CA INTERMEDIATE

SUBJECT- FM ECO
Test Code – INP 2118
(Date:)
(Marks - 100)
TOPIC : Full course

(Time allowed: 3 hours)

Question No.1 is compulsory.

Attempt any four questions out of the remaining five questions.
Working notes should form part of the answer
Section A - Financial Management

Q.1 (a) Following information is available in respect of Lockdown Ltd.

Profit Volume Ratio : 25%
Operating Leverage : 5
Tax Rate : 45%
No. of equity shares : 10 lakh
10% Debentures : 3000 lakh
Financial leverage : 4
Price Earnings Ratio : 8 times
Prepare Income Statement and find out market price per share
(5 Marks)

(b) A firm has an EBIT of Rs.4,00,000. It belongs to risk class of 10% using NOI approach
compute value of cost of equity if it employees 6% debt to the extent of 20%, 30%
or 50% of total capital fund of Rs.20,00,000.
(5 Marks)

(c) The annual cash requirement of Unlock Ltd. is Rs.12,00,000. Cost of conversion of
marketable securities per lot is Rs.300 and company can earn 5% annual yield on
securities.
- Find out the optimum cash balance as per Baumol’s Model.
- Also compute opportunity cost of holding cash.
(5 Marks)

(d) A Ltd. is in the manufacturing business and it acquires raw material from X Ltd. on a
regular basis. As per the terms of agreement the payment must be made within 40
days of purchase. However, A Ltd. has a choice of paying Rs. 98.50 per Rs. 100 it
owes to X Ltd. on or before 10th day of purchase.

Required:
EXAMINE whether A Ltd. should accept the offer of discount assuming average
billing of A Ltd. with X Ltd. is Rs. 10,00,000 and an alternative investment yield a
return of 15% and company pays the invoice.
 (5 Marks)
Q.2 (a) Distance Ltd. has 60,000 shares selling at Rs.20 per share. The company expects to
make net income of Rs.1,75,000 by end of the year. The capitalization rate of the
company is 15%. The company is planning to pay Dividend of Rs.2 per share at end
of the year.
As per Modigliani Miller Model.
(a) What will be price of the shares at the end of the year?
(i) If Dividend is paid
(ii) If Dividend is not paid?
(b) How many news shares must the company issue if Dividend is paid and
company needs Rs.3,70,000 for investment project.
(5 Marks)

(b) A project under evaluation has a risk free rate of 4% and appropriate risk premium
is 6%. The project costing Rs.1000 has the following estimated NPV and the
probabilities of different conditions.
Conditions NPV @ 4% NPV @ 10% Probability
Good 1773 1487 0.10
Average 1220 989 0.20
Medium 665 492 0.40
Poor 110 -5 0.20
Bad -445 -503 0.10
Analyze the expected NPV and its variability.
(5 Marks)

Q.3 Spray Ltd. gives you following information

(‘000)
Year-1 Year-2 Year-3
(1) Income Statement

Sales 1,000 2,000 3,000

(-) COGS (400) (850) (1,500)

Gross Profits 600 1,150 1,500

(-) Expenses (500) (1,000) (1,300)

Net Profits 100 150 200
(2) Balance Sheet

Fixed Assets 300 400 500

Current Assets 200 300 350

500 700 850
Proprietary Fund 250 440 630
 Long term loans 150 140 120
Current Liability 100 120 150
500 700 900
Calculate for the year-2 and year-3.
(a) Fixed Asset Turnover Ratio.
(b) Return on Proprietory Fund.
(c) Gross Profit Ratio.
(d) Current Ratio.
(e) Working Capital Turnover Ratio. (10 Marks)

Q.4 Following information is available in respect of Aatmanirbhar Ltd.

Return on Government Securities 10%
Stock Market return on Equity 15%
Growth rate 12%
Beta Index 1.6
Tax Rate 40%
Earnings for Equity Shareholders Rs. 15,00,000
Dividend Paid to Equity holders Rs.8,00,000
Number of Equity shares 1,00,000
Debt – Equity Ratio 2:3
(Debt is risk free)
Market price per Equity Shares Rs. 80
Compute WACC using
(i) Capital Asset Pricing Model
(ii) Gordon’s Approach.
(10 Marks)

Q.5 A company intends to produce a new product priced at Rs.200 per unit with expected
monthly sales 5000 units. Variable cost will be Rs.150 per unit. It is estimated that 10% of
customers will default while others will pay on due date. Interest rates are 15% p.a.
Credit allowed to customers is 3 months.
A credit agency has offered the company a system by which it claims can identify possible
bad debts. It will cost Rs.5,00,000 p.a. to operate and will identify 25% of customers as
being potential bad debts. If these customers are rejected then no actual bad debts will
result.
Should the credit agency system be used?
(10 Marks)
Q.6 (a) Write a Note on Debt Securitisation
(3 Marks)
(b) Difference between Financial Accounting and Financial Management
(3 Marks)
(c) Write Short Note on Capital Budgeting Process.
(4 Marks)
OR
 Write Note on Operating Cycle
(4 Marks)
Question 1 is Compulsory
Answer any three Questions from the rest

Section B - Economics in finance

Q.1 (a) Explain Sanitary and Phytosanitary measures

(2 Marks)

(b) Explain Usefulness in Calculating National Income

(3 Marks)

(c) Explain Stabilization Function & Allocation Function

(3 Marks)

(d) Short note on Recessionary Gap

(2 Marks)

Q.2 (a) (i) Explain Free rider Problem?

(3 Marks)
(ii) Explain MSS and CRR
(2 Marks)

(b) Determine liquidity aggregates for the following data:

i. NM3 is Rs. 50 Lakhs
ii. Post office deposits amount to Rs. 15 Lakhs, out of which Rs. 4 Lakhs are
NSCs.
iii. ABC Ltd. a refinancing institution, has term deposits worth Rs. 20 Lakhs and
has borrowing worth Rs. 5 Lakhs
iv. ABC Ltd. has also issued deposits certificates of Rs. Lakhs
v. Bajaj Finance, a NBFC, has deposits from public worth Rs. 4 Lakhs.
(5 Marks)
Q.3 (a) (i) Explain Comparative Cost theory given by Ricardo
(3 Marks)
(ii) Find out net indirect tax from the following data:
(2 Marks)
( Rs. In Lakhs)
GDPMP 8,75,600.00
GDP FC 5,23,670.00
NFIA 3,500.00
Depreciation 1,20,518.00
 (b)(i) Explain Adverse Selection & Moral hazard
(3 Marks)
(ii) Explain Bank rate & Open Market Operation
(2 Marks)

Q.4 (a) (i) Explain Demerits of GATT

(3 Marks)
(ii) Explain Public Expenditure & Public revenue
(2 Marks)

(b) (i) Short note on Monetary Policy Committee

(3 Marks)
(ii) Explain system of regional accounts in India
(2 Marks)

Q.5 (a) (i) Explain Transaction motive & Precautionary Motive of demand of money
(3 Marks)
(ii) Explain Mixed Tariff & Escalated Tariff
(2 Marks)

(b) (i) Impact of Appreciation of Home currency on Domestic Economy

(3 Marks)
(ii) Explain Pure and Impure Public Goods
(2 Marks)

OR

(ii) Explain Merits of FDI (2 Marks)