@yICMA STRATEGIC FINANCIAL MANAGEMENT (BAF-503) ‘SEMESTER-5 Pakistan FALL 2014 EXAMINATIONS Monday, the 2nd March 2015 ra Reading Tine imater Sara 3 Houre ‘Maximum Marks: 100 Roll No, 1) Altemptall questions. (i) Answors must be neat, relevant and brief (il) Use of non-programmable scientfe caloulators of any model s allowed {iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (W) In-marking the question paper, the examiners take into account claity of exposition, logic of arguments, effective presentation, language and use of clear diagram chart, where appropriate (v) DONOT write your Name, Reg, No. or RollNo., or any irrelevant information inside the answer script (vi) Question Paper must be returned to invigilator before leaving the examination hall. [Answer Script willbe provided after lapse of 15 minutes Extra Reading Time (0:18 am. or 246 pm.[PST]as the case may be) Qt Modern Hospital Network (MHN) is an autonomous body, privately owned institution, committed to provide quality health services to the people of Pakistan. The network comprises of eight state-of-the-art hospitals in major cities of Pakistan, MHN provides a broad range of latest and advanced diagnostic and therapeutic services. The hospitals are equipped to diagnose and treat Clinical, Surgical including Cardiac, Obstetrics, Gynaecology, Paediatrics and Psychiatry patients and its inpatients have an average length of stay of 3.3 days. MHIN's mutti-disciplinary approach to diagnosis and care ensures a continuum of safe and high-quality care services, under one roof, for all patients. The headquarter of the network is situated in Karachi vihich provides financial services to all network hospitals, whereas, other functions are decentralized. Fuelled by the passion to serve people who are unable to access excellent healthcare facilities, MHN aims to expand its hospitals’ network. The management of MHN is considering different options for expansion and in this regard, you have been assigned a task to assess the financial strength of MHN. The management of MHN has provided you the following Statement of Financial Position and other information’ ‘Statement of Financial Position as on December 31, 2014 Rs. in million Assets ‘Amount Liabilities andEquity Amount Fixed assets 1,200 Debentures 400 {Including OT, ICU and infant Creditors 300 care equipments etc ) Other payables 100 Investments 400 Share capital of Rs.1,000 each 800 Current assets 800 Reserves 400 Retained earnings 400 2,400 2,400 Other Information: * Profit after tax for the year 2014 is Rs. 200 million. * The network maintains retention ratio of 60%. © The market price per share was Rs. 4,500 as on December 31, 2014, 10f4 Marks PTOMarks The management of MHN has explored the opportunity to acquire Save Life Hospital (SLH) ‘and now decided to approach its management, As a result of intensive discussions with the management of SLH, they agreed with the proposal of MHN and furnished the following information for merger decision: Statement of Financial Position as on December 31, 2014 R million Assets ‘Amount Liabilities andEquity Amount Fixed assets 500 Creditors 150 (ncluding OT, ICU and infant Other payables 80 care equipments ete.) ‘Share capital of Rs.1,000 each 300 Goodwill 60 Reserves 150 Current assets 140_ Retained earnings 50 700 700 Other Information: + SLH has earnings yield 28%. + Therate of return of hospital industry is 20%. * Market price per share was Rs. 1,700 as on December 31, 2014, * Historical data related to profitability for the last five years is as under: Year 2014 2013-2012 ~~«2011~—=«-2010 Profit (Rs. in million) 90 62 76 52 65 Rate of dividend (%) 27 23 20 25 26 500 475460470455 The management of both hospitals have reached to a conclusion that MHN will workout the reasonable offer for the shareholders of SLH. Consequently, the management of MHN, in addition to assess the financial strength of their network, asked you to determine the equity exchange ratio for acquiring SLH Required: {a) Management of Modern Hospital Network (MHN) has decided to acquire Save Life Hospital (SLH) and wants you to provide the following related to SLH (1) The ratio of exchange of shares on the basis of book value. ) Value on the basis of earning yield. The value per share based on the dividend yield method, iv) Value of share based on return on capital employed (market expectation 12%). RABE (b) Assume that both hospitals are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms and are required to: (i). Calculate growth rates of future earnings per share (EPS) for each hospital (li) Develop a range of justifiable equity share exchange ratios that can be offered by MHN to SLH's shareholders on the basis of expected operating synergies. If the exchange ratio is 0.5 : 1 offered by MHN to SLH, what will be the EPS after ‘merger? Point out increase or decrease of EPS for both shareholders of MHN and SLH. 08 {iv) Estimate the post-merger market price using an exchange ratio of 0.5: 1, and assuming that MHN's pre-merger price! earning (P/E) ratio will continue after the merger. Show the resulting inorease or decrease in pre-merger market prices of each hospitals shares, 08 8 8 ‘spwatar 2015 20f42 (a) Landmark Company has been maintaining a steady distribution of dividends for many years. Retained earnings were used to finance capital investment projects to avoid cost of raising external funds. However, newly appointed finance director suggested that external financing would be beneficial with increasing requirement of capital expenditure. The company expects with some degree of certainty to generate the following net profit and plans to make the following capital expenditure during the next five years: Rs, ‘000° Years 2015 2016 2017 2018 2019 Net profit 6,000 4,500 7,500 6,900 5,400 Capital investment 3,000 4,500 6,000 4,500 6,000 The company currently has 3 milion ordinary shares outstanding and pays annual dividends of Re.1 per share. Required: (i) Determine dividend per share and external financing required each year if (1), Residual dividend policy is opted (2), Dividend-payout ratio is 50% (3) Annual dividend per share is Re. 1 (ii) Which one of the above three dividend policies gives maximum aggregate dividends in five years and minimum aggregate external financing (total of five years)? (b) Marshall Company capital structure consists of 100% equity having market value of Rs. 20 million. it is now considering financial leverage but there are certain benefits and costs associated with debt financing option. The benefit associated with debt financing is “net corporate plus tax” advantage equal to 20% of market value of debt, whereas associated costs are bankruptcy, agency cost and interest expense. The level of debt at which company can raise money without incurring above costs is Rs. 6.67 milion Level of debt and cost associated with it are as follows: Rs. ‘000° Level of debt [6,670] 13,330 | 20,000] 26,670 | 33,330] 40,000 Associated costs with debt financing) 0 | 800 | 1,600 | 2,700 | 4,300 | 6,700 Required: At what level of debt, market value of the Marshall Company is maximized? 3 Delta Manufacturing Company runs a business for the last thirty years in sugar industry. it has issued 15%, Rs.5,000 at par, 20-year bond paying annual interest with 20% additional interest at the end of term and having 25 warrants attached for the purchase of its shares. The bonds were initially sold for theit par value. Similar bonds were selling to yield 18% rate of return Mr. Akram is an investor and he has intention to invest Rs. 100,000. Delta Manufacturing Company has outstanding warrants that are exercisable at Rs. 175 per share. The holders of these warrants are entitled to purchase 4 shares per warrant. The shares of Delta Manufacturing Company are currently selling for Rs. 200 per share. Required: (a) What is the implied price of a warrant? (b) What is the theoretical value of the warrant of Della Manufacturing Company? {¢) Assuming the increase in share price is equal to implied price of warrant, compute warrant premium for Mr. Akram. ‘spwatar 2015 304 Marks 888 88 07 PTOMarks 4 Fast Airline plans to acquire a fleet of 20 aircrafts to manage its operations. Cost of 20 aircrafts is Rs.5 bilion with an expected life of 20 years. However, Fast Airline plans to use the aircrafts only for 10 years. After 10 years all aircrafts will get grounded and new latest available aeroplanes will take place in operation. After 10 years, aircrafts can be sold to other airlines at a price of Rs. 1 billion before tax. Fast Airline can borrow the required amount from an international banking consortium at a before tax cost of 10%, payable in 10 equal instalment at the end of each year. ‘Another option is to lease the assets for 10 years. The instalment of Rs. 700 millon will become due at the beginning of each year and all maintenance cost of Rs. 50 million per annum will be paid by lessor during lease period. The rate of tax is 30% and payable in the next year of income. The industry is using reducing balance method for depreciation for this class of assets at 15%. Required: Which one of the buy or lease options is feasible for Fast Airline? Substantiate your answer vith appropriate calculations. 16 Q.5 Max Company is involved in the business of manufacturing Tyres’. The company wishes to expand its business and requires Rs.10 millon for this purpose. The company has two options of financing i.e., through ()) common stock or (i) debt at interest rate of 10%. The current position of Max Company is as follows: Rs. $000" Debt (10%) 15,000 Equity capital (Rs. 10 per share) 40,000 Retained eaming 25,000 Total capitalization 80,000 Sales 250,000 Total cost 224,000 Earnings before interest and tax (EBIT) 26,000 Interest 1,500 Earnings after interest 24,500 Tax (35%) 8.575 Earnings after tax (EAT) 15.925, Required: (a) At what level of EBIT, after the new capital is required, would earnings per share (EPS) be the same (indifference point) whether new funds are raised by issuing ordinary shares or by issuing debt? Show computation of EPS using both options. o7 {b) Determine the level of EBIT at which EPS would be the same if sinking fund (debt repayment) obligations amount to Rs. 1 millon per year. o7 THE END Present Vaive FACTORS ‘Gumucarive Present Vatue Factors Year] 5H [wm [1m [wee [1am [rom [me [em [ame] oar Sm | om | rm [ao | tm [| oe | von [om] a 10952 0545) 09550909] o90r| 0.995] 0985] 77 | 0870] aee7 {952 | 084i | 065s | 0909] sor] o99s] oses| 0477 0870] aee7 1 2 [aso7|os@0| 0873[ 042s] oni2|aza7 ores] avsa|orse|avve] [2 | vase | 1933 | aeoe [1.726] 1719] 1690] 1460] 1607] 126) 1986 [nese] oee0| oaie|o7si ovar[ai2| oats] os7s|osse asus] [3 |2rza | za7s | 2eze [2ua7| zane 20m2| 2301] 22] 2009/2176 ‘+ [0625 [0792] 0765] 0865] 0550|0835| 0813] 0502| 0872) asie] | | sees | sass | sze7 | 3170] s102|s057| 2976) 2e16| ess) 2680 '[oye4|0747 | 0713] 082% 0505] 0587 054s) osta| 0x97 o4s7| [8 | ¢s20 | 4212 | 4100 | 3791] 3006] 3805] 5517) 3.455) 3352/3127 [0760705] 0856 [0564 | 0535 [0507 | oan] case] oaz2|asv0] [6 | Sore | ani | a7er [4365] az [ttt] 3000] 3480] 704/28 T[o7t4 | pass [os2a| osta|ase2 |oes2|aas]oan0|oave]oa«| [7 | rae | sskz | gae0 | anba| arr2[ asa] aaPa[ 4200] 4780) 3612 ' [0e77| 0827 | 0582|o4s7|oxst| os | 0376) 0351/0327) 0266] | | 6aas | e210 | 5671 [5505] 5145 | 4068] ¢709) 4an0| ave?) 4078 ‘Des |osea| oste|oaze 0x01 [aast |oaee| ama] ozet az] [a | 7108 | ear | Bete [150] ss07 [5378] 6192) ame] A712 Aal9 AW oet4 | 0ss6| soe] o3as|aas2|oa22| oam6| 0270] o2a7[ ater] [ww [7722 | rat | 7024 [6.ms| sano | 5550] 6426] 6216] E01 Aabe Hi 06@5 [0527 | 0475] 0350] 0517 0287 |ozmT|0287|O215/aie2| | TT @aMe | Tae7 | 7400 | 65| 6207 | 5050] S687) 8.465] 8254) AeRB Bi_05i7 | 03i2| 0258] 0149) 0124] 0.108 |OoRT| oa73| Omer aoaT] | zn | i24ae) THA7O|T0SB4] asia] 7aH3| 7480] 7025) 6m75| e250) 5355 ‘sewer 2016 404