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Actuarial Society of India

EXAMINATIONS

1stJune 2003 (p.m.)

Subject 108 Finance & 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 only to wri teyour Candidate s Number on each answer scri pt.

2. Mark all ocations are shown in brackets.3. Attempt al l 16 questions, beginni ng your answer to each question on a separate

sheet from question 11 onwar ds.

4. I n additi on to thi s paper you should have available graph paper , Actuar ial Tablesand an electroni c calcul ator.

AT THE END OF THE EXAMINATION

Hand in both your answer scripts and this question paper

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1. Sintex Limited made a profit before tax of Rs. 170 million during the year 2002.Throughout 2002, the company carried a secured term loan of Rs. 100 million on

which Rs. 12 million interest was paid; and an 8% unsecured loan stock withinterest payments of Rs. 20 million. The income cover on the unsecured loan

stock was:

A. 9.5B. 6.3C. 5.3D. 10.1 (2 marks)

2. Mintex Limited, a listed company, has a capital structure made up of share capitaland debenture stock. If the prevailing interest rates increase, what is likely tohappen to the market prices of these financial instruments?

A. Share price Debenture price B. Share price Debenture price C. Share price Debenture price D. Share price Debenture price (2 marks)

3. Which of the following is NOT a valid reason to use simulation technique in order

to evaluate an investment project?

I. The cashflows are uncertainII. The required rate of return might vary during the life of the projectIII. The decision maker requires an accurate forecast

A. II only is correctB. III only is correctC. II and III only are correctD. I and III only are correct (2 marks)

4. Under the floating chargeI Specific assets are available to meet investors claims if the company

defaults on interest or capital payments.II A default by the company will result in the charge crystallizing into

a fixed charge

III The company may, in the usual course of business, realize assets,which are subject to the charge.

A II and III only are correctB I and II only are correctC I only is correct

D I and III only are correct. (2 marks)

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10. An equity share may have a low dividend yield becauseI It is perceived to be risky

II It is cheapIII Dividends are expected to grow rapidly.

A. I and II only are correctB. III only is correctC. II and III only are correctD. None of the above statements are correct (2 marks)

11a) The following is an extract from the personal finance section of a financial

newspaper: Companies should not pay dividends. A zero dividend policy helpscompanies to grow more rapidly. Evaluate this statement. (4 marks)

b) Briefly discuss the factors that can influence the decision on dividend policy of a

company. (6 marks)

[Total 10 marks]

12. Briefly describe the shortcomings of historic cost accounting during inflationaryperiods. (6 marks)

13. A company is planning a rights issue for raising additional capital. It is choosing

between having the issue underwritten or having a deep discounted issue. Listthe advantages and disadvantages of the two alternatives to both the company

and its shareholders. (9 marks)

14. A manufacturing company is in the process of making a 1 for 4 rights issue at apremium of 250%. The company currently has 20 million shares of Rs.100 face

value in issue and the current market price is Rs.450 per share. The companyplans to use the cash raised to build a major extension to its factory, thereby

doubling production capacity.

(a) Calculate the value at which the share price is likely to be after the sharebecomes ex-rights. (2 marks)

(b) Explain, with reasons, the courses of action available to the shareholders, withparticular reference to the difference between the rights price and the current

market price. (7 marks)

(c) Explain whether the share price is likely to settle at the figure calculated in (a)

above after the rights issue. (4 marks)(d) Discuss the advantages and disadvantages of financing the extension by

issuing loan stock. (5 marks)

(e) Discuss the advantages and disadvantages of financing with a commercialmortgage. (4 marks)

[Total 22 marks]

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15 a) The following ratios are given for Mintex Company:

Net Profit margin ratio 4 percent

Current ratio 1.25Return on net worth 15 percent

Total debt to total assets ratio 0.40Inventory turnover ratio 4 percent

Complete the following statements

Income Statement

(Rs. in 000s)

Sales ?

Cost of goods sold ?

Operating Expenses 700EBIT ?

Interest 45

Profit before tax ?

Tax Provision(50%) ?

Profit after tax ?

Balance Sheet

(Rs. in 000s)

Liabilities Assets

Net worth ? Fixed Assets ?

Long Term Debt ? Current Assets

- Cash ?- Receivables 60.0- Inventory ?- Total Current Assets

180

Accounts payable ?

Total ? Total ?

Note: The long term debt is perpetual and it carries an interest rate of 15% pa.

(11 marks)

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15b) An equity research firm uses the following ratios as key inputs for formulating itsequity investment recommendations:

(i) Price earning ratio(ii) Gross dividend yield(iii) Net asset value per share

Define each of these ratios; and explain how these ratios can be used informulating appropriate equity investment recommendations. (9 marks)

[Total: 20 marks]

16 The following financial data have been made available to you by Shop and Hop

Departmental Stores Limited.

Extracts from Profit and Loss Account for the year 2002(Rs. in 000s)

Gross Profit 2160

Depreciation 320

Sales administrative and distribution overheads 560

Interest paid 800

Provision for tax 145

Equity dividends declared 80

Extracts from Balance Sheet

(Rs. in 000s)

December 31, 2001 December 31, 2002

Share Capital 3200 3200

Free Reserves 3495 3750

Long Term Debt 8000 12160Net Fixed Assets 14800 18400

Inventory 400 576

Receivables 82 384

Cash in bank 21 86

Bills payable 560 192

Tax payable 16 48

Dividends payable 32 96

During the year 2002, the company did not sell any of its fixed assets.

(a) Prepare the cash flow statement for the year 2002 (7 marks)

(b) Prepare a brief note (i) explaining the purpose of a cash flow statement; and(ii) highlighting the key findings based on the cash flow statement in (a).

(6 marks)[Total: 13 marks]

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