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Question Paper

FM & SM Duration: 180

Details: FULL TEST 1 MARKS: 100

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets
in arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge
your performance.

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 SECTION –A (FM)

PART I – Case Scenario based MCQs (15 Marks)

Write the most appropriate answer to each of the following multiple choice questions by
choosing one of the four options given. All questions are compulsory.

Case Study

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.

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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%.

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%

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

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%

4. Calculate the cost of preference shares using approximation method

(a) 10.23%

(b) 11.22%

(c) 12.12%

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(d) 12.22%

5. Which of the following best represents the overall cost of marginal capital to be raised?

(a) 11.76%

(b) 17.16%

(c) 16.17%

(d) 16.71%

(5 x 2 = 10 Marks)

GENERAL MCQ’S

1. The face value of equity shares of a company is Rs.10, and the current market price is
Rs.200 per share. The expected dividend at the end of the first year is Rs.10, and the growth
rate is 5%. What is the cost of retained earnings (Kr)?

A) 9%

B) 10%

C) 11%

D) 12%

(2 Marks)

2. Two companies, M Ltd. and N Ltd., have the same EBIT (Earnings Before Interest and
Taxes) of Rs. 20,000. M Ltd. is a levered company with Rs. 1,00,000 debt at a 7% interest
rate, while N Ltd. is unlevered. The cost of equity for M Ltd. is 11.50%, and for N Ltd., it is
10%. Based on this information, what will be the value of the firm (V) for M Ltd.?

A) Rs. 1,00,000

B) Rs. 1,13,043

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C) Rs. 2,00,000

D) Rs. 2,13,043

(2 Marks)

3. What does the term "trading on equity" refer to in the context of financial leverage?

A) The practice of issuing more equity shares than debt to finance operations.

B) The use of fixed-cost funds, such as long-term debt and preference share capital, to
increase the earnings available to equity shareholders.

C) The strategy of minimizing fixed costs to enhance overall profitability.

D) The reduction of equity capital to improve return on investment for shareholders.

(1 Mark)

PART II -Descriptive Questions (35 Marks)

Question 1 is compulsory;

Attempt any 2 questions from the remaining questions

Q-1(a) PI Limited has the following Balance Sheet as on March 31, 2020 and March 31, 2021:

Particulars March 31, 2020 March 31, 2021

Sources of Funds

Shareholders' Funds 87,500 87,500

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Loan Funds 1,22,500 1,05,000

Total Sources 2,10,000 1,92,500

Applications of Funds

Fixed Assets 87,500 1,05,000

Cash and Bank 15,750 14,000

Receivables 49,000 38,500

Inventories 87,500 70,000

Other Current Assets 35,000 35,000

Less: Current Liabilities (64,750) (70,000)

Total Applications 2,10,000 1,92,500

The Income Statement of the PI Ltd. for the year ended is as follows:

Particulars March 31, 2020 March 31, 2021

Sales 7,87,500 8,33,000

Less: Cost of Goods Sold (COGS) (7,30,100) (7,38,500)

Gross Profit 57,400 94,500

Less: Selling, General, and Administrative (38,500) (61,250)

Expenses

Earnings before Interest and Tax (EBIT) 18,900 33,250

Less: Interest Expense (12,250) (10,500)

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Earnings before Tax (EBT) 6,650 22,750

Less: Tax (1,995) (6,825)

Profits after Tax (PAT) 4,655 15,925

You are required to CALCULATE for the year 2020-21:

(i) Inventory turnover ratio

(ii) Financial Leverage

(iii) Return on Capital Employed (after tax)

(5 Marks)

Q-1(b) EXPLAIN Over-capitalization. STATE its causes and consequences.

(5 Marks)

Q-1(c) Following information is given for X Ltd.:

Total Contribution (₹) ₹ 4,25,000

Operating Leverage 3.125

15% Preference Shares (₹ 100 each) 1,000 shares

Number of Equity Shares 2,500 shares

Tax Rate 50%

Calculate EPS of X Ltd., if 40% decrease in sales will result EPS to zero.

(5 Marks)

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Q-2(a) GT Ltd. is taking into account the revision of its credit policy with a view to increasing
its sales and profit. Currently, all its sales are on one month credit. Other information is as
follows:

Contribution 2/5th of Sales Revenue

Additional funds raising cost 20% per annum

The marketing manager of the company has given the following options along with
estimates for considerations:

Particulars Current Position Option I Option II Option III

Sales Revenue (Rs.) 40,00,000 42,00,000 44,00,000 50,00,000

Credit Period (in months) 1 1½ 2 3

Bad Debts (% of Sales) 2 2½ 3 5

Cost of Credit Administration 24,000 26,000 30,000 60,000

(Rs.)

You are required to ADVISE the company for the best option.

(6 Marks)

Q-2(b) The following information relates to Navya Ltd:

Earnings of the Company 20,00,000

Dividend Pay-out Ratio 60%

Number of Shares Outstanding 4,00,000

Rate of Return on Investment 15%

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Equity Capitalization Rate 12%

Required:

(i) DETERMINE what would be the market value per share as per Walter’s model.

(ii) COMPUTE optimum dividend pay-out ratio according to Walter’s model and the market
value of company’s share at that pay-out ratio.

(4 Marks)

Q-3(a) A hospital is considering to purchase a diagnostic machine costing Rs. 80,000. The
projected life of the machine is 8 years and has an expected salvage value of Rs. 6,000 at the
end of 8 years. The annual operating cost of the machine is Rs. 7,500. It is expected to
generate revenues of Rs. 40,000 per year for eight years. Presently, the hospital is
outsourcing the diagnostic work and is earning commission income of Rs. 12,000 per
annum.
Consider tax rate of 30% and Discounting Rate as 10%.

Advise:

Whether it would be profitable for the hospital to purchase the machine?

Give your recommendation as per Net Present Value method and Present Value Index
method under below mentioned two situations:

(i) If Commission income of Rs. 12,000 p.a. is before taxes.

(ii) If Commission income of Rs. 12,000 p.a. is net of taxes

Given:

t 1 2 3 4 5 6 7 8

PVIF (t, 10%) 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467

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 (8 Marks)

Q-3(b) What is a share buyback, and what are its two main types? Explain how a share
buyback can affect the dividend per share.

(2 Marks)

Q-4(a) Explain in brief following Financial Instruments:

(i) Euro Bonds

(ii) Floating Rate Notes

(iii) Euro Commercial paper

(iv) Fully Hedged Bond

(4 Marks)

Q-4(b) Define debt securitization and explain its Process.

(4 Marks)

Q-4(c) Define Operating Leverage and explain the factors that affect it.

(2 Marks)

OR

Q-4(c) What are Dividend Decisions, and what are the two key elements involved in such
decisions?

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 (2 Marks)

SECTION –B (SM)

1. The question paper comprises two parts, Part I and Part II.

2. Part I comprises Case Scenario based Multiple Choice Questions (MCQs)

3. Part II comprises questions which require descriptive type answers.

CASE STUDY BASED MCQ’S

Sneha Rao, founder and CEO of DEF Technologies, is renowned for her technological insight
and visionary leadership style. She cultivates a culture of collaboration, continuous learning,
and innovative problem-solving, encouraging her employees to think outside the box and
embrace new challenges. Her exceptional ability to foresee technological trends and
navigate complex market dynamics has propelled DEF Technologies to impressive growth
over the past decade.

Sneha started DEF Technologies in 2010 as a small software development firm. With a vision
to transform DEF Technologies into a leading tech company, she initially focused on
developing custom software solutions for local businesses. However, intense competition
and limited market demand led to financial difficulties. Undeterred, Sneha pivoted the
business towards developing cloud-based solutions, leveraging the growing trend of digital
transformation. This strategic shift, along with aggressive marketing, helped DEF
Technologies capture a significant market share and become a leader in cloud services,
setting new industry standards.

In 2015, Sneha's brother, Raj, joined the company, and together they crafted an ambitious
expansion strategy. DEF Technologies entered the global market, partnering with
international tech firms to launch a new line of AI-driven cybersecurity solutions. This

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venture was highly successful, establishing DEF Technologies as a global brand and a key
player in the cybersecurity industry.

Raj then led the company’s diversification into the healthcare sector with a new brand,
MedTech Solutions. Recognizing the potential for technology to revolutionize healthcare,
Sneha and Raj focused on developing affordable telemedicine platforms and AI-driven
diagnostic tools. Their approach disrupted the market, providing high-quality healthcare
solutions at lower costs and gaining widespread trust from healthcare providers and
patients alike. MedTech Solutions experienced rapid growth, especially during the COVID-19
pandemic, as demand for remote healthcare services surged.

At the beginning of 2023, DEF Technologies launched another new business, GreenTech
Innovations, to address environmental challenges through technology. DEF Technologies
continues to explore new opportunities and ventures to stay at the forefront of the tech
industry.

Based on the above Case Scenario, answer the Multiple-Choice Questions.

1. Sneha Rao's vision to transform DEF Technologies into a leading tech company illustrates
which type of strategic intent?

(a) Goal

(b) Mission

(c) Vision

(d) Objective

2. Sneha’s leadership style, which promotes collaboration, continuous learning, and

innovative problem-solving, can best be described as:

(a) Transactional leadership

(b) Transformational leadership

(c) Autocratic leadership

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(d) Laissez-faire leadership

3. When DEF Technologies expanded into the global market with AI-driven cybersecurity
solutions, which of Porter's Five Forces was most likely mitigated by forming partnerships
with international tech firms?

(a) Threat of Substitute Products or Services

(b) Bargaining Power of Suppliers

(c) Threat of New Entrants

(d) Intense Rivalry Among Existing Competitors

4. By entering the global market and launching AI-driven cybersecurity solutions, DEF
Technologies pursued which expansion strategy from Ansoff’s Product-Market Growth
Matrix?

(a) Diversification

(b) Market Penetration

(c) Product Development

(d) Market Development

5. MedTech Solutions’ focus on developing affordable telemedicine platforms and AI-driven

diagnostic tools reflects which of the following competitive strategies?

(a) Differentiation strategy

(b) Cost leadership strategy

(c) Best-cost provider strategy

(d) Focus Strategy

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 (5×2 = 10 MARKS)

General MCQ

6. XYZ Corporation is a global company that emphasizes integrity, accountability, and

innovation as its core values. During the COVID-19 pandemic, the company's leadership
demonstrated its commitment to these values by prioritizing employee safety over short-
term profits. The company invested in remote work solutions, provided financial support to
affected employees, and postponed major business expansions to focus on people. This
approach resonated well with employees and customers, leading to increased employee
loyalty and consumer trust in XYZ Corporation. As a result, the company saw a strong
recovery after the pandemic and gained long-term customer loyalty.

How did XYZ Corporation's actions during the COVID-19 pandemic reflect the importance of
company values?

(a) The company’s focus on employee well-being highlighted its commitment to long-term
profitability at the expense of customer trust.

(b) XYZ’s decision to postpone business expansions in favor of supporting employees

showed how its core values, such as integrity and accountability, shaped its decision-
making.

(c) The company ignored its core values to pursue aggressive market expansion during the
pandemic.

(d) XYZ Corporation’s leadership did not follow any particular value-driven approach during
the pandemic.

(2 MARKS)

7. A marketing manager is tasked with promoting a campaign to discourage the

consumption of sugary beverages among teenagers. Which marketing strategy would be
most appropriate for this social cause?

A) Social Marketing

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B) Augmented Marketing

C) Viral Marketing

D) Influencer Marketing

(2 MARKS)

8. What is one key implication of the experience curve for businesses?

(a) Smaller firms tend to have lower unit costs due to their flexibility in production.

(b) Larger firms are likely to have higher unit costs because of their complex operations.

(c) Larger firms gain a competitive cost advantage due to lower unit costs as they
accumulate experience.

(d) Experience curve only applies to companies in the technology industry.

(1 MARKS)

Division B – Descriptive Questions

Question 5 is compulsory; Attempt any two from the remaining three

Q-5(a) GreenGardens, a small but growing organic farm, is assessing its business
environment to strategically plan for future growth. The farm boasts high-quality, pesticide-
free crops, but faces challenges with its limited distribution channels. As the demand for
organic products continues to rise, GreenGardens recognizes the potential to broaden its
market reach. However, unpredictable weather conditions and competition from larger
farms present significant obstacles. To effectively navigate these challenges and
opportunities, GreenGardens needs to conduct a comprehensive evaluation. Identify the

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type of analysis GreenGardens should conduct to strategically plan for its future growth and
outline the grid.

(5 Marks)

Q-5(b) Which strategy is implemented by redefining the business, by enlarging its scope of
business and substantially increasing investment in the business? Explain the major reasons
for adopting this strategy.

(5 Marks)

Q-5(c) "How do technological developments and the changing political landscape contribute
to the globalization of businesses, and what are the key factors driving companies to expand
their operations globally in the contemporary business environment?"

(5 MARKS)

Q-6(a) A manufacturing company is in direct competition with fifteen companies at the

national level. The head of marketing department of this company wishes to study the
market position of rival companies by grouping them into like positions. Name the tool that
may be used by him/her. Explain the procedure that may be used to implement the
techniques.

(5 Marks)

Q-6(b) Sunrise Enterprises Incorporated deals in multi-products and multi-businesses. It has

its own set of competitors. It seems impractical for the company to provide separate
strategic planning treatment to each one of its products or businesses. As a strategic
manager, suggest the type of structure best suitable for Sunrise Enterprises Incorporated
and state its benefits.

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 (5 MARKS)

Q-7(a) Moon light Corporation, a diverse and multi-faceted company, is currently evaluating
its organizational framework using the McKinsey 7S Model for better effectiveness. This
Model focuses on the "Soft Ss" and "Hard Ss" elements. Explain these elements in detail.

(5 MARKS)

Q-7(b) FreshDelight, renowned for its organic fruit juices, aims to expand its market
presence by identifying emerging markets in countries where organic products are gaining
popularity. To achieve this, FreshDelight launches targeted marketing campaigns and
partners with local distributors to introduce its juices to these new regions. This strategy
involves adapting product packaging and marketing messages to align with local preferences
and regulations. By entering these new markets, FreshDelight hopes to increase its
customer base and drive sales growth. What strategy is FreshDelight using to expand its
market presence?

(5 Marks)

Q-8(a) ABC Corporation, a diversified company with multiple business units, is considering
using the Boston Consulting Group (BCG) Growth-Share Matrix for strategic planning and
resource allocation. Analyze the different types of products or Strategic Business Units
(SBUs) identified in the BCG matrix and discuss the post-identification strategies that ABC
Corporation can adopt for each category.

(5 MARKS)

Q-8 (b) Analyze the role of Key Success Factors (KSFs) in determining competitive success
within an industry.

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 (5 MARKS)

OR

Q-8(b) Anita Sharma, the marketing department head of Zentech, a technology solutions
company, was recently promoted to oversee the human resources department along with
marketing. Her seniors at the corporate level have always admired her leadership style and
believe that she would ensure the implementation of policies and strategies to the best of
her capacity but have never included her in decision-making for the company.

Do you think this is the right approach? Validate your answer with logical reasoning around
management levels and decision-making.

(5 MARKS)

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