MODEL TEST PAPER - 10

FINAL COURSE: GROUP – I

PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
Time Allowed – 3 Hours Maximum Marks – 100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case Scenario based MCQs (30 Marks)
Part I is compulsory.
Case Scenario I
Following Financial data are available for PQR Ltd. for the financial year ending
2023:
(₹ in lakh)
8% Debentures 125
10% Bonds (2022) 50
Equity Shares (₹10 each) 100
Reserves and Surplus 300
Total Assets 600
Assets Turnovers ratio 1.1
Effective interest rate 8%
Effective tax rate 40%
Operating margin 10%
Dividend pay-out ratio 16.67%
Current market Price of Share ₹ 14
Required rate of return of investors 15%

From the information given above, choose the correct answer to the following
questions:
1. 10% Bonds must have issued in the month of…………….
(a) May 2022
(b) June 2022

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 (c) July 2022
(d) August 2022
2. Amount of retailed earning for the financial year 2023 approximately
is…………..
(a) ₹ 52.00 lakh
(b) ₹ 31.20 lakh
(c) ₹ 26.00 lakh
(d) ₹ 5.20 lakh
3. Return on Equity (ROE) of PQR Ltd. is…………..
(a) 15.00%
(b) 6.50%
(c) 10.00%
(d) 7.80%
4. Sustainable Growth Rate of PQR Ltd. shall be approximately…………..
(a) 15.00%
(b) 6.50%
(c) 10.00%
(d) 7.80%
5. Fair price of share of PQR Ltd. using Dividend Discount Model shall be
approximately………….
(a) ₹ 10
(b) ₹ 14
(c) ₹ 6.12
(d) ₹ 6.51 (5 x 2 = 10 Marks)
Case Scenario II

An Indian exporting firm, Rohit and Bros. exported good worth of AUD 1 million
to an importer in Sydney. Rohit and Bros. are worried about likely depreciation
of AUD in near future as it is likely that the export sum will be received after 3

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months. Today as such as there is no derivative contract is available in AUD to
hedge itself from such depreciation.
The following data is given:
Spot rate : ₹ 56.00/AUD
3 months interest rate : India : 12 per cent per annum
: Australia : 5 per cent per annum
From the information given above, choose the correct answer to the following
questions:
6. ………….. hedging technique can be used Rohit and Bros. to hedge itself
against the risk of depreciation of AUD.
(a) Forward Contract
(b) Future Contract
(c) Option Contract
(d) Money Market Hedge
7. Suppose if Rohit and Bros. want to borrow some amount in AUD in such
a manner that the receivable amount can be used to repay the amount
borrowed along with interest. The amount to be borrowed by Rohit and
Bros. shall be approximately………
(a) AUD 1 million
(b) AUD 9,87,654
(c) ₹ 5,53,08,624
(d) ₹ 5,69,67,882
8. Suppose if Rohit and Bros. borrows a designated amount in AUD for 3
months in such a manner that the receivable amount can be used to repay
the amount borrowed along with interest and plan to invest same amount
in Indian spot market. The same amount available for investment shall be
approximately………
(a) AUD 1 million
(b) AUD 9,87,654
(c) ₹ 5,53,08,624

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 (d) ₹ 5,69,67,882
9. Suppose if Rohit and Bros. borrows a designated amount for 3 months in
AUD in such a manner that the receivable amount can be used to repay
the amount borrowed along with interest. Further he plans to invest same
amount in Indian spot market. The amount obtained after 3 months of
investment shall be approximately………
(a) AUD 1 Million
(b) AUD 9,87,654
(c) ₹ 5,53,08,624
(d) ₹ 5,69,67,883
10. Suppose if Interest Rate Parity theory is held between INR and AUD, then
forward rate between INR and AUD for 6 month should be…………..
(a) ₹ 51.54/AUD
(b) ₹ 57.91/AUD
(c) ₹ 52.50/AUD
(d) ₹ 59.73/AUD (5 x 2 = 10 Marks)
Case Scenario III
XYZ Ltd. plans to invest ₹ 800,000 in a new unit. The project is expected to
have a useful life of 4 years, with no salvage value at the end of its life. The
annual depreciation charge for the project is ₹ 200,000.
Projected revenues and costs for the project, ignoring inflation, are provided as
follows:
Year Revenues (₹) Costs (₹)
1 600,000 300,000
2 700,000 400,000
3 800,000 400,000
4 800,000 400,000

XYZ Ltd. is subject to a corporate tax rate of 60%, and the cost of capital for
the project, including inflation premium, is 10%.

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Depreciation provides a tax benefit, and inflation rates for revenues and costs
over the project’s lifespan are as follows:
Year Revenue Inflation Cost Inflation
1 10% 12%
2 9% 10%
3 8% 9%
4 7% 8%

From the information given above, choose the correct answer to the following
questions:
11. The depreciation tax benefit for the project per year shall be……………
(a) ₹ 120,000
(b) ₹ 150,000
(c) ₹ 200,000
(d) ₹ 180,000
12. The inflation-adjusted revenue in Year 2 shall be…………….
(a) ₹ 700,000
(b) ₹ 839,300
(c) ₹ 492,800
(d) ₹ 501,760
13. The total cash inflow in Year 1 after adjusting for inflation and tax benefit
on depreciation shall be…………
(a) ₹ 330,000
(b) ₹ 336,000
(c) ₹ 249,600
(d) ₹ 492,800
14. The inflation-adjusted cost in Year 2 shall be…………….
(a) ₹ 700,000

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 (b) ₹ 839,300
(c) ₹ 492,800
(d) ₹ 501,760
15. The present value of cash inflow for the year 3 shall be approximately……
(a) ₹ 213,604
(b) ₹ 226,299
(c) ₹ 226,886
(d) ₹ 239,949 (5 x 2 = 10 Marks)
PART – II DESCRIPTIVE QUESTIONS
Question No.1 is compulsory. Candidates are required to answer
any four questions from the remaining five questions.
Working notes should form part of the answers.
Maximum Marks – 70 Marks
1. (a) Following information is given in respect of WXY Ltd., which is
expected to grow at a rate of 20% p.a. for the next three years, after
which the growth rate will stabilize at 8% p.a. normal level, in
perpetuity.
For the year ended
March 31, 2014
Revenues ` 7,500 Crores
Cost of Goods Sold (COGS) ` 3,000 Crores
Operating Expenses ` 2,250 Crores
Capital Expenditure ` 750 Crores
Depreciation (included in Operating ` 600 Crores
Expenses)
During high growth period, revenues & Earnings before Interest &
Tax (EBIT) will grow at 20% p.a. and capital expenditure net of
depreciation will grow at 15% p.a. From year 4 onwards, i.e. normal
growth period revenues and EBIT will grow at 8% p.a. and
incremental capital expenditure will be offset by the depreciation.
During both high growth & normal growth period, net working capital
requirement will be 25% of revenues.

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 The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%.
Corporate Income Tax rate will be 30%.
Required:
Estimate the value of WXY Ltd. using Free Cash Flows to Firm
(FCFF) & WACC methodology.
The PVIF @ 15 % for the three years are as below:

Year t1 t2 t3
PVIF 0.8696 0.7561 0.6575
(8 Marks)
(b) Shiva has a fund of ` 5 lacs which he wants to invest in share market
with rebalancing target after every 15 days to start with for a period
of one month from now. The present NIFTY is 17025. The minimum
NIFTY within a month can at most be 15322.50. He wants to know
as to how he should rebalance his portfolio under the following
situations, according to the theory of Constant Proportion Portfolio
Insurance Policy, using "2" as the multiplier:
(1) Immediately to start with.
(2) 15 days later-being the 1st day of rebalancing if NIFTY falls to
16321.89.
(3) 15 days further from the above date if the NIFTY touches
17512.14.
Note: Assume that the value of his equity component will change in
tandem with that of the NIFTY. (6 Marks)
2. (a) Following is the Balance Sheet of M/s. PK Ltd. as on 31-03-2015:
Particulars ` in Lacs
I. Equity & Liabilities
Shareholders’ Fund
Equity Share Capital (` 10 each) 900.00
10% Preference Share Capital (` 100 each) 300.00
Reserves & Surplus (500.00)
Non-Current Liabilities
Term Loan 400.00

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 Current Liabilities
Trade Payables 400.00
Total (I) 1500.00
II. Assets
Non-Current Assets 1000.00
Current Assets :
Inventory 300.00
Trade Receivables 100.00
Cash & Bank Balance 100.00
Total (II) 1500.00

M/s PK Ltd. did not perform well and has suffered sizeable losses
during the last few years. However, it is now felt that the company
can be nursed back to health by proper financial restructuring and
consequently the following scheme of reconstruction have been
designed :
(i) Equity shares are to be reduced to ` 2 per share fully paid.
(ii) Preference shares are to be reduced by ` 50 per share and
rate of dividend on Preference shares is also reduced by
2%.
(iii) Trade Payables have agreed to forego 40% of their existing
claims and for the balance 50% they have agreed to convert
their claims into equity shares of ` 2 each, fully paid.
(iv) In order to make payment for Term Loan, the company
issues 200 Lacs equity shares of ` 2 each at par. Entire sum
is required to be paid on application.
(v) Non-Current Assets is to be revalued at ` 500 Lacs.
You are required:
(1) To show the impact of financial restructuring.
(2) To prepare Balance Sheet assuming the scheme of
restructuring is implemented. (10 Marks)
(b) Explain some of the ‘sell-side’ imperatives in Mergers &
Acquisitions. (4 Marks)

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3. (a) On the basis of given information, Mr. XLY want to create a portfolio
equally as risky as the market and is having ` 20,00,000 to invest.
Assets Investment Beta
Stock A ` 4,00,000 0.70
Stock B ` 5,00,000 1.10
Stock C ? 1.60
Debenture (D) ? 0
How do you recommend and interpret the risk scenario and
investment in all the securities? (6 Marks)
(b) The following are the details of three mutual funds of MFL:
Growth Balanced Regular Market
Fund Fund Fund
Average Return (%) 7 6 5 9
Variance 92.16 54.76 40.96 57.76
Coefficient of 0.3025 0.6561 0.9604
Determination

The yield on 182 days Treasury Bill is 9 per cent per annum.
You are required to:
(i) Rank the funds as per Sharpe's measure.
(ii) Rank the funds as per Treynor's measure (4 Marks)
(c) Explain the conditions that are required to be satisfied by an entity
to be Considered as a Startup vide GSR Notification 127 (E) dated
19th February 2019. (4 Marks)
OR
Explain briefly the various factors that affect the value of an Option.
(4 Marks)
4. (a) A textile manufacturer has taken floating interest rate loan of
`40,00,000 on 1st April, 2012. The rate of interest at the inception
of loan is 8.5% p.a. interest is to be paid every year on 31st March,
and the duration of loan is four years. In the month of October 2012,
the Central bank of the country releases following projections about

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 the interest rates likely to prevail in future.
Dates Interest Rate
31 March, 2013
st
8.75%
31 March, 2014
st
10.00%
31st March, 2015 10.50%
31st March, 2016 7.75%.

(i) Advise how borrower can hedge the risk arising out of
expected rise in the rate of interest when he is interested in
pegging his interest cost at 8.50% p.a. and if option on Interest
Rate is available at 0.75% p.a.
(ii) Assume that the premium negotiated by both the parties at the
above-mentioned rate which is to be paid on upfront basis and
the actual rate of interest on the respective due dates happens
to be as follows:
Dates Interest Rate
31 March, 2013
st
10.20%
31 March, 2014
st
11.50%
31st March, 2015 9.25%
31st March, 2016 8.25%.

Evaluate how the settlement will be executed on the respective

interest due dates. (8 Marks)
(b) Ram holding shares of Reliance Industries Ltd. which is currently
selling at ` 1000. He is expecting that this price will further go down
due to lower level of profit than expected level to be announced after
one month. As on date following option contract are available in
Reliance Share.
Strike Price Option Premium (`)
1030 Call 40
1010 Call 35
1000 Call 30
990 Put 35
970 Put 20

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 950 Put 8
930 Put 5

Ram is interested in selling his stock holding as he cannot afford to

lose more than 5% of its value.
Recommend a hedging strategy with option and show how his
position will be protected. (6 Marks)
5. (a) There are two Mutual Funds viz. D Mutual Fund Ltd. and K Mutual
Fund Ltd. Each having close ended equity schemes.
NAV as on 31-12-2014 of equity schemes of D Mutual Fund Ltd. is
` 70.71 (consisting 99% equity and remaining cash balance) and
that of K Mutual Fund Ltd. is 62.50 (consisting 96% equity and
balance in cash).
Following is the other information:
Equity Schemes
Particular D Mutual Fund K Mutual Fund
Ltd. Ltd.
Sharpe Ratio 2 3.3
Treynor Ratio 15 15
Standard deviation 11.25 5

There is no change in portfolios during the next month and annual

average cost is ` 3 per unit for the schemes of both the Mutual
Funds.
If Share Market goes down by 5% within a month, calculate
expected NAV after a month for the schemes of both the Mutual
Funds.
For calculation, consider 12 months in a year and ignore number of
days for particular month. (6 Marks)
(b) Excel Exporters are holding an Export bill in United States Dollar
(USD) 1,00,000 due 60 days hence. They are worried about the
falling USD value which is currently at ` 45.60 per USD. The
concerned Export Consignment has been priced on an Exchange
rate of ` 45.50 per USD. The Firm’s Bankers have quoted a 60-day
forward rate of ` 45.20.

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 Calculate:
(i) Rate of discount quoted by the Bank
(ii) The probable loss of operating profit if the forward sale is
agreed to. (4 Marks)
(c) Explain the various requirements that makes an organisation
sustainable. (6 Marks)
6. (a) The Management of a multinational company TL Ltd. is engaged in
construction of Infrastructure Project. A proposal to construct a Toll
Road in Nepal is under consideration of the Management.
The following information is available:
The initial investment will be in purchase of equipment costing USD
250 lakhs. The economic life of the equipment is 10 years. The
depreciation on the equipment will be charged on straight line
method.
EBIDTA to be collected from the Toll Road is projected to be USD
33 lakhs per annum for a period of 20 years.
To encourage investment Nepalese government is offering a 15
year term loan of USD 150 lakhs at an interest rate of 6 per cent per
annum. The interest is to be paid annually. The loan will be repaid
at the end of 15 year in one tranche.
The required rate of return for the project under all equity financing
is 12 per cent per annum.
Post tax cost of debt is 5.6 per cent per annum.
Corporate Tax Rate is 30 per cent.
All cash Flows will be in USD.
Ignore inflation.
You are required to advise the management on the viability of the
proposal by using Adjusted Net Present Value method.
Given
PVIFA (12%, 10) = 5.650, PVIFA (12%, 20) = 7.469, PVIFA (8%,15)
= 8.559, PVIF (8%, 15) = 0.315. (8 Marks)

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(b) You as an investor had purchased a 4 month call option on the
equity shares of X Ltd. of ` 10, of which the current market price is
` 132 and the exercise price ` 150. You expect the price to range
between ` 120 to ` 190. The expected share price of X Ltd. and
related probability is given below:
Expected Price (`) 120 140 160 180 190
Probability 0.05 0.20 0.50 0.10 0.15

Compute the following:

(i) Expected Share price at the end of 4 months.
(ii) Value of Call Option at the end of 4 months, if the exercise
price prevails. (4 Marks)
(c) Explain any Three features of securitization. (2 Marks)

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