Maximum Marks: 100
Time: 3 Hours

Instructions:

1. Attempt all questions.
2. Show detailed workings wherever applicable.
3. Use relevant financial and strategic management principles in answers.

---

Section A: Theory & Conceptual Questions (20 Marks)

Answer any 4 questions. Each carries 5 marks.

1. Explain the concept of Capital Asset Pricing Model (CAPM) and its use in determining cost of equity.
2. Discuss the differences between leveraged and unleveraged firms and explain the impact of capital structure on risk and return.
3. Define portfolio management and explain the concept of efficient frontier.
4. Explain derivatives (forwards, futures, options, swaps) and their role in financial risk management.
5. Discuss strategic investment decisions and the role of risk-adjusted discount rate in project evaluation.

---

Section B: Numerical / Practical Problems (50 Marks)

Answer any 5 questions. Each carries 10 marks.

1. Capital Budgeting with Risk: A project requires an investment of ₹ 2,00,00,000. Expected cash flows are ₹ 60,00,000 per year for 5 years. Cost of capital = 12%. Risk-adjusted discount factor = 10%. Required: Compute NPV using risk-adjusted discount rate and advise on project acceptability.
2. Cost of Capital: A company has the following capital structure:
   • Equity Capital: ₹ 80 lakh (Cost of Equity = 14%)
   • 12% Preference Shares: ₹ 20 lakh (Tax-exempt)
   • 10% Debt: ₹ 50 lakh (Tax rate = 30%)
   Required: Compute Weighted Average Cost of Capital (WACC).
3. Portfolio Management: Investor holds two assets:
   • Asset A: Expected Return = 12%, Std Dev = 20%
   • Asset B: Expected Return = 16%, Std Dev = 30%
   • Correlation coefficient = 0.5
   Required: Compute expected portfolio return if 50% invested in each asset and portfolio standard deviation.
4. Derivatives – Option Valuation: Stock price = ₹ 100, Strike price = ₹ 105, Risk-free rate = 8% p.a., Time = 1 year, Volatility = 20%. Required: Compute call option value using Black-Scholes formula (simplified steps acceptable).
5. Leverage Analysis: A company has:
   • EBIT = ₹ 50,00,000
   • Interest = ₹ 10,00,000
   • Equity = ₹ 1,00,00,000
   Required: Compute Degree of Financial Leverage (DFL) and explain effect of increased debt on EPS.

---

Section C: Case Study / Analytical Questions (30 Marks)

Answer any 2 questions. Each carries 15 marks.

1. Case Study: Project Risk and Return XYZ Ltd. is evaluating two projects: | Project | Investment (₹) | Expected Cash Inflows (₹) | Probability |
   |———|—————-|—————————|
   | A | 1,50,00,000 | 50,00,000 – 70,00,000 | 0.6 – 0.4 |
   | B | 2,00,00,000 | 60,00,000 – 90,00,000 | 0.7 – 0.3 | Required:
   a) Compute expected NPV for each project.
   b) Suggest project selection based on risk-adjusted decision.
   c) Discuss strategic implications of the choice.
2. Case Study: Capital Structure Decision ABC Ltd. is planning to raise funds of ₹ 1,00,00,000. It is evaluating:
   • 100% Debt at 10% interest
   • 50% Debt + 50% Equity
   • 100% Equity
   Expected EBIT = ₹ 20,00,000, Tax = 30% Required:
   a) Compute EPS for each option.
   b) Recommend optimal capital structure.
   c) Discuss financial risk vs shareholder wealth trade-off.
3. Case Study: Derivatives and Hedging A company expects to receive USD 5,00,000 in 6 months. Spot rate = ₹ 75/USD. Futures rate for 6 months = ₹ 76/USD. Required:
   a) Compute the hedged value of receivable using futures contract.
   b) Discuss advantages and limitations of using derivatives for hedging currency risk.
   c) Suggest strategic financial decision-making implications.

Solutions – CA Final: Strategic Financial Management (100 Marks)

---

Section A: Theory & Conceptual Questions (20 Marks)

1. Capital Asset Pricing Model (CAPM)$$\text{Cost of Equity (Ke)} = R_f + \beta (R_m – R_f)$$Cost of Equity (Ke)=Rf​+β(Rm​–Rf​)
   • $R_f$Rf​ = Risk-free rate, $R_m$Rm​ = Expected market return, $\beta$β = Beta coefficient
   • Use: Determines expected return on equity; helps in project evaluation, capital budgeting, and WACC calculation.
2. Leveraged vs Unleveraged Firms
   • Leveraged: Use of debt → higher financial risk but potential higher return on equity
   • Unleveraged: No debt → lower financial risk, stable earnings
   • Impact: Leverage increases EPS volatility; affects WACC via risk-return trade-off
3. Portfolio Management – Efficient Frontier
   • Portfolio = combination of assets to minimize risk for a given return
   • Efficient Frontier: Set of optimal portfolios offering maximum expected return for a given level of risk
   • Investors choose portfolios on the frontier depending on risk tolerance
4. Derivatives & Risk Management
   • Forwards/Futures: Lock in prices, hedge currency or commodity risk
   • Options: Hedge downside risk while retaining upside potential
   • Swaps: Exchange cash flows (interest rate swaps, currency swaps)
   • Role: Reduce financial risk, manage volatility, support strategic planning
5. Strategic Investment Decisions
   • Consider long-term value, risk, and alignment with corporate strategy
   • Use risk-adjusted discount rate for NPV to account for uncertainty
   • Higher risk projects → higher discount rate → lower present value

---

Section B: Numerical / Practical Problems (50 Marks)

Q1: NPV using Risk-Adjusted Discount Rate

• Investment = ₹ 2,00,00,000
• Cash Flows = ₹ 60,00,000 per year for 5 years
• Risk-adjusted discount rate = 10%

Step 1: PV Factor (10%, 5 yrs) ≈ 3.791$$NPV = 60,00,000 × 3.791 – 2,00,00,000 = 2,27,46,000 – 2,00,00,000 = 27,46,000$$NPV=60,00,000×3.791–2,00,00,000=2,27,46,000–2,00,00,000=27,46,000

Decision: Accept project (NPV > 0)

---

Q2: WACC Calculation

• Equity = ₹ 80,00,000, Ke = 14%
• Preference = ₹ 20,00,000, Kp = 12%
• Debt = ₹ 50,00,000, Kd = 10%, Tax = 30% → After-tax Kd = 7%

$$V = 80 + 20 + 50 = 1,50,00,000$$V=80+20+50=1,50,00,000 $$WACC = \frac{80}{150}×14 + \frac{20}{150}×12 + \frac{50}{150}×7 = 7.47 + 1.6 + 2.33 ≈ 11.4\%$$WACC=15080​×14+15020​×12+15050​×7=7.47+1.6+2.33≈11.4%

---

Q3: Portfolio Management

• $w_A = w_B = 0.5$wA​=wB​=0.5
• Expected return:

$$E(R_p) = w_A × R_A + w_B × R_B = 0.5×12 + 0.5×16 = 14\%$$E(Rp​)=wA​×RA​+wB​×RB​=0.5×12+0.5×16=14%

• Portfolio standard deviation:

$$\sigma_p = \sqrt{w_A^2\sigma_A^2 + w_B^2\sigma_B^2 + 2 w_A w_B \sigma_A \sigma_B \rho}$$σp​=wA2​σA2​+wB2​σB2​+2wA​wB​σA​σB​ρ​ $$\sigma_p = \sqrt{0.25×0.04 + 0.25×0.09 + 2×0.25×0.2×0.3×0.5} = \sqrt{0.01+0.0225+0.015} = \sqrt{0.0475} ≈ 21.79\%$$σp​=0.25×0.04+0.25×0.09+2×0.25×0.2×0.3×0.5​=0.01+0.0225+0.015​=0.0475​≈21.79%

---

Q4: Option Valuation (Black-Scholes, Simplified)

• Stock Price $S = 100$S=100, Strike $K = 105$K=105, Risk-free $r = 8$r=8, T = 1 yr, σ = 20%

Step 1: Compute d1 and d2$$d1 = \frac{\ln(S/K) + (r + 0.5σ^2)T}{σ\sqrt{T}} = \frac{\ln(100/105) + (0.08 + 0.02)}{0.2} ≈ -0.25$$d1=σT​ln(S/K)+(r+0.5σ2)T​=0.2ln(100/105)+(0.08+0.02)​≈−0.25 $$d2 = d1 – σ√T = -0.25 – 0.2 = -0.45$$d2=d1–σ√T=−0.25–0.2=−0.45

Step 2: Call Option Price$$C = S N(d1) – K e^{-rT} N(d2)$$C=SN(d1)–Ke−rTN(d2)

Using standard normal tables: N(d1) ≈ 0.401, N(d2) ≈ 0.326$$C = 100×0.401 – 105×e^{-0.08}×0.326 ≈ 40.1 – 31.57 ≈ 8.53$$C=100×0.401–105×e−0.08×0.326≈40.1–31.57≈8.53

Call Option Value ≈ ₹ 8.53

---

Q5: Degree of Financial Leverage (DFL)

$$DFL = \frac{\% \text{change in EPS}}{\% \text{change in EBIT}} = \frac{EBIT}{EBIT – Interest} = \frac{50,00,000}{50,00,000 – 10,00,000} = 50/40 = 1.25$$DFL=%change in EBIT%change in EPS​=EBIT–InterestEBIT​=50,00,000–10,00,00050,00,000​=50/40=1.25

• Interpretation: 1% change in EBIT → 1.25% change in EPS
• Effect of increased debt: Higher financial risk; EPS more sensitive to EBIT fluctuations

---

Section C: Case Study / Analytical Questions (30 Marks)

Q1: Project Risk – Expected NPV

Project A:

• Cash inflows: 50L (0.6), 70L (0.4) → Expected CF = 50×0.6 + 70×0.4 = 30 + 28 = 58 L per year

NPV: Assuming discount rate 10%, PV factor 4.355 (5 yrs) → PV = 58×4.355 ≈ 2,52,59,000

• Investment = 1,50,00,000 → NPV = 1,02,59,000

Project B:

• CF = 60×0.7 + 90×0.3 = 42 + 27 = 69 L per year
• PV = 69×4.355 ≈ 3,00,50,000
• Investment = 2,00,00,000 → NPV = 1,00,50,000

Decision: Project A slightly lower risk (less variance), Project B higher cash flows but slightly riskier. Select based on risk appetite.

Strategic Implication: Balance return vs risk, align with corporate growth strategy.

---

Q2: Capital Structure – EPS Analysis

• EBIT = 20,00,000, Tax = 30%

Option 1: 100% Debt (10L interest)

• EBT = 20 – 10 = 10 L → PAT = 10×0.7 = 7 L
• Equity = 0 (all debt) → EPS = 7 / 0? → Impractical

Option 2: 50% Debt + 50% Equity

• Debt = 50L → Interest = 5 L
• Equity = 50L
• EBT = 20 – 5 = 15 → PAT = 15×0.7 = 10.5 L
• EPS = 10.5 / 50 = 0.21 per ₹1 share

Option 3: 100% Equity

• No interest → PAT = 20×0.7 = 14 L
• Equity = 100 L → EPS = 0.14 per ₹1 share

Optimal: 50% Debt + 50% Equity → higher EPS with manageable financial risk

---

Q3: Derivatives & Hedging

• Expected USD receipt = 5,00,000, Futures rate = ₹ 76/USD

$$Hedged Value = 5,00,000 × 76 = 3,80,00,000$$HedgedValue=5,00,000×76=3,80,00,000

• Advantages: Locks in exchange rate, reduces uncertainty, simplifies planning
• Limitations: Opportunity loss if rate moves favorably, margin requirement
• Strategic Implication: Helps in budgeting, cash flow certainty, supports global operations

---

Disclaimer:
This mock test is created for educational purposes only. Questions and solutions are original and inspired by typical CA Final exam patterns; they are not copied from any official CA exam papers.