The Hindu Business Line : A welcome departure from the past

After a long time, there seems to be a departure from the past in terms of coverage and quality of questions in the November 2006 CA (Final) paper on management accounting and financial analysis (MAFA). Overall, the quality of the questions is good and students at the CA Final level are expected to have done well provided they focussed on concepts rather than cramming.

The paper covers almost the entire syllabus. As there is hardly any repetition from the past examination, the quality of the students can be assessed in this important paper and would encourage them to focus on the concepts, provided the institute maintains uniformity. The last three November exams, 2004, 2005 and 2006, as compared to the May exams of the respective years have been of a higher standard.

In November 2006, practical questions account for 90 marks and theoretical questions, 30 marks. Foreign exchange management, including valuation of options and futures, accounts for 36 marks (practical questions) — a clear departure from the past.

Comments

What follows is a brief evaluation of each of the questions:

Questions 1(a): This is a fairly good question testing the skills of the student in risk analysis in capital budgeting. This thoroughly conceptual question would have been difficult for those who believe in rote learning.

1(b): This tests the understanding of the students about refinancing facilities available in the financial market.

2(a): It's a simple straight forward question based on the MM (Miller and Modigliani) approach of dividend, where students are expected to demonstrate that the value of the firm does not change whether dividends are paid or not.

2(b): This question requires application of the concept of HPR (Holding Period Return) in mutual funds to assess the year-end NAV for three years.

2(c): This requires understanding the implication of tax in dividend decisions.

2(d): This is a very simple theory question requiring students to explain advantages of keeping securities in demat form.

3(a): This question requires comparing three hedging strategies in foreign exchange risk management. The first instrument is the currency future. For the first time in CA exam, a practical question on currency future has been asked. However, the currency future rate given on September 1, 2005 is $0.2134 which should be $0.02134.

It appears the examiner wanted to test currency futures in the Indian case and, hence, a non-existing rupee currency future priced in dollars has been created. The complication has been further compounded due to the fact that currency exposure is in dollar and currency future in rupees. The students are expected to translate dollar exposure into rupees before deciding the number of contracts. To make the quote uniform, the forward contract rate has been given in indirect form (whereas all forward quotes in India are given in direct form). But students are expected to resolve academic world problems as well. The other two hedge strategies, namely, `Forward Cover' and `No Hedging', are straightforward.

3(b): This question requires simple application of CIA (Covered Interest Arbitrage). This issue was tested in the May 2006 exam too.

3(c): For the first time a question has appeared from the international capital budgeting area. But the requirement is very simple if students know the reason for difference in the domestic currency and foreign currency discount rates. All data are given and, therefore, majority of them should have attempted this question.

4(a): This question is about application of BSOPM for valuation a Call Stock Option. However, the question has not mentioned whether it is a European Call Option or American Call Option. The relevant data are given to plug in the formula of BSOPM (Black Scholes Option Pricing Model).

4(b): A very simple question testing the skills of students in determining currency exposure.

4(c): Though lengthy, it is a simple question from portfolio management, testing the skills of the students in determining return from historical data and expected data.

5(a): A simple question on mergers and amalgamations, testing the skills of the students in business valuation using the DCF (discounted cash flow) and net asset models.

5(b): This question relates to future compact valuation. The only issue is to interpret the meaning of annual interest with monthly rests.

5(c): A theoretical question on foreign collaboration.

6(a): A simple theoretical question from portfolio management requiring the students to spell out various types of systematic and unsystematic risks.

6(b): This question is more on accounting than finance. PE-II level knowledge in accounting will be handy to solve this question.

6(c): Again, any one who would have referred AS-19 can easily answer this theoretical question.

6(d): IBPC (Inter Bank Participation Certificate) is a money market instrument used by banks for lending and borrowing.