Q5 50M 150w Compulsory explain Financial management and capital markets
Answer the following questions in about 150 words each :
(a) Explain 'Capital Asset Pricing Model'. 10
(b) Briefly explain any five risks faced by the financial institutions in India. 10
(c) Discuss Walter's model of dividend decision. 10
(d) Discuss the problem of multiple internal rates of return in relation to capital budgeting decision. 10
(e) Explain the objective of maximising the wealth of shareholders. 10
हिंदी में पढ़ें
निम्नलिखित प्रश्नों में से प्रत्येक का उत्तर लगभग 150 शब्दों में दीजिए :
(a) 'पूँजी परिसम्पत्ति कीमत-निर्धारण मॉडल' की व्याख्या कीजिए । 10
(b) भारत में वित्तीय संस्थाओं द्वारा सामना किए जाने वाले किन्हीं पाँच जोखिमों की संक्षेप में व्याख्या कीजिए । 10
(c) लाभांश निर्णय के वाल्टर मॉडल की विवेचना कीजिए । 10
(d) पूँजी बजटन निर्णय के संबंध में प्रतिफल की बहु-आंतरिक दरों की समस्या की विवेचना कीजिए । 10
(e) शेयरधारकों की संपत्ति को अधिकतम करने के उद्देश्य की व्याख्या कीजिए । 10
Answer approach & key points
The directive 'explain' requires clear exposition of concepts with causal linkages and underlying logic. Allocate approximately 30 words per mark across five sub-parts: (a) CAPM—present formula with risk-free rate, beta and market premium; (b) five risks—credit, liquidity, operational, market and regulatory risks with brief elaboration; (c) Walter's model—state formula and explain r>ke, r=ke, r<ke scenarios; (d) multiple IRR—explain non-conventional cash flows and reinvestment assumption problem; (e) wealth maximization—contrast with profit maximization and address time value and risk dimensions. Use brief introductions, bullet-pointed core content, and one-line synthesizing conclusions for each part.
- (a) CAPM: Expected return formula E(Ri)=Rf+βi(E(Rm)−Rf); systematic vs unsystematic risk; beta as measure of market sensitivity; Security Market Line (SML); assumptions and limitations
- (b) Five risks: Credit risk (NPAs, loan defaults); Liquidity risk (asset-liability mismatch); Market risk (interest rate, equity price fluctuations); Operational risk (technology, fraud, cyber threats); Regulatory/compliance risk (RBI norms, Basel III)
- (c) Walter's model: P=(D+(r/ke)(E−D))/ke; dividend policy irrelevant when r=ke; retain when r>ke; distribute when r<ke; assumptions including constant r and ke, all financing through retained earnings
- (d) Multiple IRR: Occurs with non-normal cash flows (sign changes more than once); NPV profile crossing x-axis multiple times; reinvestment rate assumption criticism; Modified IRR (MIRR) as solution
- (e) Wealth maximization: Market value of shares as objective; incorporates time value of money, risk-return trade-off, and dividend policy; superior to profit maximization which ignores risk, timing and scale
Q6 50M solve Financial statement preparation and capital structure decisions
(a) From the following data, you are required to prepare a Balance Sheet and a Statement of Profit and Loss :
(a) Share Capital 9,60,000
(b) Working Capital 3,64,000
(c) Bank Overdraft 60,000
Additional information :
(i) Current Ratio – 2
(ii) Quick Ratio – 1·5
(iii) Proprietary Ratio – 0·80 (Fixed Assets/Proprietary Fund)
(iv) Gross Profit Ratio – 0·20
(v) Inventory Turnover Ratio – 4
(vi) Trade Receivables Turnover – 36 days
(vii) Net Profit to Paid-up Capital – 10%
Assume there are no fictitious assets. In the case of current assets, there are no assets other than inventories, trade receivables and cash. Closing inventory is 20% higher than the opening inventory. Also assume 360 days in a year.
(b) Capital structure of a company consists of the following :
Equity Share Capital : (Shares of ₹100 each) — 40,00,000
Retained Earning — 20,00,000
8% Preference Shares — 20,00,000
7% Debentures — 4,00,000
Total — 84,00,000
The company requires ₹ 50,00,000 to finance the expansion programme for which the following alternatives are available :
(i) Issue of 40,000 equity shares at a premium of ₹ 25 per share
(ii) Issue of 10% Preference Shares
(iii) Issue of 8% Debentures
It is estimated that in the case of equity shares, preference shares and debentures financing, the PE ratios would be 21·4, 17 and 15·7 respectively.
Assume the company earns 12% on its capital with the income tax rate of 50%.
You are required to evaluate the three financing alternatives and recommend the best alternative suitable for the company. 15
(c) What is money market ? Explain the features of a developed money market. 15
हिंदी में पढ़ें
(a) निम्नलिखित आँकड़ों से तुलन-पत्र तथा लाभ-हानि विवरण तैयार कीजिए :
(क) शेयर पूँजी 9,60,000
(ख) कार्यशील पूँजी 3,64,000
(ग) बैंक अधिविकर्ष 60,000
अतिरिक्त सूचनाएँ :
(i) चालू अनुपात – 2
(ii) त्वरित अनुपात – 1·5
(iii) स्वामित्व अनुपात – 0·80 (स्थिर परिसम्पत्तियाँ/स्वामित्व निधि)
(iv) सकल लाभ अनुपात – 0·20
(v) स्कन्ध आवर्त अनुपात – 4
(vi) व्यापारिक प्राप्य आवर्त – 36 दिन
(vii) प्रदत्त पूँजी पर शुद्ध लाभ – 10%
मान लीजिए कि कोई आभासी परिसम्पत्तियाँ नहीं हैं । चालू परिसम्पत्तियों में स्कन्ध, व्यापारिक प्राप्य और रोकड़ के अतिरिक्त कोई परिसम्पत्तियाँ नहीं हैं । अंतिम स्टॉक प्रारंभिक स्टॉक से 20% अधिक है । साथ ही, एक वर्ष में 360 दिन मान लीजिए ।
(b) एक कम्पनी की पूँजी संरचना में निम्नलिखित सम्मिलित हैं :
इक्विटी शेयर पूँजी : (₹ 100 प्रति शेयर) — 40,00,000
प्रतिधारित आय — 20,00,000
8% अधिमान शेयर — 20,00,000
7% ऋणपत्र — 4,00,000
कुल — 84,00,000
कम्पनी को विस्तार कार्यक्रम के वित्त-पोषण हेतु ₹ 50,00,000 की आवश्यकता है जिसके लिए निम्नलिखित विकल्प उपलब्ध हैं :
(i) ₹ 25 प्रति शेयर प्रीमियम पर 40,000 इक्विटी शेयरों का निर्गमन
(ii) 10% अधिमान शेयरों का निर्गमन
(iii) 8% ऋणपत्रों का निर्गमन
यह अनुमान लगाया गया है कि इक्विटी शेयर, अधिमान शेयर एवं ऋणपत्र वित्त-पोषण की स्थिति में कीमत/आय (पी.ई.) अनुपात क्रमशः 21·4, 17 तथा 15·7 होंगे ।
मान लीजिए कि कम्पनी अपनी पूँजी पर 12% अर्जित करती है । आयकर की दर 50% है । आपको तीन वित्त-पोषण विकल्पों का मूल्यांकन करके कम्पनी के लिए उपयुक्त सर्वोत्तम विकल्प की अनुशंसा करनी है । 15
(c) मुद्रा बाजार क्या है ? एक विकसित मुद्रा बाजार की विशेषताएँ स्पष्ट कीजिए । 15
Answer approach & key points
Solve this multi-part numerical problem by first preparing the Balance Sheet and P&L for part (a) using ratio analysis working backwards from given data, then evaluate financing alternatives in part (b) through EPS and market price calculations, and finally define money market with features for part (c). Allocate approximately 40% time to part (a) due to complex interlinked calculations, 35% to part (b) for comparative analysis, and 25% to part (c) for conceptual explanation.
- Part (a): Derive Current Assets (₹7,28,000), Current Liabilities (₹3,64,000), Inventory (₹1,82,000), Trade Receivables (₹3,64,000), Cash (₹1,82,000), Fixed Assets (₹7,68,000), Proprietary Fund (₹9,60,000), Sales (₹45,50,000), Gross Profit (₹9,10,000), Net Profit (₹96,000)
- Part (a): Correctly prepare vertical format Balance Sheet showing Share Capital ₹9,60,000, Reserves & Surplus ₹4,86,000, Fixed Assets ₹7,68,000, and Current Assets ₹7,28,000 against Current Liabilities ₹3,64,000
- Part (a): Prepare Statement of Profit and Loss showing Sales ₹45,50,000, Cost of Goods Sold ₹36,40,000, Gross Profit ₹9,10,000, and Net Profit ₹96,000 after expenses
- Part (b): Calculate existing EBIT ₹10,08,000 and existing EPS ₹21.60; compute new EPS under three alternatives: Equity (₹25.71), Preference Shares (₹24.00), Debentures (₹27.43)
- Part (b): Calculate market price per share using PE ratios: Equity ₹550.19, Preference Shares ₹408.00, Debentures ₹430.66; recommend debentures for maximum shareholder wealth
- Part (c): Define money market as wholesale market for short-term funds (up to 1 year) with instruments like treasury bills, commercial paper, call money
- Part (c): Explain features of developed money market: presence of central bank, commercial banks, acceptance houses, discount houses, well-organized bill market, integrated sub-markets, adequate instruments, and efficient clearing mechanism
Q7 50M calculate Financial management and corporate restructuring
(a) A company wishes to raise additional finance of ₹ 20 lakh for meeting its investment plans. It has ₹ 4,20,000 in the form of retained earnings available for investment purposes.
Following are the additional details :
(i) Debt/Equity mix — 30%/70%
(ii) Cost of debt upto ₹ 3,60,000 is 10% before tax;
Beyond ₹ 3,60,000 is 16% before tax;
(iii) Earnings per share is ₹ 8
(iv) Dividend payout is 50% of earnings
(v) Expected growth rate in dividend is 10%
(vi) Current market price per share is ₹ 88
(vii) Tax rate is 50%
You are required to determine the pattern for raising the additional finance, the post-tax average cost of additional debt, the cost of retained earnings and the cost of equity.
Also compute the overall weighted average after-tax cost of additional finance. (20 marks)
(b) From the following Summary Cash Account of Z Ltd., you are required to prepare Cash Flow Statement for the year ended March 31, 2022 in accordance with AS-3 using the Direct method. (15 marks)
Summary Cash Account
(for the year ended March 31, 2022) (₹ in '000)
Balance on 01/04/2021 100 Payment to suppliers 4,000
Issue of Equity Shares 600 Purchase of fixed assets 400
Receipts from customers 5,600 Overhead expenses 400
Sale of fixed assets 200 Wages & Salaries 200
Taxation 500
Dividend 100
Repayment of bank loan 600
Balance on 31/03/2022 300
6,500 6,500
Note :
The company does not have any cash equivalence.
(c) What is corporate restructuring ? Explain the techniques of corporate restructuring. (15 marks)
हिंदी में पढ़ें
(a) एक कम्पनी अपनी निवेश योजनाओं को पूरा करने के लिए ₹ 20 लाख का अतिरिक्त वित्त जुटाना चाहती है । इसके पास निवेश के उद्देश्य हेतु ₹ 4,20,000 प्रतिधारित आय के रूप में उपलब्ध है ।
अतिरिक्त विवरण निम्नलिखित हैं :
(i) ऋण/इक्विटी मिश्रण — 30%/70%
(ii) ऋण की लागत ₹ 3,60,000 तक — कर से पूर्व 10% है;
₹ 3,60,000 के बाद — कर से पूर्व 16% है;
(iii) प्रति शेयर आय ₹ 8 है
(iv) लाभांश भुगतान आय का 50% है
(v) लाभांश में अपेक्षित वृद्धि दर 10% है
(vi) प्रति शेयर चालू बाजार मूल्य ₹ 88 है
(vii) कर की दर 50% है
आपको अतिरिक्त वित्त जुटाने हेतु प्रतिरूप, अतिरिक्त ऋण की कर-पश्चात् औसत लागत, प्रतिधारित आय की लागत तथा समता पूँजी (इक्विटी) की लागत का निर्धारण करना है ।
अतिरिक्त वित्त की कर-पश्चात् समग्र भारांकित औसत लागत की गणना भी कीजिए । (20 अंक)
(b) जेड लिमिटेड के निम्नलिखित संक्षिप्त नकद खाता से 31 मार्च, 2022 को समाप्त होने वाले वर्ष के लिए लेखांकन मानक-3 के अनुसार प्रत्यक्ष विधि से रोकड़ प्रवाह विवरण तैयार कीजिए । (15 अंक)
संक्षिप्त नकद खाता
(31 मार्च, 2022 को समाप्त होने वाले वर्ष के लिए) (₹ '000 में)
01/04/2021 को शेष 100 आपूर्तिकर्ताओं को भुगतान 4,000
इक्विटी शेयरों का निर्गमन 600 अचल परिसंपत्तियों की खरीद 400
ग्राहकों से प्राप्तियां 5,600 उपरिव्यय 400
अचल परिसंपत्तियों की बिक्री 200 मजदूरी एवं वेतन 200
कर 500
लाभांश 100
बैंक ऋण का पुनर्भुगतान 600
31/03/2022 को शेष 300
6,500 6,500
नोट:
कंपनी के पास कोई नकद समतुल्यता नहीं है ।
(c) नैगमिक (कॉर्पोरेट) पुनर्गठन क्या होता है ? नैगमिक पुनर्गठन की तकनीकों को स्पष्ट कीजिए । (15 अंक)
Answer approach & key points
Begin with clear identification of the directive 'calculate' for part (a) and 'prepare' for part (b), while 'explain' governs part (c). Allocate approximately 40% time/words to part (a) given its 20 marks and computational complexity, 30% to part (b) for the AS-3 Cash Flow Statement preparation, and 30% to part (c) for conceptual explanation of corporate restructuring techniques. Structure with separate headings for each part, showing all workings for calculations, proper classification for cash flows, and systematic enumeration of restructuring methods.
- Part (a): Correct determination of financing pattern (₹6,00,000 debt and ₹14,00,000 equity with ₹4,20,000 retained earnings and ₹9,80,000 new equity), post-tax average cost of debt calculation (5% and 8% weighted), cost of retained earnings using Gordon's model (14.95%), cost of new equity (15.45%), and WACC computation
- Part (a): Proper application of D/P ratio (50%) to derive D1 = ₹4.40, and correct use of after-tax cost formulas: Kd = Interest(1-t) for debt, Kr = [D1/P0]+g for retained earnings, Ke = [D1/(P0-floatation cost)]+g for new equity
- Part (b): Correct preparation of Cash Flow Statement (Direct Method) as per AS-3 with proper classification into Operating, Investing and Financing activities, showing net increase of ₹200 thousand reconciled with opening/closing balances
- Part (b): Accurate treatment of items—operating activities (customer receipts, supplier payments, wages, overheads), investing activities (fixed asset purchase/sale), financing activities (equity issue, loan repayment, dividend)
- Part (c): Clear definition of corporate restructuring as fundamental change in business/financial structure to enhance shareholder value, covering financial, organizational, and asset restructuring dimensions
- Part (c): Comprehensive coverage of techniques: mergers/amalgamations, acquisitions/takeovers, demergers/spin-offs, slump sale, strategic alliances/JVs, buybacks, capital reduction, debt restructuring/SDR, and reverse mergers with brief illustrations
Q8 50M calculate Operating cycle, banking and M&M model
(a) From the following information as contained in the Trading and Profit & Loss Account and Balance Sheet of X Ltd., you are required to calculate the operating cycle period. (20 marks)
Trading and Profit & Loss Account
(for the year ended March 31, 2022) (₹ in lakh)
To Opening Stock :
Raw Materials 28
Work-in-Process 60
Finished Goods 40
To Purchases 480
To Wages 50
To Manufacturing Expenses 30
To Gross Profit 124
812
To Office & Administrative Expenses 32
To Selling & Distribution Expenses 16
To Net Profit 76
124
By Sales 640
By Closing Stock :
Raw Materials 32
Work-in-Process 80
Finished Goods 60
812
By Gross Profit 124
124
Balance Sheet (as on March 31, 2022) (₹ in lakh)
Liabilities | ₹ | Assets | ₹
---|---|---|---
Share Capital | 600 | Land & Buildings | 300
Loans | 320 | Plant & Machinery | 480
Profit & Loss Account | 76 | Stocks : |
Creditors | 84 | Raw Materials | 32
| | Work-in-Process | 80
| | Finished Goods | 60
| | Debtors | 104
| | Cash | 24
| 1080 | | 1080
Additional Information :
(i) Closing balance of debtors is ₹ 8 lakh more than the opening balance of debtors.
(ii) Opening balance of creditors is ₹ 24 lakh.
(iii) Purchases and sales are made on credit basis only.
(b) Discuss the role of commercial banks in the economic development of a country. (15 marks)
(c) Explain the Arbitrage process as per the M&M Model. (15 marks)
हिंदी में पढ़ें
(a) एक्स लिमिटेड के व्यापारिक व लाभ-हानि खाता एवं तुलन-पत्र में प्रदत निम्नलिखित सूचनाओं से आपको परिचालन चक्र अवधि की गणना करनी है । (20 अंक)
व्यापारिक व लाभ-हानि खाता
(31 मार्च, 2022 को समाप्त होने वाले वर्ष के लिए) (₹ लाख में)
| | ₹ | | ₹ |
|---|---|---|---|
| आरंभिक स्टॉक : | | बिक्री | 640 |
| कच्चा माल | 28 | अंतिम स्टॉक : | |
| निर्माणाधीन कार्य | 60 | कच्चा माल | 32 |
| तैयार माल | 40 | निर्माणाधीन कार्य | 80 |
| क्रय | 480 | तैयार माल | 60 |
| मजदूरी | 50 | | |
| निर्माण व्यय | 30 | | |
| सकल लाभ | 124 | | |
| | 812 | | 812 |
| कार्यालय एवं प्रशासनिक व्यय | 32 | सकल लाभ | 124 |
| बिक्री एवं वितरण व्यय | 16 | | |
| शुद्ध लाभ | 76 | | |
| | 124 | | 124 |
तुलन-पत्र (31 मार्च, 2022 को) (₹ लाख में)
| दायित्व | ₹ | परिसंपत्तियाँ | ₹ |
|---|---|---|---|
| शेयर पूंजी | 600 | भूमि एवं भवन | 300 |
| ऋण | 320 | संयंत्र एवं मशीनरी | 480 |
| लाभ एवं हानि खाता | 76 | स्टॉक : | |
| लेनदार | 84 | कच्चा माल | 32 |
| | | निर्माणाधीन कार्य | 80 |
| | | तैयार माल | 60 |
| | | देनदार | 104 |
| | | नकदी | 24 |
| | 1080 | | 1080 |
अतिरिक्त सूचनाएं :
(i) देनदारों का अंतिम शेष देनदारों के प्रारंभिक शेष से ₹ 8 लाख अधिक है ।
(ii) लेनदारों का प्रारंभिक शेष ₹ 24 लाख है ।
(iii) क्रय और विक्रय केवल उधार के आधार पर किए जाते हैं ।
(b) एक देश के आर्थिक विकास में वाणिज्यिक बैंकों की भूमिका की विवेचना कीजिए । (15 अंक)
(c) मोदिग्लियानी एवं मिलर मॉडल (एम एंड एम मॉडल) के अनुसार अंतर-पणन प्रक्रिया को स्पष्ट कीजिए । (15 अंक)
Answer approach & key points
Begin with the directive 'calculate' for part (a), requiring precise computation of operating cycle components using the given financial data. Allocate approximately 40% time/words to part (a) given its 20 marks weightage, covering raw material storage period, WIP conversion period, finished goods storage period, and debtors collection period with clear formula application. Devote ~30% each to part (b) on commercial banks' developmental role (directive: discuss) and part (c) on M&M arbitrage (directive: explain), ensuring theoretical depth with Indian banking examples and rigorous arbitrage mechanics. Structure as: working calculations with assumptions clearly stated → thematic discussion of banking functions → step-by-step arbitrage process with numerical illustration if possible.
- Part (a): Correct calculation of operating cycle period using Raw Material Storage Period [(Opening RM + Closing RM)/2 ÷ RM Consumed × 365], WIP Conversion Period [(Opening WIP + Closing WIP)/2 ÷ Cost of Production × 365], Finished Goods Storage Period [(Opening FG + Closing FG)/2 ÷ Cost of Goods Sold × 365], and Debtors Collection Period [Average Debtors ÷ Credit Sales × 365], with proper derivation of opening debtors (₹96 lakh) and creditors payment period
- Part (a): Accurate computation of RM consumed (₹476 lakh), Cost of Production (₹556 lakh), Cost of Goods Sold (₹536 lakh), and Average Debtors (₹100 lakh) leading to final operating cycle days
- Part (b): Discussion of commercial banks' role in economic development through capital formation, priority sector lending (PSL norms), agricultural credit (KCC), MSME financing, infrastructure financing (IIFCL synergy), financial inclusion (PMJDY), and digital payment ecosystem (UPI)
- Part (b): Critical analysis of challenges: NPA stress, credit-deposit ratio regional disparities, and RBI's developmental vs. profitability tension
- Part (c): Explanation of M&M Proposition I (irrelevance theorem) and the arbitrage process mechanism where investors create homemade leverage to exploit disequilibrium between levered and unlevered firms
- Part (c): Step-by-step arbitrage: investor sells shares in overvalued levered firm, borrows personally to replicate corporate leverage, and buys shares in undervalued unlevered firm, with numerical demonstration of risk-free profit