INSTITUTE OF ACTUARIES OF INDIA

EXAMINATIONS

21st May 2024

Subject CB1 – Business Finance

Time allowed: 3 Hours 15 Minutes (09.30 – 12.45 Hours)

Total Marks: 100

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Q. 1) Which of the following is not a feature of Ordinary Shares?

A. Ordinary shareholders typically possess voting rights at meetings corresponding to the

number of shares they hold
B. Dividends earned on ordinary shares are not legally mandated by the company
C. Ordinary shares represent the least senior form of finance issued by companies
D. Ordinary shares are seldom redeemable [2]

Q. 2) Which of the following scenarios would NOT typically lead to a company obtaining a Stock
Exchange listing?

A. To provide an exit strategy for its current investors

B. To secure additional capital through public investment
C. To conduct a rights issue for existing shareholders
D. To enhance the visibility and liquidity of its shares in the market [2]

Q. 3) Which of the following would be an example of specific risk for a residential housing
construction company?

A. Inflation
B. Interest rates
C. Regional variations in house prices
D. Recession [2]

Q. 4) Which of the following is NOT a feature of Monte Carlo Simulation?

A. modelling the project to account for interdependencies and serial correlations.

B. specifying probabilities for the distribution of key variables.
C. simulating cashflows using fixed values of variable inputs.
D. recording and ordering the outputs to assess their probability distributions. [2]

Q. 5) A company sold goods worth INR 500,000. It has received a payment of INR 200,000,
expects payment of INR 200,000 in future. However, it doesn’t expect the remainder of
INR 100,000 to be paid as the other party has gone bankrupt.

Which of the following accounting concepts shall be applied to calculate how much should
be shown in accounts as sales?

A. Money measurement and Matching concept

B. Prudence and Accruals concept
C. Accruals and Materiality concept
D. Realisation and Dual aspect concept [2]

Q. 6) Which of the following is a Non-Current Asset?

A. Cash
B. Inventory
C. Trade receivable
D. Machinery [2]

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Q. 7) Which of the following is a correct formula for Return on Capital Employed (ROCE)?

A. Profit before tax

Share capital + Reserves + Long term debt
B. Profit before tax and interest
Share capital + Reserves
C. Profit before tax and interest
Share capital + Reserves + Long term debt
D. Profit before tax and interest
Share capital + Long term [2]

Q. 8) Which of the following statement is false?

A. A call option gives the right, but not the obligation, to buy a specified asset on a set date
in the future for a specified price.
B. A put option gives the right, but not the obligation, to sell a specified asset on a set date
in the future for a specified price.
C. An American style option is an option that can be exercised on a set date before its
expiry.
D. A European style option is an option that can be exercised only at expiry. [2]

Q. 9) A parent company has a foreign subsidiary located in a host country that does not have a
double tax arrangement with the parent’s home country. The foreign subsidiary pays regular
dividends to the parent company. Which of the following will apply?

A. The subsidiary will pay tax on profits earned in its host country and the parent will pay
tax on dividends received in its home country
B. The subsidiary will not be taxed on profits earned in its host country and the parent will
pay tax on dividends in its home country
C. The subsidiary will pay tax on profits earned in its host country and the parent will not
be required to declare the dividends as taxable income in its home country
D. The subsidiary will pay tax on profits earned in its host country and the parent will pay
tax on dividends received in the subsidiary’s host country [2]

Q. 10) A company makes sales on credit of INR 100,000 every month. Trade receivables generally
take 45 days to pay. What would be the impact on cash of changing the terms of trade so
that receivables were settled after 35 days?

A. The bank balance will increase immediately

B. The bank balance will increase over the next 35 days
C. The bank balance will increase over the next 45 days
D. The bank balance will increase within a month [2]

Q. 11) Consider a new non-current asset purchased at INR 5,00,000 with a useful life of 7 years.
Assuming a residual value of INR 20,000 at the end of 7 years, what would be the
approximate book value at the end of year 5 using Reducing Balance Method?

A. INR 35,000
B. INR 40,000
C. INR 45,000
D. INR 50,000 [2]

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Q. 12) Last year Company P made profits before taxation of INR 100,000. Throughout the year,
the company had a mortgage of INR 100,000 on which INR 6,000 interest was paid, and an
8% unsecured loan stock with interest payments of INR 10,000. The interest cover was:

A. 7.25
B. 6.25
C. 10
D. 11 [2]

Q. 13) Market price of a share is currently INR 100. If ABC has a 1 for 2 rights issue at INR 70,
the expected ex-rights price of the share will be?

A. INR 100
B. INR 70
C. INR 80
D. INR 90 [2]

Q. 14) Compute Weighted Average Cost of Capital using the below information.
Equity capital = INR 100 crores
Debt capital = INR 50 crores
Risk free rate = 6%
Geared beta = 1
Equity risk premium = 7%
Gross cost of debt = 8%
Tax rate = 12%

A. 11%
B. 12%
C. 13%
D. 14% [2]

Q. 15) Which of the following is NOT a method of reducing principal-agent problems?

A. A profit-related employee bonus scheme

B. Executive share options
C. An hourly rate of pay for workers and managers
D. Written agreements between stakeholders [2]

Q. 16) Which of the following is not true about Commercial paper?

A. It is listed on the Stock exchange

B. It is a type of bearer document
C. It is a type of short term borrowing
D. It is issued at a discount and redeemed at par
[2]

Q. 17) Which of the following statements about project finance is true?

A. Projects involved are often low risk in nature

B. It often involves public-private partnership
C. It provides on-balance-sheet financing
D. It is a recourse method of financing
[2]

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Q. 18) Which of the following is NOT a part under Assets in statement of financial position of an
insurance company?

A. Reinsurer's share of technical provisions

B. Free reserves
C. Prepayments
D. Fund for future appropriations
[2]

Q. 19) What is the strongest argument in favour of setting a common hurdle rate across a company
for all projects?

A. The general notion is all projects in the same industry will have the same risk
B. A common rate will ensure consistency when capital rationing is in effect
C. The decision rule is clear and can be applied consistently
D. It will rule out any low risk projects [2]

Q. 20) Vision plc has shares in three companies

It has 20% holding in Realty Ltd and has a right to appoint 2 of the 10 directors
It has 30% holding in Imagine Ltd and has a right to appoint 7 of the 10 directors
It has 60% holding in Ambition Ltd and has used its voting rights to appoint all of its
directors.

Which are the subsidiaries of Vision plc?

A. Realty Ltd only

B. Ambition Ltd
C. Imagine Ltd and Ambition Ltd
D. All the three [2]

Q. 21) A company wants to set up a business of glass ware and has projected the following
cashflows.

Year 0 1 2 3
Cashflow -150 50 80 100

i) Compute the NPV using interest rate of 12% p.a. and Internal Rate of Return. (4)

ii) What are the advantages of NPV method over Internal Rate of Return? (2)
[6]

Q. 22) At 31 March '23 the statement of financial position of Virgo Ltd which is a manufacturing
company was as follows:

Assets INR INR

Non-Current assets
Cost 500,000
Less Depreciation 100,000
400,000
Current assets

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Inventories 75,000
Trade receivables 12,500
Cash 15,000
102,500
Total assets 502,500

Equity and Liabilities

Ordinary share capital 200,000
Reserves 50,500
Total equity 250,500
Non-current liabilities
15% Debenture loan 180,000
Current liabilities
Trade payables 72,000
Total liabilities 252,000
Total Equity and liabilities 502,500

During FY 23-24 the following items appeared in the company’s accounting records:

Heading INR
Sales 300,000
Increase in cash 113,500
Increase in inventories 10,000
Increase in payables 2,500
Rent of premises 25,000
Cost of raw materials 50,000
Wages and Salaries 50,000
Other expenses 2,000
Purchase of non-current assets 35,000

The non-current assets are being depreciated on a straight-line basis over a period of five
years including the year of purchase.

During this Financial Year the interest was paid on the debenture stock and no dividend was
paid on ordinary share.

Assume the rate of corporation tax is 15%. Prepare the statement of profit or loss for the
last FY and the statement of financial position as at 31 March '24. [20]

Q. 23) The following information is provided from the statements of financial position of Mango
plc and Apple Ltd. Figures in INR.

Heading Mango Ltd Apple Ltd

Non-current assets 450,000 100,000
Current assets 100,000 50,000
Total assets 550,000 150,000
Equity and Liabilities
Share capital (INR 10 share) 100,000 40,000
Reserves 210,000 60,000
Equity 310,000 100,000
Loan stock 200,000 40,000
Current liabilities 10,000 50,000

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Total liabilities 210,000 90,000

Total equity and liabilities 520,000 190,000
Market share of share 200 100

Mango has agreed to buy 50% of Apple for a package of INR 20 plus 2 shares in Mango
for every 5 shares bought in Apple. Define Goodwill and Calculate the value of goodwill
on this transaction. Explain each step in the calculation giving reasons. [5]

Q. 24) The directors of two general insurance companies in the same country are considering a
possible merger. Describe the possible motives for the merger. [5]

Q. 25) Adam Limited, a high-growth technology company specializing in mobile applications, is

contemplating a potential listing on the National Stock Exchange (NSE). However, the
company's Chief Financial Officer (CFO) faces resistance from the majority owner, a single
family. Evaluate the CFO's proposal and analyze the potential concerns of the company's
owner. [10]

Q. 26) Describe the capital budgeting decision and explain its importance to a business. [5]

Q. 27) If a company is not ESG compliant, it may face several issues. Discuss this statement. [5]

Q. 28) ABC is a multinational corporation seeking to raise money by issuing Eurobonds. What are
the benefits and risks to ABC of issuing Eurobonds. [4]

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