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CA Inter Taxation — Question Paper — May 2012

This page contains all 8 questions from the CA Inter Taxation Question Paper for the May 2012 attempt cycle, sourced from VSI Jaipur.

✅ 7 of 8 questions have AI-generated solutions with bare-Act citations.
Q1
20 marks very hard
Multiple case scenarios requiring financial analysis and calculations
💡 Show solution AI SOLUTION

(a) AK Limited — Production Budget and Break-Even

(i) Quarterly Production Budget:

Total annual sales = 18,000 + 22,000 + 35,000 + 27,000 = 1,02,000 units
Total production required = 1,02,000 + 8,000 (closing) − 6,000 (opening) = 1,04,000 units

Production formula: 70% of current quarter sales + 30% of next quarter sales.

| Quarter | Current Qtr Sales | 70% | Next Qtr Sales | 30% | Production (units) |
|---------|-------------------|-----|----------------|-----|--------------------|
| I | 18,000 | 12,600 | 22,000 | 6,600 | 19,200 |
| II | 22,000 | 15,400 | 35,000 | 10,500 | 25,900 |
| III | 35,000 | 24,500 | 27,000 | 8,100 | 32,600 |
| IV | — | — | — | — | 26,300 (balancing) |
| Total | | | | | 1,04,000 |

*Closing inventory verification:* Q1: 6,000+19,200−18,000=7,200 → Q2: 11,100 → Q3: 8,700 → Q4: 8,000 ✓

(ii) Break-Even Point in Q1:

*Note: The question states raw material at 20 units @ ₹40 = ₹800, which exceeds the selling price of ₹40; this appears to be a data error. Assuming variable (raw material) cost = ₹20 per unit.*

Selling price = ₹40 | Variable cost = ₹20 | Contribution per unit = ₹20
P/V Ratio = ₹20/₹40 = 50%
Fixed overhead per quarter = (17,000 hours × ₹2) ÷ 4 = ₹8,500
BEP (units) = ₹8,500 ÷ ₹20 = 425 units
BEP (₹ sales) = 425 × ₹40 = ₹17,000

Since Q1 sales budget is 18,000 units (well above BEP of 425 units), the company is expected to comfortably achieve and surpass break-even in Q1.

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(b) Machine Hour Rate

*Note: Scrap value stated as ₹90 lacs for a machine costing ₹10 lacs is clearly a data error; assumed scrap value = ₹90,000.*

Annual Cost Statement for New Machine:

| Item | Calculation | Amount (₹) |
|------|------------|------------|
| Depreciation (SLM) | (10,00,000 − 90,000) ÷ 10 | 91,000 |
| Repairs & Maintenance | Given | 5,000 |
| Power | 4,200 hrs × 5 units × ₹3.25 | 68,250 |
| Rent | ₹2,400 × 12 × 1/10 | 2,880 |
| Total Annual Cost | | 1,67,130 |

Effective (productive) hours = 4,200 − 200 = 4,000 hours

Machine Hour Rate = ₹1,67,130 ÷ 4,000 = ₹41.78 per hour

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(c) RES Ltd. — M&M Model with Taxes

Given: V_U = ₹25,00,000; k_e(U) = 16%; Debt (D) = ₹25,00,000 at k_d = 15%; Tax rate (T) = 30%

Levered firm value (M&M with taxes):
V_L = V_U + T×D = 25,00,000 + (0.30 × 25,00,000) = ₹32,50,000
Equity value (S) = 32,50,000 − 25,00,000 = ₹7,50,000

EBIT = V_U × k_e(U) = 25,00,000 × 16% = ₹4,00,000

(i) EPS (Earnings available to equity shareholders):
EBIT: ₹4,00,000
Less: Interest (25,00,000 × 15%): ₹3,75,000
EBT: ₹25,000
Less: Tax @ 30%: ₹7,500
EAT (Earnings to equity) = ₹17,500

(ii) Cost of Equity (k_e_L) — M&M Proposition II with Taxes:
k_e_L = k_e_U + (k_e_U − k_d)(1−T)(D/S)
= 16% + (16%−15%)(1−0.30)(25,00,000/7,50,000)
= 16% + 1% × 0.70 × 3.333
= 16% + 2.33% = 18.33%

(iii) Weighted Average Cost of Capital:
WACC = k_d(1−T)(D/V_L) + k_e_L(S/V_L)
= 15%(0.70)(25,00,000/32,50,000) + 18.33%(7,50,000/32,50,000)
= 10.5% × 0.7692 + 18.33% × 0.2308
= 8.08% + 4.23% = 12.31%

Comment: WACC declines from 16% (unlevered) to 12.31% (levered). In the M&M framework with corporate taxes, the tax shield on debt (₹7,50,000) increases firm value. WACC continuously falls as debt increases, implying the optimal capital structure under M&M with taxes is maximum debt (100% debt financing).

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(d) Credit Terms Evaluation — RES Ltd.

Should the company liberalise credit terms from 1/10 n/45 to 2/10 n/45?

Incremental Analysis:

| Particulars | Existing | Proposed | Increment |
|-------------|----------|----------|-----------|
| Credit Sales (₹) | 12,00,000 | 36,00,000 | 24,00,000 |
| Contribution @50% (₹) | 6,00,000 | 18,00,000 | +12,00,000 |
| Bad Debts | 12L×1.5%=18,000 | 36L×2%=72,000 | (54,000) |
| Cash Discount | 12L×50%×1%=6,000 | 36L×40%×2%=28,800 | (22,800) |

Investment in Debtors:
Current = (12,00,000 × 50% ÷ 360) × 30 = ₹50,000
Proposed = (36,00,000 × 50% ÷ 360) × 20 = ₹1,00,000
Incremental investment = ₹50,000
Opportunity cost = ₹50,000 × 15% = (₹7,500)

Net Benefit Statement:

| Particulars | ₹ |
|------------|---|
| Incremental Contribution | 12,00,000 |
| Less: Incremental Bad Debts | (54,000) |
| Less: Incremental Cash Discount | (22,800) |
| Less: Opportunity Cost on incremental debtors | (7,500) |
| Net Benefit (Pre-Tax) | 11,15,700 |
| Less: Tax @ 30% | (3,34,710) |
| Net Benefit (After Tax) | ₹7,80,990 |

Decision: The company SHOULD change its credit terms. The liberalisation generates a positive net after-tax benefit of ₹7,80,990, primarily driven by a 3x increase in sales, despite higher bad debts and discount costs.

Q2(a)Contract Costing
8 marks hard
A contractor commenced a contract on 1-7-2011. The costing records concerning the said contract reveal the following information as on 31-3-2012: Material sent to site: ₹ 7,74,300 Labour paid: ₹ 10,70,000 Labour outstanding as on 31-3-2012: ₹ 1,02,500 Salary to Engineer: ₹ 20,500 per month Salary to Supervisor: ₹ 7,71,000 Salary to Supervisor: ₹ 9,000 per month (3/4 time devoted to contract) Administration & other expenses: ₹ 4,60,600 Prepaid Administration expenses: ₹ 10,000 Material in hand at site on 31-3-2012: ₹ 7,34,400 Plant used for the contract has an estimated life of 7 years with residual value at the end of life of ₹ 50,000. Some of material costing ₹ 1,50,000 was found unissued on 31-3-2012. Two third of the contract was completed on 31-3-2012. Certificate amount so far issued and contractor has been paid ₹ 20,00,000 on account. Depreciation on plant if charged using half year basis.
💡 Show solution AI SOLUTION

Contract Account for the period 1st July 2011 to 31st March 2012 (9 months)

Note on data: The entry 'Salary to Supervisor: ₹7,71,000' is treated as Plant at Cost: ₹7,71,000 (evidently a labelling error in the question, since plant life and residual value are given, requiring a plant cost figure; a supervisor salary of ₹7,71,000 for 9 months would be implausible relative to other costs).

Contract Account (Dr)

| Particulars | ₹ |
|---|---|
| To Materials sent to site | 7,74,300 |
| To Labour paid | 10,70,000 |
| To Labour outstanding | 1,02,500 |
| To Engineer's salary (₹20,500 × 9) | 1,84,500 |
| To Plant at cost | 7,71,000 |
| To Supervisor's salary (₹9,000 × 9 × 3/4) | 60,750 |
| To Administration expenses (₹4,60,600 – ₹10,000) | 4,50,600 |
| To Notional Profit c/d | 40,250 |
| Total | 34,53,900 |

Contract Account (Cr)

| Particulars | ₹ |
|---|---|
| By Material at site (closing) | 7,34,400 |
| By Plant WDV (₹7,71,000 – ₹51,500) | 7,19,500 |
| By Work Certified | 20,00,000 |
| Total | 34,53,900 |

Notional Profit = ₹40,250

Profit transferred to Profit & Loss Account:
Since 2/3 of the contract is complete (exceeds 1/2), profit is recognized using the standard formula:

P&L Profit = 2/3 × Notional Profit × (Cash Received ÷ Work Certified)
= 2/3 × ₹40,250 × (₹20,00,000 ÷ ₹20,00,000)
= ₹26,833 (transferred to P&L)

Reserve (Profit retained in WIP) = ₹40,250 – ₹26,833 = ₹13,417

Balance Sheet Extracts as at 31st March 2012:

*Fixed Assets:* Plant WDV = ₹7,19,500

*Current Assets:*
- Material at site = ₹7,34,400
- Unissued material (Stores) = ₹1,50,000
- Prepaid administration expenses = ₹10,000
- WIP: Cost ₹19,59,750 + Profit recognized ₹26,833 – Amount received ₹20,00,000 = (₹13,417) → shown as liability

*Current Liabilities:*
- Labour outstanding = ₹1,02,500
- Advance from Contractee (excess of receipts over WIP value) = ₹13,417

Final Answer: Notional Profit = ₹40,250; Profit to P&L = ₹26,833; Reserve = ₹13,417

Q2(b)Cash Flow Statement
8 marks hard
The Balance Sheet of X Ltd as on 31-1-2011 and 31-3-2012 are as under: Equity Share capital (at ₹ 10 each): 20,50,000 (2011); 22,00,000 (2012) General Reserve: 7,50,000 (2011); 6,00,000 (2012) Security premium: 50,000 (2011); 45,000 (2012) Profit & Loss A/c: 8,50,000 (2011); 3,10,000 (2012) 7% Debentures: 3,00,000 (2011); 2,00,000 (2012) Creditors: 1,50,000 (2011); 2,15,000 (2012) Provision for tax: 1,45,000 (2011); 1,65,000 (2012) Assets - Fixed Assets (including machinery): 20,50,000 (2011); 18,75,000 (2012) Stock: 7,10,000 (2011); 8,95,000 (2012) Debtors: 7,25,000 (2011); 9,80,000 (2012) Cash Balance: 1,25,000 (2011); 1,80,000 (2012) Preliminary Expenses: 35,000 (2011); 25,000 (2012) Additional Information: (i) Depreciation charge on fixed assets during the year was ₹ 2,05,000. An old machine costing ₹ 2,00,000 (WDV ₹ 80,000) was sold for ₹ 65,000 during the year. (ii) Provisions for tax made during the year for ₹ 1,78,000. (iii) On 1-4-2011 company redeemed debenture of ₹ 1,00,000 at a premium of 5%. (iv) Company has issued fully paid bonus shares of ₹ 2,00,000 by capitalization of profit. Prepare Cash Flow Statement.
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The Cash Flow Statement is prepared using the Indirect Method as per AS 3 (Revised) — Cash Flow Statements.

Net Loss Before Tax is derived from combined reserves analysis: Opening (P&L ₹8,50,000 + GR ₹7,50,000 + Sec. Premium ₹50,000) = ₹16,50,000; Closing = ₹9,55,000; Decrease = ₹6,95,000. Decrease explained by: Bonus capitalized ₹2,00,000 + Debenture redemption premium charged to Sec. Premium ₹5,000 + Provision for tax ₹1,78,000 + Net Loss = ₹3,12,000 (balancing figure).

Loss on Sale of Machinery: WDV ₹80,000 − Proceeds ₹65,000 = ₹15,000 loss (non-cash, added back).

Preliminary Expenses written off: ₹35,000 − ₹25,000 = ₹10,000 (non-cash, added back).

Fixed Asset Purchases: Opening WDV ₹20,50,000 + Purchases − Cost of disposed machine ₹2,00,000 − Depreciation ₹2,05,000 = Closing ₹18,75,000 → Purchases = ₹2,30,000.

Tax Paid: Opening provision ₹1,45,000 + Made during year ₹1,78,000 − Closing ₹1,65,000 = ₹1,58,000 paid.

Debenture Redemption: ₹1,00,000 at 5% premium = ₹1,05,000 cash outflow. The ₹5,000 premium charged to Securities Premium explains its fall from ₹50,000 to ₹45,000.

Bonus Shares of ₹2,00,000 issued by capitalization are a non-cash financing transaction under AS 3 para 32 — excluded from the statement body and disclosed as a note.

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CASH FLOW STATEMENT OF X LTD (Indirect Method)

A. Cash Flow from Operating Activities
Net Loss before Tax: (3,12,000)
Add: Depreciation: 2,05,000
Add: Loss on sale of machinery: 15,000
Add: Preliminary expenses written off: 10,000
Operating Loss before Working Capital Changes: (82,000)
Increase in Stock: (1,85,000)
Increase in Debtors: (2,55,000)
Increase in Creditors: 65,000
Cash Used in Operations: (4,57,000)
Less: Income Tax Paid: (1,58,000)
Net Cash Used in Operating Activities (A): (6,15,000)

B. Cash Flow from Investing Activities
Purchase of Fixed Assets: (2,30,000)
Proceeds from Sale of Machinery: 65,000
Net Cash Used in Investing Activities (B): (1,65,000)

C. Cash Flow from Financing Activities
Redemption of 7% Debentures — Principal: (1,00,000)
Premium on Redemption (5% on ₹1,00,000): (5,000)
Net Cash Used in Financing Activities (C): (1,05,000)

Net Decrease in Cash (A+B+C): (8,85,000)
Opening Cash Balance: 1,25,000
Closing Cash Balance (per Balance Sheet): 1,80,000

*Note 1 — Non-cash transaction: Bonus shares of ₹2,00,000 issued by capitalization of reserves is a non-cash financing activity disclosed separately per AS 3.*
*Note 2 — The given balance sheets do not balance in either year (2011: liabilities exceed listed assets by ₹6,50,000; 2012: assets exceed listed liabilities by ₹2,20,000), indicating missing items (possibly investments/bank borrowings). Accordingly, the cash flow statement does not reconcile to the stated closing balance of ₹1,80,000. All cash flows from the disclosed data are correctly captured above.*

📖 AS 3 (Revised) — Cash Flow Statements, ICAI
Q3(a)Labour Costing - Incentive Schemes
8 marks hard
The management of a company wants to formulate an incentive plan for the workers with a view to increase productivity. The following particulars have been extracted from the books of company. Piece Wage rate: ₹ 10 Weekly working hours: 40 Hourly wages rate: ₹ 40 (guaranteed) Standard/normal time taken per unit: 15 minutes Actual work done in a week: Worker A - 176 pieces; Worker B - 140 pieces Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate when output above normal. Under Haley scheme, worker gets a bonus equal to 50% of Wages of time saved. Calculate: (i) Earning of workers under Haley's and Rowan's premium scheme. (ii) Earning of workers under Taylor's differential piece rate system and Emerson's efficiency plan.
💡 Show solution AI SOLUTION

Preliminary Calculations:

Normal output per week = (40 hours × 60 min) ÷ 15 min per unit = 160 units per week

Standard (allowed) time for actual output:
- Worker A: 176 × 15 min = 2,640 min = 44 hours
- Worker B: 140 × 15 min = 2,100 min = 35 hours

Time saved (Time Allowed – Time Taken = 40 hrs actual):
- Worker A: 44 – 40 = 4 hours saved
- Worker B: 35 – 40 = –5 hours (no saving; minimum wages guaranteed)

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(i) Haley's and Rowan's Premium Scheme

Haley's Premium Scheme
Formula: Earnings = Time Wages + 50% × (Time Saved × Hourly Rate)

- Worker A: ₹1,600 + 50% × (4 × ₹40) = ₹1,600 + ₹80 = ₹1,680
- Worker B: No time saved → Guaranteed time wages = ₹1,600

Rowan's Premium Scheme
Formula: Earnings = Time Wages + (Time Saved ÷ Time Allowed) × Time Taken × Hourly Rate

- Worker A: ₹1,600 + (4/44) × 40 × ₹40 = ₹1,600 + ₹145.45 = ₹1,745.45
- Worker B: No time saved → Guaranteed time wages = ₹1,600

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(ii) Taylor's Differential Piece Rate and Emerson's Efficiency Plan

Taylor's Differential Piece Rate System
- Normal output = 160 units. Rate above normal = 120% × ₹10 = ₹12; Rate below normal = 80% × ₹10 = ₹8.
- No guaranteed minimum under Taylor's system.

- Worker A (176 units > 160, above normal): 176 × ₹12 = ₹2,112
- Worker B (140 units < 160, below normal): 140 × ₹8 = ₹1,120

Emerson's Efficiency Plan
Efficiency = (Standard Time ÷ Actual Time) × 100
- Worker A: (44 ÷ 40) × 100 = 110%
- Worker B: (35 ÷ 40) × 100 = 87.5%

Bonus rules: Below 66⅔% → no bonus; 66⅔% to 100% → graduated bonus (0% to 20%); At 100% → 20%; Above 100% → 20% + 1% per 1% above 100%.

- Worker A (110%): Bonus = 20% + 10% = 30% → ₹1,600 + 30% × ₹1,600 = ₹1,600 + ₹480 = ₹2,080
- Worker B (87.5%): Bonus % = [(87.5 – 66.67) ÷ (100 – 66.67)] × 20% = (20.83 ÷ 33.33) × 20% = 12.5% → ₹1,600 + 12.5% × ₹1,600 = ₹1,600 + ₹200 = ₹1,800

Summary Table:

| Scheme | Worker A | Worker B |
|---|---|---|
| Haley's Premium | ₹1,680 | ₹1,600 |
| Rowan's Premium | ₹1,745.45 | ₹1,600 |
| Taylor's Differential | ₹2,112 | ₹1,120 |
| Emerson's Efficiency | ₹2,080 | ₹1,800 |

📖 ICAI Study Material on Cost and Management Accounting – Labour Costing (Incentive Schemes)
Q3bWorking Capital Management
8 marks hard
STN Ltd. is a ready-made garment manufacturing company. Its production cycle indicates that materials are introduced at the beginning of the production phase; wages and overhead accrue evenly throughout the period of cycle. The following figures for the 12 months ending 31st December 2011 are given: Production of shirts 54,000 units, Closing stock per unit ₹ 20, Duration of the production cycle 1 month, Raw material consumption 2 months, Finished goods stock held for 1 month, Credit allowed to debtors is 1.5 months and credit allowed by creditors is 1 month, Wages are paid in the next month following the month of accrual. In the work-in-progress 30% of wage and overheads are supposed to be conversion costs. The ratio of cost to sales price are - raw materials 60%, direct wages 10% and safety margin of 15% will be maintained. Calculate annual working capital required for the company on a cash cost basis.
💡 Show solution AI SOLUTION

Working Capital Estimation for STN Ltd. (Cash Cost Basis)

Cost Structure (per unit, selling price = ₹20):
Raw Materials = 60% × ₹20 = ₹12 per unit; Direct Wages = 10% × ₹20 = ₹2 per unit; Overheads (balancing figure: 85% total cost – 60% – 10%) = 15% × ₹20 = ₹3 per unit; Total Cost of Production = ₹17 per unit; Safety Margin/Profit = 15% × ₹20 = ₹3 per unit.

Annual Cost Figures (54,000 units):
Raw Materials = ₹6,48,000; Direct Wages = ₹1,08,000; Overheads = ₹1,62,000; Total Cost = ₹9,18,000.
Monthly figures: RM = ₹54,000; Wages = ₹9,000; OH = ₹13,500; Total Cost = ₹76,500.

Current Assets:

Raw Material Stock (2 months holding): ₹54,000 × 2 = ₹1,08,000

Work-in-Progress (1 month production cycle): Materials are 100% complete (introduced at start); Wages & Overheads are 30% complete (given).
— RM: ₹54,000 × 100% = ₹54,000
— Wages: ₹9,000 × 30% = ₹2,700
— Overheads: ₹13,500 × 30% = ₹4,050
— WIP Total = ₹60,750

Finished Goods Stock (1 month, at cost): ₹76,500 × 1 = ₹76,500

Debtors (1.5 months, at cash cost of production): ₹76,500 × 1.5 = ₹1,14,750

Total Current Assets (A) = ₹3,60,000

Current Liabilities:

Creditors for Raw Materials (1 month credit): ₹54,000 × 1 = ₹54,000

Wages Payable (paid in month following accrual = 1 month lag): ₹9,000 × 1 = ₹9,000

Total Current Liabilities (B) = ₹63,000

Net Working Capital (A – B) = ₹3,60,000 – ₹63,000 = ₹2,97,000

Add: Safety Margin @ 15% = ₹2,97,000 × 15% = ₹44,550

Total Working Capital Required = ₹3,41,550

📖 ICAI Study Material – Financial Management, Chapter: Working Capital Management
Q6(a)Process Costing
8 marks hard
A product passes through two processes A and B. During the year 2011, the input to process A was 8,000 units @ ₹ 9 per unit. The following table shows input/output data: Output units - Process A: 7,500, Process B: 4,800 Normal loss (% to input) - Process A: 5%, Process B: 10% Scrap value per unit (₹) - Process A: 2, Process B: 10 Direct wages (₹) - Process A: 12,000, Process B: 12,000 Direct expenses (₹) - Process A: 6,000, Process B: 5,000 Overheads per unit (₹) - Process A: 1.5, Process B: 2.5 Total overheads ₹17,460 was recovered as percentage of direct wages. Selling expenses were ₹ 3,000 and are not allocable to the processes. 2/3 of the output of Process A and 3/4 of the output of Process B was sold. The entire output of Process B was sold. Prepare Process A and B Accounts.
💡 Show solution AI SOLUTION

PROCESS A ACCOUNT

Debit Side:
Raw Materials (8,000 units × ₹9) = ₹72,000
Direct Wages = ₹12,000
Direct Expenses = ₹6,000
Manufacturing Overheads (12,000 × 72.75%) = ₹8,730
Total Cost = ₹98,730

Credit Side:
Normal Loss (400 units × ₹2) = ₹800
Abnormal Loss (100 units × ₹12.89) = ₹1,289
Transfer to Process B (7,500 units × ₹12.89) = ₹96,641
Total = ₹98,730

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PROCESS B ACCOUNT

Debit Side:
Transfer from Process A (7,500 units × ₹12.89) = ₹96,641
Direct Wages = ₹12,000
Direct Expenses = ₹5,000
Manufacturing Overheads (12,000 × 72.75%) = ₹8,730
Total Cost = ₹122,371

Credit Side:
Normal Loss (750 units × ₹10) = ₹7,500
Abnormal Loss (1,950 units × ₹17.01) = ₹33,170
Output (4,800 units × ₹17.01) = ₹81,701
Total = ₹122,371

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Key Points:
• Overhead Recovery Rate: Total overheads ₹17,460 ÷ Total direct wages ₹24,000 = 72.75% of direct wages
• Process A Cost per Unit: (Total Cost − Normal Loss Scrap Value) ÷ (Good Output + Abnormal Loss) = ₹97,930 ÷ 7,600 = ₹12.89 per unit
• Process B Cost per Unit: (Total Cost − Normal Loss Scrap Value) ÷ (Good Output + Abnormal Loss) = ₹114,871 ÷ 6,750 = ₹17.01 per unit
• Normal loss is credited at scrap value; the cost differential is absorbed in good production
• Abnormal loss is charged at full cost per unit like good output

Q6(b)Financial Leverage and Capital Structure Analysis
8 marks hard
The capital structure of XYZ Ltd. is as follows: - Equity share capital of ₹10 each: 6,00,000 - 8% Preference share capital of ₹10 each: 6,25,000 - 10% Debenture of ₹100 each: 40,000 Additional Information: - Profit after tax (tax rate 30%): ₹ 1,82,000 - Operating expenses (excluding depreciation ₹ 90,000): being 1.50 times of EBIT - Equity share dividend paid: 15% - Market price per equity share: ₹ 20 Required to calculate: (i) Operating and financial leverage (ii) Cover the preference and equity share dividends (iii) The earning yield and price earning ratio (iv) The net fund flow
💡 Show solution AI SOLUTION

Step 1 — Reconstruction of Income Statement

Profit After Tax (PAT) = ₹1,82,000; Tax rate = 30%
Profit Before Tax (PBT) = 1,82,000 ÷ 0.70 = ₹2,60,000
Interest on 10% Debentures = 10% × ₹40,000 = ₹4,000
EBIT = PBT + Interest = 2,60,000 + 4,000 = ₹2,64,000

Operating expenses excluding depreciation = 1.50 × EBIT = 1.50 × 2,64,000 = ₹3,96,000 (treated as variable costs)
Fixed cost = Depreciation = ₹90,000
Sales = EBIT + Variable costs + Fixed costs = 2,64,000 + 3,96,000 + 90,000 = ₹7,50,000
Contribution = Sales − Variable costs = 7,50,000 − 3,96,000 = ₹3,54,000

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(i) Operating Leverage (OL) and Financial Leverage (FL)

Operating Leverage = Contribution ÷ EBIT
= 3,54,000 ÷ 2,64,000 = 1.34 (approx.)

Preference Dividend = 8% × ₹6,25,000 = ₹50,000
Preference Dividend grossed up for tax = 50,000 ÷ 0.70 = ₹71,428.57

Financial Leverage = EBIT ÷ [EBIT − Interest − PD/(1−t)]
= 2,64,000 ÷ [2,64,000 − 4,000 − 71,428.57]
= 2,64,000 ÷ 1,88,571.43 = 1.40

Combined Leverage = OL × FL = 1.34 × 1.40 = 1.88 (approx.)

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(ii) Dividend Coverage Ratios

Preference Dividend Coverage = PAT ÷ Preference Dividend
= 1,82,000 ÷ 50,000 = 3.64 times

Earnings available for equity shareholders = PAT − Preference Dividend = 1,82,000 − 50,000 = ₹1,32,000
Equity Dividend = 15% × ₹6,00,000 = ₹90,000

Equity Dividend Coverage = Earnings for Equity ÷ Equity Dividend
= 1,32,000 ÷ 90,000 = 1.47 times

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(iii) Earnings Yield and Price-Earnings Ratio

Number of Equity Shares = ₹6,00,000 ÷ ₹10 = 60,000 shares
EPS = Earnings available for equity ÷ No. of shares = 1,32,000 ÷ 60,000 = ₹2.20 per share
Market Price per share = ₹20

Earnings Yield = (EPS ÷ Market Price) × 100 = (2.20 ÷ 20) × 100 = 11%

Price-Earnings (P/E) Ratio = Market Price ÷ EPS = 20 ÷ 2.20 = 9.09 times

_(Note: Earnings Yield = 1 ÷ P/E Ratio = 1 ÷ 9.09 = 11% — confirmed)_

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(iv) Net Fund Flow

Net Fund Flow = PAT + Depreciation (non-cash charge)
= 1,82,000 + 90,000 = ₹2,72,000

This represents funds generated from operations after accounting for all tax obligations but before distribution of dividends.