CA Inter Financial and Strategic Management Important Question - Jan 26

Table of Content

Financial Management

1. Scope and objectives of Financial Management
2. Types of Financing
3. Financial Analysis and Planning-Ratio Analysis
4. Cost of Capital
5. Financing Decisions - Capital Structure
6. Financing decisions - Leverages
7. Investment Decisions
8. Dividend Decisions
9. Management of Working Capital

Strategic Management

1. Introduction to Strategic Management
2. Strategic Analysis: External Enviroment
3. Strategic Analysis: Internal Enviroment
4. Strategic Choices
5. Strategy Implemation and Evaluation

Other Important Questions Blog :

1. Important Question Paper 1 : Advanced Accounting
2. Important Question Paper 2 : Corporate and Other Laws
3. Important Question Paper 3 :Taxation
4. Important Question Paper 4 : Cost & Management accounting
5. Important Question Paper 5 : Auditing and Ethics
6. CA Inter Syllabus (New Update)

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Financial Management

Chapter 1: Scope and objectives of Financial Management

Question : 1

EXPLAIN as to how the wealth maximisation objective is superior to the profit maximisation objective 

Solution:

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Chapter 2: Types of Financing

Question : 2

What are key features of bridge financing?

Solution:

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Chapter 3. Financial Analysis and Planning-Ratio Analysis

Question : 3

The following information is available for S Ltd. for the year ended 31st March, 2025:

Raw Material consumed	20% of COGS
Raw Material Inventory turnover ratio	4.00
Finished Goods Inventory holding period	0.75 month
Gross profit (based on COGS)	12.50%
Debtor collection period (all sales are credit sales)	3 months
Proprietary ratio	0.3125
Fixed Assets turnover ratio (based on sales)	3.00
Fixed Assets to Total Assets	40%

You are required to prepare a Balance Sheet as on 31^st March, 2025 in the following format:

Liabilities	₹	Assets	₹
Shareholders' Fund (assume no Preference Shares)		Fixed Assets	12,00,000
Long-term Debt	15,00,000	Stock of Raw Material
Current Liabilities		Stock of Finished Goods
		Debtors
		Cash
Total		Total

 

Solution:

Question : 4

Using the information given below, PREPARE the Balance Sheet of Nevy Private Limited – 

Particulars	Details
Stock turnover Ratio	15 times
Cash and Bank balance	10% of Current Assets (net off prepaid exp)
GP Ratio	20%
Creditors turnover (cost of goods sold) ratio	10 times
Debtors turnover ratio	12 times
Net Fixed Assets	25% of Total Liabilities
Depreciation	15% on Opening WDV
Current Ratio	1.6 : 1
Capital Gearing Ratio	0.6 : 1

All Purchases and Sales are assumed to be on credit basis. 

Balance Sheet of Nevy Private Limited as of 31.03.2025

Particulars	Amount (₹)	Amount (₹)
A] Equities and Long Term Liabilities
Share Capital	36,00,000
Reserves and Surplus	??
14% Bonds	??	???
B] Current Liabilities
Trade Payables	??
Outstanding expenses and provisions	??
(*Net of Prepaid expenses of ₹ 7,50,000)		45,00,000
TOTAL		?????
C]  Fixed Assets
Opening WDV	??
(-) Depreciation	??
D]  Current Assets
Inventory	??
Trade Receivables	??
Cash and Bank Balance	??
		???
TOTAL		?????

 

Solution:

Question : 5

Vyom Limited, an IT conglomerate, is planning to take over Aryayash Limited, a startup company incorporated 2 years ago but holding a lot of prospects. To determine the buyout consideration, Vyom Limited has approached you as a Finance controller to estimate the fair value of the startup company today based on future earnings estimates. Following details of the startup company are as below:

Expected Sales in the coming year are ₹ 25 lakhs with P/V ratio of 40%. The sales are expected to grow at a rate of 20% for the next 2 years, to 40% for another 2 years, 25% in the 6th year, and thereafter cash flows will grow at a steady rate of 10%. Fixed cost for the upcoming year is expected to be ₹ 12 lakhs in the first two years, ₹ 10 lakhs thereafter. Loss in any year can be set-off only against the profits of the immediate next year.

Corporate taxes applicable are 25% & 20% to Vyom Limited & Aryayash Limited respectively. Vyom Limited’s desired rate of return is 15% & Cost of Capital of Aryayash Limited is 17%.

As a finance controller, CALCULATE the Fair value of Aryayash Limited.

Solution:

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Chapter 4: Cost of Capital

Question : 6

The capital structure of Shine Ltd. as on 31.03.2024 is as under :

Particulars	Amount (₹)
Equity share capital of ₹ 10 each	45,00,000
15% Preference share capital of ₹ 100 each	36,00,000
Retained earnings	32,00,000
13% Convertible Debenture of ₹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 6 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 eieht 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 (β) 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:

Question : 7

Lavanya Limited wishes to raise additional finance of ₹ 20 lakhs for meeting its investment plans. It has ₹ 4,20,000 in the form of retained earnings available for investment purposes. Further details are as following:

(1)	Debt / Equity mix	3:7
(2)	Cost of debt:
	Upto ₹ 3,60,000	8% (before tax)
	Beyond ₹ 3,60,000	12% (before tax)
(3)	Earnings per share	₹ 5
(4)	Dividend pay out	40% of earnings
(5)	Retained Earnings	60%
(6)	Rate of Return on Retained Earnings	10%
(7)	Current market price per share	₹ 53
(8)	Tax rate	30%

You are required to:

(a) DETERMINE the pattern for raising the additional finance.

(b) DETERMINE the post-tax average cost of additional debt.

(c) DETERMINE the cost of retained earnings and cost of equity.

(d) COMPUTE the overall weighted average after tax cost of additional finance.

Solution:

Question : 8

Capital structure of B Ltd. for the year ended 31st March, 2025 is as follows:

Particulars	Amount (₹)
Equity share capital @ ₹ 10 each	14,00,000
10% Preference share capital @ ₹ 1,000 each	10,00,000
Debenture @ ₹ 100 each	9,60,000
Bank Loan	6,40,000

• Risk-free rate of return is 14%, Market rate of return is 19% and beta of company is 1.20.

• 10% Preference shares are redeemable at ₹ 1,065.40 after 3 years.

• Interest on bank loan is 1.30 times of interest on debentures.

• Debentures are redeemable at par after 5 years. Floatation cost is ₹ 4 per debenture.

• Tax rate is 30%.

• Cost of capital is 14%.

You are required to calculate the following:

(i) Cost of Equity.
(ii) Cost of preference share using YTM method.
(iii) Post-tax cost of debenture using approximation method.

(iv) Interest rate of bank loan.

PV factors @ 10% and 14%

Year	1	2	3	4
PVIF0.10, t	0.909	0.826	0.751	0.683
PVIF0.14, t	0.877	0.769	0.675	0.592

Solution:

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Chapter 5: Financing Decisions - Capital Structure

Question : 9

DISCUSS optimal capital structure and HOW to analyse it.

Solution:

Question : 10

Z Ltd. is an unlevered company. It wants to repurchase its equity shares of ₹300 lakhs by issue of 12% debentures of same amount. Current market value of Z Ltd. is ₹1,400 lakhs. Its cost of capital is 18%. The company will maintain same level of EBIT in future years. Dividend pay-out ratio is 100%. Company pays tax at a rate of 30%.

As per Modigliani and Miller approach, due to such change in capital structure, what will be impact on the following?

(i) Market Value of Z Ltd.

(ii) Overall cost of capital

(iii) Cost of equity

Solution:

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Chapter 6: Financing decisions - Leverages

Question : 11

Following information relates to A Ltd. for the year ended 31st March, 2025:

Profit volume ratio	24%
Operating leverage	2.00
Financial leverage	1.50
Interest Expenses	₹ 12,000
Tax rate	30%
Number of Equity Shares	1,000

You are required to:

(i) Prepare Income Statement for the year ended 31st March, 2025.

(ii) Calculate EPS.

(iii) Calculate percentage change in earnings per share, if sales increase by 5%.

Solution:

Question : 12

“Financial Leverage is a double-edged sword” Discuss

Solution:

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Chapter 7: Investment Decisions

Question : 13

Following data are given for a capital project :

Annual interim cash inflows for first two years	₹ 1,00,000
Annual interim cash inflows for next two years	₹ 80,000
Useful life	4 Years
Salvage value at end of the project	₹ 50,000
Internal rate of return	12%
Cost of capital	10%

You are required to calculate the following:

(i) Initial investment

(ii) Net present value

(iii) Profitability Index

(iv) Discounted payback period

(v) MIRR

Year	1	2	3	4
PVIF0.09, t	0.917	0.842	0.772	0.708
PVIF0.10, t	0.909	0.826	0.751	0.683
PVIF0.11, t	0.901	0.812	0.731	0.659
PVIF0.12, t	0.893	0.797	0.712	0.636
FVIF0.10, t	1.100	1.210	1.331	1.464
FVIF0.12, t	1.120	1.254	1.405	1.574

 

Solution:

Question : 14

ABC Manufacturing Ltd is a mid–sized engineering and fabrication company that supplies precision components to the automobile and heavy machinery sectors. In order to maintain competitiveness and expand its market share, the company has proposed a new capital investment project involving the purchase and installation of advanced Computer Numerical Control (CNC) machines and automated assembly lines.

The estimated cost of the project is to be financed partly through internal accruals and largely through term loans from XYZ Bank. ABC Manufacturing has approached the bank requesting project financing of the initial outlay, citing strong growth potential in demand for precision engineered products over the next decade.

Financial Projections Provided by ABC Manufacturing Ltd.

The company’s feasibility report outlines the following:

• The simple payback period is estimated at 5 years, assuming cumulative cash inflows cover the initial investment within that timeframe without considering the time value of money.

• The discounted payback period is calculated at 7 years, after discounting projected cash inflows at the weighted average cost of capital (WACC).

• The project’s Modified Internal Rate of Return (MIRR) is projected at 10.9%, which is much lower than the incremental borrowing rate.

• Terminal Value of the annual cash inflows reinvested at the rate of 10% is ₹ 11,43,589.

• Cash inflows are expected to be received equally and steadily at the end of every year over the life of the assets. However, the same Cash inflows are expected to be received even after the simple payback period due to efficiency gains, market expansion, and economies of scale.

(Note: Round off Initial investment to nearest Lakhs).

Management’s Position

ABC Manufacturing argues that:

1. The project is strategically essential for long-term survival in a competitive industry.

2. The simple payback of 5 years indicates that the investment risk is acceptable.

3. Although the discounted payback of 7 years is relatively long, the project will continue to generate positive inflows 1 year beyond this period. 

4. MIRR of 10.9% should be interpreted in light of industry cyclicality, expected market growth, and non-financial benefits such as improved brand reputation and quality standards.

Bank’s Concerns

The credit appraisal team at XYZ Bank has raised several concerns:

• Reliance on payback methods alone ignores long-term profitability, and risk factors.

• Industry volatility, competition, and technological obsolescence may affect the reliability of projected cash flows.

The credit team must now prepare a recommendation on whether to finance the project and, if so, under what conditions. Assuming you were the credit analyst, prepare justification report with a reasoned argument based on other financial considerations namely, PI, NPV, IRR & ARR in the following format.

Appraisal technic	Acceptable range	Outcome for this asset	Recommendation
NPV
MIRR
Simple payback
Discount payback
ARR
PI

Note: For ARR, use the formula Profit after tax

Consider the following PVAF:

PVAF @ 9% for 7 years = 5 & PVAF @ 9% for 8 years = 5.535

Solution:

Question : 15

A firm can make investment in either of the following two projects. The firm anticipates its cost of capital to be 10%. The pre-tax cash flows of the projects for five years are as follows:

Year	0	1	2	3	4	5
Project A (₹)	(2,00,000)	35,000	80,000	90,000	75,000	20,000
Project B (₹)	(2,00,000)	2,18,000	10,000	10,000	4,000	3,000

Ignore Taxation.

An amount of ₹ 35,000 will be spent on account of sales promotion in year 3 in case of Project A. This has not been taken into account in calculation of pre-tax cash flows.

Investment Decisions

Year	0	1	2	3	4	5
PVF (10%)	1	0.91	0.83	0.75	0.68	0.62

You are required to CALCULATE for each project:

1. The Discounted Payback period
2. Desirability factor
3. Net Present Value

Solution:

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Chapter 8: Dividend Decisions 

Question : 16

Y Ltd. produces energy drinks in different flavours. Due to high demand of its product, the rate of return on its earnings is 25%. Currently, the company retains 60% of its earnings and distributes the rest. The current P/E ratio is 8 and earnings per share is ₹10.

mark   =  (2 + 1 + 2 = 5)

According to Gordon’s Model:

(i) What will be retention ratio if the company wants to maintain its P/E ratio to 12 in current year, given that the expected rate of return for an investor is 20%?

(ii) What will be the expected price per share after one year if Y Ltd. achieves above-mentioned targeted P/E ratio?

(iii) Will there be any change in retention ratio if the company wants to maintain its P/E ratio to 10 in current year, given that the expected rate of return for an investor is 17.50%?

Solution:

Question : 17

For the year ending 31.03.2025, ABC Industries Ltd declared 40% dividend. The current market price of the share is quoted at ₹ 57.50. If the retention ratio is reduced by 20 percent, the market price dropped by ₹ 2.50. Face value of the shares is ₹ 10 per share.

1. Find the return on investment and cost of equity using walter’s model.

2. Comment on the dividend policy adopted by the company.

3. Find the limiting value of shares using walter’s model.

4. Also find the intrinsic value of the shares under Gordon’s Model.

5. Mr. X, the chief financial officer of the company, opines that the return on investment of the company is not having direct / indirect effect on the intrinsic value of the shares under Gordon’s Model. Only cost of equity will be considered for the computation of the intrinsic value of the shares under Gordon’s Model.

Solution:

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Chapter 9: Management of Working Capital

Question : 18

The following information pertain to MSD Limited for the year ending  31st March, 2024:

Particulars	Number of days
Raw material storage period	61 days
Work-in-progress conversion period	20 days
Finished goods storage period	30 days
Debt collection period	45 days
Creditors payment period	60 days

The annual operating cost (including depreciation of ₹ 4,80,000) was ₹ 60,00,000. Assume 360 days in a year.

You are required to calculate:

(i)  Operating cycle period

(ii)  Number of operating cycles in a year

(iii)  Amount of working capital required for the company 

Solution:

Question : 19

ABC Ltd. is a manufacturing company experiencing rapid sales growth. To meet the increased demand, the company has started maintaining higher inventory levels and offering more generous credit terms to customers. However, its cash reserves are depleting, and it is facing difficulties in paying suppliers on time. As a financial analyst, apply your understanding of the scope of working capital management to ANALYZE the trade-offs the company is making between different components of working capital (inventory, receivables, advances, payables, and cash).

Solution:

Question : 20

S Ltd. produces a product with the following revenue cost structure:

Particulars	₹ Per unit
Raw material	115
Direct material	80
Overheads	37
Total cost	232
Profit	58
Selling price	290

The following additional information is available: 

a. Average raw materials in stock; one month. 

b. Average work in process: half-a-month – Raw Materials 100%, Direct labour 50%, Overheads 50% complete. 

c. Average finished gods in stock: one month. 

d. Credit allowed by suppliers: one month. 

e. Credit allowed to debtors: two months. 

f. Time lag in payment of wages: half-a-month. 

g. Overheads: one month. 

h. One fourth of sales are on cash basis. 

i. Cash balance is expected to be ₹ 1,65,000. 

You are required to prepare a statement showing the Working Capital requirement of the company to finance a level of activity of ₹ 60,000 units of annual output. Assume uniform production throughout the year. Wages and overheads accrue uniformly. Debtors are to be taken at cost.

Solution:

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Strategic Management

Chapter 1: Introduction to Strategic Management

Question : 21

'A company's mission statement is typically focused on its present business scope.' Explain the significance of a mission statement.

Solution:

Question : 22

SemiCon Pvt. Ltd. (SPL) is engaged in manufacturing of semiconductors from the year 2024. Company wants to start a strategic path to be followed in future so as to build best quality semiconductor and display design with innovative ecosystem to enable India’s emergence as a global hub for electronics manufacturing in a more structured manner. Placing core values as its priority, it would like to clearly articulate its aspirations to the stakeholders with a guiding beacon to keep inspiring its workforce.

Identify and explain one of the components of strategic intent which will help indicate towards above stated intentions. Why such component is important for a successful organization? Also state the essentials of such component.

Solution:

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Chapter 2: Strategic Analysis: External Enviroment

Question : 23

As per one of the five forces of competition, Michael Porter stated that the more intensive is the rivalry, the less attractive is the industry. In view of this, explain the conditions in which rivalry among competitors tends to be cut throat and industry profitability is low.

Solution:

Question : 24

ZymaTech Pvt. Ltd., a growing player in the smart home devices industry, seeks to increase its market share amidst strong competition from HomeEdge, AutoNest and IntelliSpace. Each competitor holds a distinct edge—brand loyalty, pricing & distribution reach and AI driven product innovation respectively. However, IntelliSpace faces criticism regarding post-sales service. ZymaTech, while offering decent product quality, struggles with brand visibility and customer service. As a strategist at ZymaTech, how would Mr. Anoj Dass apply the steps involved in understanding the competitive landscape to help the company build a sustainable competitive advantage?

Solution:

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Chapter 3: Startegic Analysis: Internal Enviroment

Question : 25

What do you mean by value chain analysis? Delineate the support activities in value chain analysis, as stated by Michael Porter.

Solution:

Question : 26

Write a short note on the Key Strategic Drivers of an organization.

Solution:

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Chapter 4: Strategic Choices

Question : 27

Explain the 'product market growth matrix' as propagated by Igor Ansoff as a device for identifying growth opportunities for the future. 

Solution:

Question : 28

TechNova, a leading software development firm known for its cutting edge operating systems, is developing a groundbreaking new platform. ElectroWave, an emerging player in the electronics and hardware industry, specializes in manufacturing advanced devices. TechNova and ElectroWave have decided to join forces to design innovative laptops and smartphones, aiming to tap into new markets and broaden their business horizons. What kind of external growth strategy is being considered by TechNova and ElectroWave?

Solution:

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Chapter 5: Strategy Implemation and Evaluation

Question : 29

ABC group of companies has five projects at different geographical locations. Each project is managed by a dedicated project manager. A Chief Executive Officer (CEO) is supported by a team of subject matter experts (SMEs) in each function at corporate level of the company. As an accepted practice, the authority and communication flow vertically and horizontally in the company. There are five common functions i.e. finance, human resource, operations, marketing and information technology facilitating each project. Each functional manager is having administrative relationship with respective project manager and functional relationship with related SME with a clear mutual understanding of his or her roles and responsibilities. Identify and explain the organizational structure best suited in the above scenario. State the advantages and disadvantages of the above structure

Solution:

Question : 30

BrightWave Solutions, a small and medium-sized company in the renewable energy sector, wants to adopt the latest digital technologies to improve its operational processes and product offerings. The company aims to gain a competitive edge in the rapidly evolving renewable energy market through digital transformation. BrightWave Solutions also seeks to manage continuous changes effectively while transforming its management practices and workflows. Identify the strategy required for successful digital transformation. Also, state the most preferred practices that the company should follow.

Solution: