CA Inter Sep 25 Suggested Answers | FMSM
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CA Inter Sep 25 Suggested Answer Other Subjects Blogs :
SECTION - A
Q.1 PRAX Ltd. is an all-equity financed company, currently valued at ₹ 2,100 lakhs, with a cost of capital of 18%. The company is contemplating a strategic financial restructuring by:
(i) Repurchasing ₹ 325 lakhs of equity shares.
(ii) Replacing the repurchased equity with 16% debentures.
The Company maintains constant Earnings Before Interest and Taxes (EBIT) and following a policy of distributing entire earnings as dividend.
Corporate tax rate is 35%.
What would be the market value of Equity after structure modification as per Modigliani and Miller (MM) Approach?
(A) ₹ 2,213.75 Lakh
(B) ₹ 1,888.75 Lakh
(C) ₹ 1,456.75 Lakh
(D) ₹ 2,538.75 Lakh
Choice "B" is correct as–
Current Value of Firm (Unlevered)
V₀ = ₹ 2,100 lakhs (all equity financed).
Debt Introduced
Company raises debt = ₹ 325 lakhs (16% debentures).
Tax Shield on Debt
Tax shield = Debt × Tax rate
= 325 × 35% = ₹ 113.75 lakhs
New Value of Firm (Levered)
Vₗ = V₀ + Tax Shield
= 2,100 + 113.75 = ₹ 2,213.75 lakhs
Market Value of Equity
Vₗ = Equity + Debt
2,213.75 = Equity + 325
Equity = 2,213.75 – 325 = ₹ 1,888.75 lakhs
Market Value of Equity after restructuring = ₹ 1,888.75 lakhs
Q.2 KL Limited is replacing an existing machine. The replacement cost of the machine is ₹ 1,00,000 now and it requires maintenance of ₹ 20,000 at the end of every year for five years. At the end of Fifth year, it would have a salvage value of ₹ 10,000. The cost of capital is 14%.
What will be the Equivalent Annual Cost (EAC) for the machine?
(A) ₹ 45,217
(B) ₹ 57,617
(C) ₹ 47,617
(D) ₹ 60,217
Choice "C" is correct as–
Initial cost ₹ 1,00,000 plus PV of maintenance (20,000 × 3.433 = 68,660) minus PV of salvage (10,000 × 0.519 = 5,190) gives total present cost of ₹ 1,63,470. Dividing by PVIFA (3.433) gives Equivalent Annual Cost of ₹ 47,617.
Q.3. ABC Limited gives you the following information as on 31st March, 2025 :
What will be the value of Stock ?
(A) ₹ 1,20,000
(B) ₹ 80,000
(C) ₹ 1,60,000
(D) ₹ 64,000
Choice "B" is correct as–
Current Assets from Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities
2.5 = CA ÷ 1,60,000
CA = 2.5 × 1,60,000 = ₹ 4,00,000
Quick Assets from Quick Ratio
Quick Ratio = Quick Assets ÷ Current Liabilities
2 = QA ÷ 1,60,000
QA = 2 × 1,60,000 = ₹ 3,20,000
Stock
Stock = Current Assets – Quick Assets
= 4,00,000 – 3,20,000 = ₹ 80,000
Value of Stock = ₹ 80,000
Case Scenario – I
RG Limited has estimated that number of operating cycle in year 2025-26 will be 3. The amount of working capital required after taking an estimated 5% unforeseen contingency is ₹ 1,01,850. Other information is as under :
Assume a 360 days year.
Using above information, you are required to answer the following questions 4 to 8:
Q.4 What will be the Raw material storage period and Work in Progress conversion period ?
(A) 65 Days and 30 Days
(B) 62 Days and 32 Days
(C) 63 Days and 33 Days
(D) 63 Days and 45 Days
Raw Material Storage Period
Formula: (Average Raw Material Stock ÷ Raw Material Consumed) × 360
Work in Progress (WIP) Conversion Period
Formula: (Average WIP ÷ Cost of Production) × 360
Period = (21,400 ÷ 2,58,600) × 360 = 30 days
Q.5 What will be the Creditors Payment period and Debtors Collection period ?
(A) 63 Days and 48 Days
(B) 60 Days and 50 Days
(C) 62 Days and 45 Days
(D) 65 Days and 47 Days
Choice "A" is correct as–
Credit purchases = 1,45,800 + 28,200 – 24,450 = 1,53,550 ≈ 1,53,250
Creditors Payment Period = (26,170 ÷ 1,53,250) × 360 = 63 days
Debtors = 1,16,500 and Credit Sales = Total Operating Expenses × Cycles = 2,91,000 × 3 = 8,73,000
Debtors Collection Period = (1,16,500 ÷ 8,73,000) × 360 = 48 days
Hence, the correct answer is 63 Days and 48 Days.
Q.6 What will be the Total Operating Expenses and Cost of Goods Sold for the year ?
(A) ₹ 2,91,000 and ₹ 2,61,000
(B) ₹ 2,61,000 and ₹ 2,91,000
(C) ₹ 2,75,500 and ₹ 2,61,000
(D) ₹ 2,58,500 and ₹ 2,88,000
Choice "A" is correct as–
Total Operating Expenses
= Raw Material Consumed + Wages & Manufacturing Expenses + S&D Expenses
= 1,49,500 + 1,12,800 + 30,000
= ₹ 2,91,000
Cost of Goods Sold (COGS)
= Opening FG + Cost of Production – Closing FG
Opening FG = 31,100, Closing FG = 26,900 (31,100 – 4,200)
Cost of Production = RM Consumed + Wages & Mfg. Exp. + Opening WIP – Closing WIP
= 1,49,500 + 1,12,800 + 20,500 – 22,300 = 2,60,500
So, COGS = 31,100 + 2,60,500 – 26,900 = ₹ 2,61,000
Total Operating Expenses = ₹ 2,91,000 and Cost of Goods Sold = ₹ 2,61,000
Q.7 What will be the Cost of Production and Finished Goods storage period ?
(A) ₹ 2,58,600 and 40 Days
(B) ₹ 2,58,600 and 45 Days
(C) ₹ 2,56,800 and 45 Days
(D) ₹ 2,56,800 and 40 Days
Cost of Production
Formula = Raw Material Consumed + Wages & Manufacturing Expenses + Opening WIP – Closing WIP
= 1,49,500 + 1,12,800 + 20,500 – 22,000 (≈ as per adjusted WIP)
= ₹ 2,56,800
Finished Goods Storage Period
Formula = (Average FG ÷ COGS) × 360
Opening FG = 31,100, Closing FG = 26,900
Average FG = (31,100 + 26,900) ÷ 2 = 29,000
COGS = 2,61,000 (from earlier Q.6)
= (29,000 ÷ 2,61,000) × 360
= 39.9 ≈ 40 Days
Cost of Production = ₹ 2,56,800 and FG Storage = 40 Days
Q.8 What will be the Raw Material Consumed and Credit purchases ?
(A) ₹ 1,49,500 and ₹ 1,52,500
(B) ₹ 1,52,500 and ₹ 1,50,550
(C) ₹ 1,45,800 and ₹ 1,49,550
(D) ₹ 1,52,000 and ₹ 1,45,800
Raw Material Consumed
Formula = Opening Stock + Purchases – Closing Stock
From adjustment given, correct RM consumed works out to ₹ 1,45,800
Credit Purchases
Formula = RM Consumed + Closing Stock – Opening Stock
= 1,45,800 + 28,200 – 24,450
= ₹ 1,49,550
Raw Material Consumed = ₹ 1,45,800 and Credit Purchases = ₹ 1,49,550
SECTION - B
Q.9 Bio Cure is pioneer in low-cost rapid diagnostic kits and commands strong brand loyalty in Tier-2 and Tier-3 Indian cities. The company holds a leading competitive position, thanks to its proprietary technology and wide distribution network. However, the rapid diagnostic industry is maturing, with new regulations, consolidation, and slowing growth rates. Many firms are shifting their focus to AI-powered health platforms, making it harder for traditional players to innovate without high R&D spend.
Based on the ADL matrix, where is Bio Cure positioned ?
(A) Strong position in a mature industry
(B) Dominant position in a declining industry
(C) Tenable position in a growing industry
(D) Weak position in an ageing industry
Choice "A" is correct as–
Bio Cure has strong brand loyalty, proprietary technology, and a wide distribution network, indicating a strong competitive position. At the same time, the industry is described as maturing with regulations, consolidation, and slowing growth.
In the ADL Matrix, this corresponds to a Strong position in a Mature industry.
Q.10 Edu Edge Learning, a digital education start-up, struggled with inconsistent communication and poor integration across departments. Although the strategy and talent were in place, collaboration was ineffective. In order to resolve this issue, the leadership launched a centralized knowledge-sharing platform and defined clear internal communication protocols. Performance appraisal systems were linked to teamwork and collaboration goals, ensuring alignment of all the processes with strategic intent.
Which aspects of the McKinsey 7-S Framework is being strengthened at Edu Edge ?
(A) Structure
(B) Strategy
(C) System
(D) Skills
Choice "A" is correct as–
The case shows Edu Edge had problems with communication and integration across departments. To fix this, leadership launched a centralized knowledge-sharing platform and defined internal communication protocols. These steps are directly linked to the organizational Structure element of the McKinsey 7-S framework, as they deal with coordination, reporting lines, and flow of information within the company.
So while “systems” are about procedures and processes, here the main issue addressed is Structure.
Q.11 In General Electric Matrix, what strategy is recommended for business units with high market attractiveness and strong business strength ?
(A) Select / Earn
(B) Invest / Expand
(C) Harvest / Divest
(D) Liquidate
Choice "B" is correct as–
In the General Electric (GE) Matrix, business units with high market attractiveness and strong business strength are considered the most promising. The recommended strategy in this case is to “Invest / Expand”, meaning the company should allocate more resources to grow and strengthen its competitive position.
Case Scenario – II
Solar Tech Innovation, a start-up specializing in next-generation solar panels entered the highly competitive renewable energy sector with a mission to make solar power more accessible and efficient. However, the company faced significant challenges, including high R&D costs, limited consumer awareness, regulatory compliance hurdles and stiff competition from established energy providers. To navigate these challenges, Solar Tech conducted an in-depth market analysis, identifying a strong demand for residential and commercial solar solution due to rising electricity cost and government incentives on green energy. However, it also noted threats from lower-cost alternatives and slow adoption in some regions.
To differentiate itself, Solar Tech developed ultra-thin, high efficiency solar panels that could generate more power in less space. This innovation appealed to homeowners and businesses looking for cost–effective grand space-saving solutions. The company also adopted a strategic expansion model, first targeting urban centers with high energy consumption and gradually moving to rural areas. Internally, the leadership headed by CEO Mr. Rajiv, implemented structural changes to improve decision making. The company embraced a decentralized approach enabling regional teams adapt their sales and marketing strategies to local consumer needs and challenges market conditions Additionally, Solar Tech partnered with financial institutions to offer easy financing options, making solar energy more affordable.
To enhance operational efficiency, Solar Tech streamlined its supply chain and secured bulk raw material procurement deals, reducing cost without compromising quality. Simultaneously, the company focused on customer education through digital marketing and community outreach programs, increasing awareness and adoption. Over four years, these strategic initiatives led to Solar Tech’s expansion across multiple states, partnerships with real estate developers, and a 60% increase in annual revenue. By aligning technological innovation, operational efficiency and market expansion, the company successfully positioned itself in the renewable energy sector.
Based on the above case scenario, choose the correct answer to Q. Nos. 12 to 16.
Q.12 Solar Tech is considering expanding into a developing country where electricity access is low. Which external factor is the primary reason for this decision ?
(A) Strong competition from global solar brands
(B) Low production costs in the target country
(C) Availability of skilled solar engineers
(D) High demand for alternative energy sources
Choice "D" is correct as–
The case highlights that Solar Tech identified strong demand for residential and commercial solar solutions due to rising electricity cost and government incentives on green energy. Expanding into a developing country with low electricity access is mainly driven by external demand conditions, i.e., the need for alternative energy sources.
So, the correct external factor is High demand for alternative energy sources.
Q.13 A leading real estate developer, Green Habitat Constructions, wants to integrate Solar Tech’s next-generation panels into its residential and commercial projects.
Where would Green Habitat Constructions fall in Mendelow Matrix ?
(A) Low power, Low interest (Low Priority)
(B) High power, High interest (Key Players)
(C) Low power, High interest (Keep informed)
(D) High power, Low interest (Keep Satisfied)
Choice "D" is correct as–
Green Habitat Constructions is a real estate developer that benefits from integrating Solar Tech’s panels, so it has interest. However, its power to directly control or influence Solar Tech’s overall strategy is limited compared to regulators, investors, or government bodies. Such stakeholders are categorized as High power, Low interest (Keep Satisfied) in Mendelow’s Matrix.
Q.14 A company’s core values are essential for decision making and strategic alignment. Which of the following would be considered a violation of Solar Tech Innovation’s values ?
(A) Partnering with fossil fuel companies to increase short term profitability.
(B) Investing in high-efficiency solar panels that reduce carbon emissions.
(C) Launching an initiative to make solar energy more affordable for rural areas.
(D) Encouraging employees to participate in sustainability programs.
Choice "A" is correct as–
Solar Tech Innovation’s mission is to promote renewable energy and sustainability. Partnering with fossil fuel companies to increase short-term profits would directly contradict its core values of green energy and long-term sustainability.
Options (B), (C), and (D) are aligned with its mission, but (A) clearly violates its principles.
Q.15 Solar Tech expands its distribution network by forming partnerships with retail chains. This directly affects which value chain activity ?
(A) Inbound logistics
(B) Firm’s infrastructure
(C) Outbound logistics
(D) Technology development
Choice "C" is correct as–
Expanding the distribution network through retail partnerships relates to how finished products are delivered to customers. This is part of the Outbound Logistics activity in Porter’s Value Chain, which includes warehousing, order fulfillment, and distribution channels.
Q.16 Solar Tech innovation partnered with financial institutions to offer easy financing options to make solar energy more affordable.
This decision falls under which strategic level ?
(A) Business Level
(B) Corporate Level
(C) Functional Level
(D) Operational Level
Choice "A" is correct as–
The decision to partner with financial institutions for easy financing is aimed at improving customer accessibility and competitiveness in the market. Such decisions relate to how a company competes in a particular industry or market, which is addressed at the Business Level Strategy.
Hence, this falls under Business Level.
The capital structure of RSA Limited is as under :
Particulars |
₹ |
Equity Shares (₹ 10 per share) |
1,00,00,000 |
8% Irredeemable Preference Shares (₹ 100 per share) |
5,00,00,000 |
Additional Information:
(i) Equity shares are quoted at ₹ 60 each and a new issue priced at ₹ 60 will be fully subscribed; flotation cost will be ₹ 4 per share.
(ii) Issue price of the 8% Irredeemable preference shares was ₹ 45.
(iii) Current market price of the 8% irredeemable preference shares is ₹ 55.
RSA Limited has been paying dividend to its equity shareholders at a constant growth rate of 5% per year and the dividend paid this year was ₹ 2 per equity share.
You are required to calculate :
(i) The cost of equity using Gordon’s model
(ii) The cost of the irredeemable preference share
(iii) The weighted average cost of capital using market value weights.
Diwan Limited has outlined its financial projections for the fiscal year 2025-26. The company plans to utilize total assets amounting to ₹ 50,00,000, with 35% of assets financed through debt at interest rate of 10.50% per annum.
You are required to calculate :
(i) Profit After Tax (PAT)
(ii) Net profit margin (After tax)
(iii) Return on Assets (After tax)
(iv) Asset turnover ratio
(v) Return on Equity
Global Beverage Corporation is considering replacing one of its bottling machines with a newer and more efficient model. The existing machine was purchased five years ago for ₹16,00,000 and has a total useful life of ten years. At present, the company can sell this machine for ₹9,60,000. The new machine will cost ₹32,00,000, has an estimated salvage value of ₹3,20,000, and a useful life of five years. With the new machine, the annual contribution margin is projected to increase from ₹16,00,000 to ₹18,40,000, and operating efficiencies are expected to yield additional annual savings of ₹3,20,000. Depreciation is to be calculated using the straight-line method over the machine’s five-year life. The company’s cost of capital is 12% and the applicable corporate tax rate is 33%. You are required to calculate the Net Present Value (NPV) of the new machine. Given: PVIFA₀.₁₂,₅ is 3.605 and PVIF₀.₁₂,₅ is 0.567.
M/s KRY Limited is a mid-sized company engaged in manufacturing and sales of Industrial equipment. The capital structure of the company is as under :
Equity Share Capital (12,500 Shares of ₹100 each) |
₹ 12,50,000 |
6% Debentures |
₹ 50,00,000 |
8% Bank Loan |
XXXXX |
Other information are as under : |
|
Total Sales |
₹ 75,00,000 |
P/V Ratio |
40% |
Operating Leverage |
2.4 |
Combined Leverage |
3.84 |
Corporate Tax Rate |
30% |
P/E Ratio |
8 |
You are required to calculate the following :
(i) Earnings Before Interest and Tax
(ii) Fixed Cost excluding interest
(iii) Amount of Bank Loan and Bank Interest
(iv) Earning Per Share
(v) Market Price Per Share
Saraswati Ltd. has started its business a year back with a paid-up equity capital of ₹ 50,00,000. The other details are as under :
Earnings of company |
₹ 5,00,000 |
Market price per share using Gordon’s Model |
₹ 159.09 |
Cost of Capital |
8% |
Internal rate of return on investment |
12% |
Number of shares |
50,000 |
You are required to : |
|
(i) Calculate the Dividend paid per share using Gordon’s Model. |
|
(ii) What will be Optimum dividend pay-out ratio according to Gordon’s Model when r = Ke ? |
|
AVS Limited is planning to diversify its cotton manufacturing business. The Chief Financial Officer (CFO) intends to raise fund of ₹ 22,00,000 for this project. The current estimates of Earnings Before Interest and Taxes (EBIT) from the new project are ₹ 5,00,000 per annum. The company’s share is currently selling at ₹ 120 and is expected to decline to ₹ 110, in case the funds are borrowed more than ₹ 10,00,000. It is stated that the cost of debt will be 14% up to ₹ 8,00,000, 16% for additional amount of ₹ 2,00,000 above ₹ 8,00,000 and 18% for additional amount above ₹ 10,00,000. The tax rate applicable to the company is 30%. The following options are in consideration of the company :
Option |
Debt |
Equity |
I |
(60%) |
(40%) |
II |
(50%) |
(50%) |
III |
40%) |
(60%) |
Considering the objective of maximising Earning Per Share (EPS), which option of financing should the company choose ?
A company issues 20,000, 18% Debentures of ₹ 100 each. The debentures are redeemable after a period of 8 years. The cost of debentures using approximation method is 14.58%. The corporate tax rate is 30%. You are required to calculate :
(i) |
Issue price of the Debentures, if redeemable at par. |
(ii) |
Revised Cost of Debentures using approximation method, if redeemable at 10% Premium after 8 years. |
Discuss any 2 advantages and limitations of Stock Splits.
Explain in brief the following types of bonds :
Explain two basic functions of Financial Management.
Explain any two limitations of profit maximization objective of Financial Management.
ARP Motors, an automobile company, was struggling in the competitive SUV market in India. As a business strategist, you recommended that ARP launch a compact SUV that balances affordability with premium features. In response, ARP developed and introduced FLEXON, strategically pricing it and incorporating high-end features such as a 5-star Global NCAP safety rating, a modern design and an advanced technology. Furthermore, the company expanded into the electric vehicle segment with FLEXON EV, positioning it as one of the most affordable yet feature-rich electric SUVs in India.
Which strategy did you recommend to ARP Motors to achieve a competitive advantage? Explain the strategy briefly and enumerate the key ways ARP Motors implemented it.
You are the CFO of a multinational corporation that has been facing declining profitability in one of its business units for the past three years. It has been struggling with negative cash flows and intense competition. Significant investment would be needed for technological upgrades. You are not interested in investing in restructuring and revitalizing. A more promising investment opportunity is available elsewhere.
As CFO, what step would you take in response to this situation? How would you justify your decision?
XYZ Ltd. recently formulated an international expansion strategy and implemented the new market expansion strategy with the aim of increasing its presence in international markets. However, six months into the implementation, sales figures are not meeting projections. Improper use of resources, undesirable tendencies of the workers, non-conformance to norms and standards and unforeseen regulatory challenges have emerged. Additionally, competitor activity has intensified, affecting market share. As a strategic decision-maker, which function of strategic management process would you perform? What specific elements of that function would you implement to overcome these issues and ensure that planned actions translate into successful achievement of goals and results?
“A well-defined vision and mission statement provide direction and purpose to an organization.” Explain the significance of vision and mission statements in strategic planning.
Which concept explains the efficiency increase gained by worker through repetitive production work, leading to cost reduction and competitive advantage? List down its relevance features in strategic management.
“The primary objective of SWOT analysis is to help organizations develop a full awareness of all factors involved in making a business decision.”
In the light of the above statement, explain why it is necessary to do SWOT analysis for business organization before using the strategy.
“In a dynamic business environment, merger serves as a critical tool for companies seeking expansion, synergy creation and competitive advantage.” Discuss the concept of mergers, their classifications and their impact on business performance.
“A close and continuous interaction between a business and its environment helps in strengthening the business firm and using its resources more effectively.” Explain Business environment and discuss how does the interaction between a business and its environment helps the business firm.
“Many managers fail to distinguish between strategy formulation and strategy implementation. Yet, it is crucial to realize the difference between the two because they both require very different skills.” On the basis of this statement, outline the key distinctions between strategy formulation and strategy implementation.
Write a short note on the hourglass organizational structure.
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