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CA Final | CA Inter | CA IPCC | CA Foundation Online Test Series
Question Paper
FM & SM Duration: 80
Details: TEST-3 (FM-6,7, 8 SM-13,14) Marks: 50
Instructions:
All the questions are compulsory
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upload sheets in arranged manner.
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Q-1
Calculate operating leverage, financial leverage and combined leverage under situation 1
and 2 in financial plans A & B from the following information relating to the operation and
capital structure of a company.
Installed capacity– 2,000 units
Actual production and sales– 50% of the capacity
Selling price ₹20 per unit
Variable Cost ₹10 per unit
Fixed Cost:
Under Situation I ₹ 4,000
Under Situation II ₹ 5,000
Capital Structure:
Financial Plan
A (₹) B (₹)
Equity 5,000 15,000
Debt (Rate of Interest 10%) 15,000 5,000
20,000 20,000
(8 Marks)
Q-2 X Ltd. is a Shoes manufacturing company. It is all equity financed and has a paid up
Capital of Rs 10,00,000 (Rs 10 per share)
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X Ltd. has hired Swastika consultants to analyse the future earnings. The report of Swastika
consultants states as follows:
i) The earnings and dividend will grow at 25% for the next two years.
ii) Earnings are likely to grow at the rate of 10% from 3rd year and onwards.
iii) Further, if there is reduction in earnings growth, dividend payout ratio will increase to
50%.
The other data related to the company are as follows:
Year EPS (Rs) Net Dividend per share (Rs) Share Price (Rs)
2010 6.30 2.52 63.00
2011 7.00 2.80 46.00
2012 7.70 3.08 63.75
2013 8.40 3.36 68.75
2014 9.60 3.84 93.00
You may assume that the tax rate is 30% (not expected to change in future) and post-tax
cost of capital is 15%.
By using the Dividend Valuation Model, calculate
i) Expected Market Price per share
ii) P/E Ratio
(6 marks)
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Q-3 Indo Plastics Ltd. is a manufacturer of high quality plastic products. Rasik, President, is
considering computerizing the company’s ordering, inventory and billing procedures. He
estimates that the annual savings from computerization include a reduction of 4 clerical
employees with annual salaries of Rs. 50,000 each, Rs. 30,000 from reduced production
delays caused by raw materials inventory problems, Rs. 25,000 from lost sales due to
inventory stock outs and Rs. 18,000 associated with timely billing procedures.
The purchase price of the system in Rs. 2, 50,000 and installation costs are Rs. 50,000. These
outlays will be capitalized (depreciated) on a straight line basis to a zero books salvage value
which is also its market value at the end of five years. Operation of the new system requires
two computer specialists with annual salaries of Rs. 80,000 per person. Also annual
maintenance and operating (cash) expenses of Rs. 22,000 are estimated to be required. The
company’s tax rate is 40% and its required rate of return (cost of capital) for this project is
12%.
You are required to—
(i) Evaluate the project using NPV method;
(ii) Evaluate the project using PI method;
(iii) Calculate the Project’s payback period.
Note:
(a) Present value of annuity of Re. 1 at 12% rate of discount for 5 years is 3.605.
(b) Present value of Re. 1 at 12% rate of discount, received at the end of 5 years is 0.567.
(8 Marks)
Q-4
B’ Ltd. has the following balance sheet and income statement:
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Liabilities Rs. Assets Rs.
Equity Share Capital (Rs. 10 each) 10,00,000 Fixed Assets (net) 20,00,000
Retained Earnings 8,00,000 Current Assets 18,00,000
10% Debentures 10,00,000
Current liabilities 10,00,000
38,00,000 38,00,000
Income statement for the year ended 31-3-2009
Rs.
Sales 6,80,000
Less: Operating Expenses (including Rs. 60,000 as Depreciation) 2,40,000
EBIT 4,40,000
Less: Interest 1,00,000
EBT 3,40,000
Less: Taxes @ 30% 1,02,000
EAT 2,38,000
Required:
(a) Determine the degree of operating, financial and combined leverages at the current
sales level, if all operating expenses other than depreciation are variable costs.
(b) If total assets remain at the same level, but sales:
(i) increase by 20 per cent and
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(ii) decrease by 20 per cent.
(iii) What will be the earnings per share at the new sales levels?
(8 Marks)
Q-5 Explain the McKinsey 7S Model and its components. How do the "Hard Ss" and "Soft Ss"
elements interact within the model, and why is achieving a balance between them
important for organizational effectiveness?
(6 marks)
Q-6 ABC Corporation is currently facing a series of challenges that include declining sales,
loss of market share, negative cash flow, deteriorating physical facilities, and low employee
morale. In an effort to rejuvenate the organization, the board has brought in a young
executive named Rajesh to lead the company through these troubled waters. What
corporate strategy should Rajesh consider for ABC Corporation, and what key steps should
he take to implement this strategic choice effectively?
(5 Marks)
MCQs:-
1. B Corporation is considering a new project which will require the purchase of a new
machine at a cost of 250,000. The project will also require use of a machine which has been
fully depreciated but which could be sold today for 30,000. In addition, the firm expects an
increase in net working capital investment of 60,000 in the first year of the project. What is
the incremental net investment at the outset of this project? Applicable Tax Rate is 40%
A) Rs. 3,52,000
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B) Rs. 2,92,000
C) Rs. 3,22,000
D) Rs. 2,32,000
2. The cost of capital and rate of return on investment of GOD Ltd. is 10% and 15%
respectively. The company has 10 lakh shares of 10% each. Its earnings per share is ₹ 7.5.
Calculate the value of the firm per share using Walter’s Model assuming all earnings are
distributed as dividend.
A) ₹ 75
B) ₹ 100
C) ₹ 125
D) ₹ 150
3. Rahul is evaluating two mutually exclusive investment projects for his company. Project A
has a lifespan of 4 years, while Project B has a lifespan of 6 years. The company's weighted
average cost of capital (WACC) is 10%. Rahul decides to use the Equivalent Annualized
Criterion to compare the projects. He calculates the NPV for Project A as ₹500,000 and for
Project B as ₹800,000. What is the correct comparison result?
A) Project A is more favorable than Project B.
B) Project B is more favorable than Project A.
C) Both projects are equally favorable.
D) The comparison cannot be made using the Equivalent Annualized Criterion.
(3 x 1 = 3 marks)
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4. John, the CEO of TechVision Inc, is concerned about the validity of the assumptions on
which their current strategy is based. He decides to implement a control mechanism to
verify the accuracy of these premises. Which type of strategic control should John use to
systematically validate the assumptions underlying their strategy?
A) Strategic Surveillance
B) Premise Control
C) Special Alert Control
D) Implementation Control
5. Rahul is considering investing in a company's stock using the Dividend Discount Model
(DDM) to determine its intrinsic value. He calculates the intrinsic value as the sum of the
present value of future dividends and the present value of the expected stock sale price.
Which of the following statements about Rahul's DDM calculation is correct?
A) Rahul should not consider the present value of the stock sale price in the DDM calculation
because it only depends on the future market conditions.
B) Rahul's DDM calculation is incorrect because it should only include the present value of
dividends, not the stock sale price.
C) Rahul's DDM calculation is accurate as it correctly accounts for both future dividend
payments and the expected stock sale price.
D) Rahul's DDM calculation is flawed because it doesn't consider the company's current
stock price.
6. ABC Clothing, a well-established clothing brand, wants to increase its market share in the
United States. They plan to achieve this by using their existing product line without making
any significant changes. What growth strategy is ABC Clothing employing in this scenario?
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A) Market development
B) Product development
C) Diversification
D) Market penetration
(3 x 2 = 6 Marks)
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