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Question Paper

FM & SM Duration: 180

Details: FULL TEST 1 MARKS: 100

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets
in arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge
your performance.

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 SECTION –A (FM)

Case study 1

Adroit Manufacturers Pvt. Ltd. is a newly established startup dealing in manufacture of a

revolutionary product HDXMR which is a substitute to conventional wood and plywood. It is
an economical substitute for manufacture of furniture and home furnishing. It has been
asked by a venture capitalist for an estimated amount of funds required for setting up plant
and also the amount of circulating capital required. A consultant hired by the entity has
advised that the cost of setting up the plant would be Rs. 5 crores and it will require 1 year
to make the plant operational.

The anticipated revenue and associated cost numbers are as follows:

Units to be sold = 3 lakh sq meters p.a.

Sale Price of each sq meter = Rs. 1,000

Raw Material cost = Rs. 180 per sq meter

Labour cost = Rs. 40 per hour

Labour hours per sq meter = 3 hours

Manufacturing Overheads = Rs. 60 per machine hour

Machine hours per sq meter = 2 hours

Selling and Administration Overheads = Rs. 250 per sq meter

Being a new product in the industry, the firm will have to give a longer credit period of 3
months to its customers. It will maintain a stock of raw material equal to 15% of annual
consumption. Based on negotiation with the creditors, the payment period has been agreed
to be 1 month from the date of purchase. The entity will hold finished goods equal to 2
months of units to be sold.

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All other expenses are to be paid one month in arrears. Cash and Bank balance to the tune
of Rs. 25 lakhs is required to be maintained.

The entity is considering two options to reduce working capital requirement:

a) Reducing credit period to customers by 1 month leading to 5% fall in sales

b) Engaging a factor to manage receivables, charging 2% commission and advancing 65%

receivables at 12% p.a. This will lead to savings of Rs. 20 lakhs in administration costs and
Rs. 16 lakhs in bad debts.

The bank has offered 75% of net current assets as working capital advance at 16.5% interest
provided 10% of the loan is maintained as minimum balance.

As a finance manager, you have been asked the following questions:

1. The anticipated profit before tax per annum after the plant is operational is ……….

a) 990 Lakhs
b) 780 Lakhs
c) 370 Lakhs
d) 525 Lakhs

1.2 The estimated current assets requirement in the first year of operation (debtors
calculated at cost) is ……….

a) 9,42,50,000
b) 8,32,00,000
c) 7,25,41,667
d) 67,08,333

1.3 The net working capital requirement for the first year of operation is ……….

a) 6,39,12,500
b) 2,17,08,333
c) 7,25,41,667
d) 67,08,333

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1.4 The annualised % cost of two options for reducing the working capital is ……….

a) 18.33% and 16.92%

b) 26.86% and 16.92%
c) 26.33% and 18.33%
d) 16.92% and 19.05%

1.5 What will be the Maximum Permissible Bank Finance by the bank and annualised % cost
of the same?

a) 4,55,03,630 and 18.33%

b) 4,79,34,375and 18.33%
c) 4,45,86,025 and 18.59%
d) 3,45,89,020 and 19.85%

(2×5 = 10 MARKS)

Q2. Company A and B are homogeneous in all respects except that Company A is levered
while Company B is unlevered. Company A has Rs. 5,00,000 assumptions are met and the
tax rate is 50%. (3). EBIT is Rs. 50,000 and that equity-capitalisation rate for Company B is
12%. What would be the value for unlevered Firm according to M— M’s approach?

(a) Rs. Rs. 2,08,333 (b) Rs. 11,50,000

(c) Rs. 30,00,000 (d) Rs. 20,30,000

(2 MARKS)

Q3. Rajesh is considering two investment projects, Project X and Project Y, for his business.
Project X requires an initial investment of ₹1,000,000 and is expected to generate an
average annual net income of ₹200,000 over its useful life. Project Y, on the other hand,

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requires an initial investment of ₹2,000,000 and is expected to generate an average annual
net income of ₹400,000. If Rajesh calculates the ARR for both projects, which of the
following statements is true?

A) Project X has a higher ARR than Project Y.

B) Project Y has a higher ARR than Project X.

C) Both Project X and Project Y have the same ARR.

D) ARR cannot be determined without knowing the payback period.

(1 Mark)

Q4. Following information is provided by the DPS Ltd. for the year ending 31st March 2019.

Raw material storage period — 55 days

WW conversion period — 18 days

Finished goods storage period — 22 days

Debt collection period — 45 days

Creditor’s payment period — 60 days

Annual operating cost including depreciation of ₹ 2,10,000 was ₹ 21,00,000. [1 Year =360
days]

You are required to calculate working capital on cash cost basis.

(A) ₹ 4,20,000 (B) ₹ 4,66,667

(C) ₹ 7,35,000 (D) ₹ 8,16,667

(2 MARKS)

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 Question 1 is compulsory; Attempt any 2 questions from the remaining questions

Descriptive Questions

Q1(a). A firm has total sales of Rs.200 lakhs of which 80% is on credit. It is offering credit
terms of 2/40, net 120. Of the total, 50% of customers avail of discount and the balance pay
in 120 days. Past experience indicates that bad debts losses are around 1% of credit sales.
The firm spends about Rs.2,40,000 per annum to administer its credit sales. These are
avoidable as a factor is prepared to buy the firm’s receivables. He will charge 2%
commission. He will pay advance against receivables to the firm at an interest rate of 18%
after withholding 10% as reserve.

1) What is the effective cost of factoring? Consider year as 360 days.

2) If bank finance for working capital is available at 14% interest, should the firm avail of
factoring service.

(5 MARKS)

Q1(b). A Company earns a profit of Rs.3,00,000 per annum after meeting its interest liability
of Rs. 1,20,000 on 12% debentures. The Tax rate is 50%. The number of Equity Shares of
Rs.10 each are 80,000 and the retained earnings amount to Rs.12,00,000. The company
proposes to take up an expansion scheme for which a sum of Rs.4,00,000 is required. It is
anticipated that after expansion, the company will be able to achieve the same return on
investment as at present. The funds required for expansion can be raised either through
debt at the rate of 12% or by issuing Equity Shares at par.

Required:

1) Compute the Earnings per Shares (EPS), if:

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a) The additional funds were raised as debt

b) The additional funds were raised by issue of equity shares

2) Advise the company as to which source of finance is preferable.

(5 MARKS)

Q1(c): TATA Ltd. is in a competitive market where every company offers credit. To maintain
the competition, TATA Ltd. sold all its goods on credit and simultaneously received the
goods on credit. The company provides the following information relation to current
financial year.

Debtors velocity 3 Months

Credit Velocity 2 months

Stock turnover ratio ( on cost of goods sold) 2

Fixed assets turnover ratio (on cost of goods sold) 5

Gross profit ratio 25%

Bills receivables 65,000

Bills payables 35,000

Gross profit 10,00,000

TATA Ltd. has tendency of maintaining extra stock of Rs 30,000 at the end of the period than
that at the beginning.
Calculate the required the points:
a) Sales and cost of goods sold
b) Sundry Debtors
c) Closing Stock

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 (5 MARKS)

Q2(a). MNP Limited is thinking of replacing its existing machine by a new machine which
would cost Rs. 60 lakhs. The company’s current production is Rs. 80,000 units, and is
expected to increase to 1,00,000 units, if the new machine is bought. The selling price of the
product would remain unchanged at Rs. 200 per unit. The following is the cost of producing
one unit of product using both the existing and new machine:

Unit Cost (Rs.)

Existing Machine New Machine

(80,000 units) (1,00,000 units) Difference

Materials 75.0 63.75 (11.25)

Wages & Salaries 51.25 37.50 (13.75)

Supervision 20.0 25.0 5.0

Repairs and Maintenance 11.25 7.50 (3.75)

Power and Fuel 15.50 14.25 (1.25)

Depreciation 0.25 5.0 4.75

Allocated Corporate Overheads 10.0 12.50 2.50

183.25 165.50 (17.75)

The existing machine has an accounting book value of Rs. 1,00,000, and it has been fully
depreciated for tax purpose. It is estimated that machine will be useful for 5 years. The
supplier of the new machine has offered to accept the old machine for Rs. 2,50,000.
However, the market price of old machine today is Rs. 1,50,000 and it is expected to be Rs.
35,000 after 5 years. The new machine has a life of 5 years and a salvage value of Rs.
2,50,000 at the end of its economic life. Assume corporate Income tax rate at 40%, and

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depreciation is charged on straight line basis for Income-tax purposes. Further assume that
book profit is treated as ordinary income for tax purpose. The opportunity cost of capital of
the Company is 15%.

Required:

(i) Estimate net present value of the replacement decision.

(ii) Should Company go ahead with the replacement decision? Suggest

Year (t) 1 2 3 4 5

PVIF0.15,t 0.8696 0.7561 0.6575 0.5718 0.4972

PVIF0.20,t 0.8333 0.6944 0.5787 0.4823 0.4019

PVIF0.25,t 0.80 0.64 0.512 0.4096 0.3277

PVIF0.30,t 0.7692 0.5917 0.4552 0.3501 0.2693

PVIF0.35,t 0.7407 0.5487 0.4064 0.3011 0.2230

(8 MARKS)

(b) Explain the concept of External Commercial Borrowings (ECBs) and the routes available
for accessing ECBs in India.

(2 MARKS)

Q3(a). The Sneha Ltd. has following capital structure at 31st December 2015, which is
considered to be optimum:

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 Particulars Amount (Rs.)

13% Debenture 3,60,000

11% Preference share capital 1,20,000

Equity share capital (2,00,000 shares) 19,20,000

The company’s share has a current market price of Rs.27.75 per share. The expected
dividend per share in next year is 50 percent of the 2015 EPS. The EPS of last 10 years is as
follows. The past trends are expected to continue.

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EPS (Rs) 1.00 1.120 1.254 1.405 1.574 1.762 1.974 2.211 2.476 2.773

The company can issue 14 percent new debenture. The company’s debenture is currently
selling at Rs.98. The new preference issue can be sold at a net price of Rs.9.80, paying a
dividend of Rs.1.20 per share. The company’s marginal tax rate is 50%.

i) Calculate the after tax cost (a) of new debts & new preference share capital,

(b) Of ordinary equity, assuming new equity comes from retained earnings.

ii) Calculate the marginal cost of capital.

iii) How much can be spent for capital investment before new ordinary share must be sold?
(Assuming that retained earnings available for next year’s investment is 50% of 2015
earnings.)

iv) What will be marginal cost of capital (cost of fund raised in excess of amount calculated
in part (iii) if the company can sell new ordinary shares to net Rs.20 per share ? Cost of debt
and of preference capital is constant

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 (7 MARKS)

(b) Explain the concepts of operating leverage, financial leverage, and combined leverage.
Discuss how these leverages are calculated and their significance in financial analysis.

(3 MARKS)

Q4(a). State Agency Cost. Discuss the ways to reduce the effect of it.

(4 MARKS)

Q4(b). Explain packing credit? State the different types of Packing Credit.

(4 MARKS)

Q4(c). Discuss the concept of 'float' in the context of cash management and how firms can
reduce different types of float to accelerate cash collections.

(2 MARKS)

OR

Explain the Walter's model of dividend relevance theory. Under what conditions is a 100%
payout optimal according to Walter's model?

(2 MARKS)

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 SECTION –B (SM)

Question 1 is compulsory

Attempt any 2 questions from the remaining questions

CASE STUDY BASED MCQ’S

HealthCare Innovators Ltd (HIL) commenced its operations as a small family-run business,
specializing in providing tailor-made hospital furniture and patient care equipment.
Established in 1990 with modest capital and a small workforce, the company has evolved
over the past 20 years into a thriving center of expertise. HIL is now recognized for its
custom-made, locally sourced, or quality-imported commercial-grade hospital furniture,
particularly in the field of patient care equipment.

HIL has established a vast business network across India, supplying high-quality products to
hospitals, nursing homes, and medical colleges. The company is renowned for
manufacturing hospital furniture and operation theatre equipment, including tables and
lights.

However, facing a sudden decline in sales volume, profit margins, and market share, the
CEO of HIL called a meeting with the Board of Directors and senior executives. In response
to the challenges, they appointed Ms. Kapoor as the new strategy manager to analyze the
business environment and address the reasons for the declining trends.

Ms. Kapoor conducted a SWOT analysis, identifying increased competition as the primary
reason for the recent downturn. Although HIL has been synonymous with high quality for
many years, competitors are now offering equivalent products at lower prices, leading to a
decline in market share.

After thorough analysis, Ms. Kapoor presented her report to the top-level management,
proposing the following strategies:

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Focus on technology, innovation, and quality: Leverage expert technology, quality, and
innovation to gain the confidence of doctors and the trust of consumers in developing the
latest medical equipment.

Employee training & development: Invest in training technical staff to enhance their
expertise, ensuring the production of trouble-free products.

Cost rationalization: Implement cost reduction measures to improve the overall efficiency
of production.

Client service, support, and feedback: Prioritize after-sales service, recognizing the
importance of customer satisfaction and actively seeking valuable suggestions.

Product testing: Maintain rigorous product testing procedures to ensure the quality and
reliability of all products before dispatch.

Multiple Choice Questions:

1. After conducting the SWOT analysis by Ms. Kapoor in HIL, she identifies that high-quality,
custom-made hospital furniture has made a significant name in the field of "patient care
equipment" by HIL. For HIL, these features of its products are its:

(a) Strength

(b) Opportunity

(c) Weakness

(d) Threat

2. HIL recruits and appoints various employees at their respective levels in the organization.
Identify, the CEO, Board of Directors, and other senior executives are a part of which of the
following Strategic Levels in the organization?

(a) Business level

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(b) Functional level

(c) Corporate level

(d) Consultant level

3. According to Michael Porter’s five forces model, which force came into existence for
declining the growth and profits of HIL?

(a) Threat of new entrant

(b) Threat of substitutes

(c) Bargaining power of customers

(d) Bargaining power of suppliers

4. HIL’s market share is declining due to equivalent products being sold by competitors at
lower prices. What does this statement reflect?

(a) It reflects that the cost of production of competitors is lower than HIL

(b) It reflects that the competitors are providing cheap products

(c) It reflects that HIL has declined the quality of its products

(d) All of the above

5. Competitive advantage leads to superior profitability. Ms. Kapoor’s report indicates the
factors for value creation. Identify the factors by which HIL can achieve competitive
advantage by value creation.

(a) The expert technology, quality, and innovates can earn the confidence.

(b) Reduction in the cost of production is required

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(c) After Sale-Service to customers and welcome the valuable suggestions from their
customers.

(d) All of the above

(5×2 = 10 MARKS)

General MCQ

6. What type of relationship between levels in an organization features a grid-like structure,

with teams formed for temporary task-based projects, and more than one business level
manager for each functional level team?

A) Functional and Divisional Relationship

B) Horizontal Relationship

C) Matrix Relationship

D) Independent Relationship

(1 MARK)

7. A marketing manager is tasked with promoting a campaign to discourage the

consumption of sugary beverages among teenagers. Which marketing strategy would be
most appropriate for this social cause?

A) Social Marketing

B) Augmented Marketing

C) Viral Marketing

D) Influencer Marketing

(2 MARKS)

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8. ABC Ltd, an organization implementing a new performance management system, follows
Kurt Lewin's Model of Change. The employees have been made aware of the need for
change and are prepared for it. The next step is to redefine their behavior patterns to align
with the new system. What phase of Kurt Lewin's model is the organization currently in,
and what strategy is most effective during this phase?

A) Unfreezing; Utilizing a reward and punishment strategy to enforce compliance.

B) Changing; Encouraging employees to identify with role models who have successfully
adopted the new behavior.

C) Refreezing; Continuously reinforcing the new behavior to make it a normal way of life.

D) Unfreezing; Holding meetings and making announcements to promote new ideas

throughout the organization.

(2 MARKS)

Division B – Descriptive Questions

Question 1 is compulsory; Attempt any two from the remaining three

Q-1 (a) ABC Technologies, a prominent player in the electronics industry, is eager to assess
its competitive standing within the market. To gain valuable insights into its position relative
to competitors, the company has opted to utilize Strategic Group Mapping. Explain the
concept of Strategic Group Mapping & Provide a step-by-step guide on how to construct a
Strategic Group Map.

(5 MARKS)

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Q1(b) TechHub Enterprises was once a leader in software development but faced a decline
due to a lack of adaptation to technological advancements. What strategic steps could
TechHub Enterprises have taken to change, adapt, and survive? Explain the key steps to
initiate the necessary change.

(5 MARKS)

Q-1 (c) "How do technological developments and the changing political landscape
contribute to the globalization of businesses, and what are the key factors driving
companies to expand their operations globally in the contemporary business environment?"

(5 MARKS)

Q-2(a) Explain the PESTLE analysis as a tool to Analyze Macro Environment in the strategic
management of organizations Outline the key factors involved in PESTLE analysis and
elucidate how considering these factors contributes to proactive and structured decision-
making within an organization's strategic framework.

(5 MARKS)

Q-2 (b) Sunrise Enterprises Incorporated deals in multi-products and multi-businesses. It has
its own set of competitors. It seems impractical for the company to provide separate
strategic planning treatment to each one of its products or businesses. As a strategic
manager, suggest the type of structure best suitable for Sunrise Enterprises Incorporated
and state its benefits.

(5 MARKS)

Q-3 (a) Moon light Corporation, a diverse and multi-faceted company, is currently
evaluating its organizational framework using the McKinsey 7S Model for better

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effectiveness. This Model focuses on the "Soft Ss" and "Hard Ss" elements. Explain these
elements in detail.

(5 MARKS)

Q-3 (b) Rahul and Arjun, two brothers, are the proprietors of a textile manufacturing facility
situated in Noida. They are thriving in their business and have considerable excess funds
available within the enterprise. They harbor divergent opinions on corporate strategies to
enhance competitiveness and profitability in the future.

Rahul is keen on acquiring an additional industrial facility in Noida that specializes in

producing office supplies such as permanent markers, notebooks, pencils, pencil
sharpeners, envelopes, and other stationery items. Conversely, Arjun is inclined to establish
another unit for the production of ready-made garments.

Discuss the nature of strategic choices being proposed by the two brothers, considering the
payoffs and risks involved.

(5 MARKS)

Q-4(a) ABC Corporation, a diversified company with multiple business units, is considering
using the Boston Consulting Group (BCG) Growth-Share Matrix for strategic planning and
resource allocation. Analyze the different types of products or Strategic Business Units
(SBUs) identified in the BCG matrix and discuss the post-identification strategies that ABC
Corporation can adopt for each category.

(5 MARKS)

Q-4 (b) Explain the key components of SWOT analysis and their respective definitions. How
do these components contribute to the strategic planning process for organizations? Is
SWOT Analysis for Internal or External Environment? Explain

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 (5 MARKS)

OR

Anita Sharma, the marketing department head of Zentech, a technology solutions company,
was recently promoted to oversee the human resources department along with marketing.
Her seniors at the corporate level have always admired her leadership style and believe that
she would ensure the implementation of policies and strategies to the best of her capacity
but have never included her in decision-making for the company.

Do you think this is the right approach? Validate your answer with logical reasoning around
management levels and decision-making.

(5 MARKS)

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