Financing Decisions - Capital Structure

Original descriptive practice: 30 saved, 18 at 5 marks and 12 at 10. NI, NOI, traditional and MM models, tax/wealth reconciliation, arbitrage, trade-off/pecking order, control, EBIT-EPS-MPS, financial break-even and cash-service limits. Original practice, not ICAI questions or official marking schemes. Native tables scroll on phones. Original preparation is not a live or complete official question bank.

Boundaries: Models and usable tax shields are case supplied. The official PDF tax-equity formula on page 18 conflicts with the later page 27 formula; these exercises use the specified income/value-reconciled model and preserve that discrepancy. EPS is not automatically shareholder value or cash solvency. P/E estimates, issue terms and perpetual debt assumptions are conditional, not current offers or financing instructions.

FM-C05-D001 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A firm has ordinary equity, retained reserves, long-term debt and trade payables. Management proposes using the largest debt share solely because its quoted coupon is lowest. Required: distinguish financing mix from the whole balance-sheet funding picture and explain a value-oriented decision. (5 marks)

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Marks	Credit	Working / case application
1	Scope	Capital structure concerns the long-term financing mix; the broader financial structure also contains current funding such as trade payables.
1	Equity claim	Ordinary capital and retained earnings are shareholder funding, not cost-free residual cash.
1	Cost versus coupon	Relevant financing cost includes net proceeds, risk, tax and terms, not only a coupon.
1	Risk and flexibility	Fixed obligations, control, refinancing and adjustment capacity can change the decision.
1	Objective	Compare wealth/value and feasible risk-adjusted funding; no automatic maximum-debt optimum from one cheap quote.

Original case, indicative capped allocation, not an official scheme. Equivalent correct work credited without duplication. Supplied model, timing, market and tax facts control; no financing action or guaranteed value outcome is implied.

Official concept source, PDF page 3

FM-C05-D002 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. No-tax NI model: EBIT Rs 30 lakh forever, debt market value 100, annual debt interest 10, constant equity capitalisation rate 20%. Required: equity earnings/value, total firm value and overall cost. State the model assumption. (5 marks)

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Marks	Credit	Working / case application
1	Equity earnings	30-10=20.
1	Equity value	20/.20=100.
1	Firm value	100+100=200.
1	Overall cost	30/200=15%; also .5 x 10%+.5 x 20%.
1	Model	NI assumes unchanged source costs as leverage changes; this is not proof those rates remain fixed in real borrowing.

Official concept source, PDF page 7

FM-C05-D003 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Under a no-tax NI perpetuity model EBIT 30, Kd 10%, Ke 20% stay constant. Compare debt market values 0, 100, 150. Debt is at par and interest=Kd*debt. Required: compute interest, equity earnings/value, firm value and WACC at each level, and explain model versus practical maximum-debt claim. (10 marks)

Rs lakh unless otherwise stated; case-supplied financing terms.

Debt value	Kd	Ke	EBIT
0	10%	20%	30
100	10%	20%	30
150	10%	20%	30

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Marks	Credit	Working / case application
1	No-debt equity	30/.2=150.
1	No-debt value/cost	V 150, WACC 30/150=20%.
1	Debt 100 earnings	Interest 10, equity earnings 20.
1	Debt 100 value	S 100, V 200.
1	Debt 100 cost	30/200=15%.
1	Debt 150 earnings	Interest 15, equity earnings 15.
1	Debt 150 value	S 75, V 225.
1	Debt 150 cost	30/225=13.3333%.
1	Theory result	On fixed-cost assumptions debt replaces more expensive equity, increasing value and lowering WACC.
1	Practical limit	Risk, rising required returns, distress and debt capacity are omitted; maximum-debt recommendation is not a safe practical inference.

Official concept source, PDF page 7

FM-C05-D004 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. No-tax NOI perpetuity: EBIT 24, overall risk-class cost 12%, debt market 80 paying 8% annually. Required: firm value, equity value/earnings/cost and reconciliation. (5 marks)

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Marks	Credit	Working / case application
1	Firm value	24/.12=200.
1	Equity value	200-80=120.
1	Equity earnings	24-80 x.08=17.6.
1	Equity cost	17.6/120=14.6667%.
1	Reconciliation	WACC=(120/200)x 14.6667%+(80/200)x 8%=12%; increased equity risk offsets debt benefit under model.

Official concept source, PDF page 12

FM-C05-D005 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. No-tax NOI model EBIT 24, Ko 12%, Kd 8% unchanged. Debt values 0, 80, 120. Required: value and equity cost at each level, weighted-cost reconciliation and critique the claim that a falling equity value necessarily means destroyed firm value. (10 marks)

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Marks	Credit	Working / case application
1	Constant firm value	24/.12=200 at each mix.
1	Debt 0	S 200, earnings 24, Ke 12%.
1	Debt 80 equity	S 120; interest 6.4; equity earnings 17.6.
1	Debt 80 Ke	17.6/120=14.6667%.
1	Debt 120 equity	S 80; interest 9.6; equity earnings 14.4.
1	Debt 120 Ke	14.4/80=18%.
1	First weighted check	.6 x 14.6667%+.4 x 8%=12%.
1	Second weighted check	.4 x 18%+.6 x 8%=12%.
1	Claim distinction	Equity is a smaller residual after debt; V=S+D is unchanged in this stipulated model.
1	Scope	Constant risk-class overall rate and cheaper debt do not prove actual risk-free refinancing or constant real-world value.

Official concept source, PDF page 12

FM-C05-D006 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Supplied no-tax perpetuity choices have EBIT 20 each. A: debt weight 0%, Ke 15%. B: debt weight 40%, Kd 8%, Ke 17%. C: debt weight 60%, Kd 10%, Ke 25%. Required: compute WACCs, model firm values and select only among supplied options. (5 marks)

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Marks	Credit	Working / case application
1	A	WACC 15%, V 20/.15=133.3333.
1	B	WACC.4 x 8+.6 x 17=13.4%, V 149.2537.
1	C	WACC.6 x 10+.4 x 25=16%, V 125.
1	Finite choice	B has lowest supplied WACC/highest model value; not proof of the continuous global optimum.
1	Theory	Rising source costs can reverse early debt gains, matching traditional U-shaped tendency; supplied estimates need practical grounding.

Official concept source, PDF page 9

FM-C05-D007 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A manager says NI and NOI both predict the same debt-driven fall in overall cost. Required: distinguish assumptions, equity-risk effect and value conclusions without blending models. (5 marks)

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Marks	Credit	Working / case application
1	NI costs	NI keeps debt and equity capitalisation costs fixed in its simplified no-tax model.
1	NI result	More relatively cheap debt lowers weighted cost and raises model firm value.
1	NOI cost	NOI keeps overall cost constant; equity required return rises with leverage.
1	NOI value	Fixed operating earnings/risk-class overall rate imply unchanged total firm value.
1	No blending	Applying NI fixed Ke and NOI fixed Ko simultaneously as debt rises generally conflicts; name and use one consistent set.

Official concept source, PDF page 12

FM-C05-D008 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. No-tax MM model: unlevered required return 12%, debt cost 8%, debt/equity 0.75. Required: calculate levered Ke and WACC and state two important assumptions. (5 marks)

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Marks	Credit	Working / case application
1	Equity premium	(12%-8%)x.75=3 percentage points.
1	Levered equity	Ke=12%+3%=15%.
1	Weights	Debt .75/1.75=3/7; equity 4/7.
1	Weighted cost	(4/7)x 15%+(3/7)x 8%=12%.
1	Conditions	Equivalent business risk and perfect capital markets/no taxes or transaction frictions support the result; personal/corporate borrowing comparability matters for arbitrage.

Official concept source, PDF page 16

FM-C05-D009 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Explicit constant-perpetual-debt tax model: EBIT 40 forever, Ku 14%, corporate tax 30%, permanent debt 100 at 8%, coupon deductions fully usable immediately. No distress, agency or personal-tax costs. Use Vu=EBIT*(1-t)/Ku, VL=Vu+tD and S=VL-D. Required: derive values, equity earnings/Ke, tax-adjusted MM Ke and WACC by two methods. (10 marks)

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Marks	Credit	Working / case application
1	Unlevered value	40 x.7/.14=200.
1	Shield value	tD=.30 x 100=30 under permanent-debt assumptions.
1	Levered value	200+30=230.
1	Equity value	230-100=130.
1	Equity earnings	(40-8)x.7=22.4.
1	Equity cost	22.4/130=17.230769%.
1	Tax formula	Ku+(Ku-Kd)(1-t)D/S=.14+.06 x.7 x 100/130=17.230769%.
1	Weighted WACC	(130/230)x Ke+(100/230)x 8% x.7=12.173913%.
1	Operating check	40 x.7/230=12.173913%; also Ku*(1-tD/VL).
1	Source boundary	Use this explicitly reconciled model. Official PDF page 18 prints a conflicting Ke expression; page 27 and income/value working support the specified formula. tD is not general for changing debt or unusable shields.

Official concept source, PDF page 27

FM-C05-D010 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. An all-equity firm has permanent after-tax operating cash 28, Ku 14% and value 200. It issues permanent debt 100 at 8% and repurchases shares with all proceeds; corporate tax 30%, full immediate coupon shields, no costs/distress. Use VL=Vu+tD. Required: compute post-transaction firm/equity values, shareholder value including cash paid, Ke/WACC and distinguish equity shrinkage from shareholder loss. (10 marks)

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Marks	Credit	Working / case application
1	Unlevered value	28/.14=200.
1	Tax value	30% x 100=30.
1	Levered firm	230.
1	Remaining equity	230-100=130.
1	Cash distribution	Repurchase proceeds 100 paid to former shareholder group; do not ignore this transfer.
1	Total shareholder wealth	Remaining equity 130+cash 100=230 versus 200 before, gain 30 under model.
1	Remaining equity cash	28-8 x.7=22.4.
1	Ke	22.4/130=17.230769%.
1	WACC	28/230=12.173913%.
1	Limits	130 alone is not total original shareholder wealth; real repurchase price/terms, taxes, frictions and authorisation are separate, not guaranteed gain.

Official concept source, PDF page 25

FM-C05-D011 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Two no-tax firms have identical perpetual EBIT 30 and risk. Unlevered firm U is valued 240; levered L has debt 100 at 10% and equity 120, so V 220. Investor owns 10% of U. Assume identical corporate/personal lending rates and no transaction/tax frictions. Required: replicate U operating-income exposure using 10% of L equity and debt, calculate costs/income/surplus and describe model arbitrage direction. (10 marks)

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Marks	Credit	Working / case application
1	Initial U investment	10% x 240=24.
1	Initial income	10% x 30=3.
1	L equity cost	10% x 120=12.
1	L debt cost	10% x 100=10.
1	Replication capital	12+10=22, funded from sale proceeds 24.
1	Equity income	10% x(30-10)=2.
1	Debt income	10% x 10=1.
1	Total/surplus	Replicated income 3 with uninvested surplus 2; do not include an unsupplied return on surplus.
1	Direction	Sell relatively overvalued U; buy L equity/debt under model, tending to narrow discrepancy.
1	Risk/implementation	Same aggregate business exposure requires both claims in proportion; real lending/borrowing, taxes, fees and risk can block arbitrage. This is not a trade instruction.

Official concept source, PDF page 23

FM-C05-D012 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. No-tax equal-risk firms have EBIT 30; U market value 200. L debt 100 at 10%, equity 150. Investor owns 10% of L equity. Assume investor can borrow 10 at 10% on identical terms, no frictions. Required: sell L stake, purchase 10% of U using own capital plus borrowing, compare income/invested own funds and explain equal-risk model conditions. (10 marks)

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Marks	Credit	Working / case application
1	L stake proceeds	10% x 150=15.
1	Existing equity income	10% x(30-10)=2.
1	U stake cost	10% x 200=20.
1	Personal debt	Borrow 10, matching 10% of corporate debt.
1	Own capital needed	20-10=10.
1	Personal interest	10% x 10=1.
1	Operating stake income	10% x 30=3.
1	Net replication	3-1=2, same income for own 10 instead of 15; surplus 5 from sale.
1	Direction	Sell overvalued levered equity and buy U with matching personal leverage; total values 250 versus 200 signal discrepancy under assumptions.
1	Limits	Same business exposure and personal debt terms essential; unequal recourse/rates or transaction/tax costs invalidate a riskless implementation claim.

Official concept source, PDF page 20

FM-C05-D013 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Base unlevered value 200. Cases debt 0/50/100/150 have supplied PV tax shields 0/15/30/45 and expected PV distress/agency costs 0/3/12/40. Required: calculate net firm values and choose only among these cases; distinguish expected costs from actual bankruptcy. (5 marks)

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Marks	Credit	Working / case application
1	Values first two	Debt 0: 200; debt 50: 200+15-3=212.
1	Values last two	Debt 100: 218; debt 150: 205.
1	Choice	Debt 100 maximises the supplied discrete values.
1	Trade-off	Extra shield 15 from 100 to 150 is outweighed by extra expected cost 28.
1	Limits	These are supplied PV estimates, not observed insolvency or global continuous optimum; indirect costs can occur without bankruptcy.

Official concept source, PDF page 28

FM-C05-D014 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A highly levered firm delays payments, loses staff and faces suppliers demanding cash. Shareholders propose a much riskier project benefiting themselves if it succeeds while creditors bear losses. Required: classify direct/indirect distress and agency effects without asserting legal insolvency. (5 marks)

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Marks	Credit	Working / case application
1	Payment strain	Missed/delayed obligations are distress evidence; do not infer a legal insolvency ruling.
1	Indirect cost	Staff departures and worse supplier terms can destroy operating value before formal proceedings.
1	Direct cost	Legal/administrative insolvency costs are a separate possible category, not already established by supplied facts.
1	Agency conflict	Risk shifting can transfer exposure from shareholders to creditors, creating conflict/monitoring costs.
1	Funding assessment	Account for these costs, covenants and viable cash plans rather than compare only tax shields.

Official concept source, PDF page 28

FM-C05-D015 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A firm needs 40 lakh for a project; available internal cash 12, feasible debt capacity 20. Management dislikes information-sensitive equity issuance. Required: illustrate pecking-order allocation, residual need and limits, contrasting with a fixed optimal debt ratio. (5 marks)

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Marks	Credit	Working / case application
1	Internal first	Use 12 internal under supplied hierarchy, subject to maintaining necessary liquidity.
1	Debt second	At most 20 feasible debt on case facts.
1	Residual	40-12-20=8 needs another source, such as feasible external equity, or resizing/timing the project.
1	Rationale	Information asymmetry and issue/transaction frictions can drive preference hierarchy; internal funds still have an opportunity cost.
1	Contrast	Pecking order is not a universal fixed target ratio or permission to overborrow beyond capacity; trade-off balances marginal benefits/costs.

Official concept source, PDF page 29

FM-C05-D016 · 5 marks

Founder owns 60 of 100 ordinary voting shares. A new issue adds 50 shares, none bought by founder. Alternative debt avoids immediate share dilution but includes covenants and an uncertain refinancing date. Required: calculate voting dilution and compare control/flexibility/risk without claiming debt leaves all control unchanged. (5 marks)

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Marks	Credit	Working / case application
1	Before vote	60/100=60%.
1	After vote	60/150=40%.
1	Control dilution	20 percentage-point ownership drop; actual voting/governance rights must be examined.
1	Debt rights	No new ordinary votes alone does not mean no control impact: covenants/creditor remedies may constrain operations.
1	Flexibility/risk	Refinancing, repayment and prepayment terms matter; equity dilution versus fixed commitments is a trade-off, not coupon-only selection.

Official concept source, PDF page 32

FM-C05-D017 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Plans finance the same investment with the same operating EBIT. A has 10 lakh ordinary shares and no interest. B has 6 lakh shares and annual interest 4 lakh. Tax 30%; no preference dividend; all EBTs in requested scenarios are nonnegative. Required: EPS at EBIT 8/12/20 lakh, indifference EBIT and EPS, and choice limits. (10 marks)

Rs lakh unless otherwise stated; case-supplied financing terms.

Plan	Shares, lakh	Interest, lakh
A	10	0
B	6	4

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Marks	Credit	Working / case application
1	EPS definition	EPS=(EBIT-interest)*.7/shares in lakh gives Rs per share.
1	A EPSs	At 8/12/20: .56/.84/1.40.
1	B low	At 8: 4 x.7/6=.466667.
1	B middle	At 12: 8 x.7/6=.933333.
1	B high	At 20: 16 x.7/6=1.866667.
1	Equality setup	X.7/10=(X-4).7/6.
1	Indifference	6 X=10 X-40, X=10 lakh.
1	Equal EPS	10 x.7/10=.70.
1	Ranking	A higher below 10; B higher above 10 under these assumptions.
1	Limits	EPS alone omits risk, MPS, repayment cash and feasible terms; indifference is not financial break-even or project acceptance.

Official concept source, PDF page 37

FM-C05-D018 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Same operations: debt plan has 8 lakh shares, interest 3 lakh; preference plan has 8 lakh shares, no interest, preference dividend 2.4 lakh. Tax 25%, dividend nondeductible, EBIT 12 lakh. Required: compute PAT, ordinary earnings/EPS, financial break-even for each and whether a unique EPS indifference exists under the same tax regime. (10 marks)

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Marks	Credit	Working / case application
1	Debt PAT	(12-3)x.75=6.75.
1	Debt EPS	6.75/8=.84375.
1	Preference PAT	12 x.75=9.
1	Preference ordinary	9-2.4=6.6.
1	Preference EPS	6.6/8=.825.
1	Debt BEP	EBIT=3.
1	Preference BEP	2.4/.75=3.2.
1	Cost comparison	Debt after-tax charge 2.25 versus preference 2.4; difference.15 lakh.
1	No unique crossover	Same share counts/slopes, debt EPS exceeds preference by.15/8=.01875 wherever the specified tax equations apply.
1	Scope	Not a universal better-financing verdict: rights/risk/cash/deduction availability differ. Negative-EBT tax handling outside the given regime is not assumed.

Official concept source, PDF page 36

FM-C05-D019 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A plan has interest 4 lakh, preference dividend 1.5 lakh, tax 25%, 10 lakh ordinary shares. Required: financial BEP, EPS at EBIT 6 and 10, and distinguish BEP from cash solvency. EBT positive at these points. (5 marks)

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Marks	Credit	Working / case application
1	BEP	4+1.5/.75=6 lakh.
1	At 6	Ordinary earnings=(6-4)x.75-1.5=0, EPS 0.
1	At 10	(10-4)x.75-1.5=3, EPS.30.
1	Why gross up	Preference paid after tax; interest is before tax under case deduction assumptions.
1	Not cash proof	Zero/positive EPS does not cover principal, working capital or all dated payments; financial BEP is not a solvency certificate.

Official concept source, PDF page 36

FM-C05-D020 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Both plans have 8 lakh shares and tax 25%. Plan A interest 2, no preference. Plan B interest 0, preference 1.5. A second B scenario increases preference to 1.6. Required: compare after-tax fixed charges and EPS-indifference outcomes within the stated linear positive-EBT regime. (5 marks)

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Marks	Credit	Working / case application
1	A fixed charge	2 x.75=1.5 after tax.
1	First B	Preference 1.5 equals A charge, same slopes/intercepts.
1	First outcome	EPS equal at every admissible EBIT, not one isolated crossing.
1	Second B	1.6 exceeds A 1.5; A EPS greater by.1/8=.0125 throughout the specified regime.
1	Second outcome	No unique finite crossover for unequal parallel lines; different tax regimes/constraints require separate analysis.

Official concept source, PDF page 37

FM-C05-D021 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Tax 30%. Plan A 10 lakh shares/no interest; Plan B 6 lakh shares/interest 4 lakh. EBIT 12 lakh. Supplied P/E multiples A 12 times, B 9 times reflect different perceived risk. Required: compute EPS/MPS, EPS-indifference and MPS-indifference EBIT under constant multiples; compare rankings and limits. (10 marks)

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Marks	Credit	Working / case application
1	A EPS	.7 x 12/10=.84.
1	B EPS	.7 x 8/6=.933333.
1	A MPS	.84 x 12=Rs 10.08.
1	B MPS	.933333 x 9=Rs 8.40.
1	EPS rank	B higher EPS but A higher supplied MPS.
1	EPS crossing	X/10=(X-4)/6 gives X 10.
1	MPS equality	12 x.7 X/10=9 x.7(X-4)/6.
1	MPS crossing	.84 X=1.05 X-4.2 gives X 20 lakh.
1	Equal MPS	At 20, each Rs 16.80.
1	Boundary	P/E ratios are supplied conditional forecasts, not guaranteed market quotes; EPS max need not maximiseshareholder wealth.

Official concept source, PDF page 34

FM-C05-D022 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A pays out all ordinary earnings. At EBIT 12, interest 4, tax 30%, 6 lakh shares and Ke 14%, calculate ordinary earnings, EPS and model MPS using EPS/Ke. Explain why applying earnings capitalisation blindly to a retaining/growing firm is unsafe. (5 marks)

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Marks	Credit	Working / case application
1	Ordinary earnings	(12-4)x.7=5.6 lakh.
1	EPS	5.6/6=.933333.
1	MPS	EPS/.14=Rs 6.66667 under full constant-perpetuity payout.
1	Payout scope	Dividend cash flow equals earnings only under supplied full payout/no-growth conditions.
1	Value limit	Growth/retention/investment and risk can require a different model; earnings/Ke is not universally a fair trading price.

Official concept source, PDF page 34

FM-C05-D023 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Tax 30%, same EBIT across plans. A shares 10 lakh/interest 0; B shares 8 lakh/interest 2; C shares 6 lakh/interest 5. No preference. Required: all pairwise EPS-indifference EBITs, EPS at EBIT 8/12/18, identify the highest-EPS envelope and decision limits. All requested scenario EBTs positive. (10 marks)

Rs lakh unless otherwise stated; case-supplied financing terms.

Plan	Shares, lakh	Interest, lakh
A	10	0
B	8	2
C	6	5

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Marks	Credit	Working / case application
1	A-B crossing	X/10=(X-2)/8 gives X 10.
1	B-C crossing	(X-2)/8=(X-5)/6 gives X 14.
1	A-C crossing	X/10=(X-5)/6 gives X 12.5.
1	At 8	A.56, B.525, C.35; A highest.
1	At 12	A.84, B.875, C.816667; B highest.
1	At 18	A 1.26, B 1.40, C 1.516667; C highest.
1	Lower envelope range	A highest below 10, B above 10 through 14.
1	Upper range	C highest above 14; ties at envelope boundaries.
1	Pairwise caution	A-C crossover 12.5 does not determine the optimum envelope because B is above both there.
1	Limits	Highest scenario EPS remains subject to risk/MPS/payment capacity and financing feasibility, not a final recommendation.

Official concept source, PDF page 37

FM-C05-D024 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Tax 30%, EBIT scenarios 8/12/20 lakh with probabilities.3/.4/.3. A 10 lakh shares/no interest; B 6 lakh shares/interest 4. EBT positive and no other charges. Required: expected EBIT and each expected EPS, compare scenario losses relative to the other plan, and identify what remains unknown. (10 marks)

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Marks	Credit	Working / case application
1	Probabilities	Sum 1; mutually exclusive supplied scenarios.
1	Expected EBIT	8 x.3+12 x.4+20 x.3=13.2.
1	A scenario EPS	.56, .84, 1.4.
1	B scenario EPS	.466667, .933333, 1.866667.
1	A expectation	.7 x 13.2/10=.924.
1	B expectation	.7 x(13.2-4)/6=1.073333.
1	Low outcome	At 8 B is lower by.093333 per share.
1	Chance below crossover	30% of supplied outcomes have EBIT below 10, favouring A on EPS.
1	Expectations not certainty	Higher expected EPS does not ensure higher EPS in every outcome or establish sufficient debt service.
1	Missing decision evidence	Principal/cash timing, distress costs, risk-adjusted market valuation and terms remain needed. Linear expectation works only within stipulated tax regime.

Official concept source, PDF page 37

FM-C05-D025 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Debt-plan interest 6 lakh, 8 lakh shares, no preference. At EBIT 4, there is no immediate tax refund/shield on negative EBT; positive EBT is taxed 25%. Required: EPS at EBIT 4 and 10, and contrast the false automatic loss tax benefit. (5 marks)

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Marks	Credit	Working / case application
1	Negative EBT	4-6=-2 lakh.
1	No immediate refund	Tax 0 under specified loss rule; ordinary earnings-2.
1	Loss EPS	-2/8=-.25; not -.1875 from automatic.75 multiplier.
1	Positive scenario	EBT 10-6=4, tax 1, earnings 3, EPS.375.
1	Limit	Piecewise tax capacity makes a global linear EPS formula unsafe; any later loss relief has separate timing/availability, not assumed here.

Official concept source, PDF page 36

FM-C05-D026 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Same new funds 20 lakh. Equity plan issues at Rs 40 per share without fees; debt plan borrows 20 at 10%. Existing ordinary shares 5 lakh, no existing interest, EBIT 8, tax 25%. Required: new/total shares and EPS under each; no issue legality implied. (5 marks)

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Marks	Credit	Working / case application
1	New shares	20 lakh/Rs 40=.5 lakh shares.
1	Equity total	5+.5=5.5 lakh.
1	Equity EPS	8 x.75/5.5=Rs 1.090909.
1	Debt charge	20 x 10%=2 lakh interest; existing shares remain 5.
1	Debt EPS	(8-2)x.75/5=.90; dilution alone does not guarantee debt EPS higher.

Official concept source, PDF page 34

FM-C05-D027 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. A forecast has EBIT 12, interest 3, tax 25%, depreciation 2 included in EBIT, principal 8 due and additional net working-capital/capex outflow 4. No other cash adjustments. Required: reconcile PAT to cash before principal/investment and the shortfall, explaining positive earnings versus funding need. (5 marks)

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Marks	Credit	Working / case application
1	PAT	(12-3)x.75=6.75.
1	Non cash add-back	6.75+2=8.75 cash proxy before principal and stated investments.
1	Required cash	8+4=12.
1	Gap	8.75-12=-3.25 lakh.
1	Meaning	Positive PAT does not fund all dated obligations; cash dates and actual conversion matter, not merely EPS or EBIT above interest.

Official concept source, PDF page 32

FM-C05-D028 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Debt principal 100 remains for only 3 years, interest 8 annually, tax 30% fully usable. Discount each annual tax shield at 8%; no tax relief on principal. Required: finite PV shield, compare permanent tD and state valuation limitation. (5 marks)

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Marks	Credit	Working / case application
1	Annual shield	8 x.3=2.4 each year.
1	PV equation	2.4/1.08+2.4/1.08^2+2.4/1.08^3.
1	Value	About 6.18503 lakh.
1	Permanent comparison	tD=30 would assume perpetual continuing debt/shields with appropriate discounting, not this finite schedule.
1	Scope	Terminal debt repayment itself is not a tax shield; relevant discount risk/tax capacity and refinancing are case supplied, not universal.

Official concept source, PDF page 18

FM-C05-D029 · 5 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Official chapter page 18 prints a tax-version equity-cost expression inconsistent with the later page 27 formula and illustration. Use this specified case: Ku 14%, Kd 8%, t 30%, D 100, S 130. Required: calculate the internally reconciled tax-model Ke, compare the page 18 printed expression and explain how to handle the conflict. (5 marks)

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Marks	Credit	Working / case application
1	Reconciled formula	Ku+(Ku-Kd)(1-t)D/S.
1	Reconciled result	14%+6% x.7 x 100/130=17.230769%.
1	Printed-line result	14%+6% x 100/(100+130)=16.608696% from the differing page 18 expression.
1	Independent reconciliation	Case equity earnings 22.4/S 130=17.230769%; weighted after-tax WACC 12.173913% matches after-tax operating 28/V 230.
1	Preserve uncertainty	Do not silently blend or call page 18 settled. Later page 27 supports specified consistent model; official answer matching/erratum status for the earlier line remains unverified.

Official concept source, PDF page 27

FM-C05-D030 · 10 marks

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. Banyan Ltd compares financing for the same operations. A: 10 lakh ordinary shares, no interest/preference, supplied P/E 12. B: 6 lakh shares, interest 4 lakh, no preference, P/E 9. C: 8 lakh shares, interest 0, preference 3 lakh, P/E 11. Tax 25%; preference nondeductible; EBIT scenarios 8/12/20 lakh, no other items. Required: at EBIT 12 compute PAT, ordinary EPS/MPS for all plans; financial BEPs; A-B EPS/MPS crossovers; and a conditional decision. (10 marks)

Rs lakh unless otherwise stated; case-supplied financing terms.

Plan	Shares, lakh	Interest	Preference dividend	P/E
A	10	0	0	12
B	6	4	0	9
C	8	0	3	11

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Marks	Credit	Working / case application
1	PAT s at 12	A 9, B 6, C 9 lakh.
1	Ordinary earnings	A 9, B 6, C 6 after C preference 3.
1	EPSs	A.9, B 1, C.75.
1	MPS s	A 10.8, B 9, C 8.25; A highest supplied value though B highest EPS.
1	BEPs	A 0, B 4, C 3/.75=4 lakh.
1	A-B EPS equality	X.75/10=(X-4).75/6, X 10 lakh; EPS.75.
1	A-B MPS equality	12 x.75 X/10=9 x.75(X-4)/6, X 20 lakh.
1	Equal MPS	At 20 both Rs 18.
1	Conditional ranking	A-B: EPS favours A below 10/B above 10, MPS favours A below 20/B above 20 under constant supplied multiples; C must be compared separately.
1	Limits	Choose only on stated model/evidence; risk, payment timing, covenants, actual pricing and feasible issue terms remain relevant. No action/spending authorised by this exercise.

Official concept source, PDF page 37