CWA ICWA Question Papers Final Group III
Financial Management and International Finance December 2011
This Paper has 28 answerable questions with 0 answered.
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Please: (i) Answer all bits of a question at one place.
(ii) Open a new page for answer to a new question.
(iii) Tick the question number answered on he front sheet of the answer-book.
Answer Question No.1 from Part A which is compulsory and any five questions from Part B.
PART A (25 Marks)
1. (a) Choose the correct words from those in italic type face: 1×8=8
(i) A joint product should be processed further if (post–separation/pre–separation) costs are (greater than/ less than) the (increase in revenue/additional fixed costs). (0)
(ii) Value (engineering/analysis) is cost avoidance or cost prevention before production whereas value (engineering/analysis) is cost reduction during production. (0)
(iii) The aim of ABM is to try to eliminate as far as possible the (core/primary/secondary/discretionary) activities. (0)
(iv) The point at which a physical activity causes an entry in the accounts which flushesout cost in a backflush system is known as the (trigger point /bottleneck). (0)
(v) Market (skiming/penetration) pricing should be used if an organization wishes to discourage new entrants into a market. (0)
(b) (i) In the formula for the learning curve, Yx= aXb, how is the value of b calculated?
A. Log of the learning rate/log of 2
B. Log of 2/learning rate
C. Learning rate × log of 2
D. Log of learning rate/2
(ii) Which of the following is incorrect as a description of part of the ABC process?
A. Transactions undertaken by support department personnel are appropriate cost drivers for long–term variable overheads.
B. Longer–term production overhead costs are partly driven by volume of output.
C. Longer–term production overhead costs are partly driven by the complexity and diversity of production work.
D. Short–term variable overhead costs should normally be traced to products using volume–related cost Drivers
(iii) Which of the following is correct?
A. Cost of conformance = cost of prevention + cost of internal failure
B. Cost of conformance = cost of internal failure + cost of external failure
C. Cost of conformance = cost of appraisal + cost of prevention
D. Cost of non-conformance = cost of prevention + cost of appraisal
(iv) Which of the following statements relates to Kaizen Costing?
A. Employees are often viewed as the cause of problems.
B. The aim is to meet cost performance targets.
C. It is assumed that current manufacturing conditions remain unchanged.
D. Costs are reduced by implementing continuous improvement.
(c) In the context of a balanced score-card approach to performance measurement, to which of the four perspectives does each measure relate?
Performance measure Perspective
D. Time taken to develop new products
Percentage of on-time deliveries
Average se–up time
Return on capital employed …………..
(Note: Your answer may be of the form: Capital letter indicating performance measure-Name of the perspective). 4 (0)
(d) Match the descriptions to the budgeting style:
(i) Budget allowances are set without the involvement of the budget holder.
(ii) All budget holders are involved in setting their own budgets.
(iii) Budget allowances are set on the basis of discussions between budget holders and those to whom they report.
A. Negotiated budgeting
B. Participative budgeting
C. Imposed budgeting
(Note: Your answer may be of the form:
Description No. _________capital letter indicating Budgeting style) 1×3=3 (0)
(e) Fill in the blanks in the statement below, using the words in the box:
Throughput Accounting ratio =————–per factory hour ÷ ——————— per factory hour.
Box of words
(f) An extract of the costs incurred at two different activity levels is shown. Classify the costs according to their behaviour patterns and show the budget cost allowance for an activity of 1,500 units.
Rs. (000) 2,000
Rs. (000) Type of cost
(F/V/S–V) Budget cost allowance
for 1,500 units
(i) Fuel 300 600 ………….. …………..
(ii) Photocopying 950 1,100 ………….. …………..
(iii) Heating 240 240 ………….. …………..
(iv) Direct Wages 600 800 ………….. …………..
PART B (75 Marks for any five questions)
2. (a) Saran Ltd. has achieved sales of Rs. 40 million and a net profit of Rs. 5 million in the year ended 31–03–2011.
The following figures are extracted from the accompanying Balance Sheet (31–03–2011) of the company:
Paid up Equity Share Capital
Reserve and Surplus
Current Liabilities and Provisions 5
The company wants to increase the Return on Equity by 7.5 percent in the year ending 31–03–2012.
Assess the change needed in the Net Profit margin of the company to meet the desired increase in its ROE.
Assume that the other ratios will not change.
(b) (i) What do you understand by ‘Trading on Equity’? 2 (0)
(ii) What are the limitations of Trading on Equity? 4 (0)
3. (a) RUI–WAY Ltd. has a surplus cash of Rs. 80 lac. It wants to distribute 30 percent of it to the shareholders. The company decides to buyback some of its shares.
The finance manager of the company estimates that its share price after repurchase is likely to be 10 per cent above the buyback price, if the buyback route is taken. The number of shares outstanding at present is 10 lac and the current EPS is Rs. 3.
(i) the price at which the shares can be repurchased if the market capitalisation of the company should be Rs. 180 lac after buyback;
(ii) the number of shares that can be repurchased;
(iii) the impact of the share repurchase on the EPS, assuming the net income remains the same as before.
(b) (i) Briefly discuss the Baumal Model of Cash Management. 3 (0)
(ii) Illustrate the model by using the following information about A Ltd.
The annual cash requirement of A Ltd. is Rs. 10 lac. The company has marketable securities in lot sizes of Rs. 100,000, Rs. 200,000, Rs. 250.000. Cost of conversion of marketable securities per lot is Rs. 1,000. The company can earn 5% annual yield on its securities. The optimal lot size to be sold will be Rs.? 3 (0)
4. (a) An oil company imports crude oil at the rate of 100 tonnes per month. The price of crude oil in the month of January in Rs. 5,000 per barrel (1 barrel = 1/7.33 tonnes). It is forecast that in the month of March the price per barrel of crude oil is likely to touch Rs. 6,000. The company wants to hedge against the rising price for its requirement in March. The futures contract price for March is now traded at Rs. 5,700 per barrel for 100 barrels.
(i) Explain how the oil company can hedge its exposure against the rising price of crude,
and state the number of contracts it should book for it.
(ii) What will be the effective price per barrel if in the month of March the price of crude oil is as under:
Spot price – Rs. 5,500 per barrel
Futures – Rs. 5,800 per barrel.
(b) Mention, in brief, the main official foreign sources of finance. 5 (0)
5. (a) The following quotes are available:
Spot ($/E) 0.8385/0.8391
3–m swap points 20/30
Spot ($/£) 1.4548/1.4554
3–m swap points 35/25
Find the 3–m (ε/£) outright forward rates. 10 (0)
(b) What is ‘Covered Interest Arbitrage’? Briefly state the role of an arbitrageur under covered interest arbitrage. 1+4=5 (0)
6. (a) A company expects to generate the following net income and incur the following capex in the next five years:
Year 1 2 3 4 5
The total number of outstanding shares are 18,00,000 and the current dividend is Rs. 6.50 per share.
(i) Determine the dividend per share if the firm follows a residual dividend policy.
(ii) Determine the external financing needed if the current dividend is maintained.
(iii) Determine the external financing required if the company maintains a 50% dividend payout ratio.
(iv) Under which of the above is the external need of funds maximized?
(b) Explain the ‘Hedging Approach’ to financing working capital requirements of a firm. 5 (0)
7. (a) Cookme Ltd. a well–established food manufacturing and distribution company, currently has an annual turnover in excess of Rs. 15 crore. At present, the company has three production and distribution divisions, each responsible for specific product groups, and a cost of capital of 15%.
The summary information of the Ready-to-cook division relating to divisional assets and profitability is as follows.
The division produces a wide range of products which it sells to both the supermarket sector and the restaurant trade.
Last year the divisional figures were as follows:
Investment in non-current assets
investment in working capital
Operating profit 1.5
Divisional budgets are set at the beginning of each year and these are then monitored on a month by month basis. Managers are given as much freedom as possible to manage their divisions which operate as autonomous profit-making units. Divisional managers are rewarded in terms of divisional return on investment.
The company is currently considering expansion into a new but allied product range. This range consists of sauces and canned foods. Projected figures for the expansion into sauces and canned foods are:
Additional non–current assets required
Additional investment in working capital
Budgeted additional profit 0.75
The manager of the Ready-to-cook division has produced successful results over the past few years for her division. She and her staff have enjoyed handsome bonuses on the basis of return on investment. The company has traditionally calculated return on investment as operating profit as a percentage of return on all net divisional assets, and bonuses are paid as a percentage on this basis. The board proposes that the Ready-to-cook division will be responsible for the expansion into sauces and canned foods.
(i) Calculate the return on investment for the division both before and after the proposed divisional expansion.
(ii) Calculate the residual income for the division both before and after the proposed divisional expansion.
(iii) Determine how the manager of Ready–to–cook division of Cook me Ltd. would like to accept the proposed expansion.
(b) State briefly the importance of life cycle costing at today’s business environment. 5 (0)
8. It has been suggested that much of the training of management accountants is concerned with cost control whereas the major emphasis should be on cost reduction.
(a) Distinguish between cost control and cost reduction.
(b) Give three examples each of the techniques and principles used for
(i) cost control and
(ii) cost reduction.
(c) Discuss the proposition contained in the statement.