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Mock Test Paper - Series I: March 2025

Date of Paper: 19th March, 2025
Time of Paper: 10 A.M. – 1 P.M.

INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
DIVISION A
1. (b) 2.33 times
Liquid assets
Liquid Ratio =
Current liabilities
Liquid Assets = Current Assets − Inventories
77,000
= = 2.33 times
33,000
2. (a) 0.5 : 1 and 6 times
Sales
Sales to Proprietary Ratio =
Proprietary fund
1,00,000
= = 0.5 : 1
2,00,000
Proprietor’s fund or Shareholder’s fund
= Equity share capital + Preference share capital + Reserve and surplus
= 1,00,000 + 20,000 + 80,000 = 2,00,000
Earnings before interest and taxes(EBIT)
Interest Coverage Ratio =
Interest
= 24,000/4000 = 6 times
EBIT = 20,000 + 4,000 = 24,000
Fixed interest charges = 8% on debentures of ` 50,000 = ` 4,000

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3. (c) 3.33 times and 6 times

Credit Sales
Debtors Turnover Ratio =
Average Accounts Receivable
= 1,00,000/30,000 = 3.33 times
In the absence of credit sales and opening debtors, total sales is considered as
credit sales and closing debtors as average debtors.
Annual Net Credit Purchases
Creditors Turnover Ratio =
Average Accounts Payables
= 60,000/10,000 = 6 times
In the absence of opening creditors, closing creditors are treated as average
creditors.
Credit Purchase = Creditors x 360 / 60
= 10,000 x 360/60 = 60,000
4. (a) 1.06 times
Sales
Working Capital Turnover Ratio =
Working Capital

= 1,00,000/94,000 = 1.06 times

Net Working Capital = Current assets – Current liabilities
= 1,27,000 – 33,000 = 94,000
5. (d) 7%
Net Profit after taxes
Return on Investment = ×100
Shareholders' Funds

= 14,000/ 2,00,000 x 100

= 7%
Proprietor’s fund or Shareholder’s fund
= Equity share capital + Preference share capital + Reserve and surplus
= 1,00,000 + 20,000 + 80,000 = 2,00,000

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6. (a) 13.3%
Calculation of Cost of Equity
EBIT
Calculation of value of firm (v) =
Overall cost of capital (K o )

9,00,000
= = Rs.75,00,000
0.12
Market value of equity (S) = V – Debts
= 75,00,000 – 30,00,000 = `. 45,00,000
Market value of debts (D) = 30,00,000
V D
K e (Cost of equity) = K o   − K d  
S S
 75,00,000   30,00,000 
= 0.12   − 0.10  
 45,00,000   45,00,000 
= 0.20 − 0.067 = 0.133 × 100
Ke = 13.3%.
7. (b) `1,750
Computation of Earnings after tax
Contribution = ` 60 × 1,000 = ` 60,000
Operating Leverage (OL) × Financial Leverage (FL) = Combined Leverage (CL)
6 × Financial Leverage = 24
∴ Financial Leverage =4
Contribution `60,000
Operating Leverage = = =6
EBIT EBIT
60,000
EBIT = = `10,000
6
EBIT
Financial Leverage = =4
EBT
EBIT 10,000
 EBT = = = `2,500
4 4
EBIT- Earnings before Interest and tax.

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EBT- Earnings before tax.

Since tax rate = 30%
Earnings after Tax (EAT) = EBT (1 − 0.30) [ 30% is tax rate]
= `2,500 (0.70)
∴ Earnings after Tax (EAT) = `1,750
8. (d) 6.07%
Calculation of Cost of Debt after tax:
RV − NP
I(1 − t) +
Cost of Debt (Kd) = n
RV + NP
2

Cost of 12% Debentures, if issued at 10% Premium:

`10,00,000 −`11,00,000
`1,20,000(1 − 0.35) +
7 years `78,000 − `14,286
Kd = =
`10,00,000 + `11,00,000 `10,50,000
2

= 0.0607 or 6.07%
Division B: Descriptive Question
1. (a) Given,
Cost of Equity (Ke) 12%
Number of shares in the beginning (n) 40,000
Current Market Price (P0) `200
Net Profit (E) `5,00,000
Expected Dividend (D1) `10 per share
Investment (I) `10,00,000

Situation 1 – When dividends are paid Situation 2 – When dividends are not
paid
P1+ D1
(i) P0 =
1+ Ke P1+ D1
(i) P0 =
1+ Ke
P1+ 10
200 =
1+ 0.12 P1+ 0
200 =
1+ 0.12
P1 + 10 = 200 x 1.12

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P1 = 224 – 10 = 214 P1 + 0 = 200 x 1.12

(ii) Calculation of funds required P1 = 224 – 0 = 224
= Total Investment - (Net profit - (ii) Calculation of funds required
Dividend)
= Total Investment - (Net profit -
= 10,00,000 - (5,00,000 – 4,00,000) Dividend)
= 9,00,000 = 10,00,000 – (5,00,000 - 0)
(iii) No. of shares required to be issued for = 5,00,000
balance fund
(iii) No. of shares required to be issued
FundsRe quired for balance fund
No. of shares =
Pr ice at end(P1) FundsRe quired
No. of shares =
9,00,000 Pr ice at end(P1)
∆n = = 4,205.61
214 5,00,000
∆n = = 2,232.14
(iv) Calculation of value of firm 224
(n + n)P1− I + E (iv) Calculation of value of firm
Vf =
1+ Ke (n + n)P1− I + E
Vf =
9,00,000 1+ Ke
(40,000 + )214 − 10,00,000 + 5,00,000
= 214 5,00,000
1+ 0.12 (40,000 + )224 − 10,00,000 + 5,00,000
= 224
94,60,000 – 5,00,000 1+ 0.12
= = 80,00,000
1.12 94,60,000 – 5,00,000
= = 80,00,000
1.12

(b) Income Statement Punyakalash Limited

Particulars Amount (`)
Sales (WN 4) 4,50,000
(-) VC 3,15,000
Contribution (WN 4) 1,35,000
(-) Fixed Cost 81,000
EBIT (WN 3) 54,000
(-) Interest (WN 2) 18,000

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EBT 36,000
(-) Tax 9,000
EAT / Net profit available to equity shareholders 27,000
Net profit available to equity shareholders
No of Equity shares =
EPS
= 27,000 / 15
= 1,800 shares
WN 1 Calculation of EPS using Earnings yield ratio
Earnings yield ratio = EPS / MPS X 100
Therefore, EPS = 15
WN 2 Calculation of Interest cost

Interest rate (post tax )

Interest rate (pre-tax) =
1−t
Therefore, Int Rate (pre-tax) = 9 / 0.75 = 12%
Interest Cost = 1,50,000 X 12% = 18,000
WN 3 Calculation of EBIT using FL

EBIT
FL =
EBIT − Int
EBIT
1.5 =
EBIT − 18,000
Therefore EBIT = 54,000
WN 4 Calculation of Operating Leverage (OL), Contribution & Sales

1 1
OL = = = 2.5
MOS 0.4
Contribution
OL =
EBIT

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Contribution
2.5 =
54,000
Therefore Contribution = 1,35,000

Contribution
Sales = = 1,35,000 / 0.3 = 4,50,000
PV Ratio

(c) WN1 – Calculation of EBIT using Financial Leverage

EBIT
FL= D
(EBIT-Int.) - P
1-t

Let EBIT be ‘X’

Preference Dividend (Dp) = 0.15X
X
4 =
(X-57,400) - 0.15X
1-0.3

3.16X – 2,29,600 =X
X = EBIT = ` 1,06,296

Preference Dividend = 1,06,296 x 0.15 = ` 15,944

WN2 – Calculation of Total Fixed Cost
Cash Fixed Cost = Cash Breakeven sales x PV Ratio
= 2,25,000 x 0.40
= ` 90,000
Total Fixed Cost = 90,000 + 10,000 (Depreciation)
= ` 1,00,000
Therefore Contribution = 1,06,296 + 1,00,000 = 2,06,296
i. Income Statement for FY 2023-24:
Particulars Amount (`)
Sales (2,06,296 / 0.40) 5,15,740
(-) Variable Cost (3,09,444)
Contribution 2,06,296

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(-) Fixed Cost (See Wn 2) (1,00,000)

EBIT (See Wn 1) 1,06,296
(-) Interest Exp (57,400)
EBT 48,896
(-) Tax (14,669)
EAT 34,227
(-) Preference Dividend (1,06,296 X 15%) (15,944)
Earnings For Equity Shareholders 18,283

Contribution
ii. Operating Leverage =
EBIT
= 2,06,296 / 1,06,296
= 1.94 times
Combined Leverage = OL x FL
= 4 x 1.94
= 7.76 times
iii. Combined leverage is the study from Sales to Eps, where combined
leverage measures the % change in EPS due to increase/decrease in
% change in sales
CL = % Change in EPS / % Change in sales
7.76 = % Change in EPS / 7
Therefore, % Change in EPS = 54.32%
If sales increase by 7%, then EPS will rise by 54.32% and on the contrary
if sales decrease by 7%, then EPS will fall by 54.32%.
iv. Return on Equity shareholders’ funds
Earnings for Equity holders
=
Total Eq. Shareholders’ funds
= 18,283 / 1,53,920
= 11.88%

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v. Calculation of Amount of Debt

Interest rate (post tax )
Pre-tax Interest % =
1−t
= 6.65/0.70
= 9.5%
Interest (Rs. )
Debt Amount =
Interest(%)
= 57,400 / 0.095
= ` 6,04,210
2. (a) (i) Computation of Weighted Average Cost of Capital based on existing
capital structure
Source of Capital Existing Weights After tax WACC
Capital cost of (%)
structure capital (%)
(`) (a) (b) (a) × (b)
Equity share capital (W.N.1) 4,00,00,000 0.588 10.00 5.88
12% Preference share capital 80,00,000 0.118 12.00 1.42
11% Debentures (W.N.2) 2,00,00,000 0.294 7.70 2.26
Total 6,80,00,000 1.000 9.56

Working Notes:
1. Cost of Equity Capital:
Expecteddividend(D1 )
Ke = + Growth(g)
Current Market Pr ice (P0 )

20
= + 0.05
400
= 10%
2. Cost of 10% Debentures
Interest(1 − t)
Kd =
Net proceeds

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22,00,000 (1- 0.30)

=
2,00,00,000
= 0.077 or 7.7%
(ii) Computation of Weighted Average Cost of Capital based on new
capital structure
Source of Capital New Capital Weights After tax cost WACC (%)
structure of capital (%)
(`) (a) (b) (a) x (b)
Equity share capital 4,00,00,000 0.548 13.33 7.30
(W.N.3)
12% Preference share 80,00,000 0.110 12.00 1.32
capital
11% Debentures (W.N.2) 2,00,00,000 0.274 7.70 2.11
12% Debentures (W.N.4) 50,00,000 0.068 8.40 0.57
Total 7,30,00,000 1.000 11.30

Working Notes:
3. Cost of Equity Capital:
25
Ke = + 0.05
300
= 13.33%
4. Cost of 12% Debentures
6,00,000 (1- 0.30)
Kd =
50,00,000
= 0.084 or 8.4%
(b) Statement showing the Evaluation of Accounts Receivable Policies
(Amount in `)
Particulars Present Proposed Proposed
Policy Policy 1 Policy 2
A Expected Profit:
(a) Credit Sales 50,00,000 60,00,000 67,50,000
(b) Total Cost other than Bad
Debts:

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(i) Variable Costs (70%) 35,00,000 42,00,000 47,25,000

(c) Bad Debts 1,50,000 3,00,000 4,50,000
(d) Expected Profit [(a) – (b) – (c)] 13,50,000 15,00,000 15,75,000
B Opportunity Cost of Investments 1,75,000 2,80,000 3,93,750
in Accounts Receivable (Working
Note)
C Net Benefits (A – B) 11,75,000 12,20,000 11,81,250

Recommendation: The Proposed Policy 1 should be adopted since the net

benefits under this policy are higher as compared to other policies.
Working Note:
Calculation of Opportunity Cost of Average Investments
Opportunity Cost = Total Cost × Collection period/12 × Rate of Return/100
Present Policy = ` 35,00,000 × 3/12 × 20% = ` 1,75,000
Proposed Policy 1 = ` 42,00,000 × 4/12 × 20% = ` 2,80,000
Proposed Policy 2 = ` 47,25,000 × 5/12 × 20% = ` 3,93,750
3. (a) At Indifference Point, EPS of Plan (i) = EPS of Plan (ii)
Plan (i) Plan (ii)
(EBIT − I1 )(1 − T) (EBIT − I2 )(1 − T) − PD
=
E1 E2
(EBIT − 1,26,000)(1 − 0.25) (EBIT − 98,000)(1 − 0.25) − 80,000
=
1,80,000 1,50,000

0.75 EBIT = 4,48,500

EBIT = Indifference point = 5,98,000
A) Financial BEP = Int + (Pref Div / 1-t)
Plan (i) = 1,26,000 + 0
FBEP for Plan (i) = 1,26,000
Plan (ii) = 98,000 + {80,000/ (1 - 0.25)}
FBEP for Plan (ii) = 2,04,666

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(b) Evaluation of option A – buying brand new vehicles

The cash inflows would be in the form of ‘cash flows from operations’, government
subsidy, scrap value and tax savings on capital loss if any.
A] Calculation of PV Cash Inflows from Operations -
Year 1 2 3 4 5 6 7 8 9 10
Revenue 15,00,000 15,00,000 15,00,000 15,00,00 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000
0
Less: Cash 10,00,000 10,00,000 10,00,000 10,00,00 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Exp 0
NPBDT 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000
Less: Depre 1,26,000 1,00,800 80,640 64,512 51,610 41,288 33,030 26,424 21,139 16,911
NPBT 3,74,000 3,99,200 4,19,360 4,35,488 4,48,390 4,58,712 4,66,970 4,73,576 4,78,861 4,83,089
Less: Tax @ 56,100 59,880 62,904 65,323 67,259 68,807 70,046 71,036 71,829 72,463
15%
NPAT 3,17,900 3,39,320 3,56,456 3,70,165 3,81,132 3,89,905 3,96,925 4,02,540 4,07,032 4,10,626
Add: Depre 1,26,000 1,00,800 80,640 64,512 51,610 41,288 33,030 26,424 21,139 16,911
Cash flow 4,43,900 4,40,120 4,37,096 4,34,677 4,32,742 4,31,193 4,29,955 4,28,964 4,28,171 4,27,537
after tax from
operation
PVAF @ 0.870 0.757 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247
15%
PV of Cash 3,86,193 3,33,171 2,87,609 2,48,635 2,15,073 1,86,275 1,61,663 1,40,271 1,21,601 1,05,602
flows

PV = ` 21,86,092
Since GST on purchase of electric vehicle is not eligible for set off, it would
be added to the cost of vehicle
Initial Outflow = 1,50,000 x 4 = ` 6,00,000
(+) 5% GST = ` 30,000
Purchase price / Gross Cost = ` 6,30,000
B] Calculation of PV on Government subsidy –
Government subsidy received at the end of Year 1 = 20,000 x 4 = ` 80,000
PVIF at 15%, Year 1 = 0.870
Therefore, PV on Government subsidy = ` 69,600
C] Calculation of PV of Scrap value
Scrap value received at the end of Year 10 = 10% on Gross Cost

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= 6,30,000 x 0.1
= 63,000
Therefore, PV of scrap = 63,000 x 0.247 = ` 15,561
D] Calculation of PV on Tax savings due to Capital Loss at the end of
10th year
WDV of assets at the end of 10th year = 6,30,000 - 5,62,354 = ` 67,646

Less : Sale Value = ` 63,000

Capital Loss = ` 4,646

Tax savings at 15% on above loss = ` 697

PV on Tax savings due to Capital Loss = 697 x 0.247 = ` 172

NPV of Net Outflow = PV on Cash Inflows from Operations + PV on govt

subsidy + PV on Scrap + PV on Tax Savings due to Capital Loss - Initial
Outflow

= 21,86,092 + 69,600 + 15,561 + 172 - 6,30,000

NPV = ` 16,41,425

Evaluation of option B – buying second hand vehicles

A] Calculation of PV of Cash Outflow
Purchase of 4 vehicles at the beginning = 1,00,000 x 4 = ` 4,00,000
Rework of 4 vehicles at the end of 5th year = (70,000 x 4) x 0.497
= ` 1,39,160
Total Gross Cash Outflow = 4,00,000 + 1,39,160 = ` 5,39,160
B] Calculation of PV of Cash Inflows from Operations –
Year 1 2 3 4 5 6 7 8 9 10
Revenue 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000
Less: 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Cash Exp 10,00,000
NPBDT 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000
Less: 80,000 64,000 51,200 40,960 32,769 75,814 60,652 48,521 38,817 31,054
Depre
NPBT 4,20,000 4,36,000 4,48,800 4,59,040 4,67,231 4,24,186 4,39,348 4,51,479 4,61,183 4,68,946

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Less: Tax 63,000 65,400 67,320 68,856 70,085 63,628 65,902 67,722 69,177 70,342
@ 15%
NPAT 3,57,000 3,70,600 3,81,480 3,90,184 3,97,146 3,60,558 3,73,446 3,83,757 3,92,006 3,98,604
Add: 80,000 64,000 51,200 40,960 32,769 75,814 60,652 48,521 38,817 31,054
Depre
Cash flow 4,37,000 4,34,600 4,32,680 4,31,144 4,29,915 4,36,372 4,34,098 4,32,278 4,30,823 4,29,658
after tax
from
operation
PVAF @ 0.870 0.757 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247
15%
PV of 3,80,190 3,28,992 2,84,703 2,46,614 2,13,668 1,88,513 1,63,221 1,41,355 1,22,354 1,06,126
Cash
flows

PV = ` 21,75,736
C] Calculation of WDV at the end 5th year (for depreciation purpose)
WDV at the end of 5th Year = ` 1,31,072(4,00,000 – 2,68,928)
Add: Rework = ` 2,80,000 (70,000 x 4)
Less: Sale Value = (` 32,000)
WDV on which Depreciation will be calculated = ` 3,79,072
D] Calculation of PV of Scrap
PV of Scrap sale at the end of 5th Year = ` (8,000 x 4) x 0.497 = ` 15,904
PV of Scrap sale at the end of 10th year = ` (4,000 x 4) x 0.247 = ` 3,952
Total PV on Scrap Sale = 15,904 + 3,952 = ` 19,856
E] Calculation of PV on Tax savings due to Capital Loss (At Year 10)
WDV as per Income tax at the end of 10th Year = ` 1,24,214(3,79,072
– 2,54,858)
Less: Sale Value (4,000 x 4) = (` 16,000)
Capital Loss = ` 1,08,214
Tax @ 15% on Capital Loss = ` 16,232
PV on Tax Savings (16,232 x 0.247) = ` 4,009
NPV = PV on Cash Inflows from operations + PV on Scrap + PV on Tax
Savings due to Capital Loss - Initial Outflow
= 21,75,736 + 19,856 + 4,009 - 5,39,160

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NPV = ` 16,60,441
Comment - Since NPV for Option B is more, Millenial Limited should go for
buying second hand e-delivery vehicles instead every 5 years instead of
owning brand new vehicles.
4. (a) Though in a sole proprietorship firm, partnership etc., owners participate in
management but in corporates, owners are not active in management so, there is
a separation between owner/ shareholders and managers. In theory managers
should act in the best interest of shareholders however in reality, managers may
try to maximise their individual goal like salary, perks etc., so there is a principal
agent relationship between managers and owners, which is known as
Agency Problem.
Agency Problem can be addressed through following efforts:
♦ Managerial compensation is linked to profit of the company to some extent
and also with the long term objectives of the company.
♦ Employee is also designed to address the issue with the underlying
assumption that maximisation of the stock price is the objective of the
investors.
♦ Effecting monitoring can be done.
(b) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial
to financial intermediaries to support the lending volumes. Assets generating
steady cash flows are packaged together and against this asset pool, market
securities can be issued, e.g. housing finance, auto loans, and credit card
receivables.
Process of Debt Securitisation
(i) The origination function – A borrower seeks a loan from a finance company,
bank, HDFC. The credit worthiness of borrower is evaluated and contract
is entered into with repayment schedule structured over the life of the loan.
(ii) The pooling function – Similar loans on receivables are clubbed together
to create an underlying pool of assets. The pool is transferred in favour of
Special purpose Vehicle (SPV), which acts as a trustee for investors.
(iii) The securitisation function – SPV will structure and issue securities on the
basis of asset pool. The securities carry a coupon and expected maturity
which can be asset-based/mortgage based. These are generally sold to

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investors through merchant bankers. Investors are – pension funds, mutual

funds, insurance funds.
The process of securitization is generally without recourse i.e. investors bear the
credit risk and issuer is under an obligation to pay to investors only if the cash
flows are received by him from the collateral. The benefits to the originator are
that assets are shifted off the balance sheet, thus giving the originator recourse
to off-balance sheet funding.
(c) When the cost of ‘fixed cost fund’ is less than the return on investment, financial
leverage will help to increase return on equity and EPS. The firm will also benefit
from the saving of tax on interest on debts etc. However, when cost of debt will
be more than the return it will affect return of equity and EPS unfavourably and as
a result firm can be under financial distress. Therefore, financial leverage is also
known as “double edged sword”.
Effect on EPS and ROE:
When, ROI > Interest – Favourable – Advantage
When, ROI < Interest – Unfavourable – Disadvantage
When, ROI = Interest – Neutral – Neither advantage nor disadvantage
OR
(c) Objective of financial management is to maximize wealth. Therefore, one should
choose a capital structure which maximizes wealth. For this purpose, following
analysis should be done:
(1) EBIT-EPS-MPS analysis: Chose a capital structure which maximizes
market price per share. For that, start with same EBIT for all capital
structures and calculate EPS. Thereafter, either multiply EPS by price
earning ratio or divide it by cost of equity to arrive at MPS.
(2) Indifference Point analysis: In above analysis, we have considered value
at a given EBIT only. What will happen if EBIT changes? Will it change your
decision also? To answer this question, you can do indifference point
analysis.
(3) Financial Break-Even Point (BEP) analysis: With change in capital
structure, financial risk also changes. Though this risk has already been
considered in PE ratio or in cost of equity in point one above, but one may
calculate and consider it separately also by calculating Financial BEP.

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PAPER 6B: STRATEGIC MANAGEMENT

ANSWERS
PART I
1. (A) (i) (c) (ii) (c) (iii) (d) (iv) (c) (v) (c)
(B) (i) (b) (ii) (b) (iii) (c)

PART II PART II – Descriptive Questions

1. (a) XYZ Enterprises employs different network relationships across its divisions to
optimize efficiency and innovation.
• Automobile Division – Functional and Divisional Relationship: The
automobile division operates independently, with distinct teams handling
electric and fuel-based vehicles. Each division is managed by a business-
level head who directly reports to the corporate-level management. This
structure ensures clear accountability, specialization, and focused
decision-making. By maintaining independent divisions, XYZ Enterprises
can cater to different market segments effectively.
• IT Division – Matrix Relationship: The IT division follows a matrix
structure where employees report to both project heads and functional
managers. This setup allows for efficient resource utilization, as employees
contribute to multiple projects while maintaining alignment with their
respective departments. The matrix relationship helps manage complex
software development projects that require cross-functional expertise,
ensuring seamless collaboration among teams like development,
marketing, and finance.
• Startup Incubator – Horizontal Relationship: The startup incubator
promotes a horizontal structure where all employees, regardless of
hierarchy, collaborate and share ideas openly. This nurtures transparency,
quick decision-making, and innovation, which are essential for startups.
Since speed and adaptability are crucial in early-stage ventures, this
relationship structure ensures that creative solutions are implemented
without bureaucratic delays.
By adopting these network relationships, XYZ Enterprises maximizes
efficiency, agility, and innovation across its diverse operations.

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(b) PQR Ltd. has planned to implement the Strategic Business Unit (SBU) structure.
Very large organisations, particularly those running into several products, or
operating at distant geographical locations that are extremely diverse in terms of
environmental factors, can be better managed by creating strategic business
units. SBU structure becomes imperative in an organisation with an increase in
number, size and diversity.
The attributes of an SBU and the benefits a firm may derive by using the SBU
Structure are as follows:
♦ A scientific method of grouping the businesses of a multi – business
corporation which helps the firm in strategic planning.
♦ An improvement over the territorial grouping of businesses and strategic
planning based on territorial units.
♦ Strategic planning for SBU is distinct from rest of businesses. Products/
businesses within an SBU receive same strategic planning treatment and
priorities.
♦ Each SBU will have its own distinct set of competitors and its own distinct
strategy.
♦ The CEO of SBU will be responsible for strategic planning for SBU and its
profit performance.
♦ Products/businesses that are related from the standpoint of function are
assembled together as a distinct SBU.
♦ Unrelated products/ businesses in any group are separated into separate
SBUs.
♦ Grouping the businesses on SBU lines helps in strategic planning by
removing the vagueness and confusion.
♦ Each SBU is a separate business and will be distinct from one another on
the basis of mission, objectives etc.
(c) ABC Fashion's expansion into international markets, offering different products
tailored to the unique preferences of various customer segments, aligns with the
diversification strategy in Ansoff’s Product-Market Growth Matrix. This strategy
involves introducing new products to new markets, which represents the highest
level of risk and reward in the matrix.

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By entering international markets, ABC Fashion is stepping into unfamiliar

territories where it must navigate different cultural preferences, market dynamics,
and consumer behaviours. The decision to offer a variety of products that cater to
the specific needs and tastes of each region demonstrates the company's
commitment to localizing its offerings, which is a hallmark of diversification.
This strategy is particularly beneficial for companies like ABC Fashion that seek
to maximize their growth potential by not only expanding their geographical
footprint but also by innovating and adapting their product lines. It allows the
company to tap into new revenue streams and diversify its business risk by not
relying solely on its domestic market. However, it also requires significant market
research, investment, and adaptation to different regulatory environments.
In summary, ABC Fashion’s approach reflects a strategic diversification, enabling
the brand to establish a strong international presence while meeting the diverse
needs of global customers.
2. (a) Businesses sell products. A product can be either a good or a service. It might be
physical good or a service, an experience.
Following are the key characteristics of business products:
1. Products are either tangible or intangible. A tangible product can be
handled, seen, and physically felt, such as a car, book, pen, table, mobile
handset and so on. Alternatively, an intangible product is not a physical
good, such as telecom services, banking, insurance, or repair services.
2. Product has a price. Businesses determine the cost of their products and
charge a price for them. The dynamics of supply and demand influence the
market price of an item or service. The market price is the price at which
quantity provided equals quantity desired. The price that may be paid is
determined by the market, the quality, the marketing, and the targeted
group. In the present competitive world prices are often given by the market
and businesses have to work on costs to maintain profitability.
3. Products have certain features that deliver satisfaction. A product
feature is a component of a product that satisfies a consumer’s need.
Features determine product pricing, and businesses alter features during
the development process to optimize the user experience. Products should
be able to provide value satisfaction for the customers for whom they are
meant. Features of the product will distinguish between terms of function,
design, quality and experience. A customer’s cumulative experience with a
product from its purchase to the end of its useful life is an important
component of a product feature.

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4. Product is pivotal for business. The product is at the centre of business

around which all strategic activities revolve. The product enables
production, quality, sales, marketing, logistics and other business
processes. Product is the driving force behind business activities.
5. A product has a useful life. Every product has a usable life after which it
must be replaced, as well as a life cycle after which it is to be reinvented
or may cease to exist. We have observed that fixed-line telephone
instruments have largely been replaced by mobile phones.
(b) A company's mission statement is typically focused on its present business scope,
who we are and what we do. Mission statements broadly describe an
organization's present capability, customer focus, activities, and business make
up. Mission for an organization is significant for the following reasons:
• It ensures unanimity of purpose within the organization.
• It develops a basis, or standard, for allocating organizational resources.
• It provides a basis for innovating the use of the organisation’s
resources.
• It establishes a general tone or organizational climate, to suggest a
business-like operation.
• It serves as a focal point for those who can identify with the
organisation's purpose and direction.
• It facilitates the translation of objectives and goals into a work
structure involving the assignment of tasks to responsible elements within
the organization.
• It specifies organizational purposes and the translation of these
purposes into goals in such a way that cost, time, and performance
parameters can be assessed and controlled.
3. (a) Any organisation may find the work of digital transformation challenging and
overwhelming. To ensure that a digital transition is effective, change management
is essential. Here are some pointers for navigating change during the digital
transformation:
1. Specify the digital transformation’s aims and objectives: What is the
intended outcome? What are the precise objectives that must be
accomplished? It will be easier to make sure that everyone is on the same
page and pursuing the same aims if everyone has a clear grasp of their goals.

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2. Always, always, always communicate: It might be challenging for people

to accept change and adjust to it. Ensure that you routinely and honestly
discuss the objectives of digital transformation and how they will affect
stakeholders, including employees, clients, and other parties.
3. Be ready for resistance: Even when a change is for the better, it can be
challenging for people to embrace it. Have a strategy in place for dealing
with any resistance that may arise.
4. Implement changes gradually: Changes should ideally be implemented
gradually rather than all at once. In order to avoid overwhelming individuals
with too much change at once, this will give people time to become used
to the new way of doing things.
5. Offer assistance and training: Workers will need guidance in the new
procedures, software applications, etc.
In conclusion, effective completion of the massive project known as digital
transformation depends on meticulous planning and change management. Digital
transformation efforts are more likely to fail without change management.
Organizations can successfully integrate a new digital system by planning for and
managing the changes that must take place. Any project involving digital
transformation must include it.
(b) The following are the principal points of distinction between concentric
diversification and conglomerate diversification:
(i) Concentric diversification occurs when a firm adds related products or
markets. On the other hand, conglomerate diversification occurs when a
firm diversifies into areas that are unrelated to its current line of business.
(ii) In concentric diversification, the new business is linked to the existing
businesses through process, technology or marketing. In conglomerate
diversification, no such linkages exist; the new business/product is
disjointed from the existing businesses/ products.
(iii) The most common reasons for pursuing concentric diversification are that
opportunities in a firm’s existing line of business are available. However,
common reasons for pursuing a conglomerate growth strategy are that
opportunities in a firm's current line of business are limited or opportunities
outside are highly lucrative.

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4. (a) The company went through the following stages of the product life cycle (PLC):
Introduction stage: Initially, the company faced slow sales growth, limited
markets, and high prices, which are characteristic of the introduction stage. During
this stage, competition is almost negligible, and customers have limited
knowledge about the product.
Growth stage: Over time, the demand for the product expanded rapidly, prices
fell, and competition increased. These are typical features of the growth stage in
the PLC. In this stage, the product gains market acceptance, and customers
become more aware of the product's benefits and show interest in purchasing it.
(b) Four specific criteria of sustainable competitive advantage that firms can use to
determine those capabilities that are core competencies. Capabilities that are
valuable, rare, costly to imitate, and non-substitutable are core competencies.
i. Valuable: Valuable capabilities are the ones that allow the firm to exploit
opportunities or avert the threats in its external environment. A firm created
value for customers by effectively using capabilities to exploit opportunities.
Finance companies build a valuable competence in financial services. In
addition, to make such competencies as financial services highly
successful requires placing the right people in the right jobs. Human capital
is important in creating value for customers.
ii. Rare: Core competencies are very rare capabilities and very few of the
competitors possess these. Capabilities possessed by many rivals are
unlikely to be sources of competitive advantage for any one of them.
Competitive advantage results only when firms develop and exploit
valuable capabilities that differ from those shared with competitors.
iii. Costly to imitate: Costly to imitate means such capabilities that competing
firms are unable to develop easily.
iv. Non-substitutable: Capabilities that do not have strategic equivalents are
called non-substitutable capabilities. This final criterion for a capability to
be a source of competitive advantage is that there must be no strategically
equivalent valuable resources that are themselves either not rare or
imitable.
OR
Stakeholders through a grid-based approach by the following steps:
1. Identify Stakeholders: Begin by identifying all relevant stakeholders for
your project or organization. This includes individuals, groups, or
organizations that may be impacted by or have an impact on your activities.

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2. Assess Power and Interest: For each stakeholder, assess their power to
influence your project or organization and their level of interest in its
success. Power can be assessed based on factors such as authority,
resources, and expertise, while interest can be gauged by their level of
involvement, expectations, and potential benefits or risks.
3. Plot Stakeholders on the Grid: Create a grid with Power on one axis and
Interest on the other. Plot each stakeholder on the grid based on your
assessment. Stakeholders with high power and high interest are placed in
the "Key Players" quadrant, those with high power but low interest are in
the "Keep Satisfied" quadrant, those with low power but high interest are
in the "Keep Informed" quadrant, and those with low power and low interest
are in the "Low Priority" quadrant.

KEEP SATISFIED KEY PLAYER

Consult often Manage Closely
High

Increase their interest Involve in decision making

Can be hindrance to new Engage regularly and build
ideas or strategic choices strong relationship

LOW PRIORITY KEEP INFORMED

Power / Influence

Monitor only, Utilise the high interest by

engaging in decisions
no engagement
Consult in their areas of
General occasional expertise and interest
communication

Low Interest in the Organisation High

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4. Develop Strategies for each Quadrant: Based on the placement of

stakeholders in the grid, develop specific strategies for managing each
quadrant:
• Key Players: Fully engage with these stakeholders, seek their
input, and keep them informed. They are crucial for the success of
your project, so their needs and expectations should be a top
priority.
• Keep Satisfied: These stakeholders have significant power but may
not be as interested in your project. Keep them satisfied by providing
regular updates and addressing any concerns they may have to
prevent them from becoming detractors.
• Keep Informed: While these stakeholders may not have much
power, they are highly interested in your project. Keep them
informed to ensure they remain supportive and to leverage their
insights and feedback.
• Low Priority: These stakeholders have low power and interest.
Monitor them for any changes but allocate minimal resources to
managing their expectations.

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