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ACTUARIAL SOCIETY OF INDIA

EXAMINATIONS: NOVEMBER 2000

Time: 3 Hours Marks: 100

SUBJECT 108: FINANCE & FINANCIAL REPORTING

Instructions to the candidates.1.Do not write your name anywhere in the answer sheets.2. Fasten your sheets together in the numerical order of the Questions.

3. Begin your answer to each question on a separate sheet of paper.

Otherwise you may lose marks.

1. A company has revalued its fixed assets recently. Indicate, in your answer paper,the correct statement out of the following.

A It will make the balance sheet look stronger.

B It will increase the net worth of the company.

C It will have to pay tax on the amount of increase in fixed assets.

D Profits will be low because of increased depreciation. (2)

2. Indicate, in your answer paper, the correct statements out of the following.

A Preference shareholder never has any voting rights.

B Preference shareholder gets dividend only when profits are there.

C Preference shareholder ranks above ordinary shareholder on winding up ofthe company. (2)

3. Indicate, in your answer paper, the incorrect one out of the following statements:A. A valuation of the ordinary share of a company is made by calculating the

equity to debt ratio for the company.

B. A valuation of the ordinary share of a company is to discount the futuredividend stream at an appropriate rate.

C. A valuation of the ordinary share of a company is to multiply theestimated earnings by the price earnings ratio of the industry to which that

company belongs.

D. A valuation of the ordinary share of a company is to predict the priceusing technical analysis of the past price movements of the share. (2)

4. The balance sheet of a company shows the share premium account also. Indicate,

in your answer paper, the correct statements out of the following:

A. The company can issue bonus shares to its shareholders.B. The company can pay bonus dividend to its shareholders.C. The company can adjust this amount against unpaid calls of some

shareholders. (2)

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ASI A 11 2000 1082

5. The following figures are taken from a company 's published accounts for the year1999-2000. Rupees in crores

Ordinary shares of face value Rs.10 each 50.00

10% Preference shares of Rs.100 each 15.00

Reserves including Profit & Loss Account balance 70.00

Current liabilities 14.00 149.00

Total assets 129.00

12% Secured debentures 20.00 149.00

Indicate, in your answer paper, the correct figure of Return on Capital Employed

out of the following figures, if the profit before interest and tax for the year isRs.46.50 crores.

A 35%

B 28%C 32%

D 30% (2)

6. Indicate, in your answer paper, the correct figure of Interest cover for the

company in Question 5 out of the following figures.

A 10.5 times C 11.7 times

B 19.4 times D 20.4 times (2)

7. Indicate, in your answer paper, the correct ones out of the following statementsgiving reasons why bank overdraft is better than short-term loan for short-term

financing needs of a company.

A Only money drawn out of its current account is shown as overdraft.

B The overdraft is repaid whenever any amounts are credited to the accountby the company.

C No assets need be secured against the bank overdraft. (2)

8. Indicate, in your answer paper, the correct ones out of the following statementsgiving reasons why IRR is better than NPV.

A IRR provides dependable results even if initial capital is small.

B IRR highlights the return achievable by the project.C IRR involves calculations at various rates than for NPV. (2)

9. Explain in detail how and why i) valuation of stocks and ii) assessing the amount

of depreciation can be interpreted in different ways for preparing the Profit &

Loss Account of companies. (5)

10. Describe the investment characteristics of convertible debentures. (7)

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ASI A 11 2000 1083

11. Indicate, in your answer paper, the correct ones out of the following statementsabout an investment trust.

A Investment trust is a company listed on the stock exchange.

B The price of its share is announced by the trust.

C. The shares are not extinguished when they are sold by the holder. (2)

12. Indicate, in your answer paper, the correct ones out of the following statements

about regulation of joint stock companies' annual accounts.

A The Companies' Act regulates their annual accounts.

B Stock exchange regulates the accounts of companies listed thereon.

C The auditors regulate the preparation of annual accounts. (2)

13. XYZ Limited made a profit of Rs.5 crores last year. It declared a dividend of 20%per share. It has one crore shares of Rs.10 each. The share is priced at Rs.100 on

the stock exchange.

Assuming tax at 40.25%, calculate:

a) Earnings per share,b) Dividend cover,c) Gross dividend yieldd) Price earnings ratio. (6)

14. A company announces at a meeting of analysts that its free cash reserves are at

record levels, making it a financially strong company.

a) What would be the possible reactions of the shareholders to the news?b) Suggest, with reasons, 3 possible ways of reducing its cash level. (6)

15. A company has a gearing ratio of 30%. It has calculated that if it raised a furtherdebt capital & bought back some ordinary shares, then it could increase its EPS.a) Suggest possible reasons for the company taking such action. (1)

b) What would be the disadvantages of such action? (3)

c) If the company goes through its proposed action, list possible outcomes, with

justification, for the ordinary share price. (2)(Total marks: 6)

16. For each of the following accounting or investment ratios

a) Net asset value per share b) Return on capital employed

c) Gross profit margin d) Current ratio,

i) Define the ratio (4)

ii) Explain what the ratio indicates. (8)

iii) Suggest reasons why each ratio might be misleading or meaningless as far as

shareholders are concerned. (12)(Total marks: 20)

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ASI A 11 2000 1084

17. Discuss the relative attractions of the various means of issuing shares for cash thatwould be open to the company after it obtained a full listing. It does not want tomake a rights issue to its existing shareholders. (10)

18. The balance sheet for the year 1999-2000 of ABC Limited is given below.

(Rupees in crores)31-3-2000 31-3-1999

Fixed assets at cost 650 500

Less depreciation 200 150 450 350

Long term investments 150 200

Stock 62 55

Trade debtors 65 50

With Bankers 25 30 152 135

Total assets 752 685

Share capital 150 150

Reserves 237 215

12% Secured Debentures 2005 250 200

Trade creditors 40 43

Provision for taxation 40 49

Provision for dividend 35 28 115 120

Total liabilities 752 685

During the year 1999-2000, the following transactions took place.

Sales 450

Raw materials and wages at factory 237

Office expenses and wages at office 80

Net return on long term investments 12%

Tax charge on 1999-2000 profits 36

Sale of long term investments on 2-4-1999 50

Purchase of machinery on 31-3-2000 150Issue of further Debentures on 2-4-1999 50

Prepare the Profit & Loss Account and Cash flow statements for the financial year

1999-2000. (20)

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