CWA/ICWA Final :: Management Accounting - Financial Strategy and Reporting : June 2005

F-18(MFS)
Revised Syllabus

Time Allowed : 3 Hours Full Marks : 100
Answer Question No. 1 which is compulsory and any five from the rest.
Marks
1. (a) In the cases below, one of the answers is correct. Choose the correct answer and give your workings/reasons briefly: 5x2
(i)BKC Ltd. with a share capital of 5,00,000 shares of Rs.10 each has a profit (attributable to shareholders) of Rs.21 lakh in the year ended 31.3.2005. it had granted options for 1,00,000 shares with a face value of Rs.10 each. Fair value on the date of grant was Rs40 and the exercise price was Rs.30 per share. What will be the diluted EPS in the case?
(a)Rs.4.20(b)Rs.4.00(c)Rs.5.25(d)None of these
(ii)Ms. Mala is bullish about the Index Spot Nifty stands at Rs.1150. She decides to buy one three – month Nifty Call Option Contract (having a market lot of 200) with a strike price of Rs.1210 at a premium of Rs.15 per call. Three months later the index closes at Rs.1245. Her profit (or loss) on the position is
(a)Rs. 4,000(b)Rs. 9,000(c)Rs. 8,0000(d)Rs. 3,000
(iii)TW Ltd has outstanding warrants that are exercisable at Rs.75 per share. They entitle the holders to purchase 2 shares. The shares of TW Ltd are currently selling for RS/92.50 per share. What would be the theoretical value of warrants?
(a)Rs. 25.00(b)Rs. 57.00(c)Rs. 35.00(d)Rs. 17.50
(iv)X Ltd requires Re. 0.40 of assets for every rupee of sales, retains 60% of net profit, has a net profit of 7%, and attempts to maintain 0.75 debt-to –equity ratio. The company’s sustainable growth rate is
(a)16.0%(b)18.0%(c) 22.5%(d) 25.5%
(v)Sonex’s share is expected to generate a dividend and terminal value (one year from now) of Rs.580. the share has a beta of 1.4 and risk-free return is 8% and the expected market return is 14%. The equilibrium price of Sonex’s share in the market should be
(a)Rs. 600(b)Rs. 498(c)Rs. 520(d)Rs. 550
(b) From the following, choose the most appropriate answer (only indicate A, B, C, D as you think correct): 10x1
(i)The definition of intangible asset excludes
A:Monetary assetsB:License to ply busesC:Copy rightsD:All of the above.
(ii)AS 18 stipulates that the following are deemed not to be related parties:
A:Key management personnel and relatives of such personnel
B:Enterprises that are under common control with the reporting enterprises
C:Providers of finance trade unions and government departments
D:All of the above
(iii)Global Depository Receipts (GDR) are issued to
A:Investors of India who want to subscribe to shares of foreign companies
B:Only to persons of Indian origin residing in a foreign country
C:Non-resident investors against publicity traded shares of the companies and denominated in US dollars.
D:Foreign banks as security to raise foreign currency loans
2. (a) Outline the min factors that influence the value of call option. 5+11
(b) On April-10, 2005 the stock of Zenith Company (ZC) was trading at Rs.60. the standard deviation of the continuously compounded stock price change for ZC is estimated 30% per year. The annualized Treasury Bill rate corresponding to the option life is 7%.
Estimate the value of a 3-month Call Option with a Strike Price of Rs.56.
Note:
Extract from the table:
(i)Natural Logarithms:
Ln (1.071429) = 0.068993, Ln (0.9333) = -0.069029.
(ii)Value of e- x : e- 0.02 = 0.9901
(iii)Cumulative standardized Normal Probability Distinction: NCX
When x= 0: N (0.6516) = 0.7427, N (0.5016)= 0.6921
When x=0; N(-0.6516) = 0.2573, N(-0.516)= 0.3079
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( 2 )

F-18(MFS)
Revised syllabus		 Marks
3. (a) From the following information concerning ABS Ltd., compute the Earnings Per Share (EPS) for the years ended 31st March, 2004 and 31st March, 2005, with reference to the relevant Accounting Standard. 8
Year ended
31st March,2004		Year ended
31st March,2005
Net profit (Rs in lakh)
No. of shares of Rs.10 each at the beginning of the year
Bought back as on 1.1.2005
No. of shares at year end
Fair value prior to exercise of
Buy-back option (Rs)
Buy –back price (Rs)
Date of buy-back		 36
2,00,000
Nil
2,00,000

–
–
–		 48
2,00,000
20,000
1,80,000

62
71
31 December,2004
(b) The following financial data relate to CBA Ltd: 8
Year ended
March		Earnings Per Share
(EPS) Rs.		Net Dividend per
Share (DPS) (Rs.)		Share Price
(SP) (Rs.)
20004217282
20014618184
20025120255
20035622275
20046225372
A firm of market analysis predicts that CBA Ltd.,’s earnings and dividends will grow at 25% for the next 2 years. Thereafter, earnings are likely to increase at a lower annual rate of 10%.
If this reduction in earnings growth occurs, the analysis consider that the Dividend Pay Out Ratio will be increased to 50%.
CBA Ltd is all equity-financed and has 10 lakhs ordinary shares in issue. The tax rate of 35% is not expected to change in the foreseeable future.
Requirement:
Calculate the estimated share price and P/E Ration, which the analysis now expect for CBA Ltd using the Dividend Valuation model.
Assume a constant post-tax Cost of Capital of 15% and a constant annual growth of 10%. P.V. of Re. 1 at 15%.
Year
P.V.		0
1		1
0.8695		2
0.7561		3
0.6575
4. (a) The income statement for the year 2004-05 and the balance sheet at the end of year 2004-05 for Exotica Ltd are as follows: 12+4
Income statement
Rs. (In lakh)
Sales
Gross Margin (25%)
Selling General and Administrative Expenses(10%)
Profit before Tax
Tax (40%)
Net profit 		1000
250
100
150
60
90
Balance Sheet
 Rs. (In lakh) Rs. (In lakh)
Equity 500
     
500		 Fixed Assets
Current Assets		 300
200
500
Exotica Ltd is debating whether it should maintain the status quo or adopt a new strategy.
If it maintains the status quo:
— The sales will remain constant at Rs.100lakh.
— The gross margin and Selling, general and administrative expenses will remain unchanged
— Depreciation charges will be equal to 50% of new investments
— The Asset Turn over Ratio will remain constant.
— The discount rate will bw 16%.
If Exotica Ltd adopts a new strategy, its sales will grow at a rate of 10% per year for 5 years. The margin, the turnover ratios, the capital structure and the discount rate, however, will remain unchanged.
What value will the new strategy create?
The present value factors at 16% discount rate are:
Year
P.V.		 0
1,000		 1
0.862		 2
0.743		 3
0.641		 4
0.552		 5
0.476
(b) Discuss the concept of “Cash Generating Unit” in the context of Accounting for Impairment Loss.
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( 3 )

F-18(MFS)
Revised syllabus
Marks
5. Endalco Ltd (EL) of India is planning to set up a subsidiary in the USA (where hunerto it was exporting) in view of the growing demand for its product and the competition from other MNCs.
The Indian project cost (consisting of plant and machinery including installation) is estimated to be US dollar 400 million; working capital requirements are estimated at US dollar 40 million.
The Indian company follows the straight line method of depreciation.		 16
The General Manager (Finance) of EL estimated data in respect of the project as follows:
(i)Variable cost of production and sales: $25 per unit
(ii)Fixed cost per annum are estimated at $30 million.
(iii)The plant will be producing and selling 5 million units at $1oo per unit
(iv)The expected economic useful life of the plant is 5 years with no salvage value.
The subsidiary of the Indian company us subjected to 40% corporate tax rate in the USA and the required return of such a project is 12%. The current exchange rate between the two countries is Rs.48/ US dollar and the rupee is expected to depreciate by 2% p.a for the next 5 years.
The subsidiary will be allowed to repatriate 70% of the CFAT every year along with the accumulated arrears of blocked funds at the year –end5. the withholding taxes are 10%. The blocked funds will be invested in the USA money market by the subsidiary, earning 4% (free of tax) per year.
Advise EL regarding financial viability of having a subsidiary company in the USA, assuming no tax liability in India on earnings received by EL from the US subsidiary.
Note:
Extract for from the table:
 (i) Future value in year 5 of Re.1 each during 1 to 4 years invested at 4% per year = 4.246;
(ii) The present value factor at 12% discount rates are:
Year
P.V.		 0
1,000		 1
0.8929		 2
0.7972		 3
0.7118		 4
0.6355		 5
0.5674
6. The following balances are extracted from the account of RKD Ltd in respect of the accounting year ended on 31st March,2005: 8+8
Fig in Rs.
Sale (2004-05)1,00,00,000
Fixed Assets (31.3.2005)25,00,000
Bank overdraft (..)2,50,000
Long-term debt (..)15,00,000
Equity shares (Rs. Each) (..)5,00,000
Reserves and surplus (..)25,00,000
Forecasts for 2005-06:
(i)Sales will increase by 20%. They will spread evenly throughout the year. There will be no further increase in sales in the following year.
(ii)Year-end cash balance should be a minimum of 4% of annual sales.
(iii)Inventory Turn0ver -8 times.
(iv)Additional capital expenditure will equal depreciation.
(v)Sundry creditors – 1 month’s purchase.
(vi)Upper limit of bank borrowings Rs.10,00,000.
(vii)Accruals – 3% of sales.
(viii)Gross margin -40% of sales.
(ix)Net profit margin (after tax)- 8% of sales.
(x)Average collection period – 2 months.
(xi)Income tax – 40%.
(xii)Redemption of long-term debt at the end of the year Rs.3,75,000
(xiii)Purchases – 50% of the cost of goods sold.
From the above information, prepare a proforma profit and loss account for the year ended 31st March. 2006 and a proforma balance sheet as on that date. All relevant workings are to be shown.
7. (a) Explain the difference between the Capital market Line (CML) and the Security Market Line (SML) 8
(b) The following particulars about 4 corporate securities (shares) are available: 8
Security Today’s price
(Rs.)		Predicted Price
A year from today
(Rs.)		Expected Dividend
during the coming year
(Rs.)
A
B
C
D		 490
180
270
220		 580
200
640
235		 7.0
7.0
5.0
—
The most recent beta estimates are:
SecurityBeta
A
B
C
D		 1.4
1.2
1.0
0.5
Expected return in the market is 14% and the risk-free at the rate fi return is 8%.
You are required t calculate for each security:
(i)The estimated return based on the Capital Asset Pricing Mode (CAPM), and
(ii)predicted return.
Also state, giving reason, whether the securities are undervalued or overvalued.
8. write short note on the following:
(a)Quality Financial Reporting (QFR);
(b)International Accounting Standards Board (IASB);
(c)Voluntary Disclosures in Annual Reports.
(d)Value Added Statement.
 4x4=16

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