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

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

This Paper has 33 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 which is compulsory and any five other questions from 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 which is compulsory and
any five other questions from 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)

Unlevered beta and effective tax rate of SURYA LTD. is 0.8 and 35 percent respectively. The company intends to undertake a project with 60 percent debt financing. Assuming risk free rate of 7.5 percent and market premium of 8 percent, calculate cost of equity (rounded up to two decimal points).

(A)	13.90%
(B)	20.14%
(C)	16.40%
(D)	None of (A), (B) or (C)

(0)

(ii)

Consider the latest financial statistics of KINETIC LTD. as given under:
Average rate of interest (i): 10%
Debt–equity ratio (D/E): 1.5
Return on assets (ROA): 15%
Effective tax rate (t) : 35%.
What is the return on equity (ROE) of KINETIC?

(A)	19.5%
(B)	22.5%
(C)	14.625%
(D)	None of (A), (B) or (C)

(0)

(iii)

With reference to sales, inventory turnover and debtors’ turnover of ELECTRONICS LTD. are estimated to be 8 times and 12 times respectively. Assuming 360 days a year, calculate how many times the ‘gross operating cycle’ will be rotated in a year.

(A)	20 times a year
(B)	4.8 times a year
(C)	18 times a year
(D)	None of (A), (B) or (C)

(0)

(iv)

An analyst has valued business of POWER LTD. at Rs. 100 billion of which 60 percent represents present value of terminal value. The analyst assumes that cash flow in the fifth year (CF₅) will perpetuate at flat rate from the sixth year onwards. All cash flows are discounted at 15 percent. Calculate CF₅ in Rs. billion rounded up to the nearest integer.

(A)	Rs. 18 billion
(B)	Rs.9 billion
(C)	Rs.12 billion
(D)	None of (A), (B) or (C)

(0)

(v)

The cost of production of a particular product of an Indian company is Rs. 20 per unit. The export price of the same product is US $ 1 per unit. If the US $ appreciates by 10% and the spot rate is Rs. 40/ US $, what is the impact of transaction exposure?

(A)	Increase in profit by Rs. 4 per unit
(B)	Decrease in profit by Rs. 4 per unit
(C)	No change in profit
(D)	None of (A), (B) or (C)

(0)

(b)

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

1x5

(i)

Which of the following capital budgeting techniques uses a method of adjusting future cash flows for evaluating an investment project?

(A)	Capital rationing
(B)	Risk–adjusted discount rate
(C)	Certainty Equivalent
(D)	Decision Tree analysis

(0)

(ii)

In financial planning which of the following is used to provide future estimates of assets, liabilities and revenues and expenses resulting from the budgeted operations of a firm?

(A)	Capital expenditure analysis
(B)	Operating budgeting and analysis
(C)	Proforma Financial Statements
(D)	Breakeven analysis.

(0)

(iii)

Financial leverage can be measured as ratio of

(A)	Debt to the total Capital
(B)	Debt to equity
(C)	EBIT to Interest charges
(D)	All the above

(0)

(iv)

According to MM–hypothesis of dividend policy, what is the act of a shareholder selling some part of his holding in a firm is called, especially in the event of the firm not paying dividend but the shareholder needing money.

(A)	Creation of home made leverage
(B)	Creation of home made dividend
(C)	Creation of home make liquidity
(D)	Creation of home made market

(0)

(v)

Which of the following ratios is not affected by the financial structure and the tax rate of a company?

(A)	Return on equity
(B)	Net profit margin
(C)	Earning power
(D)	Earnings per share

(0)

(c)

State whether the following statements are True or False

1x5

(i)

Inverse floater is a suitable debt instrument for attracting debt funds when investors are anticipating a falling interest rate scenario.

(0)

(ii)

Under bank financing, a borrower is allowed to draw money against unpaid stock.

(0)

(iii)

A debt instrument rated AA (SO) means highest safety with structured obligation.

(0)

(iv)

A company can issue Level 1 ADR both sponsored and unsponsored issue.

(0)

(v)

Pay back period method is a non–discounting technique for appraising a project.

(0)

(a)

The following are the data related to the Omkar Limited:

	Rs. Crore
Average stock of raw material and stores Average work–in–progress (WIP) inventory Average finished goods inventory Average accounts receivables Average accounts payable Average raw materials and stores consumed per day Average WIP value of raw materials committed per day Average cost of goods sold per day Average sales per day	35 45 30 45 25 1.5 1.6 2.0 2.5
	Rs.
Raw materials and stores cost per unit Processing cost per unit Selling, administration and financing cost per unit Sales price per unit	60 40 12 120

(i)	Calculate the duration of the weighted cash cycle.

(ii)	Calculate the working capital requirement for the Omkar Limited, if minimum cash balance requirement is Rs. 1.5 crore.

6+2

(0)

(b)

ZINTEX LTD. is evaluating a project with the estimated cash flows as given under:

Year	Cash flow (Rs. millions)
0 1 2 3 4 5	–100 20 26 32 32 20

The above cash flows are estimated at base–year price. The project can be funded at a nominal cost of capital of 15 percent. Current rate of inflation is 7 percent per annum and the general price rise is expected to continue at this level over the next couple of years. Would you recommend this project for investment? Support your answer with necessary calculations.
PV Factor @ 15%, 0–5 year: 1.0000, 0.8696, 0.7561, 0.6575, 0.5718, 0.4972
PV Factor @ 7.5%, 0–5 year: 1.0000, 0.9302, 0.8653, 0.8050, 0.7488, 0.6966

(0)

ARF Ltd. is planning to start a major restructuring plan. If the restructuring plan is undertaken, it will reduce the EPS of the company to Rs. 6.50, but enhances the payout rate to 75%. The restructuring plan enables the company to pay dividend that grow at the rate of 22% for the next 4 years and it declines to 11% over the 4 years after that. The dividend growth rate is expected to stabilize at 11% and remain at the level forever.

The risk free rate of return 5% per annum and the market return is expected to be 12% with a standard deviation of 12.5%. The covariance of MRF’s stock with that of market is 175(%).

You are required to calculate the price of the stock, if the restructuring is undertaken by the company.

(0)

Hindustan Constructions Ltd. has a machine which can be sold at present for Rs. 40 lakhs. The machine has a useful life of 5 years. After 5 years, the machine is expected to fetch a net salvage value of Rs. 10 lakhs. The company follows straight line method of depreciation for all machines and will continue to do so for new machines also. The annual depreciation for the current machine is Rs. 8 lakhs.

The company from which they regularly buy their machinery has offered to sell them a new machine which will replace the above existing machine. The new machine is technologically advanced version and will cost Rs. 100 lakhs including installation. The new machine is expected to have a net salvage value of Rs. 40 lakhs after 5 years. The new machine can be used for many purposes and is expected to increase profits by Rs. 12 lakhs per year due to new features. In addition, the machine is expected to reduce labour costs by Rs. 5 lakhs per year and electricity costs by Rs. 2 lakhs per year. The cost of capital of Hindustan Constructions is 12 percent.

The tax rate applicable is 36 percent.

Appraise the replacement proposal using the net present value criterion and advise accordingly.

(Discount factor @ 12% cumulative 1–4 years 3.037 and 5th years 0.567)

(0)

(a)

Given below are the spot exchange rates quoted at three different forex markets:
USD/INR 48.30 in Mumbai
GBP/INR 77.52 in London
GBP/USD 1.6231 in New York

The arbitrager has USD 1,00,00,000. Assuming that there are no transaction costs, explain whether there is any arbitrage gain possible from the quoted spot exchange rates.

(0)

(b)

Moon Ltd. in planning to import equipment from Japan at a cost of 3,400 lakh yen. The company may avail loans at 18 per cent per annum with quarterly rests with which it can import the equipment. The company has also an offer from Osaka branch of an India based bank extending credit of 180 days at 2 per cent per annum against opening of an irrevocable letter of credit.

Additional information:

Present exchange rate Rs. 100 = 340 yen
180 days’ forward rate Rs. 100 = 345 yen
Commission charges for letter of credit at 2 per cent per 12 months.
Advise the company whether the offer from foreign branch should be accepted.

(0)

(a)

An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three months. Exchange rates in London are:
Spot Rate ($/£) 1.5865 – 1.5905
3–month Forward Rate ($/£) 1.6100 –1.6140
Rates of interest in Money Market:

	Deposit	Loan
$ £	7% 5%	9% 8%

Compute and show how a money market hedge can be put in place.
Compare and contrast the outcome with a forward contract.

(0)

(b)

Northern Transport Ltd. is presently using a Truck that has a book value of Rs. 6.50 lakhs. It is depreciated on straight line basis and will be fully written off over next six years. Presently the salvage value of the Truck is Rs. 3 lakhs and after six years it is expected to fetch a salvage value of Rs. 50,000. The company is planning to replace the old Truck with a new one, which will cost Rs. 14 lakhs. It will be depreciated on straight line basis over the next six years and will be fully written off at the end of six years. At the end of six years the salvage value of the new Truck is expected to be Rs. 3.50 lakhs. The following additional information are provided:

(i)	Purchase of new Truck will result in savings in annual operating and maintenance costs by Rs. 1.50 lakhs.
(ii)	There will be increase in annual income by Rs. 2.50 lakhs.
(iii)	The cost of capital of the company is 12% and applicable tax rate is 30%.

You are required to calculate yearly Cash Flows for years 1^st to 5th and for 6th year.

(0)

(a)

You are provided with the following data for a company:

•
•
•
•
•
•
•
•

Total Sales
Selling Price
Fixed Cost
Variable Cost
Debt
Equity
Face Value of each share
Tax rate applicable

1,45,000 units
Rs. 23 per unit
Rs. 2,80,000
Rs. 17 per unit
Rs. 10,00,000 @ 11% rate of interest
Rs. 20,00,000
Rs. 10
45%

You are required to work out by what amount the sale of the company has to come down to make Earning before tax as zero. You are also required to work out, what would be new amount of EBT, if EBIT is doubled.

5+3

(0)

(b)

The following information relates to the sources of long term finance used by a company:

Sources	Book value (Rs. lakhs)	Market value (Rs. lakhs)
Paid up Equity Capital Reserves and Surplus Preference Shares 12% Debentures 8%	200 400 150 250	400 — 159 241

The cost of Equity capital is 19%.
Calculate approximate weighted cost of capital using (i) book value weights and (ii) market value weights. (Ignore Taxation).

(0)

Write short notes on any four from the following:

4x4

(0)

(a)

Cross Border Leasing;

(0)

(b)

Embedded Derivatives;

(0)

(c)

Rolling Settlement;

(0)

(d)

Project Financing;

(0)

(e)

Interest Rate Swap;

(0)

(f)

Debt Securitisation;

(0)

(g)

Financial Restructuring.

(0)

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