CS Final :: Financial Tresurs & Forex Management : December 2003

1. Answer FIVE questions including Question No. 1 which is compulsory. All working notes should be shown
    distinctly.

"Liquidity and profitability are competing goals for the finance manager." Comment.

"Depreciation is a part of cost of production and is at the same time an important source of internal finance." Discuss this statement.

"Efficient cash management will aim at maximizing the availability of cash inflows by decentralising collections and decelerating cash outflows by centralizing disbursements." Discuss.

Honey and Co. Ltd. is a Canadian Corporation with head quarters in Quebec. It has its operations in FMCG products, target markets in North America and Europe. Manufacturing operations are being carried out in Europe and Canada. The company intends to expand its operations and is willing to build a new plant in Belgium. For this purpose, it needs financing for one year. Its subsidiary can borrow locally, i.e., in Belgian or use surplus cash of other subsidiaries. However, the Belgium Government imposes a 10% withholding tax on intra-corporate loans. This would add about 1.5% to the cost of such loans. The finance subsidiary of Honey and Co. Ltd. in Nassan has recently generated a surplus US Dollar 20 million, which may be used for the project. The company is willing to avoid payment of withholding tax. At the same time, it is anxious not to create a foreign exchange exposure for any of its subsidiaries. One year interest rates available in the market are as under :

Belgian Francs / EURO
ExternalandDomestic	14%
USDollar	15%
CanadianDollar	9%
SFr	3%

In case of a bank loan, a 1.5% spread is charged above these rates. On the basis of the above case, answer the following questions with justifications:
 (i) What are the available financing alternatives ?
(ii) Among the available alternatives, which is the best alternative ?

334

An established company is contemplating to issue 10% debentures to raise funds for financing its ambitious expansion project. The funds Rs.1,00,000 to be raised for the purpose will be paid off in 5 equal yearly instalments payable at the year end along with interest. The processing expenses are estimated to be 10% of the face value of the debentures.
You are required to find out such a rate of return on investment as is sufficient to pay off the interest and principal due for payment every year. Ignore taxes.

Venkatesh Ltd. is always discarding old lines and introducing new lines of products and is considering at present three alternative promotional plans for ushering in new products. Various combinations of prices, development expenditure and promotional outlays are involved in these plans. High, medium and low forecast of revenues under each plan have been formulated and their respective probabilities of occurrence have been estimated. Their budgeted revenues and probabilities along with other relevant data are summarised as under:

		(Rupees in Lakhs)
Particulars	Plan-I	Plan-II	Plan-III
Budgeted revenue with probability :
High	30 (0.3)	24 (0.2)	50 (0.2)
Medium	20 (0.3)	20 (0.7)	25 (0.5)
Low	5 (0.4)	15 (0.1)	0 (0.3)
Variable cost as percentage of revenue	60%	75%	70%
Initial investment	25	20	24
Life in years	8	8	8

The company's cost of capital is 12% and the income-tax rate is 40%. Investment in promotional programmes will be amortized by the straight line method. The company will have net taxable income each year, regardless of the success or failure of the new products.

(i)	Substantiating with figures, make a detailed analysis and find out which of the promotional plans is expected to be the most profitable ?

334

The share capital of a company is Rs.10,00,000 with shares of face value of Rs.10. The company has debt capital of Rs.6,00,000 at 10% rate of interest. The sales of the firm are 3,00,000 units per annum at a selling price of Rs.5 per unit and the variable cost is Rs.3 per unit. The fixed cost amounts to Rs.2,00,000. The company pays tax at 35%. If the sales increase by 10%, calculate ?

(i)	Percentage increase in EPS;
(ii)	Degree of operating leverage at the two levels; and
(iii)	Degree of financial leverage at the two levels.

High Vision Ltd. has current sales of Rs.20,00,000. The company is planning to introduce a cash discount policy of 2/10, net 30. As a result, the company expects the average collection period to go down by 10 days and 80% of the sales opt for the cash discount facility. If the company's required return on investment in receivables is 20%, should it introduce the new discount policy ?

What type of risk exposures are faced by a firm which is dealing with foreign exchange ?

Calculate the arbitrage gains possible on Rs.10,00,000 from the middle rates given below. Assume there are no transaction costs ?
Rs.76.200 = £ 1 in London
Rs.46.600 = $ 1 in Delhi
$ 1.5820 = £ 1 in New York.

What is 'treasury management' ? Explain the various tools of treasury management. How is it different from financial management ?

334

An investor is seeking the price to pay for a security, whose standard deviation is 4%. The correlation coefficient for the security with the market is 0.9 and the market standard deviation is 3.2%. The return from government securities is 6.2% and from the market portfolio is 10.8%. The investor knows that, by calculating the required return, he can then determine the price to pay for the security. What is the required return on the security ?

What are the methods of 'venture financing' ? Also indicate in brief the elements that are needed for the success of venture capital.

"Bonus shares represent simply a division of corporate pie into a large number of pieces." Discuss.

Discuss the salient features of risk containment measures developed by National Securities Clearing Corporation Ltd. (NSCCL) for the futures and option segment.

According to Dow Jones Theory, "identification of 'turn' is made on the basis of daily movement of prices". State, with reasons, whether this statement is correct.