CWA ICWA Final Stage III : Advanced Financial Management and International Finance - June 2008

CWA ICWA - Final Stage III • Advanced Financial Management and International Finance • June 2008

This Paper has 29 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 from Part A which is Compulsory and another five questions from Part B. Please answer all bits of a question at one Place. Working notes should form part of the answer.
PART A
Marks

The figures in the margin on the right side indicate full marks.
Answer Question No. 1 from Part A which is Compulsory and
another five questions from Part B.
Please answer all bits of a question at one Place.
Working notes should form part of the answer.

PART A

Marks

(a)

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

2x5

(i)

MILTON LTD. is foreseeing a growth rate of 10% per annum in the next 2 years. The growth rate is likely to 12% for the third and fourth year. After that the growth rate is expected to stabilize at 8% per annum. Given that, the present value of dividend stream for first 2 years is Rs. 3.03 and for next 2 years is Rs. 3.08. If the last dividend paid was Rs. 1.50 per share and the investor’s required rate of return is 10%, the intrinsic value per share of Milton Ltd. as of date will be
[Given PVIF (10%, 4 years) = 0.6830.]

(A)
(B)
(C)
(D)

Rs. 90.20
Rs. 90.12
Rs. 89.95
None of (A), (B), (C)

(0)

(ii)

GEMINI LTD. has total assets of Rs. 60 crore and a Debt/equity ratio of 0.5. Its sales are Rs. 27 crore and it has total fixed cost of Rs. 7 crore. If the company’s EBIT is Rs. 6 crore, its tax rate is 40 per cent and the interest rate on debt is 12 per cent, the ROE of Gemini Ltd. would be

(A)
(B)
(C)
(D)

4.40%
5.40%
6.20%
Insufficient information.

(0)

(iii)

Mr. SHEET AL buys 10000 shares of Rudson Ltd. at Rs. 50 and obtains a complete hedge of shorting 400 Nifties at Rs. 2200 each. She closes out her position at the closing price of the next day at which point the share of Rudson Ltd. has dropped 2% and the Nifty future has dropped 1.5%. What is the overall profit/(loss) of this set of transaction?

(A)
(B)
(C)
(D)

Gain Rs. 3200
Gain Rs. 2200
Loss Rs. 3200
Loss Rs. 2000

(0)

(iv)

CITI Bank wants to calculate Rupee TT Selling rate of exchange for DM since a deposit of DM 1,00,000 in a FNCR A/c has matured, when:
EURO 1 = DM 1.95583 (locked in rate)
EURO 1 = US $ 1.02348/43
US $ 1 = Rs. 40.51/53.
What would be the Rupee TT Selling rate for DM currency that the bank can consider for the said A/c.?

(A)
(B)
(C)
(D)

Rs. 25.3851
Rs. 21.1988
Rs. 21.2082
None of (A), (B), (C).

(0)

(v)

The total market value of the equity shares of ANKIT Ltd. is Rs. 60 lakh and the total value of debt is Rs. 40 lakh. The treasurer estimates that the beta of the stock is currently 1.5. Assume that debt beta is zero. If the expected risk premium on the market is 10% and the Treasury bill rate is 8%. What will be the cost of capital of Ankit Ltd.?

(A)
(B)
(C)
(D)

23%
17%
16%
Insufficient data

(0)

(b)

Match each item in the left hand Column I with an appropriate item in the right hand Column II:

Column–I		Column–II
(i) (ii) (iii) (iv) (v)	Dry lease Record date Residual value A put on call option Cash of nothing	(A) (B) (C) (D) (E) (F) (G)	Lessor Lessee Dividend payment Binary option Compound option Asian option Barrier option

1x5

(0)

(c)

State whether each of the following statements is True (T) or False F:

1x5

(i)

Fair value of a share that is listed, is the price of the share in the Stock Exchange.

(0)

(ii)

Excessive working capital results in production interruptions and inefficiencies

(0)

(iii)

Reviving a sick unit is far more risky than launching a new project.

(0)

(iv)

As far as inventories are concerned, drawing power under Cash Credit System considers only the paid and moving items of the stock

(0)

(v)

Buy–back of shares always leads to reduction of capital.

(0)

PART B Answer any five questions, each carrying 16 marks.

PART B
Answer any five questions, each carrying 16 marks.

(a)

The financial highlights of AMTEK Ltd. for the year 2007–08 are as given under:

EBDIT
Depreciation
Effective Tax Rate
EPS
Book Value
Number of Outstanding shares
D/E Ratio

Rs. 830 crore
Rs. 6 crore
30%
Rs. 4.00
Rs. 30 per share
33 crore
1.5 : 1

Required:

(i)	Calculate Degree of Financial leverage.

(ii)	What is the Financial Break–even Point of Amtek Ltd.

(iii)

What should be the impact of EPS if the EBIR is increased by 5%.

3+2+1

(0)

(b)

PROGRESSIVE LTD. sells its products to wholesale distributors. The management is worried over the liquidity and is exploring methods of improving the cash flow, by speeding up collection from debtors. The following table summarises its turnover and profits for the last two years and comparable debtors level as at the end of last two years.
The alternatives before the management are:

(i)	Offer a 2% discount to customers who settle within 10 days of invoicing. It is estimated that 50% of customers would take advantage of this offer.

(ii)

Seek the services of a factor, who will operate on a "service only" basis, administering and collecting payments from customers. Savings are expected to be Rs. 5,00,000 annually; also debtor days will come down to 45 days. Charges payable to the factor would be 1.5% of turnover. Progressive Ltd. can borrow from bank at 15% per annum.

	Amount in Rs. ’000
	Year 0	Year 1
Turnover Profits Debtors	60000 11500 8000	80000 15000 13000

Analyse the costs and benefits of both alternatives and state the preferred course of action. [Note: Take 365 days in a year]

(0)

(a)

NEEL LTD. which is specialized in manufacturing garments is planning for expansion to handle a new contract which it expects to obtain. An investment bank have approached the company and asked whether the Co. had considered venture capital financing. In 2001, the company borrowed Rs. 100 lacs on which interest is paid at 10% p.a. The company shares are unquoted and it has decided to take your advice in regard to the calculation of value of the company that could be used in negotiations, using the following available information and forecast.

Company’s forecast turnover for the year ending 31st March, 2005 is Rs. 2000 lacs, which is mainly dependent on the ability of the company to obtain the new contract, the chance for which is 60%. Turnover for the following year is dependent to some extent on the outcome of the year ending 31st March, 2005.
Following are the estimated turnovers and probabilities:

Year 2005
Turnover Rs. (in lacs)	Prob.
2,000	0.6
1,500	0.3
1,200	0.1

Year 2006
Turnover Rs. (in lacs)	Prob.
2,500	0.7
3,000	0.3
2,000	0.5
1,800	0.5
1,500	0.6
1,200	0.4

Operating costs, inclusive of depreciation, are expected to be 40% and 35% of turnover, respectively, for the years 31st March, 2005 and 2006. Tax is to be paid at 30%. It is assumed that profits after interest and taxes are FREE CASH FLOWS. Growth in earnings is expected to be 40% for the years 2007, 2008 and 2009, which will fall to 10% each year after that. Industry average cost of equity (net of tax) is 15%.
Note: Extracted from the table of PV.
PVIF at 15% for 0 to 5 years: 1.000, 0.870, 0.756, 0.658, 0.572, 0.497.

4+4+2+2

(0)

(b)

In March, 2008 SURAVESH INDUSTRIES makes the following assessment of the Dollar rates per British pound to prevail as on 1.09.2008:

$/Pound	Probability
1.6 1.7 1.8 1.9 2.0	0.15 0.20 0.25 0.20 0.20

(i)	What is the expected spot rate for 1.09.2008?

(ii)	If, as of March, 2008, the 6–month forward rate is $ 1.80, should the firm sell forward its pound receivable due in September, 2008?

3+1

(0)

(a)

Venture Capital is considered to be a high risk capital. Do you agree? Enumerate the main features of Venture Capital Investments.

2+4

(0)

(b)

Your client is holding the following securities:

Particulars of the securities	Cost Rs.	Dividends Rs.	Market price Rs.	Beta
Equity Shares Co. X Co. Y Co. Z PSU Bonds	8000 10000 16000 34000	800 800 800 3400	8200 10500 22000 32300	0.8 0.7 0.5 1.0

Assuming the risk free rate of 15%, Calculate:

(i)	Expected rate of return in each, using the Capital Asset Pricing Model (CAPM).

(ii)	Average return of the portfolio.

3+3

(0)

(c)

What are the determinants of Dividend Policy?

(0)

(a)

SUNSHINE LTD., an Indian based Company has subsidiaries in U.S. and U.K. whose forecast surplus funds for the next 30 days (June 2008) are given below:

U.S. subsidiary :
U.K.subsidiary :

$ 12.00 million
$ 6.00 million

The following informations pertaining to exchange rates are obtained:

	$/Rs.	£/Rs.
Spot 30 days forward	0.0243 0.0245	0.0148 0.0150

The borrowing/deposit rates per annum (simple) are available:

Rs.
$
£

8.4%/7.5%
1.6%/1.5%
4.0%/3.8%

The Indian operation is forecasting a cash deficit of Rs. 400 million. It is assumed that interest rates over based on a year of 360 days.
Required:

(i)

Calculate the cash balance in Rupees at the end of 30 days period (at the end of June, 2008) for each company under each of the following scenarios ignoring transaction costs and taxes.

(A)	Each company invests/finances its own cash balances/deficits in local currency independently.
(B)	Cash balances are pooled immediately in India and the next balances are invested/borrowed for the 30 days period.

(ii)

Which method do you think preferable from the parent company’s (Sunshine Ltd.) point of view?

5+3+1

(0)

(b)

MUMBAILTD. is an Indian company, they are in the proces of raising a US dollar loan and are negotiating the rates with City Bank. The company has been offered a fixed rate of 7% p.a. with a proviso that should they opt for a floating rate, the interest rate is likely to be linked to the Bench mark rate of 60 basis points over the 10–year US T Bill Rate, with interest refixation on a three monthly basis. The expectations of Mumbai Ltd are that the dollar interest rates with fall, and are inclined to have a flexible mechanisms built into their interest rates. On enquiry they find that they could go for a swap arrangement with CHENNAI INDIA LTD. who have been offered floating rate of 120 basis points over 10–year US T Bill Rate, as against a fixed rate of 8.20%. Describe the swap on the assumption that the swap differential is shared between Mumbai Ltd. and Chennai India Ltd. in the proportion of 2 : 1.

1+5+1

(0)

SURAT PAPER MILLS is considering setting up a cogeneration power plant to minimize production losses that occurs due to frequent interruption of power supply. The proposed plant is contemplated to meet the power requirement of the duplex board paper manufacturing continuous process plant. The capital cost of the cogeneration plant is estimated to be Rs. 126 million with phasing of expenditure as given below:

Year	0	1
Capital expenditure (Rs. million)	84	42

The capital cost will be met through company’s own capital of Rs. 38 million and borrowing of the balance amount from the financial institution at an interest rate of 8.85 percent.
The savings in electricity cost is projected as given under:

Year	Generation in million kwh	Present supply cost (Rs. per kwh)	Cogeneration cost (Rs. per kwh)	Savings (Rs. per kwh)
1 2 3 4 5 6 7 8 9	7.55 24.53 24.53 24.53 24.53 24.53 24.53 24.53 24.53	4.88 5.07 5.26 5.47 5.68 5.90 6.14 6.37 6.63	3.87 3.99 4.11 4.23 4.36 4.49 4.62 4.76 4.90	1.01 1.08 1.15 1.24 1,32 1.41 1.52 1.61 1.73

Required:

(i)	Do you think setting up a cogeneration plant a viable option for the company? Support your answer with necessary calculations.
(ii)	Also estimate levelized cost of generation per unit using the cogeneration plant. You may ignore tax effect and assume cost of equity of 16 percent.

Note: Extracted from the Table of PV.

(i)	PVIF at 11% for 0 to 9 years are	:	1.0000, 0.9009, 0.8116, 0.7312, 0.6587, 0.5935, 0.5346, 0.4817, 0.4339, 0.3909.
(ii)	PVIF at 16% for 0 to 9 years are	:	1.0000, 0.8621, 0.7432, 0.6407, 0.5523, 0.4761, 0.4104, 0.3538, 0.3050, 0.2630
(iii)	PVIFA for 9 years at 11%	:	5.5370.
(iv)	PVIFA for 9 years at 16%	:	4.6065

2+7+6+1

(0)

(a)

WELSH LTD has 150000 equity shares of Rs. 10 each and 12%. Long–term debt of Rs. 1200000 outstanding at the beginning of the year 2008–09. The finance department of the company has generated the following forecast financial statistics for the year 2008–09.

Return on Total Assets (ROTA)
(EBIT/Total Assets)
Debt ratio (External liabilities/equity)
Effective interest rate (EIR)
(Interest expenses/Total liabilities)
Current Assets to Fixed Assets
Tax Rate

25 per cent

0.75
10 per cent

0.60: 1
40%

The Assets, Liabilities and equity figures used to compute the above financial statistics are based on forecast balances as at 31.3.2009. The company has no plant to change its equity share capital and long–term debt.
Requirements

(i)	Prepare the forecast Balance Sheet, as at 31st March, 2009 with as many details as possible; and
(ii)	Forecast Earnings per share (EPS).

Show necessary workings.

3+3+4

(0)

(b)

The following information pertains to RICO LTD.

	(Amount in Rs. Lakh)
Net profit Outstanding 12% preference shares Number of shares outstanding Return on Investment Equity capitalisation rate	60 200 6 lakh 20% 16%

Required:

(i)	What should be dividend pay–out ratio so as to keep the share price at Rs. 41.25 by using WALTER MODEL?

(ii)	What is the optimum dividend pay–out ratio according to Walter Model.

5+1

(0)

Write short notes on any four out of the following:

4x4

(a)

Forward–to–forward contracts,

(0)

(b)

Objectives of portfolio management,

(0)

(c)

Strategic rollup,

(0)

(d)

Techniques of financial forecasting,

(0)

(e)

Role of mutual funds in the financial market,

(0)

(f)

Secondary market.

(0)

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