| 1. | (a) | In the cases below one of the answers is correct. Indicate it by small alphabet (a, b, c or d) and give your workings or reasons briefly: | 2x5=10 | |
| | | (i) | Target Ltd. is operating in an industry in which the average rate of return on market portfolio is 10%.
The beta coefficient of the company is computed as 1.75 and return on Govt. Securities (risk-free) is 6%.
What will be the required return on a stock of the company? | (a) | 12.50% | (b) | 13.00% | (c) | 12.90% | (d) | 12.00%. |
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| | | (ii) | The stock of pioneer company sells for Rs.120. The present value of exercise price and the value of call option are Rs.108.70 and Rs.19.80 respectively. Hence the value of the put option is | (a) | Rs.8.50 | (b) | Rs.9.00 | (c) | Rs.11.00 | (d) | Rs. 8.25 |
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| | | (iii) | The carrying amount of an asset of AB Ltd. as at 31.3.2003 is Rs.7,50,000. The net selling price and the value in use as at 31.3.2003 are estimated at Rs.3,00,000 and Rs.6,50,000 respectively. Thus impairment loss is | (a) | Rs.4,50,000 | (b) | Rs.1,00,000 | (c) | Rs.3,50,000 | (d) | None of these |
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| | | (iv) | Profit Margin (Net) of B.S. Ltd is 7% while turnover is 3 times of its capital. The Return on investment of the concern is | (a) | 20% | (b) | 18% | (c) | 21% | (d) | None of these |
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| | | (v) | B.Ltd purchased fixed assets costing Rs.1800 lakhs on 01.4.2002 and the same was fully financed by US dollar loan payable in 3 annual equal installments. Exchanges were $1=Rs.45.00 and Rs.48.00 as on 1.4.2002 and 31.3.2003 respectively. 1st installment was paid on 31.3.2003. Hence the amount of exchange difference to be adjusted is | (a) | Rs.180.50 lakhs | (b) | Rs.120.00 lakhs | (c) | Rs.150.00 lakhs | (d) | Rs.133.33 lakhs |
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| | (b) | From the following choose the most appropriate answer: | 10x1=10 | |
| | | (i) | The intangible assets that ate distinguishable from goodwill are | (a) | process patents | (b) | Product brands | | (c) | licence to use facilities of Airport Authority | (d) | all of the above. |
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| | | (ii) | Return on investment capital may be decomposed as follows: | | (0) |
| | | (iii) | The aim of foreign exchange risk management is | (a) | To maximize profits | (b) | To know with certainty the quantum of future cash flows | | (c) | To minimize losses | (d) | All of the above |
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| | | (iv) | Black–Scholes formula to value the call option is based on certain assumptions. They include- | (a) | Only European options are considered | (b) | There is no transaction cost. | | (c) | The share pays no dividend. | (d) | All of the above |
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| | | (v) | which of the following is correct? | (a) | Economic Value Added (EVA) is a measure to determine whether an investment contributes positively to the owner’s wealth. | | (b) | EVA is the net present value. | | (c) | EVA is the addition of the total value of operating assets. | | (d) | EVA is the value derived by deducting cost of sales from revenue. |
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| | | (vi) | Firm specific risk is also called | (a) | market risk | (b) | non – systematic risk | | (c) | macro risk | (d) | unavoidable risk. |
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| | | (vii) | Which of the following is a problem with CAPM? | (a) | In testing the model we are also teaching the reliability of our market proxies and also the market efficiency. | | (b) | The model cannot describe the higher than predetermined return for beta is significant. | | (c) | Fama and French found that when size and the MB ratio are included beta is significant. | | (d) | All of the above. |
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| | | (viii) | Estimate of future cash flows should not include | (a) | Income tax receipts or payments | | (b) | Projections of cash flows from the continuing use of the asset. | | (c) | Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life | | (d) | All of the above. |
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| | | (ix) | According to AS–1, which of the following is not true in case of investment? | (a) | Assets are held by an enterprise for earning income by way of dividends, interest and rental, and other benefits. | | (b) | An investment that is by its nature readily realizable and is intended to be held for not more than one year from the date of such investment is made. | | (c) | Assets are held as stock-in-trade | | (d) | An investment in land or building that is not intended to be occupied substantially for use by the investing enterprise. |
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| | | (x) | which of the following is correct? | (a) | A put option gives the option holder the right to buy a stock at a fixed price. | | (b) | The option holder pays a premium to the option writer to acquire the right. | | (c) | An American option can be expressed o or before the expiration of date. | | (d) | An European option can be exercised only on the expiration date. |
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| 2. | FP Software is in the business of engineering software development, drawings, engineering planning and design, and related areas. They work extensively with computer–aided design products and serve both Indian and International markets. FP currently employs 200 software personnel with 10 support staff managing administration, accounting, payroll and other support functions. FP is growing at a rapid pace and the company recruits around 10 software staff every month. In the last year, the growth was not so rapid and the current level of 200 software personnel was maintained during the second half of the last financial year. The FP Finance Controller is preparing his budget for the forthcoming financial year. On an average, one technical person costs Rs.20,00 per month. The revenue generation per technical person is on an average $1,400 per month. In the first month, each person who joins is provided training and does not take up any project. In the second and third months, the productivity of such persons is on an average 50% of normal levels. Dollar rate is currently Rs.46 and will remain at this level during month one. Rupee is expected to become stronger by 10 paise each month thereafter. Personal welfare and related costs are expected to be around 10% of salaries. Traveling costs are budgeted at RS.12 lakhs per quarter spread equally over each month. Marketing expenses are budgeted atRs.24 lakhs per quarter incurred equally over each month. Administration overheads including salaries of support personnel are budgeted at Rs.16 lakhs per month. All payments are made in the month after incurrence. It is expected that around 2% of he billed revenue is not realized as clients make claims against rework done at their end and FP is forced to deal with these claims as effective discounts granted. FP also spends on a software purchasing itself and expects to buy software worth Rs.15 lakhs per month and payments are effected in the same month. Hardware acquisitions are expected to be Rs.15 lakhs in the first month of each quarter and payments are effected in the month after acquisition. Due to rapid increase in personnel, FP expects to spend on furniture and the cost is budgeted at RS.50 lakhs to be paid equally over the next 5 months. As per its Balance Sheet, its hardware book value is currently Rs.1.20 crores and furniture and fixtures book value is Rs.1.00 crore. These are depreciated at 30% and 10% on their book values per annum.
FP pays no income tax. FP declares a dividend every quarter of half of its profits on which a dividend tax of 13% is applicable as per current regulations. The dividend will be paid in the first month of the next quarter along with ax thereon. Assume that cash surpluses or shortages have no funding costs nor revenues.
Prepare a cash budget for the first quarter and the forecast profit and loss statement for the first quarter given that the current cash balance is Rs.50 lakhs. | 6+10 | (0) |
| 3. | You are running a portfolio management business and have assembled the following portfolio for client A. | Scrip | Value | Beta | Infosys
Hind. Lever
Reliance
Tata Motors | Rs.5 lakhs
Rs. 8 lakhs
Rs. 5 lakhs
Rs. 2 lakhs | 1.21
0.97
1.09
1.32 |
Your client insists that the portfolio should comprise the above 4 script alone and that each scrip should be at least 10% of the total portfolio value. You project the Sensex which is currently 4200 to move to 4500 by the end of 3 months and to 4800 by the end of 6 months. | (a) | What will be the value of your portfolio at the end of 3 months and 6 months?[2] |
| (b) | What is the portfolio beta currently?[2] |
| (c) | What could you do to improve the portfolio performance given your view on the market?[4] |
| (d) | If you do take such action, what will the portfolio value be after 3 months and after 6 months?[2] |
| (e) | What will be the portfolio beta in such a case?[2] |
| (f) | At the end of 6 months, you believe that the bull market would have had its run and that the Sensex will now start moving down to around 4600 levels at the end of 9 months from now. How will you again restructure the portfolio at the end of 6 months from now?[4] |
| 16 | (0) |
| 4. | Global Transport Ltd. has monorail system which takes freight and tourist from the local town to a leisure complex in the nearby hills. On the return journeys to the town, products from craft workshops at the leisure complex and returning tourists are transported. Passengers may be assumed to return in the same train as the used on the outward journey. The mix of carriage between those for transporting freight and tourists can be adjusted as required. Each carriage has a capacity fro 600 cubic meters of freight or 60 tourists. The monorail will have 10 carriages linked together for each journey. It is budgeted to operate the monorail for two journeys in each direction in each on 200 days in the coming year (2004-2005). The freight/passenger carriage mix will be the same on inward journeys to the leisure complex.
Market research has resulted in the following estimates for the coming year (2004-2005): | (i) | Demand of 600 passengers per journey could be achieved where the adult fare each journey is Rs.9.00.
For every 45 paise (5%) rise in adult fare above this level, demand would fall by 60 passengers. | | (ii) | The passenger mix will be 2/3 adult and juvenile where the juvenile fare is 50% of the adult fare. | | (iii) | Freight would be available for transporting on the outward journeys to the leisure complex where the following pricing system is ued: | Cubic meters | Incremental revenue per cubic meter | 0001-0600
0601-1200
1201-1800
1801-2400
2401-3000
3001-3600 | 2.20
2.00
1.80
1.60
1.40
1.20 |
| | A minimum of 20% and a maximum of 60% of carriage capacity would be developed to freight on the ourward journeys. | | (iv) | On the inward journeys to the town, 20% of the carriage would be used to transport product from the craft workshops at a rate of Rs.2.00 per cubic meter. No other freight business would be available. | | (v) | The passenger fare structure would be based on the outward journey capacity available (after freight utilization) and would be used for the inward journeys even though idle capacity may exist.
Other budgeted data for the coming year is as follows: | (1) | Fuel costs per single journey: Rs.500 | | (2) | The total wages cost of the combined operation of loading and unloading each freight carriage is Rs.300 | | (3) | Miscellaneous other cost: Rs.35,00,000. | | (a) | Determine the number of carriages which should be developed to freight in the outward journeys in order to maximize profit and calculate the resulting profit for the coming year 2004-2005. | | (b) | The company is considering a two-tier passenger fare system, where by a passenger fare of Rs.5.00 be set for all passengers (adult and juvenile) onward journeys from the leisure complex to the town. the fares onward journeys would remain as detailed I the market research estimates. In order to provide seating for the anticipated unlimited demand under this policy, empty freight carriages on the inward journey could be converted for temporary passenger use at a cost of Rs.25.00 per carriage per journey. |
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Ascertain the choice of freight passenger carriage mix on the outward journey which would now maximize profit. Advise the company on whether this two- tier system should adopted. | 16 | (0) |
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| 5. | Ravina Product Pvt Ltd. manufactures high–fashion women’s garments. It has been trading for two years. The company is doing well and now needs additional capital to expand operation. You as a Management Accountant, have been assigned to the company to advise on the financial situation. As well as being provided with financial statements for the year ending 31st December 2002. the company’s Finance Manager gives you the following information: | (a) | Sales and cost of sales are expected increase by 15percent. In each of the financial years ending 31st December,2003, 2004 and 2005. operating expenses are expected to increase by 5 percent each year. | | (b) | The company expects to continue to be liable for tax at the rate of 35 percent. Assume that tax is paid or refunded twelve months after the year end. | | (c) | The rations of debtors to sales and creditors to cost of sales will remain the same for the next three years. | | (d) | The fixed assets are land and buildings which are not depreciated in the company’s books. Depreciation on the buildings may be ignored. All other assets used by the company (machinery, cars etc.) are rented. | | (e) | Dividends will grow at 25percent in each of the financial years 2003, 2004 and 2005 as per the company’s objective. | | (f) | The company intends to purchase new machinery to the value of Rs.5,00,000 during 2003 although an investment appraisal exercise has not been carried out. It will be depreciated on straight line basis over 10 years. The company charges a full years depreciation in the first year of purchase of its assets. | | (g) | Additional stock was purchased for Rs.35,000 at the beginning of 2003. the value of stock after this purchase is likely to remain at Rs.3,61,000 for the foreseeable future. | | (h) | No decision has been made on the type of finance to be used for the expansion programme. However, the company’s directors think that they can raise new medium–term secured debt, if necessary. A summary of the financial statements for the year ending 31st December,2002 is shown below: RAVINA PRODUCTS PVT. LTD. Summarised Profit and Loss account for the year ending 31st December, 2002. | (Rs. in thousands) | Turnover
Cost of sales
Gross profit
Operating expenses
Interest
Tax Liability
Net Profit
Dividends declared | 1560
(950)
610
(325)
(30)
(89)
166
68 |
Summarised Balance Sheet as at 31st December,2002. | (Rs. in thousands) | Fixed assets(Net book value)
Current Assets:
Stock
Debtors
Cash and bank
Current Liabilities
Trade creditors
Other creditors (including tax & dividends)
Total assets Less Current Liabilities
Financing:
Equity share capital (shares of Rs.10)
Retained Profits as at 31st December,2001
Retentions for the year ending 31st December,2002
10% Debenture (redeemable in 2010)
Total Financing | 750
326
192
50
(135)
(157)
1026
500
128
98
300
1026 |
Using the information in the case: | (a) | prepare forecast profit and loss accounts for the years — 2003, 2004 and 2005. | | (b) | Prepare cash–flow forecast for the years — 2003, 2004 and 2005. | | (c) | Estimate the amount of funds which will need to be raised by the company to finance its expansion. |
Notes:| (i) | Ignore interest or returns on surplus funds invested during the three year period of review. | | (ii) | This is not an investment appraisal exercise; ignore the timing of cash flows with in each year and the cash flows need not be discounted. | | (iii) | Assume the rate of interest (on funds which will need to be raised by the company) — 12 percent. |
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| 16 | (0) |
| 6. | (a) | what do you mean by segment reporting in the light of Accounting standard AS–17 on segment reporting? Briefly state the salient points of AS – 17. | 8 | (0) |
| | (b) | Avon Ltd. Group has three divisions P, Q, and R. details of their turnover, results and net assets are given below: | (Rs. in thousands) | | Division P | | Sales to Q
Other sales (Domestic) | 3010
50
3060 | | Division Q | | Sales to R
Export Sales to the U.S.A
Export Sales to Europe | 40
4,000
200
4240 | | Division R | | Export Sales to Africa | 160 |
| Particulars | Head office | Division
P | Division
Q | Division
R | Segment Expenses:
Inter–segment Purchase
Reallocated cost from H.O
Interest costs
Fixed assets
Net current assets
Long term liabilities | Rs.
—
—
—
50
48
38 | 2840
—
66
8
250
120
20 | 1200
2960
33
10
60
40
10 | 110
90
33
2
130
90
120 |
Prepare a Segmental Report for publication in the Avon Ltd. Group. | 8 | (0) |
| 7. | (a) | Describe the major types of currency exposures. | 8 | (0) |
| | (b) | Gama Ltd. Is planning to import a multipurpose machine from Japan at a cost of 7200lakhs yen. The company can avail loans at 15% interest p.a. with quarterly rests with which it can import the machine. However, there is an offer from Tokyo Branch of an India–based bank extending credit of 180 days at 2%p.a. against opening of an irrecoverable letter of credit.
Other information:| Present exchange rate | : | Rs.100= 360 yen | | 180 days forward rate | : | Rs.100 = 365yen |
Commission charges for letter of credit at 1% per 12 months.
Advise whether the offer from the foreign branch should be accepted. | 8 | (0) |
| 8. | Write short notes on the following: | 4x4=16 | |
| | (a) | Arbitrage Pricing Theory (APT) | | (0) |
| | (b) | Global Reporting Initiative (GRI) | | (0) |
| | (c) | Discounting Operation (D.O) | | (0) |
| | (d) | Financial Swaps. | | (0) |
