CWA ICWA Final - Group III : Financial Management and International Finance - June 2011

CWA ICWA Final - Group III • Financial Management and International Finance • June 2011

This Paper has 31 answerable questions with 3 answered.

F—P12(AFM) Syllabus 2008
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 any five questions from Part B.
Working notes should form part of the answer. Please (i) answer all bits of a question at one place. (ii) open a new page for answer to a new question.
PART A (25 Marks)
Marks

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

Answer Question No.1 from Part A which is compulsory and any five questions from Part B.

Working notes should form part of the answer.
Please (i) answer all bits of a question at one place.
(ii) open a new page for answer to a new question.

PART A (25 Marks)

Marks

(a)

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

2x6=12

(i)

The computed issues a new 15 per cent debentures of Rs. 1,000 face value to be redeemed after 10 years. The debenture is expected to be sold at 5 per cent discount. It will involve floatation costs of 2.5 per cent of face value. The company’s tax rate is 35 per cent. The cost of debt using short–cut method would be

10.9%

10.21%

10.44%

10.76%.

(0)

(ii)

The capital structure of a company is as under:

3,00,000 Equity Shares of Rs.10 each,
32,000, 12% Preference Shares of Rs.100 each,
General Reserve Rs. 15,00,000,
Securities Premium Account Rs. 5,00,000,
25,000, 14% Fully Secured Debentures of Rs. 100 each,
Term Loan of Rs 13,00,000.

Based on these, the leverage of the company is

60.22%

58.33%

55.21%

62.10%.

(0)

(iii)

The standard deviation of Greaves Ltd. stock is 24% and its correlation coefficient with market portofolio is 0.5. The expected return on the market is 16% with the standard deviation of 20%. If the risk–free return is 6%, what will be the required rate of return on Greaves Ltd. script?

12%;

11%;

13%;

11.5%.

(0)

(iv)

Cactus Limited paid a dividend of Rs. 5 per share for 2009–10. The company follows a fixed dividend payout ratio of 60%. The company earns a return of 20% on its investment. The cost of capital to the company is 14%. What would be the expected market price of its share, using the Walter Model?

Rs. 69.69;

Rs. 50.50;

Rs. 60.69;

Rs. 70.10.

(0)

(v)

The Sterling is trading at $ 1.6100 today. Inflation in U.K. is 4% and that in U.S.A. is 3 %. What could be the spot rate ($/£) after 2 years?

1.5792;

1.5892;

1.5992;

1.5939.

(0)

(vi)

Your customer requests you to book a sale forward exchange contract for US $ 2 million delivery 3 rd month. The quotes are:

Spot US $1
1 month margin
2 month margin
3 month margin

=
=
=
=

Rs. 48.050/060
0.0850/0900
0.2650/2700
0.5300/5350

You are required to make an exchange profit of 0.125%. Ignore telex charges and brokerage. What will be your profit?

Rs. 1,20,000;

Rs. 2,30,000;

Rs. 75,000;

Rs. 1,00,000.

(1)

(b)

State if each of the following sentences is T (= true) or F (= false):

1x5=5

(i)

Treasury management includes risk management.

(0)

(ii)

In the CAPM mode ‘systematic risk’ is the risk that cannot be eliminated by diversification, it being common to all firms.

(0)

(iii)

An yield gap refers to a situation where yield on shares is lower this year as compared to last year’s.

(0)

(iv)

Profitability Index is the profit expected in capital budgeting.

(0)

(v)

In futures trading, the margin is to be deposited by both the parties to the contract.

(1)

(c)

Match the sources of fund (i,ii, or iii) with the relevant characteristics stated in letters (a, b, or c):
Sources of Fund

(i)	Global Depository Receipts (GDRs)
(ii)	American Depository Receipts (ADRs)
(iii)	Euro–bonds

characteristics

(a)	These instruments do not confer voting rights on the investors.
(b)	Only entities enjoying very good to excellent credit ratings gain access to this source.
(c)	Besides periodical receipts of income promptly, there is an assurance of protection of ownership right.

Note:Write your answer simply by the numerical followed by chosen letter.

1x3=3

(0)

(d)

Fill in the blank with the appropriate word(s) as given in brackets in each of the following sentences:

1x5=5

(i)

Factoring reduces the working capital_____ by slashing receivables (cycle/need).

(1)

(ii)

Collar insulates the investor from the risk of interest rate ______ an agreed rate (falling below/rising above).

(0)

(iii)

The longer the loan period, the ______ should be the interest rate (higher/lower).

(0)

(iv)

On maturity in an option contract a put right is exercised when market rate is ______ favorable (less/more).

(0)

(v)

In foreign exchange quotations the size of spread for a given currency _____ with maturity (decreases/increases).

(0)

Note:In your answer you need not write the full sentence; write only the word(s)as required to fill in the blank.

PART B (75 Marks)

PART B (75 Marks)

(a)

Electronics Devices Ltd. sells goods to domestic market on a gross profit of 25% on sales without considering depreciation. Its estimates for the next year are as follows:

Amount (Rs. lakh)

Sales:

Domestic market at 2 months’ credit	1,600
Export selling price 10% below home price (Exports at 3 month’s credit)	540

Costs:

Material used (Suppliers extend 2 months’ credit)
Wages paid (½ month in arrear)
Manufacturing expenses (paid 1 month in arrear)
Sales promotion (payable quarterly in advance)
Administration expenses (paid 1 month in arrear)

600]
400
600
80
200

The company maintains one month’s stock of each of raw material and finished goods. A cash balance of Rs.20 lakh is also maintained.
You are required to work out the working capital requirement of the company.

(0)

(b)

Discuss the important factors that determine the dividend policy of a company.

(0)

You are provided with the following information for Excellent Ltd.:

Balance sheet
Liabilities	As at 31.3.2011 Rs.	As at 31.3.2010 Rs.	Assets	As at 31.3.2011 Rs.	As at 31.3.2010 Rs.
Share Capital Profit & Loss A/c Long–term Loan Creditors	5,00,000 5,00,000 5,50,000 1,80,000 17,30,000	5,00,000 4,25,000 5,00,000 1,75,000 16,00,000	Fixed Assets Stock Debtors Cash	10,50,000 3,00,000 3,45,000 35,000 17,30,000	8,50,000 3,40,000 3,80,000 30,000 16,00,000

Income Statement for the year ended 31.3.2011
	Rs.
Sales	21,50,000
(Less)Cost of sales	(14,70,000)
	6,80,000
(Less)Operating Expenses: Administrative Expenses Depreciation	(2,40,000) 1,00,000
	3,40,000
Add : Dividend Received	25,000
	3,65,000
(Less)Interest paid	(70,000)
	2,95,000
(Less)Income Tax	(1,30,000)
Profit after Tax	1,65,000

Excellent Ltd. paid Dividend of Rs. 90,000 during the year ended 31.3.2011.

Prepare a Cash Flow Statement of Excellent Ltd.for the year ended 31.3.2011 using Indirect Method and disclosing cash flows from Operating, Investing and Financing activities and the opening and closing cash balances.

(0)

(a)

You are provided with the following estimates of cost of debt and cost of equity capital (after tax) of an organisation at various levels of debt/equity mix employed in its capital structure:

Debt as % of total capital employed
Cost of debt(%)
Cost of equity (%)

0
5.0
12.0

10
5.0
12.0

20
5.0
12.5

30
5.5
13.0

40
6.0
14.0

50
6.5
16.0

60
7.0
20.0

Determine the optimal debt equity mix on the basis of composite cost of capital.

(0)

(b)

Describe the role of Hedging as foreign exchange risk management.

(0)

(a)

You are given the middel rates as under;

Rs. 80 £ 1 in London,
Rs. 47/US $ in Delhi, and
US $ 1.58/£ 1 in New York.

Compute the Arbitrage gain on Rs.8,00,000.

(0)

(b)

Explain briefly why purchasing power parity Theory does not always work in practice.

(0)

(c)

An extract from exchange rate list of a Kolkata based bank is given below:
Rs/¥ : 0.3992 :0.4002

(i)	How many Yen will it cost for a japanese tourist visiting India to purchase RS 2,500 worth of jackfruit?

(ii)	How much will Mr. Basu in Kolkata have to spend in rupees, to purchase as Sony Camcorder worth Yen 1,25,000?

2½+2½

(0)

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 an 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 and that there is no funds constraint for the company, ascertain which project should be accepted. Present value of an annuity of Rs.1 for 8 years = 5.335 and present value of Rs.1 at the end of 8 years = 0.467, both at the discount rate of 10%.

Please solve the problem by an incremental cash flow approach.

(0)

A firm’s sales, variable costs and fixed cost amount to Rs. 75,00,000, Rs. 42,00,000 and Rs. 6,00,000 respectively. It has borrowed Rs. 45,00,000 at 9 per cent and its equity capital totals Rs. 55,00,000.

(a)	What is the firm’s ROI?

(b)	Does it have favorable financial leverage?

(c)	If the firm belongs to an industry whose asset turnover is 3, does it have a high or low asset leverage?

(d)	What are the operating, financial and combined leverages of the firm?

(e)	If the sales drop to Rs.50,00,000, what will the new EBIT be?

(f)	At what level will the EBT of the firm equal to zero?

2½x6=15

(0)

Write short notes on (any three)

5x3=15

(a)

Foreign Direct Investment;

(0)

(b)

Venture Capital;

(0)

(c)

Operating Lease;

(0)

(d)

Project Appraisal.

(0)

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