Practice test 14 for Financial Management and Strategic Management covering Cost of Capital, Dividend Decisions, Strategic Choices, Strategy Implementation and Evaluation.
16 questions across 4 chapters, 30 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for CA Intermediate Paper 6: Financial Management and Strategic Management (relevant for January 2027 attempt).
Questions
16
Marks
30
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for CA Intermediate Paper 6: Financial Management and Strategic Management (relevant for January 2027 attempt)
Content as of
2026-11-04
Chapters covered
Cost of Capital (5 Q)
Dividend Decisions (3 Q)
Strategic Choices (5 Q)
Strategy Implementation and Evaluation (3 Q)
Questions, answers and explanations
Question 1 · 2 marks · Cost of Capital · medium
Scenario. Royal Hospitality Ltd has 12% irredeemable debentures of face value ₹100 each with book value ₹8,00,000 and market price ₹96 per debenture. It has 10% preference shares of face value ₹100 each with book value ₹4,00,000 and market price ₹105 per share. Equity shares of face value ₹10 each have book value ₹12,00,000 and market price ₹42 per share. The next expected equity dividend is ₹4.20 per share and dividend growth is 6% p.a. Corporate tax is 30%. The company is examining cost of capital using book value and market value weights.
What is the post-tax cost of irredeemable debentures for Royal Hospitality Ltd based on current market price?
Explanation. The post-tax cost of irredeemable debentures is annual interest after tax divided by net proceeds or current market price. Interest is ₹12 per debenture and net proceeds are ₹96. Hence Kd = 12(1 - 0.30)/96 = 8.75%. Option a ignores the market price and uses face value. Option c ignores tax. Option d is an intermediate figure and not the post-tax market-price based cost.
Where it goes wrong. Students may use face value ₹100 instead of market price ₹96, or may forget the tax shield.
Authority. Chapter 4: Cost of Capital - Cost of Long-Term Debt
Question 2 · 2 marks · Cost of Capital · medium
What is the cost of equity of Royal Hospitality Ltd using the dividend growth model?
Explanation. Using the Gordon growth model, Ke = D1/P0 + g. D1 is ₹4.20, P0 is ₹42 and g is 6%. Thus Ke = 4.20/42 + 0.06 = 16.00%. Option b is the dividend yield only. Option c and option d are not supported by the data.
Where it goes wrong. Students may omit growth or may divide by face value ₹10 instead of market price ₹42.
Authority. Chapter 4: Cost of Capital - Cost of Equity Share Capital
Question 3 · 2 marks · Cost of Capital · hard
What is the approximate weighted average cost of capital using market value weights?
Explanation. Market values are debentures 8,000 × 96 = ₹7,68,000; preference shares 4,000 × 105 = ₹4,20,000; equity shares 1,20,000 × 42 = ₹50,40,000; total ₹62,28,000. Costs are Kd 8.75%, Kp 10/105 = 9.5238% and Ke 16%. Weighted average is approximately 14.67%. Other options arise from incorrect weights or omitted tax adjustment.
Where it goes wrong. Students may use book value weights instead of market value weights or may use preference dividend divided by face value.
Authority. Chapter 4: Cost of Capital - Weighted Average Cost of Capital
Question 4 · 2 marks · Dividend Decisions · medium
Scenario. Beta Ltd has earnings per share of ₹10. Its cost of equity is 12%. The company is evaluating Gordon growth model outcomes under different internal rates of return and retention ratios. In each case the payout ratio is 40%, except where the question states otherwise. The relationship g = b*r is to be applied.
If Beta Ltd has internal rate of return r = 15%, cost of equity Ke = 12%, retention ratio b = 0.60 and EPS = ₹10, what is the Gordon model market price per share?
Explanation. Under Gordon model P0 = E1(1 - b)/(Ke - br). Here E1 = ₹10, payout = 0.40, D1 = ₹4, br = 0.60 × 0.15 = 0.09. Therefore P0 = 4/(0.12 - 0.09) = ₹133.33. Option a ignores growth and retention. Option b uses an incorrect denominator. Option c is not supported.
Where it goes wrong. Students may use D0 or may compute br incorrectly as b + r or r only.
Authority. Chapter 8: Dividend Decisions - Gordon's Model
Question 5 · 2 marks · Dividend Decisions · medium
If Beta Ltd has r = 8%, Ke = 12%, retention ratio b = 0.60 and EPS = ₹10, what is the Gordon model market price per share?
Explanation. P0 = E1(1 - b)/(Ke - br). D1 = 10 × 0.40 = ₹4; br = 0.60 × 0.08 = 0.048. Hence P0 = 4/(0.12 - 0.048) = ₹55.56. Option b uses an incorrect growth term. Option c and option d do not follow from the stated data.
Where it goes wrong. Students may wrongly use r = Ke or may ignore the retention ratio while computing growth.
Authority. Chapter 8: Dividend Decisions - Gordon's Model
Question 6 · 2 marks · Dividend Decisions · medium
Under Gordon model, which statement is correct when internal rate of return r equals cost of equity Ke?
The optimum payout ratio is zero.
Dividend policy does not affect market price. (correct answer)
The optimum payout ratio is zero only when r is less than Ke.
The company should adopt 100 percent payout when r exceeds Ke.
Answer: B — Dividend policy does not affect market price.
Working. Conceptual comparison: r greater than Ke favours zero payout; r less than Ke favours full payout; r equal to Ke makes dividend policy irrelevant to price.
Explanation. When r = Ke, the Gordon model shows that market price is not affected by retention or payout because the return available internally equals the shareholders required return. Option a is true for r greater than Ke. Option c misstates the r less than Ke case. Option d is not the Gordon conclusion.
Where it goes wrong. Students may confuse the r greater than Ke case with the r equal to Ke case.
Authority. Chapter 8: Dividend Decisions - Gordon's Model
Question 7 · 2 marks · Cost of Capital · medium
Scenario. Alpha Ltd has cost of equity of 15%. An investor faces personal tax at 20% on dividends and incurs brokerage of 2% on reinvestment. The finance team is computing cost of retained earnings using the adjustment for personal taxes and brokerage. The finance manager also wants to know the directional effect of an increase in personal tax rate on cost of retained earnings, other things remaining equal.
What is the cost of retained earnings if Ke is 15%, personal tax is 20% and brokerage is 2%?
Explanation. Kr = Ke(1 - Tp)(1 - B). Substituting Ke = 15%, Tp = 20% and B = 2% gives 15 × 0.80 × 0.98 = 11.76%. Option a ignores brokerage. Option b ignores both personal tax and brokerage. Option d is not supported.
Where it goes wrong. Students may deduct tax and brokerage additively instead of multiplying the adjustment factors.
Authority. Chapter 4: Cost of Capital - Cost of Retained Earnings
Question 8 · 1 marks · Cost of Capital · medium
If personal tax rate on dividends increases, what happens to cost of retained earnings under the adjustment formula, other things remaining equal?
It increases.
It remains unchanged.
It becomes equal to Ke.
It decreases. (correct answer)
Answer: D — It decreases.
Working. Directional check: higher Tp reduces the factor (1 - Tp), so Kr decreases.
Explanation. The formula Kr = Ke(1 - Tp)(1 - B) shows that a higher personal tax rate reduces the after-tax opportunity cost of retained earnings. Therefore Kr decreases. Option a reverses the direction. Option b ignores the adjustment. Option c is not a necessary result.
Where it goes wrong. Students may confuse the tax shield on debt with the personal tax adjustment for retained earnings.
Authority. Chapter 4: Cost of Capital - Cost of Retained Earnings
Question 9 · 2 marks · Strategic Choices · medium
Scenario. Pinnacle Enterprises is considering cooperation with a technology partner for a new platform. One option is an equity joint venture with shared ownership and a separate entity. Another option is a contractual strategic alliance without a separate equity entity. The board is concerned about partner opportunism and the need for governance safeguards while preserving strategic flexibility.
Which feature distinguishes an equity joint venture from a contractual strategic alliance?
An equity joint venture creates a separate entity with shared ownership and control. (correct answer)
A contractual alliance always transfers ownership of contributed assets.
An equity joint venture avoids sharing of profits.
A contractual alliance requires creation of a new legal entity.
Answer: A — An equity joint venture creates a separate entity with shared ownership and control.
Working. Conceptual distinction: equity joint venture equals separate entity plus shared equity; contractual alliance equals contract-based cooperation without separate equity entity.
Explanation. An equity joint venture typically involves a separate entity and shared ownership and control. A contractual alliance relies on a contract and does not necessarily create a separate equity entity. Option b is incorrect because contractual alliances do not always transfer ownership. Option c is incorrect because equity joint ventures share profits. Option d reverses the distinction.
Where it goes wrong. Students may treat all alliances as joint ventures or assume every alliance creates a separate company.
Which safeguard is most appropriate for Pinnacle Enterprises to manage the risk of partner opportunism in a strategic alliance?
Avoid written governance to preserve mutual trust.
Use staged resource commitments and explicit governance safeguards. (correct answer)
Rely only on the partner reputation without contractual terms.
Transfer all core technology at inception.
Answer: B — Use staged resource commitments and explicit governance safeguards.
Working. Conceptual evaluation: staged commitments and explicit governance reduce exposure while preserving flexibility.
Explanation. Partner opportunism is reduced through governance mechanisms such as staged commitments, clear decision rights, confidentiality and exit clauses. Option a increases risk. Option c ignores contractual protection. Option d increases exposure of core technology.
Where it goes wrong. Students may focus only on trust and ignore contractual and staged governance safeguards.
Question 11 · 2 marks · Strategic Choices · medium
Which statement correctly compares an equity joint venture with a contractual strategic alliance?
An equity joint venture is always shorter in duration than a contractual alliance.
A contractual alliance necessarily creates a separate legal entity.
An equity joint venture involves shared equity ownership while a contractual alliance relies on contract without a separate equity entity. (correct answer)
Both arrangements have identical risk allocation and governance.
Answer: C — An equity joint venture involves shared equity ownership while a contractual alliance relies on contract without a separate equity entity.
Working. Conceptual comparison: shared equity and separate entity versus contract-based cooperation.
Explanation. The equity joint venture involves shared equity ownership and a separate entity in most cases. A contractual alliance is governed by contract and does not necessarily involve shared equity. Option a is not a defining feature. Option b is incorrect. Option d ignores differences in risk and governance.
Where it goes wrong. Students may assume the two forms have the same governance and risk profile.
Question 12 · 2 marks · Strategy Implementation and Evaluation · medium
Scenario. Pinnacle Enterprises has several related businesses with distinct competitors. The board is considering a strategic business unit structure with delegated unit-level strategy and profit accountability. It is also concerned about inter-divisional friction over transfer prices and resource allocation between units.
In an SBU structure, what is the most appropriate accountability arrangement for an SBU manager?
The SBU manager has no profit accountability.
The corporate office delegates all strategic planning to functional departments.
SBU autonomy removes the need for corporate strategic control.
The SBU manager is accountable for unit strategy and profit within corporate direction. (correct answer)
Answer: D — The SBU manager is accountable for unit strategy and profit within corporate direction.
Working. Conceptual: SBU manager handles unit strategy and profit performance; corporate office handles overall corporate strategy.
Explanation. An SBU structure delegates day-to-day operations and unit strategy to SBU managers while the corporate office retains overall direction and strategic control. Option a contradicts profit-centre logic. Option b misplaces strategic planning. Option c ignores corporate oversight.
Where it goes wrong. Students may overstate SBU independence and ignore corporate strategic control.
Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure
Question 13 · 2 marks · Strategy Implementation and Evaluation · hard
Which mechanism is most appropriate to reduce inter-divisional friction in an SBU structure?
Transparent transfer pricing and corporate arbitration for resource conflicts. (correct answer)
Abolish all inter-divisional transactions.
Centralise all operating decisions at the corporate office.
Allow each SBU to set group-wide transfer prices unilaterally.
Answer: A — Transparent transfer pricing and corporate arbitration for resource conflicts.
Working. Conceptual: transparent transfer prices plus corporate arbitration balance autonomy and coordination.
Explanation. Inter-divisional friction in SBU structures is reduced through clear transfer pricing rules, resource allocation norms and corporate arbitration. Option b is impractical. Option c undermines SBU autonomy. Option d creates conflict.
Where it goes wrong. Students may propose centralisation for every conflict, ignoring SBU autonomy.
Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure
Question 14 · 2 marks · Strategy Implementation and Evaluation · medium
Which situation most appropriately supports adoption of an SBU structure?
A single-product firm operating in one local market.
A multi-business firm can group related businesses into distinct units with their own competitors. (correct answer)
A firm with no need for strategic planning.
A firm that avoids delegation of authority.
Answer: B — A multi-business firm can group related businesses into distinct units with their own competitors.
Working. Conceptual: SBU structure groups related businesses and delegates unit-level strategic planning.
Explanation. SBU structure is relevant for multi-product or multi-business firms where related businesses can be grouped into distinct strategic units with identifiable competitors. Option a is too simple. Option c is inconsistent with SBU planning. Option d contradicts delegation.
Where it goes wrong. Students may think SBU structure is for every small single-product firm.
Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Structure
Question 15 · 2 marks · Strategic Choices · medium
Scenario. Pinnacle Enterprises has a non-core division that is viable as a standalone business but has weak strategic fit with the group. Another old plant has no going-concern buyer and its realizable scrap value exceeds its value in continued use. The board is distinguishing between divestment and liquidation decisions.
For the non-core division that is viable as a standalone business but has weak strategic fit, which exit route is most appropriate?
Liquidate immediately because any exit destroys value.
Merge all non-core units into the core without evaluation.
Sell the division as a going concern when it has standalone viability but weak strategic fit. (correct answer)
Continue indefinitely regardless of losses.
Answer: C — Sell the division as a going concern when it has standalone viability but weak strategic fit.
Working. Conceptual: going-concern sale preserves value when the unit is viable but non-core.
Explanation. Divestment through sale as a going concern is appropriate where the unit has standalone viability but weak strategic fit. Option a ignores going-concern value. Option b is not an exit strategy. Option d ignores strategic fit and financial discipline.
Where it goes wrong. Students may equate divestment with liquidation and assume immediate scrapping.
Question 16 · 1 marks · Strategic Choices · medium
When is liquidation most appropriate for the old plant?
Divestment always yields higher value than liquidation.
Liquidation preserves brand and employee continuity.
Divestment is chosen when the plant has only scrap value.
Liquidation is appropriate when a going-concern sale is not viable and realizable scrap value exceeds continued use value. (correct answer)
Answer: D — Liquidation is appropriate when a going-concern sale is not viable and realizable scrap value exceeds continued use value.
Working. Conceptual comparison: liquidation is selected when going-concern sale is not viable and scrap realizable value exceeds value in continued use.
Explanation. Liquidation is appropriate where no viable going-concern sale exists and scrapping or disposal realizes more value than continued use. Option a overgeneralises. Option b is a benefit associated with going-concern sale, not liquidation. Option c confuses divestment with liquidation.
Where it goes wrong. Students may think liquidation is always inferior to divestment without comparing realizable values.
Chapter 4: Cost of Capital - Cost of Long-Term Debt · Chapter 4: Cost of Capital - Cost of Equity Share Capital · Chapter 4: Cost of Capital - Weighted Average Cost of Capital · Chapter 8: Dividend Decisions - Gordon's Model · Chapter 4: Cost of Capital - Cost of Retained Earnings · Chapter 4: Strategic Choices - Strategic Alliances · Chapter 5: Strategy Implementation and Evaluation - Organisation Structure · Chapter 4: Strategic Choices - Strategic Exits
Questions people ask
What does Test 14 cover?
Comprehensive exam-standard case scenarios and MCQs on Cost of Capital, Dividend Decisions, Strategic Choices, Strategy Implementation and Evaluation across Financial Management (Section A) and Strategic Management (Section B).
How is Test 14 scored?
16 questions across 6 case scenarios carrying 30 marks (14 questions at 2 marks each, and 2 questions at 1 mark each) in 60 minutes with no negative marking.
