Course: CA Intermediate

Paper: FM SM Marks: 100

Test: Prelim Time Allowed: 3 Hours

Section A: Financial Management

All Questions are compulsory

MULTIPLE CHOICE QUESTIONS

SET A
1) The term "capital structure" means:
(a) Long-term debt, preferred stock, and equity shares
(b) Current assets and current liabilities
(c) Net working capital
(d) Shareholder’s equity Marks 1

2) The traditional approach towards the valuation of a firm assumes:

(a) That the overall capitalization rate changes in financial leverage.
(b) That there is an optimum capital structure.
(c) That the total risk is not changed with the changes in the capital structure.
(d) That the markets are perfect. Marks 1

3) Given: risk-free rate of return = 5 %; market return = 10%; cost of equity = 15%; value of beta (β) is:
(a) 1.9
(b) 1.8
(c) 2.0
(d) 2.2 Marks 2

4) A company has a financial structure where equity is 70% of its total debt plus equity. Its cost of equity is
10% and gross loan interest is 5%. Corporation tax is paid at 30%. What is the company’s weighted
average cost of capital (WACC)?
(a) 7.55%
(b) 7.80%
(c) 8.70%
(d) 8.05% Marks 2

5) Which of the following statement is correct with respect to Gordon’s model?

(a) When IRR is greater than cost of capital, the price per share increases and dividend pay-out decreases.
(b) When IRR is greater than cost of capital, the price per share decreases and dividend pay-out increases.
(c) When IRR is equal to cost of capital, the price per share increases and dividend pay-out decreases.
(d) When IRR is lower than cost of capital, the price per share increases and dividend pay-out decreases.
Marks 1

6) What is the Internal rate of return for a project having cash flows of Rs. 40,000 per year for 10 years and
a cost of Rs. 2,26,009?
(a) 8%
(b) 9%
(c) 10%
(d) 12% Marks 2

7) If degree of financial leverage is 3 and there is 15% increase in Earning per share (EPS), then EBIT will be:
(a) Decrease by 15%
(b) Increase by 45%
(c) Decrease by 45%
(d) Increase by 5% Marks 2

8) A company has net profit margin of 5%, total assets of Rs. 90,00,000 and return on assets of 9%. Its total
asset turnover ratio would be:
(a) 1.6
(b) 1.7
(c) 1.8
(d) 1.9 Marks 2

9) Which of the following are micro economic variables that help define and explain the discipline of
finance?
(a) Risk and return
(b) Capital structure
(c) Inflation
(d) All of the above. Marks 1

10) Debt capital refers to:

(a) Money raised through the sale of shares.
(b) Funds raised by borrowing that must be repaid.
(c) Factoring accounts receivable.
(d) Inventory loans. Marks 1

Q1) Answer the following:

a) X Co. has made plans for the next year. It is estimated that the company will employ total assets
of Rs. 8,00,000; 50 per cent of the assets being financed by borrowed capital at an interest cost of 8
per cent per year. The direct costs for the year are estimated at Rs. 4,80,000 and all other operating
expenses are estimated at Rs. 80,000. the goods will be sold to customers at 150 per cent of the direct
costs. Tax rate is assumed to be 50 per cent.
You are required to calculate: (i) net profit margin; (ii) return on assets; (iii) asset turnover and (iv) return on
owners’ equity. Marks 5

b) A firm had been paid dividend at Rs.2 per share last year. The estimated growth of the dividends from the
company is estimated to be 5% p.a. Determine the estimated market price of the equity share if the estimated
growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also find out the present market price of the share,
given that the required rate of return of the equity investors is 15.5%. Marks 3

Q2) Answer the following:

a) RBML is proposing to sell a 5-year bond of Rs. 5,000 at 8 per cent rate of interest per annum. The bond amount
will be amortised equally over its life. What is the bond’s present value for an investor if he expects a minimum
rate of return of 6 per cent? Marks 5

b) A Ltd. is evaluating a project involving an outlay of Rs. 10,00,000 resulting in an annual cash inflow of Rs.
2,50,000 for 6 years. Assuming salvage value of the project is zero; DETERMINE the IRR of the project. Marks 4

Q3) Answer the following:

a)From the following information of XYZ Ltd., you are required to calculate:
(a)Net operating cycle period.
(b) Number of operating cycles in a year.
 (Rs.)
(i) Raw material inventory consumed during the year 6,00,000
(ii) Average stock of raw material 50,000
(iii) Work-in-progress inventory 5,00,000
(iv) Average work-in-progress inventory 30,000
(v) Finished goods inventory 8,00,000
(vi) Average finished goods stock held 40,000
(vii) Average collection period from debtors 45 days
(viii) Average credit period availed 30 days
(ix) No. of days in a year 360 days Marks 5

b)A Company produces and sells 10,000 shirts. The selling price per shirt is Rs. 500. Variable cost is Rs. 200 per
shirt and fixed operating cost is Rs. 25,00,000.
(a) Calculate operating leverage.
(b) If sales are up by 10%, then what is the impact on EBIT? Marks 4

Q4) Answer the following:

a) The cash flows of projects C and D are reproduced below:
Cash Flow NPV
Project C0 C1 C2 C3 at 10% IRR
C  Rs. 10,000 + 2,000 + 4,000 + 12,000 + Rs. 4,139 26.5%
D  Rs. 10,000 + 10,000 + 3,000 + 3,000 + Rs. 3,823 37.6%

(i) Why there is a conflict of rankings?

(ii) Why should you recommend project C in spite of lower internal rate of return?
Period
Time 1 2 3
PVIF0.10, t 0.9090 0.8264 0.7513
PVIF0.14, t 0.8772 0.7695 0.6750
PVIF0.15, t 0.8696 0.7561 0.6575
PVIF0.30, t 0.7692 0.5917 0.4552
PVIF0.40, t 0.7143 0.5102 0.3644
Marks 6

b) EXPLAIN the followings:

(a) Floating Rate Bonds
(b) Packing Credit. Marks 3

PART B – SM

MULTIPLE CHOICE QUESTIONS

SET B (15 x 1 Mark)
1) Which of the following term is not associated with strategy?
(a) Flexible
(b) Dynamic
(c) Focused
(d) Rigid

2) According to , strategy is a unified, comprehensive and integrated plan designed to achieve objectives of
the entity.
(a) Michael Porter
(b) C.K. Prahalad
(c) Peter F. Drucker
(d) William F. Glueck

3) In large organisations, there are total _______levels at which strategies are formulated.
(a) Only one
(b) Two
(c) Three
(d) Four

4) In an environment which is quite stable and don’t have much unanticipated developments, the actual
corporate strategy will have strategy as a dominant portion.
(a) Offensive
(b) Defensive
(c) Proactive
(d) Reactive

5) Which of the following is first step involved in understanding the competitive landscape?
(a) Determine the strengths of the competitors
(b) Determine the weaknesses of competitors
(c) Identify the competitor
(d) Put all of the information together

6) ‘Who are the competitors’ question is usually asked at the ________step of understanding the
competitive landscape.
(a) Second
(b) First
(c) Fifth
(d) Third

7) Which of the following constitute Demographic Environment?

(a) Nature of economy i.e. capitalism, socialism, Mixed
(b) Size, composition, distribution of population, sex ratio
(c) Foreign trade policy of Government
(d) Economic policy i.e. fiscal and monetary policy of Government

8) In which phase of strategic management are annual objectives especially important?

(a) Formulation
(b) Control
(c) Evaluation
(d) Implementation

9) The complete absorption of one company by another, wherein the acquiring firm retains its identity and
the acquired firm may cease to exist, is called a________.
(a) Merger
(b) Acquisition
 (c) Tender offer
(d) Spinoff

10) The acquisition of a firm whose business is not related to that of the bidder is called a________
acquisition.
(a) Conglomerate
(b) Vertical
(c) Backward
(d) Horizontal

11) Given below are some of the reasons of the divestment strategy:
(i) To raise cash
(ii) To unload unprofitable operations
(iii) To improve the strategic fit of a firm's various divisions
(iv) To comply with industry policies
Which of the above statements are correct?
(a) (i), (ii), (iii) only
(b) (i), (iii) only
(c) (ii), (iii), (iv) only
(d) (i), (iv) only

12) Porter's Five Forces Model is essentially a model about_________.

(a) Market segmentation
(b) Profitability analysis
(c) Competitive rivalry
(d) Corporate strategy evaluation

13) The power of suppliers will be high when:

(a) Customers have many substitutes
(b) Many producers dominate industry
(c) Just a few producers dominate industry
(d) Both (a) & (b)

14) ‘Strategic group mapping’ helps in-

(a) Identifying the strongest rival companies
(b) Identifying weakest rival companies
(c) Identifying weakest and strongest rival companies
(d) None of the above

15) Two kinds of linkages exists between strategy formulation and implementation. These linkages are
_________&_______.
(a) Horizontal, Vertical
(b) Related, Unrelated
(c) Forward, Backward
(d) Strong, Weak

Q5) Answer the following:

a) Explain Kurt Lewin’s Model of Change, Also explain its steps. Marks 5

b) Organo is a large supermarket chain. It is considering the purchase of a number of farms that provides Organo
 with a significant amount of its fresh produce. Organo feels that by purchasing the farms, it will have greater
control over its supply chain.Identify and explain the type of diversification opted by Organo? Marks 3

Q6) Answer the following:

a) Suresh Singhani a is the owner of an agri-based private company in Sangrur, Punjab. His unit is producing
puree, ketchups and sauces. While its products have significant market share in the northern part of
country, the sales are on decline in last couple of years. He seeks help of a management expert who advises
him to first understand the competitive landscape.
Explain the steps to be followed by Suresh Singhania to understand competitive landscape. Marks 5

b) Explain Experience curve and its features. Marks 4

Q7) Answer the following:

a) Aurobindo, the pharmaceutical company wants to grow its business. Draw Ansoff’s Product Market Growth
Matrix to advise them of the available options. Marks 5

b) Mr. Banerjee is head of marketing department of a manufacturing company. His company is in direct
competition with thirteen companies at national level. He wishes to study the market positions of rival
companies by grouping them into like positions.
Name the tool that may be used by Mr. Banerjee? Explain the procedure that may be used to implement the
technique. Marks 4

Q8) Answer the following:

a) Write a short note on Product Life Cycle (PLC) and its significance in portfolio diagnosis. Marks 5

b) Why should an organization have a mission? Marks 4