CA Inter Udesh Regular Sep 2025 Group-02

Total Marks: 50 Master Test Series – 01 05/04/2025

Total Time: 90 Min.
Financial Management
General Instructions
(1) The question paper is divided into two parts. Part A and Part B.
(2) Part A consists of MCQ and Case study MCQ of 15 marks.
(3) Part B consists of Subjective and numerical questions of 35 marks.
(4) All the questions are compulsory in nature.
(5) Attempt all the questions.
(6) Part A has 3 Questions (MCQ + Case Study MCQ) and Part B has 4 Questions. (Subjective)

Part - A
TOTAL MARKS 15 (CASE STUDY MCQ + MCQ) TOTAL 3 QUESTIONS
CASE STUDY MCQ The CFO of the company is evaluating a new
1. Tiago Ltd is an all-equity company engaged in battery technology to invest the above raised
manufacturing of batteries for electric vehicles. money. The technology is expected to have a life
There has been a surge in demand for their of 7 years. It will generate an after tax marginal
operating cash flow of ₹ 25,00,000 р.а. Assume
products due to rising oil prices. The company was
marginal tax rate to be 27%.
established 5 years ago with an initial capital of ₹ (2 Marks × 5 = 10 Marks)
10,00,000 and since then it has raised funds by IPO (A) Which of the following is best estimate of
taking the total paid up capital to ₹ 1 crore cost of equity for Tiago Ltd?
comprising of fully paid-up equity shares of face (1) 12.99% (2) 11.99%
value ₹10 each. The company currently has (3) 13.99% (4) 14.99%
undistributed reserves of ₹ 60,00,000. The
company has been following constant dividend (B) Which of the following is the most accurate
payout policy of 40% of earnings. The retained measure of issue price of debentures?
(1) 100 (2) 96
earnings by company are going to provide a return
(3) 90.58 (4) 95.88
on equity of 20%. The current EPS is estimated as
Rs 20 and prevailing PE ratio on the share of (C) Which of the following is the best estimate of
company is 15x. The company wants to expand its cost of debentures to be issued by the
capital base by raising additional funds by way of company? (Using approximation method)
debt, preference and equity mix. The company (1) 7.64% (2) 6.74%
requires an additional fund of ₹ 1,20,000. The (3) 4.64% (4) 5.78%
target ratio of owned to borrowed funds is 4 : 1
(D) Calculate the cost of preference shares using
post the fund-raising activity. Capital gearing is to
approximation method
be kept at 0.4x. (1) 10.23% (2) 11.22%
The existing debt markets are under pressure due (3) 12.12% (4) 12.22%
to ongoing RBI action on NPAs of the commercial
bank. Due to challenges in raising the debt funds, (E) Which of the following best represents the
the company will have to offer ₹ 100 face value overall cost of marginal capital to be raised?
debentures at an attractive yield of 9.5% and a (1) 11.76% (2) 17.16%
coupon rate of 8% to the investors. Issue expenses (3) 16.17% (4) 16.71%
will amount to 4% of the proceeds.
General MCQs (5 Marks)
The preference shares will have a face value of
2. Following information has been extracted from
₹ 1000 each offering a dividend rate of 10%. The the accounts of newly incorporated Textyl Pvt.
preference shares will be issued at a premium of Ltd. for the financial year 2020-21:
5% and redeemed at a premium of 10% after 10 Sales ₹ 15,00,000
years at the same time at which debentures will be P/V Ratio 70%
redeemed. Operating Leverage 1.4 times
Financial Leverage 1.25 times 3. Suppose that a firm has an all equity capital
Using the concept of leverage, find out and verify structure consisting of 1,00,000 ordinary shares
in each case: of ₹ 10 per share. The firm wants to raise ₹
(i) The percentage change in taxable income if 2,50,000 to finance its investments and is
sales increase by 15%. considering three alternative methods of
(ii) The percentage change in EBIT if sales financing–
decrease by 10%. (3 Marks) (i) to issue 25,000 ordinary shares at ₹ 10 each,
(1) (i) 26.25%; (ii) 14%; Calculate EPS. (2 Marks)
(2) (i) 29.25%; (ii) 14%; (1) 1.67 (2) 1.25
(3) (i) 26.25%; (ii) 18%; (3) 6.7 (4) 1.46
(4) (i) 35.25%; (ii) 24%;
 Part - B
1. Differentiate between Book value weight and Market value weight. (5 Marks)

2. (A) Z Ltd. wishes to raise additional fund of ₹ 25,00,000 for meeting its investment plan. It has ₹ 5,25,000 in the
form of retained earnings available for investment purposes. Further details are as following:
Combination of debt and equity 2:3
Cost of debt
Upto ₹ 2,50,000 8% (before tax)
Above ₹ 2,50,000 and to upto ₹ 5,00,000 10% (before tax)
Beyond ₹ 5,00,000 12% (after tax)
Earning of company ₹ 50,00,000
Retention Ratio 40%
Expected growth of dividend 15%
Market price per share ₹ 500
Number of outstanding equity shares 1,00,000
Tax Rate 30%
You are required to calculate:
(i) Cost of debt
(ii) Cost of retained earnings and cost of equity
(iii) Weighted average cost of capital (7 Marks = 2 + 2 + 3)

(B) The following details of a company for the year ended 31st March, 2021 are given below:
Operating leverage 2 : 1
Combined leverage 2.5 : 1
Fixed cost excluding interest ₹ 3.4 lakhs
Sales ₹ 50 lakhs
8% Debentures of ₹ 100 each ₹ 30.25 lakhs
Equity share capital of ₹ 10 each ₹ 34 lakhs
Income tax rate 30%
Calculate:
(a) Financial leverage
(b) PV Ratio and Earning per Share (EPS)
(c) If the company belongs to an industry, whose assets turnover is 1.5, does it have a high or low assets
turnover? (3 Marks = 1 + 1 + 1)

3. Details of a company for the year ended 31st March, 2022 are given below:
Sales ₹ 86 lakhs
Profit Volume (P/V) Ratio 35%
Fixed cost excluding interest expenses ₹ 10 lakhs
10% Debt ₹ 55 lakhs
Equity Share Capital of ₹ 10 each ₹ 75 lakhs
Income Tax rate 40%
Required:
(i) Determine company's return on capital employed (pre-tax) and Eps.
(ii) Does the company have a favourable financial leverage?
(iii) Calculate operating and combine leverages of the company
(iv) Calculate percentage change in EBIT, if sales increases by 10%.
(v) At what level of sales, the Earning before Tax (EBT) of the company will be equal to zero?
(10 Marks = 2 + 2 + 2 + 2 + 2)
4. The data of K Textiles Ltd. are given as follows:
Particulars Amount (₹)
Profit Before Interest and Tax 50,00,000
Less: Interest on debentures @ 10% 10,00,000
Profit before tax 40,00,000
Less: Income tax @ 50% 20,00,000
Profit after tax 20,00,000
No. of equity shares (₹ 10 each) 10,00,000
EPS 2
PE Ratio 10
Market price per share 20
The Company is planning to start a new project needs to be having a total capital outlay of ₹ 40,00,000. You are
informed that a debt equity ratio [D/D + E] higher than 36% pushes the Ke (cost of equity) up to 12.5%, means
reducing the PE ratio to 8 and rises the interest rate on additional amount borrowed to 12%. Retained earnings of
the company is ₹ 1.4 crores.
Find out the probable price of share if:
• The additional funds are raised as a loan.
• The amount is raised by issuing equity shares. (10 Marks = 5 + 5)

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