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Higher National Diploma in Accountancy

Model Answers
HNDA 4101: Financial Management-2017
Question 01
I. Financial decisions
- Capital budgeting decisions.
- Capital structure decision.
- WCM decision. (1x3 Marks)
II. Finance also draws support from other related disciplines, such as production,
marketing and quantitative methods, Finance is a service function to meet the needs of
production and marketing, If the firm decides to produce and sell more, capital expenditure
projects may be needed, for which finance manager has to arrange funds. Such a decision
also would have impact on the projected cash flows. In those areas, production and finance
managers need to work closely for optimum investment is plant and machinery.
(03 Marks)
III. The wealth maximizing objective means maximizing the net present value, i.e.,
wealth of the owner. The net wealth of the owner is the difference between the present valve
of its benefits and the present value of its costs. Any action that has a positive NPV creates
wealth for the owner. The profit maximizing objective tries to maximize the profit after tax,
i.e., net profit, witch in the long term may reduce the net worth of the owner, The profit
maximization concept basically ignores the time value of money and the risk involved in
firm's activities, which are very well taken care by wealth maximization concept.
(04 Marks)
IV. The traditional financial manager was generally involved in the regular finance activities,
e.g., banking operations, record keeping, management of the cash flow on a regular basis, and
informing the funds requirements to the top management, etc. But, the role of financial
manager has been enhanced in the today's environment, he/she takes an active role in
financing, investment, distribution of profits, and liquidity decisions. In addition, he/she is
also involved in the custody and safeguarding of financial and physical assets, efficient
allocation of funds, etc.
(05Marks)
V. Commercial Banks.
a. Investment Companies
b. Investment Bankers
c. Pension funds.
d. Insurance companies .
e. Finance companies
(1 x 5Marks)

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Question 02
I. All Share Price Index (ASPD),
The value-weighted price index, which incorporates all the voting ordinary shares
listed on the Colombo Stock Exchange (CSE). The base year in 1985, and the base
value of the index is 100.
ASPI = Market Capitalization of All Listed Companies x 100
Base Market Capitalization
Market Capitalization Number of Issued Shares of a Company x Market Price
Base Market Capitalization Number of Issued Shares at Base Year (1985) x Base
Market Price
S & P 20
The S&P Sri Lanka 20 aims to provide investors with an easily replicable, yet
representative benchmark of the Sri Lanka equity market, The index is designed to
measure the performance of 20 leading Sri Lankan companies and was developed in
partnership with the Colombo Stock Exchange (CSE).
(2 x 2 = 4Marks)

II. (1 x6=6Marks)
Instruments Issuer
01 Treasury Bill Government
02 Repurchase (Repo) Licensed Commercial Banks and
primary dealers
03 Rev-repurchase agreement Central Bank
04 Commercial paper Non-financial Corporations
05 Common Stock PLC
06 Preference Stock PLC
07 Treasury bond Government

III. A manufacturing firm is required 10 invest in current assets for a smooth,

uninterrupted production and sales. How much a firm will invest in current assets
will depend on its operating cycle. Operating cycle is defined as the time duration
which the firm requires to manufacture and sell the product and collect cash.
Investment is current assets should be just adequate to the needs of the firm.
Excessive investment in current assets impairs the firm’s profitability, as idle
investment earns nothing. On the other hand, inadequate (i.e., paucity) amount of
working capital can threaten solvency of the firm because of its inability to meet
its current obligations.
(4 Marks)

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IV. Inventory Conversion period 71

Debtors Conversion period 64
135
Creditors Deferral period (91)
Length of WCC for the year ended 31" march 2015 44 (2x3= 6 Marks)
Note 1
1. ICP = (Average Inventory / Cost of goods sold) x 365 days
(1820+1580) / 2.2365 = 71 days
8700
Note 2
2. DCP = (Average Trade receivables / Turnover) x 365 days
(2620+ 1150) / 2.5 365 = 64 days
10680
Note3
3. CDP = Average Trade payable x 365
Purchase
(2420+ 1810) / 2 x 365 = 91 days
8460
Purchase = cost of goods sold + closing inventory value – opening inventory
value
= 8700 + 1580 - 1820 = 8460
Question 3
I. Nature of business, Market and demand, Technology and manufacturing policy,
Credit policy, Supplies’ credit, Operating efficiency, Inflation. (1 x 4=4
Marks)

II. Investment in Inventory (10 Marks)

Raw Material Inventory

45 x 2/12 x 12000 x 12 = 10,80,000.00 (01Marks)
Work in progress inventory
105 x 4/52 x 150/100 7 12000 x12000 x 12 = 5,81,538.00 (01Marks)
Finished goods inventory
105 x 1/12 x 12000 x 12 = 12,60,000.00 (01Mark)
Investment in Debtors
120 x 2/12 x 12000 12 x 80/100 = 23,04,000.00 (01Mark)
Cash Baleme = 1,00,000.00 (01Marks)
Investment in Current Assets = 53,25,538.00 (01Marks)
Current Liabilities: Deferred payment

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Creditors - raw material

45 x 1/12 x 12000 x 12 = 5, 40,000.00 (01Marks)
Deferred wages
20 x 2/52 x 12000 x 12 = 1, 10,769.00 (01Marks)
Deferred Over heads
40 x 2/52 x 12000 x 12 = 2, 21,538.00 (01Marks)
Total Deferred payments 872307.00
Net working Capital - 4453231.00
10% Contingencies 445323.00 (01Marks)
WCM Requirement 4898554.00 (01Marks)

III. 6 Marks

i. EOQ =
= 2000 Units (02Marks)
ii. 40,000 / 2000 = 20 Orders (01Marks)
iii. Inventory Cycles is (01Marics)
52 weeks / 20 orders = 2.6 weeks
iv. Total cost will be
Ordering cost 20 x Rs 20 = 400 (01Marks)
Holding Cost 2000/2 x Rs 0.40 = 400 (01Marks)
800
Questions 04
i. Foreign exchange risk foreign exchange risk is the risk that the domestic currency
value of cash flows denominated in foreign currency may changes because of
the variation in the foreign exchange rate
(01Marks)
ii. Interest rate parity
Purchasing power parity
Forward rates and future spot rates parity
International Fisher effect (1x4 - 04Marks)

iii. (01Marks) = (01Marks)

rt = (01Marks) = 0.1665 or 16.65% (01Marks)
iv. Purchasing power parity
1.07 E(SW/B) (02Marks)
1.05 18.5
E(SW/B) = 18.5 x 1.07 = 18.85% (01Marks)
1.05

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v) 14% 16% 8%

D0 D1 D2 D3 D4 D5 D6 D7
D0 = 2.20
D1 = 2.20 (1+0.14)1 = 2.51
D2 = 2.51 (1+0.14)1 = 3.26
D3 = 2.86 (1+0.14)1 = 3.26 (02 Marks)
D4 = 3.26 (1+0.16)1 = 3.78
D5 = 3.78 (1+0.16)1 = 4.38
D6 = 4.38 (1+0.16)1 = 5.09
D7 = 5.09 (1+0.08)1 = 5.50
SV = D7
Ke – g
= 5.50
0.12 – 0.08
= Rs 137.50 (01 Marks)
DIV
D1 = 2.51 x 0.893 = 2.24
D2 = 2.86 x 0.797 = 2.27
D3 = 3.26 x 0.712 = 2.32 (02Marks)
D4 = 3.78 x 0.636 = 2.40
D5 = 4.38 x 0.567 = 2.48
D6 = 5.09 x 0.507 = 2.58
137.5 x 0.507 = 69.71
84 (01Marks)

Question 05
01) (a)
Year Coupon payment Dis Value
1 16 0.833 13.33 (01 Marks)
2 16 0.694 11.10
3 16 0.579 09.26
4 16+100 0.482 55.91 (01 Marks)

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89.60 (01 Marks)

b) Vp = Div = 3.00 = Rs 16.67 (03 Marks)
Kp 0.18

c) Do = Rs 2.25 g = 0.08
D1 = D0 (1+g) 2.25 (1.08) =2.43
VQ = D1 = 2.43 = Rs 14.29 (03 Marks)
Ke - g 0.25 – 0.08

d) i) ke = D1 + g D1 = D0 (1+g)1
P0 D1 = 80 (1+0.05)1 = 84
84/750 + 0.05 = 16.20% (03 Marks)

ii) Kp = D/po = 28/280 = 10% (02 Marks)

iii) Kd = Int (1-T)

= 15 (1-0.28)
= 10.8% (02 Marks)

iv)
Source MV Weight Cof source Wacc
OS 750Mn 0.75 16.20% 12.15
PS 140Mn 0.14 10.00% 1.40 (02 Marks)
Borr 110Mn 0.11 10.80% 1.18
(01 Marks) (01 Marks) 14.73

Question o6
a) Merger : A business combination that results in the creation of a new reporting entity
formed from the combining parties. (02 Marks)
Amal gamation : An agreement between two or more companies to consolidate their business
Activities by establishing a new company having & separate legal existence.
(02 marks)
b) Operating economics - Elimination of duplicate facilities.
Management acquisition
Diversification

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Asset backing
Quality of Earnings
Growth
Tax Factors
Defensive merger (any 6 x1 = 6 Marks)

c) i)
EBET 1 000 000
Interest (200 000)
EBT 800 000
Taxes 320 000
EAT 480 000
EPS 4 800 000/50 O00 = Rs 9.60 (04 Marks)
ii) Dividend per share
100 000 / 50 000 = Rs 2.00
Dividend payout rate 10 = 2.00/9.60
= 20.8% (02 Marks)
iii) Dividendyeid = DPS /PPS,
0.02 = 2/PPS
Price per share = Rs 100 (02 Marks)