Test 9: answer key

Question 1 · 2 marks · Management of Working Capital - Cash Budgeting · medium

Scenario. Sagarika FMCG has opening cash on 1 April ₹1,00,000. Monthly sales are Jan ₹6,00,000; Feb ₹8,00,000; Mar ₹10,00,000; Apr ₹12,00,000; May ₹14,00,000; Jun ₹16,00,000. All sales are credit. Collections are 60% in the month following sale and 40% in the second month following sale. Purchases are 70% of the same month sales and are paid two months after purchase. Operating expenses are 15% of the same month sales and paid in the same month. Advance tax ₹2,00,000 is paid in June. Capital outlay ₹5,00,000 is paid in May. Ignore bad debts and other cash flows.

What are the cash collections from debtors in June?

1. ₹11,20,000
2. ₹13,20,000 (correct answer)
3. ₹14,40,000
4. ₹12,00,000

Answer: B — ₹13,20,000

Working. June collections = 0.60 x ₹14,00,000 + 0.40 x ₹12,00,000 = ₹8,40,000 + ₹4,80,000 = ₹13,20,000

Explanation. June collections include 60% of May sales and 40% of April sales. Option a is the May collection only. Option c wrongly applies 60% to both months. Option d ignores the two-month collection pattern.

Where it goes wrong. Using June sales instead of May and April sales in the collection lag.

Authority. Chapter 9: Management of Working Capital - Cash Budgeting

Question 2 · 2 marks · Management of Working Capital - Cash Budgeting · hard

What are the total cash payments in May?

1. ₹13,00,000
2. ₹12,10,000
3. ₹14,10,000 (correct answer)
4. ₹15,00,000

Answer: C — ₹14,10,000

Working. Purchases of March paid in May = 70% x ₹10,00,000 = ₹7,00,000. May operating expenses = 15% x ₹14,00,000 = ₹2,10,000. Capital outlay = ₹5,00,000. Total = ₹14,10,000

Explanation. May payments include purchases of March paid after two months, May operating expenses and May capital outlay. Option a omits capital outlay. Option b uses purchases of April instead of March. Option d adds an extra item not given.

Where it goes wrong. Paying current month purchases instead of purchases made two months earlier.

Authority. Chapter 9: Management of Working Capital - Cash Budgeting

Question 3 · 2 marks · Management of Working Capital - Cash Budgeting · hard

What is the closing cash balance on 30 June?

1. ₹30,000 (correct answer)
2. ₹1,30,000
3. ₹2,30,000
4. ₹80,000

Answer: A — ₹30,000

Working. April collections = 0.60 x ₹10,00,000 + 0.40 x ₹8,00,000 = ₹9,20,000. May collections = 0.60 x ₹12,00,000 + 0.40 x ₹10,00,000 = ₹11,20,000. June collections = ₹13,20,000. Total collections = ₹33,60,000. April payments = 70% x ₹8,00,000 + 15% x ₹12,00,000 = ₹7,40,000. May payments = ₹14,10,000. June payments = 70% x ₹12,00,000 + 15% x ₹16,00,000 + ₹2,00,000 = ₹12,80,000. Total payments = ₹34,30,000. Closing cash = ₹1,00,000 + ₹33,60,000 - ₹34,30,000 = ₹30,000

Explanation. The closing balance is opening cash plus April to June collections minus April to June payments. Option b omits advance tax. Option c adds capital outlay instead of deducting it. Option d uses only June cash flows.

Where it goes wrong. Omitting advance tax or capital outlay while aggregating quarterly payments.

Authority. Chapter 9: Management of Working Capital - Cash Budgeting

Question 4 · 2 marks · Dividend Decisions - Walter's Model · medium

Scenario. Velmurugan Ltd has earnings per share ₹12, cost of equity Ke 15% and return on investment r 18%. It follows Walter's model. The management is testing zero payout, 50% payout and 100 percent payout policies.

Under Walter's model, what is the market price per share at zero payout?

1. ₹80
2. ₹88
3. ₹92
4. ₹96 (correct answer)

Answer: D — ₹96

Working. P = (D + (r/Ke)(E - D)) / Ke = (0 + (0.18/0.15) x (12 - 0)) / 0.15 = (1.2 x 12) / 0.15 = ₹96

Explanation. Walter's formula with D equal to zero gives P equal to r times E divided by Ke squared. Option a is the 100 percent payout price. Option b is the 50% payout price. Option c is an arithmetical error.

Where it goes wrong. Using E minus D as zero or applying Ke twice incorrectly.

Authority. Chapter 8: Dividend Decisions - Walter's Model

Question 5 · 2 marks · Dividend Decisions - Walter's Model · medium

Under Walter's model, what is the market price per share at 50% payout?

1. ₹80
2. ₹88 (correct answer)
3. ₹96
4. ₹104

Answer: B — ₹88

Working. D = 50% x ₹12 = ₹6. P = (6 + (0.18/0.15) x (12 - 6)) / 0.15 = (6 + 1.2 x 6) / 0.15 = ₹88

Explanation. At 50% payout, D is ₹6. The formula gives ₹88. Option a is the 100 percent payout price. Option c is the zero payout price. Option d uses an incorrect retained earnings figure.

Where it goes wrong. Taking D as ₹5 or using E as ₹10 instead of ₹12.

Authority. Chapter 8: Dividend Decisions - Walter's Model

Question 6 · 2 marks · Dividend Decisions - Walter's Model · medium

Under Walter's model, what is the market price per share at 100 percent payout?

1. ₹72
2. ₹76
3. ₹80 (correct answer)
4. ₹88

Answer: C — ₹80

Working. D = ₹12. P = (12 + 0) / 0.15 = ₹80

Explanation. At 100 percent payout, D equals E, so the retention term is zero. The price is E divided by Ke. Option a applies an extra discount. Option b uses an incorrect Ke. Option d is the 50% payout price.

Where it goes wrong. Retaining part of earnings even when payout is 100 percent.

Authority. Chapter 8: Dividend Decisions - Walter's Model

Question 7 · 2 marks · Management of Working Capital - Inventory Management · medium

Scenario. Kalyani Valves has annual consumption of 36,000 units. Ordering cost is ₹250 per order and carrying cost is ₹8 per unit per annum. The firm works for 360 days and daily consumption is steady. Lead time is 10 days.

What is the economic order quantity?

1. 1,500 units (correct answer)
2. 1,200 units
3. 1,800 units
4. 1,000 units

Answer: A — 1,500 units

Working. EOQ = sqrt(2 x 36,000 x 250 / 8) = sqrt(2,250,000) = 1,500 units

Explanation. EOQ is the square root of 2 times annual consumption times ordering cost divided by carrying cost. Option b uses annual consumption as 24,000. Option c uses carrying cost as ₹6. Option d uses ordering cost as ₹200.

Where it goes wrong. Applying monthly consumption or monthly carrying cost in the EOQ formula.

Authority. Chapter 9: Management of Working Capital - Inventory Management

Question 8 · 1 marks · Management of Working Capital - Inventory Management · medium

Under steady daily consumption, what is the reorder level?

1. 800 units
2. 900 units
3. 1,100 units
4. 1,000 units (correct answer)

Answer: D — 1,000 units

Working. Daily consumption = 36,000 / 360 = 100 units. Reorder level = 100 x 10 = 1,000 units

Explanation. Reorder level is daily consumption multiplied by lead time. Option a uses 8 days. Option b uses 9 days. Option c uses 11 days.

Where it goes wrong. Using maximum consumption or maximum lead time when steady consumption is specified.

Authority. Chapter 9: Management of Working Capital - Inventory Management

Question 9 · 2 marks · Strategic Analysis: Internal Environment - Value Chain · medium

Scenario. FastTrack Logistics has integrated automated warehousing with its last-mile delivery fleet. Warehouse dispatch schedules, vehicle loading and route plans are coordinated to reduce waiting time and handling cost. The firm aims to compete through cost leadership.

The linkage between automated warehousing and the last-mile fleet most directly supports which generic strategy?

1. Differentiation
2. Cost leadership (correct answer)
3. Focus
4. Stuck in the middle

Answer: B — Cost leadership

Working. Conceptual: internal linkage reduces cost drivers such as handling and fleet idle time.

Explanation. Coordinated warehousing and fleet operations reduce waiting time and handling cost, which supports cost leadership. Differentiation is about unique features. Focus is about a narrow segment. Stuck in the middle is not a generic strategy.

Where it goes wrong. Treating any operational improvement as differentiation.

Authority. Chapter 3: Strategic Analysis: Internal Environment - Value Chain

Question 10 · 2 marks · Strategic Analysis: Internal Environment - Value Chain · medium

The coordination between warehouse dispatch and last-mile delivery is an example of:

1. A support activity linkage only
2. A primary activity linkage only
3. An internal linkage between operations and outbound logistics (correct answer)
4. An external linkage with suppliers

Answer: C — An internal linkage between operations and outbound logistics

Working. Conceptual: value chain linkages can be internal between primary activities.

Explanation. Warehousing relates to operations and delivery relates to outbound logistics. Their coordination is an internal linkage. Option a is incomplete. Option b is too broad. Option d involves outside suppliers, which are not described.

Where it goes wrong. Classifying all value chain activities as support activities.

Authority. Chapter 3: Strategic Analysis: Internal Environment - Value Chain

Question 11 · 2 marks · Strategic Analysis: Internal Environment - Value Chain · hard

Which action most appropriately strengthens the linkage for competitive advantage?

1. Sharing real-time dispatch data between warehouse and fleet (correct answer)
2. Increasing fleet size without warehouse automation
3. Outsourcing both activities separately
4. Reducing warehouse service levels

Answer: A — Sharing real-time dispatch data between warehouse and fleet

Working. Conceptual: linkage optimization requires information flow and coordination between activities.

Explanation. Real-time data sharing optimizes the linkage and reduces cost. Option b creates imbalance. Option c may break coordination. Option d harms service and does not strengthen linkage.

Where it goes wrong. Equating linkage with adding capacity rather than coordinating activities.

Authority. Chapter 3: Strategic Analysis: Internal Environment - Value Chain

Question 12 · 2 marks · Strategy Implementation and Evaluation - Organisation Culture · medium

Scenario. PrimeCare Hospitals has strong clinical departments but silos resist patient-centric service. The management wants to align clinical department norms, incentives and communication with a patient-centric culture.

Corporate culture becomes an ally to strategy execution when:

1. Culture is ignored during implementation
2. Culture conflicts with strategy
3. Culture is changed only after failure
4. Values and behavioural norms fit strategy needs (correct answer)

Answer: D — Values and behavioural norms fit strategy needs

Working. Conceptual: culture is an ally when it is compatible with strategy and performance targets.

Explanation. A strategy-supportive culture has values and norms that fit execution needs. Options a and b create obstacles. Option c is reactive and not the condition for culture as an ally.

Where it goes wrong. Assuming any strong culture is supportive regardless of strategy fit.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Culture

Question 13 · 2 marks · Strategy Implementation and Evaluation - Organisation Culture · medium

What is the first step in changing a problem culture?

1. Replace all employees
2. Diagnose which facets are strategy-supportive and which are not (correct answer)
3. Announce a new logo
4. Reduce training

Answer: B — Diagnose which facets are strategy-supportive and which are not

Working. Conceptual: diagnose culture-strategy fit first, then communicate and act.

Explanation. Culture change begins with diagnosis of supportive and non-supportive facets. Option a is excessive. Option c is cosmetic. Option d reduces capability.

Where it goes wrong. Starting with visible actions before diagnosing cultural misfit.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Culture

Question 14 · 2 marks · Strategy Implementation and Evaluation - Organisation Culture · hard

Clinical silos resist patient-centric service. Which action is most appropriate?

1. Strengthen silo boundaries
2. Issue circulars only
3. Align incentives, communication and role models to patient-centric norms (correct answer)
4. Outsource clinical services

Answer: C — Align incentives, communication and role models to patient-centric norms

Working. Conceptual: use multiple culture-changing actions to build strategy fit.

Explanation. Culture change requires coordinated actions such as incentives, communication and role modelling. Option a worsens silos. Option b is insufficient. Option d does not directly align culture.

Where it goes wrong. Believing a circular or slogan alone can change entrenched culture.

Authority. Chapter 5: Strategy Implementation and Evaluation - Organisation Culture

Question 15 · 2 marks · Strategic Analysis: Internal Environment - Strategic Drivers · medium

Scenario. A digital e-commerce business uses real-time customer data loops, dynamic pricing and rapid order fulfilment. It wants to evaluate its core processes and value chain activities.

In a digital e-commerce business, real-time customer data loops and dynamic pricing are examples of:

1. Core processes that convert inputs into customer value (correct answer)
2. Support activities only
3. Unrelated operational tasks
4. Financial control mechanisms

Answer: A — Core processes that convert inputs into customer value

Working. Conceptual: core processes include customer data, pricing and fulfilment routines that create value.

Explanation. These processes are central to how the digital business creates and delivers customer value. Option b is incomplete because they are not only support activities. Option c ignores their strategic role. Option d confuses them with financial controls.

Where it goes wrong. Treating digital processes as only IT support rather than core processes.

Authority. Chapter 3: Strategic Analysis: Internal Environment - Strategic Drivers

Question 16 · 1 marks · Strategic Analysis: Internal Environment - Value Chain · medium

Which of the following is a support activity in Porter's value chain for the digital business?

1. Real-time customer data loop
2. Dynamic pricing
3. Last-mile delivery
4. Technology development (correct answer)

Answer: D — Technology development

Working. Conceptual: support activities include firm infrastructure, human resource management, technology development and procurement.

Explanation. Technology development is a support activity. Real-time customer data, dynamic pricing and last-mile delivery are linked to primary activities. Option a supports marketing and sales but is not classified as a support activity in Porter's model. Option b is marketing and sales. Option c is outbound logistics.

Where it goes wrong. Classifying technology development as an operational primary activity.

Authority. Chapter 3: Strategic Analysis: Internal Environment - Value Chain