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]
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