CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - June 2008

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • June 2008

This Paper has 32 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

(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)

Vishaka Ltd. is having a plant (Asset) carrying amount of which is Rs. 50 lakh on 31st March, 2008 and Balance of Plant useful life is 4 years and residual value at the end of 4 years is Rs. 3 lakh. Estimated future cash flow from using the plant will be Rs. 20 lakh per annum for the next 4 years. If the discount rate is 10%, the "Value in Use" for the plant will be
[Given PVIFA (10%, 4 years) = 3.1699 and PVIF (10%, 4 years) = 0.6830]

63.40 lakh

65.44 lakh

66.40 lakh

None of (A), (B) and (C).

(0)

(ii)

Akruti Ltd. is a manufacturing company having net profit margin of 8.50% and asset turn over ratio of 0.80 for the year ended 31st March, 2008. If its debt–asset ratio is 0.75, the Return on Net worth of the company will be

18.50%

24.00%

27.20%

Data insufficient

(0)

(iii)

The shares of Zenith Ltd. are presently trading at a price of Rs. 40 per share. The expected dividend by the end of the year is Rs. 2 per share while the price appreciation is projected by the analysts as follows:

Price (Rs.)	44	50	54
Probability	0.30	0.50	0.20

What is the expected return from the shares of Zenith Ltd.

20.50%

25.00%

27.50%

30.50%

(0)

(iv)

MBC. Ltd. has both European Call and Put options traded on NSE. Both options have an expiration date 6 months and exercise price of Rs. 20. The Call and Put are currently selling for Rs. 8 and Rs. 2 respectively. The risk free rate of interest is 6% p.a. What would be the stock price of MBC Ltd?
[Given PVIF (6%, 1/2 year) = 0.9709]

Rs. 31.03

Rs. 25.42

Rs. 53.34

None of the above.

(0)

(v)

SOFTEX Ltd. has paid a dividend of Rs. 4 per share with annual growth rate of 8%. The expected return on the market portfolio and the risk–free rate of return are estimated to be 15% and 10% respectively. If the market sensitivity Index (β) has been found to be 1.5, the equilibrium price for the shares of SOFTEX, Ltd. is

32.57

40.87

45.47

Incomplete Information.

(0)

(b)

Choose the most appropriate one from the stated options and write it down. (Only indicate A, B, C, D as you think correctly):

1x10

(i)

As per AS–11 exchange differences arising on repayment of fixed asset–linked liabilities should be adjusted to

A.	Profit and Loss account
B.	Fixed Asset account
C.	Revaluation reserve
D.	None of the above.

(0)

(ii)

If the risk–free rate of return is expected to increase in future and the investors become more risk averse, the Security Market Line (SML) will

A.	Shift up and the slope will increase
B.	Shift down and the slope will increase
C.	Shift down and the slope will decrease
D.	Remain unchanged.

(0)

(iii)

An investor owning a stock wants to retain the upside potential of the stock. At the same time he wants to limit his loss, if the stock price falls, What should he do?

A.	Buy a call option and a sell a put option
B.	Buy a call option and buy a put option
C.	Sell a call option and buy a put option
D.	Buy a put option.

(0)

(iv)

Return on Investment (ROI) and Return on Equity (ROE) are exactly 0.20. This indicates that

A.	ROE has been calculated wrongly
B.	The firm has no debt in their capital structure
C.	The firm does not pay Income Taxes
D.	Both (B) and (C) of the above.

(0)

(v)

Under the physical capital maintenance concept the Capital to be maintained is

A.	Financial amount put into the business by the owner.
B.	Physical productive capacity of the business
C.	The purchasing power of the sum originally put into the business by the owner.
D.	None of (A), (B) and (C).

(0)

(vi)

While computing the profits of a business, which of the following measures considers the Cost of Debt as well as the Cost of Equity?

A.	Market value added
B.	Gross value added
C.	Economic value added
D.	Net value added.

(0)

(vii)

Which of the following will lead to a decrease in the expected Price–Earning ratio?

A.	Increase in the growth rate
B.	Increase in the Cost of Equity Capital
C.	Decrease in the expected EPS
D.	Increase in the expected dividend payout ratio.

(0)

(viii)

The risk that arises due to change in the purchasing power is called

A.	Business risk
B.	Financial risk
C.	Inflation risk
D.	None of (A), (B) and (C).

(0)

(ix)

For measuring Beta which can be used as a better proxy for the market portfolio?

A.	BSE Sensex
B.	BSE 200 Index
C.	Any market Index
D.	None of (A), (B) and (C).

(0)

(x)

AS–17 is mandatory for listed companies and for other commercial, industrial and business reporting enterprises whose turnover for the accounting period exceeds

A.	Rs. 1000 million
B.	Rs. 500 million
C.	Rs. 25 million
D.	None of (A), (B) and (C)

(0)

(a)

State the factors on which option value depends.

(0)

(b)

LEE Ltd. has an inventory of 1500 units at the start of an accounting period. All of these units are sold during the period. At the end of the period it has 2000 units of inventory. There is no withdrawal or introduction of capital during the period. The following price prevailed.

	Price per unit Rs.
Opening position (1500 units) Historical cost Replacement cost Net Realisation value Closing Position (2000 units) Historical cost Replacement cost Net realisable value Price Index: Start of the period — 120 End of the period — 150 The Company has no other assets or liabilities.	24.00 26.00 28.00 36.00 41.00 43.00

You are required to compute Net Profits of the period using all possible combinations of bases of valuations and measures of capital maintenance.

4+4+4

(0)

(a)

FUTURA Ltd. acquired SMITTH Ltd.‘s business on 31st March, 2006 for Rs. 500 lakh. The details of acquisition are under:

Fair value of identifiable asset
Goodwill (to be amortised in 5 years)

Rs. 400 lakh
Rs. 100 lakh

The anticipated useful life of acquired assets is 8 years. Futura Ltd. uses straight line method of depreciation with no residual values anticipated. On 31.3.2008 Futura Ltd. estimated the significant decline in production due to changed Government policies, the net selling price of indentifiable asset is not determinable. The cash flow forecast based on recent financial budget for next 6 years after considering changed Government policies are as follows, incremental financing cost is 10% which represent current market assessment of the time value of money.

Year

2009
2010
2011

Cash flow

70
70
60

Year

2012
2013
2014

(Rs. in lakh)
Cash flow
60
50
50

Acquired business is a cash–generating unit.
You are required to calculate, complying with the requirement of AS–28.

(i)
(ii)
(iii)

Value in Use;
Impairment Loss;
Revised carrying amount of Asset — on 31st March, 2008.
[Given PVIF at 10% for year 1 to 6: 0.909, 0.826, 0.751, 0.683, 0.621, 0.564].

4+5

(0)

(b)

The following details are given for Glorious Ltd. for the year ended 31st March, 2008:

FP Division:	(Amount in Rs. in lakh)
Sales to PP division Other domestic sales Export Sales	458 9 613
	1080
PP Division: Sales to HD division Export Sales to USA	05 30
	35
HS Division: Export Sales to Rwanda	27

	(Amount in Rupees – lakh)
Particulars	Head Office	FP Division	PP Division	HS Division
Pre–tax operating result		24	3	(1)
Head Office cost reallocated		7	4	3
Interest costs		1	1	1
Fixed Assets	8	30	6	18
Net Current Assets	7	18	6	13
Long–term Liabilities	6	3	2	18

Requirement:
Prepare a segmental report for publication in Glorious Ltd. for the year ended 31st March, 2008, keeping in view the relevant Accounting Standard (AS – 17).

(0)

(a)

Distinguish between Integral Foreign Operations (IFO) and Non–Integral Foreign Operations (NFO).

(0)

(b)

An analyst of BCK Securities Ltd. has made risk and return projections for the securities of Reliance and Hindalco, which are as follows:

Scenario	Probability	Return on Reliance (%)	Return on Hindalco (%)	Market Return (%)
4% GDP growth	0.30	3	2	1
6% GDP growth	0.35	17	14	15
8% GDP growth	0.25	20	19	17
10% GDP growth	0.10	22	17	25

It is felt that the interest rate of 7 per cent on the 91–day T–Bill is a good approximation of the risk–free rate.
Requirement:

(i)	Calculate the Betas of Reliance and Hindal co and comment on your findings.
(ii)	Find out whether the shares of Reliance and Hindalco are under priced or over priced.

3+(2+1)+4

(0)

(a)

The summarized Balance Sheet of Green Environ Ltd. as at 31st March, 2008 was as follows:

(Amount in Rs. –lakh)
Equity Shares of Rs. 10 each Reserves 6% Debentures Current Liabilities	100 300 180 120 700	Fixed Assets at Cost less Depreciation Current Assets	480 220 700

Additionally, the following information are available.

(i)	Company’s equity beta: 1.25 Yield on long term treasury bonds: 8% Stock market risk premium: 6%.
(ii)	The current equity price is Rs. 50.
(iii)	The debentures, which are redeemable at part in ten years’ time, have a current market price of Rs. 80 each (face value Rs. 100 each).
(iv)	The company pays tax at the rate of 40%.
(v)	Debenture interest is payable at the end of each year.

There is a proposal to alter the Capital structure of the Company. The board of directors is considering whether to re–purchase equity shares with proceeds from issue of new debentures. It is proposed to issue Rs. 100 lakh (6%) new debentures at par and to use funds to repurchase equity shares.
The board believes that the market price of the existing equity shares or debentures will not change as a result of the proposed issue of new debentures.

It may be assumed that the repurchase of equity shares is permissible under the present company legislation. Assume that cost of equity and cost of debt will remain unchanged after alteration of capital structure. You are required to evaluate the likely effect on the Weighted Average Cost of Capital (WACC) of the Company if the proposed scheme of alteration of Capital structure is given effect to.
How will your evaluation change if the Company does not expect to pay taxes in the foreseeable future?

Notes:

(i)

Ignore Floatation Cost and Transaction Cost.

(ii)

Extracted from the PV Table:
PV factor of an annuity of Re. 1 for 10 years.

Interest Rate PV Factor	6% 7.360	8% 6.710	10% 6.145
PV factor for Re. 1 to be received/paid at the end of year 10:
Interest Rate PV Factor	6% 0.558	8% 0.463	10% 0.386

3+3+3+1

(0)

(b)

"Cost of Capital is used by a Company as a minimum bench mark for its yield". —Comment.

(0)

(a)

Economic Value Added (EVA) has come to the forefront as a measure of Value Creation ’� Define Economic Value Added (EVA). Discuss the usefulness of EVA implementation for a company.

2+4

(0)

(b)

The abridged financial statements of Deportivo Ltd. for the year 2006–07 and 2007–08 are given below:

Balance Sheet as at

(Amount in Rs. – million)

	31st March 2007	31st March 2008
Fixed Assets	370	480
Net Current Assets	400	500
	770	980
Financed by: Shareholders Funds	595	720
Medium and long term Bank loans	175	260
	770	980

Profit and Loss Account for the years

(Amount in Rs. – million)

	2006–07	2007–08
Turnover	995	1180
Pre–tax Accounting Profit	210	265
Taxation	63	80
Profit after Tax	147	185
Dividend	50	60
Retained Earning	97	125

Pre–tax accounting profit is taken after deducting the economic depreciation of the Company‘s fixed assets (also depreciation used for tax purposes).
Additionally, the following information are available:

(i)	Economic depreciation was Rs. 95 million in 2006–07 and Rs. 105 million in 2007–08.
(ii)	Interest expenses were Rs. 13 million in 2006–07 and Rs. 18 million in 2007–08.
(iii)	Other non–cash expenses were Rs. 32 million in 2006–07 and Rs. 36 million in 2007–08.
(iv)	Corporate Tax Rate in 2006–07 and 2007–08 was 30%.
(v)	Deportivo Ltd. had non–capitalised leases valued at Rs. 35 million in each year 2005–06 to 2007–08.
(vi)	The Company‘s Cost of Equity was estimated as 14% in 2006–07 and 16% in 2007–08,
(vii)	The Company‘s pre–tax Cost of Debt was estimated as 7% in 2006–07 and 8% in 2007–08.
(viii)	The target Capital Structure is 75% Equity and 25% Debt.
(ix)	Balance Sheet Capital employed at the end of 2005–06 was 695 million.

Required:
Estimate the Economic Value Added for Deportivo Ltd. for the years

2006—07 and 2007—08.

5+5

(0)

From the following Profit & Loss Account of Bright Co. Ltd. prepare a gross value added statement for the year ended 31.12.2007:
Show also the reconciliation between gross value added and profit before taxation.

Profit & Loss Account for the year ended 31.12.2007

Notes

(Rs. ‘000)

Income:
Sales
Other Income

6,240
55

6,295

Expenditure:
Production and operational expenses
Administration expenses (factory)
Interest & other charges

1
2
3

4,320
180
624
16

5,140

Depreciation
Profit before tax
Provision before tax

Balance as per last Balance Sheet

1,155
55
1,100
60

Transferred to fixed assets replacement reserve
Dividend paid

400
160

1,160

560

Surplus carried to Balance Sheet

600

Notes:

1.	Production & Operation expenses Consumption of raw materials Consumption of stores Local tax Salaries to administrative staff Other manufacturing expenses

3,210
40
8
620
442

4,320

2.	Administration expenses include salaries and commission to directors

Interest and other charges include:

(a)

(b)
(c)
(d)

Interest on bank overdraft (overdraft of
temporary nature)
Fixed loan from I.C.I.C.I.
Working capital loan from I.F.C.I.
Excise duties amount to one–tenth value
added by manufacturing and trading
activities

109
51
20

—

10+6

(0)

Write short notes on any four of the following:

4x4

(a)

Value in use of an Asset (as per AS – 28);

(0)

(b)

Efficient Frontier;

(0)

(c)

Systematic and Unsystematic risk in connection with Portfolio Investment;

(0)

(d)

Related Party Disclosures;

(0)

(e)

Real Options;

(0)

(f)

Forward as hedge instrument.

(0)

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