(a) A Ltd's EBIT is ₹ 10,00,000. The company has 12%, ₹ 30 lakhs debentures. The equity capitalization rate, i.e., Kₑ is…

(a)(i) Market value of equity and value of the firm

This is solved by the net income approach, which assumes the cost of debt and of equity stay constant. No tax is given, so none is assumed, and debentures are taken at their par value.

Interest on debentures = 12% of ₹30,00,000 = ₹3,60,000.

Earnings available to equity shareholders = EBIT − interest = ₹10,00,000 − ₹3,60,000 = ₹6,40,000.

Market value of equity = earnings to equity ÷ Ke = ₹6,40,000 ÷ 0.20 = ₹32,00,000.

Value of the firm = market value of equity + value of debt = ₹32,00,000 + ₹30,00,000 = ₹62,00,000.

(a)(ii) Overall cost of capital

The overall cost of capital is EBIT divided by the value of the firm: ₹10,00,000 ÷ ₹62,00,000 = 0.1613, that is 16.13%.

Check with weights. Equity weight = 32 ÷ 62 = 51.61% and debt weight = 30 ÷ 62 = 48.39%. Ko = 0.5161 × 20% + 0.4839 × 12% = 10.32% + 5.81% = 16.13%.

The result is lower than the cost of equity of 20%, because cheaper debt is part of the mix. Under the net income approach, more debt would lower Ko further and raise the firm's value.

(b) Early signs of cash flow problems

The first signs are often in the working capital cycle. Customers pay late, so receivables and the collection period lengthen. The firm in turn delays payments to suppliers or loses early-payment discounts, and suppliers begin demanding advance payment. Inventory builds up as sales slow.

Other signs are heavy reliance on overdrafts and short-term borrowing to meet routine expenses such as salaries, repeated requests to extend credit limits, and borrowing to pay existing loans. A firm may show accounting profit but have a falling cash balance, which is a sign that profits are tied up in receivables or stock.

Further warnings are bounced cheques, delay in paying taxes and statutory dues, breach of loan covenants, falling sales or margins, heavy dependence on a few customers, and a cash forecast that repeatedly misses its target. Early detection allows action before a shortage becomes insolvency.

(c)(i) Price as the most important element of the marketing mix

The statement has some basis. Price is the only element that produces revenue, while product, place and promotion create costs. It is flexible, as it can be changed quickly, unlike the product or channel. It signals quality and position, shapes demand according to price elasticity and directly affects profit. In price-sensitive markets, such as FMCG for low-income buyers, price is decisive, as with Nirma's low-priced detergent that disrupted the market.

But it is not always the most important. Customers buy value, meaning benefits relative to price, and quality, brand, convenience and service matter greatly. Apple sells at premium prices because of design and ecosystem. A low price cannot rescue a poor product, and a good price is useless without distribution. The mix elements work together.

The judgement is that price is critical, but importance depends on the product, market and customers, and no single element is supreme.

(c)(ii) The right time to change price, and leadership pricing today

Firms usually review price when a trigger arises. The process is: first, identify the trigger, such as a change in cost, a competitor's move, a shift in demand, the stage of the product life cycle, excess capacity or regulation. Second, estimate demand elasticity and how customers will react. Third, anticipate competitors' response. Fourth, test the profit effect, for example how much extra volume pays for a price cut. Fifth, choose the timing, such as a festive season, a new model launch or a cost change, and communicate it clearly. Finally, monitor results and adjust.

Under price leadership a dominant firm sets the price and others follow. It still applies in oligopolies. In India, Jio raised mobile tariffs in June 2024 and Airtel and Vodafone Idea followed within a day. Cement and steel also show leader-follower behaviour.

But its scope is narrower today. Online price comparison, disruptive entrants, and competition-law scrutiny of parallel pricing limit it, and a leader that raises price may lose share if followers do not follow.