CWA ICWA Final Stage IV : Valuations Management and Case Study - June 2008

CWA ICWA Final - Stage IV • Valuations Management and Case Study • June 2008

This Paper has 33 answerable questions with 0 answered.

*F-20(VMC)* *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 carrying 20 marks and any five from the rest.
Marks

(a)

State whether the following statements are TRUE or FALSE:

1x8

(i)

Stock dividends and stock splits may increase the stock price but not the value of business.

(0)

(ii)

If the investor’s required rate of return is greater than the annual interest on the bond, the value of the bond is greater than its par value.

(0)

(iii)

A brand is nothing but a glorified product name, hence it has no value.

(0)

(iv)

A stock with low price–earnings ratio shows that it is undervalued and may earn excess return.

(0)

(v)

Intrinsic value and market price of equity shares are always equal.

(0)

(vi)

For companies, which are not expected to pay dividends, equity shares cannot be valued.

(0)

(vii)

In constant growth model, the value of equity share is sensitive to growth rates.

(0)

(viii)

Diversification is an important strategic alternative to growth.

(0)

(b)

Fill in the blanks by filling the appropriate word(s) given in the brackets:

1x6

(i)

β factor does not measure ________ risk. (systematic/unsystematic)

(0)

(ii)

In case of Deep Discount Bonds, the issue price is always ________ the face value. (less than/more than)

(0)

(iii)

Super profit is the excess of future maintainable profits over ________ expected profits. (normally/abnormally)

(0)

(iv)

Current liabilities are anything that are due and payable within a ________ period. (twelve months/twenty–four months)

(0)

(v)

Value of a business is ________ the aggregate value of its assets. (equal to/different from).

(0)

(vi)

The ________ the market price and the book value is an indication of intellectual capital if the shares are widely held and traded for a non–cyclical firm. (sum of/difference between).

(0)

(c)

Attempt the questions by selecting the correct option:

2x3

(i)

If the operating profits of a company register a growth without employing more capital, then

(a)	The economic value added will increase
(b)	The economic value added will decrease
(c)	The economic value added will remain constant.

(0)

(ii)

If unproductive capital of a firm is liquidated, the economic value added

(a)	will decrease
(b)	will not be affected
(c)	will increase.

(0)

(iii)

The strategy increasing the economic value added of a firm by achieving growth using retained profits will work favourably as long as

(a)	Returns are equal to weighted average cost of capital
(b)	If the returns exceed the weighted average cost of capital
(c)	The percentage returns are less than the weighted average cost of capital of the firm.

(0)

Write short notes on any four of the following:

4x4

(a)

Features of a future contract;

(0)

(b)

Reasons for mergers and acquisitions;

(0)

(c)

Assumptions of Modigliani and Millar regarding dividend policy;

(0)

(d)

Market approach of valuation;

(0)

(e)

Models of maximizing shareholder value;

(0)

(f)

Expansion and Diversification.

(0)

(a)

State the main reasons for embarking on diversification as a strategy for a firm.

(0)

(b)

A firm had paid dividend at Rs. 2 per share last year. The estimated growth of the dividends from the company is estimated to be 5% p.a. Determine the estimated market price of the equity share if the estimated growth rate of dividend(i) rises to 8% and (ii) fall to 3%. Also, find out the present market price of the share given that the required rate of return of the equity investors is 15.5%.

(0)

Mona Ltd. wants to acquire Lisa Ltd. and has offered a swap ratio of 1 : 2 (0.5 shares of Mona Ltd. for every one share of Lisa Ltd.). Following information is provided:

	Mona Ltd.	Lisa Ltd.
Profit after tax	Rs. 18,00,000	Rs. 3,60,000
Equity Shares Outstanding (Nos.)	6,00,000	1,80,000
EPS	Rs. 3	Rs. 2
P/E ratio	10 times	7 times
Market price per share	Rs. 30	Rs. 14

Required:

(i)	The number of equity shares to be issued by Mona Ltd. for acquisition of Lisa Ltd.
(ii)	What is the EPS of Mona Ltd. after the acquisition?
(iii)	What is the expected market price per share of Mona Ltd. after the acquisition, assuming its P/E multiple remains unchanged?
(iv)	Determine the market value of the merged firm.

(0)

Dr. Mona Chatterjee had just completed her post qualification internship in a required medical hospital. She wants to buy the running practice of Dr. Bannerjee, a renowned child specialist located at Lansdowne in Kolkata. The revenues and the costs of this practice in 2007–2008 were as under:

	Rs.
Revenue Employee expenses Annual rent for the facilities Rental of medical equipments Medical insurance The tax rate on the income, including local taxes and subscription The cost of capital for this practice	10,00,000 3,00,000 1,00,000 80,000 90,000 35% 10%

The above revenue and all the associated expenses are estimated to grow at 4% p.a. for the next 10 years if Dr. Benerjee continues to run the practice.

Dr. Mona Chatterjee anticipates that upon the changeover there will be drop in revenue by 25% in the first year of her practice. The growth rate in revenue and expenses will remain at 4% p.a. thereafter i.e., for year 2 onwards.
Dr. Mona Chatterjee wants your advice for the price she should offer to Dr. C.Bannerjee to purchase the latter’s practice at Lansdowne, Kolkata.

(0)

(a)

Explain various methods of payments in mergers and acquisitions with the help of suitable examples.

(0)

(b)

What are the different levels of market efficiency?

(0)

(a)

Explain the differences between financial and operating synergy.

(0)

(b)

Two firms Alpha and Beta operate independently and have the following financial statements:

(Amount in Rs.)
Particulars	Alpha	Beta
Sales Cost of goods sold EBIT Expected growth rate Cost of capital	96,000 72,000 24,000 4% 10%	48,000 28,800 19,200 6% 12%

Both firms are in a steady state and working capital requirements for both firms are nil. Both firms face a tax rate of 40%. Combining the two firms will create economics of scale in the form of shared distribution and advertising costs, which will reduce the cost of goods sold from 70% to 65% of sales. The firm has no debt capital.
Estimate:
(i) The value of the two firms before the marger, and
(ii) The value of the combined firm with synergy effect.

(0)

(a)

A company has been making a machine to order for a customer but the customer has, however, since gone into liquidation and there are no prospects that any money will be obtained from the winding–up of his company.
Cost incurred to–date in manufacturing the machine are Rs. 50,000 and progress payments of Rs. 15,000 have been received from the customer prior to the liquidation.
The sales department has found another company willing to buy the machine for Rs. 34,000 once it is completed.
To complete the work, the following costs have to be incurred—

(i)	aterial: These have been bought at a cost of Rs. 6,000. They have no other use and if the machine is not finished, they would be sold as scrap for Rs. 2,000.
(ii)	Further labour costs would be Rs. 8,000. Labour is in short supply and if the machine is not finished, the work force would be switched over to another job which earns Rs. 30,000 in revenue and incurs direct costs (not including direct labour) of Rs. 12,000 and absorbed (fixed) overheads of Rs. 8,000.
(iii)	Consultancy fees Rs. 4,000. If the work is not completed, the consultant’s contract would be cancelled at a cost of Rs. 1,500.
(iv)	General Overheads, of Rs. 8,000 would be added to the cost of the additional work.

Required:
Should the new customer’s offer be accepted?
Prepare a statement showing the economics of the proposition.

(0)

(b)

True value Ltd. is planning to raise funds through issue of common stock for the first time. However, the management of the company is not sure about the value of the company and therefore it attempts to study similar companies in the same line which are comparable to True value in most of the aspects.

From the following information, you are required to compute the value of True value Ltd. using the comparable firms approach.

(Rs. in crore)
Company	True Value Ltd.	Jewel Value Ltd.	Real Value Ltd.	Unique Value Ltd.
Sales Profit after tax Book value Market value	250 40 100	190 30 96 230	210 44 110 290	270 50 128 440

The valuer feels that 50% weightage should be given to earnings in the valuation process; sales and book value may be given equal weightages.

(0)

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