Subject – Financial & strategic Management Std – CA Inter May 26

Time – 1.5 Hr. Total Marks – 50

Unit Test 2
Topic : FM - Dividend Decision ,Management of Working Capital ,Cash Management

SM – Chapter 4 & 5

Section A – Financial Management

Part – I Multiple Choice Question

Case Study 1
ABC Ltd., a company newly commencing business in the year 2021-22, provides the following
projected Profit and Loss Account:
(Rs.) (Rs.)
Sales 5,04,000
Cost of goods sold 3,67,200
Gross Profit 1,36,800
Administrative Expenses 33,600
Selling Expenses 31,200 64,800
Profit before tax 72,000
Provision for taxation 24,000
Profit after tax 48,000
The cost of goods sold has been arrived at as
under:
Materials used 2,01,600
Wages and manufacturing Expenses 1,50,000
Depreciation 56,400
4,08,000
Less: Stock of Finished goods
(10% of goods produced not yet sold) 40,800
3,67,200
The figure given above relate only to finished goods and not to work-in-progress. Goods
equal to 15% of the year’s production (in terms of physical units) will be in process on
the average requiring full materials but only 40% of the other expenses. The company
believes in keeping materials equal to two months’ consumption in stock.
All expenses will be paid one month in advance. Suppliers of materials will extend 1 -1/2
months credit. Sales will be 20% for cash and the rest at two months’ credit. 70% of
the Income tax will be paid in advance in quarterly instalments. The company wishes to
 keep Rs. 19,200 in cash. 10% must be added to the estimated figure for unforeseen
contingencies.
Based On The Above Case Scenario, Answer The Multiple Choice Questions From Q1 to Q3
(2 Marks each)

Q1 What is the amount of working capital required for stock of finished goods?
(a) 33,240
(b) 35,160
(c) 36,780
(d) 34,950

Q2 What is the amount of working capital required for receivables?

(a) 51,232
(b) 50,832
(c) 52,932
(d) 49,132

Q3 What is the amount of gross working capital requirement?

(a) 2,01,722
(b) 2,03,822
(c) 2,00,722
(d) 2,07,522

Q.4 The following information is available:

Wages for January: Rs. 20,000
Wages for February: Rs. 22,000
Delay in payment of wages: 1/2 month
The amount of wages paid during the month of February is
(a) Rs. 11,000
(b) Rs. 22,000
(c) Rs. 20,000
(d) Rs. 21,000 (1 Mark)

Part – II Descriptive Question

Question 1
A garment trader is preparing cash forecast for first three months of calendar year 2021. His
estimated sales for the forecasted periods are as below:
January (` '000) February (` '000) March (` '000)
Total sales 600 600 800
(i) The trader sells directly to public against cash payments and to other entities on
credit. Credit sales are expected to be four times the value of direct sales to public. He
expects 15% customers to pay in the month in which credit sales are made, 25% to pay in the
next month and 58% to pay in the next to next month. The outstanding balance is expected
to be written off.
(ii) Purchases of goods are made in the month prior to sales and it amounts to 90% of sales
and are made on credit. Payments of these occur in the month after the purchase. No
inventories of goods are held.
(iii) Cash balance as on 1st January, 2021 is ` 50,000.
(iv) Actual sales for the last two months of calendar year 2020 are as below:
November (` '000) December (` '000)
Total sales 640 880
You are required to prepare a monthly cash, budget for the three months from January to
March, 2021. (7 Marks)

Question 2
Bhola Limited manufactures used in the steel industry. The following information regarding the
company is given for your consideration:
(i) Expected level of production 9000 units per annum.
(ii) Raw materials are expected to remain in store for an average of two months before issue
to production.
(iii) Work-in-progress (50 percent complete as to conversion cost) will approximate to 1/2
month’s production.
(iv) Finished goods remain in warehouse on an average for one month.
(v) Credit allowed by suppliers is one month.·
(vi) Two month's credit is normally allowed to debtors.
(vii) A minimum cash balance of Rs. 67,500 is expected to be maintained.
(viii) Cash sales are 75 percent less than the credit sales.
(ix) Safety margin of 20 percent to cover unforeseen contingencies.
(x) The production pattern is assumed to be even during the year.
(xi) The cost structure for Bhola Limited's product is as follows:
Rs.
Raw Materials 80 per unit
Direct Labour 20 per unit
Overheads (including depreciation Rs. 20) 80 per unit
Total Cost 180 per unit
Profit 20 per unit
Selling Price 200 per unit
You are required to estimate the working capital requirement of Bhola limited.
(8 Marks)

Question 3
The following information is provided by MNP Ltd. for the year ending 31st March, 2020:
Raw Material Storage period 45 days
Work-in-Progress conversion period 20 days
Finished Goods storage period 25 days
Debt Collection period 30 days
Creditors payment period 60 days
Annual Operating Cost Rs. 25,00,000
(Including Depreciation of Rs. 2,50,000)
Assume 360 days in a year.
You are required to calculate:
(i) Operating Cycle period
(ii) Number of Operating Cycle in a year.
(iii) Amount of working capital required for the company on a cost basis.
(iv) The company is a market leader in its product and it has no competitor in the market.
Based on a market survey it is planning to discontinue sales on credit and deliver products based
on pre-payments in order to reduce its working capital requirement substantially. You are
required to compute the reduction in working capital requirement in such a scenario.
(5 Marks)

OR
Question 3A
Following figures and information were extracted from the company G Ltd.
Earnings of the company Rs. 10,00,000
Dividend paid Rs. 6,00,000
No. of shares outstanding 2,00,000
Price Earnings Ratio 10
Rate of return on investment 20%
You are required to calculate:
(i) Current Market price of the share
(ii) Capitalisation rate of its risk class
(iii) What should be the optimum pay-out ratio?
(iv) What should be the market price per share at optimal pay-out ratio? (use Walter’s
Model) (5 Marks)

Section B – Strategic Management

Part – I Multiple Choice Question

CASE SENARIO 1
The Tanya fashion industry has been speculated to reach $14 Trillion by 2021 with a profitability
index of over 25%. Riding on this wave of assumed growth in the industry, Miss Ankita Ahuja,
started a clothing label named Horse of Fashion (HoF) in 2017. She began with a pop range of
clothing for teenage girls and diversified her way to boys clothing. Her brand clocked revenue
of over fifty lacs in the very first year, and to her excitement, she got an investment from a
big brand label to expand pan India.
She along with her core team found a niche consumer base, studied the industry in depth,
strategized to fight off competition and even implemented these strategies to win. Her instincts
and belief have been too strong for the clothing segment and her brand per se.
Mr. Sumit Arora, who began as a consultant with Miss Ahuja, was made the Head of Boys
clothing segment and was given full freedom to think like an owner of the business segment and
experiment for expansion. He took up the challenge and partnered with major foreign labels to
bring Horse of Fashion (HoF) to mainstream consumers.
The brand was doing great until a Japanese clothing brand by the name of Kova disrupted the
low cost teenage clothing and apparel industry with its global fame and pocket friendly pricing.
Horse of Fashion saw its revenues drop to at least half of what they were expecting.
An emergency strategy meeting amongst the leaders was called upon but Miss Ahuja was
adamant on sticking to the idea of selling the brand as India’s homegrown brand while other
leaders including Mr. Sumit wanted to partner with Kova to sustain the business. The team
eventually resorted to sticking with Miss Ahuja’s ideas and marketed the brand as the desi
brand for teenagers.
Like every business faces a challenge when the environment changes and throws opportunities
or threats to the management, Horse of Fashion has had its own set of principles and leadership
styles to sustain the business in these challenging times.
Based on the above case scenario, answer the Q.1 and Q.2
Q.1 Kova blocked the industry with its global branding and disrupted Horse of Fashion. What
kind of strategy control could have saved the brand from such a big impact?
(a) Premise control
(b) Special alert control
(c) Milestone reviews
(d) Monitoring strategic thrusts (2 Marks)

Q.2 In times of distress, the core of organisational structure helps an organisation to think
holistically. Which of the following principles was highly ignored by Horse of Fashion?
(a) Ideal organisational structure is one where leaders take final decision
(b) Ideal organisational structure is one where executive order is valued over participation
(c) Ideal organisational structure is one where source of idea carries more weight than the
merit
(d) Ideal organisational structure is one where ideas filter up as well down. (2 Marks)

CASE SENARIO 2
Champak Private Limited, a Mumbai based company is launching a smartphone, under the brand
name of Poppy. The company recognizes plethora of options that customers have from Chinese
manufacturers flooding the smartphone landscape. With recent COVID-19 pandemic hurting the
global sentiment towards Chinese products, the company plans to play on the patriotic card and
advertise Poppy as the “Desi” smartphone of India.
Strategic Arm of the company undertook an industry analysis and reported, that, budget phone
segment was overtaken by the Chinese brands completely, however, the low segment of
smartphones was still open for exploration. Thus, the company planned to enter the market with
two models, Poppy A and Poppy B, priced at Rs. 4,499 and
Rs. 5,499.
The company is also aware that their product can easily be imitated at same costing as well as
pricing, and thus the very essence of their product can be lost. A team of marketing professionals
was hired to tackle this issue. The solution they suggested was to take the first mover advantage
by spending huge sums in advertising and promotion.
 Based on sound consciousness of the competition from huge money backed international players,
the company decided to manufacture smartphone covers and accessories with the same “desi”
tag, along with Poppy Smartphones. This shall help them mitigate the risk of being completely
thrown out of business. Consequently, they invested a fairly good amount in manufacturing of
these accessories.
The investors made it an objective for the team to reach an annual sales volume of 15,000
handsets and 70,000 pieces of accessories. The accessories sales surpassed the expectations by
a fairly good margin. However, Poppy A and Poppy B did not receive the much anticipated
response and the leadership decided to reduce the scope and focus purely on accessories business
going forward.
With a new focus on accessories production, the “Desi” tag will still play an important part in
the success.
Based on the above case scenario, answer the Q.3 and Q.4
Q.3 Following the sales numbers reported at the end of year, the leadership took a serious
strategic stand point to move forward and shift to a new core business which was more
profitable. Under which of the following category of business strategy can this decision be
categorized?
(a) Retrenchment strategy
(b) Strategic alliance
(c) Diversification strategy
(d) Market development (2 Marks)

Q.4 After getting results from the market, accessories business of the company can be classified
under which category of BCG’s growth share matrix?
(a) Star
(b) Question mark
(c) Cash cow
(d) Dog (2 Marks)

Part – II Descriptive Question

Q.4 is compulsory attempt any 2 Questions From Q.5 to Q.7

Question 4
A company started its operation in 2015 with Product Apple. In early 2021, with intent to have
its better presence in the market, the company diversifies by acquiring a company with product
Basket. After sometime, it was observed that product Basket is not faring well. Aggressive
competition was therein market for the product. It was also revealed that though customers are
not price sensitive, but product was not keeping pace with the fast changing unique features as
expected by its customers.
Company has tried one of the retrenchment strategies by putting efforts to improve its internal
efficiency, but could not get desired results. In the situation, company is of a considered view to
remain and grow in product Apple and to decouple with product Basket from its portfolio.
As a strategist, suggest the retrenchment strategy to be adopted by the company. Also delineate
reasons why a company should adopt such strategy? (5 Marks)

Question 5
MBW, a leading Japan based automobile company decides to make India a hub for the company’s
250 cc motorcycle to be manufactured in collaboration with the ABC Group, a leading Indian
motorcycle manufacturer. The production is to be exported to the company’s home market as
well as to other African countries.
What is this growth strategy called? Point out the most important advantages both the companies
expect from such strategy/collaboration. (5 Marks)

Question 6
Munch Pvt Ltd is dealing in multiproduct like electronics and FMCG and are having outlets in
different cities and markets across India. Due to scale of operation, it is having technical difficulty
in dealing with distinct product line and markets especially in coordination and control related
problems. Identify and suggest an ideal organizational structure for Munch Pvt Ltd in resolving
the problem? (5 Marks)

Question 7
IQ is a service company. Two years back the company hired a reputed management consultant to
formulate its strategy. The consultant recommended an aggressive expansion plan. Now in an
internal review meeting the company finds that many of the suggestions are not even fully
considered.
Which part of strategic management process is missing in IQ? (5 Marks)