CWA ICWA Final Stage III : Advanced Financial Management and International Finance - June 2009

CWA ICWA - Final Stage III • Advanced Financial Management and International Finance • June 2009

This Paper has 32 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.
Answer Question No. 1 from Part A which is compulsory and another five questions from the rest.
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 from Part A which is compulsory and
another five questions from the rest.

Working Notes should form part of the answer.

Marks

(a)

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

2x5

(i)

A company has paid Rs. 3 as current dividend, the growth rate of the dividend paid by the company is 8%. If the cost of equity is 12%, the price of the company’s share in nearest Rs. three year hence will be

(A)	Rs. 100
(B)	Rs.118
(C)	Rs.110
(D)	Rs.102

(0)

(ii)

Based on the following information, what will be the amount of Inventory?
Current ratio = 2.6:1
Liquid ratio = 1.5:1
Current Liabilities = Rs.40,000

(A)	Rs.55,000
(B)	Rs.44,000
(C)	Rs.22,000
(D)	Rs.16,400

(0)

(iii)

The following information are provided for ABC Ltd:

	Old Level	New Level
Net Profit (Rs.) Number of Shares Sales (Units)	1,70,000 80,000 2,00,000	2,20,000 80,000 2,50,000

The percentage chage of ABC Ltd. for the two levels will be

(A)	29.4% increase
(B)	29.4% decrease
(C)	0.77% increase
(D)	27.7% decrease

(0)

(iv)

Nile Ltd. issues 10% debenture of face value Rs.100 each and realised Rs.90per debenture. The debentures are redeemable after 12 years at a premium of 8%. Company is paying tax at 45%. The cost of debt will be

(A)	7.07%
(B)	4.55%
(C)	6.14%
(D)	5.67%

(0)

(v)

What will be the effect on NPV of an one year project if fixed costs are increased from Rs.200 to Rs.300, when the firm is profit making, pays tax @ 35% and has 12% cost of capital?

(A)	NPV decrease by Rs.100
(B)	NPV decrease by Rs.80.29
(C)	NPV decrease by Rs.65.
(D)	NPV decrease by Rs.58.04

(0)

(b)

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

1x5=5

(i)

Which of the following conditions indicate that short term funds have been put into long term use?

(A)	Current ratio is less than 1.00
(B)	Quick ratio is less than 1.00
(C)	Total debt to equity ratio is more than 1.00
(D)	Net working capital is positive

(0)

(ii)

If the earning per share is Rs.15, the retention ratio is 25%, the return on investment is 8% and cost of equity capital being 18%, the price of share as per Gordon’s dividend capitalization model is

(A)	Rs.70.31
(B)	Rs.68.00
(C)	Rs.70.00
(D)	Rs.89.00

(0)

(iii)

The dividend payout ratio is equal to

(A)	% of dividend per share
(B)	Dividend yield + capital gains yield
(C)	DPS/EPS
(D)	DPS/market price

(0)

(iv)

Which of the following methods provides correct ranking, if the projects are mutually exclusive and the firm is not subject to capital rationing?

(A)	Profitability index
(B)	IRR
(C)	Payback period
(D)	NPV

(0)

(v)

A call option goes out of money if

(A)	The market price is less than the exercise price
(B)	The market price is more than the exercise price
(C)	The market price is at par with the exercise price
(D)	Either (B) or (C) above

(0)

(c)

State whether the following statements are True or False

1x5=5

(i)

Cost of borrowing is higher than the cost of internally generated funds.

(0)

(ii)

A company is allowed to distribute all its profit to shareholders by way of dividend.

(0)

(iii)

Zero beta stock is equivalent to risk free asset.

(0)

(iv)

A firm with operating leverage value greater than one experiences more than proportionate increase in EBIT for every one percent rise in sales.

(0)

(v)

GDR route is used only to raise new capital from international market.

(0)

(a)

The directors of wholesalers Ltd. have forecast a steady rise in turnover for the coming year and have asked you, to set out the implications of this on the company’s cash position.

The turnover for the current year to 31st March 2009, was Rs.12 crore, a steady Rs.1 crore per month. It is felt that as a result of an advertising compaign in December 2008–March 2009, this would rise to Rs.1.3 crore per month for the first six months of 2009–2010 and to Rs.1.5 crore per month for the second six months and thereafter.

Wholesalers Ltd. achieve a gross profit on sales of 25% and take two months credit from suppliers, 40% of customers pay in the month of purchase, 40% pay in the following month and 20% pay one month later. The company holds stocks for forecast sales in April and plans to maintain this one month stock level. Variable overheads are usually 10% of sales and are paid in the month incurred.Fixed overheads of Rs. 1.5 crore are forecast for 2009-2010 which include Rs. 30,00,000 depreciation. Fixed overhead are paid in the month incurred. The company plans to spend Rs.20,00,000 in June on additional office furniture and prefabricated warehousing.

You are required to produce a summarized forecast of cash flow for 2009–2010 with supporting schedules. Ignore taxation.

(0)

(b)

Trading Corporation Ltd. has been engaged in the business of importing commodities and selling the items locally to a net–work of retail dealers. Current monthly billing is Rs.2,00,00,000. Average credit period extended to buyers in 2 months. The company is considering whether it could put in place a full factoring arrangement for collection of debts. Without recourse, on the following terms:

•	A service charge computed at 1.5% of total annual sales.
•	Factor will advance a sum equivalent to 80% of debts outstanding at interest rate of 14% p.a.
•	It is estimated that there would be savings of at least Rs.25,00,000 in administration costs annually. Currently, the company is able to raise fresh borrowings at 12% p.a.
•	Normally ½% of debts becomes bad.

Give your recommendation with working.

(0)

Good Luck Ltd. is having an expansion plan to cater to a growing market for its products. The company may finance the expansion either through an issue of 12% debentures or through an issue of shares at a price of Rs.10 per share. The total funds requirement is Rs.120 lakh. The company’s profitability statement prior to expansion is summarized as follow:

Heads	Value Rs.in lakhs
Sales Less costs excluding depreciation EBDIT Less depreciation EBIT Less interest PBT Less income tax @ 40% PAT Number of shares (lakh) EPS(Rs.)	1,600 1,100 500 70 430 80 350 140 210 65 3.23

The various possible values of EBIT, after expansion and the probabilities associated with each of the values are as follows:

EBIT (Rs. Lakh)
470
500
520
550

Probability
0.15
0.25
0.50
0.10

You are required to calculate:

(a) The companies expected EBIT, EPS and their standard deviation for each plan. What can you infer from the values?
(b) Is there an EBIT indifference point between both plans? What does this imply?

(4+4+4)+4
=16

(0)

(a)

ABC Ltd. requires an equipment costing Rs.10,00,000; the same will be utilized over a period of 5 years. It has two financing options in this regard:

(i)	Arrangement of a loan of Rs.10,00,000 at an interest rate of 13 per cent per annum; the loan being repayable in 5 equal year end installments; the equipment can be sold at the end of fifth year for Rs.1,00,000.
(ii)	Leasing the equipment for a period of five years at an yearly rental of Rs.3,30,000 payable at the year end.

The rate of depreciation is 15 per cent on Written Down Value (WDV) basis, income tax rate is 35 per cent and discount rate is 12 per cent.
Advise the management of ABC Ltd. as to which of the financing options is to be exercised and why.
(Discount factor @ 12% year 1 = 0.893, year 2 = 0.797, year 3 = 0.712, year 4= 0.636 and year 5 = 0.567)

(0)

(b)

Describe what is meant by financial engineering.

(0)

(a)

Mr. A can earn a return of 16 per cent by investing is equity shares on his own. Now, he is considering a recently announced equity based Mutual Fund scheme in which initial expenses are 5.5% and annual recurring expenses are 1.5%. How much should the Mutual Fund earn to provide Mr. A a return of 16%?

(0)

(b)

The financial statement of Asian Indistries Ltd. for the year ended 31st March 2009, reveal the following information:

Ratio of gross profit
Stock turnover ratio
Average debt collection period
Credit velocity
Current ratio
Proprietary ratio (fixed assets/capital employed)
Net profit to issued equity capital
Capital gearing ratio
(Preference shares and debentures to capital employed)
Reserves and surplus to issued equity capital
Preference shares to debentures
Cost of sales consists – 50% of material Gross profit

25%
5 times
3 months
3 months
2:1
80%
10%
30%

25%
2:1
Rs.12,50,000

On 31st March 2009, current assets consisted of stock and debtors only. All purchases are made on credit. Based on the above information, you are required to reconstruct the following:
(i) The Balance Sheet as on 31st March 2009.
(ii) The Trading and profit and Loss Account for the year ended 31st March 2009.

Show all working notes and assumptions made, if any.

(0)

(a)

What is "covered interest arbitrage"? Explain with example.

(0)

(b)

Consider the following two banks:

Bank
A
B

Credit Rating
High
Low

Funding Cost
LIBOR–20bps
LIBOR+25bps

Bank B is keen to take up an exposure of $100 million on A–rated papers, which currently pay LIBOR + 50bps. This will add some return, but taking into account the regulatory capital required to make such investment, Bank B finds the transaction not attractive enough.
Bank B, therefore, approaches Bank A to work out a mechanism to improve its return. You are required to

(i)	Structure a credit default swap between the two banks. Explain, with necessary calculations and a diagram, how the deal will work.

(ii)	Which one would be a better deal for Bank A – credit default swap or total return swap? Give reasons. Also with a diagram show how you would like to structure a total return swap.

5+5=10

(0)

(a)

The following data relate to Slow Limited:

Year ending 31st March	Net earnings Per share Rs.	Net dividend Per share Rs.
2005 2006 2007 2008 2009	28 27 27 26 25	16.80 17.60 18.00 19.00 20.00

There are 10 lakhs equity shares issued and the majority of these shares are owned by private investors. There is no debt in the capital structure.

The company has been experiencing difficult trading conditions over the past few years. In the current year, net earnings are likely to be Rs.2 crores which will be just sufficient to pay a maintained dividend of Rs.20 per share.
Give your comment on the company’s

(i)	Dividend policy between 2004–2005 and 2008–2009; and

(ii)	Possible consequences for earnings.

5+5=10

(0)

(b)

Sun Ltd. projects the following figures for the financial year 2008–2009;
Net income after tax = Rs.30 crores.
Depreciation = Rs.50 crores.
Capital expenditure planned = Rs.80 crores.
Additional working capital needed = Rs.25 crores.
Principal repayment of debt = Rs.10 crores.

As the firm has a very low debt equity ratio, it plans to increase its leverage by financing debt repayment and 30% of the planned capital expenditure and additional working capital needs by raising fresh debt.
Project the free cash flow to equity for 2008–2009.

(0)

Write short notes on any four from the following:

4x4=16

(a)

Global Depository Receipt;

(0)

(b)

Marking to Market;

(0)

(c)

Option;

(0)

(d)

Trading on Equity;

(0)

(e)

Leverage;

(0)

(f)

Factoring.

(0)

Disclaimer ♣ Privacy Policy ♣ Who We Are ♣ Terms of Service