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CA FINAL-1 : STRATEGIC FINANCIAL MANAGEMENT
Time Allowed: 3 Hours
Question 1 The Mayfair Rubber Industry Ltd. (MRIL) manufactures small rubber components for the local market. It is presently using 8 machines which were acquired 3 years ago at a cost of Rs.18 lakh each having a useful life of 8 years with no salvage value. The policy of the company is to depreciate all machines in 5 years. Their production capacity is 37 lakh units while the annual demand is 30 lakh units. The MRIL has received an order from a leading automobile company of Singapore for the supply of 20 lakh rubber bushes at Rs.15 per unit. The existing machines can be sold @Rs.12 lakh per machine. It is estimated that the removal cost of each machine would be Rs.60,000. In order to meet the increased demand, the MRIL can acquire 3 new machines at an estimated cost of Rs.100 lakh each which will have a combined production capacity of 52 lakh units. The operating parameters of the existing machines are as follows: (i) Labour requirements (Unskilled-18; Skilled-18; Supervisor-3; and Maintenance-2) and their per month salaries are Rs.3,500; Rs.5,500; Rs.6,500 and Rs.5,000 each respectively with an increase of 10 percent to adjust inflation. (ii) Raw materials cost, inclusive of wastage is 60 per cent of revenues. (iii) Maintenance cost – years 1-5 (Rs.22.5 lakh), and years 6-8 (Rs.67.5 lakh). (iv) Operating expenses – Rs.52.10 lakh expected to increase annually by 5 percent. (v) Insurance cost/premium – year 1,2 per cent of the original cost of the machine, afterwards discounted by 10 per cent. (vi) Selling Price – Rs.15 per unit. The projected operating parameters with the replacement by the new machines are as follows: (i) Additional working capital – Rs.50 lakh. (ii) Savings in cost of utilities – Rs.2.5 lakh. (iii) Maintenance cost – years 1-2 (Rs.7.5 lakh); years 3.5 (Rs.37.5 lakh). (iv) Raw materials cost – 55 per cent of sales. (v) Employee requirement (6 skilled at monthly salary of Rs.7,000 each and one for maintenance at monthly salary of Rs.6,500). (vi) Laying off cost of 34 workers – (Unskilled-18; Skilled-12; Supervisors-3; and maintenance-1) Rs.9,21,000, that is equivalent to six months salary. (vii) Insurance cost/premium-2 per cent of the Purchase cost of machine in the first year and discounted by 10 percent in subsequent years. (viii) Life of machines – 5 years and salvage value – Rs.10 lakh per machine. The company follows straight line method of depreciation and the same is accepted for tax purposes. Corporate tax rate is 35 per cent and the cost of capital is 20 percent. As the Finance Manager of MRIL, prepare a report for submission to the top management with your recommendations about the financial viability of the replacement of the existing machine. (20 Marks)
Max. Marks: 100
Ltd. Assume that the yields of both the bonds fall to 6%. (12 Marks) Question 4 (a) Following information is available for X Company’s shares and Call option: Current share price Rs. 1.000 200. 1. The current spot rate of US $ in India is Rs.00 (b) Exchange of equity shares for acquisition is based on current market value as above.000 2.450.5% and 3.7570. . is considering acquiring N. Ltd.000. after merger. the following information is available: Company Profit after tax Number of Equity Market value per shares share K. one with 5 years to maturity and the other with 20 years to maturity.18 Calculate the value of option using Black-Scholes formula.5%. how it affects the bond’s duration? And why? (3 Marks) Why should the duration of a coupon carrying bond always be less than the time to its maturity? (3 Marks) (c) (d) Question 3 (a) (i) The rate of inflation in USA is likely to be 3% per annum and in India it is likely to be 6. There is no synergy advantage available : Find the earning per share for company K.550.170 Risk free interest rate 7% Time of the expiry of option 3 years Standard deviation 0. (4 Marks) (b) Mr.5% per annum respectively.00.5 and an exercise price of Rs.43. Find the expected rate of US $ in India after one year and 3 years from now using purchasing power parity theory.000 160. What would be the forward rate for US $ for delivery on 30th June? (4 Marks) K.. (ii) Purchased one 3-month put option with a premium of Rs.000 10. Ltd. The UK £/US $ spot rate is 0. what is bond’s duration? (6 Marks) If the YTM of the bond in (b) above increases to 10%. 50. whether the price of bond will increase or decrease? What percentage of this increase/decrease comes from a change in the present value of bond’s principal amount and what percentage of this increase/decrease comes from a change in the present value of bond’s interest payments? (8 Marks) (b) Consider a bond selling at its par value of Rs. 3 months interest rate in the UK £ and US $ are 7. X established the following spread on the Delta Corporation’s stock : (i) Purchased one 3-month call option with a premium of Rs. (4 Marks) (ii) On April 1.00.000 and coupon rate of 8% (with annual interest payments) and both are selling at par. with 6 years to maturity and a 7% coupon rate (with annual interest payment).Question 2 (a) Consider two bonds.185 Option exercise price Rs.40. Ltd 15.50. would not be at a loss. Both the bonds have a face value of Rs. Find the exchange ratio so that shareholders of N. Ltd. Ltd.00 N.00.30 and an exercise price of Rs.
600.5 Growth 0. Determine profit or loss. 00. (ii) Expected return of portfolio made up 60% per cent of ABC Ltd. It is estimated that the computers would be sold for Rs. A% 10 14 20 ( 8 marks) (b) Returns on shares of ABC Ltd. The company uses the straight line method of depreciation. (4 Marks) (c) ABC Ltd. on 31. These computers can also be purchased by the company for Rs. What will be the return if total investment is divided one half in each? Economic climate Probability Returns from Returns from Dull 0. 000 15. 000 5. (iv) Covariance and coefficient of correlation between the two. and 50 per cent of PQR Ltd. (6 marks) (c) Following is the capital structure of A Ltd. Year 1 11% 20% Year 2 17% 8% B% 6 15 11 Calculate the following : (i) Expected return of portfolio made up 50% per cent of ABC Ltd. 00. This purchase can be financed by 16% loan repayable in 4 equal annual installments. (12 Marks) Question 5 (a) Calculate the expected return and standard deviation of the investments ‘A’ and ‘B’.10. if the price of Delta Corporation’s : (i) Remains at Rs.3.2006 : Equity Share Capital (of Rs. PQR Ltd.2 Stable 0.3 Also calculate the covariance and correlation.00. (v) Portfolio risk if both are invested in the ratio of 2:1 (vi) Overall portfolio risk if the ratio of investment is 1:1. (iii) Determine the minimum rent which will yield an IRR of 16% to the lessor.500.10 each) Security Premium Reserves and surplus Net worth 10. 00..00. 000 30.Delta Corporation’s stock is currently selling at Rs. 000 . (iii) Standard deviation of each stock. 00. (i) Whether computer should be acquired or leased? (ii) Analyse the financial viability from the point of view of lessor. 00. for the past two years are as follows: ABC Ltd.500 after 3 months. Corporate tax rate is 50%. and 40 per cent of PQR Ltd. (iii) Rises to Rs.350 after 3 months. Assume the size option is 100 shares of Delta Corporation. assuming 14% cost of capital. (ii) Falls at Rs.000 at the end of 4 years. and PQR Ltd. presently leasing computers on a yearly basis rental amounting Rs.000 per year.50. The economic life of the computer is that of 4 years.000.20.
4.62. X purchased 100 shares of A Ltd.56). (6 marks) Question 6 Write short note on (a) Credit derivatives (b) Translation exposure (c) Random walk hypothesis (d) Distinguish between capital market and money market. Assume that dividend income is taxable in the hands of shareholder. . he sold all the shares on 31. 50 per share (cum.30. . .2006 the company made a bonus issue of 2:5.68. He had to pay tax @ 20% on his dividend income and 15% on capital gains.2008 at the market price of Rs. (Present value factors @ 10% for 1-6 years are.3. .75. and .2002 at the market price of Rs. find out whether X was able to earn his required rate of return of 10% on his investment.4. (4×5= 20 marks) .Mr.91.dividend). If the company pays a regular dividend @ 10%. On 1.83. on 1.
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