CWA ICWA Final Stage III : Advanced Financial Management and International Finance - December 2006

CWA ICWA - Final Stage III • Advanced Financial Management and International Finance • December 2006

This Paper has 29 answerable questions with 0 answered.

F—14(AFM) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.
Part A is compulsory and answer another five questions from Part B.
Please answer all bits of a question at one place.
Working notes should form part of the answer.
Part A
Attempt all questions.
Marks

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

Part A is compulsory and answer another five questions from Part B.

Please answer all bits of a question at one place.

Working notes should form part of the answer.

Part A

Attempt all questions.

Marks

(a)

In each of the cases given below one out of four answers is correct. Indicate the correct answer and give your working/reasons briefly.

2x7=14

(i)

AD, SOFTEX LTD. decides to issue right share for every two shares held. The right shares is priced at Rs. 30 each and the present cum–right price of AD Softex Ltd. share in the stock exchange is Rs. 45. The theoretical ex–rights fair value per share is

(A)	Rs. 37.50	(B)	Rs. 40.00
(C)	Rs. 35.00	(D)	20.00

(0)

(ii)

NDA Ltd, has a debt–equity mix of 3/2 and total assets turnover ratio of 2. If the net profit margin of NDA Ltd. is 5 per cent, its return on equity (ROE) will be

(A)	20%	(B)	25%
(C)	16.7%	(D)	None of (A), (B), (C).

(0)

(iii)

The stock of Zenith Ltd. is currently quoting at Rs. 100 per share in the market. The expected stock price for the next year is as follows:

Probability	0.20	0.50	0.20	0.10
Price (Rs.)	150	175	200	225

The expected return from investing in the stock will be

(A)	60%	(B)	70%
(C)	80%	(D)	100%

(0)

(iv)

The spot and 3 month forward rates of US $ in relation to Rupee (Re./US $) are Rs. 45.00/45.35 and Rs. 44.60/45.05 respectively. What will be the annualised forward loss (discount with respect to Ask price)?

(A)

3.56%

(B)

2.65%

(C)

2.50%

(D)

2.10%

(0)

(v)

The Tata Tea trades on the spot market at Rs. 570. The cost of financing is 12 per cent per year. It is expected to pay a dividend of Rs. 10, 45 days later. What is the fair value of a 90 day futures on Tata Tea (rounded up to nearest Rupee)? — Assume day count basis as actual/365.
[Given : FVIF (12%, 0.2466 years) = 1.028 and FVIF (12%, 0.1233 years ) = 1.014]

(A)

Rs. 596.00

(B)

Rs. 576.00

(C)

Rs. 560.00

(D)

Rs. 556.00

(0)

(vi)

GESCO Ltd. has both European call and put options traded on NSE. both options have same exercise price of Rs. 40 and both expire in 6 months. GESCO does not pay any dividend. The call and the put are currently selling for Rs. 8 and Rs. 2 respectively. The risk–free rate of interest is 8% p.a. What would be the stock price of GESCO Ltd? [Given: PVIF (8%, ½year) = 0.9615]

(A)

Rs. 48.47

(B)

Rs. 44.46

(C)

Rs. 42.20

(D)

Rs. 38.46

(0)

(vii)

PLC Ltd. a valued customer engaged in import business, is in spot need to remit EURO 1 million to his European exporter. On September 14, 2006, the spot rate of Re./US $ is Rs. 46.47/46.57 and that of US$/EURO is $ 0.8453/0.8457. What rate you as a banker will qote to PLC Ltd, if the bank margin is 0.5%?

(A)

Rs. 39.58

(B)

Rs. 39.50

(C)

Rs. 39.48

(D)

None of (A), (B), (C)

(0)

(b)

From the following, choose the most appropriate answer [only indicate (A), (B), (C), (D) as you think correct]:

1x6=6

(i)

A Fund Flow shows the flow where is a transaction between

(A)	A fixed asset and a current asset.
(B)	A fixed asset and a current liability.
(C)	A fixed liability and a current liability.
(D)	A fixed liability and current asset.

(0)

(ii)

The quality of a formal process of risk management is generally accepted to be dependent upon

(A)	Management awareness.
(B)	A methodical approach.
(C)	Relying on past trends or events as a predictor of future events.
(D)	The experience and personality of the risk analyst(s) leading the process.

(0)

(iii)

March Euro dollar future is now quoted at 97.98 in CMI. The implied interest rate is

(A)	2.20%
(B)	2.06%
(C)	2.02%
(D)	2.00%

(0)

(iv)

The following are some of the recognised factors that prevent the Purchasing Power Parity Theory from determining exchange rate in practice;

(A)	Government intervention, directly in the exchange markets or indirectly through trade restrictions.
(B)	Inflation rates differing in the two concerned countries.
(C)	Structural changes in the economies of the countries.
(D)	Speculation in the exchange market.

(0)

(v)

In booming (share) market, the companies are to be selected with Beta (β)

(A)	β = 0
(B)	β > 1
(C)	β < 1
(D)	Beta is not relevant.

(0)

(vi)

Operating leverage measures the sensitivity of the ________ to change in quantity. Fill in the gap from below:

(A)	Earning before interest and taxes.
(B)	Earning per share.
(C)	Dividend per share.
(D)	Profit before tax.

(0)

PART B Attempt any five questions

PART B
Attempt any five questions

(a)

An investor purchased Reliance November Futures (600 shares Tick size) at Rs. 1,150 and write a Rs. 1,190 November call option at a premium of Rs. 10 (600 shares Tick size). As on November 25, Spot price rises and so the Futures price and the call premium. Futures price rises to Rs. 1,180 and Call premium rises to Rs. 16. Brokerage is 0.045% for the transaction value of Futures and Strike price net of Call premium for option.
Find out the profit/(Loss) of the investor, if he/she settles the transaction on that date and at stated prices. (Assuming no transaction taxes and Service taxes exist).

7+9=16

(0)

(b)

Poineer Technology Ltd. is foreseeing a growth rate of 12% per annum in the next 2 years. The growth rate is likely to fall to 10% for the third year and fourth year. After that the growth rate is expected to stabilize at 8% per annum. If the last dividend paid was Rs. 1.50 per share and the investor' required rate of return is 16%, what would be the intrinsic value per equity share of Poineer Technology Ltd. as of date?
Note: You may use the following table:

Years	0	1	2	3	4	5
P.V. Interest Factors at 16%	1.00	0.86	0.74	0.64	0.55	0.48

(0)

(a)

Briefly explain the salient features of non–recourse project financing.

(0)

(b)

Distinguish between:

4+4+3

(i)

Factoring and Forfaiting,

(0)

(ii)

Forward contract and Futures contract,

(0)

(iii)

Economic value added and Accounting profit.

(0)

(a)

GGC Ltd. is considering investment in a new equipment costing $ 30 lakh. The equipment is likely to provide a cash flow after taxes of $ 10 lakh per year for 6 years. The unlevered cost of equity capital of the company is 16 percent. The company intends to finance the project with 60 per cent debt, which will bear an interest rate of 12 per cent. The loan will be repaid in equal annual principal payments at the end of each of the 6 years. Flotation costs on financing will be $ 1 lakh and the company is in a 30 per cent tax bracket. What is the adjusted present value of the project? Is the project acceptable?
Note: Extracted from the TABLE of PV of Re. 1.

(i)	PVIF at 12% for 0 to 6 years are: 1.000, 0.8928, 0.7972, 0.7118, 0.6355, 0.5674, 0.5066:
(ii)	PVIFA for 6 years at 16% = 3.6847.

8+8=16

(0)

(b)

In 2000 AT & T acquired NCR after a hotly contested takeover for approximately $ 110 per share. The free cash flows of the two firms-before and after merger-were projected as following:

($ million)
Firm/Years	Free Cash Flows					Terminal Value∗
Firm/Years	1	2	3	4	5	Terminal Value∗
AT & T	4,684	4,918	5,164	5,422	5,693	82,756
NCR	471	509	550	594	641	8,102
Combined (Post-merger)	5,195	5,558	5,948	6,364	6,809	97,672
∗ Terminal value as at the end of the 5th year.

Cost of equity and debt of the individual firms and the combined firm (after merger) were estimated as given under:

	AT & T	NCR	Combined
Cost of equity	14.23%	15.33%	14.34%
Cost of debt	.40%	6.00%	5.42%
Debt/(Debt + Equity)	21%	9%	20%

At the time of merger deal NCR had 70.6 million outstanding shares and $537 million worth of outstanding debt.

(a)	What is the minimum price per share AT & T could have offered to NCR?
(b)	Do you think that the price paid by AT & T was justiflable? Give reasons. (Support your answers in (a) and (b) above with necessary calculations.)

Note: You may use the formula:

(1 + r)ⁿ

for determining PVIF at r (rate for cost of capital).

(0)

(a)

Given the following information:

Spot rate
3 month forward rate
3 month interest rate in USA
3 month interest rate in India

:
:
:
:

Rs. 46.88/$
Rs. 47.28/$
7% per annum
9% per annum

Assuming no transaction cost or taxes exist, what operation would be carried out to take the possible arbitrage gain?
Assume Rs. 10 million/$ 10 million borrowings (as case may be ) to explain your answer.

(2+5+1)
+(3+5)
=16

(0)

(b)

NBA Bank Ltd. transacted on August 19, 2006 the following:

(1)	Sold $ 1000000 two months forward to Alpha Manufacturing Co.Ltd. at Rs. 44.50;
(2)	Purchase EURO 1000000 two months forward from Beta Trading Co. Ltd. at Rs. 47.20.

On October 19, 2006, both the customers approached the Bank. Alpha Manufacturing Co. wants the forward contract to be cancelled while Beta Trading Co wants the contract to be extended by one month. The following exchange rates prevailed on that day:

	Rs./$	Rs./EURO
spot	44.60/65	47.75/85
One month Forward	44.75/85	48.00/48.20

Based on the above information (ignore interest etc.,) you are required to

(i)	Calculate the amount to be paid to or recovered from Alpha Manufacturing co. due to the cancellation of the forward contract.

(ii)	Calculate the amount to be paid to or recovered from Beta Trading Company due to the extension of the forward contract.

(0)

(a)

Briefly explain the objectives of "Portfolio Management".

4+6+6=16

(0)

(b)

You are running a portfolio management business and have assembled the following portfolio for Client–B.

Scrip	Value (Rs.)	Beta
Infosys Hind. Liver Reliance Tata Motors Pfizer	5 lakh 4 lakh 6 lakh 3 lakh 2 lakh	1.21 0.97 1.40 1.32 1.25

Client–B insists that the portfolio should comprise the above 5 scrips alone and that each scrip should be at least 10% of the total portfolio value. You project the Sensex which is currently 11400 to move to 11800 by the end of 3 months and to 12200 by the end of 6 months.

(i)	What will be the value of your portfolio at the end of 3 months and 6 months?
(ii)	What could you do to improve the portfolio performance give your view on the market?

(0)

(c)

The annual turnover of VIBGYOR Limited is Rs. 12 million of which 80% is on credit. Debtors are allowed one month to clear off the dues. ALLBANK Factors Ltd. (a factor company) is willing to advance 90% of the bill raise on credit for a fee of 2% a month plus a commission of 3% on the total amount of debts. vibgyor Ltd. as a result of this arrangement, is likely to save Rs. 43,200 annually in management cost and avoid bad debts at 1% on the credit sales. A scheduled bank has come forward to make an advance equal to 90% of the debts at an interest rate of 12 per cent p.a. However its processing fee will be at 2 per cent on the debts. Should the company avail of the factoring service or the offer of the bank? Give reasons.

(0)

(a)

MULTISOFT LIMITED is expected to grow at a higher rate of 4 years; thereafter the growth rate will fall and stabilize at a lower level. The following information has been assembled:

Base your (year–0) Information
Revenues EBIT Capital Expenditure Depreciation Working Capital as a percentage of revenues Corporate Tax rate (for all time) Paid–up Equity Capital (Rs. 10 par) Market Value of Debt	Rs. 3,000 million Rs. 500 million Rs. 350 million Rs. 250 million 25% 30% Rs. 400 million Rs. 1,200 million

Inputs for the High Growth period
Length of high growth period Growth rate in revenues, depreciation, EBIT and Capital Expenditure Working Capital as a percentage of revenues Cost of Debt (Pre–tax) Debt–Equity ratio Risk–free rate Market risk premium Equity beta	4 years 20% 25% 13 1 : 1 11% 7% 1.129

Inputs for the stable growth period
Expected growth rate in revenues and EBIT Capital expenditure are offset by depreciation Working Capital as a percentage of revenues Cost of Debt (Pre–tax) Risk–free rate Market risk premium Equity beta Debt–Equity ratio	10% – 25% 12.14% 10% 6% 1.00 2:3

Requirements:

(i)	What is the Weighted Average Cost of Capital (WACC) for the high growth period and the stable growth period?
(ii)	What is the value of Multisoft Ltd. Note: Extracted from the table of present value of Re. 1:

PVIF

Year
at 13%
at 14%
at 15%

0
1.000
1.000
1.000

1
0.885
0.877
0.870

2
0.783
0.769
0.756

3
0.693
0.675
0.658

4
0.613
0.592
0.572

13+3=16

(0)

(b)

Explain what is meant by Free Cash Flow.

(0)

MULTIPLEX LIMITED is considering a capital investment for which the following detailed information is available:

(i)

Cost of the project is estimated to be Rs. 435 crores which includes: (a) contingencies of Rs. 30 crores; (b) margin money for working capital of Rs. 10.5 crores; (c) interest during construction of Rs. 31 crores and (d) capital Issue expenses of Rs. 13.5 crores.

(ii)

Incremental investment on working capital is estimated to be:

				(Rs. crores)
Year	0	1	2	3
Inc. WC	10.5	32.3	7.0	5.6

(iii)

Salvage value has been estimated to be Rs. 80 crores.

(iv)

The operational cash flows are projected as follows:

(Rs. crores)
Year	PBIDT	Taxation	Interest
1	42	8	25
2	111	6	46
3	125	9	36
4	125	14	37
5	125	33	16
6	125	39	11
7	125	44	5
8	125	47	1
9	125	48	0
10	125	48	0

(v)

Project will be financed with a debt of Rs. 268 crores and the remaining through equity capital. The overall cost of financing the project would be 13 percent.
Calculate NPV of the cash flows. Is this project financially viable?
Note: Extracted from the table of PV of Re. 1.
PVIF at 13% for 0 to 10 years are: 1.000, 0.885, 0.783, 0.693, 0.613, 0.543, 0.480, 0.425, 0.376, 0.333 and 0.294.

(0)

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