The Hindu Business Line : A mix of simple and challenging

The first question in the management accounting and financial analysis (MAFA) paper is on leasing versus owning (through bank loan) from the user’s point of view. This is a balanced problem and on expected lines. An almost similar question appeared in the May 2004 and November 2005 exams.

The only possible difficulty this problem could have posed is with respect to the computation of cash flow. Towards the end of the question, the proposal is to be evaluated also from the lessor’s point of view.

Not much additional working would be required as most of the computations can be drawn from the earlier alternative. This question deserves 20 marks.

2(a): This question on mergers and acquisitions tests students’ basic understanding of the topic.

A fairly simple question, it must have been attempted by almost all the students and would have taken less than 10 minutes to answer.

2(b): On valuation of business, this problem requires usage of probability, decision tree and applications of growth models. When earnings growth is indicated as occurring during the third, fourth and fifth years, it should normally be expressed in percentage. And this is to be applied on the previous year’s earnings. In more than two places, typographical errors have crept in.

Instead of 40% and 10%, the growth figures have appeared as 405 and 105, which must have given room for students to think that the growth figures have been given in rupee terms. However, the sequence of these numbers — 405 and 105 — indicates that there can be no growth at all. Not sure how many would have got the answer correct.

3(a): This is a problem on financial viability of a proposal involving investment overseas. A reference of withholding tax of 10 per cent is made to indicate TDS (tax deduction at source). Once again a technical jargon (withholding tax) is used. Else, the question should be considered simple.

3(b): In this problem on application of futures as a hedging tool, it is suspected that the BSE index on the day of hedging should have been 5000 or 5500 when it was shorted. The reason for doubt is that on the day of maturity the BSE index settled at 4500 within the three months period.

3(c): On foreign exchange and marginal costing, this problem is a good one deserving the eight marks it has been allotted.

4(a): This problem on bond valuation tests the students on the basics of the topic.

4(b): It appears the Institute has a penchant for questions on mergers and acquisition. The question however is a good one deserving the 14 marks. A total of 24 marks could have been secured if the students were thorough with this topic.

5(a): Though it is yet another problem on bond valuation, it deals with a different area, that is, on finding the forward rate. One wonders how many candidates would have attempted this question, as many may not have given a serious look at this area. A surprise question, indeed.

5(b): The simplest question in the entire paper, it requires finding out the price per share using Gordon’s model or constant dividend growth model.

5(c): This theory question on derivative, though welcome, must have come as a disappointment for those who had come prepared with the Black Scholes model.

6(a), (b) and (c): These theory questions are on expected lines.

6(d): On CAPM, this problem involves finding out beta of a portfolio. It also requires study of individual securities being overpriced or under-priced, leading to change in the composition of securities in the portfolio.

In sum, there has been a dilution in theory content. Options and mutual funds have not been covered.

The usual typographical errors persist. And some of the computational problems could have given the students anxious moments. However, the paper does have its share of challenging questions too.

Overall, the coverage of topics is good, giving scope for scoring high marks.

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