MODEL TEST PAPER 1

INTERMEDIATE: GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

1. NV Industries Ltd. is a manufacturing industry which manages its accounts

receivables internally by its sales and credit department. It supplies small
articles to different industries. The total sales ledger of the company stands
at ` 200 lakhs of which 80% is credit sales. The company has a credit policy
of 2/40, net 120. Past experience of the company has been that on average
out of the total, 50% of customers avail of discount and the balance of the
receivables are collected on average in 120 days. The finance controller
estimated, bad debt losses are around 1% of credit sales.
With escalating cost associated with the in-house management of the debtors
coupled with the need to unburden the management with the task so as to
focus on sales promotion, the CFO is examining the possibility of outsourcing
its factoring service for managing its receivables. Currently, the firm spends
about ` 2,40,000 per annum to administer its credit sales. These are avoidable
as a factoring firm is prepared to buy the firm's receivables. The main
elements of the proposal are : (i) It will charge 2% commission (ii) It will pay
advance against receivables to the firm at an interest rate of 18% after
withholding 10% as reserve.
Also, company has option to take long term loan at 15% interest or may take
bank finance for working capital at 14% interest.
You were also present at the meeting; being a financial consultant, the CFO
has asked you to be ready with the following questions:
Consider year as 360 days.
I. What is average level of receivables of the company?
a. ` 53,33,333

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 b. ` 35,55,556
c. ` 44,44,444
d. ` 71,11,111
II. How much advance factor will pay against receivables?
a. ` 31,28,889
b. ` 39,11,111
c. ` 30,03,733
d. ` 46,93,333
III. What is the annual cost of factoring to the company?
a. ` 8,83,200
b. ` 4,26,667
c. ` 5,51,823
d. ` 4,00,000
IV. What is the net cost to the company on taking factoring service?
a. ` 4,00,000
b. ` 4,26,667
c. ` 3,50,000
d. ` 4,83,200
V. What is the effective cost of factoring on advance received?
a. 16.09%
b. 13.31%
c. 12.78%
d. 15.89% (5 x 2 = 10 Marks)
2. Ramu Ltd. wants to implement a project for which ` 25 lakhs is required.
Following financing options are at hand:
Option 1:
Equity Shares 25,000 @ ` 100
Option 2:
Equity Shares 10,000 @ ` 100
12% Preference Shares 5,000@ ` 100
10% Debentures 10,000@ ` 100
What is the indifference point & EPS at that level of EBIT assuming corporate
tax to be 35%.
(a) ` 2,94,872; ` 11.80
(b) ` 3,20,513; ` 8.33

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 (c) ` 2,94,872; ` 7.67
(d) ` 3,20513; ` 12.82 (2 Marks)
3. "If EBIT increases by 6%, net profit increases by 6.9%. If sales increase by
6%, net profit will increase by 24%.
Financial leverage must be -…………."
(a) 1.19
(b) 1.13
(c) 1.12
(d) 1.15 (2 Marks)
4. What is the maximum period for which company can accept Public Deposits?
(a) 1 year
(b) 6 months
(c) 3 years
(d) 5 years (1 Marks)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) The following figures have been extracted from the annual report of Xee
Ltd.:
Net Profit ` 54 lakhs
Outstanding 12% preference shares ` 200 lakhs
No. of equity shares 2 lakhs
Return on Investment 22%
Cost of capital i.e. (K e) 15%
COMPUTE the approximate dividend pay-out ratio so as to keep the
share price at ` 120 by using Walter’s model?
(Decimal may be taken up to 2 units) (5 Marks)
(b) Capital structure (in market-value terms) of AN Ltd is given below:
Company Debt Equity
AN Ltd. 50% 50%
The borrowing rate for the company is 10% in a no-tax world and capital
markets are assumed to be perfect.

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 Required:
(i) If Mr. R, owns 8% of the equity shares of AN Ltd., DETERMINE his
return if the Company has net operating income of ` 10,00,000 and
the overall capitalization rate of the company (K o) is 20%.
(ii) CALCULATE the implied required rate of return on equity of AN Ltd.
(5 Marks)
(c) ANVY Ltd. has furnished the following ratios and information for the year
end 31st March, 2023:
Equity share capital ` 2,00,000
The relevant ratios of the company are as follows:
Current debt to total debt 0.50
Total debt to Equity share capital 0.60
Fixed assets to Equity share capital 0.70
Total assets turnover 2.5 Times
Inventory turnover 10 Times

You are required to PREPARE the Balance Sheet of ANVY Ltd. as on

31st March, 2023. (5 Marks)
2. (a) NC Ltd. Is considering purchasing a new machine to increase its
production facility. At present, it uses an old machine which can process
5,000 units of TVs per week. NC could replace it with new machine,
which is product specific and can produce 15,000 units per week. New
machine cost ` 100 crores and requires the working capital of ` 3 crores,
which will be released at the end of 5 th year. The new machine is
expected to have a salvage value of ` 20 crores.
The company expects demand for TVs to be 10,000 units per week.
Each TV sells for ` 30,000 and has Profit Volume Ratio (PV) of 0.10. The
company works for the 56 weeks in the year. Additional fixed costs
(excluding depreciation) are estimated to increase by ` 10 crores. The
company is subject to a 40% tax rate and its after-tax cost of capital is
20%. The relevant rate of depreciation is 25 % for both taxation and
accounts. The company uses the WDV method of depreciation. The
existing machine will have no scrap value.
You are required to:
ADVISE whether the company should replace the old machine.
(Decimal may be taken up to 2 units) (8 Marks)
(b) WRITE a short note on “Cut-off Rate”. (2 Marks)

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3. (a) Ram Ltd evaluates all its capital projects using discounting rate of 16%.
Its capital structure consists of equity share capital, retained earnings,
bank term loan and debentures redeemable at par. Rate of interest on
bank term loan is 1.4 times that of debenture. Remaining tenure of
debenture and bank loan is 4 years and 6 years respectively. Book value
of equity share capital, retained earnings and bank loan is ` 20,00,000,
` 30,00,000 and ` 20,00,000 respectively. Debentures which are having
book value of ` 30,00,000 are currently trading at ` 98 per debenture.
The ongoing PE multiple for the shares of the company stands at 4.
You are required to:
(i) CALCULATE the rate of interest on bank loan and
(ii) CALCULATE the rate of interest on debentures
Tax rate applicable is 30%. (8 Marks)
(b) DISCUSS the dividend-price approach to estimate cost of equity capital.
(2 Marks)
4. (a) EXPLAIN the limitations of profit maximization objective of Financial
Management. (4 Marks)
(b) WHAT are the methods of venture capital financing? (4 Marks)
(c) WHAT is ‘Optimum Capital Structure’? (2 Marks)
OR
EXPLAIN the concept of Financial Leverage as ‘Trading on Equity’.
(2 Marks)

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 MODEL TEST PAPER 2
INTERMEDIATE GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

1. Tiago Ltd is an all-equity company engaged in manufacturing of batteries for

electric vehicles. There has been a surge in demand for their products due to
rising oil prices. The company was established 5 years ago with an initial
capital of ` 10,00,000 and since then it has raised funds by IPO taking the
total paid up capital to ` 1 crore comprising of fully paid-up equity shares of
face value ` 10 each. The company currently has undistributed reserves of `
60,00,000. The company has been following constant dividend payout policy
of 40% of earnings. The retained earnings by company are going to provide a
return on equity of 20%. The current EPS is estimated as Rs 20 and prevailing
PE ratio on the share of company is 15x. The company wants to expand its
capital base by raising additional funds by way of debt, preference and equity
mix. The company requires an additional fund of ` 1,20,00,000. The target
ratio of owned to borrowed funds is 4:1 post the fund-raising activity. Capital
gearing is to be kept at 0.4x.
The existing debt markets are under pressure due to ongoing RBI action on
NPAs of the commercial bank. Due to challenges in raising the debt funds,
the company will have to offer ` 100 face value debentures at an attractive
yield of 9.5% and a coupon rate of 8% to the investors. Issue expenses will
amount to 4% of the proceeds.
The preference shares will have a face value of ` 1000 each offering a
dividend rate of 10%. The preference shares will be issued at a premium of
5% and redeemed at a premium of 10% after 10 years at the same time at
which debentures will be redeemed.
The CFO of the company is evaluating a new battery technology to invest the
above raised money. The technology is expected to have a life of 7 years. It

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 will generate a after tax marginal operating cash flow of ` 25,00,000 p.a.
Assume marginal tax rate to be 27%.
1. Which of the following is best estimate of cost of equity for Tiago Ltd?
(a) 12.99%
(b) 11.99%
(c) 13.99%
(d) 14.99%
2. Which of the following is the most accurate measure of issue price of
debentures?
(a) 100
(b) 96
(c) 90.58
(d) 95.88
3. Which of the following is the best estimate of cost of debentures to be
issued by the company? (Using approximation method)
(a) 7.64%
(b) 6.74%
(c) 4.64%
(d) 5.78%
4. Calculate the cost of preference shares using approximation method
(a) 10.23%
(b) 9.77%
(c) 12.12%
(d) 12.22%
5. Which of the following best represents the overall cost of marginal capital
to be raised?
(a) 10.52%
(b) 17.16%
(c) 16.17%
(d) 16.71% (5 x 2 = 10 Marks)
2. Ranu & Co. has issued 10% debenture of face value 100 for ` 10 lakh. The
debenture is expected to be sold at 5% discount. It will also involve floatation
costs of ` 10 per debenture. The debentures are redeemable at a premium of
10% after 10 years. Calculate the cost of debenture if the tax rate is 30%.
(a) 9.74%
(b) 9.56%

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 (c) 8.25%
(d) 10.12% (2 Marks)
3. Given Data: Sales is ` 10,00,000, Break even sales is ` 6,00,000.
What is the Degree of operating leverage?
(a) 3
(b) 2
(c) 2.5
(d) 2.2 (2 Marks)
4. A project requires an initial investment of ` 20,000 and it would give annual
cash inflow of ` 4,000. The useful life of the project is estimated to be 10
years. What is payback reciprocal/Approximated IRR?
(a) 20%
(b) 15%
(c) 25%
(d) 12% (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) The below information for Lever Ltd is provided on annual basis:
`
Sales at 3 months credit 48,00,000
Materials consumed (suppliers extend 2 months credit) 12,00,000
Wages paid (one month lag in payment) 9,60,000
Cash manufacturing expenses (paid on month in arrear) 12,00,000
Administrative expense (one month lag in payment) 3,60,000
Sales promotion expense (paid monthly in advance) 1,20,000
The Company sells its products at a gross profit of 20%.
The Company keeps two months stock of raw materials and two months
stock of finished goods.
Depreciation is considered as a part of cost of production.
Cash balance is retained at ` 1,00,000,
Assuming a 15% margin, COMPUTE the working capital requirements
of the Company on cash cost basis. Ignore work-in progress.
(5 Marks)

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(b) SOC Ltd has 10 lakh equity shares outstanding at the beginning of the
accounting year 2024. The existing market price per share is Rs 600.
Expected dividend is Rs 40 per share. The rate of capitalization
appropriate to the risk class to which the company belongs is 20%.
(i) CALCULATE the market price per share by the end of the year
when expected dividends are: (a) declared, and (b) not declared,
based on the Miller – Modigliani approach.
(ii) CALCULATE the number of shares to be issued by the company at
the end of the accounting year on the assumption that the net
income for the year is Rs 15 crore; investment budget is Rs 20
crores, when (a) Dividends are declared, and (b) Dividends are not
declared.
(iii) PROVE that the market value of the shares at the end of the
accounting year will remain unchanged irrespective of whether (a)
Dividends are declared, or (ii) Dividends are not declared.
(5 Marks)
(c) An existing profitable company, RMC World Ltd. is considering a new
project for manufacture of home automation gadget involving a capital
expenditure of ` 1000 Lakhs and working capital of ` 150 Lakhs. The
capacity of the plants for an annual production of 3 lakh units and
capacity utilization during 5 year life of the project is expected to be as
indicated below:
Year 1 2 3 4 5
Capacity Utilization (%) 50 65 80 100 100

The average price per unit of product is expected to be `600 netting a

contribution of 60 percent. The annual fixed costs, excluding
depreciation, are estimated to be `500 Lakhs per annum from the third
year onwards. For the first and second year, it would be ` 200 lakhs and
` 350 lakhs respectively.
Scrap value of the capital asset at the end of 5th year is ` 200 Lakhs.
Depreciation on capital asset is provided on written down value basis @
40% p.a. for income tax purpose. The rate of income tax may be taken
at 30%. The cost of capital is 12%. At end of the third year an additional
investment of ` 200 lakhs would be required for working capital. There
is no capital gain tax applicable.
COMPUTE the NPV of the project. RMC World Ltd. is about to make a
presentation to Secure Venture Capital Firm. Secure Venture Capital
Firms will invest in any project if the net addition to shareholder wealth
from the project is above ` 100 lakhs. (5 Marks)

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2. (a) From the following PREPARE Income statement of company P and Q.
P Q
No. of Equity Shares 1,00,000 70,000
Financial leverage 3:1 4:1
Operating Leverage 2:1 3:1
Variable cost to sales 67% 50%
Interest ₹ 5,50,000 ₹ 6,00,000
Income tax rate 30% 30%
Also CALCULATE EPS of the company. (4 Marks)
(b) The GT Limited is willing to expand its business for which it requires an
additional finance of ` 50,00,000. At present, the capital structure of the
company is as under:
• 7,00,000 Equity shares of ` 10 each
• 10% Debentures ` 63,00,000
• 12% Term loan ` 54,00,000
• Retained earnings ` 1,30,00,000
At present, the company's EBIT is ` 54,00,000. However, the company,
after expansion, expects ROI 2% greater than the present ROI, Income
Tax Rate is 30%.
Following two options, for getting additional finance, are available-
(a) To raise funds as term loan @ 12%
(b) To raise funds by issuing 1,00,000 equity shares at ` 20 per share
and balance by issuing 11% debentures at par.
Required:
(i) FIND out the market price of shares, if the P/E ratio is 10.
(ii) RECOMMEND the suitable option of raising funds with reason.
(6 Marks)
3. (a) EOC Ltd is a listed company and has presented the below abridged
financial statements below.
Statement of Profit and Loss ` `
Sales 1,25,00,000
Cost of goods sold (76,40,000)
Gross Profit 48,60,000
Less: Operating Expenses
Administrative Expenses 13,20,000
Selling and Distribution Expenses 15,90,000 (29,10,000)

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 Operating Profit 19,50,000
Add: Non Operating Income 3,28,000
Less: Non Operating Expenses (1,27,000)
Profit before Interest and taxes 21,51,000
Less: Interest (4,39,000)
Profit before tax 17,12,000
Less: Taxes (4,28,000)
Profit after Tax 12,84,000
Balance Sheet

Sources of Funds ` `
Owned Funds
Equity Share Capital 30,00,000
Reserves and Surplus 18,00,000 48,00,000
Borrowed Funds
Secured Loan 10,00,000
Unsecured Loan 4,30,000 14,30,000
Total Funds Raised 62,30,000
Application of Funds
Non-Current Assets
Building 7,50,000
Machinery 2,30,000
Furniture 7,60,000
Intangible Assets 50,000 17,90,000
Current Assets
Inventory 38,60,000
Receivables 39,97,000
ST investments 3,00,000
Cash and Bank 2,30,000 83,87,000
Less: Current Liabilities
Creditors 25,67,000
ST loans 13,80,000 (39,47,000)
Total Funds Employed 62,30,000
The company has set certain standards for the upcoming year financial
status.

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 All the ratios are based on closing figures in financial statements.
Equity SC to Reserves= 1
Net Profit Ratio= 15%
Gross Profit Ratio= 50%
Long Term Debt to Equity= 0.5
Debtor Turnover= 100 Days
Creditor Turnover (based on COGS)= 100 Days

Inventory= 70% of Opening inventory

Cash Balance is assumed to remain same for next year

You are required to -
(1) CALCULATE inventory turnover ratio in days for current year
(2) CALCULATE receivables turnover ratio in days for current year
(3) CALCULATE the projected receivables, inventory, payables and long
term debt (8 Marks)
(b) NAME the various financial instruments dealt with in the International
market. (2 Marks)
4. (a) WRITE short notes on Inter relationship between investment, financing
and dividend decisions. (4 Marks)
(b) DISCUSS the liquidity vs. profitability issue in management of working
capital. (4 Marks)
(c) EXPLAIN the concept of discounted payback period. (2 Marks)
OR
(c) EXPLAIN the concept of Indian depository receipts. (2 Marks)

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 MODEL TEST PAPER 3
INTERMEDIATE GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.
1. Twigato Ltd is an all equity financed company in the food delivery business
and is considering an expansion into quick grocery delivery business
segment. It is the market leader in the current food delivery business with a
valuation of ` 5750 crores. From the discussion in the recent fund-raising
meeting with the venture capitalists, it has been noted that the quick delivery
business is expected to be run for 6 years, after which it will be sold to another
entity for a target valuation of 2 times of the investment made in the business
segment. The new segment will be funded by debt, preference and equity
shares in the ratio of 3:2:5. The quick grocery delivery would require ` 30
crores of investment to start with and subsequently it will require additional
infusion of ` 20 crores in start of year 2 and ` 25 crores of fund infusion in
start of year 4. The operating financials of the business is expected to be on
following lines for the 1 st year of operation.
No of quick orders = 10000 per day
No of overnight orders = 2000 per day
Ticket sizes quick orders: 5000 orders below ` 500, 3000 orders between
` 500 and ` 1000 and 2000 orders above ` 1000 with average ticket size being
` 700 per order.
Delivery charges are applicable for orders below ` 500, which is flat ` 40 per
order.
The company would charge 5% of invoice value from the seller of the quick
delivery products and 7% in case of overnight delivery.
Overnight deliveries would be available to only subscription-based customers
and subscription charges are ` 5000 p.a. Each overnight order is expected to

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be having an average ticket size of ` 750 per order. Each subscription-based
customer is expected to place order every alternate day on an average.
The quantity of orders is expected to be growing at a rate of 20%, 15%,10%,
5% for 1st 4 years of operations. Beyond this it is expected to be remaining
constant. The proportion of orders is expected to remain unchanged.
To attract the prospective customers, it is likely to spend heavily on
advertising in initial years. The advertising and promotional activities would
cost ` ` 7 crores, ` 8 crores and ` 10 crores in year 1,2 and 3 respectively.
Remuneration to delivery partners will be ` 15000 p.m. fixed plus ` 20 per
delivery. Each delivery partner can deliver an average of 30 orders per day.
An additional provision of 50% of extra delivery partners to be made to
consider the unexpected spike in orders on special occasions and holidays.
The IT infrastructure and customer care expenses would amount to ` 8 crores
each year.
Income Tax allows 20% p.a. depreciation on straight line basis for any fresh
investments. Applicable tax rate can be taken as 25%. The after-tax cost of
debt, preference share, and equity share would amount to 10%, 11% and 15%
respectively.
Assume 365 days in a year.
1. Which of the following is the best estimate of discounting rate for the
project?
(a) 12.00%
(b) 11.55%
(c) 12.70%
(d) 13.75%
2 Which of the following is the best measure of delivery partners required
in year 1?
(a) 600
(b) 720
(c) 828
(d) 911
3. Which of the following is the best measure of total revenue in year 3?
(a) 30 crores
(b) 25.78 crores
(c) 33.66 crores
(d) 25.91crores
4. Which of the following years best represents the years of loss?
(a) Year 1 only
(b) Year 1 and 2 only

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 (c) Year 1,2 and 3 only
(d) Year 1,2,3 and 4 only
5. Which of the following in the best measure of NPV of the project?
(a) 39.35 crores
(b) -25.63 crores
(c) 23.76 cores
(d) -35.67 crores (5 x 2 = 10 Marks)
2. If EBIT increases by 6%, taxable income increases by 6.9%. If sales increase
by 6%, taxable income will increase by 24%.
Financial leverage must be -………….
(a) 1.19
(b) 1.13
(c) 1.12
(d) 1.15 (2 Marks)
3. The earning per share of the company is `10. It has an internal rate of return
of 15%& capitalisation rate of the same risk class is 12.5%if the walters model
is used, what should be the price of a share of optimum payout.
(a) 92
(b) 94
(c) 96
(d) 98 (2 Marks)
4. Packing credit by an exporter is required to be liquidated within
(a) 12 months
(b) 3 months
(c) 90 days
(d) 180 days (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) As a financial analyst of a large electronics company, you are required
to DETERMINE the weighted average cost of capital of the company
using (a) book value weights and (b) market value weights. The following
information is available for your perusal.

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 The Company’s present book value capital structure is:
Debentures (` 100 per debenture) ` 8,00,000
Preference shares (` 100 per share) 2,00,000
Equity shares (` 10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, ` 110 per debenture, Preference shares, ` 120 per share,
and Equity shares, ` 22 per share
Anticipated external financing opportunities are:
(i) ` 100 per debenture redeemable at par; 10 year maturity, 11 per
cent coupon rate, 4 per cent flotation costs, sale price, ` 100
(ii) ` 100 preference share redeemable at par; 10 year maturity, 12 per
cent dividend rate, 5 per cent flotation costs, sale price, ` 100.
(iii) Equity shares: ` 2 per share flotation costs, sale price = ` 22.
In addition, the dividend expected on the equity share at the end of the
year is ` 2 per share, the anticipated growth rate in dividends is 7 per
cent and the firm has the practice of paying all its earnings in the form of
dividends. The corporate tax rate is 35 per cent. (5 Marks)
(b) A Company had the following Balance Sheet as on March 31, 2023:
Liabilities and Equity ` Assets `
(in crores) (in crores)
Equity Share Capital Fixed Assets (Net) 250
(Ten crore shares of 100 Current Assets 150
` 10 each)
Reserves and Surplus 20
15% Debentures 200
Current Liabilities 80 ___
400 400
The additional information given is as under:
Fixed Costs per annum (excluding interest) ` 80 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income-tax rate 40%
Required:
CALCULATE the following and comment:
(i) Earnings per share
(ii) Operating Leverage
(iii) Financial Leverage

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 (iv) Combined Leverage. (5 Marks)
(c) From the following information, PREPARE a summarised Balance Sheet
as at 31st March, 2023:
Working Capital ` 2,40,000
Bank overdraft ` 40,000
Fixed Assets to Proprietary ratio 0.75
Reserves and Surplus ` 1,60,000
Current ratio 2.5
Liquid ratio 1.5
(5 Marks)
2. (a) Akash Limited provides you the following information:
`
Profit (EBIT) 2,80,000
Less Int. on Debt@10% 40,000
EBT 2,40,000
Less Income Tax@50% 1,20,000
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earning per share (EPS) 4
Price /EPS (PE) Ratio 10
The company has reserves and surplus of Rs, 7,00,000 and needs
` 4,00,000 further for expansion. There is no change in Return on Capital
Employed. You are informed that a debt (debt/ debt +equity) ratio higher
than 40% will push the P/E ratio down to 8 and raise the interest rate on
additional borrowings (debentures) to 12%. You are required to
ASCERTAIN the probable price of the share.
(i) If the additional funds are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market
price. (6 Marks)
(b) A firm had been paid dividend at ` 2 per share last year. The estimated
growth of the dividends from the company is estimated to be 5% p.a.
DETERMINE the estimated market price of the equity share if the
estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%.
Also COMPUTE the present market price of the share, given that the
required rate of return of the equity investors is 15.5%. (4 Marks)
3. A company is considering its working capital investment and financial policies
for the next year. Estimated fixed assets and current liabilities for the next
year are ` 2.60 crores and ` 2.34 crores respectively. Estimated Sales and
EBIT depend on current assets investment, particularly inventories and book-

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 debts. The financial controller of the company is examining the following
alternative Working Capital Policies:
(` Crores)

Working Capital Policy Investment in Current Estimated EBIT

Assets Sales
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has
advised the adoption of the moderate working capital policy. The company is
now examining the use of long-term and short-term borrowings for financing
its assets. The company will use ` 2.50 crores of the equity funds. The
corporate tax rate is 35%. The company is considering the following debt
alternatives.
(` Crores)

Financing Policy Short-term Debt Long-term Debt

Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%
You are required to CALCULATE the following:
(1) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(2) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio. (10 Marks)
4. (a) The profit maximization is not an operationally feasible criterion.”
COMMENT on it. (4 Marks)
(b) "Financing a business through borrowing is cheaper than using equity."
Briefly EXPLAIN. (4 Marks)
(c) WHAT is meant by weighted average cost of capital? (2 Marks)
OR
(c) EXPLAIN in brief the assumptions of Modigliani-Miller theory.(2 Marks)

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 MODEL TEST PAPER 4
INTERMEDIATE: GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

Kaivalyabodhi Limited (KbL) has completed 35 years of operations in India. It has

many subsidiary & associate companies in more than 100 countries. KbL’s
business s include home and personal care, foods and beverages, and industrial,
agricultural and other products. It is one of the largest producers of soaps and
detergents in India. The company has grown organically as well as through
acquisitions. Over the years, the company has built a diverse portfolio of powerful
brands, some being household names.
It is planning to acquire one of its competitors named Prestige Limited, which would
enhance the growth of ‘KbL’. The consideration amount will be 1.5X of its average
Market Capitalization. Prestige limited has 1,30,000 outstanding equity shares and
its shares were traded at an average market price of ` 45 as on the valuation date.
The consideration amount will be paid equally in 5 years where the first installment
is to be paid immediately. Prestige Limited has Ko of 15%
KbL will raise the funds required through debt and equity in the ratio of 30:70. The
company requires the cost of capital estimates for evaluating its acquisitions,
investment decisions and the performance of its businesses.
KbL’s share price has grown from ` 150 to ` 301 in the last 5 years and it will
continue to grow at the same rate. KbL pays dividends regularly. The company has
recently paid a dividend of ` 8. For the calculation of equity, an average of 52 weeks
high market price in the last 5 years is to be considered, which is as follows :

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 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
MPS 185 MPS 210 MPS 252 MPS 325 MPS 280
Ke calculated as per growth model holds a weight of 0.6.
The company also wishes to calculate the equity’s expectation using CAPM which
holds a weight of 0.4. The risk-free rate is assumed as the yield on long-term
government bonds that the company regards as about 8%. KbL regards the market-
risk premium to be equal to 11 per cent. Its estimation on the Beta is 0.78.
KbL will issue debentures with FV of ` 10,500 which is to be amortised equally over
the life of 7 years. The company considers the effective rate of interest applicable
to an ‘AAA’ rated company with a markup of 200 basis points as its coupon rate. It
thinks that considering the trends over the years, ‘AAA’ rate is 7.5%.
Ignore taxation. Based on the above details, answer the question 1 to 5:
1. Calculate the cost of equity under both the methods
(a) 11%, 16%
(b) 18.65%, 10.34%
(c) 18.65%, 16.58%
(d) 16.5%, 9%
2. Calculate the overall cost of equity
(a) 17.82%
(b) 17.63%
(c) 15.37%
(d) 35.25%
3. Calculate the cost of debt, if the intrinsic value of debenture today is close to
` 9,740
(a) 15%
(b) 12%
(c) 9.5%
(d) 7.5%
4. Calculate the WACC & the amount of purchase consideration
(a) 18%, ` 90,00,000
(b) 15.21%, ` 87,75,000
(c) 16.07%, ` 87,75,000
(d) 15.94%, ` 58,50,000

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5. Present Value of Purchase consideration is close to `
(a) 58,83,032
(b) 67,65,487
(c) 57,35,680
(d) 66,58,997 (5 x 2 = 10 Marks)
6. X ltd has actual Sales of ` 20 lakhs and its Break-even sales are at ` 15 lakhs.
The degree of total risk involved in the company is 6.5. Calculate the % impact
on EPS, if EBIT is affected by 12%.
(a) 40%
(b) 78%
(c) 312%
(d) 19.5% (2 Marks)
7. Assuming Ke = 11%, Kd = 8% and Ko = 10%, Debt Equity ratio of the company
(a) 2:3
(b) 3:2
(c) 1:2
(d) 2:1 (2 Marks)
8. Given:
Earnings available to the equity shareholders ` 30 Lakhs,
Cost of equity is 15%,
Debt outstanding ` 150 Lakhs
Value of the firm will be –
(a) ` 200 Lakhs
(b) ` 250 Lakhs
(c) ` 350 Lakhs
(d) ` 300 Lakhs (1 Mark)

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 PART II – Descriptive Questions (35 Marks)
Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.

1. (a) You are required to CALCULATE the Total Current Assets of Ananya
Limited from the given information:
Stock Turnover = 5 times
Sales (All credit) = ` 7,20,000
Gross Profit Ratio = 25%
Current Liabilities = 2,40,000
Liquidity Ratio = 1.25
Stock at the end is ` 30,000 more than stock in the beginning.
(5 Marks)
(b) Gitarth Limited has a current debt equity ratio of 3:7. The company is
presently considering several alternative investment proposals costing
less than ` 25 lakhs. The company will always raise the funds required
without disturbing its current capital structure ratio.
The cost of raising debt and equity are as follows-
Cost of Project Kd Ke
Upto 5 lakhs 10% 12%
Above 5 lakhs & upto 10 lakhs 12% 13.5%
Above 10 lakhs & upto 20 lakhs 13% 15%
Above 20 lakhs 14% 16%
Corporate tax rate is 30%, CALCULATE:
i) Cut off rate for two Projects I & Project II whose fund requirements
are 15 lakhs & ` 26 lakhs respectively.
ii) If a project is expected to give an after-tax return of 13%, determine
under what conditions it would be acceptable. (5 Marks)
(c) From the following details of X Ltd, PREPARE the Income Statement for
the year ended 31 st December:
Financial Leverage 2
Interest ` 2,000
Operating Leverage 3
Variable Cost as a Percentage of Sales 75%
Income Tax Rate 30%
(5 Marks)

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2. (a) The financial statements of Gurunath Ltd is furnished below –
Balance Sheet as at 31 st March
Particulars as at 31 st March Note `
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds: 10,00,000
(2) Non–Current Liabilities: 10% Debt 6,00,000
(3) Current Liabilities 1,56,000
Total 17,56,000
II ASSETS
(1) Non–Current Assets 16,56,000
(2) Current Assets – Trade Receivables 1,00,000
Total 17,56,000
Additional Information:
1. The existing credit terms are 1/10, net 45 days and average
collection period is 30 days. The current bad debts loss is 1.5%. In
order to accelerate the collection process further as also to
increase sales, the company is contemplating liberalization of its
existing credit terms to 2/10, net 45 days.
2. It is expected that sales are likely to increase by 1/3 of existing
sales, bad debts increase to 2% of sales and average collection
period to decline to 20 days.
3. Credit period allowed by the supplier is 60 days. Generally,
operating expenses are paid 2 months in arrears. Total Variable
expenses of the company constitute Purchases of stock in trade
and operating expenses only.
4. Opportunity cost of investment in receivables is 15%. 50% and 80%
of customers in terms of sales revenue are expected to avail cash
discount under existing and liberalization scheme respectively. The
tax rate is 30%.
5. The Company considers only the relevant or variable costs for
calculating the opportunity costs on the funds blocked in
receivables. Assume 360 days in a year and 30 days in a month.
Should the company change its credit terms? (6 Marks)
(b) The following information is given for QB Ltd.
Earnings per share ` 180
Dividend per share ` 45
Cost of capital 17%
Internal Rate of Return on investment 20%
CALCULATE the market price per share using -
(a) Gordon’s formula

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 (b) Walter’s formula (4 Marks)
3. (a) Parmarth Limited is a manufacturer of computers. Owing to recent
developments in Artificial Intelligence (AI), it is planning to introduce AI
in its computer process. This would result into an estimated
annual savings as follows:
(i) Savings of ` 3,50,000 in production delays caused by inventory
problem.
(ii) Savings in Salaries of 5 employees with an annual pay of ` 4,20,000
per annum
(iii) Reduction in Lost sales of ` 1,75,000
(iv) Gain due to timely billing is ` 3,25,000
The project would result in annual maintenance and operating costs as
follows, which are to be paid in advance (at the beginning)
YEAR 1 2 3 4 5
COST 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000
Furthermore, the new system would need 2 AI specialists' professional
drawing salaries of ` 6,50,000 per annum per person. The purchase
price of the new system for installing AI into computers would involve an
outlay of ` 21,50,000 and installation cost of ` 1,50,000.
75% of the total value for depreciation would be paid in the year of
purchase and the balance would be paid at the end of the 1st year. The
new system will be sold for ` 1,90,000. This is the only asset in the block
for Income tax purpose.
The life of the system would be 5 years with the hurdle rate of 12%.
Depreciation will be charged at 40% on WDV basis, corporate tax rate is
25% and capital gains tax rate is at 20%.
CALCULATE NPV and advise the management on the acceptability of
the proposal. Also calculate ARR & PI. (8 Marks)
(b) DISCUSS the parameters of Lintner’s Model. (2 Marks)
4. (a) DISCUSS the Costs of Availing Trade Credit (4 Marks)
(b) Briefly EXPLAIN the following –
i. Fully Hedged Bonds
ii. Medium Term Notes
iii. Floating Rate Notes
iv. Euro Commercial Papers (4 Marks)
(c) WHAT is the range of DOL? (2 Marks)
OR
DISCUSS the role of a chief financial officer. (2 Marks)

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 MODEL TEST PAPER 5

INTERMEDIATE GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.

PART I – Case Scenario based MCQs (15 Marks)

Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

Mathangi Ltd. is a News broadcasting channel having its broadcasting Centre in

Chennai. There are total 200 employees in the organisation including top
management. As a part of employee benefit expenses, the company serves tea to
its employees, which is outsourced from a third-party. The company offers tea three
times a day to each of its employees. The third-party charges ` 10 for each cup of
tea. The company works for 200 days in a year.
Looking at the substantial amount of expenditure on tea, the finance department
has proposed to the management an installation of a master tea vending machine
from Nirmal Ltd which will cost ` 5,00,000 with a useful life of five years. Upon
purchasing the machine, the company will have to incur annual maintenance which
will require a payment of ` 25,000 every year. The machine would require electricity
consumption of 500 units p.m. and current incremental cost of electricity for the
company is ` 24 per unit. Apart from these running costs, the company will have to
incur ` 8,00,000 for consumables like milk, tea powder, paper cup, sugar etc. The
company is in the 25% tax bracket. Straight line method of depreciation is allowed
for the purpose of taxation.
Nirmal Ltd sells 100 master tea vending machines. Variable cost is ` 4,50,000 per
machine and fixed operating cost is ` 25,00,000. Capital Structure of Mathangi Ltd
and Nirmal Ltd consists of the following –

210
 Particulars Mathangi Ltd. Nirmal Ltd.
Equity Share Capital (Face value ` 10 each) 40,00,000 40,00,000
Reserves & Surplus 25,00,000 50,00,000
12% Preference Share Capital 12,00,000 Nil
15% Debentures 20,00,000 40,00,000
Risk free rate of return = 5%, Market return = 10%, Beta of the Mathangi Ltd. = 1.9
You are required to answer the following five questions based on the above details:
1. If sales of Nirmal Ltd are up by 10%, impact on its EBIT is
(a) 30%
(b) 60%
(c) 5%
(d) 20%
2. Combined leverage of Nirmal Ltd is
(a) 1.63
(b) 2.63
(c) 1.315
(d) 2
3. Discount rate that can be applied for making investment decisions of Mathangi
Ltd is
(a) 12%
(b) 13.52%
(c) 15%
(d) 20%
4. Incremental cash flow after tax per annum attributable to Mathangi Ltd due to
investment in the machine is
(a) ` 2,39,438
(b) ` 1,98,250
(c) ` 98,250
(d) ` 1,31,000
5. Net present value of investment in the machine by Mathangi Ltd is
(a) ` 6,88,522
(b) ` 1,88,522
(c) ` 9,91,250
(d) ` 4,91,250 (5 x 2 = 10 Marks)

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6. Total Assets & Current liabilities of the Vitrag Limited are 50 lakhs & 10 lakhs
respectively. ROCE is 15%, measure of business operating risk is at 3.5 &
P/V ratio is 70%. Calculate Sales.
(a) 21 lakhs
(b) 30 lakhs
(c) 37.50 lakhs
(d) 40 lakhs (2 Marks)
7. A company has issued bonds with a face value of ` 100,000 at an annual
coupon rate of 8%. The bonds are currently trading at 95% of their face value.
What is the approximate cost of debt for the company before taxes.
(a) 9.00%
(b) 7.65%
(c) 8.00%
(d) 8.42% (2 Marks)
8. A company is considering changing its capital structure by increasing its debt
ratio from 40% to 55%. What is the likely impact on the company’s cost of
equity, assuming all other factors remain constant?
(a) Cost of equity will be unaffected by debt ratio
(b) Cost of equity will remain unchanged
(c) Cost of equity will decrease
(d) Cost of equity will increase (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) X Ltd is willing to raise funds for its New Project which requires an
investment of ` 84 Lakhs. The Company has two options:
Option I: To issue Equity Shares (` 10 each) only
Option II: To avail Term Loan at an interest rate of 12%. But in this
case, as insisted by the Financing Agencies, the
Company will have to maintain a Debt–Equity proportion
of 2:1.
The Corporate Tax Rate is 30%. FIND out the point of indifference for
the project. (5 Marks)
(b) Mr. Anand is thinking of buying a Share at ` 500 whose Face Value per
share is ` 100. He is expecting a bonus at the ratio 1 : 5 at the end of
the fourth year. Annual expected dividend is 20% and the same rate is
expected to be maintained on the expanded capital base. He intends to
sell the Shares at the end of seventh year at an expected price of ` 900

212
 each. Incidental Expenses for purchase and sale of Shares are
estimated to be 5% of the Market Price. Assuming a Discount rate of
12% per annum, COMPUTE the Net Present Value from the acquisition
of the shares. (5 Marks)
(c) Paarath Limited had recently repurchased 20,000 equity shares at a
premium of 10% to its prevailing market price. The book value per share
(after repurchasing) is ` 193.20.
Other Details of the company are as follows:
Earnings of the company (before buyback) = ` 18,00,000
Current MPS is ` 270 with a P/E Ratio of 18.
CALCULATE the Book Value per share of the company before the re-
purchase. (5 Marks)
2. (a) Sukrut Limited has annual credit sales of ` 75,00,000/-. Actual credit
terms are 30 days, but its management of receivables has been poor,
and the average collection period is about 60 days. Bad debt is 1 per
cent of total sales.
A factor has offered to take over the task of debt administration and
credit checking, at an annual fee of 1.5 per cent of credit sales.
Sukrut Limited estimates that it would save ` 45,000 per year in
administration costs as a result. Due to the efficiency of the factor, the
average collection period would come back to the original credit offered
of 30 days and bad debts would come to 0.5% on recourse basis.
The factor would pay net advance of 80 percent to the company at an
annual interest rate of 12 per cent after withholding a reserve of 10%.
Sukrut Limited is currently financing its receivables from an overdraft
costing 10 per cent per year and will continue to finance the balance fund
needed (which is not financed by factor) through the overdraft facility
If occurrence of credit sales is throughout the year, COMPUTE whether
the factor’s services should be accepted or rejected. Assume 360 days
in a year. (7 Marks)
(b) Determining the amount to be invested in current assets as working
capital is a crucial policy decision for any entity. What FACTORS should
a company consider when deciding the level of investment in working
capital? (3 Marks)
3. (a) Calculate the WACC using the following data by using Market Value
weights:
Particulars `
Equity Shares (` 10 per equity share) 15,00,000
Reserves & Surplus 5,00,000
Preference Shares (` 100 per preference share) 7,50,000
Debentures (` 100 per debenture) 5,50,000
The market prices of these securities are:

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 Debentures - ` 105 per debenture,
Preference shares - `115 per preference share
Equity shares - ` 27 per equity share
Additional information:
(1) ` 100 FV per debenture redeemable at premium of 10%, 10%
coupon rate, 4% floatation costs, 10-year maturity.
(2) ` 100 FV per preference share redeemable at par, 12% coupon
rate, 2% floatation cost and 10-year maturity.
(3) Equity shares have ` 4.5 floatation cost and market price of 27 per
share.
The last dividend paid by the company was ` 2 which is expected to grow
at an annual growth rate of 9%. The firm has the practice of paying all
earnings as a dividend.
The corporate tax rate is 25%. To calculate the overall cost of debt &
preference shares, take the average of their respective costs using YTM
& approximation method. (6 Marks)
(b) EPL Ltd. has furnished the following information relating to the year
ended 31st March 2023 and 31st March, 2024:
31st March, 2023 31st March, 2024
Share Capital 50,00,000 50,00,000
Reserve and Surplus 20,00,000 25,00,000
Long term loan 30,00,000 30,00,000
• Net profit ratio: 8%
• Gross profit ratio: 20%
• Long-term loan has been used to finance 40% of the fixed assets.
• Stock turnover with respect to cost of goods sold is 4.
• Debtors represent 90 days sales.
• The company holds cash equivalent to 1½ months cost of goods
sold.
• Ignore taxation and assume 360 days in a year.
You are required to PREPARE Balance Sheet as on 31st March 2024 in
following format:
Liabilities (` ) Assets (`)
Share Capital - Fixed Assets -
Reserve and Surplus - Sundry Debtors -
Long-term loan - Closing Stock -
Sundry Creditors - Cash in hand -
(4 Marks)

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4. (a) The agency problem is one of the key concepts in corporate governance
and financial management. On the light of this statement, EXPLAIN
agency problem, consequences of agency problem and how to
overcome the issue. (4 Marks)
(b) Operating leases and financial leases are traditionally the most important
types of leases in financial management. However, in recent years, other
types of leases have also gained significance due to their unique benefits
and applications. IDENTIFY AND EXPLAIN at least four other types of
leases that have become increasingly important in modern business
practices. (4 Marks)
(c) EXPLAIN the Relationship between EBIT-EPS-MPS (2 Marks)
OR
(c) EXPLAIN Financial Leverage as a ‘Double edged Sword’ (2 Marks)

215
 MODEL TEST PAPER 6
INTERMEDIATE GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.

PART I – Case Scenario based MCQs (15 Marks)

Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.
Case Scenario I:
Small bus Company is into manufacturing mini buses. Since its establishment it
has seen a phenomenal growth in both its market share and profitability. The
financial statements (Statement of P&L and Balance Sheet) are shown below. The
company enjoys the confidence of its shareholders who have been rewarded with
growing dividends year after year. Last year too, the company had announced 20
per cent dividend, which was the highest in the automobile sector. The company
has never defaulted on its loan payments and enjoys a favourable face with its
lenders, which include financial institutions, commercial banks and other private
debenture holders. The competition in the bus industry has increased in the past
few years and the company foresees further intensification of competition with the
entry of several foreign bus manufacturers; many of whom are market leaders in
their respective countries. The mini bus segment especially, will witness entry of
foreign majors in the near future, with latest technology being offered to the Indian
customer. Small bus company’s management realises the need for large scale
investment in upgradation of technology and improvement of manufacturing
facilities to beat competition.
While on one hand, the competition in the industry has been intensifying, on the
other hand, there has been a slowdown in the Indian economy, which has not only
reduced the demand for buses, but also led to adoption of price cutting strategies
by various bus manufacturers.

216
The Company needs ` 3,12,50,000 for the investment in technology and
improvement of manufacturing facilities. Company has three options for the funds:
I The Company may issue 31,25,000 equity shares at ` 10 per share.
II The Company may issue 15,62,500 equity shares at ` 10 per share and 1,56,250
debentures of ` 100 denomination bearing an 9% rate of interest.
III The Company may issue 15,62,500 equity shares at ` 10 per share and 1,56,250
preference shares at ` 100 per share bearing an 10% rate of dividend.
The company’s earnings before interest and taxes after investment is ` 37,50,000.
Income tax rate applicable to the company is 40%.
Based on the above facts, the management of the company asked you to answer
the following questions (MCQs 1 to 5):
1. What is the EPS under financial plan I?
(a) ` 0.50
(b) ` 0.62
(c) ` 0.72
(d) ` 0.44
2. What is the EPS under financial plan II?
(a) ` 0.70
(b) ` 0.90
(c) ` 0.42
(d) ` 1.10
3. What is the EPS under financial plan III?
(a) ` 0.44
(b) ` 0.70
(c) ` 0.85
(d) ` 1.20
4. What is the EBIT-EPS indifference points by formulae between Financing Plan
I and Plan II?
(a) ` 28,12,500.00
(b) ` 29,00,000.00
(c) ` 32,50,666.66
(d) ` 45,15,253.56

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5. What is the EBIT-EPS indifference points by formulae between Financing Plan
I and Plan III?
(a) ` 36,36,666.66
(b) ` 45,25,000.00
(c) ` 28,56,256.25
(d) ` 52,08,333.33 (5 x 2 = 10 Marks)
6. A company has a degree of operating leverage is 2 and degree of financial
leverage is 3. If the sales of the company increase by 5% during the next quarter,
the Earning Per Share (EPS) will increase by?
(a) 20%
(b) 30%
(c) 50%
(d) 60% (2 Marks)
7. Following are the data on a capital project being evaluated by the
management of Aman Ltd.
Particulars Project A
Annual cost saving ` 1,80,000
Useful life 5 years
Internal rate of return 10%
Salvage value 0
PVAF (15,4 years) 3.79
Based upon the information, the payback period of the project will be
(a) 2.652
(b) 2.850
(c) 3.790
(d) 3.855 (2 Marks)
8. Under Modigliani and Miller’s Dividend Irrelevance Theory, a company has
₹1,00,000 to distribute. If it chooses to retain the earnings instead of paying
dividends, what happens to shareholder wealth?
(a) Increases due to reinvestment opportunities.
(b) Decreases due to lower immediate returns.
(c) Remains unchanged because value depends on earnings and
investment policy.
(d) Depends on the dividend payout ratio (1 Mark)

218
 PART II – Descriptive Questions (35 Marks)
Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) ABC Industries is a mid-sized company manufacturing consumer goods.
Last quarter, the company reported sales of ₹ 2,00,000. The production
process involves significant variable costs, which account for 50% of the
sales value. Additionally, the company incurs ₹ 40,000 as fixed operating
costs for rent, utilities, and management expenses. ABC Industries has
also borrowed funds, leading to ₹ 10,000 as annual interest on long-term
debt.
The company is currently planning to launch a new marketing campaign
aimed at boosting sales by 10%. As a financial analyst at ABC Industries,
you are required to:
1. CALCULATE the combined leverage.
2. ILLUSTRATE the impact of the 10% sales increase using the
combined leverage. (5 Marks)
(b) P Ltd. has the following capital structure at book-value as on 31st March,
2024:
Particulars (`)
Equity share capital (1,00,000 shares) 10,00,000
12% Preference shares 15,00,000
10% Debentures 15,00,000
40,00,000
Additional Information:
1. The equity shares of P Ltd. are currently traded at ₹ 100 per share.
2. The company expects to pay a dividend of ₹ 5 per equity share next
year, with dividends projected to grow perpetually at a rate of 5%
p.a.
3. The corporate tax rate is 35%.
Requirements:
1. CALCULATE the Weighted Average Cost of Capital (WACC) based
on the current capital structure.
2. RECALCULATE the WACC if the company raises an additional
₹ 5 lakhs of debt by issuing 12% debentures. This change will result
in:
o An increase in the expected equity dividend to ₹ 7 per share
while the growth rate remains constant at 5%.
o A decrease in the market price of equity shares to ₹90 per
share (5 Marks)

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 (c) Vyom Limited, an IT conglomerate, is planning to take over Aryayash
Limited, a startup company incorporated 2 years ago but holding a lot of
prospects. To determine the buyout consideration, Vyom Limited has
approached you as a Finance controller to estimate the fair value of the
startup company today based on future earnings estimates. Following
details of the startup company are as below -
Expected Sales in the coming year are ` 25 lakhs with P/V ratio of 40%.
The sales are expected to grow at a rate of 20% for the next 2 years, to
40% for another 2 years, 25% in the 6th year and thereafter cash flows
will grow at a steady rate of 10%. Fixed cost for the upcoming year is
expected to be 12 lakhs for the first two years, ` 10 lakhs thereafter. Loss
in any year can be set-off only against the profits of the immediate next
year.
Corporate taxes applicable are 25% & 20% to Vyom Limited & Aryayash
Limited respectively. Vyom Limited’s desired rate of return is 15% & Cost
of Capital of Aryayash Limited is 17%.
As a finance controller, CALCULATE the Fair value of Aryayash Limited.
(5 Marks)
2. (a) From the following information pertaining to M/s Anya Co. Ltd.,
PREPARE its trading, Profit & Loss Account for the year ended on
31 March, 2024 and a summarized Balance Sheet as at that date:
Amt in `
Current Ratio 2.5
Quick Ratio 1.3
Proprietary Ratio (Fixed Assets/ Proprietary Fund) 0.6
Gross Profit to Sale Ratio 10%
Debtors Velocity 40 days
Sales 730,000
Working Capital 120,000
Bank Overdraft 15,000
Share Capital 2,50,000
Closing Stock is 10% more than opening Stock.
Net Profit is 10% of Proprietary Funds. (6 Marks)
(b) Paras TMT Ltd. is a TMT manufacturing company with a face value of
` 10 per share.
The following information is given about the company:
• The company is expected to grow @ 10% p.a. for next four years
then 5% for an indefinite period.
• Rate of return expected by the shareholders on their share
investments is 15%.

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 • Company paid ` 4 as dividend per share for the current Financial
Year.
FIND out the intrinsic value per share (4 Marks)
3. Zomo Ltd. currently has a turnover of ₹ 120 lakhs, 75% of which is on credit.
The variable cost ratio is 80%, and the credit terms offered are 2/10, net 30.
On the current sales volume, the bad debts are 1%, and the company spends
₹ 1,20,000 annually on administering its credit sales, including staff salaries
for credit checking and collection. These costs are avoidable.
In addition:
• 60% of customers avail of the 2% cash discount, and the remaining
customers take 60 days on average to pay after the date of sale.
• The book debts are financed by a mix of bank borrowings and owned
funds in a 1:1 ratio, with annual costs of 15% and 14%, respectively.
However, Zomo Ltd. is also considering dynamic discounting for its cash
customers, which might incentivize more customers to pay earlier by
increasing the discount rate. This could lead to a potential reduction in bad
debts to 0.8% but may also increase the cost of the discount offered to 2.5%.
A factoring firm has proposed a deal with the following terms: (i) Factor
reserve: 12% (ii) Guaranteed payment: 25 days (iii) Interest charges: 15% (iv)
Commission: 4% of receivables.
In addition, the company also has the option to extend the credit period for its
remaining customers (who do not avail of the discount) to 75 days, which
might increase sales by 10% but could result in an increase in bad debts to
1.5%.
Given:
1. The cost of funds is expected to rise to 16% next year.
2. Zomo Ltd. plans to introduce late payment penalties (for customers who
take more than 60 days) at 5% of outstanding receivables after 60 days.
Assume a 360-day year.
Required:
• SHOULD Zomo Ltd. opt for dynamic discounting or the factoring firm’s
offer?
• ANALYZE the impact of extending the credit period on the company’s
finances.
COMPARE all options and RECOMMEND whether to continue with in-house
management, dynamic discounting, or accept the factoring firm’s offer.
(10 Marks)
4. (a) A company is evaluating two options for financing its current assets:
using short-term loans or long-term loans. HOW should the company
balance risk and return in making this decision, and WHAT factors
should it consider to ensure optimal financing? (4 Marks)

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(b) You are a financial consultant for a company that has a very high capital
base but low earnings per share (EPS). EXPLAIN over-capitalization.
What are the causes and consequences of over-capitalization?"
(4 Marks)
(c) "XYZ Corp. has adopted a strategy to maximize short-term profits by
increasing product prices significantly. ANALYZE why this might not be
a feasible operational criterion for sustainable growth." (2 Marks)
OR
(c) DEFINE Modified Internal Rate of Return method. (2 Marks)

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