Nov 2013 - CT2 Exam - IAI

Hi all,

How did people who wrote the CT2 paper from IAI yesterday feel about the paper? I felt it was not too difficult, but still ended up doing a lot of questions wrong. Please share your thoughts. Thanks!

 

Ya totally. The first half wasn't difficult. The second half was a nightmare. I made stupid mistakes as well. I really hope they don't penalise more than they should. But I 'm worried about the passing rate for CT 2. Only 10. sumthn % people passed in May 2013. It's pretty scary.

 

Can anyone tell what answer is correct for the two questions below -

Q. 1) A Zero Coupon bond


A) Does not earn interest on the money invested.
B) Is issued at a discount and redeemed at par.
C) Earns interest at regular intervals.
D) None of the above.

I answered A, but I think that B is the correct one :-(

Q. 4) Rahul Ltd has 500,000 issued shares in its share capital. For the previous year, it wanted to distribute Rs 1.1 million to its shareholders out of the retained earnings. It had a sufficient cash balance to do so. However it wanted to use the money partly to buy-back some shares and the balance was to be distributed to shareholders after the buy-back was completed. It wanted to pay a dividend of Rs 2 per share. The current market price of the company’s share is Rs. 2 and it would have to pay a 50% premium to the market price for buy-back. How many shares were bought back?

A) 400,000 shares
B) 90,000 shares
C) 125,000 shares
D) None of the above

I answered 'B'.

Q. 6) Which of the following would have no effect on the real rate of return offered by a listed loan stock?

A) A change in the perceived risk of the company defaulting.
B) A change in the rate of income tax.
C) A change in the rate of inflation.
D) A change in the rate of short term loan.

I answered 'B'

Q. 10) Hero Honda Motor co has a beta of 0.8 relative to the diversified market portfolio.
If the risk-free rate of interest over the previous year has been 8%, and the
diversified market index has risen 6%, what is the expected increase in the share
price?

A) 4.8%
B) 6.40%
C) 12.80%
D) 1.5%

I think we needed to use the CAPM formula return = risk free rate + Beta * Equity risk premium and thus get 6.4% as answer. However, I tried to be oversmart in the exam and assumed that they would not ask such a simple question and wrote 0.8*6 and thus 4.8% :-(

Can someone let me know the correct answers. Thanks!

 

Don't know the correct answers but I can tell you what I answered.

Even I answered A for the first question.

For the fourth question the equation I got was,
3x + 2(500,000-x) = 1,100,000
X being the number of shares bought back.
I got x as 100,000 and so the answer I gave was D.

For question 6, even I chose option B.

In question 10, they've asked for the expected increase in the share price and not the new rate of return on equity. So I think the answer is 6x.8 = 4.8%

 

Hi Aditi,

Thanks for the response. For the share buyback/dividend question, I assumed they would buy back 90000 shares and would just be left with some cash after the exercise. I now get a feeling this one is wrong too :-(

Also, how did you fare with the last three long questions? I totally messed them up. I am kinda getting a feeling I wont clear CT2.

 

The last three questions were horrible. I messed up too over there.
The paper was far more tough than the past papers of CT2

 

A similar type of question is given in Assignment X4 of the study mat. You can check the method of doing this sum from there.