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 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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Financial Management Model Test Paper - 7 (Answers) | Model Test Papers for CA Intermediate

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Objective type Questions

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Exam

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shortcuts and tricks

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Viva Questions

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