CMA SEPTEMBER-2022 EXAMINATION
INTERMEDIATE LEVEL II
FINANCIAL MANAGEMENT
Course Code
Reading Time
: EF232
: 15 minutes
Total Marks
Writing Time
: 100
: 180 minutes
Instructions to Candidates

You MUST NOT write anything during the reading time.

You should attempt ALL questions.

Answers should be properly structured and relevant.

Carefully read ALL the requirements and sub-questions before attempting a specific
question.

ALL answers must be written in the answer book.

AVOID WRITING/MARKING on the question paper at any time which may cause
disciplinary action.

Start answering each question from a fresh sheet.

Answers should be clearly numbered with the sub-question number.
Allowable Materials

Writing Stationaries

Non-programmable Calculator
Assessment Structure
Section
A
Section
B
Question 1
Question 2
Question 3
Question 4
Question 5
Question 6
Question 7
Multiple Choice Questions
Modified True/False
Matching
Essay/Computational/Case
Essay/Computational/Case
Essay/Computational/Case
Essay/Computational/Case
Revision
Total
Subquestion
10
5
5
4
2
3
3
Marks
10
5
5
20
20
20
20
100
Expected Time
Required
20 minutes
10 minutes
10 minutes
32.50 minutes
32.50 minutes
32.50 minutes
32.50 minutes
10 minutes
180 minutes
RESTRICTED USE
This paper MUST NOT BE REMOVED from the examination venue
Do not turn the page until instructed
SECTION A [20 MARKS]
THERE ARE 3 (THREE) QUESTIONS IN THIS SECTION. ANSWER ALL THE QUESTIONS IN
THE ANSWER SCRIPT FOLLOWING THE EXAMPLE PROVIDED FOR THE SPECIFIC
QUESTION.
QUESTION 1
[10×1 = 10 MARKS]
There are ten (10) multiple-choice questions with five options. Pick the option that best explains
the given question. Write your answer on the answer script [DO NOT PUT ANY MARK ON THE
QUESTION PAPER]. Follow the example given below in providing your answer.
Example:
(i) ICMAB stands for the –
(a) Institute of Cost Management Accounting of Bangladesh
(b) Institute of Cost and Management Accountants of Bangladesh
(c) Institute for Cost Managers and Accounting of Bangladesh
(d) Institute of Cost Management Accountants of Bangladesh
(e) Industrial Cost Management Accountants of Bangladesh
Answer: (i) (b)
(i)
Determine a firm's total asset turnover if its net profit margin is 5 percent, total assets are
Tk. 8 million, and Return on Asset (ROA) is 8 percent.
(a) 1.60
(b) 2.05
(c) 2.50
(d) 4.00
(e) 5.25
(ii)
According to the capital-asset pricing model (CAPM), a security's expected (required)
return is equal to the risk-free rate plus a premium
(a) based on the systematic risk of the security
(b) based on the unsystematic risk of the security
(c) based on the total risk of the security
(d) equal to the security's beta
(e) equal to the market's beta
(iii)
United Airlines will pay a Tk. 4 dividend next year on its common stock, which is currently
selling at Tk. 100 per share. What is the market's required return on this investment if the
dividend is expected to grow at 5% forever?
(a) 12 percent
(b) 9 percent
(c) 7 percent
(d) 5 percent
(e) 4 percent
CMA September-2022 Examination, EF232 [Page 2 of 8]
(iv)
You are considering investing in a zero-coupon bond that sells for Tk. 250. At maturity in
16 years it will be redeemed for Tk. 1,000. What annual rate of growth does this
represent?
(a) 8 percent
(b) 9 percent
(c) 10 percent
(d)12 percent
(e)25 percent
(v)
An increase in the firm's receivable turnover ratio means that:
(a) cash sales have decreased
(b) it has initiated more liberal credit terms
(c) it is collecting credit sales more quickly than before
(d) inventories have increased
(e) credit sales have increased
(vi)
Which of the following statements is correct?
(a) If the NPV of a project is greater than 0, its PI will equal 0
(b) If the IRR of a project is 0%, its NPV, using a discount rate, k greater than 0, will be 0
(c) If the PI of a project is less than 1, its NPV should be less than 0
(d) If the IRR of a project is greater than the discount rate, k, its PI will be less than 1
(e) If the IRR of a project is lower than the discount rate, k, its NPV will equal 0
(vii) A company refunds its bonds for any of the following reasons EXCEPT for:
(a) to eliminate restrictive covenants
(b) to reduce interest costs
(c) to show higher reported profits
(d) to issue new bonds at higher rate of interest
(e) to utilize surplus/excess cash
(viii) When the investment banker bears the risk of not being able to sell a new security at the
established price, this is known as:
(a) a best efforts offering
(b) shelf registration
(c) making a market
(d) underwriting
(e) private placement
(ix)
The term float is used in:
(a) Inventory management
(b) Receivable management
(c) Payable management
(d) Cash management
(e) Marketable securities
(x)
All of the following are true of stock splits EXCEPT:
(a) par value of share is reduced after the split
(b) the number of outstanding shares is increased
(c) proportional ownership is unchanged
(d) total equity remains unchanged
(e) market price per share do not change after the split
CMA September-2022 Examination, EF232 [Page 3 of 8]
QUESTION 2
[5×1 = 5 MARKS]
There are five (5) statements given under the question. Identify the statements as True or
False. If the statement is false, rewrite the statement on the answer script to make it ‘True’.
Reasoning is NOT required. Follow the example given below in providing your answer.
Example:
(a) ICMAB stands for the Industrial Cost Management and Accounting of Bangladesh.
Answer:
(a) False. ICMAB stands for the Institute of Cost and Management Accountants of
Bangladesh.
Note:
 You will not get any mark if you simply rewrite as ICMAB does not stand for the
Industrial Cost Management Accountants of Bangladesh.
 If the statement is true, you need NOT to rewrite the statement rather only mention
that the statement is True.
(a)
(b)
(c)
(d)
(e)
The operating break-even point is the point at which operating profits equal revenues
minus operating costs.
An aggressive working capital policy would have low liquidity, higher risk, and higher
profitability potential.
A call provision allows the purchaser of a security to demand repayment of the principal.
Purchasing-power parity implies that a standardized good should sell for the same price
internationally after adjusting for exchange rates.
The security market line (SML) describes the relationship between a security's expected
return and market return.
QUESTION 3
[5×1 = 5 MARKS]
Match the items of column A with the most suitable items of column B. Match only one item of
column A with one item of column B. Write your answer on the answer script. Follow the
example given below in providing your answer.
Example:
Column A
1. ICMAB
Column B
(a) Professional accountancy body
(b) University
Answer: 1 (a)
Column A
1. Measure of Solvency
2. Mutual fund
3. Treasury stock
4. Net income approach
5. Yield to maturity
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Column B
Operating leverage
Interest coverage ratio
Hybrid instrument
Capital market instrument
Government security
Buy-back own stock
Capital structure theory
Capital budgeting theory
Overall cost of capital
Cost of debt
END OF SECTION A
CMA September-2022 Examination, EF232 [Page 4 of 8]
SECTION B [80 MARKS]
THERE ARE 4 (FOUR) QUESTIONS IN THIS SECTION. ANSWER ALL THE QUESTIONS IN
THE ANSWER SCRIPT. SHOW ALL RELEVANT COMPUTATION.
QUESTION 4
[(5+6+6+3) = 20 MARKS]
(a)
For a business, it is not necessary that profit should be the only objective; it may
concentrate on various aspects such as maximization of share price, maximization of
sales, capturing more market shares, return on capital employed among others, which will
take care of profitability.
Required:
Explain why maximization of a company’s share price is preferred as a financial objective
to maximization of its sales.
(b)
You wish to choose the better of two equally costly cash flow streams: annuity X and
annuity Y. X is an annuity due with a cash in flow of Tk. 9,000 for each of 6 years. Y is an
ordinary annuity with a cash inflow of Tk. 10,000 for each of 6 years. Assume that You
can earn 15% on your investments.
Required:
(i)
(ii)
(iii)
(c)
On a purely subjective basis, which annuity do you think is more attractive? Why?
Find the future value at the end of year 6 for both annuities.
Use your finding in part (ii)to indicate which annuity is more attractive. Why?
Compare your finding to your subjective response in part (i).
IFAD Autos’ common stock just paid its annual dividend of Tk. 1.80 per share. The
required return on the common stock is 12%.
Required:
Estimate the value of the common stock under each of the following assumptions about
the dividend:
(i)
Dividends are expected to grow at an annual rate of 0% to infinity.
(ii) Dividends are expected to grow at a constant annual rate of 5% to infinity.
(iii)
(d)
Dividends are expected to grow at an annual rate of 5% for each of the next 3 years,
followed by a constant annual growth rate of 4% in years 4 to infinity.
Kazi Ltd. which operates in the Distribution sector in Bangladesh has provided the
following information for the year ended 31 December 2020.
10% cumulative preference shares
Ordinary shares
No. of shares
18,000
15,000
Market value (Tk.)
30
45
The proposed dividend for the year is Tk. 0.3 for the preference shares and Tk. 0.45 for
ordinary shares each. The company’s profit before taxation was Tk. 40,000. The tax rate
is 25% for both the Company and the individual.
Required: Calculate in respect of ordinary shares:
(i)
(ii)
Dividend cover
Earnings per share
(iii)
Price-earnings ratio
CMA September-2022 Examination, EF232 [Page 5 of 8]
QUESTION 5
(a)
[(4+6+4)+6 = 20 MARKS]
ABC Ltd is considering five projects for the coming financial year. Four of the projects
have undergone financial appraisal (see the table below).
Project
Lifespan
Initial investment (Tk.)
NPV (Tk.)
IRR
PA201
PA202
PA203
PA204
PA205
Indefinite
Indefinite
Indefinite
Indefinite
Indefinite
(50,000)
(75,000)
(48,000)
(85,000)
(150,000)
85,200
98,500
65,950
95,400
Yet to be
appraised
11.5%
12.3%
10.2%
11.4%
Yet to be
appraised
Project PA205 entails an immediate capital investment of Tk. 150,000 and will produce
the following annual net cash flows in real terms:
Year
Cash flow (Tk.)
1
2
3
4
5
5,000
10,500
25,000
28,000
30,000
Every year
after year 5
30,000
Expected general rate of inflation is 15% and the company’s money required rate of return
is 25%.
Required:
(i)
Appraise Project PA205 using the NPV criteria.
(ii)
Suppose in the coming financial year, only Tk. 200,000 of finance will be available
for investments but the capital constraint will ease afterwards. Advise the company
on which project(s) to implement in the coming year if the projects are –
1.
Independent and divisible
2.
Independent and indivisible
When management rejects projects with positive net present value because of
capital constraints, they lose opportunities to enhance the value of shareholders.
Suggest FOUR practical ways of dealing with capital rationing so as not to discard
projects with positive net present value.
(iii)
(b)
Edna Recording Studios, Inc., reported earnings available to common stock of
Tk.4,200,000 last year. From those earnings, the company paid a dividend of Tk.1.26 on
each of its 1,000,000 common shares outstanding. The capital structure of the company
includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of
40%.
Required:
(i)
(ii)
(iii)
(iv)
If the market price of the common stock is Tk.40 and dividends are expected to grow
at a rate of 6% per year for the foreseeable future, what is the company’s cost of
retained earnings financing?
If under pricing and flotation costs on new shares of common stock amount to
Tk.7.00 per share, what is the company’s cost of new common stock financing?
The company can issue Tk.2.00 dividend preferred stock for a market price of
Tk.25.00 per share. Flotation costs would amount to Tk.3.00 per share. What is the
cost of preferred stock financing?
The company can issue Tk.1,000-par-value, 10% coupon, 5-year bonds that can be
sold for Tk.1,200 each. Flotation costs would amount to Tk.25.00 per bond. Use the
estimation formula to figure the approximate cost of debt financing.
CMA September-2022 Examination, EF232 [Page 6 of 8]
QUESTION 6
[4+8+(4+2+2) = 20 MARKS]
(a)
Suppose the CEO of your company has recently attended a seminar on capital structure
and learned about Modigliani-Miller (MM) theory. After coming from the seminar, he
requested the CFO of the company to increase the amount of debt in the firm’s capital
structure because of the tax-advantaged status of interest payments. His argument is that
this action would increase the value of the company. How would you respond to CEO’s
argument in the light of capital structure relevance and irrelevance theories?
(b)
Firm A and Firm B are both subsidiary companies of Trojan Electronics. The directors of
Trojan Electronics are reviewing the capital structure of the two subsidiary companies.
You have been engaged to advise the directors on the appropriate capital structure for the
subsidiaries. You have obtained extracts from the financial results of the two
companies for the past financial year and projection of the annual results for the
current year, which is in its first quarter.
Sales revenue
Variable costs
Fixed costs
Total operating costs
Operating profits
Interest expense
Profit before tax
Tax
Profit after tax
Projected Results – 2019
Firm A
Firm B
Tk. million
Tk. million
288.00
223.20
172.80
44.64
40.00
128.00
212.80
172.64
75.20
50.56
35.00
110.00
40.20
(59.44)
10.05
(14.86)
30.15
(44.58)
Historical Results – 2018
Firm A
Firm B
Tk. million
Tk. million
480.00
372.00
288.00
74.40
40.00
128.00
328.00
202.40
152.00
169.60
35.00
110.00
117.00
59.60
29.25
14.90
87.75
44.70
Required:
(i)
Compute the degree of operating leverage for each of the two companies. Based on
the degree of operating leverage you obtain, advise the directors on the relative
level of business risk associated with the two subsidiaries and the implication of that
for capital structure design.
(ii) Compute the degree of financial leverage for each of the two companies. Based on
the degree of financial leverage you obtain, advise the directors on the relative level
of financial risk associated with the two subsidiaries and the implication of that for
capital structure design.
(c)
GCT Inc., has Tk.1 million in earnings before interest and taxes. Currently it is all-equityfinanced. It may issue Tk.3 million in perpetual debt at 15 percent interest in order to
repurchase stock, thereby recapitalizing the corporation. There are no personal taxes.
Required:
(i)
(ii)
(iii)
If the corporate tax rate is 40 percent, what is the income available to all security
holders if the company remains all-equity-financed? If it is recapitalized?
What is the present value of the debt tax-shield benefits?
The equity capitalization rate for the company’s common stock is 20 percent while it
remains all-equity-financed. What is the value of the firm if it remains all-equity
financed? What is the firm’s value if it is recapitalized?
CMA September-2022 Examination, EF232 [Page 7 of 8]
QUESTION 7
(a)
[9+5+6 = 20 MARKS]
The BSRM Steel Company has experienced a slow (3 percent per year) but steady
increase in earnings per share. The firm has consistently paid out an average of 75
percent of each year’s earnings as dividends. The stock market evaluates BSRM primarily
on the basis of its dividend payout because growth prospects are modest.
BSRM’s management presents a proposal to the board of directors that would require the
outlay of Tk. 50 million to build a new plant in the rapidly expanding Khulna market. The
expected annual return on the investment in this plant is estimated to be in excess of 30
percent, more than twice the current company average. To finance this investment, a
number of alternatives are being considered. They include the following:
Option 1:
Finance the expansion with externally raised equity.
Option 2:
Finance the expansion with 50 percent externally generated equity and 50
percent internally generated equity. This alternative would necessitate a
dividend cut for this year only.
Finance the expansion with a mix of debt and equity similar to their current
relative proportions in the capital structure. Under this alternative,
dividends would not be cut. Rather, any equity needs in excess of that
which could be provided internally would be raised through a sale of new
common stock.
Option 3:
Required:
Evaluate these various financing alternatives with reference to their effects on the
dividend policy and common stock values of the company.
(b)
An American company sells goods to a Bangladeshi buyer for US$280,000 when the
exchange rate is $1 = Tk. 4.20. The Bangladeshi buyer is allowed three months’ credit,
and when the American company eventually receives the US dollars three months later,
the exchange rate has moved to $1 = Tk. 4.60.
Required:
(i)
(ii)
(c)
What was the foreign exchange loss to the Bangladeshi buyer?
Explain Currency risk in relation to the above.
Aramit Ltd. is a company in Bangladesh engaged in the trading of commodities. The
annual sales are at Tk. 24 million. The average age of debtors is one month and the
percentage of bad debts is 1%. A new Marketing Director has been hired by the company
to improve its sales. The new Marketing Director proposed that sales could be increased
up to Tk. 30 million if new customers were taken on. Taking on new customers will
lengthen the average credit period to 2 months and increase bad debts to 1.5% of sales.
The Finance Manager provided that, variable cost is 70% of the selling price and the
company’s cost of capital is 20%.
Required:
Advise whether the Company should take on the new customers.
END OF SECTION B
CMA September-2022 Examination, EF232 [Page 8 of 8]