ACTUARIAL SOCIETY OF INDIA

EXAMINATIONS: MAY 2002

S U B J E C T 108 - : F I N A N C E A N D F I N A N C I A L R E P O R T I N G
Time allowed 3 Hours

Maximum Marks: 100

Instruction to the Candidate;

1.
2.
3.
4.

Do not write your name anywhere in the answer sheets.

Fasten your sheets together in the numerical order of the Questions.
Begin your answer to each question on a separate sheet of paper. Otherwise you may lose
marks.
At the end of the examination, HAND in BOTH your ANSWER BOOK & this QUESTION
PAPER.
The question paper will be returned to you subsequently.

Directions:

For questions 1 to 25 indicate which one of the answers A, B, C, D or E is correct. Summarise all the
answers in a single sheet. Each question carries 2 marks.

Q.1
A.
B.
C.
D.
E.

When a firm announces a two-for-one scrip issue investors should expect that, (in
the absence of other new information):
earnings per share will fall but the stock price will remain the same
the stock price will fall but the earnings per share will remain the same
both the earnings per share and the stock price will remain the same
both the earnings per share and the stock price will fall
None of the above

A.
B.
C.
D.
E.

The market price of Rs 10,000 nominal 10% convertible loan stock is Rs 15,000. The
conversion terms are 25 shares for every 10,000 nominal value of the loan stock.
What is the conversion premium per share if the market price of Rs 100 nominal
ordinary shares is Rs 550?
Rs 40
Rs 50
Rs 120
Rs 150
Rs 7,500

A.
B.
C.
D.
E.

The nominal value of a bond is received by the bondholder:

at the time of purchase
annually
whenever coupon payments are made
D at maturity
at the time of selling

Q.2

Q.3

Q.4
A.
B.
C.
D.
E.
Q.5

Which of the following would be the most likely outcome of a one percent decrease
in interest rates?
the value of a low coupon bond would increase by more than the value of a high
coupon bond with the same maturity
the value of a low coupon bond would increase by less than the value of a high
coupon bond with the same maturity
the value of a low coupon bond would decrease by more than the value of a high
coupon bond with the same maturity
the value of a low coupon bond would decrease by less than the value of a high
coupon bond with the same maturity
A and C above

D.
E.

What is the main purpose of charging depreciation in the accounts of a business?

to ensure that funds are available for the eventual replacement of the asset
to reduce the cost of the asset in the balance sheet to its estimated market value
to allocate the cost of the fixed asset over the accounting periods expected to benefit
from its use
to comply with the prudence concept
A and B above

A.
B.

Which of the following would normally be included in the calculation of gearing:

debenture loans
preference shares

A.
B.
C.

Q.6

C.
D.
E.

bank overdraft
All the above
A and B above

A.
B.
C.
D.
E.

The net present value method of capital budgeting assumes that cash flows are
reinvested at:
the firms cost of capital
B the firms dividend yield
no rate - they are not reinvested
the rate of return of the project
None of the above

A.
B.
C.
D.
E.

The payback method can lead to the wrong decisio n being made because:
it ignores income beyond the payback period
the payback period is difficult to calculate
the returns in later years are uncertain
of the emphasis placed on the interest factor
B and C above

A.
B.
C.
D.
E.

Which one of the following would be considered better for cash management in a
manufacturing company.
press debtors for prompter payment
pay creditors more quickly
encourage sales staff to sell more
delay the acquisition of a piece of manufacturing equipment
C and D above

A.
B.
C.
D.
E.

Which of the following is not a method for listing?

an offer for sale
a scrip issue
an offer for subscription
an introduction
None of the above

A.
B.
C.
D.
E.

Which of the following is not a method of short term financing for a manufacturing
company?
commercial paper
bill of exchange
factoring
leasing
B and C above

A.
B.
C.
D.
E.

Which of the following is a direct consequence of a fall in a companys share price?

an increase in interest cover
a decrease in net asset yield
an increase in dividend yield
A and B above
B and C above

Q.7

Q.8

Q.9

Q.10

Q.11

Q.12

Q.13
A.
B.
C.
D.
E.

Participating preference shareholders

must have their dividend paid if the Company makes profits
receive additional dividends once the Companys profits exceed a certain amount
have voting rights if their dividend is unpaid
A and B above
B and C above

A.
B.
C.
D.
E.

Which of the following would not be included in a firms capital structure?

retained earnings
dividends
capital surplus
convertible debentures
None of the above

A.
B.
C.
D.
E.

Which of the following best describes the effects of increased risk in a project
evaluation?
The IRR increases and the net present value increases.
The discount rate increases and the net present value decreases.
The discount rate remains constant, but the net present value decreases.
The discount rate decreases and the net present value decreases.
None of the above

Q.14

Q.15

Q.16

B.
C.
D.
E.

Which of the following is not true for a finance lease?

The lease agreement has a primary period which covers all or most of the useful
economic life of the asset.
The lessee is normally responsible for servicing and maintenance of the asset.
The lease payments will appear in the profit and loss account as an expense.
The lessee records the leased asset as a fixed asset in its balance sheet.
B and D above

A.
B.
C.
D.
E.

Which of the following are true of the underwriting process in the issue of shares?
share issues must be underwritten
the underwriters profit depends on the success of the issue
underwriters may become the owners of a substantial proportion of the issue
A and B above
B and C above

A.
B.
C.
D.
E.

Which of the following are recognised characteristics of swaps?

They allow institutions to change the nature of their assets and liabilities
negative for one party and slightly positive for the other
They enable both parties to reduce their operational risks
A and B above
B and C above

A.
B.
C.
D.
E.

Which of the following are true of price limits in the futures markets?
they are set in relation to the fundamentals of the underlying assets
they protect the clearing house from excessive credit risk
the market must close if the future price falls outside of the price limits
A and B above
B and C above

A.

Q.17

Q.18

Q.19

Q.20
A.
B.
C.
D.
E.

Eurobonds are:
bearer documents
denominated in a Euro
issued by European companies and governments
A and B above
B and C above

A.
B.
C.
D.
E.

A companys profit for corporation tax purposes is different from its profit for
accounting purposes. Which of the following could account for this?
depreciation is not allowed as an expense for tax purposes
taxable profit is calculated for the tax year and not the accounting year
taxable profit is calculated on a totally different basis from accounting Profit
A and B above
B and C above

Q.21

Q.22
A.
B.
C.
D.
E.
Q.23

When one company purchases another, goodwill may arise. Which of the following
statements about goodwill are TRUE?
Goodwill will normally arise when one company owns at least 20% of the shares of
another company.
Goodwill may be included in the balance sheet and written off over its useful life.
Goodwill represents the excess of the value paid for a subsidiary company over the
value of the share of assets acquired.
B and C above
All the above

B.
C.
D.
E.

Assume the current corporation tax rate is 35%. Which of the following items may
have contributed for a company receiving a tax assessment which was lower than
35%?
capital allowances available on fixed assets are greater than depreciation charged by
the company
receipt of un- franked investment income
entertaining expenses which are disallowed for tax
A and B above
All the above

A.
B.
C.
D.
E.

If X = (Current assets Stocks) / (Current liabilities), X is known as

Quick ratio
Acid test
Current ratio
A and B above
B and C above

A.
B.
C.
D.
E.

Where would revaluation reserves normally appear in company accounts

under fixed assets
under current assets
under creditors
A or B above
none of the above

A.

Q.24

Q.25

Q.26

Describe the role life insurance offices play in the investment markets.

[6]

Q.27

Describe briefly the main factors affecting the yield curve.

[6]

Q.28

Briefly describe the shortcomings of historic cost accounting during inflationary

periods.

[6]

Q.29

Q.30

A large long established manufacturing company is expanding and the directors are
keen to identify new ways in which they might obtain the necessary finance. The
company has borrowed very heavily in the past and the company's existing loan
agreements require it to seek the permission of existing lenders before obtaining
further debt.
The family of the companys founders owns most of the companys share capital. It is
unlikely that these investors will be able to invest the sums required to take advantage
of the opportunities that the directors have identified. The company is not listed. It
has been suggested that the company might seek a stock exchange quotation.
(i) Explain the advantages and disadvantages of issuing fresh share capital for the
[8]
company.
(ii) Assuming that the company obtains a quotation, identify the most appropriate method
by which the company might issue fresh share capital and describe the steps that are
involved.
[8]
[Total Marks 16]
The following information has been extracted from the financial statements of XYZ:
Extract from Trial balance as at 31 March 1999
Bank overdraft
Creditors
Debtors
Factory- cost
Factory- depreciation
Interest paid
Loan capital
Machinery- cost
Machinery- depreciation
Profit as at 1 July 1998
Purchases
Rates and insurance- factory
Rent, rates and insurance- office
Sales
Share capital
Stock as at 1 July 1998
Vehicles- cost
Vehicles- depreciation
Wages- administrative staff
Wages- delivery driver
Wages- manufacturing

3
26
70
290
22
60
300
290
80
83
220
17
12
600
100
8
220
70
21
14
62

Notes:
(1) Closing stock at the year end was valued at Rs 9,000.
(2) Depreciation is to be charged on the following basis:
Factory: 2% of cost.
Vehicles: 25% of reducing balance.
Machinery: 10% of cost.
(3) The payments made during the year include Rs 2,000 for factory insurance for the
year to 31 March 2000.
(4) The directors have decided to pay a dividend of Rs 80,000 for the year.
(5) The corporation tax charge has been estimated at Rs 22,000 for the year.
Prepare XYZs profit and loss account for the year ended 31 March 1999 and its
balance sheet as at that date, clearly showing the working.
[16]