Financial mgt exercises

FINANCIAL MANAGEMENT
Prof K K Jindal

E1

Shobha Remedies is manufacturer of Gelatine capsules the demand for which at
current price level is in excess of its ability to produce. The capacity of a particular
machine is, now due for replacement, is limiting factor on production
The possibilities exist either of acquiring a similar machine[Machine X]or of
purchasing amore expensive machine with greater capacity[Machine Y]
The company’s opportunity cost of capital is 10% after tax. The cash flow under
each alternative have been estimated as under
Rs in lakhs
Cash flow year Machine X Machine Y
Immediate 0 27 40
outflow
Cash inflow 1 - 10
2 05 14
3 22 16
4 14 17
5 14 15

PVs @10% are1.00,0.91,0.83,0.75,0.68,0.62 for year 0,1,2,3,4,5 respectively

In deciding between the two alternatives, the MD of the company favours Payback
method. The chief Accountant, however,that a more specific method should be used
and he has calculated for each Machine
A]the net present value
B]the profitability index
C] the discounted payback period
Having made these calculations,he finds himself still uncertain about the machine to
recommend

Assignment:

You are required to make these calculations and discuss their relevance to the
decision to be taken

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

Progressive industries Ltd , manufacturers of special purpose machines have 2
divisions which are periodically visited/assisted by visiting team of consultants on
long term basis. The management is worried about the steady increase of expenses
in 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 facilities
to consultants .The centre will additionally save the company Rs 50,000 in boarding
charges and Rs 2,00,000 in the cost of Executive training programmes conducted
outside the company’s premises every year

Consultant remuneration Rs 2,50,000
Travel and conveyance Rs 1,50,000
Accommodation expenses Rs 6,00,000
Boarding charges Rs 2,00,000
Special allowances Rs 50,000
Accommodation expenses Rs 2,00,000+
annually

The following details are available regarding construction and maintenance of the
Centre

A] Land: a t cost of Rs 800,000, already owned by the company will be used
B] construction cost: Rs 15,00,000 including fittings/furnishings
C] cost of Annual maintenance: Rs 1,50,000
D] construction cost twill be written off over 5 years being the useful life

The company’s hurdle rate is 15%.Tax rate is 50% and write off of construction
cost will be available for tax purposes

The relevant PV Factors are

Year 1 2 3 4 5
PV Factor 0.87 0.76 0.66 0.57 0.50

Assignment:

Examine the feasibility of the proposal and make recommendations

E4

The following financial data relate to Lakme Ltd a cosmetic and personal care
Products Company in the TATA group of companies

Financial data for the year ending on 31st March,20X1 and 20X2
[Rs in lakhs]

Financials 20X1 20X2
Revenue 6561 9773
Operating 625 839
profit[EBITDA]
Depreciation 88 115
Interest 216 376
Tax 0 65
Share capital 316 316
Reserve & surplus 1130 1264
LT Borrowings 1473 1530
Gross fixed assets 1336 1589
EPS 10.17 8.97
DPS 5.0 5.0

Assignment;

Comment on Lakme’s performance

E5

Calculate MPBF under Method II for Ritu Enterprises Ltd from the following
details

LIABILITIES Rs in Lakhs ASSETS Rs in Lakhs

Trade Creditors 100 Raw materials 150

Other creditors 50 Work in progress 20

Bank borrowings 200 Finished goods 80

Term liabilities 250 Sundry Debtors 50

Reserves 50 Fixed assets 300

NWC as per last audited BS: Rs 95 lakhs

MIS Department of The Progressive Bank has submitted the following Statistics
from which you are required to estimate the likely Capital Funds required by the
Bank as of March, 31st, 2010 taking into account the Basel II implementation
compliance.
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 crores
iii) For Operational Risk following Data available. The bank is required to calculate
Capital Charge for Operational Risk by Basic Indicator Approach.
Year 31-03-2007 31-03-2008 31-03-2009
Net Profit 5200.00 6000.00 6800.00 (Amount Rs in Crores)
Capital Adequacy prescription of RBI as applicable to Indian Banks has to be
considered for calculation. The bank’s present Capital [T1+T2] aggregates to Rs
11000 crores
Asset Rating Amt. Rs in Crores Risk weight
prescribed by
Supervisor
Loan to cooperates AAA 40000 20%
A+ 70000 30%
A 10000 50%
Loan to state 16000 0%
Government
Retail 32000 75%
Loan to SME [Rs 1600 3600 100%
crores covered by CGTSME]

E6

Vikas Ltd has the following financials

Balance Sheet as on 31st March,2009
Liabilities Amount[in Rs] Assets Amount[in Rs]
Paid up Share 3,00,000 Land, Building, 3,50,000
capital[50000shares] Machinery
Long term debt 1,00,000 Inventory 65,000
Sundry Creditors 80,000 Sundry Debtors 60,000
Other current 20,000 Cash/bank balance 25,000
liabilities
5,00,000 5,00,000
Income Statement
Sales Rs 9,00,000

Cost of goods sold Rs4,00,000
General, administrative &selling expenses Rs1,00,000
Other expenses Rs2,50,000

EAT Rs1,50,000

Calculate
1] Current liabilites
2]Current assets
3]Current ratio
4]Net working capital
5] operating cycle
6] Market price if PE ratio is 8

E7

With the help of the following information, complete the Balance Sheet of
Tushar Enterprises

Owners equity Rs 100,000
Current Debt to Total Debt 0.40
Total Debt to Owners Equity 0.60
Fixed Assets to Owners Equity 0.60
Sales to Total Assets Turnover 2 times
Inventory Turnover 8 times

Balance Sheet of Tushar Ltd

Liabilities Rs Assets Rs
Owners Equity 1,00,000 Fixed Assets
Long term Debt Inventory
Current Debt Cash
Total Total

E8

Vivek Industries Ltd is investigating the feasibility of manufacturing one of the
components needed for its finished product rather than purchasing it from an
outside supplier. Its present supplier has just informed the company that the sale
price of the component will have to be increased from Rs 100 to Rs 125 due to
higher input costs. The minimum order must be for a quantity of 6000 units+

The manufacturing activity will encompass
The cost of the equipment -Rs 12,00,000
Salvage value at the end of 6th year -Rs 3,00,000
Fixed costs [excluding Depreciation] -Rs 1,00,000/year
Variable costs - Rs 30 per unit
Cost of capital -15%
Tax rate -50%
Depreciation Policy -Straight line method

The company requires 7500 components /year

Assignment:
Advise the company whether to buy or manufacture?
Will your advice change if the requirement is 6000 units only

E 9

Vikas Ltd has the following capital structure

Equity share capital [5000shares of Rs100 each] Rs 5,00,000
9% Preference shares Rs 2,00,000
10% Debentures Rs 3,00,000

The equity shares of the company are quoted at Rs 102 and the company is expected
to declare a dividend of Rs 9 per share for the next year.The company has registered
a dividend growth rate of 5% which is expected to be maintained

Assuming the tax rate is 50%,
A] calculate WACC

The 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 risk
associated with the expansion

B] Calculate revised WACC

E 10

A simplified income statement of Zenith Lt is given below
Income statement for the year ending 31st March 200X [amount in Rs]
Sales 10,50,000
Variable cost 7,67,000
Fixed cost 75,000
EBIT 2,08,000
Interest 1,10,000
Tax 30% 29,400
EAT 68,600

Calculate and interpret
A] Operating leverage
B] Financial leverage
C] Combined leverage

E 11

Vikas Ltd need Rs 12 lacs for the installation of a new factory which is expected to
earn an EBIT of Rs 2, 00,000p.a. The company has the objective of maximizing the
earnings per share. It is considering the possibility of equity shares plus raising a
debt of Rs 200,000 or Rs 6, 00,000 or Rs 10, 00,000. The Merchant banker has
advised that the shares can be issued at Rs 40 and the issue price ha to be dropped
to Rs 25, if the borrowing exceeds Rs7, 50,000. The cost of borrowing is indicated as
under:

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

E 12
The relevant financial information for a new project is given hereunder. Find
out 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
3
10 53.16 2.33 50.83 0.8 50.00 25.00 25.00 10.00
3

* EBDIT stands for Earnings before depreciation interest and
taxes.

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 10.00
Sum 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

n∑ (I ị + LR ị ) 55.04 + 100 155.04
i =1
where
PAT ị = Profit after tax for year ị
D ị = depreciation for year ị
Iị= Interest on long-term loans of financial institutions for year ị
LRI ị = loan repayment instalment for year ị
n = period over which the loan has to be repaid

Calculation of Net Present Value

NPV of a project is equal to the sum of the present value of all the cash
flows 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) t

where 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

E 13
Calculate 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 3,50,000

The cost of capital k for the firm is 10%.

Solution to the exercise on NPV

NPV =

- 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

Financial mgt exercises

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Financial mgt exercises