CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - December 2007

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • December 2007

This Paper has 31 answerable questions with 0 answered.

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 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 from the rest.

Please answer all bits of a question at one place
Working notes should form part of the answer.

Marks

(a)

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

2x5

(i)

The shares of ANKITA LTD. are currently trading at Rs. 90. The dividend pay out ratio and dividend yield of the Company are 50% and 6% respectively.

If the Company has 3 lakh shares outstanding and falls in the tax bracket of 40%, the taxable income for the Company is

Rs. 49.40 lakh

Rs. 54.00 lakh

Rs. 81,00 lakh

Incomplete information.

(0)

(ii)

HANDI LTD has a plant (asset) which is carried in the Balance Sheet on 31.03.2007 at Rs. 500 lakh. As at that date the value in use is Rs. 400 lakh. What would be the impairment loss of the plant, if the net selling price as on 31.03.2007 is Rs. 350 lakh?

Rs. 100 lakh

Rs. 125 lakh

Rs. 150 lakh

Insufficient information.

(0)

(iii)

MR. SMITH an investor, has purchased a 3 months Call option on the Equity share of PENGUIN LTD. for Rs. 15 with exercise price of Rs. 380. Its current market price is Rs. 350. At the end of 3 months Mr. Smith expects the share price to be in the following range of Rs. 420 with varying probabilities.

Expected Price
Probability

Rs. 320
0.30

Rs. 370
0.40

Rs. 420
0.30

What will be the expected value of Call option price at maturity date? (Ignoring time value of money).

Rs. 29.00

Rs. 22.00

Rs. 12.00

Rs. 9.00

(0)

(iv)

ZEBRA LTD. has a beta (β) of 1.32. On an average, market has been giving a return of 14% and risk free rate has remained at 8%.

If the actual returns on the stocks of the Company for last three years are as under, what would be its ALPHA (α) value?

–	Year − 1	Year − 2	Year − 3
Return on Company Shares(%)	20.00	21.00	17.50

2.35%

3.58%

4.50%

5.50%

(0)

(v)

OLAY LTD. has reported a net income of Rs. 120 lakh for the current year. During this year the Company intends to re–purchase 20% of its shares and this is not expected to affect its net income or P/E Ratio. The number of shares outstanding at present is 10 lakh. If the current stock price is Rs. 42, the price after the re–purchase will be:

Rs. 37.50

Rs. 52.50

Rs. 56.50

None of the above.

(0)

(b)

Choose the most appropriate one from the stated options and write it down:

10x1=10

(i)

Under AS–28 when Goodwill and Corporate assets cannot be allocated on reasonable basis to cash–generating unit (CGU).

A.	‘Bottom up’ test is followed.
B.	‘Top down’ test is followed.
C.	Both the ‘bottom up’ test and ‘top down’ test are performed.
D.	None of these are performed.

(0)

(ii)

Under the financial Capital Maintenance concept, the Capital to be maintained is

A.	Productive capacity of the business
B.	The amount put into the business by the owners
C.	The purchasing power of the sum originally put into the business by the owners.
D.	None of (A), (B), (C).

(0)

(iii)

In put–call–parity, the pay–offs of buying a stock can be replicated by

A.	Buying a call and buying a put option
B.	Buying a call and writing a put option
C.	Writing a call and buying a put option
D.	Writing a call and writing a put option

(0)

(iv)

The slope of CAPM line is also referred to as the

A.	Systematic Risk
B.	Market price of the Risk
C.	Unsystematic Risk
D.	Both (A) and (B) above.

(0)

(v)

Which of the following adjustments is not recommended by Current Cost Accounting (CCA) method to determine the Current Cost operating profit?

A.	Depreciation Adjustment
B.	Cost of Sales Adjustment
C.	Equity Value Adjustment
D.	Monetary Working Capital Adjustment.

(0)

(vi)

Total leverage measures the relationship between

A.	EBIT and Sales
B.	EPS and EBIT
C.	Sales and EPS
D.	PAT and Sales.

(0)

(vii)

When there is a counterparty failure in performing repayment obligation, it gives rise to low quality assets, which in turn leads to

A.	Financial Risk
B.	Default Risk
C.	Credit Risk
D.	Market Risk.

(0)

(viii)

Information regarding basic and dilutive EPS is to be disclosed on the face of

A.	Profit and Loss Account
B.	Notes to the Accounts
C.	Balance Sheet
D.	Cash flow Statement.

(0)

(ix)

Contigent assets as per AS–29 are

A.	Recognised in Balance Sheet, if happening in almost certain
B.	Not recognised in Balance Sheet
C.	Disclosed in Notes to Accounts
D.	Subject to accounting policies followed by the enterprise.

(0)

(x)

The efficiency with which the firm utilizes its assets, can be assessed by studying its

A.	Liquidity ratios
B.	Leverage ratios
C.	Activity ratios
D.	Profitability ratios.

(0)

(a)

The following information extracted from the Books of TROMA LTD. (TL) are available as on 01.04.2006

(i)	Equity Shares of Rs. 10 each outstanding (Nos.)	2,00,000
(ii)	Partly paid Equity Shares of Rs. 10 each Rs. 5 paid outstanding (Nos.)	2,00,000
(iii)	Options Outstanding at an exercise price of Rs. 60 for one Equity Share Rs. 10 each average fair value or Equity Share Rs. 75 (Nos.)	20,000
(iv)	12% Convertible debentures of Rs. 100 each conversion ratio (Nos.) 4 Equity Shares for each debenture	20,000
(v)	10% Convertible Preference Shares of Rs. 100 each Conversion ratio 2 Equity Shares for each Preference Share (Nos.)	1,60,000
(vi)	On 01.01.2006 the partly paid shares were fully paid
(vii)	On 01.01.2007 the Company issued 1 Bonus Shares for 8 shares held on that date
(viii)	Dividend Tax is payable for the year ending 31.03.2007	10%
(ix)	Corporate Tax Rate	30%
(x)	Net Profit attributable to the Equity Shares holders for the year ending 31.03.2007	Rs. 20,00,000

From the given information you are required to calculate, complying with the requirements of AS–20;

(i)	Weighted Average number of Equity Shares for the ending March 31, 2007.
(ii)	Earnings per share (EPS) for the year ending March 31, 2007.
(iii)	Diluted Earnings per share for the year ending March 31, 2007.

2+1
+3+4

(0)

(b)

VINTEX LTD. (VL) purchased Machinery from MKC LTD. on 30.09.2006. The price was Rs. 370.44 lakhs after charging 8% Sales Tax and giving a trade discount of 2% on the quoted price. Transport charges were 0.50% on the quoted price and the installation charges come to 1.5% on the quoted price.

A loan of Rs. 320 lakh was taken from Allahabad Bank on which interest at 12% per annum was to be paid.

Expenditure incurred on the trial run was material Rs. 40,000, wages Rs. 35,000 and overheads Rs. 25,000.

Machinery was ready for use on 01.12.2006. However, it was actually put to use only on 01.05.2007. The entire loan amount remained unpaid on 01.05.2007.

Keeping in view the relevant Accounting Standards (AS – 10 and AS – 16)

(i) Find out the cost of Machine and (ii) Suggest the accounting treatment for the expenses incurred in the interval between the dates 01.12.2006 and 01.05.2007.

4+2=6

(0)

The extract of balance sheets and income statements of M/s. NOVEL COMPANY over the last 3 years are as follows:

	(Rs. in thousands)
Particulars	2004	2005	2006
Cash Receivables Inventories Current Assets Net Fixed Assets Total Assets Payable Accruals Bank loan Current Liabilities Loan term debt Share holders equity Total Liabilities and equity Sales Cost of goods sold Selling, general and administrative expenses Profit before taxes Taxes Profit after taxes	561 1,963 2,031 4,555 2,581 7,136 1,862 301 250 2,413 500 4,223 7136 11,863 8,537 2,349 977 390 587	387 2,870 2,613 5,870 4,430 10,300 2,944 516 900 4,360 1,000 4,940 10,300 14,952 11,124 2,659 1,169 452 717	202 4,051 3,287 7,540 4,364 11,904 3,613 587 1,050 5,250 950 5,704 11,904 16,349 12,016 2,993 1,340 576 764

you are required to

(a)

(i)

Prepare common size statement, and

(ii)

Perform Index analysis.

(b) Valuate trends in the Company’s financial condition and performance.

6+2
+6+2

(0)

(a)

The following information pertains to PROTECH LTD. for the year ending March 31, 2007:

		(Rs. in million)
EBIT Less: Interest on Debt (at 12%) PBT Less: Tax at 50% PAT		30.00 6.00 24.00 12.00 12.00
Number of outstanding shares of Rs. 10 each	40 lakh
EPS Market price of the share P/E Ratio		Rs. 3.00 Rs. 30.00 10.00

PROTECH LTD. has undistributed reserves of Rs. 60 million. The Company requires Rs. 20 million for expansion, which is expected to earn the same rate earned by the present Capital Employed.

If the Debt total capital employed ratio is higher than 35%, the P/E Ratio is expected to decline to 8 and raise the cost of additional debt to 14%.
Requirements:

(i)

What would be the Probable Share Price of PROTECH LTD. If

(A)	Option I:	The required amount is raised through debt and
(B)	Option II:	The required amount is raised through equity and the new shares will be issued at Rs. 25 per share.

(ii)

What option would you recommend to raise the required amount of Funds to PROTECH LTD?

3+2
+3+2

(0)

(b)

Discuss the essentials of a good financial report.

(0)

(a)

Explain the difference between the Capital Market Line (CML) and the Security Market Line (SML).

(0)

(b)

You are considering investment in one or both of two securities. X and Y and you are given the following information:

Security	Possible rates of returns %	Possibility of occurrence
X Y	30 25 20 50 30 10	0.3 0.4 0.3 0.2 0.6 0.2

You are required to:

(i)	Calculate the expected return for each security separately and for the portfolio comprising 60% X and 40% Y, assuming positive correlation between the possible rates of return from the shares comprising the portfolio.

(ii)	Calculate the expected risk of each security separately and of the portfolio as defined above.

You may use standard deviation as the measure of risk.

(2+1)
+(2+5)

(0)

The Summarized Balance Sheet of AKASH OPTIMA LTD. as at March 31, 2007 is furnished below:

(Rs. in lakh)
Equity Shares (Rs. 10 each) Share Premium General Reserves Long Term Debt Proposed Dividend Creditors: Goods Expenses	20.00 20.00 21.00 12.00 3.60 5.00 1.40 83.00	Fixed Assets Less: Accumulated Depreciation Current Assets: Inventories Debtors Cash and Bank	75.00 25.00	50.00 10.00 18.00 5.00 83.00

Sales for the year 2006–07 amounted to Rs. 80 lakh. The Company’s gross margin was 50%.

Forecasts for 2007–08
(i)	Sales (all credit) growth	10%
(ii)	Improvement in G.P. margin	2%
(iii)	Selling, general and administrative Expenses	30% on Sales
(iv)	Depreciation/Prior–year fixed assets (Gross)	5%
(v)	Interest Expenses/Prior–year long term debt	9%
(vi)	Debtors (average) Turnover	4 times
(vii)	Capital Expenditure (acquisition of new buildings and equipment)	8.5% of Turnover
(viii)	Year – end accrued Expenses	Rs. 0.75 lakh
(ix)	Turnover of average Inventory	4 times
(x)	Turnover average Creditors	1.20 months
(xi)	Proposed Dividend per share	Rs. 3.00
(xii)	Income Tax	35%
(xiii)	Year–end Cash and Bank balance	Equal to the ratio of Cash and Bank Balance to Sales Revenue Prevailing in the prior–year.
(xiv)	Additional Long–term debt	Equal to the amount needed to meet the desired year–end Cash and Bank balance.

Requirements:

(a)	Prepare Projected Balance Sheet as at March 31, 2008 and
(b)	Prepare Projected Profit and Loss Account for the year ended March 31, 2008. All relevant workings are to be shown.

5+5
+6

(0)

(a)

Following are the Balances taken from the Balance Sheet of ZENITH LTD. prepared according to current Cost Accounting Method as on March 31, 2007:

	(Rs. in thousand)
Current Assets: Bank and Cash (not included in MWCA) Current Liabilities: Creditors (Hire purchase) Taxation Proposed Dividends Bank overdraft (not included in MWCA) Long Term Loans Debentures Deferred Liabilities: Deferred Taxation Net Assets employed Shareholders' Funds	450.00 170.00 210.00 250.00 190.00 540.00 320.00 3,540.00 2,680,00
The following is the additional information regarding different Adjustments made:
	(Rs. in thousand)
Depreciation Adjustment Cost of Sales Adjustment Monetary Working Capital Adjustment Fixed Assets disposed	870.00 1,050.00 320.00 80.00

Requirements:

(i)	Determine Current Cost Gearing Proportion.
(ii)	Determine Current Cost Gearing Adjustment.

4+2+2

(0)

(b)

The Equity Shares of ENDALCO LTD. are currently selling at a price of Rs. 500 each. An investor is interested in purchasing the shares of Endalco Ltd. The investor expects that there is a 80% chance that the price will go up to Rs. 650 or a 20% chance that it will go down to Rs. 450, three months from now. There is a call option on the Shares of Endalco Ltd. that can be exercised only at the end of three months at an exercise price of Rs. 550. The risk–free rate is 12% per annum.

(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 maintain identical position regardless of the share price.

(iii)

How much the investor should pay for buying this call option today?

(iv)	What is the expected return on the option?

2+2+2+2

(0)

Write short notes on any four out of the following;

4x4

(a)

Du Point Chart;

(0)

(b)

Global Reporting Initiative (GRI);

(0)

(c)

Call and Put option with reference to Debentures;

(0)

(d)

Valuation of Intangible Assets;

(0)

(e)

Shareholders Value Analysis (SVA);

(0)

(f)

Contingent Assets and Contingent Liabilities (As per AS – 29).

(0)

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