RTP Dec 2021 Cap II Group II

CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)
Revision Test Paper

Group II
December 2021
Education Division
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the institute with a view to assist the
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taken to prepare the revision test paper. In case students need any clarification,
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PAPER 4: FINANCIAL MANAGEMENT
Questions:
CHAPTER: Introduction and Fundamental Concept of Financial Management:
Question No 1:
What are the emerging roles of the Chief Finance Officer (CFO)?
CHAPTER: Time Value of Money:
Question No 2:
You plan to make a series of deposits in an interest-bearing account. You will deposit Rs 1000
today, Rs 2000 at the end of year 2, and Rs 8000 at the end of year 5. If you withdraw Rs 3000 at
the end of year 3 and Rs 5000 at the end of year 7,
Required:
(a) How much will you have after 8 years if the interest rate is 9%?
(b) What is the PV of this cash flow?
Question No 3:
Prinshu opened an account on January- 1, 2020 with a deposit of Rs. 800. The account paid 6%
interest compounded quarterly. On July 1, 2020, she closed the account and added enough
additional money to invest in a 6-month time deposit for Rs. 1,000 earning 6% interest
compounded monthly.
Required:
(a) How much additional amount did Prinshu invest on July 1?
(b) What was the maturity value of her time deposit on January 1, 2021?
(c) How much total interest was earned during the period?
(Given that (1+ i)n is 1.03022500 for, i= 1.5%, n=2, and is 1.03037751 for i=0.5% and n =6)
CHAPTER: Strategic Finance and Policy:
Question No 4:
ABC Ltd. has the following book-value capital structure:
Equity Share Capital (150 million shares, Rs 10 par) Rs 1500 million
Reserve & Surplus Rs 2250 million
10.5% preference share capital (1 million Shares Rs 100 par) Rs 100 million
9.5% debentures (1.5 million debentures, Rs 1000 par) Rs 1500 million
8.5% term loan from financial institutions Rs 500 million
The debentures of ABC Ltd. are redeemable after three years and are quoting at Rs 981.05 per
debenture. The applicable income tax rate for the company is 35%.
The current market price per equity share is Rs 60. The prevailing default risk-free interest rate
on 10-year GON treasury bonds is 5.5%. The average market risk premium is 8%. The beta of
the company is 1.1875. The preferred stock of the company is redeemable after 5 years is
currently selling at Rs 98.15 per preference share.
Required:
i. Calculate WACC of the Co. using market value weights
ii. Define the marginal cost of capital schedule for the firm if it raises Rs 750 million for a
new project. The firm plans to have a target debt to value ratio of 20%. The beta of the new
project is 1.4375. The debt capital will be raised through term loans. It will carry an interest
rate of 9.5% for the 1st 100 million and 10% for the next Rs 50 million.
Question No 5:
PL Associates presently paid a dividend of Rs. 1 per share and has a share price of Rs 20.
1) If this dividend were expected to grow at a 12% p.a. forever, what is the firm’s expected or
required return on equity using a dividend-discount model approach?
2) Instead of this situation in part 1), suppose that the dividends were expected to grow at a
rate of 20% p.a. for 5 years and 10% p.a. thereafter. Now, what is the firm’s expected or
required return on equity?
Question No 6:
The selected financial data for A, B and C companies for the year ended March, 2009 are as
follows:
A B C
Variable expenses as a % Sales 66.67% 75% 50%
Interest Rs 200 Rs 300 Rs 1,000
Degree of Operating leverage 5:1 6:1 2:1
Degree of Financial leverage 3:1 4:1 2:1
Income tax rate 50% 50% 50%
Prepare Income Statements for A, B and C companies and also find degree of combined
leverage.
Question No 7:
The following is the Balance sheet of Prinshu Ltd as at 31st March 2018:
Rs
Share Capital:
10,000 equity shares of Rs 100 each fully paid up
10,00,000 12,50,000
25,000 11% cum. Preference share of Rs 10 each fully paid up
2,50,000
Reserves and surplus 25,00,000
Secured loans 20,00,000
Unsecured loans 12,00,000
Trade Creditors 18,00,000
Outstanding expenses 7,50,000
95,00,000
Represented by:
Fixed Assets 55,00,000
Current Assets 37,00,000
Advanced and deposits 3,00,000
95,00,000
The company plans to manufacture a new product in line with its current production, the capital
cost of which is estimated to be Rs. 25 lakhs. The company desires to finance the new project to
the extent of Rs. 16 lakhs by the issue of equity shares at a premium of Rs. 100 per share or by
the issue of 12% debentures and the balance to be raised from internal sources.
Additional information made available to you are:

1) The rate of dividends declared in the past five years i.e. year ended 31st March 2018, 31st
March 2017, 31st March 2016, 31st March 2015, and 31st March 2014, were 24%, 24%,
20%, 20%, and 18% respectively.
2) Turnover in the last three years was Rs. 80 lakhs (31st March 2018), Rs. 60 lakhs (31st
March 2017), and Rs. 50 lakhs (31st March 2016)
3) Anticipated additional sales from the new project are Rs. 30 lakhs annually.
4) Net profit before tax from the existing business which was 10% in the last three years is
expected to increase to 12% on account of new product sales.
5) The income tax rate is 35%.
6) The trend of the market price of equity share of the company quoted on the stock
exchange was:
Year High low
2017-18 300 190
2016-17 250 180
2015-16 240 180
You are required to examine whether the company’s proposal is justified. Do you have any
suggestions to offer in this regard? Workings must form part of your answer.
CHAPTER: Analysis of Financial Statements:
Question No 8:
Arati Motors Ltd. commenced manufacture of Scooters on 1.4.08 with a paid-up Capital of
Rs.100 lakhs. The company had obtained a license to manufacture 2,000 Scooters per annum. For
the year ended 31.3.2009, the company produced 1,500 Scooters and sold 1,250 Scooters at a
price of Rs. 24,000 per Scooters. The operating statements of the company revealed the
following information and ratios.
Information:
Capital: The Company raised an additional capital of Rs.50 lakhs on 1.2.09.
Dividend: The Company paid an interim dividend at 10% on 31.10.08. A further dividend of
10% was provided out of the profits on 31.3.09. No dividend was payable on the additional
capital raised.
Loan: A long-term loan of Rs.100 lakhs at a 20% rate of interest was obtained on 1.4.08. This
loan is to be paid in five annual equal installments. The company paid the interest as well as the
first installment of Rs. 20 lakhs on 31.3.09.
Cash Balance: The cash on hand and at the bank on 31.3.09 was Rs. 6 lakhs.
Investment: The Company invested a sum of Rs. 100 lakhs in Govt. Bonds on 1.6.08, carrying
an interest of 12%. The interest was received at the end of every month. All sums of money were
duly received.
Cost of Production: The cost of production consisted of Raw materials, direct labour,
manufacturing overheads, and Depreciation. Direct labour was 35% of the production cost.
Total Assets: The total assets (Net fixed assets Investment and Current assets) of the company as
of 31.3.09 equaled the Sales Turnover of the year.
Finished Goods: The finished goods were valued on the basis of the full production cost.
Ratios:
Current Ratio 2
Debtor’s turnover 6 times
Creditor’s turnover 6 times
Interest coverage ratio 4 times
Debt service coverage ratio 1.75 times
Profit after tax 10% of sales turnover
Raw materials turnover 4 times (Based on closing stock)
You are required to:
Prepare the Profit & Loss Account for the year ended 31.3.09 and the Balance Sheet as of that
date.
Note:
1) Indicate your figures in lakhs.
(2) All working notes must form part of your answer.
CHAPTER: Capital Investment Decision
Question No-9:
Elixir Limited has just completed over a period of one year, the development of a new product,
called "Noda". It now wishes to decide whether to proceed with the manufacture of the product.
The following information is available:
1. The development of new product required one year time of three employees in the
research department. These employees earned Rs. 450,000 each per annum on average.
Various materials and components had to be purchased especially for the development
work at a cost of Rs. 427,000.
2. The selling price of the product would be set at Rs. 900. It is expected that production and
sales would be 10,000 units per annum for the first five years and 15,000 units per annum
for the balance of three years.
3. Production of the Noda would require three types of material:
a) Material A: To be purchased specially for the project at a cost of Rs. 40 per kg.
b) Material B: The purchase price of Material B is now Rs. 25 per kg and is not expected
to rise over the period of the project
c) Material C: For this item, there is no further use other than the Noda. There are
10,000 kgs of material C in stock, which was bought at Rs. 50 per kg. It could be sold
as scrap for Rs 20 per kg and its current purchase price is Rs. 55 per kg, which is not
expected to change over the period of the project.
4. Each unit of Noda requires 3 kgs of Material A, 2 Kgs of Material B, and 1 kg of Material
C.
5. Fifteen work hours would be required for each unit at a wage rate of Rs. 22 per hour. For
the first year of operation, an additional labour cost of Rs. 15 lakh is also required.
6. Other variable costs of the project will be Rs. 160 per unit.
7. Inflation now being completely under control, no increase in costs over the life of the
project is expected.
8. Two machines will be needed for the project’s two processes. The first process, known as
Vega, will require a machine purchased especially at a cost of Rs. 30,00,000 which would
have a residual value of Rs. 3,00,000 at the end of eight years. Second process Mega can
be carried out on a machine which is already owned by Elixir Ltd. This Machine has a
book written down value of Rs. 750,000. If the Noda is not produced, the machine will be
sold for Rs. 500,000. The old machine requires a maintenance cost of Rs. 50,000 for year
1 and it will be increased by Rs. 20,000 per annum over previous years for the remaining
years. At the end of eight years, it will be valueless.
9. Sales may be assumed to take place and production costs to be incurred on the last day of
each year. The cost of capital of Elixir Ltd is 17% per annum. Assume corporate tax rate
to be 25% and applicable capital gain tax to be 15%. The company writes off
depreciation as per the straight-line method which is permissible for tax purposes.
10. Initial working capital will be Rs, 25,00,000 needed for the project and it will be fully
realized at the end of project life.
Establish whether or not it is worthwhile to go ahead with the production of the product Noda
with supporting computations based on the estimates given.
Question No-10:
The Board of ABC Co has decided to limit investment funds to Rs.10 million for the next year
and is preparing its capital budget. The company is considering five projects, as follows:
Initial investment (Rs.) Net present value (Rs.)

Project A 2,500,000 1,000,000
Project B 2,200,000 1,550,000
Project C 2,600,000 1,350,000
Project D 1,900,000 1,500,000
Project E 5,000,000 To be calculated
All five projects have a project life of four years. Projects A, B, C and D are divisible, and
Projects B and D are mutually exclusive. All net present values are in nominal, after-tax terms.
Project E
This is a strategically important project which the Board of ABC Co has decided must be
undertaken in order for the company to remain competitive, regardless of its financial
acceptability. Information relating to the future cash flows of this project is as follows:
Year 1 2 3 4
Sales volume (units) 12,000 13,000 10,000 10,000
Selling price (Rs./unit) 450 475 500 570
Variable cost (Rs./unit) 260 280 295 320
Fixed costs (Rs. ‘000) 750 750 750 750
These forecasts are before taking account of selling price inflation of 5·0% per year, variable
costs inflation of 6·0% per year, and fixed cost inflation of 3·5% per year. The fixed costs are
incremental fixed costs which are associated with Project E. At the end of four years, machinery
from the project will be sold for scrap with a value of Rs. 400,000. Tax allowable depreciation on
the initial investment cost of Project E is available on a 25% reducing balance basis and ABC
Co-pays corporation tax of 28% per year, one year in arrears. A balancing charge or allowance is
available at the end of the fourth year of operation.
ABC Co has a nominal after-tax cost of capital of 13% per year
Required:
a) Calculate the nominal after-tax net present value of Project E and comment on the financial
acceptability of this project.
b) Calculate the maximum net present value which can be obtained from investing the fund of
Rs.10 million, assuming here that the nominal after-tax NPV of Project E is zero.
c) Discuss the reasons why the Board of ABC Co may have decided to limit investment funds
for the next year.
CHAPTER: Working Capital Management and Financial Forecasting
Question No-11:
Palpa Cement Company Ltd. has an installed capacity of producing 1.25 lakh tons of cement p.a.
Its present capacity utilization is 80%. The major raw material to manufacture cement is
limestone which is obtained from the company’s own mechanized mine located near the plant.
The company produces cement in 200 kgs bags. From the information given below, determine
the net working capital (NWC) requirement of the company for the current year by using the cash
cost approach.
Cost structure per bag of cement (estimated):

Particulars (Rs per bag)
Gypsum 25
Limestone 15
Coal 30
Packing Material 10
Direct Labour 50
Factory overhead (including depreciation of Rs 10) 30
Administrative overheads 20
Selling overheads 25
Total cost 205
Profit margin 45
Selling price 250
Additional information:
(i) Desired holding period of raw materials: Gypsum- 3 months, Limestone-1 month, Coal-
2.5 months, and Packing material-1.5 months.
(ii) The product is in process for a period of 0.5 months (assume full units of materials,
namely gypsum, limestone and coal are required in the beginning, other conversion
costs are to be taken at 50%)
(iii) Finished goods are in stock for a period of 1 month before they are sold.
(iv) Debtors are extended credit for a period of 3 months
(v) Average time lag in payment of wages is approximately 0.5 months and of overheads, 1
month.
(vi) The credit period extended by various suppliers are: Gypsum-2 months, Coal- 1 month,
and packing materials-0.5 months
(vii) Minimum desired cash balance is Rs 25 lakhs.
The company follows a policy of including administrative overheads as a part of the cost of
production.
Question No-12:
The Danfe Company purchases raw materials on the terms of 2/10, net 30. A review of the
company’s records by the owner, Mr. Pandit, revealed that payments are usually made 15 days
after purchases are made. When asked why the firm did not take advantage of its discounts, the
accountant Mr. Rohit, replied that it cost only 2 percent for these funds, whereas a bank loan
would cost the company 12 percent.
1) Analyze what mistake is Rohit making?
2) If the firm could not borrow from the bank and be forced to resort to the use of trade
credit funds, what suggestion might be made to Rohit that would reduce the annual
interest cost? Identify.
Question No-13:
Consider the balance sheet of Maya Limited as on 31 December 2019. The company has received
a large order and anticipates the need to go to its bank to increase its borrowings. As a result, it
has to forecast its cash requirements for January, February, and March 2020. Typically, the
company collects 20 percent of its sales in the month of sale, 70 percent in the subsequent month,
and 10 percent in the second month after the sale. All sales are credit sales.
Equity and Liabilities Amount Assets Amount

(000) (000)
Equity shares capital 100 Net fixed assets 1,836
Retained earnings 1,439 Inventories 545
Long-term borrowings 450 Accounts receivables 530
Accounts payables 360 Cash and bank 50
Loan from banks 400
Other liabilities 212
2961 2961
Purchases of raw materials are made in the month prior to the sale and amounts to 60 percent of
sales. Payments for these purchases occur in the month after the purchase. Labour costs,
including overtime, are expected to be Rs1, 50,000 in January, Rs 2, 00,000 in February, and Rs
1, 60,000 in March. Selling, administrative, taxes, and other cash expenses are expected to be Rs
1, 00,000 per month for January through March. Actual sales in November and December and
projected sales for January through April are as follows (in thousands):
Month Rs Month Rs Month Rs

November 500 January 600 March 650
December 600 February 1,000 April 750
On the basis of this information:

a) Prepare a cash budget for the months of January, February, and March
b) Determine the amount of additional bank borrowings necessary to maintain a cash
balance of Rs 50,000 at all times
c) Prepare a Proforma balance sheet for March 31.
CHAPTER: Distribution Policy
Question No-14:
Mr. Narayan Ghimire is CFO of Great industry Ltd. He has to decide and recommend to Board
of Directors a suitable Dividend rate for financial year 2077-78 that would maximize market
price of companies share. For this purpose, the following information has been extracted from the
company’s financial statements.
Particulars Amount (Rs in lakhs)

Share Capital (Rs 10 each) Rs 6,250
Net Worth Rs 12,500
Profit After Tax (PAT) Rs 2500
Present Dividend Payout Ratio 40%
Cost of Equity 12%
Price Earning (PE) Ratio 10 Times
For taking a suitable dividend decision, Mr. Ghimire is considering a number of

options/alternatives. You are required to help him in this regard by answering the following
questions by using Walters Dividend Model:
1) Determine the price of the company’s share if the present Dividend Payout ratio is
maintained?
2) What should be the Dividend Payout ratio if the existing PE ratio is to be maintained?
3) What should be the Dividend Payout ratio if PE ratio is 8.75 times?
4) What should be the optimum Dividend Payout Ratio so as to maximize the market price
of the share? Also, compute the market price per share at optimum DP Ratio?
CHAPTER: Valuation of Securities
Question No-15:
Chemicals and Fertilizers Ltd. has been growing at a rate of 18% per year in recent years. This
abnormal growth rate is expected to continue for another 4 years, then it is likely to grow at the
normal rate of 6%. The required rate of return on the shares by the investment community is
12%, and the dividend paid per share last year was Rs. 3. At what price, would you, as an
investor, be ready to buy the shares of this company now and at the end of years 1, 2, 3, and 4,
respectively? Will there be any extra advantage by buying these shares now or in any of the
subsequent four years, assuming all other things remain unchanged.
Question No-16:
ABC Ltd. has cash of Rs. 90 Lakhs. It wishes to distribute 30% of cash as dividends.
Alternatively, it uses the money to buy-back its shares. It expects that price per share will go up
by 10% after the buyback. The no of existing shares is 10 lakhs and the current earnings price
per share is Rs. 3.
You are required to:
a) Calculate re-purchase price per share if the market value of the co. after buy-back is Rs. 200
lakhs and also calculate no of shares re-purchased.
b) If net income is the same then calculate changed EPS after buy-back.
CHAPTER: Risk and Return
Question No-17:
The following information is available with respect to JK Ltd.
JK Ltd Market
Year Avg. Share Price Div. Per Share (DPS) Average Index Dividend Yield (%)
2002 242 20 1812 4
2003 279 25 1950 5
2004 305 30 2258 6
2005 322 35 2220 7
Compute beta value of JK ltd at the end of 2005. What is your observation?
CHAPTER: Overview of Capital Markets
Question No-18:
NSP Mutual Fund raised Rs. 150 lakhs on April 1 by issuing 15 Lakhs units at Rs. 10 per unit.
They invested in several capital market instruments to build a portfolio of Rs. 140 lakhs. Initial
expenses amounted to Rs. 8 lakhs. During the month of April, The fund sold certain securities
costing Rs. 44.75 Lakhs for Rs. 47 lakhs and purchased certain other securities for Rs. 41.6 lakhs.
The fund management expenses for the month of April amounted to Rs. 6 lakhs of which Rs.
50,000 was in arrears. The dividend earned was Rs. 1.5 lakhs. 80% of the realized earnings were
distributed. The market value of the portfolio as on April 30 was Rs. 147. 85 lakhs.
An investor subscribed to 1 unit o 1st April and disposed it off at closing NAV on 30th April.
Determine his annual rate of earnings.
CHAPTER: Short Notes from Overall Syllabus
Question No. 19:

“Credit Cards as A Part of Consumer Finance”, briefly explain.
Question No. 20:
Write short notes on:

a) Risk- Return Trade-Off.
b) Importance of Mutual Fund in Nepal
c) CAMEL Model in Credit Rating
d) Foreign Institutional Investment (FIIs)
e) Zero Date of Project Management
f) Functions Of Merchant Bankers
g) Takeover by Reverse Bid or Reverse Takeover
h) Asset Securitization
Question No. 21:

Distinguish Between:
a) Factoring and Forfeiting
b) Horizontal analysis and vertical analysis
c) Promised yield and Realized yield:
d) Operating breakeven point Vs. Financial breakeven point:
e) Systematic Risk and Unsystematic Risk:
f) External Capital Rationing and Internal Capital Rationing:
g) Financial Distress Vs. Insolvency:
h) GDRs and ADRs:
Answers:
CHAPTER: Introduction and Fundamental Concept of Financial Management:
Question No 1:
Answer:
The chief financial officer (CFO) of an organisation plays an important role in the company’s
goals, policies, and financial success. Earlier his role was just confined to the raising of funds
from a number of sources. Today his functions are multidimensional. His responsibilities include:
a) Financial analysis and planning: Determining the proper amount of funds to employ in the
firm
b) Investment decisions: The efficient allocation of funds to specific assets
c) Financing and capital structure decisions: Raising funds on favourable terms as possible.
d) Management of financial resources (such as working capital)
e) Evaluation of financial performance
f) Financial negotiations
g) Dividend decision
h) Risk management
The figure below shows how the finance function in a large organization may be organized.
CHAPTER: Time Value of Money
Question No 2:
Answer:
(i) Future Value of Uneven cash flow:

Year Cash flow (Rs.) Future Value factor Future Value (Rs.)
0 1000 (1.09)8 1992.56
2 2000 (1.09)6 3354.20
3 (3000) (1.09)5 (4615.87)
5 8000 (1.09)3 10360.23
7 (5000) (1.09)1 (5450)
Total (Future Value) Rs. 5641.12
(ii) Present Value of above Uneven cash flow:

Present Value = F V X PVIF 9%, 8 years = 5641.12 X 0.50187 = Rs. 2831.11
(From the PVIF table at 9% in 8 years, the PV factor is 0.50187)
Question No 3:
Answer:
Maturity value of Rs. 800 on July 1, 2020 will be:
𝑖
F.V = P.V(1 + 𝑚)m x n
6
= 800 (1 + 4)4x1/2
= 800(1+0.015)2
= 800 x 1.03022500 = Rs. 824.18
Additional amount to be invested on July 1, 2020 is (1000 – 824.18) = Rs. 175.82

Maturity value on January- 1, 2021 compounded monthly for 6 months
6
= 1000 (1 + 12)12x1/2
= 1000(1.005)6
= 1000 x 1.03037751 = Rs. 1030.38
Interest Earned = (824.18 – 800) + (1030.38 -1,000)
= 24.18 + 30.38 = Rs. 54.56
CHAPTER: Strategic Finance and Policy
Question No 4:
Answer:
(i) Computation of WACC (Market Value Weights)
Amount
Sources Weight(a) Cost(b) (a) X (b)
(Rs. In Million)
ESH(150 Mio @Rs. 60
9,000.00 0.813 15.00%(WN 4) 12.195%
X 1500/3750)
10.5% PSC (1 Mio @
98.15 0.009 10.972%(WN 3) 0.099%
Rs. 98.15)
9.5% Debentures (1.5
1,471.575 0.133 6.872% (WN 1) 0.914%
Mio @ Rs. 981.05)
8.5% Term Loans 500.00 0.045 5.525%(WN 2) 0.249%
Total 11,069.725 WACC 13.457%
Working Notes:
1) Calculation of Cost of Debentures (Kd)
Interest (1-Tax) + (RV-NP)/N 95(1-0.35) + (1000 - 981.05)/3

Kd = = = 6.872%
(RV+NP)/2 (1000+981.05)/2
2) Calculation of cost of Term Loan (KTL)

KTL = Interest (1-Tax Rate) = 8.5% (1-35%) = 5.525%
3) Calculation of Cost of Preference share(KP)

Dividend + (RV – NP)/N
Cost of Pref. Share (Kp) =
(RV+NP)/2
10.50 + (100-98.15)/5
= = 10.972%
(100 + 98.15)/2
4) Computation of Cost of Equity (Ke)

As per Capital asset pricing model,
Ke = Rf + β (Rm-Rf) = 5.50% + 8% X 1.1875 = 15.00%
Since, there is no floatation cost, Ke = Kre = 15.00%
(ii) Pattern of raising additional finance:

• Additional fund is Rs 750 Million. Since Debt to Value ratio is 20%, 150 Million
should be raised through Debt and 600 Million is raised through Equity.
• Debt up to 100 Million is financed @9.5%, Post tax cost being 6.175% and 50
Million additional dent is financed @10%. Post tax cost is 6.5%.
• Equity fund is raised @ 17% ( 5.5 + 1.4375x8)
• Marginal Cost for first break point up to Rs 500 Million(Limit of low cost debt) will
be as follows:
6.175% x 0.2 + 17% x 0.8 = 14.835%.
• Marginal cost for fund more than 500 Million will be as 6.5% x 0.2 + 17% x 0.8 =
14.9%
• Cost of capital for total 750 Million = 14.86%.(14.835% x 0.66667 + 14.9% x
0.33333)
Question No 5:
Answer:
1) Firms expected or required return on equity (using dividend discount approach):
The required return as per dividend discount model can be computed as:
Ke = [D1/ P0] + g
Where,
Ke = cost of equity
D1 = expected dividend at the end of year 1
P0 = Current Market price of a share
g = expected growth rate of dividend
Now,
Ke = [1 x (1.12)/20] + 12% = 17.60%
2) Firms expected or required return on equity (if the dividends were expected to grow
at a rate of 20% p.a. for 5 years and 10% p.a. thereafter):
In this situation, since the growth in dividend is not constant, we should compute Ke by
using trial and error approach as follows:
The current market price of share of Rs 20 is the Present Value of future dividends
discounted by using cost of equity.
Supposing cost of equity is 18%, the current price of share can be computed as follows:
Year Dividend PV factor@ Present Value

18% (Rs)
1 Rs 1 x (1.20) = Rs 1.20 0.8475 1.0170
2 Rs 1.20 x (1.20) = Rs 1..44 0.7182 1.0342
3 Rs 1.44 x (1.20) = Rs 1.73 0.6086 1.0529
4 Rs 1.73 x (1.20) = Rs 2.08 0.5158 1.0729
5 Rs 2.08 x (1.20) = Rs 2.50 0.4371 1.0928
PV of dividends (year 1 to year 5): 5.2698
5 Rs 2.50 x (1.1) = Rs 2.75
Share price at the end of 5th year by
using constant growth in dividend is:
P5 = D6/(Ke – g)
= 2.75/(0.18 - 0.10) = Rs 34.38 0.4371 15.0275
Total Present Values Rs 20.2973
Since the Present value of dividends (year 1 to 5) plus Present value of share price to be
received in year 5 (P5) is more than Rs 20, the cost of equity would be more than 18%
Now, supposing cost of equity is 19%, the current price of share can be computed as
follows:
Year Dividend PV factor@ Present Value
19% (Rs)
1 Rs 1 x (1.20) = Rs 1.20 0.8403 1.0084
2 Rs 1.20 x (1.20) = Rs 1..44 0.7062 1.0169
3 Rs 1.44 x (1.20) = Rs 1.73 0.5934 1.0266
4 Rs 1.73 x (1.20) = Rs 2.08 0.4987 1.0373
5 Rs 2.08 x (1.20) = Rs 2.50 0.4190 1.0475
PV of dividends (year 1 to 5): 5.1367
5 Rs 2.50 x (1.1) = Rs 2.75
Share price at the end of 5th year
by using constant growth in
dividend is:
P5 = D6/(Ke – g) 0.4190 12.8028

= 2.75/(0.19 - 0.10) = Rs 30.5556
Total Present Values Rs 17.9395
The Present value of dividends (year 1 to 5 ) plus Present value of share price to be
received in year 5 (P5) is less than Rs 20, the cost of equity would fall between 18% and
19%.
The cost of equity can be computed by using interpolation formula as under:
(PV at Lower Rate – Current Price)

Ke = Lower Rate + (Higher Rate – Lower Rate)
(PV at Lower Rate – PV at Higher Rate)
(20.2973 – 20)
= 18 + (19- 18) = 18.13%
(20.2973 – 17.9395)
Question No-6
Answer:
The information regarding the operating leverage and financial leverage may be interpreted as
follows–For Company A, the DFL is 3 : 1 (i.e., EBIT : EBT) and it means that out of EBIT of 3,
the EBT is 1 and the remaining 2 is the interest component. Or, in other words, the EBIT: Interest
is 3: 2. Similarly, for the operating leverage of 6: 1 (i.e., Contribution- EBIT) for Company B, it
means that out of Contribution of 6, the EBIT is 1 and the balance 5 is fixed costs. In other
words, the fixed costs: EBIT is 5: 1. This information may be used to draw the statement of sales
and profit for all the three firms as follows:
Statement of Operating Profit and Sales

Particulars A B C
Financial leverage = (EBIT/EBT) 3:1 4:1 2:1
Or, EBIT/Interest 3:2 4:3 2:1
Interest Rs 200 Rs 300 Rs 1,000
EBIT Rs 300 Rs 400 Rs 2,000
Operating leverage = (Cont./EBIT) 5:1 6:1 2:1
i.e., Fixed Exp./EBIT 4:1 5:1 1:1
Variable expenses as a % Sales 66.67% 75% 50%
Contribution to Sales 33.33% 25% 50%
Fixed costs 300×4/1 400×5/1 2,000×1/1
= Rs 1,200 = Rs 2,000 = Rs 2,000
Contribution = (Fixed cost + EBIT) Rs 1,500 Rs 2,400 Rs 4,000
Sales Rs 4,500 Rs 9,600 Rs 8,000
Income Statement for the year ended 31.03.09

Particulars A B C
Sales Rs. 4,500 Rs 9,600 Rs 8,000
Variable cost 3,000 7,200 4,000
Contribution 1,500 2,400 4,000
Fixed Costs 1,200 2,000 2,000
EBIT 300 400 2,000
Interest 200 300 1,000
EBT 100 100 1,000
Tax at 50% 50 50 5,00
Profit after Tax (PAT) 50 50 5,00
Operating leverage (Cont./EBIT) = 5 6 2
Financial leverage (EBIT/PBT) = 3 4 2
Combined leverage 15 24 4
Question No-7
Answer:
1) Analysis of present position:
Particulars Rs.
Sales (31st March, 2018) 80,00,000
Earnings Before Tax (EAT) 80,00,000 x 10% 800,000
Less: Tax @ 35% 2,80,000
Earnings After Tax (EAT) 5,20,000
Less: Preference Dividend (250,000 x 11%) 27,500
Earnings Available for equity shareholders 4,92,500
No of equity shares 10,000
EPS 49.25
Average Market Price: (300 + 190)/2 245
Price Earnings Ratio (PE) 4.97 or 5 times
Existing Book Value per share:

= (Equity capital + reserves)/No of shares
= (10, 00,000 + 25, 00,000)/10,000 = Rs 350 per share
Expected market price of share after diversification through issue of equity shares:
Sales (80 lakhs + 30 Lakhs) 110,00,000
EBIT (110 lakh x 12%) 13,20,000
Less: interest -
EBT 13,20,000
Less: Tax @ 35% 4,62,000
EAT 8,58,000
No of equity shares (existing + new = 10,000 + 16,00,000/200) 18,000
EPS Rs 46.14
PE Ratio (times) 5
Market price of share Rs 230.70
Expected Book Value per share if diversification is made through equity shares:
Existing Equity fund (10, 00,000 + 25, 00,000) = Rs 35, 00,000
New equity fund = Rs 16, 00,000
Total equity shareholders fund = Rs 51, 00,000
Total no of equity shares = 18,000
Expected Book Value per share = 51, 00,000/18,000 = Rs 283.33
From the above calculations, it is clear that existing book value of each equity share is Rs
350, existing market price per share is Rs 245 and existing EPS is Rs 49.25 but if new
investment is raised through equity, book value per share will be reduced to Rs 283.33
(from 350), market price per share will be reduced to Rs 230.70 (from Rs 245) and EPS
will also be reduced to Rs 46.14 (from Rs 49.25). Hence it is not beneficial to
shareholders.
Expected market price of share after diversification through issue of 12%

debentures:
Particulars Rs
Sales (80 lakhs + 30 Lakhs) 110,00,000
EBIT (110 lakh x 12%) 13,20,000
Less: interest on 12% debentures of 16 lakhs 1,92,000
EBT 11,28,000
Less: Tax @ 35% 3,94,800
EAT 7,33,200
No of equity shares 10,000
EPS Rs 70.57
PE Ratio (times) 5
Market price of share Rs 352.85
After the project is financed by issue of 12% debentures, MPS is increased to Rs 352.85
from Rs 245 and EPS also increased to Rs 70.57 from Rs 49.25. Hence, it is
recommended to raise fund from issuing 12% debentures.
CHAPTER: Analysis of Financial Statements
Question No-8
Answer:
Working notes:
1 Capital Rs 100,00,000
Add: Additional Capital Rs 50,00,000
Total Capital Rs 150,00,000
2 Production Units 1500
Less: Sales Units 1250
Closing Stock 250 Units
3 Sales Amount (1250 x 24000) Rs 300,00,000
4 Dividend paid (10000000 @ 10 %) Rs 10,00,000
Dividend Proposed Rs 10,00,000
Total Dividend Rs 20,00,000
5 Loan Rs 100,00,000
Installment Payment Rs 20,00,000
Outstanding Loan Rs 80,00,000
Interest Paid Rs 20,00,000
6 Cash Balance Rs 6,00,000
7 Interest Received on Govt. Bonds Rs 10,00,000
100,00,000 x 12% x 10/12
Investment to be shown in Balance Sheet Rs 100,00,000
8 Cost of production (1500 units)
Raw Materials (W/N: 15) Rs 96,00,000
Direct Labour 35% Rs 84,00,000
Manufacturing overheads (b/f) Rs 40,00,000
Depreciation Rs 20,00,000
Total Production Cost Rs 240,00,000
9 Total Assets (Equal to Sales) Rs 300,00,000
Total Liability Rs 300,00,000
10 Debtors = sales/ Debtors Turnover Ratio Rs 50,00,000
11 Interest Coverage Ratio = EBIT/Interest
4 = EBIT/20,00,000
EBIT = 80,00,000
12 EBIT Rs 80,00,000
Less: Interest Rs 20,00,000
EBT Rs 60,00,000
Provision for Tax (balancing figure) Rs 30,00,000
EAT (10% of 300,00,000) Rs 30,00,000
Less: Dividend Rs 20,00,000
Retained Earnings Rs 10,00,000
13 Debt service coverage ratio
= (PAT + Interest + depreciation) / (Interest + Principal)
1.75 = (3000000 + 2000000 + depreciation / 2000000 +
2000000)
Depreciation = 20,00,000
14 Creditors turnover ratio = (credit purchases / creditors)
Purchases Rs 120,00,000
15 R. material turnover ratio
= (R. material consumed /closing stock of R. material)
4 = (purchases – closing stock) / closing stock
Closing Stock of Raw Material Rs 24,00,000
Raw Material Consumption Rs 96,00,000
Balance Sheet
Liabilities Rs Assets Rs
Capital 150,00,000 Fixed Assets (100,00,000 – 80,00,000
20,00,000)
Retained Earnings 10,00,000 Investments 100,00,000
Outstanding Loan 80,00,000 Current Assets:
Current Liabilities: Debtors 50,00,000
Provision for tax 30,00,000 Cash 600,000
Proposed Dividend 10,00,000 Stock of R. Material 24,00,000
Creditors (b/f) 20,00,000 Stock of Finished Goods 40,00,000
Total 300,00,000 Total 300,00,000
Income Statement
Particulars Amount
(Rs)
Sales 300,00,000
Less: Cost of goods sold:
Cost of production 240,00,000
Less: Closing Stock of Finished Goods 40,00,000 200,00,000
Gross Profit 100,00,000
Add: Non-operating Income 10,00,000
Less: Operating Expenses (b/f) 30,00,000
EBIT 80,00,000
CHAPTER: Capital Investment Decision
Question No-9:
Answer:
Step-1: Initial Cash Outflow of the Project:
Particulars Amount (Rs)
Purchase Cost of Machine for first process Vega 30,00,000
Net Salvage Value of Machine for Second process Mega (W/N:1) 5,37,500
Additional Working Capital required 25,00,000
Total Initial Cash Outflow Rs 60,37,500
Step-2: Computation of Annual Cash Flow After Tax (CFAT):
Particulars Y-1 Y-2 Y-3 Y-4 Y-5 Y-6 Y-7 Y-8
No of Units 10,000 10,000 10,000 10,000 10,000 15,000 15,000 15,000
Sales 90,00,000 90,00,000 90,00,000 90,00,000 90,00,000 135,00,00 135,00,00 135,00,00
0 0 0
Less: Material A 12,00,000 12,00,000 12,00,000 12,00,000 12,00,000 1800,000 1800,000 1800,000
Less: Material B 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 7,50,000 7,50,000 7,50,000
Less: Material C 2,00,000 5,50,000 5,50,000 5,50,000 5,50,000 8,25,000 8,25,000 8,25,000
Less: Labour cost 48,00,000 33,00,000 33,00,000 33,00,000 33,00,000 49,50,000 49,50,000 49,50,000
Less: Other V. Costs 16,00,000 16,00,000 16,00,000 16,00,000 16,00,000 24,00,000 24,00,000 24,00,000
Less: Maintenance 50,000 70,000 90,000 1,10,000 1,30,000 1,50,000 1,70,000 1,90,000
Cost (2nd Process)
Earnings Before Dep. 6,50000 17,80,000 17,60,000 17,40,000 17,20,000 26,25,000 26,05,000 25,85,000
and Tax (EBDT)
Less: Depreciation 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250
(W/N:2)
Earnings Before Tax 2,18,750 13,48,750 13,28,750 13,08,750 12,88,750 21,93,750 21,73,750 21,53,750
Earnings After Tax 1,64,063 10,11,563 9,96,563 9,81,563 9,66,563 16,45,313 16,30,313 16,15,313
(0.75 x EBT)
Add: Depreciation: 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250 4,31,250
CFAT 5,95,313 14,42,813 14,27,813 14,12,813 13,97,813 20,76,563 20,61,563 20,46,563
Release of Working - - - - - - - 25,00,000
Capital
NSV (Vega) - - - - - - - 3,00,000
Step-3: Computation of NPV:

Year Cash Flow (Rs) PV Factor @ 17% Present Value (Rs)
0 (60,37,500) 1 (60,37,500)
1 5,95,313 0.8547 5,08,814
2 14,42,813 0.7305 10,53,975
3 14,27,813 0.6244 8,91,526
4 14,12,813 0.5337 7,54,018
5 13,97,813 0.4561 6,37,543
6 20,76,563 0.3898 8,09,444
7 20,61,563 0.3332 6,86,913
8 48,46,563 0.2848 13,80,301
Net Present Value (NPV) Rs 6,85,034
Decision: Accept the project as its NPV is positive by Rs 6, 85,034.
Working Notes:
1) Net Salvage Value of Machine in Mega Process:
Particulars Amount (Rs)
Selvage Value 5,00,000
Less: Written Down Value 7,50,000
Loss on sale 2,50,000
Tax Saving on loss @ 15% 37,500
NSV: Sale Value + Tax Savings 5,37,500
2) Computation of Annual Depreciation:

Machine Vega Mega
Cost 30,00,000 -
Written Down Value - 750,000
Life 8 years 8 years
Method SLM SLM
Salvage Value (end) 3,00,000 0
Depreciation (30,00,000-3,00,000)/8 (7,50,000 – 0)/8
= Rs 3,37,500 Rs 93,750
Total Depreciation Rs 4,31,250
3) Cost incurred for development work in research department before making the decision is
sunk costs and hence it is not relevant for decision.
Question No-10:
Answer:
a) Calculation of NPV of Project E (Rs. '000)

Year 1 2 3 4 5
Sales income 5,670 6,808 5,788 6,928
Variable cost (3,307) (4,090) (3,514) (4,040)
Contribution 2,363 2,718 2,274 2,888
Fixed cost (776) (803) (832) (861)
Cash flow before tax 1,587 1,915 1,442 2,027
Tax at 28% - 444 536 404 568
Depreciation tax benefit 350 263 197 479
Cash flow after tax 1,587 1,821 1,169 1,820 (89)
Scrap value 400
Net cash flow 1,587 1,821 1,169 2,220 (89)
Discount at 13% 0.885 0.783 0.693 0.613 0.543
Present values 1,404 1,426 810 1,362 (48)
Sum of present values 4,954
Initial investment -5,000
Net present value (46)
Although the NPV of the project is negative and so financially it is not acceptable, the Board of
ABC Co has decided that it must be undertaken as it is strategically important.
Workings:
Year 1 2 3 4
Selling price (Rs./unit) 450.00 475.00 500.00 570.00
Inflated selling price(Rs./unit) 472.50 523.69 578.81 692.84
Sales volume (units/year) 12,000 13,000 10,000 10,000
Sales income (Rs. '000/year) 5,670 6,808 5,788 6,928
Variable cost (Rs. /unit) 260 280 295 320
Inflated variable cost (Rs.
/unit) 275.60 314.61 351.35 403.99
Variable cost (Rs. '000/year) 3,307.20 4,089.93 3,513.50 4,039.90
Year Tax allowable depreciation Tax Benefit
1 5,000,000 x 0·25 = Rs. 1,250,000 1,250,000 x 0·28 = Rs. 350,000

2 3,750,000 x 0·25 = Rs. 937,500 937,500 x 0·28 = Rs. 262,500
3 2,812,500 x 0·25 = Rs. 703,125 703,125 x 0·28 = Rs. 196,875
4 1,709,375* 1,709,375 x 0·28 = Rs. 478,625
*5,000,000 – 1,250,000 – 937,500 – 703,125 – 400,000
b) Calculation of Maximum NPV
Project A B C D E
Investment (Rs. 000) 1,500 2,200 2,600 1,900 5,000
NPV (Rs. ' 000) 1,000 1,550 1,350 1,500 Nil
PV of future cash flows 3,500 3,750 3,950 3,400 5,000
Profitability index 1.4 1.7 1.52 1.79 1.00
Ranking 4 3 2 1
Project E has been ranked first as it must be undertaken. Project B cannot be undertaken if
Project D is undertaken, as the two projects are mutually exclusive.
Calculation of maximum NPV
Projects Investment (Rs. 000) NPV (Rs. '000)

Project E 5,000 Nil
Project D 1900 1500
Project C 2600 1350
Project A 500 200
Total 10,000 3,050
As Project A is divisible and only Rs. 500,000 (20%) of its Rs. 2,500,000 initial cost is available
after cumulative investment in Projects E, D and C, the NPV from the project is Rs. 200,000
(20% of Rs. 1,000,000).
c) Reasons to limit investment:

When a company restricts or limits investment funds, it is undertaking softer internal capital
rationing. Capital rationing means that a company is unable to invest in all projects with a
positive net present value and hence it is not acting to maximize shareholder wealth.
There are several reasons why the Board of ABC Co may have decided to limit investment
funds for the next year. It may not wish to issue new equity finance in order to avoid diluting
earnings per share. Issuing new equity finance may also increase the risk of a company‘s
shares being bought by a potential acquirer, leading to a future takeover bid.
The Board of ABC Co may not wish to issue new debt finance if it wishes to avoid increasing
its commitment to fixed interest payments. This could be because economic prospects are
seen as poor or challenging, or because existing debt obligations are high and so the Board
does not wish to increase them.
The Board of ABC Co may wish to follow a strategy of organic growth, financing capital
investment projects from retained earnings rather than seeking additional external finance.
The Board of ABC Co may wish to create an internal market for capital investment funds, so
that capital investment proposals must compete for the limited funds made available in the
budget set by the Board. This competition would mean that only robust capital investment
projects would be funded, while marginal capital investment projects would be rejected.
CHAPTER: Working Capital Management and Financial Forecasting
Question No-11:
Answer:
Statement showing determination of net working capital of Palpa Cement Company Ltd:
Particulars Workings Amount (Rs)
Current Assets:
Minimum desired Cash balance - 25,00,000
Stock of Raw Materials:
Gypsum 5 lakh bags x 25 x 3/12 31,25,000
Limestone 5 lakh bags x 15 x 1/12 6,25,000
Coal 5 lakh bags x 30 x 2.5/12 31,25,000
Packing Material 5 lakh bags x 10 x 1.5/12 6,25,000
Stock of Work in Progress: 5 lakh bags x 115 x 1/24 23,95,833
Raw material cost 100% (25 +15 + 30) = 70
Other conversion cost (50 + 20 + 20 ) x 0.5 = 45
Stock of Finished Goods 5 lakh bags x 170 x 1/12 70,83,333
Debtors 5 lakh bags x 195 x 3/12 2,43,75,000
Total Current Assets 4,38,54,166
Current Liabilities:
Creditors:
Gypsum 5 lakh bags x 25 x 2/12 20,83,333
Coal 5 Lakh bags x 30 1/12 12,50,000
Packing material 5 lakh bags x 10 x 1/24 2,08,333
Wages 5 lakh bags x 50 x 1/24 10,41,667
Overheads 5 lakh bags x 65 x 1/12 27,08,333
Total Current Liabilities 72,91,666
Net working Capital 3,65,62,500
Notes:
1) Administrative overheads are also included in stock valuation as per the information
given by question.
2) Depreciation is excluded while estimating the value of work in progress, finished goods,
and debtors as we follow the cash cost approach.
3) Production of cement bags = (1.25 lakh tons x 0.8)/200 kg = 500,000 bags.
Question No-12:
Answer:
1) Rohit’s argument of comparing 2% discount with 12% bank loan rate is not rational as
2% discount can be earned by making payment 5 days in advance i.e. within 10 days
rather 15 days as payments are made presently. Whereas the 12% bank loan rate is for a
year.
Assume that the purchase value is Rs 100, the discount can be earned by making a
payment within 10 days is Rs 2, therefore, net payment would be Rs 98 only. The
annualized benefit will be:
2/98 x 365 days/ 5 days x 100 = 149%
This means the cost of not taking cash discount is 149%
2) If the bank loan facility could not be available, then in this case the company should
resort to utilizing the maximum credit period as possible.
Therefore, payment should be made in 30 days to reduce the interest cost.
Question No-13:
Answer:
1) Statement of cash budget (Rs in 000)
Nov Dec Jan Feb March April
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)
Sales 500 600 600 1,000 650 750
Collections, current months sales 120 200 130
Collections, previous months sales 420 420 700
Collections, previous 2 months 50 60 60
sales
Total cash Receipts 590 680 890
Purchases 360 600 390 450
Payment for purchases 360 600 390
Labour costs 150 200 160
Other expenses 100 100 100
Total cash disbursements 610 900 650
Receipts less disbursements (20) (220) 240
2) Additional bank borrowings necessary to maintain a cash balance of Rs 50,000 at all

times
Jan Feb March
Additional borrowings 20 220 (240)
Cumulative borrowings (Opening balance of 400) 420 640 400
The amount of financing peaks in February owing to the need to pay for purchases made the
previous month and higher labour costs. In March, substantial collections are made on the prior
month’s billings, causing large net cash inflow sufficient to pay off the additional borrowings.
3) Pro forma Balance Sheet, 31st March, 2020

Equity and Liabilities Amount Assets Amount
(000) (000)
Equity shares capital 100 Net fixed assets 1,836
Retained earnings 1,529 Inventories 635
Long-term borrowings 450 Accounts receivables 620
Accounts payables 450 Cash and bank 50
Loan from banks 400
Other liabilities 212
3,141 3,141
Accounts receivable = Sales in March × 0.8 + Sales in February × 0.1

Inventories = Rs 545 + Total purchases from January to March
− Total sales from January to March × 0.6
Accounts payable = Purchases in March
Retained earnings = Rs 1,439 + Sales – Payment for purchases –
Labour costs and – Other expenses, all for January to March
CHAPTER: Distribution Policy
Question No-14:
Answer:
1) Price per share if present dividend payout ratio is maintained:
Earnings per share (E) = Profit after tax / No of shares = 2500/625 = Rs 4
Dividend per share (D) = EPS x 40% = 4 x 0.4 = Rs 1.60
Return on Equity (r) = PAT/ Net Worth = 2,500/12,500 = 20%
Cost of equity or equity capitalization rate (Ke) = 12%
Price per share (P) as per Walters Model:
D+ (E-D) x r 1.60 + (4-1.60) x 20%

Ke 12%
P= = = Rs 46.67
Ke 12%
Where,
P = Market Price per share
D = Dividend per share
E = Earnings per share
R = internal rate of return
Ke = Cost of equity or equity capitalization rate
2) Dividend Payout ratio if existing PE ratio is to be maintained:
PE ratio is 10 times and EPS is Rs 4, Hence, Market price per share = PE x EPS = Rs 40
D+ (E-D) x r D+ (4-D) x 20%

Ke 12%
P= or, Rs 40 = or, D = Rs 2.80
Ke 12%
Hence, Dividend Pay-out Ratio = D/E = 2.8/4 = 70%

3) Dividend Payout ratio if PE ratio is 8.75 times:
PE ratio is 8.75 times and EPS is Rs 4, Hence, Market price per share = PE x EPS = Rs
35
D+ (E-D) x r D+ (4-D) x 20%

Ke 12%
P= or, Rs 35 = or, D = Rs 3.70
Ke 12%
Hence, Dividend Pay-out Ratio = D/E = 3.7/4 = 92.50%
4) Since Return of Equity (r = 20%) is more than the cost of equity (Ke = 12%), the firm is
growth one. As per Walter, growth firm shall not pay any dividend to maximize the share
price. Hence, Dividend Pay-out ratio is 0%.
The price per share at 0% Dividend Payout Ratio is:
D+ (E-D) x r 0+ (4-0) x 20%

Ke 12%
P= or, P = or, P = Rs 55.56
Ke 12%
CHAPTER: Valuation of Securities
Question No. 15:

Answer:
1) Computation of yearly Dividends:
Year Dividends (Rs)
0 Rs 3
1 Rs 3 x 1.18 = Rs 3.54
2 Rs 3.54 x 1.18 = Rs 4.18
3 Rs 4.18 x 1.18 = Rs 4.93
4 Rs 4.93 x 1.18 = Rs 5.82
5 Rs 5.82 x 1.06 = Rs 6.17
2) Computation of Price of shares at the end of year 4 (P4)
P (4) = D5 / (Ke-g) = 6.17/ (0.12 – 0.06) = Rs 102.83
P (3) = (D4 + P4) / (1 + Ke) = (5.82 + 102.83)/1.12 = Rs 97.01

P (2) = (D3 + P3) / (1 + Ke) = (4.93 + 97.01)/1.12 = Rs 91.02
P (1) = (D2 + P2) / (1 + Ke) = (4.18 + 91.02)/1.12 = Rs 85
6) Computation of Price of shares now (P0)
P (0) = (D1 + P1) / (1 + Ke) = (3.54 + 85)/1.12 = Rs 79.05
Question No-16:
Answer:
1) Existing total earnings
= Existing number of shares x EPS
= 10, 00,000 x3 = Rs 30, 00,000
2) Amount of Dividend
= 0.3 x 90, 00,000 = 27, 00,000
3) Company can use Rs 27, 00,000 to re-purchase its shares as per the question.
4) Now, assuming re-purchase price be Rs X per unit, number of sharers re-purchased
= 27, 00,000/X
5) Price of share after re-purchase = X x 110% = 1.10X
6) Number of shares after re-purchase = 10,00,000 – 27,00,000/X
7) Value of remaining shares after re-purchase (market value) will be
Value per share after re-purchase x no of shares after re-purchase
Or, 200 lakhs = 1.10X x (10, 00,000 – 27, 00,000/X)
Or, X = Rs 20.88
8) Number of shares re-purchased = 129,310 shares
9) Changed EPS after re-purchase = 30, 00,000/870,690 = Rs 3.45 per share.
CHAPTER: Risk and Return
Question No-17:
Answer:
1) Computation of % return on share:
(Year-end price – Year beginning Price) + Dividend

=
Year beginning Price
Return (2003) = [(279 – 242) + 25]/242 = 25.62%

Return (2004) = [(305 – 279) + 30]/279 = 25.62%
Return (2005) = [(322 – 305) + 35]/305 = 25.62%
2) Computation of % return on Market (Excluding dividend Yield)

Return (2003) = (1950 – 1812)/1812 = 7.62%
Return (2004) = (2258 – 1950)/1950 = 15.79%
Return (2005) = (2220 – 2258)/2258 = (-) 1.68%
3) Computation of % return on Market (including dividend Yield)

Return (2003) = 7.62% + 5% = 12.62%
Return (2004) = 15.79% + 6% = 21.79%
Return (2005) = (-) 1.68% + 7% = 5.32%
4) Statement of basic computations for Mean, Standard deviation and covariance:
Year RS RM RS- RS (RM – RM) (RM – RM)2 (RS- RS) x (RM –

RM)
2003 25.62% 12.62% 4.71 (-) 0.62 0.3844 (-) 2.9202
2004 20.07% 21.79% (-) 0.84 8.55 73.1025 (-) 7.182
2005 17.05% 5.32% (-) 3.86 (-) 7.92 62.7264 30.5712
Total 62.74% 39.73% 136.2133 20.469
5) Mean Return of Share = 62.74/3 = 20.91%

6) Mean Return of Market = 39.73/3 = 13.24%
7) Variance Market (σ2m) = 136.2133/3 = 45.40
8) Covariance of security with market = 20.469/3 = 6.823
9) Security Beta (βs) = Cov. (Rs, Rm)/Variance Market = 6.823/45.40 = 0.15
Observation: The security has quite low systematic risk. Hence, it is low risky security.
CHAPTER: Overview of Capital Markets:
Question No-18:
Answer:
1) Computation of Closing NAV:
Particulars Amount Amount Amount
(Rs in (Rs in (Rs in
Lakhs) Lakhs) Lakhs)
Opening Bank ( 150 – 140 – 8) 2
Add: Proceeds from sale of securities 47
Add: Dividend Received 1.5 50.50
Less: Cost of securities purchased 41.60
Less: Fund Management expenses paid (6-0.5) 5.50
Less: Capital gains distributed ( 80% of 47- 1.8
44.75)
Less: Dividend Distributed ( 80% of 1.5) 1.2 50.10
Closing Bank Balance 0.40
Closing Market Value of Portfolio 147.85
148.25
Less: Arrears of Expenses 0.50
Closing Net Assets 147.75
Divide by Number of units (lakhs) 15
Closing NAV 9.85
2) Computation of Annual rate of earnings:

Particulars Amount (Rs in lakhs)
Income Received (1.8 + 1.2)/15 0.20
Less: loss on disposal (9.85-10) 0.15
Net Earnings 0.05
Initial Investment 10
Monthly rate of earnings 0.5%
Annual Rate of earnings 6%
CHAPTER: Short Notes from Overall Syllabus
Question No-19:
Answer:
Credit Cards as a part of Consumer Finance:
Meaning:
Credit Cards work on the philosophy of "Buy Now and Pay Later". A person who holds a credit
card need not pay in cash at the time of every expenditure. Instead, he can use the credit card, to
meet the expenditures. Credit Cards are a good substitute for cash and the resultant safety and
convenience, the competition in this business has made credit cards a source of short-term
finance also for individuals.
Parties Involved In Credit Card Transaction:
Every transaction on a credit card involves three parties:
▪ The credit card issuer
▪ The credit cardholder and
▪ The party to whom the cardholder is supposed to pay, say the merchant outlet (MO).
Examples of MO are: a departmental store, hotel, railways, airlines, etc.
Advantages:
1. They allow you to make purchases on credit without carrying around a lot of cash. This
allows you a lot of flexibility.
2. They allow accurate record-keeping by consolidating purchases into a single statement.
3. They allow convenient remote purchasing - ordering/shopping online or by phone. They
allow you to pay for large purchases in small, monthly installments.
4. Under certain circumstances, they allow you to withhold payment for merchandise which
proves defective.
5. They are cheaper for short-term borrowing.
6. Many cards offer additional benefits such as additional insurance cover on purchases,
cash back, and discounts on holidays.
7. Besides this, the credit-card may also expend the benefit of roll over credit,
supplementary cards, and travel assistance.
8. Credit cards enable a person to track and document all his expenses
9. It is safer to carry Credit Cards rather than cash as it provides 100% safety of cash against
theft
Disadvantages:
1. You may become an impulsive buyer and tend to overspend because of the ease of using
credit cards. Cards can encourage the purchasing of goods and services you cannot really
afford.
2. Credit cards are a relatively expensive way of obtaining credit if you don't use them
carefully, especially because of the high interest rates and other costs after the credit
period expires.
3. Lost or stolen cards may result in some unwanted expenses and inconvenience.
4. The use of a large number of credit cards can get you even further into debt.
5. Using a credit card, especially remotely, introduces an element of risk as the card details
may fall into the wrong hands resulting in fraudulent purchases on the card. Fraudulent or
unauthorized charges may take months to dispute, investigate, and resolve.
Question No-20:
Answer:
a) Risk- Return Trade-Off:

This principle steps that potential return rises with an increase in risk. Low levels of
uncertainty (low-risk) are associated with low potential returns, whereas high levels of
uncertainty (high-risk) are associated with high potential returns. According to the risk-return
tradeoff, invested money can render higher profits only if it is subject to the possibility of
being lost. Because of the risk-return trade-off, you must be aware of your personal risk
tolerance when choosing investments for your portfolio. Taking on some risk is the price of
achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal
instead is to find an appropriate balance - one that generates some profit, but still allows you
to sleep at night.
b) Importance of Mutual Funds in Nepal:

A mutual fund is generally considered a less risky investment than stocks in the secondary
market. The benefits of mutual funds vary but in the context of Nepal the mutual fund is
important due to the following reasons:
1) Diversification
In Nepal, a mutual fund investment consists of a variety of securities like banking,
insurance, microfinance and hydropower stocks, fixed deposits, etc. A unitholder gets
diversified investment through a mutual fund.
2) Affordability
Mutual funds are affordable to small investors since their offer price is only NRs 10 for
one unit during issue by the scheme manager. And also in the secondary market,
NEPSE’s current price ranges from NRs 10 to 22 and currently trading at a 30 % to 40 %
discount on NAV. Anyone who wants to buy a mutual fund has to buy a minimum of 100
units.
3) Dividend Tax
The cash dividend distributed by mutual funds every fiscal year is final for the individual
investor but for the institution, it is not a final tax. So individual investors can benefit
more from the mutual fund.
4) Mandatory Allocation
In Nepal, the mutual fund gets a 5 % mandatory allocation of any Initial Public Offering
(IPO) and it is divided among six companies who are holding seven mutual funds. The
fund manager who has more than one mutual fund their share of IPO is split as per
company policies. Generally, the new scheme gets more share of IPO than the old scheme
of the mutual fund.
5) Professional Management
A mutual fund is managed by professionals who use best practices, techniques, and tools,
analytical software and also do research and monitor the performance regularly. An investor
of a mutual fund doesn’t have to worry about the management of the mutual fund investment
c) CAMEL Model in Credit Rating:

CAMEL Stands for Capital, Assets, Management, Earnings, and Liquidity. The CAMEL
model adopted by the Rating Agencies deserves special attention, it focuses on the following
aspects:
1) Capital – Composition of Retained Earnings and External Funds raised; Fixed dividend
component for preference shares and fluctuating dividend component for equity shares
and adequacy of long term funds adjusted to gearing levels; the ability of an issuer to
raise further borrowings.
2) Assets – Revenue generating capacity of existing/proposed assets, fair values,
technological/physical obsolescence, linkage of asset values to turnover, consistency,
appropriation of methods of depreciation and adequacy of charge to revenues. Size,
ageing, and recoverability of monetary assets viz. receivables and its linkage with
turnover.
3) Management – Extent of involvement of management personnel, team-work, authority,
timeliness, effectiveness, and appropriateness of decision making along with directing
management to achieve corporate goals.
4) Earnings – Absolute levels, trends, stability, adaptability to cyclical fluctuations ability of
the entity to service existing, and additional debts proposed.
5) Liquidity – Effectiveness of working capital management, corporate policies for stock
and creditors, management and the ability of the corporate to meet their commitment in
the short run. These five aspects form the five core bases for estimating the
creditworthiness of an issuer which leads to the rating of an instrument.
d) Foreign Institutional Investment (FIIs):
Meaning:
FII means an entity established or incorporated outside Nepal which proposes to make an
investment in Nepal. Nepal is being described as magnet to FIIs investments.
Advantage of FII invests in Nepal:

(a) Enhanced flow of equity capital,
(b) Improving capital markets,
(c) Better corporate governance, and
(d) Foreign investors’ confidence in Nepal attracting FDI.
Disadvantage of FII investments in Nepal:

(a) Fear of management control,
(b) Potential capital outflows—foreign capital is hot money, it may leave any time— and
(c) Foreign portfolio investment is described as notoriously volatile.
e) Zero Date of Project Management:

Zero Date of a Project means a date is fixed from which implementation of the project
begins. It is a starting point of incurring cost. The project completion period is counted from
the zero date. Pre-project activities should be completed before zero date. The pre-project
activities should be completed before zero date.
The pre-project activities are:
i. Identification of project/product
ii. Determination of plant capacity
iii. Selection of technical help/collaboration
iv. Selection of site.
v. Selection of survey of soil/plot etc.
vi. Manpower planning and recruiting key personnel
vii. Cost and finance scheduling.
f) Functions Of Merchant Bankers:

The basic function of merchant banker or investment banker is marketing of corporate and
other securities. In the process, he performs a number of services concerning various aspects
of marketing, viz., origination, underwriting, and distribution, of securities. During the
regime of erstwhile Controller of Capital Issues in Nepal, when new issues were priced at a
significant discount to their market prices, the merchant banker’s job was limited to ensuring
press coverage and dispatching subscription forms to every corner of the country. Now,
merchant bankers are designing innovative instruments and perform a number of other
services both for the issuing companies as well as the investors. The activities or services
performed by merchant bankers, in Nepal, today include:
(a) Project promotion services.
(b) Project finance.
(c) Management and marketing of new issues.
(d) Underwriting of new issues.
(e) Syndication of credit.
(f) Leasing services.
(g) Corporate advisory services.
(h) Providing venture capital.
(i) Investment management or portfolio management services.
(j) Bought out deals.
(k) Providing assistance for technical and financial collaborations and joint ventures.
g) Takeover by Reverse Bid or Reverse Takeover:
Meaning:
It is the act of a smaller company gaining control over a larger one. In ordinary case, the
company taken over is the smaller company; in a ‘Reverse Takeover’, a smaller company
gains control of a larger one.
Tests for Identifying Takeover by Reverse Bid:
The three tests in a takeover by reverse bid that are required to be satisfied are, namely,
(i) The assets of the transferor company are greater than the transferee company,
(ii) Equity capital to be issued by the transferee company pursuant to the acquisition
exceeds its original issued capital, and
(iii) The change of control in the transferee company through the introduction of a
minority holder or group of holders. Takeover by reverse bid could happen where
already a significant percent of the shareholding is held by the transfer company, to
exploit economies of scale, to enjoy better trading advantages and other similar
reasons.
h) Asset Securitization
Asset Securitization:
Securitization is a process of transformation of illiquid asset into security which may be
traded later in the open market. It is the process of transformation of the assets of a lending
institution into negotiable instruments. The term ‘securitization’ refers to both switching
away from bank intermediation to direct financing via capital market and/or money market,
and the transformation of a previously illiquid asset like automobile loans, mortgage loans,
trade receivables, etc. into marketable instruments.
This is a method of recycling of funds. It is beneficial to financial intermediaries, as it helps
in enhancing lending funds. Future receivables, EMIs and annuities are pooled together and
transferred to a special purpose vehicle (SPV). These receivables of the future are shifted to
mutual funds and bigger financial institutions.
Question No-21:
Answer:
a) Factoring and Forfeiting
Factoring Forfeiting
This may be with recourse or without This is without recourse to the exporter.
recourse to the supplier. The risks are borne by the forfeiter.
It usually involves trade receivables of It usually deals in trade receivables of
short maturities medium and long term maturities.
It does not involve dealing in It involves dealing in negotiable
negotiable instruments. instrument like bill of exchange and
promissory note.
The seller (client) bears the cost of The overseas buyer bears the cost of
factoring. forfeiting.
Usually it involves purchase of all book Forfeiting is generally transaction or
debts or all classes of book debts. project based. It’s structuring and costing
is case to case basis.
Factoring tends to be a ‘case of’ sell of There exists a secondary market in
debt obligation to the factor, with no forfeiting. This adds depth and liquidity
secondary market. to forfeiting.
b) Horizontal analysis and vertical analysis
Horizontal analysis:
This technique is also known as comparative analysis. It is conducted by setting
consecutive balance sheet, income statement of statement of cash flow side by side and
reviewing changes in individual categories on year-to-year or multiyear basis. The most
important item revealed by comparative financial statement analysis is trend. The
horizontal financial statements analysis is done by restating amount of each item or group
of items as a percentage.
Vertical analysis:
Vertical/ Cross-sectional/ Common size statements came from the problems in comparing
the financial statements of firms that differ in size. The vertical analysis represents the
relationship of different items of a financial statement which some common item by
expressing each item as a percentage of the common item.
1) In the balance sheet, for example, the assets as well as the liabilities and equity are
each expressed as a 100% and each item in these categories is expressed as a
percentage of the respective totals.
2) In the common size income statement, turnover is expressed as 100% and every item
in the income statement is expressed as a percentage of turnovers.
c) Promised yield and Realized yield:

Promised Yield indicates the total rate of return earned on bond if it is held to maturity. It
is also known as Yield-to-Maturity. This is the rate of return anticipated on a bond if held
until the end of its lifetime. YTM is considered a long-term bond yield expressed as an
annual rate. The YTM calculation takes into account the bond’s current market price, par
value, coupon interest rate and time to maturity. It is also assumed that all coupon
payments are reinvested at the same rate as the bond’s current yield. YTM is a complex
but accurate calculation of a bond’s return that helps investors to compare bonds with
different maturities and coupons.
Realized Yield is the actual amount of return earned on a security investment over a
period of time. This period of time is typically the holding period which may differ from
the expected yield at maturity. The realized yield also includes the returns that have been
earned from reinvested interest, dividends and other cash distributions.
The realized yield tends to differ from the yield at maturity in scenarios where the holding
period is less than that of the maturity date. In other words, the security is settled or sold
prior to the maturity date given at the time of purchase. For example, suppose an investor
purchases a 10-year bond for Rs. 1,000 that issues a 5% annual coupon. Furthermore, if
the investor sells the bond for Rs. 1,000 at the end of the first year (and after receiving the
first coupon payment), his realized yield would only include the Rs. 50 coupon payment.
d) Operating breakeven point Vs. Financial breakeven point:
Operating breakeven point:

The operating breakeven point is defined as the units of output at which total revenues are
equal to total operating costs (fixed costs plus variable costs). The operating breakeven
point is calculated as follows:
Operating BEP = Fixed Cost/ Contribution Margin.
Financial breakeven point:

Financial breakeven point is the situation where EBIT equals to financing cost. In this
analysis, the firms needs to just cover all of its financing costs and produce earnings per
share equal to zero. Financial Breakeven analysis can be used to help determine the
impact of the firm's financing mix on the earnings available to common stockholders.
e) Systematic Risk and Unsystematic Risk:
Systematic Risk:
Systematic risk is the variability of a security's return with that of the overall stock
market. Risks of inflation, Interest Rate Risk are example of this kind of risk. This type of
risk affects all firms in the economy and a particular firm cannot avoid it. This is also
known as Unavoidable Risk.
Unsystematic Risk:
Unsystematic risk is the amount of a stock's variance unexplained by overall market
movements. It can be diversified away; hence it is known as Avoidable Risk. A strike
may affect only one company; a new competitor may begin to produce essentially the
same product; a technological breakthrough can make an existing product obsolete.
However, by diversification this kind of risk can be reduced and even eliminated if
diversification is efficient.
f) External Capital Rationing and Internal Capital Rationing:

External Capital Rationing mainly occurs on account of the imperfections in capital
markets. Imperfections may be caused be deficiencies in market information or by
rigidities of attitude that may hamper the free flow of capital. For example, A Ltd. is a
closely held company. It borrows from the financial institutions as much as it can. It still
has investment opportunities, which can be financed by issuing equity capital. But it
doesn't issue shares. The owners- managers do not approve the idea of the public issue of
shares because of the fear of losing control of the business.
Internal capital Rationing is caused by self- imposed restrictions by the management.
Various types of constraints may be imposed. e.g., it may be decided not to obtain
additional funds by incurring debt. This may be part of management's conservative
financial policy. Management may fix an arbitrary limit to the amount of funds to be
invested by the divisional managers. Sometimes, management may resort to capital
rationing by requiring a minimum rate of return higher than the cost of capital.
g) Financial Distress Vs. Insolvency:
Financial distress is a situation where a firm’s operating cash flows are insufficient to
meet its current obligations (and so the firm must take some kind of corrective action)
financial distress may lead a firm to default on a contract, and it may involve financial
restructuring between the firm, its creditors, and its shareholders in most cases, the firm is
forced to take actions that it would not have taken if it had sufficient cash flow.
Insolvency is a term which generally means an inability to repay debts stock-based

insolvency occurs when the value of a firm’s assets is less than what is owed on its debt
flow-based insolvency occurs when the firm’s cash flows are insufficient to cover
contractually required payments.
h) GDRs and ADRs:

Finance can be raised by, Global Depositary Receipts (GDRs) Foreign Currency
Convertible Bonds (FCCBs) and pure debt bonds. However, GDRs and FCCB's are more
popular. GDRs do not carry voting rights and hence there is no dilution of control.
Global Depository Receipts (GDRs):

✓ A Depository Receipt (DR) is basically a negotiable certificate denominated in US
Dollars that represents a non- US Company publicly traded local currency Equity
share.
✓ DRs are created when the local currency shares of Domestic Company are delivered
to the depository's local custodian bank, against which the depository bank issues DRs
in US Dollars.
✓ These DRs may be freely traded in the overseas market like any other Dollar
denominated security through either a foreign stock exchange or through over the
Counter (OTC) market or among the restricted groups like qualified institutional
buyers.
GDRs with warrants are more attractive than plain GDRs in view of additional value
of attached warrants.
American Depository Receipts (ADRs):

Depository Receipts issued by a company in the USA are known As ADRs. Such receipts
have to be issued in accordance with the provisions stipulated by the Securities Exchange
Commission (SEC) of the USA which is the regulatory body like the SEBON in Nepal.
Since the conditions laid down by the SEC are stringent, Domestic companies have
chosen the indirect route to tap the vast American financial market through private
placement of GDRs listed in London and Luxembourg Stock Exchanges.
PAPER 5: COST & MANAGEMENT ACCOUNTING
Paper 5 – Cost and Management Accounting
Costs concepts and costing methods
Question No. 1 a) Differentiate between Direct and Indirect Costs
Question No. 1 b) Explain ‘Cost centre’ and ‘Cost unit’.
Material Control
Question No. 2 Write a short note on Material Transfer Note.
Question No. 3 The following detail is collected from the cost records of JCB Ltd. for the year
ending 31st March, 2016:
The stock of raw materials on 1st April, 2015: 20,000 Units at Rs. 270,000
Purchase of raw materials during the year: 172,000 Units at Rs. 25,85,600
Raw material returned to the supplier during the year: 5,000 units at Rs. 75,400
Freight Inward: Rs. 165,000
Rent of godown used for storage of materials: Rs. 240,000
Salary of store-keeper: Rs. 180,000
Demurrage charges levied by the transporter for the delay in collection of materials: Rs. 31,000
Normal loss due to shrinkage: 5% of material purchased
Abnormal loss due to absorption of moisture before receipt of material: 1,670 units
The stock of raw material on 31st March, 2016: 27,000 units
Compute the value of the closing stock of raw materials on 31st March, 2016
Labour Control
Question No. 4 Explain the general characteristics and advantages of Incentive schemes.
Question No. 5 Difference between Merit Rating and Job Evaluation.
Question No.6 From the following details, calculate the estimated recruitment requirement of the
company over the next 2 years. The company has 2,000 staff in clerical grade I, the lowest
clerical grade in the company, with the following age structure:
Under 25 1,200
25 – 35 600
Over 35 200
Wastage rates and promotion prospects in the next two years are expected to be:
Age Wastage Promotion to next grade
Under 25 30% 10%
25 – 35 10% 40%
Over 35 5% 20%
The demand forecast shows that 2,400 clerical grade I staff will be required in two years’ time.
Assume that no promotion will be made from lower grade to clerical grade I.
Question No. 7 In a manufacturing concern bonus to a worker is paid on a slab rate based on
cost-saving towards labour and overheads. The following are the slab rates:
Up to 10% saving 5% of earning
Above 40% saving 32% of earning
The wage rate of 4 workers, A, B, C, D is respectively Rs. 1.00, Rs.1.10, Rs.1.20 and 1.40.
Overhead is recovered on direct wages at the rate of 200%. Standard cost under wages and
overhead per unit of production is fixed at Rs.30. The workers have completed one unit each in 8,
7, 5.5, and 5 hours respectively. Calculate in respect of each worker:
a. Amount of bonus earned
b. Total earning
c. Total earning per hour
Overhead Control
Question No. 8 Explain the objectives and criticism of Overhead apportionment and absorption
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 9 A toy manufacturer, who commenced his business on 1st June, 2020 supplies you
with the following information, and asks you to prepare a statement showing the profit per toy
sold. Wages and materials are to be charged at actual cost, works overhead at 75% of wages and
office overhead at 30% of works cost. The number of toys manufactured and sold during the year
was 600.
Other particulars:
Materials per set Rs. 240
Wages per set Rs. 80

Selling price per set Rs. 600
If the expenses of the actual works were Rs.32,160 and office expenses were Rs.61,800, prepare
a Reconciliation Statement.
Cost Concepts for Decision Making

Question No. 10 Atul Food Products is a new entrant in the market for chocolates. It has
introduced a new product “Sweets”. This is a small rectangular chocolate bar. The bars are
wrapped in aluminium foil and packed in attractive cartons containing 50 bars. A carton is,
therefore, considered the basic sales unit. Although management had made detailed estimates of
costs and volumes prior to undertaking this venture, new projections based on actual cost
experience are now required and production efficiency we can expect in the next few quarters.
There were virtually no inventories on hand at the end of each quarter. The income statements
reveal the following:
First Quarter Second Quarter
Sales 50,000 × Rs. 24 1,200,000 -
70,000 × Rs. 24 - 1,680,000
Less : Cost of Goods Sold 7,00,000 8,80,000
Gross margin 5,00,000 8,00,000
Less : Selling and 6,50,000 6,90,000

Administration
Net income (loss) before (1,50,000) 1,10,000

taxes
Less : Tax (negative) 60,000 44,000
Net income (Loss) (90,000) 66,000
The firm’s overall marginal and average income tax rate is 40%. This 40% figure has been used
to estimate the tax liability arising from the chocolate operations.
Required:
(a) Management would like to know the break-even point in terms of quarterly carton sales for
the chocolates.
(b) Management estimates that there is an investment of Rs. 30,00,000 in this product line. What
quarterly carton sales and total revenue are required in each quarter to earn an after-tax return of
20% per annum on investment?
(c) The firm’s marketing people predict that if the selling price is reduced by Rs 1.50 per carton
(Rs 0.03 off per chocolate bar) and a Rs. 1,50,0000 advertising campaign among school children
is mounted, sales will increase by 20% over the second quarter sales. Should the plan be
implemented?
Question No. 11 Elaborate on the practical application of Marginal Costing.
Costing for planning and Control –Budgets
Question No. 12 What are the problems that may arise while introducing zero-base budgeting in
any organization?
Standard Costing
Question No.13 Write down the Limitations of Standard Costing
Question No. 14 The following information is available from the cost records of XYZ & Co.
For the month of August, 2020:
Material purchased 24,000 kg Rs 1,05,600
Material consumed 22,800 kg
Actual wages paid for 5,940 hours Rs. 29,700
Unit produced 2,160 units.
Standard rates and prices are:
The Direct material rate is Rs. 4.00 per unit
The Direct labour rate is Rs. 4.00 per hour
The Standard input is 10 kg. for one unit
The Standard labour requirement is 2.5 hours per unit.
Calculate all material and labour variances for the month of August, 2020.
Method of Costing
Question No.15 Write down the features of process costing.
Contract Costing
Question No. 16 Koshi Construction undertook a contract for Rs. 1,500,000 on an arrangement
that 80% of the value of the work done, as certified by the architect the should be paid
immediately and that the remaining 20% be retained until the contract was completed.
In year 1, the amounts expended were: Materials, Rs. 180,000; wage Rs. 170,000; Carriage
Rs.6000; Cartage Rs. 1000; sundry expenses Rs.3000. The work was certified for Rs. 375,000
and 80% of this was paid as agreed.
In year 2, the amount expended was: Materials, Rs. 220,000; wage Rs. 230,000; Carriage
Rs.23,000; Cartage Rs. 2,000; sundry expenses Rs.4,000. Three fourth of the contract was
certified as done by March 31, and 80% of this was received accordingly. The value of unused
stock and work in progress uncertified was ascertained at Rs. 20,000.
In year 3, the amount expended was: Materials, Rs. 126,000; wage Rs. 170,000; Cartage Rs.
6,000 and sundry expenses Rs.3,000 and on September 30, the whole contract was completed.
Show how the contract account and also the contractee’s account would appear in each of these
years in the books of the contractor, assuming that the balance due to him was paid on
completion of the contract.
Operating Costing
Question No. 17 Mr. Bimal has started a transport business with a fleet of 10 taxies. The various
expenses incurred by him are given below:
(i) Cost of each taxi Rs. 75,000
(ii) Salary of office Staff Rs. 1,500 p.m.
(iii) Salary of Garage’s Supervisor Rs. 2,000 p.m.
(iv)Rent of Garage Rs. 1,000 p.m
(v) Drivers Salary (per taxi) Rs. 400 pm.
(vi) Road Tax and Repairs per taxi Rs. 2,160 p.a.
(vii) Insurance premium @ 4% of cost p.a.
The life of a taxi is 3,00,000 km. and at the end of which it is estimated to be sold at Rs. 15,000.
A taxi runs on an average of 4,000 Km. per month of which 20% it runs empty, petrol
consumption 9 Km. per liter of petrol costs Rs. 6.30 perliter. Oil and other sundry expenses
amount to Rs. 10 per 100 Km.
Calculate the effective cost of running a taxi perkilometer. If the hire charge is Rs. 1.90 per
Kilometer, find out the profit that Mr. Bimal may expect to make in the first year of operation.
Process Costing
Question No. 18. PQR Ltd produces two joint products, P and Q, together with a by-
product, R, from a single main process (process 1) . Product P is sold at the point of
separation for Rs.5 per kg, whereas product Q is sold for Rs.7 per kg after further processing
into product Q2. By–product, R is sold for Rs.1.75 per kg without further processing.
Process 1 is closely monitored by a team of chemists, who planned the output per 1,000 kg of
input materials to be as follows:
Product P 500 kg
Product Q 350 kg
Product R 100kg
Toxic waste 50 kg
The toxic waste is disposed of at a cost of Rs.1.50 per kg, and arises at the end of processing.
Process 2, which is used for further processing of product Q into product Q2, has the following
cost structure:
Fixed costs Rs. 6,000 per week

Variable costs Rs.1.50 per kg processed.
The following actual data related to the first week of accounting period 10:
Process 1 Outputs
Opening work in progress nil Product P 4,800 kg
Materials input 10,000 kg Rs.15,000 Product Q 3,600 kg
Direct labour Rs.10,000 Product R 1,000 kg
Variable overhead Rs.4,000 Toxic waste 600 kg
Fixed overhead Rs.6,000 Closing WIP nil
Process 2
Opening WIP nil
The input of product Q 3,600 kg
The output of product Q2 3,300 kg
Closing WIP 300 kg, 50% converted
Conversion costs were incurred in accordance with the planned cost structure.
Required:
(i) Prepare the Main process (Process 1) account for the first week of period 10, using the
final sales value method to attribute pre –separation costs to joint products
(ii) Prepare Toxic waste accounts and process 2 accounts for the first week of period 10
(iii) Advise the management of PQR Ltd whether or not, on purely financial grounds, it
should continue to process product Q in to Q2:
a) If product Q could be sold at the point of separation for Rs. 4.30 per kg
b) If 60% of the weekly fixed cost of process 2 were avoided by not processing
product Q further
Uniform costing and Inter-firm Comparison
Question No. 19.What are the limitations of inter-firm comparison?
Cost control and cost reduction
Question No. 20.What are the areas of cost reduction process?

Paper 5 – Cost and Management Accounting
Costs concepts and costing methods
Question No. 1 a)
Solution
Direct costs are usually very easy to trace and allocate to a cost object. It can be divided in:
Direct material consists of raw materials and other components used to create a product. This
definition can be only applied properly in manufacturing organizations, where costs become part
of a physical product. However, this term usually cannot be applicable to merchandising (the
term will be purchase cost of items used for resale) and service organizations (materials or parts
purchase to provide a service).
Direct labour costs are the labour used to create a specific good or service.
Costs other than material and labour are known as other direct costs.
Indirect costs or overheads are difficult to trace, the only way to identify them is through
estimation by using cost allocations (the process used to assign a common cost to various cost
objects). These are the costs that cannot be specifically identified with a particular product,
service, or department. In the case of manufacturing, organizations are divided into
manufacturing, administrative, and marketing overheads. Examples of indirect costs are property
costs or the costs of materials use to repair machinery.
Question No. 1 b)
Solution
A cost centre is the smallest organizational sub-unit for which separate cost allocation is
attempted”. A cost centre is an individual activity or group of similar activities for which costs
are accumulated. For example in production departments, a machine or group of machines within
a department or a workgroup is considered as a cost centre. Any part of an enterprise to which
costs can be charged is called as ‘cost centre’.
A cost centre can be:
(i) Geographical i.e. an area such as production department, stores, sales area.
(ii) An item of equipment e.g. a lathe, forklift, truck, or delivery vehicle.
(iii) A person e.g. a sales person, supervisor.
CIMA defines a Cost Unit as “a quantitative unit of product or service in relation to which costs
are ascertained”. A ‘cost unit’ is a unit of product or unit of service to which costs are ascertained
by means of allocation, apportionment, and absorption. It is a unit of quantity of product, service,
or time or a combination of these in relation to which costs are expressed or ascertained. For
example, specific job, contract, unit of a product like fabrication job, road construction contract,
an automobile truck, a table, 1000 bricks, etc. The cost units which pass through the cost centre,
the direct and indirect costs of the cost centre are charged to the units of production by means of
an absorption rate. The unit of output in relation to which cost incurred by a cost centre is
expressed is called ‘cost unit’. Cost units can be developed for all kinds of organizations, whether
manufacturing, commercial, or public utility services.
Material Control
Question No. 2
Solution
When excess material remains in one department, and another neighboring department needs the
same, it becomes easier and economical to transfer the material rather than receiving it back in
stores, and again issue them. Transfers are made by using the document known as a Material
Transfer Note (MTN). This document is used to record the transfer of materials from one
department, job, store, cost center, or cost unit to another.
Valuation of Material Transfer Note (MTN) is done at the original price of issue but if this is not
practicable, the current store’s ledger rate is adopted for valuation as in the case of Material
Return Notes. However, the MTN should be prepared correctly to avoid incorrect accounting. It
is preferable to use pre-numbered forms for better control.
Circulation of Material Transfer Note:

(a) Receiving department
(b) Cost department
(c) Stores
(d) Issuing department.
Question No. 3
Solution
Computation of value of closing stock of Raw materials
Particulars Quantity (Units) Amount (Rs.)
Opening stock of raw materials 20,000 270,000
Add: Purchase of raw materials less purchase return 167,000 2,510,200
(172,000 – 5,000 = 167,000 units and 2,585,600-
75,400 = Rs. 2,510,200)
Add: Freight Charges 165,000
Less: Abnormal loss
(2,510,200+165,000) x 1,670/167,000 (1,670) (26,750)
Less: Normal loss due to shrinkage 5% of 167,000 (8,350)
Cost of raw materials 176,980 2,918,450
Value of closing Stock (2,918,450 x 27000/176,980) 27,000 445,237.59
Note: Rent of godown and salary of store-keeper as well as demurrage charge are not included in the cost
of materials.
Labour Control
Question No. 4
Solution
The general characteristics of incentive schemes should ensure that:
(i) the scheme is simple to understand and administer;
(ii) payment should be made as quickly as possible after production;
(iii) there should be no limit on earnings and employees must be safe-guarded from earning
lower wages than time rate wages arising from problems which are outside their control.
The advantages of incentive schemes are:

(i) increased production and lower average unit costs;
(ii) increased the morale of the workforce;
(iii) attraction of more efficient workers to the company.
Question No. 5
Solution
(a) Job Evaluation is the assessment of the relative worth of jobs within a business enterprise and
Merit Rating is the assessment of the employees with respect to a job.
(b) Job Evaluation helps in establishing a rational wage and salary structure. On the other hand,
Merit Rating helps in fixing fair wages for each worker in terms of his competence and
performance.
(c) Job Evaluation brings uniformity in wages and salaries while Merit Rating aims at providing
a fair rate of pay for different workers on the basis of their performance.
Question No.6
Solution
Man power in the beginning 2,000
A) Wastages
Under 25 30% 360
25 – 35 10% 60
Over 35 5% 10 (430)
B) Promotion
Under 25 10% 120
25 – 35 40% 240
Over 35 20% 40 (400)
1,170
Staff requirement 2,400
Estimated recruitment over 2 years 1,230
Question No. 7
Solution:
A B C D
Time Taken (Hrs) 8 7 5.5 5

Rate per Hour (Rs.) 1.00 1.10 1.20 1.40
Wage payable 8.00 7.70 6.60 7.00
Overhead (200% of wage) 16.00 15.7 13.2 14.0
Total Cost 24.00 23.10 19.80 21.00
Standard cost 30.00 30.00 30.00 30.00
Cost saving 6.00 6.90 10.20 9.00
% reduction on standard 20 23 34 30
cost
Bonus entitlement (in term 13 21 28 21

of %)
Bonus earned (wage 1.04 1.62 1.85 1.47

payable ˟Bonus %)
Total Earning (Wage + 9.04 9.32 8.45 8.47

Bonus)
Total earning per hour (Rs) 1.13 1.33 1.54 1.694
Overhead Control
Question No. 8
Solution:
The objectives of overhead apportionment and absorption are:
(i) To meet the stock valuation and profit measurement requirements for financial accounting
purposes. Financial accounting regulations in most countries require that all manufacturing
overheads be traced to products for stock valuation purposes.
(ii) For various decisions, such as pricing decisions, management requires estimates of the total
product costs.
(iii) Overhead costs may be traced to different segments of the business, such as product groups
or geographical regions, in order to assess the performance of each segment.
Overhead apportionment and absorption can be criticized on the following grounds:

(i) The process includes many arbitrary apportionments and does not provide an accurate
indication of the resources consumed by each product. In tracing overheads to products, the
allocation procedure assumes that all overheads are related to volume. This is inappropriate for
many fixed overheads, since they are fixed in the short term, and tend to be caused by factors
other than volume, such as the diversity of the product range, a number of set-ups, and range of
component parts which the firm stocks.
(ii) Fixed overheads are sunk costs, and will tend not to change in the short term. Hence they are
unaffected in the short term, irrespective of which decisions are taken. Arbitrary overhead
allocations should not be used for decision-making purposes.
(iii) Overhead allocations are normally undertaken for stock valuation purposes. The procedures
are not intended to meet other requirements, such as decision-making and performance
evaluation.
(iv) Individuals should not be held accountable for costs which they cannot control. Arbitrary
apportionment of overheads is therefore inappropriate for cost control and performance
measurement purposes.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 9
Solution:
Cost Sheet (or) Statement of Cost and Profit
Particulars Unit (Rs.) Total (Rs.)
Material 240 144,000
Wage 80 48,000
Prime cost 320 192,000
Work Overhead (75% of wage) 60 36,000
Work Cost 380 228,000
Office Overhead (30% of work cost) 114 68,400
Total cost 494 296,400
Profit 106 63,600
Sales 600 360,000
Trading and profit and loss Account

Particulars Amount Particulars Amount
To Material A/c 144,000 By Sales A/c 360,000
To Wage A/c 48,000
To Work Overhead 32,160

A/c
To Gross profit 135,840
By Gross Profit 135,840
To Office Expenses 61,800
To Net Profit 74,040

135,840 135,840
Statement of Reconciliation
Particulars Amount
Profit as per Financial Accounts 74,040
Less: Over recovery of Work overhead (3,840)
Less: Over recovery of office expenses (6,600)
Profit as per Cost accounts 63,600
Cost Concepts for Decision Making

Question No. 10
Solution:
(a) For determining break-even point, it is necessary to find out fixed cost.
Variable Cost = Change in cost

Change in activity
20,000
1,80,000
= 9 per unit
Total manufacturing cost at a level of 50,000 cartons 7,00,000

Less : Variable manufacturing cost (50,000 x Rs. 9) 4,50,000
Fixed manufacturing cost for the quarter 2,50,000
For Variable and fixed Selling & Administration Costs :
Variable S. & Admn. Cost = Change in cost

Change in activity
690,000 - 650,000
20,000
= 2 per unit
Total selling & admn. Cost at a level of 50,000 cartons 6,50,000

Less : Variable Selling & Admn. Cost (50,000 × 2) 1,00,000
Fixed Selling and Admn. Cost 5,50,000
Therefore, Total Variable Cost per unit = Rs. 9 + Rs. 2 = Rs. 11.00
P/V ratio = (Rs. 24 – 11)/24 = 13/24
Total fixed cost = Rs. 2,50,000 + Rs. 5,50,000 = Rs. 8,00,000
We know that BES x P/V ratio = Fixed cost
Or, BES x 13/24 =Rs. 8,00,000
Or, BES = Rs.14,76,923
Or, BES = 14,76,923 ÷ 24 = 61,539 cartons
(b) Management want 20% per annum on investment of Rs. 30,00,000

Expected quarterly profit after tax =Rs. 30,00,000 x 0.20 x (3/12) = Rs. 1,50,000
Expected quarterly profit before tax = (Rs. 1,50,000 ÷ 60) x 100 = Rs. 2,50,000
Contribution expected in each quarter = Profit + Fixed cost = Rs. 2,50,000 + Rs. 8,00,000
= Rs. 10,50,000
Therefore, S × P/V ratio = 10,50,000

Required sales per quarter = 10,50,000 × 13/24 = Rs. 19,38,461
Therefore, required sales per quarter in units = Rs. 19,38,461 ÷ 24 = 80,769 cartons
(c) New selling price per carton = Rs. 24 – 1.50 = Rs. 22.50
Variable cost remains same = Rs. 11 per carton
Sales as per revised plan (84,000 × Rs. 22.50) = 18,90,000
Less : Variable cost (84,000 × 11) 9,24,000
Contribution during the quarter as per revised plan 9,66,000
Less : Fixed cost during the quarter
Existing fixed cost Rs. 8,00,000
Additional advertisement expenditure 1,50,000
9,50,000
Profit before tax 16,000

Tax (16,000 × 0.40) 6,400
Profit after tax as per proposed plan 9,600
But the existing profit after tax during second quarter is Rs.66,000. Therefore the plan should not
be implemented.
Question No. 11
Solution:
(i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions
on pricing policy can be taken particularly in short term.
(ii) Decision Making: Marginal costing helps the management in taking a number of business
decisions like make or buy, discontinuance of a particular product, replacement of machines, etc
(iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished
goods and work-in-progress are carried on a marginal cost basis and the fixed expenses are
written off to profit and loss account as period cost. This shows the true profit of the period.
(iv) Determination of production level: Marginal costing helps in the preparation of break-even
analysis which shows the effect of increasing or decreasing production activity on the
profitability of the company.
Costing for planning and Control –Budgets
Question No. 12
Solution:
The problems that might be met in introducing zero-base budgeting include:
(i) The implementation of zero-base budgeting might be resisted by staff. Traditional incremental
budgeting tends to protect the empire that a manager has built. Zero-base budgeting challenges
this empire, and so there is a strong possibility that managers might resist the introduction of
such a system.
(ii) There is a need to combat a feeling that current operations are efficient.
(iii) The introduction of zero-base budgeting is time-consuming.
(iv) Top-management support may be lacking.
Standard Costing
Question No.13
Solution:
1. Establishment of standard costs is difficult in practice.

2. In course of time, sometimes even in a short period the standards become rigid.
3. Inaccurate, unreliable and out-of-date standards do more harm than benefit.
4. Sometimes, standards create adverse psychological effects. If the standard is set at a high level,
its non-achievement would result in frustration and build-up of resistance.
5. Due to the play of random factors, variances cannot sometimes be properly explained, and it is
difficult to distinguish between controllable and non-controllable expenses.
6. Standard costing may not sometimes be suitable for some small concerns. Where production
cannot be carefully scheduled, frequent changes in production conditions result in variances.
Detailed analysis of all of which would be meaningless, superfluous, and costly.
7. Standard costing may not, sometimes, be suitable and costly in the case of industries dealing
with non-standardized products and for repair jobs which keep on changing in accordance with
customer’s specifications.
8. Lack of interest in standard costing on the part of the management makes the system
practically ineffective. This limitation, of course, applies equally in the case of any other system
which the management does not accept wholeheartedly.
Question No. 14
Solution:
Material Variances:
(i) Material Cost Variance

= (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (2,160 units × 10 kg. × Rs. 4) – (22,800 kg. × Rs.4.40)
= Rs. 86,400 – Rs.1,00,320 = Rs. 13,920 (A)
(ii) Material Price Variance

= Actual Q (SP – AP)
= 24,000 kg. (Rs.4 – Rs.4.40) = Rs. 9,600 (A)
(Here AQ means actual quantity of material purchased)
(iii) Material Usage Variance

= SP (SQ – AQ)
= Rs. 4 (21,600 kg. – 22,800 kg.) = Rs. 4,800 (A)
Labour Variances:
(i) Labour Cost Variance

= (SH × SR) – (AH × AR)
= (2,160 units × 2.50 hours × Rs.4) – Rs.29,700
= Rs.21,600 – Rs.29,700 = Rs. 8,100 (A)
(ii) Labour Rate Variance

= AH (SR – AR) = 5,940 hours (Rs. 4 – Rs.5) = Rs. 5,940 (A)
(iii) Labour Efficiency Variance

= SR (SH – AH)
= Rs. 4 (5,400 hours – 5,940 hours) = Rs. 2,160 (A)
Method of Costing
Question No.15
Solution:
Features of Process Costing:
(i) Production is done having a continuous flow of products having a continuous flow of identical
products except where plant and machinery are shut down for repairs etc.
(ii) Clearly defined process cost centres and the accumulation of all costs by the cost centres.
(iii) The maintenance of accurate records of units and part units produced and cost incurred by
each process.
(iv) The finished product of one process becomes the raw material of the next process or
operation and so on until the final product is obtained.
(v) Avoidable and unavoidable losses usually arise at different stages of manufacture for various
reasons.
(vi) In order to obtain accurate average costs, it is necessary to measure the production at various
stages of manufacture as all the input units may not be converted into finished goods.
(vii) Different products with or without by-products are simultaneously produced at one or more
stages or processes of manufacture. The valuation of by-products and apportionment of joint cost
before the joint separation is an important aspect of this method of costing.
(viii)Output is uniform and all units are exactly identical during one or more processes. So the
cost per unit of production can be ascertained only by averaging the expenditure incurred during
a particular period.
Contract Costing
Question No. 16
Solution:
Contract Account for the year ending 1
Particulars Dr Amount Particulars Cr Amount
To Material 180,000 By Work in progress
To wage 170,000 Work certified 375,000
To Carriage 6,000
To Cartage 1,000
To Sundry Expenses 3,000
To Notional profit 15,000
To profit & Loss A/c 4,000 By Notional Profit 15,000

(1/3 ˟ 15,000 ˟ 80%
To WIP reserve 11,000

To Work in progress 375,000 BY WIP reserve 11,000

(Opening) (Opening Balance)
To Material 220,000 By Work in progress
To wage 230,000 Work certified (3/4 ˟ 1,125,000

1,500,000)
To Carriage 23,000 Work Uncertified 20,000
To Cartage 2,000
To Notional profit 302,000
1,156,000 1,156,000
To profit & Loss 161,067 By Notional Profit 302,000

A/c (2/3 ˟ 302,000 ˟
80%
To WIP reserve 140,933
To Work in progress 1,145,000 BY WIP reserve 140,933

(Opening) (Opening Balance)
To Material 126,000 By Contractee A/c 1,500,000
To wage 170,000
To Cartage 6,000
To profit and loss 190,933

A/c
1,640,933 1,640,933
Contractee Account
Year 1
To Balance C/d 300,000 By Bank 300,000
Year 2
By Balance B/d 300,000
To Balance C/d 900,000 By Bank 600,000
900,000 900,000
Year 3
By Balance B/d 900,000
To Contract A/c 1,500,000 By Bank 600,000
Operating Costing
Question No. 17
Solution:
Statement Showing Computation of Effective Cost and Profit for the Year
Particulars Amount Amount
Standing charges
Salary of staff 1500
Salary of Garage Supervisor 2000
Rent of Garage 1000
Driver Salary 4000
Road Tax and repairs 1800
Insurance Premium 2500
Fixed Cost of 10 Taxi’s per month 12800
Cost per Taxi = 12800/10 1,280
Cost per Km = 12,800/ 4,000 0.32
Running Cost
Depreciation (75,000 – 15,000)/ 300,000 0.20
Petrol (6.3/9) 0.70
Oil & Sundry expenses (10/100) 0.10
1.32
Effective cost per Km (1.32/0.8) 1.65
Profit for year = (1.90 – 1.65) x 10 taxi x 3,200 x 12 month = Rs 96,000
Process Costing
Question No. 18.
Answer:
(i) Normal loss (toxic waste) = 50 kg per 1000 kg of input (i.e. 5%)
Actual input = 10 000 kg
Abnormal loss = Actual toxic waste (600) less normal loss (500) = 100 kg
By-product R net revenues of Rs.1,750 are credited to the joint (main) process account and normal and
abnormal losses are valued at the average cost per unit of output:
Net cost of production (35 750 - 1750) = Rs.4

Expected output of the joint products (8500 kg)
The cost of the output of the joint products is Rs.33,600 (8,400 kg × 4) and this is to be allocated to the
individual products on the basis of final sales value (i.e. 4800 kg × Rs.5 = Rs.24 000 for P and 3600 kg ×
Rs.7 = Rs.25 200 for Q
P = 24,000 / 49,200 × 33 600 = Rs.16 390

Q = 25,200 / 49,200 × 33 600 = Rs.17 210
The main process account is as follows:
Main process account

(kg) (Rs) (kg) (Rs)
Materials 10 000 15 000 P Finished goods 4,800 16,390
Direct labour — 10 000 Q Process 3, 600 17,210
Variable overhead — 4 000 By-product R 1, 000 1,750
Fixed overhead — 6 000 Normal toxic waste 500 —
Toxic waste disposal a/c — 750 Abnormal toxic waste 100 400
10 000 35 750 10 000 35 750
ii)
Toxic waste disposal (Creditors’ account)
(Rs) (Rs)
Bank 900 Main process account 750
Abnormal toxic waste 150
––– –––
900 900
––– –––
Abnormal toxic waste account
Main process account 400 Profit and Loss Account 550
Toxic waste disposal account 150
(100 × Rs.1.50)
––– –––
550 550
––– –––
Process 2 account
kg (Rs) kg (Rs)
Main process Q 3,600 17,210 Finished goods Q b 3,300 26,465
Fixed cost 6,000 Closing work-in-progress b 300 1,920
Variable cost 5,175 a
3,600 28,385 3,600 28,385
Notes
a 3300 + (50% × 300) × Rs1.50 = Rs 5175
Rs Completed units WIP equiv.units Total Eqvt Units Cost PU

Previous process cost 17,210 3,300 300 3,600 Rs4.78
Conversion cost 11,175 3,300 150 3,450 Rs3.24
Rs.8.02
(Rs)
Completed units (3 300 units @ Rs.8.02) 26,465
WIP (300 × Rs 4.78) + (150 × Rs.3.24) 1,920
28,385
iii)
(Rs)
a.
Incremental sales revenue per kg from further processing (Rs.7 – Rs. 4.30) 2.70
Incremental (variable) cost per kg of further processing 1.50
––––
Incremental contribution per kg from further processing 1.20
––––
(Rs.)
At an output of 3,600 kg the incremental contribution is 4,320
Avoidable fixed costs 3,600
–––––
Net benefit 720
–––––
Break-even point = Avoidable fixed costs (Rs.3600)
Incremental unit contribution (Rs.1.20)
= 3000 kg
Further processing should be undertaken if output is expected to exceed 3,000 kg per week.
Uniform costing and Inter-firm Comparison

Question No. 19.
Solution:
The following are the limitations in the implementation of a scheme of inter-firm comparison:
(i) Top management feels that secrecy will be lost.
(ii) Middle management is usually not convinced with the utility of such a comparison.
(iii) In the absence of a suitable cost accounting system, the figures supplied may not be
reliable for the purpose of comparison.
(iv) Suitable basis of comparison may not be available.
Cost control and cost reduction

Question No. 20.
Solution:
Areas of Cost Reduction are:

i. Design of the product to be produced – Standardization and simplification of the product,
is the most important activity for controlling and reducing cost. once a design of the
product is approved and arrangements for production made, choices available in the firm
will be limited.
ii. Factory layout organization and production methods, and
iii. Marketing – points of selling and distribution, transport, channels of distribution, etc.
PAPER 6: BUSINESS COMMUNICATION & MARKETING
PAPER 6A: BUSINESS COMMUNICATION

Questions
Q.N. (1) Read the following case and answer the questions that follow. (4*5=20)
COVID-19 has created a different situation for the business organizations regarding their sales,
promotion and communication. The face-to-face business meetings are replaced by the online
meetings. Recently, New Era Construction Company has held online mode of board meeting.
The CEO of the company presented papers focusing on the challenges and consequences invited
by the pandemic at their business. The board directors of the company experienced newness in
the online meeting. One of them who belong to relatively old/senior generation expressed that the
meeting was not effective enough. The discussion was not much interactive and negotiation was
almost impossible, he said. A young entrepreneur and the director of the company, however,
enjoyed the meeting despite several barriers to it. For him, the functions such as screen sharing,
room breaking, etc. were so unique and effective. The online meeting was really effective
regarding time saving, systematic discussion and saving of logistics, he remarked.
Questions:
a) What barriers to business communication could have been there in online meeting of
this case?
b) If you were the CEO of the company, how would you overcome these barriers?
c) A senior participant of the meeting was rather disappointed. As the young director of
New Era, how can you facilitate the online mode of business meetings?
d) How can we facilitate negotiation and interaction in the virtual Business Company
meetings?
Answers:
a) Barriers to business communication are common phenomena within every organization.

In the particular context of this case where virtual meeting is organized, the following
barriers could have been seen:
• Noises caused by ‘unmute’ mode of mikes used by the participants on their
devices,
• Noises caused by the frequent interruption and overlapping of turns among the
participants,
• Barriers caused by technological limitations such breakage of electricity supply,
no access of the internet, no link, no app, no skill to work with the meeting apps,
and many more.
• Psychological barriers such as inhibition, nervousness, etc.
• Semantic barriers regarding the contextual meanings of the terms and expressions,
• Strategic barriers due to the absence of nonverbal channels, etc.
b) If I were the CEO of the given company, I would first of all accept the challenge created
by the pandemic as one of my opportunities in the sector of business communication and
transaction. I would follow the following strategies so that the barriers to communication
would be minimized and the board meeting could be effective at maximum:
• First, my focus would be on giving online training to all the board members on
how to use the meeting apps such as Zoom, Google Meet, Microsoft Teams, etc.
• I would request every participant to keep the mikes of their devices ‘mute’ while
the other is speaking.
• I would clearly distribute time for contribution and discussion.
• I would create groups and help them interact effectively.
• During my presentation I would select simple common and effective vocabulary
items and grammar structures; I would maintain my speech speed, too.
• I would use enough figures, tables, pictures, graphs, and other nonverbal signals to
ensure better understanding among the participants of the virtual meeting.
c) Today’s workplaces and working contexts are highly technologically dependent. At the
same time, many a senior staff, investor or business personnel is still struggling with the
technology though they have a great legacy, ethics and knowledge of the business sector.
So this is the transitional phase between the ancient and modern technologies. In this
particular business case, as the young and innovative participant, I would try to facilitate
the old generation with the skills of new technologies, particularly in these ways:
• By sending links on their personal email account or social media account,
• By having video chats before the meeting starts,
• By displaying through screen sharing,
• By arousing interests in them in virtual activities,
• By organizing informal meetings, recreational programmes, games, etc. in the
online mode.
d) Virtual business meetings can be made fully interactive like a workshop. Discussions can
be made even more systematic than physical meetings. For this, we are required to get
trained about the mode or application that we are using for our meetings. There are ‘room
breakout’ provisions where we can divide our whole group into pairs and small groups.
We can discuss in the groups and present our conclusion in the main group or meeting. If
we are interested to put our view while any other speaker is presenting, we can have a
‘hand raising’ option. This makes turn taking process more systematic. In the same way
when we mute all the participants except the speaker, the unwanted physical noises and
interruptions are automatically controlled and presentations become more effective and
meaningful.
Q.N.(2) The workplaces in the digitalized and globalized era are unique for different
reasons such as diversity, technology, etc. What precautions do you think should be taken
to ensure success in the new contexts of workplaces? 10
Answer:
It is of course true that today’s workplaces are unique for different reasons such as diversity and
technology. The workers need to consider different maxims for their success in the workplaces.
Basically, they should develop proper knowledge, skills and aptitude in their defined job.
Technological skills always outweigh any other skills in the today’s workplaces.
If I were in the new context of my workplace, I would adopt certain strategies as the precautions.
(a) Interactions and meetings: I will hold meeting with the project managers, ex-officers,
supervisors, etc. and get ideas about the working culture and workers’ uniqueness of the
new workplace; I will get interactions with them within or after the duty time.
(b) Social/Vernacular perspectives: I will learn the local contexts in terms of physical, social,
behavioral and other perspectives;
(c) Language and courtesy: Courteous behavior is always expected in the workplaces. Polite
form of language is also one of the components of courteous behavior. This may vary
according to the social contexts. So, I will learn some basic communication skills and
courteous behavior in the new context. Specific vocabulary items and language exponents
such as greeting exponents, thanking styles, addressing terms, politeness cues, etc.
(d) Potential barriers: I will plan about how potential barriers/ obstacles can be overcome.
They will be identified first and then possible measures will be adopted.
Q.N. (3) Answer these questions. (5*2=10)
(a) You are going to prepare a solicited report on customer rights in Nepal, focusing on the
results of a survey research. Write a work plan for your research and report.
Answer:
A comprehensive workplan for preparing the final report on Customer Rights in Nepal
Activities Allocated time duration
Planning and conceptualizing: proposal Sep 3- Sep 17

writing (2 weeks)
Preparing research tools: questionnaires and Sep 18-Oct 2

interview schedules (2 weeks)
Field visits: data collection Oct 3-Oct 15

(6weeks)
Result analysis and interpretation Oct 16-Nov 1

(2 weeks)
Preparing the first draft of the report Nov 1 week
Editing and revising Nov 2 week
Submitting the final report Nov 17, 2021
(b) From the perspective of business communication, how do you suggest for
converting the organizational conflicts into organizational assets? Discuss the common
techniques of conflict management in brief. 5
Answer:
Conflicts are usually accepted as the assets of an organization. It is so only if conflicts are
handled properly. It is an agreed point in business communication that organizational
conflicts can be settled with some careful strategies related with language and cooperation.
Some of the conventional techniques of conflict management are discussed in brief below:
• Mediation: in this process, disputes are facilitated by third party intervention. The third
party mediates between the conflicting parties. The mediator is granted with an institutional
status for conflict resolution, and is approved by both parties of conflict.
• Negotiation: Negotiation is one of the very useful and effective processes of conflict
resolution. It helps people to eliminate the basis for conflicts through bilateral discussions,
dialogues and compromise. It is based on win-win theory, and is operated by bilateral
discussions and talks.
• Arbitration: It is a legal attempt to manage conflict. The disputes are legally analyzed. The
illegal and unethical points are pointed out and concerned ones are asked to improve. Some
forceful impositions are also used.
• Reconciliation: It is an institutional practice to bring the conflicting groups together into a
consensus; it is an approach of integration. It tries to show interdependence and coexistence
of the conflicting powers.
Q.N. 4. Write short notes on the following: (4*2.5=10)
a) Business communication skills
Business communication skills are meant for making communication successful within a
business transaction and getting things done accurately in the transaction. There are different
skills that need to be developed in the communicators. For example, listening attentively,
cooperatively and actively is an essential skill to be developed. Similarly, interacting politely,
cooperatively and contextually keeps meaning in business communication. Additionally, ethics is
concerned deeply with the business communication process. Behaving with full sense of business
ethics is an important skill to be developed by the business personnel. Developing team spirits,
group interactions, conferences and sharing also poses huge significance in the today’s business.
Other essential skills may include: self-monitoring and collaborating activities, learning to
communicate through written as well as electronic modes with accurate format, intercultural
communication and so on.
b) Settling communication barriers

Different barriers to communication are identified in the business houses. They are to be settled
sensibly in a proper way. There are certain techniques that are regarded as efficient for the
settlement of communication barriers. The barriers caused by the frames of reference can be
settled by trying to understand the workers’ perspective to work. Similarly, noises or physical
barriers can be settled by managing proper technology to work in the noisy workplace and by
controlling the noise if possible. The language related barriers or semantic barriers can be
avoided by using the explicit words and language forms. The cultural and social issues can be
managed by trying to adopt the new cultural trends such as dressing up, mimicking, eating
patterns, gossiping ways, etc.
c) Buffers
Buffers are the tools for creating indirect but courteous relationship with the people in written
transactions such as bad news letters, follow up letters, and other general correspondences. A
buffer is useful to establish common ground with the reader. But, a poorly written buffer can
mislead and sometimes insult the reader. Good buffers have balanced different elements of
communication, and give good impression to the readers. Agreement, appreciation, cooperation,
politeness, fairness, etc. are some of the types of buffers which are important in most of the
business correspondences.
d) Work plan in the proposal

Proposal is a systematic plan for a research or for an action to be accomplished. A reliable and
systematic work plan needs to be presented in the proposal about how to carry out the research or
action within a given period of time. In other words, the work plan indicates exactly the schedule
for accomplishing every individual task within the project. It describes how what must be done
will be accomplished. More specifically, the work plan includes when the work will begin, how it
will be divided into stages, when it will be finished, what methods or resources will be used and
so on.
Q.N. 5. Write short notes on the following: (4*2.5=10)
a) Abstract in a report
Abstract is a very short summary of the report that appears in the very beginning part of the
report. It usually presents the primary goal of the report. It also includes the major points on
introduction, method, results and discussion, but in a very precise form. The readers readily know
the gist of the report when they read the abstract, so it helps them to decide whether to continue
reading that report or not.
b) Qualities of good minute writing

The process of minute writing of a business meeting requires certain qualities or features. First of
all, attendance of members and participants should be recorded. A good minute always involves a
record of the matters discussed and resolutions taken in the meeting. Similarly, there should be
records of decisions in explicit language. There must not be any kind of controversy or dual
meanings of the terms used in it. Other common qualities may include: making an index with
topic, number, date, etc., chairman’s points of approval and disapproval, getting Chairman’s
initial at every changes made in the record book, and signatures of members.
c) Paralanguage
Paralanguage refers to the vocal qualities that are not verbal features but have influence on
making meaning. The vocal qualities of speech such as speed, sharpness/pitch, volume, etc. are
the examples of the paralanguage. They are the language like features. They are also called
vocalic features.
Paralanguage has important influence in making the meaning in communication. It is more about
how we speak. Voice quality, pause, pitch variation, fluency, silence style, etc. are the major
components of paralanguage. These may signify very specific meaning in communication such
as speaker’s state of age, gender, personality, seriousness, patience, etc. The paralanguage
features are important for expressing specialty of meaning or message. They may also help us
predict the expectations of the participants.
d) Avoiding ethnocentrism in communication

Ethnocentrism is feeling of one who thinks that his or her identities or values are superior to
those of others. Avoiding such feelings of being superior to the people of other culture or
background is important in the diverse workplaces of today’s context. It is really significant for
minimizing intercultural misunderstandings and conflicts. It is also useful for bridging gaps and
for managing the workplace diversity. We must agree to the point that no culture is superior to
the other one.
a) You are Usha Rai from Kalanki-13, Kathmandu. You have recently completed BBA from
TU, and you are interested to join a job at Sanima bank as an account officer. Write a cover
letter for the application of the job.
Answer:
Kalanki-13
Kathmandu
July 15, 2021
Ms Salina Thapa
Head
Department of Human Resource Development
Sanima Bank
Kathmandu
An application for the post of Account officer
Dear Ms Thapa
In reference to your online advertisement for the post of account officer, I would like to
apply for the same with my full confidence that my qualifications and experiences in the field
may fulfill your requirements. I have attached my CV with this application.
I have recently acquired a graduate degree of BBA from Nepal’s largest university, i.e. TU.
In the final semester of the graduation course, I did internship for six months at Megha Bank
at Babarmahal in Kathmandu. After the completion of my academic course and internship, I
joined as an assistant officer at the same bank. Since I am now looking for an officer level
job according to my academic qualification, I have become interested to join your company. I
have actually heard much about your company and am really eager to work under your
management.
I am looking forward to your positive response. My cell number is 98510xxxxx.
Sincerely yours
Usha Rai
(b) What is your perception about intercultural communication? Discuss its significance in
the typical contexts of the today’s workplaces. 5
Answer:
Intercultural communication is a very common feature of today’s business contexts throughout

the world. In the context of the increasingly diverse workplaces there are several challenges
regarding communication. As a solution to these challenges, the process of intercultural
communication may work effectively. Since we cannot be satisfied with the business within our
territory only, then it is very obvious that new cultures, life styles and languages are to be
accepted and skillfully dealt with in the international and enter-ethnic situations.
It is a phenomenon emerged quite lately. It is also known as cross-cultural communication. It

refers to the way of communication between the people of different cultures, without posing any
kind of threat to any kind of culture. The international languages and their vernacular varieties
are commonly used as effective means of intercultural communication. Basically, the workers of
a business house are given trainings on intercultural norms, values, beliefs and practices. And,
they are given guidelines to communicate each other in line with the perspectives of different
cultures. Conferences, workshops and interaction programmes can also be conducted in the
workplaces focusing on intercultural communication. Workers may try to get adapted in the local
contexts. Sharing and respecting each other’s cultures and languages may also be encouraged.
We can successfully deal with the diverse workplaces anywhere by adopting the principles of
intercultural communication.
Q.N.7 How do you overcome the barriers to effective listening in business communication?
Explain in brief. 10
Answer:
Effective listening is one of the important determinants for the successful business interactions.
Listening becomes more complex in many business contexts because of many different barriers
to it. Listening is a very common receptive skill which often becomes for more complex than
most people think. Complexity in effective and successful listening is mostly caused by many
different factors such as content, channel, etc. of communication. Listening becomes complex
because of various barriers to it, too. Good listeners always look for ways to overcome potential
barriers throughout the listening process.
Barriers to effective listening may vary from physical reception to listener's mental conditions.
The physical barriers such as room acoustics, phone rings and other noises, background music
etc. can be serious when the listener has to extract particular information or content from
listening. Similarly, lack of attention, interruption, schema, prejudgment etc. can be the examples
of mental barriers to effective listening. Some of the strategies for overcoming the barriers to
effective listening can be:
• try to minimize the sources of physical barriers such as noises and poor acoustics
• avoid selective listening and focus on the speaker
• keep an open mind and avoid prejudgment
• try to interpret the message from the context of the speaker
• do not interrupt the speaker
• write, record or try to capture the information
• try to associate, categorize and visualize the information
• pay proper attention
• …
a) What are the major components involved in a persuasive resume? Also write resume
head and objective statement of your resume. 5
Answer:
The major components of a persuasive resume usually involve:
• Resume head (Name, address,..)
• Objective Statement
• Academic qualifications
• Professional experiences
• Additional qualifications and skills
• Personal profile
• Referees
• Signature & date
Anjali Sharma
Kathmandu 26, Samakhusi
9841xxxxxx
[email protected]
Objective statement:
To bear fulfill full responsibilities and serve organization where I work with
consistent dedication and hard work, and to enhance the business environment of my
organization, focusing on business ethics and standard.
b) What are the three Stages of a job interview? What activities are involved in each of
them?
Job interview is an important component of employment communication. It displays
distinctive features from other types of interviews. It is usually carried out in three different
stages: warming-up stage, question-answer stage and summing-up stage.
The warming-up stage refers to the stage that exists before the main conversation between the
interviewer and interviewee. In this stage both interviewer and interviewee attempt to be
prepared to lead the interview to a successful communication. The interviewee is prepared
with cheerful appearance and positive thoughts and expectations. The interviewer attempts to
make some kind of attachment with the interviewee with the help of gestures, welcome note,
etc.
Similarly, in the question-answer stage, the content based interaction between the interviewee
and the interviewer takes place. This is the largest stage of job interview. The final stage is
known as summing-up stage in which the interviewer signals pre-closing of the conversation.
And finally, the interview gets wrapped up with conventional thank-you note and farewell
exponents.
Q.N. 9. What do you mean by the term ‘ethics’ in business communication? Discuss role it
bears in the success of a business organization? 10
Answer:
The term ‘ethics’ refers to fairness in communication that may involve abiding in truth, obeying
rules and not doing unethical practices. Communication system of an organization is always
expected to be ethically rational and reliable.
Ethics is related to what is good or right. To say and know verbally what ethics is in fact less
important than behaving ethically in the business organizations. This should be translated into
our practice and behaviours. Behaving ethically usually means the way of following certain
norms and values of the business communication. The violation of such values and norms is
subjected to the violation of ethical values.
Ethical communication system believes in fair and reliable dissemination of information so as to

maintain faith and justice among the people inside and outside the organization. A business
organization has to deal with a number of its stakeholders. Its communication system should be
ethically rational and reliable for its sustainability.
The role of ethics in business communication is basically for avoiding unethical dealings within
organization such as gossiping, using grapevine, doing conspiracy, etc. Similarly, ethics helps us
avoid plagiarism, which a deceitful practice known as intellectual theft. Above all, ethics plays a
role to form ethical organizational leadership and structure within an organization. Each aspect
such as clients, staff, employers, partners, directors, etc. can benefit fairly from ethics in business
and communication.
Q.N. (10) What are the major strategies for organizing information in the analytical
reports? Critically examine the relevance of each of these strategies. 10
Answer:
Three Major strategies for organizing information in analytical reports are (1) focusing on
conclusions (2) focusing on recommendations and (3) focusing on arguments.
When one is writing an analytical report for those audiences who are receptive in nature,
information can be organized focusing on writer's conclusions and judgments based on
experience and research. The audiences are likely to trust such judgments or conclusions, and
may agree with the writer. The report can be structured around those conclusions and findings,
using a direct approach. However, focusing directly on conclusions does have potential
drawbacks. It may make everything the writer says seem too simple and personified. The
audiences can have reservations about the writer's conclusions.
When the analytical report is more concerned to what ought to be done in a particular situation
than to what is existing, the report can be structured focusing on recommendations. According to
this approach recommendations will be unfolded directly by following different steps of analysis
and different modes of conclusions. The report writer needs to be much sensible of whether the
recommendations would invite any risk in the business in future.
Reports can be organized focusing on arguments, too. Instead of drawing clear conclusions and
recommendations the report may also present certain logical analysis of specific situations along
with many different alternative ideas, solutions or options. More scientific approach is adopted in
such type of organization strategy. When the report aims at collaborative and persuasive issues,
the focusing on arguments approach would be more suitable. However, this strategy may create
certain confusions among the options. So, it seems better if the writer gives specification for each
argument or option in the report.
Q.N. 11. Discuss in brief how business professionals should develop their communication
skills. (10)
Answer:
The professionals involved in business organizations need to be highly skilled and tactful to have
their business accomplished through their staff as well as clients. If anyone of them lacks proper
communication skills, the whole company may fall in problems and conflicts. So, I would
suggest some important skills for such professionals:
a) Listen, and make wider perception of what others say. Meaning lies in the mind of people
not merely in the words someone has used. So, intended meaning of clients and staff should
be interpreted putting the discourse in particular context.
b) Frequent interaction, meetings, workshops, talks, etc. may help you minimize
misunderstanding and make your dealing more productive.
c) Cross-cultural communication devices should be developed, and understood in a proper
way. Non-verbal communication may help you conversation properly successful and
complete.
d) International audiences expect better communication and conversation. Be formal as well
as informal in communication according to topic and context of business dealing.
e) Be brief, relevant, and context worthy during instruction and interaction to your clients and
staff members. This is an important maxim of pragmatic theory.
PAPER 6: BUSINESS COMMUNICATION & MARKETING
PAPER 6B: MARKETING

Questions:
1. Read the following case carefully and answer the questions that follow:
HPL is one of the largest food products company in India, with a very well-known and
respectable brand name of its products, consisting of milk, butter, ghee, cheese, milk-powder,
ice-cream, chocolates tea-coffee whitener and curd. Some products like milk and curd are sold
locally, but some other products such as butter, milk-powder and chocolates are not only
marketed nationally all over India, but internationally to USA, Singapore and Gulf countries.
The company has 50 sales depots with over 5000 distributors, who are supplying the company’s
products to over 1.2 million retail outlets in India. The selection of the right kind of distributor is
important, because the distributors have to invest at least Rs. 200,000 in infrastructure like cold
storage and to carryout key activities like selling to retailers, inventory carrying, warehousing
and transportation. The main criteria used for selection of the distributor selection are: financial
strength, market reputation, availability of required infrastructure, and the previous experience in
handling FMCG. It is the responsibility of the distributor to appoint as many retailers as possible,
so that the company products are available at the arm’s length to the household consumers. The
distributors and the retailers are not exclusive and therefore, can deal with the competing
products. The trade discounts given to distributors and retailers are 5 and 8 percent respectively.
There is also 3 percent volume discount and one percent incentive is given to distributors at the
end of the year on achieving the sales quotas. There is no question of cash discount, as no credit
is given to any distributor. However, the dispatches are made on receipt of local cheques or
demand drafts, to the extent of the value of bank guarantee given by the distributor of the
company. Conflicts between distributors and retailers are solved through mediation by the
company’s salesforce.
The company is planning to launch their products in Nepal also from 2017. To distribute the
products in the major cities of Nepal, they are going to appoint some distributors very soon. They
have already decided to implement same policies and strategies which are successful in India.
Questions:
1. Critically evaluate the distribution strategy used by the HPL.

2. Based on above case, are they using product line or product mix strategies? Give your
opinion.
3. Comment on the criteria used by the company to select distributors.
4. Do you think marketing policies and strategies which are successful in India will also be
successful in Nepal? Give your arguments.
Chapter one: Meaning of Marketing and Marketing Mix
1. What is marketing mix? Discuss briefly the four Ps of marketing mix. (10)
2. What is demand? (2)
3. Give the meaning of customer value. (2)
Chapter two: Evolution of Marketing Concepts
4. What do you know about societal concept of marketing? Explain. (10)
Chapter three: Environmental Context of Marketing

5. Discuss competitor as an important element of micro environment. (10)
6. Explain the requirements for effective market segmentation.
7. Define macro environment. (2)
Chapter four: Marketing Information System
8. Explain the meaning and components of internal record system. (10)
Chapter five: Buyer Behavior Analysis
9. What is consumer behavior? (2)

Chapter six: Product Decisions
10. Explain the trading down and trading up strategies with suitable example. (10)
11. What is consumer product? (2)
12. What is test marketing? (2)
Chapter seven: Price Decisions
13. What is price skimming? (2)
Chapter eight: Place Decisions (Distribution)
14. Discuss the channel structure for industrial products. (10)

15. Give the meaning of order processing. (2)
16. What is intensive distribution? (2)
Chapter nine: Promotion Decisions
17. What is promotion mix? What are its components? Explain. (10)
18. What do you understand by the term ‘public’ in marketing? (2)
19. What is integrated marketing communication? (2)
Chapter ten: Emerging Concepts of Marketing
20. Define the term green marketing. (2)

Answers:
1. Critically evaluate the distribution strategy used by the HPL.

Ans: Distribution includes distribution channel and physical distribution which is related with
fulfilling gap between point of production to point of consumption. It helps to provide right
product to right customer at right time with reasonable price. In marketing, there are mainly three
types of distribution strategies. They are intensive distribution, selective distribution and
exclusive distribution strategies. In the given case, the company has used 50 sales depots with
over 5000 distributors, who are supplying the company’s products to over 1.2 million retail
outlets in India. If any company uses maximum number of middlemen to cover larger
geographical areas to satisfy innumerable customers, it is called intensive distribution strategies
which is appropriate for convenience products. Dairy products are also consumer products and it
falls under the convenience product categories. Thus, on the basis of nature of product, use of
maximum middlemen and larger geographical, it is clear that HPL has used intensive distribution
which is appropriate strategy. Selective and exclusive strategy are not suitable for dairy products
like milk, butter, ghee etc. in national as well as international market.
2. Based on above case, are they using product line or product mix strategies? Give your
opinion.
Ans: If any producer produces more than one product items which are closely related is called
product line strategy. Similarly, if any producer produces more than one product lines or varieties
of product items which are unrelated is called product mix strategies. In the given case, products
offered by the company are milk, butter, ghee, cheese, milk-powder, ice-cream, chocolates tea-
coffee whitener and curd. All products offered by them are closely related products. We can say
all products are closely related because of their nature, target market, production process,
distribution channel, price range, customer needs etc. Thus, product strategies used by them are
product line strategy not product mix strategy.
3. Comment on the criteria used by the company to select distributors.

Ans: In my opinion, it seems clear that the criteria used by the company for the selection of
distributor is appropriate because, in the given case, the main criteria used for selection of the
distributor are: financial strength, market reputation, availability of required infrastructure, and
the previous experience in handling FMCG. Without financial strength, no marketer can invest
for infrastructure like storage, transportation etc. For successful marketing market reputation is
equally important. Without the market reputation of distribution none can achieve success in
competitive environment. Similarly, without infrastructure no marketer can create and deliver
value to its customers. Experience distributor with sufficient infrastructure and financial strength
and good reputation can work effectively and efficiently in supply chain to deliver value for
customer. In this way, criteria used by the company for distributor selection is appropriate to a
large extent.
4. Do you think policies and strategies which are successful in India will also be successful in
Nepal? Give your arguments.
Ans: For successful marketing, all marketing policies and strategies must be consistent with
changing marketing environment. To some extent, socio-cultural and economic environment of
Nepal and India are similar. But to a large extent, there are dissimilarities in the marketing
environment between India and Nepal. So, in my view point, we cannot blindly adopt successful
marketing policies and strategies which is successful in India because of the unique
characteristics of Nepalese market. Thus, it is better to modify their successful policies and
strategies from Nepalese perspective. We must learn from the Indian context and should design
and implement marketing policies and strategies as per the Nepalese marketing environment and
Nepalese consumer behavior. If there is change in environment there must be change in
marketing policies and strategies. In conclusion, I think, marketing policies and strategies which
are successful in India will not be successful in Nepal.
Chapter one: Meaning of Marketing and Marketing Mix
1 What is marketing mix? Discuss briefly the four Ps of marketing mix. (10)
Ans.: Marketing is simplistically defined as ‘putting the right product in the right place, at the
right price, at the right time.’ Though this sounds like an easy enough proposition, a lot of hard
work and research needs to go into setting this simple definition up. And if even one element is
off the mark, a promising product or service can fail completely and end up costing the company
substantially.
The use of a marketing mix is an excellent way to help ensure that ‘putting the right product
in the right place’ will happen. The marketing mix is a crucial tool to help understand what
the product or service can offer and how to plan for a successful product offering. The
marketing mix is most commonly executed through the 4 P’s of marketing: Price, Product,
Promotion, and Place which can e explained as follows:
Product
The product is either a tangible good or an intangible service that is seem to meet a specific
customer need or demand. All products follow a logical product life cycle and it is vital for
marketers to understand and plan for the various stages and their unique challenges. It is key
to understand those problems that the product is attempting to solve. The benefits offered by
the product and all its features need to be understood and the unique selling proposition of the
product need to be studied. In addition, the potential buyers of the product need to be
identified and understood.
Price
Price covers the actual amount the end user is expected to pay for a product. How a product is
priced will directly affect how it sells. This is linked to what the perceived value of the
product is to the customer rather than an objective costing of the product on offer. If a
product is priced higher or lower than its perceived value, then it will not sell. This is why it
is imperative to understand how a customer sees what you are selling. If there is a positive
customer value, than a product may be successfully priced higher than its objective monetary
value. Conversely, if a product has little value in the eyes of the consumer, then it may need
to be underpriced to sell. Price may also be affected by distribution plans, value chain costs
and markups and how competitors price a rival product.
Promotion
The marketing communication strategies and techniques all fall under the promotion heading.
These may include advertising, sales promotions, special offers and public relations.
Whatever the channel used, it is necessary for it to be suitable for the product, the price and
the end user it is being marketed to. It is important to differentiate between marketing and
promotion. Promotion is just the communication aspect of the entire marketing function.
Place
Place or placement has to do with how the product will be provided to the customer.
Distribution is a key element of placement. The placement strategy will help assess what
channel is the most suited to a product. How a product is accessed by the end user also needs
to compliment the rest of the product strategy.
2 What is demand? (2)

Ans.: When the want is backed by purchasing power, it is called the demand. In another word,
wants backed by ability to pay, willingness to pay and authority to purchase is popularly known
as demand and marketing is demand management and as a marketer, we can create demand by
using appropriate marketing tools such as advertising, personal selling, sales promotion, public
relation, publicity and direct marketing.
3 Give the meaning of customer value. (2)

Ans.: Customer value is different between what customer gets and what customer gives. It is the
comparison between total customer benefits and total customer costs. Customer benefits include
product benefit, service benefit, image benefit and personal benefit. Similarly, total customer
costs include money cost, time cost, energy cost and psychic cost
Chapter two: Evolution of Marketing Concepts
4 What do you know about societal concept of marketing? Explain. (10)

Ans.: Some have questioned whether the marketing concept is an appropriate philosophy in an
age of environmental deterioration, resource shortages, explosive population growth, world
hunger and poverty, and neglected social services. Are companies that successfully satisfy
consumer wants necessarily acting in the best, long-run interests of consumers and society? The
marketing concept sidesteps the potential conflicts among consumer wants, consumer interests,
and long-run societal welfare.
Yet some firms and industries are criticized for satisfying consumer wants at society’s expense.
Such situations call for a new term that enlarges the marketing concept which is popularly known
as societal marketing concept. Societal marketing concept, which holds that the organization’s
task is to determine the needs, wants, and interests of target markets and to deliver the desired
satisfactions more effectively and efficiently than competitors in a way that preserves or
enhances the consumer’s and the society’s well-being.
The societal marketing concept calls upon marketers to build social and ethical considerations
into their marketing practices. They must balance and juggle the often conflicting criteria of
company profits, consumer want satisfaction, and public interest. Yet a number of companies
have achieved notable sales and profit gains by adopting and practicing the societal marketing
concept.
Some companies practice a form of the societal marketing concept called cause-related
marketing. Pringle and Thompson define this as “activity by which a company with an image,
product, or service to market builds a relationship or partnership with a ‘cause,’ or a number of
‘causes,’ for mutual benefits.” They see it as affording an opportunity for companies to enhance
their corporate reputation, raise brand awareness, increase customer loyalty, build sales, and
increase press coverage. They believe that customers will increasingly look for demonstrations of
good corporate citizen- ship. Smart companies will respond by adding “higher order” image
attributes than simply rational and emotional benefits. Critics, however, complain that cause-
related marketing might make consumers feel they have fulfilled their philanthropic duties by
buying products instead of donating to causes directly.
The societal marketing concept holds that the organization should determine the needs, wants,
and interests of target customers. It should then deliver superior value to costumer in a way that
maintains or improves the customer’s and the society’s well-being. The societal marketing
concept questions whether the pure marketing concept is adequate in an age of environmental
problems, resource shortages, rapid population growth, worldwide economic problems, and
neglected social services. It asks if the firm that senses, serves, and satisfies individual short term
wants is always doing what’s best for consumers and society in the long run. According to the
societal marketing concept, the pure marketing concept overlooks possible conflicts between
consumer short term wants and customer long term welfare. Societal marketing concept calls on
marketer to balance among the three considerations: consumer, organization and society.
Chapter three: Environmental Context of Marketing
5 Discuss competitor as an important element of micro environment. (10)

Ans.: The marketing concept states that to be successful, a company must provide greater
customer value and satisfaction than its competitors do. Thus, marketers must do more than
simply adapt to the needs of target customers. They also must gain strategic advantage by
positioning their offerings strongly against competitors’ offerings in the mind of consumers.
No single competitive marketing strategy is best for all companies. Each firm should consider is
own size and industry position compared with those of its competitors. Large firms with
dominant positions in an industry can use certain strategies that similar firms cannot afford. But
being large is not enough. There are winning strategies for large firms, but there are also losing
ones. And small firms can develop strategies that give them better rates of return than large firms
enjoy.
Competition can be generic, product, brand, price and non-price.
In generic competition, many products are offered to be satisfied the same needs. For example,
hunger needs can be satisfied by rice, noodles, mo-mo etc. In product competition, similar
products are offered to satisfy the same needs. For example, tea, coffee, water, glucose or coke
can be offered to satisfy the thirst needs. Similarly, in brand competition, similar brands compete
against each other. For example, Coke and Pepsi, NTV and KTV, The Himalayan Times and The
Kathmamdu Post etc. Price competition involves manipulation of price like lowering or raising
price and non-price competition involves quality of product, distribution and promotion.
The extent of competition in the market is determined by the number of competitors selling
similar products and brands in the market. The number of competitors in the market is explained
by the type of market situation. The market situation can be of a perfect, a monopoly, an
oligopoly, and monopolistic competition.
6 Explain the requirements for effective market segmentation. (10)

Ans.: The Requirements for effective market segmentation are as follows:
i. Measurability: The market segment should have measurability. Demographic and

socio- economic characteristics are objective and hence measurable. On the contrary,
life styles, personality, and other psychological governing buyer behavior (such as
attitude, perception, motivation etc.) are subjective and thus non measurable.
ii. Accessibility: The segment which is identified must be accessible so that the firm can
reach it through suitable means of existing marketing institutions, such as sales force,
advertising media and channel of distribution. In this connection, the market segment
should be sufficiently homogeneous in terms of geography, demography and socio-
economic characteristics to enable the firm to reach it conveniently and efficiently.
iii. Differentiable: The segments should be identifiable and divisible. There should be
differences in buyers’ needs, characteristics and behavior fir dividing the market in
smaller groups. There must be clear cut basis for dividing customers into meaningful
homogeneous groups that respond differently to different marketing mixes.
iv. Actionable: The segment after fulfilling the above three conditions must be
worthwhile for cultivating and exploring it. It must have sufficient buying power i.e.
willingness to buy and ability to pay. Simply, wishing or wanting a particular product
may be relevant for firm’s long range strategy, but for the present it may not hold
much relevance. Thus, the demand prospects should be sufficiently bright and
profitable too.
v. Substantial: Finally, each market segment must be large enough to justify the
investment required to market the product in it. Unless the size of the segment is large
enough, the marketing efforts cannot yield rich dividend.
7 Define macro environment. (2)

Ans.: The macro environment includes all the factors that can influences the organization and its
marketing mix but that are out of their direct control. A company does not generally influence
any laws, population or economy. It is continuously changing and the company needs to be
flexible to adapt. According to Philip Kotler, “Macro Environment consists of the large social
forces that affect the micro environments – demographic, economic, natural, technological,
political and cultural forces
Chapter four: Marketing Information System
8 Explain the meaning and components of internal record system. (10)

Ans.: To spot important opportunities and potential problems, marketing managers rely on
internal reports of orders, sales, prices, costs, inventory levels, receivables, and payables. Internal
record system is one of the component of marketing information system. It is considered as a sub
system of marketing information system. It collects various information which are scattered
within the organization. Most of the information provided by the internal records are historical in
nature.
Some major components of internal record systems are as follows:
The Order-to-Payment Cycle: The heart of the internal records system is the order-to-payment
cycle. Sales representatives, dealers, and customers send orders to the firm. The sales department
prepares invoices, transmits copies to various departments, and back-orders out-of-stock items.
Shipped items generate shipping and billing documents. Because customers favor firms that can
promise timely delivery, companies need to perform these steps quickly and accurately.
Sales Information Systems: Marketing managers need timely and accurate reports on current
sales. Nowadays, many companies operate a sales and inventory data warehouse that captures
data on every item for every customer, every store, everyday and refreshes it every hour.
Marketers must carefully interpret sales data, however, to avoid drawing wrong conclusions.
Databases, Data Warehousing, and Data Mining: A customer database is an organized collection
of comprehensive information about individual customers or prospects that is current, accessible,
and actionable for lead generation, lead qualification, sales, or customer relationship
management. Database marketing is the process of building, maintaining, and using customer
databases and other databases such as products, suppliers, resellers to contact, transact with, and
build relationships with customers. Information captured by the company is organized into a data
warehouse where marketers can capture, query, and analyze data to draw inferences about
individual customers’ needs and responses. Marketing analysts use data mining to extract from
the mass of data useful insights about customer behavior, trends, and segments.
Chapter five: Buyer Behavior Analysis
9 What is consumer behavior? (2)

Ans. Consumer Behavior is the sum total of the decision taken by the consumers concerning the
search, selection, purchase, usage, evaluation and disposal of the product and service, which are
expected to satisfy their needs.
In another words, consumer behavior can be defined as the conduct of the individual directly
concerned with making decisions as to the investing the time, money and energy to acquire and
use goods and services of their choice and need. Consumer Behavior studies the various basis,
i.e. personal, psychological, situational, social, etc. to determine for what reasons consumers
purchases, consumes and disposes of the products and services.
Chapter six: Product Decisions
10 Explain the trading down and trading up strategies with suitable example. (10)
Ans.: Two popular product line expansion strategies are trading down and trading up strategies
which can be explained as follows:
Trading down or downward stretch: If any company adds new product item in their product line
which is low price low quality in comparison to their existing products, it is known as trading
down or downward line stretching strategy. Companies sometimes introduce new products with
an objective of communicating an image of technical excellence and high quality, and locate at
the upper end of the market. Subsequently, the company might stretch downwards due to
competitor’s attack by introducing a low-end product in response to competitive attack, or a
company may introduce a low-end product to fill up a vacant slot that may seem attractive to a
new competitor. Another possibility is that market may become more attractive at low-end due to
faster growth rate. Downward stretch sometimes poses risks. Low-end competitors may attack by
moving into high-end, or for a prestige-image company introduction of a low-end model may
adversely affect its product-image.
For example, Tata Nano car offered to price sensitive customer by Tata company is best example
of trading down. Similarly, CG Foods Private limited, producer of popular brand Wai Wai has
added Mama instant noodle which is low price low quality in comparison to Wai Wai is the best
example of trading down strategy.
Trading up or upward stretch: If any company adds new product item in their product line which
is high price high quality in comparison to their existing products, it is known as trading up or
upward line stretching strategy In this situation, companies operating at low-end may opt to enter
high- end because of better opportunities as a result of faster market growth, or the need to create
an image of full line company. There may be certain risks associated with upward line stretching.
These may include prospective customers’ perceptions that the newcomer in the high-end
category may not produce high-quality products, or competitors already well established in the
high-end market may retaliate by introducing items in the low-end of the market.
For example, Maruti Udyog introduced its medium-priced models such as Maruti Zen, Maruti
Esteem, Wagon R, Alto, and Swift after it had entered the market with its low-end Maruti 800
and Maruti Omni. Toyota introduced its Lexus luxury car as a standalone product (with no
outward link to Toyota) for just this very reason. It did not want it to be in any way affected by
Toyota’s no-doubt superb, but mass market image. Similarly, a college affiliated with Tribhuvan
University, which has been offering BBS is now going to offer BBA, BHM or BBM with
premium fee structure it is called trading up strategy because BBA, BHM or BBM is considered
as high price high quality program in comparison to BBS.
11 What is consumer product? (2)

Ans.: The product that the consumers buy for the purpose of consumption or use are called
consumer product. On the basis of buying behavior, consumer goods can be divided into four
classes as convenience goods, shopping goods specialty goods and unsought goods. According to
the nature of the goods, they can be classified into two types as perishable goods and durable
goods, necessities and luxury goods.
12 What is test marketing? (2)

Ans.: Test marketing is essentially a limited introduction in some carefully selected geographic
area that is viewed as representing the intended market. Test marketing is a sample launching of
the entire marketing mix. The aim is to assess how large is the market and determine the
reactions of consumers and resellers in an authentic setting. Most companies use test marketing
basically to lessen the risk of product failure. Test marketing can furnish valuable information
about buyers, dealers, and effectiveness of promotional efforts.
Chapter seven: Price Decisions
13 What is price skimming? (2)

Ans.: Price skimming refers to charging the highest possible price that a sufficient number of
most desirous customers for the product will pay. This approach offers the most flexibility to a
pioneer in the product’s introduction stage because the demand tends to be inelastic during most
of this period due to the absence of competitors. Skimming approach generates much needed
cash flows to offset high cost of product development. Most companies, who introduce
successful pioneering products, usually adopt price-skimming approach.
Chapter eight: Place Decisions (Distribution)

14 Discuss the channel structure for industrial products. (10)
Ans: The products, which are used by industrial firms to produce other finished goods, are called
industrial products. Raw materials, machines, equipment, management materials, operating
supplies and business services, etc. include in industrial products. The channel structure used for
consumer goods cannot be used for industrial goods. The channel for sale and distribution of
such goods depends on type and nature of industrial goods, necessity, number of users,
geographical distance etc.
The structure of distribution channel for industrial products can be mentioned as follows:
1. Zero Level Channel: (Manufacturer.......Industrial User)
In this channel the manufacturers directly sell their products to industrial users without the help
of intermediaries. Large quantity of industrial goods, big installations machines, costly
equipment, raw materials and important machine parts re directly sold to the industrial users. As
the number of customers of such goods remains low and such goods are used in certain
geographical areas and are costly, their sales become easy and possible through zero level
channel. Manufacturers of planes, big generators, ships, buses etc. produce the goods according
to the order of the customers and contact directly to them. This channel is less costly and more
effective in distribution of industrial goods.
2. One Level Channel: (Manufacturer.......Industrial distributor........Industrial user)
Less costly office materials, equipment, operational supplies, construction materials, spares and
parts etc. are sold through industrial distributors. In this channel, only one level intermediary
remains between producers and users. The manufacturers sell their products to industrial
distributors and the industrial distributors sell them to industrial users.
3. One Level Channel: (Manufacturer.......Agent........Industrial User)
The other channel to sell industrial goods is one level channel in which goods are sold to users
through agents and not by industrial distributors.. The manufacturers who need to remain busy in
production cannot contact customers living in different places. So, they appoint agents for selling
their goods. The agent brings goods from producer and sell them to industrial users. But the
agents do not take tights and ownership of the goods. They get commission on the basis of
quantity they sell. The service of agents becomes very important to bring new goods in market.
They can identify potential customers and establish contact with them.
4. Two Level Channel: (Manufacturer......Agent.....Industrial distributor.....Industrial user)
This is the longest channel for distribution of industrial goods. Two intermediaries, i.e., agent and
industrial distributor remain between manufacturers and users. Manufacturer's agent contacts
industrial distributors and industrial distributors sell the goods to industrial users. This two level
channel becomes useful to sell operating supplies, small spares and parts and other industrial
goods that need massive distribution
15 Give the meaning of order processing. (2)

Ans.: Order processing is an importation component of the distribution system. It is considered as
a key to customer service and satisfaction. Order processing mainly includes: receiving order,
recording order, filing order, executing order or assembling of products for dispatch, credit and
collection. Thus, it concerns with processing the orders quickly, accurately, and efficiently.
16 What is intensive distribution? (2)

Ans.: Intensive distribution is a channel strategy that seeks to make products available in as many
appropriate places as possible. This strategy is used for fast moving consumer goods and
products, which are of high and frequent demand, like food items and daily use personal care
product categories.
For example: Consumer product such as soap, toothpaste, sugar, biscuits, noodles etc. use
intensive distribution. Unilever Nepal objective for its Lifebuoy bathing soap is to make it
available in majority of the Nepalese markets.
Chapter nine: Promotion Decisions
17 What is promotion mix? What are its components? Explain. (10)

Ans.: Promotion mix of marketing is concerned with marketing communication mechanism.
Product provides benefits, distribution creates place and time utility, and pricing determines price
of products, whereas promotion gives information to potential customers about these elements.
Hence, promotion mix includes the exchange of information take place between buyer and seller.
The effort to create demand for products by providing adequate information about quality,
features, natures and price of products to potential customers is promotion. Promotion function is
directed towards creating demand by providing adequate information about products to the
consumers and middlemen in order to increase sales volume. What the marketer has done to
satisfy the need of consumers is communicated by promotion of the products.
Promotion is mainly concerned with the efforts to influence target market. Promotional program
is designed to give information about goods or services to prospective customers to make them
confident and to remind them of the goods or services. However its ultimate objective is to
influence or bring change in customers' thinking, attitude, behavior and belief. In clear meaning,
objective of promotion is to influence prospective customers, arouse curiosity in them about
goods or services, receive purchase order from them and make them real customers.
Components of Promotion
Personal selling, advertising, sales promotion, publicity, public relation etc. include in promotion
mix. Marketers may use all the methods of promotion in order to inform target market, reassure
and remind customers of their goods or services.
Personal selling
To encourage or persuade potential customers on individual basis to buy goods or services is

called personal selling. Business firms make their efforts to reach public and sell their products.
In this, sales representatives presents goods to potential customers and persuade or motivate them
to buy. This is very old and popular technique.
Advertising
The other method of promotion is advertising. This is used as non-personal mass communication.
Well-known sponsors use advertisement by paying money to make customers know about their
goods or services. Such advertisements are communicated through radio, TV, newspapers etc.
Sales promotion
Sales promotion is used as complementary of advertisement and in coordination with personal

selling. Sales promotion is often used as short-term strategy in order to achieve certain objective
in target market. Trade fair, exhibition, display, sample distribution, coupon, gift etc. programs
are conducted in sales promotion.
Publicity
Sales promotion can also be done through publicity. Like advertisement, this is also mass
communication process to create demand for goods or services, but cost is not paid for it.
Business firms hold press conference, photography, news broadcasting, publicity etc. and
distribute different advertising materials to pressmen. News presentation may create positive
attitude in customers.
Public relations
Public relation is more target-oriented method than others. This is such a planned effort by which
the attitude, thought, idea, and belief of target customers is influenced. Effort for public relation
is reflected in newspapers, annual reports etc.
18 What do you understand by the term ‘public’ in marketing? (2)

Ans.: A public is any group that has an actual or potential interest in or impact on an
organization’s ability to achieve its objectives. There are seven types of publics. They are:
financial publics, media publics, local publics, internal publics, government publics, citizen-
action publics and general public.
19 What is integrated marketing communication? (2)

Ans.: Integrated marketing communications is a concept of marketing communications planning
that recognizes the added value of a comprehensive plan that evaluates the strategic roles of a
variety of communications disciplines – for example, general advertising, direct response, sales
promotion, and public relations – and combines these disciplines to provide clarity, consistency,
and maximum communications impact
Chapter Ten: Emerging Concepts of Marketing
20 Define the term green marketing. (2)
Ans.: The term green marketing refers to the planning, development and promotion of products
or services that satisfy the needs of consumers for quality, output, prices and services without a
negative effect on the environment with regard to the use of raw material, the consumption of
energy, etc.
PAPER 7: INCOME TAX & VAT
1. Strong Cement Limited is a company engaged in manufacturing and sale of premium grade
cement. It provides employment opportunity to 400 people. The company is listed in Nepal
Stock Exchange, it has domestic as well as export sales. Following is the provisional Income
Statement of the company for the year ended Ashad 31, 2078.
Particulars Amount in NPR

Income:
Export Sales 9,000,000.00
Domestic Sales 6,000,000.00
Dividend Received (Net of Tax) 150,000.00
Investment Income 150,000.00
Total Income 15,300,000.00
Expenditure:
Cost of Materials Consumed 4,500,000.00
Manufacturing Expenses 900,000.00
Employee Cost 1,300,000.00
Selling and Administrative Expenses 2,000,000.00
Interest and Bank Charges 1,000,000.00
Exchange Loss 250,000.00
Depreciation 450,000.00
Total Expenditure 10,400,000.00
Profit Before Tax 4,900,000.00
Additional information:
i. Cost of material consumed
For export sales: NPR 2,700,000
For local sales: NPR 1,800,000
ii. Selling and Administrative Expenses include NPR 200,000 donation given
to Provincial level Covid Fund and NPR 350,000 given for construction of
Private hospital.
iii.You are given following information with regards to some expenses.

• NPR 1,50,000 included in employee cost as staff welfare is personal
expenses of directors.
• Manufacturing expenses include NPR 40,000 for electricity bill of
previous year.
• Selling and Administrative Expenses include NPR 40,000 for business
promotion which is not related to business.
iv. Exchange loss is fully realized and is related with import of raw materials.
v. From the tax account of the company, details of property, plant and
equipment are as follows:
Block Opening WDV including Unabsorbed Repair & Maintenance

Expenses of previous year (Rs.)
A 500,000
B 400,000
C 500,000
D 2,000,000
Company has received tax assessment order from IRD for income year 2076/77 and the
company did not file any appeal to concerned authority. As per the assessment order,
following depreciation relating to income year 2076/77 is not allowed as deductible
expenses due to unsupported purchase capitalized on 2076/06/10.
Company has claimed depreciation on such capitalization as per the rates so provided by
Income Tax Act, 2058.
Particulars Disallowed Depreciation (Rs.)

Block A 15,000
Block B 20,000
Block C 30,000
Block D 45,000
No purchase and sales of depreciable assets is done during the year. The company desires
to claim additional depreciation as per Income Tax Act from this year onwards, which is
available to a special industry. This claim is only for tax purpose.
vi. Investment Income includes income from sale of land.
You are required to calculate Assessable income & Income Tax Liability of Strong Cement
Limited for the Income year 2077/78.
2. Calculate the income tax liability of Mrs. Jonita Shakya for IY 2077-78 on the basis of below detail.
1. Basic Salary: Rs. 305,000 per month.
2. As per requirement of Contributed Social Security Act, 20% of basic salary is
contributed by the employer and 11% deducted from her salary and total of 31%
deposited to Social Security Fund.
3. One month basic salary is provided as festival allowance,
4. 5% of basic salary is provided as performance based allowance per month,
5. Employer has provided her one i-PAD worth Rs. 125,000 for her outstanding
performance.
6. Residence Allowance : Rs. 24,500 per month
7. Medical Allowance : 2% of her basic salary per month
8. Residence has one employee arranged by the employer for her domestic help with
cost of Rs. 4,500 per month.
9. Being in core management team, she has attended 21 meetings during the year and
received Rs. 4,000 per meeting.
10. The cost of education for her son and daughter costing Rs. 24,000 per month paid by
her employer.
11. The cost of life insurance policy per year is Rs. 110,000, 50% reimbursed by the
employer.
12. The cost of Toyata car provided to her official & personal use is Rs. 85 lacs.
13. She has donated Rs. 105,000 to Sahara Nepal, which is a tax exempted entity.
3. Mr. Apurva Das has 250 shares of Nabil Bank Ltd. from IPO. Bonus shares has been
distributed 300% (100% before Income Tax Act and remaining thereafter) till now. He
became a non-resident for income year 2072-73. The market value at the time of introduction
of the Act was Rs. 1,800 and at the time of becoming non-resident was Rs. 2,600. Quoting
the related criteria for deemed disposal of shares, advise him if any tax liability arises on
those shares for income year 2077-78.
4. Anupama Herbal Industries Private Limited is a manufacturer of herbal soaps established in

remote area since 2071. After 7 years of operation in Baisakh 2078, Anupama Herbal
Industries Private Limited sold the entire plant to Jumla Cottage Industries which was
established in 2075. Management of the Jumla Cottage Industries is of the view that they will
receive the concession under section 11 for 10 years to come with effective from Baisakh
2075. Please advise the management with appropriate provisions of the Income Tax Act.
5. Discussing the relevant provisions of income tax act, 2058, and rules 2059, advise whether
the following transactions attract withholding of tax or not? If yes mention the withholding
tax rates and whether it is final or adjustable.
i. Commission paid by the resident employment company to non-resident person.

ii. Stall charge paid to Trade Fair India by Nepal Craft Paper Ltd. to participate in Indian
National Trade Fair 2020.
iii. Payment for carriage service to vehicle provider in rent for carriage service.
iv. Interest paid by bank to tax exempt NGO.
v. Premium paid by resident person to non-resident insurance company for life
insurance.
6. Mr. Udit, a resident natural person, is a musician deriving income from concerts performed
from various countries outside Nepal. During Financial Year 2077/78, he performed concerts
in India. Details of his assessable income and tax paid in the country as aforesaid where the
concerts were given are: Income Tax India Rs. 1,000,000 Rs. 300,000 Also, he earned Rs.
5,00,000 in Nepal during the financial year 2077/78. Assuming that he has chosen to be
couple, find his tax liability on his total income and amount for foreign tax credit available to
him under section 71(1) for the income year 2077/78.
7. Quantify the value of consideration as per Section 27 of Income Tax Act, 2058 under the
following circumstances:
i) Mr. Ram gave his smart TV for settlement of payables to a shopkeeper. Mr. Ram had
purchased the TV for Rs. 45,000 three years back, and the market value at the time of
handing over to the shop was Rs. 25,000.
ii) XYZ limited provides free motor vehicle costing Rs. 15,000,000 to Mr. Ganpath, a
government official.
iii) PQR Limited provides two security personnel free of cost to Mr. Mohan, a marketing
manager, for which the company pays Rs. 240,000 for a year.
iv) K&K Ltd. provides free accommodation to a public director of the Company, for which
the Company pays annual rent Rs. 500,000.
v) K&K Ltd. provides its own bungalow costing Rs. 20,000,000 as free accommodation to a
local leader, normal rent for the bungalow is Rs. 100,000 per month.
8. Sitaram Poudel has received a notice from Tax officer on 1 Chaitra 2077 for submission of
st
Income Tax Return for income year 2077-78 by 1 Baishakh 2078. He has been planning to
st
migrate to Australia. Sitaram Poudel’s contention is he need not have to submit tax return
since he has income from employment only, and due date of filing income tax return is also
end of Asoj.
Stating the relevant provisions of Income Tax Act, 2058, please advise Sitaram Poudel on the
above matter.
9. Saina and Safina decided to jointly invest Rs. 2,000,000 and Rs. 3,000,000 respectively. Out
of the collected amount, they bought land for Rs. 4,500,000 with additional registration and
other expenses Rs. 500,000. They sold the land for Rs. 8,600,000, out of which, they spent
Rs. 600,000 for commission and other expenses. Calculate their taxable income as per
Income Tax Act, 2058?
10. Write the tax implications on the following cases as per Income Tax Act, 2058 :
i. Smooth Telecom Pvt. Ltd. deposits all gratuity amounts into an Approved Retirement
Fund. On 30 Bhadra, 2077, the Fund paid for gratuity Rs. 30 lakh to Mr. Ram upon
termination of his job.
ii. Mr. Shayam owns a truck for providing transportation services. He is paying annual tax
as per Income Tax Act, 2058. During Ashwin 2078, he has not issued any invoice but has
earned transportation services fee amounting to Rs. 2 lakh.
iii. Kathmandu Metropolitan City (KMC) has an agreement with Kalimati Users Committee
for drain construction; the agreement was made on 30 Baishakh, 2078. KMC paid Rs. 70
lakh to the Committee on 10 Ashwin, 2078 after completion of the works.
iv. An NGO having tax exempt certificate, has booked income from house rent Rs. 500,000
during the year 2077/78.
v. A Pvt. Ltd. has booked as income from sale of Car Rs. 300,000 on Ashwin, 2078. The
Company is registered with the objectives of providing transportation services.
11. Horizon Pvt. Ltd. entered into a publication copyright contract on 1st Chaitra, 2077 with
Florish Pvt. Ltd. to publish a book. Royalty is fixed Rs. 1,200,000 for 2 years and 10 months
with maximum copies of 10,000 per year. Find the deductible expenses for three years for tax
return.
12. As on 1st Baishakh 2078 French international organization "Humanity Foundation" registered
in France approach social welfare council (SWC) and entered General agreement and project
agreement to conduct various social activities in western Nepal through a local partner.
Humanity Foundation set up its country office in Kathmandu and obtain tax exemption
certificate and PAN from Inland Revenue office. The country director said that the
Foundation is registered in France and always resident over there and it cannot be again
resident in Nepal because it is not incorporated in Nepal.
13. Write short notes of the following with reference to Income Tax Act, 2058.
1) Recovery of Tax from Agent of Non-resident
2) Departure Prohibition Order
3) Taxpayers' Rights
4) Trustee
14. Write short notes of the following with reference to Income Tax Act, 2058.
a. Controlled Foreign Entity
b. Non Business Chargeable Asset
c. Underlying ownership
d. Royalty
15. Not Only For Profit Pvt. Ltd., Kathmandu imports luxury cars and track-laying tractors and
sells in Nepal. Following details pertain to Ashwin, 2078.
a) The showroom price of luxury car is Rs. 5 million. Two percent Dashain discount was
offered on sale of the cars. 10 cars were sold to VAT registered customers and 6 cars were
sold to individual customers not registered in VAT.
b) The showroom price of Track-laying tractors is Rs. 2.5 million. Two percent Dashain
discount was offered on the tractors. 10 tractors were sold to individual customers who were
not registered for VAT.
c) The company offers additional 5% discount for prompt payment. 5 customers purchasing
luxury car and 6 customers purchasing tractor made prompt payment and benefitted from
the discount offer.
d) Import price of luxury cars was Indian Rupees (INR) 2 million per car. Total transportation
expenses upto custom point was INR 200,000 (paid to Indian transporter) and total
insurance premium Rs. 200,000 was paid to an insurance company in Nepal. 16 cars were
imported in the same month and sold as above.
e) Import price of per unit Track-laying tractors was INR 1.5 million. Total transportation
expenses up to custom point was INR 100,000 (paid to Indian transporter) and total
insurance premium Rs. 50,000 was paid to an insurance company in Nepal. 10 tractors were
imported in the same month and sold as above.
f) During the month, Rs. 90,000 was spent on mobile telephone calls, of which 40% relates to
private calls.
g) On 30 Ashwin 2078, office equipment was purchased for Rs. 1,000,000.
h) Custom duty was Rs. 41,376,000 for the luxury cars in total.
i) The company also constructed a showroom in the month of Ashwin, 2078. The total cost of
construction was Rs. 6 million, which was constructed by a VAT unregistered builder.
j) All of the figures are exclusive of VAT and use exchange rate @ Rs. 1.6015 per INR.
Calculate the amount of VAT payable/receivable by the company for Ashwin 2078.
16. X Ltd. was incorporated and registered with VAT. During the month of Kartik 2078 the
company had following transaction:
NPR.
Purchases/Expenses:
Purchase of raw materials- 175,000 (for taxable
transaction)
Electricity expenses 25,000.00
Cold drinks 12,000.00
Diesel 20,000.00
LP Gas 7,000.00
Printing and stationery 35,000.00
Services availed from UK 100,000.00
Sales
Taxable sales 500,000.00
Exempted sales 25,000.00
Export sales 10,000.00
All purchases, expenses and sales are exclusive of VAT.
The company had opening balance of VAT credit of NPR.
1,150,000
You are required to calculate VAT payable or VAT credit available for the month of Kartik
2078.
17. Itahari Bhatbhateni Ltd. has the following amounts of sales and purchases excluding VAT.
Can VAT refund be claimed in Baisakh return?
Sales Purchase % of export sales to

Month
total sales
Kartik 500,000.00 700,000.00 43%
Mangsir 800,000.00 800,000.00 65%
Poush 700,000.00 900,000.00 36%
Magh 800,000.00 900,000.00 42%
Falgun 300,000.00 900,000.00 60%
Chaitra 700,000.00 900,000.00 42%
Baisakh 600,000.00 900,000.00 20%
18. ABC Oil & Ghee industry having factory at Lalitpur, Nepal producing Mustard oil, Vanaspati
ghee and other processed cooking oil in Nepal as given below. The sales of ABC Oil & Ghee
industry to VAT registered and unregistered person are in the ration of 40% and 60%
respectively. The ABC Oil & Ghee industry had following sales transaction during the month
of Falgun, 2077:
(Amount in Rs.)
S.N. Particulars Sale
1. Mustard oil- (Domestic mustard seeds) 6,00,000
2. Mustard oil- (Imported mustard seeds) 4,00,000
3. Vanaspati Ghee- (Domestically produced) 4,00,000
4. Vanaspati Ghee- (Imported) 6,00,000
5. Other processed cooking oil 10,00,000
Total 30,00,000
Whereas XYZ oil industry having factory at Bhaktapur import processed edible cooking oil in
bulk quantities and refill it in small packages before sale. The XYZ oil industry had following
sales transaction during the month of Falgun, 2077:
(Amount in Rs.)
S.N. Particulars Sale
1. Refilled small oil packages (Imported processed edible cooking oil in 10,00,000
bulk quantities)
Total 30,00,000
Required:
Compute the amount of VAT refund available if any to ABC Oil & Ghee industry and XYZ Oil
Industry with reference to the provision of schedule I of VAT Act.
19. Answer the following with reference to Value Added Tax Act/Rules, whether the statements
are correct or not, with reasons.
i. While filing an appeal to Revenue Tribunal, the undisputed amount of the assessed Tax
due shall have to be deposited and fifty percent of the amount of the Tax in dispute plus
the amount of fine shall have to be deposited.
ii. In case the person has not made the accounts available for inspection under section 16
(1), the penalty amount is Rs. 5,000 for each time.
iii. The color of tax registration number plate for registered person shall be green, for
unregistered person doing Taxable transaction shall be yellow and for person dealing in
tax exempted goods and services shall be white.
iv. Nepal Government is not required to collect Value Added Tax even if it engages in
supply of goods or services which attract VAT.
v. No Tax is to be levied for a supply of service by a person residing in Nepal to a person
outside Nepal who has no business transaction in Nepal.
20. Write short notes on the basis of VAT Act, 2052:

a) Tax officer
b) Electronic invoice
c) Refund of VAT paid on purchase by foreign tourist
d) Suspension of transaction of registered person
ANSWERS:
1.
Computation of Taxable Income & Tax Liability:
Particulars Export Local Investment Total Remarks
Income
Income 9,000,000.00 6,000,000.00 - 15,000,000.00
Dividend Received - - - - W.N.1
(Net of Tax)
Investment Income - 150,000.00 150,000.00 W.N.2
Total Income 9,000,000.00 6,000,000.00 150,000.00 15,150,000.00
Expenditure:
Cost of Materials 2,700,000.00 1,800,000.00 - 4,500,000.00 W.N.3
Consumed
Manufacturing 516,000.00 344,000.00 - 860,000.00 W.N.4
Expenses
Employee Cost 690,000.00 460,000.00 - 1,150,000.00 W.N.5
Selling and 966,000.00 644,000.00 - 1,610,000.00 W.N.6
Administrative
Expenses
Interest and Bank 600,000.00 400,000.00 - 1,000,000.00 W.N.7
Charges
Exchange Loss 150,000.00 100,000.00 - 250,000.00 W.N.7
Depreciation 346,800.00 231,200.00 - 578,000.00 W.N.8
Total Expenditure 5,968,800.00 3,979,200.00 - 9,948,000.00
Taxable Profit 3,031,200.00 2,020,800.00 150,000.00 5,202,000.00
Tax Rate 12.00% 16.00% 25.00% W.N.9
Tax Liability 363,744.00 323,328.00 37,500.00 724,572.00
Working Notes:
1. Dividend received is net of tax and is final withholding and hence will not be included
in taxable Income.
2. Investment Income is the income from sale of Land & will be taxed at 25%, hence will
be calculated separately.
3. Cost of Materials Consumed
Particulars Amount (NPR)
Cost of Material for Export Sales (60% of total cost of Material) 2,700,000.00
Cost of Material for Local Sales (40% of total cost of Material) 1,800,000.00
Total 4,500,000.00
4. Manufacturing Expenses
Total Manufacturing expenses 900,000.00
Less: Disallowed Expenditure
Electricity Expenses (Disallowed due to prior period exp. U/s 13) (40,000.00)
Allowable Expenditure 860,000.00
For Export Sales (60%) 516,000.00
For Domestic Sales (40%) 344,000.00
5. Employee Expenses:
Total Employee expenses 1,300,000.00
Staff welfare (Disallowed personal exp. U/s 13) (150,000.00)
Allowable Expenditure 1,150,000.00
6. Selling & Distribution Expenses
Selling & Distribution Expenses 2,000,000.00
Business Promotion (Disallowed due to Not related to business. U/s 13) (40,000.00)
Donation given to construction of hospital (350,000.00)
Donation given to Covid fund is fully allowed -
Allowable Expenditure 1,610,000.00
Donation paid to tax exempt entity can be claimed as deductible expenses within the limit
prescribed under section 12 of Income Tax Act. As the Private Hospital is not a Tax
Exempt Entity, donation paid Rs. 350,000 can not be claimed as deductible expenses
under Income Tax Act.
7. Interest Expenses & Exchange Loss
Particulars Int Exp (NPR) EX. Loss Exp (NPR)
Total Interest expenses 1,000,000.00 250,000.00
Allowable Expenditure 1,000,000.00 250,000.00
For Export Sales (60%) 600,000.00 150,000.00
For Domestic Sales (40%) 400,000.00 100,000.00
8. Depreciation Expenses
Particulars Block-A Block-B Block-C Block-D Total
Opening WDV As per 500,000.00 400,000.00 500,000.00 2,000,000.00 3,400,000.00
Tax
Disallowed in Opening 285,000.00 60,000.00 120,000.00 255,000.00 720,000.00
WDV (8.1)
Allowable/Adjusted Op. 215,000.00 340,000.00 380,000.00 1,745,000.00 2,680,000.00
WDV
As per Tax Assessment
order
Additions - - - - -
Sales - - - - -
Depreciation Base 215,000.00 340,000.00 380,000.00 1,745,000.00 2,680,000.00
Rate of Depreciation 5% 25% 20% 15%
Depreciation (Normal) 10,750.00 85,000.00 76,000.00 261,750.00 433,500.00
Depreciation (Additional) 3,583.33 28,333.33 25,333.34 87,250.00 144,500.00
Total Depreciation 14,333.33 113,333.33 101,333.34 349,000.00 578,000.00
For Export Business 346,800.00
(60%)
For Export Business 231,200.00
(40%)
8.1 Calculation of Disallowance in Opening WDV

Particulars Block-A Block-B Block-C Block-D Total
Disallowed Depreciation (A) 15,000.00 20,000.00 30,000.00 45,000.00 110,000.00
Depreciation Rate (B) 5% 25% 20% 15%
Capitalized Amount [C=(A/B)] 300,000.00 80,000.00 150,000.00 300,000.00 830,000.00
Disallowed Amount (C-A) 285,000.00 60,000.00 120,000.00 255,000.00 720,000.00
8.2 Since the Company did not claim additional depreciation in previous year, only
depreciation as per the rates provided by Act is used for backward calculation of
capitalized amount.
8.3 As the company did not file any appeal in assessment order of IRD, it is established
that the company accept the disallowed depreciation and capitalization of concerned
fixed Assets.
8.4 As per Schedule 2 of Income Tax Act, Special Industry can claim additional 1/3 rd
depreciation on depreciable blocks of assets.

9. Tax Rate
Export Domestic Investment
Particulars Remarks
Income Income Income
Section 2 of
Normal tax rate 25% 25% 25%
schedule
11(2B) for special
Applicable tax rate 20% 20% 25%
industry
u/s 11 (3) (Ka) for
Rebate-1 for employing 300+
16% 16% - Spl. Industries,
employees (A) 20%
reduced rate
Rebate-2 for Listed W.N. 9.1 reduced
17% 17% -
Company (B) rate
Rebate for Export from W.N. 9.1 Section
12% -
manufacturing industry 11(3E) reduced rate
Selection of Rebate 12% 16% 25%
Net Applicable Tax Rate 12% 16% 25%
9.1 Available Exemptions:

As per section 11 of Income Tax Act, 2058 below are the exemptions available to
Strong Cement Limited being a Special Industry –
i. 20% rebate for special industry as per section 11(3)(Kha)(Kha) & the industry
availing this rebate will be eligible to enjoy & avail another rebates available in
section 11.
Accordingly,
ii. The Company employs more than 400 Nepali employees whole year. So, it is
entitled for 20% tax rebate as per section 11(3)(Ka).
ii. The Company has export sales. So, 25% tax rebate for export Income only as per
section 11 (3anga).
iii. The Company is a listed production based Company. Hence, it is entitled to 15%
rebate as per section 11 (3chha).
Selection of Tax Exemption
As per section 11(5), if more than one tax exemption is available for the same
income, then only one tax exemption should be availed as per choice of the
Taxpayer.
Hence, the Company should choose one of the exemptions mentioned above.
2)
Calculation of Tax Liability of Mrs. Jonita shakya for FY 2077.78
Particulars Amount Unit Total Amount
(Rs.)
Basic Salary 305000 12 3,660,000.00
Contribution to Social Security Fund (20% of basic 61000 12 732,000.00
salary contributed by employer)
Festival Allowance 305000 1 305,000.00
Performance Allowance (5% of basic salary each 15250 12 183,000.00
month)
Gift from Employer 125000 1 125,000.00
Residential Allowance 24500 12 294,000.00
Medical Allowance (2% of basic salary) 6100 12 73,200.00
Cost of Domestic Helper 8000 12 96,000.00
Meeting Allowance (Final Withholding, not included in -
assessable income)
Cost of Education of Children paid by employer 24000 12 288,000.00
Cost of life policy reimbursement by employer 55000 1 55,000.00
Quantification of Vehicle Facility (0.5% of 8500000) 42500 1 42,500.00
Assessable income 5,853,700.00
Reduction
Donation (Min below three conditions) 75,000.00
5% of AI (5% of 5883700) 292,685.00
Rs. 100,000 100000 100,000.00
Re. 105,000 actual payment 105000
Life Policy (Minimum of below two condition) -
Rs. 25,000 25000 25,000.00
Actual paid for her and her child (55000) 55000
Approved Retirement Fund (Management of below three 300,000.00
conditions) (Social Security Fund is ARF)
Rs. 300,000.00 300000 300,000.00
1/3rd of AI 1,951,233.33
Actual Payment (Rs. 305000*31%*12) 1134600
Taxable Income 5,478,700.00
Assuming She claims as Couple
No social security tax for 450,000 -
10% for Next 100,000 10,000.00
20% for Next 200,000 40,000.00
30% for Next 4728700 1,418,610.00
20% Surcharge for more than 20 lacs 208,722.00
(3478700*30%&20%)
Total Tax 1,692,332.00
Less: 10% rebate for female 169,233.00
Net Tax 1,523,098.00
3.
According to Section 40 (3) (Cha), if a person turns to be a non-resident; his/her assets, except
the land or buildings situated in Nepal, are deemed to have made a disposal
So, Mr. Das has made a disposal of the shares. The tax liability is calculated as below:
S. No. Particulars Workings Amount Rs.

1. Incomings 1000 shares *Rs. 2,600 (WN1) 2,600,000.00
2. Outgoings 500 shares * Rs. 1,800.00 (WN2) 900,000.00
3. Gain Incomings – Outgoings 1,700,000.00
4. Deduction Under Section 36 Nil
5. Net Gain 1,700,000.00
6. Tax Rate 5% (WN3) 85,000.00
Workings:
i. Original Shares 250 + 300% bonus shares i.e 750 = 1000 shares. Market value is
taken for calculating incomings.
ii. Outgoings for assets of before the introduction of the Income Tax Act is taken as
the market value at the time of the introduction of the Income Tax Act.
iii. The tax rate for listed shares is 5% as per Section 1 (4) of schedule 1 of
the Act.
4.
In cases when the industries are entitled to time-bound exemptions/concessions under Sec 11,
and the industries are operated after acquiring assets of industries that have already entertained
such facilities; then the period of such time-bound concessions shall be considered after
including the period of use of such assets by previous industries. In this case Jumla Cottage
Industries is entitled to effective applicable tax rate till IY 2080/81 up-to 10 years only. Since the
concession period shall be counted based on the utilization of assets of the industry, not on the
status of the industry.
5.
i. Advance tax withholding at the rate of 5% is required for the commission paid by
the resident employment company to non-resident person and this is final
withholding.
ii. No tax withholding required for payment made to book stall in foreign trade fairs.
iii. Tax withholding at the rate of 1.5% if the payment is against VAT invoice
otherwise 2.5%. Final withholding to natural person and adjustable to others.
iv. At the rate of 15% which is final withholding.
v. At the rate of 1.5% which is final withholding.
6.
Assuming there is no employment income,
Step 1: Calculation of Tax Liability before Foreign Tax Credit
Assessable Income from Nepal 500,000

Assessable Income from India 1,000,000
Total Assessable Income
(Taxable/Balance Taxable Income) 1,500,000
Tax Liability
1st Rs. 450,000 0% -
Next Rs. 100,000 10% 10,000
Next Rs. 200,000 20% 40,000
Next Rs. 750,000 30% 225,000
Tax Liability before FTC 275,000
Step 2: Calculation of Average Tax rate in Nepal
Tax Liability before Foreign Tax Credit (A) 275,000

Taxable Income in Nepal (B)
1,500,000
Average Tax Rate in Nepal [A/B * 100]
18.33%
Step 3: Calculation of Eligible Foreign Tax Credit and excess, if any

India
A Foreign Assessable Income 1,000,000

B Average Rate of Tax in Nepal 18.33%
C Average Tax liabilities in Nepal (A * B) 183,333.33
D Actual Tax Paid in Foreign Country 300,000
E Excess Taxes of Previous Income Year (s) -
F Sum of D & E 300000
G Eligible Amount [Lower of C or F] 183,333.33
H Excess to be carried forward [F- G] 116,666.67
Step 4: Calculation of Tax Liability after Tax Credit
Tax Liability before Foreign Tax Credit 275,000

Less: Eligible Credit from Step 3 (183,333)
Tax Liability after Foreign Tax Credit 91,667
7.
As per Section 27, the value of consideration shall be as follows:
i) Market value of TV i.e. Rs. 25,000 at the time of delivery is the value of consideration paid.
i) 1% of value of motor vehicle i.e. Rs. 150,000 is the value of consideration received by Mr.
Ganpath.
ii) Security personnel fee Rs. 240,000 paid by the company shall be the value of consideration
received by Mr. Mohan.
iii) Value of free accommodation is 25 % of rent paid i.e. Rs. 125,000 for the public director.
iv) Value of free accommodation is 25 % of market rent i.e. Rs. 25,000 shall be the value of
consideration for local leader.
8. As per section 96(5) of Income Tax Act, 2058, Tax Office can issue notice in writing to any
person for filing of tax return of any income year or part of any income year even before date of
filing of income tax return as per section 96(1) subject to provisions of section 100 in below
cases –
1. If the said person has become insolvent, or is under heavy debt, or has been
dissolved
2. If the said person is leaving Nepal for uncertain period of time
3. If the said person is going to discontinue the work in Nepal
4. In any other case as deemed justified by Tax office
Hence, considering the above provision of Income tax Act, 2058, it is advised to Sitaram for
submission of Tax Return as asked by the Tax Office since he is planning to migrate to Australia
9. As per Section 29 of the Income Tax Act, 2058, the amount to be included or deducted for
determining income from investment of two or more persons shall be performed on the basis
of the ratio of their contribution i.e. contribution ratio. In the given case, Saina and Safina
shall calculate their taxable income by dividing the overall income and expenses in the ratio
2:3 i.e their investment ratio.
Partiulars Total Rs. For Saina Rs. For Safina Rs.
Expenses cost of land
Other charge 45,00,000
Total 2:3) 5,00,000
Outgoings (A) 50,00,000 20,00,000 30,00,000
Selling price
Less: Expenses 86,00,000
Net Selling price
Net profit (B-A) 6,00,000
Incomings (B) 80,00,000 32,00,000 48,00,000
Gain/ Net Gain = (B-A) 30,00,000 12,00,000 18,00,000
10.
i. If any payment was made from non-contributory fund, the tax should be deducted
@ 15 % under Section 88(1) on the payment amount which is final-withholding.
The Fund should deduct Rs. 450,000 (Rs.30 lakh*15%) from the amount and
make payment amounting Rs. 26.50 lakh to him.
ii. Since Income Year 2077/78, the withholding tax on payment of rent in relation to
transport service shall be 2.5%. In the case of Shayam, he can receive after
deducting 2.5 % from the registered companies.
iii. Since Income Year 2077/78, payment exceeding Rs. 5 Million where the payment
is related to work to be conducted through Users Committee, there shall be tax
withholding @ 1.5%. The agreement was concluded on Income Year 2077/78,
however, the provision is applicable for this payment.
iv. In case of tax exempt entity, the following incomes shall be exempted as per the
Section 10(Chha) of income Tax Act, 2058:
• Donation, gift,
• Other contributions directly related with an organization entitled to
exemption as referred to in Clause (d) of Section 2 without having
consideration or without hoping for such contribution.
The rent income is not exempted by virtue of this provision, so, the NGO
should pay the tax on such rent income with filing the tax return.
v. If, in disposing the depreciable property of the business made by that person, the incomings to
be received exceed the remaining value comprising the outgoings made for the property of the
group of depreciable property pursuant to Section 4(2) of Schedule 2, the excess amount shall be
considered to have been derived from the disposal of depreciable property of the business, then
included in the income as per Section 7 of Income Tax Act, 2058. So, tax implications can be
determined on the basis of the value of the vehicles (Block C). It may impact on depreciation
expenses or income of the company. The objective is not relevant in this case.
11.
It is a case of intangible asset. Its tax rate is to be computed based on straight-line formula as:
Depreciation per Year: =1/Period of the contract near to half year

Rate of depreciation = (1/2.5)*100= 40%
Computation of depreciation base and depreciation:

Amount Rs.
Pool E Year 1 Year 2 Year 3

Purchase price 1,200,000 1,200,000 1,200,000
Opening Depreciation base 0 880,000 528,000
Addition absorbed 800,000 0 0
Depreciation Base 800,000 880,000 528,000
Terminal depreciation 0 0 528,000
Rate of depreciation 40% 40% 40%
Depreciation Expenses 320,000 352,000 528,000
Opening Depreciation for the next year 880,000 528,000 0
Expiry of terms of an asset is disposal under Section 40(1) of Income Tax Act, 2058. Hence, in
the end of 3 year, the pool shall be seized and hence whole amount of opening depreciation base
rd
is terminal depreciation.
12.
An INGO is Nepal branch of NGO of foreign country. As such, the INGO in Nepal is treated as
Foreign Permanent Establishment of Foreign NGO. Those foreign NGOs are usually not resident
in Nepal.
As per section 2 (Ka) (Nga), a foreign permanent establishment of non-resident is always
resident in Nepal since it qualifies the definition of permanent establishment in Nepal by its
presence in Nepal for more than 90 days during the year.
Accordingly, French international organization "Humanity Foundation" was established in Nepal
as on 1 Baishak 2075 after entering into agreement with Social Welfare Council (SWC) is
st
resident in Nepal for the financial year 2075/76 irrespective of its country of incorporation. A
person can be resident in two states/countries as per the provision of tax laws of respective
countries, hence country director view is not consistence with Nepalese Income Tax Law.
13.
a) Section 110 of the Income Tax Act states the following with respect to recovery of tax from
agent of non-resident:
1. Where a non-resident person (the tax debtor) fails to pay tax on or before the date it is
payable, the Department may by service of a notice in writing require a person who is
in possession of an asset owned by the tax debtor to pay tax on behalf of the tax
debtor up to the market value of the asset but not exceeding the amount of tax payable
by the tax debtor.
2. Where a person makes a payment to the Department pursuant to a notice under
subsection (1)
(a) The person may recover the payment from the tax debtor;
(b) For the purposes of paragraph (a), the person may retain out of any assets
including money of the tax debtor in or coming into the possession of the person an
amount not exceeding the payment; and
3. The tax debtor or any other person may not make a claim against the person referred to in
subsection (1) (b) with respect to the retention.
b) Section 106 of the Income Tax Act states the following with respect to departure prohibition
order:
(1) Where a person fails to pay tax on or before the date the tax is payable, the
Department may, by notice in writing serve on the concerned office of Nepal
Government, an order to prevent the person from leaving Nepal for a period of 72 hours
after the expiry of time limit specified in a notice served for the purpose of paying tax.
(2) Where an extension to the period referred to in subsection (1) is required, the
Department shall be required to get pre-approval from the concerned appellate court for
the purpose.
(3) Where the person referred to in subsection (1) pays the tax or makes an arrangement
for payment satisfactory to the Department, the Department may by notice in writing
served on the office referred to in subsection (1), withdraw the order.
c) Section 74 of the Income Tax Act states the following with respect to tax payer
right:
(1) Tax payer shall abide by the duties in accordance with this Act.
(2) A taxpayer with respect of paying tax under this Act shall have the following rights:-
(a) right to get respectful behavior;
(b) right to receive tax related information as per the prevailing laws;
(c) right to get the opportunity of submitting proof in own favor in respect of tax matters;
(d) right to appoint lawyers or auditors for defense; and
(e) right to secrecy in respect of tax matters and keep it inviolable.
Clarification:- For the purpose of this section, taxpayers means a person whom the tax is
imposed on and realized from as referred to in section 3.
d) Trustee: As per Section 2 (Pa) of IT, Act 2058, "Trustee" means a natural person,
trust (Guthi) or other body corporate who, individually or jointly with other
natural person, trust (Guthi) or corporate body, holds a property in trust, and this
term includes the following person:
(1) The operator or administrator of the assets of a deceased,
(2) A liquidator, recipient or trustee,
(3) Any person who protects, directs, controls or manages the assets of an incapacitated
person in individual or official capacity,
(4) Any person who manages the assets under a private enterprise or similar other
enterprise, and
(5) Any other person in a position similar to that of the person as referred to in clauses
(1), (2), (3) and (4) above.
14.
a) As per section 69 Clarification (b) of Income Tax Act, 2058, Controlled foreign entity for an
income-year means a non-resident entity in which a resident person holds an interest, directly or
indirectly through one or more interposed non-resident entities, and the person is associated with
the entity or would be if the person and not more than four other resident persons were
associated. Similarly section 69 clarifications (a) defines, Attributable income of a controlled
foreign entity for an income year is its taxable income for the year calculated as if the entity were
a resident entity.
b) Non Business Chargeable Asset

Non- Business Chargeable asset is defined in section 2 of the Income Tax Act, 2058.
Non-business chargeable asset means securities or an interest in an entity as well as land
and buildings but excludes the following assets:
(1) business assets, depreciable assets, or trading stock;
(2) a private residence of an individual that has been-
(A) owned continuously for ten years or more; and
(B) lived in by the individual continuously or intermittently for a total of ten years or
more;
For the purpose of this section private residence means the building and land occupied by
the building or one ropani land whichever is less
(3) An interest of a beneficiary in a retirement fund
(4) Land and a private residence of an individual that is disposed of for less than Rs.
10,000,000/-; or
(5) non-business assets of an individual that is disposed of by way of any type of transfer
other than sales and purchase made within three generations.
c) Underlying ownership is defined in section 2 of the Income Tax Act, 2058, and means the
following:
(1) in relation to an entity, an ownership created on basis of an interest held in the entity
directly or indirectly through one or more interposed entities by an individual or by an
entity in which no individual has an interest; or
(2) in relation to an asset owned by an entity, an ownership of the asset that is determined
on basis of proportion to the ownership held by the persons having underlying ownership
of the entity.
d) As per sec 2 of Income tax Act, 2058, Royalty means any payment made under a
lease of an intangible asset and includes any payment made for the following
purpose:-
(i) The use of, or the right to use, a copyright, patent, design, model, plan, secret formula
or process, or trademark;
(ii) The supply of know-how;
(iii) The use of, or right to use, a cinematography film, video tape, sound recording, or
any other like medium and the supply of information concerning industrial, commercial,
or scientific experience;
(iv) the supply of assistance ancillary to a matter referred to in paragraphs (i), (ii) or (iii);
or
(v) A total or partial forbearance with respect to a matter referred to in paragraphs (i), (ii),
(iii) or (iv). provided that, the term.
15.
Calculation of VAT payable/receivable for
the month ended Bhadra 2078
Particulars Amount Rs.
Output tax (WN 1) 10,192,000
Less: Input tax for imported cars (WN 2) -12,102,480
Input tax credit on expenses (WN 3) -131,799.57
Reverse charge (VAT) on construction 780,000
(WN 4)
Net VAT receivable -1,262,279.57
WN 1: Calculation of output tax
Particulars Cars sale Rs. Tractors sale VAT
Rs. amount Rs.
Showroom price 5,000,000 2,500,000
Dashain Discount (trade discount) 100,000 50,000
Sales price 4,900,000 2,450,000
Sales to VAT registered Customers (10 49,000,000 0.00 6,370,000
cars, 10 tractors)
Sales to Unregistered Customers (6 cars) 29,400,000 24,500,000 3,822,000
Total 78,400,000 24,500,000 10,192,000
Proportionate sales ratio 76.19% 23.81%
* Track-laying Tractor is VAT exempt as
per schedule 1 of VAT Act, 2052.
WN 2: Calculation of VAT on Import at
custom point for Luxury cars:
Particulars Amount
Qty
Import price (16*2,000,000*1.6015) 51,248,000
Transportation expenses IRs. 200,000 * 1.6015 320,000

Insurance premium 200,000
custom duty 41,376,000
Total taxable value for VAT 93,144,000
VAT paid at custom point 12,108,720
* Track-laying tractors are VAT exempt items so no need to calculate input VAT
on import
WN 3: Calculation of input tax credit on expenses:
Particulars Amount Rs.
Full tax credit:
Insurance for Car Rs. 200,000 * 13% 26,000
Proportionate tax credit:
Mobile expenses Rs. 90,000*13%* 60%* 5,349
77.27%
Office Equipment Rs. 1,00,000 * 100,451
13%*77.27%
Total 131,800
WN 4: Reverse VAT on construction of structures for commercial use through
VAT unregistered buliders
As per section 8(3), if a building, apartment or similar
structures are constructed for commercial purposes, from VAT-
unregistered builders, then VAT should be deposited as if it was
constructed fruom VAT-regisreted person.
Total cost of construction 6,000,000.00
VAT 780,000.00
16.
Vat-attractive sales Rs. 65,000.00

Exempted Sales 0.00
Export Sales Rs. 0.00
Total Vat payable 65,000.00
Less: Vat credit available (Working Note-1) 39,480.42
Vat payable without adj. opening vat credit 25,519.59
Add: Opening Vat credit 1,150,000.00
Total vat credit available for claim in next tax period 1,124,480.42
Working Note-1
Vat credit available
-Purchase of raw materials- Rs. 175,000 x 13 % 22,750.00
(Exclusively used for taxable sales- 100 % credit)
-Electricity Expenses-Rs. 25,000 (Vat Exempt)
-Cold Drinks- Rs. 12,000 x 13% (No credit item)
Diesel (no credit item)
LP Gas (no credit item)
-Printing and Stationeries- Rs. 35,000 x 13 % x 95.33% 4,337.52
(Proportionate credit)
-Services availed from UK- Rs. 100,000 x 13 % x 95.33% 12,392.90
(Reverse Vat)
Total Vat credit available 39,480.42
Working Note: 2
Ratio of sales
Taxable sales 500000 93.46%
Exempted sales 25000 4.67%
Export sales 10000 1.87%
535,000.00
VAT attractive sales proportion 95.33%
17.
Sales % of Export Domestic VAT Purchase VAT VAT

export Sales Sales Payable Receivab Payable/
sales to le (Receiva
total ble)
sales
Kartik 500000 43% 215000 285000 37050 700000 91000 -53950
Mangsir 800000 65% 520000 280000 36400 800000 104000 -67600
Poush 700000 36% 252000 448000 58240 900000 117000 -58760
Magh 800000 42% 336000 464000 60320 900000 117000 -56680
Falgun 300000 60% 180000 120000 15600 900000 117000 -101400
Chaitra 700000 42% 294000 406000 52780 900000 117000 -64220
Baisakh 600000 20% 120000 480000 62400 900000 117000 -54600
As per Rule 39(5), if in any month, the export sales of a registered taxpayer is greater than 40%
of total sales, then the taxpayer can claim for refund of vat credit that could not be set off for that
particular month in the format prescribed in Schedule-10.
Since, the portion of export to total sales is more that 40% in the month of Kartik, Mangsir,
Magh, Falgun and Chaitra, the tax payer can claim refund in along with the returns.
The excess input VAT over output VAT for the month of Poush and Baisakh is carried forward
for set off in next four months. If the same cannot be consumed by any payable VAT in
succeeding four months, it may file an application for refund after the elapse of such four
months. Section 24(3).
18.
Any domestic industry producing Mustard oil, domestically produced Vanaspati Ghee and other
processed cooking oil in Nepal and sells to registered person then such domestic industry can
have facility of Vat refund (Square off arrangement) as per schedule-I of Vat Act. Vat collected
only to the extent of 40% from registered person on sale of Mustard oil, domestically produced
Vanaspati Ghee and other processed cooking oil are refundable in accordance with the procedure
specified by Inland Revenue Department. However the facility of such VAT refund under
schedule-I is not available on vat collected on sale of Vanaspati Ghee not produced in Nepal and
to those domestic industries which import only processed edible cooking oil in bulk quantities
and refill it in small packages before sale
Sales to registered person are only 40% of total sales hence sales & VAT collected from
registered person are as follows:
Amount in Rs.
S.N. Particulars Sale to Reg. Person only VAT
(40%) Collected
1. Mustard oil- (Domestic mustard seeds) 240,000 31,200
2. Mustard oil- (Imported mustard seeds) 160,000 20,800
3. Vanaspati Ghee- (Domestically 160,000 20,800
produced)
4. Vanaspati Ghee- (Imported) 240,000 31,200
5. Other processed cooking oil 400,000 52,000
Total 1,200,000 156,000
VAT collected only to the extent of 40% from registered person on sale of Mustard oil,
domestically produced Vanaspati Ghee only and other processed cooking oil, hence the ABC Oil
& Ghee industry can have facility of VAT refund under schedule-I of Vat Act are as follows:
Amount in Rs.
S.N. Particulars VAT Collected from Reg. VAT Refund
Person (40%)
1. Mustard oil- (Domestic mustard 31,200 12,480
seeds)
2. Mustard oil- (Imported mustard 20,800 8,320
seeds)
3. Vanaspati Ghee- (Domestically 20,800 8,320
produced)
4. Vanaspati Ghee- (Imported) 31,200
5. Other processed cooking oil 52,000 10,400
Total 156,000 39,520
ABC Oil & Ghee industry can have facility of VAT refund of Rs. 39,520 as per schedule-I of
VAT Act
However, XYZ oil industry import only processed edible cooking oil in bulk quantities and refill
it in small packages before sale, hence it could not have facility of VAT refund under schedule-I
of VAT Act.
19.
i) False.
As per section 33 of Value Added Tax Act, 2052, while filing an appeal to Revenue Tribunal, the
undisputed amount of the assessed tax due shall have to be deposited and twenty fifty percent of
the amount of the tax in dispute plus the amount of fine shall have to be deposited or a bank
guarantee for the same has to be furnished.
ii) False.
As per section 29 (1) (ng) in case the person has not made the accounts available for inspection
under section 16 (1), the penalty amount is Rs. 20,000 for each time.
iii) True.
As per Rule 14(ka) of Value-Added Rules, 2053, registered person shall have to place tax
registration number plate in the format prescribed by Inland Revenue Department IRD) in his
place of transaction in a clearly visible manner within thirty days from the effective date of VAT
rule.
Further, as per circular dated 2062.06.21 by IRD, the color of tax registration number plate for
registered person shall be green, for unregistered person doing taxable transaction shall be
yellow and for person dealing in tax exempted goods and services shall be white.
iv) False.
Notwithstanding anything contained in subsection (1) or (2) of section 15, local body or
International institution/association/commission based in Nepal or Nepal Government or
corporations engaged in non-VAT transactions shall collect value added tax if they engage in
supply of goods or services which attract VAT.
v) False.
As per clause 2 of schedule 2 of Value Added Tax, 2052, a supply of service by a person
residing in Nepal to a person outside Nepal, who has a no business transaction, business
representative or legally recognized agent in Nepal, is subjected to zero rate of tax.
20.
a) As per section 2(na) of Vat Act, "Tax Officer" means tax officer, chief tax officer or chief tax
administrator appointed by the Government of Nepal and the term shall also include any
Section Officer, Director or, Deputy Director General designated by the Government of
Nepal authorizing to exercise the power of tax officer under this Act.
Accordingly, Tax Officer is either appointed or designated by Government of Nepal to
exercise the power mentioned in Vat Act.
b) As per Section 14A (1) of Vat Act, Tax payer may after obtaining prior approval from the
Department issue electronic invoice. As per sub-section (2), notwithstanding anything
contained in sub-section (1) above, the department may publish a notice and compel specific
tax payers to issue electronic invoice compulsorily by using electronic medium and may
order such electronic medium should be linked with Department's central invoice monitoring
system. As per sub-section (3), the Department shall prepare and apply such working
procedures relating to safety and trustworthiness of software or equipment used to generate
electronic invoice. Such working procedures shall be followed by concerned producer,
distributor and users.
c) As per section 25 Ka of VAT Act 2052, If a foreign tourist visiting Nepal and returning by
air purchases taxable goods of more than Twenty-Five Thousand Rupees and takes them with
him or her, the tax paid on such goods shall be refunded in accordance with the procedures
specified by the Department. Tax paid by tourist on such purchase shall be refunded to
him/her after deducting 3 % as service charges.
d) As per section 30 of Vat Act, 2052, if any registered person contravenes any of the offences
as mentioned in section 29 twice or more, the Director General may order a tax officer to
suspend the transaction of such registered person for the maximum period of seven days for
each default.

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CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)

Revision Test Paper

CHAPTER: Introduction and Fundamental Concept of Financial Management:

CHAPTER: Time Value of Money:

CHAPTER: Strategic Finance and Policy:

Additional information made available to you are:

CHAPTER: Analysis of Financial Statements:

CHAPTER: Capital Investment Decision

Initial investment (Rs.) Net present value (Rs.)

CHAPTER: Working Capital Management and Financial Forecasting

Cost structure per bag of cement (estimated):

Equity and Liabilities Amount Assets Amount

Month Rs Month Rs Month Rs

On the basis of this information:

CHAPTER: Distribution Policy

Particulars Amount (Rs in lakhs)

For taking a suitable dividend decision, Mr. Ghimire is considering a number of

CHAPTER: Valuation of Securities

CHAPTER: Risk and Return

CHAPTER: Overview of Capital Markets

CHAPTER: Short Notes from Overall Syllabus

Question No. 19:

Write short notes on:

Question No. 21:

CHAPTER: Introduction and Fundamental Concept of Financial Management:

(i) Future Value of Uneven cash flow:

(ii) Present Value of above Uneven cash flow:

Additional amount to be invested on July 1, 2020 is (1000 – 824.18) = Rs. 175.82

CHAPTER: Strategic Finance and Policy

Interest (1-Tax) + (RV-NP)/N 95(1-0.35) + (1000 - 981.05)/3

2) Calculation of cost of Term Loan (KTL)

3) Calculation of Cost of Preference share(KP)

4) Computation of Cost of Equity (Ke)

(ii) Pattern of raising additional finance:

Year Dividend PV factor@ Present Value

Total Present Values Rs 20.2973

P5 = D6/(Ke – g) 0.4190 12.8028

Total Present Values Rs 17.9395

(PV at Lower Rate – Current Price)

Statement of Operating Profit and Sales

Income Statement for the year ended 31.03.09

Existing Book Value per share:

Expected market price of share after diversification through issue of 12%

CHAPTER: Capital Investment Decision

Step-3: Computation of NPV:

2) Computation of Annual Depreciation:

a) Calculation of NPV of Project E (Rs. '000)

1 5,000,000 x 0·25 = Rs. 1,250,000 1,250,000 x 0·28 = Rs. 350,000

b) Calculation of Maximum NPV

Calculation of maximum NPV

Projects Investment (Rs. 000) NPV (Rs. '000)

c) Reasons to limit investment:

CHAPTER: Working Capital Management and Financial Forecasting

2) Additional bank borrowings necessary to maintain a cash balance of Rs 50,000 at all

3) Pro forma Balance Sheet, 31st March, 2020

Accounts receivable = Sales in March × 0.8 + Sales in February × 0.1

CHAPTER: Distribution Policy

D+ (E-D) x r 1.60 + (4-1.60) x 20%

D+ (E-D) x r D+ (4-D) x 20%