parab (2013) financial management jbims 20130408

8/22/2019 Parab (2013) Financial Management JBIMS 20130408

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Contents1 Cost of Capital .................................................................................................................... 1

2 Capital Budgeting ............................................................................................................... 33 Funds Flow ......................................................................................................................... 6

4 Ratio Analysis ................................................................................................................... 11

5 Working Capital ................................................................................................................ 13

6 Answers ............................................................................................................................ 15

(a) Cost of Capital ............................................................................................................ 15

(b) Capital Budgeting ....................................................................................................... 15

(c) Funds Flow Statement ................................................................................................ 16

(d) Ratio Analysis ............................................................................................................ 18

Practice Problems

FinancialManagement

Balkrishna Parab

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2/19

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COST OF CAPITAL

1 The earnings, dividends, and stock price of Carpetto Technologies Inc. are expected togrow at 7% per yearin the future. Carpettos common stock sells for $23 per share, and itslast dividend was $2.00. Required (a) Using the Dividend Discount Model what is its cost ofcommon equity? (b) If the firms beta is 1.6, the risk-free rate is 9%, and the average returnon the market is 13%, what will be the firms cost of common equity using the CAPMapproach?

2 Apuco Limited had the following capital structure on March 31, 2002.

Particulars Amount (Rs)Equity Share Capital (400,000 shares of Rs. 20 each) 8,000,000

14% Preference Share Capital (20,000 shares of Rs. 100 each) 2,000,000

12% Secured Debentures (6000 debentures of Rs. 1000 each) 6,000,000

Total Rs 16,000,000

The shares of the company are currently selling for Rs. 25 on the National Stock Exchange.The expected dividend next year is Rs. 3 per share which is expected to grow at the rate of 7

per cent. Assume the tax rate to be 30 per cent. Compute the weighted average cost of capitalfor the company.

3 Three companies: Delta, Gamma, Epsilon are in the same line of business. However, theircapital structure is different. The following details are available:

Source of F inance Delta Gamma Epsilon

Equity shares of Rs. 10 each Rs. 400,000 Rs. 250,000 Rs. 500,000

Current Market Price of Shares Rs. 15 Rs. 20 Rs. 12

Current Dividend per share Rs. 2.70 Rs. 4.00 Rs. 2.88

Growth Rate of Dividend 8% 10% 7%

Debentures of Rs. 100 each Nil Rs. 100,000 Rs. 250,000

Interest rate NA 10% 8%

Calculate the weighted average cost of capital (WACC) of the three companies assumingthey pay income tax at the rate of 30%.

4 Percy Motors has a target capital structure of 40 per cent debt and 60 per cent equity. Theinterest payable on the companys outstanding bonds is 9 per cent, and the companys tax rateis 40 per cent. Percys CFO has calculated the companys WACC as 9.96 per cent. RequiredWhat is the companys cost of equity shares?


3/19

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5 AB Limited has estimated the cost of equity and debt component of its capital fordifferent levels of debt-equity mix to be as follows:

Debt Proporti on Cost of Equi ty (%) I nterest Rate on Debt(%)

00 16 12

20 16 12

40 20 16

60 24 20

The income tax rate applicable for the company is 30%. Required Suggest thatproportion of debt which will result in the lowest (WACC) for the company.

6 Patton Paints Corporation has a target capital structure of 40 per cent debt and 60 per centequity shares. The companys before-tax cost of debt is 12 per cent and its marginal tax rate is40 per cent. The current stock price is Rs. 22.50; the last dividend was Rs. 2.00; and thedividend is expected to grow at a constant rate of 7 per cent.

Required what will be the firms cost of equity shares and its WACC?

7 Chinchpokli Traders Private Limited is engaged in the business of exporting tamarind tothe gulf countries. The total capital of the company includes 30% debt and 70% equity. Theinterest rate on debt is 16% pa. The companys shares are listed for trading on the BombayStock Exchange (BSE).

The BSE SENSEX grew by approximately 18.50 over the last year. The return on thecompanys stock is highly sensitive to the return on the SENSEX, and was measured as 1.1.The income tax rate applicable to the company is 40%. The RBI pays interest of 3.50 per centgovernment securities. Required Calculate the WACC.

8 Omega Enterprises, Orient Electronics, and Opulence Systems are in the same line ofbusiness. All the companies are listed on the Bombay Stock Exchange, and their capitalstructure comprises only of debt and equity. The following details were extracted about thesecompanies.

Company Proportion of Equity

in Capital structure

Interest Rate

on Debt

Omega Enterprises 80 12% 0.9

Orient Electronics 65 14% 1.1

Opulence Systems 50 18% 1.0

The BSE SENSEX gave a return of 17.50 per cent and the risk-free rate of return is 3.50 percent. The income tax rate applicable all the companies is 30%. Required Calculate theoverall cost of capital of all the above companies.

9 Hook Industries has a capital structure that consists solely of debt and equity shares. Thecompany can issue debt at 11 per cent. Its stock currently pays a Rs. 2 dividend per share, andthe stocks price is currently Rs. 24.75. The companys dividend is expected to grow at aconstant rate of 7 per cent per year; its tax rate is 35 per cent; and the company estimates thatits WACC is 13.95 per cent. Required what percentage of the companys capital structureconsists of debt financing?

10 The Bulchand Companys EPS was Rs. 6.50 in 2012. The company pays out 40 per centof its earnings as dividends, and the stock sells for Rs. 36. The dividends are expected to grow

at rate of 7%. Required (a) Calculate the next expected dividend per share; (b) what is thecost of equity for the Bouchard Company?


4/19

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CAPITAL BUDGETING

1 Aeromax Limited is considering purchase of a piece of equipment whose initial cost isRs. 3,800,000. The management accountant estimates that the equipment will generate anafter-tax cash flow of Rs. 800,000 for five years beginning with the end of the currentyear. Assume the companys cost of capital is 8%. Required (a) What is the NPV of the

project? Is the project acceptable? (b) What is the IRR of the project?

2 Adolfler Limited is desirous of purchasing a piece of equipment which costs Rs. 50 lakhs.The life of the equipment is expected to be three years at the end of which it would bescrapped for Rs. 8 lakhs. The company charges depreciation on straight line basis; the rate

of tax applicable to the company is 35%. The companys weighted average cost ofcapital is 15%. It is expected that the equipment will generate incremental cash flows(before tax) at the end of each year as follows:

Year 1 2 3

Cash Flow (Pre-Tax) 3,500,000 2,500,000 2,000,000

Calculate (a) cash flows after taxes; (b) net present value; and payback period.

3 Bristol Limited is considering purchase of a piece of equipment whose initial cost is Rs.1,000,000. The management accountant estimates that the equipment will generate a

before-tax cash flow of Rs. 350,000 for five years beginning with the end of the current

year. The company depreciates assets using straight line method. The rate of Income taxis 35 per cent; Assume the company has a cost of capital of 20 per cent. Required (a)What is the NPV of the project? (b) Is the project acceptable?

4 Cyngus Engineering is considering including two pieces of equipment, a truck and anoverhead pulley system, in this years capital budget. The projects are independent. Thecash outlay for the truck is Rs.17100 and that for the pulley system is Rs.22430. Thefirms cost of capital is 14 percent. After-tax cash flows are estimated as follows:

Year 1 2 3 4 5

Truck Rs.5100 Rs.5100 Rs.5100 Rs.5100 Rs.5100

Pulley Rs.7500 Rs.7500 Rs.7500 Rs.7500 Rs.7500

Calculate the IRR, and the NPV for each equipment.

5 Delta Company is wishes to purchase a filtering machine. Two brands of the machine areavailable in the market. The company has compiled the following expected cash inflows(after tax) at the end of each year. The initial cost of both the brands is Rs. 150,000.Assuming the required rate of return to be 15 per cent which brand should the company

buy?

Year 1 2 3 4 5

Brand A 20000 50000 50000 20000 50000

Brand B 30000 40000 30000 40000 50000


5/19

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6 English Oil Corporation is contemplating the purchase of a coconut crushing machine.Three brands of the machine are available in the market. The companys hurdle rate is12% and the tax rate is 30%. The company uses straight line method of depreciation. Themanagement accountant of the company has estimated the following cash flows beforetaxes of these machines. Advice: which brand should the company buy?

Brand Initial Cost Year 1 Year 2 Year 3 Year 4

A 100,000 25,000 30,000 50,000 50,000

B 100,000 30,000 40,000 35,000 50,000

C 100,000 40,000 10,000 50,000 50,000

7 Fishbone Pneumatics Limited has been approached by a software company tocomputerise its purchase function. Presently, the company spends Rs. 200,000 every yearon the purchase department. The software company claims that if computerisation isdone, the cost of the purchase department can be reduced by 40%. The cost ofcomputerisation is estimated to be Rs. 250,000. It is estimated that the software will

become obsolete at the end of the fifth year. Assume the required rate of return to be 10per cent and the tax rate to be 30 per cent. Advise the company whether thecomputerisation is worthwhile.

8 Gator Limited is considering a project which has 12,000 initial costs with estimatedafter-taxbenefits to be 8,000 after the first year, 7,500 after the second year and 5,000after the third year. Calculate the NPV of the project using 18.50% as a discount rate.What advice would you give about this investment?

9 Hamston Limited is considering a project which has 45,000 initial costs with estimated after-taxbenefits to be 12,500 after the first year, 15,500 after the second year and

21,000 after the third year and 38,000 after the fourth year. Calculate the NPV of theproject using 28% as a discount rate. What advice would you give about this investment?

10 Sweet Delights Co. is considering a marketing policy for its brand of chocolates. Twomutually exclusive advertising strategy changes are under consideration. The cash flowsassociated with each are as follows. The cost of capital for Sweet Delights is 13%. Which

policy should be adopted?

Policy Initial Cost 1 2 3 4 5

A (800000) 400000 400000 400000 - -

B (400000) 200000 200000 200000 200000 200000

11 A firm considering replacement of its existing machine by a new machine. The newmachine will cost Rs 160,000 and have a life of five years. The new machine will yieldannual cash revenue of Rs 250,000 and incur annual cash expenses of Rs 130,000. Theestimated salvage of the new machine at the end of its economic life is Rs 8,000.

The existing machine was originally purchased for Rs 80,000 and can be sold for Rs20,000. The existing machine, if used for the next five years is expected to generateannual cash revenue of Rs 200,000 and to involve annual cash expenses of Rs 140,000. Ifsold after five years, the salvage value of the existing machine will be negligible.

The company pays tax at 30%. The companys cost of capital is 20%. Depreciation on theold machine is charged at 10% of its original cost. Compute the NPV of the replacementdecision.


6/19

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12 You are a financial analyst for Damon Electronics Company. The director of capitalbudgeting has asked you to analyze two proposed capital investments, Projects X and Y.Each project has a cost of Rs.10000, and the cost of capital for each project is 12 percent.The projects expected net cash flows (after tax) are as follows:

Year 1 Year 2 Year 3 Year 4

Project X 6500 3000 3000 1000

Project Y 3500 3500 3500 3500

Required

(a) Calculate each projects payback period, net present value (NPV), and internal rate ofreturn (IRR);

(b) State which project or projects should be accepted if they are independent?

(c) Which project should be accepted if they are mutually exclusive?

13 Adam Smith is considering automating his pin factory with the purchase of a machine

costing Rs.475000. Shipping and installation would cost Rs.5000. Smith has calculatedthat automation would result in savings of Rs.95,000 a year due to reduced scrap andRs.85,000 a year due to reduced labour costs. The machine has a useful life of three years.The estimated final salvage value of the machine is Rs.120000. The firm's tax rate is 30

percent. Calculate the NPV of the machine assuming the discount rate of 11%.


7/19

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FUNDS FLOW

1 The following are the summarised balance sheets of a company as on December 31, 2003and December 31, 2004.

Liabilities 2003 2004 Assets 2003 2004

Share Capital 200000 250000 Land & Buildings 175000 190000

General Reserve 50000 60000 Machinery 150000 161000

Profit & Loss Ac 30500 30600 Stock 100000 74000

Term Loan 70000 25,000 Sundry Debtors 80000 64000

Sundry Creditors 150000 110200 Cash and Bank 2500 8800

Provision for tax 27000 32000 Investments 3000 8000

Bills Payable 3000 3000 Goodwill 20000 5000

Total Liabilities 530500 510800 Total Assets 530500 510800

Additional Information: (a)Dividend amounting to Rs. 23000 was paid during the year; (b)Depreciation written off on machinery was Rs. 12,000; (c) Income tax provided during the

year was Rs. 33,000; (d) Loss on sale of machinery, Rs. 200, was written off during the year;the book value of machine was Rs. 8000.

2 The following are summarized balance sheets of Mumbai Pneumatics Ltd.

Liabilities 31.3.2005 31.3.2006 Assets 31.3.2005 31.3.2006

Share Capital 100,000 125,000 Goodwill 5,000 3000

General Reserves 25,000 30,000 Building 100,000 95,000

Profit & Loss Account 15,000 15,300 Plant 70,000 89,000

Long Term Loan 35,000 5,000 Stock 50,000 37,700

Creditors 75,000 67,500 Debtors 44,750 32,000

Provision for Tax 15,000 17,500 Bank 250 4,300

Advance from Clients 10,000 4,700 Prepaid 5,000 4,000

Total Rs 275,000 265,000 Total Rs 275,000 265,000

Additional Information (a) During the year a dividend of Rs. 11,500 was paid; (b)Depreciation was written off plant Rs. 7000; (c) Depreciation was written off buildings Rs.5000; and (d) During the year a sum of Rs. 16,500 was provided for taxation.


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3 Prepare a funds flow statement from the summarised balance sheet of Sky Limited.


Shareholder Funds Fixed Assets

Share Capital 2,000,000 3,000,000 Gross Block 4,200,000 7,500,000

General Reserves 400,000 700,000 Accumulated Depreciation (745,000) (1,025,000)

P&L Account 500,000 750,000 Net Block 3,455,000 6,475,000

Debentures 1,200,000 800,000 Non-Current Investments 950,000 1,275,000

Term Loan 1,000,000 1,400,000 Stock 1,975,000 2,250,000

Loan fromDirectors

500,000 750,000 Debtors 2,045,000 1,875,000

Sundry Creditors 1,650,000 2,150,000 Bills Receivables 375,000 285,000

Bills Payable 560,000 650,000 Cash & Bank Balances 135,000 225,000

Bank Overdraft 950,000 1,275,000 Loans & Advances 215,000 215,000

OutstandingExpenses

240,000 275,000 Prepaid Expenses 200,000 50,000

Provision for Tax 450,000 650,000 Advance to Supplier 100,000 100,000

Proposed Dividend 200,000 450,000 Loan to Employees 200,000 100,000

Total Rs 9,650,000 12,850,000 Total Rs 9,650,000 12,850,000

4 The following are summarized balance sheets of Datamechanics Ltd.


Share Capital 200000 250,000 Goodwill 24,000 20,000

General Reserves 28000 36,000 Building 80,000 126,000

Profit & Loss Acc 32000 26,000 Plant 74,000 72,000

Bills Payable 2400 1,600 Investment 58,800 22,000

Creditors 16000 10,800 Stock 60,000 46,800

Short Term Loans 38,800 3,400 Advances 4,000 9,800

Provision for Tax 32,000 36,000 Debtors 36,000 38,000

Wages Payable 800 1,200 Bank 13,200 30,400

Total Liabilities 350,000 365,000 Total Assets 350,000 365,000

Additional Information (a) During the year a dividend of Rs. 16000 was paid; (b)Depreciation was written off plant Rs. 8000; (c) Depreciation was written off buildings Rs.8000; (d) a provision of Rs. 38000 was made for taxation during the year; (d) During the yearinvestment which were acquired at Rs. 25000 were sold for Rs. 37500.


9/19

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5 The following is provided by Kenyata Gold Ltd.


Share Capital 220,000 270,000 Property 148,500 144,250

Reserves 30,000 40,000 Machinery 112,950 126,200

Profit Loss Account 39,690 41,220 Goodwill 20,000 10,000


Bills Payable 33,790 11,000 Cash 1,500 11,000

Bank Overdraft 60,000 0 Stock 110,000 92,000

Provision for Tax 40,000 50,000 PrepaidExpenses

3,370 1,000

Total Liabilities 462,480 453,880 Total Assets 462,480 453,880

Additional Information (a) During the year ended December 31, 2005 a dividend of Rs.26,000 was paid; (b) The following assets of another company were purchased for Rs. 50,000in exchange for shares: (i) inventories: 21,640; (ii) machinery: 18,360; (iii) goodwill: 10,000;(c) A new plant was purchased for Rs. 5,650; (d) Depreciation written off during the year wasas follows: (i) property: 4,250; (ii) Machinery: 10,760; and (e) Rs. 28,770 was provided forincome tax during the year.

6 The summarized balance sheets ofMcKennas Silver Ltd are given below. (a) During theyear investments costing Rs. 8000 were sold for Rs. 8500; the profit was included in the profitand loss account; (b) Depreciation was written off fixed assets Rs. 70000; (c) Fixed assetscosting Rs. 10000 were sold for Rs. 12000; the profit was included in the profit and lossaccount; (d) During the year a sum of Rs. 9000 was provided for taxation; and (e) Dividend

paid during the year amounted to Rs. 40000.


Share Capital 450000 450000 Fixed Assets 400000 320000

General Reserves 300000 310000 Goodwill 8000 3000

Profit Loss Account 56000 68000 Investments 122000 87000

Debentures 68000 270000 Stock 160000 180000

Creditors 168000 134000 Debtors 210000 455000

Provision for Tax 7000 10000 Bank 149000 197000



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7 The following are the summarised balance sheets of a company as on December 31, 2005and December 31, 2006.


Share Capital 200000 250000 Land 10000 60000

Reserves & Surplus 31500 40000 Machinery 25000 40000

P&L A/c 23500 52000 Building 75000 90000

Debentures 40000 35000 Investments 50000 30000

Short Term Loans 9000 3000 Sundry Debtors 82000 92000

Wages Payable 3000 30000 Stock 32000 40000

Bills Payable 3500 4500 Bank 43000 58000

Advances from Clients 11500 5500 Prepayment 23000 54000

Creditors 33000 40000 Patents 10000 6000

Provision for Tax 45000 40000 Goodwill 50000 30000


Additional Information (a) Dividend paid during the year was Rs. 26500; Investmentoriginally purchased for Rs. 20000 were sold in 2006 for Rs. 25000; (c) Machinery having awritten down value of Rs. 5000 was sold at a loss of Rs. 1000; (d) During the yeardepreciation charged on Machinery was Rs. 6000; and on Building Rs. 15000; (e) A sum ofRs. 50,000 was provided for taxes during the year.

8 The comparative balance sheet of Graphic Design Studio, Inc., at June 30, 2009, includedthese amounts.


Share Capital 87,100 94,900 Patents 27400 5000

Reserves and Surplus 276,700 298,900 Equipment 42,400 96,000

Secured Debentures 59,800 51,200 Land 256,700 293,300

Provision for Tax 56,600 53,400 Live Stock 29200 48400

Salary payable 47,400 64,100 Investment 74,500 73,600

Advances from Clients 3,400 18,100 Cash 48,800 51,900

Bills payable 42,400 40,300 Advance to Suppliers 28,600 8,600


Fines payable 8,200 9,100 Inventories 3,700 2,800

Accrued liabilities 3,700 2,900 Prepaid expenses 10,100 5,200

Interest payable 900 2,600 Security Deposits 10,000 5,000

Total Rs 600,000 650,000 Total Rs 600,000 650,000

Additional Information (a) depreciation expense on equipment: Rs. 13,400; (b) purchasednew investment, Rs. 4,900; (c) sold land for Rs. 46,900 at a loss of Rs. 6,700 loss; (d)acquired equipment by issuing secured debentures, Rs.14,300; (e) repaid secured debentures,

Rs. 61,000; (f) paid cash dividends, Rs.38,100; and (g) provision for tax for the year was Rs.50,000.


11/19

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9 The following are the summarised balance sheets of Raffles Ltd. as on December 31,2005 and December 31, 2006.


Share Capital 200000 240000 Land 93000 0

Reserves & Surplus 23500 52000 Machinery 25000 90000

Debentures 40000 35000 Building 70000 146000

Term Loans 63900 53600 Goodwill 5000 4000

Outstanding Expenses 3500 4200 Investments 50000 30000

Creditors 33000 40000 Prepaid Expenses 2000 5000

Advance from Clients 2000 3000 Inventories 30000 35000

Bills Payable 2100 1200 Cash 43000 58000

Provision for Tax 32000 31000 Debtors 82000 92000


Additional Information (a) Dividend paid during the year was Rs. 30,000; (b)

Investment which were originally acquired for Rs. 20000 were sold in 2006 for Rs.

25000; (c) Machinery costing Rs. 5000 on which Rs. 1000 depreciation has been

accumulated was sold for Rs. 3000 in 2006; (d) Depreciation charged on building was

Rs. 14000; and on machinery was Rs. 10,000; (e) Provision for tax was Rs. 28,000; and

(f) During the year the company issued bonus shares of Rs. 40,000; (g) Land was sold

for Rs. 125,000.

10 The following are the summarised balance sheets of Perokside Ltd. as on December 31,2003 and December 31, 2004.


Share Capital 200000 250000 Building 200000 190000

Preference Shares 60000 20000 Machinery 150000 169000

Profit & Loss Ac 20500 70600 Stock 90000 74000

Term Loan 70000 10000 Sundry Debtors 80000 64000

Sundry Creditors 150000 135200 Cash and Bank 500 8800

Bills Payable 18250 21100 Goodwill 10000 5000

Accrued Liabilities 51250 18100 Patents 29500 19200

Provision for tax 30000 25000 Copyrights 40000 20000


Additional Information (a) Dividend amounting to Rs. 23000 was paid during the year; (b)Depreciation written off on machinery was Rs. 12,000; and building Rs. 10,000; (c) Amachine have a written down value of Rs. 15,000 was sold at a loss Rs. 200, was written offduring the year; (d) provision for tax during the year was Rs. 27500.


12/19

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RATIO ANALYSIS

1 From the following comparative balance sheets: (a) calculate liquidity, asset utilization,solvency and profitability ratios; and (b) comment on the relative performance of thecompanies.

Consolidated Balance Sheets on March 31, 2012 Cipla Sun TorrentPharma Pharma

Equity and Liabilities

Shareholders Funds

Share Capital ........................................ ...................... ........ 160.58 .................... 103.56 ...................... 42.31

Reserves and Surplus .................... ..................... ............. 7,478.35 ............... 12,062.79 .............. ... 1,151.51Total Shareholder Funds...................... ...................... ..... 7,638.93 ............... 12,166.35 ................. 1,193.82Minority Interest .......................................................................... ................. 1,161.45 ........................ 3.50

Non-Current Liabilities

Long Term Borrowings ..................... ..................... ................2.20 .................... 155.42 .............. ...... 322.06Deferred Tax Liabilities (Net) ............................. ............... 233.24 .................... 163.63 ...................... 77.09Long Term Provisions ................................. ...................... ... 31.45 .................... 138.73 .................... 110.45Other Long-term Liabilities ..................... ..................... .........0.00 ..................... ... 8.93 ...................... .. 3.80Total Non-Current Liabilities................... ..................... ..... 266.89 .................... 466.71 .................... 513.39

Current Liabilities

Short Term Borrowings..................... ..................... .............. 11.26 .................... 109.57 .................... 138.12Trade Payables .......................... ...................... ................... 601.69 .................... 840.11 .................... 863.47Other Current Liabilities ...................... ...................... ........ 619.70 .................... 600.85 .............. ...... 291.00

Short Term Provisions.......................... ...................... ........ 211.78 .................... 915.35 .............. ........ 70.25Total Current Liabilities .................... ..................... ......... 1,444.43 ................. 2,465.88 ................. 1,362.84

Total Equity and Liabilities ................... ...................... ................ 9,350.25 ............... 16,260.39 ................. 3,073.55

Assets

Non-Current Assets

Fixed AssetsTangible Assets ...................... ..................... .................... 3,215.79 ................. 2,613.51 .................... 773.00Intangible Assets ...................... ...................... ...................... .0.00 .................... 316.03 ...................... 23.87Capital Work-in-Progress ..................... ...................... ........ 371.17 .................... 344.65 .................. .. 118.77Total Fixed Assets ..................... ...................... ................ 3,586.96 ................. 3,274.19 .................... 915.64Goodwill on Consolidation ...................... ..................... .........0.00 ................. 1,021.81 ...................... .. 0.00Non-Current Investments ..................... ...................... ........ 328.29 .................... 588.96 ...................... 37.52Deferred Tax Assets (Net) ............ ..................... ....................0.00 .................... 683.51 ...................... 25.65

Long Term Loans and Advances..................... ................... 361.24 .................... 533.75 ...................... 61.37Other Non-Current Assets .................... ...................... ............5.20 ..................... . 17.41 ...................... 46.25Total Noncurrent Assets .................... ..................... ......... 4,281.69 ................. 6,119.63 ................. 1,086.44

Current Assets

Current Investments .......................... ..................... ............ 940.52 ................. 1,623.91 ...................... 86.52Inventories ... ...................... ...................... ..................... .. 1,850.08 ................. 2,086.98 .............. ...... 531.55Trade Receivables ............................. ..................... ......... 1,553.58 ................. 1,926.13 .................... 522.80Cash and Bank Balances ........... ...................... ..................... 90.46 ................. 3,367.19 .............. ...... 674.28Short Term Loans and Advances .................... ................... 579.94 ................. 1,042.67 ...................... 56.46Other Current Assets ......................... ..................... .............. 53.98 ..................... . 93.88 .................... 115.50Total Current Assets ...................... ..................... ............. 5,068.56 ............... 10,140.76 ................. 1,987.11

Total Assets..................... ...................... ..................... .................... 9,350.25 ............... 16,260.39 .............. ... 3,073.55


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Consolidated Profit and Loss Account for year ended March 31, 2012

Cipla Sun Torrent

Pharma Pharma

Income

Sale (Gross)................................ ...................... ..................... .. 7,128.82 ................. 8,126.94 .............. ... 2,599.21Less: Excise Duty ............... ..................... ...................... ............ 108.11 .................... 107.45 ...................... .. 4.80Net Sales ..................... ...................... ...................... ................ 7,020.71 ................. 8,019.49 ................. 2,594.41Other Operating income ....................................................................... ............................... .................... 101.51Total Operating Revenues ..................... ..................... ............. 7,020.71 ................. 8,019.49 ................. 2,695.92

Expenses

Manufacturing, Administration and Selling Expenses ............ 5,361.86 ................. 4,815.17 ................. 2,195.28

EBITDA ..................... ...................... ..................... ...................... .. 1,658.85 ................. 3,204.32 .............. ...... 500.64Depreciation and Amortisation Expense .................... ................ 312.22 .................... 291.16 ...................... 81.73

EBIT (Operating Profit) ..... ...................... ...................... ................ 1,346.63 ................. 2,913.16 .............. ...... 418.91

Non-operating Income ................................. ...................... ........ 139.52 .................... 471.51 ...................... 44.52

Finance Costs ...................... ...................... ..................... .............. 38.34 ..................... . 28.20 ...................... 39.45Other Non-operating Expense ...................... ...................... ............0.00 ..................... ... 1.11 ...................... 65.36Total Expenses ...................................... ...................... ............ 5,712.42 ................. 5,134.53 ................. 2,316.46

Earnings before Tax .................... ...................... ...................... ..... 1,447.81 ................. 3,356.47 .................... 358.61Tax Expenses ........... ...................... ...................... ..................... . 306.51 .................... 382.63 .............. ........ 72.32

Earnings after tax ..................... ...................... ..................... ......... 1,143.30 ................. 2,973.84 .................... 286.30Share of Associates .................... ..................... ...................... .........2.94 ..................... ... 0.00 ...................... .. 0.00Minority Interest ................. ..................... ...................... ................0.00 .................... 385.48 ........................ 2.26

Profit for the Year..................... ...................... ..................... ......... 1,144.24 ................. 2,587.25 .................... 284.04


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WORKING CAPITAL

1 A company plans to sell 30,000 units next year. The estimated cost of goods is as follows:

Raw materials: Rs. 100 per unit; Manufacturing expense: 30 per unit; Selling and

distribution expenses: 20 per unit; Selling price: 200 per unit.

The duration at various stages of the operating cycle is as follows: Raw materials: 2 months;

Work-in-progress: 1 month; Finished goods; half a month; Debtors: 1 month;

Desired cash balance: Rs. 75,000.

Required Estimate the gross working capital requirement.

2 Calculate the amount of working capital requirements for a company engaged in unseasonalbusiness from the following information for an expected level of production of 104000 units:

Raw material ..................................................... Rs. 160 per unit

Direct Labour .............................................................. 60 per unit

Overhead ................................................................... 120 per unit

Selling price .............................................................. 400 per unit

Additional information:

(a) Raw materials are in held in stock on an average for four weeks; materials are in process

on an average for two weeks; and finished goods are in stock on an average for four

weeks. One-fourth of the goods are sold against cash.

(b) Credit allowed by suppliers is four weeks and credit allowed to debtors is eight weeks.

(c) Time lag in payment of wages is one and a half week and in payment of overhead

expenses is four weeks.

(d) Cash in hand and bank is expected to be Rs. 140,000.

3 The management of Gemini Limited has called for a statement showing the working capital

needed to finance a level of activity of 300,000 units of output for the year. The production

pattern is evenly spread during the year. The cost structure of the company's product is as

follows:

Raw Materials: Rs. 20 per unit; Direct LabourRs. 5 per unit; Overheads Rs. 15 per unit;

Selling Price: Rs. 50 per unit.

Past record suggests the following trend:

(a) Raw materials are held in stock on an average for two months; work-in-progress will

approximate to half a month's production; and finished goods remain in warehouse on

an average for a month.

(b) Two month's credit is normally allowed to debtors; and suppliers of materials extend a

month's credit.

(c) A minimum cash balance of Rs. 25,000 is expected to be maintained.


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4 The board of directors of Nancy Engineering Limited requests you to prepare a statement

showing the working capital requirements for a level of activity at 156,000 units of

production. The cost structure of the company's product is as follows:

Raw Materials ...................................................... Rs. 90 per unit

Direct Labour ....................................................... Rs. 40 per unit

Overheads ............................................................. Rs. 75 per unit

Total Cots ............................................................ Rs. 205 per unit

Profit Expected.................................................... Rs. 60 per unit

Selling Price ....................................................... Rs. 265 per unit

Past record suggest the following trend:

Raw materials are held in stock on an average for a month. Materials are in process approximately for two weeks. Finished goods remain in stock on an average for a month. Suppliers of materials extend a month's credit. There is a two month time lag in payment from debtors Average time lag in payment of wages is one and a half week. Average time lag in payment of overheads is one month. A minimum cash balance of Rs. 60,000 is expected to be maintained. The production pattern is evenly spread during the year. 20 per cent of the production is sold against cash.


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ANSWERS

Cost of Capital

1: (a) 16.30% (b) 15.40%

2: Ke=19%; Kp=14%; Kd =8.40%;

WACC =14.40%

3: Delta: 27.44%; Gamma: 24.86%;

Epsilon: 23.65%

4: Ke=13%

5: 20%

6: Ke=16.50%; WACC=12.79%

7: 16.88%

8: (a) Omega Enterprises: 14.56%

(b) Orient Electronics: 15.72%

(c) Opulence Systems: 15.05%

9: 20%

10: (a) D1 = Rs. 2.78; (b) Ke = 14.73%

Capital Budgeting

1: (a) NPV = -605832; Project is unacceptable

(b) 2%

2: (a) CFAT (Year 1) 2765000 (Year 2) 2115000 (Year 3) 1790000

(b) NPV = 180546

(c) Payback Period = 2 Years 25 days

3: (a) NPV = 3212985(b) Project is acceptable

4: (a) Truck: NPV Rs. 409; IRR 15per cent

(b) Pulley: NPV Rs. 3318; IRR 20per cent

5: (a) Brand A: NPV = -25632; Brand B: NPV = -26213.

(b) Brand B is acceptable.

6: (a) Brand A NPV=2302; Brand B NPV=3533; Brand C NPV=516.

(b) Brand B is preferred.

7: Computerisation is advised because of positive NPV of 53263.8: Undertaking the project is advised because of positive NPV of 3097


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9: Undertaking the project is not advised because negative NPV of 1604

10: (a) NPV of Policy A = 144461; and NPV of Policy B = 303446.

(b) Marketing Policy B is preferred due to higher its NPV.

11: NPV = 8917

12: Payback (X) = 2 years 2 months (Y) 2 Years 11 months;

NPV (X) 967 (Y) 630; and

IRR (X) 15% (Y) 18%

13: NPV=3625

Funds Flow Statement

1: Sources (a) Funds from operations: 93100; (b) Issue of Shares: 50000; Total sources143100. Application of Funds (a) Repayment of term loans: 45000; (b) Payment of Tax:28000; (c) Addition to land and buildings: 15000; (d) Purchase of machinery: 23000; (e)Payment of dividend: 23000; (f) New Investments: 5000; Total Applications: 143100.

2: Sources (a) Funds from operations: 47300; (b) Issue of Shares: 25000; (c) Decrease inWorking Capital: 9200; Total sources 81500. Application of Funds (a) Repayment oflong term loans: 30000; (b) Payment of Tax: 14000; (c) Addition to plant: 26000; (d)Payment of dividend: 11500; Total Applications: 81500.

3: Sources (a) Funds from operations: 10,30,000; (b) Issue of Shares: 10,00,000; (c)Decrease in Working Capital: 13,45,000; (d) New Term Loans: 400,000; (e) New Loanfrom Directors: 250000; Total sources 40,25,000. Application of Funds (a) Repaymentof Debentures: 400,000; (b) Addition to Fixed Assets: 33,00,000; (d) Purchase of NewInvestments: 325,000; Total Applications: 40,25,000.

4: Sources (a) Funds from operations: 63,500; (b) Issue of Shares: 50,000; (c) Sale of

Investments: 49300 (37500+11800); Total sources 162,800. Application of Funds (a)Addition to Buildings: 54,000; (b) Addition to Plant: 6000; (c) Payment of Dividends:16000; (d) Tax Paid: 34,000; Increase in Working Capital: 52,800; Total Applications:162,800.

5: Sources (a) Funds from operations: 101,310; Total sources 101,310. Application ofFunds (a) Addition to Machinery: 5,650; (b) Payment of Dividends: 26000; (c) Tax Paid:18,770; Increase in Working Capital: 50,890; Total Applications: 101,310.

6: Sources (a) Funds from operations: 143,500; (b) Sale of Fixed Assets; 12000; (c)Repayment of Debentures: 202,000; (d) Sale of Investments: 35500 (8500+27000); Totalsources: 393,000. Application of Funds (a) Payment of Dividends: 40,000; (b) Tax Paid:6,000; Increase in Working Capital: 347,000; Total Applications: 393,000.

7: Sources (a) Funds from operations: 154,500; (b) Issue of Shares: 50,000; (c) Sale ofMachinery: 4000; (d) Sale of Investments: 25,000; Total sources: 233,500. Applicationof Funds (a) Payment of Dividends: 26,500; (b) Tax Paid: 55,000; (c) Purchase ofMachinery: 26,000; (d) Purchase of Building: 30,000; (e) Repayment of Debentures:5,000; (f) Purchase of Land: 50,000; (g) Increase in Working Capital: 41,000; TotalApplications: 233,500.

8: Sources (a) Funds from operations: 152,800; (b) Issue of Shares: 7,800; (c) Sale of Land:46,900; (d) Sale of Investments: 5,800; (e) Issue of Debentures: 38,100; (f) Decrease inWorking Capital: 67,900; Total sources: 319,300. Application of Funds (a) Payment ofDividends: 38,100; (b) Tax Paid: 53,200; (c) Purchase of Equipment: 52,700; (d)

Purchase of Land: 90,200; (e) Repayment of Debentures: 61,000; (f) Purchase ofLivestock: 19,200; (g) Purchase of Investments: 4,900; Total Applications: 319,300.


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9: Sources (a) Funds from operations: 115,500; (b) Sale of Land: 125,000; (c) Sale ofInvestments: 25,000; (d) Sale of Machinery: 3,000; Total sources: 268,500. Applicationof Funds (a) Payment of Dividends: 30,000; (b) Tax Paid: 29,000; (c) Increase inWorking Capital: 25,200; (d) Purchase of Machinery: 79,000; (e) Purchase of Building:90,000; (f) Repayment of Term Loans: 10,300; (g) Repayment of Debentures: 5,000;Total Applications: 268,500.

10: Sources (a) Funds from operations: 158,100; (b) Sale of Machinery: 14,800; (c) Issue ofEquity Shares: 50,000; Total sources: 222,900. Application of Funds (a) Payment ofDividends: 23,000; (b) Tax Paid: 32,500; (c) Increase in Working Capital: 21,400; (d)Purchase of Machinery: 46,000; (e) Repayment of Term Loans: 60,000; (f) Redemptionof Preference Shares: 40,000; Total Applications: 222,900.


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Ratio Analysis

RATIO FORMULA CIPLA SUN TORRENT

Liquidity

Current Ratio Current Assets/ Current Liabilities 3.51 4.11 1.46

Quick Ratio (Current Assets-Inventories)/ Current Liabilities 2.23 3.27 1.07

Activity

Inventory Turnover Net Sales/ Inventory 3.79 3.84 4.88

Days Inventory inStock

366/ Inventory Turnover 97 95 75

Debtors Turnover Net Sales/ Trade Receivables 4.52 4.16 4.96

Average CollectionPeriod

366/ Debtors Turnover 81 88 74

Fixed Asset Turnover Net Sales/ Fixed Assets 1.96 2.45 2.83

Total Asset Turnover Net Sales/ Total Assets 0.75 0.49 0.84

Solvency

Debt to Total Assets Non-Current Liabilities/ Total Assets 0.03 0.03 0.17

Debt to Equity Non-Current Liabilities/ Shareholder Funds 0.03 0.04 0.43

Interest Coverage Operating Profit/ Interest Expenses 35.12 103.3 10.62

Profitability

EBITDA Margin EBITDA/ Net Sales 0.24 0.4 0.19

Operating Margin Operating Profit/ Net Sales 0.19 0.36 0.16

Net Margin Profit for the Year/ Net Sales 0.16 0.32 0.11

Return on Assets Profit for the Year/ Total Assets 0.12 0.16 0.09

Return on Equity Profit for the Year/ Shareholder Funds 0.15 0.21 0.24

Return on CapitalEmployed

Profit for the Year/ (Non-Current Liabilities +Shareholder Funds)

0.14 0.2 0.17

parab (2013) financial management jbims 20130408

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