The Institute of Corporate Secretaries of Pakistan
C.I.S. Examinations July 2014
BUSINESS FINANCE (232)
Module – B
Monday, 7 July, 2014
Group – III
Time allowed: 3 Hours
Instructions:
Max. Marks : 100
 Attempt all questions and submit workings, which will be treated as a part of your answers.
Marks
Q.1 Select the most appropriate answers of the following questions:
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A. The key sources of value (earning an excess return) for a company can be attributed
primarily to
i. competitive advantage and access to capital
ii. quality management and industry attractiveness
iii. access to capital and quality management
iv. industry attractiveness and competitive advantage
B. What is the difference between economic profit and accounting profit?
i. Economic profit includes a charge for all providers of capital while accounting
profit includes only a charge for debt.
ii. Economic profit covers the profit over the life of the firm, while accounting profit
only covers the most recent accounting period.
iii. Accounting profit is based on current accepted accounting rules while economic
profit is based on cash flows.
iv. All of the above
C. To compute the required rate of return for equity in a company using the CAPM, it is
necessary to know all of the following EXCEPT:
i. the risk-free rate
ii. the beta for the firm.
iii. the earnings for the next time period.
iv. the market return expected for the time period.
D. Which of the following is an appraisal technique?
i. NPV
ii. IRR
iii. Discounted Pay Back Period
iv. All of the Above
E. A job of Finance Manager is to
i. Record all Vouchers
ii. Conduct Audit
iii. Maximize the Wealth of Shareholders
iv. All of the above
Business Finance
CIS Examinations – July 2014
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Q.2
Solve the below mentioned question and show computation of each separately.
A) An automobile costs Rs.10,000 now, requires Rs.1,000 annually to maintain, and has a
salvage value of Rs.2,000 at the end of eight years. Your time value of money is 9%.
What is the NPV of these cash flows?
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B) If you deposit Rs.100 in a savings account today, and keep it there for 50 years, how
much would be in the account if the interest were 8% compounded semiannually? If it
were 8% compounded quarterly? (Note: FVF.04,100 = 50.505 and FVF.02,200 = 52.485.)
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C) A stock has paid dividends regularly for the last 20 years, starting with Rs.0.75 in 1964
and rising to Rs.4 in 1984. If these dividends have been growing at a constant rate, what
has that rate been for the last 20 years?
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Q.3
ABC Company has decided to invest a maximum of Rs.30,000/- in new projects this
year. Company’s required rate of return is 15% and it has identified four potential
(independent) investments with the following information:
Project
A
B
C
D
Capital budget = Rs.30,000/Initial investment
NPV
Rs.15,000
Rs.1,970
8,000
1,130
12,000
6,840
30,000
6,900
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Which projects should be accepted if all projects are indivisible?
Q.4
Q.5
You have been asked by the president of the Memon Construction Company to evaluate
the proposed acquisition of a new earth mover. The mover's basic price is Rs.50,000, and
it would cost another Rs.10,000 to modify it for special use. Assume that the depreciation
rate for year 1, 2 & 3 is 33%, 45% and 15% respectively, it would be sold after 3 years
for Rs.20,000, and it would require an increase in net working capital (spare parts
inventory) of Rs.2,000. The earth mover would have no effect on revenues, but it is
expected to save the firm Rs.20,000 per year in before-tax operating costs, mainly labor.
The firm's marginal federal-plus-state tax rate is 40 percent.
If the project’s cost of capital is 10 percent, should the earth mover be purchase?
15
Compare the following:
20
a)
b)
c)
d)
Management buyout and Management Buy In
Operating Lease and Finance Lease
Cash Dividend and Stock Dividend
Mushrikah and Mudarba
Business Finance
CIS Examinations – July 2014
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Q.6
Q.7
Mr. Baig designs game cartridge for home computers. His total fixed cost for designing a
game package is Rs.40,000. The cartridges the game is programmed into cost Rs.40 each
and he sells them for Rs.200 each. He currently sells 3,000 cartridges for each game he
designs.
a. What is the break-even sales in units and in Rs.?
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b. If the cost of a cartridge rises to Rs.60 and he keeps the sales price constant at Rs.200,
what will the new break-even be?
3
c. If the cost of a cartridge rises to Rs.60 and he simultaneously raises the sales price to
Rs.220, what will the new break-even point, NOI, and DOL be?
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MCC Limited has the following capital structure, which it considers to be optimal.
Debt
Preferred stock
Common Stock
25%
15%
60%
100%
MCC Limited marginal tax rate is 40 percent; the investors expect earnings and
dividends to grow at a constant rate of 9 percent in the future. MCC Limited paid a
dividend of Rs.3.60 per share last year (Do), and its stock currently sells at a price of
Rs.60 per share. Treasury bonds yield 11 percent; an average stock has a 14 percent
expected rate of return; and MCC Limited’s beta is 1.51.
These terms would apply to new security offerings:
Preferred:
New preferred stock could be sold to the public at a price of Rs.100 per
share, with a dividend of Rs.11. Flotation costs of Rs.5 per share would also be incurred.
Debt:
Debt could be sold at an interest rate of 12 percent.
Required:
a) Find the component costs of debt, preferred stock and common equity.
b) Calculate Weighted Average Cost of Capital.
Business Finance
CIS Examinations – July 2014
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