PDF- -Effective Communications: Raising the profile of your archive - CA Final Sfm Formula Booklet by CA Aaditya Jain

l Sfm Formula Booklet by CA Aaditya Jain

Delhi : 9911442626

STRATEGIC FINANCIAL MANAGEMENT

Strictly As Per New Syllabus

Short FORMULA Notes In the World of Darkness,

! The Best FM Faculty Of India

- “To be a star,

you must shine your own light,

- follow your own path,

and don't worry about the darkness,

for that is when the stars shine brightest”

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Beyond 90

CA Aaditya Jain

Dimpy Jindal

ALL INDIA CA TOPPER-NOV 08

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RANK 1 Aaditya Jain

SECURED ALL INDIA

Dimpy Jindal

- 100% Passing Percentage With Maximum Students Scoring Above 80 Marks

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Beyond 90

CA Aaditya Jain

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA EXAMINATION RESULTS,NOV 2010 ROLL NUMBER 64609 NAME DIMPY JINDAL MERIT

- - RANK 1 GROUP I FINANCIAL REPORTING 082 KEEP IT STRATEGIC FINANCIAL MANAGEMENT 088 WITH ADVANCED AUDITING AND PROFESSIONAL ETHICS 073 U WITH CORPORATE AND ALLIED LAWS 068 A DREAM TOTAL 311 The Best FM Faculty Of India OF RESULT PASS GETTING GROUP II RANK 1 ADVANCED MANAGEMENT ACCOUNTING 081 INFORMATION SYSTEMS CONTROL AND AUDIT 077 DIRECT TAX LAWS 064 INDIRECT TAX LAWS 068 TOTAL 290 RESULT PASS GRAND TOTAL 601

MARKSHEET OF SHIVANGI PATNI-ALL INDIA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA EXAMINATION RESULTS,NOV 2010 ROLL NUMBER 61847 NAME SHIVANGI PATNI MERIT

- - RANK 6 GROUP I FINANCIAL REPORTING STRATEGIC FINANCIAL MANAGEMENT ADVANCED AUDITING AND PROFESSIONAL ETHICS CORPORATE AND ALLIED LAWS TOTAL RESULT GROUP II ADVANCED MANAGEMENT ACCOUNTING INFORMATION SYSTEMS CONTROL AND AUDIT DIRECT TAX LAWS INDIRECT TAX LAWS TOTAL RESULT GRAND TOTAL
- 068 089 055 067 279 PASS 066 051 070 071 258 PASS 537

WE DEDICATE OUR SUCCESS TO AADITYA JAIN SIR-FOR OUR MAXIMUM MARKS IN SFM SUBJECTS

- 88 MARKS & 89 MARKS WHICH PLAY A MAJOR ROLE IN OUR RANK

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CA Aaditya Jain

FORMULA BOOKLET Strictly As Per New Syllabus Aaditya Jain

For Those Who Want To Target 90+ The Best FM Faculty Of India

In the World of Darkness,

- “To be a star,

you must shine your own light,

- follow your own path,

and don't worry about the darkness,

for that is when the stars shine brightest”

By CA Aaditya Jain Classes Organised By Bright Professionals Pvt Ltd ,1st Floor,Lalita Park,Laxmi Nagar,Delhi-110092 Phone:47665555,9911442626,9811136987,9811042458

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FOR THE FAaditya IRST TIME Jain IN INDIA FOR CA FINAL STUDENTS The Best FM Faculty Of India

Visiting Faculty Of ICAI “It’s Time To Be Busy BECAUSE Today Will Be Yesterday Very Soon ” When nothing seems to help,I go & look at a stonecutter hammering away at his rock ,

- perhaps a hundred times,
- with no crack showing in it

at the hundred-and-one blow it will spilt into two ,

and I know it was not that blow that did it but all that had gone before

Remember ,Failure is not final –until you make it final

“I’ve missed more than 9000 shots in my career

- ” Michael Jordan

Welcome to the amazing world of finance

"You are the lock and you are the key

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CA Aaditya Jain

From the desk of CA Aaditya Jain The Importance Of Patience In CA Career Sometimes in life there are situations which makes you to loose your patience

These situations are meant just to distract you from your goal

Believe it or not a one minute involvement in such situation will take away your 2-5 hours of precious time or sometimes even more

When ever you encounter such situation just keep your head cool and try to get out of the atmosphere if posssible and afterwards just relax your mind by cracking a joke or by taking 14-15 long breathes in a single stroke

Believe me it’’ll work

was also tough for you one day Practice makes a man perfect

Follow the proper approach you will definitely succeed Ending in this high note said by late Dhiru Bhai Ambani " For Those Who Dare n Dream There is A Whole world to win " Jinke honslo mein udaan hoti hai wo aasmaan ki uchayion se nahi darte " I Welcome You as a Bright in This Amazing World of Finance " TheFuture Best FMCA Faculty Of India

“In Every Man There is Something of Which I May Also Learn,

and in All That He is My Teacher” I Wish All My Students to Always Aim High in Life

"Life is not measured by the number of breaths we take,

but by the moments that take our breath away

" Wishing You All The Best Remember You Can Do Wonders ,

- - Aaditya Jain

they will say you're the wrong height or the wrong weight or the wrong type to play this or be this or achieve this

THEY WILL TELL YOU NO,

- a thousand times no,

until all the no's become meaningless

- quite firmly and very quickly

- neither is losing,

but the only thing is doing your best

" Never look down on anybody unless you're helping him up

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CA Aaditya Jain

CA RESULT ANALYSIS:-May 2010 Pass % of CPT

- 55% Pass % of PCC
- 57% Pass % of FINAL
- 56% If 1000 student get regd
- for CA then 276 (1000*27
- 55% ) will pass CPT out of this,

37 (276*13

- 57%) will pass PCC out of this,

2 (37*6

- 56%) will pass CA Final

So, Final Analysis is that if 1000 student get registered in ICAI then only 2 student will finally become Chartered accountant( i

- 2%) Such a big task

MM/YYYY Nov-09 1 Jun-09 2 Nov-08 3 May-08 4 Nov-07 5 May-07 6 Nov-06 7 May-06 8 Nov-05 9 May-05 10 Nov-04 11 May-04 12 Nov-03 13 May-03 14 May-10[Old] May-10[New]

Appeared 25224 25848 21176 17552 16137 15083 14587 15355 15902 18211 16645 20724 19501 20290 20049

- 87 30641 3099 10
- 42 27840 4185 15
- 82 23856 5762 24
- 15 Best FM Faculty 28
- 31 Of India 36
- 71 The 18685 5290 39
- 37 16493 5005 30
- 18 15874 2777 17
- 74 16947 6555 38
- 98 17952 5718 31
- 68 20085 5772 28
- 56 20513 3520 17
- 57 20448 4484 21
- 83 21364 3354 15
- 82 20377 4381 21
- 03 18692 2203 11
- 45 26517 2552 9

- 86 18625 2579 13
- 85 14614 2926 20
- 27 10580 2645 25
- 00 8654 2446 28
- 26 7467 1023 13
- 70 68301 830 26
- 79 7053 1608 22
- 80 7620 1348 17
- 69 8650 1243 14
- 37 7666 939 12
- 25 9770 1490 15
- 25 8597 1076 12
- 52 7943 802 10
- 10 13242 458 3

FOR ANY CLASS RELATED ENQUIRY PLEASE CONTACT US AT

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- 011-47665555 www
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com NOW YOU CAN ALSO JOIN SIR'S COMMUNITY ON FACEBOOKNAME OF COMMUNITY : CA ADITYA JAIN SFM 90+ TARGET

For Getting Last Time Important Suggestions Please mail or SMS your following details at : By E-Mail:[email protected] [Name,Mobile No

,E-mail Address,Exam Due,City]

Beyond 90

SPECIAL ATTRACTIONS OF UPCOMING BATCH 15 MINUTES OF OUR CLASS WILL BE SPECIALLY DEDICATED TO STOCK MARKET PRACTICAL (ON SPECIAL DEMAND OF STUDENTS) 600 CONCEPTS TOPICS WILL BE COVERED 600 PRACTICAL QUESTION WILL BE COVERED 100% THEORY AS PER NEW SYLLABUS WILL BE COVERED SPECIAL BOOKLET COVERING ENTIRE SFM-FORMULA & THEORY BEST FOR LAST TIME REVISION WILL BE ISSUED

Aaditya Jain

- 100 % COVERAGE OF CA FINAL SFM PAPER OF NOV 2010 The Best FM Faculty Of India FROM AADITYA JAIN SIR'S ASSIGNMENT-ITS TIME TO THINK BEYOND 90 +

Its Time To Think Beyond 90+ In MAFA/SFM Limited Seats

Its Time To Learn Finance Conceptually Congratulating Surbhi Agarwal For Securing All India Rank 1 In CA Final

- -Nov 2008 Exam A Student Of Aditya Jain Sir From the Desk Of Surbhi Agarwal-All India Rank 1

I am excited and feeling great today…I must say that hard work and dedication is the path to success

friends and of course my Teachers whose guidance and support has always been with me

“I suggest the students to study the subjects not with the intention to mug up things but to gain knowledge

comprehend and revise it again and again so that it settles deep into your sub-conscious mind

”I will further like to thank Aditya Sir to make my MAFA conceptually clear

- -Surbhi Aggarwal,Rank Holder in PE-1,PE-2 and Final

Kolkata:9339238834

and to the problems of your life you are the solution

never be afraid to pick one of those pieces up and begin again

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[mafabycaaadityajain] hello friends Friday,

10 April,

- 2009 5:46 PM From: “Sweta Kothari” To: [email protected] I stay in Kolkata

I am appearing my CA finals in this June

Though he was good but i was always scared of MAFA

now i am feeling very good & comfortable in MAFA even though i am not his regular student

But now i am targeting much more

Thank you sir

Sweta Kothari Kolkata THANKS FOR YOUR THEORY BOOK Wednesday,

- 25 February,
- 2009 8:49 PM From: “Priyanka Agarwal” To: [email protected] This is Priyanka Agarwal from Kolkata

Now I regret that why havenot I joined u

Actually when I did my MAFA classes I even didnot know your name

No doubt I am getting immense knowledge from it but one more thing is there which I got from your book

The Confidence,most important thing The Best Faculty OftoIndia for gaining courage and facing the exams

I would definitely ask FM all my friends join your classes

I would like to request you that please give some of your valuable suggestions to me for passing the exams in all the subjects

Aaditya Jain

Monday,

8 June,

- 2009 3:28 PM From: “Rajeev Nagpal” To: [email protected] Hello Aditya Sir,

I came across your book and I must complement you on writing an excellent book

I have never seen such a simple and excellent presentation of any subject by any one

- (Final)

I wish I could get your complete notes

I am sure it will prove to be extremely helpful

Regards,Rajeev Nagpal,Assistant Financial Controller,Head Office Finance Control Department,Invest Bank,Sharjah,U

June 3,

- 2009 12:20 PM From: “Ashish Singla” To: [email protected] Dear Mr

Aditya Jain,

- that today,

I can heave a sigh of relief after my MAFA Exam

but so many questions came from your compilation (Which was obviously advantageous to me)

Thanks a lot for putting in such a diligent effort to compile the same

Regards,

- - I think there is not much chance that this mail shall come before your eyes because Im sending to a general id of yours BUT I believe youve made me one of your die hard word of mouth advertisers

Abhishek Jakhetiya CA Final-Roll No

- 26804 MAFA Marks-74 CS Inter-Roll No
- 17926 Securities Market Paper-70 Marks DOB: 12th September 1985 Email: [email protected] Addres: H

Gurgaon-122001 Exam Completion in CA : May 2008 Comments on your Classes: Finally Delhi has got some good MAFA classes as well

Aaditya Jain Sir has not only made us fearless but also made us think of MAFA as a high scoring paper just as Accounts or Indirect Taxes

Your Study material is fantastic

Start everyday with a smile

- not a destination

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Beyond 90

STUDENTS WHO WANTS SOFT COPY NOTES OF THEORY BOOK COVERING 30 MARKS & IMPORTANT LAST TIME SUGGESTION Aaditya Jain PLEASE MAIL YOUR FOLLOWING DETAILS The Best FM Faculty Of India

,E-mail Address,Exam Due,City]

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CA Aaditya Jain

DIVIDEND EXPRESSION OF DIVIDEND : Dividend may be expressed in the following manner : = Dividend Per Share 100

- (i) Dividend Rate

(ii) Dividend Yield ( Return ) = Market Price Per Share 100 Dividend Per Share

= Earning Per Share 100 Note:Dividend must be paid to perference share holders before any declaration of dividend to equity shareholders

- (iii) Dividend Payout Ratio

The Best FM Faculty Of India

- r (EPS – DPS) Ke Where,

DPS = Dividend Per Share

r = Rate of Return /Internal Rate of Return (IRR) /Return on Equity(ROE)/Return on Investment EPS-DPS = Retained Earning Per Share OPTIMUM DIVIDEND AS PER WALTER'S MODEL (ALL OR NOTHING APPROACH) : Walter suggested that optimum dividend payout or optimum retention ratio depends on the relationship of Ke & r Nature of Firm Relationship Optimum Dividend Payout Optimum Retention Ratio Growth Company Ker 100% 0% Normal Company Ke =r Indifferent Indifferent GORDON GROWTH'S MODEL/DIVIDEND DISCOUNT MODEL DPS1

Symbolically :Po= K – g or Po = e

DPS0 ( 1 g) EPS1 (1 b) P0 or Ke g Ke g

DPS of current year / Dividend just paid / DPS as on today/Last Year Divedend/Dividend Recently Paid

- every breath,
- is a gift from God

Beyond 90

- = = = =

g = Growth rate of dividend = b r Retention Ratio (%) Rate of Return /Internal Rate of Return (IRR) /Return on Equity(ROE)/Return on Investment Dividend Payout Ratio

GRAHAM & DODD MODEL E Po= m D' 3 Where,Po= Current Market Price Per Share Ex-Dividend,m=multiplier ,D =Dividend Per Share,E=Earning Per Share

Symbolically :- D1 D'0 [(EPS1 Target Dividend Payout Ratio) D'0 ] AF Where D1 = Dividend to be declared in current year

AF= Adjustment Factor / Speed of Adjustment / % increase in Dividend which can be maintained in future IRRELEVANCE THEORY : MODIGLIANI-MILLER (MM) MODEL Symbolically : Current Value of the firm taking investment budget and earning into consideration is given by : n Po =

(n m) P1 E1 – I1 Where,

1 Ke

= Current or Prevailing Market Price Ex-Dividend

I1 = Total Investment made at year end

n = Present / Existing Number of Equity Shares

m = Additional or New Number of Equity Shares issued at year end at year end market price nP0 = Market Value of all existing shares in beginning of year/ Market Value of the firm as on today Other useful relation in respect of MM Approach are : (a) Current Market Price of the share in the absence of Investment & Earning is given by : D1 P1 1 Ke 1

e MPS at the end of the year 1 (b) Number of new equity shares to be issued by the company for Investment purpose is given by :

Investment 1 – [Earning 1 – n DPS1 ] Market price at the end (P1 )

- you are just a piece of paper

but I haven’t seen a dustbin yet in my whole life

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(c) Market Value of the firm at the end is given by : Market Price Per Share at the end Total Number Of Equity Share at the end = P1 (n + m) PRESENT VALUE OF GROWTH OPPORTUNITY (PVGO) Present Value of Growth Opportunity

= Price of the Share with Growth – Price of the Share without Growth

Present Value of Growth Opportunity

e price which we calculate by applying present value concept are not same we will undertake following decision : Case Valuation Decision If Currenty Market Price > Present Value Market Price Overvalued Sell If Currenty Market Price < Present Value Market The Price Undervalued Buy Best FM Faculty Of India If Currenty Market Price = Present Value Market Price Correctly Valued Hold

Aaditya Jain

VALUE OF DECLINING FIRM OR WHEN GROWTH RATE IS NEGATIVE Market Price Per Share of a firm whose dividend is declining at a constant rate p

- a forever is given by P0

D 0 (1 g) Ke g

D1 P1 P0 D1 P1 P0 Dividend Yield Capital Gain Yield P0 P0 P0

D 3 P3 1 K e 1

accordingly price at the end year each year can be computed

UNEQUAL GROWTH RATE Dividend Growth Model cannot be applied directly in case dividend is not growing at a constant rate from year 1 onwards Death is more universal than life

everyone dies but not everyone lives

You have to put in many,

many tiny efforts that nobody sees or appreciates before you achieve anything worthwhile

Beyond 90

CA Aaditya Jain

In such case we will modify Dividend Growth Model and calculate Current Market Price in the following manner : P0 [ Assuming Dividend is growing constantly from year 4 onwards ]

D1 D2 D3 D4 D'(1 g) 1 4 2 3 4 1 Ke (1 Ke) (1 Ke) (1 Ke) Ke – g (1 Ke) 4

we can find the growth rate by using any of the following two relation : (a) g = b r (b) D'n D'0 (1 g) n

- -1 Where D'0 = Base Year Dividend

D'n = Latest Year Dividend

- n = number of year

Putting the values of Dn ,

Book Value Per Share ( BVPS ) =

RETURN ON EQUITY (ROE )

Total Earnings of the Firm For Equity Shareholde r 100 Total Equity Shareholde r' s'Fund Note : EPS = Book Value Per Share Return on Equity or EPS = BVPS x ROE Return On Equity (ROE ) ( r) =

EARNING YIELD

Earnings Per Share Earning Yield = Market Price Per Share 100 EARNING PER SHARE (EPS)

Total Dividend Paid To Equity Shareholde r Total Number of Equity Share

- one day more to hope
- hope for the best

Good Day & Good Luck

- ! The journey is the reward

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- EPS
- - DPS Retained Earnings Per Share 100 = = 100 EPS EPS

DETERMINATION OF PE RATIO WHICH WILL NOT EFFECT MARKET VALUE

? Example : What should be P/E ratio at which dividend pay-out ratio will have no effect on the value of the share if r = 8 %

- ? If r = Ke,

then the Dividend Payout Ratio (D/P Ratio) does not affect the price or value of the share

Ke = P/E Ratio

- 1 P/E Ratio P/E Ratio 12

5 times

Ex- Dividend Date : 4

Record Date : 5

Payment Date : CONCEPT OF MAXIMUM DIVIDEND Maximum Dividend is the amount of Retained Earning or Cash Available which ever is lower

CONSTANT DIVIDEND AMOUNT APPROACH : Under this model,

a fixed amount of dividend is paid each year irrespective of the earnings

There would be no reduction in dividend even during the period of losses

Example : Assume Contant Dividend Amount = Rs

- 4 Year 1 2 3 4 5 EPS 10 25 45 2
- -7 DPS 4 4 4 4 4 DPS
- Symbolically : P0 K e

CONSTANT DIVIDEND PAYOUT APPROACH :“Tell me,

what is it you plan to do with your one wild and precious life

- ?"It is hard to fail,

but it is worse never to have tried to succeed

- then it is not the end

Kolkata SFM-For those who want :to9339238834 score 90+ Dare To Dream

- Under this approach,

Dividend Payout Ratio is kept constant

There could be zero dividends during the period of losses

Example : Assume Contant Dividend Payout = 50 % Year 1 2 3 4 5 EPS 10 25 45 2

- -7 DPS 5 12
- 5 1 RESIDUAL DIVIDEND APPROACH : Under this Approach Earnings or Retained Earnings should first be used for beneficial investments and then if any amount is left should be used for paying dividend

Example 1: Earnings Available : Rs

1,00,000

- ? Dividend to be paid = Rs

1,00,000

1,30,000

- ? Dividend to be paid = Nil

APPLICATION OF FLOTATION COST Flotation cost are the cost which are associated with issue of new share

For Example commission ,brokerage ,underwriting expenses etc

In case flotation cost is given in question we should take Current Market Price net of flotation cost in the following manner: If flotation Cost is expressed in Percentage : If flotation Cost is expressed in Absolute Amount : DPS1

Po [ 1- f ] = K – g Po

- - f = K – g e e Note:It may be noted that Flotation cost is applicable only for new equity share and hence Flotation Cost for Existing Equity Share and Retained Earning is generally Nil

INCREASE OR DECREASE IN MPS DUE TO INVESTMENT Example : If Present MPS of the Company as per its existing policy is Rs

- 10 and it has 1,00,000 shares outstanding

Now Company is undertaking an investment which is giving a positive NPV of Rs

2,00,000

Therefore increase in MPS due to investment will be Rs

- 12 RADICAL APPROACH (APPLICATION OF TAX) Dividend Payment is not an expense for the company

Hence It should not be taken after tax

Hence if CDT is given in question we should take DPS(1+CDT)

but that it is too low and we reach it

“You can be young without money but you cannot be old without it”

CA Aaditya Jain

BOND VALUATION VALUE OF STRAIGHT COUPON BOND OR EQUAL INTEREST BOND Meaning : Straight Coupon Bonds or Equal Interest Bonds are those bonds which pay equal amount of interest upto maturity and also repay principal amount at the end of maturity period

- Symbolically

Interest Interest Interest Face Value or Maturity Value

1 2 n (1 Yield) (1 Yield) (1 Yield) (1 Yield) n = Interest x PVAF ( Yield %,

n years) + Maturity Value x PVF ( Yield %,

n years) Where n = Number of Years to Maturity Value of Bond (B0 )

VALUE OF ZERO COUPON BOND OR DEEP DISCOUNT BOND Meaning :Zero Coupon Bonds are those bonds on which investors are not paid any interest but are entitled only to repayment of principal sum on the maturity period

Symbolically : Value of Bond (B 0 ) =

VALUE OF PERPETUAL BOND OR IRREDEEMABLE BOND Meaning : These are bonds where interest payment is paid forever i

- e upto infinity

Symbolically : Value Of Bond (B0 )

VALUE OF SEMI ANNUAL INTEREST BOND Meaning : Semi Annual Interest Bonds are those bonds which pay interest semiannually

Most of the bonds pay interest semi annually

To value such bonds we have to make three changes : Yield or Discount Rate 2 If coupon interest are paid quarterly or monthly then in such case we should use '4' & '12' in place of '2' in the above changes

SELF AMORTIZING BONDS Bonds which pay a principal amount over a period of time rather than on maturity are called Self Amortizing Bonds INFLATION BONDS Inflation Bonds are the bonds where interest rate is adjusted for inflation

For example : If the interest rate is 10 % and the inflation is 2 % the investor will earn 12

20 % [ i

e ( 1+Interest Rate ) (1 + Inflation Rate )

- - 1 ] OVERPRICED AND UNDERPRICED BONDS When Current Market Price and Theoretical Market Price i

e price which we calculate by applying present value concept are not same we will undertake following decision : Let others lead small lives,

- but not you

- but not you

- but not you

Let others leave their future in someone else's hands,

- but not you

Case If Currenty Market Price > Present Value Market Price If Currenty Market Price < Present Value Market Price If Currenty Market Price = Present Value Market Price

Valuation Overvalued Undervalued Correctly Valued

n then Value of Bond will be equal to : Interest Interest Interest Interest (1 Y1 ) (1 Y1 )(1 Y2 ) (1 Y1 )(1 Y2 )(1 Y3 ) (1 Y1 )(1 Y2 )(1 Y3 )(1 Y4 )

- (1 Yn ) (1 Y1 )(1 Y2 )(1 Y3 )(1 Y4 )
- (1 Yn )

Bond Value Of One Year Zero Coupon Bond ( Bo) =

Maturity Value (1 YTM 1 )

Bond Value Of Two Year Zero Coupon Bond ( Bo) = (1 YTM )(1 YTM ) 1 2 Likewise Value of Bond can be calculated according to maturity life

CURRENT YIELD / FLAT YIELD /CURRENT INTEREST YIELD/ BASIC YIELD : Interest Current Annual Interest Amount or B O Current Value of Bond Note : Current Yield is always calculated on per annum basis

Note : If Current Market Price and Intrinsic/Fair Value are different we will take Current Market Price and not Intrinsic Value for all the calculation of yield

- Current Yield =

YEILD ( K d') OR YIELD TO MATURITY (YTM) OR COST OF DEBT /REDEMPTION YIELD / INTERNAL RATE OF RETURN/MARKET RATE OF INTEREST/ MARKET RATE OF RETURN / PROMISED YTM / OPPORTUNITY COST OF DEBT Yield to Maturity is the overall return on the bond if it is held till maturity

Symbolically : It can be calculated by using two method : Trail n Error Method/IRR Technique

1 2 n (1 Yield) (1 Yield) (1 Yield) (1 Yield) n Now for finding Yield we should use IRR Technique : Value of Bond (B0 )

Kd = Lower Rate + Lower Rate NPV – Higher Rate NPV Difference in Rates U can complain b'coz roses have thorns,or u can rejoice because thorns have roses

?Why not me

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Maturity Value – Issue Value Interest n Approximation Method : Kd Maturity Value Issue Value 2

Note : If Current Market Price and Intrinsic/Fair Value are different we will take Current Market Price and not Intrinsic Value for all the calculation of yield

YIELD TO CALL ( YTC ) : Call Value – Issue Value Interest Call Years YTC Call Value Issue Value 2

Put Value – Issue Value Interest Put Years YTP Put Value Issue Value 2

- yield to call,
- yield to put,
- and others

Example : Given the following data calculate Yield To Worst:YTM = 10%,YTC = 7%,YTP=9% Solution:YTW = 7 % HOLDING PERIOD RETURN(HPR) : Holding Period Return (R) or Total Return =

Interest (B1 B0 ) Interest (B1 B0 ) or or Current Interest Yield + Capital Gain Yield B0 B0 B0

and B1 is the price of the bond at the end of the holding period or Sale Price of Bond at the end of holding period

Note : The holding period is generally assumed to be of one year period unless otherwise stated

Kd OF PERPETUAL BOND Yield or Kd

Annual Interest Bo

Interest

Symbolically : Duration Of Bond = B 1 (1 Kd)1 2 (1 Kd) 2

n (1 Kd) n n o

“Hope is always available to us

When we feel defeated,

we need only take a deep breath and say,

“Yes,” and hope will reappear

”Success is the ability to go from failure to failure without losing your enthusiasm

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- 1 YTM (1 YTM) n (Coupon Rate YTM) YTM Coupon Rate [(1 YTM) n 1] YTM

the duration is simply equal to the maturity of the bond while the duration of a normal coupon bond is less than the maturity

- 1 YTM YTM

VOLATILITY /SENSITIVITY/MODIFIED DURATION : Macaulay Duration

Symbolically :Volatility or Modified Duration or Sensitivity [ % ] = Yield To Maturity

Note : % Change in Bond Price =

- - Modified Duration Change In Yield To Maturity The Modified Duration will always be lower than the Macaulay Duration

Interest 1 Interest Interest MaturityValue 2 (12 1) (2 2 2)

(n n) 2 1 2 n Bo (1 YTM) (1 YTM) (1 YTM) (1 YTM)

The percentage change in a bond's price =

- -Modified Duration × Change in YTM + [½ × Convexity × (Change In YTM)2 ] RELATIONSHIP BETWEEN YTM AND COUPON RATE Case Nature Of Bond Coupon Rate = YTM Par Value Bond i

e Bo = Par Value Coupon Rate > YTM Premium Bond i

e Bo > Par Value Coupon Rate < YTM Discount Bond i

e Bo < Par Value Note : For the above relationship to be true the maturity value of the bond must be equal to face value

APPLICATION OF FLOTATION COST Flotation costs are the cost which are associated with issue of new debentures like underwriting ,

- brokerage etc

If Flotation cost is given we simply take Bond Value Net of Flotation Cost

- Maturity Value – B0 [1
- - f ] Interest n Kd Equation : Maturity Value B 0 [ 1

- f ] 2

Where "f" is the flotation cost expressed in percentage

Flotation Cost may also be expressed in absolute amount in such case we will simply deduct flotation cost by bond value i

- -f Do one thing every day that scares you

”“Life is either a daring adventure,

- or nothing

” Impossible is a word to be found only in the dictionary of fools

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TAXATION EFFECT If income tax rate is given in question then Interest should be taken after tax

If Capital Gain Tax Rate is given then Maturity Value should be taken after tax i

e after adjusting it for Capital Gain Tax

Equation: Maturity Value Net Of Capital Gain Tax – Issue Value Interest(1

- - Tax) n Kd Maturity Value Net Of Capital Gain Tax Issue Value 2

- - Capital Gain Tax = Maturity Value
- - Tax Rate[ Maturity Value
- -Issue Price ] Note : If Capital Gain Tax is not given in question it is assumed to be Nil

BOND IMMUNIZATION How we can achieve Immunization : This can be attained by selecting the bonds whose duration is equal to the investor's investment horizon

Aaditya Jain

COST OF REDEEMABLE PREFERENCE SHARES Redeemable Preference Shares are those shares which can be redeemed after a specific period of time

Maturity Value – P0 Dividend n How to Calculate Kp of Redeemable Preference Share: K p Maturity Value P0 2

- -In Case of Existing Shares:Current Market Price of PSC and In case of New Shares Po will be Net Proceeds which is equal to Face Value + Premium

- Discount

- - Flotation Cost Sometimes when relevant information is not given for calculation of Kp then we simply use : Kp = Rate Of Preference Dividend BOND VALUATION AND TIME TO MATURITY The value of the bond approaches its par value as the time to maturity approaches its maturity date other things remaining the same

As the maturity approaches a Premium Bond will decrease in value As the maturity approaches a Discount Bond will increase in value As the maturity approaches a Par Value Bond will remain same in value Note : For the above relationship to be true the maturity value of the bond must be equal to face value

FAIR VALUE OF CONVERTIBLE BOND Fair Conversion Value = Number Of Equity Shares Received on Conversion Market Price Per Share prevailing at the time of conversion Fortune favours the brave

- not fail

The fear of death follows from the fear of life

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PERCENTAGE OF DOWNSIDE RISK/PREMIUM OVER INVESTMENT VALUE Market Price Of Convertible Bond

- - Market Price Of Non
- - Convertibl e Bond 100 Market Price Of Non
- - Convertible Bond

- - Fair Value Of Convertibl e Bond 100 Fair Value Of Convertibl e Bond

Market Price Of Convertibl e Bond No

of Equity Shares on Conversion

Excess Value On Conversion Annual Excess Receipt

BOND STRIPS Bond Strips = Interest Strips + Principle Strips Value of a Bond is the sum of present value of two distinct cash flows streams viz Present Value Of Interest called the Interest Strips and Present Value of Principal repaid on maturity called the Principal Strip

An issuer may split the bond in two strips and sell them to different investors having different investment objectives

- 125 at the end of year 5

Coupons are paid annually

Determine value of interest strip & principal strip

Annual Yield rate is 10%

Solution: Interest Strip = 12 x PVAF (10%,5 Years) = 12 x 3

791 = 45

- 49 Principal Strip = 125 x PVF (10%,5Years) = 12 x

621 = 77

- 63 OVERLAPPING INTEREST Example:Amount Of Bond:300,00,000

Existing Coupon rate:14%

Tax Rate:40%

calculate the amount of Overlapping Interest

? Solution:The effect on overlapping Interest will only be applicable in case of Old Bond: Interest:300,00,000 x 14 % x 2/12 = 7,00,000 Tax Saving : Benefit @ 40 % 2,80,000 Overlapping Interest 4,20,000 CONFUSION REGARDING COUPON RATE & YTM Coupon Rate is the rate

at which company pays interest

- you can always begin again

it is because we do not dare that they are difficult

Beyond 90

- - If YTM increases the price or bond value will decrease &
- - If YTM decreases the price or bond value will increase

Other things remaining constant CALLABLE BONDS AND PUTABLE BONDS A Callable Bond is one when the issuer/borrower has an option to retire or redeem the bonds prior to the date of maturity A Puttable Bond is one where the holder (investor) has an option to get the bond redeemed prior to the date of maturity CALCULATION OF YTM OF HALF YEARLY INTEREST PAYMENT BOND

Value – Issue Value Maturity The Best FM Faculty Of India Interest per 6 months nx2 Kd Of 6month Maturity Value Issue Value 2

a = Kd for 6 month x 2 Example :Bond face Value:1000

Interest paid half yearly

Calculate YTM

? Maturity Value – Issue Value 1000 – 900 Interest per 6 months 50 nx2 5x2 Solution: Kd Of 6 month Maturity Value Issue Value 1000 900 2 2

- 32 % for 6 month or 12

a EX-INTEREST & CUM INTEREST When Bond Value include the amount of Interest ,it is known as Cum-Interest,otherwise not

In all the Bond Equation Formula,Bond Value should be taken Ex-Interest

If Bond Value is given Cum-Interest then first we have to make it Ex-Interest then we should proceed with our calculation Note: (1)1 % = 100 basic points (2) If the question is silent about the maturity period of any investment say preference shares ,

- bonds ,

debentures etc then we will assume such investmet as irredeemable or perpetual

(3)Interest is paid on face value

(4)If silent bond are always assumed to be redeemed at face value

Failure is simply the opportunity to begin again,

- this time more intelligently

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- - Total External Liability

Symbolically : NAV = Number Of Units Outstanding = Number Of Units Outstanding Total Asset = Market Value of Investments + Receivables + Accured Income + Other Assets Total External Liability = Accured Expenses + Payables + Other Liabilities Note : In Mutual Fund ,

shares are termed as units and shareholders are termed as unitholders

In other words market value should be used for Mutual Fund valuation

If Market Value of any security is not given then in such case book value can be taken unless otherwise specifically stated

NPV at the end NPV at the begining Dividend Received Capital Gain Received

Expenses Incurred Per Unit The Best FM Faculty OfOpening India NAV Closing NAV Where Average NAV = Average NAV 2

Initial Expenses and Return Desired By Investors can be given by using following relation : Return Required By Investors Return Of Mutual Fund Recurring Expenses (1 Issue Expenses)

ENTRY LOAD & EXIT LOAD Entry Load or Front End Load : When an investor purchase a unit of a Mutual Fund he has to pay a load in addition to the NAV of the units

Such load is known as Entry Lod

Total amount paid by the investor i

e purchase price or Sale Price Per Unit charged by Mutual Fund Company = NAV ( 1+ Entry Load ) Exit Load or Back End Load : When an investor sale his unit to a Mutual Fund he has to pay a load

Such load is known as Exit Lod

Total amount received by the investor on sale of unit or Repurchase/Buyback price of Mutual Fund=NAV(1- Exit Load ) CALCULATION OF DISCOUNT AND PREMIUM The premium or discount for close ended mutual fund is calculated by using following relation =

Market Price NAV NAV

FALL IN NAV AFTER DIVIDEND OR ANY DISTRIBUTION NAV of Mutual Fund Scheme will fall to the extent of any distribution made by the company

- 16 and dividend of Rs
- 4 is to be distributed per unit,then in such case NAV after dividend distrubution will be Rs
- 12 You can have anything you want,
- if you want it badly enough

do anything you set out to accomplish if you hold to that desire with singleness of purpose

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PORTFOLIO MANAGEMENT RETURN OF A SECURITY OR ASSET : Holding Period Return

Price At The End Price At The Beginning Income Distributi on Price At The Beginning

- ? Solution : Average Return =

AVERAGE RETURN BASED ON PAST DATA : 2000 2001 2002 2003 2004 10 20 15 30 25 10 20 15 30 25 20 5

Aaditya Jain

EXPECTED RETURN BASED ON PROBABILITY : The Best FM Faculty Of India Example : Return (%) 20 21 22 23 24 Probability

- 05 Calculate Expected Return
- ? Solution : 20 x

15 + 21 x

10 + 22 x

60 + 23 x

10 + 24 x

05 = 21

- 80 RISK OF A SECURITY OR ASSET STANDARD DEVIATION ( σ ) : Standard Deviation is the deviation from arithmetic mean and is a measure of Total Risk

It is Pronounced as Sigma

Based On Past Data : Standard Deviation ( σ ) =

(Given Return Average Return) 2 n

Note:Sometimes in place of 'n' we can use 'n-1'

(Given Return Average Return) 2 n

Based On Probability : Standard Deviation ( ) = probabilit y (Given Return Expected Return) 2 Variance Based On Past Data as well as Based on Probability : Variance = Standard Deviation 2 = σ 2 RANGE AS A MEASURE OF RISK : A simple way to measure the risk is to find out the range of possible returns

The range is the difference between the " highest There are those who dream and wish and there are those who dream and work

Niney-nine percent of failures come from people who have the habit of making excuses

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and lowest expected return" For example : The possible returns of a security are 20 % ,

- 23 % and 24 %

? Solution :Range Of Risk = 24 %

- - 20 % = 4 % COEFFICIENT OF VARIATION (CV ): Coefficient Of Variation measures Risk Per Unit Of Return

Coefficient Of Variation ,

RULE OF DOMINANCE BASED ON SECURITY RETURN & RISK Rule 1: If Return of two security are different but Their Standard Deviation are Same

Decision : Security with higher Return is preferred

Decision : Security with Lower Standard Deviation is preferred

Rule 3: If Return and Standard Deviation of two security are different TheOf Best FM Faculty Of India Decision : In such case we should use Coefficient Variation

Securities with lower Coefficient Of Variation should be preferred

Assuming our portfolio consists of Security A and Security B with Weight A and Weight B we can calculate various measures relating to Portfolio Risk and Portfolio Return

RETURN OF PORTFOLIO The Return of the portfolio is the weighted average return of individual security

On the Basis Of Past Data : Return Of Portfolio = A's Average Return Weight A + B's Average Return Weight B On the Basis Of Probability : Return Of Portfolio = A's Expected Return Weight A + B's Expected Return Weight B Note : Weights used in Portfolio for different security will always be equal to 1

RISK OF PORTFOLIO STANDARD DEVIATION OF THE PORTFOLIO CONSISTING OF TWO SECURITY : Standard Deviation( [σ1 2 ] ) σ12 w 12 σ 2 2 w 2 2 2 σ1 w 1 σ 2 w 2 r1,2 Where ,

σ 2 Standard Deviation Of Security 2

W1 Weight Of Security 1

r 1,2 Coefficient Of Correlation Between Security 1 and Security 2

COEFFICIENT OF CORRELATION (R) : Correlation answer the following question : Does there exist an association between the two variables

- ? If yes then to what extent

It expresses the degree of closeness between two variables

-1 and + 1

“If you deliberately plan on being less than you are capable of being,

then I warn you that you'll be unhappy for the rest of your life

Beyond 90

CA Aaditya Jain

B )

Covariance (A ,

COVARIANCE Covariance also indicate link between the return of two securities just like Coefficient Of Correlation

- e it can take any value

Based On Past Data : Covariance (A ,

Given Return A Average Return A Given Return B Average Return B d A d'B n n

Given Return A Average Return A Given Return B Average Return B d A d'B n

B) Given Return A Expected Return A Given Return B Expected Return B d A d'B

Note : (i) The value Correlation Of Coefficient (r) ranges between + 1 and

- - 1 and Value of Covariance will range between α to α

(ii) When r = + 1 When r = + 1 It is a Perfect Positive Correlated Portfolio When r = + 1 Portfolio Risk will be Maximum When r = + 1 Standard Deviation Of Portfolio will become (σ A B ) σ A WA σ B WB i

e it become weighted average risk of individual security consisting a portfolio

- (iii) When r =
- - 1 When r =
- - 1 It is a Perfect Negative Correlated Portfolio When r =
- - 1 Portfolio Risk will be minimum When r =
- - 1 Standard Deviation Of Portfolio will become (σ A B ) σ A WA σ B WB (iv) When r = 0 When r = 0 It is a No Correlated Portfolio When r = 0 Out of two security in a portfolio one security must be a risk free security

When r = 0 Standard Deviation Of Portfolio will become (σ A B ) σ A WA (v) As r decreases risk also decreases

- lower the risk

Higher the correlation ,

greater would be the risk of the portfolio

When r = +1 Portfolio has its maximum risk and in such case there can be No risk reduction

- -1 Portfolio has Minimum or Lowest Risk and in such case there will be minimum risk reduction

STANDARD DEVIATION OF PORTFOLIO CONSISTING OF THREE SECURITIES The only man who never makes mistakes is the man who never does anything

and live as though you would die today

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2w A w C σ A σ C rAC 2w B w C σ C σ BrBC

STANDARD DEVIATION OF PORTFOLIO CONSISTING OF FOUR SECURITIES σ ABC

- 2w A w C σ A σ C rAC

2w B w C σ C σ B rBC 2w C w D'σ C σ D'rCD 2w D'w A σ D'σ A rDA 2w B w D'σ B σ D'rBD

- and WB 1 WA (Since

WA WB 1

σ B Covariance (A,

Aaditya Jain

SHORT CUT FORMULA FOR OPTIMUM WEIGHTS WHEN r 1 When r =

- -1 then we can also use the following formula for finding Optimum Weights WX

WY 1 WX σX σ Y

PORTFOLIO CONSISTING RISK FREE SECURITY & MARKET PORTFOLIO Case 1 : Invest 100 % in Market Portfolio and 0% in Rf security Standard Deviation ( Risk ) ( σ ) = Standard Deviation of Market or Risk of Market or σ Market Return = Return from Market or R m Case 2 : Invest 0 % in Market Portfolio & 100 % in Risk Free Security Standard Deviation ( Risk ) ( σ ) = zero [ As Standard Deviation Of Risk Free Security is always zero ] Return = Risk Free Rate or R f Case 3:Invest between 0 % and 100 % in Market Portfolio In such case he should invest few portion of his wealth in risk free security and few portion of wealth in market portfolio Return Of Portfolio = Market ReturnWeight Of Market PortfolioRisk Free ReturnWeight Of Risk Free Security = R m Wm R f Wf Standard Deviation / Risk Of Portfolio = Standard Deviation Of Market Weight Of Market Portfolio = σ m Wm Case 4 :Invest more than 100 % in Market Portfolio( Risk Free Borrowing) In such case since investment is more than 100 % in market portfolio,the excess amount required for investment should be borrowed at risk free rate

= Market Return (1 x) Risk Free Return Paid on Borrowing x = R m (1 x) R f x

Know the true value of time

- snatch,
- and enjoy every moment of it

- no delay,
- no procrastination

never put off till tomorrow what you can do today

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CA

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