CA Intermediate (IPC)

Financial Management
PAST 16 ATTEMPTS THEORY QUESTIONS

Master your skills with…

CA RAHUL GARG
[Link], FCA, LCS, ACMA, DISA (ICAI), CFA (ICFAI), MBA, ADV. DIP. MGT.
5 Times ALL INDIA RANKHOLDER in CA, CS, CMA
3 Times Single Digit Rank (including Rank 1)
GOLD MEDALIST
 Tribute to my Beloved Elder Brother

SACHIN GARG
(Inspiration for me and all my students)
who left for heavenly abode on 3rd May, 2015

CA Rahul Garg [Link], FCA, LCS, ACMA, CFA (ICFAI), DISA (ICAI), MBA, Adv Dip Mgt.
Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
Powered by TCPDF ([Link])
Powered by TCPDF ([Link])
Chandigarh Toppers of With ICAI(Cost)
Cost FM (May 2016) President Sh.
1. Shreshtha (on Left) – Kunal Banerjee
91 Marks (for getting All India
Rank 1)
2. Iram (on Right) – 73
Marks

Awarded by Chief Being Awarded with

Justice Sh. CA Degree by ICAI
[Link] in President Sh.
presence of Sh. Atal Amarjit Chopra
Bihari Vajpayee

“Economic & Labour Laws” book being released by Education Minister of UT Sh. VK Singh (IAS) in presence
of then Chairman of Chandigarh chapter of ICAI, ICSI, ICAI (Cost)

“Industrial, Labour & General Laws” book being released by Dr. Girish Ahuja (A Renowned Personality in
Direct Taxes) and Dr. D.C. Arya (Director Finance of Indian Railway)
A Special thanks is due to my biggest strength,

my wife SHIKHA GARG;

who has always been my side in all the challenges.

This publication could not have been possible without her.

I am also thankful to
my mother Smt. Prem Lata Garg and father Sh. Pawan Kumar Garg,

who have provided me best education, constant love and affection since
childhood and making me what I am today.
 A brief about Rahul Garg

1. Broke LIMCA BOOK OF RECORDS by being youngest in India to clear all the 3

professional courses CA, CS, CMA at the age of 22 years 7 months.

2. Scored SINGLE DIGIT RANK 3 times (including All India Rank 1).

3. Undisputed achiever of all 3 professional exams with ALL INDIA RANK in ALL.

4. Achieved exemption in 40+ papers out of total 50 papers held by CA, CS, CMA

institutes in his academic career.

5. Awarded by Mr. Atal Bihari Vajpayee in 2010 for exceptional performance in

Academics.

6. Invited by one of the TOP 10 B Schools XIMB (Bhubaneshwar) just at the age of

23 for a special 3 hours sessions with students.

7. One of the best motivator in India.

8. Covered by the National Magazine ‘Career 360’ amongst 12 National Toppers

in 2010.

9. Special Time management and Stress management skills.

10. Has taught more than 8000 students.

11. Teaching experience of 7+ years.

12. Has been a visiting faculty of ICAI.

 Love for the subject COST FM

1. First in India to provide Multi Colour Theory notes in Cost FM.

2. Tabular and Diagrammatic presentation of Theory to create interest.

3. Important points of theory Specially marked for last minute revision.

4. Simple and lucid language in theory for easy understanding.

5. Only one in India to cover more than 2300 Practical Questions in Cost FM.

6. More than 90% coverage of Practical Questions in CA IPCC Exams since May

2014 from Rahul sir’s notes.

7. His student Shareshtha Kadian scored 91 Marks in Cost FM in May 2016 and

topped in Chandigarh & surrounding regions.

8. Exam Analysis of past 16 attempts for theory as well as practical chapter wise.

9. Focus on 100% conceptual clarity and maximum practice of questions.

10. Special focus on Presentation and “How to Attempt” to score more than

average marks.
 Page |1

Preface

Dear Students,

It gives me immense pleasure and satisfaction to present the publication on subject matter “Financial
Management”.

The book will specifically cater to the needs of CA IPCC Students. It covers the theoretical aspects of the
subject matter in an informative and lucid manner.

It’s difficult for the students to understand the theory portion, thus the effort has been made to present
the matter under suitable headings and sub headings with sufficient detail in a manner that can be
grasped by the students easily and quickly. The unique style of presentation adopted makes the learning

G
easy and interesting for the students.

AR
The book has been drafted in a student friendly approach as a lot of charts, tables and diagrams have been
put up systematically so as to facilitate easy and quick understanding of the subject matter.
G
Though considerable care has been taken to make the book error free yet some unintended errors may
L
U

have crept in for which I feel apologies. But as ‘the road to improvement is never ending’, I would
AH

welcome the suggestions, criticism and feedback of this book for the incorporation of necessary changes in
a timely manner. The readers may post their suggestions, feedback and queries on email id
R

[Link]@[Link].
A

I believe in words of Carlson Gracie “If you want to be a Lion, you must train with Lions”.
C

This publication stands as a tribute to my elder brother Beloved Sachin Garg, who left for heavenly
abode on 3rd May, 2015.

With Best Wishes

CA RAHUL GARG

[Link], FCA, LCS, ACMA, CFA (ICFAI), DISA (ICAI), MBA, Adv Dip Mgt.

Gold Medalist

All India Rankholder

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |2

Distinguishing Features of The Book

• Strictly as per CA IPCC syllabus

• Chapter analysis of each chapter showing past trend

• Comprehensive coverage of the syllabus

• Simple & lucid language

• Questions of last 16 exams included

• Unique presentation to create interest

• Tabular and diagrammatic Presentation for easy understanding

G
• All topics categorized under suitable headings and sub headings

• More than 80 Theoretical questions with solutions

AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |3

INDEX

Chapter No. Chapter Name Theory Questions Page No.

1 Basic Concepts 11 4–8

2 Time Value of Money 6 9 – 11

3 Financing Decisions 12 – 12

3.1 Cost of Capital 2 13 – 14

3.2 Leverage 4 15 – 17

3.3 Capital Structure 6 18 – 21

G
3.4

4
Theories of Capital Structure

Capital Budgeting
AR 1

4
22 – 23

24 – 26
G
5 Working Capital Management 27 – 27
L
U

5.1 Estimation of Working Capital 1 28 – 29

AH

5.2 Debtor’s Management 6 30 – 32

5.3 Treasury & Cash Management 10 33 – 37

R

5.4 Working Capital Finance 4 38 – 41

A
C

6 Ratio Analysis 4 42 – 45

7 Cash Flow Statement 2 46 – 47

8 Fund Flow Statement 1 48 – 49

9 Sources of Finance 23 50 – 58

85

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |4

Chapter - 1

Basic Concepts

He who has never learned to obey cannot be a good commander.

Aristotle

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
6
R

5
A

5
C

4 4 4 4 4 4 4 4
4

3
3

0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |5

Theory Questions
1. N 09 (2 M) Differentiate between Financial Management and Financial Accounting.
2. N 09 (3 M) Explain the two basic functions of Financial Management.
3. M 10 (3 M) State the role of a Chief Financial Officer.
4. N 10 (4 M) Distinguish between Profit maximisation vs Wealth maximisation objective of
the firm.
5. N 11 (4 M) Elucidate the responsibilities of Chief Financial Officer.
6. M 12 (4 M) "The profit maximization is not an operationally feasible criterion." Comment on
it.
7. N 12 (4 M) Discuss the conflicts in profit verses wealth maximization principle of the firm.
8. M 14 (4 M) Discuss emerging issues affecting the future role of Chief Financial Officer
(CFO).
9. M 15 (4 M) Discuss the conflicts in Profit versus Wealth maximization principle of the firm.
10. N 16 (4 M) List the emerging issues (any four) affecting the future role of CFO.
11. M 17 (4 M) Distinguish between Profit maximisation and Wealth maximisation objective of
the firm.

G
Answer 1
AR
Though financial management and financial accounting are closely related, still they differ in the
treatment of funds and also with regards to decision - making.
G
Basis Financial Accounting Financial Management
L

Treatment of In accounting, the measurement of funds The treatment of funds, in financial

U

Funds is based on the accrual principle. The management is based on cash flows. The
accrual based accounting data does not revenues are recognised only when cash
AH

reflect fully the financial conditions of the is actually received (i.e. cash inflow) and
organisation. An organisation which has expenses are recognised on actual
earned profit (sales less expenses) may payment (i.e. cash outflow). Thus, cash
R

said to be profitable in the accounting flow based returns help financial

sense but it may not be able to meet its managers to avoid insolvency and
A

current obligations due to shortage of achieve desired financial goals.

C

liquidity.

Decision- The chief focus of an accountant is to Financial manager’s primary

making collect and present the data. responsibility relates to financial
planning, controlling and decision
making.

Answer 2
Procurement of ✓ Funds can be obtained from different sources having different characteristics in
Funds terms of risk, cost and control.
✓ The funds raised from the issue of equity shares are the best from the risk point of
view since repayment is required only at the time of liquidation.
✓ However, it is also the most costly source of finance due to dividend expectations
of shareholders.
✓ On the other hand, debentures are cheaper than equity shares due to their tax

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |6

advantage.
✓ However, they are usually riskier than equity shares.
✓ There are thus risk, cost and control considerations which a finance manager must
consider while procuring funds.
✓ The cost of funds should be at the minimum level for that a proper balancing of risk
and control factors must be carried out.

Effective ✓ The Finance Manager has to ensure that funds are not kept idle or there is no
Utilization of improper use of funds.
Funds ✓ The funds are to be invested in a manner such that they generate returns higher
than the cost of capital to the firm.
✓ Besides this, decisions to invest in fixed assets are to be taken only after sound
analysis using capital budgeting techniques.
✓ Similarly, adequate working capital should be maintained so as to avoid the risk of
insolvency.

Answer 3
✓ Determining the proper amount of funds to employ in the firm, i.e. designating the

G
Financial
analysis and size of the firm and its rate of growth.
planning
Investment
AR
✓ The efficient allocation of funds to specific assets.
decisions
G
Financing and ✓ Raising funds on favourable terms as possible i.e. determining the composition of
capital liabilities.
L

structure
U

decisions
✓ Judicious mix of Current Assets and liabilities.
AH

Management
of financial
resources
R

Risk ✓ Protecting assets

management
A

Decision ✓ Increasing shareholders wealth by bonus shares, right shares & stock split
regarding stock decisions etc.
C

market
Financial ✓ Negotiations with financial institutions, bank, public depositors, shareholders,
Negotiations investors etc.

Answer 4
Profit ✓ Profit maximization is a short-term objective and cannot be the sole objective of a
maximization company.
✓ It is at best a limited objective.
✓ If profit is given undue importance, a number of problems can arise like the term
profit is vague, profit maximisation has to be attempted with a realization of risks
involved, it does not take into account the time pattern of returns and as an
objective it is too narrow.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |7

Wealth ✓ Wealth maximisation, as an objective, means that the company is using its
maximization resources in a good manner.
✓ If the share value is to stay high, the company has to reduce its costs and use the
resources properly.
✓ If the company follows the goal of wealth maximisation, it means that the
company will promote only those policies that will lead to an efficient allocation of
resources.

Answer 5
Please refer answer to Question 3.

Answer 6
Validity of ✓ “The profit maximisation is not an operationally feasible criterion.” This statement
statement is true because Profit maximisation can be a short-term objective for any
organisation and cannot be its sole objective.
✓ Profit maximization fails to serve as an operational criterion for maximizing the
owner's economic welfare.

G
✓ It fails to provide an operationally feasible measure for ranking alternative courses
of action in terms of their economic efficiency.

Limitations
AR
✓ The definition of the term profit is ambiguous. Does it mean short term or long
term profit? Does it refer to profit before or after tax? Total profit or profit per
G
share?
✓ The profit maximization objective does not make distinction between returns
L

received in different time periods. It gives no consideration to the time value of

U

money, and values benefits received today and benefits received after a period as
AH

the same.
✓ It ignores the risk factor.
✓ The term maximization is also vague.
R
A

Answer 7
C

Please refer answer to Question 4.

Answer 8
Regulation ✓ Regulation requirements are increasing and CFOs have an increasingly personal
stake in regulatory adherence.

Globalisation ✓ The challenges of globalisation are creating a need for finance leaders to develop a
finance function that works effectively on the global stage and that embraces
diversity.

Technology ✓ Technology is evolving very quickly, providing the potential for CFOs to reconfigure
finance processes and drive business insight through ‘big data’ and analytics.

Risk ✓ The nature of the risks that organisations face is changing, requiring more
effective risk management approaches and increasingly CFOs have a role to play in
ensuring an appropriate corporate ethos.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |8

Transformation ✓ There will be more pressure on CFOs to transform their finance functions to drive a
better service to the business at zero cost impact.

Stakeholder ✓ Stakeholder management and relationships will become important as increasingly

Management CFOs become the face of the corporate brand.

Strategy ✓ There will be a greater role to play in strategy validation and execution, because
the environment is more complex and quick changing, calling on the analytical
skills CFOs can bring.

Reporting ✓ Reporting requirements will broaden and continue to be burdensome for CFOs.

Talent and ✓ A brighter spotlight will shine on talent, capability and behaviours in the top
Capability finance role.

Answer 9
Please refer answer to Question 4.

G
Answer 10
Please refer answer to Question 8. AR
Answer 11
G
Please refer answer to Question 4.
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 Page |9

Chapter - 2

Time Value of Money

Do not wait to strike till the iron is hot; but make it hot by striking.
William B. Sprague

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

4.5
4 4 4 4
A

4
C

3.5

3
2.5
2.5
2
2

1.5

0.5
0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 10

Theory Questions
1. N 11 (4 M) Explain the relevance of time value of money.
2. N 14 (4 M) Why money in the future is worth less than similar money today? Give the
reasons and explain.
3. M 15 (4 M) Define 'Present Value' and 'Perpetuity'.
4. M 16 (2.5 What is a sinking fund and how is it calculated?
M)
5. N 16 (4 M) Explain the relevance of time value of money.
6. M 17 (2 M) Explain Time Value of Money.

Answer 1
✓ Time value of money means that worth of a rupee received today is different from the worth of a
rupee to be received in future.
✓ The preference of money now as compared to future money is known as time preference for money.
✓ A rupee today is more valuable than rupee after a year due to several reasons :

G
Risk ✓ There is uncertainty about the receipt of money in future.

Preference for
present future consumption.
AR
✓ Most of the persons and companies in general, prefer current consumption over

consumption
G
Inflation ✓ In an inflationary period, a rupee today represents a greater real purchasing power
than a rupee a year hence.
L
U

Investment ✓ Most of the persons and companies have a preference for present money because
AH

opportunities of availabilities of opportunities of investment for earning additional cash flow.

R

Answer 2
Please refer answer to Question 1.
A
C

Answer 3
Present Value ✓ Present Value” is the current value of a “Future Amount”.
✓ It can also be defined as the amount to be invested today (Present Value) at a given
rate over specified period to equal the “Future Amount”.

Perpetuity ✓ Perpetuity is an annuity in which the periodic payments or receipts begin on a fixed
date and continue indefinitely or perpetually.
✓ Fixed coupon payments on permanently invested (irredeemable) sums of money
are prime examples of perpetuities.

Answer 4
Meaning ✓ It is the fund created for a specified purpose by way of sequence of periodic
payments over a time period at a specified interest rate.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 11

Calculation ✓ Size of the sinking fund is calculated as follows :

FVA = R[FVIFA (i,n)]
Where, ‘FVA’ is the amount to be saved, ‘R’ is the periodic payment and ‘n’ the
payment period.

Answer 5
Please refer answer to Question 1.

Answer 6
Please refer answer to Question 1.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 12

Chapter - 3

Financing Decisions

Try not to become a man of success but a man of value.

Albert Einstein

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

14

12
A

12
C

10

8
8

6
5
4 4 4 4 4
4

2 2
2

0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 13

Part I

Cost of Capital

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
4.5
R

4
4
A

3.5
C

3
3

2.5

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 14

Theory Questions
1. N 09 (3 M) What do you understand by Weighted Average Cost of Capital?
2. N 12 (4 M) "Financing a business through borrowing is cheaper than using equity." Briefly
explain.

Answer 1
Meaning ✓ The composite or overall cost of capital of a firm is the weighted average of the
costs of the various sources of funds.
✓ Weights are taken to be in the proportion of each source of fund in the capital
structure.
✓ While making financial decisions, this overall or weighted cost is used.
✓ Each investment is financed from a pool of funds which represents the various
sources from which funds have been raised.
✓ Any decision of investment, therefore, has to be made with reference to the
overall cost of capital and not with reference to the cost of a specific source of fund
used in the investment decision.

G
Calculation The weighted average cost of capital is calculated by :

AR
✓ Calculating the cost of specific source of fund e.g. cost of debt, equity etc;
✓ Multiplying the cost of each source by its proportion in capital structure; and
✓ Adding the weighted component cost to get the firm’s WACC represented by k0.
G
k0 = k1 w1 + k2 w2 + ………..
Where,
L

k1, k2 are component costs and w1, w2 are weights.

U
AH

Answer 2
✓ Debt capital is cheaper than equity capital from the point of its cost and interest being deductible for
R

income tax purpose, whereas no such deduction is allowed for dividends.

✓ Issue of new equity dilutes existing control pattern while borrowing does not result in dilution of
A

control.
✓ In a period of rising prices, borrowing is advantageous. The fixed monetary outgo decreases in real
C

terms as the price level increases.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 15

Part II

Leverage

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
4.5
R

4 4 4
4
A

3.5
C

2.5
2
2

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 16

Theory Questions
1. N 09 (2 M) What do you understand by Business Risk and Financial Risk?
2. N 12 (4 M) Distinguish between business risk and financial risk.
3. M 13 (4 M) “Operating risk is associated with cost structure, whereas financial risk is
associated with capital structure of a business concern.” Critically examine this
statement.
4. N 14 (4 M) Distinguish between 'Business Risk' and 'Financial Risk'.

Answer 1
Business Risk ✓ Business risk refers to the risk associated with the firm’s operations.
✓ It is an unavoidable risk because of the environment in which the firm has to
operate and the business risk is represented by the variability of earnings before
interest and tax (EBIT).
✓ The variability in turn is influenced by revenues and expenses.
✓ Revenues and expenses are affected by demand of firm’s products, variations in
prices and proportion of fixed cost in total cost.

G
Financial Risk ✓ Financial risk refers to the additional risk placed on firm’s shareholders as a result
of debt use in financing.
AR
✓ Companies that issue more debt instruments would have higher financial risk than
companies financed mostly by equity.
✓ Financial risk can be measured by ratios such as firm’s financial leverage multiplier,
G
total debt to assets ratio etc.
L
U

Answer 2
AH

Basis Business Risk Financial Risk

Meaning Business Risk refers to the risk associated Financial Risk refers to the additional
with the firm's operations. In other words, risk placed on the firm's shareholders
R

Business Risk is defined as the risk of running as a result of use of debt.

a business.
A
C

Type of cost It occurs due to fixed operating cost. It occurs due to fixed financing cost.

Avoidable or Business Risk is generally unavoidable. Financial Risk can be avoided by not
Unavoidable using the source of finance involving
fixed payment.

Higher Risk Higher the fixed operating cost, higher the Companies that issue more debt
Business Risk. instruments would have higher
financial risk than companies financed
mostly or entirely by equity.

Answer 3
Validity of ✓ The statement is valid that “Operating risk is associated with cost structure
statement whereas financial risk is associated with capital structure of a business concern”.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 17

Explanation ✓ Operating risk refers to the risk associated with the firm’s operations.
✓ It is represented by the variability of earnings before interest and tax (EBIT).
✓ The variability in turn is influenced by revenues and expenses, which are affected
by demand of firm’s products, variations in prices and proportion of fixed cost in
total cost.
✓ If there is no fixed cost, there would be no operating risk.
✓ Whereas financial risk refers to the additional risk placed on firm’s shareholders as
a result of debt and preference shares used in the capital structure of the concern.
✓ Companies that issue more debt instruments would have higher financial risk
than companies financed mostly by equity.

Answer 4
Please refer answer to Question 2.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 18

Part III

Capital Structure

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
9
R

8
8
A

7
C

5
4 4 4
4

3
2
2

1
0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 19

Theory Questions
1. M 10 (2 M) What do you understand by Capital structure? How does it differ from Financial
structure?
2. N 10 (4 M) Discuss financial break–even and EBIT–EPS indifference analysis.
3. N 12 (4 M) List the fundamental principles governing capital structure.
4. N 13 (4 M) What is Over capitalisation? State its causes and consequences.
5. N 13 (4 M) What do you mean by capital structure? State its significance in financing
decision.
6. M 16 (4 M) State the principles that should be followed while designing the capital structure
of a company.

Answer 1
Meaning of ✓ Capital Structure refers to the combination of debt and equity which a company
Capital uses to finance its long-term operations.
Structure ✓ It is the permanent financing of the company representing long-term sources of
capital i.e. owner’s equity and long-term debts but excludes current liabilities.

G
Financial ✓ On the other hand, Financial Structure is the entire left-hand side of the balance
Structure AR
sheet which represents all the long-term and short-term sources of capital.
✓ Thus, capital structure is only a part of financial structure.
G
Answer 2
L

Financial ✓ Financial break-even point is the minimum level of EBIT needed to satisfy all the
U

Break Even fixed financial charges i.e. interest and preference dividend.
AH

✓ It denotes the level of EBIT for which firm’s EPS equals zero.
✓ If the EBIT is less than the financial breakeven point, then the EPS will be negative
but if the expected level of EBIT is more than the breakeven point, then more fixed
R

costs financing instruments can be taken in the capital structure, otherwise, equity
would be preferred.
A
C

EBIT–EPS ✓ EBIT-EPS analysis is a vital tool for designing the optimal capital structure of a firm.
indifference ✓ The objective of this analysis is to find the EBIT level that will equate EPS regardless
analysis of the financing plan chosen.

Computation (𝐄𝐁𝐈𝐓 − 𝐈𝟏) (𝟏 − 𝐭) (𝐄𝐁𝐈𝐓 − 𝐈𝟐)(𝟏 − 𝐭)

=
𝐧𝟏 𝐧𝟐
Where
EBIT = Indifference point
n1 = Number of equity shares in Alternative 1
n2 = Number of equity shares in Alternative 2
I1 = Interest charges in Alternative 1
I2 = Interest charges in Alternative 2
t = Tax Rate
Alternative 1 = All equity finance
Alternative 2 = Debt-equity finance.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 20

Answer 3
Cost Principle ✓ According to this principle, an ideal pattern or capital structure is one that
❖ minimises cost of capital structure and
❖ maximises earnings per share (EPS).

Risk Principle ✓ According to this principle, reliance is placed more on common equity for financing
capital requirements than excessive use of debt.
✓ Use of more and more debt means higher commitment in form of interest payout.
✓ This would lead to erosion of shareholders value in unfavourable business situation.

Control ✓ While designing a capital structure, the finance manager may also keep in mind that
Principle existing management control and ownership remains undisturbed.

Flexibility ✓ It means that the management chooses such a combination of sources of financing
Principle which it finds easier to adjust according to changes in need of funds in future too.

Other ✓ Besides above principles, other factors such as nature of industry, timing of issue
Considerations and competition in the industry should also be considered.

G
Meaning of
Answer 4 AR
✓ It is a situation where a firm has more capital than it needs or in other words
Over assets are worth less than its issued share capital, and earnings are insufficient to
G
Capitalisation pay dividend and interest.
L

Causes ✓ Raising more money through issue of shares or debentures than company can
U

employ profitably.
AH

✓ Borrowing huge amount at higher rate than rate at which company can earn.
✓ Excessive payment for the acquisition of fictitious assets such as goodwill etc.
✓ Improper provision for depreciation, replacement of assets and distribution of
R

dividends at a higher rate.

✓ Wrong estimation of earnings and capitalization.
A
C

Consequences ✓ Considerable reduction in the rate of dividend and interest payments.

✓ Reduction in the market price of shares.
✓ Resorting to “window dressing”.
✓ Some companies may opt for reorganization. However, sometimes the matter gets
worse and the company may go into liquidation.

Answer 5
Meaning of ✓ Capital structure refers to the mix of a firm’s capitalisation i.e. mix of long-term
Capital sources of funds such as debentures, preference share capital, equity share capital
Structure and retained earnings for meeting its total capital requirement.

Significance in ✓ The capital structure decisions are very important in financial management as they
Financing influence debt – equity mix which ultimately affects shareholders return and risk.
Decision ✓ These decisions help in deciding
❖ the forms of financing (which sources to be tapped),

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 21

❖ their actual requirements (amount to be funded) and

❖ their relative proportions (mix) in total capitalisation.
✓ Therefore, such a pattern of capital structure must be chosen which
❖ minimises cost of capital and
❖ maximises the owners’ return.

Answer 6
Please refer answer to Question 3.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 22

Part IV

Theories of Capital Structure

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
4.5
R

4
4
A

3.5
C

2.5

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 23

Theory Questions
1. M 12 (4 M) What is Net Operating income theory of capital structure? Explain the
assumptions on which the NOI theory is based.

Answer 1
Meaning ✓ According to this approach, there is no relationship between the cost of capital
and value of the firm.
✓ The value of the firm is independent of the capital structure of the firm.

Assumptions ✓ There are no taxes.

✓ The market capitalizes the value of the firm as a whole. Thus, the split between
debt and equity is not important.
✓ The increase in proportion of debt in capital structure leads to change in risk
perception of the shareholders i.e. increase in cost of equity (Ke). The increase in
cost of equity is such as completely offset the benefits of using cheaper debt.
✓ The overall cost of capital remains same for all degrees of debt equity mix.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 24

Chapter - 4

Investment Decisions
(Capital Budgeting)

Every artist was first an amateur.

Ralph Waldo Emerson

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

4.5
4 4 4
A

4
C

3.5

2.5

2
1.5
1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 25

Theory Questions
1. N 09 (1.5 Explain the term Desirability factor.
M)
2. N 11 (4 M) Distinguish between Net present value method and Internal Rate of Return
method.
3. N 14 (4 M) What is 'Internal Rate of Return'? Explain.
4. N 15 (4 M) Distinguish between Net Present Value (NPV) and Internal Rate of Return (IRR)
methods for evaluating projects.

Answer 1
✓ In certain cases, we have to compare a number of proposals each involving different amount of
cash inflows.
✓ One of the methods of comparing such proposals is to work out what is known as the ‘Desirability
factor’ or ‘Profitability index’.

Formula
𝐒𝐮𝐦 𝐨𝐟 𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐂𝐚𝐬𝐡 𝐢𝐧𝐟𝐥𝐨𝐰𝐬

G
𝐈𝐧𝐢𝐭𝐢𝐚𝐥 𝐂𝐚𝐬𝐡 𝐨𝐮𝐭𝐥𝐚𝐲 𝐨𝐫 𝐓𝐨𝐭𝐚𝐥 𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐂𝐚𝐬𝐡 𝐨𝐮𝐭𝐟𝐥𝐨𝐰

Acceptance
Criteria
AR
✓ A project is acceptable if its profitability index value is greater than 1.
G
Answer 2
L

Introduction ✓ NPV and IRR methods differ in the sense that the results regarding the choice of an
U

asset under certain circumstances are mutually contradictory under two methods.
✓ In case of mutually exclusive investment projects, in certain situations, they may
AH

give contradictory results such that if the NPV method finds one proposal
acceptable, IRR favours another.
R

Causes of ✓ The different rankings given by the NPV and IRR methods could be due to
difference ❖ Size disparity problem,
A

❖ time disparity problem and

C

❖ unequal expected lives.

Absolute value ✓ The net present value is expressed in financial values whereas internal rate of
or percentage return (IRR) is expressed in percentage terms.

Reinvestment ✓ In the net present value, cash flows are assumed to be re-invested at cost of capital
of cash flows rate.
✓ In IRR, reinvestment is assumed to be made at IRR rates.

Answer 3
Meaning ✓ It is that rate at which discounted cash inflows are equal to the discounted cash
outflows.

Computation ✓ This rate is to be found by trial and error method.

✓ This rate is used in the evaluation of investment proposals.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 26

✓ In this method, the discount rate is not known but the cash outflows and cash
inflows are known.

Relevance ✓ In evaluating investment proposals, internal rate of return is compared with a

required rate of return, known as cut-off rate.
✓ If it is more than cut-off rate the project is treated as acceptable; otherwise project
is rejected.

Answer 4
Please refer answer to Question 2.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 27

Chapter - 5

Working Capital Management

Happy are those who dream dreams and are ready to pay the price to make
them come true.
Leon J. Suenes

G
AR
G
Analysis of Past 16 Attempts
L
U
AH

Theory Questions Analysis

Chapter Analysis
R

10
A

9
9
C

8 8 8 8 8 8
8

5
4 4 4 4 4 4
4

3
2
2

1
0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 28

Part I

Estimation of Working Capital

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
4.5
R

4 4
4
A

3.5
C

2.5

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 29

Theory Questions
1. N 10 (4 M) Discuss the estimation of working capital need based on operating cycle process.

Answer 1
Meaning ✓ One of the methods for forecasting working capital requirement is based on the
concept of operating cycle.
✓ The determination of operating capital cycle helps in the forecast, control and
management of working capital.
✓ The duration of working capital cycle may vary depending on the nature of the
business.

Relevance ✓ The length of operating cycle is the indicator of performance of management.

✓ The net operating cycle represents the time interval for which the firm has to
negotiate for Working Capital from its Bankers.
✓ It enables to determine accurately the amount of working capital needed for the
continuous operation of business activities.

G
Formula ✓ In the form of an equation, the operating cycle process can be expressed as follows:
Operating Cycle = R + W + F +D – C
✓ Where,
R = Raw material storage period
AR
G
W = Work-in-progress holding period
F = Finished goods storage period
L

D = Debtors collection period

U

C = Credit period availed

AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 30

Part II

Debtor’s Management

G
Analysis of Past 16 Attempts
AR
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
6
R

5
5
A
C

4 4 4
4

2 2
2

0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 31

Theory Questions
1. N 09 (2 M) Differentiate between Factoring and Bills discounting.
2. M 10 (2 M) Explain briefly the accounts receivable systems.
3. M 11 (5 M) What is factoring? Enumerate the main advantages of factoring.
4. M 13 (4 M) Distinguish between factoring and bill-discounting.
5. M 15 (4 M) Differentiate between 'Factoring' and 'Bill discounting'.
6. M 17 (4 M) Explain the meaning and advantages of factoring.

Answer 1
Basis Factoring Bill Discounting
Other name Factoring is called as “Invoice Factoring”. Bills discounting is known as
‘Invoice discounting.”

Parties In Factoring, the parties are known as the In Bills discounting, they are known as
client, factor and debtor. drawer, drawee and payee.

Purpose Factoring is a sort of management of book Bills discounting is a sort of borrowing

G
debts. from commercial banks.

Relevant
statute
For factoring, there is no specific act. AR
In the case of bills discounting, the
Negotiable Instruments Act is
G
applicable.
L

Answer 2
U

✓ Manual systems of recording the transactions and managing receivables are cumbersome and
AH

costly.
✓ The automated receivable management systems automatically update all the accounting
records affected by a transaction.
R

✓ This system allows the application and tracking of receivables and collections to store important
information for an unlimited number of customers and transactions, and accommodate efficient
A

processing of customer payments and adjustments.

C

Answer 3
Meaning ✓ In factoring, accounts receivables are generally sold to a financial institution (a
subsidiary of commercial bank-called “Factor”), who charges commission and bears
the credit risks associated with the accounts receivables purchased by it.
✓ Its operation is very simple.
✓ Clients enter into an agreement with the “factor” working out a factoring
arrangement according to his requirements.
✓ The factor then takes the responsibility of monitoring, follow-up, collection and
risk-taking and provision of advance.
✓ The factor generally fixes up a limit customer-wise for the client (seller).

Advantages Convertibility ✓ The biggest advantages of factoring are the immediate

conversion of receivables into cash.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 32

Reduction in ✓ Continuous factoring virtually eliminates the need for the credit
Costs department due to saving in collection and administration cost.

Certainty ✓ Factoring ensures a definite pattern of cash inflows.

No feature of ✓ There is no debt repayment, no compromise to balance sheet,

loan no long term agreements or delays associated with other
methods of raising capital.

Answer 4
Please refer answer to Question 1.

Answer 5
Please refer answer to Question 1.

Answer 6
Please refer answer to Question 3.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 33

Part III

Treasury & Cash Management

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
9
R

8
8
A

7
C

5
4 4 4 4 4 4 4 4
4

1
0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 34

Theory Questions
1. M 11 (4 M) Write short note on William J. Baumal Vs. Miller–Orr cash management model.
2. M 13 (4 M) State the advantage of Electronic Cash Management System.
3. N 13 (4 M) What is Virtual Banking? State its advantages.
4. N 13 (4 M) 'Management of marketable securities is an integral part of investment of cash.'
Comment.
5. M 14 (4 M) Explain the following :
(i) Concentration Banking
(ii) Lock Box System
6. N 14 (4 M) Explain four kinds of float with reference to management of cash.
7. M 15 (4 M) Explain 'Miller-Orr Cash Management model'.
8. N 15 (4 M) Evaluate the role of cash budget in effective cash management system.
9. M 16 (4 M) Describe the three principles relating to selection of marketable securities.
10. N 16 (4 M) Explain briefly the functions of Treasury Department.

Answer 1
✓ According to this model, the net cash flow is completely stochastic.

G
✓ When changes in cash balance occur randomly, the application of control theory serves a useful
purpose.
✓ The Miller – Orr model is one of such control limit [Link]
✓ This model is designed to determine the time and size of transfers between an investment account
G
and cash account.
✓ In this model control limits are set for cash balances.
L

✓ These limits may consist of ‘h’ as upper limit, ‘z’ as the return point and zero as the lower limit.
U
AH
R
A
C

✓ When the cash balance reaches the upper limit, the transfer of cash equal to ‘h – z’ is invested in
marketable securities account.
✓ When it touches the lower limit, a transfer from marketable securities account to cash account is
made.
✓ During the period, when cash balance stays between (h, z) and (z, 0) i.e. high and low limits, no
transactions between cash and marketable securities account is made.
✓ The high and low limits of cash balance are set up on the basis of fixed cost associated with the
securities transaction, the opportunities cost of holding cash and degree of likely fluctuations in cash
balances.
✓ These limits satisfy the demands for cash at the lowest possible total costs.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 35

Answer 2
✓ Significant saving in time.
✓ Decrease in interest costs.
✓ Less paper work.
✓ Greater accounting accuracy.
✓ More control over time and funds.
✓ Supports electronic payments.
✓ Faster transfer of funds from one location to another, where required.
✓ Speedy conversion of various instruments into cash.
✓ Making available funds wherever required, whenever required.
✓ Reduction in the amount of ‘idle float’ to the maximum possible extent.
✓ Ensures no idle funds are placed at any place in the organization.
✓ It makes inter-bank balancing of funds much easier.
✓ It is a true form of centralised ‘Cash Management’.
✓ Produces faster electronic reconciliation.
✓ Allows for detection of book-keeping errors.
✓ Reduces the number of cheques issued.
✓ Earns interest income or reduce interest expense.

G
Meaning
Answer 3
AR
✓ Virtual banking refers to the provision of banking and related services through the
use of information technology without direct recourse to the bank by the
G
customer.
L

Advantages ✓ Lower cost of handling a transaction.

U

✓ The increased speed of response to customer requirements.

AH

✓ The lower cost of operating branch network along with reduced staff costs leads to
cost efficiency.
✓ Possibility of improved and a range of services being made available to the
R

customer rapidly, accurately and at his convenience.

A

Answer 4
C

✓ Management of marketable securities is an integral part of investment of cash as it serves both the
purposes of liquidity and cash, provided choice of investment is made correctly.
✓ As the working capital needs are fluctuating, it is possible to invest excess funds in some short term
securities, which can be liquidated when need for cash is felt.
✓ The selection of securities should be guided by three principles namely
❖ safety,
❖ maturity and
❖ marketability.

Answer 5
Concentration ✓ In concentration banking, the company establishes a number of strategic collection
Banking centres in different regions instead of a single collection centre at the head office.
✓ This system reduces the period between the time a customer mails in his
remittances and the time when they become spendable funds with the company.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 36

✓ Payments received by the different collection centers are deposited with their
respective local banks which in turn transfer all surplus funds to the concentration
bank of head office.

Lock Box ✓ Another means to accelerate the flow of funds is a lock box system.
System ✓ The purpose of lock box system is to eliminate the time between the receipts of
remittances by the company and deposited in the bank.
✓ A lock box arrangement usually is on regional basis which a company chooses
according to its billing patterns.

Answer 6
Billing Float ✓ The time between the sale and the mailing of the invoice is the billing float.

Mail Float ✓ This is the time when a cheque is being processed by post office, messenger
service or other means of delivery.

Cheque ✓ This is the time required for the seller to sort, record and deposit the cheque after

G
processing it has been received by the company.
float
Bank
processing seller’s account.
AR
✓ This is the time from the deposit of the cheque to the crediting of funds in the

float
G
Answer 7
L

Please refer answer to Question 1.

U
AH

Answer 8
✓ Cash Budget is the most significant device to plan for and control cash receipts and payments.
✓ It plays a very significant role in effective Cash Management System.
R

✓ This represents cash requirements of business during the budget period.

✓ The various roles of cash budgets in Cash Management System are :
A

❖ Coordinate the timings of cash needs. It identifies the period(s) when there might either be a
C

shortage of cash or an abnormally large cash requirement.

❖ It also helps to pinpoint period(s) when there is likely to be excess cash.
❖ It enables firm which has sufficient cash to take advantage like cash discounts on its accounts
payable. and
❖ Lastly, it helps to plan/ arrange adequately needed funds (avoiding excess/ shortage of cash) on
favorable terms.

Answer 9
Safety ✓ Return and risks go hand in hand.
✓ As the objective in this investment is ensuring liquidity, minimum risk is the
criterion of selection.

Maturity ✓ Matching of maturity and forecasted cash needs is essential.

✓ Prices of long term securities fluctuate more with changes in interest rates and are
therefore, more risky.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 37

Marketability ✓ It refers to the convenience, speed and cost at which a security can be converted
into cash.
✓ If the security can be sold quickly without loss of time and price, it is highly liquid or
marketable.

Answer 10
The functions of treasury department management are to ensure proper usage, storage and risk
management of liquid funds so as to ensure that the organisation is able to meet its obligations, collect
its receivables and also maximize the return on its investments.
Towards this end, the treasury function may be divided into the following :

Cash ✓ The efficient collection and payment of cash both inside the organisation and to
Management third parties is the function of treasury department.
✓ Treasury normally manages surplus funds in an investment portfolio.

Currency ✓ The treasury department manages the foreign currency risk exposure of the
Management company.

G
✓ It advises on the currency to be used when invoicing overseas sales.
✓ It also manages any net exchange exposures in accordance with the company
policy.
AR
Fund ✓ Treasury department is responsible for planning and sourcing the company’s short,
G
Management medium and long-term cash needs.
✓ It also participates in the decision on capital structure and forecasts future interest
L

and foreign currency rates.

U

✓ Since short-term finance can come in the form of bank loans or through the sale of
AH

Banking
commercial paper in the money market, therefore, treasury department carries out
negotiations with bankers and acts as the initial point of contact with them.
R

Corporate ✓ Treasury department is involved with both acquisition and disinvestment activities
A

Finance within the group.

✓ In addition, it is often responsible for investor relations.
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 38

Part IV

Working Capital Finance

G
AR
Analysis of Past 16 Attempts
G
L

Theory Questions Analysis

U
AH

Chapter Analysis
4.5
R

4 4 4
4
A

3.5
C

2.5
2
2

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 39

Theory Questions
1. M 10 (2 M) Enumerate the various forms of bank credit in financing working capital of a
business organization.
2. N 10 (4 M) Discuss the liquidity vs. profitability issue in management of working capital.
3. N 12 (4 M) What are the forms of bank credit?
4. N 15 (4 M) Discuss the risk-return considerations in financing current assets.

Answer 1
Short Term ✓ In a loan account, the entire advance is disbursed at one time either in cash or by
Loans transfer to the current account of the borrower.
✓ It is a single advance and given against securities like shares, government securities,
life insurance policies and fixed deposit receipts, etc.

Overdraft ✓ Under this facility, customers are allowed to withdraw in excess of credit balance
standing in their Current Account.
✓ A fixed limit is therefore granted to the borrower within which the borrower is
allowed to overdraw his account.

G
Clean ✓ Request for clean advances are entertained only from parties which are financially
Overdrafts sound and reputed for their integrity.
AR
✓ The bank has to rely upon the personal security of the borrowers.
G
Cash Credits ✓ Cash Credit is an arrangement under which a customer is allowed an advance up to
certain limit against credit granted by bank.
L

✓ Interest is not charged on the full amount of the advance but on the amount
U

actually availed of by him.

AH

Advances ✓ Goods are charged to the bank either by way of pledge or by way of
against goods hypothecation.
R

✓ Goods include all forms of movables which are offered to the bank as security.
A

Bills ✓ These advances are allowed against the security of bills which may be clean or
C

Purchased/ documentary.
Discounted ✓ Usance bills maturing at a future date or sight are discounted by the banks for
approved parties.
✓ The borrower is paid the present worth and the bank collects the full amount on
maturity.

Advance ✓ A document becomes a document of title to goods when its possession is

against recognised by law or business custom as possession of the goods like bill of lading,
documents of dock warehouse keeper's certificate, railway receipt, etc.
title to goods ✓ An advance against the pledge of such documents is an advance against the pledge
of goods themselves.

Advance ✓ Advances against bills for supply of goods to government or semi-government

against supply departments against firm orders after acceptance of tender fall under this category.
of bills ✓ It is this debt that is assigned to the bank by endorsement of supply bills and
executing irrevocable power of attorney in favour of the banks for receiving the
amount of supply bills from the Government departments.
CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 40

Answer 2
✓ Working capital management entails the control and monitoring of all components of working
capital i.e. cash, marketable securities, debtors, creditors etc.
✓ Finance manager has to pay particular attention to the levels of current assets and their financing.
✓ To decide the level of financing of current assets, the risk return trade off must be taken into
account.
✓ The level of current assets can be measured by creating a relationship between current assets and
fixed assets.
✓ A firm may follow a conservative, aggressive or moderate policy.

G
AR
G
✓ A conservative policy means lower return and risk while an aggressive policy produces higher
L

return and risk.

U

✓ The two important aims of the working capital management are profitability and solvency.
✓ A liquid firm has less risk of insolvency i.e. it will hardly experience a cash shortage or a stock out
AH

situation.
✓ However, there is a cost associated with maintaining a sound liquidity position.
✓ So, to have a higher profitability the firm may have to sacrifice solvency and maintain a relatively
R

low level of current assets.

A
C

Answer 3
Please refer answer to Question 1.

Answer 4
Introduction ✓ The financing of current assets involves a trade off between risk and return.
✓ A firm can choose from short or long term sources of finance.
✓ Short term financing is less expensive than long term financing but at the same
time, short term financing involves greater risk than long term financing.
✓ Depending on the mix of short term and long term financing, the approach followed
by a company may be referred as matching approach, conservative approach and
aggressive approach.

Matching ✓ In matching approach, long-term finance is used to finance fixed assets and
Approach permanent current assets and short term financing to finance temporary or
variable current assets.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 41

Conservative ✓ Under the conservative plan, the firm finances its permanent assets and also a part
Approach of temporary current assets with long term financing and hence less risk of facing
the problem of shortage of funds.

Aggressive ✓ An aggressive policy is said to be followed by the firm when it uses more short term
Approach financing than warranted by the matching plan and finances a part of its permanent
current assets with short term financing.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 42

Chapter - 6

Ratio Analysis

Success does not consist in never making blunders, but in never making the
same one a second time.
Josh Billings

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

4.5
4 4 4
A

4
C

3.5

2.5
2
2

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 43

Theory Questions
1. N 09 (2 M) Explain briefly the limitations of Financial ratios.
2. M 11 (4 M) Explain the following ratios :
a. Operating ratio
b. Price earnings ratio
3. M 12 (4 M) Explain the important ratios that would be used in each of the following
situations :
a. A bank is approached by a company for a loan of 50 lakh for working capital
purposes.
b. A long term creditors interested in determining whether his claim is
adequately secured.
c. A shareholder who is examining his portfolio and who is to decide whether he
should hold or sell his holding in the company.
d. A finance manager interested to know effectiveness with which a firm uses
its available resources.
4. M 14 (4 M) Comment on the Debt Service Coverage Ratio.

G
Answer 1
Diversified
product lines
AR
✓ Many businesses operate a large number of divisions in quite different industries.
✓ In such cases, ratios calculated on the basis of aggregate data cannot be used for
G
inter-firm comparisons.

✓ Historical cost values may be substantially different from true values.

L

Financial data
badly ✓ Such distortions of financial data are also carried in the financial ratios.
U

distorted by
AH

inflation
Seasonal ✓ Seasonal factors may also influence financial data.
factors
R

Biased ratios ✓ To give a good shape to the popularly used financial ratios (like current ratio, debt-
equity ratios, etc.), the business may make some year-end adjustments.
A

✓ Such window dressing can change the character of financial ratios which would be
C

different had there been no such change.

Differences in ✓ It can make the accounting data of two firms non-comparable as also the
accounting accounting ratios.
policies and
accounting
period
No standard ✓ Sometimes, a firm’s ratios are compared with the industry average.
set of ratios ✓ But, if a firm desires to be above the average, then industry average becomes a low
standard.
✓ On the other hand, for a below average firm, industry averages become too high a
standard to achieve.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 44

Answer 2
Operating Meaning ✓ This is the test of the operational efficiency with which the business
Ratio is being carried.

Relevance ✓ The operating ratio should be low enough to leave a portion of sales
to give a fair return to the investors.

Formula 𝐂𝐨𝐬𝐭 𝐨𝐟 𝐠𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝 + 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬

× 𝟏𝟎𝟎
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬

Price-Earnings Meaning ✓ This ratio indicates the number of times the earnings per share is
ratio covered by its market price.

Relevance ✓ It indicates the expectation of equity investors about the earnings of

the firm.

Formula 𝐌𝐚𝐫𝐤𝐞𝐭 𝐩𝐫𝐢𝐜𝐞 𝐩𝐞𝐫 𝐞𝐪𝐮𝐢𝐭𝐲 𝐬𝐡𝐚𝐫𝐞

𝐄𝐚𝐫𝐧𝐢𝐧𝐠 𝐩𝐞𝐫 𝐬𝐡𝐚𝐫𝐞

G
a Liquidity
Answer 3
AR
✓ Here Liquidity or short-term solvency ratios would be used by the bank to check the
Ratios ability of the company to pay its short-term liabilities.
G
✓ A bank may use Current ratio and Quick ratio to judge short terms solvency of the
firm.
L
U

b Capital ✓ Here the long-term creditor would use the capital structure/ leverage ratios to
AH

Structure/ ensure the long term stability and structure of the firm.
Leverage ✓ A long term creditors interested in the determining whether his claim is adequately
Ratios secured may use Debt-service coverage and interest coverage ratio.
R

c Profitabi- ✓ The shareholder would use the profitability ratios to measure the profitability or
A

lity Ratios the operational efficiency of the firm to see the final results of business operations.
✓ A shareholder may use return on equity, earning per share and dividend per share.
C

d Activity ✓ The finance manager would use these ratios to evaluate the efficiency with which
Ratios the firm manages and utilises its assets.
✓ Some important ratios are :
❖ Capital turnover ratio
❖ Current and fixed assets turnover ratio
❖ Stock, Debtors and Creditors turnover ratio.

Answer 4
Meaning ✓ Debt service coverage ratio indicates the capacity of a firm to service a particular
level of debt i.e. repayment of principal and interest.

Relevance ✓ High credit rating firms target Debt service coverage ratio to be greater than 2 in
its entire loan life.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 45

✓ High Debt service coverage ratio facilitates the firm to borrow at the most
competitive rates.
✓ Lenders are interested in this ratio to judge the firm’s ability to pay off current
interest and installments.

Formula 𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐚𝐯𝐚𝐢𝐥𝐚𝐛𝐥𝐞 𝐟𝐨𝐫 𝐝𝐞𝐛𝐭 𝐬𝐞𝐫𝐯𝐢𝐜𝐞

𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 + 𝐈𝐧𝐬𝐭𝐚𝐥𝐥𝐦𝐞𝐧𝐭𝐬

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 46

Chapter - 7

Cash Flow Statement

Reputation is what men and women think of us; character is what God and
angels know of us.
Thomas Paine

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

4.5
4
A

4
C

3.5
3
3

2.5

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 47

Theory Questions
1. M 10 (3 M) Distinguish between Funds Flow Statement and Cash Flow Statement.
2. M 17 (4 M) Distinguish between Funds Flow and Cash Flow.

Answer 1
Both funds flow and cash flow statements are used in analysis of past transactions of a business firm. The
differences between these two statements are given below :

Basis Funds Flow Statement Cash Flow Statement

Meaning Funds flow statement analyses the reasons Cash Flow Statements analyses the
for change in financial position between reasons for changes in balance of cash
two balance sheets. in hand and bank.

Analysis Funds flow statement analyses the sources Cash Flow Statements shows inflows &
& application of funds. outflows of cash.

G
Time period Funds Flow analysis is more useful for long Cash Flow Statements is an important
range financial planning. tool for short term analysis.

Change in
current assets
Change in current items are adjusted in the
changes in working capital. These are
AR Changes in current items are shown by
way of adjustment in profit to arrive at
G
and current separately shown in a schedule apart from cash from operations in the main
liabilities the main funds flow statement. statement itself. No separate statement
L

is prepared for this.

U
AH

Answer 2
Please refer answer to Question 1.
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 48

Chapter - 8

Fund Flow Statement

One way to get the most out of life is

to look upon it as an adventure.
William Feather

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

4.5
4
A

4
C

3.5

2.5

1.5

0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 49

Theory Questions
1. M 16 (4 M) State, which of the following would result in inflow/outflow of funds, if the
funds were defined as working capital :
a. Purchase of a fixed asset on credit of two months.
b. Sale of a fixed asset (book value Rs. 8,000) at a loss of Rs. 7,000.
c. Payment of final dividend already declared.
d. Writing off Bad debts against a provision for doubtful debts.

Answer 1
Inflow/ Reason
Outflow
a Outflow ✓ Total current liabilities are increased but total current assets remain
unchanged.

b Inflow ✓ Current assets are increased but total current liabilities remain
unchanged.

G
c (option 1) No effect ✓ If assumed proposed dividend as Current liability, both the total
AR
current assets and current liabilities remain unchanged.

c (option 2) Outflow ✓ If assumed proposed dividend as Non- current liability, then

G
payment of final dividend is considered as out flow of fund.
L

d No effect ✓ Neither the total current assets nor the total current liabilities are
U

affected.
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 50

Chapter - 9

Sources of Finance

We make our fortunes, and we call them fate.

Earl of Beaconsfield

G
AR
G
Analysis of Past 16 Attempts
L
U

Theory Questions Analysis

AH

Chapter Analysis
R

9
8 8
A

8
C

7
6 6 6 6 6 6
6

5
4 4 4 4
4

3
2 2
2 1.5

1
0
0

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 51

Theory Questions
1. N 09 (1.5 Explain the term Ploughing back of profits.
M)
2. M 10 (2 M) Briefly discuss the concept of seed capital assistance.
3. N 10 (4 M) Distinguish between Global Depository Receipts and American Depository
Receipts.
4. M 11 (4 M) What is debt securitization? Explain the basic debt securitization process.
5. N 11 (4 M) Distinguish between Operating lease and financial lease.
6. N 11 (2 M) Explain Bridge finance.
7. M 12 (4 M) Discuss factors that a venture capitalist should consider before financing any
risky project.
8. M 12 (2 M) Write short note on Deep Discount Bonds.
9. M 13 (4 M) What is debt securitization? And also state its advantages.
10. M 13 (4 M) What is venture capital financing? State the factors which are to be considered
in financing any risky project.
11. N 13 (2 M) State the main elements of leveraged lease.
12. M 14 (4 M) State the main features of Global Depository Receipts (GDRs) and American

G
Depository Receipts (ADRs).
13.

14.
M 14 (2 M)

N 14 (4 M)
market. AR
Name any four financial instruments, which are related to international financial

Distinguish between ‘Operating Lease’ and ‘Financial Lease’.

G
15. N 14 (4 M) State the different types of Packing Credit.
16. M 15 (4 M) Explain 'Sales and Lease Back'.
L

17. N 15 (4 M) What is meant by venture capital financing? State its various methods.
U

18. N 15 (2 M) Distinguish between the Preference Shares and Debentures.

AH

19. M 16 (4 M) Distinguish between operating lease and finance lease.

20. M 16 (2 M) Explain what do you mean by Leveraged Lease.
21. N 16 (4 M) State advantages of Debt Securitisation.
R

22. N 16 (2 M) Explain Bridge finance.

23. M 17 (4 M) Explain GDR & ADR.
A
C

Answer 1
Meaning ✓ Ploughing back of Profits or Retained earnings means retention of profit.
✓ In other words, that part of surplus profit which is not distributed as dividend are
termed as Retained Profit or Ploughing back of Profits.

Features ✓ Retained Earnings are an internal source of long term financing and are treated as
long term funds.
✓ Such funds belong to the ordinary shareholders and increase the net worth of the
company.
✓ A public limited company must plough back a reasonable amount of profit every
year keeping in view the legal requirements in this regard and its own expansion
plans.
✓ Such funds also entail almost no risk.
✓ Further, control of present owners is also not diluted by retaining profits.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 52

Answer 2
✓ The seed capital assistance has been designed by IDBI for professionally or technically qualified
entrepreneurs.
✓ All the projects eligible for financial assistance from IDBI, directly or indirectly through refinance are
eligible under the scheme.
✓ The project cost should not exceed Rs. 2 crores and the maximum assistance under the project will
be restricted to 50% of the required promoters contribution or Rs. 15 lacs whichever is lower.
✓ The seed capital assistance is interest free but carries a security charge of one percent per annum for
the first five years and an increasing rate thereafter.

Answer 3
Basis GDR ADR
Meaning The depository receipts in world market is The depository receipts in US market is
GDR. ADR.

Compliance It need not comply with any of the It is issued in accordance with the
with SEC condition of SEC (Securities Exchange provisions of SEC.

G
Commission) of USA.

Disclosure
requirement
Disclosure requirement is less stringent. AR Disclosure requirement is very strict.

Cost Cost of issuing GDR is less in comparison to Cost of issuing ADR is more in
G
ADR. comparison to GDR.
L

Listing GDRs are listed in any foreign stock ADRs are listed only in American Stock
U

exchange other than the American Stock Exchange.

AH

Exchange. Example: London Stock

Exchange, Luxemburg Stock Exchanges etc.
R

Answer 4
A

Meaning of ✓ It is a method of recycling of funds.

C

Debt ✓ It is especially beneficial to financial intermediaries to support the lending volumes.

Securitisation ✓ Assets generating steady cash flows are packaged together and against this asset
pool, market securities can be issued, e.g. housing finance, auto loans, and credit
card receivables.

Process of The origination ✓ A borrower seeks a loan from a finance company, bank, HDFC.
Debt function ✓ The credit worthiness of borrower is evaluated and contract is
Securitisation entered into with repayment schedule structured over the life
of the loan.

The pooling ✓ Similar loans on receivables are clubbed together to create an

function underlying pool of assets.
✓ The pool is transferred in favour of Special purpose Vehicle
(SPV), which acts as a trustee for investors.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 53

The securitisation ✓ SPV will structure and issue securities on the basis of asset pool.
function ✓ The securities carry a coupon and expected maturity which can
be asset based/ mortgage based.
✓ These are generally sold to investors through merchant
bankers.
✓ Investors are pension funds, mutual funds, insurance funds.

Answer 5
Basis Finance Lease Operating Lease
Risk and The risk and reward incident to ownership The lessee is only provided the use of
reward are passed on the lessee. The lessor only the asset for a certain time. Risk
remains the legal owner of the asset. incident to ownership belongs only to
the lessor.

Risk of The lessee bears the risk of The lessor bears the risk of
obsolescence obsolescence. obsolescence.

G
Cancellation The lease is non-cancellable by either The lease is kept cancellable by the
party under it. lessor.

Cost of repairs The lessor does not bear the cost of

ARUsually, the lessor bears the cost of
repairs, maintenance or operations. repairs, maintenance or operations.
G
Life of Life of contract approximates the economic Life of contract is shorter than the
L

contract life of the asset. economic life of the asset.

U
AH

Answer 6
✓ Bridge finance refers, normally, to loans taken by the business, usually from commercial banks for a
R

short period, pending disbursement of term loans by financial institutions, normally it takes time
for the financial institution to finalise procedures of creation of security, tie-up participation with
A

other institutions etc. even though a positive appraisal of the project has been made.
✓
C

However, once the loans are approved in principle, firms in order not to lose further time in starting
their projects arrange for bridge finance.
✓ Such temporary loan is normally repaid out of the proceeds of the principal term loans.
✓ It is secured by hypothecation of moveable assets, personal guarantees and demand promissory
notes.
✓ Generally, rate of interest on bridge finance is higher as compared with that on term loans.

Answer 7
✓ Quality of the management team is a very important factor to be considered. They are required to
show a high level of commitment to the project.
✓ The technical ability of the team is also vital. They should be able to develop and produce a new
product/ service.
✓ Technical feasibility of the new product/ service should be considered.
✓ Since the risk involved in investing in the company is quite high, venture capitalists should ensure
that the prospects for future profits compensate for the risk.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 54

✓ A research must be carried out to ensure that there is a market for the new product.
✓ The venture capitalist himself should have the capacity to bear risk or loss, if the project fails.
✓ The venture capitalist should try to establish a number of exist routes.
✓ In case of companies, venture capitalist can seek for a place on the Board of Directors to have a say
on all significant matters affecting the business.

Answer 8
✓ Deep Discount Bonds is a form of zero-interest bonds.
✓ These bonds are sold at a discounted value and on maturity face value is paid to the investors.
✓ In such bonds, there is no interest payout during lock in period.
✓ IDBI was the first to issue a deep discount bond in India in January, 1992. The investor could hold the
bond for 26 years or seek redemption at the end of every five years with a specified maturity value.

Answer 9
Meaning of ✓ It is a method of recycling of funds.
Debt ✓ It is especially beneficial to financial intermediaries to support the lending volumes.

G
Securitisation ✓ Assets generating steady cash flows are packaged together and against this asset
pool, market securities can be issued, e.g. housing finance, auto loans, and credit
card receivables.
AR
Advantages to ✓ The asset is shifted off the Balance Sheet, thus giving the originator recourse to off
G
Originator balance sheet funding.
✓ It converts illiquid assets to liquid portfolio.
L

✓ It facilitates better balance sheet management; assets are transferred off balance
U

sheet facilitating satisfaction of capital adequacy norms.

AH

✓ The originator’s credit rating enhances.

Advantages to ✓ For the investor, securitisation opens up new investment avenues.

R

Investor ✓ Though the investor bears the credit risk, the securities are tied up to definite
assets.
A

✓ Securitisation helps to convert a stream of cash receivables into a source of long-

term finance.
C

✓ Securities are rated by Credit Rating Agencies and it becomes easier for an investor
to compare risk return profile and make an informed choice.

Answer 10
Meaning of ✓ The Venture Capital Financing refers to financing of new high risky ventures
Venture promoted by qualified entrepreneurs who lack experience & funds to give shape to
Capital their ideas.
Financing
Factors to be ✓ Please refer answer to Question 7.
considered in
financing risky
project

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 55

Answer 11
✓ Under this lease, a third party is involved beside lessor and lessee.
✓ The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e.,
lender.
✓ The asset so purchased is held as security against the loan.
✓ The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the
claims of the lender goes to the lessor.
✓ The lessor is entitled to claim depreciation allowance.

Answer 12
Global ✓ Global Depository Receipts (GDRs) are basically negotiable certificates
Depository denominated in US dollars that represent a non-US company’s publicly traded local
Receipts currency equity shares.
✓ These are created when the local currency shares of Indian company are delivered
to the depository’s local custodian bank, against which the depository bank issues
Depository Receipts in US dollars.

G
American ✓ American Depository Receipts (ADRs) are securities offered by non-US companies
Depository who want to list on any of the US exchange.
Receipts AR
✓ Each ADR represents a certain number of a company's regular shares.
✓ ADRs allow US investors to buy shares of these companies without the costs of
investing directly in a foreign stock exchange.
G
✓ ADRs are issued by an approved New York bank or trust company against the
deposit of the original shares.
L

✓ These are deposited in a custodial account in the US.

U

✓ Such receipts have to be issued in accordance with the provisions stipulated by the
AH

SEC USA which are very stringent.

R

Answer 13
✓ Euro Bonds
A

✓ Foreign Bonds
✓
C

Fully Hedged Bonds

✓ Medium Term Notes
✓ Floating Rate Notes
✓ External Commercial Borrowings
✓ Foreign Currency Futures
✓ Foreign Currency Option
✓ Euro Commercial Papers

Answer 14
Please refer answer to Question 5.

Answer 15
Clean Packing ✓ This is an advance made available to an exporter only on production of a firm
credit export order or a letter of credit without exercising any charge or control over raw
material or finished goods.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 56

✓ It is a clean type of export advance.

✓ Each proposal is weighted according to particular requirements of the trade and
credit worthiness of the exporter.
✓ A suitable margin has to be maintained.
✓ Also, Export Credit Guarantee Corporation (ECGC) cover should be obtained by the
bank.

Packing credit ✓ Export finance is made available on certain terms and conditions where the
against exporter has pledgeable interest and the goods are hypothecated to the bank as
hypothecation security with stipulated margin.
of goods ✓ At the time of utilising the advance, the exporter is required to submit along with
the firm export order or letter of credit, relative stock statements and thereafter
continue submitting them every fortnight and whenever there is any movement in
stocks.

Packing credit ✓ Export finance is made available on certain terms and conditions where the
against exportable finished goods are pledged to the banks with approved clearing agents
pledge of who will ship the same from time to time as required by the exporter.
goods ✓ The possession of the goods so pledged lies with the bank and is kept under its lock

G
and key.

E.C.G.C.
guarantee
AR
✓ Any loan given to an exporter for the manufacture, processing, purchasing, or
packing of goods meant for export against a firm order qualifies for the packing
G
credit guarantee issued by Export Credit Guarantee Corporation.
L

Forward ✓ Another requirement of packing credit facility is that if the export bill is to be drawn
U

exchange in a foreign currency, the exporter should enter into a forward exchange contact
contract with the bank, thereby avoiding risk involved in a possible change in the rate of
AH

exchange.
R

Answer 16
A

✓ Under this type of lease, the owner of an asset sells the asset to a party (the buyer), who in turn
leases back the same asset to the owner in consideration of a lease rentals.
C

✓ Under this arrangement, the asset are not physically exchanged but it all happen in records only.
✓ The main advantage of this method is that the lessee can satisfy himself completely regarding the
quality of an asset and after possession of the asset convert the sale into a lease agreement.
✓ Under this transaction, the seller assumes the role of lessee and the buyer assumes the role of a
lessor.
✓ The seller gets the agreed selling price and the buyer gels the lease rentals.

Answer 17
Meaning of ✓ The venture capital financing refers to financing and funding of the small scale
Venture enterprises, high technology and risky ventures.
Capital
Methods of Equity ✓ The venture capital undertakings generally requires funds for a
Venture financing longer period but may not be able to provide returns to the
Capital investors during the initial stages.
financing
CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 57

✓ Therefore, the venture capital finance is generally provided by

way of equity share capital.

Conditional ✓ A conditional loan is repayable in the form of a royalty after the

Loan venture is able to generate sales.
✓ No interest is paid on such loans.
✓ In India, Venture Capital Financers charge royalty ranging
between 2 to 15 per cent; actual rate depends on other factors of
the venture such as
❖ gestation period,
❖ cash flow patterns,
❖ riskiness and
❖ other factors of the enterprise.

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.

G
Participating ✓ Such security carries charges in three phases :
Debenture
AR
❖ in the startup phase, no interest is charged,
❖ next stage a low rate of interest is charged upto a particular
level of operations,
G
❖ after that, a high rate of interest is required to be paid.
L
U

Answer 18
Basis Preference Share Debenture
AH

Ownership Preference Share Capital is a special kind of Debenture is a type of loan which can be
share i.e. part of ownership. raised from the public.
R

Dividend/ It carries fixed percentage of dividend. It carries fixed percentage of interest.

A

Interest
Charge or Dividend on preference share is Interest on debentures is charge against
C

appropriation appropriation against profits. profits.

Nature Preference shares are a hybrid form of Debentures are instrument for raising
financing with some characteristic of equity long term capital with a period of
shares and some attributes of Debt Capital. maturity.

Answer 19
Please refer answer to Question 5.

Answer 20
Please refer answer to Question 11.

Answer 21
Please refer answer to Question 9.

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 P a g e | 58

Answer 22
Please refer answer to Question 6.

Answer 23
Please refer answer to Question 12.

G
AR
G
L
U
AH
R
A
C

CA Rahul Garg All India Rankholder in CA, CS, CMA (incl Rank 1) +91-9876932270
 About the Author…

RAHUL GARG is an energetic

professional and his distinguished &
exceptional teaching style has made
thousands of aspiring professionals to
conquer their exams successfully.

Gold Medalist

All India Rankholder in CA, CS, CMA

Professional Qualifications Professional Journey

✓ [Link] (GGDSD College, P.U.) ✓ AIR 1 (CMA Inter)
✓ CS (ICSI) ✓ AIR 3 (CMA Final)
✓ CA (ICAI) ✓ AIR 4 (CS Inter)
✓ CMA (ICAI) ✓ AIR 13 (CS Final)
✓ CFA (ICFAI) ✓ AIR 41 (CA PE II)
✓ DISA (ICAI) ✓ Distinction (CA PE I)
✓ MBA (Finance) ✓ Distinction (B. Com)
✓ Adv. Dip. Mgt. (ICFAI)

Awards & Achievements Boards & Committees

✓ Covered by the National ✓ Past Visiting Faculty at ICAI,
Magazine ‘Career 360’ amongst Chandigarh
12 National Toppers in 2010. ✓ Past Visiting Faculty at
✓ Awarded by Mr. Atal Bihari Chitkara University
Vajpayee for exceptional ✓ Past Joint Director (Coaching),
performance in academics ICAI (Cost)
✓ Past Secretary, ICAI (Cost)

As a Faculty International
✓ Guiding the students of CA, CS,
Representations
CMA for past 7 years Worked with International Firms
✓ Time Management Skills & Business Advisors
✓ Stress Management Skills ✓ Grant Thornton
✓ How to Attempt ✓ Ernst & Young
✓ 1 Day Capsule