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Actuarial Society of India

EXAMINATIONS

5th

June 2004 (p.m.)

Subject 108 - Finance and Financial Reporting

Time allowed: Three Hours

I NSTRUCTIONS TO THE CANDI DATES

1. Do not write your name anywhere on the answer scri pts. You have onl y towr ite your Candidates Number on each answer scri pt.

2. Mark all ocations are shown in brackets.3. Attempt all questions. Begin your answer to each question on a separate

sheet. However objective type questi ons may be wr itten on same page.

4. Fasten your answer sheets together in numerical order of questions. This, youmay complete immediately after expir y of the examinati on time.

5. I n addition to thi s paper you should have avail able graph paper , Actuar ialTables and an electronic calcul ator.

AT THE END OF THE EXAMINATION

Hand in both your answer script and thi s question paper to the supervisor

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Q.1 Which of the following statement(s) is/are true?

I) Partly paid-up shareholders can be severally liableII) Sleeping partners are partners with limited liabilityIII)Partnership firms must have Memorandum of Partnership

A. I onlyB. II onlyC. II & III

D. None of the above[2]

Q.2 What does Memorandum of Association of a company describe?

A. How the company will deal with outside worldB. Internal rules to run the companyC. The past history of company

D. All of the above[2]

Q.3 What is a capital gains tax?A. Tax on (sales price indexation allowance)

B. Tax on (sales price purchase cost cost of sales)C. Tax on (sales price cost of sales purchase cost cost of value enhancement -

indexation allowance)D. None of above

[2]

Q.4 If holder of convertible stock chooses not to convert then the security might

continue as a loan stock or preference share for a period of time known as theA. Terminal periodB. Termination period

C. StubD. Stack

[2]

Q.5 Derivatives derive their value from:

I. The underlying contractII. The underlying assetIII. The political situation in the country

A. I and II onlyB. II and III only

C. I onlyD. III only

[2]

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Q.6 Suppose a company with share price P and N shares in issue, makes a n form rights issue at a price of Q (Q

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Q.11 What is a lease? Describe different type of leases. Which types of assets are

suitable for an operating lease?[6]

Q.12 What are Double Taxation agreements and how do they benefit thecompanies? Please support your answer with a suitable example.

[4]

Q.13 What are the fundamental differences between share capital and loan capital?

[4]

Q.14 In Actaryland, initial public offerings (IPO) of common stock are usually sold byan offer for sale. Mr. Actuapy has observed that on average, these stocks areunderpriced by about 9 percent and for some years, he has followed a policy of

applying for a constant proportion of each issue. He is, therefore, disappointed

and puzzled to find that this policy has not resulted in a profit. Explain to himwhy this is so.

[6]

Q.15 Explain the role of life insurance and general insurance companies in investmentmarkets. Also describe the fundamental differences in assets and liabilities of life

insurance and general insurance companies.[6]

Q.16 List the different roles played by a typical investment bank.[6]

Q.17 Discuss the limitations of ratio analysis.[10]

Q.18 The scientists at Spectrum have come up with an electric moped. The firm is

ready for pilot production and test marketing. This will cost Rs. 20 million andthe results would be available instantaneously. In case pilot production and testmarketing is successful, Spectrum can build a plant costing Rs. 150 million. The

plant will generate an annual cash inflow of Rs. 30 million for 20 years if thedemand is high or an annual cash inflow of Rs. 20 million for 20 years if the

demand is low. Pilot production and test marketing would be successful when

the underlying demand is high in 75% of the cases, whereas the pilot productionand test marketing would be successful only in 50% cases when the underlying

demand is low. High demand has a probability of 0.4; low demand has aprobability of 0.6. Calculate expected NPV using decision tree analysis if the

cost of capital is 12%.[14]

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Q.19 The following information has been extracted from the accounting statements ofABC Ltd., a large mature company:

[in Rs. Mn.]

Year Ended Mar 31, 2003

Fixed Assets 250

Net Current Assets 100

Reserves 200

Share Capital (Nominal Value = Rs 10) 150

In the Financial Year 2003-04, the company goes for a 1-for-1 scrip issue. As on31.3.2004, determine the following (you are given that during 2003-04 the

retained profits were Rs. 30 mn. and net current assets on 31.3.2004 were Rs 150mn.):

a) Reserves [2]

b) Share Capital [2]c) No. of shares [2]

d) Fixed Assets [2]e) Discuss, with reasons the impact of the scrip issue on the share price. [2]

Total [10]

Q.20 Akash Limited commenced manufacturing personal computers on 1.04.2002

with an equity capital of Rs. 5,00,000 in shares of Rs. 10 each.The following details were gathered from the accounting records of the company

for the year ended 31.03.2003:

Sales to Net Fixed Assets 4 timesGross Profit Margin 30%Net Profit Margin 10%

Income gearing ratio 0.20Provision for Income Tax %

3133

Proposed Dividend (assume that it is not

taxable)

20%

Sales and Distribution Expenses (50% wasoutstanding as on 31.03.03)

1,00,000

Depreciation Rate (Depreciation was notpart of cost of goods sold, calculated using

reducing balance method)

20%

You are required to prepare a Profit and Loss statement for the year ended31.03.2003.

[14]