Special Studies in Finance Prelims 2012

SPECIAL STUDIES IN FINANCE

N.B.: 1) Section I is compulsory. (60 marks)
2) In Section II solve any 3 out of 4 questions. 2hrs.

Section I
1. Concepts (5)
(a) Segment Reporting
(b) Sweat Equity
(c) Wealth Maximization
(d) Non-monitory items as per Accounting standard (AS) – 11.
(e) Return on Investment.

2. (A) Case study.
Answer the following questions with the help of the following. (15)
Greenland Ltd is an extending business set up having sales turnover of Rs. 3 Crores. It wants to double its turnover in the coming years and is very confident of achieving the same. The company produces and sells a basic drug component, being the raw material for OTC (over the counter) medicines.
The firm was set up 5 years ago, as partnership firm, but converted itself into a company 2 years ago. The current capital employed of the company is totally debt free at Rs. 2 crores and hopes to raise it to Rs. 4.5 crores, the term loan applied for being Rs. 2 crores.
The term lending institution offers the loan for 5 years tenure @ rate of 10% p.a. being advance towards purchase of additional to the primary security.
The company has its establishment at Silvasa which enjoys an 8 years tax holiday from the date of inception. Depreciation on new machinery is estimated at Rs. 40 lacs p.a. The average Tax applicable to a company is 30%. Expected ROI @ 18% p.a. for years 1 to 3 years after inception and 22% p.a. thereafter.
(a) Prepare a Flash Report of Greenland Ltd.
(b) Prepare Statement of Profitability and DSCR for the tenure of the loan.
(c) Comment on the viability of the project in brief.

(B) Solve any 2 from the following: (10)
(i) Explain the term financial assets as per accounting standards 31.

(ii) From the following information, compute EVA of TCS Ltd. (Assume 35% tax rate)
• Equity Share Capital ` 1,000 lakhs
• 12% Debentures ` 500 lakhs
• Cost of equity is 20%
• Financial leverage is 1.5 times.

(iii) Vijay Ltd. Is considering a project with an initial outlay of ` 1,00,000 comprising of machinery worth ` 75,000 and balance towards, working capital exclusively for this project ` 25,000. The entire amount can be borrowed at a rate of 12% p.a. The machinery can be used for 5 yrs at the end of which there is salvage value of ` 10,000. It can be assumed that the machinery is depreciated on SLM basis @20% p.a. for tax purpose. The tax rate assumes to be 35%. Evaluate whether the project is viable under NPV method. Also calculate the pay- back period and briefly recommend for the project given the following annual sales and expenses. Annual Sales – ` 2,00,000. Expenses excluding depreciation ` 20,000.
Section II
(Any 3, 10marks each)
3. What is Lease Financing? Write advantages and limitations of Lease Financing?

4. PQR Ltd. has purchased a machine (cash price ` 1,09,737) on hire purchase system from HP Ltd. on 1-1-2010. The term are that PQR Ltd. would pay ` 40,000 as down payment on signing of the agreement and 4 annual equated instalment of ` 22,000 each including interest @10% commencing from the beginning of the next year. PQR ltd. charged depreciation @20% p.a. on WDV method in their Hire purchase contract. Prepare Journal Entries, Machinery account and HP Ltd. account for first 2 years in the book of PQR Ltd.

5. Manthan Ltd. Imported goods from Mayur company worth US$ 5 lakhs on 1 – 8 – 2009 when exchange rate was US$ 1 = ` 42.90. He agreed to pay in 5 instalments as below:
Date Instalments (US$) Rate of Exchange (`)
10-10-2009 75,000 42.75
10-12-2009 1,50,000 43.50
10-2-2010 60,000 44.80
10-4-2010 75,000 42.90
10-6-2010 Balance 43.00
The rate of exchange was ` 43.00 as on 31-3-2010. Pass journal entries (including those for cash) in the books of Mayur in accordance with AS-11.

6. (a) XYZ Ltd has provided depreciation as per accounting records ` 20 lakhs but as per tax records ` 40 lakhs. The unamortized preliminary expenses, as per tax records are ` 10, 000. There is adequate evidence of future profit sufficiency. Tax rate 30%. How much deferred tax asset /liability should be recognised as transition adjustment as per AS – 22? (5)

(b) ABC Ltd. IPO opened on 6th October & closed on 8th October- Company issued 20 crore shares in the price band 1200-1300. Public applied for 200 crore shares. The BRLM J.P. Morgan in consultation with company announced issue price ` 1250. Average Price of application receive is ` 1270. Pass necessary journal entries in books of coal India Ltd. Refund and Allotment of shares of face value of ` 10 were done on 20th Oct. 2011. (5)

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