Page 1
ANSWER S OF MODEL TEST PAPER 7
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (b) Ke =
D1
P0
+g
=
2
20
+0.05 = 15%
2. (b) Kd =
( )
( )
( )
RV-NP
I 1- t +
n
RV+NP
2
=
9(1-0.35)+
(100-102.90)
10
(100+102.90)
2
= 5.48%
3. (a) Kp =
( )
( )
RV-NP
PD+
n
RV+NP
2
K
p
=
11 + ?
100- 102.82
10
?
?
100 + 102.82
2
?
= 10.57%
4. (a) Calculation of WACC using market value weights
Source of capital Market
Value
Weights After tax
cost of
capital
WACC (Ko)
(`) (a) (b) (c) = (a)×(b)
Debentures (` 105 per
debenture)
2,88,750 0.1672 0.0548 0.0092
Preference shares (` 106
per preference share)
2,38,500 0.1381 0.1057 0.0146
Equity shares (` 24) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1280
WACC (Ko) = 12.80%
565
Page 2
ANSWER S OF MODEL TEST PAPER 7
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (b) Ke =
D1
P0
+g
=
2
20
+0.05 = 15%
2. (b) Kd =
( )
( )
( )
RV-NP
I 1- t +
n
RV+NP
2
=
9(1-0.35)+
(100-102.90)
10
(100+102.90)
2
= 5.48%
3. (a) Kp =
( )
( )
RV-NP
PD+
n
RV+NP
2
K
p
=
11 + ?
100- 102.82
10
?
?
100 + 102.82
2
?
= 10.57%
4. (a) Calculation of WACC using market value weights
Source of capital Market
Value
Weights After tax
cost of
capital
WACC (Ko)
(`) (a) (b) (c) = (a)×(b)
Debentures (` 105 per
debenture)
2,88,750 0.1672 0.0548 0.0092
Preference shares (` 106
per preference share)
2,38,500 0.1381 0.1057 0.0146
Equity shares (` 24) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1280
WACC (Ko) = 12.80%
565
5. (a) Current Market Price =
1 D
Ke-g
=
-
2
0.10 0.05
= ` 40 per share
6. (c) DFL =
EBIT
EBT
DFL = 4,00,000/3,00,000 = 1.33
Interest Coverage Ratio =
EBIT
Interest Expense
= 4,00,000/1,00,000 = 4
Operating Profit Margin =
Sales
x100
EBIT
Operating Profit Margin = (4,00,000/16,00,000) × 100 = 25%
7. (c) COGS = Sales x (1-Gross Profit Margin)
COGS = 6,00,000 x (1-0.20) = 6,00,000 x 0.80 = 4,80,000
The velocity of stock is 3 months.
stock turnovers per year (12/3) = 4
Stock Turnover Ratio = COGS / Average Stock
Average Stock = 4,80,000/4 = 1,20,000
Average Stock = (Opening Stock + Closing Stock)/2
Closing Stock = 1,50,000
8. (d) 1, 2 and 3
PART II – Descriptive Questions
1. (a) Balance Sheets of Alpha Limited
` `
Liabilities 31 March
2023
31 March
2024
Assets
31 March
2023
31 March
2024
Equity share
capital (` 10
each fully paid)
20,00,000 20,00,000 Fixed Assets
(`18,90,000– `90,000) 18,00,000 15,39,000
Reserve and
Surplus
(balancing)
1,30,000 1,30,000 Long term investment - 2,96,600
Profit & Loss
A/c
(15% of sales)
2,70,000 6,15,600 Current Assets
(` 10,00,000)
566
Page 3
ANSWER S OF MODEL TEST PAPER 7
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (b) Ke =
D1
P0
+g
=
2
20
+0.05 = 15%
2. (b) Kd =
( )
( )
( )
RV-NP
I 1- t +
n
RV+NP
2
=
9(1-0.35)+
(100-102.90)
10
(100+102.90)
2
= 5.48%
3. (a) Kp =
( )
( )
RV-NP
PD+
n
RV+NP
2
K
p
=
11 + ?
100- 102.82
10
?
?
100 + 102.82
2
?
= 10.57%
4. (a) Calculation of WACC using market value weights
Source of capital Market
Value
Weights After tax
cost of
capital
WACC (Ko)
(`) (a) (b) (c) = (a)×(b)
Debentures (` 105 per
debenture)
2,88,750 0.1672 0.0548 0.0092
Preference shares (` 106
per preference share)
2,38,500 0.1381 0.1057 0.0146
Equity shares (` 24) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1280
WACC (Ko) = 12.80%
565
5. (a) Current Market Price =
1 D
Ke-g
=
-
2
0.10 0.05
= ` 40 per share
6. (c) DFL =
EBIT
EBT
DFL = 4,00,000/3,00,000 = 1.33
Interest Coverage Ratio =
EBIT
Interest Expense
= 4,00,000/1,00,000 = 4
Operating Profit Margin =
Sales
x100
EBIT
Operating Profit Margin = (4,00,000/16,00,000) × 100 = 25%
7. (c) COGS = Sales x (1-Gross Profit Margin)
COGS = 6,00,000 x (1-0.20) = 6,00,000 x 0.80 = 4,80,000
The velocity of stock is 3 months.
stock turnovers per year (12/3) = 4
Stock Turnover Ratio = COGS / Average Stock
Average Stock = 4,80,000/4 = 1,20,000
Average Stock = (Opening Stock + Closing Stock)/2
Closing Stock = 1,50,000
8. (d) 1, 2 and 3
PART II – Descriptive Questions
1. (a) Balance Sheets of Alpha Limited
` `
Liabilities 31 March
2023
31 March
2024
Assets
31 March
2023
31 March
2024
Equity share
capital (` 10
each fully paid)
20,00,000 20,00,000 Fixed Assets
(`18,90,000– `90,000) 18,00,000 15,39,000
Reserve and
Surplus
(balancing)
1,30,000 1,30,000 Long term investment - 2,96,600
Profit & Loss
A/c
(15% of sales)
2,70,000 6,15,600 Current Assets
(` 10,00,000)
566
Current
Liabilities
Stock 4,00,000 5,20,000
Bank Overdraft 1,00,000 - Sundry Debtors 3,00,000 4,95,000
Creditors 3,00,000 4,15,000 Cash at Bank
(Balancing)
3,00,000 3,10,000
Total 28,00,000 31,60,600 Total 28,00,000 31,60,600
Calculation for 31
st
March, 2023
(i) Calculation of Current Liabilities
Suppose that Current Liabilities = x, then current assets will be
2.5 x
Working capital = Current Assets – Current Liabilities
6,00,000 = 2.5x – x
x = 6,00,000 / 1.5 = ` 4,00,000 (C.L.)
Other Current Liabilities = Current Liabilities – Bank
Overdraft
(Creditors) = 4,00,000 – 1,00,000 = ` 3,00,000
Current Assets = 2.5 x 4,00,000 = ` 10,00,000
(ii) Liquid Ratio =
Liquid Assets
Current Liabilities
1.5 =
Liquid Assets
4,00,000
Liquid assets = `6,00,000
Liquid assets = Current Assets – Stock
6,00,000 = 10,00,000 – Stock
So, Stock = ` 4,00,000
(iii) Calculation of fixed assets: Fixed assets to proprietary fund is 0.75,
working capital is therefore 0.25 of proprietary fund. So,
Fixed Assets = 6,00,000 / 0.25 x 0.75 = ` 18,00,000
(iv) Sales = (14,40,000 / 80) × 100 = ` 18,00,000
(v) Debtors =
2
x Sales
12
2 / 12 × 18,00,000 = ` 3,00,000
(vi) Net profit = 15% of `18,00,000 = ` 2,70,000
Calculation for the year 31
st
March, 2024
(vii) Sales = 18,00,000 + (18,00,000 × 0.2) = 21,60,000
(viii) Calculation of fixed assets
567
Page 4
ANSWER S OF MODEL TEST PAPER 7
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (b) Ke =
D1
P0
+g
=
2
20
+0.05 = 15%
2. (b) Kd =
( )
( )
( )
RV-NP
I 1- t +
n
RV+NP
2
=
9(1-0.35)+
(100-102.90)
10
(100+102.90)
2
= 5.48%
3. (a) Kp =
( )
( )
RV-NP
PD+
n
RV+NP
2
K
p
=
11 + ?
100- 102.82
10
?
?
100 + 102.82
2
?
= 10.57%
4. (a) Calculation of WACC using market value weights
Source of capital Market
Value
Weights After tax
cost of
capital
WACC (Ko)
(`) (a) (b) (c) = (a)×(b)
Debentures (` 105 per
debenture)
2,88,750 0.1672 0.0548 0.0092
Preference shares (` 106
per preference share)
2,38,500 0.1381 0.1057 0.0146
Equity shares (` 24) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1280
WACC (Ko) = 12.80%
565
5. (a) Current Market Price =
1 D
Ke-g
=
-
2
0.10 0.05
= ` 40 per share
6. (c) DFL =
EBIT
EBT
DFL = 4,00,000/3,00,000 = 1.33
Interest Coverage Ratio =
EBIT
Interest Expense
= 4,00,000/1,00,000 = 4
Operating Profit Margin =
Sales
x100
EBIT
Operating Profit Margin = (4,00,000/16,00,000) × 100 = 25%
7. (c) COGS = Sales x (1-Gross Profit Margin)
COGS = 6,00,000 x (1-0.20) = 6,00,000 x 0.80 = 4,80,000
The velocity of stock is 3 months.
stock turnovers per year (12/3) = 4
Stock Turnover Ratio = COGS / Average Stock
Average Stock = 4,80,000/4 = 1,20,000
Average Stock = (Opening Stock + Closing Stock)/2
Closing Stock = 1,50,000
8. (d) 1, 2 and 3
PART II – Descriptive Questions
1. (a) Balance Sheets of Alpha Limited
` `
Liabilities 31 March
2023
31 March
2024
Assets
31 March
2023
31 March
2024
Equity share
capital (` 10
each fully paid)
20,00,000 20,00,000 Fixed Assets
(`18,90,000– `90,000) 18,00,000 15,39,000
Reserve and
Surplus
(balancing)
1,30,000 1,30,000 Long term investment - 2,96,600
Profit & Loss
A/c
(15% of sales)
2,70,000 6,15,600 Current Assets
(` 10,00,000)
566
Current
Liabilities
Stock 4,00,000 5,20,000
Bank Overdraft 1,00,000 - Sundry Debtors 3,00,000 4,95,000
Creditors 3,00,000 4,15,000 Cash at Bank
(Balancing)
3,00,000 3,10,000
Total 28,00,000 31,60,600 Total 28,00,000 31,60,600
Calculation for 31
st
March, 2023
(i) Calculation of Current Liabilities
Suppose that Current Liabilities = x, then current assets will be
2.5 x
Working capital = Current Assets – Current Liabilities
6,00,000 = 2.5x – x
x = 6,00,000 / 1.5 = ` 4,00,000 (C.L.)
Other Current Liabilities = Current Liabilities – Bank
Overdraft
(Creditors) = 4,00,000 – 1,00,000 = ` 3,00,000
Current Assets = 2.5 x 4,00,000 = ` 10,00,000
(ii) Liquid Ratio =
Liquid Assets
Current Liabilities
1.5 =
Liquid Assets
4,00,000
Liquid assets = `6,00,000
Liquid assets = Current Assets – Stock
6,00,000 = 10,00,000 – Stock
So, Stock = ` 4,00,000
(iii) Calculation of fixed assets: Fixed assets to proprietary fund is 0.75,
working capital is therefore 0.25 of proprietary fund. So,
Fixed Assets = 6,00,000 / 0.25 x 0.75 = ` 18,00,000
(iv) Sales = (14,40,000 / 80) × 100 = ` 18,00,000
(v) Debtors =
2
x Sales
12
2 / 12 × 18,00,000 = ` 3,00,000
(vi) Net profit = 15% of `18,00,000 = ` 2,70,000
Calculation for the year 31
st
March, 2024
(vii) Sales = 18,00,000 + (18,00,000 × 0.2) = 21,60,000
(viii) Calculation of fixed assets
567
` `
To Opening
balance
18,00,000 By Banks (Sale) 90,000
By Loss on sales of Fixed
asset
90,000
By P & L (Dep.) (5% as in
previous year) 81,000
________ By Balance b/d 15,39,000
Total 18,00,000 18,00,000
(ix) Net profit for the year 2011, 16% × 21,60,000 = ` 3,45,600
Total Profit = 2,70,000 + 3,45,600 = ` 6,15,600
(b) EBIT = ` 3,00,000
Less: Interest = ` 10,00,000 × 10% = ` 1,00,000
Earnings available to equity shareholders = ` 2,00,000
Equity capitalization rate = 12.5%
Market value of equity =
2,00,000
12.5%
`
= ` 16,00,000
Market value of debt = ` 10,00,000
Market value of the firm = ` 26,00,000
Overall cost of capital =
3,00,000 100
26,00,000
× `
`
= 11.54%
(c) (i) Increase in taxable income if sales increase by 6%.
Combined Leverage=
EBT
on Contributi
=
1,40,000
35,000
`
`
= 4
If the sales increases by 6%, EBT will increase by 24%. (4 × 6%)
(ii) Increase in EBIT if sales increase by 10%.
Operating Leverage=
tax and interest before Earnings
on Contributi
=
1,40,000
40,000
`
`
= 3.5
If sales increases by 10%, EBIT will increase by (3.5 × 10) 35%.
(iii) Increase in taxable income if EBIT increase by 6%.
Financial Leverage =
EBT
tax(EBIT) and interest before Earnings
=
40,000
35,000
`
`
=1.14
If EBIT increases by 6%, EBT will increase by 6.8%. (1.14 × 6%)
568
Page 5
ANSWER S OF MODEL TEST PAPER 7
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. (b) Ke =
D1
P0
+g
=
2
20
+0.05 = 15%
2. (b) Kd =
( )
( )
( )
RV-NP
I 1- t +
n
RV+NP
2
=
9(1-0.35)+
(100-102.90)
10
(100+102.90)
2
= 5.48%
3. (a) Kp =
( )
( )
RV-NP
PD+
n
RV+NP
2
K
p
=
11 + ?
100- 102.82
10
?
?
100 + 102.82
2
?
= 10.57%
4. (a) Calculation of WACC using market value weights
Source of capital Market
Value
Weights After tax
cost of
capital
WACC (Ko)
(`) (a) (b) (c) = (a)×(b)
Debentures (` 105 per
debenture)
2,88,750 0.1672 0.0548 0.0092
Preference shares (` 106
per preference share)
2,38,500 0.1381 0.1057 0.0146
Equity shares (` 24) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1280
WACC (Ko) = 12.80%
565
5. (a) Current Market Price =
1 D
Ke-g
=
-
2
0.10 0.05
= ` 40 per share
6. (c) DFL =
EBIT
EBT
DFL = 4,00,000/3,00,000 = 1.33
Interest Coverage Ratio =
EBIT
Interest Expense
= 4,00,000/1,00,000 = 4
Operating Profit Margin =
Sales
x100
EBIT
Operating Profit Margin = (4,00,000/16,00,000) × 100 = 25%
7. (c) COGS = Sales x (1-Gross Profit Margin)
COGS = 6,00,000 x (1-0.20) = 6,00,000 x 0.80 = 4,80,000
The velocity of stock is 3 months.
stock turnovers per year (12/3) = 4
Stock Turnover Ratio = COGS / Average Stock
Average Stock = 4,80,000/4 = 1,20,000
Average Stock = (Opening Stock + Closing Stock)/2
Closing Stock = 1,50,000
8. (d) 1, 2 and 3
PART II – Descriptive Questions
1. (a) Balance Sheets of Alpha Limited
` `
Liabilities 31 March
2023
31 March
2024
Assets
31 March
2023
31 March
2024
Equity share
capital (` 10
each fully paid)
20,00,000 20,00,000 Fixed Assets
(`18,90,000– `90,000) 18,00,000 15,39,000
Reserve and
Surplus
(balancing)
1,30,000 1,30,000 Long term investment - 2,96,600
Profit & Loss
A/c
(15% of sales)
2,70,000 6,15,600 Current Assets
(` 10,00,000)
566
Current
Liabilities
Stock 4,00,000 5,20,000
Bank Overdraft 1,00,000 - Sundry Debtors 3,00,000 4,95,000
Creditors 3,00,000 4,15,000 Cash at Bank
(Balancing)
3,00,000 3,10,000
Total 28,00,000 31,60,600 Total 28,00,000 31,60,600
Calculation for 31
st
March, 2023
(i) Calculation of Current Liabilities
Suppose that Current Liabilities = x, then current assets will be
2.5 x
Working capital = Current Assets – Current Liabilities
6,00,000 = 2.5x – x
x = 6,00,000 / 1.5 = ` 4,00,000 (C.L.)
Other Current Liabilities = Current Liabilities – Bank
Overdraft
(Creditors) = 4,00,000 – 1,00,000 = ` 3,00,000
Current Assets = 2.5 x 4,00,000 = ` 10,00,000
(ii) Liquid Ratio =
Liquid Assets
Current Liabilities
1.5 =
Liquid Assets
4,00,000
Liquid assets = `6,00,000
Liquid assets = Current Assets – Stock
6,00,000 = 10,00,000 – Stock
So, Stock = ` 4,00,000
(iii) Calculation of fixed assets: Fixed assets to proprietary fund is 0.75,
working capital is therefore 0.25 of proprietary fund. So,
Fixed Assets = 6,00,000 / 0.25 x 0.75 = ` 18,00,000
(iv) Sales = (14,40,000 / 80) × 100 = ` 18,00,000
(v) Debtors =
2
x Sales
12
2 / 12 × 18,00,000 = ` 3,00,000
(vi) Net profit = 15% of `18,00,000 = ` 2,70,000
Calculation for the year 31
st
March, 2024
(vii) Sales = 18,00,000 + (18,00,000 × 0.2) = 21,60,000
(viii) Calculation of fixed assets
567
` `
To Opening
balance
18,00,000 By Banks (Sale) 90,000
By Loss on sales of Fixed
asset
90,000
By P & L (Dep.) (5% as in
previous year) 81,000
________ By Balance b/d 15,39,000
Total 18,00,000 18,00,000
(ix) Net profit for the year 2011, 16% × 21,60,000 = ` 3,45,600
Total Profit = 2,70,000 + 3,45,600 = ` 6,15,600
(b) EBIT = ` 3,00,000
Less: Interest = ` 10,00,000 × 10% = ` 1,00,000
Earnings available to equity shareholders = ` 2,00,000
Equity capitalization rate = 12.5%
Market value of equity =
2,00,000
12.5%
`
= ` 16,00,000
Market value of debt = ` 10,00,000
Market value of the firm = ` 26,00,000
Overall cost of capital =
3,00,000 100
26,00,000
× `
`
= 11.54%
(c) (i) Increase in taxable income if sales increase by 6%.
Combined Leverage=
EBT
on Contributi
=
1,40,000
35,000
`
`
= 4
If the sales increases by 6%, EBT will increase by 24%. (4 × 6%)
(ii) Increase in EBIT if sales increase by 10%.
Operating Leverage=
tax and interest before Earnings
on Contributi
=
1,40,000
40,000
`
`
= 3.5
If sales increases by 10%, EBIT will increase by (3.5 × 10) 35%.
(iii) Increase in taxable income if EBIT increase by 6%.
Financial Leverage =
EBT
tax(EBIT) and interest before Earnings
=
40,000
35,000
`
`
=1.14
If EBIT increases by 6%, EBT will increase by 6.8%. (1.14 × 6%)
568
2. (a) Problem mentions that the company has applied to the Private Bank for
financing its working capital needs. Ideally, banks would not finance for
Depreciation cost being a non-cash cost and it would also not finance
the profit for you. So, problem needs to be solved using Cash Cost Basis.
Estimation of working capital required (cash cost basis)
Particulars Amount
A) Current Assets
A1) Stock of RM 15,84,960 x 30/360 1,32,080.00
A2) Stock of WIP (From Cost Statement) 4,77,360.00
A3) Stock of FG (From Cost Statement) 2,37,500.00
A4) Debtors 32,74,686 x 45/360 4,09,335.75
A5) Cash & Cash
Equivalents
(Given) 1,25,000.00
Gross Working
Capital
13,81,275.75
Less: B) Current Liabilites
B1) Creditors 17,17,040 x 30/360 1,43,086.67
B2) Lag in Wages
Payment
9,20,400 x 15/360 38,350.00
Excess of Current
Assets Over Current
Liabilites
(A) - (B) 11,99,839.08
Add:
Safety Margin @ 15%
Of Net Working
Capital 2,11,736.31
Net Working Capital 14,11,575.39
WN -1: Calculation of Profit
Profit = 25% of total cost i.e 20% of sales price
= {(31,200-2,500) x 150} x 20% = Rs. 8,61,000
WN – 2:
Completed Units WIP Units
31,200 9,360
Raw Mat. Consumed 12,48,000 3,36,960
Direct Wages 7,80,000 1,40,400
Overheads 9,36,000 1,68,480
29,64,000 6,45,840
Gross Factory Cost 36,09,840
569
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