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Mock Test Paper - Series I: July, 2024
Date of Paper: 3rd August, 2024
Time of Paper: 2 P.M. to 5 P.M.
INTERMEDIATE: GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.
Kaivalyabodhi Limited (KbL) has completed 35 years of operations in India. It has

many subsidiary & associate companies in more than 100 countries. KbL’s
business s include home and personal care, foods and beverages, and industrial,
agricultural and other products. It is one of the largest producers of soaps and
detergents in India. The company has grown organically as well as through
acquisitions. Over the years, the company has built a diverse portfolio of powerful
brands, some being household names.
It is planning to acquire one of its competitors named Prestige Limited, which would
enhance the growth of ‘KbL’. The consideration amount will be 1.5X of its average
Market Capitalization. Prestige limited has 1,30,000 outstanding equity shares and
its shares were traded at an average market price of ` 45 as on the valuation date.
The consideration amount will be paid equally in 5 years where the first installment
is to be paid immediately. Prestige Limited has Ko of 15%
KbL will raise the funds required through debt and equity in the ratio of 30:70. Th e
company requires the cost of capital estimates for evaluating its acquisitions,
investment decisions and the performance of its businesses.
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KbL’s share price has grown from ` 150 to ` 301 in the last 5 years and it will
continue to grow at the same rate. KbL pays dividends regularly. The company has
recently paid a dividend of ` 8. For the calculation of equity, an average of 52 weeks
high market price in the last 5 years is to be considered, which is as follows :
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
MPS 195 MPS 210 MPS 252 MPS 325 MPS 280
Ke calculated as per growth model holds a weight of 0.6.
The company also wishes to calculate the equity’s expectation using CAPM which
holds a weight of 0.4. The risk-free rate is assumed as the yield on long-term
government bonds that the company regards as about 8%. KbL regards the market-
risk premium to be equal to 11 per cent. Its estimation on the Beta is 0.78.
KbL will issue debentures with FV of ` 10,500 which is to be amortised equally over
the life of 7 years. The company considers the effective rate of interest applicable
to an ‘AAA’ rated company with a markup of 200 basis points as its coupon rate. It
thinks that considering the trends over the years, ‘AAA’ rate is 7.5%.
Ignore taxation. Based on the above details, answer the question 1 to 5:
1. Calculate the cost of equity under both the methods
(a) 11%, 16%
(b) 18.65%, 10.34%
(c) 18.65%, 16.58%
(d) 16.5%, 9%
2. Calculate the overall cost of equity
(a) 17.82%
(b) 17.63%
(c) 15.37%
(d) 35.25%
3. Calculate the cost of debt, if the intrinsic value of debenture today is close to
` 9,740
(a) 15%
(b) 12%
(c) 9.5%
(d) 7.5%
4. Calculate the WACC & the amount of purchase consideration
(a) 18%, ` 90,00,000
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(b) 15.21%, ` 87,75,000
(c) 16.07%, ` 87,75,000
(d) 15.94%, ` 58,50,000
5. Present Value of Purchase consideration is close to `
(a) 58,83,032
(b) 67,65,487
(c) 57,35,680
(d) 66,58,997 (5 x 2 = 10 Marks)
6. X ltd has actual Sales of ` 20 lakhs and its Break-even sales are at ` 15 lakhs.
The degree of total risk involved in the company is 6.5. Calculate the % impact
on EPS, if EBIT is affected by 12%.
(a) 40%
(b) 78%
(c) 312%
(d) 19.5% (2 Marks)
7. Assuming Ke = 11%, Kd = 8% and Ko = 10%, Debt Equity ratio of the company
(a) 2:3
(b) 3:2
(c) 1:2
(d) 2:1 (2 Marks)
8. Given:
Earnings available to the equity shareholders ` 30 Lakhs,
Cost of equity is 15%,
Debt outstanding ` 150 Lakhs
Value of the firm will be –
(a) ` 200 Lakhs
(b) ` 250 Lakhs
(c) ` 350 Lakhs
(d) ` 300 Lakhs (1 Mark)
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PART II – Descriptive Questions (35 Marks)
Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) You are required to CALCULATE the Total Current Assets of Ananya
Limited from the given information:
Stock Turnover = 5 times
Sales (All credit) = ` 7,20,000
Gross Profit Ratio = 25%
Current Liabilities = 2,40,000
Liquidity Ratio = 1.25
Stock at the end is ` 30,000 more than stock in the beginning.
(5 Marks)
(b) Gitarth Limited has a current debt equity ratio of 3:7. The company is
presently considering several alternative investment proposals costing
less than ` 25 lakhs. The company will always raise the funds required
without disturbing its current capital structure ratio.
The cost of raising debt and equity are as follows-
Cost of Project Kd Ke
Upto 5 lakhs 10% 12%
Above 5 lakhs & upto 10 lakhs 12% 13.5%
Above 10 lakhs & upto 20 lakhs 13% 15%
Above 20 lakhs 14% 16%
Corporate tax rate is 30%, CALCULATE:
i) Cut off rate for two Projects I & Project II whose fund requirements
are 15 lakhs & ` 26 lakhs respectively.
ii) If a project is expected to give an after-tax return of 13%, determine
under what conditions it would be acceptable. (5 Marks)
(c) From the following details of X Ltd, PREPARE the Income Statement for
the year ended 31 st December:
Financial Leverage 2
Interest ` 2,000
Operating Leverage 3
Variable Cost as a Percentage of Sales 75%
Income Tax Rate 30%
(5 Marks)
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2. (a) The financial statements of Gurunath Ltd is furnished below –
Balance Sheet as at 31 st March
Particulars as at 31 st March Note `
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds: 10,00,000
(2) Non–Current Liabilities: 10% Debt 6,00,000
(3) Current Liabilities 1,56,000
Total 17,56,000
II ASSETS
(1) Non–Current Assets 16,56,000
(2) Current Assets – Trade Receivables 1,00,000
Total 17,56,000
Additional Information:
1. The existing credit terms are 1/10, net 45 days and average
collection period is 30 days. The current bad debts loss is 1.5%. In
order to accelerate the collection process further as also to
increase sales, the company is contemplating liberalization of its
existing credit terms to 2/10, net 45 days.
2. It is expected that sales are likely to increase by 1/3 of existing
sales, bad debts increase to 2% of sales and average collection
period to decline to 20 days.
3. Credit period allowed by the supplier is 60 days. Generally,
operating expenses are paid 2 months in arrears. Total Variable
expenses of the company constitute Purchases of stock in trade
and operating expenses only.
4. Opportunity cost of investment in receivables is 15%. 50% and 80%
of customers in terms of sales revenue are expected to avail cash
discount under existing and liberalization scheme respectively. The
tax rate is 30%.
5. The Company considers only the relevant or variable costs for
calculating the opportunity costs on the funds blocked in
receivables. Assume 360 days in a year and 30 days in a month.
Should the company change its credit terms? (6 Marks)
(b) The following information is given for QB Ltd.
Earnings per share ` 180
Dividend per share ` 45
Cost of capital 17%
Internal Rate of Return on investment 20%
CALCULATE the market price per share using -
(a) Gordon’s formula
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(b) Walter’s formula (4 Marks)
3. (a) Parmarth Limited is a manufacturer of computers. Owing to recent
developments in Artificial Intelligence (AI), it is planning to introduce AI
in its computer process. This would result into an estimated
annual savings as follows:
(i) Savings of ` 3,50,000 in production delays caused by inventory
problem.
(ii) Savings in Salaries of 5 employees with an annual pay of ` 4,20,000
per annum
(iii) Reduction in Lost sales of ` 1,75,000
(iv) Gain due to timely billing is ` 3,25,000
The project would result in annual maintenance and operating costs as
follows, which are to be paid in advance (at the beginning)
YEAR 1 2 3 4 5
COST 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000
Furthermore, the new system would need 2 AI specialists' professional
drawing salaries of ` 6,50,000 per annum per person. The purchase
price of the new system for installing AI into computers would involve an
outlay of ` 21,50,000 and installation cost of ` 1,50,000.
75% of the total value for depreciation would be paid in the year of
purchase and the balance would be paid at the end of the 1st year. The
new system will be sold for ` 1,90,000. This is the only asset in the block
for Income tax purpose.
The life of the system would be 5 years with the hurdle rate of 12%.
Depreciation will be charged at 40% on WDV basis, corporate tax rate is
25% and capital gains tax rate is at 20%.
CALCULATE NPV and advise the management on the acceptability of
the proposal. Also calculate ARR & PI. (8 Marks)
(b) DISCUSS the parameters of Lintner’s Model. (2 Marks)
4. (a) DISCUSS the Costs of Availing Trade Credit (4 Marks)
(b) Briefly EXPLAIN the following –
i. Fully Hedged Bonds
ii. Medium Term Notes
iii. Floating Rate Notes
iv. Euro Commercial Papers (4 Marks)
(c) WHAT is the range of DOL? (2 Marks)
OR
DISCUSS the role of a chief financial officer. (2 Marks)
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PAPER 6B: STRATEGIC MANAGEMENT
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises case scenario based multiple choice questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case scenario based MCQs (15 Marks)
Question 1. (A) (Compulsory)
1. (A) Kriti Pvt. Ltd. has been importing French gourmet cheeses under the
brand name of 'Fromage' since 2017. The company was amongst the
first in India to introduce innovative unbreakable cheese packaging.
Their affiliate, a French company owning Fromage, had entered into a
progressive deal, wherein products would be sourced to India via their
logistics, and all marketing expenditures would be covered by them.
However, customer management and nationwide distribution would be
taken care of by Kriti Pvt. Ltd. This required an English-speaking skilled
workforce, which has been a constant challenge for the company in
India.
The owners of Kriti Pvt. Ltd. have been regular attendees at industry-
relevant conclaves, both national and international. Leaders of the
company are passionate readers of business magazines. Following that,
it was observed that the recent sentiment of the country towards ‘Vocal
for Local’ could disrupt their French brand’s marketability. An
extraordinary meeting was set up, and the steps ahead were planned.
The outcome of the meeting was to partner with local producers of
traditional Indian cheeses in phase one of the change strategy. For this,
seven state governments were approached. The team was successful in
taking contracts from all the government departments of these seven
states and could position themselves fairly in the market. To fund this
new investment, they have planned to slowly sell off their French
business assets as well as the brand, to probable buyers.
This timely shift is proving to be a game-changer for the company, and
the leadership is quite happy with better than before earnings and a
much greater response from the customers. They find it easier to operate
with domestic producers and vendors, and a sense of patriotism is
instilled in the consumers’ minds.
Based on the above Case Scenario, answer the Multiple-Choice
Questions.
(i) Which of the following actions taken by Kriti Pvt. Ltd. is an example
of a proactive strategy?
(a) Selling off their French business assets.
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(b) Responding to the 'Vocal for Local' sentiment by partnering
with local cheese producers.
(c) Managing customer relations and nationwide distribution.
(d) Covering all marketing expenditures for 'Fromage' in India.
(2 Marks)
(ii) Which of the following types of strategic control did the owners and
leadership of Kriti Pvt. Ltd. deploy that eventually turned out to be
one of the most effective strategic decisions for the company?
(a) Premise control
(b) Special alert control
(c) Implementation control
(d) Strategic surveillance (2 Marks)
(iii) ‘Vocal for Local’ is a market sentiment that changed customers’
preferences for the majority of products across all industries. Based
on that, Kriti Pvt. Ltd. gauged the competition it might face in the
coming months and agreed to change its own product. Which of the
following forces, as per Michael Porter’s five forces of competitive
analysis, is most relevant in this case?
(a) Threat of new entrants
(b) Nature of rivalry in the industry
(c) Threat of substitutes
(d) Bargaining power of the buyer (2 Marks)
(iv) Which of the following aspects of value chain analysis was the most
challenging for Kriti Pvt. Ltd. at the time of selling the Fromage
brand?
(a) Manufacturing
(b) Outsourcing
(c) Customer service
(d) Procurement (2 Marks)
(v) To strategically revamp their business, partnerships were done with
Indian local producers from seven states, and to fund it, the existing
arm of the business was to be sold off. Which of the following
strategies has Kriti Pvt. Ltd. opted for?
(a) Turnaround strategy
(b) Divestment strategy
(c) Liquidation strategy
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(d) Intensification strategy (2 Marks)
(B) Compulsory Application Based Independent MCQs
(i) TechWave, a software development firm, aims to gain a
competitive edge in the rapidly evolving tech industry. To achieve
this, they focus on building their strength in artificial intelligence (AI)
and machine learning (ML). TechWave invests heavily in R&D,
hires top talent with specialized skills, and forms partnerships with
leading AI research institutions. They also provide continuous
training for their employees to keep them updated with the latest
advancements. By developing these, TechWave can create
innovative AI-driven solutions that differentiate them from
competitors and attract a growing number of clients seeking
cutting-edge technology. What strategy is TechWave using to gain
a competitive edge in the tech industry?
(a) Market segmentation
(b) Diversification
(c) Core competency building
(d) Cost leadership (2 Marks)
(ii) StreamlineCo is examining its internal capabilities to ensure that
employees possess advanced knowledge of emerging
technologies crucial for the company's future success. This
involves investing in specialized training programs and updating job
roles to match the latest industry standards. Which aspect of
StreamlineCo is being enhanced through specialized training and
updated job roles?
(a) Structure
(b) Systems
(c) Skills
(d) Style (2 Marks)
(iii) XYZ Corporation has launched AlphaTech to enter the consumer
electronics industry with a focus on offering high-performance
devices and innovative features at competitive prices. Which
competitive strategy is AlphaTech employing?
(a) Differentiation strategy
(b) Cost leadership strategy
(c) Best-cost provider strategy
(d) Focus strategy (1 Mark)
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PART II – Descriptive Questions (35 Marks)
Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) Mr. Arun has been hired as the CEO by ABC Ltd, a pharmaceutical
company that has diversified into affordable wellness supplements. The
company intends to launch the HealthPlus brand of supplements. ABC
wishes to enhance the well-being of people with its products that are
beneficial for health and are produced in an environmentally sustainable
manner using natural ingredients. Draft a vision and mission statement
that may be formulated by Arun. (5 Marks)
(b) GreenGardens, a small but growing organic farm, is assessing its
business environment to strategically plan for future growth. The farm
boasts high-quality, pesticide-free crops, but faces challenges with its
limited distribution channels. As the demand for organic products
continues to rise, GreenGardens recognizes the potential to broaden its
market reach. However, unpredictable weather conditions and
competition from larger farms present significant obstacles. To
effectively navigate these challenges and opportunities, GreenGardens
needs to conduct a comprehensive evaluation. Identify the type of
analysis GreenGardens should conduct to strategically plan for its future
growth and outline the grid. (5 Marks)
(c) FreshDelight, renowned for its organic fruit juices, aims to expand its
market presence by identifying emerging markets in countries where
organic products are gaining popularity. To achieve this, FreshDelight
launches targeted marketing campaigns and partners with local
distributors to introduce its juices to these new regions. This strategy
involves adapting product packaging and marketing messages to align
with local preferences and regulations. By entering these new markets,
FreshDelight hopes to increase its customer base and drive sales
growth. What strategy is FreshDelight using to expand its market
presence? (5 Marks)
2. (a) The CEO of a textile mill is convinced that his loss-making company can
be turned around. Suggest an action plan for a turnaround to the CEO.
(5 Marks)
(b) Write a short note on Matrix Structure. (5 Marks)
3. (a) "Understanding the competitive landscape is important to build upon a
competitive advantage". Explain. (5 Marks)
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(b) XYZ Corporation operates in a diverse range of industries, including
fashion, lifestyle products, furniture, real estate, and electrical goods.
The company is seeking to hire a suitable Chief Executive Officer. As
the HR consultant for XYZ Corporation, you have been tasked with
outlining the activities involved in the role of the Chief Executive Officer.
Identify the strategic level associated with this role and list the activities
it encompasses. (5 Marks)
4. (a) Buyers can exert considerable pressure on business. Do you agree?
Discuss. (5 Marks)
(b) Major core competencies are identified in three areas - competitor
differentiation, customer value and application to other markets.
Discuss.
OR
What factors should organizations consider when choosing strategic
performance measures, and why are these factors important?
(5 Marks)
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Mock Test Paper - Series I: July, 2024
Date of Paper: 3rd August, 2024
Time of Paper: 2 P.M. to 5 P.M.
INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
DIVISION A
1. (c) 18.65%, 16.58%
Ke under two approaches
Calculation of Ke (Using Gordon’s Model)
D1
Ke = +g
Po
Share Price has grown from 150 to 301 in 5 years,
150 (1 + g)5 = 301.
(1 + g)5 = 2.01
Therefore, g = 15%, (From Annuity table – Re 1 after 5 years becomes
` 2.01 at rate of 15%)
D1 = 8 + 15% of 8 = 9.2
Po = Average of 52 weeks High price in last 5 years
Po = (195 + 210 +252 +325 +280) / 5
= 252.40
Ke = 9.2 / 252.40 + 0.15
= 18.65%
Calculation of Ke (Using CAPM)
Ke = Rf + (Rm – Rf) X Beta
= 8 + (11 x 0.78)
= 16.58%
2. (a) 17.82%
Overall Ke for the company
Approach Cost of Equity (k) Weight (w) Kxw
Gordon’s 18.65% 0.6 11.19%
CAPM 16.58% 0.4 6.63%
Total Ke = 17.82%
1
3. (b) 12%
Intrinsic Value of Debentures today is ` 9,740
WN 1 – Calculation of the Pattern of Future Cash flows
YR PRINCIPAL INTEREST (II) = Coupon PV OF PV OF (I + II)
(I) Rate = 9.5% (7.5% + 2%) (I + II) @ 15%
@ 10%
1 1,500 997.50 2270.45 2171.74
2 1,500 855 1946.28 1780.72
3 1,500 712.5 1662.28 1454.75
4 1,500 570 1413.84 1183.53
5 1,500 427.50 1196.83 958.31
6 1,500 285 1007.59 771.70
7 1,500 142.50 842.86 617.48
10340.13 8938.23
= 10% +
(10,340.13 − 9,740 ) x5% = 12.14% = 12% (approx.)
(10,340.13 − 8,938.23)
4. (c) 16.07%, ` 87,75,000

Ko = Wd x Kd + We x Ke
= 0.3 X 12 + 0.7 X 17.82
= 16.07%
Purchase Consideration using M-Cap method
= 1,30,000 eq shares x 45 MPS x 1.5X
= ` 87,75,000
5. (d) ` 66,58,997
It is to be paid equally over 5 years and first instalment is to be paid
immediately at Yr 0
Discount rate will be the Ko calculated as above of the company and not
15% which is Ko of Prestige Limited
Year Amount each year PV @ 16.07% PV (`)
0 17,55,000 1.0000 17,55,000
1 17,55,000 0.8615 15,11,933
2 17,55,000 0.7423 13,02,737
3 17,55,000 0.6395 11,22,323
4 17,55,000 0.5510 9,67,005
TOTAL PV 66,58,997
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6. (d) 19.5%
Financial Leverage (FL) indicates % impact in EPS, if EBIT is affected by
12%
FL = Combined Leverage (CL) /Operating Leverage (OL)
CL = 6.5 (Measure of total risk)
OL = 1 / Margin of Safety
Actual Sales − B.E Sales
Margin of Safety (MOS) =
Actual Sales
MOS = 20 lakhs – 15 lakhs / 20 lakhs = 0.25
Therefore, OL = 1 / 0.25 = 4
So, FL = 6.5 / 4 = 1.625
So % Change in EPS = 12 x 1.625 = 19.5%
7. (c) 1:2
Item Cost Weight Product
Debt 8% W 8W
Equity 11% 1–W 11 – 11W
WACC = 10
Wd = 1/3 and We = 2/3 Debt Equity Ratio = 1/2

8. (c) ` 350 Lakhs
Value of Equity = 30 Lakhs ÷ 15% = ` 200 Lakhs
Value of Debt = ` 150 Lakhs
Value of Firm = 200 Lakhs + 150 Lakhs = ` 350 Lakhs
3
DIVISION B – Descriptive Questions
1. (a) 1. Cost of Goods Sold = Sales – Gross Profit
= ` 7,20,000 – 25% x ` 7,20,000 = ` 5,40,000
Cost of Goods Sold ` 5,40,000
2. Stock Turnover = Average Stock
= = 5 times.
Average Stock
` 5,40 ,000
Average Stock = 5
= ` 1,08,000
3. Let Opening Stock be x.

Closing Stock is ` 30,000 more than Opening Stock.
Closing Stock = (x + 30,000)
x + x + 30 ,000
Average Stock = 2
= 1,08,000.
2x = 2,16,000 – 30,000
1,86 ,000
x = = 93,000 = Opening Stock.
2
Closing Stock = x + 30,000

= 93,000 + 30,000 = ` 1,23,000
Liquid Assets Liquid Assets
4. Liquid Ratio = = = 1.25.
Current Liabilitie s 2,40,000
Liquid Assets = ` 3,00,000

5. Current Assets = Liquid Assets + Closing Stock
= ` 3,00,000 + ` 1,23,000 = ` 4,23,000
(b) Calculation of slab wise Overall Cost of Capital
(i)
Project Cost Capital Weights Cost wxk
Source (w) (k) (%)
Upto 5 Lakhs Debt 0.3 10 3
Equity 0.7 12 8.4
Ko 11.4
Above 5 lakhs upto 10 lakhs Debt 0.3 12 3.6
Equity 0.7 13.5 9.45
Ko 13.05
Above 10 lakhs upto 20 lakhs Debt 0.3 13 3.9
Equity 0.7 15 10.5
4
Ko 14.4
Above 20 lakhs Debt 0.3 14 4.2
Equity 0.7 16 11.2
Ko 15.4
Cost of Raising funds for Project I

Total Capital Ko(%) Total Cost (in `)
5,00,000 11.40 57,000
5,00,000 13.05 65,250
5,00,000 14.40 72,000
15,00,000 1,94,250
Overall COC (%) = Total Cost (in `) / Total Capital

= 1,94,250/15,00,000 * 100
= 12.95 %
Cost of Raising funds for Project II
Total Capital Ko(%) Total Cost (in `)
5,00,000 11.4 57,000
5,00,000 13.05 65,250
10,00,000 14.4 1,44,000
6,00,000 15.4 92,400
26,00,000 3,58,650
Overall COC (%) = 358650 / 2600000 * 100 = 13.79%
(ii) If any project is expected to give an after-tax return of 13%, it can
be accepted only if the maximum Overall COC (%) of that project
equals 13% or less, as at 13%, project would be at break-even i.e
earning 13% from the project and incurring 13% COC.
So, under that scenario, Project I can be taken as its COC is
12.95% whereas Project II can’t be taken as its COC is 13.79%.
Maximum Value of the Project that can be taken at 13% is approx.
(Using IRR technique Interpolation)
At 15 Lakhs Ko = 12.95%
At 26 Lakhs Ko = 13.79%
By interpolation, maximum value of Project at 13% will be
15 Lakhs + {(0.05 x 11)/0.84}
= 15.6548 lakhs
5
(c) Income Statement
EBIT EBT + Interest EBT + 2,000 2
DFL = EBT
= EBT
= EBT
= .
1
EBT + ` 2000 = 2 EBT.

EBT = ` 2,000
EBIT = EBT + Interest = ` 2000 + ` 2000 = ` 4,000.
Contribution 3
Contribution = Contribution =
EBIT 4,000 1
Contribution 12,000 48,000

Sales = 25%
PVR
Less: Variable Cost Given = 75% (36,000)
Contribution 12,000
Less: Fixed Cost( Contribution - EBIT = ` 12,000 – ` 4,000) (8,000)
EBIT 4,000
Less: Interest (2,000)
EBT 2,000
Less: Tax at 30% (600)
EAT 1,400
2. (a)
Particulars Result
Current liabilities 1,56,000
Total Variable expenses =
Purchases & Operating 1,56,000 ÷ 60 × 360 = 9,36,000
Expenses
Variable expenses % of Sales 9,36,000 ÷ 12,00,000 × 100 = 78%
Particulars Present Proposed

1 Lakh ÷ 30 × 360 12 Lakhs + 1/3rd
1. Sales
= 12,00,000 = 16,00,000
2. Variable Cost at
9,36,000 12,48,000
78%
12 Lakh × 50% × 1% 16 Lakh × 80% × 2%
3. Cash Discount
= 6,000 = 25,600
12 Lakh × 1.5% 16 Lakh × 2%
4. Bad debts
= 18,000 = 32,000
5. Profit before Tax 2,40,000 2,94,400
6. Tax @ 30% 72,000 88,320
7. Profit after Tax 1,68,000 2,06,080
6
Particulars Present Proposed
8. Opportunity Cost 9,36,000 × 30/360 × 12,48,000 × 20/360 ×
of Invest. in
70% ×15% = 8,190 70% × 15% = 7,280
Debtors
9. Net Benefit 1,59,810 1,98,800
Advise: Proposed policy should be adopted since the net benefit is
increased by (` 1,98,800 - 1,59,810) = ` 38,990.
(b) (i) As per Gordon’s Model, Price per share is computed using the
formula:
E1(1 − b)
P0 =
Ke − br
Where,
P0 = Price per share
E1 = Earnings per share
Payout ratio = 45/180 = 25%
b = Retention ratio; (1 - b = Pay-out ratio) = 1-0.25 = 0.75
Ke = Cost of capital
r = IRR
br = Growth rate (g)
Applying the above formula, price per share
180(1 − 0.75) 45
P0 = = = ` 2,250
0.17 − 0.75  0.2 0.02
(ii) As per Walter’s Model, Price per share is computed using the
formula:
r
D+Ke(E-D)
Price (P) = Ke
Where,
P = Market Price of the share.
E = Earnings per share.
D = Dividend per share.
Ke = Cost of equity/ rate of capitalization/ discount rate.
r = Internal rate of return/ return on investment
Applying the above formula, price per share
0.20
45+ 0.17 (180-45)
P = 0.17
45+158.82
Or, P = = ` 1,200 (approx..)
0.17
7
3. (a) Calculation of Present value of cash inflows (PVCI)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Savings in cost - 3,50,000 3,50,000 3,50,000 3,50,000 3,50,000
due to
Production
Delays
Savings in - 21,00,000 21,00,000 21,00,000 21,00,000 21,00,000
Salaries
Reduction in lost - 1,75,000 1,75,000 1,75,000 1,75,000 1,75,000
sales
Gain due to - 3,25,000 3,25,000 3,25,000 3,25,000 3,25,000
timely billing
- 29,50,000 29,50,000 29,50,000 29,50,000 29,50,000
Less:
Salary of AI - 13,00,000 13,00,000 13,00,000 13,00,000 13,00,000
specialists
Annual Maint. & - 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000
Op Cost
NPBDT - 14,70,000 14,50,000 15,30,000 15,40,000 15,20,000
(-) Depreciation 9,20,000 5,52,000 3,31,200 1,98,720 1,19,232
-
NPBT - 5,50,000 8,98,000 11,98,800 13,41,280 14,00,768
(-) Tax @ 25% - 1,37,500 2,24,500 2,99,700 3,35,320 3,50,192
NPAT - 4,12,500 6,73,500 8,99,100 10,05,960 10,50,576
(+) Depreciation - 9,20,000 5,52,000 3,31,200 1,98,720 1,19,232
(+) Annual Maint. - 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000
& Op Cost
Gross Cash - 15,12,500 14,25,500 13,50,300 13,14,680 12,99,808
Inflows
(-) Annual Maint. 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000 -
& Op Cost
actually paid
Net Cash Inflows -1,80,000 13,12,500 13,05,500 12,40,300 11,84,680 12,99,808
(+) Sale Value at - - - - - 1,90,000
the end of life
-1,80,000 13,12,500 13,05,500 12,40,300 11,84,680 14,89,808
PV Factor @ 1 0.8929 0.7`972 0.7118 0.6355 0.5674
12%
PV of Cash -1,80,000 11,71,875 10,40,737 8,82,821 7,52,886 8,45,357
Inflows
Total PV of 45,13,675
Cash Inflows
Calculation of Present value of cash outflows (PVCO)

As mentioned in the question, 75% of the depreciable value will be paid
at the beginning. Depreciable value means purchase price plus the
installation cost.
8
Year 0 Year 1
Purchase Price & Installation Cost 17,25,000 5,75,000
PV Factor @ 12% 1 0.8929
PVCO 17,25,000 5,13,418
(2) Total PVCO = 22,38,418
(3) PV of Tax on Capital Gains (Only asset in the block) - 5th Year end
Capital Gains = Sale Price (-) Closing WDV at 5th year
= 1,90,000 (-) 1,78,848
= 11,152
Tax @ 20% on above = 2230.40
PV = 2,230.40 x 0.5674 = 1,266
Net PVCI = PVCI - PV of Tax on Capital Gains
= 45,13,675 - 1,266 = 45,12,409
NPV = Net PVCI – PVCO
= 45,12,409 - 22,38,418
= 22,73,991
(II) PI = PVCI / PVCO = 45,12,409/ 22,38,418 = 2.0158
(III) ARR = Average NPAT / Initial Investment
= 8,08,327.2/23,00,000 x 100 = 35.145%
Note – ARR is calculated based on Initial Investment, similarly it can be
calculated based on Average Investment
(b) Lintner’s model has two parameters:
i. The target payout ratio,
ii. The spread at which current dividends adjust to the target.
4. (a) Normally it is considered that the trade credit does not carry any cost.
However, it carries the following costs:
(i) Price: There is often a discount on the price that the firm undergoes
when it uses trade credit, since it can take advantage of the
discount only if it pays immediately. This discount can translate into
a high implicit cost.
(ii) Loss of goodwill: If the credit is overstepped, suppliers may
discriminate against delinquent customers if supplies become
short. As with the effect of any loss of goodwill, it depends very
much on the relative market strengths of the parties involved.
(iii) Cost of managing: Management of creditors involves
administrative and accounting costs that would otherwise be
incurred.
9
(iv) Conditions: Sometimes most of the suppliers insist that for availing
the credit facility the order should be of some minimum size or even
on regular basis.
(b) (i) Fully Hedged Bonds: In foreign bonds, the risk of currency
fluctuations exists. Fully hedged bonds eliminate the risk by selling
in forward markets the entire stream of principal and interest
payments.
(ii) Medium Term Notes (MTN): Certain issuers need frequent
financing through the Bond route including that of the Euro bond.
However, it may be costly and ineffective to go in for frequent
issues. Instead, investors can follow the MTN programme. Under
this programme, several lots of bonds can be issued, all having
different features e.g. different coupon rates, different currencies
etc. The timing of each lot can be decided keeping in mind the
future market opportunities. The entire documentation and various
regulatory approvals can be taken at one point of time.
(iii) Floating Rate Notes (FRN): These are issued up to seven years
maturity. Interest rates are adjusted to reflect the prevailing
exchange rates. They provide cheaper money than foreign loans.
(iv) Euro Commercial Papers (ECP): ECPs are short term money
market instruments. They have maturity period of less than one
year. They are usually designated in US Dollars.
(c) DOL can never be between zero and one. It can be zero or less or it can
be one or more.
When Sales is much higher than BEP sales, DOL will be slightly more
than one. With decrease in sales, DOL will increase. At BEP, DOL will
be infinite. When sales is slightly less than BEP, DOL will be negative
infinite. With further reduction in sale, DOL will move towards zero. At
zero sales, DOL will also be zero.
OR
The finance executive of an organisation plays an important role in the
company’s goals, policies, and financial success. His responsibilities
include:
(a) Financial analysis and planning: Determining the proper amount
of funds to employ in the firm, i.e. designating the size of the firm
and its rate of growth.
(b) Investment decisions: The efficient allocation of funds to specific
assets.
(c) Financing and capital structure decisions: Raising funds on
favourable terms as possible i.e. determining the composition of
liabilities.
(d) Management of financial resources (such as working capital).
(e) Risk management: Protecting assets.
10
PAPER 6B: STRATEGIC MANAGEMENT
ANSWERS
PART I
1. (A) (i) (b) (ii) (d) (iii) (c) (iv) (c) (v) (b)
1. (B) (i) (c) (ii) (c) (iii) (c)
PART II
1. (a) The HealthPlus brand of wellness supplements may have the following
vision and mission:
Vision: Vision implies the blueprint of the company’s future position. It
describes where the organization wants to land. Mr. Arun should aim to
position “HealthPlus” as India’s leading wellness supplements brand. It
may have the vision to be India’s largest wellness supplements company
that enhances health, promotes extraordinary well-being, and brings
happiness to people.
Mission: Mission delineates the firm’s business, its goals, and ways to
reach the goals. It explains the reason for the existence of the firm in
society. It is designed to help potential shareholders and investors
understand the purpose of the company. Mr. Arun may identify the
mission in the following lines:
 To be in the business of wellness supplements to enhance the lives
of people and give them the confidence to lead a healthy life.
 To protect health by providing supplements that counteract harmful
elements in the environment.
 To produce wellness supplements using natural ingredients in an
environmentally sustainable manner.
(b) GreenGardens should conduct a SWOT analysis to strategically plan for
future growth. This analysis will help them understand their internal
strengths and weaknesses, as well as external opportunities and threats.
SWOT Analysis Grid for GreenGardens:
Strengths Weaknesses
High-quality, pesticide-free Limited distribution channels
produce
Strong brand reputation for Small scale of operations
organic products
Dedicated and knowledgeable Limited marketing and sales reach
workforce
Opportunities Threats
Rising demand for organic Unpredictable weather conditions
products
11
Potential to expand into new Intense competition from larger
markets farms
Increased consumer Regulatory changes affecting
awareness of health and organic farming
sustainability
By systematically evaluating these areas, GreenGardens can leverage
its strengths, address its weaknesses, capitalize on opportunities, and
mitigate threats. This strategic planning will guide them toward
sustainable growth and success in the organic farming industry.
(c) FreshDelight is employing a market development strategy to expand
its market presence. This approach involves introducing their existing
organic fruit juices to new markets, specifically targeting countries where
the demand for organic products is on the rise. To achieve this,
FreshDelight is launching targeted marketing campaigns and partnering
with local distributors to effectively introduce their products to these new
regions. Additionally, they are adapting their product packaging and
marketing messages to align with local preferences and regulations,
ensuring their offerings resonate with the new customer base. By
entering these emerging markets, FreshDelight aims to increase its
customer base and drive sales growth, leveraging the growing popularity
of organic products.
2. (a) A workable action plan for turnaround of the textile mill would involve:
• Stage One – Assessment of current problems: In the first step,
assess the current problems and get to the root causes and the
extent of damage.
• Stage Two – Analyze the situation and develop a strategic
plan: Identify major problems and opportunities, develop a
strategic plan with specific goals and detailed functional actions
after analyzing strengths and weaknesses in the areas of
competitive position.
• Stage Three – Implementing an emergency action plan: If the
organization is in a critical stage, an appropriate action plan must
be developed to stop the bleeding and enable the organization to
survive.
• Stage Four – Restructuring the business: If the core business is
irreparably damaged, then the outlook for the entire organization
may be bleak. Efforts to be made to position the organization for
rapid improvement.
• Stage Five – Returning to normal: In the final stage of turnaround
strategy process, the organization should begin to show signs of
profitability, return on investments and enhancing economic value-
added.
12
(b) In matrix structure, functional and product forms are combined
simultaneously at the same level of the organization. Employees have
two superiors, a product / project manager and a functional manager.
The “home” department - that is, engineering, manufacturing, or
marketing - is usually functional and is reasonably permanent. People
from these functional units are often assigned temporarily to one or more
product units or projects.
The product units / projects are usually temporary and act like divisions
in that they are differentiated on a product-market basis. The matrix
structure may be very appropriate when organizations conclude that
neither functional nor divisional forms, even when combined with
horizontal linking mechanisms like strategic business units, are right for
the implementation of their strategies. Matrix structure was developed to
combine the stability of the functional structure with flexibility of the
product form. It is very useful when the external environment (especially
its technological and market aspects) is very complex and changeable.
A matrix structure is most complex of all designs because it depends
upon both vertical and horizontal flows of authority and communication.
It may result in higher overhead costs due to more management
positions.
The matrix structure is often found in an organization when the following
three conditions exist:
1. Ideas need to be cross-fertilized across projects or products;
2. Resources are scarce; and
3. Abilities to process information and to make decisions need to be
improved.
3. (a) Competitive landscape is a business analysis which identifies
competitors, either direct or indirect. Competitive landscape is about
identifying and understanding the competitors and at the same time, it
permits the comprehension of their vision, mission, core values, niche
market, strengths and weaknesses.
An in-depth investigation and analysis of a firm’s competition allows it to
assess the competitors’ strengths and weaknesses in the marketplace
and helps it to choose and implement effective strategies that will
improve its competitive advantage.
Steps to understand the competitive landscape for building competitive
advantage are:
(i) Identify the competitor: The first step to understanding the
competitive landscape is to identify the competitors in the firm’s
industry and have actual data about their respective market share.
(ii) Understand the competitors: Once the competitors have been
identified, the strategist can use market research report, internet,
newspapers, social media, industry reports, and various other
13
sources to understand the products and services offered by them
in different markets.
(iii) Determine the strengths of the competitors: What are the
strengths of the competitors? What do they do well? Do they offer
great products? Do they utilize marketing in a way that
comparatively reaches out to more consumers? Why do customers
give them their business?
(iv) Determine the weaknesses of the competitors: Weaknesses
(and strengths) can be identified by going through consumer
reports and reviews appearing in various media. After all,
consumers are often willing to give their opinions, especially when
the products or services are either great or very poor.
(v) Put all of the information together: At this stage, the strategist
should put together all information about competitors and draw
inference about what they are not offering and what the firm can do
to fill in the gaps. The strategist can also know the areas which
need to be strengthened by the firm.
(b) The role of Chief Executive Officer pertains to corporate level.
The corporate level of management consists of the Chief Executive
Officer (CEO) and other top-level executives. These individuals occupy
the apex of decision making within the organization.
The role of Chief Executive Officer is to:
1. oversee the development of strategies for the whole organization;
2. defining the mission and goals of the organization;
3. determining what businesses, it should be in;
4. allocating resources among the different businesses;
5. formulating, and implementing strategies that span individual
businesses;
6. providing leadership for the organization;
7. ensuring that the corporate and business level strategies which
company pursues are consistent with maximizing shareholders
wealth; and
8. managing the divestment and acquisition process.
4. (a) Buyers of an industry’s products or services can sometimes exert
considerable pressure on existing firms to secure lower prices or better
services. This is evident in situations where buyers enjoy a superior
position than the seller of the product. This leverage is particularly
evident when:
(i) Buyers have full knowledge of the sources of products and their
substitutes.
14
(ii) They spend a lot of money on the industry’s products, i.e., they are
big buyers.
(iii) The industry’s product is not perceived as critical to the buyer’s
needs and buyers are more concentrated than firms supplying the
product. They can easily switch to the substitutes available.
(b) According to C.K. Prahalad and Gary Hamel, major core competencies
are identified in three areas - competitor differentiation, customer value,
and application to other markets.
 Competitor differentiation: The company can consider having a
core competence if the competence is unique and it is difficult for
competitors to imitate. This can provide a company an edge
compared to competitors. It allows the company to provide better
products or services to market with no fear that competitors can
copy it.
 Customer value: When purchasing a product or service it has to
deliver a fundamental benefit for the end customer in order to be a
core competence. It will include all the skills needed to provide
fundamental benefits. The service or the product has to have real
impact on the customer as the reason to choose to purchase them.
If customer has chosen the company without this impact, then
competence is not a core competence.
 Application of competencies to other markets: Core
competence must be applicable to the whole organization; it cannot
be only one particular skill or specified area of expertise. Therefore,
although some special capability would be essential or crucial for
the success of business activity, it will not be considered as core
competence, if it is not fundamental from the whole organization’s
point of view. Thus, a core competence is a unique set of skills and
expertise, which will be used throughout the organisation to open
up potential markets to be exploited.
OR
Organizations should consider the following factors when choosing
strategic performance measures:
1. Relevance: The measure should be relevant to the organization's
goals and objectives, providing actionable and meaningful
information. This ensures that the performance measures are
directly aligned with what the organization aims to achieve, and that
the information obtained can drive improvements and strategic
decisions.
2. Data Availability: The measure should be based on data that is
readily available and can be collected and analyzed in a timely
manner. This is important to ensure that the organization can
efficiently gather and utilize data without significant delays or
obstacles.
15
3. Data Quality: The measure should be based on high-quality data
that is accurate and reliable. Accurate and reliable data are crucial
for making informed decisions and assessing the true performance
of the organization.
4. Data Timeliness: The measure should be based on data that is
current and up-to-date. Timely data allows organizations to make
informed decisions quickly, enabling them to respond promptly to
changes and emerging challenges.
These factors are important because they provide a framework for
organizations to assess the success of their strategies, identify areas for
improvement, and make informed decisions about resource allocation
and strategic adjustments. Effective strategic performance measures
should be relevant, meaningful, easy to understand, and regularly
reviewed and updated to ensure their continued alignment with the
organization's goals and objectives.
16

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Kaivalyabodhi Limited (KbL) has completed 35 years of operations in India. It has

4. (c) 16.07%, ` 87,75,000

Wd = 1/3 and We = 2/3 Debt Equity Ratio = 1/2

3. Let Opening Stock be x.

Closing Stock = x + 30,000

Liquid Assets = ` 3,00,000

Cost of Raising funds for Project I

Overall COC (%) = Total Cost (in `) / Total Capital

EBT + ` 2000 = 2 EBT.

Contribution 12,000 48,000

Particulars Present Proposed

Calculation of Present value of cash outflows (PVCO)

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