(a) XYZ Co. is operating on 60% capacity, producing 48000 units per annum at the following cost price structure:

Raw material ₹5 per unit
Wages ₹3 per unit
Overhead (variable) ₹2 per unit
Overhead (fixed) ₹1 per unit
Profit ₹2 per unit
Selling Price

Question

(a) XYZ Co. is operating on 60% capacity, producing 48000 units per annum at the following cost price structure:

Raw material ₹5 per unit
Wages ₹3 per unit
Overhead (variable) ₹2 per unit
Overhead (fixed) ₹1 per unit
Profit ₹2 per unit
Selling Price ₹13 per unit

The current assets and liabilities were as follows:

(₹)
Raw material 4000 units at cost 20,000
Work-in-progress 1000 units at cost 8,000
Finished goods 3000 units at cost 33,000
Sundry debtors 78,000
Creditors for goods 30,000
Liability for wages 3,000
Liability for expenses 6,000

In view of the increased demand for the product, it has been decided that from 1.1.2021 the unit should operate at 80% capacity. You are required to ascertain the additional working capital as would be necessary in view of additional production. The price of materials, rates of wages and expenses and selling price per unit will not be changed. The period of credit allowed to customers, credit allowed by suppliers and also time lag in payment of wages and expenses shall remain the same as before. (20 marks)

(b) Shasun Ltd. has the following capital structure:

| Sources of Capital | Book value (₹) | Market value per security (₹) |
|---|---|---|
| 30000 equity shares of ₹100 each | 30,00,000 | 120 |
| 10000 8% preference shares of ₹100 each | 10,00,000 | 108 |
| 20000 10% debentures of ₹100 each | 20,00,000 | 105 |

The company is expected to declare 20% dividend on its equity share with a growth rate of 5%. The corporate tax rate is 30% and corporate dividend tax is 10%. Calculate Weighted Average Cost of Capital (WACC) of the company using—

(i) book value as weight;
(ii) market value as weight. (15 marks)

(c) Discuss the role of IRDA in Indian insurance sector. (15 marks)

UPSC Answer Check · Accepted Answer

The directive 'calculate' applies to parts (a) and (b), while part (c) requires 'discuss'. Spend approximately 40% time on part (a) working capital computation (20 marks), 30% on part (b) WACC calculation using both book and market value weights (15 marks), and 30% on part (c) IRDA role discussion (15 marks). Begin with clear statements of operating cycles, apply the working capital formula for increased capacity, show step-by-step WACC computations with cost of equity via Gordon's model, and structure the IRDA discussion around regulatory, developmental and consumer protection functions with recent amendments.
- Part (a): Compute current operating cycle periods (RM storage, WIP, FG, debtors) from given data; determine new production level at 80% capacity (64,000 units); calculate additional working capital requirement using operating cycle method or component approach
- Part (a): Correct treatment of fixed overheads (exclude from WIP/FG valuation as they don't vary with production) and proper computation of creditors, wages and expenses lag periods from base year data
- Part (b): Calculate cost of equity using Gordon's growth model [D1/P0 + g] with 20% dividend, 10% CDT, ₹120 market price and 5% growth; cost of preference shares and post-tax cost of debt
- Part (b): Compute WACC using book value weights (₹60 lakh total) and market value weights (₹36 lakh equity + ₹10.8 lakh preference + ₹21 lakh debentures); show clear tabular presentation
- Part (c): Discuss IRDA's regulatory role (licensing, solvency margins, investment regulations), developmental role (promoting insurance penetration, microinsurance, crop insurance), and consumer protection (grievance redressal, protection of policyholders' interests)
- Part (c): Cite recent IRDA initiatives such as Bima Sugam platform, regulatory sandbox, increase in FDI limit to 74%, and amendments to Insurance Act for enhancing insurance inclusion

Dimension	Weight	Max marks	Excellent	Average	Poor
Demand-directive understanding	20%	10	Correctly interprets 'calculate' for parts (a)-(b) showing all working steps, formulas and assumptions; for part (c) 'discuss' covers multi-dimensional analysis of IRDA functions rather than mere description; distinguishes between book value and market value weighting rationale	Attempts calculations but misses some steps or formulas; part (c) becomes descriptive listing of IRDA functions without analytical depth; confuses the two weighting methods or their implications	Misinterprets directives—treats numerical parts as theory or vice versa; no working shown for calculations; part (c) limited to definition of IRDA without functional discussion
Content depth & accuracy	20%	10	Part (a): Accurate operating cycle computation with correct additional WC figure (approximately ₹1,15,000-₹1,20,000 range); Part (b): Precise WACC figures under both methods (Book value WACC ~12.5%, Market value WACC ~11.8%); Part (c): Comprehensive coverage of IRDA's statutory mandate under IRDA Act 1999 with recent amendments	Minor calculation errors in working capital components or cost of equity formula; WACC computed but one component wrong; IRDA discussion covers only 2 of 3 major functions or misses recent developments	Fundamental errors—treating fixed overheads as variable, wrong base for capacity calculation, incorrect cost of equity formula, or WACC computation without tax adjustment; IRDA limited to pre-1999 OIC/ LIC era discussion
Structure & flow	20%	10	Clear three-part demarcation with sub-headings; part (a) shows current position → operating cycle analysis → projected position → incremental WC; part (b) presents cost of capital computation → weight calculation → WACC summary table for both methods; part (c) follows regulatory-developmental-protection framework	Parts identifiable but poor sequencing within calculations; some working shown in margins without systematic presentation; part (c) lacks clear thematic organization	No part-wise separation; calculations scattered without logic; part (c) as unbroken paragraph without structure; missing summary tables where essential
Examples / case-law / data	20%	10	Part (c) cites specific IRDA regulations: IRDA (Registration of Indian Insurance Companies) Regulations 2022, Bima Sugam (2023), regulatory sandbox guidelines, amendments raising FDI to 74% (2021), and references to Pradhan Mantri Jan Arogya Yojana or crop insurance schemes; uses actual Indian insurance penetration data (~4.2% life, ~1% non-life)	Mentions IRDA Act 1999 and basic functions; one or two recent initiatives named but not elaborated; no statistical backing for insurance sector discussion	No contemporary examples; part (c) generic without any specific regulation, scheme or data; numerical parts completely devoid of any contextual industry reference
Conclusion & analytical edge	20%	10	Synthesizes findings: for (a) comments on WC financing implications; for (b) explains why market value WACC is preferred for investment decisions; for (c) critically evaluates IRDA's effectiveness in balancing sector growth with consumer protection, suggesting reforms like independent grievance appellate mechanism or need for actuarial transparency	Brief concluding statements per part without integration; no critical evaluation of IRDA's challenges; misses opportunity to compare book vs market value merits	No conclusion; ends abruptly with last calculation or last IRDA function; no value addition beyond what was asked

(a) XYZ Co. is operating on 60% capacity, producing 48000 units per annum at the following cost price structure: Raw material ₹5…

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