BFD Revision Kit (Question Bank With Solutions - Topicwise)

Module F
Business Finance Decisions

Question Bank for Practice
Revision Kit - Summer 2008 to Summer 2012
(ICAP Past Papers with solutions With a topical index )
Atif Abidi
www.canotes.net November 28, 2012
BFD Question Bank (Topic Wise) - Summer 2008 to Summer 2012

Topic Attempt Summer 2012 Summer 2011 Winter 2010 Summer 2010 Summer 2009 Winter 2008 Summer 2008 Summer 2011 Winter 2010 Winter 2009 Winter 2008 Summer 2008 Summer 2012 Winter 2011 Winter 2011 Summer 2011 Summer 2011 Winter 2010 Summer 2010 Winter 2009 Winter 2009 Summer 2009 Summer 2009 Winter 2008 Winter 2008 Summer 2008 Winter 2011 Summer 2010 Winter 2009 Summer 2008 Summer 2012 Winter 2011 Winter 2010 Winter 2009 Summer 2009 Summer 2008 Summer 2012 Summer 2011 Summer 2010 Winter 2008 Winter 2008 Winter 2008 Winter 2011 Summer 2009 Winter 2008 Summer 2012 Winter 2011 Summer 2011 Winter 2010 Summer 2010 Winter 2009 Summer 2009 Summer 2008 Risk Analysis Q# 1 6 5 3 5 6 2 2 3 1 7 1 3 5 6 3 4 4 4 2 3 1 2 4 5 (a) 4 1 5 5 3 5 4 2 6 3 6 2 1 1 1 2 5 (b) 2 6 3 4 3 5 1 2 4 4 5 Short Description WACC + Adjusted WACC Debt Equity ratio working Interest cover + MM APV For different Capital Structures WACC + MM Market price and WACC Involvement of sharp ratio Alpha Values Apha Values and Revised Beta Beta calculations for different projects Returns and Weighted Beta NPV + Discounted Payback + IRR + MIRR (Different Currencies) International + Taxation issues NPV (2 alternatives) Lease vs Buy NPV International + Tax treaty working Leasing calculations NPV NPV TFC + Other Floating rates Asset Replacement option NPV (Leasing & IRR) NPV Leasing calculations Dividend irrelevance theory Right issue and effect on price Right issue and effect on price Right shares and Capital Structure All methods (Futures,Hedge,Options) Hedging through forward cover and money market + multilateral netting Hedging through forward cover and money market + interest rate risk Hedging through forward cover and money market Call and Put Options Hedging through forward cover Investment mix of Mutually exclusive & mutually dependent projects Leverage Ratios Projected cash flow and divident payout policy Injection of fresh equity + shareholding calculations Forcasting and Debt/Equity Ratio Sensitivity Analysis Decision Tree + NPV Probabilities and Expected Values Interest rate swaps Free Cash Flows + Optimum sales level + Cash Flow Management Free cash flows + impact of acquisition Calculating purchase consideration Shares as purchase consideration EPS / Discount Rate (+ Theory) Free cash flows + impact of SYNERGY MBO Working for mergers Surplus Value on Demerger Marks 19 17 23 16 15 13 12 115 15 13 20 12 18 78 17 20 17 12 16 24 20 14 13 20 17 18 10 18 236 15 17 17 15 64 14 14 20 12 12 17 89 20 15 22 13 14 10 94 14 15 10 39 30 20 25 20 25 24 21 20 185 Page (Q) 1 27 39 48 73 82 91 13% 24 37 58 83 91 9% 2 15 16 24 25 38 49 59 59 70 70 81 82 92 26% 13 50 61 92 7% 4 15 37 61 71 94 10% 2 23 47 80 80 82 10% 13 73 81 4% 3 14 26 36 48 60 72 93 21% 8 19 31 40 52 65 77 100 18 79 85 6 28 51 84 85 87 11 20 41 68 77 102 17 56 67 97 7 21 22 30 31 43 54 64 65 74 76 86 87 98 29 42 63 89 95 Page (A) 5 33 45 53 78 88 96
Valuation
Misc
Foreign Excahnge
Dividends & Right Issue
Investment Appraisal
CAPM + Portfolio
WACC & Capital Structures
BFD Question Bank (Attempt Wise) - Summer 2008 to Summer 2012

Attempt Q# 1 2 3 4 5 1 2 3 4 5 6 1 2 3 4 5 6 1 Winter 2010 2 3 4 5 1 2 3 4 5 1 2 3 4 5 6 Topic WACC & Capital Structures Misc Investment Appraisal Valuation Foreign Excahnge Dividends & Right Issue Risk Analysis Valuation Foreign Excahnge Investment Appraisal Investment Appraisal Misc CAPM + Portfolio Investment Appraisal Investment Appraisal Valuation WACC & Capital Structures Valuation Foreign Excahnge CAPM + Portfolio Investment Appraisal WACC & Capital Structures Misc Valuation WACC & Capital Structures Investment Appraisal Dividends & Right Issue CAPM + Portfolio Investment Appraisal Investment Appraisal Valuation Dividends & Right Issue Foreign Excahnge Short Description WACC + Adjusted WACC Investment mix of Mutually exclusive & mutually dependent projects NPV + Discounted Payback + IRR + MIRR (Different Currencies) Free Cash Flows + Optimum sales level + Cash Flow Management All methods (Futures,Hedge,Options) Dividend irrelevance theory Decision Tree + NPV Free cash flows + impact of acquisition Hedging through forward cover and money market + multilateral netting International + Taxation issues NPV (2 alternatives) Leverage Ratios Involvement of sharp ratio Lease vs Buy NPV Calculating purchase consideration Debt Equity ratio working Shares as purchase consideration EPS / Discount Rate (+ Theory) Hedging through forward cover and money market + interest rate risk Alpha Values International + Tax treaty working Interest cover + MM Projected cash flow and divident payout policy Free cash flows + impact of SYNERGY APV Leasing calculations Right issue and effect on price Apha Values and Revised Beta NPV NPV MBO Right issue and effect on price Hedging through forward cover and money market TFC + Other Floating rates Asset Replacement option Call and Put Options Working for mergers For different Capital Structures Probabilities and Expected Values Injection of fresh equity + shareholding calculations Forcasting and Debt/Equity Ratio Interest rate swaps NPV (Leasing & IRR) NPV Sensitivity Analysis WACC + MM Beta calculations for different projects Returns and Weighted Beta Market price and WACC Right shares and Capital Structure Leasing calculations Surplus Value on Demerger Hedging through forward cover Marks 19 20 17 30 14 15 14 20 14 20 17 15 15 12 16 25 17 20 20 13 24 23 22 25 16 20 17 20 14 13 24 17 12 Page (Q) 1 2 2 3 4 13 13 14 15 15 16 23 24 24 25 26 27 36 37 37 38 39 47 48 48 49 50 58 59 59 60 61 61 Page (A) 5 6 7 8 11 17 18 19 20 21 22 28 29 30 31 31 33 40 41 42 43 45 51 52 53 54 56 63 64 65 65 67 68
Winter 2009
Summer 2010
Summer 2011
Winter 2011
Summer 2012
1 2 3 4 5 6 1 2 3 4 5 (a) 5 (b) 6 7 1 2 3 4 5 6
Investment Appraisal Investment Appraisal Foreign Excahnge Valuation WACC & Capital Structures Risk Analysis Misc Misc Risk Analysis Investment Appraisal Investment Appraisal Misc WACC & Capital Structures CAPM + Portfolio CAPM + Portfolio WACC & Capital Structures Dividends & Right Issue Investment Appraisal Valuation Foreign Excahnge
20 17 12 21 15 15 13 14 10 18 10 10 13 12 18 12 15 18 20 17
70 70 71 72 73 73 80 80 81 81 82 82 82 83 91 91 92 92 93 94
74 76 77 77 78 79 84 85 85 86 87 87 88 89 95 96 97 98 100 102
Summer 2008
Winter 2008
Summer 2009
Page | 1
The Institute of Chartered Accountants of Pakistan

Final Examination Summer 2012 Module F Q.1 6 June 2012 100 marks - 3 hours Additional reading time - 15 minutes
Mac Fertilizer Limited (MFL) is a listed company and is engaged in the business of manufacturing of phosphate fertilisers. MFL intends to diversify its operations by manufacturing and distributing steel products. This diversification would require an investment of Rs. 3,600 million for establishing the plant and meeting the working capital requirement. MFL plans to finance the investment as follows: 55% of the investment would be financed by issuing Term Finance Certificate (TFCs) carrying interest at 12% per annum and repayable in 2018. The balance amount would be generated by issuing right shares at Rs. 65 per share.
Extract of MFLs statement of financial position as at 31 December 2011 is given below: Equity and liabilities Share capital (Rs. 10 each) Retained earnings TFCs (Rs. 100 each) Current liabilities Rs. in million 7,000 23,000 28,000 32,000 90,000 Assets Non-current assets Current assets Rs. in million 50,000 40,000 90,000
The existing TFCs carry mark up @ 11.5% per annum and are due for redemption at par in 2016. Currently, MFLs shares and TFCs are traded at Rs. 80 and Rs. 102.50 respectively. Equity beta of the company is 1.3. The proposed investment has been evaluated at a discount rate of 17% which is based on existing cost of equity plus a premium that takes cognisance of the risks inherent in the steel industry. However, there are divergent views among the directors regarding the discount rate that has been used. Director A is of the view that the premium charged to reflect the risk in the steel industry is too low. He is of the opinion that the companys existing weighted average cost of capital is more appropriate discount rate for evaluation of this investment. Director B suggests that the discount rate should be representative of the steel industry. He has provided the following data pertaining to a listed company, Pepper Steel Limited (PSL). 900 million shares of Rs. 10 each are outstanding which are currently being traded at Rs. 35. Long term loan amounted to Rs. 8,000 million obtained from local banks at the average rate of 13%. Equity beta of the company is 1.5. You have been appointed as the Lead Advisor by an Investment Bank working on this transaction. You have obtained the following information: Interest rate for 6-months treasury bills Market return Applicable tax rate for all companies Debt beta of MFL and PSL is assumed to be zero. Required: Compute the discount rate based on suggestions given by Directors A and B and discuss which suggestion is more appropriate. (19 marks) 8% 13% 30%
Page | 2
Business Finance Decisions Page 2 of 4
Q.2
CB Investment Limited (CBIL) has identified various projects for investments. Details of the projects are as follows: Projects Initial investment required now (Rs. in million) Forecasted annual net cash inflows (Rs. in million) Discount rate (based on risk involved in the project) Project duration (years) Year from which net cash inflows would commence A (300) 150 10% 4 1 B (120) 50 11% 5 2 C (240) 140 12% 3 1 D (512) 256 11% 6 3 E (800) 440 13% 3 1 F (400) 300 14% 2 1
Other relevant information is as follows: (i) Project A and B are mutually dependent and are non-divisible. (ii) Project C can be scaled down but cannot be scaled up. (iii) Project D, E and F are mutually exclusive. They cannot be scaled down but can be scaled up. Total financing available with the company is Rs. 1,000 million. It may be assumed that all cash flows would arise at the beginning of the year. Required: Determine the most beneficial investment mix. Q.3 (20 marks)
Beta Limited (BL) is engaged in the business of manufacturing and marketing of high quality plastic products to the large departmental stores in Pakistan and United Arab Emirates. BL is presently experiencing a decline in sales of its products. Market research carried out by the Marketing Department suggests that sustained growth in sales and profits can be achieved by offering a wide range of products rather than a limited range of quality products. In this regard, BL is considering the following two mutually exclusive options: Option I : Introduce low quality products in the market Following information has been worked out by the Chief Financial Officer of the company: Net present value using a nominal discount rate of 13% Discounted payback period Internal rate of return Modified internal rate of return Option II : Import variety of plastic products from China BL would buy in bulk from Chinese suppliers and sell it to the existing customers. The projected net cash flows at current prices after acceptance of this option are as follows: Against import from China (US$ in million) From operation in UAE (US$ in million) From operations in Pakistan (Rs. in million) Year 0 (25.00) Year 1 (20.00) 22.47 333 Year 2 (21.33) 24.15 350 Year 3 (22.33) 25.23 414 Year 4 (20.67) 23.37 450 Rs. 82 million 3.1 years 10.5% 13.2% approximately
The following information is also available: The current spot rate is Re. 1=US$ 0.0111. (i) (ii) BL evaluates all its investment using nominal rupee cash flows and a nominal discount rate. (iii) Inflation in Pakistan and USA is expected to be 10% and 3% per annum respectively. Tax may be ignored. Required: Evaluate the two options using net present value, discounted payback period, internal rate of return and modified internal rate of return. Give brief comments on each of the above methods of evaluation and their relevance in the given situation. For the purpose of evaluation, assume that BL has a four year time horizon for investment appraisal. (17 marks)
Page | 3
Q.4
FF International (FFI) is considering the opportunity to acquire CS Limited (CSL). You have been appointed as a consultant to advise the FFIs management on the financial aspects of the bid. The latest summarized annual financial statements of CSL are given below: Summarized Statement of Financial Position Rs. in million Total assets 5,000 Share capital Accumulated profit Long term loan Short term loan Other current liabilities 2,000 150 700 1,300 850 5,000
Summarized Income Statement Rs. in million Sales 1,000 Less: Cost of sales (430) Gross profit 570 Selling and administration expenses (250) Financial charges (280) Profit before taxation 40 Taxation (14) Profit after taxation 26 You have also gathered the following information: (i) CSL produces a single product X-201 and has a market share of 30%. A market survey conducted to identify the impact of increase or decrease in price has revealed the following relationship between price of X-201 and market share: Increase / (decrease) in price (10%) 5% 10% (ii) Market share 45% 23% 20%
In order to increase production, CSL would have to invest Rs. 150 million in plant and machinery which would be financed through long term loan on terms and conditions similar to those of the existing long term loan, as specified in point (v) below. (iii) Fixed production costs amount to Rs. 100 million which include depreciation of Rs. 75 million. (iv) 80% of selling and administration expenses are fixed. Fixed costs include depreciation of Rs. 25 million and salaries of Rs. 160 million. After acquisition, FFI expects to reduce the staff in sales and administration by making one-time payment of Rs. 100 million. It would reduce the departments salaries by 25% and the remaining fixed costs by 30%. (v) Long term loan carries markup @ 15% per annum. The balance amount of principal is repayable in five equal annual instalments payable in arrears. (vi) Mark up on short term loan is 14% per annum. CSL has failed to meet certain debt covenants and therefore its bankers have advised CSL to reduce the short term loan to Rs. 1,000 million. (vii) It is the policy of the company to depreciate plant and machinery at 20% per annum using straight line method. Accounting depreciation may be assumed to be equal to tax depreciation. (viii) Working capital would vary at the rate of 40% of increase / decrease in sales. (ix) Tax rate applicable to both companies is 30% and tax is payable in the same year. CSL has unutilized carry forward tax losses of Rs. 80 million. (x) All costs as well as sales are expected to increase by 10% per annum. (xi) Free cash flows of CSL are expected to grow at 5% per annum after Year 5. (xii) Based on the risk analysis of this investment, the discounting rate is estimated at 18%.
Page | 4
Required: (a) Discuss any two advantages and disadvantages of growth through acquisition. (04 marks) (b) Determine the following: Optimal sales level at which CSLs profit would be maximised. (05 marks) Amount of cash flow gap at optimal level of sales during the first five years of acquisition. (14 marks) (c) Calculate the bid price that FFI may offer for the acquisition of CSL assuming that cash flow gap identified in (b) above would have to be filled by FFI by way of an interest free loan. (07 marks) Q.5 Assume that the date today is 1 June 2012. Alpha Automobiles Limited (AAL) has imported CNG kits from Japan and has to repay an amount of JPY 175 million in three months time. AAL intends to hedge the contract against adverse movements in foreign exchange rates and its foreign exchange exposures. The following data are available: Exchange rates quoted on 1 June 2012 JPY 1 Buy Sell Rs. 1.9223 Rs. 1.9339 Rs. 1.9335 Rs. 1.9451 Rs. 1.9410 Rs. 1.9493
Spot rate One month forward rate Three month forward rate Interest rates available to AAL Japan Pakistan
Borrowing 5% 8%
Investing 3% 5%
JPY currency futures Futures have a contract size of JPY 100,000 and the margin required is Rs. 1,000 per contract. Contract prices (Rupee per JPY) are as follows: July 2012 October 2012 January 2013 JPY 1 Rs. 1.9365 Rs. 1.9421 Rs. 1.9490
The contracts can mature at the end of the above months only. Currency options Options have a contract size of JPY 250,000. The premiums (paisa per Rupee) payable on various options and the corresponding strike prices are shown below: Strike price Rs. 1.90 1.91 1.92 Calls Puts 31 July 31 October 31 July 31 October 2012 2012 2012 2012 ----------------------------Paisas---------------------------2.88 3.55 0.15 0.28 1.59 2.32 1.00 1.85 0.96 1.15 2.05 2.95
Options are exercisable at the end of relevant month only. Required: Illustrate four methods by which Alpha Automobiles Limited might hedge its currency exposure. Recommend which method should be selected. (14 marks) (THE END)
Page | 5 Business Finance Decisions Suggested Answers Final Examinations - Summer 2012
A.I DIRECTOR A's RECOMMENDATION: Evaluation on the basis of Existing WACC
lie Vd
= 700 X 80.00 = 280 x 102.50
= Rs. 56,000 million = Rs. 28,700 million 84,700 56,000
WACC = 14.5% (W - 1) x 84,700
+ 7.5% (W
28,700
- 2) x 84,700 = 12.1%
W-l: Cost of equity ke = Rf + (Rm - Rf) x f3 = 8% + (13% - 8%)1.3 W-2: Cost of debt
14.5%
Calculating the cost of debt using IRR 6.11 kd = 6% + (6.11 + 6.19) x 3% = 7.49%
DIRECTOR B's RECOMMENDATION: "It: lie Evaluation on the basis of Project Specific Cost of Capital
WACC=Kex
+ Vd
+kdx(l-t)
lie
+ Vd
(W - 4)
WACC = 19.82% (W - 3)
x 3600 + 8.4%
,
1,620
x --
1,980 = 13.54%
3,600
W-3: Cost of equity ke = 8% + (5%) x 2.364 (W - 5) = 19.82% W -4: Cost of debt kd = 12.0% x (1 - 30%) = 8.4% W-5: Computation of project specific beta Un-geared Steel Company Beta
lie Vd(1-t) Bu = Bg x lie + Vd(l- t) + Bd X lie + Vd(1where, lie = 900 x 35 = 31,500, Vd(l - t) = 8,000 x 70% = 5,600 Bg = 1.5
t)
Bu
31,500 = 1.5 x (31,500 + 5,600)
+ 0=
1.274
Page 1 of 7
Page | 6
Business Finance Decisions Suggested Answers Final Examinations - Summer 2012
Get the project beta on the basis of steel company un-geared beta
Bg = Bu + (Bu - Bd) x --Vd(l-t) Ve
Bg
1.274 + 1.274 x
1,980 x 70% 1,620
2.364
Appropriateness of discount rate The view expressed by the Director A is not worthwhile because: existing W ACC only reflects the current business and financial risk. It does not incorporate the additional risk of the new sector as well as additional return required by the company's shareholders. the proportion of debt in the investment i.e. 55% is quite high as compare to existing debt proportion i.e. 34%. The financial risk has therefore increased and it could therefore be argued that current W ACC is not an acceptable discount rate. rate used for evaluation of the project i.e. 17% is too high as it is based only on the relatively high cost of equity and ignores the amount of debt that will be used to finance the project. The suggestion given by the Director B is worthwhile as the project specific cost of capital (based on steel industry's risk) incorporates the business and financial risk of the new sector, in which MFL intends to invest and also incorporates the higher return expectation of the shareholder because of increase in financial risk.
A.2
.m
........m
T
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4...... ..r .... ..............f
1
10%
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Proiect duration
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)
[f()~ecasted net cash i ! Discount rate

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.
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1.877
I
j
,--jf!
iA!:l.r.l.llityJi!c:t()rJ()r_t()t~I.P~.r.i()_c1
3.487
!.. _!ce:..: __ A!1.!1.!oI.!tyJ'.Is:~g!.X9!.~~!.() ..C<i.s.~..i.n!!.Cl~Ee:Ij().c1_+! -+t -'-'-'-":.:::..:::.L-+----+---'-'-'-'-"-~----+-----i L.Acljll_ste..c1!l:!:l.r.lIl_ity.fa..t.2~____ ._._.____......+i_ ----'3::.;..4..:.:8::..:.7--+_.:::.:..o-=--+----'2:::.:.6""9-"-0-+_.=.:....::..:::....-+----'2:::.:.6""6""8--'-_-'I:.:.:.8::..:.7-'-.7--i
r=i~~~;l~;i~;;;~~::~~!:~~;.hj~Q.~~:::::::::::=~~::::=~~~:i~Q:QQ::t::::=:~Q:Q9~t~:1~Q~Q~=:~:=iiiQQ=:t:~~~'!goQQ---_.~.Q.9:.Q __j
i Present value of inflows ! 523.05 i 155.10; 376.60 ! 715.55 ! 1,173.92 563.10! ..?8.J~ __
L __
r~~~~~:=~~~~~:=~==:~=~~~=~~=~~~:~:~~~~~=~==~:=~:~=::==:===~==~~~==~~~~:~r~=:=:=:~::::~~:~~~=::=f~~~~~:~~~==:= "M:=:=:==:=:=~~:=~:l L_.6QiIl.s~~.11~J..Cl.~~Il.t.ll.a.!!Y.2IE.PIl!_()!:H!.()j_t:_<:.t.~ L .. L_~J_6:~Q._.j Z!.s.:.~.s. J1_!}n2f __ 2~_~Lj

f __!c~~.:...!!litj_~U_l1y~~e..~~!.e_g\l.~~e..Q_!..().c1'!L._ _.._.
j.\. (300. 00)

j
.~ (120. 00Lt----(?-1Q:-Q91+~g,g91-4---(~9..:.Q9)-!-H9.Q:QQLl
;
t----.---.--------------.------.--------------.-------------------------1---------''--------+-----------------t------------.--
! Adjustment for ~--~L.-.-.---
mutually compulsory projects
-.-
-.-.-----------------~.. i}
----J~~Q:.9Q)--.-.--!--.-(?1Q:.~Q)-l-.-(~E,.9.92. (~QQcO_OJ_~---(4Q.Q,Q.QLj
__ ...._J____
._.
._ .._!
._._.Mj
[::~~t.;~~r~~!~~~~i~:~~)=:.~:::::=:::::=:::::=:::::==::t~~::.::~O~.:1~5~~~~~~~~:~t=:::~~~ }~}~~i-~~==~~~~!~=~I
!_.~'.I'!19!.lg_.. _.._ _ _.__ _ _ _....
__ ~.__ ._L __ ._..s..
L._.}
.L___L.
__ j
Option 1: Invest in the highest ranked projects In this option, CBIL can invest only up to Rs. 660 million only as all other projects requires larger investment as compare to the funds available with the company. i Investment i NPV ! Rs. in million ! 420.00 ! 258.15 ! 240.00 i 136.60 660.00 i 394.75
~.:~~:_~:~~.~::.~::J
Rank 1 Rank 2
i
Page 2 of 7
Page | 7 Business Finance Decisions Suggested Answers Final Examinations - Summer 2012 By utilizing the entire available amount the company may be in a position to increase its NPV. Hence we should consider other options. While selecting other options the basic presumption should be to select the last project (balancing amount) which can be scaled down i.e. Project C. Considering the above, there can be three more options as shown below: Option 2: Invest in Rank 4 ahead of Rank 2 which can be scaled down If we consider the rank 4 project which requires lesser investment as compare to rank 5 project, we would be able to utilize about 75% of rank 2 project, as against option 3 in which Project C is only 28% utilized.
r------- .. -.. -- .. -.. r------- ..---- ..
------------0 ..-J _
=
c
----- ..- ..-- ..-..-----..-----..-----..---------- ..--------- ..-----------..-----..-----..-------1 _ , _ _ _ __.._ _ __.._ _.._ - ---- ..------ -- ------- -..--....J
, .....................................................................................................................................................................................
+
- ..
~H H HH _
cc
i Rank 1
1_ .............................
ecause it cannotbesc-~ie~fdown:-----I
----.-..-----.-..---.-------.----------.----.------.-------1
.. .. +__ ----'-
;--............................................. '-..i _---'--
---;. ._ . .. _ .. _ .. .. .. .. _ .. __ _ .. .. .. ..
.l
---'L .._.._ _ _.._._ .._.._
_ _ _.._._.__.._ _ _ _ _.._..
_.._..__ .._ _.._.._...1
Option 3: Invest in Rank 5 ahead of Rank 2 which can be scaled down _ _._ _ .. _.__ .._ - _ .._ _._._ ..,._---------_ ..__ .. .._._---_ _-, __ _ ,_ _ _ __ ..-_ .. ..__ _--_ _._---_ __ _ __ ._-----.-._".-----._---_ .._._-_ .._-_._ _--_._-----_., l..!!!y~~~~!!!-~; __ ~V __ . . . .. . .. . . ----I
,
.. .............. _ .. ...................
_ .. ..
.._
..
..
.. ..
..
"______________ .._;
~(l!!~J ; Rank 5 !
.i
~~_!!!_~!!!!g-!!----..L-----------------------------------------------------------------1
~~gQ,QQj
512.00 1,000.00
!
??~.:.x.? L203.55 500.40

!
i..
.. . ...._____;
Because it cannot be scaled down.
i::g~~k-?:(~~!~~~-~i~~r .68.00'1 ....3s.70T::

L. ..__ . _.... .._._ . .__ ._.
---:~:~~:::::::::::~::::::----------------::-~::::~l
!
Options 4: Invest in Rank 3 and Rank 2 which can be scaled down Investment NPV Rs. in million 800.00 73. 200.00 113.83 1,000.00 487.75
ecause it cannot be scaled down.
Conclusion: The most beneficial mix for the company is to invest in Projects A, B, F and C (balancing amount) which gives the highest NPV to the company.
A.3
(a)
The summary of investment appraisal results are as follows:
tion I
On financial ground, the project to be accepted should be the one with the higher NPV, i.e. Option 2. NPV shows the absolute amount by which the project is forecast to increase shareholders' wealth and is theoretically more sound than the IRR and MIRR. However, In this case, both IRR and MIRR back up the NPV.
The discounted payback period shows that Option II is more risky as it takes longer to recover the present value.
Page 3 of 7
Page | 8
WORKINGS
l~:!:N:t:t.PJ:t:~t:I!t.y<t!~t:
r~~~~~~~~~~~~~~~~=~~~~~~~:~~i~I~:~~!. [Qj~1:4~R~~~~9~~!ii~(~~~E:!i:Q.~~0YT~E=:::::[:i~~.i~i:~~iT:~:I41IL[::::I@::~~:=I::::::=~i~~5~]~~=~)~~ ~ ..~~~_~?_~~L~~~J!.!l<?~~(!.Qy.~ .. ~~_f.l~tj_<?!:12_._._--! i 366.30! 423.50! 551.03 i 658.85

ir--------------------------------------------Total nominal cash flows
~--..--.- ..----.- ..-- ..--.-----------
--- .. -.-----.------.- .. -~
!
1.000:
610.53 0.885!
i j
731.75 0.783!
it
899.38! 0.693
1,016.50 0.613
j
.... ---- ..- ... ---- ..---- ..--,--,.---
-..---- ... -..-.. - ..-- ..-..-... ---t--- ... --- ..-... -..-..----------}.- ..-..--.------.---.-----t
..----------..-...i------ ..-....- ...--- ..- ..----
! Discount factor at 13%
iIf~t.:Ei.~~iE.!.y.~!i!.~:=::~~::~~:~~:::=:::=::::~::::.~:~~~~:fio7:4i-+-+--+1 .+ _ ,
I~i~~~ri~_~~i~~: :::..................... .. ..(2,252:25)1

1
540..32
572.96
623.27 .... +.
Discounted payback period = W -4: Internal rate of return
3.83 years
By Interpolation, the IRR is : W3:
15.11% per annum
Modified Internal rate of return pV)l/n r MIRR (1- re) - 1 ( Pv
where, PVr (return phase) (Years 1 - 4) PVj (investment phase) (Year 0) re MIRR= 14.3%
2,359.66 2,252.25 13%
A.4 (a)
Advantages of growth by acquisition (i) The company may be able to grow much faster than would be possible through purely organic development. This is particularly true if the company is seeking to expand into a new product or market area when acquisition will allow the company to gain technical skills, goodwill and customer contracts which would take it a long time to develop by itself. A larger company with a better spread of products, customers and markets faces a
Page 4 of 7
(ii)
Page | 9 Business Finance Decisions Suggested Answers Final Examinations - Summer 2012 lower level of operating risk than a small company which may be more dependent on a small number of customers and suppliers. Acquisition will therefore allow the company to reduce its operating risk more quickly. This effect is enhanced if the company is using acquisition as a mean of diversification into new product/market areas. Acquisition may permit the company to make operating economies through the rationalization and elimination of duplication in areas such as research and development, debt collection and corporate relations. Acquisition may allow the company to achieve a better level of asset backing if it has a high ratio of sales to assets.
(iii)
(iv)
Disadvantages of growth by acquisition (i) If the acquisition is being made for strong strategic reasons, there may be competition between bidding companies which may force the price to rise to a level which may not be justifiable on financial grounds. (ii) Acquisition may involve significant reorganizations cost which may result in lower earnings at least in the short term. (iii) The acquisition may lead to inequalities in returns between the shareholders of the bidding and the target companies. Quite often the shareholders in the target company do disproportionately well as compared to the shareholders in the bidding company.
(b)
Determination
of
Sales Level Price decreased by iT m.m.f < 5% 10% 10% 30% ! 23%! 20% ! 45% -.-.-.. - -------------------Rs. in million-----------------Price increased by
-.j ......... - ..... -.-' ...... - - ....... - .. - ..... -' ....... -- ..... --
Existing sales .............
i-----------
Market share
-.- -.-
-................. .-f
...... - ..
Market size (Rs 1,000.:.. 30%) x Ll Sales

M:lrl<pt
---T667- ----3~66-fr_------j~6-67-r-------3,66i1,100.00 843.41 42.17 885.58 (278.33) (55.00) (42.17) 565.08 733.40 73.34 806.74 (242.02) (36.67) (82.51) 1,650.15
Share x Market Size) xLI
528.05 !
* (Rs. 430m - Rs. 100m) The company can achieve the optimal sale level by reducing 10% price.
Page 5 of 7
Page | 10
~!~~I~~~~~i~~~~~~~I~ 1~~~-::::r!--~~~~=~:
I
Fin. charges - Long term loan (W-2)
,__ Q.~_!~_~~~!~~ __ ~f_~~~_~_Q2~ _g~P' _ i Cash flow
i G~_;;~th-~~t~------------------------------r_-----io%-r------loo/;1----1oo/:t---------lO~;:r-----lO%l
, , , ,_._ ... _ ... _._ .... _ ... _._ ... _. __ ., . , i Year 1 i Year 2 i Year 3 i Year 4 i Year 5 !
'Fi~~~~;~i~h~;g~;:Sh~rt~~;:;:;;I~~~(1:6oo~i4 %) ( 140.00) I
-~hti~~
b~i~~~t~~~ti~~
Net cash flow .
__ !~~t!g~L~~~;~5.~-~=::~~~-~-_~-~:~=~-_~~~~~~~_~-_~_~~. i----(li.ll)T-------(97:-7-9)--r--(i26~38)r--(157:07)-r---(190.05-j-:~=~-_
Re.~~_c:ti()~.~.~.!?:gEt term debt : Reduction in long term debt (W ~~L (W-4) cash (300.00) I .__ :__ : L.. __ Q22.:29~_L Q_?_9.:2.~lJ ~!~q:_29>L ~_~~~_:922_L_Q 72.:99>-(194.05) i (59.40) i (65.34) i (71.88) i (79.07) (414.14)! 128.78 i 189.55! 254.60 i 324.39 (414.14) I (285.36) I (95.81)!
249.91; L... 358.18 l . ~....... 424.89! . +
_..........
(127.50)Q9~:99>L-(76~5-0)-r-----(5ioo)T:::~(~~::~~g~~ (140.00) 1(140:00)1(140.00)1 (140.00) 267.02! 455.97 i 551.27 i 653.55 I 763.51

496.48 ..
j ~ .
573.46
=J
f_~:_!~__ Q~_~~~!-E~~_~?!t._2K?p_~_!~!i!t.g_p.r_<?!:i!_~!_?p.~i~~!_~~!~_~_!~_y_t:!_.____ .__ .

L
L.
;---- ..
!~~-E~~f~~~~~:ld~~~~~~~~~~-_~~~~~~~~!~~~~-~~~~
......
Contribution margin
..
. ..
..
..
Rs. m million l 805.57 I
L2J~~~!~~~~i~~_~:~~~_~~_~!!i_8. __ ~_~_P.i.~~_~~~~_~)~_::::~ . .,
...~<ly!c:>IIc:?~t~J~:1.(j9.f!l:~??O!o><I:}) Other fixed costs ((Rs.250m x 80%) - 25m - 160m) x 1.1 x 70%
=_~~~=~ ~=:~~=~= I
~...........(1}?:9.9X! (11.55) 634.52
W-3: Taxation
l.--.... .--... -.-.--.... -.. -.. .--.-.-... .. -.-.-.. _. __ ._._. __ .. _._ .. __ ._._ ... _ .. _._._. ._._.-.1.__.....__ .__ ._..._.._.__..__ .._..
L._!~J~_~2.~
ki
["' HH_HHMH H
.._.
..
... .._.._..._._. ._._.._.
..._._. ._._ ..
_.J
==1;"7~.1~1=,1=..,,.;,9,;.7 .;,;.79;,..,;,1 =~1,;;;,26,;,;.,;,,38;::k1 =~1;,;.5,;.7 ',;.0 7~1 =,,;1,;,,90;,;,.0;;,;;5=1
W-4: Increase in working cap~!<ll . , _._____ _ .. _ . .. . i Existing I Year 1 i Year 2 i Year 3 .. i ----.-------.------.----t_----------! Year 4 i Year 5 ! .-------j---------------t------j-------t----------~ ! Sales i 1,000.00 i 1,485.13 i 1,633.64! 1,797.00! 1,976.70! 2,174.37!
i-i~~;~~~~~~~f~~------!-----------------::!85:i3-ri48.5i-r----i6i36r----r-79.-7-0--r:----i-?j::~?J
i
Additional working capital i 194.05 L.E.~9.\l.!!:~~_(:I_Qro_2r~!!0"_e_<l:~~_ciJ_'!!~~LL__________________
59.40 i L
65.34 i . __ L
71.88
79.07
j
Page 6 of 7
Page | 11 Business Finance Decisions Suggested Answers Final Examinations - Summer 2012
(c) Determination of maximum bid price , YearO ar2 Year 3
424.89 216.50 189.55
iAdd;F~~~~i~i;;h;;;g~~---T---
[~~~~(lshfu;-d~fi;;it-------Tdd: Changes in working capital Terminal value* Cash flows factor at 18%
I Net operating cash flows (fr~;;; ~b~~~)r.
Year 4
496.48 191.00 95.81
YearS
573.46 165.50
(90.78) 0.8475 _+ _.._ +.;-._.. (.:...7
669.56
765.60
711.41 0.5158
6,628.41
i
..1......
0.7182
i
.1..
0.6086!
i
1..........
0.4371!
_._
_ _._
6~~~)J~=i~;~~=-46s~4I~:::)~~J~I_3~~.
.
.......................................
..J
*(573.46 + 165.5) x (1+5%) -;-(18% - 5%) A.5 Hedge using forward contract
Futures Market Hedge Futures can mature at the given dates only. Since the amount is to be paid on September 30, the contract with maturity date of September 2012 would be chosen.
L~~ .2 ..U~~.!.~~..~2~)!.a.:~!~ .. !.~.~.':l..Y ..n~y. .. !].?.!QQQ~g 0Q_~J!:.!:.J._Q.Q&Q.Q2..._ _.__ .._.. : l.~~yJLZ~Q.~~.!.c:~ ..2f.c:.P:.:?Ql?(~~:.!:2.~?L.~.J.9.Q~.QQQ.. ~...!~?~.91............ ..._..
li~(i~~i!lg~()~!<?trr.:t.!'t.r.g!~D~QQQ~!~?~Q~?O(q~y!?}
i . ".,
1,750
.. ~.:}}2_&~.?J.~9.Q_..
Rs. 46,667
~~.~.~ ~ ..
1........
~.?.J..?.~ ..~.L! ..~.? ." ...
Hedging using an option Since we need to pay in JPY, we would have to buy call option expiring after the transaction date i.e. September 31,2012.
L.:I?~y.?9.9. ..~()~~<l.<::.!~.~L~.c:p_.?Q}} ..(~.~.:.??_Q,.QQ9_ ..~_J:~.~.!.?J'-Y ..=.!.L~ ...?QQL LE.i!l-'!~<::igg_c:.()~!.()Lp.r.~~.~~~ ..(Q.:Q.g.~.~.}~.Q!Q.QQ.2< ..z.QQ.2< .. ?rg..~..Yl.?2.
,._._ _...___..._.......__._......__.._.._...L
l:~<?:... ().f()p!i().~~.<::2.~.!~.<l.<::.!.~ .. 1?1!.y.O'~X.1.?~!.QQQ!Q9.Q ... :::.JYY... ??Q,QQQ2...

!Cl. ..
700 Rs. 53,667

~.: ..
_~: ..3..~_~IQL2.J.~QQ._.
__. .
~}.?_'g~.L!~L.i
W -1: Determination
of Exercise Price
cost from September 2012 contracts is worked out as
The cheapest option including premium follows:
1"E~~~~i;~r;~~:::-r-T~t~---,-~~:::~~
!....P!1E~ l....................... . ~~.~~ it....-------------------Ils.------------------. "... . .. """" .. .. .."..".." , , .. "..,,..,,..,,.."..r ,, ti.... ! 1.90 _._ _ _._0.0355! 1.9355! ..-.~..~--~-.-~ r..~~..~-~--~-~---- ..~ ~..---t~--- ..-,,---..----~ ..~--~--+---..--..-.,,-..: 1.91 0.0232 i 1.9332 :
T ...................
-.
[~~::::~~riI:~~~.=~=Q;-QI[~.I:=::!~~~I~If:hiiJ2~~!:::::~:
Conclusion Hedging using option is the cheapest option and should be selected. (THE END)
Page 7 of 7
Page | 12
Page | 13

Final Examination Module F Winter 2011 Q.1 7 December 2011 100 marks 3 hours Additional reading time 15 minutes
(a) Briefly discuss the Dividend Irrelevance Theory developed by Miller and Modigliani (MM). State three arguments against the validity of this theory. (05 marks) (b) Al-Ghazali Pakistan Limited (AGPL) is a listed company whose shares are currently traded at Rs. 80 per share. AGPLs Board has approved a proposal to invest Rs. 600 million in a project which is expected to commence on 31 December 2012. There are no internal funds available for this investment and the company would have to finance the project from the profit for the year ending 31 December 2012 and through right issue. AGPL has a share capital consisting of 20 million shares of Rs. 10 each and its profit for the year ending 31 December 2012 is projected at Rs. 250 million. The annual return on 1-year treasury bills, the standard deviation of returns on AGPLs shares and the estimated correlation of returns with market returns are 7.5%, 8% and 0.8 respectively. The current market return is 12.9% with a standard deviation of 5%. Required: Using MM Theory of Dividend Irrelevance, estimate the price of AGPLs shares as at 31 December 2012, if the company declares: (i) 20% dividend (ii) Nil dividend (05 marks) (c) Justify the MM Theory of Dividend Irrelevance, based on your computation in (b) above. (05 marks)
Q.2
The directors of Khayyam Limited (KL) are considering an investment proposal which would need an immediate cash outflow of Rs. 500 million. The investment proposal is expected to have two years economic life with salvage value of Rs. 50 million at the end of second year. KLs Budget and Planning Department anticipates that Net Cash Inflows After Tax (NCIAT) are dependent on exchange rate of the US $ and has made the following projections:
Exchange Rate Exchange Rate Exchange Rate Rs. 84-87 Rs. 88-91 Rs. 92-95 NCIAT Probability NCIAT Probability NCIAT Probability 250 65% 320 35% 280 340 20% 5% 330 380 65% 50% 360 400 15% 45%
Year 1 Year 2: If Year 1 exchange rate is Rs. 84-87 If Year 1 exchange rate is Rs. 88-91 All NCIATs are in millions of rupees
KL uses a 14% discount rate for investments having similar risk levels. Required: (a) Draw a decision tree to depict the above possibilities. (04 marks) (b) Determine whether it would be advisable for Khayyam Limited to undertake this project. (10 marks)
Page | 14
Q.3
Ibn-Seena Limited (ISL) is a reputable unquoted company engaged in the business of manufacturing and sale of pharmaceutical products. It is presently considering a proposal to acquire Al-Biruni Pharmaceuticals (Private) Limited (APPL) which is a wholly owned subsidiary of Al-Biruni International (ABI). Summarised income statements of ISL and APPL for the latest financial year are given below: ISL APPL Rs. in million 2,500 1,800 (1,350) (630) (150) (190) 1,000 980 (375) (360) (125) (90) 500 530 (175) (186) 325 344
Sales Less: Cost of sales
- Variable - Fixed *
Gross profit Selling expenses Administration expenses Profit before tax Tax (35%) Profit after tax
* includes depreciation of Rs. 70 million and 100 million respectively
Other Information (i) APPLs sales consist of Generic Medicines (40%) and Patented Products (60%). Presently, 20% of the revenue from Patented Products is contributed by a product Z-11. All patents are owned by ABI; however, no royalty or technical fee is presently claimed by it. (ii) The variable costs of Patented Products are 30% of the sales amount. Product Z-11 will complete its patent period after three years and thereafter its price would have to be reduced. Consequently, the ratio of variable costs of production to sales would fall in line with that of Generic Medicines.
(iii) After acquisition the costs and revenues of APPL are projected as follows: Total sales and variable costs would grow at 10% per annum except in Year 4 when the growth rate of sales would decline on account of reduction in price of product Z-11. Fixed costs other than depreciation would increase at the rate of 5% per annum. However, depreciation would remain constant over the next five years. Selling expenses and administration expenses would be reduced by 30% and 80% respectively. However, from Year 2 onwards, selling expenses would increase at 7% per annum whereas administration expenses would increase by 5% per annum. ABI will charge 15% royalty on sale of Patented Products whereas 3% technical fee will be levied on the sales of all products. (iv) Free cash flows of APPL are expected to grow at 3% per annum after Year 5. (v) ISL intends to finance this project through debt carrying interest at the rate of 10% per annum. The principal would be re-payable at the end of Year 6.
(vi) ISL would discount this project at its existing weighted average cost of capital of 20%. Required: (a) Calculate the bid price that ISL may offer for the acquisition of APPL. (17 marks)
(b) Assess the impact of the acquisition on the wealth of ISLs shareholders at the end of Year 5 assuming that the shares at that time would be priced at 7 times its PE ratio and ISLs profit after tax would increase at 8% per annum. (03 marks)
Page | 15
Q.4
Khaldun Corporation (KC) is a Pakistan based multinational company and has number of intergroup transactions with its two foreign subsidiaries KA and KB, which are located in USA and UK respectively. Details of receipts and payments which are due after approximately three months are as follows. Paying Company KC (Pak) KA (USA) KB (UK) Receiving Company KC (Pak) KA (USA) KB (UK) ------------in million-----------Rs. 131 5.10 US $ 1.50 US $ 4.50 4.00 1.80 -
The current exchange rates and interest rates are as follows: Exchange Rates US $ 1 Buy Sell Rs. 86.56 Rs. 86.80 Rs. 87.00 Rs. 87.20 UK 1 Buy Rs. 134.79 Rs. 135.87 Sell Rs. 135.13 Rs. 136.18
Spot 3 months forward
Interest Rates Borrowing Lending KC (Pak) 10.50% 8.50% KA (USA) 5.20% 4.40% KB (UK) 5.90% 5.00% Required: (a) Calculate the net rupee receipts/payment that KC (Pak) should expect from the above transactions under each of the following alternatives: Hedging through forward contract Hedging through money market (08 marks) (b) Demonstrate how multilateral netting might be of benefit to Khaldun Corporation. (06 marks) Q.5 Ghazali Limited (GL) operates a chain of large retail stores in country X where the functional currency is CX. The company is considering to expand its business by establishing similar retail stores in country Y where functional currency is CY. As a policy, GL evaluates all investments using nominal cash flows and a nominal discount rate. The required investments and the estimated cash flows are as follows: (i) Investment in country X CX 7 million would be required to establish warehouse facilities which would stock inventories for supply to the retail stores in country Y at cost. At current prices, the annual expenditure on these facilities would amount to CX 0.5 million in Year 1 and would grow @ 5% per annum in perpetuity. Investment in country Y Investment of CY 800 million would be made for establishing retail stores in country Y. At current prices, the net cash inflows for the first three years would be CY 170 million, 250 million and 290 million respectively. After Year 3, the net cash inflows would grow at the rate of 5% per annum, in perpetuity. (ii) Inflation in country X and Y is 7% and 20% per annum respectively and are likely to remain the same, in the foreseeable future. Presently, country Y is experiencing economic difficulties and consequently GL may face problems like increase in local taxes and imposition of exchange controls. (iii) The current exchange rate is CX 1 = CY 45. (iv) GLs shareholders expect a return of 22% on their investments. GL uses this rate to evaluate all its investment decisions.
Page | 16
Required: Prepare a report to the Board of Directors evaluating the feasibility of the proposed investment. Your report should include the following: (a) Computation of net present value of the project and a recommendation about the viability of the project. (12 marks) (b) Identification of the risk and uncertainties involved. (03 marks) (c) Brief discussions on management strategies which may be adopted to counter the risks of increase in local taxes and imposition of exchange controls. (05 marks) Q.6 Skill Enhancement Centre (SEC) is an established institution with a mission to impart training to the youth by developing their job-related technical skills. It offers industry-specific one year diploma courses to students. In the recent past, several other institutions have started offering a wide range of new courses with the result that the number of students enrolled in SECs Textile Designing Course (TDC) has declined to 175 students per annum. SEC is developing its 5-year plan and an important consideration is to replace TDC with Advanced Textile Graphics Course (ATGC). The following related information is available: (i) Several computers would need to be upgraded at a cost of Rs. 350,000. However, if ATGC is not introduced 30 such computers may be sold at Rs. 12,000 each. The current book value of each computer is Rs. 15,000. ATGC would require new textile designing software which costs Rs. 1,200,000. The new course would be taught and managed by the existing staff which receives total remuneration of Rs. 6,000,000 per annum. However, if the enrolment in ATGC program exceeds 225 students per annum, two new technical instructors would have to be engaged at a cost of Rs. 1,800,000 per annum which would be payable in advance. Details relating to income from fees and other costs are as follows: TDC ATGC Timing of cash flows Rupees In advance 42,000 43,200 In advance 6,000 7,400 In arrears 120,000 230,000 In arrears 2,400,000 3,000,000 In advance 750,000
(ii) (iii)
(iv)
Course fee per student Cost of training material per student Directly attributable costs (per annum) Apportionment of overheads excluding staff costs Preliminary costs (including training of instructors) (v) (vi)
On an average, a new student enrolled in a course brings additional revenue of Rs. 2,400 per annum on account of other activities. Being an educational institution, SEC is exempted from income tax.
(vii) SEC assesses the viability of a course using a discount rate of 7%. (viii) It is assumed that the number of students enrolled would remain constant throughout the five-year period. Required: Determine the minimum annual enrolments which would make it financially viable for SEC to introduce ATGC. (17 marks) (THE END)
Page | 17
BUSINESS FINANCE DECISIONS Suggested Answers Final Examination Winter 2011 A.1 (a) Under dividend irrelevance theory, Modigliani and Miller argued that the value of the firm depends only on the income produced by its assets, not on how this income is split between dividends and retained earnings.
(b) Market price per share Calculation of market price per share under MM dividend irrelevance theory
Arguments against the theory (i) Differing rates of taxation on dividends and capital gains can create a preference for a high dividend or one for high earnings retention. (ii) Dividend retention should be preferred by companies in a period of capital rationing. (iii) Due to imperfect markets and the possible difficulties of selling shares easily at a fair price, shareholders might need high dividends in order to have funds to invest in opportunities outside the company. (iv) Markets are not perfect. Because of transaction costs on the sale of shares, investors who want some cash from their investments will prefer to receive dividends rather than to sell some of their shares to get the cash they want. (v) Information available to shareholders is imperfect and they are not aware of the future investment plans and expected profits of their company. Even if management were to provide them with profit forecasts, these forecasts would not necessarily be accurate or believable. (vi) Perhaps the strongest argument against the MM view is that shareholders will tend to prefer a current dividend to future capital gains (or deferred dividends) because the future is more uncertain.
Po =
P1 + D1 1 + Ke
OR
P1 = Po (1 + Ke) - D1
Po D1 K e (W-1) P 1 {80x(1+0.144)-2} {80x(1+0.144)-0}
W1: Cost of equity under CAPM Ke = Rf + (Rm Rf) = 0.075 + (0.129 0.075) 1.28 (W-2) = 14.4%
Market price if dividend Declared Not declared Rs. 80.00 Rs. 80.00 Rs. 2.00 14.4% 14.4% Rs. 89.52 Rs. 91.52
W2: Computation AGPL's Standard Deviation with Market Return = Correlation of Return with Market Returns Market Standard Deviation
8% 0.8 = 1.28 5%
Page 1 of 6
Page | 18
BUSINESS FINANCE DECISIONS Suggested Answers Final Examination Winter 2011
(c) Justification of MM Dividend Irrelevance Theory Net income Less: Dividend paid Retained earnings Less: New investments Amount to be raised through right issue
Market price per share (as computed in (b) above Number of new shares to be issued (in million) Already issued share capital Total number of shares to be outstanding
A B C=AB D E=C+D
No of shares to be issued Declared Not declared Rs. in million 250.00 250.00 40.00 210.00 250.00 (600.00) (600.00 ) 390.00 350.00 89.52 4.36 20.00 24.36 91.52 3.82 20.00 23.82
Market capitalization A.2 (a)
BE
2,180
2,180
Cash Outflow (Rs. 500 million)
Rs. 250 million (65%)
Discount factor
Discount factor
1 2 3 4 5 6
250 250 250 320 320 320
0.8772 0.8772 0.8772 0.8772 0.8772 0.8772
219.30 219.30 219.30 280.70 280.70 280.70
*330 *380 *410 *390 *430 *450
0.7695 0.7695 0.7695 0.7695 0.7695 0.7695
253.94 292.41 315.50 300.11 330.89 346.28
473.24 511.71 534.80 580.81 611.59 626.98
500 500 500 500 500 500
(26.76 ) 11.71 34.80 80.81 111.59 126.98
0.1300 0.4225 0.0975 0.0175 0.1750 0.1575
*including salvage value of Rs. 50 million
Comment: Since the expected net present value of project is positive, it is suggested to accept investment proposal.
Joint Probability
PV of total inflow
Amount
Amount
Page 2 of 6
Expected NPV (3.48) 4.95 3.39 1.41 19.53 20.00 45.80
Cash outflow
(b)
Path 1
Path
PV
PV
NPV
PV of NCIAT of Year 1
Path 2
PV of NCIAT of Year 2
Path 3
Path 4
All amount are in million rupees
Path 5
Path 6
Page | 19
A.3
(a) Sales Generic Patented other than Z-11 Z-11 (Note 1) Less: Variable costs of production Generic Patented other than Z-11 Z-11 Less: Fixed costs other than depreciation Less: Depreciation Less: Selling expenses (Y1: Cost red. by 30%) Less: Admin. Expenses (Y1: Cost red. by 80%) Less: Royalty on patented products (W2) (Note 2) Less: Technical fee (Total sales x 3%) Adjusted profit before tax Taxation (35%) Profit after tax Add: Depreciation Terminal value (Note 3) Total cash flows Discount cash flows Maximum bid price Notes
Growth % 10% 10% 10% 10% 10% 10% 5% 7% 5%
FY00
720 864 216
FY01
90 360 90
(336.60) (285.12) (71.28) (94.50) (100.00) (252.00) (178.20) (59.40) 584.90 (204.72) 380.18 100.00 480.18 480.18 0.833 400 (18.00)
792.00 950.40 237.60
(370.26) (313.63) (78.41) (99.23) (100.00) (269.64) (196.02) (65.34) 666.57 (233.30) 433.27 100.00 533.27 533.27 0.694 370 (18.90)
FY02 FY03 FY04 ----- Rs. in million ----871.20 958.32 1,054.15 1,045.44 1,149.98 1,264.98 261.36 287.50 223.24 (407.29) (344.99) (86.25) (104.19) (100.00) (288.51) (215.62) (71.87) 757.23 (265.03) 492.20 100.00 592.20 592.20 0.578 342 (19.85)
(448.01) (379.49) (94.88) (109.40) (100.00) (20.84)
(308.71) (330.32) (189.75) (208.72) (76.27) (83.90) 815.02 922.30 (285.26) (322.81) 529.76 599.49 100.00 100.00 629.76 699.49 4,238.09 629.76 4,937.58 0.482 304 0.402 1,985
(492.82) (417.44) (104.36) (114.87) (100.00) (21.88)
1,159.57 1,391.48 245.56
FY05
Discount factor at WACC of 20% 3,401
1 2 3
Sales of Z-11 in Year 4: 94.88 42.5% [W-1] Up to Year 3, 15% royalty would be charged on all patented products from year 4 onward, royalty would be charged on patented products other than Z-11. {(1+FCF growth rate after year 5) x FCF in year 5} (Cost of capital FCF growth rate after year 5) = {(1+0.03) 699.49}(20% - 3%) = 4,238.09
W1: Determination of variable costs to sales % Sales in Year 0 Variable cost of production Variable costs to sales %
(b)
Value of combined entity (855.96 [W-1] x 7) Value of ISL if not combined (477.53 x 7) Additional value
Patented Rs. 1,080 Rs. 324 30.00%
Sale Generic Rs. 720 Rs. 306 42.50%
Total Rs. 1,800 Rs. 630 35.00%
W-1: Value of combined entity Year 5: Profit after tax - ISL (325 x (1+0.08)^5 Year 5: Profit after tax - APPL Less: Additional interest on debt (3,401 10%) 65% Combined earnings at Year 5
Rs. in million 5,991.70 3,342.71 2,648.98 477.53 599.49 (221.07) 855.96
Page 3 of 6
Page | 20
A.4
(a) USA The full receipt i.e. US $ 1.50 will be hedged.
Hedging through Forward Contract Hedging through Money Market
KC would sell US $ 1.5 million three months forward at Rs. 87.0 per US $ and receive 130.5 million. To obtain US $ 1.5 million, borrow now: (1.5 million [1+(5.20%x3/12)] = US $ will be converted into Rs. at spot: US $ 1.48 million x Rs. 86.56 = UK The receipts and payments can be netted off : ( 5.10 - 4.0) = 1.10 Rs. 128.11 million will be invested in Pakistan: Rs. 128.11x[1+(8.5%x3/12)]
Rs. $ 1.48
Rs. 128.11 Rs. 130.83
Hedging through Forward Contract Hedging through Money Market
KC should buy 1.1 million three months forward at Rs. 136.18 per and pay Rs. 149.8 million. To earn 1.1 million, invest now: 1.1 million [1+(5.00% x 3/12)] = Purchase at spot rate : 1.09 x Rs. 135.13 Borrow Rs. 147.29 million in Pak at 10.5%: Rs. 147.29m x [1+(10.5% x 3/12) = (b) Payments KC-(Pak) KA-(USA) KB-(UK) Total receipts Total payments Net payment / (receipts) KC-(Pak) Receipts KA-(USA) KB-(UK) ---------- Rs. in million ---------131.00 688.30 390.06 242.93 373.93 1,078.36 (520.08 ) (782.77 ) 146.15 (295.59) 1.09
Rs. 147.29 Rs. 151.16 Total
Without multilateral netting, the group companies would have required to pay Rs. 2,122.15 million as shown in the above table. On account of multilateral netting, the amounts payable and receivable were netted and as a result the amount required to be paid/received was reduced to Rs. 295.59 million i.e. 13.93% of the gross amount, resulting in savings of transaction/hedging costs.
130.02 539.84 669.86 (819.30 ) 149.44
819.30 520.08 782.77 2,122.15 (2,122.15) -
Page 4 of 6
Page | 21
BUSINESS FINANCE DECISIONS Suggested Answers Final Examination Winter 2011 A.5 To: Board of Directors Date: 7 December 2011 Subject: Evaluation of proposed investment in Country Y
(a) Net present value of the investment The financial evaluation of the Country Y Project is based on estimates of the future nominal cash flows of the investment, in both Country X and Y. All foreign cash-flows are converted to CX and total is discounted at a shareholders' required rate i.e. 22% per annum. The theory of purchasing power parity has been used to estimate future currency exchange rates. This predicts that if currencies are allowed to float freely on the market, they will adjust in the long run to compensate for differences in countries' inflation rates. The results show that the investment has an expected net present value of approximately CX 81.252 million, which indicates that it is worthwhile and should add to shareholder value. Calculations
Exchange rate (PY x 1.2 / 1.07) Cash flows in Country X Cash flows in Country Y Total nominal cash flows Present value Growth Inflation 7% 20% YEARS 1 2 50.470 56.600 ----- CX in million ----(7.000) (0.535) (0.601) (17.778) 4.042 6.360 (24.778) 3.507 5.759 0 45.000 (24.778) (15.462) (1.876) 1.000 0.766 2.686 0.587 3.381
5%
Discount factor @ 30.54% [(1.22x1.07)-1] Net present value as computed above Country X - NPV from Year 2 to perpetuity [(0.675 x 1.1235) (0.3054 - *0.1235)] 0.450 Country Y - NPV from Year 4 to perpetuity [(7.894 x 1.26) (0.3054 - **0.26)] x 0.450
(0.675) 7.894 7.219 0.450 3.249
3 63.480
(b) Risks and uncertainties (i) Large margins of potential error in the exchange rate prediction (ii) A slow payback: in present value terms the project will probably not break even until Year 8 or 4. (iii) The economic uncertainties in Country Y which may affect adversely on rate of inflation. (iv) Inappropriate projection of future cash flows specially the cash flows to be generated in Country Y and cash flows expectation to perpetuity. (c) Management Strategies (i) (ii)
*Growth rate for Country X from year 4 to perpetuity [(1.07x1.05)-1]=12.35% **Growth rate for Country Y from year 4 to perpetuity [(1.20x1.05)-1]=26%
98.59 81.252
To counter the increase in local taxes
To counter the imposition of exchange controls

(i) (ii) (iii)
Negotiate tax concessions in advance Use transfer price strategies including royalties and management, to minimize the impact of variation in Country Y taxable profits and dividends
Make extensive use of local currency loans for financing Arranging currency swaps Back to back loans with other multinational companies and banks with complimentary cash needs
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A.6 Investment costs (W-1) Additional fee from existing capacity (175 (Rs. 43,200 - Rs. 42,000) Additional cost for the existing capacity (175 (Rs. 7,400 - Rs. 6,000) Additional directly attributable course costs (Rs. 230,000 - Rs. 120,000) Additional staff costs Incremental benefit per student (over 175 students) (W-2)
Timing of Cash flows Advance Advance Advance Advance Arrears
Year 0-4 0-4 1-5 0-4 0-4 0
Discount factor @ 7% 1.000 4.387 4.387 4.100 4.387 4.387
Students< 225 Students>225 Present value Present value ------------ Rupees -----------(2,660,000) (2,660,000) (2,660,000) Amount (245,000) 210,000 (1,074,815) 921,270 (1,074,815) 921,270
(110,000) (1,800,000) 38,200.00
(3,264,566) A 167,583 B 19 C=AB 194 175 + C
(451,021)
(451,021.72) (7,896,600) (11,161,166) A 167,583 B 67 C=AB 242 175 + C
The number of additional students over 175 to cover the investment and incremental costs No. of students required on ATGC for it to be financially viable
Conclusion: If the enrolments are less than 225 then new course would be viable at 194 or above students. However, if the enrolments exceed 225 students then the new course would be viable at 242 or above students. WORKINGS W1: Initial investment cost Sale of computers foregone (30 x Rs. 12,000) Upgrade of computers Software acquisition Preliminary costs Rupees 360,000 350,000 1,200,000 750,000 2,660,000 43,200 2,400 (7,400) 38,200
W2: Incremental revenues/costs per student over 175 students Fees Additional benefit to SDS Books and consumables (The End)
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Final Examinations Module F Summer 2011
Reading time 15 minutes
June 8, 2011 100 marks 3 hours
Q.1
(a) GER Auto Parts Limited is engaged in the manufacture of automobile spare parts. GERs summarised financial statements for the year ended December 31, 2010 are as follows: Equity and Liabilities Share capital (Rs. 10 each) Reserves Long term debt Current liabilities Balance Sheet Rupees Assets 1,250,000 Fixed assets 5,250,000 Inventory 2,500,000 Receivables 625,000 Cash 9,625,000 Income Statement Sales of 12,500 units Variable costs Fixed costs Interest expense Profit before tax Tax Net profit Rupees 11,718,750 (7,812,500) (1,750,000) (250,000) 1,906,250 (667,188) 1,239,062 Rupees 7,500,000 750,000 875,000 500,000 9,625,000
(10%) (35%)
Owing to competitive pressures, GER plans to reduce the prices of existing products by 6%. However, variable and fixed costs (excluding interest) are expected to increase by 5% and 10% respectively. Interest rate is floating and is expected to increase to 10.6% per annum. Required: Calculate the amount of sales that GER should achieve in the following year to enable it to maintain its existing total leverage. Show how this change would affect the operating and financial leverages. (07 marks) (b) GERs management is also considering to launch a new product. Based on market research, it has identified the following options: Option 1 Product X 3,000,000 15,000 200,000 200 78% Option 2 Product Y 7,000,000 5,000 300,000 1,000 73%
Investment required (Rs.) Unit price (Rs.) Fixed cost (Rs.) Expected sales (units) Variable costs (% of sales)
The management plans to invest in any one of these options. The investment would be financed through long term debt which is available at 12% per annum. Required: Calculate the impact of each of the above options on GERs operating and financial leverages for the year ending December 31, 2011. Which option would you recommend and why? (You may assume that implementation of the above options would have no impact on the sales of existing products as computed in (a) above). (08 marks)
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BusinessFinanceDecisions Page2 of5
Q.2
The Trustees of FR Co-operative Housing Society are planning to invest its surplus funds in different open end mutual funds. Details of proposed investments along with market information gathered from a stock analyst are as follows: Mutual Funds B
A Information on proposed investment Date of investment Amount of investment Estimated net asset value on acquisition Estimated net asset value as on December 31, 2011 Expected dividends (during the investment holding period) Cash dividend to be received Bonus to be received Funds characteristics Front end load (Buying load) Back end load (Selling load) Sharpe ratio Correlation with benchmark indices Expected performance of benchmark indices Benchmark index Total annual return % Standard deviation of annual returns
C 1-Sep-11 Rs. 500,000 Rs. 9.70 Rs. 9.90
1-Jul-11 1-Aug-11 Rs. 500,000 Rs.1,000,000 Rs. 10.50 Rs. 10.00 Rs. 10.40 Rs. 10.00
Rs. 9,500 10% 3.00% 1.00% 0.71 0.75 KSE 100 16 0.10
Rs. 15,000 5% 2.00% 0.00% 0.31 0.92 KSE 30 17 0.18
5% 1.50% 2.00% 0.16 0.83 KMI 30 12 0.13
The yield on 1-year treasury bills is 9%. Required: (a) Estimate the effective annual yield which FR would earn, from the date of investment up to December 31, 2011. (b) In respect of each fund, evaluate whether it would achieve the return in accordance with its risk profile. (15 marks) Q.3 In order to reduce the cost of electricity consumption, HIN Textile Mills Limited has decided to install a gas generator and discontinue the power supply being obtained from a utility company. The gas generator which would meet their requirements would cost Rs. 80 million. The following two proposals are being considered by HIN: Option 1: Offer from BAL Leasing Company Limited BAL has offered a three year lease at a quarterly rent of Rs. 7.46 million payable in arrears. In addition, HIN would be required to pay a security deposit of Rs. 10 million at the time of signing the lease agreement. Generator will be transferred to HIN at the end of the lease term, against the security deposit. The fair value of the generator, at the end of lease period is estimated at Rs. 20 million. Operating and maintenance costs of the generator are estimated as follows: Costs Staff salary Lubricants and filters Parts replacement Overhaul Frequency Monthly Quarterly Half yearly At the end of 2nd year Rs. in million 0.50 1.00 3.00 15.00
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Option 2 : Offer from PUS Rental Services PUS has also offered to sign a three year contract according to which HIN would pay quarterly rent of Rs. 11 million in arrears, with a 10% increase in each subsequent year. The lease rental would include the cost of maintenance and overhauling of the generator, which will be borne by PUS. It may be assumed that HINs cost of capital is equal to the IRR offered by BAL. Required: Evaluate which of the above proposals should be accepted by HIN. (Ignore taxation) Q.4 (12 marks)
The management of JAP Recreation Club is evaluating the option to launch a restaurant that would serve complete meal to its members. Presently, it has a snack bar shop which sells snacks and drinks only. A management consultant firm was hired at a fee of Rs. 85,000 to prepare the feasibility of the project. JAPs Accountant has extracted the following information from the consultants report: (i) (ii) (iii) (iv) The restaurant will be launched on the first day of the next year. The club membership has been increasing at the rate of 5% per annum. As a result of this facility, it is expected that the rate would increase to 10% per annum. The cost of equipment for the restaurant is estimated at Rs. 7,000,000. It would have a residual value of Rs. 510,000 at the end of its estimated useful life of four years. It is estimated that during the first year, an average of 100 customers would visit the restaurant, per day. The number would increase in line with the increase in membership. The average revenue from each customer is estimated at Rs. 400 whereas variable costs per customer would be Rs. 260. Four employees would be appointed in the first year at an average salary of Rs. 200,000 per annum. A fifth employee would be hired from the third year. The annual fixed overheads for the current year are estimated at Rs. 4.8 million. 15% of the fixed overheads are allocated to the snack bar. As a result of the establishment of the restaurant the annual expenditure would increase as follows: Electricity and gas Advertising Repair and maintenance Rupees 340,000 170,000 85,000
(v) (vi)
After the establishment of restaurant, 20% of the overheads would be allocated to the restaurant whereas allocation to snack bar would reduce to 10%. (vii) The snack bar is presently serving an average of 250 customers per day and the number is increasing in proportion to the number of members. If the restaurant is launched, the number of customers would reduce by 40% in the first year but would continue to increase in subsequent years in line with the member base. The average contribution margin from snack bar is Rs. 50 per customer. (viii) The tax rate applicable to the company is 35% and it is required to pay advance tax in four equal quarterly instalments. JAP can claim tax depreciation at 25% under the reducing balance method. Any taxable losses arising from this investment can be set off against profits of other business activities. (ix) JAPs post tax cost of capital is 17% per annum before adjustment for inflation. The rate of inflation is 10%. (16 marks)
Required: Advise whether JAP should invest in the project. Assume that each year has 360 days.
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Q.5
ARA Venture Capital Limited specialises in acquiring loss making companies and converting them into profitable entities with the objective of disposing them subsequently. Presently, ARA is planning to acquire 60% shareholdings in PUN Electric Supply Company. Its Financial Analyst has obtained the following information about PUNs operations: (i) (ii) (iii) (iv) During the year ended December 31, 2010, total electricity demand and supply was Mwh 2.0 million, whereas the cumulative generation capacity of all the existing plants was Mwh 2.1 million. The demand for electricity is expected to grow at the rate of 5% per annum. Cost of power generation per Kwh is Rs. 7 which is expected to increase by 8% per annum. PUNs line losses for the year were 30%. The Power Tariff Regulatory Authority has allowed PUN to determine the tariff so as to sell electricity at a margin of 10% above the average cost of generation. PUN is allowed to include line losses of up to 20% in the cost of generation. The price per unit is determined by the following formula: (Total Cost + 10%) {Number of units produced (1 Permissible line losses %)} where, one unit = 1 Kwh and 1 Mwh = 1,000 Kwh Revenue collection ratio for the year 2010 was 90% of the aggregate billing. Other expenses, excluding depreciation and financial charges for 2010 amounted to Rs. 300 million and are expected to increase by 8% per annum. (vii) Depreciation is charged on straight line method over the useful life of 20 years. Depreciation for the year 2010 amounted to Rs. 75 million. (viii) PUN has running finance facilities of Rs. 3,000 million from various banks at an average mark-up of 13% per annum. The facilities utilized as of December 31, 2010 amounted to Rs. 2,785 million. (ix) In order to meet the future requirements of electricity, PUNs management has already started work on a new generation plant that will be commissioned into operation by the end of 2012 and will increase the present capacity by 15%. Total cost of the new project will be Rs. 1,500 million and PUN had issued TFCs on January 1, 2011 at 14% per annum, to finance the project. (x) The issued share capital of PUN as at December 31, 2010 consisted of 500 million shares of Rs. 10 each. ARA intends to invest in PUNs infrastructure facilities to reduce line losses. It also plans to broaden the Recovery Department with the objective of improving the recovery ratio. The projected figures for the next five years are as follows: Year ending December 31 Capital expenditures (Rs. in million) Additional staff cost in recovery department (Rs. in million) Line losses Recovery ratios 2011 500 15 28% 92% 2012 600 17 25% 94% 2013 500 18 22% 96% 2014 20 20% 97% 2015 22 18% 97% (v) (vi)
The planned capital expenditures would be incurred at the end of the year. ARA would provide a loan to PUN to finance the capital expenditures. The loan will be disbursed as required and carry a mark up of 10% per annum. It would be repayable on December 31, 2015. In addition, ARA would provide guarantees to different banks to secure additional running finance facilities for PUN amounting to Rs. 8,000 million, at a mark up of 13% per annum. ARA requires an IRR of 20% from its investment and expects to exit from this venture by selling its shareholdings at the P/E multiple of 16. Required: Determine the purchase consideration that ARA should be willing to pay for the acquisition of 60% shares in PUN. (Ignore taxation) (25 marks)
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Q.6
URD Pakistan Limited, a listed company, is presently considering to acquire 100% shareholdings of CHI Limited, an unlisted company, which is engaged in the same business. The following information has been extracted from the latest audited financial statements of the two companies: URD CHI ----------Rs. in million---------1,500 400 200 100 100 300 250
Non-current liabilities Term Finance Certificates Share capital (Rs. 10 each) Retained earnings Net profit after tax Tax rate applicable to both the companies is 35%.
The directors of URD believe that a cash offer for the shares of CHI would have the best chance of success. They are considering various options to finance this acquisition. The initial negotiations suggest that interest rate on debt financing would depend upon the debt equity ratio of the company as shown below: Debt equity ratio (up to) Interest rate 40:60 16% 50:50 17% 60:40 18% 70:30 20%
The shares of URD are currently traded at Rs. 52.50. According to the prevailing practice in the market, price earning ratios of unlisted companies are 10% less than those of listed companies. Required: Write a report to the Board of Directors, on behalf of Mr. Shah Rukh, the Chief Financial Officer of the company, discussing the following: (a) Which of the following financing option should the company adopt? (i) The acquisition of CHI Limited is entirely financed by debt. (ii) The acquisition is financed by issue of debt and equity in the ratio of 60:40. The equity is to be generated by the issue of right shares at Rs. 45 per share. (b) What other matters should be considered and what impact these may have on the decision arrived in (a) above? (17 marks) (THE END)
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A.1
(a) Computation of existing operating, financial and total leverage

Total leverage =
BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Summer 2011
Contribution margin 11,718,750 7,812,500 = = 2.05 1,906,250 Income before tax
Determination of sales value where total leverage remains intact
Combined leverage =
2.05 =
Contribution margin Income before tax
Contribution margin% x Sales (Contribution margin% x Sales) - (Fixed cost + Interest Expense)
2.05 =
(sales x 937.5x94%) - (salesx625x105%) (salesx937.5x94%) - ( salesx625x105%) - (Rs.1,750,000x110% + Rs.2,500,000x10.6%
461.25 sales - 4,489,500 = 225 Sales
Sales =
Sales amount= 19,003x937.5x94% = 16,746,397 (rounded off) Effect on Operating and Financial Leverage * Operating leverage
=
4,489,500 = 19,003 units 236.25
Existing
11,718,750 7,812,500 = 1.81 1,906,250 + 250,000
4,275,675 (W - 1) = 1.82 2,350,675 (W - 1) 2,350,675 (W - 1) = 1.13 2,085,675 (W - 1)
Revised
** Financial leverage
1,906,250 + 250,000 = 1.13 1,906,250
*Operating leverage = contribution margins income before interest and tax **Financial leverage = income before interest and tax income before tax
W-1: Forecasted Income Statement for the year ending December 31, 2011 Rs. Sales 16,746,394 Variable costs (19,103 units x Rs. 625 x 105%) (12,470,719) Contribution margin 4,275,675 Fixed costs (Rs. 1,750,000 x 110%) (1,925,000) Income before interest and tax 2,350,675 Interest expense (Rs. 2,500,000 x 10.6%) (265,000) Income before tax 2,085,675
% 100 74 26
Page 1 of 8
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Summer 2011 (b) Comment on the behaviour of operating and financial leverages ratio in relation to launching of either Product X or Product Y
Existing Operations
Sales Variable Cost Contribution margin Fixed Cost Income before interest & tax Interest expense Income before tax A B A+B C A+C -----------------------------------Rupees----------------------------------3,000,000 5,000,000 (2,340,000) (3,650,000) 4,275,675 660,000 *4,935,675 1,350,000 *5,675,675 (200,000) (300,000) 2,350,675 460,000 *2,810,675 1,050,000 *3,450,675 (360,000) (840,000) 2,085,675 100,000 *2,185,675 210,000 *2,345,675
Product X
Forecasted Income Statement
Existing operation + X
Product Y
Existing operation + Y
Operating leverage Existing (See (a)) 4,935,675 2,810,675 5,675,675 3,450,675 Financial Leverage Existing (See (a)) 2,810,675 2,185,675 3,450,675 2,345,675
1.83
1.76
1.64
1.13
1.29
Comment: (i) Operating leverage is declining under each of the two options, which is a favourable condition. (ii) Financial leverage would be considerably high, in case the company opts for launching product Y, although it is also accompanied by a substantial higher profit. (iii) If GER is willing to accept the higher risk as referred to in (ii) above, it would prefer to launch Product Y. Otherwise, it would opt to launch Product X.
A.2 (a) Computing the effective annual yield Investment Public Offer Price per unit (NAV at acquisition (1 + Buy Load) a A 500,000 B 1,000,000 C 500,000
1.47
No of units acquired Bonus units received (10%, 5%, 5%) Total units at year end Redemption value per unit (NAV at 31Mar-2011 (1 + Sales Load)) Value of investment at year end Increase in NAV Cash dividend received Total return No. of days Effective annual yield
c=ab d e=c+d f g= e x f
46,210.72 4,621.07 50,831.79
10.82
h=g-a i j=h+i k (j a)x365k
523,567 23,567 9,500 33,067 183 13.19%
10.30
98,039.22 4,901.76 102,940.98 1,029,410
10.20
10.00
50,761.42 2,538.07 53,299.49 517,538 17,538 17,538 121 10.58% 9.71
9.85
29,410 15,000 44,410 152 10.66%
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Summer 2011 (b) Evaluation of each investment Decision A 12.15% 13.19% Over performed 0.71 13.19% 0.06 0.75 0.10 A B 11.08% 10.66% Under performed 0.31 10.66% 0.05 0.92 0.18 B C 10.92% 10.58% Under performed 0.16 10.58% 0.10 0.83 0.13 C
Required rate of return (W-1) Effective annual yield (Computed in (a) above) Calculation of required rate of return
Rm Rf
Sharpe Ratio Rp (effective annual yield, computed above) Investment SD=[(Rp - Rf)Sharpe Ratio] Correlation with Index Market SD = Inv. SD Corr. with index Market SD Required Return=Rf + (Rm - Rf) A.3 Proposal of BAL Leasing Company Limited
Security deposit Lease rentals Lubricants and filters Parts replacement Staff cost Overhaul Residual value Total present value Quarter
Quarterly rental (Rs. in m) Discount factor (W-1) 4% Present value (Rs. in m)
16% 9%
17%
12%
9%
9%
0.45 12.15%
Interest rate /period (W-1) 4.00% 4.00% 8.00% 1.33%
0.26 11.08%
Discount factor (annuity factor) 1.000 *9.385 *9.385 *4.623 *28.460 0.731 0.625
0.64 10.92%
PV (Rs. in million)
Cash flow
Amount (Rs. in million)
10.00 7.46 1.00 3.00 0.50 15.00 (20.00)
Frequency
Quarterly Quarterly half yearly monthly End of 2nd year End of 3rd year
Total no. of payments (Rs. in million)
12 12 6 36
Proposal of PUS Rental Services

11.0 1 11.0 2 11.0 3
10 *70 *9 *14 *14 11 (13) 115
0.962 10.58
0.925 10.18
0.889
9.78
0.855
11.0
9.41
0.822
12.1
9.95
0.790
12.1
9.56
0.760
12.1
9.20
0.731
12.1
13.31 0.703
13.31 0.676
10
13.31 0.650
11
13.31 0.625
12
Total
8.85
9.36
9.00
8.65
8.32
112.84
Conclusion PUSs option is better as it gives lower overall cost in present value terms W-1 : Finding the rate offered by BAL PV of inflow = Present value of outflows (annuity) = R Annuity Factor (AF) Hence, 80 10 = 7.46 AF AF = 70 7.46 = 9.383
IRR is 4% per quarter i.e. the figure corresponding to annuity factor of 9.383 and 12 periods, on the annuity table.
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A.4 2012 2013 2014 2015 -----------------------------------------Rupees----------------------------------------(7,000,000) 510,000 5,040,000 5,544,000 6,098,400 6,708,240 (4,725,000 ) (800,000) (595,000) 1,620,000 45,500 1,665,500 1,565,570 0.940 2,700,000 (4,961,250) (800,000) (595,000) 2,157,750 (295,838) 1,861,912 1,645,930 0.884 2,970,000 (5,209,313) (1,000,000) (595,000) 2,561,087 (551,849) 2,009,238 1,669,677 0.831 3,267,000 (5,469,779) (1,000,000) (595,000) 3,747,161 (456,413) 3,290,748 2,570,074 0.781 3,593,700 2011
Initial investment Residual value 1Restaurant contribution 2Snack bar contribution in proposed structure 3Snack bar contribution in current structure Salaries Additional overheads Net cash flows Tax payment (W-1) Net cash flow after tax Discount factor (W-3) Present value
1 2 3
(7,000,000) (7,000,000) (7,000,000) 1
Net present value
Conclusion: The company should invest in the project as it would generate higher net cash flows as compare to existing business.
W-1: Tax payments Net cash flows 2012 2013 2014 2015 ---------------------------------Rupees--------------------------------1,620,000 2,157,750 2,561,087 3,747,161 (1,750,000) (1,312,500) (984,375) (2,443,125) 4,595,000 5,806,500 6,786,025 6,773,815 (45,500) 295,838 551,849 456,413 7,000,000 (1,750,000) 5,250,000 5,250,000 (1,312,500) 3,937,500 3,937,500 (984,375) 2,953,125 2,953,125 *(2,443,125) 510,000
Rs. 140 100 360 Rs. 50 250 60% 360 250 360 1.05 Rs. 50
451,251
Less: Depreciation for the year (W-2) Taxable profit Tax payments (Taxable profit x 35%)
W-2 : Depreciation for the year Opening WDV of equipment Less: Depreciation for the year (WDV x 25%) Closing WDV of equipment
* Loss on disposal
W-3: Adjustment of inflation in cost of capital Real discount rate = ((1+nominal discount rate)/(1+inflation rate))-1 = 6.36% A.5 Year ending Determination of value/bid price Loan to be given Interest on loan (@10%) Loan amount recovered Terminal value (Rs. 653.90m (W-1) 1660%) Discount factor (@20%) Present value of annual cash flows Net present value (Purchase consideration) Dec'11 Dec'12 Dec'13 Dec'14 Dec'15 ---------------------Rupees in million--------------------(600) (500) 50 110 160 160 1,600 6,277 (550) (390) 160 8,037 0.694 (381.70) 0.578 (225.42) 0.482 77.12
(500) (500)
0.833 (416.50)
W-1: Determination of net profit and loss for year 2015 Earnings before interest, tax and depreciation (W-2) Financial charges (W-5)
0.402 3,230.87 2,284.37
1,819.23 (1,165.10)
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Net profit/(loss)
W-2: Earnings before interest and tax
653.90
Revenue from sale of energy (Price per unit (W-3) x Rs. 1,000 x Units Sold (W-4) Cost of generation (W-3) Other operating & admin exp. (LY 1.08) Additional staff costs for recovery dept. Prov. for non recoverability (Sales - Unrecovered %) (Loss)/ earnings before interest W-3: Determination of price Demand (million Mwh) (LY Demandx5%) A Capacity (million Mwh) B Units produced (million Mwh) (Lower of A or B) C Existing cost of generation per Kwh (Re) (LY 8%) D E F
Year ending
15,696.45 15,876.00 (324.00) (15.00) (1,255.72) (1,774.27) 2.10 2.10 2.10 7.56
Dec'11 Dec'12 Dec'13 Dec'14 Dec'15 --------------------Rupees in million-------------------17,753.46 17,161.00 (349.92) (17.00) (1,065.21) (839.67) 2.21 2.10 2.10 8.16 22,065.35 20,569.20 (377.91) (18.00) (882.61) 217.63 2.32 2.42 2.32 8.81 25,538.78 23,169.20 (408.14) (20.00) (766.16) 1,175.28 2.44 2.42 2.42 9.51
28,134.45 25,008.40 (440.79) (22.00) (844.03) 1,819.23 2.56 2.42 2.42 10.27
Existing cost of generation (D C 1,000) Depreciation on new plant + Infrastructure Total costs
Price = 110% of cost #of units produced 0.8 W-4: Determination of units sold Line losses Units sold (million Mwh) (C (1 line losses)
15,876.00 15,876.00 10.40
17,136.00 25.00 17,161.00 11.24
20,439.20 130.00 20,569.20 12.19
23,014.20 155.00 23,169.20 13.16
24,853.40 155.00 25,008.40 14.21
W-5: Mark up on running finance Opening balance of running finance Loss / (earnings) before interest and tax (W-2) Mark up on TFCs (Rs. 1,500m x 50% x 14%) Mark up on loan from ARA (@10%) Depreciation (Rs. 75 million + F) Mark up on running finance (13%) Closing balance of running finance
28% 1.51
25% 1.58
22% 1.81
20% 1.94
18% 1.98
2,785.00
210.00 (75.00) 4,694.27 610.26 5,304.53
1,774.27
210.00 50.00 (100.00) 6,304.20 819.55 7,123.75
5,304.53
839.67
210.00 110.00 (205.00) 7,021.12 912.75 7,933.87
7,123.75
(217.63 ) (1,175.28 ) (1,819.23 )
210.00 160.00 (230.00) 6,898.59 896.82 7,795.41
7,933.87
210.00 160.00 (230.00) 6,116.18 795.10 6,911.28
7,795.41
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A.6 To From Date Subject : The Management : Chief Financial Officer : June 8, 2011 : Report on selection of financing option
In response to your advice to explore the financing options for the acquisition of 100 % shareholding in CHI Limited, we have carried out an analysis to determine the debt equity ratio and price of our shares after the acquisition under the following options: Analysis of financing options Where the acquisition is financed through debt only Where the acquisition is financed by debt and equity in the ratio of 60:40.
The following calculations suggest that both the options are feasible to the company as the acquisition of CHI Limited would result in increase in the shareholders wealth as shown below. Working note W-1 W-3 W-4 Existing (Without acquisition) -
Debt equity ratio after acquisition Per share price (Rs.) Increase in shareholders wealth because of acquisition (Rs. in million)
42 : 58 52.50
Option 1 Option 2 (acquisition (acquisition thru thru 100% 60% debt and 40% debt) equity) 59 : 41 47 : 53 64.00 57.75 460.00 388.50
The relevant workings are enclosed as annexure.
Under option 1, the shareholders wealth would increase by Rs. 460 million as compared to the projected position under the existing conditions. However, accepting option 1 would increase the debt equity ratio of the company.
If we are willing to accept the higher gearing level, option 1 should be selected. Otherwise, we should opt for option 2 as in that case there is only a slight increase in debt equity ratio which is more than adequately compensated by a significant increase in the shareholders wealth. Other factors to be considered Besides the increase in profitability and shareholders wealth, URD should also consider the following aspects:
Stability of cash flows/high risk due to financial leverage Future plans
A company with stable cash flows can handle more debt because there is constant stream of cash inflows to cover periodic interest payments. Hence, in case the company is satisfied with the stability of future cash flows, it can opt for option 2. The company may have future plans of further expansion. While comparing the option (i) and (ii) the management should assess that if it plans to obtain further financing in the near future, it may not be feasible to opt for 100% debt financing at this stage.
Stock market conditions
In case the company decides to go for option 2, it should study the stock market conditions to ensure that it would be able to generate sufficient interest in the right issue, before making any commitments as regards investment in the new venture.
Due Diligence
It seems that URD is relying on the audited accounts for making the above decision. Even if the
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audited accounts show a true and fair view, it is not necessary that CHI would be in a position to repeat the performance in future years. It is therefore recommended that URD should carry out a proper due diligence exercise before making a final decision.
W-1: Debt equity ratio after acquisition Existing (Without acquisition) Debt (Rs. in million) 1,500 Equity (Rs. in million) (W-2) 2,100 Debt equity ratio 42 : 58 *1 1,500 + 1,575 (W-2) *2 1,500 + 1,575 (W-2) x 60% = 2,445 *3 2,100 + 1,575 (W-2) x 40% = 2,730 Value of URD and CHI ANNEXURE TO THE REPORT Option 1 (acquisition Option 2 (acquisition thru thru 100% debt) 60% debt and 40% equity) *13,075 *22,445 2,100 *32,730 59 : 41 47 : 53 Rs. in million CHI 250.00 6.30 1,575.00 Rs. in million 300.00 250.00 (184.28) 365.72 2,560.04 64.00
W-2:
W-3:
Net profit after tax Number of shares outstanding (Rs. 400m Rs. 10) Earnings per share (300 40) P/E ratio (Rs. 52.5m/Rs. 7.5) Value of the company Post acquisition price under each option
URD 300.00 40.00 7.50 7.00 x 90% 2,100.00
If the acquisition is financed by debt only
Net profit after tax-URD Net profit after tax-CHI Additional Interest expense (Rs. 1,575m (W-2) x 18% x 65% Revised profit after tax Value of URD after acquisition (Rs. 365.72 x 7 (W-2)) Post acquisition value per share after (Rs. 2,560.04m 40m shares)
If the acquisition is financed by debt and equity in the ratio of 60:40.
Net profit after tax-URD Net profit after tax-CHI Additional interest expense (Rs. 1,575 (W-2) x 60% x 17% (W-4) x 65%) Revised profit after tax Existing shares in issue Number of right shares to be issued (Rs. 1,575 (W-2) 40% 45) Total number of shares to be outstanding after right issue Revised market value after right issue (Rs. 8.25 x 7) Market Capitalization
Revised EPS after right issue (Rs. 445.58 million (W-4) 54m shares) W-4:
Shares in million 40.00 14.00 54.00 PKR 57.75 Option 2 (acquisition thru 60% debt and 40% equity) 3,118.50 (630.00) (2,100.00) PKR 8.25
Rs. in million 300.00 250.00 (104.42) 445.58
Market capitalization Option 1: (40 x 64) Option 2: (54 x 57.75) Less: Funds injected by the Shareholders (14 45 ) Less: Existing market capitalization
Option 1 (acquisition thru 100% debt) 2,560.00 (2,100.00)
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Increase in shareholders wealth
BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Summer 2011 (The End)
460.00
388.50
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Final Examinations Winter 2010 Module F December 8, 2010 100 marks - 3 hours
Q.1 (a) Briefly discuss the possible synergistic effects which are the primary motivation for most mergers and takeovers. (05 marks) (b) The board of directors of Platinum Limited (PL), a leading manufacturer of electrical goods, is considering to takeover Diamond Limited (DL), a competitor of an important product line, by offering seven ordinary shares for every six ordinary shares of DL. The summarized statement of financial position and summarized income statement of the two companies for the latest financial year are given below: Summarized Statement of Financial Position PL DL Rupees in million 4,535 959 900 1,089 1,989 2,546 4,535 192 121 313 646 959
Total assets Shareholders equity Ordinary shares (Rs. 10 each) Reserves Total liabilities Total equity and liabilities
Summarized Income Statement PL DL Rupees in million 3,638 901 312 86 81 28 231 58
Turnover Profit before tax Tax Profit after tax
The current price earnings ratios of PL and DL are 15 and 19 respectively. In case of successful bidding, the directors envisage that: after tax savings in administrative costs would be Rs. 24 million per annum. the price earnings ratio of the merged company would be 18. the dividend payout ratio of PL would not be affected. Required: (i) Total value of the proposed bid based on PLs current share price. (ii) Expected earnings per share and share price of PL following the successful acquisition of DL. (iii) The board of directors is also considering the alternative to offer three zero coupon debentures (redeemable in 8 years at Rs. 100) for every 2 DL shares. PL can currently issue new 8 year loan at an interest rate of 11% per annum. Discuss whether this proposal is likely to be viewed favourably by DLs shareholders. (15 marks)
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BusinessFinanceDecisions Page2of4
Q.2 Silver Limited (SL) is a large manufacturing concern in Malaysia. It deals in four major product lines. As the financial controller of the company, you are faced with the following situations: (I) SL has made arrangements to export leather shoes to a major customer in USA. It has been agreed that one consignment would be shipped in each quarter and payment thereof would be made at the end of the quarter. SLs sole supplier of leather is in Pakistan and it has also agreed to supply on 3 months credit. The estimated sales and purchases for the first two quarters of 2011 are as follows: Purchases from Sales to US Customer Pakistani Supplier First quarter ending March 31, 2011 USD 1,020,000 USD 775,000 Second quarter ending June 30, 2011 USD 1,224,000 USD 1,347,000 The management is considering to hedge the foreign currency transactions. In this regard SLs bank has provided the following information: Exchange Rates Spot rate 3 months forward rates premium 6 months forward rates premium MYR USD Interest Rates USD 1 Buy Sell MYR 3.030 MYR 3.110 MYR 0.071 MYR 0.073 MYR 0.160 MYR 0.164 Lending 6.6% p.a. 5.8% p.a. Borrowing 7.9% p.a. 7.2% p.a.
(II) SL has sold one of its product lines for MYR 15 million. The proceeds are expected to be received at the end of February, 2011. SL plans to use these funds in September, 2011 for one of its major expansion project. Consequently, the management wants to invest this amount in a fixed deposit account for a period of six months at 6% per annum. The management is considering to hedge the interest rate risk by using interest rate futures. The current price of March six months futures is 95.50 whereas the standard contract size is MYR 3 million. Required: (a) Determine which of the following options would be more beneficial to the company: (i) Hedging through forward cover (ii) Hedging through money market (b) Determine how beneficial would it be for SL to use interest rate futures to hedge the interest rate risk if at the end of February, 2011 interest rates: (i) fall by 0.75% and future price moves by 1%; or (ii) rise by 1% and future price moves by 1%. (20 marks)
Ignore transaction costs. Q.3 Iron Limited (IL) is considering four projects for investing the excess liquidity available with the company. Each project will last for three years. The details are as follows: A 85 16% 20% 0.82 Projects B C 87 90 14% 17% 18% 27% 0.85 0.91 D 95 15% 30% 0.78
Net annual cash flows (Rs. in millions) Expected return Standard deviation of returns Estimated correlation of returns with market returns
The current market returns are 14% with a standard deviation of 16%. Risk free rate of return is 10%.
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Required: (a) Evaluate which of the above projects may be selected for investment by Iron Limited. Rank the selected projects in order of preference. (b) Determine the overall systematic risk that would be associated with the above investments if IL decides to invest in all the projects selected in (a) above. (13 marks) Q.4 Gold Limited (GL) manufactures textile machinery. The management has explored opportunities in various South Asian countries and is optimistic that there is considerable demand for GLs machines in the region. However, exports from Pakistan are not financially viable on account of higher input costs. Therefore, GL intends to establish a subsidiary either in Bangladesh or in Sri Lanka. Based on initial studies, the management projections, at current prices, are as follows: Alternative 1: Subsidiary in Bangladesh (SIB) SIB would require immediate outlay of BDT 110 million for the construction of a new (i) factory, i.e. BDT 80 million for acquisition of land and BDT 30 million as advance payment for construction of factory. Balance payment of BDT 75 million would be made in year 1. The installation and commissioning of plant and machinery would be completed in year 1 at (ii) a cost of BDT 115 million. (iii) The estimated working capital requirement in year 1 and year 2 is BDT 20 million and BDT 110 million respectively. (iv) Production and sales in year 2 are estimated at 3,000 units and in years 3-5 at 4,000 units per annum. The average price in year 2 is estimated at BDT 300,000 per unit. Total variable costs in year 2 are expected to be BDT 165,000 per unit. (v) (vi) Fixed overhead costs excluding depreciation, in year 2 are estimated at BDT 350 million. (vii) Allowable tax depreciation on all fixed assets except land is 20% per annum on a reducing balance method. (viii) Applicable tax rate on SIB is 35%. Alternative 2: Subsidiary in Sri Lanka (SISL) (i) The investment would involve the purchase of an existing factory via a takeover bid. The estimated cost of acquisition is LKR 90 million. (ii) Additional investment of LKR 18 million in new plant and machinery and LKR 36 million in working capital would be required immediately after the acquisition. (iii) Pre-tax net cash flows (including tax savings from depreciation) are estimated at LKR 27 million in year 1 and LKR 35 million in year 2. (iv) Applicable tax rate on SISL is 25%. All the above projections are based on current prices and are expected to increase annually at the current rate of inflation. Inflation rates for each of the next five years in Pakistan, Bangladesh and Sri Lanka are expected to be 12%, 10% and 8% respectively. The after-tax realizable value of the investment at the prices prevailing in year 5, is estimated at BDT 145 million and LKR 115 million in case of Bangladesh and Sri Lanka respectively. Current exchange rates are as follows: BDT /PKR LKR/PKR Rs. 0.83 Rs. 0.85 Rs. 1.31 Rs. 1.34
GLs cost of equity is 18%. It would finance the investment by borrowing at 12% per annum in Pakistan after which its debt equity ratio would be approximately 30:70. The tax rate applicable to GL in Pakistan is 30%. Pakistan has double taxation treaty agreements with both the countries. Required: Evaluate which of the two subsidiaries (if any) should be established by GL. (Assume that tax in all countries is payable in the same year and that all cash flows arise at the end of the year) (24 marks)
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Q.5 The management of Copper Industries Limited (CIL) intends to raise financing for the companys expansion project but is concerned about the impact of proposed additional financing on the companys existing capital structure and values. The management is aware that there is an inverse relationship between interest cover and cost of long term debt and the following relationship exist between interest cover and cost of debt: Interest cover (times) Cost of long term debt >8 8% 6 to 8 9% 4 to 6 11% 2 to 4 13%
The management has found that the following two debt equity ratios are usually prevalent in the industry and are also acceptable to the companys banker. (i) (ii) 70% equity, 30% debt by market values 50% equity, 50% debt by market values
The latest audited financial statements depict the following position: Net profit before tax Depreciation Interest @ 9% Capital expenditure Rs. in million 272 50 55 150
Market value of existing equity and debt is Rs. 825 million and Rs. 550 million respectively. CILs equity beta is 1.25 and its debt beta may be assumed to be zero. The risk-free rate of return and market return are 7% and 15% respectively. Applicable tax rate is 35%. Assume that: CILs cash flow growth rate would remain constant and would not be affected by any change in capital structure. Market value of the company at the existing weighted average cost of capital, after the proposed expansion, would remain the same. Required: (a) Calculate the following under the current as well as each of the above debt equity ratios being considered by the company: (i) Weighted average cost of capital (ii) Value of the company (b) Compare the three options and give recommendations in respect thereof to the company. (23 marks) (THE END)
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A.1
(a) Synergistic effects can arise from five sources: (i)
BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010
(b) (i)
production, or distribution. (ii) Financial economies, including lower interest costs etc. (iii) Tax effects, where the combined enterprise pays less in taxes than the separate firms would pay. (iv) Differential efficiency, which implies that management of one firm is more efficient and that the weaker firms assets will be more productive after the merger. (v) Increased market power, due to reduced competition.
The number of shares in Platinum Limited offered to shareholders of Diamond Limited are:
Operating economies, which result from economies of scale in management, marketing,
(ii) EPS of PL following a successful acquisition: Earnings of PL before acquisition Earnings of DL before acquisition Post takeover synergy
No. of shares to be issued to DL (7/6 x 19.2) = Existing earnings per share of PL (Rs. 231m / 90m) = Value of shares in PL (Rs. 2.57 x 15) = Total value of bid (22.4 million shares x Rs. 38.55) =
22.4 million shares Rs. 2.57 Rs. 38.55 Rs. 863.52 million
(iii) Cost of each debenture
Shares in issue following acquisition (90+22.4) (in million) EPS after acquisition (Rs. 313m / 112.4m) = Share price after acquisition (Rs. 2.78 x 18) EPS of DL before acquisition (Rs. 58 19.2) Value of a share in DL (Rs. 3.02 x 19) Value of 2 shares of DL (2 X 57.38) Present Value of 3 redeemable debentures of Rs. 100 each (W-1)
Rs. in million 231.00 58.00 24.00 313.00 112.40 Rs. 2.78 50.04
Since the present value of debentures is greater than the current market price of DL shares, the offer is expected to be worth considering by shareholders of DL. In case these debentures are marketable, there will be high chance that it will satisfy those shareholders too who are interested in equity instrument. Such shareholders will be able to swap debentures with PLs shares in market. W-1 Present Value of 3 debentures of Rs. 100 each Redeemable value (Rs.) 300 8 year discounting factor at 11% 0.4339 PV
Rupees 3.02 57.38 114.76 130.17
130.17
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A.2
(a) Net receipt due at the end of first quarter Receipt due Payment due
BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010 US $ 1,020,000 (775,000) 245,000
(i) Net receipt under forward contract (ii) Net receipt under money market hedge Borrowed in US $ = Received now in MYR = Received in 3 months time =
= 245,000 x (MYR 3.03 MYR 0.071) = 245,000 x 2.959 = 724,955
Net payment due at the end of second quarter Receipt due Payment due
245,000 245,000 = = 240,668 7 . 2 % 1.018 1+ 4 240,668 x 3.03 = MYR 729,224 729,224 (1+(6.6%/4) = MYR 741,256
(i) Net payment under forward contract (ii) Net payment under money market hedge Lent in US $ =
= 123,000 x (MYR 3.11 MYR 0.164) = 123,000 x 2.946 = 362,358

123,000 123,000 = = 119,534 5.8% 1.02900 1+ 2
US $ 1,224,000 (1,347,000) (123,000)
Paid now in MYR = Paid in 6 months time =
119,534 x 3.11 = 371,751
7.9% 371,751 x 1 + 2 = 386,435
Conclusion: For the first quarter, SL would be better off with money market hedge as it would receive more MYR than with a forward contract. For the second quarter, forward exchange contract produces a lower net payment in MYR. (b) SL wishes to lend and so will buy 5 (MYR 15,000,000 / MYR 3,000,000) interest rate February Futures.
(i) If interest rates fall by 0.75% and March Futures price increases by 1%, the net hedging position of the interest rate future would be as follows: MYR Future outcome MYR 15,000,000 x 6/12 x 1% 75,000 Receipt in spot market (MYR 15,000,000 x 5.25% x 6/12) 393,750 Net outcome 468,750 Target outcome (6% x 6/12 x MYR 15,000,000). 450,000
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Gain on hedging through interest rate futures 18,750 (ii) If interest rates rise by 1% and March Futures price decreases by 1%, the net hedging position of the interest rate future would be as follows: MYR Future outcome 15,000,000 x 6/12 x 1% Receipt in spot market (MYR 1,500,000 x 7% x 6/12) Net outcome Target outcome No gain or loss (100% efficient) A (75,000) 525,000 450,000 450,000 D
A.3
(a)
Required rate of return (W-1) Expected return Decision
Excess return index (Expected /Required return) Preference
14.12% 16% Invest 1.13 1
13.84% 14% Invest 1.01 3
Projects
16.16% 17% Invest 1.05 2
Not to invest
15.84% 15%
W-1: Required rate of return Risk free rate of return (R f ) Market return (R m ) (W-2) Required rate of return Rf + (R m - R f ) W-2: Computation of
Estimated correlation of returns with market return Project standard deviation of returns Market Standard Deviation (a x b c)
10% 14% 1.03 14.12%

a b c 0.82 20% 16% 1.03
10% 14% 0.96 13.84%

0.85 18% 16% 0.96
10% 14% 1.54 16.16%

0.91 27% 16% 1.54
10% 14% 1.46 15.84%

0.78 30% 16% 1.46
(b) Combined portfolio beta Project A B C
PV 197.20 202.71 201.60 601.51
1.03 0.96 1.54

85.00 87.00
Weighted 0.34 0.32 0.52 1.18

2.33 202.71 2.24 201.60 90.00
Net annual cash flows (Rs. in millions) *Cumulative discount factor at required rate of return Present value of cash flows (Rs. in millions) *
1 (1 + i) n i
2.32 197.20
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010 A.4 Years 0 Evaluation of investment in Bangladesh
Total contribution (W-1) Less: Fixed overhead (Expense x Inflation %) Operating cash flows Tax at 35% Tax savings on depreciation (W-3) Land Building Plant and machinery Working capital (W-4) After tax realizable value (W-7) Net cash flow Exchange rate BDT / PKR (W-2) Net cash flow (PKR in million) Discount factor (@ 15.12%) (PKR in million) (W-5) Present value (PKR in million) Net present value (PKR in million) Pre-tax cash flow (annual increase by 8% from year 0) Tax @ 25% Cost of acquisition Plant and machinery Working capital (W-4) After tax net realizable value Net cash flow Exchange rate LKR / PKR (W-2) Net cash flow from SISL in (PKR in million) Additional tax @ 5% (W-6) (PKR in million) Net cash flow (PKR in million) Discount factor (@ 15.12)(W-5)(PKR in
million)
(80.00) (30.00) (110.00) 0.8400 (130.95)
(82.50) (126.50) (22.00) (231.00) 0.8250 (280.00) 0.87 (243.22)
----------- BDT in million ---------490.05 718.74 790.62 (423.50) (465.85) (512.44) 66.55 252.89 278.18 (23.29) (88.51) (97.36) 16.73 13.38 10.71 (111.10) (51.11) 0.8103 (63.68) 0.75 (47.76) (13.31) 164.45 0.7958 206.65 0.66 136.39 (14.64) 176.89 0.7816 226.32 0.57 129.00
5
869.68 (563.68) 306.00 (107.10) 8.56 (16.11) 322.16 513.48 0.7676 668.94 0.49 327.78
Evaluation of investment in Sri Lanka
1.00 (130.95) 171.24
---------------------------------- LKR in million -------------------------------(90.00) (18.00) (36.00) 29.16 (7.29) (2.88) 40.82 (10.21) (3.11) 44.09 (11.02) (3.36) 47.62 (11.91) (3.63)
51.43 (12.86) (3.92) 167.9 202.55 1.1047 183.35 (2.34) 181.01 0.49 88.70
Present value (PKR in million) Net present value (PKR in million) Sales price
(144.00) 1.3250 (108.68) (108.68)
W-1: Contribution margin Bangladesh

Less: Variable costs Contribution margin per unit (BDT) Production / sales units Total contribution (BDT in million) BDT / PKR LKR / PKR
1.00 (108.68) 37.52 300,000
18.99 1.2777 14.86 (1.14) 13.72 0.87 11.94
27.50 1.2320 22.32 (1.66) 20.66 0.75 15.49
29.71 1.1880 25.01 (1.85) 23.16 0.66 15.29
32.08 1.1456 28.00 (2.07) 25.93 0.57 14.78
(165,000) 135,000
W-2: Computation of exchange rates for the next 5 years Average mid market exchange rate BDT / PKR Year 0: 0.8300 + 0.8500 = 1.680 2 = 0.8400 Year 1-5: Previous year x 1.10/1.12 Average mid market exchange rate LKR / PKR Year 0: 1.3100 + 1.3400 = 2.650 2 = 1.3250 Year 1-5: Previous year x 1.08 / 1.12
0.8400 1.3250 0.8250 1.2777
163,350 3,000 490.05 0.8103 1.2320
179,685 4,000 718.74 0.7958 1.1880
197,654 4,000 790.62 0.7816 1.1456
217,419 4,000 869.68 0.7676 1.1047
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010 Years 0 W-3: Tax depreciation (BDT in million) Opening balance Machinery Building 30.00 30.00 Less: 20% depreciation allowance 30.00 Tax saved at the rate of 35% W-4 : Working capital Bangladesh Working capital inflation factor Increase in working capital Sri Lanka Working capital inflation factor Increase in working capital W-5: WACC as discount factor Cost of equity Cost of debt WACC 1 2 3 4 5
30.00 126.50 82.50 239.00 239.00
239.00 239.00 47.80 191.20 16.73
191.20 191.20 38.24 152.96 13.38
152.96 152.96 30.59 122.37 10.71
122.37 122.37 24.47 97.90 8.56 177.16 16.11
36.00 36
----- BDT in million ----22.00 133.10 146.41 161.05 22.00 111.10 13.31 14.64 ----- LKR in million ----38.88 41.99 45.35 48.98 2.88 3.11 3.36 3.63
52.90 3.92
W-6 : Additional tax for income from Sri Lanka Tax rate applicable in Pakistan is 5% higher than Sri Lanka. So income from Sri Lanka will be subject to 5% additional tax. Pre-tax cash flow in LKR (as above) Exchange rate (W-2) Pre-tax cash flow in PKR Additional Tax in Pakistan @ 5% W-7: After tax realizable value
After tax realizable value of investment Realization of working capital
0.70 x 18% = 12.60% 0.30 x 12% x 70% = 2.52% 15.12%
1.33 -
29.16 1.28 22.78 1.14
----- LKR in million ----40.82 44.09 47.62 1.23 1.19 1.15 33.19 37.05 41.41 1.66 1.85 2.07
Bangladesh (BDT) 145.00 177.16 322.16
51.43 1.10 46.75 2.34

Sri Lanka (LKR) 115.00 52.90 167.90
Conclusion: Gold Limited should invest in Bangladesh as it gives higher NPV.
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010 A.5 (a) (i) Weighted average cost of capital Existing WACC = (Equity % (W-1) x K e (W-2)) + (Debt % (W-1) x K d (1-t)) = (60% x 17%(W-2) ) + (40% x 9% x 65%) = 12.54%
70% equity 30% debt 50% equity 50% debt
WACC = (70% x 15.9% (W-2)) + (30% x 8% (W-3) x 65%) = 12.70% WACC = (50% x 18.5% (W-2)) + (50% x 11% (W-3) x 65%) = 12.83%
(ii) Value of the company Current value of the company (825+550) = Rs. 1.375 million
Value of the company at 70% equity 30% debt Value of the company at 50% equity 50% debt
WACC (Computed above) = 12.70% 112.55 x 1.0403 Valuation = = 1350 million 0.1270 0.0403(W 5)
WACC (Computed above) = 12.83% 112.55 x 1.0403 Valuation = = 1330 million 0.1283 0.0403( W 5) W-1: Existing debt equity ratio 825 Equity = = 60% 1375 550 Debt = = 40% 1375 W-2: Cost of equity Existing K e = r f + (r m - r f ) K e = 7% + (15% - 7%) x 1.25 = 17%
At 70% equity 30% debt

e = a
K e = 7% + (15% - 7%) x 1.115 = 15.9%

e = a
E + D(1 - t) 70% + 30% x 65% = 1.115 = * 0.872 E 70%
K e = 7% + (15% - 7%) x 1.439 = 18.5% *

E D(1 t) + d E + D(1 t) E + D(1 t) 825 = 1.25 + 0 = 0.872 825 + 550 x 65%
E + D(1 - t) 50% + 50% x 65% = 1.439 = * 0.872 E 50%
a = e
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BUSINESS FINANCE DECISIONS Suggested Answers Final Examinations Winter 2010 W-3 : Cost of debt At 70% equity 30% debt Since interest cover has an inverse relationship, we assume decline in debt moves the CIL to lower category of interest rate: 30% debt in existing market value of the company (30% x 1375) = 412.5 Cost of debt = (8% x 412.5) = 33 Interest cover = (327* 33) = 9.91 K d = 8% * Profit before interest and tax Since interest cover has an inverse relationship, we assume increase in debt moves the CIL to upper category of interest rate: 50% debt in existing market value of the company (50% x 1375) = 687.5 Cost of debt is = (11% x 687.5) = 75.63 Interest cover = (327 75.63) = 4.32 K d = 11% W-4: Current Free cash flow (FCF o ) Rs. in million Profit before tax 272.00 Add: Interest 55.00 Profit before tax and interest 327.00 Less: Income tax @ 35% 114.45 Profit after tax 212.55 Add: Depreciation 50.00 Less: Capital expenditures (150.00) Free cash flow 112.55 W-5 Computation of growth factor FCF1 Current valuation = 1375 = (k - g) FCF1 112.55(1 + g ) 1375 = 1375 = (k - g) 0.1254 g
1375 (0.1254 g) = 112.55 (1 + g) 59.88 = 1488 = 4.03%
(b) Evaluation of the above options (i) The existing debt equity structure gives the lowest WACC i.e. 12.54%. (ii) If debt equity ratio is decreased, some of the benefits of tax shield on debt are lost. (iii) If debt equity ratio is increased, the financial risks cause an increase in the cost of debt.
Since the existing debt equity ratio gives the lowest WACC and resultantly the highest valuation to the company, the capital structure of the company should not be changed. (THE END)
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2010
June 9, 2010
BUSINESS FINANCE DECISIONS

Q.1
(MARKS 100) (3 hours)
YB Pakistan Limited is engaged in the manufacture of pharmaceutical products. On April 1, 2010 the Board of Directors approved a plan which envisages an investment of Rs. 300 million on account of capital expenditures over the next five years. Following information has been extracted from the management accounts of the company which have been prepared in respect of the year ended March 31, 2010: Sales revenue Cost of goods sold Operating expense Interest expense Property plant and equipment Shareholders equity The following information is also available: Annual outlay of investment in next five years is estimated to be 13%, 16%, 22%, 22% and 27% respectively of the total amount. (ii) The company expects that the operating profit (excluding depreciation) generated by the existing assets will grow at the rate of 12% per annum. In addition, the new investments would yield pre-tax cash flows of 15% per annum. (iii) The company follows a policy of maintaining a debt equity ratio of 40:60. (iv) Interest rates on existing and future long term debts are expected to be the same and are not expected to change during the next five years. The current debt is repayable at the end of five years. All future debts would be repayable on or after six years. (v) The company has a short term financing facility of Rs. 50 million. The outstanding balance as of March 31, 2010 was Rs. 20 million. Assume that interest @ 16% is payable at the end of each year on the closing balances. (vi) The company invests its surplus funds into highly secured investments which yield 8% per annum. (vii) The additional working capital requirements are estimated at 10% of additional capital expenditures. (viii) Accounting depreciation is calculated at the rate of 15% of written down value. It is equal to tax depreciation and therefore is allowable for tax purposes. The current corporate tax rate is 40%. To promote corporate business, the Government has announced an annual reduction of 2% in tax rate till it is reduced to 34%. (ix) The company follows the residual dividend policy for payment of dividends. You may assume that all cash flows are incurred at year end. Required: (a) Calculate the expected dividend for the next five years in accordance with the existing payout policy of the company. (b) Ascertain whether the company would be able to pay off its existing loan at the expiry of five years. (i) Rs. in millions 190.00 110.00 30.00 15.00 100.80 135.00
(22)
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(2)
Q.2 MK Limited is presently considering a proposal to acquire 100 % shareholdings of ZA Limited which is engaged in the same business. The financial data extracted from the latest audited financial statements and other records of the two companies is presented below: MK ZA -----Rs. in million----12,000 8,460 (7,695) (4,905) (1,305) (990) 3,000 2,565 (644) (1,494) 2,356 1,071 (825) (375) 1,531 696 50% 700 40% 6.5% 100 20 1.1 55% 650 55% 7.5% 90 12 1.3
Sales revenue Operating expense excluding depreciation Depreciation Profit before interest and tax Interest Profit after interest Taxation (35%) Profit after taxation Dividend payout Capital expenditure during the year (Rs. in million) Debt ratio Market rate of interest on debentures Number of shares issued (in million) Market price of share (Rs.) Equity beta
The following further information is available: (i) Both the companies follow the policy of maintaining stable dividend payouts and debt ratios. (ii) Annual growth in sales, operating expenses, depreciation and capital expenditures are estimated as under: MK ZA Year 1 2 4.0% 5.5% Year 3 onward 5.0% 5.0%
(iii) Accounting depreciation is the same as tax depreciation. (iv) The prevailing risk-free rate of return is 8% whereas the market return is 13%. The key aspects of the feasibility study carried out by MK are as follows: MK would issue 7 shares in exchange for 9 shares of ZA. A rationalization of administrative and operational functions after takeover would reduce operating expenses including depreciation, from 75% to 70% of total sales. The annual growth in sales, operating costs, depreciation and capital expenditures in the merged company would be as follows: Year 1 2 Year 3 onward 5.0% 5.5%
Required: (a) Based on an analysis of Free Cash Flows, calculate the value of MK Limited, ZA Limited and the company which would be formed after the merger. (b) Estimate the synergy effect which is expected to accrue to MK Limited on account of acquisition of ZA Limited. Q.3 (a) Briefly explain the Adjusted Present Value (APV) method and identify its advantages over the Weighted Average Cost of Capital method.
(25)
(04)
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(3)
(b) NS Technologies Limited is in the business of developing financial software. The directors of the company believe that the scope of future growth in the software sector is limited and are considering to diversify into other activities. An option available with the company is to sign an eight year distribution contract with a leading manufacturer of telecommunication equipments. Some of the important information related to the above proposal is as follows: Total investment is estimated at Rs. 600 million. It includes developing the necessary infrastructure, purchase of equipment and working capital requirements. (ii) The investment is expected to generate pre-tax net cash flows of Rs. 180 million per year. (iii) Presently NS is paying interest @ 9% on its long term debt. (iv) NS maintains a debt equity ratio of 55:45 whereas its equity beta is 0.9. (v) Average debt ratio, overall beta and debt beta of telecommunication equipment distribution segment is 40%, 1.5 and 1.3 respectively. (vi) The market rate of return is 14% whereas yield on one year treasury bills is 6%. (vii) Costs associated with the issuance of debt and equity instruments are estimated at 1% and 3% respectively. (viii) Tax rate applicable to the company is 35%. Tax is paid in the same year as the income to which it relates. (ix) In case the contract is not renewed upon expiry, after tax cash flows of Rs. 90 million would be generated from disposal of allied resources. Required: Evaluate the above proposal using the APV method. Q.4 DS Leasing Company Limited has been approached by BP Industries Limited, with a request to arrange a 4-year lease contract in respect of a state of the art machine. The cost of machine is Rs. 20 million and the expected useful life is 4 years. The residual value at the end of lease term is estimated at 10% of cost. DS would finance the purchase of machine by borrowing at 16% per annum. The interest would be payable annually and the principal amount would have to be repaid in four equal annual installments commencing from the end of first year. DS provides free-of-cost maintenance services for all its leased assets. These services are provided by the companys Maintenance Department whose costs are mostly fixed. If BP acquires this service from any other vendor, it would have to pay an annual fee of 3% of the cost of machine. Insurance cost will be borne by BP and is estimated at 4% of the cost of machine. The tax rate applicable to both companies is 35% and the tax is payable in the next year. Allowable initial and normal deprecation on the machine is 25% and 10% respectively. The weighted average cost of capital of DS and BP are 18% and 20% respectively. Both companies follow the same financial year. It may be assumed that the purchase would be finalized on the last day of the financial year. Required: (a) Calculate the annual rental (payable in advance) which DS should charge in order to break even on the lease contract. (b) Assume that BP has the following two options for financing the cost of machine: (i) DS has offered to lease the machine at an annual rental of Rs. 7 million, payable in advance. (ii) EFT Bank has offered to finance the machine at 18% per annum. The loan including interest would be repayable in 4 equal annual installments to be paid at the end of each year. Insurance costs would be borne by BP. Determine which course of action BP should follow. (12) (i)
(08)
(12)
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(4)
Q.5 The Directors of PSD Engineering Limited, a listed company, are planning to raise Rs. 100 million for a new project. They are considering two possible options of fund raising. The first is to make a two-for-five right issue of ordinary shares priced at Rs. 12.50 per share. The second option is to issue 9% Term Finance Certificates (TFCs) at par, redeemable in 2020. The following information has been extracted from the financial statements of PSD for the year ended March 31, 2010: Issued ordinary shares Rs. 10 each Retained earnings 10% TFCs at par, repayable in 2012 Rs. in million 200 390 590 350 940
The shares of the company are currently traded at Rs. 16 per share. The profit before interest and taxation of PSD for the year ended March 31, 2010 is Rs. 95 million. It is expected that the right issue will not affect PSDs current price earnings ratio. However, the issue of TFCs would result in fall in price earnings ratio by 30%. The tax rate applicable to the company is 35%. Required: (a) Make appropriate calculations in each of the following independent situations: (i) Assuming a right issue of shares is made, calculate: the theoretical ex-rights price of an ordinary share. the value of the right. (ii) Assuming the market is strong form efficient and it is expected that new project would generate positive net present value of Rs. 96 million. Calculate the theoretical ex-right price in this case. (iii) Assuming that the new project would increase the companys profit before interest and tax for the next year by 10%. Calculate the price of an ordinary share in one years time under each of the two financing options. (b)
(03)
(02)
(09)
Briefly discuss why issue of term finance certificates is expected to result in fall in price earnings ratio. (03) (THE END)
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A.1 (a)
Business Finance Decisions Suggested Answers Final Examinations Summer 2010

1 Existing operating profit from current projects [67.79(W-1)x1.12] Operating profit from new investment plan (W-2) Less: Depreciation for the year (W-3) Less: Interest on debt (W-5) Net profit before tax Tax (38%, 36%, 34%, 34%, 34%) Net profit after tax Less: Retained for CAPEX (A 60%) Residual income for dividend distribution *(Rs. 300 m x 27% x 60%)
YEARS 2 3 4 5 ---------------Rupees in million--------------75.92 85.03 95.23 106.66 119.46 5.85 13.05 22.95 32.85 (15.12) (18.70) (23.10) (29.53) (35.00) (12.58) (13.05) (14.10) (15.73) (16.92) 48.22 59.13 71.08 84.35 100.39 (18.32) (21.29) (24.16) (28.68) (34.13) 29.90 37.84 46.91 55.67 66.26 (23.40) (28.80) (39.60) (39.60) *(48.60) 6.50 9.04 7.31 16.07 17.66
(b) The company would have surplus cash of Rs. 79.55 million (W-5) which is less than Rs. 90 million. However, the company may pay the amount by obtaining the balance amount from its short term running finance facility. WORKINGS W-1: Existing operating profit Net profit before tax and interest (190 - 110 - 30) Add: Depreciation for current year (100.8 15 85) Operating profit
W-2: Operating profit from new projects 1 Year wise outlay for CAPEX in percentage terms Year wise planned CAPEX (Rs. 300m CAPEX %) Cumulative new CAPEX Yield from new projects : (B) 15% pre-tax cash flow W-3: Depreciation for the year WDV at the beginning of year Addition during the year (A) Depreciable value Depreciation for the year WDV at the end of year W-4: Interest on debts Long term debt at the beginning of year (Rs.135m6040) New debt during the year (A 40%) Long Term debt at the end of year Interest on long term debt (15- (20 x 0.16)) 90= 13.11% Interest on short term debt (W-5) Interest income (W-5) A B YEARS 2 3 4 5 0% 13% 16% 22% 22% --------------------Rs. in million----------------39.00 48.00 66.00 66.00 39.00 87.00 153.00 219.00 5.85 13.05 22.95 32.85
Rs. in millions 50.00 17.79 67.79
100.80 100.80 15.12 85.68
85.68 39.00 124.68 18.70 105.98
105.98 48.00 153.98 23.10 130.88
130.88 66.00 196.88 29.53 167.35
167.35 66.00 233.35 35.00 198.35
90.00 90.00 11.80 0.78 12.58
90.00 15.60 105.60 13.84 (0.79) 13.05
105.60 19.20 124.80 16.36 (2.26) 14.10
124.80 26.40 151.20 19.82 (4.09) 15.73
151.20 26.40 177.6 23.28 (6.36) 16.92
(W-5) Interest on short term running finance Opening outstanding balance / (Cash) Additional working capital (10% of additional CAPEX) Less: Additional cash flow generated (Depreciation) Debt / (balance) at the end of year Interest on short term running finance Interest income
20.00 (15.12) 4.88 0.78 -
4.88 3.90 (18.70) (9.92) (0.79)
(9.92) 4.80 (23.10) (28.22) (2.26)
(28.22) 6.60 (29.53) (51.15) (4.09)
(51.15) 6.60 (35.00) (79.55) (6.36)
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Business Finance Decisions Suggested Answers Final Examinations Summer 2010 A.2 (a) VALUE OF MK LIMITED Years 1 2 Rupees in million 12,480 12,979 (9,360) (9,734) 3,120 3,245 (1,092) (1,136) 1,357 1,411 (728) (757) 2,657 2,763 0.911 2,421 4,713 0.830 2,292
Sales Operating costs including depreciation Profit before interest and tax Taxation Add back depreciation Annual capital expenditure Free cash flow Discount factor (W1) Present value Present value 1 - 2 years Free cash flow after year 2 =
4% 75% 35% 4% 4% 9.8%
2,763(1.05) x 0.83 = Rs. 50,166 million 0.098 0.05 Total free cash flows = (4,713 + 50,166) Rs. 54,879 million
W1: Weighted Average Cost of Capital D/E Ratio 60% 40% Rate 13.50% 4.23% WACC 8.1% 1.7% 9.8%
k e (8% + (13% -8%) x 1.1) k d (6.5% x 0.65) WACC VALUE OF ZA LIMITED
Sales Operating costs including depreciation Profit before interest and tax Taxation Add back depreciation Annual capital expenditure Free cash flow Discount factor (W2) Present value Present value 1 - 2 years Free cash flow after year 2 =
5.5% 5.5% 35% 5.5% 5.5%
Years 1 2 Rupees in million 8,925 9,416 (6,219) (6,561) 2,706 2,855 (947) (999) 1,044 1,101 (686) (724) 2,117 2,233 0.916 1,939 3,812 0.839 1,873
9.2%
2,233(1.05) x 0.839 = Rs. 46,837 million 0.092 0.05

Rs. 50,649 million
Total free cash flows = (3,812 + 46,837)
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W2: Weighted Average Cost of Capital
Business Finance Decisions Suggested Answers Final Examinations Summer 2010 Rate 14.5% 4.9% D/E % 45% 55% WACC 6.5% 2.7% 9.2%
k e - (8% + (13% - 8%) x 1.3 k d - (7.5% x 65%) WACC VALUE OF PROPOSED MERGED COMPANY
Combined Sales Operating costs including depreciation Profit before interest and tax Taxation Add back depreciation Annual capital expenditure Free cash flow Discount factor (W3) Present value Present value 1 - 2 years Free cash flow after year 2 =
5% 70% 35% 5% 5% 9.8%
Years 1 2 Rupees in million 21,483 22,557 (15,038) (15,790) 6,445 6,767 (2,256) (2,368) 2,410 2,531 (1,418) (1,489) 5,181 5,441 0.911 4,720 9,234 0.830 4,516
5,441(1.055) x 0.83 = Rs. 110,800 million 0.098 0.055
Total free cash flows = (9,234 + 110,800) W3: Weighted Average Cost of Capital Equity - MK (100 x 20) Equity - ZA (90 x 7/9 x 20) Debt - MK (2,000 x 40% / 60%) Debt - ZA (90 x 12 x 55% / 45%) Total equity + debt of merged company WACC = 594 6,053 (b) Synergy effect of acquisition Total free cash flow of Merged Co. Total free cash flow of MK Limited Total free cash flow of ZA Limited Synergy effect of acquisition
Rs. 120,036 million
2,000 1,400 1,333 1,320 6,053 9.8%
13.50% 14.5% 4.23% 4.98%
270.00 203.00 56.00 65.00 594
Rupees in million 120,036 54,879 50,649 105,528 14,508
A.3 (a) APV separates project value into one component associated with the unlevered operating cash flows and another associated with financing the project. Each component is evaluated separately. The disaggregation of cash flows is undertaken so that different discount rates may be used. As operating cash flows are more risky, they are discounted at higher rate. Comparative advantages of APV over WACC (i) Unbundles major components of value drivers of value are much more apparent under APV
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than WACC. (ii) Miscalculation in WACC, sometimes, produces large errors in the estimates of value. APV is less prone to such miscalculations. (iii) Show better result when there are significant changes in capital structure.
(b) Adjusted present value Net present value on the basis of revised K e
Years Investments After tax cash flows (180 x 0.65) Residual value 0 1-8 8 Cash flows (Rs. in million) (600.00) 117.00 90.00 Discount @ 18.72% (W-1) 1.00 *13.99 0.30
Rs in million
Present value (Rs. in million) (600) 467 27 (106)
Net present value on the basis of revised K e Tax shield [(600 x 55% x 9% x 35% x *26.21] Issue costs - Right shares (3% x 600 x 45%) - Loan (1% x 600 x 55%)
65 (5) (2) (48)
*1
1 (1 + 0.1872) 8 0.1872( W 1)
*2
1 (1 + 0.06) 8 0.06
Conclusion The project is not feasible for the company as the APV of the project is negative. W-1: Cost of equity K e = R f + (R m R f ) x e K e = 6% + (14% 6%) x 1.59 (W-2) = 18.72% W-2: Calculating Equity Beta for Telecommunication Industry
E D (1 - t) + d E + D(1 t) E + D(1 t) 60 40(1 0.35) 1.5 = e + 1.3 60 + 40(1 0.35) 60 + 40(1 0.35) e = 1.59 a = e
A.4 (a) 0 Principal repayment Interest (Principal outstanding x 16%) Tax savings (W-1) Recovery of residual value (Note) Net cash outflow to DS Discount @ 18% PV of net cash outflow Total PV of net cash outflow NPV factor of tax rental income (W-2)
1.00
Years 1 2 3 4 5 ---------------Rupees in million--------------5.00 5.00 5.00 5.00 3.20 2.40 1.60 0.80 (3.40) (1.31) (0.99) (3.41) (2.00) 8.20 4.00 5.29 2.81 (3.41) 0.85 0.72 0.61 0.52 0.44 6.97 2.88 3.23 1.46 (1.50) 13.04 2.236
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Annual rental W-1: Tax savings
Business Finance Decisions Suggested Answers Final Examinations Summer 2010 Years 1 2 3 4 5 ---------------Rupees in million--------------20.00 13.50 12.15 10.93 5.00 1.50 1.35 1.22 1.09 7.84 6.50 1.35 1.22 8.93 13.50 12.15 10.93 2.00
5.83
0 WDV at start of year Initial depreciation (25%) Normal depreciation (10%) Loss on disposal (Note) Total tax allowance WDV at end of year
Note: Disposal value i.e. Rs. 2 million (10% of Rs. 20 million) - WDV at the end of year 4 i.e. 9.84 = Rs. 7.84 million (Loss on disposal) Years 0 1 2 3 4 5 ---------------Rupees in million--------------6.50 1.35 1.22 8.93 Total tax allowance as computed above 3.20 2.40 1.60 0.80 Interest payment computed above 9.70 3.75 2.82 9.73
Tax savings @ 35% in next year
3.40
1.31
0.99
3.41
W-2 : NPV factor of after tax rental income 0 Income Tax savings Discount factor @ 18% PV factor of income Total PV of income (b)
Leasing
1.00 1.00 1.000 1.000 2.236
Years 1 2 3 4 5 ---------------------Rupees ---------------------1.00 1.00 1.00 (0.35) (0.35) (0.35) (0.35) 0.65 0.65 0.65 (0.35) 0.850 0.720 0.610 0.520 0.553 0.468 0.397 (0.182)
0
Annual rental Tax savings (rental x 35%) Discount at 20% PV of cash flow NPV of leasing option
7.00 7.00 1 7.00 15.40
Years 2 3 4 ----- Rupees in million ----7.00 7.00 7.00 (2.45) (2.45) (2.45) (2.45) 4.55 4.55 4.55 (2.45) 0.833 0.694 0.578 0.482 3.79 3.16 2.63 (1.18) 1
15.4
Purchase Outright Principal outstanding (Opening - Loan payment + Interest) Loan payment (W-1) Interest (@18% of opening principal) Maintenance costs A B
Years 1 2 3 4 5 ------------- Rupees in million --------------20.00 16.17 11.65 6.30 0.00 0 7.43 3.60 0.60 7.43 2.91 0.60 7.43 2.08 0.60 7.43 1.13 0.60
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Tax allowance as computed above Tax savings (in next year) Recovery of residual value Cash outflow to BP Discount at 20% PV of cash outflow NPV of purchase option

C
A+B+C
14.07
6.50 10.70 8.03 0.833 6.69
1.35 4.86 (3.75) 4.29 0.694 2.97
1.22 3.90 (1.70) 6.33 0.578 3.66
8.93 10.66 (1.37) (2.00) 4.67 0.482 2.25
(3.73) (3.73) 0.402 (1.50)
W-1: Installment amount =

Rs. 20 million = 7.43 1 (1 + 0.18) 4 0.18
Conclusion: The feasible option is the outright purchase. Note: Insurance costs are ignored in our computation as these are the same in both options. Theoretical ex-right price Value of 5 original shares @ Rs. 16 Value of 2 right share @ Rs. 12.5) Ex-right price (Rs. 105 7) Value of the right Ex-right share price Cost of acquiring right share Value of right per original share (Rs. 2.5 5 share) (ii) Theoretical ex-right price Current shares market value (20 million share of Rs. 16 each) Value of right shares (8 million shares of Rs. 12.5 each) NPV 15.00 12.50 2.50 0.500 Rupees in million 320 100 96 516 18.43 95.00 (35.00) 60.00 (21.00) 39.00 Rs.1.95 8.21 Rupees 80.00 25.00 105.00 15.00
A.5 (a) (i)
Theoretical ex-right price including NPV (Rs. 516 million 28 million shares) (iii) Current earnings per share Profit before interest and taxation Less: Interest on debentures (Rs. 350 million @ 10%) Profit before taxation Less: taxation @ 35% Earnings per share (Rs. 39 million 20) Price earnings ratio (Rs. 16 Rs. 1.95)
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Business Finance Decisions Suggested Answers Final Examinations Summer 2010 New earnings per share and share price Right issue Debenture issue ---------Rupees in million-----104.50 104.50 (35.00) (35.00) (9.00) 69.50 60.50 24.33 21.18 45.17 39.32 Rs. 1.61 Rs. 13.22 Rs. 1.97 Rs. 11.31
Profit before interest and taxation (95.00 x 1.1) Less: Debenture interest (10% 350) (9% 100) Profit before tax Less: Taxation at 35%
EPS (Rs. 45.17 million / 28 million shares) New share price (Rs. 1.61 x 8.21) EPS (Rs. 39.32 million / 20 million shares) New share price (Rs. 1.97 x 8.21 x 70%)
(b) PSD already has a gearing level of 37% (350 940). If it is at or near its optimal level of gearing, shareholders may take negatively to the additional debt which would push the gearing level up to 43% (450 1,040). Accordingly the cost of equity would rise and the ordinary share price would fall. (THE END)
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Final Examinations Winter 2009
December 9, 2009

Q.1
Attock Index Tracker Fund (AITF) is an open-end mutual fund and was incorporated in 2004. However, since inception, its performance has remained unimpressive and it has generally been outperformed by KSE-100 index. You have recently joined AITF as its Fund Manager and have been asked by the management to review the current composition of the portfolio. Details relating to the shares currently held in the portfolio are as follows: Market price per share Rupees 25 15 46 106 75 114 239 156 145 67 Price forecast after one year Rupees 27 17 52 111 85 125 220 168 170 75 Dividend per share next year Rupees 2.00 1.00 2.50 4.00 2.00 3.00 5.50 3.00 2.50 1.00
Name of company A B C D E F G H I J
No of shares in 000 150 230 190 50 100 120 60 80 35 45
Standard deviation 0.150 0.240 0.160 0.320 0.190 0.220 0.190 0.210 0.180 0.220
Covariance
0.024 0.039 0.044 0.033 0.018 0.041 0.032 0.040 0.034 0.033
Following information is also available: The average market return of the KSE-100 Index companies is 12% and the standard deviation is 18%. (ii) The risk free rate of return is 8%. (iii) The correlation between the market value of securities held by AITF and KSE-100 Index is 0.737. (iv) The average return on AITFs shares is 11% with standard deviation of 22%. Required: (a) Compute the AITF's systematic risk and assess the extent to which AITF has matched the performance of KSE-100 Index. (b) Determine whether AITF achieves the return according to its risk profile. (c) Identify those shares in AITFs portfolio which are expected to underperform and should be removed. (d) Compute the revised beta of AITF i.e. after excluding the underperforming shares. Assume that cash generated from disposal of underperforming shares will be used to buy the remaining shares in proportion to their current holdings. (i)
(20)
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(2)
Q.2 Kohat Limited (KL) is considering to set-up a plant for the production of a single product IGM3. The initial capital investment required to set up the plant is Rs. 15 billion. The expected life of the plant is only 5 years with a residual value of 20% of the initial capital investment. The plant will have an annual production capacity of 1.0 million tons. A local group has offered to purchase all the production for Rs. 8,000 per ton in year 1 and thereafter at a price to be increased 5% annually. Other relevant information is as under: (i) In year 1, operating costs (other than wages and depreciation) per annum would be Rs. 2,000 per ton. They are expected to increase in line with Producer Price Index (PPI). Annual wages would be Rs. 1.0 billion and are linked to Consumer Price Index (CPI). (ii) KLs cost of capital for this project, in real terms is 6%. General inflation rate is 11%. (iii) The tax rate applicable to the company is 30% and the tax is payable in the same year. The company can claim normal tax depreciation at 20% per annum under the reducing balance method.
Price indices of the last six years are given below: Year PPI CPI 2003 107 112 2004 119 125 2005 130 139 2006 142 155 2007 160 173 2008 175 195
The costs linked to the above indices are expected to grow at their historic compound annual growth rate. Required: Advise whether KL should invest in the project. Q.3 Tarbella Enterprises (Pvt) Limited (TEPL) is the manufacturer and supplier of chemical X. Due to an internal conflict, the directors of TEPL have offered to sell the company to Chakwal Limited (CL) which is one of its largest customers. CL has hired you to determine the value at which it would be feasible for it to acquire TEPL. The relevant information is as follows: (i) (ii) (iii) CL would consider TEPL as a separate cash generating unit and it will have a useful life of five years. The normal capacity of TEPLs plant is 22,000 tons. During the year ended June 30, 2009, CL consumed 15,000 tons of chemical X. Summary of TEPLs profit and loss account for the year ended June 30, 2009 is as follows: Rs. in million Sales (20,000 tons) 240 Variable costs (80) Fixed costs (50) Operating profit 110 CLs planning department has provided the following projections related to the next five years: CLs demand for chemical X would increase by 5% each year. The annual increase in the price of chemical X would be 10%. The variable costs per ton of production of chemical X would increase by 12% per annum. Fixed costs would increase by 8% each year. CL intends to use the entire production of chemical X for its internal use only. CL maintains a debt equity ratio of 50:50. Its cost of debt and cost of equity is 14% and 20% respectively. Tax rate applicable to both the companies is 30%. (13) (14)
(iv)
(v) (vi)
Required: Compute the maximum price which CL may offer for the acquisition of TEPL.
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(3)
Q.4 The directors of Bannu Holdings Limited (BHL) have decided to sell off its wholly owned subsidiary, Ziarat Engineering Limited (ZEL). Following information has been extracted from the last audited financial statements of ZEL: Rs. in million Sales 2,958 Less: Cost of sales 1,928 Gross Profit 1,030 Allocated expenditures of BHL (255) Operating expenses (388) Other income 216 Financial charges (119) Profit before tax 484 Tax @ 30% (145) Net profit 339 A team of executives and employees, lead by the CEO of ZEL is also interested in the acquisition of the subsidiary. They plan to form a new company, Sibbi Engineering (Private) Limited (SEL), which will acquire all the assets of ZEL. After intense negotiations the directors of BHL have finally agreed to sell ZEL to the employees, under the following terms and conditions: (i) The value of ZEL will be Rs. 2,100 million. (ii) BHL would pay off all the existing debts of ZEL. (iii) BHL would acquire 10% shareholding in SEL. The employees would invest Rs. 270 million in SEL in the form of equity. In order to arrange the balance amount, they intend to accept any one of the following offers: I A commercial bank has offered a loan on the following terms: (i) Loan will carry markup @ KIBOR + 3% and would be payable annually. KIBOR is currently at 8%. (ii) The tenure of the loan would be 5 years and it would be repayable at maturity. (iii) SEL will have to comply with the following debt equity ratio: Year Debt equity ratio 1 75% 2 70% 3 60% 4-5 50%
In case of failure to comply with the above condition, the bank would reserve the right to demand repayment of the entire amount within a period of 30 days. II An investment bank is willing to provide a convertible loan to SEL. The loan carries interest at the rate of 10% per annum. The principal is repayable in four equal annual installments commencing from the end of year 2. The investment bank will have the option to convert the balance amount of loan into shares of SEL at Rs. 25 each and the conversion option will be exercisable at the commencement of year 4 or year 5. SEL would not be allowed to issue any dividend during the tenure of the loan.
SELs revenues/expenses are expected to grow in the following manner: (i) Gross profit would increase at the rate of 3% per annum. (ii) Operating expenses would increase by Rs. 100 million in year 1 and thereafter @3% per annum. (iii) 75% of the profit earned by SEL would be available in the form of cash, for repayment of debt. In the case of option 1, SEL plans to invest it in various schemes, till the loan becomes payable and consequently, the other income is expected to grow @ 10% per annum. Required: (a) Analyse the two financing options to evaluate whether SEL would be in a position to comply with the terms of the respective loans. (b) Which offer should SEL accept and why?
(24)
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(4)
Q.5 Sajawal Sugar Mills Limited (SSML), a medium sized listed company, is planning to expand its production capacity. The management has estimated that the expansion would require an outlay of Rs. 300 million. Following figures have been extracted from SSMLs financial statements for the year ended June 30, 2009. Statement of Financial Position Paid up capital (Rs. 10 each) Retained earnings Non-current liabilities Current liabilities Fixed assets Current assets Statement of Comprehensive Income Net profit after tax EPS Rs. in million 125 3.13 Rs. in million 400 150 600 100 1,250 1,100 150 1,250
To finance the expansion, SSML is considering a right issue. However, the management of SSML wants to maintain its existing debt equity ratio, return on total assets ratio and dividend payout percentage. Moreover, they wish to keep the ex-right price to be the same as current market price. SSML follows a policy of retaining 30% of its profits. The current market price of its shares is Rs. 20 whereas its share price beta is 1.23. Presently, market return is 16% whereas yield on one year treasury bills is 12%. Market is assumed to be strong form efficient. Required: Under the circumstances referred to in the above situation, what should be: (a) The right ratio (b) The right offer price (c) Theoretical ex-right price (d) Value of each right Q.6 Qalat Industries Limited (QIL) is a medium sized company which carries out extensive trading (imports as well as exports) with various German companies. The management of QIL is concerned about the recent fluctuations in the exchange rate parity between Pak Rupee (Rs.) and Euro () and is considering to hedge the following transactions which it expects to undertake, on December 15, 2009: Nature of transaction (i) (ii) (iii) (iv) Import of IT equipment Export of sports goods Export of medical instruments Import of machinery Amount 223,500 98,500 77,000 Rs. 22,500,000 Due date of payment / receipt Jun. 15, 2010 Mar.15, 2010 Jun. 15, 2010 Mar.15, 2010
(17)
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(5)
Other relevant information is as follows: (i) According to QILs bank the following exchange rates are expected to prevail on December 15, 2009: 1 Spot 3 months forward 6 months forward Buy Rs. 124.22 Rs. 123.62 Rs. 123.21 Sell Rs. 124.52 Rs. 123.96 Rs. 123.54
(ii) Interest rate on borrowing and lending in respective currencies are as follows: 3-months / 6 months borrowing 3-months / 6 months lending Rs. 11% 6.5% 5% 3%
Required: (a) Calculate the net rupee receipts/payments that QIL should expect from the above transactions under each of the following alternatives: (i) Hedging through forward cover (ii) Hedging through money market (b) Determine which would be the better alternative for QIL. (Ignore transaction costs) (THE END)
(12)
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A.1
(a) Systematic risk is measured by Beta.
Beta = Co-relation of returns x of the fund of the market = 0.737 0.22 0.18 = 0.9 Assessment of AITF Performance Beta of 0.9 shows that AITF substantially (90%) matches the performance of KSE 100 Index. (b) AITF's actual return is 11% which is less than the return which AITF should achieve according to its risk profile i.e. 11.6% (W-1) as per its current systematic risk. W-1: Required return of the fund The required return of AITF in terms of CAPM would be R = Rf + (Rm Rf) = 8% + (12% - 8%) 0.901 = 11.60% Forecasted price after one year (Rs.) Dividend per share next year (Rs.) Current price per share Required return (W-1) (c) Name of company
Total return
Co-variance
Market Variance
Beta
Remarks
()2
d=(b+c-a)a 16.0% 20.0% 18.5% 8.5% 16.0% 12.3% -5.6% 9.6% 19.0% 13.4% (e) (f) g=f e
=Rf+(Rm-Rf)
a A B C D E F G H I J 25 15 46 106 75 114 239 156 145 67
b 27 17 52 111 85 125 220 168 170 75
c 2.0 1.0 2.5 4.0 2.0 3.0 5.5 3.0 2.5 1.0
0.0324 0.0324 0.0324 0.0324 0.0324 0.0324 0.0324 0.0324 0.0324 0.0324
0.024 0.039 0.044 0.033 0.018 0.041 0.032 0.040 0.034 0.033 Value Rs. in 000 c=axb 3,750 3,450 8,740 7,500 5,075 3,015 31,530
0.741 1.204 1.357 1.019 0.556 1.265 0.988 1.235 1.049 1.019
h 11.0% 12.8% 13.4% 12.1% 10.2% 13.1% 12.0% 12.9% 12.2% 12.1%
under performing under performing under performing under performing -
(d)
Name of company A B C E I J
Current price A 25 15 46 75 145 67
No. of shares 000 b 150 230 190 100 35 45
Beta d 0.741 1.204 1.357 0.556 1.049 1.019
Weighted beta (c) x d / (c) 0.088 0.132 0.376 0.132 0.169 0.097 0.994
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A.2
Investment Revenue (Rs.8,0001 million) Operating costs(excluding wages) Wages Profit before taxation Residual value (Rs.15,00020%) Tax @ 30 % (W-3) Net inflows Discount factor (W-4)

Inflation factor 0 1 Years 2 3 Rs. in million 4 5
(15,000) 5% (W-1)10.34% (W-2)11.73% 8,000 (2,000) (1,000) 5,000 (600) 4,400 0.850 3,740 8,400 (2,207) (1,117) 5,076 (803) 4,273 0.722 3,085 8,820 (2,435) (1,248) 5,137 (965) 4,172 0.614 2,562 9,261 (2,686) (1,395) 5,180 (1,093) 4,087 0.522 2,125 9,724 (2,965) (1,558) 5,201 3,000 (617) 7,584 0.444 3,367
(15,000) 1 (15,000)
Net present value
(121)
Conclusion: Since the Net Present Value of the project is negative, KL should not invest in the project. W-1: Compound annual growth rate for CPI 175 CAGR for CPI = = (1 + i) 5 107 (1.6355)1/5 = 1+i 1+i = 1.1034 i = 10.34% W-2: Compound annual growth rate for SPI 195 CAGR for SPI = = (1 + i) 5 112 (1.7411)1/5 = 1+i 1+i = 1.1173 i = 11.73% W-3: Tax Computation: 1 Profit before taxation Depreciation Loss on disposal Taxable profit/loss Tax@ 30% 5,000 (3000) 2,000 600 2 5,076 (2400) 2,676 803 YEARS 3 5,137 (1920) 3,217 965 4 5,180 (1536) 3,644 1,093 5 5,201 (1229) (1,915) 2,057 617
W-4: Discount Rate = Required return nominal 1 + nominal return = (1+real return) (1+inflation) = 106% 111% = 117.7% = 17.7%
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A.3
Maximum price would be the NPV of series of net savings during the 5-year period
2009 CL Demand (in tons) A Annual Change 2010 2011 2012 2013 2014 % 15,000 5% 15,750.00 16,537.50 17,364.38 18,232.60 19,144.23 ------------------------------------ Rupees Saving/(Spending) --------------------------------10% 12% 13,200.00 (4,480.00) 8,720.00 137.34 (54.00) 83.34 (25.00) 58.34 0.8703 50.77 14,520.00 (5,017.60) 9,502.40 157.15 (58.32) 98.83 (29.65) 69.18 0.7575 52.40 15,972.00 (5,619.71) 10,352.29 179.76 (62.99) 116.77 (35.03) 81.74 0.6592 53.88 268.76 17,569.20 (6,294.08) 11,275.12 205.57 (68.03) 137.54 (41.26) 96.28 0.5737 55.24 19,326.12 (7,049.37) 12,276.75 235.03 (73.47) 161.56 (48.47) 113.09 0.4993 56.47
Chemical X open market price (Rs. 240 m / 20,000) per ton Less: Variable cost per ton (Rs. 80m / 20,000) Net per ton saving Gross saving (A B) Less : Fixed costs Less: Tax impact Net savings Discount factor (W-1) Discounted saving Maximum offer price B
12,000 4,000
50
8% 30%
14.90%
Assuming that depreciation already included in variable and fixed costs will not be significantly different from the depreciation allowable on the value of Rs. 268.76 million. W-1: Discount Rate WACC = We Ke + Wd Kd (1 - t) = 20% 0.5+0.14 0.5 (1-30%) = 14.90% Assuming that the rates are inflation adjusted. A.4
Analysis of Commercial Banks Offer
YEARS 1 2 3 4 5 -------------------Rupees in million--------------------
Operating profit excluding other income (For Year 1 see W-1 and for year 2-5 growth at 3%) Add: Other income growing at 10% Less: Interest on loan (1,800 (W-2) 11%) Profit before tax Tax at 30% Profit after tax Share capital Reserves Total debt at year end
572.9 237.6 (198.0) 612.5 (183.8) 428.7 300.0 428.7 728.7 1,800.0 2,528.7 71.18% 75% Yes
590.1 261.4 (198.0) 653.5 (196.1) 457.4 300.0 886.1 1,186.1 1,800.0 2,986.1 60.28% 70% Yes
607.8 287.5 (198.0) 697.3 (209.2) 488.1 300.0 1,374.2 1,674.2 1,800.0 3,474 .2 51.81% 60% Yes
626.0 316.3 (198.0) 744.3 (223.3) 521.0 300.0 1,895.2 2,195.2 1,800.0 3,995.2 45.05% 50% Yes
644.8 347.9 (198.0) 794.7 (238.4) 556.3 300.0 2,451.5 2,751.5 1,800.0 4,551.5 39.56% 50% Yes 1,838.6
Gearing Projected Gearing Required Meeting the required D/E ratio (Yes / No) Available in the form of cash for debt payment (2,451.575%)
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Analysis of Investment Banks Offer:
1 YEARS 2 3 4 5 -------------------Rupees in million--------------------
Operating profit excluding other income (For Year 1 see W-1 and for year 2-5 growth at 3%) Other income Less: Interest on loan Year 1 (1,800 (W-2) 10%) Year 2 (1,800 10%) Year 3 (1,350 10%) Year 4 (900 10%) Year 5 (450 10%) Profit before tax Tax at 30% Profit after tax Share capital Reserves Total equity Opening balance of cash Available cash for debt repayment (Profit75%) Payment of principle to investment bank (Rs.1,800 4) Closing balance of available cash
572.9 216.0 (180.0)
590.1 216.0
607.8 216.0
626.0 216.0
644.8 216.0
(180.0) (135.0) (90.0) 608.9 (182.7) 426.2 300.0 426.2 762.2 319.65 319.65 626.1 (187.8) 438.3 300.0 864.5 1164.5 319.65 328.73 (450.0) 198.38 688.8 (206.6) 482.2 300.0 1346.70 1646.7 198.38 361.65 (450.0) 110.03 752.0 (225.6) 526.4 300.0 1873.10 2173.10 110.03 394.80 (450.0) 54.83 (45.0) 815.8 (244.7) 571.1 300.0 2444.2 2744.2 54.83 428.33 (450.0) 33.16
Based on the above information, we may conclude as follows: (i) In either case, the SEL would be able to meet the debt covenants and payment requirement. (ii) In option 1, the company will earn slightly higher profits. (iii) In option 2 the break-up value of shares at the commencement of year 4 would be Rs. 54.89 (W-3) and at the commencement of year 5 it would be 72.43 (W-3). Therefore, it is likely that bank will decide to opt for conversion of loan into shares @ Rs. 25 per share, it would reduce the break-up value for the current owners. Moreover, the bank will also be in a position to obtain control over the company. In view of the above, it is concluded that it would be advisable for SEL to go for option-1. W-1: Operating profit excluding other income at year 1 Gross profit (1,030 1.03) Less: Operating expenses (388 + 100) W-2: Required debt financing Agreed price Less: Equity financing by Team of employees BHL (270 10 90) Debt financing required
W-3: Break up value
1 2 YEARS 3 4 5
Rs. in million 1,060.9 (488.0) 572.9 2,100 (270) (30) (300) 1,800
Total value of equity No. of shares (Rs.)

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25.41
38.82
54.89*
72.44*
91.47
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A.5
(a)
Right Ratio Market value of the company after expansion (W-1) Current market price of SSMLs Share (given)
Rs. 1,076.39 Rs. 20.00
Number of shares to be issued to maintain Market Value Rs. 1,076.39 at Rs. 20 desired price: Share in million Total number of shares after right issue (Market value / Price) 53.82 Less: Present number of shares 40.00 Number of right shares to be issued 13.82
Right ratio - one right share will be issued for every 2.89 (4013.82) shares held.
(b)
Right offer price To maintain Debt : Equity ratio, amount to be raised as equity (Rs. 300
million (100% - 52%) [W-7])
Rs. 144 Rs. 10.42
Million
per share
Offer price of right shares (Rs. 144 13.82) (c) Theoretical Ex-Rights price The market value of 40 million shares (already issued todate) Capital to be raised through right issue
Rs. in million 800 144 944
Theoretical Ex - rights price =

(d) Value of Right
Value of right =
944 = 17.54 53.82
Ex - right price issue price No. of rights required to buy one share
Value of right (applicable to each existing share) =
20 - 10.42 2.89
= 3.31 WORKINGS W-1 : Market value after expansion

MV = d1 r-g
MV =
Rs. 155 (W-2 ) 70% = 1,076.39 16.9% (W-5 ) - 6.82% (W-6 )
W-2: Expected profit Expected Profit = Total assets ROA = 1,550 (W-3) 10% (W-4) = 155 W-3: Total assets after capital increase
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Rs. in million
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Existing assets Total capital to be raised Total assets after capital increase
1,250 300 1,550
W- 4 : Existing return on assets 125 Net profit Existing ROA = = = 10.00% Total Assets 1,250 W-5: Required return (r) r = Rf + (Rm-Rf) B = 12% + (16% - 12%) 1.23 = 16.9% W-6: Growth (g) g=rxb
Net Profit (1 - pay out%) Equity 125 = (1 - 70%) 550 =

= 6.82% W-7: Debt Equity Ratio
D/E ratio =
Debt 600,000 = = 52% Debt + Equity 600,000 + 550,000
A.6
Net Position Export Receivable Import - (Payable) Net position Receivable/(Payable) (i) Forward Market Three months contract Receipt of export amount at the end of third month
Three months 98,500 98,500
Six months 77,000 (223,500) (146,500)
98,500 x 123.62
Rs. 12,176,570
Six months contract Net payment at the end of sixth month

146,500 x 123.54
18,098,610
(ii)
Money Market Three months payment Since the company is expecting to receive . Therefore, to hedge currency rate risk we need to convert the same into definite Rupee receivables. Borrow in Euro and invest in Rupee, so that at the end of third month repay Euro borrowing from export proceeds and receive a definite Rupee amount. Borrow a sum which has a compound value of 98,500 at the end of third month: 98,500 (1 + 5% 4) 97,284 Rs. 12,084,618
Page 6 of 7
Convert to Rupees at spot ( 97,284 Rs. 124.22) for investment

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Invest for three months now which after 3 months would amount to: Rs. 12,084,618 (1 + 6.5% 4)
12,280,993
Six month payments Since the company is expecting to pay . Therefore, to hedge currency rate risk we need to convert this payable into definite Rupee payables. Borrow in Rupee a sum equivalent to the present value of 146,500. Invest that Euro sum, so that at the end of sixth month Euro will be available for net import payment and we will have a definite Rupee payable. Investment required for a sum which has compound value of 146,500 at the end of sixth month: 146,500 (1 + 3% 2)
144,335 Rs.
To invest, borrow equivalent Rupee to buy Euro at spot ( 144,335 Rs. 124.52) Rs. 17,972,594 used for buying 145,335 would require a definite rupee repayment of compound value at the end of sixth month: 17,972,594 (1 + 11% 2)) Recommendation: Feasible option for 3 month net payment -------------------------------> Money Market Feasible option for 6 month net payment -------------------------------> Forward Cover (THE END)
17,972,594
18,961,087
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Final Examinations Summer 2009
June 3, 2009

Q.1
ABC Limited is engaged in manufacture and sale of spare parts of heavy vehicles. Presently, the company is planning to raise Rs. 2,000 million to replace its existing production machines with the latest machines. All machines will be imported from UK. The company is considering the following two options to raise the finance: (I) The company can issue Term Finance Certificates (TFCs) in the local market for a period of three years at a rate of 6-months KIBOR plus 1.5%. Interest and principal repayment will be made in six semi-annual installments. The company will be required to pay 0.25% commitment fee at the time of raising the TFCs. UK Ex-Im bank has offered to provide the required amount for a period of three years at a rate of 6-months LIBOR + 2.5%. Principal and interest will be payable in six semi-annual installments.
(II)
It is anticipated that interest rates will vary in line with inflation forecasts in each country. The forecasted interest rates expected at the beginning of half year for the next three years are as follows: July 2009 January 2010 July 2010 January 2011 July 2011 January 2012 July 2012 6-months KIBOR 13.00% 12.50% 12.00% 11.50% 11.00% 10.50% 10.00% 6 months LIBOR 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50%
It is expected that the exchange rate on July 01, 2009 would be 1 = Rs. 105. The companys cost of capital is 13%. Required: Which of the two options would you recommend to the management? Show all relevant calculations. Q.2 UVW Rental Services, a partnership concern, is in the business of providing power backup solutions to its corporate clients. At present, it is the policy of the company to replace the old power generators with the new ones after every three years. During a recent management meeting, the operation manager informed that a 350KVA generator has reached its replacement period. He suggested that since the replacement cost of this generator has significantly increased due to depreciation of rupee, the company should not dispose of the generator at the end of its replacement period and rather get it overhauled and continue.
(20)
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(2)
Following information relating to the generator is available: (i) Written Estimated Current Replacement Down Cost of Disposal Value Cost Value Overhauling --------------------------------Amount in Rupees------------------------------------3,900,000 1,750,000 2,200,000 945,000 5,250,000 Cost It is expected that after overhauling: the generator can be used for another two years. However, running cost of overhauled generator would be Rs. 440 per hour which is 10% higher in comparison with the running cost of the new generator. the overhauled generator would be sold after two years at a value of 15% of current replacement cost while the new generator is expected to fetch 25% of current replacement value, after three years. The company rents out the generator at Rs. 2,000 per hour and such generators are hired for approximately 2,500 hours per annum, irrespective of their age. The companys cost of capital is 17% per annum before adjustment for inflation. The rate of inflation is 8%. The company receives all payments after deduction of tax at the rate of 6% which is considered full and final settlement of its tax liability.
(ii)
(iii) (iv) (v)
Required: (a) Advise whether the management should replace the generator or overhaul and continue to use the existing one. (b) Calculate the % change in estimated cost of overhauling at which the management would be indifferent between the two options. Q.3 DEF Securities Limited (DEF) is a medium size investment company. During the month of February 2009, the Research Department of DEF forecasted an increase in oil prices by June 2009 which would have a positive impact on the share prices of oil marketing companies and negative impact on the share prices of power generation companies. Based on this research, the company entered into the following transactions on April 1, 2009: (I) Purchased a three month American call option of 100,000 shares of Silver Petroleum Limited (SPL), an oil marketing company, at Rs. 3 per share. The exercise price is Rs. 155 per share. Purchased a three month European put option of 5,000,000 shares of Diamond Electric Supply Corporation Limited (DESC), a power generation company, at Re. 0.50 per share. The exercise price is Rs. 3.50 per share.
(17)
(II)
However, when the price of oil actually increased on May 21, 2009, DESC revised its power tariff upward while due to tough competition SPLs margins are expected to decline. As a result, the company feels that it is now advisable to reconsider the situation. While evaluating various options, the management has gathered the following information: (i) As of June 1, 2009, the ready market price per share and one month future price per share were as follows: SPL DESC (ii) (iii) Ready market prices Rs. 170 per share Rs. 4.25 per share 1-month future prices Rs. 173 per share Rs. 4.35 per share
DEF can obtain finances at the rate of KIBOR plus 2%. Presently, the rate of KIBOR is 12.5%. Transaction costs are immaterial. (12)
Required: Based on the available information, recommend the best strategy to the management.
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(3)
Q.4 MNO Chemicals Limited is a fertilizer company. The company is planning to diversify into the food business and has identified two companies, PQ (Pvt.) Limited and RS Limited (a listed company), as potential target for acquisition. MNO Chemicals Limited intends to buy one of these companies in a share exchange arrangement. Extracts from the latest financial statements of the three companies are given below: STATEMENT OF FINANCIAL POSITION MNO PQ (Pvt.) RS Chemicals Limited Limited ---------Rupees in millions----------1,500 800 1,200 700 300 350 1,000 300 3,500 3,000 500 3,500 400 100 1,600 1,400 200 1,600 500 200 2,250 1,800 300 150 2,250
Share capital (Rs 10 each) Retained earnings TFCs Current liabilities Non-current assets Investment held for trading Current assets
STATEMENT OF COMPREHENSIVE INCOME MNO PQ (Pvt.) RS Chemicals Limited Limited ---------Rupees in millions----------2,500.00 800.00 1,200.00 1,250.00 (100.00) (450.00) 200.00 900.00 (315.00) 585.00 292.50 400.00 (48.00) (180.00) 20.00 192.00 (67.20) 124.80 87.36 540.00 (55.00) (270.00) 45.00 260.00 (91.00) 169.00 84.50
Sales Operating profit before interest, depreciation and income tax Interest Depreciation Other income Net profit before tax Tax @ 35% Net profit Dividend payout (50%:70%:50%)
Additional information: (i) All companies maintain a stable dividend payout policy. (ii) It is estimated that earnings of PQ and RS will grow by 4% and 5% respectively. (iii) The risk free rate of return is 8% per annum and the market return is 13% per annum. The market applies a premium of 300 basis point on the required returns of unlisted companies. (iv) RS Limiteds equity beta is estimated to be 1.20. (v) Synergies in administrative functions arising from merger would increase after tax profits by 5% in the case of PQ and 6% in the case of RS. Required: Which of the two companies should be acquired by MNO Chemicals Limited? Show necessary computations to support your answer. (21)
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(4)
Q.5 GHI Limited is an all equity financed company with a cost of capital of 14%. For last several years, the company has been distributing 70% of its profits to the ordinary shareholders and is expected to continue to do as in future. The company plans to enter into a new line of business. Taking it as an opportunity to reduce the cost of capital, it is considering to issue debt to finance the expansion. The Corporate Consultant of GHI has provided the following industry data relating to different levels of leverage: Debt/Assets Cost of Debt Equity Beta 0% 1.20 10% 8% 1.30 40% 10% 1.50 50% 12% 1.70
The following information is also available: (i) The estimated value of assets after the investment in new line of business would be Rs. 250 million. (ii) The forecasted revenue for the next year is Rs. 200 million. (iii) Fixed costs for the next year are estimated at Rs. 40 million whereas variable costs will be 60% of the revenue. (iv) The par value of GHIs ordinary share is Rs. 10. (v) The tax rate applicable to the company is 35%. The rate of return on 1-year Treasury Bills is 6% and the market return is 10%. Required: Advise the optimal capital structure which GHI Limited should formulate. Show all relevant workings. Q.6 JKL Phone Limited is a cellular service provider. The Marketing Director has recently proposed a marketing strategy which envisages the introduction of a new package for prepaid customers, to gain market share. He has carried out a market research and suggests that the call rates forming part of the proposed package should either be Re. 0.75 or Re. 1.00 or Rs. 1.25 per minute. Based on market research, sales demand at different levels of economic growth is estimated as follows:
Probability Recession Moderate Boom 0.30 0.50 0.20 Call Rates Rs. 0.75 Re. 1 Rs. 1.25 ----- Subscribers in million ----0.70 0.50 0.30 0.80 0.60 0.40 0.90 0.80 0.60
(15)
He foresees that the average airtime usage per subscriber would be 1800 minutes or 1600 minutes with a probability of 40% and 60% respectively. In order to cater to the increased subscriber base, the company would need to commission new cell sites, details of which are as follows: No. of subscribers Cost of new sites (in million) (Rs. in million) Up to 0.5 million 180.00 Between 0.5 0.8 million 300.00 Between 0.8 1.0 million 540.00 It is assumed that the present customers of the company would continue to use the existing packages. Required: Evaluate the proposal submitted by the Marketing Director and advise the most suitable call rates. (THE END)
(15)
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BUSINESS FINANCE DECISIONS Suggested Answer Final Examinations Summer 2009 Ans.1 Conclusion: Discounted net cash outflow (based on Rupees) in case of option 1 is lesser, hence the company should opt for LOCAL currency loan. Option 1: Local Currency Loan Principal Interest rate Installment Opening Payment Closing [(KIBOR + 1.5%)/2) --- Rupees in million --A Jul-09 Jan-10 2,000 333 1,667 (13+1.5)/2=7.25% Jul-10 1,667 334 1,333 (12.5+1.5)/2=7.00% Jan-11 1,333 333 1,000 (12+1.5)/2=6.75% Jul-11 1,000 333 667 (11.5+1.5)/2=6.50% Jan-12 667 334 333 (11+1.5)/2=6.25% Jul-12 333 333 (10.5+1.5)/2=6.00%
Financial charges
Cash outflow
--- Rupees in million --B A+B 2,000 0.25% = 5 5 2,000 7.25% = 145 478 1,667 7% = 117 451 1,333 6.75% = 90 423 1,000 6.5% = 65 398 667 6.25% = 42 376 333 6.00% = 20 353
Discount @ 6.5% (13 2) 1.000 0.939 0.882 0.828 0.777 0.730 0.685
Discounted cash flow --- Rs. in million --5.00 448.84 397.78 350.24 309.25 274.48 241.81 2,027.40
PV Option II: Foreign Currency Loan Principal Installment Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Opening Payment in million 3.175 3.175 3.175 3.175 3.175 3.173 Closing Interest rate [(LIBOR + 2.5%)/2]
Interest amount
Net cash flow in million (3.889) (3.791) (3.683) (3.568) (3.445) (3.312)
Exchange Net cash flow rates (W-1) Rs. in million 109.10 112.95 116.52 119.77 122.68 125.20 424.290 428.193 429.143 427.339 422.633 414.662
Discount @ 6.5% (13 2)
Discounted cash flow Rs. in million
19.048 15.873 12.698 9.523 6.348 3.173
15.873 12.698 9.523 6.348 3.173 -
(5.00%+2.5%)/2=3.75% (5.25%+2.5%)/2=3.88% (5.5%+2.5%)/2=4.00% (5.75%+2.5%)/2=4.13% (6.00%+2.5%)/2=4.25% (6.25%+2.5%)/2=4.38%
0.714 0.616 0.508 0.393 0.270 0.139
0.939 0.882 0.828 0.777 0.730 0.685 PV
398.408 377.666 355.330 332.042 308.522 284.043 2,056.011
Page 1 of 6
Page | 75
BUSINESS FINANCE DECISIONS Suggested Answer Final Examinations Summer 2009 W-1 : Forward rates Spot Rate (Rs. / ) at the beginning Rs. / 105.00 109.10 112.95 116.52 119.77 122.68 1 + Interest Rate (Pak) 1 + Interest Rate (UK) 6-month 6-month KIBOR LIBOR 6.5% 6.25% 6% 5.75% 5.5% 5.25% 2.5% 2.63% 2.75% 2.88% 3% 3.13% Exchange Rate (Rs. / ) at the end Rs. 109.10 112.95 116.52 119.77 122.68 125.20
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Conversion rate (Rs. / ) =
Spot Rate Rs/ x
Page 2 of 6
Page | 76
BUSINESS FINANCE DECISIONS Suggested Solution Final Examinations Summer 2009 Ans.2 Option 1: Overhaul and continue (a) Cost of Net Residual Net cash Year overhauling Revenue value flow ------------------- Rupees -------------------0 (2,200,000) (2,200,000) 1 *13,600,000 3,600,000 2 3,600,000 787,500 4,387,500
Discount rate @ 8.33% (W-1) 1.0000 0.9231 0.8521
Net present value --- Rupees --(2,200,000) 3,323,160 3,738,589 4,861,749
*1 (2,000 0.94 440) 2,500 Cum discount factor for two years (0.9231 + 0.8521) Annual equivalent Net Present Value Option 2: Replacement Year 0 1 2 3 Discount rate Residual Net cash flow @ value 8.33% (W-1) ----------------------Rupees---------------------*1(4,305,000) (4,305,000) 1.0000 2 * 3,700,000 3,700,000 0.9231 3,700,000 3,700,000 0.8521 3,700,000 1,312,500 5,012,500 0.7866 Capital Cost Net Revenue Net present value Rs. (4,305,000) 3,415,470 3,152,770 3,942,833 6,206,073 1.7752 Rs. 2,738,705
*1 5,250,000 945,000 = 4,305,000 *2 (2,000 0.94 400) 2,500 = 3,700,000 Cum discount factor for three years (0.9231 + 0.8521 + 0.7866) Annual equivalent Net Present Value W 1: Calculation of Real Rate for discounting 2.5618 Rs. 2,422,544
(1 + Nominal Discount Rate) Real Discount Rate = 1 (1 + Inflation Rate) 1 + 17% = 1 = 8.33% 1 + 8%
Conclusion: Since annual equivalent NPV of overhaul and continue option is higher, this equipment should be overhauled. (b) Total required NPV of replacement option (Rs. 2,422,544 1.7752) Less: NPV of overhauling and continue option Difference % change in overhauling cost at which management would be indifferent (Rs. 561,249 Rs. 2,200,000) Rupees 4,300,500 4,861,749 (561,249)
25.51%
Page 3 of 6
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BUSINESS FINANCE DECISIONS Suggested Solution Final Examinations Summer 2009 Ans.3 Conclusion: The best strategy for the company is: - to square position in SPL shares at future price as it gives the highest return.(Working I) - NOT to exercise option of DESC shares as it is clearly evident from the available data that both purchasing at spot or future rate will result in more loss to the company. Working I Option 1: Computation of gain/ loss if shares are squared on SPOT rate SPL Rupees Sale proceed (Rs. 170 x 100,000) 17,000,000
Less: Cost of acquisition (Rs. 155 x 100,000)
(15,500,000)
Gain/ (loss) if option exercises Option 2: Computation of gain/ loss if shares are squared on Future rate
1,500,000
SPL Rupees Sale proceed (Rs. 173 100,000) Less: Cost of acquisition (Rs. 155 100,000) Gain/ (loss) if option exercises Present Value of the gain (1/1.0121 * 1,800,000) 17,300,000
(15,500,000) 1,800,000 1,778,480
Ans.4
Investment required to be made (W 1) Net profit after tax Synergy impact (W-5)
Merger with Merger PQ with RS Rupees in million 848.00 1,888.75 124.80 37.05 161.85 19.09% 169.00 47.39 216.39 11.46%
Return on investment
Conclusion: By acquiring PQ (Pvt.) Ltd., the shareholders of MNO Chemicals will earn a higher return on investment as compared to the acquisition of RS. Hence, acquisition of PQ is financially feasible for the shareholders of MNO Chemicals. W 1: Value of equity i.e. investment required to be made by MNO PQ RS Rupees in million
Page 4 of 6
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BUSINESS FINANCE DECISIONS Suggested Solution Final Examinations Summer 2009 Total value of the company (W 2) Less: Value of TFCs Value of equity i.e. investment to be made by MNO W-2: Total value of company Yo x (1 + g) Re - g
Total Value of PQ (Pvt.) Ltd. = 156 (W - 3) x (1 + 4%) = 1,248 17% (W - 4) - 4%
1,248.00 (400.00) 848.00
2,388.75 (500.00) 1,888.75
Total Value of RS Ltd. =
204.75 (W - 3) x (1 + 5%) = 2,388.75 14% (W - 4) - 5%
W-3: Maintainable earnings (Yo) Net profit after tax Add Interest (PQ : 48 0.65) (RS : 55 0.65) Maintainable earnings
PQ RS Rupees in million 124.80 169.00 31.20 35.75 156.00 204.75
W-4: Cost of equity (Re) Re = Rf + (Rm Rf) Cost of equity of RS = 8% + (13% 8%) x 1.2 = 14% Cost of equity of PQ (Pvt.) Ltd. = Re of RS Ltd. + Illiquidity premium 14% + 3% = 17% W-5 Synergy Impact Net profit after tax of MNO Maintainable earnings of PQ (W 3) Maintainable earnings of RS (W 3) Combined profit of merged entities Synergies impact on profitability Synergy impact PQ RS Rupees in million 585.00 585.00 156.00 204.75 741.00 789.75 5% 6% 37.05 47.39
Ans.5 Advise: Debt ratio of 40% is the optimal debt structure as at this level the WACC is at the lowest. Weighted Average Cost of Capital (WACC) 0% 0.00% 0.00% 100.00% 10.80% 35.00% 10.80% Debt ratios 10% 40% 10.00% 40.00% 8.00% 10.00% 90.00% 60.00% 11.20% 12.00% 35.00% 35.00% 10.60% 9.80% 50% 50.00% 12.00% 50.00% 12.80% 35.00% 10.30%
Wd Kd We Ke Tax
(Working 1)
WACC = WdKd (1-t) + WeKe
Working 1: Cost of equity 0% 1.20 6.00% 10% Debt ratios 40% 1.30 1.50 6.00% 6.00% 50% 1.70 6.00%
Page 5 of 6
Beta Rf
Page | 79
BUSINESS FINANCE DECISIONS Suggested Solution Final Examinations Summer 2009 Rm Re = Rf + (Rm - Rf) 10.00% 10.80% 10.00% 11.20% 10.00% 12.00% 10.00% 12.80%
Expected incremental revenue
Expected incremental Costs
No. of subscribers in million
Selling Price
Probability
Probability
B 0.7 0.7 0.8 0.8 0.9 0.9
C 0.3 0.3 0.5 0.5 0.2 0.2
D 1,600 1,800 1,600 1,800 1,600 1,800
E 0.6 0.4 0.6 0.4 0.6 0.4
AxBxCxDxE
------------Rupees in million------------H HxCxE ETR - ECOS 151 300 54 97 113 300 36 77 288 216 300 300 540 540 90 60 65 43 348 32 22 90 60 36 24 264 32 22 54 36 36 24 204 198 156 65 54 647 112 86 198 156 118 91 761 76 59 186 144 108 84 657
0.75
130 97 995 144 108 288 216 154 115 1,025 108 81 240 180 144 108 861
0.5 0.5 0.6 0.6 0.8 0.8
0.3 0.3 0.5 0.5 0.2 0.2
1,600 1,800 1,600 1,800 1,600 1,800
0.6 0.4 0.6 0.4 0.6 0.4
180 180 300 300 300 300
1.00
0.3 0.3 0.4 0.4 0.6 0.6
0.3 0.3 0.5 0.5 0.2 0.2
1,600 1,800 1,600 1,800 1,600 1,800
0.6 0.4 0.6 0.4 0.6 0.4
180 180 180 180 300 300
1.25
Conclusion: Tariff of Re. 1 is most suitable because it gives the highest value of pay off. (TheEnd)
Expected incremental earnings

Page 6 of 6
Cost of cell sites
Ans.6
Airtime minutes
Page | 80

Final Examinations Winter 2008
December 3, 2008

Q.1
Shoaib Investment Company Limited is a listed company having a share capital of Rs. 1,000 million consisting of 100 million shares of Rs. 10 each. Its net equity at book value, as of March 31, 2008 was Rs. 2,000 million. The company maintains a debt equity ratio of 70:30 based on market value. Long term debt constitutes 90% of total liabilities of the company. It is the policy of the company to invest 60% of its total assets in listed securities. The correlation between the market value of these listed securities held by the company and KSE-100 Index is 1.1. On March 31, 2008, the companys shares were traded at price to book value ratio (P/B ratio) of 1.4. During the quarter April 1, 2008 to June 30, 2008, KSE-100 Index fell by 20%. This fall in Index also affected the market price of the companys shares and as of June 30, 2008, they were being traded at P/B ratio of 0.9. There was no significant change in the amount of liabilities and other assets of the company, during the quarter. Required: (a) Compute the amount of fresh equity required to be injected as of June 30, 2008 in order to maintain the debt equity ratio. (b) The company has been approached by Mr. Alam, a large investor, who has offered to provide the required capital as computed in (a) above at a discount of 10% of market value. Compute the % holding of Mr. Alam in the company, if his proposal is accepted.
(13)
Q.2
Waseem Limited is engaged in manufacture and sale of consumer products. Its management is in the process of developing the sales plan for the next year. The Sales Director is of the view that the main hurdle in increasing the sales is the availability of finance. The summarized Balance Sheet as of November 30, 2008 is shown below: Rs. in million ASSETS Fixed assets Current assets LIABILITIES AND EQUITIES Ordinary share capital Retained earnings Long term debts Current liabilities 950 730 1,680 250 450 700 465 515 1,680
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(2)
Following additional information is available: (i) It has been established from the companys past record that any increase in sales require an investment of 140% of the additional sales amount, in inventories and accounts receivable. Further, the accounts payable of the company also increase by 25% of the additional sales amount. (ii) The current sales of the company is Rs. 1,100 million while the net profit after tax is 10% of sales. (iii) It is the policy of the company to distribute 20% of its profit after tax among the shareholders of the company. Required: Assuming that you are the Chief Financial Officer of the company, advise the management on the following: (a) How much additional finance would be required to achieve 20% increase in sales in the next year? (b) What would be the maximum growth in sales that the company can achieve if: external finances are not available? the additional financing is limited to an amount which will maintain the existing debt equity ratio? Q.3 Imran Limited wants to borrow Rs. 70 million for two years with interest payable at six monthly intervals. Due to recent hike in inflation, the company expects that the rate of interest is likely to rise over the next 2 years. The company can borrow this amount from a local bank at a floating rate of KIBOR plus 2% but wants to explore the use of swap to protect it from any interest rate increase, during the next two years. Another bank has offered the company that it will be willing to receive a fixed rate of 11% in exchange for payments of six month KIBOR. Required: (a) Calculate the six monthly interest payments if the swap arrangement is in place. (b) Calculate the net amount receivable/payable by each party to the swap at the end of the first 6 months if: KIBOR is 13.5%. KIBOR is 9%. Q.4 Hafeez Ltd is planning to bid for a contract to supply a machine under an operating lease arrangement, for 5 years. The terms of proposed contract include a special arrangement whereby the supplier / lessor will have to operate and maintain the machine, during the term of lease. Hafeez Ltd is required to quote a consolidated annual fee consisting of lease rentals and operating changes which shall be payable in arrears. The following relevant information is available: (i) The cost of machine is Rs. 50 million and the expected useful life is 10 years. The residual value at the end of five years is estimated to be 25% of the cost of machine. Operating cost for the first year is estimated at Rs. 6 million and is expected to increase at the rate of 10% per annum. The tax rate applicable to the company is 35% and the tax is payable in the same year. The company can claim initial and normal depreciation at 25% and 10% respectively under the reducing balance method. The weighted average cost of capital of the company is 14%.
(14)
(10)
(ii) (iii)
(iv)
Required: (a) Calculate the annual consolidated fee to be quoted for the contract if the companys target is to achieve a Pre-tax Net Present Value of 15% of total capital outlay. (b) Using the fee quoted above, calculate the projects internal rate of return (IRR) to the nearest percent.
(18)
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(3)
Q.5 Zaheer Ltd is a manufacturer of auto parts and is currently operating at below capacity due to slump in the demand for automobiles. The company has received a proposal from a truck assembler for supply of 40,000 gear boxes per annum for five years at Rs. 1,900 per gear box . The cost of each gear box is as follows: Material costs Labour costs Variable production overheads Variable selling overheads Fixed overheads (allocated) Rupees 800 500 150 200 150 1,800
Company has already incurred a cost of Rs. 5 million on the preparation of technical feasibility. The additional cost for setting up the facility for this order would be Rs. 20 million. The company maintains a debt equity ratio of 60:40. Cost of debt and cost of equity of the company is 16% and 19% respectively. The rate of tax applicable to the company is 30%. Required: (a) Evaluate whether the proposal is financially feasible for the company. Assume that revenue and cost of gear box will remain the same during the next five years. (b) Carry out a sensitivity analysis to determine which of the following variables is most sensitive to the feasibility of the order: Material costs Labour costs Additional cost of setup Q.6 Javed Limited is a listed company and is engaged in the business of manufacture and export of garments. 100% of the companys revenue comes from exports which are taxable @ 1% under final tax regime. An extract of the companys latest balance sheet as on June 30, 2008 is as follows: Rs. in million 100 40 85 225 150 375
(20)
Ordinary Share capital (Rs. 10 each) Capital Reserves Retained Earnings Term Finance Certificates (Rs. 100 each)
Term Finance Certificates (TFCs) are due to be redeemed at par on June 30, 2010. TFCs carry floating mark up i.e. 6 months KIBOR plus 2% which is payable at half yearly intervals. Currently, TFCs with similar credit rating are available at six months KIBOR plus 1%. During the year ending June 30, 2009, the company expects to post a net profit of Rs. 15 million. Cost of equity of a similar ungeared company is 19%. The shares of other companies in this sector are being traded at P/E ratio of 8. On June 30, 2008 the six monthly KIBOR was 14%.
Required: Compute the Weighted Average Cost of Capital of the company as at July 1, 2008.
(13)
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(4)
Q.7 Mushtaq Limited is considering two possible investment projects. Both the projects have a life of one year only. The returns from new projects are uncertain and depend upon the growth rate of the economy. Estimated returns at different levels of economic growth are shown below: Economic Growth (Annual Avg.) 1% 3% 5% Probability of Occurrence 0.25 0.50 0.25 Returns (%) Project 1 20 30 40 Project 2 22 28 40 Market 30 25 40
Risk free rate of return is 10%. Required: Evaluate the above projects using the Capital Assets Pricing Model. (THE END) (12)
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BUSINESS FINANCE DECISIONS Final Examinations Winter 2008 Suggested Answers
Ans.1
(a) Fresh equity required to be injected on June 30, 2008 Market value of equity on March 31, 2008 Market value of equity as at June 30, 2008 Fresh equity required Rupees in million 2,800 Working 1 700 Working 2 2,100
Since the market value of debt on June 30, 2008 is the same as the market value of debt on March 31, 2008, the company has to maintain the same level of equity also. Working 1: Market value of net equity and debt as of March 31, 2008 Rupees in million Net equity at book value 2,000 Market value of the company's shares (2,000 x 1.4) Existing debt (2,800 x 70/30) Working 2: Market value of net equity as at June 30, 2008 Book value of net equity as of March 31, 2008 Less: Loss on listed securities portfolio Net Equity as at June 30, 2008 Market value of equity as at June 30, 2008 (Rs. 778 x 0.9) Working 3: Loss on listed securities portfolio Decline in Stock Correlation Decline in companys portfolio value Listed portfolio value as at March 31, 2008 (Rs. in million) Loss on portfolio (5,555 x 22%) (Rs. in million) Working 4: Listed portfolio value as at March 31, 2008 Value of long term debt Value of other liabilities (6,533 90 x 10) Value of equity Listed securities (60% of total assets) (b) % holding of Mr. Alam Market value of required new equity (Rs. in million) Current market price (700 100) (Rs.) Number of shares [2,100 (7 x 90%)] (shares in million) Already issued shares (shares in million) Total number of shares (shares in million) Equity stake of new owner (333.33 433.33) 2,800 6,533
2,000 1,222 778 700
Working 3
20% 1.1 22% 5,555 1,222 Rupees in million 6,533 726 2,000 9,259 5,555 Working 1 Given Working 4
2,100 7.00 333.33 100.00 433.33 76.92%

Page 1 of 7
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Ans.2
(a) Additional Finance Required: Expected increase in assets (1,100 x 20% x 140%) Expected increase in liabilities (1,100 x 20% x 25%) Retained earnings for the year (1,100 x 120% x 10% x 80%) Additional finances required
i.
Rupees in million 308.00 (55.00) (105.60) 147.40
(b) In this case, increase in assets less liabilities must be equal to the increase in retained earnings. Let x be the required growth rate (1,100x 140%) (1,100x 25%) = 1,100 (1+x) 10% (1 20%) 1,540x 275x 88x= 88 x = 7.48% ii. Existing debt equity ratio = 465 / 700 = 66.43% In this case, the company must obtain an additional loan of 66.43% of the additional earnings in order to maintain the current debt equity ratio. Now, the revised equation is as follows: (1,100x 140%) (1,100 x 25%) = [1,100 (1 + x ) 10% (1 20%)] + [1,100 (1 + x) 10% (1 20%) x 66.43%] 1,540x 275x 88x 58.46x= 88 + 58.46 x = 13.09% Ans.3 (a) Rate of interest is Since KIBOR is swapped at So the fixed rate of interest to Imran Limited (11% + 2%) Monthly payment = 70 million x 13% x 6/12 (b) (i) If KIBOR is 13.5% then: KIBOR+2 11% 13% 4,550,000 Rupees (A)
The bank which has provided the credit will receive (70 million x 15.5% x 6/12) 5,425,000 The bank which has offered the Swap arrangement will pay to Imran Limited (70 million x 2.5% x 6/12) Imran Limited Net payable by Imran Limited (ii) If KIBOR is 9% then The bank which has provided the credit will receive (70 million x 11% x 6/12) The bank which has offered the Swap arrangement will receive from Imran Limited (70 million x 2% x 6/12) Imran Limited Net payable by Imran Limited
875,000 (B)
A-B
4,550,000 Rupees 3,850,000 (A)
700,000 (B)
A+B
4,550,000
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Ans.4
(a) Bid amount of annual fee NPV of costs (W-1) Target NPV (Rs. 50 million x 15%) NPV of fees Annual Fees = =
W-1: NPV of Costs Year Tax Allowance on Total Cash Discount Depreciation Operating Outflows Factor (14%) and Disposal Costs (W-2) --------------------------------- Rupees ---------------------------(50,000,000) (50,000,000) 1.000 (6,000,000) 5,687,500 2,100,000 1,787,500 0.877 (6,600,000) 1,181,250 2,310,000 (3,108,750) 0.769 (7,260,000) 1,063,125 2,541,000 (3,655,875) 0.675 (7,986,000) 956,813 2,795,100 (4,234,087) 0.592 12,500,000 (8,784,600) 4,236,312 3,074,610 11,026,322 0.519 Capital Cost Operating Costs W-2: Tax Allowance Year Tax Allowance WDV Total Allowance on Initial Normal Disposal -------------------------------------------------------- Rupees ---------------------------------------------------------50,000,000 12,500,000 3,750,000 5,687,500 5,687,500 33,750,000 3,375,000 1,181,250 1,181,250 30,375,000 3,037,500 1,063,125 1,063,125 27,337,500 2,733,750 956,813 956,813 24,603,750 2,460,375 861,131 3,375,181 4,236,312 (W-3) Tax Allowance @35% Depreciation PV of Costs (Rupees) (50,000,000) 1,567,638 (2,390,629) (2,467,716) (2,506,580) 5,722,661 (50,074,626)
Rupees 50,074,626 7,500,000 57,574,626 NPV of fees (W-1) Cum disc factor 57,574,626 3.433 = 16,770,937
0 1 2 3 4 5
1 2 3 4 5
W-3: Tax Allowance on Disposal Disposal value (Rs. 50,000,000 x 25%) WDV Loss on disposal Tax allowance @ 35% (b) IRR of the Contract IRR = a= b= A= B= a + [ (A/A-B) (b-a) ]% 14% 20% 7,500,000 (426,261) (W-5) Rupees 12,500,000 22,143,375 (9,643,375) (3,375,181)
IRR = 14% + [7,500,000/ [(7,500,000+426,261) (20%-14%)] % = 19.7%

Page 3 of 7
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W-5 Inflows/ (Outflows) excluding fee (50,000,000) 1,787,500 (3,108,750) (3,655,875) (4,234,087) 11,026,322 Inflows from fee Rupees 16,770,937 16,770,937 16,770,937 16,770,937 16,770,937 Net Cash Flows Rupees (50,000,000) 18,558,437 13,662,187 13,115,062 12,536,850 27,797,259 Disc Factor 20% 1.00 0.83 0.69 0.58 0.48 0.40 NPV Rupees (50,000,000) 15,403,503 9,426,909 7,606,736 6,017,688 11,118,903 (426,261)
Ans.5
(a)
Financial Feasibility of the Proposal PV of Net Incremental Profit for five year [7,000,000 (W-1) x 3.407 (W-2)] Less: Capital cost for setting up the dye Net Present Value Rupees 23,849,000 (20,000,000) 3,849,000
Conclusion: The proposal is financially feasible for the company as it has a positive net present value. W-1: Profit for the year Profit per unit (1,900 800 500 150 200) No. of units Net Profit before Tax (40,000 x 250) Less: Taxation @ 30% Net Profit after Tax W-2 Cumulative Discount Factor WACC = ke Rupees 250 40,000 10,000,000 (3,000,000) 7,000,000
E D + k d (1 T ) E+D E+D 40 60 + 16%(1 0.3) = 19% 100 100 = 7.6% + 6.72%

3.407
= 14.32% Cumulative Discount Factor at WACC i.e. 14.32% = (b) Sensitivity analysis (i) Material costs: Sensitivity =
NPV of the order 3,849,000 = = 5.045% PV of material cost (800 40,000 (1 0.3) 3.406)
(ii) Labour Costs Sensitivity= NPV of the order PV of labour cost = 3,849,000 (500 x 40,000 x (1-0.3) x 3.406) =8.072%
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(iii) Additional cost of set up Sensitivity =
NPV of the order 3,849,000 = = 19.25% PV of additional set up cost 20,000,000
Conclusion: Based on above working, material is the most sensitive variable to the feasibility of the order.
Ans.6
Weighted Average Cost of Capital Value Rupees Equity (W-3)120,000,000 Debt (W-5)152,538,000 272,538,000
Cost % (W-1)24.09 15.00
Cost Rupees 28,905,120 22,880,700 51,785,820
WACC =
51,785,820 272,538,000
= 19% W-1: Cost of Equity Ke(g) = Ke(u) + [(Ke(u)-Kd) x D/E)] Ke(g) = 19% + [(19% - 15%) x 1.27115 (W-2) Ke(g) = 24.09% W-2: Debt Equity Ratio 152,538,000 (W-5) = 120,000,000 (W-3) = 1.27115 W-3: Market Value of Equity Market value of equity = Profit P/E ratio = 15,000,000 8 = 120,000,000 W-4: Market Value of TFCs Cost of debt (6 months KIBOR +1%) i.e. (14% + 1%) Actual Markup (6 months KIBOR + 2%) i.e. (14% + 2%) W-5 Present value of outflows against TFCs Date 31-Dec-08 30-Jun-09 31-Dec-09 30-Jun-10 30-Jun-10 Description Markup payment Markup payment Markup payment Markup payment Redemption Markup at 16% 12,000,000 12,000,000 12,000,000 12,000,000 150,000,000 Discount Factor 15.00% 0.930 0.865 0.805 0.749 0.749 PV 11,160,000 10,380,000 9,660,000 8,988,000 112,235,000 152,538,000
15.00% 16.00%
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Ans.7
Computation of Market Variance

Probability 1 p1 Market Return 2 Rm Probable Deviation Market Market from Variance Return Mean 3 =1 x 2 4 5 = 1x (4)2 2 pRm Rm R m p(Rm- Rm)
0.25 0.5 0.25
30 25 40
7.5 12.5 10 30
0 -5 10
0 12.5 25 37.5
Return and Cost of Project 1

Probability 1 p1 Project Return 2 Rp1 Probable Project Return 3=1 x 2 pRp1 Deviation Market Covariance from Variance Mean 4 5 ( above) 1x 4 x 5
0.25 0.5 0.25
20 30 40
5 15 10 30
Rp1 Rp1 p(Rm- Rm)2 -10 0 0 12.5 10 25 37.5
0 0 25 25
* p(Rm - Rm) (Rp1 - Rp1)

(project1) = Covariance between project and market Variance market
(project1) = 25 / 37.5 = 0.67 Required Return from new project = Risk free rate + (Market rate Risk free rate) = 10% + 0.67 (30% - 10%) = 23.4
Return and Cost of Project 2
Project Return 2 Rp2 Probable Project Return 3=1 x 2 pRp2 Deviation Market Covariance from Variance Mean 4 5 (above) 1 x 4 x 5
Probability 1 p2
Rp2 Rp2 p(Rm- Rm)2 -7.5 -1.5 10.5 0 12.5 25 37.5
0.25 0.50 0.25
22 28 40
5.50 14.00 10.0 29.50
0 3.75 26.25 30.00
* p(Rm - Rm) (Rp2 - Rp2)
(project2) =
Covariance between project and market Variance market

Page 6 of 7
Page | 90
(project2) = 30 / 37.5 = 0.8
Required Return from new project = Risk free rate + (Market rate Risk free rate) = 10% + 0.8 (29.5% - 10%) = 25.6% Conclusion: Since the project 1 has higher return over its cost of capital worked out under CAPM, the company should undertake this project.
(THE END)
Page 7 of 7
Page | 91

Final Examinations June 4, 2008 Summer 2008

Q.1
Mr. Faraz, a large investor, wants to invest Rs. 100 million in the stock market by developing a portfolio consisting of those shares which have a track record of good performance. He contacted a Stock Analyst to identify such stocks. After a detailed study, the Stock Analyst recommended investments in shares of five different companies. Based on his recommendation, Mr. Faraz invested the amount on January 1, 2008. The relevant details are as follows: Price per Share on Jan 1, 2008 (Rs.) 60 245 225 130 210 Expected Covariance Dividend Standard with Yield Deviation KSE 100 3.50% 24% 2.10% 3.00% 22% 3.00% 2.50% 18% 2.60% 8.00% 15% 1.90% 5.00% 20% 2.80%
Company A B C D E
Investment (Rs.) 15,000,000 18,000,000 22,000,000 25,000,000 20,000,000
The stock analyst also informed him that the standard deviation and market return of the KSE-100 Index is 15% and 20% respectively. The risk free rate of return is 8%. Required: (a) Assuming that Mr. Faraz estimates his cost of equity by using the Capital Asset Pricing Model, compute the required rate of return on each security. (b) As at December 31, 2008, compute the following: Estimated value of portfolio. Portfolio beta. Estimated total return on portfolio. Q.2 The Share Capital and Term Finance Certificates (TFCs) of Faiz Limited (FL) are listed on the Karachi Stock Exchange. An extract from the companys latest balance sheet as on December 31, 2007 is as follows: Ordinary share capital of Rs. 10 each Revenue reserves Other reserves 6% TFCs of Rs. 100 each Short term loan At KIBOR + 3% Total debt and equity Rs. in million 400 350 150 900 595 80 1,575
(18)
Page | 92
(2) 6 years TFCs were issued on January 1, 2007. The coupon rate is 6% payable annually and the expected IRR is 10%. These TFCs were issued to fund a medium term project. The prevailing commercial rate for similar risk bonds is KIBOR plus 2%. The accounting policy of the company states that TFCs and other Held to Maturity Liabilities are carried at the amortized cost. KIBOR is currently 9% which can be considered as risk free. FL has an equity beta value of 1.6 with market equity premium of 6.25%. The rate of income tax is 35%. The dividend paid in the year 2007 was 12.5% and current years dividend will be paid shortly. The dividend is expected to grow at a constant rate of 10%. Required: Compute the following as on December 31, 2007: (a) Market price of Faiz Limiteds Equity Shares and TFCs; and (b) Weighted Average Cost of Capital. Q.3 Jalib Limited (JL) is planning to invest in a project which would require an initial investment of Rs. 399 million. The project would have a positive net present value of Rs. 60 million if funded only from equity. There are no internal funds available for this investment and the company wants to finance the project through debt. However, JLs existing TFCs contain a covenant that at any point in time, the debt to equity ratio in terms of Market Values should not exceed 1:1. Currently, the market values of JLs equity (40 million shares are outstanding) and debt are Rs. 672 million and Rs. 599 million respectively. Markets can be assumed to be strong form efficient. Required: (a) Using Modigliani & Miller theory relating to capital structure, calculate the minimum amount of equity that the company will have to issue to comply with the TFCs covenant. (b) Advise the Board of Directors as regards the following: the right share ratio and the price at which right shares may be issued to raise the amount of equity as determined in (a) above, without affecting the market price of shares. What would be the impact on the market price of the companys shares if the required amount of equity is arranged by issue of shares at Rs. 14 per share?
(Round off all the amounts to nearest millions and price computations to two decimal places)
(12)
(15)
Q.4
Mohani Limited (ML) has decided to acquire an additional machine to augment its production. The cost of the machine is Rs. 3,200,000 and the expected useful life of the machine is 5 years. The salvage value at the end of its useful life is estimated at Rs. 400,000. To finance the cost of machine, the company is considering the following options: (A) Enter into a leasing arrangement on the following terms: Lease term Security deposits Insurance costs Installment 5 years 10% of the cost of machine payable by lessor Rs. 860,000 payable annually at the beginning of the year. Purchase Bargain Option At the end of lease term against security deposit.
(B)
Obtain a 5 year bank loan at an interest of 11% per annum. The loan including interest would be repayable in 5 equal annual installments to be paid at the end of each year.
Page | 93
(3) The company plans to depreciate the machine using straight-line method. The insurance premium is Rs. 96,000 per annum. The corporate tax rate is 35%. For the purpose of taxation, allowable initial and normal depreciation is 50% and 10% respectively under the reducing balance method. The weighted average cost of capital is 14%. Required: Which of the two methods would you recommend to the management? Show all relevant calculations. Q.5 Hali Ltd. (HL) is listed on the stock exchange of Country X and has its operations in Country X and Country Y. The functional currency of both the countries is Rupee (Rs.). In the latest balance sheet of the company, net assets were represented by the following: Ordinary share capital of Rs. 10 each Retained earnings 10% Debentures 10% Long term loans Rupees in million 50 170 220 30 40 290
(18)
The current market price of ordinary shares and debentures are Rs. 90 per share and Rs. 130 per certificate respectively. In view of various legal and taxation issues, HL is considering a demerger scheme whereby two different companies, HX and HY will be formed. Each company would handle the operations of the respective country. Mr. Bader, a director of HL, has proposed the following demerger scheme: (i) The existing equity would be split equally between HX and HY. New ordinary shares would be issued to replace the existing shares. (ii) The debentures which are redeemable at par value of Rs. 100 in 2012, would be transferred to HX as these were issued in Country X. (iii) The long term loan was obtained in Country Y and will be taken over by HY.
Demerger would require a one time cost of Rs. 17 million in year one, which would be split between the two companies equally. The finance director has submitted the following projections in respect of the demerged companies: HX HY Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 -------------------Rupees in million ------------------Profit before tax and depreciation 39 42 44 26 34 36 Depreciation 12 11 13 9 10 11 The projections for year 3 are expected to continue till perpetuity. Accounting depreciation is equivalent to tax depreciation and therefore it is allowable for tax purposes. HX and HY will be subject to corporate tax at the rate of 30% and 25% respectively. Over the next few years, the rate of inflation in Country X and Country Y is expected to be 5% and 7% respectively. Required: Assuming your name is XYZ and HLs weighted average cost of capital is 18%, prepare a brief report for the Board of Directors discussing: (a) the feasibility of the demerger scheme for the equity shareholders of Hali Limited, based on discounted cash flow technique. Your answer should be supported by all necessary workings. (b) the additional information and analysis which could assist the Board of Directors in the process of decision making.
(20)
Page | 94
(4) Q.6 Momin Industries Limited (MIL) is engaged in the business of export of superior quality basmati rice to USA and EU countries. On May 15, 2008, MIL negotiated an order from TLI Inc. (TLI), a USA based company, for the supply of 10,000 tons of rice at the rate of US$ 2,000 per ton. Immediately after acceptance of the order by MIL, the Government imposed a ban on the export of rice. In view of the long standing relationship, MIL has offered to supply rice through Thailand which has been accepted by TLI. After due consultation with the Thai Company, MIL and TLI agreed to the following terms and conditions on May 31, 2008: The quantity and price per ton will remain unchanged. First consignment of 4,000 tons will be shipped in the last week of June 2008 and the balance will be shipped during the last week of July 2008. Shipment will be made directly to TLI. TLI will make payment to MIL after one month of shipment.
It was agreed with the Thai Company that MIL shall make the payment on shipment, at the rate of Thai Bhat 50,000 per ton. MIL has a policy to hedge all foreign currency transactions in excess of Rs. 25 million by obtaining forward cover. MILs bank has arranged the forward cover and advised the following exchange rates on May 31, 2008: Thai Bhat Buy Sell Rs. 2.33 Rs. 2.36 Rs. 2.30 Rs. 2.33 Rs. 2.28 Rs. 2.31 Rs. 2.26 Rs. 2.29 US $ Buy Rs. 65.12 Rs. 65.45 Rs. 65.77 Rs. 66.10 Sell Rs. 65.24 Rs. 65.57 Rs. 65.89 Rs. 66.22
Spot 1 month forward 2 months forward 3 months forward
The bank charges a commission of 0.01% on each transaction. Required: Calculate the profit or loss on the above transaction under each of the following options: (a) the shipments are made according to the agreed schedule; (b) on July 31, 2008, the parties agree to delay the second shipment for a period of two months. The rates expected to prevail on July 31, 2008 are as follows: Spot July 31, 2008 1 months forward 2 months forward 3 months forward (c) Thai Bhat Rs. 2.29 Rs. 2.32 Rs. 2.27 Rs. 2.30 Rs. 2.25 Rs. 2.28 Rs. 2.23 Rs. 2.26 US$ Rs. 65.61 Rs. 65.73 Rs. 65.84 Rs. 65.96 Rs. 66.16 Rs. 66.28 Rs. 66.38 Rs. 66.50
the second shipment is cancelled on July 31, 2008. The exchange rates are expected to be the same as in (b) above. (THE END)
(17)
Page | 95
BUSINESS FINANCE DECISIONS Suggested Answer Final Examinations Summer 2008
Ans.1
(a) COST OF EQUITY OF MR. FARAZ (UNDER CAPM MODEL) CAPM=RF+(RM-RF) x Beta Beta =
Co variance with Market Market Variance

Market Market Co-variance Standard Variance with market Deviation A B=A2 C 15% 0.0225 2.10% 15% 0.0225 3.00% 0.0225 2.60% 15% 15% 0.0225 1.90% 15% 0.0225 2.80% Required. Return %
19.16% 23.96% 21.92% 18.08% 22.88%
Company Name
A B C D E
Beta C/B 0.93 1.33 1.16 0.84 1.25
RF
RM-RF 20%-8% 12% 12% 12% 12% 12%
8% 8% 8% 8% 8%
(b) (i) Estimated Value of portfolio as at December 31, 2008 Price on *Price at Dec Co. Dividend Required Jan. 1, 08 31 yield Return Name (Rs.) (Rs.) (A) A 60 3.50% 19.16% 69.40 B 245 3.00% 23.96% 296.35 C 225 2.50% 21.92% 268.70 143.10 D 130 8.00% 18.08% E 210 5.00% 22.88% 247.55 Portfolio Value on Dec 31 (Rs.) AXB 17,350,000 21,772,538 26,272,949 27,519,275 23,576,167 116,490,929
No. of Shares (B) 15m/60 = 250,000 18m/245 = 73,469 22m/225 = 97,778 25m/130 = 192,308 20m/210 = 95,238
(ii) Portfolio beta as at December 31, 2008 Compan y Name A B C D E Portfolio Value on Dec 31 Rs. 17,350,000 21,772,538 26,272,949 27,519,275 23,576,167 116,490,929 New Investment Weightage A 14.89% 18.65% 22.55% 23.62% 20.24% Beta B 0.93 1.33 1.16 0.84 1.25 Weighted Beta AXB 0.14 0.25 0.26 0.20 0.25 1.10
(iii) Estimated Total return on portfolio Beg. Price End Price Compan (A) (B) y Name Rs. Rs. A 15,000,000 17,350,000 B 18,000,000 21,772,538 C 22,000,000 26,272,949 D 25,000,000 27,519,275 E 20,000,000 23,576,167
Capital Gain Dividend B-A A x Div. yield Rs. Rs. 2,350,000 525,000 3,792,538 540,000 4,272,949 550,000 2,519,275 2,000,000 3,576,167 1,000,000 16,490,929 4,615,000
Total Return Rs. 2,875,000 4,312,538 4,822,949 4,519,275 4,576,167 21,105,929

Page 1 of 9
Page | 96
Company Name
A B C D E
OR Portfolio Value on January 1 Rs. 15,000,000 18,000,000 22,000,000 25,000,000 20,000,000 100,000,000
Required return
19.16% 23.96% 21.92% 18.08% 22.88%
Total Return Rs. 2,875,000 4,312,538 4,822,949 4,519,275 4,576,167 21,105,929
Ans.2
(a) Market Price of Share
K e = R f + Equity Premium x Equity Beta

= 9% + 6.25% x 1.6 = 19%
Current dividend expected (Rs. 1.25 x (1+10%) Present value of all future dividends
Rupees 1.375
D o (1 + g) Ke -g 1.375 x (1 + 10%) = 19% - 10% =
16.806 18.181
Market price of share Market Price of TFCs Calculation of TFCs Market Price (cum interest)
Factor PV of 1st Coupon today PV of 5 Coupons today @ 11% PV of Redemption today @ 11% Market Price today (cum interest)
*KIBOR + 2% i.e. prevailing commercial rate
1.000 3.696 0.593
Amount (Rs.) 6.00 6.00 130.98 (W-1)
PV (Rs.) 6.00 22.18 77.67 105.84
W-1 Calculation of Redemption Price Issue Price Less: Present Value of Coupons at 10% (4.355[Factor] x Rs. 6) Hence PV of Redemption Price must be Price on redemption @ 10% (Rs. 73.87 / 0.564 [Factor]) Rs. 100.00 26.13 73.87 130.98
Page 2 of 9
Page | 97
(b) Weightage Average Cost of Capital Price Rs. 16.806 *99.84 No. of shares Value Rs. Million 40,000,000 672 **5,410,000 540 80 1,292 Cost % 19.00% 11.00% 12.00%
Equity (Ex-Dividend) TFCs (Ex-Interest) Bank Loan (equals to book value)

* Rs. 105.84 6 = 99.84 ** Rs. 595/1.1 = 541m / Rs. 100 = 5.41 million shares
WACC = Weks + Wdkd (1-T) + Wdkd (1-T)
672 540 80 x 19% + x 11% x 65% + + 12% x 65% = 13.35% 1292 1292 1292
Rs. in million
Ans.3
(a) Existing value of equity Existing value of debt Total MV of the company before investments Increase in MV if the new project to be undertaken NPV of new project, if funded from all equity Investment required Total Market Value of the company after investment (ungeared) Benefit of tax shield on debt funding (D x t) (Assume the value of debt = X)
Total market value of the company after investments (geared) Maximum debt will be half of the above i.e.
672 599 1,271
60 399 1,730
35% of X
Rs. 1,730 + 35% of X Rs. 865 + 17.5% of X
Existing debt Hence, new debt should be New debt will be (Rs. 266 / 82.5%) Less: Total investments required
Minimum increase in equity required
599 Rs. 266 + 17.5% of X 322 399

77
(b)
(i) Existing equity New equity NPV of the new project (ungeared) Benefit of tax shield on debt funding (Rs. 322 x 35%) Value of equity after investment is taken up Price to remain the same
Rs. in million 672 77 60 113 922 Rs. 16.8
Page 3 of 9
Page | 98
Hence, number of new total shares Existing shares (given) New shares to be issued Right shares ratio (14,880,952 / 40,000,000) Amount to be raised through equity Right share price (Rs. 77,000,000 / 14,880,952) (ii) Value of equity after investment is taken up No. of shares already issued
New issue of ordinary shares (Rs. 77,000,000 / Rs. 14)
54,880,952 40,000,000 14,880,952 3.72:10 Rs. 77,000,000 Rs. 5.17 Rs. 922,000,000 40,000,000
5,500,000 45,500,000
Market value of shares after new share issue
Rs. 20.26
Ans.4
I would recommend to the management of the company to consider option B as this option provides NPV of cash outflow of Rs. 1,988,750 to the company which is lower by Rs. 455,798 in comparison to option A. Detailed computation is as follows:
Security deposits Tax Net cash benefits outflow 35% ---------------------------R u p e e s --------------------------320,000 860,000 1,180,000 860,000 (301,000) 559,000 860,000 (301,000) 559,000 860,000 (301,000) 559,000 860,000 (301,000) 559,000 (400,000) (301,000) (701,000) Salvage value Lease payment PV Factor 14% 1.000 0.877 0.769 0.675 0.592 0.519 PV Rs. 1,180,000 490,243 429,871 377,325 330,928 (363,819)
Year 0 1 2 3 4 5
2,444,548
OR Description Security deposit Lease paymentS Tax benefit @35% Salvage value Rupees 320,000 860,000 301,000 400,000 PV factor 1 3.913 3.432 0.519 PV Rupees 320,000 3,365,180 (1,033,032) (207,600) 2,444,548
Page 4 of 9
Page | 99
Installment Amount =
Rs. 3,200,000 = 865,825 1 (1 + i) n R i
Year
Loan payment
0 1 2 3 4 5
Depreciation Tax Principal Salvage Repayme Balance Insurance Shield @ Outflow value Initial Normal nt 35% -------------------------------- R u p e e s -------------------------------3,200,000 96,000 96,000 865,825 352,000 513,825 2,686,175 96,000 1,600,000 160,000 (772,800) 189,025 865,825 295,479 570,346 2,115,829 96,000 144,000 (187,418) 774,407 865,825 232,741 633,084 1,482,023 96,000 129,600 (160,419) 801,406 865,825 163,102 702,723 780,023 96,000 116,640 (131,510) 830,315 865,825 85,802 780,023 0 104,976 *(291,081) 400,000 190,674 Interest @ 11%
PV Factor @14% 1.000 0.877 0.769 0.675 0.592 0.519
PV (Rs.) 96,000 165,775 595,519 540,949 491,547 98,960

1,988,750
*This includes tax benefit / loss on disposal amounted to Rs. 190,674. Computation of this tax benefit is as follows:
Cost of machine Less: Initial and normal depreciation Tax WDV Less: Sales value Tax loss
Tax benefits @35%
Rs. 3,200,000 2,255,216 944,784 400,000 544,784

190,674
Page 5 of 9
Page | 100
Ans.5
(a)
To: Board of Directors From: XYZ Date: June 4, 2008 Sub: Report on Demerger Scheme Dear Sirs, My comments on demerger scheme are as follows: a) If the company opts for demerger scheme, the ordinary shareholder will get a surplus of Rs.28.64 million details of which are as follows: Rupees in million 276.59 281.05 557.64
Value of OCX Value of OCY Total value of both the companies
Annexure A Annexure B
Current market value of HL Equity (5 million shares of Rs. 90) Debt (40+30*130/100) Surplus
450.00 79.00 529.00 28.64
As the demerger of two separate divisions has increased the value of two companies by approx. 5.4% as compare to current market value, it appears that HL should float the two divisions separately.
(b)
The following additional information and analysis would be relevant in the process of decision making: (i) Other details of items included in the profit and loss statement and information such as expected future growth could have been useful in determining the operating cash flows more accurately. (ii) The model uses operating cash flows. A more reliable estimate of value might be free cash flows, taking into account the investment needs of both divisions. (iii) The cash flow forecasts as they stand, appear to take no account of uncertainty. It would have been helpful to see best-worst estimates, simulations or other techniques that incorporate uncertainty. (iv) The risk profiles of the companies have not been considered. (v) Individual divisions might be more vulnerable to takeovers because of their smaller size. (vi) The views of the shareholders shall be important in reaching a final decision. (vii) How will the decision impact on the companys ability to negotiate better terms with the suppliers, financial institutions, etc? (viii) The interests of other stakeholders may have to be taken into account what will employees feel about the split, will there be fewer management opportunities available, and how will creditors view their security?
Page 6 of 9
Page | 101
Annexure A Value of HX
Year 2 3 onward Total ---------- Rupees in million ----------39.00 42.00 44.00 12.00 11.00 13.00 27.00 31.00 31.00 (8.10) (9.30) (9.30) 18.90 21.70 21.70 12.00 11.00 13.00 (8.50) 22.40 32.70 34.70 1
Profit before tax and depreciation Depreciation Profit before tax Tax (30%) Profit after tax Add back depreciation One time costs Net cash inflow Discount factors (12% [W-1]) Present value of net cash inflows
0.8929 20.00
0.7972 26.07
6.6432 230.52
W-2 276.59
W-1: Adjustment of inflation in the discount rate
1 + money rate 1.18 = = 12.38% say 12% 1 + inf lation rate 1.05
W-2: Present value factor from year 3 to infinity
1 0.8929 0.7972 = 6.6432 0.12

Year 2 3 onward Total ---------- Rupees in million ----------26.00 34.00 36.00 9.00 10.00 11.00 17.00 24.00 25.00 (4.25) (6.00) (6.25) 12.75 18.00 18.75 9.00 10.00 11.00 (8.50) 13.25 28.00 29.75 0.9091 12.05 0.8265 23.14 8.2644 245.87
W-4 281.05
Annexure B Value of HY 1
Profit before tax and depreciation Depreciation Profit before tax Tax (25%) Profit after tax Add back depreciation One time costs Net cash inflow Discount factors (10% [W-3]) Present value of net cash inflows
`
W-3: Adjustment of inflation in the discount rate 1 + money rate 1.18 = = 10.28% say 10% 1 + inf lation rate 1.07 W-4: Present value factor from year 3 to infinity 1 = 0.9091 0.8265 = 8.2644 0. 1
Page 7 of 9
Page | 102
Ans.6
(a) If shipment is made in accordance with the Schedule
Purchases Per Ton Cost (Bhat) June (Buy one month forward) 50,000 July (Buy two month forward) 50,000 Month Qty. (Ton) 4,000 6,000 Amount (Bhat) 200,000,000 300,000,000 Conv. Rate 2.33 2.31 Rupees 466,000,000 693,000,000 1,159,000,000
Sales Month July (Sell two month fwd.) Aug. (Sell three month fwd.) Per Ton Revenue (US $) 2,000 2,000 Qty. (Ton) 4,000 6,000 Amount (US$) 8,000,000 12,000,000 Conv. Rate 65.77 66.10 Rupees 526,160,000 793,200,000 1,319,360,000 160,360,000
(247,836) 160,112,164
Profit on transactions (sales minus purchases)

Less: Commission costs (0.01%)
(b) If the shipment is delayed for a period of two month Purchases Per Ton Cost (Bhat) 50,000 June (Buy one month forward) July (Buy two month forward) 50,000 July (Cancelled at spot) 50,000 July (Buy 2 months forward) 50,000 Month Sales Per Ton Revenue (US $) July (Sell two month forward) 2,000 2,000 Aug. (Sell three month forward) July (Buy 1 month forward) 2,000 2,000 July (Sell 3 month forward) Month Qty. (Ton)
4,000 6,000 (6,000) 6,000
Qty. (Ton) 4,000 6,000 (6,000) 6,000
Amount (Bhat) 200,000,000 300,000,000 (300,000,000) 300,000,000
Conv. Rate 2.33 2.31 2.29 2.28
Rupees 466,000,000 693,000,000 (687,000,000) 684,000,000 1,156,000,000
Amount (US$)
8,000,000 12,000,000 (12,000,000) 12,000,000
Conv. Rate
65.77 66.10 65.96 66.38
Rupees
526,160,000 793,200,000 (791,520,000) 796,560,000 1,324,400,000
Profit on transactions (sales minus purchases) Less: Commission costs (0.01%)
168,400,000 (475,044) 167,924,956
Page 8 of 9
Page | 103
(c) If shipment is cancelled on July 31, 2008

Purchases
Per Ton Cost (Bhat) June (Buy one month forward) 50,000 July (Buy two month forward) 50,000 50,000 July (Cancelled at spot) Month
Qty. (Ton) 4,000 6,000 (6,000)
Amount (Bhat) 200,000,000 300,000,000 (300,000,000)
Conv. Rate 2.33 2.31 2.29
Rupees 466,000,000 693,000,000 (687,000,000) 472,000,000
Sales Per Ton Revenue (US $) July (Sell two month forward) 2,000 Aug. (Sell three month fwd.) 2,000 July (Buy 1 month forward) 2,000 Month Qty. (Ton) 4,000 6,000 (6,000) Amount (US$) Conv. Rate Rupees 526,160,000 793,200,000 (791,520,000) 527,840,000 55,840,000 (326,988) 55,513,012
8,000,000 65.77 12,000,000 66.10 (12,000,000) 65.96
Profit on transactions (sales minus purchases) Less: Commission costs (0.01%)
(The End)
Page 9 of 9

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Module F

Business Finance Decisions

BFD Question Bank (Topic Wise) - Summer 2008 to Summer 2012

Dividends & Right Issue

WACC & Capital Structures

BFD Question Bank (Attempt Wise) - Summer 2008 to Summer 2012

The Institute of Chartered Accountants of Pakistan

Business Finance Decisions

= 700 X 80.00 = 280 x 102.50

= Rs. 56,000 million = Rs. 28,700 million 84,700 56,000

WACC = 14.5% (W - 1) x 84,700

31,500 = 1.5 x (31,500 + 5,600)

Business Finance Decisions Suggested Answers Final Examinations - Summer 2012

1,980 x 70% 1,620

[f()~ecasted net cash i ! Discount rate

:~'~~:t........i ..~~ l. i;~;~li4;~

r~~~~~:=~~~~~:=~==:~=~~~=~~=~~~:~:~~~~~=~==~:=~:~=::==:===~==~~~==~~~~:~r~=:=:=:~::::~~:~~~=::=f~~~~~:~~~==:= "M:=:=:==:=:=~~:=~:l L_.6QiIl.s~~.11~J..Cl.~~Il.t.ll.a.!!Y.2IE.PIl!_()!:H!.()j_t:_<:.t.~ L .. L_~J_6:~Q._.j Z!.s.:.~.s. J1_!}n2f __ 2~_~Lj

j.\. (300. 00)

! Adjustment for ~--~L.-.-.---

mutually compulsory projects

__ ~.__ ._L __ ._..s..

;--............................................. '-..i _---'--

---'L .._.._ _ _.._._ .._.._

_.._..__ .._ _.._.._...1

??~.:.x.? L203.55 500.40

i::g~~k-?:(~~!~~~-~i~~r .68.00'1 ....3s.70T::

ecause it cannot be scaled down.

The summary of investment appraisal results are as follows:

Business Finance Decisions Suggested Answers Final Examinations - Summer 2012

r~~~~~~~~~~~~~~~~=~~~~~~~:~~i~I~:~~!. [Qj~1:4~R~~~~9~~!ii~(~~~E:!i:Q.~~0YT~E=:::::[:i~~.i~i:~~iT:~:I41IL[::::I@::~~:=I::::::=~i~~5~]~~=~)~~ ~ ..~~~_~?_~~L~~~J!.!l<?~~(!.Qy.~ .. ~~_f.l~tj_<?!:12_._._--! i 366.30! 423.50! 551.03 i 658.85

.... ---- ..- ... ---- ..---- ..--,--,.---

..----------..-...i------ ..-....- ...--- ..- ..----

! Discount factor at 13%

I~i~~~ri~_~~i~~: :::..................... .. ..(2,252:25)1

Discounted payback period = W -4: Internal rate of return

By Interpolation, the IRR is : W3:

15.11% per annum

Modified Internal rate of return pV)l/n r MIRR (1- re) - 1 ( Pv

2,359.66 2,252.25 13%

Existing sales .............

Market size (Rs 1,000.:.. 30%) x Ll Sales

Share x Market Size) xLI

Business Finance Decisions Suggested Answers Final Examinations - Summer 2012

,__ Q.~_!~_~~~!~~ __ ~f_~~~_~_Q2~ _g~P' _ i Cash flow

(127.50)Q9~:99>L-(76~5-0)-r-----(5ioo)T:::~(~~::~~g~~ (140.00) 1(140:00)1(140.00)1 (140.00) 267.02! 455.97 i 551.27 i 653.55 I 763.51

f_~:_!~__ Q~_~~~!-E~~_~?!t._2K?p_~_!~!i!t.g_p.r_<?!:i!_~!_?p.~i~~!_~~!~_~_!~_y_t:!_.____ .__ .

Rs. m million l 805.57 I

~...........(1}?:9.9X! (11.55) 634.52

... .._.._..._._. ._._.._.

==1;"7~.1~1=,1=..,,.;,9,;.7 .;,;.79;,..,;,1 =~1,;;;,26,;,;.,;,,38;::k1 =~1;,;.5,;.7 ',;.0 7~1 =,,;1,;,,90;,;,.0;;,;;5=1

I Net operating cash flows (fr~;;; ~b~~~)r.

(90.78) 0.8475 _+ _.._ +.;-._.. (.:...7

~.?.J..?.~ ..~.L! ..~.? ." ...

l:~<?:... ().f()p!i().~~.<::2.~.!~.<l.<::.!.~ .. 1?1!.y.O'~X.1.?~!.QQQ!Q9.Q ... :::.JYY... ??Q,QQQ2...

700 Rs. 53,667

The cheapest option including premium follows:

The Institute of Chartered Accountants of Pakistan

Business Finance Decisions

Sales Less: Cost of sales

* includes depreciation of Rs. 70 million and 100 million respectively

Spot 3 months forward

Po D1 K e (W-1) P 1 {80x(1+0.144)-2} {80x(1+0.144)-0}

BUSINESS FINANCE DECISIONS Suggested Answers Final Examination Winter 2011

Market capitalization A.2 (a)

:~':t........i .. l. i;~;~li4;~

r~:=~:=~==:~=~==~~~:~:~~~~~=~==~:=~:~=::==:===~==~==~~:~r~=:=:=:~:::::~=::=f~~~:~==:= "M:=:=:==:=:=~~:=~:l L_.6QiIl.s~~.11~J..Cl.~~Il.t.ll.a.!!Y.2IE.PIl!_()!:H!.()j_t:_<:.t.~ L .. L_~J_6:~Q._.j Z!.s.:.~.s. J1_!}n2f __ 2~_~Lj

~. ._L __ ._..s..

i::gk-?:(!~~~-~i~~r .68.00'1 ....3s.70T::

r~~~~~~~~~~~~=~:i~I~:~~!. [Qj~1:4~R~~9!ii~(~E:!i:Q.0YT~E=:::::[:i~~.i~i:~~iT:~:I41IL[::::I@::~~:=I::::::=~i~~5~]~~=~)~~ ~ ..~~~_~?_L~J!.!l<?~~(!.Qy.~ .. ~~_f.l~tj_<?!:12_._._--! i 366.30! 423.50! 551.03 i 658.85

I~i~~~ri~_i: :::..................... .. ..(2,252:25)1

,__ Q.~_!~_~! __ ~f_~~~_~_Q2~ _g~P' _ i Cash flow

(127.50)Q9~:99>L-(76~5-0)-r-----(5ioo)T:::~(::g~~ (140.00) 1(140:00)1(140.00)1 (140.00) 267.02! 455.97 i 551.27 i 653.55 I 763.51

f_~:_!~__ Q~_~!-E_~?!t._2K?p_~_!~!i!t.g_p.r_<?!:i!_~!_?p.~i!_!~_~_!~_y_t:!_.__ . .

330 380 410 390 430 450