SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

1 of 8

Marks
Question No. 1
(a) Current value per share of equity of Fast & Furious Company using FCF method:
=

Rs. 000
Free cash flows (1 + growth rate) (K g)

4,920 (W-1) (1 + 0.015) (0.11 0.015(W-2))

=
=

52,566
52,566 30,000

22,566

No. of shares

1,000,000 shares

Equity value per share

=
=

Rs. 22,566,315 1,000,000

Rs. 22.57 per share

Total value

Equity Value

Rs. 000

W-1
Free cash flows:
Profit before interest and tax (PBIT)

6,500

Non-cash items

5,500

(5,000)
(2,080)

4,920

Cash investment
TAX
Free cash flow (FCF)

W-2: Growth rate calculation:Past growth rate

=
(latest PBIT Earliest PBIT)1/no of periods of growth -1

Future g

(6,500 4,875)1/4 -1

0.0745

=
=

0.0745 0.20
0.015

(b) (i) Cash Offer:

Percentage gain in value to Fast
& Furious Company

=
=

Share price offered - equity value per share

equity value per share

Rs.24 Rs.22.57
Rs.22.57

100

6.34%

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

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Marks
Percentage gain in value to Frantic Company:
Additional post-acquisition
earnings

Rs. 2,380,000 + Rs. 450,000 = Rs. 2,830,000

Additional earnings per share

Rs. 2,830,000 5,000,000

Re. 0.566 per share

Increase in share price

15 Re. 0.566

Additional value created

Cost of acquisition
Value added for Frantic Co.

Gain in value per share

= Rs.8.49

Rs. 8.49 5,000,000

= Rs. 42,450,000

Rs. 24 1,000,000

= Rs. 24,000,000

Rs. 42,450,000 Rs. 24,000,000

Rs. 18,450,000

Rs. 18,450,000 5,000,000

Rs. 3.69 per share

Rs. 3.69 Rs. 35

10.54%

(ii) Share-for-Share Offer:

Earnings of the combined company =

Rs. 12,000,000 + Rs. 2,830,000

Rs. 14,830,000

Total no. of shares

5 million + (1 million )

EPS of combined company

Rs. 14,830,000 5,750,000 = 2.58 per share

Expected share price using P/E

Rs. 2.58 15

Gain in value to Frantic Company

shareholder

=
=

Current value of 4 shares in Fast & =

Furious Company
Gain in value to a shareholder of
Fast & Furious Company

=
=

= 5,750,000

= Rs. 38.7

(Rs. 38.7 Rs. 35) Rs. 35

10.57%
Rs. 22.57 4

= Rs. 90.28

(Rs.38.7x3 ) Rs.90.28

Rs.90.28

29%

(c) Fast & Furious Company shareholders would accept share-for-share exchange offer as it give
them gain of 29%. Frantic Company shareholders would accept both offers as the gain is
approximately equal in both the cases. So, both the company shareholders would agree on
share-for-share exchange offer.

(d) (i) Value of follow-on product without considering the option to delay:
Rupees
Present value of cash inflows
Present value of option cost
Net present value of the product

4,800,000
(4,060,000)
740,000

Based on NPV, without considering the option to delay, the project would increase the value
of Fast & Furious Company by Rs. 740,000.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

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Marks
(ii) Value of the option to delay
ln

d1

[rRF (0.5 2 ) 2]
t

ln

d1

P
X

4,800
5,000

[0.07 (0.5 0.40 2 ) 2]

3
0.40

d2

N(0.46)
N(-0.11)

=
=

0.5 + 0.1772
0.5 0.0438

0.458

0.458 (0.40 x 2 )

0.108

=
=

0.6772
0.4562

1
1

=
4,800,000 0.6772 5,000,000 0.4562 e (0.07 2)
=
3,250,560 1,983,006
=
1,267,554
This project increases the value of Fast & Furious company by Rs.1,267,554 or Rs.1.2676
per share (Rs.1,267,554 1,000,000). In percentage terms this shows an increase of about
6% (Rs.1.2676 Rs.22.57).
Value of option

(e) The follow-on product has been treated separately from the takeover. If Fast & Furious
Company ask Frantic Company to consider this in takeover offer then the return to a Fast &
Furious Company shareholder would be:
% gain through share-for-share exchange offer
% gain through follow-on product
Total

29%
6%
35%

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

4 of 8

Marks
Question No. 2
Shamim Mobile Company
Forecasted Statement of Profit or Loss
June 30, 2017
Rupees
Sales (1.15 x sales 2016)
Cost of sales (1.15 x cost of sales 2016)
Earnings before interest and taxes
Interest
Earnings before taxes
Taxes (32%)
Net Income
Dividend (50%)
Addition to retained earning

49,852,500
45,770,000
4,082,500
585,000
3,497,500
1,119,200
2,378,300
1,189,150
1,189,150

1
1

Shamim Mobile Company

Statement of Financial Position
June 30, 2017
Rupees
Assets:
Cash
Trade receivables
Inventories
Total Current assets
Net non-current assets
Total assets
Liabilities and Equity:
Trade payable
Accruals
Notes payable (balancing figure)
Long-term debt
Share capital
Retained earnings
Total liabilities and equity

2,737,000
7,866,000
2,921,000
13,524,000
19,205,000
32,729,000

5,244,000
3,289,000
3,526,850
12,059,850
4,290,000
7,600,000
8,779,150
32,729,000

Additional Funds Needed (AFN) = Rs.3,526,850 - Rs.1,560,000 = Rs. 1,966,850

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

5 of 8

Marks
Question No. 3
(a) Conversion Price:
EPS
P/E Ratio
Price per share
Premium 25%
Conversion price

Rupees
5
12
60
15
75

1
1
1

Face value per debenture

Conversion price
Share per debenture

Rupees
1,000
75
13.33

(b) Conversion Ratio:

(c) Value of Straight Bond:

Value of Bond = (1,000 x 8.75% 2) x 12.462 + 1,000 x 0.377

= Rs.545 + Rs.377

= Rs. 922

(d) Premium:

Rupees
Observations
1
2
3
4
Market Price per share
50
55
45
50
Market price of Convertible Debentures 1,250 1,400 1,100 1,050
Conversion value
667
733
600
667
Premium-over-conversion value
583
667
500
383
Value of bond
922
922
922
922
Premium-over-bond value
328
478
178
128
OR
1 +
1 + 1
+ 1 +

5
39
950
520
430
922
28
1

1
1
1
1
5

Question No. 4
(a) Profit available for dividend under existing capital structure:
Rs. 000
Earnings before interest and tax (EBIT)
Taxes @ 32%
Net profit after tax available for dividend

130,000
41,600
88,400

Profit available for dividend under proposed capital structure:

Rs. 000
Profit before tax
Interest (Rs. 250 million x 5%)
Taxes @ 32%
Net profit after tax available for dividend

130,000
12,500
117,500
37,600
79,900

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

1
1

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

6 of 8

Marks
(b) Value of the company under existing capital structure:
g

u
VE

VE

VD(1 t)

g
u
VE
VD
t

= equity beta
= asset beta
= proportion of equity in capital structure
= proportion of debt in capital structure
= corporate tax

Where:

Putting given value

1.1
=

1.1
u
u

=
=
=

80 20(1 0.32)
80

u x 1.17
1.1 1.17
0.94

The cost of equity of Matz Pharmaceutical Limited can be found using CAPM:
Ke
= 4% + (9% - 4%) 0.94
Ke
= 8.70%
Po
= D1 Ke
Po
= 1,016,091,954

1
1
1

Value of the company under proposed capital structure:

Vg
Where
Vg
Vu
TBc
Vg
Vg

= Vu + TBc
=
=
=
=
=

Market value of Geared Company

Market value of Un-geared Company
Tax benefit
Rs. 1,016,091,954 + (Rs. 250,000,000 x 32%)
Rs. 1,096,091,954

2
1

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

7 of 8

Marks
Question No. 5
The cost of the three alternatives will be as under:
Proposal-1:
Short-term loan
As the liquidity problem is expected to last for six months, the loan will be outstanding for a
period of half year. The interest charge, therefore, will be
Rs.10,000,000 x 13% x = Rs.650,000

Proposal-2:
Foregoing cash discounts
The Company could raise funds of Rs. 10 Million by:
Delaying payment for the month of June 2016 purchases from the end of July 2016 to the
end of September 2016 and so on. This will raise Rs. 5 Million and will cost in lost of
discounts:
Rs. 5,000,000 x 2% = Rs.100,000
Delaying payment for the month of July 2016 purchases from the end of August 2016 to the
end of October 2016. This will raise a further Rs. 5 Million and will again cost Rs.100,000.
Rs. 000
Month of Purchase
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Additional Finance

Jul-16 Aug-16
5,000
5,000

5,000
5,000
10,000

Sep-16
(5,000)
5,000
5,000
10,000

Month of payment
Oct-16 Nov-16 Dec-16
(5,000)
5,000
5,000
10,000

(5,000)
5,000
5,000
10,000

(5,000)
5,000
5,000
10,000

Jan-17 Feb-17

(5,000)
5,000 (5,000)
5,000

Note: The amounts in brackets indicate the end of the month at which a particular month
purchases are paid. Other amounts show the effective amount of the finance outstanding.
The payments will be postponed for total of six months purchases i.e. June 2016 to
November 2016. The total of cash discounts lost is, therefore:
Rs. 5,000,000 x 2% x 6 months = 600,000

Proposal-3:
Factoring trade debtors
Funds of Rs. 10 Million can be raised through factoring trade debtors, calculated as under:
Rupees
Funds advanced
(Rs. 15,000,000 x 75%)
11,250,000
Less:
Factoring fee
(Rs. 15,000,000 x 1.5%)
225,000
Interest
(Rs. 11,250,000 x 12% x 1 12)
112,500
337,500
Additional funds
10,912,500

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.

SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

8 of 8

Marks
The cost of raising these funds is:
Factoring fee
Interest

Rupees
225,000
112,500
337,500
(220,000)
117,500
705,000
87,750
617,250

Less: Saving on bad debts and credit control

Cost before interest savings (Rs. 117,500 x 6)
Less: interest savings (W-1)

W-1:

Surplus funds received from factor

= Rs. 10,912,500 - Rs. 10,000,000

= Rs. 912,500
Interest saved per month
= Rs. 912,500 x 1% = Rs.9,125
Interest saved for six months (Rs.9,125 x 6)
= Rs.54,750
In addition the Company will be saving Rs. 220,000 every month for six months.

The interest saving @ 1% per month will be:

Interest on Rs. 220,000 for five months
Interest on Rs. 220,000 for four months
Interest on Rs. 220,000 for three months
Interest on Rs. 220,000 for two months
Interest on Rs. 220,000 for one month

Total interest savings

Rupees
11,000
8,800
6,600
4,400
2,200
33,000

= Rs. 54,750 + Rs. 33,000

= Rs.87,750

The cheapest of the three alternative sources of finance is that of foregoing discounts which cost
Rs. 600,000 when compares with the cost of short term loan of Rs. 650,000 and cost of factoring
Rs. 617,250.

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistans website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.