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ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8, 
MPS = P0 = EPS x PE = 20 x 15=300 
G = b.r =0.6 x 20% = 12% 
D1 = D0(1+g) = 8 (1.12) = 8.96 
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99% 
2. (c) 90.58
Price of debentures= PV of future cash flows for investor 
discounted at their yield 
 = 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years) 
 = 8 x 6.2788 + 100 x 0.4035 
 =50.2304 + 40.35 
 =90.58 
3. (a)  7.64%
NP = 90.58 x 96% = 86.96, RV = 100, Interest = 8, t = 0.27, n = 10 
Kd = 
( ) ( )
( )
Int 1 t RV NP / n
RV NP / 2
- + -
+
=
( ) ( )
( )
8 1 0.27 100 86.96 /10
100 86.96 / 2
- + -
+
= 7.64% 
4. (b)  9.77%
Kp = 
( )
( )
PD RV NP / n
RV NP / 2
+-
+
= 
( )
( )
100 1100 1050 /10
1100 1050 / 2
+-
+
= 9.77% 
5. (a)  10.52%
Existing Total Additional 
Equity Funds 1,60,00,000 2,00,00,000 40,00,000 
511
Page 2


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8, 
MPS = P0 = EPS x PE = 20 x 15=300 
G = b.r =0.6 x 20% = 12% 
D1 = D0(1+g) = 8 (1.12) = 8.96 
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99% 
2. (c) 90.58
Price of debentures= PV of future cash flows for investor 
discounted at their yield 
 = 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years) 
 = 8 x 6.2788 + 100 x 0.4035 
 =50.2304 + 40.35 
 =90.58 
3. (a)  7.64%
NP = 90.58 x 96% = 86.96, RV = 100, Interest = 8, t = 0.27, n = 10 
Kd = 
( ) ( )
( )
Int 1 t RV NP / n
RV NP / 2
- + -
+
=
( ) ( )
( )
8 1 0.27 100 86.96 /10
100 86.96 / 2
- + -
+
= 7.64% 
4. (b)  9.77%
Kp = 
( )
( )
PD RV NP / n
RV NP / 2
+-
+
= 
( )
( )
100 1100 1050 /10
1100 1050 / 2
+-
+
= 9.77% 
5. (a)  10.52%
Existing Total Additional 
Equity Funds 1,60,00,000 2,00,00,000 40,00,000 
511
Preference Shares 24,00,000 24,00,000 
Debt 56,00,000 56,00,000 
1,60,00,000 2,80,00,000 1,20,00,000 
Capital gearing = 0.4 
(PSC + Debt)/Equity = 0.4 
(Total Funds -Equity)/ 
Equity = 0.4 
(2.8 crores-Equity)/ 
equity = 0.4 
Equity = 2 crores 
Weighted avg cost 
of marginal capital 
Weights Cost W.C
Equity Funds 40,00,000 0.333333333 14.99% 5.00% 
Preference Shares 24,00,000 0.2 9.77% 1.952% 
Debt 56,00,000 0.466666667 7.64% 3.565% 
Total 1,20,00,000 10.52% 
2. (a)  9.74%
RV -NP
I(1- t) + 
n
K=
d
RV +NP
2
??
??
??
??
??
110 -85
10(0.7)+
10
K=
d
97.5
= 9.50/97.5 = 9.74% 
3. (c)  2.5
Margin of safety = (sales – BEP sales)/sales x 100 
= 40% 
Degree of operating leverage = 1/MOS 
= 1/40% = 2.5  
4. (a)  20%
Payback Reciprocal = 
Average annual cash in flow 
Initial investment
= 
`
` 
 4,000×100
20,000
 = 20% 
512
Page 3


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8, 
MPS = P0 = EPS x PE = 20 x 15=300 
G = b.r =0.6 x 20% = 12% 
D1 = D0(1+g) = 8 (1.12) = 8.96 
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99% 
2. (c) 90.58
Price of debentures= PV of future cash flows for investor 
discounted at their yield 
 = 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years) 
 = 8 x 6.2788 + 100 x 0.4035 
 =50.2304 + 40.35 
 =90.58 
3. (a)  7.64%
NP = 90.58 x 96% = 86.96, RV = 100, Interest = 8, t = 0.27, n = 10 
Kd = 
( ) ( )
( )
Int 1 t RV NP / n
RV NP / 2
- + -
+
=
( ) ( )
( )
8 1 0.27 100 86.96 /10
100 86.96 / 2
- + -
+
= 7.64% 
4. (b)  9.77%
Kp = 
( )
( )
PD RV NP / n
RV NP / 2
+-
+
= 
( )
( )
100 1100 1050 /10
1100 1050 / 2
+-
+
= 9.77% 
5. (a)  10.52%
Existing Total Additional 
Equity Funds 1,60,00,000 2,00,00,000 40,00,000 
511
Preference Shares 24,00,000 24,00,000 
Debt 56,00,000 56,00,000 
1,60,00,000 2,80,00,000 1,20,00,000 
Capital gearing = 0.4 
(PSC + Debt)/Equity = 0.4 
(Total Funds -Equity)/ 
Equity = 0.4 
(2.8 crores-Equity)/ 
equity = 0.4 
Equity = 2 crores 
Weighted avg cost 
of marginal capital 
Weights Cost W.C
Equity Funds 40,00,000 0.333333333 14.99% 5.00% 
Preference Shares 24,00,000 0.2 9.77% 1.952% 
Debt 56,00,000 0.466666667 7.64% 3.565% 
Total 1,20,00,000 10.52% 
2. (a)  9.74%
RV -NP
I(1- t) + 
n
K=
d
RV +NP
2
??
??
??
??
??
110 -85
10(0.7)+
10
K=
d
97.5
= 9.50/97.5 = 9.74% 
3. (c)  2.5
Margin of safety = (sales – BEP sales)/sales x 100 
= 40% 
Degree of operating leverage = 1/MOS 
= 1/40% = 2.5  
4. (a)  20%
Payback Reciprocal = 
Average annual cash in flow 
Initial investment
= 
`
` 
 4,000×100
20,000
 = 20% 
512
PART II – Descriptive Questions 
1. (a)  (i) Working Notes: 
(i) Computation of Annual Cash Cost of
Production
(`) 
Material consumed 12,00,000 
Wages 9,60,000 
Manufacturing expenses 12,00,000 
Total cash cost of production 33,60,000 
(ii) Computation of Annual Cash Cost of Sales: (`) 
Total Cash cost of production as in (i) above 33,60,000 
Administrative Expenses 3,60,000 
Sales promotion expenses 1,20,000 
Total cash cost of sales 38,40,000 
Add: Gross Profit @ 20% on sales (25% on cost 
of sales) 
9,60,000 
Sales Value 48,00,000 
Statement of Working Capital requirements (cash cost basis) 
(`) (`) 
A. Current Assets
Inventory: 
- Raw materials
12,00,000
×2 months
12months
 ??
??
??
`
2,00,000 
- Finished Goods
33,60,000
×2 months
12months
 ??
??
??
`
5,60,000 
Receivables (Debtors) 
38,40,000
×3 months
12months
??
??
??
` 
9,60,000 
Sales Promotion expenses paid in 
advance  
1,20,000
×1 month
12 months
??
??
??
`
 
10,000 
Cash balance 1,00,000 18,30,000 
Gross Working Capital 18,30,000 
513
Page 4


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8, 
MPS = P0 = EPS x PE = 20 x 15=300 
G = b.r =0.6 x 20% = 12% 
D1 = D0(1+g) = 8 (1.12) = 8.96 
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99% 
2. (c) 90.58
Price of debentures= PV of future cash flows for investor 
discounted at their yield 
 = 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years) 
 = 8 x 6.2788 + 100 x 0.4035 
 =50.2304 + 40.35 
 =90.58 
3. (a)  7.64%
NP = 90.58 x 96% = 86.96, RV = 100, Interest = 8, t = 0.27, n = 10 
Kd = 
( ) ( )
( )
Int 1 t RV NP / n
RV NP / 2
- + -
+
=
( ) ( )
( )
8 1 0.27 100 86.96 /10
100 86.96 / 2
- + -
+
= 7.64% 
4. (b)  9.77%
Kp = 
( )
( )
PD RV NP / n
RV NP / 2
+-
+
= 
( )
( )
100 1100 1050 /10
1100 1050 / 2
+-
+
= 9.77% 
5. (a)  10.52%
Existing Total Additional 
Equity Funds 1,60,00,000 2,00,00,000 40,00,000 
511
Preference Shares 24,00,000 24,00,000 
Debt 56,00,000 56,00,000 
1,60,00,000 2,80,00,000 1,20,00,000 
Capital gearing = 0.4 
(PSC + Debt)/Equity = 0.4 
(Total Funds -Equity)/ 
Equity = 0.4 
(2.8 crores-Equity)/ 
equity = 0.4 
Equity = 2 crores 
Weighted avg cost 
of marginal capital 
Weights Cost W.C
Equity Funds 40,00,000 0.333333333 14.99% 5.00% 
Preference Shares 24,00,000 0.2 9.77% 1.952% 
Debt 56,00,000 0.466666667 7.64% 3.565% 
Total 1,20,00,000 10.52% 
2. (a)  9.74%
RV -NP
I(1- t) + 
n
K=
d
RV +NP
2
??
??
??
??
??
110 -85
10(0.7)+
10
K=
d
97.5
= 9.50/97.5 = 9.74% 
3. (c)  2.5
Margin of safety = (sales – BEP sales)/sales x 100 
= 40% 
Degree of operating leverage = 1/MOS 
= 1/40% = 2.5  
4. (a)  20%
Payback Reciprocal = 
Average annual cash in flow 
Initial investment
= 
`
` 
 4,000×100
20,000
 = 20% 
512
PART II – Descriptive Questions 
1. (a)  (i) Working Notes: 
(i) Computation of Annual Cash Cost of
Production
(`) 
Material consumed 12,00,000 
Wages 9,60,000 
Manufacturing expenses 12,00,000 
Total cash cost of production 33,60,000 
(ii) Computation of Annual Cash Cost of Sales: (`) 
Total Cash cost of production as in (i) above 33,60,000 
Administrative Expenses 3,60,000 
Sales promotion expenses 1,20,000 
Total cash cost of sales 38,40,000 
Add: Gross Profit @ 20% on sales (25% on cost 
of sales) 
9,60,000 
Sales Value 48,00,000 
Statement of Working Capital requirements (cash cost basis) 
(`) (`) 
A. Current Assets
Inventory: 
- Raw materials
12,00,000
×2 months
12months
 ??
??
??
`
2,00,000 
- Finished Goods
33,60,000
×2 months
12months
 ??
??
??
`
5,60,000 
Receivables (Debtors) 
38,40,000
×3 months
12months
??
??
??
` 
9,60,000 
Sales Promotion expenses paid in 
advance  
1,20,000
×1 month
12 months
??
??
??
`
 
10,000 
Cash balance 1,00,000 18,30,000 
Gross Working Capital 18,30,000 
513
B. Current Liabilities:
Payables: 
- Creditors for materials
12,00,000
×2 months
12months
 ??
??
??
`
2,00,000 
Wages outstanding 
9,60,000
×1 month
12months
 ??
??
??
`
80,000 
Manufacturing expenses 
outstanding 
12,00,000
×1 month
12months
 ??
??
??
`
1,00,000 
Administrative expenses outstanding 
3,60,000
×1 month
12months
 ??
??
??
`
30,000 4,10,000 
Net working capital (A - B) 14,20,000 
Add: Safety margin @ 15% 2,13,000 
Total Working Capital requirements 16,33,000 
(b) (i) Calculation of market price per share 
According to Miller – Modigliani (MM) Approach: 
Where, 
Existing market price (Po)  = ` 600 
Expected dividend per share (D1) = ` 40 
Capitalization rate (ke) = 0.20 
Market price at year end (P1) = ? 
a. If expected dividends are declared, then
600=(P1+40)/(1+0.2)
600 x 1.2 = P1+40
P1 = 680
b. If expected dividends are not declared, then
600 = (P1+0)/(1 + 0.2)
600 x 1.2 = P1
P1= 720 
514
Page 5


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II 
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT 
PAPER 6A : FINANCIAL MANAGEMENT 
PART I – Case Scenario based MCQs 
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8, 
MPS = P0 = EPS x PE = 20 x 15=300 
G = b.r =0.6 x 20% = 12% 
D1 = D0(1+g) = 8 (1.12) = 8.96 
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99% 
2. (c) 90.58
Price of debentures= PV of future cash flows for investor 
discounted at their yield 
 = 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years) 
 = 8 x 6.2788 + 100 x 0.4035 
 =50.2304 + 40.35 
 =90.58 
3. (a)  7.64%
NP = 90.58 x 96% = 86.96, RV = 100, Interest = 8, t = 0.27, n = 10 
Kd = 
( ) ( )
( )
Int 1 t RV NP / n
RV NP / 2
- + -
+
=
( ) ( )
( )
8 1 0.27 100 86.96 /10
100 86.96 / 2
- + -
+
= 7.64% 
4. (b)  9.77%
Kp = 
( )
( )
PD RV NP / n
RV NP / 2
+-
+
= 
( )
( )
100 1100 1050 /10
1100 1050 / 2
+-
+
= 9.77% 
5. (a)  10.52%
Existing Total Additional 
Equity Funds 1,60,00,000 2,00,00,000 40,00,000 
511
Preference Shares 24,00,000 24,00,000 
Debt 56,00,000 56,00,000 
1,60,00,000 2,80,00,000 1,20,00,000 
Capital gearing = 0.4 
(PSC + Debt)/Equity = 0.4 
(Total Funds -Equity)/ 
Equity = 0.4 
(2.8 crores-Equity)/ 
equity = 0.4 
Equity = 2 crores 
Weighted avg cost 
of marginal capital 
Weights Cost W.C
Equity Funds 40,00,000 0.333333333 14.99% 5.00% 
Preference Shares 24,00,000 0.2 9.77% 1.952% 
Debt 56,00,000 0.466666667 7.64% 3.565% 
Total 1,20,00,000 10.52% 
2. (a)  9.74%
RV -NP
I(1- t) + 
n
K=
d
RV +NP
2
??
??
??
??
??
110 -85
10(0.7)+
10
K=
d
97.5
= 9.50/97.5 = 9.74% 
3. (c)  2.5
Margin of safety = (sales – BEP sales)/sales x 100 
= 40% 
Degree of operating leverage = 1/MOS 
= 1/40% = 2.5  
4. (a)  20%
Payback Reciprocal = 
Average annual cash in flow 
Initial investment
= 
`
` 
 4,000×100
20,000
 = 20% 
512
PART II – Descriptive Questions 
1. (a)  (i) Working Notes: 
(i) Computation of Annual Cash Cost of
Production
(`) 
Material consumed 12,00,000 
Wages 9,60,000 
Manufacturing expenses 12,00,000 
Total cash cost of production 33,60,000 
(ii) Computation of Annual Cash Cost of Sales: (`) 
Total Cash cost of production as in (i) above 33,60,000 
Administrative Expenses 3,60,000 
Sales promotion expenses 1,20,000 
Total cash cost of sales 38,40,000 
Add: Gross Profit @ 20% on sales (25% on cost 
of sales) 
9,60,000 
Sales Value 48,00,000 
Statement of Working Capital requirements (cash cost basis) 
(`) (`) 
A. Current Assets
Inventory: 
- Raw materials
12,00,000
×2 months
12months
 ??
??
??
`
2,00,000 
- Finished Goods
33,60,000
×2 months
12months
 ??
??
??
`
5,60,000 
Receivables (Debtors) 
38,40,000
×3 months
12months
??
??
??
` 
9,60,000 
Sales Promotion expenses paid in 
advance  
1,20,000
×1 month
12 months
??
??
??
`
 
10,000 
Cash balance 1,00,000 18,30,000 
Gross Working Capital 18,30,000 
513
B. Current Liabilities:
Payables: 
- Creditors for materials
12,00,000
×2 months
12months
 ??
??
??
`
2,00,000 
Wages outstanding 
9,60,000
×1 month
12months
 ??
??
??
`
80,000 
Manufacturing expenses 
outstanding 
12,00,000
×1 month
12months
 ??
??
??
`
1,00,000 
Administrative expenses outstanding 
3,60,000
×1 month
12months
 ??
??
??
`
30,000 4,10,000 
Net working capital (A - B) 14,20,000 
Add: Safety margin @ 15% 2,13,000 
Total Working Capital requirements 16,33,000 
(b) (i) Calculation of market price per share 
According to Miller – Modigliani (MM) Approach: 
Where, 
Existing market price (Po)  = ` 600 
Expected dividend per share (D1) = ` 40 
Capitalization rate (ke) = 0.20 
Market price at year end (P1) = ? 
a. If expected dividends are declared, then
600=(P1+40)/(1+0.2)
600 x 1.2 = P1+40
P1 = 680
b. If expected dividends are not declared, then
600 = (P1+0)/(1 + 0.2)
600 x 1.2 = P1
P1= 720 
514
(ii) Calculation of number of shares to be issued
(a) (b) 
Dividends are 
declared 
( ` lakh) 
Dividends are 
not Declared 
( ` lakh) 
Net income 1500 1500 
Total dividends (400) - 
Retained earnings 1100 1500 
Investment budget 2000 2000 
Amount to be raised by new 
issues 
900 500 
Relevant market price ( ` per 
share) 
680 720 
No. of new shares to be issued 
(in lakh) 
( ` 900 ÷ 680; ` 500 ÷ 720) 
1.3235 0.6944 
(iii) Calculation of market value of the shares
(a) (b) 
Particulars Dividends are 
declared 
Dividends are 
not Declared 
Existing shares (in lakhs) 10.00 10.00 
New shares (in lakhs) 1.3235 0.6944 
Total shares (in lakhs) 11.3235 10.6944 
Market price per share ( `) 680 720 
Total market value of shares 
at the end of the year ( ` 
in lakh) 
11.3235 × 680 
= 7,700 (approx.) 
10.6944 × 720 
= 7,700 (approx.) 
Hence, it is proved that the total market value of shares remains 
unchanged irrespective      of whether dividends are declared, or not 
declared. 
(c) Calculation of Cash Flow after Tax
Year 1 Year 2 Year 3 Year 4 Year 5 
Capacity 50% 65% 80% 100% 100% 
Units 1,50,000  1,95,000  2,40,000  3,00,000  3,00,000 
Contribution p.u. 360 360 360 360 360 
(600 x 60%) 
Total Contribution 5,40,00,000  7,02,00,000  8,64,00,000  10,80,00,000  10,80,00,000  
Less: Fixed Asset 2,00,00,000  3,50,00,000  5,00,00,000  5,00,00,000  5,00,00,000  
Less: Depreciation 
(W.N.) 
4,00,00,000  2,40,00,000  1,44,00,000  86,40,000  51,84,000  
515
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