Mock Test Paper - Series I: March, 2024

Date of Paper: 16 March, 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
PART I
1. I. (b) ` 35,55,556
II. (c) ` 30,03,733
III. (a) ` 8,83,200
IV. (d) ` 4,83,200
V. (a) 16.09%
Working Note
Particulars (`)
Total Sales ` 200 lakhs
Credit Sales (80%) ` 160 lakhs
Receivables for 40 days ` 80 lakhs
Receivables for 120 days ` 80 lakhs
Average collection period [(40 x 0.5) + (120 × 0.5)] 80 days
Average level of Receivables (` 1,60,00,000  80/360) ` 35,55,556
Factoring Commission (` 35,55,556  2/100) ` 71,111
Factoring Reserve (` 35,55,556  10/100) ` 3,55,556
Amount available for advance {` 35,55,556 - (3,55,556 + ` 31,28,889
71,111)}
Factor will deduct his interest @ 18%:
`31,28,889 ×18×80 ` 1,25,156
Interest =
100 × 360
Advance to be paid (` 31,28,889 – ` 1,25,156) ` 30,03,733
(i) Statement Showing Evaluation of Factoring Proposal
`
A. Annual Cost of Factoring to the Company:
Factoring commission (` 71,111  360/80) 3,20,000
Interest charges (` 1,25,156  360/80) 5,63,200
Total 8,83,200
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 B. Company’s Savings on taking Factoring Service: `
Cost of credit administration saved 2,40,000
Bad Debts (` 160,00,000 x 1/100) avoided 1,60,000
Total 4,00,000
C. Net Cost to the company (A – B) (` 8,83,200 – ` 4,83,200
4,00,000)
` 4,83,200
Effective cost of factoring = ×100 = 16.09%
` 30,03,733

2. B. ` 3,20,513; ` 8.33
(EBIT -I)(1- t) - Dp (EBIT -I)(1- t) - Dp
=
N1 N2
(x - 0)(1- 0.35) (x -1,00,000)(1- 0.35) - 60,000
=
25,000 10,000
x = EBIT = ` 3,20,513
At EBIT of ` 3,20,513, EPS under both options will be the same i.e., `
8.33 per share
3. D. 1.15
FL= % change in NP/%change in EBIT=6.9/6=1.15
4. C. 3 years
These deposits may be accepted for a period of six months to three
years.
PART II
1. (a)
Particulars (`’ in lakhs)
Net Profit 54
Less: Preference dividend 24
Earnings for equity shareholders 30
Earnings per share 30/2 = ` 15
Let, the dividend per share be D to get share price of ` 120.
r
D+Ke(E-D)
P =
Ke
Where,
P = Market price per share.
E = Earnings per share = ` 15
D = Dividend per share
R = Return earned on investment = 22%
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 Ke = Cost of equity capital = 15%
0.22
D + 0.15 (15-D)
120 =
0.15
0.15D + 3.3 - 0.22D
18 =
0.15
0.07D = 3.3 – 2.7
D = 8.57
DPS 8.57
D/P ratio = ×100 = x 100 = 57.13%
EPS 15

So, the required dividend pay-out ratio will be = 57.13%

NOI ` 10,00,000
(b) Value of AN Ltd. = = = ` 50,00,000
Ko 20%

(i) Return on Shares of Mr. R on AN Ltd.

Particulars Amount (`)
Value of the company 50,00,000
Market value of debt (50% x ` 50,00,000) 25,00,000
Market value of shares (50% x ` 50,00,000) 25,00,000
Particulars Amount (`)
Net operating income 10,00,000
Interest on debt (10% × ` 25,00,000) 2,50,000
Earnings available to shareholders 7,50,000
Return on 8% shares (8% × ` 7,50,000) 60,000
` 7,50,000
(ii) Implied required rate of return on equity of AN Ltd. =
` 25,00,000
= 30%
(c) ANVY Ltd
Balance Sheet as on 31 st March, 2023
Liabilities ` Assets `
Equity share capital 2,00,000 Fixed assets 1,40,000
Current debt 60,000 Cash (balancing figure) 1,00,000
Long term debt 60,000 Inventory 80,000
3,20,000 3,20,000
Working Notes
1. Total debt = 0.60 x Equity share capital = 0.60 ` 2,00,000
= ` 1,20,000
Further, Current debt to total debt = 0.50. So, current debt
= 0.50 x `1,20,000 = ` 60,000,

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 Long term debt = `1,20,000 - `60,000= ` 60,000
2. Fixed assets = 0.70 × Equity share Capital = 0.70 × ` 2,00,000
= ` 1,40,000
3. Total assets to turnover = 2.5 Times: Inventory turnover = 10 Times
Hence, Inventory /Total assets = 2.5/10=1/4, Total assets = ` 3,20,000
Therefore Inventory = ` 3,20,000/4 = ` 80,000
2. (a) Cash inflows after tax (CFAT)
Particular `
Current production (units per week) 5,000 units
New capacity (units per week) 15,000 units
Demand (units per week) 10,000 units
Increase in sales (units per week) A. 5,000 units
Contribution per unit (` 30,000 x 0.10) B. 3,000
Increase in contribution A x B x 56 84 crores
Less: Additional fixed cost 10 crores
Increase in profit 74 crores
Less: Tax @ 40% 29.6 crores
Profit after tax 44.4 crores
Tax shield due to depreciation
Year Depreciation Tax Shield PV Factor Total Present
(` in Crore) (` in Crore) @ 20% Value (` in Crore)
1 25.00 10 0.83 8.33
2 18.75 7.5 0.69 5.18
3 14.06 5.62 0.58 3.26
4 10.55 4.22 0.48 2.03
5 7.91 3.16 0.40 1.27
Total 20.07
Tax shield on capital loss = (23.73-20.00) x 30% = ` 1.12 crores
Net Present Value (NPV)
Particulars Year Cash Flow PVAF @ Present Value
(` in Crores) 20% (` in Crores)
Initial Investment 0 (100) 1 (100)
Working capital 0 (3) 1 (3)
Profit after tax 1-5 44.4 2.99 132.76
Salvage value 5 20 0.40 8.00

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 Tax shield on 1-5 20.07
Depreciation
Tax shield on 5 1.12 0.40 0.45
capital loss
Release of 5 3 0.40 1.20
Working Capital
NPV 59.47
The company is advised to replace the old machine since the NPV of the
new machine is positive.
(b) Cut-off Rate: It is the minimum rate which the management wishes to
have from any project. Usually this is based upon the cost of capital. The
management gains only if a project gives return of more than the cut -
off rate. Therefore, the cut - off rate can be used as the discount rate or
the opportunity cost rate.
3. (a) Working Note:
Let the rate of Interest on debenture be x
 Rate of Interest on loan = 1.4x
RV -NP
Int (1- t)+
 kd on debentures = n
RV + NP
2
100 - 98
100x(1- 0.30)+
4
= 100 +98
2
70x +0.5
=
99
 Kd on bank loan = 1.4 x (1 – 0.30) = 0.98x
EPS 1 1 1
Ke = = = = = 0.25
MPS MPS / EPS PE 4
Ke = 0.25
Computation of WACC
Capital Amount Weights Cost Product
Equity 20,00,000 0.2 0.25 0.05
Reserves 30,00,000 0.3 0.25 0.075
Debentures 30,00,000 0.3 (70x+0.5)/99 (21x+0.15)/99
Bank Loan 20,00,000 0.2 0.98x 0.196x
1,00,00,000 1 0.125+0.196x
21x + 0.15
+
99
WACC = 16%
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  0.125+0.196x+ 21x + 0.15 = 0.16
99
 12.375+19.404x+21x+0.15 = (0.16)(99)
 40.404x = 15.84 – 12.525
 40.404x = 3.315

 x = 3.315
40.404
 x = 8.20%
(i) Rate of interest on debenture = x = 8.20%
(ii) Rate of interest on Bank loan = 1.4x = (1.4)(8.20%) = 11.48%.
(b) In dividend price approach, cost of equity capital is computed by dividing
the expected dividend by market price per share. This ratio expresses
the cost of equity capital in relation to what yield the company should
pay to attract investors. It is computed as:
D1
Ke =
P0

Where,
Ke= Cost of equity
D = Expected dividend (also written as D 1)
P0 = Market price of equity (ex- dividend)
4. (a) Limitations of Profit Maximisation objective of financial management.
(i) The term profit is vague. It does not clarify what exactly it
means. It conveys a different meaning to different people. For
example, profit may be in short term or long term period; it may be
total profit or rate of profit etc.
(ii) Profit maximisation has to be attempted with a realisation of
risks involved. There is a direct relationship between risk and
profit. Many risky propositions yield high profit. Higher the risk,
higher is the possibility of profits. If profit maximisation is the only
goal, then risk factor is altogether ignored. This implies that finance
manager will accept highly risky proposals also, if they give high
profits. In practice, however, risk is very important consideration
and has to be balanced with the profit objective.
(iii) Profit maximisation as an objective does not take into account
the time pattern of returns. Proposal A may give a higher amount
of profits as compared to proposal B, yet if the returns of proposal
A begin to flow say 10 years later, proposal B may be preferred

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 which may have lower overall profit but the returns flow is more
early and quick.
(iv) Profit maximisation as an objective is too narrow. It fails to take
into account the social considerations as also the obligations to
various interests of workers, consumers, society, as well as ethical
trade practices. If these factors are ignored, a company cannot
survive for long. Profit maximization at the cost of social and moral
obligations is a short sighted policy.
(b) Some common methods of venture capital financing are as follows:
(i) Equity financing: The venture capital undertakings generally
require funds for a longer period but may not be able to provide
returns to the investors during the initial stages. Therefore, the
venture capital finance is generally provided by way of equity share
capital. The equity contribution of venture capital firm does not
exceed 49% of the total equity capital of venture capital
undertakings so that the effective control and ownership remains
with the entrepreneur.
(ii) Conditional loan: A conditional loan is repayable in the form of a
royalty after the venture is able to generate sales. No interest is
paid on such loans. In India venture capital financiers charge
royalty ranging between 2 and 15 per cent; actual rate depends on
other factors of the venture such as gestation period, cash flow
patterns, risk and other factors of the enterprise. Some Venture
capital financiers give a choice to the enterprise of paying a high
rate of interest (which could be well above 20 per cent) instead of
royalty on sales once it becomes commercially sound.
(iii) Income note: It is a hybrid security which combines the features of
both conventional loan and conditional loan. The entrepreneur has
to pay both interest and royalty on sales but at substantially low
rates. IDBI’s VCF provides funding equal to 80 – 87.50% of the
projects cost for commercial application of indigenous technology.
(iv) Participating debenture: Such security carries charges in three
phases — in the start-up phase no interest is charged, next stage
a low rate of interest is charged up to a particular level of operation,
after that, a high rate of interest is required to be paid.
(c) Optimum Capital Structure: The capital structure is said to be optimum
when the firm has selected such a combination of equity and debt so that
the wealth of firm is maximum. At this capital structure, the cost of capital
is minimum and the market price per share i.e. value of the firm is
maximum.

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 OR
Financial leverage indicates the use of funds with fixed cost like long
term debts and preference share capital along with equity share capital
which is known as trading on equity. The basic aim of financial leverage
is to increase the earnings available to equity shareholders using fixed
cost fund.
A firm is known to have a positive/favourable leverage when its earnings
are more than the cost of debt. If earnings are equal to or less than cost
of debt, it will be an negative/unfavourable leverage. When the quantity
of fixed cost fund is relatively high in comparison to equity capital it is
said that the firm is ‘’trading on equity”.

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 INTERMEDIATE COURSE: GROUP II
PAPER 6B: STRATEGIC MANAGEMENT
ANSWERS
PART I
1. (A) (i) (a) (ii) (b) (iii) (c) (iv) (b) (v) (c)
1. (B) (i) (c) (ii) (b) (iii) (b)

PART II
1. (a) Swati operates at the functional level of management, specifically as the
marketing manager at a software company. Functional managers like
Swati oversee specific departments or functions within an organization,
such as marketing, finance, or operations. Their primary responsibilities
include implementing corporate strategies and policies within their area
of expertise and ensuring that daily operations are conducted efficiently
and effectively.
In Swati's case, as a marketing manager, her role involves developing
and executing marketing strategies for the company's products. This
includes leading a team of marketing professionals, collaborating with
product development and sales teams, and analyzing market trends and
customer feedback to refine strategies. By working closely with these
teams, Swati ensures that the company's products are effectively
promoted in the market and that marketing efforts align with overall
business goals.
Functional managers like Swati play a critical role in the organization by
bridging the gap between corporate strategy and daily operations. They
are responsible for translating high-level strategic goals into actionable
plans for their departments and ensuring that these plans are executed
effectively. Additionally, they are often key decision-makers within their
areas of responsibility, making strategic choices that impact on the
company's success. Overall, Swati's role as a marketing manager
exemplifies the importance of functional managers in driving the success
of their organizations.
(b) The PESTLE framework can help ABC Corp assess the external factors
affecting its decision to expand into a new country by considering the
following aspects:
• Political Factors: These include the stability of the government,
government policies on foreign investment, trade agreements, and
regulatory frameworks. By analyzing these factors, ABC Corp can
assess the political risks associated with entering the new market.
• Economic Factors: Economic factors such as GDP growth rate,
inflation rate, exchange rates, and economic stability can impact ABC
Corp's decision. By analyzing these factors, the company can
9
 understand the economic environment of the new market and its
potential impact on business operations.
• Social Factors: Social factors such as cultural norms,
demographics, and lifestyle trends can influence consumer behavior
and demand for ABC Corp's products. Understanding these factors
can help the company tailor its marketing strategies to the new
market.
• Technological Factors: Technological factors such as
infrastructure, technological advancements, and the level of
technology adoption in the new market can impact ABC Corp's
operations. By assessing these factors, the company can determine
the technological requirements for entering the new market.
• Legal Factors: Legal factors such as laws and regulations related to
foreign investment, intellectual property rights, and labor laws can
impact ABC Corp's decision. By analyzing these factors, the company
can ensure compliance with legal requirements in the new market.
• Environmental Factors: Environmental factors such as climate
change, environmental regulations, and sustainability practices can
impact ABC Corp's operations and reputation. By considering these
factors, the company can assess the environmental risks and
opportunities in the new market.
Overall, the PESTLE framework can provide ABC Corp with a
comprehensive analysis of the external factors that could impact its
decision to expand into a new country, helping the company make
informed and strategic decisions.
(c) To help the small manufacturing company navigate its digital
transformation successfully, we would recommend the following
strategy:
1. Begin at the top: The leadership team should be united and
committed to the digital transformation. They should communicate a
clear vision for the future of the company and lead by example.
2. Ensure that the change is necessary and desired: Before
implementing any changes, the company should assess its current
state and identify areas where digital transformation can add value.
It's important to involve employees in this process to ensure their buy-
in.
3. Reduce disruption: Employee perceptions of change can vary, so
it's important to minimize disruption. This can be done by
communicating early and often about the changes, providing training
and support for employees, and empowering change agents within
the organization.

10
 4. Encourage communication: Create channels for employees to ask
questions and provide feedback. Encourage collaboration between
departments to share ideas and innovations. Effective communication
can help alleviate fears and keep everyone aligned.
5. Recognize that change is the norm: Digital transformation is not a
one-time project but an ongoing process. The company should be
prepared to adapt to new technologies and market conditions
continuously.
By following these best practices, the small manufacturing company can
successfully navigate its digital transformation and position itself for
future growth and success.
2. (a) The retail company can develop a strategic approach that is both
proactive and reactive to address the challenge of increasing
competition from online retailers. To achieve this, the company can:
• Proactive Strategy: The company can proactively analyze market
trends and customer preferences to identify opportunities for growth.
For example, it can invest in market research to understand what
customers value in a retail experience and tailor its offerings to meet
those needs. This proactive approach can help the company stay
ahead of competitors and attract new customers.
• Reactive Strategy: In addition to proactive measures, the company
should also be prepared to react to changes in the market
environment. For example, if a competitor launches a new online
shopping platform, the company should quickly assess the impact on
its business and develop a response. This reactive strategy can help
the company adapt to changing market conditions and maintain its
competitiveness.
By combining proactive and reactive strategies, the retail company can
develop a comprehensive approach to addressing the challenge of
increasing competition from online retailers. This approach will allow the
company to capitalize on opportunities for growth while also mitigating
risks and responding to threats in the market.
(b) To target tech-savvy consumers for the new smartphone model, the tech
company can develop a marketing strategy based on customer behavior.
Consumer behaviour may be influenced by a number of things. These
elements can be categorised into the following conceptual domains:
• External Influences: Utilize online platforms and tech forums to
generate buzz around the new smartphone. Partner with tech
influencers and bloggers to review the product and create awareness
among tech-savvy consumers.
• Internal Influences: Appeal to the desire for innovation and
advanced features among tech-savvy consumers. Highlight the
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 unique selling points of the new smartphone, such as its cutting-edge
technology, performance, and design.
• Decision Making: Recognize that tech-savvy consumers are early
adopters who value functionality and performance. Provide detailed
specifications and comparisons with other smartphones to help them
make an informed decision.
• Post-decision Processes: Offer excellent customer service and
support to address any technical issues or concerns. Encourage
customers to provide feedback and reviews to build credibility and
trust among tech-savvy consumers.

External Factors
Market Stimuli
Environmental
Factors Purchase and
Decision Post Purchase
Making Actions

Internal Factors

Figure: Process of consumer behaviour

By understanding the behavior of tech-savvy consumers and aligning the
marketing strategy with their preferences, the tech company can
effectively promote the new smartphone and attract this demographic.
3. (a) To study the market position of rival companies in the energy drink
segment, the strategic manager can use strategic group mapping. This
tool helps identify strategic groups, which consist of rival firms with
similar competitive approaches and positions in the market. The
procedure for implementing strategic group mapping effectively is as
follows:
1. Identify the competitive characteristics that differentiate firms in
the industry typical variables that are price/quality range (high,
medium, low); geographic coverage (local, regional, national,
global); degree of vertical integration (none, partial, full); product-
line breadth (wide, narrow); use of distribution channels (one,
some, all); and degree of service offered (no-frills, limited, full).
2. Plot the firms on a two-variable map using pairs of these
differentiating characteristics.

12
 3. Assign firms that fall in about the same strategy space to the
same strategic group.
4. Draw circles around each strategic group making the circles
proportional to the size of the group's respective share of total
industry sales revenues.
By following these steps, the strategic manager can gain valuable
insights into the competitive landscape of the energy drink segment and
identify potential positioning strategies for the new line of energy drinks
targeted at health-conscious consumers.
(b) 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.
4. (a) Strategic performance measures are essential for organizations for
several reasons:
♦ Goal Alignment: Strategic performance measures help
organizations align their strategies with their goals and objectives,
ensuring that they are on track to achieve their desired outcomes.
♦ Resource Allocation: Strategic performance measures provide
organizations with the information they need to make informed
decisions about resource allocation, enabling them to prioritize their

13
 efforts and allocate resources to the areas that will have the greatest
impact on their performance.
♦ Continuous Improvement: Strategic performance measures
provide organizations with a framework for continuous
improvement, enabling them to track their progress and make
adjustments to improve their performance over time.
♦ External Accountability: Strategic performance measures help
organizations demonstrate accountability to stakeholders, including
shareholders, customers, and regulatory bodies, by providing a
clear and transparent picture of their performance.
(b) Mendelow's Matrix can be used effectively to analyze and manage
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.
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.

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 KEEP KEY PLAYER

High
Manage Closely
SATISFIED Involve in decision making
Consult often Engage regularly and
Increase their interest build strong relationship
Can be hindrance to new
Power / Influence ideas or strategic choices

LOW KEEP
PRIORITY INFORMED
Monitor only, Utilise the high interest by
no engagement engaging in decisions
General occasional Consult in their areas of
communication expertise and interest

Low Interest in the Organisation High

w
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.
5. Monitor and Adapt: Continuously monitor the power and interest
of stakeholders and adjust your strategies accordingly.
Stakeholders may move between quadrants based on changing
circumstances, so it's important to remain flexible and responsive.
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By using Mendelow's Matrix as a grid-based tool, you can effectively
analyze and manage stakeholders by tailoring your engagement
strategies to their specific needs and expectations, ultimately increasing
the likelihood of project success.
OR
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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