CMA MAY-2025 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
Required
Proficiency
Basic 40% and Applied
60%
Targeted
Competency
Technical, Business &
Professional Skills
Subquestion
10
5
5
4
3
3
3
Revision
Total
Marks
10
5
5
20
20
20
20
100
Expected Time
Required
20 minutes
10 minutes
10 minutes
32.5 minutes
32.5 minutes
32.5 minutes
32.5 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)
(ii)
(iii)
(iv)
(v)
(vi)
A line that describes the relationship between an individual security's returns and returns on the
market portfolio is known as:
(a) Beta
(b) Capital market line
(c) Efficient frontier
(d) Security market line
(e) Characteristic line
Which of the following is a basic principle of finance as it relates to the management of working
capital?
(a) Profitability varies inversely with risk
(b) Liquidity moves together with risk
(c) Profitability moves together with risk
(d) Profitability moves together with liquidity
(e) Profitability varies inversely with interest rate
The weighted average of possible returns, with the weights being the probabilities of occurrence
is referred to as:
(a) A probability distribution
(b) The expected return
(c) The standard deviation
(d) Beta
(e) Portfolio return
The cost of debt is measured by:
(a) The yield to maturity on the firm’s bond
(b) The coupon rate on the firm’s bond
(c) The weighted average cost of capital
(d) The marginal cost of capital
(e) The effective interest rate
Cost of the project is Tk. 600,000, life of the project is 5 years, annual cash flow is Tk. 200,000
and cut off rate is 10%. What is the discounted payback period?
(a) 2 years
(b) 2 years 6 months
(c) 3 years
(d) 3 years 6 months
(e) 3 years 9 months
What is the value of the tax shield if the value of the firm is Tk. 5 million, its value if unlevered would be
Tk. 4.78 million, and the present value of bankruptcy and agency costs is Tk. 360,000?
(a) Tk. 140,000
(b) Tk. 220,000
(c) Tk. 580,000
(d) Tk. 360,000
(e) Tk. 280,000
CMA May 2025 Examination, F1-FIM- EF232 [Page 2 of 7]
(vii) If a customer decided to pass up the chance of a cash discount of 1% in return for reducing her
average payment period from 70 to 30 days, what would be the implied cost in interest per
annum??
(a) 10%.
(b) 9.5%.
(c) 9%.
(d) 8.5%.
(e) 12%.
(viii) For a certain project, the net present value at a discount rate of 15% is Tk 3,670, and at a rate
of 18% the net present value is negative at (Tk 1,390). What is the internal rate of return of the
project?
(a) 15.7%
(b) 16.5%
(c) 16.6%
(d) 17.6%
(e) 17.2%
(ix) A US exporter receives HK$400,000 from a customer. The bank has quoted an offer price of
HK$7.7000 and a bid price of HK$7.7425. How many US dollars will the exporter receive from
the bank in exchange for HK$400,000?
(a) $ 51,662.90
(b) $ 51,948.05
(c) $ 400,000.00
(d) $ 51,805.08
(e) $ 51,548.06
(x) Which of the following would be the result of including flotation costs in the analysis of a project?
(a) It will increase the initial outflow of cash for the project
(b) It will decrease the rate of return for the project
(c) It will increase the Net Present Value (NPV) of the project
(d) It will have zero effect on the current value of the project
(e) It will decrease the initial outflow of cash for the project
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)
Unsystematic risk is measured by beta factors.
(b)
Common stocks that pay no dividends are generally priced lower than dividend-paying stocks.
(c)
(d)
Preferred stock, like debt, could provide financial leverage to a firm.
For tax purposes, firms generally prefer the straight-line method to an accelerated depreciation
method.
(e)
In a sale and leaseback arrangement, the seller is the lessee and the buyer is the lessor.
CMA May 2025 Examination, F1-FIM- EF232 [Page 3 of 7]
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) Earnings per Share (EPS)
(2) Right share
(3) Cash management
(4) Relevant cash flow
(5) Stock exchanges
Column B
(a) Opportunity cost
(b) Firm performance
(c) Baumol model
(d) Money market
(e) New shareholders
(f) Market price of a share
(g) Sunk cost
(h) EOQ model
(i) Current shareholders
(j) Capital market
END OF SECTION A
CMA May 2025 Examination, F1-FIM- EF232 [Page 4 of 7]
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+5+4 = 20 MARKS]
(a) State the relationship between present value and future value. You are trying to choose
between two different investments, both of which have up-front costs of Tk. 65,000. Investment
G returns Tk. 125,000 in 6 years. Investment H returns Tk. 205,000 in 10 years. Which of these
investments has the higher return?
(b) Currently under consideration is an investment with a beta of 1.50. At this time, the risk-free rate
of return is 7%, and the return on the market portfolio of assets is 10%. You believe that this
investment will earn an annual rate of return of 11%.
(i)
If the return on the market portfolio were to increase by 10%, what would you expect to
happen to the investment’s return? What if the market return were to decline by 10%?
(ii) Use the capital asset pricing model (CAPM) to find the required return on this investment.
(iii) On the basis of your calculation in part (ii), would you recommend this investment? Why or
why not?
(iv) Assume that as a result of investors becoming less risk-averse, the market return drops by
1%. What impact would this change have on your responses in parts (ii) and (iii)?
(c) RAK Company wants to issue new 20-year bonds for some much-needed expansion projects.
The company currently has 5.7 percent coupon bonds on the market that sell for Tk. 1,048,
have a par value of Tk. 1,000, make semiannual payments, and mature in 20 years. Calculate
coupon rate the company should set on its new bonds if it wants them to sell at par.
(d) An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate
used in the calculations is adjusted for political risk and any advantages from diversification.
Does this mean the project is acceptable? Why or why not?
QUESTION 5
[6+7+7 = 20 MARKS]
(a) The treasurer of PRAN Candy Limited has projected the cash flows of Projects A, B, and C as
follows:
Year
Project A
Project B
Project C
0
Tk. (225,000)
Tk. (450,000)
Tk. (225,000)
1
165,000
300,000
180,000
2
165,000
300,000
135,000
Suppose the relevant discount rate is 12 percent per year.
Required:
(i)
Compute the profitability index for each of the three projects.
(ii) Compute the NPV for each of the three projects.
(iii) Suppose these three projects are mutually exclusive. Which project(s) should PRAN
accept based on the profitability index rule?
(iv) Suppose PRAN’s budget for these projects is Tk. 450,000. The projects are not divisible.
Which project(s) should PRAN accept?
(b) Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the
40% tax bracket. Current investigation has gathered the following data:
Debt: The firm can raise debt by selling Tk. 1,000-par-value, 10% coupon interest rate, 10-year
bonds on which annual interest payments will be made. To sell the issue, an average discount
of Taka 30 per bond must be given. The firm must also pay flotation cost of Tk. 20 per bond.
Preferred stock: The firm can sell 11% (annual dividend) preferred stock at its Tk. 100-pershare par value. The cost of issuing and selling the preferred stock is expected to be Tk. 4 per
share.
Common stock: The firm’s common stock is currently selling for Tk. 80 per share. The firm
expects to pay cash dividends of Tk. 6 per share next year. The firm’s dividends have been
growing at an annual rate of 6%, and this rate is expected to continue in the future. The stock
will have to be underpriced by Tk. 4 per share, and flotation costs are expected to amount to Tk.
4 per share.
Retained earnings: The firm expects to have Tk. 225,000 of retained earnings available in the
coming year. Once these retained earnings are exhausted, the firm will use new common stock
as the form of common stock equity financing.
CMA May 2025 Examination, F1-FIM- EF232 [Page 5 of 7]
(c)
Required:
(i)
Calculate the individual cost of each source of financing.
(ii) Calculate the firm’s weighted average cost of capital using the weights shown in the
following table, which are based on the firm’s target capital structure proportions.
Source of capital
Weight
Long-term debt
40%
Preferred stock
15%
Common stock equity
45%
The Tata Company has decided to acquire a new truck. One alternative is to lease the truck on
a 4-year contract for a lease payment of Tk 10,000 per year, with payments to be made at the
beginning of each year. The lease would include maintenance. Alternatively, Tata could
purchase the truck outright for Tk 40,000, financing with a bank loan for the net purchase price,
amortized over a 4-year period at an interest rate of 10% per year, payments to be made at the
end of each year. Under the borrow-to purchase arrangement, Tata would have to maintain the
truck at a cost of Tk 1,000 per year, payable at year-end. The applicable depreciation rates are
33%, 45%, 15%, and 7%. The truck has a salvage value of Tk 10,000, which is the expected
market value after 4 years, at which time Tata plans to replace the truck regardless of whether
the firm leases the truck or purchases it. Tata has a tax rate of 40%.
(i)
What is Tata’s PV cost of leasing?
(ii) What is Tata’s PV cost of owning? Should the truck be leased or purchased?
QUESTION 6
(a)
[10+5+5 = 20 MARKS]
Firm A and Firm B are both subsidiary companies of Vision Electronics. The directors of Vision
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.
Projected Results – 2025
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 – 2024
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
Sales revenue
Variable costs
Fixed costs
Total operating costs
Operating profits
Interest expense
Profit before tax
Tax
Profit after tax
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.
(b)
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
CMA May 2025 Examination, F1-FIM- EF232 [Page 6 of 7]
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:
Option 2:
Option 3:
Finance the expansion with externally raised equity.
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.
Required:
Evaluate these various financing alternatives with reference to their effects on the dividend
policy and common stock values of the company.
(c)
What are the trade-offs in the static trade-off theory of capital structure? How is the firm’s
optimal capital structure determined under the assumptions of this theory? Is it possible to
determine the optimal capital structure in precise term in the real world? Why or why not?
Explain.
QUESTION 7
[4+4+12 = 20 MARKS]
(a) A financial ratio by itself tells us little about a company because financial ratios vary a great deal
across industries. There are two basic methods for analyzing financial ratios for a company:
time trend analysis and peer group analysis. In time trend analysis, you find the ratios for the
company over some period, say five years, and examine how each ratio has changed over this
period. In peer group analysis, you compare a company’s financial ratios to those of its peers.
Why might each of these analysis methods be useful? What does each tell you about the
company’s financial health?
(b) The bird-in-the-hand argument, which states that a dividend today is safer than the uncertain
prospect of a capital gain tomorrow, is often used to justify high dividend payout ratios. Explain
the fallacy behind this argument.
(c) The following data relate to Silco Pharma Ltd, a manufacturing company.
Sales revenue for the year
Tk. 1,500,000
Costs as percentage of sales:
Direct materials
30%
Direct labor
25%
Variable overheads
10%
Fixed overheads
15%
Selling and distribution
5%
Average statistics relating to working capital are as follows:
• Receivables take 2½ months to pay
• Raw materials are in inventory for three months
• WIP represents two months’ half-produced goods
• Finished goods represent one month’s production
• Credit is taken as follows:
Materials
2 months
Direct labor
1 week
Variable overheads
1 month
Fixed overheads
1 month
Selling and distribution
½ month
WIP and finished goods are valued at the cost of material, labor and variable expenses.
Required:
Compute the working capital requirement of Silco Pharma Ltd assuming that the labor force is
paid for 50 working weeks in each year.
END OF SECTION B
CMA May 2025 Examination, F1-FIM- EF232 [Page 7 of 7]