CA IntermediateFinancial & Strategic Management2025
CA Intermediate - Financial & Strategic Management (2025)
Download and solve CA Intermediate Financial & Strategic Management question paper for 2025. Free English medium easy difficulty paper with model answers and explanations on Plainscan.
Question Paper
Question 1
singleTVM ConceptThe concept of 'Time Value of Money' states that:
A.Money received in the future is worth more than money received today
B.Money received today is worth more than money received in the future
C.Money has the same value irrespective of when it is received
D.The value of money increases with inflation
Correct Answer: B(Money received today is worth more than money received in the future)
Explanation:The Time Value of Money (TVM) principle states that a rupee received today is worth more than a rupee received in the future. This is because today's money can be invested to earn returns, creating a preference for present cash flows. The two key concepts are: Future Value (FV) (compounding) and Present Value (PV) (discounting).
Question 2
singleNPVNet Present Value (NPV) of a project is positive. This means:
A.The project will earn more than the required rate of return and should be accepted
B.The project will earn less than the required rate of return
C.The project has zero IRR
D.The project has a payback period of zero years
Correct Answer: A(The project will earn more than the required rate of return and should be accepted)
Explanation:When NPV > 0, it means the present value of expected cash inflows exceeds the present value of cash outflows (including initial investment). The project is creating value above the minimum required rate of return (hurdle rate or cost of capital). Such projects should be accepted as they increase shareholder wealth.
Question 3
singleWACCThe Weighted Average Cost of Capital (WACC) is used as the discount rate in capital budgeting decisions because:
A.It is prescribed by SEBI
B.It represents the minimum return the firm must earn to satisfy all its capital providers
C.It is always lower than the cost of equity
D.It equals the risk-free rate of return
Correct Answer: B(It represents the minimum return the firm must earn to satisfy all its capital providers)
Explanation:WACC is the blended cost of all sources of capital (equity, debt, preference) weighted by their proportions in the capital structure. It represents the minimum rate of return the firm must earn on its investments to satisfy its investors (both debt and equity holders). Projects earning above WACC create value; those below WACC destroy value.
Question 4
singleModigliani-Miller TheoryAccording to the Modigliani-Miller (MM) theory (without taxes), the value of a firm is determined by:
A.The proportion of debt in its capital structure
B.Its dividend policy
C.Its operating income (EBIT) and the capitalization rate applicable to its risk class
D.The total amount of equity capital
Correct Answer: C(Its operating income (EBIT) and the capitalization rate applicable to its risk class)
Explanation:The Modigliani-Miller Theorem (without taxes) states that in a perfect capital market, the total value of a firm is determined solely by its Earnings Before Interest and Tax (EBIT) capitalized at the rate appropriate for its risk class. Financing decisions (debt vs. equity mix) are irrelevant to firm value — capital structure does not matter.
Question 5
singleOperating LeverageThe Operating Leverage (OL) at a given level of output is defined as the ratio of:
A.EBIT / EBT
B.Contribution / EBIT
C.Sales / Fixed Costs
D.Net Profit / Sales
Correct Answer: B(Contribution / EBIT)
Explanation:Operating Leverage (OL) measures the sensitivity of EBIT to changes in sales. It is calculated as OL = Contribution / EBIT, where Contribution = Sales − Variable Costs, and EBIT = Contribution − Fixed Costs. High OL means a firm has high fixed costs, so a small change in sales causes a large percentage change in EBIT.
Question 6
singleWorking Capital DefinitionThe Working Capital of a firm is defined as:
A.Fixed Assets − Long-term Liabilities
B.Current Assets − Current Liabilities
C.Total Assets − Total Liabilities
D.Equity Share Capital + Reserves
Correct Answer: B(Current Assets − Current Liabilities)
Explanation:Net Working Capital = Current Assets − Current Liabilities. It represents the short-term liquidity position of the firm and the capital available for day-to-day operations. Positive working capital means the firm can comfortably meet short-term obligations. Gross Working Capital refers to just Total Current Assets.
Question 7
singlePorter's Five ForcesIn Porter's Five Forces Model, the threat of 'Substitute Products' affects industry profitability because:
A.Substitutes require the same suppliers
B.Substitutes set a ceiling on the price that firms in the industry can charge
C.Substitutes increase buyer bargaining power simultaneously
D.Substitutes always have lower quality
Correct Answer: B(Substitutes set a ceiling on the price that firms in the industry can charge)
Explanation:In Porter's Five Forces, substitute products perform the same or similar function as the industry's product through a different means. The threat of substitutes limits the price that firms can charge — if prices rise too high, customers switch to substitutes. This caps industry profitability by setting an effective ceiling on prices.
Question 8
singleGordon's Growth ModelA company declares a dividend of ₹5 per share. The current market price of the share is ₹100. Using Gordon's Growth Model, if the expected growth rate is 5%, the cost of equity (Ke) is:
A.5%
B.10%
C.15%
D.8%
Correct Answer: B(10%)
Explanation:Gordon's Dividend Growth Model: Ke = D1/P0 + g. Where D1 = ₹5, P0 = ₹100, g = 5%. Therefore Ke = 5/100 + 0.05 = 0.05 + 0.05 = 0.10 = 10%.
Question 9
singleSWOT AnalysisA SWOT analysis is a tool used for:
A.Financial ratio analysis
B.Evaluating the internal strengths/weaknesses and external opportunities/threats of an organization
C.Scheduling production activities
D.Valuing company shares
Correct Answer: B(Evaluating the internal strengths/weaknesses and external opportunities/threats of an organization)
Explanation:SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) is a strategic planning framework used to evaluate an organization's internal environment (Strengths and Weaknesses) and external environment (Opportunities and Threats). It helps in formulating strategies that leverage strengths, address weaknesses, exploit opportunities, and mitigate threats.
Question 10
singleIRRThe Internal Rate of Return (IRR) is the discount rate at which:
A.NPV of the project equals zero
B.NPV of the project is maximized
C.Payback period is minimized
D.Accounting rate of return equals the hurdle rate
Correct Answer: A(NPV of the project equals zero)
Explanation:The Internal Rate of Return (IRR) is the discount rate that equates the present value of all future cash inflows with the initial investment cost, making the Net Present Value (NPV) equal to zero. The decision rule: Accept a project if IRR > cost of capital (hurdle rate); reject if IRR < hurdle rate.
Question 11
singleCash Conversion CycleThe 'Cash Conversion Cycle' (CCC) is calculated as:
A.Inventory Days + Receivable Days + Payable Days
B.Inventory Days + Receivable Days − Payable Days
C.Receivable Days − Inventory Days + Payable Days
D.Inventory Days − Receivable Days − Payable Days
Correct Answer: B(Inventory Days + Receivable Days − Payable Days)
Explanation:The Cash Conversion Cycle (CCC) measures the time it takes to convert investments in inventory and other resources into cash flows from sales: CCC = Inventory Conversion Period + Receivable Collection Period − Payable Deferral Period. A lower (or negative) CCC is generally better as it means the firm collects cash faster than it pays its suppliers.
Question 12
singleBlue Ocean StrategyWhich of the following is a characteristic of a 'Blue Ocean Strategy'?
A.Competing in existing market spaces with superior products
B.Creating uncontested market space by making competition irrelevant
C.Reducing product prices below competitors
D.Focusing only on cost reduction
Correct Answer: B(Creating uncontested market space by making competition irrelevant)
Explanation:Blue Ocean Strategy (Kim & Mauborgne) involves creating new market spaces ('blue oceans') where competition is irrelevant, rather than competing in saturated existing markets ('red oceans'). It is achieved through value innovation — simultaneously pursuing differentiation and low cost — to create new demand.
Question 13
singleFinancial LeverageFinancial leverage is primarily concerned with the risk arising from:
A.Variability in sales volume
B.Use of fixed-cost financing (debt/preference shares)
C.Changes in the level of current assets
D.Variability in raw material prices
Correct Answer: B(Use of fixed-cost financing (debt/preference shares))
Explanation:Financial Leverage (Capital Gearing) measures the sensitivity of Earnings Per Share (EPS) to changes in EBIT. It arises from the use of fixed-cost financial sources (debt with interest obligations, preference shares with fixed dividends). High financial leverage amplifies returns to equity shareholders in good times, but also magnifies losses in downturns.
Question 14
singleProfitability IndexThe 'Profitability Index' (PI) method in capital budgeting selects a project when:
A.PI < 1
B.PI = 0
C.PI > 1
D.PI < 0
Correct Answer: C(PI > 1)
Explanation:The Profitability Index (PI) (also called Benefit-Cost Ratio) = PV of Cash Inflows / Initial Investment. Decision Rule: Accept if PI > 1 (NPV > 0, project adds value); Reject if PI < 1 (NPV < 0); Indifferent if PI = 1 (NPV = 0). PI is particularly useful for ranking projects when capital is rationed.
Question 15
singleBCG MatrixAccording to the 'BCG Matrix', a business unit with high market share in a low-growth industry is classified as a:
A.Star
B.Question Mark
C.Cash Cow
D.Dog
Correct Answer: C(Cash Cow)
Explanation:In the BCG Growth-Share Matrix (Boston Consulting Group): Cash Cow = High Market Share + Low Market Growth. These are mature products that generate large cash flows with little investment needed. The cash generated is used to fund Stars and Question Marks. Star: High share + High growth. Question Mark: Low share + High growth. Dog: Low share + Low growth.
Question 16
singleDebt-Equity RatioThe Debt-Equity Ratio measures:
A.Profitability of the firm
B.The proportion of debt financing relative to equity in the firm's capital structure
C.Liquidity of the firm
D.Return on assets
Correct Answer: B(The proportion of debt financing relative to equity in the firm's capital structure)
Explanation:The Debt-Equity Ratio = Long-term Debt / Shareholders' Equity. It is a solvency ratio that indicates the proportion of the firm's financing that comes from creditors (debt) versus shareholders (equity). A higher ratio indicates greater financial risk (leverage), while a lower ratio indicates a more conservative capital structure.
Question 17
singleDividend Discount ModelThe 'Dividend Discount Model' values a share based on:
A.Projected earnings per share
B.Present value of all future expected dividends
C.Book value per share
D.Market capitalisation divided by earnings
Correct Answer: B(Present value of all future expected dividends)
Explanation:The Dividend Discount Model (DDM) values a stock as the present value of all future expected dividends discounted at the required rate of return (cost of equity). The simplest form is the Gordon Growth Model: P0 = D1 / (Ke − g), applicable when dividends grow at a constant rate g.
Question 18
singleCore CompetencyIn strategic management, a 'Core Competency' is best described as:
A.A legal requirement for business operations
B.A unique capability or strength that provides a sustainable competitive advantage and is difficult to imitate
C.The basic operational activities common to all firms in an industry
D.The company's financial liquidity
Correct Answer: B(A unique capability or strength that provides a sustainable competitive advantage and is difficult to imitate)
Explanation:A Core Competency (Prahalad & Hamel, 1990) is a harmonized combination of multiple resources and skills that distinguishes a firm in the marketplace. It must meet three tests: (1) provides potential access to a wide variety of markets, (2) should make a significant contribution to the perceived customer benefits of the end product, and (3) difficult for competitors to imitate.
Question 19
singleFactoringThe term 'factoring' as a source of working capital finance refers to:
A.Obtaining a bank overdraft against fixed assets
B.Selling trade receivables (debtors) to a financial institution at a discount to get immediate cash
C.Issuing commercial paper in the money market
D.Taking a term loan from a non-banking financial company
Correct Answer: B(Selling trade receivables (debtors) to a financial institution at a discount to get immediate cash)
Explanation:Factoring is a financial service where a firm sells its trade receivables (book debts) to a factor (specialized financial institution) at a discount. The firm receives immediate cash (improving cash flow and working capital) while the factor takes on the responsibility of collecting the debts. It can be 'with recourse' (risk remains with seller) or 'without recourse' (factor bears the risk).
Question 20
singleMission StatementThe 'Mission Statement' of an organization primarily communicates:
A.Detailed operational targets for the next financial year
B.The organization's fundamental purpose, its reason for existence, and what it does for its stakeholders
C.The organization's short-term profit targets
D.The number of employees and assets of the organization
Correct Answer: B(The organization's fundamental purpose, its reason for existence, and what it does for its stakeholders)
Explanation:A Mission Statement defines the organization's fundamental purpose — what it does, who it serves, and how it creates value. It answers the question 'Why do we exist?' and guides all strategic decisions. It is broad and enduring, unlike a Vision Statement (what the organization aspires to become) or specific operational objectives.
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