Paper I — Q7
(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…
(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 प्रश्न 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)
Directive word: Calculate
This question asks you to calculate. The directive word signals the depth of analysis expected, the structure of your answer, and the weight of evidence you must bring.
See our UPSC directive words guide for a full breakdown of how to respond to each command word.
How this answer will be evaluated
Approach
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.
Key points expected
- 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
Evaluation rubric
| Dimension | Weight | Max marks | Excellent | Average | Poor |
|---|---|---|---|---|---|
| Demand-directive understanding | 15% | 7.5 | Demonstrates precise grasp of three distinct directives: 'calculate' for part (a) with all computational steps shown, 'prepare' for part (b) following AS-3 direct method format strictly, and 'explain' for part (c) with conceptual depth; recognizes that part (a) requires WACC optimization, part (b) requires activity-wise classification, and part (c) requires technique enumeration with rationale | Addresses all three parts but conflates directives—e.g., describes rather than calculates in (a), uses indirect method in (b), or merely lists without explaining techniques in (c); minor format errors in cash flow presentation | Misinterprets core directives—attempts to solve (a) without showing workings, prepares balance sheet instead of cash flow for (b), or provides generic definition without techniques for (c); confuses cost of equity formulas |
| Content depth & accuracy | 30% | 15 | Part (a): Flawless calculations—financing pattern (₹6L debt/₹14L equity), post-tax Kd at 5% and 8%, weighted average debt cost, Kr=14.95%, Ke=15.45%, WACC=12.77%; Part (b): Perfect AS-3 compliance with correct activity classification and ₹200 net increase; Part (c): Covers 6+ restructuring techniques with SEBI/Companies Act references | Part (a): Minor arithmetic errors in WACC or cost of equity (e.g., ignoring floatation cost adjustment); Part (b): One misclassification (e.g., treating dividend as operating); Part (c): 4-5 techniques listed with superficial explanations; overall 60-70% accuracy | Part (a): Fundamental errors—uses before-tax cost of debt, ignores growth rate in Gordon model, or miscalculates financing mix; Part (b): Multiple misclassifications, incorrect net increase; Part (c): Vague definition, <4 techniques mentioned; <40% accuracy |
| Structure & flow | 20% | 10 | Clear tripartite structure with distinct headings (a), (b), (c); part (a) shows step-wise calculations with labeled sub-steps (pattern → debt cost → Kr → Ke → WACC); part (b) presents formal AS-3 cash flow statement format; part (c) uses sub-headings for each technique; seamless logical progression with cross-referencing between calculations | All parts addressed but structure compromised—calculations in (a) lack clear labeling, cash flow in (b) presented as narrative rather than statement format, techniques in (c) run together without demarcation; readable but requires examiner effort to follow | Disorganized response—parts mixed together, no headings, calculations scattered, cash flows listed randomly without activity grouping, techniques presented as disjointed points; significant examiner time needed to locate marks |
| Examples / case-law / data | 20% | 10 | Part (c) enriched with Indian examples: Tata-Corus acquisition (merger), Reliance demerger into RIL and RCom, Suzlon's debt restructuring via CDR, Infosys buyback, Jet Airways SDR; references to SEBI (Substantial Acquisition of Shares) Regulations, Companies Act 2013 provisions on compromise/arrangement; part (b) notes AS-3 disclosure requirements | Part (c) includes 1-2 generic Indian examples (e.g., only mentioning 'Tata group' without specificity) or international cases; part (a) and (b) lack contextual enhancement; examples mentioned but not integrated with technique explanation | No examples in part (c)—pure theoretical description; or irrelevant examples (e.g., personal finance analogies); parts (a) and (b) completely devoid of institutional context; demonstrates textbook reproduction without application awareness |
| Conclusion & analytical edge | 15% | 7.5 | Synthesizes findings: part (a) interprets WACC (12.77%) as acceptable given project returns; part (b) analyzes cash position—operating surplus funding investment with external financing; part (c) evaluates restructuring trends post-IBC 2016, noting shift from M&A to insolvency resolution; offers policy insight on optimal capital structure or stakeholder protection | Brief concluding statements for each part without synthesis—merely restates calculated WACC, notes cash increase without analysis, or concludes restructuring 'is important'; no cross-part integration or forward-looking perspective | Abrupt ending with no conclusion; or single generic conclusion unrelated to question; missing finality for all three parts; demonstrates calculation completion without interpretive closure |
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