Chartered Accountants of India Final Exam: Suggested Answers

Pages: 60 (4894 words) Published: January 10, 2014
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The Suggested Answers hosted in the website do not constitute the basis for evaluation of the students’ answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies.

The Council of the Institute is not in anyway

responsible for the correctness or otherwise of the answers published herein.

© The Institute of Chartered Accountants of India

PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT
Question No.1 is compulsory.
Answer any five questions from the remaining six questions.
Working notes should form part of the answer.
Question 1
(a) A Bank sold Hong Kong Dollars 40,00,000 value spot to its customer at ` 7.15 and covered itself in London Market on the same day, when the exchange rates were: US$ = HK$ 7.9250

7.9290

Local interbank market rates for US$ were
Spot US$ 1 = ` 55.00

55.20

You are required to calculate rate and ascertain the gain or loss in the transaction. Ignore brokerage.
You have to show the calculations for exchange rate up to four decimal points.

(5 Marks)

(b) ABC Limited is considering acquisition of DEF Ltd., which has 3.10 crore shares issued and outstanding. The market price per share is ` 440.00 at present. ABC Ltd.'s average cost of capital is 12%. The cash inflows of DEF Ltd. for the next three years are as under:

Year

` in crores

1

460.00

2

600.00

3

740.00

You are required to calculate the range of valuation that ABC Ltd. has to consider. Take P.V.F. (12%, 3) =0.893, 0.797, 0.712

(5 Marks)

(c) Ramesh owns a plot of land on which he intends to construct apartment units for sale. No. of apartment units to be constructed may be either 10 or 15. Total construction costs for these alternatives are estimated to be ` 600 lakhs or ` 1025 lakhs respectively. Current market price for each apartment unit is ` 80 lakhs. The market price after a year for apartment units will depend upon the conditions of market. If the market is buoyant, each apartment unit will be sold for ` 91 lakhs, if it is sluggish, the sale price for the same will be ` 75 lakhs. Determine the current value of vacant plot of land. Should Ramesh start construction now or keep the land vacant? The yearly rental per apartment unit is ` 7 lakhs and the risk free interest rate is 10% p.a. Assume that the construction cost will remain unchanged.

© The Institute of Chartered Accountants of India

(5 Marks)

30

FINAL EXAMINATION: MAY, 2013

(d) XYZ Limited borrows £ 15 Million of six months LIBOR + 10.00% for a period of 24 months. The company anticipates a rise in LIBOR, hence it proposes to buy a Cap Option from its Bankers at the strike rate of 8.00%. The lump sum premium is 1.00% for the entire reset periods and the fixed rate of interest is 7.00% per annum. The actual position of LIBOR during the forthcoming reset period is as under: Reset Period

LIBOR

1

9.00%

2

9.50%

3

10.00%

You are required to show how far interest rate risk is hedged through Cap Option. For calculation, work out figures at each stage up to four decimal points and amount nearest to £. It should be part of working notes.

(5 Marks)
Answer
(a) The bank (Dealer) covered itself by buying from the London market at market selling rate. Rupee – US Dollar selling rate

= ` 55.20

US Dollar – Hong Kong Dollar

= HK $ 7.9250

Rupee – Hong Kong cross rate (` 55.20 / 7.9250)

= ` 6.9653

Gain / Loss to the Bank
Amount received from customer (HK$ 40,00,000) × ` 7.15

` 2,86,00,000

Amount paid on cover deal (HK$ 40,00,000 × ` 6.9653)

` 2,78,61,200

Gain to Bank

`

7,38,800

Alternative Calculation
Gain to bank = 40,00,000 (` 7.15 – ` 6.9653) = ` 7,38,800
(b) Valuation based on Market Price
Market Price...
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