CA Final Question Papers Group I
Management Accounting and Financial Analysis Nov 2004
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.
1. You own an unused Gold mine that will cost Rs. 10,00,000 to reopen. If you open the mine, you expect to be able to extract 1,000 ounces of Gold a year for each of three years. After that the deposit will be exhausted. The Gold price is currently Rs. 5,000 an ounce, and each year the price is equally likely to rise or fall by Rs. 500 from its level at the start of year. The extraction cost is Rs. 4,600 an ounce and the discount rate is 10 per cent.
(a) Should you open the mine now or delay one year in the hope of a rise in the Gold price?
(b) What difference would it make to your decision if you could costlessly (but irreversibly) shut down the mine at any stage? Show the value of abandonment option.
2. (a) Calculate economic value added (EVA) with the help of the following information of Hypothetical Limited :
Cost of Equity
Income Tax Rate :
: 1.4 times
Equity Capital Rs. 170 lakh
Reserves and surplus Rs. 130 lakh
10% Debentures Rs. 400 lakh
(b) A has invested in three Mutual Fund Schemes as per details below :
Date of investment
Amount of investment
Net Asset Value (NAV) at entry date
Dividend received upto 31.03.04
NAV as at 31.03.04 MF A
Rs. 10.40 MF B
Rs. 10.10 MF C
What is the effective yield on per annum basis on respect of each of the three schemes to Mr. A upto 31.03.04?
(c) Explain the term ‘Exposure Netting’, with an example. 5 (0)
(d) Distinguish between Money market and Capital market. 3 (0)
3. (a) ABC Limited’s shares are currently selling at Rs. 13 per share. There are 10,00,000 shares outstanding. The firm is planning to raise Rs. 20 lakhs to Finance a new project.
What is the ex–right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholders wealth change from (i) to (ii)? How does right issue increases shareholders wealth?
(b) Fair finance, a leasing company, has been approached by a prospective customer intending to acquire a machine whose Cash Down price is Rs. 3 crores. The customer, in order to leverage his tax position, has requested a quote for a three year lease with rentals payable at the end of each year but in a diminishing manner such that they are in the ratio of 3 : 2 : 1.
Depreciation can be assumed to be on straight line basis and Fair Finance’s marginal tax rate is 35%. The targert rate of return for Fair Finance on the transaction is 10%.
Calculate the lease rents to be quoted for the lease for three years.
(c) Explain briefly about net asset value(NAV) of a Mutual Fund Scheme. 6 (0)
4. (a) Which position on the index future gives a speculator, a complete hedge against the following transactions:
(i) The share of Right Limited is going to rise. He has a long position on the cash market of Rs. 50 lakh on the Right limited. The beta of the Right Limited is 1.25.
(ii) The share of Wrong Limited is going to depreciate. He has a short position on the cashmarket of Rs. 25 lakh on the Wrong Limited. The beta of the Wrong Limited is 0.90
(iii) The share of Fair Limited is going to stagnant. He has a short position on the cashmarket of Rs. 20 lakh of the Fair Limited. The beta of the Fair Limited is 0.75
(b) Mr. A is contemplating purchase of 1,000 equity shares of a Company. His expectation of return is 10% before tax by way of dividend with an annual growth of 5%. The Company’s last dividend was Rs. 2 per share. Even as he is contemplating, Mr. A suddenly finds, due to a budget announcement dividends have been exempted from tax in the hands of the recipients. But the imposition of dividend Distribution tax on the Company is likely to lead to a fall in dividend of 20 paise per share. A’s marginal tax rate is 30%.
Calculate what should be Mr. A’s estimates of the price per share before and after the Budget announcement?
(c) Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000, due 60 days hence. They are worried about the falling USD value which is currently at Rs. 45.60 per USD. The concerned Export Consignment has been priced on an Exchange rate of Rs. 45.50 per USD. The Firm’s Bankers have quoted a 60–day forward rate of Rs. 45.20.
(i) Rate of discount quoted by the Bank
(ii) The probable loss of operating profit if the forward sale is agreed to.
(d) Distinguish between Forfeiting and Factoring. 4 (0)
5. (a) Given below is information of market rates of Returns and Data from two Companies A and B :
Company A (%)
Company B (%) Year 2002
11.0 Year 2003
10.5 Year 2004
(i) Determine the beta coefficients of Shares of Company A and Company B
(ii) Distinguish between ‘Systematic risk’ and ‘Unsystematic risk’.
(b) The following information is provided related to the acquiring Firm Mark Limited and the target Firm Mask Limited :
Earning after tax (Rs.)
Number of shares outstanding
P/E ratio (times) Firm Mark Limited
10 Target Mark Limited
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition, assuming P/E ratio of Mark Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition.
(c) Explain the terms ’Intrinsic value of an option’ and the ’Time value of an option’. 4 (0)
6. (a) Briefly explain ‘Buy Back of Securities’ and give the management objectives of buying Back Securities. 5 (0)
(b) Explain the term ‘Insider Trading’ and why Insider Trading is punishable. 5 (0)
(c) Write a brief note on the tax issue relating to Foreign Collaboration Agreements. 6 (0)
(d) A customer with whom the Bank and entered into 3 months forward purchase contract for Swiss Franks 1,00,000 at the rate of Rs. 36.25 comes to the bank after two months and requests cancellation of the contract. On this date, the rates are :
One month forward CHF 1 = Rs. 36.30
Determine the amount of Profit or Loss to the customer due to cancellation of the contract.