PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT

Question No.1 is compulsory.

Candidates are also required to answer any four from the remaining five questions.
Working notes should form part of the respective answer.
Question 1
(a) M/s. Daksh Ltd is planning to import multipurpose machine from USA at a cost of $15000.
The company can avail loans at 19% Interest per annum with quarterly rests with which it
can import the machine.
However, there is an offer from New York branch of an Indian based bank extending credit
of 180 days at 2% per annum against opening of an irrevocable letter of credit.
Other Information:
Spot rate US$ 1 = ` 75
180 days forward rate US $ 1 = ` 77
Commission charges for letter of credit at 2% per 12 months.
(i) Justify why the offer from the foreign branch should be accepted?
(ii) Based on the present market condition company is not interested to take the risk of
currency fluctuations and wanted to hedge with an additional expenses of ` 30,000,
if so, what is your advise to the company?
Assume 360 days in the year. (8 Marks)
(b) You had purchased a 3 month call option on the Equity shares of Satya Ltd for a premium
of ` 30 each, the current market price of the share is ` 560 and the exercise price is
` 590. You expect the price range between ` 540 to ` 640.
The expected share price of Satya Ltd and related probability is given below:
Expected price (` ) 540 560 580 600 620 640
Probability 0.10 0.15 0.05 0.35 0.20 0.15
Compute the followings:
(i) Expected share price at the end of 3 months,
(ii) Value of call option at the end of 3 months, if the exercise price prevails,
(iii) In case the option is held to its maturity, what will be the expected value of the call
option?
(iv) Find out the price of the shares quoted at the stock exchange to get the value of the
call option as computed in (iii) above. (8 Marks)
(c) What is Net interest position risk and Price risk? (4 Marks)

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 2 FINAL EXAMINATION: MAY, 2022

Answer
(a) (i) Option I (To finance the purchases by availing loan at 19% per annum):
Amount
Cost of equipment ($ 15,000 at US$ 1 = ` 75) ` 11,25,000
Add: Interest at 4.75% I Quarter 53,438
Add: Interest at 4.75% II Quarter (on ` 11,78,438) 55,976
Total outflow in Rupees 12,34,414
Alternatively, interest may also be calculated on compounded
basis, i.e.,
` 1,12,5000 × [1.0475] 2 ` 12,34,413
Option II (To accept the offer from foreign branch):
Amount
Cost of letter of credit at 1 % on US$ 15,000 at US$ 1 = ` 75 ` 11,250
Add: Interest for 180 days (` 11,250 × 19% x 180/360) ` 1,069
(A) ` 12,319
Payment at the end of 180 days:
Cost US$ 15,000
Interest at 2% p.a. [15000 × 2/100 × 180/360] US$ 150
US$ 15,150
Conversion at US$ 1 = ` 77 [15150 x ` 77] (B) ` 11,66,550
Total Cost: (A) + (B) ` 11,78,869
Advise: Option 2 is cheaper by (` 12,34,413 – ` 11,78,869) lakh or ` 55,544. Hence,
the offer may be accepted.
(ii) If company is not interested to take the risk of currency fluctuations and wanted to
hedge with an additional expense of ` 30,000 then it can do so because even taking
forward position is resulting in increased cash outflow by the same amount.
(b) (i) Expected Share Price
= ` 540 X 0.10 + ` 560 X 0.15 + ` 580 X 0.05 + ` 600 X 0.35 + ` 620 X 0.20 + ` 640
X 0.15
= ` 54 + ` 84 + ` 29 + ` 210 + ` 124 + ` 96 = ` 597
(ii) Value of Call Option
= ` 590 - ` 590 = Nil

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 3

(iii) If the option is held till maturity the expected Value of Call Option
Expected Value of call (C) Probability (P) Expected Value of
price (X) Option
` 540 0 0.10 0
` 560 0 0.15 0
` 580 0 0.05 0
` 600 ` 10 0.35 ` 3.50
` 620 ` 30 0.20 ` 6.00
` 640 ` 50 0.15 ` 7.50
Total ` 17.00
Alternatively, it can also be calculated as follows:
Expected Exercise price (E) Probability (P) Expected Value of Option
price (X) CP (X – E) X P
` 540 ` 590 0.10 Not Exercised*
` 560 ` 590 0.15 Not Exercised*
` 580 ` 590 0.05 Not Exercised*
` 600 ` 590 0.35 ` 3.50
` 620 ` 590 0.20 ` 6.00
` 640 ` 590 0.15 ` 7.50
Total ` 17.00
* If the stock price goes below ` 590, option is not exercised at all.
(iv) Price to be quoted at the stock exchange to get the value of the call option
` 590 + ` 17 = ` 607
(c) Net Interest Position Risk: The size of non-paying liabilities is one of the significant
factors contributing towards profitability of banks. Where banks have more earning assets
than paying liabilities, interest rate risk arises when the market interest rates adjust
downwards. Thus, banks with positive net interest positions will experience a reduction in
NII as the market interest rate declines and increases when interest rate rises. Thus, large
float is a natural hedge against the variations in interest rates.
Price Risk: Price risk occurs when assets are sold before their stated maturities. In the
financial market, bond prices and yields are inversely related. The price risk is closely
associated with the trading book, which is created for making profit out of short -term
movements in interest rates.

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 4 FINAL EXAMINATION: MAY, 2022

Banks which have an active trading book should, therefore, formulate policies to limit the
portfolio size, holding period, duration, defeasance period, stop loss limits, marking to
market, etc.
Question 2
(a) Mr. D had invested in three mutual funds (MF) as per the following details:
Particulars MF ‘A’ MF ‘B’ MF ‘C’
Amount of Investment 2,00,000 5,00,000 4,00,000
NAV at the time of purchase 10.00 25.00 20.00
Dividend Yield up to 31.03.2022 3% 5% 4%
NAV as on 31.03.2022 10.50 22.80 20.80
Annualized Yield as on 31.03.2022 9.733% - 11.185% 15%
Assume 1 Year = 365 Days.
Mr. D has misplaced the documents of his investments.
You are required to help Mr. D to find out the following:
(i) Number of units allotted in each scheme,
(ii) Value of his investments as on 31.03.2022,
(iii) Holding period of his investments in number of days as on 31.03.2022
(iv) Dates of original investments
(v) Total Return on investments,
(vi) Assuming past performance of all three schemes will continue for next one year, what
action the investor should take? What will be the expected return for the next one
year after the above action?
(vii) Will your answer as above point no. (vi) changes if the Mutual fund charges exit load
of 5% if the investment is redeemed within one year? If so, advise the investor what
and when the action to be taken to optimise the returns. (8 Marks)
(b) Calculate the value of share from the following Information:
Profit of the company (After tax) ` 560 crores
Equity share capital of the Company ` 1900 crores
Par value of share ` 50 each
Debt ratio (Debt/Debt + Equity) 43%
Long run growth rate of the company 7%
Beta 0.1 (Risk free Interest rate) 9.5%

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 5

Market return 12.6%

Capital expenditure per share ` 53
Depreciation per share ` 45
Increase in working capital ` 4.62 per share
(8 Marks)
(c) Explain the outcomes of Financial Planning. (4 Marks)
Answer
(a) (i) Number of Units in each Scheme

MF ‘A’ ` 2,00,000
= 20,000
` 10.00
MF ‘B’ ` 5,00,000
= 20,000
` 25.00
MF ‘C’ ` 4,00,000
= 20,000
` 20.00
(ii) Value of Investment on 31.03.2022
MF ‘A’ = 20,000 x ` 10.50 ` 2,10,000
MF ‘B’ = 20,000 x ` 22.80 ` 4,56,000
MF ‘C’ = 20,000 x ` 20.80 ` 4,16,000
Total ` 10,82,000

(iii) Yield on each Fund

Capital Yield Dividend Yield Total Yield (%)
MF ‘A’ ` 2,10,000 - ` 2,00,000 ` 6,000 ` 16,000.00 8.00
= ` 10,000
MF ‘B’ ` 4,56,000 - ` 5,00,000 ` 25,000 - ` 19,000.00 -3.80
= - ` 44,000
MF ‘C’ ` 4,16,000 - ` 4,00,000 ` 16,000 ` 32,000.00 8.00
= ` 16,000
Total ` 29,000.00

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 6 FINAL EXAMINATION: MAY, 2022

No. of Days Investment Held

MF ‘A’ MF ‘B’ MF ‘C’
Period of Holding 8.00 − 3.80 8.00
(Days)  365  365  365
9.733 − 11.185 15.00
= 300 Days = 124 Days = 195 Days

(iv) Date of Original Investment 04.06.21 27.11.21 17.09.21

` 29,000.00
(v) Total Yield =  100 = 2.636%
` 11,00,000
(vi) If past of all three schemes will continue for next one year, the investor should redeem
the units of MFs ‘A’ and ‘B’ and invest the proceeds in MF ‘C’. The expected return
next will be 15%.
(vii) If the Mutual funds are charging exit load of 5%, if investment is redeemed within one
year, then investor should get redeemed units of MF ‘B’ now and units of MF ‘A’ after
65 days.
` 1,900crores
(b) No. of Shares = = 38 crores
` 50

PAT
EPS =
No.of shares
` 560crores
EPS = = ` 14.737
38crores
Cost of Equity = R f + ß (Rm – Rf)
= 9.5 + 0.1 (12.6 – 9.5) = 9.81%
FCFE = Net income – [(1-b) (capex – dep) + (1-b) ( ΔWC )]
FCFE = 14.737 – [(1-0.43) (53-45) + (1-0.43) (4.62)]
= 14.737 – [4.56 + 2.6334] = 7.5436

FCFE(1+ g) 7.5436(1.07) 8.0716

Po = = = = ` 287.25
Ke − g 0.0981 − 0.07 0.0281

(c) Outcomes of the financial planning are:

(i) Financial Objectives: Financial objectives are to be decided at the very outset so
that rest of the decisions can be taken accordingly. The objectives need to be
consistent with the corporate mission and corporate objectives.

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 7

(ii) Financial Decision Making: Financial decision making helps in analyzing the
financial problems that are being faced by the corporate and accordingly deciding the
course of action to be taken by it.
(iii) Financial Measures: The financial measures like ratio analysis, analysis of cash flow
statement etc. are used to evaluate the performance of the Company. The selection
of these measures again depends upon the corporate objective.
Question 3
(a) Skylark Systems Ltd. is interested to expand its operations in US for which it requires funds
of $ 20 million, net of issue expenses and floatation costs etc., which amounts to 3% of the
issue size. To finance this project it proposes to issue GDR.
Following factors are considered in pricing the issue:
(i) Expected market price of share at the time of issue of GDR is ` 300 (FV ` 10)
(ii) 3 shares shall underlay each GDR and shall be priced at 10% discount to market
price.
(iii) Expected exchange rate is ` 75/$
(iv) 20% Dividend is expected to be paid for next year with growth rate of 15%
You are required to compute the number of GDRs to be issued and cost of GDR to Skylark
Systems Ltd.
If the company is able to raise the funds in US at the rate of 4% p.a. and the company is
able to repay the loan along with interest from revenues generated from the operations of
US, what is your advise to the company? (8 Marks)
(b) You have been given the following information about Sweccha Ltd.
Sweccha Ltd. Market
Year Average Dividend Average Dividend Return on
Share price per share Index Yield % Govt. bond %
2017 460 30 4060 5 5.5
2018 497 33 4320 6.5 5.5
2019 523 38 4592 4.5 5.5
2020 556 43 4780 6 5.5
2021 589 50 4968 5.5 5.5
(i) Compute the Beta value of the company as at the end of year 2021.
(ii) What is your Observation? (8 Marks)
(c) What are Foreign Currency Convertible Bonds? What are their advantages? (4 Marks)

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 8 FINAL EXAMINATION: MAY, 2022

Answer
(a) Working Notes:
Net Issue Size = $ 20 million
20.00
Gross Issue = = $ 20.619 million
0.97
Issue Price per GDR in ` (300 x 3 x 90%) ` 810
Issue Price per GDR in $ (` 810/ ` 75) $ 10.80
Dividend Per GDR (D 1) = ` 2 x 3 = ` 6.00
Net Proceeds Per GDR = ` 810 x 0.97 = ` 785.70
Number of GDR to be issued
$ 20.619 million
= 1.9092 million
$ 10.80
Cost of GDR
6.00
ke = + 0.15 = 15.76%
785.70
If the company receives an offer from US Bank willing to provide an equivalent amount of
loan with interest rate of 4%, it should accept the offer.
(b) (i) Computation of Beta Value
Calculation of Returns
D1 + (P1 − P0 )
Returns =  100
P0

Year Returns from Sweccha Ltd. Returns from market Index

33+ (497- 460) (4320- 4060)
2018 ×100 = 15.22% ×100 + 6.50% = 12.90%
460 4060
38+ (523- 497) (4592- 4320)
2019 ×100 = 12.88% ×100 + 4.50% = 10.80%
497 4320
43+ (556- 523) (4780- 4592)
2020 ×100 = 14.53% ×100 + 6.00% = 10.09%
523 4592
50+ (589- 556) (4968- 4780)
2021 ×100 = 14.93% ×100 + 5.50% = 9.43%
556 4780

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 9

Computation of Beta
Year Sweccha Ltd. (X) Market Index (Y) XY Y2
2018 15.22% 12.90% 196.34 166.41
2019 12.88% 10.80% 139.10 116.64
2020 14.53% 10.09% 146.61 101.81
2021 14.93% 9.43% 140.79 88.92
Total 57.56% 43.22% 622.84 473.78
57.56
Average Return of Krishna Ltd. = = 14.39%
4
43.22
Average Market Return = = 10.81%
4

Beta (β) =
 XY - nX Y = 622.84 - 4×14.39×10.81
= 0.097
 Y − n(Y )
2
2 473.78 - 4(10.81)2

(ii) Observation
Expected Return (%) Actual Return (%) Action
2017 5.5% + 0.097(12.90% - 5.5%) = 6.22% 15.22% Buy
2018 5.5% + 0.097(10.80% - 5.5%) = 6.01% 12.88% Buy
2019 5.5% + 0.097(10.09% - 5.5%) = 5.95% 14.53% Buy
2020 5.5% + 0.097(9.43% - 5.5%) = 5.88% 14.93% Buy
(c) A type of convertible bond issued in a currency different than the issuer's domestic
currency. In other words, the money being raised by the issuing company is in the form of
a foreign currency. A convertible bond is a mix between a debt and equity instrument. It
acts like a bond by making regular coupon and principal payments, but these bonds also
give the bondholder the option to convert the bond into stock.
Advantages of FCCBs
(i) The convertible bond gives the investor the flexibility to convert the bond into equity
at a price or redeem the bond at the end of a specified period, normally three years if
the price of the share has not met his expectations.
(ii) Companies prefer bonds as it leads to delayed dilution of equity and allows company
to avoid any current dilution in earnings per share that a further issuance of equity
would cause.

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(iii) FCCBs are easily marketable as investors enjoys option of conversion into equity if
resulting to capital appreciation. Further investor is assured of a minimum fixed
interest earnings.
Question 4
(a) Following information is available pertaining to ABC Ltd. which is expected to grow at a
higher rate for 3 years after which growth rate will stabilize at a lower level.
Base year information is -
Revenues EBIT Capital Depreciation
(After Depreciation) Expenditure
` 1,000 Cr. ` 150 Cr. ` 140 Cr. ` 100 Cr.
Information for high growth and stable growth period are as follows:
Stable Growth
Particulars High Growth Stable Growth
Growth in Revenue & EBIT 20% 10%
Growth in Capital 20% Capital Expenditure are offset by
Expenditure and Depreciation Depreciation
Risk free rate 10% 9%
Equity Beta 1.15 1.00
Market Risk Premium 6% 5%
PreTax cost of Debt 13% 12.86%
Debt Equity Ratio 1:1 2:3
Working capital is 25% of Revenue for all time.
Corporate Tax Rate is 30%.
You are requested to find out the value of ABC Ltd. (8 Marks)
(b) A mutual fund made an issue of New Fund Offer (NFO) on 01/01/2021 of 10.00 Lakh Units
of ` 10 each. No entry load was charged. It made the following investments:
Particulars (` )
25,000 Equity Shares of XYZ Ltd., ` 100 each @ ` 320 80,00,000
5% Government Securities 4,00,000
10% NCDs Unlisted 5,00,000
8% Listed Debentures 10,00,000

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 11

During the year, dividends of ` 8.00 lakhs were received on equity shares. Interest on all
types of debt securities were received. On 31st December 2021 equity shares were
appreciated by 15% while listed debentures were quoted at 20% premium.
XYZ Ltd., on 15 th December 2021 in its AGM declared the interim dividend of 10% and
bonus shares at 1:10 with the record date of 28th December 2021.
(i) Find out the NAV per unit as on 31 st December given that the operating expenses
paid during the year amounting to ` 3,00,000.
(ii) Find out the NAV, if the MF had distributed a dividend of, ` 0.50 per unit during the
year to the investors.
(iii) If you are the investor, find out what is the annualised return you have got.
(8 Marks)
(c) What are the benefits of Securitization? (4 Marks)
Answer
(a)
High growth phase: Stable growth phase:
ke 0.10 + 1.15 x 0.06 = 0.169 or 0.09 + 1.0 x 0.05 = 0.14 or
16.9%. 14%.
kd 0.13 x (1 - 0.3) = 0.091 or 0.1286 x (1 - 0.3) = 0.09 or
9.1%. 9%.
Cost of capital 0.5 x 0.169 + 0.5 x 0.091 = 0.6 x 0.14 + 0.4 x 0.09 =
0.13 or 13%. 0.12 or 12%.
Determination of forecasted Free Cash Flow of the Firm (FCFF)
(` in crores)
Yr. 1 Yr. 2 Yr. 3 Terminal Year
Revenue 1200.00 1440.00 1728.00 1900.80
EBIT 180.00 216.00 259.20 285.12
EAT 126.00 151.20 181.44 199.58
Capital Expenditure 48.00 57.60 69.12 -
Less Depreciation
∆ Working Capital 50.00 60.00 72.00 43.20
Free Cash Flow (FCF) 28.00 33.60 40.32 156.38

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 12 FINAL EXAMINATION: MAY, 2022

Alternatively, it can also be computed as follows:

(` in crores)
Yr. 1 Yr. 2 Yr. 3 Terminal Year
Revenue 1200.00 1440.00 1728.00 1900.80
EBIT 180.00 216.00 259.20 235.12
EAT 126.00 151.20 181.44 199.58
Add: Depreciation 120.00 144.00 172.80 190.08
246.00 295.20 354.24 389.66
Less: Capital Exp. 168.00 201.60 241.92 190.08
 WC 50.00 60.00 72.00 43.20
28.00 33.60 40.32 156.38
Present Value (PV) of FCFF during the explicit forecast period is:
FCFF (` in crores) PVF @ 13% PV (` in crores)
28.00 0.885 24.78
33.60 0.783 26.31
40.32 0.693 27.94
` 79.03

156.38
Terminal Value of Cash Flow = = ` 7819 Crore
0.12- 0.10
1
PV of the terminal, value is = ` 7819 Crore x
(1.13)3
= ` 7819 Crore x 0.693 = ` 5418.57 Crore
The value of the firm is = ` 79.03 Crores + ` 5418.57 Crores = ` 5497.60 Crores
(b) (i) In order to find out the NAV, the cash balance at the end of the year is calculated as
follows-
Particulars `
Cash balance in the beginning
(` 100 lakhs – ` 99 lakhs) 1,00,000
Dividend Received 8,00,000
Interest on 5% Govt. Securities 20,000
Interest on 10% NCDs 50,000

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Interest on 8% Debentures 80,000

Interim Dividend 2,50,000
13,00,000
(-) Operating expenses 3,00,000
Net cash balance at the end 10,00,000
Calculation of NAV `
Cash Balance 10,00,000
5% Govt. Securities (at par) 4,00,000
27,500 equity shares @ ` 368 each 1,01,20,000
10% NCDs (Unlisted) at cost 5,00,000
8% Debentures @ 120% 12,00,000
Total Assets 1,32,20,000
No. of Units 10,00,000
NAV per Unit ` 13.22
(ii) Calculation of NAV, if dividend of ` 0.50 is paid –
Net Assets (` 1,32,20,000 – ` 5,00,000) ` 1,27,20,000
No. of Units 10,00,000
NAV per unit ` 12.72
(iii) Annualised Return
13.22-10.00
= ×100 = 32.20%
10.00
Or
[12.72-10.00]+ 0.50
= ×100 = 32.20%
10.00
(c) The benefits of securitization can be viewed from the angle of various parties involved as
follows:
(A) From the angle of originator
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

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financing leading to improved liquidity position which helps in 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 as of debts and
hence the originator earns a spread, resulting in reduced cost of borrowings.
(B) From the angle of investor
Following benefits accrues to the investors of securitized securities.
(i) Diversification of Risk: Purchase of securities backed by different types of
assets provides the diversification of portfolio resulting in reduction of risk.
(ii) Regulatory requirement: Acquisition of asset backed belonging to a particular
industry say micro industry helps banks to meet regulatory requirement of
investment of fund in industry specific.
(iii) Protection against default: In case of recourse arrangement if there is any
default by any third party then originator shall make good the leas t amount.
Moreover, there can be insurance arrangement for compensation for any such
default.
Question 5
(a) M/s. Vasavi Ltd. is considering the takeover of M/s. SKPD Ltd. by the exchange of five new
shares in M/s. Vasavi Ltd. for every eight shares in M/s. SKPD Ltd. The relevant financial
details of the two companies prior to merger announcement are as follows:
Particulars M/s. Vasavi Ltd. M/s. SKPD Ltd.
Profit before tax ( ` crore) 18 20.8
No. of shares (in crore) 20 18
P/E ratio 11 8
Corporate tax rate 30%.
You are required to determine:
a. Market value of both the companies
b. Value of original share holders

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c. Price per share after merger

d. Effect on share price of both the companies. If the directors of Vasavi Ltd. expect
their own pre-merger P/E ratio to be applied to the combined earnings. (8 Marks)
(b) Closing Values of NIFTY Index from 3 rd to 12th day of the month of January 2022 were as
follows:
Days Date Closing Values of NIFTY Index
1 03/01/2022 17626
2 04/01/2022 17805
3 05/01/2022 17925
4 06/01/2022 17746
5 07/01/2022 17813
6 10/01/2022 18003
7 11/01/2022 18056
8 12/01/2022 18212
The simple moving average of NIFTY Index for the month of December 2021 was 17174.
You are required to calculate
(i) The value of exponent for 15 days EMA.
(ii) The exponential moving average (EMA) of NIFTY during the above period.
(Calculations to be done up to 2 decimals only)
(iii) Analyse the buy & sell signal on the basis of your calculations (8 Marks)
(c) Briefly explain:
(a) Compliance risk and
(b) Operational risk (4 Marks)
Answer
(a)
M/s Vasavi Ltd. M/s SKPD Ltd.
Profit before Tax (` in crore) 18.00 20.80
Tax 30% (` in crore) 5.40 6.24
Profit after Tax (` in crore) 12.60 14.56
Earnings per Share 12.60 14.56
= ` 0.63 = ` 0.81
20 18
Price per Share before Merger (EPS x ` 0.63 x 11 = ` 6.93 ` 0.81 x 8 = ` 6.48
P/E Ratio)

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 16 FINAL EXAMINATION: MAY, 2022

a. Market Value of company

M/s Vasavi Ltd. = ` 6.93 x 20 Crore = ` 138.60 crore
M/s SKPD Ltd. = ` 6.48 x 18 Crore = ` 116.64 crore
b. Value of Original Shareholders
After Merger
M/s Vasavi Ltd. M/s SKPD Ltd.
No. of Shares 20 crores 5
18 x = 11.25 crores
8
Combined 31.25 crores
% of Combined Equity Owned 20 11.25
×100 = 64.00% ×100 = 36.00%
31.25 31.25
Value of Original Shareholders ` 255.24 crore x 64.00% ` 255.24 crore x 36%
= ` 163.35 crores = ` 91.89 crores
c. Price per Share after Merger
` 27.16crore
EPS = = ` 0.87 per share
31.25crore
P/E Ratio = 11
Market Value Per Share = ` 0.87 X 11 = ` 9.57
d. Effect on Share Price
M/s Vasavi Ltd.
Gain/loss (-) per share = ` 9.57 – ` 6.93 = ` 2.64
9.57 - 6.93
i.e. ×100 = 0.381 or 38.10%
6.93
 Share price would increase by 38.10%
M/s SKPD Ltd.
5
9.57 x = ` 5.98
8
Gain/loss (-) per share = ` 5.97 – ` 6.48 = (` 0.51)
5.97 - 6.48
i.e.  100 = (0.0787) or (-7.87%)
6.48
 Share Price would decrease by 7.87%.

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 17

(b) (i) Value of Exponent for 15 days EMA

2
= = 0.125
n+ 1

(ii) EMAt = a X Pt + (1 – a) (EMA (t – 1)) Where, a = exponent, P t = Price of today

Date 1 2 3 4 5
Sensex EMA for Previous EMA
day (EMA (t – 1)) 1-2 3 × 0.125 2+4
03/01/2022 17626 17174 452 56.50 17230.50
04/01/2022 17805 17230.50 574.50 71.81 17302.31
05/01/2022 17925 17302.31 622.69 77.84 17380.15
06/01/2022 17746 17380.15 365.85 45.73 17425.88
07/01/2022 17813 17425.88 387.12 48.39 17474.27
10/01/2022 18003 17474.27 528.73 66.09 17540.36
11/01/2022 18056 17540.36 515.64 64.45 17604.82
12/01/2022 18212 17604.82 607.18 75.90 17680.71
(iii) A buy (bullish) signal is generated when actual price line (NIFTY in the give case)
rises through the moving average, while a sell a (bearish) signal is generated when
actual NIFTY level declines through the moving averages. In the case under
consideration the price line of NIFTY never breaches the 15-day EMA line. In-fact it
is hovering around the 15-day EMA line only.
(c) (a) Compliance Risk: Every business needs to comply with rules and regulations. For
example, with the advent of Companies Act, 2013, and continuous updating of SEBI
guidelines, each business organization has to comply with plethora of rules,
regulations and guidelines. Noncompliance leads to penalties in the form of fine and
imprisonment.
However, when a company ventures into a new business line or a new geographical
area, the real problem then occurs. For example, a company pursuing cement
business likely to venture into sugar business in a different state but laws applicable
to the sugar mills in that state are different. So, that poses a compliance risk. If the
company fails to comply with laws related to a new area or industry or sector, it will
pose a serious threat to its survival.
(b) Operational Risk: This type of risk relates to internal risk. It also relates to failure on
the part of the company to cope with day-to-day operational problems. Operational
risk relates to ‘people’ as well as ‘process’. We will take an example to illustrate this.

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 18 FINAL EXAMINATION: MAY, 2022

For example, an employee paying out ` 1,00,000 from the account of the company
instead of ` 10,000.
This is a people as well as a process risk. An organization can employ another person
to check the work of that person who has mistakenly paid ` 1,00,000 or it can install
an electronic system that can flag off an unusual amount.
Question 6
(a) Calculate the Covariance & Correlation Coefficient of the two securities, from the historical
rates of return over the past 10 years.
Years 1 2 3 4 5 6 7 8 9 10
Security 1 15 10 12 8 18 16 20 24 16 14
(Return %)
Security 2 24 20 18 14 22 26 12 28 16 15
(Return %)
(8 Marks)
(b) MPD Ltd. issues a ` 50 Million Floating Rate Loan on July 1, 2018 with resetting of coupon
rate every 6 Months equal to LIBOR + 50 bps.
MPD is interested in an Interest rate Collar Strategy of selling a Floor and buying a cap.
MPD buys the 3 years cap and sell 3 years Floor as per the following details on July 1,
2018:
Principal Amount ` 50 Million
Strike Rate 5% for Floor & 8% for Cap
Reference Rate 6 months LIBOR
Premium NIL, since premium paid for cap = premium received for Floor
The Reset dates & Interest rates p.a., on that dates are:
Reset Date 31/12/2018 30/06/2019 31/12/2019 30/06/2020 31/12/2020 30/06/2021
LIBOR (%) 7.00 8.00 6.00 4.75 4.25 5.25
Using the above data, you are required to determine:
(i) Effective Interest paid out at each six reset dates, (Round off to the nearest rupee)
(ii) Average overall effective rate of interest p.a. (round off to 2 decimals) (8 Marks)
(c) Define Angle Investors, are these only individuals? If not, list the entities.

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 19

OR
Enlist the criteria for an entity to be classified as a Startup entity under the Startup India
Scheme initiated by the Government of India. (4 Marks)
Answer
(a) Calculation of Covariance
Year R1 Deviation Deviation R2 Deviation Deviation Product of
deviations
(R1 - R1 ) (R1 - R1) 2 (R 2 - R 2 ) (R2 - R2 )2
1 15 -0.3 0.09 24 4.5 20.25 -1.35
2 10 -5.3 28.09 20 0.5 0.25 -2.65
3 12 -3.3 10.89 18 -1.5 2.25 4.95
4 8 -7.3 53.29 14 -5.5 30.25 40.15
5 18 2.7 7.29 22 2.5 6.25 6.75
6 16 0.7 0.49 26 6.5 42.25 4.55
7 20 4.7 22.09 12 -7.5 56.25 -35.25
8 24 8.7 75.69 28 8.5 72.25 73.95
9 16 0.7 0.49 16 -3.5 12.25 -2.45
10 14 -1.3 1.69 15 -4.5 20.25 5.85
153 Σ= 200.10 195 Σ=262.50 94.50
153
𝑅1 = =15.30
10
195
𝑅2 = =19.50
10
N

 [R 1 − R 1 ] [R 2 − R 2 ]
Covariance = i =1
= 94.50/10 = 9.45
N
Standard Deviation of Security 1

(R1 - R1) 2
σ1 =
N
200.10
σ1 = = 20.01
10
σ1 = 4.47

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 20 FINAL EXAMINATION: MAY, 2022

Standard Deviation of Security 2

(R 2 - R 2 ) 2
σ2 =
N

262.50
σ2 = = 26.25
10
σ2 = 5.12
Alternatively, Standard Deviation of securities can also be calculated as follows:
Year R1 R12 R2 R22
1 15 225 24 576
2 10 100 20 400
3 12 144 18 324
4 8 64 14 196
5 18 324 22 484
6 16 256 26 676
7 20 400 12 144
8 24 576 28 784
9 16 256 16 256
10 14 196 15 225
153 2541 195.00 4065

Standard deviation of security 1:

σ1 =
N∑R12 - (∑R1)2
N2

10×2541-(153)2 25410-23409
σ1 = 2
=
10 100

2001
σ1= = 20.01
100

σ1 = 4.47

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 PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 21

Standard deviation of security 2:

2 =
N R − ( R
2
2 2)
2

N2

10  4065-(195)2 40650- 38025

σ2 = 2
=
10 100

2625
σ2 = = 26.25
100
σ2 = 5.12
Correlation Coefficient
Cov 9.45
r12 = = = 0.413
12 4.47×5.12

(b) (i) The pay-off of each leg shall be computed as follows:

Cap Receipt
Max {0, [Notional principal x (LIBOR on Reset date – Cap Strike Rate) x (No. of days
in settlement period/ 365)}
Floor Pay-off
Max {0, [Notional principal x (Floor Strike Rate – LIBOR on Reset date) x (No. of days
in settlement period/ 365)}
Statement showing effective interest on each payment date
Reset Date LIBOR Date of Days Interest Cap Floor Effective
(%) Payment Payment (`) Receipts Pay-off Interest
LIBOR+0.50% (`) (`)
31-12-2018 7.00 30-06-2019 181 18,59,589 0 0 18,59,589
30-06-2019 8.00 31-12-2019 184 21,42,466 0 0 21,42,466
31-12-2019 6.00 30-06-2020 182 16,16,120 0 0 16,16,120
30-06-2020 4.75 31-12-2020 184 13,19,672 0 62,842 13,82,514
31-12-2020 4.25 30-06-2021 181 11,77,740 0 1,85,959 13,63,699
30-06-2021 5.25 31-12-2021 184 14,49,315 0 0 14,49,315
Total 1096 98,13,703

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 22 FINAL EXAMINATION: MAY, 2022

(ii) Average Annual Effective Interest Rate shall be computed as follows:

98,13,703 365
× ×100 = 6.54%
5,00,00,000 1096
(c) Despite being a country of many cultures and communities traditionally inclined to business
and entrepreneurship, India still ranks low on comparative ratings across entrepreneurship,
innovation and ease of doing business. The reasons are obvious. These in clude our old
and outdated draconian rules and regulations which provides a hindrance to our business
environment for a long time. Other reasons are red-tapism, our time-consuming
procedures, and lack of general support for entrepreneurship. Off course, things are
changing in recent times.
Angle Investors invest in small startups or entrepreneurs. Often angle investors are among
the entrepreneur’s family and friends.
Though angel investors usually represent individuals, the entity that actually provides th e
fund may be a limited liability company, a business, a trust or an investment fund, among
many other kinds of vehicles.
OR

As per Government Notification, an entity shall be considered as a Startup:

i. Upto a period of ten years from the date of incorporation/ registration, if it is
incorporated as a private limited company (as defined in the Companies Act, 2013)
or registered as a partnership firm (registered under section 59 of the Partnership
Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act,
2008) in India.
ii. Turnover of the entity for any of the financial years since incorporation/ registration
has not exceeded one hundred crore rupees.
iii. Entity is working towards innovation, development or improvement of products or
processes or services, or if it is a scalable business model with a high potential of
employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall
not be considered a ‘Startup’.

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