402 - FSV - Suggested Solutions - 2020 May

INSTITUTE OF CERTIFIED
MANAGEMENT ACCOUNTANTS OF SRI LANKA

Incorporated by Parliament Act No.23 of 2009
SUGGESTED SOLUTIONS Published by CMA Sri Lanka Business School
Disclaimer Notice
The copyright of this Suggested Solutions is reserved by the Institute of Certified Management
Accountants of Sri Lanka (CMA Sri Lanka) and Suggested Solutions neither in whole nor in part may
be reproduced without the prior written approval from the Institute. The purpose of the suggested
solutions is to provide only a guidance and not to be constructed as complete answers
402 - FSV - Financial Strategy and Valuation

Strategic Level
May 2020
Copyright Reserved
PART - I
QUESTION NO. 01 [Total 40 Marks]

(A)
1.1. Do you agree with Mr. X on his reason for registering the business as a private limited
company, justify your answer?
Relevant Segment & Topic Study Text Reference

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A - Overview of financial strategy and policy Chapter 01 05
onwards
Agree,
• As a sole proprietor Mr. X would be facing the challenges/difficulties in accessing/obtaining
capital.
• For a sole proprietor capital will be limited to the sources such as, owner's own funds,
retained earnings, sale of assets, borrowing from relatives and friends, loans from
commercial banks and developments banks, leasing companies, trade credit and business
credit card facilities etc.
• By registering the business as a private limited company Mr. X will be able to access many
sources of capital such as, selling a part of itself in the form of shares to investors, obtain
loans from banks, raise private equity from angel investors and venture capitalists,
crowdfunding, subsidies and grants from Government etc.
1.2. List six types of bonds, Merchant Buying can issue once converted into a private limited
company.

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B - Long- term financing Chapter 02 42
onwards
• Mortgage bonds
• Debentures
• Convertible bonds
• Indexed or purchasing power bonds
• Zero-coupon bonds
• Junk bonds
• Floating-rate bonds
CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 2 of 18

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1.3. Mr. X was advised by a friend that a private limited company can issue preferred stock
instead of long term borrowings. Compare merits and demerits of preferred stock and
long-term borrowing as a source of funds.

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Long Term Debt Preferred Stock

Advantages Advantages
• Relatively low after tax cost due to the tax The principal advantage is the potential
deductibility of interest flexibility of preferred dividend payments.
• Increased earnings per share possible Nonpayment of preferred dividend does
through financial leverage. not force a company into bankruptcy like
• Ability of the firm’s owners to maintain debt.
greater control over the firm i.e. no dilution
of control in the existing shareholding
structure
Disadvantages Disadvantages
• Increased financial risk of the firm • The principal disadvantage of
resulting from the use of debt. preferred stock financing is its higher
• Restrictions placed on the firm by the after-tax cost as compared with long
lenders term debt, because dividends cannot be
deducted for income tax purposes.
1.4. Issuing a bond is a low cost source of funds. However, bond rating is the main
determinant of applicable interest rate for the bond issue. Explain briefly what determine
bond rating of a bond issue.

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• Credit worthiness – Lesser the likelihood to default on outstanding debt (having a high level
of creditworthiness), higher the credit rating
• Earnings stability and future performance – A company whose earnings are stable over time
and have a good financial standing may get a higher credit rating
• Coverage ratios – Higher the coverage ratio, easier to make interest payments on its debt,
and thus to get a higher credit rating

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• The relative amount of debt in the company’s capital structure – Higher the financial
leverage, higher the financial risk on residual owners, and thus may not get a higher credit
rating
• The degree of subordination – Subordinated bonds have relatively lower credit ratings
(B)
1.5. Calculate value of a share

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Year 0 1 2 3 4 5 6
Dividend/share 10.00 11.00 12.10 13.31 14.64 16.10 16.58
Continuing Value 165.80 16.58
CV =
(13% - 3%)
Total CF 11.00 12.10 13.31 14.64 181.90
PV at 13% 9.73 9.48 9.22 8.98 98.73
Value/share Rs. 136.14
1.6. Recommend an appropriate strategy to the investor with justifications.

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MPS = Rs. 120 (1,200 M/10M)

Since value/share is greater than MPS, the share is under-priced. The investor is recommended
to buy the shares.
(C)
1.7. Compare financial risk of Alpha and Beta

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C - Cost of capital and long-term financial strategy Chapter 03 61
onwards

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Calculate proportions in capital structure and income statements.
Alpha Beta
Total current liabilities 54,560,000 50.91% 162,000,000 21.83%
Long-term debt 100,000 0.09% 350,000,000 47.17%
Other long-term liabilities 500,000 0.47% 30,000,000 4.04%
Total long-term Liabilities 600,000 0.56% 380,000,000 51.21%
Shareholder’s equity 52,000,000 48.53% 200,000,000 26.95%
Total liabilities and equity 107,160,000 100.00% 742,000,000 100.00%
Earnings before interest and tax 12,000,000 100% 90,000,000 100%
Interest expenses 4,000,000 33% 50,000,000 56%
Profit before Tax 8,000,000 67% 40,000,000 44%
Income Tax 2,000,000 17% 10,000,000 11%
Net Profit 6,000,000 50% 30,000,000 33%
• Financial risk refers to the additional variability of earnings per share and the increased
probability of insolvency that arises when a firm uses fixed cost sources of funds, such as debt
and preferred stock in its capital structure. Use of financial leverage increases the financial risk
of a firm.
• In this scenario, both companies are in the same industry, in the same tax bracket and neither
of them is a financial organization.
• Beta has been able to generate a larger EBIT compared to Alpha, which is approximately 7.5
times the EBIT of Alpha.
• As per the financial structure above, Alpha has not employed much long-term financing
(0.56%) compared to Beta (51.21%).
• On the other hand, 50.91% and 21.83% of assets in Alpha and Beta respectively are financed
from current liabilities.
• As a result, Total Liabilities/ Equity ratio of Alpha is 1.06, whereas that of Beta is 2.71. It is
almost 2.5 times of that of Alpha’s Total Liabilities/ Equity ratio.
• With higher financial leverage, financial risk of Beta is higher than that of Alpha. Beta’s EPS is
negatively affected from this.
• Although financial leverage arising from debt component is low in Alpha, its accounts payables
is almost 90% of its total liabilities. In addition, there is a Rs.4 Million interest expense for
Alpha which accounts for 1/3 of EBIT and can have an adverse effect of the EPS of Alpha.
• This interest expense of Rs. 4 million is incomparable with its long-term liabilities of
Rs.600,000/-. Therefore, this expense could be related to accounts payables and other current
liabilities.

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1.8. Can Alpha benchmark capital structure of Beta? Justify your answer.

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• Beta has employed a debt burden of 51.21% in its financial structure. With its current
liabilities, the total liabilities accounts to be 73.05% of total assets.
• When compared with the financial structure of Alpha whose total liabilities account for
51.47% of total assets, financial leverage and financial risk of Beta is higher than that of
Alpha.
• By considering NI/EBIT, it is observed that Alpha has been able to manage its expenses than
Beta, except for the interest cost.
• Since Alpha’s long-term liabilities are very low and current liabilities are very high, Alpha
can obtain long-term debt and settle current liabilities to an acceptable level.
• Alpha can increase leverage to restructure its total liabilities however not up to the level of
Beta.
• Therefore, Alpha should not benchmark Beta.
1.9. Suggest how Alpha can enhance Return on Equity (ROE) by restructuring the capital
structure of Alpha.

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ROE = ROA × Equity Multiplier

NI Total Assets
ROE = ×
Total Assets Equity
ROE = 5.60% × 2.06 = 11.54%
• Alpha should undertake an item-wise analysis in interest expense as it seems to be a higher

value with a very low level of long-term liabilities. By managing interest expense, Alpha can
enhance ROA and thus ROE.
• The current equity multiplier of Alpha of 2.06 remains at a reasonable level. However, Alpha
should also analyze the composition of current liabilities as it accounts for 90% of total
liabilities.

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(D)
1.10. Company A acquired Company B by paying Rs. 25 million cash which was invested in
money market account generating 10% return. Calculate immediate post-merger
EPS.

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D - Mergers, acquisitions and business valuation Chapter 04 81
onwards
EarningsA + EarningsB - Interest income lost on the investment

Immediate post-merger EPS =
No. of shares
12,000,000 + 1,500,000 - (25,000,000 × 10%)
1,000,000
11,000,000
1,000,000
Immediate post-merger EPS = Rs. 11.00
1.11. If one share of A for two shares of B was offered instead of cash, calculate immediate
post-merger EPS

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New shares issued for B 200,000

New no. of shares 1,200,000
Post-merger earnings 13,500,000
13,500,000
1,200,000
Immediate post-merger EPS = Rs. 11. 25

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PART - II
(A)
2.1 Discuss the similarities of two approaches, the Product life cycle approach and the
Boston Consulting Group’s (BCG) matrix which are used to analyze current status of a
product..

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A - Overview of financial strategy and policy Chapter 01 08
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• The basic product life cycle model shows how sales change as a company develops over time,
whereas, BCG matrix provides a framework for analyzing products according to market
share and market growth rate.
• The similarities of two approaches are as follows;
– The question mark represents the launch stage.
– Growth is the star.
– The maturity stage is used as a cash cow.
– Low-growth, low-marker share dog is described as the declining stage.
2.2 Explain two main responsibilities of a finance manager.

A - Overview of financial strategy and policy Pages/ Page
Chapter 01 08
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• Providing financial information and advice for internal and external users -
This involves preparing statutory financial accounts and providing management
information for decision making, planning and control.
• Managing the treasury function -

This includes raising finance, the management of cash, credit and inventory, foreign
currency management and financial risk management

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2.3 Discuss briefly main financial decisions taken by a financial manager of a company.

A - Overview of financial strategy and policy Pages/ Page
Chapter 01 10
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The Investment Principle (Decision)

Invest in assets and projects that yield a return greater than the minimum acceptable hurdle rate.
The hurdle rate should be higher for riskier projects and should reflect the financing mix used.
i.e. owners funds (equity) or borrowed money (debt). Returns on projects should be measured
based on cash flows generated and the timing of these cash flows; they should also consider both
positive and negative side effects of these projects. Investment decisions are defined to include
not only those that create revenues and profits but also those that save money. Furthermore, the
decisions about how much and what inventory to maintain and whether and how much credit to
grant to customers that are traditionally categorized as working capital decisions, are ultimately
investment decisions. Also, broad strategic decisions regarding which markets to enter and the
acquisitions of other companies can also be considered investment decisions. Establishing the
hurdle rate for evaluating projects and measuring the returns on an investment are also
important.
The Financing Principle (Decision)

The selection of the financing mix (debt and equity) that maximizes the value of the investments
made and matches the financing to nature of the assets being financed is considered here.
Every business, no matter how large and complex, is ultimately funded with a mix of debt and
equity. With a publicly trade firm, debt may take the form of bonds and equity is usually common
stock. In a private business, debt is more likely to be bank loans and an owner’s savings represent
equity. When the optimal financing mix is different from the existing one, the firms will have to
decide on the best ways of getting from where, they are to where they would like to be. At this
point they should keep in mind the investment opportunities that the firm has and the need for
timely responses.
The Dividend Principle (Decision)

The businesses may like to have unlimited investment opportunities that yield returns exceeding
their hurdle rates, but all businesses grow and mature. As a consequence, every business that
reaches a stage in its life when the cash flows generated by existing investments is greater than
the funds needed to take on good investments. At that point, this business has to figure out ways
to return the excess cash to owners. In private businesses, this may just involve the owner
withdrawing a portion of his or her funds from the business. But in a publicly traded corporation,
this will involve either paying dividends or buying back stock.

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(B)
2.4 Comment, if the applicable yield is 12%, should this bond be traded at a discount or
premium?

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Since 12% p.a. yield is greater than the annual coupon rate of 10%, the bond should trade at a
discount.
2.5 Advise, if the bond is trading in the market for Rs. 1100 and applicable yield rate is 8%
, whether you recommend to purchase this bond?

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Value0 = [ I × PVIFAi,n ] + [ M × PVIFi,n ]
1 - (1 + 8%)-5 1,000
Value0 = 100 × ( )+ = Rs.1,079.85
8% (1 + 8%)5
Since the market price of the bond (Rs. 1,100) is greater than the value (Rs. 1,079.85), it is
overpriced. Therefore, it is not recommended to buy the bond.
2.6 Discuss whether you agree with the statement “A short-term bond has lower
reinvestment risk and interest rate risk”.? Justify your answer.

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• The risk to which investors are exposed due to changing interest rates is called the interest
rate risk. The interest rate required on a bond is influenced by the length of time to maturity.
• A short-term bond has less interest rate risk as compared to a long-term bond.
• Reinvestment rate risk is the risk that income will decline when the funds received from
maturing a short-term bond are reinvested.
• On the other hand, this is the possibility that a bond holder/investor will not be able to
reinvest cash flows (e.g. coupon payments) at a rate comparable to their current rate of
return.
• Therefore, a short-term bond exposes the investor to more reinvestment risk.

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(A)
3.1 Calculate component cost of capitals for equity, preferred stock and debt.

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D0 5
ks = = = 12.50%
P 40
D0 5
ke = = = 13.89%
P(1 - F) 40(1 - 10%)
Dps 4
kps = = = 7.41%
P(1 - F) 60(1 - 10%)
kd (1 - t) = kd before tax (1 - t) = 8% (1 - 10%) = 7.20%
3.2 Calculate cost of capital applicable for the project.

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Cost of the project = (ks × Ws ) + (ke × We ) + (kps × Wps ) + (kd (1 - t) × Wd )

Capital Component Proportion (W) Cost (AT) Cost (AT) × W
Retained earnings 10% 12.50% 1.250%
Equity 20% 13.89% 2.778%
Preference shares 20% 7.41% 1.482%
Debt 50% 7.20% 3.600%
Cost of the project (WACC) 9.11%
**Alternative answer
Cost of the project = (ke × We ) + (kps × Wps ) + (kd (1 - t) × Wd )
Capital Component Proportion (W) Cost (AT) Cost (AT) × W
Equity 30% 13.89% 4.167%
Preference shares 20% 7.41% 1.482%
Debt 50% 7.20% 3.600%
Cost of the project (WACC) 9.249%

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(B)
3.3 Calculate Degree of financial leverage, Degree of operating leverage, and Degree of
combined leverage.

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% change in EPS 104.33%

DFL = = = 1.826
% change in EBIT 57.14%
% change in EBIT 57.14%

DOL = = = 1.7142
% change in Sales 33.33%
% change in EPS
DCL = = DFL × DOL = 3.13
% change in Sales
3.4 Interpret your answers for above question

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• When sales increases by 33.33%, variable operating costs also increases by the same
percentage, however fixed variable costs remain same.
• Therefore, EBIT increases by a greater percentage (57.14%) resulting a DOL of 1.7142. This
implies that when sales changes by 1%, EBIT changes by 1.7142%.
• Although sales increases by 33.33%, interest cost and preference dividends do not change.
Tax rate is also the same (25%).
• Therefore, EPS increases by a greater percentage (104.33%) resulting a DFL of 1.826. This
implies that when EBIT changes by 1%, EPS changes by 1.826%.
• The combined result is a DOL of 3.13. This implies that when sales changes by 1%, EPS
changes by 3.13%.

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3.5 If capital structure consists 30% debt amounting Rs 3 million, and cost of equity is 12%,
calculate market value of the firm assuming all available income distribute as dividend.
(Assume company operates at Rs 6 million sales level)

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Market value of firm = Market value of equity + Market value of debt

Dividends
Market value of firm = + Market value of debt
ke
575,000
Market value of firm = + 3,000,000
12%
Market value of firm = Rs. 7,791,666.67
3.6 If the company payout all debt in capital structure, what would be the market value of
the firm if Modigliani and Mille theory holds true. (Assume company operates at Rs. 6
million sales level)

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Market value of levered firm = Market value of unlevered firm + PVITS

Market value of unlevered firm = Market value of levered firm - PVITS
Market value of unlevered firm = 7,791,666.67 - (3,000,000 × 25%)
Market value of unlevered firm = Rs. 7,041,666.67

(A)
4.1 Compute value of ABC Ltd after considering the goodwill at three years’ super profits.
Assume the required rate of return of ABC Ltd is as 15%.

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Rs.
Present earnings 200,000
Fair return on net tangible assets (1,000,000 × 15%) (150,000)
Super Profits 50,000
Goodwill (50,000 × 3) 150,000
Value of ABC (1,000,000 + 150,000) 1,150,000

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4.2 Calculate value of XYZ using Accounting Rate of Return (ARR) method assuming, the
post-acquisition earnings of XYZ after considering synergetic effect is expected to be
Rs. 2.5 million and the expected yield after tax is at 15%.

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Estimated post-acquisition earnings

Post-acquisition value of XYZ =
Expected yield
2,500,000
Post-acquisition value of XYZ =
15%
Post-acquisition value of XYZ = Rs. 16,666,666.67
4.3 Compute synergy of merger using your answer for questions 4.1 and 4.2 above if XYZ
Ltd has no intangible assets.

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Rs.
Post-acquisition value of XYZ 16,666,666.67
Value of XYZ (13,000,000.00)
Value of ABC (1,150,000.00)
Synergy 2,516,666.67
4.4 Distinguish merger and acquisition.

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A merger is a combination of two or more companies in which one or more companies cease to
exist legally and the surviving company continues in operation under its original name An
acquisition is the terminology used to describe a business combination. When two companies
combine generally the acquiring company pays for the acquired business and the acquired
company’s assets and liabilities are transferred to the acquiring company.

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4.5 Describe two defensive tactics you can use to mitigate this situation, if a large company
has made a hostile takeover bid over Paragon Ltd.

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Pre-emptive defenses;
These are generally instituted through the Articles of Association or the Memorandum of
Association of a company/before a company is "in play".
Reactive defenses;
These are defenses which a takeover target can institute during an acquisition/after the company
is "in play".
4.6 Identify pre-emptive defensive tactics could have used by Paragon Ltd to discourage
any takeover attempt.

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• Staggered board – board members are appointed over time

• Super-majority (80%) – requires super majority to approve a takeover
• Poison pill – the disposal of crucial resources or assets when there is a takeover
• Vested interest votes – parties are vested with ability to vote during takeover
• Superior voting shares – certain shares having super majority power during takeover
(A)
5.1 Explain briefly the Transaction exposure? Giving an example from the above scenario.

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E - International corporate finance Chapter 05 103
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• Transaction exposure is the risk involved in possible exchange losses or gains on existing
foreign currency-denominated transactions.
• In other words, it is the sensitivity of the value of foreign currency denominated transactions
to exchange rate fluctuations.
• This may result in varying levels of LKR paid by the company for other raw materials imported
from USA.
• In addition, it may result in varying levels of export income in LKR (after converting USD
received to LKR).
E.g. Current exchange rate of USD 1 = LKR 181 may change over time.
If LKR depreciates from LKR 181/USD to LKR 185/USD, there will be;
- An adverse impact on the value of USD denominated imports
- A favourable impact on the value of USD denominated exports
5.2 Recommend a best suitable derivative to hedge the foreign exchange rate risk of
Malsha International? Justify your answer.

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• Malsha International could enter into a forward contract.

• This is an agreement between two parties Malsha International and a Financial Institution
to exchange one currency for another at some specified future date at an agreed forward
exchange rate now.
• This enables Malsha International to enter into a contract for any amount and term and
secure themselves from unfavorable forex movements in the future.
• Since Malsha International is trading with many currencies, it would be cost effective to go
for a forward hedging with compared to an option hedging, where the company will also
have to pay a premium to get the facility.

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5.3 Advise whether you recommend to Malsha International to enter into a forward
contract to mitigate risk of foreign exchange income with appropriate justification , if
a bank has agreed to forward contract to buy USD at Rs 185 after one year and inflation
rates in Sri Lanka and USA expected to be 5% and 7% respectively.

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• The relationship between expected spot rates and inflation can be drawn through
Purchasing Power Parity (PPP) as follows.
Future value of quote currency
Forward Exchange Rate = Spot Price × ( )
Future value of base currency
(1+rq )n
Forward Exchange Rate = S ×
(1+rb )n
(1+5%)1
Forward Exchange Rate = 181 ×
(1+7%)1
Forward Exchange Rate = LKR 177.62/USD
• To accommodate the differences in the inflation rates between the two countries, USD
should be depreciated by 1.87%. [(1.05/1.07)-1].
• However, the forward rate of USD exhibits an appreciation by 2.21% [(185 – 181)/181].
• Malsha International is exposed to a net inflow of USD 60,000 per month (100,000 –
40,000), i.e. it is a net exporter.
• Therefore, it is beneficial for Malsha International to go for the forward hedge with A Bank
at LKR 185/USD as it would increase the net inflow in terms of LKR.
Net Inflow without Forward = USD 60,000 × 177.62 = LKR 10,657,200
Net Inflow with Forward = USD 60,000 × 185 = LKR 11,100,000
(B)
5.4 Calculate Net Present Value (NPV) of the project using “Foreign currency approach”.

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LKR 25,000,000
Initial investment (INR) = = INR 9,842,519.69
2.54
Year 0 1 2 3
Cash flows (INR) (9,842.52) (Values in INR 000')

3,000 4,000 7,000
PV at 10% (INR) (9,842.52) 2,727.27 3,305.79 5,259.20
NPV (INR) 1,449.74
NPV (LKR) 3,682.34 (1,449.74 × 2.54)
5.5 Advise whether you recommend starting the project?

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Since the NPV of the project converted to LKR is positive, it is recommended to undertake this
project.
5.6 Explain economic exposure with an example from the above scenario.

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• Economic exposure is the change in the value of foreign operations due to unanticipated
fluctuations in the economic conditions.
• In other words, it is the sensitivity of the firm’s cash flows to exchange rate movements.
• If INR depreciates against LKR (or LKR appreciates against INR) in the future, this would
represent an economic exposure for the SL company. As a result, NPV from the project in
India for the SL company will be adversely affected.
*End of the Suggested Solutions*

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INSTITUTE OF CERTIFIED

MANAGEMENT ACCOUNTANTS OF SRI LANKA

SUGGESTED SOLUTIONS Published by CMA Sri Lanka Business School

402 - FSV - Financial Strategy and Valuation

QUESTION NO. 01 [Total 40 Marks]

Relevant Segment & Topic Study Text Reference

Relevant Segment & Topic Study Text Reference

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 2 of 18

Relevant Segment & Topic Study Text Reference

Long Term Debt Preferred Stock

Relevant Segment & Topic Study Text Reference

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 3 of 18

Relevant Segment & Topic Study Text Reference

1.6. Recommend an appropriate strategy to the investor with justifications.

Relevant Segment & Topic Study Text Reference

MPS = Rs. 120 (1,200 M/10M)

Relevant Segment & Topic Study Text Reference

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 4 of 18

Calculate proportions in capital structure and income statements.

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 5 of 18

Relevant Segment & Topic Study Text Reference

Relevant Segment & Topic Study Text Reference

ROE = ROA × Equity Multiplier

• Alpha should undertake an item-wise analysis in interest expense as it seems to be a higher

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 6 of 18

Relevant Segment & Topic Study Text Reference

EarningsA + EarningsB - Interest income lost on the investment

Relevant Segment & Topic Study Text Reference

New shares issued for B 200,000

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 7 of 18

QUESTION NO. 02 [Total 20 Marks]

Relevant Segment & Topic Study Text Reference

2.2 Explain two main responsibilities of a finance manager.

Relevant Segment & Topic Study Text Reference

• Managing the treasury function -

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 8 of 18

Relevant Segment & Topic Study Text Reference

The Investment Principle (Decision)

The Financing Principle (Decision)

The Dividend Principle (Decision)

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 9 of 18

Relevant Segment & Topic Study Text Reference

Relevant Segment & Topic Study Text Reference

Value0 = [ I × PVIFAi,n ] + [ M × PVIFi,n ]

Relevant Segment & Topic Study Text Reference

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 10 of 18

QUESTION NO. 03 [Total 20 Marks]

Relevant Segment & Topic Study Text Reference

kd (1 - t) = kd before tax (1 - t) = 8% (1 - 10%) = 7.20%

3.2 Calculate cost of capital applicable for the project.

Relevant Segment & Topic Study Text Reference

Cost of the project = (ks × Ws ) + (ke × We ) + (kps × Wps ) + (kd (1 - t) × Wd )

Equity 30% 13.89% 4.167%

Preference shares 20% 7.41% 1.482%

Debt 50% 7.20% 3.600%

Cost of the project (WACC) 9.249%

CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 11 of 18

Relevant Segment & Topic Study Text Reference

% change in EPS 104.33%

% change in EBIT 57.14%

3.4 Interpret your answers for above question

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CMA Sri Lanka – May 2020 Examination – SUGGESTED SOLUTION Page 12 of 18

Relevant Segment & Topic Study Text Reference

End of the Suggested Solutions