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Institute of Certified Management Accountants of Sri Lanka Strategic Level

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Institute of Certified Management Accountants of Sri Lanka Strategic Level
© Copyright Reserved
Serial No………………
Institute of Certified Management Accountants of Sri Lanka
Strategic Level
November 2013 Examination
Examination Date :
Examination Time:
23rd November 2013
9.30 a:m. – 12.30 p:m.
05
05
Number of Pages
:
Number of Questions:
Instructions to Candidates
1.
2.
3.
4.
Time allowed is three (3) hours.
Total: 100 Marks.
Answer all questions in Part I and three (3) questions from Part II.
The answers should be in English Language.
Subject
Subject Code
Financial Strategy and Policy
(FSP / SL 3 - 403)
PART I
Answer all questions
Question No. 01 (40 Marks)
Medical Instrument Company (Medico) Ltd is medium size company and it produces medical lab
instruments. The company has been operating for many years and located in Colombo city area. The
following is balance sheet of the company as at 31st March 2013:
Balance Sheet as at 31st March 2013
(Rs. in millions)
Cost
Accumulated
depreciation
Fixed Assets
Plant and machinery
Motor vehicle
72.8
2.4
85.2
Current Assets
Stocks and work in progress
Debtors
Bank
Current Liabilities
Creditors
Proposed Dividend
Taxation
Total Assets
24.4
1.2
25.6
Net value
48.4
1.2
49.6
37.0
42.8
3.8
83.6
25.4
4.8
8.2
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Financial Strategy & Policy (FSP / SL 3 - 403) – November 2013 Examination
38.4
45.2
94.8
1
Capital and reserves
Ordinary shares (Rs. 2/= each)
General reserve
Retained earnings
20.0
9.2
35.6
64.8
Long-term Debt
10% Debentures
Total Liabilities
30.0
94.8
The profit and loss account for the year to 31st March 2013 is as follows:
Profit and Loss account for the year ended 31st March 2013
Sales
Less: Variable cost
Less: Fixed cost
Profit before interest and taxes
interest
Profit before taxation
Corporate Tax
Profit after taxation
Dividend
Retained Profit for the year
Rs. in Million
230.0
138.0
65.0
27.0
3.0
24.0
8.4
15.6
7.2
8.4
The company wishes to expand its production facilities at the end of 2013 in order to open with an
increase in demand for its products starting early in 2014. Consequently, Rs. 36 million is required for
new plant and equipment. It is expected that annual sales and fixed cost will increase by 20% and Rs. 5
million respectively. Contribution to sales ratio, 40% , remains same as previous years.
The financial manager of the firm proposes the following three proposals of financing the expansion
programme:
1. The issue of 18 million ordinary shares at Rs 2.00 each.
2. The issue of 24 million 10% Rs. 1 preference shares and Rs.12 million 10% debentures at par.
3. The issue of 12 million ordinary shares at Rs 2.00 and Rs 12 million 10% debentures.
The directors wish to increase the dividend per share by 0.12 next year whichever financing scheme is
adopted.
The company tax rate is 35%.
You are required to:
(a)
Prepare income statement for the year ended 31st March 2014 for each of the financing scheme.
(05 Marks)
(b)
Calculate projected earnings per share for the year ended 31st March 2014.
(05 Marks)
(c)
Calculate the projected level of financial gearing as at 31st March 2014.
(05 Marks)
(d)
Calculate interest coverage ratios for each of the financing scheme.
(05 Marks)
(e)
Briefly assess each of the financing schemes available to Medico Ltd from the viewpoint of an
existing shareholder.
(08 Marks)
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Financial Strategy & Policy (FSP / SL 3 - 403) – November 2013 Examination
2
(f)
Estimate EBIT-EPS indifference point on the basis of two financing schemes with highest EPS and
comment on that.
(06 Marks)
(g)
Calculate all three degree of leverage for each of the financing schemes.
State any assumptions that you made.
(06 Marks)
(Total 40 Marks)
End of Part I
Part II
Answer any three (3) questions
Question No. 02 (20 Marks)
(a)
Dabroo holding has 20 million ordinary shares of Rs.1 in issue. These shares are currently valued
on the Colombo stock exchange at Rs. 1.60 per share. The directors of the company believe the
company requires additional long-term capital and have decided to make a one-for-four right issue
at Rs. 1.30 per share.
What is the value of the rights per new share?
(b)
(c)
(06 Marks)
A Company is currently paying a dividend of Rs 2.00 per share. The dividend is expected to grow
at a 10% annual rate for three years, then at 8% rate for the next three years, after which it is
expected to grow at a 5% rate forever.
(i)
What is the present value of the share if the capitalization rate is 12%?
(ii)
If the share is held for three years, what shall be its present value?
(09 Marks)
A Rs.100/- perpetual bond is currently selling for Rs.95/-. The coupon rate of interest is 13.5% and
the appropriate discount rate is 15%. Calculate the value of the bond. Should it be bought? What is
its yield at maturity?
(05 Marks)
(Total 20 Marks)
Question No. 03 (20 Marks)
(a)
Alpex Company is evaluating two mutually exclusive projects. Project X will cost Rs. 10 million
now and will generate cash flows of Rs. 5 million each year over its life of four years. Project Y
will cost Rs. 2.5 million and will generate cash flows of Rs 3 million each year over its life of three
years. Which project would you select assuming a risk-free cost of capital of 10%?
(10 Marks)
(b)
A financial manager of a Sri Lankan company has Rs. 25 million that she can invest for one year.
The manager is considering the possibility of either investing in Sri Lanka where a 1-year
investment yields an interest rate of 12% or in Germany where a 1-year investment produces an
interest rate of 9%. The current exchange rate is: DM 140/SL.
Calculate the 1-year forward exchange rate that will make the financial manager indifferent
between investing in Sri Lanka or Germany.
(10 Marks)
(Total 20 Marks)
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Financial Strategy & Policy (FSP / SL 3 - 403) – November 2013 Examination
3
Question No. 04 (20 Marks)
(a)
Two firms A and B have the following information:
Firm A
Firm B
Sales
(Rs.)
Variable Cost
(Rs.)
Fixed Cost
(Rs.)
1,800,000
1,500,000
450,000
750,000
900,000
375,000
You are required to estimate:
(i)
Contribution to sales ratio.
(ii)
Break- even point.
(iii) Contribution to EBIT ratio.
(iv)
(b)
Comment on the position of the firms. If sales increased by 20%, what shall be the impact on
the profitability of the two firms?
(10 Marks)
A customer has been ordering 5,000 units at the rate of 1,000 units per order during last year. The
production cost is Rs.12 per unit, Rs.8 for material and labour and Rs. 4 overhead cost. It costs
Rs.1,500/- to set up for one run of 1,000 units and inventory carrying cost is 20% of the production
cost. Since this customer may buy at least 5,000 units this year, the company would like to avoid
making five different production runs.
Determine the most economic production run.
(10 Marks)
(Total 20 Marks)
Question No. 05 (20 Marks)
Western Fertilizer Company (WFC) is taking over Southern Fertilizer Company (SFC). The shareholders
of SFC would receive 0.8 shares of WFC for each shares held by them. The merger is not expected to
yield in economies of scale and operating synergy. The relevant data for the two companies are as
follows:
Net sales (Rs m)
Profit after tax (Rs. m)
No of shares (million)
EPS
Market value per share (Rs)
Price-earnings ratio
WFC
335
58
12
4.83
30
6.21times
SFC
118
12
3
4.0
20
5.0 times
For the combined company (after merger), you are required to calculate:
(a)
Premium paid by WFC to the shareholders of SFC.
(04 Marks)
(b)
Earnings per Share (EPS).
(04 Marks)
(c)
P/E ratio.
(04 Marks)
(d)
Market value per share.
(04 Marks)
(e)
Total market capitalization.
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Financial Strategy & Policy (FSP / SL 3 - 403) – November 2013 Examination
(04 Marks)
(Total 20 Marks)
End of Part II
4
Present value table
-n
Present value of 1.00 unit of currency, that is (1 + r) where r = interest rate; n = number of periods until payment or
receipt.
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.943
0.890
0.840
0.792
0.747
0705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
Periods (n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Interest rates (r)
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
15%
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
16%
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
End of Question Paper
Institute of Certified Management Accountants of Sri Lanka
Strategic Level – Financial Strategy & Policy (FSP / SL 3 - 403) – November 2013 Examination
5
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