Paper I — Q7
The Board of Directors of a company asks to prepare a statement showing working capital estimates for a level of activity of…
The Board of Directors of a company asks to prepare a statement showing working capital estimates for a level of activity of 15,600 units of production. The following information is available for calculation: (A) Per Unit Cost and Selling Price: Raw materials ₹ 90 Labour ₹ 40 Overheads ₹ 75 ₹ 205 Profit ₹ 60 Selling Price ₹ 265 (B) (i) Raw materials are in stock on an average for one month. (ii) Raw materials are in process on an average for two weeks. (iii) Finished goods are in stock on an average for one month. (iv) Credit allowed by suppliers – one month. (v) Credit allowed to debtors – two months. (vi) Lag in payment of wages – 1½ weeks. (vii) Lag in payment of overheads is one month. 20% of the production is sold against cash. Cash in hand is expected to be ₹ 60,000. It is to be assumed that production is carried on evenly, throughout the year, wages and overheads accrue similarly and the time period of 4 weeks is equivalent to one month. (20 marks) (b) A company has earnings of ₹ 1,00,000. The capital structure of the company contains debt as well as equity in which debt is of ₹ 4,00,000 borrowed at the rate of 10%. Presently, the cost of equity capital of the company is 12·50%. Find out the total value of the company and the overall cost of capital using Net Income approach. If debt is increased or reduced by ₹ 1,00,000, what will be the effect on the value of the company and on overall cost of capital as per the Net Income approach? (15 marks) (c) Discuss the leading financial market instruments and innovative debt instruments in the Indian financial system. Also give suitable examples. (15 marks)
हिंदी में प्रश्न पढ़ें
एक कंपनी के संचालक मंडल ने उत्पादन की 15,600 इकाइयों के कार्य-स्तर के लिए कार्यशील पूँजी के अनुमान का विवरण तैयार करने का अनुरोध किया है। निम्नलिखित सूचनाएँ गणना हेतु उपलब्ध हैं: (अ) प्रति इकाई लागत व विक्रय मूल्य: कच्चा माल ₹ 90 श्रम ₹ 40 उपरिव्यय ₹ 75 ₹ 205 लाभ ₹ 60 विक्रय मूल्य ₹ 265 (ब) (i) कच्चा माल औसतन एक माह हेतु स्टॉक में रहता है। (ii) कच्चा माल निर्माणावस्था में औसतन दो सप्ताह रहता है। (iii) तैयार माल औसतन एक माह हेतु स्टॉक में रहता है। (iv) आपूर्तिकर्ताओं द्वारा प्रदत साख एक माह की है। (v) देनदारों को दी गई साख दो माह की है। (vi) मजदूरी भुगतान में विलम्ब 1½ सप्ताह का है। (vii) उपरिव्यय के भुगतान में विलम्ब एक माह का है। उत्पादन का 20% नकद बेचा जाता है। हस्तगत रोकड़ ₹ 60,000 अनुमानित है। यह माना जाता है कि उत्पादन वर्ष पर्यंत समान रूप से चलता है, मजदूरी व उपरिव्यय भी उसी प्रकार से देय होते हैं और 4 सप्ताह, एक माह के बराबर है। (20 अंक) (b) एक कंपनी की कुल आय ₹ 1,00,000 है। कंपनी के पूँजी ढाँचे में ऋण तथा इक्विटी दोनों हैं, जिसमें ऋण की राशि ₹ 4,00,000, 10% ब्याज की दर पर उधारी के रूप में है। वर्तमान में कंपनी की समता अंश पूँजी की लागत 12·50% है। कंपनी का कुल मूल्य और पूँजी की कुल लागत, शुद्ध आय उपागम के अंतर्गत ज्ञात कीजिए। यदि ऋण को ₹ 1,00,000 से बढ़ा दिया जाए या कम कर दिया जाए, तो कंपनी के मूल्य पर और पूँजी की कुल लागत पर शुद्ध आय उपागम के अनुसार क्या प्रभाव पड़ेगा? (15 अंक) (c) भारतीय वित्तीय प्रणाली में अग्रणी वित्तीय बाजार उपकरणों तथा नूतन ऋण उपकरणों की विवेचना कीजिए। साथ ही उपयुक्त उदाहरण दीजिए। (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
The directive 'calculate' in part (a) and 'find out' in part (b) demand precise numerical working with clear formulas, while part (c) requires 'discuss' with conceptual depth. Allocate ~40% time to part (a) working capital estimation (20 marks): compute annual production cost, determine operating cycle periods, calculate current assets (RM, WIP, FG, debtors, cash) and current liabilities (creditors, wages, overheads payable), then derive net working capital. Allocate ~30% to part (b) Net Income approach (15 marks): apply V = S + D where S = (EBIT - Interest)/Ke, show value and Ko at ₹4 lakh, ₹5 lakh and ₹3 lakh debt levels. Allocate ~30% to part (c) (15 marks): structure by money market instruments (T-bills, CP, CDs), capital market instruments (equity, bonds), and innovative debt (Masala bonds, Green bonds, Infrastructure bonds, Covered bonds). Conclude with trends like RBI's SEBI-regulated corporate bond market development.
Key points expected
- Part (a): Correct computation of annual cost of production (15,600 × ₹205 = ₹31,98,000) and correct treatment of 80% credit sales for debtors calculation
- Part (a): Accurate calculation of WIP valuation (100% RM + 50% Labour + 50% Overheads) for 2 weeks holding period, not full cost
- Part (b): Application of Net Income approach formula: Value of Equity = (EBIT - Interest)/Ke; Total Value = Value of Equity + Debt; Ko = EBIT/Total Value, showing value increases and Ko decreases with higher debt
- Part (b): Comparative table showing three scenarios (₹3 lakh, ₹4 lakh, ₹5 lakh debt) demonstrating inverse relationship between leverage and cost of capital under NI approach assumptions
- Part (c): Classification of leading instruments: Money market (91-day T-bills, Commercial Paper, Certificates of Deposit, Repo) with RBI as issuer/regulator
- Part (c): Innovative debt instruments: Masala bonds (rupee-denominated offshore), Green bonds (SEBI 2017 framework), Infrastructure bonds (NHAI, PFC), Covered bonds (YES Bank 2020 issue), and Mibor-linked floating rate bonds
- Part (c): Recent regulatory developments: SEBI's 2023 amendments to corporate bond norms, RBI's Retail Direct Scheme for G-Secs, and Bharat Bond ETF as examples
Evaluation rubric
| Dimension | Weight | Max marks | Excellent | Average | Poor |
|---|---|---|---|---|---|
| Demand-directive understanding | 15% | 7.5 | Correctly interprets 'calculate' in (a) by showing all working steps with formulas, 'find out' in (b) by explicitly stating NI approach assumptions (Ke and Kd constant, no taxes), and 'discuss' in (c) by moving beyond listing to analyzing instrument features and market evolution | Attempts calculations but misses key assumptions; lists instruments in (c) without distinguishing money market from capital market or explaining innovation significance | Misinterprets directives—treats (a) as theory without numbers, confuses NI with NOI approach in (b), or describes rather than discusses instruments in (c) |
| Content depth & accuracy | 30% | 15 | Part (a): Accurate NWC computation with correct treatment of time lags (wages 1.5 weeks = 3/8 month), proper WIP valuation, and final NWC figure; Part (b): Correct arithmetic showing value rises from ₹9.6L to ₹10L to ₹10.4L as debt increases, Ko falls from 10.42% to 10% to 9.62%; Part (c): SEBI/RBI regulatory context for each instrument | Minor calculation errors in (a) like treating WIP at full cost or incorrect debtors period; correct NI formula in (b) but arithmetic slips; generic instrument descriptions in (c) without regulatory specifics | Major conceptual errors: double counting in working capital, confusing NI with traditional approach, or omitting key instruments like Commercial Paper or Masala bonds entirely |
| Structure & flow | 20% | 10 | Clear three-part structure with visible headings; part (a) shows Current Assets → Current Liabilities → Net Working Capital; part (b) presents base case then sensitivity analysis; part (c) uses classification by maturity (money vs capital market) then innovation dimension; effective use of tables | All parts addressed but poor visual organization—calculations scattered, no clear separation between (a), (b), (c); some tables present but unlabeled | No discernible structure; jumps between parts randomly; calculations without any tabular presentation; missing part (c) entirely or severely truncated |
| Examples / case-law / data | 20% | 10 | Part (c) cites specific examples: NTPC's Green Bonds, HDFC's Masala bonds in London, NHAI's Infrastructure bonds, Bharat Bond ETF 2019/2020 series, SEBI's 2017 disclosure norms for Green bonds, RBI's 2021 Retail Direct Scheme; mentions approximate market sizes (corporate bond market ~₹8 lakh crore) | Mentions 1-2 generic examples like 'T-bills issued by RBI' or 'Green bonds for environment projects' without specific issuers or dates; no data on market size | No examples in (c); or completely incorrect examples (confusing ADRs with Masala bonds); parts (a) and (b) lack any contextual illustration |
| Conclusion & analytical edge | 15% | 7.5 | Synthesizes NI approach limitations (unrealistic assumptions, financial risk ignored) contrasting with NOI/M&M approaches; evaluates working capital policy implications (conservative vs aggressive); assesses Indian corporate bond market challenges (liquidity, credit rating dependence, investor base) and RBI/SEBI reforms | Brief concluding statement per part without synthesis; mentions 'working capital is important' or 'debt affects value' without analytical depth | No conclusion; or irrelevant conclusion repeating question; fails to recognize NI approach as theoretical construct with practical limitations |
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