Module 3

A. Problems on Cash Budget-3 problems-2 in class and one as homework

B. Problems on projections-3 problems-2 in class (Infotex and Bhavishya) and 1 for homework
(Megastar)
C. Problem on Proforma balance sheet and cash flow statement-2 problems in class-Tata Steel
and Sea horse
D. Problems on Coverage ratios- 4 problems

A. Problems on Cash Budget

Problem 1 -Class
From the following information, prepare c ash budget for the month of January to April:
Expected Sales Expected Purchase
Month Rs Month Rs
Jan. 60,000 Jan. 48,000
Feb. 40,000 Feb. 80,000
Mar. 45,000 Mar. 81,000
Apr. 40,000 Apr. 90,000

Wages to be paid to workers Rs. 5,000 each month. Balance at the bank on 1st Jan. Rs 8,000. It has
been decided by the Management that:
(i) In case of deficit fund within the limit of Rs 10,000 arrangements can be made with bank.
(ii) In case of deficit fund exceeding Rs. 10,000 but within the limits of Rs 42,000 issue of
debentures is to be preferred.
(iii) In case of deficit fund exceeding Rs 42,000, issue of shares is preferred (considering the
fact that it is within the limit of authorized capital).

Problem 2 -Homework
Prepare Cash Budget of a Company for April, May and June 2019 in a columnar form using the
following information:

Month Sales Purchase Wage Exp.

Jan. (Actual) 80,000 45,000 20,000 5,000
Feb. (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 6,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000

You are further informed that:

(a) 10% of purchase and 20% of Sale are for cash
(b) The average collection period of the Co. is 1/2 month and credit purchase is paid off regularly
after one month
(c) Wages are paid half monthly and the rent of Rs. 500 excluded in expense is paid monthly
(d) Cash and Bank Balance on April 1, was Rs.15,000 and the company wants to keep it on end of
every month below this figure, the excess cash being put in fixed deposits.

Problem 3 -Class
From the following information prepare a monthly cash budget for the three months ending 31st
Dec.2019.

Month Sales Materials Wages Production Admin. Selling, etc

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
June 3,000 1,800 650 225 160
July 3,250 2,000 750 225 160
Aug. 3,500 2,400 750 250 175
Sep. 3,750 2,250 750 300 175
Oct. 4,000 2,300 800 300 200
Nov. 4,250 2,500 900 350 200
Dec. 4,500 2,600 1,000 350 225

(i) Credit terms are:

(a) Sales — 3 months to debtors. 10% of sales are on cash. On an average, 50% of credit sales are
paid on the due dates, while the other 50% are paid in the month following
(b) Creditors for material — 2 months.

(ii) Lag in payment:

Wages. 1/4 month, overheads — 1/2 month.
(iii) Cash and Bank Balance on 1st Oct. expected Rs.1,500.
(iv) Other information
(a) Plant and Machinery to be installed in Aug. at a cost of Rs.24,000. It will be paid for by monthly
instalments of Rs.500 each from 1st Oct.;
(b) Preference share dividend @ 5% on Rs. 50,000 are to be paid on 1st Dec.
(c) Calls on 250 equity shares @ Rs. 2 per share expected on 1st November;
(d) Dividends from investments amounting to Rs. 250 are expected on 31st Dec.;
(e) Income tax (advance) to be paid in December Rs. 500

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B. Problems on Long term projections

Problem 1-Class

The income statement for year 0 (the year which has just ended) and the balance sheet at the end of
year 0 for Infotex Limited are as follows.
Income statement Balance Sheet
Sales 50,000 Equity 30,000 Fixed assets 25,000
Gross margin (20%) 10,000
Net current
Selling & general admin- assets 5,000
Stration (8%) 4,000
Profit before tax 6,000
Tax 1800 30000 30000
Infotex Limited is debating whether it should maintain the status quo or take up a new project. If it
maintains the status quo:
 The sales will remain at 50,000
 The gross margin will remain at 20% and the selling, general, and administrative expenses
will be 8% of sales
 The asset turnover ratios will remain constant
  The discount rate will be 14 percent
 The income tax rate will be 30 percent

If Infotex Limited accepts the new project, its sales will grow at the rate of 30 percent per year for
three years. Thereafter, sales will remain constant. The margins, the turnover ratios, the capital
structure, the income tax rate, and the discount rate, however, will remain unchanged.

Depreciation charges will be equal to 10 percent of the net fixed assets at the beginning of the
year. After three years, capital expenditure will be equal to Depreciation.
What value will the new project create?

Problem 2-Homework
The income statement for year 0 (the year which has just ended) and the balance sheet at the end of
year 0 for Megastar Limited are as follows.

Income statement Balance Sheet

Sales 200,000Equity 250,000Fixed assets 150,000

Gross margin (25%) 50,000 Net current
Selling & general admin- assets 100,000
Stration (10%) 20,000
Profit before tax 43,000
Tax 14,190

Profit after tax 28,810 250,000 250,000

Megastar Limited is debating whether it should maintain the status quo or adopt a new strategy. If it
maintains the status quo:
 The sales will remain at 200,000
 The gross margin will remain at 25% and the selling, general, and administrative expenses
will be 10 % of sales
 Depreciation charges will be equal to new investments
 The asset turnover ratios will remain constant
 The discount rate will be 15 percent
 The income tax rate will be 33 percent
If Megastar Limited adopts a new strategy, its sales will grow at the rate of 30 percent per year for
three years. Thereafter, sales will remain constant. The margins, the turnover ratios, the capital
structure, the income tax rate, and the discount rate, however, will remain unchanged.
Depreciation charges will be equal to 20 percent of the net fixed assets at the beginning of the year.
After three years, capital expenditure will be equal to depreciation.
What value will the new strategy create?

Problem 3-Class
The balance sheet of Bhavishya Enterprises at the end of year n (the year which is just over) is as
follows:

Liabilities Amount Assets Amount

Share capital 100 Fixed Assets 180
Reserves and surplus 20 Investments -Nil-
Secured loans 80 Current assets:
Unsecured loans 50 -Cash 20
Current liabilities 90 -Receivables 80
Provisions 20 Inventory 80
360 360

The projected income statement and the distribution of earnings for the year n + 1 is given below:
Sales 400
Cost of goods sold 300
Depreciation 20
Profit before interest and taxes 80
Interest 20
Profit before tax 60
Tax 30
Profit after tax 30
Dividends 10
Retained earnings 20

During the year n + 1,

 the firm plans to raise a secured term loan of 20,
 repay a previous term loan to the extent of 5,
 increase unsecured loans by 10.
 Current liabilities and provisions are expected to remain unchanged.
 Further, the firm plans to acquire fixed assets worth 30 and increase its inventories by 10.
Receivables are expected to increase by 15.
 Other assets would remain unchanged, excepting, of course, cash.
 The firm plans to pay 10 by way of equity dividend.
Given the above information, Prepare the projected cash flow statement of Bhavishya Enterprises.

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C. Problems on Proforma balance sheet and cash flow statement

Problem 1-Class
Following is the balance sheet of Tata Steel works ltd, as on 31st march 2018
Liabilities Rs Assets Rs
Share capital 26,00,000 Fixed assets less depreciation 12,00,000
Profit and loss a/c 1,00,000 Stock 10,00,000
Sundry creditors 7,00,000 Sundry debtors 6,00,000
Cash in hand and at bank 6,00,000
34,00,000 34,00,000
The decision taken in the board of directors meeting has made the management to make the following
estimates for the year ending 31st March 2019:
a. Purchases up to February 2019-Rs.28,00,000 and during march 2019 Rs. 7,00,000
b. Sales up to February 2019-Rs. 42, 00,000 and during March 2019 Rs.6, 00,000.
c. Management decides to invest Rs. 5, 00,000 in purchases of fixed assets which are
depreciated @10%.
d. The time lag for payment to creditors and receipts from debtors is one month.
e. The business earns a gross profit of 33 1/3% on turnover.
f. Sundry expenses against gross profit will amount to 10% of the turnover excluding
depreciation of fixed assets
Prepare a proforma balance sheet of the company for the year ending 31st march 2019.

Problem 2-class
The Balance Sheet of Seahorse ltd as on 31st march 2018 is as follows:
Liabillities Rs(in lakhs) Assets Rs(in lakhs)
Share capital 50 Fixed assets 120
Reserves & surplus 40 Investments 10
Secured loans 50 Current assets
Unsecured loans 40 Cash 20
Current liabilities 70 Receivables 40
provisions 10 Inventories 70
260 260

The projected Income statement and distribution of earnings for the year 2018-19 are given below:
(Rs. Lakhs)
Particulars Rs. Particulars Rs.
Cost of goods sold 210 Sales 300
Depreciation 20
Interest 25
Tax 20
Dividend 10
Retained earnings 15
300 300

During the year 2018-19, the firm plans to raise secured loans of Rs.15 lakhs, repay a previous
secured term loan to the extent of Rs. 5 lakhs, acquire fixed assets worth Rs.15 and to raise its
inventories by Rs.5 lakhs. During the year, current liabilities and receivables are expected to increase
by 5% each. Prepare the projected cash flow statement 2018-19 and the projected balance sheet as on
31st march 2019.

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D. Problems on Coverage ratios-

Problem 1-Class

The following information is available about Excalibur Limited.

Depreciation Rs.5 million

EBIT Rs.35 million
Interest on debt Rs.7 million
Tax rate 35 percent
Loan repayment instalment Rs.4.0 million

Required: (a) Calculate the interest coverage ratio.

(b) Calculate the Debt service coverage ratio.

Problem 2-Homework
The following information is available about Notting Hill Corporation.
Depreciation Rs.30 million
EBIT Rs.125 million
Interest on debt Rs.52 million
Tax rate 33 percent
Loan repayment instalment Rs.20.0 million
 Required: (a) Calculate the interest coverage ratio.
(b) Calculate the Debt service coverage ratio.

Problem 3-class

Pankaj limited of Mumbai has the following data for projections for the next 5 years. It has an existing
term loan of Rs.360 lakhs repayable over next five years and has got sanctions for new term loan for
Rs.500 lakhs which is also repayable in 5 years. As a finance manager you are required to calculate
a. Debt service coverage ratio and
b. Interest service coverage ratio for each year and the average for 5 years
(Rs.lakhs)

1 2 3 4 5
Profit after tax 450 585 640 670 695
depreciation 150 160 150 140 130
taxation 120 207 255 280 289
Interest on term 160 126 88 60 19
loans
Repayment of 170 180 180 180 145
term loans

Problem 4- Home work

From the following Projected figures calculate the yearly debt service coverage ratio and
the average DSCR of a firm
(Rs.Lakhs)
Year Net Profit after Depreciation Interest on Repayment of
Depreciation term loan for term loan at the
year end of year
1 12 13 10 10
2 15 14 8 10
3 17 14 9 10
4 21 13 7 10
5 20 12 5 15
6 24 11 4 15
7 24 10 3 15