Page 1
ANSWERS OF MODEL TEST PAPER 1
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 ×0.5)] 80 days
Average level of Receivables (` 1,60,00,000 ? 80/360) ` 35,55,556
Factoring Commission (` 35,55,556 ? 2/100) ` 71,111
Factoring Reserve (` 35,55,556 ? 10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 +
71,111)}
` 31,28,889
Factor will deduct his interest @ 18%:
Interest =
`31,28,889 ×18×80
100 × 360
` 1,25,156
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111 ? 360/80) 3,20,000
Interest charges (` 1,25,156 ? 360/80) 5,63,200
Total 8,83,200
B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
503
Page 2
ANSWERS OF MODEL TEST PAPER 1
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 ×0.5)] 80 days
Average level of Receivables (` 1,60,00,000 ? 80/360) ` 35,55,556
Factoring Commission (` 35,55,556 ? 2/100) ` 71,111
Factoring Reserve (` 35,55,556 ? 10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 +
71,111)}
` 31,28,889
Factor will deduct his interest @ 18%:
Interest =
`31,28,889 ×18×80
100 × 360
` 1,25,156
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111 ? 360/80) 3,20,000
Interest charges (` 1,25,156 ? 360/80) 5,63,200
Total 8,83,200
B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
503
C. Net Cost to the company (A – B) (` 8,83,200 – `
4,00,000)
4,83,200
Effective cost of factoring =
`
`
4,83,200
×100
30,03,733
= 16.09%
2. B. ` 3,20,513; ` 8.33
pp
12
(EBIT -I)(1- t)-D (EBIT -I)(1- t)-D
=
NN
(x -0)(1-0.35) (x -1,00,000)(1-0.35)-60,000
=
25,000 10,000
x = EBIT = ` 3,20,513
3. D.
4. C.
At EBIT of ` 3,20,513, EPS under both options will be the same i.e.,
` 8.33 per share
1.15
FL= % change in NP/%change in EBIT=6.9/6=1.15
3 years
These deposits may be accepted for a period of six months to three
years.
PART II
1. (a)
Particulars (`’ in lakhs)
Net Profit 54
Less: Preference dividend 24
Earnings for equity shareholders 30
Earnings per share 30/2 = ` 15
Let, the dividend per share be D to get share price of ` 120.
P =
D+
r
Ke
(E-D)
K
e
Where,
P = Market price per share.
E = Earnings per share = ` 15
D = Dividend per share
R = Return earned on investment = 22%
Ke = Cost of equity capital = 15%
120 =
D +
0.22
0.15
(15-D)
0.15
504
Page 3
ANSWERS OF MODEL TEST PAPER 1
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 ×0.5)] 80 days
Average level of Receivables (` 1,60,00,000 ? 80/360) ` 35,55,556
Factoring Commission (` 35,55,556 ? 2/100) ` 71,111
Factoring Reserve (` 35,55,556 ? 10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 +
71,111)}
` 31,28,889
Factor will deduct his interest @ 18%:
Interest =
`31,28,889 ×18×80
100 × 360
` 1,25,156
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111 ? 360/80) 3,20,000
Interest charges (` 1,25,156 ? 360/80) 5,63,200
Total 8,83,200
B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
503
C. Net Cost to the company (A – B) (` 8,83,200 – `
4,00,000)
4,83,200
Effective cost of factoring =
`
`
4,83,200
×100
30,03,733
= 16.09%
2. B. ` 3,20,513; ` 8.33
pp
12
(EBIT -I)(1- t)-D (EBIT -I)(1- t)-D
=
NN
(x -0)(1-0.35) (x -1,00,000)(1-0.35)-60,000
=
25,000 10,000
x = EBIT = ` 3,20,513
3. D.
4. C.
At EBIT of ` 3,20,513, EPS under both options will be the same i.e.,
` 8.33 per share
1.15
FL= % change in NP/%change in EBIT=6.9/6=1.15
3 years
These deposits may be accepted for a period of six months to three
years.
PART II
1. (a)
Particulars (`’ in lakhs)
Net Profit 54
Less: Preference dividend 24
Earnings for equity shareholders 30
Earnings per share 30/2 = ` 15
Let, the dividend per share be D to get share price of ` 120.
P =
D+
r
Ke
(E-D)
K
e
Where,
P = Market price per share.
E = Earnings per share = ` 15
D = Dividend per share
R = Return earned on investment = 22%
Ke = Cost of equity capital = 15%
120 =
D +
0.22
0.15
(15-D)
0.15
504
18 =
0.15D + 3.3 - 0.22D
0.15
0.07D = 3.3 – 2.7
D = 8.57
D/P ratio =
DPS
×100
EPS
=
8.57
15
x 100 = 57.13%
So, the required dividend pay-out ratio will be = 57.13%
(b) Value of AN Ltd. =
o
NOI
K
=
` 10,00,000
20%
= ` 50,00,000
(i) Return on Shares of Mr. R on AN Ltd.
Particulars Amount (`)
Value of the company 50,00,000
Market value of debt (50% x ` 50,00,000) 25,00,000
Market value of shares (50% x ` 50,00,000) 25,00,000
Particulars Amount (`)
Net operating income 10,00,000
Interest on debt (10% × ` 25,00,000) 2,50,000
Earnings available to shareholders 7,50,000
Return on 8% shares (8% × ` 7,50,000) 60,000
(ii) Implied required rate of return on equity of AN Ltd. =
` 7,50,000
` 25,00,000
= 30%
(c) ANVY Ltd
Balance Sheet as on 31
st
March, 2023
Liabilities ` Assets `
Equity share capital 2,00,000 Fixed assets 1,40,000
Current debt 60,000 Cash (balancing figure) 1,00,000
Long term debt 60,000 Inventory 80,000
3,20,000 3,20,000
Working Notes
1. Total debt = 0.60
x
Equity share capital = 0.60 ` 2,00,000
= ` 1,20,000
Further, Current debt to total debt = 0.50. So, current debt
= 0.50 x `1,20,000 = ` 60,000,
Long term debt = `1,20,000 - `60,000= ` 60,000
2. Fixed assets = 0.70 × Equity share Capital = 0.70 × ` 2,00,000
= ` 1,40,000
3. Total assets to turnover = 2.5 Times: Inventory turnover = 10 Times
505
Page 4
ANSWERS OF MODEL TEST PAPER 1
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 ×0.5)] 80 days
Average level of Receivables (` 1,60,00,000 ? 80/360) ` 35,55,556
Factoring Commission (` 35,55,556 ? 2/100) ` 71,111
Factoring Reserve (` 35,55,556 ? 10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 +
71,111)}
` 31,28,889
Factor will deduct his interest @ 18%:
Interest =
`31,28,889 ×18×80
100 × 360
` 1,25,156
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111 ? 360/80) 3,20,000
Interest charges (` 1,25,156 ? 360/80) 5,63,200
Total 8,83,200
B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
503
C. Net Cost to the company (A – B) (` 8,83,200 – `
4,00,000)
4,83,200
Effective cost of factoring =
`
`
4,83,200
×100
30,03,733
= 16.09%
2. B. ` 3,20,513; ` 8.33
pp
12
(EBIT -I)(1- t)-D (EBIT -I)(1- t)-D
=
NN
(x -0)(1-0.35) (x -1,00,000)(1-0.35)-60,000
=
25,000 10,000
x = EBIT = ` 3,20,513
3. D.
4. C.
At EBIT of ` 3,20,513, EPS under both options will be the same i.e.,
` 8.33 per share
1.15
FL= % change in NP/%change in EBIT=6.9/6=1.15
3 years
These deposits may be accepted for a period of six months to three
years.
PART II
1. (a)
Particulars (`’ in lakhs)
Net Profit 54
Less: Preference dividend 24
Earnings for equity shareholders 30
Earnings per share 30/2 = ` 15
Let, the dividend per share be D to get share price of ` 120.
P =
D+
r
Ke
(E-D)
K
e
Where,
P = Market price per share.
E = Earnings per share = ` 15
D = Dividend per share
R = Return earned on investment = 22%
Ke = Cost of equity capital = 15%
120 =
D +
0.22
0.15
(15-D)
0.15
504
18 =
0.15D + 3.3 - 0.22D
0.15
0.07D = 3.3 – 2.7
D = 8.57
D/P ratio =
DPS
×100
EPS
=
8.57
15
x 100 = 57.13%
So, the required dividend pay-out ratio will be = 57.13%
(b) Value of AN Ltd. =
o
NOI
K
=
` 10,00,000
20%
= ` 50,00,000
(i) Return on Shares of Mr. R on AN Ltd.
Particulars Amount (`)
Value of the company 50,00,000
Market value of debt (50% x ` 50,00,000) 25,00,000
Market value of shares (50% x ` 50,00,000) 25,00,000
Particulars Amount (`)
Net operating income 10,00,000
Interest on debt (10% × ` 25,00,000) 2,50,000
Earnings available to shareholders 7,50,000
Return on 8% shares (8% × ` 7,50,000) 60,000
(ii) Implied required rate of return on equity of AN Ltd. =
` 7,50,000
` 25,00,000
= 30%
(c) ANVY Ltd
Balance Sheet as on 31
st
March, 2023
Liabilities ` Assets `
Equity share capital 2,00,000 Fixed assets 1,40,000
Current debt 60,000 Cash (balancing figure) 1,00,000
Long term debt 60,000 Inventory 80,000
3,20,000 3,20,000
Working Notes
1. Total debt = 0.60
x
Equity share capital = 0.60 ` 2,00,000
= ` 1,20,000
Further, Current debt to total debt = 0.50. So, current debt
= 0.50 x `1,20,000 = ` 60,000,
Long term debt = `1,20,000 - `60,000= ` 60,000
2. Fixed assets = 0.70 × Equity share Capital = 0.70 × ` 2,00,000
= ` 1,40,000
3. Total assets to turnover = 2.5 Times: Inventory turnover = 10 Times
505
Hence, Inventory /Total assets = 2.5/10=1/4, Total assets = ` 3,20,000
Therefore Inventory = ` 3,20,000/4 = ` 80,000
2. (a) Cash inflows after tax (CFAT)
Particular `
Current production (units per week) 5,000 units
New capacity (units per week) 15,000 units
Demand (units per week) 10,000 units
Increase in sales (units per week) A. 5,000 units
Contribution per unit (` 30,000 x 0.10) B. 3,000
Increase in contribution A x B x 56 84 crores
Less: Additional fixed cost 10 crores
Increase in profit 74 crores
Less: Tax @ 40% 29.6 crores
Profit after tax 44.4 crores
Tax shield due to depreciation
Year Depreciation
(` in Crore)
Tax Shield
(` in Crore)
PV Factor
@ 20%
Total Present
Value (` in Crore)
1 25.00 10 0.83 8.33
2 18.75 7.5 0.69 5.18
3 14.06 5.62 0.58 3.26
4 10.55 4.22 0.48 2.03
5 7.91 3.16 0.40 1.27
Total 20.07
Tax shield on capital loss = (23.73-20.00) x 30% = ` 1.12 crores
Net Present Value (NPV)
Particulars Year Cash Flow
(` in Crores)
PVAF @
20%
Present Value
(` in Crores)
Initial Investment 0 (100) 1 (100)
Working capital 0 (3) 1 (3)
Profit after tax 1-5 44.4 2.99 132.76
Salvage value 5 20 0.40 8.00
Tax shield on
Depreciation
1-5 20.07
Tax shield on
capital loss
5 1.12 0.40 0.45
Release of
Working Capital
5 3 0.40 1.20
NPV 59.47
506
Page 5
ANSWERS OF MODEL TEST PAPER 1
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 ×0.5)] 80 days
Average level of Receivables (` 1,60,00,000 ? 80/360) ` 35,55,556
Factoring Commission (` 35,55,556 ? 2/100) ` 71,111
Factoring Reserve (` 35,55,556 ? 10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 +
71,111)}
` 31,28,889
Factor will deduct his interest @ 18%:
Interest =
`31,28,889 ×18×80
100 × 360
` 1,25,156
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111 ? 360/80) 3,20,000
Interest charges (` 1,25,156 ? 360/80) 5,63,200
Total 8,83,200
B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
503
C. Net Cost to the company (A – B) (` 8,83,200 – `
4,00,000)
4,83,200
Effective cost of factoring =
`
`
4,83,200
×100
30,03,733
= 16.09%
2. B. ` 3,20,513; ` 8.33
pp
12
(EBIT -I)(1- t)-D (EBIT -I)(1- t)-D
=
NN
(x -0)(1-0.35) (x -1,00,000)(1-0.35)-60,000
=
25,000 10,000
x = EBIT = ` 3,20,513
3. D.
4. C.
At EBIT of ` 3,20,513, EPS under both options will be the same i.e.,
` 8.33 per share
1.15
FL= % change in NP/%change in EBIT=6.9/6=1.15
3 years
These deposits may be accepted for a period of six months to three
years.
PART II
1. (a)
Particulars (`’ in lakhs)
Net Profit 54
Less: Preference dividend 24
Earnings for equity shareholders 30
Earnings per share 30/2 = ` 15
Let, the dividend per share be D to get share price of ` 120.
P =
D+
r
Ke
(E-D)
K
e
Where,
P = Market price per share.
E = Earnings per share = ` 15
D = Dividend per share
R = Return earned on investment = 22%
Ke = Cost of equity capital = 15%
120 =
D +
0.22
0.15
(15-D)
0.15
504
18 =
0.15D + 3.3 - 0.22D
0.15
0.07D = 3.3 – 2.7
D = 8.57
D/P ratio =
DPS
×100
EPS
=
8.57
15
x 100 = 57.13%
So, the required dividend pay-out ratio will be = 57.13%
(b) Value of AN Ltd. =
o
NOI
K
=
` 10,00,000
20%
= ` 50,00,000
(i) Return on Shares of Mr. R on AN Ltd.
Particulars Amount (`)
Value of the company 50,00,000
Market value of debt (50% x ` 50,00,000) 25,00,000
Market value of shares (50% x ` 50,00,000) 25,00,000
Particulars Amount (`)
Net operating income 10,00,000
Interest on debt (10% × ` 25,00,000) 2,50,000
Earnings available to shareholders 7,50,000
Return on 8% shares (8% × ` 7,50,000) 60,000
(ii) Implied required rate of return on equity of AN Ltd. =
` 7,50,000
` 25,00,000
= 30%
(c) ANVY Ltd
Balance Sheet as on 31
st
March, 2023
Liabilities ` Assets `
Equity share capital 2,00,000 Fixed assets 1,40,000
Current debt 60,000 Cash (balancing figure) 1,00,000
Long term debt 60,000 Inventory 80,000
3,20,000 3,20,000
Working Notes
1. Total debt = 0.60
x
Equity share capital = 0.60 ` 2,00,000
= ` 1,20,000
Further, Current debt to total debt = 0.50. So, current debt
= 0.50 x `1,20,000 = ` 60,000,
Long term debt = `1,20,000 - `60,000= ` 60,000
2. Fixed assets = 0.70 × Equity share Capital = 0.70 × ` 2,00,000
= ` 1,40,000
3. Total assets to turnover = 2.5 Times: Inventory turnover = 10 Times
505
Hence, Inventory /Total assets = 2.5/10=1/4, Total assets = ` 3,20,000
Therefore Inventory = ` 3,20,000/4 = ` 80,000
2. (a) Cash inflows after tax (CFAT)
Particular `
Current production (units per week) 5,000 units
New capacity (units per week) 15,000 units
Demand (units per week) 10,000 units
Increase in sales (units per week) A. 5,000 units
Contribution per unit (` 30,000 x 0.10) B. 3,000
Increase in contribution A x B x 56 84 crores
Less: Additional fixed cost 10 crores
Increase in profit 74 crores
Less: Tax @ 40% 29.6 crores
Profit after tax 44.4 crores
Tax shield due to depreciation
Year Depreciation
(` in Crore)
Tax Shield
(` in Crore)
PV Factor
@ 20%
Total Present
Value (` in Crore)
1 25.00 10 0.83 8.33
2 18.75 7.5 0.69 5.18
3 14.06 5.62 0.58 3.26
4 10.55 4.22 0.48 2.03
5 7.91 3.16 0.40 1.27
Total 20.07
Tax shield on capital loss = (23.73-20.00) x 30% = ` 1.12 crores
Net Present Value (NPV)
Particulars Year Cash Flow
(` in Crores)
PVAF @
20%
Present Value
(` in Crores)
Initial Investment 0 (100) 1 (100)
Working capital 0 (3) 1 (3)
Profit after tax 1-5 44.4 2.99 132.76
Salvage value 5 20 0.40 8.00
Tax shield on
Depreciation
1-5 20.07
Tax shield on
capital loss
5 1.12 0.40 0.45
Release of
Working Capital
5 3 0.40 1.20
NPV 59.47
506
The company is advised to replace the old machine since the NPV of the
new machine is positive.
(b) Cut-off Rate: It is the minimum rate which the management wishes to
have from any project. Usually this is based upon the cost of capital. The
management gains only if a project gives return of more than the cut -
off rate. Therefore, the cut - off rate can be used as the discount rate or
the opportunity cost rate.
3. (a) Working Note:
Let the rate of Interest on debenture be x
?
Rate of Interest on loan = 1.4x
?
kd on debentures =
RV -NP
Int (1- t)+
n
RV + NP
2
=
100-98
100x(1-0.30)+
4
100+98
2
=
70x+0.5
99
?
Kd on bank loan = 1.4 x (1 – 0.30) = 0.98x
Ke =
EPS
MPS
=
1
MPS / EPS
=
1
PE
=
1
4
= 0.25
Ke = 0.25
Computation of WACC
Capital Amount Weights Cost Product
Equity 20,00,000 0.2 0.25 0.05
Reserves 30,00,000 0.3 0.25 0.075
Debentures 30,00,000 0.3 (70x+0.5)/99 (21x+0.15)/99
Bank Loan 20,00,000 0.2 0.98x 0.196x
1,00,00,000 1 0.125+0.196x
+
+ 21x 0.15
99
WACC = 16%
?
0.125+0.196x+
+ 21x 0.15
99
= 0.16
?
12.375+19.404x+21x+0.15 = (0.16)(99)
?
40.404x = 15.84 – 12.525
?
40.404x = 3.315
507
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