INDEX- SUPER 50

CS-EXECUTIVE FM LDR COMPILER

Sr No. Chapter Name No of Questions.

1. Introduction to FM 3

2. Operational Approach to Financial Decisions 5

3. Leverage 5

4. Cost Of Capital 6

5. Capital Structure 3

6. Dividend Decisions 4

7. Time Value of Money 6

8. Capital Budgeting 8

9. Working Capital Management 10

TOTAL 50

QUESTIONS पचास
काम ख ास!

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 INTRODUCTION TO FM
1) Management of It’ll Heal Medical Company are evaluating the performance of three
divisions of the company. The Booboo Division had operating profit of $499 and on
average used assets with a book value of $6,238. The Splint Division had operating profit
of $350 and used average assets of $3,889. The Intensive Care Division had operating
profit of $570 and average assets of $9,500.
Which division is performing the best?

2) XYZ Ltd. has capital investment of Rs. 150 crores. After tax operating income is Rs. 20
crores and company have a cost of capital of 12%. Estimate the Economic Value Added
of the firm.

3) Calculate the market value added using the following information:

Total number of shares issued = 20,000,000
Number of shares held as treasury stock =1,100,000
Current share price = $35.5
Total invested capital plus retained earnings = $453,503,000
Cost of treasury stock = $39,050,000
Assume that the market value of debt equals its book value.

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 OPERATIONAL APPROACH TO FINANCIAL DECISIONS
4) The National Company has just been formed. They have a patented process that will
make them the sole suppliers of Product A. During the first year, the capacity of their
plant will be 9,000 units, and this is the amount they will be able to sell. Their costs are:
Direct labor = $15 per unit
Raw materials = $5 per unit
Other variable costs = $10 per unit
Fixed costs = $240,000

There are two parts to this question:

a) If the company aims to make a profit of $210,000 for the first year, what should the
selling price be? What is the contribution margin at this price?
b) If, at the end of first year, the company aims to increase its volume, how many units
will they have to sell to realize a profit of $760,000 given the following conditions?
An increase of $100,000 in the annual fixed costs will increase their capacity to
50,000 units
Selling price is at $70 per unit and no other costs change
$500,000 is invested in advertising.

5) A company manufactures a product, currently providing 80% capacity with a turnover

of 8,00,000 at 25 per unit. The cost data are as under: Material cost 7.50 per unit, Labor
cost 6.25 per unit. Semi-variable cost (including variable cost of 3.75 per unit) 1,80, 000,
Fixed cost 90,000 up to 80% level of output, beyond this an additional 20,000 will be
incurred. Calculate: level at breakeven point.

6) DB Ltd furnished the following information

Particulars 2005-2006 2006-2007

Sales (Rs 10/unit) 200,000 2,50,000

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 Profit 30,000 50,000

You are required to compute:

a) P/V Ratio.
b) Break-even point.
c) Total variable cost for 2005-2006 & 2006-2007.
d) Sales required to earn a profit of Rs. 60,000.
e) Profit/Loss when sales are Rs. 1,00,000.

7) A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio of
40%. Its fixed costs amount to Rs. 5 lakhs.

Calculate the following:

a) Break even sales

b) Total sales
c) Total variable cost
d) New 'margin of safety' if the sales volume is increased by 7 1/2 %.
e) Current profit

8) Mahindra Ltd. sells two products, J and K. The sales mix is 4 units of J and 3 units of K.
The contribution margins per unit are $40 for J and $20 for K. Fixed costs are $6,16,000
per month.

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 LEVERAGE
9) Turnover = 2000 Crores PV Ratio = 30% OFC = 120 Crores Interest Expenses = 40 Crores
Preference Dividend = 10 Crores Tax Rate = 40%
Calculate the Operating Leverage, Financial Leverage and Combined Leverage.

10)The following data is available for Iron ltd

Sales $5,00,000
Less variable cost 40% $2,00,000

Contribution $3,00,000
Less fixed cost $2,00,000

EBIT $1,00,000
Less interest $25,000

Profit before tax $75,000

Using the concept of leverage, find out –

a) % change in taxable income if EBIT increases by 10%.
b) % change in EBIT if sales increase by 10%.
c) % change in taxable income if sales increase by 10% Also verify the results in each
of the above case.

11) From the following details of X Ltd. Prepare the income statement for the year ended
31st December 2024:

Financial leverage 2

Interest 2,000

Operating leverage 3

Variable cost as a percentage of sales 75%

Income tax rate 30%

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12) ABC Limited has the following capital structure and want to know its Financial Break-
Even Point.
Equity shares (FV = $ 100) $ 5,00,000
12% Preference Shares (FV = $ 100) $ 5,00,000
10% Debentures (FV = $ 100) $ 10,00,000
Tax Rate 40%.

13) A new project requires a capital outlay of 400 lakhs. The required amount to be raised
either fully by equity shares of 100 each or by equity shares of the value of 200 lakhs
and by loan of 200 lakhs at 15% interest. Assuming a tax rate of 40%, Calculate the
figure of EBIT that would keep the equity investors indifferent to the two options.

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 COST OF CAPITAL
14) SK Company Limited has issued, 10,000 8% preference shares of Rs. 200 each. Cost of
issue is 5%. Company tax rate is 50%.
Calculate cost of capital before tax and after tax if these shares are issued:
a) 5% discount and
b) at 10% premium.

15) SK Co. Ltd. wishes to issue 1,000, 10% Debentures of Rs. 500 each for which the company
will be required to incur the following expenses:
Underwriting commission 2%,
Brokerage 0.5%,
Printing and other expenses Rs.7,500.
Calculate cost of capital (before tax as well as after tax) assuming the debt is issued:
a) At 10% discount repayable after 10 years and
b) At 10% premium repayable after 10 years.

16) The SK Company declared last dividend of Rs. 1.50 last year. The company is likely to
have growth rate of 12% in the next two years, 10% in the third year and fourth year
and thereafter the growth rate would stabilize at 8%.
Find the price at which the share shall be purchased if the shareholders expected rate
of return is 16%.

17) The capital structure of a company and its specific costs are given below. Find out
simple and the weighted average cost of capital of the company.

Source Amount Specific cost (after tax)

Long term debt 15,00,000 4%

Preference share 10,00,000 12%

Equity share 20,00,000 15%

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 Retained earnings 5,00,000 15%

50,00,000

18) Techno mate Limited has the following Capital Structure:

9% Debentures 2,75,000

11% Preference Share 2,25,000

Equity share (Face value: Rs 10 per share) 5,00,000

TOTAL 10,00,000

Additional Information:
Rs 100 Per Debenture Redeemable at Par has 2% Floatation Cost and 10 Years of
Maturity. The Market Price Per Debentures is Rs 105.
Rs 100 Per Preference Share Redeemable at Par has 3% Floatation Cost and 10
Years of Maturity. The Market Price Per Preference Share is Rs 106.
Equity Share has Rs 4 Floatation Cost and Market Price Per Share of Rs 24. The next
year expected Dividend is Rs 2 Per Share with Annual Growth of 5%. The firm has a
practice of paying all earnings in the form of dividends.
Corporate Income-Tax Rate is 35%.
You are required to Calculate Weighted Average Cost of Capital (WACC) using
Market Value Weights.

19) The capital structure of Vidya Ltd as on 31 st march is as follows (Rs in lakhs):

Equity Share Capital (7,50,000 equity shares of Rs 100 each) 750

Retained Earnings 250

13.5% Preference Share Capital 240

12.5% Debentures 360

The current market price per equity share is Rs 350. The prevailing default risk-free
interest rate is 6% and rate of return on market portfolio is 15%. The beta of the
company is 1.289. The corporate tax rate is 30%. The average tax rate of shareholders

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 is 25% and brokerage cost is 2%, that they have to pay while investing dividend in
alternative securities.
Calculate the weighted average cost of capital on the basis of BOOK VALUE WEIGHTS.

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 CAPITAL STRUCTURE
20) The following data relates to four firms?

Firm A B C D

EBIT 2,00,000 3,00,000 5,00,000 6,00,000

Interest 20,000 60,000 2,00,000 2,40,000

Equity capitalization rate 12% 16% 15% 18%

Assuming that there are no taxes and interest rate on debt is 10%, determine the value
and WACC of each firm using the net income approach. What happens if firm A borrows
Rs. 2 lakhs at 10% to repay equity capital?

21) Ashoke Ltd and Babita Ltd are identical except for capital structure. Ashoke Ltd has
60% debt and 40% equity, whereas Babita ltd has 20% debt and 80% equity. (all % are
in market-value terms). The borrowings rate for both companies is 8% in a no-tax world,
and capital markets are assumed to be perfect.

a) If X owns 3% of the equity shares of Ashoke Ltd, determine his return if the company
has net operating income Rs. 4,50,000 and the overall capitalization rate of the
company is 18%. Calculate the implied required rate of return on equity of Ashoke
Ltd.

b) Babita Ltd has the same net operating income as Ashoke Ltd. Calculate the implied
required return of Babita Ltd. Analyze why it differs from that of Ashoke Ltd.

22) There are two firms Neha and Mohan, having same earnings before interest and taxes,
i.e., EBIT of Rs. 20,000. Firm Mohan is a levered company having debt of Rs. 1,00,000
@7% interest rate. Cost of equity of company Neha is 10% and of company Mohan is
11.50% Explain how arbitrage process will be carried on in this case.

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 DIVIDEND DECISIONS
23) From the following data Calculate the value of an equity share of each of the following
three companies according to Walter's Model when dividend pay-out ratio is: Nil, 25%,
50%, 75% & 100%.

Name of the companies X ltd. Y ltd. Z ltd.

Internal rate of return (r) 15% 5% 10%

Cost of capital (k) 10% 10% 10%

Earnings per share (E) $10 $10 $10

What conclusion do you draw?

24) From the following data calculate the value of an Equity Share of each of the following
three companies according to the Gordon’s model when dividend payout ratio is 25%,
50% and 100%.

Name of the companies X ltd Y ltd Z ltd

Internal rate of return (R) 12% 8% 10%

Cost of capital (K) 10% 10% 10%

Earnings per share (E) $12 $12 $12

What conclusion do you draw?

25) Bangabasi Ltd. belongs to a risk-class for which the appropriate capitalization rate is
10%. It currently has outstanding 2000 equity shares of 100 each. The firm is
contemplating the declaration of dividend of 18 per share at the end of the current
financial year. It expects to have net earnings of 220,000 and has a proposal for making
new investment of 24,000.
Show that under the Modigliani-Miller assumption, the payment of dividend does not
affect the value of the firm.

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26) The dividends of A & G Company Ltd. are expected to grow at a rate of 25% for 2 years,
after which the growth rate is expected to fall to 5%. The dividend paid last year was
Rs.2. The investor desires a 12% return.
You are required to find the value of this stock. PV Factor @ 12% is as under:

Year 1 2 3

Value 0.893 0.797 0.712

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 TIME VALUE OF MONEY
27) An investment of RS 5,00,000 in a bank yields an amount of RS 7,70,000. If the interest
rate of 9%, what is the period for which the principle was deposited?

28) Sudesh, an executive in an MNC, is 35 years old. He has decided it is time to plan
seriously for his retirement. At the end of each year until he is 65, he will save rs. 10,000
in a retirement account. If the account earns 10% per year, how much will Sudesh have
saved at the age of 65?

29) Calculate the amount if RS 1,00,000 is invested for 1 year at 6% compounded -

a) Annually;
b) Semi-annually;
c) Quarterly;
d) Monthly;
e) Daily.

30) A project generates the following cash flows;

Beginning of years:

1 – ($100,000) (contractors’ fees)

2 – ($200,000) (contractors’ fees)

3 – ($200,000) (contractors’ fees)

End of Year 3: $1,000,000 (sales)

Calculate the NPV of the project using a risk discount rate of 20% per year.

31) Due to the large capital needed to establish a factory and warehouse for coffee
machines, Akshay have turned to private investors to fund the expenditure. He met with

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 Jacob, who is a high net-worth individual willing to contribute $1,000,000 to Akshay’s
company.
However, Jacob is only willing to contribute the said amount on the presumption that he
will get a 12% annual rate of return on his investment, compounded yearly. He wants to
know how long it will take for his investment in Akshay’ s company to double in value.

32) What is the annual yield on:

a) A 3% account compounded monthly.
b) A 6 1/8% account compounded daily.
c) A 9% account compounded semi-annually.

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 CAPITAL BUDGETING
33) Robin Ltd. is examining two mutually exclusive investment proposals. The management
uses Net Present Value method to evaluate new investment proposals. Depreciation is
charged using Straight line Method. Other details relating to these proposals are:

Particulars Proposal X Proposal Y

Annual profit before tax ($) 13,00,000 24,50,000

Cost of the project ($) 90,00,000 1,80,00,000

Salvage value ($) 1,20,000 1,50,000

Working life 4 Years 5 Years

Cost of capital 10% 10%

Corporate tax rate 30% 30%

The present value of 1 at 10% discount rates at the end of first, second, third, fourth and
fifth year are 0.9091; 0.8264; 0.7513; 0.683; and 0.6209 respectively.
You are required to advise the company on which proposal should be taken up by it.

34) A limited company is considering investing a project requiring a capital outlay of

2,00,000. Forecast for annual income after depreciation but before tax is as follows:

Year ($)

1 1,00,000

2 1,00,000

3 80,000

4 80,000

5 40,000

Depreciation may be taken as 20% on original cost and taxation at 50% of net income.
You are required to evaluate the project according to each of the following methods:
a) Payback Period Method

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 b) Rate Of Return on Original Investment Method.
c) Rate Of Return on Average Investment Method.
d) Discounted Cash Flow Method Taking Cost of Capital As 10%.
e) Net Present Value Index Method.
f) Internal Rate of Return Method.
g) Modified Internal Rate of Return Method.

35) Given below are the data on a Capital project ‘M’:

Annual cost saving Rs.60,000

Useful life 4 Years

Internal rate of return 15%

Profitability index 1.064

Salvage Value 0

You are required to calculate for this project ‘M’

a) Cost of Project
b) Payback Period
c) Cost of Capital
d) Net Present Value

Given the following table of discount factors:

Discount Factor 15% 14% 13% 12%

1 Years 0.869 0.877 0.885 0.893

2 Years 0.756 0.769 0.783 0.797

3 Years 0.658 0.675 0.693 0.712

4 Years 0.572 0.592 0.613 0.636

36) X Ltd. has a capital budget of 1.5 crore for the year. From the following information
relating to six independent proposals, select the projects if:
a) The projects are divisible and
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 b) The projects are indivisible.

Proposal INVESTMENT ($) NPV ($)

A 70,00,000 30,00,000

B 25,00,000 16,00,000

C 50,00,000 20,00,000

D 20,00,000 10,00,000

E 55,00,000 45,00,000

F 75,00,000 -25,00,000

If the projects are divisible. Projects are ranked according to PI and arranged in
descending order.

37) SK. Ltd. is considering the purchase of a new machine which will come out some
operations which are at present performed by labour X and Y are alternative models.
The following information’s are available:

Particulars Machine X Machine Y

Cost of Machine 15,000 24,000

Estimated life of machine 5 Years 6 Years

Estimated saving in scrap p.a. 1,000 1,500

Estimated cost of indirect materials 600 800

Estimates savings in direct wages p.a. 9,000 12,000

Additional cost of maintenance p.a. 700 1,100

Additional cost of supervision p.a. 1200 1,600

Depreciation will be charged on a straight-line basis. A tax rate of 50% is assumed.

a) The Payback method;
b) Unadjusted return on average investment method; and
c) Net present value index method (cost of capital 8 percent)

Note: - The present value of Re. 1 @ 8% per annum received annually for 5 years is 3.993
and for 6 years are 4.623.
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38) A company has just installed a machine Model A for the manufacture of a new product
at capital cost of₹ 1,00,000. The annual operating costs are estimated at 50,000
(excluding depreciation) and these costs are estimated on the basis of an annual volume
of 1,00,000 units of production. The fixed costs at this volume of 1,00,000 units of output
will amount to 4,00,000 p.a. The selling price is 5 per unit of output. The machine has a
five-year life with no residual value.

The company has now come across another machine called Super Model which is capable
of giving, the same volume of production at an estimated annual operating cost of 30,000
exclusives of depreciation. The fixed costs will however, remain the same in value. This
machine also will have a five-year life with no residual value. The capital cost of this
machine is 1,50,000.

The company has an offer for the sale of the machine Model A (which has just been
installed) at 50,000 and the cost of removal thereof will amount to 10,000 Ignore tax.

In view of the lower operating cost, the company is desirous of dismantling of the machine
Model A and installing the Super Model Machine. Amame that Model A has not yet started
commercial production and that the time lag in the removal thereof and the installation
of the Super Model machine is not material. The cost of capital is 14% and the P.V. Factors
for each of the five years respectively are 0.877, 0.769,0 675,0.592 and 0.519.

State whether the company should replace Model A machine by installing the Super Model
machine. Will there be any change in your decision if the Model A machine has not been
installed and the company is in the process of consideration of selection of either of the
two models of the machine Present mutable statement to illustrate your answer.

39) A Ltd. Is considering two mutually exclusive projects X and Y. You have been given below
the net cash flow probability distribution for each project.

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 Project X Project Y

Net Cash Flow (Rs) Probability Net cash flow (Rs) Probability

50,000 0.30 1,30,000 0.20

60,000 0.30 1,10,000 0.30
70,000 0.40 90,000 0.50

Compute the following –

a) Expected net cash flow of each project,
b) Variance of each project,
c) Standard Deviation of each project,
d) Coefficient of variation of each project.

Identify which project do you recommend? Give reason.

40) The textile manufacturing company Ltd is considering one of two mutually exclusive
proposals, Project M and N, which require cash outlays of Rs. 8,50,000 and Rs. 8,25,000
respectively. The certainty-equivalent approach is used in incorporating risk in capital
budgeting decisions.

The current yield on government bonds is 6% and this is the risk-free rate. The expected
net cash flows and their certainty equivalents are as follows -

Year End Project M Project N

Cash flow (Rs) C.E Cash flow (Rs) C.E.

1 4,50,000 0.8 4,50,000 0.9

2 5,00,000 0.7 4,50,000 0.8

3 5,00,000 0.5 5,00,000 0.7

Required:

a) Which project should be accepted?

b) If risk adjusted discount rate method is used, while project would be appraised with
a higher rate and why?

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 WORKING CAPITAL MANAGEMENT
41) The following information is provided by XYZ limited for the year ending 31 st March:

Raw material storage period 50 Days

Work in progress conversion period 18 Days

Finished goods storage period 22 Days

Debt collection period 45 Days

Creditors payment period 55 Days

Annual operating cost (including depreciation of Rs 2,10,000) Rs 21,00,000

You are required to calculate: [Note- Take 1 year = 360 days]

a) Operating Cycle Period.
b) Number of operating cycles in a year.
c) Amount of working capital required for the Company on a cash cost basis.

42) The Company is a market leader in its product, there is virtually no competitor in the
market. based on market research, it is planning to discontinue sales on credit and
deliver products based on pre-payments. Thereby, it can reduce its working capital
requirement substantially. What would be the reduction in working capital requirement
due to such decision?
On 1st January, the board of Directors of Dowell Co. Ltd wishes to know the amount of
Working Capital that will be required to meet the activity programme they have planned
for the year.
The following data is given
Issued and Paid-up Capital of the Company is 2,00,000.
2.5% Debentures (Secured on assets) ₹ 50,000.
Fixed Assets were valued at the year. 1,25,000 on 31st December at the end of
Production during the previous year was 60,000 units. It is planned that the same
level of activity should be maintained during the current year also.

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 The ratios of Costs to Selling Price are Materials- 60%, Wages-10%, and Overheads-
20%.
Raw Materials are expected to remain in stores for an average of two months
before they are issued for production. Each unit of production is expected to be in
process for one month.
Finished Goods will stay in the warehouse for approximately three months Trade
Creditors allow 2 months credit from the date of delivery of raw materials. The
Company allows 3 months credit to Debtors from the date of dispatch.
Selling Price per unit is 5. There is a regular production and sales cycle.
The Company normally keeps cash in hand to the extent of 20,000.
Wages and Overheads are paid on the 1st of each month for the previous month.

43) A company plans to manufacture and sell 400 units of a domestic appliance per month
at a price of 600 each. The ratio of costs to selling price are as follows:

Particulars (% of selling price)

Raw materials 30%

Packing materials 10%

Direct labour 15%

Direct expense 5%

Fixed overheads are estimated at 4,32,000 per annum.

The following norms are maintained for inventory management:

Raw Material 30 days

Packing Material 15 days

Finished Goods 200 units

Work in progress 7 days

Other particulars are given below:

Credit sales represent 80% of total sales and the dealers enjoy 30 working days
credit Balance 20% are cash sales.
Creditors allow 21 working days credit for payment.

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 Lag in payment of overheads and expenses is 15 working days
Cash requirements to be 12% of net working capital.
Working days in a year are taken as 300 for budgeting purpose
Prepare a Working Capital requirement forecast for the budget year.

44) A trade whose current sales are Rs.6 lacs per annum and an average collection period
of 30 days wants to pursue a more liberal credit policy to improve sales. A study made
by a management consultant reveals the following information:

Credit policy Increase in Increase in sales Bad debt loss

collection period anticipated

A 10 Days Rs.30,000 1.5%

B 20 Days Rs.48,000 2.0%

C 30 Days Rs.75,000 3.0%

D 40 Days Rs.90,000 4.0%

The selling price per unit is Rs.3, average cost per unit is Rs.2.25 and variable cost per
unit is Rs.2. The current bad debt loss is 1%. Required return on average investment is
20%. Assume 360 days in a year.
Which of the above policies would you recommend for adoption?

45) A firm is considering pushing up its sales by extending credit facilities to the following
categories of customers:
a) Customers with a 10% risk of non-payment, and
b) Customers with a 30% risk of non-payment.

The incremental sales expected in case of category A are ₹40,000 while in case of
category B they are ₹50,000. The cost of production and selling costs are 60% of sales
while the collection costs amount to 5% of sales in case of category A and 10% of sales
in case of category B.

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 You are required to advise the firm about extending credit facilities to each of the
above categories of customers.

46) A manufacturer requires 1,000 units of a raw material per month. The ordering cost is
Rs.15 per order. The carrying cost in addition to Rs.2 per unit is estimated to be 15% of
the average inventory per unit per year. The purchase price of the raw material is Rs.10
per unit.
Find economic lot size and total cost.
The manufacturer is offered a 5% discount in purchase price for orders of 2,000
units or more but less than 5,000 units.
A further 2% discount is available for orders of 5,000 units or more. Which of these
three alternative ways of purchase he should select?

47) Two components X and Y are used as follows:

Normal usage 300 units per week

Maximum usage 450 units per week

Minimum usage 150 units per week

Reorder Quantity X – 2,000 units and Y – 4,000 units

Re-order Period X – 4 to 6 weeks and Y – 2 to 4 weeks

Calculate for each component:

a) Re-order Level,
b) Maximum Level,
c) Minimum Level
d) Average Inventory.

48) The annual cash requirement of XYZ Ltd. is Rs.10 lakh. The company has marketable
securities in lot sizes of Rs.50,000, Rs.1,00,000, Rs.2,00,000 and Rs.2,50,000. Cost of

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 conversion of marketable securities per lot is Rs.1,000. The company’s opportunity cost
of funds is 5% per annum.
You are required to prepare a table indicating which lot size will have to be sold by the
company. Also determine economic lot size by Baumol Model.

49) From the following budgeted figures, prepare a Cash Budget in respect of three months
to June 30:

Months Sales Rs. Materials Rs. Wages Rs Overheads Rs.

January 60,000 40,000 11,000 6,200

February 56,000 48,000 11,600 6,600

March 64,000 50,000 12,000 6,800

April 80,000 56,000 12,400 7,200

May 84,000 62,000 13,000 8,600

June 76,000 50,000 14,000 8,000

Expected Cash Balance on 1st April Rs.20,000. Other information are as follows:
Materials and overheads are to be paid during the month following the month of
supply.
Wages are to be paid during the month in which they are incurred.
Terms of Sales: The terms of credit sales are payment by the end of the month
following the month of sales; of the sales are paid when due, the other half to be
paid during the next month.
5% sales commission is to be paid within the month following actual sales.
Preference dividend for Rs.30,000 is to be paid on 1st May.
Share call money for Rs.25,000 is due on 1st April and 1st June.
Plant and Machinery worth Rs.10,000 is to be installed in the month of January and
the payment is to be made in the month of June.

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50) A supplier of X Ltd. offers the company 2/15 net 40 payment terms. To translate the
shortened description of the payment terms, the supplier will allow a 2% discount if paid
within 15 days, or a regular payment in 40 days.
Determine the cost of credit related to these terms.

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