FINANCIAL MANAGEMENT CA.

DINESH JAIN

FINANCIAL MANAGEMENT
CASE SCENARIO MCQ COMPILATION
[May 2024 RTP, Sep 2024 RTP, Jan 2025 RTP, May
2024 MTP, Sep 2024 MTP, Jan 2025 MTP, Sep
2024 Exam]
BY CA. DINESH JAIN

DEDICATED TO MY LOVABLE FATHER

[RAMESH JAIN]

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Important Links:
CA Inter FM Concept Revision - https://youtu.be/hUvOefSTtT8
CA Inter Costing Concept Revision - https://youtu.be/KaUWaMpd7Gk
CA Inter FM and Costing Short concept videos playlist -
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CA Inter Costing Question Bank + Concept Book + Theory Book -
https://t.me/ca_dinesh_jain_inter_final/253
CA Inter FM Question Bank + Concept Book + Theory Book -
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Telegram Channel link - https://t.me/ca_dinesh_jain_inter_final
Telegram Discussion Group link - https://t.me/dineshjain
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Links to buy CA Inter Classes - https://bharadwajinstitute.com/course/ca

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1. Ratio Analysis
If velocity of stock is 3 months, annual sales amount to Rs.6 lakh at 20% gross profit margin and opening
stock is Rs.90,000; what is the closing stock value?
a. Rs.90,000 b. Rs.70,000
c. Rs.1,50,000 d. Rs.1,00,000
Answer:
COGS = 80% of sales = 80% x 6,00,000 = Rs.4,80,000
3 3
Average stock = COGS x = 4,80,000 𝑥 = 1,20,000
12 12
Opening stock + Closing stock 90,000 + Closing stock
Average stock = ; 1,20,000 =
2 2
Closing stock = 2,40,000 − 90,000 = Rs. 1,50,000

2. Ratio Analysis
Total Assets & Current liabilities of the Vitrag Limited are 50 lakhs & 10 lakhs respectively. ROCE is 15%,
measure of business operating risk is at 3.5 & P/V ratio is 70%. Calculate Sales.
a. 21 lacs b. 30 lacs c. 37.50 lacs d. 40 lacs
Answer:
• Answer is Rs.30 lacs
• Measure of business risk is basically operating leverage
• Capital employed = Total Assets – CL = 50,00,000 – 10,00,000 = Rs.40,00,000
Particulars Calculation Amount
Sales 21,00,000/70% 30,00,000
Less: Variable cost -9,00,000
Contribution EBIT x OL 21,00,000
6,00,000 x 3.5
Less: Fixed cost -15,00,000
EBIT ROCE x CE 6,00,000
15% x 40,00,000

3. Ratio Analysis:
KT Ltd.’s opening stock was Rs. 2,50,000 and the closing stock was Rs. 3,75,000. Sales during the year were
Rs. 13,00,000 and the gross profit ratio was 25% on sales. Average accounts payable are Rs. 80,000. Creditors
Turnover Ratio =?
a. 13.33 b. 14.33
c. 14.44 d. 13.75
Answer:
• COGS = 75% of sales = 75% x 13,00,000 = Rs.9,75,000
• COGS = Opening stock + Purchases – Closing stock
• 9,75,000 = 2,50,000 + Purchases – 3,75,000
• Purchases = 11,00,000
Purchases 11,00,000
Creditors Turnover Ratio = = = 13.75 Times
Average Creditors 80,000

4. Ratio Analysis:
ZX Limited has total assets of Rs.7,20,000 and shareholders equity is Rs.4,50,000. The net profit margin of ZX
Limited is 12.5% and asset turnover ratio is 1.5. Using the Dupont model, the return on equity of ZX Limited
is calculated as:
a. 7.03% b. 50% c. 11.72% d. 30%
Answer:
ROE = NP Margin x Asset Turnover x Equity Multiplier
Total Assets 7,20,000
ROE = 12.50 x 1.50 x = 12.50 𝑥 1.50 𝑥 = 30.00%
Equity 4,50,000

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5. Cost of Capital
A company has issued bonds with a face value of Rs. 100,000 at an annual coupon rate of 8%. The bonds
are currently trading at 95% of their face value. What is the approximate cost of debt for the company
before taxes.
a. 9.00% b. 7.65% c. 8.00% d. 8.42%
Answer:
Interest after tax 8,000
Cost of debt = = 𝑥 100 = 8.42%
Net Proceeds 95,000

6. Cost of capital
Assuming Ke = 11%, Kd = 8% and Ko = 10%, Debt Equity ratio of the company
a. 2:3 b. 3:2 c. 1:2 d. 2:1
Answer:
Security Cost Weight Product
Equity 11 A 11A
Debt 8 1-A 8-8A
Overall 10 1 11+8-8A = 10
• Weight of equity (A) = 2/3 (or) 66.67%
• Weight of debt = 1 – 66.67% = 33.33%
• Debt/equity ratio = 33.33:66.67 (or) 1:2

7. Cost of capital
MNP Ltd. is a multinational company having its operations spread mostly in India and neighbouring
countries of India. The promotors of the company believed that capital structure of a company must be kept
flexible and balanced, where proper mix should always be maintained between debt and equity. Such mix
of debt and equity should be reviewed from time to time keeping in mind the changing situation of India
and the global scenario.

The capital structure of MNP Ltd. is as under:

Particulars Amount
9% Debentures Rs.2,75,000
11% Preference Shares Rs.2,25,000
Equity shares (face value at Rs.10 per share) Rs.5,00,000
Total capital of the company Rs.10,00,000
The following are some of the additional information provided by MNP Ltd. relating to the above mentioned
capital structure.
• Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of maturity. The market
price per debenture is Rs. 105.
• Rs. 100 per preference share redeemable at par has 3% floatation cost and 10 years of maturity. The
market price per preference share is Rs. 106.
• Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. The next year expected
dividend is Rs. 2 per share with an annual growth of 5%. The firm has a practice of paying all earnings
in the form of dividends.
• Corporate Income-tax rate is 35%
Since the company is a multinational company market value weights are preferred over book value weights
when calculating the Weighted Average Cost of Capital (WACC) for several reasons. The company believes
that market values reflect the current market perception of a company's financial health and future prospects.
This is more relevant for calculating the cost of capital today, as investors base their decisions on current
market conditions. Book values, based on historical accounting principles, may not accurately represent the
true economic value of the company's capital components. Market values capture the actual cost that a
company would incur if it were to raise new capital in the current market. Book values might not reflect the

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true cost of debt due to factors like changes in interest rates or creditworthiness. Similarly, book value of
equity might not reflect the current investor expectations for future dividends and growth. Market values
are readily available through stock prices and market interest rates. Obtaining accurate book values,
especially for intangible assets, can be a complex and time consuming process.

On the basis of this information provided above you are required to answer the following MCQs (1 to 5):
Question No.1: Calculate the cost of equity and choose the correct answer from the following?
a. 14% b. 15%
c. 16% d. 17%
Question No.2: Calculate the cost of debt and choose the correct answer from the following?
a. 6.11% b. 5.48%
c. 9% d. 10.55%
Question No.3: Calculate the cost of preference shares and choose the correct answer from the following?
a. 10.57% b. 5.11%
c. 9% d. 10%
Question No.4: Calculate the WACC using market value weights and choose the correct answer from
the following?
a. 12.80% b. 5.11%
c. 9% d. 10.55%
Question No.5: What will be the current market price of MNP Ltd.’s equity shares if Ke = 10%, expected
dividend is Rs. 2 per share and annual growth rate is 5% from the following options:
a. Rs.40 per share b. Rs.20 per share
c. Rs.30 per share d. Rs.45 per share
Answer:
Question No.1 15.00% (WN 1)
Question No.2 5.48% (WN 1)
Question No.3 10.57% (WN 1)
Question No.4 12.80% (WN 2)
Question No.5 Rs.40 per share (WN 3)

WN 1: Computation of cost of individual components of capital

Cost of Equity:
𝐷1 2
Ke = +𝐺 = + 0.05 = 15%
𝑃0 − 𝐹 24 − 4

Cost of Preference:
Preferece Dividend + Average other Costs
Cost of redeemable preference shares =
Average Funds Employed
100 − 102.82
11 + 10.718
Kp = 10 = = 10.57%
100 + 102.82 101.41
2
• Net proceeds = Issue price – Floatation cost
• Issue price = CMP = Rs.106
• Net proceeds = 106 – 3% = Rs.102.82

Cost of Debt:
Interest after tax + Average other Costs
Cost of Debt =
Average Funds Employed
100 − 102.90
9 𝑥 0.65 + 5.85 − 0.29
Kd = 10 = = 5.48%
100 + 102.90 101.45
2
• Net proceeds = Issue price – Floatation cost
• Net proceeds = 105 – 2% = Rs.102.90
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WN 2: Computation of WACC:
Source Cost Weight Product
Equity 15.00% 12,00,000 1,80,000
[50,000 x 24]
Preference share capital 10.57% 2,38,500 25,209
[2,250 x 106]
Debentures 5.48% 2,88,750 15,824
[2,750 x 105]
Total 17,27,250 2,21,033
Sum of Product 2,21,033
WACC = = = 12.80%
Sum of weights 17,27,250

WN 3: Expected market price

D1 2
P0 = = = Rs. 40
K e − G 0.10 − 0.05

8. Cost of capital:
Tiago Ltd is an all-equity company engaged in manufacturing of batteries for electric vehicles. There has
been a surge in demand for their products due to rising oil prices. The company was established 5 years ago
with an initial capital of Rs. 10,00,000 and since then it has raised funds by IPO taking the total paid up capital
to Rs. 1 crore comprising of fully paid-up equity shares of face value Rs. 10 each. The company currently has
undistributed reserves of Rs. 60,00,000. The company has been following constant dividend payout policy of
40% of earnings. The retained earnings by company are going to provide a return on equity of 20%. The
current EPS is estimated as Rs 20 and prevailing PE ratio on the share of company is 15x. The company wants
to expand its capital base by raising additional funds by way of debt, preference and equity mix. The
company requires an additional fund of Rs. 1,20,00,000. The target ratio of owned to borrowed funds is 4:1
post the fund-raising activity. Capital gearing is to be kept at 0.4x.

The existing debt markets are under pressure due to ongoing RBI action on NPAs of the commercial bank.
Due to challenges in raising the debt funds, the company will have to offer Rs. 100 face value debentures at
an attractive yield of 9.5% and a coupon rate of 8% to the investors. Issue expenses will amount to 4% of the
proceeds.

The preference shares will have a face value of Rs. 1000 each offering a dividend rate of 10%. The preference
shares will be issued at a premium of 5% and redeemed at a premium of 10% after 10 years at the same time
at which debentures will be redeemed.

The CFO of the company is evaluating a new battery technology to invest the above raised money. The
technology is expected to have a life of 7 years. It will generate a after tax marginal operating cash flow of
Rs. 25,00,000 p.a. Assume marginal tax rate to be 27%.

Question No.1: Which of the following is best estimate of cost of equity for Tiago Ltd?
a. 12.99% b. 11.99%
c. 13.99% d. 14.99%
Question No.2: Which of the following is the most accurate measure of issue price of debentures?
a. 100 b. 96
c. 90.58 d. 95.88
Question No.3: Which of the following is the best estimate of cost of debentures to be issued by the
company? (Using approximation method)
a. 7.64% b. 6.74%
c. 4.64% d. 5.78%
Question No.4: Calculate the cost of preference shares using approximation method
a. 10.23% b. 9.77%
c. 12.12% d. 12.22%
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Question No.5: Which of the following best represents the overall cost of marginal capital to be raised?
a. 10.52% b. 17.16%
c. 16.17% d. 16.71%
Answer:
Question No.1
D1 8.96
Cost of equity = +𝐺 = + 0.12 = 0.0299 + 0.12 = 𝟎. 𝟏𝟒𝟗𝟗 (𝒐𝒓)𝟏𝟒. 𝟗𝟗%
P0 300
• Current EPS = Rs.20
• Current DPS = 20 x 40% = Rs.8; Next year DPS = 8 + 12% = 8.96
• Growth Rate = ROE x Retention Ratio = 20% x 60% = 12.00%
• Price = EPS x PE Multiple = 20 x 15 = 300
Question No.2
Year Cash flow PVF @ 9.5% DCF
1 to 10 8.00 6.2788 50.23
10 100.00 0.4035 40.35
Issue Price 90.58
Question No.3
Interest after tax + Average other costs 8 x 73% + 1.30
Kd = = x 100 = 7.64%
Average funds employed 93.48
Redeemable value − Net proceeds 100 − 86.96
Average other costs = = = Rs. 1.30
Balance life 10
Redeemable value + Net proceeds 100 + 86.96
Average funds employed = = = Rs. 93.48
2 2
Question No.4
Preference Dividend + Average other costs
Cost of redeemable preference (K p ) =
Average Funds Employed
1100 − 1050
(100 + ) 105
Kp = 10 = 𝑥 100 = 9.77%
1075 1075
Question No.5
Computation of Amount to be raised:
Particulars Calculation Amount
Existing capital 1,60,00,000
New funds to be raised 1,20,00,000
Total Capital Employed 2,80,00,000
Capital Gearing Ratio 0.40 Times
Fixed Charge bearing Capital (0.40) 80,00,000
Equity capital (1.00) 2,00,00,000
Manner in which new funds to be raised:
Equity 2 Cr – 1.60 Cr 40,00,000
Debt (2,80,00,000 x 1/5) 56,00,000
Preference 1.2 cr – 0.40 cr – 0.56 Cr 24,00,000

Computation of WMCC:
Source Cost Weight Product
Equity 14.99 40,00,000 5,99,600
Debt 7.64 56,00,000 4,27,840
Preference 9.77 24,00,000 2,34,480
Total 10.52 1,20,00,000 12,61,920

9. Cost of Capital:
Ranu & Co. has issued 10% debenture of face value 100 for Rs. 10 lakh. The debenture is expected to be sold
at 5% discount. It will also involve floatation costs of Rs. 10 per debenture. The debentures are redeemable
at a premium of 10% after 10 years. Calculate the cost of debenture if the tax rate is 30%.

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a. 9.74% b. 9.56%
c. 8.25% d. 10.12%
Answer:
Basic information
Type of debt Redeemable
Face value Rs.100
Coupon rate 10%
Tax rate 30%
Issue price – floatation cost
Net proceeds 95 – (10) = 85.00
Redeemable value Rs.110
Balance life 10 years

Interest after tax + Average other costs 7 + 2.50

Kd = = x 100 = 9.74%
Average funds employed 97.50
Note:
• Interest = Face value x coupon rate = 100 x 10% = Rs.10
• Interest after tax = Interest x (1 – Tax rate) = 10 x (1 – 30%) = Rs.7
Redeemable value − Net proceeds 110 − 85
Average other costs = = = Rs. 2.50
Balance life 10
Redeemable value + Net proceeds 110 + 85
Average funds employed = = = Rs. 97.50
2 2

10. Cost of capital:

The capital structure of KPS Limited includes 5,00,000 equity shares of Rs.10 each. The market price of equity
share (cum-dividend) is Rs.75 per share. The company has declared to pay dividend of Rs.6 per share which
will be paid over next three days. The company has a history of consistent growth in its dividends. It has
been predicted that in the next year KPS Limited will pay dividend on its equity shares at Rs.7.59 per share.
The rate of dividend growth will be maintained in foreseeable future. The cost of equity is calculated as:
a. 36.5% b. 34.5% c. 37.5% d. 38.5%
Answer:
7.59 − 6
Growth rate in dividend = 𝑥 100 = 26.5%
6
D1 7.59
Ke = ( ) + 𝐺 = + 0.265 = 0.11 + 0.265 = 0.375 (𝑜𝑟)37.5%
P0 75 − 6
Note: We need to use ex-dividend price in the formula for computation of cost of equity.

11. Capital Structure

Small bus Company is into manufacturing mini buses. Since its establishment it has seen a phenomenal
growth in both its market share and profitability. The financial statements (Statement of P&L and Balance
Sheet) are shown below. The company enjoys the confidence of its shareholders who have been rewarded
with growing dividends year after year. Last year too, the company had announced 20 per cent dividend,
which was the highest in the automobile sector. The company has never defaulted on its loan payments and
enjoys a favourable face with its lenders, which include financial institutions, commercial banks and other
private debenture holders. The competition in the bus industry has increased in the past few years and the
company foresees further intensification of competition with the entry of several foreign bus manufacturers;
many of whom are market leaders in their respective countries. The mini bus segment especially, will witness
entry of foreign majors in the near future, with latest technology being offered to the Indian customer. Small
bus company’s management realises the need for large scale investment in upgradation of technology and
improvement of manufacturing facilities to beat competition.

While on one hand, the competition in the industry has been intensifying, on the other hand, there has been
a slowdown in the Indian economy, which has not only reduced the demand for buses, but also led to
adoption of price cutting strategies by various bus manufacturers.
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The Company needs Rs. 3,12,50,000 for the investment in technology and improvement of manufacturing
facilities. Company has three options for the funds:
I. The Company may issue 31,25,000 equity shares at Rs. 10 per share.
II. The Company may issue 15,62,500 equity shares at Rs. 10 per share and 1,56,250 debentures of
Rs. 100 denomination bearing an 9% rate of interest.
III. The Company may issue 15,62,500 equity shares at Rs. 10 per share and 1,56,250 preference
shares at Rs. 100 per share bearing an 10% rate of dividend.
The company’s earnings before interest and taxes after investment is Rs. 37,50,000. Income tax rate applicable
to the company is 40%. Based on the above facts, the management of the company asked you to answer the
following questions (MCQs 1 to 5):
Question No.1: What is the EPS under financial plan I?
e. 0.50 f. 0.62
g. 0.72 h. 0.44
Question No.2: What is the EPS under financial plan II?
e. 0.70 f. 0.90
g. 0.42 h. 1.10
Question No.3: What is the EPS under financial plan III?
e. 0.44 f. 0.70
g. 0.85 h. 1.20
Question No.4: What is the EBIT-EPS indifference points by formulae between Financing Plan I and Plan
II?
e. Rs.28,12,500 f. Rs.29,00,000
g. Rs.32,50,667 h. Rs.45,15,254
Question No.5: What is the EBIT-EPS indifference points by formulae between Financing Plan I and Plan
III?
e. Rs.36,36,667 f. Rs.45,25,000
g. Rs.28,56,256 h. Rs.52,08,333
Answer:
Question No.1 0.72 (WN 3)
Question No.2 0.90 (WN 3)
Question No.3 0.44 (WN 3)
Question No.4 Rs.28,12,500 (WN 4)
Question No.5 Rs.52,08,333 (WN 4)

Workings:
Step 1: Identification of alternatives:
• Alternative 1 – Issue 31,25,000 equity shares of Rs.10 each
• Alternative 2 – Issue 15,62,500 equity shares of Rs.10 each and 1,56,250 9% debentures of Rs.100 each
• Alternative 3 – Issue 15,62,500 equity shares of Rs.10 each and 1,56,250 10% preference shares of
Rs.100 each

Step 2: Computation of interest, preference dividend and no of equity shares:

Particulars Alt 1 Alt 2 Alt 3
Interest
Existing interest - - -
New Interest - 14,06,250 -
[1,56,250 x 100 x 9%]
Total Interest - 14,06,250 -
Preference dividend
Existing - - -
New - - 15,62,500

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[15,62,500 x 100 x 10%]
Total dividend - - 15,62,500
No of equity shares
Existing - - -
New 31,25,000 15,62,500 15,62,500
Total shares 31,25,000 15,62,500 15,62,500

WN 3: Computation of EPS:
Particulars Alt 1 Alt 2 Alt 3
EBIT 37,50,000 37,50,000 37,50,000
Less: Interest 0 -14,06,250 0
EBT 37,50,000 23,43,750 37,50,000
Less: Tax -15,00,000 -9,37,500 -15,00,000
EAT 22,50,000 14,06,250 22,50,000
Less: Preference dividend 0 0 -15,62,500
EAES 22,50,000 14,06,250 6,87,500
No of shares 31,25,000 15,62,500 15,62,500
EPS (EAES/No of shares) 0.72 0.90 0.44

WN 4: Computation of indifference point:

• Indifference point refers to level of EBIT at which EPS of two alternatives will be equal
• Let us assume EBIT to be X
Particulars Alt 1 Alt 2 Alt 3
EBIT X X X
Less: Interest 0 -14,06,250 0
EBT X X-14,06,250 X
Less: Tax 0.4X 0.4(X – 14,06,250) 0.4X
EAT 0.6X 0.6(X-14,06,250) 0.6X
Less: Preference dividend 0 0 -15,62,500
EAES 0.6X 0.6(X-14,06,250) 0.6X – 15,62,500
No of shares 31,25,000 15,62,500 15,62,500
0.6X 0.6X − 8,43,750 0.6X − 15,62,500
EPS (EAES/No of shares) 31,25,000 15,62,500 15,62,500

Indifference point between Plan 1 and Plan 2:

At indifference point EPS of Plan 1 will be equal to EPS of Plan 2
EPS of Plan 1 = EPS of Plan 2
0.6X 0.6X − 8,43,750 16,87,500
= ; 0.6X = 1.2X − 16,87,500; X = = 𝟐𝟖, 𝟏𝟐, 𝟓𝟎𝟎
31,25,000 15,62,500 0.6
• Indifference point between Plan 1 and Plan 2 = EBIT of Rs.28,12,500

Indifference point between Plan 1 and Plan 3:

At indifference point EPS of Plan 1 will be equal to EPS of Plan 3
EPS of Plan 1 = EPS of Plan 3
0.6X 0.6X − 15,62,500 31,25,000
= ; 0.6X = 1.2X − 31,25,000; X = = 𝟓𝟐, 𝟎𝟖, 𝟑𝟑𝟑
31,25,000 15,62,500 0.6
• Indifference point between Plan 1 and Plan 3 = EBIT of Rs.52,08,333

12. Capital Structure

Abhi Ltd is an all equity financed company. It is considering replacing Rs. 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
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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%
Answer:
Before After
Particulars restructuring restructuring
500.00 500.00
EBIT [Reverse worked] [Same as before restructuring]
-41.25
Less: Interest - [275 x 15%]
500.00
EBT [350/70%] 458.75
Less: Tax @ 30% -150.00 -137.625
350.00
EAT [1,750 x 20%] 321.125

10.50%
Cost of debt NA [15% x 70%]
20.62%
Cost of equity 20.00% [321.125/1,557.50]
Cost of capital 20.00% Not needed

Value of debt - 275

1,557.50
Value of equity 1,750 [1,832.50 – 275.00]
1,832.50
Value of firm 1,750 (refer note below)
• Value post restructuring = Value of unlevered firm + (Amount of debt x Tax rate)
• Value post restructuring = 1,750 + (275 x 30%) = 1,832.50

13. Capital Structure

Earnings available to the equity shareholders Rs.30,00,000
Cost of equity 15.00%
Debt outstanding Rs.150 lacs
Value of firm will be:
a. Rs.200 lacs b. Rs.250 lacs c. Rs.350 lacs d. Rs.300 lacs
Answer:
30 lacs
Value of firm = Value of debt + value of equity = 150 lacs + = 150 + 200 = 350 lacs
15%

14. Capital Structure:

A company is considering changing its capital structure by increasing its debt ratio from 40% to 55%. What
is the likely impact on the company’s cost of equity, assuming all other factors remain constant?
a. Cost of equity will be unaffected by debt ratio b. Cost of equity will remain unchanged
c. Cost of equity will decrease d. Cost of equity will increase
Answer:
• Cost of equity will increase. As the company increases its debt ratio, the financial risk increases,
which typically leads to an increase in the cost of equity as equity investors demand a higher
return for the additional risk

15. Capital Structure:

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Ramu Ltd. wants to implement a project for which Rs. 25 lakhs is required. Following financing options are
at hand:
Option 1: Option 2:
• Equity shares – 25,000 @ Rs.100 • Equity shares – 10,000 @ Rs.100
• 12% preference shares – 5,000@ Rs.100
• 10% debentures – 10,000@ Rs.100
What is the indifference point & EPS at that level of EBIT assuming corporate tax to be 35%.
a. Rs. 2,94,872; Rs. 11.80 b. Rs. 3,20,513; Rs. 8.33
c. Rs. 2,94,872; Rs. 7.67 d. Rs. 3,20,513; Rs. 12.82
Answer:
Correct answer is Rs.3,20,513 and Rs.8.33
Particulars Option 1 Option 2
EBIT X X
Less: Interest 0 -1,00,000
[10,000 x 100 x 10%]
EBT X X-1,00,000
Less: Tax @ 35% 0.35X 0.35 (X – 1,00,000)
EAT 0.65X 0.65X – 65,000
Less: Preference dividend 0 -60,000
[5,000 x 100 x 12%]
EAES 0.65X 0.65X – 1,25,000
No of equity shares 25,000 10,000
EPS 0.65X 0.65X − 1,25,000
25,000 10,000

At indifference point, EPS of two alternatives would be equal and the same is computed below:
0.65X 0.65𝑋 − 1,25,000 0.65𝑋 0.65𝑋 − 1,25,000
= ; = ; 1.30X = 3.25X − 6,25,000
25,000 10,000 5 2

6,25,000
6,25,000 = 1.95X; X = = 3,20,513
1.95
• Hence indifference point is Rs.3,20,513
• EPS at indifference point = [0.65 x 3,20,513]/25,000 = Rs.8.33

16. Leverages
EBIT 4,00,000
EBT 3,00,000
Sales 16,00,000
Which of the following is / are correct?
1. DFL is 1.33
2. Interest coverage ratio is 3
3. Operating Profit Margin is 25%
Select the correct answer using the code given below:
a. 1,2 and 3 b. 1 and 2 only
c. 1 and 3 only d. 3 only
Answer:
EBIT 4,00,000
DFL = = = 1.33 Times
EBT 3,00,000
EBIT 4,00,000
Interest Coverage = = = 4.00 Times
Interest 1,00,000
EBIT 4,00,000
Operating Margin = = = 25.00%
Sales 16,00,000
Final answer – 1 and 3 only is correct

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FINANCIAL MANAGEMENT CA. DINESH JAIN
17. Leverages
Margin of safety is affected if:
1. P/V Ratio Changes
2. Fixed Cost Changes
3. Volume of sales Changes
a. 1 only b. 1 and 2 only
c. 2 and 3 only d. 1,2 and 3
Answer:
• MOS will be affected by change in PV Ratio, Fixed cost as well as volume of sales. Hence correct
answer is 1,2 and 3

18. Leverages
A company has a degree of operating leverage is 2 and degree of financial leverage is 3. If the sales of the
company increase by 5% during the next quarter, the Earning Per Share (EPS) will increase by?
a. 20% b. 30%
c. 50% d. 60%
Answer:
• Increase in EPS = Increase in sales x Combined leverage = 5% x (2 x 3) = 30%

19. Leverages
X ltd has actual Sales of Rs. 20 lakhs and its Break-even sales are at Rs. 15 lakhs. The degree of total risk
involved in the company is 6.5. Calculate the % impact on EPS, if EBIT is affected by 12%.
a. 40% b. 78%
c. 312% d. 19.50%
Answer – 19.50%
MOS 5,00,000 1 1
MOS (%) = = = 0.25 OL = = = 4 Times
Total Sales 20,00,000 MOS 0.25
• Total Risk (CL) = OL x FL
• 6.50 = 4 x FL; FL = 1.625 Times
• EBIT has increased by 12 percent and hence EPS will increase by EBIT % increase x FL = 12% x 1.625
= 19.50%

20. Leverages:
Given Data: Sales is Rs. 10,00,000, Break even sales is Rs. 6,00,000. What is the Degree of operating
leverage?
a. 3 b. 2
c. 2.5 d. 2.2
Answer:
MOS 4,00,000 𝟏 𝟏
MOS (%) = = = 0.40 𝐎𝐋 = = = 𝟐. 𝟓𝟎 𝐓𝐢𝐦𝐞𝐬
Total Sales 10,00,000 𝐌𝐎𝐒 𝟎. 𝟒𝟎

21. Leverages:
"If EBIT increases by 6%, net profit increases by 6.9%. If sales increase by 6%, net profit will increase by 24%.
Financial leverage must be -…………."
a. 1.19 b. 1.13
c. 1.12 d. 1.15
Answer:
Change in EPS (or)PAT 6.9%
Financial leverage = = = 𝟏. 𝟏𝟓 𝐓𝐢𝐦𝐞𝐬
Change in EBIT 6%

22. Leverages:
A firm has sales of Rs. 75,00,000, variable cost of Rs. 42,00,000 and fixed cost of Rs. 6,00,000. It has a debt
of Rs. 45,00,000 at 9% and equity of Rs. 55,00,000. Does it have favourable financial leverage?

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FINANCIAL MANAGEMENT CA. DINESH JAIN
a. ROI is less than interest on loan funds and hence it has no favourable financial leverage.
b. ROI is equal to interest on loan funds and hence it has favourable financial leverage.
c. ROI is greater than interest on loan funds and hence it has favourable financial leverage.
d. ROI is greater than interest on loan funds and hence it has unfavourable financial
leverage.
Answer:
ROI is greater than interest on loan funds and hence it has favourable financial leverage
EBIT 27,00,000
ROI = = 𝑥 100 = 27.00%
Amount of capital employed 45,00,000 + 55,00,000

23. Leverages:
A company has sales of Rs.6,00,000, Variable cost of Rs,2,40,000, Fixed operating cost of Rs.2,70,000. The
financial leverage is 2.5. The company wants to double its EBIT. The percentage change in sales required in
order to double its EBIT will be
a. 50% b. 25% c. 40% d. 80%
Answer:
Change in sales = 25%
Operating leverage links change in sales with change in EBIT
Contribution 3,60,000
Operating leverage = = = 4 Times
EBIT 90,000
EBIT needs to change by 100% (double) and hence sales has to change by 25% (100/4) for the same.

24. Investment Decision

Following are the data on a capital project being evaluated by the management of Aman Ltd.
Particulars Project A
Annual cost saving Rs.1,80,000
Useful life 5 Years
Internal Rate of Return 10%
Salvage value 0
PVAF (10%, 5 years) 3.79
Based upon the information, the payback period of the project will be
a. 2.652 b. 2.850
c. 3.790 d. 3.855
Answer:
• IRR is the rate of return at which NPV is zero and hence PV of inflows is equal to PV of outflows
• PV of inflows at 10% IRR = 1,80,000 x 3.79 = Rs.6,82,200; The same would be taken as initial outflow
of the project
Initial outflow 6,82,200
Payback = = = 3.79 Years
Annual cost saving 1,80,000

25. Investment Decision:

A project requires an initial investment of Rs. 20,000 and it would give annual cash inflow of Rs. 4,000. The
useful life of the project is estimated to be 10 years. What is payback reciprocal/Approximated IRR?
a. 20% b. 15%
c. 25% d. 12%
Answer:
Average cash flow 4,000
Payback reciprocal = = = 20.00%
Initial investment 20,000

26. Investment Decision

RS Limited is manufacturing and selling soft drinks in India. The Production process involves one important
process, which increases the shelf life of the soft drinks. Presently, the machine used for this purpose is an
old one, in which wastage due to breakage of glass bottles is considerably high and due to its limited capacity,
the company is not in a position to increase its production.
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FINANCIAL MANAGEMENT CA. DINESH JAIN

The production manager has approached the CEO of RS Limited for purchasing an automated machine,
which will drastically reduce the wastage due to breakage during the process of increasing shelf life of soft
drinks. The automated machine will support increase in production. The production manager is confident
that acquisition of the automated machine will be beneficial for the company.

Other information is as under:

• With the introduction of automated machine, additional sales and related costs over the next five
years would be as follows:
Year Additional Selling Price Variable Manufacturing, Selling Additional Fixed selling
Sales Units per unit and Distribution Cost per unit and distribution cost
1 20,000 30 20 25,000
2 25,000 30 20 30,000
3 30,000 35 20 30,000
4 32,000 35 22 35,000
5 28,000 35 22 35,000

• Cost of acquisition of automated machine is Rs.5,00,000. Residual life of the automated machine at
the end of its life of 5 years will be Rs.50,000. Depreciation on automated machine will be under
Straight line method. Depreciation is not included in the cost stated above
• The Production manager has estimated the cost savings (before tax) due to reduction in breakages as
under:

Year 1 Year 2 Year 3 Year 4 Year 5

Savings in cost due to reduction in breakages 15,000 15,000 20,000 20,000 20,000

• The machine which is being used at present has zero written down value and if sold, would fetch an
amount of Rs.10,000 only
• The cost of capital of the company is 10%. The tax rate applicable for the company is 30%. Ignore
capital gain taxes.
You are required to answer the following questions:
Question No.1: What is the Discounted Cash inflow after taxes for the year 1, year 2 and year 3 of the
Investment proposal
a. Rs.1,49,895, Rs.1,61,483 and Rs.2,66,605 b. Rs.1,36,350, Rs.1,52,810 and Rs.2,59,095
c. Rs.1,54,530, Rs.1,56,940 and Rs.2,55,340 d. Rs.1,45,440, Rs.1,58,179 and Rs.2,51,585
Question No.2: What is the Net Present value of the Investment Proposal?
a. Rs.3,78,990 b. Rs.4,54,981
c. Rs.4,74,890 d. Rs.3,89,261
Question No.3: What is the discounted payback of the Investment Proposal?
a. 2.74 Years b. 2.87 Years
c. 2.38 Years d. 2.48 Years
Question No.4: What is the Profit before taxes for the year 2, Year 3 and Year 4 of the Investment Proposal?
a. Rs.2,35,000, Rs.4,40,000 and Rs.4,01,000 b. Rs.1,45,000, Rs.3,50,000 and Rs.3,11,000
c. Rs.2,05,000, Rs.4,10,000 and Rs.3,66,000 d. Rs.1,40,000, Rs.3,60,000 and Rs.3,31,000
Question No.5: What is the cash inflow after taxes for the year 1, year 2 and Year 3 of the investment
proposal?
a. Rs.1,50,000, Rs.1,85,000 and Rs.3,45,000 b. Rs.1,65,000, Rs.1,95,500 and Rs.3,55,000
c. Rs.1,60,000, Rs.1,91,500 and Rs.3,35,000 d. Rs.1,70,000, Rs.1,90,000 and Rs.3,40,000
Answer:
Question No.1 Rs.1,45,440, Rs.1,58,179 and Rs.2,51,585 (WN 4)
Question No.2 Rs.4,74,890 (WN 4)

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FINANCIAL MANAGEMENT CA. DINESH JAIN
Question No.3 2.74 years (WN 1)
Question No.4 Rs.1,45,000, Rs.3,50,000 and Rs.3,11,000 (WN 2)
Question No.5 Rs.1,60,000, Rs.1,91,500 and Rs.3,35,000 (WN 2)

WN 1: Initial outflow
Particulars Amount
Capital Expenditure -5,00,000
Working capital 0
Salvage value of old asset 10,000
(Capital gain is ignored as per question)
Initial outflow -4,90,000

WN 2: In-between flows
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Revenues 6,00,000 7,50,000 10,50,000 11,20,000 9,80,000
Less: Variable cost -4,00,000 -5,00,000 -6,00,000 -7,04,000 -6,16,000
Less: Fixed cost -25,000 -30,000 -30,000 -35,000 -35,000
Less: Depreciation -90,000 -90,000 -90,000 -90,000 -90,000
Add: Saving in cost 15,000 15,000 20,000 20,000 20,000
Profit before tax 1,00,000 1,45,000 3,50,000 3,11,000 2,59,000
Less: Tax @ 30% -30,000 -43,500 -1,05,000 -93,300 -77,700
Profit after tax 70,000 1,01,500 2,45,000 2,17,700 1,81,300
Add: Depreciation 90,000 90,000 90,000 90,000 90,000
Cash flow after tax 1,60,000 1,91,500 3,35,000 3,07,700 2,71,300

WN 3: Terminal flow
Particulars Amount
Salvage value 50,000
Recapture of WC 0
Total terminal flow 50,000

WN 4: Computation of NPV and discounted Payback

Year Cash flow PVF @ 10% DCF CDCF
0 -4,90,000 1.000 -4,90,000 -4,90,000
1 1,60,000 0.909 1,45,440 -3,44,560
2 1,91,500 0.826 1,58,179 -1,86,381
3 3,35,000 0.751 2,51,585 65,204
4 3,07,700 0.683 2,10,159 2,75,363
5 3,21,300 0.621 1,99,527 4,74,890
NPV 4,74,890
Unrecovered DCF of BY 1,86,381
Discounted Payback = Base year + = 2+ = 2.74 years
DCF of NY 2,51,585

27. Investment Decision:

Mr. Ronak, a doctor by profession, has his own private hospital at Goa having specialization in cardiac
treatments. However, now-a-days, Goa not only being a place for the tourists, but is also a place for business
delegates, cultural people, politicians, students and other classes of people. Gradually, Goa is opening new
windows for businesses and getting recognition as an important tourist and leisure hub in South West India.

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FINANCIAL MANAGEMENT CA. DINESH JAIN
There are a number of hotels and resorts at Goa. However, the need still exists for more hotel services, in
particular with the excellent service, and because of the large number of visitors from all over the country
and all walks of life always favour Goa state for their recreation.

Mr. Ronak although being a doctor by profession is contemplating to establish a five-star hotel at Goa. The
hotel will consist of 5 floors. The hotel will include 40 normal rooms and 8 deluxe suites, as well as a
restaurant and couple of conference rooms with a small wedding hall on the ground floor. Following are the
estimated occupancy rate including fare composition in the Table 1. Being a five-star hotel, breakfast would
be complementary but lunch and dinner are on a-la-carte basis.

Table 1: Hotel accommodation, estimated occupancy rate and fare.

Types of Facilities Numbers Occupancy Average Rent per Room Growth Rate in
Rate per Day Rent
Normal Room 40 33% or 120 Rs.8,000 12%
days
Deluxe Suites 8 33% or 120 Rs.25,000 9%
days
Conference with 2 40 days Rs.3,00,000 9%
wedding hall
Restaurant 1 All days Rs.27,000 sales per day 8%
For the sake of simplicity in calculation, growth rate to be applied only once after completion of 10 years.

The estimated cost of land will be Rs. 250 million and the construction cost will be Rs. 100 million. The
estimated salvage value at the end of 15th year will be 25% of the cost of construction. The cost of furniture
will be of Rs. 1,50,000 for each normal room and Rs. 3,80,000 for each deluxe suite. The cost of the furniture
for the conference room with wedding hall will be Rs. 7,00,000 each and for restaurant it will be 10,00,000. In
addition, the hotel will require 4 elevators at different locations and will be costing around Rs. 35,00,000 each.
The cost of buying and installing electronic appliances like TV sets, Air conditioners, Fridge etc. will be
around Rs. 35 million. Elevators would be depreciated at a rate of 5% p.a. Electronic appliances will have a
salvage value of 15% of its acquisition cost at the end of 15 years.

The hotel will be built by renowned builder named ‘Harihar Infrastructure’. The builder estimated that
building will survive for 15 years. The required furniture will be supplied by the local reputed furniture
company named Veru Furnishings Ltd. They ensured that furniture will go for 10 years very smoothly. At
the end of tenth year, new furniture for normal rooms and deluxe suites will be bought and old furniture for
the same will be sold by the hotel owner. The owner of the hotel estimates that he would be able to purchase
the required furniture at 15% higher price than the previous purchase price. The salvage values of the
furniture at the end of tenth year will be 5% of their purchase prices with no book value remaining. Furniture
at restaurant, conference and wedding hall will not require any major changes as such except for minor
renovation which will cost Rs. 20,00,000 in total at the end of 12th year. Any scrap generated on account of
such renovation will be sold at Rs. 1,75,000.

In order to boost the tourism industry at Goa, the state govt will be granting subsidy of 15% on the initial
capex incurred, it will be paid at the time of cost incurred and additional subsidy of 10% on annual revenue
expenses for the first 3 years of operation, but will be credited directly in the bank account only at the end of
5th year and the same shall be non-taxable.

The total annual recurring expenses will be Rs. 1,80,00,000/-. It includes salaries to managers, staff and
employees, utilities expenses, house keeping and security services’ contract, AMC for electronic appliances,
restaurant supplies and materials, other miscellaneous expenses, etc.

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FINANCIAL MANAGEMENT CA. DINESH JAIN
After the end of 10 years, annual recurring expenses will increase at a rate of 10% which is to be applied once.
Furthermore, the hotel authority is determined to provide the best and professional hotel services to the
clients by offering training to the employees. They decided to spend Rs. 5,00,000 per year for the purpose of
training of the employees.

The hotel project will be entitled to enjoy tax holiday for the first five years after which the corporate tax
rate of 25% will also be applied for the hotel. The Cost of equity for the company is 12% and the estimated
hurdle rate by considering the structure of capital of the proposed hotel is fixed at 15%.

(Depreciation to be taken on SLM basis and assume 360 days in a year. Ignore depreciation on furniture
used in restaurant, conference and wedding hall)
Based on above, please answer to the following MCQs.
Question No.1: The amount of net initial investment required is:
a. Rs.41.044 Crores b. Rs.34.887 Crores
c. Rs.6.156 Crores d. Rs.40.74 Crores

Question No.2: NPV of the project is:

a. Rs.7.0532 Crores b. Rs.8.4029 Crores
c. Rs.8.4935 Crores d. Rs.2.4700 Crores

Question No.3: Pay Back period of the project to recover the initial investment is:
a. 5.12 years b. 12.02 years
c. 11.80 years d. 4.46 years

Question No.4: Estimated Recurring accounting profit/(loss) for first three years are:
a. Rs.7.0928 Crore per annum b. Rs.6.9078 Crores per annum
c. Rs.6.9937 Crore per annum d. Rs.9.6120 Crore per annum

Question No.5: IRR of the project is:

a. 16.25% b. 19.39%
c. 15% d. 12%
Answer:
Solution:
Question No.1 Option (B) – Rs.34.887 Crores (WN 1)
Question No.2 Option (A) – Rs.7.0532 Crores (WN 4)
Note: Rs.7.0595 Crores rounded off to closest Rs.7.0532 Crores
Question No.3 Option (D) – 4.46 years (WN 5)
Question No.4 Option (A) – Rs.7.0928 Crores
PAT + Subsidy = 690.7787 lacs + 18.5 lacs = 709.2787 lacs
Question No.5 Option (B) – 19.39% (WN 4)

WN 1: Initial outflow:
Particulars Amount (in lacs)
Land -2500.00
Construction Cost -1000.00
Furniture cost (1,50,000 x 40 + -114.40
3,80,000 x 8 + 7,00,000 x 2 + 10,00,000)
Elevator cost (35,00,000 x 4) -140.00
Electronic appliances -350.00
Initial Outflow -4104.40
Subsidy (4104.40 x 15%) 615.66
Net outflow -3488.74

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FINANCIAL MANAGEMENT CA. DINESH JAIN
WN 2: In-between recurring flows
Particulars Year 1 to 5 Year 6 to 10 Year 11 to 15
Revenues
Normal room 384.00 384.00 430.08
[8,000 x 40 x 120] [8,000 x 40 x 120] [8,000 x 40 x 120 x 1.12]
Deluxe Suites 240 240 261.60
[25,000 x 8 x 120] [25,000 x 8 x 120] [25,000 x 8 x 120 x 1.09]
Conference 240 240 261.60
[2 x 3,00,000 x 40] [2 x 3,00,000 x 40] [2 x 3,00,000 x 40 x 1.09]
Restaurant 97.20 97.20 104.976
[27,000 x 360] [27,000 x 360] [27,000 x 360 x 1.08]
Total Revenues 961.20 961.20 1058.256
Less: Expenses:
Recurring expenses -180.00 -180.00 -198.00
Training expense -5.00 -5.00 -5.00
Depreciation:
Construction cost -50.00 -50.00 -50.00
1000 − 250
[ ]
15
Furniture of rooms 8.588 8.588 10.396
(Note) 90.4 − 4.52 90.4 − 4.52 103.96 − 0
[ ] [ ] [ ]
10 10 10
Elevators 7.00 7.00 7.00
[1.4 Cr x 5%] [1.4 Cr x 5%] [1.4 Cr x 5%]
Electronic appliance 19.8333 19.8333 19.8333
350 − 52.5 350 − 52.5 350 − 52.5
[ ] [ ] [ ]
15 15 15
Profit before tax 690.7787 690.7787 768.0267
Less: Tax @ 25% 0 -172.6947 -192.0067
Profit after tax 690.7787 518.0840 576.0200
Add: Depreciation 85.4213 85.4213 87.2293
Cash flow after tax 776.2000 603.5053 663.2493
Note:
• Question has indicated that no book value will remain at end of 10 th year and hence salvage value
should not be subtracted while computing depreciation of furniture. However, we have answered
this as per ICAI solution

WN 3: In-between one-time cash flows:

Particulars Year 5 Year 10 Year 12 Year 15
Purchase of furniture -103.96
[90.4 lacs x 1.15]
Renovation expense -18.25
[20 – 1.25]
Subsidy 55.50
[ 185 x 10% x 3 year]
Salvage value of Old furniture 4.5200
[90.4 lacs x 5%]
Salvage value of building 250.00
[1000 x 25%]
Salvage value of 52.50
Electronic appliances [350 x 15%]
Salvage value of Land 0.00
(Ignored as per ICAI solution)
Total Cash flow 55.50 -99.44 -18.25 302.50

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FINANCIAL MANAGEMENT CA. DINESH JAIN
WN 4: Computation of NPV and IRR
Year Cash flow PVF @ 15% DCF PVF @ 20% DCF
0 -3488.74 1 -3488.74 1 -3488.74
1 776.2 0.87 675.29 0.833 646.575
2 776.2 0.756 586.81 0.694 538.683
3 776.2 0.658 510.74 0.579 449.42
4 776.2 0.572 443.99 0.482 374.128
831.7
5 [776.20 + 55.50] 0.497 413.35 0.402 334.343
6 603.5053 0.432 260.71 0.335 202.174
7 603.5053 0.376 226.92 0.279 168.378
8 603.5053 0.327 197.35 0.233 140.617
9 603.5053 0.284 171.4 0.194 117.08
504.0653
10 [603.5053 – 99.44] 0.247 124.5 0.162 81.659
11 663.2493 0.215 142.6 0.135 89.539
644.9993
12 [663.2493 – 18.25] 0.187 120.61 0.112 72.24
13 663.2493 0.163 108.11 0.093 61.682
14 663.2493 0.141 93.52 0.078 51.733
965.7493
15 [663.2493 + 302.50] 0.123 118.79 0.065 62.77
NPV 705.95 -97.73

705.95 705.95
IRR = 15% + 𝑥 (20 − 15) = 15% + ( ) 𝑥 5% = 15% + 4.39% = 19.39%
705.95 − (−97.73) 803.68

WN 5: Computation of normal payback:

Year Cash flow Cum CF
0 -3488.74 -3488.74
1 776.2 -2712.54
2 776.2 -1936.34
3 776.2 -1160.14
4 776.2 -383.94
5 831.7 447.76
unrecovered CF of base year 383.94
Payback = Base year + =4+( ) = 4.46 years
cash flow of next year 831.70

28. Dividend Decision:

The cost of capital of a firm is 12% & its expected earning per share at the end of the year is Rs. 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 Rs.444.45 b. It will decrease by Rs.444.45
c. It will increase by Rs.222.22 d. It will decrease by Rs.222.22
Answer:
It will decrease by Rs.444.45
20 x 25%
Earlier price = = 𝑅𝑠. 666.67
12% − 11.25%
20 x 50%
New price = = 𝑅𝑠. 222.22
12% − 7.50%
Price will decrease by Rs.444.45 (666.67 – 222.22)

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FINANCIAL MANAGEMENT CA. DINESH JAIN
29. Dividend Decision
Under Modigliani and Miller’s Dividend Irrelevance Theory, a company has ₹1,00,000 to distribute. If it
chooses to retain the earnings instead of paying dividends, what happens to shareholder wealth?
a. Increases due to reinvestment opportunities b. Decreases due to lower
immediate returns
c. Remains unchanged because value depends on earnings d. Depends on the dividend
and investment policy. payout ratio
Answer:
• Remains unchanged because value depends on earnings and investment policy.
• Explanation: M&M's theory suggests that dividend policy has no impact on shareholder wealth in a
perfect market.

30. Working Capital Management:

NV Industries Ltd. is a manufacturing industry which manages its accounts receivables internally by its sales
and credit department. It supplies small articles to different industries. The total sales ledger of the company
stands at Rs. 200 lakhs of which 80% is credit sales. The company has a credit policy of 2/40, net 120. Past
experience of the company has been that on average out of the total, 50% of customers avail of discount and
the balance of the receivables are collected on average in 120 days. The finance controller estimated, bad debt
losses are around 1% of credit sales.
With escalating cost associated with the in-house management of the debtors coupled with the need to
unburden the management with the task so as to focus on sales promotion, the CFO is examining the
possibility of outsourcing its factoring service for managing its receivables. Currently, the firm spends about
Rs. 2,40,000 per annum to administer its credit sales. These are avoidable as a factoring firm is prepared to
buy the firm's receivables. The main elements of the proposal are : (i) It will charge 2% commission (ii) It will
pay advance against receivables to the firm at an interest rate of 18% after withholding 10% as reserve.
Also, company has option to take long term loan at 15% interest or may take bank finance for working capital
at 14% interest.
You were also present at the meeting; being a financial consultant, the CFO has asked you to be ready with
the following questions:
Consider year as 360 days.
Question No.1: What is average level of receivables of the company?
a. Rs.53,33,333 b. Rs.35,55,556
c. Rs.44,44,444 d. Rs.71,11,111
Question No.2: How much advance factor will pay against receivables
a. Rs.31,28,889 b. Rs.39,11,111
c. Rs.30,03,733 d. Rs.46,93,333
Question No.3: What is the annual cost of factoring to the company?
a. Rs.8,83,200 b. Rs.4,26,667
c. Rs.5,51,823 d. Rs.4,00,000
Question No.4: What is the net cost to the company on taking factoring service?
a. Rs.4,00,000 b. Rs.4,26,667
c. Rs.3,50,000 d. Rs.4,83,200
Question No.5: What is effective cost of factoring on advance received?
a. 16.09% b. 13.31%
c. 12.78% d. 15.89%
Answer:
Question No.1 b. Rs.35,55,556
Question No.2 c. Rs.30,03,733
Question No.3 a. Rs.8,83,200
Question No.4 d. Rs.4,83,200
Question No.5 a. 16.09%

WN 1: Computation of amount lent by factor:

Particulars Calculation Amount

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1. Credit sales 200 lacs x 80% 1,60,00,000
2. Average collection period (40 𝑥 50% + 120 𝑥 50%) 80 days
3. Amount of debtors 1,60,00,000 x (80/360) 35,55,556
4. Less: Reserve 35,55,556 x 10% -3,55,556
5. Less: Commission 35,55,556 x 2% -71,111
6. Amount eligible to be lent 31,28,889
7. Less: Interest 31,28,889 x 18% x 80/360 -1,25,156
8. Amount actually lent 30,03,733

WN 2: Computation of effective cost of factoring:

Particulars Calculation Amount
A. Costs:
Commission 1,60,00,000 x 2% 3,20,000
Interest 31,28,889 x 18% 5,63,200
Total Costs 8,83,200
B. Benefits
Saving in bad debt 1,60,00,000 x 1% 1,60,000
Saving in admin cost 2,40,000
Total benefits 4,00,000
Effective cost of factoring (in Rs.) 4,83,200
Amount lent by factor WN 1 30,03,733
Effective cost of factoring (in %) 16.09%

31. Working Capital Management

ArMore LLP is a newly established startup dealing in manufacture of a revolutionary product HDHMR
which is a substitute to conventional wood and plywood. It is an economical substitute for manufacture of
furniture and home furnishing. It has been asked by a venture capitalist for an estimated amount of funds
required for setting up plant and also the amount of circulating capital required. A consultant hired by the
entity has advised that the cost of setting up the plant would be Rs. 5 Crores and it will require 1 year to
make the plant operational. The anticipated revenue and associated cost numbers are as follows:
• Units to be sold = 3 lakh sq metres p.a.
• Sale Price of each sq mtr = Rs. 1000
• Raw Material cost = Rs. 200 per sq mtr
• Labour cost = Rs. 50 per hour
• Labour hours per sq mtr = 3 hours
• Cash Manufacturing Overheads = Rs. 75 per machine hour
• Machine hours per sq mtr = 2 hours
• Selling and credit administration Overheads = Rs. 250 per sq mtr
Being a new product in the industry, the firm will have to give a longer credit period of 3 months to its
customers. It will maintain a stock of raw material equal to 15% of annual consumption. Based on negotiation
with the creditors, the payment period has been agreed to be 1 month from the date of purchase. The entity
will hold finished goods equal to 2 months of units to be sold. All other expenses are to be paid one month
in arrears. Cash and Bank balance to the tune of Rs. 25,00,000 is required to be maintained.

The entity is also considering reducing the working capital requirement by either of the two options: a)
reducing the credit period to customers by a month which will lead to reduction in sales by 5%. b) Engaging
with a factor for managing the receivables, who will charge a commission of 2% of invoice value and will
also advance 65% of receivables @ 12% p.a. This will lead to savings in administration and bad debts cost to
the extent of Rs. 20 lakhs and 16 lakhs respectively.

The entity is also considering funding a part of working capital by bank loan. For this purpose, bank has
stipulated that it will grant 75% of net current assets as advance against working capital. The bank has quoted

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16.5% rate of interest with a condition of opening a current account with it, which will require 10% of loan
amount to be minimum average balance

You being an finance manager, has been asked the following questions:
Question No.1: The anticipated profit before tax per annum after the plant is operational is ……….
a. 750 lacs b. 570 lacs
c. 370 lacs d. 525 lacs
Question No.2: The estimated current assets requirement in the first year of operation (debtors calculated
at cost) is ……….
a. Rs.9,42,50,000 b. Rs.2,17,08,333
c. Rs.7,25,41,667 d. Rs.67,08,333
Question No.3: The net working capital requirement for the first year of operation is ……….
a. Rs.9,42,50,00 b. Rs.2,17,08,333
c. Rs.7,25,41,667 d. Rs.67,08,333
Question No.4: The annualised % cost of two options for reducing the working capital is ……….
a. 18.18% and 16.92% b. 18.33% and 16.92%
c. 18.59% and 18.33% d. 16.92% and 19.05%
Question No.5: What will be the Maximum Permissible Bank Finance by the bank and annualised % cost
of the same?
a. 4,55,03,630 and 18.33% b. 5,44,06,250 and 18.33%
c. 4,45,86,025 and 18.59% d. 3,45,89,020 and 19.85%
Answer:
Part (i) Cost sheet of Armore LLP:
• Profit before tax = Rs.750 lacs
Particulars Calculation Amount
Direct Material:
Opening stock of Raw Material 0
Add: Purchases (b/f) 805.00
Less: Closing stock of Raw Material 700 x 15% -105.00
Raw Material Consumed 3.5 lac x 200 700.00
Labour cost 3.5 lac x 50 x 3 525.00
Manufacturing OH 3.5 lac x 75 x 2 525.00
Gross works cost/NWC/COP 1,750.00
Add: Opening FG 0.00
Less: Closing FG 0.5 lac x 500 -250.00
Cost of Goods Sold 1,500.00
Selling and distribution OH 3 lac x 250 750.00
Cost of Sales 2,250.00
Profit 750.00
Sales 3 lac x 1,000 3,000.00
• Units produced = Units sold + Closing stock
• Units Produced = 3,00,000 + (3,00,000 x 2/12) = 3,50,000

Part (ii) and (iii) Estimation of working capital

• Part (ii) answer = 9,42,50,000
• Part (iii) answer = 7,25,41,667
Particulars Calculation Amount
Current Assets:
Closing stock of Raw Material 105.00
Closing stock of FG 250.00
Debtors 3 562.50
2,250 𝑥
12
Cash 25.00
Total Current Assets 942.50

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Less: Current Liabilities
Creditors 1 67.08333
805𝑥
12
Outstanding expenses 1 150.00
(525 + 525 + 750)𝑥
12
Total Current Liabilities 227.08
Net working capital 725.41667

Part (iv): Computation of cost of two alternatives:

• Answer = 18.18% and 16.92%
Alternative 1 – Reduction in Credit Period:
Particulars Calculation Amount
Reduction in profit due to lower credit period 15,000 x 250 37,50,000
Old debtors 3 5,62,50,000
22,50,00,000 𝑥
12
New Debtors 2 3,56,25,000
22,50,00,000 𝑥 95% 𝑥
12
Reduction in debtors 2,06,25,000
Cost of Alternative 1 𝟑𝟕, 𝟓𝟎, 𝟎𝟎𝟎 18.18%
𝒙 𝟏𝟎𝟎
𝟐, 𝟎𝟔, 𝟐𝟓, 𝟎𝟎𝟎

Alternative 2 – Costs of factoring:

Particulars Calculation Amount
Commission 2% of 30 Crores 60,00,000
Interest (30 cr x 65% x 3/12 x 12%) 58,50,000
Saving in cost -36,00,000
Net cost (in Rs.) 82,50,000
Amount advanced 3 4,87,50,000
30 cr x 65% x
12
Cost of Alternative 2 82,50,000 16.92%
𝑥 100
4,87,50,000

Part (v)
• Answer = 5,44,06,250 and 18.33%
• MPBF = 75% x 7,25,41,667 = Rs.5,44,06,250
• Annualized cost = (16.50/90%) = 18.33%

32. Working capital Management + Cost of Capital + Investment Decision

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 Rs. 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:

Average Sales would be Rs. 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

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FINANCIAL MANAGEMENT CA. DINESH JAIN
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 Rs. 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 Rs. 1.50 lakhs per month with the transaction cost of Rs. 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 of return expected by equity
Debt shareholders
Upto 80 lakhs 10% 12.50%
Above 80 lakhs but upto 150 11.50% 13.50%
lakhs
Above 150 lakhs and upto 250 12% 14%
lakhs
Above 250 Lakhs 13.50% 15%
*It means that upto 80 lakhs of project cost company can raise debt at 10% and equity at 12.5% and so on.

Based on the above details, calculate the following for each store:
Question No.1: The optimum Cash balance is
a. Rs.7,071 b. Rs.26,500
c. Rs.7,150 d. Rs.24,495

Question No.2: The Gross and Net Working Capital for the next year would be
a. Rs. 6.7730 L, (5.9396 L) b. Rs. 6.7730 L, 12.7125 L
c. Rs. 200 L, (5.9396L) d. Rs. (5.9396 L), 6.7730 L

Question No.3: The amount of total funds needed to setup a store is

a. Rs.194.0605 L b. Rs.200 L
c. Rs.6.7730 L d. Rs.206.7730 L

Question No.4: 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%

Question No.5: The amount of revenue subsidy granted by the central govt is
a. Rs.3 L b. Rs.3.24 L
c. Nil d. Rs.2.25 L
Answer:
Question No.1 – Rs.24,495

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FINANCIAL MANAGEMENT CA. DINESH JAIN
2 x annual demand for money x transfer cost
Optimum cash balance = √
Interest cost

2 x ( 12 x 1,50,000) x 20
Optimum cash balance = √ = 𝐑𝐬. 𝟐𝟒, 𝟒𝟗𝟓
0.12
Question No.2 – Rs.6.7730 L and (5.9396 L)
Estimation of working capital
Particulars Calculation Amount
Current Assets:
FG Inventory Note 1 6,15,000
Trade Receivables Note 2 37,800
Cash/bank balance Question 1 24,495
Current assets 6,77,295
Current Liabilities:
Trade payables Note 3 8,71,250
Outstanding salaries 4,00,000
Current liabilities 12,71,250
Net working capital (5,93,955)

Note 1: Estimation of FG Inventory:

Weighted average holding period 10 days x 60% + 30 days x 25% + 60 days x 15% 22.5
Stock of FG 22.5 6,15,000
120 lacs x 82% x
360

Note 2: Estimation of Trade Receivables

Cost of Goods sold of POS Sales 120 lacs x 15% x 82% 14,76,000
POS sales fees 120 lacs x 15% x 2% 36,000
Cost of sales 15,12,000
Trade Receivables 9 37,800
15,12,000 𝑥
360

Note 3: Estimation of Trade Payables:

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 Note 1
Purchases COGS + Closing stock 1,04,55,000
[120 lacs x 82%] + 6,15,000
Trade payables 30 8,71,250
1,04,55,000 𝑥 ( )
360
Question No.3 – Rs.194.0605 Lacs
• Investment = Fixed assets + Working capital
• Investment = 200 lacs – 5.9395 lacs = Rs.194.0605 lacs
Question No.4 – 9.90%
Source Cost Weight Product
First 80 lacs
Equity 12.50% 26.67 3.3338
[80 x 1/3]
Debt 7.50% 53.33 3.9998
[10 x 75%] [80 x 2/3]
80 to 150 lacs
Equity 13.50% 23.33 3.1496
[70 x 1/3]
Debt 8.625% 46.67 4.0253
[11.50 x 75%] [70 x 2/3]
150 to 194.0605 lacs
Equity 14.00% 14.69 2.0566
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FINANCIAL MANAGEMENT CA. DINESH JAIN
[44.0605 x 1/3]
Debt 9.00% 29.37 2.6433
[12 x 75%] [44.0605 x 2/3]
Total 9.90% 194.06 19.2084
Note:
• It is assumed that cost of debt given in question is pre-tax
• Question has clearly mentioned that the various cost given in question are slab rates
Sum of Product 19.2084
Cost of capital = = 𝑥 100 = 9.90%
Sum of weights 194.06
Question No.5 – Rs.3.24 lacs
• 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% = Rs.3.24 Lakhs

33. Leverages and Investment Decision

Mathangi Ltd. is a News broadcasting channel having its broadcasting Centre in Chennai. There are total 200
employees in the organisation including top management. As a part of employee benefit expenses, the
company serves tea to its employees, which is outsourced from a third-party. The company offers tea three
times a day to each of its employees. The third-party charges Rs. 10 for each cup of tea. The company works
for 200 days in a year.

Looking at the substantial amount of expenditure on tea, the finance department has proposed to the
management an installation of a master tea vending machine from Nirmal Ltd which will cost Rs. 5,00,000
with a useful life of five years. Upon purchasing the machine, the company will have to incur annual
maintenance which will require a payment of Rs. 25,000 every year. The machine would require electricity
consumption of 500 units p.m. and current incremental cost of electricity for the company is Rs. 24 per unit.
Apart from these running costs, the company will have to incur Rs. 8,00,000 for consumables like milk, tea
powder, paper cup, sugar etc. The company is in the 25% tax bracket. Straight line method of depreciation is
allowed for the purpose of taxation.

Nirmal Ltd sells 100 master tea vending machines. Variable cost is Rs. 4,50,000 per machine and fixed
operating cost is Rs. 25,00,000. Capital Structure of Mathangi Ltd and Nirmal Ltd consists of the following:
Particulars Mathangi Limited Nirmal Limited
Equity Share Capital (Face value Rs. 10 each) 40,00,000 40,00,000
Reserves & Surplus 25,00,000 50,00,000
12% Preference Share Capital 12,00,000 Nil
15% Debentures 20,00,000 40,00,000
Risk free rate of return = 5%, Market return = 10%, Beta of the Mathangi Ltd. = 1.9 You are required to answer
the following five questions based on the above details:
Question No.1: If sales of Nirmal Ltd are up by 10%, impact on its EBIT is
a. 30% b. 60% c. 5% d. 20%
Question No.2: Combined leverage of Nirmal Ltd is
a. 1.63 b. 2.63 c. 1.315 d. 2
Question No.3: Discount rate that can be applied for making investment decisions of Mathangi Ltd is
a. 12% b. 13.52% c. 15% d. 20%
Question No.4: Incremental cash flow after tax per annum attributable to Mathangi Ltd due to investment
in the machine is
a. Rs. 2,39,438 b. Rs. 1,98,250 c. Rs. 98,250 d. Rs. 1,31,000
Question No.5: Net present value of investment in the machine by Mathangi Ltd is
a. Rs. 6,88,522 b. Rs. 1,88,522 c. Rs. 9,91,250 d. Rs. 4,91,250
Answer:
Question No.1 and 2:
Leverage Analysis of Nirmal Limited
Particulars Calculation Amount

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FINANCIAL MANAGEMENT CA. DINESH JAIN
(in lacs)
Sales 100 x 5,00,000 500.00
Less: Variable cost 100 x 4,50,000 -450.00
Contribution 50.00
Less: Fixed cost -25.00
EBIT 25.00
Less: Interest 40,00,000 x 15% -6.00
EBT 19.00
Operating leverage (Contribution/EBIT) 50 2.00
( )
25
Financial leverage (EBIT/EBT) 25 1.32
( )
19
Combined leverage (Contribution/EBT) 50 2.63
( )
19
Answers:
Question No.1 – 20%
• % Change in EBIT = % Change in Sales x Operating leverage = 10% x 2 =20%

Question No.2 – 2.63 Times

Question No.3 – 13.52%
Computation of WACC (Discount Rate) of Mathangi Limited
Source Cost Weight Product
Equity capital 14.50% 40,00,000 5,80,000
Reserves and Surplus 14.50% 25,00,000 3,62,500
Preference share capital 12.00% 12,00,000 1,44,000
Debentures 11.25% 20,00,000 2,25,000
Overall 13.52% 97,00,000 13,11,500
Note:
• Cost of equity = Rf + Beta x (Rm – Rf) = 5 + 1.9 x 5 = 14.50%
Question No.4 and 5:
• Question No.4 – 1,98,250 (WN 2)
• Question No.5 – 1,88,522 (WN 3)

WN 1: Initial outflow
Particulars Amount
Capital Expenditure -5,00,000
Working Capital 0
Initial outflow -5,00,000

WN 2: In-between flows
Particulars Calculation Amount
Saving in tea cost 200 employees x 3 times x 200 days x 10 12,00,000
Less: AMC -25,000
Less: Electricity cost 500 units x 24 x 12 months -1,44,000
Less: other costs -8,00,000
Less: Depreciation -1,00,000
PBT 1,31,000
Less: Tax @ 25% 1,31,000 x 25% -32,750
PAT 98,250
Add: Depreciation 1,00,000
CFAT 1,98,250
• No terminal flow

WN 3: Computation of NPV
Year Cash flow PVF @ 13.52% DCF

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0 -5,00,000 1.000 -5,00,000
1 to 5 1,98,250 3.473 6,88,522
NPV 1,88,522

34. Cost of capital and Investment Decision

Kaivalyabodhi Limited (KbL) has completed 35 years of operations in India. It has many subsidiary &
associate companies in more than 100 countries. KbL’s business s include home and personal care, foods and
beverages, and industrial, agricultural and other products. It is one of the largest producers of soaps and
detergents in India. The company has grown organically as well as through acquisitions. Over the years, the
company has built a diverse portfolio of powerful brands, some being household names.

It is planning to acquire one of its competitors named Prestige Limited, which would enhance the growth of
‘KbL’. The consideration amount will be 1.5X of its average Market Capitalization. Prestige limited has
1,30,000 outstanding equity shares and its shares were traded at an average market price of Rs. 45 as on the
valuation date. The consideration amount will be paid equally in 5 years where the first installment is to be
paid immediately. Prestige Limited has Ko of 15%

KbL will raise the funds required through debt and equity in the ratio of 30:70. The company requires the
cost of capital estimates for evaluating its acquisitions, investment decisions and the performance of its
businesses.

KbL’s share price has grown from Rs. 150 to Rs. 301 in the last 5 years and it will continue to grow at the
same rate. KbL pays dividends regularly. The company has recently paid a dividend of Rs. 8. For the
calculation of equity, an average of 52 weeks high market price in the last 5 years is to be considered, which
is as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
MPS 195 MPS 210 MPS 252 MPS 325 MPS 280

Ke calculated as per growth model holds a weight of 0.6.

The company also wishes to calculate the equity’s expectation using CAPM which holds a weight of 0.4. The
risk-free rate is assumed as the yield on long-term government bonds that the company regards as about 8%.
KbL regards the market risk premium to be equal to 11 per cent. Its estimation on the Beta is 0.78.

KbL will issue debentures with FV of Rs. 10,500 which is to be amortised equally over the life of 7 years. The
company considers the effective rate of interest applicable to an ‘AAA’ rated company with a markup of 200
basis points as its coupon rate. It thinks that considering the trends over the years, ‘AAA’ rate is 7.5%.

Ignore taxation. Based on the above details, answer the question 1 to 5:

Question No.1: Calculate the cost of equity under both the methods
a. 11%, 16% b. 18.65%, 10.34%
c. 18.65%, 16.58% d. 16.5%, 9%
Question No.2: Calculate the overall cost of equity
a. 17.82% b. 17.63%
c. 15.37% d. 35.25%
Question No.3: Calculate the cost of debt, if the intrinsic value of debenture today is close to Rs. 9,740
a. 15% b. 12%
c. 9.5% d. 7.5%
Question No.4: Calculate the WACC & the amount of purchase consideration
a. 18%, Rs. 90,00,000 b. 15.21%, Rs. 87,75,000
c. 16.07%, Rs. 87,75,000 d. 15.94%, Rs. 58,50,000
Question No.5: Present Value of Purchase consideration is close to Rs.

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FINANCIAL MANAGEMENT CA. DINESH JAIN
a. 58,83,032 b. 67,65,487
c. 57,35,680 d. 66,58,997
Answer:
Question No.1 – 18.65% and 16.58%
Cost of equity under Method 1 (Dividend with growth model)
D1 9.20
Ke = +G= + 0.15 = 0.0365 + 0.15 = 𝟎. 𝟏𝟖𝟔𝟓 (𝐨𝐫)𝟏𝟖. 𝟔𝟓%
P0 252.40
Where:
• Price = Average of last 5 year prices as per question = 252.40
• Growth is computed by considering the growth in share price; Share price has increased from
Rs.150 to Rs.301 in 5 years and this would translate into growth rate of
Year Cash flow PVF @ 14% DCF PVF @ 15% DCF
0 -150 1.000 -150.00 1.000 -150.00
5 301 0.519 156.22 0.497 149.60
NPV 6.22 -0.40
6.22
IRR (Growth Rate) = 14 + 𝑥 (15 − 14) = 14 + 0.94 = 14.94% ~ 15.00%
6.22 − (−0.40)
• Next Dividend = 8 + 15.00% growth = Rs.9.20

Cost of equity under Method 2 (CAPM Approach)

K e = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 ) = 8 + 0.78 𝑥 11 = 16.58%

Question No.2
Cost of equity = [18.65 x 0.60] + [16.58 x 0.40] = 17.82%
Question No.3 – 12.00%
In this question we have to compute cost of debt using IRR method
Year Cash flow PVF @ 12% DCF
0 9,740.00 1 9,740.00
-2,497.50
1 [10,500 x 9.5% + 1,500] 0.893 -2,230.27
-2,355.00
2 [9,000 x 9.5% + 1,500] 0.797 -1,876.94
-2,212.50
3 [7,500 x 9.5% + 1,500] 0.712 -1,575.30
-2,070.00
4 [6,000 x 9.5% + 1,500] 0.636 -1,316.52
-1,927.50
5 [4,500 x 9.5% + 1,500] 0.567 -1,092.89
-1,785.00
6 [3,000 x 9.5% + 1,500] 0.507 -905.00
-1,642.50
7 [1,500 x 9.5% + 1,500] 0.452 -742.41
0.67
Note:
• Interest rate of bond = 7.5% + 2.00% = 9.50%
• NPV of cash flows is closer to zero and hence IRR (cost of debt) equal to 12%
Question No.4 – 16.07% and Rs.87,75,000
• WACC = (17.82% x 0.70 + 12% x 0.30] = 16.07%
• Purchase consideration = 1.5 times of market capitalization = 1.5 x (1,30,000 x 45) = Rs.87,75,000
• Market capitalization = Market Value of equity shares
Question No.5 – Rs.66,58,997
Year Cash flow PVF @ 16.07% DCF
0 17,55,000 1 17,55,000
1 17,55,000 0.862 15,12,810

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FINANCIAL MANAGEMENT CA. DINESH JAIN
2 17,55,000 0.742 13,02,210
3 17,55,000 0.639 11,21,445
4 17,55,000 0.551 9,67,005
66,58,470
• Present value of consideration paid = Rs.66,58,470 ~ Rs.66,58,997

BHARADWAJ INSTITUTE (CHENNAI) 31