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FIM P.L IV Solution CMA June 2020 Exam

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11 views4 pages

FIM P.L IV Solution CMA June 2020 Exam

FIM suggested answer

Uploaded by

Md Joinal Abedin
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We take content rights seriously. If you suspect this is your content, claim it here.
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CMA JUNE-2020 EXAMINATION

PROFESSIONAL LEVEL-IV
SUBJECT: 401. FINANCIAL MANAGEMENT

Model Solution
Solution of the Q. No. 1
(a)

(i) $1,000,000 / $40 = 25,000 shares


(ii) $700,000 / (250,000 + 25,000) = $2.55 EPS
(iii) $1,000,000 / $1,000 = 1,000 bonds
$1,000 / $45 = 22.222 shares
1,000 bonds × 22.222 shares = 22,222 shares
250,000 + 22,222 = 272,222 shares outstanding
(iv) $700,000/(250,000 + 22,222) = $2.57 EPS
(v) Since the convertible bond issue results in less dilution and higher EPS (although the EPS are
very close), it is therefore recommended. The risk of an overhanging issue should be
considered since the marginal increase in EPS is slight.
(b)
(i) The current price of Tangshan Mining stock is:
P = $4.89 / (0.1089 - 0.05) = $83.02
(ii) The price of Tangshan Mining stock if the capital structure change is made is expected to be:
P = $5.24 / (0.1134 - 0.06) = $98.13
(iii) Yes. Tangshan Mining should make the change because it will maximize share price.

(c)
Answer: Interest on debt = $1,000 × 9% = $90
Net proceeds = $1,000 - $20 - ($1,000 × 2%) = $960
Before-tax cost of debt = 9.45% (using financial calculator)
ri = 9.45% × (1-40%) = 5.67%
rp = $8 ÷ ($65 - $3) = 12.9%

Growth = (($5.07 - $3.45) ÷ $3.45) × 100 = 47% ÷ 5 years = 9.3913%


Net proceeds = $40 - 1 - 1 = $38
rn = ($5.07 ÷ $38) + 9.3913% = 22.73%

ra = (0.3) × ($5.67) + (0.05) × (12.9) + (0.65) × (22.73) = 16.20%

Solution of the Q. No. 2(a)


(i) EPS = $5,000,000/1,000,000 = $5.00 per share
(ii) P/E Ratio = $50.00/$5.00 = 10
(iii) Dividends/Share = $2,500,000/1,000,000 = $2.50/share
(iv) If the firm paid $55 to repurchase stock, it could repurchase approximately 45,455 shares
($2,500,000 ÷ $55 per share). As a result, the firm would now have 954,545 shares outstanding
(1,000,000 shares - 45,455 shares). As a result, EPS would rise from $5.00 per share to
approximately $5.24 per share ($5,000,000 ÷ 954,545 shares). If we assume the stock still sells at 10
times earnings, the new market price could be estimated by multiplying the new EPS by the PE ratio.
The new price would thus be $52.40 per share, an increase of approximately $2.40 in share price.
Note that this amount would have been precisely $2.50 cents per share if not due to rounding.
(v) The net effect of a stock dividend and a stock repurchase is the same. In this example, in both
cases, shareholders would have received a net gain of approximately $2.50 per share.

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(b)

(i) The maximum dividend per share the firm can pay is:
$11,600,000/2,000,000 shares = $5.80/share
(ii) 2-for-1 Cash dividend Stock dividend

*(4,000,000 shares at $0.50 par)


**(2,100,000 shares at $1 par)

(iii) (1) $10/share


(2) $19.05; 2,000,000 shares × $20/share = $40,000,000 market value
No. of shares after the stock dividend = 2,100,000 shares
Stock price per share = $40,000,00/2,100,000 = $19.05

Solution of the Q. No. 3(a)


(i) Reduction in receivables days=75-45=30 days
Reduction in receivables = 30 ÷ 365*Tk. 16m = Tk. 13,15,068
Saving in Finance cost = (8%*13,15,068) = 1,05,205
Administrative savings = 100,000
Service charge = (1.75%*Tk. 16m) = 2,80,000

Summary:
Service charge (2,80,000)
Finance cost saved by reducing receivables 1,05,000
Administrative costs saved 1,00,000
Net annual cost of the service (75,000)
Edden will have to balance this cost against the security offered by improved cash flows and
greater liquidity.

(ii)
Sale ledger administration 1%*Tk. 16m Tk. (1,60,000)
Administration costs savings 1,00,000
Cost of factor finance 10%*80%*3.3m (2,64,000)
Overdraft finance costs saved 8%*80%*3.3m 2,11,200
Net cost of factoring Tk. 1,12,800
As before Edden will have to balance this cost against the security offered by improved cash
flows and greater liquidity.
(b) (i)
Rp=.4(15%)+.6(20%)=18%
σp=[(.4)²(1.0)(.2)²+2(.4)(.6)(.36)(.2)(.4)+(.6)²(1.0)(.4)²]1/2
=(.0778)1/2
=27.9%

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(ii)
Rp=.6(15%)+.4(20%)=17%
σp=[(.6)²(1.0)(.2)²+2(.6)(.4)(.36)(.2)(.4)+(.4)²(1.0)(.4)²]1/2
=(.0538)1/2
=23.2%
The lesser proportional investment in the riskier asset, Meet Inc., results in a lower expected
return as well as a lower standard deviation.

Solution of the Q. No. 4


(i) Total annual interest (Tk. in thousands):
Serial bonds, 8% on 2,400 Tk. 192
Mortgage bonds, 10% on 3000 300
Subordinate debentures, 12% of 2000 240
Tk. 732
Total annual principal payments: Tk. 100+150=Tk. 250
EBIT necessary to service Tk. 250 (1- 0.30)=Tk. 175
Times Interest earned: Tk. 2000/Tk. 732= 2.73
Debt-service coverage: Tk. 2000/1089=1.84
(ii) Deviation from mean before ratio is one to one:
Times Interest earned: Tk. 2000-732=Tk. 1,268
Debt service coverage: Tk. 2000-1089=Tk. 911
Standardizing the deviations:
Times Interest earned: 1,268/1500=.845
Debt service coverage: 911/1500=.607
Using Normal Probability Distribution Table, these standardized deviations correspond to
probabilities of the two ratios being less than one to one of approximately 20% and 27%,
respectively.
(iii): There is a significant probability, 27%, that the company will fail to cover its interest and principal
payments. Its debt ratio of tk 7.4m/8.3m=0.89 is much higher than the industry norm of .47. Its
book value of debt to market value of stock ratio is even higher. Although the information is
limited, it would appear that Torstein is pushing out on the risk spectrum as it has to do with
debt. Still its times interest earned approaches 3, and the situation would not yet appear to be
critical.

Solution of the Q. No. 5(a)


This shows that an appreciation of the foreign currency against the dollar for a subsidiary in that
country will result in higher values on both the balance sheet and income statement once those
values are translated into dollars even if the local currency values didn't change at all. The opposite
would be the case if the foreign currency depreciates against the dollar.

Translation of Income Statement

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Translation of Balance Sheet

(b)(i)

(ii) $25 million should be invested in U.S. dollars in the Euromarket.


(iii) $10 million should be raised in Euro in the Euromarket.

(c) (i)

Total tax relief = $1,500,000 × 0.40 = $600,000

(ii)

Liquidation value of assets $1,300,000.00


+ PV of tax benefits 357,550
Maximum Price $1,657,550

(iii) No, the PV of the benefits is less than the purchase price of the acquisition ($1.8 million).

= THE END =

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