Higher National Diploma in Accountancy

Fourth Year, First Semester Examination - 2016

HNDA 4101-Financial Management

Instructions for Candidates: No. of questions: 06

Answer any five questions No. of pages: 05
Duration: 03 Hours

Question 01

(i) Briefly explain the types of decisions which are made by a Financial Manager. (04 Marks)
(ii) Differentiate Money Market and Capital Market. (04 Marks)
(iii) State the core functions and services of the Colombo Stock Exchange (CSE) in Sri
Lanka? (04 Marks)
(iv) Briefly explain the important characteristics of financial instruments in the financial
market. (04 Marks)
(v) The role of financial system in an economy is to provide the mechanism by which funds
can be transferred from those with surplus units to deficit units. Evaluate the flow of
funds through financial system. (04 Marks)
(Total 20 marks)

Question 02

(i) What are the factors that determine working capital requirements? (02 Marks)
(ii) Explain briefly the spontaneous working capital. (03 Marks)
(iii) Fallowing information taken from the books of a manufacturing concern, compute the
gross opening cycle and net operating cycle in day assuming that all sales on credit basis.

Period covered 365 days

Average period of credit allowed by suppliers 16 days
Rs: ‘000
Average of total debtors outstanding—————————————480
Raw material consumption ———————————————— 4,400
Total production cost——————————————————10,000
Total cost of sates ———————————————————10,500

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 Sales for the year ——————————————————16,000
Value of average stock maintained:
Raw materials 320
Work In Progress 350
Finished goods 260

(07 Marks)

(iv) The management of Saman Ltd has called for a statement showing the working capital
needed to finance a level of activity of 300,000 units of output for the year. The cost structure
for the company product for the above mentioned activity level is detailed below.

Cost per unit : Rs

Raw materials 20
Direct labour 05
Overheads 15
Total cost 40
Profit 10
Selling price 50

Past trends indicate that the new raw materials are held in stock on an average for two months.
Work in Process (50% complete) will approximate to ½ month production. Finished goods
remain in warehouse on an average for one month. Suppliers of materials extend one month
credit. Two month credit is normally allowed to debtors. A minimum cash balance of
Rs:25,000 is expected to be maintained, The Production pattern 1s assumed to be even during
the year.

Prepare a statement of working capital determination. (05 marks)

(Total 20 marks)

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Question 03

(i) Explain the following risks which are associated with bonds
a) Interest Rate Risk
b) Default Risk
c) Inflation Risk (04 marks)

(ii) A 10 year bond of Rs. 1000 has an annual rate of interest rate of 12% he interest is pad half-
yearly, What is the value of the bond if the required rate of return is 12 percent?
(04 marks)

(iii) Gihan Fashion Ltd issued debentures at 14.5 % interest rate with a nominal value of
Rs1000. The maturity period 1s 6 years and the market value of the debentures is Rs. 900,
Calculate the Yield to Maturity (YTM).
(06 marks)

(iv) Last year Earning Per Share (EPS) of the Company was Rs. 16 and the dividend payout
ratio was 50% from EPS. ‘The market value of the share is Rs. 50 and the dividend growth rate
is 11%, Calculate the cost of equity.
(06 marks)
(Total 20 marks)

Question 04

(i) Briefly explain the importance of calculating the cost of capital of a company.
(03 marks)
(ii) The following information relates to POR Ltd. a company that is listed on the Colombo
Stock Exchange:
1. PQR Ltd. has 100 million ordinary shares currently trading at Rs.80/- per share. A
dividend of s.8/- per share has been paid and it is expected to grow by 6% per annum.

2. There are 30 million irredeemable preference shares which are currently trading at
Rs.16/- per share. These preference shares are paid a dividend of Rs 2/- per share.

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 3. The company has issued 10 million debentures. The debentures will be redeemed
after 5 years at Rs. 100/- (par value) per debenture and interest is paid at 12% per
annum. The current market price of a debenture is Rs.80/-.

4. Cooperate tax rate is 28%

You are required to calculate,

(a) Cost of Ordinary Share Capital.
(b) Cost of Preference Share Capital.
(c) Cost of Debenture.
(d) Weighted Average Cost of Capital (WACC) using the Market Value.
(Total 20 marks)

Question 05

(i) Define the following financial strategies

a) Merger
b) Acquisition
c) Takeover
(06 Maras)
(ii) Explain the following types of merger with example
a) Horizontal merger
b) Vertical merger
c) Conglomerate merger
(06 Marks)

(iii) Delta Company is taking over Beta Company. The shareholders of Beta would receive 0.8
shares of Delta for each shares held by them. The merger is not expected to yield in economics
of scale and operating synergy. The relevant data for the two companies are as follows.

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 Delta Beta
Net sales 335 118
Profit after tax 80 20
Number of shares 15 5
EPS 5.33 4.00
Marker value per share 40 24
P/E ratio 7.50 6.00

After the merger of the company, you required to calculate;

a) EPS
b) P/E ratio
c) Market value per share
d) Number of shares and
c) Total market capitalization
d) Also calculate the premium paid by Delta to the shareholders of Beta
(08 Marks)
(Total 20 Marks)

Question 06

(i) What is a spot exchange rate? How is it different from a forward rate? How you calculate
forward premium of discount? (06 Marks)
(ii) Explain each of the following parity condition briefly
a) Interest rate parity (IRP) b) Purchasing power parity (PPP
c) Forward rates and future spot rates parity d) International Fisher effect (IFE)
(06 Marks)
(iii) The interest rate in Sri Lanka on a one year loan is 14.5% and inflation is expected to be
6.5%. The expected inflation Fete in Thailand is 8.5% and what should be the interest rate
of a one year loan in Thailand?
(08 Marks)
(Total 20 Marks)