a STRATEGIC FINANCIAL Gee | Cc MA MANAGEMENT (BAF-503) G SEMESTERS age _ Pakistan EXTRA ATTEMPT EXAMINATIONS, MAY 2016 ‘Wednesday, the 18th May 2016 Extra Wein Reading Time: 18 Minutes faximum Marks: oll No. 9 Time! 03 Hours m fener ll @ w (i) Ww 0) wi i) wii) ‘Attempt all questions, Write your Roll No. in the space provided above. Answers must be neat, relevant and brief. Itis not necessary to maintain the sequence, Use of non-programmable scientific calculators of any model s allowed Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram chart, where appropriate DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script Question Paper must be returned to invigilator before leaving the examination hall DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME Que: Catt signi quali mea of hi has sale Finar Fu Marks sstion No. 1 Proposed Time : 70 Min. | Total Marks : 40 le markets are the important and pivotal component of livestock supply chain, and contribute ificantly in gross domestic product (GDP) of Pakistan. On one side, cattle markets are providing ty animals to meet local consumption of meat and generating foreign income through export of 3t to Middle East and other countries, and on other side, providing platform for buying and selling igh quality dairy farm animals. In view of this, recently a public sector company “CMMC Limited! been incorporated in order to establish a state of the art Model Cattle Market to accommodate of thousands of animals per day, ncial data for the establishment of Model Cattle Market is as under: CMMC Limited had spent a sum of Rs. 3.3 million over past two (2) years ie., 2015 and 2016 ‘on survey and other expenditures for establishment of the cattle market Total project cost is estimated at Rs. 5,500 million with following cost break up: Land Building and civil works including infrastructure 1,800 Plant and machinery 2,200 Fumiture and fixture 300 Net initial working capital 400 Total project cost 5,500 Total construction period will be two years and year-wise estimate of total project cost to be incurred is as under: > Year-2017: 70% of total project cost > Year-2018: Remaining 30% of total project cost, Total project cost is being financed by issuing fully paid-up shares of Rs. 100 each, Weighted average cost of capital (WACC) of project will be15%. EAE-May 2016 10f6 PTOMarks * The revenues and expenses projected by the CFO of the company are as under: Revenues Year-2019 Year 2020-2024 (Rs. in million) _ (Yearly Increase By) Self-managed services 380 a% Outsourcing services 900 4% Other income 340 5% Total 1,620 Expenses Year-2019 Year 2020-2024 (Rs. in million) (Annual Escalation) Cost of services (excluding depreciation) 386 5% Administrative and selling expenses (excluding depreciation) 264 5% Other expenses 120 4% Total 770 * Net cash flows are expected to grow at 6% after 2024 for an indefinite period, ©The company will follow straight-line method of depreciation. Annual rate of depreciation and its allocation to cost of services and administrative and selling expenses is as follows. Allocation Annual —___“Wioeaton _____ Rate Cost of Administrative and Services _ Selling Expenses Building and civil works including infrastructure 10% 70% 30% Plant and machinery 10% 100% - Furniture and fixture 15% 40% 60% * Additional working capital of Rs. 52 million and Rs. 55 million will be required in Year-2022 and ‘Year-2023 respectively, which will be recovered in Year-2024 * Income tax will be 32%, and it is assumed that income tax rate will remain at this level in future. Required: {a) Prepare the projected Statement of Profit or Loss of the project for the period 2019 to 2024 (Present all your calculations and workings clearly) 18 (b) Calculate the following by using the projected financial data (i) Year-wise future net cash flows for the years 2017 to 2024 06 (li) Payback period 02 (iii) Net present value 05 {iv) Internal rate of return 05 (v)_ Profitability index 02 (©) In view of results of (a) and (b) above, advise whether CMMC Limited should establish Model Cattle Market as per the projected data prepared by CFO? 02 SFULEAE-May 2016 20f6Question No. 2 Proposed Time : 20 Min. | Total Marks : 12 Progressive Ltd. is planning to install new machinery for Rs. 5,000,000 at its existing site. The ‘company is considering buy and lease alternatives for the new machinery. For buying altemative, following information is available: * Progressive Ltd, can obtain a bank loan for 100% of the required amount at an interest rate of 1% per annum in 3 equal instalments at the end of each year. * The company will follow straight-line method of depreciation and the new machinery will have useful life of 3 years with zero salvage value. For lease altemative, following information is available: * The tentative lease terms call for payment of Rs. 1,600,000 at the end of each year for 3 years. * Progressive Ltd. must use the equipment, if, it is to continue in business, so it will almost certainly want to acquire the equipment at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at that time. The best estimate of this fair market value is Rs, 1,000,000, The new machinery will require maintenance expenses of Rs. 250,000 per year in both the alternatives and this will be bore by Progressive Ltd. Applicable tax rate for this type of capital investment is 40%, Required: Being a Management Accountant, suggest the company whether to buy or lease the machinery. (Substantiate your answer through proper workings and calculations) Question No. 3 Proposed Time : 20 Min. | Total Marks : 10 Nawab Rice Mills (NRM) has eamed profit before interest and tax of Rs. 105 milion last year. The company's capital structure is as under: Rs. ‘000° Long-term loan @ 15% per annum 225,000 Common shares 200,000 Retained earnings 175,000 Past experience has shown that long-term loan is being utilized to meet working capital requirements on an average by Rs. 50 milion, during April to September. In the remaining six months, these funds remain idle. NRM pay tax at the rate of 32%. The company is considering different alternatives to utilise these funds. Following two altematives are available Alternative-1: NRM can place Rs. 50 million as short-term investment for six months to earn profit at 12% per annum Altemative-2: The company is considering paying off Rs.60 million of its long-term loan and obtaining a short-term loan at 16% per annum as per requirements in the following months: Rs. ‘000° April 30,000 May 20,000 June 40,000 The entire borrowing on short-term is to be paid at the end of September, when enough cash will be available from sales. Required: (a) Calculate retum on equity under existing situation. (b) Calculate return on equity under each of the two alternatives and compare it with existing situation. Which alternative is best for Nawab Rice Mills (NRM)? SFULEAE-May 2016 30f6 Marks 12 02 08 PTOQuestion No. 4 Proposed Time : 20 Min. | Total Marks : 10 Creative Lahore Centre (CLC) is planning to install air conditioners at its new campus at Raiwind Road, Lahore. CLC has received proposals from two manufacturers. The first proposal is for installation of 6 inverter air conditioners at a cost of Rs. 120,000 each. The other is for the installation of 6 simple split air conditioners with an equal capacity costing Rs, 85,000 each. The useful life of inverter is 6 years and that of simple spit air conditioners is 4 years, The cash operating costs associated with each proposal is given as under: Operating Costs Rupees Year Proposal Proposal-2 1 55,000 65,000 2 55,000 85,000 3 75,000 100,000 4 92,000 150,000 5 415,000, . 6 131,000 - The salvage value of inverter air conditioner is expected to be Rs. 25,000 each and that of simple split air conditioner to be Rs. 7,500 each at the end of their useful lives. Required: Being a Management Accountant, calculate equivalent annual cost of both the proposals and recommend CLC which proposal should be selected, if opportunity cost of funds is 10%, Question No. 5 Proposed Time : 25 Min. | Total Marks : 14 LightWear Industries is in the business of making clothes for the last 25 years. Company's head office is located in New York, United States of America, where the currency is US $ (Dollar). It has a subsidiary in Pakistan namely Sehar Clothing, where the currency is Pakistani Rupee (PKR). The exchange rate of the year is as follows: Exchange Rate PKR USS July 1, 2014 408 June 30, 2015 1004 Average exchange rate for the year 1044 Historical exchange rate for non-current assets 1084 The subsidiary’s statement of profit or loss for the year ended June 30, 2015 and statement of financial position as at June 30, 2015 and June 30, 2014 is as follows: Sehar Clothing Statement of Profit or Loss for the year ended June 30, 2015 PKR ‘000° Sales 17,000 Cost of goods sold 10,000 Gross profit 7,000 Operating expenses (including depreciation of PKR 600,000) 4,500 Profit before tax 2,500 Taxes 1,200 Profit after tax 4,300 SFULEAE-May 2016 40f6 Marks 10Sehar Clothing Statement of Financial Position as at June 30, PKR ‘000° 2015-2014 Cash and cash equivalents, 650 500 ‘Accounts receivables 3,450 2,800 Inventories 3,400 2,500 Net non-current assets 2,800 _ 3,400 Total 10,300 _ 9,200 ‘Accounts payables 3,000 ~ 3,200 Ordinary shares capital @ PKR 10 each 4,000 1,000 Retained earnings 6,300 _5,000 Total 9,200 ‘The historical-cost exchange rate for inventories and cost of goods sold, using the US$ as the functional currency, is PKR 98 to one US$. Using PKR as the functional currency, it is PKR 94 to one US $ for the purposes of cost of goods sold The sales, operating expenses, and taxes paid are steady throughout the year. There are no previous translation adjustments. Required: Reconstruct the following financial statements of Sehar Clothing (to the nearest thousand US $) in functional currency PKR and US$: {a) Statement of profit or loss for the year ended June 30, 2015 (b) Statement of financial position as on June 30, 2015 Question No. 6 Proposed Time : 25 Min. | Total Marks : 14 Fine Apparels (Pvt) Limited is a leading manufacturer and exporter of textile products to USA and European countries. Projected statement of profit or loss for the year 2016 is as follows: ine Apparels (Pvt.) Limited Projected Statement of Profit or Loss for the year 2016 ‘Sales Cost of goods sold Gross profit ‘Administrative expenses 1,400 Selling expenses 1,300 Profit before tax Provision for taxation Profit after tax SFULEAE-May 2016 50f6 Marks o7 o7 PTOMarks Cost of goods sold for the year 2016 is calculated as follows: Rs. ‘000° Material used 8,400 Wages and manufacturing expenses 6,250 Depreciation 2,350 17,000 Less: Ending finished goods (10% of goods produced not yet sold) 1,700 15,300 Goods equal to 15% of the year's production (in terms of physical units) will be in process on the average requiring full materials but only 40% of the other expenses. The company keeps materials equal to two months’ consumption in stock. All expenses will be paid one month in arrears. Supplier of material will extend 1% months’ credit Sales will be 20% for cash and the rest at two months’ credit. 90% of the income tax will be paid in advance in quarterly instalments. 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