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Financial mgt exercises

1. 1. FINANCIAL MANAGEMENT Prof K K JindalE1 Shobha Remedies is manufacturer of Gelatine capsules the demand for which atcurrent price level is in excess of its ability to produce. The capacity of a particularmachine is, now due for replacement, is limiting factor on productionThe possibilities exist either of acquiring a similar machine[Machine X]or ofpurchasing amore expensive machine with greater capacity[Machine Y]The company’s opportunity cost of capital is 10% after tax. The cash flow undereach alternative have been estimated as underRs in lakhsCash flow year Machine X Machine Y Immediate 0 27 40outflowCash inflow 1 - 10 2 05 14 3 22 16 4 14 17 5 14 15PVs @10% are1.00,0.91,0.83,0.75,0.68,0.62 for year 0,1,2,3,4,5 respectivelyIn deciding between the two alternatives, the MD of the company favours Paybackmethod. The chief Accountant, however,that a more specific method should be usedand he has calculated for each MachineA]the net present valueB]the profitability indexC] the discounted payback periodHaving made these calculations,he finds himself still uncertain about the machine torecommendAssignment:You are required to make these calculations and discuss their relevance to thedecision to be taken
2. 2. E2 Vikas Ltd desire to acquire a DG Set costing Rs 20 lacs which has an economic life of 10 years with no residual value. The company is considering A] taking the DG Set on lease. Lessor requires the asset to be amortised in 10 years and a return of 10% B] purchasing the asset by raising loan@ 16% C] income tax rate is 50% Straight line method of Depreciation is adopted The present value discount factors over the number of years are given Year 8% 10% 16% 1 0.91 0.91 0.86 2 1.78 1.74 1.60 3 2.58 2.49 2.25 4 3.31 3.17 2.80 5 3.99 3.79 3.27 6 4.62 4.35 3.68 7 5.20 4.87 4.04 8 5.75 5.33 4.34 9 6.25 5.76 4.61 10 6.71 6.14 4.83 Assignment:What will be your financial advice to the company?E3
3. 3. Progressive industries Ltd , manufacturers of special purpose machines have 2divisions which are periodically visited/assisted by visiting team of consultants onlong term basis. The management is worried about the steady increase of expensesin this regard over the years. An analysis of the last year expenses is as under. The company proposes to set up a Guest house/centre which can provide facilitiesto consultants .The centre will additionally save the company Rs 50,000 in boardingcharges and Rs 2,00,000 in the cost of Executive training programmes conductedoutside the company’s premises every yearConsultant remuneration Rs 2,50,000Travel and conveyance Rs 1,50,000Accommodation expenses Rs 6,00,000Boarding charges Rs 2,00,000Special allowances Rs 50,000Accommodation expenses Rs 2,00,000+ annuallyThe following details are available regarding construction and maintenance of theCentreA] Land: a t cost of Rs 800,000, already owned by the company will be usedB] construction cost: Rs 15,00,000 including fittings/furnishingsC] cost of Annual maintenance: Rs 1,50,000D] construction cost twill be written off over 5 years being the useful lifeThe company’s hurdle rate is 15%.Tax rate is 50% and write off of constructioncost will be available for tax purposesThe relevant PV Factors areYear 1 2 3 4 5PV Factor 0.87 0.76 0.66 0.57 0.50Assignment:Examine the feasibility of the proposal and make recommendationsE4
4. 4. The following financial data relate to Lakme Ltd a cosmetic and personal careProducts Company in the TATA group of companiesFinancial data for the year ending on 31st March,20X1 and 20X2[Rs in lakhs]Financials 20X1 20X2Revenue 6561 9773Operating 625 839profit[EBITDA]Depreciation 88 115Interest 216 376Tax 0 65Share capital 316 316Reserve & surplus 1130 1264LT Borrowings 1473 1530Gross fixed assets 1336 1589EPS 10.17 8.97DPS 5.0 5.0Assignment;Comment on Lakme’s performanceE5
5. 5. Calculate MPBF under Method II for Ritu Enterprises Ltd from the following detailsLIABILITIES Rs in Lakhs ASSETS Rs in LakhsTrade Creditors 100 Raw materials 150Other creditors 50 Work in progress 20Bank borrowings 200 Finished goods 80Term liabilities 250 Sundry Debtors 50Reserves 50 Fixed assets 300 NWC as per last audited BS: Rs 95 lakhs
6. 6. MIS Department of The Progressive Bank has submitted the following Statisticsfrom which you are required to estimate the likely Capital Funds required by theBank as of March, 31st, 2010 taking into account the Basel II implementationcompliance.i) Risk-Weighted Assets for Credit Risk is to be calculated as per table given below.ii) Capital Allocation for Market Risk to be Rs.200 croresiii) For Operational Risk following Data available. The bank is required to calculateCapital Charge for Operational Risk by Basic Indicator Approach.Year 31-03-2007 31-03-2008 31-03-2009Net Profit 5200.00 6000.00 6800.00 (Amount Rs in Crores)Capital Adequacy prescription of RBI as applicable to Indian Banks has to beconsidered for calculation. The bank’s present Capital [T1+T2] aggregates to Rs11000 croresAsset Rating Amt. Rs in Crores Risk weight prescribed by SupervisorLoan to cooperates AAA 40000 20% A+ 70000 30% A 10000 50%Loan to state 16000 0%GovernmentRetail 32000 75%Loan to SME [Rs 1600 3600 100%crores covered by CGTSME]E6Vikas Ltd has the following financials Balance Sheet as on 31st March,2009Liabilities Amount[in Rs] Assets Amount[in Rs]Paid up Share 3,00,000 Land, Building, 3,50,000capital[50000shares] MachineryLong term debt 1,00,000 Inventory 65,000Sundry Creditors 80,000 Sundry Debtors 60,000Other current 20,000 Cash/bank balance 25,000liabilities 5,00,000 5,00,000 Income StatementSales Rs 9,00,000
7. 7. Cost of goods sold Rs4,00,000General, administrative &selling expenses Rs1,00,000Other expenses Rs2,50,000EAT Rs1,50,000Calculate1] Current liabilites2]Current assets3]Current ratio4]Net working capital5] operating cycle6] Market price if PE ratio is 8E7With the help of the following information, complete the Balance Sheet ofTushar EnterprisesOwners equity Rs 100,000Current Debt to Total Debt 0.40Total Debt to Owners Equity 0.60Fixed Assets to Owners Equity 0.60Sales to Total Assets Turnover 2 timesInventory Turnover 8 times Balance Sheet of Tushar Ltd
8. 8. Liabilities Rs Assets RsOwners Equity 1,00,000 Fixed AssetsLong term Debt InventoryCurrent Debt CashTotal TotalE8Vivek Industries Ltd is investigating the feasibility of manufacturing one of thecomponents needed for its finished product rather than purchasing it from anoutside supplier. Its present supplier has just informed the company that the saleprice of the component will have to be increased from Rs 100 to Rs 125 due tohigher input costs. The minimum order must be for a quantity of 6000 units+The manufacturing activity will encompassThe cost of the equipment -Rs 12,00,000Salvage value at the end of 6th year -Rs 3,00,000Fixed costs [excluding Depreciation] -Rs 1,00,000/yearVariable costs - Rs 30 per unitCost of capital -15%Tax rate -50%Depreciation Policy -Straight line method
9. 9. The company requires 7500 components /yearAssignment:Advise the company whether to buy or manufacture?Will your advice change if the requirement is 6000 units onlyE 9Vikas Ltd has the following capital structureEquity share capital [5000shares of Rs100 each] Rs 5,00,0009% Preference shares Rs 2,00,00010% Debentures Rs 3,00,000The equity shares of the company are quoted at Rs 102 and the company is expectedto declare a dividend of Rs 9 per share for the next year.The company has registereda dividend growth rate of 5% which is expected to be maintainedAssuming the tax rate is 50%,A] calculate WACCThe company can raise term loan of Rs 500,000 at 12% interest for its expansion.However the company expects market price to fall to Rs 96 due to business riskassociated with the expansionB] Calculate revised WACC
10. 10. E 10A simplified income statement of Zenith Lt is given belowIncome statement for the year ending 31st March 200X [amount in Rs]Sales 10,50,000Variable cost 7,67,000Fixed cost 75,000EBIT 2,08,000Interest 1,10,000Tax 30% 29,400EAT 68,600Calculate and interpretA] Operating leverageB] Financial leverageC] Combined leverage
11. 11. E 11Vikas Ltd need Rs 12 lacs for the installation of a new factory which is expected toearn an EBIT of Rs 2, 00,000p.a. The company has the objective of maximizing theearnings per share. It is considering the possibility of equity shares plus raising adebt of Rs 200,000 or Rs 6, 00,000 or Rs 10, 00,000. The Merchant banker hasadvised that the shares can be issued at Rs 40 and the issue price ha to be droppedto Rs 25, if the borrowing exceeds Rs7, 50,000. The cost of borrowing is indicated asunder:Up to Rs2, 50,000 10%Rs250, 000-Rs6, 25,000 14%Rs6, 25,000-Rs10, 00,000 16%Assume the tax rate to be 50%, find out the EPS under different options
12. 12. E 12The relevant financial information for a new project is given hereunder. Findout the debt-service coverage ratio. (DSCR) Financial Information of a New Project (Rs. In lakhs)Year EBDIT* Deprn EBIT Int PBT Tax PAT Loan Instal ment 1 13.80 6.00 7.80 8.8 -1.00 - -1.00 10.00 0 2 22.20 5.40 16.80 8.8 8.00 3.50 4.50 10.00 0 3 37.39 4.86 32.53 8.5 24.00 12.00 12.00 10.00 3 4 41.80 4.37 37.43 7.4 30.00 15.00 15.00 10.00 3 5 40.27 3.94 36.33 6.3 30.00 15.00 15.00 10.00 3 6 48.77 3.54 45.23 5.2 40.00 20.00 20.00 10.00 3 7 47.32 3.19 44.13 4.1 40.00 20.00 20.00 10.00 3 8 55.90 2.87 53.03 3.0 50.00 25.00 25.00 10.00 3 9 54.51 2.58 51.93 1.9 50.00 25.00 25.00 10.00 310 53.16 2.33 50.83 0.8 50.00 25.00 25.00 10.00 3* EBDIT stands for Earnings before depreciation interest andtaxes.
13. 13. PBT = Profit before tax. PAT = Profit after tax Solution to Exercise on DSCR Financial Information of a New Project ( Rs. In lakhs)Year EBDIT Deprn EBIT Int PBT Tax PAT Loan Instalm ent 1 13.80 6.00 7.80 8.80 - 1.00 - -1.00 10.00 2 22.20 5.40 16.80 8.80 8.00 3.50 4.50 10.00 3 37.39 4.86 32.53 8.53 24.00 12.00 12.00 10.00 4 41.80 4.37 37.43 7.43 30.00 15.00 15.00 10.00 5 40.27 3.94 36.33 6.33 30.00 15.00 15.00 10.00 6 48.77 3.54 45.23 5.23 40.00 20.00 20.00 10.00 7 47.32 3.19 44.13 4.13 40.00 20.00 20.00 10.00 8 55.90 2.87 53.03 3.03 50.00 25.00 25.00 10.00 9 54.51 2.58 51.93 1.93 50.00 25.00 25.00 10.00 10 53.16 2.33 50.83 0.83 50.00 25.00 25.00 10.00Sum 415.12 39.08 376.04 55.04 321.00 160.50 160.50 100.00 DSCR is defined as = n∑ (PAT ị + D ị + I ị ) i =1__________________ = 160.50 + 39.08 + 55.04 = 254.62 = 1.64
14. 14. n∑ (I ị + LR ị ) 55.04 + 100 155.04i =1wherePAT ị = Profit after tax for year ịD ị = depreciation for year ịIị= Interest on long-term loans of financial institutions for year ịLRI ị = loan repayment instalment for year ịn = period over which the loan has to be repaid
15. 15. Calculation of Net Present ValueNPV of a project is equal to the sum of the present value of all the cashflows associated with the project. Symbolically,NPV = CF o + CF 1 + ……. CFn = n∑ CF t (1 + k)° ( 1+k) ı (1+k) n t=o (1 + k) twhere NPV = net present value CFt = cash flow occurring at the end of year t (t =0, … n). A cash inflow has a positive sign, whereas a cash outflow has a negative sign n = life of the project k = cost of capital used as the discount rate
16. 16. E 13Calculate NPV for a project which has the following cash flow stream : Year Cash flow 0 - 10,00,000 1 2,00,000 2 2,00,000 3 3,00,000 4 3,00,000 5 3,50,000The cost of capital k for the firm is 10%.
17. 17. Solution to the exercise on NPVNPV =- 10,00,000 + 2,00,000 + 2,00,000 + 3,00,000 + 3,00,000 + 3,50,000 0 1 2 3 4 5 (1.10) (1.10) (1.10) (1.10) (1.10) (1.10) = - 5273