CA-Inter-FM-SM-RTP-jan 25

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PAPER – 6:
FINANCIAL MANAGEMENT AND
STRATEGIC MANAGEMENT
6A: FINANCIAL MANAGEMENT
QUESTIONS
Division A: Case Scenarios

Integrated Case Scenario
1. Samvar Ltd, a leading FMCG company having its current presence in
more than 150 Tier I and Tier II cities in India. The stores are operating in
the brand name of GoMART competing with Reliance fresh, Walmart,
BigBazaar and other chains. Owing to the increase in demand from Tier
III cities and rural areas, it is planning for massive expansion and is
contemplating to open up additional 50 stores which will have variety of
FMCG products.
The CFO and his team estimate that the funds needed for massive
expansion would be ` 200 lakhs per store. Such funds would be utilized
for buying out a space and setting up a store, buying the other required
fixed assets, etc. Central government will provide a revenue subsidy of
15% on Gross profit if the overall cost of capital doesn’t exceed 10%
Apart from above, CFO and his team require an estimate on the
additional capital needed based for the smooth running of fixed assets
and its daily operations. Based on their market research, they have
collected the other information for each store which is as follows-
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REVISION TEST PAPER

INTERMEDIATE EXAMINATION
Average Sales would be ` 120 lakhs p.a. with a GP margin of 18%.

Customers pay through different digital modes and channels including
POS systems (Debit and credit cards) which generally takes approx. 9
days for the funds to get credited in the bank account. 15% of the
customers use debit and credit cards to make the payment. Installing a
POS system comes with a fee of 2% of total sales through POS.
Being a FMCG outlet, inventories of multiple products need to be kept.
Different products have different storage period. However primarily,
products are classified into three broad categories, Durable, Semi
Durable & Perishable. Perishable products comprise 60% of sales,
whereas semi-durable is 25% and balance is for durable products.
Inventory storage period for perishable, semi-durable & durable
products are 10 days, 30 days & 60 days respectively. Suppliers of these
products provide a credit period of average 30 days.
Each store will employ around 20 personnel of a different hierarchy and
monthly average salaries to staff for each store is estimated at ` 4 lakhs
per month. Company will pay employees’ dues on the 1st of next month.
Samvar Ltd plans to keep optimum cash balance in hand as suggested
by Baumol’s model. Excess cash balance if any, will be invested in the
marketable securities which will generate a return of 12% p.a. The total
disbursement for the year is estimated at ` 1.50 lakhs per month with
the transaction cost of ` 20 per transfer to the disbursement account.
The optimum capital structure with debt equity of 2:1 has been proven
ideal for raising the finance and company wishes to follow the same
pattern for the additional funds required for each store. Trade credit can
also be utilized for financing the expansion needs.
The cost of raising debt and equity for each store is as per the slabs as
under:
Project Cost * Cost of Minimum rate

Debt expected by equity
share holders
Upto 80 lakhs 10% 12.5%
Above 80 lakhs but upto 150 Lakhs 11.5% 13.5%
JANUARY 2025 EXAMINATION

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Above 150 lakhs & Upto 250 lakhs 12% 14%

Above 250 lakhs 13.5% 15%
*It means that upto 80 lakhs of project cost company can raise debt at
10% and equity at 12.5% and so on.
Tax rate applicable to the corporate is 25%
Based on the above details, calculate the following for each store:
i. The optimum Cash balance is
(A) ` 7,071
(B) ` 26,500
(C) ` 7,150
(D) ` 24,495
ii. The Gross and Net Working Capital for the next year would be
(A) ` 6.7730 L, (5.9396 L)
(B) ` 6.7730 L, 12.7125 L
(C) ` 200 L, (5.9396L)
(D) ` (5.9396 L), 6.7730 L
iii. The amount of total funds needed to setup a store is
(A) ` 194.0605 L
(B) ` 200 L
(C) ` 6.7730 L
(D) ` 206.7730 L
iv. The overall cost of capital for raising additional funds for setting
up of each store is
(A) 10.01%
(B) 10.65%
(C) 9.90%
(D) 8.91%
3 JANUARY 2025 EXAMINATION

REVISION TEST PAPER

v. The amount of revenue subsidy granted by the central govt is

(A) `3L
(B) ` 3.24 L
(C) Nil
(D) ` 2.25 L
Dividend Decision
2. The cost of capital of a firm is 12% & its expected earning per share at
the end of the year is ` 20. its existing payout ratio is 25%. the company
is planning to increase its payout ratio to 50% what will be the effect of
this change on the market price of equity share (MPS) of the company as
per Gordon model, if the reinvestment rate of the company is 15%?
(A) It will increase by ` 444.45
(B) It will decrease by ` 444.45
(C) It will increase by ` 222.22
(D) It will decrease by ` 222.22
Financing Decision - Cost of Capital
3. Abhi Ltd is an all equity financed company. It is considering replacing
` 275 lakhs equity shares with 15% debentures of the same amount.
Current Market value of the company is 1750 lakhs with cost of capital
at 20%. Future EBITs are going to be constant and entire earnings are
going to be distributed. Corporate Tax Rate can be assumed to be 30%.
What will be the new cost of equity of the firm?
(A) 19.11%
(B) 17.53%
(C) 10.50%
(D) 20.62%

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Division B: Descriptive Questions

Financial Analysis & Planning – Ratio Analysis
4. Vardhaman Limited gives you the following information related for the
year ending 31st March, 2024:
Particulars Amount (`)
Current Ratio 3:1
Loan funds to Owned Funds Ratio 1:3
Gross Profit Ratio 25%
Stock Turnover Ratio 10
Net Working Capital ` 5,00,000
Return on Total Assets (pre-tax) 15%
MPS ` 20
Total Assets Turnover Ratio 2.5
Opening stock ` 6,50,500
Fixed Assets ` 15,00,000
75,000 equity shares of ` 10 each
25,000, 12% Pref. Shares of ` 10 each
Depreciation ` 50,000
Interest on Debt 9%
Future Instalments ` 2,00,000
Tax rate applicable to the company is 25%
You are required to CALCULATE:
(i) Quick Ratio
(ii) Fixed Assets Turnover Ratio
(iii) Debt Service Coverage
(iv) Earnings per Share
(v) Price Earnings Ratio
Financing Decision - Cost of Capital
5. The Capital Structure of Samyaktva Limited is as follows:

REVISION TEST PAPER

Amount (in `)
12% Debentures 3,50,000
14% Pref. Shares 4,50,000
Equity shares (Face value of ` 10 each) 8,50,000
16,50,000
Additional Information:
1. ` 100 per debentures redeemable at premium of 6% with floatation
cost of 5% & 5 years of maturity. The current market price of the
debenture is ` 115
2. ` 100 per preference shares redeemable at a premium of 10%, issued
at discount of 2% with a floatation cost of 5% on the issue price. The
current market price per preference share is ` 108. It has maturity of
10 years
3. An equity share has a floatation cost of ` 5 with a market price per
share currently quoted at ` 30. Samyaktva Limited paid a last
dividend of ` 4 and the company is expected to give an annual
growth rate of 9% on the dividends. The company has a practice of
paying all the earnings in the form of dividends.
4. Corporate Taxation rate is at 25%
CALCULATE WACC using market value weights
Financing Decision - Capital Structure
6. Ritu Limited in the expansion stage and it provides you the following
information:
(`)
Profit (EBIT) 5,00,000
Less: Interest on Debenture @ 10% (1,00,000)
EBT 4,00,000
Less Income Tax @ 30% (1,20,000)
2,80,000
No. of Equity Shares (` 10 each) 50,000

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Earnings per share (EPS) 5.6

Price /EPS (PE) Ratio 10
The company has reserves and surplus of ` 10,00,000 and required

` 5,00,000 further for modernisation. Return on Capital Employed (ROCE)
is constant. Debt (Debt/ Equity) Ratio lesser than 2 will raise the P/E
Ratio to 12. Interest rate on additional debts is 12%. You are required to
ASCERTAIN the probable price of the share.
(i) If the additional capital are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market
price.
Financing Decision – Leverages
7. From the following financial data of Company X and Company Y:
(i) PREPARE their Income Statements.
(ii) CALCULATE Margin of Safety for both the Companies
(iii) CALCULATE Percentage change in EPS for both the companies, if
percentage change in sales is 25%
(in `)
Company X Company Y
Variable Cost 72,000 65% of Sales
Fixed Cost 35,000 -
Interest Expenses 12,000 6,000
Financial Leverage 4:1 -
Operating Leverage - 5:1
Income Tax Rate 30% 30%
Sales - 1,45,000

REVISION TEST PAPER

Dividend Decisions
8. The following information is supplied to you:

Total Earnings 4,50,000
No of Equity Shares (of ` 100 each) 25,000 shares
Retention ratio 40%
MPS 198
Applying Walter’s Model:

(i) ANALYSE whether the company is following an optimal dividend
policy.
(ii) COMPUTE P/E ratio at which the dividend policy will have no effect
on the value of the share. Also calculate the MPS at such P/E ratio
(iii) Will your decision change if the P/E ratio is 4.5? ANALYSE.
Investment Decisions – Capital Budgeting
9. A company is considering the proposal to take up a new project which
requires investment of ` 850 lakhs in plant & machinery and ` 150 lakhs
in working capital. The project is expected to yield the following Cash
flows before tax and depreciation over the next five years:
Year Amount
(` in Lakhs)
1 290
2 320
3 360
4 390
5 270
The desired rate of return from the project is 14% and assets must be
depreciated at 20% on a written down value basis. The scrap value at the
end of the five-year period may be taken as ` 140 lakhs. The income tax

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applicable to the company is 20%. This is the only asset in the entire
block. Capital gains tax is at 15% (for capital loss as well)
You are required to CALCULATE the net present value of the project and
advise the management to take appropriate decisions. Also calculate the
Internal Rate of Return and Desirability factor of the Project.
Note: Present values of Re. 1 at different rates of interest are as follows:
Year 14% 16% 20%

1 0.88 0.86 0.83
2 0.77 0.74 0.69
3 0.67 0.64 0.58
4 0.59 0.55 0.48
5 0.52 0.48 0.40
Management of Working Capital

10. Nirmoh Limited wants to avail short-term loan from the bank. However,
bank grants short term loan by keeping the collateral in the form of
accounts receivable. A bank is analyzing the receivables of Nirmoh
Limited to identify acceptable collateral for a short-term loan.
The current policy of the company is 3/10 net 40. Bank will lend only to
the extent of 90% of acceptable receivables at an interest rate of 12%
only if both the conditions mentioned below are fulfilled. Bank will keep
a reserve of 5% for cash discount & returns
(a) Customers are not currently overdue for more than 5 days to the
net period
(b) Average aging (payment period) of the customer should not
exceed 15 days past the net period.
If any of the above conditions are not fulfilled, the bank will lend 65% of
the receivables subject to a reserve of 15% and the interest rate will be
charged at 15% on such accounts. The corporate tax rate applicable is
25%.
On the scrutiny of all the receivables, following are the acceptable
receivables considered for lending-

REVISION TEST PAPER

Accounts Amount Outstanding in Average Aging

(`) Days since (payment period) in
invoiced Days
DR 01 50,000 37 40
DR 02 25,000 25 48
DR 03 1,20,000 47 49
DR 04 72,000 10 56
DR 05 45,000 30 30
DR 06 1,75,000 39 50
DR 07 19,000 55 25
DR 08 54,000 44 54
DR 09 1,05,000 15 25
DR 10 37,000 22 75
You are required to CALCULATE:

(a) Total amount lend by the bank
(b) Effective Interest cost (%) to the company
11. (a) LIST the emerging issues (any four) affecting the future role of CFO.
(b) EXPLAIN any four Methods for Computation of Cost of Equity
Capital.
(c) Do the profitability index and the NPV criterion of evaluating
investment proposals lead to the same acceptance-rejection and
ranking decisions? In what SITUATIONS will they give conflicting
results?
SUGGESTED ANSWERS/HINTS
1. i. (D) ` 24,495
As per William J Baumol,

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2 AT
optimum cash balance =
O
A = Annual Cash disbursement
T = Cost per transfer
O = Opportunity cost
2 X 18,00,000 X 20
= = ` 24,495/-
0.12
ii. (A) `6.7730 L, (5.9396 L)
Gross working capital is sum of total current assets and net
working capital is Gross working capital less current
liabilities.
Estimation of Working Capital Statement
Amount Amount
(`) (`)
A) CURRENT ASSETS / GROSS
W.C
1. FG Inventory WN - 1 6,15,000
2. Trade receivables WN - 2
37,800
3. Cash/ bank balance
(Calculated in Solution 1) 24,495 6,77,295
B) CURRENT LIABILTIES
1. Trade payables WN - 3 8,71,250
2. Outstanding salaries WN - 4
4,00,000 12,71,250
NET WORKING CAPITAL (A) - (B) (5,93,955)
WN – 1 Calculation of FG Inventory
FG STORAGE PERIOD (DAYS )
FG Inventory = COGS x
360
COGS = 120 Lakhs x 82% = 98.40 Lakhs

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Perishable = 98.40 x 60% x 10 /360 = 1.64 Lakhs

Semi Durable = 98.40 X 25% X 30 /360 = 2.05 Lakhs
Durable = 98.40 X 15% X 60 /360 = 2.46 Lakhs
Total = ` 6.15 lakhs
WN – 2 Calculation of Trade Receivables
Since, company is into FMCG industry, sales are always on cash
basis as no credit is given to any of the custome` However, as
mentioned in the case study, company will get the credit in the
bank account only after 9 days for those customers that pay
through POS (debit and credit cards). It means companies
funds’ get blocked for 9 days.
Company’s trade receivable would only comprise of 15% of
total sales as rest are through cash basis
Trade Receivables = Cost of Sales x Days Blocked / 360
= 15.12 L x 9 / 360
= 0.378 Lakhs
Cost of Sales = COGS + POS Transaction fees
= (98.40 L x 0.15) + (120 L x 0.15 x 2%)
= 15.12 Lakhs
WN – 3 Calculation of Trade Payables
Average Credit period in days
Trade Payables = Purchases x
360
= 104.55 x 30 /360
= 8.7125 Lakhs
Purchases = COGS (+) Closing Stock (-) Opening Stock
Since, company is planning to open up new store, its opening
stock would be NIL but there would be definitely a closing FG
stock which is calculated in WN -1
Therefore, Purchases = 98.40 L + 6.15 L - 0 = 104.55 Lakhs

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WN – 4 Calculation of Outstanding salaries

Salaries are paid on 1st of next month, thereby meaning it has
been outstanding for a period of 30 days assuming salaries
accruing evenly throughout.
Outstanding salaries = 48,00,000 x 30 / 360
= 4,00,000
iii. (A) ` 194.0605 L
Total Capital needed = Total capital needs (Fixed assets) +
Working Capital needs
= 200 L + (5,93,955)
= ` 194.0605 L
iv. (C) 9.90%
Samvar Ltd would require financing of ` 194.0605 lakhs from
debt and equity and not ` 200 lakhs as trade credit is also
considered to be a source of finance as mentioned in the
case study.
Furthermore, the overall cost of raising this additional fund
for each store of ` 194.0605 needs to be calculated slab wise
Project Cost Weights (W) Cost (K) WXK Total cost (`)
Upto 80 Lakhs Debt = 0.67 Kd = 10 (1 - 0.25) Ko = 9.167% = 80L x 9.167%
Equity = 0.33 = 7.5 = 7.334 Lakhs
Ke = 12.5
Above 80 L Debt = 0.67 Kd = 11.5(1-0.25) Ko = 10.25% = 70L x 10.25%
upto 150 L Equity = 0.33 = 8.625 = 7.175 Lakhs
Ke = 13.5
Above 150 L Debt = 0.67 K = 12 (1-0.25) Ko = 10.667% =44.0605L x 10.667%
upto 250 L Equity = 0.33 =9 = 4.7Lakhs
Ke = 14
Total Funds = 194.0605 L

Total Cost (`) = 7.334 L + 7.175 L + 4.700 L = 19.209 L
Ko = Total Cost (`) / Total Funds

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= 19.209 / 194.0605
= 9.90%
v. (B) ` 3.24 L
Since the Overall Cost of Capital is below 10%, Samvar Ltd is
eligible for revenue subsidy
Revenue Subsidy = GP x 15%
= 21.6 L x 15%
= ` 3.24 Lakhs
2. (B) It will decrease by ` 444.45
Current D1 = 20 x 25% = 5
Current g = 0.75 x 0.15 = 11.25%
Current MPS = 5/(0.12 - 0.1125) = 666.67
Proposed D1 = 20 x 50% = 10
proposed g = 0.5 x 0.15 = 0.075,
Proposed MPS = 10/(0.12 - 0.075) = 222.22
Change in MPS = 666.67 - 222.22 = `444.45
3. (D) 20.62%
Current PAT = 1750 x 20% = 350
Current PBT = Future EBIT = 350/0.7 = 500
Future PBT = 500 - 275x15% = 458.75
Future PAT = 458.75 x 70% = 321.125
Value (L) = Value (UL) + Debt x t = 1750+275 x 30% = 1832.5
Value of Equity= 1832.5-275 = 1557.5
Ke = 321.125/1557.5 = 20.62%
4. WN 1: Calculation of Current Assets & Current Liabilities
Current Ratio = CA / CL = 3:1

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Therefore, CA = 3CL
Net Working Capital = CA - CL = 5,00,000
= 3CL (-) CL = 5,00,000
Therefore, CL = 2,50,000,
CA = 7,50,000
WN 2: Calculation of Average Stock Value & Closing Stock
Total Assets = Fixed Assets + Current Assets
= 15 L + 7.5 L = 22.50 lakhs
Total Assets Turnover Ratio = Sales / Total Assets = 2.5 (given)
Therefore Sales = 22.5 lakhs X 2.5
Sales = 56,25,000
GP Margin = 25%, therefore COGS = 75% of Sales
COGS = 56.25 x 75% = 42,18,750
Stock Turnover Ratio = COGS / Average Stock = 10 (given)
Average Stock = 42,18,750 / 10 = 4,21,875
Average Stock = Op. Stock + Cl. Stock / 2
4,21,875 = 6,50,500 + Cl. Stock / 2
Cl Stock = 1,93,250
WN 3: Calculation of Cash Profit before Interest & Tax
Return on Total Assets (pre-tax) = (EBIT / Total Assets)
0.15 = EBIT / 22.50 lakhs
Therefore, EBIT = 3,37,500
Cash Profit before Int & Tax = EBIT + Depreciation
= 337500 + 50000
Cash Profit before Int & Tax = 3,87,500

REVISION TEST PAPER

WN 4 : Calculation of Loan Funds (Debt) & Owned Funds (Equity)

Debt to Equity = 1 : 3, which means 3 times Debt = Equity (Owned
Funds)
As per the Accounting equation,
Equity + Debt + Current Liab. = Fixed Assets + Current Assets
3 Debt + Debt + 2,50,000 = 15,00,000 + 7,50,000
4 Debt = 20,00,000
Therefor Debt (Loan Funds) = 5,00,000
Equity (Owned Funds) = 15,00,000
WN 5: Calculation of Earnings Available to Eq. Share holders
EBIT 3,37,500
(-) Int (5 lakhs x 9%) (45,000)
EBT 2,92,500
(-) Tax @ 0.25 (73,125)
EAT 2,19,375
(-) Pref Div. (250000 x 12%) (30,000)
Earnings For Eq. Sh Holders 1,89,375
1. Quick Ratio = {CA - Cl Stock}/CL
= 7,50,000 – 1,93,250 / 2,50,000
Quick Ratio = 2.23 : 1
2. Fixed Assets Turnover Ratio = Sales / Total Fixed Assets
= 56,25,000 / 15,00,000
Fixed Assets Turnover Ratio = 3.75 times
3. Debt Service Coverage Ratio = Cash profit before Int & Tax /
Int + Instalments
= 3,87,500 / (45,000+2,00,000)
Debt Service Coverage Ratio = 1.58 times.

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4. EPS = Earnings for Eq. Shareholders / No of Eq. Shareholders

= 1,89,375/75,000
EPS = ` 2.53
5. Price to Earnings Ratio = MPS / EPS
= 20 / 2.53
Price to Earnings Ratio = 7.91 times
5. WN 1: Calculation of Cost of Debt
I (1- t )+
(RV-NP )
Kd = n
(RV+NP )
2
RV = 100 + 6% = 106
n = term = 5 years
t = tax = 0.25
NP = Issue Price – Floatation cost
= 115 – 5% (Issue price will be at Market price and no Face Value)
= 109.25
12 (1-0.25)+
(106 -109.25)
Kd = 5
(106+109.25)
2
Therefore Kd = 7.76%
WN 2: Calculation of Cost of Preference Shares
PD+
(RV-NP )
Kp = n
(RV+NP )
2
RV = 100 + 10% = 110
n = term = 10 years

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NP = Issue Price – Floatation cost

Issue Price = (108 – 2%) = 105.84
Net Proceeds = 105.84 (-) 5% = 100.55
14+
(110 - 100.55)
Kp = 10
(110+100.55 )
2
Therefore Kp = 14.19%
WN 3: Calculation of Cost of Equity
Since growth rate is given, Ke is to be calculated by using Gordon’s formula
As per Gordon,
D1
Ke = +g
P0
Where, D1 = Expected dividend at the end of Year 1
Po = Current Market Price (–) Floatation cost
G = growth rate in dividends
4+9% x 4
Ke = +0.09
30-5
Ke = 26.44%
Calculation of WACC using Market Value Weights
Sources Amount of Weights Cost (K) WXK
Capital (`) (W)
Debentures 4,02,500 0.1171 7.76 (WN 1) 0.9087
(3,500 x 115)
Preference 4,86,000 0.1413 14.19 (WN 2) 2.00
shares (4,500 x 108)
Equity shares 25,50,000 0.7416 26.44 (WN 3) 19.6079
(85,000 x 30)
34,38,500 Ko = 22.52%

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6. Ascertainment of probable price of shares of Akash limited

Particulars Plan-I Plan-II
If ` 5,00,000 If ` 5,00,000 is
is raised as raised by issuing
debt equity shares
(`) (`)
Earnings Before Interest and Tax 6,00,000 6,00,000
(EBIT)
{20% of new capital i.e. 20% of
(` 25,00,000 + ` 5,00,000)}
(Refer working note1)
Less: Interest on old debentures (1,00,000) (1,00,000)
(10% of ` 10,00,000)
Less: Interest on new debt (60,000) --
(12% of ` 5,00,000)
Earnings Before Tax (EBT) 4,40,000 5,00,000
Less: Tax @ 30% (1,32,000) (1,50,000)
Earnings for equity shareholders 3,08,000 3,50,000
(EAT)
No. of Equity Shares (refer 50,000 58,929
working note 2)
Earnings per Share (EPS) ` 6.16 ` 5.94
Price/ Earnings (P/E) Ratio (refer 12 10
working note 3)
Probable Price Per Share (PE ` 73.92 ` 59.40
Ratio × EPS)
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(`)
Equity Share capital (50,000 shares × ` 10) 5,00,000

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 100  10,00,000
10% Debentures  `1,00,000× 
 10 
Reserves and Surplus 10,00,000

Total Capital Employed 25,00,000
Earnings before interest and tax (EBIT) (given) 5,00,000
` 5,000,000 20%
ROCE = ×100
` 25,00,000
2. Number of Equity Shares to be issued in Plan-II:

` 5,00,000
= = 8,929shares
` 56
Thus, after the issue total number of shares = 50,000+ 8,929

= 58,929 shares
3. Debt/Equity Ratio if ` 5,00,000 is raised as debt:
`15,00,000
= =1
`15,00,000
As the debt equity ratio is less than 2 the P/E ratio will be increase
to 12 in Plan-I
7. (i) Income Statement
Particulars Co. X (`) Co. Y (`)

Sales 1,23,000 1,45,000
(WN 2)
(-) Variable Cost (72,000) (94,250)
(65% on sales)
Contribution 51,000 50,750
(WN 2)
(-) Fixed Cost (35,000) (40,600)
EBIT 16,000 10,150
(WN 1) (WN 3)
(-) Interest (12,000) (6,000)

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EBT 4,000 4,150

(-) Tax @ 30% (1,200) (1,245)
EAT 2,800 2,905
WN 1: Calculation of EBIT for Co. X using Financial Leverage

EBIT EBIT
FL = or
EBT EBIT − Interest
EBIT
4 =
EBIT − 12,000
EBIT = ` 16,000
EBT = ` 16,000 – ` 12,000 = ` 4,000
WN 2: Calculation of Contribution and Sales using reverse
mechanism
Contribution = EBIT + Fixed Cost
= ` 16,000 + ` 35,000
Contribution = ` 51,000
Sales = Contribution + Variable Cost
Sales = `1,23,000
WN 3: Calculation of EBIT for Co. Y using Operating leverage
OL = Contribution / EBIT
50,750
5 =
EBIT
EBIT = ` 10,150
(ii) Margin of Safety (MOS) is inversely proportionate to the Operating
Leverage as higher the safety margin lower would be the business
risk
1
MOS =
OL

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51,000
Operating Leverage (Co. X) =
16,000
Operating Leverage (Co. X) = 3.1875 : 1
Therefore, MOS for Co. X = 1 / 3.1875
MOS for Co. X = 31.37%
Operating Leverage (Co. Y) = 5 : 1
1
Therefore, MOS for Co. X =
5
MOS for Co. Y = 20%
(iii) Combined leverage measures the percentage change in EPS due to
percentage change in sales
Contribution
Combined Leverage =
EBT
51,000
Combined Leverage (Co. X) =
4,000
= 12.75
% change in EPS
Combined Leverage =
% change in sales
% change in EPS
12.75 =
25%
% change in EPS (Co. X) = 318.75%
50,750
Combined Leverage (Co. Y) =
4,150
= 12.23
% change in EPS
12.23 =
25%
% change in EPS (Co. Y) = 305.75%

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8. (i) As per Walter,

If ROI > Ke, firm should retain everything and distribute nothing to
maximize the share price. On the contrary, if ROI < Ke, firm should
distribute everything and retain nothing to maximize the wealth of
the equity owners.
ROI = Total Earnings / Equity Share capital
= 4,50,000 / 25,00,000
ROI = 18%
1
Ke =
PE
P.E Ratio = MPS / EPS = 198 /18 = 11
Therefor Ke = 1/11 = 9.091%
Since ROI > Ke, optimal dividend policy of the firm should be to
retain everything and distribute nothing. However, the firm has
retained 40% and distributed 60%, hence it is not having an
optimal dividend policy as per Walter’s model.
(ii) When ROI = Ke, dividend policy of the company will have no
effect on the value of the share as per Walter’s model
Therefore, in that case, Ke should be equal to 18%
1 1
P.E Ratio = =
Ke 0.18
P.E Ratio = 5.56 times
MPS at the above P.E Ratio = 18 x 5.56 = ` 100.08
(iii) If P.E Ratio is 4.5,
1
Ke = = 22.22%
4.5
Since, ROI < Ke, optimal dividend policy of the firm should be to
distribute everything and retain nothing, as the value of share would be
maximum at that point thereby maximizing the wealth of the
shareholder

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9. (A) Calculation of NPV

WN 1 : Calculation of Present Value of Cash Outflow (PV CO)
(i) Initial Investment = ` 850 lakhs
(ii) Working capital outlay = ` 150 lakhs
Therefore, total PV CO = ` 1000 lakhs
WN 2 : Calculation of Present Value of Cash Inflows (PV CI)
Cash flows before tax are given i.e. nothing but NPBDT
Amount (` in lakhs)
Year 1 2 3 4 5
NPBDT 290.00 320.00 360.00 390.00 270.00
(-) Dep 170.00 136.00 108.80 87.04 69.63
NPBT 120.00 184.00 251.20 302.96 200.37
(-) Tax 24.00 36.80 50.24 60.59 40.07
NPAT 96.00 147.20 200.96 242.37 160.29
(+) Dep 170.00 136.00 108.80 87.04 69.63
CFAT 266.00 283.20 309.76 329.41 229.93
(+) Working Capital 150.00
Release
(+) Scrap 140.00
PV Factor @ 14% 0.88 0.77 0.67 0.59 0.52
PV CI 234.08 218.06 207.54 194.35 270.36
(i) Total PV CI = ` 1124.40 Lakhs

WN 3 : Calculation of Present Value of tax savings on short
term Capital loss
` in Lakhs
WDV at end of 5 year
th
278.53
(-) Sale value 140.00

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Loss on sale 138.53

Tax savings on above @ 15% 20.78
PV of tax savings on short term capital loss (STCL) = Tax saving x

PV factor (14%, 5th year)
= 20.78 x 0.52
= ` 10.81 lakhs
NPV = PV CI + PV of tax savings on STCL - PV CO
= 1124.40 + 10.81 - 1000
NPV = ` 135.20 lakhs
Advise: Since the NPV of the project is positive, project should
be accepted
(B) Calculation of IRR
IRR is that discounting rate where NPV = 0 (point where PV of all
CI = PV Co)
We know that @ 14%, NPV is ` 135.20, so by trial-and-error
method we need to calculate that rate where NPV equals 0.
When Discounting rate is 16%
1 2 3 4 5
CFAT 266.00 283.20 309.76 329.41 229.93
Release
(+) Scrap 140.00
PV Factor @ 14% 0.86 0.74 0.64 0.55 0.48
PV CI 228.76 209.57 198.25 181.17 249.56
PV CI = 1067.31
(+) PV of tax savings on STCL = 9.97 {20.78 x 0.48}
(-) PV CO = (1000)

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NPV = ` 77.29
Since NPV is positive at 16% as well, we need to go for Trial II at
20%
When Discounting rate is 20%
1 2 3 4 5
CFAT 266.00 283.20 309.76 329.41 229.93
Release
(+) Scrap 140.00
PV Factor @ 14% 0.83 0.69 0.58 0.48 0.4
PV CI 220.78 195.41 179.66 158.12 207.97
PV CI = 961.94
(+) PV of tax savings on STCL = 8.31 {20.78 x 0.40}
(-) PV CO = (1000)
NPV = ` (29.75)
Since NPV is negative at 20%, IRR lies somewhere between 16%
and 20%
NPV at LR
IRR = LR + ×(HR -LR)
NPV at LR - NPV at HR
LR = Lower Rate (16% here) HR = Higher Rate (20% here)

77.29
IRR = 16+ ×(20-16)
77.29 − ( −29.75)
IRR = 18.89%
(C) Calculation of Desirability Factory (Profitability Index)
PI = TOTAL PV CI / PV CO
PI = 1135.21 / 1000
PI = 1.13521

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10. (A) Condition (a) says that accounts shouldn’t be overdue for more than
5 days to the net period. In other words, it means those accounts who
are overdue by 45 days (40 days + 5 additional days), will not fulfill
condition a) and thus will not be eligible for 90% lending.
Therefore, from the above, we can see that Accounts DR 03 & DR

07 are overdue for more than 45 days and hence will not be
eligible for 90% lending.
Condition (b) says that average receivables ageing (payment

period) should not exceed 15 days to the net period i.e. it should
not exceed 55 days (40 days + 15 days = 55 days). Therefore, from
the above, we can see that Accounts DR 04 & DR 10 has an
ageing of more than 55 days. Hence, they would also not be
eligible for 90% lending.
Amount of Bank Lending:
Accounts Bank Lending at 90% Bank Lending at 65%

DR 01 50,000 -
DR 02 25,000 -
DR 03 - 1,20,000
DR 04 - 72,000
DR 05 45,000 -
DR 06 1,75,000 -
DR 07 - 19,000
DR 08 54,000 -
DR 09 1,05,000 -
DR 10 - 37,000
Total 4,54,000 2,48,000
(-) Reserve 22,700 {4,54,000 x 5%} 37,200 {2,48,000 x 15%}
Net 4,31,300 2,10,800
Loan 3,88,170 1,37,020

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Total short-term loan granted by the bank = ` 5,25,190

(B) Calculation of the Effective Interest Cost
Interest at 12% (On 90% lending) = 3,88,170 x 0.12 = 46,580.4
Interest at 15% (On 65% lending) = 1,37,020 x 0.15 = 20,553
Total Interest = ` 67,133.4
Effective Interest Cost (%) = Interest (1-t) / Total Short-term Loan
= 67,133.4 (1-0.25) / 5,25,190
Effective Interest Cost (%) = 9.59%
11. (a) Emerging Issues/Priorities Affecting the Future Role of Chief
Financial Officer (CFO)
(i) Regulation: Regulation requirements are increasing and CFOs
have an increasingly personal stake in regulatory adherence.
(ii) Globalisation: The challenges of globalisation are creating a
need for finance leaders to develop a finance function that
works effectively on the global stage and that embraces
diversity.
(iii) Technology: Technology is evolving very quickly, providing
the potential for CFOs to reconfigure finance processes and
drive business insight through ‘big data’ and analytics.
(iv) Risk: The nature of the risks that organisations face are
changing, requiring more effective risk management
approaches and increasingly CFOs have a role to play in
ensuring an appropriate corporate ethos.
(v) Transformation: There will be more pressure on CFOs to
transform their finance functions to drive a better service to
the business at zero cost impact.
(vi) Stakeholder Management: Stakeholder management and
relationships will become important as increasingly CFOs
become the face of the corporate brand.
(vii) Strategy: There will be a greater role to play in strategy

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validation and execution, because the environment is more

complex and quick changing, calling on the analytical skills
CFOs can bring.
(viii) Reporting: Reporting requirements will broaden and
continue to be burdensome for CFOs.
(ix) Talent and Capability: A brighter spotlight will shine on
talent, capability and behaviours in the top finance role.
(b) Cost of equity capital is the rate of return which equates the
present value of expected dividends with the market share price.
Methods for Computation of Cost of Equity Capital
• Dividend Price Approach (: Here, cost of equity capital is
computed by dividing the expected dividend by market price
per share.
D1
Ke =
Po
• Earning/ Price Approach: The advocates of this approach co-
relate the earnings of the company with the market price of its
share.
E
Ke =
P
• Realized Yield Approach: According to this approach, the
average rate of return realized in the past few years is
historically regarded as ‘expected return’ in the future. The
yield of equity for the year is:
Dt + Pt
Yt =
Pt-1
• Capital Asset Pricing Model Approach (CAPM): CAPM

model describes the risk-return trade-off for securities. It
describes the linear relationship between risk and return for
securities.
Ke = Rf + ß (Rm − Rf)

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(c) In the most of the situations the Net Present Value Method (NPV)
and Profitability Index (PI) yield same accept or reject decision. In
general items, under PI method a project is acceptable if
profitability index value is greater than 1 and rejected if it less than
1. Under NPV method a project is acceptable if Net present value
of a project is positive and rejected if it is negative. Clearly a
project offering a profitability index greater than 1 must also offer
a net present value which is positive. But a conflict may arise
between two methods if a choice between mutually exclusive
projects has to be made. Consider the following example:
Project A Project B
PV of Cash inflows 3,00,000 80,000
Initial cash outflows 1,00,000 40,000
Net present value 2,00,000 40,000
P.I 3,00,000 80,000
=3 =2
1,00,000 40,000
According to NPV method, project A would be preferred, whereas
according to profitability index method project B would be
preferred.
This is because Net present value gives ranking on the basis of absolute
value of rupees, whereas, profitability index gives ranking on the basis of
ratio. Although PI method is based on NPV, it is a better evaluation
technique than NPV in a situation of capital rationing.

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6B: STRATEGIC MANAGEMENT
QUESTIONS
Multiple Choice Questions

1. In the ever-growing consumer electronics industry, Horizon
Technologies found itself at a crossroads in 2018. The company,
founded a decade earlier, had established itself as a key player in the
global market for smartphones and other electronics. However, the
pressure to stay relevant, meet customer demands, and fend off
competitors was mounting. This is the story of how Horizon
Technologies navigated its challenges, leveraging key business
strategies and analyses to achieve remarkable success.
Horizon Technologies recognized the need to divide its operations to
find areas for improvement. They conducted a comprehensive value
chain analysis, identifying both primary and support activities. By
streamlining processes and eliminating redundancies, the company
reduced production costs and enhanced product quality. This allowed
them to offer more competitive prices, thus gaining a strategic edge in
the market.
The company’s CEO, Mr. Jonathan Mercer, was known for his
authoritative management style. His challenge was to transform his
leadership approach to one that encouraged creativity and teamwork
within the SBUs. Mr. Mercer invested in leadership development
programs for middle and senior managers to enhance their
interpersonal and communication skills. The transition wasn’t easy, but it
fostered a more collaborative and dynamic work environment.
They did not stop there, Horizon Technologies adopted a Strategic
Business Unit (SBU) structure, dividing the company into smaller, more
manageable units. Each SBU was tasked with focusing on specific
product lines. This decentralization empowered individual units to make

REVISION TEST PAPER

strategic decisions autonomously, leading to quicker market response

and a deeper understanding of customer needs. It was the catalyst for
innovation and improved customer satisfaction.
Post organizational changes, Horizon Technologies strategized to
embrace a cost leadership strategy, positioning itself as the go-to brand
for affordable yet high-quality electronics. By optimizing production
processes and supply chain management, the company achieved cost
efficiencies that competitors struggled to match. This not only attracted
cost-conscious consumers but also enabled the company to maintain
healthy profit margins.
As Horizon Technologies expanded into new international markets, the
management recognized the importance of adapting to the local
environment. Conducting a thorough PESTLE analysis (Political,
Economic, Social, Technological, Legal, and Environmental) proved
pivotal for navigating complex market dynamics. This analysis
highlighted specific challenges, especially in understanding socio-
cultural trends and regulatory differences across regions. By leveraging
these insights, Horizon Technologies was able to overcome these
obstacles, customizing its products, marketing strategies, and operations
to align more effectively with local preferences and regulations,
ultimately contributing to their success.
Through these strategic moves, Horizon Technologies experienced a
remarkable transformation. Within two years, their market share had
significantly grown in local markets, whereas the cost leadership strategy
resonated strongly. Their annual revenue skyrocketed by 35%, and the
company saw a 20% increase in its stock price. The business case for
Horizon Technologies serves as an inspiration for companies navigating
competitive and dynamic industries.
Based on the above Case Scenario, answer the Multiple Choice
Questions.
(i) In Horizon Technologies’ journey towards globalization, PESTLE
analysis played a pivotal role in navigating diverse international
markets. Which aspect of PESTLE analysis proved to be the most
challenging for Horizon Technologies?


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(a) Socio-cultural factors, as they struggled to keep up with

changing trends and cultural preferences.
(b) Legal factors, given the complex regulatory landscape in
foreign markets.
(c) Environmental factors, with the need to adhere to varying
sustainability standards.
(d) Technological factors, due to rapid changes in local
technology preferences.
(ii) Horizon Technologies implemented a Strategic Business Unit (SBU)
structure to improve its responsiveness and innovation. How did
the SBU structure differ from the company’s previous
organizational model, and what benefits did this new structure
bring?
(a) The SBU structure replaced a functional structure and
empowered units to make strategic decisions. It led to
quicker market response and enhanced customer
satisfaction.
(b) The SBU structure replaced a matrix structure, improving
vertical communication and reducing operational silos.
(c) The SBU structure maintained the existing functional
structure but focused solely on cost-cutting measures.
(d) The SBU structure introduced a more centralized approach,
ensuring consistent decision-making across units.
(iii) Horizon Technologies faced internal challenges, including
leadership struggles with an authoritative CEO. How did Mr.
Jonathan Mercer transform his leadership style to foster a more
collaborative work environment, and what were the key outcomes
of this transformation?
(a) Mr. Mercer increased his authoritative approach to drive
quicker decision-making and efficiency.
(b) He introduced a strict top-down hierarchy to enhance
discipline and order within the organization.

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(c) Mr. Mercer invested in leadership development programs,

enhancing interpersonal and communication skills, which
resulted in a more collaborative and dynamic work
environment.
(d) He delegated most of his responsibilities to middle managers,
reducing his involvement in the company’s daily operations.
(iv) While implementing a cost leadership strategy, Horizon
Technologies went beyond just streamlining their production
processes. What other factors did they consider achieving cost
efficiencies, and how did this contribute to their success?
(a) They solely focused on reducing labor costs, resulting in job
cuts and employee dissatisfaction.
(b) Horizon Technologies invested heavily in extravagant
marketing campaigns to attract a premium customer base.
(c) They optimized supply chain management and invested in
research and development, leading to enhanced product
quality and reduced production costs.
(d) The company acquired competitors to eliminate competition
and establish a monopoly in the market.
(v) The primary factor contributing to Horizon Technologies’
remarkable transformation was their commitment to systematic
analysis. What role did value chain analysis play in this
transformation, and how did it drive their success in both local and
global markets?
(a) Value chain analysis revealed opportunities for
diversification, enabling them to cater to various market
segments.
(b) It allowed the company to identify and eliminate
inefficiencies in their operations, resulting in cost reductions
and improved product quality.
(c) Value chain analysis highlighted the need for excessive
vertical integration, helping them control the entire supply
chain.


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(d) Horizon Technologies used value chain analysis primarily for

financial forecasting and budgeting.
2. In a recent strategy meeting, the leadership team of TechNova, a
growing software development firm, emphasized the importance of
defining the core purpose of the organization. They aimed to outline the
primary reason for the company’s existence and to guide their decision-
making processes during challenging times. They noted that this central
guiding declaration would help align the team’s efforts and
communicate to stakeholders what the company stands for. What term
best describes the central guiding declaration that communicates the
purpose and values of TechNova?
(a) Vision
(b) Mission
(c) Objectives
(d) Goals
3. A company’s flagship product has experienced a plateau in sales despite
heavy promotions and marketing. What phase of the Product Life Cycle
are they likely in, and what is the best strategic option to consider?
(a) Introduction; increase prices
(b) Growth; diversify product range
(c) Maturity; seek product differentiation
(d) Decline; invest in new technology
4. A multinational corporation is planning a merger with a local firm in a
developing country. The local firm’s community has high stakes in
maintaining local employment and environmental standards but
possesses low power in formal negotiations. How should the corporation
categorize this stakeholder?
(a) High power, low interest
(b) Low power, high interest
(c) High power, high interest

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(d) Low power, low interest

5. EcoGreen, a company specializing in sustainable home products, has
decided to enter the energy sector by developing and marketing solar
panels and home energy storage solutions. This new direction involves
creating a completely new product line that extends beyond their
traditional home goods, thereby entering an industry with their current
brand. What strategy is EcoGreen using to enter the energy sector?
(a) Market penetration
(b) Product development
(c) Market development
(d) Diversification
6. Alpha Corp is undergoing a shift to foster a culture that encourages
innovative thinking and team collaboration. To achieve this, the
company is focusing on how leaders interact with their teams and set
examples for behavior, aiming to align leadership practices with desired
cultural outcomes. Which aspect of AlphaCorp is being adjusted to
foster a culture of innovation and collaboration?
(a) Structure
(b) Systems
(c) Skills
(d) Style
Descriptive Questions
Chapter 1-Introduction to Strategic Management
7. XYZ Enterprises operates in various sectors, including renewable energy
solutions, organic skincare products, eco-friendly packaging, and smart
home technologies. The organization is currently in the process of
recruiting a Chief Executive Officer. In this scenario, imagine yourself as
an HR consultant for XYZ Enterprises. Identify the strategic level that
encompasses this role within XYZ Enterprises. Provide an overview of
the key duties and responsibilities falling under the Chief Executive
Officer's scope.


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8. ‘A company's mission statement is typically focused on its present

business scope.' Explain the significance of a mission statement.
Chapter 2-Strategic Analysis: External Environment
9. Mr. Arun Kumar has built a successful business in the handmade ceramic
products industry in Gujarat. His company, CeramiCrafts, is renowned for
crafting distinctive, high-quality ceramic home décor items that have
gained a strong foothold in the market. However, recent market shifts
and rising competition have impacted sales. Seeking professional
guidance, Mr. Kumar consults a strategic advisor who recommends an
in-depth analysis of the competitive landscape. To comprehend the
competitive landscape, what steps should Mr. Kumar follow?
10. According to Michael Porter, what are the five competitive forces that
exist within an industry?
Chapter 3-Strategic Analysis: Internal Environment
11. ABC Corporation, a leading manufacturer of consumer electronics, is
considering launching a new line of smart home devices. As a strategic
manager, conduct a SWOT analysis for ABC Corporation to assess the
feasibility and potential success of this new venture. Consider both
internal and external factors that could impact on the success of the new
product line.
12. What are channels? Why is channel analysis important? Explain the
different types of channels?
Chapter 4-Strategic Choices
13. InnovaTech, a technology company with a range of business units, is
assessing its investment opportunities. To allocate resources effectively,
InnovaTech uses a matrix that evaluates each business unit based on
two key factors: industry attractiveness and business unit strength.
For example, the AI solutions division, positioned in a highly attractive
industry with a strong competitive edge, receives a "go ahead" for
further investment. In contrast, its legacy software division, operating in
a less attractive industry with a weaker position, receives a "be careful"
rating, suggesting limited investment. Identify and explain which
analytical tool InnovaTech is using for this evaluation.

REVISION TEST PAPER

14. What do you understand by Strategic Alliance? Discuss its advantages.

Chapter 5-Strategy Implementation and Evaluation
15. EcoTec, a company specializing in sustainable technology solutions, is
facing challenges due to shifts in environmental regulations and market
preferences. To manage these uncertainties, they regularly review and
update their business assumptions and strategic plans based on
changing regulatory environments and consumer trends. This proactive
approach helps them stay aligned with evolving market conditions and
maintain a competitive edge. Explain which approach is EcoTech to
adapt to changes in regulations and market conditions?
16. GloWare Ltd., an apparel manufacturer, has been in the market for over
a decade. Until 2023, it operated on the founding principles of its CEO,
focusing on a limited regional market. With new growth opportunities
arising, GloWare is now interested in developing new competencies in
areas such as digital marketing, product innovation, sustainable
materials, and financial management. Recognizing that changing one
area may impact others, the company wants a comprehensive
understanding of the interconnected elements that contribute to its
operational effectiveness.
As a strategist, you are tasked with creating a questionnaire to analyze
both the "hard" and "soft" elements of the organization. This assessment
will enable GloWare to understand the factors that influence its
effectiveness and to strategically align its structure, skills, and culture
with its growth ambitions.
SUGGESTED ANSWERS/HINTS
MCQ No. Answer

1. (i) (a)
(ii) (a)
(iii) (c)
(iv) (c)
(v) (b)


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2. (b)
3. (c)
4. (b)
5. (d)
6. (d)
7. The Chief Executive Officer (CEO) position within XYZ Enterprises
operates at the Corporate Level. This executive level is key in leading
the overall direction, performance, and success of the entire
organization. The CEO assumes a central role in shaping the company's
strategic vision, overseeing diverse business sectors, and ensuring
alignment with organizational goals.
Key Duties and Responsibilities of the CEO:
The CEO's role encompasses various strategic responsibilities at the
Corporate Level, involving:
1. oversee the development of strategies for the whole organization;
2. defining the mission and goals of the organization;
3. determining what businesses, it should be in;
4. allocating resources among the different businesses;
5. formulating, and implementing strategies that span individual
businesses;
6. providing leadership for the organization;
7. ensuring that the corporate and business level strategies which
company pursues are consistent with maximizing shareholders
wealth; and
8. managing the divestment and acquisition process.
Given the diverse nature of XYZ Enterprises, including renewable energy
solutions, organic skincare products, eco-friendly packaging, and smart
home technologies, the CEO's responsibilities are tailored to navigate
the unique challenges and opportunities presented by each sector. In
conclusion, the CEO at the Corporate Level plays a critical role in guiding

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XYZ Enterprises strategically, ensuring cohesive leadership, and driving

sustainable success across its diverse business domains.
8. A company's mission statement is typically focused on its present
business scope, who we are and what we do. Mission statements
broadly describe an organization's present capability, customer focus,
activities, and business make up. Mission for an organization is
significant for the following reasons:
• It ensures unanimity of purpose within the organization.
• It develops a basis, or standard, for allocating organizational

resources.
• It provides a basis for innovating the use of the organisation’s

resources
• It establishes a general tone or organizational climate, to suggest a

business-like operation.
• It serves as a focal point for those who can identify with the
organisation's purpose and direction.
• It facilitates the translation of objectives and goals into a work

structure involving the assignment of tasks to responsible elements
within the organization.
• It specifies organizational purposes and the translation of these

purposes into goals in such a way that cost, time, and performance
parameters can be assessed and controlled.
9. Understanding the competitive landscape is crucial for Mr. Arun Kumar
to navigate the handmade ceramic products industry in Gujarat
successfully. This involves identifying both direct and indirect
competitors while gaining insights into their vision, mission, core values,
niche markets, and strengths and weaknesses. Here are the structured
steps Mr. Kumar should follow to comprehend the competitive
landscape and bolster his strategic position:
(i) Identify the competitor: The first step to understanding the
competitive landscape is to identify the competitors in the


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handmade ceramic products industry. Mr. Kumar should gather

actual data on the market share and positioning of competitors
within the industry.
(ii) Understand the competitors: Once the competitors have been
identified, Mr. Kumar can use market research reports, the internet,
newspapers, social media, industry reports, and various other
sources to understand the products and services offered by
competitors. This will help him comprehend how they position
themselves in different markets and their unique selling
propositions.
(iii) Determine the strengths of the competitors: Mr. Kumar should
assess what the competitors excel at. Do they offer superior
product quality? Are they using marketing strategies that reach a
wider customer base? Why do consumers choose them over
others? Understanding these strengths will help Mr. Kumar identify
areas where his company, CeramiCrafts, can enhance its offerings.
(iv) Determine the weaknesses of the competitors: Weaknesses of
competitors can be identified by reviewing customer feedback,
consumer reports, and reviews. Consumers often share their
experiences, especially when products or services are either
exceptional or subpar. By examining these weaknesses, Mr. Kumar
can find opportunities to position CeramiCrafts as a better
alternative.
(v) Put all of the information together: At this stage, Mr. Kumar
should consolidate all the information gathered about
competitors. This will help him identify gaps in the market that his
company can fill, as well as areas where CeramiCrafts needs to
improve. By understanding the competition thoroughly, he can
devise strategies that strengthen his market position.
By following these steps, Mr. Kumar can gain a comprehensive
understanding of the competitive landscape, enabling him to make
informed strategic decisions for CeramiCrafts. This tailored approach
ensures that the insights gained are directly applicable to the handmade
ceramic products industry in Gujarat.

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10. Michael Porter's Five Forces model is a widely utilized tool for
systematically analyzing the competitive forces within an industry. The
model identifies five competitive forces that shape the overall
competitive landscape:
• Threat of New Entrants: New entrants bring added capacity and
product variety, intensifying competition and impacting prices. The
size of new entrants magnifies their competitive influence, placing
constraints on prices and affecting existing players' profitability.
• Bargaining power of Buyers: The ability of buyers to form groups
or cartels influences their bargaining power. This force, particularly
in industrial products, impacts pricing and often leads to demand
for better services, influencing costs and investments for
producers.
• Bargaining power of Suppliers: Suppliers with specialized
offerings exert significant bargaining power, especially when
limited in number. Supplier bargaining power determines raw
material costs, affecting industry attractiveness and profitability.
• Rivalry among Current Players: Existing players engage in
competition, influencing strategic decisions across various levels.
This rivalry is evident in pricing, advertising, cost pressures, and
product strategies, impacting the overall competitive landscape.
• Threats from Substitutes: Substitute products can alter an
industry's competitive dynamics, offering price advantages or
performance improvements. Substitutes limit prices and profits,
and industries with substantial R&D investments are particularly
susceptible to threats from substitute products.
These forces collectively determine industry’s attractiveness and
profitability by influencing factors such as costs and investments
required for industry participation. The strength of these forces varies
across industries, ultimately shaping the potential for earning attractive
profits.


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11. SWOT Analysis for ABC Corporation's New Smart Home Devices Venture:
Strengths Weaknesses
• Strong brand reputation in • Limited experience in the
consumer electronics. smart home devices market.
• Established distribution • May require additional
network. investments in research and
development.
• Access to technological • Potential challenges in
expertise for product integrating a new product line
development. with existing offerings.
• Financial resources to • Lack of established customer
support product launch and base for smart home devices.
marketing.
Opportunities Threats
• Growing market for smart • Intense competition from
home devices due to established players in the
increasing consumer smart home devices market.
interest in home
automation.
• The possibility of partnering • Rapid technological
with existing smart home advancements lead to short
platform providers. product life cycles.
• Potential to leverage brand • Potential for cybersecurity
loyalty from existing threats in connected devices.
customers.
• Ability to differentiate • Economic factors impacting
through innovative features consumer spending on
and design. discretionary items.

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The SWOT analysis highlights that while ABC Corporation has several
strengths that can support the launch of a new smart home devices line,
there are also significant weaknesses and threats to consider. To
maximize the chances of success, ABC Corporation should focus on
leveraging its brand reputation and distribution network while carefully
addressing the weaknesses and threats identified. Additionally, being
informed about technological developments and consumer trends will
be essential for maintaining competitiveness in the dynamic smart home
devices market.
12. Channels represent the distribution system through which
organizations distribute their products or provide services to customers.
They play a pivotal role in reaching target markets, maximizing sales,
and establishing competitive advantages.
Channel analysis is important when the business strategy is to scale up and
expand beyond the current geographies and markets. When a business
plans to grow to newer markets, they need to develop or leverage existing
channels to get to new customers. Thus, analysis of channels that suit one’s
products and customers is of utmost importance.
There are typically three channels that should be considered: sales
channel, product channel and service channel.
♦ The sales channel - These are the intermediaries involved in
selling the product through each channel and ultimately to the
end user. The key question is: Who needs to sell to whom for
your product to be sold to your end user? For example, many
fashion designers use agencies to sell their products to retail
organizations, so that consumers can access them.
♦ The product channel - The product channel focuses on the
series of intermediaries who physically handle the product on its
path from its producer to the end user. This is true of Australia
Post, who delivers and distributes many online purchases
between the seller and purchaser when using eBay and other
online stores.


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♦ The service channel - The service channel refers to the entities

that provide necessary services to support the product, as it
moves through the sales channel and after purchase by the end
user. The service channel is an important consideration for
products that are complex in terms of installation or customer
assistance. For example, a Bosch dishwasher may be sold in a
Bosch showroom, and then once sold it is installed by a Bosch
contracted plumber.
13. InnovaTech is using the GE Matrix, a strategic tool designed to assess
the resource allocation needs of different business units based on two
factors: industry attractiveness and business unit strength. This matrix
is a nine-cell grid that helps companies prioritize investments by
categorizing units into “grow,” “hold,” or “harvest” zones, depending on
their positions within the matrix.
For InnovaTech, the AI solutions division, which operates in a highly
attractive industry with a strong competitive position, falls into the
“grow” category, meriting further investment. Meanwhile, the legacy
software division operates in a less attractive industry with weaker
positioning, likely placing it in the “harvest” or “hold” category, where
investments are minimized.
The GE Matrix enables companies like InnovaTech to systematically
evaluate each business unit’s potential, optimize resource allocation, and
focus on divisions that align with long-term growth and profitability
goals.
14. A strategic alliance is a relationship between two or more businesses
that enables each to achieve certain strategic objectives which neither
would be able to achieve on its own. The strategic partners maintain
their status as independent and separate entities, share the benefits and
control over the partnership, and continue to make contributions to the
alliance until it is terminated. The advantages of strategic alliance can be
broadly categorised as follows:
(a) Organizational: Strategic alliance helps to learn necessary skills
and obtain certain capabilities from strategic partners. Strategic

REVISION TEST PAPER

partners may also help to enhance productive capacity, provide a

distribution system, or extend supply chain.
(b) Economic: There can be reduction in costs and risks by
distributing them across the members of the alliance. Greater
economies of scale can be obtained in an alliance, as production
volume can increase, causing the cost per unit to decline. The
partners can also take advantage of co-specialization, creating
additional value.
(c) Strategic: Rivals can join together to cooperate instead of
competing. Strategic alliances may also be useful to create a
competitive advantage by the pooling of resources and skills. This
may also help with future business opportunities and the
development of new products and technologies. Strategic alliances
may also be used to get access to new technologies or to pursue
joint research and development.
(d) Political: Sometimes strategic alliances are formed with a local
foreign business to gain entry into a foreign market either because
of local prejudices or legal barriers to entry.
15. EcoTech is using Premise Control to adapt to changes in regulations
and market conditions. Premise Control is a strategic management
approach focused on continuously monitoring and reviewing the
underlying assumptions that form the basis of an organization’s
strategy. By regularly assessing these assumptions—such as
environmental regulations and consumer preferences, EcoTech ensures
that its strategic plans remain relevant and responsive to external
changes. This proactive process helps the company make timely
adjustments to its strategies, allowing it to stay competitive and aligned
with the evolving market environment.
16. In addressing the strategic needs of GloWare Ltd., the McKinsey 7-S
Model serves as a valuable tool. This model examines how various
"hard" and "soft" elements within the organization interact, with the
understanding that modifying one aspect can create a ripple effect on
other elements, helping to maintain a balanced and effective
organizational structure. By analyzing these elements, GloWare can gain


REVISION TEST PAPER
insights into its organizational design and make strategic adjustments to

improve performance.
The McKinsey 7-S Model categorizes elements into hard and soft
components:
Hard Elements (directly managed by the company):
1. Strategy: The organization's direction and competitive approach,
designed to leverage core competencies and achieve industry
leadership.
2. Structure: The chosen organizational setup, shaped by resource
availability and the degree of centralization or decentralization
desired by management.
3. Systems: The daily operations, processes, and teams that execute
objectives in an efficient and effective manner.
Soft Elements (influenced by organizational culture and more
challenging to define):
1. Shared Values: Core beliefs that shape the culture and ethical
code within the organization.
2. Style: Leadership style and its impact on decision-making,
employee motivation, and goal delivery.
3. Staff: The talent pool and workforce capabilities.
4. Skills: The key competencies of employees that contribute to
organizational success.
While the McKinsey 7-S Model provides a structured approach to
analyzing organizational effectiveness, it has certain limitations:
1. Limited Focus on External Environment: The model focuses only
on internal elements, potentially overlooking external factors
impacting the organization.
2. Undefined Organizational Effectiveness: It does not clearly
explain how to measure or achieve organizational effectiveness.

REVISION TEST PAPER

3. Static Nature: The model is considered more static and may lack
flexibility in dynamic decision-making situations.
4. Potential Gaps in Strategy Execution: It may not fully capture
gaps between strategy development and execution.
By applying the McKinsey 7-S Model, GloWare Ltd. can gain a
comprehensive understanding of the interconnected elements within its
organization and how they impact overall performance. Insights
gathered from a questionnaire based on this model can inform strategic
decisions, allowing GloWare to enhance growth, operational efficiency,
and competitiveness in a changing market.


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6A: FINANCIAL MANAGEMENT

Division A: Case Scenarios

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Average Sales would be ` 120 lakhs p.a. with a GP margin of 18%.

Project Cost * Cost of Minimum rate

JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

Above 150 lakhs & Upto 250 lakhs 12% 14%

3 JANUARY 2025 EXAMINATION

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v. The amount of revenue subsidy granted by the central govt is

JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

Division B: Descriptive Questions

5 JANUARY 2025 EXAMINATION

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JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

Earnings per share (EPS) 5.6

The company has reserves and surplus of ` 10,00,000 and required

Variable Cost 72,000 65% of Sales

Fixed Cost 35,000 -

Interest Expenses 12,000 6,000

Financial Leverage 4:1 -

Operating Leverage - 5:1

Income Tax Rate 30% 30%

7 JANUARY 2025 EXAMINATION

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Particulars Amount (`)

Applying Walter’s Model:

JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

Year 14% 16% 20%

Management of Working Capital

9 JANUARY 2025 EXAMINATION

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REVISION TEST PAPER

Accounts Amount Outstanding in Average Aging

You are required to CALCULATE:

JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

11 JANUARY 2025 EXAMINATION

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Perishable = 98.40 x 60% x 10 /360 = 1.64 Lakhs

JANUARY 2025 EXAMINATION

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FINANCIAL MANAGEMENT AND

WN – 4 Calculation of Outstanding salaries

Total Funds = 194.0605 L