FINANCIAL MANAGEMENT
1. Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations.
2. What is meant by Working capital? How is it calculated? Explain the determinants of working capital requirements.
3. Are the share holders of a company likely to gain with a debt component in the capital employed ? Explain with the help of an example?
4. What do you mean by yield to maturity (YTM) of a bond? Explain briefly.
5. What can a financial institution often do for a deficit economic unit (DEU)that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?
6. Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain.
7. How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market.
8. What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the stocks of a single corporation.
Finance and Economics
Q1. What are the advantages of accounting?
Q2. Advantages & disadvantages of partnership.
Q3. Explain methods of demand forecasting.
Q4. Discuss subsidiary objectives of balance sheet.
Q5. Write a note on Explanation of columns.
Q6. Why cash book is important?
Q7. What is fixed capital & working capital?
Q8. Describe special methods of ARR method.
FINANCIAL INSTITUTION
1. What is the implication for cross-border trades if it can be shown that interest rate parity is maintained consistently across different markets and different currencies ?
2. What forms of protection and regulation are imposed by regulators of CBs to ensure their safety and soundness ?
3. How has the composition of the assets of U.S. life insurance companies changed over time ?
4. Describe the difference between a defined benefit pension fund and a defined contribution pension fund.
5. Why is the length of time selected for repricing assets and liabilities important when using the repricing model ?
6. Contrast the use of financial futures options with the use of options on cash instruments to construct interest rate hedges.
7. What is a mortgage-backed bond ? Why do financial institutions issue MBBs ?
8. What is the difference between loan participations and loan assignments ?
Finance Management
1. A stock is expected to pay a dividend of Rs.0.75 at the end of the year. The required rate of return is ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?
2. Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1,00,000 Maturity = 3 years, Coupon Rate = 15% p.a, Security = Machinery
You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.
3. How negatively correlated investments behave in a market?
4. Why does diversification reduce risk?
5. State the decisions involved in Financial management
6. What is meant by capital budgeting decision?
7. Discuss how Working capital affects both the liquidity and profitability of a business
8. What is meant by Working capital? How is it calculated? Explain the determinants of working capital requirement
Finance Management
1. Briefly define the terms proprietorship, partnership, and corporation.
2. Why do we add back non cash items to net profit while calculating cash flow from operating activities
3. “To avoid the problem of shortage and surplus of funds, what is
required in Financial management? Name the concept and explain
four points of importance.
4. Explain the impact of interest rate on long term and short term
bonds?
5. What is Merger ? Is it harmful or beneficial? Explain n Justify
6. Suppose Govt. pay coupon on its bond quarterly; calculate the
intrinsic value of bond under following circumstances:
10 Year
bond with 10% coupon rate is selling at Rs. 1050 face value of
bond is Rs. 1000. Required rate of return is 12%.
7. What are Strike Price and Option Price?
8. Define the Diversifiable Risk and Market Risk and Causes of Risk.
Finance Management
Q1. Briefly explain what call provision is and in which case companies use this option.
Q2. Define the Diversifiable Risk and Market Risk and Causes of Risk.
Q3. List and explain the three financial factors that influence the value of a business
Q4. State the decisions involved in Financial management
Q5. “To avoid the problem of shortage and surplus of funds, what is required in Financial management? Name the concept and explain four points of importance.
Q6. Suppose Govt. pay coupon on its bond quarterly; calculate the intrinsic value of bond under following circumstances: 10 Year bond with 10% coupon rate is selling at Rs. 1050 face value of bond is Rs. 1000. Required rate of return is 12%.
Q7. What can a financial institution often do for a deficit economic unit (DEU)that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?
Q8. Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1,00,000 Maturity = 3 years Coupon Rate = 15% p.a, Security = Machinery You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.
Finance Management
Q1. Discuss how Working capital affects both the liquidity and profitability of a business
Q2. Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1,00,000 Maturity = 3 years Coupon Rate
= 15% p.a, Security = Machinery You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.
Q3. A stock is expected to pay a dividend of Rs.0.75 at the end of the year. The required rate of return is ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?
Q4. What can a financial institution often do for a deficit economic unit (DEU)that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?
Q5. Suppose Govt. pay coupon on its bond quarterly; calculate the intrinsic value of bond under following circumstances: 10 Year bond with 10% coupon rate is selling at Rs. 1050 face value of bond is Rs. 1000. Required rate of return is 12%.
Q6. “To avoid the problem of shortage and surplus of funds, what is required in Financial management? Name the concept and explain four points of importance.
Q7. What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the stocks of a single corporation.
Q8. Calculate the market value of equity for a 100% equity firm using the following information extracted from its financial statements: EBIT = Rs. 50, 000, return on equity is 12%, amount of equity is Rs. 100, 000. tax rate is 35%.
Finance Management
Q1. What is meant by capital budgeting decision?
Q2. Why does diversification reduce risk?
Q3. State the decisions involved in Financial management
Q4. Why are trend analysis and industry comparison important to financial ratio analysis?
Q5. List and explain the three financial factors that influence the value of a business
Q6. Determination of capital structure of a company is influenced by a number of factors’ explain six such factors.
Q7. Why do we add back non cash items to net profit while calculating cash flow from operating activities
Q8. Explain why financial planning is important to today’s chief executives?
Finance Management
Q1. What is meant by capital budgeting decision?
Q2. Why does diversification reduce risk?
Q3. Why are trend analysis and industry comparison important to financial ratio analysis?
Q4. Every Manager has to take three major decisions while performing the finance function’ briefly explain them.
Q5. Define the Diversifiable Risk and Market Risk and Causes of Risk.
Q6. Why do we add back non cash items to net profit while calculating cash flow from operating activities
Q7. Explain why financial planning is important to today’s chief executives?
Q8. Briefly explain what call provision is and in which case companies use this option.
FINANCIAL MANAGEMENT
1. What is meant by financing decisions? Mention two limitations of accounting rate of return.
2. Explain Financial Risk.
3. Mention the utility of public deposits as a source of fund.
4. Explain operating Lease.
5. Discuss the relation between debt financing and financial leverage.
6. Differentiate between Bonus issue and stock split.
7. Define the term ‘take over.’
8. What is Capital Asset pricing model?
9. How cost of preference share capital is calculated?
10.What is dividend pay-out Ratio?
11.Explain the concept of Capital Rationing.
12.Define Economic Value added in relation to shareholder’s value criteria
13.Mention two advantages of Lease financing
14.What is a letter of credit
FINANCE MANAGEMENT
a) What is meant by financing decisions? Mention two limitations of accounting rate of return.
b) Explain Financial Risk.
c) Mention the utility of public deposits as a source of fund.
e) Discuss the relation between debt financing and financial leverage. F) What is a letter of credit
g) Differentiate between Bonus issue and stocksplit. H) Define the term ‘take over.’
i) What is Capital Asset pricing model?
j) How cost of preference share capital is calculated?
K) What is dividend pay-out Ratio?
l) Explain the concept of Capital Rationing.
m) Mention two advantages of Lease financing.
n) Define Economic Value added in relation to shareholder’s value criteria.
Finance Management
Q1. What is meant by Working capital? How is it calculated? Explain the determinants of working capital requirement
Q2. Why does diversification reduce risk?
Q3. Determination of capital structure of a company is influenced by a number of factors’ explain six such factors.
Q4. Every Manager has to take three major decisions while performing the finance function’ briefly explain them.
Q5. Define the Diversifiable Risk and Market Risk and Causes of Risk.
Q6. Explain why financial planning is important to today’s chief executives?
Q7. Differentiate the real assets and securities.
Q8. Briefly explain what call provision is and in which case companies use this option.
FINANCIAL MANAGEMENT
1. What is the future of Financial Risk Management?
2. Why the companies prefer to raise money through debt not through equity?
3. Briefly explain what call provision is and in which case companies use this option.
4. Calculate the market value of equity for a 100% equity firm using the following information extracted from its financial statements: EBIT = Rs. 50, 000, return on equity is 12%, amount of equity is Rs. 100, 000. tax rate is 35%.
5. What is correlation of coefficient?
6. Differentiate the real assets and securities.
7. Explain why financial planning is important to today’s chief executives?
8. What is a portfolio? Why an investor should invest his/her funds in a portfolio rather than in the stocks of a single corporation.
Finance Management
Q1. Who owns a credit union? Explain.
Q2. Where will you show purchase of furniture in cash flow statement ?
Q3. Define current assets and Give four examples
Q4. What are Strike Price and Option Price?
Q5. What is Merger ? Is it harmful or beneficial? Explain n Justify
Q6. Explain the impact of interest rate on long term and short term bonds?
Q7. What is correlation of coefficient?
Q8. What is the future of Financial Risk Management?
FINANCIAL Management
ZIP ZAP ZOOM CAR COMPANY
Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment. It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability. Its financial statements are shown in Exhibits 1 and 2 respectively.
The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year. Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector. The company has never defaulted on its loan payments and enjoys a favourable face with its lenders, which include financial institutions, commercial banks and debenture holders.
The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries. The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer. The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.
Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures. The industry indicators predict that the economy is gradually slipping into recession.
Exhibit 1 Balance sheet as at March 31,200 x
(Amount in Rs. Crore)
Source of Funds
Share capital 350
Reserves and surplus 250 600
Loans :
Debentures (@ 14%) 50
Institutional borrowing (@ 10%) 100
Commercial loans (@ 12%) 250
Total debt 400
Current liabilities 200
1,200
Application of Funds
Fixed Assets
Gross block 1,000
Less : Depreciation 250
Net block 750
Capital WIP 190
Total Fixed Assets 940
Current assets :
Inventory 200
Sundry debtors 40
Cash and bank balance 10
Other current assets 10
Total current assets 260
-1200
Exhibit 2 Profit and Loss Account for the year ended March 31, 200x
(Amount in Rs. Crore)
Sales revenue (80,000 units x Rs. 2,50,000) 2,000.0
Operating expenditure :
Variable cost :
Raw material and manufacturing expenses 1,300.0
Variable overheads 100.0
Total 1,400.0
Fixed cost :
R & D 20.0
Marketing and advertising 25.0
Depreciation 250.0
Personnel 70.0
Total 365.0
Total operating expenditure 1,765.0
Operating profits (EBIT) 235.0
Financial expense :
Interest on debentures 7.7
Interest on institutional borrowings 11.0
Interest on commercial loan 33.0 51.7
Earnings before tax (EBT) 183.3
Tax (@ 35%) 64.2
Earnings after tax (EAT)
119.1
Dividends 70.0
Debt redemption (sinking fund obligation)** 40.0
Contribution to reserves and surplus 9.1
* Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).
* The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.
The company is faced with the problem of deciding how much to invest in up
gradation of its plans and technology. Capital investment up to a maximum of Rs. 100 crore is required. The problem areas are three-fold.
The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
The company does not want to issue new equity shares and its retained earning are not enough for such a large investment. Thus, the only option is raising debt.
The company wants to limit its additional debt to a level that it can service without taking undue risks. With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.
Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise. He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession. The company can raise debt at 15 per cent from a financial institution. While working out the debt capacity. Mr. Shortsighted takes the following assumptions for the recession years.
a) A maximum of 10 percent reduction in sales volume will take place.
b) A maximum of 6 percent reduction in sales price of cars will take place.
Mr. Shorsighted prepares a projected income statement which is representative of the recession years. While doing so, he determines what he thinks are the “irreducible minimum” expenditures under recessionary conditions. For him, risk of insolvency is the main concern while designing the capital structure. To support his view, he presents the income statement as shown in Exhibit 3.
Exhibit 3 projected Profit and Loss account
(Amount in Rs. Crore)
Sales revenue (72,000 units x Rs. 2,35,000) 1,692.0
Operating expenditure
Variable cost :
Raw material and manufacturing expenses 1,170.0
Variable overheads
90.0
Total 1,260.0
Fixed cost :
R & D —
Marketing and advertising 15.0
Depreciation 187.5
Personnel 70.0
Total 272.5
Total operating expenditure 1,532. 5
EBIT 159.5
Financial expenses :
Interest on existing Debentures 7.0
Interest on existing institutional borrowings 10.0
Interest on commercial loan 30.0
Interest on additional debt 15.0 62.0
EBT 97.5
Tax (@ 35%) 34.1
EAT 63.4
Dividends —
Debt redemption (sinking fund obligation) 50.0*
Contribution to reserves and surplus 13.4
* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt) Assumptions of Mr. Shorsighted
R & D expenditure can be done away with till the economy picks up. Marketing and advertising expenditure can be reduced by 40 per cent.
Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.
He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment. Mr. Arthashatra does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm. He points out the following :
Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
Certain management policies like those relating to dividend payout, send out important signals to the investors. The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm. The firm should pay at least 10 per cent dividend in the recession years.
Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations. This does not give the true picture. Net cash inflows should be used to determine the amount available for servicing the debt.
Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession. It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on. Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed. From this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution). This will give a true picture of how the company’s cash flows will behave in recession conditions.
The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret. Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis. Information on the behaviour of cash flows during the recession periods is taken into account.
The methodology undertaken is as follows :
(a) Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.
(b) Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
(c) Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.
Assuming a normal distribution of the expected behaviour, the mean expected
value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.
Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions. Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.
To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.
Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Analyse the debt capacity of the company.
NO. 2
COOKING LPG LTD
DETERMINATION OF WORKING CAPTIAL
Introduction
Cooking LPG Ltd, Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a network of distributors in the districts of Gurgaon and Faridabad. The bottling plant of the firm is located on National Highway – 8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon. The firm has been consistently performing we.” and plans to expand its market to include the whole National Capital Region.
The production process of the plant consists of receipt of the bulk LPG through tank trucks, storage in tanks, bottling operations and distribution to dealers. During the bottling process, the cylinders are subjected to pressurized filling of LPG followed by quality control and safety checks such as weight, leakage and other defects. The cylinders passing through this process are sealed and dispatched to dealers through trucks. The supply and distribution section of the plant prepares the invoice which goes along with the truck to the distributor. Statement of the Problem :
Mr. I. M. Smart, DGM(Finance) of the company, was analyzing the financial performance of the company during the current year. The various profitability ratios and parameters of the company indicated a very satisfactory performance. Still, Mr. Smart was not fully content-specially with the management of the working capital by the company. He could recall that during the past year, in spite of stable demand pattern, they had to, time and again, resort to bank overdrafts due to non-availability of cash for making various payments. He is aware that such aberrations in the finances have a cost and adversely affects the performance of the company. However, he was unable to pinpoint the cause of the problem.
He discussed the problem with Mr. U.R. Keenkumar, the new manager (Finance). After critically examining the details, Mr. Keenkumar realized that the working capital was hitherto estimated only as approximation by some rule of thumb without any proper computation based on sound financial policies and, therefore, suggested a reworking of the working capital (WC) requirement. Mr. Smart assigned the task of determination of WC to him. Profile of Cooking LPG Ltd.
1) Purchases : The company purchases LPG in bulk from various importers ex-Mumbai and Kandla, @ Rs. 11,000 per MT. This is transported to its Bottling Plant at Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual contract basis. The average transportation cost per bullet ex-either location is Rs. 30,000. Normally, 2 bullets per day are received at the plant. The company make payments for bulk supplies once in a month, resulting in average time-lag of 15 days.
2) Storage and Bottling : The bulk storage capacity at the plant is 150 MT (2 x 75 MT storage tanks) and the plant is capable of filling 30 MT LPG in cylinders per day. The plant operates for 25 days per month on an average. The desired level of inventory at various stages is as under.
LPG in bulk (tanks and pipeline quantity in the plant) – three days average production / sales. Filled Cylinders – 2 days average sales.
3) Marketing : The LPG is supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder. The rate of applicable sales tax on the invoice is 4 per cent. A commission of Rs. 15 per cylinder is paid to the distributor on the invoice itself. The filled cylinders are delivered on company’s expense at the distributor’s godown, in exchange of equal number of empty cylinders. The deliveries are made in truck-loads only, the capacity of each truck being 250 cylinders. The distributors are required to pay for deliveries through bank draft. On receipt of the draft, the cylinders are normally dispatched on the same day. However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on one truck-load.
4) Salaries and Wages : The following payments are made :
Direct labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the
month. Security agency – Rs. 30,000 per month paid on 10th of subsequent month. Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last working day.
5) Overheads :
Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on the 10th of subsequent month.
Power (including on DG set) – Rs. 1,00,000 per month paid on the 7th Subsequent month. Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum paid at the beginning of the year.
Insurance – Rs. 5,00,000 per annum to be paid at the beginning of the year.
Housekeeping etc – Rs. 10,000 per month paid on the 10th of the subsequent month.
Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every month to the vendors. This includes expenditure on account of lubricants, spares and other stores.
Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum – paid on monthly basis on the 15th of the subsequent month.
All transportation charges as per contracts – paid on the 10th subsequent month.
Sales tax as per applicable rates is deposited on the 7th of the subsequent month.
6) Sales : Average sales are 2,500 cylinders per day during the year. However, during the winter months (December to February), there is an incremental demand of 20 per cent.
7) Average Inventories : The average stocks maintained by the company as per its policy guidelines
:
Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh. This amounts to 15 days consumption.
Maintenance spares – Rs. 1 lakh Lubricants – Rs. 20,000
Diesel (for DG sets and fire engines) – Rs. 15,000 Other stores (stationary, safety items) – Rs. 20,000
8) Minimum cash balance including bank balance required is Rs. 5 lakh.
9) Additional Information for Calculating Incremental Working Capital During Winter.
No increase in any inventories take place except in the inventory of bulk LPG, which increases in the same proportion as the increase of the demand. The actual requirements of LPG for additional supplies are procured under the same terms and conditions from the suppliers.
The labour cost for additional production is paid at double the rate during wintes. No changes in other administrative overheads.
The expenditure on power consumption during winter increased by 10 per cent. However, during other months the power consumption remains the same as the decrease owing to reduced production is offset by increased consumption on account of compressors /Acs.
Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies during winter. No change in time schedules for any payables / receivables.
The storage of finished goods inventory is restricted to a maximum 5,000 cylinders due to statutory requirements.
NO. 3
M/S HI-TECH ELECTRONICS
M/s. Hi – tech Electronics, a consumer electronics outlet, was opened two years ago in Dwarka, New Delhi. Hard work and personal attention shown by the proprietor, Mr. Sony, has brought success. However, because of insufficient funds to finance credit sales, the outlet accepted only cash and bank credit cards. Mr. Sony is now considering a new policy of offering installment sales on terms of 25 per cent down payment and 25 per cent per month for three months as well as continuing to accept cash and bank credit cards.
Mr. Sony feels this policy will boost sales by 50 percent. All the increases in sales will be credit sales. But to follow through a new policy, he will need a bank loan at the rate of 12 percent. The sales projections for this year without the new policy are given in Exhibit 1. Exhibit 1 Sales Projections and Fixed costs
Month Projected sales without instalment Projected sales with instalment
option option
January Rs. 6,00,000 Rs. 9,00,000
February 4,00,000 6,00,000
March 3,00,000 4,50,000
April 2,00,000 3,00,000
May 2,00,000 3,00,000
June 1,50,000 2,25,000
July 1,50,000 2,25,000
August 2,00,000 3,00,000
September 3,00,000 4,50,000
October 5,00,000 7,50,000
November 5,00,000 15,00,000
December 8,00,000 12,00,000
Total Sales 43,00,000 72,00,000
Fixed cost 2,40,000 2,40,000
He further expects 26.67 per cent of the sales to be cash, 40 per cent bank credit card sales on which a 2 per cent fee is paid, and 33.33 per cent on installment sales. Also, for short term seasonal requirements, the film takes loan from chit fund to which Mr. Sony subscribes @ 1.8 per cent per month.
Their success has been due to their policy of selling at discount price. The purchase per unit is 90 per cent of selling price. The fixed costs are Rs. 20,000 per month. The proprietor believes that the new policy will increase miscellaneous cost by Rs. 25,000.
The business being cyclical in nature, the working capital finance is done on trade – off basis.
The proprietor feels that the new policy will lead to bad debts of 1 per cent.
(a) As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.
(b) Also prepare cash budget for one year of operation of the firm, ignoring interest. The minimum desired cash balance & Rs. 30,000, which is also the amount the firm, has on January 1. Borrowings are possible which are made at the beginning of a month and repaid at the end when cash is available.
NO.4
SMOOTHDRIVE TYRE LTD
Smoothdrive Tyre Ltd manufacturers tyres under the brand name “Super Tread’ for the domestic car market. It is presently using 7 machines acquired 3 years ago at a cost of Rs. 15 lakh each having a useful life of 7 years, with no salvage value.
After extensive research and development, Smoothdrive Tyre Ltd has recently developed a new tyre, the ‘Hyper Tread’ and must decide whether to make the investments necessary to produce and market the Hyper Tread. The Hyper Tread would be ideal for drivers doing a large amount of wet weather and off road driving in addition to normal highway usage. The research and development costs so far total Rs. 1,00,00,000. The Hyper Tread would be put on the market beginning this year and Smoothdrive Tyrs expects it to stay on the market for a total of three years. Test marketing costing Rs. 50,00,000, shows that there is significant market for a Hyper Tread type tyre.
As a financial analyst at Smoothdrive Tyre, Mr. Mani asked by the Chief Financial Officer (CFO), Mr. Tyrewala to evaluate the Hyper-Tread project and to provide a recommendation or whether or not to proceed with the investment. He has been informed that all previous investments in the Hyper Tread project are sunk costs are only future cash flows should be considered. Except for the initial investments, which occur immediately, assume all cash flows occur at the year-end.
Smoothedrive Tyre must initially invest Rs. 72,00,00,000 in production equipments to make the Hyper Tread. They would be depreciated at a rate of 25 per cent as per the written down value (WDV) method for tax purposes. The new production equipments will allow the company to follow flexible manufacturing technique, that is both the brands of tyres can be produced using the same equipments. The equipments is expected to have a 7-year useful life and can be sold for Rs. 10,00,000 during the fourth year. The company does not have any other machines in the block of 25 per cent depreciation. The existing machines can be sold off at Rs. 8 lakh per machine with an estimated removal cost of one machine for Rs. 50,000. Operating Requirements
The operating requirements of the existing machines and the new equipment are detailed in Exhibits 11.1 and 11.2 respectively.
Exhibit 11.1 Existing Machines
Labour costs (expected to increase 10 per cent annually to account for inflation) :
(a) 20 unskilled labour @ Rs. 4,000 per month
(b) 20 skilled personnel @ Rs. 6,000 per month.
(c) 2 supervising executives @ Rs. 7,000 per month.
(d) 2 maintenance personnel @ Rs. 5,000 per month. Maintenance cost :
Years 1-5 : Rs. 25 lakh
Years 6-7 : Rs. 65 lakh
Operating expenses : Rs. 50 lakh expected to increase at 5 per cent annually. Insurance cost / premium :
Year 1 : 2 per cent of the original cost of machine
After year 1 : Discounted by 10 per cent.
Exhibit 11.2 New production Equipment
Savings in cost of utilities : Rs. 2.5
lakh Maintenance costs :
Year 1 – 2 : Rs. 8 lakh
Year 3 – 4 : Rs. 30 lakh
Labour costs :
9 skilled personnel @ Rs. 7,000 per month
1 maintenance personnel @ Rs. 7,000 per month.
Cost of retrenchment of 34 personnel : (20 unskilled, 11 skilled, 2 supervisors and 1
maintenance personnel) : Rs. 9,90,000, that is equivalent to six months salary. Insurance premium
Year 1 : 2 per cent of the purchase cost of machine
After year 1 : Discounted by 10 per cent.
The opening expenses do not change to any considerable extent for the new equipment and the difference is negligible compared to the scale of operations. Smoothdrive Tyre intends to sell Hyper Tread of two distinct markets :
1. The original equipment manufacturer (OEM) market : The OEM market consists primarily of the large automobile companies who buy tyres for new cars. In the OEM market, the Hyper Tread is expected to sell for Rs. 1,200 per tyre. The variable cost to produce each Hyper Tread is Rs. 600.
2. The replacement market : The replacement market consists of all tyres purchased after the automobile has left the factory. This markets allows higher margins and Smoothdrive Tyre expects to sell the Hyper Tread for Rs. 1.500 per tyre. The variable costs are the same as in the OEM market.
Smoothdrive Tyre expects to raise prices by 1 percent above the inflation rate.
The variable costs will also increase by 1 per cent above the inflation rate. In addition, the Hyper Tread project will incur Rs. 2,50,000 in marketing and general administration cost in the first year which are expected to increase at the inflation rate in subsequent years.
Smoothdrive Tyre’s corporate tax rate is 35 per cent. Annual inflation is expected to remain constant at 3.25 per cent. Smoothdrive Tyre uses a 15 per cent discount rate to evaluate new product decisions.
The Tyre Market
Automotive industry analysts expect automobile manufacturers to have a production of 4,00,000 new cars this year and growth in production at 2.5 per year onwards. Each new car needs four new tyres (the spare tyres are undersized and fall in a different category) Smoothdrive Tyre expects the Hyper Tread to capture an 11 per cent share of the OEM market.
The industry analysts estimate that the replacement tyre market size will be one crore this year and that it would grow at 2 per cent annually. Smoothdrive Tyre expects the Hyper Tread to capture an 8 per cent market share.
You also decide to consider net working capital (NWC) requirements in this scenario. The net working capital requirement will be 15 per cent of sales. Assume that the level of working capital is adjusted at the beginning of the year in relation to the expected sales for the year. The working capital is to be liquidated at par, barring an estimated loss of Rs. 1.5 crore on account of bad debt. The bad debt will be a tax-deductible expenses.
As a finance analyst, prepare a report for submission to the CFO and the Board of Directors, explaining to them the feasibility of the new investment.
No. 5
COMPUTATION OF COST OF CAPITAL OF PALCO LTD
In October 2003, Neha Kapoor, a recent MBA graduate and newly appointed assistant to the Financial Controller of Palco Ltd, was given a list of six new investment projects proposed for the following year. It was her job to analyse these projects and to present her findings before the Board of Directors at its annual meeting to be held in 10 days. The new project would require an investment of Rs. 2.4 crore.
Palco Ltd was founded in 1965 by Late Shri A. V. Sinha. It gained recognition as a leading producer of high quality aluminum, with the majority of its sales being made to Japan. During the rapid economic expansion of Japan in the 1970s, demand for aluminum boomed, and palco’s sales grew rapidly. As a result of this rapid growth and recognition of new opportunities in the energy market, Palco began to diversify its products line. While retaining its emphasis on aluminum production, it expanded operations to include uranium mining and the production of electric generators, and finally, it went into all phases of energy production. By 2003, Palco’s sales had reached Rs. 14 crore level, with net profit after taxes attaining a record of Rs. 67 lakh.
As Palco expanded its products line in the early 1990s, it also formalized its caital budgeting procedure. Until 1992, capital investment projects were selected primarily on the basis of the average return on investment calculations, with individual departments submitting these calculations for projects falling within their division. In 1996, this procedure was replaced by one using present value as the decision making criterion. This change was made to incorporate cash flows rather than accounting profits into the decision making analysis, in addition to adjusting these flows for the time value of money. At the time, the cost of capital for Palco was determined to be 12 per cent, which has been used as the discount rate for the past 5 years. This rate was determined by taking a weighted average cost Palco had incurred in raising funds from the capital market over the previous 10 years.
It had originally been Neha’s assignment to update this rate over the most recent 10-year period and determine the net present value of all the proposed investment opportunities using this newly calculated figure. However, she objected to this procedure, stating that while this calculation gave a good estimate of “the past cost” of capital, changing interest rates and stock prices made this calculation of little value in the present. Neha suggested that current cost of raising funds in the capital market be weighted by their percentage mark-up of the capital structure. This proposal was received enthusiastically by the Financial Controller of the Palco, and Neha was given the assignment of recalculating Palco’s cost of capital and providing a written report for the Board of Directors explaining and justifying this calculation.
To determine a weighted average cost of capital for Palco, it was necessary for Neha to examine the cost associated with each source of funding used. In the past, the largest sources of funding had been the issuance of new equity shares and internally generated funds. Through conversations with Financial Controller and other members of the Board of Directors, Neha learnt that the firm, in fact, wished to maintain its current financial structure as shown in Exhibit 1. Exhibit 1 Palco Ltd Balance Sheet for Year Ending March 31, 2003
Assets Liabilities and Equity
Rs. Accounts payable Rs. 8,50,000
Cash 90,00,000
Accounts receivable 3,10,00,000 Short-term debt 1,00,000
Inventories 1,20,00,000 Accrued taxes 11,50,000
Total current assets 5,20,00,000 Total current liabilities 1,20,00,000
Net fixed assets 19,30,00,000 Long-term debt 7,20,00,000
Goodwill 70,00,000 Preference shares 4,80,00,000
Total assets Retained earnings 1,00,00,000
25,20,00,000
Equity shares 11,00,000
Total liabilities and
equity shareholders 25,20,00,000
fund
She further determined that the strong growth patterns that Palco had exhibited over the last ten years were expected to continue indefinitely because of the dwindling supply of US and Japanese domestic oil and the growing importance of other alternative energy resources. Through further investigations, Neha learnt that Palco could issue additional equity share, which had a par value of Rs. 25 pre share and were selling at a current market price of Rs. 45. The expected dividend for the next period would be Rs. 4.4 per share, with expected growth at a rate of 8 percent per year for the foreseeable future. The flotation cost is expected to be on an average Rs. 2 per share.
Preference shares at 11 per cent with 10 years maturity could also be issued with the help of an investment banker with an investment banker with a per value of Rs. 100 per share to be redeemed at par. This issue would involve flotation cost of 5 per cent.
Finally, Neha learnt that it would be possible for Palco to raise an additional Rs. 20 lakh through a 7 – year loan from Punjab National Bank at 12 per cent. Any amount raised over Rs. 20 lakh would cost 14 per cent. Short-term debt has always been usesd by Palco to meet working capital requirements and as Palco grows, it is expected to maintain its proportion in the capital structure to support capital expansion. Also, Rs. 60 lakh could be raised through a bond issue with 10 years maturity with a 11 percent coupon at the face value. If it becomes necessary to raise more funds via long-term debt, Rs. 30 lakh more could be accumulated through the issuance of additional 10-year bonds sold at the face value, with the coupon rate raised to 12 per cent, while any additional funds raised via long-term debt would necessarily have a 10 – year maturity with a 14 per cent coupon yield. The flotation cost of issue is expected to be 5 per cent. The issue price of bond would be Rs. 100 to be redeemed at par.
In the past, Palco had calculated a weighted average of these sources of funds to determine its cost of capital. In discussion with the current Financial Controller, the point was raised that while this served as an appropriate calculation for external funds, it did not take into account the cost of internally generated funds. The Financial Controller agreed that there should be some cost associated with retained earnings and need to be incorporated in the calculations but didn’t have any clue as to what should be the cost.
Palco Ltd is subjected to the corporate tax rate of 40 per cent.
From the facts outlined above, what report would Neha submit to the Board of Directors of palco Ltd?
NO. 6
ARQ LTD
ARQ Ltd is an Indian company based in Greater Noida, which manufactures packaging materials for food items. The company maintains a present fleet of five fiat cars and two Contessa Classic cars for its chairman, general manager and five senior managers. The book value of the seven cars is Rs. 20,00,000 and their market value is estimated at Rs. 15,00,000. All the cars fall under the same block of depreciation @ 25 per cent.
A German multinational company (MNC) BYR Ltd, has acquired ARQ Ltd in all cash deal. The merged company called BYR India Ltd is proposing to expand the manufacturing capacity by four folds and the organization structure is reorganized from top to bottom. The German MNC has the policy of providing transport facility to all senior executives (22) of the company because the manufacturing plant at Greater Noida was more than 10 kms outside Delhi where most of the executives were staying.
Prices of the cars to be provided to the Executives have been as follows :
Manager (10) Santro King Rs. 3,75,000
DGM and GM (5) Honda City 6,75,000
Director (5) Toyota Corolla 9,25,000
Managing Director (1) Sonata Gold 13,50,000
Chairman (1) Mercedes benz 23,50,000
The company is evaluating two options for providing these cars to executives
Option 1 : The company will buy the cars and pay the executives fuel expenses, maintenance expenses, driver allowance and insurance (at the year – end). In such case, the ownership of the car will lie with the company. The details of the proposed allowances and expenditures to be paid are as follows :
a) Fuel expense and maintenance Allowances per month
Particulars Fuel expenses Maintenance allowance
Manager Rs. 2,500 Rs. 1,000
DGM and GM 5,000 1,200
Director 7,500 1,800
Managing Director 12,000 3,000
Chairman 18,000 4,000
b) Driver Allowance: Rs. 4,000 per month (Only Chairman, Managing Director and Directors are eligible for driver allowance.)
c) Insurance cost: 1 per cent of the cost of the car.
The useful life for the cars is assumed to be five years after which they can be sold at 20 per cent salvage value. All the cars fall under the same block of depreciation @ 25 per cent using written down method of depreciation. The company will have to borrow to finance the purchase from a bank with interest at 14 per cent repayable in five annual equal instalments payable at the end of the year.
Option 2 : ORIX, The fleet management company has offered the 22 cars of the same make at lease for the period of five years. The monthly lease rentals for the cars are as follows (assuming that the total of monthly lease rentals for the whole year are paid at the end of each year.
Santro Xing Rs. 9,125
Honda City 16,325
Toyota Corolla 27,175
Sonata Gold 39,250
Mercedes Benz 61,250
Under this lease agreement the leasing company, ORIX will pay for the fuel, maintenance and driver expenses for all the cars. The lessor will claim the depreciation on the cars and the lessee will claim the lease rentals against the taxable income. BYR India Ltd will have to hire fulltime supervisor (at monthly salary of Rs. 15,000 per month) to manage the fleet of cars hired on lease. The company will have to bear additional miscellaneous expense of Rs. 5,000 per month for providing him the PC, mobioe phone and so on.
The company’s effective tax rate is 40 per cent and its cost of capital is 15 per cent. Analyse the financial viability of the two options. Which option would you recommend? Why?
Finance Management
1. Define current assets and Give four examples
2. Every Manager has to take three major decisions while
performing the finance function’ briefly explain them.
3. Where will you show purchase of furniture in cash flow statement ?
4. Determination of capital structure of a company is influenced by a number of factors’ explain six such factors.
5. List and explain the three financial factors that influence the value of a business
6. What can a financial institution often do for a deficit economic unit (DEU)that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?
7. Who owns a credit union? Explain.
8. Why are trend analysis and industry comparison important to financial ratio analysis?
FINANCIAL & COST ACCOUNTING
Q1) ABC Ltd. Produces room coolers. The company is considering whether it should continue to manufacture air circulating fans itself or purchase them from outside. Its annual requirement is 25000 units. An outsider vendor is prepared to supply fans for Rs 285 each. In addition, ABC Ltd will have to incur costs of Rs 1.50 per unit for freight and Rs 10,000 per year for quality inspection, storing etc of the product.
In the most recent year ABC Ltd. Produced 25000 fans at the following total cost :
Material Rs. 50,00,000
Labour Rs. 20,00,000
Supervision & other indirect labour Rs. 2,00,000
Power and Light Rs. 50,000
Depreciation Rs. 20,000
Factory Rent Rs. 5,000
Supplies Rs. 75,000
Power and light includes Rs 20,000 for general heating and lighting, which is an allocation based on the light points. Indirect labour is attributed mainly to the manufacturing of fans. About 75% of it can be dispensed with along with direct labour if manufacturing is discontinued. However, the supervisor who receives annual salary of Rs 75,000 will have to be retained. The machines used for manufacturing fans which have a book value of Rs 3,00,000 can be sold for Rs 1,25,000 and the amount realized can be invested at 15% return. Factory rent is allocated on the basis of area, and the company is not able to see an alternative use for the space which would be released. Should ABC Ltd. Manufacture the fans or buy them?
Q2) Usha Company produces three consumer products : P, Q and R. The management of the company wants to determine the most profitable mix. The cost accountant has supplied the following data.
Usha Company : Sales and Cost Data
Description Product Total
Material Cost per unit P Q R
Quantity (Kg) 1.0 1.2 1.4
Rate per Kg (Rs) 50 50 50
Cost per unit (Rs) 50 60 70
Labour Cost per unit 30 90 90
Variable Overheads per unit 15 10 25
Fixed Overheads (Rs .000) 9,175
Current Sales (Units ,000) 100 50 60 210
Projected Sales (Units ,000) 109 55 125 289
Selling Price per unit (Rs) 150 200 270
Raw material used by the firm is in short supply and the firm can expect a maximum supply of 350 lakh kg for next year. Is the company’s projected sales mix most profitable or can it be changed for the better?
Q3) DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers and textiles.
The summary of the company’s profit is given below :
(Rs/Crore)
Cement Fertilizer Textiles Total
Sales 20.0 12.0 18.0 50.0
Less : Variable Cost 8.0 9.6 5.4 23.0
Contribution 12.0 2.4 12.6 27.0
Less : Fixed Cost (allocated to 8.0 4.8 7.2 20.0
divisions in proportion to
volumes of Sales)
Profit (Loss) 4.0 (2.4) 5.4 7.0
After allocating the company’s fixed overheads to products the Fertilizers, division incurs a loss of Rs 2.4 crore. Should the company drop this division?
FINANCIAL & COST ACCOUNTING
1. Differentiate between idle cost and standard cost?
2. What is a trial balance? Explain its objective.
3. Distinguish between Accrual basis of accounting and cash basis of accounting.
4. Standard costing is a valuable aid to management discuss. State in brief limitation of standard costing?
5. Define Budgetary Control and explain the pre-requisites for its successful introduction and implementation?
6. How the total cost, variable cost and marginal cost differ from each other?
7. What are the advantages of cost audit?
8. Which are the different ways by which the cost can be analyzed?
FINACIAL & COST ACCOUNTING
1. What are the objectives of cost accounting and what is the relation with Management accounting department?
2. Define costing. Discuss briefly the objectives and advantages of costing.
3. Differentiate between idle cost and standard cost?
4. Explain the significance of cost accounting in a manufacturing company.
5. Which ratios will help in determining the long term solvency of a business and how?
6. Differentiate between Management Accounting and Financial Accounting.
7. Discuss the limitations of financial accounting and explain the importance of cost accounting.
8. How cost accounting is superior over financial accounting? Explain the techniques of costing and their application and suitability.
FINANCIAL ACCOUNTANCY
1. What are the foreign currency transaction and translation exposures ? Describe the accounting treatment for these exposures.
2. How is MODVAT credit availed shown in financial statements ?
3. Distinguish between funds flow and cash flow statement.
4. Study journalisation process of a manufacturing company. Show the process with the help of a flow diagram.
5. Discuss the salient features of Accounting Standard 6 (AS-6) on Depreciation Accounting.
6. Collect financial statements of ten companies in a fast moving consumer goods industry and critically analyse their depreciation policy.
7. What is deferred tax liability ? How is it different from current tax liability ?
8. Discuss the accounting treatment of government grants relating to depreciation fixed assets.
Finance and Cost Accounting
Q1. Explain the different rules of journalizing the transaction with appropriate illustrations?
Q2. Explain the role of Accountant in the present day Economy?
Q3. Cost accounting has become an essential tool of modern management”. comment.
Q4. What one the objectives of cost accounting? What are its advantages and limitations?
Q5. Define costing. Discuss briefly the objectives and advantages of costing.
Q6. Cost accounting is a system of foresight like pre-natal care, but financial accounting is just a postmortem examination”. Critically examine this statement
Q7. Cost accounting is better understood as a cost control and cost reduction exercise and not a more cost ascertainment process”. Discuss.
Q8. Differentiate between Management Accounting and Financial Accounting
Financial and Cost Accounting
Q1. Explain the different rules of journalizing the transaction with appropriate illustrations?
Q2. Differentiate between idle cost and standard cost?
Q3. Which are the different ways by which the cost can be analysed?
Q4. What is cost accounting? What are its objectives? Discuss.
Q5. Discuss the limitations of financial accounting and explain the importance of cost accounting.
Q6. Explain briefly the objects advantages and limitations of costing.
Q7. What one the objectives of cost accounting? What are its advantages and limitations?
Q8. Differentiate between Management Accounting and Financial Accounting.
Financial and Cost Accounting
Q1. Explain the term Convention of materiality.
Q2. Define Budgetary Control and explain the pre-requisites for its successful introduction and implementation?
Q3. Explain the advantages of cost accounting.
Q4. How cost accounting is superior over financial accounting? Explain the techniques of costing and their application and suitability.
Q5. What do you mean by installation of costing system? Explain the practical difficulties involved in installing such a system in a manufacturing concern
Q6. An efficient system of costing is essential factor for industrial control under modern conditions of business and as such may be regarded as an important part in the efforts of any management to secure business stability”
Q7. Cost accounting has become an essential tool of management. Mention the steps to be taken while installing cost accounting system in a manufacturing concern.
Q8. Define cost accounting and bring out the differences between cost accounts and Financial accounts.
FINANCIAL INSTITUTIONS
Q1) What are derivatives? What are their features?
Q2) What is a financial system? What is the role in the economic development of a country?
Q3) How does the Central Bank regulate the quantity and direction of the flow of credit?
Q4) What are the measures initiated by the SEBI to build investor confidence?
Q5) What is a Call Money market? What is the importance of Call Money market?
Who are the participants in the Call Money market?
Q6) What is the commercial paper? What are its advantages?
Q7) What is a Certificate of deposit? How is it different from bank deposit?
Q8) What is a discount market? What are its services?
Q9) What is a stock exchange? What are its function?
Q10) Write short notes on:
a)Put Option
b)Hedging
Financial Management
Q1. A stock is expected to pay a dividend of Rs.0.75 at the end of the year. The required rate of return is ks = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?
Q2. Hammad Inc. is considering two alternative, mutually exclusive projects. Both projects require an initial investment of Rs. 10,000 and are typical, average risk projects for the firm. Project A has an expected life of 2 years with after tax cash inflow of Rs. 6,000 and Rs. 8,000 at the end of year 1 and 2, respectively. Project B has an expected life of 4 years with after tax cash inflow of Rs. 4,000 at the end of each of next 4 years. The firm’s cost of capital is 10 percent. If the projects cannot be repeated, which project will be selected, and what is the net present value?
Q3. What is correlation of coefficient?
Q4. Define Financial Management.
Q5. What do you mean by floatation cost?
Q6. Why is the cash flow statement not a suitable judge of profitability ?
Q7. What is the basic goal of a business?
Q8. Define intermediation.
FINANCIAL MANAGEMENT
(A). (1).Mr. Nimish holds the following portfolio. (10 marks)
Share Beta Investment
Alpha 0.9 Rs.12, 00,000
Beta 1.5 Rs. 3, 50,000
Carrot 1.0 Rs. 1, 00,000
What is the expected rate of return on his portfolio, if the risk rate is 7 per cent and the expected return on the market portfolio is 16 per cent?
(A). (2). A share is selling for Rs.60 on which a dividend of Rs.4 per share is expected at the end of the year. The expected market price after dividend declaration is to be Rs.70. Compute the following: –
(i) The return on investment ® in shares.
(ii) Dividend yield
(iii) Capital Gain Yield
(B) DIC Ltd. provides the following data:
Comparative trial balance
March 31 year 2 March 31 year 1 Increase(Decrease)
Debit Balance 20 10 10
Cash Rs.190 Rs. 90 Rs.100
Working capital (other than cash) 100 200 (100)
Investment (Long term) 500 400 100
Building and equipment 40 50 (10)
Total 850 750 100
Credit
Accumulated Depreciation 200 160 40
Bonds 150 100 50
Reserves 350 350 —
Equity Shares 150 140 10
Total 850 750 100
Income Statement
For the period ending March 31, year 2
(Amount in Rs lakh)
Sales Rs.1000
Cost of Goods Sold 500
Selling Expense Rs.50
Administrative Expenses 50 100
Operating Income 400
Other charges
Gain on sale of building and equipment Rs 5
Loss on sale of investments (10)
Interest (6)
Taxes (189) (200)
Net Income after taxes 200
Notes: (a) The depreciation charged for the year was Rs.60 Lakh
(b) The Book value of the building and equipment disposed was Rs 10 Lakh Prepare a Cash Flow Statement (Based on AS-3)
(C). (1). A. Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a component X which is purchased at Rs.20. For every finished product one unit of component is required. The ordering cost is Rs.120 per order and the holding cost is 10 per cent per annum.
You are required to calculate:
(i) Economic order quantity
(ii) If the minimum lot size to be supplied is 4, 000 units, what is the extra cost, the company has to incur?
(iii) What is the minimum carrying cost, the company has to incur?
(C). (2). 4. Master Tools Ltd. Is currently operating its business at 75% level, producing 38275 units of a tools component and proposes to increase capacity utilization in the coming year by 33 1/3 % over the existing level of production.
The following data has been supplied:
(1)Unit cost structure of the product at current level:
Rs.
Raw Material 5
Wages 2
Overheads 3
Fixed Overhead 2
Profit 3
_____
15
(i) Raw Material will remain in stores for 1 month before issued for production. Material will remain in process for further 1 month. Suppliers grant 4 months credit to the company.
(ii) Finished goods remain in godown for 2 months
(iii) Debtors are allowed credit for 2 months.
(iv) Lag in wages and overheads payments in 1 month, and these expenses accrue evenly throughout the production cycle.
(v) No increase either in cost of inputs or selling price is envisaged
You are required to prepare a Projected Profitability statement and the Working Capital Requirement at new level, assuming that a minimum cash balance of Rs.20000 has to be maintained.
(D). A stock is currently trading for Rs.29. The risk less interest is 7 % p.a continuously compounded. Estimate the value of European call option with a strike price of Rs.30 and a time of expiration of 4 months. The standard deviation of the stock’s annual return is 0.45. Apply BS model.
(E). Following is the EPS record of AB Ltd over the past 10 years. (20 marks)
Year EPS Year EPS
10 Rs.30 5 Rs.16
9 20 4 15
8 19 3 14
7 18 2 18
6 17 1 (12)
(i) Determine the annual dividend paid each year in the following cases:
(a) If the firm’s dividend policy is based on a constant dividend payout ratio of 40 per cent for all years
(b) If the firm pays at Rs 10 per share, and increases it to Rs 12 per share when earnings exceed Rs.14 per share for the previous 2 consecutive years.
(c) If the firm pays dividend at Rs 7 per share each except when EPS exceeds Rs 14 per share, when an extra dividend equal to 80 per centof earnings beyond Rs.14 would be paid.
(ii) Which type of dividend policy will you recommended to the company and why?
(F). (1). A US MNC has its subsidiary in India. The subsidiary has issued 15 pr cent preference shares of the face value of Rs.100, to be redeemed at year-end 9. Flotation costs are expected to be 5 per cent; these costs can be amortized for tax purpose during 8 years at a uniform rate. The corporate tax rate is 35 per cent. Determine the costs of preference shares from the perspective of the subsidiary.
(F). (2) The US inflation rate is expected to be Rs.3 per cent annually and that of India is expected to be 4.5 per cent annually. The current spot rate of US $ in India is Rs.47.4060/US $.
Find the expected rate of US $ in India after one year and after 5 years from now using purchase power theory of exchange rate.
Finance Management
Q1. What is accumulated depreciation?
Q2. Who owns a credit union? Explain.
Q3. What can a financial institution often do for a deficit economic unit (DEU)that it would have difficulty doing for itself if the DEU were to deal directly with an SEU?
Q4. Why is the cash flow statement not a suitable judge of profitability ?
Q5. What are the objectives of financial planning?
Q6. Why a person should invest in shares? Give reasons.
Q7. Explain the equation of EBIT when it is equal to Break Even Point
Q8. What is the relationship between standard deviation & Risk
Financial Management
Q1. What is meant by ‘Financial management’ Explain its importance..
Q2. Every Manager has to take three major decisions while performing the finance function’ briefly explain them.
Q3. Discuss how Working capital affects both the liquidity and profitability of a business
Q4. What is meant by capital budgeting decision?
Q5. What is meant by Financial Planning?
Q6. State the decisions involved in Financial management.
Q7. How risk and expected return is compared in two distributions?
Q8. Briefly explain what call provision is and in which case companies use this option.
Financial Management
Q1. What is meant by ‘Financial management’ Explain its importance..
Q2. Define current assets and Give four examples
Q3. What is capital structure of a company?
Q4. What is meant by Financial Planning?
Q5. State the decisions involved in Financial management.
Q6. Different types of investments time horizons.
Q7. What types of shares are available in the market?
Q8. Why we use WACC?
Financial Management
Q1. What is Merger>Is it harmful or beneficial? Explain n Justify.
Q2. How negatively correlated investments behave in a market?
Q3. How does production cycle effect working capital?
Q4. What are the determinant of capital structure of a company?
Q5. Explain briefly five factors determining the amount of fixed capital.
Q6. Briefly define the terms proprietorship, partnership, and corporation.
Q7. Why are trend analysis and industry comparison important to financial ratio analysis?
Q8. What is international business environment?
Financial Management
Q1. What is the definition of management fraud?
Q2. Different types of investments time horizons.
Q3. What are efficient portfolios?
Q4. What is meant by capital budgeting decision?
Q5. Define current assets and Give four examples
Q6. To avoid the problem of shortage and surplus of funds, what is required in Financial management? Name the concept and explain four points of importance.
Q7. Compare and contrast a defined benefit and a defined contribution pension plan.
Q8. Define depreciation expense as it appears on the income statement. How does depreciation affect cash flow
International Financial Management
Q1. Are interest rate swaps popular ? Elucidate.
Q2. Explain the characteristics of GDRs and how they are priced ?
Q3. Explain the criteria for assessing country risk by Euromoney and Institutional investor.
Q4. Elucidate the various techniques to optimize cash inflows.
Explain any two with examples.
Q5. Discuss the “pecking order” of financing as given by Donaldson.
Q6. Why are forward contracts popular ?
Q7. Why do we classify futures and options as derivatives ? Elucidate.
Q8. What are the goals and functions of the World Bank, the IDA and IFC ?
INTERNATIONAL FINANCE MANAGEMENT
1. Explain the possible reasons for growth in international business
2. What risks confront dealers in the foreign Exchange Market? How can they cope with those Risks?
3. Why do companies go in for interest rate swaps? Give The advantages of Interest rate swaps.
4. What are the Advantages and Disadvantages of GDRs
5. What do you understand by the term,’ Inter-national Cash Management’ ? Briefly elucidate its objectives.
6. What are the advantages and Disadvantages of joint ventures
7. Differentiate between Transaction and economic exposure?
8. Discuss the market imperfections for derivatives that characterize the Indian Markets.
INTERNATIONAL FINANCIAL MANAGEMENT
Q.1) What is exchange rate determination and forecasting?
Q.2) Explain financial management in a global context.
Q.3) Explain in detail:
a) Accounting implications of international activities
b) Tax implications of international activities
Q.4) What is forwards, swaps and interest Parity?
Q.5) Explain short-term financial management in a multinational corporation.
Q.6) Explain long-term borrowing in the global capital markets.
Q.7) What are different currency options?
Q.8) Explain currency and interest rate futures.
Q.9) Write a detailed note on the foreign exchange market in India
Q.10) What is balance of payments?