CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - December 2002

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • December 2002

This Paper has 18 answerable questions with 0 answered.

F—18(MFS) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks
Answer Question No. 1 which is compulsory and any five from the rest.
Marks

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

Answer Question No. 1 which is compulsory and any five from the rest.

Marks

Patel Enterprise Ltd. is in the business of Agarbati and has prepared the following forecast of its Income and Expenses for the year ending 31^st March,2004. You are required to revise this forecast in the light of various possibilities the management is considering.
Forecast for the financial year ending 31^st March,2004

		Rs.
Sales		13,000,000
Interest income		1,000,000
		14,000,000
Operating costs:
Material Production Labour Production Overheads Increase in stock Administration Overheads Marketing Overheads		5,000,000 1,000,000 2,000,000 (2,000,000) 800,000 1,500,000
Depreciation		11,100,000
Operating profit Interest Expenses Provision for taxes Profit after Tax Dividends Retainable Earnings		2,900,000 1,500,000 800,000 600,000 400,000 200,000

Various assumptions have been made with arriving at this forecast which may not necessarily materialize. The company relies heavily on the rural market, the prosperity where of depends on the monsoon level. The management has therefore, decided to categorize the possibilities in to two: Good Monsoon and bad Monsoon.

Selling price per packet of Agarbati has been taken at Rs.13 which could increase to Rs.14, if the monsoon is good. And could decline to Rs.12, if the monsoon is bad. Volume could be better than forecast by 10%, if the monsoon is good, and down by 10%,if the monsoon is bad.

The average investment surplus available with the company is Rs.1 crore on which interest income at 10% has been estimated. It is however, believed that in a bad monsoon the interest rate might decline to 7%, while in a good monsoon the interest rate might still decline to around 8%. On interest expense area, the borrowing rate is assumed at 15% which might remain the same in both types of monsoons.

You may assume that production volume would remain in the same n both the monsoon situations. There were no opening stock at the beginning of the year.

In a good monsoon, company will advertise heavily. Advertising considered in the initial estimates provided above is Rs.15 lakhs which would increase by 40% in this scenario. In a bad monsoon, the current assumed level of advertising will be decreased by 10%. Other marketing costs are of a fixed nature

The management has experienced both types of monsoons in their past 15 years and believed that, while a good monsoon witness fast off take of products, collections from customers are generally delayed resulting in more funds requirements for working capital. The current working capital is financed 50% from debt and 50% from equity, while long term needs are entirely funded by equity. In a good monsoon, working capital will rise by 20%. The incremental working capital will be funded entirely by debt. In a bad monsoon, working capital requirements will remain the same. The effective tax rates will remain in same in both the situations, in case the company generates profits.

The dividend amount will remain same, even if profits are better than the current estimates. No dividend shall be paid, if profits are lower than current estimates or, if the company were to generate a loss.

Prepare revised income and profit forecast for the both situations, viz., Good monsoon and Bad monsoon, in the same format as above. Attach working notes for detailed calculations.

(0)

(a)

Ramesh & Co. Ltd. manufactures water filters. The current ratio at the end of the last year was 3:1 which appeared to be comfortable. However, the cash flow position, in reality , is rather weak and the company finds it difficult to effect payments to the suppliers and workers on time.
The composition of working capital as per the balance sheet is provided here.

	Rs.
Current Assets: Inventories Receivables Cash and Bank Balances Loans and Advances Current Liabilities	1,800,000 1,200,000 100,000 2,000,000 5,100,000 1,700,000

Mention specific possibilities of which might be causing cash flow difficulties in this context. Suggest any better rations which the company might use to gauge its liquidity in future.

(0)

(b)

Rao Sill Mills Ltd. is currently generating an annual operating profit (before interest, depreciation and taxes) of Rs.60 lakhs. Its current borrowings are Rs.120 lakhs against an equity level. Its interest rate on borrowing is 15%.

It is planning to install a new machine which will improve the operating profits by Rs.20 lakhs and will cost Rs.85 lakhs. Depreciation at 10% will be charged on straight line basis.
The bankers have specified that the debt–equity ratio cannot increase beyond
1 :1 : 1 and the interest coverage should be, at least, 3 times.

(i)	How much maximum debt can the company raise in this context?

(ii)	The promoters do not want to invest more than Rs.30 lakhs in the expansion project. How much incremental operating profits would be required from the new project so that the bankers can lend the balance requirement of funds?

8+2

(0)

(a)

Sachin Enterprises Ltd. provides the following extracts from its accounts as at 31^st March,2002.

	Rs.
Capital and Reserves Debit, ICBI Loan (12%) ACD Loan Capital Employed Profit before Tax Provision for Tax Profit after Tax	15,000,0000 10,000,000 25,000,000 50,000,000 18,000,000 4,500,000 13,500,000

The risk–free rate of return in the economy is 10% and the premium expected from business in general is 5%. The beta of Sachin Enterprises Ltd. shares is currently 1.28.

(i)	Work out the Weighted Average Cost of Capital (WACC) in percentage terms (accurate to two decimal places).
(ii)	If beta is reduced to 1.18 in future, what will be the impact on the WACC?

5+3=8

(0)

(b)

Comment on the realibility of the WACC as an effective measure of cost of capital.

(0)

(a)

what does the term ‘Strategic financial planning imply’?

(0)

(b)

Identify the various types of decisions, which are to be taken by a finance manager in the emerging business scenario?

(0)

(c)

How would a finance manager respond under uncertainty?

(0)

(a)

‘Exchange rate are highly volatile in the international market’. In the light of this statement, discuss the significance of exposed and unexposed assets and liabilities for a multinational corporation.

(0)

(b)

Explain the principal methods of currency translation.

(0)

(a)

State the importance of ‘reports’ in a system of control.

(0)

(b)

State the importance of ‘reports’ in a system of control.

(0)

(c)

Discuss the essentials of a good financial report.

(0)

Interpretation of ratios is a highly technical job for a ‘financial analyst’ . Discuss?

(0)

Write short notes on the following:

4x4=16

(a)

Du Point Chart;

(0)

(b)

‘Beta’ as a measure of risk;

(0)

(c)

Segment Reporting in India;

(0)

(d)

Indian Accounting Standard on intangible Assets.

(0)

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