Mock Test Paper - Series I: March, 2025

Date of Paper: 12th March, 2025

Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 2: ADVANCED FINANCIAL MANAGEMENT
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (a)
2. Option (b)
3. Option (c)
4. Option (c)
5. Option (a)
6. Option (d)
7. Option (c)
8. Option (c)
9. Option (b)
10. Option (a)
11. Option (a)
12. Option (b)
13. Option (b)
14. Option (b)
15. Option (a)

ANSWERS OF PART – II : DESCRIPTIVE QUESTIONS

1. (a) (i) Portfolio Beta
0.20 x 0.40 + 0.50 x 0.50 + 0.30 x 1.10 = 0.66
(ii) Residual Variance
To determine Residual Variance first of all we shall compute the
Systematic Risk as follows:

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 β2A × σ M
2
= (0.40)2(0.01) = 0.0016

βB2 × σ M2 = (0.50)2(0.01) = 0.0025

β2C × σ M2 = (1.10)2(0.01) = 0.0121

Residual Variance
A 0.015 – 0.0016 = 0.0134
B 0.025 – 0.0025 = 0.0225
C 0.100 – 0.0121 = 0.0879
(iii) Portfolio variance using Sharpe Index Model
Systematic Variance of Portfolio = (0.10)2 x (0.66)2 = 0.004356
Unsystematic Variance of Portfolio = 0.0134 x (0.20)2 + 0.0225 x (0.50)2
+ 0.0879 x (0.30)2 = 0.014072
Total Variance = 0.004356 + 0.014072 = 0.018428
(iv) Portfolio variance on the basis of Markowitz Theory
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= (wA x wAx σ A ) + (wA x wBxCovAB) + (wA x wCxCovAC) + (wB x wAxCovAB) +
2
(wB x wBx σ B ) + (wB x wCxCovBC) + (wC x wAxCovCA) + (wC x wBxCovCB) +
2
(wC x wCx σ c )

= (0.20 x 0.20 x 0.015) + (0.20 x 0.50 x 0.030) + (0.20 x 0.30 x 0.020)

+ (0.20 x 0.50 x 0.030) + (0.50 x 0.50 x 0.025) + (0.50 x 0.30 x 0.040)
+ (0.30 x 0.20 x 0.020) + (0.30 x 0.50 x 0.040) + (0.30 x 0.30 x 0.10)
= 0.0006 + 0.0030 + 0.0012 + 0.0030 + 0.00625 + 0.0060 + 0.0012 + 0.0060
+ 0.0090
= 0.0363
(b) The standard deviation of the daily change in the investment in each asset is
` 2,00,000 i.e. 2 lakhs. The variance of the portfolio’s daily change is
V = 22 + 22 + 2 x 0.3 x 2 x 2 = 10.4

σ (Standard Deviation) = 10.4 = ` 3.22 lakhs

Alternatively, it can also be computed as follows:

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 = (1)2(0.50)2 + (1)2(0.50)2 + 2(1)(1)(0.3)(0.50)(0.50)
= 0.25 + 0.25 + 0.15 = 0.65%
σ (Standard Deviation) = 0.65 = 0.80623%

σ (Standard Deviation) in Amount = ` 400 lakhs x 0.80623% = ` 3.22 lakhs

Accordingly, the standard deviation of the 10-day change is

` 3.22 lakhs x 10 = ` 10.18 lakh

From the Normal Table we see that z score for 1% is 2.33. This means that 1%
of a normal distribution lies more than 2.33 standard deviations below the mean.
The 10-day 99 percent value at risk is therefore
2.33 × `10.18 lakh = ` 23.72 lakh
(c) Pricing of securitized instruments is an important aspect of securitization. While
pricing the instruments, it is important that it should be acceptable to both
originators as well as to the investors. On the same basis pricing of securities
can be divided into following two categories:
(i) From Originator’s Angle
From originator’s point of view, the instruments can be priced at a rate at
which originator has to incur an outflow and if that outflow can be
amortized over a period of time by investing the amount raised through
securitization.
(ii) From Investor’s Angle
From an investor’s angle security price can be determined by discounting
best estimate of expected future cash flows using rate of yield to maturity
of a security of comparable security with respect to credit quality and
average life of the securities.
2. (a) Calculation of NPV
NPV = - 20,00,00,000 + 4,00,000 x 300 x PVF (12%, 1) + 6,00,000 x 300
x PVF (12%, 2) + 6,00,000 x 300 x PVF (12%, 3)
= - 20,00,00,000 + 10,71,60,000 + 14,34,60,000 + 12,81,60,000
= 37,87,80,000 – 20,00,00,000
= ` 17,87,80,000

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Measurement of sensitivity is as follows:
(i) Sales Price
Let the sale price/Unit be S so that the project would break even with 0
NPV.
∴ 20,00,00,000 = 4,00,000 x (S – 500) x PVF (12%, 1) + 6,00,000 x (S –
500) x PVF (12%, 2) + 6,00,000 x (S – 500) x PVF (12%, 3)
S – 500 = 20,00,00,000/12,62,600
S – 500 = ` 158.40
S = ` 658.40 which represents a fall of (800-658.40)/800
Or 0.177 or 17.70%
(ii) Unit Cost
Let the Cost/Unit be C so that the project would break even with 0 NPV
with sales price = ` 800.
∴ 20,00,00,000 = 4,00,000 x (800 – C) x PVF (12%, 1) + 6,00,000 x
(800 – C) x PVF (12%, 2) + 6,00,000 x (800 – C) x PVF (12%, 3)
800 – C = 20,00,00,000/12,62,600
800 – C = ` 158.40
C = ` 641.60 which represents an increase of (641.60 - 500)/500 Or
0.2832or 28.32%
Or
If sale price = ` 800.00 the cost price required to give a margin of
` 158.40 i.e., (` 800 – ` 158.40) or ` 641.60 which would represent a
641.60 − 500
rise of 28.32% i.e., x 100
500
(iii) Sales volume
The requisite percentage fall is: -
17,87,80,000/37,87,80,000 × 100 = 47.20%
(iv) Since PV of inflows remains at ` 37,87,80,000 the initial outlay must also
be the same.
∴ Percentage rise = 17,87,80,000/20,00,00,000 × 100 = 89.39%.

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(b) (i) Equilibrium price of Equity using CAPM
= 9% + 1.20(13% - 9%)
= 9% + 4.80%= 13.80%
D1 2.00(1.07) 2.14
P= = = = ` 31.47
k e - g 0.138- 0.07 0.068

(ii) New Equilibrium price of Equity using CAPM

= 11% + 1.3(15% - 11%)
= 11% + 5.2%= 16.20%
D1 2.00(1.10)
P= = = ` 35.48
k e - g 0.162 − 0.10

(c) The cost-of-carry model for Futures Contract Pricing, is as under: -

Future price = Spot price + Carrying cost – Returns (dividends, etc.)
This is also called as Theoretical minimum price or arbitrage free price.
The difference between the prevailing spot price of an asset and the futures
price is known as the Basis, i.e.,
Basis = Spot price – Futures price
In a normal market, the spot price is less than the futures price (which includes
the full cost-of-carry) and accordingly the basis would be negative. Such a
market, in which the basis is decided solely by the cost-of-carry is known as a
contango market.
Basis can become positive, i.e., the spot price can exceed the futures price only
if there are factors other than the cost of carry to influence the futures price. In
case this happens, then basis becomes positive and the market under such
circumstances is termed as a backwardation market or inverted market.

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3. (a) (i) NAV of the Fund.
3,94,000 + 4,82,60,000 + 52,88,000 + 13,50,34,000 + 15,00,000
=
8,00,000
19,04,76,000
= = ` 238.095 rounded to ` 238.10
8,00,000
50,00,100
(ii) (A) No. of units to be issued to Mr. X = = 21000
238.10
(B) No. of shares of E Ltd. to be purchased:
Fund received from Mr. X ` 50,00,100
Less: - Position of cash to be maintained (` 4,76,000)
Amount of cash available for acquisition of
` 45,24,100
shares of E. Ltd.
Price per share of E Ltd. ` 25.00
Number of shares to be acquired (45,24,100/25) 1,80,964
(iii) On 2nd April 2023, the NAV of fund will be as follows:
Shares No. of shares Price Amount (`)
A Ltd. 20000 20.30 4,06,000
B Ltd. 100000 513.70 5,13,70,000
C Ltd. 20000 290.80 58,16,000
D Ltd. 200000 671.90 13,43,80,000
E Ltd. 240964 44.00 1,06,02,416
Cash 4,76,000
20,30,50,416
20,30,50,416
NAV as on 2nd April 2023 = = ` 247.32 per unit
8,21,000
(b) The levered beta of the company will be 1.8[1+(1-0.3)*40/60)] = 2.64
The adjusted EBITDA would be ` 90 crore – ` 10 crore – ` 20 crore = ` 60 crore
The EV will be multiple of 5 on the 60 obtained above = ` 300 crore
The Cost of equity in accordance with CAPM = Rf + β (Rm – Rf)
= 5% + 2.64 (11% - 5%) = 20.84%
The WACC = Cost of Equity + Cost of Debt

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 = 20.84 (60/100) + 8.40 (40/100) = 15.864
Finally, the future cash flows can be discounted at the WACC obtained above as
under –
Y1 Y2 Y3
Future Cash flows (` crore) 100 120 150
Discount factor (` crore) 0.863 0.745 0.643
PVs of cash flows (` crore) 86.30 89.40 96.45
Value of Firm (` crore) 272.15

(c) Either
The Dow Theory’s purpose is to determine where the market is and where is it
going, although not how far or high. The theory, in practice, states that if the
cyclical swings of the stock market averages are successively higher and the
successive lows are higher, then the market trend is up and a bullish market
exists. Contrarily, if the successive highs and successive lows are lower, then
the direction of the market is down and a bearish market exists.
The Dow Theory is based upon the movements of two indices, constructed by
Charles Dow, Dow Jones Industrial Average (DJIA) and Dow Jones
Transportation Average (DJTA).
The movements of the market are divided into three classifications, all going at
the same time:-
(i) the primary movement,
(ii) the secondary movement, and
(iii) the daily fluctuations.
The primary movement is the main trend of the market, which lasts from one
year to 36 months or longer. This trend is commonly called bear or bull market.
The secondary movement of the market is shorter in duration than the primary
movement and is opposite in direction. It lasts from two weeks to a month or
more.
The daily fluctuations are the narrow movements from day-to-day.
OR
Markowitz has formalized the risk return relationship and developed the concept
of efficient frontier using the Mean-Variance Dominance Principle. For selection

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 of a portfolio, comparison between combinations of portfolios is essential. As a
rule, a portfolio is dominating another portfolio in terms of mean and variance if
there is another portfolio with:
(a) A lower expected value of return and same or higher standard deviation
(risk).
(b) The same or higher standard deviation (risk) but a lower expected return.
Markowitz has defined the diversification as the process of combining assets
that are less than perfectly positively correlated in order to reduce portfolio risk
without sacrificing any portfolio returns. If an investors’ portfolio is not efficient
he may:
(i) Increase the expected value of return without increasing the risk.
(ii) Decrease the risk without decreasing the expected value of return, or
(iii) Obtain some combination of increase of expected return and decrease
risk.
4. (a) 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 50.00
Release of existing Working Capital (15.00)
535.00

II. Incremental Cash Inflow after Tax (CFAT)

(a) Generated by investment in India for 5 years
$ Million
Sales Revenue (5 Million x $80) 400.00
Less: Costs
Variable Cost (5 Million x $20) 100.00
Fixed Cost 30.00
Depreciation ($500Million/5) 100.00
EBIT 170.00

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 Taxes @35% 59.50
EAT 110.50
Add: Depreciation 100.00
CFAT (1-5 years) 210.50

(b) Cash flow at the end of the 5 years (Release of Working Capital)
35.00
(c) Cash generation by exports (Opportunity Cost)
$ Million
Sales Revenue (1.5 Million x $80) 120.00
Less: Variable Cost (1.5 Million x $40) 60.00
Contribution before tax 60.00
Tax@35% 21.00
CFAT (1-5 years) 39.00
(d) Additional CFAT attributable to Foreign Investment
$ Million
Through setting up subsidiary in India 210.50
Through Exports in India 39.00
CFAT (1-5 years) 171.50
III. Determination of NPV
Year CFAT ($ Million) PVF@12% PV ($ Million)
1-5 171.50 3.6048 618.2232
5 35 0.5674 19.8590
638.0822
Less: Initial Outflow 535.0000
103.0822
Since NPV is positive the proposal should be accepted.
(b)
Shares No. of Market Price × (2) % to ß (x) wx
shares of Per Share (` total
(lakhs) (1) (2) lakhs) (w)
A Ltd. 3.00 500.00 1500.00 0.30 1.40 0.42
B Ltd. 4.00 750.00 3000.00 0.60 1.20 0.72

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C Ltd. 2.00 250.00 500.00 0.10 1.60 0.16
5000.00 1.00 1.30

(1) Portfolio beta 1.30

(2) Required Beta 0.91
Let the proportion of risk free securities for target beta 0.91 = p
0.91 = 0 × p + 1.30 (1 – p)
p = 0.30 i.e. 30%
Shares to be disposed off to reduce beta (5000 × 30%) ` 1,500 lakh and
Risk Free securities to be acquired.
(3) Number of shares of each company to be disposed off

Shares % to total Proportionate Market No. of

(w) Amount (` Price Per Shares
lakhs) Share (Lakh)
A Ltd. 0.30 450.00 500.00 0.90
B Ltd. 0.60 900.00 750.00 1.20
C Ltd. 0.10 150.00 250.00 0.60

(4) Number of Nifty Contract to be sold

(1.30-0.91) × 5000 lakh
= 120 contracts
8,125 × 200

(5) 2% rises in Nifty is accompanied by 2% x 1.30 i.e. 2.6% rise for portfolio of
shares

` Lakh
Current Value of Portfolio of Shares 5000
Value of Portfolio after rise 5130
Mark-to-Market Margin paid (8125 × 0.020 × ` 200 × 120) 39
Value of the portfolio after rise of Nifty 5091
% change in value of portfolio (5091 – 5000)/ 5000 1.82%
% rise in the value of Nifty 2%
Beta 0.91

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5. (a) Market price per share (MPS) = EPS X P/E ratio or P/E ratio = MPS/EPS
(i) Determination of EPS, P/E ratio, ROE and BVPS of BA Ltd. and DA Ltd.
BA Ltd. DA Ltd.
Earnings After Tax (EAT) ` 2,10,000 ` 99,000
No. of Shares (N) 100000 80000
EPS (EAT/N) ` 2.10 ` 1.2375
Market price per share (MPS) 40 15
P/E Ratio (MPS/EPS) 19.05 12.12
Equity Funds (EF) ` 12,00,000 ` 8,00,000
BVPS (EF/N) 12 10
ROE (EAT/EF) × 100 17.50% 12.37%

(ii) Estimation of growth rates in EPS for BA Ltd. and DA Ltd.

Retention Ratio (1-D/P ratio) 0.6 0.4
Growth Rate (ROE × Retention Ratio) 10.50% 4.95%
(iii) Justifiable equity shares exchange ratio
(a) Intrinsic value = ` 20 / ` 40 = 0.5:1 (upper limit)
based
(b) Market price = MPSDA/MPSBA = ` 15 / ` 40 = 0.375:1(lower limit)
based

Since, BA Ltd. has a higher EPS, ROE, P/E ratio and even higher EPS
growth expectations, the negotiable terms would be expected to be closer
to the lower limit, based on the existing share prices.
(iv) Calculation of Post merger EPS and its effects
Particulars BA Ltd. DA Ltd. Combined
EAT (`) (i) 2,10,000 99,000 3,09,000
Share outstanding (ii) 100000 80000 132000*
EPS (`) (i) / (ii) 2.1 1.2375 2.341
EPS Accretion (Re.) 0.241 (0.301***)
(Dilution)

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 (v) Estimation of Post merger Market price and other effects
Particulars BA Ltd. DA Ltd. Combined
EPS (`) (i) 2.1 1.2375 2.341
P/E Ratio (ii) 19.05 12.12 19.05
MPS (`) (i) / (ii) 40 15 44.6
MPS Accretion (`) 4.6 2.84***

* Shares outstanding (combined) = 100000 shares + (0.40 × 80000) = 132000

shares
** EPS claim per old share = ` 2.34 × 0.4 ` 0.936
EPS dilution = ` 1.2375 – ` 0.936 ` 0.3015

***S claim per old share (` 44.60 × 0.4) ` 17.84

Less: MPS per old share ` 15.00
` 2.84
(b) (i) TM will make a profit of 25 basis points since a 6X9 FRA is a contract on
3-month interest rate in 6 months, which turns out to be 5.50% (higher
than FRA price).
(ii) The settlement amount shall be calculated by using the following formula:
N(RR - FR )(dtm / 360)
1+ RR(dtm / 360)

Where
N = Notional Principal Amount
RR = Reference Rate
FR = Agreed upon Forward Rate
Dtm = FRA period specified in days.
Accordingly:
100crore(5.50% − 5.25%)(90 / 360)
= ` 6,16,523
1 + 0.055(90 / 360)
Hence there is profit of ` 6,16,523 to TM Fincorp.

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6. (a)
Date 1 2 3 4 5
Sensex EMA for EMA
Previous day 1-2 3×0.062 2+4
6 14522 15000 (478) (29.636) 14970.364
7 14925 14970.364 (45.364) (2.812) 14967.55
10 15222 14967.55 254.45 15.776 14983.32
11 16000 14983.32 1016.68 63.034 15046.354
12 16400 15046.354 1353.646 83.926 15130.28
13 17000 15130.28 1869.72 115.922 15246.202
17 18000 15246.202 2753.798 170.735 15416.937

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.
(b) Option I (To finance the purchases by availing loan at 18% per annum):
Cost of equipment ` in lakhs
3400 lakh yen at `100 = 340 yen 1,000.00
Add: Interest at 4.5% I Quarter 45.00
Add: Interest at 4.5% II Quarter (on `1045 lakhs) 47.03
Total outflow in Rupees 1,092.03
Alternatively, interest may also be calculated on compounded
basis, i.e.,
` 1000 × [1.045]² `1092.03

Option II (To accept the offer from foreign branch):

Cost of letter of credit

At 1 % on 3400 lakhs yen at `100 = 340 yen ` 10.00 lakhs
Add: Interest for 2 Quarters ` 0.90 lakhs
(A) ` 10.90 lakhs
Payment at the end of 180 days:
Cost 3400.00 lakhs yen

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 Interest at 2% p.a. [3400 × 2/100 × 180/365] 33.53 lakhs yen
3433.53 lakhs yen
Conversion at `100 = 345 yen [3433.53 / 345 ×100] (B) ` 995.23 lakhs
Total Cost: (A) + (B) ` 1006.13 lakhs

Advise: Option 2 is cheaper by (1092.03 – 1006.13) lakh or ` 85.90 lakh.

Hence, the offer may be accepted.
(c) Traditional lenders like banks etc. are not interested in a startup business. The
reason is that when you are just starting out, you're not at the point yet where
a conservative lender or investor can rely on security of your assets or be able
to forecast cashflows to secure their investments or estimate your repayment
capacity with certainty. So that leaves one with the option of selling some
assets, borrowing against one’s home, asking loved ones i.e. family and
friends for loans etc. But that involves a lot of risk, including the risk of
bankruptcy and strained relationships with friends and family.
Here are some of the sources for funding a startup:
(i) Personal financing
(ii) Personal credit lines
(iii) Family and friends
(iv) Peer-to-peer lending
(v) Crowdfunding

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