Higher National Diploma in Accountancy

Fourth Year (2017/2016) First Semester Examination - 2017

DA4101-Financial Management

Instructions for Candidates: No. of questions: 06

Answer five (05) questions No. of pages: 05
Duration: 03 Hours

Question 01

(i) “Corporate finance basically deals with financial decisions” state those basic financial
decisions (03 Marks)
(ii) Briefly explain the relationship between Financial Management and other non-financial
disciplines. (03 Marks)
(iii) Wealth maximization is a value maximization of shareholders or net Present worth
maximization. This objective is a universally accepted concept in the field of business. In
which ways the wealth maximizing objective superior to the profit maximization objective?
(04 Marks)
(iv) Key functions of financial manager are to review and control decisions to commit or
recommit funds to new of ongoing uses. How does the modem financial manager's role
differ from the traditional financial manager? (05 Masks)

(v) State variety of financial intermediaries, which facilitate the flaw of fund between surplus
units and deficit spending (05 marks)
(Total 20 Marks)

Question 02

(i) What are the indexes performing in Colombo Stock Exchange(CSE) at present in Sri Lanka?
Explain them briefly? (04 Marks)
(ii) Last down the major financial instruments and the issuer of those instruments available in
Sri Lanka (06 Marks)
(iii) Briefly explain the importance of working, capital for a manufacturing firm than for a
service firm (04 Marks)

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(iv) Following information has been extracted from the annual accounts of Nimal PLC as at
31st March 2016 and 31st March 2015
as at 31st March 2016 as at 31st March 2015
Inventory 1,580 1,820
Trade Receivables 2,620 1,150
Trade Payables 1,810 2,420

Sales and the cast of goods sold for the year ended in 31st March 2016 were Rs 10,680 and
8,700 respectively, all purchasers are on credit base (Assume 365 days per annum)

You are required to compute the length of the operating cycle and cash cycle for the year end
in 31st March 2016. (06 Marks)
(Total 20 Marks)

Question 03

(i) Name six factors that determine the working capital needs of a firm. Briefly explain one &
factor which determines the working capital needs. (04 Marks)
(ii) The following information has been extracted from the records of a Company:
Product cost sheet---------------------------Rs/unit
Raw materials---------------------------------45
Direct labour ----------------------------------20
Overheads--------------------------------------40
Total -------------------------------------------105
Profit --------------------------------------------15
Selling price -----------------------------------120
 Raw materials are in stock on an average of two months
 The materials are working in process on an average for 4 weeks, The degree of
completion is 50%
 Finished Bonds stock on an average is for one month.
 Time lag in payment of wages and overheads is 2 weeks
 Time lag in receipt of proceeds from debtors is 2 months.
 Credit allowed by suppliers is one month.

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  20% of the output is sold on cash basis.
 The company expects to keep a cash balance of Rs 1, 00,000,
 Assume 52 weeks Per annum
 The Company forecasts to manufacture of 12,000 units per month

You ate required to prepare a statement showing the Working Capital requirements of the
Company for the Period of one year. Further, add 10% to compute figure to allow for
contingencies.
(10 Marks)
(iii) The demand for a commodity is 40,000 units per year, at a steady rate. It costs Rs.20 to
place an order, and 40 cents to hold a unit for a year. Find,
(a) Order size to minimise inventory costs
(b) Number of orders placed each year
(c) Length of inventory cycle
(d) Total cost of holding inventory foe the year (06 Marks)
(Total 20 Marks)

Question 04

(i) Briefly explain “foreign exchange risk”. (02 Marks)

(ii) Name four international parity conditions (04 Marks)
(iii) In Sri Lanka, the interest rate on one-year loan is 14.5 % and inflation is expected to be
6.5%. The expected inflation rate in Thailand is 8.5%. What should be the interest rate of
one-year loan in Thailand? (04 Marks)
(iv) Thailand and South Korea are Tanning annual inflation rates of 5% and 7% respectively.
The current spot exchange is Won 18.50/Baht. What should be the value of the Thai Baht
in one year? (04 Marks)
(v) The Golden Company Ltd pays a dividend of Rs. 2.20 per share currently. The company is
expected to maintain a 14% dividend growth rate for the next three years, 16% super growth
over the following three year and then will keep an average growth rate of 8% forever. If
the required rate of return on Golden Company Ltd stocks is 12 %, what will be the share
of Golden Company Ltd value? (06 marks)
(Total 20 Marks)

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Question 05

(i) Consider a 4-year debenture with the par value of Rs 100 that Pays a 16% coupon annually,
An investor who is considering the purchase of this debenture requires a rate of return of
20% How much is the value of this debenture? (03 Marks)
(ii) What is the value of a Preferred stock that Pays dividends of Rs.3.00 per share every year
if investors require a return of 18% from this stock? (03 Marks)
(iii) A common stock, paid a dividend of Rs 2.25 last year. Analysts expect dividends to grow
at 8% per year for the foreseeable future. The required rate of return on this stock is 25%
What is the value of the common stock? (03 Marks)
(iv) The following information is extracted from the financial statements of JPK Holdings PLC
(JPK) as at 31st December 2016:
a. Issued share capital of JPK is Rs.500 million and it compresses with 1,000,000 ordinary
shares JPK is a listed company in Colombo Stock Exchange (CSE) and the last traded
price of an ordinary share was Rs. 750/-. The dividend paid for the year just ended was
Rs 80/- per share and growth rate of annual dividend payment is 5%.
b. The retained earnings of JPK was Rs.150 million.
c. JPK has issued irredeemable preference shares for a value of Rs. 100 million. This
consists of 500,000 preference shares and annual dividend per share is Rs. 28/-. The
last traded price of a preference share was Rs.280/-,
d. Irredeemable, non-quoted long term borrowings of JPK were Rs.110 million with
annual interest rate of 15%,
e. JPK is liable for income tax at the rate of 28% per annum on its profits.

You are required to compute the following:

1. Cast of ordinary share capital. (03 Marks)
2. Cost of preference share capital. (02 Masks)
3. Cost of debt. (02 Marks)
4. Weighted average cost of capital (WACC) based on market value. (04 Marks)
(Total 20 Marks)

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Question 06

(i) Define the concepts of merger and amalgamation. (04 Marks)

(ii) What are the important reasons for mergers and takeovers? (06 Marks)
(iii) XYZ Company currently has annual earnings before interest and taxes of Rs 1,000,000.
The Company's outstanding common stock is 50,000. The interest expenses are
Rs.200,000 a year and the company pays Rs 100,000 in annual dividends to its
stockholders. The corporate tax rate is 40% and its common stock's current dividend yield
is 2%.

You are required to:

(a) Calculate company’s earrings pet share
(b) Calculate the company’s dividend pay-out ratio
(c) Calculate company’s current common stock price
(d) If the company declares and pays a 100% stock dividend and then pays an annual cash
dividend of Rs 1.10 per share, what could be the effective rate by which the dividend has
been increased? (10 Masks)
(Total 20 Marks)