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CA Final | CA Inter | CA IPCC | CA Foundation Online Test Series

Answer Paper

FM & SM Duration: 75

Details: TEST-2 (FM-4,5 SM-11, 12) Marks: 45

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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Ans-1

12% Debenture of Rs. 2,00,000, Face value Rs.100, Debenture issued at par, Tax rate 20%.

= (I-t)

Where, I=24000; n=7 Years; P=100; NP=100; t=20%

= (I-0.20)

= 9.6%

(ii) Debenture issued at premium (10%)

=7.04%

(iii) Debenture issued at discount (10%)

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=

= 8.48%

(6 Marks)

Ans-2

Statement Showing the Value of Firm and Overall Cost of Capital WACC

Degrees of Leverages

Rs. Rs. Rs.

Debentures capital 2,00,000 5,00,000 7,00,000

EBIT 2,00,000 2,00,000 2,00,000

Less Int.@6% 12000 30000 42000

Net profit(i.e., earning available to equity share 188000 170000 158000

holders )

Equity capitalization rate i.e, 10% 10% 10%

Therefore value of equity (e.g.,188000/10%) 1880000 1700000 1580000

+value of debt (D) 2,00,000 5,00,000 7,00,000

Therefore value of firm(V) 2080000 2200000 2280000

WACC,

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Conclusion: Firm is able to increase its value and to decrease it’s (WACC) increasing the debt
proportion in the capital structure.

The NI approach, though easy to understand, ignores perhaps the most important aspects
of leverage that the market price depends upon the risk, which varies in direct relation to
the changing proportion of debt in capital structure.

(6 Marks)

Ans-3 SWOT analysis is a crucial framework that enables organizations like XYZ Corporation
to assess their current situation and develop strategies to improve their competitive edge in
the dynamic technology industry.

• Strengths: These are inherent capabilities that give the organization a strategic advantage
over its competitors. For XYZ Corporation, strengths could include cutting-edge technology,
a skilled workforce, strong brand recognition, and a wide customer base.

• Weaknesses: Weaknesses are inherent limitations or constraints within the organization

that put it at a strategic disadvantage. In the case of XYZ Corporation, weaknesses might
include outdated infrastructure, a lack of diversity in the product portfolio, or inefficient
internal processes.

• Opportunities: Opportunities are favorable conditions in the organization's external

environment that can be leveraged to enhance its position. In the tech industry,
opportunities could be emerging markets, partnerships with innovative startups, or
advancements in technology.

• Threats: Threats are unfavorable conditions in the external environment that pose risks or
challenges to the organization's position. For XYZ Corporation, threats may include
aggressive competitors, rapid technological obsolescence, or changing regulatory
landscapes.

By conducting a SWOT analysis, XYZ Corporation can gain a comprehensive understanding of

its internal strengths and weaknesses as well as external opportunities and threats. This

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analysis serves as a logical framework, offering a comparative account of these factors. The
insights obtained guide XYZ's strategists in identifying effective strategies that capitalize on
strengths, address weaknesses, seize opportunities, and mitigate threats.

For instance, if the analysis reveals that one of XYZ's strengths is a highly skilled workforce,
they may decide to invest in employee development to maintain this advantage. If a
weakness is outdated infrastructure, they can strategize to modernize their systems. When
opportunities arise, such as entering new markets, they can plan expansion efforts. And in
the face of threats like fierce competition, they may focus on innovation to stay ahead.

In conclusion, SWOT analysis equips XYZ Corporation with a structured approach to assess
their current position, devise informed strategies, and ultimately achieve a competitive
advantage in the ever-evolving technology sector.

(5 Marks)

Ans-4

In order to find out the WACC, the specific cost of capital of different sources may be
calculated as follows:

Cost to debenture:

Int, I = Rs. 13

SV = 100 – 4 = Rs. 99

RV = Rs. 100

t = .50

N = 10 year

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=

=6.8%

Cost to Pref. Shares:

PD = Rs. 14

RV = 100

SV = 100 – 5 = Rs. 95

N = 10 years

=14.9%

Cost to Equity Shares:

= 22 – 2 = 20

=2

g = .07

= +g

= +0.07

=17%

Calculation of WACC (Book Value)

Source Amount Weight C/C W x C/C

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Pref. of shares Rs.2,00,000 0.10 0.149 0.0149

Equity shares Rs.10,00,000 0.50 0.170 0.0850

Debentures Rs.8,00,000 0.40 0.070 0.0280

Rs.20,00,000 1.00 0.1279

So, WACC (BV) is 12.79 or 12.8%

Calculation of WACC (Market Value)

Source Amount Weight C/C W x C/C

Pref. of shares Rs.2,40,000 0.072 0.149 0.0107

Equity shares Rs.22,00,000 0.663 0.170 0.1127

Debentures Rs.8,80,000 0.265 0.070 0.0186

Rs.33,20,000 1.000 0.1420

So, WACC (MV) is 14.2%

(8 Marks)

Ans-5

Alternative 1 Alternative 2 Alternative 3

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 Debt Rs.5 lacs Debt Rs.20 lacs Debt Rs.30 lacs
+Equity Rs.45 lacs +Equity Rs.30 lacs +Equity Rs.20 lacs

Earnings before Rs.10,00,000 Rs.10,00,000 Rs.10,00,000

interest and tax

Less interest on debt 50,000 2,75,000 4,75,000

Earnings before tax 9,50,000 7,25,000 5,25,000

Tax@50% 4,75,500 3,62,500 2,62,500

Earnings after tax 4,75,500 3,62,500 2,62,500

No. of equity shares 30,000 20,000 16,000

Earnings per share Rs.15,833 18,125 16,406

The earnings per share is higher in Alternative 2 i.e., if the company finances the project by
raising debt of Rs.70,00,000 and issue equity shares of Rs.30,00,000.
(7 Marks)

Ans-6

Certainly, Rahul Value chain analysis is a crucial framework for assessing the competitive
strength of organizations by breaking down their activities into primary and support
activities. explain the five primary activities and four support activities for better clarity:

Primary Activities:

1. Inbound Logistics: These activities involve the handling of inputs, including receiving,
storing, and distributing materials for the product or service. For example, in a hypothetical
company, XYZ Manufacturing, inbound logistics would encompass activities such as
transportation, stock control, and warehousing, ensuring the efficient flow of raw materials
and components for production.

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2. Operations: In this stage, inputs are transformed into the final product or service. It
includes processes like machining, packaging, assembly, and testing that convert raw
materials into finished goods. For instance, in XYZ Manufacturing, the production process
where raw materials are processed, assembled, and tested to create the final product falls
under operations.

3. Outbound Logistics: These activities focus on collecting, storing, and distributing the
product to customers. For tangible products, it includes warehousing, materials handling,
and transportation. If XYZ Manufacturing ships its products to customers, these logistics
activities ensure timely and efficient delivery.

4. Marketing and Sales: This area involves making consumers/users aware of the product or
service and facilitating its purchase. In the case of XYZ Manufacturing, marketing and sales
activities encompass advertising, sales administration, and selling the products. They aim to
attract customers and promote the products.

5. Service: These activities enhance or maintain the value of a product or service. Examples
include installation, repair, training, and providing spare parts. XYZ Manufacturing ensures
that its customers receive post-sales services, such as product installation, repair services,
and access to spare parts when needed.

Support Activities:

1. Procurement: This process refers to acquiring the various resource inputs for the primary
activities. It includes sourcing raw materials, components, and other resources required in
the production process. For XYZ Manufacturing, procurement would involve sourcing the
raw materials used in its products.

2. Technology Development: All value activities have a technological aspect. This includes
product design, research and development (R&D), process development, and improvements
in resource utilization. XYZ Manufacturing invests in R&D to enhance product features and
production processes.

3. Human Resource Management: This area is crucial and extends across all primary
activities. It involves recruiting, managing, training, developing, and rewarding employees

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within the organization. At XYZ Manufacturing, human resource management ensures that
the workforce is skilled and motivated to contribute to the company's success.

4. Infrastructure: Infrastructure refers to the systems, structures, and routines that support
the organization's performance. It includes areas like planning, finance, quality control, and
information management. XYZ Manufacturing's infrastructure supports planning, quality
control, and financial management to ensure efficient operations and maintain the
company's culture.

By understanding and optimizing these primary and support activities, organizations like XYZ
Manufacturing can enhance their competitive advantage and provide value-for-money
products or services to their customers.

(6 Marks)

MCQs:-

1. B) 14.2%

Explanation: Kr = Rf + ß (Rm – Rf)

= 7% + 1.20 (6%)=7% + 7.20

Kr = 14.2%

(1 Mark)

2. A) 1-True, 2-True

Explanation: The answer is indeed (A) 1-True, 2-True.

Here's the explanation for each statement:

No indifference point: If the after-tax cost of the source of funds other than equity shares
(such as debt or preference shares) is not the same under both financing plans, then there
won't be an indifference point between the two plans. An indifference point occurs when

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the EPS is the same for two financing options at a specific EBIT level. If the costs are
different, there won't be an EBIT level where EPS is equal under both plans.

Many indifference points: If the after-tax cost of the source other than equity shares is the
same under both financing plans, then every EBIT level will be an indifference point. This
means that for each level of EBIT, the EPS will be the same for both financing options,
making them equally attractive from an EPS perspective.

In summary, when the costs of non-equity financing sources differ, there won't be an
indifference point, and when they are the same, multiple indifference points exist.

(1 Mark)

3. C) XYZ Tech benefits from the experience curve, allowing them to produce smartphones
at lower unit costs, giving them a competitive advantage over Innovate Mobile.

Explanation: The experience curve states that as firms accumulate experience and
production volume, their unit costs tend to decline. In this case, XYZ Tech's ability to offer
smartphones at a lower price compared to Innovate Mobile suggests that they are
benefiting from the experience curve, allowing them to produce smartphones at lower unit
costs and gain a competitive advantage.

(1 Mark)

4. A) 4.865%

Explanation:

(1 Mark)

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5. C) Achieving a balance between control, risk, and cost of capital.

Explanation: Rajesh's primary objective, while making decisions about the company's capital
structure, should be to strike a balance between control, risk, and cost of capital. This
involves designing a capital structure that allows existing shareholders to retain a majority
stake (control), prevents the financial risk from exceeding acceptable limits, and minimizes
the overall cost of capital. While each of the factors mentioned in the options is important,
the key is to find a harmonious combination that maximizes the company's value and
benefits all stakeholders.
(1 Mark)

6. D) External influences comprise elements like advertisements, peer recommendations,

and social norms, which directly impact the psychological and internal processes influencing
consumer decisions.

Explanation: External influences encompass factors like advertisements, peer

recommendations, and social norms, which directly influence the psychological and internal
processes that affect consumer decisions. These external factors can shape a consumer's
preferences, perceptions, and choices. Internal influences, on the other hand, involve
psychological factors within the individual, such as motivation and attitudes, which also play
a role in consumer decision making. Option D provides an accurate representation of this
relationship between external and internal influences in understanding consumer behavior.
(1 Mark)

7. D) KEY PLAYERS Stakeholders

Explanation: According to Mendelow's stakeholder classification, the "KEY PLAYERS" group

consists of stakeholders with both high power and high interest. Sophia should make the
greatest effort to fully engage and satisfy this group because they have a significant
influence on the organization, and their level of interest is high. Option D aligns with this
classification, while options A, B, and C represent the other stakeholder groups with varying
power and interest levels, and their engagement strategies differ accordingly.

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 (1 Mark)

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