CA Inter Paper 6: FM & SM common mistakes
CA Inter Paper 6: FM & SM · Understand the traps and how to avoid them.
Starting the Cost of Capital question by computing WACC on book-value weights pulled straight from the balance sheet, instead of using market values (or explicitly stating the assumption and justifying it).
Candidates memorise the WACC formula and rush to plug numbers; the balance sheet is the only ready source of weights in the question, so book values get used by default without checking whether the question gives market prices or says 'market value weights' are required.
What to do instead
Before computing, scan the question for market price per share, market value of debentures, or a phrase like 'using market weights'. If market data is given, build a small working table of market values and market weights first, then apply the formula. If only book values exist, write one sentence stating that book values are used as a proxy, so the examiner sees the choice was deliberate.
Computing NPV and IRR in the Capital Budgeting question but failing to reconcile the two when they conflict, and leaving the ranking decision undecided.
Candidates treat NPV and IRR as two independent formula drills. When a question deliberately sets up a size or timing conflict (different scale or different lives), they present both numbers and stop, because the underlying reinvestment-rate logic was never internalised.
What to do instead
Whenever the question says 'rank' or 'select', explicitly compare NPV and IRR. State that NPV is preferred for value maximisation and explain the conflict using reinvestment rate assumptions. Where lives differ, use Equivalent Annual NPV (NPV divided by the annuity factor) rather than raw NPV, and show the annuity factor calculation.
In the Leverage/Capital Structure question, mixing up operating leverage, financial leverage and combined leverage, and computing them on contribution instead of EBIT or vice versa.
The three ratios share a family of formulas and candidates recall fragments. Under exam pressure they grab the wrong base (contribution, EBIT, or PAT) and the answer is dimensionally wrong even though the arithmetic is clean.
What to do instead
Write the definition line before computing: DOL = Contribution/EBIT; DFL = EBIT/(EBIT − Interest − Preference dividend adjusted for tax); DCL = DOL × DFL. Check dimensional sanity: DOL uses contribution over EBIT, so it must be at least 1. If a preference dividend appears, gross it up by dividing by (1 − tax rate) before subtracting.
Treating Working Capital Management as a single formula and ignoring the operating cycle, then failing to link the cycle length to the working capital requirement.
Candidates memorise the current ratio or the maximum permissible bank finance formulas but not the cycle construction. When a question gives raw material holding period, WIP period, finished goods period, debtor period and creditor period, they cannot assemble them.
What to do instead
Build the operating cycle explicitly: RM holding + WIP + FG + Debtors − Creditors = net operating cycle in days. Then convert to rupees using cost of goods sold or sales per day, matching the base the question implies. Show each period in a labelled line so partial credit is available even if the final figure slips.
In the Dividend Decision question, applying the Gordon or Walter model without checking whether the growth rate assumption is valid, and using the wrong version of the formula.
Candidates learn one version of each formula and apply it mechanically to every question. Gordon's model requires g < k; when a question supplies g > k, the formula breaks down and candidates still produce a number.
What to do instead
Before applying Gordon, check that g < k and state the check. For Walter, confirm whether the question asks for market price or for the optimum payout ratio, and use the P = [D + (E − D)r/k]/k form. For MM, apply the dividend irrelevance proof only under the stated assumptions and name them (perfect markets, no taxes, no flotation costs).
In the Ratio Analysis / Financial Statement Analysis question, computing every ratio asked but not interpreting them or linking them to the company's position, so the 'comment on' marks are lost.
Candidates see the question as an arithmetic exercise and stop once the table is filled. The interpretive marks feel subjective, so they are left until the end and then abandoned for time.
What to do instead
Allocate the last three to four minutes of the question to a short written commentary: compare current year with prior year, compare with industry average if given, and state one plausible cause and one implication for each major movement. Even two sentences per ratio recover most of the interpretive marks.
Writing Strategic Management answers as generic business prose with no reference to the specific framework, model or level of strategy the question names.
Candidates from a commerce background are more comfortable with numbers and treat the theory paper as 'common sense'. They answer 'how should the firm grow' with general advice instead of applying Ansoff, BCG, Porter's Five Forces or the value chain as instructed.
What to do instead
Open every Strategic Management answer by naming the framework the question asks for and drawing its structure (the four Ansoff quadrants, the five forces, the four BCG cells) before writing prose. Place each point inside a named cell or force. If the question says 'critically evaluate', add a limitation of the model itself.
Confusing the levels of strategy and the strategy formulation versus implementation distinction, so a question on corporate-level strategy is answered with functional-level tactics.
The vocabulary (corporate, business, functional, operational) overlaps in ordinary usage, and candidates do not hold a clean hierarchy in memory. Under time pressure they write whatever related content comes to mind.
What to do instead
Keep a one-line hierarchy in revision notes: corporate = what businesses and how to allocate resources; business = how to compete in a given market; functional = how each function supports the business strategy. Before answering, identify which level the question names and restrict the answer to that level, naming it in the first sentence.
Ignoring the Strategic Management section entirely or attempting it last with ten minutes left, on the assumption that Financial Management carries more marks.
Candidates over-invest preparation time in numerical questions because they feel more learnable, and the paper's two-part structure is not planned for. The result is a rushed or blank section worth a large share of the paper.
What to do instead
Plan the paper in advance with a fixed time budget for each section and hold to it. In the exam, attempt the Strategic Management section while fresh rather than as a leftover, and write structured point-form answers with framework headings, because they earn marks faster per minute than lengthy numerical workings.
Not showing workings, assumptions or the treatment of a figure that the question leaves ambiguous, then losing method marks even where the final answer is close.
Candidates believe only the final figure is marked and try to save time by writing just the answer. In questions with deliberately loose data (tax rate not stated, depreciation policy unclear), they silently pick an assumption and never record it.
What to do instead
Write a short 'Assumptions' line at the top of each numerical answer stating the tax rate, depreciation basis, and whether cash flows are year-end. Show each intermediate line (contribution, EBIT, discount factor, present value) so the marker can follow the method. A stated assumption earns credit; a silent one earns nothing if the examiner disagrees.