CA Final Question Papers Group I Strategic Financial Management November 2011

CA Final Question Papers – Group I

Strategic Financial Management – November 2011

Total No. of Questions — 7

Time Allowed : 3 Hours

Maximum Marks : 100
Answers to questions are to be given only in English except in the case of candidates who
have opted for Hindi Medium. If a candidate has not opted for Hindi medium, his/her answers
in Hindi will not be valued.
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Working notes should form part of the answer.
Marks
1. (a) Orange purchased 200 units of Oxygen Mutual Fund at Rs. 45 per unit on 31st December, 2009. In 2010, he received Rs. 1.00 as dividend per unit and a capital gains distribution of Rs. 2 per unit.
Required:
(i) Calculate the return for the period of one year assuming that the NAV as on 31st December 2010 was Rs. 48 per unit.
(ii) Calculate the return for the period of one year assuming that the NAV as on 31st December 2010 was Rs. 48 per unit and all dividends and capital gains distributions have been reinvested at an average price of Rs. 46.00 per unit.
Ignore taxation.
5 (0)
(b) An importer is due to pay the exporter on 28th January 2010, Singapore Dollars of 25,00,000 under an irrevocable letter of credit. It directed the bank to pay the amount on the due date.
Due to go–slow and strike procedures adopted by its staff, the bank was not in a position to remit the amount due. The amount was actually remitted on 4th February 2010.

On the transaction, the bank wants to retain an exchange margin of 0.125 per cent.

The following were the rates prevalent in the exchange market on the relevant dates:

28th January 4th February
Rupee/US $1
London Pound/Dollars
Pound Rs. 45.85/45.90
$1.7840/1.7850
Sing $3.1575/3.1590 Rs. 45.91/45.97
$1.7765/1.7775
Sing $3.1380/3.1390
What is the effect on account of the delay in remittance? Calculate rate in multiples of .0001.

5 (0)
(c) A company has a book value per share of Rs. 137.80. Its return on equity is 15% and follows a policy of retaining 60 percent of its annual earnings. If the opportunity cost of capital is 18 percent, what is the price of its share? [adopt the perpetual growth model to arrive at your solution]. 5 (0)
(d) The six months forward price of a security is Rs. 208.18. The rate of borrowing is 8 percent per annum payable at monthly rates. What will be, the spot price? 5 (0)
2. (a) Using the chop–shop approach (or Break–up value approach), assign a value for Cranberry Ltd. whose stock is currently trading at a total market price of €4 million. For Cranberry Ltd, the accounting data set forth three business segments: consumer wholesale, retail and general centers. Data for the firm’s three segments are as follows:
Business
Segment Segment
Sales Segment
Assets Segment Operating
Income
Wholesale
Retail
General € 225,000
€ 720,000
€ 2,500,000 € 600,000
€ 500,000
€ 4,000,000 € 75,000
€ 150,000
€ 700,000
Industry data for “pure–play” firms have been compiled and are summarized as follows:

Business
Segment Capitalization/
Sales Capitalization/
Assets Capitalization/
Operating Income
Wholesale
Retail
General 0.85
1.2
0.8 0.7
0.7
0.7 9
8
4
8 (0)
(b) Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4 million with a large German retailer on 6 months credit. If successful, this will be the first time that Nitrogen Ltd has exported goods into the highly competitive German market. The following three alternatives are being considered for managing the transaction risk before the order is finalized.
(i) Invoice the German firm in Sterling using the current exchange rate to calculate the invoice amount.
(ii) Alternative of invoicing the German firm in € and using a forward foreign exchange contract to hedge the transaction risk.
(iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to the nearly whole number) to hedge the transaction risk.
Following data is available:
Spot Rate
6 months forward premium
6 months further contract is currently trading at
6 months future contract size is
Spot rate and 6 months future rate €1.1750 – €1.1770/£
0.60-0.55 Euro Cents
€1.1760/£
£ 62500
€1.1785/£
Required:

(a) Calculate to the nearest £ the receipt for Nitrogen Ltd, Under each of the three proposals.
(b) In your opinion, which alternative would you consider to be the most appropriate and the reason therefor.
4+4 (0)
3. (a) Helium Ltd has evolved a new sales strategy for the next 4 years. The following information is given:
Income Statement Rs. in thousands
Sales
Gross Margin at 30%
Accounting, administration and distribution expense at 15%
Profit before tax
Tax at 30%
Profit after tax 40,000
12,000
6,000
6,000
1,800
4,200
Balance sheet information
Fixed Assets
Current Assets
Equity 10,000
6,000
15,000
As per the new strategy, sales will grow at 30 percent per year for the next four years. The gross margin ratio will increase to 35 percent. The Assets turnover ratio and income tax rate will remain unchanged.

Depreciation is to be at 15 percent on the value of the net fixed assets at the beginning of the year.
Company’s target rate of return is 14%.
Determine if the strategy is financially viable giving detailed workings.

10 (0)
(b) Pineapple Ltd. has issued fully convertible 12 percent debentures of Rs. 5,000 face value, convertible into 10 equity shares. The current market price of the debentures is Rs. 5,400. The present market price of equity shares is Rs. 430.
Calculate:
(i) the conversion percentage premium, and
(ii) the conversion value
3+3 (0)
4. (a) Based on the credit rating of the bonds, A has decided to apply the following discount rates for valuing bonds:
Credit rating Discount rate
AAA
AA
A 364–day T–bill rate + 3% spread
AAA + 2% spread
AAA + 3% spread
He is considering to invest in a AA rated Rs. 1,000 face value bond currently selling at Rs. 1,025.86. The bond has five years to maturity and the coupon rate on the bond is 15 percent per annum payable annually. The next interest payment is due one year from today and the bond is redeemable at par. (Assume the 364–day T–bill rate to be 9 percent).
You are required to :

(i) Calculate the intrinsic value of the bond for A. Should he invest in the bond?
(ii) Calculate the Current Yield (CY) and the Yield to Maturity (YTM) of the bond.
8 (0)
(b) XYZ Ltd. is considering to acquire an additional computer to supplement its time–share computer services to its clients. It has two options:
(i) To purchase the computer for Rs. 22,00,000
(ii) To lease the computer for three years from a leasing company for Rs. 5,00,000 as annual lease rent plus 10 percent of gross time–share service revenue. The agreement also requires an additional payment of Rs. 6,00,000 at the end of the third year. Lease rent is payable at the year end, and the computer reverts to the lessor after the contract period.
The company estimates that the computer under review now will be worth Rs. 10,00,000 at the end of third year. Forecast revenues are:
Year Rs.
1
2
3 22,50,000
25,00,000
27,50,000
Annual operating costs (excluding depreciation/lease rent of computer) are estimated at Rs. 9,00,000 with an additional Rs. 1,00,000 for start–up and I training cost at the beginning of the first year. These costs are to be borne by the lessee. XYZ Ltd. will borrow at 16% interest to finance acquisition of computer; repayments are to be made according to the following schedule:

Year–end Principal
(Rs.) Interest
(Rs.) Total
(Rs.)
1
2
3 5,00,000
8,50,000
8,50,000 3,52,00
2,72,000
1,36,000 8,52,000
11,22,00
9,86,000
The company uses straight line method to depreciate its assets and pays 50 percent tax on its income.
The management of XYZ Ltd. approaches you for advice. Which alternative would you recommend and why? 8 (0)
5. (a) The following is the Balance–sheet of Grape Fruit Company Ltd as at March 31st 2011.
Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)
Equity shares of Rs. 100 each
14% preference shares of
Rs.100/- each
13% Debentures
Debenture interest accrued
and payable
Loan from bank
Trade creditors 600

200
200
26

74
340 Land and Building
Plant and Machinery

Furniture and Fixtures
Inventory

Sundry debtors
Cash at bank
Preliminary expenses
Cost of issue of
debentures
Profit and Loss Account 200
300

50
150

70
130
10
5

125
1440 1440
The Company did not perform well and has suffered sizable losses during the last few years. However, it is felt that the company could be nursed back to health by proper financial restructuring. Consequently the following scheme of reconstruction has been drawn up :
(i) Equity shares are to be reduced to Rs. 25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of Rs. 50 each, fully paid up.
(iii) Debenture holders have agreed to forgo the accrued interest due to them. In the future, the rate of interest on debentures is to be reduced to 9 percent.
(iv) Trade creditors will forego 25 percent of the amount due to them.
(v) The company issues 6 lakh of equity shares at Rs. 25 each and the entire sum was to be paid on application. The entire amount was fully subscribed by promoters.
(vi) Land and Building was to be revalued at Rs. 450 lakhs, Plant and Machinery was to be written down by Rs. 120 lakhs and a provision of Rs. 15 lakhs had to be made for bad and doubtful debts.
Required:
(i) Show the impact of financial restructuring on the company’s activities.
(ii) Prepare the fresh balance sheet after the reconstruction is completed on the basis of the above proposals.
6+4 (0)
(b) An Indian importer has to settle an import bill for $ 1,30,000. The exporter has given the Indian exporter two options:
(i) Pay immediately without any interest charges.
(ii) Pay after three months with interest at 5 percent per annum.
The importer’s bank charges 15 percent per annum on overdrafts. The exchange rates in the market are as follows:
Spot rate (Rs./$) : 48.35 / 48.36
3-Months forward rate (Rs./$) : 48.81 /48.83
The importer seeks your advice. Give your advice. 6 (0)
6. (a) A Portfolio Manager (PM) has the following four stocks in his portfolio:
Security No. of Shares Market Price Per Share (Rs.) β
VSL
CSL
SML
APL 10,000
5,000
8,000
2,000 50
20
25
200 0.9
1.0
1.5
1.2
Compute the following:
(i) Portfolio beta.
(ii) If the PM seeks to reduce the beta to 0.8, how much risk free investment should he bring in ?
(iii) If the PM seeks to increase the beta to 1.2, how much risk free investment should he bring in ?
8 (0)
(b) ABC established the following spread on the Delta Corporation’s stock :
(i) Purchased one 3–month call option with a premium of Rs. 30 and an exercise price of Rs. 550.
(ii) Purchased one 3–month put option with a premium of Rs. 5 and an exercise price of Rs. 450.
The current price of Delta Corporation’s stock is Rs. 500. Determine ABC’s profit or loss if the price of Delta Corporation’s stock.
(a) stays at Rs. 500 after 3 months.
(b) falls to Rs. 350 after 3 months.
(c) rises to Rs. 600.
8 (0)
7. Write short notes on any four of the followings: 4×4=16
(a) Capital Rationing (0)
(b) Embedded derivatives (0)
(c) Depository participant (0)
(d) Money market mutual fund (0)
(e) Leading and lagging (0)
(f) Take over by reverse bid (0)

Leave a Comment