Financial Management Important Question Bank 2012

Topic – Cash Management

 

Q. Prepare a Cash Budget showing bank saving balance separately for three months ended 30^th June, 2009 based on the following information :

	`
Cash on 1st April 2009	15,000
Salaries and Wages Estimated Monthly	10,000
Interest Payable May 2009	5,000

                                                                                         Amount in (`)

Estimated	March	April	May	June
Cash Sales	1,20,000	1,40,000	1,52,000	1,21,000
Credit Sales	1,00,000	80,000	1,40,000	1,20,000
Purchases	1,60,000	1,70,000	2,40,000	1,80,000
Other Expenses	18,000	22,000	32,000	21,000

Credit Sales are collected 50% in the month in which sales are made and 50% in the month following. Collection form credit sales are subject to 5% discount if payment is received during the month of sales and 2% if payment is received in the month following. Creditors are paid either on ‘prompt’ or 30 days basis. It is estimated that 10% of creditors are in the ‘prompt’ category.

Other expenses are paid in the month in which they are incurred. Cash on hand is not to exceed 50,000 at the end of any month. Excess is deposited in bank saving account on which interest is received quarterly @ 10% p.a. in a financial year on the balance of the day.

 

Q.        From the following particulars prepare a cash budget for the quarter ended 31^st March, 2010.

(All figures in `)

Month	Sales	Purchases	Wages	Expenses
November 09	5,00,000	1,00,000	2,00,000	40,000
December 09	6,00,000	2,00,000	2,00,000	40,000
January 10	4,00,000	3,00,000	2,20,000	50,000
February 10	5,00,000	2,00,000	2,20,000	50,000

Other Information:

10% of sales and purchases are on cash.

Credit to Debtors -1 month. On an average 50% of Debtors make payment on the due date while the rest make payment one month thereafter.

Credit from Creditors – 2 months, 1% cash discount if payment is made within 1 month. It is estimated that 50% of creditors will be paid within 1 month.

Lag in payment of wages in 15 days.

Expenses generally paid in the same month.

Plant costing ` 1,00,000 installed on 31<sup>st</sup> January, on payment of 25% of the cost in addition to the installation cost of ` 5,000 and balance to be paid in 3 equal monthly installments from the following month including  interest @ 12% p.a. on unpaid balance. Cash and bank balance on 1^st January, 2010 is expected to be ` 2,00,000.

 

Q.        The relevant financial information for Xavier Limited for year ended 2009 is given below :

Profit & loss Account date		Balance Sheet Date
	(Million)		Beginning of 2009	End of 2009
Sales	50	Inventory	9	12
Cost of goods sold	35	Account Receivable	12	15
		Accounts Payable	7	10

What is the length of the operating cycle? The cash cycle? Assume 365 days to a year.

Q.        Texas Manufacturing Company Ltd. is to start production on 1^st January, 2012. The prime post of a unit is expected to be ` 40 out of which ` 16 is for materials and `24 for labour. In addition variable expenses per unit are expected to be ` 8 and fixed cash expenses per month. ` 30,000. Payment for materials is to be made in the month following the purchase. One-third of sales will be for cash and the rest on credit for settlement in the following month. Expenses are payable in the month in which they are incurred.

            The selling price is fixed at ` 80 per unit. The number of unit manufactured and sold are expected to be as under.

January	900
February	1,200

Draw up a statement showing requirements of cash for the month of February, ignoring the question of stocks.

 

Q. Prepare a Cash Budget for the Quarter beginning from 1^st July 2011, from the following information.

Month	Sales	Purchases	Wages	Overheads	Other expenses
June 11	1,20,000	62,000	24,000	8,000	6,000
July	1,30,000	67,000	27,000	7,000	8,000
August	1,24,000	60,000	25,000	7,000	7,000
September	1,32,000	65,000	26,000	9,000	8,000

Other Information :

(a)     25% of the sales are for cash and the balance are on one month credit.

(b)     The purchases are on 1 month credit.

(c)     All other expenses are paid in the same month.

(d)     Advance income tax of ` 1,00,000 in August 11, out of which ` 50,000 were paid immediately remaining in next month.

(e)     The Cash in hand on 1-7-11 was ` 32.300.

 

Topic – Working Capital Management

Q.        Tasty Ltd. is presently operating at 50% level producing 30,000 packets of snack foods and proposes to increase capacity utilization in the coming year by 25% over existing level of production.

            The following data has been supplied :

(i)      Unit cost structure of the product current level :

	(`)
Raw Material	4
Wages (Variable)	2
Overheads (Variable)	2
Fixed Overhead	1
Profit	3
Selling Price	12

(ii)     Raw materials will remain in stores for 1 month before being issued for production. Material will remain in process for further 1 month.  Suppliers grant 3 months credit to the company.

(iii)    Finished goods remain in godown for 1 months.

(iv)    Debtors are allowed credit for 2 months.

(v)     Lag in wages and overhead payments is 1 month and these expenses accrue evenly throughout the production cycle.

(vi)    No increase either in cost of inputs or selling price is envisaged.

Prepare an estimate of working capital requirement at the new level, assuming that a minimum cash balance of ` 20,000 has to be maintained.

 

Q.        The following is a cost sheet of a Company producing 48,000 similar types of products every year.

Particulars	Amount per unit in (`)
Raw Material	80
Labour	40
Factory Overheads	30
Selling and Distribution cost	20
Net Profit	30

The following further particulars are given to you :

(1)     Raw materials remain in stock for 2 months while finished goods stock in carried for 3 month.

(2)     Credit allowed to customers is 3 months while credit allowed by suppliers of materials is 2 months.

(3)     Factory Overheads are paid at the end of the month.

(4)     Company has a policy to have bank balance of at least ` 1,50,000 on any date and cash holding worth 3 months factory overhead.

(5)     20% of the total sale is for cash.

You are required to prepare a statement of working capital requirements.

 

Q.        The selling price of a product is ` 20/- each and its break up is :

            Materials 40%, Labour 20%, Other Direct Cost 10%,

General Overheads 10%, Selling and Distribution Cost 10%, Profit @ 10%

A company produces 3,60,000 units of a product in a year and the following details for the year are given for consideration :

(a)     Raw materials remain in stock for 3 months, and the suppliers of Raw materials extend 2 months credit.

(b)     The Work in Progress is to be valued @ 50% of the total direct cost of one month’s production.

(c)     The customers are given three months credit.

(d)     The wages are paid after the end of the month.

(e)     40% of the total sales are for cash and balance on credit.

(f)      There is no opening and closing stock of finished goods.

(g)     Cash and Bank balance is carried to the extent of 50% of a monthly profit on an average basis.

You are required to compute Working Capital Requirement of the business.

 

Q.        From the following information available to you, on 1^st January, prepare the working capital requirement forecast for the year.

            Production during the previous year was 30,000 units. It is planned that this level of activity should be maintained during the current year. The expected rations of the cost to selling prices are Raw materials 60%, direct wages 10% and Overheads 20%. Raw materials are expected to remain in stores for an average of 2 months before, issue to production. Each unit of production is expected to be in process for 1 month, the raw materials being fed into the pipeline immediately and the labour and overheads cost accruing evenly during the month. Finished goods will be in the storehouse approximately for 3 months before being dispatched to customer. Creditors allow 2 months credit from the date of delivery of raw materials. Credit allowed to debtors is 3 months from the date of dispatch. Selling price is ` 10 per unit. The cycle of production and sales is regular. Wages are paid 15 days in arrears. Cash in hand with the company is normally ` 20,000. Assume 30 days to a month.

Q.        The Board of Directors of Maria Ltd. Requires you to prepare working capital estimation for the coming year. The details of the company are as follows :

            The number of units being produced currently are 50,000 units per annum.

The Raw Material cost is ` 180 per unit.

The wages are ` 40 per unit.

The Fixed Overheads are ` 100 per unit.

The Selling Price per unit ` 680.

Other Details are :

(a)     Raw Materials are in store on an average for 1 month along with Finished Goods.

(b)     Materials in Progress is on an average for 15 days.

(c)     Credit allowed by suppliers is for 1 month.

(d)     Time lag in collection from debtors is 4 months.

(e)     Time lag in payment of Wages is 1 month and that of Overheads it is 3 months.

(f)      20% of the output is sold against credit. Cash in hand and in Bank is expected to be ` 3,00,000.

 

Q.        A factory produces 96,000 units during the year and sells them @ ` 50 per unit. Cost structure of a product is as follows :         

Raw Material	60%
Labour	15%
Overheads	10%
	85%
Profit	15%
Selling Price	100%

The following additional information is available :

(i)      The activities of purchasing, producing and selling occur evenly throughout the year.

(ii)     Raw Materials equivalent to 1 month’s supply is stored in godown.

(iii)    The production process takes 1 month.

(iv)    Finished goods equal to three months production are carried in stock.

(v)     Debtors get 2 months’ credit.

(vi)    Creditors allow 1½ % month’s credit.

(vii)   Time lag in payment of wages and overheads is ½ month.

(viii)  Cash and Bank Balance is to be maintained at 10% of the working capital.

(ix)    10% of the sales are made at 10% above the normal selling price.

Draw a forecast of working capital requirements of the factor.

 

Q.        From the following information prepare an estimate of working capital required to finance a level of activity of 3,12,000 units p.a. (52 weeks)       

Particulars	Per Unit (`)
Raw Material	90
Wages	40
Overheads :
Manufacturing	30
Administrative	40
Selling	10
	210
Profit	40
Selling price	250

Other Information :

(i)      Raw materials are held in stock for a period of 4 weeks.

(ii)     Materials remain in process for 2 weeks requiring 50% wages and 40% overheads.

(iii)    Finished goods remain in stock for a period of 4 weeks.

(iv)    Credit allowed to customers is 8 weeks but 20% of the invoice price is collected immediately.

(v)     Time lag in payment of wages is 1.5 weeks and in overheads is 4 weeks.

(vi)    Credit available from suppliers is 4 weeks but 20% of the creditors are paid 4 weeks in advance.

(vii)   Bank balance is to be maintained at ` 60,000.

 

Q.        Computers India Ltd. produced and sold 6,000 Laptops in 2001 and their cost structure was as under :

	Per unit in (`)
Raw Material	12,000
Labour	9,000
Manufacturing Overheads	8,000
Administration and Selling Overheads	3,000
Profit	25% of Total Cost

In 2002 they plan to Manufacture 7,800 Laptops and sell 7,280 units. In the mean time, it is estimated that :

(a)     Raw material cost will go up by 10% p.a.

(b)     Labour will reduce by 5% p.a.

(c)     Manufacturing overheads will go up by 10% p.a.

(d)     Administration and selling overheads per unit will remain unchanged.

(e)     Selling price per unit will rise by 10% over last year

It is further informed that :

(1)     Raw Materials will remain in stores for 4 weeks before issue to production.

(2)     Process period is 3 weeks.

(3)     25% of sales will be on cash basis, 25% of sale will be against Bills of Exchange maturing in 8 weeks, balance will be sold at 4 weeks credit.

(4)     25% of Purchases are on cash basis. 25% of Purchases are from Japan and suppliers are to be given advance payment of 6 weeks. Balance suppliers allow a credit of 6 weeks.

(5)     Wages and Manufacturing Overheads remain outstanding for 2 weeks, whereas Administration and Selling overheads are paid 2 weeks in advance.

(6)     Cash and Bank Balance shall be maintained at ` 75,000/-.

(7)     Company shall get Bank Overdraft equal to 50% of stock of raw material and finished goods.

Work out working capital requirements for the year 2002.

Q.        Calculate the amount of working capital requirement for KJBP Pvt. Ltd. for year 2007 form the following information :

	Per unit in (`)
Raw Material	160
Direct Labour	60
Overheads	120
Total Cost	340
Profit	60
Selling Price	400

Other Information :

(i)      Raw materials are held in stock on an average for one month.

(ii)     Work in process on an average for half – a – month.

(iii)    Finished goods are in stock in average for one month.

(iv)    Credit allowed by suppliers is one month.

(v)     Credit allowed to debtors is two months.

(vi)    Time lag in payment of wages is half – a – month.

(vii)   Time lag in payment of overhead expenses is one month.

(viii)  Cash Sales – One fourth of the Total Sales.

(ix)    Cash in hand  and at the bank is expected to be ` 50,000/-.

Level of production 1,04,000 units.

 

Q.        Arjun Enterprise expect to sale 5,200 units @ ` 100 per unit.

            It is cost structure is :

Material Cost	40%
Wages Cost	15%
Cash Overheads	30%
Depreciation	5%
Profit	10%

Assuming a year to be equivalent to 52 weeks and a period 4 weeks equal to one month, estimate the working capital requirements.

The stock and credit period are :

(a)     Stock held in Raw Material and Finished Goods – 4 weeks each.

(b)     Processing time – ½ month.

(c)     25% of sales and 20% of Purchases are expected on Cash basis.

(d)     Credit offered and enjoyed by the enterprise is 1 month.

(e)     Minimum Cash Balance required ` 50,000.

(f)      Though all activities are evenly spread over a variation of 10% may arise, for which provision to be considered.

Prepare Estimate of Working Capital requirements stating the assumptions made wherever required.

 

Topic – Receivables Management

 

Q.        Easy Limited specializes in the manufacture of a computer component. The component is currently sold for ` 1,000 and its variable cost is ` 800. For the year ended 31.12.2009 the company sold on an average 400 components per month. At present the company grants one month credit to its customers. The company is thinking of extending the same to two months on account of which the following is expected :

Increase in Sales	25%
Increase in Stock	` 2,00,000
Increase in Creditors	` 1,00,000

You are required :

To advise the companion whether or not to extend the credit items if :

(a)     All customers avail the extended credit period of two months, and

(b)     Only new customers avail two months credit.  Assume in this case that the entire increase in sales is attributable to the new customers.

The company expects a minimum return of 40% on the investment. Assume 30 days to a month and 360 days to a year.

 

Q.        Apex Limited has classified its customers into five risks categories as follows :     

Category	Percentage of bad debts	Average collection period
1	1.0	30 days
2	2.0	45 days
3	5.0	60 days
4	10.0	100 days
5	20.0	1500 days

Presently Apex allows unlimited credit to customers in categories 1, 2, and 3, limited credit to customers in category 5. Due to this policy Apex rejects orders of ` 3 lakhs from customers in category 4 and ` 6 lakhs from customers in category 5. The variable cost to sales ratio for Apex is 75% and the opportunity cost of funds for Apex is 25%. Should Apex grant credit to all customers in categories 4 and 5 as well? Assume 360 days to a year.

 

Q.        Jethalal Garments Ltd. manufactures readymade garments and sells them on credit basis through a network of dealers. Its present sale is ` 60 lakhs per annum with 20 days credit period. The company is contemplating an increase in the credit period with a view to increase sales. Present variable costs are 70% of sales and the total fixed costs ` 8 lakhs per annum. The company expects pre-tax return on investment @ 25%. Some other details are given as under :

Proposed Credit Policy	Average Collection Period (days)	Expected Annual Sales (` Lakhs)
I	30	65
II	40	70
III	50	74
IV	60	75

            Required : Which credit policy should the company adopt?  Assume 360 – days a year. Calculations should be made upto two digits after decimal.

 

Q.        An a part of strategy to increase sales and profit, the sales manager of a company proposes to sell goods to a group of new customers with 10% risk of non-payment. This group would require 3 months credit and this is likely to increases sales by      ` 1 lac per annum. All sales are credit sales. Variable expenses amount to 80% of sales and the income tax rate is 50%. The minimum rate of return expected to be earned by the company is 25% before tax. Will you accept the proposal of the sales manager?

 

Q.        STS Ltd. which seels on credit basis has ranked its customers in categories 1 – 5 in order of credit risk.

Category	% bad Debts	Anticipated Credit Period
1	0.0	30 days
2	1.0	45 days
3	2.0	60 days
4	5.0	90 days
5	10.0	120 days

The company’s current policy is to allow unlimited credit to firms in categories 1 to 3, limited credit to firms in category 4 and no additional credit to firms in category 5.

As a result, orders amounting to ` 25,00,000 from category 4 and ` 75,00,000 from category 5 customers are rejected every year. If the STS Ltd. makes a 10% gross profit on sales and has an opportunity cost on investment in receivables of 12%, what would be the effect on profits of allowing full credit to all categories of customers? Should credit be extended to all categories of customers?

 

Q.        A trader whose current sales are in the region of ` 6 lakhs per annum and an average collection period of 30 days wants to place a more liberal policy to improve sales. A study made by a management consultant reveals the following information :

Credit Policy	Increase in Collection Period (Days)	Increase in Sales (in Units)	Percentage Default Anticipated (in %)
A	10	30,000	1.5%
B	20	48,000	2%
C	30	75,000	3%
D	45	90,000	4%

Selling price per unit is `, average cost per unit is ` 2.25 and variable cost per unit is ` 2.

Current bad debts loss is 1%. Required return on additional investment is 20%. Assume 360 days a year.

Which of the above policies would you recommend for adoption?

 

Q.        Surya Industries Ltd. is marketing all its products through a network of dealers. As sales are on credit and the dealers are given one month time to settle their bills. The company is thinking of changing the credit period with a view to increase its overall profits. The marketing department has prepared the following estimates for different period of credit.

	Present Policy	Plan I	Plan II	Plan III
Credit Period	30 days	45 days	60 days	90 days
Sales (` in lakhs)	120	130	150	180
Fixed costs (` in lakh)	30	30	35	40
Bad Debts (% of Sales)	0.5	0.8	1	2

The company has a contribution / sales ratio of 40%.  Further it requires a pre-tax return on investment @ 20%. Evaluate each of the above proposals and recommend the best credit period for the company.

 

Q.        Present Situation :

            Sales = ` 50 lacs, variable cost = ` 40 lacs.

Fixed costs = ` 6 lacs. Credit to Debtors = 30 days.

Proposed Credit Period	Sales (` in lacs)
45 days	56
60 days	60
75 days	62
90 days	63

Determine the credit period that should be allowed by the company. Assume ROI @ 10%.  Assume 360 days in a year.

 

Topic – Leverages

 

Q.        The following projections are related to company A.    

Sales (Units)	80,000
Variable Costs per Unit (`)	4
Fixed Costs (`)	2,40,000
Interest burden on Debt (`)	1,20,000
Selling Price per Unit (`)	10

On the basis of above data compute :

(a)     Operating Leverage

(b)     Financial Leverage

(c)     Combined Leverage

 

Q.        From the following particulars, prepare income statement of A Ltd. and B Ltd.      

	A Ltd.	B Ltd.
Degree of Combined Leverage	6 times	15 times
Degree of Operating Leverage	3 times	5 times
Variable Cost as a % of Sales	40%	50%
Rate of Income Tax	35%	35%
Number of Equity Shares	1,00,000	1,00,000
Earnings Per Share	` 1.30	` 0.65

 

Q.        Compute the operating, financial and combined leverage on basis of following information :

            Sales – 1,00,000 units at ` per unit.

Variable Cost            –           ` 0.70 per unit.

Fixed Cost                 –           ` 1,00,000

Interest Charge        –           ` 3,668

 

 

 

 

Q.        From the following information furnished for four companies, prepare income statement of each company and comment thereon.

	Alpha	Beeta	Gema	Delta
Financial Leverage	3 : 1	4 : 1	2 : 1	2. 5 : 1
Interest	` 2,000	` 3,000	` 10,000	` 6,000
Operating Leverage	4 : 1	5 : 1	3 : 1	3 : 1
Variable Cost as % of Sales	66  2/3%	75%	50%	40%
Income Tax Rate	35%	35%	35%	35%

 

Q.        Prepare income statement from the data given below for P, Q, R companies :

	P	Q	R
Variable Cost as a % of Sales	50	60	70
Interest	` 45,000	` 20,000	` 10,000
Degree of Operating Leverage	5 : 1	4: 1	7 : 1
Degree of Financial Leverage	4 : 1	5 : 1	6 : 1
Income Tax Rate	50%	50%	50%

Compute Net Profit (After Tax) for all the three companies.

Offer your comments on the leverages and profitability position of all three companies.

 

Topic – Cost of Capital

 

 

Q.        Following is the cost structure of a firm :

	(`)	Cost
Equity Capital	4,50,000	14%
Retained Earnings	1,50,000	13%
Preference Share Capital	1,00,000	10%
Debts	3,00,000	4.5%
	10,00,000

Calculate weighted Average Cost of Capital of the firm.

 

Q.        The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long run level of future earning of ` 7 per shares. The current price of Xavier’s shares is ` 55.45, floatation costs for the sale of equity shares would average about 10% of the price of the shares. What is the cost of new equity capital to Xavier Corporation?

 

 

Q.                   

Debt as Percentage of Total Capital Employed	Cost of Debt (After-tax) (%)	Cost of Equity (%)
0	6.0	13.0
10	6.0	13.0
20	6.0	13.5
30	6.5	14.0
40	7.0	15.0
50	7.5	17.0
60	8.0	21.0

            You are required to determine the optimal debt-equity mix for the company by calculating composite cost of capital.

 

Q.        Elam Ltd. has total capital employed of ` 75,00,000.  The break – up is an under :

            15% Debt – 30%

12% Preference capital – 10%

Equity capital and retained earnings are proportion of 3 : 1

All shares and debt are in units of ` 100 each. The tax rate applicable is 40%.

Equity share holders expect dividend @ 15%. Cost of retained earnings is to be considered @ 10%.

You are required to ascertain :

(a)     Composite cost of capital.

(b)     If earnings before interest and tax is ` 15,00,000. Calculate :

(i)      EPS

(ii)     Market Price of Equity Shares.

 

Q.        Bata Ltd. wishes to raise additional funds of ` 20,00,000 for meeting its investment plans. It has ` 4,00,000 in the form of retained earnings available for investment purposes. The following are further details :

(1)     Debt/Equity mix 40% / 60%.

(2)     Cost of debt :

Upto ` 5,00,000            10% (before tax)

Beyond ` 5,00,000      12% (before tax)

(3)     Last Year Earnings per share ` 4.

(4)     Dividend Pay out 50% of earnings.

(5)     Expected growth rate in dividend 10%.

(6)     Current market price per share ` 44.

(7)     Rate of Income tax 50%.

you are required to determine :

(i)      Pattern for raising the additional finance.

(ii)     Post tax average cost of additional debt.

(iii)    Cost of retained earnings and equity.

(iv)    Weighted average after tax cost of additional finance.

 

Topic – Capital Structure Planning

 

Q.        Paranjape Chemical Ltd. requires ` 25,00,000 for a new plant. This plant is expected to yield earning before interest and taxes of 20% on investment. While deciding about the financial plan, the company considers the objective of maximizing earning per share. It has three alternatives to finance the project – by raising debt of ` 2,50,000 or ` 10,00,000 or ` 15,00,000 and the balance, in each case, by issuing equity shares. The company’s share is currently selling at ` 150, but is expected to decline to ` 125 in case the funds are borrowed in excess of        ` 10,00,000.

            The funds can be borrowed at the rate of 10% upto ` 2,50,000, at 15% over             ` 2,50,000 and upto ` 10,00,000 and at 20% over ` 10,00,000. The tax rate applicable to the company is 30%. Equity shares are issued at market price. Which form of financing should the company choose?

 

Q.        Ravi Ltd., has a capital structure exclusively of ordinary share of ` 10 each, amounting to ` 5,00,000.  The company desires to raise additional funds of             ` 5,00,000 for financing its extension programme. The company can raise 50% as equity capital at par and balance in 5% debentures. The existing EBIT is ` 60,000 which will rise by 75% on expansion. The market price per share is ` 100 and tax rate 30%. Calculate EPS after expansion.

 

Q.        AB Company needs 5,00,00,000 for the construction of a new plant. The following three financial plans are feasible :

(a)     The company may issue 50,00,000 ordinary shares of ` 10 each.

(b)     The company may issue 25,00,000 ordinary shares @ ` 10 and remaining amount may be collected by issue of 2,50,000. Debentures of ` 100 bearing an 8% rate of interest.

(c)     The company may issue 25,00,000 ordinary shares @ ` 10 each and remaining amount as Preference. Shares of ` 10 each bearing an 8% rate of Dividend.

It the expected EBIT, which the Company may earn is ` 40,00,000, then suggest which Capital Structure alternative the Company should select. Assume tax rate to be 50%?

 

 

Topic – Business Restructuring

 

Q.        The Balance sheet of Ganesh Ltd. as on 31.03.2005 was as under :          

Liabilities	(`)	Assets	(`)
2,000 Equity Shares of		Land and Building	1,25,000
` 100 each	2,00,000	Machinery	75,000
General Reserve	50,000	Investment at Cost
Profit and Loss A/c	25,000	(Market Value ` 37,500)	45,000
Creditors	45,000	Debtors	50,000
Provision for Taxation	20,000	Stock	37,500
Provident Fund	17,500	Cash and Bank	25,000
Total	3,57,500	Total	3,57,500

Additional Information :

(i)      Land and Building and Machinery are valued at ` 1,37,500 and ` 55,000 respectively.

(ii)     Of the total debts ` 2,500 are bad.

(iii)    Goodwill is to be valued at ` 25,500.

(iv)    The normal dividend declared and paid by such type of companies is 15% on the paid up capital.

(v)     Calculate the fair value of an equity share of the company.

 

Q.        The final accounts of QQ Ltd. as on 31^st march 2005 revealed the following information :

            Share Capital (Fully paid-up)

12% Preference shares 20,000 shares of ` each.

Reserves and Surplus ` 1,50,000.

Preliminary Expenses ` 30,000.

The assets as shown in the accounts are undervalued to the extent of ` 2,50,000.

The average pre-tax profits of past three years was ` 5,00,000. The tax rate applicable is 35%.

It is anticipated that due to favourable market conditions pre-tax profit will increase by 20%.

Equity shareholders expect a return of 15%

Determine the Fair Value of an Equity share.

Q.        Gems Ltd. gives you the following information as on 31.03.2006.    

1.	Tangible Fixed Assets	` 15 lacs
2.	Patents	` 5 lacs
3.	Investments	` 1 lacs
4.	Current Assets	` 10 lacs
5.	Long Term Loan	` 5 lacs
6.	Current Liabilities	` 3 lacs
7.	Share Capital :
	20,000; 10%  Preference Shares of ` 10 each	` 2 lacs
	50,000; Equity Shares of ` 10 each	` 5 lacs
8.	Average Profit after tax, but before Dividend on Pref. Shares	` 4 lacs
9.	Normal Rate of return for industry	19%

The patents are worthless while 50% of the fixed assets are to be appreciated by 20%. From the above you are required to calculate value of an equity share of the company under :

1.      Net Worth Basis.

2.      Yield basis.

3.      Fair Valuation basis.

 

Q.        The following is the summarized Balance Sheet of M/s NSE Traders Ltd. as at 31.03.2007.       (` in lacs)

	`	`	`
Sources of Funds :
Shares Capital	125
Reserves	143
		268
Debentures	50
Other loans	45
		95
Application of Fund :			363
Fixed assets
Investments		233
Investments		30
Working capital		100
			363

Other Information :

            The total current assets of the company are ` 190 lacs while goodwill is ` 13 lacs. It is decided to value all tangible fixed assets @ 125% while current assets with the exception of cash and bank balance of ` 30 lacs are to be revalued 10% less of the book value. There is an unrecorded liability of ` 14 lacs which needs to be recorded. The share capital of the company includes 2,00,000 Preference shares of ` 10 each. And balance by way of equity shares of ` 10 each.

You are required to redraft the Balance Sheet after the above changes and calculate value per equity share of ` 10 each under net worth method.

 

Q.        The following are the Balance Sheet of X Ltd. and Y Ltd. for the year ended 31.08.2007.

(amount in Thousand of `)

Particulars	X Ltd.	Y Ltd.
Equity Share Capital (` 10 each)	1,50,000	75,000
10% Preference Share Capital (` 10 each)	30,000	Nil
Securities Premium	Nil	3,000
Profit & Loss A/c	57,000	6,000
10% Debentures	22,500	7,500
Total	2,59,500	91,500
Fixed Assets	1,83,000	52,500
Net Current Assets	76,500	39,000
Total	2,59,500	91,500
Maintainable Annual Profits After Tax	39,000	22,500
Market Price per Share	20	25

            X Ltd. is planning to take over Y Ltd. Hence you are required to determine for each company the following :

(a)     Value per share under Net Assets Method.

(b)     Earning Per Share.

(c)     P/E Ratio.

(d)     ESP if both the companies are merged.

 

Q.        The following is the Balance Sheet of M/S ABC Ltd. as at 31.03.2008. (Amount in `)

Liabilities	(`)	Assets	(`)
20,00,000 Equity Shares		Fixed Assets	2,56,00,000
of ` 10 each	2,00,00,000	Investment	40,00,000
10,00,000 Equity Shares		Current Assets	1,80,90,000
of ` 6 paid up	60,00,000	Suspense Account	15,22,770
12%  2,00,000 Preference
Shares of ` 10 each	20,00,000
Reserves and Surplus	99,89,230
Secured Loans	44,23,000
Current Liabilities	68,00,540
Total	4,92,12,770	Total	4,92,12,770

            Additional Information :

            The Fixed assets of the company are to be appreciated by 20% while investments have market value of ` 48,00,000. The company has cash and bank balance worth ` 12,24,560 and apart from this all current assets are to be revalued @ 10% less. The Suspense account represented advances made for which no records are available and is estimated that a sum of ` 4,00,000 could only be recovered. There is an unrecorded liability of ` 4,56,700 which is to be recorded now. The company has a track record of paying dividend @ 24% while the normal rate of dividend expected is 20%.

You are required to calculate value of each equity share (both fully and partly paid) under :

(1)     Net Worth method.

(2)     Dividend Yield method and

(3)     Fair Value method.

 

Q.        Star and Moon had been carrying on business independently. They agreed to amalgamate and from a new company Neptune Ltd., with an authorized share capital of 2,00,000 divided into 40,000 equity shares of ` 5 each. On 31^st December, 2009 the respective Balance Sheet of Star and Moon were as follows :

	Star (`)	Moon (`)
Fixed Assets	3,55,000	1,99,000
Current Assets	1,63,500	83,875
	4,81,000	2,66,375
Less : Current Assets	2,98,500	90,125
Representing Capital	1,82,500	1,76,250

Additional Information :

(a)     Revalued figures of Fixed and Current Assets were as follows :

	Star (`)	Moon (`)
Fixed Assets	3,55,000	1,95,000
Current Assets	1,49,750	78,875

 

(b)     The purchase consideration is satisfied by issue of following shares and debentures :

(i)      30,000 equity shares of Neptune Ltd., to Star and Moon in proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows :

	Star (`)	Moon (`)
2007 Profit	2,24,788	1,36,950
2008 (loss) / Profit	(1,250)	1,71,050
2009 Profit	1,88,962	1,79,500

 

(ii)     15% debentures in Neptune Ltd. at par to provide an income equivalent to 8% return on capital employed in their respective business as on      31^st December, 2009 after revaluation of assets.

You are requested to :

(1)     Compute the amount of debentures and shares to be issued to Stat and Moon.

(2)     A Balance Sheet of Neptune Ltd., showing the position immediately after amalgamation.

 

Q.        Company X wishes to takeover Company Y.  The financial details of the two companies are as under ;

	Company X (`)	Company Y (`)
Equity Shares (` 10 per share)	1,00,000	50,000
Security Premium Account	–	2,000
Profit & Loss A/c	38,000	4,000
Preference Shares	20,000	–
10% Debentures	15,000	5,000
	1,73,000	61,000
Fixed Assets	1,22,000	35,000
Net Current Assets	51,000	26,000
	1,73,000	61,000
Maintainable Annual Profit (after tax)
For Equity Shareholders	24,000	15,000
Market : Price per equity share	24	27
Price Earning Ratio	10	9

What offer do you think Company X could make to Company Y in terms of exchange ratio, based on

(i)      Net assets value;

(ii)     Earning per share; and

(iii)    Market price per share?

Which method would you prefer from Company X’s point of view?

 

Topic – Capital Budgeting

Q.        Navniman Ltd. is considering four capital projects for the year 2010 and 2011.  The company is financed by equity entirely and its cost of capital is 12%. The expected cash flows of the projects are as below :

Year and Cash flows (`. ‘000)

Project	2010	2011	2012	2013
A	(40)	(30)	45	55
B	(50)	(60)	70	80
C	–	(90)	55	65
D	(60)	20	40	50

            Note : Figures in bracket present cash outflows.

            All projects are indivisible i.e. size of investment cannot be reduced.  None of the projects can be delayed or undertaken more than once. Calculate which project(s) Navnirman Ltd., should undertake if the capital available for investment is limited to ` 1,10,000 in 2010 and with no limitation in subsequent years. For your analysis use the following present value factors.

Year	2010	2011	2012	2013
Factor	1.00	0.89	0.80	0.71

 

Q.        Pioneer Chemicals is evaluating two alternative systems for waste disposal, Systems A and B which have lives of 6 years respectively. The initial outlay and operative costs for the two systems are expected to be as follows :     

	System A	System B
Initial Outlay	` 4 million	` 3 million
Annual Operating Costs	` 1.2 million	` 1 million

If the discount rate is 13% which system should Pioneer choose? Ignore salvage value.

(Annuity of ` 1 @ 13% for 4 years is 2.9744 and for 6 years 3.9975)

 

 

Q.        M/s. Kurthade is considering two projects, M and N, each of which requires an initial outlay of ` 50 million. The expected cash inflows in million ` from theses projects are :

Year	Project M	Project N
1	11	38
2	19	22
3	32	18
4	37	10

(a)     What is the simple payback period for each of the projects?

(b)     What is the discounted payback period and discount payback profitability for each of the projects if the cost of capital is 12%.

(c)     Advise which project should be selected.

Year	1	2	3	4
Discount @ 12%	0.8929	0.7972	0.7118	0.6355

 

Q.        A Project requires an investment of ` 60,000.  The plant and machinery required under the project will have a scrap value of ` 3,000 at the end of its useful life of 5 years. The profits after tax and depreciation are estimated to be as follows :

Year	PAD & T `
1	5,000
2	15,000
3	20,000
4	30,000
5	20,000

Calculate the Accounting Rate of Return.

 

Q.        Suhail Enterprises Ltd. is a manufacturer of high quality running shoes.

            Ms. Dhinchak, President, is considering computerizing the company’s ordering, inventory and billing procedures. She estimates that the annual savings from computerization include a reduction of ten clerical employees with annual salaries of ` 15,000 each, ` 8,000 from reduced production delays caused by raw materials inventory problems, ` 12,000 from lost sales due to inventory stockouts and ` 3,000 associated with timely billing procedure. the purchase price of the system is ` 2,00,000 and installation costs are ` 50,000. These outlays will be capitalized (depreciated) on a straight line basis to a zero book (salvage) value which is also its market value at the end of five years. Operation of the new system requires two computer specialists with annual salaries of ` 40,000 per person. Also annual maintenance and operation (cash) expenses of ` 12,000 are estimated to be required. The company’s tax rate is 30% and its required rate of return (cost of capital) for this project is 12%.

You are required to :

(a)     Find the project’s initial net cash outlay.

(b)     Find the project’s operating and terminal value cash flows over its 5 year life.

(c)     Evaluate the project using NPV method.

(d)     Evaluate the project using Pl method.

(e)     Evaluate project’s simple payback period.

Note :

(i)      Present value of annuity of ` 1 at 12% rate of discount for 5 years is 3.065.

(ii)     Present value of ` 1 t 12% rate of discount, received at the end of 5 years is 0.567.

 

Q.        A product is currently being manufactured on a machine that has a book value of    ` 30,000. The Machine was originally purchased for ` 60,000 units were produced and sold for ` 50 per unit.

            An equipment manufacture has offered to accept the old machine at ` 28,000, a trade – in for a new version. The purchase price of new machine is ` 1,00,000 And Project per unit cost associated with the new machine are : Direct labour : ` 4; direct materials ` 7; and the total cost is ` 22 per unit. The new machine has an expected life of 10 years and with no salvage value under the straight line method of depreciation. It is also expected that the future demand of the product would remain same at 6,000 units per year. Should the new equipment be acquired?

Corporate tax is @ 40% (Present value of annuity of ` 1,00 at 10% rate of discount for 9 years is 0.386)