CFI Final Project

Submitted by:

Puneet Verma (13BM6012)

Charu Keshi (14BM60092)

1 – Investing Decision

Additional investment = INR 500 million

Incremental annual cash inflow for 10 years (t1 –t10) = 30% of initial investment i.e. 150

million

Given – Cost of capital = 15%, and required rate of return in 5% above the cost of capital.

So, required rate of return (K) = 20%

As NPV of the project is positive. So, we should take this project.

2- Financial decision

For calculation, please refer to attached excel sheet in mail.

So, from EPS point of view choice 3 is best. And from ROE point of view also choice 3 is best.

3- Dividend decision

Given – Capitalization rate (K) = 15%

Dividend per share = INR 1.20

Calculation for internal growth of the company for year 2014 (Using annual report):

Net cash flow:

Working Capital:

Working capital for year 2014 = Total CA – Total CL

= 10163.13 – 5672.2 = INR 4490.93 million

So, internal growth rate of the company for the year 2014 = Net cash flow / Working

capital

= 27.92/4490.93 = 0.006217 = 0.62 %

Given, dividend growth rate (g) = Internal growth rate of the company = 0.62%

So, price of the share (P) = Dividend (D) / (K-g) = 1.20 / (0.15 – 0.0062) = INR 8.35

AS given in the question that average share price of the company for 2014 is Rs. 135.

That means share is overvalued.

4- Working capital management

Inventory period 204.9173772 days

Receivables period 66.70058433 days

Payables period 92.24360902 days

Inventory turnover:

We know that inventory turnover = COGS / Average inventory

= 7450.73 / (4340.02 + 4025.92)/2

= 1.7812

Receivables turnover = Sales / Average receivables

= 21253.43/ 3883.88

= 5.472215928

Payables turnover = COGS / Payables

= 7450.73/ 1882.965

= 3.9569

Inventory period = 365/ Inventory turnover = 205 days

Receivables period = 365 / Receivables turnover = 67 days

Payables period = 365 / Payables turnover = 92 days

Operating Cycle = Inventory period + Receivables period = 272 days

Cash cycle = Operating cycle – Payables period = 180 days

Working capital requirement for year 2014 = Total CA – Total CL

= 10163.13 – 5672.2 = INR 4490.93 million

Considering long term fund requirement as non-current capital requirement.

So, long term fund requirement = Non-current assets – Non-current liabilities

Long term fund requirement = 9784.2 - 2516.06 = 7268.14 INR million

So, Working capital / Long term fund requirement = 0.61789

5- WCM: A Manager’s Dilemma

Number of days in working capital:

An accounting and finance term used to describe how many days it will take for a company to convert its working capital into revenue. The faster a company does this, the better. To calculate days working capital, the following formula can be used:

Average Working capital for year 2014 = (WC for year 2014 + WC for year 2013)/2

So, number of days in working capital = 75.69 days

Comparing the debtor turnover ratio for Grindwell Norton and CMUI:

We know that debtor turnover ratio = Sales / Average account receivable

In case of Grindwell Norton:

From their annual report-

In case of CMUI:

From their annual report-

We can see that Grindwell Norton has lower trade receivable compared to their total

sales which has caused higher debtor turnover ratio.

To increase the debtor turnover rate we can reduce the time given to the customer to

pay the bill or we can give customers some incentives if they pay their bill early. We can

revise the credit policies to improve the ratio.