CWA/ICWA Final :: Advanced Financial Management and International Finance : Decemeber 2002

*F-14(AFM)* *Revised Syllabus*
Time Allowed : 3 Hours		Full Marks : 100
Part A is compulsory and answer another five questions from Part B.
PART A Attempt all the questions, each carrying 2 marks
Questions No. 1 to 5 — There is an incorrect statement. Indicate it by the small alphabet (a,b,c,d or e)
Questions No. 6 to 10 — There is a correct answer. Indicate it by the small alphabet (a,b,c,d or e)
In all cases, give your working or reasons for your answer.
Marks

Some of the assumptions on which capital structure theories are based include:

(a)

There are only two sources of funds used by a firm: perpetual riskless debt and ordinary shares.

(b)

There are no corporate taxes.

(c)

All inventors have the same subjective probability distribution of the future expected EBIT for a given firm.

(d)

The dividend payout ratio varies between 0% and 100%.

(e)

The firm's business risk is constant over time.

Choosing positive NPV projects is a kin to selecting under-valued securities using fundamental analysis. The latter is possible if there are imperfections in the financial market that cause a discrepancy between security prices and their equilibrium (intrinsic) values. Likewise, imperfections in real markets (product and factor markets) lead to entry barriers which cause positive NPVs. Such entry barries are

(a)	Economies of scale	(b)	Product differentiation	(c)	Cost advantage
(d)	Government policy	(e)	None of the above.

The commonly employed sources of long-term finance for a business firm a limited company - are

(a)	Retained earnings	(b)	Equity capital	(c)	Preference capital
(d)	Bank cash credit	(e)	Debenture capital

Markets for the following securities are part of Money market

(a)	Commercial paper	(b)	Call money	(c)	91-day Treasury bill
(d)	Certificate of deposit	(e)	5-year public deposit

The dividend policy is likely to be affected by

(a)	Restrictions on payment of dividends as and when imposed by loan agreements
(b)	Consideration of tax status of the shareholders
(c)	Decision to pay dividend in cash or by issue of bonus sharesl
(d)	Shareholders opportunities for alternate investment
(e)	Dilution of ownership.

An investment produces annual returns of 12% in the first year, 7% in the second year and 10% in the third year. What is the annualized return over the three years?

(a)

9.42%

(b)

9.65%

(c)

9.67%

(d)

9.51%

(e)

None of the above.

A supplier offers credit to a company under terms of 2/20, net 60. The implicit cost of credit is —

(a)

24%

(b)

36%

(c)

18.62%

(d)

16.12%

(e)

None of the above

The 6-month forward rate for US dollar against Rupee is quoted as Rs. 49.50 as opposed to a spot price of Rs. 48.85. The forward premium on US dollar is

(a)

1.50%

(b)

3.08%

(c)

3.05%

(d)

3.03%

(e)

None of the above

The minimum margin which a customer must maintain with the member at all times for transacting currency futures is known as

(a)	Initial margin	(b)	Mark to market margin	(c)	Maintenance margin
(d)	Margin call amount	(e)	Variation margin

The aim of foreign exchange risk management is

(a)	To maximize profits	(b)	To minimize losses
(c)	To know with certainty the quantum of future cash flows	(d)	To earn a minimum level of profit
(e)	All of the above.

Please turn over

( 2 )

F-14(AFM)
Revised syllabus

Marks

PART B

11.

The Chief Financial Officer of Agra Oil Company has produced the following summary forecast profit statement and balance sheet of the company for the next twelve months.

	Rs. (lakhs)	Rs. (lakhs)
Summary Profit Forecast Sales income (200,000 tins of all of 15 litres each @ Rs. 40 per litre Less: Variable costs Fixed costs (including depm) Profit Summary Balance Sheet Investment in fixed assets Investment in working capital: Debtors Stock Cash	900 150 200 80 24 304	1.200 1,050 150 1,500
Less: Creditors Total Investment	60	244 1,744
Profit as return on investment = 8.6%

The directors are worried over the forecast low return on investment specially as a lot of the investment in fixed assets will remain under-utilised. A detailed study shows that selling prices cannot be increased nor the costs be reduced. So, there is a dire need to increase the sales volume.

Currently all sales are on credit and the company operates a very strict credit control procedure which has virtually eliminated bad debts. Because of this a number of potential customers have had to be refused and some existing customers have taken their business elsewhere. The suggestion has been made that a relaxation of the credit control policy could increase sales substantially, specially, if the company were to introduce a scheme whereby a 2% discount (at present no discount is given) were given on accounts paid within ten days and if the company were willing to accept 'riskier' customers, the sale would increase by 40%. Probability 65% of the customers would avail themselves of the cash discount and the average collection period of the remainder would be half of what it is at present. Bad debts would be of the order of 2% to 6% on total sales.
Comment on whether the credit control policy should be relaxed as suggested. Ignore taxation. State your assumptions, if any.

12.

(a)

An Indian importer has to settle a bill for $ 135,000.
The exporter has given the Indian Company two options:

(i)	Pay immediately without any interest charge.
(ii)	Pay after 3 months, with interest 6% p.a.
The importer's bank charges 16% p.a. on overdrafts.
If the exchange rates are as follows, what should the company do?

Spot (Rs/$)	: 48.35/48.36
3 - month (Rs/$)	: 48.81/48.83

Give reasons for your advice.

(b)

An American multinational corporation has subsidies whose cash positions for the month of September, 2002 are given below:

Swiss subsidiary	:	Cash surplus of SF 1,50,00,000
Canadian subsidiary	:	Cash deficit of Can $ 2,50,00,000
UK subsidiary	:	Cash deficit of 30,00,000 (UK pound)

What are the cash requirements, if:

(i)	Decentralised cash management is adopted?
(ii)	Centralised cash management is adopted?
(Exchange rate : SF 1,48/$. Can $ 1,58/$, $ 1.57/£)

13.

The following are the balance sheets of Tamilnadu Industrial Corporation Ltd:

12+4

Balance Sheet (figures in Rs.)
	Previous Year	Current Year
Assets Fixed Assets
Property Machinery Good will	111,375 84,713 —	108,187 94,650 7,500
Current Assets:
Stock Trade Debtors Cash and Bank Pre-payments	82,500 64,620 1,125 2,527 346,860	69,000 52,073 8,250 750 340,410

Liabilities: Shareholders' Funds
Paid-up Capital Reserves Profit and Loss Account	165,000 22,500 29,768	202,500 30,000 30,915
Current Liabilities:
Creditors Bills Payable Bank Overdraft Provision for Taxation	29,250 25,342 45,000 30,000 346,860	31,245 8,250 — 37,500 340,410

Please turn over

( 3 )

F-14(AFM)
Revised syllabus

Marks

During the current year ended 31st March, a dividend of Rs. 19,500 was paid and the assets of another company were purchased for Rs. 37,500 payable in fully paid-up shares. Such assets purchased were:
Stock — Rs. 16,230; Machinery — Rs. 13,770 and Goodwill — Rs. 7,500
In addition, plant at a cost of Rs. 4,237 was purchased during the year.

The following depreciation was written off during the year: on Property — Rs. 3,187 and on Machinery — Rs. 8,070.
Income-tax during the year amounting to Rs. 21,578 was changed to provision for taxation. Net profit for the year before tax was Rs. 57,225.
(a) Prepare statement of changes in financial position on total resources basis, and
(b) Prepare a schedule of changes in the working capital.

14.

(a)

A company is faced with the problem of choosing between two mutually exclusive projects. Project A requires a cash outlay of Rs. 1,00,000 and cash running expenses of Rs. 35,000 per year. On the other hand, Project B will cost Rs. 1,50,000 and require cash running expenses of Rs. 20,000 per year. Both the machines have a eight-year life. Project A has a salvage value of Rs. 4,000 and Project B has a salvage value of /rs. 14,000. The company's tax rate is 50% and it has a 10% required rate of return.

6+10=16

Assuming depreciation on straight line basis, ascertain which project should be accepted. Present value of an annuity of Re. 1 for 8 years = 5.335 and present value of Re. 1 at the end of 8 years = 0.467, both at the discount rate of 10%.

(b)

The present capital structure of a company is as follows:

	Rs. (million)
Equity Shares (Face value = Rs. 10) Reservers 11% Preference Shares (Face value = Rs. 10) 12% Debentures 14% Term Loans	240 360 120 120 360
	1,200

Additionally the following information are available:

Company's equity bata — 1.06
Yield on long-term treasury bonds — 10%
Stock market risk premium — 6%
Current ex-dividend equity share price — Rs. 15
Current ex-dividend preference share price — Rs. 12
Current ex-interest debenture market value — Rs. 102.50 per Rs. 100
Corporate tax rate — 40%

The debentures are redeemable after 3 years and interest is paid annually. Ignoring flotation costs, calculate the company's weighted average cost of capital (WACC).

15.

(a)

Discuss the relative merits of Rights issue and New Public issue as sources of equity finance for an established company.

4+(3x4)

(b)

Write short notes on any three of the following topics:

(i)	Operating and cash cycles;
(ii)	Trading on equity;
(iii)	Sensitivity analysis in capital budgeting;
(iv)	Factoring and its advantages.

16.

(a)

Enumerate the basic differences between a forward contract and futures contract.

(b)

Briefly explain the major types of currency exposures.

(c)

Explain the difference between degree of financial and total leverages.

(d)

Your bank wants to calculate Rupee. TT selling rate of exchange for DM since a deposit of DM 100,000 in a FNCR A/c has matured, when:

EURO 1	=	DM 1,95583 (locked in rate)
EURO 1	=	US $ 1.02348/43
US % 1	=	Rs. 48.51/53

What is the Rupee TT selling rate for DM currency?

17.

The issued capital of Indiana Ltd.comprises of 100,000 ordinary shares of Rs. 100 each. It has no fixed interest capital. It has paid a dividend of Rs. 30 per share consistently over years and each share has a current market value of Rs. 270 cum dividend. The next dividend is due to be paid shortly. Earnings have been running at about the same level as dividends.

The directors are now considering a new investment proposal, requiring an outlay of Rs. 20,00,000, which is expected to yield a net cash inflow of Rs. 4,00,000 p.a. indefinitely. All additional net cash receipts could be used to increase dividend payments. Three sources of finance for the new project are under consideration:

(a)	A reduction in the current dividend.
(b)	A rights issue of one new share for every ten shares held, at Rs. 200 per share;and
(c)	A new public issue of ordinary shares.

Assume that the broad details of the directors' plan become known in the stock market (but were not known when the share price was Rs. 270).
Estimate the new price per share:

(a)	If the current dividend is reduced; and
(b)	If the rights issue are made

Calculate the price per share required in a new public issue if the entire surplus generated by the new project is to accrue to the existing shareholders.

6+6+4

__________

CWA/ICWA Final :: Advanced Financial Management and International Finance : December 2002