# Financial Management and International Finance June 2010

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 five questions from Part B.
Working notes should form part of the answer.
(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. Indicate the correct answer(= 1 mark) and give workings/reasons briefly in support of your answer (= 1 mark): 2×7
(i) LEENZA LTD. currently pays a dividend of Rs.4 per share that is expected to grow at a rate of 10% for the next year, after which it is expected to grow at a rate of 7% forever. What value would you place on the stock of this company if a 15% rate of return is required? (Rounded off your answer to the nearest integer.)[Given PVIF (15% 1 year) = 0.8696.]
A. Rs.53.05
B. Rs.55.00
C. Rs.58.10
D. Noe of the above
(0)
(ii) The Degree of Operating Leverage (DOL) and the Degree of Financial Leverage of ALANTA LTD. are 3 and 1.67 respectively. If the management of the company targets to increase the EPS by 10 percent, by how much percentage should sales volume be increased? (Rounded off your answer to the nearest value.)
A. 5.00%
B. 3.00%
C. 2.00%
D. Insufficient data
(0)
(iii) ANGEL LTD., an export customer who relied on the inter bank rate of Rs./ \$ 46.50/10 requested his banker to purchase a bill for USD 80,000. What is the rate to be quoted to ANGEL LTD., if the banker wants a margin of 0.08%?
A. Rs.46.40
B. Rs.46.46
C. Rs.46.60
D. None of the above
(0)
(iv) The total asset – turnover ratio and total asset to net – worth of ZENITH LTD. are 1.75 and 2 respectively. If the net – profit margin of the company is 8 per cent, what will be its Return on Equity (ROE)?
A. 28.0%
B. 25.5%
C. 20.0%
D. Insufficient information
(0)
(v) The current price of a share of VETA LTD. is Rs.120. The company is planning to go for rights issue. The subscription price for one rights share is proposed to be Rs.104. If the company targets that ex–rights value of a share shall not fall below Rs.116, the number of existing shares require for one rights share will be
A. 1
B. 2
C. 3
D. None of the above
(0)
(vi) Consider the following
One year euro interest rate is 3%(compounded quarterly).
One year Rupee interest rate is 6% (compounded quarterly).
The forward six months exchange rate is Rs.58.82/euro.
According to interest rate parity, the spot exchange rate is
A. Rs.57.96
B. Rs.58.10
C. Rs.58.60
D. None of the above
(0)
(vii) The dividend payout ratio of ASKITA LTD. is 40%. If the company follows traditional approach to dividend policy with a multiplier of 9, the P/E of ASKITA LTD. will be
A. 4.4
B. 6.6
C. 7.1
D. 7.7
(0)
(b) Choose the most appropriate one from the stated options and write it down [only indicate A, B, C, D as you think correct (= 1 mark each)]: 1×6
(i) Short – term portfolio investments are recorded in which head of Balance of Payment(BOP) account?
A. Investment Income
B. Current Accounts
C. Capital Account
D. Reserves
(0)
(ii) If the acceptance of one project is dependent on the acceptance of the other project, then they are said to be
A. Complementary
B. Mutual exclusive
C. Contingent
D. Economically dependent
(0)
(iii) The internal rate of return can be said to be based on the assumption that the intermediate cash flows are
A. Perfectly certain
B. Highly variable
C. Re–invested at a rate equal to the internal rate of return of the firm
D. Re–invested at the cost of capital of the firm.
(0)
(iv) Which of the following institutions has international monetary co–operation as its primary concern?
A. World Bank
B. Bank of international settlement
C. IMF
D. IDA
(0)
(v) Cash transaction means settlement on
A. T + 0
B. T + 1
C. T + 2
D. T + 3
(0)
(vi) Which of the following statements about Venture Capital is correct?
A. It will not be appropriate to finance a management buy out.
B. It will provide both loan and equity finance to a company.
C. It will provide secured medium term–loan
D. It will be available to companies listed in stock exchange.
(0)
(c) Mention whether the following statements are True (T) or False (F) : 1×5
(i) CVP analysis assumes a linear revenue function and a linear cost function. (0)
(ii) The key issue of the theory of capital structure is to examine whether a business can change its value and cost of capital by changing its capital structure. (0)
(iii) In case of projects which are divisible, capital rationing is done by ranking the projects on the basis of Net Present Value (NPV). (0)
(iv) Leading and netting are internal hedging techniques whereas swap is an external technique for hedging. (0)
(v) If a forward currency is FLAT, it means that the expected spot rate is equal to the forward rate. (0)
PART B (75 Marks)
2. (a) Explain the relevancy of EBIT – EPS analysis in capital structure decisions of management. 5 (0)
(b) The following particulars pertain to PREETI LTD.:
Income Statement for the year ended 31st March, 2010
(Amount in Rs. thousand)
Sales Revenue
Less: Cost of Goods sold

Add: Government Compensation for loss in riots 3,200
2,000
1,200
50
1,250
Less: Operating Expenses
Interest on Debentures
Depreciation on Fixed Assets
Cost of issue of Debentures written off
Profit before Tax
Less: Tax Provision
Profit after Tax 790
15
210
1

1,016
234
92
142
As on 31st March, 2009 As on 31st March, 2010
(Amount in Rs. thousand)
Inventories
Debtors
Bills receivable
Cash in hand and at Bank
Creditors
Bills payable
Outstanding expenses 180
40
30
102
78
20
31 220
38
55
248
95
15
44
You are also informed that the following important transactions have taken place during the year ended 31st March, 2010;

(i) Fully paid equity shares of the face value of Rs.2,00,000 were allotted at a premium of 20%.
(ii) 10% Debentures for Rs.3,00,000 were redeemed at a premium of 2%.
(iii) Land was purchased for Rs.1,50,000 and th consideration was discharged by the allotment to the vendor of zero per cent convertible Debentures for the amount.
(iv) Tax paid during the year totaled Rs.95,000
(v) Dividend for the year ended 31st March, 2009 amounting to Rs.1,00,000 was paid.
Required

Prepare CASH FLOW statement for the year ended 31st March, 2010, using Indirect Method.

10 (0)
3. AMTEK LTD. which is specialized in manufacturing garments is planning for expansion to handle a new contract which it expects to obtain.
An investment bank have approached the company and asked whether the company had considered Venture Capital financing.
In 2006, the company borrowed Rs. 150 lakhs on which interest is paid at 10% p.a
The company shares are unquoted and it has decided to take your ADVICE in regard to the CALCULATION OF VALUE of the COMPANY that could be used in negotiations, using the following available Information and Forecast. Company’s Forecast Turnover for the year ending 31st March, 2010 is Rs.3,000 lakh which is mainly dependent on the ability of the company to obtain the new contract, the chances for which is 60%.
Turnover for the following year is dependent to some extent on the outcome of the year ending 31st March, 2010:
Following are the estimated turnovers and probabilities:
Year 2010 Year 2011
Turnover
(Rs. in lakh) Probability Turnover
(Rs. in lakh) Probability
3,000
2,250
1,800 0.60
0.30
0.10 3,750
4,500
3,000
2,700
2,250
1,800 0.70
0.30
0.50
0.50
0.60
0.40
Operating costs, inclusive of depreciation, are expected to be 40% and 35% of turnover respectively, for the years ending 31st March, 2010 and 2011.
Corporate tax is to be paid at 30%.
It is assumed that profits after interest and Taxes are FREE CASH FLOWS.
Growth in earnings is expected to be 40% for the years ending 31st March, 2012, 2013 and 2014 which will fall to 10% each year after that.
Industry Average Cost of equity (net of tax) is 15%.
Note: Extracted from the table of PV.
PVIF at 15% for 0 to 5 years: 1.000, 0.870, 0.756, 0.658, 0.572, 0.497.

3+3+4
+2+3 (0)
4. (a) A company is currently facing working capital crunch. You are required to discuss the various areas that you would like to took into and suggest the ways by which the company can overcome the problem. 5 (0)
(b) ATUL COMPANY LTD. earned an EBIT of Rs.3 crore for the year just ended. The company has 10 lakh equity shares outstanding with a face value of Rs.10 each and an outstanding debt of Rs.2 crore, which carries interest at 12%. The company also has free reserves to the extent of Rs.5 crore, which can be capitalized. The company is planning a bonus issue to utilize the entire free reserves and later a stock split to make the face value of the shares Rs.2.
After the bonus issue and stock split are complete, the company plans to raise funds to the extent of Rs.5 crore to finance additional investments. The required funds may be raised either as debt at an interest of 14% or equity, which can be issued at the par value of Rs.2. The company expects the standard deviation of total EBIT after the investments are made is RS.1.8 crore. Assume the income tax rate of the company is 30%.

You are required to calculate the minimum level of EBIT at which the debt issue is better than the equity from the point of view of EPS by at least 95%.

7+3 (0)
5. (a) What are the needs for a range of various performance measures in an organization? What are the various categories of performance indicators? 3+2 (0)
(b) The Manager (Accounts) of MULTSOFT LTD. has studied his varying monthly Cash Flows and has arrived at the probabilities of Cash Inflows and outgo as detailed below:
Cash Inflow
(Rs.) Probabilities Cash Outgo
(Rs.) Probabilities
1,40,000
1,50,000
1,60,000
1,70,000
1,80,000
1,90,000 0.35
0.20
0.15
0.14
0.11
0.05 1,10,000
1,20,000
1,30,000
1,40,000
1,50,000
1,70,000 0.15
0.25
0.30
0.15
0.11
0.04
The Manager (Accounts) at the beginning(April) of the year has Rs.20,000 in Bank. The Manager (Accounts) can avail of temporary overdraft facilities to cover any cash shortage.

Required

(i) Simulate the process to compute sales (cash inflow) and expenses (cash outgo) of the company over a financial year (April to March) using the following two series of random numbers:
Series 1 : 34, 84, 38, 82, 36, 92, 73, 91, 63, 29, 27, 26
Series 2 : 96, 57, 99, 84, 51, 29, 41, 11, 66, 30, 41, 80
(ii) How much money does the Manager (Accounts) has at the end (March) of the year?
4+4+2 (0)
6. (a) Explain briefly the factors that attract the flow of Foreign Direct Investments (FDI) in India. 5 (0)
(b) VEDIKA TRADERS LTD. exports edible oils to Middle–East and African countries. In June the company exported an assignment worth \$ 5 million to Jambia. The payment for the same is expected to realize during the month of September. For the company has entered into a option forward contract for delivery of \$ 5 million over the month of September.
The Market quotes on June 30 at the time of entering into the contract were as follows:

June 30, Spot
Forward Rs./ \$
1 month
2 month
3 month 47.05/08
23/25 paise
47/49 paise
70/72 paise
On September’01, the company approached the bank for extension of the contract by another two months, that is for delivery during the month of November.

The market quotes on Septermber’01, were as follows:

Spot
Forward Rs./ \$
1 month
2 month
3 month 47.58/60
18/20 paise
37/39 paise
55/57 paise
On November’01, the company approached the bank to cancel the forward contract. The exchange rates as on Novermber’01, were as follows:

Spot
Forward Rs./ \$
1 month
2 month 47.97/99
16/18 paise
33/35 paise
You are required to calculate:

(i) The forward rate to be quoted to Laxmi Traders on June 30.
(ii) The exchange rate to be quoted by the bank on September’01 for the extension of the contract.
(iii) The amount of cash flows due to extension of the contract.
(iv) The exchange rate at which the forward contract to be cancelled on November’01.
(v) The amount of cash flows due to cancellation of the contract.
(Ignore FEDAI margins for merchant quotes.) 2+1+3
+1+3 (0)
7. (a) Venture Capital is considered to be a high risk capital. Do you agree? Enumerate the main features of Venture Capital. 2+3 (0)
(b) ANKRIT LTD. is considering two mutually exclusive project M and project N.
The Finance Director thinks that the project with the higher NPV should be chosen whereas the Managing Director thinks that the one with the higher IRR should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after–tax cash flows of the projects are as follows:

Year 0 1 2 3 4 5
Cash Flows:
Project M
Project N
(200000)
(200000)
35000
218000
80000
10000
90000
10000
75000
4000
20000
3000
Required:

(1) Calculate the NPV and IRR of each project.
(2) State with reasons, which project you would recommend.
(3) Explain the inconsistency in the ranking of the two projects.
Present Value Table is given:
Year 0 1 2 3 4 5
PVIF at 10%
PVIF at 20% 1.000
1.00 0.909
0.833 0.826
0.694 0.751
0.579 0.683
0.482 0.621
0.402
3+4+
2+1 (0)
8. Write short notes on any three out of the following: 5×3