2. FINAL SFM May 2015

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Join with us : ipa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamGurukripa’s Guideline Answers for May 2015 Exam QuestionsCA Final –Strategic Financial ManagementQuestion No.1 is Compulsory. Answer any 5 Questions from the remaining 6 Questions. Answer any 4 out of 5 in Q.7.Note: Page Number References are from “Padhuka’s Students’ Referencer on Strategic Financial Management”Question 1(a): Forward vs Future vs No Hedge6 MarksEFD Ltd is an Export Business House. The Company prepares Invoice in customers’ currency. Its Debtors of US 10,000,000 isdue on1stApril 2015.Market Informationasat1st January 2015 is:Exchange Rates US / INRSpot1–month forward3–months forwardCurrency Futures US / INRContract Size: 129Initial Margin 17,500 22,5001–month3–months0.0165190.016118Interest rates in India6.5%7%On1stApril 2015, the Spot Rate US / INR is 0.016136 and Currency Future Rate is 0.016134.Which of the following methods would be most advantageous to EFD Ltd?(i) Using Forward Contract(ii) Using Currency Futures(iii) Not hedging the Currency RiskSolution:Similar to Page No.17.80, Q.No.76 – [N 06]1. Forward Contract HedgeParticularsAmountUSD 1,00,00,0000.016129 62,00,01,240Amount receivable in US Dollars3 months Forward Rate USD per Cash Inflow in (USD 1,00,00,000 USD 0.016129 / )2.Facts:Hedging using Currency FuturesUSD 1,00,00,000 is receivable in 3–Months time. USD should be encashed into Rupees. Therefore, USD should besold and Rupee should be bought. Therefore, the Company should BUY Rupee Futures Contract.Cash Flows:Jan 1 (Now)Apr 1 (3 Mths Later)Apr 1 (3 Mths Later)Apr 1 (3 Mths Later)Payment of Initial Margin in by borrowing in RupeesSettlement of Variable Margin based on Contracted Futures Rate and FuturesRate on Settlement Date for April 2015 FuturesPurchase of Rupee by paying in US Dollars (received from the OverseasCustomer) based on Spot Rate on the date of settlement.Settlement of money borrowed in Rupees for payment of Margin along withinterest(a) No. of Futures Contracts Required and Margin MoneyParticularsAmountAmount receivable in USD(A)USD 1,00,00,000Exchange Rate for April 2015 Futures [USD / ](B)USD 0.016118Total Value Receivable in Rupees Rupees to be bought(C) (A) (B) 62,04,24,370 2,48,16,976Contract SizeMay 2015.1Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamParticularsAmount25No. of Contracts Required [Rupee required 62,04,24,370 Contract Size 2,48,16,975]Margin Money per April 2015 Rupee Futures Contract 22,500Therefore, Total Margin Money payable [ 22,500 per Contract 25 Contracts] Amount Borrowed 5,62,500(b) Settlement of Variable Margin MoneyParticulars7.8.Amount 62,04,24,400Total Value of Rupee Futures Bought[25 Contracts 2,48,16,975]Contracted Futures Rate [USD payable per Rupee]USD 0.016118Total USD Payable for buying under Futures Contract based on contracted Apr 2015 Futures Rate USD 1,00,00,000[1 2]Futures Rate on date of settlement or expiry [USD payable per Rupee]USD 0.016134Total USD Payable for buying under Futures Contract based on Apr 2015 Futures Rate on the dateUSDof settlement1,00,09,927.27Amount of Gain [Amount Payable under Futures Rate on Expiry Date Less Amount Payable under9,927.27Contracted Futures Rate][5 – 3]Exchange Rate for Settlement of Amount of Gain [Spot Rate prevailing on the date of settlement]0.016136Amount Receivable in Rupees [Amount of Gain Exch. Rate][6 7] 6,15,2251.2.3.4.5.6.7.(c) Settlement of Futures Contract — Computation of USD PayableParticularsAmountRupees to be bought Amount receivable in Rupees 62,04,24,400Exchange Rate [Spot Rate prevailing on date of settlement]USD 0.016136USD Required for buying Rupees[1 2]USD 1,00,11,168.12Less: USD Received from Overseas CustomerUSD 1,00,00,000USD to be bought in Spot Market for settling Futures Contract[3 – 4]USD 11,168.12Rate at which USD can be bought [Spot Rate prevailing on date of settlement]USD 0.016136Rupees Payable for buying USD[5 6] 6,92,1241.2.3.4.5.6.(d) Total Amount Receivable in Rupees [Cash Flows on Settlement Date]ParticularsAmount Receivable on Settlement of Futures ContractAdd:Amount Receivable on Settlement of Gain on account of Variable MarginLess: Amount payable to buy US Dollars for settlement of Futures ContractLess: 62,04,24,4006,15,225(6,92,124)Interest Payable on money borrowed for payment of Initial Margin [ 5,62,500 7% p.a. 3]12(9,844)Net Inflow under Futures Contract62,03,37,657Note: Initial Margin of 5,62,500 and the corresponding borrowing is not considered above, since the sum borrowed andpaid on 1st January will be received back on 1st April and used for settlement of the borrowing.3. No Hedge SituationParticularsExchange Rate on the date of settlement [Spot Rate] [USD per ]AmountUSD 1,00,00,0000.016136Cash Inflow in (USD 1,00,00,000 USD 0.016136/ ) 61,97,32,276Amount receivable in US Dollars4.Evaluation of AlternativesAlternativeForward Market Hedge(WN 1)Futures Contract(WN 2 d)Cash InflowRanking 62,00,01,240 62,03,37,657 61,97,32,276213No Hedging(WN 3)Conclusion: Expected Cash Inflows under Futures Contract Hedge is maximum and hence would be most advantageous.May 2015.2Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamQuestion 1(b):Mutual Funds – Effective YieldTUV Ltd has invested in three Mutual Fund Schemes as per the details given below:Scheme XScheme YDate of 0,000Amount of Investment ( )Net Asset Value at EntryDate 12.50 36.25Dividend received up to 31sMarch2015 45,000 12,500Net Asset Value as at31stMarch2015 12.25 36.45stWhat will be the Effective Yield (per annum basis) for each of the above three schemes upto 31 March 2015?Solution:Schemes[1]Scheme X Scheme Z01–03–20152,50,000 27.75Nil 27.55Similar to Page No.8.18, Q.No.11 – [RTP, N 04, N 09, M 13]1. Computation of Net Value Added during the year ended 31.03.2015NAV as atCapitalNAV as at 31.03.2015Number of UnitsOpening NAV ( )Entry DateAppreciation ( )( )[2]15,00,000Scheme Y7,50,000Scheme Z2,50,000[3] 12.50 36.25 27.75[4] [2] [3]1,20,000[5]12.25[7] [(5)–(3)] (4)(–)30,00020,689.6636.45( )4,137.939,009.0127.55(–)1,801.802. Effective Yield in %Total Yield Capital Appreciation DividendEffective Yield in % (Total Yield Opening NAV) (365 No. of days of holding)CapitalNo. of daysSchemesTotal Yield( )Dividend Received ( )Appreciation ( )Scheme XScheme YScheme Z4 Marks45,00012,500––(–)30,000( 1829031Effective yield % p.a2.01%9%(8.49)%Question 1(c): Factoring–Effective Rate of Cost6 MarksPQR Ltd has credit sales of 165 Crores during the Financial Year2014–2015 and its Average Collection Period is 65 days. Thepast experience suggest that Bad Debt Losses are 4.28% of Credit Sales.Administration Cost incurred in collection of its Receivables is 12,35,000 p.a. A Factor is prepared to buy the Company’sReceivables by charging 1.95% Commission. The Factor will pay advance on Receivables to the Company at an interest rate of16% p.a. after withholding 15% as Reserve.Estimate the Effective Cost of Factoring to the Company assuming 360 days in a year.Solution:Similar to Page No.4.12, Q.No.9 – [RTP, N 08]ParticularsLess:Less:Less:Less: CroresReceivables[Total Sales 165Crores Collection Period 65 / 360]15% Factor Margin Money [ 29.7917 15%]29.7917(4.4688)Amount of Finance offered by FactorFactor Commission[1.95% of Factored Debts of 29.7917]Amount Available for AdvanceInterest at 16% for 65 Days[ 25.3229 16% 65 Days / 360 Days]Net Amount Paid to the Firm (Assumed Net of Commission & Interest)Gross Cost of Factoring Commission Interest 0.5809 0.7316Savings on account of FactoringCost of Credit Administration[Annual 12,35,000 65 360]Bad Debts (assumed as avoided due to Factoring)[ 29.7917 4.28%]25.3229(0.5809)Net Cost of Factoring for 65 days 0.0151May 2015.3Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamParticulars Crores360Net Cost of Factoring p.a. 0.0151 650.08360.083624.7420(c)Effective Rate of Factoring Cost (based on Net Cost) (d)Effective Rate of Factoring Cost (based on Gross Cost) 0.338% p.a.1.3125 x 360 / 6524.742029.38% p.a.Question 1(d): Valuation of Shares –Gordon’s ModelThe following information is collected from the Annual Reports of J Ltd.Profit before Tax 2.50 Crores Number of Outstanding SharesTax Rate40 percent Equity Capitalization RateRetention Ratio40 percent Rate of Return on InvestmentWhat should be the Market Price per Share according to Gordon’s Model of Dividend Policy?Solution:4 Marks50,00,00012 percent15 percentSimilar to Page No.10.15 Q.No.5 2.5 Crores Less 40%Profit After Tax 3.No. of Outstandin g Shares50 Lakhs Shares1.EPS (Year 0) 2.Growth Rate (g) b r, i.e. Retention Ratio Return on Investment 40% 15% 6%.3.EPS (Year 1) E1 3 6% 3.18.4.E (1 b) 3.18 (1 0.4) 1.908 31.80 [Ke Cost of Equity 12%]Market Price per Share 112% - 6%6%Ke brQuestion 2(a):CAPMMr. Shyam is holding the following Securities:Particulars of SecuritiesCost Dividend / Interest Equity Shares:Gold Ltd10,0001,725Silver Ltd15,0001,000Bronze Ltd14,000700GOI Bonds36,0003,600Average Return of the Portfolio is 15.7%.Using Average Beta, calculate:(i) Expected Rate of Return in each case, using the Capital Asset Pricing Model (CAPM).(ii) Risk Free Rate of Return.Solution:Market Price Beta9,80016,20020,00034,5000.60.80.61.0Similar to Page 7.35, Q. No. 18 [RTP, M 96, M 03, N 05, M 08]Particulars of SecuritiesGold LtdSilver LtdBronze LtdGOI BondsTotal1.8 MarksCost 10,00015,00014,00036,00075,000Actual Return on Market Portfolio Dividend/ Interest 1,7251,0007003,6007,025Capital Gain Market Price – Cost9,800 – 10,000 – 20016,200 – 15,000 1,20020,000 – 14,000 6,00034,500 – 36,000 –1,5005,500 7,025 5,500Dividend Earned Capital Appreciation 16.7%Initial Investment75,000May 2015.4Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management Exam10,00015,00014,00036,000 0.6) ( 0.8) ( 0.6) ( 1.0) 0.83275,00075,00075,00075,0002.Weighted Average Beta (3.Computation of Risk Free Return (Rf):(a) Beta of GOI Bonds (given as 1.00 in the question) is taken as Yield Beta, attributable to Market Rate and PriceFluctuations, and Income by way of Interest thereon.3,600 10%.(b) Hence, Risk Free Return is taken as the Rate of Interest on GOI Bonds 36,0004.Average Return of Portfolio15.7% (Given)5. Rf β (Rm – Rf)Now, Beta 0.832, and Rf 10% as above. 10% 0.832 (Rm – 10%)Solving, Rm 16.85%Expected Rate of Return for each Security (taking Rf as 10%)Particulars of SecuritiesExpected Return Rf β (Rm – Rf)10 0.6 (16.85 – 10) 14.11%10 0.8 (16.85 – 10) 15.48%10 0.6 (16.85 – 10) 14.11%10 1.0 (16.85 – 10) 16.85%Gold LtdSilver LtdBronze LtdGOI BondsNote: Instead of above Formula, GOI Bonds may be taken at Rf 10%Question 2(b): Bond ValuationOn 31st March 2013, the following information about Bonds is available:Name of SecurityMaturity DateFace Value Zero Coupon10,00031st March 2023T–Bill1,00,00020th June 201310.71% GOI 202310031st March 202310% GOI 201810031st March 20188 MarksCoupon RateN.A.N.A.10.7110.00Coupon Date(s)N.A.N.A.31st Marchst31 March & 31st OctoberCalculate:(i) If 10 years yield is 7.5% p.a., what price the Zero Coupon Bond would fetch on 31st March 2013?(ii) What will be the annualized yield if the T –Bill is traded @ 98500?(iii) If 10.71% GOI 2023 Bond having YTM is 8%, what Price would it fetch on 1st April 2013 (after Coupon Payment on 31st March)?(iv) If 10% GOI 2018 Bond having YTM is 8%, what Price would it fetch on 1stApril 2013 (after Coupon Payment on 31st March)?Solution:1. Zero Coupon Bond: Cash Inflows at Maturity 10,000, Life 10 years, Yield 7.5% p.a.So, Price as on 31.3.2013 PV of Cash Flows discounted at 7.5% p.a. 2.10,000(1 0.075)10 10,00010,000 4,852.102.0610(1.075)Annualized Yield of T Bill:(a) Period from 31st March 2013 to 20th June 2013 30 31 20 81 days.(b) Value of T Bill traded as on 31st March 2013 98,500(given).(c) So, Annualized Yield 3.Income from T Bill 365Redemption Price Issue Price 365 100% 100Price of T Bill81Issue Price811,00,000 98,500 365 100 6.8622% 98,50081Price of 10.71% GOI 2023: Face Value of the Bond 100, Tenure of the Bond 10 years, Interest Rate 10.71%.Fair Value of the Bond Present Value of Future Cash Flows from the Bond (a) Interest Received every year 100 10.71% 10.71(b) Redemption Value (Maturity Value) 100 realised in 10th YearMay 2015.5Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamDetailsInterestMaturity Value4.YearCash Flow 1 to 10 Year10.7110th Year100Fair Value of the BondPVF@ YTM Rate8%6.71010.4632DCF ( )71.8746.32118.19Price of 10% GOI 2018 Bond:Fair Value of the Bond Present Value of Future Cash Flows from the Bond (a) Interest Received every year 100 10 10(b) Maturity Value 100YearCash FlowPVF @ YTM Rate8%1 to 5 Year103.99275th Year1000.6806Fair Value of the BondDetailsInterestMaturity ValueQuestion 3(a): Breakup of EPS, Exchange Ratios, etc.R Ltd and S Ltd are Companies that operate in the same industry. The Financial Statements of bothCurrent Financial Year are as follows:Balance SheetEquity & LiabilitiesAssetsR Ltd ( )S Ltd ( )1. Shareholders’ Fund1. Non–Current Assets20,00,000 16,00,000 2. Current Assets(a) Equity Capital ( 10 each)(b) Retained Earnings4,00,000–2. Non–Current Liabilities:16% Long Term Debt 10,00,0006,00,0003. Current Liabilities14,00,0008,00,000Total48,00,000 30,00,000TotalDCF39.9368.06107.998 Marksthe Companies for theR Ltd ( )20,00,00028,00,000S Ltd ( )10,00,00020,00,00048,00,00030,00,000Income StatementParticularsR Ltd ( )A. Net Sales69,00,000B. Cost of Goods Sold55,20,000C. Gross Profit (A–B)13,80,000D. Operating Expenses4,00,000E. Interest1,60,000F. Earnings Before Taxes [C–(D E)]8,20,000G. Taxes @ 35%2,87,000H. Earnings After Tax (EAT)5,33,000I. No. of Equity Shares2,00,000J. Dividend Payment Ratio (D/P)20%K. Market Priceper Share 50Assume that both Companies are in the process of negotiating a Merger through exchange of Equity Shares.S Ltd ( ,34,4002,49,6001,60,00030% 20You are required to:(i) Decompose the Share Price of both the Companies into EPS & P/E components. Also segregate their EPS Figures intoReturn on Equity (ROE) and Book Value / Intrinsic Value per Share components.(ii) Estimate Future EPS Growth Rates for both the Companies.(iii) Based on expected operating synergies, R Ltd estimated that the Intrinsic Value of S Ltd Equity Share would be 25 perShare on its acquisition. You are required to develop a range of justifiable Equity Share Exchange ratios that can beoffered by R Ltd to the Shareholders of S Ltd. Based on your analysis on parts (i) and (ii), would you expect the negotiatedterms to be closer to the upper or the lower exchange ratio limits and why?Solution:Similar to Page No.18.58, Q.No.39 – [N 08]1.Two–way analysis of EPS, (a) Market based (i.e. MPS PE Ratio) & (b)Book based (i.e. ROE Book Value Per Share)May 2015.6Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management ExamParticularsR LtdEquity Earnings i.e . EAT(a) Earnings Per Share No. of Equity Shares 5,33,0002,00,000 2.665(b) Market Price per Share (Given)MPS(c) So, PE Multiple EPS(d) Return on Equity [Based on PE Multiple] 1PE RatioBook Value of EquityNo. of Equity Shares(g) Return on Equity[Based on Book Value] EATBook Value of Equity1,60,000 1.56 50.00 20.0050 18.762.66520 12.821.561 5.33%18.761 ,00,000Equity CapitalAdd:Retained Earnings(e) Book Value of Equity(f) Book Value per Share (Intrinsic Value) S Ltd 2,49,600 24,00,0002,00,000 12 16,00,0001,60,000 105,33,000 22.21%24 ,00,0002,49,600 15.60%16 ,00,000 2.665 1.56(h) So, EPS Book Value per Share ROE as per Books, i.e.This should match with EPS as per (a) (b d) (f g)2. Computation of Growth RateNote: It is assumed that the Debt Equity Ratio will be maintained in the future as well and there is no trading on equity.Therefore, Growth Rate in Equity Earnings is computed based on Return on Equity Investment and Retention Ratio.Alternatively, Sustainable Growth Rate model can be applied for computation of growth rate in Sales and Assets, which canbe used as a proxy for Growth Rate in Equity Earnings as well.Growth Rate Return on Equity Investment Retention Ratio (g br)R Ltd 22.21% 80% 17.77%S Ltd 15.60% 70% 10.92%3. Range of Justifiable Exchange Ratio based on Intrinsic ValueNote: The question states that because of synergies, the Intrinsic Value of S Ltd’s Shares will be 25, i.e. Book Value perShare of S Ltd in the post merger scenario. Therefore, Exchange Ratio is computed based on Intrinsic Value, as Gain inValue due to Merger is expressed only for Intrinsic Value. Market Price per Share is ignored.Range of justifiable Exchange Ratio is the range between the Minimum Exchange Ratio (from the point of Selling Company,i.e. S Ltd) and the Maximum Exchange Ratio (from the point of view of Buying Company i.e. R Ltd)Where, VS Value of Selling Company before MergerVB Value of Buying Company before Merger[(VS G S ) S B ]GS Share of Selling Company in the Gain on Value due to MergerExchange Ratio [(VB GB ) S S ]GB Share of Buying Company in the Gain on Value due to MergerSS Shares outstanding in Selling Company before MergerSB Shares outstanding in Buying Company before Merger(a) Computation of Value of GainParticularsIntrinsic Value per Share of S Ltd after MergerLess: Intrinsic Value per Share of S Ltd before MergerGain in Value per ShareTherefore, Value of Gain because of Merger[ 15 per Share 1,60,000 Shares]Value 25( 10) 15 24 Lakhs(b) Exchange RatiosMinimum Exchange RatioMaximum Exchange Ratio(Entire Gain enjoyed by Buying Company)(Entire Gain enjoyed by Selling Company) 16 Lakhs NIL 16 Lakhs 24 Lakhs2 Lakh Shares2 Lakh Shares 24 Lakhs 24 Lakhs 1.6 Lakh Shares 24 Lakhs NIL1.6 Lakh Shares 2.08 Shares of R Ltd per Share of S Ltd 0.42 Shares of R Ltd per Share of S LtdMay 2015.7Get CA CMA CS Updates and More From Caultimates.com

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management Exam(c) Exchange Ratios based on EPS and MPSBased on EPSBased on MPS 1.56 20Factor for Selling Co. 0.59 0.40Exchange Ratio 2.665 50Factor for Buying Co.Based on Intrinsic Value 10 0.833 12(d) InferenceThe(a)(b)(c)Agreeable Exchange Ratio will be closer to the lower level, i.e. 0.42, because —Growth Rate of Equity Earnings is greater for the Buying Company than the Selling Company.Earnings Per Share and Return on Equity is also higher for the Buying Company than the Selling Company.The Exchange Ratio based on Market Price per Share is also lower than the Minimum Exchange Ratio.Question 3(b): Beta, Portfolio Variance, etc.Following are the details of a portfolio consisting of three Shares:SharePortfolio WeightBetaA0.200.40B0.500.50C0.301.10Standard Deviation of Market Portfolio Returns 10%8 MarksExpected Return in %141521Total Variance0.0150.0250.100You are given the following additional data: Covariance (A, B) 0.030, Covariance (A, C) 0.020, Covarianc

Gurukripa’s Guideline Answers for May 2015 CA Final Strategic Financial Management Exam May 2015.3 . Question 1(b):Mutual Funds – Effective Yield 4 Marks TUV Ltd has invested in three Mutual Fund Schemes as per the details given below: Scheme X Scheme Y Scheme Z Date of Investment 01–10–2014 01–01–2015 01–03–2015

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