Page 1
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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