CWA ICWA Final - Group III : Financial Management and International Finance - June2012

CWA ICWA Final - Group III • Financial Management and International Finance • June 2012

This Paper has 34 answerable questions with 0 answered.

F—P12(AFM) Syllabus 2008
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.
Please: (i) Answer all bits of a question at one place. (ii) Open a new page for answer to a new question. (iii) Tick the question number answered on he front sheet of the answer-book.
Answer Question No.1 from Part A which is compulsory and any five questions from Part B.
PART A (25 Marks)

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

Please: (i) Answer all bits of a question at one place.
(ii) Open a new page for answer to a new question.
(iii) Tick the question number answered on he front sheet of the answer-book.

Answer Question No.1 from Part A which is compulsory and any five questions from Part B.

PART A (25 Marks)

(a)

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

2x9=18

(i)

The capital of PQR Limited is as follows:

9% preference shares of Rs. 10 each
Equity shares of Rs. 10 each
Following further information is available:
Profit after Tax
Equity Dividend paid
The market price of equity shares

Then the EPS and PE ratio are:

Rs. 3,00,000
Rs. 8,00,000

Rs. 2,70,000
20%
Rs. 40 each

(A)	Rs. 3.12 and 10.80
(B)	Rs. 3.33 and 10.34
(C)	Rs. 4.51 and 12.56
(D)	Rs. 3.04 and 13.16

(0)

(ii)

A project has an equity beta of 1.2 and is going to be financed by 30% debt and 70% equity. Assume debt beta = 0, R_f = 10% and R_m = 18%. What is the required rate of return?

(A)	8.4%
(B)	18%
(C)	16.72%
(D)	10%

(0)

(iii)

A Limited is presently selling 1,00,000 units of its products. The selling price per unit is Rs. 25 and variable cost per unit is Rs. 15. The fixed cost is Rs. 5,00,000. The financial breakeven point for the company is Rs. 1,50,000. What will be the percentage change in EBIT required to increase EPS by 20%?

(A)	10%
(B)	12%
(C)	14%
(D)	20%

(0)

(iv)

Zoom Technologies Limited issued 1,00,000, 14% debentures of Rs. 100 each, redeemable after 5 years at Rs. 110 each. The commission payable to under writers and brokers is 10%: The after–tax cost of debt, assuming a tax rate of 45%, will be

(A)	15.1%
(B)	12.54%
(C)	10%
(D)	11.7%

(0)

(v)

An investor wrote a naked call option. The premium was Rs. 2.50 per share and the market price and exercise price of the share are Rs. 37 and Rs. 41 respectively. The contract being for 100 shares, what is the amount of margin under First Method, that is required to be deposited with the clearing house?

(A)	Rs. 590
(B)	Rs. 250
(C)	Rs. 740
(D)	Rs. 400

(0)

(vi)

According to Gordon’s dividend capitalisation model, if the share price of a firm is Rs. 43, its dividend pay–out ratio is 60%, cost of equity is 9%, ROI is 12% and the number of shares are 12,000, what will be the net profit of the firm?

(A)	Rs. 15,840
(B)	Rs. 23,220
(C)	Rs. 36,120
(D)	Rs. 54,180

(0)

(vii)

You are a forex dealer in India. Rates of rupee and Euro in the international market are US $ 0.01962905 and US $ 1.335603 respectively. What will be your direct quote of ∈ (euro) to your customer?

(A)	Rs. 69.5900
(B)	Rs. 68.0420
(C)	Rs. 65.1010
(D)	Rs. 70.9050

(0)

(viii)

The interest rate in the United States is 5%, in Japan, the camparable rate is 1.5%. The spot rate for the yen is $ 0.012067821. If the interest rate parity holds, what is the 90–day forward rate on the Japanese yen?

(A)	$ 0.01248
(B)	$ 0.01359
(C)	$ 0.01350
(D)	$ 0.01200

(0)

(ix)

An investor buys a call option contract for a premium of Rs. 200. The exercise price is Rs. 20 and the current market price of the share is Rs. 17. If the share price after three months reaches Rs. 25, what is the profit made by the option holder on exercising the option? Contract is for 100 shares. Ignore the transaction charges.

(A)	Rs. 200
(B)	Rs. 250
(C)	Rs. 300
(D)	Rs. 350

(0)

(b)

State if each of the following sentences is T (= true) or F (= false):

1x7=7

(i)

The amount of cheques issued by a company not yet paid out is referred to as net float.

(0)

(ii)

Annual capital charge method is used for evaluating projects having different life spans.

(0)

(iii)

According to Modigliani and Miller Theory on dividends, dividend pay-out ratio is irrelevant for all firms.

(0)

(iv)

Simulation is done for capturing the different possible outcomes and determining the probability of a particular event happening.

(0)

(v)

A call option is the right to sell, whereas a put option is a right to buy.

(0)

(vi)

An acquisition of a business by using equity fund and a small amount of debt is known as leveraged buy out.

(0)

(vii)

Global Depository Receipts are issued to investors in India, who want to subscribe to shares of foreign companies.

(0)

PART B (75 Marks for any five questions)

PART B (75 Marks for any five questions)

(a)

"Cost of capital is used by a company as a minimum benchmark for its yield".–Comment. Also enumerate the applications of cost of capital in managerial decisions.

(0)

(b)

National Textile Corporation belongs to a risk–class for which the appropriate PE ratio is 15. It currently has 75,000 outstanding shares selling at Rs. 150 each. The corporation is contemplating declaration of dividend @ Rs. 12 per share at the end of the current fiscal year, which has just started. Given the assumption of Modigliani – Miller approach, answer the following questions:

(i)	What will be the price of the share at the end of the year, if: (a) dividend is not declared? (b) dividend is declared?

(ii)	Assuming that the corporation pays dividend, has net income of Rs. 7,50,000 and makes new invesments of Rs. 15,00,000 during the period, how many new shares must be issued?

(iii)

What would be the current value of the corporation, if:
(a) divident is declared?
(b) dividend is not declared?

3+3+
4=10

(0)

(a)

The turnover of Bengal Polymers Limited is Rs. 60 lakhs of which 80% is on credit. Debtors are allowed one month to clear off the dues. A factor is willing to advance 90% of the bills raised on credit for a fee of 2% per month plus a commission of 4% on the total amount of debts. The company, as a result of this arrangement, is likely to save Rs. 21,600 annually in management costs and avoid bad debts at 1 % on the credit sales.

A scheduled bank has come forward to make an advance equal to 90% of the debts at interest rate of 18% per annum. However, its processing fee will be 2% on the debts.

Advise management of the company whether it should avail services of a factor or accept offer from the bank.

(0)

(b)

Explain briefly what is meant by Capital Asset Pricing Model (CAPM)?

(0)

(a)

Precision Instruments Limited manufactures ball bearings. The company plans to add some more product lines and so, it has decided to acquire a machine costing Rs. 50 lakhs having a useful life 5 years, with salvage value of Rs. 10 lakhs. Consider short–term capital loss/gain for income tax. The full purchase value of the machine can be financed by bank loan at the rate of 10% interest per annum repayable in five equal instalments falling due at the end of each year. Alternatively, the machine can be procured on a 5 year lease, year–end lease rentals being Rs. 12.50 lakhs per annum. The company follows the written down value method of depreciation at the rate of 25 per cent. The company is in 30% tax bracket.
Required:

(i)	What is the present value (PV) of cash outflow for each of these financing alternatives using the after–tax cost of debt?
(ii)	Which of the two alternatives is preferable?

Note: Extracts from the PV TABLE:

(i)	PVIF at 7% for 0 to 5 years are: 1.000, 0.9346, 0.8734, 0.8163, 0.7629, 0.7130
(ii)	PVIF at 10% for 0 to 5 years are: 1.000, 0.9091, 0.8264, 0.7513, 0.6830, 0.6209
(iii)	PVIFA for 5 years at 10% = 3.7908
(iv)	PVIFA for 5 years at 7% = 4.1002

(0)

(b)

Briefly explain the salient features of non–recourse project financing.

(0)

(a)

The Balance Sheet of Southern Real Estates Limited as on 31^st March, 2011 and 31^st March, 2012 are given below:

		(Rs.)			(Rs.)
Liabilities	31.3.2011	31.3.2012	Assets	31.3.2011	31.3.2012
Share Capital (ordi- nary,ofRs. 100 each) Reserves and surplus Secured loan from Bank Sundry Creditors Provision for Taxation	1,97,000 1,48,000 87,000 2,51,450 65,000	2,30,000 3,12,000 — 2,98,000 1,72,000	Fixed Assets less depreciation Investments Stock–in–trade Sundry Debtors Cast at Bank Prepaid Expenses	3,60,000 11,250 1,42,500 90,700 1,30,000 14,000	6,00,000 10,000 1,96,000 1,40,000 45,000 21,000
	7,48,450	10,12,000		7,48,450	10,12,000

From the records, the following further information is available:

(i)

Reserves and surplus position:

	Rs.
Balance as on 1st April, 2011	1,48,000
+ Net profit for the year	1,98,500
	3,46,500
− Dividend	34,500
	3,12,000

(ii)

The accumulated depreciation on fixed assets as on 31.3.2012 was Rs. 1,80,000 and as on 31.3.2011 was Rs. 1,60,000. Machinery costing Rs. 20,000, which was depreciated to the extent of 50% was discarded and written off in 2012. Depreciation for the year ending 31.3.2012 amounted to Rs. 30,000.

(iii)

Investment costing Rs. 5,000 was sold during the year ending 31.3.2012 for Rs. 4,800 and Government Securities of the face value of Rs. 4,000 were purchased during the year for Rs. 3,750.
You are required to prepare the following:

(i)	Statement showing changes in working capital.
(ii)	Statement of sources and application of funds.

(0)

(b)

Explain the following terms in one or two sentences:

(i)	Gross working capital.

(ii)	Net working capital.

(iii)

Working capital gap.

1.5+1.5
+2=5

(0)

(a)

The following information is available for a call option:

Time to Expiration	:	3 months
Risk–free Rate	:	8%
Exercise Price	:	∈ 65
Stock Price	:	∈ 70
Call Price	:	∈ 12

You are required to calculate value of put option.

(0)

(b)

An Indian importer has to settle a bill for US $ 1,50,000. There are two options available:
Option A—Pay immediately by drawing from the bank overdraft account bearing interest @ 15% p.a.
Option B—Pay after 3 months with interest @ 5% p.a. in foreign currency.
The exchange rates are as under:
Spot (Rs./US $) = Rs. 50.50/ Rs. 51.00
3 months (Rs./US $) = Rs. 51.50/ Rs. 52.00
Evaluate the two options and advise.

(0)

(c)

The total asset turnover ratio and total asset to net–worth ratio of ABC Limited are 1.75 and 2 respectively. If the net–profit margin of the company is 8%, what will be its Return On Equity (ROE)?

(0)

(d)

The degree of operating leverage of XYZ Limited is increased by 30%. What will be the change in the degree of total leverage, if the degree of financial leverage is decreased by 20%?

(0)

(a)

How are currency swaps different from interest swaps? Explain.

(0)

(b)

On September 1,2011, the Rs./$ spot rate in New York is Rs. 51.90 and December £ futures are trading at $ 1.5950. The Rs./£ spot rate on that day is Rs. 78.90.
Neel Corporation has a 3–month sterling receivable of £ 1,00,000.
You are given that the standard size of sterling futures contracts is £ 62,500 and Neel Corporation decides to hedge its risk by trading in two sterling futures contracts. By December 1,2011 the spot dollar has appreciated to Rs. 52.80, while the spot pound sterling has depreciated to Rs. 78.20. If December futures are trading at £ 1.5720, what is the profit or loss incurred by Neel Corporation?

(0)

Write short notes on (any three):

5x3=15

(a)

Asset Securitisation;

(0)

(b)

Foreign Collaboration;

(0)

(c)

Money Market Hedge;

(0)

(d)

Sensitivity Analysis.

(0)

Disclaimer ♣ Privacy Policy ♣ Who We Are ♣ Terms of Service