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CWA ICWA Final - Group III - Financial Management and International Finance - June 2011

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23 views5 pages

CWA ICWA Final - Group III - Financial Management and International Finance - June 2011

Uploaded by

nehag9054
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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F—P12(AFM)

Syllabus 2008
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Answer Question No.1 from Part A which is compulsory and any five questions from Part B.
Working notes should form part of the answer.
Please (i) answer all bits of a question at one place.
(ii) open a new page for answer to a new question.
PART A (25 Marks)
Marks
1. (a) In each of the cases given below, one out of four answers is correct. 2x6=12
Indicate the correct answer (= 1 mark) and give workings/reasons briefly
in support of your answer (= 1 mark):
(i) The computed issues a new 15 per cent debentures of Rs. 1,000 face (0)

value to be redeemed after 10 years. The debenture is expected to


be sold at 5 per cent discount. It will involve floatation costs of 2.5
per cent of face value. The company’s tax rate is 35 per cent. The
cost of debt using short–cut method would be
A. 10.9% B. 10.21% C. 10.44% D. 10.76%.
(ii) The capital structure of a company is as under: (0)

3,00,000 Equity Shares of Rs.10 each,


32,000, 12% Preference Shares of Rs.100 each,
General Reserve Rs. 15,00,000,
Securities Premium Account Rs. 5,00,000,
25,000, 14% Fully Secured Debentures of Rs. 100
each,
Term Loan of Rs 13,00,000.

Based on these, the leverage of the company is

A. 60.22% B. 58.33% C. 55.21% D. 62.10%.


(iii) The standard deviation of Greaves Ltd. stock is 24% and its (0)

correlation coefficient with market portofolio is 0.5. The expected


return on the market is 16% with the standard deviation of 20%. If
the risk–free return is 6%, what will be the required rate of return on
Greaves Ltd. script?
A. 12%; B. 11%; C. 13%; D. 11.5%.
(iv) Cactus Limited paid a dividend of Rs. 5 per share for 2009–10. The (0)

company follows a fixed dividend payout ratio of 60%. The company


earns a return of 20% on its investment. The cost of capital to the
company is 14%. What would be the expected market price of its
share, using the Walter Model?
Rs. Rs. Rs. Rs.
A. B. C. D.
69.69; 50.50; 60.69; 70.10.
(v) The Sterling is trading at $ 1.6100 today. Inflation in U.K. is 4% and (0)

that in U.S.A. is 3 %. What could be the spot rate ($/£) after 2


years?
A. 1.5792; B. 1.5892; C. 1.5992; D. 1.5939.
(vi) Your customer requests you to book a sale forward exchange contract (1)

for US $ 2 million delivery 3 rd month. The quotes are:


Spot US $1 = Rs. 48.050/060
1 month margin = 0.0850/0900
2 month margin = 0.2650/2700
3 month margin = 0.5300/5350

You are required to make an exchange profit of 0.125%. Ignore telex


charges and brokerage. What will be your profit?

Rs. Rs. Rs. Rs.


A. B. C. D.
1,20,000; 2,30,000; 75,000; 1,00,000.
(b) State if each of the following sentences is T (= true) or F (= false): 1x5=5
(i) Treasury management includes risk management. (0)

(ii) In the CAPM mode ‘systematic risk’ is the risk that cannot be (0)

eliminated by diversification, it being common to all firms.


(iii) An yield gap refers to a situation where yield on shares is lower this (0)

year as compared to last year’s.


(iv) Profitability Index is the profit expected in capital budgeting. (0)

(v) In futures trading, the margin is to be deposited by both the parties (1)

to the contract.
(c) Match the sources of fund (i,ii, or iii) with the relevant characteristics 1x3=3 (0)

stated in letters (a, b, or c):


Sources of Fund
(i) Global Depository Receipts (GDRs)
(ii) American Depository Receipts (ADRs)
(iii) Euro–bonds
characteristics
(a) These instruments do not confer voting rights on the investors.
Only entities enjoying very good to excellent credit ratings gain
(b)
access to this source.
Besides periodical receipts of income promptly, there is an assurance
(c)
of protection of ownership right.

Note:Write your answer simply by the numerical followed by chosen


letter.
(d) Fill in the blank with the appropriate word(s) as given in brackets in each 1x5=5
of the following sentences:
(i) Factoring reduces the working capital_____ by slashing receivables (1)

(cycle/need).
(ii) Collar insulates the investor from the risk of interest rate ______ an (0)

agreed rate (falling below/rising above).


(iii) The longer the loan period, the ______ should be the interest rate (0)

(higher/lower).
(iv) On maturity in an option contract a put right is exercised when (0)

market rate is ______ favorable (less/more).


(v) In foreign exchange quotations the size of spread for a given (0)

currency _____ with maturity (decreases/increases).


Note:In your answer you need not write the full sentence; write only
the word(s)as required to fill in the blank.

PART B (75 Marks)


2. (a) Electronics Devices Ltd. sells goods to domestic market on a gross profit of 10 (0)

25% on sales without considering depreciation. Its estimates for the next
year are as follows:
Amount (Rs. lakh)
Sales:
Domestic market at 2 months’ credit 1,600
Export selling price 10% below home price (Exports at 3
540
month’s credit)
Costs:
Material used (Suppliers extend 2 months’ credit) 600]
Wages paid (½ month in arrear) 400
Manufacturing expenses (paid 1 month in arrear) 600
Sales promotion (payable quarterly in advance) 80
Administration expenses (paid 1 month in arrear) 200

The company maintains one month’s stock of each of raw material and
finished goods. A cash balance of Rs.20 lakh is also maintained.
You are required to work out the working capital requirement of the
company.
(b) Discuss the important factors that determine the dividend policy of a 5 (0)

company.
3. You are provided with the following information for Excellent Ltd.: 15 (0)

Balance sheet
Liabilities As at As at Assets As at As at
31.3.2011 31.3.2010 31.3.2011 31.3.2010
Rs. Rs. Rs. Rs.
Share 5,00,000 5,00,000 Fixed 10,50,000 8,50,000
Capital 5,00,000 4,25,000 Assets 3,00,000 3,40,000
Profit & 5,50,000 5,00,000 Stock 3,45,000 3,80,000
Loss A/c 1,80,000 1,75,000 Debtors 35,000 30,000
Long–term 17,30,000 16,00,000 Cash 17,30,000 16,00,000
Loan
Creditors
Income Statement for the year ended 31.3.2011
Rs.
Sales 21,50,000
(Less)Cost of sales (14,70,000)
6,80,000
(Less)Operating Expenses:
Administrative Expenses (2,40,000)
Depreciation 1,00,000
3,40,000
Add : Dividend Received 25,000
3,65,000
(Less)Interest paid (70,000)
2,95,000
(Less)Income Tax (1,30,000)
Profit after Tax 1,65,000
Excellent Ltd. paid Dividend of Rs. 90,000 during the year ended 31.3.2011.

Prepare a Cash Flow Statement of Excellent Ltd.for the year ended 31.3.2011
using Indirect Method and disclosing cash flows from Operating, Investing and
Financing activities and the opening and closing cash balances.
4. (a) You are provided with the following estimates of cost of debt and cost of 10 (0)

equity capital (after tax) of an organisation at various levels of debt/equity


mix employed in its capital structure:
Debt as % of total capital
0 10 20 30 40 50 60
employed
5.0 5.0 5.0 5.5 6.0 6.5 7.0
Cost of debt(%)
12.0 12.0 12.5 13.0 14.0 16.0 20.0
Cost of equity (%)

Determine the optimal debt equity mix on the basis of composite cost of
capital.
(b) Describe the role of Hedging as foreign exchange risk management. 5 (0)

5. (a) You are given the middel rates as under; 5 (0)

Rs. 80 £ 1 in London,
Rs. 47/US $ in Delhi, and
US $ 1.58/£ 1 in New York.

Compute the Arbitrage gain on Rs.8,00,000.


(b) Explain briefly why purchasing power parity Theory does not always work in 5 (0)

practice.
(c) An extract from exchange rate list of a Kolkata based bank is given below: 2½+2½ (0)

Rs/¥ : 0.3992 :0.4002


How many Yen will it cost for a japanese tourist visiting India to
(i)
purchase RS 2,500 worth of jackfruit?
How much will Mr. Basu in Kolkata have to spend in rupees, to
(ii)
purchase as Sony Camcorder worth Yen 1,25,000?
6. A company is faced with the problem of choosing between two mutually 15 (0)

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 an 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.
Assuming depreciation on straight line basis and that there is no funds
constraint for the company, ascertain which project should be accepted. Present
value of an annuity of Rs.1 for 8 years = 5.335 and present value of Rs.1 at the
end of 8 years = 0.467, both at the discount rate of 10%.

Please solve the problem by an incremental cash flow approach.


7. A firm’s sales, variable costs and fixed cost amount to Rs. 75,00,000, Rs. 2½x6=15 (0)

42,00,000 and Rs. 6,00,000 respectively. It has borrowed Rs. 45,00,000 at 9


per cent and its equity capital totals Rs. 55,00,000.
(a) What is the firm’s ROI?
(b) Does it have favorable financial leverage?
If the firm belongs to an industry whose asset turnover is 3, does it have
(c)
a high or low asset leverage?
(d) What are the operating, financial and combined leverages of the firm?
(e) If the sales drop to Rs.50,00,000, what will the new EBIT be?
(f) At what level will the EBT of the firm equal to zero?
8. Write short notes on (any three) 5x3=15
(a) Foreign Direct Investment; (0)

(b) Venture Capital; (0)

(c) Operating Lease; (0)

(d) Project Appraisal. (0)

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