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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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