Success-Gurus

SECTION - 4B : FINANCIAL MANAGEMENT

Financial Management: An Overview

1. (a) Mr. Rohan invested Rs. 2,000 for four years. Calculate at what annual rate of

compound interest the invested amount grows to Rs. 2,721 after four years. (b) Maha Bank adds interest monthly to investors’ accounts even though interest rates are expressed in annual terms. The current rate of interest is 12%. Ram deposited Rs. 2,000 on 1st July, 2009. You are required to calculate the amount of interest he will have earned by 31st December, 2009?

Working Capital Management

2. (a) Ganpati Limited faces a fixed cost of Rs. 4,000 to obtain new funds. There is a

requirement for Rs. 24,000 of cash over each period of one year for the foreseeable future. The interest cost of new funds is 12% per annum and the interest rate

earned on short-term securities is 9% per annum. You are required to calculate the amount of finance Ganpati Limited should raise at a time.

(b) Asin Limited is proposing to increase the credit period that it gives to its customers

from one month to one and a half months in order to raise turnover from the present annual figure of Rs. 2.4 crores representing 40 lakhs of units per annum. The price of the product is Rs. 6 and it costs Rs. 5.40 to make it. The increase in the credit period is likely to generate an extra 1,50,000 unit sales. Advise whether this is enough to justify the extra costs given that Asin Limited’s required rate of return is 20%? Assume no changes to stock levels, as Asin Limited is increasing its operating efficiency. Also assume that the existing debtors will take advantage of the new terms.

Working Capital Management

3.

The details regarding the fixed assets and equities of Sona Limited are supplied for your

consideration both at the beginning and at the end of the year 2008-2009:

1.04.08

31.03.09

Rs.

Rs.

Plant (Less: Depreciation)

63,500

1,42,500

Investment in Shares of Kanta Limited

1,32,000

2,90,000

Bonds Payable

2,50,000

70,000

Capital Stock

4,00,000

4,00,000

Retained Earnings

2,38,000

4,10,500

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You are not in a position to have the complete Balance Sheet data or an income statement for the year in spite of the fact that you have obtained the following information:

(a) Dividend of Rs. 37,500 was paid.

(b) The net income included Rs. 13,000 as profit on sale of equipment. There has been

an increase of Rs. 93,000 in the value of gross plant assets even though

equipments worth Rs. 29,000 with a net book value of Rs. 19,000 were disposed off.

You are required to prepare a statement of sources and uses of net working capital.

Tools of Financial Analysis and Planning

4.

Sandblast Limited is a manufacturer of products for the construction industry and its

accounts are given for your consideration. You are required to calculate the liquidity and

working capital ratios from the accounts and comment on the ratios.

2009

2008

Rs. ( in lakhs)

Rs. ( in lakhs)

Turnover

2,065.0

1,788.7

Cost of Sales

1,478.6

1,304.0

Gross Profit

586.4

484.7

2009

2008

Rs. ( in lakhs)

Rs. ( in lakhs)

Current Assets

Stocks

119.0

109.0

Debtors (Refer Note A)

400.9

347.4

Short-term Investments

4.2

18.8

Cash at bank and in hand

48.2

48.0

572.3

523.2

Current Liabilities

Loans and Overdrafts

49.1

35.3

Taxes

62.0

46.7

Dividend

19.2

14.3

Creditors (Refer to Note B)

370.7

324.0

501.0

420.3

Net Working Capital

71.3

102.9

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Notes:

2009

2008

Rs.

Rs.

A

Trade Debtors

329.8

285.4

B

Trade Creditors

236.2

210.8

Tools of Financial Analysis and Planning

5.

Mahalaxmi Limited’s balance sheets as on 31st March, 2008 and 2009 were as follows:

Liabilities

31.3.08

31.3.09

Assets

31.3.08

31.3.09

Rs.

Rs.

Rs.

Rs.

Equity Share Capital

10,00,000

10,00,000

Goodwill

1,00,000

80,000

8% P.S. Capital

2,00,000

3,00,000

Land and Building

7,00,000

6,50,000

General Reserve

1,20,000

1,45,000

Plant and

Machinery

6,00,000

6,60,000

Securities Premium



25,000

Profit and Loss A/c

2,10,000

3,00,000

Investments

11% Debentures

5,00,000

3,00,000

(non-trading)

2,40,000

2,20,000

Creditors

1,85,000

2,15,000

Stock

4,00,000

3,85,000

Provision for tax

80,000

1,05,000

Debtors

2,88,000

4,15,000

Proposed Dividend

1,36,000

1,44,000

Cash and Bank

88,000

93,000

Prepaid Expenses

15,000

11,000

Premium

on



20,000

Redemption

of

Debentures

24,31,000

25,34,000

24,31,000

25,34,000

Additional Information:

(a) Investments were sold during the year at a profit of Rs. 15,000. (b) During the year an old machine costing Rs. 80,000 was sold for Rs. 36,000. Its

written down value was Rs. 45,000.

(c) Depreciation charged on Plants and Machinery @ 20 per cent on the opening

balance.

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(d) There was no purchase or sale of Land and Building. (e) Provision for tax made during the year was Rs. 96,000. (f) Preference shares were issued for consideration of cash during the year. (g) Debentures are redeemed at the beginning of the year.

You are required to prepare Cash flow statement as per Accounting Standard 3 (revised).

Capital Budgeting and Project Planning

6. (a) Felco Limited manufactures a product which it sells for Rs. 5 per unit. Variable costs

of production are currently Rs. 3 per unit, and fixed costs 50 paise per unit. A new machine is available which would cost Rs. 90,000 but which could be used to make the product for a variable cost of only Rs. 2.50 per unit. Fixed costs, however, would increase by Rs. 7,500 per annum as a direct result of purchasing the machine. The machine would have an expected life of 4 years and a resale value after that time of Rs. 10,000. Sales of the product are estimated to be 75,000 units per annum. Felco Limited expects to earn at least 12% per annum from its investments. Ignore

taxation. You are required to advise whether Felco Limited should purchase the machine.

(b) You are required to compute the internal rate of return (IRR) of the project given

below and advise whether the project should be accepted if the company requires a minimum return of 17%.

Time

Rs.

0

(4,000)

1

1,200

2

1,410

3

1,875

4

1,150

Leverage

7. Satvik Limited has sales of Rs. 40 lakhs; variable cost of Rs. 25 lakhs; fixed cost of Rs. 6

lakhs; 10% debt of Rs. 30 lakhs; and equity capital of Rs. 45 lakhs. You are required to calculate the operating, financial and combined leverage of Satvik Limited.

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Capital Structure and Cost of Capital

8.

Goodbuy Company’s capital structure is given as under:

9% Debentures

Rs.

2,75,000

11% Preference Shares

Rs.

2,25,000

Equity Shares (face value : Rs. 10 per share)

Rs.

5,00,000

Rs. 10,00,000

Additional information:

(i) Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of

maturity. The market price per debenture is Rs. 105.

(ii) Rs. 100 per preference share redeemable at par has 3% floatation cost and 10

years of maturity. The market price per preference share is Rs. 106. (iii) Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. The

next year expected dividend is Rs. 2 per share with annual growth of 5%. The firm has a practice of paying all earnings in the form of dividends.

(iv) Corporate Income-tax rate is 35%.

You are required to calculate Weighted Average Cost of Capital (WACC) using market value weights.

9. Differentiate between the following:

(a) Traditional Phase and Modern Phase of Financial Management (b) Debt Financing and Equity Financing

(c) Investment Decisions and Dividend Decisions (d) Funds Flow Analysis and Cash Flow Analysis.

10. Write short notes on the following:

(a) Composition of ROE using Du Pont (b) Trading on Equity

(c) Seed Capital Assistance (d) Capital Budgeting Process.