FINAL EXAMINATION SET - 2

MODEL ANSWERS TERM – DEC 2024

PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)

1. (a) Choose the correct option: [10 x 2 = 20]

(i) The following details are given for a company:

Sales - ₹ 1,00,000; Costs - ₹ 75,000; Depreciation - ₹ 20,000; Tax - 35% Change in Net
Working Capital - ₹ 1,000; Change in Capital Spending - ₹10,000. Then the Free Cash
Flow to Firm (FCFF) will be:
a) ₹3,250
b) ₹6,750
c) ₹10,250
d) ₹12,250

(ii) Burnpur Cements Ltd. earned free cash flow to Equity Shareholders during the
Financial Year ending 2016 at ₹4.5 lakhs and its cost of equity is 13% with a projected
earnings growth rate of 10%. The market value of debt is ₹50 lakhs. The value of firm
as per Constant Growth Valuation Model will be:
a) ₹4,50,000
b) ₹1,45,000
c) ₹1,50,000
d) ₹1,65,000

(iii) X Ltd. has ₹100 crores worth of common equity on its balance sheet comprising of 50
lakhs shares. The company’s Market Value Added (MVA) is ₹24 crores. What is
company’s stock price?
a) ₹230
b) ₹238
c) ₹248
d) ₹264

(iv) P Ltd. intends to acquire R Ltd. (by merger) based on market price of the shares. The
following information is available of the two companies.
P Ltd. R Ltd.
No. of Equity shares 10,00,000 6,00,000
Earning after tax 50,00,000 18,00,000
Market value per share ₹ 30 ₹ 25

New EPS of R Ltd. after merger will be:

a) ₹4.00
b) ₹4.05
c) ₹4.60
d) ₹4.53

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
(v) Duration of a bond will __________ when the yield-to-maturity on the bond increases.
a) Decrease
b) Increase
c) Not Change
d) All three above are possible

(vi) The Average Cost of a firm is given by the function Average Cost = x3 + 12x² – 11x,
its marginal cost will be:
a) 4x3 + 36x2 – 22x
b) x4 + 12x3 – 11x2
c) x3 + 12x2 – 11x
d) None of the above

(vii) ________ give target company bondholders the right to sell their bonds back to the
target at a pre-specified redemption price in the event of a takeover.
a) Poison pills
b) Poison puts
c) Share repurchase
d) None of these

(viii) If value of A Ltd. is 50, B Ltd. is 20 and on merger their combined value is 90 and A
Ltd. receives premium on merger 12, the synergy for merger is (all amounts are in ₹
Lakhs) —
a) ₹8
b) ₹20
c) ₹32
d) ₹38
(ix) This is the estimated price for the transfer of an asset or liability between identified
knowledgeable and willing parties that reflects the respective interests of those
parties:
a) Market Value
b) Liquidation Value
c) Equitable Value
d) Investment Value
(x) Six Sigma is a business-driven, multi-dimensional structured approach to:
a) Reducing process variability
b) Lowering Defects
c) Improving Processes
d) All of the above

(b) Read the following scenario and answer the following questions: [5 x 2 = 10]
There are four firms (A, B, C and D) which operates under similar conditions and
comparable. The top management of Firm B is worried about the profitability of the firm
and anticipates that the firm’s operational efficiency is relatively poor which is projected in
declining market share of the company as well as other operational ratios.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Miss Lizi, the cost accountant of Firm B has been authorised by the top management to look
into the matter and report back. Miss Lizi is able to extract the following data of the four
firms.

Firm Capital Employed (₹ in Millions) Value added (₹in Millions)

A 8.6 1.8
B 2.2 0.2
C 15.6 2.8
D 31.6 4.1
She is of the opinion that the value added is the comparable output and the capital employed
is the comparable input. Accordingly, she extracts the data of the two variable across the
four firms.

Choose the correct option from the given alternatives based on the above scenario:

(i) Which firm has the highest efficiency?

a. A
b. B
c. C
d. D

(ii) Relative efficiency of Firm B is

a. 85.88
b. 43.40
c. 62.08
d. 100

(iii) For Inefficient firm,

a. Input target = Actual Input
b. Input target > Actual Input
c. Input target < Actual Input
d. Input target = Input Slack

(iv) Input Slack for Firm B is

a. 2.2
b. 1.245
c. 0
d. 0.955

(v) Output Target for Firm B is

a) ₹0.46 million
b) ₹0.26 million
c) ₹0.95 million
d) ₹0.80 million
Answer:
(a)
i ii iii iv v vi vii viii ix x
d d c d a a b b c d

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION

(b)
i ii iii iv v
a b c b a

SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 Marks.) [5x14=70]

2. (a) Explain the four intrinsic flows of the supply chain and Components of Supply Chain
Management. [7]

(b) Distinguish between Six Sigma and Total Quality Management. [7]

Answer:

(a) Supply chain is also known as ‘value chain’ when the ‘links’ are considered as value adding
activities. The supply chain is also considered as a ‘demand chain’ when the chain is considered as
a continuous demand originated from the consumers stretched to upstream suppliers. There are
four intrinsic flows of the supply chain.
a) Material flow: For all manufacturing entities, materials flow from the beginning of the
supply chain and flows to the customers as finished products, who are at the end of the
supply chain.
b) Information flow: Unlike material flows, information flows both upstream and
downstream. It is important to note that information requirement and flow is specific to a
supply chain and differs from requirement in another supply chain.
c) Finance flow: Finance is the lifeblood of business and therefore smooth finance flow is an
important aspect of the supply chain. Without smooth finance flow supply chains falters
and becomes ineffective. Finance flows downstream and ultimately adds value to the
supply chain.
d) Commercial flow: Most supply chains represent a transactional commercial flow. This
means that the material flow that runs through the supply chain changes its ownership. This
transactional commercial flow will only take place in a supply chain where there are more
than one company in the supply chain.

Customer satisfaction in terms of quality products and timely delivery and internal operating
efficiencies of the companies in the supply chain are the two aspects of effective supply chain
management. Internal operating efficiency is measured in terms of the rate of return on
investments in inventory and other assets and lower than average operating expenses. As such,
companies in the supply chain -referred as ‘links’- have to make effective decisions regarding the
five specific areas.
a) Production: Producing as per requirements of the market is the primary requirement of
supply chain management. It needs immaculate planning. Master production schedules
have to be in place which takes into account plant capacities, workload balancing, quality
control and equipment maintenance scheduling.
b) Inventory: In supply chain management, decisions regarding inventory to be held at each

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
stage of the supply chain is crucial as a wrong decision has a cascading effect. Inventory
often acts as a buffer against uncertainty in the supply chain. However, higher the
inventory, higher is the cost of holding. Thus optimal inventory levels need to be fixed
which will have a positive impact on all the links of the supply chain.
c) Location: The next important decision making issue, in supply chain management, is the
selection of location for production and storage of inventory. The underlying issue is cost
efficiency. These decisions facilitate products to flow through the supply to the final
customer.
d) Transportation: Decision regarding inventory, discussed previously, is related to the mode
of transportation. Cost effective mode of transportation results in delayed movement of
products and uncertainty in transportation. The uncertainty may be countered with higher
stock levels which will increase the cost of investment in inventory. Thus deciding upon
the mode of transportation is critical to the success of the supply chain.
e) Information: Smooth flow of information is the key to successful implementation of
supply chain and its management. With good information, people can make effective
decisions about what to produce and how much, about where to locate inventory, and how
best to transport it.

(b) TQM, Six-Sigma, and Toyota production system (or lean production), are three main quality
improvement programs initiated by various companies in order to better their production
processes to meet ever-growing challenges of the new competitive business environment. All
three are quality improvement programs. Of the two, lean production system is taken up for
discussion in the next section.

Both Six Sigma and TQM are quality management tools which have been put to effective use by
companies. Although the methodologies and procedures used in the two appear quite similar, there
are certain differences between the two which are enumerated in the next few lines;
a) Six-Sigma is a relatively newer concept than TQM – while TQM refers to continuous
effort by employees to ensure high quality products Six Sigma incorporates many small
changes in the systems to ensure effective results and better customer satisfaction. As such
TQM evolved, through contributions of various quality gurus post 1950, as a philosophy of
quality management. Feigenbaum introduced the concept of “Total Quality Control”
(TQC) his first book “Quality Control Handbook” in 1951. This is considered as the
starting of the philosophy of TQM. Six Sigma, on the other, incepted in 1981 in Motorola.
b) Focus - The main focus of TQM is to preserve existing quality standards whereas. Six
Sigma focuses on improving quality by minimizing and eventually eliminating defects
from the system.
c) Implementation – implementation of Six Sigma is much complicated in comparison to
implementation of the TQM process. Deployment of Six Sigma is dependent on certified
professionals (referred as Master Black Belts). Even the employees are certified as “Green
Belts” or “Black Belts” depending on their level of proficiency. TQM, on the other, is a
philosophy which can be referred to a part time activity which does not require any special
training.
d) Results - Six-Sigma is delivers better and effective results than TQM. Customers’
feedbacks make Six Sigma more accurate and result oriented. There is a growing
consensus24 that six sigma will outperform TQM in future.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION

3. (a) A radio manufacturer produces “x” sets per week at total cost of x² + 78x + 2500. He is a
monopolist and the demand function for his product is x = (600-P)/8, when the price is “p”
per set.
Demonstrate that maximum net revenue is obtained when 29 sets are produced per week
and calculate the monopoly price. [7]

(b) Explain the qualitative and quantitative methods of risk analysis. [7]

Answer:

(a) Cost (C) = x2 + 78x + 2500

Demand (D) X = (600 –P) / 8
8x = 600 – P
∴ P = 600 – 8x
Total Revenue per “x” sets
Price = 600x – 8x2

Maximum revenue is obtains at MC = MR

Marginal Cost =dc/dx = 2x + 78 –---------- (i)
Marginal Revenue = dr/dx= 600 – 16x –------------------- (ii)
Equating (i) & (ii),
2x +78 = 600 – 16x
or, 18x = 522
∴ x = 522/18 = 29
Monopoly price = 600 – 8x
= 600 – (8 × 29)
= 600 – 232 = 368.
(b) Qualitative Methods
This method of risk analysis is most often used for decision making in business projects;
entrepreneurs base themselves on their judgment, experience and intuition for decision making.
These methods can be used when the level of risk is low and does not warrant the time and
resources necessary for making a full analysis. These methods are used when the numerical data
available are not adequate for quantitative analysis that would serve as the basis for a subsequent
and more detailed analysis of the entrepreneur’s global risk. Qualitative risk analysis is referred as
the base for quantitative risk analysis, and it’s beneficial because not only the uncertainty in the
project gets reduced, but also focuses on the high-impact risks. Thus it helps the prioritization of
risk.
The qualitative methods include:
 Brainstorming
 Questionnaire and structured interviews
 Evaluation for multidisciplinary groups
 Judgment of specialists and experts (Delphi Technique)
Quantitative Methods:
Quantitative risk analysis tallies the possible outcomes for the project and figures out the
probability of accomplishing project objectives. This assists decision-making, especially when

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
there is uncertainty in the planning phase. It helps project managers create realistic cost, schedule
and targets. These are considered to be those that enable us to assign values of occurrence to the
various risks identified, that is, to calculate the level of risk of the project. Quantitative method
encompasses.
 Analysis of likelihood
 Analysis of consequences and
 Computer simulation.

4. (a) Explain the Five Components of DuPont Analysis. [7]

(b) Using Altman’s Model (1968) of Corporate Distress Prediction, Calculate the Z score of S &
Co. Ltd., whose five accounting ratios are given as below and Interpret, its financial
position.
The five variables are:
(i) Working Capital to Total Assets =25%
(ii) Retained Earnings to Total Assets = 30%
(iii) EBIT to Total Assets = 15%
(iv) Market Value of Equity Shares to Book Value of Total Debt =150%
(v) Sales to Total Assets = 2 times. [7]

Answer:

(a) The 5 – component DuPont analysis is an extension of the original model presented in the above
section. In this case, the ROE is segregated into five components which provide information on
five aspects of profitability.

The identity is presented as;

ROE = Operational Efficiency × Interest Burden on Earnings × Tax burden on earnings ×
Asset Utilization × equity multiplier (Financial leverage).

The impact of operational efficiency (measured in terms of net margin), asset utilization
(measured in terms of asset turnover) and financial leverage (measured in terms of the equity
multiplier) is comprehended through the 3 component analysis discussed in the previous section.
Two additional aspects; the effect of interest on earning and the effect of tax on earnings, which
are also the components of ROE, are deliberated in the 5 –component analysis.

The above identity is represented through five ratios, given below:

ROE = (EBIT/ Sales) × (EBT/EBIT) × (EAT/ EBT) × (Sales/Total Assets) × (Total Assets/ Equity)
 (EBIT ÷ Sales) - This is approximation of the net margin. Here earnings before interest
and taxed (EBIT) is used as an approximation of the net profit, used in the previous 3 –
component framework. EBIT is calculated by adjusting net profit. This shows the
operational efficiency of the firm.
 (EBT ÷ EBIT) – This component is an addition in the 5 – component framework. Earnings
before taxes (EBT) are mapped against the EBIT. This component shows the impact of
interest burden on the earnings of the firm. If this ratio is one, it implies zero interest
burdens which further imply that there is no debt in the capital structure (all equity firms).

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
 (EAT ÷ EBT) – This is the third component in the 5 – component framework. Earnings
after taxes (EAT) are mapped against EBT. This component shows the impact of tax
burden on the earnings of the firm.
 (Sales ÷ Total Assets) - This component was previously dealt with, in the discourse on the
3 component framework which was taken up in the previous section. This shows the return
generated in terms of the asset base of the firm. The issue of asset utilization is addressed
in this ratio.
 (Total Assets ÷ Equity) –this component was also previously dealt with, in the discourse
on the 3 component framework which was taken up in the previous section. This ratio is
referred as the equity multiplier and is an approximation of the financial leverage. If the
ratio is one, it implies that all of the assets are sourced from equity and there is no debt
component.

(b) As per Altman ‘s Model (1968) of Corporate Distress Prediction:

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5
Given 5 variables are:
x1 = Working Capital to Total Assets = 25%
x2 = Retained earnings to total Assets = 30%
x3 = EBIT to Total Assets = 15%
x4 = Market Value of Equity Shares to Book Value of Total Debts = 150%
x5 = Sales to Total Assets = 2 times
Hence, Z -score = (1.2 × 25%) + (1.4 × 30%) + (3.3 ×15%) + (0.6 ×150%) + (1×2)
= 0.30 + 0.42 + 0.495 + 0.90 + 2.00 = 4.115.
Interpretation on the financial position: As the calculated value of Z-score is much higher than
2.99, it can be strongly predicted that the company is a non-bankrupt company.

5. (a) ABC Ltd has FCFF of ₹170 Crores and FCFE of ₹130 Crores. ABC Ltd’s WACC is 13%
and its cost of equity is 15%. FCFF is expected to grow forever at 7% and FCFE is expected
to grow forever at 7.5%. ABC Ltd has debt outstanding at ₹1500 Crores. Calculate the value
of ABC Ltd using FCFF approach and FCFE approach.
[7]

(b) Quinton Johnston is evaluating TMI Manufacturing Company, Ltd., which is

headquartered in Taiwan. In 2019, when Johnston is performing his analysis, the company is
unprofitable. Furthermore, TMI pays no dividends on its common shares. Johnston decides
to value TMI Manufacturing by using his forecasts of FCFE. Johnston gathers the following
facts and assumptions.
(i) The company has 17 billion shares outstanding.
(ii) Sales will be 5.5 billion in 2020, increasing at 28% annually for the next four years
(through 2024).
(iii) Net income will be 32% of sales.
(iv) Investment in fixed assets will be 35% of sales; investment in working capital will be
6% of sales;
(v) Depreciation will be 9% of sales.
(vi) 20% of the investment in assets will be financed with debt.

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
(vii) Interest expenses will be only 2% of sales.
(viii) The tax rate will be 10%. TMI Manufacturing’s beta is 2.1; the risk-free government
bond rate is 6.4%;
(ix) The equity risk premium is 5%.
(x) At the end of 2024, Johnston projects TMI will sell for 18 times earnings.
Calculate the value of one ordinary share of TMI Manufacturing Company. [7]

Answer:

(a) FCFF Approach: (discount rate = WACC)

The firm value is the present value of FCFF discounted at the weighted-average cost of capital
(WACC):
= FCFFt /(k-g)
= 170 x 1.07 / (0.13 - 0.07)
= ₹ 3031.67 Crores
The market value of equity is the value of the firm minus the value of debt:
Equity = 3031.67 - 1500
= ₹ 1531.67 Crores

FCFE Approach: (Discount Rate = Cost of Equity)

Using the FCFE valuation approach, the present value of FCFE, discounted at Cost of equity
= FCFEt/(k-g)
= 130 × 1.075/(0.15 - 0.075)
= ₹ 1863.33 Crores

(b) The required rate of return found with the CAPM is

ke = Rf + (Rm – Rf ) × β
ke = 6.4% + 5 % × 2
ke = 16.4%

The following table shows the values of sales, net income, capital expenditures less depreciation,
and investments in working capital. FCFE equals net income less the investments financed with
equity:
FCFF = Net income – (1 – DR) (Capital Expenditure – Depreciation) – (1 – DR) (Investment in
Working Capital)

Where DR is the Debt Ratio (debt financing as a percentage of debt and equity). Because 20
percent of new investments are financed with debt, 80 percent of the investments are financed
with equity, which reduces FCFE by 80 percent of (Capital expenditures – Depreciation) and 80
percent of the investment in working capital.
Particulars (in billions) 2020 2021 2022 2023 2024
Sales (growing at 28%) 5.5 7.04 9.01 11.53 14.76
Net income = 32% of sales 1.760 2.253 2.884 3.691 4.724
Investment in Fixed asset - Dep = (35% - 1.43 1.830 2.343 2.999 3.839
9%) × sales

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Working capital investment = 6% of sales 0.33 0.422 0.541 0.692 0.886
.80 × (Investment in Fixed asset - Dep + 1.408 1.802 2.307 2.953 3.780
Working capital investment)
FCFE = Net income - .80 × (Investment in 0.352 0.451 0.577 0.738 0.945
Fixed asset - Dep + Working capital
investment)
PV of FCFE discounted at 16.4% 0.302 0.333 0.366 0.402 0.442
Terminal Value (4.724 × 18) 85.04
PV of Terminal Value discounted at 16.4% 39.7979
Total PV of FCFE 1.845
Total value of firm 41.643

The present value of the terminal value plus PV of first five year’s FCFE is 41.643 billion.
Because TMI Manufacturing has 17 billion outstanding shares, the value per ordinary share is ₹
2.45.

6. (a) From the following details, Evaluate, the total value of human resources for employee
groups - skilled and un-skilled as per Lev and Schwartz (1971) model.

Particulars Skilled Un-Skilled

(i) Annual average earning of an employee till age of retirement ₹ 1,00,000 ₹ 60,000
(ii) Age of retirement 65 years 62 years
(iii) Discount rate 20% 20%
(iv) No. of employees in the group 25 20
(v) Average age 62 years 60 years

It is assumed that employees will leave the organization only on retirement. [7]

(b) You are given following information about Sandeep Ltd.:

(i) Beta for the year 2023-24: 1.05
(ii) Risk free rate 12%
(iii) Long Range Market Rate (based on BSE Sensex): 15.14%
(iv) Extracts from the liabilities side of balance sheet as at 31st March, 2024:
Particulars ₹
Equity 29,160
Reserve & Surplus 43,740
Shareholder’s Fund 72,900
Loan Funds 8,100
Total Funds (Long term) 81,000
(v) Profit after tax ₹20,394 .16 lakhs
(vi) Interest deducted from profit ₹487.00 lakhs
(vii) Effective tax rate (i.e. Provision for Tax/PBT × 100) 24.45%.
Calculate Economic Value Added of Sandeep Ltd. as on 31 st March 2024 [7]

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Answer:

(a) (i) Value of skilled employees:

100,000/ (1+ (0.20)) (65-62) + 100,000/ (1+ (0.20)) (65-63) + 100,000/ (1+ (0.20)) (65-64)
= 57870.37 + 69444.44 + 83333.33
Total value of this group = 57870.37 + 69444.44 + 83333.33
= 210648.14 × 25 = ₹ 52,66,203.50
(ii) Value of unskilled employees: 60,000/ (1+ (0.20))(62-60) + 60,000/ (1+ (0.20))(62-61)
= 60,000/ (1.20)2 + 60,000/ (1.20)1
= 41666.67 + 50000
Total of this group = 91666.67 × 20 = ₹ 18,33,333
Total value of human resources of both the groups = ₹ 70,99,536.50

(b) We know that EVA = NOPAT -Cost of Capital Employed,

Where, EVA = Economic Value Added
NOPAT = Net Operating Profit after tax

Required Calculations are as under:

(i) NOPAT
PARTICULARS ₹
Profit after tax 20,394.16 lakhs
Add: Interest Net of tax [ 487 lakh (1 - 0.2445)] = 487 lakh x 0.7555 367.93 lakhs
NOPAT 20,762.09 lakhs

(ii) Cost of Equity: Risk free rate + β [Market rate - Risk free return]
= 12% + 1.05 (15.14% - 12%)
= 12% + 1.05 x 3.14
= 12% + 3.30%
= 15.30%

(iii) Cost of Debt = [Interest on Loan Funds (1 - tax rate) / Loan Funds] x 100
Cost of Debt = [487 x (1-0.2445) /8100] x 100
= [487 x 0.7555/ 8100] x 100
= [367.93/8100] x 100
= 4.54

Weighted Average Cost of Capital:

Amount in Lakhs (₹) Weight Cost WACC%
Equity 72,900 0.90 15.30 13.77
Debt 8,100 0.10 4.54 0.45
81,000 1.00 14.22
Cost of capital employed
= ₹ 81,000 x 14.22%
= ₹ 11,518.20 lakhs
EVA = NOPAT – Cost of Capital Employed

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Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
= ₹ 20,726.09 lakhs - ₹ 11,518.20 lakhs
= ₹ 9,207.89 lakhs

7. (a) Q Ltd. wants to acquire R Ltd. and has offered a swap ratio of 1: 2 (0.5 shares for every one
share of R Ltd.). Following information is provided:
Particulars Q Ltd. R Ltd.
Profit after tax (₹) 18,00,000 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (₹) 3 2
P/E Ratio 10 times 7 times
Market price per share (₹) 30 14
(i) Calculate, the number of equity shares to be issued by Q Ltd., for acquisition of R
Ltd.
(ii) Calculate the EPS of Q Ltd., after the acquisition.
(iii) Evaluate the equivalent earnings per share of R Ltd.
(iv) Calculate the expected market price per share of Q Ltd., after the acquisition,
assuming its P/E multiple remains unchanged.
(v) Evaluate the market value of the merged firm. [7]

(b) R Ltd. is intending to acquire S Ltd. (by merger) and the following information is available
in respect of both the companies—
Particulars R ltd S ltd
Total current earnings ₹ 2,50,000 ₹ 90,000
Number of outstanding shares 50,000 30,000
Market price per share ₹ 21 ₹ 14
You are required to—
(i) Calculate Present EPS of both the companies.
(ii) If the proposed merger takes place. Evaluate, what would be the new EPS for R Ltd.
(assuming that merger takes place by exchange of equity shares and the exchange
ratio is based on the current market price)
(iii) Calculate the exchange ratio if S Ltd., wants to ensure the same earnings to members
as before the merger took place. [7]

Answer:

(a) (i) The number of shares to be issued by Q Ltd.:

The Exchange ratio is 0.5
So, the new shares = 1,80,000 × 0.5 = 90,000 shares

(ii) EPS of Q Ltd., after acquisition:

Total Earnings = ₹ (18,00,000 + 3,60,000) ₹ 21,60,000
No. of Shares (6,00,000 + 90,000) ₹ 6,90,000
EPS (₹ 21,60,000) / 6,90,000 ₹ 3.13

(iii) Equivalent EPS of R Ltd.,

12
Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
No. of new shares 0.5
EPS (₹) 3.13
Equivalent (3.13 ×0.5) (₹) 1.57

(iv) New Market price of Q Ltd., (P/E remaining unchanged):

Present P/E Ratio of Q Ltd., 10 times
Expected EPS after merger (₹) 3.13
Expected Market Price (3.13 × 10) (₹) 31.30

(v) Market Value of merged firm:

Total number of Shares 6,90,000
Expected Market Price (₹) 31.30
Total Value (6,90,000 x 31.30) (₹) 2,15,97,000

(b) (i) EPS = Total Earnings/No. of Equity shares

EPS R ltd = 2,50,000 /50,000= ₹ 5
EPS S ltd = 90,000/30,000= ₹ 3
(ii) No. of shares S Ltd shareholders will get in R Ltd based on market prices of shares is as
follows:
Exchange Ratio = 14/21 =2/3 i.e. for every 3 shares of S Ltd 2 shares of R Ltd
Total No. of shares of R Ltd issued = 14/21×30,000= 20,000 shares
Total number of shares of R Ltd after merger = 50,000+20,000=70,000
Total Earnings of R Ltd after merger = 2,50,000+90,000=3,40,000
[Remember no synergy given]
The new EPS of R Ltd after merger = ₹ 3,40,000/70,000= ₹ 4.86.
(iii) Calculation of Exchange Ratio to ensure S Ltd to earn the same before the merger took
place: Both acquiring and acquired firm can maintain their EPS only if the merger takes
place based on respective EPS.
Exchange Ratio based on EPS=3/5=0.6
Total Shares of R Ltd receivable by S Ltd. Shareholders = 0.6×30,000=18,000
Total number of shares of R Ltd after merger = 50,000+18,000=68,000
EPS after merger = Total Earnings/Total number of shares = [₹ 2,50,000+₹ 90,000] /68,000
= ₹ 5.
Total Earnings after merger of S Ltd = ₹ 5×18,000= ₹ 90,000

8. (a) From the following income statement, illustrate a common size statement and also interpret
the result.
Income Statement for the year ended 31st March
2023 (₹) 2024 (₹)
Net Sales 10,50,000 13,50,000
Less : - Cost of goods sold 5,70,000 6,45,000
Gross Profit 4,80,000 7,05,000
Less :- Other operating expenses 1,50,000 2,16,000
Operating profit 3,30,000 4,89,000
Less :- Interest on long term debt 60,000 51,000

13
Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Profit before tax 2,70,000 4,38,000
[7]
(b) Highland Company is considering the acquisition of Lowland Company in a stock- for-
stock transaction in which Lowland Company would receive ₹90 for each share of its
common stock. Highland company does not expect any change in its price/earnings ratio
multiple after the merger and chooses to value Lowland company conservatively by
assuming no earnings growth due to synergy.
Calculate:
(i) The purchase price premium
(ii) The exchange ratio
(iii) The number of new shares issued by Highland company.
(iv) Post-merger EPS of the combined firms
(v) Pre-merger EPS of the Highland company
(vi) Pre-merger P/E ratio
(vii) Post-merger share price
(viii) Post-merger equity ownership distribution.
The following additional information is available.
Particulars Highland Lowland
Earnings ₹ 2,50,000 ₹ 72,500
Number of Shares 1,10,000 20,000
Market Price per share ₹ 50 ₹ 60
[7]
Answer:
(a)
Particulars 2023 (₹) % 2024 (₹) %
Net Sales 10,50,000 100 13,50,000 100
Less : - Cost of goods sold 5,70,000 54.29% 6,45,000 47.78%
Gross Profit 4,80,000 45.71% 7,05,000 52.22%
Less :- Other operating expenses 1,50,000 14.29% 2,16,000 16.00%
Operating profit 3,30,000 31.43% 4,89,000 36.22%
Less :- Interest on long term debt 60,000 5.71% 51,000 3.78%
Profit before tax 2,70,000 25.71% 4,38,000 32.44%

Comment:
(i) The PBT to net sales has increased from 25.7% in the year 2022-23 to 32.4% in the year
2023-24. It indicates that the profit earning capacity of the company has improved during
the study period. This improvement in the profitability of the company has been mainly
due to significant reduction in the cost of goods sold of the company. It may occur due to
fall down of input market or may occur due to improvement in the efficiency of the
company. As other operating expenses has higher in 2023-24 so, it is clear that company
has been operated with tight supervision, tight inventory control for reduction of COGS
(Cost of Goods Sold).
(ii) The interest on long term debt to net sales has declined from 5.7% in the 2022-23 to 3.8%
in 2023-24.It implies that the financial burden of the company has reduced significantly
during the study period. Higher operating profit or fund from operation has been utilised

14
Directorate of Studies, The Institute of Cost Accountants of India
 FINAL EXAMINATION SET - 2
MODEL ANSWERS TERM – DEC 2024
PAPER – 20A SYLLABUS 2022
STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
for repayment of long term debt, so that the financial risk associated with the company has
declined significantly during the study period.

(b) (i) Purchase price premium

= Offer price for Lowland company stock / Lowland company Market price per share
= 90 / 60
= 1.5

(ii) Exchange ratio

= Price per share offered for Lowland Company/Market Price per share for Highland company
= 90 / 50
= 1.8
Highland company issues 1.8 shares of stock for each of Lowland Company’s stock.

(iii) New shares issued by Highland company

= shares of Lowland Company × Exchange ratio
= 20,000 × 1.8 = 36,000.

(iv) Post-merger EPS of the combined companies

= Combined earning / Total number of shares.
Combined earnings = (2,50,000 + 72,500) = ₹ 3,22,500
Total shares outstanding of the new entity = 1,10,000 + 36,000 = 1,46,000
Post-merger EPS of the combined companies = ₹ 3,22,500 ÷ 1,46,000 = ₹ 2.21

(v) Pre-merger EPS of the Highland company

= earnings / Number of shares = 2,50,000 / 1,10,000 = ₹ 2.27

(vi) Pre-merger P/E

= Pre-merger market price per share / Pre-merger earnings per share
= 50 / 2.27 = 22.00

(vii) Post-merger share price

= Post-merger EPS × Pre-merger P/E
= 2.21 × 22.00 = ₹ 48.60 (as compared to ₹ 50 Pre-merger)

(viii) Post-merger Equity Ownership Distribution

Lowland Company = Number of new shares / Total number of shares
= 36,000/ 1,46,000 = 0.2466 or 24.66%
Highland company = 100 – 24.66 = 75.34%

Comment – The acquisition results in a ₹1.40 reduction in the market price of Highland company
due to a 0.064 decline in the EPS of the combined companies. Whether the acquisition is a poor
decision depends upon what happens to the earnings would have in the absence of the acquisition,
the acquisition may contribute to the market value of Highland company.

15
Directorate of Studies, The Institute of Cost Accountants of India