STRATEGIC FINANCIAL

MANAGEMENT
(BAF-5a3)
SEMESTER5

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)

Attempt all questions.

Write your Roll No. in the space provided above.
Answers must be neat, relevant and brief. It is not necessary to maintain the sequence.
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Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
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effective presentation, language and use of clear diagram/ chart, where appropriate.
DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
Question Paper must be returned to invigilator before leaving the examination hall.

D U RI N G EXT R A REA D I N G TI M E , WR ITI N G I B BT RT

L Y P R 0 H I 0 I T E D I N T H E A N BWE R B C RI PT__

EXA Ml N E ES AB E AB VISEB
TO MANAG E SO L UTIO NS/ ANSWERS
WIT HI N P B O POS EB TIM E
..-..~~~~~~~~~~~~~--~~~~~"~~~~~~...-.~~~~~~~~~~~~~~~~~~~~~~~~~~...-.~~~~~~~~~~~~...-.~~~~~~~~~~

-----------------------------------,.,.,.,.,.,,
_Question __No.
1
__
__

Marks
__

Propo_____sed
Time___:___70
Min. ]-Total Mafks : 40

Cattle markets are the important and pivotal component of livestock supply chain, and contribute
significantly in gross domestic product (GDP) of Pakistan. On one side, cattle markets are providing
quality animals to meet local consumption of meat and generating foreign income through export of
meat to Middle East and other countries, and on other side, providing platform for buying and selling
of high quality dairy farm animals. In view of this, recently a public sector company "CMMC Limited"
has been incorporated in order to establish a state of the art Model Cattle Market to accommodate
sale of thousands of animals per day.
Financial data for the establishment of Model Cattle Market is as under:
*

CMMC Limited had spent a sum of Rs. 3.3 million over past two (2) years i.e., 2015 and 2016
on survey and other expenditures for establishment of the cattle market.

Total project cost is estimated at Rs. 5,500 million with following cost break up:
Rs. in million
Land
Building and civil works including infrastructure
Plant and machinery
Furniture and fixture
Net initial working capital
Total project cost

Total construction period will be two years and year-wise estimate of total project cost to be
incurred is as under:
Year-2017: 70% of total project cost
Year-2018:

800
1,800
2,200
300
400
5,500__

Remaining 30% of total project cost

Total project cost is being financed by issuing fully paid-up shares of Rs. 100 each. Weighted
average cost of capital (WACC) of project will bel5%.

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*

The revenues and expenses projected by the CFO of the company are as under:
Revenues
Year-2019
(Rs. in million)
380
900
340

Self-managed services
Outsourcing services
Other income
Total

Year 2020 - 2024

(Yearly Increase By)_
4%
4%
5%

1,620________________________
Expenses
Year-2019
(Rs. in million)

Year 2020 - 2024

(Annual Escalation)_

Cost of services (excluding depreciation)

Administrative and selling expenses (excluding
depreciation)
Other expenses

386

5%

264
120

5%
4%

Total

770

Net cash flows are expected to grow at Boloafter 2024 for an indefinite period.

The company will follow straight-line method of depreciation. Annual rate of depreciation and its
allocation to cost of services and administrative and selling expenses is as follows:
Annual
Rate
Building and civil works including
infrastructure
Plant and machinery
Furniture and fixture

10%
10%
15%

--

Cost of
Services

Allocation
Administrative and
Selling Expenses___

70%
100%
40%

30%
60%

Additional working capital of Rs. 52 million and Rs. 55 million will be required in Year-2022 and
Year-2023 respectively, which will be recovered in Year-2024.

Income tax will be 32%, and it is assumed that income tax rate will remain at this level in future.

Required:
(a)
(b)

Prepare the projected Statement of Profit or Loss of the project for the period 2019 to 2024.
(Present all your calculations and workings clearly)
Calculate the following by using the projected financial data:
(i)

Year-wise future net cash flows for the years 2017 to 2024

Payback period
(iii) Net present value

(ii)

06
02
05

(iv) Internal rate of return

05

Profitability index

02

(v)
(c)

18

In view of results of (a) and (b) above, advise whether CMMC Limited should establish Model
Cattle Market as per the projected data prepared by CFO?

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--!
_Question___No.
2

Marks
__

___

___

Propo_____sed
Time___:_20
Min. j___Total
Marks : 12

Progressive Ltd. is planning to install new machinery for Rs. 5,000,000 at its existing site. The
company is considering buy and lease alternatives for the new machinery. For buying alternative,
following information is available:
*
Progressive Ltd. can obtain a bank loan for 100% of the required amount at an interest rate of
15% per annum in 3 equal instalments at the end of each year.
* The company will follow straight-line method of depreciation and the new machinery will have
useful life of 3 years with zero salvage value.
For lease alternative, following information is available:
* The tentative lease terms call for payment of Rs. 1,600,000 at the end of each year for 3 years.
*
Progressive Ltd. must use the equipment, if, it is to continue in business, so it will almost
certainly want to acquire the equipment at the end of the lease. If it does, then under the lease
terms it can purchase the machinery at its fair market value at that time. The best estimate of
this fair market value is Rs. 1,000,000.
The new machinery will require maintenance expenses of Rs. 250,000 per year in both the
alternatives and this will be borne by Progressive Ltd. Applicable tax rate for this type of capital
investment is 40%.
Required:
Being a Management Accountant, suggest the company whether to buy or lease the machinery.
(Substantiate your answer through proper workings and calculations)

12

Nawab Rice Mills (NRM) has earned profit before interest and tax of Rs. 105 million last year. The
companys capital structure is as under:
Rs. 000'
Long-term loan @ 15% per annum
Common shares
Retained earnings

225,000
200,000
175,000_

Past experience has shown that long-term loan is being utilized to meet working capital
requirements on an average by Rs. 50 million, during April to September. In the remaining six
months, these funds remain idle. NRM pay tax at the rate of 32%. The company is considering
different alternatives to utilise these funds. Following two alternatives are available:
Alternative-1" NRM can place Rs. 50 million as short-term investment for six months to earn profit at
12% per annum.
Alternative-2: The company is considering paying off Rs. 60 million of its long-term loan and
obtaining a short-term loan at 16% per annum as per requirements in the following months:
Rs. 000'
April
May
June

30,ODO
20,000
10,000_

The entire borrowing on short-term is to be paid at the end of September, when enough cash will be
available from sales.
Required:
(a)
(b)

Calculate return on equity under existing situation.

Calculate return on equity under each of the two alternatives and compare it with existing
situation. Which alternative is best for Nawab Rice Mills (NRM)?
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Question No. 4
Proposed Time : 20 Min. | Total Marks : 10
Creative Lahore Centre (CLC) is planning to install air conditioners at its new campus at Raiwind
Road, Lahore. CLC has received proposals from two manufacturers The first proposal is for
installation of 6 inverter air conditioners at a cost of Rs. 120,000 each. The other is for the
installation of 6 simple split air conditioners with an equal capacity costing Rs. 85,000 each. The
useful life of inverter is 6 years and that of simple split air conditioners is 4 years. The cash operating
costs associated with each proposal is given as under:
Operating Costs
Rupees_
Year
1
2
3
4
5
6

Proposal-1
55,000
55,000
75,000
92,000
115,000
131,000

Proposal-2___
65,000
85,000
100,000
150,000
-______

The salvage value of inverter air conditioner is expected to be Rs. 25,000 each and that of simple
split air conditioner to be Rs. 7,500 each at the end of their useful lives

Required:
Being a Management Accountant, calculate equivalent annual cost of both the proposals and
recommend CLC which proposal should be selected, if opportunity cost of funds is 10%.

______Question
__No.
5

_____

__

______

______
PropO_____sed
Time___5 Min. |__.Total
Mas

: 14

Light\ear Industries is in the business of making clothes for the last 25 years Companys head
office is located in New York, United States of America, where the currency is US $ (Dollar). It has a
subsidiary in Pakistan namely Sehar Clothing, where the currency is Pakistani Rupee (PKR). The
exchange rate of the year is as follows:
Exchange Rate
July 1, 2014
June 30, 2015
Average exchange rate for the year
Historical exchange rate for non-current assets

PKR
108
100
104
108

US $
1
1
1
1___

The subsidiary s statement of profit or loss for the year ended June 30, 2015 and statement of
financial position as at June 30, 2015 and June 30, 2014 is as follows:
Sehar Clothing
Statement of Profit or Loss
for the year ended June 30, 2015
PKR 000'
Sales
Cost of goods sold
Gross profit
Operating expenses (including depreciation of PKR 600,000)
Profit before tax
Taxes
Profit after tax
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17,000
10,000_
7,000
4,500
2,500
1,200
1,300_

10

Marks
Sehar Clothing
Statement of Financial Position
as at June 30,
PKR 000'
Cash and cash equivalents
Accounts receivables
Inventories
Net non-current assets
Total

2015
650
3,450
3,400
2,800
10,300

2014
500
2,800
2,500
3,400
9,200_

Accounts payables
Ordinary shares capital @ PKR 10 each
Retained earnings
Total

3,000
1,000
6,300
10,300

3,200
1,000
5,000
9,200__

The historical-cost exchange rate for inventories and cost of goods sold, using the US $ as the
functional currency, is PKR 98 to one US $. Using PKR as the functional currency, it is PKR 94 to
one US $ for the purposes of cost of goods sold
The sales, operating expenses, and taxes paid are steady throughout the year. There are no
previous translation adjustments.
Required:
Reconstruct the following financial statements of Sehar Clothing (to the nearest thousand US $) in
functional currency PKR and US $:
(a)

Statement of profit or loss for the year ended June 30, 2015

07

(b)

Statement of financial position as on June 30, 2015

07

Question No. 6

Proposed Time : 25 Min. | Total Marks : 14

Fine Apparels (Pvt.) Limited is a leading manufacturer and exporter of textile products to USA and
European countries. Projected statement of profit or loss for the year 2016 is as follows:
Fine Apparels (Pvt.) Limited
Projected Statement of Profit or Loss
for the year 2016
Rs. 000'
Sales
Cost of goods sold
Gross profit
Administrative expenses
Selling expenses
Profit before tax
Provision for taxation

21,000
15,300
5,700
1,400
1,300

Profit after tax

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2,700
3,000
1,000
2,000

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Cost

Of

goods sold for the year 2016 is calculated as follows:

Rs. 000'
Material used
Wages and manufacturing expenses
Depreciation
Less: Ending finished goods (10% of goods produced not yet sold)

8,400
6,250
2,350
17,000
1,700
15,300_

Goods equal to 15% of the year's production (in terms of physical units) will be in process on the
average requiring full materials but only 40% of the other expenses. The company keeps materials
equal to two months consumption in stock.
All expenses will be paid one month in arrears. Supplier of material will extend 11/2months credit.
Sales will be 20% for cash and the rest at two months credit. 90% of the income tax will be paid in
advance in quarterly instalments It is the policy of the company to keep Rs. 500,000 cash in hand.

Required:
Prepare an estimate of the requirement of working capital.
THE END

PRESENT
VALUEINTEREST
FACTORPVIF(r,n) = (1 + r)n

Year
(n)
1

8%
O,926

9%
0,917

Interest Rate (r)

14%
15%
0,909
0,877
0.870

16%
0.862

0,833

0.857

0.842

0.826

0.769

0.756

0.743

0.694

0.794

0.772

0.751

0.675

0.658

0.641

0.579

0,735

O,708

0.683

0.592

0.572

O,552

0,482

0.681

0.650

0.621

0.519

0.497

0.476

0 402

0,630

0.596

0.564

0.456

0.432

O,410

0.335

0,583

O,547

0.513

0.400

0.376

0,354

0,279

0.540

0.502

0.467

0.351

0.327

0.305

0.233

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20%

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