CA Intermediate Paper 6 Financial Management & Strategic Management PDF May'24

CA Intermediate Paper 6 Financial Management & Strategic Management Chapter-wise compilation of RTP, MTP and PYP May’24 Prakshal Shah | 8779794646 11  CA Finalist _______________________________...

CA Intermediate Paper 6 Financial Management & Strategic Management Chapter-wise compilation of RTP, MTP and PYP May’24 Prakshal Shah | 8779794646 11  CA Finalist _______________________________ (Once you print this write your name in this blank to give you the much-needed mo琀椀va琀椀on. Remember what you see is what you achieve!) Disclaimer: While we have made every a琀琀empt to ensure that the informa琀椀on contained in this compila琀椀on has been obtained from reliable sources (from the answers given by the Ins琀椀tute of Chartered Accountants of India), Vivitsu is not responsible for any errors or omissions, or for the results obtained from the use of this informa琀椀on. All informa琀椀on on this site is provided "as is," with no guarantee of completeness, accuracy, 琀椀meliness, or of the results obtained from the use of this informa琀椀on, and without warranty of any kind, express or implied, including, but not limited to warran琀椀es of performance, merchantability, and 昀椀tness for a par琀椀cular purpose. In no event will Vivitsu, its related partnerships or corpora琀椀ons, or the partners, agents, or employees thereof be liable to you or anyone else for any decision made or ac琀椀on taken in reliance on the informa琀椀on on this site or for any consequen琀椀al, special, or similar damages, even if advised of the possibility of such damages. This compila琀椀on is presented for informa琀椀onal and educa琀椀onal purposes and should not be considered a formal book or publica琀椀on. It is essen琀椀al to use cri琀椀cal thinking and judgment when applying the knowledge and informa琀椀on provided in this compila琀椀on. The compiler does not endorse or promote any speci昀椀c products, services, or organiza琀椀ons men琀椀oned in this compila琀椀on. By using this compila琀椀on, readers agree to accept full responsibility for their ac琀椀ons and decisions based on the informa琀椀on and content provided, and they acknowledge the limita琀椀ons and poten琀椀al risks associated with any compila琀椀on of educa琀椀onal materials. Prakshal Shah | 8779794646  GETTING THE MOST FROM THIS BOOK A QUICK GUIDE 1 INITIAL READING After your initial reading of a particular chapter in your study material, go through the questions in our 3, 5, and 11 attempt’s compilations, focusing on the chapter you've just covered. Make note of challenging questions for later reference. 2 FIRST REVISION During your first revision, revisit the marked questions. If you still can't answer them, highlight them in red and review the related concepts to improve your understanding. This process helps you to grasp the key concepts and address your weak points 3 KEEP GOING WITH THE REVISIONS Repeat the reading and revision process as often as possible before your exams. Each iteration will enhance your confidence and knowledge. 4 EXAMINERS COMMENTS Pay attention to the examiner's comments in our compilations, as they highlight common mistakes. Learning from these errors will help you avoid them in your exams Prakshal Shah | 8779794646  Frequently Asked Ques琀椀ons 1. Why RTP’s, MTP’s and PYP’s? RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language. These ques琀椀ons train you to understand what is important and what is expected of you. At least 41% of ques琀椀ons* are asked from previous RTP’s, MTP’s and PYP’s. 2. What is included? In this compiler, all ques琀椀ons from the last 3, 5 or 11 a琀琀empts depending on the one you have selected will be available. There will be references to the marks and the a琀琀empt from which they were asked. Iden琀椀cal or similar ques琀椀ons have been removed and references for both a琀琀empts are men琀椀oned. 3. What is the bene昀椀t of Chapter-wise? We have categorized each and every ques琀椀on from all Old RTPs, MTP’s, and PYP’s into chapters. This means that you don't have to wait un琀椀l you've completed your en琀椀re syllabus to tackle an RTP, MTP, or past paper. You can start solving these ques琀椀ons to check your conceptual clarity right a昀琀er 昀椀nishing a par琀椀cular chapter. 4. What does amended for the latest a琀琀empt mean? When we reviewed all the ques琀椀ons from the past 11 a琀琀empts of RTP, MTP, and PYP’S, we didn't just segregate them Chapterwise; we also updated them to re昀氀ect the latest provisions. All the answers provided in the compila琀椀on are applicable for the May 2024 examina琀椀on. So, there's no need to stress about outdated or incorrect informa琀椀on. 5. How are Old RTP’s, MTP’s & PYP’s bene昀椀cial for me? All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI. This means that if a speci昀椀c chapter from the old scheme is not included in the new scheme, it has been omi琀琀ed. If a par琀椀cular chapter in the new scheme is based on concepts from two or more chapters in the old scheme, it has been adapted to align with how the chapter should be in the new scheme. If a chapter is only par琀椀ally included in the new scheme, the ques琀椀ons related to those speci昀椀c concepts are only included in the corresponding chapter of the new scheme. A comprehensive reconcilia琀椀on of the chapters between the new scheme and the old scheme is provided on the following page. 6. What if a new a琀琀empt is added post my purchase? If you have purchased materials for the May 2024 a琀琀empt, you will receive a 昀椀le with the ques琀椀ons segregated Chapterwise speci昀椀cally for that a琀琀empt. 7. What does N/A mean? It could mean any of the following: 1. No ques琀椀ons from that chapter have been included in the selected a琀琀empts. 2. The chapter is newly introduced, and as a result, no ques琀椀ons have been previously asked in RTP’s, MTP’s, or PYP’s. *This is on an average based on the last 11 a琀琀empts Prakshal Shah | 8779794646  Financial Management & Strategic Management Reconciliation of chapters of the new scheme (May’24) with old course New Chapter Name as per New Syllabus Old Old Chapter Name Chapter Chapter No. No. Section A: Financial Management 1 Scope and Objectives of Financial 1 Scope and Objectives of Financial Management Management 2 Types of Financing 2 Types of Financing 3 Financial Analysis and Planning – Ratio 3 Financial Analysis and Planning – Analysis Ratio Analysis 4 Cost of Capital 4 Cost of Capital 5 Financing Decisions – Capital Structure 5 Financing Decisions – Capital Structure 6 Financing Decisions – Leverages 6 Financing Decisions – Leverages MODULE 2 7 Investment Decisions 7 Investment Decisions 8 Dividend Decision 9 Dividend Decision 9 Management of Working Capital 9.1 Introduction to Working Capital 10.1 Introduction to Working Capital Management Management 9.2 Treasury and Cash Management 10.2 Treasury and Cash Management 9.3 Management of Inventory 10.3 Management of Inventory 9.4 Management of Receivables 10.4 Management of Receivables 9.5 Management of Payables (Creditors) 10.5 Management of Payables (Creditors) 9.6 Financing of Working Capital 10.6 Financing of Working Capital Section B: Strategic Management 1 Introduction to Strategic Management 6,8 Introduction to Strategic Management & Strategic Management Process 2 Strategic Analysis: External Environment 7,10 Dynamics of Competitive Strategy & Business Level Strategies 3 Strategic Analysis: Internal Environment 7,10,11 Dynamics of Competitive Strategy, Business & Functional Level Strategies 4 Strategic Choices 9 Corporate Level Strategies 5 Strategy Implementation and Evaluation 8,12,13 Strategic Management Process, Organisation & Strategic Leadership and Strategy Implementation & Control Prakshal Shah | 8779794646  Table of Contents Sr. Particulars Page Number No Financial Management 1 Scope and Objectives of Financial Management 1.1 – 1.9 2 Types of Financing 2.1 – 2.13 3 Financial Analysis and Planning – Ratio Analysis 3.1 – 3.51 4 Cost of Capital 4.1 – 4.41 5 Financing Decisions – Capital Structure 5.1 – 5.37 6 Financing Decisions – Leverages 6.1 – 6.42 7 Investment Decisions 7.1 – 7.61 8 Dividend Decision 8.1 – 8.25 9.1 Introduction to Working Capital Management 9.1-1 – 9.1-32 9.2 Treasury and Cash Management 9.2-1 – 9.2-13 9.3 Management of Inventory 9.3-1 9.4 Management of Receivables 9.4-1 – 9.4-14 9.5 Management of Payables (Creditors) 9.5-1 9.6 Financing of Working Capital 9.6-1 – 9.6-3 Strategic Management 1 Introduction to Strategic Management 1.1 – 1.23 2 Strategic Analysis: External Environment 2.1 – 2.15 3 Strategic Analysis: Internal Environment 3.1 – 3.24 4 Strategic Choices 4.1 – 4.30 5 Strategy Implementation and Evaluation 5.1 – 5.37 6 Case Scenarios 6.1 – 6.29 21 MTPs: March’18, April’18, Aug’18, Oct’18, May’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21, Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23, Sep ’23 & Oct ‘23 11 PYPs: May’18, Nov’18, May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May ‘23 12 RTPs: May’18, Nov’18, May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22, May ’23, Nov ‘23 Prakshal Shah | 8779794646  1.1 Chapter 1 Scope & Objectives of Financial Management Question 1 STATE Agency Cost. DISCUSS The Ways to Reduce the Effect of It. (MTP 4 Marks, Aug918) OR DISCUSS Agency Problem and Agency Cost. [MTP 4 Marks, Oct920, MTP 4 Marks March 923, MTP 4 Marks Apr921, MTP 5 Marks April 923, RTP Nov 20, May922 & Nov 823) Answer 1 Agency Cost: In a sole proprietorship firm, partnership etc., owners participate in management but in corporate, owners are not active in management so, there is a separation between owner/ shareholders and managers. In theory managers should act in the best interest of shareholders however in reality, managers may try to maximize their individual goal like salary, perks etc., so there is a principal-agent relationship between managers and owners, which is known as Agency Problem. In a nutshell, Agency Problem is the chances that managers may place personal goals ahead of the goal of owners. Agency Problem leads to Agency Cost. Agency cost is the additional cost borne by the shareholders to monitor the manager and control their behavior so as to maximize shareholder9s wealth. Generally, Agency Costs are of four types (I) monitoring (ii) bonding (iii) opportunity (iv) structuring Addressing the agency problem The agency problem arises if manager9s interests are not aligned to the interests of the debt lender and equity investors. The agency problem of debt lender would be addressed by imposing negative covenants i.e. the managers cannot borrow beyond a point. This is one of the most important concepts of modern day finance and the application of this would be applied in the Credit Risk Management of Bank, Fund Raising, Valuing distressed companies. Agency problem between the managers and shareholders can be addressed if the interests of the managers are aligned to the interests of the share- holders. It is easier said than done. However, following efforts have been made to address these issues: (A) Managerial compensation is linked to profit of the company to some extent and also with the long term objectives of the company. (B) Employee is also designed to address the issue with the underlying assumption that maximisation of the stock price is the objective of the investors. (C) Effecting monitoring can be done. Question 2 EXPLAIN as to how the wealth maximization objective is superior to the profit maximization objective What is the cost of these sources? [MTP 4 Marks, March919] Answer 2 A firm9s financial management may often have the following as their objectives: (i) The maximization of firm9s profit. (ii) The maximization of firm9s value / wealth. The maximization of profit is often considered as an implied objective of a firm. To achieve the aforesaid objective various type of financing decisions may be taken. Options resulting into maximization of profit may be selected by the firm9s decision makers. They even sometime may adopt policies yielding exorbitant profits in short run which may prove to be unhealthy for the growth, survival and overall interests of the firm. The profit of the firm in this case is measured in terms of its total accounting profit available to its shareholders. The value/wealth of a firm is defined as the market price of the firm9s stock. The market price of a firm9s stock Prakshal Shah | 8779794646 Chapter 1 Scope & Objectives of Financial Management  1.2 represents the focal judgment of all market participants as to what the value of the particular firm is. It takes into account present and prospective future earnings per share, the timing and risk of these earnings, the dividend policy of the firm and many other factors that bear upon the market price of the stock. The value maximization objective of a firm is superior to its profit maximization objective due to following reasons. 1. The value maximization objective of a firm considers all future cash flows, dividends, earning per share, risk of a decision etc. whereas profit maximization objective does not consider the effect of EPS, dividend paid or any other returns to shareholders or the wealth of the shareholder. 2. A firm that wishes to maximize the shareholder9s wealth may pay regular dividends whereas a firm with the objective of profit maximization may refrain from dividend payment to its shareholders. 3. Shareholders would prefer an increase in the firm9s wealth against its generation of increasing flow of profits. 4. The market price of a share reflects the shareholders expected return, considering the long- term prospects of the firm, reflects the differences in timings of the returns, considers risk and recognizes the importance of distribution of returns. The maximization of a firm9s value as reflected in the market price of a share is viewed as a proper goal of a firm. The profit maximization can be considered as a part of the wealth maximization strategy. Question 3 DISCUSS the Inter relationship between investment, financing and dividend decisions. (MTP 4 Marks, Oct919] OR DISCUSS the three major decisions taken by a finance manager to maximize the wealth of shareholders. (MTP 4 Marks, Oct918) OR BRIEFLY explain the three finance function decisions. [MTP 4 Marks, Oct921, RTP Nov 919, RTP May919, PYP 3 Marks Nov919) OR What are the two main aspects of the Finance Function? (PYP 2 Marks, May 918, Old & New SM) Answer 3 Inter-relationship between Investment, Financing and Dividend Decisions: The finance functions are divided into three major decisions, viz., investment, financing and dividend decisions. It is correct to say that these decisions are inter-related because the underlying objective of these three decisions is the same, i.e. maximization of shareholders9 wealth. Since investment, financing and dividend decisions are all interrelated, one has to consider the joint impact of these decisions on the market price of the company9s shares and these decisions should also be solved jointly. The decision to invest in a new project needs the finance for the investment. The financing decision, in turn, is influenced by and influences dividend decision because retained earnings used in internal financing deprive shareholders of their dividends. An efficient financial management can ensure optimal joint decisions. This is possible by evaluating each decision in relation to its effect on the shareholders9 wealth. The above three decisions are briefly examined below in the light of their inter-relationship and to see how they can help in maximizing the shareholders9 wealth i.e. market price of the company9s shares. Investment decision: The investment of long term funds is made after a careful assessment of the various projects through capital budgeting and uncertainty analysis. However, only that investment proposal is to be accepted which is expected to yield at least so much return as is adequate to meet its cost of financing. This have an influence on the profitability of the company and ultimately on its wealth. Financing decision: Funds can be raised from various sources. Each source of funds involves different issues. The finance manager has to maintain a proper balance between long-term and short-term funds. With the total volume of long-term funds, he has to ensure a proper mix of loan funds and owner9s funds. The optimum financing mix will increase return to equity shareholders and thus maximize their wealth. Dividend decision: The finance manager is also concerned with the decision to pay or declare dividend. He Prakshal Shah | 8779794646 Chapter 1 Scope & Objectives of Financial Management  1.3 assists the top management in deciding as to what portion of the profit should be paid to the shareholders by way of dividends and what portion should be retained in the business. An optimal dividend pay-out ratio maximizes shareholders9 wealth. The above discussion makes it clear that investment, financing and dividend decisions are interrelated and are to be taken jointly keeping in view their joint effect on the shareholders9 wealth. EXAMINERS9 COMMENTS ON THE PERFORMANCE OF EXAMINEES: This was a theoretical question based on explanation of three finance functions decision. Only a handful number of examinees attempted the question, but performance observed was above average. Question 4 DISCUSS the advantages and disadvantages of Wealth maximization principle. (MTP 4 Marks, March921, PYP 2 Marks May922) Answer 4 Advantages and disadvantages of Wealth maximization principle. Advantages: (i) Emphasizes the long term gains (ii) Recognizes risk or uncertainty (iii) Recognizes the timing of returns (iv) Considers shareholders9 return. Disadvantages: (i) Offers no clear relationship between financial decisions and share price. (ii) Can lead to management anxiety and frustration. Question 5 WRITE two main objectives of Financial Management. [MTP 2 Marks, Oct921, PYP 2 Marks Nov 918) Answer 5 Two main objectives of Financial Management Profit Maximization It has traditionally been argued that the primary objective of a company is to earn profit; hence the objective of financial management is also profit maximization. This implies that the finance manager has to make his decisions in a manner so that the profits of the concern are maximized. Each alternative, therefore, is to be seen as to whether or not it gives maximum profit. Wealth / Value Maximization We will first like to define what is Wealth / Value Maximization Model. Shareholders wealth are the result of cost benefit analysis adjusted with their timing and risk i.e. time value of money. So, Wealth = Present Value of benefits 3 Present Value of Costs It is important that benefits measured by the finance manager are in terms of cash flow. Finance manager should emphasis on Cash flow for investment or financing decisions not on Accounting profit. The shareholder value maximization model holds that the primary goal of the firm is to maximize its market value and implies that business decisions should seek to increase the net present value of the economic profits of the firm. Question 6 A finance executive of an organisation plays an important role in the company9s goals, policies, and financial success. WHAT his responsibilities include? (MTP 4 Marks Sep922) Answer 6 A finance executive of an organisation plays an important role in the company9s goals,policies, and financial success. His responsibilities include: (i) Financial analysis and planning: Determining the proper amount of funds to employ in the firm, i.e. designating Prakshal Shah | 8779794646 Chapter 1 Scope & Objectives of Financial Management  1.4 the size of the firm and its rate of growth. (ii) Investment decisions: The efficient allocation of funds to specific assets. (iii) Financing and capital structure decisions: Raising funds on favourable terms as possible i.e. determining the composition of liabilities. (iv) Management of financial resources (such as working capital). (v) Risk management: Protecting assets. Question 7 EXPLAIN Financial Distress and explain its relationship with Insolvency. (MTP 4 Marks, March918) OR 8Financial distress is a position where Cash inflows of a firm are inadequate to meet all its current obligations.9 Based on above mentioned context, EXPLAIN Financial Distress along with Insolvency. [MTP 4 Marks March 22] Answer 7 There are various factors like price of the product/ service, demand, price of inputs e.g. raw material, Labour etc., which is to be managed by an organization on a continuous basis. Proportion of debt also needs to be managed by an organization very delicately. Higher debt requires higher interest and if the cash inflow is not sufficient then it will put lot of pressure to the organization. Both short term and long term creditors will put stress to the firm. If all the above factors are not well managed by the firm, it can create situation known as distress, so financial distress is a position where Cash inflows of a firm are inadequate to meet all its current obligations. Now if distress continues for a long period of time, firm may have to sell its asset, even many times at a lower price. Further when revenue is inadequate to revive the situation, firm will not be able to meet its obligations and become insolvent. So, insolvency basically means inability of a firm to repay various debts and is a result of continuous financial distress. Question 8 DISTINGUISH between Profit maximisation vis-a-vis wealth maximization. (MTP 5 Marks April 923) OR 8Profit maximisation is not the sole objective of a company. It is at best a limited objective. If profit is given undue importance, a number of problems can arise.9 DISCUSS four of such problems. (RTP May 22, RTP May 21) OR EXPLAIN