ICAI MCQs Bank
The Institute's own questions for this paper, reproduced word for word and grouped the way ICAI sets them. Graded instantly, with ICAI's own reasoning as the explanation.
Case Scenarios
54 scenarios · 220 questions
Case Scenario 1
Security Analysis
Equity Researchers have estimated the rate of returns for Stock A, Stock B and Market Portfolio under each state of the economy is as under: Economy Probability Return on Stock A (%) Return on Stock B (%) Market Portfolio (%) Boom 0.3 Normal 0.4 Recession 0.3 -9 -7 -8 The risk-free rate of return is expected to be 8%. The covariance between Stock A and the Market Portfolio is 122.70, while the covariance between Stock B and the Market Portfolio is 125.40. Assume that the CAPM framework is valid in this market. From the information given above, choose the correct answer to the following questions:
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Case Scenario 2
Mutual Funds
Steady Mutual Fund has the following assets in Scheme - Star Gold at the close of business as on 31st March, 2025: Company No. of Shares (units) Market Price per share (₹ ) A Ltd. 20,000 B Ltd. 30,000 C Ltd. 38,000 D Ltd. 50,000 The total numbers of units of Scheme - Star Gold are 20 lakhs. The Scheme - Star Gold has accrued expenses of ₹ 2,00,000 and other liabilities of ₹ 2,50,000. From the information given above, choose the correct answer to the following questions:
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Case Scenario 3
Derivatives Analysis and Valuation
Mr. X, an investor buys the stocks of WBL Limited worth ₹ 21,60,000 due to very strong fundamentals. Since last 3 months, the market sentiment is weak and witnessed a significant volatility and considered to remain weak for about the next three months. Keeping in the mind volatility in the market, Mr. X is planning to hedge his portfolio in the future market. The Beta of WBL stock is 1.3 and the current value of NIFTY is 2250 and 3 months future is selling at 2310. The current market price of the WBL stock is ₹ 240. Each Nifty future can be trade in units of 240 only. Assume there is no transaction cost and M to M Margin. From the information given above, choose the correct answer to the following questions:
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Case Scenario 4
Derivatives Analysis and Valuation
ABC Ltd., a UK firm, has a receivable $ 20 Million due in 6 months. The company wants to cover full exposure. Following information are available: Spot rate 1$ = £ 0.7720 / £ 0.7840 6 months forward rate 1$ = £ 0.7910 / £ 0.8040 Interest rates are as follows: US UK 6 months deposit rate 4.50% p.a. 5.50% p.a. 6 months borrowing rate 6.00% p.a. 7.50% p.a. Following options on pound are available: Option Strike rate Price Call £ 0.8100 £ 0.01 Put £ 0.8100 £ 0.02 © The Institute of Chartered Accountants of India ABC Limitedhas forecasted the spot rates for 6 months as follows: Future Rates of 1$ Probability £ 0.7800 30%. £ 0.8100 50% £ 0.8300 20% From the information given above, choose the correct answer to the following questions:
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Case Scenario 5
Advanced Capital Budgeting Decisions
P Ltd. is considering a new project with the following details: Initial project cost ₹ 4,80,000 Annual projected sales ₹ 4,00,000 Annual projected variable cost ₹ 1,60,000 Annual projected fixed cost ₹ 60,000 Project life 4 years Cost of capital 10% p.a. Consider Cumm. PVF for 4 years @ 10% = 3.169 and @ 11% = 3.103 Note: (a) (b) Calculation up to 2 decimal places. From the information given above, choose the correct answer to the following questions.
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Case Scenario 6
Mutual Funds
Fair Return Mutual Fund made an issue of 5,00,000 units @ ₹ 10 each on 1st April 2024. No entry load was charged. The fund made the following investments: Particulars (₹) 25,000 Equity Shares of ₹ 100 each @ ₹ 160 40,00,000 7% Government Securities (At Par) 4,00,000 9% Debentures (Unlisted) (At Par) 2,50,000 10% Debentures (Listed) (At Par) 2,50,000 49,00,000 During the year dividend of ₹ 6,00,000 were received on equity shares. Interest on all types of debt securities was received as and when due. Operating expenses paid during the year amounted to ₹ 2,50,000. © The Institute of Chartered Accountants of India At the end of the year equity shares and 10% debentures are quoted at 175% and 90% respectively of the face value. Other investments are valued at par. From the information given above, choose the correct answer to the following questions:
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Case Scenario 7
Derivatives Analysis and Valuation
HHM & Co., is a famous consultant. It has established the following strategy on the stock of PLS Ltd: (a) Purchased one 3-month call option with a premium of ₹ 25 and an exercise price of ₹ 750. (b) Purchased one 3-month put option with a premium of ₹ 8 and an exercise price of ₹ 600. The stock of PLS Ltd is currently selling at ₹ 680. The option size is 100 shares of PLS Ltd. From the information given above, choose the correct answer to the following questions:
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Case Scenario 8
Derivatives Analysis and Valuation
On 3rd April, 2025, Royal Bank quotes the following: Bid Ask Spot Exchange Rate (US$ 1) ₹ 84.2525 ₹ 85.5945 2 months’ swap points 3 months’ swap points In a spot transaction, delivery is made after two days. Assume spot date as 5th April, 2025 and 1 swap point = 0.0001. Calculation up to 4 decimal places. From the information given above, choose the correct answer to the following questions:
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Case Scenario 9
Mergers, Acquisitions and Corporate Restructuring
ABC Ltd. is planning to acquire XYZ Ltd. The following information is available in this respect: Company No. of Shares Market Price Per Share (₹) P/E Ratio ABC Ltd. 12,00,000 20 times XYZ Ltd. 4,00,000 10 times ABC Ltd. plans to acquire the whole of XYZ Ltd. by issuing shares at its market price of ₹ 16. It is expected that the price of ABC Ltd. share will remain constant after this acquisition. Purchase Consideration is ₹ 80,00,000. Calculation up to 2 decimal places. From the information given above, choose the correct answer to the following questions:
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Case Scenario 10
Derivatives Analysis and Valuation
A and B are two friends. Since B has earned a lot of profit from trading in financial derivative market, A is also considering speculating on G Ltd.’s shares which is currently trading at ₹ 1,400 per share through taking positions in options in stocks of same company. Accordingly, A took following contract positions in the options on G Ltd.’s stock: (i) Selling one contract of 2-month call option with a premium of ₹ 70 and an exercise price of ₹ 1,500. (ii) Purchasing one contract of 2-month put option with a premium of ₹ 50 and an exercise price of ₹ 1,200. From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 11
Derivatives Analysis and Valuation
A Ltd. wants to acquire D Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of D Ltd.). Following information is provided: A Ltd. D Ltd. ₹ 72,00,000 ₹ 14,40,000 Equity shares outstanding (Nos.) 24,00,000 7,20,000 PE Ratio 5 times 3.5 times Market price per share ₹ 15 ₹ 7 From the information given above, choose the correct answer to the following questions:
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Case Scenario 12
Business Valuation
During one business meeting at ABC Ltd., one of the members presented data relating to 3 companies X Ltd., Y Ltd. and Z Ltd. whose operating Income are equal, but their capital structure is different. (in ₹ 000) X Ltd. Y Ltd. Z Ltd. Total invested capital 40,00,000 40,00,000 40,00,000 Debt/Assets ratio 0.8 0.5 0.2 Shares outstanding 1,22,000 1,66,000 2,00,000 10.40% 8.45% 9.75% Cost of Equity 26% 22% 20% Operating Income (EBIT) 10,00,000 10,00,000 10,00,000 From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 13
Financial Policy and Corporate Strategy
XYZ Ltd. is planning to expand its business and therefore raising fund by issuing a Convertible Bond of ₹ 10 crore. An investor “Mr. A” is interested to invest in the bond of XYZ Ltd. Mr. A has following data related to the Convertible Bond. The data given below relates to a convertible bond: Face value ₹ 1000 Coupon rate 12% No. of shares per bond Market price of share ₹ 48 Straight value of bond ₹ 940 Market price of convertible bond ₹ 1060 Maturity 5 Years From the information given above, choose the correct answer to the following questions:
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Case Scenario 14
Security Analysis
A Ltd. paid a dividend of ₹ 5 for the last year. The dividend is expected to grow at 25% for the next 6 years and at 10% per annum thereafter. The standard deviation of market return and A Ltd.’s share is 12% and 18% respectively. The correlation between market return and A Ltd. share return is 0.3733. The return of government bond is 13% per annum and market return is expected to be around 20%. From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 15
Risk Management
The following information is available in respect of Bond X and Bond Y. Bond X Bond Y Face value, redeemable at par ₹ 1000 ₹ 1000 Coupon rate, payable annually (%) 6% 10% Time to maturity (years) Mr. A, an investor has the portfolio consisting of 75% of Bond X and 25% of Bond Y. The current YTMs prevailing in the market is 10%. Year (n) : PVIF (10%, n) : 0.9091 0.8264 0.7513 0.6830 0.6209 From the information given above, choose the correct answer to the following questions:
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Case Scenario 16
Derivatives Analysis and Valuation
Following information is related to actions taken in different situation of financial options: Situation Action Exercise Price Premium Spot Price Exercised Exercised Lapsed From the information given above, choose the correct answer to the following questions:
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Case Scenario 17
Mergers, Acquisitions and Corporate Restructuring
The company ABC Ltd. proposes to take over XYZ Ltd. The chief executive of the company thinks that shareholders always look for the earnings per share. Therefore, he considers maximization of the earnings per share as his company’s objective. The following information is available in respect of ABC Ltd. and XYZ Ltd. ABC Ltd. XYZ Ltd. ₹ 400 Lakh ₹ 315 Lakh P/E ratio 10.50 10.00 Current market price per share ₹ 840 ₹ 1700 The company is planning to borrow funds @ 15% rate of interest and buys out the target company by paying cash. From the information given above, choose the correct answer to the following questions:
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Case Scenario 18
Derivatives Analysis and Valuation
A Ltd. is planning to borrow an amount of ₹ 300 crores for a period of 3 months in the coming 6 months’ time from now. The current rate of interest is 9% p.a., but it is likely to go up in 6 months’ time. The company wants to hedge itself against the likely increase in interest rate. You as CFO has been asked to suggest both traditional as well as modern methods to hedge interest rate risk. Suppose the banker of A Ltd. has quoted the following Forward Rate Agreement (FRA) rates: 3 x 6 8.10% 8.15% 6 x 9 8.20% 8.30% 9 x 12 8.35% 8.45% A Ltd. has already issued redeemable bonds or debentures. From the information given above, choose the correct answer to the following questions:
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Case Scenario 19
Derivatives Analysis and Valuation
ABC Inc., a U.S. firm, will require £ 600,000 in 6 months and is evaluating different strategies to hedge against currency risk. The available market data is as follows: Current Spot Rate: 1 £ = $ 2.50 6-months Forward Rate: 1 £ = $ 2.45 Interest Rates: • UK (per annuam): o Deposit Rate: 9.00% o Borrowing Rate: 10.00% • US (per annuam): o Deposit Rate: 10% o Borrowing Rate: 11.00% Option Contract: • Call option available on £, expiring in 6 months with: o Exercise price: $ 2.46 o Premium: $ 0.05 ABC Inc. has forecasted the following probabilities for spot rates after 6 months: Spot Rate Probability $ 2.39 25% $ 2.44 60% $ 2.56 15% From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 20
Security Analysis
An investor is evaluating two companies, X Ltd. and Y Ltd., to determine which company is a better investment. Both companies have different expected returns, standard deviations, and betas. • X Ltd. has an expected return of 22% and a standard deviation (risk) of 40%. Its Beta is 0.86. • Y Ltd. has an expected return of 24%, a standard deviation of 38%, and a Beta of 1.24. The correlation coefficient between the returns of X Ltd. and Y Ltd.is 0.72, and the standard deviation of the market return is 20%. From the information given above, choose the correct answer to the following questions:
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Case Scenario 21
Advanced Capital Budgeting Decisions
ABC Ltd. plans to invest ₹ 16,00,000 in a new unit. The project is expected to have a useful life of 4 years, with no salvage value at the end of its life. The annual depreciation charge for the project is ₹ 4,00,000. Projected revenues and costs for the project, ignoring inflation, are provided as follows: © The Institute of Chartered Accountants of India Year Revenues (₹) Costs (₹) 12,00,000 6,00,000 14,00,000 8,00,000 16,00,000 8,00,000 16,00,000 8,00,000 project, including inflation premium, is 10%. over the project’s lifespan are as follows: Year Revenue Inflation Cost Inflation 10% 12% 9% 10% 8% 9% 7% 8% From the information given above, choose the correct answer to the following questions:
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Case Scenario 22
Advanced Capital Budgeting Decisions
X and Y are two friends. Since Y has earned a lot of profit from trading in financial derivative market, X is also considering speculating on Gamma Corporation’s shares which is currently trading at ₹ 700 per share through taking positions in options in stocks of same company. Accordingly, X took following contract positions in the options on Gama Corporation’s stock: (i) Purchasing one contract of 2-month call option with a premium of ₹ 35 and an exercise price of ₹ 750. (ii) Purchasing one contract of 2-month put option with a premium of ₹ 25 and an exercise price of ₹ 600. After some time, trading in Option Market and understanding the nitty-gritties of same, X being CEO in an organization advised his team to implement the concept of Financial Options in the Capital Budgeting decisions called ‘Real Option’. From the information given above, choose the correct answer to the following questions:
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Case Scenario 23
Financial Policy and Corporate Strategy
The data given below relates to a convertible bond: Face value ₹ 450 Coupon rate 15% No. of shares per bond Market price of share ₹ 20 © The Institute of Chartered Accountants of India Straight value of bond ₹ 400 Market price of convertible bond ₹ 550 From the information given above, choose the correct answer to the following questions:
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Case Scenario 24
Mutual Funds
Mr. A is interested in investing ₹ 1,00,000 for which he is considering following three alternatives: (i) Invest ₹ 1,00,000 in Mutual Fund X (MFX) (ii) Invest ₹ 1,00,000 in Mutual Fund Y (MFY) (iii) Portfolio - Invest ₹ 60,000 in Mutual Fund X (MFX) and ₹ 40,000 in Mutual Fund Y (MFY) Average annual return earned by MFX and MFY is 12% and 11% respectively. Risk free rate of return is 8% and market rate of return is 10%. Covariance of returns of MFX, MFY and market portfolio Mix are as follow: MFX MFY Portfolio MFX 4.400 4.300 3.370 MFY 4.300 4.200 2.800 Portfolio 3.370 2.800 4.200 From the information given above, choose the correct answer to the following questions:
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Case Scenario 25
Derivatives Analysis and Valuation
P Ltd. is studying the possible acquisition of Q Ltd. by way of merger. The following data are available: Firm earnings No. of equity shares Market price per share Book Value Per share P Ltd. ₹ 10,00,000 2,00,000 ₹ 75 ₹ 210 Q Ltd. ₹ 3,00,000 50,000 ₹ 60 ₹ 105 The merger shall be gone through by exchange of equity shares and the exchange ratio is set according to different weights assigned to different basis as mentioned below :- EPS 50% Market Price 25% Book Value 25% From the information given above, choose the correct answer to the following questions:
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Case Scenario 26
Mutual Funds
Mr. Y has invested in the three mutual funds (MF) as per the following details: Particulars MF ‘X’ MF ‘Y’ MF ‘Z’ Amount of Investment (₹) 4,00,000 8,00,000 4,00,000 © The Institute of Chartered Accountants of India Net Assets Value (NAV) at the time of purchase (₹) 10.30 10.10 Dividend Received up to 31.03.2023 (₹) 9,000 6,000 NAV as on 31.03.2023 (₹) 10.35 10.30 Effective Yield per annum as on 31.03.2023 (percent) 9.66 -11.66 24.15 Assume 1 Year = 365 days From the information given above, choose the correct answer to the following questions:
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Case Scenario 27
Financial Policy and Corporate Strategy
ABC Ltd. is planning to expand its business and therefore raising fund by issuing a convertible bond of ₹ 10 crore. An investor “Mr. X” is interested to invest in the bond of ABC Ltd. Mr. X has following data related to the convertible bond. The data given below relates to a convertible bond: Face value ₹ 250 Coupon rate 12% No. of shares per bond Market price of share ₹ 12 Straight value of bond ₹ 235 Market price of convertible bond ₹ 265 Maturity 5 Years From the information given above, choose the correct answer to the following questions:
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Case Scenario 28
Security Analysis
Suppose you are a financial consultant and following 3 clients have approached to you seeking advise on the investment to be made in securities. All these clients have different background and risk appetite as well as perception to the market. Client A wants to invest in Fixed income avenues and therefore he is looking at the credit rating of the securities as well as financial ratios such as interest coverage, earning power etc and the general prospect of the industry. © The Institute of Chartered Accountants of India Client B wants to earn a fixed income over a period of time by holding the security till its maturity. Client C wants to earn more by taking more risk. Therefore, he is more interested to invest in stocks. He believes that Price reflects all information found in the record of past prices and volumes. From the information given above, choose the correct answer to the following questions:
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Case Scenario 29
Derivatives Analysis and Valuation
AES Ltd. wants to acquire DNF Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of DNF Ltd.). Following information is provided: AES Ltd. DNF Ltd. ₹ 36,00,000 ₹ 7,20,000 Equity shares outstanding (Nos.) 12,00,000 3,60,000 PE Ratio 10 times 7 times Market price per share ₹ 30 ₹ 14 From the information given above, choose the correct answer to the following questions:
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Case Scenario 30
Business Valuation
During one business meeting at XYZ Ltd., one of the member pointed out that while evaluating the performance of any company one should not only see its Operating Income but should also analyse its Capital structure as well. Weighted Average Cost of Capital changes on the basis of capital structure keeping all other factors unchanged. He presented data relating to 3 companies Alpha Ltd., Beta Ltd. and Gama Ltd. whose operating Income are equal, but their capital structure is different. The following information relating to these 3 companies is as follows: (in ₹ 000) Alpha Ltd. Beta Ltd. Gama Ltd. Total invested capital 20,00,000 20,00,000 20,00,000 Debt/Assets ratio 0.8 0.5 0.2 Shares outstanding 61,000 83,000 1,00,000 16% 13% 15% Cost of Equity 26% 22% 20% Operating Income (EBIT) 5,00,000 5,00,000 5,00,000 © The Institute of Chartered Accountants of India From the information given above, choose the correct answer to the following questions:
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Case Scenario 31
Derivatives Analysis and Valuation
On 1 October 2023 Mr. X an exporter enters into a forward contract with a BNP Bank to sell US$ 1,00,000 on 31 December 2023 at ₹ 85.40/$. However, due to the request of the importer, Mr. X received the amount on 28 November 2023. Mr. X requested the bank the take delivery of the remittance on 30 November 2023 i.e., before due date. The inter-banking rates on 28 November 2023 was as follows: Spot ₹ 85.22/85.27 One Month Premium 10/15 Note: 1. Consider 365 days in a year. 2. Prevailing Prime Lending Rate is 12% From the information given above, choose the correct answer to the following questions:
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Case Scenario 32
Risk Management
A US parent company has subsidiaries in France, Germany, UK and Italy. The amounts due to and from the affiliates is converted into a common currency viz. US dollar and entered in the following matrix. © The Institute of Chartered Accountants of India Inter Subsidiary Payments Matrix (US $ Thousands) Paying affiliate France Germany UK Italy Total Receiving affiliate France --- Germany --- UK --- Italy --- Total The treasurer of US Parent company is suggesting that by applying Multilateral Netting system the company can save a lot of transfer/ exchange costs. The company’s Board agreed with Treasurer’s proposal. From the information given above, choose the correct answer to the following questions:
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Case Scenario 34
Securitization
Grow More Ltd. an NBFC is in the need of funds and hence it sold its receivables to MAC Financial Corporation (MFC) for ₹ 100 million. MFC created a trust for this purpose called General Investment Trust (GIT) through which it issued securities carrying a different level of risk and return to the investors. Further, this structure also permits the GIT to reinvest surplus funds for short term as per their requirement. MFC also appointed a third party, Safeguard Pvt. Ltd. (SPL) to collect the payment due from obligor(s) and passes it to GIT. It will also follow up with defaulting obligor and if required initiate appropriate legal action against them. From the information given above, choose the correct answer to the following questions:
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Case Scenario 35
Derivatives Analysis and Valuation
You are a financial analyst at a prominent investment firm and have been tasked with empirically verifying the weak form of Efficient Market Hypothesis (EMH) Theory for the XYZ Stock Index, a collection of diverse stocks. You decided to conduct three different tests to assess whether the stock market follows the principles of the weak form of EMH. Test 1 For the past five years, you collected daily price changes of the stocks in the XYZ Stock Index. You calculated correlation coefficients for different lag periods and analyzed whether past price changes exhibit any significant correlation with future price changes. You considered price changes to be serially independent. The results indicated that most auto correlation coefficients are close to zero and statistically insignificant, suggesting those past price changes do not predict future price changes. Test 2 You further investigated the randomness of price changes in the XYZ Stock Index. Analyzing the sequence of daily price changes, you count the number of runs where price changes are consistently positive or negative. Upon comparing the observed number of runs with the expected number based on randomness, you find that they align closely, supporting the idea that price changes follow a random pattern. Test 3 To examine the efficacy of trading strategies based on historical price trends, you implemented a simple trading rule for the XYZ Stock Index. The rule involves buying when the price crosses a moving average of 5% threshold and selling when it crosses another 7% threshold. Over a period of testing, you computed the returns generated by the trading strategy. The results revealed that the returns are not consistently better than random chance, implying that past price trends do not reliably predict future price movements. © The Institute of Chartered Accountants of India Conclusion: After conducting the three tests the evidence supports the weak form of Efficient Market Theory for the XYZ Stock Index you concluded that past price trends do not reliably predict future price movements. From the information given above, choose the correct answer to the following questions:
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Case Scenario 36
Financial Policy and Corporate Strategy
Bank A is in need of fund for a period of 14 days. To meet this financial need on 20th September 2023 Bank A enters into an agreement with Bank B under which it will sell 10% Government of India Bonds issued on 1st January 2023 @ 5.65% for ₹ 8 crore (Face value is ₹ 10,000 per Bond). The clean price of same Bond is ₹ 9,942 and the Initial Margin be 2% and the maturity date of Bond is 31st December 2028. Consider 360 days in a year and interest is payable annually. Based on above Case Scenario, answer the following questions:
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Case Scenario 37
Security Analysis
Two friends Mr. A and Mr. N were discussing about the risks of market. While Mr. A is sort of risk averse, Mr. N is an aggressive investor and believes in taking risk. Mr. N said we cannot diversify the market risk at all and he quoted the Modern Portfolio Approach. Both of these friends analyse the market data for the few month and came out with expected returns on two stocks for a particular market. © The Institute of Chartered Accountants of India Market Return Aggressive Defensive 7% 4% 9% 25% 40% 18% From the information given above, choose the correct answer to the following questions:
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Case Scenario 38
Mutual Funds
Mr. X on 1st July 2021, during the initial offer of some Mutual Fund invested in 10,000 units having face value of ₹ 10 for each unit. On 31st March 2022, the dividend paid by the M.F. was 10% and Mr. X found that his annualized yield was 153.33%. On 31st December 2023, 20% dividend was given. On 31st March 2024, Mr. X redeemed all his balance of 11,296.11 units when his annualized yield was 73.52%. From the information given above, choose the correct answer to the following questions:
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Case Scenario 39
Portfolio Management
The Asset Management Company of the mutual fund (MF) has declared a dividend of 9.98% on the units under the dividend reinvestment plan for the year ended 31st March 2021. The investors are issued additional units for the dividend at the rate of closing Net Asset Value (NAV) for the year as per the conditions of the scheme. The closing NAV was ₹ 24.95 as on 31st March 2021. An investor Mr. X who is having 20,800 units at the year-end has made an investment in the units before © The Institute of Chartered Accountants of India the declaration of the dividend at the rate of opening NAV plus an entry load of ₹ 0.04. The NAV has appreciated by 25% during the year. Assume the face value of the unit as ₹ 10.00. From the information given above, choose the correct answer to the following questions:
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Case Scenario 40
Derivatives Analysis and Valuation
You as an investor had purchased a 4-month European Call Option on the equity shares of X Ltd. for ₹ 10, of which the current market price is ₹ 132 per share and the exercise price ₹ 150. You expect the price to range between ₹ 120 to ₹ 190. The expected share price of X Ltd. and related probability is given below: Expected Price (₹) Probability 0.05 0.20 0.50 0.10 0.15 From the information given above, choose the correct answer to the following questions:
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Case Scenario 41
Derivatives Analysis and Valuation
Suppose you are a risk manager at a financial institution, and your company has loaned a significant amount of ₹ 500 crore to a company X Ltd. for a period of 3 years at 6-month at MCLR plus 200 bps. You are concerned about X Ltd.'s ability to repay the debt due to recent market volatility. To protect your institution from potential default, you decide to purchase a Credit Default Swap (CDS) from ABC Bank Ltd. for same notional amount at a premium quoted at 1% per year through cash settlement. On the respective reset dates for the same period actual MCLR interest rate comes out as follows: Reset MCLR 9.75% 10.00% 10.25% 10.35% 10.50% 10.60% From the information given above, choose the correct answer to the following questions:
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Case Scenario 42
Advanced Capital Budgeting Decisions
XYZ Ltd. is a mid-sized manufacturing company that produces industrial equipment. The company is considering a new investment project—a state-of- the-art automated production line, which is expected to improve production efficiency. The details of the same project are as follows: ₹ Initial Cost of the project 10,00,000 Sales price/unit Cost/unit Sales volumes Year 1 20000 units Year 2 30000 units Year 3 30000 units The applicable discount rate is 10% p.a. From the information given above, choose the correct answer to the following questions:
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Case Scenario 43
Risk Management
You are an investment analyst working for a financial advisory firm. You have been asked to analyze the bond market's yield curve to assist your clients in making investment decisions. The yield curve represents the relationship between the interest rates (yield) and the time to maturity for debt securities, usually government bonds. © The Institute of Chartered Accountants of India For simplicity, assume the following yield data for government bonds over various maturities (measured in years): Yield Curve Table Maturity (Years) Yield (%) 1 Year 3.00% 2 Years 4.00% 3 Years 5.00% 5 Years 6.00% 7 Years 6.40% 10 Years 7.00% 15 Years 7.40% 30 Years 7.60% From the information given above, choose the correct answer to the following questions:
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Case Scenario 44
Security Analysis
Following Financial data are available for PQR Ltd. for the financial year ending 2023: (₹ in lakh) 8% Debentures 10% Bonds (2022) Equity Shares (₹10 each) Reserves and Surplus © The Institute of Chartered Accountants of India Total Assets Assets Turnovers ratio 1.1 Effective interest rate 8% 40% Operating margin 10% Dividend payout ratio 16.67% Current market Price of Share ₹ 14 Required rate of return of investors 15% From the information given above, choose the correct answer to the following questions:
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Case Scenario 45
Derivatives Analysis and Valuation
An Indian exporting firm, Rohit and Bros. exported good worth of AUD 1 million to an importer in Sydney. Rohit and Bros. are worried about likely depreciation of AUD in near future as it is likely that the export sum will be received after 3 months. Today as such as there is no derivative contract is available in AUD to hedge itself from such depreciation. The following data is given: Spot rate : ₹ 56.00/AUD 3 months interest rate : India : 12 per cent per annum : Australia : 5 per cent per annum From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 46
Risk Management
Mr. B is a rational risk taker. He takes his position in a single stock for 4 days in a week. He does not take a position on Friday to avoid weekend effect and takes position only for four days in a week i.e. Monday to Thursday. He transfers the amount on Monday morning and withdraws the balance on Friday morning. He desires to take a maximum exposure in the single stock (not the portfolio) where Value at Risk (VAR) should not exceed the balance lying in his bank account. The position by his manager, as per standing instructions, is taken on the free balance lying in the bank account in the morning on each Monday. On Monday morning (before opening of the capital market) he has transferred an amount of ₹ 11 Crore to his bank account. A fixed deposit also matured on this Monday. The maturity amount of ₹ 63,42,560 was also credited to his account by the bank in the morning of the Monday. However, Mr. B received the intimation of the same in the evening. The bank needs a minimum balance of ₹ 1,000 all the time. © The Institute of Chartered Accountants of India The other information with respect to stocks X and Y, which are under consideration for this week, is as under: Y Return Probability Return Probability 0.10 0.10 0.25 0.20 0.30 0.40 0.25 0.20 0.10 0.10 From the information given above, choose the correct answer to the following questions:
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Case Scenario 47
Financial Policy and Corporate Strategy
XYZ Ltd. plans to invest ₹ 800,000 in a new unit. The project is expected to have a useful life of 4 years, with no salvage value at the end of its life. The annual depreciation charge for the project is ₹ 200,000. Projected revenues and costs for the project, ignoring inflation, are provided as follows: Year Revenues (₹) Costs (₹) 600,000 300,000 700,000 400,000 800,000 400,000 800,000 400,000 © The Institute of Chartered Accountants of India project, including inflation premium, is 10%. over the project’s lifespan are as follows: Year Revenue Inflation Cost Inflation 10% 12% 9% 10% 8% 9% 7% 8% From the information given above, choose the correct answer to the following questions:
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Case Scenario 48
Financial Policy and Corporate Strategy
An investor is evaluating two companies, A Ltd. and B Ltd., to determine which company is a better investment. Both companies have different expected returns, standard deviations, and betas. • A Ltd. has an expected return of 22% and a standard deviation (risk) of 40%. Its Beta is 0.86. • B Ltd. has an expected return of 24%, a standard deviation of 38%, and a Beta of 1.24. The correlation coefficient between the returns of A Ltd. and B Ltd. is 0.72, and the standard deviation of the market return is 20%. From the information given above, choose the correct answer to the following questions: © The Institute of Chartered Accountants of India
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Case Scenario 49
Derivatives Analysis and Valuation
XYZ Ltd., a U.S. firm, will require £ 300,000 in 180 days and is evaluating different strategies to hedge against currency risk. The available market data is as follows: Current Spot Rate: 1 £ = $ 2.00 180-Day Forward Rate: 1 £ = $ 1.96 Interest Rates: • UK (180 days): o Deposit Rate: 4.5% o Borrowing Rate: 5% • US (180 days): o Deposit Rate: 5% o Borrowing Rate: 5.5% Option Contract: • Call option available on £, expiring in 180 days with: o Exercise price: $ 1.97 o Premium: $ 0.04 © The Institute of Chartered Accountants of India XYZ Ltd. has forecasted the following probabilities for spot rates after 180 days: Spot Rate Probability $ 1.91 25% $ 1.95 60% $ 2.05 15% From the information given above, choose the correct answer to the following questions:
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Case Scenario 50
Derivatives Analysis and Valuation
P Ltd. is planning to borrow an amount of ₹ 60 crores for a period of 3 months in the coming 6 month's time from now. The current rate of interest is 9% p.a., but it is likely to go up in 6 month’s time. The company wants to hedge itself against the likely increase in interest rate. You as CFO has been asked to suggest both traditional as well as modern methods to hedge interest rate risk. Suppose the banker of P Ltd. has quoted the following Forward Rate Agreement (FRA) rates: 3 x 6 9.10% 9.15% 6 x 9 9.20% 9.30% 9 x 12 9.35% 9.45% P Ltd. has already issued redeemable bonds or debentures. © The Institute of Chartered Accountants of India From the information given above, choose the correct answer to the following questions:
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Case Scenario 51
Portfolio Management
XYZ Ltd., a medium-sized company in the renewable energy sector, is experiencing steady sales growth. The company’s management, however, is concerned about balancing rapid growth with long-term sustainability. In the past year, XYZ’s growth objectives have led to aggressive expansion plans, but management now realizes that such growth might not be financially sustainable in the long run. This raises concerns about how to maintain the company's financial health while meeting its ambitious growth targets. The CFO of XYZ Ltd. highlights the importance of Sustainable Growth Rate (SGR). The company now needs to ensure that its operational and financial policies align with its growth goals. XYZ must avoid expanding too quickly, which could strain its financial resources and lead to excessive borrowing. Moreover, management must also consider the long-term implications of resource consumption, particularly in the renewable energy industry, where sustainability is key to both current and future stakeholders. XYZ Ltd. also realizes that it needs to focus on building its growth capability alongside its growth strategy. Without the necessary infrastructure and financial planning in place, the company’s efforts to achieve long-term, sustainable growth could be in jeopardy. Furthermore, the company is aware of the risks of relying too much on external financing and recognizes the need for a balance between maintaining sufficient equity and minimizing debt. Given the importance of these considerations, XYZ’s management team must now review their growth strategy and financial policies to ensure they are consistent with the firm’s sustainable growth objectives. From the information given above, choose the correct answer to the following questions:
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Case Scenario 52
Financial Policy and Corporate Strategy
The company X Ltd. proposes to take over Y Ltd. The chief executive of the company thinks that shareholders always look for the earnings per share. Therefore, he considers maximization of the earnings per share as his company’s objective. The following information is available in respect of X Ltd. and Y Ltd. X Ltd. Y Ltd. Net Profit ₹ 80 Lakh ₹ 15.75 Lakh P/E ratio 10.50 10.00 Current market price per share ₹ 42 ₹ 85 From the information given above, choose the correct answer to the following questions:
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Case Scenario 54
Risk Management
The following information is available in respect of Bond A and Bond B. Bond A Bond B Face value, redeemable at par ₹ 1000 ₹ 1000 Coupon rate, payable annually (%) 6% 10% Time to maturity (years) An investor has the portfolio consisting of 75% of Bond A and 25% of Bond B. The current YTMs prevailing in the market is 10%. Year (n) : PVIF (10%, n) : 0.9091 0.8264 0.7513 0.6830 0.6209 From the information given above, choose the correct answer to the following questions:
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Case Scenario 55
Financial Policy and Corporate Strategy
Z Ltd. paid a dividend of ₹ 5 for the current year. The dividend is expected to grow at 25% for the next 6 years and at 10% per annum thereafter. The return of government bond is 13% per annum and market return is expected to be around 20%. The correlation between market return and Z Ltd. share return is 0.3733. The standard deviation of market return and Z Ltd. shares is 12% and 18% respectively. Round off calculations to two decimal places. From the information given above, choose the correct answer to the following questions:
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Case Scenario 56
Financial Policy and Corporate Strategy
SM Limited has a market capitalization of ₹ 3,000 crore and the current earnings per share (EPS) is ₹ 200 with a price earnings ratio (PER) of 15. The Board of directors is considering a proposal to buy back 20% of the shares at a premium which can be supported by the financials of the company. The Boards expects post buy back market price per share (MPS) of ₹ 3057. Post buy back PER will remain same. The company proposes to fund the buy back by availing 8% bank loan since available resources are committed for expansion plans. From the information given above, choose the correct answer to the following questions:
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2 questions held back: ICAI published them without an answer key entry, so they cannot be scored.