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CA FINAL (May 2025)

GROUP I – PAPER 2
ADVANCED FINANCIAL MANAGEMENT
(Series 3)
Time Allowed: - 3 Hours Maximum Marks: 100

This question paper comprises two parts, Part I and Part II.
Part I comprises MCQ & Part II comprises questions which require descriptive answers.

PART – I (MCQs)
All MCQs are compulsory

Question no. 1-15 carry 2 marks each

Case Study 1
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.
Conclusion:
After conducting the three tests the evidence supports the weak form of Efficient Market Theory for the

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XYZ Stock Index you concluded that past price trends do not reliably predict future price movements.
1. Test 1 is …
A. Serial Correlation test
B. Filter Rules test
C. Run test
D. Variance Ratio test
2. Test 2 is …
A. Serial Correlation test
B. Filter Rules test
C. Run test
D. Variance Ratio test
3. Test 3 is ……
A. Serial Correlation test
B. Filter Rules test
C. Run test
D. Variance Ratio test.
4. The Filter Rule Test should not be applied for buy and hold strategy if……
A. the behavior of stock price changes is predictable.
B. the behavior of stock price changes is dependent on past trends.
C. the behavior of stock price changes is correlated.
D. the behavior of stock price changes is random.
5. Results of your studies support the…
A. Semi-strong EMH Theory
B. Strong EMH Theory
C. Random Walk Theory
D. Markowitz Theory

Case Study 2
Mr. X wants to buy shares of A Ltd. (having a Beta of 2) at current market price of ₹ 500 each having
face value of ₹ 100. He is expecting a bonus at the ratio of 1:4 during the fifth year. Annual expected
dividend is 20% and the same rate is expected to be maintained throughout the holding period. He
intends to sell the shares at the end of 7th year and expect that the market price shall be doubled during
this holding period. Incidental expenses for purchase of shares are estimated to be 5% of the market
price. The risk-free rate of return and market rate of return are 5% and 7.50% respectively.
Assume no tax on dividend income and capital gain.
You are required to answer the following:
6. Maximum price Mr. X should be ready to pay
(a) 618.84
(b) 747.09
(c) 593.19
(d) 715.03
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7. Cost of buying share
(a) 525
(b) 500
(c) 1,000
(d) 1,250
8. Net gain on buying this share
(a) 222.09
(b) 247.09
(c) 93.84
(d) 68.19

Case Study 3
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.
For simplicity, assume the following yield data for government bonds over various maturities
(measured in years):
Yield Curve Tables:
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%
You are required to answer the following:
9. The main characteristic of a normal yield curve is…
A. Short-term yields are higher than long-term yields.
B. Short-term yields are lower than long-term yields.
C. Yields remain the same across all maturities.
D. Yields fluctuate randomly over different maturities.
10. Based on the revised yield data, what is the yield spread between the 10- year bond and
the 1-year bond?
A. 2.0%
B. 3.5%
C. 4.0%

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 D. 5.0%
11. An inverted yield curve typically indicates…
A. Economic growth
B. Economic uncertainty
C. An upcoming recession
D. Inflationary pressure
12. If an investor is looking to invest for 2 years starting 3 years from now, the forward rate he
would expect shall be…
A. 7.41%
B. 7.52%
C. 7.76%
D. 7.93%

Case Study 4
M/s. Sky products Ltd., of Mumbai, an exporter of sea foods has submitted a 60 days bill for EUR
5,00,000 drawn under an irrevocable Letter of Credit for negotiation. The company has desired to keep
50% of the bill amount under the Exchange Earners Foreign Currency Account (EEFC). The rates for
₹/USD and USD/EUR in inter-bank market are quoted as follows:

₹/USD USD/EUR
Spot 67.8000 – 67.8100 1.0775 – 1.8000
1 month forward 10/11 Paise 0.20/0.25 Cents
2 months forward 21/22 Paise 0.40/0.45 Cents
3 months forward 32/33 Paise 0.70/0.75 Cents

Transit Period is 20 days. Interest on post shipment credit is 8 % p.a. Exchange Margin is 0.1%. Assume
365 days in a year.
You are required to answer the following:
13. Exchange rate quoted to the company in INR/USD
(a) 67.9420
(b) 67.9520
(c) 67.5224
(d) 68.0519
14. Cash inflow to the company in ₹
(a) 3,67,39,650
(b) 5,00,000
(c) 1,83,69,825
(d) 2,50,000
15. Interest amount to be paid to bank by the company
(a) 6,53,149
(b) 6,44,202
(c) 3,26,575

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(d) 3,22,101

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 PART – II (Descriptive Answers)
This part comprises 6 questions. Question No. 1 is compulsory. Attempt any
4 questions out of the remaining 5 questions.

Question 1A (6 Marks)
B International Ltd. (BIL) has purchased 5 years 15.28% convertible debentures on 1.04.2021. The
convertible debentures will mature on 31.03.2026. Each debenture can be converted into 20 equity
shares of face value of ₹ 1 at any point of time but before maturity. Debentures will be redeemed at ₹
100 on maturity.
The required rate of return of BIL is 10% per annum on a 5-year security.
The Reputed, a consultant has projected the following price behaviour of the shares:

Period Price Range (₹)

From To Passive Most likely Optimistic
1.04.2021 31.12.2022 4 4.5 5
1.01.2023 30.06.2025 4.5 6.5 7
1.07.2025 31.03.2026 3.5 5 5.5

BIL, as a matter of policy, rounds up the amount. You are required to calculate
(a) The break-even price at which the debentures can be converted
(b) The ideal period in which BIL shall convert and dispose of the shares
Given:
PVIF (10%, 5) 0.6209
PVIFA (10%, 5) 3.7908

Question 1B (4 Marks)
Trupti Co. Ltd. promoted by a Multinational group “INTERNATIONAL INC” is listed on stock exchange
holding 84% i.e. 63 lakhs shares.
Profit after Tax is ₹ 4.80 crores.
Free Float Market Capitalisation is ₹ 19.20 crores.
As per the SEBI guidelines promoters have to restrict their holding to 75% to avoid delisting from the
stock exchange. Board of Directors has decided not to delist the share but to comply with the SEBI
guidelines by issuing Bonus shares to minority shareholders while maintaining the same P/E ratio.
Calculate
(i) P/E Ratio
(ii) Bonus Ratio
(iii) Market price of share before and after the issue of bonus shares
(iv) Free Float Market capitalization of the company after the bonus shares.

Question 1C (4 Marks)

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With regards to financing activity of market expansion, acquisition & product development for a profit
making company, answer the following:
(i) What is this financing called?
(ii) At which stage this financing is required by the company?
(iii) General lock in period of funds at this stage of financing.
(iv) What is the risk perception at this stage of financing?

Question 2A (8 Marks)
Mr. A, a HNI invested on 1.4.2021 in certain equity shares as below:

Name of Co. No. of shares Cost (₹)

X Ltd. 1,00,000 (₹ 100 each) 2,00,00,000
Y Ltd. 50,000 (₹ 10 each) 1,50,00,000

In September 2021, 10% dividend was paid out by X Ltd. and in October 2021, 30% dividend paid out
by Y Ltd. On 31.3.2022 market quotations showed a value of ₹ 220 and ₹ 290 per share for X Ltd. and Y
Ltd. respectively.
On 1.4.2022, a technical analyst indicated as follows:
(1) that the probabilities of dividends from X Ltd. and Y Ltd. for the year ending 31.3.2023 are as
below:

Probability factor Dividend from X Ltd. (%) Dividend from Y Ltd. (%)
0.2 10 15
0.3 15 20
0.5 20 35

(2) that the probabilities of market quotations on 31.3.2023 are as below:

Probability factor Price/share of X Ltd. Price/share of Y Ltd.

0.2 220 290
0.5 250 310
0.3 280 330

You are required to:

(i) Analyze the average return from the portfolio for the year ended 31.3.2022;
(ii) Analyze the expected average return from the portfolio for the year 2022-23; and
(iii) Calculate comparative risk in the two investments.

Question 2B (6 Marks)
Based on the following data, estimate the Net Asset Value (NAV) on per unit basis of a Regular Income
Scheme of a Mutual Fund:

₹ in lakhs
Listed Equity shares at cost (ex-dividend) 40.00
Cash in hand 2.76

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 Bonds & Debentures at cost of these, 8.96
Bonds not listed & not quoted 2.50
Other fixed interest securities at cost 9.75
Dividend accrued 1.95
Amount payable on shares 13.54
Expenditure accrued 1.76

Current realizable value of fixed income securities of face value of ₹ 100 is ₹ 96.50. Number of Units:
2,75,000
All the listed equity shares were purchased at a time when market portfolio index was 12,500. On NAV
date, the market portfolio index is at 19,975.
There has been a diminution of 15% in unlisted bonds and debentures valuation. Listed bonds and
debentures carry a market value of ₹ 7.5 lakhs, on NAV date. Operating expenses paid during the year
amounted to ₹ 2.24 lakhs.

Question 3A (8 Marks)
XYZ Ltd. requires ₹ 8,00,000 for a unit. Useful life of project is 4 years. Salvage value is Nil. Depreciation
charge is ₹ 2,00,000 p.a.
Expected revenues & costs (excluding depreciation) ignoring inflation:

Year 1 2 3 4
Revenues ₹ 6,00,000 ₹ 7,00,000 ₹ 8,00,000 ₹ 8,00,000
Costs ₹ 3,00,000 ₹ 4,00,000 ₹ 4,00,000 ₹ 4,00,000

Tax rate is 60%. Cost of capital is 10% (including inflation premium).

Calculate NPV of the project, if inflation rates for revenues & costs are as follows:

Year Revenues Costs

1 10% 12%
2 9% 10%
3 8% 9%
4 7% 8%

Note: Show amount to the nearest rupee in calculations.

Question 3B (6 Marks)
R Ltd. and S Ltd. operating in same industry are not experiencing any rapid growth but providing a
steady stream of earnings. R Ltd.'s management is interested in acquisition of S. Ltd. due to its excess
plant capacity. Share of S Ltd. is trading in market at ₹ 3.20 each.
Other data relating to S Ltd. is as follows:
Balance Sheet of S Ltd.

Liabilities Amount (₹) Assets Amount (₹)

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 Current Liabilities 1,59,80,000 Current Assets 2,48,75,000
Long Term Liabilities 1,28,00,000 Other Assets 94,00,000
Reserve & Surplus 2,79,95,000 Property, Plants & Equipment 3,45,00,000
Share Capital 1,20,00,000
(80 Lakhs shares of ₹ 1.5 each)
Total 6,87,75,000 Total 6,87,75,000

Particulars R Ltd. (₹) S Ltd. (₹) Combined Entity (₹)

Profit after Tax 86,50,000 49,72,000 1,21,85,000
Residual Net Cash Flows per year 90,10,000 54,87,000 1,85,00,000
Required return on equity 13.75% 13.05% 12.5%
You are required to compute the following:
(i) Minimum price per share S Ltd. should accept from R Ltd.
(ii) Maximum price per share R Ltd. shall be willing to offer to S Ltd.
(iii) Floor Value of per share of S Ltd., whether it shall play any role in decision for its acquisition by R
Ltd.

Question 4A (6 Marks)
DK Ltd. is considering an investment proposal in Sri Lanka involving an initial investment of LKR 25
billion. The current spot exchange rate is 0.37 INR/LKR. The risk free rate in India is 6% and the same
in Sri Lanka is 5.02%.
The project will generate a cash flow of LKR 5 billion in the first year. The cash flow will increase by
LKR 1 billion each year for the next 4 years. The project will bind up on completion of 5 years with no
salvage value. The required rate of return for the project is 8%.
(i) You are required to find out the investment worth of the project by using
(1) Home Currency Approach
(2) Foreign Currency Approach
(ii) Compare the outcome under both the approaches.
Given:

t 1 2 3 4 5
PVIF (8%, t) 0.92593 0.85734 0.79383 0.73503 0.68058
PVIF (7%, t) 0.93457 0.87344 0.81630 0.76290 0.71299

Note: Consider exchange rate in 3 decimals and show all calculations in Billion upto 4 decimal points.

Question 4B (4 Marks)
You are requested to find out the approximate dividend payment ratio as to have the Share Price at ₹
56 by using Walter Model, based on following information available for a Company.

Amount ₹
Net Profit 50 lakhs

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 Outstanding 10% Preference Shares 80 lakhs
Number of Equity Shares 5 lakhs
Return on Investment 15%
Cost of Capital (after Tax) (Ke) 12%

Question 4C (4 Marks)
What resembles the process of Securitization. Explain any 3 similarities between these two.

Question 5A (6 Marks)
The NSE-50 Index futures are traded with rupee value being ₹ 100 per index point. On 15th September,
the index closed at 1,195, and December futures (last trading day December 15) were trading at 1,225.
The historical dividend yield on the index has been 3% per annum and the borrowing rate was 9.5%
per annum.
(i) Determine whether on September 15, the December futures were underpriced or overpriced?
(ii) What arbitrage transaction is possible to gain out this mispricing?
(iii) Calculate the gains and losses if the index on 15th December closes at (a) 1,260 (b) 1,175.
Assume 365 days in a year for your calculations.

Question 5B (4 Marks)
GHI Ltd., AAA rated company has issued, fully convertible bonds on the following terms, a year ago:

Face value of bond ₹ 1,000

Coupon (interest rate) 8.5%
Time to Maturity (remaining) 3 years
Interest Payment Annual, at the end of year
Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
Current market price per share ₹ 45
Market price of convertible bond ₹ 1,175

AAA rated company can issue plain vanilla bonds without conversion option at an interest rate of 9.5%.
Required: Calculate as of today:
(i) Straight Value of bond
(ii) Conversion Premium
(iii) Percentage of downside risk
(iv) Conversion Parity Price

t 1 2 3
PVIF (0.095, t) 0.9132 0.8340 0.7617

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Question 5C (4 Marks)
In March 2025, SMD Bank sold 7% Interest Rate Futures underlying Notional 7.5% Coupon Bonds. The
exchange provides following details of eligible securities that can be delivered:

Security Quoted Spot Price of Bonds Conversion Factor

6.55 GOI 2028 9,264 0.9060
6.80 GOI 2032 8,775 0.9195
6.85 GOI 2029 9,723 0.9643
8.44 GOI 2030 11,463 1.1734
8.85 GOI 2031 12,017 1.2428

Recommend the Cheapest to Deliver (CTD) security that should be delivered by SMD Bank if Future
settlement price is 10,000.

Question 6A (8 Marks)
Mr. V is a commodity trader and specialized himself in trading of rice.
He has 24,000 kg. of rice. The following details are available as on date:
Spot price ₹ 70 per kg.
3 month's future is trading at ₹ 68 per kg.
Expected Lower price after 3 months ₹ 64 per kg.
Contract size 500 kg. per contract
You are required to advise to Mr. V:
(i) How to mitigate the risk of fall in price.
(ii) How to use the futures market.
(iii) What will be the effective realized price for his sales if, after 3 months, spot price is ₹ 69 per kg.
and the 3 months future contract price for closing the contract is
(A) ₹ 72 per kg.
(B) ₹ 67 per kg.

Question 6B (6 Marks)
Mr. Tamarind intends to invest in equity shares of a company the value of which depends upon various
parameters as mentioned below:

Factor Beta Expected value in % Actual value in %

GNP 1.20 7.70 7.70
Inflation 1.75 5.50 7.00
Interest rate 1.30 7.75 9.00
Stock market index 1.70 10.00 12.00
Industrial production 1.00 7.00 7.50

Risk free rate of interest is 25 basis points over and above the actual interest rate.
(i) How much is the return of the share under Arbitrage Pricing Theory?

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(ii) Also calculate return using CAPM.

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