Unit – 1 Introduction

1. What is financial management? Explain the major functions of finance manager.

2. Which goal would you like to recommend to a firm stock price maximization or profit
maximization? Discuss.
Unit – 2 Time value of money

1. Explain what is meant by the following statement. "A rupee in hand today is worth more than a
rupee to be received next year."
2. Suppose you had just celebrated your 19th birthday. A rich uncle set up a trust fund for you that
will pay Rs. 1,00,000 when you turn 25 years. If the relevant discount rate is 11 percent, how
much is this fund worth today?
Ans: Rs. 53,464.08
3. To the closest year, how long will it take Rs 200 to double if it is deposited and earns the
following rates? a) at 7 percent b) 10 Percent c) 18 percent and d) 100 percent.
Ans: a. 10.24 year, b. 7.27 year, c. 4.19 year, d. 1 year
Ans: FV5 = Rs 16,105.10

4. Find the amount to which Rs. 500 will grow under each of the following conditions.
a) 12 percent compounded annually for 5 year.
b) 12 percent compounded semi-annually for 5 year.
c) 12 percent compounded quarterly for 5 year.
d) 12 percent compounded monthly for 5 year.
Ans: a. 881.17, b. 895.42, c. 903.06, d. 908.35

5. Find the present values of the following cash flow streams under the following conditions.
Year Cash stream A Cash stream B
1 Rs 100 Rs 300
2 400 400
3 400 400
4 400 400
5 300 100
a) The appropriate interest rate is 8 percent.
b) What is the value of each cash flow stream at a 0 percent interest rate?
Ans: a. 1251.12, 1300.27, b. 1600, 1600

6. Find the present value of following cash flow stream, discounted at 7 percent: year 1, Rs 100: year 2,
Rs 400: year 3 through 20, Rs 300.
Ans: Rs. 3078.64

7. Nike Company is considering the purchase of a machine. The machine is expected to provide cash
flow as follows:
End of year Cash flow End of year Cash flow
1 Rs. 1200 6 1600
2 2000 7 1600
3 2400 8 1600
4 1900 9 1600
5 1400 10 1600
If the appropriate annual discount is 14 percent, what is the percent value of the cash flow stream?
Ans: Rs 8916.59
8. Your broker offer to sell a note for Rs. 13,250 that will pay Rs. 2,345.05 per year for 10 years. If you
buy the note, what rate of interest (to the closest percent) will you be earning?
Ans: 12%
9. To complete your last year in business school and then go through law school, you will need to
withdraw the first Rs 10,000 per year for 4 years, (that is you will need to withdraw the first Rs.
10,000 one year from today). Your rich uncle offer to put you through school, and he will deposit in a
bank paying 7 percent interest a sum of money that is sufficient to provide the four payment of Rs
10,000 each. His deposit will be made today.
a) How large must the deposit be?
b) How much will be in the account immediately after you make the first withdrawal? After the
last withdrawal?
Ans: a. Rs 33.872, b. Rs 26,243.04 and Rs 0
10. You need to accumulate Rs 10,000. To do so, you plan to make deposit of Rs. 1,750 per year, with the
first payment being made a year from today, in a bank account which pays 6 percent annual interest.
Your last deposit will be more than Rs. 1,750 if more in needed to round out of Rs. 10,000. How
many years will it take you to reach your Rs. 10,000 goal, and how much the last deposit be?
Ans: 5 year and Rs 1,885.08
11. You have just joined the investment-banking firm of Dahal Investment Company. They have offered
you two different salary arrangements. You can have Rs. 30,000 per year for next two years or Rs.
20,000 at the end of second year, along with a Rs. 30,000 signing bonus today. If the interest rate is
12% compounded quarterly, which do you prefer?
Ans: PV of Plan 1st = Rs. 50337.47, PV of Plan 2nd = Rs. 45788.18; Select 1st Plan.
12 Assume it is now January 1, 2014. On January 1, 2015, you will deposit Rs. 1,000 into a saving
account that pays 8 percent.
a) If the bank compounds interest annually, how much will you have on your account on January
1, 2018?
b) What would your January 1, 2018 balance be if the bank used quarterly compounding rather
than annual compounding?
c) Suppose you deposited the Rs. 1,000 in 4 payments of Rs. 250 each on January 1 of 2015, 2016,
2017 and 2018. How much would you have in your account on January 1, 2018 based on 8
percent annual compounding?
d) Suppose you deposited 4 equal payments in your account on January 1 of 2015, 2016, 2017 and
2018. Assuming an 8 percent interest rate, how large would each of your payment be for you to
obtain the same ending balance as you calculated in part (a) ?
Ans: a. 1259.71, b. 1268.24, c. 1126.53 d. 279.56
13. Assume that it is now January 1, 2014, and you will need Rs. 1,000 on January 1, 2018. Your bank
compounds interest at an 8 percent annual rate.
a) How much you deposit on January 1, 2015 to have a balance of Rs. 1,000 on January 1, 2018?
b) If you want to make equal payments on each January 1 from 2015, through 2018 to accumulate
the Rs. 1,000. How large must each of the 4 payments be?
c) If your father offers either to make the payments calculate in part (b), ( i.e. Rs. 221.92) or to give
you a lump sum of Rs. 750 on January 1, 2015, which would you choose?
d) If you have only Rs. 750 on January 1, 2015. What interest rate, compounded annually, would
you have to earn to have the necessary Rs. 1,000 on January 1, 2018?
e) Suppose you can deposit only Rs 186.29 each January 1, from 2015 through 2018, but you still
need Rs. 1,000 on January 1, 2018. What interest rate, with annual compounding must you set
out to achieve your goal?
 f) To help you reach your Rs. 1,000 goal, your mother offers to give you Rs. 400 on January 1, 2015.
You will get a part -time job and make 6 additional payments of equal amounts 6 months
thereafter. If all this money is deposited in a bank that pays 8 percent compounded semi-
annually, how large must each of the payments be?
g) What is the effective annual rate being paid by the bank in part (f) ?
Ans: a. Rs. 793.84 b. Rs. 221.92 c. 1st offer d. 10% e. 20% f. Rs. 74.40 g. 8.16%

Unit – 3 Lease financing

1. The Kathmandu Machinery Company (KMC) produces industrial machines, which have
five years lives. The KMC is willing to sell the machines for 30,000 or lease them at a
rental rate, because of competitive factors, yields an after-tax return to KMC of 6
percent-its cost of capital. What is the company's competitive lease-rental rate?
(Assume straight-line depreciation, zero salvage value, and an effective corporate tax
rate of 40 percent).
2. A manufacturing company wishes to acquire three heavy trucks that cost Rs. 100,000 in total. A
leasing company has offered to lease the trucks to a manufacturing company for a total Rs.
25,000 per year for each of the five years with lease payment payable in advance. To evaluate
this option, manufacturing company depreciated the trucks via straight-line deprecation over
their five-year normal recovery period and 8 percent investment tax credit is in effect. The
marginal tax rate applicable is 40 percent and before tax cost of debt is 11.67%. If the trucks are
leased, the ITC will be passed on the leasing company. Should the manufacturing company
lease of purchase the trucks?
3. Nepal leasing Company wishes to acquire an asset of Rs. 200,000. It has a useful life of 6 years.
At the end of this time, its scrap value will be Rs. 8,000. The asset falls into the 5-year property
class for cost recovery (depreciation) purpose under MACRS. The Company can use either lease
or debt financing; lease payments of Rs. 35,000 at the beginning of each of the 6 years would be
required. If debt financed, the interest rate would be 14 percent paid payment would be due at
the beginning of each of the 6 years. (interest would be amortized as a mortgage type of debt
instrument). The company is in a 40 percent tax bracket. Which method of financing has the
lower present value of cash outflows? Depreciation under MACRS:
Year 1 2 3 4 5 6
Depreciation rate 0.20 0.32 0.19 0.12 0.11 0.06
4. Define lease financing. Explain different types of lease.

Unit – 3 Capital budgeting

1.You are given the following two projects

Year CFAT of A CFAT of B

0 (1000) (1000)
1 400 300
2 400 800
3 400 400
Required rate of return is 11%
 a) Calculate PBP,ARR,DPBP,NPV,PI,IRR and MIRR.
b) Which project/projects would you select if they are independent (Inclusive)
c) Which project would you select if they are dependent (Exclusive)
d) If there is conflict between IRR and NPV , which criteria do you prefer and why?

3. You are financial analyst for the LG Company. The director of capital budgeting has asked you to
analyze two proposed capital investments: Project 'X' and Project 'Y'. Each project has a cost of Rs.
10,000,000 and the cost of capital for each project is 12 percent. The expected net cash flows are as
follows:

Expected net cash flows (in thousands)

Year Project X Project Y

0 (10,000) (10,000)

1 6,500 3,500

2 3,000 3,500

3 3,000 3,500

4 1,000 3,500

a. Calculate each project's payback period, net present value, internal rate of return and modified
internal rate of return.
b. Which project(s) should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
d. How might a change in the cash of capital produce a conflict between the NPV and IRR ranking
of these two projects? Would this conflict exist if cost of capital is 5 present?
e. Why does the conflict exist?
Ans: a. PBP:2.17 years and 2,86 years ; NPV: Rs. 966.35 and Rs. 630.55,
IRR: 18.03% and 14.91% ; MIRR: 14.61% and 13.73%
3. Project X and project Y are mutually exclusive. The followings are projected cash flows of these
projects.
Year Cash flow of project 'X' Cash flow of project 'Y'

0 (Rs. 10,000) (Rs. 10,000)

1 3,000 0

2 3,000 0

3 3,000 0

4 3,000 0

5 3,000 20,000

a) Determine the internal rate of return, assuming a required rate of return of 10 percent.
 b) Which project would you select? Determine NAV of project.
c) Do NPV and IRR give conflicting decision? If so, why? Explain.
Ans: a. 15.24% and 14.87% ; b. Rs. 1372.4 and Rs. 2418
4. KTM Trading Ltd. is evaluating two mutually exclusive projects: Project 'A' and project 'B'. The
company will require Rs. 100,000 for project 'A' and Rs. 140,000 for project 'B', the net cash flow of
these projects are as follows:
Year Cash flow of 'A' Cash flow of 'B'

0 (Rs. 100,000) (Rs. 140,000)

Profit after taxes

Project 'A' Project 'B'

1 Rs. 10,000 Rs. 25,000

2 Rs. 15,000 Rs. 25,000

3 Rs. 20,000 Rs. 25,000

4 Rs. 25,000 Rs. 25,000

5 Rs. 35,000 Rs. 25,000

Both projects will be depreciated on straight line over a 5 year life and cost of capital of the company
is 12 percent.

a) Calculate the payback period of each project. If the firm has set a maximum payback perod of
three years, suggest as to which project is preferred.
b) What are the average rate of return of the projects?
c) Evaluate the projects on the basis of their NPV.
d) What are the profitability indexes of both projects?
Ans: a. 2.85 years and 2.64 years ; b. 42% and 35.71% ; c. Rs. 42, 965 and Rs. 51,054 ; d. 1.43 and 1.36
5.What is capital rationing? Explain it's types.

Unit – 4 Cost of capital

1. Assuming that a firm has tax rate of 30%, compute the after tax cost of the following assets.
(a) A bond, sold at par, with a 10.50 coupon.
(b) A preferred stock, sold at Rs. 100 with a 10% dividend and a call price of Rs. 110, if the company
plans to call the issue in 5 years (use an approximation method)
(c) A common stock selling at Rs. 16 and paying a Rs. 2 dividend, which is expected to continue
indefinitely.
(d) The same common stock if dividends are expected to grow at the rate of 5% per year and
expected dividend in year 1 is Rs. 2.
Ans: a. 7.35%, b. 11.61%, c. 12.50%, d. 17.50%
2. The Kalog Precision Tool Company was recently formed to manufacture a new product. The
company has the following capital structure in market value terms:
13% debentures of 2005 Rs. 6,000,000
 12% preferred stock 2,000,000
Common stock (320,000 shares) 8,000,000
Total Rs. 16,000,000
The common stock sells for Rs.25 a share, and the company has a marginal tax rate of 40 percent. A
study of publicly held compares in this line of business suggests that the required rate of return on
equity is about 17 percent for a company of this sort.
a) Compute the firm's present weighted average cost of capital.
b) Is the figure computed, an appropriate acceptance criterion for evaluating investment
proposals?
Ans: 12.925%
3. The Tanner Company was recently formed to manufacture a new product. It has the following
capital structure in market value terms:
Long-term debt Rs. 30,00,000
Preferred stock 10,00,000
Common stock 1,60,00,000
Rs. 2,00,00,000
The Company's cost of common stock is 18 percent and cost of preferred stock is 13 percent. Tanner's
before tax cost of debt is 12 percent, and its tax rate is 40 percent. Using the above capital structure,
calculate Tanner's after tax weighted average cost of capital. Explain.
Ans: 16.13%; Explanation: Weighted average cost of capital represents the percentage cost beard by the company against the
utilizations of different sources of funds. The company can accept the investment project having rate of
return more than weighted average cost of capital.
4. Compute the component cost and weighted average cost of capital from the following information
extracted from Brij Enterprises.
(a) Interest rate on debenture is 16 percent and marginal income tax rate is 30 percent.
(b) Rs. 100 preferred stock, dividend of 18% and flotation cost is 2 percent.
(c) Common stock of Rs. 100 is netted at Rs. 98, expected dividend and growth rate are 12 percent
and 7 percent respectively.
(d) The total capital of Rs. 10 million consists of Rs. 4 million common stock, Rs. 4 million
debentures and Rs. 2 million preferred stock.
Ans: a. 11.2%, b. 18.37%, c. 19.24%, d. 15.85%
5. The Queen Company is interest in measuring its cost of specific types of capital as well as its overall
capital cost. Current investigations indicate that the following costs would be associated with the
sale of debt, preferred stock and common stock. The company has a 40 percent average tax rate.
Debt: The company can sells a Rs. 1,000 face value bond with a 6% coupon for Rs. 970.
Underwriting fee of 2% of the face value would be incurred in the process.
Preferred stock: 10% preferred stock having face value of Rs. 100 with 10 years maturity period can
be sold for Rs. 95. A fee of Rs. 2 per share must be paid to the underwriters.
Common stock: The Company's common stock is currently selling for Rs. 90 per share. The
company expects to pay a dividend of Rs. 4 per share at the end of the coming
year. Its dividend payment, which represent a fixed payout of earnings over the
past five years are given below:
Year Dividend
2014 Rs. 3.74
2013 Rs. 3.495
2012 3.266
2011 3.053
2010 2.853
 It is expected that in order to sell the new common stock it must be under priced Rs. 5 and therefore
will reach the market at Rs. 85 per share. The company must also pay a Rs. 3 per share underwriting
fee.
a. Calculate the specific cost of each source of financing including retained earnings.
b. Given the following book and market value data, calculate:
i. The weighted average cost of capital using book value weights, and
ii.The weighted average cost of capital using market value weights.
Book and market values for each type of capital are as follows:
Types of capital Book value Market value
Long-term debt Rs. 60,000 Rs. 65,000
Preferred stock 15,000 18,000
Common stock 20,000 47,000
Retained earnings 5,000
Total Rs. 1,00,000 Rs. 1,30,000
c. Compare the weighted average cost of capital calculated above. Explain how they are different.
Ans: a. 3.79%, 11.22%, 11.44% and 11.88% ; b. i. 7.4%, ii. 7.55%
Unit – 5 Risk and return

1. Define risk and return. Explain portfolio investment.

2. What is CAPM. Explain security market line.
3. The market and Stock J have the following probability distributions:
Probability rM rJ

0.30 15% 20%

0.40 9 5

0.30 18 12

a. Calculate the expected rates of return for the market and Stock J.
b. Calculate the standard deviations for the market and Stock J.
c. Calculate the coefficient of variations for the market and Stock J.
d. Interpret all above results.
4: NIC Bank's stock and Nabil's stock have the following probability distributions of
expected future returns:
Probability 0.1 0.2 0.4 0.2 0.1

Return (NIC) -12.5% 5% 10% 25% 35%

Return (Nabil) -20% 0% 15% 30% 36%

a. Calculate the expected rate of return for each bank's stock.

b. Calculate the standard deviation of expected returns for each bank's stock.
c. If you invest 40% in NIC and 60% in Nabil . Calculate risk and return of your
portfolio.
d. Calculate coefficients of variation. Which stock would you prefer?
e. What purpose does coefficient of variation serve?
 5. There are two assets and three states of economy with following probabilities and rate
of return on stock X and Y.
State of economy Probabilities Rate of return on stock
X Y

Recession 0.2 -10% -20%

Normal 0.5 20 30

Boom 0.3 30 40

Required:
i. Expected rate of return of each stock
ii. Standard deviation of each stock
iii. You have Rs 10000, you invest 3000 in X and 7000 in Y. Calculate expected return
and risk of your portfolio.
iv. Risk per return of each stock.
v. Which stock is less risky?
vi. Interpret the result.

Unit – 6 Retained earning management

1. A firm has had the following net income over the 2005 - 2007 periods and the firm currently has
400,000 shares outstanding.
Year 2005 2006 2007
Net income Rs. 1,000,000 Rs. 2,000,000 Rs. 5,000,000
a. Calculate the earnings per share in each year.
b. If the firm's dividend policy is based on a constant payout ratio of 40 percent for all years with
positive earnings, determine the total dividend and dividend per share paid in each year.
c. If the firm has a regular dividend policy of paying Rs 2 per share, regardless of the per share
earnings, determine the annual dividend paid in each year.
d. If firm's policy is to pay out Rs. 2.5 per share each period, except in those periods when earnings
are above Rs. 2.5; when they pay out an extra dividend equal to 50 percent of the earnings
above Rs. 2.5, determine the amount of regular and extra dividends paid each year.
Ans: a. Rs. 2.5, Rs. 5 and Rs. 12.5 b. Rs. 4,00,000 and Re. 1, Rs. 8,00,000, Rs. 2, Rs. 20,00,000 and Rs. 5
c. Rs. 2 each year d. Total DPS: Rs. 2.50, Rs. 3.75 and Rs. 7.50

2. The Nepal Oil Corporation (NOC) expects next year's net income to be Rs. 15 million. The firm's
debt ratio is currently 40 percent. NOC has Rs. 12 million of profitable investment
opportunities, and it wishes to maintain its existing debt ratio. According to the residual
dividend policy, how large should NOC's dividend payout ratio be next year?

3. The Himal Company's optimal capital structure calls for 50 percent debt and 50 percent common
equity. The interest rate on its debt is a constant 10 percent; its cost of common equity from retained
earnings is 14 percent; the cost of equity from new stock is 16 percent; and its marginal tax rate is 40
percent. Himal has the following investment opportunities:
Project A: Cost = Rs. 5 million; IRR = 20%
Project B: Cost = Rs. 5 million; IRR = 12%
Project C: Cost = Rs. 5 million; IRR = 9%
 Himal expects to have net income of Rs. 7,287,500. If Himal bases its dividends on the residual
policy, what will its payout ratio be?
Ans: 31.39%

4. Computer Trading Company has 2.4 million shares of common stock outstanding, and the
present market price per share is Rs. 36. Its equity capitalization is as follows:
Common stock (Rs. 2 par; 2,400,000 shares) Rs. 4,800,000
Additional paid-in capital 5,900,000
Retained earnings 87,300,000
Shareholders' equity Rs.98,000,000
a. If the company were to declare a 12 percent stock dividend, what would happen to these
accounts? A 25 percent stock dividend? A 5 percent stock dividend?
b. If, instead, the company declared a 3-for-2 stock split, what would happen to the accounts? A 2-
for-1 stock split? A 3-for –1split?
c. What would happen if there were a reverse stock split of 1 for 4? 1for 6?
Ans: a. at 12%, Amount add in common stock Rs. 576,000, Amount add in paid in capital = Rs. 97,92,000
Retained earnings decreased by Rs. 1,03,68,000,
at 25 % Amount add in common stock Rs. 12,00,000, Amount add in paid in capital = Rs. 2,04,00,000
Retained earnings decreased by Rs. 2,16,00,000
at 5% Amount add in common stock Rs. 2,40,000, Amount add in paid in capital = Rs. 40,80,000
Retained earnings decreased by Rs. 43,20,000

5. Shares of Januka Publication are selling for Rs. 40 per share. There are 1 million shares outstanding.
What will be the share price & number of shares in each of the following situation?
a. The stock splits five for four.
b. The company pays a 25 percent stock dividend.
c. The company repurchases 100,000 shares.
d. Cash dividend per share of Rs. 2.
Ans: a. 12,50,000 share and Rs. 42 b. 12,50,000 share and Rs. 32 c. 9,00,000 share and Rs. 44.44
d. No change and Rs. 38
6. Explain dividend and procedure of distributing dividend.

Unit – 7 Capital Structure

1. Aquarium suppliers Inc., produces 10-gallon aquariums. The firm's variable costs equal 50 percent
of rupee sales, while fixed costs total Rs. 180,000. The firm plans to sell the aquarium for Rs. 12 each.
a. What is Aquarium suppliers' breakeven quantity of sales?
b. What is Aquarium suppliers' breakeven sales volume?
c. What price must Aquarium Suppliers charge to breakeven at sales of 40,000 units?
Ans: a. 30,000 units, b. Rs. 3,60,000 , c. Rs. 9
2. The Meri Gold Press, Inc., publishes the Annual Financial Magazine. Last year, the book sold for Rs.
9 a copy, with variable costs per book of Rs. 7; the company has fixed costs of Rs. 40,000. How many
books will it have to sell this year to achieve its breakeven point?
a. What if fixed costs should rise to Rs. 44,000 (and all other figures remain unchanged)?
 b. What if the selling price of the book falls to Rs. 8.50 a copy (again assume all other figures
remain unchanged)?
c. What if variable costs per book falls to Rs. 6.50 (and all else remains the same)?
d. What conclusions about the firm’s breakeven point can be drawn from your answers?
Ans (d) If fixed cost and variable cost rise, the financial manager should achieve BEP by selling
more quantity but fi selling price rises than financial manager can achieve BEP by selling lowest
unit.
Ans : 20,000 units; a. 22,000 units ; b. 26,667 units
3. The Hundi Horse Hotel (HHH) has a capacity to stable 50 horses. The fee for stabling a horse is
Rs.100 per month. Maintenance, depreciation, and other fixed operating costs total Rs.1,200 per
month. Variable operating costs per horse are Rs.12 per month for hay and bedding and Rs.8 per
month for grain.
a. Determine the monthly operating break-even point (in horses stabled).
b. Compute the monthly operating profit if an average of 40 horses are stabled.

Ans: a. 15 horses , b. Rs. 2,000

4. Januka Publications Private Limited is doing an analysis of proposed new finance text. Using the
following data, answer parts a through e.
Fixed costs (per edition):
Development (reviews, class testing, and so on) Rs 1,80,000
Copyediting 50,000
Selling and commission 70,000
Typesetting 4,00,000
Total Rs 7,00,000
Variable costs ( per copy):
Printing and binding Rs 42
Administrative costs 16
Salespeople’s commission (2% of selling price) 6
Author’s royalties (12% of selling price) 36
Bookstore discounts (20% of selling price) 60
Total Rs 160
Projected selling price Rs 300
The company’s tax rate is 40 percent.
a. Determine the company’s breakeven volume for this book.
i. In units; ii. In rupee sales
b. Develop a breakeven chart for the text.
c. Determine the number of copies Januka must sell in order to earn an operating profit of Rs
2,10,000 on this text.
d. Determine the total operating profits at the following sales levels:
i. 3,000 units; ii. 5,000 units; iii. 10,000 units
e. Suppose Januka feels that Rs 300 is too high a price to charge for the new finance text. It has
examined the competitive market and determined that Rs 240 would be a better selling price.
What would the breakeven volume be at this new selling price?
Ans: a. i) 5,000 copies. ii) Rs. 15,00,000 , c. 6,500 copies ,
d. i) -Rs. 2,80,000 , ii) 0 , iii) Rs. 7,00,000 ; e. 6,972 Copies
5. The Nano Corporation produces tea kettles, which it sells for Rs. 15. Fixed costs are Rs. 7,00,000 for
up to 4,00,000 units of output. Variable costs are Rs. 10 per kettle.
a. What is the firm's gain or loss at sales of 1,25,000 units? of 1,75,000 units?
b. What is the breakeven point? Illustrate by means of a chart.
 c. What is the DOL at the breakeven point? Explain what this value means conceptually?
d. What is Nano's degree of operating leverage at sales of 1,25,000 units? Of 1,50,000 units? Of
1,75,000 units?
Ans: a. - Rs. 75,000 and Rs. 1,75,000; b. 1,40,000 units and Rs. 21,00,000 ; c.  ; d. 15 times and 5 times
6. Define capital structure. How does it differ from financial structure? Explain.

Unit – 8 Economic value added

1. Last Year Rattner Robotics has Rs. 5 m in operating income (EBIT). The company has net depreciation
expenses of Rs. 1 million and interest expenses of Rs. 1 million; Its corporate tax rate was 40 percent.
The company has Rs. 14 million in current assets and Rs. 4 million in non-interest-bearing current
liabilities; It has Rs. 15 million in net plant and equipment. It estimates that the after tax cost of capital
is 10 percent. Assume that Rattner's only non-cash item was depreciation and operating capital is Rs
25M.
a. What was company's net income for the year?
b. What was company's net operating profit after taxes?
c. What was company's economic value added (EVA) ?
2. Explain economic value added.

Unit – 9 Working capital management

1. Rudra Electronics Company Ltd. is concerned about managing cash efficiently. On the average, inventories have
an average age of 75 days, and accounts receivable are collected in 40 days. Account payable is paid
approximately after 35 days they arise. The firm spends Rs. 50 million in operating cycle each year, at a
constant rate. Assume a 360-day a year.
a. Calculate the firm's operating cycle.
b. Calculate the firm's cash conversion cycle.
c. Calculate the amount of negotiated financing required to support the firm's cash conversion cycle.
d. Discuss how management might be able to reduce the cash conversion cycle.
Ans: a. 115 days ; b. 80 days ; c. Rs. Rs. 11.11m
2. Best Fertilizer Centre (BFC) sells 3,00,000 bags of Best Fertilizer annually, although total demand may be
equal to 3,50,000 bags. The optimal safety stock (which is in hand initially) is 1,500 bags. Each bag costs
BFC Rs. 5, inventory- carrying cost is 20 percent and the cost of placing order with suppliers is Rs. 30.
a. What is the EOQ of fertilizer?
b. What is the maximum inventory of fertilizer?
c. What will BFC's average inventory be?
d. How often must the BFC order?
e. If lead time is approximately 20 days, at what inventory level an order be made? Assume 360 days in a
year
Ans: a. 4,243 bags ; b. 5,743 bags ; c. 3,622 bags ; d. 5.09 days ; e. 5,438 bags

3. Discuss the concept of working capital?