Financial Management: Page 1 of 4

FINANCIAL MANAGEMENT
Time allowed- 3:30 hours

Total marks- 100
[N.B. - The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of the
quality of language and of the manner in which the answers are presented. Different parts, if any, of the same question
must be answered in one place in order of sequence.]
Marks
1. 1. Reza Ali has graduated from BUET and dreamed to start his own startup. Suddenly his father who
was a successful entrepreneur in the area of household engineering items died and he became
inheritance of BDT 3,000 mn.
Mr. Pallab who was the business partner of Reza’s father offered him to invest his wealth into his
business with a guaranteed return of 15% per annum. His investment will be entirely paid off at the
end of 6th year along with 7% additional amount on initial investment.
This offer is so lucrative and certain that Reza is hesitant to decide whether he should be given up on
his dream or taking a challenge to pursue his dream. His friend Usha who recently came back to
Bangladesh after completing her post-grad from Harvard came up with the following business plan:
Saudi Arab (KSA) is a very good country for penetrating household engineering items as there are
very few competitions over there. Following data has been gathered based on market research:
Initial investment to set up a manufacturing Company in KSA (Reza Electronics KSA, REKSA.) is:
In Saudi Riyal (SAR) (‘000)
Description Now Year 1
Land 10,000 -
Building 7,500 15,000
Machinery - 20,000
Working capital - 27,500
Production and sales of REKSA will commence in Year 2 and is estimated at 15,000 units. An increase
of 6,000 units is planned to be achieved by the end of Year 3. A further increase of 5,000 units is to be
achieved at the end of Year 4 and then it is expected to remain at the same level for another 2 years until
the operation is totally disposed of to a foreign company, due to expected outdated technology, for an
estimated purchase consideration of USD 6.5 million (after tax realisable value) receivable at the end of
Year 6. The working capital will be realised by REKSA at the end of Year 7, which will be free of tax.
The selling price and variable costs per unit have been estimated to be SAR 6,000 and SAR 3,300
respectively at current prices. Administrative, selling and distribution costs of REKSA will be maintained
at 7.5% of the total contribution each year. Tax allowable depreciation in KSA on machines is at a rate of
20% per annum on the reducing balance method. No other assets will qualify for tax allowable
depreciation. Income tax is payable on tax adjusted profits at a rate of 20%.
REKSA will be managed and controlled from Bangladesh by opening a Company in Bangladesh, Reza
Electronics Bangladesh, REBAN which will be taxed at 22.5%. The operational costs of REBAN will
be met from royalty revenue receivable from REKSA agreed at USD 25,000 per annum, remitted at the
end of each year starting from Year 2 for a period of five years. The administrative and other expenses
of REBAN have been estimated (at current prices) at BDT 1.0 mn in Year 2, BDT 1.5 mn in Year 3
and then at BDT 1.9 mn per year for another 3 years.
Inflation rates per annum and exchange rates for each of the next six years are expected to change in
line with purchasing power parity (PPP).
Bangladesh KSA USA
Current inflation rate 9% 3% 4%
Exchange rates
BDT/USD SAR/USD
Current inflation rate 110 3.75
Entire project will be funded from equity, that is no debt. The current beta factor for the same business
in Bangladesh has been calculated as 1.0. The Saudi operation will have 20% higher risk profile. Reza
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expects an extra 3% of return over his calculated cost of capital based on the Capital Asset Pricing
Model (CAPM) for any local investments, and a further 2% for any investment that is exposed to
exchange rate fluctuations. The risk free rate in Bangladesh is assumed to be 9% and the expected
market risk premium is 3%.
As a full bilateral trade agreement exists between Bangladesh and Saudi Arab, there are no foreign currency
exchange restrictions. Income tax is payable and capital allowance is receivable one year in arrears.
Requirements:
a) i) Calculate the cost of equity (Ke) for local investor; 2
ii) Calculate NPV of proposal made by Mr. Pallab to invest in his business for a guaranteed return; 4
b) Calculate (1) SAR exchange rates (2) Working capital in SAR (3) Depreciation and tax benefit thereon
in SAR (4) Purchase consideration in SAR (5) Royalty income in Taka (6) Royalty cost in SAR. 6
c) i) Calculate the cost of equity for foreign investment; 2
ii) Calculate the accounting profit after tax and Cash profit after tax for KSA operations; 4
d) Calculate NPV of the business proposal made by Usha; 5
e) Advise Reza which proposal he should accept with a view to maximizing his wealth. Also advise
him what qualitative matters he should consider besides the numeric expected results. 4
2. Panama Limited has always maintained a policy of no gearing. Other companies in Panama’s market
sector have average gearing ratios (measured as debt/equity by market values) of 45%, with a maximum
of 55%, and an average interest cover of 4 times, with a minimum of 2.5. The finance director of
Panama is considering raising the BDT 100 crore by either a rights issue or by the company new
borrowing and issuing debentures.
The details of the alternative sources of finance are as follows:
Rights Issue: The 100 crore would be raised by a 1 for 1 rights issue, priced at a discount on the current
market value of Panama’s ordinary shares.
Debt issue: The 100 crore would be raised by an issue of 8% coupon debentures, redeemable at par on
30 June 2029. The gross redemption yield would be based on the current gross redemption yield of
other debentures issued by companies in the industry. One such company is Atlantic Ltd. Details for
Atlantic’s debentures are as follows:
• Coupon 7%
• The current market price on 30 June 2023 is BDT 112 cum interest
• Redemption at par on 30 June 2027
• Tenure is 5 years
Further information regarding Panama:
• The forecast pre-tax operating profit for the year ending 30 June 2023 is 220 million
• The corporation tax rate is 20%
• The current share price at 30 June 2023 is BDT 20 ex-div
• The number of ordinary shares in issue is 100 million
Requirements:
a) Assuming 1 for 1 rights issue is made on 1 July 2023:
i) Calculate the discount the rights price represents on Panama’s current share price. 1
ii) Calculate the theoretical ex-rights price per share. 1
iii) Is the actual share price equal to the theoretical ex- rights price? 1
b) Alternatively, assuming debt is issued on 1 July 2023:
i) Calculate the issue price per debenture and total nominal value of the debentures that will have
to be issued to give a yield to redemption equal to that of Atlantic’s debentures. 3
ii) What is the validity of using the yield to redemption of Atlantic debentures in the above
calculation? 1
c) Calculate the gearing and interest cover ratios of Panama Ltd. Advise Panama’s finance director of
the advantages and disadvantages of raising 100 crore by debt or equity or a combination of the two. 4
d) State the likely reaction of Panama’s shareholders and the stock market. 2
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3. a) How is it possible that dividends are so important, but at the same time dividend policy is
irrelevant? 1
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. 2
c) Despite the theoretical argument that dividend policy should be irrelevant, the fact remains that
many investors like high dividends. If this preference exists, a firm can boost its share price by
increasing its dividend payout ratio. Explain the fallacy in this argument. 2
d) Shofiq owns Neotech stock because its price has been steadily rising over the past few years and
he expects this performance to continue. Shofiq is trying to convince Sarah to purchase some
Neotech stock, but she is reluctant because Neotech has never paid a dividend. She depends on
steady dividends to provide her with income.
i) What preferences are these two investors demonstrating? 1
ii) What argument should Shofiq use to convince Sarah that Neotech stock is the stock for her? 2
iii) Why might Shofiq’s argument not convince Sarah? 2
4. a) SR Noman, CFO of Charming Tourist Ltd., has created the firm's pro forma balance sheet for the next
fiscal year. Sales are projected to grow by 10 percent to Tk. 420 million. Current assets, fixed assets,
and short-term debt are 20 percent, 75 percent, and 15 percent of sales, respectively. Charming Tourist
pays out 30 percent of its net income in dividends. The company currently has Tk. 120 million of long-
term debt and Tk. 48 million in common stock par value. The profit margin is 9 percent.
i) Construct the current balance sheet for the firm using the projected sales figure. 4
ii) Based on Mr. Noman’s sales growth forecast, how much does Charming Tourist need in
external funds for the upcoming fiscal year? 3
iii) Construct the firm's pro forma balance sheet for the next fiscal year and confirm the external
funds needed that you calculated in part (b). 6
b) The Siam Company has an ROE of 13.1 percent and a payout ratio of 40 percent.
i) What is the company's sustainable growth rate? 2
ii) Can the company's actual growth rate be different from its sustainable growth rate? Why or why not? 3
iii) How can the company increase its sustainable growth rate? 2
5. a) A bank has quoted the following rates for dealing Forward Rate Agreements (FRAs):
Bid Offer
3v6 6.59 4.56
It is 24th September and your company wants to fix an interest rate for borrowing US$ 1 million
for three months from 24th December.
Requirement:
What is the payment to be made on the FRA if the company entered a 3 v 6 FRA with a bank,
assuming that interest rates rises to 7.65% from their current level of 4.5% 5
b) ZN Ltd has a fixed rate of loan of Tk. 10 million at 14% , which must be redeemed in one year.
The company is considering an interest rate swap with MM Ltd, which has a floating rate of loan
of the same size at SOFR plus 1%. If the swap goes ahead, MM Ltd will pay ZN Ltd 13% and ZN
Ltd will pay MM Ltd SOFR plus 1.5%. ZN Ltd could issue floating rate debt of SOFR plus 2%
and MM Ltd could issue fixed rate debt at 13.5%
There would be legal fees of Tk. 10,000 for each company if the swap is made.
Requirements:
i) Would the swap benefits ZN Ltd (a) if SOFR is 12% for the next year and (b) if SOFR is 12%
for the next six months, and 10% thereafter? 6
ii) Could an alteration in the terms of the swap make it beneficial to both companies? Any benefits
would be shared equally between them? 4
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6. a) A company has just sold a computerized manufacturing systems to a Japanese car maker for 4,680
million yen receivable in three months' time. The company does not wish to bear the risk of
fluctuating exchange rates and therefore intends to hedge the transaction on the forward exchange
market at the following rates:
Spot 234.46 - 234.78 yen/Tk
Three months forward 2.72 - 2.56 yen premium
Requirement:
What amount of Taka will be received in three months' time? 5
b) Khulna Ltd has various long term investment in the USA

An extract from its balance sheet at 31 December 2022 is as follows. The exchange rate at that date
was Tk. 92/US$
Tk.'000
Bangladesh assets 60,000
Overseas assets: US$ 1 million @ Tk. 92/US$ 92,000
152,000
Bangladesh loan (110,000)
Net assets 42,000
Requirements:
i) Determine the impact on the company's gearing if the exchange rate moved to Tk. 105/US$ and
reduced to Tk. 85/US$. 6
ii) Explain how any increase in gearing caused by exchange rate changes could be hedged by
Khulna Ltd. 4
---The End---
Page 4 of 4

Total marks- 100
Marks
1. a) Bijli Aluminum Limited’s management are contemplating a strategy of diversification in order to
spread the risk inherent in the aluminum industry. They have employed a firm of management
consultants to research the financial viability of investing in shares of companies in the cement industry.
They have received a report from the management consultants containing the following executive
summary:
“Portfolio theory indicates that your ability to spread the unsystematic risk by developing a
portfolio of shares of companies in two industries can only benefit the risk profile of your business.
However, the concern is in relation to the extent to which risk can be diversified, as the coefficient
of correlation between the aluminum and cement industries stands at plus (+.8).”
Requirement:
Assist as a Finance Manager to Bijli Alumunium Limited’s management by preparing a briefing
note which explains the following terms: 6
i) Portfolio Theory
ii) Systematic Risk and Unsystematic Risk
iii) Co-efficient of Correlation (as it relates to the two stock/investment portfolio)
b) The statement shown below have been made in respect of the Dhaka Stock Exchange or of
particular securities traded in that market. Critically comment on each of the following three
statements, clearly explaining any technical terms contained within them or used by you.
i) 'In view of the fact that the market is efficient in the semi-strong form, financial information
released by companies is of no value to investors, because the information is already included
in share prices before it is released'. 4
ii) 'If an investor holds shares in about 20 different companies all of the risk is eliminated and the
portfolio will give a return equal to the risk-free rate'. 4
iii) 'A graph of the daily price of a share looks similar to that which would be obtained by plotting
a series of cumulative random numbers. This shows clearly that share prices move randomly
at the whim of investors, indicating that the market is not price efficient'. 2
2. The directors of ABC limited are considering opening a factory to manufacture a new product. Detailed
forecast of the product’s expected cash flows have been made, and it is estimated that an initial capital
investment of Tk. 2.5 million is required. The company's current (31 December 2022) authorized share
capital consists of 4 million ordinary shares, each with a nominal value of Tk. 0.25. During the last
five years the number of shares in issue has remained constant at 3 million, and the market price per
share at 31 December 2022 is Tk. 1.35 ex-dividend.
The company pays only one dividend each year (on 31 December) and dividends for the last five years
have been as follows:
Year 2018 2019 2020 2021 2022
Dividend per share Tk. 10.0 Tk. 10.8 Tk. 11.6 Tk. 13.6 Tk. 13.6
ABC Limited currently has in issue of Tk. 800,000 8% debentures redeemable at on 31 December
2026. The current market price of these debentures is Tk. 82.50 ex-interest, and the interest is payable
in one amount each year on 31 December. The company also has outstanding a Tk. 900,000 bank loan
repayable on 31 December 2030. The rate of interest on this loan is variable, being fixed at 1.5% above
the bank's base rate. Assume that the current bank’s base rate is 15%.
Requirements:
a) Calculate the weighted average cost of capital (WACC) for ABC Limited as at 31 December 2022 6
b) Explain briefly to the directors of ABC Limited what assumptions they are making if the WACC
calculation in (a) above is used to discount the expected cash flows of the project. 4
c) Describe the practical problems that might be encountered when attempting to compute the WACC
for a large Bangladeshi listed company. 5
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3. Dhaka Limited is a small manufacturing company which has recently completed a major contract in
Europe, as a result of which it will receive €5 million in three months' time. Its directors are worried
that the euro will weaken relative to Taka, and hence affect the company's cash flow. Four possible
approaches have been suggested to deal with the foreign currency exposure.
(1) Do nothing now and convert the €5 million at the spot rate prevailing in three months' time.
(2) Use the forward market to sell €5 million for Tks at today's three month forward rate.
(3) Buy today a three month €5 million put option at a strike price equal to the three month forward
rate. The option will cost Tk. 125,000, which will be paid from the company's surplus cash
currently in a bank deposit account.
(4) Use the money market to cover the position.
The following relevant information has been collected:
(i) The spot rate is Tk. 1/€1.5575 - 1.5625
(ii) The three month forward premium is €0.0047 - €0.0015
(iii) The current bank interest rates per annum are:
Eurozone Bangladesh
Prime lending rate 3.2% 9.0%
Three month deposit rate 2.8% 6.0%
Requirement:
Calculate the effects of each of the four approaches, assuming that the spot rate prevailing in three
months' time is Tk. 1/€1.50 and Tk. 1/€1.70 12
4. Jamil Ahmed invested Tk. 100,000 to set up the following portfolio one year ago.
Asset Cost Beta at purchase Yearly income Value today
A Tk. 20,000 0.80 Tk. 1,600 Tk. 20,000
B 35,000 0.95 1,400 36,000
C 30,000 1.50 - 34,500
D 15,000 1.25 375 16,500
Requirements:
a) Calculate the portfolio beta on the basis of the original cost figures. 4
b) Calculate the percentage return of each asset in the portfolio for the year. 4
c) Calculate the percentage return of the portfolio on the basis of original cost, using income and
gains during the year. 2
d) At the time Jamil made his investments, investors were estimating that the market return for the
coming year would be 10%. The estimate of the risk-free rate of return averaged 4% for the year.
Calculate an expected rate of return for each stock on the basis of its beta and the expectations of
market and risk-free returns. 4
e) On the basis of the actual results, explain how each stock in the portfolio performed relative to those
CAPM-generated expectations of performance. What factors could explain these differences? 4
5. Affordable Housing Limited (AHL) is a Bangladeshi Company that builds affordable housing for sale
and for rent. It currently owns and collects rent from 20,000 rental properties.
AHL is now willing to invest in a project of 2,000 flats at Gazipur. In this regard, an MoU was signed
with Trusted Builders, a reputed builders Company to construct these houses over next 2 years.
Following are details of the projects:
- Land filling and clearance will cost BDT 20 million, payable on 30 June 2023;
- The total contract price for the 2,000 flats is BDT 2.25 billion, which will be payable to Trust
Builders in three equal annual instalments starting on 30 June 2023.
- Out of 2,000 flats 800 will be sold and 1,200 will be rented out (flats are rented out after the year
of construction). Schedule of construction and forecast about sell and renting out is given below:
Year to 30 June
2023 2024 2025
Flats constructed in year 800 1,200 0
Flats sold in year 300 500 0
Flats rented in year ((500+700)) in 2025) 0 500 1,200
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- Only the construction costs relating to the flats for sale are an allowable expense for tax purposes.
Those construction costs are allowable for tax in the year of sale.
- The rent per property will be BDT 120,000 pa. As per past practice, bad debt is estimated to 3%
of rental income.
- The selling price of a flat will be BDT 2,500,000.
- AHL will need to employ 8 new full-time employees to manage the additional rented houses in
the year 2025 and then 10 more employees will be employed in the year 2026. The average salary
per employee will be BDT 500,000 pa.
- It is estimated that the new flats for rent will lead to an increase in general costs equal to 4% of
their rental income before bad debts.
- AHL will need to purchase specialist equipment to ensure the environmental safety and green
energy of the new flats. This will be purchased on 2024 at a cost of BDT 20 million. Because this
equipment has a high rate of obsolescence, it is estimated that it will be sold on 30 June 2026 for
BDT 2 million. The equipment attracts 20% (reducing balance) capital allowances in the year of
expenditure and in every subsequent year of ownership by the company, except the final year. In
the final year, the difference between the equipment’s written down value for tax purposes and its
disposal proceeds will be treated by the company either as a:
✓ balancing allowance, if the disposal proceeds are less than the tax written down value, or
✓ balancing charge, if the disposal proceeds are more than the tax written down value.
Assumptions to be used in calculations:
• Corporation tax will be payable at the rate of 22.5% for the foreseeable future and tax will be
payable in the same year as the cash flows to which it relates.
• All income will be liable to corporation tax.
• Unless indicated otherwise, all costs will be allowable for corporation tax.
• Inflation can be ignored throughout.
• Cost of capital of AHL is 9%.
[PV Factors: Year 1 = 0.917; Year 2 = 0.842; Year 3 = 0.772 & Year 4 - 20 = 6.597]
• All cash flows occur at the end of the relevant financial year.
Investment appraisal:
AHL appraises its capital investments using the net present value approach. For new developments
AHL discounts its future income and costs over a 20-year period.
Requirements:
a) Calculate the net present value of the new flats development project at 30 June 2023 and
recommend whether the company should go for this project. 16
b) Calculate the sensitivity of the decision made in the above case a) to changes in the selling price
per house sold and hence the minimum selling price per house sold that AHL should accept for the
project development to proceed. 4
c) Determine the impact on your advice in a) above if Trust Builders offers to accept a revised
contract price of BDT 2.10 billion payable in full on 30 June 2023. 4
6. a) You are a member of ICAB and working as Strategic Finance Manager in Your Breakfast Friend (YBF)
Limited, a breakfast cereal manufacturer. Currently the Company sells its products through supermarket
and distributor. It’s a listed Company in DSE and CSE. The Capital structure of the Company is:
Ordinary Share, 7% Preference Share, 6% Irredeemable debenture and 4% Redeemable debenture.
You have received an e-mail from CFO which is red as below:
Board of Directors is considering to open a number of retail outlets to sell Company’s products across
the country which will need BDT 200 million. The BDT 200 million required for this investment
would be raised in such a way as not to alter the company’s existing gearing ratio (equity: debt). Our
bank is willing to lend the required debt amount at an interest rate of 8.5% pa.
As you know, we always use a discount rate of 7% when assessing potential investments. However,
the following comments made by directors in last meeting:
Chairman: “Let’s carry on using 7% as the discount rate. We’re being prudent here, as 7% represents
the costliest source of finance that we have, i.e. preference shares. At least that’s a fixed cost, unlike
the ordinary shares.”
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Finance Director: “I don’t think we can ignore the ordinary shares. Can’t we average out the costs of
the various types of capital and use that?”
Marketing Director: “We should use 8.5% as our discount rate as that’s what L&E would charge us
for funding the retail expansion.”
Please be very careful who you share this information as this proposal is likely to have an impact on
Company’s share price.
Requirement:
Discuss the points raised by directors about the discount rate to be used for project appraisal. Make
your recommendations with justification. Explain the ethical implications of CFO’s email for you,
as a member of ICAB. 6
b) Padma & Meghna Plc is a venture capitalist having investment in many Companies of Bangladesh
in different manufacturing business related to real estate. Recently the Company has decided that
it will divest itself from its steel manufacturing subsidiary, Bulbul Steel Mills Limited (BSML)
either by any of the following 3 options:
Option 1: To downsize operations over a period of three years and then shut it down
• Sales revenue for the year to 30 June 2023 was BDT 600 million. For the three years to 30
June 2026 sales volumes are expected to decrease by 12% pa compound. Selling prices will
not change and contribution is expected to be 75% of the selling price.
• The amount invested in working capital on 30 June 2023 was BDT 50 million. This amount
will reduce at the end of each year in line with the reduction in sales volumes. On 30 June 2026
all remaining working capital will be recovered in full.
• On 30 June 2023 BSML’s plant and equipment has a tax written down value of BDT 50 million.
• On 30 June 2026 BSML’s plant and equipment will be sold for an estimated BDT 55 million
(at 30 June 2026 prices).
• The plant and equipment attracts 20% (reducing balance) capital allowances in the year of
expenditure and in every subsequent year of ownership by the company, except the final year.
In the final year, the difference between the plant and equipment’s written down value
for tax purposes and its disposal proceeds will be treated by the company either as a:
o balancing allowance, if the disposal proceeds are less than the tax written downvalue, or
o balancing charge, if the disposal proceeds are more than the tax written down value.
• Redundancy payments on 30 June 2026 will amount to BDT 5 million (at 30 June 2026
prices). This amount is fully allowable for tax.
Option 2: To sell BSML to another company
All the shares in BSML will be sold for BDT 1 billion million before taxation on 30 June 2023.
Assume that this amount is fully taxable.
Option 3: Management Buy Out
The management team will buy the shares of BSML for BDT 1,100 million which will be paid
in three instalments as follows:
• On 30 June 2023 BDT 300 million
• On 30 June 2024 BDT 300 million
• On 30 June 2025 BDT 500 million.
Following information are pertinent to the Padma & Meghna Plc:
- Discount rate used for investment appraisal is 9%
[PV Factors: Year 1 = 0.917; Year 2 = 0.842 & Year 3 = 0.772]
- Corporate tax rate is 22.5%
- Tax is payable in the same year as the cash flows to which it relates
Requirement:
Calculate the present value at 30 June 2023 of each of the three proposed options in which Padma
& Meghna plc could divest itself of BSML. Advise the board of Padma and Meghna plc as to
which of the three divestment options should be chosen. 9
---The End---
Page 4 of 4

Total marks- 100
Marks
1. a) Karnofuli Ltd., a market leader in the cement industry and a listed Company, has been approached
to supply cement for the construction of a mega project. The contract will last for 5 years. The
following data was collected from Karnofuli Ltd.'s most recently published financial statements.
BDT ‘000
Equity Shares (10,000,000 shares) 350,000
14% Preference shares 250,000
12% (Bonds Irredeemable) 200,000
Total 800,000
Estimated investment for financing this project will cost BDT 100 million. 12% Irredeemable
bonds issued at the current market rate would be used to raise the entire amount. Preference share
and bond prices will not change.
The market risk premium for the cement sector is 2.5%, the bond rate for the Bangladesh
government for same tenure (5 years) is 8%, and Karnofuli Ltd. has a beta of 1.2. The current
market price for Irredeemable Bonds of BDT 1,000 nominal value is BDT 920.
The dividend payment policy of Karnofuli Ltd. is to pay a constant dividend, and this policy will
not change in the near future. The most recent dividend was BDT 5 per share. Karnofuli Ltd. pays
tax at 25% rate.
During the last board meeting, Chairman of the Board said that we should reform our Company’s
capital through share buy-back as gearing level is too low and cost of equity is higher than cost of debt.
Requirements:
i) Determine the cost of equity, current share price and current market capitalization of Karnofuli Ltd. 6
ii) Calculate the Weighted Average Cost of Capital (WACC) of Karnofuli Ltd. both before and
after undertaking of this project. 6
iii) State the circumstances when a company may opt for “share buy-back”. 2
iv) Recommend whether the “share buy-back” is a good choice for Karnofuli Limited. Justify
stating the factors that need to be considered for buying back the shares. 6
b) Clear Glass Company sells glass containers. It reported total sales of Tk. 1,580,000, with 60% of
the sales on credit. It takes 60 days to collect accounts receivable. The selling price is Taka 20 per
container while the variable cost is Taka 15 per container. The board is currently investigating a
change in the collection of accounts receivable that is expected to result in a 20% increase in credit
sales and a 10% increase in the average collection period. Bad debts will also increase, from 2%
to 4% of sales. The firm’s opportunity cost on its investment in accounts receivable is 12%. (Note:
Use a 365-day year.
Requirements:
i) Calculate bad debts in Taka for the current and proposed plans. 3
ii) Calculate the incremental bad debts to Clear Glass Company. 1
iii) Would you recommend the proposed plan? Why? 3
c) Modigliani and Miller (MM) on the one hand and Gordon and Lintner (GL) on the other have
expressed strong views regarding the effect of dividend policy on a firm’s cost of capital and value.
Requirements:
i) In essence, what are the MM and GL views regarding the effect of dividend policy on the cost
of capital and stock prices? 2
ii) How does the tax preference theory differ from the views of MM and GL? 2
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iii) How could MM use the information content, or signaling, hypothesis to counter their
opponents’ arguments? If you were debating MM, how would you counter them? 2
iv) How could MM use the clientele effect concept to counter their opponents’ arguments? If you
were debating MM, how would you counter them? 2
2. a) Padma Limited imports raw materials from USA and Europe. In order to hedge for next 6 months,
it enters into 2 option contracts with New Bank Limited.
The details of the option contracts are as follows:
Details Transaction Strike Price/ Spot Rate on Option
Amount Exchange Rate Maturity Date premium
OPTION Bought call option to US$ 75m BDT 107/ USD BDT 105/ USD 3.00%
A buy USD against BDT
OPTION Bought call option to EUR 65m BDT 110/ EUR BDT 112/ EUR 3.5%
B buy Euro against BDT
Requirements:
i) Advice Padma Limited on whether to exercise Option A or Option B on the basis of its
profit/loss. 10
ii) Calculate overall gain/ loss of the hedge. 2
b) Bangla Metal Ltd. got a large contract with a European Company. The Company will pay in Euro
and there will be a credit period of 3 months. Being an accountant, you are worried about this
payment. You are not worried about credit risk rather than for foreign exchange risk due to volatile
nature of Euro and BDT which may cause a loss of substantial amount.
Requirement:
Write a report to CEO describing the points to consider in relation to foreign exchange risk and
available solutions to manage such risks. Your report should cover highlighting the nature (but not
the amount) of cost associated with each of following options:
i) Do nothing and accept the risk 3
ii) Using a forward exchange contract 4
iii) Carrying out a market hedge 4
iv) Buying a currency option 4
1. 3. Purnima RMG group has decided to expand through vertical integration and is considering to invest in
following mutually exclusive textiles:
Liza Textile Shormi Textile
BDT ‘000 BDT ‘000
Annual cash inflows 13,000 32,000
Cost of Machine 33,000 75,000
Scrap value of Machine 1,250 1,750
Expected life of the Project 6 6
Purnima depreciates property using the straight-line approach and its cost of capital is 9% per annum.
Requirements:
2. Calculate followings and advise the Company which projects should be taken based on these
calculations:
a) Each project's accounting rate of return. 4
b) Each project's Net Present Value (NPV). 4
c) Each project’s internal rate of return (IRR). 4
d) Each project’s payback period. 2
Page 2 of 3
4. Sky Air Ltd. is a new airlines maintenance company. A Turkish airline asked the company to take on
a maintenance contract for four years. Sky Air would receive an expected revenue of BDT 55 million
per year from the contract, based on foreign exchange rate between Taka and Turkish Lira. Sky Air
has conducted an in-depth feasibility study for the project at a cost of BDT 1 million. This suggests
that the effective solution would be to construct brand-new maintenance facilities on property that the
corporation already owns but does not actively use.
The new facilities will require a capital investment of BDT 115 million payable in advance. Except for a
BDT 12 m on the sale of the old maintenance facility at the end of the year, there would be no pre-tax
cash flows or efficiency savings in the year after the initial BDT 115m payment while the facility is being
built. Regarding BDT 12 million receipt in Year 1, no tax depreciation considerations are to be made.
In order to maintain Sky Air’s present level of maintenance activities, the new facilities would
thereafter deliver efficiency benefits that would save BDT 2.5 million annually. Additional revenue
will be generated from this new facility which will be BDT 2.7 million in the first year of operations
and increase by BDT 1.5 million annually over the next three of the predicted four-year operating life
of the new facility.
The maintenance facility is expected to be sold for BDT 12 m at the completion of Year 4 of its
operations, with the proceeds being received instantly. The directors plan to charge existing head office
overhead expenditures of BDT 6 million per year along with annual incremental costs during the
facility's operational period of 50% of sales revenue (contract from Turkey plus additional revenue
from the facility.
Company’s cost of capital is 8%. On the first BDT 115 million investment in the factory, 25% tax
depreciation allowances on a reducing basis are accessible immediately. Assume there are enough
profits available elsewhere in the business to utilize all tax benefits at once and in full.
Corporate tax rate is 25% and assumed to be the same during the whole project time. It is presumed
that all tax payments were made at the end of the relevant tax year. The project is estimated to have a
negligible working capital impact.
Requirements:
a) Calculate net present value of the proposed investment and decide whether it should be taken or not. 10
b) What additional factors to be considered before taking final decision on the proposed investment? 2
5. Sunmoon Ltd. is an unlevered firm with expected annual earnings before taxes of Tk. 21 million in
perpetuity. The current required return on the firm’s equity is 16%, and the firm distributes all of its
earnings as dividends at the end of each year. The company has 1.3 million ordinary shares outstanding
and is subject to a corporate tax rate of 35%. The firm is planning a recapitalization under which it will
issue Tk. 30 million of perpetual 9% debt and use the proceeds to buy back shares.
Requirements:
a) Calculate the value of the company before the recapitalization plan is announced. What is the value
of equity before the announcement? What is the value of equity after announcement? What is the
price per share? 4
b) Use the Adjusted Present Value (APV) method to calculate the company value after the
recapitalization plan is announced. What is the value of equity after the announcement? What is
the price per share? 4
c) How many shares will be repurchased? What is the value of equity after the repurchase has been
completed? What is the price per share? 4
---The End---
Page 3 of 3

Total marks- 100
Marks
1. a) Siam’s broker has shown him two bonds. Each has a maturity of 5 years, a par value of Tk 1,000
and a yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annually. Bond B
has a coupon interest rate of 14% paid annually.
Requirements:
i) Calculate the selling price for each of the bonds. 1
ii) Siam has Tk 20,000 to invest. Judging on the basis of the price of the bonds, how many of
either one could Siam purchase if he were to choose it over the other? 1
iii) Calculate the yearly interest income of each bond on the basis of its coupon rate and the
number of bonds that Siam could buy with his Tk 20,000. 1
iv) Assume that Siam will reinvest the interest payments as they are paid (at the end of each
year) and that his rate of return on the reinvestment is only 10%. For each bond, calculate the
value of the principal payment plus the value of Siam’s reinvestment account at the end of
the 5 years. 2
v) Why are the two values calculated in part (iv) different? If Siam was worried that he would
earn less than the 12% yield to maturity on the reinvested interest payments, which of these
two bonds would be a better choice? 2
b) You own stock in the Goodwill Drug Company. Suppose you had expected the following events
to occur last month and following events actually occurred thereafter:
Events expected to occur Events actually occurred
i) The government would announce that real i) The government announced that real
GNP had grown 1.2% during the previous GNP grew 2.3 percent during the
quarter. The returns of Goodwill are previous quarter.
positively related to real GNP.
ii) The government would announce that ii) The government announced that
inflation over the previous quarter was inflation over the previous quarter was
3.7%. The returns of Goodwill are 3.7 percent.
negatively related to inflation.
iii) Interest rates would rise 2.5 percentage iii) Interest rates rose 2. 1 percentage points.
points. The returns of Goodwill are
negatively related to interest rates.
iv) The president of the firm, considered an iv) The president of the firm died suddenly
asset to the firm, would announce his of a heart attack.
retirement, effective at the end of six
months from the announcement day.
v) Research data would conclusively prove v) Research results in the efficacy testing were
the efficacy of an experimental drug. not as strong as expected, must be tested for
Completion of the efficacy testing means another six months, and the efficacy results
the drug will be on the market soon. must be resubmitted to the FDA.
vi) Lab researchers had a breakthrough with
another drug.
vii) A competitor announced that it will
begin distribution and sale of a medicine
that will compete directly with one of
Goodwill’s top-selling products.
Requirement:
Discuss how each of the actual occurrences affects the return on your Goodwill stock. 7
Page 1 of 5
c) You have recently joined a local company as Treasury Manager. During the discussion in the
orientation session with the Chairman of the company, he told you “Despite having profit, our
company has been experiencing cash flow difficulties for recent years”. What are the reasons
behind and how can you overcome that? Answer briefly with major points. 3
d) You were asked by the Finance Director to prepare a brief write-up on the types of dividend
policies and the factors that generally influence those dividend policies. Write a memo to respond
to his queries. 4
2. a) In Gazipur, there is a long-standing clothing factory called New Fashion. In order to invest in
cutting-edge production technologies, the company requires Tk. 250 million. The company has
secured Tk. 250 million in 10% irredeemable loan stocks from a local entrepreneur as growth
funding. The company's management would wish to provide feedback on the impact this new
funding source would have on its finance costs and guidelines on assessing future investments.
Following are extracts from New Fashion's most recent Statement of Financial Position that has
been publicly released:
Statement of
Financial Position
Extracts as at 31
December 2022
Equity Attributable to Equity Holders Tk. 000’s

60,000,000 Ordinary shares @ Tk. 10 each 600,000
8% Preference Shares @ Tk. 100 each 400,000
Other Reserves (Retained Revenue Reserves) 1,600,000
2,600,000
Non-Current Liabilities
10% Debentures (Redeemable 31/12/2024) 250,000
• Ordinary shares are currently trading at Tk. 27.50 per share cum-div.
• The ex-dividend market value of preference shares is Tk. 122.
• A recent board meeting agreed on an ordinary dividend of Tk. 2.50 per share. On 14th February
2023, this dividend will be paid out.
• New Fashion's average annual rate of growth in dividends is projected to be 10% for the
foreseeable future.
• Debentures are currently trading at 92% of their par value. Interest on debentures is paid
annually. All payments for the fiscal year ending 31/12/2022 have been made in full.
• Preference dividends are paid annually.
• Corporation tax of 25% is charged on profits in the fiscal year in which they are reported.
Requirements:
Develop a short overview for the Board of New Fashion which:
i) Estimates the company’s current weighted average cost of capital. 6
ii) Calculates the company's revised average cost of capital for the scenario in which the Tk. 250
million irredeemable loan stock is used to finance the proposed investment. 4
b) Tulip resort is aggressively pursuing an organic growth strategy but is beginning to be somewhat
frustrated by the slow pace of growth. It has decided to consider acquisition targets. It has identified
a cox’s bazar based resort that is willing to discuss a potential takeover if the price of BDT 6 billion
(in cash and/or in shares) is met. Tulip Resort’s Investment department has confirmed that there
are no significant concerns to obstruct the takeover. Tulip’s Board of Directors accepts the
proposal. The only decision to be made is whether the purchase consideration should be in cash
and/or share.
Requirement:
As a Finance Manager, prepare a briefing note for the Board of Tulip Resort outlining the
attractions and drawbacks of both cash and share as purchase consideration. 4
Page 2 of 5
3. a) Five wealthy individuals have put Tk.20 million (m) each at your disposal to invest for the next three
years. The funds can be invested in one or more of four specified projects and/or in the money market.
The projects are not divisible and cannot be postponed. The investors require a minimum return of
24% over the three years.
Details of the possible investments are:
Initial cost Return over three Expected standard
(Tk.m) years (%) deviation of returns
over three years (%)
Project 1 60 22 7
Project 2 40 26 9
Project 3 60 28 15
Project 4 60 34 13
Money market minimum 10 18 5
Correlation co-efficient of returns (over the three years):
Between Projects Between Projects and Between Projects and

market portfolio money market
1 and 2 0.70 1 and market 0.68 1 and money market 0.40

2 and 4 0.57
3 and 4 0.76
Between the money market and the market portfolio 0.40

The risk-free rate is estimated to be 16%, the market returns 27% and the variance of returns on
the market 100% (all for the three-year period).
Requirements:
i) Justify with workings how Tk.100 million should be invested using:
• Portfolio theory; 3
• The Capital Asset Pricing Model (CAPM). 3
ii) Why Portfolio Theory and CAPM might give different decisions? 2
iii) When does a stock portfolio only contain systematic risk? 2
iv) What is ‘Limit Order’ using share market terminology? 1
v) Define the term ‘Bond-yield-plus premium approach’. 1
b) How do the Price/Earnings (P/E) ratio and the market/book (M/B) ratio provide an assessment
about the firm’s return and risk? 2
c) A UK company is due to receive 500,000 Northland dollars in six months’ time for goods exported.
The company decides to hedge its currency exposure by using the forward market. The short-term
interest rate in the UK is 6% p.a and the equivalent rate in Northland is 7.5%. The spot rate of
exchange is 2.5 Northland dollars to the pound.
Requirements:
Assuming that the forward rate of exchange simply reflects the interest differential in the two
countries (i.e. it reflects the interest rate parity analysis of forward rates), calculate how much the
UK company would earn gain or losses as a result of the hedging transaction if, at the end of the
six months, the pound in relation to the Northland dollar, has:
i) gained 4%; 2
ii) lost 2%; 2
iii) remained stable. 2
Page 3 of 5
4. Organic Spices World (OSW), your client, is based in Keraniganj who manufactures organic spices.
The spices come in 15 boxes per case. OSW spends Tk. 100 on each box's production, packaging,
promotion and other additional costs.
The company recently attended in International Trade Fair where a potential Lebanese client voiced
its interest in acquiring 10,000 cases of the spices ahead of the Eid Festival 2023. Assume the date is
December 1, 2022. The potential Lebanese client has indicated that it is willing to place an order
provided that:
• It is sold at LP 35,000 per case and invoiced in Lebanese Pound (LP), the native currency.
• It can accept extended credit terms as it cannot pay for the produce for six months (until after
the produce has been sold).
OSW is eager to consent to the terms set forth by the prospective Lebanese company, seeing as how
this transaction would offer a foundation for entry into the Lebanese market. Despite that, the
management is concerned about the proposal's possible credit risk and foreign currency risk.
You contacted OSW’s bankers about the rates for forward exchange contracts, and you were provided
with the following figures:
Forward Rates (Quoted by Bank)

Term LP/Tk.
Spot LP 15 LP 17
Three Month Forward .70 LP Premium .80 LP Premium
Six Month Forward .90 LP Premium 1.00 LP Premium
Ignore taxation and transaction costs.
Requirements:
Draft a briefing memo with the following recommendations to OSW’s management:
a) The transaction's estimated profit if the foreign exchange rate risk is hedged with forward exchange
contracts. 7
b) Outline three suggestions for OSW to reduce the credit risk in relation to the proposed contract. 3
5. N Ltd is a listed company which is seen as a potential target for acquisition by financial analysts. The
value of the company has therefore been a matter of public debate in recent weeks and the following
financial information is available:
Year 2018 2019 2020 2021

Profit after tax (Tk.m) 8.5 8.9 9.7 10.1
Total dividends (Tk.m) 5.0 5.2 5.6 6.0
Statement of financial position information for 2021:
Tk.m Tk.m
Non-current assets (A) 91.0
Current assets (B):
Inventory 3.8
Trade receivables 4.5 8.3
Total assets (A+B) 99.3
Equity finance (C):

Ordinary shares 20.0
Reserves 47.2 67.2
Non-current liabilities (D):
8% bonds 25.0
Current liabilities (E) 7.1
Total liabilities (C+D+E) 99.3
Page 4 of 5
The shares of N Ltd have a nominal (par) value of Tk 0.50 per share and a market value of Tk.4·00
per share. The cost of equity of the company is 9% per year. The business sector of N Ltd has an
average price/earnings ratio of 17 times. The 8% bonds are redeemable at nominal (par) value of Tk100
per bond in seven years’ time and the before-tax cost of debt of N Ltd is 6% per year. The expected
net realizable values of the non-current assets and the inventory are Tk.86·0m and Tk. 4·2m,
respectively. In the event of liquidation, only 80% of the trade receivables are expected to be
collectible.
Requirements:
a) Calculate the value of N Ltd using the following methods:
i) Market capitalization (equity market value); 2
ii) Net asset value (liquidation basis); 3
iii) Price/earnings (P/E) ratio method using the business sector average price/earnings (P/E) ratio; 2
iv) Dividend growth model using:
• The average historic dividend growth rate; 2
• Gordon’s growth model. 2
b) Suppose N Ltd is financed entirely by issued share capital of 8 million ordinary shares of Tk.10
per share, market value of which is Tk.15 per share. N Ltd recently declared a right issue (1 for 4
of Tk.12 per share) of ordinary shares. Calculate the theoretical ex-right price per share. 2
c) Briefly explain the five drivers that influence option value. 5
6. Bangladesh Automobiles Limited has completed R&D on a new CNG run three wheeler which will
be eco-friendly and consuming less energy. The Company has already spent Tk. 60,000,000 and is
committed to spend a further Tk. 52,500,000 within a few months. Following information are placed
to the Board of Directors to take a decision whether the Company will go for producing the new vehicle
or not:
(i) A machine will be needed to purchase immediately amounting Tk. 705,000,000 with a
residual value of Tk. 120,000,000 at the end of four years.
(ii) Fixed costs of the production of new paint would be Tk. 146,250,000 per year. However, this
includes a depreciation charge in respect of the machinery of Tk 11,250,000 per year and a
charge allocated to represent a fair share of the fixed costs of the business as a whole of Tk.
37,500,000 per year.
(iii) The three wheelers are expected to sell for Tk. 1,500,000 each and the marketing department
believes that the business can sell 1,200 vehicles per year over the next four years.
(iv) The variable costs of production are Tk. 1,200,000 per vehicle.
(v) If the business decides not to produce the vehicle it can sell the patents immediately for Tk.
150,000,000.
The company has a cost of capital of 12%.
Requirements:
a) Calculate the net present value of producing and selling the new vehicle versus the alternative of
selling the patent. 6
b) Carry out a separate sensitivity analysis to show by how much the following factors would have
to change before the proposal to produce and sell the new vehicle has an NPV of zero:
i) The initial outlay on the machinery; 1
ii) The discount rate; 4
iii) The residual value of the machinery; 1
iv) The annual net operating cash flows 1
c) Briefly evaluate your findings in (a) and (b) above 4
---The End---
Page 5 of 5

Total marks- 100
[N.B – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of
the quality of language and of the manner in which the answers are presented. Different parts, if any, of the same
question must be answered in one place in order of sequence.]
Marks
1. a) A US company is planning to set up a subsidiary company in Bangladesh. The initial project
cost (consisting of Plant and Machinery including installation) is estimated to be US$ 750
million. The net working capital requirements are estimated at US$ 75 million. The company
follows straight line method of depreciation. Presently, the company is exporting three
million units every year to Bangladesh at a unit price of US$ 120, its variable cost per unit
being US$ 60.
The Chief Financial Officer has estimated the following operating cost and other data in
respect of proposed project:
• Variable operating cost will be US $ 30 per unit of production;

• Additional cash fixed cost will be US $ 45 million p.a. and project's share of
allocated fixed cost will be US $ 4.5 million p.a. based on principle of ability to
share;
• Production capacity of the proposed project in Bangladesh will be 7.5 million units;
• Expected useful life of the proposed plant is five years with no salvage value;
Existing working capital investment for production & sale of three million units
through exports was US $ 22.5 million;
• Export of the product in the coming year will decrease to 2.25 million units in case
the company does not open subsidiary company in Bangladesh, in view of the
presence of competing MNCs that are in the process of setting up their subsidiaries
in Bangladesh;
• Applicable Corporate Income Tax rate is 25%, and
• Required rate of return for such project is 12%.
Requirement:
CALCULATE the Net Present Value (NPV) of the proposed project assuming that: 12
❖ there will be no variation in the exchange rate of two currencies; and
❖ all profits will be repatriated, as there will be no withholding tax. Present Value
Interest Factors (PVIF) @ 12% for five years is as below:
Year 1 2 3 4 5
PVIF 0.8929 0.7972 0.7118 0.6355 0.5674
b) Fossil Fuel Ltd. has six project investment opportunities in the pipeline. The estimated cash
flows (BDT Million) of the identified projects are as follows. Assume all projects will cease
in 2025.
Projects 2022 2023 2024 2025

AA (84) (24) 72 84
AB (96) 48 54 60
AC (60) 42 48 54
BA (84) 48 60 72
BB (72) (60) 90 60
BC (90) (48) 120 84
Notes:
(1) Cost of capital of the firm is 12%, (2) Size of any project could be adjusted to the
availability of funds, (3) Capital available for the investment in 2022 is BDT 360 million
only (4) No residual value, (5) Ignore income tax.
Page 1 of 5
Requirements:
i) Determine the projects that should be undertaken by the company if the capital available 5
for investment in 2022 is limited to BDT 360 million, and no such limitation in
subsequent years.
ii) If the projects are indivisible instead of adjusting the available funds given in Note 2 i.e. 2
projects have to be accepted in their entirety or not at all, explain strategies available to
improve the outcome of the fund availability.
c) Plant Ltd. is considering making an offer to purchase Palmer Crop. Plant’s vice president of
finance has collected the following information:
Plant Palmer
Price earnings ratio 15 10
Shares outstanding 1,500,000 750,000
Earnings Tk 4,200,000 960,000
Dividends Tk 1,050,000 470,000
Requirements:
Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow
at a constant rate of 4 percent each year. Plant management believes that the acquisition of
Palmer will provide the firm with some economies of scale that will increase this growth rate
to 6 percent per year.
i) What is the value of Palmer to Plant? 3
ii) What would Plant’s gain be from this acquisition? 2
iii) If Plant were to offer Tk. 20 in each share of Palmer, what would the NPV of the 2
acquisition be?
iv) What is the most Plant should be willing to pay in cash per share for the stock of Palmer? 2
v) If Plant were to offer 225,000 of its shares in exchange for the outstanding stock of 3
Palmer, what would the NPV be?
vi) Should the acquisition be attempted? If so, should it be as in (c) or as in (e)? 1
vii) Plant’s outside financial consultants think that the 6 percent growth rate is too 3
optimistic, and a 5 percent rate is more realistic. How does this change your previous
answers?
2. a) A Bangladeshi company has today invoiced sales to a Japanese company in Yen, payment
being due 2 months from the date of invoice. The invoice amount is ¥ 30,000,000, and today's
spot rate between BDT and Yen is BDT/¥ 1.4185 -1.4905. It is expected that Yen will be
stronger by about 6% over the 2-month period, and in order to safeguard the BDT proceeds
from the sale, the company is interested in taking appropriate action either through the
foreign exchange market or the money market.
The 2-month borrowing rate for Japanese Yen is 7.5% whereas the 2-month deposit rate
quoted by the company's banker for BDT is 12%. The BDT/¥ two-month forward exchange
rate is quoted at 1.3755-1.4475.
Requirements:
i) Evaluate the two alternative courses of action available to the company, and advise the 7
company as to which course of action should be followed.
ii) “Currency risk emerges in three different forms linked to three different exposures a firm 3
could face due to direct or indirect business operations across national boundaries that
involve foreign currencies”.
Explain Three different forms of currency risks arising out of three different exposures.
b) Your client J Limited expects to win a tender for a contract to supply tables for South African
schools. The tender will be for the supply of 40,000 tables in three months time and a further
60,000 tables in nine months time. The tender price was quoted at 750 South African Rand
(ZAR) per table. If J Limited wins the tender, the South African schools department will pay
for the tables in South African Rand three months after the receipt of each batch of tables.
J Limited has sourced the tables in Australia. If they are successful in winning the tender
their Australian supplier will charge $100 (Australian) per table. All tables will be dispatched
Page 2 of 5
directly to South Africa. The Australian supplier has agreed that full payment (for all tables)
will be made by J Limited in 12 month’s time.
You have researched the relevant exchange rate information which is summarised in the
following table:
Exchange Rates ZAR/€ Aus $/€
Spot 12.5 13 1.9 1.95
3 Month Forward 30 cent premium 32 cent premium 10 cent premium 15 cent premium
Your bank has quoted the following standardised currency options rates;
Option Type Exercise 6 Month 9 Month 12 Month Contract Size

Price Premium Premium Premium
ZAR Put 12 0.25 0.4 0.55 500,000 ZAR
Aus $ Call 2 0.4 0.6 0.8 100,000 Aus $
Each premium is quoted in €s per 100 units of the relevant foreign currency.
Requirements:
i) If J Limited is successful in winning the tender, advise on the profit it will secure if the 4
foreign exchange risk is hedged using the forward exchange market.
ii) Determine the profit on the contract if the foreign currency transaction risk relating to all 4
potential transactions is hedged using standardised currency options.
3. Giant Auto Corporation manufactures automobiles, vans, and trucks. Among the various Giant
Auto plants around the Toni Gazipur is the Denver Cover Plant. Coverings made primarily of
vinyl and upholstery fabric are sewn at the Denver Cover Plant and used to cover interior seating
and other surfaces of Giant Auto products.
Rahath is the plant manager for Denver Cover. The Denver Cover Plant was the first Giant Auto
plant in the region. As other area plants were opened, Rahath, in recognition of his management
ability, was given responsibility for managing them. Rahath functions as a regional manager,
although the budget for him and his staff is charged to the Denver Cover Plant.
Rahath has just received a report indicating that Giant Auto could purchase the entire annual
output of Denver Cover from outside suppliers for Tk. 35 million. Rahath was astonished at the
low outside price because the budget for Denver Cover's operating costs for the coming year was
set at Tk.52 million. Rahath believes that Giant Auto will have to close operations at Denver
Cover in order to realize the Tk. 22 million in annual cost savings.
The budget for Denver Cover's operating costs for the coming year is presented below. Additional
facts regarding the plant’s operations are as follows:
❖ Due to Denver Cover's commitment to use high-quality fabrics in all its products, the
Purchasing Department was instructed to place blanket purchase orders with major
suppliers to ensure the receipt of sufficient materials for the coming year. If these orders
are canceled as a consequence of the plant closing, termination charges would amount to
20% of the cost of direct materials.
❖ Approximately 800 plant employees will lose their jobs if the plant is closed. This includes
all of the direct laborers and supervisors as well as the plumbers, electricians, and other
skilled workers classified as indirect plant workers. Some would be able to find new Jobs
while many others would have difficulty. All employees would have difficulty matching
Denver Cover's base pay of Tk9.40 per hour, which is the highest in the area, A clause in
Denver Cover's contract with the union may help some employees; the company must
provide employment assistance to its former employees for 12 months after a plant closing.
The estimated cost to administer this service would be Tk1.5 million for the year.
❖ Some employees would probably choose early retirement because Giant Auto has an
excellent pension plan. In fact, Tk. 3 million of the annual pension expense would continue
whether Denver Cover is open or not.
Page 3 of 5
❖ Rahath and his staff would not be affected by the closing of Denver Cover. They would
still be responsible for administering three other area plants
❖ Denver Cover considers equipment depreciation to be a variable cost and uses the units-
of-production method to depreciate its equipment; Denver Cover is the only Giant Auto
plant to use this depreciation method. However, Denver Cover uses the customary straight-
line method to depreciate its building.
DENVER COVER PLANT

Annual Budget for Operating Costs
Materials Tk. 14,000,000
Labor:
Direct Tk. 13,100,000
Supervision 900,000
Indirect plant 4,000,000 18,000,000
Overhead:
Depreciation – equipment 3,200,000
Depreciation – building 7,000,000
Pension expense 5,000,000
Plant manager and staff 800,000
Corporate allocation 4,000,000 20,000,000
Total budgeted costs Tk. 52,000,000
Requirements:
a) Without regard to costs, identify the advantages to Giant Auto Corporation of continuing to 1
obtain covers from its own Denver Cover Plant.
b) Giant Auto Corporation plans to prepare a financial analysis that will be used in deciding
whether to close the Denver Cover Plant. Management has asked you to identify.
i) The annual budgeted costs that are relevant to the decision regarding closing the plant 3
(show the Taka amounts).
ii) The annual budgeted costs that are not relevant to the decision regarding closing the plant 3
and explain why they are not relevant (again show the Taka amounts).
iii) Any nonrecurring costs that would arise due to the closing of the plant and explain how 2
they would affect the decision (again show any Taka amounts).
c) Looking at the data you have prepared in (b) above, should the plant be closed? Show 1
computations and explain your answer.
d) Identify any revenues or costs not specifically mentioned in the problem that Giant Auto 2
should consider before making a decision.
4. a) Micromax, a computer components company, is considering the introduction of an early
settlement discount for its customers. The company’s current credit terms are 30 days net
and on average customers settle within this period. The marketing manager considers that to
introduce a cash discount would increase the company’s sales and market share.
Micromax is considering offering a cash discount of 2 per cent for payment within 10 days.
Credit sales are currently found Tk 15m and the marketing team has estimated that these
would increase by 5 per cent if a 2 per cent discount was offered. Variable costs are estimated
at 60 per cent of sales.
Marketing surveys indicate that 70 percent of customers would avail themselves of the
discount. It is estimated that the average collection period would be reduced to 20 days and
bad debts would also be reduced from 2 per cent to 1.5 per cent of sales. The company’s
opportunity cost of capital is currently 15 per cent.
Requirement:
Determine if the proposal is worthwhile and values enhancing, so to assess the effect on the 9
company’s existing profits and cash flows by comparing the estimated incremental income
with the estimated incremental costs.
b) Assume that it is now January 1, 20x5, and you will need Tk. 1,000 on January 1, 20x9. Your
bank compounds interest at an 8% annual rate.
Page 4 of 5
i) How much must you deposit on January 1, 20x6, to have a balance of Tk. 1,000 on 1
January 1, 20x9?
ii) If you want to make equal payments on each January 1 from 20x6 through 20x9 to 2
accumulate the Tk. 1,000, how large must each of the four payments be?
iii) If your father were to offer either to make the payments calculated in part (ii) or to give 2
you a lump sum of Tk. 750 on January 1, 20x6, which would you choose?
iv) If you have only Tk. 750 on January 1, 20x6, what interest rate, compounded annually, 1
would you have to earn to have the necessary Tk. 1,000 on January 1, 20x9.
v) Suppose you can deposit only Tk. 186.29 each January 1 from 20x6 through 20x9, but 2
you still need Tk. 10,000 on January 1, 20x9. What interest rate, with annual
compounding, must you seek out to achieve your goal?
vi) To help you reach your Tk. 1,000 goal, your father offers to give you Tk. 400 on January 2
1, 20x6. You will get a part-time job and make six additional payments of equal amounts
each six months thereafter. If all of this money is deposited in a bank that pays 8%,
compounded semiannually, how large must each of the six payments be?
5. a) Under what two assumptions can we use the dividend growth model to determine the value 6
of a share of stock? Comment on the reasonableness of these assumption.
b) Components Manufacturing Corporation (CMC) has an all-common-equity capital structure.
It has 200,000 shares of Tk. 2 par value common stock outstanding. When CMC's founder,
who was also its research director and most successful inventor, retired unexpectedly to the
South Pacific in late 2020, CMC was left suddenly and permanently with materially lower
growth expectations and relatively few attractive new investment opportunities.
Unfortunately, there was no way to replace the founder's contributions to the firm.
Previously, CMC found it necessary to plow back most of its earnings to finance growth,
which averaged 12% per year. Future growth at a 5% rate is considered realistic, but that
level would call for an increase in the dividend payout. Further, it now appears that new
investment projects with at least the 14% rate of return required by CMC's stockholders (kg
= 14%) would amount to only Tk 800,000 for 2021 in comparison to a projected Tk.
2,000,000 of net income. If the existing 20% dividend payout were continued, retained
earnings would be Tk. 1.6 million in 2021, but as noted, investments that yield the 14% cost
of capital would amount to only Tk. 800,000.
The one encouraging factor is that the high earnings from existing assets are expected to
continue, and net income of Tk. 2mn is still expected for 2021. Given the dramatically
changed circumstances, CMC's management is reviewing the firm's dividend policy.
Requirements:
i) Assuming that the acceptable 2021 investment projects would be financed entirely by 2
earnings retained during the year, calculate DPS in 2021 if CMC follows the residual
dividend policy.
ii) What payout ratio does your answer to part (i) imply for 2021? 2
iii) If a 60 percent payout ratio is maintained for the foreseeable future, what is your estimate 3
of the present market price of the common stock? How does this compare with the market
price that should have prevailed under the assumptions existing just before the news
about the founder’s retirement? If the two values of Po are different, comment on why.
iv) What would happen to the price of the stock if the old 20 percent payout were continued? 3
Assume that if this payout is maintained, the average rate of return on the retained
earnings will fall to 7.5% and the new growth rate will be 6%.
---The End---
Page 5 of 5
Total marks- 100
Marks
1. a) Your friend Salman owns and operates Craft Catering, a medium sized catering service business,
which has supply contracts with leading airlines, local offices and supermarket chains. It supplies
80% of its sales on credit.
The pressures of managing substantial business growth in recent years have resulted in a deterioration
on credit management and debtor collection procedures. The average collection period has
consequently slipped from 30 days to 70 days, and bad debts have risen to one percent of credit sales.
The business is currently relying on a bank overdraft, at an interest rate of 8%, to finance its debtors.
Salman has heard about factoring and is considering contracting out the entire credit management
function to the factoring services arm of his local bank. The factor has quoted terms of a
prepayment of 75% of the amount invoiced. The balance of 25%, less fees of 1.5% of credit sales,
will be paid over to the company when the customer pays the factor. The factor insists all customer
accounts will be collected within the normal 30-day credit period, and that bad debts will be
eliminated. Financing charges on the monies advanced will be at 9% per year.
Sales for Crafting Catering for next year are projected at Tk 8mn. The company is currently
spending Tk 20,000 per year on administering its sales ledger and credit control systems.
Requirement:
You are required to advise Salman whether he should accept the factoring arrangement. Assume a
365-day year. 9
b) Energy Systems, a company which designs and manufactures sophisticated electronic energy
control systems, has experienced a period of rapid growth in recent years. The directors will soon
meet to discuss the company’s financial plan for the next five years. A key item on the agenda for
the meeting is the discussion of the company’s dividend policy over the planning period.
The Managing Director has suggested that the following dividend policies should be considered:
1. Maintain the same dividend payout ratio as in the current year; or
2. Increase the dividend per share by a constant 20% per year.
The Managing Director’s objective is to avoid any reduction in dividends.
The Company has ambitious growth plans and based on the company’s strategic business plan, the
finance director has prepared the following forecast financial data:
Year Forecasted EPS (Tk)
Current 9.8
1 11.9
2 10.1
3 13.3
4 14.5
5 17.4
It is approaching the end of the current financial year and the directors are proposing a final
dividend of Tk 2.9 per share. An interim dividend of Tk 1.02 per share has already been paid.
Requirements:
i) As an assistant to the finance director, you have been asked to calculate the dividend per share
(DPS) and the dividend payout ratios for each of the two policies over the five years period
and comment on your findings.
Based on the information provided, state in your answer which policy, if any, you consider
financially feasible and give your reasons. 7
ii) The finance director has now determined that, in order to be able to finance its planned
investment programme over the five years, the company will need to retain at least 70% of its
earnings in years 1 to 3 and at least 50% in years 4 to 5.
Show how this is likely to affect the proposed dividend policies over the five-year period. Assuming
the directors do not wish to raise additional financing, indicate the maximum dividend payable. 7
Page 1 of 5
2. BCC Limited wishes to estimate its cost of capital for use in analysing projects that are similar to its
existing projects. The following figures have been extracted from their most recent accounts:
BDT’000 BDT’000
Fixed assets 42,000
Investments 7,000
Current Assets 20,000
Less - current liabilities 15,500
4,500
53,500
Issued - 500,000 @ BDT2 1,000

Reserves 29,250
Shareholders’ funds 30,250
6% Irredeemable Debentures 12,000
7% Preference Shares 10,000
Deferred taxation 500
Corporation Tax 750
53,500
The current market value of BCC Ltd.’s ordinary shares is BDT 48.00 per share cum-dividend. BCC’s
beta is 1.2, the risk-free rate is 2 percent, and the return on the ISEC index (the market proxy) is 10
percent. An annual dividend of BDT 3,000,000 is due for payment shortly. The 6% debentures are
irredeemable and are trading at a current market value of BDT 110.00, a BDT 10 premium above their
issue price of BDT 100. Semi-annual interest of BDT 3 per debenture has just been paid on the
debentures.
The 7% preference shares are trading at a current market value of BDT 12.50, a BDT 2.50 premium
above their issue price of BDT 10. Interest has just been paid on these preference shares. There have
been no issues or redemptions of ordinary shares or debentures during the past five years. The
corporation tax rate of 12.5% has pertained throughout the past five years without change. Assume
that tax relief on the debenture interest arises at the same time as the interest payment.
Requirement:
Ignoring the potential new investment, calculate the cost of capital that BCC should use as a discount
rate when appraising new marginal investment opportunities. 12
3. Attire Ltd., a UK multinational Company operating in Bangladesh, started trading in 2016. Its
functional currency is GBP (£). The company makes industrial filters and of late has been expanding
its trading links (both in terms of imports and exports) in Europe. To date it has not been concerned
with managing its foreign exchange risk. However, Attire's board of directors now wishes to
investigate the implications of a change in that policy. You are a member of the company's finance
team and have been sent the memorandum set out below by Nayeem Ahmed, Attire's Finance Director.
MEMORANDUM
To: Finance Team Member
From: Nayeem Ahmed
Date: 21 March 2022
I'd like you to finish off a piece of work I've been doing for the board which wants to establish if it's
worth trying to hedge our exposure to foreign exchange risk. We have three fairly large transactions
to deal with in the next six months, all of which involve buying/selling euros.
The details are as follows.

• We are due to receive €632,000 from a German customer on 20 June 2022.
• We are due to receive €560,000 from a Belgian customer on 22 September 2022 and to pay
€1,347,500 to one of our Spanish suppliers on the following day.
Page 2 of 5
I have researched the relevant foreign exchange rates and interest rates and they're listed below:
Exchange rates Euro (€)/GBP (£)

Spot rates 1.412 – 1.445
Three months forward rates 0.85 – 0.81 cents premium
Six months forward rates 1.43 – 1.38 cents premium
Interest rates Lending Borrowing

Euro 3.9% pa 5.2% pa
GBP 4.8% pa 6.1% pa
Could you write a memorandum for the board which:

a) Recommends whether we should use (i) a forward contract or (ii) a money market hedge. It would
also be advisable to show the board what the outcome would be if we didn't hedge at all (you can
assume here there would be no change in the spot rate as at 21 March 2022 in the next six months). 10
b) Explain the implications of using futures contracts or currency options instead. 4
Regards
Nayeem Ahmed
4. a) Compare and contrast the three main attitudes to risk which investors may exhibit. Why is it
considered important for the finance manager to understand these concepts? 4
b) The staff of Safwan Manufacturing has estimated the following cash flows and probabilities for a
new manufacturing process:
NET CASH FLOWS

YEAR
PR = 0.2 PR = 0.6 PR = 0.2
0 (100,000) (100,000) (100,000)
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains
the estimated salvage values. Safwan’s required rate of return for an average risk project is 10%.
Requirements:
i) Assume that the project has average risk. Find the project’s expected NPV. 3
ii) Find the best case and worst case NPVs. What is the probability of occurrence of the worst case
if the cash flows are perfectly positively correlated over time? If they are independent over time? 3
iii) Assume that all the cash flows are perfectly positively correlated; that is, there are only three
possible cash flow streams over time: (1) the worst case, (2) the most likely, or base case and
(3) the best case, with probabilities of 0.2, 0.6 and 0.2 respectively. These cases are
represented by each of the columns in the table. Find the expected NPV, its standard deviation
and its coefficient of variation. 4
iv) The coefficient of variation of Modern’s average project is in the range 0.8 to 1.0. If the
coefficient of variations of a project being evaluated is greater than 1.0, 2 percentage points
are added to the firm’s required rate of return. Similarly, if the coefficient of variation is less
than 0.8, 1 percentage point is deducted from the required rate of return. What is the project’s
required rate of return? Should Modern accept or reject the project? 2
Page 3 of 5
5. Fine Home Limited is in the business of manufacturing different home appliances for the last 20 years.
Due to increased demand of home appliances in the country, Fine Home Ltd. is now considering a
takeover bid for a competitor, Nice Home Ltd., in the same line of business.
Following are the summarized statement of profit or loss and statement of financial position of Nice
Home Ltd.:
Statement of Profit or Loss
for the year ended June 30, 2020
Tk. '000
Sales 500,000
Profit before taxation 75,000
Income tax 18,750
Profit for the year 56,250
Statement of Financial Position
as on June 30, 2020
Tk. '000
Assets Equity and Liabilities
Non-current assets 125,000 Share capital (Tk. 10 each) 45,000
(Net of depreciation) Retained earnings 25,000
Current assets 165,000 Total equity 70,000
Non-current liabilities 25,000
Current liabilities 195,000
Total liabilities 220,000
Total assets 290,000 Total equity and liabilities 290,000
The Strategic Investment Analyst of Fine Home Ltd. has prepared projected revenue and expenses
analysis of five years for the activities of Nice Home Ltd., after taking over by Fine Home Ltd., as
follows:
Nice Home Ltd.
Projected revenue and expenses
(On taking over by Fine Home Ltd.) Tk. '000
2020-21 2021-22 2022-23 2023-24 2024-25
Sales 550,000 605,000 653,400 686,000 713,450
Cost of goods sold 247,500 272,250 294,030 308,700 321,053
Cash operating expenses 7 7 , 0 0 0 84,700 85,000 89,180 90,000
The current market prices of Fine Home Ltd., and Nice Home Ltd. shares are Tk. 55 and Tk. 65 per
share respectively. Fine Home Ltd. has a 9% bonds with 4 years to maturity, par value of Tk. 100
and current market price of Tk. 105. Tax rate of Fine Home Ltd. is 25%. Other information relevant
to takeover are as follows:
• Information related to cost of equity:
Risk-free rate 5%
Return on market 11%
Nice Home Ltd., equity beta 1.15
• Post-acquisition gearing (Debt ÷ Capital employed) of Fine Home Ltd. is depending upon
the final price paid for Nice Home Ltd. However, its forecasted gearing is to be between
30% and 40%. Assume that cost of debt of Fine Home Ltd. will remain unchanged on
acquisition of Nice Home Ltd.
• Capital allowances (tax deduction) are allowable for taxation purposes against profits. Capital
allowances and additional working capital for the replacement of assets and forecasted growth are
as follows: Tk. '000
2020-21 2021-22 2022-23 2023-24 2024-25
Capital allowances 81,250 85,000 87,500 87,500 87,500
Additional working capital 85,000 82,000 85,000 90,000 95,000
Page 4 of 5
Requirements:
a) Two competitors of Nice Home Ltd. have price/ earnings (P/E) ratio as 6: 1 and 7: 1. Both of these
competitors have same business risk as of Nice Home Ltd. Using P/E ratio of competitors of Nice
Home Ltd., calculate price per share or range of prices per share (based on existing profit of Nice
Home Ltd.) that Fine Home Ltd. should offer to purchase the shares of Nice Home Ltd. 5
b) Strategic Investment Analyst also expects that after acquisition of Nice Home Ltd., equity beta of
Nice Home Ltd. is expected to be 1.25. Calculate weighted average cost of capital (WACC) of
Fine Home Ltd. at 30% and 40% level of gearing. 7
c) Using forecasted data as prepared by the Strategic Investment Analyst, calculate future net cash
flows for the activities of Nice Home Ltd. for the period of 2020-21 to 2024-25. 6
d) Fine Home Ltd. also forecasted that expected net cash flows of Nice Home Ltd. (after working
capital) are expected to grow at between 5% and 7% per year after 2024-25 for indefinite period.
Estimate present values of future net cash flows using 11% weighted average cost of capital. 8
e) Calculate the value of shares by using present values of future net cash flows as calculated in (d)
above, at 30% and 40% level of gearing. 4
6. The Van Development Company has just sold a Tk 100mn, 10 years, 12% bond issue. A sinking fund
will retire the issue over its life. Sinking fund payments are of equal amounts and will be made
semiannually, and the proceeds will be used to retire bonds as the payments are made. Bonds can be
called at par for sinking fund purposes, or the funds paid into the sinking fund can be used to buy bonds
in the open market.
Requirements:
a) How large must each semiannual sinking fund payment be? 2
b) What will happen, under the conditions of the problem thus far, to the company’s debt service
requirements per year for this issue over time? 2
c) What would have to happen to interest rates to cause the company to buy bonds on the open market
rather than call them under the original sinking fund plan? 1
---The End---
Page 5 of 5
Nov-Dec 2021
Total marks- 100
Marks
1. (a) Describe the risks and returns of a leveraged buyout. Explain how changes in capital structure
affect a firm’s value. 3
(b) Discuss the effects of the three approaches to working capital financing policy. 3
(c) MM Company Ltd has a debt-equity ratio of 0.35. The required return of the company’s unlevered
equity is 13% and the pretax cost of the firm’s debt is 7%. Sales revenue for the company is
expected to remain stable indefinitely at last year’s level of Tk 17,500,000. Variable costs amount
to 60% of sales. The tax rate is 40% and the company distributes all its earnings as dividends at
the end of each year.
Requirements:
i) If the company were financed entirely by equity, how much would it be worth? 3
ii) What is the required return on the firm’s levered equity? 2
iii) Use the weighted average cost of capital method to calculate the value of the company. What
is the value of the company’s equity? What is the value of the company’s debt? 4
iv) Use the flow to equity method to calculate the value of the company’s equity? 3
2. (a) You are presented with the following different views of stock market behaviour.
(1) If a company publishes an earnings figure higher than the market expectation, the shares of
that company will usually experience an abnormally high return, both on the day of the earnings
announcement and over the two or three days following.
(2) The return on professionally managed portfolios of equities is likely to be no better than that
which could be achieved by a naive investor who holds the market portfolio.
(3) Share prices usually seem to rise sharply in the first few days of a new fiscal year. However,
this can be explained by the fact that many investors sell losing stocks immediately prior to the
fiscal year end in order to establish a tax loss for capital gains tax purposes. This causes
abnormal downward pressure which is released when the new fiscal year begins.
Requirement:
Comment on what each of the above three statements tells you about the efficiency of the stock
market. Where appropriate, relate your comments to one or more forms of the efficient markets
hypothesis. 5
(b) Seven Star Furniture Limited (SSFL) produces and sells two luxury furniture items bed and chair.
The company expects growth in the business during 2022. Sales projections are as follows:
Projected Sales Q1 Q2 Q3 Q4
2022 2022 2022 2022
Bed 5,000 7,000 9,000 10,000
Chair 2,500 3,500 5,000 6,000
The price of each bed is BDT 15,000 and will remain fixed for the next two years. Clients pay in
full when purchasing the bed.
Each chair presently sells for BDT 5,000. This will increase by 20% per chair effective from 1st
January 2022.
Clients pay a 20% cash deposit and pay the remainder three months from the date of order. SSFL
is owed BDT 3,500,000 from chairs sold in the last quarter of 2021.
Page 1 of 4
SSFL has projected that on 1 January 2022 it will have:
- BDT 5,000,000 cash on hand; and
- 100 beds in stock.
The ongoing inventory policy is to produce enough bed to meet 20% of the following quarter’s
estimated sales demand. The chairs are produced to order i.e. each quarter’s sales will be produced
in that quarter.
The wood used to produce the company’s products costs BDT 12,000 per bed and BDT 3,000 per
chair. The company purchases raw material on a just-in-time basis. Creditors allow SSFL three
months after their date of purchase to settle their account. SSFL owes creditors BDT 70,000,000
for purchases in the quarter ended 31st December 2021.
It is anticipated that 20 staff members will be employed from 1st April 2022 onwards at a monthly
cost of BDT 100,000 each. This will remain fixed for one year.
Two directors of SSFL are paid a quarterly fee of BDT 50,000 each. This will increase by 20%
from 1st January 2022. All wages and fees are paid in the month to which they relate.
Factory rental is payable (in even instalments) three month’s in advance on the quarter days 1st
January, April, July and October. The annual rental for the year ended December 2022 has been
fixed at BDT 60,000,000.
To increase production, the company will purchase a new moulding machine at a cost of BDT
100,000,000. This will be paid for in March 2022.
Requirements:
i) Prepare a quarterly cash budget for SSFL for the year ended 31st December 2022. 10
ii) Comment on your findings and suggest three steps that Wood Limited’s management could
take to manage their cash position for the year ended 31st December 2022. 2
3. Ringtel Communications Ltd (RCL) supplies headphones to airlines for use with movie and stereo
programs. The headphones, which use the latest in electronic components, sell for Tk 28.80 per set and
this year’s sales are expected to be 450,000 units. Variable production costs for the expected sales
under present production methods are estimated at Tk 10,200,000 and fixed production (operating)
costs at present are Tk 1,560,000. RCL has Tk 4,800,000 of debt outstanding at an interest rate of 8%.
There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend
payout ratio is 70% and RCL is in the 40% tax bracket.
The company is considering investing Tk 7,200,000 in new equipment. Sales would not increase, but
variable costs per unit would decline by 20%. Also fixed operating cost would increase from Tk
1,560,000 to Tk 1,800,000. RCL could raise the required capital by borrowing Tk 7,200,000 at 10%
or by selling 240,000 additional shares at Tk 30 per share.
Requirements:
(a) What would be RCL’s EPS (i) under the old production process (ii) under the new process if it
uses debt, and (iii) under the new process if it uses common stock? 3
(b) At what unit sales level would RCL have the same EPS, assuming it undertakes the investment
and finances it with debt or with stock? 3
(c) At what unit sales level would EPS = 0 under the three production/financing set ups – that is,
under the old plan, the new plan with debt financing, and the new plan with stock financing? 3
(d) On the basis of the analysis in parts a through c, and given that operating leverage is lower under
the new setup, which plan is riskiest, which has the highest expected EPS, and which would you
recommend? Assume here that there is a fairly high probability of sales falling as low as 250,000
units and determine EPS debt and EPS stock at that sales level to help assess the riskiness of the
two financing plans. 3
Page 2 of 4
4. Assume that the current date is 31 December 2021
You are a Financial Analyst working for Soft Apparels (SA) which is a Bangladeshi Company that
exports apparels to Srilanka. The Chairman of Risk Management Committee of SA is wary of its
exposure to foreign exchange rate risk (‘forex risk’) and the need to hedge it.
The Chairman asked you to advise the board on how to hedge the forex risk associated with its trading
activities in Srilanka. You have the following information available to you at the close of business on
31 December 2021:
One of SA’s client owes to SA LKR 35,000,000 which will become due on March 31, 2022.
Exchange rates
Spot rate (LKR/BDT) 2.36 – 2.38
Three-month forward contract discount (LKR/BDT) 0.0031 - 0.0034
March currency futures price (standard contract size BDT 1,000,000): LKR 2.41/BDT
Annual borrowing and depositing interest rates

BDT 9.00% - 6.00%
LKR 10.5% - 5.50%
Three-month over-the-counter currency options

Call options to buy BDT have an exercise price of LKR/BDT 2.42 and premium of BDT 0.03 per LKR
converted.
Put options to sell LKR have an exercise price of LKR/BDT 2.41 and a premium of BDT 0.02 per
LKR converted.
Requirements:
(a) Assuming that the spot exchange rate on 31 March 2022 will be LKR/BDT 2.425 – 2.445 and that
the BDT currency futures price will be LKR 2.443/BDT, calculate SA’s BDT receipt if it uses the
following to hedge its forex risk:
• a forward contract
• a money market hedge
• currency futures contracts
• an over-the-counter currency option 8
(b) Describe the relative advantages and disadvantages of each of the hedging techniques in (a) above
and advise SA on which would be most beneficial for hedging its forex risk. 6
(c) Identify and explain overseas trading risks (other than forex risk) that SA is exposed to and discuss
how they might be mitigated. 4
5. Best GPS System (BGS) manufactures and sells GPS devices. Recently BGS has developed a new
GPS for cars tracking (GCT). It intends to set up a manufacturing facility in Bangladesh, although the
board of BGS had planned setting up in an overseas country. The GCT project will have a life of four
years.
The selling price of the GCT will be BDT 10,000 per unit, and sales in the first year to 31 December
2022 are expected to be 5,000 units per month, increasing by 4% pa thereafter. Relevant direct labor
and materials costs are expected to be BDT 7,600 per unit and incremental fixed production costs are
expected to be BDT 35 million pa. The selling price and costs are stated in 31 December 2021 prices
and are expected to increase at the rate of 2% & 7% pa respectively. Research and development costs
to 31 December 2021 amounted to BDT 10 million.
Investment in working capital will be BDT 5 million on 31 December 2021 and this will increase in
line with sales volumes and inflation. Working capital will be fully recoverable on 31 December 2024.
BGS will need to rent a factory for the life of the project. Annual rent of BDT 12 million will be
payable in advance on 31 December each year and will not increase over the life of the project.
Page 3 of 4
Plant and machinery will cost BDT 250 million on 31 December 2021. The plant and machinery is
expected to have a resale value of BDT 50 million (in 31 December 2024 prices) at the end of the
project. The plant and machinery will attract 20% (reducing balance) capital allowances in the year of
expenditure and in every subsequent year of ownership by the company, except the final year. In the
final year, the difference between the plant and machinery’s written down value for tax purposes and
its disposal proceeds will be treated by the company either:
(i) as an additional tax relief, if the disposal proceeds are less than the tax written down value, or
(ii) as a balancing charge, if the disposal proceeds are more than the tax written down value.
Corporation tax will be 35% pa for the foreseeable future and that tax flows arise in the same year as
the cash flows which gave rise to them.
The project will be financed from the company’s pool of funds and there will be no change in current
gearing levels. An appropriate weighted average cost of capital for the project is 14% pa.
BGS’s directors are concerned that there are rumours in the industry of research by a rival company
into a much cheaper alternative to the GPS devices currently available. However, the rumours that the
directors have heard suggest that this research will take another year to complete and, if it is successful,
it will be a further year before any new devices are operational.
Requirements:
(a) Calculate, using money cash flows:
i) The net present value of the GCT project on 31 December 2021;
ii) Advice BGS’s board as to whether it should proceed; and 8
iii) Submit the workings on calculation of contributions, fixed costs, capital allowances and 2
working capital. 4
(b) Calculate and comment upon the sensitivity of the project to a change in the annual rent of the
factory and the weighted average cost of capital. 4
(c) Assume now that the project had been financed entirely by debt and that this had caused the gearing
of BGS to change materially. Describe how you would have appraised the project in such
circumstances. 2
(d) If the board of BGS decided to set up the manufacturing facility overseas, advise the board on how
political risk could change the value of the project and how it might limit its effects. 2
(e) Identify and discuss the real options available to BGS in relation to the GCT project. 3
6. Your broker offers to sell you some shares of B Ltd that paid a dividend of Tk 2 yesterday. You expect
the dividend to grow at the rate of 5% per year for the next 3 years, and, if you buy the stock, you plan
to hold it for 3 years and then sell it.
Requirements:
(a) Find the expected dividend for each of the next 3 years; that is, calculate D1, D2 and D3. 2
(b) Given that the appropriate discount rate is 12% and that the first of these dividend payments will
occur 1 year from now, find the present value of the dividend stream; that is, calculate the PV of
D1, D2 and D3 and then sum these PVs. 2
(c) You expect the price of the stock 3 years from now on to be Tk 34.73; that is you expect P3 to
equal Tk 34.73. Discounted at a 12% rate, what is the present value of this expected future stock
price? In other words, calculate the PV of Tk 34.73. 1
(d) If you plan to buy the stock, hold it for 3 years and then sell it for Tk 34.73, what is the most you
should pay for it today? 1
(e) Using constant growth valuation, calculate the present value of this stock. Assume that g=5%, and
it is constant. 2
(f) Is the value of this stock dependent upon how long you plan to hold it? In other words, if your
planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of
the stock today, Po? 2
---The End---
Page 4 of 4
March-April 2021
Time allowed: 3:30 hours
Total marks: 100
[N. B.: – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and of the manner in which the answers are presented. Different parts,
if any, of the same question must be answered in one place in order of sequence.]
Marks
1. Finance Director of Best Water Limited said in a Management Committee meeting “Financial
Managers need only concentrate on meeting the needs of shareholders – no other group matters
as we are not charity. As a company our main financial objective should be to increase dividends
each year.” The discussion of Best Water’s Management Committee meeting then continued to
consider the company's objectives. Its only nonfinancial objective was to treat all stakeholders in
the organisation with 'even-handedness'.
Company background:
 Privately-owned water purifier and bottler.

 It has a large number of shareholders with a combination of both major and smaller
investors.
 Financed with 60% equity and 40% debt (based on book values).
 The debt is a mixture of secured and unsecured bonds carrying interest rates of between
8% and 9.5% and repayable in 5 to 8 years' time.
 Revenue and assets equivalent in amount to some public listed companies.
 Global market for inputs and output.
Company strategy
Best Water Limited has been a reasonably profitable company for a number of years and the
directors and shareholders are unwilling to adopt strategies that they think might involve a
substantial increase in risk. Some of its competitors for example, have set up manufacturing
facilities in low cost areas. Best Water accepts its growth rate will be relatively low as a result of
this 'play it safe' approach, compared with some of its competitors.
Inflation in Bangladesh can be assumed to be stable around 5.5% and interest rates are low and
possibly falling.
Requirements:
(a) You are a qualified chartered accountant who has recently joined in strategy setting
department of Best Water Limited. Evaluate the appropriateness of the Finance Director's
statement and Best Waters’s current objectives. Discuss the issues that the Management
Committee should consider when determining the new corporate objectives. Conclude with a
recommendation. 10
(b) Best Water has a treasury department. Discuss the factors that it should consider when
determining financing, or re-financing strategies in the context of the economic environment
described in the scenario and explain how these might impact on the determination of
corporate objectives. 5
2. (a) Discuss the factors those are considered in determining dividend policy of a company. 5
(b) Z Ltd. and ST Ltd. are two fast growing companies in the cement industry. They are close
competitors and their asset composition, capital structure, and profitability records have been
very similar for several years. The primary difference between the companies from a financial
management perspective is their dividend policy. Z Ltd. tries to maintain a non-decreasing
dividend per share, while ST Ltd. maintains a constant dividend payment ratio. Their recent
earnings per share (EPS), dividend per share (DPS), and share price (P) history are as follows:
Page 1 of 4
Z Ltd. (in BDT) ST Ltd. (in BDT)
Year EPS DPS P (range) EPS DPS P(range)
1 9.30 2.00 75-90 9.50 1.90 60-80
2 7.40 2.00 55-80 7.00 1.40 25-65
3 10.50 2.00 70-110 10.50 2.10 35-80
4 12.75 2.25 85-135 12.25 2.45 80-120
5 20.00 2.50 135-200 20.25 4.05 110-225
6 16.00 2.50 150-190 17.00 3.40 140-180
7 19.00 2.50 155-210 20.00 4.00 130-190
Requirements: In all calculations below that require a share price, use the average of the two
prices given in the share price range.
i) Determine the dividend payment (DP) ratio and price to earnings ratio (PE) for both
companies for all the years. 8
ii) Determine the average DP and PE for both the companies over the period 1 through 7. 4
iii) The management of ST Ltd. is puzzled as to why their share prices are lower than those
of Z Ltd., in spite of the fact that profitability record of ST Ltd. is slightly better
(particularly of past three years). As a financial consultant, how would you explain the
situation? 3
1. 3. You are Head of Strategic Investment in Best Pharma Ltd., a pharmaceuticals company engaged
in producing generic medicine of serval lifesaving drugs. It has completed few successful R & D
projects and is currently considering two potential strategic investments:
Best Pharma has annual growth expectations of 12% p.a and has paid a dividend of BDT 1.2 and
is currently priced at BDT 24.
1st Investment Proposal
New Life Saving Drugs (NLSD) Ltd. has offered to Best Pharma that they want to use some
patents of Best Pharma for 12 years starting next year in exchange of BDT 20 million each year.
NLSD is also proposing a joint R & D and marketing efforts that will give a boost up in the sales
of all products of Best Pharma. Investment Analyst of Best Pharma had made a forecast and sees
that profit of Best Pharma will increase by BDT 50 million after 2 years from now and will rise
by 7.5% each year thereafter for infinite period. The conditions of the investment are as follows:
- Instant payment of 40% cost of setting up a new manufacturing plant. The cost for
such set up is BDT 150 million.
- Annual payment of BDT 50 million must be given to NLSD for their expertise in
running such a plant for 20 years starting from 2 years from now;
- After year 22, NLSD will own the plant.
2nd Investment Proposal
A foreign Company asks Best Pharma to manufacture a newly invented drug for child which
would involve an investment of BDT 175 million now. The Company will pay Best Pharma BDT
25 million each year for 20 years starting next year. They will then buy out all rights to the plant
and the product for the final pay-out of BDT 2,000 million in 20 years’ time.
Requirements:
(a) Calculate the NPV of both investments and calculate the IRR of 2nd investment proposal.
Advise the company whether 1st investment proposal or 2nd investment proposal (mutually
exclusive) should be undertaken. 10
Page 2 of 4
(b) State in general terms which method of investment appraisal NPV or IRR; you consider to be
the most appropriate for evaluating investment projects and discuss the reasons why you
picked this method of investment appraisal. 6
(c) Briefly outline general techniques that could be used by companies to assess the consequences 4
of their financial forecasts being inaccurate due to uncertainty about the future.
4. (a) In 2020, Wet Ltd announced that it was acquiring Capital Hill, the owner of the ABC
television and radio network, for approximately BDT 120 per share and that it would be
finance the acquisition partly through the issue of BDT 10 billion in debt. At the time of the
acquisition, Wet has a market value of equity of BDT 31.1 billion, debt outstanding of BDT
3.186 billion and a beta of 1.15. Capital Hill, based on the BDT 120 offering price, had a
market value of equity of BDT 18.5 billion, debt outstanding of BDT 615 million, and a beta
of 0.95. (Corporate tax rate was 36%).
Requirement:
In order to evaluate the effects of the acquisition on Wet’s beta, examine the effects of the 8
merger on the business risk of the Combined firm, by estimating the unlevered betas of the
two companies and calculating the combined firm’s unlevered beta.
(b) An exporter knows that he would receive US $ 500,000 in three months. He buys a put option
of three-month maturity at the strike price of BDT 86/US$. Spot rate is BDT 46/US$.
Forward rate is also BDT 43.00/US$, premium to be paid is 2.5%.
Requirement: 6
Show the various possibilities of how option is going to be exercised.
5. Tripple Limited is an equity financed company. It has in issue 5,000,000 shares. These are
currently quoted at BDT 5.50 each cum-div. The dividend proposed for the current year is 50p
per share. No increase in this dividend is anticipated unless new projects are accepted. There is
no long-term debt.
The company’s cost of equity (Ke) is 10%.
One such project is currently under consideration. This project would involve investing BDT
500,000 immediately. It would generate a cash surplus of BDT 100,000 in one year’s time and
annually thereafter in perpetuity. The project cash flows are known to the market, and do not alter
the company’s risk. All of the project cash flows would be paid as dividends.
The NPV of the project is (BDT 500,000) + BDT 100,000/0.1 = BDT 500,000
Requirement: You are asked to evaluate three alternative sources of finance from the point of
view of the existing shareholders:
(a) A reduction in the current year’s dividend to 40p per share, so as to release BDT 500,000 for
internally generated funds 5
(b) A right issue on a one for ten basis at BDT 1 per share 5
(c) A new issue of shares. These would be identical to existing ordinary shares and would first
rank for dividend in one year’s time.
5
Ignore taxation and issue costs.
6. Sadik Textiles import raw materials from suppliers in USA. Sadik currently has bank overdraft
that costs 6% pa. It has a payment to make of $1,500,000 on 31 July 2021.
The following information is available at the close of business on 31 March 2021:
Exchange rates:
Spot rate (BDT/$) 84 - 85
Four-month forward premium (BDT/$) 0.1101 – 0.1114
Page 3 of 4
July currency futures price (standard contract size BDT 10 million) BDT 85.30/$
Over the counter currency option
A July call option to buy $ has an exercise price of BDT 85.15/$. The premium is BDT 0.35 per
$ and is payable on 31 March 2021.
2. You should assume that the current date is 31 March 2021.
Requirements:
(a) Calculate Sadik’s BDT payment if it uses each of the following to hedge its foreign
exchange rate risk:
- a forward contract
- currency futures contracts
- an over the counter currency option.
You should assume that on 31 July 2021 the spot exchange rate will be BDT 84.50 – BDT
85.30 and that the BDT currency futures price will be BDT 85.28/$. 10
(b) A discussion of the relative advantages and disadvantages of using the methods in part (i)
above to hedge Sadik’s foreign exchange rate risk. 6
---The End---
Page 4 of 4

Total marks- 100
quality of language and the manner in which the answers are presented. Different parts, if any, of the same question must
be answered in one place in order of sequence.]
Marks
1. (a) Define Optimum Capital Structure. “MM hypothesis is based on some unrealistic assumptions”-
do you agree and what are those assumptions? 4
(b) ABC Ltd, a producer of turbine generators, is in this situation: EBIT = Tk 4 million; tax rate = T=
35%; debt outstanding D = Tk 2 million; Kd = 10%; Ks= 15%; shares of stock outstanding No =
600,000; and book value per share = Tk 10. Since ABC’s product market is stable and the company
expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.
Requirements:
i) What are ABC’s earnings per share (EPS) and its price per share (Po)? 4
ii) What is ABC’s weighted average cost of capital (WACC)? 2
iii) ABC can increase its debt by TK 8 million, to a total of TK 10 million, using the new
debt to buy back and retire some of its shares at the current price. Its interest rate on debt
will be 12% (it will have to call and refund the old debt), and its cost of equity will rise
from 15% to 17%. EBIT will remain constant. Should ABC change its capital structure? 3
iv) If ABC did not have to refund the Tk 2 million of old debt, how would this affect things?
Assume that the new and the still outstanding debt are equally risky, with Kd = 12%, but
that the coupon rate on the old debt is 10%. 3
v) What are ABC’s TIE coverage ratio under the original situation and under the conditions
in part (iii) of the above? 2
(c) Assume that you own 100 shares of S Limited, a small software development firm. When you read
the Financial Express this morning, S Limited shares were selling at Tk 50. There are 10,000 shares
outstanding, with most of those being held by small investors such as yourself. On the way to
work, you hear on the radio that a group of outside investors have managed to acquire 20% of the
firm and are attempting a hostile takeover. They are offering Tk 75 a share for any and all
outstanding shares. The analyst on the radio goes on to state that, due to the bidder’s expertise at
managing similar companies, the equity in the firm is expected to be worth Tk 1 million if their
bid is successful. Assume that there will be no tax effects if you sell your shares.
Requirements:
i) Should you sell your shares to the bidder? 2
ii) What will happen if everyone makes the same sell/keep decision you do? 2
iii) What does this imply about the bid price of successful takeover attempt? 2
(d) As CEO of a major corporation, you must decide on how much you can afford to borrow. You
currently have 10 million shares outstanding, and the market price per share is Tk 50. You also
currently have about Tk 200 million in debt outstanding (market value). You are rated as a BBB
corporation now.
 Your stock has a beta of 1.5 and the Treasury bond rate is 8%.
 Your marginal tax rate is 46%
 You estimate that your rating will change to a B if you borrow Tk 100 million. The BBB
rate now is 11%. The B rate is 12.5%.
Requirements:
i) What is your best estimate of the weighted average cost of capital with and without the
Tk 100 million in borrowing? 2
ii) If you do borrow the Tk 100 million, what will be the price per share after the borrowing? 2
iii) Assume that you have a project that requires an investment of Tk 100 million. It has
expected before-tax revenues of Tk 50 million and costs of Tk 30 million a year in
perpetuity. Is this a desirable project by your criteria? Why or why not? 4
iv) Does it make a difference in your decision if you are told that the cash flows from the
project in (iii) are certain? 3
Page 1 of 4
2. (a) Why do options typically sell at prices higher than their exercise values? How can Swaps be used
to reduce the risks associated with debt contracts? 4
(b) Safwan is considering an investment in Modern Communications, whose stock currently sells for
Tk 60. A put option on Modern’s stock, with an exercise price of Tk 55, has a market value of Tk
3.06. Meanwhile, a call option on the stock with the same exercise price and time to maturity has
a market value for Tk 9.29. The market believes that at the expiration of the options the stock price
will be either Tk 70 or Tk 50, with equal probability.
Requirements:
i) What are the premiums associated with the put options and the call option? 2
ii) If Modern’s stock price increases to Tk 70, what would be the return to an investor who
bought a share of the stock? If the investor bought a call option on the stock? If the
investor bought a put option on the stock? 3
iii) If Modern’s stock price decreases to Tk 50, what would be the return to an investor who
iv) If Safwan buys 0.6 shares of Modern Communications and sells one call option on the
stock, has he created a riskless hedged investment? What is the total value of his portfolio
under each scenario? 4
v) If Safwan buys 0.75 shares of Modern Communications and sells one call option on the
3. (a) SC has invested in a portfolio of Bangladesh FTSE100 shares which is worth BDT 18.225 million
on 1 July 2020. The spot value of the FTSE100 index on that date is 6,750.
SC’s board wishes to explore the implications of hedging the company against a potential fall in
share prices in the next month. Accordingly, it is considering the use of traded FTSE100 index
options.
The following information has been gathered:
FTSE 100 INDEX OPTION (BDT 10 per full index point)
Exercise Price 6,650 6,700 6,750 6,800 6,850

Call Put Call Put Call Put Call Put Call Put
August 215 95 184 115 154 135 125 159 105 191
September 272 131 241 152 217 176 186 197 162 221
Assume that the board decides to use options to protect the current value of the portfolio in one
month’s time.
Requirements: Explain, with supporting workings, what will happen in one month’s time if: 6
i) the portfolio’s value falls to BDT 17.955 million and the FTSE100 index falls to 6,650
ii) the portfolio’s value rises to BDT 18.360 million and the FTSE100 index rises to 6,800
(b) As an alternative to hedging the BDT 18.225 million portfolio with options, SC’s board is considering
using FTSE100 stock index futures. At 1 July 2020 the quote for FTSE100 stock index futures in one
month is 6,720 and the face value of a FTSE100 index contract is BDT 10 per index point.
Requirement: Calculate the outcome of this hedge if in one month’s time the portfolio’s value
falls to BDT 17.955 million and the FTSE100 stock index futures contract falls
to 6,630. Comment on whether this hedge has been effective and identify the
reasons for any inefficiency which may arise when using futures contracts. 4
Page 2 of 4
4. Best Hotels Limited is a listed company which owns a chain of hotels around the country. The
management of Best Hotels are investigating a BDT 195 million potential investment in the real estate
business which would be a diversification from its mainstream business. The investment would involve
the construction and management of a Shopping Mall. An initial investment payment of BDT 120
million is payable immediately and the reminder upon completion of the Shopping Mall at the end of
year one. The operations would commence immediately after completion of the Mall. The Shopping
Mall is expected to operate for a period of 13 years after which a major investment would be required.
The residual value at the end of its life cycle (after 14 years from now) is projected to be BDT 45
million after tax. The rental charges would be based on the floor area.
Type of floor area Number of shops Monthly rent per shop

Medium 40 BDT 65,000
Large 30 BDT 180,000
It’s expected that during the first year of operation the shop occupancy will be 60% for Medium and
40% for Large. During the subsequent years, the shop occupancy would be at full capacity. Annual
operating costs are expected to be 45% of the annual revenue.
The corporate tax rate is 37.5% per year.

Requirements:
(a) Evaluate the proposed investment in the Real Estate Business using the Net Present Value
method. Assume the cost of capital is 13% per year. 8
(b) Assuming the role of a Financial Consultant, write a brief report to the management of Best
Hotels Ltd, discussing the non-financial factors that should be considered before the decision to
diversify into the real estate business is made. 5
5. Channel 14 Ltd (C14) is a large commercial television company based in London, with a year end of
31 December. Its senior management is considering relocating the company's production operations at
the end of 2020 to a site in Bolton, in the North of England, where, it is hoped, C14's capacity could
be increased and its running costs lowered.
The majority of C14's main administration functions would continue to be carried out in London for
the foreseeable future and the Bolton site would commence its full-time operations from 1 January
2021. The financial implications of the move are being considered by C14's board of directors and the
key figures available are shown below.
Equipment at the new site
Were C14 to relocate its production to Bolton, it could either buy new equipment or transfer its existing
equipment from London. New equipment would cost BDT 65 million, payable on 31 December 2020,
and because of the fast rate of technological change, would be worth BDT 30 million by the end of
20Y0.
Alternatively, the transfer (from London) and installation (in Bolton) of its existing equipment on 31
December 2020 would cost BDT 7 million (which would not attract tax depreciations, but would be
treated as tax deductible revenue expenditure). This equipment was purchased in 2018 for BDT 50
million, could be sold on 31 December 2020 for BDT 25 million and will have zero scrap value at the
end of 2023. The new equipment, having advanced technological capabilities would enable C14 to
make annual savings of BDT 5 million.
Page 3 of 4
The new equipment will attract tax depreciations, but will be excluded from the general pool. This
means that it attracts 25% (reducing balance) tax depreciation in the year of expenditure and in every
subsequent year of ownership by the company, except the final year. In the final year, the difference
between the machinery's written down value for tax purposes and its disposal proceeds will be either
(i) allowed to the company as an additional tax relief, if the disposal proceeds are less than the tax
written down value, or (ii) be charged to the company, if the disposal proceeds are more than the tax
written down value.
Staffing
20% of employees have already indicated that were C14 to move to Bolton then they would stay in the
London area and seek another job. As a result, redundancy payments (with an estimated total value of
BDT 1.5 million) would have to be made on 31 December 2020. Relocation costs for employees
moving to Bolton would total BDT 2 million on 31 December 2020, but there would be an annual
wage saving of BDT 1m per annum resulting from the move.
Property
C14 Currently pays BDT 3 million a year to rent its properties in London. These rental agreements are
binding on C14 until the end of 2021. By moving to the north, C14 would incur an annual total rental
cost (from 2021) of BDT 2.2 million in Bolton. The company would retain properties in London with
an annual rental cost (from 2022) of BDT 0.8m. If the move to Bolton does not go ahead then the
annual London rental charge will total BDT 5 million from 2022.
Capacity
By moving to Bolton, C14 will enhance its production capacity. This means that it will be able to (i)
make more programmes using its own facilities, thereby saving BDT 1.1 million annually and (ii) hire
out those facilities to independent programme makers, generating an annual income of BDT 1.9
million.
The company's Marketing Director feels that the proposed move to Bolton is an ideal opportunity for
the board to employ Shareholder Value Analysis (SVA). He is concerned that the stock market is
undervaluing the company at present and that, in his words, 'using SVA would, at least, give us an
accurate figure of its real worth.'
The corporation tax rate is 30% per annum and is payable in the same year as the
investment/income/costs to which it relates.
C14 uses a cost of capital figure of 8% when assessing investments.
All cash flows will take place at the end of each relevant trading year outlined above.
Note: Ignore inflation.
Requirements:
(a) Assuming it were to proceed with the relocation of facilities to Bolton, advise C14's
management whether it would be more beneficial, in net present value terms, to acquire the new
equipment and dispose of the existing equipment or to transfer the existing equipment to Bolton. 10
(b) Advise C14's management whether it is worth, in net present value terms and based only on a
planning period 31 December 2020 to 31 December 2023, proceeding with the relocation of
facilities to Bolton. 8
(c) Explain what you understand by Shareholder Value Analysis and comment on the Marketing
Director's views. 4
---The End---
Page 4 of 4

Total marks- 100
quality of language and the manner in which the answers are presented. Different parts, if any, of the same question must
be answered in one place in order of sequence.]
Marks
1. (a) Define Optimum Capital Structure. “MM hypothesis is based on some unrealistic assumptions”-
do you agree and what are those assumptions? 4
(b) ABC Ltd, a producer of turbine generators, is in this situation: EBIT = Tk 4 million; tax rate = T=
35%; debt outstanding D = Tk 2 million; Kd = 10%; Ks= 15%; shares of stock outstanding No =
600,000; and book value per share = Tk 10. Since ABC’s product market is stable and the company
expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.
Requirements:
i) What are ABC’s earnings per share (EPS) and its price per share (Po)? 4
ii) What is ABC’s weighted average cost of capital (WACC)? 2
iii) ABC can increase its debt by TK 8 million, to a total of TK 10 million, using the new
debt to buy back and retire some of its shares at the current price. Its interest rate on debt
will be 12% (it will have to call and refund the old debt), and its cost of equity will rise
from 15% to 17%. EBIT will remain constant. Should ABC change its capital structure? 3
iv) If ABC did not have to refund the Tk 2 million of old debt, how would this affect things?
Assume that the new and the still outstanding debt are equally risky, with Kd = 12%, but
that the coupon rate on the old debt is 10%. 3
v) What are ABC’s TIE coverage ratio under the original situation and under the conditions
in part (iii) of the above? 2
(c) Assume that you own 100 shares of S Limited, a small software development firm. When you read
the Financial Express this morning, S Limited shares were selling at Tk 50. There are 10,000 shares
outstanding, with most of those being held by small investors such as yourself. On the way to
work, you hear on the radio that a group of outside investors have managed to acquire 20% of the
firm and are attempting a hostile takeover. They are offering Tk 75 a share for any and all
outstanding shares. The analyst on the radio goes on to state that, due to the bidder’s expertise at
managing similar companies, the equity in the firm is expected to be worth Tk 1 million if their
bid is successful. Assume that there will be no tax effects if you sell your shares.
Requirements:
i) Should you sell your shares to the bidder? 2
ii) What will happen if everyone makes the same sell/keep decision you do? 2
iii) What does this imply about the bid price of successful takeover attempt? 2
(d) As CEO of a major corporation, you must decide on how much you can afford to borrow. You
currently have 10 million shares outstanding, and the market price per share is Tk 50. You also
currently have about Tk 200 million in debt outstanding (market value). You are rated as a BBB
corporation now.
 Your stock has a beta of 1.5 and the Treasury bond rate is 8%.
 Your marginal tax rate is 46%
 You estimate that your rating will change to a B if you borrow Tk 100 million. The BBB
rate now is 11%. The B rate is 12.5%.
Requirements:
i) What is your best estimate of the weighted average cost of capital with and without the
Tk 100 million in borrowing? 2
ii) If you do borrow the Tk 100 million, what will be the price per share after the borrowing? 2
iii) Assume that you have a project that requires an investment of Tk 100 million. It has
expected before-tax revenues of Tk 50 million and costs of Tk 30 million a year in
perpetuity. Is this a desirable project by your criteria? Why or why not? 4
iv) Does it make a difference in your decision if you are told that the cash flows from the
project in (iii) are certain? 3
Page 1 of 4
2. (a) Why do options typically sell at prices higher than their exercise values? How can Swaps be used
to reduce the risks associated with debt contracts? 4
(b) Safwan is considering an investment in Modern Communications, whose stock currently sells for
Tk 60. A put option on Modern’s stock, with an exercise price of Tk 55, has a market value of Tk
3.06. Meanwhile, a call option on the stock with the same exercise price and time to maturity has
a market value for Tk 9.29. The market believes that at the expiration of the options the stock price
will be either Tk 70 or Tk 50, with equal probability.
Requirements:
i) What are the premiums associated with the put options and the call option? 2
ii) If Modern’s stock price increases to Tk 70, what would be the return to an investor who
iii) If Modern’s stock price decreases to Tk 50, what would be the return to an investor who
iv) If Safwan buys 0.6 shares of Modern Communications and sells one call option on the
v) If Safwan buys 0.75 shares of Modern Communications and sells one call option on the
3. (a) SC has invested in a portfolio of Bangladesh FTSE100 shares which is worth BDT 18.225 million
on 1 July 2020. The spot value of the FTSE100 index on that date is 6,750.
SC’s board wishes to explore the implications of hedging the company against a potential fall in
share prices in the next month. Accordingly, it is considering the use of traded FTSE100 index
options.
The following information has been gathered:
FTSE 100 INDEX OPTION (BDT 10 per full index point)
Exercise Price 6,650 6,700 6,750 6,800 6,850

Call Put Call Put Call Put Call Put Call Put
August 215 95 184 115 154 135 125 159 105 191
September 272 131 241 152 217 176 186 197 162 221
Assume that the board decides to use options to protect the current value of the portfolio in one
month’s time.
Requirements: Explain, with supporting workings, what will happen in one month’s time if: 6
i) the portfolio’s value falls to BDT 17.955 million and the FTSE100 index falls to 6,650
ii) the portfolio’s value rises to BDT 18.360 million and the FTSE100 index rises to 6,800
(b) As an alternative to hedging the BDT 18.225 million portfolio with options, SC’s board is considering
using FTSE100 stock index futures. At 1 July 2020 the quote for FTSE100 stock index futures in one
month is 6,720 and the face value of a FTSE100 index contract is BDT 10 per index point.
Requirement: Calculate the outcome of this hedge if in one month’s time the portfolio’s value
falls to BDT 17.955 million and the FTSE100 stock index futures contract falls
to 6,630. Comment on whether this hedge has been effective and identify the
reasons for any inefficiency which may arise when using futures contracts. 4
Page 2 of 4
4. Best Hotels Limited is a listed company which owns a chain of hotels around the country. The
management of Best Hotels are investigating a BDT 195 million potential investment in the real estate
business which would be a diversification from its mainstream business. The investment would involve
the construction and management of a Shopping Mall. An initial investment payment of BDT 120
million is payable immediately and the reminder upon completion of the Shopping Mall at the end of
year one. The operations would commence immediately after completion of the Mall. The Shopping
Mall is expected to operate for a period of 13 years after which a major investment would be required.
The residual value at the end of its life cycle (after 14 years from now) is projected to be BDT 45
million after tax. The rental charges would be based on the floor area.
Type of floor area Number of shops Monthly rent per shop

Medium 40 BDT 65,000
Large 30 BDT 180,000
It’s expected that during the first year of operation the shop occupancy will be 60% for Medium and
40% for Large. During the subsequent years, the shop occupancy would be at full capacity. Annual
operating costs are expected to be 45% of the annual revenue.
The corporate tax rate is 37.5% per year.

Requirements:
(a) Evaluate the proposed investment in the Real Estate Business using the Net Present Value
method. Assume the cost of capital is 13% per year. 8
(b) Assuming the role of a Financial Consultant, write a brief report to the management of Best
Hotels Ltd, discussing the non-financial factors that should be considered before the decision to
diversify into the real estate business is made. 5
5. Channel 14 Ltd (C14) is a large commercial television company based in London, with a year end of
31 December. Its senior management is considering relocating the company's production operations at
the end of 2020 to a site in Bolton, in the North of England, where, it is hoped, C14's capacity could
be increased and its running costs lowered.
The majority of C14's main administration functions would continue to be carried out in London for
the foreseeable future and the Bolton site would commence its full-time operations from 1 January
2021. The financial implications of the move are being considered by C14's board of directors and the
key figures available are shown below.
Equipment at the new site
Were C14 to relocate its production to Bolton, it could either buy new equipment or transfer its existing
equipment from London. New equipment would cost BDT 65 million, payable on 31 December 2020,
and because of the fast rate of technological change, would be worth BDT 30 million by the end of
20Y0.
Alternatively, the transfer (from London) and installation (in Bolton) of its existing equipment on 31
December 2020 would cost BDT 7 million (which would not attract tax depreciations, but would be
treated as tax deductible revenue expenditure). This equipment was purchased in 2018 for BDT 50
million, could be sold on 31 December 2020 for BDT 25 million and will have zero scrap value at the
end of 2023. The new equipment, having advanced technological capabilities would enable C14 to
make annual savings of BDT 5 million.
Page 3 of 4
The new equipment will attract tax depreciations, but will be excluded from the general pool. This
means that it attracts 25% (reducing balance) tax depreciation in the year of expenditure and in every
subsequent year of ownership by the company, except the final year. In the final year, the difference
between the machinery's written down value for tax purposes and its disposal proceeds will be either
(i) allowed to the company as an additional tax relief, if the disposal proceeds are less than the tax
written down value, or (ii) be charged to the company, if the disposal proceeds are more than the tax
written down value.
Staffing
20% of employees have already indicated that were C14 to move to Bolton then they would stay in the
London area and seek another job. As a result, redundancy payments (with an estimated total value of
BDT 1.5 million) would have to be made on 31 December 2020. Relocation costs for employees
moving to Bolton would total BDT 2 million on 31 December 2020, but there would be an annual
wage saving of BDT 1m per annum resulting from the move.
Property
C14 Currently pays BDT 3 million a year to rent its properties in London. These rental agreements are
binding on C14 until the end of 2021. By moving to the north, C14 would incur an annual total rental
cost (from 2021) of BDT 2.2 million in Bolton. The company would retain properties in London with
an annual rental cost (from 2022) of BDT 0.8m. If the move to Bolton does not go ahead then the
annual London rental charge will total BDT 5 million from 2022.
Capacity
By moving to Bolton, C14 will enhance its production capacity. This means that it will be able to (i)
make more programmes using its own facilities, thereby saving BDT 1.1 million annually and (ii) hire
out those facilities to independent programme makers, generating an annual income of BDT 1.9
million.
The company's Marketing Director feels that the proposed move to Bolton is an ideal opportunity for
the board to employ Shareholder Value Analysis (SVA). He is concerned that the stock market is
undervaluing the company at present and that, in his words, 'using SVA would, at least, give us an
accurate figure of its real worth.'
The corporation tax rate is 30% per annum and is payable in the same year as the
investment/income/costs to which it relates.
C14 uses a cost of capital figure of 8% when assessing investments.
All cash flows will take place at the end of each relevant trading year outlined above.
Note: Ignore inflation.
Requirements:
(a) Assuming it were to proceed with the relocation of facilities to Bolton, advise C14's
management whether it would be more beneficial, in net present value terms, to acquire the new
equipment and dispose of the existing equipment or to transfer the existing equipment to Bolton. 10
(b) Advise C14's management whether it is worth, in net present value terms and based only on a
planning period 31 December 2020 to 31 December 2023, proceeding with the relocation of
facilities to Bolton. 8
(c) Explain what you understand by Shareholder Value Analysis and comment on the Marketing
Director's views. 4
---The End---
Page 4 of 4
Time allowed – 3:30 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of the
Marks
1. You work as Financial Controller at Padma Paper Ltd. (PPL), a listed Bangladeshi paper manufacturer
which has a financial year end of 30 June.
PPL currently has a very healthy level of liquid funds (approximately BDT 85 m) in its bank accounts.
At the company’s most recent board meeting the following issues were discussed:
- should the firm’s current weighted average cost of capital (WACC) figure of 9% be amended? This
figure has been used for many years and the directors are concerned that this rate does not represent
current market conditions.
- should the dividend growth model or the capital asset pricing (CAPM) model be used to calculate
the WACC?
- should PPL’s long-term funding be restructured?
Cost of capital
The figures below have been given to you for the year ended at 30 June 2018:
Type of capital Total dividends Total market

Total nominal /interest (BDT) value (BDT)
(nominal value) value (BDT)
Ordinary shares (10 Tk. per share) 102,960,000 1,320,000,000
300,000,000
Preference shares (10 Tk. per share) 3,132,000 54,000,000
20,000,000
Irredeemable debentures (Tk. 100 each) 4,050,000 140,175,000
130,500,000
Note 1: All dividends have been paid for the year ended 30 June 2018. Ordinary dividends have been
growing at a steady rate of 5% pa for the past five years.
Note 2: All debenture interest payable for the year to 30 June 2018 has been paid.
Restructuring the long-term funding
It is decided to purchase and cancel all of PPL’s irredeemable debentures at their current market value.
Issue 8% coupon debentures with a nominal value of BDT 90 million, redeemable in four years’ time
at par.
Assume that the corporation tax rate will be 25% pa for the foreseeable future.
Requirements:
(a) Using the dividend growth model, calculate PPL’s current WACC on 30 June 2018. 6
(b) Giving reasons, advise PPL’s directors whether they should use the WACC figure from part (a)
when appraising potential investments rather than the current figure of 9%. 3
(c) Discuss the logic underpinning the CAPM and explain how the CAPM can be used to calculate the WACC. 4
(d) If, at their issue date, the market gross redemption yield for similar redeemable debentures is 9%
pa, calculate the issue price of the new redeemable debentures and the total funds raised. 5
Page 1 of 5
2. (a) Your CEO has recently spoken to you about personal investment. He said:
'I've always played safe and put my savings into bank and financial institutions’ fixed deposit, but
recently the interest rates have been so tiny that it doesn't seem worth it. Everyone seems to be
saying that investing in companies' shares is a much better bet. I must admit that I can't really see
the difference between the two.
I think that I am right in saying that, with shares you get dividends instead of interest, but I was
reading the other day that sometimes companies don't pay a dividend for a particular year. Surely
they have to or no one will invest money with them. How do they decide on the size of each year's
dividend?
Newspaper says that shares in Quality Shop, the supermarket, are cheap at the moment and I'm
thinking about taking my money out of the fixed deposit and buying Quality Shop shares. I do most
of my food shopping at Quality Shop and I find them very good, so I can believe that their shares
are pretty good value.'
Requirements:
i) Reply to your CEO clarifying the risks and return issues relating to investment in shares. 2
ii) Comment on your CEO’s planned investment in the shares of Quality Shop and state the
benefits of diversified investments. 3
(b) You are a shareholder in Best Air Ltd, a listed company with an issued share capital of 10 million
ordinary BDT 1 shares with a current market price of BDT 1.80 per share at the close of business
yesterday afternoon. Today you are to attend the company's annual general meeting, and just before
the meeting begins you are in conversation with a number of fellow shareholders.
(1) The first shareholder is Saidur Rahman who owns 2,000 shares in Best Air Ltd. He expresses
great concern that before the market opened this morning the company announced its intention to
pursue a 1-for-2 rights issue at BDT 1.00 per share to raise funds for a new project that it claimed
has a net present value of BDT 2 million. 'This massive discount to the market price is appalling,
and the consequent fall in the share price will be bad news for me.'
(2) The second shareholder, Shafiq Ahmed, produces a recent investment bank report that hints at a
possible acquisition by Best Air Ltd of its principal competitor. The report states that the annual
cash flows of Best Air are currently BDT 4.2 million and that 'an appropriate discount rate for these
cash flows is 12%'. The report goes on to estimate that combined annual cash flows would total
BDT 6.8 million and that 'the appropriate discount rate for these cash flows is 10%'. Ahmed’s
concern is that he does not know what would be a reasonable price for the directors to pay in such
circumstances, as the report makes no reference to a likely purchase price.
(3) The third shareholder is Jannatul Ferdous, who is concerned by rumours that Best Air Ltd might be
about to cut its dividend, because she has read that a cut in dividend by another company adversely
affected that company's share price. At the same time, however, Ferdous mentions that a friend has
suggested that a company's dividend policy is irrelevant. She is confused.
Requirements:
(i) Advise Mr. Rahman of his various options in such a scenario, making clear to him the expected
ex-rights price of the company's ordinary shares, how much he could reasonably sell his rights
for (if he chose to) and provide calculations to illustrate to him the effect on his wealth of each
of the options available to him. 6
(ii) Calculate for Mr. Ahmed the maximum price the directors of Best Air Ltd should consider
paying for this acquisition, and advise him of the potential reasons why the directors of Best
Air Ltd might recommend an acquisition to their shareholders. 4
(iii) Outline to Ms. Ferdous the theoretical and practical positions regarding the relevance or
otherwise of a company's dividend policy. 5
Page 2 of 5
3. Fine Oil is a Bangladeshi company which manufactures and sells large-scale components for the oil
and gas industries. As the majority of its customers are international, the Fine Oil board is considering
whether the company should be hedging its exposure to foreign exchange risk. One of its key customers
is NSDF, a Norwegian oil exploration company.
Fine Oil and NSDF have recently agreed a contract (FO/12/2018/77) for the supply of a large
consignment of components. Fine Oil will start manufacturing these at the end of December 2018 and
the work will be completed in the summer of 2019. Fine Oil will receive the agreed contract price,
16.75 million Norwegian Kroner (NK), on 31 December 2019.
Information regarding Bangladesh and Norwegian currencies is given in the table below:
Table
(1) Recent research paid for by Fine Oil produced the following forecast spot rates for NK/Tk. at 31
December 2019:
Probability
9.200 – 9.230 10%
9.300 – 9.330 10%
9.400 – 9.430 40%
9.500 – 9.530 40%
(2) Spot rate (NK/Tk.) 9.300 – 9.325
(3) Forward rate at 31 December 2019 offered by Fine Oil’s bank: 0.10 – 0.13 NK discount
(4) Current interest rates Borrowing Depositing
NK 6.60% pa 5.70% pa
Taka (Tk.) 5.49% pa 4.30% pa
(5) Fine Oil’s bank has quoted the following twelve month currency over-the-counter options each with
a premium of Tk.25,000;
A put option on 16.75 million NK at an exercise price (NK/Tk.) of 9.300
A call option on 16.75 million NK at an exercise price (NK/Tk.) of 9.250
Looking ahead, the Fine Oil’s board has also identified a surplus of funds denominated in Taka. It is
planning to invest this in June 2019 in an interest-bearing BD deposit account for a period of six months.
It would like to investigate how it might hedge against adverse interest rate movements.
Requirements:
(a) Assuming the current date is 31 December 2018, calculate the Taka amount receivable by Fine Oil;
on 31 December 2019 if it uses: 8
(i) the expected spot rate in 12 month’s time
(ii) a forward contract
(iii) a money market hedge
(iv) an option.
(b) Making reference to your calculations in part (a) discuss the issues that should be taken into account
by the Fine Oil’s board when it considers whether it should hedge the NSDF receipt. 6
(c) Advise the Fine Oil’s board as to the effectiveness of employing the following methods of hedging
the company’s exposure to interest rate risk on the proposed investment of the surplus funds in June
2019: 4
(i) a Forward Rate Agreement (FRA)
(ii) an interest rate future
(iii) an interest rate option
(iv) an interest rate swap.
Page 3 of 5
4. United Group wishes to lend US $ 500,000 to its Japanese subsidiary. At the same time Sumitomo Ltd., a
Japanese firm is making a medium term loan of same amount to its Bangladesh subsidiary. The two parties
are brought together by an investment bank for the purpose of making parallel loan (a form of currency
swap). United group will lend US $ 500,000 to the Bangladesh subsidiary of Sumitomo for four years at
13%. Principal and interest are only payable at the end of fourth year, with interest compounding annually.
Sumitomo will lend the Japanese subsidiary of United 70 m Yen for four years at 10%. The principal and
interest is payable at the end of fourth year with annual compounding interest. The current exchange rate is
140 yen per US Dollar. However, Dollar is expected to decline by 5 yen to Dollar per year over the next
four years.
Requirements:
i. If these estimations prove to be correct, what would be the US Dollar equivalent of principal and
interest payments to Sumitomo at the end of four years? 3
ii. What total US Dollars will United receive at the end of four years from the payment of principal
and interest on its loan by the Bangladesh subsidiary of Sumitomo? 3
iii. Which party is better off with the parallel loan arrangement? What would happen if the yen did not
change the value? 3
5. An investment Company, The Mutual Investment Ltd. (MIL) has total capital of Taka 500 million
which has been invested in following five stocks:
Investment in Stocks beta co-
Stock
million Taka efficient
A 160 0.5
B 120 2.0
C 50 4.0
D 50 1.0
E 60 3.0
The current risk free rate is 8 per cent. Market returns have the following estimated probability for the
next period:
Probability Market return

0.1 10%
0.2 12%
0.4 13%
0.2 16%
0.1 17%
Requirements:
i. Compute the expected return for the market. 2
ii. Compute the beta co-efficient for the investment fund. 2
iii. What is the estimated equation for the security market line? 2
iv. Compute the funds required rate of return for the next period 2
v. Suppose the president of the company receives a proposal for a new stock. The investment needed
to take a position in the stock is Tk. 50 million, it will have an expected return of 18%, and its beta
co-efficient is 2.0. Should the firm purchase the new stock? At what expected rate of return should
the president be indifferent in purchasing the new stock? 2
Page 4 of 5
6. Sun Light Ltd. (SLL) manufactures domestic solar panels and has a financial year end of 31 December.
Its directors are now considering expanding SLL’s scale of operations via an initiative called “Project
North”.
If “Project North” is proceed, then SLL would have to invest in new capital equipment which would
cost Tk.3 million and be purchased on 31 December 2018. Because of the fast rate of technological
change in the solar panel industry, SLL’s directors estimate the “Project North” would enjoy a three-
year period of competitive advantage (2019-2021).
SLL has paid for market research which produced the following estimates for “Project North”.
 Year to 31 December 2019 (all figures expressed in December 2018 prices)
Total sales Tk.2,200,000
Total variable costs Tk.1,200,000
Total fixed costs (including interest paid of Tk.17,000) Tk.427,000
 Increasing sales volume in 2020 and 2021 10% pa
 Inflation rates: Sales prices 5% pa
All costs 8% pa
 Working capital
(to be in place at the start of each trading year) 10% of total annual sales
 Trade-in value of capital equipment (in December 2021 prices) Tk.600,000
Capital allowances
SLL’s machinery and equipment attracts capital allowances, but is and will be excluded from the
general pool. The equipment attracts 20% (reducing balance) capital allowances in the year of
expenditure and in every subsequent year of ownership by the company, except the final year. In the
final year, the difference between the machinery’s written down value for tax purposes and its disposal
proceeds will be either:
(i) treated by the company as an additional tax relief, if the disposal proceeds are less than the tax
written down value, or
(ii) be treated as a balancing charge to the company, if the disposal proceeds are more than the tax
written down value.
Other information
 SLL uses a post-tax money weighted average cost of capital of 14%.
 SLL’s directors would like to assume that the corporation tax rate will be 28% for the foreseeable future
and tax will be payable in the same year as the cash flows to which it relates.
 Unless otherwise stated all cash flows occur at the end of the relevant trading year.
Requirements:
(a) Calculate the net present value of the “Project North” initiative at 31 December 2018 and advise
SLL’s directors whether they should proceed with it. 12
(b) Calculate the sensitivity of the decision in part (a) to changes in the estimated volume of sales.
Ignore the impact of working capital in this calculation. 3
(c) Advise SLL’s directors whether “Project North” initiative should proceed if the trade-in value of
the capital equipment at 31 December 2018 were to be Tk.100,000 (in December 2021 prices). 3
(d) Explain briefly your treatment of SLL’s interest payment of Tk.17,000 in part (a). 2
(e) Explain Shareholder Value Analysis and identify the extent to which its principles are employed in
making the decision in part (a). 5
-The end-
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FINANCIAL MANAGEMENT

Time allowed- 3:30 hours

b) Khulna Ltd has various long term investment in the USA

Time allowed- 3:30 hours

Time allowed- 3:30 hours

Time allowed- 3:30 hours

Equity Attributable to Equity Holders Tk. 000’s

Correlation co-efficient of returns (over the three years):

Between Projects Between Projects and Between Projects and

1 and 2 0.70 1 and market 0.68 1 and money market 0.40

Between the money market and the market portfolio 0.40

Forward Rates (Quoted by Bank)

Year 2018 2019 2020 2021

Statement of financial position information for 2021:

Equity finance (C):

The company has a cost of capital of 12%.

Time allowed- 3:30 hours

• Variable operating cost will be US $ 30 per unit of production;

Projects 2022 2023 2024 2025

Option Type Exercise 6 Month 9 Month 12 Month Contract Size

DENVER COVER PLANT

Issued - 500,000 @ BDT2 1,000

The details are as follows.

Exchange rates Euro (€)/GBP (£)

Interest rates Lending Borrowing

Could you write a memorandum for the board which:

NET CASH FLOWS

Annual borrowing and depositing interest rates

Three-month over-the-counter currency options

 Privately-owned water purifier and bottler.

1st Investment Proposal

2nd Investment Proposal

The following information is available at the close of business on 31 March 2021:

Over the counter currency option

2. You should assume that the current date is 31 March 2021.

Time allowed- 3:30 hours

The following information has been gathered:

FTSE 100 INDEX OPTION (BDT 10 per full index point)

Exercise Price 6,650 6,700 6,750 6,800 6,850

Type of floor area Number of shops Monthly rent per shop

The corporate tax rate is 37.5% per year.

Equipment at the new site

Time allowed- 3:30 hours

The following information has been gathered:

FTSE 100 INDEX OPTION (BDT 10 per full index point)

Exercise Price 6,650 6,700 6,750 6,800 6,850

Type of floor area Number of shops Monthly rent per shop

The corporate tax rate is 37.5% per year.

Equipment at the new site

Type of capital Total dividends Total market

Probability Market return

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