General:

The paper was set covering broad area of the syllabus and mostly in a straightforward manner. However, the only deficiency, a persistent one, that caused the failure for majority was poor analysis of the problems and situations given in various questions which ultimately resulted in substandard solutions expressed in haphazard fashion. Other chronic lapses observed were, non-submission of complete workings, non-indication of question number and poor presentation of views, which gives very bad reflection of students who are at the threshold of qualifying as ‘Chartered Accountants’.

Q.1

The question required probable outcome of the order on the basis of experience of the company. Inflows and outflows were to be discounted on two periods i.e. zero and one year and resultant NPV was to form the basis of recommendation. There were three possible outcomes each with a different probability. However 50% of the students failed to grasp the above.  Application of wrong probabilities, discounting factor and incorrect calculation of debt agency fee were the main problems noticed.

Q.2

This was a very easy question and at least 30% of the students secured full marks. A reasonable number of students were able to discount the cash flows after giving impact of inflation. However, they muddled the profitability index with profitability percentage.

Q.3

This question did not involve any intricacy but students could not exhibit the required level of knowledge on the subject. Barring a very few students, no one could comment precisely on share exchange ratio and its impact on SL. They were not able to decipher that proposed share exchange ratio was a liberal one and could result in extreme tussle for control of the company. Very few offered comments on ambitious P/E ratio estimated by the management of SL. Market Value Addition for SL shareholders after acquisition was also not well commented.

Q.4

Valuation of shares, evaluation and measurement of risk, effects of gearing on beta values of equity, required rate of equity return etc. are some areas, which are being regularly asked in every attempt, but always proved to be most unpopular topics for candidates. Re-gearing industry equity beta at WIZ Limited gearing ratio after taking into account industry and WIZ debt betas was the main crux of the solution.

The students are advised to seriously study good books, which are now easily available in libraries, in order to deal with practical life situations.

Q.5

This question was based on elementary knowledge of dividend cover but it was very sad to observe that final level students of Chartered Accountancy did not know much about dividend cover that is simply “EPS/DPS”. A vast majority of students lost bonus marks for lack of plain knowledge, which was really astonishing. Although a large number of students calculated it correctly but only a limited number could describe the significance of this easy concept, in a commanding way.

Q.6

Quite a large number of students were able to secure full marks, as the concept was easy. However many students still made mistakes which were as under:

Some could not determine the PV of dividends for the period of uneven growth.

The price at the end of year 3 was discounted to get the market price but the present value of first three years dividend was ignored.

Some of the students concluded that the price based on the third year’s dividend was the current market price and ignored the process of discounting.

Q.7

This was also a businesslike question, which students took as a difficult one. They were not able to analyze the statement of each director due to lack of knowledge about various theories like Clientele effect, Preferred Habitat theory, long-term relevance of stock market crash on share valuation, weak form of efficient market hypothesis, hard capital rationing, soft capital rationing and Modigliani and Miller theories etc. The students at this level should easily identify the factors which are considered while evaluating the various options available for raising capital. However, the students could not list down the important factors. As a result, they could not give any recommendations based on valid reasons.

Q.8

This practical question involved nothing more than careful arithmetic calculations. Although no one could gain full marks yet a number of students earned reasonably good marks. A large number of students did not know anything about the impact of inflation and choosed to ignore it.