Hello friends good morning and welcome to this analysis of AFM May 2024 exam paper and I'm also going to give you the stepbystep solution for all the question including the theory question you can download the question paper with complete solution step by solution from our website V know.in our website is wo. you can go to the free resource section and you can download the entire question paper with solution those who have appeared for the exam they can check to what extent they have got it right we have given answer of only part two part B descriptive question because I have not yet received the McQ questions so in case if I receive McQ question I'll prepare the answer for that we have also uploaded the answer of paper complete stepbystep solution on our website V know.in and the explanation is given on the YouTube channel as Foundation if you have not yet subscribed to the channel as Foundation subscribe it now and also share this video with all your friends in CA final who have appeared for the exam or who have not yet appeared for the exam it will be very very useful to you now coming to the AFM May 2024 paper it was one of the easiest papers I have seen in last about 20 years yes all the questions all the numerical questions were from your study material or your past exam RTP and MTP and many difficult chapters were totally ignored for example Foreign Exchange Management they have not asked question on that right or in derivative also just one very basic question has been asked they have asked questions from valuation of share two questions on mutual fund two or three questions on portfolio management lot of theory questions were there there was question on mergers and acquisition Advanced Capital budgeting all these questions were from study material as I always say trust me do not keep any topic for option nowadays there are lot of wrong way of explanation that certain topics are very important certain topics are not important some of the faculties are wrongly classifying a b c category of topic please do not do that do not listen to such people trust me you will face lot of challenges in the exam my simple advice is all topics are important chapter 1 to chapter 15 all topics are important all concepts are important all the questions appearing in the study material or which have been asked in exam RTP and MTP are important at least do this much no shortcut you can practice more but you can't practice less if in case if you are serious about your exam if you're not welcome you do whatever you want nobody can help you please only learn from experienced faculties I am teaching for 21 year and I know there are lot of surprises in the exam do not take this Exam May 24 exam as a benchmark for November 24 exam number 24 exam can be very different this was probably the first exam under the new scheme so F FR as well as AFM till now have been very very easy paper but we cannot assure the same thing about November 24 please study all topics my formula is mmm more practice more confidence and more marks in the exam M mm more practice more confidence more marks otherwise you'll be stuck in the exam so let us start with the analysis and solution of AFM paper for May 2024 the first question from portfolio management the first question from portfolio management several times we have done this question in the class same to same problem is also appearing in the study material so the question is an investor is holding 1,000 shares an investor is holding 1,000 shares of X limited current year dividend is 3 rupees per share so what will you call it d0 or D1 so we are going to call it d0 the market price of this share the current market price of the share is 35 rupees I will use this number in my answer the investor is concerned about several factors which are likely to change during the next financial year as indicated below now this is current year data and this is what can happen in the next year so two times you have to solve it is written dividend paid this is paid 3 rupees already mentioned here so this is d0 and anticipated dividend per share this 3.25 is D1 3.25 is D1 so if you're using anticipated column revised column then take 3.25 as it is next is risk-free rate RF is given Market risk premium means RM minus RF is given beta is given expected growth now expected growth you are going to get in the next financial year advise the investor to take further action whether to buy hold or sell the share based on the above information so what I'll do I will solve it twice good morning everybody who has joined this live streaming session and please also inform your friends to join otherwise they can watch it later uh on the YouTube channel yes Foundation okay so I'm going to give you the answer first we'll compute the exis exting rate of return which is based on existing data based on existing data risk-free return is 11 risk premium is 4 and beta is 1.5 so it comes to 177% Revis rate of return which is based on this revised data and this is your risk- free return which has also changed to 12 and this is Market risk premium and beta is also changing 1.6 so this comes to 20% based on original data the share price is 35 share price is 35 d0 into 1 + G here we are given d0 so I need to increase it by expected growth rate of 8% there's a small calculation error I will Rectify it should be 3 into 1.08 3 into 1.08 then divide by 177% minus 8% 9% so this is 36 rupees instead of 35 this is 36 rupees and based on revised data D1 is already given here 3.25 so take D1 as it is take D1 as it is and uh then 20% is the new rate and 10% is the new growth rate so that comes to 32.5 so existing price 36 revised price 32.5 good morning Arch Agarwal good morning Ramesh thank you for joining please inform your friends also there may be some minor calculation error because we have prepared read this in a hurry but please take care of the calculations yourself now I'm going to give you a note in case of existing market price of rupees 35 per share the rate of return 177% and the possible equilibrium price at the rate rupees 36 the share needs to be bought write down bought the share needs to be bought as the share is underpriced the share needs to be bought at the share is underpriced existing price is 35 based on existing data it should be 36 so this is underpriced share So based on existing data my answer would be buy because enterpris but based on revised data existing price 35 revised data will give you 32.5 so your answer will be under the changed scenario growth of dividend rate is revised to 10% return has been revised to 20% and the possible price of the share will be 32.5 therefore investors should sell the share as the price is expected to decrease if other things remain the same so thank you Raju MAA for joining and please also share this video with your friends they might also need some guidance now I'll come to question number 1 B this is one of the highly repeated questions in the exam okay there are three mutual fund schemes given to you like many problems amount invested is given dividend received up to 31st March 23 is given nav on closing date closing nav is given effective yield is given on 31st March so most most of the exam question they ask you effective yield but this time effective yield is given and holding period is also given in days holding period is also given in days so what do they want you are required to compute nav at the time of purchase missing figure is nav at the time of purchase and for calculation use 365 days in a year so we have purchased this investment amount but we don't know what was the nav on the date of purchase to help you they have given you effective yield they've given you holding period they have given you closing nav they've given you dividend so what I'll do I will first write an equation and solve this equation based on this equation you will be able to get the answer so the equation for Effective yield percentage paranam is dividend plus closing investment value closing investment value will be closing nav plus number of units minus amount invested so dividend plus capital gain divide div by amount invested will give you holding period return will give you holding period return and when you multiply by 365 divide by holding period that will give you effective yield per anom number of units is not given in the problem let the number of units be X that is the starting point good morning rishik good morning Satish first mutual fund X we'll have to solve one by one look at the question question is effective return return is 19.34% 19345 please download the question paper with solution from our website V know.in immediately keep it in front of you and you'll be able to understand better this is the sheet you will get exactly same sheet you'll get and you can correct it also certain things if required okay so this is the equation I will write dividend given 10,000 closing nav 11.15 into number of unit x minus opening investment divide by opening investment into 365 by 120 when you solve this you get 50,000 units approximately approximately means not exactly because you might get 49,900 point something so I have rounded off and therefore nav on the purchase date will be 550,000 is the total investment divide by units answer is 11 so if you have got 11 rupees or very close to 11 you will get uh how many marks I think it was for two marks for each part total is four marks so maybe you'll get two or one and half marks same thing for mutual fund y effective yield is given 22.5% dividend is given 6,000 na AV 11 number of unit X investment 420,000 here the holding period is given in the problem 100 days when I solve it I will first get the number of units 40,000 unit approximately because of rounding of you might get 30 39,999 something so don't bother you can round off to 40,000 unit the total amount invested is 420,000 divide by 40,000 unit you get 10.50 very easy question same thing for mutual fund Zed but in mutual fund Zed they have given you negative return minus 36.5% so which is - 0.365 and then dividend is zero closing nav is 9.50 opening amount invested is 1 L number of days held is 50 when I solve it I get 10,000 unit nav per unit is 10 Rupees so the answer for this question is 11 10.5 and 10 approximately if you have got it right then welcome you'll get full marks and you can check also your answer once you have got the opening and a you can find out the effective return by taking dividend plus nav1 minus nav 0 divide by nav 0 into 365 by holding period And if your answer matches with the effective yield given in the problem then you are right good morning Rajiv Sharma Raju Sharma is all India ranker he has written in in his name air10 I am also air2 Foundation air4 intermediate air 24 CF final and I have passed IES Mains exam also two times okay so don't think you are the only intelligent one now next is uh question number one C was a Theory question the starting point of an organization is money and end point of organization is also money explain the statement to clearly understand this interface of strategic management and financial policy this is from your chapter one of your AFM study material interface between strategic management and financial policy this is a theory question and I have given the answer taken from your study material only this Theory question you can just read yourself later download the notes from website V know.in now we'll come to question number 2 a again a question which has been repeated in the last few years taken from past exam or you can say study material you have to compute uh EMA exponential moving average they have given you data from 2nd January to 24th Jan uh to 11 January day 1 2 3 4 5 6 7 8 9 10 11 and these are the days given day given Nifty when there is no trading you ignore this it won't be required in your calculation so total number of trading Days 1 2 3 4 5 6 78 9 little lengthy calculation but you'll be able to get it good morning em fers kker and please also share this video with your friend immediately take a pause share it with all your friends Group C a final groups they will be and they will find it useful and those who appeared for the exam you please check your answer with my answer and you can easily calculate how much you are going to score you are required to compute the exponential moving average of the Nifty during the above period previous day exponential moving average of nifty can be assumed to be 21500 so that is my starting point and the value of the exponent for 31st date EMA is also given when the Institute gives you exponent use the same so the table heading calculation of EMA I'm not explaining this right now we have already done two questions in the classroom and it is the same question only these figures have changed otherwise Institute has even given this EMA Factor same which was taken in the classroom 062 so what is the formula for computing you will write date Nifty previous day EMA difference between Nifty and previous day EMA that difference will be multiplied by Factor 062 exponent and the previous day EMA column number this plus this adjustment for exponential moving average Factor this two you will add and you'll get the EMA for the day so we have done this calculation one line I'm going to explain this is 21742 given in the problem please keep the print out of the question in front of you okay in case if you are serious then this is the previous day EMA given we have taken the difference between these two numbers multiplied by 062 this two you will add you'll get 20 515 same way you continue and these are the EMA you will get if you look at this EMA you will observe that what do You observe you will observe that they are falling which means the trend is a falling Trend trend is a falling Trend based on the limited data given to us we can interpret that the market is turning to be bearish because only in the first second here there was a increase but after that there is a continuous decrease so the trend is what is the trend bearish Trend the trend is a bearish trend and therefore the answer is investor or the broker can take a short position is it right those who are attending online please respond is it right question number 2 B question number two be very very easy question again several time repeated the question is also in the study material in fact all questions are in the study material 2 B four marks question on Computing cost of of gdr or ADR no change in the problem only some figures they have changed XY is interested in expanding its operation and planning to install a unit at us for the proposed project it requires a fund of15 million net of issue expense and flotation cost so 15 million should come in hand after incurring expenses and the estimated flotation cost is 3% so you need to raise 15 million divide by 97% this much fund you will have to raise because 3% will be spent on flotation cost to finance the project it proposes to issue gdr Global depository receipt you as a Financial Consultant is required to compute the number of gdr to be issued so the first question is number of gdr to be issued so first I need to compute the amount raised and that amount raised will be divided by issue price per gdr in dollar and that will give me number of gdr to be issued second is the cost of gdr with the help of following additional information gdr is also equitation only so cost of gdr formula is D1 by p 0 plus G and for to help you they have given you this detail expected market price of the share at the time of issue of gdr is 350 one share is 350 face value 100 rupes this will be required for dividend calculation three shares underline each gdr so one gdr is equal to 350 into 3 and shall be priced at 6% discount so in terms of Indian rupee this is the price but they are going to issue in dollar so they have given you exchange rate rupees per doar 84 so when you divide this by 84 you get issue price in dollar use that issue price in dollar here and you'll get number of gdr to be issued and dividend expected is 10% see the face value is 100 rupees face value is 100 rupees means dividend is 10 Rupees per share into three share so dividend per gdr will be 30 rupees okay so D1 amount raised from gdr this figure minus 3% flotation cost will be p 0 and growth rate is given 8% so very easy question This Is The Answer issue size is 15 million flotation cost is 3% gross issue is this amount issue price per gdr 987 issue price per gdr in dollar will be 11.75 dividend per gdr will be 30 rupe net proceed per gdr will be 9 87 into 97% because 3% is flotation cost this is amount received in rupee per gdr after deducting flotation Cost question one number of gdr issued this is your gross amount rised and this 11.75 is your issue price per gdr therefore please check the calculation it comes to 13161 million gdr and cost of gdr will be same formula which we use in the classroom D1 upon p 0 + G okay so dividend would be 30 rupees calculated here net proceed 9573 n growth rate 8% is given please check the calculation 11.13% is the calculation right say yes or no is the calculation right kindly reply yes or no okay now we'll come to question number 2 C it was from mutual fund very very easy question for four marks okay anybody could do it Mr a has invested in Grow Rich mutual fund scheme the details of the mutual fund scheme are given below asset value at the beginning of the month this is actually nav 0 7850 annualized return that is return return percentage perom so they have already done annualization 16% distribution made in the nature of income and capital gain per unit respectively 40 is the dividend distribution 30 is the the capital gain distribution you are required to compute the month end so this is D nav1 is missing nav1 is missing of the grow mutual fund round off to two decimal comment briefly on the month and nav so one small comment also we write what is the formula for computing annualized return all of you know that in fact this question you can see like a repetion within the same question paper some minutes back we have done this annualize return percentage equal to dividend per unit plus capital gain distribution per unit plus closing na minus opening na divide by opening na because the figures are in months I will take 12/ by holding period in earlier problem it was in days so I have taken 365 divid by number of days so don't worry let the closing na be X this is your missing figure closing nav is what they want your annualized return is given 16% so take6 if you want to take 16 here then multiply by 100 here then it will be okay is it right your left hand side of the equation and right hand side should match okay so let us continue dividend capital gain closing opening divide by opening into 12 by 1 when you will solve it you'll get 78.85 in the exam you can quickly cross check by putting the value of 78.85 here and if you're getting 16% as the answer that means you're right so so you can always cross check your answer whether your calculation is right they have asked you to comment also the month and nav is higher by 35 opening was 7850 given in the problem closing is 78.85 so there's an appreciation in nav by 35 why the nav appreciates nav appreciates because the portfolio held by mutual fund portfolio held by mutual fund must have also appreciated okay so that is the small comment I can write based on the limited data this is the question from interest rate risk management and this question has already been asked in the RTP MTP and I think study metal also I have seen this question in RTP and MTP recently in the regular class and revision batch also we had taken this question same problem of course some numbers are different so are you there are you listening to me question number 3A very easy question a manufacturer of electronic components has taken floating rate loan of rupees 2 CR on 1st April 2023 the rate of interest so the amount is 2 CR and the rate of interest is 9% interest is paid on 31st March every year in the month of October 2023 Central Bank of the country means RBI releases the folling projections about the interest rate prevailing in future this is the projection given by Central Bank okay this is the projection given by the central bank this company has taken floating interest rate loan so if the market rate goes up you pay more if the market rate goes down you pay less so what are the projection of the Central Bank you can see these are the projection for next 5 years and you will find except the last two in the first three year the interest rates are expected to rise the interest rates are expected to rise so what we are going to do we are going to protect ourself from rising interest rate we have taken a floating rate loan interest rate might rise as per the indication given by the central bank and therefore we need to do hedging you are required who is required you the student is required to show how the borrower can H the risk using option cap means you'll have to buy a call option on interest rate which will ensure that you don't pay more than a certain rate however you can pay less than a certain rate rising out of expected rise in the rate of interest when he wants to pay his interest cost at 9% perom so this borrower does not want to pay more more than 9% perom so he should enter into a call option contract which will have an exercise price of 9% the cap rate will be 9% if the interest rate goes above 9% he will pay 9% but if the interest rate goes below 9% he will pay the lower rate of interest to get this benefit he will have to pay the premium and they have written also assuming that the premium negotiated by both parties 8% so you'll have to pay 80% of 2 CR rupees as onetime premium to be paid on to be paid at once onetime premium on 1st October 23 and the actual rate of interest on the respective due date happens to be this line is important actual rate of interest happens to be so in order to compute the gain or loss I need to take actual rate I need to take actual rate I don't have to take the projected rate of the RBI I have to take the actual rate some student can make a mistake what is the mistake you can make you might take the projected rate of the RBI you might take these rates given in the first paragraph you don't have to take that rate that is the projected rate for the purpose of computing gain or loss I need to take the actual rate I need to take the actual rate for comparison we are going to compare this with 9% if it has gone above then we are going to get the difference if it is going below or equal we are not going to get anything so we are going to get 5% difference 2% difference 25% difference and we are not going to get anything in the last two column and this difference will multiply by 2 CR you will calculate how much difference you will receive that's it you are required to show how the settlement will be executed on the respective interest due date these differences multiplied by 2 CR because you are going to take a cap you will not pay more than 9% third question Theory question of the same problem but Theory question State whether this option is advantageous when compared to interest rate caller option in interest rate caller option you buy a cap and you sell a flow the advantage of this is premium is reduced but the disadvantage is if the market rate goes below flow rate you'll not be able to take advantage of that and therefore it is interest rate option has some advantage over color although it will be more costly but you will be able to enjoy the benefit if the market rate of interest Falls so that small note we have to write so how do you present the answer first you will write what as a borrower you are supposed to do the borrower does not want to pay more than 9% perom on this loan where the rate of interest is likely to rise Beyond this hence he has to hedge the risk by entering into an agreement to buy interest rate cap on the following parameter so he will have to enter into an interest rate cap following terms and condition will be applied the notional principal amount will be 2 CR strike rate will be 9% reference rate will be the rate of interest applicable to this loan then calculation and settlement will be done 31st March every year duration of the cap will be till 31st March 28 premium for the cap is negotiable between both the parties which is 8% now to purchase this cap the borrower is required to pay the premium upfront premium is required to be paid upfront the payment for such premium will entitle him with the right to receive the compensation from the seller of the cap if the interest rate goes above make it 9 % if the interest rate goes above 9% the compensation at the rate will be difference between the rate of rate of none of the case the cost of rate of will be the difference between rate between the rate just forget this line some drafting mistake this implies that in none of the cases the cost of the loan will rise above 9% the hedging benefit is received at the respective interest due date at the cost of Premium to be paid only once so let us come to the calculation part the student is saying on 31st March 24 there will be zero payment you are not write on 31st March 24 please see the market rate is 99.5% and the strike rate is 9% so you will get 99.5% minus 9 okay it has gone above sement will be based on the rate prevailing on this date now I'll come to the premium to be paid on 1st October 2023 will be 2 lakh into 8% 1ak 160,000 payment will be made at the beginning now we'll come to now we'll come to next Point 31st March 24 please follow the discussion you will get your answer there is a query on 31st March 24 they are going to see what is the rate of interest now which is applicable for the coming year which is 99.5% but my cap rate is 9 you have to see the actual rate not the rate uh announced by Central Bank as projected rate 9.5 I will show you the table again this is 9.5 here the rate of interest is 9.5 for the upcoming year so I'm going to take the difference 5% multiplied by 2 cr. 5% of 2 CR we are going to get 1 lakh 31st March 25 now the rate is 11 cap rate is 9 we will receive compensation of 2% on 2 CR the answer is 4 lakh on 31st March 26 the rate is 9.25 cap rate is 9 will get 25% of 2 CR that is 50,000 31st March 27 cap rate is nine actual rate is also nine so option will lapse and if option will lapse there is no compensation you will end up paying 9% only your cost will not exceed 9% then the last one 31st March 28 here the actual rate is below your cap rate of 9 so option will lapse and you can you will pay 9 sorry you will pay 8.5% interest liability shall not exceed 99.5% it will pay 88.5% 8.5% so in all the five cases the interest cost does not exceed 9% s so you have to write a note by paying the premium up front buyer of the cab gets the compensation on respective interest due dates without any obligation why interest rate option is better than interest rate caller in case of interest rate option you fix the upper limit but at the same time when the market rate goes down you will let the option lapse and enjoy the fall in the market rate like in case of 31st March 28 but if you take caller also then you're are going to limit the lower rate at which you will have to borrow so the benefit of caller is cost will reduce but you'll not be able to enjoy the flexibility which option which call option offers you so I've written a note for you you can write similar note in the exam in interest rate provides more flexibility compared to interest rate caller with option the buyer has the right but not the obligation to execute the trade at predetermined rate this means that if Market changes favorably if the market keeps on falling you'll benefit the buyer can choose not to exercise the option and pursue more advantageous opportunity interest rate caller this is the drawback of interest rate caller limits potential gain if interest rate moves in a favorable direction that was question number three a based on interest rate risk management dear students we have prepared this very important book called integrated Business Solution book we have compressed the book only in 400 some pages we have R designed the book can you see that and we have prepared one very wonderful index like this I'll show you let me just bring it like this you can see the index is prepared like this which gives you what is the content of that topic which subjects are covered which topics are covered what is the starting line of this topic if you carry this book in the exam you can easily find out any question if asked in the exam nowadays there are few questions which are repeated we have also removed all those questions which were duplicated so in some books you will find there are 100 case study but out of that around 18 question or 18 case studies are reputation so there is a wastage of time and page and effort we have removed those duplications right so you can purchase this integrated Business Solution book from our website w.in or Amazon or even flip cart so wherever you are comfortable you can place the order for IBS book and you are also going to get this AFM summary chart and formula book worth 600 rupees free along with this IBS book we have got lot of student who have purchased this IBS book summary chart book and they have tremendously benefited from this thank you and let us continue so next question number 3B apart from the support from government there are quite a few other reasons why India became a sustainable environment for startup to thrive in what are the other reasons in India startup culture is growing government is giving lot of benefits other than government benefit why startup culture is thriving in India so one is Shark Tank okay but don't write in the exam because people get inspired they think it is easy to raise funds okay so that is there that is there that is also mentioned here variety of funding options available so India has developed as far as startups are concerned lacks of startups have registered with uh the min history the reason is pool of talent cost effective Workforce internet is easily and available at a very affordable rate technology is one of the important game changers and now there are lot of funding options available there was one choice element here tokenization to some extent resemble the process of securitization this question is from the topic securitization it is there in your study materal also what are the similarities of tokenization and similar securitization so I have written the same answer which is printed in the study metal liquidity diversification trading New Opportunities you can read the answer by downloading our question paper and solution from website V doin V know.in go go there this paper and the solution both are appearing you will be able to download it question number 4 a this is only simple question on derivative option they have asked and this question is there in the study material and repeated in the exam so many times that by reading the first two three lines only you will understand what they are going to ask Market received some information about ABC tie up with a multinational company this has induced the market price to move up if the information is false ABC stock price will fall dramatically to protect from this the investor has bought underline bought because you will have to pay the premium on both call and put option you will have to pay the premium on both call and put option he purchased one thre Monon call at a strike price of 45 by paying 3 rupees premium and he paid 2 rupees premium for a 3month put with a strike price of 42 so these are the two strike prices we have to keep in mind for call option 45 for put option 42 call will be exercised if market price goes above 45 put will be exercised if market price Falls below 40 two you and one more number 100 shares assume 100 shares for call and put so multiply by 100 for calculating premium for calculating profit and loss you are required again you are required but most of the task is now done by teachers only you are required you means I am required to determine the Investor's position if the tie up offers bat the price of ABC stock up up to 44 rupees in 3 months 44 is somewhere between these two both options will lapse and whatever premium you have paid is your loss to determine the investor position of the ti up program fails and the price of the stock Falls to the4 put will become exercisable 42 minus 34 call Will lapse and what whatever premium you have paid deduct that that will give you net profit okay and to determine the Investor's position of the tie up program successful and the price of the stock Rises to 46 call will become exercisable one rupe profit on call put will lapse profit on call minus premium paid is your net payoff so the answer is very easy I will read one by one first compute the total premium paid on call option we'll pay 3 into 100 300 on put we will pay 2 into 100 200 total premium 500 case one price goes to 44 investor will not exercise both the option ending value will be 500 premium paid zero gain 500 loss net loss 500 first answer net loss 500 if the price goes to 34 then call will not be exercised because Market pric is below exercise price put is valuable put will be exercised total premium paid 500 ending value will be minus 500 and the profit on put option which is 800 rupees so still we will have a net gain of 300 rupees and if the price goes to 46 oh oh my God put is worthless put will not be exercised but call will be exercised total premium paid remains 500 ending value will be minus 500 and profit on call option 100 rupees still we will have a net loss of 400 rupees that was a very easy question now 4B question on merger there were two questions on merger surprisingly there was no question on Forex okay so those who think that Forex is the only topic we have to master they will be taken for a surprise by this exam study all topics there is no concept of ABC in AFM if somebody tells you block his number okay misguidance will cost you a lot learn from experienced faculties only either other faculties also who are experienced okay PQ limited plans to acquire RS limited PQ is acquirer RS is Target the financial details of the two firms prior to merger announcement are so this is the market price and number of share for two companies so market capitalization of PQ will be 100 into 20 lakh 2,000 lakhs and market capitalization of RS will be 50 into 10 500 lakhs the expected Synergy is 300 lakh so total market value after merger is 2,800 lakh the exchange ratio agreed is .5 exchange ratio is also given there are 10 lakhs share so number of share issued will be 5 lakhs number of share issued will be 5 lakh this company already has 20 lakh share so 20 + 5 total number of shares will become 25 lakh you are required to calculate the true cost of merger from the the point of view of PQ PQ is the acquirer very very easy question this similar question was asked in the exam also it is there in your study material also so what I need to do first I need to calculate number of share issued 5 lakh then we'll calculate what is the stake of shareholders of RS limited what is the stake of holders in RS of RS Limited in the merged company they will get 5 lakh share divid by total 25 lakh share so they will be having a stake of 20% in the merch company PQ limited is giving 20% stake in the merch company to the shareholders of RS this is my total valuation after merger and we are giving 20% of that to the Target company so Target company gets shares worth 560 Target company gets shares worth 560 and what is the Standalone value of the target company the Standalone value of the target company is 500 only so 560 minus 500 the difference is true cost of acquisition from the point of view of acquired company PQ limited okay if they ask you npv of Target company if they ask you then that will also be 60 lakhs and PV of Target company will be 60 lakh is it right the answer is on the screen have a look at it you can download the answer sheet from our website V know.in next question for was a theory question what do you mean by IFC that is gift City and benefits of IFC so I've written the meaning you can check later and benefits of IFC like in Gujarat we have this gift City and it is very very popular and it is giving lot of opportunities to our professionals it has got lot of flexibility lot of tax advantage it is as if it is a separate country within the country with a separate set of rules where huge financial opportunities are there question number 5 a from portfolio chapter same question in the study material same question we have taken in the class also you can see in our class notes question number I think 30 on portfolio same question you are so lucky those who have appeared in this exam that most of the questions were already covered in the class not most we can say all questions were covered only you have to change the numbers an investor has decided to invest rupees 1 lakh in shares of X and Y that desired return from the shares of the two companies along with their probabilities are given below these are the probabilities return of X limited return from y very easy question compute what is the calculation required risk and return of investment in individual share very easy compare the risk and return of these two shares with the portfolio of these shares in equal proportion so 50% in X and 50 % in y and one more question find out the proportion of each of the above shares to formulate a minimum risk portfolio what should be the weight of X and what should be the weight of Y so that you create a portfolio which will have the minimum risk so first what I'll do first I will prepare a table this table will will be very very useful for calculating expected return standard deviation coant which we will require for answering all the questions so in this table we have the same format we have done this several time in the class probability return on X return on y multiply these two P into X multiply probability into return of Y calculate deviation of the two stock from the mean in order to calculate standard deviation we'll take P into x - x bar s p into y - Y Bar squ in order to calculate Coan we'll take P into x - xar into y - Y Bar first you copy this three columns as it is from the question okay just let me check whether I have typed the correct number one second this is the original paper I have yes I am right sometimes I am also right so - 5 10 15 and 15 25 - 10 if this is right then I think my calculation is right so you will come multiply probability into return return you will get 8.5% return on X 12.55% return on y then you will compute the deviation from the mean - 5 10 and 15 this 3 minus 8.5 you'll do you get this column y - Y Bar you get this column then you take p P into x - xar s p into y - Y Bar squ this column you'll get .25 this you'll get 2 31.25 and this column P into x - xar into y - Y Bar p x - xar y - Y Bar this is called coant that column is coant in this this column take the square root you get the standard deviation of X and in the next column you get standard deviation of Y now I ready for solving all the questions the first question is what is the return on stock x what is the return on stock X just a second please uh some problem I will start again don't worry all of you must have got it right I'm sure okay back to business so return on stock X will be this number 8.5 return on y will be 12.5 standard deviation of X will be 7.09 standard deviation of Y is 15.21 this is scaran first what is the expected Return of the portfolio which has 50% of X and 50% of Y so the answer will be 10.5 and standard deviation of portfolio using this formula your answer is 7.06% using the formula of two stock portfolio and then minimum variance portfolio we have already computed coar so the formula to be used is Sigma y² minus coar of X and Y upon Sigma x² + Sigma y² - 2 coant of X and Y so this is Sigma y² you can take directly this number this is Sigma y s minus minus Covance this Covance is already negative so minus minus will become Plus in calculation this is Sigma x² you can directly take .25 or you can take square of standard divion this is Sigma y s - 2 into - 41.25 when you do the calculation you should get 7486 and weight of Y will be balancing figure 24.14% please check the answer is it right if it is right let us go to 5B 5B another easy question highly repeated question XY limited paid a dividend of three d0 for the current year dividend is expected to grow at the rate 30% for next 5 years 30% for next 5 year and at 15% per anom thereafter okay so this is a two-stage growth model for First 5 year growth rate is 30% and then six to Infinity growth rate will be 50% now they have given you the return on 182 treasury bill is 12% perom this is called risk-free return and the market return is expected to be around 16% this is RM variance of the market portfolio is 24% this is Sigma M square is given 24% Co variance of return with the market is 34% so you should know how to compute beta beta is equal to co variance with the market upon variance of the market portfolio have you learned this if yes you can solve it so first we will compute beta how my thought process will start after reading this problem first beta then you compute required rate of return which is a part of the question also and then in the third step we'll compute the intrinsic value and to help you they have given you e Factor at 17% so indirectly there is a hint in the problem that your required return will come to 177% let us check so please Focus beta formula is co-variance of the stocks written with the variance of the market portfolio both are given in the problem 30 / 24 30 / 24 1.25 then you compare required return using capm you get 17% compute intrinsic value of the share first 5 year 3 rupees increase by 30% for 5 years you'll get this numbers first five year factors are given take the same when Institute gives you factor use the same take the total then compute the terminal value by preparing a working note take the last dividend paid growth rate is 15% divide by cost of equity minus growth rate it comes to 640 421 multiply this by fifth year Factor you get 292.00 593 20.8 is the PV of dividend 292 is the PV of terminal value the total of these two together is called intrinsic value of the share 3 12.86 you can round off in two digits no problem okay so this was my question number 5B for six marks only question number 6A taken from Advanced Capital budgeting study material this question is in advanced Capital budgeting chapter okay and this question is based on Optimum replacement timing so I'm just going to tell you that we have recorded amm in Hindi as well as English we have recorded the lecture by taking questions from all the study material RTP MTP past exam and some good reference books also our lectures are very comprehensive one thing I can assure you you will not find any other video lecture as comprehensive as our class notes that is my Assurance we have prepared two modules which will cover all 15 chapter this is module one of Advanced Financial Management and this is module two you'll get these two modules in addition to these two modules we will also provide you this summary chart and formula book which will cover summary of all the chapters and all the formula at one place and we will also provide you this McQ book where very comprehensive McQ book on all topics we have prepared and very high quality McQ which will be useful for the exam so you'll get all this study material along with our video lecture and our video lecture pricing is very reasonable so that most of the student can benefit and it is only rupees 6,000 whether you purchase in Hindi or English and you get five year validity five year Val validity so I'm sure you will not require for 5 years you'll pass much before that so let us uh solve question number 6 a very easy question if you have done it in advance if you have not practiced before going to the exam then there is no point in trying in the exam you'll not get it a machine used on a production line must be replaced at least every 4 year at least every 4 year means you can replace either in year 1 or year 2 or year three or year 4 but after 4 year you have to replace there is no choice cost in Cut to run the machine according to its age R so when you purchase the machine one lakh if you go up to one year you will incur maintenance 18,000 repair zero and you'll get scrap value 35,000 if you go to year two then you have to incur both year 1 and year two maintenance year to repair and you will get 23,000 rupes scrap value same thing if you go up to year three you will incur repairs and maintenance for all the three year and you'll get the scrap value of the third year scrap value of only that particular year you will get if you replace at the end of that year and if you go up to fourth year you will incur repair maintenance and you will receive scrap value these first three lines are your outflow and scrap value is your inflow so while solving the problem be careful future replacement will be with identical machine having same cost revenue is not affected by the age of the machine so we are not going to discuss Revenue because revenue does not get affected whether you replace it after 1 year 2 year three year or four year ignore income tax and inflation very good enjoy and determine the optimum replacement cycle so we have to basically answer whether we should replace this machine every year or every 2 year every 3 year or every four year so how do I take a judgment treat it like you have given four choices in intermediate syllabus there are four machines one has a life of one year one has a life of 2 year one has a life of three year and one has a life of 4 years how do I compare them I will compare them by Computing equivalent annualized cost I will not compute equivalent annualized benefit because there's no Revenue model we have to minimize the cost so that option where equivalent annualized cost is minimum that option we are going to exercise okay so one by one we'll solve the discount rate is15 % and factors are given I'm going to use the same factor suppose we replace it after year 1 what are my cash flows I will have to buy machine for 1 lakh year 1 repair and maintenance 18,000 I will get scrap value or residual value 35,000 I will write PV Factor as given in the problem I will compute the npv the npv comes to 85217 the students are requested to please check the calculation thems if there are some calculation error please let me know divide by PV nvt factor for one year for one year for one year the factor will be same when you divide this by Factor you get equivalent annualized cost 97 996 this is the cost perom if you replace every year if you replace every year you are going to incur in equivalent terms 97996 if you choose twoe replacement cycle then write all cash flows of 2 years year Zer 1 lakh year 1 repair maintenance 18,000 year 2 repair maintenance 20 + 3 23,000 and residual value you'll get 23 write the factors from the question book multiply take the total this is my npv for 2 years divide by PV anity factor for 2 years 1. 6257 divide you get equivalent analized cost 71120 it is equivalent to incurring 71 140 if you keep on replacing after every 2 year if you replace after every 3 Year my cash flow will be cost of machine repair maintenance for 3 years 18 23 and 28 and salvage value will be 12 npv will come to this amount 143 563 check nity factor 2.28 32 for 3 years and 15% and your equivalent annualized cost 62 878 then same thing will do for 4 years also cost of machine repair maintenance for first four years and then salvage value inflow 6,000 in the 4th year factors are given in the problem kindly multiply and please check the total npv comes to 167 463 divide by nity factor for 4 years and 15% your equivalent analiz cost comes to 58656 now this is the lowest this is the lowest if this is the lowest your Optimum replacement cycle will be 4 years because your equivalent annualized cost is lower so you you buy the machine use it for 4 years replace it here again use it for 4 years so Optimum replacement cycle will be 4 years now the last question number 6B okay that was highly easy question very easy taken from mergers and acquisition question is in the study material the equity shares of XY Z limited are currently traded at rupees 34 per share in the market underline 34 XY Z has a total of 10 lakh equity share outstanding this is the number of share price per share you can compute the market capitalization of XY Z and in number and the promoters Equity holding in companies 30% 10 lakh into 30% means promoters are holding 3 lakh shares ABC wishes to acquire XY Z because of likely synergies estimated PV of this syner is 1 CR so important number one CR if ABC acquires XY Z there will be Synergy benefit of 1 CR further ABC limited feels that management of XY Z has been overpaid XY Z management are getting more remuneration than what they deserve with better motivation lower salary and fewer pucks for the top management will lead to a saving of 5 lakh perom top management with their families are promoters of XY Z so top management is nothing but the promoters only the promoters are holding 30% share of XY Z so if they take lower salary lower perks it will save 5 lakh rupees perom and the present value of this savings comes to 25 lakh so this is one more benefit two benefits one is operational Synergy 1 CR lower salary lower perks lower compensation to top management will save 205 lakh rupees in present value terms following additional information is given regarding ABC acquire company EPS 5 rupees number of share 15 lakh market price 30 so this is the market cap capitalization of ABC 15 lakh into 30 450 lakhs is the market capitalization of ABC and market capitalization of this company was 10 into 34 340 lakh and if the two companies merge there will be one CR rupees extra because of synergy and 25 5 lakh rupees extra because of reduction in salary calculate the maximum price per share ABC can offer to pay for XY Z how suppose you are ABC how much maximum you can pay per share you will say I will pay what I will get you will get a company whose value is 10 lakh into 34 plus it will give you a Synergy benefit of one CR and plus you are going to get a benefit of reduction in salary of 25 lakh this is the total benefit you as an acquirer will be getting and divide by 10 lakh share that is the maximum you can pay that is the maximum you can pay is it right second question is compute the meaning minimum price compute the minimum price per equity share at which XY Z management at which management of XY Z will be willing to offer their controlling interest so management of XY Z would want how much minimum not maximum minimum so they will want they are already having a valuation of 34 rupees per share into 3 lakh share plus they are going to sacrifice 25 lakh rupees salary in present value terms so they would want that I must get my existing share Value Plus loss of remuneration at least that much I should get at least that much I should get okay Synergy will arise only if the two companies merge but the minimum value is what I am already enjoying I'm already enjoying the value 34 rupees and salary and perks but that salary and perks if I lose I should be compensated for that so now you see the first answer first answer is maximum price per share which ABC can offer to pay for XY Z market capitalization of XY Z 10 lakh into 34 3 cr40 lakh Sy gain 1 CR saving due to overp payment 25 lakh check the total 4 cr65 lakh and divide by 10 lakh share that is a maximum price 4650 rupees per share you can stop here the first answer but in the study metal of The Institute they have have given you an alternative answer also not required in the exam you can answer one of the two only and this first part is easy to understand easy to explain but still I will explain the second part also in case if you have done it like this you are right let the exchange ratio be ER so this company the acquirer company would want that the market price should not be falling below 30 the shareholders of acquirer would not want to have a dilution in the market value they want 30 rupees in any case even after the merger so 30 will be the desired market price for that we have to see how many shares we have to issue and what should be exchange ratio this is the market capitalization of XY Z this is the market capitalization of uh ABC this is synergy gain this is saving due to lower salary and pu payment divide by number of shares of uh ABC and number of share issued to XY Z 10 lakh into exchange ratio when I solve it for exchange ratio I get 1.55 share exchange ratio should be 1.55 1.55 share against one share in XY Z then the market price or the amount per share should be p ratio of ABC into a EPS of ABC into exchange ratio p ratio of ABC will be 30X 5 6 into EPS 5 30 in fact you can take directly 30 also Institute has unnecessarily complicated multiplied by exchange ratio 1.55 so per share maximum they can pay is 4650 if you find this complicated don't write if you understood it you can write and the last part minimum price per share at which management of XY Z will be willing to offer their uh controlling interest that is very easy what is the value of their 30% stake today 30% of 10 lakh 3 lakh share into the4 but if they sell their controlling stake they will lose that salary and PS which they were enjoying which is 25 lakh in present value terms so the total value they are looking for is at least equal to what they were getting in the old firm that is value of their share and perks compensation salary 1 cr27 lakh number of share 3 lakh divide this by 3 lakh and the minimum price which they must enjoy is 4233 they want 4233 this company maximum they want to pay 4650 will the deal be done yes the deal will be done because the maximum price they want to offer is greater than the minimum price which the target compan is asking for okay so this completes my uh discussion on AFM May 2024 in case if you have any doubt you can mail me on my personal mail ID with noore CA ya.com please share this video with your friend you can WhatsApp or call on our number 9766 n 21860 please note down and store in your mobile phone 94223 65495 okay I would request you not to raise uh academic query on YouTube chat you can raise question relating to F FR or AFM subject directly to my mail ID or Whatsapp 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