CWA ICWA Final Stage III : Advanced Financial Management and International Finance - December 2005

CWA ICWA - Final Stage III • Advanced Financial Management and International Finance • December 2005

This Paper has 31 answerable questions with 0 answered.

F—14(AFM) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks
Part A is compulsory and answer another five from part B. .
Please answer all bits of a question at one place.
PART A Attempt all questions.
Marks

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

Part A is compulsory and answer another five from part B. .

Please answer all bits of a question at one place.

PART A
Attempt all questions.

Marks

(a)

In the cases below, one of the answer is correct. Choose the correct answer and give your workings/reasons briefly.

2x7=14

(i)

Syntex Ltd is to pay dividend of Rs. 2.15 at he end of the year and is expected to grow at 11.20 per cent per year forever. If the required rate of return on the company stock is 15.20 per cent per annum. its intrinsic value will be

(A)

Rs. 59.77

(B)

Rs. 53.75

(C)

Rs. 52.50

(D)

none of (A), (B), (C).

(0)

(ii)

A company is planning to issue a discount bond with a par value of Rs. 1000, implicit interest rate of 11.5% and a redemption period of 5 years. The company also intends to offer an early bird incentive of 1.5%. The issue price (rounded up to nearest rupee) will be [Given:PVIF, (11.5%, 5 years) = 0.5803]

(A)

Rs. 580

(B)

Rs. 572

(C)

Rs. 543

(D)

Rs. 490

(0)

(iii)

MS Ltd has a debt–equity mix of 30/70. If MS Ltd’s debt Beta is 0.30 and Beta for its activity (or project) is 1.21, what is the Beta for its equity?

(A)

Rs. 1.65

(B)

Rs. 1.60

(C)

Rs. 1.52

(D)

Rs. none of (A), (B), (C).

(0)

(iv)

Consider the following for Strong Ltd:

Return on Government Securities
Share Beta
Market Return

:
:
:

12%
1.50
16%

Based on CAPM, cost of equity capital is equal to

(A)

Rs. 28%

(B)

Rs. 22%

(C)

Rs. 18%

(D)

Rs. 12%

(0)

(v)

Barclay Bank, London has credited Nostro A/c ABN–Amro, Mumbai with £ 250000 to fund Barclays Bank's Vostro A/c with ABN–Amro, Mumbai. With what Rupee equivalent ABN–Amro Mumbai will credit Barclays Bank's Vostro A/c when inter bank rate is £1 = Rs. 80.9570 – 90?

(A)

Rs. 202 39250

(B)

Rs. 202 39500

(C)

Rs. 202 39750

(D)

none of (A), (B), (C).

(0)

(vi)

In June 2005, a six month Call on Ritz Ltd's stock with an exercise price of Rs. 25 sold for Rs. 5. The stock price was Rs. 20. The risk–free interest rate was 5% per annum. How much would you be willing to pay for a put on Ritz Ltd's stock with the same maturity and exercise price?
[Given: PVIF (5%, ½ year) = 0.9756]

(A)

Rs. 6.39

(B)

Rs. 9.39

(C)

Rs. 12.39

(D)

none of (A), (B), (C).

(0)

(vii)

The spot exchange rate is $ 0.02090/Re. and the six month Forward exchange rate is $ 0.02105/Re. If the normal rate of India 6–month T–Bills is 5.50% p.a., what would be the normal rate of US 6–month T–Bills?

(A)

8.00%

(B)

7.00%

(C)

6.50%

(D)

4.60%.

(0)

(b)

From the following, choose the most appropriate answer (only indicate A, B, C, D as you think correct):

1x6=6

(i)

Euro–dollar deposit means;

(A)	dollar deposit outside USA
(B)	dollar deposit beyond the control of monetary authority
(C)	dollar deposit in the US and outside US
(D)	none of (A), (B), (C).

(0)

(ii)

A shareholder has received bonus share in the proportion of 1:1. What is his/her stake holding in the company? (indicate the most appropriate alternative)

(A)	Stake holding remains the same
(B)	Stake holding goes up with more shares available for trading
(C)	Stake holding goes up
(D)	Stake holding remains the same with more shares available for trading.

(0)

(iii)

Buying and selling Call or put option with different strike prices and different expiration dates are called:

(A)

Butterfly spread

(B)

Diagonal spread

(C)

Vertical spread

(D)

Short heldge

(0)

(iv)

The mechanism of spot and forward exchange ratio is determined by

(A)

Arbitrageurs

(B)

Hedgers

(C)

Speculation

(D)

All of the above.

(0)

(v)

_____ is composed of several large banks that accept deposits and provided loans in various currencies.
(Fill in the gap from below)

(A)	Foreign Exchange Market	(B)	Euro–currency market
(C)	Euro credit market	(D)	Euro bond market.

(0)

(vi)

Variable rate investors are the typical users of

(A)	Interest rate Caps	(B)	Interest rate Collars
(C)	Both (A) and (B)	(D)	Interest rate floors.

(0)

PART B Answer any five questions.

PART B
Answer any five questions.

(a)

Distinguish between (any three):

(4x3)+4=16

(i)

Foreign bond and Euro–bond

(0)

(ii)

Capital Market and Money Market

(0)

(iii)

Futures Contract and Options Contract

(0)

(iv)

Book building and Underwriting.

(0)

(b)

Briefly explain forfeiting as means of financing export receivable.

(0)

EXCEL INDUSTRIES LTD designs and manufactures toys, Past experience indicates that the product life of a toy is 3 years. Promotional advertising produces an increase in Sales in the early years, but there is a substantial Sales decline in the final year of a toy's life.

Consumer demand for new toys placed on the market tends to fall into three classes. About 30 percent of the new toys sell well above expectations. 60 per cent sell as anticipated, and 10 per cent have poor Consumer acceptance. A new toy has been developed. The following sales projections were made by carefully evaluating the consumer demand:

Consumer demand for a new toy	Probability of occurrence	Estimated Sales in year (Rs. in lakh)
		1	2	3
Above average Average Below average	0.30 0.60 0.10	12 7 2	25 17 9	6 4 1.5

Variable costs are estimated at 30 per cent of the selling price. Special machinery must be purchased at a cost of Rs. 860000 which will be installed in an unused portion of the factory. The company has been trying unsuccessfully for several years to rent out the vacant portion at Rs. 50000 per year. Fixed expenses (excluding depreciation) are estimated at Rs. 50000 per year. The new machinery will be depreciated by the written down value method @ 25 percent with an estimated value of Rs. 110000 at the end of the third year. Assume this is the only asset in the block. Advertising and promotional expenses will be incurred uniformly, and will total Rs. 100000 in the first year, Rs. 150000 in the second year, and Rs. 50000 in the third year. The company is subject to a corporate tax rate of 35 per cent. Its cost of capital is 10 per cent. It is assumed that no depreciation will be charged in the Terminal year.
Requirements:

(i)	Prepare a Schedule computing the probable Sales of this new toy in each of the three years. Also determine NPV of the proposal.
(ii)	Assuming that Cash Flows occur uniformly throughout each year, determine Net Present Value (NPV) of the proposal.
(iii)	Give your recommendation in both the situations. Note: P.V. of Re. 1 at a 10% discount rate are as follows:

Year	Re. 1 received at the end of year	Re. 1 received uniformly throughout the year
1 2 3	0.909 0.826 0.751	0.952 0.864 0.783

(0)

(a)

The marketing manager of a company has estimated the following regression equation:

C_t = 0.10 S_t−0 + 0.62 S_t−1 + 0.27 S_t−2

where C_t = cash collection in month t

S_t = sales in month t

(i)	What is the sales–weighted DSO?
(ii)	At present, the company makes a bad debt provision of 0.5 per cent. It is adequate? What should be the provision for bad debt?

4+12=16

(0)

(b)

The ABC company currently sells on terms ‘net 45’. The company has sales of Rs. 3.75 million a year, with 80 per cent being the credit sales. At present, the average collection period is 60 days. The company is now considering offering terms ‘2/10, net 45’. It is expected that the new credit terms will increase current credit sales by 1/3rd. The company also expects that 60 per cent of the credit sales will be on discount and average collection period will be reduced to 30 days. The average selling price of the company's product is Rs. 100 per unit, and variable cost per unit works out to be Rs. 85. The company is subject to a tax rate of 40 per cent, and its before–tax rate of borrowing for working capital is 18 percent. Should the company change its credit terms to ‘2/10, net 45’? Support your answer by calculating the expected change in net profit. (Assume 360 days in a year)

(0)

(a)

The Balance Sheet of EVERGREEN LTD as on March 31, 2005 is as follows:

(Rs. in lakh)
Source of Funds:
Shareholders'Funds Share Capital	200
Reserves and Surplus	140	340
Loan Funds:
Long–term Loans Total		360 700
Application of Funds:
Fixed Assets (Net Block)		500
Current Assets, Loans & Advances:
Inventories Receivables Cash and Bank	300 240 60 600
Less: Current Liabilities and Provisions:
Short–term Loans Payables Provisions	200 120 80 400
Net Current Assets		200
Total		700

Sales for the year 2004–05 were Rs. 600 lakh. For the year ending on March 31, 2006, they are expected to increase by 20 per cent. The net profit margin after taxes and dividend payout are expected to be 4 and 50 per cent respectively.
You are required to:

(i)

Estimate the "External Funds Requirement" (EFR) for the year 2005–06.

(ii)

Determine the mode of raising EFR given the following parameters:

(a)	Current ratio should be 1.33;
(b)	Ratio of Fixed assets to Long–term loans should be 1.50;
(c)	Long–term Debt to Equity ratio should not exceed 1.06

(iii)

Determine the order of Preference of EFR amongst Short–term loans, Long–term loans and Equities.
Note: Assuming Assets will increase pari passu with sales.

11+5=16

(0)

(b)

SUNSHINE LTD expects its Cash flows to behave in a random manner, as assumed by the Miller and Orr model. The company wants you to establish (i) the 'Return Point' and the 'Upper control limit'.
It provides the following information as requested by you:

—	The annual yield on marketable securities is 12 per cent.
—	The fixed cost of effecting a marketable securities transaction is Rs. 1600.
—	The standard deviation of the change in daily Cash balance is Rs. 5000.
—	The management of Sunshine Ltd. would like to maintain a minimum Cash balance of Rs. 50000.

(0)

(a)

Consider the following:

Spot rate = $ 0.75/DM

Forward rate (one year) = $ 0.77/DM

Interest rate (DM) = 7% per year

Interest rate ($) = 9% per year.

(i)	Assuming no transaction cost or taxes exist, do covered arbitrage profits exist in the above situation? Explain.
(ii)	Suppose now that transaction costs in the foreign exchange market equal 0.25% per transaction. Do unexploited covered arbitrage profit opportunities still exist?

8+8=16

(0)

(b)

Company A has outstanding debt on which it currently pays fixed rate of interest at 9.5%. The company intends or refinance the debt with a floating rate of interest. The cost floating rate it can obtain is LIBOR + 2%. However, it does not want to pay more than LIBOR. Another company B is looking for a loan at a fixed rate of interest to finance its exports. The best rate it can obtain is 13.5%, but it cannot afford to pay more than 12%. However, one bank has agreed to offer finance at a floating rate of LIBOR + 2%.

City Bank is in the process of arranging an interest rate swap between these two companies.
(i)	With a schematic diagram, show how the swap deal can be structured.
(ii)	What are the interest savings by each company?
(iii)	How much would Citi Bank received?

(0)

(a)

(i)

Explain the concept, structure and process of assets based securitisation.

(4+3+3)+6=16

(0)

(ii)

Distinguish between ‘pay–through’ and ‘pass–through’ certificates.

(0)

(iii)

What are the benefits of secutisation to a housing finance company?

(0)

(b)

A company is considering to set up a cogeneration power plant. Cost of generation is estimated as given below:

Year	1	2	3	4	5	6	7	8	9
Rs. per Kwth	3.87	3.99	4.11	4.23	4.36	4.49	4.62	4.76	4.90

What is the levelized cost of generation over the 9 years? Assume cost of capital of 11 per cent for your calculation.
Note: Extracted from the table:

(i)	The present value factors at 11% discount rate for 0 to 9 years are: 1.0000, 0.9009, 0.8116, 0.7312, 0.6587, 0.5934, 0.5346, 0.4817, 0.4339 and 0.3909.
(ii)	The present value factor of an annunity of Re. 1 for 9 years at 11% = 5.5370.

(0)

(a)

What are Forwards? How they can be used to hedge?

4+12=16

(0)

(b)

ZENITH LTD (ZL) places an order to buy machinery with an American company. As per the agreement Zenith Ltd will be paying $ 200000 after 180 days. The company (ZL) considers to use (1) a Forward hedge (2) a Money market hedge, (3) an option hedge or (4) no hedge.

The Consultant of Zenith Ltd. collects and develops the following data/information as desired by the company, which can be used to assess the alternative approaches for hedging:

(i)

Spot rate of dollar as of to-day is Rs. 47/$.

(ii)

180 day forward rate of dollar as of to-day is Rs. 47.50/$.

(iii)

Interest rates are as follows.

	India	US
180 day deposit rate (per annum) 180 day borrowing rate (per annum) (Assume 360 days in a year)	7.5% 8.0%	3% 4%

(iv)

Future Sport rate in 180 days as estimated by the Consultant is Rs. 47.75/$.

(v)

A call option on the dollar, which expires in 180 days has an exercise price of 47/$ and premium Re. 0.52/$.

(vi)

A put option on the dollar, which expires in 180 days has an exercise price of Rs. 47.50 and premium Re. 0.40/$.

Required:
Carry out a comparative analysis of various outcomes, (rupee cost of import)/alternatives and decide which of the alternatives is the most attractive to Zenith Ltd.

(0)

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