ICWAI Paper no 11 and 12 dec 2009

December 2009

Capital Market Analysis & Corporate Laws

Time Allowed: 3 Hours

The figures in the margin on the right side indicate full marks'

Please answer all bits of a question at one place.

SncrtoN I (60 Marks)

(CAPITAL MARKET ANALYSIS)

Answer Question No. I which is compulsory and aryJ:W

fro* tfu ,ttt io thtt trttit*

1. (a) Fill up the blanks with the appropriate answers:

(i) For LMN Ltd., the market standard deviation is 0'03, standard deviation of an asset is 0'027 and the

correlation coefficient of the portfolio with market is 0'8. The market sensitivity index is

(ii) Continuing(i)above,ift heexpectedmarketretumisIZ Voandt herisk-freerateofr eturnisBVo,the

expectedrateofreturnofaportfolioapplyingCapitalAssetPricingModeliS-Eo.

(iii) In the context of Capital Adequacy Ratio (CAR) of banks, Tier II Capital [can/cannot] be

more than Tier I Capital.

(iv)-isregardedasthefatherofmodernportfoliotheory.

(v)Theexterna1factorthataffectstheindustryasawholeistermedas-risk,incapitalmarket

analysis.

(vi) In the case of options, only the is obligated to perform the contract.

(vii) The entire pre-issue share capital, other than that locked in as promoter's contribution, shall be lockedin

for a period of Q-F-

(viii) Premium settlementi s adoptedb y stock exchangesf or the products and -. 1x8

Statew ith reasons,w hethert he following statementsa reT rue of False( Mere conclusionw ill not be sfficient):

(i) In the capital issuance through the book building process, the merchant banker acting as book runner

determines the *,thsc. e.

(ii) Grosse xposurel imits of memberso f stocke xchangea re computedi n absolutet erms,i gnoring positive

and negative sings (purchase values and sale values).

(iii) Junk bonds are corporate bonds, considered as unfit for investment purposes and so branded, by the

investing fraternity.

(iv) Repo and reverse repo trade are also termed as cgjlatglahzqd lending and bo€tt"g.g:!uT*.t[

(v) An e-mail is not an-acceptablefo rm of approvede videncet owards receipt of communicationf rom a

person. (a

(vi) Efficient Market Hypothesis implies that a new information revealed about a firm will effect the share

price rapidly and rationally.

Syllabus 2008

Full Marks: 100

(b)

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F-P11(CMC)

Syllabus 2008

(iii)

(iv)

(v)

2

2

2

Y @ Ltd.hasbeeninexistenceforthepastseVenyears.Therelevantextractsfromthecompany's

financial statement and other records for the vear ended 3l-3-2009 are as under:

(i) Assets position:

Fixed Assets: (Rs. in lacs)

--"

Patents trademarks and copyrights

Goodwill

Land and buildings

Equipments g0v

Vehicles

Current assets

Total value of assets

Share capital and reserves: ---\

Paid up share capital 85\

General reserve

(a) The company was orieinallv in the hotel bEilress and during,tpgl2g0g,it forayed into the telecom

Walgglso, changinfto tt,"

"lrrEntF*e.

The net profits earned by the company was'R5II20

lgr jtotul tu*ou". Rs. 400 crores), of *hi"h Rr. 75 lu". (,r

hotelsecffi "

(b) The company was consolidating its financial position and hence even though it had distributable

surplus during the last five years, it declared dividend during the last two years only (including

culTenr year).

The company wishes to make a public issue of shares to the extent of rupe

( 3 )

Correlation coefficient between the returns of the two stocks L and M:

Expectedr eturn of a portfolio comprising of 3l%o,,ofL and{ p%oo f M; and

Risk of a portfolio consisting of L and M in thisame proportion.

oes not

want to go through the book building route or engage in "market building' E-r the listing,

and does not want the participation of financial institutions or scheduled commercial banks. The

company seeks your advice whether it is possible to make a public issue, in the light of the SEBI

requirements,andifitisnotpossible,what @ itionsoastocomplywith

the requirements. You may tabulate your views as under:

sl.

No.

Requirements under the

option

Does the company fulfill

the norms?

Action to be taken by

the company

l0

Please Turn Over

F-P11(CMC)

Syllnbus 2048

( 4 )

Sncrron II (40 Marks)

(CORPORATE LAWS)

Answer Question No. 5 which is compulsory and aay two from the rest in this section.

.4---

5. (a) Fill up the blanks: ,

(i) Every public company having a paid-up capital of not less than rupees shall constitute tle

Audit Committee.

(ii) In the context of classification of risk, tax risk will fall under - ris\ (credit, liquidity, disaster).

(iii) The CompetitionC ommissions hall consisto f a Chairpersona ndm ore than otherM embers

to be appointed by the Central Government. (

(iv) In the context of corporateg overnanceN, arayanaM urthy Committeew as formed in the year- gA)-.

lx4

(b) State with reasons whether true or false (Mere conclusion will not suffice):

(i) Where a charger equiringr egistrationi s not registeredt,h e chargeb ecomesv oidablea gainstt he creditor

and not against the liquidator.

(ii) To effect buy back of shares, the same should be, inter alia, after passing an ordinary resolution in a

meeting of the Board of directors.

(iii) Amalgamation in the nature of merger is to be accounted as per the purchase method. 3x2

6. (a) A public company sought extension of time from the ROC for holding AGM upto a period of 3 months and

it was granted. However, when the actual AGM was to be held, the company faced a situation that the annual

accountsw ere upto a period beyondw hich it is permissible.T he companyc ontendedt hat sinceR OC granted

extension of time for holding the AGM, the same would also be applicable for presentation of acounts as

weli. Referring to the relevant provisins of the Companies Act, 1956, state v'hether the contention of the

companyh olds good. 4

(b) The Board of Directors of Moonshine Ltd. are contributing every year to a charitable trust a sum of

Rs. I lac. In a particular yeat, the company suffered losses and the directors are contemplating to contribute

the same amount in spite of the losses. In this connection, discuss whether the directors can do so. 4

(c) GangaP lasticsL td. andY amunaT ubeplastsL td. enterdi nto a schemeo f amalgamationb y which former would

transfer its entire undertaking to the latter. However, the Central Government raised an objection that unless

the objects clause of the companies are similar and the Memorandum empowers to do so, the scheme of

amalgamation cannot be permitted. Is the objection of the Central Government tenable? 7-

fr\ ,/

f, (a) /Fruits Lrd.{as its slrbsidiary company Oraqges Ltd., which was formed to carry out some of the objectives

\'\/_ol tthe*torme,!.Fqdtsrtd.suspendsoneofitsseveralbusinesses,bypassingare @ y'S

extra-ordinary_gggglalggeeSjnwgr"$ effect frqm tst lanu The businesss o suspendedc ontinues

' to be suspendedu ntil the end of Mg!;_p09. On l€t an4il-{p9, a Srolg :f shar:hold:r.so f Frui:s"Ltd.

FileapetitionintheCourtforwindingofthecompanyonthegtoundo @ "

compjlny--l

Referring to the provisions of the Companies Act, 1956,

(i) State whether the contentiono f the shareholdersis legally correct;

(ii) Will your answerb e the same in caseF ruits Ltd. suspendsa ll its businesses?

8.

(s)

Syllnbus 2008

//

O/Wnutdo you comprehend by the term "Corporate Governance"? Explain how the provisions of the Companies

'1

A",, 1956 relatinj to Audit Committee will help in realizing some of the objectives of Corporate Govemance.

,/'

C{Ca"it be said that management audit incorporates in itself, an efficiency audit? What are the main objects

ofr{fficiency audit2 7

fbfrru*the importanceo f going concernc oncepti n preparationo f corporatef inancial statementsin India' How

is the term "foreseeable future" defined in this cbntext? 8

*-.

I

FINAL EXAMINATION

Decembe2r0 09

FinancialM anagemenatn dI nternationaFl inance

Time Allowed: 3 Hours

The figtrres in the margin on the right side indicate full marks.

Answer Question No. I from part A which is compulsory and.

any five questiotxfsro m part B.

Working notes should form part of the answen

Please (i) answer all bits of a question at one place,

(ii) open a new page for answer to a new question.

Prnr A (25 Marks)

I ' (a) In eacho f the casesg ivenb elow,o neo ut of four alternativesis correct.I ndicatet he correcta nswer( - I mark)a nd

give your workings/reasonbsr iefly in supporto f your answer( = 1 mark):

(i) The Boardo f Directoro f MOULIN LTD. (ML) is dissatisfiedw ith last year'sR OE of t17o.If the net

profit margina nda ssetu rnoverr atio remainu nchangeda t 70Voa nd 1.25r espectivelyb, y how muchm ust

the asserto equity increaseto achieve2 0Zoo f ROEf

A. Must increaseb y 0.6

B. Must increaseb y 0.5

C. Must increaseb y 0.4

D. Insufficient information

(ii) Ther atesa vailablein the Kolkatam arketa re:

Rs./$ Spot 46.75178

f/$ 0.5285/86

lf an Indian importer requires pounds, the rate quoted to him is

A. Rs. 88.461f.

B. Rs.88.5l/f

C. Rs. 88.641f.

D. None of (A), (B), (C)

F-P12(AFM)

Syllabas 2008

Full Marks: 100

(iii)

(iv)

B.3Voincrease

MARISON LTD. an Indian companyi s planningt o investi n the USA. The rateso f inflation arc g%ain

India and 37o in USA. If the spot rate is cumently Rs. 46j0l$, what spor rate can the

5years? "ornp*y 6-&-^=f,.,

)years/ ' .*--- :- -:= <r-- \

A.Rs.57.93/$ i ^ r\ - r \ i o i )

B.R s5. 8.94l$ ,-,.t- ' ''

_ L €,t -tX (luil:\&\

''

c.Rs.se.oo/$ , z o ^Y qt.\"f\--l

D. Rs.59.13/$ t4 k'l'

---1--- \3

-l,E

F-PI2(AFM) (2)

Syllabus 2008

(v) The current price of a share of RONEX LTD. is Rs. 55. The company is planning to issue oje_!gh!_:!gg

for everyf our equity sharesI.f the companyt argetst hat the ex-rightsv alueo f a sharqs: halfnot fall below

R @ for one righti sh;e should be

A. Rs.50

B. Rs.48

C. Rs.40

D. None of (A), (B), (C)

(vi) ASHLEEN LTD. is to pay dividendo f Rs.3 .QQq t_tbeeryLqltbg:Ieargnedx pectedto grow at lLVop ery ear

forewr. If the required rate ofrqlugg_b9-c @ ryltomlnsintrinffi uewill be

,A( Rs.I00

./ B. Rs. 110

C. Rs. 115

D. None of (A), (B), (C)

(vii) The earningp ower of SYNTEX LTD. is 0.30. If the averageo ftotal -asse!-asn d intereste xpensesa re

Rs. 2,00,000a ndR s. 15,000r espectivelyt,h e interestc overagera tio will be

<--

A. 1.5

B. 3.00

D. Noneof (A), (B), (C) 2x7=14

(b) Chooseth em osta ppropriatoen ef rom thes tatedo ptionsa ndw ritei t down[ onlyi ndicateA , B, C, D asy out hink

cofrect (= 1 mark each)l:

(i) Which oneo f the following would describec ommerciapl aperm osta ppropriately?

A. Unsecuredlo ng-termn otesa sl oan

B. &cured shoit+erm loan notes

C. -Secured.short-terlmoa nn otes

D. Securedlo ng-terml oann otes

(ii) Hedging through forward, futures, swaps etc. is an example of

A-t'skavoidance

B. Risk sharing

C. Risk transfer

D. None of the above

(iii) In which of thef ollowing appraisalbs y thef inanciali nstitutionsi,s the gEslg ofjgplc.menringt hew hole

project qitically studied?.

e).-Uft<et appraisal

B. Technicaal ppraisal ,

C. Financial appraisal ,

D. Economicalappraisal

(iv) Which of the following is a corrects equenceo f life cycle of a project?

I

i

. t

!

t

I

A. Planning,s elections, chedulingt,e rmination

B. Planning,im plementationc,o ntrol,e valuation ,--

ft , Selections, chedulingi,m plementatione, valuationfontrol

p) Planninei,m plementationc.o ntrol,e valuation

@

(a) Explainh ow the combinede ffecto f operatinga ndf inanciall everagesp rovidet he risk profile of an organization.

(b) TheB alancSe heetosf MAGNAVISIONLT D.a so n3 1.03.200a8n d3 1.03.200a9r ee ivenb elow:

31.03.20083 1.03.2009

Assets

Land & Buildings

Investments

SdcountsR eceivables

6n UBank Balances

8,00,000

1,00,000

4,80,000

4,20,000

2,98,000

6,40,000

1,20,000

4,20,000

9,10,000

3,94,000

A. Forward contract

B. Option contract

C. Currency swap /

D. Futurecontract , .z'

(c) Mentionw hethert he following statementas reT rue (T) or False( F): .4

(i) TRIPSi s an internationaal greemenot n intellectualp ropertyr ights.]

(ii) In the Bank'sp arlancen, et working capitalr epresentms arginm oney{

(iii) GDR may be convertedin to underlyings haresa ndv ice-vert".T

(iv) The changesin forejgn exchangere servesa ndr eserlreso f monetary_golhde ld by the monetarya uthodty

(v) Portfolio BalanceA pproacha ssum€sth att he PurcfasingP .owePr arity (PPP)h oldsg oodf 1x5=5

vy _z-\\

\

-- \L --- \

1'a4

t<

,

(ii) Net profit for the year2 008-09w asR s. 1,24,000a fterc hargingd epreciationo n fixed assetsa mountingt o

Rs. 1.40.000

( 3 )

(v) Whenc osto f capitaol f a projecits equatlo its InternaRl ateo f Return( IRR)

A. TheNPVwillbezero yt

B. The NPV will be +ve

C. The NPV will be -ve

D. Benefit cost ratio will be zero

(vi) A transactionw heret wo currenciesa ree xchangedb y thep artiesi nvolved,o nly to be eJ @ d backl ater

is termed as

lx6=6

Prnr B (75 Marks)

F-P12(AFM)

Syllabus 2008

s

Total Assets 20,98,000 24,84,000

Liabilities

Share Capital

Reserves

P&LAccount

TermLoan

Qy6nt Liabilities

9,00,000

6,20,000

I,36,000J

5,40.000

2,99,000

9,00,000

6,00,000

1,12,000

Nil

4,86,000

Total Liabilities

The following details are provided:

(i) Dividend paid during the year 2008-09 was Rs. 80,000.

J,,?

]

Please Thrn Over

F-Pr2(AFM)

Syllabus2 008

( 4 )

3. (a)

(b)

(iii) Iinnvveessttmmeennttssww aosrct ha Rrrsie. d1o 6u,0t a0t0 twh ee yree saor-lde nddu.ring the year 2008-09f or Rs. 17,000.N o revaluationo f th

(iv) tph1e"y "6e aasre snedtswin egr3 e1s .o0l3d.a 2t 0a0 p9ro.fit of Rs.4 .000d uringt hey eara ndt he profit is includedi n the net profit fo

yYebaur ae rnedreeqd3u lisrte Mdt 9a prcrehp,2 a0re0t 9h.e Statemenot f changesi n working capital andt he FundsF low Statemenfto r thr

'

"- 3+4+3=l(

Explainb rieflyt hef unctionsp erformedb y theS ecuritie&s ExchangeB oardo f India( SEBI). :

ANKIT LTD' a manufacturingc ompanyp roduces2 5,000l itres of speciall ubricantsi n its plant. The exi.stintr

-

cIto iss teo xfRpesc. t2e ldath kahta t hnen ouida lmlya. chinec anb e usedf or furtherp eriodo f 10 yearsb y canying out suitabler epairsa t a

tAh em oaldn upflaancttu (mreaorc f hminaec)hf oinr eRrsyi. s 1 o lfafekhri.n Tgha e n perwoj mecatcehdci noesw to itfh t thhee pl arotedsuttc etwc hilnl othloegnyb a et R: s. l0 lakh aftert radingo fl

Variable Costs

Fixed Overheads

Variable Costs

Fixed Overheads

Cost/litr(eR s.)

60.00 ./

15.00 .--

75.00

Cost/litre(R s,)

45.00

20.00

The fixed overheads*" ullo"utionG*-other departmenpt lus thed epreciariono f plant ard machinerv .

eTcaoxth tspehte eo oc elfd tnte mhddieso a n fcl lewhVwihon ime.cc haa,cn ithb si ens saeoal vlndad fgo tehvr aaRtl sou.fe 2 wt hlaielkl ohbl iedn R o thsn.ee 1 o m ipuaettynt .bm Rea adrtek"ep otrf.eT cchoiearp nteoedriwna m t1eta0a c xyhaeitanioresin s.i T s eh 5xebp mzecci.ntF eiomdrr ou ta lmaxs rprauf rorerpo ol0fs r eyesettu,ah rrens

It is alsoa nticipatedth at in futuret he demandf or the productw ill remaina t 25,000litres.

Advisew hethert he new machinec anb ep urchasedI.g lore capitaig ain taxes.

lGiven:P VIFA( l}Vo,I0 years)= 6.145P, VIF( I}Vo,l 0 years=) 0.3g6.1 5+3+2=10

4' The key informationp ertaininglot he proposedn ew financingp lanso f ADVENTURE LTD. is given below:

Sourceos fFunds FinancingP lanI FinancingP tanI I

Equity

Preferencseh ares

Debentures

15,000s hareso fRs. 100e ach

727o,25,00s0h areos f Rs.1 00e ach

Rs.5 ,00,000a t a couponr ateo f l\Vo

30,000s hareso fRs. 100e ach

Rs.15,00,00c0o, uponr ateI lVo

The corporateta x ratei s 35 per cent.

Requip*

(a)tileterminet het wo EBIT-EPSc oordinatefso r eachf inanciapl lan.

(b) Determineth e

(i) Indifferencepoinat;n d

(ii) Financialb reak-evenp oint for eachf inancingp lan.

l -

(s)

Svllabus 2008

(c) Which plan has more financial risk and why?

(d) In/icate over what EBIT range, if any, one plan is better than the other.

(dzftAefirm is fairly certaint hat its EBIT will be Rs. 12,50,000w, hich plan would you recommenda, ndw hy?

(3+4)+3+2+I( x 3)=1 5

(a) Whata ret he differencesb etweenw arrantsa ndc onvertibled ebentures? 5

(b) The equity share of AMTREX LTD. is quoted at Rs. 210. A 3-month call option is available at a premium of

Rs. 6 per share and a 3-month put option is available at a premium of Rs. 5 per share.

(i) Ascertaint he net pay-offst o the optionholdero f a call option anda put option,g iven that:

(1) The strikep rice in both casesis Rs. 220; and

(2) The sharep riceo n thee xcercised ayi s Rs.2 00,R s.2 10,R s.2 20,R s.2 30a ndR s.2 40r espectively.

(ii) Also indicate the price range at which the call and the put options may be gailfully exercised.

4+4+2=10

6. (a) WhatismeantbyBalancedScorecard? 5

(b)( A financiala nalysth asb eena skedt o appraiseN ETWORKS LTD., an IT companyi n termso f the future cash

generatingc apacityH. e hasp rojectedt he following after-taxc ashf lows:

Year

Cash Flows

rRs. ir lakh)

352

Ir is firrfter estimatedt hat beyond 5th year, cashf lows-will-perpetuate-at_a,eoqslngnrot wth ryte o_lf$g

5th rgirJ

eOffi=..----otnhaet ftoyl lowing informationa rea vailable:

(2) The coepqny ha*om"q debto f Rs. 7ffid cash/bankb alanceo f nsSf+Z farfr)

(3) The numherof o .3Olakh /.

Requirements: V

(i) What is the valueo f NETWORKS LTD. in termso f expectedfu ture cashf lows?

(ii) Calculate the value of shareholders.

(iii) The company has received a take over bid of Rs. 402 per share. Is it good offer?

[Given:( PVIFa t2l%of or year1 to 5): 0.833,0.694.0.579,0.482,0.402.]

VATSAN LTD. is consideringa projectw ith the following expectedc ashf lows:

lnitial investrnenl Rs. 1.00.000.

Year

ExpectedC ashI nflows( Rs.) 70,000 60,000 45,000

Duet o uncertaintyo f futurec ashf lows, them anagemendte cidesto reducet hec ashi nflows to certaintye quivalent

(CE) by taking only 807of or lst yea470%ofo r 2nd yeara nd6 0Vof or 3rd yearr espectively.

Thec osto f capitali s L07o.

Required:

Is it worthwhile to take up the project? 5

Please lhrn Over

6+2+2=10

t

I

l : $

I

l'

I

I

I

i

( 6 )

F-P12(AFM)

Syllnbus2 008

&) wLsoNLTD.anlndiancompanyhasapayableofus$1'00'000duein3months'Thecompanyisconsidering

to covert hep a:;vi; ;il;; itie roilowingi lternatives:

.' (i) Forward contract;

(ii) MoneY market; and

liii) OPeton.

Thefollowinginformationisavailablewiththecompany:

Exchangera te:

SPot Rs./$ 45'50/45'55

3-mForward 40145

Interest rates (70): PerAnnum

US 4'515'0 (DePosit/Bonow)

India 10'0/11'0 (Deposit/Bonow) cn- ^ i^,e D.r.

call option on g with a srrike price of Rs. 46.00 is available ar a premium of Rs. 0. r0/$. put option on g with a

TreasurydepartmentofthecompanyforecastedthefutureSpotrateafter3monthstobe:

SPot rate after 3-m ProbabilitY

Rs.45'60/$ 0'10

Rs.46.00/$ 0'60

tq-{ '/'

P1v*'

€'- fL

Rs.46.40/$ 0.30

You arer equiredt o suggesttheb esta lternativeo fhedging'

Write short notes on 4ny three otttof the following:

(a) CunencY Futures;

(b)..kteasureso f Non-Financial Performance;

(c), Foreign Direct Investment;

(d)- Balance of Payment. ..rr:

(1+3+4)+2=10

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