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Total No. of Questions – 6 No. of Printed Pages – 3

Time Allowed – 90 Mins Maximum Marks – 50
Answers to questions to be given only in English. Answers in Hindi will not be valued.
Candidates are also required to answer any Five questions from the remaining Six questions.

CA Intermediate – Financial Management

Q 1)

(A) ABC Ltd adopts constant - WACC approach, and believes that its cost of Debt and overall
cost of capital is at 9% and 12% respectively. If the ratio of the market value of debt to the market
value of equity is 0.8, what rate of return do equity shareholders earn? Assume that there are no
taxes.
(5 Marks)
(B) Following Information relate to a Concern
Debtors Velocity 3 Months Gross Profit Ratio 25%
Gross Profit ₹ 4,00,000 Stock Turnover Ratio 1.5
Closing Stock of the period is ₹ 10,000 above the opening stock. You are required to
compute-
a) Sales
b) Costs of Goods sold
c) Sundry Debtors
(5 Marks)
d) Closing Stock

Q 2)
(A) The following information pertains to M/s XY Ltd.

Earnings of the Company ₹ 5,00,000

Dividend Payout ratio 60%
No. of shares outstanding 1,00,000
Equity capitalization rate 12%
Rate of return on investment 15%

i) What would be the market value per share as per Walter’s model?
ii) What is the optimum dividend payout ratio according to Walter’s model and the market value
of Company’s share at that payout ratio?
(5 Marks)
(B) The total sales (all credit) of a firm are ₹ 6,40,000. It has a gross profit margin of 15 per cent
and a current ratio of 2.5. The firm’s current liabilities are ₹ 96,000; inventories ₹ 48,000 and cash ₹
16,000.
a) Determine the average inventory to be carried by the firm, if an inventory turnover of 5 times is
expected? (Assume a 360 day year).
b) Determine the average collection period if the opening balance of debtors is intended to be of ₹
80,000? (Assume a 360 day year).
(5 Marks)

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Q 3)
(A) The following information is collected from the annual reports of J Ltd:
Profit before tax ₹ 2.50 crore
Tax rate 40 percent
Retention ratio 40 percent
Number of outstanding shares 50,00,000
Equity capitalization rate 12 percent
Rate of return on investment 15 percent
What should be the market price per share according to Gordon's model of dividend policy?

(B) The following data relates to four Firms – (5 Marks)

Firm A B C D
EBIT ₹ 2,00,000 ₹ 3,00,000 ₹ 5,00,000 ₹ 6,00,000
Interest ₹ 20,000 ₹ 60,000 ₹ 2,00,000 ₹ 2,40,000
Equity 12% 16% 15% 18%
Capitalization
Rate

Assuming that there are no taxes and Interest rate on debt is 10%, Determine the value and WACC of each
firm using the Net Income Approach.
(5 Marks)
Q 4)

(A) X Ltd. is considering the following two alternative financing plans:

Particulars Plan – I (₹) Plan – II (₹)
Equity shares of ₹ 10 4,00,000 4,00,000
each 12% Debentures 2,00,000 -
2,00,000
Preference Shares of ₹ 100
each 6,00,000 6,00,000

The Indifference point between the plans is ₹ 2,40,000. Corporate tax rate is 30%.
Calculate the rate of dividend on preference shares. (5 Marks)

(B) The following information regarding the equity shares of M ltd. is given:
Market price ₹ 58.33
Dividend per share ₹5
Multiplier 7

According to the Graham & Dodd approach to the dividend policy, compute the EPS.
(5 Marks)

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Q 5)
ABC Ltd. has 50,000 outstanding shares. The current market price per share is ₹ 100 each. It hopes
to make a net income of ₹ 5,00,000 at the end of current year. The Company’s Board is considering
a dividend of ₹ 5 per share at the end of current financial year. The company needs to raise ₹
10,00,000 for an approved investment expenditure. The company belongs to a risk class for
which the capitalization rate is 10%. Show, how the M-M approach affects the value of firm if the
dividends are paid or not paid.
(10 Marks)

Q 6)

From the following Information, prepare Balance sheet of a Firm:

Stock Turnover Ratio (based On 7 Times Liquidity Ratio 1.25

cost of goods sold
Rate of Gross Profit to Sales (All 25% Net Working Capital ₹ 8,00,000
sales are on credit basis.)
Sales to Fixed Assets 2 times Net Worth to Fixed Assets 0.9 times
Average Debt Collection Period 1.5 months Reserves and Surplus 0.25 Times
Current Ratio 2 Long Term Debts Nil

(10 Marks)

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