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Practice Problems

Financial
Management
Balkrishna Parab
balkrishnaparab@jbims.edu

Contents
1

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

Capital Budgeting ............................................................................................................... 3

Funds Flow ......................................................................................................................... 6

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

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

Answers ............................................................................................................................ 15
(a) Cost of Capital ............................................................................................................ 15
(b) Capital Budgeting ....................................................................................................... 15
(c) Funds Flow Statement ................................................................................................ 16
(d) Ratio Analysis ............................................................................................................ 18

COST OF CAPITAL
1 The earnings, dividends, and stock price of Carpetto Technologies Inc. are expected to
grow at 7% per year in the future. Carpettos common stock sells for $23 per share, and its
last dividend was $2.00. Required (a) Using the Dividend Discount Model what is its cost of
common equity? (b) If the firms beta is 1.6, the risk-free rate is 9%, and the average return
on the market is 13%, what will be the firms cost of common equity using the CAPM
approach?
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 capital
for the company.
3 Three companies: Delta, Gamma, Epsilon are in the same line of business. However, their
capital structure is different. The following details are available:
Source of Finance
Equity shares of Rs. 10 each
Current Market Price of Shares

Delta

Gamma

Epsilon

Rs. 400,000 Rs. 250,000 Rs. 500,000


Rs. 15

Rs. 20

Rs. 12

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

Current Dividend per share

10%

8%

Calculate the weighted average cost of capital (WACC) of the three companies assuming
they 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. The
interest payable on the companys outstanding bonds is 9 per cent, and the companys tax rate
is 40 per cent. Percys CFO has calculated the companys WACC as 9.96 per cent. Required
What is the companys cost of equity shares?

balkrishnaparab@jbims.edu

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

Debt Proportion Cost of Equity (%) Interest 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 that
proportion 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 cent
equity shares. The companys before-tax cost of debt is 12 per cent and its marginal tax rate is
40 per cent. The current stock price is Rs. 22.50; the last dividend was Rs. 2.00; and the
dividend 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 to
the gulf countries. The total capital of the company includes 30% debt and 70% equity. The
interest rate on debt is 16% pa. The companys shares are listed for trading on the Bombay
Stock Exchange (BSE).
The BSE SENSEX grew by approximately 18.50 over the last year. The return on the
companys 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 cent
government securities. Required Calculate the WACC.
8 Omega Enterprises, Orient Electronics, and Opulence Systems are in the same line of
business. All the companies are listed on the Bombay Stock Exchange, and their capital
structure comprises only of debt and equity. The following details were extracted about these
companies.
Company

Proportion of Equity Interest Rate


in Capital structure
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 per
cent. The income tax rate applicable all the companies is 30%. Required Calculate the
overall cost of capital of all the above companies.
9 Hook Industries has a capital structure that consists solely of debt and equity shares. The
company can issue debt at 11 per cent. Its stock currently pays a Rs. 2 dividend per share, and
the stocks price is currently Rs. 24.75. The companys dividend is expected to grow at a
constant rate of 7 per cent per year; its tax rate is 35 per cent; and the company estimates that
its WACC is 13.95 per cent. Required what percentage of the companys capital structure
consists of debt financing?
10 The Bulchand Companys EPS was Rs. 6.50 in 2012. The company pays out 40 per cent
of 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 the
cost of equity for the Bouchard Company?
balkrishnaparab@jbims.edu

CAPITAL BUDGETING
1

Aeromax Limited is considering purchase of a piece of equipment whose initial cost is


Rs. 3,800,000. The management accountant estimates that the equipment will generate an
after-tax cash flow of Rs. 800,000 for five years beginning with the end of the current
year. 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?

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 be
scrapped 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 of
capital is 15%. It is expected that the equipment will generate incremental cash flows
(before tax) at the end of each year as follows:
Year

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 tax
is 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?

Cyngus Engineering is considering including two pieces of equipment, a truck and an


overhead pulley system, in this years capital budget. The projects are independent. The
cash outlay for the truck is Rs.17100 and that for the pulley system is Rs.22430. The
firms cost of capital is 14 percent. After-tax cash flows are estimated as follows:
Year

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 are
available 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

Brand A 20000 50000 50000 20000 50000


Brand B 30000 40000 30000 40000 50000
balkrishnaparab@jbims.edu

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 is
12% and the tax rate is 30%. The company uses straight line method of depreciation. The
management accountant of the company has estimated the following cash flows before
taxes of these machines. Advice: which brand should the company buy?
Brand

Initial Cost

Year 1

Year 2

Year 3

Year 4

100,000

25,000

30,000

50,000

50,000

100,000

30,000

40,000

35,000

50,000

100,000

40,000

10,000

50,000

50,000

Fishbone Pneumatics Limited has been approached by a software company to


computerise its purchase function. Presently, the company spends Rs. 200,000 every year
on the purchase department. The software company claims that if computerisation is
done, the cost of the purchase department can be reduced by 40%. The cost of
computerisation 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 10
per cent and the tax rate to be 30 per cent. Advise the company whether the
computerisation is worthwhile.

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

Hamston Limited is considering a project which has 45,000 initial costs with estimated
after-tax benefits 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 the
project 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. Two
mutually exclusive advertising strategy changes are under consideration. The cash flows
associated with each are as follows. The cost of capital for Sweet Delights is 13%. Which
policy should be adopted?
Policy Initial Cost

(800000)

400000 400000 400000

(400000)

200000 200000 200000 200000 200000

11 A firm considering replacement of its existing machine by a new machine. The new
machine will cost Rs 160,000 and have a life of five years. The new machine will yield
annual cash revenue of Rs 250,000 and incur annual cash expenses of Rs 130,000. The
estimated 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 Rs
20,000. The existing machine, if used for the next five years is expected to generate
annual cash revenue of Rs 200,000 and to involve annual cash expenses of Rs 140,000. If
sold 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 the
old machine is charged at 10% of its original cost. Compute the NPV of the replacement
decision.

balkrishnaparab@jbims.edu

12 You are a financial analyst for Damon Electronics Company. The director of capital
budgeting 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 of
return (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 calculated
that automation would result in savings of Rs.95,000 a year due to reduced scrap and
Rs.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%.

balkrishnaparab@jbims.edu

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

2003
200000

2004 Assets
250000 Land & Buildings

2003

2004

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

3000

3000 Goodwill

20000

5000

510800 Total Assets

530500

510800

Bills Payable
Total Liabilities

530500

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

Share Capital

31.3.2006 Assets

31.3.2005

31.3.2006

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

275,000

265,000 Total Rs

275,000

265,000

Total Rs

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.

balkrishnaparab@jbims.edu

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

Liabilities

31.3.2009

31.3.2010

Shareholder Funds
Share Capital

Assets

31.3.2009

31.3.2010

Gross Block

4,200,000

7,500,000

Fixed Assets
2,000,000

3,000,000

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 from
Directors

500,000

750,000

Debtors

2,045,000

1,875,000

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

Outstanding
Expenses

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

9,650,000

12,850,000

9,650,000

12,850,000

Sundry Creditors

Total Rs

Total Rs

The following are summarized balance sheets of Datamechanics Ltd.

Liabilities

31.3.2005

31.3.2006

Assets

31.3.2005

31.3.2006

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 year
investment which were acquired at Rs. 25000 were sold for Rs. 37500.

balkrishnaparab@jbims.edu

The following is provided by Kenyata Gold Ltd.

Liabilities
Share Capital

31.3.2005
220,000

31.3.2006 Assets
270,000 Property

31.3.2005

31.3.2006

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

Creditors

39,000

41,660 Debtors

66,160

69,430

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

3,370

1,000

Total Liabilities

462,480

462,480

453,880

50,000 Prepaid
Expenses
453,880 Total Assets

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. 50,000
in 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 was
as follows: (i) property: 4,250; (ii) Machinery: 10,760; and (e) Rs. 28,770 was provided for
income tax during the year.
6 The summarized balance sheets of McKennas Silver Ltd are given below. (a) During the
year investments costing Rs. 8000 were sold for Rs. 8500; the profit was included in the profit
and loss account; (b) Depreciation was written off fixed assets Rs. 70000; (c) Fixed assets
costing Rs. 10000 were sold for Rs. 12000; the profit was included in the profit and loss
account; (d) During the year a sum of Rs. 9000 was provided for taxation; and (e) Dividend
paid during the year amounted to Rs. 40000.
Liabilities

31.3.2005

31.3.2006 Assets

31.3.2005

31.3.2006

400000

320000

8000

3000

122000

87000

270000 Stock

160000

180000

134000 Debtors

210000

455000

10000 Bank

149000

197000

1049000

1242000

Share Capital

450000

450000 Fixed Assets

General Reserves

300000

310000 Goodwill

Profit Loss Account

56000

Debentures

68000

Creditors

168000

Provision for Tax

7000

Total Liabilities

1049000

balkrishnaparab@jbims.edu

68000 Investments

1242000 Total Assets

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

2005

Share Capital

200000

2006 Assets
250000 Land

2005

2006

10000

60000

Reserves & Surplus

31500

40000 Machinery

25000

40000

P&L A/c

23500

52000 Building

75000

90000

Debentures

40000

35000 Investments

50000

30000

82000

92000

Short Term Loans

9000

3000 Sundry Debtors

Wages Payable

3000

30000 Stock

32000

40000

Bills Payable

3500

4500 Bank

43000

58000

5500 Prepayment

23000

54000

Advances from Clients

11500

Creditors

33000

40000 Patents

10000

6000

Provision for Tax

45000

40000 Goodwill

50000

30000

Total Liabilities

400000

400000

500000

500000 Total Assets

Additional Information (a) Dividend paid during the year was Rs. 26500; Investment
originally purchased for Rs. 20000 were sold in 2006 for Rs. 25000; (c) Machinery having a
written down value of Rs. 5000 was sold at a loss of Rs. 1000; (d) During the year
depreciation charged on Machinery was Rs. 6000; and on Building Rs. 15000; (e) A sum of
Rs. 50,000 was provided for taxes during the year.
8 The comparative balance sheet of Graphic Design Studio, Inc., at June 30, 2009, included
these amounts.
Liabilities
Share Capital

2008

2009 Assets

2008

2009

87,100

94,900 Patents

27400

5000

42,400

96,000

256,700

293,300

Reserves and Surplus

276,700

Secured Debentures

59,800

51,200 Land

Provision for Tax

56,600

53,400 Live Stock

29200

48400

Salary payable

47,400

64,100 Investment

74,500

73,600

18,100 Cash

48,800

51,900

Advances from Clients

3,400

298,900 Equipment

Bills payable

42,400

40,300 Advance to Suppliers

28,600

8,600

Creditors

13,800

14,500 Debtors

68,600

60,200

3,700

2,800

Fines payable

8,200

9,100 Inventories

Accrued liabilities

3,700

2,900 Prepaid expenses

10,100

5,200

900

2,600 Security Deposits

10,000

5,000

600,000

650,000

Interest payable
Total Rs

600,000

650,000 Total Rs

Additional Information (a) depreciation expense on equipment: Rs. 13,400; (b) purchased
new 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.
balkrishnaparab@jbims.edu

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

2005
200000

2006 Assets
240000 Land

2005

2006

93000

Reserves & Surplus

23500

52000 Machinery

25000

90000

Debentures

40000

35000 Building

70000

146000

Term Loans

63900

53600 Goodwill

5000

4000

50000

30000

2000

5000

Outstanding Expenses
Creditors

3500
33000

4200 Investments
40000 Prepaid Expenses

Advance from Clients

2000

3000 Inventories

30000

35000

Bills Payable

2100

1200 Cash

43000

58000

82000

92000

400000

460000

Provision for Tax

32000

Total Liabilities

400000

31000 Debtors
460000 Total Assets

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.
Liabilities
Share Capital

2003
200000

2004 Assets
250000 Building

2003

2004

200000

190000

150000

169000

Preference Shares

60000

20000 Machinery

Profit & Loss Ac

20500

70600 Stock

90000

74000

Term Loan

70000

10000 Sundry Debtors

80000

64000

150000

135200 Cash and Bank

500

8800

Sundry Creditors
Bills Payable

18250

21100 Goodwill

10000

5000

Accrued Liabilities

51250

18100 Patents

29500

19200

Provision for tax

30000

25000 Copyrights

40000

20000

Total Liabilities

600000

550000 Total Assets

600000

550000

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) A
machine have a written down value of Rs. 15,000 was sold at a loss Rs. 200, was written off
during the year; (d) provision for tax during the year was Rs. 27500.

balkrishnaparab@jbims.edu

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 the
companies.
Consolidated Balance Sheets on March 31, 2012

Cipla

Sun
Pharma

Torrent
Pharma

Equity and Liabilities


Shareholders Funds
Share Capital ......................................................................160.58.................... 103.56 ...................... 42.31
Reserves and Surplus ......................................................7,478.35............... 12,062.79 ................. 1,151.51
Total Shareholder Funds.................................................7,638.93............... 12,166.35 ................. 1,193.82
Minority Interest .......................................................................... ................. 1,161.45 ........................ 3.50
Non-Current Liabilities
Long Term Borrowings ..........................................................2.20.................... 155.42 .................... 322.06
Deferred Tax Liabilities (Net) ............................................233.24.................... 163.63 ...................... 77.09
Long Term Provisions ..........................................................31.45.................... 138.73 .................... 110.45
Other Long-term Liabilities ...................................................0.00........................ 8.93 ........................ 3.80
Total Non-Current Liabilities.............................................266.89.................... 466.71 .................... 513.39
Current Liabilities
Short Term Borrowings........................................................11.26.................... 109.57 .................... 138.12
Trade Payables ...................................................................601.69.................... 840.11 .................... 863.47
Other Current Liabilities ....................................................619.70.................... 600.85 .................... 291.00
Short Term Provisions........................................................211.78.................... 915.35 ...................... 70.25
Total 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 Assets
Tangible Assets ...............................................................3,215.79................. 2,613.51 .................... 773.00
Intangible Assets ...................................................................0.00.................... 316.03 ...................... 23.87
Capital Work-in-Progress...................................................371.17.................... 344.65 .................... 118.77
Total Fixed Assets ...........................................................3,586.96................. 3,274.19 .................... 915.64
Goodwill on Consolidation ....................................................0.00................. 1,021.81 ........................ 0.00
Non-Current Investments ...................................................328.29.................... 588.96 ...................... 37.52
Deferred Tax Assets (Net) .....................................................0.00.................... 683.51 ...................... 25.65
Long Term Loans and Advances........................................361.24.................... 533.75 ...................... 61.37
Other Non-Current Assets ......................................................5.20...................... 17.41 ...................... 46.25
Total Noncurrent Assets ..................................................4,281.69................. 6,119.63 ................. 1,086.44
Current Assets
Current Investments ...........................................................940.52................. 1,623.91 ...................... 86.52
Inventories ......................................................................1,850.08................. 2,086.98 .................... 531.55
Trade Receivables ...........................................................1,553.58................. 1,926.13 .................... 522.80
Cash and Bank Balances ......................................................90.46................. 3,367.19 .................... 674.28
Short Term Loans and Advances .......................................579.94................. 1,042.67 ...................... 56.46
Other Current Assets ............................................................53.98...................... 93.88 .................... 115.50
Total 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
Pharma

Torrent
Pharma

Income
Sale (Gross).............................................................................7,128.82................. 8,126.94 ................. 2,599.21
Less: Excise Duty ......................................................................108.11.................... 107.45 ........................ 4.80
Net Sales .................................................................................7,020.71................. 8,019.49 ................. 2,594.41
Other Operating income ....................................................................... ............................... .................... 101.51
Total 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 .................... 500.64
Depreciation 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 ...................... 39.45
Other Non-operating Expense ........................................................0.00........................ 1.11 ...................... 65.36
Total Expenses ........................................................................5,712.42................. 5,134.53 ................. 2,316.46
Earnings before Tax .....................................................................1,447.81................. 3,356.47 .................... 358.61
Tax Expenses .............................................................................306.51.................... 382.63 ...................... 72.32
Earnings after tax .........................................................................1,143.30................. 2,973.84 .................... 286.30
Share of Associates ........................................................................2.94........................ 0.00 ........................ 0.00
Minority 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.

Calculate the amount of working capital requirements for a company engaged in unseasonal
business 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.

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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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 sources
143100. 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 in
Working Capital: 9200; Total sources 81500. Application of Funds (a) Repayment of
long 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 Loan
from Directors: 250000; Total sources 40,25,000. Application of Funds (a) Repayment
of Debentures: 400,000; (b) Addition to Fixed Assets: 33,00,000; (d) Purchase of New
Investments: 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 of
Funds (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); Total
sources: 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 of
Machinery: 4000; (d) Sale of Investments: 25,000; Total sources: 233,500. Application
of Funds (a) Payment of Dividends: 26,500; (b) Tax Paid: 55,000; (c) Purchase of
Machinery: 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; Total
Applications: 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 in
Working Capital: 67,900; Total sources: 319,300. Application of Funds (a) Payment of
Dividends: 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 of
Livestock: 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 of
Investments: 25,000; (d) Sale of Machinery: 3,000; Total sources: 268,500. Application
of Funds (a) Payment of Dividends: 30,000; (b) Tax Paid: 29,000; (c) Increase in
Working 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 of
Equity Shares: 50,000; Total sources: 222,900. Application of Funds (a) Payment of
Dividends: 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) Redemption
of 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

Inventory Turnover

Net Sales/ Inventory

3.79

3.84

4.88

Days Inventory in
Stock

366/ Inventory Turnover

97

95

75

Debtors Turnover

Net Sales/ Trade Receivables

4.52

4.16

4.96

Average Collection
Period

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

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

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 Capital
Employed

Profit for the Year/ (Non-Current Liabilities +


Shareholder Funds)

0.14

0.2

0.17

Activity

Solvency

Profitability

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