The Hindu Business Line : The MAFA bugbear

THE last three sessions of the management accounting and financial analysis (MAFA) paper have turned out to be a bugbear for students. But the latest appears to be the worst. A concept not found in the study material and often spoken of in financial companies has wormed its way into the question paper, throwing quite a few students out of gear.

1(a): This compulsory problem is on leasing. Ever since the introduction of the new syllabus, this chapter has almost been a permanent fixture. This time around, the question is simple, in line with those that appeared in the past (which includes the May 2005 exam) and which are solved in most classrooms. Using the quick-fire method, it should take only 10 minutes to crack this 14-mark compulsory question on lease versus borrow.

1(b): This compulsory six mark problem on risk-adjusted discount rate has appeared in the earlier exams. It requires one to identify the discount rate from a table (!) and then compute the net present value (NPV). Surprisingly, computations need to be done on three different projects. Why should an examiner test a student's understanding of the same concept thrice? It should take about six minutes to solve this question.

2(a): A good question on computing return from a mutual fund investment. In the past, such questions were elementary. This time around, there is an element of practicality. The question introduces the idea of bonus issue in mutual funds and calls for working returns across a timeframe. It is not clear whether simple average return or the IRR is to be calculated. While the latter is a better indicator of return, it would throw up issues such as reinvestment of dividends, their growth till maturity date, and so on, and a whole range of complex arithmetic.

Here too, like in the previous question, three mutual funds are involved. So a candidate is tested thrice over. If the idea was to test the concept rather than the arithmetic, it would have been better to have talked about one investor and, say, three years rather than three investors and six years. This 12-mark question is likely to take 20 minutes to crack. A student familiar with capital markets should not have had any difficulty.

2(b): A good question for eight marks that combines ideas relating to buyback, bonus debentures (courtesy HLL) and portfolio management. The novelty lies in splitting the price into share price and price for debenture and then converting the market price in each market condition to a rate of return. Once the crux of the query is understood, it should take only about 15 minutes to solve.

3(a)(i): This three-mark theory question calls for explaining the various types of risks associated with an investment. A quick explanation, followed by an example would suffice.

3(a)(ii): A two-mark question on repo. Again, a quick explanation followed by an example would do.

3(b): The first of the top-spinners. Requires you to draw up a Nostra account and assess what you would do if you were a forex dealer. This seven mark question would have come as a surprise to many a student.

3(c): An eight mark problem on mergers and acquisitions (M&A). M&A has been a frequently asked question ever since the new syllabus was introduced, the novelty this time around being de-merger. Looks to be a relatively straightforward question with the student needing to take a call on what basis shares would be issued and then to compute the ratio.

4(a): This eight-mark theory question is split in two parts. One, on the rights and obligations of the investor under mutual fund regulations. And, two, on the different methods of evaluating the performance of a mutual fund. A mention of the five known methods along with their formula and explaining the meaning and significance of the methods would do.

4(b): Here comes the googly — an eight mark problem involving duration. This is a googly because the study material does not talk about it. This is not to suggest that "duration" is an unimportant concept. In fact, portfolio managers use duration instead of maturity as a measure of the average time to the various coupon and principal payments.

Duration represents the weighted average time to interest and principal payments. It is computed by dividing the present value of weighted cash flow by the market price of the instrument.

The current market price is the present value of future cash flows associated with the investment. The question gives the duration and requires you to assess the value of the investment. The period to maturity is not available. It is unlikely that many students would have cracked this question.

4(c): A simple problem on foreign exchange. Carries four marks and could have been solved within five minutes.

5(a): The googly again — an eight-mark problem on duration. A series of simple steps would lead to the answer.

This should be easier than Question 4(b), but again students may not have cracked this because they are unlikely to have studied this topic. Why the same concept should be tested in two places is an issue that ICAI needs to address.

5(b): A four-mark theory question on ESOS and ESOP. Those familiar with SEBI guidelines would have answered this.

5(c): This portfolio management problem carrying eight marks has appeared twice before with numbers altered. This should be straightforward, as these types of questions would have been solved in most classrooms.

6(a): A five mark theory question on securitisation, which should not have been difficult to handle.

6(b): That's what I call a good question on bond refunding. Even if someone has not formally read it, he could look at it as a source of financing and check whether the fresh money required to be raised is cheaper than the current cost of the bond. The question carries 10 marks.

6(c): A five mark theory question on external commercial borrowing. It should not have been difficult to handle.

On balance, with a couple top spinners and googlies thrown in, this paper is likely to have upset a majority of students.

A proper choice of questions, keeping one's cool, solving correctly without arithmetical or other mistakes the easier questions, should have helped students score above-average marks.

The paper can be given a rating of seven on a scale of 10 in terms of difficulty.

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