CS Professional FTFM
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Fiancial, Treasury and Forex Mgt
Revisionary Test Paper (December 2014)
Important Note: All those questions marked in class are also to be
revised.(Theory + Practical)
Working Capital Management :Q.1
A company has prepared its annual budget, relevant details of which are produced below:
(i)
Sales Rs.46.80 lakh (25% cash sales
And balance on credit)
:
78,000 units
(ii)
Raw material cost
:
60% of sales value
(iii) Labour cost
:
Rs. 6 per unit
(iv)
Variable overheads
:
Rs. 1 per unit
(v)
Fixed overheads
:
Rs. 5,00,000 (including Rs. 1,10,000
as depreciation
(vi)
Budgeted stock levels:
Raw materials
:
3 weeks
Work-in-progress
:
1 week(material 100%; labour and
overheads 50%)
Finished goods
:
2 weeks
(vii) Debtors are allowed audit
:
4 weeks
(viii) Creditors allow
:
4 weeks credit
(ix)
Lag in payment of overheads
:
2 weeks
(x)
Cash in hand required
(a)
for 1st and 2nd week : in the 3rd week
(b)
for 3rd and 4th week : in the next week.
Prepare working capital budget (requirement) for a year for the company. Assume one year = 52
weeks.
Answer:
Unit Selling Price and Cost
Selling Price
Raw Materials
(60% of Rs. 60)
Labour
1
Rs. 60
36
6
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Variable overheads
Fixed Overheads (3,90,000/78,000)
Total
5 (Excluding depreciation)
48
Statement of Working Capital Requirement
A. Current Assets
Raw Materials
(3 x 1500 x 36)
Raw-in-Progress
(1 x 1500 x 42)
Finished Goods
(2 x 15000 x 48)
Debtors
(4500 x 48)
Cash-in-hand
Total Current Assets
1,62,000
63,000
1,44,000
2,16,000
50,000
6,35,000
B. Current Liabilities
Creditors
(4 x 1500 x 36)
Lag in Wages
(2 x 1500 x Rs6)
Lag in Payment of overheads [2 x 1500 x Rs 6)
Total Current Liabilities
Net Working Capital required (CA-CL)
2,16,000
18,000
18,000
2,52,000
3,83,000
Notes:
(1) Total sales for 4 weeks are 6,000 units. Excluding 25% cash sales, credit sales
amounts to 4500 units.
(2) One year is assumed to be 52 weeks and weekly sale is 78,000 / 52 = 1500 units
(3) Work-in-process is valued at Rs. 42 (i.e 369 +3 +3)
(4) Total overheads per unit is Rs.(1+5). As no fund is required for depreciation, this has
been deducted from total fixed cost.
(5) Some candidate may calculate the debtors at selling price and in that case, the debtors
would be Rs. 2,70,000 and working capital amount would be Rs.4,37000.
Q.2
Ashoka Ltd. A newly formed company, has applied to the commercial bank for the first
time for financing its working capital requirements. The following information is
available about the projections for the current year:
Estimated level of activity : 1,04,000 completed units of production plus 4,000 units of
work-in-progress. Based on the above activity, estimated cost per units is:
(Rs. Per unit)
2
CS Professional FTFM
-
-
Prepare time table and follow the same.
Raw material
80
Direct wages
30
Overheads (exclusive of depreciation)
60
Total cost
170
Selling price
200
Raw material in stock
:
Average 4 weeks consumption
Work-in-progress
:
50% completion stage in respect of
Conversion cost while materials
issued at start of the processing
Finished goods in stock
:
8,000 units
Credit allowed by suppliers
:
Average 4 weeks
Credit allowed to debtors/receivables: :
Average 8 weeks
Lag in payment of wages
:
Average 1.5 weeks
Cash at banks is expected to be
:
Rs.25,000
Assume that production is carried on evenly throughout the year (52 year) and wages and
overheads accrue similarly. All sales are on credit basis only.
Find out(i)
The net working capital required on total value method; and
(ii)
The maximum permissible bank finance under second method of financing as per
Tandon Committee Norms.
A(i):
Working Notes
Amount in Rs.
Cost of Production (for 1,04,000 units)
Raw Material @ Rs. 80
Direct wages @ Rs. 30
Overhead (exclusive of depreciation)
Total Cost of Production for 1,04,000 units
Cost per unit (Rs.1,76,80,000/1,04,000)
Work in Progress
Raw Materials (4000 units @ Rs 80)
Direct wages (4000 units @ Rs 30 x 50/100)
Overhead (4000 units @ Rs 60 x 50/100)
Total
Raw Material Stock
Raw material stock i.e Average 4 weeks consumption
3
83,20,000
31,20,000
62,40,000
1,76,80,000
Rs. 170
3,20,000
60,000
1,20,000
5,00,000
CS Professional FTFM
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(2000x4x80)
6,40,000
Stock Finished Goods
8,000 units @ Rs 170 unit
13,60,000
Debtors
8 weeks
Since Ashoka Limited is a newly formed company so there
will be opening stock. Expected total sales in the year
i.e (1,04,000-8,000)
96,000 units
Debtors (Assumed at cost of production) i.e. 96,000*8/52*170
25,10,769
Debtors (Assumed at Sales Value) i.e. Rs. 96,000*8/52*200
29,53,846
Creditors for Raw Material
Total Purchased during the year i.e
(Rs. 83,20,000 + Rs. 3,20,000 + 64,000)
92,80,000
Total creditor at the end of year i.e. 92,80,000*4/52
7,13,846
Creditors for wages
Direct wages paid during the year i.e (Rs.31,20,000 + Rs. 60,000)
Creditors for wages i.e (Rs. 31,20,000 + Rs. 60,000)
31,80,000
Creditors for wages i.e (Rs. 31,80,000*1.5/52)
91,731
Computation of Net Working Capital
Current Assets
Raw Material
6,40,000
Work in progress
5,00,000
Finished Goods
13,60,000
Debtors (at cost of production)
25,10,769
Debtors (at sales value)
29,53,846
Cash at bank
25,000
Total Current assets (if debtors taken at sales value)
54,78,846
Total Current assets (if debtors valued at cost of production)
50,35,769
Current Liabilities
Creditors for Raw Material
7,13,846
Creditors for wages
91,731
Total
8,05,577
Net working capital (if debtors taken at sales value)
46,73,269
Net working capital (if debtors taken at cost of production)
42,30,192
Ans (ii):
Maximum Permissible Bank Finance as per Tandon Committee
Method 2
75% of Current Assets – Current Liabilities
If debtors taken at sales value (75% of Rs.54,78,846 – Rs8,05,577) Rs 33,03,558
If debtors taken at cost of production
4
CS Professional FTFM
(75% of Rs 50,60,384 – Rs 8,07,,471)
Rs 29,71,250
पापा कहते है बडा नाम करे ग ा, बेटा हमारा ऐसा काम करे गा,
Financial Decisions
Q.3
The capital structure of the Progressive Corporation consists of ordinary share capital of
Rs. 10, 00,000 (shares of Rs 100 each) and Rs. 10,00,000 of 10% debentures. The selling
price is Rs. 10 per unit; variable costs amount to Rs 6 per unit and fixed expenses amount
to Rs.
2, 00,000 . The income tax rate is assumed to be 50%. The sales level is expected to
increase from 1,00,000 units to 1,20,000 units.
(a) You are required to calculate:
(i)
The percentage increase in earnings per share.
(ii)
The degree of operating leverage at 1,00,000 units and 1,20,000 units
(iii)
The degree of operating leverage at 1,00,000 units and 1,20,000 units
(b) Comment on the behavior of operating and financial leverages in relation to increase in
production from 1, 00,000 units to 1, 20,000 units.
Q.4
Three companies X Ltd. Y Ltd. are in the same type business and hence having similar
operating risks. However, the capital structure of each of them is different as follows:
X Ltd.
Y Ltd.
Z Ltd.
(Rs.)
(Rs.)
(Rs.)
Equity share capital (face value Rs 10 per share) 4,00,000
2,50,000
5,00,000
Market value per share
15
20
12
Dividend per share
2.70
4.00
2.88
Debentures (face value Rs 100 per debenture)
Nil
1, 00,000
2,50,000
Market value per debenture
125
80
Interest rate on debenture
10%
8%
Assume that the current level of dividend is expected to continue indefinitely and the
income tax rate is 30%.
You are required to compute the weighted average cost of capital (at market value) of
each company.
Ans:________________________________________________________________________
X Limited
Y Limited
Z Limited
Cost of Equity
Market Value per share (Rs)
15
20
12
Dividend per Share (Rs)
2.70
4.00
2.88
2.70 x 100
15
4.00 x 100
20
2.88 x 100
12
Cost of Equity in %
5
CS Professional FTFM
Formula :
Dividend per share x 100
Market Value per share
Cost of Debt in %
Market Value per Debenture (Rs)
Interest Rate on Debenture (%)
=18
=20
=24
-
125
10
80
8
Cost of Debt in % (Pretax)
10 x 100
125
8 x 100
80
Formula:
Interest per debenture x 100
Market value per debenture
-
Cost of Debt after Tax (%)
Formula:
Pre tax cost of Debt (1-Tax rate)
8
8(1-0.30)
10
10(1-0.3)
=8(0.70)
=5.6
=10(0.70)
=7
Calculation of Market Value of Shares and Debentures
Company No. of
Shares
Market
Value
per
Share
(Rs)
Total
Market
value of
Share
(Rs)
No of
Debenture
Market
Value per
Debenture
Total
Market
value of
Debentures(Rs)
Total
Market
Value
of Shares and
DebenTures(Rs)
______________________________________________________________________________
X
4,00,000/10
=40,000
15
6,00,000
6,00,000
Y
2,50,000/10
1,00,000/100
=25,000
20
5,00,000
=1000
125
1,25,000
6,25,000
Z
5,00,000/10
2,50,000/100
=50,000
12
6,00,000
=2,500
80
2,00,000
8,00,000
Calculation of Weighted Average Cost of Capital at market value of Each Company
Formula for calculation of weighted cost of capital
Cost of Equity x
M.V. Equity Shares
+ Cost of Debt x
M.V. of Debentures
Total of M.V. of shares & Debentures
X Limited
=
Y Limited – 20
6
18%
x 5,00,000 + 5.6 x 1,25,000
Total of M.V. Shares & Debentures
CS Professional FTFM
6,25,000
6,25,000
Respect your parents
=
17.12%
Z Limited -24 x 6,00,000 + 7 x 2,00,000
8,00,000
8,00,000
=
19.75%
*MV stands for Market Value
Q.5
The capital structure of Supreme Ltd. is as under:
Rs.
2,000, 6% Debentures of Rs 100 each (I issue)
2,00,000
1,000, 7% Debentures of Rs 100 each (II issue)
1,00,000
2,000, 8% Cumulative preference shares of Rs 100 each
2,00,000
4,000, Equity shares of Rs 100 each
4,00,000
Retained earnings
1,00,000
Earnings per share of the company in the past many years has been Rs 15. Shares of the
company are sold in the market at book value. The company’s tax rate is 30% and
shareholders personal tax liability is 10%.
Find out weighted average cost of capital of the company.
Ans:
(a) Cost of Debentures (I issue)
(I/NP) x 100(1-t)
=
(Rs 6/100) x 100(1-0.3)
=
4.2 %
(Where I is the interest rate, NP is Net Proceed and t is tax rate)
(b) Cost of Debentures (II issue)
:
(I/NP) x 100(1-t)
=
(Rs 7/100)x100 (1-0.3)
=
4.9%
(Where is the Interest rate, NP is Net Proceed and t is tax rate)
(c) Cost of Preference Share Capital
:
(DPS/NP)x100
=
(Rs 8/100) x 100
=
8%
(Where DPS is the Dividend per Shares, NP is Net Proceed)
(d) Cost of equity share capital
:
(EPS/MPS) x 100
=
Rs 15/125 x 100
=
12%
(Where EPS is the Earning per Share, MPS is Market Price per Share)
Market Price per share
=
Equity Share Capital + Retained Earnings
Total number of Equity Shares
=
Rs. 4,00,000 + Rs. 1,00,000
4000 equity shares
7
:
CS Professional FTFM
(e) Cost of Retained Earnings
E(1-tp)/MP X 100
= Rs 15(1-0.10) / Rs 125 x 100
= 10.8%
__________________________________________________________________________
Sources
Amount (Rs)
Weights
Cost of Capital
Weighted
Average
Cost
Debenture
(I issue)
Debentures (II issue)
Preference Share
Capital
Equity Share Capital
Retained Earnings
:
2,00,000
1,00,000
0.2
0.1
0.042
0.049
0.0084
0.0049
2,00,000
4,00,000
1,00,000
0.2
0.4
0.1
0.08
0.12
0.108
0.0160
0.0480
0.0108
0.0881
Weighted Average Cost of Capital = 0.0881 or 8.81%
Q. 6 The following information is related to Sunrise Ltd :
Sales
Less : Variable expenses 35%
Contribution
Less : Fixed expenses
EBIT
Less: Interest Taxable income
4,00,000
1,40,000
2,60,000
1,80,000
80,000
10,000
70,000
You are required to submit the following to management of the company:
(i)
What percentage will taxable income increase, if the sales increase by 6% ? Use
combined leverage.
(ii)
What percentage will EBIT increase, if there is a 10% increase in sales? Use
operating leverage.
(iii)
What percentage will taxable income increase, if EBIT increase by 6% Use
financial leverage.
Ans:
The combined leverage on sales of Rs 4,00,000 of Sunrise Ltd.
Contribution = 2,60,000 =3.714
Taxable income
70,000
If sales increased by 6 per cent the taxable income will increase by
3.714x0.06 = .22284 = 22.28%
(ii)
The degree of operating leverage at sales level of Rs 4,00,000
Contribution
= 2,60,000 =3.714
8
CS Professional FTFM
Taxable Income
(iv)
70,000
Think Positive
If sales increase by 10 percent the EBIT will increase by 3.25 x 0.10
=0.325 = 32.5%
Degree of financial leverage
EBIT
= 80,000 = 1.143
Taxable Income 70,000
If EBIT, increase by 6 percent taxable income will increase by 1.143 x 0.06 =
0.686 = 6.86%.
Q.7
Ruta Max Ltd. and Buta Max Ltd. operate in the same risk class and are identical in all
respect except that Ruta Max Ltd. uses debt financing white Buta Max Ltd. does not opt
for debt financing.
Ruta Max Ltd. has Rs.25,00,000 debentures carrying coupon rate of 10%. Both the
companies earn 20% profit before interest and taxes on their total assets of Rs 50 lakh.
Assume perfect capital markets and rational investors and so on. The capitalization rate
for an all equity company is 15%. The corporate tax rate is 30%.
You are required to compute the value of both companies according to bet income (NI)
and net operating income (NOI) approach.
Ans(i)
Value of firm under Net Income Approach
Ruta Max Ltd. (Rs)
Buta Max Ltd. (Rs.)
(Leverage Firm)
(Unlevered Firm)
EBIT (20% OF 50 Lakh)
10,00,000
10,00,000
Less: Interest
2,50,000
7,50,000
10,00,000
Less: Taxes 30%
2,25,000
3,00,000
EAT or Profit available for
Shareholders
5,25,000
7,00,000
Equity Capitalization Rate
.15
.15
Market Value of Equity EAT/Ke 35,00,000
46,66,666
Market Value of Debt(Kd)
25,00,000
Total Value of Firm
(iii)
60,00,000
Value of firm under Net Operating Income Approach.
Value of Buta Max Ltd. (Unlevered Firm)
= EBIT (1-t) = 10,00,000(1-.30) = Rs. 46,00,000
Ke
0.15
Value of Ruta Max Ltd. (Levered firm)
9
46,66,666
CS Professional FTFM
= Value of Unlevered firm + D(t)
मन के हारे हार है ,मन के जीते जीत
= 46,66,666 + 25,00,000 (.3)
= 46,66,666 + 7,50,000 = Rs 54,16,666
Portfolio Mgt
Q.8
During a 5 year period, the relevant results for the aggregate market are that the risk free rate (rf) is 8 % and the return on market (rm) is 14%.
For that period, the results of five portfolio managers are as follows :
Portfolio
Actual Average
Beta ()
Manager
Return (%)
A
13
0.80
B
14
1.05
C
17
1.25
D
13
0.90
E
15
0.95
Using CAPM model, your are required to –
(i)
Calculate the expected rate of return for each portfolio manager and compare the
actual returns with the expected return: and
(ii)
Based upon your calculations, select the portfolio manager with the best
performance.
Ans: CAPM equation
Ri = Rf + β(Rm - Rf)
Where Ri
=
Expected rate of return
Rf
=
Risk free rate
Rm
=
Return on market
β
=
Beta
The expected rates of return are as follows:
Portfolio
Manager
Actual
Difference
Average
between
Return
Actual & Exp(%)
cted
Returns(%)
________________________________________________________________________
A
rA = 8% +0.80 (14% - 8%) = 12.8
13
+ 0.25
B
rB = 8% + 1.05 (14% - 8%) = 14.3
14
- 0.3
C
rC = 8% + 1.25 (14% - 8%) = 15.5
17
+ 1.5
10
Expected Return
(%)
CS Professional FTFM
D
E
(ii)
Q.9
rC = 8% + 0.90 (14% - 8%) = 13.4
I can and I will
rE = 8% + 0.95 (14% - 8%) = 13.7
13
+ 0.4
15
+ 1.3
Portfolio managers A,C and E did better than expected. A exceeded the expected
return by 1.56 per cent (0.2% ÷ 12.8%), C exceeded the expected return by 9.68
per cent 1.5% ÷ 15.5%) and E bettered the expected return by 9.49 percent (1.3%
÷ 1.37%). Therefore, portfolio manager C showed the best performance.
Vivek is holding 1,000 shares of Right Choice Ltd. the current rate of dividend paid by
the company is Rs 5 per share and the share is being sold at Rs 50 per share in the
market. However, several factors are likely to change during the course of the year as
indicated below:
Existing
Revised
Risk free rate
14%
12%
Market risk premium
8%
6%
Beta (β) value
1.42
1.27
Expected growth rate
6%
10%
In view of above factors, whether Vivek should buy, or hold or sell the shares and why?
Ans: The expected rate of return can be calculated by applying the CAPM as follows:
Ke = Rf + β (Rm – Rf)
Existing Rate of Return = 14% + 1.42 (8%) = 14% + 11.36% = 25.36%
Revised Rate of Return = 12% + 1.27 (6%) = 12% + 7.62% = 19.62%
Original Share Price P0 = D(1 + g) = 5 ( 1 + 6%)
Ke – g
.2536-0.06
Or
5 (1.06)
= 5.30 =Rs 27.38
.2536-0.06
.1936
Revised Share price Po = D ( 1+ g) = 5 (1+10%)
Ke – g
.1962 -.10
Or
5(1.10) = 5.5 = Rs 57.17
.1962-.10
.0962
Comment:
(i)
Under the growth rate of 6% the share price is expected to be Rs 27.38 but the
existing share price is Rs 50 which is overpriced. If the growth rate remains same at
6% under equilibrium process it is expected that share price will fall from Rs 50 to Rs
27.38. So sell the stock.
(ii)
Under the revised growth rate of 10% the expected share price is Rs 57.17. The
current market price is Rs 50. So Mr. Vivek can hold the share for further price rise.
11
CS Professional FTFM
Success come to those who will and dare.
Forex
Q.10 Give the following information:
Exchange rate
-
Canadian dollar 0.665 per DM (spot)
Canadian dollar 0.670 per DM( 3 months)
Interest rates
DM 7% p.a.
Canadian dollar 9% 9.a.
What operations would be carried out to take the possible arbitrage gains
Q.11 Following are the spot exchange rates quoted at three different forex markets:
USD/INR
48.30 in Mumbai
GBP/INR
77.52 in London
GBP/USD
1.6231 in New York
The arbitrage has USD 1, 00,00,000. Assuming that there are no transaction costs,
explain whether there is any arbitrage gain possible from the quoted spot exchange rates.
Ans: The arbitrage gain/loss be assessed by the under given process
Step 1 -
Money realized from conversion of 1,00,000
USD in Indian Rupees at spot rate of Rs 48.30
Step 2 Money realized from conversion of 48,30,00,000
INR in GBP at spot rate of 77.52 in London
i.e. 48,30,00,000/77.52
Step 3 Money realized from conversion of 62,30,650.155
GBP in USD at spot rate of 1.6231 in New York
i.e. 62,30,650.155 x 1.6231
USD 101,12,968.27
Arbitrage Gain i.e. USD (101,12,968.27-1,00,00,000)
Derivatives
Q.12 Identify the profit or loss (ignoring dealing cost and interest) in each of the following
cases :
(i)
A put option with exercise price of Rs 250 is bought for a premium of Rs 42. The price of
underlying share is Rs 189 at the expiry date.
(ii)
A put option with an exercise price of Rs 300 is written for a premium of Rs 57. The
price of the underlying share is Rs 314 at the expiry date.
Ans: (i)
12
Exercise price of Put Option
CS Professional FTFM
Less :
Price of the Underlying
Shares at the expiry date
Premium Paid
Rs 189
Rs 42
Rs 231
Rs 19
Profit
(ii)
i.e. a profit of Rs 19 per contract purchased.
Exercise Price = Rs 300, put option is written on exercise price for a premium of
Rs 57.
On the expiry date, the put option will not be exercised against the investor. Profit
position would be equal to the amount of premium received i.e Rs 57.
Q.13 Internet Services Ltd. is a listed company and the share price have been volatile. An
investor expects that the share price may fall from the present level of Rs 1,900 and
wants to make profit by a suitable option strategy. He is short of share at a price of Rs
1,900 and wants to protect himself against and loss. The following option rate are
available:
Strike Price
Call Option
Put Option
(Rs.)
(Rs.)
(Rs)
1,700
325
65
1,800
200
80
1,900
85
120
2,000
70
200
2,100
65
280
The investor decides to buy a call at a strike price of Rs. 1,800 and to write a put at a
strike price of 2,000. Find out the profit or loss profile of the investor if the share price on
the expiration date is Rs 1,600, Rs 1,700, Rs 1,800, Rs 1,900, Rs 2,000 or Rs 2,100
respectively.
Ans:
Strike Price
1800
2000
Net Premium
Long Call Option
Shot Put Option
Price on Expiry
Payoff
1600
1700
13
Payoff on Call
-
Payoff on Put
-400
-300
(Amount in Rs)
Premium
200
200
-(Amount in Rs)
Net
-
Premium
Net
-400
-300
CS Professional FTFM
1800
1900
2000
2100
Actions speak louder than words
-200
100
-100
200
300
-
-
-200
Nil
200
300
Q.14 Zenith company has a beta of 0.5 with Nifty. Each Nifty contract is equal to 100 units.
Zenith company now quotes at Rs 250 and the Nifty future is 4,000 index points. X is
long on 1,200 shares of Zenith company in the spot market.
(i)
How many futures contracts will X have to take?
(ii)
If the price in spot market drops by 10%, how is X protected?
Ans: (i)
(i)
14
Since X is long on the shares of Zenith Company in the
Spot market, he will have to go short in the futures market.
He will have to sell Nifty. Market value of holding to be
Hedged = 1200 x Rs 250 x 0.5
No of Future contracts to be sold i.e. Rs 1,50,000/Rs 4,00,000
If the price in spot market is down by 10%, then Nifty
Would go down by 10%/0.5 = 20%
Loss on shares i.e. 1200 x Rs 250 x10/100
Gain on Nifty i.e. 4,000 x 100 x 0.375 x 20/100
Difference
So, Mr X is fully protected
Rs 1,50,000
0.375
Rs. 30,000
Rs. 30,000
Nil