CA Intermediate May 2026 Suggested Answers Paper 6 Financial Management and Strategic Management

FOR CA INTERMEDIATE EXAM PREPARATION

CA Intermediate 2026
Suggested Answers ·
Paper 6 Financial
Management and
Strategic Management
EXAM YEAR TYPE

CA Intermediate 2026 Suggested Answers
SUBJECT DATE

Paper 6 Financial Management and Strategic Management May 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 6: FINANCIAL MANAGEMENT AND
STRATEGIC MANAGEMENT
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PART – I Multiple Choice Questions

g laScenario - I a
aXYZ Ltd. is engaged in manufacturing of an electronic component, to be used by
Case

industries producing electronic gadgets for domestic use. The company is a
leveraged company, currently paying annual interest of ` 33 lakhs on its 11%
debt. The company is financially prudent. It has a balance of ` 50 lakhs as
retained earnings. The company maintains Long-term Debt to Equity ratio of 2:
1. The face value per share of the company is ` 10.
Due to operating in a competitive market, the marketing manager of the
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company has submitted a report exhibiting significant potential for sales growth.
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The production manager has endorsed the idea and has suggested adopting latest

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technology at the workplace. In case the company implements new technology,

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the production efficiency will increase which will bring down the overall cost of
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production. To procure and install this new technology, the company requires an
additional fund of ` 3 crores. This additional fund will be arranged in such a
manner that it will not impact the present Long-term Debt to Equity ratio. The
additional debt will carry interest rate of 12% p.a. As a result of implementing
the new technology, it is anticipated that ROI will increase by 3% from present
ROI of 15%. Applicable tax rate is 30%.
Based on the facts mentioned above pertaining to XYZ Ltd., you are
required to answer the following questions 1 to 5:
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1. What is the equity share capital outstanding before the additional fund is
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(A) ` 1.00 crores

las (B) ` 1.50 crores
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ag (C) ` 0.50 crores
(D) ` 2.00 crores (2 Marks)

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2. What is the total capital employed before and after additional financing?
(A) ` 4.00 crores and `7.00 crores
(B) ` 5.00 crores and `8.00 crores
(C) ` 4.50 crores and ` 7.50 crores
(D) ` 5.50 crores and ` 8.50 crores (2 Marks)
3. Compute the EPS after additional financing. What will be the percentage
increase in EPS of the company, after introducing the additional fund?
(A) ` 2.73, 13.04%
(B) ` 2.18, 35.65%
(C) ` 2.73, 11.54%
(D) ` 2.18, 26.28% (2 Marks)
4. What will be the expected MPS after the change in funds, if company expects
a P/E ratio of 20?
(A) ` 43.68
(B) ` 54.60
(C) ` 70.00
(D) ` 47.60 (2 Marks)
5. What will be the post-tax weighted average cost of debt after additional
financing?
(A) 7.70%
(B) 8.05%
(C) 9.00%
(D) 7.98% (2 Marks)
6. A company has credit sales of ` 20,00,000 with an average collection period
of 35 days. It wants to liberalize its existing credit terms which are expected
to increase sales to ` 25,00,000. However, average collection period is
expected to decline to 10 days. Profit Volume ratio is 20% and opportunity
cost (post-tax) is 6%. Tax rate is 40%. Assume 360 days in a year.

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What is the incremental investment in debtors and its impact on post-tax
profitability?
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Incremental Investment in
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Impact on Post -tax
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(A)
e m ` (1,25,000) ` 7,500
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(B) ` (1,00,000) ` (6,000)
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(D)
` (1,25,000)
` (1,00,000)
` (7,500)
` 6,000
(2 Marks)
7. FG Ltd. is appraising a one-year investment plan, which requires an initial
outlay of ` 1,00,000. At the end of term, it will be matured at ` 1,25,000. The
plan has a beta of 1.3, risk free rate of return 10% and market rate of return

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18%. Calculate the required rate of return and decide whether the plan is

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worthwhile.
(A) 25%, The plan is not worthwhile..
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(B) 20.4%, The plan is not worthwhile.
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(C) 20.4%, The plan is worthwhile.
(D) 25%, The plan is worthwhile. (2 Marks)
8. Details of a project are given below:

Initial outlay ` 800 lakhs
NPV at 16% discount rate ` 50.71 lakhs
NPV at 20% discount rate ` (26.84) lakhs
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What will be Internal rate of return (IRR) of the project? If cost of capital is
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18.50%, should the project be accepted?

s em (A) 16.00%, Yes
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gla (B) 18.62%, Yes a
a (C) 18.00%, Yes
(D) 18.62%, No (1 Mark)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

Case Scenario - II
Alex Motor Company was born out of crisis in a small garage on the edge of a
dusty town. In the early 90s when the fuel prices soared and imported vehicles
flooded the market, many automobile companies were forced to shut down their
operations. Many employees lost their jobs.
Ajay Sharma, a production engineer at a failing automobile plant along with ten
of his colleagues, rented an abandoned garage and a portion of unused
equipment from a shutdown factory and decided to start operations. Their main
aim was to transform Indian auto industry by providing comprehensive,
affordable and fuel-efficient vehicles. Instead of chasing volumes, the company
focused on customization-adjustable cargo layouts, fuel efficient engines and
easy maintenance to cater demand of narrow market.
Alex Motor Company developed its first commercial model Alex One which was
simple but could survive floods, heat waves, bumpy roads, and most importantly
was fuel efficient. The customers loved it and hence sales grew steadily.
Ajay made a simple promise that every decision would begin on the factory floor
and not in the board-room. Mechanics were encouraged to suggest improvement
in design and were rewarded for the best innovations, but success brought a new
challenge.
The younger generation demanded technology with higher connectivity, better
safety systems and cleaner energy. Due to these matters Alex Motor Company
lagged behind from the flashy foreign brands that entered the Indian market.
As a result, sales declined and critics called the company outdated. Ajay, now the
CEO of the company, faced defining choice, either to sell the company or reinvent
it.
Ajay's team of engineers, through participation, shared their next plan of action
to the employees for the further technology upgradation, in order to gain growth
and success of business. The team took the initiative to develop the good working
culture and code of ethics. They focused on training and various motivational
plans for employees so they can be tuned up with new working system. In this
way the company made its breakthrough with the launch of Alex Electra; a hybrid
vehicle designed specifically for congested urban environment. It was not just the
technology that made Electra different, but the mindset. Engineers, designers and

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data-analysts worked side by side, decision making became faster and mistakes
were treated as learning cost and not failures.
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Alex Motor Company also established company-owned showrooms and service
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centers to increase their sales and provide free after-sale services which led to
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improved customer services and brand image.
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Today Alex Motor Company's success is studied in business schools as it proved
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that companies that listen, learn and adapt can outlast any crisis.
on the above case scenario, choose the correct answer to questions
no. 9 to13:
9. Identify the initial strategy to gain competitive advantage adopted by Alex
Motor Company.
(A) Growth strategy emphasizing strong and fuel-efficient vehicles.

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(B) Focused cost leadership strategy emphasizing fuel efficiency and easy

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(C) Focused differentiation strategy. emphasizing customized commercial
maintenance.

s emand fuel efficiency rather than mass
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vehicles, easy maintenance
production.
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(D) Expansion strategy emphasizing customized vehicles and mass
production. (2 Marks)
10. Use McKinsey's 7S Model to identify the soft elements that change during
reinvention.
(i) Shared value

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(ii) Style

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(iv) Staff

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(A) Only (i) and (ii) are correct.

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(B) Only (i), (iii) and (iv) are correct.
(C) (i), (ii), (iii) and (iv) are correct.
(D) Only (i), (ii) and (iv) are correct. (2 Marks)

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

11. Strategic Management allowed Alex Motor Company to be
(A) More directive towards the cross-functional team to reduce
communication barrier.
(B) Partly proactive as the company anticipated future urban mobility needs
and partly reactive as the company responded to the declining sales.
(C) More proactive as it readily launched Alex Electra with updated
technology to stay competitive.
(D) More authoritative in taking faster decisions. (2 Marks)
12. Ajay Sharma undertook a retrenchment strategy to save his company when
the sales of his company declined, and his company was called outdated. The
action plan undertaken to implement it was
(i) Assessing the current problem
(ii) Providing innovative transport service
(iii) Developing an action plan with specific goals
(iv) Restructuring organizational hierarchy
Which of the above actions does not pertain to the strategy undertaken by
Ajay Sharma?
(A) (ii) and (iv)
(B) (iii) and (iv)
(C) (i), (iii) and (iv)
(D) Only (iii) (2 Marks)
13. The mission of Alex Motor Company was:
(A) To adopt new technology such as connectivity, advanced safety features
and cleaner energy solutions.
(B) Introducing cross-functional teams so that decision making process
becomes faster.
(C) To establish company owned showrooms and service centers to increase
their sales and provide after sale services.

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(D) To transform Indian auto industry by providing comprehensive,
affordable and fuel-efficient vehicles through present capability and
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activities. (2 Marks)
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14. Altex Ltd. is a company that produces and sells home appliances. However,
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at present the company is facing stiff competition from the new entrants who
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are offering similar products at a lower price. To stay competitive the top
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management of the company decided to adopt the best cost provider
strategy. Which of the following actions should the company take to align
with their best cost provider strategy?
(A) Reducing the price of their products without making changes in
manufacturing process and product features.
(B) Streamlining manufacturing processes to reduce cost, sourcing materials
from cost-effective suppliers and adding innovative features to their
products.
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(C) Streamlining manufacturing processes to reduce cost with no innovation

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in product feature.

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(D) Focusing solely on premium features thereby increasing the cost of the

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products to reflect the added value. (2 Marks)
15. A fashion retail company is designing a new marketing campaign for
Generation Z. During its market survey, the company observes that
customers' personal preferences, attitudes, lifestyle, motivation, and
perception of quality strongly influence their buying behaviour, even before
they are exposed to advertisements or peer opinions. Considering these facts,
the company should primarily focus on which conceptual domain of the

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consumer behaviour?

m (A) Cultural influences
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(B) Social influences

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(C) External influences

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(D) Internal influences (2 Marks)

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16. In General Electric (GE) Nine-Cell Matrix, which two dimensions form the
basis of portfolio analysis to develop the strategic options?
(A) Business Strength and Market Attractiveness
(B) Company's Strength and Weakness
(C) Market Share and Market Growth Rate
(D) Competitive Intensity and Pricing Trends (1 Mark)
Answer Key

MCQ. No. Correct Answer
1. (A)
2. (C)
3. (A)
4. (B)
5. (D)
6. (D)
7. (C)
8. (B)
9. (C)
10. (D)
11. (B)
12. (A)
13. (D)
14. (B)
15. (D)
16. (A)

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PART – II Descriptive Questions

SECTION A: FINANCIAL MANAGEMENT
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Question No. 1 is compulsory.

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Attempt any two questions out of the remaining three questions.

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In case, any candidate answers extra question(s)/ sub-question(s) over and
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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.
Question 1
(a) Finance manager of A Ltd. noticed that a 5% increase in sales leads to
increase of ` 9,000 in operating profit. The company operates with a

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contribution margin of 40%, fixed annual operating cost of `1,35,000 and
interest obligation of ` 30,000.
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You are required to calculate:
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(i) Current level of sales of the company.
(ii) Operating, financialaand combined leverage. (2 + 3 = 5 Marks)
(b) Z Ltd. has issued 8% convertible debentures of ` 100 each with a remaining
maturity period of five years. The current market price per debenture is
` 85. At the time of maturity, debenture holders have an option to either
redeem it at a premium of 5% or to convert each debenture into 5 equity
shares. Current market price per equity share is `16. The company has just
paid dividend of ` 8.03 per equity share. Seven years ago, it paid dividend of

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` 5.00 per equity share.

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Applicable tax rate is 30%.

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Compute the post-tax cost of debentures using present value method.

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Year 1 2 3 4
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ag PVIF0.10,t 0.909 0.826 0.751 0.683 0.621 0.564 0.513
PVIF0.12,t 0.893 0.797 0.712 0.636 0.567 0.507 0.452

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Interest 1 2 3 4 5 6 7 8 9
Rate
FVIFi,5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539
FVIFi6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677
FVIFi7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828

(5 Marks)
(c) Following information is related to Exe Ltd. for the year ended 31st March,
2026:

Total dividend coverage ratio 2.863 times
Dividend yield on the equity shares 4%
Market price per equity share ` 40.00
Equity share capital of 10 each 12,00,000
Preference share capital of 10 each ` 3,00,000
Price-earnings ratio 8 times

You are required to calculate:
(i) Total dividend paid to equity shareholders
(ii) Earnings per share
(iii) Rate of preference dividend
(iv) Total profit after tax (1 + 1 + 2 + 1 = 5 Marks)
Answer
(a) (i) Current level of Sales:
Let the present sales be = `X
or 5% of Sales×40% = 9,000
or 0.05X x 0.40 = 9,000
or 0.02X = 9,000
Current Sales (X) = ` 4,50,000
P/V ratio = Change in profit/ Change in sales

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0.40 = 9,000/X

X = 9,000/0.40
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c m
= Rs 22,500

m . total sales; s e
se = Change in sales/ % change in sales la
Hence,

la a g
ag = ` 22,500/0.05
= ` 4,50,000

Income Statement

Particulars (`)
Sales 4,50,000

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Contribution (40%) 1,80,000

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. tax)
Less: Fixed annual operating cost (1,35,000)

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EBIT (Earnings before interest and 45,000
Less: Interest
la s (30,000)
EBT (Earnings beforegtax)
a 15,000

(ii) Leverage

Contribution ` 1,80,000
Operating Leverage = = =4
EBIT ` 45,000
EBIT ` 45,000
Financial Leverage = = =3
EBT ` 15,000
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Combined Leverage = Operating Leverage × Financial Leverage

c. o = 4 × 3 = 12
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gla Contribution ` 1,80,000
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Combined Leverage = = = 12
EBT ` 15,000

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(b) Calculation of growth rate in dividend
8.03 = 5 (1+g)7
1.606 = (1+g)7
g = 7%
Price of share after 5 years
P5 = 16 x FVIF 7%,5
= 16 x 1.403 = 22.45
Conversion value of shares = 22.45 × 5 = ` 112.25 (RV)
Redemption Value of Debenture (RV) = 100+5% premium = ` 105
Since, conversion value is higher, debenture holders will prefer conversion.
After-tax Interest = 8(1−0.30) = ` 5.60

Year Cash Inflow (`) PVIF PV (`) PVIF PV (`)
@ 10% @12%
0 85 (Current Market 1 (85) 1 (85)
Price)
1-5 5.60 (Interest) 3.79 21.224 3.605 20.188
5 112.25 (Conversion 0.621 69.707 0.567 63.646
Value)
Total PV 5.931 -1.166

IRR = L+ NPVL
(H-L )
NPVL -NPVH

= 10%+ 5.931
(12% -10% ) = 11.67%
5.931-(-1.166)

(c) Dividend per Equity Share (DPS) = 4 % of `40.00 = `1.60
No. of Equity Shares = `12,00,000 / `10 = 1,20,000 shares
(i) Total Dividend Paid to Equity Shareholders
1,20,000 × `1.60 = `1,92,000

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(ii) Calculation of Earnings Per Share (EPS)

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P/E ratio =

m = 40 / EPS
EPS

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EPS = `5

g a Rate of Preference Dividend
l(iii) a
a Profit Available to Equity Shareholders
EPS × No. of Equity Shares = `5 × 1,20,000 = `6,00,000
Let preference dividend =P
Then, PAT = 6,00,000 + P
Total dividend =Equity Dividend+ Preference Dividend

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=1,92,000 + P

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em
Dividend coverage ratio = 2.863

2.863
l a s= (1,92,000+P )
( 6,00,000+P )

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6,00,000+P = 2.863(1,92,000+P)
6,00,000+P = 5,49,696+2.863P
50,304 =1.863P
P = ` 27,000
Rate of Preference Dividend= 27,000/3,00,000 x 100=9%

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(iv) Total Profit after Tax
m = `6,00,000 + `27000 = `6,27,000.
c. o QuestionPAT2 s em
s em g l a in the operation
gla (a) R Ltd. wants to reduce the dependency of manual
a
workforce

a of its factory by adopting automatic machine. It has two options under
consideration Machine M and Machine N. Both the machines serve the same
job and are also able to satisfy the purpose of the company.

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Details of both the machines are given below:

Machine M Machine N
Purchase cost (`) 4,50,000 3,50,000
Estimated useful life 5 years 7 years
Estimated salvage value (% of cost) 10% 10%
Annual saving to wages (`) 11,00,000 12,00,000
Runing cost per year (excl. depreciation) (`) 9,00,000 11,00,000
Annual saving in scrap due to use of 1,00,000 1,20,000
machine in place of manual work force (`)

The Company's cost of capital is 9%. Corporate tax rate is 25%. Depreciation
will be charged on SLM basis.
(i) Calculate NPV and Profitability index for each machine.
(ii) Which machine should be selected on the basis of Equivalent Annualized
Criterion?

Year 1 2 3 4 5 6 7
PVIF 0.09, t 0.917 0.842 0.772 0.708 0.650 0.596 0.547
PVIA 0.09, t 0.917 1.759 2.531 3.239 3.889 4.485 5.032

(4 + 3 = 7 Marks)
(b) B Ltd. has received an offer to get a discount of 2% on an invoice value of
`75,000, if payment is made within one month instead of normal credit terms
of 3 months. If the company makes early payment, it will need to finance the
payment through a bank overdraft of 10% p.a. Tax rate is 30%.
Whether B Ltd. should accept the offer? Support your decision with
calculations. (3 Marks)
Answer
(a) Evaluation of Alternatives
Working Notes:
(4,50,000 - 45,000)
Depreciation on Machine M = = ` 81,000
5

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(3,50,000 - 35,000)
Depreciation on Machine N = = ` 45,000
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(i) NPV and PI for each machine

o m m
c
. Savings:
Particulars Machine M (`) Machine N (`)
s e
m la
seDirect Wages
Annual

la Scraps a g
g
11,00,000 12,00,000

a 1,00,000 1,20,000
Total Savings (A) 12,00,000 13,20,000
Annual Running Cost (B) 9,00,000 11,00,000
Annual Cash Savings (A-B) 3,00,000 2,20,000
Less: Depreciation 81,000 45,000
Annual Savings before Tax 2,19,000 1,75,000

Annual Savings /Profits after tax.co
Less: Tax @ 25%
m 54,750 43,750

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1,64,250 1,31,250

Annual Cash Inflows la
Add: Depreciation
s 81,000 45,000

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2,45,250 1,76,250
PVIFA 3.889 5.032
PV of Annual Cash Inflows 9,53,777.25 8,87,890
PV of Salvage Value 45,000 x 0.650 35,000 x 0.547
= ` 29,250 = ` 19,145
Total PV of Inflows 9,83,027.25 9,06,035
NPV 9,83,027.25- 9,06,035-
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4,50,000 3,50,000
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= ` 5,33,027.25 = ` 5,56,035

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9,83,027.25
4,50,000 a
PV Index

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3,50,000

la
Present Value of Cash Inflow
=
g Investment =2.18 =2.59
a (ii) Equivalent Annualized NPV
5,33,027.25
Machine M = = ` 1,37,060/-
3.889

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

5,56,035
Machine N = = ` 1,10,500/-
5.032
So machine M should be selected on the basis of Equivalent Annualized
Criterion.
(b) Discount on early payment = 2% x 75,000 = `1,500
Net Benefit (A) = ` 1,500 - Tax (30%) = ` 1,050
The company must borrow the discounted invoice amount via a bank
overdraft for the 2-month period.
Amount to be Borrowed = 75,000 − 1,500 = ` 73,500
Bank overdraft interest for 2 months:
=P×R×T
= 73,500 × 10% × 2/12
= ` 1,225
After tax interest cost = 1,225 × (1−0.30)
= 1,225 × 0.70
= ` 857.50
Net Saving = Net Benefit – Net Interest Cost
= ` 1,050 – ` 857.50
= ` 192.50 (Net Saving)
Since the company gains a net benefit of ` 192.50 by making early payment,
B Ltd. should accept the discount offer.
Alternatively, the question can be solved as below:
Annualized benefit of discount
Discount % 12 months
= ×
100-Discount % Credit Period – Discount Period
= 2/98 x 12/2 x 100 =12.245 %
Post tax benefit = 12.245 x (1-0.3) =8.571
Post tax Bank OD rate = 10% x (1-0.3) =7%
Benefit of discount is more than cost of OD. Hence, discount should be
accepted.

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Question 3

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(a) K Ltd. provides the following information:

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Net profit ` 50,00,000
. e m
e m
10% Preference share capital @ `100 each ` 2,00,00,000

la s
a s Number of equity share outstanding
l Rate of return on investment
5,00,000
a g
ag Cost of equity
25%
15%

You are required to:
(i) Calculate EPS and also calculate market price per equity share as per
Walter's Model with the retention ratio of 20%.
(ii) If the company aims to keep the market price of its equity share at ` 60
each, what retention ratio should be adopted?
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(iii) What would be optimum dividend payout ratio as per Gordon's Model?

s em (2 + 1 + 1 = 4 Marks)

g l a
(b) AR Ltd. has given following data for the year ended 31st March, 2026:
• a
Receivables are collected on an average after 60 days,
• Inventories are held for average period of 90 days before being sold.
• The company usually settles its payables with suppliers after 30 days.
• The total sales of the company amounts to ` 200 lakhs, which is earned
evenly throughout the year. All sales are credit sales. Net profit margin is
10%. The company has not incurred any non-operating expenses during

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the year.

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c. o m
• Tax rate is 30%.

em
• Assume 360 days in a year.
la se
las Opportunity cost of investment is 12%.
a g
g
•

a On the basis of the above data:
(i) Calculate the cash cycle and the minimum cash balance to be
maintained to meet its obligations.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(ii) The company is planning to propose a scheme, whereby it will offer a
cash discount of 2% to debtors to reduce the debtors' collection period
by 30 days. It is expected that 60% of the debtors will avail the scheme.
(A) What will be reduction in the minimum cash to be maintained to meet
obligation after the proposed scheme is adopted?

(B) What will be net saving due to such scheme?
(C) Should the company adopt the scheme? (2 + 4 = 6 Marks)
Answer
(a)

(`) in lakhs
Net Profit 50
Less: Preference dividend 20
Earning for equity shareholders 30

(i) Earning per share = 30,00,000/5,00,000 = ` 6.00
Market Price as per Walters model
r
D+ (E - D)
P = Ke
Ke

0.25
4.8+ (6 - 4.8)
P = 0.15
0.15
P = ` 45.33
(ii) Retention ratio when market price is ` 60 each
Let, the dividend per share be D to get share price of 6O
r
D+ (E - D)
P = Ke
Ke

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0.25
D+ (6 -D)
0.15
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or 60 =

c. o
0.15
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.co m
0.15D +1.5 - 0.25D
e
or 9 =

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eor 1.35
0.15

la s
l a s = 0.15D +1.5- 0.25D
a g
ag or 0.10D = 0.15
D = ` 1.50
Retention ratio= 4.5/6 = 0.75 = 75%
(iii) As per Gordon’s model, when r > Ke, optimum dividend payout ratio
is ‘Zero’.
(b) (i) Cash cycle = 60 days + 90 days – 30 days =120 days (4 months)
m
Cash turnover
c. o
= 12 months (360 days)/4months (120 days) = 3.
Total Cash Outlay = Sales – m
e
sLakhs−20 Lakhs = ` 180 Lakhs
Net Profit

g l
= 200 a
Minimum operating a
cash = Total operating annual outlay/cash turnover
= ` 180 lakhs/3 = ` 60 lakhs.
(ii) (A) Reduction in Minimum Cash Balance
First, we calculate the new average collection period and the new
cash cycle.

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New Average Collection Period: 30 days

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New Cash Cycle: 30 + 90 −30 = 90 days

em
New Cash Turnover: 360/90 = 4 times
la s
las a g
g
New Minimum Cash Balance: 180/4 = ` 45 Lakhs

a Reduction in Cash Balance: 60 Lakhs−45 Lakhs = ` 15 Lakhs

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(B) Net Saving Due to Scheme
Opportunity Cost Saving = 12% of reduction in cash balance
(15 Lakhs) x (1-0.30) = ` 1.26Lakhs
Cost of Cash Discount = 2% of 60 % of Total Sales x (1-0.30)
= 0.02 × 0.60 × 200 Lakhs = ` 1.68 Lakhs

Net Saving =1.26 Lakhs−1.68 Lakhs = ` (0.42 Lakhs)
(C) Recommendation
No, the company should not adopt the scheme.
Solution for part (ii) can be done in following alternative way:
If we assume
• 60% of debtors will pay 30 days early (Collection period = 30 days).
• The remaining 40% of debtors will not avail the scheme and will
continue to pay after the normal 60 days.
Therefore, the New Average Collection Period:
= (60%×30 days) + (40% × 60 days) = 18 days+24 days = 42 days
Cash Cycle & Cash Balance:
• New Cash Cycle = 90 (Inventory) + 42 (New Debtors) - 30
(Payables) = 102 days
• New Cash Turnover = 360 / 102 = 3.529 times
• New Minimum Cash Balance = ` 180 Lakhs / 3.529 = ` 51 Lakhs
• Reduction in Cash Balance = ` 60 Lakhs - ` 51 Lakhs = ` 9 Lakhs
(B) Net Savings:
• Opportunity Cost Saving: ` 9 Lakhs × 12% × (1 - 0.30) = ` 0.756
Lakhs
• Cost of Cash Discount: 2% × 60% × 200 Lakhs × (1 - 0.30) = ` 1.68
Lakhs
• Net Saving: ` 0.756 Lakhs - ` 1.68 Lakhs = (` 0.924 Lakhs) or (Net
Loss of ` 92,400)

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(C) No, the company should not adopt the scheme, because it results in

m
a net financial loss of ` 0.924 Lakhs.
Question 4
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(a) MM Hypothesis of dividend policy is based on certain assumptions. What are
s e m
e m la
s
those assumptions without which the hypothesis cannot hold? Explain briefly.

l a (4 Marks)
a g
a(b)g An Indian exporter has shipped goods to a foreign buyer, but the export
proceeds are yet to be realised. He approaches the bank for immediate
finance assistance.
(i) Identify the type of finance involved.
(ii) Explain any three forms of such type of finance. (1 + 3 = 4 Marks)
(c) How do the concepts of profit maximization and wealth maximization differ
in terms of objective, risk, time horizon and sustainability? (2 Marks)

o m
c
. called 'High Yield Bonds'?
OR

e m
(c) What are Junk Bonds and why are they

l a s (2 Marks)
Answer ag
(a) MM hypothesis is based on the following assumptions:
• Perfect capital markets: The firm operates in a market in which all
investors are rational and information is freely available to all.
• No taxes: There are no taxes or no tax discrimination between
dividend income and capital appreciation (capital gain). It means there

m
is no difference in taxation of dividend income or capital gain. This

c. o
assumption is necessary for the universal applicability of the theory,
m
c. o m
since the tax rates may be different in different countries.
• Fixed investment policy: It is necessary to assume that eall investment
em l s
a after using
las a g
should be financed through equity only, since implication

ag debt as a source of finance may be difficult to understand.
impact will be different in different cases.
Further, the

• No floatation or transaction cost: Similarly, these costs may differ
from country to country or market to market.

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• Risk of uncertainty does not exist. Investors are able to forecast
future prices and dividend with certainty and one discount rate is
appropriate for all securities and all time periods.
(b) Post-shipment Finance is the type of finance involved:
It takes the following forms:
(a) Purchase/discounting of documentary export bills: Finance is
provided to exporters by purchasing export bills drawn payable at sight
or by discounting usance export bills covering confirmed sales and
backed by documents including documents of the title of goods such
as bill of lading, post parcel receipts, or air consignment notes.
(b) E.C.G.C. Guarantee: Post-shipment finance, given to an exporter by a
bank through purchase, negotiation or discount of an export bill
against an order, qualifies for post-shipment export credit guarantee.
It is necessary, however, that exporters should obtain a shipment or
contracts risk policy of E.C.G.C. Banks insist on the exporters to take a
contracts shipments (comprehensive risks) policy covering both
political and commercial risks. The Corporation, on acceptance of the
policy, will fix credit limits for individual exporters and the
Corporation’s liability will be limited to the extent of the limit so fixed
for the exporter concerned irrespective of the amount of the policy.
(c) Advance against export bills sent for collection: Finance is provided
by banks to exporters by way of advance against export bills forwarded
through them for collection, taking into account the creditworthiness
of the party, nature of goods exported, usance, standing of drawee etc.
(d) Advance against duty draw backs, cash subsidy, etc.: To finance
export losses sustained by exporters, bank advance against duty draw-
back, cash subsidy etc., receivable by them against export
performance. Such advances are of clean nature; hence necessary
precaution should be exercised.
(c)

Particular Profit Maximization Wealth Maximisation
Objective Large amount of Highest market value of
profits. shares.

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Risk Ignores risk or Recognises risk or certainty

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uncertainty
Time Horizon
o m
Emphasizes the short Emphasizes the long term
c. o
.c term gains. gains.
e m
em
Sustainability Not sustainable in Critical for the very existence
l a s
l a s long term. of the business enterprise.
a g
ag
Sustainability is low. Sustainability is high.

OR
(c) High Yield Bonds (or Junk Bonds): Junk Bond is a bond that is rated below
investment grade by credit rating agencies. It has a low credit rating and a
high risk of default.
Because of the higher risk, investors are compensated with higher interest
rates, which is why junk bonds are also called high-yield bonds.
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s em
g l a
a

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

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

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) Eagle Manufacturing Ltd. has been facing declining productivity due to
outdated working methods, rigid routines and workforce inefficiency
leading to quality degradation and increasing customer complaints. To
enhance operations, productivity, quality and work routines, the Board
introduces new technologies and operating procedures to ensure
continuous improvement and efficient workflow with operator feedback and
performance evaluation.
The management faces initial backlash from the employees to adopt these
new techniques as they are a bit hesitant and scared of change. To cater to
their concerns, the management introduces various awareness sessions,
capacity building programs and exercises to handhold the operators during
this transition while effectively communicating the need for change for
future resilience and long-term benefits. Post these training sessions, the
new techniques and procedures are gradually implemented in a phase-wise
integration with constant support for seamless adoption by the employees
in a moderated manner to accept. Finally, the management takes steps to
stabilize these new work methods through revised policies, performance
measures, and reward systems to ensure that employees do not revert to
old practices.
Identify the model being applied by Eagle Manufacturing Ltd. in the above
case. Explain the different phases of the process for moving the
organization from the present to the future. Is this a one-time Process/
application? (1 + 3 + 1 = 5 Marks)
(b) Pearl India Ltd. is a major packaged food company which dominates in
some sectors like snacks, diary, biscuits and instant meals. It offers high
quality and unique products that match the taste and preference of the
customers. It always takes steps to enhance brand image and charge a
premium price for which buyers do not negotiate. Often the unique features
of their products that are not available with their competitors help them to

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gain competitive advantage. Hence, using this strategy, today Pearl India
Ltd. is consistently gaining its position in the industry over its competitors.
m
m
Identify and explain Michael Porter's generic strategy being followed by
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Pearl India Ltd. to gain competitive advantage. What are the disadvantages
s e m
em
of following such strategy? (1 + 1 + 3 = 5 Marks)
la
l a s
(c) A well-established MM Company is manufacturing tubeless tyre as one of
a g
ag
its major products for quite some time. The product has reached at the
maturity stage of the product life cycle. Company is aware about the
competitive scenario and fast change in technology. Cost benefit analysis
indicates that it would be better to modernise its plant and machinery so as
to improve its efficiency and productivity. The basic idea is to remain
competitive in the dynamic and volatile business world and at the same
time having an objective to preserve their market share.
Suggest the specific corporate strategy to be adopted by the MM Company
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in the given situation. Also state the reasons why a company should adopt
.
such strategy in general. Justify your opinion about identified strategy in a
case of start-up venture.
s em (1 + 3 + 1 = 5 Marks)
Answer
g l a
a
(a) The model being applied by Eagle Manufacturing Ltd. is Kurt Lewin’s
Three Phase Model of Change comprising Unfreezing, Changing and
Refreezing. It reflects strategic change undertaken to improve
organizational efficiency, productivity and competitiveness.
Phases of Kurt Lewin’s Change Model
(a) Unfreezing the Situation: Unfreezing means making employees

m
aware of the need for change and preparing them to accept it by

m .c o
breaking old attitudes, rigid routines and existing work practices.

c. o m
e awareness
In the given case, employees initially resisted the new technologies
s
em l a
and procedures. Therefore, management conducted

las a g
sessions, capacity building programmes and communication exercises

ag to explain the need and long-term benefits of change.
(b) Changing to the New Situation: In this stage, new behaviour
patterns, systems and procedures are introduced after employees
recognize the need for change.

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

In the given case, new technologies and operating procedures were
gradually implemented through phase wise integration with
continuous support, guidance and feedback mechanisms for
employees.
(c) Refreezing: Refreezing occurs when the new behaviour becomes a
permanent way of organizational life and employees do not revert to
old practices.
In the given case, revised policies, performance measures and reward
systems were introduced to stabilize the new work methods and
institutionalise the changed practices successfully.
Is it a One-Time Process?
No, it is not a one-time process. Change is a continuous and cyclical
process due to dynamic business environment, technological changes and
competition. Therefore, organizations continuously undergo the stages of
unfreezing, changing and refreezing.
(b) Pearl India Ltd. is following the Differentiation Strategy propounded by
Michael Porter. Differentiation strategy is aimed at a broad market and
involves creation of products or services that are perceived by customers
as unique. The uniqueness may be associated with product quality,
features, brand image, technology or customer preferences. Because of
differentiation, the business can charge a premium price and gain
competitive advantage.
In the given case, Pearl India Ltd. offers high quality and unique food
products matching customer tastes and preferences. It continuously
enhances its brand image and charges premium prices for which buyers
do not negotiate. The special features of its products help it gain a strong
competitive position over rivals.
Disadvantages of Differentiation Strategy
1. In the long run, uniqueness may be difficult to sustain as competitors
may imitate product features.
2. Charging very high prices for differentiated products may force
customers to switch to alternative products.

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3. Differentiation strategy fails if the basis of differentiation is not
valued by customers.
m
m
(c) MM Company should adopt a Stability Strategy. A stability strategy is
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.co
pursued when a firm continues in the same business and aims to maintain
s e m
em
its market position through incremental improvements in efficiency and
la
a s
operations. In the given case, the company’s product has reached the
l a g
ag
maturity stage of the product life cycle, and the company wants to
modernise its plant and machinery to improve efficiency and productivity
while preserving market share in a dynamic business environment.
Reasons for Adopting Stability Strategy
1. A product has reached the maturity stage of the product life cycle.
2. The staff feels comfortable with the status quo as it involves less
changes and less risks.

m
c. o
3. It is opted when the environment in which an organisation is
operating is relatively stable.
4. It is adopted where expansionm
s e may be perceived as threatening.
5. After rapid expansion, laafirm may want to stabilise and consolidate
itself. ag
Applicability in Case of Start-up Venture: Stability strategy is generally
not suitable for start-ups because startups are in the early stages of
ideation and development where speed, agility and expansion are
important. Stability strategy is more meaningful for mature businesses
operating at full capacity rather than emerging ventures.
Question 6
m
m
(a) "In a modern competitive landscape, the interaction of supply and demand
.co
c. o determines the price at which quantity provided equals to quantity desired."
se
m
em a
Analyse the inherent characteristics of business products that must be
s g l
la
managed to maintain profitability under these market dynamics. (5 Marks)

g a
a
(b) What is meant by corporate level strategies?
Identify and explain the basic features of corporate level strategies being
represented by each of the following decisions:

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

(i) The company decided to expand its profit-making units of packaged
food division into the international market and closing down the loss-
making units.
(ii) The company decided to sell-out its commercial real estate division
entirely as it is incurring heavy losses due to intense competition.
(iii) The company has decided to maintain the current operations of the
home appliances division which is maintaining steady sales and strong
brand loyalty with no major investments.
(iv) The company decided to make high investments in a rapidly growing
online learning platform division to take greater control over the
market. (1 + 4 = 5 Marks)
Answer

(a) Business products possess certain inherent characteristics that businesses
must manage effectively to maintain profitability in a competitive market
where price is determined by the interaction of supply and demand.
Characteristics of Business Products
1. Products are Tangible or Intangible: A product may be tangible
such as a car, mobile phone or table or intangible such as banking,
insurance or telecom services. Businesses must manage both types
efficiently to satisfy customer requirements.
2. Product has a Price: Every product has a price determined by market
forces of supply and demand. The market price is the price at which
quantity supplied equals quantity demanded. In the present
competitive environment, businesses often cannot fix prices by simply
adding profit margins over cost. Therefore, firms need to control and
reduce costs to maintain profitability.
3. Products have Features that Deliver Satisfaction: Products possess
features relating to design, quality, function and customer experience
that provide value and satisfaction to consumers. Businesses
continuously improve product features to optimise customer
experience and differentiate products from competitors.

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4. Product is Pivotal for Business: Product is the centre around which
all strategic and operational activities revolve, including production,
m
c. o
quality control, marketing, logistics and sales. Thus, product acts as

o m m
c
the driving force behind business operations and profitability.
.
m life cycle after which it may require replacement, reinvention las e
eproduct
5. Product has a Useful Life: Every product has a useful life and

l a s or discontinuation. Businesses need to innovate and update productsag
ag continuously to remain competitive and profitable in changing
market conditions.
(b) Corporate level strategies are the strategies formulated at the top
management level which define the overall direction and scope of the
organization. These strategies deal with decisions relating to stability,
expansion, retrenchment and combination of businesses.
(i) Combination Strategy: The company is simultaneously expanding its
m
co
profitable packaged food business into international markets while
.
closing down loss-making units. Thus, it is adopting a Combination

s em
Strategy involving both expansion and retrenchment strategies.

g l a
(ii) Retrenchment Strategy: The decision to sell out the commercial real
a
estate division due to heavy losses represents Retrenchment
Strategy. Under this strategy, the firm retrenches or drops loss
making businesses through sell out or liquidation to improve overall
performance.
(iii) Stability Strategy: The decision to continue current operations of
the home appliances division with steady sales and strong brand
loyalty represents Stability Strategy. Under this strategy, the firm

m
continues with the same business and maintains the existing level of

m
effort without major investments.
.c o
c. o m
e market
(iv) Expansion/Growth Strategy: The decision to make high investments
in a rapidly growing online learning platform to gainsgreater
s em g a
l This strategy
la a growth to achieve
control represents Expansion/Growth Strategy.

ag involves substantial investments and business
greater market control and competitive advantage.

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Question 7

(a) "Beyond the basic need to grow modern organizations are driven by a mix
of market inadequacy resource needs and the collapse of international
barriers." Analyse the various reasons why companies choose to globalise
their operations. (5 Marks)
(b) "The wider and stronger the channel the better position a business has to
fight and win over competition." In the context of this statement, define the
concept of channels. Why is channel analysis more important for a business
strategy? Explain different type of channels. (1 + 1 + 3 = 5 Marks)
Answer

(a) Globalisation refers to the process of expanding business operations
beyond domestic boundaries into international markets. Companies
choose to globalise their operations due to various strategic, economic
and competitive reasons.
Reasons for Globalisation of Business
1. Need for Growth: The foremost reason for internationalisation is the
need to grow. Organizations expand globally in search of new
business opportunities, higher sales and greater earnings.
2. Shrinking Time and Distance: Rapid technological developments,
faster communication, speedier transportation and increased financial
flows have reduced geographical barriers and made global
operations easier.
3. Inadequacy of Domestic Markets: Domestic markets are often not
sufficient for long-term growth. Companies enter international
markets where competition may be less intense and growth
opportunities may be higher.
4. Availability of Resources: Businesses globalise to access reliable and
cheaper sources of raw materials, skilled labour and talent pools
available in foreign countries.
5. Reduction in Transportation Costs: Companies establish overseas
manufacturing plants near target markets to reduce transportation
costs, delivery time and logistics expenses.

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6. Expansion of Foreign Markets: When foreign markets grow
substantially, organizations establish overseas production and sales
m
c. o
units to increase sales volume and improve cash flows.
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7.
.co
Growth of Service Sector and Regional Integration: The growing
s e m
em
importance of the service sector and regional economic integration
la
a samong countries encourage firms to expand internationally.
g
8. Collapse of International Trade Barriers: Reduction in trade tariffs,a
l
ag customs barriers and government restrictions has increased the flow
of international business and encouraged globalization.
9. Formation of Strategic Alliances: Globalization enables companies
from different countries to form strategic alliances to face
technological and economic challenges and leverage competitive
advantages.

m
Thus, modern organizations globalise their operations to achieve growth,

. co
access resources, reduce costs, enhance competitiveness and exploit

em
opportunities arising from technological and economic integration across
nations.
l a s
a g
(b) Channels refer to the distribution system through which an organisation
distributes its products or provides its services to customers. Strong and
wide channels help businesses reach customers effectively and gain
competitive advantage.
Importance of Channel Analysis
Channel analysis is important when a business strategy aims to scale up
and expand into new geographies and markets. Businesses need suitable

m
channels to reach new customers effectively. Strong channels also help

co
businesses fight competition and create barriers for new entrants into the
m .
c. o m
industry.

em
Types of Channels
la se
las 1. Sales Channel: Sales channel refers to intermediaries involved in
a g
ag selling the product to the end user. It focuses on who sells the
product to customers. For example, fashion designers use agencies
and retail stores to sell products to consumers.

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2. Product Channel: Product channel refers to intermediaries who
physically handle and distribute the product from producer to
customer. For example, logistics companies and delivery services
distribute products purchased through online platforms.
3. Service Channel: Service channel refers to entities providing support
services such as installation, maintenance and customer assistance
after purchase. For example, installation of appliances by authorised
service providers after sales.
Thus, strong and efficient channels act as important strategic tools for
market reach, customer satisfaction and competitive advantage.
Question 8

(a) "Strategic uncertainty refers to the unpredictability of future events and
circumstances that can impact an organization's strategy and goals." In the
light of this statement, discuss how an organization can deal with or
manage such uncertainty. (5 Marks)
(b) "Relying blindly on business strategy can go absolutely wrong when daily
operation are impeded or when environmental estimates prove inaccurate."
Discuss the overall objective of strategic management and evaluate the
limitations attached to it that may prevent from overcoming a turbulent
environment. (1 + 4 = 5 Marks)
OR
Differentiate between Proactive and Reactive strategies. Explain in detail,
why it is important for every organisation to use both these strategies in a
dynamic and an uncertain business environment. (1 + 4 = 5 Marks)
Answer

(a) Strategic uncertainty refers to the unpredictability of future events and
circumstances that may affect an organization’s strategy and goals. It may
arise due to changes in market conditions, technology, competition,
regulations and other external environmental factors.
An organization can deal with strategic uncertainty in the following ways:
1. Flexibility: Organizations should build flexibility into their strategies
so that they can quickly adapt to environmental changes and respond
effectively to uncertainties.
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2. Diversification: Diversifying product portfolio, markets and customer

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base helps reduce dependence on a single business area and

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minimizes the impact of uncertainty.
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3.
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Monitoring and Scenario Planning: Organizations should
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continuously monitor key indicators of change and undertake

l a scenario planning to understand how different future situations may
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4. Building Resilience: Firms should strengthen operational processes,
improve financial flexibility and enhance risk management capabilities
to withstand uncertain situations effectively.
5. Collaboration and Partnerships: Strategic alliances and
collaborations with suppliers, customers and other organizations help
in sharing resources, reducing risk and accessing new markets and

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technologies.

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e
Thus, organizations can manage strategic
s
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gl in a dynamic environment.
diversification, resilience, monitoring and collaboration to remain

a
competitive and sustainable
(b) The overall objective of strategic management is:
1. To create competitive advantage so that the company can outperform
competitors.
2. To guide the company successfully through environmental changes and
react in the right manner.
Limitations of Strategic Management
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1. Complex and Turbulent Environment: Business environment is
highly dynamic and uncertain. Organisational estimatese about future
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las ag environment.
conditions may go wrong, thereby affecting strategic

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Hence, strategy cannot always overcome a turbulent
a 2. Time Consuming Process: Strategic management involves extensive
planning, analysis and communication which may impede daily

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SUGGESTED ANSWERS INTERMEDIATE EXAMINATION: MAY 2026

operations and routine business activities. Excessive planning may
reduce execution efficiency.
3. Costly Process: Strategic management requires expert planners,
environmental analysis and implementation efforts, which increase
organizational costs, especially for small and medium enterprises.
4. Difficulty in Predicting Competitive Responses: In a competitive
environment, it is difficult to estimate competitors’ strategic actions
and responses accurately, as such decisions are generally confidential
and uncertain.
Or
Difference between Proactive and Reactive Strategies

Basis Proactive Strategy Reactive Strategy
Meaning Proactive strategy refers to Reactive strategy refers to
planned and deliberate adaptive responses to
actions taken by unforeseen changes and
management to improve unexpected developments
market position and in the business
performance. environment.
Nature It is planned and It is responsive and
intentional. adaptive in nature.
Objective To gain competitive To cope with changing
advantage through advance circumstances and
planning. environmental uncertainties.

Importance of Using Both Strategies
Every organization needs both proactive and reactive strategies because
the business environment is dynamic and uncertain.
1. Helps in Achieving Planned Objectives: Proactive strategies help
organizations define long-term direction, improve market position
and achieve organizational objectives through planned managerial
actions.

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2. Helps in Coping with Uncertainty: Business conditions may change

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unexpectedly due to competition, technology, regulations or

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customer preferences. Reactive strategies help firms respond
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effectively to such unforeseen developments.
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3. Provides
reactive strategies enables organizations to remain flexible and g
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a adapt to changing environmental conditions.

4. Ensures Survival and Competitive Advantage: Organizations using
both strategies can exploit opportunities, tackle threats, handle crises
and maintain competitiveness in turbulent business environments.
Thus, a company’s actual strategy is always a blend of proactive planned
actions and reactive adaptive responses to changing business
circumstances.
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