CWA/ICWA Final :: Management Accounting - Financial Strategy and Reporting : December 2004

F-18(MFS)
Revised Syllabus

Time Allowed : 3 Hours Full Marks : 100
Answer Question No. 1 which is compulsory and any five from the rest.
Marks
1. (a) In the cases below, one of the answers is correct. Choose the correct answer and give your workings/reasons briefly: 5x2
(i)The bank balance of a business firm has increased during the last financial year by Rs. 1,50,000. During the same period it issued shares of Rs.2,00,000 and redeemed debentures of Rs.1,50,000. it purchased fixed assets for Rs.40,000 and charged depreciation of Rs.200,00. The working capital of the firm, other than bank balance, increased by Rs.1,15,000 during the period.
The profit of the firm for the year was:
(A)Rs.2,75,000(B)Rs. 2,65,000(C)Rs.2,35,000(D)Rs.2,55,000
(ii)BKC Ltd. Has profits before interest and taxed of Rs.3,00,000. the applicable tax rate is 40%. Its required rate of return on equity in the absence of borrowings is 18%. In the absence of personal taxes, the value of the company in an MM world with no leverage is:
(A)Rs.10,00,000(B)Rs.11,60,000(C)Rs.12,60,000(D)Rs. 14,00,000
(iii) KPS Limited share price at present is Rs.120. after 6 months the price will be either Rs.150 with a probability of 0.8 or Rs.110 with a probability of 0.2. a European call option exists with an exercise price of Rs.130. the expected value of the call option price at maturity date will be:
(A)Rs.16(B)Rs.20(C)Rs.10(D)Zero
(iv)SB Ltd. Has in issue 50,000 equity shares of Rs.10 each. The shares are currently quoted at Rs.50 each. (ex-dividend). Current year’s proposed dividend is Rs. 5 per share. If the current dividend policy is maintained, the share holders wealth will be:
(A)Rs.25,00,000(B)Rs.23,50,000(C)Rs.27,50,000(D)None of these
(v)BB Ltd has sales of Rs.7,74,000 with after – tax –profit of Rs.93,000. if the company’s asset turnover is 2.55, its return on assets (ROA) is:
(A)11.83%(B)30.64%(C)26.54%(D)21.69%
(b) From the following choose the most appropriate answer: (only indicate A, B,C, D as you think correct.) 10x1
(i)An investor who is willing to pa to take risk is:
A.Risk –taker investorB.Risk-averter investorC.Risk-neutral investorD.None of these
(ii)A depreciating asset is said to have impaired:
A.When depreciated book value exceeds the recoverable amount.
B.When original cost is less than the recoverable amount.
C.When current replacement cost is lessthan the recoverable amount.
D.When depreciated book value is less than the recoverable amount.
(iii)Security characteristic line defines:
A.The relationship between the security return and the market portfolio return.
B.The relationship between the security return and the market borrowing rate.
C.The relationship between the security return and the risk-free marker lending rate.
D.The relationship between the security return and the risk-free borrowing of lending rate.
(iv)Under AS 26, brand generating costs:
A.Can be capitalized if they can be measured realibly.
B.Can be capitalized if market value exceeds the costs
C.Cannot be capitalized
D.Can be capitalized if present value of future benefits exceeds the costs.
(v)Markowitz portfolio theory is most concerned with :
A.The elimination of systematic risk.
B.The effect of diversification on portfolio risk.
C.The identification of systematic risk.
D.Active portfolio management to enhance return.
(vi)The accouning system that employs an artificial unit of measurement based on arithmetic relationship is:
A.The replacement cost system
B.The net present value system
C.The historical cost system
D.The current purchasing power system.
(vii)The relationship between terminal value (Tn) and present value (Po) is given by the equation:
A.(Tn) = (Po) (1 + r )-n
B.(Tn) = (Po) (1 + r )n
C.(Tn) = (Po) /(1 + r )n
D.(Po) = (Tn) (1 + r )n .
(viii)According to the APT model, arbitrage opportunity will be eliminated as soon as it is identified because:
A.There is a relationship between security returns and a limited number of factors.
B.The factors are known by all investors.
C.The relative importance of all factors have been calculated.
D.The most important factors is market return.
(ix)Which of the following firms would have the least liquidity?
A.Current ratio = 2.2 and Quick ratio = 1.6
B.Current ratio = 2.2 and Quick ratio = 1.1
C.Current ratio = 1.2 and Quick ratio = 0.6
D.Current ratio = 1.2 and Quick ratio = 0.8.
(x)In perfect capital markets:
A.Leasing and borrowing to buy will always be equivalent.
B.Borrowing to buy will always be preferable to leasing
C.Leasing will always be preferable to borrowing to buy.
D.None of the above.
2. (a) What is capital rationing? 4
Please turn over

( 2 )

F-18(MFS)
Revised syllabus
Marks
(b) KPR is evaluating six capital investments projects. The company has allocated Rs.20,00,000 for capital budgeting purposes. The relevant particulars of the projects, which are independent of one another, are as follows:
ProjectInvestment needed
Rs.
Profitability index
P110,00,0001.21
P23,00,0000.94
P37,00,0001.20
P49,00,0001.18
P54,00,0001.20
P68,00,0001.05
12
If there is strict capital rationing. Which of the projects should be undertaken?
3. Star Transport Company decided on 1April, 2003 to lease a bus from the manufacturer. The fair value on that date was Rs.7,73,125. the economic life of the bus is three years. Its expected residual value is zero. The asset is to be depreciated on a straight line basis. According to lease terms, annual lease rentals of Rs.3,00,000 are payable at the end of each year. The payments do include maintenance and insurance charges, which are covered by a separate contract. The interest rate implicit in the annual lease payment is 85. The company’s accounts are closed on 31st March.
Required:
(i)Calculate interest expense and year-end liability under finance lease method.
(ii)Show the profit and loss account impact of the lease under finance lease method.
(iii)Calculate year –end asset account balance under finance lease method.
(iv)If the lease were accounted for as an operating lease, what would be its financial statement impact.
4x4
4. (a) Calculate profits and losses from the following transactions:
(i)Mr. X writes a call option to purchase share at an exercise price of Rs.60 for a premium of Rs.12 per share. The share price rises to Rs.62 by e time the option expires.
(ii)Mr. Y buys a put option at an exercise price of Rs.80 for a premium of Rs.8.50 per share. The share price falls to Rs.60 by the time the option expires.
(iii)Mr. Z writes a put at an exercise price of Rs.80 for a premium ofRs.11 per share. The price of the share rises to Rs.96 by the time the option expires.
(iv)Mr. XY writes a put option with an exercise price of Rs.70 for premium of Rs.8 per share. The price falls to Rs. 48 by the time the option expires.
6
(b) Describe in brief, the simple and complex option trading strategies. 6
(c) The intrinsic value of an option is a function of several variables. What are those variables? 4
5. The summarized balance sheet of Punam Ltd. as at 31st March,2004 was as follows: 16
Rs.Rs.
Equity shares of Rs.10 each
Reserves
6% Debentures
Current Liabilities
5,00,000
15,00,000
9,00,000
7,00,000
Fixed assets at cost
Less deprecation
Current assets
24,00,000

12,00,000
36,00,00036,00,000
Other relevant information:
(i)The current equity share price is Rs.50.
(ii)The debenture which are redeemable at par in ten year’s time, have a current market price of Rs.80 each (face value Rs.100 each)
(iii)The company pay tax at the rate fo 40%.
(iv)Debenture interest is payable at the end of the year.
(v)The company’s cost of equity I s15%.

There is a proposal to alter the capital structure of the company. The board of directors is considering whether to repurchase equity shares with proceeds from issue of new debentures. It is proposed to issue Rs.5,00,000 new debentures at pat and to use funds tp repurchase equally shares. The board believes that the market price of the existing equity shares or debentures will not change as a result of the proposed issue of new debentures.

It may be assumed that the repurchase of equity shares is permissible under the present company legislation.

You are required to evaluate the likely effect on the weighted average cost of capital of the company if the proposed scheme of alteration of capital structure is given effect to. How will your evaluation change if the company does not expect to pay taxes in the foreseeable future?
Do you consider it reasonable on the part of the board to believe that the market price of the company’s existing equity shares and debentures will not change even if the capital structure is altered?
Give reasons for your answer
Note: Extract from the PV table

PV factor of an annuity of Re. 1 for 10 years:
nterest rate
PV factor
6%
7.36
8%
6.71
10%
6.15
PV factor for Re. 1 to be received or paid at the end of year 10:
nterest rate
PV factor
6%
0.56
8%
0.46
10%
0.39
Please turn over

( 3 )

F-18(MFS)
Revised syllabus
Marks
6. The summarized balance sheet of a company as at 31st March, 2004 is provided below: 16
Rs/lakhRs/lakhRs/lakh
Equity shares (Rs.10)
Share premium
General reserves
Long-term debt
Proposed dividend
Creditors
Goods
Expenses
18.00
20.00
23.00
12.00
3.60

6.00
1.40
84.00
Fixed assets
Less accumulated depreciation
Current assets
Inventories
Debtors
Cash and bank
Other current assets
75.00
25.00

50.00

10.00
18.00
5.00
1.00
84.0084.00

Using the following information prepare the projected profit and loss account, balance sheet and the statement of cash flows for 2004 -05.

Sales (all credit) growth
Improvement in G.P margin
Selling general and administrative expenses
Depreciation expense/prior-year fixed asset (gross)
Interest expense/ prior- year long term debt
Debtors (average) turnover
Capital expenditure (acquisition of new buildings and equipment)
Year-end accrued expenses
Turnover of average inventory
Year-end other current expenses
Turnover average creditors
Proposed dividend per share
Income –tax expense/pre-tax profit
Year-end cash and bank balance



Additions to long-term debt
5%
2%
30% (of sales)
5%
9%
4 times
8.5% of turnover
Rs.0.75 lakh
4 times
Rs.1 lakh
1.20 month
Rs.2.5
35%
Equal to a level measured
by the ratio of cash and
bank balance to sales revenue
prevailing in the prior year.
Equal to the amount needed
to meet the desired year-end
cash and bank balance.
Sales revenue in the prior year amounted to Rs.80,00,000
The company’s gross margin was 50%
Show all necessary workings.
7. (a) What is monetary working capital adjustment (MWCA) under current cost accounting (CCA) and how is the adjustment made? 8
(b) The current assets and liabilities of a company on 1st April 2003 and 31st March 2004 were as follows: 8
1st April 200331st March 2004
Current assets
Stock
Debtors
Pre – payments
Cash

3,00,000
3,20,000
40,000
60,000

3,60,000
3,50,000
50,000
80,000
Total7,20,0008,40,000
Current liabilities
Trade creditors
Bills payable
Dividend payable

2,00,000
1,20,000
1,60,000

2,30,000
1,00,000
1,90,000
Total4,80,0005,20,000
Working capital 2,40,0003,20,000
Using the above information, calculate the MWCA at 31st march,2004.
Assume that the appropriate index numbers are:
1st April 2003, 120; average for the year, 125; 31st March 2004, 140
The company does not require cash floats to support its day – to –day operations.
Give journal entry necessary to record the MWCA.
8. Write short notes on the following:
(a)Shareholder value
(b)The effect of depreciation on a company’s cash flows
(c)Features of intangible assets
(d)The balance sheet view of provisions
4x4=16

__________

 

© Krishbhavara ♣