FM Paper Solution (2012) (1)

7/28/2019 FM Paper Solution (2012) (1)

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FM PAPER SOLUTION

October - 2012

Q.1) b]

(i) The following data is furnished to you regarding two companies Ajanta and Barley operating

in the industry. Ajanta Barley

Raw material in stock in terms of days 80 73

Work in Progress (No. of days) 42 25

Finished Goods Stock (No. of days) 49 45

Average Collection Period (No. of days) 65 50

Average Payment Period (No. of days) 62 55

On basis of above calculate the Operating Cycle and Cash Cycle of business for each of the twocompanies.

Solution:

Operating Cycle = R + W + F + DAjanta = 80 + 42 + 49 + 65

= 236 days

Barley = 73 + 25 + 45 + 50

= 193 days

Cash Cycle = R + W + F + DCAjanta = 80 + 42 + 49 + 6562

= 174 days

Barley = 73 + 25 + 45 + 50

55= 138 days

(ii) A Company Meenu Ltd. has issued 10% debentures of face value 100 each which are

redeemable at par after 10 years. Assuming that tax rate applicable is 40% and the floatation costof debentures is 5%, calculate the Cost of debentures for the company.

Solution:

Kd = 100)1(

2

xtxNPFV

N

NPFVI

= 100)4.01(

2

95100

10

9510010

xx


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= 1006.05.97

5.010xx

= 6.46%

NP = FV + PremiumDiscount Floatation Cost

= 100 + 0

0

5= 95

(iii) Determine the Operating and Financial Leverage from the following data:

A B C

Contribution 600000 100000 500000

10% Debentures 50000 40000 80000

Fixed Overheads 10000 20000 30000

Solution:

Particulars A B CContribution

(-) Fixed O/H

6,00,000

10,000

1,00,000

20,000

5,00,000

30,000

PBIT(-) Interest

5,90,0005,000

(50,000 x 10%)

80,0004,000

(40,000 x 10%)

4,70,0008,000

(80,000 x 10%)

PBT 5,85,000 76,000 4,62,000

Operating Leverage

PBIT

onContributi

= 1.02 = 1.25 = 1.06

Financial Leverage

PBT

PBIT

= 1.01 = 1.05 = 1.02

Q.2) Company Maharaja Private Limited is planning an investment in new project. The

investment budget of the company is 30,00,000. The company has following two investmentalternatives:

Project A Project B

Investment 30,00,000 30,00,000

Useful Life 5 Years 6 Years

Cost of Capital 12% 12%Cash inflows at the end of the year

Year 1 7,00,000 8,00,000

Year 2 10,00,000 8,00,000

Year 3 9,00,000 8,00,000

Year 4 8,00,000 8,00,000

Year 5 4,00,000 6,00,000

Year 6 - 2,00,000


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Find which project the company should select on basis of (a) Payback Period Method (b) Net

Present Value Method.

Discount factor @ 12%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

0.893 0.797 0.712 0.636 0.567 0.507

Solution:

Project A PC = COF = 30,00,000

Year CIF CCIF PV@12% PVCIF

1 7,00,000 7,00,000 0.893 6251002 10,00,000 17,00,000 0.797 797000

3 9,00,000 26,00,000 0.712 640800

4 8,00,000 34,00,000 0.636 508800

5 4,00,000 38,00,000 0.567 226800PVCIF 27,98,500

Project B PC = COF = 30,00,000Year CIF CCIF PV @ 12% PVCIF1 8,00,000 8,00,000 0.893 714400

2 8,00,000 16,00,000 0.797 637600

3 8,00,000 24,00,000 0.712 5696004 8,00,000 32,00,000 0.636 508800

5 6,00,000 38,00,000 0.567 340200

6 2,00,000 40,00,000 0.507 101400PVCIF 2872000

a) Payback Period

Project A =

800000

26000003000003

years

= 3 years + 0.5 years

= 3.5 years

Project B = 3 years +800000

2400000300000

= 3 years + 0.75 years= 3.75 years

Advise/recommendation

On the basis of payback period method select project A, since it has lower payback period.

b) NPV = PVCIFPVCOF

Project = 27,98,500 30,00,000 = (2,01,500)Project B = 28,72,000 30,00,000 = (1,28,000)

Advice/RecommendationOn the basis of NPV Method reject both project since it has negative NPV.


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Q.3) Kanchanjanga Industries Ltd. is currently having annual sales of 30,00,000. Out of

which, 20% is Cash Sales and remaining are Credit Sales. The Company is currently

experiencing 1% bad debts on their credit sales. The present age of accounts receivables is onemonth. The variable cost of the company is 50%. Mr. Limye, the newly appointed Sales

manager, has plans to increase the sales of the Company. Mr. Limye has put forward following

two proposals in front of the Company; (a) To increase the credit period allowed to debtors to 4months. He expects that sales under such condition will increase up to 40,00,000. However, atthe same time the bad debt will become 4% of the credit sales. (b) To give cash discount of 5%

on the sales. He expects that sales under such condition will increase up to 35,00,000 and the

credit period will go down to 20 days. The expected bad debts will be 0.5% of the credit sales.Assume that the cost of funds is 15% per annum. As Vice President of Finance Operations,

which option of Mr. Limye will you accept? Assume 360 days in a year.

Solution:

Kanchanjanga Industries Ltd.

Existing Policy Proposed Policy

(a) (b)DCP (days) 30

(1m)

120

(4m)

20

Sales

(-) V.C. @ 50%

30,00,000

15,00,000

40,00,000

20,00,000

35,00,000

17,50,000

Contribution (a) 15,00,000 20,00,000 17,50,000

Receivables

DCPxxSales

360

%80

2,00,000 10,66,667 1,55,556

Cost of A.R.Capital Cost (Recv x 15%)

Bad debt (Sales x 80% x x%)Cash discount

30,000

24,000-

1,60,000

1,28,000-

23,333

14,00035,000

(Sales x20% x 5%)

(b) 54,000 2,88,000 72,333

Net Profit (ab) 14,46,000 17,12,000 16,77,667Incremental NP - 2,66,000 2,31,667

Note: In absence of information of Fixed Cost, receivable is valued at Sales.

Recommendation:

As vice president of finance operation, Mr. Limye I will accept proposal (a) since it results intohighest incremental NP 2,66,000.

Q.4) Amartax Ltd. is going produce and sell 5,000 unit per month in the year 2011. The material

required per unit is 550/-. The direct labour is 12,00,000/- per month. The other directexpenses are 1,26,00,000/- per annum. The selling price is fixed by calculating profit at 20%

on cost price.


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Calculate requirement of working capital for 2011 by taking into consideration following

information:-

(a)Stock or raw material will be for two months.(b)Process time is one month.(c)Stock is finished goods will be for 1.5 months.(d)Credit allowed to customer is two months.(e)Time lag in payment of wages is one month and the direct expenses in arrear of 15 days.(f) 20% of material is purchased on cash basis and suppliers of 80% material give 2 months

credit.

(g)Cash required is 15% of net working capital.Solution:

Amar Tax Ltd.

Statement of Estimation of Working Capital

Particulars W.N.

Current AssetsStockRaw Material

WIP

Finished Goods

Debtors

2

3

4

5

55,00,000

38,75,000

75,00,000 1,68,75,000

1,20,00,000

(a) 2,88,75,000

Current LiabilitiesCreditors

O/s Wages

O/s Direct Expenses

6

7

8

44,00,000

12,00,000

5,25,000

(b) 61,25,000(ab)

(+) Cash Balance

85

15

2,27,50,000

40,14,706

Net Working Capital

(+) Safety Margin

100 2,67,64,706

-

Estimated Working Capital 2,67,64,706

W.N.1) Cost statement for 5000 units (1 months)

Other direct expenses per month =12

000,00,26,1

= 10,50,000

C.P.U.Material 27,50,000 550

Direct Labour 12,00,000 240

Other direct expenses 10,50,000 210Total Cost 50,00,000 1000

(+) Profit @ 20% 10,00,000 200


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Sales 60,00,000 1200

W.N. 2) R.M. (2M)= 27,50,000 x 2 = 55,00,000

W.N. 3) WIP (1M)M 27,50,000 x 1 x 100% = 27,50,000DL 12,00,000 x 1 x 50% = 6,00,000

ODE 10,50,000 x 1 x 50% = 5,25,000

38,75,000

Note: In WIP valuation, material is taken at 100% & labour, ODE at 50%

W.N. 4) F.G. (1.5M)

= 50,00,000 x 1.5 = 75,00,000

W.N. 5) Debtors (2M)

= 60,00,000 x 2 = 1,20,00,000Note: Debtors have been valued at sales. Alternatively it can be valued at cost.

W.N. 6) Creditors (2M)

= 27,50,000 x 80% x 2= 44,00,000

W.N. 7) O/s Wages (1M)12,00,000 x 1 = 12,00,000

W.N. 8) O/s Direct expenses (15 days = 0.5M)

= 10,50,000 x 0.5 = 5,25,000

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FM Paper Solution (2012) (1)

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