESTION NO.6: Buying and selling call and put option with different strike prices and different expiration
dates are called : (A) Butterfly spread (B) Diagonal spread (C) Vertical spread (D) Short hedge

QUESTION NO.7: ‘Straddle’ as a type of option trading means : (A) One call, one put, same security, same strike
and same period(B) One call, one put, same security, different strike price and same period(C) One call, two
puts, same security, same strike price and same period(D) None of the above.

QUESTION NO.8: Which of the following is/are basic precondition/s for interest arbitrage theory ?
(A) Free capital mobility (B) No taxes
(C) No government restrictions on borrowing in foreign currency (D) All of the above

QUESTION NO.9: Global Depository Receipts (GDR) are issued to :

(A) Investors of India who want to subscribe to shares of foreign companies
(B) Only to persons of Indian origin residing in a foreign country
(C) Non resident investors against publicly traded shares of the issuing companies and denominated in US dollars.
(D) Foreign banks as security to raise foreign currency loans.

QUESTION NO.10: If the amount and timing of a foreign

AADITYA JAINcurrency outflow are both uncertain, then the best
hedging technique will be to :
THE BEST SFM FACULTY OF INDIA
(A) Buy a put option (B) Buy a call option (C) Sell a call option (D)Buy a forward contract
TARGET 100% PLUS CRORE PLUS
(B) In each of the questions given below, oneSALARY
out of four is correct. Indicate the correct answer.
9911442626
QUESTION NO.1: Vishnu Steels Ltd. Has issued 30,000 irredeemable 14% debentures of ‘ 150 each. The cost of
floatation of debentures is 5% of the total issued amount. The company’s taxation rate is 40%. The cost of
debentures is : (A) 8.95% (B) 7.64% (C) 9.86% (D) 8.84%

QUESTION NO.2: The balance sheet of ABC Ltd. Shows the capital structure as follows : 2,50,0 equity shares
 Ph. 9911442626
Wherever you go, go with all your heart 46 CA Aaditya Jain
of ‘ 10 each; 32,000, 12% preference shares of ‘ 100 each; general reserve of ‘ 14,00,000; securities premium
account ‘ 6,00,000; 25,000, 14% fully secured non-convertible debentures of ‘ 100 each.; term loans from financial
institutions ‘ 10,00,000. The leverage of the firm is : (A) 67.2% (B) 62.5% (C) 59.8% (D) 56.3%

QUESTION NO.3: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows : Product Cost (‘Million) Estimated life (years)
Make X 4.50 10
Make Y 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper ? The company’s cost of capital is 10%.
[Given : PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) Make X will be cheaper (B) Make Y will be cheaper (C) Cost will be the same (D) None of the above

QUESTION NO.4: According to the second method of lending by a bank as per Tandon committee suggestion, the
maximum permissible bank borrowing - based on the following information is :
Total current assets ‘ 40,000; Current assets other than bank borrowings ‘ 10,000; Core current assets ‘ 5,000.
(A) ‘ 22,500 (B) ‘ 20,000 (C) ‘ 16,250 (D) ‘ 18,500

QUESTION NO.5: ABC Ltd. Is selling its products on credit basis and its customers are associated with 5% credit
risk. The annual turnover is expected at ‘ 5,00,000 if credit is extended with cost of sales at 75% of sale value. The
cost of capital of the company is 15%. The net profit of the company is :
(A) ‘ 1,25,000 (B) ‘ 77,670 (C) ‘ 88,430 (D) ‘ 1,10,500

QUESTION NO.6: The following various currency quotes are available from a leading bank: Rs. / £:- 75.31 / 75 .33
; £ / $ :- 0.6391 / 0.6398 ; $ / ¥ :- 0.01048 / 0.01052. The rate at which yen (¥) can be purchased with rupees will
be: (A) Re. 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) None of the above.

QUESTION NO.7: Ms. S buys 10000 shares of RR Ltd. at ‘ 50 and obtains a complete hedge of shorting 400
Nifties at ‘ 2200 each. She closes out her position at closing price of next day at which point the share of RR Ltd.
has dropped 2% and the Nifty future has dropped1.5% . What is the overall profit / (loss) of this set of transaction
? (A) Gain ‘ 3200 (B) Gain ‘ 2200 (C) Loss ‘ 3200 (D) Loss ‘ 2200

QUESTION NO.8: An Indian company is planning to invest in US. The US inflation rate is expected to be 3% and
that of India is expected to be 8% annually. If the spot rate currently is ‘45 / US$, what spot rate can you expect
after 5 year ? (A) ‘ 59.09 / US$ (B) ‘ 57.00 / US$ (C) ‘ 57.04 / US$ (D) ‘ 57.13 / US$

QUESTION NO.9: The stock of Pioneer company sells for ‘ 120. The present value of exercise price and the value
of a call option are ‘ 108.70 and RS. 19.80 respectively. Hence the value of the put option is :
(A) ‘ 8.50 (B) ‘ 9.00 (C) ‘ 10 (D) Zero

QUESTION NO.10: The spot and 6 months forward rates of L in relation to the rupee (Re/L) are ‘ 77.92542/
78.1255 and ‘ 78.8550/78.9650 respectively. What will be the annualized forward margin (premium with respect
to Ask price) ? (A) 2.31% (B) 2.15% (C) 1.80% (D) 1.59%

Answer (A) (i) (D) ; (ii) (C) ; (iii) (B) ; (iv) (D) ; (iv) (B) ; (vii) (B) ; (vii) (A) ; (viii) (D) ; (ix) (C) ; (x)(B)

Answer (B)
(i) (D) Particulars Rs.
Total issued amount (30,000 x Rs. 150) 45,00,000
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
Less : Floatation cost (Rs. 45,00,000 x 5 / 100) 2,25,000
Net proceeds from issue 42,75,000
Annual interest charge = Rs. 45,00,000 x 14 / 100 = Rs. 6,30,000
I(1  t) 6,30,000(1  0.40)
Kd    8.84%
NP 42,75,000

(ii) (C) Fixed income funds = Preference share capital + Debentures + Term loans
= ` 32,00,000 + ` 25,00,000 + ` 10,00,000 = ` 67,00,000
Equity funds = Equity share capital + General reserve + Securities premium
= ` 25,00,000 + ` 14,00,000 + ` 6,00,000 = ` 45,00,000
Total funds used in the capital structure = ` 67,00,000 + ` 45,00,000 = ` 1,12,00,000

(iii) (A) Make X

Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make Y
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make X is lower than make B, make X is suggested to purchase.

(iv) (B) MPBF under second method = (75% current assets) – (Current liabilities other than bank borrowings)
= (` 40,000 x 75 / 100) – ` 10,000 = ` 20,000

(v) (B) Profitability of credit sales (Rs.)

Credit sales 5,00,000
Less : Cost of sales (` 5,00,000 × 75 / 100) 3,75,000
1,25,000
Less : Cost of granting credit
Default risk (` 5,00,000 × 5 / 100) 25,000
Opportunity cost (` 5,00,000 × 60 / 365 × 15 / 100) 12,330
Administration cost (` 5,00,000 × 2/100) 10,000
47,330
Net profit 77,670

(vi) (A) To purchase (¥ ) we need to have a quote of (¥ ) in terms of Rs. ; We need only the ASK quote.
ASK (Rs. / ¥ ) = ASK (Rs. / £) x ASK ( £ / $) x ASK($ / ¥) = 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)

(vii) (A) Value of bought shares Value of short future

Today’s valuation 50 x 10000 = ’5.00 lac 400 x 2200 = ’8.80 lac
Next day’s valuation
AADITYA JAIN
49 x 10000 = ’4.90 lac 400 x 2167 = ’ 8.668 lac
Gain / (loss) THE BEST SFM FACULTY OF
2% dropped = Rs0.10 lac INDIA
1.5% dropped = ‘0.132 lac
Net Gain = ‘0.13200 - ’0.1000TARGET 100% PLUS CRORE PLUS
lac = ‘ 3200/-.
SALARY
spot rate after 5 years = ‘ 45 x [(1 + 0.08) / (1 + 0.03)]5 = ‘ 57.04
(viii) (C) According to Purchase Power Parity,9911442626

(ix) (A) Value of put option = Value of call option + PV of exercise price - Stock price
= ‘ 19.80 + RS. 108.70 - ‘ 120 ; = ‘ 8.50

(x) (B) The forward margin (premium with respect to Ask price) rate :
 Ph. 9911442626
Wherever you go, go with all your heart 48 CA Aaditya Jain
F  S 12 78.9650 - 78.1255 12
=   100    100  2.15%
S n 78.1255 6

MCQ Set 26
QUESTION NO.1: The value of a share of MN Ltd. after right issue was found to be ‘ 75. The theoretical value of
the right is ‘5. The number of existing shares required for a rights share is 2. The subscription price at which were
issued were: (A) ‘ 22.50 (B) ‘ 40.00 (C) ‘ 65.00 (D) ‘ 82.00

Answer: (C) Theoretical value of a right (Vt) = (P-S) / N+1 = ’ 5 where, N = 2

or, P- S = 5(2+1); or, P = 15 + S Equation (i)
Value of share after right (Vo ) = NP + S where, Vo = ‘ 75
Or, 75 = (2P + S) / 3 ; Or, 2P + S = 3 x 75 ; Or, 2P + S = 225 Equation (ii)
Putting value of P in equation (ii), we get 2 P + S = 225 ; Or, 2(15 + S) + S = 225 ; Or, 30 + 3S = 225;
Or, S = (225-30) / 3 ; Or, S =65.

QUESTION NO.2: The following various currency quotes are available from a leading bank: Rs. /£ 75.31 / 75.33
£ / $ :- 0.6391/ 0.6398 ; $ /¥ :- 0.01048 / 0.01052 . The rate at which yen (¥) can be purchased with rupees will be
(A) ‘ 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) None of the above.

Answer: (A) To purchase (¥) we need to have a quote of (¥) in terms of Rs. we need only the ASK quote.
ASK (Rs. / ¥ ) = ASK (Rs. / £) x ASK ( £ / $) x ASK($ / ¥) = 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)

QUESTION NO.3: HP Leasing Company expects a minimum yield of 10% on its investment in the leasing
business. It proposes to lease a machine costing ‘ 5,00,000 for ten years. If yearly lease payments are received
in advance , the lease rental to be charged by the company for lease will be :
(A) ‘ 81,372 (B) ‘ 73,975 (C) ‘ 72,370 (D) None of (A), (B), (C).
Answer: (B) Let , lease rental per annum be , x
‘ 500000 = x + x / (1+0.1) + x / (1+0.1)2 + ... + x / (1+0.1 )9 = x + 5.759 x = 6.759 x or, x = ‘ 5,00,000/ 6.759 = ‘ 73,975.

QUESTION NO.4:The average daily sales of a company are ‘ 5 lac. The company normally keeps a cash balance
of ‘ 80,000. If the weighted operating cycle of the company is 45 days, its working capital will be
(A) ‘112.9 lac. (B) ‘ 113.3 lac (C) ‘ 5.8 lac (D) ‘ 225.8 lac.

Answer: (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash
balance= Sales per day x weighted operating cycle + cash balance requirement =‘5 lac x 45 + ‘0.80 lac=‘225.80 lac

QUESTION NO.5: ABC Ltd.’s share price at present is ‘ 120. After 6 months, the price will be either ‘ 150 with a
probability of 0.8 or ‘ 110 with a probability of 0.2. A European call option exists with an exercise price of ‘ 130.
The expected value of the call option at maturity date will be : (A) ‘ 16 (B) ‘ 20 (C) ‘ 10 (D) Zero

Answer: (A) Expected value of call option

Expected share price (‘) Exercise price (‘) Call value (‘) Probability Call option value (‘)
150 130 20 0.8 16
110 130 0 0.2 0
16

QUESTION NO.6: Surya Ltd. has issued 30,000 irredeemable 14% debentures of ‘ 150 each. The cost of floatation
of debentures is 5% of the total issued amount. The copany’s taxation rate is 40%. The cost of debentures is :
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(A) 8.95% (B) 7.64% (C) 9.86% (D) 8.84%

Answer: (D) Particulars Rs.

Total issued amount (30,000 x Rs. 150) 45,00,000
Less : Floatation cost (Rs. 45,00,000 x 5 / 100) 2,25,000
Net proceeds from issue 42,75,000
Annual interest charge = Rs. 45,00,000 x 14 / 100 = Rs. 6,30,000
I(1  t) 6,30,000(1  0.40)
Kd    8.84%
NP 42,75,000

QUESTION NO.7: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows : Product Cost (‘ Million) Estimated life (years)
Make A 4.50 10
Make B 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The company’s cost of capital is 10%.
[Given : PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) Make A will be cheaper (B) Make B will be cheaper (C) Cost will be the same (D) None of the above.

Answer: (A) Make A

Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make B
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make A is lower than make B, make A is suggested to purchase.

QUESTION NO.8: A company is planning to issue a discount bond with a par value of ‘ 1,000, implicit interest rate
of 11.5% and a redemption period of 5 years. The company also intends to offer an early bird incentive of 1.5%.
The issue price (rounded up to nearest rupee) will be [Given : PVIF (11.5%, 5 years) = 0.5803]
(A) ‘ 580 (B) ‘ 572 (C) ‘ 543 (D) ‘ 490

Answer: (B) Bo = Bn x PVIF (K%, n years) ; Bo = ‘ 1,000 x 0.5803=’ 580.30

Issue price will be = ‘ 580.30 (1 - 0.015) = ‘ 571.60 or ‘ 572

QUESTION NO.9: A company issue commercial paper for ‘ 3 crores with a maturity period of 90 days. The interest
rate is 11% p.a. The net amount received by the company will be: (A)‘ 2.94 cr (B)‘ 2.92 cr (C)‘ 2.85 cr (D) ‘ 3.08 cr

Answer: (B) Interest @ 11% p.a. for 90 days on ‘1 = 0.0271233; Amount after 90 days = 1 + 0.0271233 = 1.0271233
Net amount received = ‘ 3,00,00,000/1.0271233
AADITYA= ‘ 2,92,07,788
JAIN say ‘ 2.92 crores
THE BEST SFM FACULTY OF INDIA
QUESTION NO.10: A share Sun Ltd. is currently quoted at ‘ 55. The retained earnings per share being 40% is ‘ 4
TARGET
per share. If the investors expect 100%rate
annual growth PLUS CRORE
of 10%, PLUS
what would be the cost of equity of Sun Ltd.?
(A) 20.5% (B) 21.0% SALARY
(C) 22.0% (D) 23.5%
9911442626
Answer: (C) Retained earnings per share = ‘ 4 ; EPS = ‘ 4 x 100 / 40 = ‘ 10 ; Dividend = ‘10 x 60 / 100 = ‘ 6
Do(1  g) 6(1  0.10)
Cost of equity (Ke) = g  0.10  22%
Po 55
 Ph. 9911442626
Wherever you go, go with all your heart 50 CA Aaditya Jain
MCQ Set 27
QUESTION NO.1: Which of the following securities is not a part of money market?
(A) Commercial Paper (B) Call money (C) 91 day Treasury bill (D) 5 year Public Deposit.

QUESTION NO.2: Which of the following assumption is wrong under MM approach?

(A) Capital market is perfect (B) There is no transaction cost
(C) The dividend payout ratio is 0%. (D) There are no corporate taxes.

QUESTION NO.3: The aim of foreign exchange risk management is :

(A) To maximize profits. (B) To know with certainty the quantum of future cash flows.
(C) To minimize losses. (D) To earn a minimum level of profit.

QUESTION NO.4: Z Ltd. is a manufacturing company having asset turnover ratio of 2 and debt- asset ratio of 0.60
for the year ended 31st March, 2014. If its net profit margin is 5%, the Return on Equity(ROE) of the company will
be : (A) 20% (B) 25% (C) 16.7% (D) data insufficient.

QUESTION NO.5: Which of the following conditions indicate that short term funds have been put to long term
use? (A) Current Ratio is less than 1.00 (B) Quick Ratio is less than 1.00
(C) Total debt to Equity ratio is more than 1.00 (D) Net working Capital is positive.

QUESTION NO.6: A company has paid ‘ 3 as current dividend, the growth rate of dividend paid by the company is
8%. If the cost of equity is 12%, the price of the company’s share in nearest ‘ three year hence will be:
(A) ‘ 100 (B) ‘ 118 (C) ‘ 110 (D) ‘ 102

QUESTION NO.7: An Indian company is planning to invest in US. The US inflation rate is expected to be 3% and
that of India is expected to be 8% annually. If spot rate currently is ‘ 45 / US $, what spot rate you expect after 5
years? (A) ’56.09 / US $ (B) ‘ 57.00 / US $ (C) ‘ 57.04 / US $ (D) ‘ 57.13 / US $.

QUESTION NO.8: The average daily sales of a company are ‘ 5 lac.The company normally keeps a cash balance of
‘ 80000. If the weighted operating cycle of the company is 45 days, its working capital will be
(A) ‘112.9 lac. (B) ‘ 113.3 lac (C) ‘ 5.8 lac (D) ‘ 225.8 lac.

QUESTION NO.9: An Indian bank wants to find their Nostro A/c with a US correspondent by US $ 500000 against
INR when interbank rate is US $ 1= ’47.20/50 . The deal is struck and the overseas bank’s Vostro A/c that is being
maintained with the Indian bank will be credited by :
(A) ‘ 23,600,000 (B) ‘ 23,750,000 (C) ‘ 23,675,000 (D) ‘ 23,712,500

QUESTION NO.10: The stock of ABC Ltd sells for ‘ 240. The present value of exercise price and value of call
option are ‘ 217.40 and ‘ 39.60 respectively. What is the value of put option?
(A) ‘ 16.50 (B) ‘ 22.00 (C) ’17.00 (D) ’18.00

Answer:
(i) (D) 5 year deposit has maturity of more than 1 year. Hence it is not a security in the money market.

(ii) (C) As per MM approach the dividend payout ratio is 100%, i.e. there are no retained earnings.

(iii) (B) To know with certainty the quantum of future cash flows.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain

 Net profit   Sales   Avg. Assets 

(iv) (B) According to Du-Pont Analysis, ROE         
 Sales   Avg. Assets   Avg. Equity 
Avg. Assets 1
  2.50 ; ROE = 0.05 x 2 x 2.5 = 0.25 i.e 25%.
Avg. Equity (1  0.60)

(v) (A) Current Ratio less than 1 indicates use of Current Assets in funding long term liabilities.

(vi) (D) P3 = D4 / Ke - g = D0(1+g)4 / Ke - g = 3(1+0.08)4 / 0.12 - 0.08 = 3 x (1.360) / 0.04 = 4.08 / 0.04 = ‘ 102/-

(vii) (C) According to purchase power parity, spot rate after 5 years = ‘ 45 x [(1+.08)5 / (1+.03)5] = 45[1.469 /
1.159] = 45 x 1.2675 = 57.04.

(viii) (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash balance
= Sales per day x weighted operating cycle+ cash balance requirement = ‘ 5 lac x 45 + ‘ 0.80 lac = ‘ 225.80 lac.

(ix) (A) ‘ 47.20x5,00,000 = ‘ 2,36,00,000.

(x) (C) Value of put option = Value of Call option + PV of exercise price - Stock price = ‘ (39.60 + 217.40 - 240)=‘ 17

MCQ Set 28
QUESTION NO.1: The value of a share of MN Ltd. after right issue was found to be ‘ 75. The theoretical value of
the right is ‘5. The number of existing shares required for a rights share is 2. The subscription price at which were
issued were: (A) ‘ 22.50 (B) ‘ 40.00 (C) ‘ 65.00 (D) ‘ 82.00

Answer: (C) Theoretical value of a right (Vt)= (P-S) / N+1= Rs. 5 ; where, N =2
or, P-S = 5 (2+1) ; or, P=15+ S Equation (i)
Value of share after right (V0 ) =NP + S where V0= ‘ 75
or, 75 = (2P + S) / 3 ; or, 2P + S =3 x 75 ; or, 2P + S = 225 Equation (ii)
Putting value of P in equation (ii), we get 2 P + S = 225 ; Or, 2(15+S)+ S = 225 ; Or, 30 + 3S = 225
Or, S = (225 - 30) / 3 ; Or, S = 65.

QUESTION NO.2: The following various currency quotes are available from a leading bank: Rs. / £ :- 75.31 / 75.33
£ / $ :- 0.6391 / 0.6398 ; $ / ¥ :- 0.01048 / 0.01052. The rate at which yen (¥) can be purchased with rupees will
be:- (A) ‘ 0.5070 (B) ‘ 1.5030 (C) ‘ 1.7230 (D) None of the above.

Answer: (A) To purchase (¥) we need to have a quote of JAIN

AADITYA (¥) in terms of ‘ we need only the ASK quote.
ASK (Rs. / ¥ ) = ASK (Rs. / £) x ASK ( £ / $) x ASK ($ / ¥) ; = 75.33 x 0.6398 x 0. 01052 = ‘ 0.5070 (approx.)
THE BEST SFM FACULTY OF INDIA
QUESTION NO.3: HP Leasing TARGET 100%
Company expects PLUS CRORE
a minimum yield of 10%PLUS
on its investment in the leasing business.
SALARY
It proposes to lease a machine costing ‘ 5,00,000 for ten years. If yearly lease payments are received in advance
9911442626
, the lease rental to be charged by the company for lease will be :-
(A) ‘ 81,372 (B) ‘ 73,975 (C) ‘ 72,370 (D) None of (A), (B), (C).

Answer: (B) Let , lease rental per annum be , x

‘ 500000 = x + x / (1+0.1) + x / (1+0.1)2 + ........... + x / (1+0.1)9
= x + 5.759 x = 6.759 x ; Or, x = ‘ 500000 / 6.759 = ‘ 73975.
 Ph. 9911442626
Wherever you go, go with all your heart 52 CA Aaditya Jain
QUESTION NO.4: The average daily sales of a company are ‘ 5 lac. The company normally keeps a cash balance
of ‘ 80,000. If the weighted operating cycle of the company is 45 days, its working capital will be
(A) ‘112.9 lac. (B) ‘ 113.3 lac (C) ‘ 5.8 lac (D) ‘ 225.8 lac.

Answer: (D) The working capital requirement is for 45 days of the weighted operating cycle plus normal cash
balance = Sales per day x weighted operating cycle+ cash balance requirement = ‘5 lac x 45 + ‘ 0.80 lac = ‘225.80
lac

QUESTION NO.5: ABC Ltd.’s share price at present is ‘ 120. After 6 months, the price will be either ‘ 150 with a
probability of 0.8 or ‘ 110 with a probability of 0.2. A European call option exists with an exercise price of ‘ 130.
The expected value of the call option at maturity date will be : (A) ‘ 16 (B) ‘ 20 (C) ‘ 10 (D) Zero

Answer: (A) Expected value of call option

Expected share price (‘) Exercise price (‘) Call value (‘) Probability Call option value (‘)
150 130 20 0.8 16
110 130 0 0.2 0
16

QUESTION NO.6: Surya Ltd. has issued 30,000 irredeemable 14% debentures of ‘150 each. The cost of floatation
of debentures is 5% of the total issued amount. The copany’s taxation rate is 40%. The cost of debentures is :
(A) 8.95% (B) 7.64% (C) 9.86% (D) 8.84%

Answer: (D) Particulars Rs.

Total issued amount (30,000 x Rs. 150) 45,00,000
Less : Floatation cost (Rs. 45,00,000 x 5 / 100) 2,25,000
Net proceeds from issue 42,75,000
Annual interest charge = Rs. 45,00,000 x 14 / 100 = Rs. 6,30,000
I(1  t) 6,30,000(1  0.40)
Kd    8.84%
NP 42,75,000

QUESTION NO.7: A company has obtained quotes from two different manufacturers for an equipment. The details
are as follows : Product Cost (‘ Million) Estimated life (years)
Make A 4.50 10
Make B 6.00 15
Ignoring operation and maintenance cost, which one would be cheaper? The company’s cost of capital is 10%.
[Given : PVIFA (10%, 10 years) = 6.1446 and PVIFA (10%, 15 years)= 7.6061]
(A) Make A will be cheaper (B) Make B will be cheaper (C) Cost will be the same (D) None of the above.

Answer: (A) Make A

Purchase cost = Rs. 4.50 million ; Equivalent annual cost = 4.50 / 6.1446 = Rs. 0.73235 million
Make B
Purchase cost = Rs. 6.00 million; Equivalent annual cost = 6.00 / 7.6061 = 0.78884 million
Therefore, equivalent annual cost of make A is lower than make B, make A is suggested to purchase.

QUESTION NO.8: A company is planning to issue a discount bond with a par value of ‘ 1,000, implicit interest rate
of 11.5% and a redemption period of 5 years. The company also intends to offer an early bird incentive of 1.5%.
The issue price (rounded up to nearest rupee) will be [Given : PVIF (11.5%, 5 years) = 0.5803]
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(A) ‘ 580 (B) ‘ 572 (C) ‘ 543 (D) ‘ 490

Answer: (B) Bo = Bn × PVIF (K%, n years) ; Where, Bn = Rs. 1,000; n = 5 years; K% = 11.5% ; incentive = 0.015 ; Bo
= Rs. 1,000 × 0.5803 = Rs. 580.30 ; Issue price will be= Rs. 580.30 (1 – 0.015) = Rs. 571.60 or Rs. 572

QUESTION NO.9: A company issue commercial paper for ‘ 3 crores with a maturity period of 90 days. The interest
rate is 11% p.a. The net amount received by the company will be: (A)‘2.94 cr (B)‘2.92 cr (C)‘2.85 cr (D) ‘ 3.08 cr

Answer: (B) Interest @ 11% p.a. for 90 days on ‘1 = 0.11x 90 / 365 = 0.0271233 ; Amount after 90 days = 1 +
0.0271233 = 1.0271233 ; Net amount received = ‘ 3,00,00,000 / 1.0271233 = ‘ 2,92,07,788 say ‘ 2.92 crores

QUESTION NO.10: A share Sun Ltd. is currently quoted at ‘ 55. The retained earnings per share being 40% is ‘ 4
per share. If the investors expect annual growth rate of 10%, what would be the cost of equity of Sun Ltd.?
(A) 20.5% (B) 21.0% (C) 22.0% (D) 23.5%

Answer: (C) Retained earnings per share = ‘ 4 ; EPS = ‘ 4 x 100 / 40 = ‘ 10 ; Dividend = ‘ 10 x 60 / 100 = ‘ 6
Cost of equity (K ) = D° (1 + g) / Po + g = 6 (1 + 0.10) / 55 + 0.10 = 0.22 or 22%

MCQ Set 29
QUESTION NO.1: Which of the following securities is most liquid?
(A) Money Market instruments (B) Capital Market instruments (C) Gilt -edged securities (D) Index futures

QUESTION NO.2: A Ltd. has an EPS of f 3 last year and it paid out 60% of its earnings as dividends that year.
This growth rate in earnings and dividends in the long term is expected to be 6%. If the required rate of return on
equity for Ashrin Ltd. is 14%. Calculate the P / E ratio of A Ltd. (A) 7.50 (B) 7.65 (C) 7.85 (D) 7.95
QUESTION NO.3: The current spot rate for the US$ is Rs. 50. The expected inflation rate is 6 per cent in India and
2.5 per cent in the US. What will be the expected spot rate of the US$ a year hence?
(A) Rs.51.71 (B) Rs.50.71 (C) Rs. 57.01 (D) Rs. 52.71

QUESTION NO.4: DEF Ltd. placed Rs. 52 Crores in overnight call with a foreign bank for a day in overnight call.
The call ruled at 5.65% p.a. What is the amount it would receive from the foreign bank the next day?
(A) Rs.52,00,70,493 (B) Rs. 52,00,80,493 (C) Rs. 52,00,80,593 (D) Rs. 52,00,80,693

QUESTION NO.5: The rates available in the Kolkata market are: Rs. / $ Spot :- 46.75 / 78 ; £/ $ :- 0.5285 / 86.
If an Indian Importer requires pounds, calculate the rate quoted to him.
(A) Rs.88.51/ £ (B) Rs. 85.51/ £ (C) Rs. 86.51/ £ (D) Rs.87.51/ £

QUESTION NO.6: While plotting a graph with risk on X -axis

AADITYA JAINand expected return on Y -axis , a line drawn with co-
ordinates (0, rf ) and (Beta, THE
rm ) is BEST
called: SFM FACULTY OF INDIA
(A) Security market Line (B) Characteristic Line (C) Capital Market Line (D) CAPM Line
TARGET 100% PLUS CRORE PLUS
SALARY
QUESTION NO.7: If the RBI intends to reduce the supply of money as part of anti inflation policy , it might
(A) Lower bank rate 9911442626
(B) Increase Cash Reserve Ratio
(C) Decrease SLR (D) Buy Government securities in open market

QUESTION NO.8: A Ltd., an export customer who relied on the interbank rate of Rs./ $ 46.50 / 10 requested his
banker to purchase a bill for USD 80,000. Calculate the rate to be quoted to A Ltd., if the banker wants a margin
of 0.08%. (A) Rs. 45.45 (B) Rs. 44.44 (C) Rs. 46.46 (D) Rs. 47.47
 Ph. 9911442626
Wherever you go, go with all your heart 54 CA Aaditya Jain
QUESTION NO.9: --------- estimate the difference between the required rate of return and the growth rate.
(A) Retention ratio (B) Leverage ratio (C) Payout Ratio (D) Dividend yield ratio.

QUESTION NO.10: Two Firms P Ltd and M Ltd. are similar in all respects expect that M Ltd. uses Rs. 10,00,000
debt in its capital structure. If the corporate tax rate for these firms is 40%. Calculate the value of M Ltd. exceeds
that of P Ltd. (A) Rs. 4,00,000 (B) Rs. 4,40,000 (C) Rs. 4,04,000 (D) Rs. 4,00,400

Answer:
(i) (C) Of all securities given, gilt edged securities are considered as most liquid because they are Government
bonds and have active secondary market.

(ii) (D) P / E Ratio = Payout Ratio / (r-gn) ; =0.6(1.06) / (0.14 - 0.06) = 0.636 / 0.08 = 7.95

(iii) (A) (Expected spot rate a year from now) / Current spot rate = (1+ Expected inflation on home country) / (1+
Expected Inflation in foreign country or Expected spot rate of US$ a year hence = (Rs. 50 x 1.06) / 1.025
= Rs. 51.71

(iv) (B) Amount placed in call = Rs. 52 crores; Interest = 5.65% p.a. ; Amount receivable next day = Principal +
Interest for a day = Rs. 52 Crores + 52 crores x ( 1 / 365) x (5.65 / 100) = Rs. 52,00,80,493

(v) (A) The rate to be quoted to the importer is the Ask rate = (Rs. / $) Ask x ($ / N) Ask
= (Rs. / $) Ask x (1 / (£ / $) Bid = 46.78 x 1 / 0.5285 = Rs. 88.51/£

(vi) (A) Security market Line simply represents the average or normal trade-off between risk and return for a
group of securities where risk is measured typically in terms of the securities betas.

(vii) (B) If the RBI intends to reduce the supply of money as part of anti inflation policy, it might increase bank
rate, increase Cash Reserve Ratio, increase SLR, sell Government securities in open market.

(viii) (C) Profit margin of 0.08% is to be deducted from the bid rate.
That is 46.50 x 0.0008 = Rs. 0.04; Spot bid rate = 46.50 - 0.04 = Rs. 46.46

(ix) (D) As per constant dividend discount model, P = D1 / (k-g); so, k - g= D1 / P is dividend yield.

(x)(A) When Corporate taxes are considered, the value of the firm that is levered would be equal to the value of
the unlevered firm increased by the tax shield associated with debt i.e. Value of Levered Firm = Value of unlevered
firm + Debt (Tax rate). Therefore, Value of M Ltd. would exceed the value of P Ltd. by only Debt (Tax rate)
i.e., 0.4 x 10,00,000 = Rs. 4,00,000.

MCQ Set 30
QUESTION NO.1: A project has a 10% discounted pay back of 2 years with annual after tax cash inflows commencing
from year end 2 to 4 of ‘ 400 lacs. How much would have been the initial cash outlay which was fully made at the
beginning of year 1? (A) ‘ 400 lacs (B) ‘ 452 lacs (C) ‘ 633.80 lacs (D) 497.20 lacs

QUESTION NO.2: A project is expected to yield an after tax cash inflow at the end of year 2 of ‘ 150 lacs and has
a cost of capital of 10%. Inflation is expected at 3% p.a. While computing the NPV of t the project, this cash flow
will be taken as the following:
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
150 150
150 150(1.03)2
(A) 1.03 (B) (1.03)2 (C) (D)
(1.1)2 (1.1)2 (111.33%)2 (1.11)2

QUESTION NO.3: A firm has an asset Beta = 1.3, equity Beta = 1.5. Then, which of the following is true?
(A) The firm is unlevered. (B) Debt Beta is also 1.3.
(C) The above data is not possible. (D) The firm is leveraged and the debt Beta is lower than the asset Beta.

QUESTION NO.4: For a portfolio containing three securities A, B and C, correlation coefficients PAB = +0.4; ñAC
= +0.75; PBC = - 0.4; S.D.A = 9; S.D.B = 11; S.D.C = 6; weights A = 0.2; weights B = 0.5; weights C = 0.3; the covariance
of securities A and B is (A) 3.96 (B) 24.75 (C) 39.6 (D) 247.5

QUESTION NO.5: A ‘ 1,000 per value bond bearing a coupon rate of 14% matures after 5 years. The required rate
of return on this bond is 10%. The value of the bond (to the nearest rupee) will be:
(A) 1,125 (B) 1,152 (C) 1,512 (D) 862.20

QUESTION NO.6: The following information is available for a mutual fund:

Return - 13% ; Risk (S.D.) - 16% ; Beta - 0.90 ; Risk Free Rate - 10%. Treynor’s Ratio of the mutual fund is:
(A) 3.85 (B) 4.43 (C) 3.33 (D) 3.73

QUESTION NO.7: The 90 day interest rate is 1.85% in USA and 1.35% in the UK and the current spot exchange rate
is $ 1.6 / £. The 90-day forward rate is: (A) $ 1.607893 (B) $ 1.901221 (C) $ 1.342132 (D) $ 1.652312

QUESTION NO.8: The intercept of the Security Market Line (SML) on the y axis is
(A) E(Rm) - Rf (B) 1 / [E(Rm) - Rf] (C) Rf - E(Rm) (D) Rf

QUESTION NO.9: A mutual fund wants to hedge its portfolio of shares worth ‘ 10 crore using the NIFTY Index
Futures. The contract size is 100 times the index. The index is currently quoted at 6840. The Beta of the portfolio
is 0.8. The beta of the index may be taken as 1. What is the number of contracts to be traded?
(A) 110 (B) 116 (C) 145 (D) 123

QUESTION NO.10: A call option at a strike price of ‘ 200 is selling at a premium of ‘ 24. At what share price on
maturity will it break-even for the buyer of the option? (A) ‘ 200 (B) 176 (C) ‘ 224 (D) ‘ 248

Answer:
(i) (B) Sum of PV Factors year 2 to 4 @10% = 2.26; Discounted cash flow after tax = 400 x 2.26 = 904 lacs
Hence, Investment = 904 / 2 = 452 lacs. AADITYA JAIN
THE BEST SFM FACULTY OF INDIA
(ii) (B) Nominal Cash Flow = 150 ; P.V. of nominal cash flow = Real Cash Flow = 150 / (1.03)2
TARGET 100% PLUS CRORE PLUS
150 SALARY
P.V. of real cash flow = (1.03)2 9911442626
(1.1)2
(iii) (D) Debt Beta is lower than equity Beta. Asset Beta is the weighted average of debt and equity and it has to
be between 1.5 and debt Beta.

(iv) (C) PAB × S.D.A x S.D.B = 0.4 × 9 × 11 = 39.6

 Ph. 9911442626
Wherever you go, go with all your heart 56 CA Aaditya Jain
(v) (B) Value of the bond = ‘ [140 × PVIFA 10%, 5 year + 1,000 × PVIF10%, 5 year]
= 140 × 3.7907 + 1,000 × 0.6209 = 1,151.598 = 1,152

(vi) (C) Treynor’s Ratio = (Rp – Rf)/Beta = (13 – 10) / 0.90 = 3.33

(vii) (A) [Forward Rate / Spot Rate] =[(1 + domestic interest rate) / (1 + foreign interest rate)]
F / $ 1.6 = [(1 + 0.0185) / (1 + 0.0135)] = $1.607893

(viii) (D) Rf, The risk free rate.

(ix) (B) Hedge Ratio = Beta of the portfolio / Beta of the index = 0.8 / 1.0 = 0.8
Hedge Ratio 0.8
Number of contracts to be traded = Portfolio Value ×  10 Cr.   116.96  117
Value of a future Contract 684000

(x) (C) To recover the call option premium of ‘ 24, the share price on the date of expiration should rise to (‘ 200 +
24)= ‘ 224.
MCQ Set 31
QUESTION NO.1: A company has ‘ 7 crore available for investment. It has evaluated its options and has found
that only four investment projects given below have positive NPV. All theseninvestments are divisible and get
proportional NPVs. Project Initial Investment (‘ crore) NPV (‘ crore) PI
W 6.00 1.80 1.30
X 3.00 0.60 1.20
Y 2.00 0.50 1.25
Z 2.50 1.50 1.60
Which investment projects should be selected?
(A) Project W in full and X in part (B) Project Z in full and W in part
(C) Project W in full and Z in part (D) Project Z and Y in full and X in part

QUESTION NO.2: An investor is bullish about X Ltd. which trades in the spot market at ‘ 1,150. He buys two call
option contracts with three months (one contract is 100 shares) with a strike price of ‘ 1,195 at a premium of ‘ 35
per share. Three months later, the share is selling at ‘ 1,240. Net profit / loss of the investor on the position will
be (A) ‘ 1,000 (B) ‘ 16,000 (C) ‘ 11,000 (D) ‘ 2,000

QUESTION NO.3: Duhita Ltd. intends to buy an equipment. Quotes are obtained for two different makes A and B
as given below: Cost (‘ Million) Estimate life (years)
A 4.5 10
B 6.00 15
Ignoring the operations and maintenance costs which will be almost the same for A and B, which one would be
chapter? The company’s cost of capital is 10% [Given: PVIFA (10%, 10 yrs.) = 6.1446 and PVIFA (10%, 15 years) =
7.6061] (A) A will be cheaper (B) B will be cheaper
(C) Cost will be the same (D) They are not comparable and therefore nothing can be said about which is cheaper.

QUESTION NO.4: BLC Ltd. a valued customer engaged in import business, is in need to remit EURO 1 million to
his European exporter. The spot rate of Rs. / US$ is ‘ 65.47 / 65.57 and that of US$ / EURO is $ 0.8053 / 0.8057.
What rate will a banker quote to BLC Ltd. if the bank’s margin is 0.50%?
(A) ‘ 53.09 (B) ‘ 53.067 (C) ‘ 53.01 (D) ‘ 52.99
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.5: Given for a project: Annual Cash inflow = ‘ 80,000, Useful life = 4 years ; Undiscounted Pay-
Back period = 2.855 years ; What is the cost of the project?
(A) ‘ 1,12,084 (B) ‘ 2,28,400 (C) ‘ 9,13,600 (D) None of the above

QUESTION NO.6: A project had an equity beta of 1.4 and is to be financed by a combination of 25% Debt and 75%
Equity. Assume Debt Beta as zero, Rf = 12% and Rm = 18%.. Hence, the required rate of return of the project is
(A) 16.72% (B) 18.30% (C) 17.45% (D) 12.00%

QUESTION NO.7: An Indian Company is planning to invest in the US. The annual rates of inflation are 8% in India
and 3% in USA. If the spot rate is currently ‘ 60.50 / $, what spot rate can you expect after 5 years, assuming the
inflation rates will remain the same over 5 years? (A) ‘ 88.89 (B) ‘ 54.95 (C) ‘ 76.68 (D) 76.10

QUESTION NO.8: Which of the following securities is most liquid?

(A) Money Market instruments (B) Capital Market instruments (C) Gilt-edged securities (D) Index futures

QUESTION NO.9: While plotting a graph with risk on X-axis and expected return on Y-axis, a line drawn with co-
ordinates (0, rf) and (Beta, rm) is called
(A) Security Market Line (B) Characteristic Line (C) Capital Market Line (D) CAPM Line

QUESTION NO.10: If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might
(A) Lower the bank rate (B) Increase the Cash Reserve Ration
(C) Decrease the SLR (D) Buy Government securities in the open market.

Answer:
(i) (B) All 4 projects have positive NPV. So PI is the selection criteria. Higher the PI, greater is the return for every
rupee of investment. Z has highest and W has 2nd highest PI. So, option B is selected.

(ii) (D) Investor’s Profit = (Spot Price – Strike Price – Premium) × No of Contracts × Lot Size = (‘ 1,240 – ‘ 1,195 –
‘ 35) × 2 × 100 = ‘ 2,000

(iii) (A) Equivalent annual cost of Make – A = 45,00,000 ÷ 6.1446 = ‘ 7,32,350

Equivalent annual cost of Make – B = 60,00,000 ÷ 7.6061 = ‘ 7,88,841

(iv) (A) BLC Ltd. needs EURO to pay for import. BLC Ltd. will purchase EUROS. Hence bank would quote for selling
= (‘ 65.57 x 0.8057) + (0.5% commission) = (‘ 52.83 x 1.005) = ‘ 53.09 / EURO

(v) (B) Pay-back period = Cost of project / Annual cash inflow

So, Cost of project = Annual cash inflow x Pay-back
AADITYA period = 80,000 x 2.855 = ‘ 2,28,400
JAIN
THE BEST SFM FACULTY OF INDIA
(vi) (B) We know, BetaP = [ Beta EQUITY x {E / (D + E)}] + [ Beta DEBT x {D / (D + E)}]
TARGET 100% PLUS CRORE PLUS
= (1.4 x 0.75) + (0 x 0.25) = 1.05
Rate of return of the project = Rp = Rf + Bp (RmSALARY
- Rf); = 12% + 1.05 (18% - 12%) ; = 12%+ 6.30% ; = 18.30%
9911442626
(vii) (C) F = S x [(1 + rA) n / (1+ rB) n]; Or, F(Rs. / $) = 60.50 x [1 + 0.08)5 / (1+ 0.03)5] = 60.50 x 1.267455 = ‘76.68

(viii) (C) Of all securities given, gilt edged securities are considered as most liquid because they are Government
bonds and have active secondary market.
 Ph. 9911442626
Wherever you go, go with all your heart 58 CA Aaditya Jain
(ix) (A) Security Market Line simply represents the average or normal trade-off between risk and return for a
group of securities where risk is measured typically in terms of the securities betas.

(x) (B) If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might increase bank rate,
increase Cash Reserve Ratio, increase SLR, sell Government securities in the open market.

MCQ Set 32
QUESTION NO.1: M buys a call option contract for a premium of Rs. 200. The exercise price is RS. 25 and the
current market price of the share is Rs. 22. If the share price after three months reaches Rs. 30, what is the profit
made by M on exercising the option? A contract is for 100 shares. Ignore transaction charges.
(A) Rs. 200 (B) Rs. 300 (C) Rs. 100 (D) Rs. 600

QUESTION NO.2: You are a forex dealer in India. Rates of rupee and pound in the international market are US $
0.01386952 and US $1.3181401 respectively. What will be your direct quote of £ (pound) to your customer.
(A) Rs.54.6987 (B) Rs.71.1408 (C) Rs.95.0386 (D) Rs.0.0105

QUESTION NO.3: ‘Bank rate’ published by the Reserve Bank refers to

(A) the repo rate transacted by RBI.
(B) the rate at which housing or other long term loans shall be sanctioned by scheduled banks to their customers.
(C) The rate at which RBI is willing to buy or rediscount bills of exchange or other commercial paper.
(D) the rate which RBI uses as cut-off for auction of Government securities.

QUESTION NO.4: An investor has invested in a mutual fund when the NAV was Rs. 15.50 per unit. After 90 days
the NAV was Rs. 14.45 per unit. During the period the investor got a cash dividend of Rs. 1.35 per unit and capital
gain distribution of Re. 0.20. The annualized return based on 360 days year count will be
(A) 3.23% (B) 12.92% (C) 0.8075% (D) 16.45%

QUESTION NO.5: Initial investment of a project is Rs. 25 lakh. Expected annual cash flows are Rs. 6.5 lakh for 10
years Cost of capital is 15%. The annuity factor for 15% for 10 years is 5.019. The Profitability Index of the
project will be (A) 1.305 (B) 3.846 (C) 0.26 (D) 0.7663

QUESTION NO.6: Rate of inflation = 5.1%, â = 0.85, Risk premium = 2.295%, Market return = 12%. The real rate
of return will be: (A) 4.2% (B) 11.70% (C) 6% (D) 5.95%

QUESTION NO.7: In a constant dividend model, the following estimates the difference between the required rate
of return and the growth rate : (A) Earnings Retention ratio (B) Leverage ratio
(C) Dividend Pay-out ratio (D) Dividend yield ratio

QUESTION NO.8: Presently, a company’s share price is Rs. 120. After 6 months, the price will be either Rs. 150
with a probability of 0.8 or Rs. 110 with a probability of 0.2. A call option exists with an exercise price of Rs. 130.
What will be the expected value of call option at maturity date? (A) Rs. 20 (B) Rs. 16 (C) Rs. 12 (D) Rs. 10

QUESTION NO.9: A stock is currently selling at Rs. 270. The call option to buy the stock at Rs. 265 costs Rs. 12.
What is the Time Value of the option ? (A) Rs. 5 (B) Rs. 17 (C) Rs. 7 (D) None of (A), (B) or (C)

QUESTION NO.10: A Ltd., an export customer requested his banker B to purchase a bill for USD 80,000. Calculate
the rate to be quoted to A Ltd. if B wants a margin of 0.08%, given that the inter bank rate is Rs./ $ 71.50 / 10.
(A) Rs. 71.1569 (B) Rs. 71.0431 (C) Rs.71.5572 (D) Rs.71.4428
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
Answer:
(i) (B) Strike price – price after 3 m = 25 - 30 = Rs. 5 increase. Hence gain by exercising call option is 5 x 100
shares = Rs. 500. Less premium = Rs. 200. Net gain = 500 – 200 = 300

(ii) (C) Rs./ $ = 1 / 0.01386952 = Rs. 72.1005 ; $ / £ = 1.3181401; Rs./ £ = 72.1005 x 1.3181401 = 95.0386

(iii) (C) This is the base rate upon which many other rates are determined. It is a medium term policy rate.

(iv) (B) -15.50 + 14.45 + 1.35 + 0.20 = + 0.50 ; Annualized return = 0.50 / 15.5 x (360 / 90) = 12.92%

(v) (A) PI = 6.50 X 5.019 / 25 = 1.305

(vi) (A) Rf = Real rate + Inflation rate ; Risk premium = Beta (Rm-Rf) ; 2.295 = 0.85 (12-Rf) = 9.3
Real Rate of return – 9.3 – 5.1 = 4.2%

(vii) (D) P = D / (ke - g). Hence, Ke - g = D / P = Dividend Yield ratio

(viii) (B) Expected value of call option :

Expected share price (Rs.) Exercise price (Rs.) Call value(Rs.) Probability Call option value (Rs.)
150 130 20 0.8 16
110 130 0 0.2 0
16

(ix) (C) Time Value of option = Call premium – Intrinsic Value = Rs. (265 + 12) - (Rs.270) = Rs. 7

(x) (B) A’s banker will purchase $ from A and sell in the interbank market.In the interbank market, B is a customer
and hence he can sell at only 71.10 while B can purchase in the interbank market at 71.50. Hence , if B sells at
71.10, it has for itself only the margin of 0.08%. Hence it will quote to A 71.10 - 0.08% x 71.10 for purchasing the
$ from A. i.e. 71.10 - 0.0569 = 71.0431
MCQ Set 33
QUESTION NO.1: Annual Cost Saving- ‘ 4,00,000; Useful life - 4 years; Cost of the Project - ‘ 11,42,000; The Pay
back period would be (A) 2 years 8 months (B) 2 years 11 months (C) 3 years (D) 1 year 10 months

QUESTION NO.2: There are 4 investments X Y Z U

The standard deviation is 37,947 44,497 42,163 41,997
Expected net present value (‘) 90,000 1,06,000 1,00,000 90,000
Which investment has the highest risk? (A) X (B) Y (C) X (D) U
AADITYA JAIN
QUESTION NO.3: The spot rate of the US dollar is ‘ 65.00 / USD and the four month forward rate is 65.90 / USD.
THE BEST SFM FACULTY OF INDIA
The annualized premium is: (A) 4.2% (B) 5.1% (C) 6.0% (D) 6.4%
TARGET 100% PLUS CRORE PLUS
SALARY
QUESTION NO.4: A stock is currently sells at ‘ 350. The put option to sell the stock sells at ‘ 380 with a premium
of ‘ 20. The time value of option will be: (A) ‘9911442626
10 (B) ‘ -10 (C) ‘ 20 (D) ‘ 0

QUESTION NO.5: An investor owns a stock portfolio equally invested in a risk free asset and two stocks. If one of
the stocks has a beta of 0.75 and the portfolio is as risky as the market, the beta of the stock in portfolio is
(A) 2.12 (B) 2.25 (C) 2.56 (D) 2.89
 Ph. 9911442626
Wherever you go, go with all your heart 60 CA Aaditya Jain
QUESTION NO.6: You are given the following information: required rate of return on risk free security 7%; required
rate of return on market portfolio of investment 12%; beta of the firm 1.7. The cost of equity capital as per CAPM
approach is : (A) 16.3% (B) 18.0% (C) 18.60% (D) 19%

QUESTION NO.7: The following statement is true in the context of rupee-dollar exchange rate with ri denoting
interest rate in India and ru denoting interest rate in the US.
(A) Rupee will be at forward discount if ri > ru (B) Rupee will be at forward premium if ru > ri
(C) Rupee will be forward premium if ri > ru (D) Rupee will be at par with dollar if ri = ru.

QUESTION NO.8: The following is not a systematic risk.

(A) Market Risk (B) Interest Rate Risk (C) Business Risk (D) Purchasing Power Risk

QUESTION NO.9: The following statement is true: (If ‘r’ denotes the correlation coefficient)
(A) r = +1 implies full diversification of securities in a portfolio (B) r = -1 implies full diversification of securities
in a portfolio (C) r = 0 implies an ideal situation of zero risk (D) ‘r’ is independent of diversification. Nothing
can be inferred based on r.

QUESTION NO.10: The following is not a feature of Capital Market Line:

(A) There is no unsystematic risk. (B) The individual portfolio exactly replicates market portfolio in terms of risk
and reward. (C) Estimates portfolio return based on market return. (D) Diversification can minimize the individual
portfolio risk.

Answer:
(i) (B) Pay-back Period = Cost of Project / Annual Cost Saving = ‘ 11,42,000 / 4,00,000 = 2.855 = 2 years 11 months.

(ii) (D) Coefficient of variation = Standard deviation / Expected NPV

Coefficient of variation of X=37947 / 90000 = 0.422; Coefficient of variation of Y = 44497 / 106000 = 0.420
Coefficient of variation of Z= 42163 / 100000 = 0.422; Coefficient of variation of U = 41997 / 90000 = 0.467
U has highest risk as it has highest coefficient of variation.

(iii) (A) The annualized premium = [(Forward rate - Spot Rate) / Spot Rate] x [12/ Forward Contract length in
months]; = 65.90 - 65 / 65 x 12 / 4 = 4.2%.

(iv) (D) Time value of option is = (Option premium- Intrinsic Value of option)
= ‘[20 - (380 - 350)] = ‘(20 - 30) = ‘-10; = 0 (Cannot be negative)

(v) (B) Beta of the stock of the portfolio is [(1 / 3 x 0.75) + (1 / 3 x X) + (1 / 3 x 0)] = 1 So, X = 2.25

(vi) (A) Cost of equity capital as per CAPM approach= 0.07 + 1.7 (0.12 - 0.07) = 16.3
F  1  ri 
(vii) (B) Interest Parity =   
S  1  rU 
Rupee premium is when spot is more than forward rupee/dollar ; Forward value is less if ri < rU i.e rU > ri.

(viii) (C) Business Risk arise from known and controllable factors unique to particular security or industry. Business
Risks can be eliminated by diversification of portfolio.

(ix) (B) Investments offset each other as they move in opposite direction.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(x) (D) Individual securities does not lie on Capital Market Line. A well diversified portfolio does not become risk
free and would be subject to considerable variability. The real risk of a security is the market risk which cannot be
eliminated.
MCQ Set 34
QUESTION NO.1: Dividend-Payers Ltd. has a stable income and stable dividend policy. The average annual
dividend payout is ‘ 27 per share (Face Value = ‘100). You are required to find out Dividend payout in year 2, if the
company were to have an expected market price of ‘160 per share at the existing cost of equity. [The market price
in year 1 is ‘ 150] (A) ’28.88 (B) ‘ 26.86 (C) ‘ 28.80 (D) ‘ 26.98

QUESTION NO.2: The ratio of current assets (‘ 3,00,000) to current liabilities (‘2,00,000) is 1.5 : 1. The accountant
of this firm is interested in maintaining a current ratio of 2 : 1 by paying some part of current liabilities. Hence, the
amount of current liabilities which must be paid for this purpose is:
(A) ‘ 1,00,000 (B) ‘ 2,00,000 (C) ‘ 2,50,000 (D) 1,50,000

QUESTION NO.3: The interest rate in Germany is 11% and the expected inflation rate is 5% . The British interest
rate is 9% . How much is the expected inflation rate in Britain? (A) 3.0% (B) 3.1% (C) 4.5% (D) 2.9%

QUESTION NO.4: Annual usage of a firm is 3,60,000 units and 2 to 4 days are taken in receiving delivery of
inventory after placing an order. Calculate Re-order level, if the reasonable expected stock out is 100 units per
day. (Assume 1 year = 360 days) (A) 3000 units (B) 3300 units (C) 2500 units (D) 3500 units

QUESTION NO.5: A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt
and 70% equity (assume debt beta = 0). Hence, the required rate of return of the project is (assume Rf = 10% and
Rm =18%) (A) 16.27% (B) 17.26% (C) 16.72% (D) 12.76%

QUESTION NO.6: M/s. Fine Dress Ltd. has sales of ‘800 lakhs and the variable costs amount to 62.5% of sales.
The Company has fixed cost of ‘ 100 lakhs. If the sales of the Company increase by 5% from the existing level,
what will be the per cent change in the EBIT? (A) 7.5% (B) 8.7% (C) 7.9% (D) 10.9%

QUESTION NO.7: Consider the following quotes. Spot (Euro/ Pound) = 1.6543 / 1.6557; Spot (Pound / NZ$) =
0.2786 / 0.2800 Calculate the % spread on the Euro/Pound Rate.(A) 0.085% (B) 0.0085% (C) 0.85%(D) 0.00085%

QUESTION NO.8: A company has expected Net Operating Income - ‘ 2,40,000; 10% Debt - ‘7,20,000 and Equity
Capitalisation rate - 20%; what is the weighted average cost of capital for the company?
(A) 0.15385 (B) 0.13585 (C) 0.18351 (D) 0.15531

QUESTION NO.9: The P/V ratio of a firm dealing in precision instruments is 50% and margin of safety is 40%.
Calculate net profit, if the sales volume is ‘AADITYA
50,00,000. (A) 1,00,000 (B) 5,00,000 (C) 10,00,000 (D) ‘ 6,00,000
JAIN
THE BEST SFM FACULTY OF INDIA
QUESTION NO.10: State if each of the following sentences is T (= true) or F (= false):
TARGET
(i) Deterministic model of financial 100%
planning yieldPLUS
multipleCRORE PLUS
— point estimate.
SALARY
(ii) Risk under transaction exposure can be minimized using Money Market Hedge.
(iii) Flexibility is one among the performance9911442626
indicators of the organisation.
(iv) A project is a “One-shot” major undertaking.
(vi) Fund Managers use futures as a more economical way of achieving their portfolio goals.
(vii) The profit or loss associated with converting foreign currency dominated assets/liabilities in reporting currency
is called Economic Exposure.
(vii) TRIMs are the rules, a country applies to the domestic regulations to promote Foreign investment, often as
 Ph. 9911442626
Wherever you go, go with all your heart 62 CA Aaditya Jain
a part of an Industrial Policy.

Answer:
(i) (C) Ke = 27 / 150 x 100 = 18% ; Ke = DPS / 160 = 18% ; DPS = 160 x 18% = ’28.80

(ii) (A) Current Ratio = Current Asset / Current Liabilities = 300000-X / 200000 - X = 2 ; Or, (300000 - X)
= 2 (200000 - X); Or, X = 100000

(iii) (B) If purchasing power parity holds, then the British inflations rate will be:
1.09  1.05
1.11 / 1.09 = 1.05 /1+ iB ; Or iB =  1 = 0.031 or 3.1%
1.11

(iv) (B) Safety Stock = 100 x 3 = 300 units

Re- order level = (Normal Daily Usage x Normal Lead Time) + Safety Stock = (1000 x 3) + 300 = 3300 units

 E   D 
(v) (C) Beta   Beta Equity     Beta Debt   = (1.2 × 0.70) + (0 × 0.30) = 0.84
 DE   DE 
Required Rate of Return = Rf + Beta (Rm – Rf) = 10% + 0.84 (18% -10 %) = 10% + 6.72% = 16.72%

Contribution Sales  VC 800  0.625(800)

(vi) (A) DOL    = 1.5
EBIT Sales  VC  Fixed Cost 800  0.625(800)  100
Which is given by 1% increase in sales. Therefore, by 5% increase in sales,
Change in EBIT will be by 1.5 x 5% = 7.5%
1.6557 - 1.6543
(vii) (A) The % spread on Euro/Pound =  100 = 0.085%
1.6543

2,40,000 - 72,000(I)
(viii) (A) Market value of equity (S) =  84,000
0.20
N0I 2,40,000
Total value of firm (V) = S + D = 840000 + 720000 = 1560000 ; Ko    0.15385
V 15,60,000

(ix) (C) Margin of Safety = 50,00,000@40% = ‘2000000

BEP Sales = 50,00,000 - 20,00,000 = ’30,00,000
Fixed cost = BEP (s) x P / V ratio = 30,00,000@50% = 15,00,000
Contribution = 5000000 x 50 / 100 = 25,00,000
Profit = 25,00,000 - 15,00,000 = ‘10,00,000

(x) (i) False ; (ii) True ; (iii) True ; (iv) True ; (v) True ; (vi) False ; (vii) True

MCQ Set 35
QUESTION NO.1: MN Ltd. has earning before interest and taxes of ‘ 36 crores. The company has 7% debentures
of ‘ 72 crores. Cost of equity is 12.5%. Ignore taxes. What is the overall cost of Capital?
(A) 11.26% (B) 11.20% (C) 11.50% (D) 11.28%
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.2: R Ltd. earns ‘ 8 per share, has capitalisation rate of 10% and has a return on investment at the
rate of 18%. According to Walter’s Model, what should be the price per share at 28% dividend pay out ratio?
(A) ‘ 120 (B) ‘ 125 (C) ‘ 126.08 (D) ‘ 125.08

QUESTION NO.3:MAYANK Ltd. employs 12% as nominal required rate of return to evaluate its new investment
projects. In the recent meeting of the Board of Directors, it has been decided to protect the interest of shareholders
against purchasing power loss due to inflation. The expected inflation rate in the economy is 5%. What is the real
discount rate? (A) 6.67% (B) 6% (C) 5% (D) 6.5

QUESTION NO.4: What is the opportunity cost of not taking a discount, when the credit terms are 1 / 15 net 30?
Assume 1 year = 365 days. (A) 29.58% (B) 24.58% (C) 24.65% (D) 29.68%

QUESTION NO.5: An Indian Company is planning to invest in the US. The rates of inflation are 8% in India and 3%
in USA. If the spot rate is currently ’60.50 / $, what spot rate can you expect after 5 years, assuming the inflation
rates will remain the same over 5 years? (A) ‘ 76.68 (B) ‘ 75.90 (C) ‘ 74.00 (D) ‘ 76.10

QUESTION NO.6: Operating Leverage 2 ; Combined Leverage 5 ; Profit / volume ratio 40% ; Tax rate 40%,
Earnings after tax ‘ 7.20 lakhs. Calculate the percentage drop in Sales to make the EPS zero.
(A) 10% (B) 15% (C) 20% (D) 12%

QUESTION NO.7:From the following quotes of a bank, determine the rate at which Yen can be purchased with
Rupees. Rs. / £ Sterling - 75.31 - 33 ; £ Sterling / Dollar ($) - 1.563 - 65 ; Dollar ($) / Yen (¥) - 1.048 / 52 [per 100
Yen) (A) ‘ 124.02 (B) ‘142.02 (C) ‘ 412.02 (D) ‘ 214.02

QUESTION NO.8: Spot (Euro / Pound) = 1.6543 / 1.6557 ; Spot (Pound / NZ $) = 0.2786 / 0.2800
What is the % Spread on the Euro / Pound rate? (A) 0.085% (B) 0.805% (C) 0.508% (D) 0.058%

QUESTION NO.9: State if each of the following sentences are T (= true) or F (= false):
(i) The ‘sale and lease back’ is usually preferred by firms having fixed assets but shortage of funds.
(ii) WTO, governed by a ministerial conference, meets every three years.
(iii) The sensitivity analysis deals with the consideration of sensitivity of the NPV in relation to different variables
contributing to the NPV.
(iv) PPP theory takes into account only the movement of goods and services and not that of capital.
(v) A call option is said to be ‘in-the-money’ if the stock price is more than the strike price.
(vi) Working capital leverage measures the responsiveness of ROCE for changes in current assets.
(vii) The maturity date of Commercial Paper (CP) should not exceed the date beyond the date upto which credit
rating is valid.
(viii) In the case of independent projects, ifAADITYA
the NPV of the
JAINproject is zero, IRR is equal to cost of Capital.
(ix) Cash Value Added (CVA) is a measurement that finds the excess of Operating Cash Flow over the capital
THE BEST SFM FACULTY OF INDIA
employed.
TARGET 100% PLUS CRORE PLUS
Answer: SALARY
(i) (A) Market value of Equity = [EBIT -1] / Ke9911442626
= [ 36 - 5.04] Cr. / 0.125 = 30.96 / 0.125 = ‘ 247.68 Cr.
Total value of firm (v) = 247.68 + 72.00 = 319.68 cr. So, Ko = EBIT / V = [36 / 319.68] x 100 = 11.26%
r
D E  D
(ii) (C) DPS = 28% x EPS = 28% x ‘8 = ‘2.24. So, Market value of share = K
K
 Ph. 9911442626
Wherever you go, go with all your heart 64 CA Aaditya Jain
= [2.24 + {0.18 / 0.10 (8 - 2.24)}] / 0.10 = [2.240 + 10.368] / 0.10 = ` 126.08

(iii) (A) Real rate = [(1+n) / (1 + i)] -1 = [ (1 + 0.12) / (1+ 0.05)] -1 = 0.06667 = 6.67%

(iv) (B) Opportunity cost = Discount % / [100 - Discount %] x [365 / (N -S) ] x 100 = 1 / 99 x 365 / 15 x 100
= [365 / 1485] x 100 = 24.58 %

(v) (A) F = S x [ (1 + rA)N / (1 + rB)N ]; Or, F (Rs. / $) = 60.50 x [1 + 0.08)5 / (1+ 0.03)5 ] = 60.50 x 1.267455 = ‘ 76.68

(vi) (C) Degree of combined Leverage = 2 x 2.5 = 5; DCL = % Change in EPS / % change in Sales;
Or, 5 = 100 % / % change in sales; So, % change in sales = 100 % / 5 = 20 %

(vii) (A) Ask (Rs. / ¥) = Ask(Rs. / £ ) x Ask (£ / $) x Ask ( $ / ¥) = 75.33 x 1.565 x 1.052 = ‘ 124. 02

(viii) (A) The % spread in Euro / Pound = [1.6557 -1.6543] / 1.6543 = 0.085%

(ix) (ii) TRUE ; (ii) FALSE ; (ii) TRUE ; (v) TRUE ; (v)TRUE; (v) TRUE ; (v) TRUE ; (v) TRUE ; (ix) FALSE.

MCQ Set 36
QUESTION NO.1: X Ltd. issued ‘ 100, 12% Debentures 5 years ago. Interest rates have risen since then, so that
debentures of the company are now selling at 15% yield basis. What is the current expected market price of the
debentures? (A) ‘ 75 (B) ‘ 80 (C) ‘ 90 (D) ‘ 85

QUESTION NO.2: Given: Last year Current year

Sales unit 2,000 2,800
Selling price per unit ‘ 10 ‘ 10
EPS ‘ 9.60 ‘ 38.40
What is the Degree of Combined Leverage? (A) 6.5 (B) 5.6 (C) 7.5 (D) 5.7

QUESTION NO.3: MI Ltd. has annual sales of ‘365 lakhs. The company has investment opportunities in the money
market to earn a return of 15% per annum. If the company could reduce its float by 3 days, what would be the
increase in company’s total return? (Assume 1 year = 365 days) (A)‘ 45,000 (B)‘ 40,000 (C) ‘ 54,000 (D) ‘46,000

QUESTION NO.4: In the inter-bank market, the DM is quoting ‘ 21.50. If the bank charges 0.125% commission for
TT selling, what is the TT selling rate? (A) ‘ 21.47 / DM (B) ‘ 21.53/ DM (C) ‘ 22.78 / DM (D) ‘ 23.45 / DM

QUESTION NO.5: The required rate of return on equity is 24% and cost of debt is 12%. The company has a capital
structure mix of 80% of equity and 20% debt. What is the overall rate of return, the company should earn? Assume
no tax. (A) 21.6% (B) 14.4% (C) 18.6% (D) 17.22%

QUESTION NO.6: Consider the following quotes: Spot (Euro/Pound) = 1.6543 / 1.6557; Spot (Pound / NZ’s) =
0.2786 / 0.2800. Calculate the % spread on the Euro/Pound Rate.
(A) 0.0805% (B) 0.0080% (C) 0.8501% (D) 0.0850%

QUESTION NO.7: Initial Investment ‘ 20 lakh. Expected annual cash flows ‘ 6 lakh for 10 years. Cost of capital @
15%. What is the Profitability Index? The cumulative discounting factor @ 15% for 10 years = 5.019.
(A) 1.51 (B) 1.15 (C) 5.15 (D) 0.151
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
QUESTION NO.8: The following details relate to an investment proposal of XYZ Ltd.
Investment outlay— ‘ 100 lakhs; Lease Rentals are payable at ‘ 180 per ‘ 1,000; Term of lease - 8 years; Cost of
capital—12%. What is the present value of lease rentals, if lease rentals are payable at the end of the year?
[Given PV factors at 12% for years (1 -8) is 4.9676.] (A) ‘98,14,680 (B) ‘89,41,680 (C)‘ 94,18,860 (D) ‘ 96,84,190

QUESTION NO.9: State if each of the following sentences is T (= true) or F (= false):

(i) Fixed capital is a financial lubricant which keeps business operation going.
(ii) Forward Exchange Rate contract is for the purchase or sale of a specified quantity of a specified currency
price as agreed today.
(iii) Stochastic (irregular) Model is developed to avoid the problems associated with the EOQ model.
(iv) TRIPS sets down minimum standards for many forms of Intellectual Property (IP) regulations.
(v) Risk Adjusted Discount Rate (RADR) = Risk Free Return * Premium for facing the risk.
(vi) Buyout refers to the transfer of management control by creating a separate business by separate
business by separating it from their existing owners.
(vii) Feasibility study is included in implementation phase of project development cycle.
(viii) Price of contract changes every day in Futures.
(ix) Interest Rate Guarantees (IRG) is an option contract.

Answer:
(i) (B) Market value of Debentures = Interest on Debenture / Current Yield Rate = 12 / 0.15 = ’80

(ii) (C) : Degree of Combined leverage = Change in EPS / EPS / Change In Sales/ Sales = [(38.40 - 9.60) / 9.60] /
(28,000 - 20,000)/ 20,000 = 3 / 40 = 7.5
ASales/Sales (28,000 -20,000)/20,000 40

(iii) (A) Average sales per day = ‘3.65 lakhs / 365 days ; Increase in Total Returns = ‘1 lakhs @ 3days × 15% =
‘45,000.

(iv) (A) TT selling rate = 21.50 (1 – 0.00125) = ‘21.47 / DM

(v) (A) Rate of return on equity fund = 24% × 0.80 = 19.2

Cost of debt is = 12% × 0.20 = 2.4
Overall rate of return Co. should earn 21.6
1.6557 - 1.6543
(vi) (D) % spread on Euro/Pound rate =  100 =0.0850%
1.6543

(vii) (A) P.V. of inflows = 6.00 × 5.019 = ‘30.114 lakhs

Profitability Index = P.V.of inflow s / P.V.of AADITYA JAIN / 20 = 1.51
outflow s = 30.114
THE BEST SFM FACULTY OF INDIA
(viii) (B) P. V. of lease rentals = ‘18 lakhs100%
TARGET × PVI FAPLUS
(12%, 8) ; = ‘18 lakhs
CRORE × 4.9676 ; = ‘89,41,680
PLUS
SALARY
(ix) (i) False ; (ii) True ; (iii) True ; (iv) True ; (v) False ; (vi) True; (vii) False ; (viii) True ; (ix) True
9911442626
MCQ Set 37
QUESTION NO.1: Return on Equity (ROE) is computed as
(A) (NP Ratio x Assets Turnover Ratio) / Equity Multiplier (B) (NP Ratio x Assets Turnover Ratio) x Equity Multiplier
(C) (NP Ratio x Equity Multiplier) + Assets Turnover Ratio (D) (NP Ratio + Assets Turnover Ratio) + Equity Multiplier
 Ph. 9911442626
Wherever you go, go with all your heart 66 CA Aaditya Jain
QUESTION NO.2: The ratio of Current Assets (‘9,00,000) to Current liabilities (‘6,00,000) is 1.5 : 1.The accountant
of this firm is interested in maintaining a current ratio of 2:1 by paying some part of current liabilities. Hence, the
amount of current liabilities which must be paid for this purpose is:
(A)‘ 3,00,000 (B) ‘ 2,00,000 (C)‘ 6,00,000 (D) ‘ 4,00,000

QUESTION NO.3: Annual usage of a firm is 7,30,000 units and 3 to 5 days are taken in receiving delivery of
inventory after placing an order. Calculate Re-order Level, if the reasonable expected stock out is 500 units per
day. (Assume 1 year = 365 days) (A) 10,000 units (B) 8,000 units (C) 80,000 units (D) 1,00,000 units

QUESTION NO.4: EXCEL Ltd. projects that cash outlays of ‘ 37,50,000 will occur uniformly throughout the coming
year. Excel plans to meet its cash requirements by periodically selling marketable securities from its portfolio.
The firm’s marketable securities are invested to earn 12% and the cost per transaction of converting securities to
cash is ‘ 40. According to Baumol, what is the optimal transaction size of marketable securities to cash?
(A) ‘ 25,000 (B) ‘ 30,000 (C) ‘ 50,000 (D) ‘ 35,000

QUESTION NO.5: Presently, the company’s share price is ‘ 120. After 6 months, the price will be either ‘150 with
a probability of 0.8 or ‘ 110 with a probability of 0.2. A European call option exists with an exercise price of ‘ 130.
What will be the expected value of call option at maturity date? (A) 02 (B) ‘ 16 (C) ‘ 18 (D) ‘10

QUESTION NO.6: Consider the following quotes: Spot (Euro / Pound) = 1.3904 - 1.3908; Spot (Pound / NZ $) =
0.5020 — 0.5040 ; What will be the possible % spread on the cross rate between Euro and NZ $?
(A) 0.40 (B) 0.39 (C) 0.41 (D) 0.43

QUESTION NO.7:A project had an equity beta of 1.4 and was going to be financed by a conbination of 25% Debt
and 75% Equity (Assume Debt Beta as zero). Hence, the required rate of return of the project is
(A) 16.72% (B) 18.30% (C) 17.45 (D) 12.00
(Assume Rf, = 12% and Rm = 18%).

QUESTION NO.8: Given for a project: Annual Cash inflow ’80,000; Useful life 4 years; Pay-Back period 2.855
years; What is the cost of the project? (A) ‘ 2,28,500 (B) ‘ 2,28,400 (C) ‘ 2,28,600 (D) ‘ 2,28,700

QUESTION NO.9: State if each of the following sentences are T (= true) or F (= false):
(i) A firm adopts financial contingency planning in situations of prosperity.
(ii) Cost of Retained Earnings: = (Cost of Equity) x (1-Rate of Tax) x (1-Cost of purchasing new securities or
brokerage cost)
(iii) Securitisation is the conversion of non-tradable assets into marketable securities.
(iv) Under favourable conditions, Financial Leverage decreases EPS.
(v) Sensitivity analysis refers to studying the relationship between risks and return.
(vi) Preferred stock, a hybrid corporate security, pays a variable dividend depending on the corporation’s earnings.
(vii) External Commercial Borrowing (ECB) is the amount borrowed by the Government through designated agents
from All India Financial Institutions (AIFIs).
(viii) European Option can be exercised any time during option period.
(ix) FPA policy is a minimum liability insurance and gives only a partial cover for losses.

Answer:
(i) (B) ROE = [NP / Sales] x [Assets / Equity] x [Sales / Total assets]
= NP Ratio x Equity Multiplier x Assets Turnover Ratio.
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(ii) (A) Let the amount of current liabilities paid be “x”
C A 900000  X
Thus, Current Ratio =   2 ; 9,00,000 – x = 12,00,000 – 2x ; = 3,00,000
CL 600000  X

(iii) (A) Safety stock = 500 units x 4 = 2,000 units; Reorder level = [Normal Daily Usage x Normal lead time] +
Safety stock = [(7,30,000 / 365) x (3 + 5)/ 2] + 2,000 = (2,000 x 4) + 2,000 = 10,000 units.

(iv) (C) According to Baumol model,

Optimal size = “2TA/ I = “(2 x 40 x 37,50,000) / 0.12 = 50,000

(v) (B) Expected value of call option

Expected share price (‘) Exercise price (‘) Call value (‘) Probability Call option value (‘)
150 130 20 0.8 16
110 130 0 0.2 0
16

(vi) (D) The % spread on Cross rate between the Euro and NZ $. Let us find out the Cross rate first.
SPOT (Euro / NZ $) = (0.5020 x 1.3904) : (0.5040 x 1.3908) = 0.6980 : 0.7010.
So, % Spread on Euro to NZ $ = [(0.7010 - 0.6980) / 0.6980] x 100 = 0.4298 = 0.43.

(vii) (B) We know, Bp = [Beta EQUITY x {E / (D+E)}] + [Beta DEBT x {D / (D + E)}]; = (1.4 x 0.75) + (0 x 0.25) = 1.05
Rate of return of the Project = Rp = Rf + Bp (Rm - Rf) = 12% + 1.05 (18% - 12%) = 12% + 6.30% = 18.30%

(viii) (B) Pay-back period = Cost of project / Annual cash inflow

So, Cost of project = Annual cash inflow x Pay-back period = 80,000 x 2.855 = ‘2,28,400

(ix) (i) False. ; (ii) True. ; (iii) True. ; (iv) False. ; (v) True. ; (vi) False. ; (vii) True. ; (viii) False. ; (ix) True.

MCQ Set 38
QUESTION NO.1: Madura Steel earns 12% on the equity. The growth rate of dividends and earnings is 6%. The
book value per share is ‘ 60. If the cost of equity is 14% , which of the following is the market price of the share of
company, according to the Marakon Model of Valuation? (A) ‘36 (B) ‘39 (C) ‘45 (D) ‘48

QUESTION NO.2: R Limited requires ‘ 3 Million in cash for meeting its transaction needs over the next 6 months,
its planning horizon for liquidity decision. The company currently has the amount in the form of marketable
securities. The cash payment will be made evenly over the six month period. R Ltd. earns 12% annual yield on its
marketable securities. Conversion of marketable securities into cash entails a fixed cost of ‘1,000 per transaction.
AADITYA JAIN
What will be the optimal conversion size as per Baumol model of cash management?
(A) ‘3,15,628. THE BEST SFM FACULTY
(B) ‘3,16,228 (C) ‘3,17,678OF INDIA (D) ‘3,18,428
TARGET 100% PLUS CRORE PLUS
QUESTION NO.3:The price of Swedish Krones isSALARY
$ 0.14 today. If it appreciates by 10% today, how many Krones a
dollar will buy tomorrow? (A) 6.49351 (B) 4.69351
9911442626 (C) 3.49513 (D) 5.64913

QUESTION NO.4:Calculate the future value of ‘1,000 invested in State Bank Cash Certificate scheme for 2 years
@5.5% p.a., compounded semi- annually. (A) ‘1,114.62 (B) ‘1,104.62 (C) ‘1,401.51 (D) ‘1,141.51

QUESTION NO.5: A firm has sales of ’75,00,000 variable cost of ’42,00,000 and fixed cost of ‘6,00,000.It has a
 Ph. 9911442626
Wherever you go, go with all your heart 68 CA Aaditya Jain
debt of ’45,00,000 at 9% interest and equity of ’55,00,000. At what level of sales, the EBIT of the firm will be equal
to zero? (A) ’28,48,500 (B) ’28,84,500 (C) ’22,84,500 (D) ’26,48,500

QUESTION NO.6: The sterline is trading at $ 1.6400 today. Inflation U.K. is 3.8% and that in U.S.A. is 2.9%. What
would be the spot rate ($ / £) after 2 years? (A) 1.5792 (B) 1.5892 (C) 1.6117 (D) 1.6002

QUESTION NO.7: The following various currency quotes are available from the State Bank of India: Rs. /£ - 81.31
/ 81.33 ; £ / $ - 0.6491 / 0.6498; $ / ¥ - 0.01098 / 0.01102. The rate at which yen(¥) can be purchased with rupees
will be: (A) 1.5270 (B) 1.5890 (C) 0.5824 (D) 0.7824

QUESTION NO.8: State if each of the following sentences is T (=true) or F (= false):

(i) Corporate tax rate does not affect cost of debt.
(ii) IRR and NPV always give the same profitability ranking.
(iii) Retention ratio is the product between growth rate and rate of return on investments.
(iv) Low financial leverage indicates high financial risk and vice - versa.
(v) If Profitability Index is 1, cash inflow and cash outflow would be equal.
(vi) A currency swap converts a stream of cash flow from one currency to another without exchange rate risk.
(vii) An investor expecting a fall in interest rates buys a floor and also a cap.
(viii) Commercial paper introduced by RBI in early 1990, is ‘a secured promissory note’ tied to any specific
transaction.
(ix) A call option is ‘in-the money’ when the price of the underlying asset is below the exercise price of the call.

QUESTION NO.9: Match the assumptions to the different ‘Capital Structure theories’:
Assumptions
(i) Cost of debt and cost of equity are constant, and overall cost of capital decreases with increase in leverage.
(ii) Cost of debt and overall cost of capital are constant, and cost of equity will change with the degree of
leverage.
(iii) Value of firm increases with increase in financial leverage upto a certain limit only.
(iv) Overall cost of capital and the value of firm are independent of the capital structure.
Capital Structure theories
(A) Modigliani- Miller approach (B) Traditional approach
(C) Net Income approach (D) Net operating Income approach

Answer
B(r  g) 60(0.12  .06)
(i) (C)   45
(k  g) (0.14  0.06)

2bt 2  1000  3000000

(ii) (B) Optimal Conversion size =   316228
I 0.06
Where, T= Estimated Cash requirement, b= conversion cost and I= Interest rate

(iii) (A) The price of Swedish krones = $ 0.14; At 10% appreciation, it will be worth = $0.154 ;
A dollar will buy 1 / 0.154 = 6.49351 krones tomorrow

(iv) (A) FVn = PV (1+ c / m)mxn ; = 1000(1+ 0.055 / 2)2x2 = ‘1,114.62

(v) (C) EBIT to became zero means 100% reduction in EBIT

 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
F. Leverage = EBIT / EBT = 2700000 / 2295000 = 1.1764
O. Leverage = Contribution / EBIT = 3300000 / 2700000 = 1.2222 ; Combined Leverage = 1.1764 × 1.2222 = 1.438
Sales have to drop by 100 / 1.438 = 69.54% ; New Sales will be = 7500000 × (1-0.6954) = ‘2284500 (approx)

(vi) (C) S ($ / £) = F ($ / £) x (1 + r$)2 / (1 + r£)2 =1.64 x (1+2.9%)2 / (1 + 3.8%)2 = 1.6117

(vii) (C) To purchase ¥, we need to have a quote of ¥ in terms of Rs. We need only the ‘ask’ quote
Ask (Rs. / ¥) = Ask (Rs. / £) x Ask (£ / $) x Ask ($ / ¥) = 81.33 x 0.6498 x 0.01102 = 0.5824

(viii) (i) False; (ii) False: (iii) False : (iv) False : (v) True: (vi) True : (vii) True : (viii) False: (ix) False:

(ix) (i) - (C) ; (i) - (D) ; (i) - (B) ; (vii) - (A)

MCQ Set 39
QUESTION NO.1: The capital of PQR Limited is as follows :
90% preference shares of ‘ 10 each ‘ 3,00,000
Equity shares of ‘ 10 each ‘ 8,00,000
Following further information is available :
Profit after Tax ‘ 2,70,000
Equity Dividend paid 20%
The market price of equity shares ‘ 40 each
Then the EPS and PE ratio are :(A)‘ 3.12 and 10.80 (B) ‘ 3.33 and 10.34 (C) ‘ 4.51 and 12.56 (D) ‘ 3.04 and 13.16

QUESTION NO.2: A project has an equity beta of 1.2 and is going to be financed by 30% debt and 70% equity.
Assume debt beta =0, Rf = 10% and Rm = 18%. What is the required rate of return?
(A) 8.4% (B) 18% (C) 16.72% (D) 10%

QUESTION NO.3:A Limited is presently selling 1,00,000 units of its products. The selling price per unit is ‘ 25 and
variable cost per unit is ‘ 15. The fixed cost is ‘ 5,00,000. The financial breakeven point for the company is ‘
1,50,000. What will be the percentage change in EBIT required to increase EPS by 20%?
(A) 10% (B) 12% (C) 14% (D) 20%

QUESTION NO.4: Zoom Technologies Limited issued 1,00,000, 14% debentures of ‘ 100 each, redeemable after 5
years at ‘ 110 each. The commission payable to under writers and brokers is 10%. The after-tax cost of debt,
assuming a tax rate of 45%, will be: (A) 15.1% (B) 12.54% (C) 10% (D) 11.7%

QUESTION NO.5: An investor wrote a naked call option. The premium was ‘ 2.50 per share and the market price
and exercise price of the share are ‘ 37 and ‘ 41 respectively.
AADITYA JAIN The contract being for 100 shares, what is the
amount of margin under First Method, that is required to be deposited with the clearing house?
THE BEST SFM FACULTY OF INDIA
(A) ‘ 590 (B) ‘ 250 (C) ‘ 740 (D) ‘ 400
TARGET 100% PLUS CRORE PLUS
QUESTION NO.6:According to Gordon’s dividend SALARY
capitalisation model, if the share price of a firm is ‘ 43, its
dividend pay-out ratio is 60%, cost of equity is9911442626
9%, ROI is 12% and the number of shares are 12,0, what will be the
net profit of the firm? (A) ‘ 15,480 (B) ‘ 23,220 (C) ‘ 36,120 (D) ‘ 54,180

QUESTION NO.7: You are a forex dealer in India. Rates of rupee and Euro in the international market are US $
0.01962905 and US $ 1.335603 respectively. What will be your direct quote of e (euro) to your customer?
(A) ‘ 69.5900 (B) ‘ 68.0420 (C) ‘ 65.1010 (D) ‘ 70.9050
 Ph. 9911442626
Wherever you go, go with all your heart 70 CA Aaditya Jain
QUESTION NO.8: The interest rate in the United States is 5%, in Japan, the comparable rate is 1.5%. The spot rate
for the yen is $ 0.012067821. If the interest rate parity holds, what is the 90-day forward rate on the Japanese
yen? (A) $ 0.01248 (B) $ 0.01359 (C) $ 0.01350 (D) $ 0.01200

QUESTION NO.9: An investor buys a call option contract for a premium of ‘ 200. The exercise price is ‘ 20 and the
current market price of the share is ‘ 17. If the share price after three months reaches ‘ 25, what is the profit made
by the option holder on exercising the option? Contract is for 100 shares. Ignore the transaction charges.
(A) ‘ 200 (B) ‘ 250 (C) ‘ 300 (D) ‘ 350

QUESTION NO.10: State if each of the following sentences is T (= true) or F (= false) :

(i) The amount of cheques issued by a company not yet paid out is referred to as net float.
(ii) Annual capital charge method is used for evaluating projects having different life spans.
(ii) According to Modigliani and Miller Theory on dividends, dividend pay-out ratio is irrelevant for all firms.
(v) Simulation is done for capturing the different possible outcomes and determining the probability of a particular
event happening.
(v) A call option is the right to sell, whereas a put option is a right to buy.
(v) An acquisition of a business by using equity fund and a small amount of debt is known as leveraged buy out.
(v) Global Depository Receipts are issued to investors in India, who want to subscribe to shares of foreign
companies.

Answer:
PAT  Preference Dividend 270000  27000
(i) (D) EPS =   3.04 ; PE Ratio  Market Price  40  13.16
No. of Equity Share 80000 EPS 3.04

 E   D 
(ii) (C) Beta   Beta Equity     Beta Debt   = (1.2 × 0.70) + (0 × 0.30) = 0.84
 DE   DE 
Required Rate of Return = Rf + Beta (Rm – Rf) = 10% + 0.84 (18% -10 %) = 10% + 6.72% = 16.72%

EBIT
DFL   150000  Dp 
(iii) (C)  Dp  ; The Financial Break even point I   = 150000 (Given)
EBIT -  I    1t
 1t
EBIT = Q (S - V) - F = 1,00,000 (25 - 15) - 5,00,000 = ‘ 5,00,000 ; DFL = SL / SL -1.50 Lacs = 1.43
DFL = Required Change in EPS / Change in EBIT; Or, 1.43 = 20% / Change in EBIT
Thus, % Change in EBIT for 20% EPS increase = 20% / 1.43 = 13.99% or 14%

(iv) (D) 11.7%

(v) (A) Margin = (Option premium x 100) + {100 x 0.20 (market value of the share)} - {100 x (Exercise price -
market price)} = (2.50 x 100) + {100 x (0.20 x 37)} - 100 x (41 - 37) = ‘ 590

(vi) (C) Gordon’s equity capitalisation model : P = E (1-b) / (K-br); Or, 43 = E (0.6) / {0.09 - (0.4 x 0.12)} ;
Or, E = 3.01 ; Net Profit = EPS x No. of shares = 3.01 x 12000 = 36120

(vii) (B) Rs. / US $ = 1 / 0.01962905 = ‘ 50.9449 ; Now, US$ / Euro = 1.335603

The direct quote of e in India will be — Rs. / Euro = RS. / US $ x US $ / Euro = ‘ 50.9449 x 1.335603 = ‘ 68.0420
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
(viii) (A) As per IRPT, the 90 day forward rate on the yen should be equal to —
= $ 0.012067821 [(1+0.05 / 4) / (1+0.015 / 4)] = $ 0.0124839 or $ 0.01248

(ix) (C) Assuming in call option, the total outgo = Premium + Exercise Price = ‘ 200 + (‘ 20x100) = ‘ 2,200.
After 3 months, if the shareprice is ‘ 2,500, the net profit = ‘ 2,500 - ‘ 2,200 = ‘ 300.

(ix) (i) False. (ii) True. (iii) True. (iv) True. (v) False. (vi) False. (vii) False.

MCQ Set 40
QUESTION NO.1: What is the opportunity cost of not taking a discount, when the credit terms are 2 / 20 net 45?
Assume 1 year = 360 days (A) 24.9% (B) 29.4% (C) 22.9% (D) 29.2%

QUESTION NO.2: E Limited has earnings before interest and taxes (EBIT) of ‘ 10 million at a cost of 7%., Cost of
equity is 12.5%. Ignore taxes. What is the overall cost of capital? (A) 11.26% (B) 11.62% (C) 16.12% (D) 12.61%

QUESTION NO.3: S Limited earns ‘ 6 per share, has capitalisation rate of 10% and has a return on investment at
the rate of 20%. According to Walter’s model, what should be the price per share at 30% dividend payout ratio?
(A) ‘120 (B) ‘102 (C) ‘112 (D) ‘106

QUESTION NO.4: On January 1, 2012, X Limited’s begining inventory was ‘4,00,000. During 2012, Ltd. purchased
’19,00,000 of additional inventory. On December 31, 2012, X Ltd.’s ending inventory was ‘5,00,000. What is X
Ltd.’s operating cycle in 2012, if it is assumed that the average collection period is 42 days?
(1 year =36 days). (A) 123.3 days (B) 132.3 days (C) 126.3 days (D) 133.3 days

QUESTION NO.5: From the following, what is the amount of sales of A Ltd.?
Financial Leverage — 3:1; Interest—’200; Operating Leverage — 4 : 1; Variable Cost as a % of sales — 66.67%.
(A) ‘3,600 (B) ‘6,300 (C) ‘6,030 (D) ‘3,060

QUESTION NO.6: The dollar is currently trading at ’40. If rupee depreciates by 10%, what will be the spot rate?
(A) ‘0.0525 (B) ‘0.0552 (C) ‘0.0225 (D) ‘0.0522

QUESTION NO.7: If the following rates are prevailing: Euro / $ : 1.1916 / 1.1925 and $ / £ : 1.42 / 1.47 what will
be the corss rate between Euro / Pound?
(A) 1.6921 / 1.750 (B) 1.7530 / 1.6921 (C) 1.6921 / 1.1925 (D) 1.7530 / 1.1916

QUESTION NO.8: State if each of the following sentences is T (= true) or F (= false) :

(i) Basic lease period refers to the period during which the lease is irrevocable.
(ii) LIBOR for treasury bill rate is the example of basis swaps.
AADITYA JAIN
(iii) Provision for taxation is an external source of financing.
THE BEST SFM FACULTY OF INDIA
(iv) TRIPS are the international agreement on intellectual property rights.
(v) The ROE of an unleveredTARGET 100%
firm is higher PLUS
than the ROE ofCRORE
a levered PLUS
firm, when the ROI is lower than the cost
of debt. SALARY
9911442626
(vi) If IRR is less than the firm’s cost of capital, the project should be rejected.
(vii) There is no need for calculating separate cost for retained earnings, when cost of equity capital is calculated
on the basis of the market value of equity shares.
(viii) In CAPM, systematic risk is the risk that can not be eliminated by diversification, it being common to all
firms.
(ix) Interest rate swap is an exchange of interest payments between two parties.
 Ph. 9911442626
Wherever you go, go with all your heart 72 CA Aaditya Jain
QUESTION NO.9: Match the descriptions to the ‘Four kinds of Float’ with reference to management of cash:
Descriptions:
(i) The time when a cheque is being processed by pst office, Messanger service or other means of delivery.
(ii) The time required to sort, record and deposit the cheque after it has been received by the company.
(iii) The time from the deposit of cheque to the crediting of funds in the seller’s account.
(iv) The time between the sale and the mailing of the invoice.
Four kinds of Float—Management of cash:
(A) Billing Float(B) Banking processing Float(C) Cheque processing Float(D) Mailing Float

Answer:
(i) (B) Opportunity cost = Discount % / [100 - Discount %] x 360 / N = 2 / 98 x 360 / 25 = 29.4 %

(ii) (A) Market Value of equity (S) = (EBIT-1) / ke =(‘10,000,-1,400,000) / 0.125 ; = ‘68,800,000
Total value of Firm(V) = S + D = ‘68,800,000 + ‘20,000,000 = ‘88,800,000
Overall cost of capital (Ko) = (EBIT-1) / V =‘ 10,000,000 / ‘88,800,000 = 11.26%

(iii) (B) ‘102

D + -^(E-D) 1.80 +—(6-1.80)
Market Value of share (P) = ^^ = ‘102
Ke 0.10
(iv) (D) (D) Cost of goods sold = ‘(4,00,000 + 1,900,000 - 500,000) = ‘1,800,000 ; Inventory turnover = Rs.
1800000/450000 = 4 ; Average age of Inventory = 365 / 4 = 91.3 days
Operating cycle = Average age inventory + Average Collection Period = 91.3 = 42 = 133.3 days

(v) (A) Financial Leverage = EBIT / EBT = 3 / 1 ; EBIT = 3EBT ; EBIT - 200 = EBT ; EBIT = 3[EBIT - 200] ; EBIT = ‘300
1200
SV 4  Sales   Rs.3600
Operating Leverage =  ; S - V = 4 EBIT = 4 X 300 = 1200 ; (100 - 66.67%)S = 1200 ; 1
EBIT 1 33
3
(vi) (C) Re quote : Re.1 = $1 / 40 = 0.25. If rupee depreciates by 10%, then = 0.025 - 0.0025 = `0.0225

(vii) (A) Bid (Euro / £) = Bid (Euro / $) x Bid ($ / £)

Bid rate for Euro /£ = 1.1916 x 1.42 = 1.6921; Ask rate for Euro / £ = 1.1925 x 1.47 = 1.7530 ;
= Quote as Euro / £ = 1.6921 / 1.7530

(viii) (i) True ; (ii) True ; (iii) False ; (iv) True ; (v) True ; (vi) True ; (vii) True ; (viii) True ; (ix) True ;

(ix) (i) -(D) ; (ii) - C (iii) - B ; (iv)- A

MCQ Set 32
QUESTION NO.1: A company is considering four projects A, B, C and D with the following information:
Project A Project B Project C Project D
Expected NPV 60,000 80,000 70,000 90,000
Standard deviation 4,000 10,000 12,000 14,000
Which project will fit the requirement of low risk apetite? (A) Project A (B) Project B (C) Project C (D) Project D

QUESTION NO.2: From the following quotes of a bank, determine the rate at which Yen can be purchased with
Rupees. ; Rs. / £ Sterling 75.31 - 33 ; £ Sterling / Dollar ($) -1.563 - 65 ; Dollar ($) / Yen (¥) - 1.048 / 52 [per 100
 Ph. 9911442626
Wherever you go, go with all your heart CA Aaditya Jain
Yen] (A) ‘ 124.02 (B) ‘ 142.02 (C) ‘ 412.02 (D) ‘ 214.02

QUESTION NO.3: The spot Value of Nifty is 4430. An investor bought a one month Nifty 4410 call option for a
premium of ‘ 12. The option is: (A) In the money (B) At the money (C) Out of the money (D) Insufficient data

QUESTION NO.4:A certain mutual fund has a return of 17% with standard deviation of 3.5% and the sharpe ratio
is 4. The risk free rate is: (A) 12.5% (B) 4% (C) 3% (D) 7.5%

QUESTION NO.5: The following information of a project are given below:

Expected cash flow (Rs.) Probability
6,000 0.20
16,000 0.80
If certainty equivalent coefficient is 0.7, what will be certain (Risk less) cash flows of the project?
(A) ‘ 12,000 (B) ‘ 9,800 (C) ‘ 9,000 (D) ‘ 15,400

QUESTION NO.6: The spot and 6 months forward rates of US dollar in relation to the rupee (Rs. / $) are ‘ 74.532
/ 75.4143 and ‘ 75.1278 / 76.2538 respectively. What will be the annualized forward margin (with respect to Ask
price)? (A) 2.42% (B) 1.60% (C) 2.23% (D) 2.31%

QUESTION NO.7: B can earn a return of 18% by investing in equity shares on his own. Now he is considering a
recently announced equity based Mutual Fund Scheme in which initial expenses are 1% and annual recurring
expenses are 2%. How much should be Mutual Fund earn to provide B, a return of 18%?
(A) 18.18% (B) 20.18% (C) 22.18% (D) 21%

QUESTION NO.8: You are given the following information of a stock: Strike Price -‘ 400 ; Current stock price -‘ 370
; Risk free rate of interest- 5%; Theoretical minimum price of a European 6 months’ put option after six months is
(A) ‘ 9.37 (B) ‘ 20.12 (C) ‘ 30.76 (D) ‘ 20.63

QUESTION NO.9: MS Ltd. is planning to invest in USA. The annual rates of inflation are 8% in India and 3% in USA.
If spot rate is currently ‘ 75-50/$, what spot rate can the company expect after 3 years?
(A) ‘ 65.49 (B) ‘ 79.16 (C) ‘ 87.04 (D) ‘ 72.00

QUESTION NO.10:If the covariance between the returns on a portfolio BC and returns on the market index is 25
and the variance of returns on the market index is 20, what will be the systematic risk of BC under the variance
approach? (A) 1.25 (B) 1.56 (C) 5.45 (D) 31.25

Answer:
(i) (A) Risk per unit of NPV = S.D. / NPV ; AAADITYA
= 4000 / 60000
JAIN= 0.066 ; B = 0.125 ; C = 0.17 ; D = 0.16
Hence A is chosen as least risky
THErelative
BESTto NPV.
SFM FACULTY OF INDIA
TARGET 100% PLUS CRORE PLUS
(ii) (A) Yen to be purchased with Rs. ; Rs. 75.33 to purchase 1£ ; 1.565 £ for 1 $ ; 1.052 $ for 100 Yen
= 75.33 x 1.565 x 1.052 = ‘ 124.02 SALARY
9911442626
(iii) (A) In an option, only the premium is paid up front, which is ‘ 12; ‘ 4,410 is the strike price
Current spot price = 4430 > 4410. Hence it is in the money.

Rp  Rf
(iv) (C)  Sharpe Ratio ; = 17% – 3.5% × 4 = 17 – 14 = 3%
S.D.
 Ph. 9911442626
Wherever you go, go with all your heart 74 CA Aaditya Jain
(v) (B) (Expected cash flow with risk) = [6,000 x .2 + 16,000 x .8]
Certainty adjusted = [6,000 x .2 + 16,000 x .8] x .7 = 9,800

(vi) (C) Ask price diff = 76.2538 - 75.4143 = 0.8395 ;

6 month margin = 0.8395 / 75.4143 x 100% ; Annualised = 0 8395 / 75.4143 x 100% x 2 = 2.23%

(vii) (B) 18 / 99% + 2% = 18.18 % + 2% = 20.18% ; [Initially, only 99% is available for investment]

(viii) (B) Spot price today = 370; Strike price = 400 ; = 400 x e-5% x 6 / 12 ; = 390.12 ;
Put option value = 390.12 - 370 = 20.12

(ix) (C) 75.50 will become (75.50) (1.08)3 = 75.50 x 1.26 = 95.10
1 $ will become (1.03)3 = 1.09 ; Expected rate = 95.10 / 1.092 = 87.08

(x) (D) Sys. risk of Beta 2 portfolio x S.D.2 ; Beta = 25 / 20 = 1.25 = (1.25)2 x 20 = 31.25