AFM Imp Questions Nov 2024 - Financial Policy & Corporate Strategy PDF

CA A CH Mayank P T EKothari R 1 AFM Imp Questions Nov 2024 2.Risk Management FINANCIAL POLICY & CORPORATE STRATEGY Question 1 i. What is sustainable growth rate? ii. What makes an Organization Sustainable? iii. Mr. X has...

CA A CH Mayank P T EKothari R 1 AFM Imp Questions Nov 2024 2.Risk Management FINANCIAL POLICY & CORPORATE STRATEGY Question 1 i. What is sustainable growth rate? ii. What makes an Organization Sustainable? iii. Mr. X has submitted the following data: Particulars (₹) in Lakhs Total Assets 250 Total Liabilities 220 Net Income 12 Dividend Paid 4.5 Sales 100 Mr. X wants to know to what extent sales can be increased without going for additional borrowings by using Sustainable Growth Rate (SGR) concept? Answer: (i) The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. After the firm has passed this rate, it must borrow funds from another source to facilitate growth. (ii) In order to be sustainable, an organisation must: have a clear strategic direction; be able to scan its environment or context to identify opportunities for its work; be able to attract, manage and retain competent staff; have an adequate administrative and financial infrastructure; be able to demonstrate its effectiveness and impact in order to leverage further resources; and Get community support for, and involvement in its work. (iii) No Particulars Amount in ₹Lakhs (a) Total Assets 250.00 (b) Total Liabilities 220.00 (c) Net Income 12.00 (d) Dividend Paid 4.50 (e) Sales 100.00 (f) Equity (a) – (b) 30.00 (g) Return on Equity (ROE) (c) /(f) 40.00% (h) Dividend pay-out Ratio (d) /(c) 37.50% (i) SGR [g × (1-h)] 25.00%* (j) Additional Sales can be achieved without further 25.00 borrowings (e) × (i) (k) Maximum sales can be achieved without further 125.00 borrowings (e) + (j) * Alternatively, it can also be computed as follow 1  CA Mayank Kothari AFM Imp Questions Nov 2024 2.Risk Management g(1− h) SGR = 1− [g(1−h)] = 33.33% and then Additional Sales shall be ₹33.33 Lakhs and Maximum Sales can be achieved without further borrowings shall be ₹133.33 Lakhs CHAPTER 2 RISK MANAGEMENT Question 1 ABC Ltd. is considering a project X, which is normally distributed and has mean return of ₹2 crore with Standard Deviation of ₹1.60 crore. In case ABC Ltd. loses on any project more than ₹1.00 crore there will be financial difficulties. Determine the probability the company will be in financial difficulty. Given: Standard Normal Distribution Table (Z-Score) providing area between Mean and Z score Z Score Area 1.85 0.4678 1.86 0.4686 1.87 0.4693 1.88 0.4699 1.89 0.4706 MTP April 21 (4 Marks) Answer: For calculating probability of financial difficulty, we shall calculate the area under Normal Curve corresponding to the Z Score obtained from the following equation (how many SD is away from Mean Value of financial difficulty): x-μ -1.00 crore - 2.00 crore z= = = -1.875 σ 1.60 crore Corresponding area from Z Score Table by using interpolation shall be found as follows Z Score Area under Normal Curve 1.87 0.4693 1.88 0.4699 0.01 0.0006 0.0006 The corresponding value of 0.005 Z score =0.005 × =0.0003 0.01 Thus the Value of 1.875 shall be = 0.4693 + 0.0003 = 0.4696 And the value of -1.875 shall be = 0.50 – 0.4696 = 0.0304 Thus the probability the company shall be in financial difficulty is 3.04%. 2 CA Mayank Kothari AFM Imp Questions Nov 2024 2.Risk Management Question 2 Neel holds ₹1 Crore shares of XY Ltd. Whose market price standard deviation is 2% per day. Assuming 252 trading days in a year, determine maximum loss level over the period of 1 trading day and 10 trading days with 99% confidence level. Assuming share prices are normally distributed for level of 99%, the equivalent Z score from Normal table of Cumulative Area shall be 2.33. May 18 (4 Marks) Answer: Assuming share prices are normally distributed, for level of 99%, the equivalent Z score from Normal table of Cumulative Area is 2.33. Volatility in terms of Rupee is 2% of ₹1 Crore = ₹2 Lakh The maximum loss for 1 day at 99% Confidence level is ₹2 Lakh × 2.33 = ₹4.66 Lakhs, and expected maximum loss for 10 trading days shall be: √10 × ₹4.66 lakh = 14.74 Lakhs or 14.73 Lakhs. Question 3 Following is the information about Mr. J's portfolio: Investment in shares of ABC Ltd. ₹200 lakh Investment in shares of XYZ Ltd. ₹200 lakh Daily standard deviation of both shares 1% Co-efficient of correlation between both shares 0.3 Required: Determine the 10 days 99% Value At Risk (VAR) for Mr. J's portfolio. Given: The Z score from the Normal Table at 99% confidence level is 2.33. (Show your calculations up to four decimal points). Nov 19 (4 Marks) Answer: VARPortfolio = SDPortfolio × Z Score × √t = 3.22 × 2.33 × √10 VARPortfolio = ₹23.73 Lakhs ---10 Days SD = √Variance of Portfolio 3 CA Mayank Kothari AFM Imp Questions Nov 2024 2.Risk Management VarianceP (%) = (σXYZ WXYZ )2 +(σABC WABC )2 +2σXYZ × WXYZ σABC WABC rXA VarianceP (`) = σ2XYZ +σ2ABX +2σXYZ σABC rXA VarianceP = σ2XYZ +σ2ABX +2σXYZ σABC rXA = 22 +22 +2 × 2 × 2 × 0.3 = 4+4+2.4 VarianceP = 10.4 SDP = √10.4 = 3.22 Question 4 Mr. Bull 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 make a maximum investment 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. Bull received the intimation of the same in the evening. The bank needs a minimum balance of ₹1,000 all the time. The value of Z score, at the required confidence level of 99 percent is 2.33. The other information with respect to stocks X and Y, which are under consideration for this week, is as under: X Y Return Probability Return Probability 6 0.10 4 0.10 7 0.25 6 0.20 8 0.30 8 0.40 9 0.25 10 0.20 10 0.10 12 0.10 You are required to recommend a single stock, where maximum investment can be made. May 23 (8 Marks) Answer: (a) Working Notes: (1) Security X Return (1) Prob. (2) (1) × (2) Dev. Dev.2 Dev.2 × Prob. 6 0.10 0.60 -2 4 0.40 7 0.25 1.75 1 1 0.25 8 0.30 2.40 0 0 0 9 0.25 2.25 1 1 0.25 10 0.10 1.00 2 4 0.40 8.00 1.30 Expected Return (Rx) = 8.00% Variance (σ2X ) = 1.30 Standard Deviation ( σX ) = √1.30 = 𝟏. 𝟏𝟒 4 CA Mayank Kothari AFM Imp Questions Nov 2024 2.Risk Management (2) Security Y Return (1) Prob. (2) (1) × (2) Dev. Dev.2 Dev.2 × Prob. 4 0.10 0.40 -4 16 1.60 6 0.20 1.20 -2 4 0.80 8 0.40 3.20 0 0 0 10 0.20 2.00 2 4 0.80 12 0.10 1.20 4 16 1.60 8.00 4.80 Expected Return (RY) = 8.00% Variance (σ2Y ) = 4.80 Standard Deviation ( σY ) = √4.80 = 2.19 No. of X Y days Amount Transferred ₹110000000 ₹110000000 Maturity Proceeds of Fixed Deposit ₹6342560 ₹6342560 Amount available in bank account ₹116342560 ₹116342560 Minimum balance to be kept ₹1000 ₹1000 Available amount which can be used for ₹116341560 ₹116341560 potential investment for 4 days Maximum loss for 4 days at 99% 4 ₹116341560 ₹116341560 Level Maximum loss for 1 day at 99% level = Maximum loss for 4 days/ √No. of days = 1 ₹58170780 ₹58170780 116341560/ √4 Z Score at 99% level 2.33 2.33 Volatility in terms of ₹ ₹24966000 ₹24966000 (Maximum Loss/Z Score at 99% Level) Standard Deviation 0.0114 0.0219 Maximum Investment (Volatility in terms of ₹2190000000 ₹1140000000 ₹ / SD) Recommendation: Position should be taken in X. 5 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting CHAPTER 3 ADVANCED CAPITAL BUDGETING Question 1 Following are the estimates of the net cash flows and probability of a new project of M/s X Ltd.: Year P = 0.3 P = 0.5 P = 0.2 Initial investment 0 4,00,000 4,00,000 4,00,000 Estimated net after tax cash inflows per year 1 to 5 1,00,000 1,10,000 1,20,000 Estimated salvage value (after tax) 5 20,000 50,000 60,000 Required rate of return from the project is 10%. Find: i. The expected NPV of the project. ii. The best case and the worst case NPVs. iii. The probability of occurrence of the worst case if the cash flows are perfectly dependent overtime and independent overtime. iv. Standard deviation and coefficient of variation assuming that there are only three streams of cash flow, which are represented by each column of the table with the given probabilities. v. Coefficient of variation of X Ltd. on its average project which is in the range of 0.95 to 1.0. If the coefficient of variation of the project is found to be less risky than average, 100 basis points are deducted from the Company’s cost of Capital Should the project be accepted by X Ltd? StudyMat Answer: (i) Expected cash flows:- Year Net cash flows P.V. PV. @ 10% 0 (4,00,000 × 1) = (-)4,00,000 1.000 (-)4,00,000 1 to 4 (1,00,000 × 0.3+1,10,000 × 0.5 + = 1,09,000 3.170 3,45,530 1,20,000 × 0.2) 5 [1,09,000 + (20,000 × 0.3 + = 1,52,000 0.621 94,392 50,000 × 0.5 + 60,000 × 0.2)] NPV 39,922 (ii) ENPV of the worst case 1,00,000 × 3.790 = ₹3,79,000 (Students may have 3.791 also the values will change accordingly) 20,000 × 0.621 = ₹12,420/- ENPV = (-) 4,00,000 + 3,79,000 + 12,420 = (-) ₹8,580/- ENPV of the best case = (-) 4,00,000 + 1,20,000 × 3.790 + 60,000 × 0.621 = ₹92,060/- (iii) (a) Required probability = 0.3 (b) Required probability = (0.3)5 = 0.00243 (iv) The base case NPV = (-) 4,00,000 + (1,10,000 × 3.79) + (50,000 × 0.621) = ₹47,950/ ENPV = 0.30 × (-) 8580 + 0.5 × 47950 + 92060 × 0.20 = ₹39,813/- 6 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Therefore, σΕNPV = √0.3(−8580 + 39,813)2 + 0.5(47950 − 39813)2 + 0.2(92,060 − 39,813)2 = ₹35,800/− Therefore, CV = 35,800/39,813 = 0.90 (v) Risk adjusted out of cost of capital of X Ltd. = 10% - 1% = 9%. Year Expected net cash flow PV @ 9% Present Value 0 (-) 4,00,000 1.000 (-) 4,00,000 1 to 4 1,09,000 3.240 3,53,160 5 1,52,000 0.650 98,800 ENPV 51,960 Therefore, the project should be accepted. Question 2 Aeroflot airlines is planning to procure a light commercial aircraft for flying class clients at an investment of ₹50 lakhs. The expected cash flow after tax for next three years is as follows: Year 1 Year 2 Year 3 CFAT Prob. CFAT Prob. CFAT Prob. 15 0.1 15 0.1 18 0.2 18 0.2 20 0.3 22 0.5 22 0.4 30 0.4 35 0.2 35 0.3 45 0.2 50 0.1 The company wishes to consider all possible risk factors relating to an airline. The company wants to know- (i) The expected NPV of this proposal assuming independent probability distribution with 6 per cent risk free rate of interest, and (ii) The possible deviation on expected values. Answer: (i) Determination of expected CFAT ₹ in lakh Year-1 Year-2 Year – 3 CFAT P1 Cash flow CFAT P2 Cash flow CFAT P3 Cash flow 15 0.1 1.5 15 0.1 1.5 18 0.2 3.6 18 0.2 3.6 20 0.3 6 22 0.5 11 22 0.4 8.8 30 0.4 12 35 0.2 7 35 0.3 10.5 45 0.2 9 50 0.1 5 ̅̅̅̅̅ 𝐂𝐅𝟏 24.4 ̅̅̅̅̅ 𝐂𝐅𝟐 28.5 ̅̅̅̅ 𝐂𝐅𝟑 26.6 CFAT (₹ in lakh) PV factor @ 6% Total PV (₹ in lakh) 24.4 0.943 23.009 28.5 0.89 25.365 26.6 0.84 22.344 Total Cash Inflow 70.718 Total Cash Outflow 50 NPV 20.718 7 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting (ii) Determination of Standard deviation for each year Year 1 (CF1 − ̅CF ̅̅̅1 )2 (CF1 − ̅CF ̅̅̅1 )2 P1 2 (15-24.4) 88.36 0.1 8.836 2 (18-24.4) 40.96 0.2 8.192 (22-24.4)2 5.76 0.4 2.304 2 (35-24.4) 112.36 0.3 33.708 53.04 𝛔 = √𝟓𝟑. 𝟎𝟒 = 𝟕. 𝟐𝟖𝟐 Year 2 ̅̅̅̅2 )2 (CF2 − CF (CF2 − ̅CF ̅̅̅2 )2 P2 (15-28.5)2 182.25 0.1 18.225 (20-28.5)2 72.25 0.3 21.675 (30-28.5)2 2.25 0.4 0.9 (45-28.5)2 272.25 0.2 54.45 95.25 𝛔 = √𝟗𝟓. 𝟐𝟓 = 𝟗. 𝟕𝟔 Year 3 ̅̅̅̅3 )2 (CF3 − CF ̅̅̅̅3 )2 (CF3 − CF P3 (18-26.6)2 73.96 0.2 14.792 (22-26.6)2 21.16 0.5 10.58 (35-26.6)2 70.56 0.2 14.112 (50-26.6)2 547.56 0.1 54.756 94.24 𝛔 = √𝟗𝟒. 𝟐𝟒 = 𝟗. 𝟕𝟎 Standard deviation of the expected Values n σ2 t √∑ (1 + i)2t t=1 53.04 95.25 94.24 σ=√ 2 + 4 + (1 + 0.06) (1 + 0.06) (1 + 0.06)6 σ = √47.21 + 75.45 + 66.44 = √189.10 = 𝟏𝟑. 𝟕𝟓 Question 3 KLM Ltd. requires ₹15,00,000 for a new project. Useful life of project is 3 years. Salvage value - NIL. Depreciation is ₹5,00,000 p.a. Given below are projected revenues and costs (excluding depreciation) ignoring inflation: Year → 1 2 3 Revenues in ₹ 10,00,000 13,00,000 14,00,000 8 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Costs in ₹ 5,00,000 6,00,000 6,50,000 Applicable tax rate is 35%. Assume cost of capital to be 14% (after tax). The inflation rates for revenues and costs are as under: Year Revenues % Costs % 1 9 10 2 8 9 3 6 7 PVF at 14%, for 3 years =0.877, 0.769 and 0.675 Show amount to the nearest rupee in calculations. You are required to calculate net present value of the project. StudyMat Answer: (i) Inflation adjusted Revenues Year Revenues (₹) Revenues (Inflation Adjusted) (₹) 1 10,00,000 10,00,000(1.09) 10,90,000 2 13,00,000 13,00,000(1.09) (1.08) 15,30,360 3 14,00,000 14,00,000(1.09) (1.08)(1.06) 17,46,965 (ii) Inflation adjusted Costs Year Revenues (₹) Revenues (Inflation Adjusted) (₹) 1 5,00,000 5,00,000(1.10) 5,50,000 2 6,00,000 6,00,000(1.10)(1.09) 7,19,400 3 6,50,000 6,50,000(1.10)(1.09)(1.07) 8,33,905 (iii) Tax Benefit on Depreciation = ₹5,00,000 × 0.35 = ₹1,75,000 (iv) Net Profit after Tax Year Revenues Costs Net Profit Tax Profit after (Inflation (Inflation (₹) (₹) Tax (₹) Adjusted) (₹) Adjusted) (₹) (1) (2) (3) =(1) -(2) (4) = 35% of (3) (3) - (4) 1 10,90,000 5,50,000 5,40,000 1,89,000 3,51,000 2 15,30,360 7,19,400 8,10,960 2,83,836 5,27,124 3 17,46,965 8,33,905 9,13,060 3,19,571 5,93,489 (v) Present Value of Cash Inflows Year Net Profit Tax Benefit on Cash Inflow PVF@ 14% PV (₹) after tax (₹) Depreciation (₹) (₹) 1 3,51,000 1,75,000 5,26,000 0.877 4,61,302 2 5,27,124 1,75,000 7,02,124 0.769 5,39,933 3 5,93,489 1,75,000 7,68,489 0.675 5,18,730 15,19,965 NPV = ₹15,19,965 - ₹15,00,000 = ₹19,965 9 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Question 4 New Projects Ltd. is evaluating 3 projects, P-I, P-II, P-III. Following information is available in respect of these projects: P-I P-II P-III Cost ₹15,00,000 ₹11,00,000 ₹19,00,000 Inflows-Year 1 6,00,000 6,00,000 4,00,000 Year 2 6,00,000 4 ,00,000 6,00,000 Year 3 6,00,000 5 ,00,000 8,00,000 Year 4 6,00,000 2 ,00,000 12,00,000 Risk Index 1.80 1.00 0.60 Minimum required rate of return of the firm is 15% and applicable tax rate is 40%. The risk free interest rate is 10%. Required: i. Find out the risk-adjusted discount rate (RADR) for these projects. ii. Which project is the best? StudyMat Answer: (i) The risk free rate of interest and risk factor for each of the projects are given. The risk adjusted discount rate (RADR) for different projects can be found on the basis of CAPM as follows: Required Rate of Return = IRf + (ko - IRF ) Risk Factor For P-I : RADR = 0.10 + (0.15 – 0.10 ) 1.80 = 19% For P-II : RADR = 0.10 + (0.15 – 0.10 ) 1.00 = 15 % For P-III : RADR = 0.10 + (0.15 – 0.10) 0.60 = 13 % (ii) The three projects can now be evaluated at 19%, 15% and 13% discount rate as follows: Project P-I Annual Inflows ₹ 6,00,000 PVAF (19 %, 4) 2.639 PV of Inflows (₹6,00,000 × 2.639) ₹15,83,400 Less: Cost of Investment ₹15,00,000 Net Present Value ₹ 83,400 Project P-II Year Cash Inflow (₹) PVF (15%,n) PV (₹) 1 6,00,000 0.870 5,22,000 2 4,00,000 0.756 3,02,400 3 5,00,000 0.658 3,29,000 4 2,00,000 0.572 1,14,400 Total Present Value 12,67,800 Less: Cost of Investment 11,00,000 Net Present Value 1,67,800 Project P-III Year Cash Inflow (₹) PVF (13%,n) PV (₹) 1 4,00,000 0.885 3,54,000 2 6,00,000 0.783 4,69,800 3 8,00,000 0.693 5,54,400 4 12,00,000 0.613 7,35,600 10 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Total Present Value 21,13,800 Less: Cost of Investment 19,00,000 Net Present Value 2,13,800 Project P-III has highest NPV. So, it should be accepted by the firm Question 5 The Textile Manufacturing Company Ltd., is considering one of two mutually exclusive proposals, Projects M and N, which require cash outlays of ₹8,50,000 and ₹8,25,000 respectively. The certainty-equivalent (C.E) approach is used in incorporating risk in capital budgeting decisions. The current yield on government bonds is 6% and this is used as the risk free rate. The expected net cash flows and their certainty equivalents are as follows: Project M Project N Year-end Cash Flow ₹ C.E. Cash Flow ₹ C.E. 1 4,50,000 0.8 4,50,000 0.9 2 5,00,000 0.7 4,50,000 0.8 3 5,00,000 0.5 5,00,000 0.7 Present value factors of ₹1 discounted at 6% at the end of year 1, 2 and 3 are 0.943, 0.890 and 0.840 respectively. Required: i. Which project should be accepted? ii. If risk adjusted discount rate method is used, which project would be appraised with a higher rate and why? StudyMat Answer: (i) Statement Showing the Net Present Value of Project M Year Cash Flow C.E. Adjusted Cash Present value Total Present end (₹) flow (₹) factor at 6% value (₹) (a) (b) (c) = (a) × (b) (d) (e) = (c) × (d) 1 4,50,000 0.8 3,60,000 0.943 3,39,480 2 5,00,000 0.7 3,50,000 0.890 3,11,500 3 5,00,000 0.5 2,50,000 0.840 2,10,000 8,60,980 Less: Initial Investment 8,50,000 Net Present Value 10,980 Statement Showing the Net Present Value of Project N Year Cash Flow C.E. Adjusted Cash Present value Total Present end (₹) flow (₹) factor value (₹) (a) (b) (c) = (a) × (b) (d) (e) = (c) × (d) 1 4,50,000 0.9 4,05,000 0.943 3,81,915 2 4,50,000 0.8 3,60,000 0.890 3,20,400 3 5,00,000 0.7 3,50,000 0.840 2,94,000 9,96,315 Less: Initial Investment 8,25,000 Net Present Value 1,71,315 Decision: Since the net present value of Project N is higher, so the project N should be accepted. 11 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting (ii) Certainty - Equivalent (C.E.) Co-efficient of Project M (2.0) is lower than Project N (2.4). This means Project M is riskier than Project N as "higher the riskiness of a cash flow, the lower will be the CE factor". If risk adjusted discount rate (RADR) method is used, Project M would be analysed with a higher rate. RADR is based on the premise that riskiness of a proposal may be taken care of, by adjusting the discount rate. The cash flows from a more risky proposal should be discounted at a relatively higher discount rate as compared to other proposals whose cash flows are less risky. Any investor is basically risk averse. However, he may be ready to take risk provided he is rewarded for undertaking risk by higher returns. So, more risky the investment is, the greater would be the expected return. The expected return is expressed in terms of discount rate which is also the minimum required rate of return generated by a proposal if it is to be accepted. Therefore, there is a positive correlation between risk of a proposal and the discount rate. Question 6 X Ltd. is considering its new project with the following details: Sr. No. Particulars Figures 1. Initial capital cost ₹400 Cr. 2. Annual unit sales 5 Cr. 3. Selling price per unit ₹100 4. Variable cost per unit ₹50 5. Fixed costs per year ₹50 Cr. 6. Discount Rate 6% Required: (i) Tabulate the NPV of the project. Does it represent the actual outcome? Comment. (ii) Examine the impact of 2.5 percent adverse variance in each of the variables on the project’s NPV. Decide which variable is having maximum effect? (iii) Critically analyse the Sensitivity analysis as method of incorporating risk in capital budgeting decisions. Consider Life of the project as 3 years. RTP May 2024 Answer: i. Calculation of Net Cash Inflow per year Particulars Amount (₹) A Selling price per unit 100 B Variable cost per unit 50 C Contribution per unit (A - B) 50 D Number of units sold per year 5 Cr. E Total Contribution (C × D) ₹250 Cr. F Fixed cost per year ₹50 Cr. G Net cash inflow per year (E - F) ₹200 Cr. Calculation of Net Present Value (NPV) of the Project Year Year Cash Flow (₹in PV factor @ Present Value (PV) (₹in Cr.) 6% Cr.) 0 (400.00) 1.000 (400.00) 1 200.00 0.943 188.60 2 200.00 0.890 178.00 3 200.00 0.840 168.00 12 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Net Present Value 134.60 Here, NPV represent the most likely outcomes and not the actual outcomes. The actual outcome can be lower or higher than the expected outcome. ii. Sensitivity Analysis considering 2.5 % Adverse Variance in each variable Particulars Base Initial Selling Variable Fixed Units sold capital Price per Cost Per Cost Per per year cost Unit Unit Unit reduced increased Reduced increased increased to 4.875 to ₹410 to ₹97.5 to ₹51.25 to ₹51.25 crore crore (₹) (₹) (₹) (₹) (₹) (₹) A Selling price per unit 100 100 97.50 100 100 100 B Variable cost per unit 50 50 50 51.25 50 50 C Contribution per unit 50 50 47.50 48.75 50 50 (A - B) (₹in Cr.) (₹in Cr.) (₹in Cr.) (₹in Cr.) (₹in Cr.) (₹in Cr.) D Number of units sold 5 5 5 5 5 4.875 per year (units in Crores) E Total Contribution (C 250 250 237.50 243.75 250 243.75 × D) F Fixed cost 50 50 50 50 51.25 50 per year G Net Cash Inflow per 200 200 187.50 193.75 198.75 193.75 year (E - F) H PV of Net cash Inflow 534.60 534.60 501.19 517.89 531.26 517.89 per year (G × 2.673) I Initial capital cost 400 410 400 400 400 400 J NPV (H - I) 134.60 124.60 101.19 117.89 131.26 117.89 K Percentage Change - -7.43% -24.82% -12.41% -2.48% -12.41% in NPV The above table shows that by changing one variable at a time by 2.5% (adverse) while keeping the others constant, the impact in percentage terms on the NPV of the project can be calculated. Thus, the change in selling price has the maximum effect on the NPV by 24.82%. Advantages of Sensitivity Analysis: Following are the main advantages of Sensitivity Analysis: (1) Critical Issues: This analysis identifies critical factors that impinge on a project’s success or failure. (2) Simplicity: It is a simple technique. Disadvantage of Sensitivity Analysis Following are the main disadvantages of Sensitivity Analysis: (1) Assumption of Independence: This analysis assumes that all variables are independent i.e. they are not related to each other, which is unlikely in real life. (2) Ignore probability: This analysis does not look to the probability of changes in the variables 13 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Question 7 The Easygoing Company Limited is considering a new project with initial investment, for a product “Survival”. It is estimated that IRR of the project is 16% having an estimated life of 5 years. Financial Manager has studied that project with sensitivity analysis and informed that annual fixed cost sensitivity is 7.8416%, whereas cost of capital (discount rate) sensitivity is 60%. Other information available are: Profit Volume Ratio (P/V) is 70%, Variable cost ₹60/- per unit Annual Cash Flow ₹57,500/- Ignore Depreciation on initial investment and impact of taxation. Calculate i. Initial Investment of the Project ii. Net Present Value of the Project iii. Annual Fixed Cost iv. Estimated annual unit of sales v. Break Even Units Cumulative Discounting Factor for 5 years 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 StudyMat Answer: (i) Initial Investment IRR = 16% (Given) At IRR, NPV shall be zero, therefore Initial Cost of Investment = PVAF (16%,5) × Cash Flow (Annual) = 3.274 × ₹57,500 = ₹1,88,255 (ii) Net Present Value (NPV) 16 − X Let Cost of Capital be X, then = 60% X = 10% X Thus NPV of the project = Annual Cash Flow × PVAF (10%, 5) - Initial Investment = ₹57,500 × 3.791 - ₹1,88,255 = ₹2,17,982.50 - ₹1,88,255 = ₹29,727.50 (iii) Annual Fixed Cost Let change in the Fixed Cost which makes NPV zero is X. Then, ₹29,727.50 - 3.791X = 0 Thus X = ₹7,841.60 Let original Fixed Cost be Y then, Y × 7.8416% = ₹7,841.60 Y = ₹1,00,000 Thus Fixed Cost is equal to ₹1,00,000 14 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting (iv) Estimated Annual Units of Sales ₹60 Selling Price per unit = = ₹200 100% − 70% Annual Cash Flow + Fixed Cost = Sales Value P/VRatio ₹57,500 + ₹1,00,000 = ₹2,25,000 0.70 ₹𝟐, 𝟐𝟓, 𝟎𝟎𝟎 𝐒𝐚𝐥𝐞𝐬 𝐢𝐧 𝐔𝐧𝐢𝐭𝐬 = = 𝟏, 𝟏𝟐𝟓 𝐮𝐧𝐢𝐭𝐬 ₹𝟐𝟎𝟎 (v) Break Even Units Fixed Cost 1,00,000 = = 714.285 units Contribution Per Unit 140 Question 8 A company in India is evaluating a project using Simulation Analysis to account for uncertainties in the project's annual cash flow and project life. The following data is provided: Annual Cash Flow Project Life Value (₹) Probability Value (Year) Probability 10,000 0.02 3 0.05 15,000 0.03 4 0.10 20,000 0.15 5 0.30 25,000 0.15 6 0.25 30,000 0.30 7 0.15 35,000 0.20 8 0.10 40,000 0.15 9 0.03 10 0.02 Random Numbers for 10 Simulation Runs: Run Random No. (Cash Flow) Random No. (Project Life) 1 53 97 2 66 99 3 30 81 4 19 09 5 31 67 6 81 70 7 38 75 8 48 83 9 90 33 10 58 52 Calculate the NPV for each Simulation run , Take 10% as the Discount Rate Study Mat Answer: 15 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Correspondence between Values of Exogenous Variables and two Digit Random Numbers: Value Probability Cumulative Two Digit Value Probability Cumulative Two Digit (₹) Probability Random (Year) Probability Random No. No. 10,000 0.02 0.02 00-01 3 0.05 0.05 00-04 15,000 0.03 0.05 02-04 4 0.10 0.15 05-14 20,000 0.15 0.20 05-19 5 0.30 0.45 15-44 25,000 0.15 0.35 20-34 6 0.25 0.70 45-69 30,000 0.30 0.65 35-64 7 0.15 0.85 70-84 35,000 0.20 0.85 65-84 8 0.10 0.95 85-94 40,000 0.15 1.00 85-99 9 0.03 0.98 95-97 10 0.02 1.00 98-99 NPV= (Annual Cash Flow × PVAF) − Initial Investment Random Random Corresponding PVAF No. Corresponding No. PV of PV of NPV Run Project Life @ (Cash Cash Flow (₹) (Project CIF COF (₹) (Years) 10% Flow) Life) 1 53 30,000 97 9 5.759 172770 130000 42,770 2 66 35,000 99 10 6.145 215075 130000 85,075 3 30 25,000 81 7 4.868 121700 130000 -8,300 - 4 19 20,000 9 4 3.17 63400 130000 66,600 - 5 31 25,000 67 6 4.355 108875 130000 21,125 6 81 35,000 70 7 4.868 170380 130000 40,380 7 38 30,000 75 7 4.868 146040 130000 16,040 8 48 30,000 83 7 4.868 146040 130000 16,040 9 90 40,000 33 5 3.791 151640 130000 21,640 10 58 30,000 52 6 4.355 130650 130000 650 Question 9 A firm has an investment proposal, requiring an outlay of ₹80,000. The investment proposal is expected to have two years economic life with no salvage value. In year 1, there is a 0.4 probability that cash inflow after tax will be ₹50,000 and 0.6 probability that cash inflow after tax will be ₹60,000. The probability assigned to cash inflow after tax for the year 2 is as follows: The cash inflow year 1 ₹50,000 ₹60,000 The cash inflow year 2 Probability Probability ₹24,000 0.2 ₹40,000 0.4 ₹32,000 0.3 ₹50,000 0.5 ₹44,000 0.5 ₹60,000 0.1 The firm uses a 10% discount rate for this type of investment. Required: 16 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting ii. Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). iii. What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? iv. What will be the best outcome and the probability of that occurrence? v. Will the project be accepted? (Note: 10% discount factor 1 year 0.909; 2 year 0.826) StudyMat Answer: (i) The decision tree diagram is presented in the chart, identifying various paths and outcomes, and the computation of various paths/outcomes and NPV of each path are presented in the following tables: Path No. Joint probability Year 1 x year 2 24,000 1.08 50,000 32,000 2 0.12 CASH 44,000 3 0.20 OUTLAY 40,000 4 0.24 80,000 0.30 60,000 50,000 5 60,000 6 0.06 1.00 The Net Present Value (NPV) of each path at 10% discount rate is given below: Path Year 1 Cash Flows Year 2 Cash Flows Total Cash NPV Cash Inflows Inflows (PV) ₹ ₹ ₹ ₹ ₹ 1 50,000×.909 = 45,450 24,000×.826 = 19,824 65,274 80,000 (―) 14,726 2 45,450 32,000×.826 = 26,432 71,882 80,000 (―) 8,118 3 45,450 44,000×.826 = 36,344 81,794 80,000 1,794 4 60,000×.909 = 54,540 40,000×.826 = 33,040 87,580 80,000 7,580 5 54,540 50,000×.826 = 41,300 95,840 80,000 15,840 6 54,540 60,000×.826 = 49,560 1,04,100 80,000 24,100 Statement showing Expected Net Present Value ₹ z NPV (₹) Joint Probability Expected NPV 1 ―14,726 0.08 ―1,178.08 2 ―8,118 0.12 ―974.16 3 1,794 0.20 358.80 4 7,580 0.24 1,819.20 5 15,840 0.30 4,752.00 6 24,100 0.06 1,446.00 6,223.76 (ii) If the worst outcome is realized the project will yield NPV of -₹14,726. The probability of occurrence of this NPV is 8% and a loss of ₹1,178 (path 1). 17 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting (iii) The best outcome will be path 6 when the NPV is at ₹24,100. The probability of occurrence of this NPV is 6% and a expected profit of ₹1,446. (iv) The project should be accepted because the expected NPV is positive at ₹6,223.76 based on joint probability. Question 10 A manufacturing unit engaged in the production of automobile parts is considering a proposal of purchasing one of the two plants, details of which are given below: Plant A Plant B Cost ₹20,00,000 ₹38,00,000 Installation Charges ₹4,00,000 ₹2,00,000 Life 20 years 15 years Scrap Value after Full Life ₹4,00,000 ₹4,00,000 Output per minute (units) 200 400 The annual costs of the two plants are as follows: Plant A Plant B Running hours per annum 2500 2500 Costs Wages 1,00,000 1,40,000 Indirect Materials 4,80,000 6,00,000 Repairs 80,000 1,00,000 Power 2,40,000 2,80,000 Fixed Cost 60,000 80,000 Will it be advantageous to buy Plant A or Plant B? Substantiate your answer with the help of comparative unit cost of the plants. Assume interest on capital at 10 percent. Make other relevant assumptions May 2015 ( 7 Marks) Answer: Calculation of Equivalent Annual Cost Machine A Machine B Cash Outlay ₹24,00,000 ₹40,00,000 Less: PV of Salvage Value 4,00,000 × 0.1486 ₹59,440 4,00,000 × 0.2394 ₹95,760 Annuity Factor 0.1175 0.1315 ₹2,75,016 ₹5,13,408 Computation of Cost Per Unit Machine A Machine B Annual Output (a) 2500 × 60 × 200 2500 x 60 x 400 = 3,00,00,000 = 6,00,00,000 Annual Cost (b) ₹ ₹ Wages 1,00,000 1,40,000 Indirect Material 4,80,000 6,00,000 Repairs 80,000 1,00,000 Powers 2,40,000 2,80,000 Fixed Cost 60,000 80,000 18 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Equivalent Annual Cost 2,75,016 5,13,408 Total 12,35,016 17,13,408 Cost Per Unit (b)/(a) 0.041167 0.02860 Decision: As the unit cost is less in proposed Plant B, it may be recommended that it is advantageous to acquire Plant B. Question 11 A & Co. is contemplating whether to replace an existing machine or to spend money on overhauling it. A & Co. currently pays no taxes. The replacement machine costs ₹90,000 now and requires maintenance of ₹10,000 at the end of every year for eight years. At the end of eight years it would have a salvage value of ₹20,000 and would be sold. The existing machine requires increasing amounts of maintenance each year and its salvage value falls each year as follows: Year Maintenance Salvage (₹) (₹) Present 0 40,000 1 10,000 25,000 2 20,000 15,000 3 30,000 10,000 4 40,000 0 The opportunity cost of capital for A & Co. is 15%. Required: When should the company replace the machine? (Notes: Present value of an annuity of Re. 1 per period for 8 years at interest rate of 15% : 4.4873; present value of Re. 1 to be received after 8 years at interest rate of 15% : 0.3269). StudyMat Answer: A & Co. Equivalent cost of (EAC) of new machine ₹ (i) Cost of new machine now 90,000 Add: PV of annual repairs @ ₹10,000 per annum for 8 years 44,873 (₹10,000 × 4.4873) 1,34,873 Less: PV of salvage value at the end of 8 years (₹20,000×0.3269) 6,538 1,28,335 Equivalent annual cost (EAC) (₹1,28,335/4.4873) 28,600 PV of cost of replacing the old machine in each of 4 years with new machine Scenario Year Cash Flow PV @ 15% PV ₹ ₹ Replace Immediately 0 (28,600) 1.00 (28,600) 40,000 1.00 40,000 11,400 Replace in one year 1 (28,600) 0.870 (24,882) 1 (10,000) 0.870 (8,700) 1 25,000 0.870 21,750 19 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting (11,832) Replace in two years 1 (10,000) 0.870 (8,700) 2 (28,600) 0.756 (21,622) 2 (20,000) 0.756 (15,120) 2 15,000 0.756 11,340 (34,102) Replace in three years 1 (10,000) 0.870 (8,700) 2 (20,000) 0.756 (15,120) 3 (28,600) 0.658 (18,819) 3 (30,000) 0.658 (19,740) 3 10,000 0.658 6,580 (55,799) Replace in four years 1 (10,000) 0.870 (8,700) 2 (20,000) 0.756 (15,120) 3 (30,000) 0.658 (19,740) 4 (28,600) 0.572 (16,359) 4 (40,000) 0.572 (22,880) (82,799) Advice: The company should replace the old machine immediately because the PV of cost of replacing the old machine with new machine is least. Alternatively, optimal replacement period can also be computed using the following table: Scenario Year Cash Flow PV @ 15% PV Replace Immediately 0 (40,000) 1 (40,000) 1 to 4 28,600 2.855 81,652 41,652 Replace after 1 year 1 10,000 0.870 8,696 1 (25,000) 0.870 (21,739) 2 to 4 28,600 1.985 56,783 43,739 Replace after 2 years 1 10,000 0.870 8,696 2 20,000 0.756 15,123 2 (15,000) 0.756 (11,342) 3 and 4 28,600 1.229 35,157 47,633 Replace after 3 years 1 10,000 0.870 8,696 2 20,000 0.756 15,123 3 30,000 0.658 19,725 3 (10,000) 0.658 (6,575) 4 28,600 0.572 16,352 53,321 Replace after 4 years 1 10,000 0.870 8,696 2 20,000 0.756 15,123 3 30,000 0.658 19,725 4 40,000 0.572 22,870 66,414 20 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Question 12 A machine used on a production line must be replaced at least every four years. Costs incurred to run the machine according to its age are: Age of the Machine (years) 0 1 2 3 4 Purchase price (in ₹) 60,000 Maintenance (in ₹) 16,000 18,000 20,000 20,000 Repair (in ₹) 0 4,000 8,000 16,000 Scrap Value (in ₹) 32,000 24,000 16,000 8,000 Future replacement will be with identical machine with same cost. Revenue is unaffected by the age of the machine. Ignoring inflation and tax, determine the optimum replacement cycle. PV factors of the cost of capital of 15% for the respective four years are 0.8696, 0.7561, 0.6575 and 0.5718. May 24 (8 Marks), May 2012 (10 Marks), StudyMat Answer: Working Notes First of all, we shall calculate cash flows for each replacement cycle as follows: One Year Replacement Cycle ₹ Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (60,000) - - (60,000) 1 - (16,000) 32,000 16,000 Two Years Replacement Cycle ₹ Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (60,000) - - (60,000) 1 - (16,000) - (16,000) 2 - (22,000) 24,000 2,000 Three Years Replacement Cycle ₹ Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (60,000) - - (60,000) 1 - (16,000) - (16,000) 2 - (22,000) - (22,000) 3 - (28,000) 16,000 (12,000) Four Years Replacement Cycle ₹ Year Replacement Cost Maintenance & Repair Residual Value Net cash Flow 0 (60,000) - - (60,000) 1 - (16,000) - (16,000) 2 - (22,000) - (22,000) 3 - (28,000) - (28,000) 4 - (36,000) 8,000 (28,000) 21 CA Mayank Kothari AFM Imp Questions Nov 2024 03. Capital Budgeting Now we shall calculate NPV for each replacement cycles 1 Year 2 Years 3 Years 4 Years Year PVF@ Cash PV Cash PV Cash PV Cash PV 15% Flows Flows Flows Flows 0 1 -60,000 -60,000 -60,000 -60,000 -60,000 -60,000 -60,000 -60,000 1 0.8696 16,000 13,914 -16,000 -13,914 -16,000 -13,914 -16,000 -13,914 2 0.7561 - - 2,000 1,512 -22,000 -16,634 -22,000 -16,634 3 0.6575 - - - 0 -12,000 -7,890 -28,000 -18,410 4 0.5718 - - - 0 0 -28,000 -16,010 -46,086 -72,402 -98,438 -1,24,968 Replacement Cycles EAC (₹) 46,086 1 Year 52,997 0.8696 72,402 2 Years 44,536 1.6257 98,438 3 Years 43,114 2.2832 1,24,968 4 Years 43,772 2.855 Since EAC is least in case of replacement cycle of 3 years hence machine should be replaced after every three years. Note: Alternatively, Answer can also be computed by excluding initial outflow as there will be no change in final decision 22 CA Mayank Kothari AFM Imp Questions Nov 2024 04. Security Analysis CHAPTER 4 SECURITY ANALYSIS Question 1 The Closing values of NSE Nifty from 2nd January, 2024 to 11th January, 2024 were as follows: Days Date Day Nifty 1 2 TUE 21,742 2 3 WED 21,665 3 4 THU 21,517 4 5 FRI 21,462 5 6 SAT No Trading 6 7 SUN No Trading 7 8 MON 21,238 8 9 TUE 21,182 9 10 WED 20,997 10 11 THU 20,926 11 12 FRI 20,901 You are required to: (i) Calculate Exponential Moving Average (EMA) of Nifty during the above period. The previous day exponential moving average of Nifty can be assumed as 21,500. The value of exponent for 31 days EMA is 0.062. (ii) Give brief analysis on the basis of your calculations. May 24 (8 Marks) Answer: EMA =Previous EMA+ [(CP-Previous EMA) x e] or EMA = [CP x e]+ [Previous EMA x (1-e)] 1 2 3 4 5 EMA for EMA Sensex (1 – 2) (3) × 0.062 Previous Day (2 + 4) 02/01/2024 21742 21500.00 242.00 15.00 21515.00 03/01/2024 21665 21515.00 150.00 9.30 21524.30 04/01/2024 21517 21524.30 -7.30 -0.45 21523.85 05/01/2024 21462 21523.85 -61.85 -3.83 21520.02 08/01/2024 21238 21520.02 -282.02 -17.49 21502.53 09/01/2024 21182 21502.53 -320.53 -19.87 21482.66 10/01/2024 20997 21482.66 -485.66 -30.11 21452.55 11/01/2024 20926 21452.55 -526.55 -32.65 21419.90 12/01/2024 20901 21419.90 -518.90 -32.17 21387.73 23 CA Mayank Kothari AFM Imp Questions Nov 2024 04. Security Analysis Question 2 The closing value of Sensex for the month of October, 2017 is given below: Date Closing Sensex Value 1.10.17 2800 3.10.17 2780 4.10.17 2795 5.10.17 2830 8.10.17 2760 9.10.17 2790 10.10.17 2880 11.10.17 2960 12.10.17 2990 15.10.17 3200 16.10.17 3300 17.10.17 3450 19.10.17 3360 22.10.17 3290 23.10.17 3360 24.10.17 3340 25.10.17 3290 29.10.17 3240 30.10.17 3140 31.10.17 3260 ANALYZE the weak form of efficient market hypothesis by applying the run test at 5% and 10% level of significance using 18 Degrees of Freedom. Note: Value of t at 5% is 2.101 at 18 Degrees of Freedom Value of t at 10% is 1.734 at 18 Degrees of Freedom MTP April 21 (12 Marks), Nov 08 (8 Marks), RTP Nov 23, RTP May 12, MTP Mar 16 (8 Marks), MTP Oct 18 (10 Marks), StudyMat Answer: Date Closing Sensex Sign of Price Charge 1.10.11 2800 3.10.11 2780 - 4.10.11 2795 + 5.10.11 2830 + 24 CA Mayank Kothari AFM Imp Questions Nov 2024 04. Security Analysis 7.10.11 2760 - 10.10.11 2790 + 11.10.11 2880 + 12.10.11 2960 + 13.10.11 2990 + 14.10.11 3200 + 17.10.11 3300 + 18.10.11 3450 + 19.10.11 3360 - 20.10.11 3290 - 21.10.11 3360 + 24.10.11 3340 - 25.10.11 3290 - 27.10.11 3240 - 28.10.11 3140 - 31.10.11 3260 + Total of price changes (r) = 8 No. of Positive changes = n1 = 11 No. of Negative changes = n2 = 08 2n1 n2 μr = +1 n1 +n2 2 × 11 × 8 = +1 11+8 = 176/19+1 = 10.26 2n1 n2 (2n1 n2 -n1 -n2 ) ^ σ^r = √ σr (n1 +n2 )2 (n1 +n2 -1) (2 × 11 × 8) (2 × 11 × 8-11- 8) =√ (11+ 8)2 (11+8-1) 176 × 157 =√ (19)2 (18) = √4.252 = 2.06 Since too few runs in the case would indicate that the movement of prices is not random. We employ a two- tailed test the randomness of prices. 25 CA Mayank Kothari AFM Imp Questions Nov 2024 04. Security Analysis Test at 5% level of significance at 18 degrees of freedom using the t-table. The lower limit = μ-t × σ^r = 10.26-2.101 × 2.06 = 5.932 Upper limit = μ+t × σ^r = 10.26+2.101 × 2.06 = 14.588 At 10% level of significance at 18 degrees of freedom Lower limit = 10.26 – 1.734 × 2.06 = 6.688 Upper limit = 10.26 + 1.734 × 2.06 = 13.832 As seen r lies between these limits. Hence, the market exhibits weak form of efficiency. *For a sample of size n, the t distribution will have n-1 degrees of freedom. Question 3 Mr. X is of the opinion that market has recently shown the Weak Form of Market Efficiency. In order to test the validity of his impression he has collected the following data relating to the movement of the SENSEX for the last 20 days. Days Open High Low Close 1 33470.94 33513.79 33438.03 33453.99 2 33453.64 33478.11 33427.82 33434.83 3 33414.06 33440.29 33397.65 33431.93 4 33434.94 33446.18 33377.78 33383.41 5 33372.92 33380.27 33352.12 33370.93 6 33375.85 33389.49 33331.42 33340.75 7 33340.89 33340.89 33310.95 33330.98 8 33326.84 33340.91 33306.17 33335.08 9 33307.16 33328.22 33296.43 33301.97 10 33298.64 33318.60 33254.28 33259.03 11 33260.04 33228.85 33241.66 33251.53 12 33255.92 33289.46 33249.46 33285.89 13 33288.86 33535.67 33255.98 33329.28 14 33335.00 33346.21 33276.72 33284.17 15 33293.83 33310.86 33278.54 33298.78 16 33300.02 33337.79 33300.02 33325.38 17 33323.36 33356.34 33322.44 33329.95 18 33322.81 33345.98 33317.44 33319.67 19 33317.51 33321.18 33294.19 33302.32 20 33290.86 33324.96 33279.62 33319.61 You are required: To test the Weak Form of Market Efficiency using Auto-Correlation test, taking time lag of 10 days. Jan 21 (8 Marks) Answer: Period 1 Closing Prices Change Period 2 Closing Prices Change 1 33453.99 11 33251.53 2 33434.83 -19.16 12 33285.89 34.36 3 33431.93 - 2.90 13 33329.28 43.39 4 33383.41 - 48.52 14 33284.17 - 45.11 26 CA Mayank Kothari AFM Imp Questions Nov 2024 04. Security Analysis 5 33370.93 - 12.48 15 33298.78 14.61 6 33340.75 - 30.18 16 33325.38 26.6 7 33330.98 -9.77 17 33329.95 4.57 8 33335.08 4.1 18 33319.67 -10.28 9 33301.97 - 33.11 19 33302.32 -17.35 10 33259.03 - 42.94 20 33319.61 17.29 X Y X2 Y2 XY -19.16 34.36 367.11 1180.61 -658.34 -2.90 43.39 8.41 1882.69 -125.83 -48.52 -45.11 2354.19 2034.91 2188.74 -12.48 14.61 155.75 213.45 -182.33 -30.18 26.6 910.83 707.56 -802.79 -9.77 4.57 95.45 20.88 -44.65 4.1 -10.28 16.81 105.68 -42.15 -33.11 -17.35 1096.27 301.02 574.46 -42.94 17.29 1843.84 298.94 -742.43 ∑ X =-194.96 ∑ Y =68.08 ∑ X2 =6848.66 ∑ Y2 =6745.74 ∑ XY =164.68 X̅ =-21.66 Y̅ =7.56 27