Practice test 9 for Section A: Financial Management covering Management of Working Capital - Cash Budgeting, Dividend Decisions - Walter's Model, Management of Working Capital - Inventory Management.
8 questions across 3 chapters, 15 marks and 30 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
8
Marks
15
Time limit
30 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
Management of Working Capital - Cash Budgeting (3 Q)
Dividend Decisions - Walter's Model (3 Q)
Management of Working Capital - Inventory Management (2 Q)
Questions, answers and explanations
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?
₹11,20,000
₹13,20,000 (correct answer)
₹14,40,000
₹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?
₹13,00,000
₹12,10,000
₹14,10,000 (correct answer)
₹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?
₹30,000 (correct answer)
₹1,30,000
₹2,30,000
₹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?
₹80
₹88
₹92
₹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?
₹80
₹88 (correct answer)
₹96
₹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?
₹72
₹76
₹80 (correct answer)
₹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?
1,500 units (correct answer)
1,200 units
1,800 units
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?
800 units
900 units
1,100 units
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
Authorities cited in this paper
Chapter 9: Management of Working Capital - Cash Budgeting · Chapter 8: Dividend Decisions - Walter's Model · Chapter 9: Management of Working Capital - Inventory Management
Questions people ask
What does Test 9 cover?
Section A: Financial Management case scenarios and MCQs on Management of Working Capital - Cash Budgeting, Dividend Decisions - Walter's Model, Management of Working Capital - Inventory Management.
How is Test 9 scored?
8 questions across 3 case scenarios carrying 15 marks (7 questions at 2 marks each and 1 question at 1 mark) in 30 minutes with no negative marking.
