120 Resource November 1991 to November 2006

8/9/2019 120 Resource November 1991 to November 2006

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Cost Academy Financial Management 1

May 1991

Question 1The following projected funds flow statement has been prepared by a company covering itsoperations for its next financial year to end on 31/3/1999.

(s. !n la"hs#Sourcei# !nternal accruals$

%rofit after tax 1&'''dd$ )epreciation **1+'

1&1+'

,ess$ )ividend (on e-uity capital of s. '' la"hs# **'' 3+'ii# !ncrease in public fixed deposits 1'iii# !ncrease in ban" cash credits ''iv# !ncrease in 0 year debentures **+''

Total 1&10'

Usesv# !ncrease in fixed assets ''vi# epayment of term loans 1''vii# increase in investments 1''viii# !ncrease in wor"ing capital ***10' Total 1&10'

SolutionThe projected funds flow statement given in the problem can be rearranged to analye by

preparing a funds flow statement and statement showing wor"ing capital movement.

2unds flow statement for the year ended 3131999 (s. !n la"hs#Sources of Funds:

!nternal accruals 3+'!ncrease in 0 year debentures +'')ecrease in wor"ing capital (balancing figure# ***4'

Total 1&'''

Application of funds:!ncrease in fixed assets ''epayment of term loans 1''!ncrease in investments **1''

Total 1&'''

5tatement showing movement of 6or"ing 7apital (s. !n la"hs#Increase in Current Assets by:

!ncreases in public deposits 1'!ncrease in 7ash credit **''

8',ess$ 2unds used for financing longterm assets **4'et increase in wor"ing capital 10'

2rom the analysis of above statement it is observed that the funds raised from shorttermsources (i.e. from public deposits and cash credit# is used for ac-uisition of longterm assets andinvestments& and also used for repayment of term loan. The company will run into troubles soonin the near future since there is a mismatch in financing decision. The longterm re-uirementsshould be met only from longterm funds.


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November 199

Question 12rom the following information : atios& prepare the profit : ,oss ccount for the year ended31st;arch& +''& and the verage collection period 3' days Taxation nil(ssume 38' days in the year#

M!s "Stan # Co"$rofit and %oss Account for t&e year ended '1stMarc&( 199

s.5ales '&''&''',ess$ ?ariable costs 3'&''&'''

+'&''&''',ess$ 2ixed 7osts (excluding interest# 9&''&'''=arnings before interest and taxes 11&''&''',ess$ !nterest 8&''&'''=arnings before tax &''&''',ess$ Tax il**

%rofit after tax &''&'''

)alance S&eet as at '1st Marc&( 199

Sources *s" *s"5hareholders@ 2unds +'&''&''',ong term ,iabilities '&''&''' 0'&''&'''Applications2ixed ssets 41&88&8807urrent ssets$5toc" 1'&''&'''

)ebtors 4&18&880Athers 3&333

1&''&''',ess$ 7urrent ,iabilities &''&'''et 7urrent ssets 1'&''&'''Ather ssets (balancing figure# 1&33&333

0'&''&'''

Solution+or,in-s.

/10 Biven et 6or"ing 7apital C s. 1'&''&'''or 7urrent ssets ( 7# 7urrent ,iabilities (7,# C s. 1'&''&'''

or 7 C s. 1'&''&''' D 7,7urrent atio C 3

Ar& 7 7, C 3

Ar& E(s. 1'&''&''' D 7,# C 3


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7, C s. &''&'''7 C s. 1&''&'''

+# 7urrent ssets to 5toc" 3$+5toc" C s. 1&''&''' x +/3 C s. 1'&''&'''

3# 5toc" Turnover atio C 5o& Turnover C x s. 1'&''&''' Cs. '&''&'''

4# ?ariable 7ost C 8'> of 5ales C s. 3'&''&''' 7ontribution C 4'> of 5ales C s. +'&''&'''

# et profit (= =

# ,ong term ,oan Cs. 8&''&''''.1+ C s. '&''&'''

9# Total ,iabilities to net worth C +.0

Total ,iabilities C ,ong term loan D 7urrent liabilities C s. '&''&''' D s. &''&''' C s. &''&'''

et 6orth C s. &''&'''+.0 C s. +'&''&'''

1'# 2ixed ssets Turnover atio C 1.+

Ar 5ales 2ixed ssets C 1.+

11# verage collection period C 3' days

5o&

7ross 7hec"$Biven =arning per share C s. 1'

Ar&

%rofit after tax umber of 5hares C s. 1'

Ar umber of shares C s. &''&'''s. 1' C '&'''

1# The difference in the balance sheet& prepared on the basis of available information& isshown as other assets.

Question


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The Taxfree will be paid during the year.

Hou are re-uired to prepare the following projected statements of the 7o. for the year 19949 $

a#


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Sources of Funds7apital =-uity shares of s. 1' each (6.. +# 1+> %reference 5hares of s. 1' each

eserves 5ecurities %remium Ather eserves (1&'''D3 +8#

,oans 1> convertible )ebentures of s. 1'' each 14> 2ixed deposits

Jses of 2unds 2ixed ssets ,ess$ )epreciation !nvestments (9> taxfree bonds#

et current ssets$ 7ash : # s. 8&''&'''

c. ?alue of an e-uity share s. +

d. umber of e-uity shares to be issued (bc# +4&'''

e. 2ace value of e-uity shares issued (d1'# s. +&4'&'''


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f. =-uity share capital on 31.'3.'8 (aDe# s. 1'&4'&'''

'" Cas& # )an, )alanceC Apening balance D cash from operations F )ividend paidC Apening balance D (%rofit after tax Ddepreciation# Fdividend paidC s. &''&'''D (s. 3&'&'''D s. 1&'&'''# F (s. 8'&'''D s. +&'&'''#C s. 0&80&'''

May 1997

1" 7alculate the %/= ratio from the following$ s.


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=-uity 5hare 7apital (s. +' each# '&''&''' eserves and 5urplus &''&''' 5ecured ,oans at 1> +&''&''' Jnsecured ,oans at 1+.> 1'&''&''' 2ixed ssets 3'&''&''' !nvestments &''&''' !ncometax ate '> ;ar"et %rice/5hare s.'

Aperating %rofit +&''&'''

Solution *s" *s"

Aperating profit +&''&''',ess$ !nterest on$

5ecured ,oans N1> 3&0&'''Jnsecured ,oans N 1+.> 1&+&''' &''&'''

%rofit before tax (%


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Total 1' 13' 14' 133 1' 1

%rofit 1 + (1'# 10 1'

The following additional information is significant$

(a# ent is payable in advance on the last day of the previous -uarter.(b# 5tipend will be paid in the same month.

(c# Telephone will be paid every two months in arrears.(i.e. pril and ;ay will be paid in Gune#(d# Affice expenses and 5alaries will be paid in the following month.

(e# Travel : Training will be paid in the same month.(f# %artners@ and assistants@ salaries will be paid in the following month.

(g# The firm is planning to invest a sum of s.'&''' in Guly for ac-uiring a computer.(h# The firm expects to pay a self assessment tax of s. &''' and advance tax of s. 1&'''

in ugust.

(i# The firm is planning to open a branch a spend a sum of s.+'&''' in 5eptember in thisregard.

7ollection of 2ees$(j# !nternal/ 7orporate udit fees will be collected in the following month. Taxation$ '> in the

same month and '> in the following month. 7onsultancy charge is normally received after +months.

("# The firm@s 7ash


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11&4'&''' 13&+'&'''

Trade !nvestment +&''&''' 1&8'&'''

7urrent ssets &8'&''' 8&8'&'''

%reliminary =xpenses **4'&''' ***+'&'''

19&4'&''' +1&8'&'''

)uring the year 1994& the 7ompany$

(i# 5old one machine for s. '&''' the cost of which was s. 1&''&''' and the depreciationprovided on it was s. 4'&'''.

(ii# %rovided s. 1&'&''' as depreciation.

(iii# edeemed 3'> of the )ebentures N 1'.

(iv# 5old some Trade !nvestments at a profit of s. +'&''' which was credited to 7apitaleserve.

(v# )ecided to value stoc" at cost& whereas previously the practice was to value stoc" at costless 1'>. The stoc" according to boo"s on 31.1+.1993 was s. 1&'&'''. The stoc" on31.1+.94 was correctly valued at s. 1&'&''' and

(vi# )ecided to write off 2ixed ssets costing s. +&''' on which depreciation amounting to s.+'&''' has been provided.

Hou are re-uired to prepare the 5tatement of 5ources and pplication of 2unds during 1994&showing the changes in the 6or"ing 7apital. ll wor"ings should form part of your answer.

Solution

Statement of Sources and applications of Funds bet8een t&e year ended '1"1"22

5ources of 2unds s. pplication of 2unds s.

2unds from Aperations (w.n. 1#

!ssue of =-uity 5hares

5ale %roceeds of machine

5ale of Trade investment (6.. 8#

&44&'''

+&''&'''

'&'''

8'&'''

&4&'''

!ncreasing in 6or"ing 7apital

%urchase of fixed assets

%ayment of dividend

%ayment of income tax

edemption of )ebentures

8&'''

4&+&'''

+&'''

1&'&'''

1&+8&'''

&4&'''

+or,in- Notes:1" Funds from operations

!ncrease in Beneral eserve (s. 4&''&''' s. 3&4'&'''# 8'&'''!ncrease in % : , /c


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!ncrease in value of Apening stoc" E(s. 1&'&'''9'># s. 1&'&'''M

!ncrease in 7urrent ,iabilities (s. +&8'&''' s. +&4'&'''# !ncrease/ )ecrease in 6or"ing capital

(1+&'''#(+'&'''#

8&'''

'" Fied Assets A!c

$articulars *s" $articulars *s"To


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November 1997

Question 1The

2rom the above particulars calculate for the year 1994 F 9$(a# eturn on 7apital =mployed atio(b# 5toc" Turnover atio(c# eturn on et 6orth atio.(d# 7urrent atio(e# %roprietary atio

Solution

+or,in- Notes:1" Avera-e Capital 5mployed:

7apital =mployed C 7apital D eserves D ,oans7apital employed as on 31.'3.+'' C +'D118D1'' C 488

7apital employed as on 31.'3.+''4 C +'D1''D1+' C 40'

verage 7apital employed C Q of (488D40'# C 48

" Avera-e net 8ort&et worth C 7apitalD eserves ;iscellaneous =xpenditure

et 6orth as on 31'3.' C +'D1188' C 3'8

et 6orth as on 31.'3.'4 C +'D1''0' C +'

verage et worth C Q of (3'8D+'# C +93

'" $rofit after ta C %


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" Current assets as on '1"2'"27 C 5toc"D )ebtors D7ash/

5ecured ,oans$


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%rojected %rofit : ,oss ccount for the year ended 31st ;arch& 1998

s. s.

To Apening stoc" &8'&'''


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7reditors for =xpenses %rovision for Taxation %roposed )ividend (e-uity#

&'''1&38&'''1&''&'''

19&48&'''

;iscellaneous =xpenditure$ %reliminary =xpenses

1'&'''

19&48&'''

/ii0 Statement s&o8in- sources # application of funds for t&e year ended '1"2'"227

5ources of 2unds s. pplication of funds s.

2unds from operations (6.. 9#!ssue of =-uity 5hares5ales proceeds of machine

3&88&'''3&3'&'''4&'''

0&41&'''

!ncrease in wor"ing capital (6.. #%urchase of machinery (6.. 8#%ayment of dividend%ayment of income tax

4&'1&'''1&''&'''9'&'''

1&'&'''

0&41&'''

+or,in- Notes:

1" )oo, debts C 1'> over + months@ credit sales C s. 1&''&'''(+1+#11'>

C s. 3&3'&'''

" Creditors C 1 Q month@s purchase C s. 14&4'&'''(1.1+# C s. 1&'&'''

%articulars s. %articular s.

To


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7" Creditors A!c


To


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+&'&''' +&'&'''

1" $rovision for ;a A!c


To dvance Tax /cTo eserve /c

To


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May 1993

Question 1

The .

7alculate for the years 199 and 1998$(i# 2ixed ssets Turnover atio(ii# 5toc" Turnover atio(iii# )ebtors Turnover atio in terms of number of days@ sales(iv# =arnings per share.


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i. !ncrease in reserves during the year +'' 1''j. )ividends +'' 3''". %rofit after tax (!Dj# 4'' 4''I" 5S$ 1"''

Comments2ixed assets turnover ratio is a measure of the efficiency or use of fixed assets F a high ratioindicates a high degree of efficiency in asset utiliation and a low ratio reflects inefficiency in theuse of assets. !n 1998& the ratio has increased from +.' to 3.'3 showing better efficiency in theutiliation of fixed assets.

5imilarly& better turnover ratios in 1998 as compared to 199& relating to current assets inventoryand receivables& indicate improved management of current assets. Powever inventory holdingperiod is very highI its comparison with the industry average may actually reveal the degree ofefficiency in inventory management.

=%5 has declined. %erhaps on the reasons is increase in number of shares on account ofutiliation of& securities premium account for issuing fully paid bonus shares. 6hile the net profitratio has& declined& the dividend payout ratio on share capital has remained the same in 1998 ascompared to 199.

=%5 has declined. %erhaps one of the reasons is increase in number of shares on account ofutiliation of& securities premium account for issuing fully paid bonus shares. 6hile the net profitratio has& declined& the dividend payout ratio on share capital has remained the same in 1998 ascompared to 199.

otes$1. !n the absence of information about the cost of sales& stoc" turnover ratio has been

calculated on the basis of sales.

+. )ebtors turnover ratio in terms of number of days@ sales has been calculated on the basis of38 days for 199 and 388 days for 1998. lternatively it may be computed on the basis of38' days.

3. 2or the purpose of calculating debtors turnover ratio& the entire sales have been assumed tobe made on credit.

Question

Ma$s %td& 's launc!ing a ne( )o*ect +o t!e manu+actue o+ a uni,ue com)onent& At +ullca)acity o+ 24"000 units" t!e cost (ill -e as +ollo(s.

7ost per unit s.;aterial ',abour : ?ariable expenses 4'2ixed ;anufacturing : dministrative =xpenses +')epreciation **1'

The selling price per unit is expected at s. +'' and the selling expenses per unit will be s. 1'&'> of which is variable.

!n the first two years production and sales are expected to be as follows$

?ear $roduction Sales

1 1&''' units 14&''' units + +'&''' units 1&''' units


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To assess wor"ing capital re-uirement& the following additional information is given$

(a# 5toc" of raw material3 months@ average consumption(b# 6!% il(c# )ebtors 1 month average sales.(d# 7reditors for supply of materials+ months average purchases of the year.

(e# 7reditors for expenses1 month average of all expenses during the year.(f# 7ash balance Fs. +'&'''

5toc" of finished goods is ta"en at average cost.

Hou are re-uired to prepare for the two years$(1# projected statement of profit/,oss(+# projected statement of wor"ing capital re-uirements. (2inal;ay 1998#

Solution/10 Mar,s %td"

%rojected 5tatement of %rofit /,oss

Hear ! Hear !! s. s.%roduction in units 1&''' +'&'''5ales in units 14&''' 1&'''5ales revenue N s. +'' per unit (# +&''&''' 38&''&'''

7ost of production;aterial N s. ' per unit. 1+&''&''' 18&''&''')irect ,abour : ?ariable expenses N s. 4' per unit 8&''&''' &''&'''2ixed manufacturing : dministrative expensesN s. +' on +4&''' units 4&'&''' 4&'&''')epreciation N s. 1' for +4&''' units +&4'&''' +&4'&'''Total cost of production +&+'&''' 31&+'&'''

dd$ Apening stoc" of finished goods at average cost 1&8&'''

E(+&+'&'''1&'''#1'''M

7ost of goods available +&+'&''' 3+&&''',ess$ 7losing stoc" of finished goods at

verage cost 1&8&''' 4&89&014N

E(N 3+&&'''+1&'''#3&'''M

7ost of goods sold +3&+&''' +&1&+8

dd$ 5elling expenses (?ariable at s. #5elling expenses fixed at s. + *****4&''' 4&'''7ost of sales (


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(b# 7reditors for expenses 1&'3&334 1&++&880 Total of 7urrent ,iabilities (


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2. of the 7apital5elling %rice s.3' %er Jnit?ariable 7ost s.1 %er Jnit

2ixed 7ost $

Jnder 5ituation ! s.1&'''Jnder 5ituation !! s.+'&'''

7apital structure $ 2inancial %lan


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# 1'&''' &'''

+'&''' +'&'''

Solution (i# Aperating ,everages $ 5ituation ! 5ituation !!

s. s.5ales (s# 9'&''' 9'&'''

3&''' units N s. 3'/ per unit,ess$ ?ariable 7ost (?7# 4&''' 4&''' N s. 1/ per unit

7ontribution (7# 4&''' 4&'''

,ess $ 2ixed 7ost (27# 1&''' +'&'''****** ******Aperating %rofit (A%# 3'&''' +&'''(=

Aperating ,everage

7 C s. 4&''' s. 4&'''A% 3'&''' +&'''

C 1. 1.

(ii# 2inancial ,everages $ 2inancial %lan

over the existing level ofproduction.

The following data has been supplied $

(.i# Jnit cost structure of the product at current level $

s.aw ;aterial 46ages (?ariable# +Averheads (?ariable# +2ixed Averhead 1%rofit 3 .5elling %rice 1+ .

(ii# aw materials will remain in stores for 1 month before being issued for production.;aterial will remain in process for further 1 month. 5uppliers grant 3 months credit to thecompany.

(iii# 2inished goods remain in godown for 1 month.

(iv# )ebtors are allowed credit for + months.

(v# ,ag in wages and overhead payments is 1 month and these expenses accrue evenlythroughout the production cycle.

(vi# o increase either in cost of inputs or selling price is envisaged.

%repare a projected profitability statement and the wor"ing capital re-uirement at the newlevel& assuming that a minimum cash balance of rs.19&'' has to be maintained. (2inalov 1998#

SolutionFoods %td" $ro2B capacity units to be produced

/'3(22232>20 >(222 pac,ets"

. 7ost of 5ales$ s.

aw ;aterial s. 44&''' C 1&9+&'''

6ages s. +4&''' C 98&'''Averheads (variable# s. +4&''' C 98&'''

Averhead (2ixed# e. 138&''' C **38&'''

4&+'&'''


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6ages (+4&'''# 98&'''

Averheads (?ariable# (+4&'''# 98&'''

Averheads (2ixed# (138&'''# **38&'''

4&+'&'''

,ess$ !ncrease in stoc" of;aterials D6!%D 2inished goods (efer to wor"ing note# 1&'''djusted cost of sales 4&'+&''' '>o. of units of production 38&''' 4&''' 7ost/Jnit s. s.

aw ;aterial stoc" (1 month# 4 1+&''' 18&'''6!% stoc"$

;aterial (1 month# 4 1+&''' 18&'''6ages (1/+ month# + 3&''' 4&'''?ariable overheads (1/+ month# + 3&''' 4&'''2ixed overheads (1/+ month# 1 1&''('.0# 1&''2inished goods (1 month# 9 +0&'''(.0# 3&'''

&'' 08&''!ncrease in stoc" 1&'''

+or,in- Notes: Cost of SalesDavera-e per mont& %er annum %er monthaw ;aterial 1&9+&''' 18&'''6ages 98&''' &'''Averhead (?ariable# 98&''' &'''Averheads (2ixed# **38&''' **3&'''

4&+'&''' 3&'''%rofit 1&8&''' 13&'''5ales value &08&''' 4&'''

$ro2B capacity7urrent ssets

aw ;aterials (4&'''1+4# 18&'''6!% +&''

;aterials E4&'''4(11+#M 18&'''

6ages E4&'''+(1+4#M 4&'''

?ariable overheads E4&'''+(1+4#M 4&'''

2ixed Averheads E4&''''.0(1+4#M 1&''

2inished goods E4&'''.0(11+#M *3&'''

08&''5undry )ebtors *98&'''

1&0+&''7ash


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80&''' # is higher than the interest payable on debt at 9>&the firm has a favourable financial leverage.

(iii# sset Turnover C et 5ales Total ssets CTotal !nvestment

0&''&'''

2irm@s sset Turnover is C C '.0

1&''&''&'''The industry average is 3. hence the firm has low asset leverage.

7ontribution 33&''&'''(iv# Aperating leverage C C C 1.++++=

= Pence =# C s. ++&4&'' (approx.#*************


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November 199=

Question 1The fixed assets and e-uities of =astern ;anufacturing 7o. ,td. are supplied to you both at the

beginning and at the end of the year 199890 $1/4/98 (s.# 31/3/90 (s.#

%lant ,ess depreciation 83&'' 1&4+&''!nvestment in 5hares of 5outhern;anufacturing 7ompany 1&3+&''' +&9'&'''


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5ales of e-uipment 3+&''')ecrease in 6or"ing 7apital (%rofit : ,oss ccount 1>0> )ebentures 1'>7reditors +>

The )ebentures were issued on 1stpril& +''& interest being paid on 3'th5eptember& +''and 31st;arch& +''8.

(b# )uring the year ended on 31st ;arch& +''8& dditional plant and ;achinery had beenbought and a further s. +&''' depreciation written off. 2reehold property remained

unchanged. The total fixed assets then constituted 8'> of total fixed and current assets.

(c# The current ratio was 1.8 $1. The -uic" assets ratio was 1$1.

(d# The debtors (fourfifths of the -uic" assets# to sales ratio revealed a credit period of twomonths.

(e# Bross %rofit was at the rate of 1> of selling price and return on net worth as at 31 st;arch+''8 was 1'>.

Solution)alance S&eet of 5verest Co" %td" As at '1st Marc&( 199=


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7apital : ,iabilities s. ssets s. s.5hare 7apital &''&''' 2ixed ssets$ 4&''&'''eserve : 5urplus 2reehold %roperty %rofit : ,oss /c 1&'&''' %lant : ;achinery 3&''&'''5ecured ,oans ,ess$ )epreciation 1&''&'''

0 > )ebentures 1&''&''' +&''&'''Jnsecured ,oans il 8&''&'''7urrents ,iabilities 7urrent ssets$

nd %rovisions 5toc" 1&'&''' 7reditors +&'&''' )ebtors +&''&'''

of the total liabilities side # is s. &''&'''I the total of the liabilityside would be s. 1'&''&''' of which %rofit : ,oss ccount& )ebenture and creditors are 1>&1'> and +> respectively.

(ii.# Total value of fixed assets is s. 8&''&''' ( 8'> of s. 1'&''&'''#. s freeholdproperty is worth s. 4&''&'''& the net value of %lant : ;achinery would be s. +&''&'''. Total

depreciation written off to data is s. 1&''&''' i.e. s. 0&''' plus +&''' the gross cost todata of the plant and machinery would be s. 3&''&'''.

(iii.# Total current liabilities are s. +&'&''' total current assets would be 1.8 times of this ors. 4&''&'''. s the li-uid assets are e-ual to current liabilities ( s. +&'&''' #& 5toc" isworth s. 1&'&''' ( 4&''&''' F +&'&'''#. )ebtors are 4/ of total li-uid assets i.e. s.+&''&'''& the balance of s. '&''' is presumed to be


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(i# nnual re-uirement of inventory 4'&''' units(ii# 7ost p.u. (other than carrying : ordering cost# s.18(iii# 7arrying cost are li"ely to be 1> per year (iv# 7ost of placing order s.4' per order

)etermine the economic ordering -uantity.

(b# The experience of the firm being out of stoc" is summarised below $

(1# 5toc" out (o. of units# o. of times

'' 1 (1#

4'' + (+#+' 3 (3#1'' 4 (4#

' 1' (1'#

' ' ('#2igures in brac"ets indicate percentage of time the firm has been out of stoc".

(+# 5toc" out costs are s.4' per unit(3# 7arrying cost of inventory per unit is s.+'

)etermine the optimal level of stoc" out inventory.

(c# firm has different levels in its inventory. The relevant details re given. 5uggest a brea"downof the items into &< and 7 classifications $.

" Item No" Av-" No" of units inventory Av-" Cost per unit

1 +'&''' s.8'+ 1'&''' s.1''3 3+&''' s.114 +&''' s.1' 8'&''' s.3.4'

Solution/a0 7arrying cost per unit per annum

C 7ost per unit x 7arrying cost > p.a.

C s. 18 x '.1 C s. +.4'

ow from the formula for =conomic Arder Suantity (=AS#

+ x Total consumption p.a. x ordering cost per orderC carrying cost per unit

+ x 4'&''' x 4'C C 4&''' units

+.4'

Alternative 8or,in- :

Ardering sie (units# 1&''' +&''' +&'' 4&''' &''' &''' 1'&'''


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o. of orders re-uired 4' +' 18 1' 4

verage inventory (units# '' 1&''' 1&+' +&''' +&'' 4&''' &'''

Total carrying cost ofverage inventory in s.1&+'' +&4'' 3&''' 4&'' 8&''' 9&8'' 1+&'''

Total ordering cost

C o of orders x cost of%lacing each order 19&+'' 9&8'' 0&8' 4&'' 3&4' +&4'' 1&9+'

Total cost in s. +'&4'' 1+&''' 1'&8' 9&8'' 9&4' 1+&''' 13&9+'

Pence lease cost of s. 9&8'' is at the ordering sie of 4&''' units.

/b0 safety stoc" stoc" stoc" probability expected stoc" out Total expectedlevel out out cost N of stoc" at this level stoc" out cost(units# (units# s. 4' per out

unit s. s. s.'' ' ' ' ' '4'' 1'' 4&''' '.'1 4' 4'+' +' 1'&''' '.'1 1''

1' 8&''' '.'+ 1+' +8'

1'' 4'' 18&''' '.'1 18'3'' 1+&''' '.'+ +4'1' 8&''' '.'3 1' 4'

' 4' 1&''' '.'1 1'3' 14&''' '.'+ +'+'' &''' '.'3 +4'

' +&''' '.'4 ' 1&8+'' '' +'&''' '.'1 +''

4'' 18&''' '.'+ 3+'+' 1'&''' '.'3 3''1'' 4&''' '.'4 18'

' +&''' '.1' +'' +&''

5afety stoc" expected stoc" carrying cost at Total safety,evel (units# out costs s. +' per unit stoc" cost s. s. s.

' +&'' ' +&''' 1&8+' 1&''' +&8+'

1'' 4' +&''' +&4'+' +8' &''' &+8'4'' 4' &''' &'4''' ' 1'&''' 1'&'''

Aptimum safety stoc" where the total cost is the least is at ' units level.

/c0 !tem o. Jnits > of total Jnit cost Total cost > of total cost Jnits s. s.

1 +'&''' 13.3 8'.'' 1+&''&''' 39.X


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+ 1'&''' 8.0 1''.'' 1'&''&''' 3+.9X3 3+&''' +1.3 11.'' 3&+&''' 11.8X to be classified as < and last priority item though in -uantity bul" but value is less henceto be classified as 7.

**********

Question 2rom the following prepare !ncome 5tatement of 7ompany &< and 7. !ncometax ate 4> 4> 4>

Solution

First Alternative

+or,in- notes :Company A

=

=Ta"ing (1# : (+# we get 3=

+ow variable cost C 88 > on sales

3

+7ontribution C 1'' F 88 i.e. 33> on sales

31&+''


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Pence sales C C s. 3&8''331/3 >

5ame way =

Ar& 3=

=

=

Pence sales C C s. &'''

+>

Company C=

2inancial leverage C C or =

gain = on sales.

7ontribution C 1'' F ' C '> on sales 8&'''Pence sales C C s. 1+&''' '>

Income Statement : < 7


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s. s. s.5ales 3&8'' &''' 1+&''',ess $ ?ariable cost +&4'' 8&''' 8&'''7ontribution 1&+'' +&''' 8&'''

,ess $ 2ixed cost 9'' 1&8'' 4&'''=

< 7

5hare 7apital ' +' 1'14> )ebentures +' 1,oan from a 2inancial !nstitutionN 1> p.a. ate of !nterest. 1' +

=xpected rate of return before tax is +>. The rate of dividend of the company is not less than+'>. The company at present at present has low debt. 7orporate taxation '>.

Solution


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< 7

eturn on s. ' la"hs N +> 1+.' 1+.' 1+.'

,ess $ !nterest on )ebenture +.' +.1'

!nterest on loan 1.' 4.'***** ***** *****

Taxable profit 1+.' 0.9' .9'!ncome tax '> 8.+ 3.9 +.9%rofit after tax available 8.+ 3.9 +.9

To share holdersate of return on 1+.> 19.0> +9.>5hare capital2rom shareholders point of view alternative 7 (highest# is to be chosen.

Question 3/a0 The following information is available in respect of


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%ayments $6ages : expenses 11&''' 11&'' 1+&''' 1+&''

%ayment to suppliers ++&''' +4&''' +8&''' +&'''33&''' 3&'' 3&''' 4'&''

7losing balance 0&''' 4&'' +&'' 1&'''

$rofit # %oss forecast for mont&s April G ulys.

5ales (pril to Guly# 1&04&'''7losing stoc" (Guly purchase# 3+&'''

********+&'8&'''

,ess $ Apening stoc" F (;arch purchase# +4&'''%urchase (pril to Guly# 1&18&'''6ages : expenses (pril to Guly 40&'''

1&0&'''%rofit for the 4 month period 19&'''

Movement of Funds Statement5toc" (Apening# pril ;arch purchase +4&'''eceivables (Apening# pril 7redit allowed 3 month

Ganuary sales 3'&'''2ebruary sales 33&''';arch sales 38&'''

99&'''7reditors (Apening# pril 7redit received + months

2ebruary purchases ++&'''

;arch purchase +4&'''48&'''

7losing stoc" (end of Guly#& Guly purchase 3+&'''eceivable (end of Guly#& ;ay to Guly sales 1&3&'''

7reditors (end of Guly#& Gune and Guly purchase 8+&'''ow movement of funds statement can be wor"ed out

Sources : s.%rofit earned during 4 months 19&'''dd $ !ncrease in creditors (8+&''' F 48&'''# 18&'''

3&'''

Application :,ess $ !ncrease in receivables (1&3&''' F 99&'''# 38&''',ess $ !ncrease in stoc" &''' (3+&''' F +4&'''# 44&'''

(# 9&'''Apening cash balance 1'&'''Pence closing cash balance 1&'''


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May 199>

Question 1The directors of


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%roposed $ C s. 3&1+&'3 38' dayseduction in investment in receivable s. 1&1'&139 (s. 4&++&+++ F s. 3&1+&'3#7ost of savings on investment in receivable (s. 1&1'&139 x 1'># 11&'14

8&'14


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s. 1'&98&0=.%.5. C 1&''&'''

=.%.5. C s. 1'.90

;ar"et price s. 1'9.0'

s. 1'9.0'Pence& %/= C C 1' s. 1'.90

/a0 $robable price! s&are( if t&e additional investment 8ere to be raised by 8ay of loans

%resent capital employed $

s.

=-uity 1'&''&''')ebenture (,ong term# 1'&''&'''evenue reserves 1+&''&''' s. 3+&''&'''

%re F !nterest and pre F tax profits given s. 1 la"hs

s. 1 la"hs x 1''ate of return = s. 3+ la"hs

)ebt e-uity ratio& if s. 1' la"hs (additional investment# were to be borrowed ()ebt s. +' la"hsand e-uity s. ++ la"hs#& will be

s. +' la"hs x 1'' C 40.8'> s. 4+ la"hs

5ince& the debt e-uity ratio will not exceed 8'> %/= will remain same.

!f s. 1' la"hs is to be borrowed& the earning will be as under $

s& s&eturn of 8.+> on s. 4+ la"hs +3&8+&''

,ess $ !nterest at 1> on existing s. 1' la"hs debenture 1&'&'''!nterest on fresh borrowed amount of s. 1' la"hs at 1>1&'&''' 3&3'&'''

%rofit after interest before tax +'&3+&'',ess $ Tax at 3> 0&11&30%rofit after tax 13&+1&1+

o. of e-uity shares 1&''&'''

=.%.5. C s. 13&+1&1+1&''&''' C s. 13.+1

%robable price of e-uity share C s. 13.+1 x 1'(efer to wor"ing note# C s. 13+.1'


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/b0 $robable price! s&are( if additional investment 8ere to be raised by 8ay of e6uity"

!f s. 1' la"hs were to be raised by way of e-uity shares to be raised at mar"et rates. Theexisting mar"et price of s. 1'9.0' may come down a little and may possible settle at s. 1''.hence& new e-uity shares to be raised will be

s. 1'&''&'''/ s. 1'' C 1'&''' shares

!f s. 1' la"hs is to be raised by way of e-uity shares& the earning will be as under $

s&

%rofit before interest and tax +3&8+&''

,ess $ !nterest on debentures 1&'&'''%rofit after interest before tax ++&1+&''

,ess $ Tax N 3> 0&04&30

%rofit after tax 14&3&1+

o. of e-uity shares 1&1'&'''

s. 14&3&1+=.%.5. C C s. 13.'0 1&1'&'''

%robable price of e-uity share C s. 13.'0 x 1'(efer to wor"ing note# C s. 13'.0'

The suggested solution will be to issue fresh debentures to finance expansion.

Question ' newly established company manufacturing two products furnishes the 7ost 5heets as under $

%roducts s./unit

, of the direct wages will be paid in the month of use of direct labour forproduction and the balance in the next following month.

?ariable Averheads $ '> to be paid in the month of incurrence and the balance in the nextfollowing month.

2ixed Averheads $ 4'> will be paid in the month of incurrence and the other 4'> in the nextfollowing month. The balance of +'> represents depreciation.

The bill discounting charges payable to the


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(efer to wor"ing note 3#

?ariable overheads 48&13 0&8 0'&43(efer to wor"ing note 4#

2ixed overheads 4'&''' 4'&''' 4'&'''(efer to wor"ing note #


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, 0> 3&1' 3&4' +&0'' 3&'''(0> of (0> of (0> of (0> of

4&+'' units# 4&8'' units# 3&8'' units# 4&''' units#

+> 1&'' 1&1' 9'' 1&''' 1&1+(+> of (+> of (+> of (+> of (+> of

4&+'' units# 4&8'' units# 3&8'' units# 4&''' units# 4&'' units#******** ******* ******** ******** ******

1&'' 4&3'' 4&3' 3&0'' 4&1+

< 0> 1&0 1&0+ 1&3' 1&''(0> of (0> of (0> of (0> of

+&1'' units# +&3'' units# 1&'' units# +&''' units#

+> + 0 4' '' 40(+> of (+> of (+> of (+> of (+> of

+&1'' units# +&3'' units# 1&'' units# +&''' units# 1&9'' units#

****** ***** ******* ******* *******+ +&1' +&10 1&' 1&90

)irect material re-uirements $ (s.#

, 4+&''' 1&0+&''' 1&04&''' 1&4&''' 1&8&'''(1&'' units (4&3'' units (4&3' units (3&0'' units (4&1+ units

x s. 4'# x s. 4'# x s. 4'# x s. 4'# x s. 4'#

< 1'&'' 43&''' 43&'' 30&''' 39&''(+ units (+&1' units (+&10 units (1&' units (1&90 unitsx s. +'# x s. +'# x s. +'# x s. +'# x s. +'#

******** ******** ********* ********* ********+&'' +&1&''' +&10&'' 1&&''' +&'4&''

%urchases $ (s.#+8&+' 1&'0&'' 1&'&0' 9+&''

('> of ('> of ('> of ('> of s. +&''# s. +&1&''# s. +&10&''# s. 1&&'''#

1&'0&'' 1&'&0' 9+&'' 1&'+&+' ('> of ('> of ('> of ('> of

s. +&1&'''#s. +&10&''#(s. 1&&'''# s. +&'4&''#******** ********* ********* **********

1&33&0' +&18&+' +&'1&+' 1&94&0'%ayment (s# ****** 1&33&0' +&18&+' +&'1&+'

3. )irect wages

, 31&'' 1&+9&''' 1&3'&'' 1&11&'''

(1&'' x s. 3'#(4&3'' x s. 3'#(4&3' x s. 3'#(3&0'' x s.3'#

< 0&0 3+&+' 3+&8+ +0&0' (+ x s.1#(+&1' x s.1#(+&10 x s.1#(1&' x s1#******** ******** ******** *********


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39&30 1&81&+' 1&83&1+ 1&3&0'

%ayment+'> , 0&0 3+&+' 3+&8+

(+'> of (+'> of (+'> of s. 39&30# s. 1&81&+'# s. 1&83&1+#

'> < *** 1&+9&''' 1&3'&'' 1&11&''' ('> of ('> of ('> of

s. 1&81&+'# s. 1&83&1+# s. 1&3&0'#******** ******** *********

1&38&0 1&8+&0' 1&43&8+

4. ?ariable overheads, 14&0'' 8'&+'' 8'&9'' 1&''

(1&'' x s.14#(4&3'' x s.14#(4&3' xs.14#(3&0'' x s14#

< 3&80 1&'' 1&++ 1+&9' (+ x s.0#(+&1' x s.0#(+&10 x s.0# (1&' x s.0#********* ********* ********* **********

1&30 0&+' 08&1+ 84&0'

?ariable overheads payment (s.#'> 30&8+ 3&'83 3+&30

('> of ('> of ('> of

s. 0&+'# s. 08&1+# s.84&0'#

'> 9&1 30&8+ 3&'83 ('> of ('> of ('> of

s. 1&30# s. 0&+'# s. 08&1+#******** ********** ******

48&13 0&8 0'&43

. 2ixed overheads payment 4'&''' 4'&''' 4'&'''

8.


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Financial Mana-ement

Question 1

i/en -elo( ae cas! )osition atios o+ M %td& And t!e industy A/eage& 'ndusty a/eage is

ai/ed -y ta$ing a/eage )osition o+ 25 com)anies o+ t!e simila tade.

bsolute 7ash atio 7ash position to Totalassets ratio

7ash interval

;) ,td.!ndustry verage

'.38'.3'

1+.'>1>

+ days33 days

Pow do you feel about the cash position of ;) ,td.

Solution

A-solute cas! atio indicates t!e )osition o+ a/aila-le cas! +o meeting t!e cuent lia-ilities& Cas!

)osition to total assets atio indicates t!e )o)otion o+ li,uid cas! in t!e total assets o+ t!e entity&Cas! inte/al measue gi/es an idea a-out t!e num-e o+ days o)eating e)enses t!at can -e met out

o+ t!e cuently a/aila-le cas!&


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2ind out(i# The net wor"ing capital re-uired$(ii# The maximum permissible ban" finance under first and second methods of financing as per

Tndom 7ommittee norms. (2inal ov. 199#

Solution/i0 5stimated of t&e re6uirements of +or,in- Capital

s. s.. 7urrent ssets$

aw ;aterial stoc" (6.. 3# 8&84&816!% stoc" (6.. +# &''&'''2inished goods stoc" (6.. 4# 13&8'&''')ebtors (6.. # +9&3&487ash : of 7urrent ssets# F7urrent ,iabilities (i.e. 0> of s. &'3&481# s. &'0&401

(efer to (i# above#C s. 41&+0&98 s. &'0&401C s. 33&+'&1+

+or,in- Notes:1. nnual cost of production

s.

aw ;aterial re-uirements (1&'4&''' units s. '# 3&+'&'''

)irect wages (1&'4&''' units s. 3'# 31&+'&'''

Averheads (exclusive of department# (1&'4&'''s. 8'# 8+&4'&'''

1&08&'&'''

+. 6!% 5toc"$ s.

aw ;aterial re-uirements (4&''' units s. '# 3&+'&'''

)irect wages ('>4&''' units s. 3'# 8'&'''

Averheads ('>4&'''s. 8'# ***1&+'&'''

1&08&'&'''

3. aw ;aterial 5toc"!t is given that raw material in stoc" is average 4 wee"s consumption. 5ince& the company isnewly formed& the raw material re-uirement for production and wor" in progress will beissued and consumed during the year.

Pence& the raw material consumption for the year (+ wee"s# is as follows$ s.2or 2inished goods 3&+'&'''2or 6or" in progress **3&+'&'''


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aw ;aterial stoc" E(s. 8&4'&'''+ wee"s#4 wee"s i.e. s. 8&84&81

4. 2inished goods stoc"&''' units N s. 10' per unit C s. 13&8'&'''

. )ebtors for sale7redit allowed to debtors verage wee"s7redit sales for year (+ wee"s#i.e. (1&'4&''' units&''' units# 98&''' units

5elling price per unit s. +''

7redit sales for the year (98&''' units s. +''# s. 1&9+&''&'''

)ebtors E(s. 1&9+&''&'''+ wee"s# wee"s#

i.e. s. +9&3&48

8. 7reditors for raw material$

7redit allowed by suppliers verage 4 wee"s%urchases during the year (+ wee"s# i.e. s. 93&'4&81(s. 3&+'&'''D s. 3&+'&'''D s. 8&84&81#(6.. 1&+ : 3#

7reditors E(s. 93&'4&81+ wee"s#4 wee"sM

C s. 0&1&04'

0. 7reditors for wages,ag in payment of wages verage 1 Q wee"s)irect wages for the year (+ wee"s# i.e. s. 31&'&'''(s. 31&+'&'''D s. 8'&'''#(6.. 1 :+ above#

7reditors s. 31&'&'''+ wee"s1 Q wee"s

C s. 91&031

*****

Question '/a0 2ollowing are the data on a capital project being evaluated by the management of Z ,td.

.

Project M

nnual cost saving s.4'&'''

Jseful life 4 years!... 1>%rofitability !ndex (%!# 1.'84%? W7ost of capital W7ost of project W%aybac" W

Salvage value 0

2ind the missing values considering the following table of discount factor only $.

Discount factor 15% 14% 13% 12%

1 year '.89 '.00 '. '.93


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+ years '.08 '.089 '.03 '.0903 years '.8 '.80 '.893 '.01+4 years '.0+ '.9+ '.813 '.838

+. +.913 +.904 3.'3

/b0 5 ,td. has s.1'&''&''' allocated for capital budgeting purposes. The following proposals andassociated profitability indexes have been determined $.

%roject mount %rofitability !ndex s.

1 3&''&''' 1.+++ 1&'&''' '.93 3&'&''' 1.+'4 4&'&''' 1.1 +&''&''' 1.+'

8 4&''&''' 1.'

#!ic! o+ t!e a-o/e in/estments s!ould -e undeta$en : Assume t!at )o*ects ae indi/isi-le and

t!ee is no altenati/e use o+ t!e money allocated +o ca)ital -udgeting&

Answer

(a) Cost of Project M

At 15 '&&&" t!e sum total o+ cas! in+lo(s ; cost o+ t!e )o*ect i&e& 'nitial cas! outlay

i/en .

Annual cost sa/ing s& 40"000


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!f the profitability index (%!# is 1& cash inflows and outflows would be e-ual. !n this case& (%!# is1.'84. Therefore& cash inflows would be more by '.84 than outflow.

%rofitability !ndex (%!# C )iscounted cash inflows7ost of the project

Ar& 1.'84 C )iscounted cash inflowss. 1&14&+''

Ar& 1.'84 x s. 1&14&+'' C s. 1&+1&'9

Pence& )iscounted cash inflows C s. 1&+1&'9

5ince& nnual cost saving is s. 4'&'''. hence& cumulative discount factor for 4 years

C s. 1&+1&'94'&'''

C 3.'300+ or 3.'3

7onsidering the discount factor table at discount rate of 1+>& the cumulative discount factor for

4 years is 3.'3.Pence& the cost of capital is 1+>Net present value of t&e pro


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8 4&''&''' 1.' 4&+'&''' +'&'''

The allocation of funds to the projects 1& 3 and (as selected above on the basis of %.!# will give.%?. Af s. 1&08&''' and s. 1&'&''' will remain unspent.

Powever& the .%.?. of the projects 3& 4 and is s. 1&91&''' which is more than the .%.?. ofprojects 1& 3 and . further& by underta"ing projects 3& 4 and no money will remain unspent.Therefore& 5. ,td. is advised to underta"e investments in projects 3& 4 and .


57/174


May 1999


Question 15hri )evdas as"s you to prepare his


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7losing stoc" is s. (x D &'''#

verage inventory C Apening stoc" D 7losing stoc"+

4'&''' C +x D &''' +

'&''' C +x D &'''x C 0&'''+ C 30&''

Therefore& opening stoc" C s. 30&''nd closing stoc" C s. 30&'' D s. &''' C s. 4+&''.

(4# 7apital turnover ratio C +

7apital C 5ales7apital turnover ratio

C s. 3&''&'''+ C s. 1&'&'''

(# 2ixed assets

2ixed assets turnover ratio C 4

2ixed assets C 5ales2ixed assets turnover ratio

C s. 3&''&'''4 C s. 0&'''

(8# )ebtors)ebt collection period C + months

)ebtors C E7redit sales1+ +M

C s. 3&''&'''8 C s. '&'''

(0# %urchase%urchase C 7ost of goods sold D =xcess of closing stoc" over opening stoc"

C s. +&4'&''' D s. &''' C s. +&4&'''

(# 7reditors

7reditors payment period C 03 daysC 7redit purchase0338

C s. +&4&''' C s. 49&'''

Note :The entire sales and purchases have been assumed to be made on credit.

Question S ,td. sells goods at a uniform rate of gross profit of +'> on sales including depreciation as partof cost of production. !ts annual figures are as under $

s.5ales (t + months@ credit# +4&''&''';aterials consumed (5uppliers credit + months# 8&''&'''6ages paid (;onthly at the beginning of the subse-uent month# 4&'&''';anufacturing expenses (7ash expenses are paidone month in arrear# 8&''&'''dministration expenses (7ash expenses are paidone month in arrear# 1&'&'''5ales promotion expenses (%aid -uarterly in advance# 0&'''

The company "eeps one month stoc" each of raw materials and finished goods. minimumcash balance of s.'&''' is always "ept. The company wants to adopt a 1'> safety margin inthe maintenance of wor"ing capital.

The company has no wor" in progress.

2ind out the re-uirements of wor"ing capital on cash cost basis. (2inal ;ay 1999#


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Solution/a0 +or,in- Notes:

s.1. ;anufacturing expenses

5ales +4&''&''',ess$ Bross profit margin at +'> *4&'&'''Total ;anufacturing cost 19&+'&''',ess$ ;aterials consumed 8&''&''' 6ages 4&'&''' 1'&'&''';anufacturing expenses &4'&'''

,ess$ 7ash manufacturing expenses ('&'''1+# 8&''&'''

)epreciation +&4'&'''

+. Total cash costs s.;anufacturing 7osts 19&+'&''',ess$ )epreciation +&4'&'''7ash ;anufacturing costs 18&'&'''

dd$ dministrative expenses 1&'&'''dd$ 5ales promotion expenses ***0&'''Total cash costs 19&'&'''

Statement s&o8in- t&e re6uirements of +or,in- Capital of t&e Company7urrent ssets$ s.

)ebtors 1/8thof total cash costs (1/8 s. 19&'&'''# (6.. +# 3&10&''

5ales promotion expenses (prepaid# 1&0'5toc" of raw materials (1 month# '&'''

2inished goods (1/1+ of cash manufacturing costs# (s. 18&'&'''1/1+# 1&4'&'''

7ash in hand **'&'''8&'8&+'

,ess$ 7urrent ,iabilities7reditors for goods (+ months# 1'&'''6ages (1 month# 4'&''';anufacturing expenses (1 month# '&'''dministrative expenses (1 month# 1+&'' +&'+&''et wor"ing capital 4&'3&0'dd$ 5afety margin 1'> ***4'&306or"ing 7apital re-uired **4&44&1+

***********

Question ' large profit ma"ing company is considering the installation of a machine to process the wasteproduced by one of its existing manufacturing process to be converted into a mar"etableproduct. t present& the waste is removed by a contractor for disposal on payment by thecompany of s.' la"hs p.a. for the next four years. The contract can be terminated uponinstallation of the aforesaid machine on payment of a compensation of s.3' lacs before theprocessing operation starts. This compensation is not allowed as deduction for tax purposes.

The machine re-uired for carrying out the processing will cost s.+'' lacs to be financed by aloan repayable in 4 e-ual installments commencing from the end of year 1. The interest rate is18> p.a. t the end of the 4thyear& the machine can be sold for s.+' lacs and the cost ofdismantling and removal will be s.1 lacs.

5ales and direct costs of the product emerging from waste processing for 4 years are estimatedas under $ s. (lacs#Hear 1 + 3 4


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5ales 3++ 3++ 41 41;aterial consumption 3' 4' 6ages 0 0 1''Ather expenses 4' 4 4 0'2actory Averheads 8' 11' 14)epreciation (as per incometax rules# ' 3 + +1

!nitial stoc" of materials re-uired before commencement of the processing operations is s.+' la"hs at the start of year 1. The stoc"levels of materials to be maintained at the end of year 1& + and 3 will be s. la"hs and the stoc"s at the end of year 4 will be nil.The storage of materials will utilise space which would otherwise have been rented out for s.1' la"hs p.a. ,abour cost includewages of 4' wor"ers& whose transfer to this process will reduce idle time payments of s.1 laths in year 1 and s.1' laths in year +.2actory overheads include apportionment of general factory overheads except to the extent of insurance charges of s.3' la"hs p.a.payable on this venture. The company@s tax rate is '>.

%resent value factors for four years are as under $Hear 1 + 3 4%resent value factors '.0' '.08 '.8 '.0+

dvise the management on the desirability of installing the machine for processing the

waste. ll calculations should form part of the answer.

Solution

Statement of Incremental $rofit

s. !n

la"hs

Hears 1 + 3

4

5ales (# 3++ 3++ 41 41

;aterial consumption 3' 4'

6ages 8' 8 1''

Ather expenses 4' 4 4 0'

2actory overheads (insurance# 3' 3' 3' 3'

,oss of rent 1' 1' 1' 1'


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!nterest 3+ +4 18

)epreciation (as per income tax rules# ' 3 + +1

Total cost$ (


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%resent value factor 1.'' '.0' '.08 '.8 '.0+

et present value of cash flows ('# +1.0 38.+ 3.184 +0.48

et present value C s. 1+3.8 '

C 03.8 la"hs

Advice: 5ince the net present value of cash flow is s. 03.8 la"hs which is positive

the management should install the machine for processing the waste.

Notes:

1. ;aterial stoc" increases are ta"en in cash flows.+. idle time wages have also been considered3. pportioned factory overheads are not relevant only insurance charges of this project

are relevant.4. !nterest calculated at 18> based on 4 e-ual installments of loan repayment.

. 5ale of machinery net income after deducting removal expenses ta"en. Tax oncapital gains ignored.

8. 5aving in contract payment and income tax there on considered in the cash flows.

*********


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November 199>


Question 1adiance Barments ,td. manufactures readymade garments and sells them on credit basisthrough a networ" of dealers. !ts present sale is s.8' la"h p.a. with +' days credit period. Thecompany is contemplating an increase in the credit period with a view to increasing sales.%resent variable costs are 0'> of sales and the total fixed costs s. la"h p.a. The companyexpects pretax return on investment N +>. 5ome other details are given as under $

%roposed 7redit verage 7ollection =xpected nnual %olicy %eriod (days# 5ales (s. la"hs#

! 3' 8!! 4' 0'!!! ' 04!? 8' 0

e-uired$ 6hich credit policy should the company adopt W %resent your answer in a tabularform. ssume 38' days a year. 7alculations should be made up to two digits after decimal.

Solution Statement s&o8in- evaluation of t&e proposed credit policies (mt. !n s. la"hs#

7redit %olicies

%roposed%resent ! !! !!! !?

verage collection (+' days# (3' days# (4' days# (' days# (8' days#%eriod (days#5ales (nnual# 8'.'' 8.'' 0'.'' 04.'' 0.'',ess$ ?ariable cost 4+.'' 4.' 49.'' 1.' +.'7ontribution 1.'' 19.' +1.'' ++.+' ++.',ess$ 2ixed costs .'' .'' .'' .'' .''%rofit 1'.'' 11.' 13.'' 14.+' 14.'!ncrease in profit com%ared to present profit$(# 1.' 3.'' 4.+' 4.'!nvestments in debtors'.'' 3.' 0.'' 9.' 8'.'(variable cost D 2ixed cost#)ebtors turnover 1 1+ 9 0.+' 8(38' days/ averagecollection period#verage investment!n )ebtors +.0 4.48 8.33 .3 1'.'(investment in debtors/

)ebtors turnover#dditional investment in debtors7ompared to present,evel 1.8 3. .+ 0.3'e-uired return on


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dditional in investment(+>#$ (. The present value of e.1 to be received atthe end of the year at 1'> is as under $

Hear 1 + 3 4 %resent value .9'9 .+8 .01 .83 .8+1

e-uired $ Jsing %? method& you are re-uired to analyse the feasibility of the proposal andma"e recommendations.

Solution

A)C Company %td" Computation of yearly cas& inflo8;achine V Z H5ales (units# 18&''' 18&''' +4&'''5elling price per unit (s# +' +' +'5ales$ (# 3&+'&''' 3&+'&''' 4&'&'''

,ess$ 7osts?ariable running costs 4&''' +4&''' 8'&''';aterial cost 1&8'&''' 1&8'&''' +&4'&'''nnual fixed cost 9+&''' 3&''&''' 1&'&''' +&9+&''' 1&3+&''' 4&3+&'''


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dditional cost (special adv.# &''' ******** ******* *******

Total costs$ (


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5ince the profitability index of machine H is the highest therefore machine V should be replacedby machine H.

Question 'The ;odern 7hemicals ,td. re-uires s.+&''&''' for a new plant. This plant is expected toyield earning before interest and taxes of s.&''&'''. 6hile deciding about the financial plan&the company considers the objective of maximising earnings per share. !t has three alternativesto finance the project F by raising debt of s.+&'&''' or s.1'&''&''' or s.1&''&''' and thebalance& in each case& by issuing e-uity shares. The company@s share is currently selling ats.1'& but is expected to decline to s.1+ in case the funds are borrowed in excess ofs.1'&''&'''. The funds can be borrowed at the rate of 1'> upto s.+&'&'''& at 1> overs.+&'&''' and uptos.1'&''&''' and at +'> over s.1'&''&'''. The tax rate applicable tothe company is '>. 6hich form of financing should the company choose W

SolutionCalculation of 5arnin- per s&are for t&ree alternatives to finance t&e pro on s. +&'&'''#(1'> on s. +&'&'''# (1> on s. 0&'&'''#(1> on s. 0&'&'''#**** **** (+'> on s. &''&'''#

=arnings before tax 4&0&''' 3&8+&''+&8+&'',ess $ Tax N '> +&30&'' 1&1&+'1&31&+'

=arnings after tax $ (# +&30&'' 1&1&+'1&31&+'

] umber of shares $ (


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Question The following is the capital structure of 5imons 7ompany ,td. as on 31/1+/199 $

s.=-uity shares $1'&''' shares (of s.1'' each# 1'&''&'''1'> %reference shares (of s.1'' each# 4&''&'''1+> )ebentures 8&''&'''

+'&''&'''

?!e ma$et )ice o+ t!e com)anys s!ae is s&110 and it is e)ected t!at a di/idend o+ s&10 )e s!ae (ould

-e declaed +o t!e yea 1998& ?!e di/idend go(t! ate is 6&

i '+ t!e com)any is in t!e 50 ta -ac$ets" com)ute t!e (eig!ted a/eage cost o+ ca)ital&

(ii# ssuming that in order to finance an expansion plan& the company intends to borrow afund of s.1' la"h bearing 14> rate of interest& what will be the company@s revisedweighted average cost of capital W This financing decision is expected to increasedividend from s.1' to s.1+ per share. Powever& the mar"et price of e-uity share isexpected to decline from s.11' to s.1' per share.

Solution/i0 Computation of t&e 8ei-&ted avera-e cost of capital

5ource of %roportion fter tax cost (># 6eighted average2inance (1 F tax rate i.e.& '># cost of capital (>#

(a# (b# (c# (d# C (b# x (c#

=-uity share '. 1.'9 0.4

(efer to wor"ing note 1#1'> %reference share '.+ 1'.'' +.''1+> )ebentures '.38.'' 1.'6eighted average cost of 11.347apital

/ii0 Computation of *evised 8ei-&ted avera-e cost of capital

5ource of %roportion fter tax cost (># 6eighted average2inance (1 F tax rate i.e. '># cost of capital (>#

(a# (b# (c# (d# C (b# x (c#=-uity shares '.333 10.4+ .'

(efer to wor"ing note +#1'> preference shares '.133 1'.'' 1.331+> )ebentures '.+'' 8.'' 1.+'

14> ,oan '.333 0.'' +.33evised weighted average cost of capital 1'.88


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+or,in- notes:(1# 7ost of e-uity shares (Oe#

)ividend per shareOe C D Browth rate ;ar"et price per share

1'C D '.'8 11'C '.1'9 or 1.'9>

(+# evised cost of e-uity shares (Oe# 1+evised Oe C D '.'8 1'

C '.104+ or 10.4+>


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May 222


Question 1=xamine the following schedule prepared by O ,td.

Sc&edule of funds provided by operations for t&e years ended '1stuly( 227

(s. L'''# (s. L'''#5ales 3+&08'dd$ )ecrease in bills receivables 1&''',ess$ !ncrease in accounts receivables **(8+8#!nflow from operating revenues 33&1347ost of goods sold 1&,ess$ )ecrease in inventories (+1+#

dd$ )ecrease in trades payable ***1 1&406ages and 5alaries &+4,ess$ !ncrease in wages payable ***(1+# &+0+

dministrative =xpenses 3&'88dd$ !ncrease in prepaid expenses ***11 3&'00

%roperty taxes 4+!nterest expenses 3+dd$ mortiation of premium on bonds payable ***+' **+Autflow from operating expenses +0&08

2rom operations &34ent !ncome +'0dd$ !ncrease in unearned rent ****3 **+1'

!ncome tax 1&33' &,ess$ !ncrease in deferred tax ***' *1&+'2unds from operations *4&+0

e-uired$(i# 6hat is the definition of funds shown in the scheduleW(ii# 6hat amount was reported as gross margin in the income statementW(iii# Pow much cash was collected from the customersW

(iv# Pow much cash was paid for the purchases madeW(v# s a result of change in inventories& did the wor"ing capital increase or decrease any by

what amountW(vi# Pow much rent was actually earned during the yearW(vii# 6hat was the amount of tax expenses reported on the statementW(viii# 7an you reconcile the profit after tax with the funds provided from operationsW

Solutionote$ ll figures are in s. L'''(i# L2unds@ shown in the schedule are noting but cash e-uivalents as defined in 53 on

R7ash 2low statements^.

(ii# Bross ;argin C 5ales 7ost of goods sold C s. 3+&08's. 1& s. 14&10+

(iii# 7ash collected from customers C !nflow from operating revenues s. 33&134


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(iv# 7ash paid for purchases made s. 1&40(v# 7hange in wor"ing capital due to change in inventory s. +1+

()ecrease#(vi# ent actually earned during the year C s. +'0(vii# Tax expenses reported in the income statement s. 1&33'

(s. L'''#%rofit after tax (6. note K 1# 3&019dd$ )ecrease in bills receivable 1&'''

)ecrease in inventories +1+!ncrease in wages payable 1+!ncrease in unearned rent 3!ncrease in deferred tax **' **1&+00

4&998,ess$ !ncrease in accounts receivable 8+8

)ecrease in trades payable 1!ncrease in prepaid wages ***11 **01

2unds from operations 4&+0

+or,in- Notes$rofit after ta

s. L'''5ales 3+&08',ess$ 7ost of goods sold 1&Bross ;argin 14&10+dd$ ent income ***+'0

14&309,ess$ 6ages : 5alaries &+4

dministrative expenses 3&'88

%roperty taxes 4+!nterest expenses 3+mortiation of premium on bonds payable ***+' 9&33'

%rofit before tax &'49,ess$ !ncome tax 1&33'%rofit after tax 3&019

****

Question (a# 7ompany Z is forced to choose between two machines and b. The two machines are designed

differently& but have identical capacity and do exactly the same job. ;achine costs s.1&'&'''and will last for 3 years. !t costs s.4'&''' per year to run. ;achine < is an Leconomy@ model

costing only s.1&''&'''& but will last only for + years& and costs s.8'&''' per year to run.These are real cash flows. The costs are forecasted in rupees of constant purchasing power.!gnore tax. Apportunity cost of capital is 1' percent. 6hich machine company Z should buy W

(b# 7ompany H is operating an elderly machine that is expected to produce a net cash inflow ofrs.4'&''' in the coming year and s.4'&''' next year. 7urrent salvage value is s.'&''' andnext year@s value is s.0'&'''. The machine can be replaced now with a new machine& whichcosts s.1&'&'''& but is much more efficient and will provide a cash inflow of s.'&''' a yearfor 3 years. 7ompany H wants to "now whether it should replace the e-uipment now or wait ayear with the clear understanding that the new machine is the best of the available alternativesand that it in turn be replaced at the optimal point. !gnore tax. Ta"e opportunity cost of capital as1' percent. dvise with reasons.

Solution


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/a0 Statement s&o8in- t&e evaluation of t8o mac&ines

;achines $ (iv# U 1.03%resent value of running cost of machines (s.# $ (v# 99&44' 1&'4&1''

\(ii# x (iii#X \(ii# x (iv#X7ash outflow of machines (s.# $ (vi# C (.i# D (v# +&49&44' +&'4&1''=-uivalent present value of annual cash outflow 1&''&33 1&10&830

\(vi# (iii#X \(vi# (iv#X

ecision : 7ompany Z should buy machine since its e-uivalent cash outflow is less thanmachine +.48 s.%resent value of cash inflow for 3 year (s.'&''' x +.48# 1&9&'

s.,ess $ 7ash outflow

%urchase cost of new machine 1&'&''',ess $ 5alvage value of old machine 0'&''' '&'''

.%.?. of cash inflow for 3 years 1&1&'

=-uivalent annual cash inflow of new machine s.1&1&' 40&+' +.48

Advice : 5ince the e-uivalent annual cash inflow of new machine now and next year is morethan cash inflow (s.4'&'''# of an elderly machine the company H is advised to replace theelderly machine now.


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Com)any B need not (ait +o t!e net yea to e)lace t!e eldely mac!ine since t!e e,ui/alent annual

cas! in+lo( no( is moe t!an t!e net yeas cas! in+lo(&

______

Question ' new manufacturing company is to be incorporated from Ganuary 1& +'''. !ts authorised capitalwill be s.+ crores divided into +' la"h e-uity shares of s.1' each. !t intends to raised capitalby issuing e-uity shares of s.1 crore (fully paid# on 1stGanuary. on sales.(3# The company will ma"e credit sales only and these will be collected in the second month

following sales.

(4# 7redit will be paid in the first month following credit purchases. There will be credit purchasesonly.

(# The company will "eep minimum stoc" of raw materials of s.1' la"h.

(8# )epreciation will be charged N 1'> p.a. on cost on all fixed assets.

(0# %ayment of preliminary expenses of rs.1 la"h will be made in Ganuary.

(# 6ages and salaries will be s.+ la"h each month and will be paid on the first day of the nextmonth.

(9# dministrative expenses of s.1 la"h per month will be paid in the month of their insurance.

ssume no minimum re-uired cash balance.

Hou are re-uired to prepare the monthly cash budget (Ganuary F Gune#& the projected !ncome5tatement for the 8 F month period and the projected


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SolutionSecond Alternative

Mont&ly Cas& )ud-et /anuary G une0(s. in la"hs#

an" Feb" Marc& April May une ;otal

Apening cash balance U +1.'' U +.0 1'.' 14.' UA" Cas& Inflo8s=-uity shares 1''.'' U U U U U 1''.'',oans 13.'' +.' U U U U 1.'(efer to wor" note 1#eceipt from debtors U U 3'.'' 3.'' 3.'' 4'.'' 14'.''Total $ (# 113.'' +3.' 3'.'' 30.0 4.' 4.' +.')" Cas& Hutflo8s%lant and ;achinery +'.'' U U U U U +'.'',and and


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!ssued& subscribed and %lant and ;achinery +'.''paid up capital ,ess $ depreciation 1.'' 19.''1'&''&''' e-uity shares ofs.1' each 1''.'' 2urniture 1'&''eserve and 5urplus ,ess $ )epreciation '.' 9.'%rofit and ,oss 4.34,ongterm loans 1.' ;otor vehicles 1'.''7urrent liabilities and ,ess $ )epreciation '.' 9.' 08.''provisions $ 7urrent ssets $5undry creditors 31.0 5toc" 1'.''ccrued interest '.9' 5undry debtors .''Autstanding expenses +.'' 34.8 7ash +3.' 11.'

;iscellaneous expenditure tothe extent not written off $

. %reliminary expenses 1.''19.' 19.'

+or,in- notes :1. 5ubse-uent


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1+> interest on s.13 la"hs for 8 months '.0 la"hsdd $ 1+> interest on s.+. la"hs for months '.1+ la"hs

'.9' la"hs

November 222


Question 1Jsing the following data& complete the


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(e# Total turnover to total assets 4 times(f# 7ost of sales to !nventory 1' times(g# verage collection period days& assume 38 days in a year (h# ,ongterm debt W(i# 7urrent ratio 1.(j# 5undry 7reditors s. 8'&'''

)alance S&eet of %td" As at '1"2'"227

,iabilities s. ssets s.

5undry 7reditors,ongTerm )ebt5hare 7apital

7ash5undry )ebtors!nventory2ixed ssets

Solution

+or,in- Notes1" Sales

Bross profit C +> of sales

s. 1&+'&''' C +> of sales

5ales C s. 1&+'&'''+> C s. 4&'&'''

7redit 5ales C '> of Total 5ales C s. 3&4&'''

" Closin- stoc,7losing stoc"

7ost of sales !nventory C 1'

5ales Bross %rofit!nventory C 1'

(s. 4&'&''' s. 1&+'&'''#!nventory C 1'!nventory C s. 3&8'&'''1' C s. 38&'''

'" ;otal AssetsTotal ssets turnover atio C 4

5ales Total ssets C 4

s. 4&'&'''Total ssets C 4

Total ssets C s. 4&'&'''4 C s. 1&+'&'''

7" Current Assets7urrent atio C 1.

7urrent ssets7urrent ,iabilities C 1.7urrent ssets s. 8'&''' C 1.

7urrent ssets C s. 8'&'''1. C s. 9'&'''

7" ebtorsverage 7ollection %eriod C days

E()ebtors7redit 5ales# 38M C days

E()ebtorss. 3&4&'''#38M C days

)ebtors C E(s. 3&4&'''#38M C s. &+8'

3" Cas&

7urrent ssets C s. 9'&'''7ash D )ebtorsD !nventory C s. 9'&'''

7ash D s. &+8'D s. 38&''' C s. 9'&'''

7ash C s. 9'&''' s. &+8' C s. 4&04'


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78/174


74 25"000 22"500 18"000

107 11"500 10"350 8"280

108 2"300 2"070 1"656

116 29"000 26"100 20"880

?otal loan amount 48"816

Question 'ZHV ,td.& has the following boo" value capital structure$

=-uity 7apital (in shares of s. 1' each& fully paid up F at par# s. 1 crores

11> preference 7apital (in shares of s. 1'' each& fully paid up F at par# s. 1 crore

etained =arnings s. +' crores

13.> )ebentures (of s. 1'' each# s. 1' crores

1> Team ,oans s. 1+. crores

The next expected dividend on e-uity shares per share is s. 3.8'I the dividend per share isexpected to grow at the rate of 0>. The mar"et price per share is s. 4'.

%reference stoc"& redeemable after ten years& is currently selling at s. 0 per share.

)ebentures& redeemable after six years& are selling at s. ' per debenture.

The !ncome F tax rate for the company is 4'>

(i# e-uired$

7alculate the weighted average cost of capital using$

(a# boo" value proportionsI and(b# mar"et value proportions.

(ii# )efine the weighted marginal cost of capital schedule for the company& if it raises s. 1'

crores next year& given the following information$

(a# the amount will be raised by e-uity and debt in e-ual proportionsI

(b# the company expects to retain s. 1.' crores earnings next yearI

(c# the additional issue of e-uity shares will result in the next price per share being fixedat s. 3+I

(d# the debt capital raised by way of term loans will cost 1> for the first s. +.' croresand 18> for the next s. +. crores. (D1+ C +' mar"s#

Solution/i0/a0 Statement s&o8in- computation of 8ei-&ted avera-e cost of capital by usin- )oo, Kalue

proportions

5ources of mount 6eight 7ost of 6eighted


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2inance (


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Ar 1+.>

+. =-uity 5hares 1 '. '.1+ '.'91+(efer to wor"ing note #

)ebt 1 '. '.'9 '.'4(efer to wor"ing note 8#

*******6eighted average cost of capital '.138+

Ar 13.8+>3. =-uity shares +. '. '.1+ '.'91+

(efer to wor"ing note #)ebt +. '. '.'98 '.'4

(efer to wor"ing note 8#

******'.139+

Ar 13.9+>

+or,in- Notes:1. 7ost of e-uity capital and retained earnings (Oe# )1OeC D g %'6here& Oe C 7ost of e-uity capital

)1 C =xpected dividend at the end of year 1

%' C 7urrent mar"et price of e-uity share.

B C Browth rate of dividend

ow it is given that )1C s. 3.8'& p'C s. 4' and g C 0>

s. 3.8'Therefore& OeC D '.'0

s. 4'

Ar& OeC 18>

+. 7ost of preference capital (Op#

) D 2 F %

nOpC 2 D %

+

6here& ) C %reference dividend

2 C 2ace value of preference shares

% C 7urrent mar"et price of preference shares C edemption period of preference shares

ow& it is given that ) C 11>& 2 C s. 1''& % C s. 0 and n C 1' years

11 D s. 1'' F s. 0 1'


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Therefore Op C x 1'' s. 1'' D s. 0

+

C 1.43>

3. 7ost of debentures (Od#

r(1 F t# 2 F % nOd C 2 D %

+6here& r C !nterest on debentures

t C Tax rate applicable to the company

2 C 2ace value of debentures

% C 7urrent mar"et price of debentures

n C edemption period of debentures

ow& it is given that r C 13.>& t C 4'>& 2 C s. 1''& % C s. ' and n C 8 years

13. (1 F '.4'# D s. 1'' F s. ' 8

Therefore& OdC x 1'' s. 1'' D s. '

+

C 1+.0'>

4. 7ost of term loans (Ot#

where& r C ate of interest on term loans

t C Tax rate applicable to the company.

ow& r C 1> and t C 4'>

Therefore& OtC 1> (1 F '.4'#

C 9>

. 7ost of fresh e-uity share (Oe#

)1OeC D g %

ow& )1C s. 3.8'& % C s. 3+ and g C '.'0

s. 3.8'Therefore& OeC D '.'0 s. 3+


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C 1.+>

8. 7ost of debt (Od#

Od C r(1 F t#(2or first s. +. crores#

r C 1> and t C 4'>Therefore& Od C 1> (1 F 4'>#

C 9>

(2or the next s. +. crores#

r C 18> and t C 4'>Therefore& Od C 18> (1 F 4'>#

C 9.8>

May 221


Question 1The credit manager of ZHV ,td. is reappraising the company@s credit policy. The company sellsits products on terms of net 3'. cost of goods sold is > of sales and fixed costs are further >of sales. ZHV classifies its 7ustomers on a scale of 1 to 4. during the post five years& theexperience was as under$

7lassification )efault as verage collection percentage of sales period F in days for non

defaulting account

1 ' 4+ + 4+3 1' 4'4 +' '


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The average rate of interest is 1>. 6hat conclusions do you draw about the company@s creditpolicyW 6hat other factors should be ta"en into account before changing the present policyW)iscuss.

Solution

5ince the amount of revenue generated from each category of customer is not given in the-uestions. ,et us consider s. 1'' as the amount of revenue generated from each type ofcustomer. Therefore& s. 1'' shall be ta"en as the basis for reappraisal of company@s creditpolicy.

Classi+i E oss Po+it Had de-ts 'nteest cost ?otal Cost =et e++ect Gtategy&

7ation N 1> (s# (efer to 6or"ing (s# (s# (s# note# (s#

i ii iii i/ ; ii I iii / ; i J i/

1 1 il 1.0 1.0 13.43 ccept

+ 1 + 1.40 3.40 11.3 ccept

3 1 1' 1.4' 11.4' 3.8' ccept

4 1 +' +.' ++.' (0.'# eject

_ !t is given that cost of goods sold is >. Therefore Bross %rofit is 1> of sales.

The reappraisal of the company@s credit policy indicates that the company either follows a lenientcredit policy or it is inefficient in collection of debts. =ven though the company sells its productson terms of net 3' days& it allows average collection period for more than 3' to al categories ofits customersI the net effect i.e. Bross %rofit less Total cost is favourable in respect of categories1& + and 3 therefore these customers shall be ta"en into fold. 2or the customers covered incategory 4 the net effect is unfavorable i.e. total cost is more than the gross profit. The companyshould try to reduce bad debt > for this category of customers at least by 0.> (i.e. at 1+.+'>#.!f the company is able to do so& the company can allow the credit period of ' days for at leastincreasing the mar"et share.The other factors to be ta"en into consideration before changing the present policy includes (i#

past performance of the customers and (ii# their credit worthiness.

The information so re-uired may be outsourced as well as in sourced.

+or,in- Notes:

Computation of Interest cost:

!nterest 7ost C

verage rate of interest 7ost of goods soldverage collection period in days for nondefaulting

account 38 days

2or 7ategory 1 C E(1> s. 4 days#38 daysM C s. 1.0

2or 7ategory + C E(1> s. 4+ days#38 daysM C s. 1.40


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2or 7ategory 3 C E(1> s. 4' days#38 daysM C s. 1.4'

2or 7ategory 4 C E(1> s. ' days#38 daysM C s. +.'

************

Question

lcobex ;etal 7ompany (;7# does business in three products %1& %+and %3. product %+are

manufactured in the company& while product %3 is procured from outside and resold as a

combination with either product %1or %+. the sales volume budgeted for the three products for

the year +''' F +''1 (pril F ;arch# are as under$

Poduct s& in la$!s

P1 1"200

P2 500

P3 400

\)ec. 1999 to ;arch +''' s. +'.'' la"h %.;pril +''' to Guly +''' s. +.'' la"h %.;.ug. +''' to ov. +''' to s. 3'.'' la"h %.;.)ec +''' to ;arch +''1 s. 4.'' la"h %.;X


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(9# =xpenses are given below and are expected to be constant throughout the year$

6ages and 5alaries s. 31+ la"hsdministrative =xpenses s. 3++ la"hs5elling and distribution =xpenses s. 3 la"hs.

(1'# )ividend of s. .'3 la"hs is to be paid in Actober

(11# Tax of s. +3.9+ la"hs will be paid in e-ual installments in four F -uarters$ i.e.& Ganuarypril& Guly and Actober.

(1+# The term F loan of s. +30.3+ la"hs is repayable in two e-ual installments half F yearly&i.e.& Gune/ )ecember.

(13# 7apital expenditure of s. +9+.44 la"hs for the year is expected to be spread e-uallyduring the 1+ month period.

Hou are re-uired to prepare a 7ash flow statement (cash 9"'2 1>7"1 1>3"'> 72"'9 1>3"'> 1(9="'

7losing balance (+03.9# (+94.4# 31'.3# (3+8.31# (4'.'3# (419.04# (4+1.9#

Assumptions:1. 5ince the opening cash balance as on Gune& +''' is not given& it is assumed that the credit

facility enjoyed by the company of s. 14'. la"hs is its opening balance.


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2& Gince t!e ,uestion does not )o/ide ele/ant in+omation egading )uc!ase )ice and

)ayment tems to t!e su))lies in es)ect o+ )oduct P3 (!ic! is )ocued +om outside and sold

as a com-ination (it! eit!e )oduct P1 o P2& it is assumed t!at t!e )oduct P3 is manu+actued

(it!in t!e com)any and its )oduction )ogamme and )oduction costs ae same as to t!e

manu+actuing o+ )oducts P1 o P2&

3. !n the wor"ing notes some of the calculations are ta"en from )ecember for the sa"e ofcompleteness otherwise they are not re-uired.

+or,in- Notes.1. 7ollection from debtors$

5ales %roduct %roduct Total 7urrent + nd 3rd Total%+ %3 sales month month month collection

7ollection collection collection(i# (ii# (iii# (iv# (v# (vi#CiiD iiiD iv

)ecember 1'' 41.80 +' 181.80 '.3 ' ' '.3

Ganuary 1'' 41.80 +' 181.80 '.3 4'.4+ ' 1+1.+2ebruary 1'' 41.80 +' 181.80 '.3 4'.4+ 4'.4+ 181.80;arch 1'' 41.80 +' 181.80 '.3 4'.4+ 4'.4+ 181.80pril 1'' 41.80 + 188.80 3.33 4'.4+ 4'.4+ 184.10;ay 1'' 41.80 + 188.80 3.33 41.80 4'.4+ 18.4+Gune 1'' 41.80 + 188.80 3.33 41.80 41.80 188.80Guly 1'' 41.80 + 188.80 3.33 41.80 41.80 189.10ugust 1'' 41.80 3' 101.80 .3 41.80 41.80 189.805eptember 1'' 41.80 3' 101.80 .3 4+.9+ 41.80 10'.4+Actober 1'' 41.80 3' 101.80 .3 4+.9+ 4+.9+ 101.80ovember 1'' 41.80 3' 101.80 .3 4+.9+ 4+.9+ 109.10)ecember 1'' 41.80 4 18.90 93.33 4+.9+ 4+.9+ 109.10Ganuary 1'' 41.80 4 18.80 93.33 48.80 4+.9+ 1+.9+2ebruary 1'' 41.80 4 18.80 93.33 48.80 48.80 18.80;arch 1'' 41.80 4 18.80 93.33 48.80 48.80 18.80

Total 18'' 888.80 4' +048.80 1303.33 84'.'' 93.33 +8'8.80

+. %roduction %rogramme;onths 5ales Total 7omponents other imported indigenous indigenous indigenous ?alue material material ; ; : ; : ; components (efer to consumption


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November 221


Question 17onsider the following information for 5trong ,td$

=

7alculate the percentage of change in earnings per share& if sales increased by >.

Solution7omputation of percentage of change in earnings per share& if sales increased by >.

)egree of combined leverage C > change in =arnings per share (=%5# > change in sales Ar

)egree of operating leverage )egree of financial leverage

C > 7hange in =arning per share (=%5#>7hange in 5ales

or

1.8+3. (efer to 6.. (i# and (ii# C > 7hange in =arning per 5hare (=%5#

or

.80 C > 7hange in =arning per share (=%5#

or

> 7hange in =%5 C .80

C +.430>

+or,in- Notes:

(i# )egree of operating leverage )A7# C 7ontribution =

C (s. 1&1+'D s. 0'' la"hs# s. 1&1+' la"hs

C 1.8+

(ii# )egree of financial leverage ()A2# C =

C s. 1&1+'s. 3+'

C 3.

Question

A com)any is consideing its (o$ing ca)ital in/estment and +inancial )olicies +o t!e net yea&

Kstimated +ied assets and cuent lia-ilities +o t!e net yea ae s& 2&60 coes and s& 2&34 coes

es)ecti/ely& Kstimated sales and KH'? de)end on cuent assets in/estment" )aticulaly in/entoies

and -oo$Ede-ts& ?!e +inancial contolle o+ t!e com)any is eamine t!e +ollo(ing altenati/e #o$ing

ca)ital )olicies.

(s. 7rores#6or"ing capital !nvestment in current =stimated 5ales =

$olicy Assets

7onservative 4.' 1+.3' 1.+3;oderate 3.9' 11.' 1.1

A--ressive "32 12"22 1"22


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A+te e/aluating t!e (o$ing ca)ital )olicy" t!e Financial Contolle !as ad/ised t!e ado)tion o+ t!e

modeate (o$ing ca)ital )olicy& ?!e com)any is no( eamining t!e use o+ longEtem and s!otEtem

-oo(ings +o +inancing its assets& ?!e com)any (ill use s& 2&50 coes o+ t!e e,uity +unds&

(s. 7ores#

Financin- $olicy S&ortDterm ebt%on-Dterm ebt7onservative '.4 1.1+;oderate 1.'' '.88ggressive 1.'

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120 Resource November 1991 to November 2006