CS Final Group II : Financial Treasury and Forex Management - December 2007

CS Final - Group II • Financial Treasury and Forex Management • December 2007

This Paper has 25 answerable questions with 0 answered.

Roll No…………………
Time allowed : 3 hours		Maximum marks : 100
Total number of questions : 7		Total number of printed pages : 4

Note:	1.	Answer FIVE questions including Question No.1 which is compulsory. All working notes should be shown distinctly.
	2.	Tables showing the present value of Re.1 and the present value of an annuity of Re.1 for 15 years are annexed.

Comment on any four of the following :

(i)

Effective treasury management involves incorporation of control and supervision measures.

(0)

(ii)

A stable dividend policy is always preferable to fluctuating dividend policy.

(0)

(iii)

An option protects the underlying asset against loss and the underlying asset protects the option against loss.

(0)

(iv)

Adequacy of current assets is a myth.

(0)

(v)

The portfolio managers generally attempt to diversify risks by investing in debts and equity instruments.

(0)

(vi)

Taxation provisions have a significant effect on financial planning of a company.

(0)

(5 marks each)

Sushmita is a managing partner of a toy manufacturing unit. The unit currently sells 1,00,000 toys in a year @ Rs.50 each. Variable cost to produce a toy is Rs.30 and has Rs.16 lakh in fixed costs. Sales to assets ratio is 4 times, 30% of assets are financed with 10% debts, and the balance being financed by ordinary shares of Rs.100 each. The tax rate is 30%.

Mayank, a newly appointed Finance Manager, feels that the unit is doing it all wrong. By reducing price of toys to Rs.45 per toy, it could increase sales volume of toys by 50%. Fixed costs would remain constant, and variable costs would remain Rs.30 per toy. Sales to asset ratio would be 5.4 times. Furthermore, the unit could increase its debt to assets ratio to 40% with the balance in shares. It is assumed that the interest rate would go up by 2% and that the price of shares would remain constant.

You are required to ––

(i)	Compute EPS under the unit’s existing plan and Mayank&rsqul;s plan. Is Mayank’s perception right ?

(8 marks)

(ii)	Sushmita’s other partners do not think that fixed costs would remain constant under the Mayank’s plan, but they would go up by 20%. If this be the case, should the unit shift to Mayank’s plan based on earnings per share ?

(6 marks)

(iii)

What is the effect on the total risk of the manufacturing unit on switching from one plan to another ?

(6 marks)

(0)

(a)

Tirupati Ltd. has a plant to manufacture LPG cylinders. The total cash operating expenses for the last year were Rs.2,500 lakh. These expenses include the cash expenses of 35% as well as those for goods 65%. Average operating cycle period for different elements are as follows :

(i)
(ii)
(iii)
(iv)
(v)

Average credit period to customers
Average credit period from suppliers
Raw materials holding period
Work in progress cycle
Finished goods holding period

90 days
60 days
120 days
10 days
75 days

Find out the net operating cycle. Make an estimate of working capital requirement for goods as well as for other expenses. What is the ratio of working capital requirement to total cash operating expenses during the year ? (Assume 360 days in a year.)

(0)

(6 marks)

(b)

The following data are available for a bond :

Face value
Coupon rate
Years to maturity
Redemption value
Return to maturity

Rs.1,000
16%
6
Rs.1,000
18%.

What is the current market price duration and volatility of this bond ? Calculate the expected market price, if increase in required yield is 80 basis points.

(0)

(6 marks)

(c)

An existing machine in Bipasha Ltd. can be sold today for Rs.1,00,000 net. The cash flow after tax (CFAT) for the balance life of 4 years is Rs.30,000 per annum. At the end of the 4th year, the existing machine can be sold for Rs.20,000 net. A new machine can replace the existing machine at a net cash outflow of Rs.1,50,000 and will generate annual CFAT of Rs.46,000. The scrap value at the end of its useful life will be Rs.25,000 net. If the discount rate is 10%, decide whether the existing machine should be replaced with a new machine.

(0)

(8 marks)

Distinguish between any four of the following :

(i)

‘Capital structure’ and ‘financial structure’.

(0)

(ii)

‘Futures’ and ‘forwards’.

(0)

(iii)

‘Business risk’ and ‘financial risk’.

(0)

(iv)

‘Finance lease’ and ‘operating lease’.

(0)

(v)

‘Semi–strong form’ and ‘strong form’ of efficient market hypothesis.

(0)

(5 marks each)

(a)

Work out the marginal cost of capital from the following data :

Particulars	Rs. in Lakhs	Cost %
Existing structure :
Equity Retained earnings Preference capital Debt	3,000 500 500 2,000	15 18 10 12
Additional demand :
Equity Retained earnings Preference capital Debt	2,000 500 1,000 1,500	18 18 12 16

What should be the rate of return so that investors stay invested ?

(0)

(10 marks)

(b)

Electrofast Ltd. is a manufacturing organisation. It is manufacturing electronic equipments in which a Component-X is used which is purchased from a local supplier at a cost of Rs.40 each. In order to bring down the cost and improve its competitiveness, the company has a proposal to install a machine for the manufacture of Component-X. It has the following two options :

Option—1	Installation of semi–automatic machine involving an annual fixed expenses of Rs.22 lakh and a variable cost of Rs.18 per component manufactured.
Option—2	Installation of automatic machine involving an annual fixed cost of Rs.40 lakh and a variable cost of Rs.15 per component manufactured.

You are required to ––

(i)	Find the annual requirement of Component–X to justify a switch over from purchase of components to manufacture of the same by installing (i) semi–automatic machine; and (ii) automatic machine.
(ii)	If the annual requirements of the Component–X is 8,00,000 units, which machine would you advise the company to install ?

(0)

(10 marks)

(a)

The following information is related to stock of Adarsh Ltd. Adarsh Ltd. has a beta of 0.5 with Nifty. Each Nifty contract is equal to 100 units. Adarsh Ltd. now quotes at Rs.250 and the Nifty future is 4,000 index points. You are long on 1,200 shares of Adarsh Ltd. in the spot market.

(i)	How many futures contracts will you have to take?

(ii)	Suppose the price in the spot market drops by 10%, how are you protected?

(0)

(5 marks each)

(b)

Rama Ltd. had 1,00,000 equity shares of Rs.10 each outstanding on 1st January, 2007. The shares are currently being quoted at par in the market. In the wake of the removal of the dividend restraint, the company now intends to pay a dividend of Rs.2 per share for the current financial year. It belongs to a risk class whose appropriate capitalization rate is 15%. Using Modigliani–Miller Model and assuming no taxes, ascertain the price of the company’s shares as it is likely to prevail at the end of the year –– (i) when dividend is declared; and (ii) when no dividend is declared.

Also find out the number of new equity shares that company must issue to meet its investment needs of Rs.4 lakh assuming that the dividend is paid and the earnings per share works out @ Rs.2.20.

(0)

(5 marks)

Write notes on any four of the following :

(i)

Sharpe index

(0)

(ii)

Re–financing

(0)

(iii)

Bridge finance

(0)

(iv)

Arbitrage–free market

(0)

(v)

Hedge funds

(0)

(vi)

Depository system in India.

(0)

(5 marks each)

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