Actuarial Society of India EXAMINATIONS

5th June 2004 (p.m.) Subject 108 - Finance and Financial Reporting
Time allowed: Three Hours INSTRUCTIONS TO THE CANDIDATES 1. 2. 3. 4. 5. Do not write your name anywhere on the answer scripts. You have only to write your Candidates Number on each answer script. Mark allocations are shown in brackets. Attempt all questions. Begin your answer to each question on a separate sheet. However objective type questions may be written on same page. Fasten your answer sheets together in numerical order of questions. This, you may complete immediately after expiry of the examination time. In addition to this paper you should have available graph paper, Actuarial Tables and an electronic calculator.

AT THE END OF THE EXAMINATION Hand in both your answer script and this question paper to the supervisor

S-108 Q.1 Which of the following statement(s) is/are true? I) Partly paid-up shareholders can be severally liable II) Sleeping partners are partners with limited liability III) Partnership firms must have Memorandum of Partnership A. B. C. D. I only II only II & III None of the above

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[2] Q.2 A. B. C. D. What does Memorandum of Association of a company describe? How the company will deal with outside world Internal rules to run the company The past history of company All of the above [2] Q.3 A. B. C. D. What is a capital gains tax? Tax on (sales price indexation allowance) Tax on (sales price purchase cost cost of sales) Tax on (sales price cost of sales purchase cost cost of value enhancement indexation allowance) None of above [2] Q.4 A. B. C. D. If holder of convertible stock chooses not to conve rt then the security might continue as a loan stock or preference share for a period of time known as the Terminal period Termination period Stub Stack [2] Q.5 Derivatives derive their value from: I. II. III. A. B. C. D. I and II only II and III only I only III only [2] The underlying contract The underlying asset The political situation in the country

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Q.6 A. B. C.

D. Q.7 A. B. C. D. Q.8 A. B. C. D.

Suppose a company with share price P and N shares in issue, makes a n for m rights issue at a price of Q (Q<P), what is its theoretical ex-rights price? m P + n Q m+ n n P + m Q m+ n m N P + Q n m m+ n None of the above [2] Choose the best option for a company to raise finance: Debt is always preferable Equity is always preferable Debt and Equity are equally preferable Depends on the individual circumstances of a company [2] What could be the hurdle rate for a company to estimate NPV of a project? The cost of capital is 10%. 8% 9% 9.5% 10% [2]

Q.9

Which of the following statement(s) is/are false? I) II) III) IV) All the above I and III only II and III only I, II and III Project analysis is unnecessary for projects with asset betas that are equal to zero The break-even sales level of a project is higher when break even is defined in terms of NPV rather than accounting income Monte Carlo simulation eliminates the need to estimate a projects opportunity cost of capital High abandonment value increases NPV, other things being equal

A. B. C. D.

[2] Q.10 A. B. C. D. What is weighted average cost of capital? Cost of equity * cost of debt Cost of equity + cost of debt Cost of equity - cost of debt None of above [2] Page 3 of 5

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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 the companies? 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 by an offer for sale. Mr. Actuapy has observed that on average, these stocks are underpriced 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 him why this is so. [6]

Q.15

Explain the role of life insurance and general insurance companies in investment markets. 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 and the results would be available instantaneously. In case pilot production and test marketing 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 the demand 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 production and 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 a probability 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 of ABC Ltd., a large mature company: [in Rs. Mn.] Year Ended Fixed Assets Net Current Assets Mar 31, 2003 250 100

Reserves Share Capital (Nominal Value = Rs 10)

200 150

a) b) c) d) e)

In the Financial Year 2003-04, the company goes for a 1-for-1 scrip issue. As on 31.3.2004, 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 150 mn.): Reserves Share Capital No. of shares Fixed Assets Discuss, with reasons the impact of the scrip issue on the share price. Total

[2] [2] [2] [2] [2] [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 Gross Profit Margin Net Profit Margin Income gearing ratio Provision for Income Tax 4 times 30% 10% 0.20 33 13 %

Proposed Dividend (assume that it is not 20% taxable) Sales and Distribution Expenses (50% was 1,00,000 outstanding as on 31.03.03) Depreciation Rate (Depreciation was not 20% part of cost of goods sold, calculated using reducing balance method) You are required to prepare a Profit and Loss statement for the year ended 31.03.2003. [14] Page 5 of 5