@ICMA STRATEGIC FINANCIAL MANAGEMENT [S5] STRATEGIC LEVEL-2 WINTER 2018 EXAMINATIONS ae Pakistan Tuesday, the 6th November 2018 Entra Reading Time: 15 Minutes Bara reaing Te Minute Maximum Marks: 100 Roll No. (i) Attempt all questions. (i) Write your Roll No. in the space provided above. (ii) Answers must be neat, relevant and brief. Itis not necessary to maintain the sequence. (iv) Use of non-programmable scientific calculators of any model s alowed. (v) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (vi) In-marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/ char, where appropriate. (vil) DONOT write your Name, Reg. No. or Rall No,, or any irrelevant information inside the answer script (vii) Question Paper must be returned to invigilator before leaving the examination hall. DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME Marks Question No. 1 Proposed Time : 30 Min. | Total Marks : 15 ‘The financial year of the Masroor Limited has just completed by earning revenue of Rs. 16.6 million and expects growth of 7.93% in the next financial year. The cost of sales, during the year, was Rs. 10.13 million and other expenses were Rs.1.44 million, Following is extracted from the statement of financial position of the company: Masroor Limited Statement of Financial Position [Extract] asat year-end Assets Fixed assets 37.0 Inventories 24 Trade receivables 22 Equity and Liabilities ‘Share capital 50 Long-term loan 10.0 Trade payables 19 Bank overdraft 22 Retained earnings 75 Interest rate for long-term loan is 6% and the company pays the tax at the rate of 31%. Following ratios have been forecasted for the next financial year: Gross proft ratio 21% Operating profit ratio 17% Dividend payout ratio 30% Inventory turnover (Days) 110 Trade receivable period (Days) 65 Trade payable period (Days) 75 Interest on bank overdraft is estimated as Rs. 0.140 million for the next financial year. It is also assumed that other information may remain constant during the year. The company operates for 360-day a year Required: {a) Prepare a forecasted statement of profit or loss of Masroor Limited for the next financial year. 06 (b) Prepare a statement of financial position as at year-end for the next financial year. 04 {c) Analyze the forecasted financial performance of Masroor Limited with reference to working capital management. 05, ‘SFMWintr 2078 10f6 PTOQuestion No. 2 Proposed Time : 25 Min. | Total Marks : 15 (a) AKA Limited, manufacturers of ‘Video Games’, are considering the liberalization of its existing credit terms to three of its high net worth clients, Arif Sons, Asad & Co. and Comset (Pvt) Limited. The credit period and likely quantity of Video Games that will be lifted by these clients are as follows: ‘Quantity of Video Games Lifted [Numbers] pered Comset (Pvt) [Days] aritSons Asad &.co, Comet (Pvt 9 500 300 = 30 500 750 - 60 500 1,000 500 20 500 11260 750 Additional Information: “Galing pice por Video Gane Pupeesy 80 Expected contribution (Percentage of seling price) 20% Cost of carrying debtors (Average) 20% Number of days in year 360 Required: Determine the credit period to be allowed to each high net worth client of AKA Limited. {b) Star Limited has received an offer of quantity discount on its order of materials as under: Range of Order Quantity Price [Tone] IRs. per tonne] 1-49 4,800 50-99 4,680 100 - 199 4,580 200 - 299 4,440 300 and above 4,320 Annual requirement for the material is 500 tonne. Ordering cost is Rs, 6,250 per order and the stock holding cost is estimated at 25% of the material cost per annum. Required: Compute the most economical purchase level for Star Limited. Question No. 3 Proposed Time : 25 Min. | Total Marks : 15 (a) Sunshine Limited has invested in a 5-year bond, issued by another company, at the end of 2015, carrying a coupon rate of 12% per annum. The interest payable is on half-yearly basis and the principal amount will be repayable after 6 years i.e. at the end of 2020. The current market yield has fallen to 10% during 2018. Now Sunshine Limited wants to take the advantage of the current scenario (fall in market yield) by selling the bond to any willing buyer. Required: Compute the value of the bond at the end of 2020. Assume par value of each bond as Rs. 5,000. ‘SF winter 2078 20f6 Marks 09 06 07Marks {b) M/s Agha Industries is contemplating a debenture issue series on the following terms: Face value (Rs. per debenture) 100 Terms to maturity (Years) 7 Coupon rate of interest (Per annum) 4-2 years 9% 3-4 years 13% 5-7 years 16% Current market rate of interest on similar debentures (Per annum) 14% The company proposes to price the issue in such a manner that it can yield 15% compounded rate of retum to the investors. Required: Determine the issue price of debentures. Assume redemption value at a premium of 9% on face value. 08 Question No. 4 Proposed Time : 30 Min. | Total Marks : 15 ‘As a Financial Analyst of a company, you have been provided with the following information: Before Initiating Expansion Plan: Rupees Equity shares (Nos) 32,500 Revenue from sales 2,381,500 Average debtors 65,000 Earnings before interests and taxes (EBIT) 450,000 Interest expense 7,500 Dividend on preferred shares 10,000 Credit sales (Days) 23 Expansion Plan: Further funds of Rs. 175,000, to be raised through any of the following three options: © Option-a: Issue of 5,000 equity shares at Rs. 35 each © Option-B: Issue of 15-year maturity bonds at an interest rate of 8.5% © Option-c: Issue of additional preference shares at a rate of 9.5%. Additional Information: + The company pays tax at a rate of 31%. + EBIT, after expansion plan, is expected to increase at Rs 637,000. Required: Being Financial Analyst, the company has sought your advise for the following considerations: (a) What will be the earnings per share (EPS) of the company in each of the three options? 09 {b) What will be the equivalency level of EBIT between two options of additional equity [Option-A] and additional debt [Option-B]? 06 ‘SF winter 2078 30f6 PTOQuestion No. 5 As a Chief Financial Officer (CFO) of Modern analysis: Fixed cost Interest payable per year Sales Dividend per share Combined leverage Operating leverage Required: Calculate the following: (a) Financial leverage {b) Profit/ volume (PIV) ratio Question No. 6 (a) ‘Current sales (Rs. in million) Operating profit - Year-1 and 2 ~ Year-3 and onwards Tax rate (per annum) Weighted average cost of capital (WACC) ‘Short-term investment (market value) (Rs. in milion) Debt (market value) (Rs. in million) Proposed Time : 15 Min. | Total Marks : 10 Textile Limited the following data is available for Rupees 635,000 128,000 1,300,000 2 35 14 Proposed Time : 30 Min. | Total Marks : 15 Target Limited has provided the following data from its financial records: 625.00 12% 14% 31% 13% 5.75 48.39 ‘The company has also provided the following additional information: Years Year-2to4 ‘Year-5 and Onwards Growth in sales 8% 2% [reduction on annual basis] Level Depreciation (Rs. in million) 10.00 _ 2.00 [increase on annual basis] Level * Replacement asset investment is equal to the depreciation amount. + Incremental investment in assets, calculated as percentage of the increase in sales, is as follows: Year 8% Year-2 6% Required: Years 6% Year-4 A% Calculate the value of equity of Target Limited, using free cash flow forecast. {b) The last year performance of Indigenous Limited is as under: ‘Operating profit Asset base Weighted average cost of capital (WACC) ‘SF winter 2078 in million 280 750 8.5% 40f6 Marks 03 07 09Marks However, while performing the horizontal analysis with the competitors in the same industry, it was revealed that a new company, Dr. Shee Limited, registered the following results for the same year: ‘Operating profit Asset base Corporate tax rate is 31% Required: Calculate the value of Indigenous Limited including calculated intangible value (CIV), 06 Question No.7 Proposed Time : 25 Min. | Total Marks : 15 (a) Following data is related to Mohsin Limited Rupes Price per share — Current 90 Price per share — Future market (5-month) 123 Interest rate prevailing (per annum) 8.5% Required: Calculate the theoretical minimum price of S-month forward contrac. 05 {b) Which position on the index future gives a speculator, a complete hedge against the following transactions: 05 (i) The shares of IFS Limited are going to rise. He has a long position on the cash market of Rs. 6 million on IFS Limited. The beta of IFS Limited is 1.50. (ii) The shares of ABM Limited is going to depreciate. He has a short position on the cash market of Rs. 3 million on ABM Limited. The beta of ABM Limited is 0.75. (iii) The share of the GEF Limited is going to be stagnant. He has a short position on the cash market of Rs. 2 million of GEF Limited. The beta of GEF Limited is 0.60. (c) Mr. Naimat purchased 10,000 shares of Silver Limited at Rs. 26 each and obtained a complete hedge of shorting 500 Nifties (future index points in New York Stock Exchange) at Rs. 900 each. He closed out his position at the closing price of the next day at which point of Silver Limited dropped by 2% and the Nifty future dropped by 1.5%. Required: Calculate the overall profit (loss) of Mr, Naimat from above transaction. 05 THE END ‘SF winter 2078 50f6 PTOPresn VAse EET FoR PF 0) Pres NT VALERIE FAERFON AAMT PAG eid ine ae Paice inert ae [wpa pe [ws [ose pa] |'w fw pa Poe [os [ws | me] oe [oe | ae 1 [oer [ose [ox [onms[uer [oa [oows [oar [osm] | 1 Joo [osm |ouca [oss [vow [oe | ns om [oss 2 [oom [ove [our | oes [ow ovr [ores [ores [owe] | 2 | ao] rol aca 7 r7® | vm] oe | ez | 150 3 [oor |ose[oase| ove [ors [ or [ows [ows [oss] [a [ann |asu | 2ra[aerr [aur [ow eat [2a 208 4 [esi [ose [oazs| a7 [ows | oe [onrs | osm [owe] [a [seen] aoe] nsw sara] sro | ser] core [a |20 3 [oer [ase [ores [ase [ama or [os [our [oa] | —s ]aan[ arr | aman [aro | see] aor [cen ain & [ova [ose [are [osm [oree| oso [owen ox [ome] |e [srs | sor sora| aaze[exe | amr] ama ara sean 7 [oss [oan [orn [oss [ost] 04a [oes [oar [oz] |__1 |r| nara | sen] san [som [cae] azo] ao [ses + [oss [aus [oor [asm [oar] oan [oar |oser[ozm| |» [rea [ras |eaa|sra [saw [con] 7 arse + [ose [ousr [ose [asco [owe] ox [os [ozs [owe] |» [asee| nie | ree [oaw [sree [scan] sara a0 iw [ous [ax [oow [as [oss [ose [ows [oa [avee] [Tw [oar [eons rx [ar or [seo [cs [soo [2 FORMULAS Profil volume (PIV) ratio, = —Contbutlon_ 99 3+ Weighted average cost of capital (WACC) Calculated intangible value (CIV) = Post-tax value spread Present value of post-tax value spread W(t = T)ta + Wale + Woy ‘SF winter 2078 6 0f6