CA Intermediate September 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 September 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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aCase
PART - I
Scenario 1
RS Limited is manufacturing selling soft drinks in India. The production process
involves one important process which increases the shelf life of the soft drinks.
Presently, the machine used for this purpose is an old one, in which wastage due
to breakage of glass bottles is considerably high and due to its limited capacity,
the company is not in a position to increase its production.

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The production manager has approached the CEO of RS Limited for purchasing

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an automated machine, which will drastically reduce the wastage due to

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breakage during the process of increasing shelf life of soft drinks. The automated

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machine will support increase in production. The production manager is confident

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that acquisition of the automated machine will be beneficial for the company.
Other information is as under :
• With the introduction of automated machine, additional sales and related
costs over the next five years would be as follows:

Year Additional Selling Variable Additional
Sales Unit price per Manufacturing, fixed Selling
unit (`) Selling and & Distribution

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Distribution Cost (`)

m cost per unit

c. o (` )
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se 25,000
s em 1 20,000 30 20
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gla 2 25,000 30
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20 30,000

a 3 30,000 35 20 30,000
4 32,000 35 22 35,000
5 28,000 35 22 35,000

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• Cost of acquisition of automated machine is ` 5,00,000. Residual value of
the automated machine at the end of its life of 5 years will be ` 50,000.
Depreciation on automated machine will be under Straight line method.
Depreciation is not included in the cost stated above.
• The Production Manager has estimated the cost savings (before tax) due to
reduction in breakages as under:

Year 1 Year 2 Year 3 Year 4 Year 5
Savings Cost due ` 15,000 ` 15,000 ` 20,000 ` 20,000 ` 20,000
reduction in
breakages
• The machine which is being used at present has zero written down value
and if sold, would fetch an amount of ` 10,000 only.
• The cost of capital of the company is 10%. The tax rate applicable for the
company is 30%. Ignore capital gain taxes.
P.V Factors of ` 1 at year end at 10%:

Year 1 Year 2 Year 3 Year 4 Year 5
P.V Factor of ` 1 0.909 0.826 0.751 0.683 0.621
You are required to answer the following Questions 1 to 5 :
1. What is the Profit before Taxes for the Year 2, Year 3 and Year 4 of
the investment proposal ?
(A) ` 2,35,000, ` 4,40,000, ` 4,01,000
(B) ` 1,45,000, ` 3,50,000, ` 3,11,000
(C) ` 2,05,000, ` 4,10,000, ` 3,66,000
(D) ` 1,40,000, ` 3,60,000, ` 3,31,000
2. What is the Cash Inflow after Taxes for the Year 1, Year 2 and Year 3 of the
investment proposal ?
(A) ` 1,50,000, ` 1,85,000, ` 3,45,000
(B) `1,65,000, ` 1,95,500, ` 3,55,000
(C) ` 1,60,000, ` 1,91,500, ` 3,35,000

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(D) ` 1,70,000, ` 1,90,000, ` 3,40,000

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3. What is the Discounted Cash Inflow after Taxes for the Year 1, Year 2

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and Year 3 of the investment proposal ?
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(A)
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` 1,49,985, ` 1,61,483, ` 2,66,605
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(B) m` 1,36,350, ` 1,52,810, ` 2,59,095
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g l (C) ` 1,54,530, ` 1,56,940, ` 2,55,340 a
a (D) ` 1,45,440, ` 1,58,179, ` 2,51,585
4. What is the Net Present Value of the investment proposal?
(A) ` 3,78,990.30
(B) ` 4,54,980.60
(C) ` 4,74,890.40

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(D) ` 3,89,260.70

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5. What is the Discounted Payback period of the investment proposal ?
(A) 2.74 years
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(B) 2.87 years
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(C) 2.38 years
(D) 2.48 years
6. A company has sales of ` 6,00,000, variable cost of ` 2,40,000, fixed
operating cost of ` 2,70,000. The financial leverage is 2.5. The company
wants to double its EBIT. The percentage change in ales required in order
to double its EBIT will be :

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(A) 50%
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s em (C) 40%
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gla (D) 80%
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a 7. The capital structure of KPS Limited includes 5,00,000 equity shares of ` 10
each. The market price of equity share (cum-dividend) is ` 75 per share. The
company has declared to pay dividend on equity shares @ ` 6 per share

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

which will be paid within next three days. The company has a history of
consistent growth in its dividends. It has been predicted that in the next
year KPS Limited will pay dividend on its equity shares@ ` 7.59 per share.
The rate of dividend growth will be maintained in foreseeable future. The
cost of equity is calculated as:
(A) 36.5%
(B) 34.5%
(C) 37.5%
(D) 38.5%
8. ZX Limited has total assets of ` 7,20,000 and its Shareholders' equity is
` 4,50,000. The net profit margin of ZX Limited is 12.5% and asset turnover
ratio is 1.5. Using the DuPont model, the return on equity of ZX Limited is
calculated as :
(A) 7.03%
(B) 50%
(C) 11.72%
(D) 30%
Answer Key
Question No. Answer
1. (B)
2. (C)
3. (D)

4. (C)
5. (A)
6. (B)
7. (C)
8. (D)

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SECTION – B: STRATEGIC MANAGEMENT

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PART - I

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Case Scenario 2
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decades. It has its own fleets and also has business arrangement with gl
Quick N Safe Logistics is one of the prominent transporters of goods for more
as
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than two
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aCompetition with existing players and threat from new entrants are increasing
Railways.

regularly. Customer preferences and expectations are also changing. Need for
considering new and improved means of transportation seems inevitable.
Current philosophy of the company is 'to bring the best user experience to its
customers through timely and safe delivery of goods'. While keeping this
philosophy in mind, it desires to keep ahead and reap the benefits of first mover

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advantages in the industry. In order to achieve its growth target, company is

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exploring available other options so as to have a strong presence in supply

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chain management.

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The company is of a considered view s that 'we learn as we grow’. It knows that

cumulative volume of services.
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a Since the company will have a cost advantage
the overall per mile operating cost decreases due to increase in efficiency and

over the competitors due to reduced cost of services, it can develop and adopt a
penetrative pricing strategy by setting a low price to attract more customers.
It is also observed that arrangement of transportation through railways is
becoming a concern. Growth rate is slow and market for areas being covered by
this means of transport is by and large stabilized. Profit margin is coming down
due to stiff competition. Company has to work out an action plan to maintain

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the stability.

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On the other side, one of the customer segments is looking for fast delivery of its

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goods in major cities all across the country. The prime consideration of such

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customers is quick and safe delivery of their products, irrespective of cost for the

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same. The target market of such services is very large and also increasing very

a fast. In view of the same, the company wants to reform its operation, by
engaging a dedicated team to perform with a niche marketing strategy for
transporting such goods through airways on an assurance of 'delivery by next
day'.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

In view of the given case scenario, answer MCQs from 9 to 13 with correct
option.
9. The strategy in which the company wants to keep ahead and reap the first
mover advantages in the industry, is known as:
(A) Adaptive strategy
(B) Reactive strategy
(C) Proactive strategy
(D) Responsive strategy
10. In context to service in transportation through railways, the company is
analyzing a relationship between volume of business on one axis with respect
to time on another axis. As per Product Life Cycle (PLC), which stage this
service is passing through:
(A) Introduction
(B) Maturity
(C) Growth
(D) Decline
11. In Strategic Management, the concept of decrease in the overall per mile
operating cost due to increase in efficiency and cumulative volume of services
is depicted as:
(A) Experience curve
(B) Ansoff’s growth matrix
(C) Strategic surveillance
(D) Value chain analysis
12. As per strategies propagated by Michael Porter, niche marketing strategy for
transporting goods through airways for a large customer segment on an
assurance of 'delivery by next day', is known as:
(A) Cost leadership strategy
(B) Differentiation strategy
(C) Focus differentiation strategy

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STRATEGIC MANAGEMENT

(D) Focus cost leadership strategy
13. The philosophy of the company stated as, 'to bring the best user experience
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to its customers through timely and safe delivery of goods', is indicating
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towards:
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(A) mVision statement
e Mission statement la s
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(B)
a (C) Goals of the company
(D) Objectives of the company
14. Super Products Ltd. is having four divisions, i.e. Alpha, Beta, Cos and Theta.
All the divisions are independent product center and are also integral part of
product Gama of the company. Each division contains its own set of activities
under the control of respective general manager. Each general manager is
responsible for his respective product line and its profitability. While having
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own set of competitors, each center has its own competitive advantages with
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the resources and capabilities they develop. Such structure is known as:
(A) Network structure
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(B) Divisional structure
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(C) Multi divisional structure
(D) Strategic business unit
15. Always Ahead Ltd. is an established player in FMCG, Herbs, Health care and
White goods. Company has classified its portfolio on investments in different
businesses in four quadrants as suggested by Boston Consulting Group. On
further analysis of relationship between market growth rate and relative
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market share for White goods business, it is found that opportunities to

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increase its market share are there. Emphasis need to be given to make a
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strong future with large market share even by foregoing short-term earnings

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for this business. Which strategy is being pursued by the company for White
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goods segment:

ag (A) Build
(B) Hold
(C) Harvest

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

(D) Divest
16. The correct sequence of the stages as per Kurt Lewin's model of change is:
(A) Changing to the new situation, Unfreezing the situation and Refreezing
(B) Unfreezing the situation, Refreezing and Changing to the new situation
(C) Refreezing, Unfreezing the situation and Changing to the new situation
(D) Unfreezing the situation, Changing to the new situation and Refreezing
Answer Key
Question No. Answer
9. (C)
10. (B)
11. (A)

12. (C)
13. (B)
14. (D)
15. (A)
16. (D)

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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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ag Part II
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.
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Working notes should form part of the answer.
Question 1
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(a) Financial information for the year 2023-24 of two companies, N Limited and
C Limited are as under:
a
Details N Limited C Limited
Equity share capital (` 100 each) ` 10,00,000 ` 8,00,000
Debt ` 5,00,000@10% ` 7,00,000@8%
Fixed Cost 3,00,000 3,36,000
Combined Leverage 8 4.5
Financial Leverage 2
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1.5

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You are required to calculate:

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(i) Contribution for N Ltd. and C Ltd.

las (ii) Margin of safety in % for N Ltd. and C. Ltd.
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ag (iii) Sales of C Ltd. (5 Marks)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

(b) The following information is available for SK Limited for the year ended on
31st March,2024:

Particulars `
Cost of production 15,48,000
Cost of goods sold 14,61,000
Average stock of work-in-progress 94,600
Average stock of finished goods 2,43,500
Administration and Selling expenses 4,14,000
Receivables collection period 36 days
Raw Material Storage period 65 days
Creditors payment period 63 days

You are required to calculate the working capital requirement by operating
cycle method. Assume a 360 days year. (5 Marks)
(c) Following information relates to MNP Limited for the year ended on
31sMarch, 2024:

Inventory turnover ratio (based on cost of goods sold) 7.5 times
Total assets turnover ratio 2.5 times
Long term debt to Shareholders’ fund 0.6:1
Debtors collection period 30 days
Gross profit ratio 25% on sales
Current Ratio 2.9:1

Balance Sheet as on 31st March,2024

Liabilities ` Assets `
Equity share capital 6,00,000 Fixed Assets ?
Reserves & Surplus 3,00,000 Inventories ?
Long term debt ? Debtors ?
Creditors 3,00,000 Cash ?
Total Total

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You are required to complete the Balance Sheet of MNP Limited as on
31st March,2024. Assume a 360 days year and all sales are credit sales.
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(5 Marks)
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Answer
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(a) (i) Calculation of Contribution
g la
g la N Limited a
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C Limited
Financial Leverage (FL)
EBIT EBIT
= or
EBT EBIT − Interest
EBIT EBIT
2= 1.5 =
EBIT − 50,000 EBIT − 56,000
2 EBIT – 1,00,000 = EBIT 1.5 EBIT – 84,000 = EBIT

o m = ` 1,68,000
c EBT = ` 1,12,000
EBIT = ` 1,00,000 EBIT
EBT = ` 50,000
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Combined Leverage (CL)se

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a
Contribution
=
EBT
8 = Contribution / 50,000 4.5 = Contribution / 1,12,000
Contribution= ` 4,00,000 Contribution= ` 5,04,000

(ii) Calculation of Margin of safety (MOS) in %
Contribution - Fixed Cost EBIT
MOS = =
Contribution Contribution
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N Limited
MOS = 1,68,000/5,04,000.
C Limited
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= 25% = 33.33%

s Part (ii) can also be presented in following way: gl
gla a
a Calculation of Margin of safety (MOS) in %
MOS = 1/operating leverage (OL)
OL = CL/FL

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

N Limited C Limited
OL = 8/2 = 4 OL = 4.5/1.5 = 3
MOS = 1/4 = 25% MOS = 1/3 = 33.33%

(iii) Sales of C Limited
Let assume that PV ratio is 40%
Contribution Contribution
PV Ratio = =
Sales OR Sales PV Ratio
5,04,000
Sales = = ` 12,60,000
0.40
Part (iii) of the solution can be solved by any alternative assumption.
(b) Operating Cycle = R + W + F + D – C
Where,
R = Raw material storage period = 65 days
W = Work-in-progress inventory* holding period
F = Finished goods storage period
D = Receivables (Debtors) collection period = 36 days
C = Credit period allowed by suppliers (Creditors) = 63 days
Work-in-progress inventory holding period (W)
Average Work -in-progress inventory
=
Average Cost of Production per day

` 94,600
= = 22 days
` 15, 48,000÷360 days

Finished Goods storage period (F)
Average stock of finished goods
=
Average Cost of Goods Soldper day

`2, 43,500
= = 60 days
`14,61,000÷360days

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Net Operating Cycle = 65+22+60+36-63 = 120 days

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Number of Operating Cycles in a year

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No. of days in a year
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=

m . Operating Cycle period
s e
s e= 360days = 3 times g la
la 120days a
ag Amount of Working Capital Required
Annual Operating Cost ` 14,61,000+ ` 4,14,000
= = =` 6,25,000
Number of Operating Cycles 3

(c) Working Notes:
Long term debt to Shareholder’s fund = 0.6:1

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Long term debt = 0.6 x ` 9,00,000 = ` 5,40,000
Total Assets
. c = ` 17,40,000

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Sales

la = 2.5 x ` 17,40,000 = ` 43,50,000
Total Asset turnover ratio = 2.5 times

g
TotalAssets
Sales a
Current Assets
Current ratio = = 2.9:1
Current Liabilities
Current Assets = 2.9 x ` 3,00,000 = ` 8,70,000
Fixed Assets = Total Assets - Current Assets
= ` 17,40,000 – ` 8,70,000 = ` 8,70,000

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Gross profit ratio = 25% on sales
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= ` 43,50,000 x 0.25 = ` 10,87,500

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s em Cost of Good Sold (COGS) = Sales – GP
g la
gla a
= ` 43,50,000 - ` 10,87,500

a = ` 32,62,500
Cost of Goods Sold
Inventory Turnover Ratio = = 7.5 times
Average Inventory

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

Inventory = ` 32,62,500/7.5 = ` 4,35,000
Average Accounts Receivables
Debtor Collection Period = = 30 days
Average Daily Credit Sales

Receivables = 30 days x ` 43,50,000/360 days = ` 3,62,500
Balance Sheet as on 31st March 2024

Liabilities (`) Assets (`)
Share Capital 6,00,000 Fixed Assets 8,70,000
Reserve and Surplus 3,00,000 Inventories 4,35,000
Long-term loan 5,40,000 Debtors 3,62,500
Creditors 3,00,000 Cash 72,500
(Balancing Figure)
17,40,000 17,40,000

Question 2
(a) Capital structure of T Limited as on 1st April,2024 is as under:
`
Equity Share Capital (` 10 per share) 50,00,000
10% Debentures (` 100 per Debenture) 40,00,000
12% Preference Share Capital (10,000 shares of ` 100 each) 10,00,000

Additional Information:
(1) The risk free rate of return is 10%. The Beta of T Ltd. is 1.75 and the
return on market portfolio is 12%. The Equity shares have a current
market price of ` 70 per share.
(2) The debentures are trading at a market price of ` 80 per debenture. The
Debentures are to be redeemed after 5 years at par.
(3) Preference shares are redeemable after 5 years at a premium of 5%,
presently selling at ` 104 per share.
(4) The Company pays tax at a rate of 30%.
(5) The Cost of Debentures are to be calculated on Yield to Maturity
approach.

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(6) The present value factors at 10% and 14% are:

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Year 1 2 3 4 5

m 0.909 0.826 0.751 0.683 0.621
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PVIF0.10,t

. 0.877 0.769 0.675 0.592 0.519
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PVIF0.14,t

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You are required to calculate Weighted Average Cost of Capital (after tax) of
a g
a(b)g Explain Angel Financing.
T Limited using Market value weights. (8 Marks)
(2 Marks)
Answer
(a) Cost of Equity Share Capital using Capital Asset Pricing Model (CAPM)
Approach
Ke = Rf + ß (Rm − Rf)
Ke = 0.10 + 1.75 (0.12 – 0.10)

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c
. using Yield to Maturity (YTM)
= 0.10 + 1.75 (0.02) = 0.135 or 13.5%

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Cost of Redeemable Debentures
Approach
g la cash flows
a
Step-1: Identification of relevant

Year Cash flows
0 Current market price (P0) = ` 80
1 to 5 Interest net of tax [I(1-t)] = 10% of ` 100 (1-0.30) = ` 7
5 Redemption value (RV) = Face value i.e. ` 100

Step- 2: Calculation of NPVs at two discount rates
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Year Cash Discount Present Discount Present

em se
flows factor @ Value factor @ Value

s
(`) 10% (L) (`)
g la
14% (H) (`)

gla 0 80 1.000 (80.000)
a 1.000 (80.000)
a 1 to 5 7 3.790 26.530 3.432 24.024
5 100 0.621 62.100 0.519 51.900
NPV +8.630 -4.076

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

Step- 3: Calculation of Cost of Debentures (Kd)
NPVL ` 8.630
Kd = L+ (H-L) = 10%+ (14%-10%)= 12.72%
NPVL-NPVH ` 8.630 - (`-4.076)

Cost of Redeemable Preference Share Capital using approximation method
(RV-NP)
PD+ n
Kp = (RV+NP)
2
105 - 104
12 + � �
5
Kp =
105 + 104
� �
2
= 11.67%
Calculation of WACC using market value weights

Source of Capital Market Weights After tax WACC
Value cost of (Ko)
capital
(`) (a) (b) (c) =
(a)×(b)
Equity Share Capital 3,50,00,000 0.8919 0.1350 0.1204
(` 70 x 5,00,000 equity
shares)
10% Debentures 32,00,000 0.0816 0.1272 0.0104
(` 80 × 40,000)
12% Preference Share 10,40,000 0.0265 0.1167 0.0031
Capital (` 104 × 10,000
shares)
3,92,40,000 1.000 0.1339

WACC (Ko) = 0.1339 or 13.39%
(b) Angel Financing is a form of an equity-financing in which individual or a
group of individuals provides capital to entrepreneurs and early-stage
businesses, or start-ups, in exchange for an ownership/equity in the
company.

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They may provide a one-time investment or an ongoing capital injection
via a series of investments, Angel investors are looking for a higher rate of
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return than what is given by traditional investment

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Question 3

s emper annum. All sales are on credit and average collection period is 30 glas
(a) AB Enterprises deals in hardware materials having current turnover ` 30

g a with zero bad debts. The customers are requesting to increase the credita
ldays
Lakhs

a period. As a result of increase in credit period sales will also increase. Other
information is as under:

Credit policy Increase in collection Increase in Bad debts
period (days) sales (` ) anticipated
A 15 3,00,000 1%
B 30 5,00,000 3.5%

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The Selling price is ` 100/- per unit. Variable cost per unit is ` 50/- and fixed
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cost is ` 5,00,000. Required rate of return on additional investment is 20%.

s
Creditors for variable cost are ready to give 15 days extra credit for the

l a
additional cost incurred. Assume a 360 days year.
g the present and proposed credit policies using
a
You are required to analyse
the “Total Approach” method and recommend the credit policy to be adopted.
(5 Marks)
(b) ER Private Limited has a paid-up capital ` 2,50,000 consisting of 25,000
Equity shares of ` 10 each. The Market price per share is ` 24 with PE ratio
of 8. The company is planning to purchase a plant which will cost ` 5,00,000.
This plant is expected to yield earnings before interest and taxes of

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` 2,00,000 per annum. It has two alternatives to finance the plant:

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c. o
Alternatives Equity Debt
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A 100% -

la se
las B 50% 50%
a g
ag Other information is as under:
(i) Cost of debt is 12%.

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(ii) Equity shares of face value of ` 10 each will be issued at a premium of
` 10 per share.
(iii) PE ratio of Leveraged company will be 7.
(iv) Tax rate -40%.
Advise which alternative is the most suitable to raise the funds for additional
capital, keeping in mind to maximize the benefit to its Shareholders.
(5 Marks)
Answer
(a) A. Statement showing the Evaluation of Credit Policies (Total
Approach)

Particulars Present Proposed Credit
Credit Policy
Policy
A B
Credit Period (in days) 30 45 60
Units sold 30,000 33,000 35,000
` ` `

A Expected Profit:
(a) Credit Sales @ 30,00,000 33,00,000 35,00,000
` 100 per unit
(b) Total Cost other
than Bad Debts
(i) Variable Costs 15,00,000 16,50,000 17,50,000
@ ` 50 per unit
(ii) Fixed Costs 5,00,000 5,00,000 5,00,000
20,00,000 21,50,000 22,50,000
(c) Bad Debts - 33,000 1,22,500
(d) Expected Profit [(a) 10,00,000 11,17,000 11,27,500
– (b) – (c)]

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B Opportunity Cost of 33,333 52,500 72,917

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Investments in

c. o
Receivables (i)-(ii)
C omBenefits (A – B)
c. Net 9,66,667 10,64,500 10,54,583
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eRecommendation: l a s
la s The Proposed Policy A (i.e. increase in collection
a g
ag
period by 15 days or total 45 days) should be adopted since the net
benefits under this policy are higher as compared to other policies.
Working Notes:
(i) Calculation of Opportunity Cost of Average Investment in
Receivables

Particulars Present Proposed Credit
Credit Policy

om
Policy
A B

. c
em
Credit Period (in days) 30 45 60

las
` ` `

ag
(a) Cost of Sales (Variable Cost 20,00,000 21,50,000 22,50,000
+ Fixed Cost)
(b) Average Debtors = Cost of 1,66,667 2,68,750 3,75,000
Sales × (Credit period) / 360
(c) Average Creditors for extra - 6,250 10,417
variable cost [(Variable
Cost) x 15/360]

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c. o
(d) Average Investment in 1,66,667 2,62,500 3,64,583
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c. o
Receivables or Net

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s
Working Capital = (b) – (c)

s em l a
ag
(e) Opportunity Cost @20% 33,333 52,500 72,917

gla of average Investments in
a Receivables

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(b) Calculation of No. of Equity Shares and Existing Earnings before
Interest and Taxes

Particulars Existing Alternative A: Alternative B:
Issue Equity Issue Equity
shares only Shares and 12%
Debentures of
equal amount
Number of Equity
Shares
- Existing 25,000 25,000 25,000
- Newly issued 25,000 12,500
` 5,00,000 ` 2,50,000
� � � �
` (10+10) `(10+10)
Total no. of Equity 25,000 50,000 37,500
Shares
Calculation of Existing Earnings before Interest and Taxes (EBIT)
Market Price per share ` 24
(MPS)
Price-Earnings Ratio 8 times 8 times 7 times
(PE Ratio)
Earning per share (EPS) 3
= MPS/PE Ratio
Earnings after Tax 75,000
(EAT) = EPS x No. of
Equity shares
Earning before Tax 1,25,000
(EBT) = EAT/0.6 (or
EBIT as Interest nil)

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Calculation of EPS and MPS under two financial alternatives

Particulars Existing Alternative A Alternative B
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o m
Earnings before Interest c. o
. c
and Tax:
e m
-m Existing EBIT
la s
se- From New Project
1,25,000 1,25,000 1,25,000

la a g
g
2,00,000 2,00,000

a Less: Interest on 12% 1,25,000 3,25,000 3,25,000
- - 30,000
Debentures
Earnings before Tax
(EBT) 1,25,000 3,25,000 2,95,000
50,000 1,30,000 1,18,000
Less: Tax @ 40%
Earnings after Tax (EAT) 75,000 1,95,000 1,77,000

m
EPS = EAT/ No. of Equity 3.00 3.90 4.72
Shares
. c o
Market Price per share
e m
24.00 31.20 33.04
(MPS) = EPS x Price-
la s
Earning Ratio
a g
Advise: Alternative B i.e., issue of 12% Debentures is most suitable to
maximize the market price per share.
Alternatively, Solution can also be presented in following way:
Calculation of EPS and MPS under two financial alternatives
Particulars Existing Alternative A Alternative B

m
Earnings before Interest

m
and Tax: 2,00,000
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2,00,000

c. o - From New Project 2,00,000
se
m 2,00,000

em -la
Less: Interest on

las 12% Debentures -
a g 30,000

ag Earnings before Tax (EBT)
Less: Tax @ 40%
2,00,000
80,000
1,70,000
68,000
Earnings after Tax (EAT)
from new project 1,20,000 1,02,000

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Earnings from Existing
(PAT) 75,000 75,000 75,000
Total Earnings After Tax
(EAT) 75,000 1,95,000 1,77,000
Number of Shares 25,000 50,000 37,500

EPS = EAT/ No. of Equity
3.00 3.90 4.72
Shares
Market Price per share 24.00 31.20 33.04
(MPS) = EPS x Price-
Earning Ratio

Advise: Alternative B i.e., issue of 12% Debentures is most suitable to
maximize the market price per share.
Question 4
Answer the following:
(a) Discuss any 2 advantages and 2 disadvantages of raising finance by issue of
debentures. (4 Marks)
(b) List any four assumptions of Gorden’s Model. (4 Marks)
(c) What is Leveraged Lease? Explain. (2 Marks)
OR
(d) What are the remedies for over-capitalisation? (2 Marks)
Answer
(a) Advantages of raising finance by issue of debentures are:
(i) The cost of debentures is much lower than the cost of preference or
equity capital as the interest is tax-deductible. Also, investors consider
debenture investment safer than equity or preferred investment and,
hence, may require a lower return on debenture investment.
(ii) Debenture financing does not result in dilution of control.
(iii) In a period of rising prices, debenture issue is advantageous. The fixed
monetary outgo decreases in real terms as the price level increases. In
other words, the company has to pay a fixed rate of interest.

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Disadvantages of debenture financing are:

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(i) Debenture interest and the repayment of its principal amount is an

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obligatory payment.
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(ii) The protective covenants associated with a debenture issue may be
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restrictive.
la
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(iii) Debenture financing enhances the financial risk associated with the
firm because of the reasons given in point (i).
(i) Since debentures need to be paid at the time of maturity, a large
amount of cash outflow is needed at that time.
(b) Gordon’s model is based on the following assumptions:
• Firm is an all equity firm i.e. no debt.
• IRR will remain constant, because change in IRR will change the growth

m
rate and consequently the value will be affected. Hence this

c o
• K will remain constant, because.change in discount rate will affect the
assumption is necessary.
e

s em
ladecide upon, is constant i.e. constant dividend
present value.

a g
• Retention ratio (b), once
payout ratio will be followed.
• Growth rate (g = br) is also constant, since retention ratio and IRR will
remain unchanged and growth, which is the function of these two
variable will remain unaffected.
• Ke> g, this assumption is necessary and based on the principles of
series of sum of geometric progression for ‘n’ number of years.

o m
c
• All investment proposals of the firm are to be financed through
m m. lessor
c. o (c) Leveraged Lease: Under this lease, a third party is involvedsebesides
retained earnings only.

s em and the lessee. The lessor borrows a part of the purchaseacost (say 80%) of
g l
l a a
ag
the asset from the third party i.e., lender and asset so purchased is held as
security against the loan. The lender is paid off from the lease rentals
directly by the lessee and the surplus after meeting the claims of the lender
goes to the lessor. The lessor is entitled to claim depreciation allowance.

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OR
(c) Following steps may be adopted to avoid the negative consequences of
over-capitalisation:
(i) Company should go for thorough reorganization.
(ii) Buyback of shares.
(iii) Reduction in claims of debenture-holders and creditors.
(iv) Value of shares may also be reduced. This will result in sufficient funds
for the company to carry out replacement of assets.

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SECTION – B: STRATEGIC MANAGEMENT

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Part II
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Question paper comprises of 4 questions, Answer Question No. 5 which is
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emcompulsory and any 2 out of the remaining 3 questions.
la
l a s
Question 5
a g
a(a)g M/s. MTS Ltd, is one of the mobile telephone service providers in India. It
has its own mobile network, towers and distribution channels. It operates
through its team of network operation, technicians, marketing, sales and
after sales services. Currently all the team members are on its roll.
Company knows that market is densely competitive. The environment is
quite unstable and likely to remain so. Customer's taste and preferences are
changing very fast. There is a strong need for innovation and quick

m
response. While eliminating in-house business functions, company is

c. o
considering outsourcing major activities and focusing on its core

emorganizational structure suitable for the
competencies.
In the given situation identify s
la and demerits in going for the identified
the

a g
company. Also outline the merits
structure. (5 Marks)
(b) Symergy Ltd. is manufacturing a product since year 2010. The company
was doing well till year 2022. After that its market share started declining.
Accumulated losses started mounting and in turn carried a persistent
negative impact on its cash flow. As a result morale of the employees was
not up to mark.
The Board of Directors (BoD) of the company thought it proper to continue
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in business by placing emphasis on improvement in internal efficiency. In
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view of the same, the BoD is evolving a workable action plan with intent to

em se
ensure a radical change in direction in strategy which includes revamping

s
in top management.
g l a
gla Which retrenchment strategy company should adopt a
in the given situation?
a Also state the stages in the action plan for the strategy. (5 Marks)
(c) Market for baby care, readymade garments for new born, toys and strollers
meant for babies are there. M/s. Maa ki Pasand is desirous to introduce new

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products for existing customers and new customers as well. The market for
such products is narrow. On one side there are customers who are price
conscious and on the other side there are customers who are ready to pay
premium charges for an upscale product. The company wants to charge low
price, relative to other firms that compete within the target market for
customers who are price sensitive and also wants to charge premium based
on uniqueness for rest of its products.
Which of the strategy is being considered by the company, out of strategies
as suggested by Michael Porter at business level. Also outline the
advantages and disadvantages using such strategy. (5 Marks)
Answer
(a) The suitable organizational structure for MTS Ltd is the Network
Organizational Structure. A company with such a structure is often
called a Virtual Organization.
Merits of the Network Structure:
1. Flexibility and Adaptability: The structure allows for rapid
technological changes and shifting competition patterns. This enables
the company to adapt quickly to the unstable environment and
changing customer preferences.
2. Focus on Core Competencies: The company can concentrate on its
distinctive competencies while outsourcing non-core functions to
specialized firms, which can perform them more efficiently.
3. Cost Efficiency: Through subcontracting and outsourcing, MTS Ltd
can reduce the costs associated with maintaining in-house teams.
4. Decentralized Operations: The network structure scatters business
functions across various geographical locations, reducing the need
for a large central headquarters and ensuring responsiveness in
different regions.
Demerits of the Network Structure:
1. Loss of Synergies: Contracting out functions may prevent MTS Ltd
from discovering synergies that could emerge from combining
internal activities.

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2. Over-Specialization Risk: By focusing on only a few functions, the
company may risk choosing the wrong functions, leading to a loss of
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competitiveness.
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3.
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Stress and Learning Challenges: The flatter structure and increased
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em
need for personal interactions may create stress for employees,
la
l a s especially those who lack the confidence for active participation in
a g
a(b)g In the given situation, the suitable retrenchment strategy for Symergy
organization-sponsored learning programs.

Ltd. is the Turnaround Strategy. This strategy is designed to reverse the
company’s decline and restore it to profitability, particularly when the
company is facing challenges such as declining market share, negative
cash flows, and low employee morale.
Stages in the Action Plan for Turnaround Strategy:

m
• Stage One - Assessment of Current Problems: The first step is to

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assess and diagnose the root causes of the company’s decline, such as

em
uncompetitive products, poor cash flow, or internal inefficiencies. This

a s
stage involves determining the extent of the damage caused by these
l
g
problems.
• a
Stage Two - Analyze the Situation and Develop a Strategic Plan:
Evaluate the chances of the company’s survival and develop a strategic
plan that outlines the corrective actions to be taken. This includes
identifying appropriate strategies to address internal inefficiencies,
improve competitiveness, and enhance employee morale.
• Stage Three - Implementing an Emergency Action Plan: If the
situation is critical, an immediate action plan must be executed to

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stabilize the business. This may involve cutting costs, ensuring positive

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c. o
cash flow, raising necessary funds, and addressing short-term
operational issues.
em
em s
• Stage Four - Restructuring the Business: Focus onarestructuring the
l
las company’s core business operations, especially gif they have been
a
ag significantly affected. This stage involves efforts to improve efficiency,
restructure finances, and position the company for long-term recovery
and growth.

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• Stage Five - Returning to Normal: In the final stage, the company
should begin showing signs of profitability and improving financial
performance. Strategic efforts such as introducing new products,
improving customer service, and forming alliances should be
emphasized to restore market share and build long-term sustainability.
By following these stages, Symergy Ltd. can develop a comprehensive
turnaround plan to regain its financial stability, improve operational
efficiency, and rebuild its competitive position in the market.
(c) The company, M/s. Maa ki Pasand, is adopting a focus strategy that
incorporates both focused cost leadership and focused differentiation
strategies. In the given case, M/s. Maa ki Pasand aims to target price-
conscious customers by charging low prices relative to other firms within
the narrow market of baby care products. This aligns with focused cost
leadership, where the firm competes based on price within a targeted
niche.
For the segment of customers willing to pay more for premium, unique
products, the company follows a focused differentiation strategy. It
caters to this specific niche by offering high-end, differentiated products,
which is a key feature of focused differentiation.
Advantages of using a Focus Strategy:
1. Premium prices: For the differentiated segment, the company can
charge higher prices for its upscale products.
2. Expertise in niche markets: M/s. Maa ki Pasand can develop
expertise in both price-sensitive and premium segments, making it
difficult for rivals to compete effectively.
Disadvantages of Using a Focus Strategy:
1. Distinctive competencies required: The firm needs to have strong
competencies in both cost control and product differentiation to
succeed. Otherwise, it may struggle to pursue the focus strategy
effectively.
2. High costs: Serving a narrow market can lead to higher costs due to
limited demand, which could pose challenges in maintaining
profitability, especially in the premium segment.

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3. Disappearance in long run: In the long run, the niche goods can
disappear or be taken over by large competitors by acquiring the
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c. o
same distinctive competencies.
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In conclusion, M/s. Maa ki Pasand is adopting a focus strategy by
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em
targeting specific customer niches with both cost leadership and
la
l a s differentiation. While this strategy offers opportunities for premium
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ag
pricing and market expertise, it also comes with challenges related to
cost control and distinctive competencies.
Question 6
(a) Explain in brief the term ‘objectives’ as part of strategic intent. Also outline
the characteristics, the objectives of a company must possess to be
meaningful and to serve the intended role. (5 Marks)
(b) Value Chain Analysis consist two activities: Primary activities and Support

m
activities. As per Michael Porter both the activities are intertwined. Do you

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agree with the statement? Also delineate the main areas in which primary

em
activities of any organization are grouped. (5 Marks)
Answer
l a s
a g performance targets – the results and
(a) Objectives are an organization’s
outcomes it wants to achieve. They function as yardstick for tracking an
organization’s performance and progress. Objectives with strategic focus
relate to outcomes that strengthen an organization’s overall business
position and competitive vitality.
Objectives, to be meaningful to serve the intended role, must possess the
following characteristics:

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Objectives should define the organisation’s relationship with its

c. o
♦

m environment.

c. o ♦ They should be facilitative towards achievement of m
s e mission and

s em purpose.
l a
gla ag
♦ They should provide the basis for strategic decision-making.
a ♦ They should provide standards for performance appraisal.
♦ They should be concrete and specific.

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♦ They should be related to a time frame.
♦ They should be measurable and controllable.
♦ They should be challenging.
♦ Different objectives should correlate with each other.
♦ Objectives should be set within the constraints of organisational
resources and external environment.
(b) Yes, I agree with the statement that Value Chain Analysis consist of two
activities: Primary activities and Support activities. As per Michael Porter
both the activities are intertwined. It is a tool used to examine the
activities that create value in an organization, helping to enhance
efficiency and build competitive advantage. It breaks down a business’s
operations to identify areas for improvement in value creation.
The primary activities of an organization are categorized into five areas:
1. Inbound logistics: Activities related to receiving, storing, and
distributing inputs (e.g., materials handling, stock control, and
transport).
2. Operations: Transforming inputs into final products or services (e.g.,
machining, packaging, assembly).
3. Outbound logistics: Collecting, storing, and delivering products to
customers (e.g., warehousing, transport).
4. Marketing and sales: Promoting and selling the product or service,
including advertising and sales administration.
5. Service: Enhancing or maintaining product value (e.g., installation,
repair, training).
Question 7
(a) Explain the four specific criteria of sustainable competitive advantages that
a company can use to determine the capabilities that are core
competencies. (5 Marks)
(b) Start-ups rarely aim for stability strategy. While agreeing with the
statement or otherwise, support your point of view by briefly stating as to
when the stability strategy is meaningful. State the major reasons for

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considering stability strategy as one of the corporate strategies by a
company. (5 Marks)
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Answer
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(a) Four specific criteria of sustainable competitive advantage that firms can
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em la
s
use to determine those capabilities that are core competencies.

l a
Capabilities that are valuable, rare, costly to imitate, and non-
a g
ag i. Valuable: Valuable capabilities are the ones that allow the firm to
substitutable are core competencies.

exploit opportunities or avert the threats in its external environment.
A firm created value for customers by effectively using capabilities to
exploit opportunities. Finance companies build a valuable
competence in financial services. In addition, to make such
competencies as financial services highly successful require placing
the right people in the right jobs. Human capital is important in
creating value for customers.
o m
c
. rare capabilities and very few of
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ii. Rare: Core competencies are very

s e
a of competitive advantage for any one of
the competitors possess this. Capabilities possessed by many rivals

g l
are unlikely to be sources
a
them. Competitive advantage results only when firms develop and
exploit valuable capabilities that differ from those shared with
competitors.
iii. Costly to imitate: Costly to imitate means such capabilities that
competing firms are unable to develop easily.
iv. Non-substitutable: Capabilities that do not have strategic
equivalents are called non-substitutable capabilities. This final

o m
criterion for a capability to be a source of competitive advantage is

m .c
c. o
that there must be no strategically equivalent valuable resources that
are themselves either not rare or imitable.
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efor a stability
em l a s
s strategy because they are in the early stagesg of ideation and
(b) Agree with the given statement. Start-ups rarely aim

l a a
ag development, where speed and agility are critical. Stability strategy is
more relevant for businesses that have reached maturity, where
maintaining current operations and market share becomes a priority.
Start-ups, however, focus on rapid growth and market penetration, and

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stability is usually considered when a business has expanded to full
capacity.
A stability strategy is meaningful in the following scenarios:
• When a firm continues serving the same markets with the same
products and services.
• Firms whose products are in the maturity stage of the product life
cycle or who have a substantial market share may opt for stability to
retain their position.
• Stability helps consolidate gains after rapid expansion, optimize
returns on committed resources, and enhance functional efficiencies.
Major reasons for choosing a stability strategy include:
• Maturity of products in the life cycle.
• Comfort of staff with fewer changes and risks.
• Stable external environment.
• A need to consolidate after rapid growth or expansion.
• Where it is not advisable to expand as it may be perceived as
threatening.
Question 8
(a) In light of the five forces as propagated by Michael Porter, explain the
common barriers which may cause restrain for the keenness of new
entrepreneurs. (5 Marks)
(b) Strategic performance measures are key indicators that organizations use
to track the effectiveness of their strategies and make informed decisions
about resource allocation. In light of the statement, state various types of
Strategic performance measures. (5 Marks)
OR
(b) Explain the pointers for navigating change during digital transformation.
(5 Marks)

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Answer
(a) In light of Michael Porter's Five Forces, new entrepreneurs often face
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significant barriers that restrain their keenness to enter an industry. These
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barriers increase the competitiveness of existing firms and discourage
s e m
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new entrants, impacting industry profitability.
la
l a s
Common barriers that may restrain new entrepreneurs include:
a g
ag (i) Capital Requirements: When a large amount of capital is required to
enter an industry, firms lacking funds are effectively barred from the
industry, thus enhancing the profitability of existing firms in the
industry.
(ii) Economies of Scale: Many industries are characterized by economic
activities driven by economies of scale. Economies of scale refer to
the decline in the per-unit cost of production (or other activity) as

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volume grows.

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(iii) Product Differentiation: Product differentiation refers to the

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product special or unique in the eyes of customers.
(iv) Switching Costs: Togsucceed in an industry, new entrant must be
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able to persuade existing customers of other companies to switch to
its products. When such switching costs are high, buyers are often
reluctant to change.
(v) Brand Identity: The brand identity of products or services offered by
existing firms can serve as another entry barrier. Brand identity is
particularly important for infrequently purchased products that carry

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(vii) Possibility of Aggressive Retaliation: Sometimes the mere threat of
aggressive retaliation by incumbents can deter entry by other firms
into an existing industry.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: SEPTEMBER 2024

(b) Strategic performance measures are key indicators used by organizations
to track the effectiveness of their strategies and make informed decisions
about resource allocation. These measures provide a snapshot of
performance, enabling leaders to assess whether their strategies align
with organizational goals and make necessary adjustments for
improvement.
Types of strategic performance measures include:
1. Financial Measures: These include revenue growth, return on
investment (ROI), and profit margins, which help in understanding the
financial performance and profitability of the organization.
2. Customer Satisfaction Measures: Metrics like customer satisfaction,
retention, and loyalty give insights into how well the organization
meets customer needs and the quality of its products and services.
3. Market Measures: Market share, customer acquisition, and referrals
indicate the organization’s competitiveness and ability to attract and
retain customers in the marketplace.
4. Employee Measures: Employee satisfaction, turnover rate, and
engagement provide insights into the organization’s ability to create
a positive work environment and retain talent.
5. Innovation Measures: These include R&D spending, patent
applications, and new product launches, reflecting the organization's
capacity to innovate and meet evolving customer demands.
6. Environmental Measures: Environmental measures such as energy
consumption, waste reduction, and carbon emissions offer insights
into the organization's impact on the environment. These measures
help track sustainability efforts and ensure that the organization is
operating in an eco-friendly and socially responsible manner.
These measures help organizations ensure their strategies are
effectively executed, aligned with their objectives, and adaptable to
changes in both market and environmental contexts.
Or
Any organisation may find the work of digital transformation challenging
and overwhelming. To ensure that a digital transition is effective, change

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FINANCIAL MANAGEMENT AND
SUGGESTED ANSWER
STRATEGIC MANAGEMENT

management is essential. Here are some pointers for navigating change
during the digital transformation:
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1.
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Specify the digital transformation’s aims and objectives: What is
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the intended outcome? What are the precise objectives that must be
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accomplished? It will be easier to make sure that everyone is on the
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l a s same page and pursuing the same aims if everyone has a clear grasp
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ag 2. Always, always, always communicate: It might be challenging for
of the goals.

people to accept change and adjust to it. Ensure that you routinely
and honestly discuss the objectives of the digital transformation and
how they will affect stakeholders, including employees, clients, and
other parties.
3. Be ready for resistance: Even when a change is for the better, it can
be challenging for people to embrace it. Have a strategy in place for

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dealing with any resistance that may arise.
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. Changes should ideally be
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4. Implement changes gradually:

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awith too much change at once, this will give
implemented gradually rather than all at once. In order to avoid

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overwhelming individuals
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people time to become used to the new way of doing things.
5. Offer assistance and training: Workers will need guidance in the
new procedures, software applications, etc.
In conclusion, effective completion of the massive project known as
digital transformation depends on meticulous planning and change
management. Digital transformation efforts are more likely to fail without
change management. Organizations can successfully integrate a new

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digital system by planning for and managing the changes that must take

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place. Any project involving digital transformation must include it.
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