SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2017 1 of 8

STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL

Marks
Question No. 1

Rs. 000
Famous Limited Legend Limited
(a) Current Ratio:
7,700,000 12,100,000
Current ratio =
3,000,000 4,000,000
= 2.57 3.03
= 2.57 : 1 3.03 : 1
Acid Test Ratio:
4,200,000 7,100,000
Acid test ratio =
3,000,000 4,000,000
= 1.40 1.78
= 1.40 : 1 1.78 : 1
Short-term liquidity position of Legend Limited is better and can meet its current liabilities than 1
Famous Limited.

(b) Average Collection Period in Days:

3,000,000 x 360 5,600,000 x 360
Average collection period in days =
16,500,000 24,000,000
= 65 84 1
Famous Limited is collecting its receivable faster than Legend Limited. 1

(c) Average Payable Period in Days:

3,000,000 x 360 4,000,000 x 360
Average payable period in days =
10,000,000 15,000,000
= 108 96 1
Famous Limited is extending credit for a longer period than Legend Limited. 1

(d) Inventory Turnover in Days:

3,500,000 x 360 5,000,000 x 360
Inventory turnover in days =
10,000,000 15,000,000
= 126 120 1
Length of time required for conversion of investment in stock to cash:
Average collection period in days 65 84
Inventory turnover in days 126 120
191 204 1

(e) Rate of Return on Shareholders Equity:

1,518,000 2,070,000
Rate of return on shareholders equity =
42,500,000 65,000,000
= 3.57% 3.18% 1
Famous Limited is using the money of shareholders more profitability. 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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 2 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
Rs. 000
Famous Limited Legend Limited
(f) Debt-Equity Ratio:
35,000,000 54,000,000
Debt-equity ratio =
42,500,000 65,000,000
= 0.82 0.83
Interest Coverage Ratio:
4,120,000 6,000,000
Interest coverage ratio =
1,920,000 3,000,000
= 2.15 times 2.00 times
Investor will buy the debenture of Famous Limited. 1

(g) Retention Ratio:

379,500 621,000
Dividend pay-out ratio =
1,518,000 2,070,000
= 25% 30%
Retention ratio = 75% 70% 1
Famous Limited is retaining larger portion of its income in the business. 1

Question No. 2
(a) Annual Budgeted Requirement:
Units
Products Yee Zee
Ending inventory 5,000 10,000
Add: Sales during the year 40,000 40,000
45,000 50,000
Less: Beginning inventory 15,000 15,000
Units to be produced 30,000 35,000

Budgeted Requirements of Components:

Units
Components S N
For Yee: (2 x 30,000), (3 x 30,000) 60,000 90,000 1
For Zee: (4 x 35,000), (2 x 35,000) 140,000 70,000 1
Annual budgeted requirement 200,000 160,000

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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 3 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
(b) Economic Order Quantity (EOQ):
2x 200,000 x 20 8,000,000
EOQComp-S = = 1
(Rs. 5.00 x 10%) 0. 5

= 16,000,000 = 4,000 units

2 x 160,000 x 20 6,400,000
EOQComp-N = = 1
(Rs. 4.00 x 10%) 0.4

= 16,000,000 = 4,000 units

(c) Calculation of Savings in Case of Switching Over to the New Ordering System:
Working Under Existing System:
Rupees
Investment in inventory Component S (25,000 [W-1] x Rs.5) 125,000
Investment in inventory Component N (20,000 [W-1] x Rs.4) 80,000
Total investment 205,000
Carrying cost @ 10% 20,500
Ordering Cost:
Component S (4 x Rs. 20) 80
Component N (4 x Rs. 20) 80
160
Total cost 20,660

W-1: Units
Components S N
Present order quantity (units) equivalent to three months consumption 50,000 40,000
Average stock 25,000 20,000

Working Under Proposed Ordering System:

Rupees
Investment in inventory Component S (2,000 [W-2] x Rs.5) 10,000
Investment in inventory Component N (2,000 [W-2] x Rs.4) 8,000
Total investment 18,000
Carrying cost @ 10% 1,800
Ordering Cost:
Component S (50 [W-3] x Rs. 20) 1,000
Component N (40 [W-3] x Rs. 20) 800
1,800
Total cost 3,600

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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 4 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
W-2: Units
Components S N
EOQ 4,000 4,000
Average stock 2,000 2,000

W-3: Number of Orders Under Proposed Plan:

Component S (200,000 4,000) 50
Component N (160,000 4,000) 40

Rupees
Saving in cost (20,660 3,600) 17,060
Reduction in working capital (205,000 18,000) 187,000

Question No. 3
(a) Price of the Bonds:

T (CxPar) Par
t 1 (1 kd) (1 kd) t
Price of the Bond-A = t

= Rs.40 x 7.360 + Rs.1,000 x 0.558 1

= Rs.294.4 + Rs.558
= Rs.852.4

T (CxPar) Par
t 1 (1 kd) (1 kd) t
Price of the Bond-B = t

= Rs.70 x 7.360 + Rs.1,000 x 0.558 1

= Rs.515.2 + Rs.558
= Rs.1,073.2

(b) Number of Bonds:

Rs.100,000
Bond-A = = 117 1
Rs.852.4

Rs.100,000
Bond-B = = 93 1
Rs.1,073.2

(c) Yearly Interest Income of Bonds:

Interest income of Bond-A = 117 bonds Rs.80 = Rs.9,360 1
Interest income of Bond-B = 93 bonds Rs.140 = Rs.13,020 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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 5 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
(d) At the end of the 5 years both bonds mature and will sell for par of Rs.1,000.
Future value of the Bond-A = Rs.40 x 12.578 + Rs.1,000 1
= Rs.503.1 + Rs.1,000
= Rs.1,503.1

Future value of the Bond-B = Rs.70 x 12.578 + Rs.1,000 1

= Rs.880.5 + Rs.1,000
= Rs.1,880.5

(e) The difference is due to the differences in interest payments received each year. The principal
payments at maturity will be the same for both bonds.
The yield to maturity of both the bonds is as follows:
YTMBond-A = Rs.(1,503.1 852.4)1/10 1 = 5.83%
= 5.83% x 2 = 11.66%
YTMBond-B = Rs.(1,880.5 1,073.2) 1/10
1 = 5.76% 1
= 5.76% x 2 = 11.52%
Mr. Mehfooz would be better off investing in Bond-A. The reasoning behind this result is that for
both bonds the principal is priced to yield the YTM of 12%. However, Bond-B is more dependent
upon the reinvestment of the large coupon payment at the YTM to earn the 12% than is the lower
coupon payment of Bond-A.

Question No. 4

Rs. 000
Years EBIT Old EBIT New Total EBIT
2016 10,000 10,000
2017 11,000 550 11,550
2018 12,100 550 12,650
2019 13,310 550 13,860
2020 14,641 550 15,191
2021 16,105 550 16,655
2022* 18,654
2023 20,892
2024 23,399
2025 26,207
2026 29,352
*Overall growth will increase by 12%.

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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 6 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
Rs. 000
100% Equity 50%
50% Equity and
Existing (At Market Price Bank loan and
50% Debenture
Plus 10%) 50% Debenture
Total EBIT 10,000 188,410 188,410 188,410
Interest [W-2] 6,600 3,025 +
Earning before tax 10,000 188,410 181,810 185,385
Tax (31%) 3,100 58,407 56,361 57,469 + +
Earnings after tax 6,900 130,003 125,449 127,916 + +
No. of shares [W-1] 1,000,000 1,025,000 1,000,000 1,012,500 + +
Total earnings per share 6.90 126.83 125.45 126.34 + +
Average per annum 6.90 12.683 12.545 12.634 + +

W-1: No. of shares:

100% Equity 50% Equity and 50%
(At Market Price Plus 10%) Debenture
Financing required 5,500,000 2,750,000 +
Market value per share with + 10% 220.00 220.00
No. of shares issue 25,000 12,500 +

W-2: Interest:
50% Bank loan and 50% 50% Equity and 50%
Debenture Debenture
Bank loan 13% 357,500
Debenture 11% 302,500 302,500 +
660,000 302,500 +

Best option is 100% equity, as EPS is highest in this option.

Question No. 5
(a) Expected Return:
Amount Invested Expected Weighted
Proportion
[Rupees] Return Return
Meeraj Oil Limited 12,000 0.12 0.13 0.0156
Faris Oil Limited 18,000 0.18 0.15 0.0270
Sameer Cement Limited 15,000 0.15 0.16 0.0240
Excellent Tiles Limited 10,000 0.10 0.18 0.0180
Seemab Food Limited 13,000 0.13 0.12 0.0156
Inaam Cement Limited 20,000 0.20 0.14 0.0280
Mehmood Electronics Limited 12,000 0.12 0.17 0.0204
100,000 0.1486
Expected return 14.86%

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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 7 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
(b) Expected Return:
Amount Invested Expected Weighted
Proportion
[Rupees] Return Return
Meeraj Oil Limited 12,000 0.092 0.13 0.0120
Faris Oil Limited 18,000 0.138 0.15 0.0208
Sameer Cement Limited 15,000 0.115 0.16 0.0185
Excellent Tiles Limited 40,000 0.308 0.18 0.0554
Seemab Food Limited 13,000 0.100 0.12 0.0120
Inaam Cement Limited 20,000 0.154 0.14 0.0215
Mehmood Electronics Limited 12,000 0.092 0.17 0.0157
130,000 0.1558
Expected return 15.58%

His expected return is increased by 0.72% (15.58% 14.86%). 2

Question No. 6
(a) Cost of Acquisition:
Rs. 000
10% preference share 150,000
14% convertible debenture 105,000
Ordinary share capital [W-1] 700,000
Payment of current liabilities 135,000
Gross payment 1,090,000 1
Less: Realization from
Investment 140,000
Inventories 190,000
Accounts receivable 170,000
Cash and bank 70,000
570,000 1
Net cost 520,000 1

W-1: Ordinary share capital = (Rs. 500,000,000 10) 5 x 70 = Rs. 700,000,000 1

(b) Annual After-Tax Cash Flows:
520,000,000 = A x PVIFA(0.18,12) 1
A = 520,000,000 4.793 1
Annual cash flow = Rs.108,491,550 1

(c) Annual After-Tax Cash Flows with Salvage Value:

520,000,000 = A x PVIFA(0.18,12) + 40,000,000 x PVIF(0.18,12) 1
A = {520,000,000 (40,000,000 x 0.137)} 4.793 1
A = {520,000,000 5,480,000} 4.793 1
A = 514,520,000 4.793
Annual cash flow = Rs.107,348,216
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 treated 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 EXTRA ATTEMPT EXAMINATIONS, MAY 2017 8 of 8
STRATEGIC FINANCIAL MANAGEMENT [C3] CHARTERED LEVEL
Marks
Question No. 7

Rs. 000
Option-1: Purchase of Machinery Through Loan @ 10% per Annum:
Cost of machinery (US$ 3 million x Rs.104) 312,000 1
Add: Interest expenses for first quarter {(312,000 x 10%) x 90 360} 7,800 1
Add: Interest expenses for second quarter [{(312,000 + 7,800) x 10%} x 90 360] 7,995 1
Total cash outflow 327,795 1

Option-2: Extension of 180 Days Letter of Credit:

Commission charges on establishment of letter of credit (US$ 3 million x Rs.104 x
1.5% x 2) 9,360 1
Amount Payable After 180 days:
Cost of machinery (US$ 3 million x Rs.100) 300,000 1
Interest on loan 2,250 1
302,250 1
Total amount payable:
Cost of machinery and interest payable 302,250
Commission charges on establishment of letter of credit 9,360
Total cash outflow 311,610 1

Recommendation:
The company should go for establishment of letter of credit because of less cash outflow of
Rs.16,185,000 as compared to Option-1. 1

(b) Advantages:
Centralised liquidity management avoids mixing cash surpluses and overdrafts in different
localised bank accounts.
Bulk cash flows allow lower bank charges to be negotiated.
Larger volumes of cash can be invested, giving better short-term investment opportunities.
Borrowing can be agreed in bulk, probably at lower interest rates than for smaller borrowings.
Currency risk management should be improved, through matching of cash flows in different
subsidiaries. There should be less need to use expensive hedging instruments such as
option contracts.
A specialist department can employ staff with a greater level of expertise than would be
possible in a local, more broadly based, finance department.
The company will be able to benefit from the use of specialised cash management software.
Access to treasury expertise should improve the quality of strategic planning and decision
making.
Any five @ 01 marks each 05
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 treated 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.