CWA/ICWA Final :: Management Accounting—Financial Strategy and Reporting : December 2005

*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

(a)

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

5x2

(i)

CIPLA Ltd. announced a rights issue of four shares of Rs.100 each at a premium of 160% for every five shares held by the existing shareholders. The market value of the shares at the time of rights issue is Rs.395. the value of right is:

Rs.90.00

Rs.80.00

Rs.60.00

(D)

Rs.55.00

(ii)

PR Company’s equity share is expected to provide a dividend of Rs.3.00 and fetch a price of Rs.40.00 a year hence. What price would it sell for now if investor’s required rare of return is 15 percent?

Rs.35,50

Rs.37.39

Rs.38.27

(D)

Rs.40.00

(iii)

The equity shares of MNC Ltd. are selling at Rs.2.40 each. At the end of the folding period the share is expected to be worth any one of the following values:

Price
Rs.220
Rs.250
Rs.280

Profitability
0.3
0.4
0.3

A European option with an exercise price of Rs.240 will (ignoring time value of money) be worth:

A. Rs.16

Rs.15

Rs. 14

(D)

Rs. 18

(iv)

On April 1,3 months interest rate in the US$ and Germany DM are 6.5 percent and 5.6 percent per annum, respectively. The Us $/DM spot rate is 0.6560. what would be the forward rate for DM for delivery on 30th June?

US $ 0.6592 /DM

US $ 0.6528 /DM

US $ 0.6430 /DM

(D)

US $ 0.6525 /DM

(v)

An asset has a book value of Rs.5,00,000. The current replacement cost of an equivalent asset is Rs. 6,00,000. The net realizable value of the asset is Rs.4,80,000. the present value of the future cash flows estimated to be generated by the asset is Rs.5,90,000. the deprival value of the asset is:

Rs.5,00,000

Rs.6,00,000

Rs.3,90,000

(D)

Rs.4,80,000

(b)

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

10x1

(i)

A derivative financial instrument

A.	Is settled at a future date	B.	Is renewed at each balance sheet date
C.	Invariably forms part of a hedging relationship	(D)	All of the above.

(ii)

Firms specific risk is also called

Market risk

Non systematic risk

Macro risk

(D)

All of the above

(iii)

The price of a company’s share has risen from Rs.10 to Rs.400. Small investors are complaining that this is affecting their ability to buy shares in the company. Which of the following might overcome the problem?

A Share buy-back

A share spilt

Issuing stock option

(D)

A share consideration

(iv)

Four companies have the following P/F rations:
E 17, F 24, G 12, H 8, which of the statement about the companies is incorrect?

A. F’s share price must be twice that of G

B. E’s share price must be 17 times its earnings

C. H has the lowest share price relative to its earnings growth.

D. F has the greatest expectations of future earnings growth.

(v)

According to AS – 26; an active market is a market where

A. The items traded within the market are homogeneous

B. Prices are not available to the public

C. Willing buyers and sellings are not found any time

D. All of the above.

(vi)

A portfolio is not efficient if there is another portfolio with in

A. A higher expected return and lower standard deviation.

B. A lower expected return and same standard deviation

C. The same expected return and higher standard deviation

D. None of the above.

(vii)

Write an option does not imply

A.	Selling an option	B.	Taking a short position
C.	Taking a long position	(D)	Accepting an uncertain obligation

(viii)

A strategy of anti-take over under which of the acquirer puts pressure on the management of the target company by threatening to make an open offer is known as:

Street sweep

White knight

Bear hug

(D)

Brand power

(ix)

Buying and selling call or put option with the same strike price but different expiration dates is called:

Long hedge

Short hedge

Horizontal option spread

(D)

None of the above

(x)

A company has an equity rate of return of 12 percent and a debt rate of return of 6 percent. Its gearing ratio is 40 percent. The tax rate is 30 percent. Interest payments on debt are chargeable for tax. The weighted average cost of capital of the company is:

A. 8.88 percent B. 9.88 percent C. 10.88 percent (D) 9.60 percent

(a)

Ray gold Ltd . (RL) has a paid-up ordinary share capital of Rs.200 lakhs represented by 4 lakhs shares of Rs.50 each. Earnings after tax in the most recent year (2004-2005) were Rs.80,00,000 of which Rs.26,50,000 was distributed as dividend. The current price/earning ratio of these shares as reported in the financial press is 8.

Please turn over

( 2 )

F-18(MFS)
Revised syllabus

Marks

The company (RL) is planning a major investment that will cost Rs.240 lakhs and is expected to produce additional after-tax earnings over the foreseeable future at a rate of 15 percent on the amount invested. The necessary finance is to be raised by a rights issue to the existing shareholders at a price 25 percent below the current market price of the company’s shares.
You are required to calculate:

(i)	The current market price of the shares already in issue;
(ii)	The price at which the rights issue will be made;
(iii)	The number of new shares that will be issued;
(iv)	The value of the rights;
(v)	TShe price of the shares of the company should theoretically be quoted on completion of the rights issue (i.e the ex-rights price), ignoring incidental and transactional costs. Assuming that - the rate of return on existing funds is 12.5% and the market accepts the company’s forecast of incremental earnings.

2+1+1
2+2

(b)

B. K. Construction Ltd. (BKCL) commenced construction of a cement factory in Jhargram on 1.04.2003 for Royal Industries Ltd., one of its customers. The contract price was fixed at Rs.150 lakh and the initial estimate of total construction cost was Rs.128 lakh. At the end 2003-04, the initial estimate of cost was revised to Rs.129 lakh.

Royal Industries Lts. Approved a variation in 2004-05 and agreed to increase the contract price to Rs.156 lakh. The contractor (BKCL) estimated additional cost of Rs.3 lakh for the variation. The contractor (BKCL) determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed up to the reporting date bear to the latest estimated total contract costs.
It took three years to complete the construction. Costs incurred are as follows:

Year	Costs (Rs. In lakh)
2003-04 2004-05 2004-05 Total	38.70 61.80 33.15 Rs.133.65	(including stock of materials as on 31.03.05 Rs.) (including opening stock of materials Rs.1.50 lakh)

You are required to work out:

(i)	Total estimated contract costs:
(ii)	Stage of completion – percentage;
(iii)	Contract revenues; and
(iv)	Profit/(Loss) on the contract of B.K Construction Ltd. – for the year ended March 31,2004, March 31, 2005, March 31,2006 with reference to the relevant Accounting Standard.

2+2
+1+3

All of the 100 accountants employed by Molson Ltd, are offered the opportunity to attend six training courses per year. Each course lasts for several days and require the delegates to travel to a specially selected hotel for the training.
The current costs incurred for each courses are:

Delegate costs:
	Per delegate Per course (Rs.)
Travel Accommodation, food and drink	200 670 870

It is expected that the current delegate costs will increase by 5% per annum.

Course costs:	Per course (Rs.)
Room hire Trainers Course materials Equipment hire Course administration	1500 6000 2000 1500 750 11750

It is expected that the current costs will increase by 2.5 percent per annum.
The Director (HRD) of Molson Ltd is concerned at the level of costs that these course incur and has recently read an article about the use of the internet for the delivery of training courses (e-learning). He decided to hire an external consultant at a cost of Rs.5000 to advise the company on how to implement an e –learning solution. The consultant prepared a report which detailed the cost of implementing and running an e-learning solution:

	Notes	Rs.
Computer Hardware Software Licenses Technical Manager Camera and Sound Crew Trainers and Course materials Broadband Connection	(1) (2) (3) (4) (5) (6)	15,00,000 35,000 30,000 4,000 2,000 300	per annum per annum per course per course Per delegate per annum

Notes:

(1)

The Computer Hardware will be depreciated on a straight line basis over 5 years. The scrap value at the end of five years is expected to be Rs.50,000.

(2)

The company would sign a software license agreement which fixes the annual software license fee for 5 years. This fee is payable in advance.

(3)

An employee working in the I.T. Department currently earning Rs.20,000 per annum will be promoted to Manager (Technical) for this project. This employee’s position will be replaced. The salary of the Technical Manager is expected to increase by 6 percent per annum.

(4)

The Company supplying the camera and Sound crew for recording the courses for internet delivery has agreed to hold its current level of pricing for the first 2 years but will increase costs by 6 percent per annum. All courses will be recorded in the first quarter of the year of delivery.

(5)

The trainers will charge a fixed fee of Rs.2,000 per course for the delivery and course material in the year and expect to increase this by 6 percent per annum thereafter. The preparation of the course material and the recording if the trainers delivering the courses will take place in the first quarter of the year of delivery.

(6)

All of the accountants, utilizing the training courses will be offered Rs.300 towards broadband costs which will allow them to acess the course from home. They will claim this expense annually in arrears. Broadband costs are expected to decrease by 5 percent per annum after the first year as it becomes more widely used by Internet users.
Molson Ltd uses a 14 percent cost of capital to appraise projects of this nature, ignore taxation.
Requirement:
As the Management Accountant for MOLSON LTD, prepare a financial evaluation of the options available to the company and advise the Director on the best course of action to take, from a purely financial point of view.
Note: extract from the table:
The present value factor at 14% Discount rate are:

Year
P/V

0
1,000

1
0.877

2
0.769

3
0.675

4
0.592

5
0.519

Please turn over

( 3 )

F-18(MFS)
Revised syllabus

Marks

(a)

Coomer Ltd has at the beginning of a period 1,00,000 Equity shares of Rs.10 each and 12% long-term debt of Rs.8,00,000. the financial department of the company has generated the following forecast financial statistics for the period:

4+2+4

Return on Total Assets (ROTA)
(PBIT / Total Assets)
Debt Ratio (External Liabilities / Equity)
Effective Interest Rate (EIR)
(Interest Expense/ Total Liabilities)
Current Assets to Fixed Assets
Tax Rate

20%

0.5 : I

0.80
8%

40%

The Assets, Liabilities and Equity figures used to compute the above financial statistics are based on forecast period – end balances. The company has no plan to change its equity share capital and long - term debt.
You are required to:

(i)	Prepare the forecast balance sheet as at the end of the forecast period with as many details as possible; and
(ii)	Forecast Earnings per share (EPS).
Show necessary workings.

(b)

Throughout the year ended 31st March, 2005 C.L.C Ltd had in issue Rs.4,00,000 8% convertible debentures. The terms of conversion for every Rs.1,000 of debentures are as follows:

3+3

31st March, 2005
31st March 2006
31st March 2007

120 Equity Shares
115 Equity Shares
110 Equity Shares

Profits attributable to equity shareholders for the year amounted to Rs.5,00,000. the weighted average number of equity shares in issue during the year was 2,00,000. the tax rate is 40%.
Calculate:
(1) Fully diluted earnings; and
(2) Full diluted earnings per share

(a)

What are the most common option trading strategies? Give a brief description of each strategy.

(b)

Quickset Company’s equity shares are currently selling at a price of Rs.400 each. An investor is interested in purchasing Quickset’s shares. The investor expects that there is a 70% chance that the price will go up to Rs.5.50 or a 30% chance that it will go down to Rs.3.50, three months from now. There is a call option on the shares of Quickset that can be exercised only at the end of three months at an exercise price of Rs.450.

(i)	If the investor wants a perfect hedge, what combination of the share and option should he select?
(ii)	Explain how the investor will be able to maintain identical position regardless of the share price.
(iii)	If the risk-free rate of return is 5% for the 3 month period, what is the value of the option at the beginning of the period?
(iv)	What is the expected return on the option?

3+3+
3+2

(a)

What are the arguments for and those against for inclusion of Intangible assets in financial statements?

4+2

(b)

As a financial analyst of Wilson Electronics Ltd (WLL) you are requested to determine the Weighted Average Cost of Capital (WACC) of the company using Market Value Weights. The following information is available for your perusal.
The company’s present book value Capital Structure is:

2+3+5

	Rs.(Lakh)
Equity share (Rs.10 per share) Reserves 9% Preference Share (Rs. 10 per share) 10% Debentures (Rs.100 per debenture) 12% Term Loans	270 180 90 90 270 900
All these Securities are traded in the Capital Market. Recent prices are:
Ex-dividend equity share price Ex-dividend preference share price Ex-interest debenture market value	Rs.15 Rs.12 Rs.103

Additionally the following information are available:
Company’s Equity beta - 1.06
Yield on Long-term treasury bonds – 10%
Stock market risk premium -6%
The debentures are redeemable after 3 years and interest is payable annauly.
Corporate tax rate -35%.
Note: ignore floatation costs and transaction costs.

(a)

The Accounts of Sitraze Ltd (SL) engaged in manufacturing business are summarized below:

5+2+3

INCOME STATEMENT FOR THE YEAR ENDED MARCH 31,2005
		(Amount inn Rs. Million)
Sales Revenue Less: Cost of goods sold	59.10	95.00
General expenses Administrative expenses Selling and distribution expenses Interest on loan	6.80 7.80 2.90 1.80	78.40
Earnings Before Tax (EBT) Less: Corporate Taxes (0.35) Earnings After Taxes (EAT)		16.60 5.81 10.79

BALANCE SHEET AS AT MARCH 31,2005 (Amount in Rs. Million)
Liabilities		Assets
Equity share capital (10 lakh shares of Rs.20 each) Reserves and surplus 10% Loan Creditors and other Liabilities	10.00 31.50 18.00 18.00 77.50	Freehold land and buildings (net) Plant and Machineries (net) Current Assets: Stock Debtors Bank and cash balances	20.00 28.50 10.00 15.00 4.00 77.50

Additional information:

1.	The risk free rate of return in the economy is 8% and the premium expected from business in general is 5%. The beta of Siteraxe Ltd. shares is currently 1.27
2.	The equity shares of this company (SL) quoted in the market as on 31.3.2005 are Rs.50 per share.
3.	General expenses include R & D expenses of Rs.0.50 million.

Note:For EVA computation R & D expenses are to be considered as an investment.
Requirements:

(i)	Determine the Economic Value Added (EVA) for the year ended March 31, 2005 and
(ii)	Determine the amount of Market Value Added (EVA) of the year ended March 31, 2005.

(b)

The following information are available from a Merchant Bank:

2+4

Company	Forcast Equity Return (%)	Standard Deviation of total Equity Return (%)	Covariation with Market Return (%)
Infosys HLL Reliance Tata Motors	16.00 12.00 14.00 19.00	6.3 4.8 4.7 6.9	32 19 24 43

The market return and the market standard deviation are 14.50 percent and 5 percent respectively and the risk-free rate is 6 percent.
Required:
Estimate the “ALPHA” Value of each of these company’s shares.

Write short notes on the following:

(a)	Accounting for knowledge assets
(b)	Global Reporting Initiative
(c)	Segment reporting;
(d)	Treatment of impairment losses of an individual asset.

4x4=16

__________