CA Final Question Papers Group I Management Accounting and Financial Analysis November 2003

CA Final Question Papers  Group I

 Management Accounting and Financial Analysis Nov 2003

 

 

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.
Answer any five Questions
All working notes should form part of the answer
Wherever appropriate, suitable assumptions should be made.
Present value/Annuity tables would be supplied on demand.
Marks
1. (a) Explain the term ‘Buy – Outs’. 8 (0)
(b) The Textile Manufacturing Company Ltd., is considering one of two mutually exclusive proposals, Projects M and N, which require each outlays of Rs. 8,50,000 and Rs. 8,25,000 respectively. The certainty – equivalent (C.E.) approach is used in incorporating risk in capital budgeting decisions. The current yield on government bonds is 6% and this is used as the risk free rate. The expected net cash flows and certainty equivalent are as follows:
Project M Project N
Year – end Cash flow Rs. C.E. Cash flow Rs. C.E.
1
2
3 4,50,000
5,00,000
5,00,000 0.8
0.7
0.5 4,50,000
4,50,000
5,00,000 0.9
0.8
0.7
Required:

(i) Which project should be accepted?
(ii) If risk adjusted discount rate method is used, which project would be appraised with a higher rate and why?
12 (0)
2. (a) Explain, how to establish a Mutual Fund. 6 (0)
(b) Mr. A can earn a return of 16 per cent by investing in equity shares on his own. Now he is considering a recently announced equity based mutual fund scheme in which initial expenses are 5.5 per cent and annual recurring expenses are 1.5 per cent. How much should the mutual fund earn to provide Mr. A a return of 16 per cent? 4 (0)
(c) The rates of return on the security of Company X and market portfolio for 10 periods are given below:
Period Return of Security
X (%) Return on
Market Portfolio (%)
1
2
3
4
5
6
7
8
9
10 20
22
25
21
18
–5
17
19
–7
20 22
20
18
16
20
8
–6
5
6
11
(i) What is the beta of Security X?

(ii) What is the characteristic line for Security X?

10 (0)
3. (a) M/s. Agfa Industries is planning to issue a debenture series on the following terms:
Face value
Term of maturity
Yearly coupon rate Rs. 100
10 yrs
Years
1 — 4
5 — 8
9 — 10
9%
10%
14%
The current market rate on similar debentures is 15 per cent per annum. The Company proposes to price the issue in such a manner that it can yield 16 per cent compounded date of return to the investors. The Company also proposes to redeem the debentures at 5 per cent premium on maturity. Determine the issue price of the debentures.

8 (0)
(b) Write short notes on any three of the following: 3×4=12
(i) Marking to market (0)
(ii) Treasury bills (0)
(iii) Social Cost benefit analysis (0)
(iv) Credit rating in India (0)
(v) Green show option. (0)
4. (a) Write a brief note on project appraisal under inflationary conditions. 8 (0)
(b) M Ltd. has to make a payment on 30th January, 2004 of Rs. 80 lakhs. It has surpluscash today, i.e. 31st October, 2003; and has decided to invest sufficient cash in bank’scertificate of Deposit scheme offering an yield of 8% p.a. on simple interest basis. What is the amount to be invested now? 4 (0)
(c) M Co. Ltd., is studying the possible acquisition of N Co. Ltd. by way of merger. The following data are available in respect of the companies:
Particulars M Co. Ltd. N Co. Ltd.
Earnings after tax (Rs.)
No. of equity shares
Market value per share (Rs.) 80,00,000
16,00,000
200 24,00,000
4,00,000
160
(i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price, what is the new earning per share for M Co. Ltd.?
(ii) N Co. Ltd. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. What should be the exchange ratio in that case?
8 (0)
5. (a) Write a short note on ’Book building’. 4 (0)
(b) ABC Co. have taken a 6–month loan from their foreign collaborators for US Dollars 2 millions. Interest payable on maturity is at LIBOR plus 1.0%. Current 6–month LIBOR is 2%. Enquiries regarding exchange rate with their bank elicit the following information:
Spot VSD 1
6 months forward Rs. 48,5275
Rs. 48,4575
(i) What would be their total commitment in Rupees, if they enter into a forward contract?
(ii) Will you advise them to do so? Explain giving reasons.
10 (0)
(c) A company operating in Japan has today effected sales to an Indian company, the payment being due 3 months from the date of invoice. The invoice amount is 108 lakhs yen. At today’s spot rate, it is equivalent to Rs. 30 lakhs. It is anticipated that the exchange rate will decline by 10% over the 3 months period and in order to protect the yen payments, the importer proposes to take appropriate action in the foreign exchange market. The 3–months forward rate is presently quoted as 3.3 yen per Rupee. You are required to calculate the expected loss and to show how it can be hedged by a forward contract. 6 (0)
6. (a) Explain reforming the public sector enterprises (PSEs) through Greenfield privatization. 8 (0)
(b) Capital structure of Sun Ltd., as at 31.3.2003 was as under:
(Rs. in lakhs)
Equity share capital
8% Preference share capital
12% Debentures
Reserves 80
40
64
32
Sun Ltd., earns a profit of Rs. 32 lakhs annually on an average before deduction of income–tax, which works out to 35% and interest on debentures.

Normal return on equity shares of companies similarly paces is 9.6% provided:

(a) Profit after tax covers fixed interest and fixed dividends at least 3 times.
(b) Capital gearing ratio is 0.75.
(c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed profits.
Sun Ltd., has been regularly paying equity dividend of 8%.

Compute the value per equity share of the company.

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