# CA Final Exam Papers Group I

# Management Accounting and Financial Analysis May 2005

This Paper has 19 answerable questions with 0 answered.

Total No. of Questions— 6]

Time Allowed : 3 Hours

Maximum Marks : 100

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.

Question No. 1 is compulsory.

Answer any four Questions from the rest. Figures in the margin indicate marks allotted to each question.

All working notes should form part of the answer

Marks

1. ABC Ltd. is considering a proposal to acquire a machine costing Rs. 1,10,000 payable Rs. 10,000 down and balance payable in 10 annual equal installments at the end of each year inclusive of interest chargeable at 15%. Another option before it is to acquire the asset on a lease rental of Rs. 15,000 per annum payable at the end of each year for 10 years. The following information is also available :

(i) Terminal Scrap Value of Rs. 20,000 is realizable, if the asset is purchased.

(ii) The company provides 10% depreciation on straight line method on the original cost.

(iii) Income tax rate is 50%

You are required to compute and analyse cash flows and to advise as to which option is better.

20 (0)

2. (a) XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd’s shares are currently traded at Rs. 25. It has 2,00,000 shares outstanding and its earning after taxes (EAT) amount to Rs. 4,00,000. ABC Ltd. has 1,00,000 shares outstanding; its current market price is Rs. 12.50 and its EAT is Rs. 1,00,000.

The merger Will be effect by means of a stock swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer the current market value of ABC Ltd’s shares.

(i) What is the pre–merger earnings per share (EPS) and P/E ratios of both the companies?

(ii) If ABC Ltd’s P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ Ltd’s post merger EPS be?

(iii) What must the exchange ratio be for XYZ Ltd’s pre–merger and post–merger EPS to be the same?

8 (0)

(b) A company pays a dividend of Rs. 2.00 per share with a growth rate of 7%. The risk free rate is 9% and the market rate of return is 13%. The company has a beta factor of 1.50. However, due to a decision of the Finance Manager, beta is likely to increase to 1.75. Find out the present as well as the likely value of the share after the decision. 6 (0)

(c) RBI sold a 91 day T–bill of face value of Rs. 100 at an yield of 6%. What was the issue price? 2 (0)

(d) Explain the term “Officer for Sale”. 4 (0)

3. (a) A firm has projected the following cash flows from a project under evaluation :

Year

0

1

2

3 Rs. Lakhs

(70)

30

40

30

The above cash flows have been made at expected prices after recognizing inflation. The firm’s cost of capital is 10%. The expected annual rate of inflation is 5%.

Show how the viability of the project is to be evaluated.

8 (0)

(b) Write a note about the functions of merchant bankers. 6 (0)

(c) The following figures are collected from the annual report of XYZ Ltd :

Net Profit

Outstanding 12% preference shares

No. of equity shares

Return on Investment Rs.

30 lakhs

100 lakhs

3 lakhs

20%

What should be the approximate dividend pay-out ratio so as to keep the share price at Rs. 42 by using Walter model?

6 (0)

4. (a) On January 28, 2005 an importer customer requested a bank to remit Singapore Dollar (SGD) 25,00,000 under an irrevocable LC. However due to bank strikes, the bank could effect the remittance only on February 4, 2005. The interbank market rates were as follows :

Bombay US$1

London Pound 1

Pound 1

=

=

= January

Rs. 45.85/45.90

US$1.7840/1.7850

SGD 3.1575/3.1590 February 4

45.91/45.97

1.7765/1.7775

3.1380/3.1390

The bank wishes to retain an exchange margin of 0.125%. How much does the customer stand to gain or lose due to the delay?

Calculate rate in multiples of .0001).

8 (0)

(b) Ram buys 10,000 shares of X Ltd. at Rs. 22 and obtains a complete hedge of shorting 400 Nifties at Rs. 1,100 each. He closes out his position at the closing price of the next day at which point the share of X Ltd. has dropped 2% and nifty future has dropped 1.5%. What is the overall profit/loss of this set of transaction? 4 (0)

(c) Write a brief note about regulation of NBFCs in India. 8 (0)

5. (a) Project X and Project Y are under the evaluation of XY Co. The estimated cash flows and their probabilities are as below :

Project X : Investment (year 0) Rs. 70 lakhs

Probability weights

Years

1

2

3 0.30

Rs. Lakhs

30

30

30 0.40

Rs. Lakhs

50

40

40 0.30

Rs. Lakhs

65

55

45

Project Y : Investment (year 0) Rs. 80 lakhs

Probability weights

0.20

0.50

0.30 Annual cash flows thro’life

Rs. Lakhs

40

45

50

(a) Which project is better on NPV. criterion with a discount rate of 10%

(b) Compute the standard deviation of the present value distribution and analyse the inherent risk of the projects.

12 (0)

(b) A share of Tension–free Economy Ltd. is currently quoted at, a price earning ratio of 7.5 times. The retained earning per share being 37.5% is Rs. 3 per share. Compute :

1. The company’s cost of equity, if investors expect annual growth rate of 12%.

2. If anticipated growth rate is 13% p.a., calculate the indicated market price, with same cost of capital.

3. If the company’s cost of capital is 18% and anticipated growth rate is 15% p.a., calculate the market price share, assuming other conditions remain the same.

8 (0)

6. (a) The following information is provided relating to the acquiring company Efficient Ltd. and the target company Healthy Ltd.

No. of Shares (F.V. Rs. 10 each

Market Capitalization

P/E ratio (times)

Reserves and Surplus

Promoter’s Holding (No. of shares) Efficient Ltd.

10.00 lakhs

500.00 lakhs

10.00

300.00 lakh

4.75 lakh Healthy Ltd.

7.5 lakhs

750.00 lakhs

5.00

165.00 lakh

5.00 lakh

Board of Directors of both the Companies have decided to give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25% and 35% respectively for Earning, Book Value and Market Price of share of each company :

(i) Calculate the swap ratio and also calculate Promoter’s holding % after acquisition.

(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?

(iii) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition, assuming P/E ratio of Firm Efficient Ltd. remains unchanged.

(iv) Calculate free float market capitalization of the merged firm.

12 (0)

(b) (i) Who can be appointed as Asset Management Company (AMC) ? 4 (0)

(ii) Write the conditions to be fulfilled by an AMC. (0)

(iii) What are the obligations of AMC? (0)

(c) Write short notes on the following : 4

(1) Debt Securitisation (0)

(2) Stock Lending Scheme—its meaning, advantages and risk involved. (0)