FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

Roll No……………..
Total No. of Questions – 11 Total No. of Printed Pages – 8
Time Allowed – 3 Hours Maximum Marks - 100

NAC (FME 2)

CA Intermediate (New Syllabus)

Paper – 8: Financial Management and Economics for Finance

SECTION A – Financial Management

Question No. 1 is compulsory.

Answer any four questions out of the remaining five questions.
Working notes should form part of the answer.

(4 × 5 = 20 Marks)
1. Answer the followings:

(a) Following information relating to Jee Ltd. are given:

Profit after tax : `10,00,000

Dividend payout ratio : 50%
Number of Equity shares : 50,000
Cost of equity : 10%
Rate of return on investment : 12%

(1) What would be the market value per share as per as per Walter’s Model?
(2) What is the optimum dividend payout ratio according to Walter’s Model and market value of
equity share at that payout ratio?

(b) Tarus Ltd. has an estimated cash payments of `8,00,000 for a one month period and the payments
are expected to steady over the period. The fixed cost per transaction is `250 and the interest rate on
marketable securities is 12% p.a.
Calculate the optimal transaction size, average cash and number of transactions during one
month.

(c) RES Ltd. is an all equity financed company with a market value of `25,00,000 and cost of equity Ke
21%. The company wants to buyback equity shares worth `5,00,000 by issuing and raising 15%
perpetual amount (Debt).

Rate of tax may be taken as 30%. After the capital restructuring and applying MM model with
taxes.

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

You are required to calculate:

(a) Market value of RES Ltd.

(b) Cost of Equity Ke.
(c) Weighted average cost of capital and comment on it.

(d) Door ltd. is considering an investment of `4,00,000 this investments expected to generate substantial
cash inflows over the next five years. Unfortunately the annual cash flows from this investment is
uncertain, but the following probability distribution has been established:

Annual Cash Flow (`) Probability

50,000 0.3
1,00,000 0.3
1,50,000 0.4

At the end of its 5 years life, the investment is expected to have a residual value of `40,000. The cost
of capital is 5%.

(1) Calculate NPV under the three different scenarios.

(2) Calculate expected net present value
(3) Advise Door Ltd. on whether the investment is to be undertaken.

Year 1 2 3 4 5
DF @ 5% 0.952 0.907 0.864 0.823 0.784

2. SRS Ltd has furnished the following ratios and information relating to the year ended 31st
March,2015.

Sales `60,00,000
Return on Net Worth 25%
Rate of Income Tax 50%
Share Capital to Reserve 7: 3
Current Ratio 2
Net Profit to Sales (after tax) 6.25%
Inventory Turnover 12
(Based on cost of goods sold and closing stock)
Cost of Goods Sold `18,00,000
Interest on Debenture @ 15% `60,000
Sundry Debtors `2,00,000
Sundry Creditors `2,00,000

You are required to:

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

(i) Calculate the operating expenses for the year ended 31st March,2015.
(ii) Prepare Balance Sheet as on 31st March,2015.
(10 Marks)

3. ANP Ltd. Is providing the following information:

Annual cost of saving `96,000

Useful life 5 years
Salvage value zero
Internal rate of return 15%
Profitability index 1.05

Table of discount factor:

Discount Years
Factor 1 2 3 4 5 Total
15% 0.870 0.756 0.658 0.572 0.497 3.353
14% 0.877 0.769 0.675 0.592 0.519 3.432
13% 0.886 0.783 0.693 0.614 0.544 3.52

You are required to calculate:

(a) Cost of the project

(b) Payback period
(c) Net present value of cash inflow
(d) Cost of capital

(10 Marks)

4. The management of Royal industries has called for a statement showing the working capital needs to
finance a level of 1,80,000 units of output for the year. The cost structure for the company's product
for the above mentioned activity level is detailed below:
Cost per Unit (`)
Raw materials 20
Direct labour 5
Overheads (including depreciation of `5 per unit) 15
Total cost 40
Profit 10
Selling price 50

Additional Information:

(a) Minimum desired cash balance is `20,000.

(b) Raw materials are held in stock on an average for 2 months.

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

(c) Work-in-progress (assume 50% completion stage) will approximate to half month's
production.
(d) Finished goods remain in warehouse on an average for a month.
(e) Suppliers of materials extend a month's credit and debtors are provided two month's credit.
(f) Cash sales are 25% of total sales.
(g) There is a time lag in payment of wages of a month and half a month in case of overheads.

From the above data, you are required to:

(1) Prepare a statement showing working capital needs; and

(2) Determine the maximum working capital finance available under the first two methods
suggested by Tandon Committee.
(10 Marks)

5. A company had the following Balance Sheet as on 31st March, 2014:

[in crores]

Liabilities ` Assets `
Equity Share Capital 5.00 Fixed Assets (Net) 12.50
(50 lakh shares of `10 each) Current Assets 7.50
Reserve and Surplus 1.00
15% Debentures 10.00
Current Liabilities 4.00
20.00 20.00

The additional information given is as under:

Fixed cost per annum (excluding interest) 4 crores

Variable operating cost ratio 65%
Total assets turnover ratio 2.5
Income Tax rate 30%

Required:

(i) Earnings Per Share

(ii) Operating Leverage
(iii) Financial Leverage
(iv) Combined Leverage
(10 Marks)

6. Answer the following:

(a) Explain in brief following Financial Instruments:

(i) Euro Bonds

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

(ii) Floating Rate Notes

(iii) Euro Commercial paper
(iv) Fully Hedged Bond
(1 x 4 = 4 Marks)

(b) Discuss the Advantages of Leasing.

(4 Marks)

(c) Write two main objectives of Financial Management.

OR

Write two main reasons for considering risk in Capital Budgeting decisions.
(2 Marks)

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

SECTION B – Economics for Finance

Question No. 7 is compulsory.

Answer any three questions from the rest.
Working notes should form part of the answer.

Question 7 (1)

"World Trade Organisation (WTO) has a three-tier system of decision making." Explain.
(2 Marks)

Question 7 (2)

In a two sector economy, the business sector produces 7,500 units at an average price of `7.
(a) What is the money value of output?
(b) What is the money income of households?
(c) If households spend 75 percent of their income, what is the total consumer expenditure?
(d) What is the total money revenues received by the business sector?
(e) What should happen to the level of output?
(5 Marks)

Question 7 (3)

Explain the objectives of Fiscal Policy.

(3 Marks)

Question 8 (1)

Which types of Government interventions are applied for correcting information failure?
(2 Marks)

Question 8 (2)

Compute M1 supply of money from the data given below:

Currency with public `2,13,279.8 Crores

Time deposits with bank `3,45,000.7 Crores
Demand deposits with bank `1,62,374.5 Crores
Post office savings deposit `382.9 Crores
Other deposits of RBI `765.1 Crores

(3 Marks)

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

Question 8 (3)

Describe the determinants of demand for money as identified by Milton Friedman in his restatement
of Quantity Theory of demand for money.
(3 Marks)

Question 8 (4)

The Nominal Exchange rate of India is `56/1$, Price Index in India is 116 and Price Index in USA is
112. What will be the Real Exchange Rate of India?
(2 Marks)

Question 9 (1)

The table given below shows the number of labour hours required to produce Sugar and Rice in two
countries X and Y:

Commodity Country X Country Y

1 Unit of Sugar 2.0 5.0
1 unit of Rice 4.0 2.5

(a) Compute the Productivity of labour in both countries in respect of both commodities.
(b) Which country has absolute advantage in production of Sugar?
(c) Which country has absolute advantage in production of Rice?
(3 Marks)

Question 9 (2)

Calculate the Average Propensity to Consume (APC) and Average Propensity to Save (APS) from the
following data:
Income Consumption
`4,000 `3,000
(2 Marks)

Question 9 (3)

Explain with example how Ad Valorem Tariff is levied.

(3 Marks)

Question 9 (4)

Describe features of public goods.

(2 Marks)

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 FM & ECO GRAND TEST 2 BY CA NAMIT ARORA SIR

Question 10 (1)

Distinguish between Personal Income and Disposable Personal Income.

(3 Marks)

Question 10 (2)

Explain the role of Government in a market economy as stated by Richard Musgrave.

(3 Marks)

Question 10 (3)

Why is the central bank referred to as a "banker's bank"?

(2 Marks)

Question 10 (4)

"World Trade Organisation (WTO) has a three-tier system of decision making." Explain.
(2 Marks)

Question 11 (1)
Describe the meaning and mechanism of 'crowding out' effect of public expenditure.
(3 Marks)

Question 11 (2)

"Money has four functions: a medium, a measure, a standard and a store." Elucidate.
(2 Marks)

Question 11 (3)

What will be the total credit created by the commercial banking system for an initial deposit of `3,000
at a Required Reserve Ratio (RRR) of 0.05 and 0.08 respectively? Also compute credit multiplier.

(2 Marks)

Question 11 (4)

What are the modes of Foreign Direct Investment (FDI)?

(3 Marks)

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