SCANNER'S APPENDIX CS Final Gr. II June 2006

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1 FREE OF COST I.S.B.N : SCANNER'S APPENDIX CS Final Gr. II June 2006 Paper - 4 Financial, Treasury and Forex Management Chapter - 1 : Nature and Scope of Financial Management June [1] {C} (a) Profit maximisation is pre-requisite for shareholders wealth maximisation. Do you agree? Give a brief account of the advantages and disadvantages of these goals. Chapter - 2 : Capital Budgeting Decisions June [4] (a) The cash flow approach of measuring future benefits of a project is superior to the accounting approach. Discuss June [5] A firm has an investment proposal, requiring an outlay of Rs.40,000. The investment proposal is expected to have 2 years economic life with no salvage value. In Year-1, there is a 0.4 probability that cash flow after tax (CFAT) will be Rs. 25,000 and 0.6 probability that CFAT will be Rs.30,000. The probabilities assigned to CFAT for the Year-2 are as follows: If CFAT = Rs. 25,000 If CFAT = Rs. 30,000 Amount Probability Amount Probability (Rs.) (Rs.) 12, , , , , , The firm uses a 10% discount rate for this type of investment. You are required to (i) Present the above information in the form of a decision tree. (ii) Find out the NPV under (a) the worst outcome; and (b) under the best outcome. (7 marks) (iii) Find out the profitability or otherwise of the above investment proposal. (7 marks) June [6] (c) Evaluate the feasibility or otherwise of a project keeping in view the following data : (i) The nominal rate of return is 14%. 1

2 CS Final Gr. II June (ii) The expected rate of inflation over life is 7%. (iii) Cash flows of the project are as under : Year Cash flows (Rs.) (10,000) 3,000 3,000 3,000 3,000 Also find out the real rate of return. (10 marks) Chapter - 3 : Capital Structure June [3] (a) Two companies P Ltd. and Q Ltd. belong to the equivalent risk group. The two companies are identical in every respect except that Q Ltd. is levered, while P Ltd. is unlevered. The outstanding amount of debt of the levered company is Rs. 6,00,000 in 10% debentures. The other information for the two companies are as follows : P Ltd. Q Ltd. Net operating income (EBIT) (Rs.) 1,50,000 1,50,000 Interest (Rs.) 60,000 Earnings to equity-holders (Rs.) 1,50,000 90,000 Equity capitalisation rate, ke Market value of equity (Rs.) 10,00,000 4,50,000 Market value of debt (Rs.) 6,00,000 Total value of firm (Rs.) 10,00,000 10,50,000 Overall capitalisation rate, ko = EBIT/V 15.0% 14.3% Debt equity ratio An investor owns 5% equity shares of Q Ltd. Show the process and the amount by which he could reduce his outlay through use of the arbitrage process. Is there any limit to the process? (10 marks) June [6] (a) A company is planning to raise Rs. 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company to be sold on a 14% net yield basis to the company, and equity shares to be sold at Rs. 50 per share net to the company, are the alternatives being considered by the company. The company expects to pay dividend of Rs. 5 per share at the end of coming year. The expansion is expected to carry the company into a new-higher risk class. The required rate of return expected from the point of view of the investment community is 16%. (i) Determine the growth rate of the company, which the market is anticipating. (ii) Management is anticipating 8% growth rate. On this basis, at what price should the equity share be sold by the company? (iii) Assuming that management is anticipating growth rate of only 4% per year, what form of financing would you recommend? Chapter - 4 : Sources of Company Finance June [4] (d) Describe the reasons for internationalisation of business and investment.

3 CS Final Gr. II June Chapter - 5 : Dividend Policy June [2] (b) A closely-held toys manufacturing company has been following a dividend policy, which can maximise the market value of the company as per Walter s Model. Accordingly, each year at dividend time, the capital budget is reviewed in conjunction with the earnings for the period and alternative investment opportunities for the shareholders. In the current year, the company reports net profits of Rs. 10,00,000. It is estimated that the company can earn Rs. 2,50,000 if such profits are retained. The investors have alternative investment opportunities that will yield them 12%. The company has 1,00,000 shares outstanding. What would be the dividend payout ratio of the company, if it wishes to maximise the wealth of the shareholders? (10 marks) June [7] Write notes on the following : (ii) Considerations in dividend policy Chapter - 6 : Working Capital Management and Control June [1] {C} (c) Length of operating cycle is the major determinant of working capital needs of a business firm. Explain June [2] (a) A dealer having annual sales of Rs. 50 lakh extends 30 days credit period to its debtors. The variable cost is estimated at 80% on sales and fixed costs are Rs. 6,00,000. The dealer intends to change the credit policy for which the following information is given : Average Collection Annual Sales Credit Policy Period (Days) (Rs. in Lakhs) A B C Rate of return (pre-tax) required on investment is 20%. You are required to assess the most profitable policy with the help of incremental approach. Calculations may be restricted to two decimal places. (10 marks) Chapter - 7 : Security Analysis and Portfolio Management June [3] (c) The following information is available in respect of Security-X and Security-Y : Security Expected Rate of Return X % Y % Rate of return of market portfolio is 15.3%. If risk-free rate of return is 7%, are these securities correctly priced? What would be the risk-free rate of return, if they are correctly priced? June [4] (b) Describe the main features of the gift edged primary market.

4 CS Final Gr. II June June [7] Write notes on the following : (iii) Dow theory Chapter - 8 : Financial Services June [1] {C} (b) Discuss the advantages of investing in mutual funds. (d) Write a note on depository system in India June [4] (c) Briefly explain the services offered by merchant bankers to an issue June [7] Write notes on the following : (i) Leveraged lease (iv) Securitisation of mortgages. Chapter - 12 : Forex Management June [3] (b) Soni Ltd. and Toni Ltd. face the following interest rate : Soni Ltd. Toni Ltd. US Dollar (Floating rate) LIBOR % LIBOR % Japanese Yen (Fixed rate) 1.75% 2% Toni Ltd. wants to borrow US Dollars at a floating rate of interest and Soni Ltd. wants to borrow Japanese Yen at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 100 basis point spread. If the swap is equally attractive to Soni Ltd. and Toni Ltd., what rate of interest will they end up paying? June [6] (b) Indigo Ltd. is planning to import a multi-purpose machine from Japan at a cost of 7,200 lakh Yen. The company can avail loans at 15% interest per annum with quarterly rests with which it can import the machine. However, there is an offer from Tokyo branch of an India based bank extending credit of 180 days at 2% per annum against opening of an irrevocable letter of credit. Other information : Present exchange rate Rs. 100 = 360 Yen 180 Days forward rate Rs. 100 = 365 Yen Commission charges for letter of credit at 2% per 12 months. Will you accept the bank s offer and why? Paper - 5 Corporate Restructuring Law and Practice Chapter - 1 : Introduction June [5] (c) Corporate restructuring increases shareholders wealth. Critically examine this statement contrasting demerger and buy-back as tools of restructuring.

5 CS Final Gr. II June Chapter - 2 : Strategies June [3] (c) Define the term strategic planning Discuss its salient features and importance in today s competitive world. Distinguish it with long range planning. Chapter - 3 : Mergers and Amalgamations June [4] Comment on the following with supporting case law : (i) In respect of modification of a scheme of arrangement. any person interested can make application. (ii) Sun Ltd. wishes to merge with Moon Ltd. and both the companies have fixed the appointed date for the merger as 1 st April, The financial year ending of both these companies is 30 th June, Share exchange ratio is to be arrived at based on the financial position of both these companies as on 30 th June, (iii) Ekta, Ltd., a listed company, is merging into Kutumbh Pvt. Ltd. (iv) Daisy Ltd. proposes to takeover the whole of the issued and paid-up capital of Lilly Ltd. without making application to the court as required under Section 391. (4 marks each) Chapter - 4 : Takeovers June [1] {C} (c) A listed company has three major groups, out of which members of two groups have family relations as per the definition of relative and the third group is of outsiders. In the light of regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, answer the following : (i) Whether all the three groups shall be treated as person acting in concert to each other? (ii) Whether all the three groups can acquire upto 5% of share-holding through creeping acquisition route separately under the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997? June [3] (a) Under what conditions can an acquirer or any person acting in concert may make an offer conditional as to the level of acceptance which may be less than 20% of the issued and paid-up capital of the target company? June [5] (b) The total holding of all promoters in a listed company of which they are in control is 40% of the issued and paid-up capital of the company. One of the promoters desires to do creeping acquisition in the said target company. Can he do so? If yes, what percentage of shares can he acquire without the necessity of making a public offer? June [6] (a) What is meant by hostile takeover? In case of hostile takeover, what are the basis of arriving at the public offer price? June [7] (b) RPL is a listed joint venture company engaged in the business of manufacture of bulk drugs; fine chemicals diagnostics and non-

6 CS Final Gr. II June prescription drugs, etc.,with 74% foreign investment in its share capital. RPL s financial performance was not very impressive due to low margins compared to industry norms. Accordingly, the management decided to undertake a major re-furbishing of its plant with the investment of about Rs.5 crore. NPL, the other company, incorporated in 1997, also engaged in the business of pharmaceuticals and had achieved substantial improvements in growth and profitability, despite the constraint of price control. The turnover of NPL increased from Rs. 18 crore in 1998 to Rs. 103 crore in Although NPL has emerged as a fast growing profitable company, its growth plans were stymied. NPL, therefore, decided to acquire sizable stake in RPL to make synergy in the operations of both the companies. The foreign collaborator of RPL decided to divest the sizable equity stake in RPL at a best price. Accordingly, a meeting was scheduled between the representatives of both the companies to negotiate and conclude the deal. As the Company Secretary of NPL, you are required to submit a detailed note to the Managing Director enumerating the general obligations of NPL under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, (10 marks) June [8] Write notes on the following : (iv) Promoters as per the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, Chapter - 5 : Revival and Restructuring of Sick Companies June [2] (c) What are the conditions precedent for declaring a company as sick company? Chapter - 6 : Funding of Mergers and Takeovers June [3] (b) Pace Pvt. Ltd. has two shareholders-raja, an Indian resident and Sonart Gmbh., a German Company. Pace Pvt. Ltd. is engaged in manufacturing of automobile parts. It has to import machinery of 5 million Euros. The supplier of machinery has agreed for one years s credit. Advise Pace Pvt. Ltd. in the light of External Commercial Borrowing (ECB) guidelines June [8] Write notes on the following : (ii) Funding through ECB Chapter - 7 : Valuation of Shares and Business June [5] (a) Valuation of shares and fixation of exchange ratio in an amalgamation of companies is a matter of commercial judgement and the courts should not sit in judgement over it. Critically examine this statement, with case laws June [6] (c) XYZ Ltd. is intending to acquire. ABC Ltd. by merger and the following information is available in respect of both the companies :

7 CS Final Gr. II June XYZ Ltd. ABC Ltd. No. of equity shares 5,00,000 3,00,000 Profit after tax (Rs.) 25, 00,000 9,00,000 Market price per share (Rs.) (i) Calculate the present EPS of both companies. (1 mark) (ii) If the proposed merger takes place, what would be the new EPS for XYZ Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. (iii) Will you recommend the merger of both the companies? Justify your answer. (2 marks) June [8] Write notes on the following : (iii) Discounted cash flow method of valuation Chapter - 8 : Corporate Demergers/Splits and Divisions June [1] {C} (b) Enumerate the steps to be taken to effectuate a scheme of demerger June [7] (a) The shareholding of Winsome Ltd., a company in which the public are not substantially interested, as on 31 st March, 2005, is as under: Indian joint-venture partner 50% Foreign joint-venture partner 50% Total 100% The company has two distinct lines of business. It has a carry forward loss of Rs. 10 crore as on 31 st March, 2005 and it continues to incur losses. The management is desirous of utilising the accumulated losses. Advise June [8] Write notes on the following : (i) Tax relief available in the case of demerger to the shareholders of demerged company Chapter - 9 : Post Merger Re-organisation June [1] {C} (a) Mergers, demergers, takeovers or combinations or acquisitions take place as a vehicle for achieving faster corporate growth. Discuss. (8 marks) Chapter - 10 : Financial Restructuring June [2] (a) Gem Ltd., a listed company of which you are the Company Secretary, is planning to buy-back its shares through book building process. You are required to prepare an activity chart for carrying out the whole process with time to be involved in the process. (8 marks) (b) What are the obligations of a company after the announcement of buy-back of securities? Chapter - 11 : Alliances June [6] (b) With alliance we can do more for less. In the light of this statement, explain why an alliance is the best strategy.

8 CS Final Gr. II June Paper - 6 Banking and Insurance Law and Practice Chapter - 1 : Introduction to Banking June [3] Attempt the following : (i) Write a note on banking ombudsman scheme June [4] Attempt the following : (i) Define banking under the Banking Regulation Act, Chapter - 2 : Relationship between Banker and Customer June [1] {C} (a) Greenfield Ltd. has a cash credit limit of Rs. 10 crore with Jagat Bank. The company s paid-up capital and reserve amounts to Rs.15 crore. The company requires an increase in cash credit limit upto Rs. 20 crore. The memorandum and articles of association of the company are silent as to the limit upto which the company can borrow. They have given powers to directors to give security and also to borrow. (i) Will the bank sanction the required cash credit limit? Give reasons. (ii) If a term loan of Rs. 20 crore is required, will the bank approve it? If so, what formalities are to be followed? (b) A stranger opens an account by depositing a cheque to which he asserts himself to be the payee. Does he thereupon become a customer? Is the banker who collects that cheque protected in receiving payment on his behalf even though he has defective title? (c) Happy Ltd. was sanctioned a loan of Rs. 10 crore by Excellent Bank. Hasmukh Bhai, Chairman and Sukhi Ram, Managing Director of the company were authorised to sign the documents. Sukhi Ram suddenly had to fly to USA before executing the documents. However, Hasmukh Bhai executed the documents on 1 st December, 2005, while Sukhi Ram executed the documents on 20 th December, 2005 after coming back from USA. Explain what will be the effective date of documents from the limitation period point of view. Had this situation occurred in case of a partnership firm, state whether the effective date of documents would have been different? June [4] Attempt the following : (vi) A banker s right to set-off is nothing but the right to combine the accounts. Comment. Chapter - 3 : Law and Procedure Governing Banking Instruments June [1] {C} (d) A cheque issued by Rajat is presented to Kuber Bank on 20 th November, 2005 and paid. The cheque is dated as 11 th November, On 25 th November, 2005, Mrs. Rajat comes to the branch of Kuber Bank and gives a letter stating that Rajat died on 7 th November, 2005 and demands restoration of the amount of the cheque. Advise.

9 CS Final Gr. II June June [4] Attempt the following : (iv) The combination of account payee crossing and not negotiable crossing gives fullest protection to a cheque. Comment. Chapter - 4 : Management of Assets and Liabilities June [2] Attempt the following : (iii) Enumerate the main elements of prudential norms announced by the Reserve Bank of India. (iv) Analyse the various items appearing on the asset side of the balance sheet for enhancement of working capital June [3] Attempt the following : (ii) Write a note on role of treasury management department in banks. (iv) Skill of successful banking lies in arranging maturity pattern of liabilities and assets sub-serving the principle of liquidity. Comment. Chapter - 5 : Lending Policies June [2] Attempt the following : (i) What are the accepted norms the banks should follow to minimise the risk involved in lending? Chapter - 6 : Development Banking June [2] Attempt the following : (ii) Distinguish between development banking and commercial banking. Chapter - 7 : RBI and its control on Commercial Banks June [4] Attempt the following : (v) The qualitative credit control methods control the use and direction of credit. Comment. Chapter - 8 : Law relating to Bank Regulation June [1] {C} (e) Karan took a vehicle loan under the hire purchase agreement with Jyoti Bank. The bank seized and took forcible possession of the vehicle on his failure to repay the instalment towards the said loan. Karan alleging illegal action on the part of the bank in seizing the vehicle by its musclemen and lodged a complaint with the police for taking steps to recover the vehicle. But, when the police did not take any action on the complaint of Karan, he challenged their inaction before the High Court. In your opinion whether the action of the bank and inaction/apathy on the part of the police in recovering the vehicle was justifiable? Give reasons June [3] Attempt the following : (iii) Settlements arrived at before Lok Adalats in respect of NPAs are not legally enforceable by themselves. Comment.

10 CS Final Gr. II June Chapter - 9 : Banking Sector Reforms in India June [4] Attempt the following : (ii) Write a short note on narrow banking. (iii) Write a short note on relationship banking. Chapter - 10 : Risk and Insurance June [5] {C} (c) Comment on the following statements : (i) Risk avoidance is one method of handling risk. (2 marks) (ii) Price risk can be hedged. (2 marks) Chapter - 11 : Insurance - Meaning, Nature and Significance June [5] {C} (c) Comment on the following statements : (iv) Insurance works as a social security tool. (2 marks) June [8] (b) Indicate giving reason(s) whether the following guarantees are considered insurance : (i) A television set is guaranteed by the manufacture against defects for 90 days. (ii) A new set of radial tyres is guaranteed by the manufacturer against road defects for 50,000 kms. (iii) A builder of new homes gives a ten year guarantee against structural defects in the home. (2 marks each) (c) Explain securitisation of insurance risk. Chapter - 12 : Life Insurance June [5] {C} (b) State various distribution channels associated with life insurance business June [7] (b) Describe the role of an actuary with respect to demographic assumption in life insurance. Chapter - 13 : General Insurance June [5] {C} (a) A shopkeeper has taken two policies against fire covering the stock at his shop. The sum insured under Policy - A is Rs. 20 lakh and the sum insured under the Policy - B is Rs. 30 lakh. If the loss occurred due to fire is Rs. 10 lakh, whether he would get the claim under both the policies? If not, then how much amount of claim he would get under both these policies? (c) Comment on the following statements : (iii) Liability can be insured. (2 marks) June [8] (a) What is the measurement of subrogation? Chapter - 14 : Accident and Motor Insurance June [6] Write notes on the following : (iv) Certificate of insurance June [7] (a) What does permit mean under motor insurance? What is the duration of a permit and how is it renewed? State the general conditions attaching to all the permits.

11 CS Final Gr. II June Chapter - 15 : Deposit and Credit Insurance June [5] {C} (c) Comment on the following statements : (v) Credit insurance replace normal credit risk management process. (2 marks) June [7] (c) Write a short note on the need for credit insurance. (d) Differentiate between active credit risk management and passive credit risk management. Chapter - 18 : Risk Management June [6] Write notes on the following : (iii) Risk administration programme Chapter - 19 : Insurance Surveyorship June [6] Write notes on the following : (ii) Claim examiners in life and health insurance Chapter - 20 : Company Secretary vis-a-vis Insurance June [6] Write notes on the following : (i) Underwriting agents for insurance sector Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Tow n, ALLAHABAD Visit us :