Solution of CA Final Strategic Financial Management (SFM) 2016

“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”