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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 – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

1. NV Industries Ltd. is a manufacturing industry which manages its accounts

receivables internally by its sales and credit department. It supplies small
articles to different industries. The total sales ledger of the company stands
at ` 200 lakhs of which 80% is credit sales. The company has a credit policy
of 2/40, net 120. Past experience of the company has been that on average
out of the total, 50% of customers avail of discount and the balance of the
receivables are collected on average in 120 days. The finance controller
estimated, bad debt losses are around 1% of credit sales.
With escalating cost associated with the in-house management of the debtors
coupled with the need to unburden the management with the task so as to
focus on sales promotion, the CFO is examining the possibility of outsourcing
its factoring service for managing its receivables. Currently, the firm spends
about ` 2,40,000 per annum to administer its credit sales. These are avoidable
as a factoring firm is prepared to buy the firm's receivables. The main
elements of the proposal are : (i) It will charge 2% commission (ii) It will pay
advance against receivables to the firm at an interest rate of 18% after
withholding 10% as reserve.
Also, company has option to take long term loan at 15% interest or may take
bank finance for working capital at 14% interest.
You were also present at the meeting; being a financial consultant, the CFO
has asked you to be ready with the following questions:
1

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Consider year as 360 days.

I. What is average level of receivables of the company?
a. ` 53,33,333
b. ` 35,55,556
c. ` 44,44,444
d. ` 71,11,111
II. How much advance factor will pay against receivables?
a. ` 31,28,889
b. ` 39,11,111
c. ` 30,03,733
d. ` 46,93,333
III. What is the annual cost of factoring to the company?
a. ` 8,83,200
b. ` 4,26,667
c. ` 5,51,823
d. ` 4,00,000
IV. What is the net cost to the company on taking factoring service?
a. ` 4,00,000
b. ` 4,26,667
c. ` 3,50,000
d. ` 4,83,200
V. What is the effective cost of factoring on advance received?
a. 16.09%
b. 13.31%
c. 12.78%
d. 15.89% (5 x 2 = 10 Marks)
2. Ramu Ltd. wants to implement a project for which ` 25 lakhs is required.
Following financing options are at hand:
Option 1:
Equity Shares 25,000 @ ` 100
Option 2:
Equity Shares 10,000 @ ` 100
12% Preference Shares 5,000@ ` 100
10% Debentures 10,000@ ` 100

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What is the indifference point & EPS at that level of EBIT assuming corporate
tax to be 35%.
(a) ` 2,94,872; ` 11.80
(b) ` 3,20,513; ` 8.33
(c) ` 2,94,872; ` 7.67
(d) ` 3,20513; ` 12.82 (2 Marks)
3. "If EBIT increases by 6%, net profit increases by 6.9%. If sales increase by
6%, net profit will increase by 24%.
Financial leverage must be -…………."
(a) 1.19
(b) 1.13
(c) 1.12
(d) 1.15 (2 Marks)
4. What is the maximum period for which company can accept Public Deposits?
(a) 1 year
(b) 6 months
(c) 3 years
(d) 5 years (1 Marks)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) The following figures have been extracted from the annual report of Xee
Ltd.:
Net Profit ` 54 lakhs
Outstanding 12% preference shares ` 200 lakhs
No. of equity shares 2 lakhs
Return on Investment 22%
Cost of capital i.e. (K e) 15%
COMPUTE the approximate dividend pay-out ratio so as to keep the
share price at ` 120 by using Walter’s model?
(Decimal may be taken up to 2 units) (5 Marks)
(b) Capital structure (in market-value terms) of AN Ltd is given below:
Company Debt Equity
AN Ltd. 50% 50%

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The borrowing rate for the company is 10% in a no-tax world and capital
markets are assumed to be perfect.
Required:
(i) If Mr. R, owns 8% of the equity shares of AN Ltd., DETERMINE his
return if the Company has net operating income of ` 10,00,000 and
the overall capitalization rate of the company (K o) is 20%.
(ii) CALCULATE the implied required rate of return on equity of AN Ltd.
(5 Marks)
(c) ANVY Ltd. has furnished the following ratios and information for the year
end 31st March, 2023:
Equity share capital ` 2,00,000
The relevant ratios of the company are as follows:
Current debt to total debt 0.50
Total debt to Equity share capital 0.60
Fixed assets to Equity share capital 0.70
Total assets turnover 2.5 Times
Inventory turnover 10 Times

You are required to PREPARE the Balance Sheet of ANVY Ltd. as on

31st March, 2023. (5 Marks)
2. (a) NC Ltd. Is considering purchasing a new machine to increase its
production facility. At present, it uses an old machine which can process
5,000 units of TVs per week. NC could replace it with new machine,
which is product specific and can produce 15,000 units per week. New
machine cost ` 100 crores and requires the working capital of ` 3 crores,
which will be released at the end of 5 th year. The new machine is
expected to have a salvage value of ` 20 crores.
The company expects demand for TVs to be 10,000 units per week.
Each TV sells for ` 30,000 and has Profit Volume Ratio (PV) of 0.10. The
company works for the 56 weeks in the year. Additional fixed costs
(excluding depreciation) are estimated to increase by ` 10 crores. The
company is subject to a 40% tax rate and its after-tax cost of capital is
20%. The relevant rate of depreciation is 25 % for both taxation and
accounts. The company uses the WDV method of depreciation. The
existing machine will have no scrap value.
You are required to:
ADVISE whether the company should replace the old machine.
(Decimal may be taken up to 2 units) (8 Marks)
(b) WRITE a short note on “Cut-off Rate”. (2 Marks)

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3. (a) Ram Ltd evaluates all its capital projects using discounting rate of 16%.
Its capital structure consists of equity share capital, retained earnings,
bank term loan and debentures redeemable at par. Rate of interest on
bank term loan is 1.4 times that of debenture. Remaining tenure of
debenture and bank loan is 4 years and 6 years respectively. Book value
of equity share capital, retained earnings and bank loan is ` 20,00,000,
` 30,00,000 and ` 20,00,000 respectively. Debentures which are having
book value of ` 30,00,000 are currently trading at ` 98 per debenture.
The ongoing PE multiple for the shares of the company stands at 4.
You are required to:
(i) CALCULATE the rate of interest on bank loan and
(ii) CALCULATE the rate of interest on debentures
Tax rate applicable is 30%. (8 Marks)
(b) DISCUSS the dividend-price approach to estimate cost of equity capital.
(2 Marks)
4. (a) EXPLAIN the limitations of profit maximization objective of Financial
Management. (4 Marks)
(b) WHAT are the methods of venture capital financing? (4 Marks)
(c) WHAT is ‘Optimum Capital Structure’? (2 Marks)
OR
EXPLAIN the concept of Financial Leverage as ‘Trading on Equity’.
(2 Marks)

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INTERMEDIATE COURSE: GROUP II

PAPER 6B: STRATEGIC MANAGEMENT
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises case scenario based multiple choice questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case scenario based MCQs (15 Marks)
Question 1.(A) (Compulsory)
1. (A) In the fiercely competitive automotive industry, Zing, a promising
newcomer, set out on a strategic journey with ambitions of making a
substantial impact. Recognizing the significance of a robust distribution
network early on, Zing forged partnerships with established dealerships,
offering them attractive margins. This strategic move significantly
enhanced Zing's reach, with a presence in 80% of the nation's
dealerships by 2022, expanding its coverage significantly.
To differentiate themselves from competitors, Zing adopted two key
strategies. Firstly, they prioritized product design, investing heavily in
aesthetics and incorporating innovative features and environmentally
friendly technologies. This focus on design led to their vehicles receiving
excellent reviews and achieving an impressive 15% year-on-year growth
in sales.
Secondly, Zing implemented switching costs to discourage customers
from switching to other brands. Their vehicles featured branded
software, making it both expensive and cumbersome for customers to
transition to alternative brands. This strategic move effectively protected
Zing's market share.
Zing's overarching goal was to position itself as a premium automotive
brand, blending luxury with sustainability. However, their execution fell
down as they challenged with maintaining consistent quality and service
levels, resulting in mixed customer reviews.
Despite their best efforts, Zing's differentiation strategy fell short due to
issues with inconsistent quality and service. Negative word-of-mouth and
declining customer satisfaction scores tarnished their brand image,
leading to stagnating sales. This failure to deliver on their brand promise
proved to be a significant setback.
As Zing's reputation suffered from execution failures, securing additional
funds for international expansion became challenging. Consequently,
they made the difficult decision to postpone their global ambitions for the
next five years, focusing instead on stabilizing their finances and
rebuilding their brand image.
In summary, Zing's strategic journey illustrates the importance of not
only crafting a compelling differentiation strategy but also executing it
flawlessly. In the competitive automotive landscape, maintaining

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consistent quality and service is paramount to sustaining brand loyalty

and achieving long-term success.
Based on the above Case Scenario, answer the Multiple Choice
Questions.
(i) What key strategic approach did Zing use to expand its market
presence in the automotive industry?
(a) Product innovation and design
(b) Cost leadership strategy
(c) Entering new international markets
(d) Vertical integration (2 Marks)
(ii) How did Zing protect its market share from potential competitors?
(a) Price-cutting strategy
(b) Branded software and switching costs
(c) Aggressive marketing campaigns
(d) International expansion (2 Marks)
(iii) Why did Zing's differentiation strategy fall short in the market?
(a) Intense price competition
(b) Poor marketing strategy
(c) Inconsistent quality and service
(d) Lack of international expansion (2 Marks)
(iv) Forging partnerships with established dealerships to enhance its
distribution network falls under which level of strategy?
(a) Corporate level strategy
(b) Business level strategy
(c) Functional level strategy
(d) Competitive level strategy (2 Marks)
(v) How did Zing initially expand its market presence across the
nation?
(a) Aggressive marketing campaigns
(b) Developing low-cost vehicles
(c) Partnering with established dealerships
(d) Launching a luxury brand (2 Marks)
(B) Compulsory Application Based Independent MCQs
(i) TechMex Inc., a leading technology company, offers a diverse
portfolio of products ranging from established cash cows to
promising question marks. As part of its strategic planning process,

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the company aims to assess its product portfolio's performance and

allocate resources effectively. In which quadrant of the BCG Matrix
would TechMex's new innovative product, recently launched in a
rapidly growing market, likely fall into?
(a) Cash Cow
(b) Dog
(c) Question Mark
(d) Star (2 Marks)
(ii) BlueSky Enterprises, a multinational corporation specializing in
renewable energy solutions, is undergoing a strategic
transformation to enhance its competitive position in the market. As
part of this initiative, the company is reevaluating its organizational
structure, processes, and culture. Which aspect of the McKinsey
7S Model is most relevant for BlueSky Enterprises during this
strategic transformation?
(a) Strategy
(b) Structure
(c) Systems
(d) Skills (2 Marks)
(iii) The threat of substitutes is high when:
(a) There are few substitute products available
(b) Switching costs are low
(c) Suppliers have high bargaining power
(d) There is strong brand loyalty (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) Swati is the marketing manager at a software company. She is
responsible for developing and implementing marketing strategies for
the company’s products. Swati leads a team of marketing professionals
and works closely with the product development and sales teams to
ensure that the company's products are effectively promoted in the
market. She also analyzes market trends and customer feedback to
refine the marketing strategies. Which level is she working at, discuss
the roles and responsibilities of this level in organization? (5 Marks)
(b) ABC Corp, a multinational consumer electronics company, is planning to
expand its operations into a new country. The company's senior
management is evaluating the potential risks and opportunities of
entering this new market. As part of their analysis, they decide to use
8

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the PESTLE framework to assess the external factors that could impact
their decision. How can the PESTLE framework help ABC Corp assess
the external factors affecting its decision to expand into a new country?
(5 Marks)
(c) Imagine you are a consultant advising a small manufacturing company
embarking on a digital transformation journey. The company's leadership
is concerned about managing the change effectively. Using the best
practices for managing change in small and medium-sized businesses,
outline a strategy to help the company navigate this transformation
successfully. (5 Marks)
2. (a) Imagine you are a strategic consultant advising a retail company that is
facing increasing competition from online retailers. The company is
considering several strategic options to improve its market position.
Using the concept that strategy is partly proactive and partly reactive,
explain how the company can develop a strategic approach to address
this challenge. (5 Marks)
(b) You are a strategic manager for a tech company launching a new
smartphone model. The company wants to target tech-savvy consumers
who value innovation and cutting-edge technology. Using the concept of
customer behavior, develop a marketing strategy to promote the new
smartphone. (5 Marks)
3. (a) A beverage company is launching a new line of energy drinks targeted
at health-conscious consumers. The strategic manager wants to study
the market position of rival companies in the energy drink segment.
Which tool can be used for this analysis, and what is the procedure to
implement it effectively? (5 Marks)
(b) The CEO of a textile mill believes that his company, currently operating
at a loss, can be turned around. Develop an action plan outlining steps
the CEO can take to achieve this turnaround. (5 Marks)
4. (a) Why Strategic Performance Measures are essential for organizations?
(5 Marks)
(b) How can Mendelow's Matrix be used to analyze and manage the
stakeholders effectively?
OR
Distinguish between Concentric Diversification and Conglomerate
Diversification. (5 Marks)

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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
1

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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%
2

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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%
5

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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
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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.

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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.

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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

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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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