CWA ICWA Final - Group III : Capital Market Analysis and Corporate Laws - June2012

CWA ICWA Final - Group III • Capital Market Analysis and Corporate Laws • June 2012

This Paper has 38 answerable questions with 0 answered.

F—P11(CMC) Syllabus 2008
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.

Working notes should form part of the answer.

Please:

(1)
(2)
(3)

Answer all bits of a question at one place.
Open a new page for answer to a new question.
Attempt the required number of questions only.

SECTION I (60 Marks)

(Capital Market Analysis)

Answer Question No. 1 (carrying 20 marks) which is compulsory and answer any two
(carrying 20 marks each) from the rest in this Section.

(a)

In each of the cases given below, one out of four is correct. Indicate the correct answer (= 1 mark)and give workings/reasons briefly in support of your answer (= 1 mark).

2x5=10

(i)

MS BRISTI, a prospective investor has collected the following information pertaining to two securities A and B.

Particulars	Security A	Security B
Expected Return % Standard deviation of returns (%) Beta	15 18 0.90	18 22 1.40

The correlation co–efficient between the returns on security A and B is 0.75. If the variance of returns on the market index is 225%, the systematic risk of a portfolio consisting of these two securities in equal proportions will be:

(A)	128.75%
(B)	297.56%
(C)	420.50%
(D)	None of the above.

(0)

(ii)

Consider a bullish spread option strategy using a call option on the stock of ROYAL LTD. with Rs. 60 . exercise price, priced at Rs. 6 and a call option with Rs. 75 exercise price, priced at Rs. 3.50. The current market price of stock of Royal Ltd. is Rs. 67. If the price of the stock is Rs. 95 on maturity, the net profit at expiration will be

(A)	Rs. 1.50
(B)	Rs. 10.50
(C)	Rs. 12.50
(D)	Rs. 72.50

(0)

(iii)

The beta of stock of ANKlT Ltd. is 2.00 and is currently in equilibrium. The required return on the stock is 12% and expected return on the market is 10%.Suddenly due to change in the economic conditions, the expected return on the market increases to 12%. Other things remaining the same what would be new required return on the stock?

(A)	15.0%
(B)	16.0%
(C)	20.0%
(D)	22.5%

(0)

(iv)

The share price of RANA Ltd. (F.Y. Rs. 10) quotes Rs. 500 in the NSE and the 3 months future price quotes at Rs. 525. The borrowing rate is 12% p.a. If the expected annual dividend yield is 15% payable before expiry, then the price of 3 months RANA Ltd’s future would be

(A)	Rs. 500.00
(B)	Rs. 513.50
(C)	Rs. 516.50
(D)	Insufficient information

(0)

(v)

The NAV of each unit of a closed–end fund at the beginning of the year was Rs. 18. By the end of the year its NAV equals Rs. 18.50. At the beginning of the year each unit was selling at a 2% Premium to NAV and by the end of the year each unit is selling at a 4% discount to NAV.
If the closed–end fund paid year end distribution of Rs. 2.50 on each unit, the rate of return to the investor in the fund during the year would be

(A)	10.35%
(B)	11.51%
(C)	11.95%
(D)	None of the above

(0)

(b)

Choose the most appropriate one from the stated options and write it down.(Only indicate A, B, C or D as you think correct)

1x5=5

(i)

Residual analysis is a test of

(A)	Weak form of market efficiency
(B)	Semi–strong form of market efficiency
(C)	Strong form of market efficiency
(D)	Super–strong form of market efficiency.

(0)

(ii)

Arbitrage pricing theory model helps to

(A)	Reduce risk
(B)	Eliminate arbitrage
(C)	Identify the equilibrium asset price
(D)	None of the above.

(0)

(iii)

Which of the following is/are assumption(s) common to both Markowitz model and CPM?

(A)	Investors can borrow and lend at risk free rate
(B)	There are no market imperfection
(C)	Investors choose portfolios on the basis of their expected mean and variance of returns
(D)	None of the above

(0)

(iv)

Non–systematic (Non–Market) Risk is attributable to factors unique to

(A)	Then Industry
(B)	A Security
(C)	A Company
(D)	Concerned stock exchange.

(0)

(v)

An investor has received bonus shares from ALBUNO LTD., a listed company, in the ratio of 1 : 2. After the receipt of bonus shares:

(A)	There is no change in stockholding and it remains the same
(B)	There is no change in stockholding, but more shares available for trading
(C)	Stockholding has gone up with more shares available for trading
(D)	Stockholding has gone up.

(0)

(c)

Fill in the blanks in the following sentences by using appropriate word(s)/phrase(s)/number(s):

1x5=5

(i)

"Term money" is a form of _______ market instrument.

(0)

(ii)

Insurance Regulatory and Development Authority (IRDA) Act was passed in the year _________.

(0)

(iii)

In an arbitrage portfolio, the change in the proportions of different securities will add upto ________ .

(0)

(iv)

Chart reading as a comprehensive technique, was developed by _______.

(0)

(v)

As per existing SEBI Regulations, the allocation of shares under IPO to QIBs NIls and retail investors has to be in the ratio of __________.

(0)

(a)

Who are the Qualified Institutional Buyers (QIBs) as per SEBI Guidelines for primary issuance process? Is there any need to register with SEBI in this regard?

(0)

(b)

MR ANIL KOTHARI, an investor is evaluating the prospects of investing in two Companies SNOAKER LTD and GLOBAL LTD. The projections of returns for the stocks of these two Companies along with their probabilities are as follows:

Probability	Returns associated with
Probability	SNOAKER LTD	GLOBAL Ltd.
0.20	12%	16%
0.25	14%	10%
0.25	−7%	28%
0.30	28%	−2%

You are required to:

(i)	Comment on the return and risk of investment in individual stocks.

(ii)	Compare the risk and return of these two stocks with a portfolio of these stocks in equal proportions.

(iii)

Find out the proportions of each of the above two stocks to construct a minimum risk portfolio.

5+5+
4=14

(0)

(a)

Can it be said that "Derivatives are complex and exotic instruments that Indian investors will have difficulty in understanding"?

(0)

(b)

The shares of EXECPRO LTD. are currently priced at Rs. 408 and call option exercisable in three months time has an exercise rate of Rs. 400. Risk free interest rate is 5% p.a. and standard deviation (volatility) of share price is 22%. The Company is going to declare a dividend of Rs. 10 and it is expected to be paid in two months time.
Required:

(i)	Determine the value of a three–month CALL OPTION on the share of Execpro Ltd. based on Black Scholes Model.

(ii)	What would be the worth of PUT OPTION if the current price is considered to be Rs. 390?

Note: Extracted from the tables:
1. ln(0.99521) = −0.00480, ln(1.00481) = 0.004798
2. Value of e^−x : e^−0.01 = 0.99005, e^−0.0125 = 0.987578, e^−0.008333 = 0.9917
3. Cumulative standardized normal probability distribution : NCX.
When X ≥ 0 : N (0.125) = 0.5498, N (0.015) = 0.5060
When X ≤ 0 : N (-0.125) = 0.4502, N (-0.015) = 0.4940

6+2=8

(0)

(c)

TEMPLAN MUTUAL FUND has a NAY of Rs. 17.50 at April 1,2011. At March 31, 2012 NAY of the Fund increases to Rs. 18.90. During the year 2011-2012, Templan Mutual Fund distributes Rs. 1.50 as dividend per unit and Rs. 1.20 per unit as Capital gain.
Required:

(i)	What is the fund’s return during the year 2011–12 ?

(ii)	Assuming that Ms ANURADHA, an investor had 300 units and also assuming that the distribution of all dividends and capital gains have been re–invested at an average NAY of Rs. 17.30, what is the return?

2+(2+2)
=6

(0)

(a)

PROTECT LTD. pays no taxes and is entirely financed by equity shares. The equity share has a beta of 0.60 and price earning ratio of 5 and is priced to offer an expected return of 20%.
Protect Ltd, now decides to buy–back half of the equity shares by borrowing an equal amount. The debt yields a Risk–free return of 10%.
You are required to calculate

(i)	The beta of the equity shares after the buy–back

(ii)	The required return and risk premium on the equity shares before and after the buy–back

(iii)

The required return on debt

(iv)	The percentage increase in expected earnings per share

(v)	The new price earnings multiple

Assume that the operating profit of the company is expected to remain constant in perpetuity.

2+6+
4=12

(0)

(b)

Describe the grounds on which an Ombudsman can reject complaints lodged with him, under the Banking Ombudsman Scheme, 2006, Can an appeal be filed against such a rejection, and if so, to whom and within what time limit?

(0)

(c)

The following quotes were observed by MR KARUNA on March 10, 2012 in the Economic Times:

(i)	SBI MARCH 2012 FUT 1441
(ii)	NIFTY APRIL 2012 FUT 4280.

Required:

(i)	Explain what these quotes indicate?

(ii)	If the initial Margin is 10% and Mr. Karuna wants to buy 100 of each how much margin he has to deposit individually?

2+2=4

(0)

SECTION II (40 Marks)
(Corporate Laws)
Answer Question No. 5 (carrying 10 marks) which is compulsory and any two (carrying 15 marks each) from the rest in this Section.
Marks

SECTION II (40 Marks)

(Corporate Laws)

Answer Question No. 5 (carrying 10 marks) which is compulsory and any two
(carrying 15 marks each) from the rest in this Section.

Marks

(a)

Choose the most appropriate one from the stated options and write it down (only indicate A, B, C or D as you think correct):

1x5=5

(i)

Which of the following statements is true, in respect of constitute an 'Audit Committee' under section 292A of the Companies Act, 1956?

(A)	The Audit Committee shall have a minimum of three members.
(B)	The members of an Audit Committee are elected by the members of a Company in general meeting.
(C)	All Companies whether private or public have to constitute an Audit Committee.
(D)	None of the above.

(0)

(ii)

If in a general meeting of a Company, a matter could not be resolved because of tie, then

(A)	Meeting will be adjourned
(B)	Meeting will be postpond
(C)	Chairman of the meeting can give his second/casting vote
(D)	Managing Director can give his casting/second vote

(0)

(iii)

The Competition Commission shall consist of a chairperson and not less than two but not more than _____________ other members to be appointed by the Central Government. (Fill in the gap from the below.)

(A)	7
(B)	10
(C)	5
(D)	None of the above

(0)

(iv)

Which of the following committee set up by SEBI had submitted its report in February, 2003 on Corporate Governance?

(A)	Narasimham Committee
(B)	Kumar Mangalam Birla Committee
(C)	Narayana Murthy Committee
(D)	Naresh Chandra Committee.

(0)

(v)

In the context of classification of Risks, System Risks fall under:

(A)	Obsolescence risks
(B)	War Risks
(C)	Tax Risks
(D)	Contract Risks

(0)

(b)

Fill in the blanks in the following sentences by using appropriate word(s)/phrase(s)/number(s):

1x5=5

(i)

The prospectus issued by a financial institution for one or more issues of securities specified therein, is called ____ prospectus.

(0)

(ii)

When two firms working in different stages of production of the same product combine, _________________ merger takes place.

(0)

(iii)

The requirement of minimum 50 percent of the total number of directors to be independent directors in the case of listed companies, is mandated by Clause ________ of the Listing Agreement.

(0)

(iv)

As regards corporate governance, apart from those mandated by the Listing Agreement, section ______ of the Companies Act, 1956 contains additional requirements.

(0)

(v)

______ is not a linear process; it is the balancing of a number of interwoven elements.

(0)

(a)

The General norms is that after the risk identification takes place, the actions involved in pinpointing suitable responses to the risk are broadly of five types.
_______________ Sketch these five types of actions.

(0)

(b)

SHAKSHI TELECOM LTD., a private mobile operator had furnished confidential information relating to customer complaints lodged with the company during the quarter ended 31.3.2012 to a public authority. On an application under the Right to Information Act, 2004, the public authority wants to furnish the said information. The authority seeks the objections of SHAKSHI TELECOM LTD.

Can SHAKSHI TELECOM LTD. ask the public authority not to furnish the same on the grounds that the said information is confidential and that it may endanger its image in the market?
What decision should the public authority take?

(0)

(c)

The Competition Commission has served notice on VIPUL PAINTS LTD. to look into alleged contravention of certain provisions. The company wants to object to the same on the ground that the same was consequent to a complaint made by the State Government, which is not in order.
Advise the company suitably.

(0)

(a)

Discuss the role of Nomination Committee in the context of the principle of Corporate Governance. What are the principal functions and responsibilities of the Governance and the Nomination Committee in this regard?

2+6=8

(0)

(b)

What is meant by oppression? State whether the aggrieved party would succeed in obtaining relief from Company Law Board on the ground of oppression in the situations given below:

(i)	The complaint is by the minority Directors that the majority of the Board of Directors override the minority Directors;
(ii)	A petition by majority shareholders complaining oppression by minority shareholders.

4+3=7

(0)

(a)

What is the role of SEBI in promoting Corporate Governance?

(0)

(b)

MR MUKHOPADHYAY was appointed as director of EXCEL FITTINGS LTD., a public limited company on 1.2.2012. He bought 1000 equity shares of Rs. 10 each from his cousin on 11.06.2012.
Discuss the compliance with the applicable provisions of the Companies Act, 1956 relating to qualification shares and the ensuing consequences.

(0)

(c)

The Board of Directors of GREEN ENVIRON LTD. at a meeting held on 15.1.2012 resolved to borrow a sum of Rs. 50 crores from a Nationalised Bank. Subsequently the said amount was received by the Company. One of the Directors who opposed the said borrowing as not in the interest of the Company has raised an issue that the said borrowing is outside the powers of the Board of Directors. The Company seeks your advice and the following data is given for your information:

(i)	Share Capital (Paid-up)	Rs. 15 crores
(ii)	Reserves and Surplus	Rs. 20 crores
(iii)	Secured Loans	Rs. 50 crores
(iv)	Unsecured Loans	Rs. 15 crores

Advice the Management of the Company (Green Environ Ltd.).

(0)

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