Institute of Actuaries of India 2010 CT-2 Finance and Financial Reporting ( ) - Question Paper
INSTITUTE OF ACTUARIES OF INDIA
EXAMINATIONS 13th May 2010 Subject CT2 - Finance and Financial Reporting Time allowed: Three Hours (10.00 - 13.00 Hrs)
INSTRUCTIONS TO THE CANDIDATES
1) Please read the instructions on the front page of answer booklet and instructions to examinees sent along with hall ticket carefully andfollow without exception
2) Mark allocations are shown in brackets.
3) Attempt all questions, beginning your answer to each question on a separate sheet. However, answers to objective type questions could be written on the same sheet.
Q. 1) A business made a loss during the financial year just ended but has more cash at the end of the year than it did at the beginning. Which of the following could be a reason for this?
A. Dividends were lower this year than last year.
B. Some fixed assets were sold during the year.
C. Debtors took longer to pay this year than last.
D. Creditors were lower at the end of this year.
Q. 2) Soham Sons conducted a financial analysis of its restaurant business, the analysis did not improve the actual fortunes of the business, and it may not be able to achieve any one of the following issues:-
A. Improve the profitability of this project.
B. Delineate the risks involved in the project.
C. Highlights the salient factors that lead to the greatest uncertainty.
D. Possibly suggest methods by which the risks might be reduced.
Q. 3) The needs and the objectives of these shareholders will NOT vary according to which one of the following factor:
A. Attitude towards risk.
B. Time preference and consumption needs.
C. Balance between the need for income and capital growth.
D. Attitude towards growth
Q. 4) Please read the following statements with respect to Put Option carefully and answer the question below.
I. - The buyer of the option has the right but not the obligation to
sell the underlying sell the underlying sell the underlying sell the underlying
asset at a specific point in the future at a specific price.
II. - The buyer of the option has the obligation but not the right to
asset at a specific point in the future at a specific price.
III. - The seller of the option has the right but not the obligation to
asset at a specific point in the future at a specific price.
IV. - The seller of the option has the obligation but not the right to
asset at a specific point in the future at a specific price.
Which of the following is correct?
A. II and III only are correct
B. I and IV only are correct
C. I and III only are correct
D. All are incorrect
Q. 5) The decision made from a Payback Method may not be the optimum decision for maximizing the Profit or Returns because:
A. It ignores income beyond the payback period
B. The payback period is difficult to calculate
C. The returns in later years are uncertain
D. Of the emphasis placed on the interest factor
Q. 6) A reduction in risk in the context of a Capital Project Appraisal will lead to:-
A. Increase in the Risk Discount Rate and decrease in the Net Present Value
B. No change in the Risk Discount Rate and increase in the Net Present Value
C. Decrease in the Risk Discount Rate and increase in the Net Present Value
D. Decrease in the Risk Discount Rate and decrease in the Net Present Value
q. 7) Which of the following is Not a definition of return on capital employed:-
A. = Net Profit before interest and tax
Share Capital + Reserves + Long term debt
B. = Net Profit before interest and tax
Share Capital + Reserves + Long term debt - Intangible Assets
C. = Net Profit before interest and tax
Market Value of (Share Capital + Loan capital) + Reserves
D. = Total Assets - Intangible Assets.
Share Capital + Reserves + Long term debt
Q. 8) Low margins relative to other firms in the industry will not indicate which of the following things :-
A. A more down market product range.
B. Subnormal profits are being made, so that the firm will exit the industry in the long run.
C. An attempt to increase market share.
D. An attempt to increase product awareness.
Q. 9) The share premium account is not used for which one of the following purposes: -
A. Any profit or loss on the issue of loan stock.
B. Preliminary expenses of forming a company.
C. Expenses & commissions incurred in any issue of debentures.
D. Expenses & commissions incurred in any issue of shares.
Q. 10) Which of the following in respect of Monte Carlo Simulation Model is not correct?
A. It involves creating a model, into which all the variabilities and correlations of the input criteria are entered.
B. They are likely to be performed at an early stage in the capital appraisal process.
C. The model runs a large number of simulations to obtain a spread of results.
D. It is complex and expensive.
Q. 11) (a) Define the following:-
i. Beta Value
ii. Covenant
iii. Introduction
iv. Underwriting (2)
(b) In principle, agency cost is incurred to deal with the conflict of interest that arise between various stakeholders. This has led to significant costs associated with monitoring and protecting individual interests. Whereas if, all stakeholders agree to work together in the best interests of the entity, they would benefit significantly without incurring this agency based costs.
Explain, why it would be difficult if not impossible, to eliminate these agency costs. (4)
(c) Vaibhav Industries is looking at setting up a new textile division & also expanding its current printing division, what is the role of financial management
in an organization, why is it important, why is it difficult? (2)
Q. 12) (a) Define chargeable gain in the context of capital gains tax. Calculate the capital gains tax using the following information:
Rs.30,00,000
Rs.
Rs.
Rs.
Rs.
25%
200
125
6,00,000
3.00.000
4.00.000
1.00.000
Sale Price of a Property Purchase Price of the Property Sale Costs
Property Development Costs Individual Allowance Capital Gains Tax Rate Index at the time of Sale Index at the time of Purchase
IAI_CT2 0510
The property development costs are incurred at the time of purchase itself and the sale cost is totally incurred at the time of sale. (4)
(b) Explain the basic principles of Double Taxation Relief. (2)
Q. 13) Secure Life Insurance Company has been in operation in the Indian Insurance Industry for the last fifteen years. Currently the companys shares are not listed on any market.
(a) List four reasons why Secure Life Insurance Company may seek a full stock exchange listing? (2)
(b) State any four methods for obtaining a quotation with an advantage and disadvantage for each of the methods. (6)
Q. 14) Pioneer Transports Ltd has a Debt: Equity ratio of 1:1. The risk-free rate of return is 8%, the equity risk premium derived from the market is 7% and the gross cost of debt is 4%.
The companys beta is 1.25. The profits of the company are taxed at 30%. State any further assumptions you make.
(a) Calculate the weighted average cost of capital. (2)
(b) The company wishes to repay all the debt. What would be the required return to equity in such a situation? (3)
(c) The company decides against repaying all debt, but instead embarks on a rights issue in order to reduce its Debt: Equity ration to 1:2. Calculate the weighted average cost of capital after the rights issue. (3)
Q. 15) Meghan Stores Limited:-
Income statement for the year ended 31st December: -
|
2009 |
2008 | |
|
Sales |
25,200 |
18,000 |
|
Cost of Goods Sold |
(10,080) |
(8,460) |
|
Gross Profit |
15,120 |
9,540 |
|
Distribution Cost |
(1,512) |
(540) |
|
Administrative Expenses |
(504) |
(270) |
|
Operating Profit |
13,104 |
8,730 |
|
Finance Costs |
(1,896) |
(561) |
|
Net profit before tax |
11,208 |
8,169 |
|
Tax expenses |
(3,060) |
(2,298) |
|
Profit for the year |
8,148 |
5,871 |
|
Dividend Paid |
6,000 |
3,000 |
Balance Sheet as at 31st December:-
|
2009 |
2008 | |
|
Assets | ||
|
Non Current Assets | ||
|
Property |
15,000 |
15,000 |
|
Plant & Equipment |
21,000 |
6,000 |
|
Current Assets | ||
|
Inventories |
840 |
705 |
|
Trade Receivables |
2100 |
1500 |
|
Cash at Bank |
30 |
30 |
|
Total Assets |
38,970 |
23,235 |
|
Eauitv & Liabilities | ||
|
Equity | ||
|
Share Capital |
6,000 |
6,000 |
|
Retained Earnings |
8,448 |
6,300 |
|
Non Current Liabilities | ||
|
Long Term Borrowings |
20,802 |
8,025 |
|
Current Liabilities | ||
|
Trade Payables |
720 |
570 |
|
Current Tax Payable |
3,000 |
2,340 |
|
Total Liabilities |
24,522 |
10,935 |
|
Total equity & liabilities |
38,970 |
23,235 |
Analyse the last two years financial statements & discuss the profitability ratios for this company for last 2 years.
[0.5 X 8]=4
Q. 16) Draw up a table to compare an Investment banks, Building societies, Pension schemes, life insurance companies with respect to: -
A. Role
B. Source of funds
C. Application of funds
[3 X 2]=6
Q. 17) a) One of the state cricket associations in India is considering building a new cricket stadium to host IPL matches. They are planning to build the stadium together with a gymnasium, hospital and a school at the now unused industrial site, situated in the suburbs of the states capital city.
i. Describe the steps necessary to effectively identify risks involved in the project? (6)
ii. Explain how a risk matrix can be used in the risk analysis process. (4)
b) Write down the formulas for an investments NPV and rate of return. Prove that NPV
is positive only if the rate of return exceeds the opportunity cost of capital. (4)
c) You are the manager of a specialty retailing firm which is considering two strategies for getting into the Malaysian retail market. Under the first strategy, the firm will make a small initial investment of $ 10 million and can expect to capture about 5% of the overall market share. Under the second strategy, the firm will make a much larger commitment of $ 40 million for advertising and promotion and can expect to capture about 10% of the market share. If the overall size of the market is $ 200 million, the firms cost of capital is 12% and the typical life of a project in the firm is 15 years, what would the operating margin have to be for the firm to consider the second strategy? [You can assume that the firm leases its stores and has no depreciation or capital expenditures.] (6)
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a) Explain the difficulties associated with depreciation of property, plant & equipment,
Q. 18)
in a companys financial statement. (2)
b) Chetek Ltd. Which depreciates its machinery @ 10% p.a. on the written down value method, provides you the following information
Machinery account as on 1st Jan 2007 :- Rs 10,00,000
Accumulated Depreciation account :- Rs 2,71,000
No depreciation is charged in the year of sale of machinery but full depreciation charge is being made for the year during which the machinery is purchased.
On 1st July 2007, one new machinery was purchased for Rs. 1,60,000 and old machinery purchased on 1st July 2004 for Rs. 1,20,000 was discarded but could not be sold immediately. However, it was expected to realize Rs. 20,000/-.
Calculate the depreciation charge for 2007 & 2008 and net profit received from sale of non - current asset in 2007. (6)
c) Using the information below, prepare the cashflow statement of Rahul Enterprises for Year 2009.
During 2009, Rahul Enterprises had the following items of income & expenditure: -
Rs.
Increase in finished stocks 40,500
Staff Cost 1,41,900
Dividend income from ABC company 12,600
Turnover 10,86,000
Tax paid 1,47,360
Increase in cash 71,340
Dividends paid 45,000
Increase in work in progress 6,300
Interest received on 3 month bank deposit 10,500
Interest paid on loan stock 16,500
2009 sales for which payment not yet received 2,13,000
Payments for 2008 sales received in 2009 1,89,000
2009 raw material purchases not yet paid for 1,11,000
2008 purchases paid for in 2009 1,20,000
The company bought 3 bank note printing machines in January2009 for Rs 1,05,000/- each. The total depreciation charge for 2009 was Rs 67,350/-.
On first January2009 the company had Rs 1,50,000/- in cash and Rs 2,94,000 in a 3 month bank deposit. By 31st December2009 it had a Rs 2,21,340 in cash and Rs 2,85,000 in three month bank deposit.
Rahul Enterprises operating profit for 2009 was Rs 5,75, 550. (12)
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