Test Series: October, 2017

MOCK TEST PAPER – 2

FINAL COURSE : GROUP – I
PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT

Question No. 1 is compulsory. Attempt any five questions from the remaining six questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours Maximum Marks – 100

1. (a) TMC Holding Ltd. has a portfolio of shares of diversified companies valued at Rs. 400 crore
enters into a swap arrangement with None Bank on the terms that it will get 1.15% quarterly
on notional principal of Rs. 80 crore in exchange of return on portfolio which is exactly
tracking the Sensex which is presently 21600.
You are required to determine the net payment to be received/ paid at the end of each
quarter if Sensex turns out to be 21,860, 21,780, 22,080 and 21,960. (5 Marks)
(b) IPL already in production of Fertilizer is considering a proposal of building a new plant to
produce pesticides. Suppose, the PV of proposal is Rs. 100 crore without the abandonment
option. However, if market conditions for pesticide turns out to be favourable the PV of
proposal shall increase by 30%. On the other hand if market conditions remain sluggish the
PV of the proposal shall be reduced by 40%. In case company is not interested in
continuation of the project it can be disposed off for Rs. 80 crore.
If the risk free rate of interest is 8% than what will be value of abandonment option. (5 Marks)
(c) Using Lintner’s Model determine the dividend per share of S Ltd. for the year 2016-17 with
the help of following information:
EPS for the year 2016-17 (per share) Rs. 6
Dividend Per Share for 2015-16 Rs. 2.40
Target payout ratio 0.50
Adjustment Factor 0.80
(5 Marks)
(d) Bank A enters into a Repo for 14 days with Bank B in 12% GOI Bonds 2017 at a rate of
5.25% for Rs.5 Crore. Assuming that the clean price be 99.42, initial margin be 2% and days
of accrued interest be 292, you are required to determine:
(a) Dirty Price
(b) Start Proceeds (First Leg)
(c) Repayment at Maturity (Second Leg)
Note: Number of days in a year is 360. (5 Marks)
2. (a) The credit sale and receivables of A Ltd. at the end of the year are estimated at Rs. 3.2
crores and its average collection period is 90 days. The past experience indicates that bad-
debt losses are 1.5% on Sales. The expenditure incurred by the firm in administering its
receivable collection efforts are Rs. 5,00,000. A factor is prepared to buy the firm’s
receivables on recourse basis by charging 2% Commission. The factor will pay advance on
receivables to the firm at an interest rate of 18% p.a. after withholding 10% as reserve.
Calculate the effective cost of factoring to the Firm assuming 360 days a year. (6 Marks)

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 (b) Hanky Ltd. and Shanky Ltd. operate in the same field, manufacturing newly born babies’ s
clothes. Although Shanky Ltd. also has interests in communication equipments, Hanky Ltd.
is planning to take over Shanky Ltd. and the shareholders of Shanky Ltd. do not regard it as
a hostile bid.
The following information is available about the two companies.
Hanky Ltd. Shanky Ltd.
Current earnings Rs. 6,50,00,000 Rs. 2,40,00,000
Number of shares 50,00,000 15,00,000
Percentage of retained earnings 20% 80%
Return on new investment 15% 15%
Return required by equity shareholders 21% 24%
Dividends have just been paid and the retained earnings have already been reinvested in
new projects. Hanky Ltd. plans to adopt a policy of retaining 35% of earnings after the
takeover and expects to achieve a 17% return on new investment.
Saving due to economies of scale are expected to be Rs. 85,00,000 per annum.
Required return to equity shareholders will fall to 20% due to portfolio effects.
Requirements
(i) Calculate the existing share prices of Hanky Ltd. and Shanky Ltd.
(ii) Find the value of Hanky Ltd. after the takeover
(iii) Advise Hanky Ltd. on the maximum amount it should pay for Shanky Ltd. (10 Marks)
3. (a) Project X and Project Y are under the evaluation of XY Co. The estimated cash flows and
their probabilities are as below:
Project X : Investment (year 0) Rs. 70 lakhs
Probability weights 0.30 0.40 0.30
Years Rs. lakhs Rs. lakhs Rs. lakhs
1 30 50 65
2 30 40 55
3 30 40 45
Project Y: Investment (year 0) Rs. 80 lakhs.
Probability weighted Annual cash flows through life
Rs. lakhs
0.20 40
0.50 45
0.30 50
(i) Which project is better based on NPV, criterion with a discount rate of 10%?
(ii) Using Hiller’s Model compute the standard deviation of the present value distribution
and analyse the inherent risk of the projects. (10 Marks)
(b) An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three
months. Exchange rates in London are:
Spot Rate $ 1.5865 – 1.5905 per £

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 Rates of interest in Money Market:
Deposit Loan
$ 7% 9%
£ 5% 8%
Compute the forward rates for US$ at which the exporter will be indifferent between money
market hedge and a forward contract assuming the same spread shall be continued after 3
months. (6 Marks)
4. (a) Following are the details of a portfolio consisting of three shares:
Share Portfolio weight Beta Expected return in % Total variance
A 0.20 0.40 14 0.015
B 0.50 0.50 15 0.025
C 0.30 1.10 21 0.100
Standard Deviation of Market Portfolio Returns = 10%
You are given the following additional data:
Covariance (A, B) = 0.030
Covariance (A, C) = 0.020
Covariance (B, C) = 0.040
Calculate the following:
(i) The Portfolio Beta
(ii) Residual variance of each of the three shares
(iii) Portfolio variance using Sharpe Index Model
(iv) Portfolio variance (on the basis of modern portfolio theory given by Markowitz)
(10 Marks)
(b) Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X
were as follows:
Days Date Day Sensex
1 6 THU 14522
2 7 FRI 14925
3 8 SAT No Trading
4 9 SUN No Trading
5 10 MON 15222
6 11 TUE 16000
7 12 WED 16400
8 13 THU 17000
9 14 FRI No Trading
10 15 SAT No Trading
11 16 SUN No Trading
12 17 MON 18000

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 Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30
days simple moving average of Sensex can be assumed as 15,000. The value of exponent
for 30 days EMA is 0.062.
Give detailed analysis on the basis of your calculations. (6 Marks)
5. (a) Using the chop-shop approach (or Break-up value approach), assign a value for Cranberry
Ltd. whose stock is currently trading at a total market price of €4 million. For Cranberry Ltd,
the accounting data set forth three business segments: consumer wholesale, retail and
general centers. Data for the firm’s three segments are as follows:
Business Segment Segment Segment Operating
Segment
Sales Assets Income
Wholesale €225,000 €600,000 €75,000
Retail €720,000 €500,000 €150,000
General € 2,500,000 €4,000,000 €700,000

Industry data for “pure-play” firms have been compiled and are summarized as follows:
Business Sales/ Capitalization Assets/ Operating Income/
Segment Capitalization Capitalization
Wholesale 1.18 1.43 0.11
Retail 0.83 1.43 0.125
General 1.25 1.43 0.25
(8 Marks)
(b) The HLL has Rs. 8.00 crore of 10% mortgage bonds outstanding under an indenture. The
indenture allows additional bonds to be issued as long as all of the following conditions are
met:
 Income before tax  Bond Interest 
(1) Pre - tax interest coverage   remains greater than 4.
 Bond Interest 
(2) Net depreciated value of mortgage assets remains twice the amount of the mortgage
debt.
(3) Debt-to-equity ratio remains below 0.50.
The HLL has net income after taxes of Rs. 2 crores and a 40% tax-rate, Rs. 40 crores
in equity and Rs. 30 crores in depreciated assets, covered by the mortgage.
Assuming that 50% of the proceeds of a new issue would be added to the base of
mortgaged assets and that the company has no Sinking Fund payments until next year, how
much more 10% debt could be sold under each of the three conditions? Which protective
covenant is binding? (8 Marks)
6. (a) Based on the following data, estimate the Net Asset Value (NAV) 1st July 2016 on per unit
basis of a Debt Fund:
Name of Face Purchase Maturity Date No. of Coupon Date(s) Duration
Security Value Price Securities of Bonds
Rs. Rs.
10.71% 100 104.78 31st March, 2028 100000 31st March 7.3494
GOI 2028
10 % 100 100.00 31st March, 2023 50000 31st March & 5.086
GOI 2023 30th September
4

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 9.5 % 100 97.93 31st December, 40000 30th June & 4.3949
GOI 2021 2021 31st December
8.5% 100 91.36 30th June 2025 20000 30th June 6.5205
SGL 2025

Number of Units (Rs. 10 face value each): 100000

All securities were purchased at a time when applicable Yield to Maturity (YTM) was 10%.
On NAV date, the required yield increased by 75 basis point and Cash in hand and accrued
expenses were Rs. 6,72,800 and Rs. 2,37,400 respectively. (10 Marks)
(b) Odessa Limited has proposed to expand its operations for which it requires funds of $ 15
million, net of issue expenses which amount to 2% of the issue size. It proposed to raise the
funds though a GDR issue. It considers the following factors in pricing the issue:
(i) The expected domestic market price of the share is Rs. 300
(ii) 3 shares underly each GDR
(iii) Underlying shares are priced at 10% discount to the market price
(iv) Expected exchange rate is Rs. 60/$
You are required to compute the number of GDR's to be issued and cost of GDR to Odessa
Limited, if 20% dividend is expected to be paid with a growth rate of 20%. (6 Marks)
7. Write short notes on any of four of the following:
(a) Cross Border Leasing
(b) Three basis questions that can be answered by Corporate Level Strategy
(c) Inter Bank Participation Certification (IBPC).
(d) Nostro, Vostro and Loro Accounts
(e) Exposure Netting (4 × 4 = 16 Marks)

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 Test Series: October, 2017
MOCK TEST PAPER – 2
FINAL COURSE: GROUP – I
PAPER – 2: STRATEGIC FINANCIAL MANAGEMENT
SUGGESTED ANSWERS/HINTS

1. (a)
Qtrs. Sensex Sensex Amt Payable Fixed Return Net (Rs.
Return (%) (Rs. Crore) (Receivable) (Rs. Crore) Crore)
(1) (2) (3) (4) (5) (5) – (4)
0 21,600 - - - -
1 21,860 1.2037 4.8148 4.6000 - 0.2148
2 21,780 -0.3660 -1.4640 4.6000 6.0640
3 22,080 1.3774 5.5096 4.6000 - 0.9096
4 21,960 -0.5435 -2.1740 4.6000 6.7740

(b) Decision Tree showing pay off

Year 0 Year 1 Pay off
130 0
100
60 80-60 = 20
First of all we shall calculate probability of high demand (p) using risk neutral method as
follows:
8% = p x 30% + (1-p) x (-40%)
0.08 = 0.30 p - 0.40 + 0.40p
0.48
p= = 0.686
0.70
The value of abandonment option will be as follows:
Expected Payoff at Year 1
= p x 0 + [(1-p) x 20]
= 0.686 x 0 + [0.314 x 20]
= Rs. 6.28 crore
Since expected pay off at year 1 is 6.28 crore. Present value of expected pay off will be:
6.28
= 5.81 crore.
1.08
This, the value of abandonment option (Put Option).
(c) Formula as per Lintner’s Model
D1 = D0 + [(EPS1 X Target Payout) – D0] X AF
Where
D1 = Dividend in year 1

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 D0 = Dividend in year 0
EPS1 = Earning Per Share of year 1
AF = Adjustment Factor
Accordingly, Dividend for 2017-18 shall be:
= Rs. 2.40 + [(Rs. 6 x 0.50) – Rs. 2.40] x 0.80
= Rs. 2.88
(d) (i) Dirty Price
= Clean Price + Interest Accrued
12 292
= 99.42 + 100 × ×
100 360
= 109.1533
(ii) First Leg (Start Proceed)
Dirty Price 100 - Initial Margin
= Nominal Value x ×
100 100
109.1533 100 - 2
= Rs.5,00,00,000 x ×
100 100
= Rs.5,34,85,117 say Rs. 5,34,85,000
(iii) Second Leg (Repayment at Maturity)
No. of days
= Start Proceed x (1+ Repo rate × )
360
14
= Rs. 5,34,85,000 x (1+ 0.0525 × )
360
= Rs.5,35,94,199
2. (a)
Particulars Rs.
Average level of Receivables = 3,20,00,000  90/360 80,00,000
Factoring commission = 80,00,000  2/100 1,60,000
Factoring reserve = 80,00,000  10/100 8,00,000
Amount available for advance =
Rs. 80,00,000 – (1,60,000 + 8,00,000) 70,40,000
Factor will deduct his interest @ 18%:-
` 70,40,000  18  90
Interest  Rs.
100  360
3,16,800
Advance to be paid = (Rs. 70,40,000  Rs. 3,16,800)
67,23,200

Annual Cost of Factoring to the Firm: Rs.

Factoring commission (Rs. 1,60,000  360/90) 6,40,000
Interest charges (Rs. 3,16,800  360/90) 12,67,200
Total 19,07,200

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 Firm’s Savings on taking Factoring Service:
Cost of credit administration saved 5,00,000
Net cost to the Firm (Rs. 19,07,200 – Rs. 5,00,000) 14,07,200
` 14,07,200 × 100
Effective rate of interest to the firm = 20.93%
67,23,200
(b) (i) Existing share price of Hanky Ltd.
g=rxb
r = 15%
b = 20%
g = 0.15 x 0.2
= 0.03 or 3%
Next year's dividend
Ex dividend market value =
ke  g
6,50,00,000 x 0.8 x1.03
= = Rs. 29,75,55,556
0.21  0.03
Rs. 29,75,55,556
Value of one share = = Rs. 59.51 per share
5000000
Existing share price Shanky (P) Ltd.
g=rxb
= 0.15 x 0.8 = 0.12
Next year's dividend
Ex dividend market value =
ke  g

2,40,00,000 x 0.2 x 1.12

= = Rs. 4,48,00,000
0.24 - 0.12
Rs. 4,48,00,000
Value of one share = = Rs. 29.87 per share
1500000
(ii) Value of Hanky Ltd. after the takeover
Care must be taken in calculating next year’s dividend and the subsequent growth rate.
Next year’s earnings are already determined, because both companies have already
reinvested their retained earnings at the current rate of return. In addition, they will get
cost savings of Rs. 85,00,000.
The dividend actually paid out at the end of next year will be determined by the new
35% retention and the future growth rate will take into account the increased return on
new investment.
Growth rate for combined firm, g = 0.17 x 0.35 = 0.06
New cost of equity = 20%
Next year’s earnings = (Rs. 6,50,00,000 + Rs. 2,40,00,000 + Rs. 85,00,000) x 1.06
= Rs. 10,33,50,000

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 Next year’s dividend = Rs. 10,33,50,000 x 0.65
= Rs. 6,71,77,500
` 6,71,77,50 0
Market value = = Rs. 47,98,39,286
0.20 - 0.06
(iii) Maximum Hanky Ltd. should pay for Shanky Ltd.
Combined value = Rs. 47,98,39,286
Present Value of Hanky Ltd. = Rs. 29,75,55,556
= Rs. 18,22,83,730
3. (i) Calculation of NPV of XY Co.:
Project X Cash flow PVF PV
Year
1 (30  0.3) + (50  0.4) + (65  0.3) 48.5 0.909 44.09
2 (30  0.3) + (40  0.4) + (55  0.3) 41.5 0.826 34.28
3 (30  0.3) + (40  0.4) + (45  0.3) 38.5 0.751 28.91
107.28
NPV: (107.28 – 70.00) = (+) 37.28
Project Y (For 1-3 Years)
1-3 (40  0.2) + (45  0.5) + (50  0.3) 45.5 2.487 113.16
NPV (113.16 – 80.00) (+) 33.16
(ii) Calculation of Standard deviation 
As per Hiller’s model
n
M=  (1+r)-1 Mi
i0

n
2   (1+r)-2i i2
i0

Hence
Project X
Year
1 (30 - 48.5)2 0.30 + (50 - 48.5)2 0.40 + (65 - 48.5)2 0.30 = 185.25 =13.61

2 (30 - 41.5)2 0.30 + (40 - 41.5)2 0.40 + (55 - 41.5)2 0.30 = 95.25 = 9.76

3 (30 - 38.5)2 0.30 + (40 - 38.5)2 0.40 + (45 - 38.5)2 0.30 = 35.25 = 5.94

Standard Deviation about the expected value

185.25 95.25 35.25
= 2 + 4 +
(1+ 0.10) (1+ 0.10) (1+ 0.10)6

185.25 95.25 35.25

= + + = 153.10+65.06+19.90
1.21 1.4641 1.7716
= 238.06 = 15.43
Project Y (For 1-3 Years)

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 (40 - 45.5)2 0.20 + (45 - 45.5)2 0.50 + (50 - 45.5)2 0.30 = 12.25 = 3.50

Standard Deviation about the expected value

12.25 12.25 12.25
= 2 + 4 +
(1+ 0.10) (1+ 0.10) (1+ 0.10)6

12.25 12.25 12.25

= + + = 10.12+8.37+6.91
1.21 1.4641 1.7716
= 25.4 = 5.03
Analysis: Project Y is less risky as its Standard Deviation is less than Project X.
(b) The spread between Bid and Ask Rate = $1.5905 - $1.5865 = $0.004
The forward rate bid rate for US$ at which the exporter will be indifferent between money
market hedge and a forward contract will be the rate as per Money Market Hedge involving
following steps.
Identify: Foreign currency is an asset. Amount $ 3,50,000.
Create: $ Liability.
Borrow: In $. The borrowing rate is 9% per annum or 2.25% per quarter.
Amount to be borrowed: 3,50,000 / 1.0225 = $ 3,42,298.29
Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely, 1.5905 per £,
(Note: This is an indirect quote). Amount of £s received on conversion is 2,15,214.27
(3,42,298.29/1.5905).
Invest: £ 2,15,214.27 will be invested at 5% for 3 months and get £ 2,17,904.45
Settle: The liability of $3,42,298.29 at interest of 2.25 per cent quarter matures to $3,50,000
receivable from customer.
Amount received through money market hedge is £ 2,17,904.45 in lieu of $ 3,50,000 i.e. the
effective ask rate for £ is $1.6062 and since spread is $0.004 the bid rate shall be $1.6062 -
$0.004 = $1.6022 i.e. = $ 1.6022 - $1.6062 per £
4. (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:
β2A  σ M
2
= (0.40)2(0.01) = 0.0016

βB2  σ M
2
= (0.50)2(0.01) = 0.0025

β2C  σ M
2
= (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
5

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 (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
2
= (wA x wAx σ A ) + (wA x wBxCovAB) + (wA x wCxCovAC) + (wB x wAxCovAB) + (wB x
2 2
wBx σ B ) + (wB x wCxCovBC) + (wC x wAxCovCA) + (wC x wBxCovCB) + (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)
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.
5. (a)
Business Segment Capital-to-Sales Segment Sales Theoretical Values
Wholesale (1/1.18) 0.85 €225000 €191250
Retail (1/0.83) 1.2 €720000 €864000
General (1/1.25) 0.8 €2500000 €2000000
Total value €3055250

Business Segment Capital-to-Assets Segment Assets Theoretical Values

Wholesale (1.43) 0.7 €600000 €420000
Retail (1.43) 0.7 €500000 €350000
General (1.43) 0.7 €4000000 €2800000
Total value €3570000

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 Business Segment Capital-to- Operating Income Theoretical Values
Operating
Income
Wholesale (1/0.11) 9 €75000 €675000
Retail (1/0.125) 8 €150000 €1200000
General (1/0.25) 4 €700000 €2800000
Total value €4675000

3055250  3570000  4675000

Average theoretical value   3766750
3
Average theoretical value of Cranberry Ltd. = €3766750
(b) Let x be the crores of Rupees of new 10% debt which would be sold under each of the three
given conditions. Now, the value of x under each of the three conditions is as follows:
 Income before tax  Bond Interest 
1. Pre - tax interest coverage  remains greater than 4.
 Bond Interest 
` 2 crores / (1  0.4)  8 crores  0.1  x  0.1
=4
(8 crores  0.1)  (x  0.1)
` 3.33 crores  0.80 crores  0.10x
Or =4
(0.80 crores  ` 0.10x)
` 4.13 crores  0.10x
Or =4
` 0.80 crores  ` 0.10x
Or Rs. 4.13 crores + 0.10x = 4 (Rs. 0.80 crores + Rs. 0.10x)
Or Rs. 4.13 crores + 0.10x = Rs. 3.2 crores + Rs. 0.40x
Or Rs. 0.30 x = 0.93
Or x = Rs. 0.93/0.30
Or x = Rs. 3.10 crores
Additional mortgage required shall be a maximum of Rs. 3.10 crores.
2. Net depreciated value of mortgage assets remains twice the amount of mortgage debt
(Assuming that 50% of the proceeds of new issue would be added to the base of
mortgaged assets)
` 30 crores  0.5 x
i.e.  2
` 8 crores  x
or Rs. 30 crores + 0.5x = 2 (Rs. 8 crores + x)
or Rs. 1.5x = Rs. 14 crores
` 14 crores
or x
1.5
or x = 9.33 crores
Additional mortgage required to satisfy condition No. 2 is Rs. 9.33 crores

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 3. Debt to equity ratio remains below 5
` 8 crores + x
i.e. =0.50
` 40 crores
or Rs. 8 crores + x = Rs. 20 crores
or x = Rs. 12 crores
Since all the conditions are to be met, the least i.e. Rs. 3.10 crores (as per condition – 1)
can be borrowed by issuing additional bonds.
Thus, binding conditions are met and it limits the amount of new debt to 3.10 crore.
6. (a) Working Notes:
(i) Calculation of Interest Accrued
Name of Security Maturity Date Amount (Rs.)
10.71% GOI 2028 3
100 x 100000 x 10.71% x 2,67,750
12
10 % GOI 2023 3
100 x 50000 x 10.00% x 1,25,000
12
Total 3,92,750
(ii)
Name of Purchase Duration Volatility (+)/(-) Total
Security Amount Rs. of Bonds (%) Amount Rs.
10.71% GOI 2028 1,04,78,000 7.3494 7.3494 - 5,25,053 99,52,947
x 0.75 =
1.10
5.0110
10 % GOI 2023 50,00,000 5.086 5.086 - 1,81,645 48,18,355
x 0.75 =
1.05
3.6329
9.5 % GOI 2021 39,17,200 4.3949 4.3949 - 1,22,969 37,94,231
x 0.75 =
1.05
3.1392
8.5% SGL 2025 18,27,200 6.5205 6.5205 - 81,233 17,45,967
x 0.75 =
1.10
4.4458
2,03,11,500

Calculation of NAV
Particulars Rs. crores
Value of Securities as computed above 2,03,11,500
Cash in hand 6,72,800
Interest accrued 3,92,750
Sub total assets (A) 2,13,77,050

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 Less: Liabilities
Expenditure accrued 2,37,400
Sub total liabilities (B) 2,37,400
Net Assets Value (A) – (B) 2,11,39,650
No. of units 1,00,000
Net Assets Value per unit (Rs. 2,11,39,650/ 1,00,000) Rs. 211.40

(b) Net Issue Size = $15 million

$15 million
Gross Issue = = $15.306 million
0.98
Issue Price per GDR in Rs. (300 x 3 x 90%) Rs. 810
Issue Price per GDR in $ (Rs. 810/ Rs. 60) $13.50
Dividend Per GDR (D1) = Rs. 2* x 3 = Rs. 6
* Assumed to be on based on Face Value of Rs. 10 each share.
Net Proceeds Per GDR = Rs. 810 x 0.98 = Rs. 793.80
(a) Number of GDR to be issued
$15.306 million
= 1.1338 million
$13.50
(b) Cost of GDR to Odessa Ltd.
6.00
ke = + 0.20 = 20.76%
793.80
7. (a) Cross-border leasing is a leasing agreement where lessor and lessee are situated in
different countries. This raises significant additional issues relating to tax avoidance and tax
shelters. It has been widely used in some European countries, to arbitrage the difference in
the tax laws of different countries.
Cross-border leasing have been in practice as a means of financing infrastructure
development in emerging nations. Cross-border leasing may have significant applications in
financing infrastructure development in emerging nations - such as rail and air transport
equipment, telephone and telecommunications, equipment, and assets incorporated into
power generation and distribution systems and other projects that have predictable revenue
streams.
A major objective of cross-border leases is to reduce the overall cost of financing through
utilization by the lessor of tax depreciation allowances to reduce its taxable income, The tax
savings are passed through to the lessee as a lower cost of finance. The basic prerequisites
are relatively high tax rates in the lessor's country, liberal depreciation rules and either very
flexible or very formalistic rules governing tax ownership.
(b) Corporate level strategy should be able to answer three basic questions:
Suitability - Whether the strategy would work for the accomplishment of common objective of
the company.
Feasibility - Determines the kind and number of resources required to formulate and
implement the strategy.

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 Acceptability - It is concerned with the stakeholders’ satisfaction and can be financial and
non-financial.
(c) Inter Bank Participation Certificate (IBPC): The Inter Bank Participation Certificates are short
term instruments to even out the short-term liquidity within the Banking system particularly
when there are imbalances affecting the maturity mix of assets in Banking Book.
The primary objective is to provide some degree of flexibility in the credit portfolio of banks.
It can be issued by schedule commercial bank and can be subscribed by any commercial
bank.
The IBPC is issued against an underlying advance, classified standard and the aggregate
amount of participation in any account time issue. During the currency of the participation,
the aggregate amount of participation should be covered by the outstanding balance in
account.
There are two types of participation certificates, with risk to the lender and without risk to the
lender. Under ‘with risk participation’, the issuing bank will reduce the amount of participation
from the advances outstanding and participating bank will show the participation as part of
its advances. Banks are permitted to issue IBPC under ‘with risk’ nomenclature classified
under Health Code-I status and the aggregate amount of such participation in any account
should not exceed 40% of outstanding amount at the time of issue. The interest rate on
IBPC is freely determined in the market. The certificates are neither transferable nor
prematurely redeemable by the issuing bank.
Under without risk participation, the issuing bank will show the participation as borrowing
from banks and participating bank will show it as advances to bank.
The scheme is beneficial both to the issuing and participating banks. The issuing bank can
secure funds against advances without actually diluting its asset-mix. A bank having the
highest loans to total asset ratio and liquidity bind can square the situation by issuing IBPCs.
To the lender, it provides an opportunity to deploy the short-term surplus funds in a secured
and profitable manner. The IBPC with risk can also be used for capital adequacy
management.
This is simple system as compared to consortium tie up.
(d) In interbank transactions, foreign exchange is transferred from one accou nt to another
account and from one centre to another centre. Therefore, the banks maintain three types of
current accounts in order to facilitate quick transfer of funds in different currencies. These
accounts are Nostro, Vostro and Loro accounts meaning “our”, “your” and “their”. A bank’s
foreign currency account maintained by the bank in a foreign country and in the home
currency of that country is known as Nostro Account or “our account with you”. For example,
An Indian bank’s Swiss franc account with a bank in Switzerland. Vostro account is the local
currency account maintained by a foreign bank/branch. It is also called “your account with
us”. For example, Indian rupee account maintained by a bank in Switzerland with a bank in
India. The Loro account is an account wherein a bank remits funds in foreign currency to
another bank for credit to an account of a third bank.
(e) Exposure Netting refers to offsetting exposures in one currency with Exposures in the same
or another currency, where exchange rates are expected to move in such a way that losses
or gains on the first exposed position should be offset by gains or losses on the second
currency exposure.
The objective of the exercise is to offset the likely loss in one exposure by likely gain in
another. This is a manner of hedging foreign exchange exposures though different from
forward and option contracts. This method is similar to portfolio approach in handling
systematic risk.

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 For example, let us assume that a company has an export receivables of US$ 10,000 due 3
months hence, if not covered by forward contract, here is a currency exposure to US$.
Further, the same company imports US$ 10,000 worth of goods/commodities and therefore
also builds up a reverse exposure. The company may strategically decide to leave both
exposures open and not covered by forward, it would be doing an exercise in exposure
netting.
Despite the difficulties in managing currency risk, corporates can now take some concrete
steps towards implementing risk mitigating measures, which will reduce both actual and
future exposures. For years now, banking transactions have been based on the principle of
netting, where only the difference of the summed transactions between the parties is actually
transferred. This is called settlement netting. Strictly speaking in banking terms this is known
as settlement risk. Exposure netting occurs where outstanding positions are netted against
one another in the event of counter party default.

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