VIDYA SAGAR

CAREER INSTITUTE LIMITED

Answer of Aud
Answer Key FM & SM MAY. 2024

Section (A) & (B) Objective 31.03.2024

1 2 3 4 5 6 7 8 9 10
A B A A B A A A A A
11 12 13 14 15 16 17 18 19 20
A A D B D D B B D C
21 22 23 24 25 26 27 28 29 30
C B B B B C D A C C

Division "A"
Section “B”
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Answer 1 (a)
(i) Calculation of market price per share
According to Miller – Modigliani (MM) Approach:

Po =

Where,
Existing market price (Po) = ` 150

Expected dividend per share (D1) = ` 8 Capitalization rate (ke)

= 0.10
Market price at year end (P1) = to be determined

(a) If expected dividends are declared, then

` 150 =

 P1 = ₹ 157

(b) If expected dividends are not declared, then

` 150 =

  P1 = ₹ 165
(ii) Calculation of number of shares to be issued

(a) (b)
Dividends Dividends are not
are declared Declared
(₹ lakh) (₹ lakh)
Net income 300 300
Total dividends (80) -
Retained earnings 220 300
Investment budget 600 600
Amount to be raised by new issues 380 300
Relevant market price (` per share) 157 165
No. of new shares to be issued (in 2.42 1.82
lakh) (` 380 ÷ 157; ₹ 300 ÷ 165)

(iii) Calculation of market value of the shares

(a) (b)
Dividends Dividends are not
are declared Declared

Existing shares (in lakhs) 10.00 10.00

New shares (in lakhs) 2.42 1.82
Total shares (in lakhs) 12.42 11.82

Market price per share (`) 157 165

Total market value of 12.42 × 157 11.82 × 165
shares at the end of = 1,950 (approx.) = 1,950 (approx.)
the year (` in lakh)

Hence, it is proved that the total market value of shares remains unchanged irrespective
of whether dividends are declared, or not declared.
Answer 1 (b)

(i) Calculation of Leverages and Earnings per Share (EPS)

Income Statement
Particulars (`)
Sales Revenue 90,00,000
Less: Variable Cost @60% Contribution 54,00,000
36,00,000
Less: Fixed Cost other than Interest 10,00,000
26,00,000
Less:Intest (12% on `40,00,000) 4,80,000
Earnings before tax (EBT) 21,20,000

Less : Tax @30% 6,36,000

Earnings after tax (EAT)/Profit after tax (PAT) 14,84,000

(1) Calculation of Operating Leverage (OL)

Contributi on on `36,00,000
Operating Leverage    1.3846
EBIT 26,00,00

(2) Calculation of Financial Leverage (FL)

EBIT ` 26,00,000
Financial Leverage    1.2264
EBT 21,20,00

(3) Calculation of Combined Leverage (CL)

Combined Leverage = OL × FL = 1.3846 ×1.2264 = 1.6981

Contributi on `36,00,000
Or,    1.6981
EBT ` 21,20,000

(4) Calculation of Earnings per share (EPS)

EAT/PAT `14,84,000
EPS    3.71
Number of Equity Shares 4,00,000

Answer 1(c)
Working Notes:
(1) Computation of cost of debentures (Kd) :
x100

95 (1- 0.35) + ( ,000 - 981.05)/ 3

Kd = = 6.872%
(1,000 + 981.05) / 2
(2) Computation of cost of term loans (KT) :
= r ( 1t)
= 0.085 ( 10.35) = 0.05525 or 5.525%
(3) Computation of cost of preference capital (KP) :
Preference Dividend + (RV - NP) / n
Kp =
(RV + NP) / 2

10.5 + (100 - 98.15) / 5

= = 0.1097 = 10.97%
(100 + 98.15) / 2

(4) Computation of cost of equity (Ke) :

= Rf + ß(Rm – Rf)

Or, = Risk free rate + (Beta × Risk premium)

= 0.055 + (1.1875 0.08) = 0.15 or 15%

(i) Calculation of Weighted Average cost of capital Using market value weights
Source of Capital Market value of Weights After tax WACC
4B

(%)
capital structure cost of
capital (%)
Equity share capital (` in millions)
9,000 0.813 15.000 12.195
(150 million share  ` 60)

10.5% Pref. share capital (1 98.15 0.0089 10.970 0.098

million shares `98.15)
9.5 % Debentures 1,471.575 0.1329 6.872 0.913

(1.5 million `981.05)

8.5% Term loans 500
0B 0.0452
1B 5.525
2B 0.249
3B

11,069.725 1.000 13.455

Alternative Answer
Working Notes:
1) Computation of cost of debentures (Kd) :

981.05 = 95 1
+ 95 2
+ 1095 3

(1 + ytm) (1 + ytm) (1 + ytm)

Yield to maturity (ytm) = 10% (approximately)
Kd = ytm × (1 − Tc)
= 10% × (1− 0.35) = 6.5%
2) Computation of cost of term loans (KT) :
= i × ( 1− Tc)
= 8.5% ( 1− 0.35)
= 5.525%
3) Computation of cost of preference capital (KP) :

98.5 = 10.5 1
+ 10.5 2
+ 10.5 3
+ 10.5 4
+ 10.5 5

(1 + YTM) (1 + YTM) (1 + YTM) (1 + YTM) (1 + YTM)

 YTM = 11% (approximately)
Kp = 11%
4) Computation of cost of equity (KE) :
= rf + Average market risk premium × Beta
= 5.5%+ 8% × 1.1875
= 15%
5) Computation of proportion of equity capital, preference share, debentures and term loans in the market
value of capital structure:

(` in millions)
Market value of
capital structure Proportion
`
Equity share capital 9,000 81.3000
(150 million share × ` 60)
10.5% Preferential share capital 98.15 0.889
(1 million shares × 98.15)
9.5 % Debentures 1,471.575 13.294
(1.5 million debentures × `981.05)
8.5% Term loans 500 4.517
11,069.725 100

(i) Weighted Average cost of capital (WACC) : (Using market value weights)

WACC * = Kd D +K × T + K P × P + K E × E
× T
V V V V
= 6.5% × 0.1329 + 5.25% × 0.04517 + 11% × 0.0089 + 15% × 0.813
= 0.008638 + 0.002495 + 0.00097 + 0.12195
= 13.41%
* For the values of Kd, KT, KP and KE and weights refer to working notes 1 to 5 respectively.
(ii) Marginal cost of capital (MCC) schedule:
KE (New Project) = 5.5% + 8% × 1.4375 = 17%
Kd = 9.5% × ( 1−0.35) = 6.175%
= 10% × (1−0.35) = 6.5%
100 50
MCC = 17% x 0.80 + 6.175% × + 6.5% ×
750 750
= 14.86% (Approximately)

Answer 2
Market Value of Equity =

Rs 1,750 =

Net Income to equity holders/EAT = ` 350 lakhs

Therefore, EBIT = = = Rs 500 Lakh

Income Statement
All Equity Equity & Debt
(in Lakh) (in Lakh)
EBIT (as calculated above) 500 500
Interest on Rs 275 Lakhs @15% - 41.25
EBT 500 458.75
Tax @30% 150 137.63
Income available to equity holders 350 321.12

(i) Market value of the company

Market value of levered firm = Value of unlevered firm + Tax Advantage
= ` 1,750 lakhs + (` 275 lakhs x 0.3)
= ` 1,832.5 lakhs
Change in market value of the company = ` 1,832.5 lakhs – ` 1,750 lakhs
= ` 82.50 lakhs

The impact is that the market value of the company has increased by ` 82.50 lakhs due to
replacement of equity with debt.

(ii) Overall Cost of Capital

Market Value of Equity = Market value of levered firm - Equity repurchased
= ` 1,832.50 lakhs – ` 275 lakhs = ` 1,557.50 lakhs

Cost of Equity (Ke) = x 100

= x 100 – 20.62%

Cost of debt (Kd) = I (1 - t) = 15 (1 - 0.3) = 10.50%

Components Amount Cost of Capital Weight WACC (Ko)

(` In lakhs) % %
Equity Debt 1,557.50 20.62 0.85 17.53
275.00 10.50 0.15 1.58
1,832.50 1 19.11

The impact is that the Overall Cost of Capital or Ko has fallen by 0.89% (20% - 19.11%) due to the
benefit of tax relief on debt interest payment.

(iii) Cost of Equity

The impact is that cost of equity has risen by 0.62% (20.62% - 20%) due to the presence of
financial risk i.e. introduction of debt in capital structure.
Note: Cost of Capital and Cost of equity can also be calculated with the help of following formulas,
though there will be no change in the final answers.
Cost of Capital (Ko) = Keu [1 – (t x L)] Where,
Keu = Cost of equity in an unlevered company

t = Tax rate

L =

So, Ko = 0.20 [1-(0.3 x ) = 0.191 or 19.10% (approx.)

Cost of Equity (Ke) - Keu + (Keu – Kd)

Where

Keu = Cost of equity in an unlevered company

Kd = Cost of debt
t = Tax rate

So, Ke = 0.20 + (0.20 – 0.15) x ) = 0.2062 or 20.62%

Answer 3
Working Notes:
(i) Computation of Current Assets & Current Liabilities & Total Assets
Net Working Capital = Current Assets – Current Liabilities
= 2.5 – 1 = 1.5
Thus. Current Assets =

= = `22,50,000
Current Liabilities (CL) = `22,50,000 - `13,50,000 = `9,00,000
Total Assets = Current Assets + Fixed Assets
= `22,50,000 + `30,00,000 = `52,50,000
(ii) Computation of Sales & Cost of Goods Sold
Sales = Total Assets Turnover × Total Assets
= 2 × (Fixed Assets + Current Assets)
= 2 × (`30,00,000 +`22,50,000)
= `1,05,00,000
Cost of Goods Sold = (100% - 20%) of Sales = 80% of Sales
= 80% × `1,05,00,000 = ` 84,00,000
(iii) Computation of Stock & Quick Assets
Average Stock =
= `12,00,000
Closing Stock = (Average Stock × 2) – Opening Stock
= (`12,00,000 × 2) - `11,40,000
= `12,60,000
Quick Assets = Current Assets – Closing Stock
= `22,50,000 - `12,60,000 = `9,90,000

(iv) Computation of Proprietary Fund

Debt – Equity Ratio =

Or, Equity = 1.5 Debt

Total Assets = Equity + Preference capital + Debt + CL
`52,50,000 = 1.5 Debt + `6,00,000 + Debt + `9,00,000
Thus, Debt = = `15,00,000
Equity = `15,00,000 × 1.5
= `22,50,000
So, Proprietary Fund = Equity + Preference Capital
= `22,50,000 + `6,00,000
= `28,50,000
(v) Computation of Profit after tax (PAT)
= Total Assets + Return on Total Assets
= `52,50,000 × 15%
= `7,87,500
(a) Quick Ratio
Quick Ratio = = 1.1
(b) Fixed Assets Turnover Ratio
Fixed Assets Turnover Ratio = 3.5
(c) Proprietary Ratio
Proprietary Ratio =
(d) Earnings per Equity Share (EPS)
Earning per Equity Share =

=
= `4.075 per share
Answer 4(a)

Goal Objective Advantages Disadvantages

Profit Maxi- Large amount (i) Easytocalculate (i) Emphasizes the short
mization of profits profits term gains
(ii) Easy to determine the (ii) Ignores riskor
link between financial uncertainty
decisions and profits.
(iii) Ignoresthetimingof
returns
(iv) Requires immediate
resources.
Shareholders Highest (i) Emphasizes the long (i) Offersnoclear
Wealth market term gains relationship between
Maximisa- value of (ii) Recognises risk or financial decisions and
tion shares. share price.
uncertainty
(iii) Recognises the (ii) Can lead to man-
timingofreturns agement anxiety and
frustration.
(iv) Considers
shareholders’ return.

Answer 4(b)

(a) Financial analysis and planning: Determining the proper amount of funds to employ in the
firm, i.e. designating the size of the firm and its rate of growth.
(b) Investment decisions: The efficient allocation of funds to specific assets.
(c) Financing and capital structure decisions: Raising funds on favourable terms as possible i.e.
determining the composition of liabilities.
(d) Management of financial resources (such as working capital).
(e) Risk management: Protecting assets.

Answer 4(c)

1 NOI means earnings before interest and tax (EBIT).

2 According to this approach, capital structure decisions of the firm are irrelevant.
3 Any change in the leverage will not lead to any change in the total value of the firm
and the market price of shares, as the overall cost of capital is independent of the
degree of leverage. As a result, the division between debt and equity is irrelevant.
4 As per this approach, an increase in the use of debt which is apparently cheaper is
offset by an increase in the equity capitalisation rate. This happens because equity
investors seek higher compensation as they are opposed to greater risk due to the
existence of fixed return securities in the capital structure.

Cost of
Capital %

Leverage (Degree)
OR

Answer 4(c)

The terms ‘liquidity’ and ‘short-term solvency’ are used synonymously.

Liquidity or short-term solvency means ability of the business to pay its short-term liabilities.
Inability to pay-off short-term liabilities affects its credibility as well as its credit rating.
Continuous default on the part of the business leads to commercial bankruptcy. Eventually
such commercial bankruptcy may lead to its sickness and dissolution. Short-term lenders and
creditors of a business are very much interested to know its state of liquidity because of their
financial stake. Both lack of sufficient liquidity and excess liquidity is bad for the organization.
Various Liquidity Ratios are:
(a) Current Ratio
(b) Quick Ratio or Acid test Ratio
(c) Cash Ratio or Absolute Liquidity Ratio
(d) Basic Defense Interval or Interval Measure Ratios
(e) Net Working Capital Ratio

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 Division "B"
Section “B”

Answer 6
Strategic group
 A strategic group consists of those rival firms which have similar competitive
approaches and positions in the market.
 Companies in the same strategic group can resemble one another in any of the several
ways:
 They may have comparable product-line breadth, sell in the same price/quality range,
emphasize the same distribution channels, use essentially the same product attributes
to appeal to similar types of buyers, depend on identical technological approaches, or
offer buyers similar services and technical assistance.
 An industry contains only one strategic group when all sellers pursue essentially
identical strategies and have comparable market positions.
 At the other extreme, there are as many strategic groups as there are competitors when
each rival pursues a distinctively different competitive approach and occupies a
substantially different competitive position in the marketplace.
The procedure for constructing a strategic group map and deciding which firms belong in which
strategic group is straightforward:
1. Identify the competitive characteristics that differentiate firms in the industry typical
variables are price/quality range (high, medium, low); geographic coverage (local, regional,
national, global); degree of vertical integration (none, partial, full); product-line breadth
(wide, narrow); use of distribution channels (one, some, all); and degree of service offered
(no-frills, limited, full).
2. Plot the firms on a two-variable map using pairs of these differentiating characteristics.
3. Assign firms that fall in about the same strategy space to the same strategic group.
4. Draw circles around each strategic group making the circles proportional to the size of the
group’s respective share of total industry sales revenues.

Answer 7 (a)
Steps to understand the Competitive Landscape
i. Identify the competitor: The first step to understand the competitive landscape is to identify
the competitors in the firm’s industry and have actual data about their respective
market share.
This answers the question:
 Who are the competitors and how big are they?
ii. Understand the competitors: Once the competitors have been identified, the strategist can
use market research report, internet, newspapers, social media, industry reports, and
various other sources to understand the products and services offered by them in
different markets.
This answers the question:
 What are their product and services?
iii. Determine the strengths of the competitors: What are the strength of the competitors?
What do they do well? Do they offer great products? Why are consumers liking their
product/service? Do they utilize marketing in a way that comparatively reaches out to
more consumers. Why do customers give them their business?
This answers the questions:
 What are their financial positions?
 What gives them cost and price advantage?
 What are they likely to do next?
 How strong is their distribution network?
 What are their human resource strengths?
iv. Determine the weaknesses of the competitors: Weaknesses (and strengths) can be
identified by going through consumer reports and reviews appearing in various
media. After all, consumers are often willing to give their opinions, especially when the
products or services are either great or very poor. Like reviews on online websites, google,
tripadvisor, amazon, blogs, youtube videos, etc.
This answers the question
 Where are they lacking?
v. Put all of the information together: At this stage, the strategist should put together all
information about competitors and draw inference about what they are not offering
and what the firm can do to fill in the gaps. The strategist can also know the areas which
need to be strengthen by the firm.
This answers the questions:
 What will the business do with this information?
 What improvements does the firm need to make?
 How can the firm exploit the weaknesses of competitors?
Answer 7 (b)
The Mendelow Stakeholder matrix (also known as the Stakeholder Analysis matrix and the
Power-Interest matrix) is a simple framework to help manage key stakeholders.
Managing a project is extremely complicated as it involves managing the competing interests of
various stakeholders. Who needs to know what and when, who needs to give their feedback
and who has the final approval can be confusing. However, managing stakeholders is critical
to the success of a project. This is where a stakeholder analysis matrix i.e. Mendelow’s Matrix
can help.
Mendelow suggests that one should analyse stakeholder groups based on Power (the ability
to influence organisation strategy or resources) and Interest (how interested they are in the
organisation succeeding). A thing to remember is that all stakeholders may seem to have lots of
power and organisation may hope they would have lots of interest too. But in reality, some
stakeholders will hold more Power than others, and some stakeholders will have more
Interest than others.
For example, a big shareholder is likely to have high power and high interest in the
organisation, whereas a big competitor would have high power to impact strategy, but
potentially less Interest in success of rival organisation.
Mendelow’s Matrix is based on Power and Interest. It suggests to identify which stakeholders
are incredibly important. Metrics to define the importance being High Power and High Interest
which management would need to manage closely, while investing a lot of time and resources.

In the above figure, we see categorisation of stakeholders into four groups by Mendelow’s;
• KEEP SATISFIED Stakeholders: High power, less interested people - Organisation
should put in enough work with these people to keep them satisfied with their intended
information on a regular basis. For example, banks, government, customers, etc.
• KEY PLAYERS Stakeholders: High power, highly interested people - Organisation’s aim
should be to fully engage this group of stakeholders, making the greatest efforts to satisfy
them, take their advice, build actions and keep them informed with all information
on a regular basis. For example, Shareholders, CEO, Board of Directors, etc.
• LOW PRIORITY Stakeholders: Low power, less interested people - Organisation should
only monitor them with no actions to satisfy their expectations. Strategically, minimal
efforts should be spent on this group of stakeholders while keeping an eye to check i f their
levels of interest or power change. For example, business magazines, media houses, etc.
• KEEP INFORMED Stakeholders: Low power, highly interested people - Organisation
should adequately inform this group of people and communicate with them to ensure
that no major issues arise. This audiences can also help with real time feedbacks and
areas of improvement for an organisation. For example, employees, vendors, suppliers,
legal experts, etc.

Answer 8 (a)
Stability Strategies, as name suggests, are intended to safeguard the existing interests and
strengths of business.
It involves organisations to pursue established and tested objectives, continue on the chosen
path, maintain operational efficiency and so on.
A stability strategy is pursued when a firm continues to serve in the same or similar markets
and deals in same products and services.
In stability strategy, few functional changes are made in the products or markets, however, it
is not a ‘do nothing’s trategy.
This strategy is typical for mature business organizations. Some small organizations also
frequently use stability as a strategic focus to maintain comfortable market or profit position.
On the other hand, expansion strategy is aggressive strategy as it involves redefining the
business by adding the scope of business substantially, increasing efforts of the current
business.
In this sense, it becomes opposite to stability strategy. Expansion is a promising and popular
strategy that tends to be equated with dynamism, vigor, promise and success.
Expansion also includes diversifying, acquiring and merging businesses. This strategy may
take the enterprise along relatively unknown and risky paths, full of promises and pitfalls.
Answer 8 (b)
 Vastralok Ltd. is currently manufacturing silk cloth and its top management has decided to
expand its business by manufacturing cotton cloth. Both the products are similar in
nature within the same industry.
 The strategic diversification that the top management of Vastralok Ltd. has opted is
concentric in nature.
 They were in business of manufacturing silk and now they will manufacture cotton as well.
They will be able to use existing infrastructure and distribution channel.
Concentric Diversification:
 Concentric diversification takes place when the products are related. In this
diversification, the new business that is it diversifies into is linked to the existing
 businesses through process, technology or marketing.
 The new product is a spin-off from the existing facilities and products/processes.
This means that in concentric diversification too, there are benefits of synergy with
the current operations.
 However, concentric diversification differs from vertically integrated diversification in the
nature of the linkage the new product has with the existing ones. While in vertically
integrated diversification, the new product falls within the firm’s current process-product
chain, but in concentric diversification, there is a departure from this vertical linkage.
 The new product is only connected in a loop-like manner at one or more points in
the firm’s existing process/technology/product chain.
Answer 9 (a)
In the light of BCG Growth Share Matrix, four strategic options that can be pursued by an
organization are: build, hold, harvest and divest. Different strategic options can be pursued in
different situations as follows:
1. Build: Here the objective is to increase market share, even by forgoing short-term
earnings in favour of building a strong future with large market share. It is done by
increasing investment. For example, investments can be made to push question
marks into stars.
2. Hold: Here the objective is to preserve market share. It can be in a situation where the
organization is not in position to invest or has other commitments.
3. Harvest: A relevant situation can be when the product or SBU is in position of being
cash cow. Here the objective is to increase short-term cash flow regardless of long- term
effect.
4. Divest: Divest is relevant in case of dog quadrant. Here the objective is to sell or
liquidate the business because resources can be better used elsewhere.

Answer 9 (b)
SWOT analysis is the analysis of a business’s strengths, weaknesses, opportunities and
threats. The primary objective of a SWOT analysis is to help organizations develop a full
awareness of all the factors (external as well as internal), involved in making a business
decision.
SWOT analysis shall be implemented before all company actions, whether it is exploring new
initiatives, revamping internal policies, considering opportunities to grow or alter a plan
midway. One shall also us SWOT analysis to discover recommendations and strategies, with
a focus on leveraging strengths and opportunities to overcome weaknesses and threats.
Since its creation, SWOT has been the most widely used tools for business owners to grow
their companies. Sometimes it’s wise to perform SWOT analysis just to check on the current
landscape of your business to improve business operations as needed. The analysis can
show areas where an organization is performing well, as well as areas that need
improvement.
an example of a law firm - what could its SWOT analysishelp understand about its business.
STRENGTH WEAKNESS
Multiple Partners with varied expertise Run by old methods
Long Term contractual service agreements No automation of work and
70 years of brand value documentation
Services spread across 20 states of India Not very employee friendly culture
400+ employee strength to deliver work
OPPORTUNITY THREAT
Automation driven advancement. Online players entering market.
Startups can be supported with AI based solutions and applications. Price
experienced partners. point of online being very
Investment in technology can multiplyreturns. competitive
Speed of work becoming faster by theday.
The benefit of this analysis is that it identifies the complex issues for an organisation and
puts them into a simple framework. While on the other hand, one of the major criticisms of
this tool is that it does not generally provide for evaluation of strengths, weaknesses,
opportunities and threats in the competitive context.
Therefore, an organsition while using this tool, SWOT analysis, should consider relative
competitors, and external factors affecting the organisation. Although a simple tool, it is a
useful starting point for analysis.
SWOT Analysis for Internal or External Environment?

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Internal analysis is more
focused on understanding the existing structure and competencies of the business, thus
highlighting the Strengths and Weaknesses, while External Analysis is about identifying
and preparing for uncontrollable which can either be Opportunities or threats.
Therefore, SWOT Analysis is a tool which is used for both Internal and External Analysis.

.
Answer 10 (a)
 Shreekant opt for turnaround strategy which is a highly-targeted effort to return
Arena Ltd. to profitability and increase positive cash flows to a sufficient level.
 Organizations those have faced a significant crisis that has negatively affected
operations require turnaround strategy.
 Once turnaround is successful the organization may turn to focus on growth.

Conditions for turnaround strategies

When firms are losing their grips over market, profits due to several internal and external
factors, and if they have to survive under the competitive environment they have to identify
danger signals as early as possible and undertake rectification steps immediately.

These conditions may be, inter alia cash flow problems, lower profit margins, high employee
turnover and decline in market share, capacity underutilization, low morale of employees,
recessionary conditions, mismanagement, raw material supply problems and so on.

Action plan for turnaround strategy

• Stage One – Assessment of current problems
• Stage Two – Analyze the situation and develop a strategic plan
• Stage Three – Implementing an emergency action plan
• Stage Four – Restructuring the business
• Stage Five – Returning to normal
Answer 10 (b)
Selling the same alarms with different coverings to smaller and low income group
households at a lower price represents Market Development as the same products are
being sold into a new market.
Market development refers to a growth strategy where the business seeks to sell its existing
products into new markets.
It is a strategy for company growth by identifying and developing new markets for the
existing products of the company.
While the development of new and more sophisticated alarms and a wide range of security
services (guards and surveillance) for sale to industrial clients for higher prices is classified as
Diversification, because it involves a new product, being sold in a new market .
Diversification refers to a growth strategy where a business markets new products in new
markets. It is a strategy by starting up or acquiring businesses outside the company’s
current products and markets.
OR
Answer 10 (b)
It is advisable that divestment strategy should be adopted by X Pvt. Ltd.
In the given situation where the business of co-working spaces became unprofitable and
unviable due to Global pandemic, the best option for the company is to divest the loss
making business.
Retrenchment may be done either internally or externally. Turnaround strategy is adopted
in case of internal retrenchment where emphasis is laid on improving internal efficiency
of the organization, while divestment strategy is adopted when a business turns unprofitable
and unviable due to some external factors. In view of the above, the company should go
for divestment strategy.
Further, divestment helps address issues like:
1. Persistent cash flows from loss making segment could affect other profit-making
segments, which is the case in the given scenario.
2. Inability to cope from the losses, which again is uncertain due to pandemic.
3. Better investment opportunity, which could be the case if X Pvt. Ltd. can invest the
money it generates from divestment.

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