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Mock Test Paper - Series II: April, 2024

Date of Paper: 15 April, 2024
Time of Paper: 2 P.M. to 5 P.M.

INTERMEDIATE GROUP – II
PAPER – 6A : FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A: FINANCIAL MANAGEMENT
Time Allowed – 3 Hours (Total time for 6A and 6B) Maximum Marks – 50
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
4. Working note should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of note.
However, in answers to Questions in Division A, working notes are not
required.
PART I – Case Scenario based MCQs (15 Marks)
Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

1. Tiago Ltd is an all-equity company engaged in manufacturing of batteries for

electric vehicles. There has been a surge in demand for their products due to
rising oil prices. The company was established 5 years ago with an initial
capital of ` 10,00,000 and since then it has raised funds by IPO taking the
total paid up capital to ` 1 crore comprising of fully paid-up equity shares of
face value ` 10 each. The company currently has undistributed reserves of `
60,00,000. The company has been following constant dividend payout policy
of 40% of earnings. The retained earnings by company are going to provide a
return on equity of 20%. The current EPS is estimated as Rs 20 and prevailing
PE ratio on the share of company is 15x. The company wants to expand its
capital base by raising additional funds by way of debt, preference and equity
mix. The company requires an additional fund of ` 1,20,00,000. The target
ratio of owned to borrowed funds is 4:1 post the fund-raising activity. Capital
gearing is to be kept at 0.4x.
The existing debt markets are under pressure due to ongoing RBI action on
NPAs of the commercial bank. Due to challenges in raising the debt funds,
the company will have to offer ` 100 face value debentures at an attractive
yield of 9.5% and a coupon rate of 8% to the investors. Issue expenses will
amount to 4% of the proceeds.
The preference shares will have a face value of ` 1000 each offering a
dividend rate of 10%. The preference shares will be issued at a premium of
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5% and redeemed at a premium of 10% after 10 years at the same time at

which debentures will be redeemed.
The CFO of the company is evaluating a new battery technology to invest the
above raised money. The technology is expected to have a life of 7 years. It
will generate a after tax marginal operating cash flow of ` 25,00,000 p.a.
Assume marginal tax rate to be 27%.
1. Which of the following is best estimate of cost of equity for Tiago Ltd?
(a) 12.99%
(b) 11.99%
(c) 13.99%
(d) 14.99%
2. Which of the following is the most accurate measure of issue price of
debentures?
(a) 100
(b) 96
(c) 90.58
(d) 95.88
3. Which of the following is the best estimate of cost of debentures to be
issued by the company? (Using approximation method)
(a) 7.64%
(b) 6.74%
(c) 4.64%
(d) 5.78%
4. Calculate the cost of preference shares using approximation method
(a) 10.23%
(b) 11.22%
(c) 12.12%
(d) 12.22%
5. Which of the following best represents the overall cost of marginal capital
to be raised?
(a) 11.76%
(b) 17.16%
(c) 16.17%
(d) 16.71% (5 x 2 = 10 Marks)

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2. Ranu & Co. has issued 10% debenture of face value 100 for ` 10 lakh. The
debenture is expected to be sold at 5% discount. It will also involve floatation
costs of ` 10 per debenture. The debentures are redeemable at a premium of
10% after 10 years. Calculate the cost of debenture if the tax rate is 30%.
(a) 8.97%
(b) 9.56%
(c) 8.25%
(d) 10.12% (2 Marks)
3. Given Data: Sales is ` 10,00,000, Break even sales is ` 6,00,000.
What is the Degree of operating leverage?
(a) 3
(b) 2
(c) 2.5
(d) 2.2 (2 Marks)
4. A project requires an initial investment of ` 20,000 and it would give annual
cash inflow of ` 4,000. The useful life of the project is estimated to be 10
years. What is payback reciprocal/Approximated IRR?
(a) 20%
(b) 15%
(c) 25%
(d) 12% (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) The below information for Lever Ltd is provided on annual basis:
`
Sales at 3 months credit 48,00,000
Materials consumed (suppliers extend 2 months credit) 12,00,000
Wages paid (one month lag in payment) 9,60,000
Cash manufacturing expenses (paid on month in arrear) 12,00,000
Administrative expense (one month lag in payment) 3,60,000
Sales promotion expense (paid monthly in advance) 1,20,000
The Company sells its products at a gross profit of 20%.
The Company keeps two months stock of raw materials and two months
stock of finished goods.
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Depreciation is considered as a part of cost of production.

Cash balance is retained at ` 1,00,000,
Assuming a 15% margin, COMPUTE the working capital requirements
of the Company on cash cost basis. Ignore work-in progress.
(5 Marks)
(b) SOC Ltd has 10 lakh equity shares outstanding at the beginning of the
accounting year 2024. The existing market price per share is Rs 600.
Expected dividend is Rs 40 per share. The rate of capitalization
appropriate to the risk class to which the company belongs is 20%.
(i) CALCULATE the market price per share by the end of the year
when expected dividends are: (a) declared, and (b) not declared,
based on the Miller – Modigliani approach.
(ii) CALCULATE the number of shares to be issued by the company at
the end of the accounting year on the assumption that the net
income for the year is Rs 15 crore; investment budget is Rs 20
crores, when (a) Dividends are declared, and (b) Dividends are not
declared.
(iii) PROVE that the market value of the shares at the end of the
accounting year will remain unchanged irrespective of whether (a)
Dividends are declared, or (ii) Dividends are not declared.
(5 Marks)
(c) An existing profitable company, RMC World Ltd. is considering a new
project for manufacture of home automation gadget involving a capital
expenditure of ` 1000 Lakhs and working capital of ` 150 Lakhs. The
capacity of the plants for an annual production of 3 lakh units and
capacity utilization during 5 year life of the project is expected to be as
indicated below:
Year 1 2 3 4 5
Capacity Utilization (%) 50 65 80 100 100

The average price per unit of product is expected to be `600 netting a

contribution of 60 percent. The annual fixed costs, excluding
depreciation, are estimated to be `500 Lakhs per annum from the third
year onwards. For the first and second year, it would be ` 200 lakhs and
` 350 lakhs respectively.
Scrap value of the capital asset at the end of 5th year is ` 200 Lakhs.
Depreciation on capital asset is provided on written down value basis @
40% p.a. for income tax purpose. The rate of income tax may be taken
at 30%. The cost of capital is 12%. At end of the third year an additional
investment of ` 200 lakhs would be required for working capital. There
is no capital gain tax applicable.
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COMPUTE the NPV of the project. RMC World Ltd. is about to make a
presentation to Secure Venture Capital Firm. Secure Venture Capital
Firms will invest in any project if the net addition to shareholder wealth
from the project is above ` 100 lakhs. (5 Marks)
2. (a) From the following PREPARE Income statement of company P and Q.
P Q
No. of Equity Shares 1,00,000 70,000
Financial leverage 3:1 4:1
Operating Leverage 2:1 3:1
Variable cost to sales 67% 50%
Interest ₹ 5,50,000 ₹ 6,00,000
Income tax rate 30% 30%
Also CALCULATE EPS of the company. (4 Marks)
(b) The GT Limited is willing to expand its business for which it requires an
additional finance of ` 50,00,000. At present, the capital structure of the
company is as under:
• 7,00,000 Equity shares of ` 10 each
• 10% Debentures ` 63,00,000
• 12% Term loan ` 54,00,000
• Retained earnings ` 1,30,00,000
At present, the company's EBIT is ` 54,00,000. However, the company,
after expansion, expects ROI 2% greater than the present ROI, Income
Tax Rate is 30%.
Following two options, for getting additional finance, are available-
(a) To raise funds as term loan @ 12%
(b) To raise funds by issuing 1,00,000 equity shares at ` 20 per share
and balance by issuing 11% debentures at par.
Required:
(i) FIND out the market price of shares, if the P/E ratio is 10.
(ii) RECOMMEND the suitable option of raising funds with reason.
(6 Marks)
3. (a) EOC Ltd is a listed company and has presented the below abridged
financial statements below.
Statement of Profit and Loss ` `
Sales 1,25,00,000
Cost of goods sold (76,40,000)
Gross Profit 48,60,000
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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
Equity Share Capital 30,00,000
Reserves and 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

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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%
Long Term Debt to Equity= 0.5
Debtor Turnover= 100 Days
Creditor Turnover (based on COGS)= 100 Days

Inventory= 70% of Opening inventory

Cash Balance is assumed to remain same for next year

You are required to -
(1) CALCULATE inventory turnover ratio in days for current year
(2) CALCULATE receivables turnover ratio in days for current year
(3) CALCULATE the projected receivables, inventory, payables and long
term debt (8 Marks)
(b) NAME the various financial instruments dealt with in the International
market. (2 Marks)
4. (a) WRITE short notes on Inter relationship between investment, financing
and dividend decisions. (4 Marks)
(b) DISCUSS the liquidity vs. profitability issue in management of working
capital. (4 Marks)
(c) EXPLAIN the concept of discounted payback period. (2 Marks)
OR
(c) EXPLAIN the concept of Indian depository receipts. (2 Marks)

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INTERMEDIATE COURSE: GROUP II

PAPER 6B: STRATEGIC MANAGEMENT
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises case scenario based multiple choice questions (MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I – Case scenario based MCQs (15 Marks)

Question 1.(A) (Compulsory)

1. (A) Café Delight, a thriving restaurant chain known for its unique blend of
Australian and Indian culinary experiences, embarked on a remarkable
journey from its humble beginnings as a small café in Australia to
becoming a renowned player in the Indian restaurant industry. This case
study digs into the strategic decisions and market dynamics that fueled
Café Delight's growth, highlighting its transition from a single café in
Powai, Mumbai, to a flourishing chain with a presence in five cities and
over 25 stores. It explores how Café Delight effectively leveraged social
media and adapted its pricing strategy to compete with global brands
while maintaining a healthy profit margin.
In 2005, Café Delight was founded in Melbourne, Australia, by a
passionate entrepreneur with a vision to bring the flavors of Australia
and India together. The first café established in Powai, Mumbai, received
accolades for its unique menu, blending Australian coffee culture with
Indian culinary traditions. Over the course of five years, Café Delight
expanded to three stores in Mumbai, driven by exceptional mouth
publicity, customer loyalty, and consistent quality.
As the social media landscape evolved, Café Delight recognized the
power of online platforms in reaching a wider audience. By effectively
utilizing social media and online marketing, Café Delight expanded its
presence to five cities across India and established over 25 stores.
Customer engagement through social media platforms enabled the
brand to create a strong and vibrant community, driving organic growth.
Café Delight's customer-centric approach involved continuously evolving
its menu to cater to the changing tastes and dietary preferences of its
patrons. By understanding the evolving needs of its customers, Café
Delight could offer personalized menu items, seasonal specials, and
dietary alternatives. This approach created a sense of loyalty and
engagement among customers, strengthening the brand's appeal. Not
just customers but High-power, low-interest stakeholders, including
regulatory authorities, were addressed with careful compliance and
adherence to industry standards. Low-power, high-interest stakeholders,
like potential customers and local communities, were engaged through
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targeted marketing campaigns and community involvement initiatives.

This meticulous stakeholder analysis allowed Café Delight to build and
maintain strong relationships with each group, effectively managing their
influence and impact on the brand.
With its expanding presence and increasing popularity, Café Delight
underwent a shift in its pricing strategy. It transitioned from a pocket -
friendly pricing model to a skimming strategy, capitalizing on its unique
blend of Australian and Indian flavors to position itself as a premium
restaurant. Café Delight faced stiff competition from global brands
entering the Indian market but maintained a profit margin of
approximately 30% through menu engineering and targeted pricing.
In one of its kind, using strategic tools enabled Café Delight to identify
and act on opportunities while mitigating threats, contributing to its long-
term success in the highly competitive restaurant industry.
Based on the above Case Scenario, answer the Multiple-Choice
Questions.
(i) Café Delight effectively leveraged social media and adapted its
pricing strategy as it stepped into which phase of business life cycle
of operations?
(a) Introduction Stage
(b) Growth Stage
(c) Maturity Stage
(d) Decline Stage (2 Marks)
(ii) What stakeholder group did Café Delight engage through targeted
marketing campaigns and community involvement initiatives?
(a) High-power, high-interest stakeholders
(b) Low-power, low-interest stakeholders
(c) Low-power, high-interest stakeholders
(d) High-power, low-interest stakeholders (2 Marks)
(iii) What best describes Café Delight's initial expansion strategy when
it expanded from one café to three in Mumbai?
(a) Aggressive price reduction
(b) Leveraging customer loyalty and word-of-mouth publicity
(c) Extensive online marketing
(d) Embracing global branding strategies (2 Marks)

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(iv) At which level of strategic management does Café Delight's

transition from a pocket-friendly pricing model to a skimming
strategy fit?
(a) Corporate level
(b) Business level
(c) Functional level
(d) Operational level (2 Marks)
(v) What type of strategy did Café Delight use to differentiate itself from
competitors in the Indian restaurant industry?
(a) Cost leadership strategy
(b) Focused differentiation strategy
(c) Cost focus strategy
(d) Hybrid strategy (2 Marks)
(B) Compulsory Application Based Independent MCQs
(i) Shamita joined GlobalX Consulting firm as an Analyst in financial
fraud mitigation. In her very first assignment she faced an integrity
dilemma where her subordinates had missed calling out a potential
financial risk which could impact the overall fraud rating of the
organisation. She quickly reached out to her seniors who
appreciated her diligence and immediately reported the same to
senior management. In this scenario which element, soft or hard,
is acting in favor of GlobalX?
(a) Strategy
(b) Systems
(c) Shared Value
(d) Staff (2 Marks)
(ii) Chocopo, an ice cream company run by Shri Shyam Kumar since
1985, now had its management change to his two daughters, who
came in and wanted to experiment with a lot of flavors. They
introduced 21 new flavors in a span of 6 months while not losing
out of 2 legendary flavors of their dad i.e. Stick Kulfi and Mango
Bar. After year 1 of operations, 9 out of the 21 flavors had to be
stopped, while 10 flavors were still kept, extending the
experimentation. The early sense from market was that they would
have to be stopped too, but the sisters decided to extend their
timelines. What category as per BCG Matrix would the 10 flavors
fall into?
(a) Cash Cow

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(b) Dog
(c) Question Mark
(d) Star (2 Marks)
(iii) A company negotiating the best prices and quality from its suppliers
to add to customer’s delight is an example of?
(a) Value Creation by improving primary activity
(b) Value Creation by improving support activity
(c) Competitive Advantage Creation
(d) Stakeholder Management (1 Mark)

PART II – Descriptive Questions (35 Marks)

Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
1. (a) ABC retail chain regularly monitors consumer trends and supply chain
flexibility. The retail chain tracks consumer trends to adjust its offerings,
ensuring they meet customer needs. Simultaneously, it maintains a
flexible supply chain to respond swiftly to demand fluctuations. This
strategy enables ABC retail chain to anticipate market shifts and adapt
to them effectively, ensuring its competitiveness and customer
satisfaction. Which type of strategy is the retail chain employing?
(5 Marks)
(b) A Mumbai-based conglomerate, PQR Ltd., has announced a major
restructuring of its business operations. The company has decided to
split its business into four separate units: Manufacturing, Retail,
Services, and Technology. Each unit will operate as a separate
business, with delegated responsibility for day-to-day operations and
strategy to the respective unit managers. Identify the organization
structure that PQR Ltd. has planned to implement. Discuss any four
attributes and the benefits the firm may derive by using this organization
structure. (5 Marks)
(c) GreenThrift Inc., a sustainable clothing retailer, is experiencing a surge
in popularity due to the growing awareness of environmental issues
among consumers. The company specializes in selling second-hand
clothing and upcycled garments, offering an eco-friendly alternative to
traditional fast fashion.
A major concern for GreenThrift Inc. is the emergence of new
sustainable fashion brands in the market. These brands focus on using
organic and recycled materials, as well as ethical manufacturing
practices, which align with the values of environmentally conscious
consumers.

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Identify and explain that competition from new sustainable fashion

brands falls under which category of Porter’s Five Forces Model for
Competitive Analysis? (5 Marks)
2. (a) “Each organization must build its competitive advantage keeping in mind
the business warfare. This can be done by following the process of
strategic management.” Considering this statement, explain major
benefits of strategic management. (5 Marks)
(b) Reshuffle Corp is a company that manufactures and sells office furniture.
They offer a range of products, from desks and chairs to cabinets and
shelves. Recently, the company has been facing increased competition
from online retailers offering similar products at lower prices.
Analyzing the characteristics of products in the furniture industry,
discuss how Reshuffle Corp can differentiate its products to maintain a
competitive edge in the market. (5 Marks)
3. (a) EasyLife Corporation, a leading manufacturer of consumer electronics,
is considering launching a new line of smart home devices. As a strategic
manager, conduct a SWOT analysis for EasyLife Corporation to assess
the feasibility and potential success of this new venture. Consider both
internal and external factors that could impact the success of the new
product line. (5 Marks)
(b) Explain the concept of forward and backward linkages between strategy
formulation and implementation in strategic management, using relevant
examples. How do these linkages impact the overall strategic decision -
making process of an organization? (5 Marks)
4. (a) Define Strategic Performance Measures (SPM). Explain various types of
strategic performance measures. (5 Marks)
(b) StarTech Solutions, an aerospace technology firm, operates in a highly
competitive industry. Despite the fierce competition in the aerospace
sector, StarTech has carved out a niche for itself by focusing on serving
unique, high-end clients. Unlike its competitors, StarTech has chosen
not to diversify its target market and instead specializes in providing
cutting-edge solutions to this niche market.
Identify and explain the strategy adopted by StarTech Solutions. Discuss
the advantages and disadvantages of this strategy.
OR
Strategic alliances are formed if they provide an advantage to all the
parties in the alliance. Do you agree? Explain in brief the advantages of
a strategic alliance. (5 Marks)

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Mock Test Paper - Series II: April, 2024

Date of Paper: 15 April, 2024
Time of Paper: 2 P.M. to 5 P.M.

INTERMEDIATE: GROUP – II
PAPER – 6: FINANCIAL MANAGEMENT & STRATEGIC MANAGEMENT
PAPER 6A : FINANCIAL MANAGEMENT
Suggested Answers/ Hints
PART I – Case Scenario based MCQs
1. 1. (d) 14.99%
B = retention ratio=0.6, r=return on equity=20%, DPS=D0=20 x 0.4= 8,
MPS = P0 = EPS x PE = 20 x 15=300
G = b.r =0.6 x 20% = 12%
D1 = D0(1+g) = 8 (1.12) = 8.96
Ke = D1/P0 + g = 8.96/300 + 0.12 = 14.99%
2. (c) 90.58
Price of debentures= PV of future cash flows for investor
discounted at their yield
= 8 x PVAF(9.5%,10 years)+ 100 x PVF(9.5%, 10 years)
= 8 x 6.2788 + 100 x 0.4035
=50.2304 + 40.35
=90.58
3. (a) 7.64%
NP = 90.58 x 96%=86.96, RV= 100, Interest=8, t=0.27, n= 10
Int (1− t ) + ( RV − NP ) / n
Kd =
(RV + NP ) / 2
8 (1− 0.27 ) + (100 − 86.96 ) /10
=
(100 + 86.96 ) / 2
= 7.64%
4. (b) 11.22%
PD + (RV − NP ) / n
Kp =
(RV + NP ) / 2
100 + (1100 − 950 ) /10
=
(1100 + 950 ) / 2
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= 11.22%
5. (a) 11.76%
Existing Total Additional
Equity Funds 1,60,00,000 2,00,00,000 40,00,000
Preference Shares 24,00,000 24,00,000
Debt 56,00,000 56,00,000
1,60,00,000 2,80,00,000 1,20,00,000

Capital gearing = 0.4

(PSC + Debt)/Equity = 0.4

(Total Funds -Equity)/
Equity = 0.4
(2.8 crores-Equity)/
equity = 0.4

Equity = 2 crores

Weighted avg cost Weights Cost W.C

of marginal capital
Equity Funds 40,00,000 0.333333333 14.99% 5.00%
Preference Shares 24,00,000 0.2 11.22% 1.53%
Debt 56,00,000 0.466666667 7.64% 5.24%
Total 1,20,00,000 11.76%
2. (a) 8.97%
1
[I+ (RP - NP)](1- t)
K = n
d 1/ 2(RP +NP)
1
[10 + (110 - 85)](1- 0.30)
K = 10
d 1/ 2(110 + 85)
= 8.75/97.5 = 8.97%
3. (c) 2.5
Margin of safety = (sales – BEP sales)/sales x 100
= 40%
Degree of operating leverage = 1/MOS
= 1/40% = 2.5
4. (a) 20%

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Average annual cash in flow

Payback Reciprocal =
Initial investment

= ` 4,000×100 = 20%
` 20,000
PART II – Descriptive Questions
1. (a) (i) Working Notes:
(i) Computation of Annual Cash Cost of (`)
Production
Material consumed 12,00,000
Wages 9,60,000
Manufacturing expenses 12,00,000
Total cash cost of production 33,60,000
(ii) Computation of Annual Cash Cost of Sales: (`)
Total Cash cost of production as in (i) above 33,60,000
Administrative Expenses 3,60,000
Sales promotion expenses 1,20,000
Total cash cost of sales 38,40,000
Add: Gross Profit @ 20% on sales (25% on cost 9,60,000
of sales)
Sales Value 48,00,000
Statement of Working Capital requirements (cash cost basis)
(`) (`)
A. Current Assets
Inventory:
- Raw materials 2,00,000
 ` 12,00,000 
 ×2 months 
 12months 
- Finished Goods 5,60,000
 ` 33,60,000 
 ×2 months 
 12months 
Receivables (Debtors) 9,60,000
 ` 38,40,000 
 ×3 months 
 12months 
Sales Promotion expenses paid in 10,000
 `1,20,000 
advance  ×1 month 
 12 months 
Cash balance 1,00,000 18,30,000

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Gross Working Capital 18,30,000

B. Current Liabilities:
Payables:
- Creditors for materials 2,00,000
 ` 12,00,000 
 ×2 months 
 12months 
Wages outstanding 80,000
 ` 9,60,000 
 ×1 month 
 12months 
Manufacturing expenses 1,00,000
outstanding
 ` 12,00,000 
 ×1 month 
 12months 
Administrative expenses outstanding 30,000 4,10,000
 ` 3,60,000 
 ×1 month 
 12months 
Net working capital (A - B) 14,20,000
Add: Safety margin @ 15% 2,13,000
Total Working Capital requirements 16,33,000
(b) (i) Calculation of market price per share
According to Miller – Modigliani (MM) Approach:

Where,
Existing market price (Po) = ` 600
Expected dividend per share (D 1) = ` 40
Capitalization rate (ke) = 0.20
Market price at year end (P1) =?
a. If expected dividends are declared, then
600=(P1+40)/(1+0.2)
600 x 1.2 = P1+40
P1 = 680
b. If expected dividends are not declared, then
600 = (P1+0)/(1 + 0.2)
600 x 1.2 = P1
P1= 720
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(ii) Calculation of number of shares to be issued

(a) (b)
Dividends are Dividends are
declared not Declared
(` lakh) (` lakh)
Net income 1500 1500
Total dividends (400) -
Retained earnings 1100 1500
Investment budget 2000 2000
Amount to be raised by new 900 500
issues
Relevant market price (` per 680 720
share)
No. of new shares to be issued 1.3235 0.6944
(in lakh)
(` 900 ÷ 680; ` 500 ÷ 720)
(iii) Calculation of market value of the shares
(a) (b)
Particulars Dividends are Dividends are
declared not Declared
Existing shares (in lakhs) 10.00 10.00
New shares (in lakhs) 1.3235 0.6944
Total shares (in lakhs) 11.3235 10.6944
Market price per share (`) 680 720
Total market value of shares 11.3235 × 680 10.6944 × 720
at the end of the year (` = 7,700 (approx.) = 7,700 (approx.)
in lakh)
Hence, it is proved that the total market value of shares remains
unchanged irrespective of whether dividends are declared, or not
declared.
(c) Calculation of Cash Flow after Tax
Year 1 Year 2 Year 3 Year 4 Year 5
Capacity 50% 65% 80% 100% 100%
Units 1,50,000 1,95,000 2,40,000 3,00,000 3,00,000
Contribution p.u. 360 360 360 360 360
(600 x 60%)
Total Contribution 5,40,00,000 7,02,00,000 8,64,00,000 10,80,00,000 10,80,00,000
Less: Fixed Asset 2,00,00,000 3,50,00,000 5,00,00,000 5,00,00,000 5,00,00,000
Less: Depreciation 4,00,00,000 2,40,00,000 1,44,00,000 86,40,000 51,84,000
(W.N.)
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PBT (60,00,000) 1,12,00,000 2,20,00,000 4,93,60,000 5,28,16,000

Less: Tax (18,00,000) 33,60,000 66,00,000 1,48,08,000 1,58,44,800
PAT (42,00,000) 78,40,000 1,54,00,000 3,45,52,000 3,69,71,200
Add: Depreciation 4,00,00,000 2,40,00,000 1,44,00,000 86,40,000 51,84,000
CFAT 3,58,00,000 3,18,40,000 2,98,00,000 4,31,92,000 4,21,55,200

Calculation of NPV
Year Description Cash Flow PVF PV
@12%
0 Initial Investment (10,00,00,000) 1 (10,00,00,000)
0 WC introduced (1,50,00,000) 1 (1,50,00,000)
3 WC introduced (2,00,00,000) 0.7118 (1,42,36,000)
1 CFAT 3,58,00,000 0.8929 3,19,65,820
2 CFAT 3,18,40,000 0.7972 2,53,82,848
3 CFAT 2,98,00,000 0.7118 2,12,11,640
4 CFAT 4,31,92,000 0.6355 2,74,48,516
5 CFAT 4,21,55,200 0.5674 2,39,18,860
5 WC released 3,50,00,000 0.5674 1,98,59,000
5 Scrap Sale 2,00,00,000 0.5674 1,13,48,000
Net Present Value 3,18,98,684
Working Notes (W.N.)
Calculation of Depreciation
Year Opening WDV Depreciation Closing WDV
1 10,00,00,000 4,00,00,000 6,00,00,000
2 6,00,00,000 2,40,00,000 3,60,00,000
3 3,60,00,000 1,44,00,000 2,16,00,000
4 2,16,00,000 86,40,000 1,29,60,000
5 1,29,60,000 51,84,000 77,76,000
2. (a) Income statement
Particulars P Q
(`) (`)
Sales 50,00,000 48,00,000
(–) Variable Cost 33,50,000 24,00,000
Contribution 16,50,000 24,00,000
Fixed Cost 8,25,000 16,00,000
EBIT 8,25,000 8,00,000
(–) Interest 5,50,000 6,00,000
EBT 2,75,000 2,00,000

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(–) Tax 82,500 60,000

EAT 1,92,500 1,40,000
(÷) No. of Shares 1,00,000 70,000
EPS ₹ 1.93 ₹ 2.00
Working Note :
1. Financial = EBIT = EBIT
Leverage EBT (EBIT – Int.)
Let the EBIT be X
P Q
3 = X/(X – 5,50,000) 4 = X/(X – 6,00,000)
3(X – 5,50,000) = X 4(X – 6,00,000) = X
3X – 16,50,000 = X 4X – 24,00,000 = X
2X = 16,50,000 3X = 24,00,000
X = 8,25,000 X = 8,00,000
2. Operating Leverage = Contribution/EBIT
Let the Contribution be X
P Q
2 = X/8,25,000 3= X/8,00,000
X = 16,50,000 X = 24,00,000

3. Sales
Let the Sales be 100
Sales – Variable Cost = Contribution
P Q
Contribution = 100 – 67 = 100 – 50
= 33 = 50
Sales =
P Q
For 33 = 16,50,000 For 50 = 24,00,000
For 100 = 50,00,000 For 100 = 48,00,000
(b) Expected return on capital employed
Capital Employed = Debt + Equity
= (` 63,00,000 + ` 54,00,000) + (` 70,00,000 + ` 1,30,00,000)
= ` 3,17,00,000
 EBIT 
Return on capital employed/ROI =   x 100
 Capital employed 

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At present:
 54,00,000 
=   x 100
 3,17,00,000 
= 17.03%
Now company expects 2% more as ROI
So, Expected ROI = 17.03% + 2%
= 19.03%
Proposed EBIT = Proposed Capital Employed x Return on capital
employed
= (` 3,17,00,000 + ` 50,00,000) x 19.03% = ` 69,84,010
(i) Market Price per Share:
Particular Financial Options
Option – I Option II
12% term 1,00,000 equity
loan of shares @ ` 20
` 50,00,000 and 11%
debentures of
` 30,00,000
(`) (`)
EBIT 69,84,010 69,84,010
Less: Interest
- 10% on old debentures 6,30,000 6,30,000
- 11% on new debentures - 3,30,000
- 12% on old term loan 6,48,000 6,48,000
- 12% on new term loan 6,00,000
Total Interest 18,78,000 16,08,000
EBT 51,06,010 53,76,010
Less Tax @ 30% 15,31,803 16,12,803
EAT 35,74,207 37,63,207
No. of equity shares 7,00,000 8,00,000
Earnings per share 5.11 4.70
P/E ratio 10 10
Market Price per Share = EPS x
51.06 47.04
P/E ratio

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(ii) Recommendation:
The option I is better and may be opted as both EPS and MPS are
higher.
Inventory 38,60,000 × 365
3. (a) Inventory Turnover = ×365 = = 184.41 days
COGS 76,40,000
= 185 days (apx)
Receivables
Receivables Turnover = ×365 = 39,97,000×365
1,25,00,000
= 116.71
Sales
= 117 days (apx)
Equity to Reserves = 1
Reserves = 1 x 30,00,000 = 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
Closing Receivables
Projected Debtors Turnover = 100 days = x 365
Sales
Closing Receivables
100 = x 365
80,00,000
80,00,000 x 100
Closing Receivables = = 21,91,781
365
Projected Closing Inventory = 70% of opening inventory = 70% of
38,60,000 = 27,02,000
Closing Creditors
Projected Creditor Turnover= 100 days = x365
COGS
COGS
Closing Creditors = x100
365
40,00,000
Closing Creditor = x100 = 10,95,890
365
Equity Share Capital + Reserves = 30,00,000 + 30,00,000 = 60,00,000
Long Term Debt to Equity = 0.5
LTD
= 0.5
60,00,000
Long Term Debt = 0.5 x 60,00,000
Long Term Debt = 30,00,000

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(b) Financial Instruments in the International Market

Some of the various financial instruments dealt with in the international
market are:
(a) Euro Bonds
(b) Foreign Bonds
(c) Fully Hedged Bonds
(d) Medium Term Notes
(e) Floating Rate Notes
(f) External Commercial Borrowings
(g) Foreign Currency Futures
(h) Foreign Currency Option
(i) Euro Commercial Papers.
4. (a) Inter-relationship between Investment, Financing and Dividend
Decisions: The finance functions are divided into three major decisions,
viz., investment, financing and dividend decisions. It is correct to say that
these decisions are inter-related because the underlying objective of
these three decisions is the same, i.e. maximisation of shareholders’
wealth. Since investment, financing and dividend decisions are all
interrelated, one has to consider the joint impact of these decisions on
the market price of the company’s shares and these decisions should
also be solved jointly. The decision to invest in a new project needs the
finance for the investment. The financing decision, in turn, is influenced
by and influences dividend decision because retained earnings used in
internal financing deprive shareholders of their dividends. An efficient
financial management can ensure optimal joint decisions. This is
possible by evaluating each decision in relation to its effect on the
shareholders’ wealth.
The above three decisions are briefly examined below in the light of their
inter-relationship and to see how they can help in maximising the
shareholders’ wealth i.e. market price of the company’s shares.
Investment decision: The investment of long term funds is made after
a careful assessment of the various projects through capital budgeting
and uncertainty analysis. However, only that investment proposal is to
be accepted which is expected to yield at least so much return as is
adequate to meet its cost of financing. This have an influence on the
profitability of the company and ultimately on its wealth.
Financing decision: Funds can be raised from various sources. Each
source of funds involves different issues. The finance manager has to
maintain a proper balance between long-term and short-term funds. With
the total volume of long-term funds, he has to ensure a proper mix of
loan funds and owner’s funds. The optimum financing mix will increase
return to equity shareholders and thus maximise their wealth.

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Dividend decision: The finance manager is also concerned with the

decision to pay or declare dividend. He assists the top management in
deciding as to what portion of the profit should be paid to the
shareholders by way of dividends and what portion should be retained in
the business. An optimal dividend pay-out ratio maximises shareholders’
wealth.
The above discussion makes it clear that investment, financing and
dividend decisions are interrelated and are to be taken jointly keeping in
view their joint effect on the shareholders’ wealth.
(b) Liquidity versus Profitability Issue in Management of Working
Capital
Working capital management entails the control and monitoring of all
components of working capital i.e. cash, marketable securities, debtors,
creditors etc. Finance manager has to pay particular attention to the
levels of current assets and their financing. To decide the level of
financing of current assets, the risk return trade off must be taken into
account. The level of current assets can be measured by creating a
relationship between current assets and fixed assets. A firm may follow
a conservative, aggressive or moderate policy.

A conservative policy means lower return and risk while an aggressive

policy produces higher return and risk. The two important aims of the
working capital management are profitability and solvency. A liquid firm
has less risk of insolvency i.e. it will hardly experience a cash shortage
or a stock out situation. However, there is a cost associated with
maintaining a sound liquidity position. So, to have a higher profitability
the firm may have to sacrifice solvency and maintain a relatively low level
of current assets.
(c) Concept of Discounted Payback Period
Payback period is time taken to recover the original investment from
project cash flows. It is also termed as break even period. The focus of
the analysis is on liquidity aspect and it suffers from the limitation of
ignoring time value of money and profitability. Discounted payback
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period considers present value of cash flows, discounted at company’s

cost of capital to estimate breakeven period i.e. it is that period in which
future discounted cash flows equal the initial outflow. The shorter the
period, better it is. It also ignores post discounted payback period cash
flows.
OR
(c) Concept of Indian Depository Receipts: The concept of the depository
receipt mechanism which is used to raise funds in foreign currency has
been applied in the Indian capital market through the issue of Indian
Depository Receipts (IDRs). Foreign companies can issue IDRs to raise
funds from Indian market on the same lines as an Indian company uses
ADRs/GDRs to raise foreign capital. The IDRs are listed and traded in
India in the same way as other Indian securities are traded.

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INTERMEDIATE COURSE: GROUP II

PAPER 6B: STRATEGIC MANAGEMENT
ANSWERS
PART I - Case Scenario based MCQs
1. (A) (i) (b) (ii) (c) (iii) (b) (iv) (b) (v) (b)
(B) (i) (c) (ii) (b) (iii) (b)

PART II - Descriptive Questions

1. (a) The retail chain is employing a strategy that combines both proactive
and reactive elements. Monitoring consumer trends and adjusting
product offerings accordingly demonstrates a proactive approach to
anticipate and meet customer needs. On the other hand, maintaining a
flexible supply chain to respond quickly to changes in demand reflects a
reactive strategy to address unforeseen shifts in the market.
This combination allows the retail chain to both anticipate future trends
and react effectively to immediate market changes, making its strategy
partly proactive and partly reactive. This dual strategy of proactive trend
monitoring and reactive supply chain flexibility enables the retail chain to
anticipate market shifts and adapt to them effectively, ensuring its
competitiveness and customer satisfaction.
(b) PQR Ltd. has planned to implement the Strategic Business Unit (SBU)
structure. Very large organisations, particularly those running into
several products, or operating at distant geographical locations that are
extremely diverse in terms of environmental factors, can be better
managed by creating strategic business units. SBU structure becomes
imperative in an organisation with increase in number, size and diversity.
The attributes of an SBU and the benefits a firm may derive by using the
SBU Structure are as follows:
 A scientific method of grouping the businesses of a multi – business
corporation which helps the firm in strategic planning.
 An improvement over the territorial grouping of businesses and
strategic planning based on territorial units.
 Strategic planning for SBU is distinct from rest of businesses.
Products/ businesses within an SBU receive same strategic
planning treatment and priorities.
 Each SBU will have its own distinct set of competitors and its own
distinct strategy.
 The CEO of SBU will be responsible for strategic planning for SBU
and its profit performance.

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 Products/businesses that are related from the standpoint of

function are assembled together as a distinct SBU.
 Unrelated products/ businesses in any group are separated into
separate SBUs.
 Grouping the businesses on SBU lines helps in strategic planning
by removing the vagueness and confusion.
 Each SBU is a separate business and will be distinct from one
another on the basis of mission, objectives etc.
(c) Competition from new sustainable fashion brands falls under the "Threat
of New Entrants" category of Porter’s Five Forces Model for Competitive
Analysis. These new entrants pose a threat to existing sustainable
clothing retailers like GreenThrift Inc. by increasing competition and
potentially eroding market share. The emergence of these brands,
focusing on using organic and recycled materials along with ethical
manufacturing practices, aligns with the values of environmentally
conscious consumers, making them strong competitors in the
sustainable fashion market.
2. (a) Each organization has to build its competitive advantage over the
competitors in the business warfare in order to win. This can be done
only by following the process of strategic management. Strategic
Management is very important for the survival and growth of business
organizations in dynamic business environments. Other major benefits
of strategic management are as follows:
 Strategic management helps organizations to be more proactive
rather than reactive in dealing with its future. It facilitates to work
within vagaries of environment and remains adaptable with the
turbulence or uncertain future. Therefore, they are able to control
their own destiny in a better way.
 It provides better guidance to entire organization on the crucial
point – what it is trying to do. Also provides frameworks for all major
business decisions of an enterprise such as on businesses,
products, markets, organizational structures, etc.
 It facilitates to prepare the organization to face the future and act
as pathfinder to various business opportunities. Organizations are
able to identify the available opportunities and identify ways and
means as how to reach them.
 It serves as a corporate defence mechanism against mistakes and
pitfalls. It helps organizations to avoid costly mistakes in product
market choices or investments.

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 Over a period of time strategic management helps organization to

evolve certain core competencies and competitive advantages that
assist in the fight for survival and growth.
(b) To maintain a competitive edge in the face of increased competition,
Reshuffle Corp can differentiate its products in several ways:
• Tangible and Intangible Aspects: Reshuffle Corp can focus on the
tangible aspects of its products, such as using high-quality materials
and innovative designs to create furniture that is both functional and
aesthetically pleasing. Additionally, they can emphasize the intangible
aspects of their products, such as excellent customer service and a
strong brand reputation for reliability and durability.
• Pricing Strategies: While market prices are often dictated by
competition, Reshuffle Corp can work on cost optimization to maintain
profitability. They can also consider offering value-added services,
such as free installation or extended warranties, to justify a higher
price point.
• Product Features: By continually optimizing their product features
based on customer feedback and market trends, Reshuffle Corp can
ensure that their products deliver maximum satisfaction to their target
customers. This may include features that enhance functionality,
design, quality, and overall user experience.
• Product Centric Approach: Reshuffle Corp should keep their
products at the center of their strategic activities, ensuring that all
business processes, from production to sales and marketing, are
aligned to meet customer needs and expectations.
• Product Life Cycle Management: Reshuffle Corp should be aware
of the life cycle of their products and plan for reinvention or
replacement accordingly. They can introduce new product lines or
upgrade existing ones to keep up with changing customer
preferences and market trends.
3. (a) SWOT Analysis for EasyLife Corporation’s New Smart Home Devices
Venture:
Strengths Weaknesses
• Strong brand reputation in • Limited experience in the
consumer electronics. smart home devices
• Established distribution market.
network. • May require additional
• Access to technological investments in research
expertise for product and development.
development.
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• Financial resources to support • Potential challenges in

product launch and marketing. integrating a new product
line with existing offerings.
• Lack of established
customer base for smart
home devices.
Opportunities Threats
• Growing market for smart • Intense competition from
home devices due to established players in the
increasing consumer interest smart home devices
in home automation. market.
• Possibility of partnering with • Rapid technological
existing smart home platform advancements lead to
providers. short product life cycles.
• Potential to leverage brand • Potential for cybersecurity
loyalty from existing threats in connected
customers. devices.
• Ability to differentiate through • Economic factors
innovative features and impacting consumer
design. spending on discretionary
items.
The SWOT analysis highlights that while EasyLife Corporation has
several strengths that can support the launch of a new smart home
devices line, there are also significant weaknesses and threats to
consider. To maximize the chances of success, EasyLife Corporation
should focus on leveraging its brand reputation and distribution network
while carefully addressing the weaknesses and threats identified.
Additionally, staying informed about technological developments and
consumer trends will be essential for maintaining competitiveness in the
dynamic smart home devices market.
(b) The concept of forward and backward linkages between strategy
formulation and implementation in strategic management highlights the
interconnected nature of these two phases and their impact on the
overall strategic decision-making process of an organization.
Forward Linkages: Forward linkages refer to the impact of strategy
formulation on strategy implementation. When an organization
formulates a new strategy or revises an existing one, it sets the direction
for the organization's future actions. For example, if a company decides
to expand its product line to target a new market segment, this decision
will require changes in the organization's structure, resources allocation,
and possibly its leadership style. These changes are necessary to align
the organization's operations with the new strategic direction. Thus, the
formulation of strategies has forward linkages with their implementation,
as it sets the stage for how the strategy will be executed.

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Backward Linkages: Backward linkages, on the other hand, refer to the

impact of implementation on strategy formulation. As an organization
implements its strategies, it gains valuable insights and feedback from
the implementation process. This feedback can influence future strategic
decisions. For example, if a company faces unexpected challenges or
discovers new opportunities during the implementation of a strategy, it
may need to reevaluate its strategic choices. Similarly, past strategic
actions and their outcomes can also influence the formulation of future
strategies. Over time, these incremental changes in strategy and
implementation take the organization from its current state to where it
aims to be, reflecting the dynamic nature of strategic management.
In conclusion, the forward and backward linkages between strategy
formulation and implementation highlight the iterative and
interconnected nature of strategic management. By understanding and
leveraging these linkages, organizations can enhance their strategic
decision-making process and improve their overall performance.
4. (a) Strategic Performance Measures (SPM) are metrics used by
organizations to evaluate and track the effectiveness of their strategies
in achieving strategic goals and objectives. SPM provides a framework
for measuring the performance of key areas critical to the success of the
organization's strategy. These measures help in assessing whether the
organization is progressing towards its desired outcomes and allow for
adjustments to be made to improve performance.
Types of Strategic Performance Measures
There are various types of strategic performance measures, including:
♦ Financial Measures: Financial measures, such as revenue growth,
return on investment (ROI), and profit margins, provide an
understanding of the organization's financial performance and its
ability to generate profit.
♦ Customer Satisfaction Measures: Customer measures, such as
customer satisfaction, customer retention, and customer loyalty,
provide insight into the organization's ability to meet customer
needs and provide high-quality products and services.
♦ Market Measures: Market measures, such as market share,
customer acquisition, and customer referrals, provide information
about the organization's competitiveness in the marketplace and its
ability to attract and retain customers.
♦ Employee Measures: Employee measures, such as employee
satisfaction, turnover rate, and employee engagement, provide
insight into the organization's ability to attract and retain talented
employees and create a positive work environment.

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♦ Innovation Measures: Innovation measures, such as research and

development (R&D) spending, patent applications, and new product
launches, provide insight into the organization's ability to innovate
and create new products and services that meet customer needs.
♦ Environmental Measures: Environmental measures, such as
energy consumption, waste reduction, and carbon emissions,
provide insight into the organization's impact on the environment
and its efforts to operate in a sustainable manner.
(b) The strategy adopted by StarTech Solutions is Focused differentiation.
This strategy involves targeting a specific segment of the market with
unique products or services that are perceived as valuable by customers
in that segment. By specializing in serving unique, high-end clients,
StarTech is able to differentiate itself from competitors and create a
competitive advantage.
Advantages of Focused Differentiation:
• Strong Customer Loyalty: By catering to a specific niche
market, StarTech can build strong relationships with its customers,
leading to higher customer loyalty and retention.
• Higher Profit Margins: Serving a niche market allows StarTech
to command higher prices for its specialized products or services,
leading to higher profit margins.
• Reduced Competition: By focusing on a niche market that other
firms are not targeting, StarTech faces less competition, allowing it
to establish itself as a leader in that segment.
• Better Resource Allocation: Focusing on a specific market
segment allows StarTech to allocate its resources more efficiently,
concentrating on areas that will provide the greatest return on
investment.
Disadvantages of Focused Differentiation:
• Limited Market Size: The niche market that StarTech is targeting
may be limited in size, restricting the company's potential for
growth.
• Risk of Market Changes: Changes in the market or customer
preferences could impact on the demand for StarTech's specialized
products or services, leading to potential revenue loss.
• Higher Costs: Serving a niche market may require specialized
resources and expertise, leading to higher costs of operation.
• Imitation by Competitors: If StarTech's success in the niche
market attracts competitors, they may attempt to imitate its
strategy, eroding its competitive advantage.

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Overall, the focused differentiation strategy adopted by StarTech

Solutions has allowed it to differentiate itself in a competitive industry
and build a strong position in the market. However, the company must
be aware of the potential challenges and risks associated with this
strategy and continue to innovate and adapt to maintain its competitive
edge.
OR
Strategic alliances are formed if they provide an advantage to all the
parties in the alliance. These advantages can be broadly categorised as
follows:
(i) Organizational: Strategic alliances may be formed to learn
necessary skills and obtain certain capabilities from the strategic
partner. Strategic partners may also help to enhance productive
capacity, provide a distribution system, or extend supply chain. A
strategic partner may provide a good or service that complements
each other, thereby creating a synergy. If one partner is relatively
new or untried in a certain industry, having a strategic partner who
is well-known and respected will help add legitimacy and
creditability to the venture.
(ii) Economic: Alliances can reduce costs and risks by distributing
them across the members of the alliance. Partners can obtain
greater economies of scale in an alliance, as production volume
increase, causing the cost per unit to decline. Finally, partners can
take advantage of co-specialization, where specializations are
bundled together, creating additional value.
(iii) Strategic: Organizations may join to cooperate instead of compete.
Alliances may also create vertical integration where partners are
part of supply chain. Strategic alliances may also be useful to
create a competitive advantage by the pooling of resources and
skills. This may also help with future business opportunities and the
development of new products and technologies. Strategic alliances
may also be used to get access to new technologies or to pursue
joint research and development.
(iv) Political: Sometimes there is need to form a strategic alliance with
a local foreign business to gain entry into a foreign market either
because of local prejudices or legal barriers to entry. Forming
strategic alliances with politically-influential partners may also help
improve overall influence and position.

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