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Past papers/ FM + SM/ May 2024
Paper 21 Qs
Question Paper · May 2024

CA Inter FM + SM

This page contains all 21 questions from the CA Inter Financial Management & Strategic Management Question Paper for the May 2024 attempt cycle, sourced from CATS.

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Q.1(a) 00 marks easy Financial ratio analysis ⚡ Try this Q →
Theme Ltd provides you the following information: 12.5% Debt: ₹45,00,000 Debt to Equity ratio: 1.5:1 Return on Shareholder's fund: 54% Operating Ratio: 85% Ratio of operating expenses to Cost of Goods sold: 2:6 Tax rate: 25% Fixed Assets: ₹39,00,000 Current Ratio: 1.8:1 You are required to calculate: (i) Interest Coverage Ratio (ii) Gross Profit Ratio (iii) Current Assets
ICAI

Official Suggested Answer

May 2024 · ICAI BoS

Working Notes:
Debt = ₹ 45,00,000
Interest = ₹ 45,00,000 x 12.5% = 5,62,500

Debt to Equity = 1.5:1 = Total Debt / Shareholders' Equity
Equity = ₹ 30,00,000

Return on Shareholder's funds = 54% = Net Profit after taxes / Equity shareholders' fund × 100
Profit after tax (PAT) = 54% x Equity = ₹ 16,20,000
Profit before tax (PBT)(1-25%) = Profit after tax
= ₹ 16,20,000 / 75% = ₹ 21,60,000
Earning before interest and tax (EBIT) = PBT + Interest
= ₹ 21,60,000 + ₹ 5,62,500
= ₹ 27,22,500

(i) Interest Coverage Ratio = EBIT / Interest
= ₹ 27,22,500 / ₹ 5,62,500
= 4.84 Times

(ii) Operating Profit Ratio = 1 - Operating Ratio
= 1 – 0.85 = 0.15 or 15%
0.15 = Operating Profit / Sales × 100
Sales = EBIT or Operating Profit / 0.15
= ₹ 27,22,500 / 0.15
= ₹ 1,81,50,000

Operating ratio = Operating expenses / Cost of goods sold (COGS) = 2:6 = 1:3
Operating expenses = 1/3 COGS
Operating cost = Sales – Operating profit
= ₹ 1,81,50,000 - ₹ 27,22,500
= ₹ 1,54,27,500

₹ 1,54,27,500 = COGS + Operating expenses
₹ 1,54,27,500 = COGS + 1/3 COGS
COGS = ₹ 1,15,70,625

Gross profit = Sales – COGS
= 1,81,50,000 – 1,15,70,625
= ₹ 65,79,375

Gross Profit ratio = Gross Profit / Sales × 100
= 65,79,375 / 1,81,50,000
= 0.3625 or 36.25%

Gross profit and sales can be calculated in alternative way also. However, there will be no change in GP ratio i.e 36.25%

(iii) Current Ratio = Current Assets / Current Liabilities = 1.8
Current Assets = 1.8 Current Liabilities
Total of Balance sheet liability = Equity + Debt + Current Liabilities
= 30,00,000 + 45,00,000 + CL ……….(2)
Total Balance sheet asset = Fixed Assets + Current Assets
= 39 lakhs + CA = 39 + 1.8CL …….(3)
Equating 2 and 3,
75,00,000 + CL = 39,00,000 + 1.8CL
0.8CL = 36,00,000
CL = ₹ 45,00,000
Current Assets = 1.8 CL = 1.8 x 45 lakhs = ₹ 81,00,000

Source: ICAI Board of Studies. open source PDF ↗

CTTP

Worked Solution

✓ Verified

Solution: Financial Ratio Analysis — Theme Ltd

(i) Interest Coverage Ratio

Debt = ₹45,00,000 at 12.5%, so Interest = ₹5,62,500.

Equity (from Debt:Equity = 1.5:1) = 45,00,000 ÷ 1.5 = ₹30,00,000.

Return on Shareholder's Fund = 54%, so Net Profit After Tax = 54% × 30,00,000 = ₹16,20,000.

Net Profit Before Tax (at 25% tax) = 16,20,000 ÷ 0.75 = ₹21,60,000.

EBIT = Net Profit Before Tax + Interest = 21,60,000 + 5,62,500 = ₹27,22,500.

Interest Coverage Ratio = EBIT ÷ Interest = 27,22,500 ÷ 5,62,500 = 4.84 times

---

(ii) Gross Profit Ratio

Operating Ratio = 85% means (COGS + Operating Expenses) = 85% of Sales, so Operating Profit = 15% of Sales.

Since Operating Profit = EBIT = ₹27,22,500:
Sales = 27,22,500 ÷ 0.15 = ₹1,81,50,000

Ratio of Operating Expenses : COGS = 2:6. Combined they are 8 parts = 85% of Sales.
COGS = (6/8) × 85% of Sales = 63.75% of Sales = 63.75% × 1,81,50,000 = ₹1,15,70,625.

Gross Profit = Sales − COGS = 1,81,50,000 − 1,15,70,625 = ₹65,79,375.

Gross Profit Ratio = 65,79,375 ÷ 1,81,50,000 × 100 = 36.25%

---

(iii) Current Assets

Total Long-term Funds = Equity + Debt = 30,00,000 + 45,00,000 = ₹75,00,000.

Net Working Capital (NWC) = Long-term Funds − Fixed Assets = 75,00,000 − 39,00,000 = ₹36,00,000.

From Current Ratio = CA/CL = 1.8 and CA − CL = 36,00,000:
0.8 × CL = 36,00,000 → CL = ₹45,00,000 → CA = 1.8 × 45,00,000 = ₹81,00,000.

Current Assets = ₹81,00,000

PLAN

Write it like this

Time target 14 min 24 sec

1The skeleton

- Establish Equity first from Debt:Equity = 1.5:1 — write this as Step 1 on your sheet before touching any other ratio, because literally every part (i), (ii), and (iii) chains back to Equity = ₹30,00,000; examiners reward sequential logic.
- Work EBIT backwards via the tax chain — go NPAT → NPBT → EBIT, showing each arrow explicitly; if you jump straight to EBIT without showing the ÷0.75 step, you lose a method mark even if your final number is right.
- Anchor GP Ratio on the Operating Profit = EBIT insight — write 'Since no non-operating income/expense is given, Operating Profit = EBIT' as a one-liner; this justifies using ₹27,22,500 to derive Sales and stops the examiner questioning your logic.
- Split COGS using the 2:6 ratio explicitly — show 'COGS = 6/8 × 85% of Sales' as a separate line; telescoping this into one step hides your working and risks zero marks on the sub-step even if your GP% is correct.
- Use the Balance Sheet identity for Current Assets — state 'NWC = Long-term Funds − Fixed Assets' before applying Current Ratio; examiner expects this route, not a plug-and-pray with random CL values.
- Box each final answer with its name and unit — 'Interest Coverage Ratio = 4.84 times', 'GP Ratio = 36.25%', 'Current Assets = ₹81,00,000'; unboxed answers buried in working get missed during rapid scanning.

2Examiner-rewarded phrases

“Return on Shareholder's Fund = (Net Profit After Tax / Shareholder's Funds) × 100”“Net Working Capital = Long-term Funds employed − Fixed Assets”“Interest Coverage Ratio = Earnings Before Interest and Tax (EBIT) / Interest Charges”

3Common trap

Don't fall for this

The killer mistake is using Total Capital Employed (Equity + Debt = ₹75,00,000) instead of just Equity (₹30,00,000) when applying the 54% Return on Shareholder's Fund — that single wrong base blows up NPAT, EBIT, Sales, and GP Ratio in a domino, costing you 6+ marks across all three parts even though your ratio mechanics are perfect.

Q.1(b) 00 marks easy Operating leverage, financial leverage, EPS impact on sales ⚡ Try this Q →
Alpha Limited has provided following information: Equity Share Capital: 25,000 Shares @ ₹100 per Share 15% Debentures: 10,000 Debentures @ ₹750/- per Debenture Sales: 50 Lakhs units @ ₹20 per unit Variable Cost: ₹12.50 per unit Fixed Costs: ₹175.00 Lakhs Due to recent policy changes and entry of foreign competitors in the sector, Alpha Limited expects the sales may decline by 15–20%. However, selling price and other costs will remain the same. Corporate Taxes will continue @ 20%. You are required to calculate the decrease in Earnings per share, Degree of Operating Leverage and Financial Leverage separately if sales are declined by (i) 15%; and (ii) 20%.
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Q.1(c) 00 marks easy Factoring cost evaluation, receivables management ⚡ Try this Q →
Following is the sales information in respect of Bright Ltd: Annual Sales (90% on credit): ₹7,50,00,000 Credit period: 45 days Average Collection period: 70 days Bad debts: 0.75% Credit administration cost (out of which 2/5th is avoidable): ₹18,60,000 A factor firm has offered to manage the company's debtors on a non-recourse basis at a service charge of 2%. Factor agrees to grant advance against debtors at an interest rate of 14% after withholding 20% as reserve. Payment period guaranteed by factor is 45 days. The cost of capital of the company is 12.5%. One time redundancy payment of ₹50,000 is required to be made to factor. Calculate the effective cost of factoring to the company. (Assume 360 days in a year)
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Q.2(a) 00 marks easy Cost of capital — CAPM, preference shares, convertible deben ⚡ Try this Q →
The capital structure of Shine Ltd. as on 31.03.2024 is as under: Equity share capital of ₹10 each: ₹45,00,000 15% Preference share capital of ₹100 each: ₹36,00,000 Retained earnings: ₹32,00,000 13% Convertible Debenture of ₹100 each: ₹67,00,000 11% Term Loan: ₹20,00,000 Total: ₹2,00,00,000 Additional information: (A) Company issued 13% Convertible Debentures of ₹100 each on 01.04.2023 with a maturity period of 6 years. At maturity, the debenture holders will have an option to convert the debentures into equity shares of the company in the ratio of 1:4 (4 shares for each debenture). The market price of the equity share is ₹25 each as on 31.03.2024 and the growth rate of the share is 6% per annum. (B) Preference stock, redeemable after eight years, is currently selling at ₹150 per share. (C) The prevailing default-risk free interest rate on 10-year GOI treasury bonds is 6%. The average market risk premium is 8% and the Beta (β) of the company is 1.54. Corporate tax rate is 25% and rate of personal income tax is 20%. You are required to calculate the cost of: (i) Equity Share Capital (ii) Preference Share Capital (iii) Convertible Debenture (iv) Retained Earnings (v) Term Loan
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Q.2(b) 00 marks easy MM theory, arbitrage process, homemade leverage ⚡ Try this Q →
Following data is available in respect of Levered and Unlevered companies having same business risk: Capital employed = ₹2,00,000, EBIT = ₹25,000 and Ke = 12.5% | Sources | Levered Company (₹) | Unlevered Company (₹) | |---|---|---| | Debt (@8%) | 75,000 | Nil | | Equity | 1,25,000 | 2,00,000 | An investor is holding 12% shares in levered company. Calculate the increase in annual earnings of investor if he switches over his holding from Levered to Unlevered company.
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Q.3(a) 00 marks easy Capital budgeting — NPV, Profitability Index, discounted pay ⚡ Try this Q →
HCP Ltd. is a leading manufacturer of railway parts for passenger coaches and freight wagons. Due to high wastage of material and quality issues in production, the General Manager of the company is considering the replacement of machine A with a new CNC machine B. Machine A has a book value of ₹4,80,000 and remaining economic life is 6 years. It could be sold now at ₹1,80,000 and zero salvage value at the end of sixth year. The purchase price of Machine B is ₹24,00,000 with economic life of 6 years. It will require ₹1,40,000 for installation and ₹60,000 for testing. Subsidy of 15% on the purchase price of the machine B will be received from Government at the end of 1st year. Salvage value at the end of sixth year will be ₹3,20,000. The General Manager estimates that the annual savings due to installation of machine B include a reduction of three skilled workers with annual salaries of ₹1,68,000 each, ₹4,80,000 from reduced wastage of materials and defectives and ₹3,50,000 from loss in sales due to delay in execution of purchase orders. Operation of Machine B will require the services of a trained technician with annual salary of ₹3,90,000 and annual operation and maintenance cost will increase by ₹1,54,000. The company's tax rate is 30% and its required rate of return is 14%. The company follows straight line method of depreciation. Ignore tax savings on loss due to sale of existing machine. The present value factors at 14% are: | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |---|---|---|---|---|---|---| | 1.000 | 0.877 | 0.769 | 0.675 | 0.592 | 0.519 | 0.456 | Required: (i) Calculate the Net Present Value and Profitability Index and advise the company for replacement decision. (ii) Also calculate the discounted pay-back period.
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Q.3(b) 00 marks easy Dividend Discount Model, intrinsic value, variable growth ra ⚡ Try this Q →
Vista Limited's retained earnings per share for the year ending 31.03.2023 being 40% is ₹3.60 per share. Company is foreseeing a growth rate of 10% per annum in the next two years. After that the growth rate is expected to stabilize at 8% per annum. Company will maintain its existing pay-out ratio. If the investor's required rate of return is 15%, Calculate the intrinsic value per share as of date using Dividend Discount model.
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Q.4(a) 00 marks easy Financial management concepts — true/false with reasons ⚡ Try this Q →
State with brief reasons whether the following statements are true or false: (i) Maximising Market Price Per Share (MPS) as the financial objective which maximises the wealth of shareholders. (ii) A combination of lower risk and higher return is known as risk return trade off and at this level of risk-return, profit is maximum. (iii) Financial distress is a position when accounting profits of a firm are sufficient to meet its long-term obligations. (iv) Angel investor is one who provides funds for start-up in exchange for an ownership/equity.
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Q.4(b) 00 marks easy Forms of bank credit, working capital financing ⚡ Try this Q →
ABC Ltd. is approaching the banks for financing its business activity. You are required to describe any four forms of bank credit for the consideration of the company.
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Q.4(c) 00 marks easy Payback reciprocal, capital budgeting ⚡ Try this Q →
Discuss the relevance of Payback reciprocal in capital budgeting decisions.
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Q.4(c) OR 00 marks easy Crowd funding features, alternative financing sources ⚡ Try this Q →
Explain the features of crowd funding.
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Q.5(a) 05 marks medium McKinsey 7S Model, hard and soft elements, organizational de ⚡ Try this Q →
BOYA Ltd. is a venture in the market present for a decade. Till 2023, it was working on the values and vision of its founder while operating in a limited area of operations. Growth opportunities exist for BOYA Ltd. Considering the changing environment, the company is interested to leverage new skills in marketing, technology, product development and financial management. As a known fact, modifying one aspect might have a ripple effect on other elements. The company wants to understand various hard and soft elements interrelated with each other in the company and having a bearing on effective operational results. As a strategist, you intend to prepare a questionnaire based on both types of elements by analyzing the organizational design. The response to the same will help in finding an answer to ensure effectiveness through the interaction of such elements. Briefly discuss the strategic model you will use in the given situation. State the limitations of the model as well.
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Q.5(b) 05 marks medium Levels of strategy, benefits of strategic management, functi ⚡ Try this Q →
Elvis Global is a famous OTT platform facing fierce competition from its competitors amid changing consumer preferences. This has made it difficult to retain customers as the existing television channels are also launching their own platforms. The company has appointed Raghav to lead the company forward as the sales & marketing manager. Raghav needs to design creative and innovative advertising campaigns to gain a competitive edge, engage the public and capture the market. Identify the strategic level that represents Raghav's role at Elvis Global. As a strategic advisor, highlight the various benefits of strategic management in overcoming different challenges to Raghav.
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Q.5(c) 05 marks medium Business environment definition, environmental interaction a ⚡ Try this Q →
Yash is planning to launch his new tech start-up. He is exploring different locations across the country to establish his company in the right business environment. One option is the city of Bengaluru, the silicon valley of India, with an engaging network of entrepreneurs, investors, advisors and mentors. Coupled with various subsidies for new ventures and tax benefits, Bengaluru might be an ideal choice for Yash to establish his company and increase the chances of success. Define the term Business Environment with respect to the above scenario. Explain the different ways in which the interaction of a business with its environment can be helpful in developing a successful strategy.
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Q.6(a) 05 marks medium Role of innovation in business, strategic value of innovatio ⚡ Try this Q →
'Innovation leads to unnecessary expenses that do not give as many returns.' Do you agree with the statement? Give reasons in support of your answer.
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Q.6(b) 05 marks medium Managing strategic uncertainty, flexibility and scenario pla ⚡ Try this Q →
Explain how organizations can effectively manage strategic uncertainties in a rapidly changing business environment.
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Q.7(a) 05 marks medium Characteristics of business products, product features and c ⚡ Try this Q →
What are the key characteristics of business products that contribute to the overall competitiveness and dynamics of the market?
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Q.7(b) 05 marks medium Mission statement significance and purpose ⚡ Try this Q →
'A company's mission statement is typically focused on its present business scope.' Explain the significance of a mission statement.
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Q.8(a) 05 marks medium Distribution channels — definition, importance, types (sales ⚡ Try this Q →
What are channels? Why is channel analysis important? Explain the different types of channels.
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Q.8(b) 05 marks medium Vertical integration, forward vs backward integration ⚡ Try this Q →
Explain the concept of vertically integrated diversification. How is forward integration different from backward integration?
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Q.8(b) OR 05 marks medium Strategic Group Mapping, competitive analysis tool ⚡ Try this Q →
Recommend a tool to analyze the competitive position of various rival companies in the market and outline the step by step procedure for using the identified tool.
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