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Swapnil Patni's Classes: CA Intermediate - Financial Management Total Marks - 60

This document contains 8 questions regarding financial management for a CA Intermediate exam. Question 1 asks to calculate operating, financial, and combined leverage for 3 companies. Question 2 asks about calculating cost of equity, determining market price based on a new growth rate, and calculating cost of debentures. Question 3 asks to calculate degrees of operating and combined leverage for 5 companies. Question 4 asks to calculate weighted average cost of capital using market value weights for a company.

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Aniket Patel
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123 views3 pages

Swapnil Patni's Classes: CA Intermediate - Financial Management Total Marks - 60

This document contains 8 questions regarding financial management for a CA Intermediate exam. Question 1 asks to calculate operating, financial, and combined leverage for 3 companies. Question 2 asks about calculating cost of equity, determining market price based on a new growth rate, and calculating cost of debentures. Question 3 asks to calculate degrees of operating and combined leverage for 5 companies. Question 4 asks to calculate weighted average cost of capital using market value weights for a company.

Uploaded by

Aniket Patel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Swapnil Patni’s Classes

CA Intermediate – Financial Management

Total Marks - 60
Q 1)

Calculate the operating leverage, financial leverage and combined leverage for the following firms and
interpret the results:

P Q R
Output (units) 2,50,000 1,25,000 7,50,000
Fixed Cost (₹) 5,00,000 2,50,000 10,00,000
Unit Variable Cost (₹) 7.50
Unit Selling Price (₹) 7.50 10.0
Interest Expense (₹) 75,000 25,000 (6 Marks)

Q 2)
ABC Company’s Equity share is quoted in the market at ₹ 25 per share currently. The company pays

a dividend of ₹ 2 per share and the investor’s market expects a growth rate of 6% per year. You are

required to:

a) Calculate the company’s Cost of Equity Capital.

b) If the Anticipated Growth Rate is 8% p.a., calculate the indicated Market price per share.

c) If the company issues 10% Debentures of face value of ₹ 100 each and realizes ₹ 96 per

Debenture while the debenture are redeemable after 12 years at a premium of 12 %, what will be

the cost of debentures? (Tax = 50%) (6 Marks)


Q 3)
Following information are related to four firms of the same industry :

Firm Change in Revenue Change in Operating Income Change in EPS

M 28% 26% 32%


N 27% 34% 26%
P 25% 38% 23%
Q 23% 43% 27%
R 25% 40% 28%
You are required to calculate – 1) Degree of Operating Leverage and
(6 Marks)
2) Degree of Combined Leverage, of all firms
Q 4)

PC Ltd. has the following capital structure on October 31, 2015:

Particulars Amount (₹)


Equity Share Capital (2,00,000 shares of ₹ 10 each) 20,00,000
Reserves and Surplus 20,00,000
12% Preference Shares 10,00,000
9% Debentures 30,00,000
Total 80,00,000
The market price of equity share is ₹ 30. It is expected that the company will pay next year a dividend of
₹ 3 per share, which will grow at 7% forever. Assume 40% income tax rate.
You are required to compute weighted average cost of capital using market value weights.
(6 Marks)
Q 5)

From the following financial data of Company A and Company B: Prepare their Income Statements.

Company A (₹) Company B (₹)


Variable Cost 56,000 60% of sales
Fixed Cost 20,000
Interest Expenses 12,000 9,000
Financial Leverage 5:1
Operating Leverage 4:1
Income Tax Rate 30% 30%
Sales 1,05,000
(10 Marks)
Q 6)
Geeta Ltd. has furnished the following information:
Earning per share (ESP) ₹4
Dividend payout ratio 25%
Market price per share ₹ 40
Rate of tax 30%
Growth rate of dividend 8%

The company wants to raise additional capital of ₹ 10 lakhs including debt of ₹ 4 lakhs. The cost of
debt (before tax) is 10% upto ₹ 2 lakhs and 15% beyond that.

Compute the after tax cost of equity and debt and the weighted average cost of capital.
(10 Marks)
Q 7)
The following details of RST Limited for the year ended 31st March, 2015 are given below:

Operating Leverage 1.4 times


Combined Leverage 2.8 times
Income Tax Rate 30%
Fixed cost (Excluding Interest) ₹ 2.04 Lakhs
Sales ₹ 30.00 Lakhs
12% Debentures of ₹ 100 each ₹ 21.25 Lakhs
Equity share capital of ₹ 10 each ₹ 17.00 Lakhs
a) Calculate Financial leverage
b) Calculate P/V ratio and Earning per Share (EPS)
c) If the company belongs to an industry, whose assets turnover is 1.5, does it have a high or low
assets Leverage?
d) At what level of sales the Earning before Tax (EBT) of the company will be equal to zero?

(8 Marks)
Q 8)
The following is the capital structure of a Company:

Source of capital Book value (₹) Market value (₹)


Equity shares @ ₹ 100 each 9% Cumulative 80,00,000 1,60,00,000
preference shares @ ₹ 100 each 20,00,000 24,00,000
11% Debentures 60,00,000 66,00,000
Retained earnings 40,00,000
2,00,00,000 2,50,00,000
The current market price of the company’s equity share is ₹ 200. For the last year the company had
paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The
corporate tax rate is 30 per cent and shareholders personal income tax rate is 20 per cent.

You are required to calculate:


Cost of capital for each source of capital.
Weighted average cost of capital on the basis of book value weights.
Weighted average cost of capital on the basis of market value weights
(8 Marks)

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