58804bos47896finalnew p2 PDF
58804bos47896finalnew p2 PDF
58804bos47896finalnew p2 PDF
Answer
(a) (i) Before Merger
A Ltd. B Ltd.
Earning after tax (`) 10,00,000 2,50,000
No. of shares outstanding 4,00,000 2,00,000
EPS ` 2.50 ` 1.25
Current Market Price/Share ` 50 ` 20
P/E Ratio 20 16
(ii) If B Ltd.’s P/E Ratio is 10
Then, it’s Current Market Price = 10 x ` 1.25 = ` 12.50
Exchange Ratio = 12.50 : 50 i.e. 1 share of A Ltd. for every 4 shares of B Ltd.
No. of shares to be issued = 50,000
A Ltd. Post-Merger EPS
Post-Merger Earning (10,00,000 + 2,50,000) ` 12,50,000
No. of Equity Shares after Merger (4,00,000 + 50,000) 4,50,000
EPS ` 2.78
(iii) Calculation of Exchange Ratio for A Ltd.’s pre-merger and post-merger EPS to
be the same
= Total earnings/Pre-merger EPS of A Ltd.
= `12,50,000/` 2.50 = 5,00,000 shares
Now, number of shares to be issue to B Ltd. = 5,00,000 – 4,00,000 = 1,00,000 shares
Therefore, the share exchange ratio is 1,00,000 : 2,00,000 or 1:2. It means for every
two shares in B Ltd., one share should be issued from A Ltd.
(b) Final settlement amount shall be computed by using formula:
(N)(RR - FR)(dtm / DY)
=
[1+ RR(dtm / DY)]
Where,
N = the notional principal amount of the agreement;
RR = Reference Rate for the maturity specified by the contract prevailing on the contract
settlement date;
(` 50crore)(-0.005)(0.25) - 6,25,000
= = = - ` 6,13,046
1.0195 1.0195
Thus P Ltd. will pay banker a sum of ` 6,13,046 and actual interest rate for P Ltd. shall
be as follows:
Interest on loan @7.80% for 3 months ` 97,50,000
Add: Amount paid to bank ` 6,13,046
Net Amount ` 1,03,63,046
Effective Interest Rate 8.29%
(` 1,03,63,046/50 crore x 12/3 x 100)
15,15,583 12
Annual average return (%) = × × 100 = 73.33 %
2,00,000 124
Mr. Ashish Plan C – Growth
Particulars (Amount in `)
Redemption value 20,000 82.07 16,41,400.00
Less: Security Transaction Tax (S.T.T) is 0.2% 3282.80
Net amount received 16,38,117.20
Less: Short term capital gain tax @ 10% 0.00
Net of tax 16,38,117.20
Less: Investment 2,00,000.00
Net gain 14,38,117.20
14,38,117.20 12
Annual average return (%) × × 100 = 69.59 %
2,00,000 124
(ii) Mr. Amit (Bonus Plan) earns the highest effective yield per annum of 73.33% and the
difference to his nearest investor Mr. Ashish is 3.74 (73.33 – 69.59%).
Note: Alternatively, figure of * and † can be taken as without net of Tax because, as per
Proviso 5 of Section 48 of IT Act, no deduction of STT shall be allowed in computation of
Capital Gain.
In such case:
Mr. Arun Plan A – Short term capital gains tax would be Rs 553.10. Accordingly Net of tax
will be ` 13,14,895.10 and the net gain would be Rs 11,14,895.10.
Mr. Amit Plan B – Bonus Plan – Short term capital gains tax would be Rs 4,545. Accordingly
Net of tax will be `17,15,508 and the net gain would be Rs 15,15,508.
(b) (i) Future Price = Spot + Cost of Carry – Dividend
= ` 125 + (` 125 x 0.08) – 4 = ` 131
Price of one future contract = 1000 share x ` 131 = ` 1,31,000
(ii) Price decrease by 6 %
Market Price = 125 x 94% = 117.50
Then, price of one future contract
= ` 117.50 + (` 117.50 x 0.08) – 4 = ` 122.90
= ` 122.90 x 1000 = ` 1,22,900
(iii) If the investor has taken a long position, decrease in price will result in loss for the
investor.
Amount of loss will be:
` 1, 31,000 - ` 1,22,900 = ` 8,100
(c) Originator (entity which sells assets collectively to Special Purpose Vehicle) achieves the
following benefits from securitization:
(i) Off – Balance Sheet Financing: When loan/receivables are securitized, it releases
a portion of capital tied up in these assets resulting in off Balance Sheet financing
leading to improved liquidity position which helps expanding the business of the
company.
(ii) More specialization in main business: By transferring the assets, the entity could
concentrate more on core business as servicing of loan is transferred to SPV. Further,
in case of non-recourse arrangement even the burden of default is shifted.
(iii) Helps to improve financial ratios: Especially in case of Financial Institutions and
Banks, it helps to manage Capital –To-Weighted Asset Ratio effectively.
(iv) Reduced borrowing Cost: Since securitized papers are rated due to credit
enhancement even they can also be issued at reduced rate in case of debts and,
hence, the originator earns a spread, resulting in reduced cost of borrowings.
Question 3
(a) AB Ltd.'s equity shares are presently selling at a price of ` 500 each. An investor is
interested in purchasing AB Ltd.'s shares. The investor expects that there is a 70% chance
that the price will go up to ` 650 or a 30% chance that it will go down to ` 450, three
months from now. There is a call option on the shares of the firm that can be exercised
only at the end of three months at an exercise price of ` 550.
Calculate the following:
(i) If the investor wants a perfect hedge, what combination of the share and option should
he select ?
(ii) Explain how the investor will be able to maintain identical position regardless of the
share price.
(iii) If the risk-free rate of return is 5% for the three months period, what is the value of
the option at the beginning of the period ?
(iv) What is the expected return on the option? (8 Marks)
(b) Closing values of BSE Sensex from 6 th to 17th day of the month of January of the year 20xx
were as follows:
(b) If price of share comes down to ` 450 then value of purchased share will be:
Sale Proceeds of Investment (0.50 x ` 450) ` 225
(iii) The Value of Option, say, P at the beginning of the period shall be computed as
follows:
(` 250 – P) 1.05 = ` 225
` 262.50 – 1.05P = ` 225
` 37.5 = 1.05P
P = ` 35.71
(iv) Expected Return on the Option
Expected Option Value = (` 650 – ` 550) × 0.70 + ` 0 × 0.30 = `70
70- 35.71
Expected Rate of Return = ×100 = 96.02%
35.71
(b)
Date 1 2 3 4 5
Sensex EMA for EMA
Previous day 1-2 3×0.064 2+4
6 34522 35000 (478) (30.592) 34969.408
7 34925 34,969.408 (44.408) (2.842) 34966.566
10 35222 34966.566 255.434 16.348 34982.914
11 36000 34982.914 1017.086 65.094 35048.008
12 36400 35048.008 1351.992 86.527 35134.535
13 37000 35134.535 1865.465 119.390 35253.925
17 38000 35253.925 2746.075 175.749 35429.674
Conclusion – The market is bullish. The market is likely to remain bullish for short term to
medium term if other factors remain the same. On the basis of this indicator (EMA) the
investors/brokers can take long position.
(c) Startup India scheme was initiated by the Government of India on 16 th of January, 2016.
The definition of startup was provided which is applicable only in case of Government
Schemes.
❖ Startup means an entity, incorporated or registered in India (at the date of
initiation of the scheme):
• Not prior to five years,
• With annual turnover not exceeding `25 crore in any preceding financial year,
and
• Working towards innovation, development, deployment or commercialization of
new products, processes or services driven by technology or intellectual
property.
Provided that such entity is not formed by splitting up, or reconstruction, of a business
already in existence. Provided also that an entity shall cease to be a Startup if its
turnover for the previous financial years has exceeded ` 25 crore or it has completed
5 years from the date of incorporation/ registration. Provided further that a Startup
shall be eligible for tax benefits only after it has obtained certification from the Inter -
Ministerial Board, setup for such purpose.
Question 4
(a) Following information is available of M/s. TS Ltd.
(` in crores)
PBIT 5.00
Less : Interest on Debt (10%) 1.00
PBT 4.00
Less: Tax @ 25% 1.00
PAT 3.00
No. of outstanding shares of ` 10 each 40 lakh
EPS (`) 7.5
Market price of share (`) 75
P/E ratio 10 Times
TS Ltd. has an undistributed reserves of ` 8 crores. The company requires ` 3 crores for
the purpose of expansion which is expected to earn the same rate of return on capital
employed as present. However, if the debt to capital employed ratio is higher than 35%,
then P/E ratio is expected to decline to 8 Times and rise in the cost of additional debt to
14%. Given this data which of the following options the company would prefer, and why?
Option (i) : If the required amount is raised through debt, and
Option (ii) : If the required amount is raised through equity and the new shares will be
issued at a price of ` 25 each. (8 Marks)
(b) Following information relates to M/s A Lt d. which is a manufacturing-cum-exporting unit.
It is exporting some electronic components to Japan, USA and Europe on 90 days credit
terms:
PBIT 5
ROCE 22.73%
(2) Revised PBIT
Existing Capital Employed 22
Additional 3
ROI 22.73%
Revised PBIT 5.6825
(3) New Debt/Equity
Existing Debt 10
Additional Under Option (i) 3
Total Debt 13
Total Equity 12
13
New Debt to Capital Employed Ratio = = 0.52
25
So, P/E Ratio to be reduced to 8 times
(4) Debt to Capital Employed Ratio in Option (ii)
10
= = 0.40
25
(f) Export of the product in the coming year will decrease to 1.5 million units in case the
company does not open subsidiary company in India, in view of the presence of
competing MNCs that are in the process of setting up their subsidiaries in India.
(g) Applicable Corporate Income Tax rate is 30%.
(h) Required rate of return for such project is 12%.
Assume that there will be no variation in the exchange rate of two countries, all profits will
be repatriated and there will be no withholding tax.
Estimate the Net Present Value (NPV) of the proposed project in India.
Present Value Interest Factors (PVIF) @ 12% for 5 years are as under:
Year: 1 2 3 4 5
PVIF: 0.8929 0.7972 0.7118 0.6355 0.5674
(Compute your workings to 4 decimals) (8 Marks)
(c) Discuss briefly the key decisions which fall within the scope of financial strategy.
(4 Marks)
Answer
(a) Calculation of expected return on market portfolio (R m)
Investment Cost (`) Dividends (`) Capital Gains (`)
Shares A 16,000 1600 400
Shares B 20,000 1600 1000
Shares C 32,000 1600 12,000
PSU Bonds 68,000 6800 –3,400
1,36,000 11,600 10,000
11,600 + 10,000
Rm = × 100 = 15.88%
1,36,000
Calculation of expected rate of return on individual security:
Security
Shares A 12 + 0.9 (15.88 – 12.0) = 15.49%
Shares B 12 + 0.8 (15.88 – 12.0) = 15.10%
Shares C 12 + 0.6 (15.88 – 12.0) = 14.33%
PSU Bonds 12 + 0.4 (15.88 – 12.0) = 13.55%
(b) Financial Analysis whether to set up the manufacturing units in India or not may be carried
using NPV technique as follows:
I. Incremental Cash Outflows
$ Million
Cost of Plant and Machinery 500.00
Working Capital 100.00
Saving of existing Working Capital employed in Export Business (20.00)
580.00
II. Incremental Cash Inflow after Tax (CFAT)
(a) Generated by investment in India for 5 years
$ Million
Sales Revenue (5 Million x $100) 500.00
Less: Costs
Variable Cost (5 Million x $25) 125.00
Fixed Cost 40.00
Depreciation ($500Million/5) 100.00
EBIT 235.00
Taxes@30% 70.50
EAT 164.50
Add: Depreciation 100.00
CFAT (1-5 years) 264.50
Cash flow at the end of the 5 years (Release of Working 80.00
Capital)
(b) Cash generation by exports
$ Million
Sales Revenue (1.5 Million x $100) 150.00
Less: Variable Cost (1.5 Million x $50) 75.00
Contribution before tax 75.00
Tax @ 30% 22.50
CFAT (1-5 years) 52.50
Stock B