CMA JANUARY 2024 EXAMINATION

ADVANCED LEVEL I
CORPORATE FINANCIAL STRATEGY & FINANCIAL MARKET

Course Code : EF343 Total Marks : 100

Reading Time : 15 minutes Writing Time : 180 minutes

Instructions to Candidates
 You MUST NOT write anything during the reading time.
 There are 5 (five) questions.
 You should attempt ALL questions.
 Answers should be properly structured and relevant.
 Show all relevant computation.
 Carefully read ALL the requirements and sub-questions before attempting a specific
question.
 ALL answers must be written in the answer book.
 AVOID WRITING/MARKING on the question paper at any time which may cause
disciplinary action.
 Start answering each question from a fresh sheet.
 Answers should be clearly numbered with the sub-question number.

Allowable Materials
 Writing Stationaries
 Non-programmable Calculator

Assessment Structure

Expected
Sub-
Marks Time
question
Required
Question 1 Essay/Computational/Case 3 20 35 minutes
Question 2 Essay/Computational/Case 3 20 35 minutes
Question 3 Essay/Computational/Case 3 20 35 minutes
Question 4 Essay/Computational/Case 4 20 35 minutes
Question 5 Essay/Computational/Case 4 20 35 minutes
Revision 5 minutes
Total 100 180 minutes

RESTRICTED USE
This paper MUST NOT BE REMOVED from the examination venue

Do not turn the page until instructed

QUESTION 1
(a) Superior Plc is in the FMCG industry and has been in the industry for a long time. The
business is well established and currently do not have profitable investment
opportunities at their disposal. The CFO thinks that the shareholders deserve a high
payout and proposes the board of directors (BOD) to declare a dividend of Tk. 10 per
share, which is 50% of earnings per share. However, the Chairman is in the view that
the company should look for new investment opportunity; may acquire a small
company with promising growth potential. Further, he claims that the acquisition shall
be made using debt capital instead using equity capital. CFO however does not agree
with the chairman claiming that the shareholders will not be happy with lower dividend
payments since most of the investors are above 60 years old. He has collected this
information from the research conducted by the market research section of the
company.
Required:
Based on the scenario given in this mini case, identify the potential elements of
financial strategy. Discuss the arguments of both CFO and Chairman of Superior Plc
using your knowledge on corporate finance.
(b) Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing.
Because of this, the company’s profits are driven by the amount of work Tom does. If
he works 40 hours each week, the company’s EBIT will be Tk. 475,000 per year;
however, if he works 50hourseach week, the company’s EBIT will be Tk. 560,000 per
year. The company is currently worth Tk. 2.9 million. The company needs a cash
infusion of Tk. 1.2 million, and it can issue equity or debt with an interest rate of 8
percent p.a. Assume there are no corporate taxes.
Required:
(i) What are the cash flows to Tom under each scenario?
(ii) Under which form of financing is Tom likely to work harder?
(iii) What specific new costs will occur with each form of financing?
(c) ABC is considering a large-scale recapitalization. Currently, ABC is financed with 25%
debt and 75% equity. ABC is considering increasing its level of debt until it is financed
with 60% debt and 40% equity. The beta on its common stock at the current level of
debt is 1.5, the risk-free rate is 6%, the market risk premium is 4%, and ABC faces a
40% corporate tax rate.
Required:
(i) What is ABC’s current cost of equity?
(ii) What is ABC’s unlevered beta?
(iii) What will be the new beta and new cost of equity if ABC recapitalizes?
[Marks: 5+ (3+3+2) +(2+2+3) = 20]
QUESTION 2
(a) Define Market portfolios. Why can we say that the beta of an asset should be
measured in relation to the market portfolio?
(b) GENXIL is a stock listed in Dhaka Stock Exchange. You are given monthly return data
of Stock GENXIL and DSE broad index in the table presented below:
Month GENXIL DSE Broad Index
1 9.43 7.41
2 0.00 -5.33
3 -4.31 -7.35
4 -18.92 -14.64
5 -6.67 1.58
6 26.57 15.19
7 20.00 5.11
8 2.93 0.76
9 5.25 -0.97
10 21.45 10.44
11 23.13 17.47
12 32.83 20.15

CMA January 2024 Examination, EF343 [Page 2 of 4]

 Required:
(i) Calculate beta of GENXIL stock and interpret the result.
(ii) Suppose DSE broad index is expected to move up by 7 % percent next month.
How much return would you expect from GENXIL.
(c) Seeler Muller wishes to borrow 300 million euros for five years at a floating rate to
finance an investment project in Germany. The cheapest rate at which it can raise such
a loan is Euro LIBOR + 0.75%.
The company's bankers have suggested that one of their client companies, Overath
Maier, would be interested in a swap arrangement. This company needs a fixed
interest loan at €300 million. The cheapest rate at which it can arrange the loan is
10.5% per annum. It could, however, borrow in euros at the floating rate of euro LIBOR
+ 1.5%.
Seeler Muller can issue a fixed interest five-year bond at 9% per annum interest. The
banker would charge a swap arrangement fee of 0.15% per year to both parties.
Required:
You are required to devise a swap by which both parties can benefit.
[Marks: 3 + (3+7) + 7 = 20]
QUESTION 3
(a) Tatar Company is being acquired by Vison company on a share exchange basis. CEO
of the vision company thinks that shareholders always look for the earning per share.
Therefore, he would like to offer shares of vision company to the shareholder Tatar
company in such ratio that will not dilute Earnings Per Share of the acquiring company.
The data for the two companies are as given below:
Vision Company Tatar Company
Profit after tax (Tk. in Lakh) 56 21
Number of Shares(lakh) 10 8.4
Earnings Per Share (Tk.) 5.6 2.5
Price Earnings Ratio 12.5 7.5
(i) What is the pre-merger market value per share and maximum exchange ratio that
vision company should offer without dilution of EPS. What is the post-merger
market value per share if price earnings ratio of vision company falls to 11 after
the merger?
(ii) The forecast of Vision company show that the acquisition would increase its
annual after tax cashflows by Tk. 60,000 indefinitely. The appropriate discount
rate for the incremental cash flow is 8 percent. What is the value of synergy?
What is the maximum exchange ratio that vision company should offer without
dilution of EPS?
(b) As a firm operating in a mature industry, Arbot Industries is expected to maintain a
constant dividend payout ratio and constant growth rate of earnings for the foreseeable
future. Earnings were Tk. 4.50 per share in the recently completed fiscal year. The
dividend payout ratio has been a constant 55 percent in recent years and is expected
to remain so. Arbot’s return on equity (ROE) is expected to remain at 10 percent in the
future, and you require an 11 percent return on the stock.
(i) Using the constant growth dividend discount model, calculate the current value of
Arbot common stock. Show your calculations.
(ii) After an aggressive acquisition and marketing program, it now appears that
Arbot’s earnings per share and ROE will grow rapidly over the nexttwo years. You
are aware that the dividend discount model can be useful in estimating the value
of common stock even when the assumption of constant growth does not apply.
Calculate the current value of Arbot’s common stock using the dividend discount
model assuming Arbot’s dividend will grow at a 15 percent rate for the next two
years, returning in the third year to the historical growth rate and continuing to
grow at the historical rate for the foreseeable future. Show your calculations.

CMA January 2024 Examination, EF343 [Page 3 of 4]

(c) Summit corp’s stock is currently selling at Tk. 32 per share. There are 1 million shares
outstanding. The firm is planning to raise Tk.2 million to finance a new project. Two
shares of outstanding stock are entitled to purchase one additional share of the new
issue.
(i) What is the ex-rights stock price, the value of the right and the appropriate
subscription prices?
(ii) Why might a company have rights offering rather than a general cash offer?

[Marks: (5+5) + (3+3) + (2+2) = 20]

QUESTION 4
(a) What does financial intermediation mean? What are the different roles of financial
intermediaries in financial market system?
(b) “While no single bank can lend out more than its excess reserves, the entire banking
system can create multiple volume of deposit money through bank lending” Explain this
statement in the light of credit creation process.
(c) What advice would you give to the central bank on the appropriate monetary policy to
follow at the present time? Your answer must specify the current state of the economy
and the goals and targets you think the central bank should follow. You must present
the impact of your suggested policy on output, inflation, and interest rates.
(d) There are various strategies that are used by the investors and traders to take specific
positions on underlying asset’s price movements and manage risk. Butterfly spread
and seagull spread are among them. These strategies involve different options. Explain
the terms butterfly spread and seagull spread with those options.
[Marks: (4+4+6+6) = 20]
QUESTION 5
(a) The New Pioneer closed-end fund has Tk. 140 million in securities, Tk. 5 million in
liabilities, and 10 million units outstanding. It trades at a 15 percent discount from net
asset value (NAV).
(i) What is the net asset value and current price of the fund?
(ii) Suggest reasons why the fund may be trading at a discount from net asset value.
(iii) if New Pioneer converted to an open-end fund trading at its net asset value with a
6 percent load (commission), what would its purchase price be? What is the
difference between load fund and no-load fund?
(b) During August 2023, the economy of Bangladesh has experienced 9.92% inflation.
During the same month six month moving average rate of treasury bill (SMART) was
7.14%.
(i) If the SMART rate is considered as risk free rate, what is the real rate of return of
the economy?
(ii) A stock in DSE has beta value of 1.1 and market return is 8%. Compute required
rate of return from the stock.
(c) Suffolk ltd negotiated a forward contract to purchase US$ 200,000 in 90 days. The 90
days forward rate was Tk. 115 per US$. The purchased dollars would be used to
procure US supplies. On the day when the dollars were delivered in accordance with
the forward contract, the spot rate was Tk. 113 per US$.
(i) What was the real cost of hedging the payables for this Bangladesh Company?
(ii) If the hedging is expected to be more costly than not hedging, why would a firm
even consider hedging?
(iii) What were the other options that Suffolk ltd had to hedge the foreign exchange
risk? Explain in brief.
(d) Who are Depository Participants? Briefly mention functions and operational activities of
CDBL.
[Marks: (2+2+2)+(2+2)+(2+2+2)+4 = 20]

END OF QUESTION

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