The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Mock Examinations
February 16, 2025
3 hours – 100 marks
Additional reading time - 15 minutes

Managerial & Financial Analysis

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only

Section A
Q.1 Select the most appropriate answer from the options available for each of the following Multiple-Choice
Questions.
1. …………… is the characteristic of fascist capitalism. (01)
(a) Open communication and free market. (c) Class less society.
(b) Full religious freedom. (d) Practice of violence.
2. USA and Pakistan are closest examples of: (01)
(a) Socialism. (c) Democratic socialism.
(b) Fascist capitalism. (d) Democratic capitalism.
3. Business can influence the government through: (01)
(a) Constituency building.
(b) Having an active marketing department.
(c) Paying taxes.
(d) None of the above.
4. In Tucker’s five-question model, the question "Is it right?" primarily considers: (02)
(a) Personal values. (c) Market values.
(b) Environment values. (d) Social Values.
5. All of the following are lagging indicators EXCEPT: (01)
(a) Interest rates. (c) Unemployment.
(b) GDP. (d) Balance of payment.
6. Market value of a firm calculated by multiplying the number of shares available for trade in stock
market by price per share is: (01)
(a) Free float market capitalization. (c) Market worth.
(b) Full cap market capitalization. (d) All of the above.
7. Inflation adjusted GDP is called as: (01)
(a) Normal GDP. (c) Nominal GDP.
(b) Real GDP. (d) None of the above.
8. A 6% debenture, with a nominal value of Rs 100 per debenture, is due to be redeemed in three years’
time at a discount of 7%. Interest is paid annually in arrears. Upon redemption, the debenture is
convertible into 25 ordinary shares, currently priced at Rs 3.45 per share cum dividend and dividend
of Rs 0.25 is about to be paid. Share price is expected to grow at 8% annually in the future. Investors
expect a yield of 7% and corporation tax is payable by the company at a rate of 25%.
What is the current market value of the debenture? (02)
(a) Rs 98. (c) Rs 96.
(b) Rs 93. (d) Rs100
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9. Ali Co has announced that it will pay an annual dividend equal to 55% of earnings. Its earnings per
share is Rs 0.80, and it has ten million shares in issue. The return on equity of Ali Co is 20% and its
current cum dividend share price is Rs 5.60. What is the cost of equity of Ali Co? (02)
(a) 19.4%. (c) 28.0%.
(b) 18.29%. (d) 22.7%.
10. Moeed Limited (ML) has an accounts receivables turnover of 12.5 times, an inventory turnover of 5
times and payables turnover of 7 times. What is ML’s cash operating cycle (assume 365 days in a
year)? (02)
(a) 70.38 days. (c) 42.50 days.
(b) 50.01 days. (d) 121.54 days.
11. Which of the following is a characteristic of a zero-coupon bond? (01)
(a) Investor return is gained through capital appreciation
(b) It can have only one annual interest payment.
(c) It is ideal for those investors who require a periodic return.
(d) It cannot be sold before its maturity date.

Q.2 Khan Limited (KL) manufactures and sells many products. Presented below is the information available on
two products Alpha & Gamma:
Product Alpha:
Alpha is the first product KL introduced in the market and carries strong brand value. When Alpha was
introduced, its market share quickly grew to 5% and has remained steady for a long time now. Its market
share is 8% less than the market leader. The overall market is growing by 3.8% year on year basis. Alpha
has impressive impact on KL business on overall basis.
Product Gamma:
Gamma has been consistently selling and enjoying high profits in the same market for quite some time now.
The annual market growth for this product is 6% and market share is 2.1% less than the only competitor in
the market.
Required:
For each of the products presented above:
(a) Identify the quadrant and explain the corresponding strategies from the perspective of Boston
Consulting Group (BCG) Model. (06)
(b) Highlight the relevant criticism of BCG Model and recommend future strategies accordingly.
(05)

Q.3 Basit Textile Limited (BTL) is a leading apparel manufacturing company in Pakistan. The company was
started in 2000 by Mr. Basit (CAF qualified). Initially the company was engaged in manufacturing of cloth.
Over the course of almost 25 years, the firm has integrated vertically and now it is operating its own
processing plant, finishing, stitching units. The new CEO is deciding to launch company operated outlets
with the name Libaas. In an effort to differentiate this retail brand from others, the CEO is thinking of
following initiatives:
(i) In-store food corner
In-store food corner will be offered where customers can sit, relax and order some snacks during the
shopping spree.
(ii) In-car buying option
In-car buying option will also be available for the customers who are uncomfortable with the crowded
places. Customers will be served catalogs in cars; the selected products will be fetched from the store
and customers can make final decision by paying in cash or through card in the comfort of their cars.
(iii) Drone-delivery system
Drone-delivery system to be launched for the customers ordering goods online.
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(iv) offer customized fabric designing service in-store

Apart from standardized apparel product, offer customized fabric designing service in-store. The desired
apparel will be manufactured and provided to customers within ten days of placing the order.
(v) Money back guarantee
Money back guarantee will be given. No apparel store in Pakistan offers money back guarantee. If a
customer returns within ten days of purchase of the product, it will be completely refunded without any
penalty (provided the fabric is not spoiled or washed).
Based on the scenario above, answer the following questions:
(a) Highlight primary value chain activities of Libaas. (06)
(b) Comment on at least two risks associated with these strategies. How these risks can have a negative
impact on performance of the BTL. (04)

Q.4 For each of the following scenarios identify the force of competition that may have an impact on industry
profitability. Clearly comment on the strength of the force mentioned along with supported arguments:
(a) Traditions is a leading apparel manufacturer in textile industry that is dominated by four major players.
The aggregate share of the market acquired by these players is over 85%. Due to the current socio-
economic situation in the country, the demand of high-end apparel is significantly declining, and it has
become challenging for the competitors to maintain their market position.
(b) ‘Care for All’ and ‘Life Matters’ are two pharmaceutical companies engaged in the manufacture of
medicines of treatment of a chronic disease. The companies have spent substantive R&D costs and the
medicines produced by these companies are highly effective. Due to Covid pandemic in the world,
demand for healthcare products have already increased and pharma companies are enjoying hefty profits.
(c) CarreSeven is a leading large scale retail company that targets consumers and small retailers. Different
fast moving consumer goods companies approach CarreSeven for shelf space and want their product to
be displayed at the outlet because of high customer traffic.
(d) In January 2020 world was hit by a global pandemic Covid-19 that affected the aviation industry across
the world. Airline companies operating internationally and domestically have to restrict their flight
operations and strict travel SOPs were implemented across the world. (08)

Q.5 You work as a Finance Manager at a manufacturing company. One fine day, you discover that your company
has been inaccurately recording certain expenses in their financial statements which are not allowed as per
IFRS. The CFO, who is also your immediate senior, instructs you to make these changes without informing
the external auditors. You are aware that this directive could potentially violate ethical standards and result
in misleading financial information being presented to stakeholders.
Required:
Using the American Accounting Association (AAA) model for ethical decision-making, outline the step-by-
step solution for addressing this scenario. (06)

Section B
Q.6 Galaxy Limited (GL) has the following financing structure at end of 2024 extracted from balance sheet
Rs.
Ordinary share Capital (Rs 10 per share) 900,000
Retained Earnings 725,000
Bank loan from Moon Bank at 14% 700,000
15% redeemable debentures (Rs 100 per debenture) 1,880,000
14% irredeemable preference shares (Rs 100 per share) 1,950,000
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Other information
(i) Market value of ir-redeemable preference share is Rs.103 per share and Tax Rate of GL is 30%
(ii) Current equity beta of GL is 1.15
(iii) Market value per debenture is Rs 109 and these shall be redeemed at premium of 12% at end of
2027.
(iv) The return on government securities is 14% p.a whereas market risk premium is 6% per annum
(v) Ordinary dividend history of GL for last 5 years is as follows:
Year 2020 2021 2022 2023 2024
Ordinary dividend Per share (Rs) 14.88 16 17.5 19 21
GL is considering to investment in a new project in Lahore which requires investment of Rs 5,000,000 and
would be financed through 18% redeemable bonds (Par value Rs 100) and redeemable at discount of 3%
after three years. Issuance of bonds and new project initiation would result in following
• Increase in equity beta of GL by 12%.
• Dividend of next year will increase by 15%
• Growth rate in dividend after next year will be 12%
Required:
(i) Compute GL’s weighted average cost of capital (WACC) of the existing business. (07)
(ii) Revised WACC if New Project is undertaken. (04)
(iii) Discuss any three factors that GL may need to consider before deciding on whether to finance the
expansion by issuing shares or debt. (03)

Q.7 (a) Sun Limited (SL) is engaged in manufacturing and selling consumer products. SL procures the material from
Australia. The management of SL is concerned over high volatility in foreign exchange rates. The payment
of AD (Australian Dollar) 250,000 to a supplier is expected in three months’ time and management is
considering to hedge the foreign exchange risk.
SL’s bank has quoted the following exchange rates and annual interest rates:
AD 1
Buy Sell
Spot [Rs] 226.6 227.8
1 month forward [Rs] 230.5 231.1
3 months forward [Rs] 234.6 235.2

Deposit Borrowings
Interest rates
--- Rate per annum ---
In AD (1 month) 10.2% 13.2%
In AD (3 months) 10.5% 13.6%
In PKR (1 months) 12.80% 16.30%
In PKR (3 months) 13.10% 16.50%
Required:
Determine which of the following options would be more beneficial for SL:
(i) Hedging through forward contract
(ii) Hedging through money market (06)
(b) Star Trading enterprise (STE) intends to borrow Rs. 50 million in one month’s time for a period of 6 months.
Being concerned about the volatility in the KIBOR rate, STE has taken out a borrower’s option with a strike
rate of 22% for a notional 6-month loan of Rs. 50 million. The option will expire in one month’s time. The
option premium is the equivalent of 0.7% per annum of the notional principal.
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The current and the expected KIBOR rates are as under:
Current Kibor Expected KIBOR in 1 month’s time
1-month KIBOR 20.5% 23.0%
6-month KIBOR 21.5% 24.5%

Required:
Determine whether the option would be exercised. Also calculate the net effective interest rate. (04)

Q.8 Earth Limited (EL) produces and sells Electric Motor of Electric Bikes in Pakistan. It is planning to introduce
new type of Electric Motor (Saver 1) for the local market. Following information has been gathered in this
respect:
(i) Initial investment in the new plant for manufacturing o f S a v e r 1 would be Rs. 1000 million
including installation and commissioning of the plant.
(ii) The plant would be depreciated at the rate of 25% under the reducing balance method. The one of the
associated undertaking has offered to purchase the plant for Rs. 205 million (at current prices) at the
end of 4th year.
(iii) Applicable tax rate is 30% and tax would be payable / refundable in the next year to which it arises.
(iv) The plant would be installed in a premises owned by EL which has been currently rented out at Rs.
20 million per annum. Annual fixed cost (excluding depreciation and insurance) is estimated to be
Rs. 50 million.
(v) EL estimates immediate working capital requirements to be Rs. 24 million.
(vi) EL estimates to produce 100,000 Saver 1 in first year. Sales volume is expected to increase by 10%
per annum. Contribution margin is estimated to be Rs. 5,150 per unit of Saver 1.
(vii) EL would have to incur dismantling costs of Rs. 18 million (at current prices) at the end of 4th year.
(viii) An overall increase of 14%, including all elements, in the working capital requirement is anticipated
at the start of each year. However, only 60% of the total working capital is expected to be realised
at the project’s end. The remaining balance would be written off at the end of year 4th Year.
(ix) Insurance of plant will have to be paid at start of year. Insurance of year 1 is Rs 15 million and that
is expected to decrease by Rs.2 million each year
(x) All revenues and costs are quoted on today's rate and are expected to remain the same in the first
year. Thereafter, the estimated annual inflation of 12% would be applicable on all future revenues
and costs.
(xi) EL’s real cost of capital is 15% and general inflation in economy is 10%.
Required:
By using the net present value method, recommend whether EL should launch Saver 1. (Assume that all cash
flows arise at the end of each year unless otherwise specified) (16)

Q.9 Universe Merchandising Company is in the process of assembling a cash budget. The following
budgeted information for August, September, and October 2025 has been extracted from the company's
accounting records:
August September October
Sales 490,000 550,000 645,000
Manufacturing costs 240,000 245,000 260,000
Admin and selling expenses 158,000 165,000 175,000
Capital expenditure 95,000
Other information is as follows:
(i) The company expects to sell about 10% of its sales for cash. Past experience indicates that 60% of
sales on account are expected to be collected in full in the month of sale, and the remainder in the
following month. It is estimated that 80% of the manufacturing costs are expected to be paid in
the month in which they are incurred and the balance in the following month.
(ii) Assets as of August 01, 2025 include cash of Rs. 55,000 and accounts receivable of Rs. 151,200 from
July sales.
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(iii) Current liabilities as of August 01, 2025 include Rs. 45,000 three months note payable, bearing annual
interest rate of 12% due on October 20, 2025 and Rs. 60,000 of accounts payable incurred in
July for manufacturing costs.
(iv) All selling and administrative expenses are paid in cash in the month in which they are incurred.
(v) It is expected that dividend of Rs. 1,500 will be received in August.
(vi) An estimated income tax payment of Rs. 42,000 will be made in September.
(vii) Universe's regular quarterly dividend of Rs. 15,000 is expected to be declared in September and
paid in October.
(viii) Management desires to maintain a minimum cash balance of Rs. 154,200.
(ix) Borrowings are made at the end of the month on which bank charges 12% interest per annum.
Repayments are also made at the end of the month as excess cash permits.
Required:
The Controller of Universe Merchandising Company asked you to prepare a cash budget for the
month of August, September and October 2025. (10)

(THE END)