MEPL CLASSES

CMA FINAL - PAPER – 14

STRATEGIC FINANCIAL MANAGEMENT
EMAIL ID – d2hclasses@mohitsir.com
WEBSITE – www.meplclasses.com
ADDRESS – 59, JATINDRA MOHAN AVENUE , SOVABAZAR KOLKATA – 700005

Time Allowed: 3 hours Full Marks: 100

The figures in the margin on the right side indicate full marks.
All Sections are compulsory. Each Section contains instructions regarding the number of
questions to be answered within the Section.
All working notes must form part of the answer.
Whenever necessary, candidates may make appropriate assumptions and clearly state them in
the respective answer.
No present value factor table or other statistical table will be given in additional to this
question paper. Candidates may use the values tabulated at the relevant portions of this
question paper.
This paper contains two Sections A and B. Section A is Compulsory and contains question 1 of
30 marks.
Section B contains questions 2 to 8 of 14 marks each.

Question 1.
Choose the correct alternative. [15 x 2 =30]

(i)The IRR of a project is 10%. If the annual cash flow after tax is ₹1,30,000 and project duration
is 4 years, what is the initial investment in the project?

(a) ₹4,10,000
(b) ₹4,12,100
(c) ₹3,90,000
(d) ₹4,05,000

(ii)Which of the following is/are not true regarding the risk adjusted investment appraisal
techniques?
i. In the certainty equivalent method, if there is high degree of correlation between the cashflows
for the entire project life the certainty equivalent coefficient is taken as one for all the years.
ii.In sensitivity analysis, the impact of the changes in one or more variables on the criterion of
merit is studied.

iii.Simulation does not produce an optimal solution but the user of the technique has to
generate all possible combinations of conditions and constraints to choose the optimal solution.

(a) Only (ii) above.

(b) Only (iii) above.
(c) Both (i) and (ii) above
(d) Both (i) and (iii) above

(iii) Given, expected value of profit without perfect information = ₹1,600 and expected value of
perfect information = ₹300, then expected value of profit with perfect information will be
.
(a) ₹1,300
(b) ₹1,900
(c) ₹950
(d) None of the above

(iv) The type of lease that includes a third party, a lender, is called as which of the following?

(a) Sale and lease back

(b) Leveraged Lease
(c) Direct leasing arrangement
(d) Operating lease

(v)The current price is ₹100, the required rate of return is 20% and the dividend paid ₹3.00 on
a share of₹10 face value. What is the expected growth rate?

(a) 15%
(b) 16%
(c) 18%
(d) 17%

(vi) Bond volatility is inversely related to:

a. Term to maturity
b. Yield to maturity
c. Coupon rate
d. Both (b) and (c)

(vii)Mr. X expects 20% return from his investment. The dividend from the stock is ₹2.0 and the
present price is ₹50. What should be the future price of the stock?

(a) ₹ 56.39
(b) ₹ 58.00
(c) ₹ 60.00
(d) ₹ 62.30

(viii)According to the constant growth model, the next year’s dividend is ₹2.00, required rate of
return is 15% and the growth rate is 10%, the market price would be:

(a) ₹ 50
(b) ₹45
(c) ₹ 40
(d) ₹ 48

(ix) Which among the following increases the NAV of a mutual fund scheme?

(a) Value of investments

(b) Receivables
(c) Accrued income
(d) All of (a), (b) and (c)

(x) A portfolio comprises two securities and the expected return on them is 12% and 16%
respectively.

Determine return of portfolio if first security constitutes 40% of total portfolio.

a. 12.4%
b. 13.4%
c. 14.4%
d. 15.4%
(xi) Plain vanilla interest rate swaps involved:

a. Fixed to fixed rate swap

b. Fixed to floating rate swap
c. Floating to floating rate swap
d. Currency swap

(xii) An investor writes a three-month put on the stock of an oil company at an exercise price of
₹275 per share at a premium of ₹34. If the expiration date price is ₹280, calculate the gain/loss
of put writer.

a. ₹5
b. (̶) ₹5
c. ₹34
d. None of the above

(xiii) The 6-month forward rate for US dollar against Rupee is quoted as ₹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. None of the above.

(xiv) The sterling 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. $1.6117
b. $1.615
c. $1.625
d. None of the above

(xv) Sharpe’s measure of the portfolio performance is based on:

(a) Systematic risk of the portfolio
(b) Unsystematic risk of the portfolio
(c) Total risk of the portfolio
(d) Market risk of the portfolio

SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 Marks)

Question 2 .
(a) X Ltd. an existing profit-making company, is planning to introduce a new product with
projected life of 8 years. Initial equipment cost will be ₹120 lakhs and additional equipment
costing ₹10 lakhs will be needed at the beginning of third year. At the end of the 8 years, the
original equipment will have resale value equivalent to the cost of removal, but the additional
equipment would be sold for ₹1 lakhs. Working Capital of ₹15 lakhs will be needed. The 100%
capacity of the plant is of 4,00,000 units per annum, but the production and sales- volume
expected are as under:

A sale price of ₹100 per unit with a profit-volume ratio of 60% is likely to be obtained. Fixed
Operating Cash Cost are likely to be ₹16 lakhs per annum. In addition to this the advertisement
expenditure will have to be incurred as under:

The company is subject to 40% tax, straight-line method of depreciation, (permissible for tax
purposes also) and taking 15% as appropriate after-tax Cost of Capital, should the project be
accepted? [7]

(b) Fair finance, a leasing company, has been approached by a prospective customer intending
to acquire a machine whose Cash Down price is ₹3 crores. The customer, in order to leverage his
tax position, has requested a quote for a three-year lease with rentals payable at the end of each
year but in a diminishing manner such that they are in the ratio of 3: 2: 1. Depreciation can be
assumed to be on straight line basis and Fair Finance’s marginal tax rate is 35%. The target rate
of return for Fair Finance on the transaction is 12%. Calculate the lease rents to be quoted for
the lease for three years. [7]

Question 3.
(a) A firm has an investment proposal, requiring an outlay of ₹80,000. The investment proposal
is expected to have two years economic life with no salvage value. In year 1, there is a 0.4
probability that cash inflow after tax will be ₹50,000 and 0.6 probability that cash inflow after
tax will be ₹60,000. The probability assigned to cash inflow after tax for the year 2 are as follows:

The firm uses 8% discount rate for this type of investment. Required

(i) Develop a decision tree for the proposed investment project and calculate the expected net
present value (NPV).

(ii)Calculate net present value will the project yield, if worst outcome is realized and also
calculate the probability of occurrence of this NPV.

(iii) Suggest what will be the best outcome and the probability of that occurrence?

(iv)Recommend whether the project be accepted. (Note: 8% discount factor 1 year 0.9259; 2
year 0.8573) [7]

(b) The rates of return on the Security of company S and Market Portfolio for 10 periods are
given below:

(i) Compute the beta of Security S?

(ii) Determine the Characteristic Line for Security S?
(iii) Analyse the Systematic and Unsystematic Risk of Security S? [7]
Question 4.
(a)AB Ltd. is expected to pay a dividend of ₹4.00 at the end of first year, a dividend of ₹7.00 at
the end of second year, a dividend of ₹11.00 at the end of 3rd year. From 4th year onwards, the
dividends are expected to grow at a constant growth rate of 4%. If the required rate of return is
14%, compute the present value of the stock. [7]
(b)There are two mutual funds viz. X mutual fund and Y mutual fund. Each having closed-ended
equity schemes. NAV as on 31-12-2022 of equity schemes of X mutual fund is ₹70.71 (consisting
99% equity and remaining cash balance) and that of Y mutual fund is ₹62.50 (consisting 96%
equity and balance in cash).

Following is the other information:

There is no change in portfolios during the next months and annual average cost is ₹3 per unit
for the schemes of both the mutual funds. For calculation, consider 12 months in a year and
ignore number of days for particular month. Calculate NAV after one month if the market goes
down by 5%. [7]

Question 5.
(a)The beta coefficient of M Ltd. is 1.40. The company has been maintaining 8% rate of growth
in dividends and earnings. The last dividend paid was ₹4.00 per share. Return on government
securities is 12% and return on market portfolio is 18%. The current market price of the share of
M Ltd. Is ₹32.00. Calculate be the equilibrium price per share of M Ltd. [7]

(b)Based on the data provided below, compute and compare the performance of the portfolios
using the Jensen model of the differential return
 Return on market portfolio, Rm = 12%
Risk-free rate of interest = 6% [7]

Question 6.
(a) Given the following information

We assume that a futures contract on the BSE index with 4 months maturity is used to hedge the
value of portfolio over next 3 months. One future contract is for delivery of 50 times the index.
Based on the information, calculate:
(a) Price of future contract,
(b) The gain on short futures position if index turns out to be 45,000 in 3 months [7]

(b) A put and a call option each have an expiration date 6 months hence and an exercise price
₹9. The interest rate for the 6 month period is 3 percent.
(a)If the put has a market price of ₹2 and share is worth ₹10 per share, compute the value of
the call.
(b)If the put has a market price of ₹2 and the call ₹4. determine the value of the share per share.
If the call has a market value of ₹5 and market price of the share is ₹12 per share what is the
value of the put? [7]
Question 7.
(a) Following are the details of cash inflows and outflows in foreign currency denominations of
M Co., an Indian export firm, which have no foreign subsidiaries —

(a) Determine the net exposure of each foreign currency in terms of Rupees.
(b) Are any of the exposure positions off-setting to some extent? [7]

(b) Exchange rate between Rupee and Swiss franc is ₹33/SFr at the reference period and the
forward rate is found to be ₹33.40/SFr after 9 months. Nine-month interest rate on Rupee is 8%
p.a. Recommend what should have been corresponding interest rate on Swiss franc. Show that
interest rate differential is equal to forward premium or discount. [7]

Question 8.
Short Notes on:
(a) Advantages of Digital Financial Services. [5]
(b) Participatory Notes. [5]
(c) Sale and Lease back. [4]