FM12
Financial Management
Assignment No.I
Assignment Code: 2013FM12A1 Last Date of Submission: 15th April 2013
Maximum Marks:100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A
Ques.1 Explain the concept of cost of capital ? How can you classify them.
Ques.2 What are the steps involved in computation of WACC? What factors affect the WACC.
Ques. 3 Using annual, semi-annual and quarterly compounding periods for each of the
following (1) compute the future value if Rs.1,000 is initially deposited and (2)
Determine the effective rate of interest.
(a) At 10 percent annual interest for 5 years
(b) At 8 percent annual interest for 6 years
(c) At 6 percent annual interest for 10 years
Ques. 4 Describe the emerging role of the Financial Manager in India.
Section-B
Case Study
Babu Lal & Associates (BLA) was organized as a partnership firm in 1989, with its main office in Delhi. Since that time, the firm diversified into various product lines, both in manufacturing and trading, and also expanded its market. Sales of BLA increased from Rs 7 1akh in 1989 to the estimated figure of Rs 150 lakh for the accounting year ending on March 31, 2007.
At present; BLA has three works offices engaged processing of basic Industrial chemicals, production of hardware goods and leather products. All these works offices are located in Faridabad, Haryana. In addition to that, BLA also owns one cold storage-cum-warehouse located in Azadpur, Delhi. Each unit operates under the 'overall' guidance of Mr Babu Lal. All works offices serve as a sales and distribution point for the line of product carried on by that unit and is run by a supervisor who is responsible for hiring and supervision of personnel and for sales, credit, purchasing, and inventory and cost control at the unit level. All decisions affecting BLA's overall policy, capital expenditure and the addition of product lines are reviewed by Babu Lal.
For the last two years BLA is experiencing shortage of funds caused by low profits and the installment payments of term loan to HDFC Bank. The payments became necessary as per the agreement with the bank. However the problem which bothered Mr Babu Lal was of low profits. He asked each unit supervisor to submit his suggestion to improve the long run profitability of the company. While going through various suggestions. Mr Babu Lal found three proposals of investment which he took up for consideration. He was concerned about the profitability and payment schedule of each one of them. He estimated that the use of 12 per cent after-tax required rate of return would be appropriate in evaluating the proposals. The first one Mr Babu Lal selected was new investment proposal from Faridabad Chemical Processing Unit.
New Investment Proposal:
The chemicals processing works office head has suggested that BLA should invest in a plant which can produce a new chemical. He expects that the new chemical would be widely accepted and used by the manufacturers of plastic bags. The works manager of that unit submitted the following information on the basis of market survey and sales forecasts generated by him.
Rs.
Estimated investment 3,96,000
Estimated Life 10 years
Annual after-tax cash flows: Years 1-4 76,000
Annual after-tax cash flows: Years 5-10 1,20,000
He has estimated that the salvage value of the machine at the end of its expected life is likely to be 50 per cent of its book value. About tax benefits he mentions in his proposal that BLA would be entitled for depreciation at the rate of 33.33 per cent using diminishing balance method.
Cost Saving Proposal:
The hardware unit of BLA used to contribute 40 per cent towards the overall profitability of the company. But recently the contribution had declined significantly because of the rising cost and labour problems. Therefore, the proposals submitted by the hardware unit supervisor emphasized the cost-reduction techniques. Among other suggestions Mr Babu Lal found a proposal to invest in a machine which would help the company to reduce the costs. The following note was submitted by the manager of the unit:
"Automation Industry is a manufacturer of special machines used in the processes like ours. The installations of these machines go a long way to reduce the costs. At present one particular machine which is being marketed by them will do the Job satisfactorily, and will help the company in reducing its costs. The machine costs Rs 4.63.500 by paying the entire amount in cash.
However, the company also provides the facility of purchasing the machine on installment basis. In that case the amount has to be paid in eight equal annual installments and the rate of interest compounded annually by the company would be 11 per cent.
Mr Babu Lal was interested in knowing the amount which the company would be required to pay each year. Given that the life of this machine is 15 years, how much after-tax-cost savings should accrue to BLA each year to recover the investment made on installment basis?"
Expansion Proposal:
The cold storage manager has proposed to install refrigeration system in their newly acquired complex. A distributor of various makes of refrigera¬tion systems is prepared to install the system which costs Rs 1.40.000. The distributor has informed the cold storage manager that the firm can pay in four years, interest rate being 13 per cent. He submitted the following schedule giving the details of annual payments.
Rs.
Principal
Four years of interest @ 13% 1,40,000
72,800
Total 2,12,800
Annual payment 53,200
In case BLA installs this refrigeration system, what is the rate of return that the distributor will earn on such installment payments? In case Mr Babu Lal negotiates with the distributor and he agrees to earn 13 per cent rate of return, what will be the annual installment amount which he will be required to pay to the distributor?
Financing and its Cost:
Mr Babu Lal estimated that he would require about Rs 5 lakh to finance the three proposals in case they are accepted. Funds from internal sources were out of question. He approached HDFC Bank to explore the possibility of seven-year term loan. The bank officials informed him that the current rate of interest on such loans would be 15 per cent. The payments for both principal and interest would be required to be made either at the end of each year or at the end of the maturity of loan. In the latter case he was interested in finding how much he should save each year by investing outside at 16 per cent so that he has sufficient funds to repay the loan at maturity. He was also concerned about the after-tax required rate of return which he should use in evaluating the proposal.
FM12
Financial Management
Assignment No.II
Assignment Code: 2013FM12A2 Last Date of Submission: 15th May 2013
Maximum Marks:100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A
Ques. 1 (a) Explain the meaning of inventory management. Discuss the techniques of
Inventory control.
(b) During the period of inflation, which method of inventory issue will give higher
profits?
(i) LIFO
(ii) FIFO
Explain with example.
Ques. 2 a) What are the costs associated with maintaining receivable?
b) Explain the factors determining the credit policy of a firm.
Ques. 3 Explain the following theories of Capital structure.
i. Net Income approach
ii. Modigliani and Miller approach.
Ques. 4 Assume perfect capital market. An all equity firm has Rs.6,000 in cash and assets worth
Rs 28,000. The firm has 1200 shares outstanding and no investment opportunities.
a. If the firm pays no dividend today, what is the stock price and the wealth of stockholders?
b. If the firm pays a dividend of Rs.6000 today.
i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. What is the wealth of stockholders after the dividend?
c. If the firm pays a dividend of Rs.9000 today.
i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. How many new shares must be issued?
iv. How does the dividend affect stockholder wealth?
Section-B
Case Study
Ashok Manufacturing Company Limited (AMC) is engaged in manufac¬turing rubber-based products used in a variety of commercial applications. The company is located in Noida near Delhi and is one of the leading suppliers of these products to a large number of companies engaged in manufacturing automobile accessories electronic and light engineering products. In recent years the competition in this type of business has intensified. AMC has been able to face this competition and has been growing rapidly. The main reasons for its growth have been its good image for quality products, technological improvements leading to increased production capacity cost advantage and strong marketing team.
During the last two years of operation the company has been facing frequent cash deficit problems as a result of which the company has not been able to meet its obligation to pay to its suppliers in time and this has forced the company to postpone its payments. The company's reputation as a credit-worthy customer has gone down. Mr Ashok speculates that if this experience is repeated the suppliers would force the company for cash payments for its purchases. To prevent the occurrence of this type of unforeseen events he wanted to plan his cash in a better way.
Mr Ashok asked his finance manager Mr V P Iyer to develop the monthly cash forecasts for the period starting from January 2007 to June2007. Mr Iyer obtained the following actual sales figures from the records of the last three months:
October 2006 : Rs 240 lakh
November 2006 : Rs 280 lakh
December 2006 : Rs 320 lakh
Mr Iyer first tried to find out the sales forecasts for the next seven months. After consulting with Mr. Ashok, he developed the following forecasts:
January 2007 : Rs 260 lakh
February 2007 : Rs 210 lakh
March 2007 : Rs 160 lakh
April 2007 : Rs 240 lakh
May 2007 : Rs 200 lakh
June 2007 : Rs 160 lakh
July 2007 : Rs 200 lakh
Over the past three years. AMC had averaged 25 per cent of the company's total sales as cash sales, the remaining 75 per cent of the sales being accounts receivable. Forty per cent of these accounts receivables were collected m the first month after sales. 30 per cent collections took place m the second month after the sales and the remaining receivables were collected m the last month.
AMC's average consumption of raw mater1alis 80 per cent of the sales. The accounts indicated that 40 per cent of this is paid m the month of sales itself, 55 per cent in the following month and the remaining m the third month.
Mr Iyer anticipated payments for wages and salaries to be as follows:
January : Rs 42 lakh
February : Rs 39 lakh
March : Rs 32 lakh
April : Rs 40 lakh
May : Rs 32 lakh
June : Rs 28 lakh
The other general adm1nistrative expenses were assumed to be about Rs 2.51akh per month. Mr Iyer was aware of the 16 per cent annual Interest payment liability on Rs 20 lakh of borrowings to be paid m the month of March. A tax payment on 2005 income of Rs 2.5lakh is due in April. Mr Iyer estimated that AMC's tax liability for the next accounting year 15 expected to be Rs 24 lakh for which the company would be required to pay the tax m advance. Quarterly installment of such liability would be due in March, June, September and December. He also found that a capital expenditure of Rs 70 lakh is planned in February of which 50 per cent will have to be paid m the same month and the remaining in May. The company has a cash balance of Rs 1.40.000 as on December 31 which is the minimum desired level of cash. For projecting the cash flows for the next six months Mr. Iyer assumed the prices and costs to remain constant.
After collecting the information about cash flows Iyer created a file in LOTUS 123 by classifying each item of cash flows systematically into cash receipts and payments. While entering the amounts of cash flows he was not sure how to input these figures. His immediate concern was that as and when any change in sales or collection experience is made the cash flow forecasts should automatically get updated. Before entering the figures in the worksheet file he wanted to plan it more systematlcal1y. He saved this fie which contained only the format of cash receipts and payments as KMC.WKI. He referred to the note on principles of spread¬sheet design to format his cash flows m a systematic way. He wants your help in completing this worksheet.
You are required to design a statement showing cash inflows and outflows in proper format for the period from October 2006 to June 2007.
Financial Management
Assignment No.I
Assignment Code: 2013FM12A1 Last Date of Submission: 15th April 2013
Maximum Marks:100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A
Ques.1 Explain the concept of cost of capital ? How can you classify them.
Ques.2 What are the steps involved in computation of WACC? What factors affect the WACC.
Ques. 3 Using annual, semi-annual and quarterly compounding periods for each of the
following (1) compute the future value if Rs.1,000 is initially deposited and (2)
Determine the effective rate of interest.
(a) At 10 percent annual interest for 5 years
(b) At 8 percent annual interest for 6 years
(c) At 6 percent annual interest for 10 years
Ques. 4 Describe the emerging role of the Financial Manager in India.
Section-B
Case Study
Babu Lal & Associates (BLA) was organized as a partnership firm in 1989, with its main office in Delhi. Since that time, the firm diversified into various product lines, both in manufacturing and trading, and also expanded its market. Sales of BLA increased from Rs 7 1akh in 1989 to the estimated figure of Rs 150 lakh for the accounting year ending on March 31, 2007.
At present; BLA has three works offices engaged processing of basic Industrial chemicals, production of hardware goods and leather products. All these works offices are located in Faridabad, Haryana. In addition to that, BLA also owns one cold storage-cum-warehouse located in Azadpur, Delhi. Each unit operates under the 'overall' guidance of Mr Babu Lal. All works offices serve as a sales and distribution point for the line of product carried on by that unit and is run by a supervisor who is responsible for hiring and supervision of personnel and for sales, credit, purchasing, and inventory and cost control at the unit level. All decisions affecting BLA's overall policy, capital expenditure and the addition of product lines are reviewed by Babu Lal.
For the last two years BLA is experiencing shortage of funds caused by low profits and the installment payments of term loan to HDFC Bank. The payments became necessary as per the agreement with the bank. However the problem which bothered Mr Babu Lal was of low profits. He asked each unit supervisor to submit his suggestion to improve the long run profitability of the company. While going through various suggestions. Mr Babu Lal found three proposals of investment which he took up for consideration. He was concerned about the profitability and payment schedule of each one of them. He estimated that the use of 12 per cent after-tax required rate of return would be appropriate in evaluating the proposals. The first one Mr Babu Lal selected was new investment proposal from Faridabad Chemical Processing Unit.
New Investment Proposal:
The chemicals processing works office head has suggested that BLA should invest in a plant which can produce a new chemical. He expects that the new chemical would be widely accepted and used by the manufacturers of plastic bags. The works manager of that unit submitted the following information on the basis of market survey and sales forecasts generated by him.
Rs.
Estimated investment 3,96,000
Estimated Life 10 years
Annual after-tax cash flows: Years 1-4 76,000
Annual after-tax cash flows: Years 5-10 1,20,000
He has estimated that the salvage value of the machine at the end of its expected life is likely to be 50 per cent of its book value. About tax benefits he mentions in his proposal that BLA would be entitled for depreciation at the rate of 33.33 per cent using diminishing balance method.
Cost Saving Proposal:
The hardware unit of BLA used to contribute 40 per cent towards the overall profitability of the company. But recently the contribution had declined significantly because of the rising cost and labour problems. Therefore, the proposals submitted by the hardware unit supervisor emphasized the cost-reduction techniques. Among other suggestions Mr Babu Lal found a proposal to invest in a machine which would help the company to reduce the costs. The following note was submitted by the manager of the unit:
"Automation Industry is a manufacturer of special machines used in the processes like ours. The installations of these machines go a long way to reduce the costs. At present one particular machine which is being marketed by them will do the Job satisfactorily, and will help the company in reducing its costs. The machine costs Rs 4.63.500 by paying the entire amount in cash.
However, the company also provides the facility of purchasing the machine on installment basis. In that case the amount has to be paid in eight equal annual installments and the rate of interest compounded annually by the company would be 11 per cent.
Mr Babu Lal was interested in knowing the amount which the company would be required to pay each year. Given that the life of this machine is 15 years, how much after-tax-cost savings should accrue to BLA each year to recover the investment made on installment basis?"
Expansion Proposal:
The cold storage manager has proposed to install refrigeration system in their newly acquired complex. A distributor of various makes of refrigera¬tion systems is prepared to install the system which costs Rs 1.40.000. The distributor has informed the cold storage manager that the firm can pay in four years, interest rate being 13 per cent. He submitted the following schedule giving the details of annual payments.
Rs.
Principal
Four years of interest @ 13% 1,40,000
72,800
Total 2,12,800
Annual payment 53,200
In case BLA installs this refrigeration system, what is the rate of return that the distributor will earn on such installment payments? In case Mr Babu Lal negotiates with the distributor and he agrees to earn 13 per cent rate of return, what will be the annual installment amount which he will be required to pay to the distributor?
Financing and its Cost:
Mr Babu Lal estimated that he would require about Rs 5 lakh to finance the three proposals in case they are accepted. Funds from internal sources were out of question. He approached HDFC Bank to explore the possibility of seven-year term loan. The bank officials informed him that the current rate of interest on such loans would be 15 per cent. The payments for both principal and interest would be required to be made either at the end of each year or at the end of the maturity of loan. In the latter case he was interested in finding how much he should save each year by investing outside at 16 per cent so that he has sufficient funds to repay the loan at maturity. He was also concerned about the after-tax required rate of return which he should use in evaluating the proposal.
FM12
Financial Management
Assignment No.II
Assignment Code: 2013FM12A2 Last Date of Submission: 15th May 2013
Maximum Marks:100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A
Ques. 1 (a) Explain the meaning of inventory management. Discuss the techniques of
Inventory control.
(b) During the period of inflation, which method of inventory issue will give higher
profits?
(i) LIFO
(ii) FIFO
Explain with example.
Ques. 2 a) What are the costs associated with maintaining receivable?
b) Explain the factors determining the credit policy of a firm.
Ques. 3 Explain the following theories of Capital structure.
i. Net Income approach
ii. Modigliani and Miller approach.
Ques. 4 Assume perfect capital market. An all equity firm has Rs.6,000 in cash and assets worth
Rs 28,000. The firm has 1200 shares outstanding and no investment opportunities.
a. If the firm pays no dividend today, what is the stock price and the wealth of stockholders?
b. If the firm pays a dividend of Rs.6000 today.
i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. What is the wealth of stockholders after the dividend?
c. If the firm pays a dividend of Rs.9000 today.
i. What is the stock price before dividend?
ii. What is the stock price after dividend?
iii. How many new shares must be issued?
iv. How does the dividend affect stockholder wealth?
Section-B
Case Study
Ashok Manufacturing Company Limited (AMC) is engaged in manufac¬turing rubber-based products used in a variety of commercial applications. The company is located in Noida near Delhi and is one of the leading suppliers of these products to a large number of companies engaged in manufacturing automobile accessories electronic and light engineering products. In recent years the competition in this type of business has intensified. AMC has been able to face this competition and has been growing rapidly. The main reasons for its growth have been its good image for quality products, technological improvements leading to increased production capacity cost advantage and strong marketing team.
During the last two years of operation the company has been facing frequent cash deficit problems as a result of which the company has not been able to meet its obligation to pay to its suppliers in time and this has forced the company to postpone its payments. The company's reputation as a credit-worthy customer has gone down. Mr Ashok speculates that if this experience is repeated the suppliers would force the company for cash payments for its purchases. To prevent the occurrence of this type of unforeseen events he wanted to plan his cash in a better way.
Mr Ashok asked his finance manager Mr V P Iyer to develop the monthly cash forecasts for the period starting from January 2007 to June2007. Mr Iyer obtained the following actual sales figures from the records of the last three months:
October 2006 : Rs 240 lakh
November 2006 : Rs 280 lakh
December 2006 : Rs 320 lakh
Mr Iyer first tried to find out the sales forecasts for the next seven months. After consulting with Mr. Ashok, he developed the following forecasts:
January 2007 : Rs 260 lakh
February 2007 : Rs 210 lakh
March 2007 : Rs 160 lakh
April 2007 : Rs 240 lakh
May 2007 : Rs 200 lakh
June 2007 : Rs 160 lakh
July 2007 : Rs 200 lakh
Over the past three years. AMC had averaged 25 per cent of the company's total sales as cash sales, the remaining 75 per cent of the sales being accounts receivable. Forty per cent of these accounts receivables were collected m the first month after sales. 30 per cent collections took place m the second month after the sales and the remaining receivables were collected m the last month.
AMC's average consumption of raw mater1alis 80 per cent of the sales. The accounts indicated that 40 per cent of this is paid m the month of sales itself, 55 per cent in the following month and the remaining m the third month.
Mr Iyer anticipated payments for wages and salaries to be as follows:
January : Rs 42 lakh
February : Rs 39 lakh
March : Rs 32 lakh
April : Rs 40 lakh
May : Rs 32 lakh
June : Rs 28 lakh
The other general adm1nistrative expenses were assumed to be about Rs 2.51akh per month. Mr Iyer was aware of the 16 per cent annual Interest payment liability on Rs 20 lakh of borrowings to be paid m the month of March. A tax payment on 2005 income of Rs 2.5lakh is due in April. Mr Iyer estimated that AMC's tax liability for the next accounting year 15 expected to be Rs 24 lakh for which the company would be required to pay the tax m advance. Quarterly installment of such liability would be due in March, June, September and December. He also found that a capital expenditure of Rs 70 lakh is planned in February of which 50 per cent will have to be paid m the same month and the remaining in May. The company has a cash balance of Rs 1.40.000 as on December 31 which is the minimum desired level of cash. For projecting the cash flows for the next six months Mr. Iyer assumed the prices and costs to remain constant.
After collecting the information about cash flows Iyer created a file in LOTUS 123 by classifying each item of cash flows systematically into cash receipts and payments. While entering the amounts of cash flows he was not sure how to input these figures. His immediate concern was that as and when any change in sales or collection experience is made the cash flow forecasts should automatically get updated. Before entering the figures in the worksheet file he wanted to plan it more systematlcal1y. He saved this fie which contained only the format of cash receipts and payments as KMC.WKI. He referred to the note on principles of spread¬sheet design to format his cash flows m a systematic way. He wants your help in completing this worksheet.
You are required to design a statement showing cash inflows and outflows in proper format for the period from October 2006 to June 2007.
No comments:
Post a Comment