Mr. A is holding 10000 shares of face value of 100 each of M/s. XYZ Ltd. He wants to hold these shares for long term and have no intention to sell.…
CA Final · Advanced Financial Management · RTP · November 2024
Mr. A is holding 10000 shares of face value of 100 each of M/s. XYZ Ltd. He wants to hold these shares for long term and have no intention to sell. On 1 st January 2020, M/s. ABC Ltd. has made short sales of M/s. XYZ Ltd.'s shares and approached Mr. A to lend his shares under Stock Lending Scheme with following terms: (1) Shares to be borrowed for 3 months from 01-01-2020 to 31-03-2020, (2) Lending Charges/Fees of 1% to be paid every month on the closing price of the stock quoted in Stock Exchange and (3) Bank Guarantee will be provided as collateral for the value as on 01-01-2020. Other Information: (a) Cost of Bank Guarantee is 8% per annum, (b) On 29-02-2020 M/s XYZ Ltd., declared dividend of 25%, (c) Closing price of M/s. XYZ Ltd.'s share quoted in Stock Exchange on various dates are as follows: Date Share Price in Scenario -1 Bullish Share Price in Scenario -2 Bullish 01-01-2020 1000 1000 31-01-2020 1020 980 29-02-2020 1040 960 31-03-2020 1050 940 You are required to find out: (i) Earning of Mr. A through Stock Lending Scheme in both the scenarios, (ii) Total Earnings of Mr. A during 01-01-2020 to 31-03-2020 in both the scenarios, (iii) What is the Profit or loss to M/s. ABC by shorting the shares using through Stock Lending Scheme in both the scenarios?
Suggested Answer and Working Notes:
Earnings of Mr. A through stock lending scheme Scenario 1 Scenario 2 (i) Lending fee 31-01-20 1020 x 1% and 980 x 1% 10.20 9.80 29-02-20 1040 x 1% and 960 x 1% 10.40 9.60 31-03-20 1050 x 1% and 940 x 1% 10.50 9.40 Earnings from lending per Share (A) 31.10 28.80 Total No. of Shares 10000 10000 Total Earning from Lending 3,11,000 2,88,000 (ii) Dividend income per Share (B) 25.00 25.00 Total earnings per share (A) + (B) 56.10 53.80 Total No. of Shares 10000 10000 Total Earning 5,61,000 5,38,000 (iii) Gain on shortening the shares (1,050 - 1,000) and (1,000 - 940) (50.00) 60.00 Lending fees paid per share (31.10) (28.80) Bank guarantee charges @ 8% p.a. (20.00) (20.00) Gain Per Share (101.10) 11.20 Total No. of Shares 10000 10000 Total Gain on shortening the shares (10,11,000) 1,12,000
Topics: Security Valuation
Related Questions in this Topic
- Rahul Ltd. has surplus cash of ₹ 100 lakhs and wants to distribute 27% of it to the shareholders. The company decides to...
- Shares of V Ltd. are currently quoted at a trailing Price-to-Earnings (P/E) ratio of 8 times. As per the existing policy...
- Mr. A is thinking of buying shares at 500 each having face value of 100. He is expecting a bonus at the ratio of 1: 5 du...
- The data given below relates to a convertible bond: Face value 1,000 Coupon rate 12% No. of shares per bond...
- XYZ Ltd. recently paid a dividend of 40. The company is entering a 5-year transition phase where its current 15% growth ...