SFM Past 10 Year Papers

450 Pages·2014·1.96 MB·English

COMPILATION
OF
SUGGESTED ANSWERS
TO
QUESTIONS
SET AT THE
INSTITUTE’S EXAMINATIONS
(NOVEMBER, 2003 – NOVEMBER, 2013)
FINAL COURSE
PAPER – 2
STRATEGIC FINANCIAL MANAGEMENT

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
NEW DELHI
© The Institute of Chartered Accountants of India
The Suggested Answers published in this volume do not constitute the basis for evaluation of the
students’ answers in the examinations. The answers are prepared by the Faculty of the Board of
Studies with a view to assist the students in their education. While due care is taken in preparation
of the answers, if any errors or omissions are noticed, the same may be brought to the attention of
the Director of Studies. The Council of the Institute is not responsible in any way for the
correctness or otherwise of the answers published therein.

©The Institute of Chartered Accountants of India

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© The Institute of Chartered Accountants of India
ons hapter – 7: ortfolio heory and sset Pricing c) a) & (b), 3(b) a)(i) & (ii) b), 5(c) b),5(c), 6(b)(i) c), 6(a) b), 6(a) d) b), 2(a)&(b) b), 6(c) c) c)
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PStatement Chapter - 1: Financial Policy and Corporate Strategy 1(c)
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Term of Examinatin Nov 2003 May 2004 Nov 2004 May 2005 Nov 2005 May 2006 Nov 2006 May 2007 Nov 2007 May 2008 Nov 2008 Jun 2009 Nov 2009 May 2010 Nov 2010
© The Institute of Chartered Accountants of India
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hapter-13: ergers, cquisitions aestructuring a), 4(c) a) b) a), 6(a) c) a)(ii), 6(a) a) a), 4(a), 6(b) a)&(b), 4(b) a) a)&(b) b), 4(a) a), 4(a) a), 7(d)
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hapter utual F a) & (b) c) b), 3(c) b) a), 4(a) c) b) c) b) b), 6(c) a) b) a)
CM 2( 4( 2( 6( 2( 2( 2( 2( 2( 4( 3( 2( 5(
Chapter – 8: Financial Services in India 3(b)(iv) 4(c) 1(b),4(c) 6(d) 5(b) 1(b)
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erm of xaminati ov 2003 ay 2004 ov 2004 ay 2005 ov 2005 ay 2006 ov 2006 ay 2007 ov 2007 ay 2008 ov 2008 un 2009 ov 2009 ay 2010 ov 2010
TE N M N M N M N M N M N J N M N
© The Institute of Chartered Accountants of India
7: d b)
Chapter – Portfolio Theory anAsset Pricing 1(c) 1(b), 2(a)&(c) 2(a), 5(b) 1(a),5(a) 1(a),1(d),7( 6(a) 5(b) 4(b) 2(a)

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ation question Chapter - 6: Security Analysis 2(a)&(d),3(b), 4(c) 2(b),3(b),6(a),(b),(c)&(d) 2(c),3(a)&(b), 4(b) 3(a) 1(d),4(b), 6(b) 4(a), 5(b), 6(b)(ii) 1(c),3(b),4(a) 7(a) 2(b),5(a),5(b),6(b) 5(a), 4(a) 1(a),4(a), 6(a)
t n
ial Managemenn of eleven exami Chapter - 5: Indian Capital Market 1(a)&(b), 2(c),6(c),(d)&(e) 1(a)&(c) 1(b), 2(c), 5(a)&(b) 1(c),2(a),3(b),7(c) 1(b) &(c),2(b),6(b)(i), 7(a), 7(d) 1(d),6(b),7(b) & (c) 1(b),1(d),4(a),6(a),7(b) 3(a), 7(d) 1(d),2(b),6(b) 1(b),5(b)
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gic Fina distribut Chapter - 4: Dividend Decisions 2(b) 4(c) 3(a) 6(a) 2(b),4(b) 1(a) 3(b)
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-2: Strathapter-wis Chapter- 3: Leasing decision including cross border leasing 6(b) 3(a) 1(a) 2(a) 2(a) 4(b) 3(a)
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Statemen Chapter - 1: Financial Policy and Corporate Strategy 1(c) 7(a)
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erm of xaminati ov 2008 un 2009 ov 2009 ay 2010 ov 2010 ay 2011 ov 2011 ay 2012 ov 2012 ay 2013 ov 2013
TE N J N M N M N M N M N
© The Institute of Chartered Accountants of India
hapter-13: ergers, cquisitions and estructuring b),6(a) a) a) b),4(a) a),5(a) a),3(a),5(a),7(f) a) a),4(a) ,6(a),7(e) b),6(a),7(e) a),7(d)
CMAR 5( 5 4( 4( 2( 3( 2( 3( 2( 1( 5(
Chapter -12: Foreign Exchange Exposure and Risk Management 4(a)&(b),5(a) 4(a),(b)&(c) 5(a) 3(b) 6(a) 7(c) 1(b),2(b),5(b),7(e) 1(c),5(a),7(d),7(e) 1(d),3(b) 1(a) 1(c), 2(b),6(b),7(b)
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Chapter-11: ForeigDirect Investment and International Financial Management 3(c) 7(c) 5(b),7(d)
10: rket s
hapter –oney Maperation c) b) a),7(c) b),7(b) b) & (c) e)
CMO 5( 1( 1( 1( 7( 7(
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Chapter – 8: Financial Services in India 2(b) 3(c) 7(a),7(e) 7(a) 3(b)
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erm of xaminati ov 2008 un 2009 ov 2009 ay 2010 ov 2010 ay 2011 ov 2011 ay 2012 ov 2012 ay 2013 ov 2013
TE N J N M N M N M N M N
© The Institute of Chartered Accountants of India
CONTENTS
Page Nos.
CHAPTER − 1 Financial Policy and Corporate Strategy 1.1 – 1.2
CHAPTER − 2 Project Planning and Capital Budgeting 2.1 – 2.51
CHAPTER − 3 Leasing Decisions 3.1 – 3.34
CHAPTER − 4 Dividend Decisions 4.1 – 4.21
CHAPTER − 5 Indian Capital Market 5.1 – 5.58
CHAPTER − 6 Security Analysis 6.1 – 6.55
CHAPTER − 7 Portfolio Theory 7.1 – 7.45
CHAPTER − 8 Financial Services in India 8.1 – 8.09
CHAPTER − 9 Mutual Funds 9.1 – 9.31
CHAPTER − 10 Money Market Operations 10.1 – 10.14
CHAPTER − 11 Foreign Direct Investment (FDI), Foreign 11.1 – 11.12
Institutional Investment (FIIs) and International
Financial Management
CHAPTER − 12 Foreign Exchange Exposure and Risk 12.1 – 12.44
Management
CHAPTER − 13 Merger, Acquisition & Restructuring 13.1 – 13.66
Question Papers 1 – 66

© The Institute of Chartered Accountants of India
© The Institute of Chartered Accountants of India
1

Financial Policy and Corporate Strategy

Question 1
Explain briefly, how financial policy is linked to strategic management.(4 Marks) (May 2010)(S)
Answer
The success of any business is measured in financial terms. Maximising value to the shareholders
is the ultimate objective. For this to happen, at every stage of its operations including policy-
making, the firm should be taking strategic steps with value-maximization objective. This is the
basis of financial policy being linked to strategic management.
The linkage can be clearly seen in respect of many business decisions. For example :
(i) Manner of raising capital as source of finance and capital structure are the most
important dimensions of strategic plan.
(ii) Cut-off rate (opportunity cost of capital) for acceptance of investment decisions.
(iii) Investment and fund allocation is another important dimension of interface of strategic
management and financial policy.
(iv) Foreign Exchange exposure and risk management.
(v) Liquidity management
(vi) A dividend policy decision deals with the extent of earnings to be distributed and a close
interface is needed to frame the policy so that the policy should be beneficial for all.
(vii) Issue of bonus share is another dimension involving the strategic decision.
Thus from above discussions it can be said that financial policy of a company cannot be
worked out in isolation to other functional policies. It has a wider appeal and closer link with
the overall organizational performance and direction of growth.
Question 2
Explain the Interface of Financial Policy and Strategic Management.
(6 Marks) (November 2009) (M), (4 Marks) (November 2012)
Answer
The interface of strategic management and financial policy will be clearly understood if we
appreciate the fact that the starting point of an organization is money and the end point of that
© The Institute of Chartered Accountants of India
1.2 Strategic Financial Management
organization is also money. No organization can run an existing business and promote a new
expansion project without a suitable internally mobilized financial base or both internally and
externally mobilized financial base.
Sources of finance and capital structure are the most important dimensions of a strategic plan.
The generation of funds may arise out of ownership capital and or borrowed capital. A
company may issue equity shares and / or preference shares for mobilizing ownership capital.
Along with the mobilization of funds, policy makers should decide on the capital structure to
indicate the desired mix of equity capital and debt capital. There are some norms for debt
equity ratio. However this ratio in its ideal form varies from industry to industry. It also
depends on the planning mode of the organization under study.
Another important dimension of strategic management and financial policy interface is the
investment and fund allocation decisions. A planner has to frame policies for regulating
investments in fixed assets and for restraining of current assets. Investment proposals mooted
by different business units may be addition of a new product, increasing the level of operation
of an existing product and cost reduction and efficient utilization of resources through a new
approach and or closer monitoring of the different critical activities.
Now, given these three types of proposals a planner should evaluate each one of them by
making within group comparison in the light of capital budgeting exercise.
Dividend policy is yet another area for making financial policy decisions affecting the strategic
performance of the company. A close interface is needed to frame the policy to be beneficial
for all. Dividend policy decision deals with the extent of earnings to be distributed as dividend
and the extent of earnings to be retained for future expansion scheme of the firm.
It may be noted from the above discussions that financial policy of a company cannot be
worked out in isolation of other functional policies. It has a wider appeal and closer link with
the overall organizational performance and direction of growth. These policies being related to
external awareness about the firm, specially the awareness of the investors about the firm, in
respect of its internal performance. There is always a process of evaluation active in the minds
of the current and future stake holders of the company. As a result preference and patronage
for the company depends significantly on the financial policy framework. And hence attention
of the corporate planners must be drawn while framing the financial policies not at a later
stage but during the stage of corporate planning itself.
© The Institute of Chartered Accountants of India