File Content -
“Together we are Better”
Jay mataji
Strategic Financial Management
“Together we are Better”
If you find any difference in answer & error OR any
Other Query please inform me
@ gohilrr07@gmail.com or +91 760-055-8055
“Together we are Better”
Q.1
[A]
Reward To Volatility Ratio : Return / Risk (Return Per Unit Of Risk
Sharpe Method: Rp - Rf /Standard Deviation
Treynor’s Method: Rp –Rf / Beta
[B]
ISSUE PRICE @ 16% YIELD
security sharpe treynor Rp/risk
A
1.28 II 7.2 II 2.14
B 1.2 III 16 I 1.8
C 1.6 I 5.71 V 2.8
D 1 V 6.12 IV 2
E 1.11 IV 6.66 III 1.78
YEAR CF
PVIF
16% PV
1 80 0.862 68.96
2 80 0.743 59.44
3 80 0.641 51.28
4 80 0.552 44.16
5 90 0.476 42.84
6 90 0.41 36.9
7 90 0.354 31.86
8 90 0.305 27.45
9 130 0.263 34.19
10 1130 0.227 256.51
653.59
“Together we are Better”
[C]
Value of Share = 177.38 (working Note)
No of shares = 1200 crores/40 Each = 30 crores (Nos )
EPS = 300 crores/30 Crores = Rs. 10 per share
FCFE = EPS –
[(1-B)(CAPEX – DEP) + (1-B) (CHANGE IN WKG CAP)]
= 10 – [ (1- 0.25)(48-40)+ (1-0.25) (3.45)]
=10 – [ (0.75)(8)+(0.75)(3.45)]
=10-8.5875
=1.4125
Ke = Rf + Beta (Risk premium)
= 8.7+0.1(10.3-8.7)
=8.86%
Value per share = 1.4125 (1+g)/8.86-g
=1.5255 /0.86%
=177.38
[D]
Investor bought call : 1 lot(50) strike price 52 Premium Paid Rs.2
(total=Rs 100 50 x 2)
“Together we are Better”
Investor Bought Put : 1 lot(50) Strike Price 50 Premium Paid Rs 1
(total =50 50x1)
(1) share price UP (2) share price down
CALL OPTION
PUT
OPTION CALL OPTION PUT OPTION
CMP 53 53 46 46
STRIKE PR 52 50 52 50
CALL EXERCISE NE NE EXRC
GAIN 1 0 0 4
TOTAL GAIN 50 50 50 0 0 200
PREMI.
(PAID) -100 -50 -100 -50
NET -50 -50 -100 150
TOTAL NET -100 50
Q.2
[A]
The Risk free Rate of interest and risk factor for each of the project are
given.the Risk Adjusted discount rate for different project can be found
on the basis of CAPM .(HERE RISK INDEX IS CAN BE TR EATED LIKE beta
OF PROJECT )
CAPM = RF + BETA (MARKER RETURN – RISK FREE RETURN)
:. RRR = Rf + Risk factor ( ke-rf)
AB = 10 + 1.8 (15-10) = 19 %
BC = 15 % (RISK INDEX IS ONE NO NEED TO ADJUST)
CD = 10 + .06 (15-10) = 13 %
“Together we are Better”
YEAR
AB PVIF PV BC PVIF PV CD
PVIF
13% PV
0 -1E+06 1 -1E+06 -1E+06 1 -1E+06 -2E+06 1 -2E+06
1 500000 0.8 420168 500000 0.87 434783 400000 0.885 353960
2 500000 0.7 353082 400000 0.76 302400 500000 0.783 391550
3 500000 0.6 296700 500000 0.66 328500 600000 0.693 415800
4 500000 0.5 249350 300000 0.57 171300 1E+06 0.613 613300
NPV 119300 NPV 236983 NPV 274610
PROJECT CD : HIGHEST NPV = BEST PROJECT
[B]
NET ASSETS VALUE (NAV)
PARTICULARS
(RS
CRORES) ADJ. VALUE
LISTED SHARES 30 38.028169
CASH 0.75 0.75
BOND & DEB.
NOT LISTED BOND 1 1
OTHER 1.3 10
OTHER FIXED INTEREST SECURITY 2.5 2.6625
DIVIDEND 0.8 0.8
AMOUNT PAYABLE -8.32
EXPS -1
NET ASSETS 43.920669
NO OF UNITS ( CRORE ) 0.3
NAV 146.40223
“Together we are Better”
Q.3 ( WILL UPDATE SOON ) - ☺ SORRY
Q.4
[A]
D0 = Rs 2
g = 40% for five years and 15 % thereafter
Rf = 11 %
Risk premium = 7 % (18-11)
Rm= 18 %
Market = Variance 24%
Cov (stock Mkt) = 30%
Beta = cov(mkt stock) / variance mkt
= 30/24
=1.25
Required rate of return = Rf + B (Risk premium)
= 11+1.25 (7)
= 19.75%
Intrinsic value Year Do=2 PVIF @ 19.75%
1 D1 = 2+40%=2.8 0.835 2.338
2 3.92 0.697 2.732
3 5.488 0.582 3.194
4 7.6832 0.4862 3.7355
5 10.756 0.4060 4.366
TV5 260.42 0.4060 105.75
“Together we are Better”
INTRI…VALUE TOTAL 122.11
(W.N.) TV5 = D6/ke-g = 10.756+15% / 19.75-15
=12.37/4.75% =260.42
[B]
EXISTING RATE OF RETURN
AS PER DIVIDEND GROWTH MODeL
Po = D0 (1+g) /Ke –g
50 = 5 (1+5%) / Ke – 0.08
50 = 5.25/Ke – 0.08
50Ke =5.25+4
Ke =18.5%
By writing note (I think): Answer
can be solved by this Rate (Ke =
18.5% )
EXISTING RATE OF RETURN
CAPM(MODEL)
Ke = RF + B (RISK PREMIUM)
= 12.5% + 1.5 ( 6)
=21.5%
REVISED RATE OF RETURN
Ke = 10+1.25(4.8)
10+6
=16%
Po=D+g /Ke-g
=5.4/10%
=54
CURRENT PRICE IS 50 INVESTOR
SHOULD HOLD OR BUY
“Together we are Better”
Q.5
[A]
CHECKING POSIBILITY
FWD / SPOT = (1+r) OF CAD RATE / (1+R) OF DM RATE
FWS / 0.666 = ( 1 + 0.095*3/12) / (1 + 0.075*3/12)
FWD /0.666 = (1.02375) / (1.01875)
FWD= 0.666 X 1.0049
FWD = 0.669
THEORITICAL FORWARD RATE CAD 0.669 per DM
ACTUAL FORWARD RATE CAD 0.671 pe r DM
HERE, DM IS OVERVALUED (SELL/INVEST) AND CAD IS UND ERVALUED
(BUY/BORROW)
OPERATION SHOULD BE UNDERTAKEN FOR ARBITRAGE GAIN
(1) BORROW CAD @9.5% P.A. FOR 3 MONTHS (eg. CAD 100000 )
(2) CONVERT CAD INTO DM @SPOT RATE ie. CAD 0.666 = 1 DM
CAD 100000 = ?
:> 150150 DM
(3) INVEST DM @ 7.5% P.A. FOR 3 MONTHS
(4) ACTUAL RECEIVED DM WITH INTEREST AFTER 3 MONTH
150150 + (150150 X 7.5% X 3/12)=150150 + 2815
=152965 DM
(5) CONVERT SUCH AMOUNT @ PRE-BOOKED FORWARD RATE
“Together we are Better”
1 DM = CAD 0.671 :> 152965 X 0.671 = 102639.70 CAD
(6) REPAY BORROWED AMOUNT WITH INTEREST
100000 + (100000 X 9.5% X 3/12 )= 10237 5 CAD
(7) GAIN FROM OPERATIONS : 102639.70-102375=264.70 CAD
[B]
HOME CURRENCY: GBP
FOREIGN CURRENCY: CAD
RECEIVABLE: CAD 500000 AFTER 6 MONTH
FORWARD RATE: REFLECT PARITY OF INTEREST RATE
FORWARD RATE: (?)
FWD / SPOT = (1+r) OF CAD RATE / (1+R) OF UK RATE
FWD / 2.5 CAD = (1+ 0.15*6/12) / (1+ 0.12*6/12)
FWD / 2.5 CAD = (1.075 / 1.06)
FWD = 2.5354 CAD per GBP (i) Exporter Hedge Through Forward Marker
Forward Rate: 2.5354 CAD = 1 GBP
500000 CAD =? 197207.54 GBP Receivable Fix
(ii) Gain and Loss To Exporter
NOTE: We should careful while calculating Currency Appreciate or
Depreciate. When question say CAD is decline then d ue to indirect rate
per GBP price of CAD will increase then can say dec rease in CAD. same
rule (understanding )apply for gain
“Together we are Better”
CAD SPOT RATE CHANGES
(i) Decline by 2% (ii) Gain by 4% (iii) No change
current
spot 1 GBP = CAD 2.5 1 GBP = CAD 2.5 1 GBP = CAD 2.5
3 mo. AFT
spot 1 GBP = CAD 2.55 1 GBP = CAD 2.4 1 GBP = CAD 2.5
current
rec.amt
(500000 /2.5)
= 200000 GBP 200000 GBP 200000 GBP
after effect
(500000/2.55)
=196078 GBP 208333 GBP 200000 GBP
WITHOUT
HEDGE
GAIN
(LOSS) LOSS 3922 GAIN 8333 GBP NO P/(L)
HEDGE
RECEIVABLE
197207.54 GBP 197207.54 GBP 197207.54 GBP
Effect of
Hedge
(GBP) IN
REVENUE GAIN (197207-
196078) =1129 LOSS ( 208333 -
197207) = 11126 LOSS 2793
Q.6
[A]
Reference que. No 10 (Page 13.14 ) practice manual SFM
[B]
Break Even EPL = EPS of seller / EPS of purch.co
PURCH. CO. SELLER CO.
NET PROFIT 80 LAKHS 15.75 LAKH
“Together we are Better”
CMP SHARE 42 105
PE RATIO 10.5 10
EPS 4 10.5
No of shares 80 lakh/y=4
20 lakh shares
15.75 lakh /y=10.5
1.5 lakh shares
To maintain EPS swap ratio = seller’s EPS / Buyer’s EPS
=10.5/4 = 2.625
CASH DEAL
Consideration will be
EPS (post) =
Earning pur’co. + Earning Seller + synergy (if any ) – Interest (1-t) / No
shares of Purchaser
Suppose “y” is Amount of CASH DEAL
Then
4= 80 lakh+ 15.75 lakh + 0 - 0.15 y (1-0.30) / 20 l akh
20 lakh x 4 = 95.75 lakh – 0.105 y
80 – 95.75 = -0.105 y
Y= 150
CASH DEAL VALUE 150 lakh Rs. 100 per share
“Together we are Better”
Q.7
[A]
Investment banking and commercial banking are two divisions of the banking
industry that provide substantially different servi ces. Investment
banks expedite the purchase and sales of bonds, sto cks and other
investments and aid companies in making initial public offerings (IPOs).
Commercial banks act as managers for deposit accounts for businesses and
individuals, although they are primarily focused on business accounts, and
they make public loans through deposit money that t hey hold
[B]
Horizontal Merger
A horizontal merger takes place when two companies offering similar, or
compatible, products or services to the same market combine under single
ownership. If the other company sells products simi lar to yours, your
combined sales give you a greater share of the market. If the other company
manufactures products complementary to your range, you can now offer a
wider range of products to your customers. A merger with a company that
offers different products to a different sector of the market enables you to
diversify your activities and enter new markets
Vertical Merger
The main aim of a vertical merger is not to increas e revenue, but to improve
efficiency or reduce costs. A vertical merger takes place when two
companies that previously sold to or bought from each other combine under
single ownership. The companies are generally at di fferent stages of
production. A manufacturer may decide to merge with a supplier of important
components or raw materials, for example, or with a distributor or retailer that
sells its products.
“Together we are Better”
[C]
BASIS FOR
COMPARISON MONEY MARKET CAPITAL MARKET
Meaning A segment of the financial
market where lending and
borrowing of short term
securities are done.
A section of financial
market where long term
securities are issued and
traded.
Nature of Market Informal Formal
Financial
instruments
Treasury Bills, Commercial
Papers, Certificate of
Deposit, Trade Credit etc.
Shares, Debentures, Bonds,
Retained Earnings, Asset
Securitization, Euro Issues
etc.
Risk Factor Low Comparatively High
Time Horizon Within a year More than a year
Merit Increases liquidity of funds
in the economy.
Mobilization of Savings in
the economy.
Return on
Investment
Less Comparatively High
“Together we are Better”
[D]
[E]
Note : answer is available in PM (chapter 1)
extra points are as follows
Sources of finance and capital structure are the most important dimensions
of a strategic plan. The need for fund mobilization to support the expansion
activity of firm is very vital for any organization. The generation of funds
may arise out of ownership capital and or borrowed capital. A company may
issue equity shares and/or preference shares for mo bilizing ownership
capital and debentures to raise borrowed capital. Public deposits, for a fixed
time period, have also become a major source of sho rt and medium term
finance. Organizations may offer higher rates of in terest than banking
institutions to attract investors and raise fund.
The overdraft, cash credits, bill discounting, bank loan and trade credit are
the other sources of short term finance. Along with the mobilization of
funds, policy makers should decide on the capital structure to indicate the
desired mix of equity capital and debt capital.
“Together we are Better”
Please Note:
Answers may be incorrect
Please suggest me if you find any difference or err or
“All the Best for Results Hope for the Best”
4
CAclubindia
