Finance management lecture presentations

8/12/2019 Finance management lecture presentations

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CAIIB-FM-Module D topics

Marginal Costing

Capital Budgeting

Cash BudgetWorking Capital


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COSTING

Cost accounting system provides releventinformation about cost

Aim : best use of resources and maximization

of returns cost = amount of expenditure incurred(

actual+ notional)

Purposes: know about profit from each

job/product/division/segment. Pricing decision+control +profit planning +inter firmcomparison


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Marginal costing

Marginal costing distinguishes betweenfixed cost and variable cost

Marginal cost is nothing but variable costof additional unit

Marginal cost= variable cost

MC= Direct Material + Direct Labour+Direct expenses


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Marginal costing problems

Sales (-) variable cost (=)contribution

Contribution(/ divided by) sales(=) C.S. Ratio

Contribution and Fixed costs

determine the Break even point Fixed Cost (/ divided by)

contribution per unit= break even units


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Basic formulaSales price (-) variable cost= contribution

SP less VC = Contribution

10 6 = 4

9 6 = 3

8 6 = 2

7 6 = 1

6 6 = 05 6 = (1)

4 6 = (2)


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SP = Rs.10, VC =Rs.6 Fixed CostRs.60000

Find

- Break even point (in Rs. & in units)

- C/S ratio

- Sales to get profit of Rs.20000


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Sales Rs.100000

Fixed Cost Rs.20000

B.E.Point Rs.80000 What is the profit ?


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Management decisions- assessing profitabilityCONTRIBUTION/SALES=C.S.RATIO

Product sp vc Contribtion c/s Ratio % ranking

A 20 10 10 10/20 50% 1

B 30 20 10 10/30 33% 2

C 40 30 10 10/40 25% 3


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DECISION when limiting factors

SP Rs.14 Rs.11

VC 8 7

Contribution

Per unit

6 4

Labour hr. pu 2 1

Contri.per hr 3 4


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Other managerial DECISIONS

Make or buy decisions

Close department

Accept or reject order


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Marginal costing

cost-volume-profit analysis is reliant upon aclassification of costs in which fixed and variablecosts are separated from one another. Fixed

costs are those which are generally time relatedand are not influenced by the level of activity.

Variable costs , on the other hand, are directlyrelated to the level of activity; if activity

increases, variable costs will increase andvice-versa .


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Marginal costing

USES OF COST-VOLUME-PROFIT ANALYSIS

The ability to analyse and use cost-volume-profitrelationship is an important management tool. Theknowledge of patterns of cost behaviour offers insights

valuable in planning and controlling short and long-runoperations. The example of increasing capacity is a goodillustrations of the power of the technique in planning.

The implications of changes in the level of activity can bemeasured by flexing a budget using knowledge of cost

behaviour, thereby permitting comparison to be made ofactual and budgeted performance for any level ofactivity.


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Marginal costing

LIMITATIONS OF COST-VOLUME-PROFITANALYSIS

A major limitation of conventional CVP analysis that wehave already identified is the assumption and use of

linear relationships. Yet another limitation relates to thedifficulty of dividing fixed costs among many productsand/or services. Whilst variable costs can usually beidentified with production services, most fixed costusually can only be divided by allocation and

apportionment methods reliant upon a good deal ofjudgement. However, perhaps the major limitation of thetechnique relates to the initial separation of fixed andvariable costs.


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Marginal costing

ADVANTAGES AND DISADVANTAGES OFMARGINAL COSTING

ADVANTAGES 1. More efficient pricing decisions can be made, since

their impact on the contribution margin can bemeasured. 2. Marginal costing can be adapted to all costing

system. 3. Profit varies in accordance with sales, and is not

distorted by changes in stock level. 4. It eliminates the confusion and misunderstanding

that may occur by the presence ofover-or-under-absorbed overhead costs in the profit andloss account.


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Marginal costing

5. The reports based on direct costing are far moreeffective for management control than those based onabsorption costing. First of all, the reports are moredirectly related to the profit objective or budget for theperiod. Deviations from standards are more readily

apparent and can be corrected more quickly. Thevariable cost of sales changes in direct proportion withvolume. The distorting effect of production on profit isavoided, especially in month following high productionwhen substantial amount of fixed costs are carried in

inventory over to next month. A substantial increase insales in the month after high production underabsorption costing will have a significant negative impacton the net operating profit as inventories are liquidated.


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Marginal costing

6. Marginal costing can help to pinpointresponsibility according to organisational lines:individual performance can be evaluated onreliable and appropriate data based on current

period activity. Operating reports can beprepared for all segments of the company, withcosts separated into fixed and variable and thenature of any variance clearly shown. Theresponsibility for costs and variances can then

be more readily attributed to specific individualsand functions, from top management to downmanagement


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Marginal costing

DISADVANTAGES OF MARGINAL COSTING 1. Difficulty may be experienced in trying to segregate

the fixed and variable elements of overhead costs for thepurpose of marginal costing.

2. The misuse of marginal costing approaches topricing decisions may result in setting selling prices thatdo not allow the full recovery of overhead costs.

3. Since production cannot be achieved withoutincurring fixed costs, such costs are related toproduction, and total absorprtion costing attempts tomake an allowance for this relationship. This avoids thedanger inherent in marginal costing of creating theillusion that fixed costs have nothing to do withproduction.


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CAPITAL BUDGETING

It involves current outlay of funds in theexpectation of a stream of benefits

extending far into the futureYear Cash flow

0 (100000)

1 300002 40000

3 50000

4 50000


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CAPITAL BUDGETING

A capital budgeting decision is one that involves theallocation of funds to projects that will have a life ofatleast one year and usually much longer.

Examples would include the development of a major

new product, a plant site location, or an equipmentreplacement decision.

Capital budgeting decision must be approached withgreat care because of the following reasons:

1. Long time period: consequences of capital expenditureextends into the future and will have to be endured for alonger period whether the decision is good or bad.


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CAPITAL BUDGETING

2. . Substantial expenditure: it involves largesums of money and necessitates a carefulplanning and evaluation.

3. Irreversibility: the decisions are quite often

irreversible, because there is little or no secondhand market for may types of capital goods.

4. Over and under capacity: an erroneousforecast of asset requirements can result in

serious consequences. First the equipmentmust be modern and secondly it has to be ofadequate capacity


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CAPITAL BUDGETING

Difficulties

There are three basic reasons why capital expendituredecisions pose difficulties for the decision maker. Theseare:

1. Uncertainty: the future business success is todaysinvestment decision. The future in the real world is neverknown with certainty.

2. Difficult to measure in quantitative terms: Even ifbenefits are certain, some might be difficult to measurein quantitative terms.

3. Time Element: the problem of phasing properly theavailability of capital assets in order to have them comeonstreamat the correct time.


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CAPITAL BUDGETING

Methods of classifying investments

Independent Dependent Mutually exclusive Economically independent and statistically

dependent Investment may fall into two basic categories,

profit-maintaining and profit-adding when

viewed from the perspective of a business, orservice maintaining and service-adding whenviewed from the perspective of a government oragency.


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CAPITAL BUDGETING

Expansion and new product investment

1. Expansion of current production to meetincreased demand

2. Expansion of production into fields closelyrelated to current operation horizontalintegration and vertical integration.

3. Expansion of production into new fields not

associated with the current operations.4. Research and development of new products.


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CAPITAL BUDGETING

Reasons for using cash flows

Economic value of a proposed investment can beascertained by use of cash flows.

Use of cash flows avoids accounting ambiguities

Cash flows approach takes into account the time valueof money

For any investment project generating either expandedrevenues or cost savings for the firm, the appropriate

cash flows used in evaluating the project must beincremental cash flow.

The computation of incremental cash flow should followthewithand withoutprinciple rather than the beforeand afterprinciple


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Types of capital investments

New unit

Expansion

Diversification Replacement

Research & Development


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Significance of capital budgeting

Huge outlay

Long term effects

Irreversibility Problems in measuring future cash flows


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Facets of project analysis

Market analysis

Technical analysis

Financial analysis Economic analysis

Managerial analysis

Ecological analysis


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Financial analysis

Cost of project

Means of finance

Cost of capital Projected profitability

Cash flows of the projects

Project appraisal


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Decision process

PLANNING PHASE

EVALUATION PHASE

SELECTION PHASE

IMPLEMENTATION PHASE

CONTROL PHASE

AUDITING PHASE

INVESTMENT OPPORTUNITIES

PROPOSALS

ONLINE PROJECTS

PROJECTS

ACCEPTED PROJECTS

PROJECT TERMINATION

PROPOSALS

Improvementinplanning&Evalu

ationprocedure

Improvementinplanning&Evalu

ationprocedure

NEWIN

VESTMENTOPPOR

TUNITIES


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Methods of capital investmentappraisal

DISCOUNTING NON-DISCOUNTING

Net present value (NPV) Pay back period

Internal rate of return(IRR)

Accounting rate ofreturn

Profitability Index orBenefit cost ratio


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Present value of cash flow stream-(cash outlay Rs.15000)@ 12%

Year Cash flow PV factor@12%

PV

1 1000 0.893 893

2 2000 0.799 15943 2000 0.712 1424

4 3000 0.636 1908

5 3000 0.567 17016 4000 0.507 2028

7 4000 0.452 1808

8 5000 0.404 2020


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Present value of cash flow stream-(cash outlay Rs.15000 )@10%

Year Cash flow PV factor@10%

PV

1 2000 0.909 1818

2 2000 0.826 16523 2000 0.751 1502

4 3000 0.683 2049

5 3000 0.621 18636 4000 0.564 2256

7 4000 0.513 2052

8 5000 0.466 2330


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Solution IRR NPV

Project A 20% 309

Project B 15% 1441

These project are mutually exclusive

The IRR ranks project A higher, whereas the NPV ranksproject B first.

The conflict arises because B is ten times the size of A.This gives a higher NPV but in relative terms it is less

profitable with a lower percentage return. Naturally, B ispreferable because it gives the greatest increase inshareholders wealth.


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The advantages of IRR over NPV are: 1. It gives a percentage return which is easy to

understanding at all levels of management. 2. The discount rate/required rate of return

does not have to be known to calculate IRR. Itdoes have to be decided upon at sometimebecause IRR must be compared with something.The discussion as to what is an acceptable rate

of return can however be left until much laterstage. In a NPV calculation the discount ratemust be specified prior to any calculation beingperformed.


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The advantages of NPV over IRR are: 1. NPV gives an absolute measure of profitability and hence

immediately shows the increase in shareholders wealth due to aninvestment decision.

2. NPV gives a clear answer in an accept/reject decision. IRRgives multiple answers.

3. NPV always gives the correct ranking for mutually exclusiveproject while IRR may not.

4. NPVs of projects are additive while IRRs are not. 5. Any changes in discount rates over the life of a project can

more easily be incorporated into the NPV calculation.

The NPV approach provides as absolute measure that fullyrepresents in value of the company if a particular project isundertaken. The IRR by contrast, provides a percentage figure fromwhich the size of the benefits in terms of wealth creation cannotalways be grasped.


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The timing of the cash flows is critical for

determining the Project's value.

below the line for cash investments or

above the line for returns.

Rs.51 La kh Rs.51 La kh Rs.61 La kh

Year 1 Year 2 Year 3

Rs.102 lakh

Year 0


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Net Present Value

Year Cash Flow Dis. Factor Present

@10% Value

0 -102 1 -1021 51 0.91 46.36

2 51 0.83 42.15

3 61 0.75 45.83NPV 32.34


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@27% Value

0 -102 1 -102

1 51 0.78740 40

2 51 0.62000 32

3 61 0.48818 30

NPV 0


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The evaluation of any projectdepends on the magnitude of thecash flows, the timing and thediscount rate.

The discount rate is highlysubjective. The higher the rate , theless a rupee in the future would beworth today.

The risk of the project shoulddetermine the discount rate.


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Internal Rate of Return(IRR)IRR is the rate at whichthe discounted cash flowsin the future equal thevalue of the investmenttoday. To find the IRR onemust try different ratesuntil the NPV equals zero.


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BUDGET

Quantitative expression ofmanagement objective

Budgets and standardsBudgetary control

Cash budget


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PROFIT PLANNING

Budget & budgetary control

Marginal costing

CVP and break even pointComparative cost analysis

ROCE


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PRICING DECISIONS

Full cost pricing

Conversion cost pricing

Marginal cost pricingMarket based pricing


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PRICING DECISIONS

PRICING AND ITS OBJECTIVES The objective of pricing in practice will probably

be one of the following: (a) To skim the market (in the case of new

products) by the use of high prices; (b) To penetrate deeply into the market (again

with new products) at an early stage, beforecompetition produces similar goods;

(c) To earn a particular rate of return on thefunds invested via the generating of revenue; and

(d) To make a profit on the product range as awhole, which may involve using certain items inthe range as loss leaders, and so forth.


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PRICING DECISIONS

Full cost pricing The object is to recover all costs incurred

plus a percentage of profit. It is a method

best used where the product is clearlydifferentiated and not in immediate, directcompetition. It would not lend itself tosituation where price tended to bedetermined by the market,


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PRICING DECISIONS

Conversion cost pricing

Conversion cost consists of direct labourcost and factory overhead, ignoring thecost of the raw material on the groundsthat profit should be made within thefactory and not upon materials bought

from suppliers.


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PRICING DECISIONS

Marginal cost pricing Briefly it is that cost which would not be incurred if the

production of the product were discontinued. Animportant advantage of differential cost of pricing is the

flexibility it gives to meet special short-termcircumstances, while accepting that full costs must berecovered in the long term. This is by no means alwaysdesirable in the short term. For example, there may besurplus productive capacity in a factory, in which case

any opportunity to accept an order which coversdifferential cost and makes a contribution to fixed costand profit should be accepted. Any contribution is betterthan none.


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PRICING DECISIONS

Market based pricing

This can be based on the value to a customer ofgoods or services and involves variable pricing.It also takes account of the price he is able andwilling to pay for the goods or services.Businesses using this approach develop specialproducts or services which command premium

prices. The other market-based approach is to price on

the basis of what competitors are charging.

O i l


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Operating leverageFinancial leverage

OL= amount of fixed cost in a coststructure. Relationship between sales andop. profit

FL= effect of financing decisions on returnto owners. Relationship between operatingprofit and earning available to equity

holders (owners)


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Working capital

Current assets less current liabilities = networking capital or net current assets

Permanent working capital vs. variable

working capital


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Working capital cycle

cash> Raw material > Work in progress >finished goods > Sales > Debtors >Cash>

Operating cycle it is a length of timebetween outlay on RM /wages /others

AND inflow of cash from the sale of the

goods


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Matching approach to asset financing

Fixed Assets

Permanent Current Assets

Total Assets

Fluctuating Current Assets

Time

$

Short-termDebt

Long-termDebt +EquityCapital


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THE WORKING CAPITAL

CYCLE

(OPERATING CYCLE)

Accounts Payable

Cash

Raw

MaterialsW I P

Finished

Goods

Value Addition

Accounts

ReceivableSALES


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Operating cycle concept

A companys operating cycle typically consists ofthree primary activities: Purchasing resources,

Producing the product and

Distributing (selling) the product.

These activities create funds flows that are bothunsynchronizedand uncertain.

Unsynchronized because cash disbursements (forexample, payments for resource purchases) usually takeplace before cash receipts (for example collection of

receivables).They are uncertain because future sales and costs, which

generate the respective receipts and disbursements,cannot be forecasted with complete accuracy.

Working capital cycleWorking capital cycle


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Working capital

FACTORS DETERMINING WORKING CAPITAL

1. Nature of the Industry2. Demand of Industry3. Cash requirements

4. Nature of the Business5. Manufacturing time6. Volume of Sales7. Terms of Purchase and Sales8. Inventory Turnover9. Business Turnover

10. Business Cycle11. Current Assets requirements12. Production Cycle


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Working capital

Working Capital Determinants (Contd)

13. Credit control14. Inflation or Price level changes15. Profit planning and control16. Repayment ability17. Cash reserves18. Operation efficiency19. Change in Technology20. Firms finance and dividend policy21. Attitude towards Risk


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TYPES OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF

CONCEPT

BASIS OF

TIME

Gross

Working

Capital

Net

Working

Capital

Permanent/ Fixed

WC

Temporary/ Variable

WC

Regular

WC

Reserve

WC

Special

WC

Seasonal

WC


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Working capital

Working Capital Levels in Different Industries A retailing company usually has high levels of

finished goods stock and very low levels ofdebtors. Most of the retailers sales will be for

cash, and an independent credit card company ora financial subsidiary of the retail business (whichon occasions is not consolidated in the groupaccounts). The retailing company, however,usually has high levels of creditors. It pays its

suppliers after an agreed period of credit. Thelevels of working capital required are thereforelow:


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Working capital

Excess of current assets over current liabilities are calledthe net working capital or net current assets.

Working capital is really what a part of long term financeis locked in and used for supporting current activities.

The balance sheet definition of working capital ismeaningful only as an indication of the firms currentsolvency in repaying its creditors.

When firms speak of shortage of working capital they infact possibly imply scarcity of cash resources.

In fund flow analysis an increase in working capital, asconventionally defined, represents employment orapplication of funds.


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Working capital

In contrast, a manufacturing company willrequire relatively high levels of workingcapital with investments in raw materials,

work-in-progress and finished goodsstocks, and with high levels of debtors.The credit terms offered on sales andtaken on purchases will be influenced by

the normal contractual arrangements inthe industry.


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Working capital

Debtors Volume of credit sales Length of credit given Effective credit control and cash collection Stocks Lead time & safety level Variability of demand Production cycle No. of product lines Volume of planned output actual output sales Payables Volume of purchases Length of credit allowed

Length of credit takenDiscounts Short-term finance All the above Other payments/receipts Availability of credit Interest rates


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Working capital

Cash Levels it is necessary to prepare a cash budget where

the minimum balances needed from month tomonth will be defined.

business is seasonal, cash shortages may arise in certainperiods. Generally it is thought better to keep onlysufficient cash to satisfy short-term needs, and toborrow if longer-term requirements occur

The problem, of course, is to balance the cost of thisborrowing against any income that might be obtained

from investing the cash balances. The size of the cash balance that a company might need

depends on the availability of other sources of funds atshort notice, the credit standing of the company and thecontrol of debtors and creditors


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Working capital

Debtors The debtors problem again revolves around the

choice between profitability and liquidity. Itmight, for instance, be possible to increase sales

by allowing customers more time to pay, butsince this policy would reduce the companysliquid resources it would not necessarily result inhigher Profits.

historical analysis or the use of establishedcredit ratings to classify groups of customers interms of credit risk


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Working capital

1. Establish clear credit practices as a matter ofcompany policy.

2. Make sure that these practices are clearlyunderstood by staff, suppliers and customers.

3. Be professional when accepting new accounts,

and especially larger ones.4. Check out each customer thoroughly before you

offer credit. Use credit agencies, bankreferences, industry sources etc.

5. Establish credit limits for each customer... and

stick to them.6. Have the right mental attitude to the control of

credit and make sure that it gets the priority itdeserves.


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Working capital

7. Continuously review these limits when you suspecttough times are coming or if operating in a volatile sector.8. Keep very close to your larger customers.9. Invoice promptly and clearly.10. Consider charging penalties on overdue accounts.11. Consider accepting credit /debit cards as apayment option.12. Monitor your debtor balances and ageingschedules, and don't let any debts get too large or too old.

DIMENSIONS OF RECEIVABLES MANAGEMENT


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DIMENSIONS OF RECEIVABLES MANAGEMENT

OPTIMUM LEVEL OF INVESTMENT IN TRADE RECEIVABLES

Profitability

Costs &

Profitability Optimum Level

Liquidity

Stringent Liberal


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Working capital-FACTORING

FactoringDefinition:

Factoring is defined as a continuing legal relationshipbetween a financial institution (the factor) and a

business concern (the client), selling goods or providingservices to trade customers (the customers) on openaccount basis whereby the Factor purchases the clientsbook debts (accounts receivables) either with or withoutrecourse to the client and in relation thereto controls the

credit extended to customers and administers the salesledgers.


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It is the outright purchase of credit approvedaccounts receivables with the factor assumingbad debt losses.

Factoring provides sales accounting service, useof finance and protection against bad debts.

Factoring is a process of invoice discounting bywhich a capital market agency purchases all

trade debts and offers resources against them.


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Debt administration:

The factor manages the sales ledger ofthe client company. The client will be

saved of the administrative cost of bookkeeping, invoicing, credit control and debtcollection. The factor uses his computer

system to render the sales ledgeradministration services.


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Different kinds of factoring services Credit Information: Factors provide credit

intelligence to their client and supply periodicinformation with various customer-wise analysis.

Credit Protection: Some factors also insureagainst bad debts and provide without recoursefinancing.

Invoice Discounting or Financing : Factors

advance 75% to 80% against the invoice oftheir clients. The clients mark a copy of theinvoice to the factors as and when they raise theinvoice on their customers.


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Services rendered by factor Factor evaluated creditworthiness of the customer

(buyer of goods)

Factor fixes limits for the client (seller) which is an

aggregation of the limits fixed for each of the customer(buyer).

Client sells goods/services.

Client assigns the debt in favour of the factor

Client notifies on the invoice a direction to the customerto pay the invoice value of the factor.


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Client forwards invoice/copy to factor along withreceipted delivery challans.

Factor provides credit to client to the extent of80% of the invoice value and also notifies to the

customer Factor periodically follows with the customer When the customer pays the amount of the

invoice the balance of 20% of the invoice value

is passed to the client recovering necessaryinterest and other charges. If the customer does not pay, the factor takes

recourse to the client.


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Benefits of factoring The client will be relieved of the work relating to sales ledger

administration and debt collection The client can therefore concentrate more on planning production

and sales. The charges paid to a factor which will be marginally high at 1 to

1.5% than the bank charges will be more than compensated byreductions in administrative expenditure.

This will also improve the current ratio of the client andconsequently his credit rating.

The subsidiaries of the various banks have been rendering thefactoring services.

The factoring service is more comprehensive in nature than thebook debt or receivable financing by the bankers.

Working capital INVENTORY


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Working capital- INVENTORYMANAGEMENT

Managing inventory is a juggling act.

Excessive stocks can place a heavy burden onthe cash resources of a business.

Insufficient stocks can result in lost sales, delaysfor customers etc.

INVENTORIES INCLUDE RAW MATERIALS, WIP & FINISHED

GOODS

FACTORS INFLUENCING INVENTORY


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FACTORS INFLUENCING INVENTORYMANAGEMENT

Lead Time Cost of Holding Inventory

Material Costs

Ordering Costs Carrying Costs

Cost of tying-up of Funds

Cost of Under stocking Cost of Overstocking


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Working capital

Cost of Working capital The other aspect of the working capital problem

concerns obtaining short-term funds. Every source offinance, including taking credit from suppliers, has a

cost; the point is to keep this cost to the minimum. Thecost involved in using trade credit might includeforfeiting the discount normally given for promptpayment, or loss of goodwill through relying on thisstrategy to the point of abuse. Some other sources of

short-term funds are bank credit, overdrafts and loansfrom other institutions. These can be unsecured orsecured, with charges made against inventories, specificassets or general assets.


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Working capital

Disadvantages of Redundant or Excess Working Capital

Idle funds, non-profitable for business, poor ROIUnnecessary purchasing & accumulation of inventories

over required level

Excessive debtors and defective credit policy, higherincidence of B/D.

Overall inefficiency in the organization.When there is excessive working capital, Credit

worthiness suffers

Due to low rate of return on investments, the marketvalue of shares may fall


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Working capital

Disadvantages or Dangers of Inadequate or Short WorkingCapital

Cant pay off its short-term liabilities in time.Economies of scale are not possible.

Difficult for the firm to exploit favourable marketsituations

Day-to-day liquidity worsensImproper utilization the fixed assets and ROA/ROI falls

sharply

k l l


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Example: X Company plans to attain a sales of Rs 5 crores. It has the following information forproduction and selling activity. It is assumed that the activities are evenly spread through out theyear.

(a) Average time raw materials are kept in store prior to issue for production.2months (b) Production cycle time or work-in-progress cycle time. 2months (c) Average time finished stocks are kept in sale in unsold condition 1/2 months (d) Average credit available from suppliers 1 1/2 months (e) Average credit allowed to customer 1 1/2 months

(f) Analysis of cost plusprofit for above sales: % Rs. In Crores Raw Materials 50 2.50 Direct Labour 20 1.00 Overheads 10 0.50 Profit 20 1.00 Total 100 5.00 -----------

ki i l l


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Calculation of Wokring Capital Requirement: 1. Total months to be financed to Raw Material

Months Time in raw material store 2 Working progress cycle 2 Finished goods store 1/2 Credit given to customer 1 1/2

6 Less: Credit available from suppliers 1

---------------- Total months to be financed to Raw Materials 4

---------------- 2. Total months to be financed to Labour Production cycle 2 In Finished stock store Credit to customer 1

Total Months to be financed 4

W ki i l l


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3. Total months to be finacned to overhead Production cycle 2 In finished goods stores Credit to customer 1

------------- 4 Less:Credit from suppliers 1

------------- Total months to be financed 2 4. Maximum working capital required Rs in crores Raw Materials 4 / 12 2.50 0.94 Direct Labour 4 / 12 1.00

0.33 Overheads 2 0.50 0.10

------- Maximum Working Capital 1.37

-------

Q ti f ti


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Questions for practice

If the average annual rate of return forcommon stocks is 13%, and treasury billsis 3.8%, what is the average market risk

premium? 13.%

3.8%

9.2% None of the above

Q ti f ti


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Minimum Stock Levels is calculated as:

a Re-order Level(Average Usage x AverageLead Time)

b Re-order Level + (Average Usage +Average Lead Time)

c Re-order Level(Average Usage + AverageLead Time)

Q ti f ti


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Maximum Stock Level is calculated as: a Re-order Level(Minimum Usage x

Minimum Lead Time) + Re-order Quantity.

b Re-order Level + (Minimum x MinimumLead Time)Re-order Quantity.

C Re-order Level(Minimum Usage xMinimum Lead Time)Re-order Quantity.

Q ti f ti


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The formulae for Present Value is: 1/ (1 + r) to the power of n

1/ (1r) to the power of n

1 (1 x r) to the power of n

1 (1/r) to the power of n

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Profitability Index Equals to PV of cash in flow / PV of Cash out flow PV of Initial outlay / PV of Final out lay P I / (1r) to the power of n

None of the above The following is one of the method in

Discounted Cash Flow Techniques: Pay Back Period

Average Rate of Return Discount to Sales Ratio Net Present Value

Q ti f ti


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In break even analysis, the break even pointsymbolizes: No profit and no loss situation No profit but loss situation

No loss but profit situation None of the above

Break even in Term Lending is a tool for appraisal.The level of break even should be: Higher LowerAny of the above None of the above

Q ti f ti


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A firm has break-even point Units no. of 1000 andfixed cost of .40,000. What is the contribution perunit ? 30 32

36 40

Working capital management involves all but one ofthe following. Identify?:

a)The level of cash needs to be on call at various dates.

b)The level of inventory we need to maintain. c)The period of credit do we grant to our debtors. d)Suppliers Payments. e)Proportion of assets should be financed by long-term funds.

Q ti f ti


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Of the following assets, which is generallythe most liquid? Plant and equipment Inventory

GoodwillAccounts receivable

Intangible fixed assets would include Building

Machinery Trademarks Equipment

Q ti f ti


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Which of the following is not included in current assets? Accounts receivable Accrued wages Cash Inventories

The main difference between short term and long termfinance is: The risk of long term cash flows being more important than

short term risks The present value of long term cash flows being greater than

short term cash flows

The timing of short term cash flow being within a year or less All of the above

Q estions fo p actice


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The cash budget is the primary short-run financialplanning tool. The key reasons a cash budget iscreated are: To estimate your investment in assets To estimate the size and timing of your new cash flows

To prepare for potential financing needs A and B B and C

Cash inflow in cash budgeting comes mainly from: Collection on accounts receivable Short-term debt Issue of securities None of the above



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Common sources of short-term financing include: Stretching payables Issuing bonds Reducing inventory

All of the above Factoring refers to:

Determining the aging schedule of the firm's accountsreceivable

The sale of a firm's accounts receivable to another

firm The determination of the average collection period Scoring a customer based on the 5 C's of credit



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A number of steps could be taken to shorten this operatingcycle. One of them is not true . Choose it The amount of debtors could be cut by a quicker collection of

accounts. Finished goods could be turned over more rapidly. The level of raw material inventory could be reduced or The production period could be lengthened

Firms would need to hold zero cash when: Transaction-related needs are greater than cash inflows Transaction-related needs are less than cash inflows Transaction-related needs are not perfectly synchronized with

cash inflows Transaction-related needs are perfectly synchronized with cash

inflows



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Change in cost due to change in the volumeof activity is called ----- Fixed CostVariable Cost

Shutdown CostAll of the above

Actual Sales minus Break Even Sales means Profit on Sales

Loss on Sales Margin of Safety Sales None of the above



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The size of Cash Balance a company should maintainshould depend on: a Sources of funds at short notice b Credit standing of the company c Control of debtors and creditors

d All of the above . EOQ is calculated as:

a Square of 2AC/H where A=stock usage, C=cost ofordering and H= Stock holding cost per unit of cost.

b Square root of 2AC/H where A = Stock usage, C= Cost

of ordering and H=Stock holding cost per unit of cost. c Square root of AC/2H where A=Stock usage, C=Cost of

ordering and H=Stock holding cost per unit of cost.



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A retail Company normally has High levels of finished goods stock

High levels of debtors

None of the above

The Tandon Working Group introduced theconcept of Project Balance sheet

Maximum permissible Bank Finance Current Asset Management

dCurrent Liability Management



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Contribution is equal toVariable cost less fixed cost

Sales less fixed cost

Sales less semi variable cost

Sales less variable cost

Break even point can be calculated as: Total Variable Cost / Contribution per Unit

Total Fixed Cost / Variable Cost per Unit Total Fixed Cost / Contribution per unit

Contribution per unit / total fixed cost



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Master Budget Covers various Products Budget Functional Budget Customer Budget All of the above

A company manufacturing washing machines has annualcapacity for producing 5000 units. The variable cost per unitcomes to Rs.1,600/- and each machine is sold for Rs.2,000/-.Fixed cost amount Rs.5,00,000/-. Break even point in termsof UNITS would be 1,000 units

1,250 units 1,200 units



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Under Cash Budget System method of Working Capitalis determined by: Ascertaining level of Current Assets Ascertaining level of Current Liabilities Finding Cash Gap after taking in account projected Cash

inflows and outflows All of above

Which of the following investment rules does not usethe time value of the money concept? The payback period

IRR NPV All above



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Preferably, cash flows for a project are estimated as: Cash flows before taxes Cash flows after taxes Earnings before taxes Earnings after taxes

Money that a firm has already spent or committed tospend regardless of whether a project is taken iscalled: Sunk costs Fixed costs Opportunity costs None of the above



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The opportunity cost of capital for a riskyproject is

The expected rate of return on a government

security having the same maturity as theproject

The expected rate of return on a welldiversified portfolio of common stocks

The expected rate of return on a portfolio ofsecurities of similar risks as the project

None of the above



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The payback period rule accepts allprojects for which the payback period is

Greater than the cut-off value

Less than the cut-off value Is positive

An integer

Your queries


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Your queries

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