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Commerce & Accountancy 2025 Paper I 50 marks Calculate

Paper I — Q7

(a) As a Financial Manager of an engineering company, you are required to compute the weighted average cost of capital of the…

(a) As a Financial Manager of an engineering company, you are required to compute the weighted average cost of capital of the company using (1) Book-value weights and (2) Market-value weights. The company's present capital structure is : ₹ Equity Shares (₹ 10 per share) 30,00,000 10% Preference Shares (₹ 100 per share) 4,00,000 12% Debentures (₹ 100 per debenture) 14,00,000 48,00,000 All these securities are traded in the securities market. Their recent prices are : Debentures—₹ 110 per debenture Preference Shares—₹ 115 per share Equity Shares—₹ 40 per share Anticipated external financing opportunities are : (i) New ₹ 100 Debentures can be sold at par at 9% coupon rate, redeemable at 10% premium after 5 years. Flotation cost would be 2% (ii) New ₹100 Preference Shares carrying 8% dividend can be sold at par, redeemable at premium of 5% after 10 years. Flotation cost would be ₹3 per share (iii) New ₹10 Equity Shares can be sold at ₹35. Flotation cost would be 2% of issue price. Expected dividend on Equity Shares is 20%. Anticipated growth rate in dividend is 8%. Corporate tax rate is 40% (20 marks) (b) Discuss the present state of Indian capital market. Illustrate the role of SEBI in regulating the markets in the changing international investment scenario. (20 marks) (c) How is Economic Order Quantity (EOQ) determined? How does quantity discount affect the EOQ? (10 marks)

हिंदी में प्रश्न पढ़ें

(a) एक अभियांत्रिकी कंपनी के वित्तीय प्रबंधक के रूप में आपको (1) पुस्तक-मूल्य भार (बुक-वैल्यू वेट) और (2) बाजार-मूल्य भार (मार्केट-वैल्यू वेट) का उपयोग करके कंपनी की पूंजी की भारित औसत लागत की गणना करनी है। कंपनी की वर्तमान पूंजी संरचना इस प्रकार है : ₹ इकिटी शेयर (₹ 10 प्रति शेयर) 30,00,000 10% अधिमान शेयर (₹ 100 प्रति शेयर) 4,00,000 12% ऋणपत्र (₹ 100 प्रति ऋणपत्र) 14,00,000 48,00,000 इन सभी प्रतिभूतियों का कारोबार प्रतिभूति बाजार में होता है। उनकी हाल की कीमतें हैं : ऋणपत्र—₹ 110 प्रति ऋणपत्र अधिमान शेयर—₹ 115 प्रति शेयर इकिटी शेयर—₹ 40 प्रति शेयर प्रत्याशित बाहरी वित्तपोषण के अवसर इस प्रकार हैं : (i) नए ₹ 100 के ऋणपत्र को सम्मूल्य पर, 9% कूपन दर पर बेचा जा सकता है, जिसे 5 साल बाद 10% प्रीमियम पर भुनाया जा सकता है। प्रवर्तन (फ्लोटेशन) लागत 2% होगी (ii) 8% लाभांश वाले नए ₹ 100 के अधिमान शेयर को सम्मूल्य पर बेचा जा सकता है, जिसे 10 साल बाद 5% प्रीमियम पर भुनाया जा सकता है। प्रवर्तन लागत ₹ 3 प्रति शेयर होगी (iii) ₹ 10 वाले नए इकिटी शेयर ₹ 35 में बेचे जा सकते हैं। प्रवर्तन लागत निर्गम कीमत (इश्यू प्राइस) की 2% होगी। इकिटी शेयरों पर अपेक्षित लाभांश 20% है। लाभांश में प्रत्याशित वृद्धि दर 8% है। निगम कर की दर 40% है (20 अंक) (b) भारतीय पूँजी बाजार की वर्तमान स्थिति की विवेचना कीजिए। बदलते अंतर्राष्ट्रीय निवेश परिदृश्य में, बाजार को विनियमित करने में, सेबी (एस० ई० बी० आई०) की भूमिका को समझाइए। (20 अंक) (c) आर्थिक आदेश मात्रा (ई० ओ० क्यू०) कैसे निर्धारित की जाती है? मात्रा छूट, ई० ओ० क्यू० को कैसे प्रभावित करती है? (10 अंक)

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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' for part (a) demands precise numerical computation of WACC using both book-value and market-value weights, incorporating cost of capital calculations for each source with flotation costs and tax adjustments. For part (b), 'discuss' and 'illustrate' require analytical exposition on Indian capital market developments with SEBI's regulatory evolution, while part (c) needs explanatory treatment of EOQ determination and quantity discount effects. Allocate approximately 40% time to part (a) given its 20 marks and computational complexity, 35% to part (b) for comprehensive discussion, and 25% to part (c). Structure with clear working notes for calculations, followed by analytical discussion, and conclude with integrated insights on financial decision-making.

Key points expected

  • Part (a): Correct computation of cost of equity using Gordon's growth model [D₁/(P₀-f) + g], cost of preference shares considering redemption premium and flotation cost, and cost of debentures using IRR/YTM approach with tax shield
  • Part (a): Accurate calculation of WACC under both book-value weights (₹48,00,000 total) and market-value weights (equity ₹1,20,00,000; preference ₹4,60,000; debentures ₹15,40,000)
  • Part (a): Proper treatment of flotation costs (2% for debentures, ₹3 for preference, 2% of ₹35 for equity) and tax benefit on debenture interest at 40%
  • Part (b): Analysis of Indian capital market transformation—dematerialization, rolling settlement, institutional investor growth, derivatives market expansion, and integration with global markets post-LPG reforms
  • Part (b): SEBI's regulatory role through SCRA 1956, SEBI Act 1992, LODR Regulations, insider trading regulations, and recent reforms like T+1 settlement, investor protection mechanisms, and FPI framework alignment with IOSCO principles
  • Part (c): EOQ derivation from total cost minimization (TC = ordering cost + carrying cost), formula √(2AO/C), and graphical representation; explanation of how quantity discounts alter total cost curve by reducing purchase cost, requiring modified EOQ with price-break analysis

Evaluation rubric

DimensionWeightMax marksExcellentAveragePoor
Demand-directive understanding20%10Demonstrates precise grasp of 'calculate' for part (a) with complete working notes and formulas, 'discuss' and 'illustrate' for part (b) with balanced analysis and exemplification, and explanatory depth for part (c); recognizes that part (a) requires marginal cost of capital for new financing, not historical costsAddresses all directives but with uneven treatment—calculations present but with missing steps, discussion lacks illustrative depth, or EOQ explanation omits mathematical derivationMisinterprets directives—treats calculate as theoretical discussion, provides descriptive narrative without SEBI illustration, or fails to distinguish between explanatory and computational demands across parts
Content depth & accuracy20%10Numerically accurate WACC calculations with correct cost of capital components (equity: 20%×10/₹34.3 + 8% = 13.83%; preference: [8+(5/10)]/[100-3] = 8.76%; debentures: IRR ~7.2% post-tax ~4.32%), correct market values, and proper weight application; comprehensive SEBI regulatory framework with specific regulations; rigorous EOQ mathematical treatment with discount analysisMinor computational errors in one component (e.g., flotation cost treatment or growth model application), general awareness of SEBI functions without specific regulations, or EOQ formula stated without derivation or discount impact fully explainedMajor calculation errors (wrong base for weights, ignoring flotation costs, incorrect tax adjustment), superficial SEBI description without regulatory specifics, or confused EOQ explanation with inventory management concepts
Structure & flow20%10Clear tripartite structure with visible sub-part headings; part (a) shows systematic progression from individual costs to WACC computation with parallel presentation of book-value and market-value results; part (b) moves from market description to regulatory analysis; part (c) presents derivation then applicationAll parts addressed but with poor visual organization—calculations scattered, SEBI discussion merged with market description without distinct focus, or EOQ explanation lacks logical progression from assumptions to conclusionDisorganized response with mixed calculations and theory, missing sub-part demarcation, or illogical sequencing that impedes examiner's ability to follow the solution
Examples / case-law / data20%10For part (b): cites specific SEBI regulations (SEBI (LODR) Regulations 2015, SEBI (PIT) Regulations 2015, FPI Regulations 2019), references specific market data (NSE/BSE market capitalization trends, T+1 settlement implementation), and contextualizes with international developments (IOSCO MMoU, cross-border cooperation); for part (a): uses realistic assumptions and presents comparative table of WACC resultsGeneral reference to SEBI as regulator without specific regulations, mentions NSE/BSE without data points, or provides WACC results without comparative analysis of book vs market value implicationsNo specific examples or data in part (b), purely theoretical treatment; or part (a) presents numbers without context or interpretation of why market-value WACC is preferred for decision-making
Conclusion & analytical edge20%10Synthesizes across parts: interprets WACC divergence between book and market values for financing decisions; evaluates SEBI's effectiveness in balancing market development with investor protection, referencing specific challenges (cryptocurrency regulation, short-selling concerns); critically assesses EOQ limitations in dynamic environments; offers forward-looking perspective on Indian financial market evolutionBrief concluding statements per part without cross-integration; standard evaluation of SEBI role without critical nuance; or EOQ conclusion merely restates formula without practical limitationsNo conclusion or abrupt ending; purely descriptive without evaluative content; or conclusions contradict earlier analysis (e.g., recommending book-value WACC for new projects)

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