2026 BUSINESS INSIGHTS

AND ANALYSIS
ICAP ATTEMPTWISE PAST PAPERS
(Updated till SPRING - 26 Attempt)

B This volume contains;

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✓ Suggested Answers by ICAP
(Autumn 22 - Autumn 25)

I
✓ Examiner Comments (Autumn 22 - Autumn25)
✓ Marking plan (Autumn 22 - Autumn25)

A
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ICAP
 Certificate in Accounting and Finance Stage Examination

The Institute of 9 March 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all TEN questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions.

(i) Agha (Private) Limited (APL), a family-owned business, registered as a private

company two years ago. The business has grown exponentially and now Salman,
CEO, is considering to expand the business by introducing a new product. He has
developed a comprehensive business plan and is looking for source of finance for
expansion. Salman is not sure regarding the tenure for which finance would be
needed as it is highly dependent on how product would perform in the initial years.

Salman has approached a venture capitalist to finance the expansion of business. The
venture capitalist would:

(a) likely finance the project as APL has excelled in the past two years
(b) likely finance the project as APL has a comprehensive business plan
(c) less likely finance the project as there is no clear exit route for venture capitalist
(d) less likely finance the project as it has only been two years since APL has
registered as a private company (1.5)

(ii) Furqan runs a chain of retail outlets of electronic items (items). Due to economic
downturn, the demand for items has declined significantly. Furqan is considering to
sell the items on credit to customers but he wants to charge some additional profit for
allowing the customers to pay later. He is seeking the Islamic mode of financing for
these transactions.

Which of the following modes of financing would be most appropriate?

(a) Mudaraba, however, Furqan would need to expressly mention the retail price
of the items and the additional profit he would charge
(b) Murabaha, however, Furqan would need to expressly mention the cost of items
and the additional profit he would charge
(c) Musharaka, however, Furqan would need to mutually agree the profit over the
cost with the customers
(d) Credit transactions cannot be financed through Islamic mode of financing as
Furqan wants to charge profit over the retail price (1.5)

(iii) Free market and open competition are the elements of __________ ideology.
(a) democratic (b) radicals (c) dictatorial (d) communist (01)
 Managerial and Financial Analysis Page 2 of 7

(iv) Fortune Limited (FL) is in the process of issuing bonds to finance its project. It has
been decided to issue bonds that are redeemable at par (i.e. Rs. 100) in three years’
time. The bonds would carry annual interest at 10.4%, payable at the end of
each year.

The annual spot yield curve for a bond of this class of risk is as follows:

Maturity 1 year 2 years 3 years 4 years

Yield 8.0% 9.5% 11.0% 12.5%

FL should issue the bonds at:

(a) an approximate discount of Re. 1 per bond
(b) an approximate discount of Rs. 5 per bond
(c) an approximate premium of Re. 1 per bond
(d) a par value (02)

(v) Which of the following is NOT an example of ‘disruptive technology’ at its inception
in the market?
(a) A mobile application through which customers can order food from a choice of
large number of restaurants
(b) A media streaming platform allowing customers to watch movies of their
choice
(c) Smartphone with improved users interface and camera resolution
(d) An online social networking website where people can connect and share
information with each other (01)

(vi) Advocacy advertising focuses on:

(a) a particular product that needs marketing support
(b) core services offered by an organization
(c) an organization’s CSR activities
(d) an organization’s views on controversial political issues (01)

(vii) HQ Group is considering entering into a business of coal extraction. The process of
coal extraction is subject to strict environmental regulations. Any mishandling could
result in heavy fines. The given risk can be classified as:
(a) pure risk that cannot be reduced
(b) pure risk that can be reduced by internal controls
(c) speculative risk that cannot be reduced
(d) speculative risk that can be reduced by internal controls (01)

(viii) Alpha Limited is engaged in manufacturing consumer goods. The goods are
manufactured in two factories and staff at head office is mostly involved in
maintenance of accounting record. The CEO has directed the management to
develop a risk management program. The management has identified various risks
and classified them as high, moderate or low. Most of the high risks pertain to
factories therefore, the management has prepared a risk management program for
factories. It has a plan to train the factories’ staff to learn to manage and respond to
the risks. It is also agreed that management would proactively look for new risks at
factories and continually incorporate such risks into risk management program.
Which of the following elements of Risk Management Framework: ISO 31000 is
missing?
(a) Leadership and commitment (b) Integration
(c) Implementation (d) Evaluation (01)
 Managerial and Financial Analysis Page 3 of 7

(ix) The data of marketing expense and sales for the past five years of Disney Limited
(DL) is given below:

Marketing
Sales (y)
Year expense (x)
---- Rs. in million ----
2017 10 120 ∑x = 100
2018 15 125 ∑y = 680
2019 20 140 ∑x2 = 2250
2020 25 145 ∑y2 = 93150
2021 30 150 ∑xy = 14000
If the management of DL sets the budget for marketing expense for the year 2022 at
Rs. 50 million, the expected sales would:
(a) increase by Rs. 34 million
(b) decrease by Rs. 34 million
(c) not be affected as sales is increasing in the same proportion to marketing
expense
(d) be negatively affected as sales is declining in proportion to marketing expense (02)

Use the following scenario for answering MCQs (x), (xi) and (xii):

Haris is the owner of a small software house with 7 employees. At year-end, he conducted
an employee job satisfaction survey using a questionnaire with a 5-points rating scale
(1-highly unsatisfied, 2-unsatisfied, 3-neutral, 4-satisfied, 5-highly satisfied). The results of
the survey showed the mean score to be 2.71. Both median and mode were at a score of 1.
Haris is satisfied as the mean score is close to 3, which he takes as majority are either
neutral or satisfied with their job. However, to his surprise, shortly after, more than half of
the employees tendered their resignation.

(x) What do the scores indicate about the satisfaction level of the employees?
(a) Most of the employees are highly satisfied with their job
(b) Employees are either highly satisfied or highly unsatisfied with their job
(c) More than half of the employees are satisfied with their job
(d) No conclusion can be drawn from these scores (01)

(xi) Which central measure should be used in this case?

(a) Mean
(b) Median
(c) Mode
(d) Central measure cannot be used in this case (01)

(xii) What is a possible data set for these results?

(a) 1,1,1,1,5,5,5 (b) 1,1,1,2,2,4,4
(c) 1,1,1,1,4,4,5 (d) 1,2,2,3,4,4,5 (01)
 Managerial and Financial Analysis Page 4 of 7

Q.2 AUM manufactures and sells two products. Presented below is the information available on
each of the two products:

Product 1:
This product is the first product AUM introduced in the market and carries strong brand
value. Its repute carries positive influence on many other AUM business activities. When
the product was introduced, its market share quickly grew to 4% and has remained steady
for a long time now. Its market share is 7% less than the market leader. The overall market
is growing by 2.5% year on year basis.

Product 2:
This product has been consistently selling and enjoying high profits in the same market for
quite some time now. The annual market growth for this product is 5% and market share is
merely 1.5% less than the only competitor in the market.

Required:
For each of the products presented above:
(a) Identify the quadrant and explain the corresponding strategies from the perspective of
Boston Consulting Group (BCG) Model. (05)
(b) Highlight the relevant criticism of BCG Model and recommend future strategies
accordingly. (05)
(Note: 10% is taken as a low/high cut-off for market growth under BCG model)

Q.3 Rizwan, a chartered accountant and the CFO of Cure Pharma (CP), has called for proposals
from three banks, including Sotel Bank (SB), to take up CP’s salary disbursements. Rizwan
maintains his personal bank account in SB and has recently applied for personal loan. He
received a call from the manager of SB who reminded him of their great banking
relationship. Apart from the discussion of the proposal, the manager also informed that he
has requested the credit team to offer good terms for Rizwan’s personal loan.

Required:
Identify, explain and relate the fundamental principles of Code of Ethics of ICAP that
Rizwan may compromise in the above situation. (07)

Q.4 Identify and briefly explain the type of information system used in each of the following
examples:

(i) Book keeping and sales processing systems.

(ii) A budgeting and budgetary control systems.
(iii) System designed to provide information, advice and recommendations on
pharmaceutical products to doctors at a hospital.
(iv) System that includes statistical and forecast models to help managers assign annual
sales targets.
(v) An integrated system that connects all departments in the organization. (07)

Q.5 Saldia, a country in Asia, does not allow import of automobiles as a national policy. It is
now considering to dissolve this policy. Discuss the impact of allowing the import of
automobiles on each of the Porter’s five competitive forces on Saldia’s automobile industry.
Your answer should also clearly mention whether the changed policy would strengthen or
weaken each of these forces. (08)
 Managerial and Financial Analysis Page 5 of 7

Section B

Q.6 Zaryaab Limited (ZL) is engaged in manufacturing and selling sports goods. Following
information has been extracted from the latest financial statements of ZL:

Rs. in '000
5,000,000 ordinary shares @ Rs. 10 each 50,000
8% bank loan 25,000

Other information:
(i) Shares of ZL are currently trading at Rs. 25 each.
(ii) The return on government bonds is 6% whereas the average return on market
investments is 10%. The average equity beta for ZL’s share is 0.9.
(iii) The tax rate applicable to ZL is 30%.

ZL is planning to set-up another factory in Peshawar for which it would need finance of
Rs. 150 million for four years. Following two financing proposals are under the
consideration of ZL’s management:
(i) Issue 9% preference shares of Rs. 100 each. The preference shares would be
redeemable at par at the end of 4th year.
(ii) Issue 9% bonds of Rs. 1,000 each. The bondholders would have a right to either
convert each bond into 35 ordinary shares or redeem it at a premium of 10% at the
end of 4th year. The market value of ZL’s shares is expected to increase by
7% per annum.

Required:
Recommend the financing proposal that would result in lower weighted average cost of
capital (WACC). (Show necessary computations) (10)

Q.7 Shaheen Limited (SL) is engaged in manufacturing and selling textile products. SL procures
the material locally which is then manufactured and exported to customers. The
management of SL is concerned over high volatility in foreign exchange rates. The receipt
of USD 50,000 from a customer is expected in three months’ time and management is
considering to hedge the foreign exchange risk.

SL’s bank has quoted the following exchange rates and annual interest rates:

USD 1
Buy Sell
Spot 178.650 179.800
1 month forward 177.745 178.795
3 months forward 177.555 178.555

Deposit % Borrowing %
USD 1.25 2.75
PKR 6.75 9.75

Required:
Determine which of the following options would be more beneficial for SL:
(a) Hedging through forward contract
(b) Hedging through money market
(c) No hedging. Assume that on the date of settlement of transaction, spot rate is
USD 1 = PKR 178.15. (09)
 Managerial and Financial Analysis Page 6 of 7

Q.8 Decor Limited (DL) is engaged in selling home decoration items. DL has provided you the
following information based on its latest management accounts:

Rs. in '000
Average inventory 6,000
Average trade debtors 7,500
Average trade creditors 3,800

Sales 50,000
Cost of sales 35,000

The management of DL is concerned over increasing working capital requirement that is

centrally managed through bank overdraft facility. As per arrangement with the bank, DL
has overdraft limit of Rs. 10 million.

For the next year, it is projected that sales and cost of sales would increase by 25% and 15%
respectively. This would result in:
 average inventory to increase by 30%
 average trade debtors to increase by 20%
 average trade creditors to increase by 10%

The CFO is of the view that DL would not be able to manage its working capital
requirement within the bank overdraft limit for next year. He has suggested that DL should
take certain actions to follow industry average ratios which are given below:

Industry average ratios *Number of days

Inventory holding period 50
Trade debtors’ collection period 45
Trade creditors’ payment period 30
*Based on 365 days a year

Required:
(a) Determine the cash operating cycle for the next year. (03)
(b) Validate CFO’s view regarding management of working capital requirement if:
 DL does not follow industry average ratios
 DL follows industry average ratios (04)
(c) List down any two actions that management of DL may take to reduce the length of
its cash operating cycle. Also, mention any two risks associated with those actions of
management. (03)

Q.9 Star Capital (SC) is a financial institution that offers credit facility to its customers among
other services. SC is looking to waive off annual fee for the credit facility if a customer has a
balance above a certain limit. Arsalan, Head of Credit Department, determined that waiving
off annual fee could be justified only if customers maintain an average monthly balance of
more than Rs. 70,000 in a given year. A random sample of 900 customers’ balances is
obtained. The monthly mean of the sample data is Rs. 71,000. It is also known that the data
is normally distributed with a standard deviation of Rs. 30,000. Arsalan is looking to apply
statistical analysis to determine whether to waive off annual fee or not.

Required:
(a) Determine and explain the type of test that will be applied in this case. (02)
(b) What conclusion can Arsalan draw from the given data, using a 10% significance level
(critical value=1.28)? (07)
 Managerial and Financial Analysis Page 7 of 7

Q.10 Comfort Wear Limited (CWL) is engaged in selling men activewear (units) through its retail
outlets. The extracts from CWL’s last year management accounts have been provided as
follows:

Rs. in '000
Sales [5,000 units @ Rs. 2,500] 12,500
Cost of goods sold 6,875
Gross profit 5,625

The management is considering setting up kiosks in four major shopping malls. The finance
manager has gathered following data in this regard:
(i) Kiosks will set-up at the cost of Rs. 250,000 each. Kiosks would have estimated useful
life of three years, subject to a depreciation of 40% on reducing balance method. At
the end of three years, kiosks would have no residual value.
(ii) 4,000 units would be sold through all kiosks in the first year. It is estimated that 20%
customers of retail outlets would shift to kiosks.
(iii) The past trend of retail outlets sales has revealed an average 5% increase in units’ sale
each year. It is expected to continue for both retail outlets and kiosks.
(iv) In the first year of kiosks’ sales, a discount of 15% would be offered on retail price.
However, discount would be reduced to 10% for subsequent years’ sales.
(v) The rent for each kiosk’s space would be Rs. 150,000 per annum.
(vi) The marketing campaign for kiosks would be carried out at Rs. 50,000 for the first
year. However, it would be reduced to 50% for subsequent years.
(vii) One sales person would be hired for each kiosk. He would be paid Rs. 20,000 per
month in addition to 1% commission on retail price of each unit sold through kiosk.
(viii) CWL’s cost of capital is 18%.
(ix) Applicable tax rate is 30% and tax is paid in the year in which the liability arises.
(x) All revenues and costs are quoted on today’s rate that is expected to remain same in
the first year. Thereafter, the estimated annual inflation of 10% would be applicable
for all future revenues and costs.

Required:
By using net present value method, recommend whether CWL should set-up kiosks. (15)
(All cash flows occur at the end of year except for cost of setting-up kiosks)

(THE END)
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Section A

A.1 (i) (c) Less likely finance the project as there is no clear exit route for venture
capitalist
(ii) (b) Murabaha, however, Furqan would need to expressly mention the cost of
items and the additional profit he would charge
(iii) (a) Democratic
(iv) (a) An approximate discount of Re. 1 per bond
(v) (c) Smartphone with improved users interface and camera resolution
(vi) (d) An organization’s views on controversial political issues
(vii) (b) Pure risk that can be reduced by internal controls
(viii) (b) Integration
(ix) (a) Increase by Rs. 34 million
(x) (b) Employees are either highly satisfied or highly unsatisfied with their job
(xi) (b) Median
(xii) (a) 1,1,1,1,5,5,5

A.2 (a) Product 1 and Product 2 both fall under the quadrant of ‘Dog’ as neither of the
product is market leader nor the market is growing above cut-off of 10%.

For ‘Dog’ products, BCG matrix recommends the following strategies:

 Immediate withdrawal from the market as it is unlikely that the products will
gain a larger market share because the market leader will defend the position
of its cash cow.
 Keep selling the products till they generate profit / positive cash flows before
eventually withdrawing it from the market. However, a dog product may
generate positive cash flows only temporarily and would ultimately be a loss
making product.
 Do not invest more capital in ‘dog’, in the hope of increasing market share and
improving cash flows, because gaining market share in a low-growth market is
very difficult to achieve.

(b) Product 1:
BCG matrix focuses on market share and market size only. There may be other
factors that can also influence the overall performance of a business. For example,
strength of competition, cost base, brand strength, etc.

Although Product 1 is a Dog product according to BCG Matrix, it has strong brand
value and repute for AUM. Immediate withdrawal or withdrawal after some time of
this product may have adverse impact on other business activities of AUM. The
recommended strategies could be as follows:

 Continue this product until the costs of this product (even if the cash flows are
negative or temporarily positive) exceed the benefits (influence on other
business activities of AUM).
 If possible, make further investment in this product to defend its brand value,
repute and its positive influence on other business activities of AUM.

Page 1 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Product 2:
According to BCG matrix, if an organization is not a market leader then it is
considered as having low market share. These might practically not hold true
particularly if difference of market share between market leader and next to market
leader is minimal. Therefore, it may not be wise to shut down or stop making
investments in this product altogether.

Product 2’s market share is merely 1.5% less than the only competitor in the market.
The recommended strategies could be as follows:

 This product is enjoying high profits and it could possibly be considered as (or
be converted into) a cash cow for AUM. This means it can generate necessary
cash to sustain the other products, or new products. Therefore, AUM should
not change strategy or stop investments in the product as recommended by
BCG model.
 It would be wise to defend and maintain its position in the market. Since, there
is only one competitor in market, it may be fruitful to invest in efforts to
increase the market share of the company to get the leading position.

A.3 Following fundamental principles of Code of Ethics of ICAP may be compromised:

(i) Integrity
A Chartered Accountant must be honest and straightforward in his professional and
business dealings. This includes a requirement for ‘fair dealing’ and a requirement
to be truthful.
If Rizwan keeps his personal relationship and interest with Sotel bank in mind while
deciding on selection of bank for CP’s salary disbursements, he will not be doing
‘fair dealing’ thus violating the principle of integrity.
(ii) Objectivity
A Chartered Accountant must not allow his professional or business judgement to
be affected by: bias (personal prejudice), conflicts of interest or undue influence
from others.
The bank manager’s request to the credit team to offer good terms for Rizwan’s
personal loan may create bias, conflict of interest or undue influence on Rizwan’s
decision of selecting the bank for CP’s salary disbursements.
(iii) Professional behavior
A Chartered Accountant must comply with relevant laws and regulations and avoid
any conduct that the accountant knows or should know might discredit the
profession.
If Rizwan favors Sotel Bank’s proposal based on his personal relationship and
interest with Sotel bank he will not be displaying professional behavior. He will be
impairing the integrity, objectivity and risking good reputation of the profession.

Page 2 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.4 (i) Transaction processing system

It is used for processing routine transactions.

(ii) Management information system

It provides management with the information, typically routine in nature, needed
for planning and controlling operations.

(iii) Expert system

It provides information, advice and recommendations on matters related to a
specific area of expertise.

(iv) Decision support system

It helps managers to make decisions of a more complex or unstructured nature.

(v) Enterprise resource planning

It integrates all departments and manages the collective knowledge contained in an
organization, using data warehouses and other technology tools.

A.5 The impact of Saldia allowing import of automobiles on each of the Porter’s five
competitive forces is discussed hereunder:

(i) Threat from potential entrants

It will be strengthened as it will give access to foreign automakers to enter the
Saldia’s automobile market.

(ii) Threat of substitute products

It will be weakened as influx of foreign automobiles in the market would increase
the competition which is likely going to reduce prices of automobiles. This means
more people will be able to afford automobiles and might move from substitute
products (such as motor bike, public transport, etc.).

(iii) Bargaining power of suppliers

It will be strengthened at least initially as new automakers will enter the market and
their demand for components of automobile would likely increase thereby suppliers
of those components would be in a better position to bargain.

(iv) Bargaining power of customers

It will be strengthened as availability of more automobile suppliers would allow
customers to have greater options to choose from and customers would likely easily
switch from one supplier to another.

(v) Competitive rivalry

It will be strengthened as ease of entry would allow foreign automakers to enter the
market and compete with local automakers to gain the Saldia’s automobile market
share.

Page 3 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Section B

A.6 Zaryab Limited

Rs. in '000 Rs. in '000
Market value Cost (rate) MV×Cost
Equity (5,000×25) 125,000 (W-1)0.096 12,000
Bank loan 25,000 0.056 1,400
(0.08×0.7)
150,000 13,400

E×ke+D×kd
Existing WACC = E+D
Existing WACC = 13,400/150,000
Existing WACC = 8.93%

Issue of preference shares: Rs. in '000

Cost/Market value 150,000
Rate 0.09
MV × Rate 13,500

Revised WACC [13,400+13,500]/[150,000+150,000] 8.97%

Issue of convertible bonds: Rs. in '000

Cost/Market value 150,000
Rate (W-2) 0.0954
MV × Rate 14,310

Revised WACC [13,400+14,310]/[150,000+150,000] 9.24%

W-1: Cost of equity

ke = Rf + (Rm–Rf)×Be
ke = 0.06 +(0.1–0.06)×0.9
ke = 0.096 or 9.6%

W-2: IRR Cashflow D.F. @ 10% PV D.F. @ 5% PV

Issue value [given] 1,000 1.000 1,000 1.000 1,000
Interest (1000×0.09×0.7) (63) 3.170 (200) 3.546 (223)
Redemption value (W-2.1) (1,147) 0.683 (783) 0.823 (944)
17 (167)

NPVA
IRR = A% +[ ]×(B–A)%
NPVA −NPVB
IRR = 0.05+(–167/–167–17)×(0.1–0.05)
IRR = 9.54%

W-2.1: Redemption value

Higher of:
- Bond [1000×1.1] 1,100
- Shares [35×25×(1.07)4] 1,147
1,147

Recommendation:
ZL should issue preference shares as it would result in lower WACC.

Page 4 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.7 (a) Hedging through forward contract:

SL is expected to receive $50,000 in three months’ time. Therefore, it should enter
into a 3 months’ forward contract to sell $50,000 as follows:

Amount = $50,000
Forward rate = PKR 177.555
On the date of settlement:
Payment in PKR (50,000 × 177.555) = PKR 8,877,750

(b) Hedging through money market:

SL is expected to receive USD 50,000.

Step 1:
Borrow USD today for three months that would be equivalent to USD 50,000
(principle and interest) in three months’ time.
Annualized borrowing rate = 2.75%
One month borrowing rate (2.75% × 3 ÷ 12) = 0.006875 or 0.6875%
Amount to borrow (50,000 ÷ 1.006875) = USD 49,659

Step 2:
Convert USD to PKR at the spot rate.
Spot rate = 178.65
PKR amount (49,659 × 178.650) = PKR 8,871,580

Step 3:
Put PKR on PKR deposit account for three months.
Annualized deposit rate = 6.75%
Three months’ deposit rate (6.75% × 3 ÷ 12) = 0.016875 or 1.6875%

Step 4:
On the date of settlement, principle and interest on PKR deposit account would be:
Amount from deposit account
(8,871,580 + 8,871,580 × 1.6875%) = PKR 9,021,288

Step 5:
On the settlement date, repay USD loan from USD receive from the customer.

(c) No hedging:
Amount = USD 50,000
Spot rate = 178.15
PKR [50,000 × 178.15] = 8,907,500

Conclusion: The hedging through money market would be more beneficial

for SL as it would result in the highest amount of receipts.

Page 5 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.8 Decore Limited

(a) Cash operating cycle for next year

Inventory days [7,800/40,250(W-1)]×365 70.73

Trade debtors day [9,000/62,500(W-1)]×365 52.56
Trade creditors day [4,180/40,250]×365 (37.91)
Cash operating cycles 85.38

W-1: Projections for the next year Rs. in '000

Sales [50,000×1.25] 62,500
Cost of sales [35,000×1.15] 40,250

Average inventory [6,000×1.3] 7,800

Average trade debtors [7,500×1.2] 9,000
Average trade creditors [3,800×1.1] 4,180

(b) If DL does not follow industry average ratios:

Projected average inventory + Projected average trade debtors –
Projected average creditors [7,800+9,000–4,180] (W-1) 12,620

CFO has rightfully pointed out that DL would not be able to maintain its working capital
requirement within the bank overdraft limit next year.

If DL follows industry average ratios:

Average inventory [40,250(W-1)/365]×50 5,514
Average trade debtors [62,500(W-1)/365]×45 7,705
Average trade creditors [40,250(W-1)/365]×30 (3,308)
9,911

CFO has rightfully pointed out that DL would be able to maintain its working capital
requirement within the limit of bank overdraft if it follows industry average ratios.

(c) Actions and related risks are listed down below:

Action Risk
Reduce the inventory level of finished The probability of stock-out would increase
goods. which could adversely impact the overall
profitability of DL.
Reduce the period of credit allowed to DL might not be able to sell at the existing
customers. sales price as it would have to offer early
payment discount or else customers might
switch to competitor offering better credit
terms.
Delay the payment to suppliers. DL is already taking higher credit period as
compared to industry average. Further
delaying the payment could significantly
affect the existing relationship with the
suppliers who might not be ready to offer
their products at the existing terms.

Page 6 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.9 (a) A right tail z-test will be applied in this case because data is normally distributed,
standard deviation is known and a large sample is randomly drawn from it.

(b) H0: 𝜇 <= 70,000

H1: 𝜇 > 70,000

Given:
z = 1.28 (10% significance level) 𝜇 = 70,000 x = 71,000
SD = 30,000 n = 900

x−μ 71,000 − 70,000 1,000

z= ⇒ ⇒ ⇒1
SD ÷ √n 30,000 ÷ √900 1,000

Conclusion:
Since the value of z = 1, that is less than 1.28, we fail to reject the null hypothesis.
This means we do not have sufficient evidence to conclude that the mean is greater
than 70,000. Therefore, offering annual waivers will not be appropriate.

A.10 Comfort Wear Limited

0 1 2 3
----------------------- Rupees -----------------------
Kiosks - setup cost
[250,000×4] (1,000,000) - - -
Revenue 8,500,000 10,395,000 12,006,225
[4000×2500×0.85] [4000×2500×0.9 [4000×2500×0.9
×1.1×1.05] ×(1.1)2×(1.05)2]
Cost of goods sold (5,500,000) (6,352,500) (7,337,138)
[4000×1375] [4000×1375×1.1 [4000×1375×(1.1)2
×1.05] ×(1.05)2]
Gross profit 3,000,000 4,042,500 4,669,087
Gross profit - lost (W-1) (1,181,250) (1,364,342) (1,575,814)
Rent cost (600,000) (660,000) (726,000)
[150000×4] [150000×4×1.1] [150000×4×(1.1)2]
Marketing cost (50,000) (27,500) (30,250)
[50000×0.5×1.1] [50000×0.5×(1.1)2]
Staff cost - fixed cost (960,000) (1,056,000) (1,161,600)
[20000×4×12] [20000×4×12× [20000×4×12×
1.1] (1.1)2]
Staff cost - commission (100,000) (115,500) (133,403)
[4000×2500×0.01] [4000×2500×0.0 [4000×2500×0.01
1×1.1×1.05] ×(1.1)2×(1.05)2]
Depreciation (400,000) (240,000) (144,000)
[1000000×0.4] [400000×0.6] [240000×0.6]
Loss on disposal
[1,000,000–(400,000+240,000+144,000)] - - (216,000)
Profit before tax (291,250) 579,158 682,020
Tax @ 30% 87,375 (173,747) (204,606)
Profit after tax (203,875) 405,411 477,414
Add back depreciation 400,000 240,000 144,000
Add back loss on disposal - - 216,000
Net cashflows (1,000,000) 196,125 645,411 837,414
Discount factor @ 18% 1.000 0.847 0.718 0.609
Present value (1,000,000) 166,118 463,405 509,985
Net present value 139,508

Recommendation: CWL should set-up kiosks as it would result in positive NPV.

Page 7 of 8
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

W-1: Gross profit lost 1 2 3

-------------- Rupees --------------
Revenue lost (2,625,000) (3,031,875) (3,501,816)
[5000×0.2×2500 [5000×0.2×2500 [5000×0.2×2500
×1.05] ×(1.05)2×1.1] ×(1.05)3×(1.1)2]
CoGS saved 1,443,750 1,667,531 1,925,999
[5000×0.2×1375 [5000×0.2×1375 [5000×0.2×1375
×1.05] ×(1.05)2×1.1] ×(1.05)3×(1.1)2]
Gross profit lost (1,181,250) (1,364,344) (1,575,817)

(The End)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Spring 2022

Passing %

Question-wise
1 2 3 4 5 6 7 8 9 10 Overall
53% 13% 41% 27% 49% 31% 73% 54% 38% 56% 37%

General comments

MFA exam has been introduced under the Education Scheme 2021 and has replaced BMBS
of the previous scheme.

The overall result is 37%. It was commonly observed that examinees performed reasonably
well in numerical parts of the exam. However, the performance in application of theoretical
concepts was less than satisfactory. In particular, Q.2 was poorly performed. It is suggested
that instead of rote learning, understand the underlying concepts and related application in
the practical scenarios.

Question-wise common mistakes observed

Question 1

(i), (iv), (viii) and (x) were least well-performed MCQs.

Question 2

 Examinees who ignored the given information about low/high cut-off for market growth,
ended in the wrong identification of the quadrants and explanation of corresponding
strategies.
 Since both products were neither the market leaders nor the market growth rates were
above or at the cut-off growth rates, both of these products fall under the quadrant of
‘Dog’ products. However, very few examinees were able to identify that correctly.
 Product 1 was generally identified as ‘Question mark’ and product 2 was generally
identified as ‘Star’.
 Instead of highlighting the relevant criticism as per the given case scenario, large number
of examinees opted to produce general criticism at length that resulted in wastage of time.
 Some examinees opted to reproduce the strategies similar to the ones recommended under
part (a) of the question.

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2022

Question 3

 Many examinees could only identify, explain and relate 1-2 fundamental principles of
Code of Ethics of ICAP correctly.
 Some examinees opted to identify, explain and relate all principles of Code of Ethics of
ICAP resulting in wastage of time and reflected lack of knowledge of application of
concepts.

Question 4

 Examinees remained confused among Management Information System, Expert System

and Decision Support System.
 Some examinees although correctly identified the type of information system, they opted
to offer explanation by simply copying the information from the given question.
 Few examinees opted to identify the systems by only giving the abbreviation of type of
information system.

Question 5

 Examinees wasted time in offering general explanation of numerous factors that could
result in strengthen or weaken the competitive forces. The question clearly required the
discussion from the perspective of lifting of ban to import automobiles.
 Many examinees assumed that the imported automobiles are the substitute of locally
manufactured automobiles.
 Examinees also assumed the suppliers as of sellers of automobiles rather than the
suppliers to sellers of those automobiles.

Question 6

 Examinees failed to determine the cost of equity by using the CAPM model.
 Some examinees assumed that return on preference shares is subject to tax deduction.
 Many examinees wasted time in determining the IRR of preference shares.
 Examinees remained confused between cash inflows and cash outflows while computing
the IRR of convertible bonds.

Question 7

Several mistakes were noted while determining the hedging through money market. For
example, in selecting the correct borrowing rates and exchange rates.

Page 2 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2022

Question 8

 Some examinees wrongly applied the formulas for inventory days and trade creditors’
days.
 Examinees opted to offer general discussion while validating the CFO’s views. The
discussion was not supported by the numbers that could have been determined by using
the given information in the case scenario.
 Actions to reduce the length of cash operating cycle were generally correct. However, the
corresponding risks lacked the substance.

Question 9

 Many examinees wrongly assumed that t-test would be the most appropriate in the given
case scenario.
 Examinees could not construct the hypothesis equation correctly.
 Examinees failed to draw appropriate conclusion based on the results achieved while
applying z-test formula.

Question 10

 Different types of mistakes were noted in constructing the cash flows. For example, some
examinees failed to apply inflation or quantity or discount rates correctly.
 Many examinees ignored the information regarding opportunity cost of losing the sales
units through retail outlets.
 Sales commission (variable component) was mostly wrongly computed.
 Some examinees ignored to consider the loss on disposal of kiosks.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2 (a)  0.5 mark for identifying each quadrant 1.0

 Up to 1.5 marks for explaining each strategy 4.0

(b)  01 mark for each relevant criticism 2.0

 01 mark for each recommended future strategy 3.0

A.3  0.5 mark for identifying each fundamental principle 1.5

 01 mark for explaining each identified fundamental principle 3.0
 Up to 01 mark for relating each identified fundamental principle 2.5

A.4  0.5 mark for identifying each type of information system 2.5
 Up to 01 mark for explaining each identified type of information system 4.5

A.5  Up to 0.25 mark for identifying each competitive force 0.5

 0.5 mark for stating the strength of each competitive force 2.5
 01 mark for explaining the impact on each competitive force 5.0

A.6  Market value of equity 0.5

 Cost of equity 1.0
 Cost of bank loan 0.5
 Cost of preference shares 0.5
 Determination of redemption value of convertible bonds 2.5
 Determination of IRR 3.5
 Determination of WACC under each option 1.0
 Recommendation 0.5

A.7  Hedging through forward contract 1.0

 Hedging through money market 6.5
 No hedging 1.0
 Conclusion 0.5

A.8 (a)  Inventory days 1.0

 Trade debtors’ days 1.0
 Trade creditors’ days 1.0

(b)  Working capital requirement if industry average ratios are not followed 1.0
 Working capital requirement if industry average ratios are followed 3.0

(c)  0.5 mark for each action 1.0

 01 mark for each risk 2.0
Page 1 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022

Mark(s)
A.9 (a)  Determination of type of test 1.0
 Explanation of type of test 1.0

(b)  Formulation of hypothesis equations 2.0

 Determination of value of z 3.0
 Conclusion 2.0

A.10  Set-up cost of Kiosks 0.5

 Revenue 1.5
 Cost of goods sold 1.5
 Gross profit lost 3.0
 Rent cost 1.0
 Marketing cost 1.0
 Staff cost 3.0
 Depreciation 0.5
 Loss on disposal 0.5
 Tax 0.5
 Adding back depreciation and loss on disposal 0.5
 Determination of NPV 1.0
 Recommendation 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 7 September 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions.
(i) A sales person of a large clothing store is given the task to determine the most frequently
sold item last week. In order to complete the task, he retrieves the list of all the
individual items sold last week. Which central tendency measure should the sales
person use to complete the task?
(a) Mean (b) Median
(c) Mode (d) Harmonic Mean (01)
(ii) Irfan downloaded a data file from a website to check the historical trends of Pakistan
Rupee against US dollar. After a short while, he was shocked to find that the
downloaded data file is present in all folders of the computer. This situation is caused
by:
(a) Worms (b) Trap doors
(c) Logic bombs (d) Denial of service (01)
(iii) Which of the following represents ‘pure risk’ for a business?
(a) Investment in a volatile share listed on Pakistan Stock Exchange
(b) Entering into a finance lease agreement at a fixed rate of interest
(c) Purchasing USD for a future payment to be made in USD
(d) Entry of a highly resourced competitor (01)
(iv) Which TWO of the following justify that equity investment is riskier than investment
in the debt capital of the same company?
(a) Providers of debt capital have a contractual right to collect cash flows
(b) Debt capital generally provides much better return than equity investment
(c) Earnings per share can be volatile
(d) Providers of debt may ask any time to pay the debt in full (01)
(v) Which of the following is NOT considered as cash flows to calculate an IRR of
redeemable debt?
(a) Annual interest payment on the bond
(b) Tax relief on annual interest payments
(c) Par value of the bond, excluding any interest payable in near future
(d) Redemption amount (01)
(vi) The Islamic mode of financing in which the seller expressly mentions the cost of a
commodity sold and sells it to another person by adding mutually agreed profit is
called:
(a) Ijarah (b) Murabaha (c) Mudaraba (d) Musharaka (01)
 Managerial and Financial Analysis Page 2 of 6

(vii) A cotton producer estimates 20 tons of cotton will be available for sale in three months’
time. He gathers the following information for the purpose of hedging using futures:
 Futures contract for one ton of cotton with three months to expiry is at Rs. 31,500.
 Producer will sell 20 futures at Rs. 31,500, as the standard contract size is
one ton.

After three months, price of cotton is expected to be Rs. 32,500 per ton.

What is the cotton producer’s effective rate per ton if he decides to hedge through
futures?
(a) Rs. 30,500 (b) Rs. 33,500 (c) Rs. 32,500 (d) Rs. 31,500 (02)

(viii) Which of the following is the coincident economic indicator?

(a) Industrial production (b) New private house building permits
(c) Unemployment (d) Balance of trade (01)

(ix) Due to easy availability of internet, businesses are using M-Commerce as an effective
tool for increasing their revenue. Which of the following sales is NOT related to
M-Commerce?
(a) Purchasing cell phone credit directly from the vendor application
(b) Mobile banking application
(c) Ordering food by calling the restaurant
(d) Purchasing digital content on a mobile device (01)

(x) Which of the following examples, best reflects product differentiation?

(a) Sale of goods only in the high-end locality
(b) Restaurant giving an option to the customers to customize the ingredients of the
dish
(c) Bread manufacturer has also started producing meat related products
(d) Marketing through different advertisement mediums (01)

Use the following scenario for answering MCQs (xi), (xii) and (xiii):

Rehan Baig, a newly hired assembly line manager, feels that the average time it takes the
worker to complete the task is higher than the commonly accepted 10 seconds or less. To test
his claim, he measures the task time of 15 workers. The results show an average time of
11.4 seconds with standard deviation of 2.5 seconds.

(xi) The hypothesis for the test conducted is:

(a) H0: μ ≤ 10 seconds, HA: μ > 10 seconds
(b) H0: μ ≥ 10 seconds, HA: μ > 10 seconds
(c) H0: μ ≤ 10 seconds, HA: μ < 10 seconds
(d) H0: μ = 10 seconds, HA: μ > 11.4 seconds (1.5)

(xii) The test statistic calculated is:

(a) 2.17 (b) 1.55 (c) 2.25 (d) 1.77 (1.5)

(xiii) The critical value calculated at 95% confidence level for this test is 1.761. Therefore, it
can be deduced that the true mean task time is:
(a) equal to or less than 10 seconds (b) equal to or greater than 10 seconds
(c) less than 10 seconds (d) greater than 10 seconds (01)
 Managerial and Financial Analysis Page 3 of 6

Q.2 WMB is a large multi-national automobile company that has automobile assembly plants in
over twenty-four countries including Rawada where it holds the largest market share by reach
and revenue. Rawada’s government is considering to put a complete ban on imports of all
automobiles and their parts in order to promote local automobile manufacturers, which is
going to have an adverse impact on WMB’s operations in Rawada.

Required:
Explain any four approaches that WMB can use to influence government to re-think its stance
of complete ban on imports of all automobiles and their parts. Also provide an example for
each approach. (08)

Q.3 Northern Hotels Limited (NHL) is planning to build a new resort alongside a lake in Baboon
Valley (Valley), a remote area of Pakistan. Although the Valley is known for its scenic views,
it is largely cut-off from other areas of Pakistan due to its poor infrastructure. There is no
sewerage system in the Valley and all the bio-waste created by the locals is put to organic use.
People residing in the Valley have been living there below the poverty line.

NHL has obtained all the relevant government approvals. As part of the approval, NHL will
build proper road infrastructure leading to the resort. NHL has also been able to enter a deal
for the land at a significantly lower market price.

NHL expects to achieve its objective of high profits due to very low operational costs as the
labour is available in the Valley at a significantly reduced rate. On the other hand, the locals
have also foresighted that this will bring tourism in the area and will create greater earning
opportunities.

Required:
Apply the Tucker’s 5-question model on the above scenario. (06)

Q.4 Rauf Baweja (Rauf) is the owner of a chain of computer stores, named Complus, that sells
computer parts and accessories throughout the city. Rauf sources all its products from a large
wholesale supplier situated in Saddar, Karachi. The supplier has an outlet and online store
where people can select and order the products. At the start of every week, Rauf visits the
supplier’s online store, selects and orders inventory for the rest of the week. Upon receiving
the payment for products and delivery charges, the supplier sends them directly to each
Complus store according to the requirements received from Rauf.

All Complus stores follow a standardized layout. When the products reach the store, the staff
places a price tag, stacks and organises the products in a standard fashion. The standard
processes make it easy to transfer a well-trained staff member from one store to the other. This
also makes it easy for a customer to walk into any Complus store and locate the desired
product where they will always find a well-trained staff ready to help.

Complus has a strong marketing team that frequently runs social media campaigns, SMS
messages and TV adverts to inform customers about the products and discounts. Complus
also has an aftersales customer helpline that assists customers with common queries and
collects their feedback. Lately, there have been mounting customer complaints of faulty
products upon first use and Rauf is looking for ways to solve it.

Required:
(a) Perform Porter’s primary value chain analysis of Complus. Your analysis should
include explanation of each element of value chain and activities being performed
under that element. (10)
(b) Recommend a value addition activity that would reduce customer complaints of faulty
products. Also explain its position(s) in Porter’s primary value chain. (03)
 Managerial and Financial Analysis Page 4 of 6

Q.5 Barganza Limited (BL) manufactures and markets four consumer durable products. Presented
below are the main costs incurred on each of the products:

 Product A: Costs of setting up and expansion of distribution channels

 Product B: Costs of withdrawals
 Product C: Marketing and product enhancement costs to extend product life cycle
 Product D: Increased costs of working capital

Required:
(a) Identify and explain the stage of product life cycle for each product. (06)
(b) From your answer to (a) above, for each product:
(i) provide one more cost, other than marketing and advertising cost, that is likely
incurred. (03)
(ii) suggest a promotion strategy BL may pursue. (04)

Section B

Q.6 Islamabad Universe (IU) is engaged in production and sales of various consumer products.
The management is in the process of launching a new product ‘Gladiator’. You have been
provided the following information in this regard:

(i) IU has outsourced the due diligence of Gladiator at the cost of Rs. 250,000 which is
payable shortly.
(ii) A specialized machine costing Rs. 25 million would be needed for the production of
Gladiator. The machinery would be financed by a bank loan that would carry interest
rate of 12% per annum.
(iii) The machine would be expected to produce 10,000 units in the first year of its
operation. However, the production would reduce by 10% and 15% in the second and
third years respectively. At the end of third year, an overhauling would be carried out
at the cost of Rs. 2.5 million. This would result in continuation of third year’s
production in the fourth and fifth years.
(iv) The selling price and cost of goods sold (other than depreciation) of Gladiator would
be Rs. 1,600 and Rs. 750 per unit respectively.
(v) The fixed operating cost of producing Gladiator would be Rs. 1 million per annum,
whereas variable operating cost would be Rs. 100 per unit.
(vi) The machine would have an estimated useful life of five years, after which it could be
scrapped for Rs. 5 million. The machine and overhauling costs would be subject to tax
depreciation of 25% on reducing balance method.
(vii) The applicable tax rate would be 30% and tax would be payable/refundable in the year
in which the liability/asset would occur.
(viii) All revenues and costs are quoted on today’s rate. The estimated annual inflation of
8% would be applicable for all revenues and costs that arise from first year and
onwards.
(ix) There are no opening or closing inventories of Gladiator in any of the five years.

Required:
By using net present value method, determine the discount rate at which launching of
Gladiator would be financially feasible. (All cash flows occur at the end of year unless otherwise
specified) (12)
 Managerial and Financial Analysis Page 5 of 6

Q.7 Multan Star (MS) is engaged in manufacturing and selling of a single product K-100.

The management is in the process of preparing its budgeted profit or loss statement for the
year ending 31 August 2023. Following information is available in this respect:

Information for the year ended 31 August 2022

(i) Extracts from profit or loss statement:

Rs. in '000
Sales 90,000
Cost of goods sold:
Material (36,000)
Labour (25,000)
Manufacturing overheads (9,000)
Gross profit 20,000
Selling and administration expenses (2,500)
Profit before tax 17,500

(ii) During the year, MS operated at 80% of its machine production capacity. It
manufactured and sold 72,000 units of K-100. Each unit of K-100 requires 3 hours of
machine time.
(iii) 2.5 kg of material is required for manufacturing of each unit of K-100.
(iv) Each unit of K-100 requires three labour hours. Labour is hired under a third party
contract according to which MS has to pay for a minimum of 250,000 labour hours.
However, each hour exceeding 250,000 hours would be paid at two times of standard
labour rate per hour.
(v) 20% of total manufacturing overheads are fixed. Variable manufacturing overheads are
absorbed on the basis of machine hours.
(vi) All selling and administration expenses are fixed.
(vii) There are no opening or closing stocks of raw material and finished goods.

Information and projections for the budget for the year ending 31 August 2023
(i) MS would introduce the mini version of K-100 under the name of K-50. The demand
for K-50 is expected to be 25,000 units. The selling price of K-50 would be
Rs. 750 each.
(ii) The introduction of K-50 would not affect the existing demand for K-100. In addition,
MS has entered into a contract with a new customer for supply of 10,000 units of
K-100 at the last year’s prevailing price.
(iii) Any constraint due to production capacity would be met by reducing the production of
K-100. However, any shortfall in production of K-100 would be met by purchasing it
from the market at a price of Rs. 1,200 per unit.
(iv) The selling price of K-100 (other than already contracted to supply) would increase by
12%.
(v) Each unit of K-50 would require 1 kg of material, 1.5 hours of machine and 1.5 hours
of labour. The production of K-50 would result in increase in selling and administration
expenses by 20% other than the inflation.
(vi) All expenses unless otherwise specified are subject to inflation of 5%.

Required:
Prepare a budgeted profit or loss statement for the year ending 31 August 2023. (12)
 Managerial and Financial Analysis Page 6 of 6

Q.8 Assume today is 1 September 2022.

On 1 September 2022, Karachi Kites Limited (KK) plans to hedge the market rate risk of an
export receipt amounting to USD 2,000,000 which is expected to be received on
30 November 2022. The current spot price per USD is Rs. 208.
KK intends to hedge the currency risk through futures. A future contract is for USD 120,000
and is available in standard lot size of 1 with a tick value of Rs. 12. Following future rates are
available:
Future Rate Maturity Date
October future Rs. 210.5/USD 31 October 2022
November future Rs. 213.5/USD 30 November 2022
December future Rs. 215.5/USD 31 December 2022

The spot rate on 30 November 2022 is expected to be Rs. 218.5.

Required:
(a) Set up the hedge for USD receipt. (02)
(b) Compute the gain/loss in term of ticks. (02)
(c) Compute the effective exchange rate for KK. (02)

Q.9 Lahore Quotient (LQ) is engaged in manufacturing and selling of textile products. LQ is
presently considering to expand the business and needs finance of Rs. 50 million. The
management is considering the following two options:

Option I: Issuance of new shares

Finance the entire expansion by issuing new shares. However, the new project would result
in equity beta of 1.2.

Option II: Issuance of convertible bonds

Finance the entire expansion by issuing 10% convertible bonds of Rs. 1,000 each. Each bond
will be converted into 3 shares at the end of year 4. The market value of each share is expected
to be Rs. 400 on the date of redemption.

Following information has been extracted from the latest financial statements of LQ:

Rs. in '000
1,000,000 ordinary shares (Rs. 100 each) 100,000
11% bank loan 100,000

Other information:
(i) The return on government bonds is 8% per annum, whereas, the average return on
market investments is 12% per annum. The current equity beta for LQ is 1.3.
(ii) Applicable tax rate to LQ is 30%.
(iii) The details of dividend paid during the last four years (including current year 2022) are
given below:
Years 2019 2020 2021 2022
Dividend per share Rs. 10 Rs. 11 Rs. 12 Rs.14

Required:
(a) Compute LQ’s existing weighted average cost of capital. (05)
(b) Recommend whether LQ should finance the new project by issuing new shares or by
issuing convertible bonds. (06)
(c) Discuss any four factors that LQ may need to consider before deciding on whether to
finance the expansion by issuing new shares or convertible bonds. (04)
(THE END)
 Managerial and Financial Analysis
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.1 (i) (c) Mode

(ii) (a) Worms
(iii) (d) Entry of a highly resourced competitor
(iv) (a) Providers of debt capital have a contractual right to collect cash flows
(c) Earnings per share can be volatile
(v) (c) Par value of the bond, excluding any interest payable in near future
(vi) (b) Murabaha
(vii) (d) Rs. 31,500
(viii) (a) Industrial production
(ix) (c) Ordering food by calling the restaurant
(x) (b) Restaurant giving an option to the customers to customize the ingredients of
the dish
(xi) (a) H0: μ <= 10 seconds, HA: μ > 10 seconds
(xii) (a) 2.17
(xiii) (d) greater than 10 seconds

A.2 (i) Financial Incentive Strategy

Businesses may gain a position where they can pursue a financial incentive strategy
to use their economic leverage to influence public policymakers.
Example
WMB can offer financial support to government in support of the pressing issues
faced by the country e.g., if reducing pollution is a government priority, then WMB
can initiate projects and offer financial support in reducing carbon emission and
managing its adverse impact to the environment.
(ii) Stakeholder Coalitions
WMB may try to influence politics by mobilizing various organizational
stakeholders - employees, stockholders, customers, and the local community - to
support their political agenda.
Example
WMB can organize programs to get organizational stakeholders, acting as lobbyists
or voters, to influence government officials to vote or act in a way that would not
put a complete ban on imports of automobiles and parts.
(iii) Advocacy Advertising
WMB can influence constituents by using advocacy advertising. Advocacy ads
focus not on a particular product or service, like most ads, but rather on an
organization’s or company’s views on controversial political issues.
Example
WMB can run adverts that would advocate its value addition to the country and
society. It can run ads on supporting taxes or generating employment or fostering
innovation/growth to advocate import of necessary and relevant goods.
(iv) Trade Associations
WMB can work with trade associations to influence government policy. As trade
associations represent numerous businesses, government tend to give greater weight
to the views of trade associations than they do to individual businesses.
Example
WMB can work with trade associations to publish content on widely circulated
magazines and newsletters to broadcast and educate how imports help better the
automobile industry.
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A.3 Is it profitable?
 Yes, it is profitable as NHL will make a superior return from this investment due to
lower operating costs.
 Yes, it is profitable for the locals as it will bring tourism in the area and will create
greater earning opportunities.
Is it legal?
 Yes, it is legal as all the government approvals have been taken and there seems to
be no-legal issues.
Is it fair?
 No, the land is obtained at a significantly lower market price. It seems that the local
community did not get a fair price for this deal.
 NHL is expecting to obtain cheap labor for its resort. It needs to be determined
whether it would be exploitation of the local community.
Is it right?
 Yes, construction of the resort will help the valley with tourism development and
also provide employment opportunities to the local community.
Is it sustainable or environmentally sound?
 Yes, it is sustainable as construction of the road infrastructure will bring a lot of
development and would make the valley further sustainable.
 It needs to be considered that in the absence of any sewerage system, how the resort
would dispose of the waste without harming the environment.

A.4 (a) Inbound logistics

These are the activities concerned with receiving and handling purchased materials
and components (inputs), and storing them until needed. Complus is carrying out
the following activity under inbound logistics:
 The supplier packages the products and sends them directly to each Complus
store according to the requirements received from Rauf.
Operations
These are the activities concerned with converting the purchased materials into an
item that a business sells to customers (outputs). Complus is carrying out the
following activity under operations:
 When the products reach the store, the staff places a price tag, stacks and
organises the products in a standard fashion.
Outbound logistics
These are the activities concerned with the storage before sale of finished goods
(outputs), and its distribution and delivery to the customers. The following activities
can be classified under outbound logistics:
 Customers visit Complus stores to buy products
 The products are stored in Complus stores

Marketing and sales

These are the activities associated with advertising and brand building which seek
to increase visibility and communicate why a product or service should be
purchased. These activities are usually associated with the ‘4Ps’ of marketing,
namely; product, place, price, and promotion. Complus is carrying out the
following activity under marketing and sales:
 Complus frequently runs social media campaigns, SMS messages and TV
adverts to inform customers about the products and discounts
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Certificate in Accounting and Finance – Autumn 2022

Service
These are the activities that occur after the point of sale and include activities such
as customer service and product support. It may also include activities like
installation, warranties, repairs and maintenance, and providing training to the
employees of customers. Complus is carrying out the following activity under
service:
 Complus has an aftersales customer helpline that assists customers with
common queries and collects their feedback.

(b) Product quality check can be done to reduce customer complaints. Quality check
can be performed at any of the following positions in Porter’s primary value chain:
(i) Quality check of products should be done before they are delivered to the
stores. This will ensure only products in working condition are present at the
store, which will reduce customer complaints of faulty products at first use.

This activity is to be placed in Inbound logistics of Porter’s primary value

chain.

A.5 (a) Product A - Introduction phase

During this stage of a product life cycle, there is some sales demand but total sales
are low and the product is not yet profitable.

BL needs to make and sell the product which would incur high investment costs,
start-up costs, running costs, setting up and expansion of distribution channels, etc.

Product B - Decline phase

At this stage, total annual sales starts to fall and so do profits.

It will lead BL to leave the market for the product, and incur cost of withdrawals.
This continues until it is no longer possible for any company in the market to turn
a profit from the product. When the last supplier exits the market, the product
lifecycle is complete.

Product C - Maturity phase

During the maturity phase, total annual sales remain fairly stable. Prices and profits
stabilize.
Although the opportunity for more growth no longer exists, BL can extend the life
of the product through product enhancement and marketing. BL and other
companies might seek to improve profits by differentiating their products more from
those of competitors, and selling to a ‘niche’ market segment.

Product D - Growth phase

During the growth phase, total sales demand in the market grows at a faster rate
and new entrants are attracted into the market at this stage by the prospect of high
sales and profits.
Hence, the requirement of working capital grows as is the case of BL.

(b) (i) Product A - Introduction phase

 Manufacturing costs (costs of operations)

Product B - Decline phase

 Discounts to attract customers

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Product C - Maturity phase

 Costs to maintain manufacturing capacity

Product D - Growth phase

 Costs of increasing capacity

(ii) Product A - Introduction phase

(i) Inform and educate the potential customers of the existence and benefits
of the product.
(ii) Secure distribution in leading retail outlets.
(iii) Place heavy emphasis on personal selling and promotion in trade shows
and exhibitions.

Product B - Decline phase

(i) As the size of the market is shrinking reduce overall promotion expenses
and focus efforts towards reminding remaining customers.
(ii) Rejuvenate old products to make them look new.

Product C - Maturity phase

(i) Focus on promotion and advertising to persuade the customers to
purchase the particular brand rather than to provide information about
the product
(ii) Selective promotion only as intense competition and increase in
promotion expenditures would result in lower profits

Product D - Growth phase

(i) Stimulate demand in selected market segments and promote the
particular brand as competition increases
(ii) Enter new markets and expand coverage
(iii) Identify new distribution channels
(iv) Shift emphasis from product awareness to the individual firm’s brand
preference through aggressive advertising.
(v) Promote differentiation

A.6 Islamabad Universe

0 1 2 3 4 5
Sales in units A 10,000 9,000 7,650 7,650 7,650

------------------- Inflation @ 8% per annum -------------------

Sales price/unit B 1,600 1,728 1,866 2,016 2,177 2,351

Variable cost of sales/unit C 750 810 875 945 1,020 1,102

Variable operating cost/unit D 100 108 117 126 136 147

----------------------------- Rs. in '000 -----------------------------

Sales A×B - 17,280 16,794 15,422 16,654 17,985
Cost of goods sold A×C - (8,100) (7,875) (7,229) (7,803) (8,430)
Operating costs – Variable A×D - (1,080) (1,053) (964) (1,040) (1,125)
Operating costs – Fixed - (1,080) (1,166) (1,260) (1,360) (1,469)
Machine purchase (25,000) - - - - -
Depreciation
Machine (W-1) - (6,250) (4,688) (3,516) (2,637) (1,978)
Overhauling (W-1) - - - - (787) (591)
Loss on sale of machine (W-1) - - - - - (357)
Profit before tax (25,000) 770 2,012 2,453 3,027 4,035

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Less: Tax @ 30% - (231) (604) (736) (908) (1,211)

Profit after tax (25,000) 539 1,408 1,717 2,119 2,824
Scrap value (W-1) - - - - - 7,347
Overhauling cost - - - (3,149) - -
Add back:
Depreciation - 6,250 4,688 3,516 3,424 2,569
Loss on sale of machine - - - - - 357
Cash flows (25,000) 6,789 6,096 2,084 5,543 13,097
Discount factor @ 12% 1.000 0.893 0.797 0.712 0.636 0.568
Present value of cash flows (25,000) 6,063 4,859 1,484 3,525 7,439
Net present value (1,630)

Discount factor @ 9% 1.000 0.917 0.841 0.772 0.708 0.650

Present value of cash flows (25,000) 6,226 5,127 1,609 3,924 8,513
Net present value 399
NPVA
IRR = A% + ( ) × (B − A)%
NPVA −NPVB

399
IRR = 0.09 + ( ) × (0.12 − 0.09) = 𝟗. 𝟓𝟗%
399+1630

Conclusion: At 9.59%, the launching of Gladiator would be financially feasible.

W-1: Depreciation & Loss of sale of machine

Machine Overhauling Total
Depreciation Depreciation
cost NBV cost NBV NBV
----------------------------- Rs. in '000 -----------------------------
Cost of machine - 25,000 - - 25,000
Year 1 6,250 18,750 - - 18,750
Year 2 4,688 14,063 - - 14,063
Year 3 3,516 10,547 - - 10,547
Overhauling cost 2.5m×(1.08)3 - 10,547 - 3,149 13,696
Year 4 2,637 7,910 787 2,362 10,272
Year 5 1,978 5,933 591 1,771 7,704
Less: Scrap value 5m×(1.08)5 - - - - (7,347)
Loss on sale of machine 357

A.7 Multan Stars

Budgeted Profit or Loss Statement
For the year ending 31 August 2023
Rs. in '000
Sales (W-1) 132,050
Cost of goods sold
Material (W-3) (45,938)
Labour (W-4) (30,450)
Manufacturing overheads (W-5) (11,340)
Purchase from market [4,500(W-2)×1200] (5,400)
(93,128)
Gross profit 38,922
Less: Selling & admin. [2,500,000×1.2×1.05] 3,150
Profit 35,772

W-1: Sales Rate Quantity Rs. in '000

- K-100 [90,000,000/72,000]×1.12 1,400 72,000 100,800
- K-100 (New Cont.) [90,000,000/72,000] 1,250 10,000 12,500
- K-50 750 25,000 18,750
132,050

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Certificate in Accounting and Finance – Autumn 2022

W-2: Production K-100 K-50

Demand Units 82,000 25,000
Machine hours required Hours 3.00 1.50
Total required Hours 246,000 37,500 283,500
Available [72,000×3/0.8] Hours 270,000
Shortfall Hours 13,500
K-100 to be purchased from outside
[13,500/3] Units 4,500
To be manufactured internally:
- K-100 [72000+10000–4500] Units 77,500
- K-50 Units 25,000

W-3: Material Kgs

- K-100 [77,500(W-2)×2.5×1.05×200] 40,688
- K-50 [25,000×1×1.05×200] 5,250
45,938

W-4: Labour Hrs

- K-100 [77,500(W-2)×3] 232,500
- K-50 [25,000×1.5] 37,500
Required 270,000
Available 250,000
Overtime 20,000

Cost Rs. in '000

- Normal [25,000,000×1.05] 26,250
- Overtime [20,000×(25,000,000/250,000)×1.05×2] 4,200
30,450

W-5: Manufacturing Overheads

Machine hour rate [9,000,000×0.80 / 216,000(72,000×3)] = 33.33×1.05 35

Rs. in '000
Variable overheads
- K-100 [77,500(W-2)×3×35] 8,138
- K-50 [25,000×1.5×35] 1,312
9,450
Fixed overheads [9,000,000×0.2×1.05] 1,890
11,340

A.8 Karachi Kites Limited

(a) Setting up the hedge

Which future contract to choose?

The first future contract to mature after the expected receipt date will be chosen. As
the expected transaction date is 30 November, future contracts which mature on
30 November will be chosen.

Buy/Sell
KK will create a hedge with futures by selling November futures.

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 Managerial and Financial Analysis
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Certificate in Accounting and Finance – Autumn 2022

How many contracts

US$ 2,000,000 is equivalent to 16.667 contracts (2,000,000/120,000). Since the
standard lot size is 1, 17 contracts would be used for hedging.

(b) Gain/Loss in terms of ticks Rupees

Open future position: sell at 213.5
Close position: buy at 218.5
Loss (5.0)

No. of ticks
Loss in ticks is (5×120,000/12) (50,000)

(c) Effective exchange rate Rupees

KK sells its receipts (2m×218.5) 437,000,000
Loss (17×120,000×5) (10,200,000)
Net receipts A 426,800,000

Effective exchange rate [A÷2m] (Rupees per USD) 213.40

A.9 Lahore Quotient

(a) Existing WACC
Ke × E + Kd × D
WACC =
E+D
0.132(𝐖−𝟏)×1,177,580,000 (𝐖−𝟐) + 0.077(𝐖−𝟑) × 100,000,000
WACC = 1,177,580,000 + 100,000,000
= 12.77%

W-1: Cost of equity

Ke = Rf +(RmRf)×Be
Ke = 0.08 + (0.120.08) ×1.3 = 13.20%

W-2: Market value (MV) of equity

MV per share = d(1+g) / keg
14(1+0.1187(𝐖𝟐.𝟏)
MV per share = 0.1320.1187
= Rs. 1,177.58

MV of equity =1,000,000×1,177.58 = Rs. 1,177,580,000

W-2.1: Growth rate

S= P(1+g)n
14=10(1+g)3 ⇒ g = 11.87%

W-3: Cost of debt

Kd=Interest (1tax) = 11% (130%) = 7.70%

(b)  Option I: Issuance of new shares

Ke (Using CAPM)= 0.08 + (0.120.08) ×1.2 = 12.80%
Revised market value (MV) of equity
14(1+0.1187(𝐖𝟐.𝟏)
MV per share = = Rs. 1,684.06
0.1280.1187

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MV of equity =1,000,000×1,684.06 = Rs. 1,684,060,000

[0.128 × (1,684,060,000 + 50,000,000)] + [0.077 × 100,000,000]
WACC = 1,684,060,000 + 50,000,000 + 100,000,000
= 12.52%

 Option II: Issuance of convertible bonds

Cashflows D.F. PV D.F. PV
(Rs.) @ 10% (Rs.) @ 12% (Rs.)
Issue value 1,000 1.000 1,000 1.000 1,000
Interest (1000×0.1×0.7) (70) 3.170 (222) 3.037 (213)
Redemption (3×400) (1,200) 0.683 (820) 0.636 (763)
(42) 24

NPVA
IRR = A% + (NPV ) × (B − A)%
A −NPVB

−42
IRR = 0.1 + (−42−24) × (0.12 − 0.1) = 11.25%
[0.132 × 1,177,580,000] + [(0.077 × 100,000,000)+(0.1125 × 50,000,000)]
WACC = 1,177,580,000 + 50,000,000 + 100,000,000
= 12.71%

Recommendation: LQ should issue new shares as it will result in lower WACC.

(c) Before selecting the source of finance, KK should consider the following factors:

Amount required – The company should have a best estimate of the amount of
finance required as after financing, further long-term bank lending may be restricted
or available at a higher cost.

Cost – The company should consider both the on-going servicing cost and the initial
arrangement cost for its financing. For example, the cost of both raising and servicing
equity may be high as shareholders accept high risk in return for the promise of higher
rewards.

Duration – Broadly speaking short-term financing is used to fund short-term assets

and long-term financing used to fund long-term assets.

Flexibility – The Directors should consider balancing risk, cost and flexibility. For
example, in a year with low profits (or even a loss) the company could decide not to
pay a dividend to the shareholders. However, most debt financing requires the
payment of interest irrespective of company performance.

(The End)

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 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Autumn 2022

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9
46%
70% 08% 65% 64% 22% 62% 35% 35% 46%

General comments

The overall result is 46% which is better than the previous session’s result of 37%. It was
commonly observed that examinees performed reasonably well in the numerical parts of the
paper. However, the performance in the application of theoretical concepts was not
satisfactory. In particular, Q2 and Q5 were poorly performed. It is therefore advised that
instead of rote learning, the students should understand the underlying concepts and relate it
to practical scenarios.

Question-wise common mistakes observed

Question 1

MCQs at serial (iv), (vii), and (x) were the least well-performed.

Question 2

 Many examinees gave generalized examples and did not identify the relevant approach.
Therefore, it could not be determined which approach the examples were related to.
 Examinees could not cover most of the required approaches that could be used to
influence the government to rethink its decision to ban imports.

Question 3

Many examinees were confused when relating the “Is it fair?” and “Is it right?” questions to
the scenario. They incorrectly related them to fairness discussion under the “Is it right?”
question and vice-versa.

Question 4(a)

Examinees were generally able to identify the five elements of Porter’s primary value chain,
however, many did not explain each element.

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 Examiners’ comments on Managerial and Financial Analysis Autumn 2022

Question 4(b)

Examinees were able to recommend a value addition activity. However, many of them did
not identify the activity’s position in Porter’s primary value chain.

Question 5(a)

Many examinees mixed up the life cycle phase for Product A and Product D. Product A was
identified as the “Growth phase” and Product D as the “Introductory phase” when in fact it
was the other way around.

Question 5(b)(i)

 Many examinees were unable to identify the cost correctly.

 Some examinees even gave an example of marketing or advertising cost despite the fact
that the question specifically asked for a cost other than marketing or advertising.

Question 5(b)(ii)

 Most of the examinees were unable to identify a promotion strategy for each product.
 A number of examinees resorted to the general discussion without relating it to the
product.

Question 6

 Most examinees failed to account for the effect of inflation correctly. Some applied it
from year 2 onwards, while some did not compound the inflation from year to year.
 Many examinees failed to properly calculate last year’s depreciation. Instead of applying
the regular written-down value percentage, they took the entire remaining balance as tax-
deductible depreciation, without taking into account the scrap value.
 Some examinees failed to correctly calculate depreciation based on the reducing balance
method. They deducted the estimated scrap value from the cost of the machine to
determine the depreciable value from year 1 onwards.
 Many examinees failed to ignore the due diligence cost and the interest cost on the loan.

Question 7

 Some examinees did not correctly calculate the sales value. They either applied the 12%
price increase on both contracted and other sales of K-100 or failed to apply it altogether.
 Many examinees did not calculate the production budget correctly. Most of them failed
to account for the fact that K-50 required half of the machine hours as compared to K-
100 and therefore arrived at incorrect internal production and external purchase figures
for K-100
 Many examinees also failed to properly account for the fact that labour was hired under
a contract by which MS was bound to pay for a minimum number of hours. This had
implications on the labour rate for both minimum hours and overtime hours.
 Some examinees did not apply the inflation anywhere in their calculations.

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 Examiners’ comments on Managerial and Financial Analysis Autumn 2022

Question 8

 Some examinees did not round up the number of futures contracts to 17 considering that
futures markets do not usually allow partial contracts
 Majority of the examinees did not provide the gain/loss in terms of ticks which was one
of the requirements of this question
 Some examinees also could not calculate the loss in rupees as they failed to correctly
identify the selling and buying rates.

Question 9(a)

 Many examinees were not able to correctly calculate the market value of equity.
 Some examinees used the book value of equity to calculate the WACC.

Question 9(b)

 Under project finance by equity, in order to calculate WACC, a number of examinees

used separate costs of equity for the exiting equity and the newly issued equity which was
incorrect
 Under project finance by convertible debt, examinees made various mistakes while
calculating the IRR. For example, they did not apply the tax saving on interest, or/and
they discounted it over 3 years instead of 4.

Question 9(c)

Students generally performed well in this part of the question.

(THE END)

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 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2  01 mark for identifying and explaining each approach 4.0

 01 mark for providing an example for each approach 4.0

A.3  0.25 mark for identifying each question 1.25

 0.75 mark for application of the scenario under each question 4.75

A.4 (a)  Up to 01 mark for explaining each Porter’s primary value chain element 5.0
 01 mark for relating the various tasks of Complus under each element 5.0

(b)  Up to 02 marks for recommending a value addition activity 2.0

 Identifying the position in the Porter’s primary value chain 1.0

A.5 (a)  0.5 mark for identifying the stage of product life cycle for each product 2.0
 Up to 01 mark for explaining each identified stage of product life cycle 4.0

(b) (i) 0.75 mark for identifying a cost under each product 3.0

(ii) 01 mark for suggesting a promotion strategy for each product 4.0

A.6  Sales 1.0

 Cost of goods sold 1.0
 Operating costs – variable and fixed 1.5
 Machine purchase 0.5
 Depreciation on machine and overhauling/loss on sale of machine 3.0
 Tax 0.5
 Scrap value 0.5
 IRR determination 3.0
 Ignoring due diligence and interest cost 1.0

A.7  Sales 2.0

 Production – units 3.0
 Material – cost 2.0
 Labour – cost 3.0
 Manufacturing overheads – cost 2.0

A.8 (a) Setting up the hedge 2.0

(b) Computing the gain/loss in terms of ticks 2.0

(c) Computing the effective exchange rate 2.0

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 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022

Mark(s)
A.9 (a) Computation of:
 WACC 1.0
 cost of equity 1.0
 market value of equity 1.5
 growth rate 1.0
 cost of debt 0.5

(b)  For project financed by shares

– Cost of equity computation 0.5
– Revised market value of equity 1.0
– WACC computation 1.0
 For project financed by convertible bonds
– Determination of IRR 2.0
– WACC computation 1.0
– Conclusion 0.5

(c) Up to 01 mark for discussing each factor 4.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 8 March 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all TEN questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions.
(i) Degree program of Universal University requires more than 60% marks for final year
project. A total of 8 groups presented their final year projects and secured following
marks out of 45 marks:
30, 43, 35, 37, 25, 38, 40, 32
What are the mean, median and mode of the above data?
(a) 35, 36, 37 (b) 35, 31, No mode
(c) 34, 36, 38 (d) 35, 36, No mode (1.5)

(ii) Faiz is analysing the data of customers’ complaints and his findings set out that
12 customers registered complaints and ‘machine halt’ is the most common fault
among them. This is called _________ of data in statistics.
(a) Mode (b) Central tendency
(c) Median (d) Mean (01)

(iii) Which of the following is the difference between Ijarah and conventional finance lease?
(a) In Ijarah, the lessor bears the risk of the asset, while, in conventional lease, the
lessee bears the risk of the asset
(b) In Ijarah, the lessor transfers the ownership, while, in conventional lease, the
lessor retains the ownership
(c) In Ijarah, any surcharge for delayed payments is credited to income, while, in
conventional lease, any such surcharge cannot be credited to income
(d) In Ijarah, rental amount can be variable, while, in conventional lease, rental
amount is fixed (01)

(iv) Which TWO of the following options are considered when determining the threats
from potential entrants?
(a) Specialist knowledge required
(b) Importance of the product to the firm
(c) Differences between products/services of competitors
(d) Technology protection for existing firms (1.5)

(v) The individual products or business units of the firm can be plotted on the BCG matrix
as a circle. The size of the circle shows the relative:
(a) time taken for the product to reach that stage
(b) money value of sales for the product
(c) brand value of the product
(d) market growth of the product (01)
 Managerial and Financial Analysis Page 2 of 6

(vi) A system that takes the generic formula of medicine and recommends all the different
brands of medicine available in the pharmacy for that generic formula is an example
of:
(a) Expert System (b) Transaction Processing System
(c) Executive Information System (d) Enterprise Resource Planning System (01)

(vii) The use of encryption to protect a confidential document involves:

(a) encrypting the document with public key and decrypting it with private key
(b) encrypting the document with public key and decrypting it with public key
(c) encrypting the document with private key and decrypting it with public key
(d) encrypting the document with private key and decrypting it with the same key (01)

(viii) Which of the following is the difference between Musharaka and Mudaraba financing?
(a) In Musharaka, profits are shared equally, while, in Mudaraba, profits are shared
on a pre-agreed ratio
(b) In Musharaka, only one party provides management responsibility, while, in
Mudaraba, all parties share management responsibility
(c) In Musharaka, both parties provide the capital, while, in Mudaraba, only one
party provides the capital
(d) In Musharaka, losses are borne by all parties, while, in Mudaraba, losses are
borne by the Mudarib (01)

(ix) Which TWO of the following options are NOT ‘Coincident economic indicators’?
(a) Industrial production
(b) Index of business confidence
(c) Number of people in employment
(d) Stock market index (1.5)

(x) Mean value of share prices of three companies over 5 years and their standard deviation
are tabulated as follows:

Mean value of Standard

share price (Rs.) deviation (Rs.)
Company A 230 20
Company B 230 45
Company C 230 30

Based on the above data, which of the following TWO statements are correct?
(a) Share price of all the companies carry similar risk as mean value in all cases is
the same
(b) Share price of company A is most stable as its standard deviation is the lowest
among all companies
(c) Share price of company A is most volatile as its standard deviation is the lowest
among all companies
(d) Share price of company C is more stable than company B but more volatile than
company A (1.5)

(xi) While evaluating the financial feasibility of a new project, the finance director
concluded that the project has a positive net present value (NPV) at the end of the
project when discounted at the cost of capital of 18%. What would be the internal rate
of return (IRR) of this project?
(a) It would also be 18%
(b) It would be lower than 18%
(c) It would be higher than 18%
(d) It would depend on a number of other factors and could be higher or lower (01)
 Managerial and Financial Analysis Page 3 of 6

(xii) Which of the following is the corrupt data that replicates itself within the system,
moving from one file or program to another?
(a) Worms (b) Trojan Horse
(c) Trap Door (d) Logic bomb (01)

(xiii) Businesses may try to influence the government policies by mobilizing employees,
shareholders, customers, etc. to support their agenda. This method of influencing is
called:
(a) Advocacy Advertising (b) Stakeholder Coalition
(c) Trade association (d) Public Relation (01)

Q.2 The management team at 24Seven, a call centre, notices that their call handling times, one of
their critical success factors (CSFs), have been consistently underperforming. The
management determines that the lack of proper training and inadequate staffing are the main
reasons for the declining performance. The data shows that the desired call handling time to
achieve the competitive advantage is 30 seconds, but the actual call handling time recorded is
45 seconds.
Given the importance of the issue, the management has hired 3 additional staff and
emphasized on setting ambitious training targets to resolve the matter within the next three
months. The management is closely following the progress of implementing the plan and has
recorded a decrease in call handling time to 35 seconds for the first month. For the second
month the target is to reduce call handling time to 30 seconds, which will outbeat the
competition, and 28 seconds in the third month to solidify their position as a market leader in
call handling times.

Required:
Identify, explain and relate Johnson and Scholes six-step approach to using CSFs from the
scenario above. (10)

Q.3 (a) FabTabz (FT) designs, assembles, packages and distributes high-end tablets. FT is
known for its unique designs and recognizes it as their core product offering. Due to a
recent surge in demand, FT is facing challenges in meeting customer orders in a timely
manner without compromising on product quality. FT is considering outsourcing some
of its activities to meet the demand.
Required:
Explain outsourcing and provide reasons why FT should opt for outsourcing to meet
the demand. Also, explain which activities should FT outsource. (05)
(b) Explain what disruptive technology means. Also, state two examples of disruptive
technology. (03)

Q.4 Presented below are the three independent situations:

(i) Abbas, ACA, is the in-charge of approving tender applications on behalf of his
company. Recently, he awarded a large tender to Bulk Limited because its CEO had
been his mentor during his struggling years.
(ii) Adnan, an audit senior, is auditing a client where his friend, Aliya, works. In a casual
conversation, Adnan told Aliya that she gets paid the lowest salary among all the
officers of her grade.
(iii) Salman, an audit supervisor, intentionally missed many trainings that were deemed
necessary to conduct the audit of the firm’s clients.
Required:
In the light of ICAP’s Code of Ethics, identify and explain the fundamental principles, other
than professional behaviour, that may be violated in each of the above cases. (06)
 Managerial and Financial Analysis Page 4 of 6

Q.5 Fawad Ahmed, a consultant, wants to predict the annual revenue (Rs. in million) on the basis
of number of marketing campaigns launched in a given year. He has collected the required
data and performed regression analysis on it. The table below shows the results obtained.

y-intercept (b0) 4.78

Sample slope coefficient (b1) 2.03
Coefficient of determination (R2) 0.85
Rejection region for 5% significance level + 2.074
t-statistic 7.37

Required:
(a) Assess the significance of the relationship between annual revenue and marketing
campaigns launched. Also, explain the meaning of R2 value obtained. (04)
(b) Suggest how much revenue can Fawad Ahmed expect if he launches four marketing
campaigns next year. (02)

Q.6 Star Business School (SBS), a renowned world-class education provider, is offering a range of
degree courses in business, accounting, finance, human resource, hospitality management,
marketing, and supply chain management. The school boasts a strong faculty, high-quality
research, state-of-the-art infrastructure, and a zero-tolerance policy for quality education.
SBS has been receiving grants from the government to support its futuristic educational
activities. However, due to political instability and a deteriorating economic situation in the
country, the educational sector has experienced a decline in grants over the past year. Further,
it has been under consideration that the grant shall be given to a university only on the
recommendation of the Higher Education Commission and its related bill has recently been
placed before the National Assembly.

In order to remain competitive, SBS has invested heavily in the latest software and technology
for its education program, to ensure smooth delivery of lectures both online and in-person. It
is also reserving seats and offering scholarships for international students, and is working on
student and faculty exchange programs with world-class universities. SBS's long-term plans
include launching various online programs for international students and opening facilitation
offices in countries with a high potential for collaborations and international students.

Required:
Conduct PESTEL analysis on the information provided for SBS. (10)

Section B

Q.7 Cherat Mobiles (CM) produces and sells smart mobile accessories. It is planning to introduce
a low-priced smart watch for the local market. Following information has been gathered in
this respect:
(i) Research and development team incurred an amount of Rs. 0.5 million on market and
product research. However, only Rs. 0.2 million was paid as an advance and the
remaining amount is due for payment in two months' time.
(ii) Initial investment in the new plant for manufacturing the smart watch would be
Rs. 250 million including installation and commissioning of the plant. The plant would
be partly financed through a loan of Rs. 100 million at an interest rate of
18% per annum. The interest would be payable annually and the principal amount
would have to be repaid at the end of 5th year.
(iii) The plant would be installed in a building owned by CM which has been currently
rented out at Rs. 0.5 million per month.
(iv) CM expects to produce 3,000 watches per month. Sales volume is expected to increase
by 5% per annum. Contribution margin is estimated to be Rs. 4,000 per watch, whereas
the annual fixed cost is estimated to be Rs. 58 million.
 Managerial and Financial Analysis Page 5 of 6

(v) Additional working capital requirements are estimated to be Rs. 15 million which
would be realized at 80% of its value at the end of 5th year. No further investment in
working capital is expected during the course of the project.
(vi) The plant would be depreciated at the rate of 15% under the reducing balance method.
The plant supplier has offered to repurchase the plant for Rs. 80 million (at current
prices) at the end of 5th year. CM would have to incur dismantling costs of
Rs. 1.2 million (at current prices) at the end of 5th year.
(vii) All revenues and costs are quoted on today's rate and are expected to remain the same
in the first year. Thereafter, the estimated annual inflation of 9% would be applicable
on all future revenues and costs.
(viii) Applicable tax rate is 30% and tax would be payable / refundable in the year in which
it arises. Dismantling costs are allowed as an expense by the tax authorities when they
are incurred.
(ix) CM's cost of capital is 20%.

Required:
By using the net present value method, recommend whether CM should launch the new smart
watch. (Assume that all cash flows arise at the end of each year unless otherwise specified) (15)

Q.8 Faran Limited (FL) manufactures and sells a specialised machine. It is currently in the process
of finalizing its sales plan for 2023. According to the sales director, the main obstacle to
increasing sales is the availability of working capital finance. The finance director informed
that any increase in sales would increase:
 the trade receivables by 80% of the additional sales amount;
 the inventories by 60% of the additional sales amount; and
 the trade payables by 35% of the additional sales amount.

Following is the summary of FL's financial position as at 31 December 2022:

Assets Rs. in million Equity and liabilities Rs. in million
Plant and machinery 950 Long term debt 465
Current liabilities:
Current assets: Trade payables 405
Inventory 500 Other payables 110
Trade receivables 300 Equity:
Cash and bank balances 30 Share capital 350
Retained earnings 450
1,780 1,780

The sales for the year ended 31 December 2022 was Rs. 2,200 million, and the net profit after
tax was 15% of the sales amount. FL distributes 25% of profit after tax as dividend to its
shareholders. It is expected that profit after tax and dividend distribution for the year 2023
will be in line with 2022.

All receipts and payments except dividend can be assumed to occur evenly throughout the
year. Dividend is paid on the last day of the financial year.

Required:
(a) Determine the amount of additional working capital finance required to achieve a 25%
increase in sales next year. (03)
(b) Estimate the maximum growth in sales that FL can achieve under each of the following
independent assumptions:
(i) No external financing is available. (02)
(ii) Only debt financing is available to the extent that existing debt equity ratio is
maintained at the end of 2023. (04)
 Managerial and Financial Analysis Page 6 of 6

Q.9 (a) Apart from market risk, identify other broader categories of financial risks that a business
is subjected to. Also identify two strategies to manage each of the identified financial
risks. (03)
(b) Fifa Sports Limited (FSL) imports raw material from China. FSL has to pay
CNY 1,000,000 in six months’ time. FSL plans to hedge this exposure to currency risk
using a money market hedge. Following information is available in this regard:
Deposit Borrowings
Interest rates
--- Rate per annum ---
In CNY (3 months) 11.35% 15.12%
In CNY (6 months) 11.71% 15.81%
In PKR (3 months) 12.12% 17.01%
In PKR (6 months) 12.90% 17.16%

PKR/CNY
Current spot exchange rate PKR 34.5
Estimated exchange rate in 3 months PKR 36.8
Estimated exchange rate in 6 months PKR 37.6
Required:
Construct money market hedge and determine the effective exchange rate. Recommend
whether the hedge would be beneficial for FSL. (06)

Q.10 International Packaging Limited (IPL) is in business of packaging material for a range of food
products. Following information has been extracted from IPL’s financial statements as on
31 December 2022:
Rs. in '000
Ordinary share capital (Rs. 10 each) 100,400
Irredeemable preference share capital (Rs. 100 each) 20,400
9% redeemable bonds (Rs. 100 each) 30,200
Additional information:
Existing businesses:
(i) IPL distributes 60% of its earnings as cash dividend. Following is the trend of its earing
per share (EPS) for the preceding six years:
For the year ended 31 December 2017 2018 2019 2020 2021 2022
EPS (Rs.) 16 19 21 24 26 28
(ii) The return on government securities is 9% per annum whereas market risk premium is
5% per annum. IPL’s current equity beta is 1.2.
(iii) IPL pays Rs. 20 as annual dividend on each preference share every year. The current
market price of preference shares is Rs. 185 each.
(iv) 9% redeemable bonds will be redeemed on 31 December 2025 at 15% premium. The
current market price of these bonds is Rs. 110 each.
(v) Applicable tax rate is 30%.
New business:
(i) IPL is planning to setup one more packaging unit. Total cost of the project is estimated
to be Rs. 45 million which will be financed by issuing 15% redeemable preference shares
of Rs. 100 each at par value. These shares will be redeemed after 4 years at a premium
of 20% above par value.
(ii) IPL estimates that, as a result of this new investment, the equity beta will increase to 1.3.
Required:
(a) Compute IPL’s weighted average cost of capital (WACC) of the existing business. (07)
(b) Calculate the impact of new business on IPL’s existing WACC. Also discuss the effect
of the revised WACC on the overall market value of the company. (05)
(THE END)
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

Ans.1 (i) (d) 35, 36, No mode

(ii) (a) Mode
(iii) (a) In Ijarah the lessor bears the risk of the asset, while in conventional lease the
lessee bears the risk of the asset
(iv) (a) Specialist knowledge required
(d) Technology protection for existing firms
(v) (b) money value of sales for the product
(vi) (a) Expert System
(vii) (a) encrypting the document with public key and decrypting it with a private key
(viii) (c) In Musharaka, both parties provide the capital, while, in Mudaraba only one
party provides the capital
(ix) (b) Index of business confidence
(d) Stock market index
(x) (b) Share price of company A is most stable as its standard deviation is the lowest
among all companies
(d) Share price of company C is more stable than company B but more volatile
than company A
(xi) (c) It would be higher than 18%
(xii) (a) Worms
(xiii) (b) Stakeholder Coalition

A.2 24Seven
Step 1 - Identify the critical success factors that are essential for profitability.

Short/minimal call handling time is one of their critical success factors (CSF).

Step 2 - Identify what is necessary (the ‘critical competence’) in order to achieve a superior
performance in the critical success factors.

The critical competence in this case is adequate number of staff and their proper training.

Step 3 - The entity should develop the level of critical competence so that it acquires the
ability to gain a competitive advantage in the CSF.

The staff, new and existing, should be trained to reduce the call handling time.

Step 4 - Identify appropriate key performance indicators for each critical competence.

The target KPI is to reduce the call handling time from 45 seconds to the desired level of 30
seconds or less.

Step 5 - Give emphasis to developing critical competencies for each aspect of performance,
so that competitors will find it difficult to achieve a matching level of competence.

Given the importance of the issue, the management has hired 3 additional staff and
emphasized on setting an ambitious training target to resolve the matter within the next
three months.

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 Managerial and Financial Analysis
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Certificate in Accounting and Finance – Spring 2023

Step 6 - Monitor the firm’s achievement of its target KPIs and also monitor the competitors’
comparative performance.

The management closely followed the progress in implementing the plan and has recorded
a decrease in call handling time to 35 seconds for the first month. Getting the call handling
time reduced to 28 seconds as planned shall solidify their position as a leader in the market
for call handling times.

A.3 (a) FabTabz

Outsourcing means arranging for other business organisations to perform some
administrative tasks, or management tasks, instead of having to employ individuals
to do the task internally, as part of the organisation’s own activities.

When a business performs all these non-core activities itself, this diverts management
attention away from the core competences. The management should focus on its
strengths, not the routine and ordinary. It should therefore outsource ‘noncore’
activities and concentrate on its core activities, to make sure that it maintains or
improves its competitive advantage over rivals.

Therefore, FabTabz should outsource its non-core activities i.e. product assembly,
packaging and distribution to specialized vendors to meet the demand.

(b) Disruptive technology is an innovation that significantly alters the way consumers,
industries, or businesses operate.

The examples are: 3D printing, Blockchain Technology and Biotechnology.

A.4 ICAP’s Code of Ethics

(i) Abbas violated the:
 principle of integrity:
A chartered accountant must be honest and straightforward in his professional
and business dealings. This includes a requirement for ‘fair dealing’ and a
requirement to be truthful.
 principle of objectivity:
An accountant must not allow his professional or business judgement to be
affected by: bias (personal prejudice), conflicts of interest and undue influence
from others

(ii) Principle of confidentiality is violated. The principle of confidentiality requires an

accountant to respect the confidentiality of information acquired as a result of
professional and business relationships.

(iii) Principle of professional competence and due care is violated. Compliance with this
means to attain and maintain professional knowledge and skill at the level required
to ensure that a client or employing organization receives competent professional
service, based on current technical and professional standards and relevant
legislation.

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 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.5 (a) Fawad Ahmed

The t statistic value is 7.37, which is more than +2.074.

Therefore, the results obtained are significant to ascertain the linear relationship
between annual revenue generated in millions and number of marketing campaigns
launched in a given year.

The r2 is equal to 0.85. This tells that 85% of the variation in the amount of annual
revenue generated is explained by the variation in the number of marketing
campaigns.

(b) y = b0 + b 1 x
Annual revenue expected = 4.78 + 2.03 × 4 = 12.90 million

A.6 Star Business School

A PESTEL analysis for Star Business School (SBS) would consider the following factors:

Political:
SBS is facing political instability in the country and a decline in grants from the government,
which could impact its future plans and activities.

Economic:
The overall deteriorating economic conditions of the country are affecting the education
sector and causing a decrease in grants. However, SBS is trying to stay competitive by
offering scholarships and launching online programs for international students.

Social:
SBS is working on student and faculty exchange programs to collaborate with world-class
universities, which could help improve its reputation and attract international students.

Technological:
SBS has invested in the latest software and technology to ensure smooth online and face-
to-face lectures, which will ensure smooth delivery of lectures both online and in-person.

Environmental/Ecological:
The impact of the school's activities on the environment is not addressed in the given
situation.

Legal:
A bill has recently been placed in the National Assembly to issue grant to a university only
on the recommendation of Higher Education Commission. If the bill is passed it could
impact SBS’s ability to achieve its goals.

Page 3 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.7 Cherat Mobiles

Y0 Y1 Y2 Y3 Y4 Y5
------------------------- Rs. in million -------------------------
Research cost - - - - - -
Machinery and equipment (250.00) - - - - -
Loan – receipt and repayment - - - - - -
Working cap. – invest. & release (15.00) - - - - 12.00
Profit after tax (W-1) - 29.75 44.22 59.84 76.98 94.12
Add: Depreciation - 37.50 31.88 27.09 23.03 19.58
Add: Loss/(gain) on disposal - - - - - (2.00)
Add: Working capital loss 3.00
Sale value - machinery & equip. - - - - - 112.93
Cash flows (265.00) 67.25 76.10 86.93 100.01 239.63
Discount factor 1.000 0.833 0.694 0.579 0.482 0.402
Discounted cash flow (265.00) 56.02 52.81 50.33 48.20 96.33

NPV 38.69

Conclusion: As the company has a positive NPV, the company should proceed with the investment

W-1: Accounting profit after tax Y1 Y2 Y3 Y4 Y5

Annual sales volume (3,000 watches×12×5%) 36,000 37,800 39,690 41,675 43,758

Contribution margin (4,000×9%) 4,000.00 4,360.00 4,752.40 5,180.12 5,646.33

--------------------- Rs. in million ---------------------

Contribution margin 144.00 164.81 188.62 215.88 247.07
Fixed cost (excluding depreciation) (58.00) (63.22) (68.91) (75.11) (81.87)
Depreciation - machinery & equipment(W-2) (37.50) (31.88) (27.09) (23.03) (19.58)
Gain on disposal of machine - - - - 2.00
Dismantling cost - - - - (1.69)
Rental income loss - (6.00) (6.54) (7.13) (7.77) (8.47)
Working capital loss – bad debt - - - - (3.00)
Interest on loan (to be ignored) - - - - -
Profit before tax 42.50 63.17 85.49 109.97 134.46
Taxation 30% (12.75) (18.95) (25.65) (32.99) (40.34)
Profit after tax 29.75 44.22 59.84 76.98 94.12

W-2: Depreciation @ 15% Y1 Y2 Y3 Y4 Y5

------------------------- Rs. in million -------------------------
Depreciation for the year (37.50) (31.88) (27.09) (23.03) (19.58)
Carrying amount 250.00 212.50 180.62 153.53 130.50 110.93

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 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.8 Faran Limited

(a) Additional finance required Rs. in million
Current sales 2,200.0
Additional sales – 25% increase 550.0
2,750.0
Expected increase in:
− trade receivable (550×80%) 440.0
− inventory (550×60%) 330.0
− payables (550×35%) (192.5)
Retained profit for the year (2,750 ×15%×75%) (309.4)
Additional finance required 268.1

(b) (i) Maximum growth in sales in case no external financing available

That would mean that any increase in net assets should be equal to increase in
retained earnings:

Let 𝑥 be the required growth rate:

(2200𝑥 × 80%) + (2200𝑥 × 60%) − (2200𝑥 × 35%) = 2200 × (1+ 𝑥) × 15% × 75%
⟹ 1760𝑥 + 1320𝑥 − 770𝑥 − 247.5𝑥 = 247.5
⟹ 2062.5𝑥 = 247.5 𝑥 = 247.5 ÷ 2062.5 = 12.00%

(ii) Maximum growth limited upto the current debt equity ratio:

D/E Ratio = 465 ÷ 800 = 58.13%

A loan of 58.13% of the additional earning must be obtained so that this ratio is
maintained:

(2200𝑥 × 80%) + (2200𝑥 × 60%) − (2200𝑥 × 35%) = [2200 × (1+𝑥) × 15% × 75%]
+ [{2200 × (1+𝑥) × 15% × 75%} × 58.13%]
⟹ 1760𝑥 + 1320𝑥 − 770𝑥 − 247.5𝑥 − 143.87𝑥 = 247.5 + 143.87
⟹ 1918.63𝑥 = 391.37 𝑥 = 391.37 ÷ 1918.63 = 20.40%

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 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.9 (a) Apart from market risk, businesses may be subject to the following financial risks:

Credit Risk:
Credit risk is the risk of loss as a result of a borrower's inability to make a payment on
a debt obligation.
Some key strategies to manage credit risk are:
 Setting credit limits
 Regular monitoring
 Guarantees
 Credit insurance

Liquidity Risk
Liquidity risk is the risk that a business may not be able to meet its short-term
obligations.
Some key strategies to manage liquidity risk are:
 Standing credit lines
 Regular monitoring of working capital ratios

(b) Fifa Sports Limited

Step 1 – Compute required CNY to deposit now for 6 months
FSL will be paying CNY 1,000,000 in six months’ time.
The deposit rate will be 11.71%.
Interest rate for six months will be 11.71% × 6/12 = 5.855% or 0.05855.
Required amount now to make CNY 1,000,000 after 6 months
Final amount/ (1 + interest rate for the period) = 1,000,000 ÷ 1.05855 = CNY 944,689

Step 2 – Funds required in PKR to deposit CNY

Local currency equivalent = CNY 944,689 × PKR 34.5 = PKR 32,591,770

Step 3 - Borrow in PKR and pay in 6 months’ time (Interest & Principal)
The borrowing rate will be 17.16%.
Interest rate for six months will be 17.16% × 6/12 = 8.58%
PKR
Principal 32,591,770
Interest @ 8.58% 2,796,374
Total 35,388,144

Step 4 – Pay CNY on its due date and calculate effective rate
Convert the borrowed LC loan into FC and deposit. After 6 months the deposit will
increase to CNY 1,000,000 which can be used to pay on the due date to the supplier.

Effective exchange rate

Effective Rate (PKR 35,388,144/CNY 1,000,000) = PKR 35.39

Conclusion:
The hedge is likely to be beneficial since the effective exchange rate is lower than the
estimated actual spot rate after 6 months.

Page 6 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.10 International Packaging Limited

(a) Cost of equity

Ke = Rf + (Rm ̶ Rf ) × Be = 9% + (5% × 1.2) = 15.00%

Dividend growth

Year EPS (Rs.) Year Dividend (Rs.) @ 60%

Dec-17 16 Dec-17 9.6
Dec-22 28 Dec-22 16.8

S = P(1+g)n ⟹ 16.8 = 9.6(1 + g)5 = 11.843%

Market value - Ordinary share capital

MV per share = d(1 + g) ÷ Ke ̶ g ⟹ 16.8(1+0.11843)÷0.15– 0.11843 = Rs. 595.17

Cost of 9% redeemable bonds

Cash flow Discount Present Discount Present
Years
(Rs.) factor 10% value (Rs.) factor 8% value (Rs.)
0 110.0 1.000 110.00 1.000 110.00
1 (6.3) 0.909 (5.73) 0.935 (5.89)
2 (6.3) 0.826 (5.20) 0.873 (5.50)
3 (121.3) 0.751 (91.10) 0.816 (99.02)
7.97 (0.41)

NPVa
IRR = L + × (H – L) = 7.15%
NPVa – NPVb

Cost of irredeemable preference shares

d 20
MV = ⟹ = 10.81%
rp 185

Weighted average cost of capital – Existing

Units Per unit Total MV Cost

Description Cost %
(in '000) MV Rs. in '000 Rs. in '000
Ordinary shares 10,040 595.17 5,975,507 15.00% 896,331
9% Redeemable
bonds 302 110.00 33,220 7.15% 2,375
Preference shares 204 185.00 37,740 10.81% 4,080
6,046,467 902,786

WACC = 902,786 ÷ 6,046,467 = 14.93%

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 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

(b) Revised cost of equity & market value (MV) of ordinary shares
Ke = Rf + (Rm – Rf ) × Be = 9% + (5% × 1.3) = 15.50%

MV per share = d(1+g) ÷ Ke – g ⟹16.8(1+0.11843) ÷ 0.155 – 0.11843 = Rs. 513.8

Cost of new redeemable preference shares:

Cash Flow Discount Present Discount Present
Years
(Rs.) factor 20% Value factor 15% Value
0 100 1.000 100.00 1.000 100.00
1 (15) 0.833 (12.50) 0.870 (13.04)
2 (15) 0.694 (10.42) 0.756 (11.34)
3 (15) 0.579 (8.68) 0.658 (9.86)
4 (135) 0.482 (65.10) 0.572 (77.19)
3.30 (11.43)
NPVa
IRR = L + × (H – L) = 18.88%
NPVa – NPVb

Weighted Average Cost of Capital - Revised

Units Per unit Total MV Cost
Description Cost %
(in '000) MV Rs. in '000 Rs. in '000
Ordinary shares 10,040 513.80 5,158,552 15.50% 799,576
9% redeemable bonds 302 110.00 33,220 7.15% 2,375
20% preference shares 204 185.00 37,740 10.81% 4,080
15% redeemable
450 100.00 45,000 18.88% 8,496
preference shares
5,274,512 814,527

WACC = 814,527 ÷ 5,274,512 = 15.44%

Conclusion:
As a result of increase in the WACC, the overall market value (equity, preference and
debt capital) of the company will fall.

(THE END)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Spring 2023

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9 10
50%
69% 37% 53% 65% 17% 32% 75% 16% 68% 51%

General comments

The overall result is 50%, which is slightly better than the previous session’s result of 46%.
This improvement can be primarily attributed to the slightly better performance in the
numerical components of the examination, while the performance in the theoretical segment
remained consistent with the previous session.

An observation was made that a significant number of examinees did not attempt Q5 on
statistics and Q8(b) on working capital. This observation indicated that students had adopted
a selective approach while preparing for their exams, focusing on specific areas while
neglecting others.

Question-wise common mistakes observed

Question 1

MCQs at serial (iv), (ix), and (x) were the least well-performed.

Question 2

 Many examinees were not aware of the order of Johnson and Scholes’s six-step approach
and the steps were presented out of sequence.
 Many examinees were not able to relate the scenario given to the six steps.

Question 3(a)

Examinees were not able to properly explain what outsourcing is and/or provide a clear
justification for outsourcing.

Question 3(b)

Examinees were unable to provide a proper explanation of disruptive technologies, with some
even mistakenly identifying viruses and similar entities as disruptive technologies.

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2023

Question 4

Examinees were able to correctly identify the fundamental principle that was violated.
However, many of them were not able to properly explain it.

Question 5(a)

 A high number of examinees did not attempt this question.

 Examinees were unable to relate the t-statistic with the rejection region for a 5%
significance level and evaluate the significance of the relationship in the results.

Question 5(b)

 A high number of examinees did not attempt this question.

 Examinees failed to apply the formula correctly, resulting in their inability to calculate
the revenue in the event of launching four marketing campaigns.

Question 6

 Examinees were unable to correctly relate the provided information to the specific
PESTEL factors. For instance, the legal factor was mistakenly grouped under the political
factor.
 Many examinees conducted a general PESTEL analysis without considering the specific
situation of SBS.

Question 7

 Examinees incorrectly accounted for the effect of inflation. Some applied it only from
year 1, while others failed to compound the inflation from year to year.
 Some examinees overlooked the receipt and payment of loans, as well as the research and
interest costs associated with the loan.
 Many examinees mistakenly included the loss of rental income as part of taxable income,
leading to an incorrect calculation of the tab expense.

Question 8

 The majority of examinees only completed part (a) of this question. Many of them failed
to consider the impact of retained profit for the year on the additional finances required.
 A significant number of examinees did not attempt part (b) of this question. Among those
who did, many encountered difficulties in applying algebraic logic correctly to reach the
solution.

Question 9(a)

Many examinees were not able to identify the other categories of financial risks. Instead of
identifying the categories of financial risks, they mistakenly provided general categories of
risk i.e. pure risk and speculative risk.

Page 2 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2023

Question 9(b)

Some examinees chose incorrect deposit and borrowing rates when calculating the funds
required. Additionally, some examinees neglected to calculate the effective exchange rate.

Question 10

 Many examinees failed to recognize that the market risk premium was already provided
in the question, and they were not required to calculate it. Those who attempted to
calculate it arrived at a cost of equity that was lower than the risk-free rate of return.
 Instead of calculating the dividend, many examinees used EPS to determine the market
value of share capital based on the Gordon/Dividend growth model.
 When calculating the IRR of the redeemable preference share, many examinees
incorrectly applied tax benefits to the preference dividend.
 Many examinees were unaware that the market value of the company as a whole is
inversely proportional to the WACC. Several examinees concluded that an increase in
WACC would lead to an increase in the market value of the company.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2023

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2  Up to 01 mark for identification and explanation of each step 5.0

 Up to 01 mark for relating it with the case study 5.0

A.3 (a)  Defining ‘outsourcing’ 1.0

 Providing FT specific reasons for outsourcing 2.0
 Providing examples of activities that could be outsourced 2.0

(b)  Explaining disruptive technology 1.0

 Providing examples of disruptive technologies 2.0

A.4 Up to 1.5 marks for identification and explanation of each violated principle 6.0

A.5 (a)  Comparing t-statistic with the rejection region 1.0

 Evaluating the significance of the linear relationship 2.0
 Explaining the R2 value 1.0

(b) Computing the expected revenue 2.0

A.6 Up to 02 marks for relating the information provided to each PESTEL factor 10.0

A.7  Working capital investment and release 1.0

 Machinery and equipment 0.5
 Loss of rental income 1.5
 Add back of depreciation and gain on disposal 1.0
 Sale value – machinery and equipment 1.5
 Discounting and NPV calculation 1.5
 Contribution margin 2.0
 Fixed cost 1.0
 Depreciation 1.0
 Gain on disposal 1.0
 Dismantling cost 1.0
 Taxation 0.5
 Conclusion 0.5
 Ignoring research and interest costs and receipt and payment of loan 1.0

A.8 (a)  Additional sales and increase in trade receivables, inventory and payables 1.0
 Retained profit for the year 2.0

(b) (i) Estimating maximum sales growth if no external financing is available 2.0

(ii)  Computing existing debt equity ratio 0.5

 Estimating maximum sales growth if financing available to the extent
of exiting debt equity ratio 3.5

Page 1 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2023

Mark(s)
A.9 (a)  0.5 mark for defining the other financial risks 1.0
 01 mark for identifying two risk management strategies 2.0

(b)  Step 1 – Compute required CNY 2.0

 Step 2 – Funds required in PKR 1.0
 Step 3 – Borrow in PKR 1.5
 Step 4 – Pay CNY and calculate effective exchange rate 1.0
 Conclusion 0.5

A.10 (a)  Computation of cost of equity 0.5

 Dividend growth percentage 1.5
 Market value - Ordinary share capital 1.0
 Cost of 9% redeemable bonds 2.0
 Cost of irredeemable preference shares 0.5
 WACC computation 1.5

(b)  Computation of revised cost of equity 0.5

 Revised market value 1.0
 Cost of new redeemable preference shares 2.0
 Revised WACC computation 1.0
 Conclusion 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 6 September 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all TEN questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions.
(i) The higher management is considering to implement a structured risk management
process in the organization. Which of the following should be considered the most
fundamental step?
(a) Procuring tools for risk evaluation
(b) Establishing a dedicated risk management department
(c) Formulating a response to potential risk
(d) Setting clear expectations about the importance of risk awareness and open
dialogue (01)

(ii) Which of the following statements correctly defines disruptive technology?

(a) An innovation that has a minimal impact on existing systems or habits
(b) An innovation that significantly alters the way consumers operate but doesn't
affect industries or businesses
(c) An innovation that significantly alters the way consumers, industries, or
businesses operate and sweeps away the systems or habits it replaces due to its
superior attributes
(d) An innovation that affects only industries and businesses but not consumers (01)

(iii) Which of the following is NOT a component of the microeconomic environment?

(a) Consumer behaviour
(b) Broad economic factors that affect the entire economy
(c) Demand and supply forces in the marketplace
(d) Market environment (01)

(iv) Nowadays, consumers increasingly rely on ratings and reviews from previous buyers,
especially through online means, when making purchasing decisions. This is an
example of which social factor:
(a) Attitudes and lifestyles (b) Demography
(c) Law and order (d) Health (01)

(v) Which of the following best explains a deep-discounted bond?

(a) A bond with a low coupon rate that adjusts annually
(b) A bond with a low coupon rate that is sold at a significant discount to its fair
value
(c) A bond with a high coupon rate but sold at a significant discount to its fair value
(d) A bond that is available in the market at a significant discount to its issue price (01)
 Managerial and Financial Analysis Page 2 of 6

(vi) ERP (Enterprise Resource Planning) systems are extensively utilized in organizations
across various industries and sectors. These software solutions play a pivotal role in
optimizing business processes.

Which of the following statements about ERP systems is true?

(a) ERP systems are primarily used for processing routine transactions like sales
orders and bookkeeping
(b) ERP systems are designed exclusively for providing senior executives with
up-to-date information for decision-making
(c) ERP systems are expert systems that offer advice and recommendations in
specific areas of expertise
(d) ERP systems aim to integrate multiple information systems across the
organization and enhance overall business strategy and operations (01)

(vii) Which of the following is a characteristic of a zero-coupon bond?

(a) Investor return is gained through capital appreciation

(b) It can have only one annual interest payment
(c) It is ideal for those investors who require a periodic return
(d) It cannot be sold before its maturity date (01)

(viii) Which of the following statements does NOT represent the characteristic of asset
securitization and sale?

(a) It is commonly employed within the financial services sector

(b) It facilitates the transformation of non-marketable assets into marketable ones
(c) It enables companies to obtain borrowing rates reflective of the assets’ rating
rather than the company’s own rating
(d) It is commonly utilized for short-term financing needs (01)

(ix) Which of the following correctly distinguishes between investment returns and
speculation returns?

(a) Investment returns are usually generated only through capital appreciation,
while speculation returns result from both capital appreciation and yield
(b) Speculation returns are usually derived from non-marketable assets, while
investment returns are derived from marketable assets
(c) Speculation returns are usually generated through capital appreciation, while
investment returns result from both capital appreciation and yield
(d) Speculation returns are usually derived from marketable assets, while investment
returns are derived from non-marketable assets (01)

(x) A negative or inverse yield curve indicates that the market expects:

(a) long-term interest rates to fall at some time in the future

(b) short-term interest rates to fall at some time in the future
(c) short-term interest rates to rise at some time in the future
(d) long-term interest rates to rise at some time in the future (01)

(xi) An investor has purchased a put option on the shares of Vortex Limited (VL) at a strike
price of Rs. 50 per share and paid a premium of Rs. 7 per share. If at expiration, the
shares of VL are trading at Rs. 42, what will the investor most likely do?
(a) Exercise the option and make a net loss of Rs. 15 per share
(b) Not exercise the option as the shares can be bought at lower than the strike price
(c) Not exercise the option and make a net loss of Rs. 7 per share
(d) Exercise the option and make a net profit of Re. 1 per share (1.5)
 Managerial and Financial Analysis Page 3 of 6

(xii) A company has purchased an interest rate call option with a strike price of 18% per
annum and a premium of 1% per annum for a notional three-month deposit of
Rs. 100 million. If at expiration, the interest rate is 15%, what would be the net
annualized interest as a percentage annual rate?
(a) 17% (b) 16% (c) 19% (d) 14% (1.5)

(xiii) GG Limited (GGL) has achieved an annual earnings per share of Rs. 60 and has
reinvested 70% of the earnings as retained earnings while distributing 30% as dividends.
Assuming that GGL is expected to continue this practice every year, and with a cost of
equity capital of 18%, what is the approximate expected value of each GGL’s share?
(a) Rs. 876 (b) Rs. 151 (c) Rs. 375 (d) Rs. 502 (02)

Q.2 Ali, a marketing manager at a software company specializing in mobile app development, has
task of overseeing the marketing strategy for IQRA, an Arabic language learning app targeting
the Indo-Pak region.
Despite IQRA's unique features, user-friendly interface, and cultural relevance, the fiercely
competitive market and limited brand recognition pose significant challenges. Catering to
varying language learning perceptions and localization challenges within the region adds
complexity to the endeavour. The marketing team must navigate these hurdles with a limited
budget while capitalizing on factors like the growing smartphone penetration, increasing
interest in Arabic learning, and using social media and influencer marketing. Building
partnerships with educational institutions will also be crucial for reaching the target audience
effectively. To succeed, Ali's team must closely monitor and adapt to changing user
preferences and promptly address any negative reviews or feedback. Moreover, they need to
ensure compliance with regional legal and regulatory requirements to maintain user trust.
Required:
(a) Conduct SWOT analysis for IQRA. (06)
(b) Based on your answer in (a) above, suggest how each identified threat could be tackled
using strengths of IQRA. (Note: Clearly state the strengths used to answer the question) (04)

Q.3 Nawaz Ali, a senior consultant at Vertex Financial Advisors, uncovers financial irregularities
in a prominent client's records and promptly reports the same to the managing partner, Asif
Ahmed. However, Asif Ahmed faces a challenging decision, as taking action against the client
could lead to financial losses for both the firm and the client.
Required:
Apply Tucker’s 5-question model to the situation and advise an appropriate action for Asif
Ahmed to take. (06)

Q.4 In the bustling city of Urbana, the micro-mobility industry is a fierce battleground for major
players: SpeedyScoot, CityRiders, and GoGreenBike. Newcomers face significant challenges
with high start-up costs and strict government rules. However, customers enjoy a diverse
range of micro-mobility options from the existing players, making it easy to switch between
them. To stay ahead, companies use competitive pricing, enticing loyalty programs, and
unique features. As the industry matures, speculations of mergers and acquisitions raise the
stakes in this micro-mobility showdown.
The thriving micro-mobility sector owes its success in Urbana to its convenience for short-
distance commutes. Established players compete through innovation in technology, pricing,
coverage area, and fleet quality. There are numerous suppliers, primarily small to medium-
sized firms offering innovative products. Urbana's well-planned infrastructure, with dedicated
bike lanes and convenient parking, nurtures a culture of embracing micro-mobility for short
commutes. Meanwhile, an efficient public transport system caters seamlessly to longer
journeys, providing a comprehensive transportation solution for residents. The race for the
ultimate winner in this dynamic micro-mobility market remains uncertain, making it an
exciting and intriguing market to observe.
 Managerial and Financial Analysis Page 4 of 6

Required:
Perform a Porter’s five forces analysis of Urbana's micro-mobility industry. Include the
strength of each force and provide supporting arguments. (09)

Q.5 Pak Healthcare (PH) is an expanding medical facility that has three branches across the city.
To ensure the confidentiality of information when communicating across branches, PH
follows a strict policy of protecting all data using public-private key encryption. PH uses a
standalone proprietary software, installed at each branch, for encryption. The software
generates the keys and is also used to encrypt or decrypt the data when the keys are provided.
All the employees are instructed to communicate encryption related messages through PH’s
secure chat channel.

Shehzad, a newly-hired Customer Services Representative, used his own public key to encrypt
a file. He then sent his private key through the secure chat channel to a colleague in another
branch.

Required:
(a) Explain the process of public-private key encryption. (02)
(b) Highlight the issues with Shehzad's actions and recommend corrective measures. (04)

Q.6 Suave, a renowned premium clothing brand known for offering formal office attire for men,
caters to unique styles targeting adults aged 18 to 40 years. However, in the face of intensifying
competition and ever-evolving consumer preferences, Suave is contemplating narrowing its
focus to a specific age group within their target market. This shift will better utilize its limited
budget and penetrate the market segment for higher revenues. During an open discussion
forum with the employees, Suave received the following options for segments to target:
(i) Senior Executives: This segment consists of adults aged 45 to 60 years. They have a
high disposable income and an appreciation of stylish clothes.
(ii) Savvy Entrepreneurs: This segment consists of cost-conscious entrepreneurs aged
30 to 40 years, who are seeking stylish yet affordable attire.
(iii) College Fashionistas: This segment consists of fashion-forward college students aged
18 to 25 years. They aim to make a stylish statement on campus, despite potentially
having limited disposable income.

Required:
(a) Briefly discuss the suitability of each option. (03)
(b) Recommend a new suitable segment for Suave to consider. Provide reason(s) for your
recommendation. (02)

Section B

Q.7 Armaan Khan recently registered a small spice exporting business and will begin exporting
Biryani Masala to customers in the USA starting from October 2023. He managed to secure
a cash injection of Rs. 0.5 million from his friends. He has promised to repay this loan by the
end of 2023. Additionally, he has brought his personal car, valued at Rs. 1.5 million, into the
business.

While formulating the planning and budgeting strategy, he developed the following estimates:
(i) An immediate investment of Rs. 1 million will be required to purchase the packaging
machinery.
(ii) The month-wise projected sales (in rupee equivalence) from October 2023 to
January 2024 are as follows:
Month October 23 November 23 December 23 January 24
Amount in Rs. 7,500,000 10,500,000 13,500,000 15,000,000
 Managerial and Financial Analysis Page 5 of 6

(iii) 20% of sale receipts from customers are received in the month before sale, 60% during
the month of sale, and the remaining in the following month.
(iv) The bank deducts a 1.5% tax at source from all customer receipts.
(v) To timely process the spices for export, Armaan must purchase the spices a month
before the expected sales. Packing materials are readily available and can be purchased
in the month of sales.
(vi) Further details regarding sales and purchase are as follows:
Rupees
Sales price per carton 1,500
Spices required per carton (Rs. 400 per kg) 1,000
Packing material required per carton (Rs. 40 per foot) 60
(vii) 60% of the spice purchases are paid in the month of purchase, with the remaining
amount settled in the following month. Packing material suppliers are paid in the
month of purchase.
(viii) A 2% agency commission is payable to the agents in the month of sale.
(ix) Projected administrative expenses amount to Rs. 300,000 per month for the quarter
ending 31 December 2023. The related payment is made in the month of its incurrence.
(x) Armaan has arranged a running finance facility of Rs. 3 million with a local bank at a
mark-up of 25% per annum. The mark-up is payable at each month-end on the
outstanding closing balance.

Required:
Prepare a month-wise cash budget for the quarter ending 31 December 2023. (13)

Q.8 Plasto Plastic Limited (PPL) is an all equity financed company. Following information has
been extracted from PPL’s financial statements as at 30 June 2023:
(i) PPL has ordinary share capital of Rs. 150 million with a face value of Rs. 10 per share.
(ii) On 30 June 2023, PPL paid an annual dividend of Rs. 25 per share.
(iii) PPL expects the next three annual dividend payments to be Rs. 25 per share. Thereafter,
a 3% per annum growth rate is expected in perpetuity.
(iv) The equity beta of PPL’s share is 0.8, and the average return on the stock market is 21%.
The return on government bonds is 12%.
PPL is considering a new investment which would require an initial outlay of Rs. 600 million
and is considering financing it with a 1-for-3 rights issue. The following additional information
is available regarding the new investment:
(i) The investment would enable PPL to increase the dividend to Rs. 26 per share on
30 June 2024 and all subsequent dividends would increase by 5% per annum in
perpetuity.
(ii) The investment is riskier than the average of PPL’s existing investments and, therefore,
the beta would increase to 1.05.
Required:
Using the dividend valuation model, determine whether PPL should undertake the new
investment. (11)

Q.9 Assume that the date today is 1 September 2023.

Unity Rice Traders (URT) estimates that it will have 25.59 metric tons (MT) of rice available
for sale on 29 February 2024. In view of the recent volatility in food prices, URT is considering
hedging its market risk. The following information is available:
(i) The current spot price stands at PKR 90,000/MT.
(ii) The futures contract for one MT, set to expire in six months, is priced at
PKR 93,500/MT.
(iii) The term of the forward contract for one MT, with six-months expiry, is as follows:
Buy Sell
PKR 93,600 PKR 94,500
 Managerial and Financial Analysis Page 6 of 6

Required:
(a) Determine the outcome using the futures and forward contract hedging strategies,
assuming the spot rate on 29 February 2024 is expected to be PKR 87,500/MT. (05)
(b) Suggest the optimal strategy for URT, along with appropriate justifications, in the event
that the spot price is forecasted to rise to PKR 102,000/MT within the next six months.
What could be the reason(s) that might prevent the execution of the optimal strategy?
(Note: Calculations are not required for this part) (03)

Q.10 Sania Cosmetics (SC) is considering the launch of a beauty product called Zinco. Following
information has been gathered in this regard:

(i) SC will need to spend Rs. 250 million on purchasing and installing the plant for the
manufacturing of Zinco. At the end of year 4, the plant’s resale value is expected to be
Rs. 65 million. The plant will be subjected to accounting/tax depreciation at 25% using
the reducing balance method.
(ii) SC estimates immediate working capital requirement to be Rs. 75 million. A 15%
increase, inclusive of inflation, in the working capital requirement (based on the
previous balance) is anticipated at the start of years 2, 3, and 4. However, only 60% of
the working capital is expected to be realised at the project’s end. The remaining
balance would be written off as unsaleable inventory at the end of year 4.
(iii) Sales of Zinco are expected to be 30,000 units per annum, remaining constant over a
4-year period. The selling price is estimated to be Rs. 4,000 per unit.
(iv) Raw material requirements for the year, along with current inventory details, are as
follows:
Raw Material
BW SB
Annual requirement for Zinco (kg) 3,000 1,200
Current inventory (kg) 1,500 1,200
Cost per kg Rs. 550 Rs. 4,200
Contribution margin if used on other products (per kg) Rs. 200 Rs. 1,500

(v) SB will not be available in the market until the end of the first year. Further, it is also
used in another product, requiring 600 kg for the year. However, that product will be
discontinued at the end of the year. SB is not used in any other product and can be sold
in the market at 50% of its cost.
(vi) SC estimates an annual labour requirement of 30,000 semi-skilled labour hours at
Rs.150 per hour and 10,000 skilled labour hours at Rs. 250 per hour.
(vii) The annual fixed cost (excluding depreciation) is estimated to be Rs. 1.8 million.
(viii) The applicable tax rate would be 30%. Taxes will be payable or refundable in the year
in which the tax liability or asset arises.
(ix) All revenues and costs are quoted in today’s rate. Annual inflation is estimated to be
11% and will apply to all revenues and costs (except where specified) from the first year
onwards.
(x) SC’s cost of capital is 22%.

Required:
Compute internal rate of return (IRR) of Zinco and advise whether SC should introduce it.
(Assume that all cash flows arise at the end of each year unless specified otherwise.) (17)

(THE END)
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.1 (i) (d) Setting clear expectations about the importance of risk awareness and open
dialogue
(ii) (c) An innovation that significantly alters the way consumers, industries, or
businesses operate and sweeps away the systems or habits it replaces due to its
superior attributes
(iii) (b) Broad economic factors that affect the entire economy
(iv) (a) Attitudes and lifestyles
(v) (b) A bond, with a low coupon rate, that is sold at a significant discount to its fair
value
(vi) (d) ERP systems aim to integrate multiple information systems across the
organization and enhance overall business strategy and operations
(vii) (a) Investor return is gained through capital appreciation
(viii) (d) It is commonly utilized for short-term financing needs
(ix) (c) Speculation returns are usually generated through capital appreciation, while
investment returns result from both capital appreciation and yield
(x) (b) short-term interest rates to fall at some time in the future
(xi) (d) Exercise the option and make a net profit of Re. 1 per share
(xii) (a) 17%
(xiii) (c) Rs. 375

A.2 (a) SWOT Analysis for IQRA is presented below:

Strengths:
(i) Unique Features: IQRA has unique features that set it apart from competitors,
providing a competitive advantage in the market.
(ii) User-Friendly Interface: The app's ease of use enhances the overall user
experience, which can lead to higher retention rates and word-of-mouth referrals.
(iii) Cultural Relevance: Catering to the Indo-Pak region's cultural nuances and
language learning perceptions helps establish a strong connection with the target
audience.

Weaknesses:
(i) Limited Brand Recognition: The lack of brand awareness makes it challenging to
attract new users and compete effectively with established competitors.
(ii) Limited Budget: The constrained marketing budget may restrict the reach and
impact of promotional efforts.
(iii) Localization Challenges: Adapting the app to suit various dialects and linguistic
variations within the region can be complex and resource-intensive.

Opportunities:
(i) Growing Smartphone Penetration: With an increasing number of people owning
smartphones in the Indo-Pak region, there is a vast potential user base to tap into.
(ii) Increasing Interest in Arabic Learning: A rising interest in Arabic language
learning, possibly due to educational, cultural, or economic reasons, presents a
significant opportunity for IQRA.
(iii) Social Media and Influencer Marketing: Leveraging social media platforms and
collaborating with influential figures can help reach a broader audience
effectively.
(iv) Building partnerships: Building partnerships with educational institutions will
help reach target audience effectively.

Page 1 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

Threats:
(i) Fierce Competition: The market for language learning apps is highly competitive,
with established players and new entrants vying for market share.
(ii) Varying Language Learning Perceptions: Different learning preferences and
expectations from users in the region may require diverse approaches to cater to
their needs effectively.
(iii) Negative Reviews and Feedback: Any negative feedback or reviews left
unaddressed can harm IQRA's reputation and deter potential users.
(iv) Legal and Regulatory Compliance: Failure to comply with regional laws and
regulations can lead to legal issues and a loss of user trust.

(b) (i) Threat: Fierce Competition

Tackled using strength: Unique Features

IQRA can leverage its unique features to stand out from competitors and attract
users seeking a more engaging language learning experience. By highlighting these
features in its marketing campaigns, IQRA can position itself as a distinct and
valuable choice in a crowded market.

(ii) Threat: Varying Language Learning Perceptions

Tackled using strength: Cultural Relevance

IQRA's understanding of the Indo-Pak region's cultural nuances can help address
varying language learning perceptions. The app can offer content and learning
approaches that align with the preferences and expectations of different user
segments, ensuring a more personalized and effective learning experience.

(iii) Threat: Negative Reviews and Feedback

Tackled using strength: User-Friendly Interface

IQRA's user-friendly interface can be instrumental in addressing negative reviews

and feedback. By actively listening to user concerns and feedback, the app can
make continuous improvements to enhance the user experience. Responding to
negative reviews with helpful solutions and thanking users for positive feedback
can show a commitment to user satisfaction.

(iv) Threat: Legal and Regulatory Compliance

Tackled using strength: Cultural Relevance

IQRA's understanding of the Indo-Pak region's cultural nuances and language

learning perceptions can be instrumental in addressing legal and regulatory
compliance. By aligning its content and practices with the cultural norms and
values of the region, IQRA can navigate potential compliance issues more
effectively and gain user trust through responsible and relevant offerings.

Page 2 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.3 Tucker's Five Question Model is applied to the scenarios above as such:

(i) Is it profitable? No
While taking action against the client might result in financial losses in the short term,
it is essential to consider the long-term impact on the firm's reputation and client trust.
Upholding ethical standards and maintaining the firm's integrity can lead to stronger
client relationships and increased trust from other clients, ultimately benefiting the firm's
profitability in the long run.

(ii) Is it legal? (Legal values) Yes

Taking action against the client is aligned with legal values, as it involves addressing
fraudulent practices and adhering to the laws and regulations governing financial
reporting. Ignoring the fraud could lead to legal consequences and potential damage to
the firm's reputation.

(iii) Is it fair? (Social values) Yes

Addressing the financial irregularities is fair to all stakeholders involved. It ensures that
all clients are treated with integrity and that the firm's reputation remains untarnished.
Failing to take action would be unfair to other clients who rely on the firm's ethical
conduct.

(iv) Is it right? (Personal values) Yes

From a personal values perspective, Asif Ahmed, as the managing partner, has a
responsibility to ensure the firm operates ethically and maintains its integrity. Doing the
right thing involves confronting the fraudulent practices and taking necessary actions to
uphold the firm's ethical standards.

(v) Is it sustainable development? (Environmental values) N/A

No environmental information is provided in the scenario.

Advice for Asif Ahmed:

Considering Tucker's Five Question Model, it is advisable for Asif Ahmed to take action
against the client and address the financial irregularities promptly. Despite potential short-term
financial losses, the long-term benefits of upholding ethical conduct, maintaining the firm's
reputation, and building trust among clients far outweigh the immediate financial concerns.
Asif Ahmed should collaborate with Nawaz Ali and the relevant legal teams to handle the
situation diligently and transparently, ensuring that the firm's commitment to ethical values
remains unwavering. By taking a principled stand, the firm can reinforce its commitment to
integrity, potentially attracting more ethical clients and strengthening its position in the
industry.

Page 3 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.4 Porter's five forces analysis of Urbana's micro-mobility industry:

(i) Threat of New Entrants:

 Strength: Low
 Substantial initial investments act as a significant barrier, making it difficult for
new players to enter the market and compete with established players.
 Strict government regulations further deter new entrants from entering the micro-
mobility industry, as compliance with these regulations requires additional
resources and expertise.
 Existing companies have already built customer trust and loyalty through their
services and enticing loyalty programs, making it challenging for new entrants to
attract and retain customers.

(ii) Bargaining Power of Suppliers:

 Strength: Low
 The micro-mobility industry in Urbana relies on numerous suppliers, primarily
small to medium-sized firms, offering innovative products. The abundance of
suppliers may limit their individual bargaining power.

(iii) Bargaining Power of Buyers (Customers):

 Strength: High
 Customers in Urbana enjoy a diverse range of micro-mobility options from
existing players, providing them with multiple choices and fostering easy
switching between providers. This high level of choice empowers customers and
increases their bargaining power.

(iv) Threat of Substitutes:

 Strength: Low
 Micro-mobility options are highly convenient for short-distance commutes in
Urbana. This is due to the well-planned infrastructure with dedicated bike lanes
and convenient parking. This convenience and infrastructure support create a low
threat of substitutes for these short trips.

(v) Competitive Rivalry:

 Strength: High
 The micro-mobility industry in Urbana is fiercely competitive among key players.
As there are various micro-mobility options available to the customers, which
makes it easy to switch between them.
 Speculations of mergers and acquisitions indicate the high stakes and desire for
market dominance, further supporting the high strength of competitive rivalry in
the micro-mobility industry.

Page 4 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.5 (a) Public-private key encryption involves a pair of keys: a public key, shared openly, and
a private key, kept secret.

When a sender wants to send confidential data, they use the recipient's public key to
encrypt it. This encrypted data is transmitted over a communication channel to the
receiver.

The recipient then uses their private key to decrypt the data, reversing the encryption
process and revealing the original content.

This process ensures only the intended recipient, with the private key, can access the
decrypted information.

(b) Following are the issues with Shehzad’s actions and recommended corrective measures:

(i) Issue no. 1: Shehzad used his own public key to encrypt the file instead of the
recipient’s public key.

Recommended Corrective Measure: Shehzad should have used the public key of
the recipient to encrypt the file/data. He can then send the encrypted data to the
recipient through the secure channel. The recipient will then use his own private
key to decode the message. The system can also be updated to prompt the user
that he is using his own public key.

(ii) Issue no. 2: Sending the private key through a chat channel, even if it's a secure
channel, exposes the private key to potential eavesdropping or interception by
unauthorized individuals.

Recommended Corrective Measure: Shehzad should not share his password or

private key with anyone. Sending the private key through a chat channel defeats
the purpose of public-private encryption. However, the recipient’s public key could
be shared through the secure chat channel, if not already available.

(iii) Issue no. 3: Shehzad may not be adequately trained on the proper procedures for
handling sensitive information and encryption.

Recommended Corrective Measure: The organization should provide

comprehensive training to all employees on data security best practices, including
proper encryption methods, encryption key management, secure communication
channels, and the risks associated with insecure practices, such as using weak
passwords.

(iv) Issue no. 4: There is lack of encryption keys management

Recommended Corrective Measure: PH should have a secure and well-managed

space where encryption keys can be stored and securely accessed. The proprietary
software can be enhanced to manage the keys.

Page 5 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.6 (a) Senior Executives (Aged 45 to 60):

This option is not suitable for the brand because senior executives, who are aged 45 to
60, fall outside Suave's traditional target age range of 18 to 40.

Savvy Entrepreneurs (Aged 30 to 40):

This option is not suitable for the brand because the primary characteristic of this group
being cost-conscious may not align well with Suave's premium brand image. The
emphasis on affordability might contradict the premium image Suave aims to maintain.

College Fashionistas (Aged 18 to 25):

This option is not suitable for the brand because college students often have limited
disposable income, which may pose challenges in terms of pricing and overall revenue
generation.

(b) Any option that caters to customer segment that can afford premium clothing brand
who likes to wear stylish clothes and is between the age of 18 to 40. Examples of such
options include:
 Urban Professionals: This segment is an ideal fit for Suave as it falls within the
brand's target age group and aligns with its premium image. Urban professionals
have the financial capacity to afford Suave's stylish offerings and often seek high-
quality, fashionable clothing for work and social engagements.
 Luxury Enthusiasts: This segment comprises individuals aged 30 to 40 who have
a strong affinity for luxury brands and are willing to invest in high-end, stylish
clothing. Suave's premium image would resonate with this group, offering them
a unique alternative to established luxury labels.
 Style-Conscious Professionals: This segment consists of working professionals
aged 25 to 40 who prioritize style in their daily lives. They appreciate well-
tailored, fashionable clothing suitable for both work and social events.

Page 6 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.7 September October November December January

---------------------------- Rupees ----------------------------
Cash injection 500,000
Vehicle injection (capital in kind) -
Packing equipment (1,000,000)
Receipts from debtors (W-1) 1,477,500 6,501,000 10,342,500 13,002,000
Payments to spice suppliers (W-2) (3,000,000) (6,200,000) (8,200,000) (9,600,000)
Payments to packing material supplier (300,000) (420,000) (540,000)
Admin expenses (300,000) (300,000) (300,000)
Agent commission (2% of sales amount) (150,000) (210,000) (270,000)
Repayment of friends’ loan (500,000)
Cash from operations (2,022,500) (449,000) 1,212,500 1,792,000
Bal. brought forward - (2,064,635) (2,566,003) (1,381,701)
Bal. carried forward before markup (2,022,500) (2,513,635) (1,353,503) 410,299
Markup @ 25% (42,135) (52,367) (28,198) -
Bal. carried forward after markup (2,064,635) (2,566,003) (1,381,701) 410,299

W-1: Receipts from debtors

Sales A 7,500,000 10,500,000 13,500,000 15,000,000
Receipts
Advance: 20% 1,500,000 2,100,000 2,700,000 3,000,000
In the month of sales: 60% 4,500,000 6,300,000 8,100,000
In the following month: 20% - 1,500,000 2,100,000
1,500,000 6,600,000 10,500,000 13,200,000
Less: Tax deducted at source (@1.5%) 22,500 99,000 157,500 198,000
Net receipts 1,477,500 6,501,000 10,342,500 13,002,000

W-2: Payments to spice suppliers

Sale price per carton B 1,500 1,500 1,500 1,500
Volume of sales (in carton)
[Sales / sale price per carton] C=A/B 5,000 7,000 9,000 10,000
Material required for each carton:
– Spices (per carton) D 1,000 1,000 1,000 1,000
– Packing (per carton) E 60.00 60.00 60.00 60.00

Cost of spice C×D 5,000,000 7,000,000 9,000,000 10,000,000

Cost of packing material C×E 300,000 420,000 540,000 600,000

Timing of spices purchased

Purchase of spice 5,000,000 7,000,000 9,000,000 10,000,000

Payments to spice suppliers:

– in the month of purchase - 60% 3,000,000 4,200,000 5,400,000 6,000,000
– in the following month - 40% 2,000,000 2,800,000 3,600,000
Total payments 3,000,000 6,200,000 8,200,000 9,600,000

Page 7 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.8 Market value of a share without the new investment

Cost of equity:
Ke = Rf +(Rm–Rf) × b
Ke = 0.12+(0.21–0.12) × 0.8
Ke = 19.20% or 0.192
Terminal value of dividend:
TV = Do(1+g) / (Ke – g)
TV = 25(1+0.03) / (0.192–0.03)
TV = 158.95
2024 2025 2026
Dividend 25.00 25.00 25.00
Terminal value - - 158.95
25.00 25.00 183.95
Discount factor 0.839 0.704 0.590
20.97 17.59 108.61
Market value per share 147.18

Market value of a share with new investment

Cost of equity:
Ke = Rf +(Rm–Rf) × b
Ke = 0.12+(0.21–0.12) × 1.05
Ke = 21.45% or 0.2145

Market value per share

MV = D1/ (Ke – g)
MV = 26/(0.2145–0.05)
MV = 158.05

Whether the investment should be undertaken:

Existing MV of equity Rs. in million
15 million shares × 147.18 2,207.68

New MV of equity
New shares (1 for 3)
15×4÷3 = 20
20 million shares × 158.05 3,161.00
Increase in MV of equity 953.32
Amount raised through rights 600.00
Increase in MV of equity (due to project) 353.32

Conclusion: The project results in increase in MV of the equity, hence should be undertaken.

Page 8 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.9 (a) Hedging through futures and forwards

Hedging through futures

URT would have to sell 26 contracts as the standard contract size is one ton.

Open future position: sell at 93,500

Close position: buy on 29 February 2024 (87,500)
Profit 6,000

Total profit on futures (26 contracts × 6,000) 156,000

URT sells the rice in the spot market (87,500 × 25.59) 2,239,125
Add: Profit on futures 156,000
Net receipts 2,395,125

Hedging through forward contract

URT is expected to have 25.59 metric tons of rice in six months’ time. Therefore, it will
sell 25.59 tons as follows:
Metric tons 25.59
Forward rate 93,600
Receipts 2,395,224

(b) Strategy if spot price expected to be 102,000 / MT

If the expected spot price at 29 February 2024 is PKR 102,000 / MT, then the best
strategy for URT would be to not hedge at all, and instead sell the rice directly at the
spot rate. By doing this, URT can take advantage of higher expected spot price and
maximize its profit.

The strategy may however not be implemented because of the following reasons:
(i) The expected price is just an expectation and may not turn out to be true.
OR
The expected spot price may not be accurate, and the actual price could turn out
to be lower than the price available under the hedging strategies, resulting in
potential losses for URT.
(ii) While no-hedge strategy may result in a better position it is only after assuming
the risk of fall in price of rice.
OR
(iii) URT might have a lower risk tolerance and may prefer the certainty of a hedging
strategy, even if it means potentially lower profit.

Page 9 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.10 Y0 Y1 Y2 Y3 Y4
-------------------------- Rs. in '000 --------------------------
Machine – Investment and sales (250,000.00) 98,674.58
Working capital invest. & release (W-1) (75,000.00) (11,250.00) (12,937.50) (14,878.13) 68,439.38
Accounting profit after tax (W-2) 38,907.05 57,324.24 75,442.41 74,363.18
Net of tax scrap value of SB
600 kg @ 50% less 30% tax (882.00) - - - -
Add: Depreciation - Machine 62,500.00 46,875.00 35,156.25 26,367.19
Add: Inventory write-off 45,626.25
Less: Gain on disposal of machine (19,573.01)
Cash flows (325,882.00) 90,157.05 91,261.74 95,720.53 293,897.57
Discount rate at cost of capital @ 20% 1.00 0.833 0.694 0.578 0.482
Discounted cash flows (325,882.00) 75,100.82 63,335.65 55,326.47 141,658.63
Net present value 9,539.56

Discount rate at cost of capital @ 22% 1.00 0.820 0.672 0.551 0.452
Discounted cash flows (325,882.00) 73,928.78 61,327.89 52,742.01 132,841.70
Net present value (5,041.62)

NPVa 9,539.56
IRR = A% + × (B–A)% = 20% + × (22%–20%) = 21.31%
NPVa –NPVb 9,539.56–(–5,041.62)

Conclusion:
IRR is less than the cost of capital of the company. So this project should not be under taken.

W-1: Working Capital Year 0 Year 1 Year 2 Year 3 Year 4

WC (Investment)/Release (75,000.00) (11,250.00) (12,937.50) (14,878.13) 68,439.38
Balance (75,000.00) (86,250.00) (99,187.50) (114,065.63) (45,626.25)

W-2: Accounting profit after tax

Y1 Y2 Y3 Y4
Sales volume 30,000 30,000 30,000 30,000
-------------------------- Rs. in '000 --------------------------
Sales price -11% inflation from year 1 4.44 4.93 5.47 6.07
Sales 133,200.00 147,852.00 164,115.72 182,168.45

Material cost - SB – 1st year (600 kg @ 4,200 per kg) (2,520.00) - - -

11% inflation from year 1:

Material cost - BW (W-3) (1,831.50) (2,032.97) (2,256.59) (2,504.82)
Material cost - SB (W-3) - (6,209.78) (6,892.86) (7,651.07)
Contribution foregone (W-4) (999.00)
Labour (W-5) (7,770.00) (8,624.70) (9,573.42) (10,626.49)
Fixed overheads - excl. dep. (1,998.00) (2,217.78) (2,461.74) (2,732.53)
Depreciation (W-6) (62,500.00) (46,875.00) (35,156.25) (26,367.19)
Gain on disposal 19,573.01
Inventory write-off (45,626.25)
Profit before tax 55,304.30 81,891.77 107,774.87 106,233.12
Taxation 30% (16,591.29) (24,567.53) (32,332.46) (31,869.93)
Profit after tax 38,713.01 57,324.24 75,442.41 74,363.18

W-3: Material cost BW SB

Annual requirement - kgs 3,000 1,200
Cost per kg 550 4,200
Total cost (to be inflated by 11% from Y1) 1,650,000 5,040,000

Page 10 of 11
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

W-4: Contribution foregone Rupees

Contribution on 600 kg @ 1,500 per kg 900,000
11% inflation 99,000
999,000

W-5: Labour cost Semi-Skilled Skilled Total

Hours per annum 30,000 10,000
Rate per hour 150 250
Labour Cost (to be inflated by 11% from Y1) 4,500,000 2,500,000 7,000,000

W-6: Depreciation Year 0 Year 1 Year 2 Year 3 Year 4

-------------------------- Rs. in '000 --------------------------
Depreciation @ 25% reducing bal. (62,500.00) (46,875.00) (35,156.25) (26,367.19)
Carrying amount 250,000.00 187,500.00 140,625.00 105,468.75 79,101.56

(THE END)

Page 11 of 11
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Autumn 2023

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9 10
48%
59% 13% 65% 83% 26% 15% 56% 35% 36% 59%

General comments

The overall result is 48%, fairly consistent with the previous session’s result of 50%. This
slight reduction is mainly due to comparatively lower performance in the numerical
components of the examination.

Question-wise common mistakes observed

Question 1

MCQs at serial (v), (xi), (xii), and (xiii) were the least well-performed.

Question 2(a)

 While examinees were able to identify many SWOT factors, they did not offer any
discussion, even briefly, on each of the factors.
 Some examinees confused strengths with opportunities and weaknesses with threats.

Question 2(b)

Examinees did not relate the strengths and threats as required by the question; instead, they
proposed other methods to address the identified threats.

Question 3

 Examinees were able to answer most of Tucker’s 5-question. However, they failed to
provide any explanation, e.g., the potential impact of not taking action under each of the
questions.
 Some examinees did not offer advice as required by the question.

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Autumn 2023

Question 4

Examinees generally performed well in this question. However, many examinees took long-
distance commutes as a substitute for short-distance ones and incorrectly concluded that the
threat of substitutes was high.

Question 5

 A large number of examinees did not attempt this question.

 Examinees were not aware of the difference between public-private key encryption and
regular encryption and attempted to answer the question with an incorrect understanding.
 Accordingly, examinees were also not able to identify the issues as well as suggest
corrective measures.

Question 6

 A large number of examinees did not attempt this question.

 Suave was a premium clothing brand targeting adult men aged 18 to 40 and now wanted
to narrow its focus to a specific age group within the target age range. All three segments
were not suitable for Suave because they were either cost-conscious (and hence not
brand-conscious) or outside of the target age range. Examinees failed to account for it
while discussing the suitability of the three segments and gave incorrect answers.
 As a result, examinees suggested irrelevant segments like children's or ladies' clothing as
possible new segments.

Question 7

 Examinees failed to account for the fact that there were several receipts and payments in
September that were incorrectly taken by them in October.
 Examinees also failed to correctly calculate the markup and account for it in the cash
budget.
 Some examinees even prepared a cumulative cash budget for the quarter instead of a
month-wise budget as required by the question

Question 8

 Examinees failed to correctly calculate the market value without the new investment by
discounting the dividends and the terminal value. Instead, they took the terminal value of
the dividend as the market value.
 Examinees did correctly calculate the new shares after accounting for the right issue.
 Examinees did not calculate the change in the market value of equity as a result of the
project and incorrectly concluded the viability of the project based only on the cost of
capital.

Page 2 of 3
 Examiners’ comments on Managerial and Financial Analysis Autumn 2023

Question 9

 Many examinees failed to account for the fact that the standard contract size is 1 ton and
accordingly 26 contracts have to be sold.
 Some examinees used incorrect spot market rates to calculate the profit on future
contracts. Similarly, examinees also used the incorrect rate for forward contract.
 Many examinees demonstrated their lack of conceptual understanding of hedging risks
while suggesting the best strategy in case the price of rice increases from the current rates.
They suggested that the optimal strategy was either future or forward when the best
strategy was a no-hedge strategy.
 Examinees who correctly suggested a no-hedge strategy did not provide the reasons that
might prevent the execution of this strategy, as required by the question.

Question 10

 Many examinees did not perform any calculations regarding the contribution foregone as
a result of taking the project.
 Many examinees failed to account for the sale of the extra 600kg of raw material SB in
their decision to undertake the project.
 Many examinees failed to apply the inflation percentage from the first year as required
by the question. Instead, they applied it from the second year.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2023

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2 (a) Up to 0.5 mark for each point under SWOT analysis, subject to a maximum of
03 points under each head 6.0

(b)  0.5 mark for identification of each threat tackling strength 2.0
 0.5 mark for explaining how the strength can be used 2.0

A.3  Up to 01 mark for identification and explanation under each Tucker’s question 5.0
 An appropriate advice for Asif 1.0

A.4  Identification of all the five forces 1.0

 0.5 mark for identifying the strength of each of the five porter’s forces 2.5
 Up to 0.75 mark for each supporting argument 5.5

A.5 (a)  Discussing encryption 1.0

 Discussing decryption 1.0

(b)  Up to 01 mark for highlighting each issue 2.0

 Up to 01 mark for recommending each corrective measure 2.0

A.6 (a)  0.5 mark for pointing out the suitability of each option 1.5
 0.5 mark for pointing out the reason 1.5

(b) Recommending a new suitable segment 2.0

A.7  Cash injection and repayment 1.0

 Ignoring vehicle injection 0.5
 Packing equipment 0.5
 Receipts from debtors 4.0
 Payments to suppliers 5.0
 Payments to packing material suppliers 1.0
 Markup 1.0

Page 1 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2023

Mark(s)
A.8  Market value of share without the investment
– Cost of equity 1.0
– Terminal value of dividend 1.5
– Market value per share 2.0
 Market value of share with the investment
– Cost of equity 0.5
– Market value per share 1.5
 Whether the investment should be undertaken
– Existing market value 1.0
– New market value 2.0
– Increase in MV 1.0
– Conclusion 0.5

A.9 (a)  Hedging through futures 4.0

 Hedging through forward 1.0

(b)  Optimal strategy and justification for not hedging 1.5

 Reasons preventing implementation of optimal strategy 1.5

A.10  Machine investment and disposal 1.0

 Working capital and inventory write-off 1.5
 Depreciation and gain on disposal 1.5
 IRR calculation 3.0
 Sales 1.0
 Material cost 3.0
 Labour cost 1.0
 Fixed overheads 1.0
 Taxation 0.5
 Scrap material sale 1.0
 Contribution foregone 2.0
 Conclusion 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 6 March 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer(s) from the options available for each of the following
Multiple Choice Questions.

(i) In Tucker’s five-question model, the question "Is it right?" primarily considers:
(a) Personal values (b) Market values
(c) Environmental values (d) Social values (01)

(ii) Which TWO of the following are examples of operational (pure) risks?
(a) Workers’ strike (b) Fire incident
(c) Stock market crash (d) Product failure (01)

(iii) Which of the following technologies best exemplifies a disruptive innovation?

(a) Incremental software update enhancing existing features

(b) Introduction of a faster processor in a laptop
(c) Emergence of electric cars replacing traditional combustion engine vehicles
(d) Addition of new automatic machine in the existing product line (01)

(iv) Which TWO of the following are examples of strategic or enterprise (speculative) risks?
(a) Buying earthquake insurance for a property located in a seismic zone
(b) Investing in a start-up company
(c) Taking out a mortgage on a house
(d) Developing a new product (01)

(v) Which factor primarily influences the duration of finance sought for purchasing an
asset?
(a) Expectations of interest rate movements
(b) Availability of collaterals
(c) Revenue generating time period of the asset
(d) Current market rates (01)

(vi) Which of the following statements distinguishes application controls from general
controls?
(a) They are applied universally to all IT systems
(b) They are unique to a particular IT system or application
(c) They focus on physical security measures
(d) They are primarily concerned with IT standards (01)
 Managerial and Financial Analysis Page 2 of 6

(vii) Which TWO of the following can be used to estimate the cost of equity of a company?
(a) Gordon growth model (b) Internal rate of return
(c) Capital asset pricing method (d) Weighted average cost of capital (01)

(viii) Which of the following is correct regarding a bonus issue and a right issue?
(a) A bonus issue involves the issuing of shares to existing shareholders while a right
issue involves offering shares to the general public
(b) A bonus issue increases the company’s assets, while a right issue increases the
number of shares in circulation
(c) A bonus issue increase the number of shares in circulation, while a right issue
increases the company’s assets
(d) A bonus issue requires purchase of additional shares at a discount while right
shares are given at a premium (01)

(ix) Which of the following is the main objectives of an efficient capital structure?
(a) maximizing short-term funding, minimizing long-term liabilities, and
maintaining high liquidity
(b) maximizing equity capital, minimizing debt financing, and ensuring high
profitability
(c) minimizing equity capital, maximizing debt financing, and reducing overall
financial risk
(d) striking a balance between equity and debt financing, ensuring adequate working
capital, and balancing short- and long-term funding (1.5)

(x) When shares are traded “ex dividend (XD)”, which of the following TWO statements
accurately describe the situation?
(a) Buyers of shares at XD price are entitled to receive the dividend upon selling their
shares
(b) The XD share price reflects the anticipation of future dividends
(c) Buyers of shares at XD price are not entitled to receive the upcoming dividend
payment
(d) The XD share price is typically lower than when shares are traded “cum
dividend” (1.5)

(xi) Following is the data extracted from the books of Zadran Limited (ZL). Assuming a
365 days’ year, what is the length of ZL’s cash operating cycle (in days)?

Inventory turnover 7.5 times

Trade receivables turnover 6.5 times
Trade payables turnover 5.0 times

(a) 177.82 days (b) 19.81 days (c) 31.82 days (d) 40.56 days (02)

(xii) A company entered into a 3 v 9 Forward Rate Agreement (FRA) with a bank for a
notional principal of Rs. 5 million at 17.4% per annum to hedge its future borrowings.
If at the end of the third month, the KIBOR is 18.65% per annum, what will be the
settlement amount?
(a) Rs. 28,585 payable by the bank
(b) Rs. 31,250 payable by the bank
(c) Rs. 28,585 payable by the company
(d) Rs. 31,250 payable by the company (02)
 Managerial and Financial Analysis Page 3 of 6

Q.2 Presented below are scenarios of three entities, each confronting unique challenges
necessitating structural changes.
(i) Easy Foods (EF), a long standing frozen food items producer with a large workforce,
has started using automatic production and packaging machinery, which has greatly
reduced manual work and production time. As a result, 45% of the workforce now
faces reduced hours or no work.
(ii) Spicy Foods (SF), structured with multiple management levels, faces decision-making
challenges and delays in addressing issues. In a recent presentation to the CEO,
human resource department highlighted that technological advancements in SF have
resulted in 40% overlapping duties across many levels of management.
(iii) Shiza Autos (SA), a growing automobile assembly plant, initially hired security staff
through personal contacts and has been managing them manually, leading to
operational challenges. SA recognises its lack of expertise in this domain and
acknowledges the absence of technological tools necessary for efficient security process
management.
Required:
(a) Briefly explain the strategies of outsourcing, restructuring, downsizing and de-layering
in the context of the impact of technological changes and the need for organizational
adjustments. (04)
(b) Suggest the right strategy for each of the mentioned entities, based on the strategies
explained in part (a) above. Provide reasons for your answer. (04)

Q.3 Electrik Automobile (EA), a renowned multinational company is currently considering the
establishment of an electric car assembly plant in Paland. With manufacturing and assembly
plants spread across various countries, EA aims to capture the growing market for electric
vehicles. The proposal includes selling a specific number of electric cars locally in Paland and
exporting the remaining production to various parts of the world. EA's strategic move is driven
by the absence of electric car assembly facilities in Paland, presenting an opportunity to cater
to the evolving preferences in the automotive industry.
With the evolution of the automotive industry, electric cars are positioned not only as efficient
means of transportation but also as lifestyle choices and status symbols across the world. EA's
target demographic in Paland consists of individuals seeking eco-friendly alternatives amid
rising petrol prices. Despite the somewhat unstable political and economic conditions in
Paland, the government is actively working to instill confidence among foreign investors by
providing tax exemptions and strengthening emission regulations, aligning with EA's
expansion plans. This venture not only promises economic benefits and job opportunities for
the local population but also addresses the increasing environmental concerns by introducing
electric vehicles to the market.

Required:
(a) Perform PESTEL analysis of electric automobile industry in Paland. (08)
(b) Conduct SWOT analysis for EA. (06)

Q.4 ZAM Accountancy School (ZAM) has been a renowned professional education provider for
35 years, known for its quality education and impressive results. With purpose-built campuses
in three major cities and 10 branches in five cities, ZAM offers both online and face-to-face
classes equipped with the use of latest technological tools that are considered best in the
industry. ZAM hires highly qualified and experienced professionals. Unlike other
accountancy schools, ZAM offers crash courses before exams and free mock exams that
contribute to identifying deficiencies and improving performance. In a unique approach,
ZAM conducts career counseling sessions and offers free one-to-one advisory sessions, setting
it apart from other accountancy schools.
Required:
Briefly explain threshold resources, unique resources, threshold competencies and core
competencies, and relate them to the scenario. (10)
 Managerial and Financial Analysis Page 4 of 6

Q.5 ANZ (Pvt) Ltd (ANZ) is in discussions with potential investors for a crucial funding round.
Abrar, the accountant, discovers that a significant portion of ANZ’s accounts receivable is
likely uncollectible, which would negatively impact the company's financial health and overall
stakeholder benefits. ANZ’s management asks Abrar to temporarily delay recognizing these
bad debts to present a more positive financial picture.

Required:
Discuss end-point ethics and rule ethics in light of the scenario above. (04)

Section B

Q.6 Majestic Alliance (MA) is engaged in producing and selling a single product, AZ08. MA is
currently preparing its budget for the year ending 31 March 2025. The budgeted production
volume is set at 300,000 units. The budgeted production costs per unit are as follows:

Material A 30 kg per unit @ Rs. 200 per kg

Material B 18 kg per unit @ Rs. 150 per kg
Skilled labour 4.5 hours per unit @ Rs. 500 per hour
Semi-skilled labour 3.5 hours per unit @ Rs. 300 per hour
Other variable overheads Rs. 567 per unit

Additional information relating to budgeted production

(i) The budgeted selling price of AZ08 will be cost of manufacturing plus 25%.
(ii) The normal defective units during production are 5% of budgeted production, which
can be sold at Rs. 10,000 per unit.
(iii) Fixed production overheads are budgeted at Rs. 129.9 million per annum, whereas
total selling and administration expenses are budgeted at Rs. 3 million per annum.
(iv) There will be no opening or closing inventories of AZ08.

Suggestions of financial controller

The newly appointed financial controller has suggested following revisions to the current
policies, believing they would improve MA’s profitability:
(i) Currently, 40% of AZ08 sales comprises credit sales. He proposed offering a
3% discount for upfront cash payment that would increase the total sales volume by
5%. He is of the view that this would also reduce the volume of credit sales to 20% of
total sales.
(ii) Implementing strict quality controls is recommended to improve quality of procured
materials, which would reduce the number of defective units to 3% of total production.
However, these controls would increase fixed production overheads by Rs. 2 million
per annum.
(iii) MA has faced challenges regarding packaging of AZ08. To overcome these challenges,
negotiations with a packaging company have been concluded. This deal would result
in outsourcing of the packaging process for a lump sum cost of Rs. 200 per good unit.
This would also lead to:
 a reduction of semi-skilled labour costs by 25% and skilled labour costs by 5%.
 a reduction of variable overheads by 15%.

Sales price would remain the same despite the implementation of the above measures. All
other information relating to the budgeted production will remain the same.

Required:
Prepare a budgeted profit or loss statement under the present situation and after the
implementation of the suggestions made by the financial controller. (13)
 Managerial and Financial Analysis Page 5 of 6

Q.7 Arctic Meridian Limited (AML) specializes in the establishment, maintenance and operation
of a fiber optic cable system. Following information has been extracted from the latest
financial statements of AML:

Rs. in '000
10 million ordinary shares @ Rs. 10 each 100,000
11% bank loan 15,000

The risk-free rate of return is 9%, while the risk premium is 6%. The equity beta for AML’s
share is 1.1. The market value of AML’s share is Rs. 45 each and is expected to grow by
5% per annum.

Expansion plan
AML is all set to expand its business by acquiring a local fiber optic business for
Rs. 240 million. For this venture AML’s management is considering either of the following
two financing proposals:
(i) Issue right shares at a premium of Rs. 10 per share. The equity beta would remain
unchanged under this proposal.
(ii) Issue 13% convertible bonds at par value of Rs. 1,000 each. The bondholders would
have a right to either convert each bond into 15 ordinary shares or redeem it at par at
the end of the third year. This proposal would result in an increase in equity beta to
1.2.

The tax rate applicable to AML is 30%.

Required:
Recommend the financing proposal that would result in a lower weighted average cost of
capital (WACC). (12)

Q.8 (a) Imran Trading Company (ITC) intends to borrow Rs. 30 million in one month’s time
for a period of 6 months. Being concerned about the volatility in the KIBOR rate, ITC
has taken out a borrower’s option with a strike rate of 21% for a notional 6-month loan
of Rs. 30 million. The option will expire in one month’s time. The option premium is
the equivalent of 0.5% per annum of the notional principal.

The current and the expected KIBOR rates are as under:

Current Expected KIBOR in

KIBOR 1 month’s time
1-month KIBOR 19.5% 22.0%
6-month KIBOR 20.5% 23.5%

Required:
Determine whether the option would be exercised. Also calculate the net effective
interest rate. (04)

(b) It is now 1 March 2024. Medical Hub (MH) signed an agreement with an American
Welfare Organization to build a world class medical school in Pakistan, offering free
medical education. In lieu of this agreement, MH anticipates to receive a grant of
USD 50 million in June 2024. To hedge this potential receipt, MH wishes to use a
currency option. Each currency option is for USD 5 million.

The current spot exchange rate is USD 1 = PKR 279. June options are available with a
strike price of PKR 280 and a premium of PKR 500,000 per option. MH expects that
spot rate in June will move to USD 1 = PKR 276.

Required:
Determine whether the option should be purchased. (Show all necessary computations) (04)
 Managerial and Financial Analysis Page 6 of 6

Q.9 Zaid Limited (ZL) launched a product called ‘Zing’ two years ago and prepared a five-year
projection for it. In the first year, Zing performed well and achieved all milestones. However,
in the second year, the machine used for production of Zing developed certain operational
issues. While ZL was able to maintain the production of the originally estimated quantity, the
quality of Zing was significantly affected, resulting in lost sales. ZL is now considering either
replacing the machine and continuing with Zing’s production or discontinuing Zing’s
production.

Following information is available in this respect:

Original estimates:
(i) ZL purchased an old machine costing Rs. 120 million for production of Zing and had
to incur an overhaul cost amounting to Rs. 25 million immediately and another
overhaul of the same amount would have to be incurred at the end of third year.
(ii) As per ZL’s policy, the machine was depreciated at a rate of 25% using the reducing
balance method. It was anticipated that the residual value of machine would be equal
to its written down value at the end of the project i.e. the fifth year.
(iii) Initial investment in working capital was assessed at Rs. 20 million, with no further
additions required in subsequent years. ZL anticipated that only 25% of this investment
would be realized at the end of the fifth year.
(iv) A warehouse was rented for a 5-year period at an annual rent of Rs. 5 million, subject
to an annual increase of 10%. Early termination of the agreement would incur a penalty
equivalent to 6 months’ rent.
(v) Production and sales were estimated at 40,000 units per annum for all the years.
However, in the second year, only 15,000 units were sold due to quality issues.
(vi) The sales price for the first year was Rs. 1,500 per unit, with an annual increase of 10%.
(vii) Variable costs were estimated at Rs. 650 per unit, with fixed costs (other than rent)
associated with Zing at Rs. 1.5 million per annum. Both costs were subject to a
7% annual increase.
(viii) The weighted average cost of capital is 18%.
(ix) ZL operates in a tax-free environment.
(x) All cash flows would arise at the end of the year, except where stated otherwise.

Option 1: Replace the machine and continue with the production of Zing
(i) A Chinese supplier has offered ZL the opportunity to trade-in the old machine for
Rs. 60 million and upgrade to the latest machine for an additional investment of
Rs. 100 million. This would help ZL in maintaining the production of Zing at standard
quality for the remaining period of project. At the end of the project, ZL expects selling
this upgraded machine with a 15% profit above its written down value.
(ii) ZL can negotiate a contract with an existing customer to sell the existing stock of Zing
at 85% of the price based on the original estimates.
(iii) The new machine is expected to reduce variable cost by 8% compared to the original
estimates.
(iv) All other information would remain consistent with the original estimates.

Option 2: Discontinue production of Zing

(i) Under this option, the existing stock of Zing would be sold at 80% of the price based on
the original estimates.
(ii) Machine would be sold for Rs. 50 million on an ‘as is where is’ basis.
(iii) 35% of the working capital would be realized.
(iv) All other information would remain consistent with the original estimates.

Required:
Evaluate both options by using net present value method. Recommend the best course of
action for ZL to follow. (Net present value based on original estimates is not required) (16)
(THE END)
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.1 (i) (a) Personal values

(ii) (a) Workers’ strike (b) Fire incident
(iii) (c) Emergence of electric cars replacing traditional combustion engine vehicles
(iv) (b) Investing in a start-up company (d) Developing a new product
(v) (c) Revenue generating time period of the asset
(vi) (b) They are unique to a particular IT system or application
(vii) (a) Gordon growth model (c) Capital asset pricing method
(viii) (c) A bonus issue increase the number of shares in circulation, while a right issue
increases the company’s assets
(ix) (d) striking a balance between equity and debt financing, ensuring adequate
working capital, and balancing short- and long-term funding
(x) (c) Buyers of shares at XD price are not entitled to receive the upcoming dividend
payment
(d) The XD share price is typically lower than when shares are traded “cum dividend”
(xi) (c) 31.82 days
(xii) (a) Rs. 28,585 payable by the bank

A.2 (a) Outsourcing - means arranging for other business entities to perform some
administrative tasks, or management tasks, instead of having to employ individuals
to do the task internally, as part of the entity’s own activities.

Restructuring - Restructuring may be vertical and horizontal both. Different

organizations merge functions, sections and departments according to the
technological advancement and continuously restructure the organizational
structure. Like real time, online data availability has shifted the regional decision
making into centralized decisions.

Downsizing - means the reduction in size of a business entity. It does not (necessarily)
mean that the business entity is selling fewer goods or services. It means that its
business activities are conducted by a smaller number of people.

De-layering - means removing one or more levels of management in the entity’s

organisational structure.

(b) Easy Foods (EF): Solution: Downsizing

Reasoning: With the introduction of automatic production and packaging machinery
leading to a reduced need for manual labor, downsizing is a suitable solution. This
allows EF to align its workforce with the new technological landscape, ensuring cost-
effectiveness and improved efficiency.

Spicy Foods (SF): Solution: De-layering

Reasoning: The issue of overlapping duties across multiple management levels
indicates a need for simplifying the organizational structure. De-layering would
streamline decision-making processes, enhance communication, and eliminate
redundancy, ultimately improving the overall efficiency of SF.

Shiza Autos (SA): Solution: Outsourcing

Reasoning: SA's security staff challenges stem from lack of expertise in this domain
and absence of technological tool for its efficient process management. Outsourcing
security services to specialized agencies can enhance operational efficiency, ensure
professional security management, and allow SA to focus on its core business
activities.

Page 1 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.3 (a) Political Factors:

 Paland is somewhat politically unstable, which could pose risks for a
multinational company like EA.
 The government is actively working to attract foreign investors, offering support
to companies like EA.

Economic Factors:
 The economic instability in Paland may be a concern for EA.
 Rising petrol prices could work in favor of electric vehicles, making them an
attractive option for consumers seeking cost-effective and eco-friendly
alternatives.

Social Factors:
 The shift towards eco-friendly alternatives indicates a positive trend for electric
vehicles.
 Electric cars are seen as lifestyle choices and status symbols.

Technological Factors:
 There is an absence of electric car manufacturing technology/plant within
Paland By bringing the technology, EA can achieve first mover advantage.

Environmental Factors:
 The increasing awareness of environmental issues in Paland presents an
opportunity for EA. Marketing the eco-friendly aspects of electric cars could
attract environmentally conscious consumers.

Legal Factors:
 Paland government is actively working to instill confidence among foreign
investors by providing tax exemptions.
 Paland government is also strengthening emission regulations.
 Exporting electric cars to various parts of the world involves navigating trade
regulations and tariffs.

(b) Strengths:
 Technological Expertise: EA is an experienced organisation and likely carries
strong technical expertise in electric vehicle manufacturing and technology
 Global presence: With manufacturing facilities spread across various countries,
EA has established a global presence, allowing it to leverage experience,
expertise and resources from diverse markets.
 Strong Brand Reputation: EA is renowned multinational company.
 Established supply chain and distribution network: EA is an established
multinational companies and likely has well established supply chain and
distribution network to manage such large operations.
 Resources to expand: EA likely has access to sufficient financial and non-
financial resources to be able establish manufacturing units in Paland.

Weaknesses:
 Limited local market understanding: EA has no experience in operating in
Paland and may faces challenges in understanding and catering to the
preferences of the local market.

Opportunities:
 Growing Demand for Electric Vehicles: The global trend toward electric
vehicles is likely mirrored in Paland, providing an opportunity for EA to tap
into a market with increasing demand for eco-friendly transportation.

Page 2 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

 Government Support: Paland, the government is actively working to instill

confidence among foreign investors by providing tax exemptions and
strengthening emission regulations, aligning with EA's expansion plans.
 Rising Petrol prices: EA's target demographic in Paland consists of individuals
seeking eco-friendly alternatives amid rising petrol prices.
 First mover advantage: There is no electric vehicle assembly plant in Paland.
This present an opportunity for EA to take the first mover advantage.

Threats:
 Changing Government Policies: Despite current support, government policies
may change as there is political instability, impacting the ease of doing business
or introducing new regulations that could affect EA's operations.
 Economic Downturn Impact: A worsening of economic conditions in Paland
could reduce consumer purchasing power, affecting the demand for electric
vehicles.
 Dependency of demand on petrol price: dependency of local eco-friendly
vehicles demand on petrol prices means the demand for eco-friendly electric
vehicles may shrink should petrol prices decrease.

A.4 Threshold Resources

Threshold resources are the resources that an entity needs in order to participate in the
industry and compete in the market. Without threshold resources, an entity cannot survive
in its industry and markets. Threshold resources of ZAM include:
 Building and other facilities to conduct classes.
 Availability of required number of faculty and staff.

Unique Resources
Unique resources are resources controlled by the entity that competitors do not have and
would have difficulty in acquiring. Unique resources can be a source of competitive
advantage. Unique resources of ZAM include:
 Purpose built campuses in three major cities and 10 branches in five cities.
 All the campuses and branches are fully equipped with latest technology for lectures
delivery that are considered best in the industry.
 Resources available for recorded lectures, online as well as face to face lectures.

Threshold competencies
Threshold competencies are activities, processes and abilities that provide an entity with the
capability to provide a product or service with features that are sufficient to meet customer
needs. Threshold competencies include:
 Professional faculty for lectures delivery.
 Technical competence for online lectures and recordings.

Core competencies
Core competencies are activities, processes and abilities that give the entity a capability of
meeting the critical success factors for products or services and achieving competitive
advantage. Core Competencies:
 Crash courses before exam besides regular classes.
 Career counselling sessions for prospective students and offers free of cost one to one
advisory sessions for students on need basis.
 Free of cost mock exam for all students.
 Quality education and impressive results.

Page 3 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.5 End-point ethics:

Through end-point ethics, or utilitarianism, one seeks the greatest benefit for the greatest
number of stakeholders. This obviously requires some compromises for certain segments of
stakeholder. As a matter of fact, the course of action selected results in greater good if taken
in aggregate of all key stakeholders.

In this case, delaying the recognition of uncollectible debts temporarily may present a more
positive financial picture, which could potentially attract more investors in the short term
for ANZ. However, hiding such information puts investors in a disadvantaged position at
the expense of the current shareholders. Also, long term benefits would also need to be
assessed for the action for all stakeholders.

Rule ethics:
The rule ethics intends to follow the duty and norms relevant to the problem. The intended
decision is assessed on the basis of law of the land, or company’s stated policies or any
professional code applicable on the matter.

From a rule ethics standpoint, the accountant, Abrar, has a responsibility to follow
accounting standards and principles that require the timely recognition of bad debts to
provide accurate and transparent financial information.

A.6 (a) Budgeted Profit or Loss Statement under the present situation

Majestic Alliance
Budgeted Profit or Loss Statement
For the year ending 31 December 2024
Rupees
Sales
Good units – [285,000 (300,000 units×0.95) ×15,621(W-1)] 4,451,985,000
Cost of sales
Variable cost of production [12,567(W-1)×300,000 units] (3,770,100,000)
Fixed production overhead (129,900,000)
Sale of normal defective units [300,000 units×0.05×10,000] 150,000,000
(3,750,000,000)
Selling and admin expenses (3,000,000)
Budgeted annual profit 698,985,000

W-1: Determination of Sale Price Rs. per unit

Material A 30 kg per unit @ Rs. 200 per kg 6,000
Material B 18 kg per unit @ 150 per kg 2,700
Skilled labour 4.5 hours per unit @ Rs. 500 per hour 2,250
Semi-skilled labour 3.5 hours per unit @ Rs. 300 per hour 1,050
Other variable overheads 567
Total variable cost 12,567
Fixed production overhead 129,900,000÷285,000 456
Normal defective units 300,000×0.05×10,000÷285,000 (526)
Cost of production per unit 12,497
Add: profit margin 12,497×25% 3,124
Sale price 15,621

Page 4 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

(b) If the recommendations of financial controller are implemented

Majestic Alliance
Budgeted Profit or Loss Statement
For the year ending 31 December 2024

Sales Rupees
Cash sales of good items 299,250×0.8×15,621(W-1)×0.97 3,627,477,378
Credit sales of good items 299,250×0.2×15,621(W-1) 934,916,850
4,562,394,228
Cost of Sales
Variable cost of production 12,106.95(W-3)×308,505 3,735,054,610
Fixed production overhead increase by 2 million 131,900,000
Sale of normal defective units 9,255×10,000 (92,550,000)
Packing cost 299,250×200 59,850,000
3,834,254,610
Gross profit 728,139,618
Less: Selling and admin expenses (3,000,000)
Budgeted annual profit 725,139,618

W-2: Normal defective units Units

Sales (285,000 units×1.05) 299,250
Total production (299,250÷0.097) 308,505
Normal defective units 9,255

W-3: Revised variable cost of production Units

Material cost A 6,000.00
Material cost B 2,700.00
Skilled labour 2,250 × 0.95 2,137.50
Semi-skilled labour 1,050 × 0.75 787.50
Other variable overheads 567 × 0.85 481.95
Revised variable cost of production 12,106.95

A.7 Ordinary share capital

Cost of equity Ke = Rf + (Rm – Rf ) × Be

= 9% + 6%×1.1 ⇒ 15.60%

Cost of debt = 11% × 0.7 ⇒ 7.70%

New Financing
Option I – Right Shares

Weighted average cost of capital

Units MV
MV Cost % Rs. in ‘000
in'000 Rs. in '000
Ordinary shares 10,000 45.00 450,000 15.60% 70,200
Loan (existing) - - 15,000 7.70% 1,155
Right shares - - 240,000 15.60% 37,440
705,000 108,795

Revised WACC ⇒108,795 ÷ 705,000 × 100 ⇒ 15.43%

Page 5 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

Option II – Convertible loan

Cost of equity Ke = Rf + (Rm –Rf ) × Be
= 9% + 6% × 1.2 ⇒ 16.20%

Cash Discount Present Discount Present

Description
Flow (Rs.) factor@9% value (Rs.) factor@12% value (Rs.)
Issue value 1,000.00 1.000 1,000.00 1.000 1,000
Interest (Rs. 1,000×0.13×0.7) (91.00) 2.531 (230.35) 2.402 (218.57)
Redemption (W-1) (1,000.00) 0.772 (772.18) 0.712 (711.78)
(2.53) 69.65

NPVa – 2.53
IRR = L + ×(H–L) 9%+ ×(12%– 9%) ⇒ 9.11%
NPVa – NPVb – 2.53 – 69.65

W-1: Redemption value – Higher of

Par value 1,000.00
Shares 45×15×(1.05)3 781.40

Weighted average cost of capital

Units MV
MV Cost % Rs. in '000
in'000 Rs. in '000
Ordinary shares 10,000 45.00 450,000 16.20% 72,900.00
Loan (existing) - - 15,000 7.70% 1,155.00
Convertible bonds 240 1,000 240,000 9.11% 21,852.48
705,000 95,907.48

Revised WACC ⇒ 95,907.48 ÷ 705,000 × 100 ⇒ 13.60%

Recommendation:
Option II – Convertible loan gives lower WACC than issuance of right shares.

A.8 (a) Interest Rate Option

%
Borrow for 6 months at 23.5
Receive from option writer (23.5% – 21%) (2.5)
Cost of option premium 0.5
Net annualized interest rate 21.5

As net annualized interest rate is less than KIBOR spot rate in 1 months’ time (23.5%)
so ITC should exercise this option.

(b) Number of options (50m ÷ 5m) 10 options

Rs. in million
Receipts after exercising option (280×$50 m) 14,000
Premium on currency option (Rs. 500K × 10) (5)
Net of Premium 13,995

Receipts at spot rate without option (276×$50 m) 13,800

Option should be exercised or not? Yes

Page 6 of 7
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2024

A.9 Option 1: Replace machine and continue with production of Zing

Year 0 Year 1 Year 2 Year 3
-------------------- Rs. in 000 --------------------
Machine (100,000)
Sales of opening inventory
[(1,500×1.1)×0.85×25,000] 35,063
Sales [40,000×1,500×(1.1)2] 72,600 79,860 87,846
Variable cost (W-1) (27,386) (29,303) (31,354)
Rent [5m×(1.1)2÷1,000] (6,050) (6,655) (7,321)
Other fixed cost [1.5m×(1.07)2] (1,717) (1,838) (1,966)
Depreciation (ignore) - - - -
Working capital release 5,000
Sale value of machine (W-2) 77,625
Cash flows (64,938) 37,447 42,064 129,830
Discount rate at cost of capital 18% 1 0.85 0.72 0.61
Discounted cash flows (64,938) 31,734 30,210 79,019

Net present value 76,026

W-1: Variable cost Year 1 Year 2 Year 3

Initial estimate – Per unit [650×(1.07)2] 744.19 796.28 852.02
Variable cost – Initial estimate 29,767 31,851 34,081
8% reduction with new machine 27,386 29,303 31,354

W-2: Sale value of machine Rupees

WDV after 3 years (160m×0.75×0.75×0.75) 67,500,000
Profit @ 15% 10,125,000
Residual value 77,625,000

Option 2: Discontinue production of Zing Year 0

Rupees
Sales (25,000×1,500×1.1×0.8) 33,000,000
Working capital realization 7,000,000
Penalty (5m÷2×1.1) (2,750,000)
Resale value 50,000,000
Cash Flow – Net present value 87,250,000

Recommendation
ZH should choose Option 2.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Spring 2024

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9
54%
72% 57% 16% 45% 18% 50% 78% 47% 34%

General comments

The overall result is 54%, which is better than the previous session’s result of 48%. The
improvement in the result can be attributed to the comparatively better performance in the
numerical components of the examination.

Question-wise common mistakes observed

Question 1

MCQs at serial (v), (ix), (x), and (xii) were the least well-performed.

Question 2(a)

 Examinees were not able to fully explain the required strategies. For example, they
identified that outsourcing involves giving some internal tasks to outsiders but failed to
specify that these tasks are generally administrative or management tasks in nature.
 Some examinees confused the strategies of restructuring and de-layering and could not
differentiate between the two correctly.

Question 2(b)

Examinees again confused the strategies of restructuring and de-layering when suggesting
the right strategy for Spicy Foods (SF).

Question 3(a)

 Instead of relating the given situation to perform a PESTEL analysis, examinees gave
unrelated or generalized factors under each of the PESTEL constituents.
 Some examinees did not identify the impact of the factor identified on the automobile
industry and could not attain the full allotted marks. For example, under environmental
factors, many examinees mentioned that electric cars are good for the environment

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2024

because they do not emit greenhouse gases. They did not specify its impact on the
automobile industry in general and electric automobiles in particular.

Question 3(b)

 Examinees confused strengths with opportunities and weaknesses with threats.

 Many examinees could not identify any weakness.

Question 4

Examinees were confused between the concepts of resources and competencies. Moreover,
they struggled to distinguish between the two types within each category: threshold and
unique resources, and threshold and core competencies.

Question 5

Examinees were unaware of the concepts of end-point ethics and rule ethics. They gave
completely irrelevant answers by discussing points like ethical principles and its compliance
threats.

Question 6

 Examinees failed to include normal defective units as part of the cost of production and
accordingly calculated an incorrect selling price resulting in incorrect sales figures.
 Examinees also failed to correctly calculate the revised production units and the revised
normal defective units and accordingly computed incorrect sales and cost figures.

Question 7

 Examinees failed to apply the cost of equity formula correctly.

 Examinees failed to calculate the post-tax cost of debt under Option I. They also used
pre-tax interest amounts for the purpose of calculating IRR for determination of the cost
of debt under Option II.
 Examinees did not demonstrate by calculation that the redemption value was more than
the conversion value.

Question 8(a)

 Examinees selected the incorrect 1-month KIBOR rate instead of the 6-month KIBOR as
the borrowing to be hedged was for 6 months.
 Examinees did not calculate the effective interest rate and also did not appropriately
conclude whether the option should be exercised.

Question 8(b)

Instead of deducting the option premium against the exercise price, examinees deducted it
from the spot rate, which demonstrated their lack of understanding in this area.

Page 2 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2024

Question 9

 Examinees failed to realize that two years had already passed since the original estimates
were projected, and the revenues and costs for those two years were sunk costs and
therefore irrelevant for decision making.
 Examinees failed to apply the correct inflation/increase percentages while computing the
sales and cost figures.
 In the case of discontinuation of production, examinees incorrectly discounted the
calculated figures despite all of the amounts being realized or paid immediately.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2024

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2 (a) ▪ 01 mark for each strategy 4.0

(b) ▪ 0.5 mark for identification of the right strategy 1.5

▪ Up to 01 mark for each reason 2.5

A.3 (a) Up to 0.75 mark for each point placed correctly under each PESTEL factor 8.0

(b) 0.5 mark for each point placed correctly under each SWOT factor 6.0

A.4 ▪ 0.5 mark for explaining each of the two resources and two competencies 2.0
▪ Up to 0.75 mark for correct identification and placement of points from the
scenario and its correct placement under the appropriate resources /
competencies 8.0

A.5 ▪ 01 mark each for discussing end-point and rule ethics 2.0
▪ 01 mark each for relating to the scenario 2.0

A.6 ▪ Present situation

– Sales 0.5
– Cost of sales 1.5
– Determination of sale price 5.0
▪ Recommended situation
– Sales 2.0
– Cost of sales 1.0
– Revised sales and defective unit 2.0
– Revised variable cost of production 1.0

A.7 ▪ Cost of equity and cost of debt 1.0

▪ Option I – WACC calculation 2.5
▪ Revised cost of equity 0.5
▪ IRR calculation (including determination of redemption value) 5.5
▪ Option II – WACC calculation 2.5

A.8 (a) ▪ Determination of net annualized interest rate 3.0

▪ Conclusion 1.0

(b) ▪ Determination of receipts under option 2.5

▪ Determination of receipts without option 1.0
▪ Conclusion 0.5

Page 1 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2024

Mark(s)
A.9 ▪ Option 1: Replace and continue operations
– Machine investment and disposal 2.0
– Sale (including opening inventory 2.5
– Variable cost 3.0
– Rent 1.0
– Fixed cost 1.0
– Release of working capital 0.5
– NPV calculation 1.5
▪ Option 2: Discontinue operations
– Sales 1.5
– Working capital release 0.5
– Rent penalty 1.0
– Resale value 0.5
– NPV calculation 0.5
– Conclusion 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 4 September 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs). Each MCQ carries ONE mark.

(i) Which of the following is the primary purpose of conducting a resource audit in an
organization?
(a) To comply with legal requirements for annual financial audits
(b) To identify and assess all significant resources and their effective utilization
(c) To determine the organization’s market position and level of competition
(d) To forecast economic trends and prepare financial statements

(ii) Which of the information systems is specifically designed to improve senior

management’s decision making by providing continual access to up-to-date
information?
(a) Transaction Processing System (b) Management Information System
(c) Decision Support System (d) Executive Information System

(iii) Which of the following is NOT a likely consequence of poor law and order situation
on businesses?
(a) Increased employee absenteeism (b) Lower security costs
(c) Higher insurance premiums (d) Reduced investment

(iv) Risk management is the process of managing:

(a) downside risks only (b) business risks only
(c) speculative risks only (d) both downside and business risks

(v) Companies arrange credit lines and overdraft facilities to manage:

(a) the credit risk (b) the liquidity risk
(c) the market risk (d) the speculative risk

(vi) Which of the following is NOT a characteristic of futures contracts?

(a) They are traded on an exchange
(b) They can be tailored to users’ requirements
(c) They are settled on a predetermined date.
(d) They cannot be negotiated ‘over-the-counter’

(vii) A company has recently paid a dividend of Rs. 6 per share, which is expected to grow
by 9% per annum in the foreseeable future. The shareholders require an annual return
of 19% and the next annual dividend will be paid in one year’s time. What would be
the market value of each share?
(a) Rs. 79.3 (b) Rs. 66.7 (c) Rs. 65.4 (d) Rs. 60.0
 Managerial and Financial Analysis Page 2 of 6

(viii) The WACC of a company is 12%, and 50% of its shares are held by the directors.
Ignoring taxation, if annual cash profits of the company are Rs. 240 million, the total
market value of the company would be:
(a) Rs. 1 billion (b) Rs. 2 billion (c) Rs. 4 billion (d) Rs. 480 million

(ix) A company has an average payment period of 2 months and a payable balance of
Rs. 2.5 million. What are the annual credit purchases of the company?
(a) Rs. 30 million (b) Rs. 5 million (c) Rs. 15 million (d) Rs. 10 million

(x) A company with an aggressive working capital policy is likely to:

(a) maintain low levels of raw materials and finished goods
(b) offer extended credit terms to attract more customers
(c) invest heavily in long-term assets to boost profitability
(d) ensure high liquidity by holding large cash reserves

(xi) Which of the following best explains the trade-off between high and low levels of
working capital?
(a) High levels of working capital are inexpensive but offer low returns, while low
levels reduce cost and increase liquidity
(b) High levels of working capital are costly but ensure operational stability, while
low levels reduce costs but increase the risk of financial difficulties
(c) High levels of working capital increase profitability but reduce flexibility, while
low levels enhance liquidity but decrease profitability
(d) High levels of working capital reduce the need for external financing, while low
levels increase the need for long-term investments

(xii) Which of the following factors is LEAST likely to influence the required level of
working capital investment in a company?
(a) The length of the working capital cycle
(b) The company’s risk management strategy
(c) The industry’s standard credit terms and payment practices
(d) The company’s long term growth prospects and capital expenditure plans

(xiii) What does the seller do in a Murabaha transaction?

(a) Provides financing to the buyer without disclosing the product cost
(b) Sells a product by mentioning the cost and adding a profit
(c) Sells a product at a fixed price without considering the cost
(d) Engages in a profit-sharing agreement with the buyer

(xiv) When is venture capital most likely to be used?

(a) As a way for small companies to raise debt finance
(b) As an important source of finance for management buy-outs
(c) To manage the day-to-day operations of a company
(d) To fund start-ups exclusively

(xv) How do business angels differ from private equity funds, in terms of their approach to
investment?
(a) Business angels usually take control of the companies they invest in, while private
equity funds do not.
(b) Business angels do not usually get involved in the management, while private
equity funds may appoint directors and take an active role.
(c) Business angels invest in publicly traded companies, while private equity funds
focus on private companies.
(d) Business angels require a clear exit route, while private equity funds do not.
 Managerial and Financial Analysis Page 3 of 6

Q.2 Elegant Interiors Limited (EIL), a well-established company in the interior design and decor
sector with over three decades of experience, operates its head office in Lahore, along with
regional offices in Islamabad and Karachi, and outlets in major cities across Pakistan. EIL
has adhered to traditional business practices, including the manual distribution of information
across its three levels of management, strict office hours and mandatory physical monthly
management meetings at the head office. These practices have resulted in inefficiencies,
particularly in decision-making, leading to competitive disadvantages.

Required:
Discuss how the implementation of centralized databases, intranet systems, and advanced
communication tools could improve decision-making efficiency at EIL. Also, discuss any two
potential impact that these technological changes could have on the EIL’s management
hierarchy. (06)

Q.3 Aaliyan launched a business selling pre-loved items and hired ten young, uneducated men
from his village. He offered them with accommodation, meals, and low wages without formal
agreements. The workers accepted the job, unaware of legal wage requirements.

Three years later, a worker's relative from an NGO, informed them about the minimum wage
laws. The workers then demanded higher wages and compensation. When Aaliyan
threatened to fire them, they sought help from the NGO, which filed a lawsuit against him for
violating the wage laws. Aaliyan's lawyer suggested backdating hiring documents and
including the value of meals and accommodation to comply with wage law requirements.
Aaliyan believes this will resolve the issue.

Required:
Use Tucker’s model to analyze the lawyer’s suggestion for Aaliyan and recommend
solution(s). (06)

Q.4 Khalid Masroor (Khalid), an entrepreneur with a strong background in engineering and
business, is keen to enter the Electric Vehicle (EV) industry. Although the EV industry is
rapidly growing, Khalid is aware of the increasing competition, with established companies
leading the industry. To assess the potential of various segments in the EV industry, Khalid,
with his risk averse nature, conducts a Porter’s Five Forces analysis and constructs the
following table:

Force 1 Force 2 Force 3 Force 4 Force 5

Segment Threat of Threat of Bargaining Bargaining Competitive
new substitutes power of power of rivalry
entrants suppliers buyers
Charging Infrastructure Low Low Low High High
Battery Recycling High Low Low Low Low
Specialized Commercial EVs High High Low High High
Affordable Personal EVs High High High High High

Required:
(a) Advise which segment presents the most viable business opportunity for Khalid. Also,
provide reasons for your answer. (03)
(b) For each force, list three factors that influence its strength. Also, explain how each of
these factors might have impacted the strength of that particular force in your
recommended segment in (a). (11)
 Managerial and Financial Analysis Page 4 of 6

Q.5 Examples of technological advancements include Blockchain technology, the 5G network,

Intel’s new generation of Core i7 processors, 3TB USB drive, Windows 11, Social media
platforms, and e-Commerce.

Required:
Define disruptive technology and discuss whether each example of technological
advancements listed above is disruptive or non-disruptive. (06)

Section B

Q.6 Wasi Limited (WL), engaged in the production and sale of a wide range of consumer goods,
is scheduled to commence commercial production of its new product, ‘Sisool’, on
1 October 2024.

In this respect, a cash budget for the nine months ending 30 June 2025 is currently being
prepared, and the following information has been gathered:

(i) Sisool’s cost per unit is estimated as under:

Direct material – A 2 kg at Rs. 270 per kg (inclusive of normal loss)

Direct material – B 1.5 kg at Rs. 150 per kg (inclusive of normal loss)
Direct labour – Skilled 2 hours at Rs. 500 per hour
Direct labour – Unskilled 3 hours at Rs. 300 per hour
Variable factory overheads Rs. 200 per direct labour hour
Fixed factory overheads Rs. 16 million per annum
(inclusive of Rs. 2.5 million depreciation)

(ii) Direct material is purchased at the start of every quarter based on budgeted requirement
for that quarter. Material A is purchased from supplier ZT Limited, which offers
4-month credit period, and Material B is purchased from Zia Enterprises on advance
payment. Normal loss is estimated at 5% of direct materials, 40% of the loss results in
solid waste, which will be sold for cash at Rs. 800 per kg.
(iii) WL maintains an average inventory of raw materials and finished goods equivalent to
15 days’ consumption/sales of next quarter.
(iv) Sisool will be sold with a mark-up of 20%. Cash sales represents 40% of total sales and
attract a 12% discount. 60% of credit customers pay within 2 months from the date of
sale, while the remaining customers take an extra month to settle the account.
(v) Production for the first quarter ending 31 December 2024 is budgeted at 28,000 units,
while production would be 12,000 units per quarter for the following two years.
(vi) WL has acquired a building on rent for this project at an annual cost of Rs. 5 million,
payable in equal monthly instalment at the start of each month.
(vii) All labour and variable factory overheads are paid at the end of the month, while fixed
factory overheads are paid in the first week of the next month.

Note: All transactions would occur evenly throughout the period unless otherwise specified.
Assume 30 days in a month.

Required:
Compute the budgeted net cash inflows/(outflows) for the nine months ending 30 June 2025.
(A month-wise/quarter-wise working is not required) (16)
 Managerial and Financial Analysis Page 5 of 6

Q.7 (a) List four benefits of having an effective risk management process in place. (04)

(b) Assume that the date today is 1 September 2024.

Zain Associates (ZA) has been in the beverages business for past many years and
recently signed an export agreement with a customer in Germany. The management of
ZA is concerned over high volatility in foreign exchange rates. The receipt of
EUR 75,000 from that customer is expected on 30 November 2024, and the
management is considering to hedge the related foreign exchange risk through the
money market.

ZA’s bank has quoted the following exchange rates and annual interest rates:

PKR/EUR
Buy Sell
Spot – Current 301.25 303.15
Spot – 30 November 2024 (Estimated) 310.00 312.00

Deposit% Borrow%
EUR 4.5 6.0
PKR 12.5 18.0

Required:
Determine whether hedging through the money market is beneficial for ZA. (06)

Q.8 Azomax Limited (AL) is a company involved in the manufacturing and sale of home
appliances. Below are the extracts from its latest annual financial statements:

Rs. in million
Ordinary share capital (Rs. 100 each) 80
9% Irredeemable preference shares 30
Earnings before tax 150

Additional information:
(i) AL’s ordinary shares are currently trading at Rs. 110 each.
(ii) The risk free rate of return is 7% and the average return on market investments is 11%.
AL’s equity beta is 1.1.
(iii) The applicable tax rate is 35%.

Proposal under consideration:

AL plans to expand its product line by setting-up a new plant in Khushaab for manufacturing
refrigerators. The project requires financing of Rs. 100 million for four years. The
management is considering the following two financing options:

Option I: Issue 13% bonds of Rs. 100 each at par. Bondholders can either convert their
bonds into ordinary shares at a ratio of 1 share for every 2 bonds or redeem them
at a 15% premium at the end of the 4th year.

Option II: Issue zero-coupon bonds of Rs. 100 each at a discount of 20%. Bondholders can
either convert each bond into 1 ordinary share or redeem them at par at the end
of 4th year.

It is expected that either financing option will increase AL’s equity beta to 1.2. Additionally,
the market value of AL’s shares is expected to grow by 5% per annum.

Required:
Using the weighted average cost of capital (WACC), recommend which of the two financing
options should AL use for the new plant. (12)
 Managerial and Financial Analysis Page 6 of 6

Q.9 Zayd Packaging Solutions (ZPS) is planning to setup a new packaging unit to meet the specific
requirements of one of its customers and is considering the purchase of a customized machine.
In this respect, the following two proposals are under consideration:

Proposal 1 Proposal 2
Purchase cost including import duties Rs. 15 million Rs. 11.5 million
Useful life (years) 4 3
Annual production capacity (units) 50,000 35,000
Annual preventive maintenance cost at current prices Rs. 200,000 Rs. 300,000

Additional information:
(i) Under Proposal 1, the supplier would repurchase the machine for Rs. 2.5 million (at
year 4 prices) at the end of its useful life.
(ii) Under Proposal 2, a major overhaul at the end of year 2, costing Rs. 1.5 million (at
year 2 prices), would be required. This overhaul would increase the machine’s
production capacity by 5,000 units from the 3rd year onward and extend its useful life
by one year. This machine would be sold in the local market for Rs. 1.5 million (at
year 4 prices)
(iii) ZPS anticipates an annual demand of 35,000 units in the first year, with demand
increasing by 7% each year. The production capacity of the new machine would be used
to meet this demand. If the machine’s production capacity falls short, ZPS would need
to purchase additional units from the market at Rs. 1,200 per unit (at current prices).
(iv) The variable cost of production at current price is Rs. 700 per unit under Proposal 1 and
Rs.750 per unit under Proposal 2.
(v) Depreciation would be calculated using the reducing balance method at a rate of 25%.
It is assumed that accounting depreciation matches tax depreciation.
(vi) Inflation rate is estimated at 10% per annum, starting from year 1.
(vii) The applicable tax rate is 35% and is payable in the year in which the liability arises.
(viii) The applicable discount rate is 14%.
(ix) Assume that, unless stated otherwise, all cash flows arise at the end of the year.

Required:
Evaluate both proposals using the net present value method and recommend the best
proposal. (15)

(THE END)
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2024

A.1 (i) (b) To identify and assess all significant resources and their effective utilization
(ii) (d) Executive Information System
(iii) (b) Lower security costs
(iv) (d) both downside and business risks
(v) (b) the liquidity risk
(vi) (b) They can be tailored to users’ requirements
(vii) (c) Rs. 65.4
(viii) (b) Rs. 2 billion
(ix) (c) Rs. 15 million
(x) (a) maintain low levels of raw materials and finished goods
(xi) (b) High levels of working capital are costly but ensure operational stability, while
low levels reduce costs but increase the risk of financial difficulties
(xii) (d) The company’s long term growth prospects and capital expenditure plans
(xiii) (b) Sells a product by mentioning the cost and adding a profit
(xiv) (b) As an important source of finance for management buy-outs
(xv) (b) Business angels do not usually get involved in the management, while private
equity funds may appoint directors and take an active role.

A.2 Centralized Databases

 Real-time Data Accessibility: A centralized database would enable real-time access
to inventory levels, customer preferences, and sales data across all outlets. This allows
both central and local management to make informed decisions quickly, whether they
pertain to stock replenishment, promotional strategies, or design adjustments, leading
to a more responsive business model.
 Data Consistency: With a unified database, data from various outlets can be
standardized, ensuring that marketing strategies, pricing models, and customer service
practices are consistent across all locations. This consistency helps maintain the brand
image and ensures that all decision-makers work from the same set of accurate
information.

Intranet Systems
 Efficient Internal Communication: An intranet system can streamline
communication between the head office, regional offices, and outlets. It enables quick
dissemination of company-wide updates, promotional campaigns, design trends, and
operational guidelines. This reduces delays and ensures that all employees are aligned
with the company’s objectives.
 Collaborative Work Environment: The intranet can serve as a platform for
collaboration on design projects, allowing teams in different locations to contribute
their insights and expertise. This is especially useful in the interior design sector, where
creativity and teamwork are vital to developing innovative solutions.
 Streamlined Workflow Processes: Automated distribution (as opposed to manual
distribution) for tasks such as order approvals, design submissions, and project
tracking can reduce the administrative burden on local managers, allowing them to
focus more on customer engagement and sales growth.

Advanced Communication Tools

 Real-Time Communication: Tools like video conferencing and instant messaging
enable real-time communication between the head office and outlets, facilitating quick
decision-making and problem resolution.
 Increased Flexibility: Advanced communication tools allow for more flexible
working arrangements, such as remote collaboration with interior designers or
suppliers, without compromising the quality of communication. This can enhance
creativity and innovation within the company.

Page 1 of 10
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2024

 Crisis Management: In case of urgent issues, such as supply chain disruptions or

customer complaints, advanced communication tools ensure that all relevant parties
can collaborate immediately, leading to faster and more effective responses.

Impact on Management Hierarchy

 Flattening the Hierarchy: The adoption of these technologies can lead to a more
decentralized decision-making process. Local managers at outlets will have greater
access to real-time data and communication tools, empowering them to make
decisions without always waiting for directives from the head office. This can speed
up responses to local market trends and customer needs.
 Shift in Managerial Roles: The role of middle management may shift from overseeing
routine administrative tasks to more strategic functions, such as analyzing data trends,
optimizing store layouts, and enhancing customer experiences based on centralized
insights resulting in effective achievement of organizational goals.
 Increased Accountability and Transparency: With centralized data and improved
communication, it becomes easier to monitor performance across all outlets. This
leads to increased accountability, as each outlet’s performance can be tracked and
evaluated in real-time, ensuring that all locations meet the company’s standards.

A.3 1. Is it profitable?
Yes, for short-term: The lawyer's suggestion to backdate hiring documents and include the
value of meals and accommodation might provide a short-term solution to avoid immediate
financial penalties and increased wages, potentially maintaining short-term profitability.

No, for long-term: This approach risks future profitability due to potential legal
ramifications and damage to the business's reputation. If the deception is discovered, it could
lead to heavier fines, legal costs, and loss of trust from customers and employees.

2. Is it legal?
No, backdating documents and manipulating the value of meals and accommodation to
comply with wage laws is illegal. It constitutes fraud and falsification of records. Following
the lawyer’s advice could result in severe legal consequences if discovered, including fines,
penalties, and possible criminal charges against Aaliyan and his business.

3. Is it fair?
No, the suggestion is unfair to the workers. It attempts to deceive them and the authorities
instead of addressing their legitimate grievances and legal rights.
4. Is it right?
No, ethically, the lawyer's suggestion is wrong. It involves exploitation of the workers, who are
already disadvantaged by their lack of education and awareness of their rights.

5. Is it sustainable?
No, the proposed deception is not sustainable. If the deceit is uncovered, it could lead to
significant legal and financial troubles, loss of business reputation, and potential closure of the
business.

Recommendation:
Aaliyan should avoid pursuing any strategy that involves illegal actions, such as backdating
documents. Instead, he should negotiate a settlement with the workers that considers both the
business interests and workers’ rights.
For the future, Aaliyan should ensure that all employment terms and compensation are properly
documented prevent similar issues from arising.

Page 2 of 10
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Autumn 2024

A.4 (a) Based on the Porter Five Forces analysis, the segment that presents the most viable
business opportunity for Khalid, being risk averse, is Battery Recycling. The reasons are:
 Threat of New Entrants: High
The high threat of new entrants indicates potential competition in the future.
However, it also suggests a growing market with increasing opportunities. Being an
early entrant can help Khalid establish brand loyalty and market share before the
market becomes saturated.
 Threat of Substitutes: Low
The low threat of substitutes implies that battery recycling is a critical need with few
alternatives, ensuring a steady demand for the services provided by Khalid.
 Bargaining Power of Suppliers: Low
With a low bargaining power of suppliers, Khalid can source raw materials or
necessary inputs at more favorable terms, reducing costs and enhancing profitability.
 Bargaining Power of Buyers: Low
The low bargaining power of buyers means that Khalid can set prices more
advantageously, leading to potentially higher profit margins.
 Competitive Rivalry: Low
Fewer players currently dominate the battery recycling industry compared to other
segments, indicating less intense competition and a greater opportunity for Khalid
to establish a presence.

(b) (i) Threats from Potential Entrants (High)

 Time and Cost of Entry: Initial investment in recycling technology is
likely lower which can attract new entrants thereby increasing the threat.
 Building a Brand: Standardized products with limited differentiation
would make brand building a difficult and expensive project.
 Specialist Knowledge Required: Technical knowledge in recycling
processes is necessary but could be easily acquired, lowering barriers to
entry and increasing the threat.
 Economies of Scale: Larger firms may have some advantages, but new
smaller entrants can still compete as the market is expanding and the
product is standardized.
 Technology Protection for Existing Firms (Patents, Design Rights):
Limited patents or proprietary technology in battery recycling make it
easier for new entrants to enter the market.

(ii) Threats from Substitutes (Low)

 Existence of Substitutes: Few viable substitutes for battery recycling
ensure sustained demand for recycling services.
 Costs of Switching to a Substitute Product: High costs associated with
regulatory fines and environmental damage make switching to substitutes
less appealing.
 Relative Prices: Recycling is often more cost-effective than alternatives
(like new batteries) when considering long-term environmental and
regulatory costs.
 Fashion Trends: Growing environmental consciousness and regulatory
support for recycling over alternatives reinforce the demand for battery
recycling.

(iii) Suppliers’ Bargaining Power (Low)

 Number of Suppliers: Multiple suppliers for recycling technology and
materials reduce the power of any single supplier.
 Size of Suppliers: Smaller suppliers have less power compared to the
recycling firms means better negotiation terms for Khalid.
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 Uniqueness of Service: Standardized recycling services mean less

uniqueness and hence lower supplier power.
 Cost of Switching to a Different Supplier: Low switching costs due to
standardized materials and processes reduce supplier power.

(iv) Customers’ Bargaining Power (Low)

 Number of Customers: A growing market with many potential customers
(e.g., EV manufacturers, government bodies) reduces individual customer
power.
 Size of Each Order: Smaller, fragmented orders mean less bargaining
power for each customer.
 Price Differences and Price Sensitivity: Environmental regulations and
sustainability goals make customers less price-sensitive.

(v) Competitive Rivalry (Low)

 Number of Competitors: There are fewer competitors in the battery
recycling market, reducing competitive pressure.
 Size of Competitors: Existing competitors may be smaller or fragmented,
which makes the recycling market less aggressive.
 Quality Differences: Battery recycling services are often standardized,
meaning less differentiation and hence less competition.
 Customer Loyalty: Strong customer relationships and long-term contracts
contribute to lower rivalry.

A.5 Definition:
Disruptive technology is an innovation that significantly alters the way consumers,
industries, or businesses operate. A disruptive technology sweeps away the systems or habits
it replaces, because it has attributes that are recognizably superior.

Examples of technologies:

Blockchain Technology
Classification: Disruptive
Explanation: Blockchain has the potential to revolutionize various industries by enabling
secure, transparent, and decentralized transactions. It challenges traditional financial
systems and can transform industries such as banking, supply chain management, and even
voting systems.

5G network
Classification: Disruptive
Explanation: The 5G network is considered disruptive because it dramatically increases
speed and reduce latency, enabling new technologies like autonomous vehicles and IoT. It
also transforms industries by supporting new business models and applications.
Additionally, it requires substantial changes to existing infrastructure, driving a shift in
telecommunications and related sectors.

Intel’s New Generation of i7 Core Processors

Classification: Non-Disruptive
Explanation: The Intel Core i7 processors represent incremental improvements in
processing power and efficiency. While they enhance performance, they do not
fundamentally change the market or disrupt existing business models.

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 Managerial and Financial Analysis
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3TB USB Drive

Classification: Non-Disruptive
Explanation: Higher capacity USB drives offer greater storage solutions but do not disrupt
the existing market. They provide incremental improvements in data storage without
changing how storage solutions are fundamentally used.

Windows 11
Classification: Non-Disruptive
Explanation: Windows 11 is an updated version of Microsoft’s operating system, offering
new features and improvements. While it enhances user experience and productivity, it does
not disrupt the operating system market.

Social Media Platforms

Classification: Disruptive
Explanation: Social networking platforms like Facebook, Twitter, and LinkedIn have
transformed how people interact and communicate. They have disrupted traditional media,
advertising, and even job recruitment by providing new ways to connect and share
information.

e-Commerce
Classification: Disruptive
Explanation: E-Commerce has revolutionized traditional business models by enabling
online transactions and digital interactions. It has disrupted retail, finance, and various
service industries by providing more efficient, accessible, and scalable business solutions.

A.6 Wasi Limited

Cash budget for nine months ending 30 June 2025

CASH INFLOWS: Rupees

Cash sales 20,000(10,400+4,800+4,800)(W-1) × 4,631(W-3) × 0.88 81,505,600
Credit sales 24,240(15,600+7,200+1,440)(W-1) × 4,631(W-3) 112,250,440
Sale proceeds from solid waste 52,000(28,000+12,000+12,000)×56(W-3) 2,912,000
196,668,040

CASH OUTFLOWS:
Material A 84,000(60,000+24,000)(W-2) × 270 (22,680,000)
Material B 81,000(45,000+18,000+18,000)(W-2) × 150 (12,150,000)
Skilled labour 52,000(28,000+12,000+12,000) (W-1) ×1,000(W-3) (52,000,000)
Unskilled labour 52,000(28,000+12,000+12,000) (W-1)×900(W-3) (46,800,000)
Variable FOH 52,000(28,000+12,000+12,000) (W-1)×1,000(W-3) (52,000,000)
Fixed overheads (16,000,000–2,500,000)÷ 12×8 months (9,000,000)
Rent (5,000,000×9÷12) (3,750,000)
(198,380,000)

Net Cashflow - Shortfall (1,711,960)

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W-1: Sales quantity Quarter 1 Quarter 2 Quarter 3 Quarter 4

Oct to Dec Jan to Mar Apr to Jun Jul to Sep
Production 28,000 12,000 12,000 12,000
Opening inventory - 2,000 2,000
Units available for sale 28,000 14,000 14,000
Closing inventory 2,000 2,000 2,000
Total units to be sold 26,000 12,000 12,000
Cash sales 10,400 4,800 4,800
Credit sales 15,600 7,200 7,200
W-1.1: Credit sales receipt of 3rd quarter Quarter 3 Quarter 4
Sales in April 2025 received (7,200÷3) 2,400

– 60% of the monthly sales in 2 months 1,440

W-2: Raw material purchases quantity

Quarter 1 Quarter 2 Quarter 3 Quarter 4
Required for production - A 56,000 24,000 24,000 24,000
Opening inventory A - (4,000) (4,000)
Required closing inventory - A 4,000 4,000 4,000
Purchases 60,000 24,000 24,000 -

Required for production - B 42,000 18,000 18,000 18,000

Opening inventory B - (3,000) (3,000) -
Closing Inventory B 3,000 3,000 3,000 -
Purchases 45,000 18,000 18,000

W-3: Selling price per unit Rupees

Direct material – A 2×270 540
Direct material – B 1.5×150 225
Direct labour – Skilled 2×500 1,000
Direct labour – Unskilled 3×300 900
Variable factory overheads 5×200 1,000
Proceeds from solid waste 3.5×0.05×0.4×800 (56)
Total variable cost per unit 3,609
Fixed overheads 16m÷64000 250
Total cost 3,859

Selling price – Markup @ 20% 3,859×1.2 4,631

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 Managerial and Financial Analysis
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Certificate in Accounting and Finance – Autumn 2024

A.7 (a) The adoption of an effective risk management process within an organization will
have a number of benefits, examples of which include:
 Increased likelihood of achieving objectives
 Awareness of the need to identify and treat risk throughout the organization
 Improved identification of opportunities and threats
 Compliance with relevant legal and regulatory requirements and international
norms
 Improved governance
 Improved stakeholder confidence and trust
 Establishment of a reliable basis for decision making and planning
 Effective allocation and use of resources for risk treatment

(b) Hedging through money market:

Step 1: Foreign currency to borrow

Borrow Euro today for three months that would be equivalent to Euro 75,000
(principle and interest) in three months’ time.
Borrowing rate = 6.00%
Three months borrowing rate (6%×3÷12) = 1.500%
Amount to deposit (75,000÷1.015) = Euros 73,892

Step 2: PKR to deposit

Convert Euro to PKR at the spot rate.
Spot rate = 301.25
PKR amount (73,892 × 301.25) = PKR 22,259,965

Step 3: PKR at maturity

Deposit PKR for three months.
Annualized deposit rate = 12.5%
Three months’ deposit rate (12.5% × 3÷12) = 3.125%

On the date of settlement, principle and interest on PKR deposit would be:
Amount from deposit account (22,259,965 × 1.03125) = PKR 22,955,589

Step 4: Effective rate

On the settlement date, repay Euro loan from Euro received from the customer.
Effective Rate = PKR
Effective Rate (22,955,589÷75,000) = 306.07

Conclusion:
Since the effective rate will be lower than the expected spot rate, the company may
choose to not opt for this hedge.

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 Managerial and Financial Analysis
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Certificate in Accounting and Finance – Autumn 2024

A.8 Ordinary share capital

Revised cost of equity

Ke = 0.07+(0.11 - 0.07) × 1.2 ⟹ 11.8%

Option I – 13% Bonds

Weighted average cost of capital

Units MV
MV Cost % Rs. in '000
in'000 Rs. in '000
Ordinary shares 800 110.00 88,000 11.80% 10,384
11% Irredeemable
preference shares - - 30,000 9.00% 2,700
13% bond - - 100,000 11.72% 11,720
218,000 24,804

Revised WACC ⇒ 24,809 ÷ 218,000 × 100 ⇒ 11.38%

Cash Discount Present Discount Present

Description
Flow (Rs.) factor @ 10% value (Rs.) factor@15% value (Rs.)
Issue value 100.00 1.000 100.00 1.000 100.00
Interest (Rs. 100×0.13×0.65) (8.45) 3.169 (26.78) 2.854 (24.12)
Redemption (W-1) (115.00) 0.683 (78.55) 0.571 (65.67)
(5.33) 10.21

NPVa – 5.33
IRR = L + ×(H–L) 10%+ ×(15%– 10%) ⇒ 11.72%
NPVa – NPVb – 5.33 – 10.12

W-1: Redemption value – Higher of

Repay at premium 115
Convertible into shares 110×(1.05)4×0.5 66.852

Option II – Zero coupon bonds

Weighted average cost of capital

Units MV
MV Cost % Rs. in '000
in '000 Rs. in '000
Ordinary shares 800 110.00 88,000 11.80% 10,384
11% Irredeemable
preference shares - - 30,000 9.00% 2,700
Zero coupon bond - - 100,000 13.94% 13,940
218,000 27,024

Revised WACC ⇒ 27,025 ÷ 218,000 × 100 ⇒ 12.40%

Cash Discount Present Discount Present

Description
Flow (Rs.) factor @12% value (Rs.) factor @20% value (Rs.)
Issue value 80.00 1.000 80.00 1.000 80.00
Interest – zero coupon - - -
Redemption (133.71) 0.636 (85.03) 0.482 (64.45)
(5.03) 15.55

NPVa – 5.03
IRR = L + ×(H–L) 12%+ ×(20% – 12%) ⇒ 13.96%
NPVa – NPVb – 5.03 – 15.52

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W-1: Redemption value – Higher of

Repay at par 100.00
Convertible into shares 110×(1.05)4 133.71

Conclusion: Option 1 is the recommended option because it results in the lower WACC.

A.9 Proposal 1 Y0 Y1 Y2 Y3 Y4
-------------------------- Rs. in '000 --------------------------
Variable cost @ 700 per unit* (26,950,000) (31,720,150) (37,334,617) (43,942,844)
Maintenance cost* (220,000) (242,000) (266,200) (292,820)
Depreciation (W-2) (3,750,000) (2,812,500) (2,109,375) (1,582,031)
Loss on disposal (W-3) (2,246,094)
(30,920,000) (34,774,650) (39,710,192) (48,063,789)
Tax @ 35% 10,822,000 12,171,128 13,898,567 16,822,326
Add back: Depreciation 3,750,000 2,812,500 2,109,375 1,582,031
Add back: Loss on disposal 2,246,094
Purchase cost (15,000,000)
Disposal value of machine 2,500,000
Net cash outflow (15,000,000) (16,348,000) (19,791,022) (23,702,250) (24,913,338)
Discount factor @ 14% 1.000 0.877 0.769 0.675 0.592
PV (15,000,000) (14,340,351) (15,228,549) (15,998,343) (14,748,696)
(75,315,919)

Proposal 2 Y0 Y1 Y2 Y3 Y4
-------------------------- Rs. in '000 --------------------------
Variable cost @ 750 per unit* (28,875,000) (31,762,500) (39,930,000) (43,923,000)
Shortfall @ 1,200 per unit* - (3,557,400) (114,200) (5,053,789)
Maintenance cost* (330,000) (363,000) (399,300) (439,230)
Depreciation (W-2) (2,875,000) (2,156,250) (1,992,188) (1,494,141)
Loss on disposal (W-3) (2,982,422)
(32,080,000) (37,839,150) (42,435,687) (53,892,582)
Tax @ 35% 11,228,000 13,243,703 14,852,491 18,862,404
Add back: Depreciation 2,875,000 2,156,250 1,992,188 1,494,141
Add back: Loss on disposal 2,982,422
Purchase cost (11,500,000)
Overhaul cost (1,500,000)
Disposal value of machine 1,500,000
Net cash outflow (11,500,000) (17,977,000) (23,939,198) (25,591,009) (29,053,616)
Discount factor @ 14% 1 0.8772 0.7695 0.6750 0.5921
PV (11,500,000) (15,769,298) (18,420,435) (17,273,202) (17,202,073)
(80,165,008)

Recommendation: Proposal 1 is more favourable.

*Amounts inflated by inflation rate of 10% per annum starting from year 1.

W-1: Shortfall units Y1 Y2 Y3 Y4

-------------------------- Units --------------------------
Units required - Proposal 1 & 2 35,000 37,450 40,072 42,877

Units available - Proposal 2 35,000 35,000 40,000 40,000

Shortfall - Under Proposal 2 - 2,450 72 2,877

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W-2: Depreciation Proposal 1 Proposal 2

----------- Rupees -----------
Cost 15,000,000 11,500,000
Depreciation year 1 3,750,000 2,875,000
Carrying amount 11,250,000 8,625,000
Depreciation year 2 2,812,500 2,156,250
Carrying amount 8,437,500 6,468,750
Overhaul - 1,500,000
Carrying amount after overhaul 8,437,500 7,968,750
Depreciation year 3 2,109,375 1,992,188
Carrying amount 6,328,125 5,976,563
Depreciation year 4 1,582,031 1,494,141
Carrying amount 4,746,094 4,482,422

W-3: Loss on disposal Proposal 1 Proposal 2

---------- Rupees ----------
Carrying amount 4,746,094 4,482,422
Disposal value 2,500,000 1,500,000
Loss on disposal 2,246,094 2,982,422

(THE END)

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 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Autumn 2024

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9
77% 28% 54% 23% 28% 4% 78% 63% 62% 45%

General

During this examination session, performance declined significantly, down from 54% in the
previous session. It is important to note that the previous session's result was the highest ever
in this subject. The primary reason for this decline is the weak performance in Q.4, which
was related to the budgeted cash flow and significantly contributed to the overall decline
compared to the previous session.

Question-wise common mistakes observed

Question 1

The MCQs at serial (xii), (xiv), and (xv) had the lowest performance.

Question 2

 The examinees highlighted only some improvements but overlooked others. For
instance, they failed to recognize improvements such as data consistency, streamlined
workflow processes, and crisis management in their responses.
 Additionally, the examinees did not categorize these improvements based on the specific
technological changes—centralized databases, intranet systems, or advanced
communication. Instead, they combined all the improvements as a collective outcome of
implementing all three technological advancements.

Question 3

The examinees were primarily focused on providing a positive or negative response to the
five Tucker model questions. However, the question also required an analysis such as
identification of the implications, ethical considerations, and sustainability of the decision.
This aspect was largely overlooked in their responses.

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Autumn 2024

Question 4

 While examinees were able to correctly identify the battery recycling segment, they
failed to provide substantial reasoning to support their choice. For instance, they did not
discuss the favorable impacts of the lower forces for this business segment. Instead, their
rationale was limited to noting that one of the five Porter forces was high, while the
others were low.
 The examinees did not list all three factors for each force, as required by the question.
Additionally, they failed to explain how each identified factor contributed to the high or
low strength of the respective force, which was also explicitly required by the question.

Question 5

 The examinees were unable to provide a correct or complete definition of disruptive

technology, limiting their responses to general statements such as "disruptive
technologies are major changes to technologies" or "they disrupt earlier technologies."
They failed to emphasize a key characteristic of disruptive technology: its significant
impact on altering the habits and practices of consumers and businesses.
 Additionally, the examinees focused solely on classifying whether the specific
technology was disruptive or not, without providing a discussion or explanation of the
reasons behind their classification.

Question 6

 Examinees failed to recognize that the question required a cumulative nine months’ net
cash inflow / (outflow) budget instead of a monthly or quarterly budget.
 Examinees who attempted the question only were able to correctly calculate the quarterly
production quantity and the sales price per unit. They failed to incorporate key
adjustments such as changes in inventory for both raw materials and finished goods as
well as adjustments for cash and credit sales and purchases. Consequently, they were
unable to correctly calculate cash flows arising from sales and purchases.

Question 7(a)

Examinees struggled to list four distinct benefits of having an effective risk management
process, often repeating the same benefit in different words. They failed to identify such
benefits as improved governance, effective utilization of resources, improved likelihood of
achieving objectives, and compliance with regulatory requirements.

Question 7(b)

Some examinees failed to prorate the annual borrowing and deposit rates over three months.

Question 8

 Examinees applied the current, instead of the revised, cost of equity when calculating the
weighted average cost of capital (WACC) under one of both the finance options.
 Examinees also incorrectly calculated the market values of ordinary and preference share
capital leading to inaccuracies in WACC calculations.

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 Examiners’ comments on Managerial and Financial Analysis Autumn 2024

 Furthermore, under Option I, examinees failed to recognize that the conversion ratio was
1 share for every 2 bonds. Instead, they incorrectly applied a 1 for 1 conversion ratio
resulting in errors when calculating the cost of debt.

Question 9

 The question primarily focused on decision-making based on the cash outflows of two
options, with tax benefit and residual values as potential inflows which were significantly
lower than the outflows. A common error among examinees was the incorrect application
of outflow and inflows—some outflows were incorrectly shown as positive numbers
leading to errors in net present value (NPV) calculations.
 Additionally, examinees failed to correctly calculate the shortfall in production under
proposal 2 further contributing to incorrect NPV results.
 Examinees also failed to include the overhaul cost under proposal 2 when calculating the
depreciation expense, resulting in additional inaccuracies.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2024

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 01 mark for each correct answer 15.0

A.2 ▪ 0.75 mark for each point subject to a maximum of 2 points per technology 4.5
▪ 0.75 mark for each impact on management hierarchy 1.5

A.3 ▪ 01 mark for explanation under each Tucker’s model question 5.0
▪ Recommendation 1.0

A.4 (a) ▪ Selecting the most viable option 0.5

▪ 0.5 mark for each reason 2.5

(b) Up to 0.75 mark for listing and explaining each factor that impacted the selected
option 11.0

A.5 ▪ Definition of ‘Disruptive technology’ 0.75

▪ Up to 0.75 mark for discussing whether each example is disruptive or not 5.25

A.6 ▪ Cash and credit sales 1.0

▪ Sale proceeds from solid waste 0.5
▪ Material A and material B purchases 1.0
▪ Skilled and unskilled labour payment 1.0
▪ Variable and fixed overhead, and rent 1.5
▪ Determination of sales quantity 2.0
▪ Credit sales receipt for 3rd quarter 2.0
▪ Determination of raw material purchase quantity 3.0
▪ Determination of selling price per unit 4.0

A.7 (a) 01 mark for each benefit 4.0

(b) ▪ Foreign currency to borrow 2.0

▪ PKR amount to deposit 1.5
▪ PKR amount at maturity 1.5
▪ Effective rate and conclusion 1.0

A.8 ▪ Revised cost of equity 1.0

▪ WACC for option I 2.0
▪ IRR calculation for option I 3.0
▪ WACC for option II 2.0
▪ IRR calculation for option II 3.5
▪ Conclusion 0.5

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 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2024

Mark(s)
A.9 ▪ Proposal 1
– Variable cost per unit 1.0
– Maintenance cost 0.5
– Depreciation and loss on disposal 1.5
– Tax 0.5
– Purchase and disposal of machine 1.0
– Calculation of NPV 1.5
▪ Proposal 2
– Variable cost per unit 1.0
– Maintenance cost 0.5
– Depreciation and loss on disposal 2.0
– Tax 0.5
– Purchase, overhaul and disposal of machine 1.5
– Calculation of NPV 1.5
– Determination of shortfall 1.5
▪ Conclusion 0.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
5 March 2025
3 hours – 100 marks
Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs). Each MCQ carries ONE mark.

(i) Which of the following best exemplifies the concept of disruptive technology?
(a) A company upgrades from landline telephones to smartphones to enhance
communication efficiency
(b) An online retailer uses blockchain technology to execute peer-to-peer
transactions, eliminate intermediaries and reduce costs
(c) A business expands its social media presence to complement its traditional
marketing strategies
(d) A multinational corporation introduces energy-efficient appliances to comply
with environmental regulations

(ii) Which of the following best defines the ‘Question Mark’ category in the BCG Matrix?
(a) Products with a high market share in a high-growth market
(b) Products with a low market share in a high-growth market
(c) Products with a low market share in a low-growth market
(d) Products with a high market share in a low-growth market

(iii) Which of the following is NOT a benefit of life cycle costing?

(a) Assessing the potential profitability of products before incurring major
development costs
(b) Shortening the research and development phase to accelerate the product launch
(c) Enhancing estimating techniques and applying lessons from actual performance
to future products
(d) Ensuring higher profits by preventing competitors from entering the market

(iv) Which of the following is NOT an example of outsourcing?

(a) A company hires an external accountancy firm to manage payroll and employee
salaries
(b) A company contracts a building services firm for office cleaning and security
(c) A company sources all its raw materials from various suppliers for manufacturing
of its products
(d) A company gives the task of supporting its IT systems to a specialist IT firm

(v) Entity A has an equity beta of 0.9 and a tax rate of 29%. If the risk-free rate is 10% and
the average market return is 15%, what is the cost of equity for Entity A?
(a) 11.31% (b) 13.20% (c) 14.50% (d) 15.00%
 Managerial and Financial Analysis Page 2 of 6

(vi) Which of the following statements is/are correct?

(I) IT Standards are a form of general control within IT that help to reduce the risk
of system weaknesses and processing errors for entities that apply these
Standards.
(II) Application controls are applied to all IT systems, particularly in the
development, security and use of computer programs.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct

(vii) Which of the following is a key characteristic of financing obtained through preference
shares?
(a) Preference shareholders must have voting rights
(b) Dividends on preference shares must be paid even in years of losses
(c) Preference shares rank higher than common equity in liquidation
(d) Preference shares guarantees fixed returns like bonds

(viii) Which of the following financing methods is most suitable for a company experiencing
irregular cash flows and seasonal demand?
(a) Long-term debt (b) Trade credit and bank overdrafts
(c) Retained earnings (d) Equity financing

(ix) How could a company’s heavy reliance on debt financing influence investor perception?
(a) Investors may view it as a sign of strong growth potential
(b) It could raise concerns about financial stability despite potential tax benefits
(c) Equity investors may gain confidence due to higher leverage
(d) It primarily impacts internal financial management rather than investor sentiment

(x) A company is considering issuing bonus shares to enhance the marketability of shares
and attract investors. Which of the following is NOT a result of a bonus issue?
(a) The company’s total share capital increases without an actual cash inflow
(b) The company’s earnings per share will likely decrease as the number of shares
increases
(c) The shareholders’ wealth increases proportionally as the number of shares
increase
(d) The market price of the shares may decrease proportionally due to the increase in
the number of shares

(xi) Which of the following best distinguishes a commodity futures contract from a
commodity forward contract?
(a) Futures are traded over-the-counter, while forwards are exchange-traded
(b) Futures settle only at maturity, while forwards involve daily settlement
(c) Futures have standardized contract sizes, while forwards allow flexibility in
quantity
(d) Futures contracts are primarily used for physical delivery, while forwards are
mostly used for speculation

(xii) If a company fails to monitor its working capital ratios, which of the following is the
LEAST likely consequence?
(a) It may struggle to pay suppliers on time
(b) It might have excess cash sitting idle
(c) It’s short-term liquidity risk will increase
(d) It will experience a sudden increase in operational costs

(xiii) In Tucker’s five-question model, the question ‘Is it fair?’ primarily considers:
(a) Personal values (b) Social values
(c) Market values (d) Legal values
 Managerial and Financial Analysis Page 3 of 6

(xiv) A non-profit organization (NPO) receives inconsistent donations each year. The
budgeting committee is struggling to set financial targets due to unpredictable revenue.
Which budgeting issue is most relevant in this situation?
(a) The NPO has not implemented rolling budgets to adjust for fluctuating revenues
(b) The NPO lacks a proper variance analysis framework to track financial
unpredictability
(c) Dependence on external funding sources makes financial forecasting complex
(d) The budgeting process does not include zero-based budgeting to reassess priorities
annually
(xv) Which of the following scenarios best exemplifies a situation where the threat of
substitutes is the most significant force affecting industry profitability in Porter’s Five
Forces model?
(a) A high-end fashion brand faces new competitors producing similar luxury items
at lower prices
(b) A smart phone manufacturer negotiates better supply chain contracts to reduce
component costs
(c) A steel manufacturer experiences rising raw material costs due to a monopoly
supplier controlling iron ore distribution
(d) A traditional taxi company struggles as customers increasingly prefer ride-hailing
apps due to convenience and lower fares

Q.2 Kurrency Kings (KK), a mid-sized industrial undertaking in Pakistan, recently encountered
significant IT challenges. A hacker was able to exploit weak employee passwords to access
sensitive production data. Additionally, during a heavy monsoon season, the server room in
KK’s Karachi office was flooded due to water rushing in from streets, resulting in data loss
and service disruption. Despite having firewalls and anti-virus software, the frequency of
employees clicking on phishing emails has led to virus infiltrations within the system.
The IT manager at KK has proposed the following controls for approval to the CEO:
 Encrypting all data transmissions within the KK’s internal network.
 Enforcing strong passwords policies with mandatory changes every 90 days.
 Relocating servers to an elevated floor and installing shatterproof glass in the server room.
 Implementing surveillance cameras in the server room.
 Disabling USB ports and CD drives on all employee computers.
 Conducting regular IT security awareness training to prevent phishing attacks.
Required:
Determine which controls, proposed by the IT Manager, are most critical for addressing KK’s
current challenges and which may be less relevant. Provide reasons for your answer. (06)

Q.3 GreenGrove Organics Inc. (GG), a global leader in palm oil production, claims to prioritize
sustainability and social responsibility. However, an investigative report reveals issues such
as deforestation, habitat destruction, and forced relocation of indigenous communities due to
GG’s operations. Indigenous communities have lost access to vital resources, including clean
water, food, and medicinal plants. GG has also been accused of suppressing dissent through
legal intimidation and manipulation.
Sadaf Kanwal, who was recently hired as an Assistant Internal Auditor on six-month
probation, has been tasked with verifying GG’s sustainable palm oil sourcing. During her
verification, she uncovered discrepancies in sustainability certifications and no evidence of
conservation efforts. When raising these concerns, the CFO dismisses them by saying, “Oh,
these are just the company’s standard practices. Don’t worry about them! However, seeing
your dedication to work, I will surely recommend a salary measure upon the successful
completion of your probation period.”
Required:
Apply the seven-step decision-making process, as outlined in the American Accounting
Association (AAA) model, addressing ethical concerns. (10)
 Managerial and Financial Analysis Page 4 of 6

Q.4 AutoPro, a leader in eco-friendly automobile manufacturing since 2001, has transitioned from
fuel-efficient gasoline cars to hybrids and electric vehicles (EV) to address environmental
concerns. The government of Takistan supports this shift by offering 5-year tax breaks for
investments exceeding USD 20 million and enforcing strict safety regulations. The EV
industry is growing fast, with innovations like ABB’s Terra 360 chargers and enhanced
security through blockchain technology. However, challenges such as political instability,
economic issues, and disruptions in lithium imports from Saziland pose significant hurdles,
particularly in price-sensitive markets like Takistan. Despite these challenges, global EV
demand persists, driven by environmental concerns.
AutoPro’s advanced battery technology enhances range and efficiency, yet Takistan’s
inadequate charging infrastructure contributes to consumer ‘range anxiety’. The high cost of
setting up fast-charging stations and dependency on a single vendor for supplying critical
battery components are other barriers. On the positive side, a 30% rise in global gasoline prices
in 2024 is pushing more people toward EVs. Furthermore, Takistan’s Health and
Environment Committee is also working on stricter laws and fines to improve EV safety and
reduce pollution. Millennials in Takistan are strong supporters of EVs, with 72% preferring
them over traditional cars. This perfectly aligns with AutoPro’s mission to focus on
sustainability, innovation, and compliance with safety and emissions standards.
Required:
(a) Perform a PESTEL analysis of AutoPro’s operations in Takistan’s automotive industry. (07)
(b) Conduct a SWOT analysis for AutoPro based on the information provided. (06)
(c) Explain how a built-in app in AutoPro’s cars that displays real-time charging station
locations and availability could benefit AutoPro. (02)

Section B

Q.5 (a) A corporate treasury plans to invest Rs. 50 million in a 6-month fixed deposit starting
in three months. To guard against unfavorable movements in interest rates, it has
secured a lender’s option with a strike rate of 19.5% on the notional amount. The option
expires in three months. The treasury paid an upfront premium of Rs. 250,000, and an
additional transaction cost of Rs. 75,000 applies if the option is exercised.
The current and projected KIBOR rates are as follows:
3-month KIBOR rate 6-month KIBOR rate
Current 18.4% 19.8%
Projected 18.7% 18.9%
Required:
Determine whether the option should be exercised. Also, calculate the net effective
interest rate. (05)
(b) Assume that the date today is 1 March 2025.
On 1 March 2025, Tech Solutions (TS), a Pakistani technology company, has signed an
agreement with a German software provider to purchase an AI-powered medical
diagnostic system. The payment of EUR 4 million is due on 30 June 2025. To hedge
against exchange rate fluctuations, TS is considering a currency option. Each option
covers EUR 0.4 million.
The current spot exchange rate is EUR 1 = PKR 290. The following June options are
available, each with a premium of PKR 0.6 million per option:
 Call option with a strike price of PKR 295.
 Put option with a strike price of PKR 298.
TS predicts that the spot rate in June could range between PKR 296 and PKR 300
per EUR.
Required:
Determine whether the option should be purchased. (Show all necessary computations) (05)
 Managerial and Financial Analysis Page 5 of 6

Q.6 The functional currency of Zaristan is ZR.

Great Future Enterprise (GFE) is evaluating a solar farm project that will sell electricity to
the national grid. With the government support through subsidies and incentives, GFE aims
to strengthen its position in the renewable energy sector while assessing the project’s financial
feasibility. The following information has been gathered in respect of the solar farm project:

(i) The project requires an initial investment of ZR 200 million, with ZR 150 million
allocated for solar panels and ZR 50 million for other infrastructure.
(ii) The solar farm is expected to produce and sell 8,000 MWh in the first year, with an
anticipated annual efficiency decline by 2% due to general panel degradation. To
counteract, GFE plans to invest an additional ZR 25 million at the start of the fourth
year to restore the efficiency back to 8,000 MWh.
(iii) The solar panels will have a useful life beyond the project’s duration. At the end of
Year 5, their residual value will be 50% of their initial cost, while all other equipment
will have zero residual value.
(iv) Electricity will be sold at ZR 10,000 per MWh, with prices increasing by 8% annually.
(v) The annual operations and maintenance cost is estimated at ZR 20 million, increasing
by 6% annually.
(vi) Depreciation will be charged at 40% per annum using the reducing balance method for
tax purposes.
(vii) An initial working capital investment of ZR 30 million is required, and 80% of it will
be recovered at the end of Year 5.
(viii) ZR 10 million was spent on feasibility studies and site surveys last year. Additionally,
a permit fee of ZR 5 million must be paid immediately to the government.
(ix) The project will earn 1 carbon credit per MWh, which can be sold at ZR 2,000 per
credit. Carbon credit prices are likely to increase by 5% annually.
(x) GFE qualifies for a government subsidy of ZR 50 million, to be received after one full
year of successful operation.
(xi) This project qualifies for a two-year tax holiday, after which a standard tax rate of 30%
applies. Taxes are payable in the year they arise, and tax losses cannot be carried
forward.
(xii) GFE’s cost of capital is 18%.

Required:
Using the net present value method, evaluate whether GFE should proceed with the solar
project. Assume all cash flows occur at year-end unless stated otherwise. (15)

Q.7 XYZ Limited (XYZ) is engaged in the manufacturing of motor cycles. The following
information has been extracted from the financial statements of XYZ as of 31 December 2024:

Rs. in million
Ordinary share capital (Rs. 10 each) 100
20% Irredeemable preference shares (Rs. 100 each) 20
10% Bank loan 20

Additional information:
(i) The details of the dividends in the last four years are as follows:

Year 2021 2022 2023 2024

Dividend per share Rs. 6.0 Rs. 6.5 Rs. 7.0 *Rs. 8.0
*declared but not paid, due very shortly

(ii) XYZ’s ordinary share price is quoted at Rs. 104 (cum dividend) per share and is
expected to grow at 5% per annum.
(iii) The preference share price is quoted at Rs. 200 per share.
(iv) The applicable tax rate is 30%.
(v) XYZ’s current equity beta is 1.2.
 Managerial and Financial Analysis Page 6 of 6

New investment
XYZ plans to setup an assembly unit for electric motorcycles. The estimated project cost is
Rs. 50 million, which will be financed through 12% convertible debentures (Rs. 100 each).
Debenture holders will have the right to either convert each bond into one ordinary share or
redeem it at a premium of 10% above par value of the bond, at the end of the third year.
Required:
(a) Compute XYZ’s weighted average cost of capital (WACC) for the existing business. (07)
(b) Calculate the impact of the new investment on XYZ’s WACC. (07)

Q.8 WildWave Resorts Limited has recently constructed a fully equipped theme park, including
an adventure park named WildLand and a water park named WaveLand, at a cost of
Rs. 2.2 billion, including capital expenditures of Rs. 2.0 billion. It also features a theatre for
live shows, known as WildWave Arena. The following information and projections are
provided for the first year of operations:
Theme Park (WaveLand and WildLand)
The standard ticket price for the theme park is Rs. 2,000 per person, while a VIP ticket (which
includes a Fast Pass) costs Rs. 3,000 per person. It is estimated that 20% of visitors will opt
for the VIP ticket. Tickets for WaveLand and WildLand must be purchased separately.
WildLand is expected to receive approximately 20,000 visitors per month. However, it will
remain closed for maintenance in March and September. WaveLand is expected to attract
30,000 visitors per month from March to November but will remain closed during winter.
Visitors are likely to come in groups, such as families or friends, with an average group size
of four people. Moreover, the estimated average spending on food and beverages per group is
Rs. 5,000.
Theatre (WildWave Arena)
The theatre charges Rs. 500 for a standard ticket and Rs. 1,000 for a VIP ticket. It has a seating
capacity of 500, with 100 seats reserved for VIP ticketholders. Each new theatre show will
run for five weeks, with an expected occupancy rate of 70% for standard seats and 50% for
VIP seats. On weekdays, there will be two shows per day, while on weekends (Saturday and
Sunday), three shows per day will be scheduled. The theatre will operate for 40 weeks per
year, after taking into account closures during Ramadan, Muharram, and maintenance
periods.
The average spending per theatre visitor on food and beverages is expected to be Rs. 300.
Additional information:
Revenue-related information
Approximately 35% of all visitors to WildWave Resorts, including those attending the
theatre, are expected to purchase merchandise such as souvenirs, T-shirts, and toys, with an
average spending of Rs. 1,000 per visitor.
Cost-related information
The direct cost of food and beverages is estimated to be 50% of the related revenue, while the
cost of merchandise is projected at 60% of the related revenue. The production cost of each
new theatre show, which includes related salaries, utilities and other expenses, is estimated at
Rs. 4 million. Operating costs, including salaries, utilities, maintenance, and other expenses,
are estimated at Rs. 520 million for the first year. The marketing and advertising budget for
the first year is projected at Rs. 30 million.
The resort is funded equally by debt and equity, with the debt portion carrying an interest rate
of 15% per annum. All assets will be depreciated at a rate of 20% per annum using the
reducing balance method. Profits will be subject to a 30% tax rate.
Required:
Prepare the budgeted profit and loss account for the first year ending 28 February 2026. (15)
(THE END)
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

A.1 (i) (b) An online retailer uses blockchain technology to execute peer-to-peer
transactions, eliminating intermediaries and reducing costs
(ii) (b) Products with a low market share in a high-growth market
(iii) (d) Ensuring higher profits by preventing competitors from entering the market
(iv) (c) A company sources all its raw materials from various suppliers for
manufacturing of its products
(v) (c) 14.50%
(vi) (a) Only (I) is correct
(vii) (c) Preference shares rank higher than common equity in liquidation
(viii) (b) Trade credit and bank overdrafts
(ix) (b) It could raise concerns about financial stability despite potential tax benefits
(x) (c) The shareholders’ wealth increases proportionally as the number of shares
increase
(xi) (c) Futures have standardized contract sizes, while forwards allow flexibility in
quantity
(xii) (d) It will experience a sudden increase in operational costs
(xiii) (b) Social values
(xiv) (c) Dependence on external funding sources makes financial forecasting complex
(xv) (d) A traditional taxi company struggles as customers increasingly prefer ride-
hailing apps due to convenience and lower fares

A.2 Most Critical Controls:

▪ Enforcing strong passwords with mandatory updates every 90 days:

This is essential to address the weak password vulnerability exploited by the hacker.
Strong passwords with regular updates reduce the likelihood of unauthorized access
to sensitive customer data.

▪ Relocating servers to an elevated floor and installing shatterproof glass:

This measure directly tackles the issue of flooding during monsoon rains, which
caused significant data loss and disruptions. Elevating the servers and enhancing
physical security will mitigate future risks of water damage and ensure operational
continuity.

▪ Conducting regular IT security awareness training:

Employee mistakes, such as clicking on phishing emails, have been a recurring issue.
Regular training will help employees identify and avoid phishing attempts, reducing
the risk of introducing viruses into the system.

Less Relevant Controls:

▪ Encrypting all data transmissions across the KK’s internal network:

While encryption is a good security practice, it does not address the specific issues
faced by KK, such as phishing, flooding, or password vulnerabilities.

▪ Installing cameras in the server room:

Cameras improve physical security but are not directly relevant to solving the
highlighted problems, such as flooding, phishing, and password security.

▪ Disabling USB ports and CD drives on all employee systems:

There is no evidence that USB devices or CDs were the source of the viruses in this
case. Therefore, this measure is not relevant to addressing the challenges mentioned.

Page 1 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

A.3 (i) Establishing the facts of the case:

▪ GG is contributing to deforestation, habitat destruction, and forced relocation of
indigenous communities.
▪ The Assistant Internal Auditor (AIA) has discovered discrepancies in
sustainability certifications and minimal evidence of conservation efforts.
▪ The CFO dismissed the AIA’s findings as standard practices while offering a
benefit (shortened probation period) that may influence her objectivity.

(ii) Identifying the ethical issues:

▪ GG’s operations contradict its claims of sustainability and social responsibility.
▪ The CFO’s attempt to influence the AIA’s objectivity through the offer of a
benefit.
▪ Neglect of indigenous communities' rights and environmental degradation.

(iii) Principles, rules, and values involved:

▪ The AIA’s responsibility to maintain integrity, objectivity, and professionalism
in her audit.
▪ The CFO’s duty to ensure ethical financial reporting and support transparency.
▪ GG’s obligation to uphold environmental and social commitments as part of its
corporate responsibility.
(iv) Alternative courses of action:
▪ Accept the CFO’s favor and overlook the discrepancies in her report.
▪ Accept the CFO’s favor but include the findings in her report.
▪ Refuse the favor and take no further action on the findings.
▪ Refuse the favor and disclose the findings in her report.

(v) Matching norms, principles, and values:

▪ Accepting the favor compromises the AIA’s integrity and objectivity.
▪ Refusing the favor aligns with professional principles of ethics and transparency.

(vi) Analysis of consequences:

▪ Accepting the favor: While it may benefit the AIA’s career in the short term, it
compromises her professional integrity and could damage her reputation in the
long run.
▪ Refusing the favor: This may lead to potential career repercussions, such as
prolonging the probation period or strained relations with the CFO.

(vii) Taking a decision/conclusion:

▪ The AIA should refuse the favor and disclose the findings in her report.
Upholding professional ethics, integrity, and transparency is critical despite the
potential personal risk. This decision ensures accountability and aligns with the
broader ethical responsibility to address GG’s harmful practices.

Page 2 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

A.4 (a) Political:

▪ Takistan’s government supports EV growth through tax breaks for infrastructure
investments and strict safety rules, creating a favorable policy environment.
▪ Political instability and economic challenges negatively affect business
operations.

Economic:
▪ The rise in global gasoline prices (30% in 2024) makes EVs more attractive as a
cost-effective alternative.
▪ The high cost of fast-charging stations are economic barriers.
▪ Price sensitivity in Takistan’s market makes it tough for the industry.
▪ Lithium import disruptions from Saziland create supply chain risks.

Social:
▪ Millennials in Takistan strongly support EVs, with 72% preferring them over
gasoline cars, reflecting a shift in consumer preferences toward eco-friendliness
and innovation.
▪ Global concerns about climate change and pollution continue to drive demand
for EVs.

Technological:
▪ Innovations like ABB’s Terra 360 chargers and blockchain technology are
advancing EV charging infrastructure, improving security and automation.
▪ There is a lack of charging infrastructure, which causes range anxiety.

Environmental/Ecological:
▪ Rising global concern about climate change and air pollution is accelerating EV
adoption.
▪ Takistan’s Health and Environment Committee is introducing stricter laws and
fines to enhance safety and reduce pollution.

Legal:
▪ Compliance with Takistan’s strict safety and emissions standards is highly
essential.

(b) SWOT Analysis:

Strengths:
▪ Leadership in eco-friendly transportation since 2001.
▪ Advanced battery technology offering better range and efficiency.
▪ Alignment with millennial preferences for sustainable and innovative vehicles.

Weaknesses:
▪ Lack of partnerships or initiatives by AutoPro to improve Takistan’s public
charging infrastructure, leading to range anxiety.
▪ Finds it tough to address price-sensitive market demands.
▪ Dependency on single vendor for critical battery components.

Opportunities:
▪ Global gasoline price increases (30% in 2023) encouraging a shift toward EVs.
▪ Government tax incentives in Takistan for EV related investments.
▪ Expanding demand for EVs due to climate change and pollution concerns.

Page 3 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

Threats:
▪ Political instability and economic challenges in Takistan.
▪ Disruptions in lithium imports from Saziland impacting battery production.
▪ High costs of fast-charging stations, making infrastructure expansion
challenging.
▪ Stricter laws and fines for EV technical failures, increasing compliance costs.

(c) ▪ Provides users with instant information about nearby charging stations, reducing
range anxiety and increasing confidence in using EVs.
▪ Differentiates AutoPro from competitors by offering a technology-driven
solution to a common EV concern.
▪ Enables AutoPro to gather valuable insights on charging patterns and user
behavior, helping to optimize charging infrastructure planning and deployment.

A.5 (a) Should the option be exercised?

Option is already purchased, so premium cost is sunk and not relevant for decision
making

% age interest earned 19.50%

Less: Transaction cost (75,000÷50m) (0.15%)
19.35%

6-month KIBOR rate 18.90%

Alternate
Rs. in '000
Interest earned (19.50% × 50m), if exercised 4,875
Less: Transaction cost (75)
4,800

Interest earned (18.90% × 50m), if not exercised 4,725

Exercised: Yes, because 19.35% > 18.90% OR 4.8m > 4.725m

Net effective interest rate:
% age net interest earned 19.35%
Less: upfront option premium (250,000÷50m) (0.50%)
18.85%

Page 4 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

(b) TS is making a payment in EUR, meaning it is exposed to the risk of the PKR
weakening. To hedge this risk, TS can use a call option, which allows it to buy EUR
at a fixed price (PKR 295), regardless of the market rate.

Number of options (4m ÷ 0.4m) 10 options

Rs. in million
Receipts after exercising option (295 × EUR 4m) 1,180
Premium on options (Rs. 0.6m × 10) 6
Net cost 1,186

Rs.
Net Effective Exchange Rate if option purchased/exercised
(1,186m / 4m) 296.50

Rs. in million
Expected loss if June rate is PKR 296 (0.5 × 4m) 2

Potential profit if June rate is PKR 300 (3.5 × 4m) 14

Conclusion:
Since the predicted June spot rate range (PKR 296–300) includes values above the net
effective exchange rate (PKR 296.5), and the potential loss (Rs. 2m) appears low
compared to the likelihood of a higher spot rate in June, purchasing the call option is
a reasonable hedge against adverse currency movements.

A.6 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

------------------------- Rs. in million -------------------------
Feasibility cost (sunk cost) -
Permit fee (5)
Sales of electricity (W-1) 80 85 90 101 107
Carbon credits (W-2) 16 16 17 19 19
Operations & maintenance (20) (21) (22) (24) (25)
Depreciation (W-3) (80) (48) (29) (27) (16)
Working capital loss (6)
Gain on sale of equipment 50
(5) (4) 32 55 68 129
Tax @ 30% - - (17) (20) (39)
(5) (4) 32 39 48 90
Further investment (25)
Solar panels and other
infrastructure (200) 75
Add Back: Depreciation 80 48 29 27 16
Add: Working capital loss 6
Less: Gain on sale (50)
Working capital (30) 24
Government subsidy 50
Net cash flow (235) 126 80 43 75 161
Discount factor - 18% 1 0.847 0.718 0.609 0.516 0.437
PV (235) 107 57 26 39 70
NPV 64

Conclusion: Project is feasible

Page 5 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

W-1: Sales of electricity

Units 8,000 7,840 7,683 8,000 7,840
Price per unit 10,000 10,800 11,664 12,597 13,605

Sales in millions 80 85 90 101 107

W-2: Revenue from carbon credits

Credits 8,000 7,840 7,683 8,000 7,840
Price per credit 2,000 2,100 2,205 2,315 2,431

Sales in millions 16 16 17 19 19

W-3: Depreciation and gain on sale

----------------- Rs. in million -----------------
Book Value - opening 200 120 72 68 41
Depreciation - 40% 80 48 29 27 16
Further investment 25
Book Value - closing 120 72 68 41 25

Sale value - panels - 150m×50% 75

Gain on sale 50

A.7 (a) Weighted average cost of capital (WACC)

Units MV
MV Cost % Rs. in '000
in'000 Rs. in '000
Ordinary shares 10,000 96.00 960,000 19.24% 184,668
Preference shares 200 200.00 40,000 10.00% 4,000
(20÷200)
Bank loan - - 20,000 7.00% 1,400
(10%×30%)
1,020,000 190,068

WACC ⇒ 190,068 ÷ 1,020,000 × 100 ⇒ 18.63%

W-1:
XD Price 104–8 96
Dividend growth rate (8/6)1÷3 –1 10.06%
Cost of equity [8×(1+10.06%)÷96]+10.06% 19.24%

(b) Revised WACC

Units MV
MV Cost % Rs. in '000
in'000 Rs. in '000
Ordinary shares
capital 10,000 96.00 960,000 19.24% 184,668
Preference shares 200 200.00 40,000 10.00% 4,000
Bank loan - - 20,000 7.00% 1,400
Convertible
debentures 50,000 11.81% 5,903
1,070,000 195,971

Revised WACC ⇒ 195,971 ÷ 1,070,000 × 100 ⇒ 18.32%

Page 6 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

W-1: Redemption value – Higher of

Par value 10% premium 110
Convertible into shares 96×(1.05)3 111.13

Cash flow Discount Present Discount Present

Description
(Rs.) factor @ 10% value (Rs.) factor @15% value (Rs.)
Issue value 100.00 1.000 100.00 1.000 100.00
Interest (8.40) 2.487 (20.89) 2.283 (19.18)
Redemption (W-1) (111.13) 0.751 (83.49) 0.658 (73.07)
(4.38) 7.75

NPVa – 4.38
IRR = L + ×(H–L) 10%+ ×(15%– 10%) ⇒ 11.81%
NPVa – NPVb – 4.38 – 7.75

A.8 WildWave Resorts

Budgeted Profit and Loss Account
For the year ending 28 February 2026

Ticket F&B Merchandise Total

------------------------- Rs. in '000 -------------------------
Sales
▪ WildLand (W-1) 440,000 250,000 70,000 760,000
▪ WaveLand (W-2) 594,000 337,500 94,500 1,026,000
▪ WildWave Arena (W-3) 121,600 63,360 73,920 258,880
1,155,600 650,860 238,420 2,044,880

Cost of sales
▪ Food & Beverage – 50% 325,430 325,430
▪ Merchandise – 60% 143,052 143,052
▪ Production cost – 4m per
theatre show × 8 shows 32,000
500,482

Selling and Admin Costs

▪ Operating cost 520,000
▪ Marketing & advertising 30,000
550,000

Depreciation (2b×20%) 400,000

Finance cost (1.1b × 15%) 165,000

Profit before tax 429,398

Tax – 30% 128,819

Profit after tax 300,578

Page 7 of 8
 Managerial and Financial Analysis
Suggested Answer
Certificate in Accounting and Finance – Spring 2025

W-1: Sales – WildLand

No. of months – excluding March and September 10
Annual visitors – 20000 visitors/month 200,000
Group size – 4 person/group 50,000

Rs. in '000
Standard ticket – 80% 2,000×200,000×80% 320,000
VIP Ticket – 20% 3,000×200,000×20% 120,000
Sales – Tickets 440,000
Sales – F&B 5,000×50,000 250,000
Sales – Merchandise 1,000×35%×200,000 70,000

W-2: Sales – WaveLand

No. of months – March to November 9
Annual visitors – 30000 visitors/month 270,000
Group size – 4 person/group 67,500

Rs. in '000
Standard ticket – 80% 2,000×270,000×80% 432,000
VIP Ticket – 20% 3,000×270,000×20% 162,000
Sales – Tickets 594,000
Sales – F&B 5,000×67,500 337,500
Sales – Merchandise 1,000×35%×270,000 94,500

W-3: Sales – WildWave Arena

Total new shows per year (40 weeks ÷ 5 weeks/show) 8
Shows per week 2 shows × 5 days + 3 shows × 2 days 16
Shows per year 16 × 40 weeks 640
Total visitors per show (400×70%)+(100×50%) 330
Total visitors per year 330×640 211,200

Rs. in '000
Standard seats – 70% 400 seats × 70% × Rs. 500 × 640 shows 89,600
VIP seats – 50% 100 seats × 50% × Rs. 1,000 × 640 shows 32,000
Sales – Tickets 121,600
Sales – F&B 300×211,200 63,360
Sales – Merchandise 1,000×35%×211,200 73,920

(THE END)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Managerial and Financial Analysis Certificate in Accounting and Finance (CAF)
(MFA) Spring 2025

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8
85% 46% 39% 36% 5% 69% 80% 33% 54%

General comments

During this examination session, performance improved notably, with the pass rate increasing
to 54%, up from 45% in the previous session. MFA’s result has shown consistent progress
across successive sessions, with the pass rate also reaching 54% in the session before last.
The dip in performance occurred in the last session, primarily due to below-average scores
in Section B, particularly the budgeted cash flow question.

Question-wise common mistakes observed

Question 1

MCQs at serial (iii), (xiv), and (xv) were the least performed.

Question 2

 Examinees were unable to differentiate between the most critical and less relevant
controls. In some cases, vague terms such as ‘good control’ and ‘better control’ were
used rather than clearly specifying the level of criticality.
 Examinees also failed to provide justifications for their classification.

Question 3

 Examinees struggled to apply the AAA model in a structured manner. A common issue
was the failure to address all seven steps of the model, often omitting key steps such as
alternative courses of action or matching norms, principles, and values.
 Examinees lacked clarity and coherence, with issues or considerations from one step
being misplaced under another. This mixing of ideas diluted the logical flow and
undermined the overall ethical reasoning.

Page 1 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2025

Question 4(a)

 Examinees were unable to identify and address all six factors of the PESTEL framework.
 Some examinees focused on company-specific details such as product features or
competitive advantages, instead of analyzing the broader industry trends and external
environment factors.
 Some examinees lacked clear structure, with considerations meant for one factor (e.g.,
legal) incorrectly placed under another (e.g., political)

Question 4(b)

 Examinees failed to clearly distinguish between internal factors (Strengths and

Weaknesses) and external factors (Opportunities and Threats), resulting in
misclassification of several observations.
 Examinees repeated the same point under multiple factors, indicating a limited
understanding of the fundamental differences between each element of the SWOT
framework

Question 4(c)

Examinees provided only overly generalized benefits of the built-in app, such as increased
profitability or revenue, rather than highlighting specific advantages like enhanced customer
confidence, a solution to common EV concerns, or insights into charging patterns.

Question 5(a)

Examinees failed to consider that the interest rate option was already purchased and the
premium cost, being already incurred, was a sunk cost for the purpose of decision making.

Question 5(b)

 Examinees incorrectly selected the put option, instead of the appropriate call option,
leading to the incorrect determination of the net effective exchange rate
 Examinees failed to properly compute the premium on options. In some cases, the
premium was mistakenly added to the expected receipts instead of being correctly
deducted.
 Examinees failed to provide proper justification for their conclusion. They failed to
consider that although there was a likelihood of a favorable future spot rate, the risk of
adverse movement was substantial, and therefore it was reasonable to hedge the
exposure.

Question 6

 Examinees failed to allocate important cash flows to their correct years, such as
recognizing government subsidies in the second year instead of the first, and additional
investments in the fourth year instead of the third.
 Examinees overlooked other important impacts, such as loss from working capital
release and gain on sale of equipment for the purpose of tax calculation.

Page 2 of 3
 Examiners’ comments on Managerial and Financial Analysis Spring 2025

Question 7

 Examinees overlooked the fact that the current market price was cum dividend and
therefore failed to calculate the ex-dividend price necessary for determination of cost of
equity.
 Examinees failed to calculate the dividend growth rate and instead used the expected
market price growth to determine the cost of equity.
 Examinees made errors in calculating the market values of ordinary and preference share
capital, leading to inaccuracies in WACC calculations.

Question 8

Examinees made several errors in determining the amounts required for the budgeted profit
and loss account. Common mistakes included:
 Computing revenue for WildLand and WaveLand based on monthly visitor numbers
rather than annual visitor numbers.
 Overlooking the impact of group size when calculating food and beverage revenue.
 Incorrectly calculating revenue for WildWave Arena without factoring in the number of
weekly shows.
 Failing to account for the number of new shows per year when determining the annual
production cost for the theatre.
 Neglecting to exclude the non-CapEx expenditure of 200 million from the depreciation
calculation.

(THE END)

Page 3 of 3
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2025

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
the answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2 Up to 01 mark for correct classification and explanation 6.0

A.3 ▪ Identification of all 7 steps of the AAA model 1.0

▪ 0.5 mark for the correct identification/classification of each point 9.0

A.4 (a) ▪ Identification of all the PESTEL factors 0.5

▪ 0.5 mark for the correct identification/classification of each point 6.5

(b) ▪ 0.5 mark for the correct identification/classification of each point under the
SWOT analysis 6.0

(c) 01 mark for identifying each benefit for AutoPro 2.0

A.5 (a) ▪ Computing net interest earned 2.0

▪ Comparison with the correct KIBOR rate 1.0
▪ Computing the net effective interest rate 1.5
▪ Conclusion 0.5

(b) ▪ Computing the net effective exchange rate 3.0

▪ Justified conclusion 2.0

A.6 ▪ Sales of electricity and carbon credit 3.0

▪ Depreciation and gain on sale 3.0
▪ Operations and maintenance 1.0
▪ Feasibility, permit fee and government subsidy 1.5
▪ Taxation 0.5
▪ Initial and further investment, including disposal and working capital release 4.0
▪ Determination of net present value 1.5
▪ Conclusion 0.5

A.7 (a) ▪ Determination of the cost of equity 3.0

▪ Computation of current WACC 4.0

(b) ▪ Determination of the cost of convertible debt 5.5

▪ Determination of revised WACC 1.5

A.8 ▪ Sales – WildLand 3.5

▪ Sales – WaveLand 3.5
▪ Sales – WildWave Arena 5.0
▪ Cost of sales 1.5
▪ Selling and admin cost, depreciation, finance cost and taxation 1.5

(THE END)
Page 1 of 1
 Certificate in Accounting and Finance Stage Examination
3 September 2025
3 hours – 100 marks
Additional reading time – 15 minutes

Managerial and Financial Analysis

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs).
(i) A traditional taxi service loses 35% of its customers within 18 months after the launch
of an app-based ride-hailing competitor. This situation is an example of:
(a) Cyclical competition (b) Technological disruption
(c) Regulatory failure (d) Price war (01)

(ii) A food delivery platform experiences unexpected losses after a provincial government
mandates formal employment contracts for all riders, effectively prohibiting freelance
delivery work. Under PESTEL, this is best categorized as:
(a) Environmental policy (b) Political intervention
(c) Social pressure (d) Technological limitation (01)

(iii) Which of the following is an example of a preventive control that reduces the risk of
unauthorized access?
(a) Daily reconciliation (b) Firewall restrictions
(c) Intrusion log reports (d) Transaction audit trail (01)

(iv) A logistics firm deployed a new enterprise information system integrating warehouse,
inventory, and delivery tracking. However, regional branches continue using legacy
spreadsheets for reporting, leading to data discrepancies between operational records
and executive dashboards.

Which of the following best explains the primary Information and Communication
Technologies (ICT) failure in this scenario?
(a) Inadequate encryption protocols during data transmission
(b) Lack of user access controls in the new system
(c) Poor ICT governance leading to non-standardized data practices
(d) Overinvestment in communication hardware without cloud backup (01)

(v) Under the AAA model, what should an accountant do first when asked to backdate an
invoice to meet a sales target?
(a) Consider alternative courses of action
(b) Identify the stakeholders involved
(c) Recognize that an ethical issue exists
(d) Make a decision and act on it (01)

(vi) A system that provides in-depth information, advice and recommendations on matters
related to a specific field is known as:
(a) Expert System (b) Decision Support System
(c) Enterprise Resource Planning (d) Executive Information System (01)
 Managerial and Financial Analysis Page 2 of 6

(vii) Lenders analyse a company’s financial statements primarily to help them:

(a) assess the risk and creditworthiness of financing the company
(b) provide a record of the company’s historical profitability
(c) outline the company’s future growth plans and investment projects
(d) show how efficiently the company manages its operations (01)

(viii) Which of the following statements is NOT correct about an interest rate option for the
option buyer?
(a) An interest rate option grants the buyer the right, but not the obligation, to deal
at an agreed interest rate at a future maturity date
(b) A call option is the right to receive interest at the specified rate, guaranteeing a
maximum rate of interest
(c) A put option is the right to pay interest at the specified rate, guaranteeing a
minimum rate of interest
(d) A call option is the right to pay interest at the specified rate, guaranteeing a
minimum rate of interest (01)

(ix) How can a company with a lower credit rating obtain financing at a rate similar to that
of a higher rated company?
(a) By issuing corporate bonds directly to the market
(b) By securing financing through asset securitization of its AA-rated receivables
(c) By taking on bank loans at floating interest rates, instead of fixed rates
(d) By increasing dividend pay-outs to attract more investors (01)

(x) Which of the following statements is the most appropriate regarding risk management?
(a) Both pure and speculative risks can usually be insured
(b) Pure risks are often managed through internal controls or insurance, while
speculative risks must be accepted as part of profit-making
(c) Speculative risks can be avoided through better forecasting, while pure risks
cannot be avoided
(d) Speculative risks only arise in financial markets, whereas pure risks exist only in
operational areas (01)

(xi) Consider the following statements:

(I) A floating charge prevents the borrower from selling inventory in the normal
course of business.
(II) A fixed charge is typically attached to non-current assets.
(III) A fixed charge provides the lender with stronger protection than a floating charge.

Which of the above statements is/are NOT correct with respect to fixed and floating
charges?
(a) I only (b) II only
(c) I and III only (d) II and III only (1.5)

(xii) Consider the following statements:

(I) The payroll application automatically flags duplicate entries.
(II) Employees retain system access for six months after leaving the entity because
user IDs are not deactivated.
(III) Access to the financial reporting system requires both a password and a
second-factor token.
Which of the above statements most clearly illustrates a weakness in general IT controls
that could undermine the effectiveness of application controls in a financial reporting
system?
(a) I and III only (b) II only
(c) III only (d) I and II only (1.5)
 Managerial and Financial Analysis Page 3 of 6

(xiii) A company reports the following information for the year (assume 360 days):

Rs. in million Rs. in million

Annual credit sales 720 Average debtors 90
Cost of sales 360 Average inventory 60
Annual credit purchases 300 Average creditors 30

What is the company’s Cash Operating Cycle?

(a) 21 days (b) 51 days (c) 69 days (d) 141 days (02)

Q.2 CleanAir Motors (CM), a local electric vehicle (EV) manufacturer in Pakistan, has built its
business around assembling affordable urban e-scooters using imported battery packs and
locally manufactured frames. In its earlier years, CM’s survival depended on access to
government grants and low-interest green financing, as well as its ability to meet minimum
vehicle safety standards.

Recently, CM has invested in a proprietary battery thermal control system that extends battery
life in hot climates, a technology that no local competitor currently offers. Its in-house
engineering team has also developed a fast-charging algorithm that integrates with standard
220V outlets, allowing users to fully charge e-scooters at home in just one hour.

As competition heats up with new entrants offering stylish but less efficient EVs, CM’s
management is evaluating its strategic strengths and considering whether to license its battery
control technology to other manufacturers or retain it as an exclusive advantage.

Required:
(a) For CM, explain and identify:
(i) threshold resources and unique resources
(ii) threshold competencies and core competencies (08)
(b) Briefly explain the characteristics of sustainable core competencies and relate these
characteristics to the core competencies identified in (a)(ii) above. (02)
(c) Advise CM on whether it should license its proprietary battery technology to
competitors to earn additional profit. Justify your recommendation. (02)

Q.3 MediScan Labs, a diagnostics technology company, has developed an AI-based software tool
that pre-screens X-rays and flags potentially cancerous cases. The tool has undergone rigorous
validation and is certified in both the European Union and Pakistan, demonstrating a proven
accuracy rate of 92%.

MediScan plans to deploy the tool in rural hospitals across Pakistan as soon as possible. The
rollout plan includes training paramedical staff to operate the tool and provide patient
counselling.

MediScan has arranged operational training for staff, believing that no further instruction is
needed since the results are ‘easy to understand’. The company is concerned that offering
additional training such as patient communication, error handling, etc. would delay the
rollout plan.

Required:
Using the Tucker 5-Question Model, analyse the above situation and advise whether
MediScan should proceed with the rollout as planned. (06)
 Managerial and Financial Analysis Page 4 of 6

Q.4 AxisSound, a mid-range consumer electronics company, launched its wireless earbuds,
AxisPods, three years ago. Initially, the product struggled to gain market share in a crowded
segment, with only limited sales. However, it eventually gained traction following the
introduction of influencer marketing campaigns and product roadshows. Recently, sales have
gone down, as most tech influencers have shifted to newer brands offering active noise
cancellation and integrated AI features.

Required:
(a) Identify and explain the stages of the product lifecycle demonstrated in the above
situation. (03)
(b) For each stage identified in (a), highlight two relevant costs incurred and recommend
an appropriate marketing strategy. (07)

Section B

Q.5 TrendTote (TT) is an online retailer of branded handbags, selling exclusively through its
e-commerce website. Orders are shipped to Karachi, Lahore and Islamabad via a courier
company. The following information is available in this respect:
(i) The modes of payment and their respective share of total sales are as follows:
Payment Method % of Sales
Cash on delivery (COD) 40%
Credit card 60%

(ii) 20% of credit card sales are high-value items requiring customization. These are
dispatched 10 days after payment. All other items are dispatched immediately and are
delivered the same day.
(iii) Month wise details of sales value and sales orders are as follows:
Month Sales value (Rs.) No. of sales order
August 2025 – Actual 4,800,000 410
September 2025 – Projected 5,200,000 420
October 2025 – Projected 5,600,000 450
November 2025 – Projected 5,100,000 460
December 2025 – Projected 6,200,000 500

(iv) The courier service charges Rs. 350 per order.

(v) COD amounts collected by the courier are remitted 5 days after delivery. However,
courier charges are deducted on monthly basis from the first payment due in the
following month.
(vi) Credit card payments are credited by the bank 5 days after the sale.
(vii) All handbags are sold at cost plus 25%.
(viii) High-value items are purchased upon receipt of orders. Inventory of regular handbags
is maintained at 30% of the next month’s projected sales. 45% of the purchases are paid
in the same month, while the balance are paid in the following month.
(ix) Annual selling and administrative expenses amount to Rs. 8.6 million, including
Rs. 0.9 million in depreciation. These expenses are paid in the same month in which
they are incurred.
(x) The cash and bank balance on 31 August 2025 was Rs. 1,250,000.
(xi) Purchases of handbags in August 2025 amounted to Rs. 3,600,000.
(xii) Sales and purchases occur evenly throughout the month unless stated otherwise.
(xiii) It can be assumed that high value orders numbers are 10% of the total order numbers.
All high value orders in August 2025 were delivered in the same month.

Required:
Prepare a cash budget for TT for the quarter ending 30 November 2025. (15)
Notes:  Month-wise break-down is not required.
 Assume 30 days per month for calculation purposes.
 Managerial and Financial Analysis Page 5 of 6

Q.6 Al-Meezan Textile Ltd. (AMTL), a Pakistan-based exporter and importer of premium fabrics
and accessories, is exposed to fluctuations in the exchange rate of Euro (EUR) due to its
foreign currency receivables and payables. The details of company’s exposures are as follows:
 Receivable: EUR 300,000 due in 3 months from a European customer
 Payable: EUR 500,000 due in 6 months to a European supplier
To manage this currency risk, the treasury department has gathered the following market
data:
Interest Rates (Annualized)
EUR PKR
Deposit 3.80% 9.25%
Borrow 4.80% 11.75%
Current and Forecasted Exchange Rates (PKR/EUR)
Period Bid Ask
Current spot 321.00 322.00
Expected 3-month spot 327.00 328.25
Expected 6-month spot 330.00 331.50

Required:
Construct money market hedge for each of the foreign currency exposures separately and
determine their effective exchange rates. Recommend whether each hedge would be
beneficial for AMTL. (12)

Q.7 Maqbool Limited (ML) is a listed consumer goods company. ML’s capital structure, based
on the financial statements as at 31 August 2025, is as follows:
Source Rs. in million
Ordinary share capital (Rs. 10 each) 3,000
10% convertible bonds (Rs. 100 each) 2,000

Additional information:
(i) ML’s market price as at 31 August for the last three years is as follows:
2023 2024 2025
Price per share (Rs.) 48 52 60

The 2025 price is cum-dividend. A dividend of Rs. 4 per share has been announced and
is payable shortly.
(ii) ML’s equity beta is 1.13, the risk-free rate is 10% and the market risk premium is 8%.
(iii) The convertible bonds are either redeemable at par or convertible into 1.5 shares per
bond in four years. The bonds are currently trading at Rs. 94. ML’s share price is
expected to grow in line with historical trends.
(iv) The applicable tax rate is 35%.

New investment
ML plans to expand into the ready-to-eat food segment, requiring financing of Rs. 2,000
million. ML’s management is considering following two alternative financing strategies:
 Option A: Convertible Bonds Issue
Issue new convertible bonds at par for Rs. 2,000 million. The coupon rate will be
200 basis points higher than the existing bonds’ rate, to cover the additional gearing
risks. All other bond features, i.e., convertibility, par value and four-year term, will be
identical to the current bonds.
 Option B: Right Issue
Raise the required funds through a right issue at a premium of Rs. 40 per share. Market
analysts caution that such an issue may signal financial weakness, leading to a rise in
ML’s existing equity beta by approximately 15%.
 Managerial and Financial Analysis Page 6 of 6

Required:
(a) Compute ML’s weighted average cost of capital (WACC) of the existing business. (07)
(b) Recommend which of the two financing options should ML prefer for the new
investment. (Show necessary computations) (06)

Q.8 Alpha Tools Limited (ATL), a mid-sized manufacturer of power tools, is evaluating two
mutually exclusive investment projects intended to enhance long-term profitability. Both
projects require an initial investment of Rs. 10 million. However, due to capital constraints,
ATL can only select one of these projects.

Project A: Automation Upgrade

This project focuses on modernizing ATL’s production system for a tool model T21 through
advanced automation technology. Implementation will take one year, after which cost
efficiencies will begin. The following information is available in respect of this projects:
(i) At present, ATL produces 100,000 units per year, with expected growth of 10%
annually.
(ii) The current variable cost is Rs. 180 per unit, which is expected to increase by 5%
annually. After implementation, this variable cost would reduce by 25%.
(iii) In addition to savings in variable costs, the project would reduce ATL’s working capital
needs by Rs. 1.5 million (at current prices) due to streamlined operations, available
immediately after implementation.
(iv) The annual recurring maintenance cost of the system would be Rs. 0.5 million (at
current prices).
(v) The project would operate for four years after implementation, with no residual value
at the end of its life. Tax depreciation will be calculated using the reducing balance
method, with 50% applied in the first year and 25% per year thereafter.
(vi) For this project, ATL plans to repurpose an existing warehouse, which would otherwise
be available for rental at Rs. 0.8 million (at current prices) per year.

Project B: Market Expansion Initiative

This growth-driven initiative aims to increase ATL’s market share and sales volume of a
power tool model K44. The following additional information is available regarding this
project:
(i) Rs. 5 million would be used to purchase new equipment with a useful life of five years,
while the remaining Rs. 5 million would fund a comprehensive marketing and
advertising campaign.
(ii) ATL currently sells 200,000 units per year, which is expected to increase by 5%. After
implementation, sales units are projected to increase at a rate of 17% annually.
(iii) The current and post implementation contribution margin is Rs. 80 per unit (at current
prices). It is projected to increase by 7% per year.
(iv) To support ongoing market visibility, ATL would also incur a recurring annual
marketing expense of Rs. 1 million (at current prices).
(v) This initiative will also require an additional working capital of Rs. 0.75 million (at
current prices) per annum, out of which 75% will be released at the end of the project.
(vi) Tax depreciation will be calculated using the reducing balance method at 25% and the
depreciable assets will have a salvage value of 20% of its original cost.

Additional information:
ATL uses a discount rate of 12% for capital budgeting decisions and applies a corporate tax
rate of 30%. Tax is payable in the year in which the liability arises. Unless explicitly stated
otherwise, the general rate of inflation is assumed to be 9% per year. All cash flows are
assumed to occur at the end of each year unless specified otherwise.

Required:
Using the net present value method, recommend which project ATL should undertake. (17)

(THE END)
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

A.1 (i) (b) Technological disruption

(ii) (b) Political intervention
(iii) (b) Firewall restrictions
(iv) (c) Poor ICT governance leading to non-standardized data practices
(v) (c) Recognize that an ethical issue exists
(vi) (a) Expert System
(vii) (a) assess the risk and creditworthiness of financing the company
(viii) (d) A call option is the right to pay interest at the specified rate, guaranteeing a
minimum rate of interest.
(ix) (b) By securing financing through asset securitization of its AA-rated receivables
(x) (b) Pure risks are often managed through internal controls or insurance, while
speculative risks must be accepted as part of profit-making
(xi) (a) I only
(xii) (b) II only
(xiii) (c) 69 days

A.2 (a) (i) Threshold vs Unique Resources

Threshold Resources: These are the minimum resources required to survive in the
EV market
▪ Access to government grants and green financing
▪ Compliance with minimum vehicle safety standards

Unique Resources: These provide CleanAir Motors with a potential competitive

advantage
▪ Proprietary battery thermal control system for hot climates
▪ Fast-charging battery algorithm

(ii) Threshold vs Core Competences

Threshold Competences: These are basic operational abilities that allow the company
to function:
▪ Assembly of e-scooters with standard safety compliance
▪ Ability to integrate imported battery packs with local frames
Core Competences: These contribute to competitive advantage:
▪ Ability to innovate battery performance under extreme climate conditions
▪ In-house development of fast charging technology that increases customer
convenience
▪ Engineering team’s ability to integrate systems efficiently

(b) Sustainable Core Competences:

Sustainable competences must be durable and difficult to imitate.
Durability:
▪ The battery thermal control system addresses a climate-specific problem, making it
highly relevant for the region.
▪ Charging innovation offers long-term customer convenience, increasing brand
loyalty.
Difficulty to Imitate:
▪ Technology is developed in-house, protected by proprietary knowledge.
▪ Competitors may lack the technical expertise or resources to replicate the system
quickly.

Page 1 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

(c) Recommendation:
No, CM should not license its proprietary battery technology to competitors, even if it
may generate short-term profits. The technology currently provides CM with a
significant competitive advantage — it is unique, not available to competitors, and
difficult to imitate. Licensing it would erode this advantage, allowing competitors to
match CM’s product performance and reduce differentiation in the market. Retaining
exclusivity strengthens CM’s brand, supports long-term strategic positioning, and helps
sustain its market edge in a growing but competitive EV sector.

A.3 Tucker 5-Question Model:

1. Is it profitable?

Yes. The rollout is likely to generate significant revenue for MediScan through public–private
partnerships. It opens up access to new rural markets with high diagnostic need, contributing
positively to the company’s financial performance.

2. Is it legal?

Yes. The software tool has been rigorously validated and certified by relevant regulatory
authorities in both the EU and Pakistan.

3. Is it fair?

No. It is not fair to the people who use the facility. They are unaware of the requirements.
They should receive relevant information in a professional manner that they can understand,
with due care.

4. Is the decision right?

No. Delegating diagnostic interpretation and counseling to paramedical staff with minimal
training may compromise accuracy in complex cases or lead to miscommunication of critical
health information.

5. Is the decision sustainable?

No. Dealing with and counseling patients is a critical part of a paramedic’s job. Without
proper training and support on patient counseling, the initiative may fail to bring the desired
results. (Or not relevant / no information given)

Recommendation:
While the decision satisfies some aspects of the Tucker Model, it fails the key tests of "Is it
right?”, “Is it fair?” and “Is the decision sustainable?”. The minimal training provided to
paramedical staff may result in ethical and operational risks, particularly where nuanced
judgment or patient communication is critical. Therefore, MediScan should revise its rollout
strategy to include the additional training. The short-term delay is worth the long-term trust,
legal compliance, and ethical responsibility.

Page 2 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

A.4 (a) (i) Introduction Stage

▪ Identification: Initially, the product struggled in a crowded market, as only a
few people bought the product.
▪ Explanation: During this stage of a product life cycle, there is some sales
demand, but total sales are low. Firms that make and sell the product incur
investment costs, and start-up costs and running costs are high. The product is
not yet profitable.

(ii) Growth Stage

▪ Identification: It eventually gained traction, especially when influencer
marketing and roadshow campaigns were arranged
▪ Explanation: During the growth phase, total sales demand in the market grows
at a faster rate. New entrants are attracted to the market by the prospect of high
sales and profits. At an early stage during the growth phase, companies in the
market begin to earn profits.

(iii) Decline Stage

▪ Identification: Recently, sales have gone down. Most tech influencers have
moved on to newer brands offering active noise cancellation and integrated
AI.
▪ Explanation: Total annual sales in the market will start to fall. As sales fall, so
do profits. This leads to companies leaving the market, which continues until
it is no longer possible for any company to turn a profit from the product.

(b) (i) Introduction Stage

▪ Key Costs Involved:
– Manufacturing costs
– Operating costs, including marketing and advertising costs
– Set up and expansion of distribution channels.

▪ Recommended Marketing Strategy:

– Focus on product awareness, differentiation, and early user feedback.
– Offer demo units, launch events, or trial campaigns to create word-of-
mouth interest. This strategy emphasizes informative promotion and
selective reach at the introduction stage.

(ii) Growth Stage

▪ Key Costs Involved:
– Increased costs of working capital
– Costs of increasing capacity
– Marketing and advertising costs to raise the customer base

▪ Recommended Marketing Strategy:

– Reinforce brand image, improve availability, and enhance customer
experience.
– Use value-added bundles and referral incentives to grow market share.
This strategy supports mass-market adoption and is appropriate for a
product experiencing rising demand.

(iii) Decline Stage

▪ Key Costs Involved:
– Inventory Holding Costs – Unsold stock tied up in warehousing or slow-
moving channels.

Page 3 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

– Discounting & Margin Reduction – Reduced profitability due to bulk

discounts and clearance pricing.

▪ Recommended Marketing Strategy:

– Use flash sales, bulk deals, and discount retail partnerships to clear stock.
– Avoid additional promotional investment; instead, harvest profits or plan
for product retirement.
The strategy suggests cost control, selective retention, or product refresh
strategies at this stage.

A.5 Receipts Rupees

Sep, Oct, and Nov sales 15,900,000
Aug sales collection in Sep – COD and CC – Regular (5 days) 704,000
Nov sales collection in Dec – COD and CC – Regular (5 days) (748,000)
Sep sales collected in Aug – CC - High Value (10 days – 5 days) (104,000)
Dec sales collected in Nov – CC - High Value (10 days – 5 days) 124,000
Courier charges (410+420+450) @ 350 per order (448,000)
High value orders of November delivered in December (460×10%×10÷30)×350 5,367
Collection for the quarter 15,433,367

Payments
Cost of sales (15,900÷1.25) (12,720,000)
Opening stock 1 Sep (4,576×30%÷1.25) 1,098,240
Closing stock 30 Nov (5,456×30%÷1.25) (1,309,440)
Purchases (12,931,200)
Payment of Aug purchases in Sep – 55% of 3.6 million (1,980,000)
Payment of Nov purchases due in Dec – 55% of 4,312,320 2,371,776
Payment for purchases (12,539,424)
Quarterly expenses (8.6 m – 0.9 m)÷4 (1,925,000)
(14,464,424)
Net inflow for the quarter 968,943
Cash and bank balances – opening 1,250,000
Cash and bank balances – closing 2,218,943

Working
Monthly Sales Aug Sep Oct Nov Total Dec
Sales orders 410 420 450 460 1330 500
--------------------------------- Rs. in '000 ---------------------------------
Sales amount 4,800 5,200 5,600 5,100 15,900 6,200
COD (40%) 1,920 2,080 2,240 2,040 6,360 2,480
Credit Card –
Regular (80%×60%) 2,304 2,496 2,688 2,448 7,632 2,976
4,224 4,576 4,928 4,488 13,992 5,456
Credit Card –
High Value (20%×60%) 576 624 672 612 1,908 744
4,800 5,200 5,600 5,100 15,900 6,200

Purchases of November
Cost of sales for Nov (5,100÷1.25) 4,080,000
Opening stock 1 Nov (4,488×30%÷1.25) (1,077,120)
Closing stock 30 Nov - calculated above 1,309,440
Purchases of November 4,312,320

Page 4 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

A.6 A - Receivable in 3 months, therefore, borrow EUR now

Step 1 - Calculate the EUR amount to be borrowed
Amount to be received (EUR) 300,000
Applicable borrowing rate 4.80%
3 months’ interest rate 1.20%
Amount to be borrowed 296,443

Step 2 - Borrow in EUR now, convert to PKR, and deposit in the bank
Applicable exchange rate 321.00
PKR Value 95,158,103
Applicable deposit rate 9.25%
3 months’ interest rate 2.31%
Value after 3 months 97,358,634

Step 3 - Effective Exchange Rate

EUR received from the customer, and the borrowing was paid off 300,000
Effective exchange rate 324.53

Step 4 - Decision
Expected Spot rate in 3 months 327.00

Conclusion: As the spot rate is expected to be higher than the effective exchange rate, the
company may not opt to hedge this foreign currency receivable exposure.

B - Payable in 6 months, therefore borrow PKR now

Step 1 - Calculate the EUR amount to be deposited

Amount to be paid (EUR) 500,000
Applicable deposit rate 3.80%
6 months’ interest rate 1.90%
Amount deposited now by borrowing in PKR 490,677

Step 2 - Borrow in PKR now, buy EUR, and deposit in the bank
Applicable exchange rate 322.00
PKR Value 157,997,994
Applicable borrowing rate 11.75%
6 months’ interest rate 5.88%
Value after 6 months 167,280,376

Step 3 - Effective Exchange Rate

EUR paid to the supplier at the maturity of the deposit 500,000
Effective exchange rate 334.56

Step 4 - Decision
Expected Spot rate in 6 months 331.00

Conclusion: As the spot rate is expected to be lower than the effective exchange rate, the
company may not opt hedge this foreign currency payable exposure.

Page 5 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

A.7 (a) Weighted average cost of capital (WACC)

Units in MV
MV Cost % Rs. in million
million Rs. in million
Share capital 300 56.00 16,800 19.04% 3,199
Bonds 20 94.00 1,880 11.49% 216
18,680 3,415

WACC ⇒ 3,415,000 ÷ 18,680,000 × 100 ⇒ 18.28%

W-1: Cost of equity

Cost of equity = Rf + (Beta × Risk premium) 10%+(1.13×8%) 19.04%

W-2: Higher of
Par value 100
Convertible into shares 56×(1+8.01%)4×1.5 114.33

W-2.1:
Conversion value
⁄
Share price growth = (Ending value / Beginning value)1 𝑛 years – 1 = 8.01%

W-3: Cost of debt

Cash flow Discount Present Discount Present
Description
(Rs.) factor @ 10% value (Rs.) factor @ 12% value (Rs.)
Market value (94.00) 1.000 (94.00) 1.000 (94.00)
Interest (10%×0.65) 6.50 3.170 20.60 3.037 19.74
Conversion 114.33 0.683 78.09 0.636 72.66
4.70 (1.60)

NPVa – 4.70
=L+ ×(H–L) = 10%+ ×(12% –10%) ⇒ 11.49%
NPVa – NPVb – 4.70 – (–1.60)

(b) Revised WACC – Option A

Units in MV
MV Cost % Rs. in million
million Rs. in million
Share capital 300 56.00 16,800 19.04% 3,199
Bonds 20 94.00 1,880 11.49% 216
New bonds 20 100.00 2,000 10.87% 217
20,680 3,632

Revised WACC ⇒ 3,632,000÷20,680,000×100 ⇒17.56%

Cash flow Discount Present Discount Present

Description
(Rs.) factor @ 10% value (Rs.) factor @ 12% value (Rs.)
MV (100.00) 1.000 (100.00) 1.000 (100.00)
Interest 7.80 3.170 24.72 3.037 23.69
Conversion 114.33 0.683 78.09 0.636 72.66
2.82 (3.65)

NPVa 2.82
IRR = L + ×(H–L) 10% + × (12% –10%) ⇒ 10.87%
NPVa – NPVb 2.82 –(– 3.65)

Page 6 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

Revised WACC – Option B

Units in MV
MV Cost % Rs. in million
million Rs. in million
Share capital 300 56.00 16,800 20.40% 3,427
Bonds 20 94.00 1,880 11.49% 216
Right shares 40 50.00 2,000 20.40% 406
20,680 4,051

Revised WACC ⇒ 4,051,000÷20,680,000×100 ⇒19.59%

W-1: Cost of equity

CAPM = Rf + (Risk premium × Beta) 10%+(1.30×8%) 20.40%
Conclusion: As WACC is lower for option A, company should go with this option.

A.8 Option A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

------------------------- Rs. in million -------------------------
Investment (10.00)
Savings 6.00 6.93 8.01 9.25
Maintenance cost (0.59) (0.65) (0.71) (0.77)
Depreciation (5.00) (1.25) (0.94) (0.70) (0.53)
Loss of investment (1.58)
Opportunity cost (0.87) (0.95) (1.04) (1.13) (1.23)
(10.00) (5.87) 3.21 4.31 5.47 5.14
Tax - 1.76 (0.96) (1.29) (1.64) (1.54)
(10.00) (4.11) 2.25 3.02 3.83 3.60
Add back: Dep - 5.00 1.25 0.94 0.70 0.53
Add back: Loss 1.58
Working capital 1.64
(10.00) 2.52 3.50 3.96 4.53 5.71
Discount factor 1.00 0.89 0.80 0.71 0.64 0.57
(10.00) 2.25 2.79 2.82 2.88 3.24
NPV 3.98

W-1:
Project A Year 1 Year 2 Year 3 Year 4 Year 5
Volume (units) @ 10% (A) 110,000 121,000 133,100 146,410 161,051
Increase in variable cost per unit @ 5% (B) 189.00 198.45 208.37 218.79 229.73
Savings per unit @ 25% (C) 47.25 49.61 52.09 54.70 57.43
Saving in millions (A×C) 6.00 6.93 8.01 9.25

W-2: Depreciation Year 1 Year 2 Year 3 Year 4 Year 5

Rate 50% 25% 25% 25% 25%
Depreciation (Rs. in million) 5.00 1.25 0.94 0.70 0.53
NBV (Rs. in million) 5.00 3.75 2.81 2.11 1.58

Page 7 of 8
 MANAGERIAL AND FINANCIAL ANALYSIS
Suggested Answer
Certificate in Accounting and Finance – Autumn 2025

Option B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

------------------------- Rs. in million -------------------------
Investment (10.00)
Incremental CM 2.05 4.88 8.70 13.81 20.56
Marketing cost (1.09) (1.19) (1.30) (1.41) (1.54)
Depreciation (1.25) (0.94) (0.70) (0.53) (0.40)
Loss of investment (0.19)
Loss of working capital (1.12)
(10.00) (0.29) 2.75 6.70 11.87 17.31
Tax 0.09 (0.83) (2.01) (3.56) (5.19)
(10.00) (0.20) 1.93 4.69 8.31 12.11
Add back: Depreciation 1.25 0.94 0.70 0.53 0.40
Add back: Loss of investment 0.19
Add back: Loss of working capital 1.12
Sale of equipment 1.00
Working capital (0.75) (0.82) (0.89) (0.97) (1.06) 3.37
(10.75) 0.23 1.97 4.42 7.78 18.19
Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57
(10.75) 0.21 1.57 3.15 4.94 10.32
NPV 9.44

W-3:
Project B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Expansion volume @ 17% 234,000 273,780 320,323 374,777 438,490
Regular volume @ 5% 210,000 220,500 231,525 243,101 255,256
Incremental volume (A) 24,000 53,280 88,798 131,676 183,233
CM @ 7% (B) 85.60 91.59 98.00 104.86 112.20
Increase in CM (million) (A×B) 2.05 4.88 8.70 13.81 20.56

W-4: Depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Depreciation @ 25% 1.25 0.94 0.70 0.53 0.40
NBV 3.75 2.81 2.11 1.58 1.19
Salvage (20% of 5m) 20% 1.00
Gain/(Loss) on sales (0.19)

W-5: Working capital

Investment 0.75 0.82 0.89 0.97 1.06
Release 3.37
Loss of working capital (4.49–3.37) (1.12)

Conclusion:
Option B is more suitable as the NPV is greater in this option.

(THE END)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Certificate in Accounting and Finance Stage Examination

Managerial and Financial Analysis

Examiners’ Comments Autumn 2025

PASSING %

Question-wise Overall
1 2 3 4 5 6 7 8
53%
91% 32% 52% 39% 2% 81% 69% 23%

GENERAL COMMENTS

Overall, the performance in this examination was almost identical to that of the previous session.
While most examinees demonstrated a reasonable understanding of basic concepts, many struggled
to apply theoretical knowledge to practical scenarios. Weaknesses were observed in analytical
reasoning, planning, and interpretation of question requirements, highlighting the need for greater
emphasis on conceptual clarity and structured problem-solving in future examinations.

QUESTION-WISE COMMON MISTAKES OBSERVED

Question 1

MCQs at serial (viii), (xi), and (xii) were the least performed.

Question 2

▪ Examinees were unable to differentiate between the resources and competencies, often mixing
the two. They also showed confusion between threshold and unique resources as well as
between threshold and core competencies, frequently providing examples belonging to the
other type.
▪
▪ Examinees were unfamiliar with the term ‘sustainable core competencies’ and interpreted it
in the environmental context rather than in relation to durability and difficulty of imitation of
a competency.
▪
▪
Question 3

▪ Examinees confused the concepts of fairness and rightness within the Tucker Five-Question
model, leading to incorrect answers.
▪
▪ Examinees failed to provide any recommendation or advice as required by the question.
▪
▪
▪
▪

Page 1 of 2
 Managerial and Financial Analysis Examiners’ Comments – Autumn 2025

Question 4

▪ Examinees listed the four stages of the product lifestyle in general terms rather than identifying
the specific events described in the given situation.
▪
▪ Examinees were able to identify key costs associated with each stage, but they were unable to
propose an appropriate marketing strategy, indicating a lack of ability to apply theoretical
knowledge to practical scenarios.
▪

Question 5

This question, which required the preparation of a cash budget, demanded careful planning before
attempting the solution. However, most examinees demonstrated weak planning skills and
consequently overlooked several key considerations, such as:

▪ The time lag between sales and collection in cash on delivery and credit card was the same,
whereas that of high-value items was different.
•
▪ The effect of gross margins and the opening and closing stock when determining purchases
and related payments for the quarter.
•
▪ The delay in collection from credit card sales occurred five days after the actual sales.
•
As a result, examinees were unable to secure high marks.

Question 6

▪ While the question was attempted well by examinees, many examinees failed to provide a
recommendation on the possible course of action for the company.
▪
▪ Some examinees also applied incorrect exchange rates, confusing bid and ask rates when
determining the effective exchange rate.
▪
▪
Question 7

▪ Examinees overlooked the fact that the current market price was cum dividend and therefore
failed to calculate the ex-dividend price necessary for the determination of the cost of equity
▪
▪ Examinees made errors in calculating market values of share capital and bonds, leading to
inaccuracies in WACC calculations.
▪
▪
Question 8

▪ The NPVs of Projects A and B were computed over four years instead of five.
•
▪ The savings under Project A were incorrectly computed due to errors in one or more relevant
factors — namely, growth in volume, increase in variable cost per unit, and savings per unit.
•
▪ The incremental contribution under Project B was incorrectly determined by miscalculating
one or more relevant factors — such as growth in volume post-expansion, growth in volume
pre-expansion, and an increase in contribution margin.

(THE END)

Page 2 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2025

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in the
answer may exceed the total marks of a question.

Mark(s)
A.1 Marks as mentioned on the question paper against each MCQ 15.0

A.2 (a) ▪ 0.5 mark for explaining both the resources and competencies 2.0
▪ 0.5 mark for the correct identification of each resource from the question 2.0
▪ 01 mark for the correct identification of each competency from the question 4.0

(b) ▪ Explaining sustainable core competencies 0.5

▪ Up to 0.5 mark for relating each core competency identified in (a) 1.5

(c) Justified recommendation on licensing the battery technology 2.0

A.3 ▪ Up to 01 mark for correctly answering each of the Tucker questions 5.0
▪ Justified recommendation 1.0

A.4 (a) ▪ 0.5 mark for identification of the stage from the question 1.5
▪ 0.5 mark for the explanation of each identified stage 1.5

(b) ▪ 0.75 mark for each correct identification of relevant cost 4.5
▪ Up to 01 mark for each appropriate marketing strategy 2.5

A.5 ▪ Unadjusted sales for the quarter 1.0

▪ Adjustments for regular sales – COD and CC 4.0
▪ Adjustments for regular sales – High value 2.0
▪ Adjustments for courier charges 2.0
▪ Unadjusted cost of sales 1.0
▪ Opening and closing stock adjustments 2.0
▪ Adjustment for payments against purchases 2.0
▪ Quarterly expenses 0.5
▪ Opening cash and bank balances 0.5

A.6 ▪ Hedging against receivables

– Step 1 2.0
– Step 2 2.5
– Step 3 0.5
– Step 4 and conclusion 1.0
▪ Hedging against payables
– Step 1 2.0
– Step 2 2.5
– Step 3 0.5
– Step 4 and conclusion 1.0

Page 1 of 2
 MANAGERIAL AND FINANCIAL ANALYSIS
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2025

Mark(s)
A.7 (a) ▪ Determination of the current WACC 2.0
▪ Determination of the current cost of equity 1.0
▪ Determination of the current cost of debt 4.0

(b) ▪ Determination of revised WACC under option A 1.0

▪ Determination of the cost of new debt 2.5
▪ Determination of revised WACC under option B 2.0
▪ Justified conclusion 0.5

A.8 ▪ Option A
– Investment and opportunity cost 1.0
– Savings 2.0
– Maintenance 0.5
– Depreciation and related add-backs 2.0
– Taxation 0.5
– Working capital 0.5
– Determination of NPV 1.0
▪ Option B
– Investment and sale 1.0
– Incremental contribution margin 2.5
– Marketing cost 0.5
– Depreciation and related add-backs 2.5
– Working capital and related loss 1.5
– Taxation 0.5
– Determination of NPV 1.0

(THE END)

Page 2 of 2
Certificate in Accounting and Finance Stage Examination

Business Insights and Analysis

7 March 2026
100 marks
3 hours and 15 minutes (including 15 minutes’ reading time)

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Use the first page of the answer script to answer the Multiple-Choice Questions.

SECTION A

QUESTION 1
Select the most appropriate answer from the options provided for each of the following Multiple-Choice
Questions.

(i) A logistics company adopts blockchain technology to record shipment transactions on a distributed
ledger. These transactions are validated through network consensus and once recorded, cannot be
altered or deleted. This system operates without reliance on a central authority. The primary
technological feature of blockchain illustrated in this situation is:
(a) Encryption-based control of user access to transaction data
(b) Centralised storage and processing of transaction records
(c) Decentralisation combined with immutability of transaction records
(d) Automation of transactions through high-speed data processing (01 mark)

(ii) A company operates in a market where customers can easily switch suppliers, competing companies
offer largely similar products, and price competition is intense. The most significant competitive force
affecting the company is:
(a) Threat of new entrants (b) Bargaining power of customers
(c) Bargaining power of suppliers (d) Threat of substitute products (01 mark)

(iii) An Islamic bank leases machinery to a client under an Ijarah contract. The lessee delays the rental
payments and the bank charges a late payment penalty and records it as its income. From a Shariah
perspective, how is this treatment of the penalty viewed?
(a) It is not permissible because any amount collected in excess of outstanding debt is considered
as riba
(b) It is permissible if agreed in the contract
(c) It is permissible because rental payments becomes a debt once due
(d) It is permissible if the penalty amount is small (01 mark)

(iv) A central bank hints that from next year, all digital lenders must maintain a minimum liquidity
reserve to continue operating. Although the requirement has not yet been enacted into law, this news
immediately influences investor confidence. Under PESTEL analysis, which factor best classifies this
development?
(a) Technological factor, because it affects digital lending platforms
(b) Legal factor, because it will eventually impose compliance obligations on firms
(c) Economic factor, because it influences market confidence and capital availability
(d) Political factor, because it reflects a policy stance of a public authority (01 mark)
Spring 2026 Business Insights and Analysis Page 2 of 6

(v) An industry is characterised by high fixed costs, low variable costs, largely undifferentiated products,
and excess production capacity across firms. Which competitive force is most intensified under these
characteristics?
(a) Threat of new entrants (b) Bargaining power of suppliers
(c) Threat of substitute products (d) Rivalry among existing competitors (01 mark)

(vi) Delta Electronics has a product line that operates in a market growing at 18% annually. Delta holds
a 30% market share, while the largest competitor holds 25%. Given that 10% is considered as the
midpoint for market growth in the BCG Matrix, this product is best classified as:
(a) Cash Cow (b) Star
(c) Question Mark (d) Dog (01 mark)

(vii) In a Mudarabah contract, if a loss occurs due to normal business risks and not because of negligence
or misconduct, who bears the financial loss?
(a) The Rabb-ul-Maal only
(b) The Mudarib only
(c) Both Mudarib and Rabb-ul-Maal share the loss equally
(d) The loss is shared according to the pre-agreed profit-sharing ratio (01 mark)

(viii) Which of the following situations most clearly demonstrates the loss of a unique resource, causing it
to become a threshold resource?
(a) A patented production process expires, allowing competitors to legally adopt similar methods
(b) A company loses its operating licence due to regulatory non-compliance
(c) A firm upgrades its standard IT systems to align with industry best practice
(d) A competitor enters the market using lower-cost labour (01 mark)

(ix) A company entered into a 3 v 9 Forward Rate Agreement (FRA) with a bank for a notional principal
of Rs. 5 million at 12.4% per annum to hedge its future deposits. If the KIBOR is 13.2% per annum
at the end of the third month, what will be the settlement amount?
(a) Rs. 18,765 payable by the bank (b) Rs. 20,000 payable by the bank
(c) Rs. 18,765 payable by the company (d) Rs. 20,000 payable by the company (02 marks)

QUESTION 2
NovaWear Ltd (NWL) is a textile manufacturing company that markets itself internationally as a ‘100%
Sustainable Fashion Brand’. NWL’s website highlights initiatives such as reduced electricity consumption
in its head office, the use of biodegradable packaging, and sponsorship of a national tree-planting campaign.

However, 70% of NWL’s garments are produced by overseas suppliers. Recent investigation has revealed
that several of these suppliers discharge untreated dye waste into rivers and pay workers below the statutory
minimum wage. NWL does not conduct independent audits of its supplier but instead requires them to sign
a self-declaration form confirming compliance with environmental and labour laws.

Executive bonuses at NWL are linked solely to revenue growth and profit margins. Sustainability
information is disclosed in a two-page summary within the annual report and is not prepared in accordance
with any recognised Environmental, Social and Governance (ESG) reporting framework. Management
argues that, since NWL’s own facilities comply with environmental laws and NWL contributes to
environmental campaigns, it is justified in branding itself as a fully sustainable company.

Required:
(a) Classify the sustainability-related matters, both positive and negative, in the scenario under the ESG
framework. (04 marks)
(b) Discuss whether NWL’s claim of being a ‘100% Sustainable Fashion Brand’ is justified, or whether it
represents an instance of greenwashing. (04 marks)
(c) Explain the importance of sustainability to NWL and recommend appropriate actions to better align
to a recognized sustainability framework. (03 marks)
Spring 2026 Business Insights and Analysis Page 3 of 6

QUESTION 3
MedLogix (Pvt.) Ltd (MLPL) operates a specialised cold-chain logistics business that transports
temperature-sensitive pharmaceutical products for hospitals and pharmaceutical distributors across
Pakistan. MLPL owns a fleet of refrigerated vehicles equipped with GPS tracking and temperature-
monitoring systems. MLPL has also developed an in-house logistics management system that provides
clients with real-time shipment visibility. MLPL has established a strong reputation for reliability and
compliance with pharmaceutical storage standards.

MLPL incurs high operating costs due to fuel-intensive refrigerated transport and regular maintenance of
specialised vehicles. MLPL’s revenue base is also highly concentrated, as it depends on a small number of
large pharmaceutical clients. Expansion into secondary cities has been slow because of a shortage of trained
cold-chain technicians.

Demand for pharmaceutical logistics services is expected to increase as regulatory requirements for drug
storage and transportation become more stringent. In addition, government health programmes and vaccine
distribution initiatives are driving greater demand for reliable cold-chain logistics. However, recent increases
in fuel prices have further escalated operating costs. At the same time, new low-cost logistics providers have
entered the market, and the regulators have announced plans to impose stricter penalties for cold-chain
compliance failures.

Required:
(a) Conduct a SWOT analysis of MLPL based on the information provided. (07 marks)
(b) Using your answer in (a), explain how the strengths of MLPL could be used to address each of the
threats identified. You should clearly link each threat to the relevant strength. (03 marks)

QUESTION 4
AquaHeat (Pvt.) Ltd manufactures electric water heaters using a batch production system and follows a
standard operating cycle for all production batches. Raw materials received are subject to a mandatory
quality inspection lasting two days. Once cleared, materials are issued to production through the central
stores department. To manage workload and control overtime costs, the stores department processes
material issues once per day at a fixed cut-off time, resulting in an average waiting time of one day between
clearance and issue to production.

Manufacturing requires 14 days of actual processing time. At the final stage of production, all units must
pass through a sealing station before completion. Due to limited capacity, the sealing station processes
batches sequentially, resulting in an average waiting time of one day before sealing can commence.

After production is completed, finished goods undergo a mandatory safety certification process lasting two
days. Once certification is completed, dispatch documentation is prepared, which requires one day to
finalize. Dispatch takes place immediately upon completion of documentation.

To improve the operating cycle, management is considering the following three independent options:
(i) Removing the cut-off time so that all cleared materials are issued to production on the same day as
clearance.
(ii) Installing an additional sealing machine.
(iii) Preparing dispatch documentation during the certification period.

Management desires to implement the most economical and least disruptive solution.

Required:
(a) Identify the primary value chain activities of AquaHeat. (04 marks)
(b) Recommend the most appropriate option to management for improving the operating cycle.
Your answer should include clear reasons for the recommendation. (07 marks)
Spring 2026 Business Insights and Analysis Page 4 of 6

QUESTION 5
AlphaMed (Pvt.) Ltd manufactures medicines for government hospitals. An internal compliance review
revealed that a recently supplied batch of medicine does not comply with updated regulatory labelling
requirements. However, the medicines are clinically safe and no adverse effects have been reported.

The regulatory authority is currently unaware of the non-compliance. Disclosing the non-compliance would
require a product recall, resulting in a significant financial loss for the company. If the matter is not disclosed,
the company’s profits will remain unaffected. Management maintains that, in light of the substantial
financial impact, disclosure would not be in company’s best interest.

Required:
Using the Tucker 5-Question model, evaluate whether the non-compliance should be disclosed. (06 marks)

SECTION B

QUESTION 6
Gloria Beverages Limited (GBL) is a listed company engaged in the manufacture and sale of soft drinks.
GBL has a proven track record of paying consistent and steadily growing dividends. The following
information has been extracted from GBL’s financial statements as at 31 December 2025:

Rs. in million
Ordinary share capital (Rs. 10 each) 800
15% irredeemable preference shares (Rs. 100 each) 200

Additional information:
(i) A dividend of Rs. 8 per ordinary share has just been announced.
(ii) Dividends are expected to grow at 5% per annum in perpetuity.
(iii) The current market price of ordinary shares is Rs. 78 (cum-dividend) per share, while market price of
preference share is Rs. 150 per share.
(iv) The risk-free rate of return is 10% and the market risk premium is 6%.
(v) The applicable corporate tax rate is 30%.

New investment proposal

GBL is considering a new investment to expand its operations. The project is expected to raise the GBL’s
overall business risk above its current level. As a result, the revised equity beta after undertaking the
investment is estimated to be 1.3.

To finance the project, management is considering the following two alternative financing options:
(i) A 1-for-4 rights issue of ordinary shares at a premium of Rs. 40 per share.
(ii) An issue of 12% redeemable preference shares of Rs. 100 each, sufficient to raise funds equivalent to
the rights issue. These shares will be redeemed after 4 years at a 20% premium.

Required:
(a) Calculate GBL’s current weighted average cost of capital (WACC). (05 marks)
(b) Based on the revised WACC, recommend which financing option should be adopted for the proposed
investment. (08 marks)
Spring 2026 Business Insights and Analysis Page 5 of 6

QUESTION 7

Assume that the date today is 1 June 2026.

Stellar Textiles Ltd. (STL), a Pakistani exporter, expects to receive USD 1,500,000 from a European
customer on 30 September 2026. STL is exposed to foreign exchange risk due to potential fluctuation in the
PKR/USD exchange rate. Management is considering alternative hedging strategies to manage this
exposure.

Market Data:
 Spot exchange rate (1 June 2026): PKR 280 per USD
 Currency futures:
Rate Transaction cost
Future Contract size
(PKR/USD) per contract
September 282.5 USD 50,000 Rs. 1,000
October 283.0 USD 50,000 Rs. 1,000

 Currency options:
Strike price Contract Premium Exercise fee
Option type
(PKR/USD) size per contract per contract
Call 285.0 USD 100,000 Rs. 55,000 Rs. 7,500
Put 283.5 USD 100,000 Rs. 60,000 Rs. 7,500

 Expected spot rate on 30 September 2026: PKR 282.75 per USD

Required:
Advise STL on the most appropriate hedging strategy for managing its foreign exchange exposure, including
a no-hedge strategy, and justify your recommendation based on effective exchange rates. (09 marks)

QUESTION 8
Novatech Industries (NTI) is considering the launch of a new battery product, SunVault, designed for the
commercial solar energy storage market. The following information has been compiled to support the
investment appraisal of the proposed project:
(i) The project requires an initial capital investment of Rs. 250 million to establish the production facility.
This amount includes Rs. 15 million incurred last year on feasibility studies and prototype testing.
(ii) An initial working capital investment of Rs. 40 million is required at the start of the project, of which
75% will be recovered at the end of Year 5.
(iii) The production facility has a maximum annual capacity of 9,000 units. Expected demand in Year 1
is 6,000 units, increasing thereafter at 12% per annum.
(iv) The selling price in Year 1 is Rs. 45,000 per unit, increasing at 8% per annum. Variable production
costs are Rs. 30,000 per unit in Year 1, increasing at 6% per annum.
(v) Annual fixed operating costs related to this project are Rs. 20 million, increasing at 10% per annum.
(vi) NTI currently sells an existing battery product, PowerCell, generating a contribution margin of
Rs. 12,000 per unit at current prices. The launch of SunVault is expected to reduce PowerCell sales by
1,000 units per year, with the lost contribution margin increasing at 5% per annum throughout the
project’s life cycle.
(vii) The SunVault facility can generate additional rental income by leasing idle testing and calibration
facilities, amounting to Rs. 10 million in Year 1, increasing at 9% per annum.
(viii) Depreciation for tax purposes will be charged at 40% per annum on a reducing balance method. The
project qualifies for a three-year tax holiday, after which profits will be taxed at 30%. Taxes are payable
in the year they arise, and tax losses during tax holiday cannot be carried forward.
(ix) The production facility will have a residual value of 40% of its original cost at the end of Year 5.
(x) NTI’s cost of capital is 18%, and unless stated otherwise, all cash flows occur at the end of each year.

Required:
Using the net present value method, evaluate whether NTI should proceed with the SunVault project.
(15 marks)
Spring 2026 Business Insights and Analysis Page 6 of 6

QUESTION 9
SafeStep Footwear Limited (SFL) manufactures a popular brand of industrial safety shoes in Pakistan and
is planning to expand its production facilities in order to meet the increasing market demand. Currently,
SFL produces and sells 280,000 pairs of shoes per annum. The current cost and selling price per pair of shoes
are as follows:

Particulars Rupees
Selling price (inclusive of 18% sales tax) 13,920
Raw materials (inclusive of import duty) 3,750
Packing material 420
Direct labour cost 1,680
Variable manufacturing overheads 720
Fixed manufacturing overheads 2,050
Variable selling overheads 540
Fixed selling overheads 310
Fixed administrative overheads 460

Additional information:
(i) Raw materials are imported from foreign suppliers on 45-day credit term, with import duty of 10% of
C&F value payable on arrival. Packing materials are purchased locally on 30-day credit term.
(ii) Direct labour are paid in the month they are incurred, while manufacturing, selling and administrative
overheads are paid 30 days after incurrence. The production process takes 20 days; raw materials are
issued at the start of the process, packing materials are added at the end, and conversion costs are
incurred evenly throughout the process. On average, work-in-process is 50% complete.
(iii) Approximately 65% of sales are made for cash, while the remaining 35% are credit sales to corporate
customers, which are normally settled after 90 days. Sales tax is payable 30 days after the sales.
(iv) To ensure uninterrupted production, SFL maintains inventories equivalent to 75 days of raw
materials, 15 days of packing materials, and 30 days of finished goods. A minimum cash balance of
Rs. 3.20 million is maintained at all times.
(v) Total fixed manufacturing overheads include depreciation amounting to Rs. 80 million.
(vi) SFL’s current working capital requirement is estimated at Rs. 512.40 million.

Expected changes due to expansion:

(i) Annual production and sales are expected to increase to 390,000 pairs.
(ii) Credit sales are expected to reduce to 25% of total sales.
(iii) Total fixed manufacturing overheads will increase by Rs. 85 million per annum (inclusive of
depreciation of Rs. 20 million).
(iv) Additional sales promotion expenses of Rs. 21.60 million per annum will be incurred.
(v) The minimum cash balance requirement will increase to Rs. 4.75 million.
(vi) There is no change in total fixed selling and total fixed administrative overheads.

Required:
Compute the revised working capital requirement arising from proposed expansion of production.
Assume a 360-day year. (15 marks)

(THE END)