CWA ICWA Final Stage IV : Valuations Management and Case Study - December 2008

CWA ICWA Final - Stage IV • Valuations Management and Case Study • December 2008

This Paper has 31 answerable questions with 0 answered.

F—20(VMC) 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 carrying 20 marks and any five from the rest.
Marks

The figures in the margin on the right side indicate full marks.

Answer Question No. 1 which is compulsory carrying 20 marks and any five from the rest.

Marks

(a)

State whether the following statements are True or False:

1x8

(i)

All types of investments involve sacrifice of present consumption.

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(ii)

Buying the units of a mutual fund is an indirect investment.

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(iii)

When prices rise, last in first out (LIFO) results in lower earnings.

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(iv)

A market is efficient when trading oriented strategies can beat the market.

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(v)

A levered portfolio provides increasing returns with increased risk.

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(vi)

Market capitalization refers to the total market value of all the equity shares issued by a company.

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(vii)

Systemic risk of a portfolio is diversifiable.

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(viii)

The CAPM is appealing in its elegance and logic but its assumptions are not entirely correct.

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(b)

Fill in the blanks by filling the appropriate word(s) given in the brackets:

1x6

(i)

Capital Asset Pricing Model helps in determining _________ of return. (fixed rate/required rate).

(0)

(ii)

_________ risk is the objective of risk–return trade–off. (sufficient/insufficient).

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(iii)

Yield to maturity of a bond depends upon the _________ price of the bond. (market/issue)

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(iv)

Existence of strong form of market efficiency requires a _________ stock exchange network. ((developed/undeveloped).

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(v)

In order to calculate the holding period return on equity shares, the selling price is _________(required/not required).

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(vi)

In Walter’s model, the value of equity share depends upon the _________ (dividend pay out ratio/price earning ratio).

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(c)

Attempt all the questions by selecting the correct option:

2x3

(i)

Marketing relating intangible asset is

A.
B.
C.
D.

Process patents
Software copyrights
trade marks
none of the above.

(0)

(ii)

Which is not a human–capital relating intangible asset?

A.
B.
C.
D.

Trained workforce
Employment agreements
Union contracts
Design patents.

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(iii)

Customer related intangible asset is

A.
B.
C.
D.

Customer lists
Open purchase orders
Both A and B
None of the above.

(0)

Write short notes on any four of the following:

4x4

(a)

Valuation of unlisted companies;

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(b)

Causes of horizontal mergers;

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(c)

IRR and NPV;

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(d)

Option Pricing;

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(e)

Walter’s Valuation Model;

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(f)

Valuation of Preference Shares.

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(a)

Vedika Ltd. belongs to a risk class for which the capitalization rate is 10%. It has 25,000 outstanding shares and current market price is Rs. 100. It expects a net profit of Rs. 2,50,000 for the year and the Board is considering dividend of Rs. 5 per share.

Vedika Ltd. requires to raise Rs. 5,00,000 for an approved investment expenditure.

Show how does the MM approach affect the value of Vadika Ltd., if dividends are paid or not paid.

(0)

(b)

Discuss with suitable examples the various methods of valuing goodwill in a firm.

(0)

Companies Krishna and Gopal are identical in every respect except that the former does not use debt in its capital structure while the latter employs Rs. 6,00,000 of 15% debts. Assuming that (a) all the MM assumptions are met. (b) the corporate tax rate including surcharge and education cess is 50%; (c) the EBIT is Rs. 2,00,000; and (d) the equity capitalization of the unlevered company is 20%.

You are required to compute the values of the firms Krishna and Gopal. Also determine the weighted average cost of capital for both the firms.

(0)

Under the efficient market hypothesis, what is the assumption about the processing of new information and what effect does this have on the share price?

(0)

X Ltd. wants to take over Y Ltd. and the financial details of both are as follows:

	X Ltd. (Rs.)	Y Ltd. (Rs.)
Preference Share Capital Equity Share Capital of Rs. 10 each Share Premium Profit and Loss A/c 10% Debentures	20,000 1,00,000 — 38,000 15,000	— 50,000 2,000 4,000 5,000
	1,73,000	61,000
Fixed Assets Current Assets	1,22,000 51,000	35,000 26,000
	1,73,000	61,000
Profit after tax and preference dividend Market Price	24,000 24	15,000 27

What should be the share exchange ratio to be offered to the shareholders of Y Ltd. based on
(a) Net Asset Value,
(b) EPS, and
(c) Market Price.

Which should be preferred from the point of X Ltd.?

(0)

(a)

Laxmi Services is in the business of providing home services like plumbing, sewerage line cleaning etc. There is a proposal before the company to purchase a mechanized sewerage cleaning line for a sum of Rs. 20 lakhs. The life of the machine is 10 years. The present system of the company is to use manual labour for the job.

You are provided the following information:

Cost of machine
Depreciation
Operating Cost
Present System
Manual labour
Cost of Manual labour

Rs. 20 lakhs
20% p.a. straight line
Rs. 5 lakhs per annum

200 persons
Rs. 10,000 per person per annum

The company has an after tax cost of funds of 10% p.a. The applicable rate of tax inclusive of surcharge and cess is 35%. Based on the above you are required to state whether it is advisable to purchase the machine.

Present values of given amount on 10% for 10 years are as follows:

Year	1	2	3	4	5	6	7	8	9	10
PVF	.909	.826	.751	.683	.621	.564	.513	.467	.424	.386
PVAF (Future Annuity)	.909	1.736	2.487	3.170	3.791	4.355	4.868	5.335	5.759	6.145

(0)

(b)

What are the salient features of Accounting Standard (AS) 26?

(0)

Mahila Griha Udyog Industries is considering to supply products — a special range of namkeens to a departmental store. The contract will last for 50 weeks and the details are given below:

Material	Rs.
X (in stock–at original price) Y (on order–on contract) Z (to be ordered)	1,50,000 1,80,000 3,00,000
Labour
Skilled Non–skilled Supervisory	5,40,000 3,00,000 1,00,000
General Overheads Total cost Price offered by departmental store Net Loss	10,80,000 26,50,000 18,00,000 8,50,000

Should the contract be accepted if the following additional information is considered?

(i)	Material X is an obsolete material. It can only be used on the another product, the material which is available at price Rs. 1,35,000 (Material X requires some adaptation to be used and costs Rs. 27,000):
(ii)	Material Y is ordered for some other product which is no longer required. It has now a residual value of Rs. 2,10,000;
(iii)	Skilled labour can work on other contracts which are presently operated by semi–skilled labour at a cost of Rs. 5,70,000;
(iv)	Non-skilled labour are specifically employed for this contract;
(v)	Supervisory staff will remain whether or not the contract is accepted. Only two of them can replace the other position where salary is Rs. 35,000;
(vi)	Overheads are charged at 200% of skilled labour. Only Rs. 1,25,000 would be avoidable, if the contract is not accepted.

(0)

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