CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - December 2008

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • December 2008

This Paper has 32 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.
Please answer all bits of a question at one place. Working notes should form part of the answer.
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.

Please answer all bits of a question at one place.
Working notes should form part of the answer.

Marks

(a)

In each of the cases given below, one out of four answers is correct. Indicate the correct answer (= 1 mark) and give your workings/reasons briefly (= 1 mark):

2x5

(i)

ASHREEN LTD. has a target ROE of 20 percent. The Debt. Equity ratio of the company is 1.5 and its pre–tax cost of debt is 10 percent. What ROI should the company plan to earn. If its tax rate is 35 percent?

A.
B.
C.
D.

18.31%
16.50%
15.80%
None of A, B, C.

(0)

(ii)

The shares of ENRON LTD. 5 years hence is Rs. 157.45. It has paid Rs. 2 as the current dividend. If the growth rate of the company is 16%, the cost of equity would be:

A.
B.
C.
D.

25.5%
19.09%
18.75%
None of A, B, C.

(0)

(iii)

The correlation co–efficient of the share price of ABN Ltd. with the market and standard deviation for the share prices are 0.9 and 3% respectively. The standard deviation of the market price is 2.5 percent. If the return of Government security is 6% and of the market portfolio is 12.5%, what will be the required rate of return on the stock?

A.
B.
C.
D.

15.50%
13.02%
10.20%
None of A, B, C.

(0)

(iv)

The current price of a share of ANKIT TEXTILES LTD. is Rs. 150. The company is planning to issue 1 (one) rights share for every 5 equity shares. If the company targets that the ex–rights value of a share should be at least Rs. 140, the subscription price for one rights share should be more than or equal to

A.
B.
C.
D.

Rs. 80
Rs. 90
Rs. 96
None of A, B, C.

(0)

(v)

RJS purchased a six month call option on the equity stock of HITECH LTD. with an exercise price of Rs. 110. The equity stock is currently selling for Rs. 100. It can rise by 60% or fall by 20% in 6 month’s time. What will be the value (current) of the call option if the risk–free rate is 10 percent? Use the Risk–natural method.
[Given: PVIF (10%, 0.5 year) = 0.9524]

A.
B.
C.
D.

Rs. 17.05
Rs. 14.88
Rs. 12.65
Insufficient information.

(0)

(b)

Choose the most appropriate one from the stated options and write it down (only indicate A, B, C, D as you think correct):

1x10

(i)

As per AS–26 when an intangible asset is acquired by the issue of shares and other securities, the cost of the intangible asset should be recorded at

A.
B.
C.
D.

Fair value of the intangible asset acquired
Fair value of the shares and other securities issued
A or B, whichever is more evident
None of A, B, C.

(0)

(ii)

Of the slope of the line measuring a stocks historic returns against the market’s historic return is positive, the stock

A.
B.
C.
D.

Has a beta greater than 1.00
Has no unique risk
Has a positive beta
None of A, B, C.

(0)

(iii)

Which of the following is not an assumption of Black and Scholes model of option pricing?

A.
B.
C.
D.

The stock pays no dividend
There are no restrictions or penalties for short selling
There are no transaction costs and taxes
The stock price is continuous and follows standard normal distribution.

(0)

(iv)

According to the trade–off theory, while choosing debt–equity ratio, finance managers often look at trade–off between

A.
B.
C.
D.

The tax shelter provided by uncommitted reserves and debt service coverage ratio
The probability of the company and its debt component in capital structure
The interest coverage ratio and cash flow coverage ratio
The tax shelter provided by debt and cost of financial distress.

(0)

(v)

What is EBITDA?

A.
B.
C.
D.

Earnings before interest, tax, debt and amortization
Earning before inter–company transaction, tax, debt and annual charges
Extraordinary income before interest, tax, depreciation and annual charges
Earning before interest, tax, depreciation and amortization.

(0)

(vi)

A measure which reflects the effectiveness and efficient use of firm’s resources is

A.
B.
C.
D.

Return on Equity (ROE)
Return on Assets (ROA)
Net income margin
None of A, B, C.

(0)

(vii)

Collection float means

A.
B.
C.
D.

Amount due from Debtors
Cheque issued but not yet presented to the Bank
Cheque deposited with the Bank but not yet cleared
None of A, B, C.

(0)

(viii)

In an inflationary period the use of FIFO will make which of the following more realistic?

A.
B.
C.
D.

Balance Sheet
Profit & Loss Account
Cashflow Statement
None of A, B, C

(0)

(ix)

Which of the following is correct?

A.	EVA is the value derived by deducting cost of sales from revenue
B.	EVA is net present value
C.	EVA is a measure to determine whether an investment contributes positively to the owner’s wealth
D.	Both A and C above.

(0)

(x)

Under AS–28 estimate of future cash flows should include

A.
B.
C.
D.

Projections of cash inflows from continuous use of assets
Cash inflows or outflows from the financing activities
Income tax receipts or payments
Both A and B above.

(0)

(a)

The stock of VINTEX LTD. is currently trading at Rs. 500 and call option exercisable in three months time has an exercise rate of Rs. 488. The standard deviation of continuously compounded stock price change for VINTEX LTD. is estimated to be 20% per year. The annualized treasury bill rate corresponding to this option life is 6%. The company is going to declare a dividend of Rs. 15 and it is expected to be paid in two months time.

Requirements:

(i)	Determine the value of a three–month Call option on the stock of VINTEX LTD. (based on Black and Scholes model).

(ii)	What would be the worth of PUT option if current price of stock is considered to be Rs. 485.15?

Note: Extracted from the Tables:

(1)

Natural Logarithms: Ln(0.99416) = –0.005857. Ln(1.02459) = 0.02429

(2)

Value of e^–x:e^–0.02 = 0.9802, e^–0.015 = 0.9851

(3)

For N(X) : where X=0 : N(o.1414) = 0.5562
N(0.0414) = 0.5165
Where X=0 : N(–0.1414) = 0.4438
N(–0.0414) = 0.4835

(4)

PVIF (6%, � year) = 0.9852, PVIF (6%,

year) = 0.9901

8+2

(0)

(b)

RAX INVESTMENTS LTD. deals in equity derivatives. Their current portfolio comprises of the following investments:

Infosys Rs. 1,400 Call expire December 2008: 200 units bought at Rs. 50 each (Cost)
Infosys Rs. 1,425 Call expire December 2008: 3,000 units bought at Rs. 33 each (Cost)
Infosys Rs. 1,350 Put expire December 2008: 4,000 units bought at Rs. 22 each (Cost)

What will be the profit or loss to RAX INSTRUMENTS LTD. in the following situations?

(i)	Infosys closes on the expiry day at Rs. 1,550

(ii)	Infosys closes on the expiry day at Rs. 1,460

(iii)

Infosys closes on the expiry day at Rs. 1,280

(Ignore transaction cost and taxation.)

2x3

(0)

(a)

The following information relates to NDA Ltd.

(1) (2) (3)	Net Profit for the year 2007 Net Profit for the year 2008 Number of shares outstanding prior to rights issue	Rs. 44.00 lakh Rs. 60.00 lakh 10,00,000
(4)	Details of rights issue : One for every five held. Offer price of rights share Rs. 60 and the last date for exercising the rights was 01.03.2007.
(5)	Fair value of each share prior to exercise of rights was Rs. 84 per share.
On the basis of the above data you are required to compute with reference to As–20.

(i)	Theoretical ex–rights fair value per share;

(ii)	Adjustment factor for EPS because of rights issue;

(iii)

EPS for the year 2007 before and after rights issue; and

(iv)	EPS for the year 2008.

3+1+2+2

(0)

(b)

INDUGA Ltd. made the followings:

Borrowing	Date of Borrowing	Amount (Rs.)	Purpose	Related expenses (Rs.)
15% Term Loan 14.5% Term Loan 14% Term Loan	01.04.2007 01.10.2007 01.01.2008	12,00,000 8,00,000 10,00,000	General Specific to acquisition of Plant and Machineries General	1,00,000 40,000 80,000

Qualifying assets for borrowings are:

Factory shed Plant & Machinery Other Fixed Assets	Rs. Rs. Rs.	2,00,000 18,00,000 2,00,000
	Rs.	22,00,000

Assume that project is ready for commercial production as on 01.04.2008.
Requirements:

Determine the amount of Borrowing Costs to be capitalised as per As–16 during the year ended 31.03.2008.

(0)

(a)

Discuss the various kinds of systematic and unsystematic risk.

3+3

(0)

(b)

Consider the following information relating to the return from stock SIGMA and the market Index in different Economic Scenario.

Economic Scenario	Probability	Conditional Returns
		Stock–SIGMA	Market
Boom Steady Bust	0.30 0.40 0.30	18% 9% –8%	12% 8% –4%

Requirements:

(i)	Determine the equation for Security Market Line (SML) assuming that the Risk–free interest rate (Rf.) is 8%.

(ii)	What does the SML tell you about the "market price at Risk"?

(iii)

Compute the Beta for "Stock–SIGMA".

(iv)	Compute the Alpha for "Stock–SIGMA".

2+2+4+2

(0)

(a)

The following is the capital structure of SIMONS Company Ltd. as on 31.03.2008:

	(Amount in Rs. Lakh)
Equity Shares (Rs. 100 per share) Reserves 9% Preference shares (Rs. 100 per share) 10% Debentures (Rs. 100 per Debentures) 12% Term Loans	500.00 320.00 180.00 180.00 500.00 1,680.00
All the securities are traded in the Capital Market. Recent prices are:
	Rs.
Ex–dividend Equity share price Ex–dividend Preference share price Ex–interest Debenture market value Additionally, the following data are available: Company’s Equity Beta Yield on long term Treasury Bonds Stock Market Risk Premium	160 125 103 1.25 6% 10%
The Debentures are redeemable after 3 years and interest is payable annually.
Corporate tax rate	35%

Required:

Using the information in the case, determine the Weighted Average Cost of Capital (WACC) of SIMONS Company Ltd. based on market value weights.

Note:

(i)

Ignore Floatation Costs and Transaction Costs:

(ii)

Extracted from the table of PV

Interest Rate
PVIFA (3 years)
PVIF (3 years)

8%
2.577
0.794

9%
2.531
0.772

10%
2.487
0.751

1+1+1+2+5

(0)

(b)

The following is an extract from the Cash Flow Statement of NOVELTY Ltd. prepared for the year ended March 31, 2008:

Particulars		(Amount in Rs. Lakh)
Net Profit		30,000
Add:	Sales of Investments Depreciation on Assets Issue of Preference Shares Loan raised Decrease in Stock	35,000 5,500 4,500 2,250 6,000 83,250
Less:	Purchase of Fixed Assets Decrease in Creditors Decrease in Debtors Exchange Gain Profit on Sale of Investments Redemption Debentures Dividend Paid Interest paid	32,500 3,000 4,000 4,000 6,000 2,850 700 472.50	53,522,50
Add:	Opening Cash & Cash Equivalent	29,727,50 6,170,50
Closing Cash & Cash Equivalent		35,898.00

You are required to redraft and reconstruct the Cash Flow Statement of the company in proper order keeping in mind the requirement of As–3.

2+2+2

(0)

(a)

From the following details given, calculate the amount of depreciation under "Current Cost Accounting" (CCA) method for each of the four years as well as the backlog depreciation for the machine X:

Cost of Machine
Cost of Installation
Estimated Life
Residual Value
Inflation Factor

Rs. 90,000
Rs. 10,000
4 years
Nil
10% p.a.

Depreciation to be charged according to straight line method.

(0)

(b)

XYZ LTD., is considering a proposal to acquire an equipment costing Rs. 5,00,000. The expected effective line of the equipment is 5 years. The company has two options—either to acquire it by obtaining a loan of Rs. 5 lakh at 12% interest per annum or by lease. The following additional information is available:

(i)	The principal amount of loan will be repaid in 5 equal yearly installments;
(ii)	The full cost of the equipment will be written off over a period of 5 years on straight line basis and it is to be assumed that such depreciation charge will be allowed for tax purpose;
(iii)	The effective tax rate for the company is 40% and the after–tax cost of capital is 10%
(iv)	The interest charge, repayments of principal and the lease rentals are to be paid on the last day of each year.

You are required to work out the amount of lease rental payable annually, which will match the loan option.
The discount factors at 10% are as follows:

Year	1	2	3	4	5
Discount Factor	.909	.826	.751	.683	.621

(0)

The Balance Sheet (on historical cost basis) of ARCADE Ltd. at 31st March, 2007 and 31st March, 2008 were as follows:

	(Amount in Rs. Lakh)
	31st March, 2007	31st March, 2008
Land and Buildings (Cost Rs. 160) Equipments (Cost Rs. 100) Stock Debtors Bank	152 50 30 13 (10)	148 40 40 28 14
	235	270
Equity Shares Reserves Debentures (10%) Creditors Proposed Dividend	150 60 — 10 15	150 70 20 15 15
	235	270
Profit & Loss Account for the year ended 31st March, 2008
	(Amount in Rs. (Lakh)
Sales Opening Stock Purchases Less: Closing Stock Gross Profit Expenses (including Debenture interest) Depreciation—Building Depreciation—Equipment Net Profit Proposed Dividend Balance carried forward	30 61 91 40 10 4 10	100 51 49 24 25 15 10

The relevant price indices are:

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

2005–06 (Average) — Date of Building acquisition
2002–03 (Average) — Date of Equipment acquisition and issue of Equity Shares
2006–07 (Last quarter average)
2007–08 (1st April Debenture issued)
2007–08 (Last quarter average)
2007–08 (Average)
2007–08 (31st March, 2008)

105
80
114
116
122
118
125

Closing stock of 31st March was acquired during the whole of 2007–08 and Opening Stock during 2006–07.

Required:

ARCADE Ltd. wish to adjust its historic accounts to reflect current costs in line with ‘Current Cost Accounting’ (CCA) method.

Assuming that the ‘Value to the Business’ of the assets is given by the price indices above.

Prepare the Accounts on Current Cost basis (Balance Sheet/Profit & Loss A/c) Showing Current Adjustments for the year ended 31st March, 2008 under the following heads:

(i)
(ii)
(iii)
(iv)
(v)

Cost of Sales Adjustments (COSA);
Depreciation Adjustments;
Monetary Working Capital Adjustment (MWCA);
Gearing Adjustment (GA);
Current Cost Reserve.

3+2+(2+
2+1+4+2)

(0)

Write short notes on any four out of the following:

4x4

(a)

Discounting Operations;

(0)

(b)

Impairment of Asset and its application to Inventory;

(0)

(c)

Treatment of Borrowing Costs;

(0)

(d)

Shareholder Value;

(0)

(e)

Gearing Adjustment (GA);

(0)

(f)

Voluntary disclosures in Annual Report.

(0)

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