The Hindu Business Line : Quick analysis, post-exams

Question 1(a) — first alternative: A short notes query on derivatives. Here, the L. C. Gupta Committee recommendations on derivatives are required to be spelt out. A startling question to begin the paper with; many would not have attempted the same.

Question 1(a) — second alternative: On CAPM, this question would have been chosen by default.

Question 1(b): It is astonishing to find probability count as well as cash flows of both the projects symmetrical. One can easily make out that both the projects would end up with same NPV. The company would be indifferent in the choice. It should be explained by workings. A lollipop.

Question 1(c): This involves choice of a project based on highest NPV, followed by coefficient of variation as a measure of risk. The merits of the latter technique would place the project manager in an advantageous position on account of risk accommodation in the study. But ultimately both the approaches would lead to the selection of Project Y.

Question 1(d): This is on finding the ex-rights price, valuation of rights, wealth ascertainment when the investor sells his rights, and when the rights issue is totally ignored. A very basic question on financial management.

Question 2(a): A good short notes query on the role of mutual funds in the financial market.

Question 2(b): Another problem on the usage of probability. The expected future rate works out to $1.81. When the pound is to be sold, it would be advantageous to sell at a cent above the forward rate of $1.80.

Question 2(c): In this one, on application of CAPM model, the solution can be drawn with the help of the dividend growth model (DGM) and the CAPM security market line (SML) equation.

Question 3(a): This query, a good one on buyback of shares by companies, can be answered at any level. The answer should, therefore, in keeping with the level and marks (10, that is) allotted.

Question 3(b): This is on the irrelevance of dividend policy in gauging share price in the MM model.

Question 4(a): When leasing is waning in the current context, earmarking 16 marks seems pointless.

There is a typographical error in the end — where the word "term" appears as "turn".

Question 4(b): This short notes question on GDR and ECB should have been allotted more than four marks.

Question 5(a): It is a short notes question on commercial paper deserving the six marks.

Question 5(b): A basic arithmetic problem on finding the rate of return. Summing up all incomes, including the change in the prices on the opening figure, gives the rate of return.

Question 5(c): This problem, involving mergers and acquisitions, can be solved with basic knowledge of the topic. Students should have had little difficulty in tackling this question.

Question 6(a): The role of merchant bankers in public issue is definitely an easy question at the Final level.

Question 6(b): Finding the expected return of a portfolio is no big task; a similar problem was asked in an earlier exam.

The market return is not given directly but can be inferred from the information given on PSU bonds — the beta of PSU bonds is "one".

When a security's beta is one then the return on that security and the market return should be the same. This is a good cache.

Question 6(c): This problem calls for change in the interest cover ratio immediately after additional borrowings; should not have posed any problems at all.

In all, the paper still smacks of the old syllabus at the cost of wider coverage of the new syllabus — something the students would not have been unhappy about.

The areas ignored are international financial management and derivatives.

Advanced accounting

Question 1(a): This is on the application of AS on EPS. The problem, involving a lot of adjustments, such as partly-paid shares, conversions from preference and debentures and so on, deserves more than 14 marks, especially under examination conditions. In this problem, the students should basically understand that the information on capital is in rupee, not quantitative, terms. A number of adjustments are given for arriving at the diluted weighted average number of equity shares (WANES) — options and conversions, for instance.

While dividend tax rates are given, the more important corporate tax rate is surprisingly missing. Bonus shares issued in the second year would affect not only the second year EPS but also the first. There is a catch here. EPS and diluted EPS have to be arrived at separately for the first year. Then, for the EPS and diluted EPS for the second year, the first year automatically becomes the previous year, but the bonus share issue would affect the first year too.

The requirement of adjustment for the bonus factor is brought in by the paper-setter in the form of adjusted EPS. But a small mistake seems to have crept into the paper: "Net profit attributable to the equity shareholders for the years ending 31.3.2003 and 31.3.2002 were Rs 10,00,000". Should the sentence have read: Net Profit attributable to the equity shareholders for the years ending 31.3.2003 and 31.3.2002 were Rs 10,00,000 and Rs 8,00,000 respectively?

Alternatively, the students could assume the amount as Rs 10 lakh each.

Question 1(b): A routine theory question on environmental accounting. Students are expected to reproduce the points given in the Institute's study material.

Question 2(a): This is on consolidated financial statement, wherein the balance-sheet of the subsidiary is given on the date of acquisition along with the balance-sheet as on the date of consolidation. The situation gets complicated when consolidation schedules are to be prepared, that is, one before the bonus issue and one after. Hence, two consolidation schedules are required, with the consolidated balance-sheet obviously after the bonus issue. The problem covers the entire process of consolidation with clear-cut information regarding the source of bonus issue. An excellent problem for 10 marks.

Question 2(b): This is on treatment of investments held in associate company in the consolidated financial statements. It simply is a test of one's knowledge on equity method of accounting. The first sub-question is on the computation of goodwill and the second is on the equity method of accounting for arriving at the increase/decrease in the reserves of the associate company. The last sub-question is tricky, though. It is compounded in the first sub-question itself, as the dividend received relates to the period prior to acquisition. However, for the dividend declared for the post-acquisition period, no effect shall be given in the consolidation until the investing company receives the dividend.

Question 3: This is on internal reconstruction to be carried out before absorbing the vendor company. After absorption, the company will be taken over by a new company. Very deftly drafted, this question could have tested many a candidate if the adjustments were not followed carefully.

Question 4: This involves valuation of equity shares in the backdrop of revision in the valuation of assets, elimination of some of them in the balance sheet, and so on. Items such as income from non-trade investments, loss on sale of furniture need to be eliminated from the respective year's profit on account of abnormality and to ensure the regular income pattern. A routine and frequently-asked problem.

Question 5(a): A simple problem on capitalising borrowing cost, involving also the application of Accounting Standard 16.

Question 5(b): A theory question based on the Institute's study material.

Question 6: A discussion-type problem on individual cases, basically to test the application of AS and guidance notes issued by ICAI. Can be tackled effectively without much of a difficulty.

In all, the paper is time-consuming but not lopsided.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Fund-flow in Prosperous

Marriage counselling for taxpayers

If you lend, track where your money goes

Quick analysis, post-exams

The sharp edge of Java