CWA/ICWA Final :: Management Accounting - Financial Strategy and Reporting : December 2006

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 which is compulsory and any five from the rest.
Please answer all bits of a question at one place.
Marks
1. (a) In each of the cases given below, one out of four answers is correct. Indicate the correct answer and give your workings/reasons briefly: 2x6=12
(i)KOREX LTD has an average cost of debt of 10 per cent and a tax rate of 40 per cent. The financial leverage ratio for the company is 0.60. What is the ROE for KOREX LTD if its R.O.I is 20 per cent?
A.10.40% B.12.80% C.15.60% D.16.50%.
(ii)Mr. Garg is bearish about Cipla which trades in the Spot market at Rs. 1240. He decides to buy one three month put option contract (having a market lot of 100) on Cipla with a strike price of Rs. 1235 at Rs. 35.00 a put. Three months later Cipla is selling at Rs. 1280. His profit/(loss) on the position is
A.Rs. 3,000 B.(Rs. 3,500) C.Rs. 3,500 D.(Rs. 8,000)
(iii)The Cum-rights price per share of BIN LTD is Rs. 48 and the theoretical value of the right is Rs. 4. The subscription price at which the rights are issued is Rs. 36 per share. The number of existing shares required for a right share is
A.5 B.4 C.3 D.2
(iv)BBA LTD has its net operating income of Rs. 8,00,000 utilising capital base of Rs. 40,00,000. If the average cost of capital is 11 per cent and corporate tax is 30 per cent, then EVA turns up to
A.Rs. 1,20,000 B.1,60,000 C.2,00,000 D.2,20,000
(v)The share of MKC LTD is selling at Rs. 100. A 2 month put is selling at Rs. 8. The put's exercise price is Rs. 101 and the risk free rate is 9 per cent P.A. What would be the price of a 2 month call?
[Given PVIF (9%, 1/6yr) = 0.9852]
A.Rs. 6.00 B.Rs. 8.49 C.Rs. 11.48 D.Rs. 13.24
(vi)If the dividend yield for SANDAL LTD is 0.4, whose P/E multiple and EPS are 4 and Rs. 10 respectively the dividend per share of the company is
A.18.50 B.16.00 C.13.60 D.12.00
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F-18(MFS)
Revised syllabus		 Marks
  (b) From the following, choose the most appropriate answer (only indicate A, B, C, D as you think correct): 1x8=8
(i)As per AS—10, Fixed assets that have been retired from active use and held for disposal should be stated in Balance Sheet at
A.Net book value.
B.Net realisable value
C.Lower of the net book value and net realisable value.
D.Higher of the net book value and net realisable value.
(ii)Equity multiplier is defined in DU point Analysis as
A.EPS/Market price of shares
B.EPS/Book value of shares.
C.PAT/Net worth.
D.Average assets/Average equity.
(iii)For measuring beta, which can be used as a Proxy for the market portfolio?
A.BSE 200 Index.
B.Any market Index.
C.BSE Sensex.
D.None of (A), (B), (C).
(iv)Global Reporting Initiative is
A.Global Reporting Software.
B.An undertaking for sustainable development.
C.World Bank Initiative.
D.None of (A), (B), (C).
(v)Which of the following is not considered while determining the appropriate P/E Ratio for a firm?
A.Industry growth rate.
B.Stability of earnings.
C.Both (A) and (B).
D.Book value to earnings per share ratio.
(vi)Certeris Paribus, a security is to be bought if
A.The required rate of return is less than the expected rate of return.
B.The required rate of return is greater than the expected rate of return.
C.Security has a beta greater than one.
D.Security has a beta less than one.
(vii)If the return on a security lies below the Security Market Line (SML), then
A.The Security is aggressive security.
B.The Security is over priced.
C.The Security is under priced.
D.The Security's beta is less than one.
(viii)Under the CPP method of Price Level Accounting, which of the following is not Considered as Monetary Asset?
A.Fixed Interest investment.
B.Debtors
C.Inventory
D.Both (B) and (C).
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F-18(MFS)
Revised syllabus
Marks
2. (a) Explain how the five input variables can be adapted to value 'Real' options as opposed to traded share options. 5
(b) The stock of EXOTICA LTD (EL) is currently trading at Rs. 408 and call option exercisable in three months time has an exercise rate of Rs. 400. The standard deviation of the continuously compounded stock price change for EXOTICA LTD is estimated to be 22% per year. The annualized Treasury Bill rate corresponding to this option life is 5%. The company (EL) is going to declare a dividend of Rs. 10 and it is expected to be paid in two months time.
Requirement:
What is the value of a three month call option on the stock of EXOTICA LTD. (based on Black and Scholes Model).		 11
Note:
Extracted from the Tables
1.Natural Logarithms:
Ln (o.99521) = -0.00480, Ln (1.020) = 0.01980, Ln (0.98039) = -0.019804.
2.Value of e-x : e-0.01 = 0.99010, e-0.0125 = 0.98758.
3.When x ≥ 0: N (0.125) = 0.5498, N(0.015) = 0.5060
When x ≤ 0 : N (-0.125) = 0.4502, N (-0.015) = 0.4940.
4.PVIF (5%, ¼ year) = 0.9877, PVIF (5%, 1/6 year) = 0.9917.
3. (a) INDUGA LTD has at its financial year ended 31st March 2006, twenty law suits outstanding, none of which has been settled by the time the accounts are approved by the Directors. The Directors have estimated that the possible outcomes as below:
ResultProbabilityAmount of loss
Rs.
For first 14 cases
Win
Lose-low damages
Lese-high damages
For remaining 6 cases
Win
Loose-low damages
Losse-high damages
0.6
0.3
0.1

0.5
0.3
02
—
1,20,000
1,80,000

—
90,000
1,20,000
 8
The directors believe that the outcome of each case is independent of the outcome of all the others. Estimate the amount of contingent loss and state the accounting treatment of such contingent loss keeping in view the relevant Accounting Standard (AS).
(b) NDA LTD has three divisions P, Q and R. Details of their turnover, results and Net Assets are given below:

Division P
Sales to Q
Other Sales (Home)
Export Sales		Rs.

3,000
80
4,100
7,180
Division Q
Sales to R
Export Sales to U.K
40
210
250
Division R
Export Sales to U.S.A
180
 8
 Head
Office		Division
PQR
Operating Profit or Loss before Tax
Re-allocated Cost from Head Office
Interest Costs
Fixed Costs
Net Current Assets
Long-term liabilities		 —


60
50
40		 180
50
5
210
110
20		 30
35
6
50
45
12		 (10)
25
1
130
85
125
Prepare a Segment Report for Publication in NDA LTD in accordance with AS - 17.z
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F-18(MFS)
Revised syllabus		 Marks
4. (a)
(i)What is deprival value?
(ii)How would you compute deprival value in the following cases?
 2+6
 I
Rs.		II
Rs.		III
Rs.
Historical Cost (depreciated)
Replacement Cost of identical assets
Net present value (value in use)
Net realisable value		 24,000
30,000
36,000
33,600		 30,000
26,400
25,200
24,000		 36,000
48,000
60,000
54,000
(b) The following information pertains to OPTIMA LIMITED:
Cost of Machine
Estimated life
Residual value
Inflation factor
Depreciation		 5,00,000
4 years
Nil
10% p.a.
Straight line method
 8
From the given information you are required to calculate the amount of depreciation under Current Cost Accounting (CCA) Method for each of the four years as well as the Backlog Depreciation for a certain item.
5. (a) Discuss the steps involved in implementing EVA (Economic Value Added) System. 6+10=16
(b) MAGNAVISION CORPORATION LTD (MCL) is considering a new project involving an investment of Rs. 50 million for which the following information is available:
Project life
Salvage value
Annual Revenues
Annual Costs
(excluding depreciation
Interest and Taxes)
Risk free rate of return in the economy		 4 years
Nil
Rs. 60 million
Rs. 40 million

6%		 Depreciation
(for tax purposes)
Debt-Equity Ratio
Interest rate on Debt (Post Tax)
Tax Rate
Market Risk Premium
Beta of MCL's Equity		 Straight line

4 : 5
9%
40%
8%
1.5
You are required to:
(i)Compute the EVA of the project over its life.
(ii)Calculate the NPV of the project using EVA approach.
Note
Extracted from the table of PV of Re. 1
Present Value Interest Factor (PVIF)

At 14%
At 15%		 Year
PV:
PV:		 0
1
1		 1
0.877
0.870		 2
0.769
0.756		 3
0.675
0.658		 4
0.592
0.572
6. GNL Limited has maintained the following relationships in recent years:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)		 Gross profit to net sales
Net profit to net sales
Selling expenses to net sales
Book debts turnover
Inventory turnover
Quick ratio
Current ratio
Assets turnover (sales basis)
Total assets to intangible assets
Accummulated depreciation to cost of fixed assets
Books debts to Sundry Creditors (for goods)
Shareholders' funds to Working Capital
Total debts to Shareholders' funds		 40%
10%
20%
8 p.a.
6 p.a.
2
3
2 p.a.
20
1/3
1.50
1.60
0.50
 16
Quick assets comprise 15% cash, 25% marketable securities and 60% book debts.
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F-18(MFS)
Revised syllabus
Marks

During 2005-06, the company earned Rs. 12,00,000 or Rs. 4.68 per equity share; the market value of one equity share was Rs. 78. The capital consisted of equity shares issued at a premium of 10% and 12% preference shares of Rs. 100 each. Interest was Rs. 75,000 in 2005-06; many year ago, the company had issued 10% debentures due for redemption in 2007. During 2005-06 there was no change in the level of Inventory, Book-debts, Debentures and Shareholders' funds. All purchases and sales were on account. Preference dividend paid in 2005-06, in full was Rs. 30,000.
You are required to prepare:
(i)Balance Sheet as on March 31, 2006 and
(ii)Profit and Loss Account for the year ended March 31, 2006. Ignore Taxation.
—Show necessary workings.
7. (a) Explain the differences between Unique Risk and Market Risk. 4+12
(b) FUTURA LIMITED is a manufacturing company in the furniture trade. Its sales have risen sharply over the past 6 months as a result of an improvement in the economy and a strong housing market. The company is now showing signs of overtrading and Ms.A.Basu, General Manager (F & A) is concerned about its liquidity. The company is 1 month from its year end. Estimated figures for the full 12 months of the current year ended March 31, 2006 and forecast for the year ended March 31, 2007, on present cash management policies, are shown below:

 Year ended
March 31,
2007		March 31,
2007
Profit and Loss Account;
Turnover
Less: Cost of Sales (1)
5,200
3,224
4,200
2,520
Operating Expenses
Operating Profit
Interest paid
Profit before Tax
Tax payable
Profit after Tax
Dividends declared		    650
1,326
    54
1.272
   305
   967
   387		    500
1,180
     48
1,132
   283
   849
   339
Current Assets and Liabilities as at the end of the year  
Stock/Work in Progress
Debtors
Cash
Trade Creditors
Other Creditors (Tax and Dividends)
Over draft
Net Current Assets/(Liabilities)		    625
   750
      0
  (464)
  (692)
   (11)
   208		    350
   520
     25
  (320)
  (622)
       0
   (47)
Note
1. Cost of Sales includes depreciation of
   225
   175
Ms. Basu is considering methods of improving the cash position. A number of actions are being discussed:
DEBTORS:
Offer a 2 per cent discount to customers who pay within 10 days of despatch of invoices. It is estimated that 50 per cent of customers will take advantage of the new discount scheme. The other 50 per cent will continue to take the current average credit period.
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F-18(MFS)
Revised syllabus		 Marks
  TRADE CREDITORS AND STOCK:
Reduce the number of suppliers currently being used and negotiate better terms with those that remain by introducing a Just-in-Time policy. The aim will be to reduce the end of year forecast cost of sales (excluding Depreciation) by 5 per cent and Stock/Work-in-progress levels by 10 per cent. However, the number of days' credit taken by the company will have to fall to 30 days to help persuade suppliers to improve their prices.
OTHER INFORMATION:
•All trade is on credit. Official terms of sale at present require payment within 30 days. Interest is not charged on late payments.
•All purchases are made on credit
•Operating expenses will be Rs. 6,50,000 under either the existing or proposed policies.
•Interest payments would be Rs. 45,000 if the new policies are implemented.
•Capital expenditure of Rs. 5,50,000 is planned for the year ended March 31, 2007.
REQUIREMENTS:
Prepare a Cash-flow forecast for the year ended March 31, 2007, assuming.
(i)The Company does not change its policies;
(ii)The Company's proposals for managing Debtors, Creditors and Stock are implemented.
In both cases, assume a full 12-month period, that is the changes will be effective from day 1 of the year ended March 31, 2007.
8. Write short notes on the following:
(a)Earning Value (Equity Share);
(b)"Cash Generating Unit" (CGU) in the context of accounting for Impairment Loss;
(c)Voluntary Disclosures in Annual Reports;
(d)Value Added Statement.
 4x4=16

__________

 

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