CWA ICWA Final - Stage IV : Management Accounting Financial Strategy and Reporting - June 2010

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • June 2010

This Paper has 32 answerable questions with 0 answered.

F–18(MFS) 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 (carrying 20 marks) which is compulsory and any five (each carrying 16 marks) from the rest.
Please answer all bits of a question at one place. 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 (carrying 20 marks) which is compulsory and
any five (each carrying 16 marks) from the rest.

Please answer all bits of a question at one place.
Working notes should form part of the answer.

Marks

(a)

In each of the cases given below, one out of four answers is correct. Indicate the correct answer(=1 mark) and give your workings/reasons briefly in support of your answer (=1 mark):

2x5

(i)

X purchased a six month call option on A Ltd.’s share with an exercise price of Rs.95. The current market price is Rs.100. The continuously compounded risk free interest is 10% p.a. What will be the present value of the call option, if the share price moves to Rs.90 or to Rs.108. (Assuming the investors are indifferent to risk.) Give your answer adopting the risk neutral approach. [Given :PVIF(10%, 0.5 year) = 0.9524]

A.	Rs.7.69
B.	Rs.10.28
C.	Rs.19.38
D.	Insufficient information

(0)

(ii)

The share price of TIL Ltd., an oil company is Rs.800. It is expected to yield the equivalent of Rs.960 after one year. Due to uncertainty about the quantum of oil available at the drilling site, the standard deviation of the return is σ = 40%. The risk free rate is 8% and the expected return on market portfolio is 16%. If the standard deviation of market portfolio is 20%, the expected rate of return of the share predicted by the Capital Market Line (CML) will exceed the actual expected rate of return by

A.	10%
B.	8%
C.	4%
D.	None of these

(0)

(iii)

The spot and 6 month forward rates between US $ and Re. are (Re./$ )
a. Rs.40.9542 – 41.1255 : Spot
b. Rs.41.8550 – 41.9650 : 6 month forward
What is the annualised forward premium with respect to Ask Price?

A.	4.40%
B.	4.08%
C.	4.94%
D.	Data insufficient

(0)

(iv)

The net profit margin for A Ltd., is 10%. The total asset turnover ratio and debt–equity ratio are same which is 1.5. The company maintains 40% retentions ratio. The sustainable growth rate by using internal equity will be (to the nearest whole number)

A.	4%
B.	18%
C.	22%
D.	Data insufficient

(0)

(v)

The following data is available for the security of A Ltd.

Expected return
Beta
Risk free rate of return
Market return

:
:
:
:

16%
1.2
7%
18%

Is the security correctly priced? Where does it lie on the Security Market Line (SML)?

A.	Undervalued below SML
B.	Overvalued below SML
C.	Overvalued above SML
D.	Correctly valued lies on the SML

(0)

(b)

Choose the most appropriate one from the stated options and write it down(only indicate A, B, C, D as you think correct):

1x10

(i)

In ROE analysis, if the total leverage ratio is falling and the ratio of PBT to EBIT is constant, it can be interpreted as a sign of

A.	Falling operating margin
B.	Falling efficiency
C.	Both A and B above
D.	Cheaper debt financing

(0)

(ii)

AS – 26 does not apply to which of the following?

A.	Intangible assets held by an enterprise for sale in the course of business
B.	Deferred tax assets
C.	Lease
D.	All A, B and C of the above

(0)

(iii)

The slope of the CAPM line is also referred to as the

A.	Systematic risk
B.	Market price of risk
C.	Unsystematic risk
D.	Both A and B of the above

(0)

(iv)

An option to buy a stated number of shares of stock at a specified price is called

A.	Call option
B.	Future contract
C.	Put option
D.	Warrant

(0)

(v)

Du Pont chart is the decomposition of

A.	Return on invested capital
B.	Return on equity
C.	Net profit to total assets
D.	A or B

(0)

(vi)

NDA Co. acquired 100% of Induga Corpn. prior to 2009. During 2009,the individual companies included in their financial statements the following:

	NDA	Induga
Officers salary Officers expenses Loan to officers Inter–company sales	75,000 20,000 1,25,000 1,50,000	50,000 10,000 50,000 –

What amount should be reported as related –party disclosures (AS –18) in the noes to NDA 2009 consolidated financial statements?

A.	1,50,000
B.	1,55,000
C.	1,75,000
D.	3,30,000

(0)

(vii)

The IRR of the following series of cash flows:

Investment Rs.600 now, post tax inflows of Rs.500 at the end of year 1 and an outflow of Rs.100 at the end of year 2 is

A.	2%
B.	5%
C.	6%
D.	None of the above

(0)

(viii)

The beta of X Ltd. is 4. The growth rate of dividend and earning is 8%. The last dividend paid was Rs.4 per share. Return on government security is 10%. Return on market portfolio is 15%. The current market price per share of X Ltd. is Rs.36. The equilibrium price per share of X Ltd. is

A.	Rs.30
B.	Rs.25
C.	Rs.40
D.	Rs.48

(0)

(ix)

If the trade credit offered were 2/15 net 45, the customers in effect pay interest at

A.	5%
B.	8%
C.	18%
D.	24.5%

(0)

(x)

Collection float means

A.	Amount due from debtors
B.	Cheque issued but not yet presented to the bank
C.	Cheque deposited with the bank but not yet cleared
D.	None of A, B and C

(0)

The Balance Sheet of Beta Ltd. at 31^st March 2007 and 31^st March 2008 were as follows:

	Rs.in lakhs
	31.3.07	31.3.08
Land and Building (Cost Rs.320) Equipment(Cost Rs.200) Stock Debtors Bank Equity Shares Reserves Debentures(10%) Creditors Proposed Dividend	304 100 60 26 (20) 470 300 120 – 20 30 470	296 80 80 56 28 540 300 140 40 30 30 540

The Profit and Loss Account for the year ended 31.3.2008 was:

Sales
Opening Stock
Purchases

Less Closing Stock
Gross Profit
Expenses (including Debenture Interest)
Depreciation – Building
Depreciation – Equipment
Net Profit
Proposed Dividend
Balance Carried forward

60
122
182
80

20
8
20

200

102
98

48
50
30
20

The relevant price indices are:

(a)
(b)

(c)
(d)
(e)
(f)
(g)

2005–06 (Average) – Date of building acquisition
2002–03 (Average) – Date of equipment acquisition and
issue of equity shares
2006–07 (Last quarter average)
2007–08 (1^st April) Debenture issued
2007–08 (Last quarter average)
2007–08 (Average)
2007–08 (31.3.2008)

105

80
114
116
122
118
125

Closing Stock of 31.3.08 was acquired during whole of 2007–08 and Opening Stock during 2006–07.

Required:
Beta Ltd. wish to adjust its historic accounts to reflect current costs in line with CCA (Current Cost Accounting) method.

Assuming that the ‘Value to the Business’ of the assets is given by the price indices above, prepare the accounts on a current cost basis showing current cost adjustment for the year ended 31^st March 2008 under the following heads:

(i)	Cost of Sales Adjustment (COSA);

(ii)	Depreciation Adjustment (DA);

(iii)

Monetary Working Capital Adjustment (MWCA);

(iv)	Gearing Adjustment;

(v)	Current Cost Reserve;

(vi)	Balance Sheet and Profit/Loss Account (Inflation adjusted) – 31.3.08.

2+1+2
+2+1+8

(0)

(a)

You are given the following information of A Ltd. which sold off a geographical segment in the year 2007–08;

	Rs.in lakhs
Income from continuing operation (pre–tax) Income from geographical segment (pre–tax) Gain on disposal of division (pre–tax) Tax rate applicable	50 15 5 35%

You are required to report the information in the Income Statement for the year ended 31^st March 2008 in accordance with AS–24.

(0)

(b)

A company operating in a country having the dollar as its unit of currency has today invoiced sales to MKC Ltd., an Indian company, the payment being due three months from the date of invoice. The invoice amount is $ 27,500 an at the spot rate of $ 0.025 per Re.1 is equivalent to Rs.11,00,000. It is anticipated that the dollar will get stronger by 5% over the three month period and in order to protect the remittances, the importer proposes to take appropriate action through foreign exchange market.

Three month forward rate is quoted as $% 0.0248 per Re.1

Calculate the expected loss and show how it can be hedged by forward contract.

(0)

A Ltd. has approached its bankers – National Bank Ltd. for enhancement of Working Capital limits from Rs.6 lakhs to Rs.10 lakhs. The company has Rs.5 lakhs outstanding at the year end. The Company has provided National Bank with the following:

Balance Sheet as at 31^st March 2010
	Rs.in lakhs
Liabilities		Assets
Paid up Equity Share Capital Reserves and Surplus Long term Debt Working Capital Loan Sundry Creditors Accrued Expenses	25.00 20.25 20.00 5.00 32.50 2.50	Fixed Assets (Net) Investments Current Assets, Loans and Advances: Inventories Sundry Debtors Loans and Advances Cash and Bank	49.60 – 20.40 30.25 2.50 2.50
	105.25		105.25

Profit and Loss Account for the year ended 31.3.10
Rs.in lakhs
Sales Other Income Cost of Goods Sold Selling and Administrative Expenses Depreciation Profit before Interest & Taxes (PBIT) Interest Expenses Profit before Tax Tax(40%) Profit after Tax	340.00 2.00 342.00 258.40 45.00 8.50 311.90 30.10 4.50 25.60 10.24 15.36

Projections for 2010– 11:

•
•
•
•
•
•
•

•
•

Sales are expected to increase by
Cost of Goods sold
Selling and Administrative Expenses to increase by
Depreciation is expected to increase by
Interest Expenses will increase by
Purchase of New Machine
One–fifth of the outstanding balance of Secured Loans
will be repaid at the end of the year 2010–11
Corporate Tax rate will remain unchanged
No change in the other income

10%
76%
10%
Rs.90,000
16%
Rs.5,50,0000

Partial Proforma Balance Sheet as on 31.3.11
	Rs.in lakhs
Liabilities		Assets
Paid up Equity Share Capital Reserves and Surplus Long term Debt Working Capital Loan Sundry Creditors Accrued Expenses	25.00 ? 15.00 ? 33.50 3.20	Fixed Assets (Net) Investments Current Assets, Loans and Advances: Inventories Sundry Debtors Loans and Advances Cash and Bank	45.70 – 29.60 38.50 3.50 2.50
	119.80		119.80

The company intends to increase the credit limit to the extent necessary to support its operations.

Requirements:

(a)	Complete the Proforma Balance Sheet as on 31.3.11;

(b)	Prepare Proforma Profit & Loss A/c. for the year ended 31.3.11; and

(c)	Compute the Additional Working Capital Loan (Credit limit) that will be needed.

3+5+8

(0)

(a)

Distinguish between Value Added (VA) and Economic Value Added (EVA).

(0)

(b)

The Profit and Loss Account of Growth Ltd. is shown below:

Profit & Loss A/c. for the year ended 31.3.2010
	Rs.	Rs.
Turnover Cost of Sales ∗ Gross Profit Distribution Cost ∗ Administration Expenses ∗ Interest Payable Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the year on ordinary activities after tax Undistributed profits from last year Transfer to General Reserve Proposed Dividend Undistributed Profits carried to next year Cost ∗ include: Wages, Pensions and other employee benefits Depreciation All other Costs were purchased from outside (Rs.4,39,000 + Rs.93,000 + Rs.1,08,000)	93,000 1,08,000 15,000 60,000	7,65,000 4,39,000 3,26,000 2,01,000 1,25,000 2,000 1,23,000 44,000 79,000 55,000 1,34,000 75,000 59,000 2,20,000 74,000 3,46,000 6,40,000

Prepare a statement of Value Added indicating the allocation of Value Added

(i)	To employees;
(ii)	To provider of Capital;
(iii)	To Government;
(iv)	To maintenance and expansion of assets.

(0)

(a)

The current share price is Rs.100 There is a 0.7 probability that the share price would increase in value by 30% and 0.3 probability that the same price would decrease in value by 20% at the expiration date (six months hence).
The exercise price is Rs.100.

(i)	Calculate the expected share value and expected option value at the end of the period.
(ii)	What is the hedge ratio?
(iii)	What is the value of the combined portfolio (combined hedged position)?

(0)

(b)

What would be price of a call option as per Put–Call parity if value of a put is Rs.5, exercise price Rs.100, current price Rs.100, rate of interest 6% p.a., time period 2 months. (Given e^0.01 = 1.01)

(0)

(a)

A company is faced with the problem of choosing between two mutually exclusive projects. Project A requires a cash outlay of Rs.1,00,000 and cash running expenses of Rs.35,000 per year. On the other hand, Project B will cost Rs.1,50,000 and require cash running expenses of Rs.20,000 per year. Both the machines have a eight – year life. Project A has a salvage value of Rs.4,000 and Project B has a salvage value of Rs.14,000. The company’s tax rate is 50% and it has a 10% required rate of return.

Assuming depreciation on straight line basis, ascertain which project should be accepted. Present value of an annuity of Re.1 for 8 years = 5.335 and present value of Re.1 at the end of 8 years = 0.467, both at the discount rate of 10%.

(0)

(b)

The present capital structure of a company is as follows:

	Rs.(million)
Equity Shares (Face Value = Rs.10) Reserve 11% Preference Shares (Face Value = Rs.10) 12% Debentures 14% Term Loans	240 360 120 120 360 1,200

Additionally the following information are available:

Company’s equity beta –1.06.
Yield on long–term treasury bonds – 10%.
Stock market risk premium – 6%.
Current ex–dividend equity share price – Rs.15.
Current ex–dividend preference share price – Rs.12.
Current ex–interest debenture market value – Rs.102.50 per Rs.100.
Corporate tax rate – 40%

The debentures are redeemable after 3 years and interest is paid annually. Ignoring flotation costs, calculate the company’s Weighted Average Cost of Capital (WACC), using market values as weights.

(0)

Write short notes on any four out of the following:

4x4

(0)

(a)

Physical Maintenance of Capital;

(0)

(b)

Value in use of an Asset(as per AS–28);

(0)

(c)

Efficient Frontier;

(0)

(d)

Onerous Contract;

(0)

(e)

Business/Geographical Segment;

(0)

(f)

Corporate Governance Report – List of contents.

(0)

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