CA Intermediate May 2024 Suggested Answers Paper 6 Financial Management and Strategic Management

FOR CA INTERMEDIATE EXAM PREPARATION

CA Intermediate 2024
Suggested Answers ·
Paper 6 Financial
Management and
Strategic Management
EXAM YEAR TYPE

CA Intermediate 2024 Suggested Answers
SUBJECT DATE

Paper 6 Financial Management and Strategic Management May 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 6: FINANCIAL MANAGEMENT AND
STRATEGIC MANAGEMENT
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l a s SECTION A: FINANCIAL MANAGEMENT
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Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and
above the required number, then only the requisite number of questions first
answered in the answer book shall be valued and subsequent extra
question(s) answered shall be ignored.
Working notes should form part of the answer.

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Question 1
(a) Theme Ltd provides you the following. information:

s em
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12.5 % Debt ` 45,00,000
Debt to Equity ratio
a g 1.5 : 1
Return on Shareholder's fund 54%
Operating Ratio 85%
Ratio of operating expenses to Cost of Goods sold 2:6
Tax rate 25%
Fixed Assets ` 39,00,000

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Current Ratio 1.8 : 1

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You are required to calculate:

em
(i) Interest Coverage Ratio
la se
las (ii) Gross Profit Ratio
a g
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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Alpha Limited has provided following information:

Equity Share Capital 25,000 Shares @ ` 100 per Share
15% Debentures 10,000 Debentures@ ` 750/- per Debenture
Sales 50 Lakhs units@ ` 20 per unit
Variable Cost ` 12.50 per unit
Fixed Costs ` 175.00 Lakhs

Due to recent policy changes and entry of foreign competitors in the sector,
Alpha Limited expects the sales may decline by 15-20%, However, selling
price and other costs will remain the same. Corporate Taxes will
continue@20%.
You are required to calculate the decrease in Earnings per share, Degree of
Operating Leverage and Financial Leverage separately if sales are declined
by (i) 15%; and (ii) 20%;
(c) Following is the sales information in respect of Bright Ltd:
Annual Sales (90 % on credit) ` 7,50,00,000
Credit period 45 days
Average Collection period 70 days
Bad debts 0.75%
Credit administration cost (out of which 2/5th is avoidable) ` 18,60,000
A factor firm has offered to manage the company's debtors on a non-
recourse basis at a service charge of 2%. Factor agrees to grant advance
against debtors at in interest rate of 14% after withholding 20% as reserve.
Payment period guaranteed by factor is 45 days. The cost of capital of the
company is 12.5%. One time redundancy payment of ` 50,000 is required to
be made to factor.
Calculate the effective cost of factoring to the company. (Assume 360 days in
a year)
Answer
(a) Working Notes:
Debt = ` 45,00,000

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Interest = ` 45,00,000 x 12.5%= 5,62,500

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Total Debt

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Debt to Equity = 1.5:1 =

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Shareholders'Equity

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Equity = ` 30,00,000

a s e NetProfitafter taxes
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Return of Shareholder’s funds = 54% = ×100

ag Profit after tax (PAT)
Equity shareholders'fund

= 54% x Equity = `16,20,000
Profit before tax (PBT)(1-25%) = Profit after tax
= `16,20,000/75% = `21,60,000
Earning before interest and tax (EBIT) = PBT + Interest
= `21,60,000 + ` 5,62,500
= `27,22,500

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(i) Interest Coverage Ratio = EBIT/Interest

c. o= `27,22,500/`5,62,500
em = 4.84 Times
s= 1 - Operating Ratio
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(ii) Operating Profit Ratio
= 1 – 0.85 = 0.15 or 15%
Operating Profit
0.15 = ×100
Sales
Sales = EBIT or Operating Profit /0.15
= ` 27,22,500 / 0.15

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= ` 1,81,50,000

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Operating expenses
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Operating ratio = =2:6=1:3
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Cost of goods sold ( COGS )

s em Operating expenses = 1/3COGS
g la
gla Operating cost = Sales – Operating profit a
a = ` 1,81,50,000 - ` 27,22,500
= ` 1,54,27,500

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

` 1,54,27,500 = COGS + Operating expenses
` 1,54,27,500 = COGS + 1/3COGS
COGS = ` 1,15,70,625
Gross profit = Sales – COGS
= 1,81,50,000 – 1,15,70,625
= ` 65,79,375
Gross Profit
Gross Profit ratio = ×100
Sales
= 65,79,375/1,81,50,000
= 0.3625 or 36.25%
Gross profit and sales can be calculated in alternative way also.
However, there will be no change in GP ratio i.e 36.25%
Current Assets
(iii) Current Ratio =
CurrentLiabilities

= 1.8
Current Assets = 1.8 Current Liabilities
Total of Balance sheet liability = Equity + Debt + Current Liabilities
=30,00,000+45,00,000+CL ……….(2)
Total Balance sheet asset = Fixed Assets + Current Assets
= 39 lakhs + CA= 39 + 1.8CL…….(3)
Equating 2 and 3,
75,00,000 + CL = 39,00,000 + 1.8CL
0.8CL = 36,00,000
CL =` 45,00,000
Current Assets = 1.8 CL = 1.8 x 45 lakhs= ` 81,00,000

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FINANCIAL MANAGEMENT AND
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(b) Income Statement with required calculations

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Particulars (`) (`) (`)

o m Existing Sales declined Sales declined

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Sales in. units
by 15% by 20%

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s emprice per unit la
50,00,000 42,50,000 40,00,000

laVariable Cost per unit a g
g
Sales 20 20 20

a Contribution per unit (12.50)
7.5
(12.50)
7.5
(12.50)
7.5
Contribution 3,75,00,000 3,18,75,000 3,00,00,000
Fixed expenses (1,75,00,000) (1,75,00,000) (1,75,00,000)
EBIT 2,00,00,000 1,43,75,000 1,25,00,000
Debenture Interest (11,25,000) (11,25,000) (11,25,000)

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EBT 1,88,75,000 1,32,50,000 1,13,75,000
Tax @ 20%
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(37,75,000) (26,50,000) (22,75,000)
Profit after tax (PAT)
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e 25,000
1,51,00,000 1,06,00,000 91,00,000
No. of shares
la s 25,000 25,000

ag ` 1,51,
Earnings per share (EPS) 00, 000 ` 1,06,00,000 ` 91, 00, 000
PAT 25, 000 25,000 25, 000
=
No. of shares
= ` 604 = `424 = `364
(i) Decrease in EPS = `180 = `240
Or Or
% Decrease in % Decrease in
180 240
EPS =  100 EPS = 

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604 604

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= 29.80% 100

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= 39.73%

=s
em ` 3,18,75,000 a ` 1,25,00,000
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(ii) Operating leverage = 3,00,00,000

las =
Contribution
a g
g
EBIT ` 1, 43,75,000
a
= 2.40
Or = 2.22 Or
Or 37.50/20
28.125/15 = 1.875

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Degree of Operating 1.875
leverage
Percentage change in EBIT
=
Percentage change in sales
(iii) Financial Leverage ` 1, 43, 75, 000 ` 1, 25, 00, 000
= =
EBIT ` 1,32,50, 000 ` 1,13, 75, 000
=
EBT = 1.08 = 1.10
Or Or Or
Degree of Financial 29.80/28.125 39.735/37.50
Leverage = 1.06 = 1.06
Percentage change in EPS
=
Percentage change in EBIT

(c) Evaluation of Factoring Proposal

Particulars ` `
A. Savings due to factoring
Bad Debts saved 0.75% x 7.5 crores ` 5,06,250
x 90%
Administration cost saved 18.6 lakhs x 2/5 ` 7,44,000
Interest saved due to 7.5 crores x 90% ` 5,85,937.5
reduction in average x (70-45)/ 360 x 12.5%
collection period
Total ` 18,36,187.5
B. Costs of factoring:
Service charge 7.5 crores x 90% x 2% ` 13,50,000
Interest cost ` 1,15,171.875 ` 9,21,375
x 360/45
Redundancy Payment ` 50,000
Total ` 23.21,375
C. Net Annual cost to the ` 4,85,187.5
Firm: (A-B)
Rate of effective cost of ` 4,85,187.5/ 7.504%
factoring ` 64,66,078.125 x 100

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Advice: Since the rate of effective cost of factoring is less than the existing
cost of capital, therefore, the proposal is acceptable.
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Credit Sales = ` 7.5 crores x 90% = ` 6,75,00,000
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Average level of receivables = ` 6.75 crores x 45/360 = ` 84,37,500
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s emcharge = 2% of ` 84,37,500 g la
a = 20% of ` 84,37,500
Service ` 1,68,750

lReserve ` 16,87,500a
g
a Total (i) ` 18,56,250
Thus, the amount available for advance is
Average level of receivables ` 84,37,500
Less: Total (i) from above ` 18,56,250
(ii) ` 65,81,250

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Less: Interest @ 14% p.a. for 45 days ` 1,15,171.875

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emcost is taken as irrelevant for decision
Net Amount of Advance available. ` 64,66,078.125

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a to the Firm will be ` 4,35,187.5 and Rate of
Note: Alternatively, if redundancy
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a will be ` 4,35,187.5/` 64,66,078.125 x 100
making, then Net Annual cost
effective cost of factoring
= 6.730%
If average level of receivables is considered for 70 days then the
calculation can be done in following way:
Evaluation of Factoring Proposal
Credit Sales = ` 7.5 crores X 90% = ` 6,75,00,000

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Average level of receivables = ` 6.75 crores x 70/360 = ` 1,31,25,000

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Service charge = 2% of ` 1,31,25,000 ` 2,62,500

em
Reserve = 20% of ` 1,31,25,000
la se ` 26,25,000
las Total (i)
a g ` 28,87,500

ag Thus, the amount available for advance is
Average level of receivables ` 1,31,25,000
Less: Total (i) from above ` 28,87,500

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(ii) ` 1,02,37,500
Less: Interest @ 14% p.a. for 45 days ` 1,79,156.25
Net Amount of Advance available. ` 1,00,58,343.75
Note 1: Accordingly, interest cost will be ` 14,33,250 cost of factoring will
be ` 28,33,250. Therefore, Rate of effective cost of factoring is 9.913%
Note 2: Alternatively, if redundancy cost is taken as irrelevant for decision
making, then Net Annual cost to the Firm will be ` 9,47,062.5 and Rate of
effective cost of factoring will be ` 9,47,062.5/ ` 1,00,58,343.75 x 100
= 9.416%.
Advice: Since the rate of effective cost of factoring is less than the existing
cost of capital, therefore, the proposal is acceptable.
Question 2
(a) The capital structure of Shine Ltd. as on 31.03.2024 is as under:

Particulars Amount (`)
Equity share capital off 10 each 45,00,000
15% Preference share capital of f 100 each 36,00,000
Retained earnings 32,00,000
13% Convertible Debenture off 100 each 67,00,000
11 % Term Loan 20,00,000
Total 2,00,00,000

Additional information:
(A) Company issued 13% Convertible Debentures of ` 100 each on
01.04.2023 with a maturity period of 6 years. At maturity, the debenture
holders will have an option to convert the debentures into equity shares
of the company in the ratio of 1 : 4 (4 shares for each debenture). The
market price of the equity share is ` 25 each as on 31.03.2024 and the
growth rate of the share is 6% per annum.
(B) Preference stock, redeemable after eight years, is currently selling at
` 150 per share.

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(C) The prevailing default-risk free interest rate on 10-year GOI treasury
bonds is 6%. The average market risk premium is 8% and the Beta () of
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the company is 1.54.

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You are .required to calculate the cost of: e
Corporate tax rate is 25% and rate of personal income tax is 20%.

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ag (ii) Preference Share Capital
(i) Equity Share Capital

(iii) Convertible Debenture
(iv) Retained Earnings
(v) Term Loan
(b) Following data is available in respect of Levered and Unlevered companies
having same business risk:

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. (f)
Capital employed = ` 2,00,000, EBIT = ` 25,000 and Ke = 12.5%

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e 75,000
s
Sources Levered Company Unlevered Company (`)
Debt (@8%)
g la 1,25,000 Nil
Equity
a 2,00,000

An investor is holding 12% shares in levered company. Calculate the
increase in annual earnings of investor if he switches over his holding from
Levered to Unlevered company.
Answer
(a) (i) Cost of Equity Share capital

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As per CAPM Model Ke = Rf + ß (Rm − Rf)

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Rf = 6%

em
B = 1.54
la se
las Rm-Rf = 8%
a g
ag Ke = 6% + 1.54(8%)
Ke = 18.32%

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(ii) Cost of Preference Share capital
n = 8
Net Proceeds (NP) = 150
Redemption Value (RV) = 100
Preference Dividend (PD) = 15

PD+
(RV-NP )
Kp = n
( RV+NP )
2

 100 - 150 
15 +  
Kp =  8 
 100 + 150 
 
 2 
Kp = 7%
Alternatively, if we take NP as 100 and RV as 100, then solution can
be done in the following way:
Cost of Preference Share capital
n = 8
Net Proceeds (NP) = 100
Redemption Value (RV) = 150
Preference Dividend (PD) = 15

PD+
(RV-NP )
Kp = n
(RV+NP )
2

 150 -100 
15 +  
Kp =  8 
 150 + 100 
 
 2 
Kp = 17%

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(iii) Cost of convertible debenture

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Cash Redemption Value (RV) = 100

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Share Redemption Value (RV):

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Value of share after 5 years
eShare Redemption Value (RV)
= 25 x (1.06) 5 = 33.46

la s
l a s = 33.46 X 4=133.82
a g
ag Therefore, investor will choose share redemption.
Redemption Value (RV) = 133.82
Net Proceeds (NP) = 100
n =5
Interest (I) = 13
Tax (t) = 25%

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(RV-NP )
.
I (1- t )+

em
Kd = n

s
(RV+NP )
2
l a
g -100 )
13 (1- 0.25 )+a
(133.82
= 5
( 133.82 +100 )
2
Kd = 14.13%
(iv) Cost of Retained Earnings

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Kr = Ke (1-tp)= 18.32 % x (1-0.20) = 14.66%

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We can also take cost of equity as cost of retained earnings,
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em
Accordingly, Kr = Ke = 18.32%

la se
las (v) Cost of Term Loan
a g
ag = 11% x (1-0.25) = 8.25%

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) 1. Valuation of firms

Particulars Levered Unlevered
Firm (`) Firm (`)
EBIT 25,000 25,000
Less: Interest on debt (8% × ` 75,000) 6,000 Nil
Earnings available to Equity shareholders 19,000 25,000
Ke 12.5% 12.5%
Value of Equity (S) 1,52,000 2,00,000
(Earnings available to Equity shareholders/
Ke)
Debt (D) 75,000 Nil
Value of Firm (V) = S + D 2,27,000 2,00,000

Value of Levered company is more than that of unlevered company.
Therefore, investor will sell his shares in levered company and buy
shares in unlevered company. To maintain the level of risk he will
borrow proportionate amount and invest that amount also in shares of
unlevered company.
2. Investment & Borrowings `

Sell shares in Levered company (` 1,52,000 x 12%) 18,240

Borrow money (` 75,000 x 12%) 9,000

Buy shares in Unlevered company 27,240
3. Change in Return `

Income from shares in Unlevered company

(` 27,240 x 12.5%) 3,405

Less: Interest on loan (` 9,000 x 8%) 720

Net Income from unlevered firm 2,685

Less: Income from Levered firm (` 18,240 x 12.5%) 2,280

Incremental Income due to arbitrage 405

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Solution can also be done in the following way:

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Valuation of firms

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Particulars Levered Unlevered

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Firm (`) Firm (`)

s e EBIT g
l a Nil a
25,000 25,000

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Less: Interest on debt (8% × ` 75,000) 6,000
Earnings available to Equity shareholders 19,000 25,000
Ke 12.5% 12.5%
Value of Equity (S) 1,52,000 2,00,000
(Earnings available to Equity shareholders/
Ke)
Debt (D) 75,000 Nil

o m
c than that of unlevered company.
Value of Firm (V) = S + D 2,27,000 2,00,000
.
m shares in levered company and buy
Therefore, investor will sellehis
Value of Levered company is more

la s
Arbitrage Process: a
g
shares in unlevered company.

If investor have 12% shares of levered company, value of investment in
equity shares is 12% of ` 1,52,000 i.e. ` 18,240 and return will be 12%
of `19,000 = ` 2,280.
Alternate Strategy will be:
Sell 12% shares of levered firm for ` 18,240 and borrow 12% of levered

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firm's debt i.e. ` 9,000 (12% of ` 75,000) and invest the money i.e. 12%

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in unlevered firm's stock:

em= ` 27,240
em a
Total resources /Money investor have = ` 18,240 + ` 9,000

l s
s g
and investor invest 12% of ` 2,00,000 = ` 24,000

gla a– ` 24,000 = ` 3,240
a
Surplus cash available with investor is = ` 27,240
Investor return = 12% EBIT of unlevered firm – Interest to be paid on
borrowed funds
i.e. = 12% of ` 25,000 – 8% of ` 9,000 = ` 3,000 – ` 720 = ` 2,280

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Now, return remains the same i.e. ` 2,280 which investor is getting from
levered company before investing in unlevered company but still have
` 3,240 excess money available with investor. Hence, investor is better
off by doing arbitrage.
Question 3
(a) HCP Ltd. is a leading manufacturer of railway parts for passenger coaches
and freight wagons. Due to high wastage of material and quality issues in
production, the General Manager of the company is considering the
replacement of machine A with a new CNC machine B. Machine A has a book
value of ` 4,80,000 and remaining economic life is 6 years. It could be sold
now at ` 1,80,000 and zero salvage value at the end of sixth year. The
purchase price of Machine B is ` 24,00,000 with economic life of 6 years. It
will require ` 1,40,000 for installation and ` 60,000 for testing. Subsidy of
15% on the purchase price of the machine B will be received from
Government at the end of 1st year. Salvage value at the end of sixth year will
be ` 3,20,000.
The General manager estimates that the annual savings due to installation
of machine B include a reduction of three skilled workers with annual salaries
of ` 1,68,000 each, ` 4,80,000 from reduced wastage of materials and
defectives and ` 3,50,000 from loss in sales due to delay in execution of
purchase orders. Operation of Machine B will require the services of a trained
technician with annual salary of t 3,90,000 and annual operation and
maintenance cost will increase by ` 1,54,000. The company's tax rate is 30%
and it's required rate of return is 14%. The company follows straight line
method of depreciation. Ignore tax savings on loss due to sale of existing
machine.
The present value factors at 14% are:

Years 0 1 2 3 4 5 6
PV Factor 1 0.877 0.769 0.675 0.592 0.519 0.456

Required:
(i) Calculate the Net Present Value and Profitability Index and advise the
company for replacement decision.
(ii) Also calculate the discounted pay-back period.

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(b) Vista Limited's retained earnings per share for the year ending 31.03.2023
being 40% is ` 3.60 per share. Company is foreseeing a growth rate of 10%
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per annum in the next two years. After that the growth rate is expected to
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stabilize at 8% per annum. Company will maintain its existing pay-out ratio.

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If the investor's required rate of return is 15%, Calculate the intrinsic value
s e
s e
per share as of date using Dividend Discount model.

a g la
g l
Answer a
a(a) Calculation of Net Initial Cash Outflows:
Particulars `
Cost of new machine 24,00,000
Less: Sale proceeds of existing machine (1,80,000)
Add: Installation 1,40,000

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Add: Testing 60,000

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Less: Subsidy from government (15% of 24,00,000) x (3,15,720)

em
0.877
Net initial cash outflows
l a s 21,04,280

a g
Calculation of Incremental Depreciation

Particulars `

Depreciation on existing machine (4,80,000/6) (i) 80,000
Depreciation base of New Machine
Cost of new machine 24,00,000

om
Add: Installation 1,40,000

m c. 60,000
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Add: Testing
m(3,60,000)
em la se
Less: Subsidy from government

las Less: Salvage value at the end of 6 th year
a g (3,20,000)

ag Depreciation base of New Machine 19,20,000
Depreciation on New Machine (19,20,000/6) (ii) 3,20,000
Incremental depreciation [(ii) – (i)] 2,40,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Computation of Annual Operating Cash flow after tax (CFAT)

Particulars Amount Amount
(`) (`)
Savings in cost
Cost of 3 skilled workers (`1,68,000 x 3) 5,04,000
Reduced wastage of material 4,80,000
Saving in loss of sales 3,50,000
Total 13,34,000
Less: Increase in cost
Salary to trained technician 3,90,000
Increase in annual operation and maintenance 1,54,000
cost
Total (5,44,000)
Incremental Saving before tax and 7,90,000
depreciation
Less: Incremental Depreciation (2,40,000)
Incremental PBT 5,50,000
Less: Tax @30% (1,65,000)
PAT 3,85,000
Add: Depreciation 2,40,000
Incremental CFAT 6,25,000

Calculation of NPV
Particulars Year Net PVF @ PV (`)
Cashflow (`) 14%
Net initial cash 0 (24,20,000) 1 (21,04,280)
outflows
Incremental CFAT 1 to 6 6,25,000 3.888 24,30,000
Salvage Value of New 6 3,20,000 0.456 1,45,920
Machine

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PV of inflows 25,75,920

m
c. o
Net Present Value 4,71,640

m
co m
Sum of discounted cash inflows

.
Profitability Index =

m
Initial cash outlay or Total discounted cash outflow (as the case may)
s e
s e g l a
a
= 25,75,920/21,04,280= 1.224

lAdvise: Since the NPV is positive and PI is greater than 1, the companya
ag should replace the machine
Computation of Discounted Payback Period

Year Cashflow PVF @ 14% PV of CFs (`) Cumulative PV (`)
1 6,25,000 0.877 5,48,125 5,48,125
2 6,25,000 0.769 4,80,625 10,28,750
3 6,25,000 0.675 4,21,875 14,50,625

o m3,70,000
0.519 .
c
4 6,25,000 0.592 18,20,625
5 6,25,000
e m 3,24,375 21,45,000

a s
gl
6 9,45,000 0.456 4,30,920 25,75,920

Discounted Payback Period a
21,04,280 - 18,20,625
=4+
3,24,375
= 4.87 years
If we take subsidy in cash inflow of 1st year, then solution can also be
done in the following way:

m
c. o `
Calculation of Net Initial Cash Outflows:

m
c. o m
se 24,00,000
Particulars

em la (1,80,000)
Cost of new machine

las Less: Sale proceeds of existing machine
a g
ag Add: Installation 1,40,000
Add: Testing 60,000
Net initial cash outflows 24,20,000

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Note: However, Incremental Depreciation and CFAT will remain same.
Calculation of NPV

Particulars Year Net PVF @ PV (`)
Cashflow 14%
(`)
Net initial cash outflows 0 (24,20,000) 1 (24,20,000)
Subsidy 1 3,60,000 0.877 3,15,720
Incremental CFAT 1 to 6 6,25,000 3.888 24,30,000
Salvage Value of New 6 3,20,000 0.456 1,45,920
Machine
PV of inflows 28,91,640
Net Present Value 4,71,640

Profitability Index = Sum of discounted cash in flows
Initial cash outlay or Total discounted cash outflow (as the case may)

= 28,91,640 /24,20,000 = 1.195
Advise: Since the NPV is positive and PI is greater than 1, the company
should replace the machine
Computation of Discounted Payback Period

Year Cashflow PVF @ 14% PV of CFs (`) Cumulative PV (`)
1 9,85,000 0.877 8,63,845 8,63,845
2 6,25,000 0.769 4,80,625 13,44,470
3 6,25,000 0.675 4,21,875 17,66,345
4 6,25,000 0.592 3,70,000 21,36,345
5 6,25,000 0.519 3,24,375 24,60,720
6 9,45,000 0.456 4,30,920 28,91,640

Discounted Payback Period
= 4 + 24,20,000- 21,36,345
3,24,375
= 4.87 years

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(b) As per Dividend discount model, the price of share is calculated as

m
follows:

m
Retained earning per share = ` 3.60
c. o
.co ` 3.60

s e m
m
Dividend per share, D 0 = 40% x 60% = `5.40

a s e g la
a
D1 D2 D3 1

l
P= + + ×

ag Where,
(1+Ke )1 (1+Ke )2 (Ke -g) (1+Ke )2

P = Price per share
Ke = Required rate of return on equity
g = Growth rate
5.4x1.1 5.94x1.1 6.534x1.08 1
P= 1 + 2 + ×
(1+0.15) (1+0.15) (0.15-0.08) (1+0.15)2

o m
Intrinsic value of share is ` 86.33 .
c
P= 5.17 + 4.94 + 76.23 = `86.33

s em
Question 4
g la the following statements are true or false:
a
(a) State with brief reasons whether
(i) Maximising Market Price Per Share (MPS) as the financial objective
which maximises the wealth of shareholders.
(ii) A combination of lower risk and higher return is known as risk return
trade off and at this level of risk-return, profit is maximum.
(iii) Financial distress is a position when accounting profits of a firm are

m
co
sufficient to meet its long-term obligations.

m .
c. o m
(iv) Angel investor is one who provides funds for start-up m exchange for an

em se
ownership/equity.

s g l aactivity. You are
a
(b) ABC Ltd. is approaching the banks for financing its business
l a
ag
required to describe any four forms of bank credit for the consideration of
the company.
(c) Discuss the relevance of Payback reciprocal in capital budgeting decisions.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

OR
(c) Explain the features of crowd funding.
Answer
(a)

Statement True or Reason
False
Maximising Market Price Per True Maximizing MPS or Market
Share (MPS) as the financial value as the financial
objective which maximises the objective will ensure the
wealth of shareholders. maximizing shareholder’s
wealth.
A combination of lower risk False There is a direct
and higher return is known as relationship between risk
risk-return trade off and at this and profit. Higher the risk,
level of risk-return, profit is higher is the possibility of
maximum. profits. Stockholders
expect greater returns from
investments of higher risk
and vice-versa.
Financial distress is a position False Financial distress is a
when accounting profits of a position where Cash
firm are sufficient to meet its inflows of a firm are
long-term obligations. inadequate to meet all its
current obligations.

Angel investor is one who True Angel Financing is a form
provides funds for start-up in of an equity-financing
exchange for an where an angel investor
ownership/equity. provides capital for start-
up or expansion, in
exchange for an
ownership/equity in the
company.

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(b) Some of the forms of bank credit are:

m
(i) Cash Credit: This facility will be given by the banker to the customers

m
by giving certain amount of credit facility on continuous basis. The
c. o
.co e m
borrower will not be allowed to exceed the limits sanctioned by the

em
bank.
la s
l a s
(ii) Bank Overdraft: It is a short-term borrowing facility made available
a g
ag
to the companies in case of urgent need of funds. The banks will
impose limits on the amount they can lend. When the borrowed funds
are no longer required they can quickly and easily be repaid. The banks
issue overdrafts with a right to call them in at short notice.
(iii) Bills Discounting: The Company which sells goods on credit will
normally draw a bill on the buyer who will accept it and sends it to the
seller of goods. The seller, in turn discounts the bill with his banker.
The banker will generally earmark the discounting bill limit.

m
. co
(iv) Bills Acceptance: To obtain finance under this type of arrangement a

em
company draws a bill of exchange on bank. The bank accepts the bill

s
thereby promising to pay out the amount of the bill at some specified
future date.
l a
gof Credit is a commitment by a bank to lend a
a
(v) Line of Credit: Line
certain amount of funds on demand specifying the maximum amount.
(vi) Letter of Credit: It is an arrangement by which the issuing bank on
the instructions of a customer or on its own behalf undertakes to pay
or accept or negotiate or authorizes another bank to do so against
stipulated documents subject to compliance with specified terms and
conditions.

m
c. o
(vii) Bank Guarantees: Bank guarantee is one of the facilities that the
m
c. o m
commercial banks extend on behalf of their clients in favour of third

s e
em
parties who will be the beneficiaries of the guarantees.

s l a
g account of the
la
(viii)Short Term Loans: In a loan account, the entire advance is disbursed

g a
at one time either in cash or by transfer to the current
a borrower. It is a single advance and given against securities like shares,
government securities, life insurance policies and fixed deposit
receipts, etc.

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(ix) Clean Overdrafts: Request for clean advances are entertained only
from parties which are financially sound and reputed for their integrity.
The bank has to rely upon the personal security of the borrowers.
(x) Advances against goods: Goods are charged to the bank either by
way of pledge or by way of hypothecation. Goods include all forms of
movables which are offered to the bank as security.
(xi) Usance bills maturing at a future date or sight are discounted by the
banks for approved parties. The borrower is paid the present worth and
the bank collects the full amount on maturity.
(xii)Advance against documents of title to goods: A document becomes
a document of title to goods when its possession is recognised by law
or business custom as possession of the goods like bill of lading, dock
warehouse keeper's certificate, railway receipt, etc. An advance against
the pledge of such documents is an advance against the pledge of
goods themselves.
(xiii)Advance against supply of bills: Advances against bills for supply of
goods to government or semi-government departments against firm
orders after acceptance of tender fall under this category. It is this debt
that is assigned to the bank by endorsement of supply bills and
executing irrevocable power of attorney in favour of the banks for
receiving the amount of supply bills from the Government
departments.
(c) Reciprocal of the payback would be a close approximation of the Internal
Rate of Return if the life of the project is at least twice the payback period
and the project generates equal amount of the annual cash inflows.
The payback reciprocal is a helpful tool for quick estimation of rate of return
of a project provided its life is at least twice the payback period.
It may be calculated as follows:
Payback Reciprocal = Average annual cash flows/initial Investment
Or
Payback Reciprocal = 1 / payback period

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OR

m
(c) Crowd funding: crowdfunding means raising money for an individual or

m
organisation from a group of people to fund a project, typically via internet
c. o
.co
(social media and crowdfunding websites). It generally involves collecting
s e m
em
funds from family, friends, strangers, corporates and many more in
la
a s
exchange of equity (known as Equity funding), loans (known as P2P lending)
l a g
ag
or nothing at all (i.e. donation). This source of funding also helps start-up
to substantiate demand for their product before entering into production.
In the crowdfunding process, three parties are involved i.e. fund raiser,
mediator and fund investor. The platforms (mediator) may also charge
certain fees in the form of processing fee, transaction fee, etc. either as a
fixed amount or a percentage or in combination of both.

m
. co
s em
g l a
a

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c. o se
m
s em g la
gla a
a

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SECTION – B: STRATEGIC MANAGEMENT
Question paper comprises of 4 questions, Answer Question No. 5 which is
compulsory and any 2 out of the remaining 3 questions.
Question 5
(a) BOYA Ltd. is a venture in the market present for a decade. Till, 2023, it was
working on the values and vision of its founder while operating in limited
area of operations.
Growth opportunities exist for BOYA Ltd. Considering the changing
environment, company is interested to leverage new skills in marketing,
technology, product development and financial management. As a known
fact, modifying one aspect might have a ripple effect on other elements.
The company wants to understand various hard and soft elements
interrelated with each other in the company and having a bearing on
effective operational results.
As a strategist, you intend to prepare a questionnaire based on both types
of elements by analyzing the organizational design. The response to the
same will help in finding an answer to ensure effectiveness through the
interaction of such elements.
Briefly discuss the strategic model you will use in the given situation. State
the limitations of the model as well. (2 +3 = 5 Marks)
(b) Elvis Global is a famous OTT platform facing fierce competition from its
competitors amid changing consumer preferences. This has made it difficult
to retain customers as the existing television channels are also launching
their own platforms. The company has appointed Raghav to lead the
company forward as the sales & marketing manager. Raghav needs to
design creative and innovative advertising campaigns to gain a competitive
edge, engage the public and capture the market.
Identify the strategic level that represents Raghav's role at Elvis Global. As a
strategic advisor, highlight the various benefits of strategic management in
overcoming different challenges to Raghav. (1 +4 = 5 Marks)
(c) Yash is planning to launch his new tech start-up. He is exploring different
locations across the country to establish his company in the right business
environment. One option is the city of Bengaluru, the silicon valley of India,

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with an engaging network of entrepreneurs, investors, advisors and

m
mentors. Coupled with various subsidies for new ventures and tax benefits,

m c. o
Bengaluru might be an ideal choice for Yash to establish his company and

c o
increase the chances of success.
. e m
emthe different ways in which the interaction of a business with its glas
Define the term Business Environment with respect to the above scenario.

a s
lenvironment
Explain
a
ag can be helpful in developing a successful strategy.
(1 +4 = 5 Marks)
Answer

(a) In addressing the strategic needs of BOYA Ltd., the McKinsey 7S Model
is an effective tool to consider. This model focuses on the interaction of
hard and soft elements within an organization, suggesting that modifying
one aspect might have a ripple effect on the other elements to maintain

m
c. o
an effective balance. The McKinsey 7S Model helps analyze the company's
organizational design to achieve effectiveness through these interactions.

emcontrolled by the management. The
The model categorizes the elements into 'hard' and 'soft' components:
s
la elements in an organization.
The Hard elements are directly

a g
following elements are the hard
♦ Strategy: the direction of the organization, a blueprint to build on a
core competency and achieve competitive advantage to drive margins
and lead the industry.
♦ Structure: depending on the availability of resources and the degree of
centralisation or decentralization that the management desires, it choses
from the available alternatives of organizational structures.

m
co
♦ Systems: the development of daily tasks, operations and teams to
m .
c. o m
execute the goals and objectives in the most efficient and effective

em se
manner.

s g la
la
The Soft elements are difficult to define as they are more governed by

g
culture. But these soft elements are equally important in determining an
a
a organization’s success as well as growth in the industry. The following are
the soft elements in this model.

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♦ Shared Values: The core values which get reflected within the
organizational culture or influence the code of ethics of the
management.
♦ Style: This depicts the leadership style and how it influences the
strategic decisions of the organisation. It also revolves around people
motivation and organizational delivery of goals.
♦ Staff: The talent pool of the organisation.
♦ Skills: The core competencies or the key skills of the employees play a
vital role in defining the organizational success.
While the McKinsey 7S Model provides a structured approach to analysing
organizational effectiveness, it has certain limitations:
♦ It ignores the importance of the external environment and depicts only
the most crucial elements within the organization.
♦ The model does not clearly explain the concept of organizational
effectiveness or performance.
♦ The model is considered to be more static and less flexible for decision
making.
♦ It is generally criticized for missing out the real gaps in conceptualization
and execution of strategy.
By applying the McKinsey 7S Model, BOYA Ltd. can gain a comprehensive
understanding of how different elements within the organization interact
and influence overall performance. The insights gathered from the
questionnaire can guide strategic decisions to enhance growth and
operational effectiveness.
(b) Raghav's role at Elvis Global represents the Functional level of strategy.
As the sales and marketing manager, his responsibilities are focused on
specific areas within the company, particularly on crafting and executing
marketing and sales strategies that drive customer engagement and
competitive positioning.

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Benefits of Strategic Management for Raghav at Elvis Global

m
c. o
Strategic management can provide several benefits to Raghav in

o m
addressing the competitive and consumer challenges faced by Elvis
Global:
. c e m
m clear direction for future initiatives. This ensures that all las
eproviding
s g
• Strategic management helps Elvis Global define its goals and mission,

l a a
ag Raghav to set realistic and achievable objectives that support the
marketing efforts are aligned with the company’s overall vision. It allows

company’s long-term goals, ensuring that marketing strategies are
both ambitious and attainable.
• Through strategic management, Raghav can proactively shape the
future of Elvis Global rather than merely reacting to market changes.
This allows the company to anticipate trends and act accordingly. A
proactive approach enables Elvis Global to better manage environmental
m
c. o
uncertainties and stay ahead of competitors, ensuring a more controlled

m a robust framework for making
and predictable business environment.

s e
a marketing strategies, target markets, and
• Strategic management provides

g l
critical decisions regarding
a
resource allocation. This ensures that all major decisions are well-
informed and strategically sound. It ensures coherence and consistency
in decision-making across the organization, aligning marketing
strategies with overall business objectives.
• Strategic management helps identify and exploit new business
opportunities, allowing Raghav to craft campaigns that resonate with
emerging consumer preferences and market trends. By recognizing

m
and capitalizing on these opportunities, Elvis Global can differentiate

m c o
• Strategic management acts as a defence mechanism against. potential
itself from competitors and capture a larger market share.

c. o s em
s em a
l approach to
mistakes and pitfalls, helping Raghav avoid costly errors in marketing

la g
identifying and mitigating risks, ensuring moreainformed and safer
decisions and campaign execution. It provides a structured

ag decision-making.
• Strategic management enhances the longevity and sustainability of
Elvis Global by ensuring that marketing strategies are adaptable and

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

resilient in a dynamic market. It helps the company establish a clear
and deliberate position within the industry, ensuring sustained
relevance and competitiveness.
• Strategic management enables the development of core
competencies and competitive advantages that are crucial for the
company's success. This includes building strong brand identity,
innovative content offerings, and superior customer service. By focusing
on these strengths, Raghav can ensure that Elvis Global achieves
sustainable growth and maintains its competitive edge in the OTT
market.
Through strategic management, Raghav can effectively navigate the
competitive challenges faced by Elvis Global. By providing clear
direction, encouragement a proactive approach, guiding critical
decisions, identifying new opportunities, defending against pitfalls,
ensuring longevity, and developing core competencies, strategic
management enables the company to achieve and sustain a
competitive edge. This comprehensive approach will allow Raghav to
design innovative advertising campaigns that engage the public,
capture the market, and drive the company forward.
(c) Business Environment refers to all external factors, influences, or
situations that affect business decisions, plans, and operations. In Yash's
case, these factors include the dynamic and evolving conditions in
Bengaluru, which impact the strategic decisions for his tech start-up.
Benefits of Interaction with the Business Environment
• Determine Opportunities and Threats: Interaction with the
environment helps Yash identify new consumer needs, emerging
trends, and potential market opportunities. This insight can guide
the development of innovative products and services that meet
market demands. Understanding changes in laws, social behaviors,
and competitor actions enables Yash to anticipate and mitigate
potential threats, ensuring the start-up remains resilient and adaptive.
• Give Direction for Growth: By analyzing the external environment,
Yash can pinpoint areas for expansion and growth. Recognizing
market trends and technological advancements allows him to
strategize effectively, ensuring the start-up scales successfully.

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Awareness of the changes around the business environment

m
facilitates better planning and strategic decisions, aligning the start-

m c. o
up’s goals with the market dynamics.
•
.co
Continuous Learning: Continuous interaction with the environment
s e m
em
motivates Yash and his team to update their knowledge,
la
l a sunderstanding, and skills. Staying informed about industry trends
a g
ag
and advancements ensures the start-up remains competitive. This
ongoing learning process enhances the start-up's ability to adapt to
changes, promoting innovation and responsiveness to market shifts.
• Image Building: Understanding and responding to environmental
needs help the start-up build a positive image. For instance, adopting
sustainable practices or contributing to local initiatives can
enhance the company’s reputation. Demonstrating sensitivity to
the business environment shows that the start-up is responsible and

o m
community-focused, attracting customers and partners who value

c
. with the environment allows Yash
corporate social responsibility.

m
e strategies and adapt accordingly.
s
• Meeting Competition: Interaction

la strengths and weaknesses helps in
to analyze competitors’
g
crafting strategiesathat provide a competitive edge. By leveraging
Understanding competitors’

insights from the environment, the start-up can position itself
uniquely in the market, differentiating its offerings from those of
competitors.
Question 6
(a) ‘Innovation leads to unnecessary expenses that do not give as many

m
returns.’ Do you agree with the statement? Give reasons in support of your

m
answer.
.c o
(1 + 4 = 5 Marks)

c. o (b) Explain s em
how organizations can effectively manage strategic uncertainties in

em l a
s
a rapidly changing business environment. (5 Marks)

l a a g
ag
Answer

(a) The statement "Innovation leads to unnecessary expenses that do not
give as many returns" is often debated, but evidence strongly suggests

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

that innovation is crucial for long-term business growth and success. I
disagree with the statement for several reasons:
Innovation offers the following for a business to grow long term:
Helps to solve complex problems: A business strives to find
opportunities in existing problems of the society, and it does so through
planned innovation in areas of expertise. This guided innovation helps
solve complex problems by developing customer centric sustainable
solutions.
Increases productivity: Innovation leads to simplification and in most
cases automation of existing tasks. Companies are willing to spend
millions on increasing their productivity. Innovation, by automating
repetitive tasks and simplifying the long chain of processes, adds to
productivity of teams and thereby the organization as a whole.
Gives competitive advantage: Being ahead of competition is a need and
businesses spend majority of their strategic time building solutions to
achieve this advantage. The faster a business innovates, the farther it goes
from its competitors reach. Innovative products need less marketing as
they aim to provide added satisfaction to consumers, thus, creating a
competitive advantage. Innovation not only helps retain its existing
customers but helps acquire new ones with ease too.
(b) In managing strategic uncertainties in a rapidly changing business
environment, organizations need to adopt proactive strategies to
navigate unpredictability effectively. Here are several key approaches:
Flexibility: Organizations should build flexibility into their strategies to
enable quick adaptation to change in the environment.
Diversification: Diversifying the organization's product portfolio,
markets, and customer base can help reduce the impact of strategic
uncertainty.
Monitoring and Scenario Planning: Regularly monitoring key indicators
of change and conducting scenario planning exercises can help
organizations anticipate and prepare for different future scenarios.
Building Resilience: Investing in building internal resilience is essential
for weathering uncertainty. This includes strengthening operational

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processes, increasing financial flexibility, and improving risk management

m
capabilities.

m c. o
co
Collaboration and Partnerships: Collaborating with other organizations,

.
suppliers, customers, and partners can provide access to additional
e m
em
resources, expertise, and market opportunities. Strategic partnerships
la s
l a s
enable organizations to pool resources, share risk, and leverage each
a g
g 7
aQuestion
other's strengths to navigate uncertainty more effectively.

(a) What are the key characteristics of business products that contribute to the
overall competitiveness and dynamics of the market? (5 Marks)
(b) ‘A company's mission statement is typically focused on its present business
scope.' Explain the significance of a mission statement. (5 Marks)
Answer

m
c. o
(a) Businesses sell products. A product can be either a good or a service. It

em of business products:
might be physical good or a service, an experience.

s
la or intangible. A tangible product can
Following are the key characteristics
1. Products are either g
a tangible
be handled, seen, and physically felt, such as a car, book, pen, table,
mobile handset and so on. Alternatively, an intangible product is not
a physical good, such as telecom services, banking, insurance, or
repair services.
2. Product has a price. Businesses determine the cost of their products
and charge a price for them. The dynamics of supply and demand

m
influence the market price of an item or service. The market price is

m .co
the price at which quantity provided equals quantity desired. The

c. o m
price that may be paid is determined by the market, the quality, the

em la se
marketing, and the targeted group. In the present competitive world

s g
price is often given by the market and businesses have to work on

gla costs to maintain profitability.
a
a 3. Products have certain features that deliver satisfaction. A product
feature is a component of a product that satisfies a consumer need.
Features determine product pricing, and businesses alter features

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during the development process to optimize the user experience.
Products should be able to provide value satisfaction to the
customers for whom they are meant. Features of the product will
distinguish it in terms of its function, design, quality and experience A
customer's cumulative experience with a product from its purchase to
the end of its useful life is an important component of a product
feature.
4. Product is pivotal for business. The product is at the centre of business
around which all strategic activities revolve. The product enables
production, quality, sales, marketing, logistics and other business
processes. Product is the driving force behind business activities.
5. A product has a useful life. Every product has a usable life after
which it must be replaced, as well as a life cycle after which it is to be
reinvented or may cease to exist. We have observed that fixed line
telephone instruments have largely been replaced by mobile phones.
(b) A company's mission statement is typically focused on its present
business scope who we are and what we do. Mission statements broadly
describe an organization's present capability, customer focus, activities,
and business make up. Mission for an organization is significant for the
following reasons:

• It ensures unanimity of purpose within the organization.

• It develops a basis, or standard, for allocating organizational
resources.

• It provides a basis for innovating the use of the organisation’s
resources

• It establishes a general tone or organizational climate, to suggest a
business like operation.

• It serves as a focal point for those who can identify with the
organisation's purpose and direction.

• It facilitates the translation of objectives and goals into a work
structure involving the assignment of tasks to responsible elements
within the organization.

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• It specifies organizational purposes and the translation of these

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purposes into goals in such a way that cost, time, and performance

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parameters can be assessed and controlled.
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Question 8
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(a) Whatm a
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are channels? Why is channel analysis important? Explain the

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(b) Explain the concept of vertically integrated diversification. How is forward
integration different from backward integration? (5 Marks)
OR
(b) Recommend a tool to analyze the competitive position of various rival
companies in the market and outline the step by step procedure for using
the identified tool. (5 Marks)

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Answer

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(a) Channels represent the distribution system through which organizations

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distribute their products or provide services to customers. They play a

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pivotal role in reaching target markets, maximizing sales, and establishing
competitive advantages.
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Channel analysis is important when the business strategy is to scale up
and expand beyond the current geographies and markets. When a
business plans to grow to newer markets, they need to develop or
leverage existing channels to get to new customers. Thus, analysis of
channels that suit one’s products and customers is of utmost importance.
There are typically three channels that should be considered: sales

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channel, product channel and service channel.

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The sales channel - These are the intermediaries involved in selling
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the product through each channel and ultimately to the end user. The

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sold to your end user? For example, many fashion designers use

ag agencies to sell their products to retail organizations, so that
consumers can access them.
 The product channel - The product channel focuses on the series of
intermediaries who physically handle the product on its path from its

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producer to the end user. This is true of Australia Post, who delivers
and distributes many online purchases between the seller and
purchaser when using eBay and other online stores.
 The service channel - The service channel refers to the entities that
provide necessary services to support the product, as it moves
through the sales channel and after purchase by the end user. The
service channel is an important consideration for products that are
complex in terms of installation or customer assistance. For example,
a Bosch dishwasher may be sold in a Bosch showroom, and then once
sold it is installed by a Bosch contracted plumber.
(b) Vertically integrated diversification is a strategic approach in which a
company expands its business operations into different stages of the
production or distribution process within the same industry. This involves
either forward integration or backward integration.
The key difference between forward and backward integration lies in the
direction of expansion within the supply chain. Forward integration
moves towards the end consumer, while backward integration moves
towards the source of raw materials or components.
Forward integration allows companies to have more control over
distribution channels, improve customer relationships, and capture a
larger share of the value chain. In contrast, backward integration helps
companies secure a stable supply of inputs, reduce dependency on
suppliers, and potentially lower production costs.
Forward integration is often associated with activities such as retailing,
marketing, and after-sales services, while backward integration is
associated with activities such as manufacturing, sourcing, and
procurement.
Both types of integration offer strategic advantages such as increased
market power, cost efficiencies, and greater control over critical business
processes. However, the decision to pursue forward or backward
integration depends on factors such as industry dynamics, competitive
landscape, and the company's core competencies and resources.

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Or

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A tool to identify the market positions of rival companies by grouping

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them into like positions is Strategic Group Mapping. A strategic group

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consists of those rival firms which have similar competitive approaches

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and positions in the market.
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a procedure for constructing a strategic group map and deciding whicha
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ag firms belong in which strategic group are as follows:
1. Identify the competitive characteristics that differentiate firms in the
industry typical variables that are price/quality range (high, medium,
low); geographic coverage (local, regional, national, global); degree of
vertical integration (none, partial, full); product-line breadth (wide,
narrow); use of distribution channels (one, some, all); and degree of
service offered (no-frills, limited, full).

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2. Plot the firms on a two-variable map using pairs of these

mthe same strategy space to the same
differentiating characteristics.

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3. Assign firms that fall in about

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strategic group.
4. Draw circles arounda each strategic group making the circles
proportional to the size of the group's respective share of total
industry sales revenues.

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