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FINANCIAL
MGMT
(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: - (10 marks)
(i) The return on investment ®
in shares.
(ii) Dividend yield
(iii) Capital Gain Yield
(B) DIC Ltd. provides the
following data: (20 marks)
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
3
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
(c)
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. (10 marks)
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?
4
(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.
(10 marks)
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. (20 marks)
5
(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.
(10 marks)
(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 $.
(10 marks)
Find the expected rate of US $
in India after one year and after 5 years from now using
purchase power theory of
exchange rate.
Financial
Management
Q1. Why we use WACC? (10 marks)
Q2. What is Merger>Is it
harmful or beneficial? Explain n Justify. (10 marks)
Q3. Strategies to protect firm
from exchange rate risk. (10 marks)
Q4. What is the definition of
management fraud? (10 marks)
Q5. How negatively correlated
investments behave in a market? (10 marks)
Q6. What types of shares are
available in the market? (10 marks)
Q7. How does ‘Interest coverage
ratio’ affects the capital structure. (10 marks)
Q8. Why Capital budgeting
decisions are more important?.
FINANCIAL
MANAGEMENT
NO. 1
ZIP ZAP ZOOM CAR COMPANY
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
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.
Work-in Process inventory – zero.
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
(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
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
From the facts outlined above,
what report would Neha submit to the Board of Directors of
palco Ltd?
NO. 6
ARQ LTD
Analyse the financial viability
of the two options. Which option would you recommend? Why?
WE PROVIDE CASE STUDY ANSWERS, ASSIGNMENT SOLUTIONS, PROJECT REPORTS AND THESIS
ARAVIND - 09901366442 – 09902787224
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