Grand Test 2 with Solution Autumn 2023 SAUD TARIQ

CAF 6 Managerial & Financial Analysis

ST Academy
Certificate in Accounting and Finance Stage Examination
June 2, 2023
1 Hour – 33 marks
Additional reading time – 5 minutes

CAF-6 Managerial & Financial Analysis (Test 2)

Question 1)
ST&Co. is a multinational company specialising in travel goods such as suitcases and travel bags. It has a
strong position in the ‘luxury goods’ section of the market, and its brand is well-known and highly-
regarded.
It has manufacturing facilities and distribution centres located around the world. Its IS/IT systems
strategy has been to allow decentralisation of systems. Each division of the company has been allowed
to develop and use its own IS/IT systems.
The company has been successful in using developments in information technology. It has EDI links with
many of its major suppliers, and it was one of the first companies in the industry to develop a website
for advertising and selling its goods directly to consumers. However, the popularity of the website has
been falling, and the number of ‘hits’ per day is now down to a third of its peak level about three years
ago.
Although the company has EDI links with suppliers, it does not yet have similar arrangements with its
major customers. However, some customers have recently suggested that improvements could be made
in their supply chain by establishing extranet links.
The company is in a highly-competitive market, and rival companies have been successful in taking
market share by offering well-designed products at lower prices.
The directors of ST&Co. are aware that some managers have ideas for improving competitiveness, but
these ideas are spread out throughout the company, and it has been difficult for different divisions in
different countries to exchange their ideas. It has been suggested that a new intranet system could be
introduced to improve the interchange of ideas within the group.
The directors are also aware that they do not have as much information as they would like about their
competitors. Travel goods are a type of fashion accessory for many customers, and ST&Co. would
probably benefit from learning much faster about the initiatives that its competitors are taking in the
market. It has been suggested that an information system should be developed for senior managers,
giving them access to information about competitors, including easy access to their internet sites.

Required
Construct a simple SWOT analysis for ST&Co.
(8 Marks)

Lectures: https://sta.saudtariq.com/Course/Detail/5117 1 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy
Question 2)

Assume that you have been appointed as finance director of Parhezgaar Ltd. The company is
considering investing in the production of an electronic security device, with an expected
market life of five years.

The previous finance director has undertaken an analysis of the proposed project, the main
features of his analysis are shown below. He has recommended that the project should not be
undertaken because the estimated annual profit is only 12%.

Proposed electronic security device project

(Rs. 000) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Investment in
depreciable Fixed assets 4,500
Cumulative investment in
working capital 300 400 500 600 700
Sales 3,500 4,900 5,320 5,740 5,320
Materials 535 750 900 1,050 900
Labour 1,070 1,500 1,800 2,100 1,800
Overhead 50 100 100 100 100
Interest 576 576 576 576 576
Depreciation 900 900 900 900 900
(3,131) (3,826) (4,276) (4,726) (4,276)
Taxable Profit 369 1,074 1,044 1,014 1,044
Profit after Tax 240 698 679 659 679

Total initiative investment is Rs 4,800,000. Average annual tax profit Rs. 591,000
All the above cashflow and profit estimates have been prepared in terms of present-day costs
and prices, since the previous finance director assumed that the sales price could be increased
to compensate for any increase in costs.
You have available the following additional information:
a) Selling prices, working capital requirements and overhead expenses are expected to
increase by 5% per year.
b) Material costs and Labour costs are expected to increase by 10%, per year.
c) Tax depreciation are allowable for taxation purposes against profit at 25% per year on a
reducing balance basis.
d) Taxation on profits is at a rate of 35% payable one year in arrears.
e) The fixed assets have no expected salvage value at the end of five years.
f) The company’s after tax weighted cost of capital is 15% per year.

Required:
Estimate the NPV of the proposed project. (15 marks)

Lectures: https://sta.saudtariq.com/Course/Detail/5117 2 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy

Multiple Choice Questions

Q3)

(2)

Q4)

(2)

Q5)

(2)

Q6)

(2)

Lectures: https://sta.saudtariq.com/Course/Detail/5117 3 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy

Q7)

(2)

Lectures: https://sta.saudtariq.com/Course/Detail/5117 4 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy
Solutions
Question 1)
Strengths

• Strong brand and reputation

• Worldwide facilities for manufacture and distribution

• Managers with ideas for improving the business

• Successful experience with EDI

• Successful experience with website and e-commerce.

(0.5 Marks for each point… Total 2.5 Marks)

Weaknesses

• Poor communications between divisions within the company

• Little or no access to information about competitors

• Possibly the decentralisation of IS/IT systems is a weakness.

(0.5 Marks for each point… Total 1.5 Marks)

Opportunities

• Possible use of intranet to improve internal communications and interchange of ideas

• Possible use of extranets to improve communications with customers

• Possible use of an executive information system to provide more information about competitors
and the market.

(0.5 Marks for each point… Total 1.5 Marks)

Threats

• Strong competition in the market. Competitors have made some successful initiatives

• Significant fall in number of ‘hits’ on the website

(0.5 Marks for each point… Total 1 Mark)

0.5 Mark for each relevant point

Lectures: https://sta.saudtariq.com/Course/Detail/5117 5 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy
Q2) Parhezgaar Ltd

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Marks

Sales inflates at 5% (W-1) 3,675 5,402 6,159 6,977 6,790 (1)
Outflows
Materials-inflate at 10% 588 907 1,198 1,537 1,449 (1)
Labour inflates at 10% 1,177 1,815 2,396 3,075 2,899 (1)
Overheads inflate at 5% 52 110 116 122 128 (1)
Fixed assets 4,500 (1)
Working capital 300 120 131 144 156 (851) (3)
Taxation(W-1) 256 604 636 619 312 (4)
(4,800) (1,937) (3,219) (4,458) (5,526) (4,244) (312)
Net cash flows (4,800) 1,738 2,183 1,701 1,451 2,546 (312) (1)
Discount Factors at 15% 1.000 0.870 0.756 0.658 0.572 0.497 0.432 (1)
Present value (4,800) 1,512 1,650 1,119 830 1,265 (135) (1)

Net present value in Rs. 1,441,000 and therefore it is recommended that the project should be
undertaken.
(W-1) – 4 Marks
Year 1 2 3 4 5 Marks
Sales at 5% inflation 3,675 5,402 6,159 6,977 6,790
Materials at 10% inflation (588) (907) (1,198) (1,537) (1,449)
Labour at 10% inflation (1,177) (1,815) (2,396) (3,075) (2,899)
Overheads at 5% inflation (52) (110) (116) (122) (128)
Tax Depreciation (1,125) (844) (633) (475) (356) (2)
Tax Loss on Disposal (W1) (1,067)
Taxable profits 733 1,726 1,816 1,768 891
Taxation at 35% 256 604 636 619 312
The interest payments are not included because they are taken into account when the cash
flows are discounted.

Computation of Loss on Disposal:

Rs 000
Cost 4,500
Less: Accumulated Depreciation (3,433)
Net Book Value 1,067 (1 Mark)
Sales Proceeds Nil
Loss on Disposal 1,067 (1 Mark)
*Total 2 Marks for showing Loss
Note: Depreciation is only relevant for Tax purpose. Depreciation can be shown in the main
format. It can be deducted first and then after calculation of profit, should be added back.
However, here we have directly calculated Tax separately so ignored depreciation in the main
Cashflow.

Lectures: https://sta.saudtariq.com/Course/Detail/5117 6 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)
 Grand Test 2 with Solution Autumn 2023 SAUD TARIQ
CAF 6 Managerial & Financial Analysis
ST Academy
Answer to MCQS: (2 Marks each x 5 MCQS = 10 Marks)
3. Option B: Before Depreciation but after Taxation
4. Option A: 20%

5. Option C: It is a measure of Absolute Return

6. Option C: $11,100

7. Option D: Year 5

Lectures: https://sta.saudtariq.com/Course/Detail/5117 7 Sir Saud Tariq (CAF 3, CAF 6, CFAP 3, CFAP 4, MSA 2)