Sanjay Saraf Educational institute Pvt. Ltd.

SOLUTION AND FEED A!" FO# !A FINAL NO$ %&'( SF) E*A) + SAN,A+ SA#AF SI#
T-is is .y feed/ac0 to t-e SF) Nov '( 1a1er 3-ic- 3as full of .ista0es and a.i4uities and ofcourse certain 4ood tou4- su.s.T-e intention of t-is 3rite u1 is not to 1ro.ote or advertise .yself 5nor to de.ean or disres1ect any 1erson or entity.T-e sole intention is to s-are .y vie3s 3it- t-ousands of students 3-o too0 t-e e6a. after ta0in4 .y classes and t-ose t-at are 3aitin4 in line to ta0e e6a. in future.

7'. 8a9 A ! Ltd issued :;5 <yr ond of #s. '&&&=> eac- -avin4 a .aturity of ( +ears. T-e 1resent rate of interest is '%; for one year tenure. It is e61ected t-at For3ard rate of interest for one year tenure is 4oin4 to fall /y ?< /asis 1oints and furt-er /y <& /asis 1oints for every ne6t year in future for t-e sa.e tenure. T-is /ond -as a eta value of '.&% and is .ore 1o1ular in t-e .ar0et due to less credit ris0. !alculate@ i9 Intrinsic $alue of t-e ond. ii9 E61ected 1rice of ond in t-e .ar0et. Solution@ )y !o..ent TAIS IS A SU) ON OND $ALUATION UNDE# !AANBINB INTE#EST #ATES. I DO NOT APP#E!IATE TAE A) IBUOUS LANBUABE IN TAIS SU). FO# TAE 'ST TI)E IN TAE AISTO#+ OF SF)5 DE AA$E TAE !ON!EPT OF +IELD ETA I.E. IF )A#"ET +IELD !AANBES + ';5 OND +IELD !AANBES + AOD )U!A ; .I A!"NODLEDBE TAAT SU!A A SU) DAS NOT DONE IN !LASS. AODE$E#5 TAE#E DOULD E TO TAE EST OF )+ E*PE!TATION SOLID PA#T )A#"INB FO# E$E#+ONE DAO AAS ATTE)PTED TAE SU). i9 T-ere is a lac0 of clarity re4ardin4 t-e onds re.ainin4 years to .aturity. De assu.e t-at t-e ond at t-e ti.e of issue -ad an ori4inal .aturity if < +ears and 1resently ( years are left to .aturity. Prior to t-e antici1ated c-an4e in interest rate5 3e assu.e t-at t-ere is a flat ter. structure at '%; yield. Aence intrinsic value 8I$&9 can /e co.1uted as follo3s> Face valueE'&&&F !ou1on a.ount E:; of '&&& E:& I$&E :&GP$IFA 8'%;5(9H'&&&GP$IF8'%;5(9 E %'I.'I H ?''.?K E :%?.:L ii9 Biven t-e forecasted c-an4e in interest rate and yield eta of '.&%5 3e -ave to derive t-e ne3 structure as follo3s>@ r&'E'%; f'% for t-e .ar0et E '%>&.?<E ''.%<;. Ao3ever 4iven t-e yield eta of '.&%5

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

f'% E '%>'.&%8&.?<9 E ''.%(< ; T-erefore5 r&%E MN8' H r&'98' H f'%9O '=%P Q ' E N8'.'%98'.''%(<9O '=% > ' E ''.I%; f%( for t-e .ar0et E ''.%<>&.< E '&.?<; Ao3ever f%( for t-e ondE ''.%<>N8'.&%98&.<9O E '&.?L T-erefore5 r&(E MN' H r&'98' H f'%98' H f%(O '=(P Q ' E N8'.'%9 8'.''%(<9 8'.'&?L9O '=( Q ' E ''.(%; T-erefore5 P& E N:&= 8' H r&'9O H N:&= 8'H r&%9%O H N'&:&= 8 'H r &( 9(O E:&='.'% H :&=8'.''I%9% E K&.(I H ?%.%L H K?:.<: E'&(%.': H '&:&=8'.''(%9(

NOTE@ T-ere could /e ot-er solutions de1endin4 u1on t-e inter1retation of t-e lan4ua4e of t-e for3ard rate c-an4e 4iven in t-e su.. 7.' /9 A trader is -avin4 in its 1ortfolio s-ares 3ort- #s. K< La0-s at current 1rice and cas- #s. '< La0-s. T-e eta of t-e s-are 1ortfolio is '.I.After ( .ont-s t-e 1rice of s-ares dro11ed /y (.% ;. Deter.ine@ 8i9 !urrent 1ortfolio /eta. 8ii9 Portfolio /eta after ( )ont-s if t-e trader on current date 4oes lon4 1osition on #s. '&& La0-s Nifty Futures. Solution@ )y !o..ent TAIS IS A ST#AIBAT FO#DA#D SU) ON PO#TFOLIO ETA AND AEDBINB. INFA!T TAE 'ST PA#T IS A PLAIN $ANILLA STUFF. TAE#E DAS A !AT!A IN TAE SE!OND PA#T AS DE AA$E TO !AL!ULATE ETA OF TAE PO#TFOLIO AFTE# ( )ONTAS + DAI!A TI)E P#I!E OF SAA#ES AS DELL AS NIFT+ DOULD AA$E !AANBED. ALSO5 STUDENTS AA$E TO #E)E) E# TAAT TA"INB A LONB O# SAO#T POSITION IN FUTU#ES DOES NOT IN$OL$E AN+ FUNDS E*!LUDINB )A#BIN. !ON!EPTUALL+ BOOD STUDENTS DOULD E A LE TO DO TAE SE!OND PA#T #IBAT.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. i9 Biven 1ortfolio co.1osition >F ERuity s-ares Q #s K< la0-s 3it- a eta of '.I !asQ#s '< La0-s 3it- a eta of & E Dei4-ted Avera4e E 8K<G '.I H '<G &9= '&& E '.(I T-is .eans t-at if t-e .ar0et c-an4es /y ';5 Portfolio is e61ected to c-an4e /y '.(I ; in t-e sa.e direction. Aence t-e Portfolio is a44ressive.
P

Portfolio eta i.e.

ii9

It is no3 4iven t-at t-e trader ta0es a lon4 1osition on #s. '&& La0-s Nifty Futures. De assu.e t-at Nifty futures -ave a eta of '. Aence as of no35 t-e revised P is 4iven /y >@ 8K<G '.I H '<G& H '&&G '9='&&G E%.(I

is no invest.ent involved in ta0in4 a lon4 1osition in futures. Aence 3e -ave divided /y '&& La0-s and not /y %&& La0-s. T-e 1ro/le. states t-at after ( .ont-s 1rice of t-e s-ares dro11ed /y (.%;.De inter1ret t-e sa.e to .ean t-at t-ese are 1ortfolio s-ares and not Nifty. Since Portfolio s-ares -ave a eta of '.I and t-eir 1rice -as /een dro11ed /y (.% ;5 it .eans t-at Nifty .ust -ave fallen /y (.%='.I E % ;. Aence after ( .ont-s5 t-e revised values are Q ERuity s-ares > K< La0-s>(.%; of K< La0-s E K%.%K La0-s5 3it- a eta of '.I !as- Q '< La0-s 3it- a eta of &. Nifty Futures Q '&& La0-s >% ; of '&& La0-s E :K La0-s5 3it- a eta of ' 8No invest.ent9. Aence
PE

GT-ere

8K%.%K G '.I H '< G & H :K G '9= 8K%.%K H '<9 E %.(I.

7 '.c9 +ou5 a forei4n e6c-an4e dealer of your /an05 are infor.ed t-at your /an0 -as sold a T.T on !or1oration for Danis- "roner '&5&&5&&& at t-e rate of Danis- "roner ' E #s I.<'<&5 +ou are reRuired to cover t-e transaction eit-er in London or Ne3 +or0 .ar0et. T-e rates on t-at date are as under@ )u./ai> London London Q Ne3 +or0 London> !o1en-a4en Ne3 +or0> !o1en-a4en #s ?L.(&&& #s L:.%<&& D"" ''.L%&& D"" &?.<I?& #s ?L.(%&& #s L:.%I%< D"" ''.L(<& D"" &?.<KL&

In 3-ic- .ar0et 3ill you cover t-e transaction5 London or Ne3 +or05 and 3-at 3ill /e t-e e6c-an4e 1rofit or loss on t-e transactionS I4nore /ro0era4es.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. Solution@ )y !o..ent TAIS IS A ST#AIBAT FO#DA#D SU) ON !#OSS #ATES IN FO#E* 8SI)ILA# TO TAE AONB "ONB DOLLA# SU) TAAT APPEA#ED LAST TI)E AND IS TAE#E IN OU# )AT9. AODE$E#5 IT AAD A !AOI!E OF !O$E# TA#OUBA LONDON O# N+ AND SO STUDENTS NEEDED TO DO TAE SU) TDI!E. NO ISSUES DITA TAAT. I DILL ALSO NOT A!!EPT AN+ ALI I F#O) STUDENTS #EBA#DINB TAE FA!T TAAT UN"NODN !U##EN!IES !A)E IN TAE E*A). IN !LASS5 DE AA$E ALDA+S STUDIES FO#E* DITAOUT AN+ ATTA!A)ENT TO AN+ !U##EN!+> ITS ALL A= STUFF AND DOESNTT )ATTE# DAETAE# A AND #EFE# TO D""5 S"#5 SAD O# DAAT NOT. I "NOD )OST OF )+ STUDENTS A#E SUPE# L+ E*PE#T IN !O)PUTINB !#OSS #ATES AND TAE+ DOULD AA$E DONE IT UT UNFO#TUNATEL+ TAE SU) DAS D#ONB. TAE SE!OND 7UOTE SAOULD AA$E EEN )U) AI>NED +O#" INSTEAD OF LONDON>NED +O#". OF !OU#SE5 IF ONE DOULD AA$E APPLIED !O))ON SENSE + LOO"INB AT TAE FIBU#ES5 ONE DOULD AA$E UNDE#STOOD ITS #UPEE PE# DOLLA#. AODE$E#5 I DONTT TAIN" DE NEED TO )A"E STUDENTS LIA LE FO# 'ST UNDE#STANDINB )ISTA"ES5 !O##E!TINB TAE SA)E AND TAEN ANSDE#INB 7UESTIONS .I!AI SAOULD ETTE# I)P#O$E TAEI# AU)AN AND TE!ANI!AL INF#AST#U!TU#E TO A$OID TAESE )ISTA"ES. TAE+ )UST BI$E FULL )A#"S 8IN FA!T DOU LE TAE )A#"S9 TO ALL STUDENTS FO# TAE F#UST#ATION AND TI)E DASTABE !AUSED AS A #ESULT OF SU!A )ISTA"E. T-e dealer -as 4one s-ort on D"" '& La0-s U D"" ' E #s I.<'<& To cover t-e sa.e5 it needs to 4o lon4 on D"". Alternative '@ Usin4 London )ar0et Biven )u./ai> London 8#S= Pound9E ?L.(&&&V ?L.(%&& London>!o1en-a4en 8D"" = Pound9E ''.L%&&V ''.L(<& Aence Synt-etic #s= D"" E ?L.(&&&=''.L(<&V ?L.(%&&=''.L%&& E I.L:?IVI.<&?: So t-e dealer can /uy D"" U I.<&?: Alternative %@ Usin4 Ne3 +or0 )ar0et Biven )u./ai> Ne3 +or0 8#S =W9 E L:.%<&&V L:.%I%< Ne3 +or0> !o1en-a4en 8D""= W9E ?.<I?&V ?.<KL& Aence Synt-etic #s= D"" E L:.%<&&=?.<KL&V L:.%I%<=?.<I?& E I.L:(:V I.<'&% So t-e dealer can /uy D"" U I.<'&% Overall5 Alternative ' is c-ea1er. T-e dealer s-ould cover t-e transaction via London )ar0et U #s I.<&?:=D""

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

Profit E 8I.<'<&>I.<&?:9G '&5 &&5&&& E #s ?'&& 7'.d9 On &'>&?>%&'&5 )r. * invested #s <&5&&&=> at initial offer in )utual Funds at a face value of #s '& eac- 1er unit. On ('>&(>%&''5 a dividend 3as 1aid U '& ; and annualiXed yield 3as '%&;. On ('>&(>%&'%5 a %& ; dividend and ca1ital 4ain of &.I& 1er unit 3as 4iven5 )r. * redee.ed all -is I%?'.:K units 3-en -is annualiXed yield 3as ?'.<& ; over t-e 1eriod of -oldin4. !alculate NA$ as on ('>&(>%&''5 ('>&(>%&'%5 and ('>&(>%&'( For calculations consider a year of '% .ont-s. Solution@ )y !o..ent@ TAIS IS A DI#E!T SU) OF )UTUAL FUND F#O) OU# )AT. e4innin4 1urc-ase 1rice E NA$ E '& AnnualiXed #eturn E '%&; T-erefore5 return for : .ont-s E '%& G :='% E :& ; So5 endin4 $alue= unit s-ould /e '& H :&; of '& E ': T-is includes dividend of #e. ' = unit So5 NA$ on ('.(.%&'' E ': >' E 'K Also a.ount re>invested E <&&& G ' E <&&& T-erefore additional units received E <&&&='K So5 units -eld on ('.(.%&'' E <%??.?K ('.(.%&''> ('.(.'%8 ' year9 Dividend 1er unit E %& ; of '& E % T-erefore5 total dividend E <%??.?K G % E '&<<<.<I T-is a.ount 3as reinvested at NA$ on ('.(.%&'% to result in additional units>@ E I%?'.:K Q <%??.?K E ::L.%& Units So 3e -ave '&<<<.<I=NA$ E ::L.%&

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. NA$ E '&.I% on ('.(.%&'% Total Aoldin4 1eriod E % years : .ont-s AnnualiXed #eturn E ?'.<& ; T-erefore Total #eturn E ?'.<& G %.?< E ':I.I( ; Initial Invest.ent E <&&& G '& E #s. <&&&& T-erefore endin4 $alue s-ould /e@> <&&&& H ':I.I(; of <&&&& E'LK('< T-erefore NA$ on ('.(.%&'( E 'LK('<= I%?'.:K E %(.I< 7.% a9 )r. #a. is -oldin4 t-e follo3in4 securities@ Particulars of Securities !ost Dividends ERuity S-ares@ Bold Ltd. Silver Ltd ronXe Ltd. BOI onds !alculate@ i9 ii9 E61ected rate of return in eac- case5 usin4 !AP) Avera4e rate of return5 if ris0 free rate of return is 'L;. ''5&&& 'I5&&& '%5&&& L&5&&& '5K&& '5&&& K&& L5&&& )ar0et Price '%5&&& '?5%&& 'K5&&& (?5<&& eta &.I &.K &.I '.&

Solution )y !o..ent TAIS IS A DI#E!T SU) F#O) OU# )AT TAAT STUDENT SAOULD AA$E EEN A LE TO SOL$E. IT IS SO UNFO#TUNATE TAAT TAIS D#ONB 7UESTION "EEPS ON APPEA#INB IN TAE E*A) AS DELL AS IN TAE #TP. DOES BOI OND AA$E A ETA OF 'SS AND IF TAAT IS T#UE5 DAAT IS TAE STUDENT SUPPOSE TO TA"E AO)E AS "NODLEDBEY )ISTA"ES !AN E !O))ITTED ON!E O# TDI!E AND ,USTIFI!ATIONS !OULD E TAE#E. AODE$E# TAE#E IS NO ,USTIFI!ATION FO# #EPETITI$E )ISTA"ES LI"E TAIS. I ST#ONBL+ !ONDE)N TAE SA)E. AS A FO#)ALIT+5 AN ILLOBI!AL SOLUTION TO TAIS ILLOBI!AL 7UESTION IS AS FOLLODS@

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

Ste1 >' !alculation of #) Particulars of securities Bold Silver ronXe BOI onds !ost ''5&&& 'I5&&& '%5&&& L&5&&& ?:5&&& Dividend '5K&& '5&&& K&& L5&&& ?I&& )ar0et $alue '%5&&& '?5%&& 'K5&&& (?5<&& KL5?&&

#) E N8Dividend H c-an4e in $alue9=!ostOG '&& E MN?I&& H 8KL?&&>?:&&&9O=?:5&&&P G '&& E'I.KL ; Ste1 >% eta of 1ortfolio E Si.1le Avera4e E 8&.I H &.K H &.I H '9=L E &.?< i9 As 1er !AP)5 E61ected #ate of #eturn 8#P9 >@ @ #P E #F H 8#) Q#F9 G E 'L H 8'I.KL>'L9 G E 'L H %.KL Bold E 'L H %.KLG &.I E'<.?&L Silver E 'L H %.KLG&.K E 'I.%?% ronXe E 'L H %.KL G&.I E '<.?&L BOI ond E 'L H %.KLG ' E 'I.KL ii9 Avera4e rate of return E 8'<.?&L H 'I.%?% H '<.?&L H 'I.KL9=L E'I.'( 7.%/9 An A.erican fir. is under o/li4ation to 1ay interests of !anW '&'&&&& and !anW ?&<&&& on ('st ,uly and (&t- Se1te./er res1ectively5 T-e fir. is ris0 averse and its 1olicy is to -ed4e t-e ris0s involved in all forei4n currency transactions. T-e Finance )ana4er of t-e Fir. is t-in0in4 of -ed4in4 t-e ris0 considerin4 t3o .et-ods i.e. fi6ed for3ard or o1tion contracts.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

It is no3 ,une (&t-. Follo3in4 Ruotations re4ardin4 rates of e6c-an4e5 USW 1er !anW5 fro. t-e fir.Zs /an0 3ere o/tained@ S1ot ' )ont- For3ard ( )ont- For3ard &.:%KL>&.:%KK &.:(&' &.:(<I Price for a !anW= USW o1tion on a U.S stoc0 e6c-an4e 8cents 1er !anW5 1aya/le on 1urc-ase of t-e o1tion5 contract siXe !anW <&5&&&9 are as follo3s@ Stri0e Price 8USW=!anW9 &.:( &.:L &.:< !alls ,uly '.<I '.&% &.I< Se1t %.<I NA '.IL Puts ,uly Se1t &.KK NA '.:% '.?< NA %.(L

Accordin4 to t-e su44estion of finance .ana4er if o1tions are to /e used5 one .onto1tion s-ould /e /ou4-t at a stri0e 1rice of :< cents and for t-e re.ainder uncovered /y t-e o1tions t-e fir. 3ould /ear t-e ris0. For t-is5 it 3ould use For3ard rate as t-e /est esti.ate of s1ot5 Transaction costs are i4nored. #eco..end5 3-ic- of t-e a/ove t3o .et-ods 3ould /e a11ro1riate for t-e A.erican fir. to -ed4e its forei4n e6c-an4e ris0 on t-e t3o interest 1ay.ents. Solution )y !o..ent@ TAIS IS ONE SU) TAAT I #EALL+ LI"ED AND DOULD LI"E TO P#AISE TAE INSTITUTE FO# IT .E$E#+TAINB IS !#+STAL !LEA#. FO#DA#D !O$E# IS ONE LINE# DAILE OPTIONS !O$E# IS ALSO UNA) IBUOUS. NO E*!USES FO# NOT SOL$INB IT #IBAT. I #E)E) E# A STUDENT !ALLINB )E LAST E$ENINB AND SA+INB TAAT SI# DE AAD NOT DONE SU!A A SU). TAIS IS NOT DONE. TAE#E A#E INNU)E#A LE SU)S ON FO#DA#D !O$E# AND AEDBINB TA#OUBA OPTIONS DONE IN !LASS. DAAT AE PE#AAPS )EANT DAS TAAT DE AADNTT DONE TAIS E*A!T SU). LET IT E "NODN TO ALL TAAT ITS NOT POSSI LE TAAT TAE SA)E SU)S DILL !O)E IN TAE E*A) TAAT DE AA$E DONE IN !LASS. +OU SAOULD AA$E #E$ISED !LASS NOTES )ULTIPLE TI)ES AND TAEN ONL+ U DILL E A LE TO APPL+ TAOSE !ON!EPTS IN NED SU)S. T-e transaction e61osures faced /y t-e US fir. are su..ariXed /elo3>@ !anW '&5 '&5&&& 1aya/le after ' .ont!anW ?5 &<5&&& 1aya/le after ( .ont-s. Aence t-e US fir. is afraid of !anW risin4. To -ed4e t-e sa.e 3e -ave t-e follo3in4 alternatives>

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

Alternative '@ For3ard !over uy !anW '&5 '&5&&& '.f U&.:(&' T-erefore5 Outflo3 after ' .ont- E '&5 '&5&&& G &.:(&' E USW :5 (:5L&' uy !anW ?5 &<5&&& (.f U &.:(<I T-erefore5 Outflo3 after ( .ont-s E ?&<&&& G &.:(<I E USW I<:<:K Alternative %@ O1tion H No cover ' .ont- E61osure@ uy ,uly !all O1tion on !anW at a stri0e 1rice of &.:L No. of !ontracts E E*POSU#E= LOT SI[E E '&'&&&=<&&&& E%&.% !ontracts rounded off to %& contracts So a.ount uncovered /y o1tion E %& G<&&&& E !anW '&5 &&5&&& A.ount left un-ed4ed E !anW '&&&& Initial Pre.iu. 1aidE'&&&&&& G &.&'&% E USW '&%&& Outflo3 on call cover E '&&&&&& G&.:L E USW :L&&&& For t-e uncovered 1ortion5 s1ot rate is to /e ta0en as for3ard rate 8PU#E E*PE!TATIONS TAEO#+9. T-erefore5 Outflo3 E '&&&& G &.:(&' E USW :(&' So total outflo3 after ' .ont- i4norin4 Ti.e $alue of )oney E '&%&& H :L&&&& H :(&' E USW :<:<&' ( )ont-s E61osure@ uy Se1te./er !all O1tion on !anW at a stri0e 1rice of &.:< No. of !ontracts E E*POSU#E= LOT SI[E E ?&<&&&=<&&&&

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. E'L.' !ontracts rounded off to 'L contracts So a.ount covered /y o1tion E 'L G<&&&& E !anW ?5 &&5&&& A.ount left un-ed4ed E !anW <&&& Initial Pre.iu. 1aidE?&&&&& G &.&&I< E USW L<<& Outflo3 on call cover E ?&&&&& G&.:< E USW II<&&& For t-e uncovered 1ortion5 s1ot rate is to /e ta0en as for3ard rate 8PU#E E*PE!TATIONS TAEO#+9. T-erefore5 Outflo3 E <&&& G &.:(<I E USW LI?K So total outflo3 after ( .ont-s i4norin4 Ti.e $alue of )oney E L<<& H II<&&& H LI?K E USW I?L%%K Su..ariXin4 t-e a/ove calculations@ E61osure ' )ont( )ont-s For3ard !over USW :(:L&' USW I<:<:K O1tion !over USW :<:<&' USW I?L%%K Advise For3ard cover is reco..ended. For3ard cover is reco..ended.

Advise@ ' .ont-@ As t-e outflo3 under for3ard cover is lo3er t-an o1tion cover 3e reco..end t-e A.erican fir. to Aed4e t-rou4- For3ard !over. ( )ont-@ As t-e outflo3 under for3ard cover is lo3er t-an o1tion cover 3e reco..end t-e fir. to Aed4e t-rou4- For3ard cover. 7.(.a9 A ! Ltd. is conte.1latin4 -avin4 an access to a .ac-ine for a 1eriod of < years. T-e !o.1any can -ave t-e use of t-e .ac-ine for t-e sti1ulated 1eriod t-rou4- leasin4 arran4e.ent or t-e reRuisite a.ount can /e /orro3ed to /uy t-e .ac-ine. In case of leasin45 t-e !o.1any received a 1ro1osal to 1ay annual end of year rent of #s %.L La0-s for a 1eriod of < years. In case of 1urc-ase 83-ic- costs #s '&5&&5&&&=> 9 t-e !o.1any 3ould -ave a '% ;5 < year loan to /e 1aid in eRuated install.ents5 eac- install.ent /eco.in4 due at t-e /e4innin4 of eac- year. It is esti.ated t-at t-e .ac-ine can /e sold for #s %&&&&&=> at t-e end of <t- year. T-e !o.1any uses strai4-t line .et-od of de1reciation. !or1orate ta6

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. rate is (& ;.Post ta6 cost of ca1ital of A ! Ltd. is '&;. +ou are reRuired to advice @ i. D-et-er t-e .ac-ine s-ould /e /ou4-t or ta0en on lease. ii. Analyse t-e financial via/ility fro. t-e 1oint of vie3 of t-e lessor assu.in4 '% ; 1ost ta6 cost of ca1ital. P$ of #e. ' U '&; for < years ' % ( L < &.:&: &.K%I &.?<' &.IK( &.I%' P$ of #e. ' U'% ; for < years &.K:( &.?:? &.?'% &.I(I &.<I?

Solution@ )y !o..ent TAIS IS A T+PI!AL SU) ON LEASE $S U+ >NO !O)PLAINS>STANDA#D SOLUTION DONE INNU)E#A LE TI)ES IN !LASS UT ITS TI)E !ONSU)INB. IT SAOULD AA$E EEN OF 'I )A#"S TO ,USTIF+ TAE EFFO#T IN$OL$ED. STUDENTS A#E AD$ISED TO I)P#O$E TAEI# SPEED OF !AL!ULATIONS AND D#ITINB AND TAE EST PLA!E TO DO IT IS IN !LASS. DO NOT DAIT FO# OTAE#S TO TELL U TAE ANSDE#S. E A!TI$E IN !LASS5 SIT DITA +OU# !AL!ULATO#S AND #AINS OPEN. DE TEA!A ABB#ESSI$EL+ AND +OU NEED TO SAOD ABB#ESSION TOO. A ! Ltd -as % alternatives5
i. ii. Ta0e t-e .ac-ine on lease orro3 funds and uy t-e .ac-ine

Alternative i @ Ta0e t-e .ac-ine on lease> Post ta6 lease rent E %L&&&& 6 8'>t9 E %L&&&& 6 8'> &.(9 E 'IK&&& P.$.of Post ta6 lease rent U '&; E 'IK&&& P$IFA8'&;5 <9 E 'IK&&& * (.?: E I(I?%& !ost of Leasin4 E #s I(I?%& Alternative ii @ orro3 funds and /uy t-e .ac-ine> T-e co.1any 3ill 1ay loan instal.ents /ut 3ill 4ain Ta6 s-ields on Interest and Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. De1reciation of t-e .ac-ine and 3ill also 4ain Salva4e value at t-e end of < years. !ost of orro3in4 E Present $alue of Install.ents Q P$ of Interest Ta6 S-ield Q P$ of De1reciation Ta6 S-ield Q P$ of Salva4e $alue
a9 Let Loan Install.ent E 6 '&&&&&& E 6 H 6 P$IFA8'%;5 L9 6 H (.&(K6 E '&&&&&& 6 E %L?IL? P$ of INstall.ents U "c E %L?IL? H %L?IL? P$IFA8'&;5 L9 E %L?IL? 6 (.'I: E '&(%LL& ............................................. 8a9 /9 Interest tA6 S-ield +ears A.t outstandin4 Interest U '%; Princi1al Portion Install.ent Interest Ta6 S-ield > %?&K< %'L%& '<&?< ?K:% P$ U '&;

& ' % ( L

'&&&&&& ?<%(<( <:L:KK L'K?L& %%'(L%

> :&%K% ?'(:: <&%L: %I(&< 8a1169

%L?IL? '<?(I< '?I%LK ':?(:K %%'(L%

%L?IL? %L?IL? %L?IL? %L?IL? %L?IL?

> %LI%% '??&% ''(I% <(:&

Total E <:&L&......8/9 c9 De1reciation Ta6 S-ield De1reciation E '& Q % E '.I Lacs < De1reciation ta6 s-ield E 'I&&&& 6 (&; E LK&&& P$ of De1reciation ta6 s-ield E LK&&& P$IFA 8'&;5<9 E LK&&& 6 (.?: E 'K':%& ..............................8c9 d9 P$ of Salva4e $alue E %&&&&& 6 &.I%' E '%L%&&..............................8d9

!ost of uyin4 E

aQ/QcQd

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. E '&(%LL& Q <:&L& Q 'K':%& Q '%L%&& E II?%K& Since !ost of Leasin4 is less t-an !ost of /uyin45 -ence t-e fir. s-ould ta0e t-e .ac-ine on Lease. 8ii9 De 3ill calculate NP$ for t-e Lessor U "c E '%; T-e Lessor 3ill /e 1ayin4 t-e ERui1.ent !ost and 3ill /e receivin4 Post ta6 Lease #ent5 De1reciation ta6 s-ield and Salva4e $alue
A ! D Particulars ERui1.ent cost Post Ta6 Lease #ent De1reciation Ta6 S-ield Salva4e $alue Net !as- Flo3s 8/HcHd>a9 P$ U '%; & 8'&&&&&&9 > > > 8'&&&&&&9 8'&&&&&&9 ' > 'IK&&& LK&&& > %'I&&& ':%KKK % > 'IK&&& LK&&& > %'I&&& '?%'<% ( > 'IK&&& LK&&& > %'I&&& '<(?:% L > 'IK&&& LK&&& > %'I&&& '(?(?I < > 'IK&&& LK&&& %&&&&& L'I&&& '%%L?%

Net Present $alue E 8'&&&&&&9 H ??KIK& E 8%%'(%&9 Aence t-e Lessor s-ould not a4ree to t-e 1ro1osal. 7.(./9 )=s Atlantic !o.1any Ltd. 3it- a turnover of #s. L.K& !rores is e61ectin4 4ro3t- of %<; for fort-co.in4 year5 Avera4e credit 1eriod is :& days. T-e 1ast e61erience s-o3s t-at /ad de/t losses are '.?<; on sales. T-e !o.1anyZs ad.inisterin4 cost for collectin4 receiva/les is #s. I&&&&&=>. It -as decided to ta0e factorin4 services of Pacific Factors on ter.s t-at factor 3ill /uy receiva/les /y c-ar4in4 % ; co..ission and %& ; ris0 3it- recourse. T-e factor 3ill 1ay advance on receiva/les to t-e fir. at 'I ; interest rate P.a after 3it--oldin4 '& ; as reserve. !alculate t-e effective cost of factorin4 to t-e fir. 8 Assu.e (I& days in a year9. Solution@ )y !o..ent T+PI!AL SU) ON FA!TO#INB DONE IN !LASS. Ste1'@ !alculation of Net a.t financed 8#s in Lacs9
E61ected credit sales for ne6t year E LK& 6 '%<; De/tors on t-e /asis of :& days E 8I&& 6 :&=(I&9 8>9 Factor reserve '&; I&& '<& 8'<9 '(<

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

8>9 !o..ission c-ar4ed u1front U %; of '<&

8(9 '(%

8>9 Interest c-ar4ed u1front 8'I; of '(% 6 :&=(I&9

8<.%K9 '%I.?%

Ste1 %@ Net 1eriodic cost of Factorin4 for :& days

Factorin4 co..ission 8H9 Interest 8>9 ad De/ts saved 8%&; of '.?<; of I&& 6 :&=(I&9 8>9 Ad.inistration E61ense Saved 8I 6 :&=(I&9 ( <.%K 8&.<%<9 8'.<9 I.%<<

Ste1 (@ T-erefore5 cost of factorin4 for :& days E 8I.%<<='%I.?%9 6'&& E L.:L; Annualised effective cost of factorin4 E L.:L; 6 (I&=:& E ':.?L; Assu.1tions@ '. All sales are credit sales %. Factor 3ill /ear %&; ris0 of ad de/ts

7.L.a9 Tru1ti !o. Ltd. 1ro.oted /y a )ultinational 4rou1 \ INTE#NATIONAL IN!] is listed on stoc0 e6c-an4e -oldin4 KL ; i.e. I( La0-s s-ares. Profit after Ta6 is #s. L.K& !rores. Free Float )ar0et !a1italiXation is #s. ':.%& !rores As 1er t-e SE I 4uidelines 1ro.oters -ave to restrict t-eir -oldin4 to ?< ; to avoid delistin4 fro. t-e stoc0 e6c-an4e. oard of Directors -as decided not to delist t-e s-are /ut to co.1ly 3it- t-e SE I 4uidelines /y issuin4 onus s-ares to .inority s-are-olders 3-ile .aintainin4 t-e sa.e P=E ratio.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

!alculate@ i9 P=E ratio ii9 onus #atio iii9 )ar0et 1rice of s-are /efore and after t-e issue of /onus s-ares. iv9 Free Float )ar0et !a1italiXation of t-e !o.1any after t-e /onus s-ares. Solution@ )y !o..ent $E#+ BOOD !O))ON SENSE O#IENTED SU). AN+ONE DAO #EAD TAE SU) P#OPE#L+ DOULD E A LE TO SOL$E IT DITAOUT AN+ P#IO# P#EPA#ATION. TAE !ON!EPT OF F#EE FLOAT )A#"ET !APITALI[ATION AAS EEN !O$E#ED IN !LASS. i9 Particulars A.ount Pro.oterZs sta0e 8KL;9 Total No. of s-ares NI(=&.KLO No. of s-ares -eld /y .inority Free Float )ar0et !a1italiXation S-are 1rice N':%&='%O PAT EPS NLK&=?<O P=E #atio N'I&=I.LO T-erefore5 P=E #atio E %< ti.es. ii9 Pro.oterZs -oldin4 s-ould co.e do3n to ?< ; T-erefore5 I( La0-s s-are s-ould re1resent ?< ; So total No. of s-ares s-ould /eco.e I(= &.?< E KL La0-s s-ares. So5 No. of onus s-ares to /e issued EKL>?< E : La0-s s-ares. So5 No. of s-ares already -eld /y .inority E '% La0-s s-ares. So5 onus ratio E := '% E (@L iii9 Price of t-e s-ares /efore /onus E #s. 'I& 8!o.1uted in 1art i.9 After onus EPS E PAT=No.of s-ares I( La0-s s-ares ?< La0-s s-ares '% La0-s s-ares ':.%& crores i.e. ':%& La0-s 'I& LK& La0-s I.L %< ti.es.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. LK&=KL E <.?' P=E #atio E %< ti.es 8sa.e as earlier9 T-erefore5 Price of t-e s-are after onus issue E P=E G EPS E %<G <.?' E 'L%.?< iv9 Free Float )ar0et !a1italiXation after onus s-ares@ E No of s-ares -eld /y .inority G s-are 1rice E 8KL>I(9 G 'L%.?< E(&&& La0-s 8a11ro69 E (& !rores. 7.L./9 T-e Easy4oin4 !o.1any Ltd. is considerin4 a ne3 1roject 3it- initial invest.ent5 for a 1roduct \Survival]. It is esti.ated t-at I## of t-e 1roject is 'I ; -avin4 an esti.ated life of < years. Financial )ana4er -as studied t-e 1roject 3it- sensitivity analysis and infor.ed t-at annual fi6ed cost sensitivity is ?.KL'I ;5 3-ereas cost of ca1ital 8discount rate9 sensitivity is I& ;. Ot-er infor.ation availa/le is@ Profit $olu.e ratio is ?& ; $aria/le !ost is #s. I&=> 1er unit. Annual !as- Flo3 #s. <?5<&& I4nore de1reciation on initial invest.ent and i.1act of ta6ation. !alculate@ i9 ii9 iii9 iv9 v9 Initial Invest.ent Net 1resent value of t-e 1roject Annual fi6ed cost Esti.ated annual unit of sales rea0 Even units.

!u.ulative Discountin4 Factor for < +ears K; :; '&; (.::( (.K:& (.?:' ''; (.I:I '%; (.<&< '(; (.<'? 'L; '<; 'I; '?; 'K; (.L(( (.(<% (.%?L (.':: (.'%?

Solution@ )y !o..ent SENSITI$IT+ ANAL+SIS IS TAE )OST I)PO#TANT TOPI! IN !APITAL

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. UDBETINB. DE AAD DONE IT $E#+ ELA O#ATEL+ IN !LASS.AODE$E#5 DE AAD ALDA+S !A##IED OUT SENSITI$IT+ ANAL+SIS DAILE TAE SU) STATES TAAT SENSITI$IT+ AAS AL#EAD+ EEN !A##IED OUT AND TAE #ESULTS A#E BI$EN. SO DE A#E SUPPOSED TO DO A!" !AL!ULATION AND !O)PUTE )ISSINB FIBU#ES. I PE#SONALL+ AA$E NO ISSUES DITA IT AND DOULD !ONB#ATULATE I!AI FO# SETTINB SU!A A SU). AODE$E#5 DE "NOD TAAT TAE#E A#E % )ETAODS OF !ONDU!TINB SENSITI$IT+ ANAL+SIS> )ETAOD '>SAO!" APP#OA!A>DE SAO!" EA!A FA!TO# + A !E#TAIN ; AND FIND OUT TAE ; EFFE!T ON NP$ )ETAOD %>DE FIND OUT TAE )A#BIN OF SAFET+ FO# EA!A FA!TO#. TAE SE!OND PA#AB#APA OF TAE SU) IS NOT !LEA#. IT STATES TAAT TAE FI*ED !OST SENSITI$IT+ IS ?.KL'I;.DAAT IS TAISS AE#E IS DAE#E TAE P#O LE) LIES >TAE+ SAOULD AA$E !LEA#L+ )ENTIONED TAAT ITS )A#BIN OF SAFET+>AAD TAE+ )ENTIONED TAAT )OST OF )+ STUDENTS DOULD E A LE TO DO TAE SU). i9 ii9 Initial Invest.entE P$ of future cas- flo3s discounted U I## E <?<&& G P$IFA 8'I;5 <9 E 'KK%<<. To co.1ute NP$ 5 3e reRuire "!5 is is 4iven t-at "!Z sensitivity is I& ; T-is .eans t-at if "! 4oes u1 /y I& ;5 NP$ 3ould /eco.e [ero. De 0no3 t-at I## is t-e /rea0 even "!5 So5 'I ; is 'I& ; of e6istin4 "! So5 "! E'I='.I& E '& ; T-erefore5 NP$ E cas- flo3 G P$IFA 8"!5 n9 > Initial Invest.ent E <?<&& G P$IFA 8 '& ;5 <9 Q 'KK%<< E <?<&& G (.?:' Q 'KK%<< E %:?%K iii9 Biven Fi6ed !ost sensitivity E ?.KL'I ;5 T-is .eans t-at if fi6ed cost 4oes u1 /y ?.KL'I ;5 NP$ 3ould /eco.e [ero. Let fi6ed cost /e #s. * T-erefore5 &.&?KL'I* G P$IFA 8'& ; 5 <9 E %:?%K Or5 &.&?KL'I* G (.?:' E %:?%K T-erefore * E #s. '5 &&5&&& Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

So5 t-e fi6ed cost E #s. '5 &&5&&& iv9 $aria/le !ost E #s. I&=> P$ #atio E ?& ; So5 Sellin4 Price E I&=(&; E %&& Annual cas- flo3 E <?<&& So5 8 Sellin4 1rice Q $aria/le !ost 97uantity> Annual fi6ed cost E <?<&&F 8%&&>I&97uantity > '5&&5&&& E <?<&& T-erefore 7uantity E ''%< Units. v9 rea0 Even Units E Fi6ed !ost = !ontri/ution Per unit E '&&&&&= 8%&&>I&9 E ?'L.%: Units rounded off to ?'L units.

7<.a9 )=s Ti4er Ltd. 3ants to acRuire )=s Leo1ard Ltd. T-e /alance s-eet of Leo1ard Ltd. as on ('st )arc-5 %&'% is as follo3s@ Lia/ilities ERuity !a1ital 8?&&&& S-ares9 #etained Earnin4s '%; De/entures !reditors and Ot-er lia/ilities #s. ?5 &&5&&& (5 &&5&&& (5 &&5&&& (5 %&5&&& 'I5 %&5&&& Assets !asDe/tors Inventories Plant ^ ERui1.ent #s. <&5&&& ?&5&&& %5 &&5&&& '(5 &&5&&& 'I5 %&5&&&

Additional Infor.ation@ '. S-are-olders of Leo1ard Ltd 3ill 4et one s-are in Ti4er Ltd. for every t3o s-ares. E6ternal lia/ilities are e61ected to /e settled at #s. <5&&5&&&. S-ares of Ti4er Ltd 3ould /e issued at its current 1rice of #s. '< 1er s-are. De/entures 3ill 4et '( ; converti/le de/entures in t-e 1urc-asin4 !o.1any for t-e sa.e a.ount. De/tors and inventories are e61ected to realiXe. %5&&5&&&. %. Ti4er Ltd. -as decided to o1erate t-e /usiness of Leo1ard Ltd. as a se1arate division. T-e division is li0ely to 4ive cas- flo3s 8after ta69 to t-e e6tent of #s.<5 &&5&&& 1er year for I years. Ti4er Ltd -as 1lanned t-at after I years5 t-is division

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. 3ould /e de.er4ed and dis1osed of for #s. %5 &&5&&&. (. T-e !o.1anyZs cost of ca1ital is 'I ; )a0e a re1ort to t-e oard of t-e !o.1any advisin4 t-e. a/out t-e financial feasi/ility of t-is acRuisition. Net Present $alues for 'I ; for #e. ' are as follo3s@ +ears@ ' % ( L < I P$@ &.KI% &.?L( &.IL' &.<<% &.L?I &.L'&

Solution@ )y !o..ent EAS+ SU) ON )E#BE#>IN FA!T I AA$E DONE A SI)ILA# SU) IN )+ <TA #E$ISION !LASS IF SO)EONE ATTENDED TAE SA)E. T-e financial feasi/ility of t-is acRuisition reRuires t-e deter.ination of NP$ Q Ste1 '> !alculation of /enefit fro. t-e acRuisition> a9 !asE <&&&& /9 De/tors ^ Inventory E%&&&&& c9 P$ of future cas- flo3s E <&&&&& G P$IFA 8'I;5 I9 H %&&&&&GP$IF 8'I;5I9 and divest.ent 1roceeds E <&&&&& G (.IKL H %&&&&& G &.L'& E %&'L&&&. T-erefore5 total /enefit E a H / H c E <&&&& H %&&&&& H %&'L&&& E %%IL&&& Ste1 % Q !alculation of cost of acRuisition a9 ERuity s-ares E (<&&& G '< E <%<&&& /9 E6ternal Lia/ilities Total Ste1 ( Q NP$ E enefit Q !ost E %%IL&&&>'&%<&&& E'%(:&&& Since NP$ is 1ositive 3e advise t-e S-are-olders Dealt-. oard to acce1t t-is acRuisition as it 3ould create <&&&&& '&%<&&& NSince E6c-an4e #atio is &.< So No. of s-ares E ?&&&& G &.<O

7.<./9 #a. /uys '&&&& s-ares of * Ltd. at a 1rice of #s. %% 1er s-are 3-ose eta value

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. is '.< and sells <&&& s-ares of A Ltd. at a 1rice of #s. L& 1er s-are -avin4 a eta value of %. Ae o/tains a co.1lete -ed4e /y Nifty futures at #s. '&&& eac-. Ae closes out 1osition at t-e closin4 1rice of t-e ne6t day 3-en t-e s-are of * Ltd dro11ed /y %;5 s-are of A Ltd. a11reciated /y ( ; and Nifty futures dro11ed /y '.<;. D-at is t-e overall 1rofit = Loss to #a.S Solution@ )y !o..ent TAIS IS A EAUTIFUL SU) ON ETA )ANABE)ENT TA#OUBA NIFT+ FUTU#ES>ALL P#AISES TO I!AI FO# TAIS SU)> UT I TAIN" I ETTE# AOLD A!" )+ P#AISE TILL TAE TI)E TAE+ !O)E DITA !O##E!T SOLUTION AS I AA$E DONE AE#E. E6istin4 eta of #a.Zs Lon4 Q s-ort 1osition E 8'&&&&G %% G '.< Q <&&& G L& G %9= %&&&& E ((&&&& Q L&&&&& E > (.< Since eta is ne4ative5 #a. -as to /uy Nifty futures to -ed4e t-e sa.e. No of Nifties to /e 1urc-ased E 8$alue of t-e Portfolio G eta9 = futures 1rice E 8%&&&& G (.<9='&&& E ?& Note@ In class 3e -ave used for.ula for No. of contracts E N$P 8
T

>

P9O=

8fG.9

Ao3ever if 3e i4nore .ulti1lier5 t-e for.ula /eco.es Q N$P 8 T > P9O= f E 8%&&&&N& Q 8 > (.<9O9='&&& E ?& So5 #a. 1urc-ased ?& Nifties 8T-ese are not contracts /ut units of -y1ot-etical Nifty9 Ne6t Day Loss on Lon4 Position in * Ltd. E 8%; of '&&&&9G %% E LL&& Loss on S-ort Position in A Ltd. E 8(; of <&&&9 G L& E I&&& Loss on Lon4 1osition in Nifty E 8 '.<; of '&&&9 G ?& E '&<&

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

T-erefore overall Loss E ''L<& Note@ TAE #ESULT IS SU#P#ISINB. TAE #EASON FO# TAE SU#P#ISE IS TAAT IF NIFT+ FUTU#ES AA$E D#OPPED5 A LTD. SAOULD AA$E FALLEN AND #A) DOULD AA$E BAINED ON TAE SAO#T POSITION IN A LTD. AODE$E# TAE D#ITE UP SA+S TAAT ALTD AAS APP#E!IATED. I DOULD E )OST SU#P#ISED IF TAE INSTITUTEZS SOLUTION TO E #ELEASED LATE# AD$ISES SELLINB FUTU#ES> TAAT DOULD E TOTALL+ UNA!!EPTA LE. IF DE A#E SITTINB ON NEBATI$E ETA5 DE A#E AF#AID OF )A#"ET #ISINB. SO DE NEED TO AEDBE TAE SA)E + U+INB NIFTIES. 7.I.a9 A s-are of Tension> free Econo.y Ltd. is currently Ruoted at a 1rice earnin4s ratio of ?.< ti.es. T-e retained earnin4 /ein4 (?.<; is #s.( 1er s-are. !alculate@ i9 T-e co.1anyZs cost of eRuity5 if investorZ e61ected rate of return is '%;. ii9 )ar0et 1rice of s-are5 if antici1ated 4ro3t- rate is '(; 1.a. 3it- sa.e cost of ca1ital. iii9 )ar0et 1rice 1er s-are5 if t-e co.1anyZs cost of ca1ital is 'K ; and antici1ated 4ro3t- rate is '<; 1.a.5 assu.in4 ot-er conditions re.ainin4 t-e sa.e. Solution@ )y !o..ent TAIS IS A #EPEATED SU) OF PAST PAPE#S 8)A+ Z&<9. AODE$E#5 TAE+ AA$E )ADE A T+POB#APAI!AL E##O# Q I. 8a9 8i9 SAOULD AA$E #EAD LI"E TAIS Q \!AL!ULATE TAE !O)PAN+ZS !OST OF E7UIT+ IF IN$ESTO#S E*PE!T B#ODTA #ATE OF '% ;.]INSTEAD TAE SU) #EADS Q \IN$ESTO#S E*PE!TED #ATE OF #ETU#N IS '% ;]TAIS IS UTTE# STUPIDIT+ AND NEBLIBEN!E. OFF !OU#SE5 +OU NE$E# "NOD TAAT TAE INSTITUTE )A+ LATE# !O)E OUT DITA A SOLUTION TA"INB IN$ESTO#ZS E*PE!TED #ATE OF #ETU#N i.e. '% ; AS #OE AND USINB TAE FO#)ULA 4E / G r. AODE$E# TAAT DOES NOT )A"E TAE %ND AND (#D PA#T OF TAE SU) !ONSISTENT DITA TAE 'ST PA#T. TAE#E IS A )ISTA"E IN TAIS SU). DE E*PE!T TAAT STUDENTS DILL BET FULL )A#"S FO# IT.

I 8a9 8i9 #etained Earnin4s 1er s-areE( T-is is (?.<; of EPS So5 EPSE(=&.(?<

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd. EK8Alternatively one can ta0e EPS as ( de1endin4 u1on t-e inter1retation of t-e a./i4uous lan4ua4e9 1=e ratio E?.< ti.es T-erefore PriceE?.< GK EI& Also D'E<8Alternatively5t-is can /e ta0en as D& and .ade to 4ro3 to calculate D'9 As 1er constant 4ro3t- DD)> !OST OF E7UIT+8"e9E8D'=P&9H 4 E<=I& H &.'% E%&.((; Note>I 3ill once a4ain ac0no3led4e t-at t-is is an illo4ical and dis1uta/le solution to an illo4ical and dis1uta/le Ruestion.T-is solution is consistent 3it- t-e institutes solution in t-e 1ast. 8iii9 No3 4ro3t- #ate c-an4es to '(; Assu.in4 "e to re.ain constant at t-e a/ove co.1uted value of %&.((;> PoED'="e Q4 E<=&.%&((>&.'( EIK.%' No3 "e /eco.es 'K; and 4 /eco.es '<; So5 P&E D'="e Q4 E<=&.'K>&.'< E'II.I?

8iv9

7.I./9 +our /an0Zs London office -as sur1lus funds to t-e e6tent of USW <&&&&& for a 1eriod of ( .ont-s. T-e cost of funds to t-e /an0 is L ; 1.a. It 1ro1oses to invest t-ese funds in London5 Ne3 +or0 or Fran0furt and o/tain t-e /est yield5 3it-out any e6c-an4e ris0 to t-e /an0. T-e follo3in4 rates of interest are availa/le at t-e t-ree centres of do.estic funds t-ere at for a 1eriod of ( .ont-s. London < ; 1.a. Ne3 +or0 K ; 1.a. Fran0furt (; 1.a. T-e .ar0et rates in London for US dollars and EU#O are as under@ London on Ne3 +or0 S1ot ' .ont% .ont-s ( .ont-s '.<(<&=:& '<='K (&=(< K&=K<

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

London on Fran0furt S1ot ' .ont% .ont-s ( .ont-s '.K%I&=:& I&=<< :<=:& 'L<='L&

At 3-ic- centre5 3ill t-e invest.ent /e .ade ^ 3-at 3ill /e t-e net 4ain 8to t-e nearest 1ound9 to t-e /an0 on t-e invested fundsS Solution@ )y !o..ent TAIS IS A SI)PLE SU) ON !AOOSINB TAE !U##EN!+ OF IN$EST)ENT. Initial Invest.ent E <&&&&&='.<(:& E Pound (%LKKI.%: !ost of funds E L ; 1.a. i.e. ' ; for ( .ont-s T-erefore5 initial invest.ent H cost of funds E '&'; of (%LKKI.%: E (%K'(<.% T-is 3ould /e used in all t-e alternatives to co.1ute t-e net 4ain. Solution '@ De s-ould invest in t-at currency for 3-ic- inflo3 after ( .ont-s in 1ound ter.s 3ould /e -i4-est Q Alternative '@ Invest in London 8No currency E61osure9 Sell USW <&&&&& S1ot U '.<(:& Bettin4 <&&&&&='.<(:& E Pound (%LKKI.%: T-is is invested U < ; 1.a. for ( .ont-s@ So inflo3 after ( .ont-s E (%LKKI.%: H < ; of (%LKKI.%:G (='% E (%K:L?.L T-erefore net 4ain E (%K:L?.L Q (%K'(<.% E K'%.% 1ound Alternative %@ Invest.ent in Ne3 +or0 Invest W <&&&&& U K ; for ( .ont-s T-erefore5 receiva/le after ( .ont-s E <&&&&& H K ; of <&&&&& G (='% E W <'&&&&

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

T-is is sold (.f U '.<(:& H &.&&K< i.e. '.<L?< So5 1ound inflo3 after ( .ont-s E <'&&&&= '.<L?< E (%:<I(.K T-erefore5 net 4ain E (%:<I(.K > (%K'(<.% E 'L%K.I'( 1ound Alternative (@ Invest.ent in Fran0furt Biven Q S1ot 8 W=Pound9 E '.<(<&='.<(:& (. S3a1 1oints E K&=K< SO5 (. for3ard W=Pound E '.<L(&='.<L?< Si.ilarly Q S1ot 8 FF=Pound9 E '.K%I&='.K%:& (. S3a1 1oints E 'L<='L& SO5 (. for3ard FF=Pound E '.K''<='.K'<& Synt-etic s1ot FF=W E '.K%I&_'.<(:&='.K%:&_'.<(<& E '.'KI<='.':'< !onvert W <&&&&& into FF s1ot U '.'KI< 4ettin4 <&&&&&G'.'KI< E <:(%<& Invest W <:(%<& U ( ; for ( .ont-s T-erefore5 receiva/le after ( .ont-s E <:(%<& H ( ; of <:(%<& G (='% E FF <:?I::.L T-is is sold (.f U '.K'<& So5 1ound inflo3 after ( .ont-s E <:?I::.L= '.K'<& E (%:('' T-erefore5net 4ain E (%:('' > (%K'(<.% E ''?<.?I 1ound Advise@ T-e /an0 s-ould invest in Dollars 8Ne3 +or09 as net 4ain is t-e -i4-est on a covered /asis.
In )ay %&'' e6a.s5 7'8a9 on Ar/itra4e Pricin4 T-eory 3as 3ron4>t-ey si.1ly 1ic0ed t-e su. fro. Professor I ) PandeyZs /oo0 3it-out verifyin4 3-et-er it 3as correct or not. D-en I .ailed t-e. and 1roved to t-e. t-eir .ista0e5 t-ey said t-ey 3ill do t-e needful and you 0no3 3-at 5t-e sa.e su. -as /een 1ut in %&'% rt1 3-ic- .eans t-at 3ron4 su. can once a4ain co.e in future e6a.. Is it t-e needful>3-at are innocent students su11osed to do>.u4 u1 3ron4 conce1ts and 3ron4 solutions>is t-at 3-at 3e teac-ers s-ould /e doin4 in class. In t-e sa.e 1a1er ie )ay ''5t-e su. on dividend 1olicy8Dalter and Bordon )odel9 3as 3ron4.

Sanjay Saraf Educational Institute Pvt. Ltd.

Sanjay Saraf Educational institute Pvt. Ltd.

Its al3ays c-allen4in4 3-en u find a nu./er of Ruestions in t-e SF) 1a1er 3-ic- are ne3 as in not covered in t-e institutes study .at5 1ractice .anual5 #TP and .oc0 1a1ers. Students cali/er co.es to real test under suc- a situation and all conce1ts co.e into 1lay.All .y sincere students are 1re1ared for t-at. Ao3ever5 -o3 do I 1re1are t-e. for uneart-in4 .ista0es. It is so 3ron4 on t-e 1art of t-e institute to 0ee1 on settin4 3ron4 and a./i4uous Ruestions in t-e SF) 1a1er. It see.s t-at a ne3 c-a1ter s-ould /e introduced in t-e sylla/us /y t-e na.e of TAo3 to co1e 3it- .ista0es co..itted /y t-e institute in t-e SF) 1a1er. T-ere 3ere alto4et-er ( Ruestions t-at 3ere incorrect in t-is NovZ'( 1a1er.T-e only 1ossi/le consolation t-at 3e as teac-ers can 4ive to t-e student is TSa/0o to ye- Sa-na 1ada -o4a na5tu. a0ela to na-i t-aT ty1es>I sincerely sy.1at-iXe 3it- t-e students co..unity and ur4e t-e institute to 1rovide full .ar0s to students in t-ose 3ron4 Ruestions.

ALL SAID AND DONE>LETS UNDE#STAND ALL +OU P#OSPE!TI$E E*A)INEES TAAT E*A)S A#E ALL A OUT #ELATI$E PE#FO#)AN!E. +OU NEED TO P#EPA#E DITA TAE )ENTALIT+ TAAT TAE TOUBAEST 8AND A) IBUOUS9 PAPE# IS BOINB TO !O)E AND I AA$E P#EPA#ED E$E#+TAINB. SO IF I AOLD )+ NE#$ES IN TAE E*A) AALL5 )+ #ELATI$E PE#FO#)AN!E DOULD E STUPENDOUS. IS TAE#E AN+ SAO#T !UT>NOT AT ALL>ITS ALL A OUT EA#NEST AND DEDI!ATED AA#D DO#" F#O) OTA TEA!AE#SZ SIDE AND STUDENTSZ SIDE. F#O) )+ PA#T5 I A) #E$A)PINB )+ ENTI#E )AT5 INT#ODU!INB !ASE STUDIES AND FLASA !A#D AND A AOST OF NED $A#IET+ OF SU)S. !LASSES DOULD E TOUBAE#5 LENBTAIE# AND "NODLEDBE DISE )O#E EN#I!AINB TAEN E$E# EFO#E. ALL PAST STUDENTS A#E AD$ISED TO "EEP A T#A!" OF DAATTS AAPPENINB IN TAE !U##ENT AT!AES5 UPDATE DITA F#IENDS O# #EDO TAE !LASSES IF NOT !ONFIDENT.

Sanjay Saraf Educational Institute Pvt. Ltd.