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NEW ADDITIONAL QUESTION

CA INTER FM
BY
AADITYA JAIN
PART 2
IMPORTANT QUESTIONS FOR
MAY 2025 EXAM

FIRST REFER YOU CLASS

MATERIAL AT LEAST 5 TIMES
BEFORE SOLVING THIS MATERIAL
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CA INTER FM MAY 2024 SUGGESTED ANSWER

QUESTION NO.1 Theme Ltd provides you the following information:

12.5 % Debt `45,00,000
Debt to Equity ratio 1.5 : 1
Return on Shareholder’s fund 54%
Operating Ratio 85%
Ratio of operating expenses to Cost of Goods sold 2:6
Tax rate 25%
Fixed Assets `39,00,000
Current Ratio 1.8 : 1
You are required to calculate:(i) Interest Coverage Ratio(ii) Gross Profit Ratio(iii) Current Assets
Solution:
Working Notes:
Debt = `45,00,000
Interest = ` 45,00,000 x 12.5%= 5,62,500
Total Debt
Debt to Equity = 1.5:1 =
Shareholde rs Equity
Equity = ` 30,00,000
Net Profit after taxes
Return of Shareholder’s funds = 54% = × 100
Equity shareholde rs fund
Profit after tax (PAT) = 54% x Equity =`16,20,000
Profit before tax (PBT)(1-25%)= Profit after tax= `16,20,000/75% = `21,60,000
Earning before interest and tax (EBIT) = PBT + Interest= ` 21,60,000 + ` 5,62,500= `27,22,500
(i) Interest Coverage Ratio= EBIT / Interest= `27,22,500/ `5,62,500= 4.84 Times
(ii) Operating Profit Ratio= 1 - Operating Ratio= 1 – 0.85 = 0.15 or 15%
Operating Profit
0.15 = × 100 or Sales= EBIT or Operating Profit / 0.15= ` 27,22,500 / 0.15= ` 1,81,50,000
Sales
Operating expenses
Operating ratio = = 2 : 6 = 1 : 3 or Operating expenses= 1/ 3COGS
Cost of goods sold(COGS)
Operating cost= Sales – Operating profit= ` 1,81,50,000 - ` 27,22,500= ` 1,54,27,500
 `1,54,27,500= COGS + Operating expenses`1,54,27,500 = COGS + 1/3COGSCOGS= `1,15,70,625
Gross profit= Sales – COGS= 1,81,50,000 – 1,15,70,625= ` 65,79,375
Gross Profit
Gross Profit ratio = × 100 = 65,79,375 / 1,81,50,000= 0.3625 or 36.25%
Sales
Gross profit and sales can be calculated in alternative way also. However, there will be no change in GP ratio
i.e 36.25%
Current Assets
(iii)Current Ratio = = 1.8 or Current Assets= 1.8 Current Liabilitiess
Current Liabilitie s
Total of Balance sheet liability = Equity + Debt + Current Liabilities=30,00,000+45,00,000+CL.........(2)
Total Balance sheet asset= Fixed Assets + Current Assets= 39 lakhs + CA= 39 + 1.8CL.........(3)
Equating 2 and 3,
75,00,000 + CL= 39,00,000 + 1.8CL0.8CL= 36,00,000CL=`45,00,000
Current Assets= 1.8 CL = 1.8 x 45 lakhs= Rs 81,00,000

QUESTION NO.2 Alpha Limited has provided following information:

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Equity Share Capital 25,000 Shares @ 100 per Share

15% Debentures 10,000 Debentures @` 750/- per Debenture
Sales 50 Lakhs units@ Rs 20 per unit
Variable Cost `12.50 per unit
Fixed Costs ` 175.00 Lakhs
Due to recent policy changes and entry of foreign competitors in the sector, Alpha Limited expects the sales may
decline by 15-20%, However, selling price and other costs will remain the same. Corporate Taxes will
continue@20%. You are required to calculate the decrease in Earnings per share, Degree of Operating Leverage
and Financial Leverage separately if sales are declined by (i) 15%; and (ii) 20%;
Solution:
Income Statement with required calculations
Particulars (`) (`) (`)
Existing Sales declined Sales declined
by 15% by 20%
Sales in units 50,00,000 42,50,000 40,00,000
Sales price per unit 20 20 20
Variable Cost per unit (12.50) (12.50) (12.50)
Contribution per unit 7.5 7.5 7.5
Contribution 3,75,00,000 3,18,75,000 3,00,00,000
Fixed expenses (1,75,00,000) (1,75,00,000) (1,75,00,000)
EBIT 2,00,00,000 1,43,75,000 1,25,00,000
Debenture Interest (11,25,000) (11,25,000) (11,25,000)
EBT 1,88,75,000 1,32,50,000 1,13,75,000
Tax @ 20% (37,75,000) (26,50,000) (22,75,000)
Profit after tax (PAT) 1,51,00,000 1,06,00,000 91,00,000
No. of shares 25,000 25,000 25,000
(i) Decrease in EPS = Rs 180 = Rs 240
Or Or
% Decrease in % Decrease in
180 240
EPS = × 100 EPS = × 100
604 604
= 29.80% = 39.73%

3,18,75,000 =2.22 3,00,00,000

(ii) Operating leverage = Contributi on = = =2.40
1,43,75,000 1,25,00,000
EBIT
Or
Degree of Operating leverage

Percentage change in EBIT 28.125/15=1.875 37.50/20=1.875

=
Percentage change in sales

(iii) Financial Leverage

1,43,75,000 1,25,00,000
EBIT =
= 1,32,50,000 =1.08 = =1.10
EBIT 1,13,75,000
Or Or Or
Degree of Financial Leverage 29.80/28.125=1.06 39.735/37.50 =1.06
Percentage change in EPS
=
Percentage change in EBIT

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QUESTION NO.6 Following is the sales information in respect of Bright Ltd:
Annual Sales (90 % on credit) `7,50,00,000
Credit period 45 days
Average Collection period 70 days
Bad debts 0.75%
Credit administration cost (out of which 2/5th is avoidable) Rs 18,60,000
A factor firm has offered to manage the company’s debtors on a non- recourse basis at a service charge of 2%.
Factor agrees to grant advance against debtors at in interest rate of 14% after withholding 20% as reserve.
Payment period guaranteed by factor is 45 days. The cost of capital of the company is 12.5%. One time redundancy
payment of `50,000 is required to be made to factor.
Calculate the effective cost of factoring to the company. (Assume 360 days in a year)
Solution:
Evaluation of Factoring Proposal
Particulars ` `
A. Savings due to factoring
Bad Debts saved 0.75% x 7.5 croresx 90% `5,06,250
Administration cost saved 18.6 lakhs x 2/5 `7,44,000
Interest saved due to reduction
in average collection period 7.5 crores x 90% x `5,85,937.5
(70-45)/ 360 x 12.5%
Total `18,36,187.5
B. Costs of factoring:
Service charge 7.5 crores x 90% x 2% `13,50,000
Interest cost `1,15,171.875x 360/45 `9,21,375
Redundancy Payment `50,000
Total `23.21,375
C. Net Annual cost to the Firm: (A-B) `4,85,187.5
Rate of effective cost of factoring `4,85,187.5/`64,66,078.125 x 100 7.504%
Advice: Since the rate of effective cost of factoring is less than the existing cost of capital, therefore, the proposal
is acceptable.
Working Note: Calculation of Net Amount of Advance Available
Credit Sales = `7.5 crores x 90% = `6,75,00,000
Average level of receivables =`6.75 crores x 45/360 = `84,37,500
Service charge = 2% of `84,37,500 `1,68,750
Reserve = 20% of `84,37,500 `16,87,500
Total (i) `18,56,250
Thus, the amount available for advance is
Average level of receivables `84,37,500
Less: Total (i) from above `18,56,250
`65,81,250
Less: Interest @ 14% p.a. for 45 days `1,15,171.875
Net Amount of Advance available. ` 64,66,078.125
Note: Alternatively, if redundancy cost is taken as irrelevant for decision making, then Net Annual cost to the
Firm will be `4,35,187.5 and Rate of effective cost of factoring will be ` 4,35,187.5/` 64,66,078.125 x 100
= 6.730%
If average level of receivables is considered for 70 days then the calculation can be done in following way:
Evaluation of Factoring Proposal
Credit Sales = `7.5 crores X 90% = ` 6,75,00,000
Average level of receivables = `6.75 crores x 70/360 = ` 1,31,25,000
Service charge = 2% of `1,31,25,000 ` 2,62,500
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Reserve = 20% of `1,31,25,000 ` 26,25,000

Total (i) ` 28,87,500
Thus, the amount available for advance is
Average level of receivables ` 1,31,25,000
Less: Total (i) from above ` 28,87,500
` 1,02,37,500
Less: Interest @ 14% p.a. for 45 days ` 1,79,156.25
Net Amount of Advance available. ` 1,00,58,343.75

Note 1: Accordingly, interest cost will be `14,33,250 cost of factoring will be `28,33,250. Therefore, Rate of
effective cost of factoring is 9.913%
Note 2: Alternatively, if redundancy cost is taken as irrelevant for decision making, then Net Annual cost to the
Firm will be ` 9,47,062.5 and Rate of effective cost of factoring will be `9,47,062.5 / `1,00,58,343.75 x 100
= 9.416%.
Advice: Since the rate of effective cost of factoring is less than the existing cost of capital, therefore, the proposal
is acceptable.

QUESTION NO.4 The capital structure of Shine Ltd. as on 31.03.2024 is as under:

Particulars Amount (`)
Equity share capital off 10 each 45,00,000
15% Preference share capital of f 100 each 36,00,000
Retained earnings 32,00,000
13% Convertible Debenture off 100 each 67,00,000
11 % Term Loan 20,00,000_
Total 2,00,00,000
Additional information:(A) Company issued 13% Convertible Debentures of ` 100 each on 01.04.2023 with a
maturity period of 5 years. At maturity, the debenture holders will have an option to convert the debentures into
equity shares of the company in the ratio of 1 : 4 (4 shares for each debenture). The market price of the equity
share is `25 each as on 31.03.2024 and the growth rate of the share is 6% per annum.(B) Preference stock,
redeemable after eight years, is currently selling at `150 per share(C) The prevailing default-risk free interest
rate on 10-year GOI treasury bonds is 6%. The average market risk premium is 8% and the Beta (b) of the company
is 1.54.Corporate tax rate is 25% and rate of personal income tax is 20%.
You are required to calculate the cost of:(i) Equity Share Capital (ii) Preference Share Capital(iii) Convertible
Debenture(iv) Retained Earnings(v) Term Loan
Solution:
(i) Cost of Equity Share capital : As per CAPM Model Ke= Rf + ß (Rm - Rf)
Rf= 6%; ß = 1.54; Rm - Rf= 8%; Ke = 6% + 1.54(8%); Ke = 18.32%
(ii) Cost of Preference Share capital
n= 8; Net Proceeds (NP)= 150 ; Redemption Value (RV)= 100; Preference Dividend (PD)= 15; Kp = 7%
Alternatively, if we take NP as 100 and RV as 100, then solution can be done in the following way:
Cost of Preference Share capital
n=8; Net Proceeds (NP)=100; Redemption Value (RV)=150; Preference Dividend (PD)=15
(RV NP) (150 100)
PD + n 15 +
KP = (RV+NP) 8
 KP = (150+100) Kp=17%
7%
2 2
(iii) Cost of convertible debenture
Cash Redemption Value (RV) = 100 Share
Redemption Value (RV):
Value of share after 5 years = 25 x (1.06)5= 33.46
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Share Redemption Value (RV) = 33.46 X 4=133.82
Therefore, investor will choose share redemption.
Redemption Value (RV)= 133.82; Net Proceeds (NP)= 100; n= 5; Interest (I)= 13; Tax (t)= 25%

(RV - NP) (133.82 - 100)

I(1 - t) + 13(1 - 0.25) +
Kd = n  5 Kd= 14.13%
(RV + NP) (133.82 + 100)
2 2
(iv)Cost of Retained Earnings : Kr = Ke (1-tp)= 18.32 % x (1-0.20) = 14.66%
We can also take cost of equity as cost of retained earnings, Accordingly, Kr = Ke = 18.32%
(v)Cost of Term Loan= 11% x (1-0.25) = 8.25%

QUESTION NO.5 Following data is available in respect of Levered and Unlevered companies having same business
risk: Capital employed =` 2,00,000, EBIT =` 25,000 and Ke = 12.5%
Sources Levered Company (f) Unlevered Company (`)
Debt (@8%) 75,000 Nil
Equity 1,25,000 2,00,000
An investor is holding 12% shares in levered company. Calculate the increase in annual earnings of investor if he
switches over his holding from Levered to Unlevered company.
Solution:
1.Valuation of firms
Particulars Levered Firm (`) Unlevered Firm (`)
EBIT 25,000 25,000
Less: Interest on debt (8% × ` 75,000) 6,000 Nil
Earnings available to Equity shareholders 19,000 25,000
Ke 12.5% 12.5%
Value of Equity (S)(Earnings available to Equity 1,52,000 2,00,000
shareholders/ Ke)
Debt (D) 75,000 Nil
Value of Firm (V) = S + D 2,27,000 2,00,000
Value of Levered company is more than that of unlevered company. Therefore, investor will sell his shares in
levered company and buy shares in unlevered company. To maintain the level of risk he will borrow proportionate
amount and invest that amount also in shares of unlevered company.
2.Investment & Borrowings `
Sell shares in Levered company (` 1,52,000 x 12%) 18,240
Borrow money (` 75,000 x 12%) 9,000
Buy shares in Unlevered company 27,240
3.Change in Return `
Income from shares in Unlevered company(`27,240 x 12.5%) 3,405
Less: Interest on loan (`9,000 x 8%) 720
Net Income from unlevered firm 2,685
Less: Income from Levered firm (`18,240 x 12.5%) 2,280
Incremental Income due to arbitrage 405
Solution can also be done in the following way:
Valuation of firms
Particulars Levered Firm (`) Unlevered Firm (`)
EBIT 25,000 25,000
Less: Interest on debt (8% × ` 75,000) 6,000 Nil
Earnings available to Equity shareholders 19,000 25,000
Ke 12.5% 12.5%

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Value of Equity (S) 1,52,000 2,00,000

(Earnings available to Equity shareholders/ Ke)
Debt (D) 75,000__ Nil_____
Value of Firm (V) = S + D 2,27,000 2,00,000
Value of Levered company is more than that of unlevered company. Therefore, investor will sell his shares in
levered company and buy shares in unlevered company.
Arbitrage Process: If investor have 12% shares of levered company, value of investment in equity shares is 12% of
Rs 1,52,000 i.e. Rs 18,240 and return will be 12% of ` 19,000 = `2,280.
Alternate Strategy will be: Sell 12% shares of levered firm for `18,240 and borrow 12% of levered firm’s debt i.e.
` 9,000 (12% of `75,000) and invest the money i.e. 12% in unlevered firm’s stock:
Total resources /Money investor have = `18,240 +`9,000 =`27,240 and investor invest 12% of `2,00,000= `24,000
Surplus cash available with investor is = `27,240 – `24,000 =` 3,240
Investor return = 12% EBIT of unlevered firm – Interest to be paid on borrowed funds
i.e. = 12% of ` 25,000 – 8% of` 9,000 =` 3,000 –` 720 =` 2,280
Now, return remains the same i.e.` 2,280 which investor is getting from levered company before investing in
unlevered company but still have` 3,240 excess money available with investor. Hence, investor is better off by
doing arbitrage.

QUESTION NO.6 HCP Ltd. is a leading manufacturer of railway parts for passenger coaches and freight wagons.
Due to high wastage of material and quality issues in production, the General Manager of the company is
considering the replacement of machine A with a new CNC machine B. Machine A has a book value of `4,80,000
and remaining economic life is 6 years. It could be sold now at `1,80,000 and zero salvage value at the end of sixth
year. The purchase price of Machine B is `24,00,000 with economic life of 6 years. It will required `1,40,000 for
installation and ` 60,000 for testing. Subsidy of 15% on the purchase price of the machine B will be received from
Government at the end of 1st year. Salvage value at the end of sixth year will be `3,20,000.
The General manager estimates that the annual savings due to installation of machine B include a reduction of
three skilled workers with annual salaries of `1,68,000 each, ` 4,80,000 from reduced wastage of materials and
defectives and `3,50,000 from loss in sales due to delay in execution of purchase orders. Operation of Machine B
will require the services of a trained technician with annual salary of t 3,90,000 and annual operation and
maintenance cost will increase by` 1,54,000. The company’s tax rate is 30% and it’s required rate of return is 14%.
The company follows straight line method of depreciation. Ignore tax savings on loss due to sale of existing
machine.The present value factors at 14% are:
Years 0 1 2 3 4 5 6
PV Factor 1 0.877 0.769 0.675 0.592 0.519 0.456
Required:(i)Calculate the Net Present Value and Profitability Index and advise the company for replacement
decision.(ii)Also calculate the discounted pay-back period
Solution:
Calculation of Net Initial Cash Outflows:
Particulars `
Cost of new machine 24,00,000
Less: Sale proceeds of existing machine (1,80,000)
Add: Installation 1,40,000
Add: Testing 60,000
Less: Subsidy from government (15% of 24,00,000) x 0.877 (3,15,720)
Net initial cash outflows 21,04,280
Calculation of Incremental Depreciation
Particulars `
Depreciation on existing machine (4,80,000/6) (i) 80,000
Depreciation base of New Machine
Cost of new machine 24,00,000
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Add: Installation 1,40,000
Add: Testing 60,000
Less: Subsidy from government (3,60,000)
Less: Salvage value at the end of 6th year (3,20,000)
Depreciation base of New Machine 19,20,000
Depreciation on New Machine (19,20,000/6) (ii) 3,20,000
Incremental depreciation [(ii) – (i)] 2,40,000
Computation of Annual Operating Cash flow after tax (CFAT)
Particulars Amount(`) Amount(`)
Savings in cost
Cost of 3 skilled workers (Rs 1,68,000 x 3) 5,04,000
Reduced wastage of material 4,80,000
Saving in loss of sales 3,50,000
Total 13,34,000
Less: Increase in cost
Salary to trained technician 3,90,000
Increase in annual operation and maintenance cost 1,54,000
Total (5,44,000)
Incremental Saving before tax and depreciation 7,90,000
Less: Incremental Depreciation (2,40,000)
Incremental PBT 5,50,000
Less: Tax @30% (1,65,000)
PAT 3,85,000
Add: Depreciation 2,40,000
Incremental CFAT 6,25,000
Calculation of NPV
Particulars Year Net Cashflow (`) PVF @14% PV (`)

Net initial cash outflows 0 (24,20,000) 1 (21,04,280)

Incremental CFAT 1 to 6 6,25,000 3.888 24,30,000
Salvage Value of New 6 3,20,000 0.456 1,45,920
Machine
PV of inflows 25,75,920
Net Present Value 4,71,640
Sum of discounted cashflows
Profitability Index = Initial cash outlay or total discounted cash outflow(as the cash may)
= 25,75,920/ 21,04,280= 1.224
Advise: Since the NPV is positive and PI is greater than 1, the company should replace the machine
Computation of Discounted Payback Period
Year Cashflow PVF @ 14% PV of CFs (`) Cumulative PV (`)
1 6,25,000 0.877 5,48,125 5,48,125
2 6,25,000 0.769 4,80,625 10,28,750
3 6,25,000 0.675 4,21,875 14,50,625
4 6,25,000 0.592 3,70,000 18,20,625
5 6,25,000 0.519 3,24,375 21,45,000
6 9,45,000 0.456 4,30,920 25,75,920
21,04,280- 18,20,625
Discounted Payback Period = 4 + = 4.87 yearss
3,24,375

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If we take subsidy in cash inflow of 1st year, then solution can also be done in the following way:
Calculation of Net Initial Cash Outflows:
Particulars `
Cost of new machine 24,00,000
Less: Sale proceeds of existing machine (1,80,000)
Add: Installation 1,40,000
Add: Testing 60,000
Net initial cash outflows 24,20,000
Note: However, Incremental Depreciation and CFAT will remain same.
Calculation of NPV
Particulars Year Net PVF PV (`)
Cashflow(Rs) @14%
Net initial cash outflows 0 (24,20,000) 1 (24,20,000)
Subsidy 1 3,60,000 0.877 3,15,720
Incremental CFAT 1 to 6 6,25,000 3.888 24,30,000
Salvage Value of New 6 3,20,000 0.456 1,45,920
Machine
PV of inflows 28,91,640
Net Present Value 4,71,640
Sum of discounted cashflows
Profitability Index =
initial cash outlay or total discounted cash outflow(as the cash may)
= 28,91,640 /24,20,000 = 1.195
Advise: Since the NPV is positive and PI is greater than 1, the company should replace the machine
Computation of Discounted Payback Period
Year Cashflow PVF @ 14% PV of CFs (`) Cumulative PV (`)
1 9,85,000 0.877 8,63,845 8,63,845
2 6,25,000 0.769 4,80,625 13,44,470
3 6,25,000 0.675 4,21,875 17,66,345
4 6,25,000 0.592 3,70,000 21,36,345
5 6,25,000 0.519 3,24,375 24,60,720
6 9,45,000 0.456 4,30,920 28,91,640
24,20,000 21,36,345
Discounted Payback Period= 4 + = 4.87 yearss
3,24,375

QUESTION NO.7 Vista Limited’s retained earnings per share for the year ending 31.03.2023 being 40% is Rs 3.60
per share. Company is foreseeing a growth rate of 10% per annum in the next two years. After that the growth
rate is expected to stabilize at 8% per annum. Company will maintain its existing pay-out ratio. If the investor’s
required rate of return is 15%.Calculate the intrinsic value per share as of date using Dividend Discount model.
Solution:
As per Dividend discount model, the price of share is calculated as follows:
3.60
Retained earning per share =`3.60 ; Dividend per share= D 0 = × 60%
40%
5.4 × 1.1 5.94 × 1.1 6.53 × 1.08 1
P= 1 + 2 + × = 5.17 + 4.94 + 76.23 = `86.33
(1 + 0.15) (1 + 0.15) (0.15 0.08) (1 + 0.15)2
Intrinsic value of share is ` 86.33

QUESTION NO.1 Kaivalyabodhi Limited (KbL) has completed 35 years of operations in India. It has many subsidiary
& associate companies in more than 100 countries. KbL’s business s include home and personal care, foods and
beverages, and industrial, agricultural and other products. It is one of the largest producers of soaps and detergents
in India. The company has grown organically as well as through acquisitions. Over the years, the company has
built a diverse portfolio of powerful brands, some being household names.
It is planning to acquire one of its competitors named Prestige Limited, which would enhance the growth of ‘KbL’.
The consideration amount will be 1.5X of its average Market Capitalization. Prestige limited has 1,30,000
outstanding equity shares and its shares were traded at an average market price of ` 45 as on the valuation date.
The consideration amount will be paid equally in 5 years where the first installment is to be paid immediately.
Prestige Limited has Ko of 15%
KbL will raise the funds required through debt and equity in the ratio of 30:70. The company requires the cost of
capital estimates for evaluating its acquisitions, investment decisions and the performance of its businesses.
KbL’s share price has grown from ‘ 150 to ‘ 301 in the last 5 years and it will continue to grow at the same rate. KbL
pays dividends regularly. The company has recently paid a dividend of ‘ 8. For the calculation of equity, an average
of 52 weeks high market price in the last 5 years is to be considered, which is as follows:
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
MPS 195 MPS 210 MPS 252 MPS 325 MPS 280
Ke calculated as per growth model holds a weight of 0.6.
The company also wishes to calculate the equity’s expectation using CAPM which holds a weight of 0.4. The risk-
free rate is assumed as the yield on long-term government bonds that the company regards as about 8%. KbL
regards the market- risk premium to be equal to 11 per cent. Its estimation on the Beta is 0.78.
KbL will issue debentures with FV of ‘ 10,500 which is to be amortised equally over the life of 7 years. The
company considers the effective rate of interest applicable to an ‘AAA’ rated company with a markup of 200 basis
points as its coupon rate. It thinks that considering the trends over the years, ‘AAA’ rate is 7.5%.
Ignore taxation. Based on the above details, answer the question 1 to 5:
1.Calculate the cost of equity under both the methods
(a)11%, 16% (b)18.65%, 10.34% (c)18.65%, 16.58% (d)16.5%, 9%
2.Calculate the overall cost of equity
(a)17.82% (b)17.63% (c)15.37% (d)35.25%
3.Calculate the cost of debt, if the intrinsic value of debenture today is close to `9,740
(a)15% (b)12% (c)9.5% (d)7.5%
4.Calculate the WACC & the amount of purchase consideration
(a)18%, ‘ 90,00,000 (b)15.21%, ‘ 87,75,000 (c)16.07%, ‘ 87,75,000 (d)15.94%, ‘ 58,50,000
5.Present Value of Purchase consideration is close to ‘
(a)58,83,032 (b)67,65,487 (c)57,35,680 (d)66,58,997
6.X ltd has actual Sales of ‘ 20 lakhs and its Break-even sales are at ‘ 15 lakhs. The degree of total risk involved
in the company is 6.5. Calculate the % impact on EPS, if EBIT is affected by 12%.
(a)40% (b)78% (c)312% (d)19.5%
7.Assuming Ke = 11%, Kd = 8% and Ko = 10%, Debt Equity ratio of the company
(a)2:3 (b)3:2 (c)1:2 (d)2:1
8.Given: Earnings available to the equity shareholders ‘ 30 Lakhs, Cost of equity is 15%, Debt outstanding ‘ 150
Lakhs Value of the firm will be (a)‘ 200 Lakhs (b)‘ 250 Lakhs (c)‘ 350 Lakhs (d) 300 Lakhs
Solution:
1.(c)18.65%, 16.58%
D1
Ke under two approaches:Calculation of Ke (Using Gordon’s Model): Ke = P  g
0
5 5
Share Price has grown from 150 to 301 in 5 years, 150 (1 + g) = 301. (1 + g) = 2.01

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Therefore, g = 15%, (From Annuity table – Re 1 after 5 years becomes‘ 2.01 at rate of 15%) D1 = 8 + 15% of 8 = 9.2
Po = Average of 52 weeks High price in last 5 years Po = (195 + 210 +252 +325 +280) / 5 = 252.40
Ke = 9.2 / 252.40 + 0.15 = 18.65%
Calculation of Ke (Using CAPM): Ke = Rf + (Rm – Rf) X Beta = 8 + (11 x 0.78) = 16.58%

2. (a)17.82%
Overall Ke for the company
Approach Cost of Equity (k) Weight (w) Kxw
Gordon’s 18.65% 0.6 11.19%
CAPM 16.58% 0.4 6.63%
Total Ke = 17.82%
3.(b)12%
Intrinsic Value of Debentures today is ‘ 9,740
WN 1 – Calculation of the Pattern of Future Cash flows
YR PRINCIPAL (I) INTEREST (II) = Coupon PV OF PV OF (I + II)
Rate = 9.5% (7.5% + 2%) (I+II) @ 15%
@ 10%
1 1,500 997.50 2270.45 2171.74
2 1,500 855 1946.28 1780.72
3 1,500 712.5 1662.28 1454.75
4 1,500 570 1413.84 1183.53
5 1,500 427.50 1196.83 958.31
6 1,500 285 1007.59 771.70
7 1,500 142.50 842.86 617.48
10340.13 8938.23
(10,340.13 - 9,740)
= 10% + × 5 = 12.14% = 12% (approx.)
(10,340.13 - 8,938.23)
4. (c)16.07%, ‘ 87,75,000
Ko = Wd x Kd + We x Ke= 0.3 X 12 + 0.7 X 17.82= 16.07%
Purchase Consideration using M-Cap method = 1,30,000 eq shares x 45 MPS x 1.5X = ‘ 87,75,000
5.(d)‘ 66,58,997
It is to be paid equally over 5 years and first instalment is to be paid immediately at Yr 0
Discount rate will be the Ko calculated as above of the company and not 15% which is Ko of Prestige Limited
Year Amount each year PV @ 16.07% PV (‘)
0 17,55,000 1.0000 17,55,000
1 17,55,000 0.8615 15,11,933
2 17,55,000 0.7423 13,02,737
3 17,55,000 0.6395 11,22,323
4 17,55,000 0.5510 9,67,005
TOTAL PV 66,58,997
6.(d)19.5%
Financial Leverage (FL) indicates % impact in EPS, if EBIT is affected by 12%
FL = Combined Leverage (CL) /Operating Leverage (OL) CL = 6.5 (Measure of total risk)
OL = 1 / Margin of Safety
Actual sales - BE sales
Margin of safety(MOS)= or MOS = 20 lakhs – 15 lakhs / 20 lakhs = 0.25
5
Actual sales
Therefore, OL = 1 / 0.25 = 4.So, FL = 6.5 / 4 = 1.625
So % Change in EPS = 12 x 1.625 = 19.5%

PART II – Descriptive Questions Question No. 1 is compulsory.

QUESTION NO.1 You are required to CALCULATE the Total Current Assets of Ananya Limited from the given
information:
Stock Turnover = 5 times
Sales (All credit) = ‘ 7,20,000
Gross Profit Ratio = 25%
Current Liabilities = 2,40,000
Liquidity Ratio = 1.25
Stock at the end is ‘ 30,000 more than stock in the beginning.
Solution:
1.Cost of Goods Sold = Sales – Gross Profit or = ‘ 7,20,000 – 25% x ‘ 7,20,000 = ‘ 5,40,000
Cost of good sold 5,40,000 5,40,000
2.Stock Turnover= or = or = 5 times. or Average Stock= = 1,08,000
Average stock Average stock 5
3.Let Opening Stock be x.
Closing Stock is ‘ 30,000 more than Opening Stock.
Closing Stock= (x + 30,000)
X + X + 30,000 1,86 ,000
Average Stock= = ‘ 1,08,0002x= 2,16,000 – 30,000 x= Opening Stock.=93,000
2 2
Closing Stock= x + 30,000 93,000 + 30,000 = ‘ 1,23,000
Liquid Assets Liquid assets
4.Liquid Ratio=  = 1.25.
5.Liquid Assets= ‘ 3,00,000
Current Liabilitie s 2,40,000
5.Current Assets= Liquid Assets + Closing Stock = ‘ 3,00,000 + ‘ 1,23,000 = ‘ 4,23,000

QUESTION NO.2 Gitarth Limited has a current debt equity ratio of 3:7. The company is presently considering
several alternative investment proposals costing less than ‘ 25 lakhs. The company will always raise the funds
required without disturbing its current capital structure ratio.The cost of raising debt and equity are as follows-
Cost of Project Kd Ke
Upto 5 lakhs 10% 12%
Above 5 lakhs & upto 10 lakhs 12% 13.5%
Above 10 lakhs & upto 20 lakhs 13% 15%
Above 20 lakhs 14% 16%
Corporate tax rate is 30%, CALCULATE:i)Cut off rate for two Projects I & Project II whose fund requirements are
15 lakhs & ‘ 26 lakhs respectively.ii)If a project is expected to give an after-tax return of 13%, determine under
what conditions it would be acceptable.
Solution:
Calculation of slab wise Overall Cost of Capital
(i)Project Cost CapitalWeights Cost w x k
Source (w) (k) (%)

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Upto 5 Lakhs Debt 0.3 10 3

Equity 0.7 12 8.4
Ko 11.4
Above 5 lakhs upto 10 lakhs Debt 0.3 12 3.6
Equity 0.7 13.5 9.45
Ko 13.05
Above 10 lakhs upto 20 lakhs Debt 0.3 13 3.9
Equity 0.7 15 10.5
Ko 14.4
Above 20 lakhs Debt 0.3 14 4.2
Equity 0.7 16 11.2
Ko 15.4
Cost of Raising funds for Project I
Total Capital Ko(%) Total Cost (in ‘)
5,00,000 11.40 57,000
5,00,000 13.05 65,250
5,00,000 14.40 72,000
15,00,000 1,94,250
Overall COC (%) = Total Cost (in ‘) / Total Capital = 1,94,250/ 15,00,000 * 100 = 12.95 %

Cost of Raising funds for Project II

Total Capital Ko(%) Total Cost (in ‘)
5,00,000 11.4 57,000
5,00,000 13.05 65,250
10,00,000 14.4 1,44,000
6,00,000 15.4 92,400
26,00,000 3,58,650
Overall COC (%) = 358650 / 2600000 * 100 = 13.79%

(ii) If any project is expected to give an after-tax return of 13%, it can be accepted only if the maximum Overall
COC (%) of that project equals 13% or less, as at 13%, project would be at break-even i.e earning 13% from the
project and incurring 13% COC.So, under that scenario, Project I can be taken as its COC is 12.95% whereas
Project II can’t be taken as its COC is 13.79%.
Maximum Value of the Project that can be taken at 13% is approx. (Using IRR technique Interpolation)
At 15 Lakhs Ko = 12.95%; At 26 Lakhs Ko = 13.79%
By interpolation, maximum value of Project at 13% will be 15 Lakhs + {(0.05 x 11)/0.84}= 15.6548 lakhs

QUESTION NO.3 From the following details of X Ltd, PREPARE the Income Statement for the year ended 31st
December:
Financial Leverage 2; Interest ‘ 2,000; Operating Leverage 3; Variable Cost as a Percentage of Sales 75%
Income Tax Rate 30%
Solution:
Income Statement

EBIT EBT + Interest EBT + 2,000 2

DFL = or = or  = EBT + ‘ 2000= 2 EBTTEBT= ‘ 2,000
EBT EBT EBT 1
EBIT= EBT + Interest  ‘ 2000 + ‘ 2000 = ‘ 4,000.

Contribution= Contributi on = Contribution = 3 ;

EBIT 4,000 1
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Contributi on 12,000 48,000

Sales = = =
PVR 25%
Less: Variable Cost Given = 75% (36,000)
Contribution 12,000
Less: Fixed Cost( Contribution - EBIT = ‘ 12,000 – ‘ 4,000) (8,000)
EBIT 4,000
Less: Interest (2,000)
EBT 2,000
Less: Tax at 30% (600)
EAT 1,400

QUESTION NO.4 The financial statements of Gurunath Ltd is furnished below:

Balance Sheet as at 31st March
Particulars as at 31st March Note ‘
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds: 10,00,000
(2) Non–Current Liabilities: 10% Debt 6,00,000
(3) Current Liabilities 1,56,000
Total 17,56,000
II ASSETS
(1) Non–Current Assets 16,56,000
(2) Current Assets – Trade Receivables 1,00,000
Total 17,56,000
Additional Information:1.The existing credit terms are 1/10, net 45 days and average collection period is 30
days. The current bad debts loss is 1.5%. In order to accelerate the collection process further as also to increase
sales, the company is contemplating liberalization of its existing credit terms to 2/10, net 45 days.2.It is expected
that sales are likely to increase by 1/3 of existing sales, bad debts increase to 2% of sales and average collection
period to decline to 20 days.3.Credit period allowed by the supplier is 60 days. Generally, operating expenses are
paid 2 months in arrears. Total Variable expenses of the company constitute Purchases of stock in trade and
operating expenses only.4.Opportunity cost of investment in receivables is 15%. 50% and 80% of customers in
terms of sales revenue are expected to avail cash discount under existing and liberalization scheme respectively.
The tax rate is 30%.5.The Company considers only the relevant or variable costs for calculating the opportunity
costs on the funds blocked in receivables. Assume 360 days in a year and 30 days in a month.
Should the company change its credit terms?
Solution:
Particulars Result
Current liabilities 1,56,000
Total Variable expenses = Purchases & Operating Expenses =1,56,000 ÷ 60 × 360 = 9,36,000
Variable expenses % of Sales=9,36,000 ÷ 12,00,000 × 100 = 78%
Particulars Present Proposed
1. Sales 1 Lakh ÷ 30 × 360= 12,00,000 12 Lakhs + 1/3rd= 16,00,000
2. Variable Cost at 78% 9,36,000 12,48,000
3. Cash Discount 12 Lakh × 50% × 1%= 6,000 16 Lakh × 80% × 2%= 25,600
4. Bad debts 12 Lakh × 1.5%= 18,000 16 Lakh × 2%= 32,000
5. Profit before Tax 2,40,000 2,94,400
6. Tax @ 30% 72,000 88,320
7. Profit after Tax 1,68,000 2,06,080
8. Opportunity Cost of Invest in Debtors 9,36,000 × 30/360 × 12,48,000 × 20/360 ×
70% ×15% = 8,190 70% × 15% = 7,280

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9. Net Benefit 1,59,810 1,98,800

Advise: Proposed policy should be adopted since the net benefit is increased by (‘ 1,98,800 - 1,59,810) = ‘ 38,990.

QUESTION NO.5 The following information is given for QB Ltd.

Earnings per share ‘ 180; Dividend per share‘ 45; Cost of capital17%; Internal Rate of Return on investment20%

CALCULATE the market price per share using -(a)Gordon’s formula (b)Walter’s formula
Solution:

(i)As per Gordon’s Model, Price per share is computed using the formula: P0 = E1 (1 - b)
ke - bxr
Where, P0 = Price per share; E1 = Earnings per share Payout ratio = 45 / 180 = 25%;b = Retention ratio; (1 - b =
Pay-out ratio) = 1-0.25 = 0.75 ; Ke = Cost of capital; r = IRR; br = Growth rate (g)
180(1 - 0.75) 45
Applying the above formula, price per share: P0 = = = ‘ 2,250
50
0.17 - 0.75 × 0.2 0.02
(ii)As per Walter’s Model, Price per share is computed using the formula:
0.20
45 + (180 - 45) 45 + 158.82
P= 0.17 Or, P= = ‘ 1,200 (approx..)
0.17 0.17

QUESTION NO.6 Parmarth Limited is a manufacturer of computers. Owing to recent developments in Artificial
Intelligence (AI), it is planning to introduce AI in its computer process. This would result into an estimated annual
savings as follows:(i)Savings of ‘ 3,50,000 in production delays caused by inventory problem.(ii)Savings in Salaries
of 5 employees with an annual pay of ‘ 4,20,000 per annum(iii)Reduction in Lost sales of ‘ 1,75,000(iv)Gain due
to timely billing is ‘ 3,25,000.The project would result in annual maintenance and operating costs as follows,
which are to be paid in advance (at the beginning)
YEAR 1 2 3 4 5
COST 1,80,000 2,00,000 1,20,000 1,10,000 1,30,000
Furthermore, the new system would need 2 AI specialists’ professional drawing salaries of ‘ 6,50,000 per annum
per person. The purchase price of the new system for installing AI into computers would involve an outlay of ‘
21,50,000 and installation cost of ‘ 1,50,000.
75% of the total value for depreciation would be paid in the year of purchase and the balance would be paid at
the end of the 1st year. The new system will be sold for ‘ 1,90,000. This is the only asset in the block for Income
tax purpose.
The life of the system would be 5 years with the hurdle rate of 12%. Depreciation will be charged at 40% on WDV
basis, corporate tax rate is 25% and capital gains tax rate is at 20%.
CALCULATE NPV and advise the management on the acceptability of the proposal. Also calculate ARR & PI.
Solution:
Calculation of Present value of cash inflows (PVCI)
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Savings in cost due - 3,50,000 3,50,000 3,50,000 3,50,000 3,50,000
toProduction Delays
Savingsin Salaries - 21,00,000 21,00,000 21,00,000 21,00,000 21,00,000
Reduction in lost sales - 1,75,000 1,75,000 1,75,000 1,75,000 1,75,000
Gain due to timely billing - 3,25,000 3,25,000 3,25,000 3,25,000 3,25,000
- 29,50,000 29,50,000 29,50,000 29,50,000 29,50,000
Less:
Salary of AI specialists - 13,00,000 13,00,000 13,00,000 13,00,000 13,00,000

CA INTER FM MTP SERIES 2 SEPT 2024

QUESTION NO.1 Mathangi Ltd. is a News broadcasting channel having its broadcasting Centre in Chennai. There
are total 200 employees in the organisation including top management. As a part of employee benefit expenses,
the company serves tea to its employees, which is outsourced from a third-party. The company offers tea three
times a day to each of its employees. The third-party charges ‘ 10 for each cup of tea. The company works for 200
days in a year.
Looking at the substantial amount of expenditure on tea, the finance department has proposed to the management
an installation of a master tea vending machine from Nirmal Ltd which will cost ‘ 5,00,000 with a useful life of five
years. Upon purchasing the machine, the company will have to incur annual maintenance which will require a
payment of ‘ 25,000 every year. The machine would require electricity consumption of 500 units p.m. and current
incremental cost of electricity for the company is ‘ 24 per unit. Apart from these running costs, the company will
have to incur ‘ 8,00,000 for consumables like milk, tea powder, paper cup, sugar etc. The company is in the 25%

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tax bracket. Straight line method of depreciation is allowed for the purpose of taxation.
Nirmal Ltd sells 100 master tea vending machines. Variable cost is ‘ 4,50,000 per machine and fixed operating
cost is ‘ 25,00,000. Capital Structure of Mathangi Ltd and Nirmal Ltd consists of the following –
Particulars Mathangi Ltd. Nirmal Ltd.
Equity Share Capital (Face value ‘ 10 each) 40,00,000 40,00,000
Reserves & Surplus 25,00,000 50,00,000
12% Preference Share Capital 12,00,000 Nil
15% Debentures 20,00,000 40,00,000
Risk free rate of return = 5%, Market return = 10%, Beta of the Mathangi Ltd. = 1.9.You are required to answer
the following five questions based on the above details:
1.If sales of Nirmal Ltd are up by 10%, impact on its EBIT is (a)30% (b)60% (c)5% (d)20%
Solution:(d)

2.Combined leverage of Nirmal Ltd is (a)1.63 (b)2.63 (c)1.315 (d)2

Solution: (b)
Particulars Computation Result
Sales 100 × 5,00,000 5,00,00,000
Less Variable cost 100 × 4,50,000 4,50,00,000
Contribution 50,00,000
Less Fixed cost 25,00,000
EBIT 15% × 40,00,000 25,00,000
Less Interest 6,00,000
EBT 19,00,000
Operating leverage = Contribution ÷ EBIT = 50 Lakhs ÷ 25 Lakhs = 2 times
Operating leverage = % Change in EBIT ÷ % Change in Sales i.e. if sales increase by 10%, EBIT increase by 20%.
Financial leverage = EBIT ÷ EBT = 25 Lakhs ÷ 19 Lakhs = 1.315 times
Combined leverage=Operating leverage × Financial leverage = 2 × 1.315 = 2.63 times

3.Discount rate that can be applied for making investment decisions of Mathangi Ltd is
(a)12% (b)13.52% (c)15% (d)20%
Solution:(b)
Particulars Weights Cost in % Weights × Cost
Share Capital 40,00,000 5 + 1.9 × (10 – 5) = 14.5 5,80,000
Reserves & Surplus 25,00,000 14.5 3,62,500
Preference Share Capital 12,00,000 12 1,44,000
15% Debentures 20,00,000 15 × (1 – 25%) = 11.25 2,25,000
Total 97,00,000 Total Cost 13,11,500
Discount rate = WACC = 13,11,500 ÷ 97,00,000 × 100 = 13.52%

4.Incremental cash flow after tax per annum attributable to Mathangi Ltd due to investment in the machine is
(a)‘ 2,39,438 (b)‘ 1,98,250 (c)‘ 98,250 (d)‘ 1,31,000
Solution:(b)
Particulars Computation Result
Savings in Tea cost 200 Employees × 200 days × 3 times × ‘ 10 12,00,000
Less: Annual maintenance (25,000)
Less: Cost of Electricity 500 units × ‘ 24 per unit × 12 months (1,44,000)
Less: Consumables (8,00,000)
Less: Depreciation 5,00,000 ÷ 5 years (1,00,000)
Profit before tax 1,31,000
Less: Tax 1,31,000 × 25% 32,750

5.Net present value of investment in the machine by Mathangi Ltd is

(a)‘ 6,88,522 (b)‘ 1,88,522 (c)‘ 9,91,250 (d)‘ 4,91,250
Solution:(b)
Year Particulars Cash flow [email protected]% PV
0 Initial investment 5,00,000 1 (5,00,000)
1 to 5 Savings 1,98,250 3.473 6,88,522
Net present value 1,88,522

6.Total Assets & Current liabilities of the Vitrag Limited are 50 lakhs & 10 lakhs respectively. ROCE is 15%,
measure of business operating risk is at 3.5 & P/V ratio is 70%. Calculate Sales.
(a)21 lakhs (b)30 lakhs (c)37.50 lakhs (d)40 lakhs
Solution:(b)
ROCE = EBIT / Total Capital Employed ;
Total Capital Employed = Total Assets – Current Liabilities= 50 lakhs – 10 lakhs= 40 lakhs
EBIT= 40 lakhs x 15%= 6 lakhs
Now, OL of 3.5 = Contribution / EBIT or Therefore Contribution = 6 Lakhs X 3.5 = 21 lakhs
Sales = Contribution / PV Ratio = 21 lakhs / 0.7 = 30 lakhs

7.A company has issued bonds with a face value of ‘ 100,000 at an annual coupon rate of 8%. The bonds are
currently trading at 95% of their face value. What is the approximate cost of debt for the company before
taxes. (a)9.00% (b)7.65% (c)8.00% (d)8.42%
Solution:(d)
Calculation: Cost of Debt= (Interest Payment/ Market Price of Bond) = (8,000 / 95,000) = 8.42%

8.A company is considering changing its capital structure by increasing its debt ratio from 40% to 55%. What is
the likely impact on the company’s cost of equity, assuming all other factors remain constant?
(a)Cost of equity will be unaffected by debt ratio (b)Cost of equity will remain unchanged
(c)Cost of equity will decrease (d)Cost of equity will increase
Solution:(d) Cost of equity will increase. As the company increases its debt ratio, the financial risk increases,
which typically leads to an increase in the cost of equity as equity investors demand a higher return for the
additional risk.

PART II – DESCRIPTIVE QUESTIONS QUESTION NO. 1 IS COMPULSORY.

QUESTION NO.1 X Ltd is willing to raise funds for its New Project which requires an investment of ‘ 84 Lakhs. The
Company has two options:Option I:To issue Equity Shares (‘ 10 each) only,Option II:To avail Term Loan at an
interest rate of 12%. But in this case, as insisted by the Financing Agencies, the Company will have to maintain a
Debt–Equity proportion of 2:1.The Corporate Tax Rate is 30%. FIND out the point of indifference for the project.
Solution:
Let the EBIT at the Indifference Point level be E
Particulars Alternative 1 Alternative 2
Description Fully Equity of Debt = 56 Lakhs,
84 Lakhs Equity = 28 Lakhs
EBIT E E
Less: Interest at 12% of ‘ 56 Lakhs Nil 6.72
EBT E E – 6.72

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Less: Tax at 30% 0.3 E 0.3 E – 2.016

EAT 0.7 E 0.7 E – 4.704
Less: Preference Dividend Nil Nil
Residual Earnings 0.7 E 0.7 E – 4.704
No. Of Equity shares (Face Value Rs 10) 8.4 Lakh Shares 2.8Lakh Shares
Residual earnings 0.7 E 0.7E - 4.704
EPS=
No. of equity shares 8.4 Lakh Shares 2.8 Lakh shares
0.7 E 0.7E - 4.704
For indifference between the above alternatives, EPS should be equal. So, =
8.4 Lakh Shares 2.8 Lakh shares
14.112
On cross multiplication and simplification, 2.1 E – 14.112 = 0.7 E.; So, 1.4 E = 14.112; So, E = =10.08
1.4
So, for same EPS, required EBIT = ‘ 10.08 Lakhs. EPS at that level= ‘ 0.84
Note: Presentation of solution may differ.

QUESTION NO.2 Mr. Anand is thinking of buying a Share at ‘ 500 whose Face Value per share is ‘ 100. He is
expecting a bonus at the ratio 1 : 5 at the end of the fourth year. Annual expected dividend is 20% and the same
rate is expected to be maintained on the expanded capital base. He intends to sell the Shares at the end of
seventh year at an expected price of ‘ 900 each. Incidental Expenses for purchase and sale of Shares are estimated
to be 5% of the Market Price. Assuming a Discount rate of 12% per annum, COMPUTE the Net Present Value
from the acquisition of the shares.
Solution:
Computation of PV of Future Cash Flows
Year Nature Cash Flow DF @ 12% DCF
1 Dividends (‘ 100 × 20%) 20 0.893 17.86
2 Dividends (‘ 100 × 20%) 20 0.797 15.94
3 Dividends (‘ 100 × 20%) 20 0.712 14.24
4 Dividends (‘ 100 × 20%) 20 0.636 12.72
5 Dividends (‘ 100 × 1.2 × 20%) 24 0.567 13.61
6 Dividends (‘ 100 × 1.2 × 20%) 24 0.507 12.17
7 Dividends (‘ 100 × 1.2 × 20%) 24 0.452 10.85
7 Net Sale Proceeds (‘ 900 × 1.2 – 5%) 1,026 0.452 463.75

Present Value of Cash Inflows 561.14

0 Less: Initial Investment (‘ 500+ 5%) 525 1 525.00
Net Present Value 36.14
Note: At the end of Year 4, Anand will have 1.2 Share i.e. 1 Bought Share + 1/ 5th Bonus Share.

QUESTION NO.3 Paarath Limited had recently repurchased 20,000 equity shares at a premium of 10% to its
prevailing market price. The book value per share (after repurchasing) is ‘ 193.20.
Other Details of the company are as follows:Earnings of the company (before buyback) = ‘ 18,00,000; Current
MPS is ‘ 270 with a P/E Ratio of 18.CALCULATE the Book Value per share of the company before the re- purchase.
Solution:
(i)No of Eq. Shares(before buyback)=Total Earnings (before buyback)/EPS=18,00,000/(270/18)=1,20,000 shares
(ii)Buyback price = 270 + 10% premium = 297
(iii)No of Eq. shares (after buyback) = 1,20,000 (-) 20,000 = 1,00,000 shares
(iv)Total Book Value of Equity (after buyback) = 1,00,000 X 193.20= 1,93,20,000
Now,Total BV of Eq. (after buyback) = Total BV of Eq.(before buyback) (-)Amt of buyback
1,93,20,000= x (-) (20,000 X 297) ; Therefore x= Total BV (before buyback)= 2,52,60,000

QUESTION NO.4 Sukrut Limited has annual credit sales of ‘ 75,00,000/-. Actual credit terms are 30 days, but its
management of receivables has been poor, and the average collection period is about 60 days. Bad debt is 1 per
cent of total sales.A factor has offered to take over the task of debt administration and credit checking, at an
annual fee of 1.5 per cent of credit sales.Sukrut Limited estimates that it would save ‘ 45,000 per year in
administration costs as a result. Due to the efficiency of the factor, the average collection period would come
back to the original credit offered of 30 days and bad debts would come to 0.5% on recourse basis.
The factor would pay net advance of 80 percent to the company at an annual interest rate of 12 per cent after
withholding a reserve of 10%. Sukrut Limited is currently financing its receivables from an overdraft costing 10
per cent per year and will continue to finance the balance fund needed (which is not financed by factor) through
the overdraft facility.If occurrence of credit sales is throughout the year, COMPUTE whether the factor’s services
should be accepted or rejected. Assume 360 days in a year.
Solution:
Evaluation of Factoring Proposal -
PARTICULARS ‘ ‘
(A) Savings (Benefit) to the firm
Administration Cost 45,000 45,000
Bad Debts Cost (On Recourse basis)
In House – 75 lakhs X 1%
Factoring – 75 lakhs X 0.5% (75lakhs X 0.5%) 37,500
Net Savings in bad debts cost
Cost of Carrying Debtors Cost (WN – 1) 1,06,750
TOTAL 1,89,250
(B) Cost to the Firm:
Factor Commission[Annual credit Sales × % of Commission] 75 lakhs X 1.5% 1,12,500
Interest Cost on Net advances (See WN – 1) 53,100__
TOTAL 1,65,600
(C) Net Benefits to the Firm (A – B) 23,650
Advice: Since the savings to the firm exceed the cost due to factoring, the proposal is acceptable.
WN-1 : Calculation of Savings in Interest Cost of Carrying Debtors
(I)In house Management: Interest Cost = Credit Sales X Avg Collection Period / 360 X Interest (%) p.a = 75,00,000
x 60/360 x 10% = 1,25,000
(II)If Factoring services availed: If factoring services are availed, then Sukrut Limited must raise the funds blocked
in receivables to the extent which is not funded by the factor (i.e amount of factor reserve (+) amount of factor
commission for 30 days (+) 20% of net advances)
Calculation of Net Advances to the firm -
Debtors = 75 lakhs x 30/360 = 6,25,000
(-) Factor Reserve = 10% of above = (62,500)
(-) Factor Commission = 1.5% of Debtors = (9,375)__
Net Advance = 5,53,125
Advance from Factor = 5,53,125 x 80% = 4,42,500 ;
Int cost on Advance from Factor = 4,42,500 x 12% = 53,100
Now, the amount that is not funded by the factor (6,25,000 - 4,42,500) needs to be funded by Sukrut Limited
from overdraft facility at 10%
Therefore, Int cost on Overdraft (Cost of carrying debtors) = 1,82,500 x 10% = 18,250
Net Savings in Interest Cost of Carrying Debtors = 1,25,000 (-) 18,250 = 1,06,750

QUESTION NO.5 Calculate the WACC using the following data by using Market Value weights:
Particulars `

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Equity Shares (‘ 10 per equity share) 15,00,000

Reserves & Surplus 5,00,000
Preference Shares(‘ 100 per preference share) 7,50,000
Debentures(‘ 100 per debenture) 5,50,000
The market prices of these securities are:
Debentures - ‘ 105 per debenture; Preference shares - ‘115 per preference share; Equity shares ‘ 27 per equity
share .Additional information:(1)‘ 100 FV per debenture redeemable at premium of 10%, 10% coupon rate, 4%
floatation costs, 10-year maturity.(2)‘ 100 FV per preference share redeemable at par, 12% coupon rate, 2%
floatation cost and 10-year maturity.(3)Equity shares have ‘ 4.5 floatation cost and market price of 27 per share.
The last dividend paid by the company was ‘ 2 which is expected to grow at an annual growth rate of 9%. The firm
has the practice of paying all earnings as a dividend.
The corporate tax rate is 25%. To calculate the overall cost of debt & preference shares, take the average of their
respective costs using YTM & approximation method.
Solution:
Int(1 - t) + (RV - NP)/N
WN-1 : Calculation of Cost of Debt (Kd):Approximation Method =
(RV + NP)/2
10(1 - 0.25) + (110 - 100.8)/10
RV = 100 + 10% = 110, NP = 105 - 4% = 100.8 ; Kd = = 7.99%
(110 + 100.8)/2
YTM Method:CMP (Po) (-) Floatation Cost = {Int(1-t) × PVAF (r%,10years)} + {RV × PVIF (r%,10th Year)}
105 - 4% = {10 (1 – 0.25) × PVAF (r%,10 years)} + {110 × PVIF (r%,10thyear)}
Using trial and error method, NPV at 5% & 10%
Year Cash flows Disc Factor @5% PV (‘) Disc Factor@ 10% PV (‘)
0 -100.8 1 -100.8 1 -100.8
1 to 10 7.5 7.7217 57.91275 6.1446 46.0845
10 110 0.6139 67.529 0.3855 42.405
24.64175 -12.3105
24.64175
IRR= 5 + × (10 - 5) = 8.33% ; Therefore overall cost of debt (Kd) = (7.99 + 8.33) / 2 = 8.16%
24.64175 - (-12.3105)
Pref.div. + (RV - NP)/N
WN-2 : Calculation of Cost of Preference (Kp):Approximation Method =
(RV + NP)/2
12 + (100 - 112.7)/10
RV = 100 NP = 115 - 2% = 112.7 ; Kp = =10.09%
(100 + 112.7)/2
YTM Method:CMP (Po) (-) Floatation Cost = {Pref Div × PVAF (r%,10years)} + {RV × PVIF (r%,10th Year)}
115 - 2% = {12 × PVAF (r%,10 years)} + {100 × PVIF (r%,10th year)}
Using trial and error method, NPV at 5% & 10%
Year Cash Disc Factor PV (‘) Disc Factor PV (‘)
flows @ 5% @ 10%
0 -112.7 1 -112.7 1 -112.7
1 to 10 12 7.7217 92.6604 6.1446 73.7352
10 100 0.6139 61.39__ 0.3855 38.55__
41.3504 -0.4148
41.3504
IRR= 5 + × (10 - 5) = 9.95% ; Therefore, overall cost of debt (Kp) = (10.09 + 9.95) / 2 = 10.02%
41.3504 - (-0.4148)
WN-3 : Calculation of Cost of equity (Ke): Ke = {D1 / (Po - Floatation)} + G= {2+9% / 27 – 4.5} + 0.09= 18.69%
Calculation of WACC using market value weights

QUESTION NO.6 EPL Ltd. has furnished the following information relating to the year ended 31st March 2023
and 31st March, 2024: 31st March, 2023 31st March, 2024
Share Capital 50,00,000 50,00,000
Reserve and Surplus 20,00,000 25,00,000
Long term loan 30,00,000 30,00,000
Net profit ratio: 8%Gross profit ratio: 20%Long-term loan has been used to finance 40% of the fixed assets.
Stock turnover with respect to cost of goods sold is 4.Debtors represent 90 days sales.The company holds
cash equivalent to 1½ months cost of goods sold.Ignore taxation and assume 360 days in a year.
You are required to PREPARE Balance Sheet as on 31st March 2024 in following format:
Liabilities (‘ ) Assets (‘)
Share Capital - Fixed Assets -
Reserve and Surplus - Sundry Debtors -
Long-term loan - Closing Stock -
Sundry Creditors - Cash in hand -
Solution:
Change in Reserve & Surplus = ‘ 25, 00,000 – ‘ 20,00,000 = ‘ 5,00,000 ; So, Net profit = ‘ 5, 00,000
5,00,000
(i)Net Profit Ratio = 8% Or Sales= = Rs 62,50,000
8%
(ii)Cost of Goods sold= Sales – Gross profit Margin= ‘ 62, 50,000 – 20% of ‘ 62, 50,000= ‘ 50, 00,000
Rs 30,00,000 Cost of goods sold 50,00,000
(iii)Fixed Assets= =‘ 75, 00, 000 ; (iv)Stock= = =12,50,000 ;
40% STR 4
62,50,000 50,00,000
(v)Debtors= × 90 = ‘15, 62, 500 ; (vi)Cash Equivalent = × 1.5 = ‘ 6, 25, 000
360 12
Balance Sheet as on 31st March 2024
Liabilities (‘) Assets (‘)
Share Capital 50,00,000 Fixed Assets 75,00,000
Reserve and Surplus 25,00,000 Sundry Debtors 15,62,500
Long-term loan 30,00,000 Closing Stock 12,50,000
Sundry Creditors 4,37,500 Cash in hand 6,25,000
(Balancing Figure) _________ ________
1,09,37,500 1,09,37,500

CA INTER FM RTP SETP 2024

QUESTION NO. 1 Mr. Ronak, a doctor by profession, has his own private hospital at Goa having specialization in
cardiac treatments. However, now-a-days, Goa not only being a place for the tourists, but is also a place for
business delegates, cultural people, politicians, students and other classes of people. Gradually, Goa is opening

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new windows for businesses and getting recognition as an important tourist and leisure hub in South West India.
There are a number of hotels and resorts at Goa. However, the need still exists for more hotel services, in particular
with the excellent service, and because of the large number of visitors from all over the country and all
walks of life always favour Goa state for their recreation.
Mr. Ronak although being a doctor by profession is contemplating to establish a five-star hotel at Goa. The hotel
will consist of 5 floors. The hotel will include 40 normal rooms and 8 deluxe suites, as well as a restaurant and
couple of conference rooms with a small wedding hall on the ground floor.
Following are the estimated occupancy rate includingfare composition in the Table 1. Being a five-star hotel,
breakfast would be complementary but lunch and dinner are on a-la-carte basis.
Table 1: Hotel accommodation, estimated occupancy rate and fare.
Types of Facility Numbers Occupancy Average Growth
Rate Rent Per Rate in
Room Per Rent
Day
Normal Room 40 33% or 120 Days `8000 12%
Deluxe Suites 8 33% or 120 Days `25,000 9%
Conference with 2 40 days `3,00,000 9%
Wedding Hall
Restaurant 1 All days `27,000 sales 8%
per day
For the sake of simplicity in calculation, growth rate to be applied only once after completion of 10 years.
The estimated cost of land will be ` 250 million and the construction cost will be `100 million. The estimated
salvage value at the end of 15th year will be 25% of the cost of construction. The cost of furniture will be of ‘
1,50,000 for each normal room and ` 3,80,000 for each deluxe suite. The cost of the furniture for the conference
room with wedding hall will be ` 7,00,000 each and for restaurant it will be 10,00,000. In addition, the hotel will
require 4 elevators at different locations and will be costing around ` 35,00,000 each. The cost of buying and
installing electronic appliances like TV sets, Air conditioners,Fridge etc. will be around ` 35 million. Elevators
would be depreciated ata rate of 5% p.a. Electronic appliances will have a salvage value of 15% of its acquisition
cost at the end of 15 years.
The hotel will be built by renowned builder named ‘Harihar Infrastructure’. The builder estimated that building
will survive for 15 years. The required furniture will be supplied by the local reputed furniture company named
Veru Furnishings Ltd. They ensured that furniture will go for 10 years very smoothly. At the end of tenth year,
new furniture for normal rooms and deluxe suites will be bought and old furniture for the same will be sold by
the hotel owner. The owner of the hotel estimates that he would be able to purchase the required furniture at
15% higher price than the previous purchase price. The salvage values of the furniture at the end of tenth year
will be 5% of their purchase prices with no book value remaining. Furniture at restaurant, conference and wedding
hall will not require any major changes as such except for minor renovation which will cost ` 20,00,000 in total at
the end of 12th year. Any scrap generated on account of such renovation will be sold at ` 1,75,000.
In order to boost the tourism industry at Goa, the state govt will be granting subsidy of 15% on the initial capex
incurred, it will be paid at the time of cost incurred and additional subsidy of 10% on annual revenue expenses
for the first 3 years of operation, but will be credited directly in the bank account only at the end of 5th year and
the same shall be non-taxable.
The total annual recurring expenses will be ` 1,80,00,000/-. It includes salaries to managers, staff and employees,
utilities expenses, house keeping and security services’ contract, AMC for electronic appliances, restaurant supplies
and materials, other miscellaneous expenses, etc.
After the end of 10 years, annual recurring expenses will increase at a rate of 10% which is to be applied once.
Furthermore, the hotel authority is determined to provide the best and professional hotel services to the clients
by offering training to the employees. They decided to spend ` 5,00,000 per year for the purpose of training of
the

(ii) (a) ` 7.0532 Cr

PV of Cash Inflow = ‘ 42.2317 Cr [As per WN - 2 ] (-) PV of Cash Outflow = ‘ 35.1785 Cr [ As per WN - 1 ]
= 7.0532 CR
Note: Discounting Rate would be the hurdle rate and not cost of equity as hurdle rate means the overall cost of
capital
WN 1 - Calculation of PV of Cash Outflows (`) DF @ PV (`)
15%
Year 1 Initial Net Investment 4,88,74,000 1.0000 34,88,74,000
At the end of 10th Year
Year 10 Purchase of new furniture (At 15% higher price)
Normal Rooms 69,00,000 0.2472 17,05,680
Suite Rooms 34,96,000 0.2472 8,64,211
At the end of 12th Year
Year 12 Renovation at restaurant,conference and 18,25,000 0.1869 3,41,093
wedding halls(Net) ___________
35,17,84,983
WN – 2: Calculation of PV of Cash Inflows
Year 1 to 5 Year 6 to 10 Year 11 to 15
(`) (`) (`)
Sales (Apply growth rate here)

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Normal Rooms 3,84,00,000 3,84,00,000 4,30,08,000

Suites 2,40,00,000 2,40,00,000 2,61,60,000
Conf & Hall 2,40,00,000 2,40,00,000 2,61,60,000
Restaurant 97,20,000__ 97,20,000_ 1,04,97,600
Total Sales (A) 9,61,20,000 9,61,20,000 10,58,25,600
Less:
Annual Recurring Exp 1,80,00,000 1,80,00,000 1,98,00,000
(Excl Depreciation)
Training Exp 5,00,000 5,00,000 5,00,000
Depreciation
Building 50,00,000 50,00,000 50,00,000
Elevators 7,00,000 7,00,000 7,00,000
Electronic App 19,83,333 19,83,333 19,83,333
Furniture (Old) 8,58,800 8,58,800
Furniture (New) 10,39,600
TOTAL EXP (B) 2,70,42,133 2,70,42,133 2,90,22,933
NPBT (A - B) 6,90,77,867 6,90,77,867 7,68,02,667
(-) Tax Nil (Tax Holiday) 1,72,69,466 1,92,00,666
NPAT 6,90,77,867 5,18,08,400 5,76,02,000
(+) Depreciation 85,42,133_ 85,42,133_ 87,22,933__
(+) Cash Inflows from 7,76,20,000 6,03,50,533 6,63,24,933
Operation
PVAF@ 15% 3.3522 1.6666 0.8285
PV of Cash Inflows 26,01,97,764 10,05,80,199 5,49,50,207
from Operations
(+) PV of Other Cash Inflows : In year 5 - Govt Subsidy on first 3 years of = 55,50,000 x 0.4972 = ` 27,59,460
Annual Revenue Exp
In year 10 - Salvage Value of Old Furniture = 4,52,000 x 0.2472 = ` 1,11,734
In year 15 - Salvage of building and electronic appliance = 3,02,50,000 x 0.1229 = ` 37,17,725
Therefore, Total PV of Cash Inflows = ` 42,23,17,089
(iii) (d) 4.46 years
Total Net Initial Investment Incurred = ` 34,88,74,000
Cumulative of Total Cash Inflows (not discounted cash inflows)
Year Total Cash Inflows (`) Cumulative of Cash Inflows (`)
1. 7,76,20,000 7,76,20,000
2. 7,76,20,000 15,52,40,000
3. 7,76,20,000 23,28,60,000
4. 7,76,20,000 31,04,80,000
5. 8,31,70,000 (Govt Subsidy of 39,36,50,000
55,50,000 added here)
6. ` 6,03,50,533 45,40,00,533
From the above table, it can be seen that the initial net investment incurred is getting recovered after 4th year
but
before the end of 5th year i.e. somewhere between 4th & 5th Year.
3,83,94,000
Payback period = 4 + = 4 + 0.46 = 4.46 yearss
8,31,70,000
(iv) (a) ` 7.0928 Cr p.a.
Accounting profit = NPAT + Govt Subsidy on Revenue Expense = 6,90,77,867 + (1,85,00,000 x 10%)= 6,90,77,867

RATIO ANALYSIS
QUESTION NO. 2 KT Ltd.’s opening stock was `2,50,000 and the closing stock was ` 3,75,000. Sales during the
year were `13,00,000 and the gross profit ratio was 25% on sales. Average accounts payable are `80,000. Creditors
Turnover Ratio =? (a) 13.33 (b) 14.33 (c) 14.44 (d) 13.75
Solution: (d) 13.75
Creditors Turnover Ratio = Purchases / Average Accounts Payable
Cost of Goods Sold = Opening Stock+ Purchases - Closing Stock
Purchases = Cost of Goods Sold + Closing Stock -Opening Stock
= ` 9,75,000 + ` 3,75,000 - ` 2,50,000 = ` 11,00,000
Average Accounts Payable = `80,000
Creditors Turnover Ratio = Purchases/Average Accounts Payable = ` 11,00,000 / ` 80,000 = 13.75
Therefore, the Creditors Turnover Ratio is 13.75.

LEVERAGE
QUESTION NO. 3 A firm has sales of ` 75,00,000, variable cost of ` 42,00,000 and fixed cost of `6,00,000. It has
a debt of ` 45,00,000 at 9% and equity of ` 55,00,000. Does it have favourable financial leverage?
(a) ROI is less than interest on loan funds and hence it has no favourable financial leverage.
(b) ROI is equal to interest on loan funds and hence it has favourable financial leverage.
(c) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
(d) ROI is greater than interest on loan funds and hence it has unfavourable financial leverage.
Solution: (c) ROI is greater than interest on loan funds and hence it has favourable financial leverage.
EBIT = 75,00,000 - 42,00,000 - 6,00,000 = 27,00,000,
ROI = 27,00,000/(45,00,000 + 55,00,000) = 27%,
Rate of Interest lower than Return on investment.Therefore, there is favourable leverage.

DIVISION B: DESCRIPTIVE QUESTIONS

RATIO ANALYSIS
QUESTION NO.1 Following are the data in respect of LP enterprises for the year ended 31st March, 2024:
Debt to Total assets ratio : 0.40
Long-term debts to equity ratio : 30%
Gross profit margin on sales : 20%
Accounts receivables period : 36 days
Quick ratio : 0.9
Inventory holding period : 60 days
Cost of goods sold : ` 64,00,000
Liabilities ` Assets `
Equity Share Capital 20,00,000 Fixed assets
Reserves & surplus Inventories
Long-term debts Accounts receivable
Accounts payable Cash
Total 50,00,000 Total
Required: COMPLETE the Balance Sheet of LP enterprises as on 31st March, 2024. All calculations should be in
nearest Rupee. Assume 360 days in a year.
Solution:
Working Notes:

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(1) Total liability = Total Assets =` 50,00,000

Debt Debt
Debt to Total Asset Ratio = 0.40 OR = 0.40 OR = 0.40 OR So, Debt = 20,00,000
Total assets 50,00,000
(2) Total Liabilities = ` 50,00,000
Equity share Capital + Reserves + Debt = ` 50,00,000
So, Reserves = ` 50,00,000 - ` 20,00,000 - ` 20,00,000
So, Reserves & Surplus = ` 10,00,000
Long term Debt Long term Debt
(3) Equity' s Shareholde r fund = 30% OR = 30% OR Long Term Debt = ` 9,00,000
(20,00,000  10,00,000)
(4) So, Accounts Payable = ` 20,00,000 – ` 9,00,000 = ` 11,00,000
(5) Gross Profit to sales = 20%
100
Cost of Goods Sold = 80% of Sales = ` 64,00,000 OR Sales =  64,00,000 = 80,00,000
80
360 COGS 360 64,00,000 360
(6)Inventory Turnover= or Closing inventory = or Closing inventory =
60 60 60
or Closing inventory = 10,66,667
Accounts Receivable
(7)Accounts Receivable period = 36 days OR × 360 = 36 OR
Credit Sales
36 36
Accounts receivable   Credit Sales OR =  80,00,000 (assumed all sales are on credit) = ` 8,00,000
360 360
Quick assets Cash  debtors
(8) Quick Ratio = 0.9 OR = 0.9 OR = 0.9 OR Cash + 8,00,000 = ` 9,90,000
Current liabilties 11,00,000
Cash = ` 1,90,000
(9) Fixed Assets = Total Assets - Current Assets = 50,00,000 –(10,66,667 + 8,00,000 + 1,90,000) = 29,43,333
(10) Balance Sheet of LP enterprises as on 31st March 2024
Liabilities (`) Assets (`)
Share Capital 20,00,000 Fixed Assets 29,43,333
Reserved surplus 10,00,000 Current Assets:
Long Term Debt 9,00,000 Inventory 10,66,667
Accounts Payable 11,00,000 Accounts 8,00,000
Receivables
________ Cash 1,90,000
Total 50,00,000 Total 50,00,000
(*Note: Equity shareholders’ fund represent equity in ‘Long term debts to equity ratio’. The question can be
solved assuming only share capital as ‘equity’)

Cost of Capital
QUESTION NO.2 BS Ltd. has the following capital structure at book-value as on 31st March, 2024:
Particulars (`)
Equity share capital (10,00,000 shares) 3,00,00,000
11.5% Preference shares 60,00,000
10% Debentures 1,00,00,000
4,60,00,000
The equity shares of the company are sold for ` 300. It is expected that the company will pay next year a dividend
of ` 15 per equity share, which is expected to grow by 5% p.a. forever. Assume a 35% corporate tax rate.

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Required: (i) COMPUTE weighted average cost of capital (WACC) of the company based on the existing capital
structure. (ii) COMPUTE the new WACC, if the company raises an additional ` 50 lakhs debt by issuing 10 years
12% debentures but the yield on debentures of similar maturity and risk class is 13%; flotation cost is 2%. Face
value of the debenture is ` 100. This would result in increasing the expected equity dividend to ` 20 and leave the
growth rate unchanged, but the price of equity share will fall to `250 per share.
Solution:
(i) Computation of Weighted Average Cost of Capital based on existing capital structure
Source of Capital Existing Weights After tax WACC
Capital cost of (%)
structure capital (%) (a) × (b)
(`) (a) (b)
Equity share capital 3,00,00,000 0.652 10.00 6.52
(W.N.1)
11.5% Preference 60,00,000 0.130 11.50 1.50
share capital
10% Debentures 1,00,00,000 0.218 6.50 1.42
(W.N.2) __________ _____ ____
Total 4,60,00,000 1.000 9.44
Expected dividend(D 1 ) Rs 15
Working Notes: 1. Cost of Equity Capital: Ke = Current Market price(P )  Growth(g) =  0.05 = 10%
0 Rs 300
Interest (1 - t) 10,00,000(1 - 0.35)
2. Cost of 10% Debentures : Kd = = = 0.065 or 6.5%
Net proceeds 1,00,00,000
(ii) Computation of Weighted Average Cost of Capital based on new capital structure
Source of Capital New Weights After tax WACC
` Capital (a) cost of (%)
structure capital (%) (a) x (b)
(`) (b)
Equity share capita 3,00,00,000 0.588 13.00 7.64
(W.N.3)
11.5% Preference 60,00,000 0.118 11.50 1.36
share capital
10% Debentures 1,00,00,000 0.196 6.50 1.27
(W.N.2)
12% Debentures 50,00,000 0.098 9.21 0.90
(W.N.4) _________ ____ _____
Total 5,10,00,000 1.000 11.17
20
3. Cost of Equity Capital: Ke =  0.05 = 13% ;
250
Rs 100 - Rs 90.31 *
12(1 - 0.35) + ( )
Kd = n Rs 8.769
4. Cost of 12% Debentures: Rs 100 + Rs 90.31 *   0.0921
Rs 95.155
2
*Since yield on similar type of debentures is 13 per cent, the company would be required to offer debentures at
discount.
Market price of debentures (approximation method) = ` 12 ÷ 0.13 = ` 92.31
Sale proceeds from debentures = ` 92.31 – ` 2 (i.e., floatation cost) = ` 90.31

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CAPITAL STRUCTURE
QUESTION NO.3 Company XYZ is unlevered and has a cost of equity of 20 percent and a total market value of `
10,00,00,000. Company ABC is identical to XYZ in all respects except that it uses debt finance in its capital structure
with a market value of ` 4,00,00,000 and a cost of 10 percent. FIND the market value of equity, weighted average
cost of capital and cost of equity of ABC if the tax advantage of debt is 25 percent.
Solution:
Computation of Market Value of Equity of Company ABC
Market value of leveraged company [ VABC ] = ` 10,00,00,000 + ` 4,00,00,000 × 0.25% = ` 11,00,00,000
The Market Value of Equity of Company ABC = ` 11,00,00,000 – ` 4,00,00,000 = ` 7,00,00,000
Weighted Average Cost of Capital of Company ABC
4 ,00,00,000
WACC ABC  WACC XYZ[1Bt/VABC ] or 20%[1 - × 0.25] = 18.18%
11,00,00,000
Where, WACC ABC is the weighted average cost of capital of the levered company ABC
WACCXYZ is the weighted average cost of capital of the unlevered company XYZ.
Cost of Equity of company ABC R Eabc = R Exyz + [(1 - t)B/E( R Exyz - RB)]
20%+[(1-.25)4,00,00,000/7,00,00,000(.20-.10)] = 24.28% approx.
Where, R Eabc is the cost of equity in the levered Company ABC. ; R Exyz is the cost of equity in the unlevered
ed
Company XYZ. ; E is the market value of equity. ; B is the market value of debt. ; R B is the cost of debtt

QUESTION NO.4 The following data relate to two companies belonging to the same risk class:
Particulars A Ltd. B Ltd.
Expected Net Operating Income ` 18,00,000 ` 18,00,000
12% Debt ` 54,00,000 -
Equity Capitalization Rate - 18
Required: (a) DETERMINE the total market value, Equity capitalization rate and weighted average cost of capital
for each company assuming no taxes as per M.M. Approach.
(b) DETERMINE the total market value, Equity capitalization rate and weighted average cost of capital for each
company assuming 40% taxes as per M.M. Approach.
Solution:
(a) Assuming no tax as per MM Approach:
Calculation of Value of Firms ‘A Ltd.’ and ‘B Ltd’ according to MM Hypothesis
Market Value of ‘B Ltd’ [Unlevered(u)]
Total Value of Unlevered Firm (Vu) = [ NOI/ke] = ` 18,00,000/.18 = ` 1,00,00,000
Ke of Unlevered Firm (given) = 0.18
Ko of Unlevered Firm (Same as above = ke as there is no debt) = 0.18
Market Value of ‘A Ltd’ [Levered Firm (I)]
Total Value of Levered Firm (VL) = Vu + (Debt× Nil) = ` 1,00,00,000 + (54,00,000 × nil)= ` 1,00,00,000
Computation of Equity Capitalization Rate and Weighted Average Cost of Capital (WACC)
Particulars A Ltd. B Ltd.
A Net Operating Income (NOI) 18,00,000 18,00,000
B Less: Interest on Debt (I) 6,48,000 -
C Earnings of Equity Shareholders 11,52,000 18,00,000
(NI)
D Overall Capitalization Rate (ko) 0.18 0.18
E Total Value of Firm (V = NOI/ko) 1,00,00,000 1,00,00,000
F Less: Market Value of Debt 54,00,000 -

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G Market Value of Equity (S) 46,00,000 1,00,00,000
H Equity Capitalization Rate 0.2504 0.18
[ke = NI /S]
I Weighted Average Cost of 0.18 0.18
Capital [WACC] (ko)
Assuming 40% taxes as per MM Approach
Calculation of Value of Firms ‘A Ltd.’ and ‘B Ltd’ according to MM Hypothesis Approach
Market Value of ‘B Ltd’ [Unlevered(u)]
Total Value of unlevered Firm (Vu) = [NOI(1 - t)/ke] = 18,00,000
(1 – 0.40)] / 0.18 = ` 60,00,000
Ke of unlevered Firm (given) = 0.18
Ko of unlevered Firm (Same as above = ke as there is no debt)= 0.18
Market Value of ‘A Ltd’ [Levered Firm (I)]
Total Value of Levered Firm (VL) = Vu + (Debt× Tax) = ` 60,00,000 + (54,00,000 × 0.40) = ` 81,60,000
Computation of Weighted Average Cost of Capital (WACC) of‘B Ltd.’ = 18% (i.e. Ke = Ko)
Computation of Equity Capitalization Rate and Weighted Average Cost of Capital (WACC) of A Ltd
Particulars A Ltd.
Net Operating Income (NOI) 18,00,000
Less: Interest on Debt (I) 6,48,000
Earnings Before Tax (EBT) 11,52,000
Less: Tax @ 40% 4,60,800
Earnings for equity shareholders (NI) 6,91,200
Total Value of Firm (V) as calculated above 81,60,000
Less: Market Value of Debt 54,00,000
Market Value of Equity (S) 27,60,000
Equity Capitalization Rate [ke = NI/S] .2504
Weighted Average Cost of Capital (ko)* 13.23
*Computation of WACC A Ltd
Component Amount Weight Cost of WACC
of Capital Capital
Equity 27,60,000 0.338 0.2504 0.0846
Debt 54,00,000 0.662 0.072* 0.0477
Total 81,60,000 0.1323
*Kd= 12% (1- 0.4) = 12% × 0.6 = 7.2%
WACC = 13.23%
Leverage
QUESTION NO.5 Following data of PC Ltd. under Situations 1, 2 and 3 and Financial Plan A and B is given:
Installed Capacity (units) 3,600
Actual Production and Sales (units) 2,400
Selling price per unit (`) 30
Variable cost per unit (`) 20
Fixed Costs (`): Situation 1 3,000 Situation 2 6,000 Situation 3 9,000
Capital Structure:
Particulars Financial Plan
A B
Equity ` 15,000 `22,500
Debt ` 15,000 ` 7,500
Cost of Debt 12% 12%
Required: (i) CALCULATE the operating leverage and financial leverage. (ii) FIND out the combinations of operating
and financial leverage which give the highest value and the least value.

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Solution:
(i) Operating Leverage(`) Situation 1 Situation 2 Situation 3
Sales (S) [2,400 units @ ‘ 30 per unit ] 72,000 72,000 72,000
Less: Variable Cost (VC) 48,000 48,000 48,000
@ ‘ 20 per unit Contribution (C) 24,000 24,000 24,000
Less: Fixed Cost (FC) 3,000 6,000 9,000
EBIT 21,000 18,000 15,000
24,000 24,000 24,000
Operating leverage
21,000 18,000 15,000
C
= 1.14 = 1.33 = 1.60
EBIT
Financial Leverage Financial Plan
Situation 1 A(`) B(`)
EBIT 21,000 21,000
Less: Interest on debt(` 15,000 x 12%); (` 7,500 x 12%) 1,800 900
EBT 19,200 20,100
EBIT 21,000 21,000
Financial Leverage = =1.09 = 1.04
EBT 19,200 20,100
Situation 2
EBIT 18,000 18,000
Less: Interest on debt 1,800 900
EBT 16,200 17,100
EBIT 18,000 18,000
Financial Leverage = =1.11 = 1.05
EBT 16,200 17,100
Situation 3
EBIT 15,000 15,000
Less: Interest on debt 1,800 900
EBT 13,200 14,100
EBIT 15,200 15,000
Financial Leverage = =1.14 = 1.06
EBT 13,200 14,000
(ii) Combined Leverages CL = OL x FL
Financial Plan A(`) B(`)
(a) Situation 1 1.14 x 1.09 = 1.24 1.14 x 1.04 = 1.19
(b) Situation 2 1.33 x 1.11 = 1.48 1.33 x 1.05 = 1.40
(c) Situation 3 1.60 x 1.14 = 1.82 1.60 x 1.06 = 1.70
The above calculations suggest that the highest value is in Situation 3 financed by Financial Plan A and the lowest
value is in the Situation 1 financed by Financial Plan B.

Dividend Decision
QUESTION NO.6 The following information is taken from Gamma Ltd.
Net Profit for the year ` 30,00,000
12% Preference share capital `1,00,00,000
Equity share capital (Share of ` 10 each) ` 60,00,000
Internal rate of return on investment 22%
Cost of Equity Capital 18%
Retention Ratio 75%

Working Capital
QUESTION NO.7 TMT Limited is commencing a new project for manufacture of electric toys. The following cost
information has been ascertained for annual production of 60,000 units at full capacity:
Amount per unit (‘)
Raw materials 20
Direct labour 15
Manufacturing overheads: `
Variable 15
Fixed 10 25
Selling and Distribution overheads: `
Variable 3
Fixed 1 4_
Total cost 64
Profit 16
Selling price 80
In the first year of operations expected production and sales are 40,000 units and 35,000 units respectively. To
assess the need of working capital, the following additional information is available:
(i) Stock of Raw materials 3 months consumption. (ii) Credit allowable for debtors 1½ months. (iii) Credit allowable
by creditors 4 months. (iv) Lag in payment of wages 1 month. (v) Lag in payment of overheads ½ month. (vi) Cash
in hand and Bank is expected to be ‘ 60,000. (vii) Provision for contingencies is required @ 10% of working capital
requirement including that provision. You are required to PREPARE a projected statement of working capital
requirement for the first year of operations. Debtors are taken at cost.
Solution:
Statement Showing Cost and Sales for the First Year
Annual Production Capacity 60,000 units
Production 40,000 units
Sales 35,000 units
Particulars `

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Sales Revenue (` 80 × 35,000) 28,00,000

Cost of Production:
Materials @ ` 20 per unit 8,00,000
Direct Labour @ ` 15 per unit 6,00,000
Manufacturing Overheads:
Variable @ ` 15 per unit 6,00,000
Fixed (based on production capacity 60,000 units × ` 10) 6,00,000
Cost of Production 26,00,000
Less: Closing Stock (40,000 – 35,000 = 5,000 units)
26,00,000
(Rs × 5,000units) 3,25,000_
40,000
Cost of Goods Sold 22,75,000
Add: Selling & Distribution Overheads
Variable @ ` 3 × 35,000 units = 1,05,000
Fixed (Re. 1 × 60,000 units) = 60,000 1,65,000
Cost of Sales 24,40,000
Profit 3,60,000
Statement Showing Working Capital Requirement
A. Current Assets `
Stock of Raw Materials (` 8,00,000 × 3/12) 2,00,000
Stock of Finished Goods 3,25,000
Debtors at Cost (` 24,40,000 × 3/24) 3,05,000
Cash and Bank 60,000__
Total (A) 8,90,000
B. Current Liabilities
Creditors for Materials (` 10,00,000 × 4/12) 3,33,333
Creditors for Expenses (` 13,65,000 × 1/24) 56,875
Outstanding Wages (` 6,00,000 × 1/12) 50,000__
Total (B) 4,40,208
Working Capital Requirement before Contingencies (A – B) 4,49,792
Add: Provision for Contingencies (` 4,49,792 × 1/9) 49,977_
Estimated Working Capital Requirement 4,99,769
Workings Notes:
Purchase of Raw Material during the first year `
Raw Material consumed during the year 8,00,000
Add: Closing Stock of Raw Materials (3 months
consumption) 2,00,000
10,00,000
Less: Opening Stock of Raw Material Nil
Purchases during the year 10,00,000

QUESTION NO. 8 Banu Limited is considering relaxing its present credit policy and is in the process of evaluating
two proposed policies. Currently, the firm has annual credit sales of ` 225 lakhs and accounts receivable turnover
ratio of 5 times a year. The current level of loss due to bad debts is ` 7,50,000. The firm is required to give a return
of 20% on the investment in new accounts receivables. Policy option II requires a manager to manage the
receivables with salary of ` 50,000 per month. The company’s variable costs are 60% of the selling price. Given
the following information, which is a better option? (Amount in lakhs)
Present Policy Policy

CASE SCENARIOS

CHAPTER-3 FINANCIAL ANALYSIS AND PLANNING- RATIO ANALYSIS

QUESTION NO. 1 RNOC Ltd is a listed company and has been facing a cash crunch situation since a while. The CFO
is of the opinion that excess stock maintained as per the instructions of management of the company is the
reason for cash crunch.
However, the management states that its product line requires larger amount of inventory due to greater variety
of product line and customer may ask for any type of product. To maintain competitive advantage, the company
should be able to cater to customer needs as and when required. The management is highly critical of the
collection team as the management feels that they are not collecting the receivables within time as per industry
standards.
You have been hired by the company as a financial consultant. Management has provided you the latest audited
financial statements and also relevant industry statistics. You are required to advice the company to improve its
liquidity position.
Statement of Profit and Loss ‘ `
Sales 1,25,00,000
Cost of goods sold
Opening Stock 23,00,000

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Add: Purchases 80,00,000

Add: Direct expenses 12,00,000
Less: Closing Stock (38,60,000) (76,40,000)
Gross Profit 48,60,000
Less: Operating Expenses
Administrative Expenses 13,20,000
Selling and Distribution Expenses 15,90,000 (29,10,000)
Operating Profit 19,50,000
Add: Non-Operating Income 3,28,000
Less: Non-Operating Expenses (1,27,000)
Profit before Interest and taxes 21,51,000
Less: Interest (4,39,000)
Profit before tax 17,12,000
Less: Taxes (4,28,000)
Profit after Tax 12,84,000
Balance Sheet
Sources of Funds ‘ ‘
Owned Funds
EquityShare Capital 30,00,000
Reservesand Surplus 18,00,000 48,00,000
Borrowed Funds
Secured Loan 10,00,000
Unsecured Loan 4,30,000 14,30,000
Total Funds Raised 62,30,000
Application of Funds
Non-Current Assets
Building 7,50,000
Machinery 2,30,000
Furniture 7,60,000
Intangible Assets 50,000_ 17,90,000
Current Assets
Inventory 38,60,000
Receivables 39,97,000
ST investments 3,00,000
Cash and Bank 2,30,000 83,87,000
Less:Current Liabilities
Creditors 25,67,000
ST loans 13,80,000 (39,47,000)
Total Funds Employed 62,30,000
Industry Standards : Receivables Turnover=90;DaysInventory Turnover=100 Days; Payables turnover=90 Days;
Net Asset Turnover=4 Times
The company has set certain standards for the upcoming year financial status.
All the ratios are based on closing figures in financial statements.
Equity SC to Reserves =1
Net Profit Ratio =15%
Gross Profit Ratio =50%
loan Term Debt to Equity =0.5
Debtor Turnover =100 Days
Creditor Turnover (based on COGS) =100 Days

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Inventory =70% of Opening inventory
Cash Balance is assumed to remain same for next year.
(i)What is the inventory turnover ratio in days and whether assertion of CFO is correct?
(a) 120 days; Assertion of CFO is correct. (b) 100 days; Assertion of CFO is incorrect.
(c) 185 days; Assertion of CFO is correct. (d) 150 days; Assertion of CFO is incorrect.
(ii)What is the receivables turnover and whether assertion of management is correct?
(a) 117 days; Assertion of management is correct. (b) 100 days; Assertion of management is correct.
(c) 85 days; Assertion of management is correct. (d) 85 days; Assertion of management is not correct.
(iii) What is the expense company needs to incur for earning ‘ 1 of revenue in the last year?
(a) 0.844 (b) 0.754 (c) 0.962 (d) 0.824
(iv) What is the projected net working capital of the company?
(a) ‘ 42,87,891 (b) ‘ 40,27,891 (c) ‘ 48,27,891 (d) ‘ 48,28,891
(v) What is the projected Long-Term Debt of the company for the next year?
(a) ‘60,00,000 (b) ‘30,00,000 (c) ‘14,30,000 (d) ‘ 28,60,000
Solutuion:
Inventory 38,60,000
(i) (c)Inventory Turnover = × 365 = × 365 = 184.41 days = 185 days (apx) x)
COGS 76,40,000
Inventory holding period of 185 days is significantly higher as compared to industry standard of 100 days. This
means a significant amount of working capital is tied in inventory, which may be leading to liquidity crunch.
Receivable s 39,79,000× 365
(ii) (a) Receivables Turnover = × 365 = = 116.71 = 117 days (apx)
x)
Sales 1,25,00,000
Receivables turnover of 117 days as compared to industry standard of 90 days is a further delay of 27 days. This
will lead to good amount of money being tied up in debtors.
(iii)(a)Operating Ratio is the number which indicates cost incurred by company for earning each rupee of revenue
COGS + Operating expense 76,40,000+ 29,10,000
Operatiing Ratio = × 100 = × 100 = 0.844
Sales 1,25,00,000
(iv)(b)
Equity to Reserves= 1 Or Reserves= 1x30,00,000 = ‘ 30,00,000
Projected profit= 30,00,000 -18,00,000 = ‘ 12,00,000
Net Profit Margin= 15% 12,00,000/ Sales= 0.15Sales= ‘ 80,00,000
Gross Profit= 80,00,000 x 50% = ‘ 40,00,000
COGS= 80,00,000 - 40,00,000 = ‘ 40,00,000
Projected Debtors Turnover = 100 days = closing Receivables /Sales x 365
100= Closing Receivables/ 80,00,000 x 365Closing Receivables= 80,00,000 x100/365 =‘ 21,91,781
Projected Closing Inventory= 70% of opening inventory= 70% of 38,60,000 = ‘ 27,02,000
Projected Creditor Turnover= 100 daysclosing creditors /COGS x 365Closing Creditors= COGSx100/365
Closing Creditor= 40,00,000x100/365 = ‘ 10,95,890
Net Working Capital= Cash+Debtors+Inventory-Creditors= 2,30,000+21,91,781+27,02,000-10,95,890
Net Working Capital= ‘ 40,27,891
(v) (b) Equity Share Capital + Reserves = 30,00,000+30,00,000= ‘ 60,00,000
Long Term Debt to Equity= 0.5LTD/60,00,000= 0.5Long Term Debt= 0.5x60,00,000LTD= ‘ 30,00,000

CHAPTER - 4:COST OF CAPITAL

QUESTION NO. 1 MNP Ltd. is a multinational company having its operations spread mostly in India and
neighbouring countries of India. The promotors of the company believed that capital structure of a company
must be kept flexible and balanced, where proper mix should always be maintained between debt and equity.
Such mix of debt and equity should be reviewed from time to time keeping in mind the changing situation of
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India and the global scenario.The capital structure of MNP Ltd. is as under:
9% Debentures ‘ 2,75,000; 11% Preference shares ‘ 2,25,000; Equity shares (face value: ‘ 10 per share) ‘ 5,00,000
Total capital of the company ‘ 10,00,000
The following are some of the additional information provided by MNP Ltd. relating to the above mentioned
capital structure.(i)‘ 100 per debenture redeemable at par has 2% floatation cost and 10 years of maturity. The
market price per debenture is ‘ 105.(ii)‘ 100 per preference share redeemable at par has 3% floatation cost and
10 years of maturity. The market price per preference share is ‘ 106.(iii)Equity share has ‘ 4 floatation cost and
market price per share of ‘ 24. The next year expected dividend is ‘ 2 per share with an annual growth of 5%. The
firm has a practice of paying all earnings in the form of dividends.(iv)Corporate Income-tax rate is 35%.
Since the company is a multinational company market value weights are preferred over book value weights
when calculating the Weighted Average Cost of Capital (WACC) for several reasons. The company believes that
market values reflect the current market perception of a company’s financial health and future prospects. This is
more relevant for calculating the cost of capital today, as investors base their decisions on current market
conditions. Book values, based on historical accounting principles, may not accurately represent the true economic
value of the company’s capital components. Market values capture the actual cost that a company would incur if
it were to raise new capital in the current market. Book values might not reflect the true cost of debt due to
factors like changes in interest rates or creditworthiness. Similarly, book value of equity might not reflect the
current investor expectations for future dividends and growth. Market values are readily available through stock
prices and market interest rates. Obtaining accurate book values, especially for intangible assets, can be a complex
and time-consuming process.Being a Finance manager of the company, you are required to provide the answer
to the following questions to the top management:
(i) Calculate the cost of equity and choose the correct answer from the following?
(a)14% (b)15% (c)16% (d)17%
(ii) Calculate the cost of debt and choose the correct answer from the following?
(a)6.11% (b)5.11% (c)5.48% (d)10.55%
(iii) Calculate the cost of preference shares and choose the correct answer from the following?
(a)10.57 % (b)5.11% (c)9% (d)10.55%
(iv) Calculate the WACC using market value weights and choose the correct answer from the following?
(a)12.80 % (b)5.11% (c)9% (d)10.55%
(v) What will be the current market price of MNP Ltd.’s equity shares if Ke = 10%, expected dividend is ‘ 2 per
share and annual growth rate is 5% from the following options:
(a)‘ 40 per share (b)‘ 20 per share (c)‘ 30 per share (d)‘ 45 per share
Solutuion:
D1
(i) (b) K e = P + g = 2 / 20 + 0.5 = 15%
0

(RV - NP) 100 - 102.90

I(1 - t) + 9(1 - 0.35) +
n 10
(ii)(c) K d = (RV + NP) = (100 + 102.90) = 5.48%
2 2

(RV - NP) 100 - 102.82

PD + 11 +
n 10
(iii) (a) Kp = (RV + NP) = (100 + 102.82) = 10.57%
2 2
(iv) (a)
Calculation of WACC using market value weights

CHAPTER-5 FINANCIAL DECISIONS- CAPITAL STRUCTURE

QUESTION NO. 1 XYZ Industries Ltd., a renowned player in the manufacturing sector, has been contemplating an
ambitious expansion program. To finance this growth, the company scrutinizes its current capital structure, which
is a blend of equity, retained earnings, preference shares, and debentures.
The equity base of XYZ Industries Ltd., is robust with 40,000 equity shares valued at ‘ 100 each, amounting to a
substantial ‘ 40,00,000. This equity foundation is bolstered by retained earnings of ‘ 10,00,000, reflecting the
company’s prudent profit reinvestment strategy.
In addition to equity, XYZ Industries Ltd., has diversified its financing through 9% preference shares and 7%
debentures, each contributing ‘ 25,00,000 to the capital pool. This strategic mix of debt and equity showcases
the company’s balanced approach to leveraging and risk management.
The company’s capital yields a healthy return rate of 12% on capital employed, indicative of its operational
efficiency and market competitiveness. However, it operates in a high-tax environment with an income-tax rate
of 50%, which significantly impacts its net earnings and available reinvestment capital.
Faced with the need to raise an additional ‘ 25,00,000 for its expansion program, XYZ Industries Ltd., stands at a
crossroads. The decision to fund this venture will require careful consideration of the cost of capital, tax
implications, and the impact on shareholder value.
The management must evaluate whether to issue more equity shares, preference shares or debentures. Issuing
equity could dilute current shareholders’ value but would not increase the company’s debt burden. Preference
shares offer a fixed return to investors and have priority over equity in profit distribution but come at a higher
cost than debt. Debentures are less expensive due to tax-deductible interest expenses but increase financial risk.
XYZ Industries Ltd.’s journey towards expansion is not just about raising funds but also about maintaining a
delicate balance between growth aspirations and financial stability. The company’s choice will set a precedent
for its future financial strategies and market reputation.
Faced with the challenge of capital structure decision making to finance the expansion programme the finance
manager is considering the following alternatives:(i)Issue of 20,000 equity shares at a premium of ‘ 25 per
share.(ii)Issue of 10% preference shares.(iii)Issue of 8% debentures
The manufacturing company has estimated that the PE ratios in the cases of equity preference and debenture
financing would be 20, 17 and 16 respectively. You are required to evaluate the various financial alternatives
considering three plans proposed i.e. Plan I (Equity), Plan II (Preference Shares) and Plan III (Debentures).
Based on the information provided above you are required to answer the following MCQ’s:
(i) What will be the amount of PAT under the three plans i.e. Plan I (Equity), Plan II (Preference Shares) and
Plan III (Debentures) respectively from the following?
(a)‘ 13,25,000, ‘ 13,25,000 and ‘ 11,25,000 (b)‘ 8,62,500, ‘ 9,62,500 and ‘ 10,62,500
(c)‘ 15,00,000, ‘ 15,00,000 and ‘ 15,00,000 (d)‘ 6,62,500, ‘ 6,62,500 and ‘ 5,62,500
(ii) What will be the amount of total preference dividend under the three plans i.e. Plan I (Equity), Plan II

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(Preference Shares) and Plan III (Debentures) respectively from the following?
(a)‘ 3,25,000, ‘ 3,25,000 and ‘ 5,25,000 (b)‘ 8,62,500, ‘ 9,62,500 and ‘ 10,62,500
(c)‘ 2,25,000, ‘ 4,75,000 and ‘ 2,25,000 (d)‘ 2,25,000, ‘ 2,25,000 and ‘ 2,25,000
(iii) What will be the amount of earnings available for equity shareholders under the three plans i.e. Plan I
(Equity), Plan II (Preference Shares) and Plan III (Debentures) respectively from the following?
(a)‘ 3,47,500, ‘ 5,77,500 and ‘ 3,98,000 (b)‘ 9,37,500, ‘ 8,87,500 and ‘ 7,37,500
(c)‘ 4,37,500, ‘ 1,87,500 and ‘ 3,37,500 (d)‘ 5,37,500, ‘ 2,87,500 and ‘ 4,37,500
(iv) What will be the EPS under the three plans i.e. Plan I (Equity), Plan II (Preference Shares) and Plan III
(Debentures) respectively from the following?
(a)4.44, 7.66 and 7.29 (b)7.00, 6.88 and 7.29 (c)7.29, 4.69 and 8.44 (d)8.44, 9.88 and 6.78
(v) What will be the market price per share under the three plans i.e. Plan I (Equity), Plan II (Preference Shares)
and Plan III (Debentures) respectively from the following?
(a)134.50, 123.45 and 78.98 (b)145.80, 79.73 and 135.04
(c)148.8, 187.96 and 118.48 (d)168.8, 167.96 and 108.48
Solutuion:i.(d); ii.(c); iii.(c); iv.(c); v.(b)
Detailed Solution:
Evaluation of various Plan I PlanII PlanIII
financial alternatives (Equity) (Preference (Debentures)
(‘) Shares) (‘) (‘)
1.EBIT** 15,00,000 15,00,000 15,00,000
2.Interest:
Existing 1,75,000 1,75,000 1,75,000
Additional - - 2,00,000
Total Interest 1,75,000 1,75,000 3,75,000
3.PBT(1-2) 13,25,000 13,25,000 11,25,000
4.TAX50% 6,62,500 6,62,500 5,62,500
5.PAT(3-4) 6,62,500 6,62,500 5,62,500
6.Preference dividend
Existing 2,25,000 2,25,000 2,25,000
Additional - 2,50,000 -
Total Dividend Preference 2,25,000 4,75,000 2,25,000
7.Equity earnings(5-6) 4,37,500 1,87,500 3,37,500
8.No.of equity shares *60,000 40,000 40,000
9.EPS [7 / 8] 7.29 4.69 8.44
10.P/ERatio (Given) 20 17 16
11.Market Price per share 145.80 79.73 135.04
*40,000 + 20,000 new shares= 60,000 shares
**EBIT=12% of (100 lakhs existing + new 25 lakhs) =‘15,00,000

CHAPTER- 6 FINANCING DECISIONS- LEVERAGES

QUESTION NO. 1 BEST Limited, a prominent company in semi-conductors’ industry, aims to understand the
impact of operating and combined leverage on its financial performance for the year ended 31st March 2024. By
examining the provided financial details, the company seeks to make informed decisions regarding its cost structure
and financing mix.
BEST Limited is a well-established firm known for its products in the market. With a focus on innovation and
customer satisfaction, the company has achieved significant growth and success over the years.
Financial Analysis: For the financial year ending 31st March 2024, BEST Limited provides the following financial
details:
¨Fixed Cost (Excluding interest): ¹ 2,040 Lakhs

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¨Sales: ¹ 30,000 Lakhs
¨12% Debentures of ¹ 100 each: ¹ 21,250 Lakhs
¨Equity Share Capital of ¹ 10 each: ¹ 17,000 Lakhs
¨Income tax rate: 30%
Mr. Pallav Kumar, an Executive Director from engineering background discussed following analysis with CA
Nagarjuna, Additional Director - Finance of the company:
1.Operating Leverage: Operating leverage, which is currently at 1.4, measures the impact of fixed costs on the
company’s operating income.
2.Combined Leverage: Combined leverage considers both operating and financial leverage. It is calculated as the
product of operating leverage and financial leverage. And company’s combined leverage is 2.8.
CA Nagarjuna explained to Mr. Pallav that the Finance department is already analysing the various leverages like
Operating Leverage, Financial Leverage and Combined Leverage. Due to these, BEST Limited gains insights into
its cost structure and financial risk. These information enables the company to make strategic decisions regarding
its operating expenses, financing options, and overall business strategy. Continuous monitoring and evaluation
of leverage ratios will be essential for BEST Limited to maintain financial stability and drive sustainable growth in
the competitive market landscape.
Calculate the ratios to understand the financial health of BEST Ltd and CA Nagarjuna can submit his report to Mr.
Pallav Kumar.
(i)Calculate the Financial Leverage.
(a) 0.5 (b) 2 (c) 3.92 (d) 4
(ii)Calculate the Profit Volume Ratio.
(a) 47.60% (b) 15.86% (c) 23.8% (d) 17.43%
(iii)Calculate the Earnings Per Share.
(a) ‘ 1.5 (b) ‘ 1.05 (c) ‘ 4.2 (d) ‘ 2.1
(iv)Calculate the Asset Turnover ratio of BEST Ltd.
(a) 1 (b) 0.5 (c) 0.784 (d) 1.41
(v)Calculate the minimum level of Sales which must be attained to at least pay finance cost of BEST Ltd.
(a)¹ 19,286 Lakhs (b) ¹ 8,574 Lakhs (c) ¹ 24,000 Lakhs (d) ¹ 27,000 Lakhs
Solutuion:
(i) (b)Financial leverage:Combined Leverage=Operating Leverage(OL) × Financial Leverage (FL)2.8= 1.4 × FLFL=
2
Contributi on
(ii)(c) P/V Ratio: × 100
Sales
C C 2,856
OL= 1.4= 1.4(C-2,040)=C1.4 C- 2,856 = CC = C= `7,140 lakhs
C - Fixed Cost (FC) C  2040 0.4
7,140
P/V = × 100 = 23.8% ; Therefore, P/V Ratio = 23.8%
30,000
Profit After tax
(iii)(b) EPS: ; EBT= C – FC – Interest= 7140 – 2,040 – 2,550= ‘ 2,550 Lakhs
No. of equity shares
1,785
PAT= EBT – Tax= 2,550 – 765 = 1,785 Lakhs ; EPS= = 1.05
1,700
Sales 30,000
(iv)(c) Assets turnover = = = 0.784 ;
Total Assets 38,250
Total Assets= Debt + Equity = ‘ 21,250 Lakhs + ‘ 17,000 Lakhs= 38,250 Lakhs
(v)(a) The minimum level of Sales which must be attained to at least pay finance cost of BEST Ltd. EBT zero means
100% reduction in EBT. Since the combined leverage is 2.8, sales will be dropped by 100/2.8=35.714%. Hence
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new sales will be:‘ 30,000 Lakhs × (100 – 35.714) = ‘19,286 Lakhs.
Therefore, at ‘ 19,286 Lakhs level of sales, the Earnings before Tax of the company will be equal to zero.

CHAPTER- 7 INVESTMENT DECISIONS

QUESTION NO. 1 Twigato Ltd is an all equity financed company in the food delivery business and is considering
an expansion into quick grocery delivery business segment. It is the market leader in the current food delivery
business with a valuation of ‘ 5750 crores. From the discussion in the recent fund-raising meeting with the
venture capitalists, it has been noted that the quick delivery business is expected to be run for 6 years, after
which it will be sold to another entity for a target valuation of 2 times of the investment made in the business
segment. The new segment will be funded by debt, preference and equity shares in the ratio of 3:2:5. The quick
grocery delivery would require ‘ 30 crores of investment to start with and subsequently it will require additional
infusion of ‘ 20 crores in start of year 2 and ‘ 25 crores of fund infusion in start of year 4. The operating financials
of the business is expected to be on following lines for the 1st year of operation.
No of quick orders = 10,000 per day No of overnight orders = 2,000 per day Ticket sizes quick orders: 5,000 orders
below ‘ 500, 3,000 orders between ‘ 500 and ‘ 1,000 and 2,000 orders above ‘ 1000 with average ticket size being
‘700 per order.
Delivery charges are applicable for orders below ‘ 500, which is flat ‘ 40 per order.The company would charge 5%
of invoice value from the seller of the quick delivery products and 7% in case of overnight delivery.
Overnight deliveries would be available to only subscription-based customers and subscription charges are ‘
5,000 p.a. Each overnight order is expected to be having an average ticket size of ‘ 750 per order. Each subscription-
based customer is expected to place order every alternate day on an average.
The quantity of orders is expected to be growing at a rate of 20%, 15%,10%, 5% for 1st 4 years of operations.
Beyond this it is expected to be remaining constant. The proportion of orders is expected to remain unchanged.
To attract the prospective customers, it is likely to spend heavily on advertising in initial years. The advertising
and promotional activities would cost ‘ ‘ 7 crores, ‘ 8 crores and ‘ 10 crores in year 1,2 and 3 respectively.
Remuneration to delivery partners will be ‘ 15,000 p.m. fixed plus ‘ 20 per delivery. Each delivery partner can
deliver an average of 30 orders per day. An additional provision of 50% of extra delivery partners to be made to
consider the unexpected spike in orders on special occasions and holidays. The IT infrastructure and customer
care expenses would amount to ‘ 8 crores each year.
Income Tax allows 20% p.a. depreciation on straight line basis for any fresh investments. Applicable tax rate can
be taken as 25%. The after-tax cost of debt, preference share, and equity share would amount to 10%, 11% and
15% respectively. Assume 365 days in a year.
(i)Which of the following is the best estimate of discounting rate for the project?
(a)12.00% (b)11.55% (c)12.70% (d)13.75%
(ii)Which of the following is the best measure of delivery partners required in year 1?
(a)600 (b)720 (c)828 (d)911
(iii)Which of the following is the best measure of total revenue in year 3?
(a)30 crores (b)25.78 crores (c)33.66 crores (d)25.91crores
(iv)Which of the following years best represents the years of loss?
(a)Year 1 only (b)Year 1 and 2 only (c)Year 1,2 and 3 only (d)Year 1,2,3 and 4 only
(v)Which of the following in the best measure of NPV of the project?
(a)39.35 crores (b)(25.63) crores (c)23.76 cores (d)(35.67) crores
Solutuion: i.(c); ii.(a); iii.(c); iv.(d); v.(a)
Detailed Solution:
(i)Calculation of cost of capital
Capital Weight Cost Product
Debt 0.3 10% 3.00%
Preference 0.2 11% 2.20%
Equity 0.5 15% 7.50%

Advertising 7 8 10 0 0 0
IT and customer care 8 8 8 8 8 8
Delivery partner (F x 15000) 0.90 1.08 1.24 1.37 1.43 1.43
salary
Delivery partner (C+D) x 20 8.76 10.51 12.09 13.30 13.96 13.96
commission
Depreciation on investment 6 6 6 6 6
in year 0
on investment 4 4 4 4 4
in year 2
on investment 5 5 5
in year 4
Total Cost 30.66 37.59 41.33 37.66 38.40 32.40
PBT (6.25) (8.30) (7.65) (0.61) 0.51 6.51
Less: Tax 1.56 2.08 1.91 0.15 (0.13) (1.63)
PAT (4.69) (6.23) (5.74) (0.46) 0.38 4.88
Add: Depreciation 6.00 10.00 10.00 15.00 15.00 9.00
CFAT 1.31 3.77 4.26 14.54 15.38 13.88
Computation of NPV
Year Particulars Cash Flows PVF @ PV
(‘ in crores) 12.7% (‘ in crores)
0 Investment (30.00) 1.00 (30.00)
1 Investment (20.00) 0.89 (17.75)
3 Investment (25.00) 0.70 (17.46)
1 Operating CFAT 1.31 0.887 1.16
2 Operating CFAT 3.77 0.787 2.97
3 Operating CFAT 4.26 0.699 2.98
4 Operating CFAT 14.54 0.620 9.01
5 Operating CFAT 15.38 0.550 8.46
6 Operating CFAT 13.88 0.488 6.77

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6 Sale Proceeds(30+20+25)x 2 150 0.488 73.21

NPV 39.35

CHAPTER-8 DIVIDEND DECISIONS

QUESTION NO. 1 KGF Chemicals Ltd., a prominent player in the chemical industry, faces the challenge of
determining its growth trajectory and dividend policy to maximize shareholder value. With expectations of
significant growth in the near term and stabilization in the long run, the company must strategically manage its
resources to align with investor expectations.
KGF Chemicals Ltd. is a leading manufacturer and supplier of specialty chemicals catering to diverse industries
such as pharmaceuticals, agriculture, and manufacturing. Established with a commitment to innovation and
quality, the company has garnered a strong market presence over the years.
The company is projected to experience robust growth at a rate of 14% per annum for the next four years.
Subsequently, the growth rate is expected to stabilize at the national economy’s rate of 7% indefinitely. This
forecast reflects both the company’s expansion plans and the broader economic landscape.
KGF Chemicals Ltd. paid a dividend of ¹ 2 per share last year (Do = 2). The management faces the crucial decision
of balancing dividend payouts with reinvestment opportunities to sustain growth and meet shareholders’
expectations. The dividend policy must strike a delicate balance between rewarding shareholders and retaining
earnings for future investments.
The required rate of return on equity shares is 12%, indicating investors’ expected return given the company’s
risk profile and market conditions. Management must carefully assess investment opportunities to ensure they
meet or exceed this threshold, thereby generating value for shareholders over the long term.
In navigating the dynamic landscape of the chemical industry, KGF Chemicals Ltd. must adopt a proactive approach
to managing growth and dividend policy. By aligning strategic decisions with investor expectations and market
dynamics, the company can position itself for sustainable success while maximizing shareholder value. Continual
evaluation and adaptation will be essential to capitalize on growth opportunities and maintain competitiveness
in the evolving marketplace.You are required to answer the following on the basis of above information:
(i)What is the expected dividend at the end of 4th Year?
(a)‘ 2.1097 (b)‘ 2.1483 (c)‘ 2.9631 (d)‘ 3.3779
(ii)What is the present value of Expected Dividends to be received in next four years?
(a)‘ 11.2202 (b)‘ 8.3655 (c)‘ 9.8423 (d)‘ 6.2176
(iii)Determine the Market Price of shares at the end of 4th Year?
(a)‘ 72.28 (b)‘ 67.55 (c)‘ 50.67 (d)‘ 77.34
(iv)Determine the Present Value of Market Price of shares at the end of 4th Year?
(a)‘ 49.18 (b)‘ 32.22 (c)‘ 45.79 (d)‘ 42.96
(v)Calculate today’s market price of the share.
(a)‘ 59.03 (b)‘ 54.33 (c)‘ 57.01 (d)‘ 57.54
Solutuion: i.(d);ii.(b);iii.(a);iv.(c);v.(b)
Detailed Solution:
Year D1 = D0(1+g) PVF@12% PV in ‘
1 2(1+14%) =2.28 0.893 2.0364
2 2.28(1+14%) =2.5992 0.797 2.0715
3 2.5992(1+14%) =2.9631 0.712 2.1097
4 2.9631(1+14%) =3.3779 0.636 2.1483
Total PV of Expected Dividend ‘ 8.3655
D5 D (1 + g) 3.3779(1 + 7%)
P4 = = 4 = = Rs 72.28
Ke - g Ke - g 12% - 7%
PV of share at the end of 4th Year = ¹ 72.28 x 0.636 = ¹ 45.97 ; Market Price of shares = ¹ 8.3655 + ¹ 45.97 = ‘ 54.33

QUESTION NO. 1 ArMore LLP is a newly established startup dealing in manufacture of a revolutionary product
HDHMR which is a substitute to conventional wood and plywood. It is an economical substitute for manufacture
of furniture and home furnishing. It has been asked by a venture capitalist for an estimated amount of funds
required for setting up plant and also the amount of circulating capital required. A consultant hired by the entity
has advised that the cost of setting up the plant would be ‘ 5 Crores and it will require 1 year to make the plant
operational. The anticipated revenue and associated cost numbers are as follows:
Units to be sold = 3 lakh sq metres p.a. Sale Price of each sq mtr = ‘ 1000 Raw Material cost = ‘ 200 per sq mtr
Labour cost = ‘ 50 per hour; Labour hours per sq mtr = 3 hoursCash Manufacturing Overheads = ‘ 75 per machine
hour; Machine hours per sq mtr = 2 hours; Selling and credit administration Overheads = ‘ 250 per sq mtr
Being a new product in the industry, the firm will have to give a longer credit period of 3 months to its customers.
It will maintain a stock of raw material equal to 15% of annual consumption. Based on negotiation with the
creditors, the payment period has been agreed to be 1 month from the date of purchase. The entity will hold
finished goods equal to 2 months of units to be sold. All other expenses are to be paid one month in arrears. Cash
and Bank balance to the tune of ‘ 25,00,000 is required to be maintained.
The entity is also considering reducing the working capital requirement by either of the two options: a) reducing
the credit period to customers by a month which will lead to reduction in sales by 5%. b) Engaging with a factor
for managing the receivables, who will charge a commission of 2% of invoice value and will also advance 65% of
receivables @ 12% p.a. This will lead to savings in administration and bad debts cost to the extent of ‘ 20 lakhs
and 16 lakhs respectively.
The entity is also considering funding a part of working capital by bank loan. For this purpose, bank has stipulated
that it will grant 75% of net current assets as advance against working capital. The bank has quoted 16.5% rate of
interest with a condition of opening a current account with it, which will require 10% of loan amount to be
minimum average balance.You being an finance manager, has been asked the following questions:
(i)The anticipated profit before tax per annum after the plant is operational is ……….
(a)‘ 750 Lakhs (b)‘ 570 Lakhs (c)‘ 370 Lakhs (d)‘ 525 Lakhs
(ii)The estimated current assets requirement in the first year of operation (debtors calculated at cost) is…….
(a)‘ 9,42,50,000 (b)‘ 2,17,08,333 (c)‘ 7,25,41,667 (d)‘ 67,08,333
(iii)The net working capital requirement for the first year of operation is ……….
(a)‘ 9,42,50,000 (b)‘ 2,17,08,333 (c)‘ 7,25,41,667 (d)‘ 67,08,333
(iv)The annualised % cost of two options for reducing the working capital is……….
(a)18.18% and 16.92% (b)18.33% and 16.92%
(c)18.59% and 18.33% (d)16.92% and 19.05%
(v)What will be the Maximum Permissible Bank Finance by the bank and annualised % cost of the same?
(a)‘ 4,55,03,630 and 18.33% (b)‘ 5,44,06,250 and 18.33%
(c)‘ 4,45,86,025 and 18.59% (d)‘ 3,45,89,020 and 19.85%
Solutuion: i.(a);ii.(a);ii.(c);iv.(a);v.(b)
Detailed Solution:
(i) Units Per unit(‘) Amount(‘)
Raw Material consumption 3,50,000 200 7,00,00,000
labour cost 3,50,000 150 5,25,00,000
Production Overheads 3,50,000 150 5,25,00,000
Cost of Production 3,50,000 500 17,50,00,000
Less: Stock of FG 50,000 500 2,50,00,000
COGS 3,00,000 500 15,00,00,000
Selling and admin exp 3,00,000 250 7,50,00,000
Cost of Sales 3,00,000 750 22,50,00,000
Sales 3,00,000 1000 30,00,00,000
Profit 3,00,000 250 7,50,00,000

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Stock of FG (sq. mtr.) = 30,00,000x2/12 = 50,000

Units sold = 3,00,000
Raw material consumed (sq. mtr.) = 3,50,000
Raw Material Purchases=Consumption+RM stock (15%) = 7,00,00,000 + 1,05,00,000= ‘ 8,05,00,000
(ii) Stock of Raw Material (15% of 7,00,00,000) = 1,05,00,000
Stock of finished goods = 2,50,00,000
Debtors (22,50,00,000 x 3/12) = 5,62,50,000
Cash = 25,00,000
Total Current Assets = 9,42,50,000
(iii) Working Capital Statement
Amount (‘)
Stock of Raw Material (15% of 7,00,00,000) 1,05,00,000
Stock of finished goods 2,50,00,000
Debtors (22,50,00,000 x 3/12) 5,62,50,000
Cash 25,00,000
Total Current Assets 9,42,50,000
Creditors (8,05,00,000 x 1/12) 67,08,333
O/s Exp (18,00,00,000 x 1/12) 1,50,00,000
Total Current Liabilities 2,17,08,333
Net Working Capital 7,25,41,667
(iv)Cost reducing debtors credit period
Debtors credit period = 2 months
Debtors balance = 21,37,50,000(2,85,000 units) x 2/12 = ‘3,56,25,000
Debtors credit period = 3 months
Debtors balance= 22,50,00,000 x 3/12= ‘ 5,62,50,000
Amount released from debtors = ‘ 2,06,25,000
reduction in profit (15,000 units x ‘ 250) = ‘ 37,50,000
% p.a. cost (37,50,000/2,06,25,000) = 18.18%
Costs of factoring
Commission (2% of 30 crores) = 60,00,000
Interest = ‘ 58,50,000
(30cr x 65% x 12% x 3/12)
savings = ‘ 36,00,000
82,50,000 12
Net cost of factoring= × = Rs 82,50,000
65% of 30 cr i.e,19,50,00,000 3
%p.a. cost =16.92%
(v)5,44,06,250 and 18.33%
Maximum Permissible Bank Finance= 75% of 7,25,41,667= ‘ 5,44,06,250
Annualised cost of bank loan= 16.5 / 90% = 18.33%

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NEW QUESTION INTER FM - PARTT 2

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NEW QUESTION INTER FM - PARTT 2

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Target 100% Marks & Career in Dont Forget To Refer

NEW ADDITIONAL QUESTION

FIRST REFER YOU CLASS

QUESTION NO.1 Theme Ltd provides you the following information:

QUESTION NO.2 Alpha Limited has provided following information:

Equity Share Capital 25,000 Shares @ 100 per Share

3,18,75,000 =2.22 3,00,00,000

Percentage change in EBIT 28.125/15=1.875 37.50/20=1.875

(iii) Financial Leverage

Reserve = 20% of `1,31,25,000 ` 26,25,000

QUESTION NO.4 The capital structure of Shine Ltd. as on 31.03.2024 is as under:

(RV - NP) (133.82 - 100)

Value of Equity (S) 1,52,000 2,00,000

Net initial cash outflows 0 (24,20,000) 1 (21,04,280)

PART II – Descriptive Questions Question No. 1 is compulsory.

Upto 5 Lakhs Debt 0.3 10 3

Cost of Raising funds for Project II

EBIT EBT + Interest EBT + 2,000 2

Contribution= Contributi on = Contribution = 3 ;

Contributi on 12,000 48,000

QUESTION NO.4 The financial statements of Gurunath Ltd is furnished below:

9. Net Benefit 1,59,810 1,98,800

QUESTION NO.5 The following information is given for QB Ltd.

CA INTER FM MTP SERIES 2 SEPT 2024

2.Combined leverage of Nirmal Ltd is (a)1.63 (b)2.63 (c)1.315 (d)2

5.Net present value of investment in the machine by Mathangi Ltd is

PART II – DESCRIPTIVE QUESTIONS QUESTION NO. 1 IS COMPULSORY.

Less: Tax at 30% 0.3 E 0.3 E – 2.016

Present Value of Cash Inflows 561.14

Equity Shares (‘ 10 per equity share) 15,00,000

CA INTER FM RTP SETP 2024

(ii) (a) ` 7.0532 Cr

Normal Rooms 3,84,00,000 3,84,00,000 4,30,08,000

DIVISION B: DESCRIPTIVE QUESTIONS

(1) Total liability = Total Assets =` 50,00,000

Sales Revenue (` 80 × 35,000) 28,00,000

CHAPTER-3 FINANCIAL ANALYSIS AND PLANNING- RATIO ANALYSIS

Add: Purchases 80,00,000

CHAPTER - 4:COST OF CAPITAL

(RV - NP) 100 - 102.90

(RV - NP) 100 - 102.82

CHAPTER-5 FINANCIAL DECISIONS- CAPITAL STRUCTURE

CHAPTER- 6 FINANCING DECISIONS- LEVERAGES

CHAPTER- 7 INVESTMENT DECISIONS

6 Sale Proceeds(30+20+25)x 2 150 0.488 73.21

CHAPTER-8 DIVIDEND DECISIONS

Stock of FG (sq. mtr.) = 30,00,000x2/12 = 50,000

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