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MBA FINANCE ASSIGNMENT 1

1. AB Ltd holds a Brand of Coffee Parlors. They are approached by XY(P)


Ltd to take their franchise on the following terms:

a) The term of Franchise will be 5 years.


b) The upfront payment will be Rs 10 lacs
c) Royalty will be 10% of Sales ( Net of VAT)
d) Rate of VAT is 4% on Sales which is charged from the Customers
e) For executing the Franchise Agreement XY(P) Ltd pays a stamp duty of
Rs 5,000.

As per the terms of the Franchise Agreement, XY (P) Ltd is supposed to


take up a place facing the road on a prime location. It incurs the
following expenditure for the set up:

a) Deposit of the place taken on Leave & License Basis Rs 5,00,000


The deposit is refundable.
b) Furniture & Fixtures including Air Conditioning Rs 10,00,000
c) Kitchen Equipments, cutlery etc Rs
4,00,000
d) Delivery Vehicles Rs
2,00,000

XY (P) Ltd is a new company. The Promoters have incurred the


following expenses before incorporation of the Company:

a) Feasibility Study etc Rs 2,50,


000
b) In corporation Expenses Rs
50,000

The promoters have not taken reimbursement of Preliminary Expenses.

During the first year, the operations of the company were as under:

a) Sales Rs 75,00,000
(These sales are inclusive of VAT)

b) Purchase of Provisions Rs 15,00,000


c) Rent Rs 12,00,000
d) Direct Expenses Rs 10,00,000
e) Administrative Exp (including Salaries) Rs 5,00,000
f) Marketing Expenses Rs 7,50,000
g) Rate of Income Tax 30%
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h) Dividend is paid @ 10% on Capital
i) Interest on loan from Bank @ 15% pa
j) Receivables from Customers at the end of the year Rs 7,50,000
k) Stock of Provisions at the end of the year Rs 2,50,000
l) Creditors at the end of the year Rs 1,00,000

Rates of Depreciation:

a) Furniture & Fixtures 10%


b) Kitchen Equipments 20%
c) Vehicles 30%

Sources of Funds are as follows:

a) Capital by Promoters Rs 20,00,000

b) Loan from Bank Rs 20,00,000

Note: Loan from Bank is repaid in yearly installments of Rs 2,00,000 paid at


the end of the year.

Prepare the following:

a) Profit & Loss Account


b) Cash Flow Statement
c) Balance Sheet

Second Year

The projections for the next year are based on following


presumptions:

a) Sales will increase by 25% over Year 1. Rate of VAT will remain
unchanged ie 4%.

b) During the year the purchase of material will be of Rs 16,00,000. The


company shall maintain a stock of material of 15 days of purchase at
the end of the year.

c) Following Fixed Assets shall be purchased during the year:

i. Furniture & Fixtures Rs 3,00,000

ii. Kitchen Equipments Rs 1,00,000

d) The debtors at the end of the year will be equivalent to one month of
gross sales during the year.
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e) The creditors at the end of the year will be equivalent to one month of
purchases during the year.

f) Direct Expenses will increase by 25%

g) Rent will remain unchanged.

h) Administrative Expenses will increase by 5%

i) Marketing Expenses will increase by 10%

j) Royalty will continue to be 10% of Net Sales.

k) There is an ongoing litigation on the company. Legal Charges to be


paid during the year are Rs 50,000.

l) Dividend will be 10% of capital. This shall be paid during the year.

m) The company will take Fixed Deposit of Rs 13,00,000 in the bank for
future growth.

n) Preliminary Expenses remaining unpaid last year will be reimbursed to


the Promoters during the year.

Prepare the following:

a) Profit & Loss Account


b) Cash Flow Statement
c) Balance Sheet

Third Year

a) The turnover will increase by 25% over last year in respect of Gross Sales.

b) Purchase of Materials during the year will be Rs 20,00,000.

c) Stocks of Materials will be equivalent to 15 days of purchase during the


year.

d) Direct Expenses will increase by 25% over last year.

e) Rent will increase by 25% over last year.

f) Administrative Expenses will increase by 10% over last year.

g) Marketing Expenses will increase by 15% over last year.

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h) The existing vehicle met with an accident and was totally destroyed. Scrap
value is Nil. Since the vehicle was not insured, no insurance claim was
received.

i) A new vehicle was purchased at a cost of Rs 4 lacs. It was put to use for
the whole year.

j) The Fixed Deposit was liquidated on 31st December. Accordingly the


company received interest @ 10% for 9 months.

k) In the end of March the company purchased office premises for Rs


80,00,000. The normal rate of depreciation on Premises is 20%. Since the
premises was used for a period of less than 6 months, hence only 50%
depreciation will be charged.

l) The Company proposes to fund purchase of the Premises by internal cash


accruals and additional capital to be raised from promoters.

m) Debtors will be equivalent to 1 month of sale during the year.

n) Creditors will be equivalent to 1 month purchases during the year.

o) The rate of Income Tax will be 35%

p) The company shall pay dividend of 10% on enhanced capital.

q) The Company shall maintain Cash and Bank Balance of app Rs 5 lacs at
the end of the year.

Following needs to be done:

a) Estimate how much Capital should be raised to meet the fund requirement.

b) Prepare:

i. Profit & Loss Account

ii. Cash Flow Statement

iii. Balance Sheet.

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