06 Challenger Series Solutions

FM Challenger Series Solutions
RATIO ANALYSIS
Solution 1:
(i) Calculation of Shareholders’ Fund:
𝑅𝑒𝑠𝑒𝑟𝑣𝑒 & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟'𝑠 𝐹𝑢𝑛𝑑𝑠
= 0.5

𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠
= 0.5

10,00,000+ 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠
= 0.5
Reserve & Surplus = 5,00,000 + 0.5 Reserve & Surplus
0.5 Reserve & Surplus = 5,00,000
Reserve & Surplus = 10,00,000
Shareholders’ funds = 10,00,000 +10,00,000
Shareholders’ funds = ₹20,00,000
(ii) Calculation of Value of Stock:

𝑆𝑎𝑙𝑒𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟'𝑠 𝐹𝑢𝑛𝑑𝑠
= 1.5
Sales = 1.5 × 20,00,000
Sales = 30,00,000
Gross Profit = 30,00,000 × 20% = 6,00,000
Cost of Goods Sold = 30,00,000 – 6,00,000
= ₹24,00,000
Stock velocity = 2 months
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
× 12 = 2
24,00,000
× 12 = 2
Average stock = ₹4,00,000
(iii) Calculation of Debtors:

Debtors Turnover Ratio = 6
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑏𝑡𝑜𝑟𝑠
=6
30,00,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑏𝑡𝑜𝑟𝑠
=6
Average Debtors = ₹5,00,000
(iv) Calculation of Current Liabilities:

Net Working Capital Turnover ratio = 2.5
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 2.5
30,00,000
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 2.5
Current Assets – Current Liabilities = 12,00,000.................. (1)
Current Ratio = 2.5
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 2.5
Current Assets = 2.5 Current Liabilities.............................. (2)
From (1) & (2),
2.5 Current Liabilities – Current Liabilities = 12,00,000
1.5 Current Liabilities = 12,00,000
Current Liabilities = ₹8,00,000
(v) Calculation of Cash Balance:

Current Assets = 2.5 Current Liabilities
Current Assets = 2.5 (8,00,000) = 20,00,000
(-) Debtors (5,00,000)
(-) Stock (4,00,000)
CA Nitin Guru | www.edu91.org 1

Cash Balance ₹11,00,000

Solution 2:
(a) Computation of Net Profit Margin
Debt = (10,00,000 x 50%) = ₹ 5,00,000
10
Interest cost = 5,00,000 x ( 100 )= ₹ 50,000
Direct cost = 50,000 x 10 = ₹ 5,00,000
Sales = 5,00,000 x 150% = ₹ 7,50,000
(₹)
Gross profit = 7,50,000 – 5,00,000 = 2,50,000
Less: Operating expenses = 1,00,000
EBIT = 1,50,000
Less: Interest = 50,000
EBT = 1,00,000
Less: Tax @ 30% = 30,000
PAT = 70,000
70,000
Net profit margin = ( 7,50,000 ) × 100= 9.33%
(ii) Net Operating Profit margin

𝐸𝐵𝐼𝑇
Net operating profit margin = ( 𝑆𝑎𝑙𝑒𝑠 ) × 100
1,50,000
=( 7,50,000 ) × 100 = 20%
(iii) Return on Assets
(𝑃𝐴𝑇+ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
Return on Assets =[ (𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠)
× 100]
(1,20,000)
=[ (10,00,000)
× 100] = 12%
(OR)
𝐸𝐵𝐼𝑇
Return on Assets = 𝐴𝑠𝑠𝑒𝑡𝑠
×100
1,50,000
= 10,00,000
×100 = 15%
(OR)
70,000
= 10,00,000 × 100 = 7%
(OR)
1,50,000(1−03)
=[ 10,00,000
× 100] = 10.5%
(iv) Return on owner’s equity

𝑃𝐴𝑇
Return = [ 𝑂𝑤𝑛𝑒𝑟'𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 ] × 100
70,000
= [ 5,00,000 ] × 100 =14%
Solution 3:
(i) Determination of Sales and Cost of goods sold:
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Gross Profit Ratio = 𝑆𝑎𝑙𝑒𝑠
× 100
25 ₹12,00,000
Or, 100
= 𝑆𝑎𝑙𝑒𝑠
12,00,00,000
Or, Sales = 25
= ₹48,00,000
Cost of Goods Sold = Sales – Gross Profit

= ₹ 48,00,000 - ₹ 12,00,000 = ₹ 36,00,000
(ii) Determination of Sundry Debtors:

Debtors’ velocity is 3 months or Debtors’ collection period is 3 months,

12 𝑚𝑜𝑛𝑡ℎ𝑠
So, Debtors’ turnover ratio = 3 𝑚𝑜𝑛𝑡ℎ𝑠
=4
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
Debtors’ turnover ratio = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
₹48,00,000
= 𝐵𝑖𝑙𝑙𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + 𝑆𝑢𝑛𝑑𝑟𝑦 𝐷𝑒𝑏𝑡𝑜𝑟𝑠
=4
Or, Sundry Debtors + Bills receivable = ₹ 12,00,000
Sundry Debtors = ₹ 12,00,000 – ₹ 75,000 = ₹ 11,25,000
(ii) Determination of Closing Stock

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 ₹36,00,000
Stock Turnover Ratio = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘
= 1.5
So, Average Stock = ₹ 24,00,000
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘
Now Average Stock = 2
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 + (𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 + ₹30,000)
Or 2
= ₹ 24,00,000
Or 2 Opening Stock + ₹ 30,000= ₹48,00,000
Or 2 Opening Stock = ₹47,70,000
Or, Opening Stock = ₹ 23,85,000
So, Closing Stock = ₹ 23,85,000 + ₹ 30,000 = ₹ 24,15,000
(iii) Determination of Sundry Creditors:

Creditors’ velocity of 2 months or credit payment period is 2 months.
12 𝑚𝑜𝑛𝑡ℎ𝑠
So, Creditors’ turnover ratio = 2 𝑚𝑜𝑛𝑡ℎ𝑠
=6
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠*
Creditors turnover ratio = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
₹36,30,000
= 𝑆𝑢𝑛𝑑𝑟𝑦 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 + 𝐵𝑖𝑙𝑙𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
=6
So, Sundry Creditors + Bills Payable = ₹ 6,05,000

Or, Sundry Creditors + ₹ 30,000 = ₹ 6,05,000
Or, Sundry Creditors = ₹ 5,75,000
(iv) Determination of Fixed Assets

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Fixed Assets Turnover Ratio = 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
=4
₹36,00,000
Or, 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
=4
Or, Fixed Asset = ₹ 9,00,000
Workings:
*Calculation of Credit purchases:
Cost of goods sold = Opening stock + Purchases – Closing stock

₹ 36,00,000 = ₹ 23,85,000 + Purchases – ₹ 24,15,000

Purchases (credit) = ₹ 36,30,000
Calculation of credit purchase also can be done as below:
Or Credit Purchases =Cost of goods sold +Difference in Opening Stock Or Credit
Purchases =36,00,000 +30,000=₹ 36,30,000
Solution 4:
1. Working Notes:
(i) Calculation of Sales
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 1
=3
1,30,00,000 1
= 3
⇒ Sales = ₹ 3,90,00,000
(ii) Calculation of Current Assets

𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 13
= 11
1,30,00,000 13
= 11
⇒ Current Assets = ₹ 1,10,00,000
(iii) Calculation of Raw Material Consumption and Direct Wages
₹
Sales 3,90,00,000
Less: Gross Profit (15 % of Sales) 58,50,000
Cost of Goods sold 3,31,50,000
Raw Material Consumption (20% of Cost of Goods Sold) ₹ 66,30,000 Direct

Wages (10% of Cost of Goods Sold) ₹ 33,15,000
(iv) Calculation of Stock of Raw Materials (= 3 months usage)
3
= 66,30,000 × 12
= ₹ 16,57,500
(v) Calculation of Stock of Finished Goods (= 6% of Cost of Goods Sold)

6
= 3,31,50,000 × 100
= ₹ 19,89,000
(i) Calculation of Current Liabilities

=2
1,10,00,000
=2 ⇒ Current Liabilities = ₹ 55,00,000
(ii) Calculation of Debtors

𝐷𝑒𝑏𝑡𝑜𝑟𝑠
Average collection period = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 × 12 months
𝐷𝑒𝑏𝑡𝑜𝑟𝑠
3,90,00,000
× 12 = 2 ⇒Debtors = ₹ 65,00,000
(iii) Calculation of Long-term Loan

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐿𝑜𝑎𝑛 2
=1
𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐿𝑜𝑎𝑛 2

55,00,000
= 1 ⇒Long term loan = ₹ 1,10,00,000
(iv) Calculation of Cash Balance
Current assets 1,10,00,000

Less: Debtors 65,00,000
Raw materials stock 16,57,500
Finished goods stock 19,89,000 1,01,46,500
Cash balance 8,53,500
(v) Calculation of Net worth
Fixed Assets 1,30,00,000
Current Assets 1,10,00,000

Total Assets 2,40,00,000
Less: Long term Loan 1,10,00,000
Current Liabilities 55,00,000 1,65,00,000
Net worth 75,00,000
Net worth = Share capital + Reserves = ₹ 75,00,000
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 1 1
𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠 𝑎𝑛𝑑 𝑆𝑢𝑟𝑝𝑙𝑢𝑠
= 4
⇒ 𝑆ℎ𝑎𝑟𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =₹75,00,000 × 5 =₹ 15,00,000
4
Reserves and Surplus = ₹75,00,000 × 5
=₹ 60,00,000
Profit and Loss Statement of ASD Ltd. for the year ended
31st March, 2022
Particulars (₹) Particulars (₹)
To Direct Materials consumed 66,30,000 By Sales
To Direct Wages 33,15,000
3,90,00,000
To Works (Overhead) (Bal. fig.) 2,32,05,000
To Gross Profit c/d (15% of Sales) 58,50,000
3,90,00,000 3,90,00,000
Selling and Distribution Expenses
To 27,30,000 By Gross Profit b/d
(Bal. fig.) 58,50,000
To Net Profit (8% of Sales) 31,20,000
58,50,000 58,50,000
Balance Sheet of ASD Ltd. as at 31st March, 2022

Liabilities (₹) Assets (₹)
Share Capital 15,00,000 Fixed Assets 1,30,00,000
Reserves and Surplus 60,00,000 Current Assets:
Long term loans 1,10,00,000 Stock of Raw Material 16,57,500
Current liabilities 55,00,000 Stock of Finished Goods 19,89,000
Debtors 65,00,000

Cash 8,53,500
2,40,00,000 2,40,00,000
Solution 5:
Liabilities (₹) Assets (₹)
Equity Share Capital 12,50,000Fixed Assets (cost) 20,58,000
Reserves & Surplus 2,50,000Less: Acc. Depreciation (3,43,000)
Long Term Loans 6,75,000Fixed Assets (WDV) 17,15,000
Bank Overdraft 60,000 Stock 2,30,000
Payables 4,00,000Receivables 2,62,500
Cash 4,27,500
Total 26,35,000 Total 26,35,000
Working Notes:
(i) Sales ₹ 21,00,000

Less: Gross Profit (20%) ₹ 4,20,000
Cost of Goods Sold (COGS) ₹ 16,80,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
(ii) Receivables Turnover Velocity = 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
× 12
2= ₹21,00,000×75%
× 12
₹21,00,000×75%×2
Average Receivables = 12
Average Receivables = ₹ 2,62,500
Closing Receivables = ₹ 2,62,500
(iii) Stock Turnover Velocity = 𝐶𝑂𝐺𝑆
× 12
Or 1.5 = ₹16,80,000
× 12
₹16,80,000×1.5
Or Average Stock = 12
Or Average Stock = ₹ 2,10,000
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘
2
=₹ 2,10, 000
Opening Stock + Closing Stock = ₹ 4,20,000 (1)
Also, Closing Stock-Opening Stock = ₹ 40,000 (2)
Solving (1) and (2), we get closing stock = ₹ 2,30,000
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑆𝑡𝑜𝑐𝑘 +𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐶𝑎𝑠ℎ

(iv) Current Ratio= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 𝐵𝑎𝑛𝑘 𝑂𝑣𝑒𝑟𝑑𝑟𝑎𝑓𝑡 + 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
₹2,30,000+₹2,62,500+ 𝐶𝑎𝑠ℎ
Or 2 = ₹60,000+ 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
Or ₹ 1,20,000 + 2 Payables = ₹ 4,92,500 + Cash
Or 2 Payables – Cash.= ₹ 3,72,500
Or Cash = 2 Payables – ₹ 3,72,500 (3)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑆𝑡𝑜𝑐𝑘 𝐷𝑒𝑏𝑡𝑜𝑟 + 𝐶𝑎𝑠ℎ
Acid Test Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
3 ₹2,62,500+ 𝐶𝑎𝑠ℎ
Or 2
= 60,000 + 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
Or ₹ 1,80,000 + 3 Payables = ₹ 5,25,000 + 2 Cash
Or 3 Payables – 2 Cash = ₹ 3,45,000........................... (4)
Substitute (3) in (4)
Or 3 Payables – 2(2 Payables – ₹ 3,72,500) = ₹ 3,45,000
Or 3 Payables – 4 Payables + ₹ 7,45,000= ₹ 3,45,000
(Payables) = ₹ 3,45,000 - ₹ 7,45,000
Payables = ₹ 4,00,000
So, Cash = 2 x ₹ 4,00,000 – ₹ 3,72,5000

Cash = ₹ 4,27,500
(v) Long term Debt = 45% of Net Worth

Or ₹ 6,75,000 = 45% of Net Worth
Net Worth = ₹ 15,00,000
(vi) Equity Share Capital (ESC) + Reserves = ₹ 15,00,000
Or ESC + 0.2ESC = ₹ 15,00,000
Or 1.2 ESC = ₹ 15,00,000
Equity Share Capital (ESC) = ₹ 12,50,000
(vii) Reserves = 0.2 x ₹ 12,50,000
Reserves = ₹ 2,50,000
(viii) Total of Liabilities=Total of Assets
Or ₹ 12,50,000 + ₹ 2,50,000 + ₹ 6,75,000 +₹ 60,000 + ₹ 4,00,000 + Fixed Assets(FA) (WDV) + ₹ 2,30,000 + ₹
2,62,000 +₹ 4,27,500
Or ₹ 26,35,000 = ₹ 9,20,000 + FA(WDV)
FA (WDV) =₹ 17,15,000
Now FA(Cost) – Depreciation = FA(WDV)
Or FA(Cost) – FA(Cost)/6 = ₹ 17,15,000
Or 5 FA(Cost)/6 = ₹ 17,15,000
Or FA(Cost) = ₹ 17,15,000x 6/5
So, FA(Cost) = ₹ 20,58,000
Depreciation = ₹ 20,58,000/6 = ₹ 3,43,000
Solution 6:
1. Current Ratio = 3:1
Current Assets (CA)/Current Liability (CL) = 3:1
CA = 3CL
WC = 10,00,000
CA – CL = 10,00,000
3CL – CL = 10,00,000
2CL = 10,00,000
10,00,000
CL = 2
CL = ₹5,00,000
CA = 3 x 5,00,000
CA = ₹15,00,000
2. Acid Test Ratio = CA – Stock / CL = 1:1
15,00,000− 𝑆𝑡𝑜𝑐𝑘
= 5,00,000
=1
15,00,000 – stock = 5,00,000
Stock = ₹10,00,000
3. Stock Turnover ratio (on sales) = 5
𝐴𝑣𝑔 𝑠𝑡𝑜𝑐𝑘
=5
10,00,000
=5
Sales = ₹50,00,000
4. Gross Profit = 50,00,000 x 40% = ₹20,00,000
Net profit (PBT) = 50,00,000 x 10% = ₹5,00,000
5. PBIT/PBT = 2.2
PBIT = 2.2 x 5,00,000
PBIT= 11,00,000
Interest = 11,00,000 – 5,00,000 = ₹6,00,000
6,00,000
Long term loan = 0.12 = ₹50,00,000
6. Average collection period = 30 days
30
Receivables = 360 x 50.00.000 = 4,16,667
7. Fixed Assets Turnover Ratio = 0.8
50,00,000/ Fixed Assets = 0.8
Fixed Assets = ₹62,50,000

Income Statement
Amount (₹)
Sales 50,00,000
Less: Cost of Goods Sold 30,00,000
Gross Profit 20,00,000
Less: Operating Expenses 9,00,000
Less: Interest. 6,00,000
Net Profit 5,00,000
Balance sheet
Liabilities Amount (₹) Assets Amount (₹)
Equity share capital 22,50,000Fixed asset 62,50,000
Long term debt 50,00,000Current assets:
Current liability 5,00,000Stock 10,00,000
Receivables 4,16,667
Other 83,333 15,00,000
77,50,000 77,50,000
Solution 7:
Working Notes:
(i) Long term Debt

Long Term Debt/ Net worth = 0.25
Long Term Debt/ (8,00,000+16,00,000) = 0.25
Long term debt = 6,00,000
(ii) Total assets
Total liabilities and Equity = Notes and payables + Long-term debt + Common stock + Retained earnings
= 2,50,000+6,00,000+8,00,000+16,00,000
Total assets = Total liabilities and Equity = 32,50,000
(iii) Sales and Cost of Goods sold

Total asset turnover = 3 = Sales/ Total Assets = Sales/32,50,000
Sales = 97,50,000
Cost of goods sold = (100% - Gross Profit margin) x Sales
= (100% - 20%) x 97,50,000 =78,00,000.
(iv) Current Assets
Inventory turnover = 13 = COGS/ Inventory = 78,00,000/Inventory
Inventory = ₹ 6,00,000
Average collection period = 9 = Receivables/Sales x 360 = Receivables/ 97,50,000 x 360
Accounts receivables = 2,43,750
Acid-test ratio = 1.5 = (Cash+ Accounts Receivables) /Notes and Payables
= (Cash +2,43,750)/2,50,000 = 1.5
Cash = 1,31,250
(v) Plant and equipment
= Total Assets - Current Assets
= 32,50,000 - (1,31,250+2,43,750+6,00,000) = 22,75,000

Balance Sheet
Liabilities ₹ Assets ₹
Notes and payables 2,50,000Cash 1,31,250
Long-term debt 6,00,000Accounts receivable 2,43,750
Common stock 8,00,000Inventory 6,00,000
Retained earnings 16,00,000Plant and equipment 22,75,000
Total liabilities and equity 32,50,000Total assets 32,50,000
Solution 8:
Ratios Comment
Liquidity Current ratio has improved from last year and matching
the industry average.
Quick ratio also improved than last year and above the
industry average.
The reduced inventory levels (evidenced by higher
inventory turnover ratio) have led to better quick ratio in
FY 2022 compared to FY 2021.
Further the decrease in current liabilities is greater than
the collective decrease in inventory and debtors as the
current ratio have increase from FY2021 to FY 2022.
Operating Profits Operating Income-ROI reduced from last year, but
Operating Profit Margin has been maintained. This may
happen due to decrease in operating cost. However,
both the ratios are still higher than the industry
average.
Financing The company has reduced its debt capital by 1% and
saved earnings for equity shareholders. It also signifies
that dependency on debt compared to other industry
players (60%) is low.
Return to the shareholders Prabhu’s ROE is 26 per cent in 2021 and 28 per cent in
2022 compared to an industry average of 18 per cent.
The ROE is stable and improved over the last year.

COST OF CAPITAL
Solution 1:
(i) Calculation of Cost of Convertible Debentures:
Given that,
RF = 10%
Rm – Rf = 18%
Β = 1.25
D0 = 12.76
D-5 = 10
Flotation Cost = 5%
Using CAPM,
Ke = Rf + β (Rm – Rf)
= 10%+1.25 (18%)
= 32.50%
Calculation of growth rate in dividend
12.76 = 10 (1+g)5
1.276 = (1+g)5
(1+5%)5 = 1.276................ from FV Table
g = 5%
7
𝐷7 12.76(1.05)
Price of share after 6 years = 𝑘𝑒−𝑔
= 0.325−0.05
12.76×1.407
P6 = 0.275
P6 = 65.28
Redemption Value of Debenture (RV) = 65.28 × 2 = 130.56 (RV)
NP = 95
n =6
(𝑅𝑉−𝑁𝑃)
𝐼𝑛𝑡(1−𝑡)+
Kd = (𝑅𝑉−𝑁𝑃)
𝑛
× 100
2
(130.56−95)
15(1−0.4)+
= (130.56+95)
6
× 100
2
9+5.93
= 112.78
× 100
Kd = 13.24%
(i) Calculation of Cost of Preference Shares:

Net Proceeds = 100 (1.1) - 6% of 100 (1.1)
= 110 - 6.60
= 103.40
Redemption Value = 100
Year Cash Flows (₹) PVF @ 3% PV (₹) PVF @ 5% PV (₹)
0 103.40 1 103.40 1 103.40
1-10 -5 8.530 -42.65 7.722 -38.61
10 -100 0.744 -74.40 0.614 -61.40
-13.65 3.39
5%−3%
Kp = 3% + {3.39−(−13.65)}
× 13. 65
2%
= 3% + 17.04
× 13. 65
Kp = 4.6021%
Solution 2:
Balance Sheet of M/s KD Ltd:
(a) Computation of WACC on the basis of market value

W.N. 1
Cum-dividend price of Preference shares = ₹ 18
Less: Dividend (8/100) x 25 =₹2
Market Price of Preference shares = ₹ 16
2
Kp = 16
= 0.125 (or) 12.5%
4,00,000
No. of Preference shares =[ 25
]= 16,000
W.N. 2
120
Market price of Debentures =[ 100 ] × 100= ₹120
12(1−0.3)
𝐾𝑑 =[ 120
] = 0.7 or 7%
6,00,000
No. of Debentures =( 100
)= 6,000
W.N.3
Market Price of Equity shares = ₹39
Ke (given) = 19% or 0.19

5,00,000
No. of Equity shares = 10
= 50,000
Market
Sources Nos. Total Market Weight Cost of Capital Product
Value (₹)
value (₹)
Equity
39 50,000 19,50,000 0.6664 0.19 0.1266
Shares
Preference
16 16,000 2,56,000 0.0875 0.125 0.0109
Shares
Debentures 120 6,000 7,20,000 0.2461 0.07 0.0172
WACC = 0.1547
WACC = 0.1547 or 15.47%
Solution 3:
(a) (i) After tax cost of new Debt:
(1−𝑡) (1−0.3)
Kd= 𝑃1
= 15 96
= 0.1094 (or) 10.94%
(ii) After tax cost of New Preference share capital:

𝑃𝐷 12
𝐾𝑝= 𝑃𝑜
− ( 91.5 )=0.1311 (or) 13.11%

(iii) After tax cost of Equity shares:
𝐷 (2.50×50%)
K = 𝑃1 + 𝑔 = 25
+ 0. 10
𝑜
= 0.15 (or) 15%
(b) Marginal Cost of Capital
Type of capital Proportions Specific cost Product
Equity Shares 0.8 0.15 0.12

Preference Shares 0.05 0.1311 0.0066
Debentures 0.15 0.1094 0.0164
\Marginal cost of capital 0.143
(c) Amount that can be spend for capital investment
Retained earnings = 50% of EPS x No. of outstanding Equity shares
= 1.25 x 50,000
= ₹ 62,500
Proportion of equity (Retained earnings here) capital is 80% of total capital. Therefore, ₹ 62,500 is 80% of
total capital.
62,500
Amount of Capital Investment = 0.80
= ₹ 78,125
Solution 4:
𝐷1 ₹17.716
1. Cost of Equity (K ) = 𝑃𝑜−𝐹 + 𝑔 = ₹125−₹5
+ 0. 10 *
Ke = 0.2476
*Calculation of g:
₹ 10 (1+g)5 = ₹ 16.105
16.105
Or, (1+g)5 = 10
= 1.6105
Table (FVIF) suggests that ₹ 1 compounds to ₹ 1.6105 in 5 years at the compound rate of 10
percent. Therefore, g is 10 per cent.
𝐷1 ₹17.716
(ii) Cost of Retained Earnings (K ) = 𝑃𝑜
+g = 130
+ 0.10 = 0.2363
𝑃𝐷 ₹15
(iii) Cost of Preference Shares (Kp) = 𝑃𝑜
= ₹105 =0.1429
(iv) Cost of Debentures (Kd) =

𝐼(1−𝑡)+ ( 𝑅𝑉−𝑁𝑃
𝑛 )
( 𝑅𝑉 +𝑁𝑃
2 )
=
₹15(1−0.30)+ (₹100−₹91.75*
11 𝑦𝑒𝑎𝑟𝑠 )
₹100+₹91.75
2
₹15×0.70+ ₹0.75 ₹11.25

= ₹95.875
= ₹95.875
= 0.1173
*Since yield on similar type of debentures is 16 per cent, the company would be required to offer
debentures at discount.
Market price of debentures (approximation method)

= ₹ 15 ÷ 0.16 = ₹ 93.75
Sale proceeds from debentures = ₹ 93.75 – ₹ 2 (i.e., floatation cost) = ₹91.75
Market value (P0) of debentures can also be found out using the present value method:
P0 = Annual Interest × PVIFA (16%, 11 years) + Redemption value × PVIF (16%, 11 years)
P0 = ₹ 15 × 5.0287 + ₹ 100 × 0.1954
P0 = ₹ 75.4305 + ₹ 19.54 = ₹ 94.9705

Net Proceeds = ₹ 94.9705 – 2% of ₹ 100 = ₹ 92.9705
Accordingly, the cost of debt can be calculated
Total Cost of capital [BV weights and MV weights]

(Amount in (₹) lakh)
Weights Specific Total cost
Source of capital BV MV Cost (K) (BV × K) (MV × K)

Equity Shares 240 320** 0.2476 59.4240 79.2320
Retained Earnings 60 80** 0.2363 14.1780 18.9040
Preference Shares 72 67.50 0.1429 10.2888 9.6458
Debentures 18 20.80 0.1173 2.1114 2.4398
Total 390 488.30 86.0022 110.2216
**Market Value of equity has been apportioned in the ratio of Book Value of equity and retained earnings i.e.,
240:60 or 4:1.
Weighted Average Cost of Capital (WACC):
₹86.0022
Using Book Value = ₹390
= 0.2205 or 22.05%
₹110.2216
Using Market Value = ₹488.30
= 0.2257 or 22.57%
Solution 5:
Let the rate of Interest on debenture be x
Rate of Interest on loan = 1.5x
𝑅𝑉−𝑁𝑃
𝐼𝑛𝑡(1−𝑡)+
Kd on debentures = 𝑅𝑉+𝑁𝑃
𝑛
100−97
100×(1−0.25)+
= 100+97
3
2
75𝑥+1
= 98.5
Kd on bank loan = 1.5 x (1-0.25) = 1.125 x
𝐸𝑃𝑆 1 1 1
Ke = 𝑀𝑃𝑆 = 𝑀𝑃𝑆/𝐸𝑃𝑆 = 𝑃/𝐸 = 5 = 0.2
Ky = Ke= 0.2
Computation of WACC
Capital Amount (₹) Weights Cost Product
Equity 10,00,000 0.2 0.2 0.04

Reserves 15,00,000 0.3 0.2 0.06

Debentures 15,00,000 0.3 (75x+1)/98.5 (22.5x + 0.3)/98.5
Bank Loan 10,00,000 0.2 1.125x 0.225x

22.5𝑥+0.3
50,00,000 1 0.1 + 0.225x + 98.5
WACC = 15%
22.5𝑥 0.3
0.1 + 0.225x + 98.5
+ 98.5
= 0.15
9.85+22.1625x+22.5x+0.3 = (0.15) (98.5)

44.6625x = 14.775 – 9.85 – 0.3
44.6625x = 4.625
4.625
x= 44.6625
x = 10.36 %
\ Rate of interest on debenture = x = 10.36%
Rate of interest on Bank loan = 1.5x = (1.5) (10.36%) = 15.54%.
Solution 6:
Calculation of Cost of Equity
(i) D0 = ₹ 5x 60%
D0 = ₹ 3
g=bxr
= (1-0.6) x 10% = 4% D1 = D0 x (1 + g)
= 3 x (1 + 4%)
= 3 x 1.04 = 3.12
𝐷1
Ke= 𝑃𝑜 + 𝑔
3.12
Ke= 20.8
+ 0. 04
Ke= 19%
(ii) Calculation of Cost of Preference Shares
N =10 years
NP = ₹ 90
PD = ₹ 15
RV = ₹ 100
𝑃𝐷+(𝑅𝑉−𝑁𝑃)/𝑁
Kp= (𝑅𝑉+𝑁𝑃) ×100
15+(100−90)/10
Kp= (100+90)/2
× 100
Kp = 16/95 x 100
Kp= 16.84%
(iii) Calculation of Cost of Debentures
N = 6 years
NP = ₹ 75
Interest = ₹ 14 RV = ₹ 100
T = 40%
𝐼𝑛𝑡(1−𝑡)+(𝑅𝑉−𝑁𝑃)/𝑁
Kd = (𝑅𝑉+𝑁𝑃)/2
× 100
14×(1−0.04)+(100−75)/6
Kd = (100+75)/2
× 100
8.4−4.17
Kd= 87.5
× 100
Kd= 14.37%
(iv) Cost of Term Loan
Kd = Interest rate (1-t) Kd = 13% (1-40%)
Kd = 7.8%

Calculation of Weighted Average Cost of Capital (WACC) (using market weights)

Capital Cost of Market Value Market Product
Capital Value (Cost x
Weights weights)
Equity 19.00% 20.8 x 50,00,000 ₹10,40,00,000 0.6218 11.81%
Preference Shares 16.84% 90 x 50,000 ₹ 45,00,000 0.0269 0.45%
Debentures 14.37% 75 x 2,50,000 ₹ 1,87,50,000 0.1121 1.61%
Term Loan 7.80% ₹ 4,00,00,000 0.2392 1.87%
Total ₹16,72,50,000 1 15.74%
WACC= 15.74%
(b)Calculation of Marginal Cost of Capital (MACC)
The required capital of ₹ 50,000,000 will be raised as follows:
Equity = 60% of ₹ 50,000,000 = ₹ 30,000,000
Deby = 20% of ₹ 50,000,000 = ₹10,000,000
Retained Earnings= 20% of ₹ 50,000,000 = ₹ 10,000,000
3.12
Marginal Cost of Equity= 1.4 + 0. 04
= 26.28%
Marginal Cost of Debt
13% 𝑜𝑓 ₹40,00,000 + 15% 𝑜𝑓 ₹60,00,000
Cost of Debt (before tax)= ₹1,00,00,000
₹5,20,000+₹9,00,000
= ₹1,00,00,000
= 14.2%
Cost of Debt (after tax)). = 14.2% (1-t)
= 14.2% (1-0.4)
= 8.52%
Calculation of marginal cost of capital
Capital Cost of Capital Value Weights Product (Cost x
weights)
Equity 26.28% ₹ 3,00,00,000 0.6 15.77%
Reserves 26.28% ₹ 1,00,00,000 0.2 5.26%
Debt 8.52% ₹ 1,00,00,000 0.2 1.70%
Total ₹ 5,00,00,000 1 22.73%
Marginal Cost of Capital (MACC) = 22.73%
Solution 7:
(i) Calculation of Cost of Capital for each source of capital:
(a) Cost of Equity share capital:
𝐷𝑜(1+𝑔) 25%×₹100(1+0.05)
Ke = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑃𝑜) + 𝑔 = ₹200
+ 0. 05
₹26.25
= ₹200
+ 0. 05 = 0. 18125 𝑜𝑟 18. 125%
(b) Cost of Preference share capital (Kp) = 9%
(c) Cost of Debentures (Kd) = r (1 – t)
= 11% (1 – 0.3) = 7.7%
(ii) Weighted Average Cost of Capital
Source Amount (₹) Weights After tax Cost of WACC (%)

Capital (%)
(a) (b) (c) = (a) ´ (b)
Equity share 24,00,000 0.60 18.125 10.875
9% Preference share 4,00,000 0.10 9.000 0.900
11% Debentures 12,00,000 0.30 7.700 2.310
40,00,000 1.00 14.085
Solution 8:
(a) Cost of Equity / Retained Earnings (using dividend growth model)
𝐷1
Ke = 𝑃𝑜
where D1 = Do (1 + g) = 2 (1 + .10) = 2.2

2.2
Ke = 44
+ 0.10 = 0.15 or 15 %
(b) Cost of Debt (Post Tax)
Kd = I (1-t)
Upto 3,60,000 Kd = .08 (1-0.4) = 0.048
Beyond 3,60,000 = .12 (1-0.4) = 0.072
Thus, post-tax cost of additional debt = 0.048 x 3,60,000 / 6,00,000 + 0.072 x 2,40,000/ 6,00,000 = 0.0288 +
0.0288 = 0.0576 or 5.76%
(c) Pattern for Raising Additional Finance
Debt = 20,00,000 x 30% = 6,00,000
Equity = 20,00,000 x 70 % = 14,00,000
Out of this total equity amount of
₹ 14,00,000 - Equity Shares = 14,00,000 – 4,20,000
= 9,80,000
And Retained Earnings = 4,20,000
(d) Overall Weighted Average after tax cost of additional finance
WACC = Kd x Debt Mix + Ke x Equity Mix = 0.0576 x 30% + 0.15 x 70% = 0.01728 +
0.105 = 0.1223 or 12.23% (approx.)

CAPITAL STRUCTURE
Solution 1:
Alternative 1 = Raising Debt of ₹5 lakh + Equity of ₹15 lakh
Calculation of Earnings per share (EPS)
FINANCIAL ALTERNATIVES
Particulars Alternative 1 Alternative 2 Alternative 3
(₹) (₹) (₹)
Expected EBIT [W. N. (a)] 19,50,000 19,50,000 19,50,000
Less: Interest [W. N. (b)] (50,000) (1,25,000) (2,05,000)
Earnings before taxes (EBT) 19,00,000 18,25,000 17,45,000
Less: Taxes @ 40% 7,60,000 7,30,000 6,98,000
Earnings after taxes (EAT) 11,40,000 10,95,000 10,47,000
Number of shares [W. N. (d)] 1,07,500 1,05,000 1,03,000
Earnings per share (EPS) 10.60 10.43 10.17
Conclusion: Alternative 1 (i.e. Raising Debt of ₹5 lakh and Equity of ₹15 lakh) is recommended which
maximises the earnings per share.
Working Notes (W.N.):

(a) Calculation of Earnings before Interest and Tax (EBIT)
Particulars
Output (1,00,000 + 50%) (A) 1,50,000
Selling price per unit ₹40
Less: Variable cost per unit (₹20 – 15%) ₹17
Contribution per unit (B) ₹23
Total contribution (A x B) ₹34,50,000
Less: Fixed Cost (₹10,00,000 + ₹5,00,000) ₹15,00,000
EBIT ₹19,50,000
(b) Calculation of interest on Debt

Alternative (₹) Total (₹)
1 (₹5,00,000 x 10%) 50,000
2 (₹5,00,000 x 10%) 50,000
(₹5,00,000 x 15%) 75,000 1,25,000
3 (₹5,00,000 x 10%) 50,000
(₹5,00,000 x 15%) 75,000
(₹4,00,000 x 20%) 80,000 2,05,000
(c) Number of equity shares to be issued

₹(20,00,000−5,00,000) ₹15,00,000
Alternative 1 = ₹200 (𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒) = ₹200
=7,500 shares
₹(20,00,000−10,00,000) ₹10,00,000
Alternative 2 = ₹200(𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒)
= ₹200 = 5,000 shares
₹(20,00,000−14,00,000) ₹6,00,000
Alternative 3 = ₹200 (𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒)
= ₹200 = 3,000 shares
(d) Calculation of total equity shares after expansion program

Alternative 1 Alternative 2 Alternative 3
Existing no. of shares 1,00,000 1,00,000 1,00,000
Add: issued under 7,500 5,000 3,000
expansion program
Total no. of equity shares 1,07,500 1,05,000 1,03,000
Solution 2:
The following are the costs and values for the firms A and B
(a) (i) Computation of Equilibrium value of Firms A & B under MM Approach:

As per MM approach KO is equal to Keu

KO = Keu (1 – t) = 9.09 (1 – 0) = 9.09
Particulars A B
EBIT (NOI) (₹) 5000 5000
KO (%) 9.09 9.09
Equilibrium value (₹) (NOI/Ko) x 100 55005.5 55005.5
5,000 5,000
9.09
× 100 9.09
× 100
(ii) Computation of value of equity and cost of equity of Firms A & B
Particulars A B
Equilibrium value (₹) 55,005.50 55,005.50
Less: Value of Debt - 30,000
Value of Equity 55,005.50 25,005.50
Cost of Equity of Firm A (unlevered) = 9.09

Cost of Debt of Firm B (Kd) (levered) = (1800/30000) x 100 = 6%
Cost of Equity of Firm B (Levered) = KO + (KO - Kd ) x (Debt / Equity)
= 9.09 + (9.09 – 6) x (30000/25005.5)

= 9.09 + 3.09 x 1.2 = 9.09 + 3.71 = 12.80%
(OR)
Cost of Equity of Firm B (Levered) = ( 𝑁𝐼

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 )x 100
3,200
= 25,005.5 x 100 = 12.8%
Solution 3:
1. (a) Assuming no tax as per MM Approach.
Calculation of Value of Firms ‘Bee Ltd.’ and ‘Cee Ltd’ according to MM
Hypothesis
Market Value of ‘Cee Ltd’ [Unlevered(u)]
Total Value of Unlevered Firm (Vu) = [NOI/ke] = 9,00,000/0.18 = ₹ 50,00,000
Ke of Unlevered Firm (given) = 0.18

Ko of Unlevered Firm (Same as above = ke as there is no debt) = 0.18
Market Value of ‘Bee Ltd’ [Levered Firm (I)]
Total Value of Levered Firm (VL) = Vu + (Debt× Nil)
= ₹ 50,00,000 + (27,00,000 × nil)
= ₹ 50,00,000
Computation of Equity Capitalization Rate and Weighted Average Cost of Capital (WACC)
Particulars Bee Ltd.
Net Operating Income (NOI) 9,00,000

Less: Interest on Debt (I) 3,24,000

Earnings of Equity Shareholders (NI) 5,76,000
Overall Capitalization Rate (ko) 0.18

Total Value of Firm (V = NOI/ko) 50,00,000
Less: Market Value of Debt 27,00,000
Market Value of Equity (S) 23,00,000
Equity Capitalization Rate [ke = NI /S] 0.2504

Weighted Average Cost of Capital (ko)*
0.18
ko = (ke×S/V) + (kd×D/V)
*Computation of WACC Bee Ltd
Component of Capital Amount Weight Cost of Capital WACC
Equity 23,00,000 0.46 0.2504 0.1152
Debt 27,00,000 0.54 0.12* 0.0648
Total 50,00,000 0.18
*Kd = 12% (since there is no tax) WACC = 18%

(b) Assuming 40% taxes as per MM Approach
Calculation of Value of Firms ‘Bee Ltd.’ and ‘Cee Ltd’ according to MM
Hypothesis
Market Value of ‘Cee Ltd’ [Unlevered(u)]
Total Value of unlevered Firm (Vu) = [NOI (1 - t)/ke] = 9,00,000 (1 – 0.40)] / 0.18
= ₹ 30,00,000
Ke of unlevered Firm (given) = 0.18
Ko of unlevered Firm (Same as above = ke as there is no debt) = 0.18
Market Value of ‘Bee Ltd’ [Levered Firm (I)]
Total Value of Levered Firm (VL) = Vu + (Debt× Tax)
= ₹ 30,00,000 + (27,00,000 × 0.4)
= ₹ 40,80,000
Computation of Weighted Average Cost of Capital (WACC) of ‘Cee Ltd. ’

= 18% (i.e. Ke = Ko)
Computation of Equity Capitalization Rate and Weighted Average Cost of Capital (WACC) of Bee Ltd
Particulars Bee Ltd. (₹)
Net Operating Income (NOI) 9,00,000
Less: Interest on Debt (I) 3,24,000
Earnings Before Tax (EBT) 5,76,000
Less: Tax @ 40% 2,30,400
Earnings for equity
3,45,600
shareholders (NI)
Total Value of Firm (V) as
40,80,000
calculated above
Less: Market Value of Debt 27,00,000
Market Value of Equity (S) 13,80,000
Equity Capitalization Rate [ke 0.2504

= NI/S]
Weighted Average Cost of
Capital (ko)* ko = (ke×S/V) + 13.23
(kd×D/V)
*Computation of WACC Bee Ltd.

Component of Capital Amount Weight Cost of Capital WACC
Equity 13,80,000 0.338 0.2504 0.0846
Debt 27,00,000 0.662 0.072* 0.0477
Total 40,80,000 0.1323
*Kd= 12% (1- 0.4) = 12% × 0.6 = 7.2%

WACC = 13.23%
Solution 4:
1. Ascertainment of probable price of shares

Plan (ii) (If ₹
4,00,000 is raised by
Plan (i) (If ₹ 4,00,000 is issuing equity
Particulars
raised as debt) (₹) shares) (₹)
Earnings Before Interest (EBIT) 20% on (14,00,000 +
3,60,000 3,60,000
4,00,000)
Less: Interest on old debentures @ 10% on 4,00,000 40,000 40,000
3,20,000 3,20,000
Less: Interest on New debt @ 12% on ₹ 4,00,000 48,000 -
Earnings Before Tax (After interest) 2,72,000 3,20,000
Less: Tax @ 50% 1,36,000 1,60,000
Earnings for equity shareholders (EAIT) 1,36,000 1,60,000
Number of Equity Shares (in numbers) 30,000 40,000
Earnings per Share (EPS) 4.53 4
Price/ Earnings Ratio 8 10
Probable Price Per Share 36.24 (8 x 4.53) 40 (10 x 4)
Working Notes:
(₹)
1. Calculation of Present Rate of Earnings

Equity Share capital (30,000 x ₹ 10) 3,00,000
(
10% Debentures 40, 000 ×
100
10 ) 4,00,000
Reserves (given) 7,00,000
14,00,000
Earnings before interest and tax (EBIT) given 2,80,000
Rate of Present Earnings = ( 2,80,000
14,00,000 ) × 100 20%
Number of Equity Shares to be issued in Plan ( )

4,00,000
2. 40 10,000
Thus, after the issue total number of 30,000 + 10,000
shares = 40,000

3. Debt/Equity Ratio if ₹ 4,00,000 is raised as debt: ( 8,00,000

18,00,000 )
× 100 = 44.44%
As the debt equity ratio is more than 32% the P/E ratio shall be 8 in plan (i)
Solution 5:
Current Capital Structure

Equity Share Capital ₹ 20 x 7 lakhs ₹ 1,40,00,000
Reserves ₹ 10,00,000
9% Bonds ₹ 3,00,00,000
11% Preference Share Capital ₹ 50 x 3 lakhs ₹ 1,50,00,000
Total Capital Employed ₹ 6,00,00,000
Proposed Capital Structure

Capital Working Proposal I Proposal II
Capital to be raised ₹5,00,00,000 ₹5,00,00,000
Equity 50000000 x 25% ₹ 1,25,00,000 -
50000000 x 50% - ₹ 2,50,00,000
Debt @ 10% 50000000 x 75% ₹ 3,75,00,000 -
Preference Shares @ 50000000 x 50% - ₹ 2,50,00,000
12%
Combined Capital Amount (proposal Amount (proposal
1) 2)
Equity ₹ 2,65,00,000 ₹ 3,90,00,000
Reserves ₹ 10,00,000 ₹ 10,00,000
9% Bond ₹ 3,00,00,000 ₹ 3,00,00,000
10% Debt ₹ 3,75,00,000 -
11% Preference Shares ₹ 1,50,00,000 ₹ 1,50,00,000
12% Preference Shares - ₹ 2,50,00,000
₹ 11,00,00,000 ₹ 11,00,00,000
Interest for Proposal I = ₹ 3,00,00,000 x 9% + ₹ 3,75,00,000 x 10%
= ₹ 27,00,000 + ₹ 37,50,000
= ₹ 64,50,000
Preference Dividend for Proposal I = ₹ 1,50,00,000 x 11% = ₹ 16,50,000
Interest for Proposal II = ₹ 3,00,00,000 x 9% = ₹ 27,00,000
Preference Dividend for Proposal II = ₹ 1,50,00,000 x 11% + ₹ 2,50,00,000 x 12%
= ₹ 16,50,000 + ₹ 30,00,000 = ₹ 46,50,000
Let the indifference point be ₹ X
For Proposal I,
(𝑋− ₹64,50,000)×0.66−₹16,50,000 (𝑋−₹27,00,000)×0.66−₹46,50,000
EPS= 13,25,000
= 19,50,000
0.66 ×₹42,57,000−₹16,50,000 0.66𝑋−₹17,82,000−₹46,50,000
1,325
= 1,950
0.66𝑥− ₹59,07,000 0.66𝑋 −𝑛₹64,32,000
53
= 78
51.48 X - ₹46,07,46,000 = 37.98X-₹34,08,96,000
16.5X = ₹11,98,50,000
Indifference Point = X = ₹72,63,636.36
Solution 6:
Calculation of Equity Share capital and Reserves and surplus:
Alternative 1:
Equity Share capital = ₹20,00,000 + =₹21,50,000
Reserves= ₹10,00,000 +=₹10,50,000
Alternative 2:
Equity Share capital = ₹ 20,00,000 + =₹27,20,000
Reserves= ₹10,00,000 +=₹11,80,000
Capital Structure Plans

Amount in ₹
Capital Alternative 1 Alternative 2
Equity Share capital 21,50,000 27,20,000
Reserves and surplus 10,50,000 11,80,000
10% long term debt 15,00,000 15,00,000
14% Debentures 8,00,000 -
8% Irredeemable Debentures - 1,00,000
Total Capital Employed 55,00,000 55,00,000
Computation of Present Earnings before interest and tax (EBIT)

EPS (₹) 21
No. of equity shares 20,000
Earnings for equity shareholders (I x II) (₹) 4,20,000
Profit Before Tax (III/75%) (₹) 5,60,000
Interest on long term loan (1500000 x 10%) (₹) 1,50,000
EBIT (IV + V) (₹) 7,10,000
EBIT after expansion = ₹7,10,000 +₹ 2,00,000 = ₹9,10,000
Evaluation of Financial Plans on the basis of EPS, MPS and Financial Leverage
Amount in ₹
Particulars Alternative I Alternate II
EBIT 9,10,000 9,10,000
Less: Interest: 10% on long term loan (1,50,000) (1,50,000)
14% on Debentures (1,12,000) Nil
8% on Irredeemable Debentures Nil. (8000)
PBT 6,48,000 7,52,000
Less: Tax @25% (1,62,000) (1,88,000)
PAT 4,86,000 5,64,000
No. of equity shares 21,500 27,200
EPS 22.60 20.74
Applicable P/E ratio (Working Note 1) 7 8.5
MPS (EPS X P/E ratio) 158.2 176.29
Financial Leverage EBIT/PBT 1.40 1.21
Working Note 1
Alternative I Alternative II
Debt:
₹15,00,000 +₹8,00,000 23,00,000 -
₹15,00,000 +₹1,00,000 - 16,00,000
Total capital Employed (₹) 55,00,000 55,00,000
Debt Ratio (Debt/Capital employed) =0.4182 =0.2909
=41.82% =29.09%
Change in Equity: ₹21,50,000-₹20,00,000 1,50,000
₹27,20,000-₹20,00,000 7,20,000
Percentage change in equity 7.5% 36%
Applicable P/E ratio 7 8.5
Calculation of Cost of equity and various type of debt

Alternative I Alternative II
A) Cost of equity
EPS 22.60 20.74
DPS (EPS X 60%) 13.56 12.44
Growth (g) 10% 10%
Po (MPS) 158.2 176.29
Ke= Do (1 + g)/ Po 13.56(1.1) 12.44(1.1)
158.2 176.29
=9.43% =7.76%

B) Cost of Debt:
10% long term debt 10% + (1-0.25) 10% +(1-0.25)
= 7.5% = 7.5%
14% redeemable debentures 14(1−0.25)+(110−100/10) nil
110+100/2
= 10.5 + 1 / 10.5
= 10.95%
8% irredeemable debenture NA 8000(1-0.25)/1,00,00 = 6%
Calculation of Weighted Average cost of capital (WACC)

Alternative 1 Alternative 2
Capital Weights Cost (%) WACC Weights Cost (%) WACC
Equity Share Capital 0.3909 9.43 3.69% 0.4945 7.76 3.84%
Reserves and Surplus 0.1909 9.43 1.80% 0.2145 7.76 1.66%
10% Long term Debt 0.2727 7.50 2.05% 0.2727 7.50 2.05%
14% Debenture 0.1455 10.95 1.59%
8% Irredeemable - 0.0182 6 0.11%
Debentures
9.12% 7.66%
Calculation Marginal Cost of Capital (MACC)

Alternative 1 Alternative 2
Amount(weight) Cost Amount Cost MACC
Capital (%) MACC (weight) (%)
Equity Share ₹ 1,50,000(0.15) 9.43 1.41% ₹7,20,000(0.72) 7.76 5.59%
Capital
Reserves and ₹ 50,000(0.05) 9.43 0.47% ₹1,80,000(0.18) 7.76 1.40%
Surplus
14% Debenture ₹ 8,00,000(0.80) 10.95 8.76% - 0.00%
8%
Irredeemable - ₹1,00,000(0.10) 6 0.60%
Debentures
Total Capital ₹10,00,000 10.65% ₹10,00,000 7.58%
Employed
Summary of solution:
Alternate I Alternate II
Earning per share (EPS) 22.60 20.74
Market price per share (MPS) 158.20 176.29
Financial leverage 1.4043 1.2101
Weighted Average cost of capital (WACC) 9.12% 7.66%
Marginal cost of capital (MACC) 10.65% 7.58%
Alternative 1 of financing will be preferred under the criteria of EPS, whereas Alternative II of financing will
be preferred under the criteria of MPS, Financial leverage, WACC and marginal cost of capital.
Solution 8:
Ascertainment of probable price of shares of Prakash limited
Plan-I Plan-II
If ₹ 5,00,000 is raised If ₹ 5,00,000
Particulars as debt is raised by
issuing equity
(₹) Shares (₹)
Earnings Before Interest and Tax (EBIT)
{20% of new capital i.e., 20% of (₹15,00,000 + 4,00,000 4,00,000
₹ 5,00,000)}
(Refer working note1)
Less: Interest on old debentures (10% of ₹5,00,000) (50,000) (50,000)

Less: Interest on new debt (12% of ₹5,00,000) (60,000) --

Earnings Before Tax (EBT) 2,90,000 3,50,000
Less: Tax @ 50% (1,45,000) (1,75,000)
Earnings for equity shareholders (EAT) 1,45,000 1,75,000
No. of Equity Shares (refer working note 2) 25,000 35,000
Earnings per Share (EPS) ₹ 5.80 ₹ 5.00
Price/ Earnings (P/E) Ratio (refer working note 3) 8 10
Probable Price Per Share (PE Ratio × EPS) ₹ 46.40 ₹ 50
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(₹)
Equity Share capital (25,000 shares × ₹10) 2,50,000
(
10% Debentures ₹50, 000 × 10
100
) 5,00,000
Reserves and Surplus 7,50,000
Total Capital Employed 15,00,000
Earnings before interest and tax (EBIT) (given) 3,00,000
₹3,00,000
ROCE = ₹15,00,000 × 100 20%
2. Number of Equity Shares to be issued in Plan-II:
₹5,00,000
= ₹50 = 10,000 Shares
Thus, after the issue total number of shares = 25,000+ 10,000 = 35,000 shares
3. Debt/Equity Ratio if ₹ 5,00,000 is raised as debt:
₹10,00,000
= ₹20,00,000 ×100 = 50%
As the debt equity ratio is more than 40% the P/E ratio will be brought down to 8 in Plan-I

LEVERAGES
Solution 1:
Income Statement
Particulars Amount (₹)
Sales 86,00,000
Less: Variable cost (65% of 86,00,000) 55,90,000
Contribution (35% of 86,00,000) 30,10,000
Less: Fixed costs 10,00,000
Earnings before interest and tax (EBIT) 20,10,000
Less: Interest on debt (@ 10% on ₹55 lakhs) 5,50,000
Earnings before tax (EBT) 14,60,000
Tax (40%) 5,84,000
PAT 8,76,000
𝐸𝐵𝐼𝑇 𝐸𝐵𝐼𝑇
(i) ROCE (Pre-tax) = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
× 100 = 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡
× 100
₹20,10,000
₹(75,00,000+55,00,000)
× 100 = 15.46%
EPS (PAT/ No. of equity shares) 1.168 or ₹1.17
(ii) ROCE is 15.46% and Interest on debt is 10%. Hence, it has a favourable financial leverage.
(iii) Calculation of Operating, Financial and Combined leverages:
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 ₹30,10,000
Operating Leverage = 𝐸𝐵𝐼𝑇
= ₹20,10,000 = 1.497 (approx)
𝐸𝐵𝐼𝑇 ₹20,10,000
Financial Leverage = 𝐸𝐵𝑇 = ₹14,60,000 = 1.377 (approx.)
Combined Leverage = 𝐸𝐵𝑇
= ₹14,60,000 = 2.062 (approx.)
Or, = Operating Leverage × Financial Leverage = 1.497 × 1.377 = 2.06 (approx.)
(iv) Operating leverage is 1.497. So, if sales are increased by 10%.

EBIT will be increased by 1.497 × 10% i.e. 14.97% (approx.)
(v) Since the combined Leverage is 2.062, sales have to drop by 100/2.062 i.e. 48.50% to bring EBT
to Zero.
Accordingly, New Sales = ₹86,00,000 × (1 - 0.4850)
= ₹86,00,000 × 0.515
= ₹44,29,000 (approx.)
Hence, at ₹44,29,000 sales level, EBT of the firm will be equal to Zero.
Solution 2:
(1) Preparation of Profit – Loss Statement
Working Notes:
1. Post tax interest 5.60%
Tax rate 30%
Pre tax interest rate = (5.6/70) x 100 8%

Loan amount ₹ 1,25,000
Interest amount = 1,25,000 x 8% ₹ 10,000
Financial Leverage (FL) = ( 𝐸𝐵𝐼𝑇

𝐸𝐵𝑇 )=( 𝐸𝐵𝐼𝑇
(𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡) )= ( 𝐸𝐵𝐼𝑇
(𝐸𝐵𝐼𝑇 −10,000) )
𝐸𝐵𝐼𝑇
1.5 = (𝐸𝐵𝐼𝑇 −10,000)

1.5 EBIT -15000 = EBIT

1.5 EBIT – EBIT = 15,000
0.5 EBIT = 15,000

EBIT = ₹ 30,000
EBT = EBIT – Interest = 30,000 – 10,000 = ₹ 20,000
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
2. Operating Leverage (OL) = 𝐸𝐵𝐼𝑇
2 = 30,000
Contribution = ₹ 60,000
3. Fixed cost = Contribution – Profit
= 60,000 – 30,000 = ₹ 30,000
4. Sales = 𝑃𝑉 𝑅𝑎𝑡𝑖𝑜
60,000
= 30%
= ₹ 2,00,000
5. If PV ratio is 30%, then the variable cost is 70% on sales.
Variable cost = 2,00,000 x 70% = ₹ 1,40,000

Profit – Loss Statement
Particulars ₹
Sales 2,00,000
Less: Variable cost 1,40,000
Contribution 60000
Less: Fixed cost 30,000
EBIT 30,000
Less: Interest 10,000
EBT 20,000
Less: Tax @ 30% 6,000
EAT 14,000
(2) Calculation of no. of Equity shares Market
Price per Share (MPS) = ₹140 Price Earnings
Ratio (PER) = 10 WKT,
𝑀𝑃𝑆 140
EPS = 𝑃𝐸𝑅
= 10
= ₹ 14
Total earnings (EAT) = ₹ 14,000

No. of Equity Shares = 14,000 / 14 = 1000

Solution 3:
1. Income Statement
Particulars Company P (₹) Company Q (₹)
Sales 40,00,000 18,00,000
Less: Variable Cost 30,00,000 12,00,000
Contribution 10,00,000 6,00,000
Less: Fixed Cost 8,00,000 4,50,000
EBIT 2,00,000 1,50,000
Less: Interest 1,50,000 1,00,000
EBT 50,000 50,000
Tax (45%) 22,500 22,500
EAT 27,500 27,500
Workings:
(i) Margin of Safety
For Company P = 0.20
For Company Q = 0.20 x 1.25 = 0.25
(ii) Interest Expenses
For Company P = ₹ 1,50,000
For Company Q = ₹ 1,50,000 (1-1/3) = ₹ 1,00,000
(iii) Financial Leverage
For Company P = 4
For Company Q = 4 x 75% = 3
(iv) EBIT
For Company A
Financial Leverage = EBIT/(EBIT- Interest)
4 = EBIT/(EBIT- ₹ 1,50,000)
4EBIT – ₹ 6,00,000 = EBIT
3EBIT = ₹ 6,00,000
EBIT = ₹ 2,00,000
For Company B
Financial Leverage = EBIT/(EBIT - Interest)
3 = EBIT/(EBIT – ₹ 1,00,000)
3EBIT – ₹ 3,00,000 = EBIT
2EBIT = ₹ 3,00,000
EBIT = ₹ 1,50,000
(i) Contribution For Company A
Operating Leverage = 1/Margin of Safety
= 1/0.20 = 5
Operating Leverage = Contribution/EBIT
5 = Contribution/₹ 2,00,000 Contribution
= ₹ 10,00,000
For Company B
Operating Leverage = 1/Margin of Safety
= 1/0.25 = 4


4 = Contribution/ ₹1,50,000
Contribution = ₹ 6,00,000
(ii) Sales
For Company A
Profit Volume Ratio = 25%
Profit Volume Ratio = Contribution/Sales x 100
25% = ₹ 10,00,000/Sales
Sales = ₹ 10,00,000/25%
Sales = ₹ 40,00,000
For Company B
Profit Volume Ratio = 33.33%
Therefore, Sales = ₹ 6,00,000/33.33%
Sales = ₹ 18,00,000
Solution 4:
Sources of Capital Plan I Plan II Plan III Plan IV

Present Equity Shares 13,00,000 13,00,000 13,00,000 13,00,000
New Issue 7,80,000 5,20,000 3,90,000 3,90,000
Equity share capital (₹) 2,08,00,000 1,82,00,000 1,69,00,000 1,69,00,000
No. of Equity shares 20,80,000 18,20,000 16,90,000 16,90,000
12% Long term loan (₹) - 26,00,000 - -
9% Debentures (₹) - - 39,00,000 -
6% Preference Shares (₹) - - - 39,00,000
Computation of EPS and Financial Leverage
Sources of Capital Plan I Plan II Plan III Plan IV
EBIT (₹) 52,00,000 52,00,000 52,00,000 52,00,000
Less: Interest on 12% Loan (₹) - 3,12,000 - -
Less: Interest on 9% debentures
- - 3,51,000 -
(₹)
EBT (₹) 52,00,000 48,88,000 48,49,000 52,00,000
Less: Tax@ 40% 20,80,000 19,55,200 19,39,600 20,80,000
EAT (₹) 31,20,000 29,32,800 29,09,400 31,20,000
Less: Preference Dividends (₹) - - - 2,34,000
(a) Net Earnings available for
31,20,000 29,32,800 29,09,400 28,86,000
equity shares (₹)
(b) No. of equity shares 20,80,000 18,20,000 16,90,000 16,90,000
(c) EPS (a ¸ b) (₹) 1.50 1.61 1.72 1.71
Financial leverage EBIT)
1.00 1.06 1.07 1.08*
(EBT

*Financial Leverage in the case of Preference dividend = ( 𝐸𝐵𝐼𝑇

𝐷𝑜
(𝐸𝐵𝐼𝑇− 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡)−( (1−𝑡) ) )
= ( 52,00,000
(52,00,000−0)−(
2,34,000
(1−40)
) )
=( 52,00,000
48,10,000 )=1.08
Solution 5:
Income Statement of companies A, B and C
Particulars A B C
Sales ₹15,00,000 ₹30,00,000 ₹41,66,667
Less: Variable Expenses ₹9,00,000 ₹15,00,000 ₹16,66,667
Contribution ₹6,00,000 ₹15,00,000 ₹25,00,000
Less: Fixed Cost ₹4,50,000 ₹10,00,000 ₹15,00,000
EBIT ₹1,50,000 ₹5,00,000 ₹10,00,000
Less: Interest ₹1,00,000 ₹4,00,000 ₹6,00,000
PBT ₹50,000 ₹1,00,000 ₹4,00,000
Less: Tax @ 30% ₹15,000 ₹30,000 ₹1,20,000
PAT ₹35,000 ₹70,000 ₹2,80,000
Working Notes:
𝐸𝐵𝐼𝑇
(i) Degree of Financial Leverage= 𝐸𝐵𝐼𝑇− 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
DFL x (EBIT – Int) = EBIT
DFL x EBIT – Int x DFL= EBIT
DFL x EBIT – EBIT =Int x DFL
EBIT(DFL – 1) = Int x DFL
𝐼𝑛𝑡×𝐷𝐹𝐿
EBIT = 𝐷𝐹𝐿 − 1
For A,
₹1,00,000×3
EBITA = 3−1
EBITA = ₹150000
For B
₹4,00,000×5
EBITB = 5−1
EBITB = ₹500000
For C
₹6,00,000×2.5
EBITc = 2.5−1
EBITc =10,00,000
(ii) DOL= 𝐸𝐵𝐼𝑇
Contribution = DOL x EBIT
ContributionA = 4 x ₹1,50,000
ContributionA = ₹6,00,000
ContributionB = 3 x ₹5,00,000
ContributionB = ₹15,00,000
ContributionC = 2.5 x ₹10,00,000
ContributionC = ₹25,00,000
(ii) Fixed Cost = Contribution – EBIT
Fixed CostA= ₹6,00,000 – ₹1,50,000 = ₹4,50,000
Fixed CostB =₹15,00,000 – ₹5,00,000 = ₹10,00,000
Fixed CostC = ₹25,00,000 – ₹10,00,000 = ₹15,00,000
(iii) Contribution= Sales – VC
VC= Sales – Contribution
Sales x VC Ratio= Sales – Contribution
Contribution= Sales – Sales x VC Ratio
Contribution=Sales(1-VCR)

Sales = 1−𝑉𝐶𝑅
SalesA = ₹6,00,000/(1-0.6) = ₹15,00,000
SalesB = ₹15,00,000/(1-0.5) = ₹30,00,000
SalesC = ₹25,00,000/(1-0.4) = ₹41,66,667
Of all the companies, A has the highest degree of Operating Leverage, B has highest degree of Financial
Leverage and C is equally leveraged on both Operating and Financial fronts. If we consider combined leverage
companies will have the leverages of 12, 15 and 6.25 (by multiplying both operating and financial leverages).
This means A is undertaking a higher degree of operating risk while B is undertaking a higher degree of
financial risk.
Solution 6:
Break Even Sales = ₹ 6800000×0.75 = ₹ 51,00,000
Income Statement (Amount in ₹)
Original Calculation of Interest Now at present
at BEP (backward level
calculation)
Sales 68,00,000 51,00,000 68,00,000
Less: Variable Cost 40,80,000 30,60,000 40,80,000
Contribution 27,20,000 20,40,000 27,20,000
Less: Fixed Cost 16,32,000 16,32,000 16,32,000
EBIT 10,88,000 4,08,000 10,88,000
Less: Interest (EBIT-PBT) ? 3,93,714 3,93,714
PBT ? 14,286(10,000/70%) 6,94,286
Less: Tax @ 30%(or PBT-PAT) ? 4,286 2,08,286
PAT ? 10,000(Nil+10,000) 4,86,000
Less: Preference Dividend 10,000 10,000 10,000
Earnings for Equity share holders ? Nil (at BEP) 4,76,000
Number of Equity Shares 1,50,000 1,50,000 1,50,000
EPS ? - 3.1733
So Interest=₹3,93,714, EPS=₹3.1733, Amount of debt=3,93,714/12%=₹ 32,80,950
Solution 7:
Income Statement
Sales 1,11,00,000
Contribution (Sales × P/V ratio) 27,75,000
Less: Fixed cost (excluding Interest) (7,15,000)
EBIT (Earnings before interest and tax) 20,60,000
Less: Interest on debentures (12% ´ ₹ 60,91,400) (7,30,968)
EBT (Earnings before tax) 13,29,032
Less: Tax @ 30% 3,98,710
PAT (Profit after tax) 9,30,322
(i) Operating Leverage:
= 𝐸𝐵𝐼𝑇
= ₹20,60,000 = 1.35
(ii) Combined Leverage:
= Operating Leverage × Financial Leverage
= 1.35 ´ 1.55 = 2.09 (Approx)
Or,
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐸𝐵𝐼𝑇
× 𝐸𝐵𝑇
= ₹13,29,032 = 2.09 (Approx)
(iii) Earnings per share (EPS):
𝑃𝐴𝑇 ₹9,30,322
= 𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 6,55,000 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 = ₹1.42

Solution 8:
Computation of Operating Leverage (OL)
Selling Price = ₹ 21 per unit Variable Cost = ₹ 13.50 per unit
Fixed Cost = BEP × (Selling price – Variable cost) = 30,000 × (21 – 13.50) = 30,000 × 7.5 = 2,25,000
Particulars For 37,500 units For 45,000 units (₹)
(₹)
Sales (@ ₹ 21 /unit) 7,87,500 9,45,000
Less: Variable Cost (@ 13.50 /unit) 5,06,250 6,07,500
Contribution 2,81,250 3,37,500
Less: Fixed Cost 2,25,000 2,25,000
Earnings before Interest and tax (EBIT) 56,250 1,12,500
Operating Leverage ( EBIT ) ( 56,250 ) (1,12,500)
Operating Leverage 5 times 3 times
Solution 9:
Ratios for the year 2020-21
(i)Inventory turnover ratio
𝐶𝑂𝐺𝑆 ₹7,38,500
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = (87,500+70,000) = 9.4
2
(ii)Financial leverage
𝐸𝐵𝐼𝑇 ₹33,250
= 𝐸𝐵𝑇 = ₹22,750 = 1.46
𝐸𝐵𝐼𝑇(1−𝑡) ₹33,250(1−0.3) ₹23275
(iii)ROCE = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
= ₹2,10,000+₹1,92,500 = ₹2,01,250
× 100 = 11.56%
2
Solution 10:
Particulars Manchow Ltd (₹) Noodle Ltd (₹)
Sales 2,10,93,750 1,08,00,000

Less: Variable Cost 1,26,56,250 54,00,000
Contribution 84,37,500 54,00,000
Less: Fixed Cost 50,62,500 27,00,000
EBIT 33,75,000 27,00,000
Less: Interest 22,50,000 13,50,000
EBT 11,25,000 13,50,000
Less: Tax 3,37,500 4,05,000
PAT 7,87,500 9,45,000
Workings:
(i) Margin of Safety
For Manchow Ltd= 0.4
For Noodles Ltd= 0.4 x 1.25 = 0.5
(ii) Interest Expense
For Manchow Ltd = ₹ 22,50,000
For Noodles Ltd = ₹ 22,50,000 x 60%= ₹ 13,50,000
(iii) For Manchow Ltd:

Financial Leverage = 3
𝐸𝐵𝑇
= 𝐸𝐵𝐼𝑇−𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
=3

𝐸𝐵𝐼𝑇
𝐸𝐵𝐼𝑇 − 22,50,000
=3
EBIT = 3 EBIT - 67,50,000
67,50,000 = 2 EBIT
EBIT = 33,75,000
For Noodles Ltd:
Financial Leverage = 2
𝐸𝐵𝑇
= 𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
=2
𝐸𝐵𝐼𝑇
𝐸𝐵𝐼𝑇 − 13,50,000
=2
EBIT = 2 EBIT- 27,00,000
EBIT = 27,00,000
(i) Contribution:
For Manchow Ltd
Operating Leverage = 1/ Margin of Safety
= 1/0.4
= 2.5
2.5 = Contribution/33,75,000
Contribution = 84,37,500
For Noodles Ltd
Operating Leverage = 1/ Margin of Safety
= 1/0.5
=2
2 = Contribution/27,00,000
Contribution = 54,00,000
(v) Sales:
For Manchow Ltd
P/V Ratio = 40%
P/V Ratio = Contribution/Sales
0.4 = 84,37,500/Sales
Sales = 2,10,93,750
For Noodles Ltd
P/V Ratio = 50%
P/V Ratio = Contribution/Sales
0.5 = 54,00,000/Sales
Sales = 1,08,00,000
Solution 11:
Sales in units 1,20,000 1,00,000

(₹) (₹)
Sales Value 18,00,000 15,00,000
Variable Cost (12,00,000) (10,00,000)
Fixed expenses (2,00,000) (2,00,000)
EBIT 4,00,000 3,00,000
Debenture Interest (2,00,000) (2,00,000)
EBT 2,00,000 1,00,000
Tax @ 30% (60,000) (30,000)
Profit after tax (PAT) 1,40,000 70,000
𝐸𝐵𝐼𝑇 4,00,000 3,00,000
(i) Financial Leverage= 𝐸𝐵𝑇
= 2,00,000
=2 = 1,00,000
=3
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 6,00,000 5,00,000
(ii) Operating leverage = 𝐸𝐵𝐼𝑇
= 4,00,000 = 1.50 = 3,00,000 = 1.67
(iii) Earnings per share (EPS) 1,40,000
=₹7
70,000
= ₹ 3.5
20,000 20,000
Decrease in EPS = ₹ 7 – ₹ 3.5 = ₹ 3.5

% decrease in EPS 3.5
= x 100 = 50%
7

INVESTMENT DECISIONS
Solution 1:
Computation of Annual Cash Flow after Tax

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Savings in Salaries 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000
Reduction in 3,00,000 3,00,000 3,00,000 3,00,000 3,00,000
Production Delays
Reduction in Lost Sales 2,50,000 2,50,000 2,50,000 2,50,000 2,50,000
Gain due to Timely Billing 2,00,000 2,00,000 2,00,000 2,00,000 2,00,000
Salary to Computer (10,00,000 (10,00,000) (10,00,000) (10,00,000) (10,00,000)
Specialist )
Maintenance and (2,00,000) (1,80,000) (1,60,000) (1,40,000) (1,20,000)
Operating Cost
(payable in advance)
Depreciation (21 lakhs/5) (4,20,000) (4,20,000) (4,20,000) (4,20,000) (4,20,000)
Gain Before Tax 6,30,000 6,50,000 6,70,000 6,90,000 7,10,000
Less: Tax (30%) 1,89,000 1,95,000 2,01,000 2,07,000 2,13,000
Gain After Tax 4,41,000 4,55,000 4,69,000 4,83,000 4,97,000
Add: Depreciation 4,20,000 4,20,000 4,20,000 4,20,000 4,20,000
Add: Maintenance and 2,00,000 1,80,000 1,60,000 1,40,000 1,20,000
Operating Cost (payable
in advance)
Less: Maintenance and (2,00,000) (1,80,000) (1,60,000) (1,40,000) (1,20,000) -
Operating Cost (payable
in advance)
Net CFAT (2,00,000) 8,81,000 8,95,000 9,09,000 9,23,000 10,37,000
Note: Annual cash flows can also be calculated Considering tax shield on depreciation & maintenance and
operating cost. There will be no change in the final cash flows after tax.
Computation of NPV
Particulars Year Cash Flows (₹) PVF PV (₹)
Initial Investment (80% of 20 Lacs) 0 16,00,000 1 16,00,000
Installation Expenses 0 1,00,000 1 1,00,000
Instalment of Purchase Price 1 4,00,000 0.870 3,48,000
PV of Outflows (A) 20,48,000
CFAT 0 (2,00,000) 1 (2,00,000)
CFAT 1 8,81,000 0.870 7,66,470
CFAT 2 8,95,000 0.756 6,76,620
CFAT 3 9,09,000 0.658 5,98,122
CFAT 4 9,23,000 0.572 5,27,956
CFAT 5 10,37,000 0.497 5,15,389
PV of Inflows (B) 28,84,557
NPV (B-A) 8,36,557
Profitability Index (B/A) 1.408 or 1.41
Evaluation: Since the NPV is positive (i.e. ₹8,36,557) and Profitability Index is also greater than 1 (i.e. 1.41),
Alpha Ltd. may introduce artificial intelligence (AI) while making computers.
Solution 2:
A firm is in need of a small vehicle
Selection of Investment Decision
Tax shield on Purchase of New vehicle
Year WDV Dep. @ 25% Tax shield @ 30%
1 1,50,000 37,500 11,250

2 1,12,500 28,125 8,437

3 84,375 21,094 6,328
4 63,281 15,820 4,746
5 47,461 11,865 3,560
6 35,596 8,899 2,670
7 26,697 6,674 2,002
8 20,023 5,006 1,502
9 15,017 3,754 1,126
10 11,263 2,816 845
11 8,447 Scrap value
Tax shield on Purchase of Second hand vehicles

Year WDV Dep. @ 25% Tax shield @ 30%
1 80,000 20,000 6,000
2 60,000 15,000 4,500
3 45,000 11,250 3,375
4 33,750 8,437 2,531
5 25,313 6,328 1,898
6 60,000 15,000 4,500
7 45,000 11,250 3,375
8 33,750 8,437 2,531
9 25,313 6,328 1,898
10 18,985 4,746 1,424
Calculation of PV of Net outflow of New Vehicle
Year Cash OF/IF PV Factor PV of OF/IF
0 1,50,000 1 1,50,000
1 -11,250 0.892 -10,035
2 -8,437 0.797 -6,724
3 -6,328 0.711 -4,499
4 -4,746 0.635 -3,014
5 -3,560 0.567 -2,018
6 -2,670 0.506 -1,351
7 -2,002 0.452 -905
8 -1,502 0.403 -605
9 -1,126 0.36 -405
10 (845 + 8447) 0.322 -2,992
PVNOF 1,17,452
Calculation of PV of Net outflow of Second hand Vehicles

Year Cash OF/IF PV Factor PV of OF/IF
0 80,000 1 80,000
1 -6,000 0.892 -5,352
2 -4,500 0.797 -3,587
3 -3,375 0.711 -2,400
4 -2,531 0.635 -1,607
(60000 – 18985 –
5 0.567 22,179
1898) = 39,117
6 -4,500 0.506 -2,277

7 -3,375 0.452 -1,525

8 -2,531 0.403 -1,020
9 -1,898 0.36 -683
(1424 + 14239) =
10 0.322 -5,043
(15,663)
PVNOF 78,686
Advise: The PV of net outflow is low in case of buying second hand vehicles. Therefore, it is advisable to
buy second hand vehicles.
Solution 3:
A hospital is considering to purchase
Analysis of Investment Decisions
Situation-(i) Situation-(ii)
Commission Commission
Determination of Cash inflows
Income before Income after
taxes taxes
Cash flow up-to 7th year:
Sales Revenue 40,000 40,000
Less: Operating Cost (7,500) (7,500)
32,500 32,500
Less: Depreciation (80,000 – 6,000) ÷ 8 (9,250) (9,250)
Net Income 23,250 23,250
Tax @ 30% (6,975) (6,975)
Earnings after Tax (EAT) 16,275 16,275
Add: Depreciation 9,250 9,250
Cash inflow after tax per annum 25,525 25,525
Less: Loss of Commission Income (8,400) (12,000)
Net Cash inflow after tax per annum 17,125 13,525
In 8th Year:
Net Cash inflow after tax 17,125 13,525
Add: Salvage Value of Machine 6,000 6,000
Net Cash inflow in year 8 23,125 19,525
Calculation of Net Present Value (NPV) and Profitability Index (PI)

Situation-(i) Situation-(ii)
PV
[Commission [Commission
Particulars factor
@10% Income before Income after
taxes] taxes]
Present value of cash inflows (1st 83,347.38 65,826.18

A 4.867
(17,125 × 4.867) (13,525 × 4.867)
to 7th year)
Present value of cash inflow at 8th 10,799.38 9,118.18

B 0.467
(23,125 × 0.467) (19,525 × 0.467)
year
C PV of cash inflows 94,146.76 74,944.36
D Less: Cash Outflow 1.00 (80,000) (80,000)

E Net Present Value (NPV) 14,146.76 (5,055.64)
F PI = (C÷D) 1.18 0.94

Recommendation: The hospital may consider purchasing of diagnostic machine in situation
(i) where commission income is 12,000 before tax as NPV is positive and PI is also greater than 1.
Contrary to situation (i), in situation (ii) where the commission income is net of tax, the
recommendation is reversed to not purchase the machine as NPV is negative and PI is also less
than 1.
Solution 4:
1. ABC & Co.

Equivalent Annual Cost (EAC) of new machine
(₹)
(i) Cost of new machine now 18,00,000

Add: PV of annual repairs @ ₹ 2,00,000 per annum for 8 years (₹ 2,00,000 x 4.4873) 8,97,460
Less: PV of salvage value at the end of 8 years 26,97,460
(₹ 4,00,000 x 0.3269) 1,30,760
25,66,700
Equivalent annual cost (EAC) (₹ 25,66,700/4.4873) 5,71,992
PV of cost of replacing the old machine in each of 4 years with new machine
Scenario Year Cash Flow (₹) PV @ 15% PV (₹)
Replace Immediately 0 (5,71,992) 1 (5,71,992)
0 8,00,000 1 8,00,000
2,28,008
Replace in one year 1 (5,71,992) 0.8696 (4,97,404)
1 (2,00,000) 0.8696 (1,73,920)
1 5,00,000 0.8696 4,34,800
(2,36,524)
Replace in two years 1 (2,00,000) 0.8696 (1,73,920)
2 (5,71,992) 0.7561 (4,32,483)
2 (4,00,000) 0.7561 (3,02,440)
2 3,00,000 0.7561 2,26,830
(6,82,013)
Replace in three years 1 (2,00,000) 0.8696 (1,73,920)
2 (4,00,000) 0.7561 (3,02,440)
3 (5,71,992) 0.6575 (3,76,085)
3 (6,00,000) 0.6575 (3,94,500)
3 2,00,000 0.6575 1,31,500
(11,15,445)
1 (2,00,000) 0.8696 (1,73,920)
2 (4,00,000) 0.7561 (3,02,440)
3 (6,00,000) 0.6575 (3,94,500)
Replace in four years
4 (5,71,992) 0.5718 (3,27,065)
4 (8,00,000) 0.5718 (4,57,440)
(16,55,365)

Advice: The company should replace the old machine immediately because the PV of the cost of replacing
the old machine with new machine is the least.
Solution 5:
Determination of Cash inflows
Elements (₹)
Sales Revenue 45,00,000
Less: Operating Cost 14,00,000
31,00,000
Less: Depreciation (90,00,000 – 10,00,000)/5 16,00,000
Net Income 15,00,000
Tax @ 40% 6,00,000
Earnings after Tax (EAT) 9,00,000
Add: Depreciation 16,00,000
Cash inflow after tax per annum 25,00,000
Less: Loss of Commission Income 6,60,000
Net Cash inflow after tax per annum 18,40,000
In 5th Year:
New Cash inflow after tax 18,40,000
Add: Salvage Value of Machine 10,00,000
Net Cash inflow in year 5 28,40,000
Calculation of Net Present Value (NPV)
Present Value of Cash
Year CFAT PV Factor @10%
inflows
1 to 4 18,40,000 3.169 58,30,960
5 28,40,000 0.62 17,60,800
75,91,760
Less: Cash Outflows 90,00,000
NPV (14,08,240)
𝑆𝑢𝑚 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤𝑠 75,91,760,
Profitability Index= 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠
= 90,00,000
=0.844
Advise: Since the net present value is negative and profitability index is also less than 1, therefore, the hospital
should not purchase the MRI machine.
Solution 6:
Calculation of Cash Flow After tax
Year 1 2 3 to 5 6 to 8
A Capacity 20% 30% 75% 50%
B Units 80000 120000 300000 200000
C Contribution p.u. ₹60 ₹60 ₹60 ₹60
D Contribution ₹48,00,000 ₹72,00,000 ₹1,80,00,00 ₹1,20,00,00
0 0
E Fixed Cash Cost ₹16,00,000 ₹16,00,000 ₹16,00,000 ₹16,00,000
Depreciation
F Original Equipment (₹240Lakhs/8) ₹30,00,000 ₹30,00,000 ₹30,00,000 ₹30,00,000
G Additional Equipment (₹24Lakhs/6) -- -- ₹4,00,000 ₹4,00,000
H Advertisement Expenditure ₹30,00,000 ₹15,00,000 ₹10,00,000 ₹4,00,000
I Profit Before Tax (D- E-F-G-H) ₹ (28,00,000) ₹11,00,000 ₹1,20,00,00 ₹66,00,000
0
J Tax savings/ (expenditure) ₹14,00,000 ₹ ₹ ₹
(5,50,000) (60,00,000) (33,00,000)

K Profit After Tax ₹ (14,00,000) ₹5,50,000 ₹60,00,000 ₹33,00,000

L Add: Depreciation (F+G) ₹30,00,000 ₹30,00,000 ₹34,00,000 ₹34,00,000
M Cash Flow After Tax ₹16,00,000 ₹35,50,000 ₹94,00,000 ₹67,00,000
Calculation of NPV
Year Particulars Cash Flows PV factor PV
0 Initial Investment ₹ (2,40,00,000) 1.000 ₹ (2,40,00,000)
2 CFAT ₹ 35,50,000 0.797 ₹ 28,29,350
2 Additional Equipment ₹ (26,00,000) 0.797 ₹ (20,72,200)
3 CFAT ₹ 94,00,000 0.712 ₹ 66,92,800
4 CFAT ₹ 94,00,000 0.636 ₹ 59,78,400
5 CFAT ₹ 94,00,000 0.567 ₹ 53,29,800
6 CFAT ₹ 67,00,000 0.507 ₹ 33,96,900
7 CFAT ₹ 67,00,000 0.452 ₹ 30,28,400
8 CFAT ₹ 67,00,000 0.404 ₹ 27,06,800
8 WC Released ₹ 25,00,000 0.404 ₹ 10,10,000
8 Salvage Value ₹ 2,00,000 0.404 ₹ 80,800
Net Present Value ₹39,09,850
Since the NPV is positive, the proposed project should be implemented.
Solution 7:
(a) Calculation of Cash Flow After Tax (CFAT) in original scenario
Sr. No. Particulars
1 Sales units 1,50,000
(₹)
2 Sale Price p.u. 120
3 Sales 1,80,00,000
4 Variable Cost p.u. 60
5 Variable Cost 90,00,000
6 Contribution (3-4) 90,00,000
7 Fixed OH (Excluding Depreciation) 22,50,000
8 Depreciation 30,00,000
9 EBIT or PBT (6-7-8) 37,50,000
10 Tax@40% 15,00,000
11 Profit After Tax (PAT) 22,50,000
12 Add: Depreciation 30,00,000
13 CFAT 52,50,000
Calculation of NPV in original Scenario

Years Particulars Cash Flows PVF PV
0 Initial Investment (1,50,00,000) 1 (1,50,00,000)
0 Initial WC introduced (60,00,000) 1 (60,00,000)
1 to 5 CFAT 52,50,000 3.6048 189,25,075
5 WC released 60,00,000 0.5674 34,04,561
NPV 13,29,636
Since the NPV of the project is Positive the project is viable.
(b) Sensitivity Analysis of the project under various conditions
Sr. Particulars (i)Selling (ii)Variable (iii)Plant
No. Price reduced Cost increased &Machinery cost
by 10% by 10% increased by 10%
1 Sales units 1,50,000 1,50,000 1,50,000
₹ ₹ ₹
2 Sale Price p.u. 108 120 120
3 Sales 162,00,000 180,00,000 180,00,000
4 Variable Cost p.u. 60 66 60
5 Variable Cost 90,00,000 99,00,000 90,00,000

6 Contribution (3-4) [or Contribution 72,00,000 81,00,000 90,00,000

per unit x1,50,000 units)
7 Fixed OH (Excluding Depreciation) 22,50,000 22,50,000 22,50,000
8 Depreciation 30,00,000 30,00,000 33,00,000
9 EBIT or PBT (6-7-8) 19,50,000 28,50,000 34,50,000
10 Tax 7,80,000 11,40,000 13,80,000
11 PAT 11,70,000 17,10,000 20,70,000
12 Add: Depreciation 30,00,000 30,00,000 33,00,000
13 CFAT 41,70,000 47,10,000 53,70,000
14 PV of CFAT (CFAT x3.6048) 150,31,917 169,78,496 193,57,648
15 WC released (60,00,000 x0.5674) 34,04,561 34,04,561 34,04,561
16 Initial Investment (1,50,00,000) (1,50,00,000) (1,50,00,000)
17 Initial WC introduced (60,00,000) (60,00,000) (60,00,000)
18 NPV (14+15-16-17) (25,63,522) (6,16,943) 2,62,209
19 % Change in NPV [Based on -292.80% -146.40% -80.28%
original NPV (13,29,636)]
From the above calculations it can be seen that change in selling price is most sensitive and has the maximum
effect on the NPV.
Solution 8:
Calculation of year-wise Cash Inflow (₹ in crores)
Year Sales VC(60% of FC Dep. Profit Tax PAT Dep. Cash
Sales Value) (@30%) inflow
1 17.28 10.368 3.6 4.375 (1.063) - (1.0630) 4.375 3.312
2 25.92 15.552 3.6 4.375 2.393 0.3990* 1.9940 4.375 6.369
3 62.4 37.44 3.6 4.375 16.985 5.0955 11.8895 4.375 16.2645
4-5 64.8 38.88 3.6 4.825# 17.495 5.2485 12.2465 4.825 17.0715
6-8 43.2 25.92 3.6 4.825 8.855 2.6565 6.1985 4.825 11.0235
*(30% of 2.393 – 30% of 1.063) = 0.7179 – 0.3189 = 0.3990
#4.375 + (2.50 - .25)/5 = 4.825
Calculation of Cash Outflow at the beginning
Particulars ₹
Cost of New Equipment 35,00,00,000
Add: Working Capital 4,00,00,000
Outflow 39,00,00,000
Calculation of NPV
Year Cash inflows PV factor NPV
(₹) (₹)
1 3,31,20,000 .893 2,95,76,160
2 6,36,90,000 .797 5,07,60,930
3 16,26,45,000 - 2,50,00,000 = 13,76,45,000 .712 9,80,03,240
4 17,07,15,000 .636 10,85,74,740
5 17,07,15,000 .567 9,67,95,405
6 11,02,35,000 .507 5,58,89,145
7 11,02,35,000 .452 4,98,26,220
8 11,02,35,000 + 4,00,00,000 + 25,00,000 = 15,27,35,000 .404 6,17,04,940
Present Value of Inflow 55,11,30,780
Less: Out flow 39,00,00,000
Net Present Value 16,11,30,780
Advise: Since the project has a positive NPV, it may be accepted.
Solution 10:(a) Option I: Purchase Machinery and Service Part at the end of Year 2 and 4 .
Net Present value of cash flow @ 12% per annum discount rate.
NPV (in ₹) = - 10,00,000 + 2,56,000 x (0.8928+0.7972+0.7118+0.6355+0.5674) – (1,00,000 x

0.7972+1,00,000 x 0.6355) + (76,000 x 0.5674)

= - 10,00,000 + (2,56,000 x 3.6047) – 1,43,270+43,122.4
= - 10,00,000 + 9,22,803.2 – 1,43,270+ 43,122.4
NPV = - 1,77,344.4
Since Net Present Value is negative; therefore, this option is not to be considered.
If Supplier gives a discount of ₹ 90,000, then:
NPV (in ₹) = + 90,000 - 1,77,344.4 = -87,344.4
In this case, Net Present Value is still negative; therefore, this option may not be advisable
Option II: Purchase Machinery and Replace Part at the end of Year 2.
NPV (in ₹)= - 10,00,000 + 2,56,000 x (0.8928+0.7972+0.7118+0.6355+0.5674) – (3,00,000 x
0.7118) + (1,86,000 x 0.5066+1,36,000 x 0.5066)
= - 10,00,000 + (2,56,000 x 3.6047) – 2,13,540+1,63,125.2
= - 10,00,000 + 9,22,803.2 – 2,13,540+1,63,125.2
NPV = - 1,27,611.6
Net Present Value is negative, the machinery should not be purchased.
If the Supplier gives a discount of ₹ 90,000, then:
NPV (in ₹) = 90,000 - 1,27,611.6 = - 37,611.6
In this case, Net Present Value is still negative; therefore, this option may not be advisable.
Decision: The Machinery should not be purchased as it will earn a negative NPV in both options of
repair and replacement.
Solution 11:
Calculation of Net Cash flows
Contribution = (400 – 375) ´ 80,000 = ₹ 20,00,000
Fixed costs = 10,40,000 – [(40,00,000 – 5,00,000)/5] = ₹ 3,40,000
Year Capital Contribution Fixed costs Promotion Net cash flow

(₹) (₹) (₹) (₹) (₹)
0 (32,00,000) (32,00,000)
1 (8,00,000) 20,00,000 (3,40,000) (1,25,000) 7,35,000
2 20,00,000 (3,40,000) (1,75,000) 14,85,000
3 20,00,000 (3,40,000) 16,60,000
4 20,00,000 (3,40,000) 16,60,000
5 5,00,000 20,00,000 (3,40,000) 21,60,000
Calculation of Net Present Value
Year Net cash flow (₹) 12% discount factor Present value (₹)
0 (32,00,000) 1.000 (32,00,000)
1 7,35,000 0.893 6,56,355
2 14,85,000 0.797 11,83,545
3 16,60,000 0.712 11,81,920
4 16,60,000 0.636 10,55,760
5 21,60,000 0.567 12,24,720
21,02,300
The net present value of the project is ₹21,02,300.

RISK ANALYSIS IN CAPITAL BUDGETING

Solution 1:
Computation of Net Present Value (NPV):
Year PVF @ 10% Original Cash Flows (₹) PV (₹) PV (₹)
0 1 (1,00,000) (1,00,000)
1 0.909 30,000 27,270
2 0.826 40,000 33,040
3 0.751 50,000 37,550
4 0.683 60,000 40,980 1,38,840
NPV 38,840
Determination of the most Sensitive factor:

(i) Sensitivity Analysis w.r.t. Initial Project cost (such that NPV becomes zero):
NPV of the project would be zero when the initial project cost is increased by ₹38,840.
₹38,840
Percentage change in Initial project cost = 1,00,000 × 100= 38.84%
(ii) Sensitivity Analysis w.r.t. Annual Cash inflows (such that NPV becomes zero):
NPV of the project would be zero when the Annual cash inflows is decreased by
₹38,840.
₹38,840
Percentage change in the Annual cash inflows = ₹1,38,840 × 100 = 27.97%
Conclusion: Annual cash inflows factor is the most sensitive as only a change beyond 27.97% in savings
makes the project unacceptable.
Solution 2:
Selection of project on the basis of Risk Adjusted Net Present Value
Particulars A B C
Co efficient of Variation 2.2 1.6 1.2
Applicable discount rate (%) 25 18 16
Annual cash inflow (₹) 30,000 42,000 70,000
Relevant PVIFA 2.689 3.127 3.274
PV of cash inflow (₹) 80,670 1,31,334 2,29,180
Less: Cash outflow (₹) 70,000 1,20,000 2,20,000
Risk adjusted NPV (₹) 10,670 11,334 9,180
Conclusion: Project B should be selected as its Risk adjusted NPV is high.
Solution 3:
1. i) Calculation of Yearly Cash Inflow
In worst case: High costs and Low price (Selling price) and volume (Sales units) are taken.
In best case: Low costs and High price (Selling price) and volume (Sales units) are taken.
Worst Case Base Best Case
Sales (units) (A) 9,000 10,000 11,000
(₹) (₹) (₹)
Selling Price p.u. 175 200 225
Less: Variable cost p.u. 150 125 100
Contribution p.u. (B) 25 75 125
Total Contribution (A x B) 2,25,000 7,50,000 13,75,000
Less: Fixed Cost 2,00,000 1,50,000 1,00,000
EBT 25,000 6,00,000 12,75,000
Less: Tax @ 25% 62,50 1,50,000 3,18,750
EAT 18,750 4,50,000 9,56,250
Add: Depreciation 70,000 70,000 70,000

Cash Inflow 88,750 5,20,000 10,26,250

(ii) Calculation of NPV in different scenarios
Worst Case Base Best Case
Initial outlay (A) (₹) 15,00,000 15,00,000 15,00,000
Cash Inflow (c) (₹) 88,750 5,20,000 10,26,250
Cumulative PVF @ 15% for 5 years (d) 3.353 3.353 3.353
PV of Cash Inflow (B = c x d) (₹) 2,97,578.75 17,43,560.00 34,41,016.25
NPV (B - A) (₹) (12,02,421.25) 2,43,560.00 19,41,016.25
Solution 4:
Calculation of Expected Cash Flow, Standard Deviation & Co-efficient of variation
(a) Project X
Probability (P) Cash Flows (x) P.x P.x2
0.2 5,00,000 1,00,000 50,00,00,00,000

0.3 3,00,000 90,000 27,00,00,00,000
0.15 1,50,000 22,500 3,37,50,00,000
0.2 50,000 10,000 50,00,00,000
0.15 10,000 1,500 1,50,00,000
2,24,000 80,89,00,00,000
Expected Cash flow = ∑ P.x = 2,24,000 = X
2 2
Standard Deviation = Σ𝑃. 𝑥 − (Σ𝑃. 𝑥)
= 80, 89, 00, 00, 000 − (2, 24, 000)

2
= 30, 71, 40, 00, 000
σ𝑥 = 1,75,254
σ𝑥
Coefficient of variation = 𝑋
1,75,254
= 2,24,000
COVx = 0.7824
(b) Project Y
Probability (P) Cash Flows (y) P.y P.y2
0.3 4,00,000 1,20,000 48,00,00,00,000

0.2 3,50,000 70,000 24,50,00,00,000
0.2 2,50,000 50,000 12,50,00,00,000
0.2 75,000 15,000 1,12,50,00,000
0.1 5,000 500 25,00,000
2,55,500 86,12,75,00,000
Expected Cash flow = ∑ P.y = y = 2,55,500

2 2
Standard Deviation = Σ𝑃. 𝑦 − (Σ𝑃. 𝑦)
2
= 86, 12, 75, 00, 000 − (2, 55, 500)
σ𝑦 = 1,44,386
σ𝑦
Co-efficient of variation = 𝑌
1,44,386
= 2,55,500
COVY = 0.5651
B. Calculation of Risk Adjusted Discount Rate
Project COV Risk Premium RADR
X 0.7824 6% 6% + 6% = 12%
Y 0.5651 4% 6% + 4% = 10%
C. Calculation of NPV
Year Project X Project Y

Cash Flows PVF @ 12% PV Cash Flows PVF @ 10% PV
0 (1,50,000) 1 (1,50,000) (1,50,000) 1 (1,50,000)
5 2,24,000 0.5674 1,27,098 2,55,500 0.6209 1,58,640
NPV (22,902) 8,640
NPV of project Y is higher, Project Y should be selected.

Solution 5:
Calculation of NPV and sensitivity for different scenarios
Original Scenario Sale Price Sales Volume Fixed Cost
reduced by reduced by increased by 10%
10% 10%
Units 300000 300000 270000 300000
Sale Price p.u. ₹20 ₹18 ₹20 ₹20
VC p.u. ₹12 ₹12 ₹12 ₹12
Contribution p.u. ₹8 ₹6 ₹8 ₹8
Contribution ₹24,00,000 ₹18,00,000 ₹21,60,000 ₹24,00,000
Less: Fixed Cost ₹6,00,000 ₹6,00,000 ₹6,00,000 ₹6,60,000
Profit/Cash Flows ₹18,00,000 ₹12,00,000 ₹15,60,000 ₹17,40,000
PVAF (14%, 5 3.4331 3.4331 3.4331 3.4331
years)
PV of Cash Inflows ₹61,79,546 ₹41,19,697 ₹53,55,606 ₹59,73,561
Less: Initial ₹ (55,00,000) ₹ (55,00,000) ₹ (55,00,000) ₹ (55,00,000)
Investment
NPV ₹6,79,546 ₹ (13,80,303) ₹ (1,44,394) ₹4,73,561
% Change in NPV NA (303.12%) (121.25%) (30.31%)
Sensitivity NA 30.3121 12.1249 3.0312
times times times
Sales Price is the most sensitive variable of all and needs to be given due attention during the life of the
project.
Solution 6:
Cost Structure for 52000 units
Raw Material @ ₹ 400 2,08,00,000

Direct Wages @ ₹ 150 78,00,000

Manufacturing Overheads@ ₹ 200 1,04,00,000
Selling and Distribution OH@ ₹ 100 52,00,000
Total Cost 4,42,00,000
Sales@₹1000 5,20,00,000
Particulars Calculation Amount (₹)

A. Current Assets:
Raw Material Stock 2,08,00,000 x 52
4 16,00,000
Work in Progress (WIP) Stock 2, 08, 00, 000 +
(78,00,000+1,04,00,000)
×
4 23,00,000
2 52
Finished Goods Stock 4
4, 42,00,000 x 52 34,00,000
Receivables 8
5,20,00,000 x 52 80,00,000
Cash 50,000
Total Current Assets 1,53,50,000
B. Current Liabilities:
Creditors 20800000 x 52
4 16,00,000
C. Working 1,37,50,000
Capital Estimates(A-B)
Solution 7:
Computation of CFAT (year 1 to year 4)
Sr. Particulars Original Sales Units SP reduced Variable Cost
No. Case reduced by 10% by 10% increased by 10%
A Sale Price p.u. ₹ 250 ₹ 250 ₹ 225 ₹ 250
B Sale units 6000 5400 6000 6000
C Sales (A x B) ₹ 15,00,000 ₹ 13,50,000 ₹ 13,50,000 ₹ 15,00,000
D Variable Cost p.u. ₹ 80 ₹ 80 ₹ 80 ₹ 88
E Variable Cost (B x D) ₹ 4,80,000 ₹ 4,32,000 ₹ 4,80,000 ₹ 5,28,000
F Contribution (C - E) ₹ 10,20,000 ₹ 9,18,000 ₹ 8,70,000 ₹ 9,72,000
G Less: Fixed Cost ₹ -2,00,000 ₹ -2,00,000 ₹ -2,00,000 ₹ -2,00,000
H PBDT (F-G) ₹ 8,20,000 ₹ 7,18,000 ₹ 6,70,000 ₹ 7,72,000
I Less: Depreciation
(1500000-150000)/4 ₹ -3,37,500 ₹ -3,37,500 ₹ -3,37,500 ₹ -3,37,500
(1600000-150000)/4 - - - -
J PBT ₹ 4,82,500 ₹ 3,80,500 ₹ 3,32,500 ₹ 4,34,500
K Less: Taxes @ 30% ₹ -1,44,750 ₹ -1,14,150 ₹ -99,750 ₹ -1,30,350
L PAT ₹ 3,37,750 ₹ 2,66,350 ₹ 2,32,750 ₹ 3,04,150
M Add: Depreciation ₹ 3,37,500 ₹ 3,37,500 ₹ 3,37,500 ₹ 3,37,500
N CFAT ₹ 6,75,250 ₹ 6,03,850 ₹ 5,70,250 ₹ 6,41,650
Sr. Particulars Fixed Cost increased Initial Investment

No. by 10% increased by 10%
A Sale Price p.u. ₹ 250 ₹ 250
B Sale units 6000 6000
C Sales (A x B) ₹ 15,00,000 ₹ 15,00,000
D Variable Cost p.u. ₹ 80 ₹ 80
E Variable Cost (B x D) ₹ 4,80,000 ₹ 4,80,000

F Contribution (C - E) ₹ 10,20,000 ₹ 10,20,000

G Less: Fixed Cost ₹ -2,20,000 ₹ -2,00,000
H PBDT (F-G) ₹ 8,00,000 ₹ 8,20,000
I Less: Depreciation
(1500000-150000)/4 ₹ -3,37,500 -
(1600000-150000)/4 - ₹ -3,62,500
J PBT ₹ 4,62,500 ₹ 4,57,500
K Less: Taxes @ 30% ₹ -1,38,750 ₹ -1,37,250
L PAT ₹ 3,23,750 ₹ 3,20,250
M Add: Depreciation ₹ 3,37,500 ₹ 3,62,500
N CFAT ₹ 6,61,250 ₹ 6,82,750
Calculation of NPV and sensitivity analysis

Sr. Particulars Original Sales Units SP reduced Variable Cost
No. Case reduced by by 10% increased by
10% 10%
I CFAT ₹ 6,75,250 ₹ 6,03,850 ₹ 5,70,250 ₹ 6,41,650
II PVAF @ 14% 2.9138 2.9138 2.9138 2.9138
III PV of CFATs (I x II) ₹ ₹ 17,59,498 ₹16,61,594 ₹ 18,69,640
19,67,543
IV Salvage ₹ 1,50,000 ₹ 1,50,000 ₹ 1,50,000 ₹ 1,50,000
V PVF @ 14% 0.5921 0.5921 0.5921 0.5921
VI PV of Salvage (IV x V) ₹ 88,815 ₹ 88,815 ₹ 88,815 ₹ 88,815
VII Initial Investment ₹ ₹ 15,00,000 ₹15,00,000 ₹ 15,00,000
15,00,000
VIII NPV (III+VI-VII) ₹ 5,56,358 ₹ 3,48,313 ₹ 2,50,409 ₹ 4,58,455
IX Sensitivity (Case NPV- -37.39% -54.99% -17.60%
Original NPV)/ Original NPV
Most
sensitive
Capitalization rate (ke) = 0.20 Market price at year end (P1) = ?

Sr. Particulars Fixed Cost Initial Investment
No. increased by increased by 10%
10%
I CFAT ₹ 6,61,250 ₹ 6,82,750
II PVAF @ 14% 2.9138 2.9138
III PV of CFATs (I x II) ₹ 19,26,750 ₹ 19,89,397
IV Salvage ₹ 1,50,000 ₹ 1,50,000
V PVF @ 14% 0.5921 0.5921
VI PV of Salvage (IV x V) ₹ 88,815 ₹ 88,815
VII Initial Investment ₹ 15,00,000 ₹ 16,50,000
VIII NPV (III+VI-VII) ₹ 5,15,565 ₹ 4,28,212
IX Sensitivity Sensitivity (Case NPV-Original -7.33% -23.03%
NPV)/ Original NPV
Least sensitive

Solution 8:
Statement showing the Evaluation of credit Policies
Particulars Proposed Policy ₹
A. Expected Profit:
(a) Credit Sales 40,00,000
(b) Total Cost
(i) Variable Costs (₹ 380 x 10000 units) 38,00,000
(ii) Recurring Costs 20,000
38,20,000
(c) Bad Debts 80,000
(d) Expected Profit [(a) – (b) – (c)] 1,00,000
B. Opportunity Cost of Investments in 1,31,790
Receivables
C. Net Benefits (A – B) (31,790)
Recommendation: The Proposed Policy should not be adopted since the net benefits under this policy are
negative.
Working Note: Calculation of Opportunity Cost of Average Investments
𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛
Opportunity Cost = Total Cost × 360
× 100
Particulars 20% 30% 30% 18% Total
A. Total Cost 7,64,000 11,46,000 11,46,000 6,87,600 37,43,600
B. Collection period 30/360 60/360 90/360 100/360
C. Required Rate of 18% 18% 18% 18%
Return
D. Opportunity 11,460 34,380 51,570 34,380 1,31,790
Cost (A × B × C)

DIVIDEND DECISIONS
Solution 1:
(a)
₹ in lakhs
Net Profit 75
Less: Preference dividend 30
Earning for equity shareholders 45
Earning per share = 45/7.5 = ₹ 6.00
Let, the dividend per share be D to get share price of ₹ 42
𝑟
𝐷+ (𝐸−𝐷)
P= 𝐾𝑒
𝐾𝑒
0.20
𝐷+ 0.16 (6−𝐷)
₹42= 0.16
0.16 𝐷+ 1.2 − 0.20𝐷

6.72 = 0.16
0.04D = 1.2 – 1.0752

D = 3.12
𝐷𝑃𝑆 3.12
D/P ratio = 𝐸𝑃𝑆 ×100 = 6
×100 = 52%
So, the required dividend payout ratio will be = 52%
(b) Since r > Ke, the optimum dividend pay-out ratio would ‘Zero’ (i.e. D = 0),
Accordingly, value of a share:

𝑟
𝐷+ 𝐾𝑒 (𝐸−𝐷)
P= 𝐾𝑒
0.20
0+ 0.16 (6−0)
P = 0.16
= ₹ 46.875
(c) The optimality of the above pay-out ratio can be proved by using 25%, 50%, 75% and
100% as pay- out ratio:
At 25% pay-out ratio
0.20
1.5+ (6−1.5)
P= 0.16
0.16
= ₹44. 531
0.20
3+ (6−3)
P= 0.16
0.16
= ₹42. 188
0.20
4.5+ (6−4.5)
P= 0.16
0.16
= ₹39. 844
0.20
6+ (6−6)
P= 0.16
0.16
= ₹ 37.50
From the above it can be seen that price of share is maximum when dividend pay-out
ratio is ‘zero’ as determined in (b) above.
Solution 2:
P0 = ₹ 10 n = 2,00,000, E = ₹ 5,00,000 Ke = 15%, ∆n = 26,089, I = ?
𝑃1
Po= 1+𝐾𝑒

𝑃1
10= 1.15
P1= 11.5
𝐼−𝐸 + 𝑛𝐷1
∆𝑛= 𝑃1
1−5,00,000
26.089= 11.5
I = 8,00,024
Now,
P0 = ₹ 10, n = ₹ 2,00,000,
E = ₹ 5,00,000, I = 8,00,024,
Ke = 15%, ∆n 47,619, D1 = ?
𝑃1+𝐷1
Po= 1+𝐾𝑒
𝑃1+𝐷1
10= 1.15
P1= 11.5-D1
𝐼−𝐸 + 𝑛𝐷1
∆𝑛 = 𝑃1
8,00,024−5,00,000+2,00,000𝐷1
47.619= 𝑃1
47,619 P1 = 2,00,000 D1+ 3,00,024
From 1,
47619 (11.5 – D1) = 2,00,000 D1 + 3,00,024
5,47,618.5 – 47,619D1 = 2,00,000D1 + 3,00,024

2,47,594.5 = 2,00,000D1 + 47,619 D1
2,47,594.5 = 2,47,619 D1
2,47,594.5
D1 = 2,47,619 = 0.99 =1
P1 = 11.5 – D1
P1 = 11.5 – 1
P1 = 10.5
(2,00,000+47,619)(10.5)−8,00,024 +5,00,000
n.Po = 1.15
n.P0 = ₹19,99,979 » ₹20,00,000
Using direct calculation,
n.P0 = 2,00,000 ×10 = ₹ 20,00,000
Solution 3:
CASE 1: Value of the firm when dividends are not paid.
Step 1: Calculate price at the end of the period
Ke = 15%, P₀ = ₹100, D₁ = 0
𝑃1+𝐷1
Pₒ = 1+𝐾𝑒
𝑃1+0
₹100 = 1+0.15
P₁ = ₹115
Step 2: Calculation of funds required for investment
Earning ₹ 40,00,000
Dividend distributed Nil
Fund available for investment ₹ 40,00,000
Total Investment ₹ 50,00,000
Balance Funds required ₹ 50,00,000 - ₹ 40,00,000 = ₹
10,00,000
Step 3: Calculation of No. of shares required to be issued for balance funds
No. of shares = Funds required/P1
∆n = ₹10,00,000/₹115
Step 4: Calculation of value of firm
nPₒ = [(n+∆n)P1-I+E]/(1+Ke)
nP₀ = [(100000+1000000/₹115) ₹115 - ₹5000000 + ₹4000000]/(1.15)

= ₹1,00,00,000
CASE 2: Value of the firm when dividends are paid.
Step 1: Calculate price at the end of the period
Ke= 15%, P₀= ₹100, D₁= ₹10
𝑃1+𝐷1
Pₒ = 1+𝐾𝑒
𝑃1+10
₹100 = 1+0.15
P₁ = ₹105
Step 2: Calculation of funds required for investment
Earning ₹ 40,00,000
Dividend distributed 10,00,000
Fund available for investment ₹ 30,00,000
Total Investment ₹ 50,00,000
Balance Funds required ₹ 50,00,000 - ₹ 30,00,000 = ₹ 20,00,000
Step 3: Calculation of No. of shares required to be issued for balance fund
No. of shares = Funds Required/P1
∆n = ₹2000000/₹105
Step 4: Calculation of value of firm
nPₒ = [(n+∆n)P1 – I+E]/(1+Ke)
nP₀ = [(100000 + 2000000/₹105) ₹105 – ₹5000000 + ₹4000000]/(1.15)= ₹1,00,00,000
Thus, it can be seen from the above calculations that the value of the firm remains the same in either case.
Solution 4:
Price per share according to Gordon’s Model is calculated as follows:
Particulars Amount in ₹
Net Profit 78 lakhs
Less:Preference dividend(120 lakhs@15%) 18 lakhs
Earnings for equity shareholders 60 lakhs
Earnings Per Share 60 lakhs/6 lakhs = ₹
10.00
Price per share according to Gordon’s Model is calculated as follows:
𝐸1(1−𝑏)
P0 = 𝐾𝑒 − 𝑏𝑟
Here, E1 = 10, Ke = 16%
(i) When dividend pay-out is 30%
10×0.30 3
Po = 0.16−(0.70×0.2) = 0.16−0.14 = ₹150
(ii) When dividend pay-out is 50%
10×0.5 5
P0 = 0.16−(0.5×0.2) = 0.16−0.10 = ₹83.33
(iii) When dividend pay-out is 100%
10×1 10
P0 = 0.16−(0×0.2) = 0.16 =₹ 62.5
Solution 5:
(i) As per Gordon’s Model, Price per share is computed using the formula:
𝐸1(1−𝑏)
P0 = 𝐾𝑒−𝑏𝑟
Where,
P0 = Price per share
E1 = Earnings per share
b = Retention ratio; (1 - b = Pay-out ratio)
Ke = Cost of capital r = IRR
br = Growth rate (g)
Applying the above formula, price per share
30×0.3* 9
P0 = 0.15−0.70×0.2 = 0.01 = ₹ 900
9
*Dividend pay-out ratio = ₹30 = 0.3 or 30%
(ii) As per Walter’s Model, Price per share is computed using the formula:

𝑟
𝐷+ 𝐾𝑒 (𝐸−𝐷)
Price (P) = 𝐾𝑒
Where,
P = Market Price of the share
E = Earnings per share
D = Dividend per share
Ke = Cost of equity/ rate of capitalization/ discount rate
r = Internal rate of return/ return on investment
Applying the above formula, price per share
0.20
𝑔+ 0.15 (30−9) 37
P= 0.15
= 0.15
= ₹246.67
Solution 6:
The Present Value of the Cash Flows for all the years by discounting the cash flow at 7% is calculated as
below:
Year Cash flows Discounting Present value of Cash
₹In lakhs Factor@7% Flows ₹ In Lakhs
1 50 0.935 46.75
2 120 0.873 104.76
3 150 0.816 122.40
4 160 0.763 122.08
5 130 0.713 92.69
Total of present value of Cash flow 488.68
Less: Initial investment (200.00)
Net Present Value (NPV) 288.68
Now, the risk-free rate is 7 % and the risk premium expected by the Management is 7 %. So, the risk adjusted
discount rate is 7 % + 7 % =14%.
Discounting the above cash flows using the Risk Adjusted Discount Rate would be as below:
Year Cash flows Discounting Present Value of Cash Flows
₹ in Lakhs Factor@14% ₹ in lakhs
1 50 0.877 43.85
2 120 0.769 92.28
3 150 0.675 101.25
4 160 0.592 94.72
5 130 0.519 67.47
Total of present value of Cash flow 399.57
Initial investment (200.00)
Net present value (NPV) 199.79

WORKING CAPITAL
Solution 1:
Current Assets = 150 + 100 + 50 + 125 + 55 = ₹480 Lakhs
Current Liabilities = 100 + 80 + 100 = ₹280 Lakhs
Maximum Permissible Banks Finance under Tandon Committee Norms:
Method I
Maximum Permissible Bank Finance = 75% of (Current Assets – Current Liabilities)
= 75% of (480 - 280)
= ₹150 Lakhs
Method II
Maximum Permissible Bank Finance = 75% of Current Assets – Current Liabilities
= 75 % of 480 – 280
= ₹80 Lakhs
Method III
Maximum Permissible Bank Finance = 75% of (Current Assets – Core Current Assets) – Current
Liabilities
= 75 % of (480 - 30) – 280
= ₹57.5 Lakhs
Solution 2:
Annual Consumption = 36,000 (A)
Ordering Cost = ₹250 per order (O)
4.5
Carrying Cost = 100 × 100
= ₹4.5 (C)
Lead Time = 25 days
(i) Reorder Level = Lead Time × Daily Consumption
36,000
= 25 × 360
= 2,500 units
2𝐴𝑂
(ii) Economic Order Quantity (EOQ) = 𝐶
2×36,000×250
= 4.5
= 2,000 units
(iii) Evaluation of Profitability of Quantity Discount Offer:
(a) When EOQ is ordered
(₹)
Purchase Cost (36,000 units x ₹100) 36,00,000
Ordering Cost [(36,000 units/2,000 units) x ₹250] 4,500
Carrying Cost (2,000 units x ½ x ₹4.5) 4,500
Total Cost 36,09,000
(b) When Quantity Discount is accepted

(₹)
Purchase Cost (36,000 units x ₹99*) 35,64,000
Ordering Cost [(36,000 units/9,000 units) x ₹250] 1,000
Carrying Cost (9,000 units x ½ x ₹99 x 4.5%) 20,048
Total Cost 35,85,048
*Unit Cost = ₹100
Less: Quantity Discount @ 1% = ₹1
Purchase Cost = ₹ 99
Advise – The total cost of inventory is lower if Quantity Discount is accepted. Hence, the company is advised
to accept the proposal.

Solution 3:
(i) Computation of Average Cash balance:
Annual cash outflow (U) = 9,00,000 x 4 = ₹ 36,00,000
Fixed cost per transaction (P) = ₹ 60
12
Opportunity cost of one rupee p.a. (S) = 100 = 0.12
2𝑈𝑃 2×36,00,000×60
Optimum cash balance (C) = 𝑆
= 0.12
= ₹ 60,000
(0+60,000)
Average Cash balance = 2
=₹ 30,000
(ii) Number of conversions p.a.

Annual cash outflow = ₹ 36,00,000
Optimum cash balance = ₹ 60,000
36,00,000
No. of conversions p.a. = 60,000 = 60
(iii) Time interval between two conversions

No. of days in a year = 360
No. of conversions p.a. = 60
360
Time interval = 60 = 6 days
Solution 4:
Projected Profit and Loss Account for the year 3
Year 2 Actual Year 3 Projected Year 2 Actual Year 3 Projected
Particulars Particulars
(₹ in lakhs) (₹ in lakhs) (₹ in lakhs) (₹ in lakhs)
To Materials
140 168 By Sales 400 480
consumed
To Stores 48 57.6 By Misc. Income 4 4
To Mfg. Expenses 64 76.8
To Other expenses 40 60
To Depreciation 40 40
To Net profit 72 81.6
404 484 484 484
Cash Flow:
Particulars (₹ in lakhs)
Profit 81.6
Add: Depreciation 40
121.6
Less: Cash required for increase in stock 20
Net cash inflow 101.6
Available for servicing the loan: 75% of ₹ 1,01,60,000 or ₹ 76,20,000

Working Notes:
(i) Material consumed in year 1 = (32 + 120 – 40)/320 = 35% Material
consumed in year 2 = (40 + 160 – 60)/400 = 35%
35
Likely consumption in year 3 = 480 × 100 = ₹ 168 (lakhs)
(ii) Stores are 12% of sales & Manufacturing expenses are 16% of sales for both the years.
Solution 5:
Statement showing the requirements of Working Capital

Particulars (₹) (₹)

A. Current Assets:
Inventory:
Stock of Raw material (₹ 2,31,840 × 2/12) 38,640
Stock of Work-in-progress (As per Working Note) 39,240
Stock of Finished goods (₹ 3,51,600 × 10/100) 35,160
Receivables (Debtors) (₹3,04,992 × 2/12) 50,832
Cash in Hand 19,200
Prepaid Expenses:
Wages & Mfg. Expenses (₹ 1,59,000 × 1/12) 13,250
Administrative expenses (₹ 33,600 × 1/12) 2,800
Selling & Distribution Expenses (₹ 31,200 × 1/12) 2,600
Advance taxes paid {(70% of ₹ 24,000) × 3/12} 4,200
Gross Working Capital 2,05,922 2,05,922
B. Current Liabilities:
Payables for Raw materials (₹ 2,70,480 × 1.5/12) 33,810
Provision for Taxation (Net of Advance Tax) (₹ 24,000 ×
7,200
30/100)
Total Current Liabilities 41,010 41,010
C. Excess of CA over CL 1,64,912
Add: 10% for unforeseen contingencies 16,491
Net Working Capital requirements 1,81,403
Working Notes:
(i) Calculation of Stock of Work-in-progress
Particulars (₹)
Raw Material (₹ 2,01,600 × 15%) 30,240
Wages & Mfg. Expenses (₹ 1,50,000 × 15% × 40%) 9,000
Total 39,240
(ii) Calculation of Stock of Finished Goods and Cost of Sales
Particulars (₹)
Direct material Cost [₹ 2,01,600 + ₹ 30,240] 2,31,840
Wages & Mfg. Expenses [₹ 1,50,000 + ₹ 9,000] 1,59,000
Depreciation 0
Gross Factory Cost 3,90,840
Less: Closing W.I.P. -39,240
Cost of goods produced 3,51,600
Add: Administrative Expenses 33,600
3,85,200
Less: Closing stock -35,160
Cost of Goods Sold 3,50,040
Add: Selling and Distribution Expenses 31,200
Total Cash Cost of Sales 3,81,240
Debtors (80% of cash cost of sales) 3,04,992
(iii) Calculation of Credit Purchase

Particulars (₹)
Raw material consumed 2,31,840
Add: Closing Stock 38,640
Less: Opening Stock -
Purchases 2,70,480
Solution 6:
Monthly Cash Budget (April-September)
April May June July August September

Opening cash balance - 10,50,000 - 1,37,500 5,25,000 7,25,000
A. Cash inflows
Equity shares 50,00,000 - - - - -
Loans (Refer to working 6,50,000 1,25,000 - - - -
note 1)
Receipt from Debtors - - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 11,75,000 15,00,000 18,87,500 22,75,000 27,25,000
B. Cash Outflows
Plant and Machinery 10,00,000 - - - - -
Land and Building 20,00,000 - - - - -

Furniture 5,00,000 - - - - -
Motor Vehicles 5,00,000 - - - - -
Stock of raw 5,00,000 - - - - -
materials (Minimum
stock)
Miscellaneous 50,000 - - - - -
expenses
Payment to creditors - 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
for credit purchases
(Refer to working note
2)
Wages and - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
salaries
Admn. expenses 50,000 50,000 50,000 50,000 50,000 50,000
Total :(B) 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000
Closing balance (A)-(B) 10,50,000 - 1,37,500 5,25,000 7,25,000 11,75,000
Budgeted Income Statement for six-month period ending 30th September

Particulars (₹) Particulars (₹)
To Purchases 83,37,500 By Sales 1,12,50,000
To Wages and Salaries 6,00,000 By Closing stock 5,00,000
To Gross profit c/d 28,12,500
1,17,50,000 1,17,50,000
To Admn. expenses 3,00,000 By Gross profit b/d 28,12,500
To Depreciation 2,00,000
(10% on ₹ 40 lakhs for six
months)
To Accrued interest on loan 45,250
(Refer to working note 3)
To Miscellaneous expenses 50,000

To Net profit c/d 22,17,250

28,12,500 28,12,500
Projected Balance Sheet as on 30th September, 2021

Liabilities Amount (₹) Assets Amount
(₹)
Share Capital: Fixed Assets:
Authorised Land and Building 20,00,000
capital Less: Depreciation 1,00,000 19,00,000
10,00,000 equity 1,00,00,000 Plant and 10,00,000

shares of ₹ 10 Machinery
each Less: Depreciation 50,000 9,50,000
Issued, Furniture 5,00,000

subscribed Less: Depreciation 25,000 4,75,000
and paid up 50,00,000
capital 5,00,000 Motor Vehicles 5,00,000
equity Less: Depreciation 25,000 4,75,000 38,00,000
shares of ₹ 10 Current Assets:
each Stock
Sundry debtors 5,00,000
Reserve 22,17,250 Cash 42,50,000
and Surplus: 11,75,000 59,25,000
7,75,000
Profit and Loss
Long-term loans
Current liabilities 15,87,500

and 45,250 17,32,750
provisions: 1,00,000
Sundry creditors
Accrued interest
Outstanding
expenses
97,75,000 97,75,000
Working Notes:
Subsequent Borrowings Needed (₹)
April May June July August September
A. Cash Inflow
Equity shares 50,00,000
Loans 6,50,000
Receipt from debtors
- - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 - 15,00,000 17,50,000 17,50,000 20,00,000
B. Cash Outflow
Purchase of fixed
40,00,000
assets
Stock 5,00,000
Miscellaneous
50,000
expenses
Payment to creditors - 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
Wages and salaries - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000

Administrative
expenses 50,000 50,000 50,000 50,000 50,000 50,000
Total 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000
Surplus/ (Deficit) 10,50,000 (11,75,000) 1,37,500 3,87,500 2,00,000 4,50,000
Cumulative balance 10,50,000 (1,25,000) 12,500 4,00,000 6,00,000 10,50,000
1. There is shortage of cash in May of ₹ 1,25,000 which will be met by borrowings in May.
2. Payment to Creditors
Purchases = Cost of goods sold - Wages and salaries
Purchases for April = (75% of 15,00,000) - ₹ 1,00,000 = ₹ 10,25,000
(Note: Since gross margin is 25% of sales, cost of manufacture i.e. materials plus wages and salaries should
be 75% of sales)
Hence, Purchases = Cost of manufacture minus wages and salaries of ₹ 1,00,000) The creditors are paid in the
first month following purchases.
Therefore, payment in May is ₹ 10,25,000
The same procedure will be followed for other months.
April (75% of 15,00,000) - ₹ 1,00,000 = ₹ 10,25,000
May (75% of 17,50,000) - ₹ 1,00,000 = ₹ 12,12,500
June (75% of 17,50,000) - ₹ 1,00,000 = ₹ 12,12,500
July (75% of 20,00,000) - ₹ 1,00,000 = ₹ 14,00,000
August (75% of 20,00,000) - ₹ 1,00,000 = ₹ 14,00,000
September (75% of 22,50,000) - ₹ 1,00,000 = ₹ 15,87,500
Minimum Stock ₹ 5,00,000
Total Purchases ₹ 83,37,500
3. Accrued Interest on Loan

12% interest on ₹ 6,50,000 for 6 months 39,000
Add: 12% interest on ₹ 1,25,000 for 5 months 6,250
45,250
Solution 7:
Computation of Operating Cycle
(1) Raw Material Storage Period (R)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙
Raw Material Storage Period (R) = 𝐷𝑎𝑖𝑙𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙
(14,40,000+16,00,000)/2
= 86,40,000/365
= 64.21 Days
Raw Material Consumed = Opening Stock + Purchases – Closing Stock
= ₹ 14,40,000+₹ 88,00,000–₹ 16,00,000 = ₹ 86,40,000
(2) Conversion/Work-in-Process Period (W)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑊𝐼𝑃
Conversion/Processing Period = 𝐷𝑎𝑖𝑙𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡
(4,80,000+8,00,000)/2
= 1,23,20,000/365
=18.96 days
Production Cost: ₹
Opening Stock of WIP 4,80,000
Add: Raw Material Consumed 86,40,000
Add: Wages 24,00,000
Add: Production Expenses 16,00,000
1,31,20,000
Less: Closing Stock of WIP 8,00,000
Production Cost 1,23,20,000
(3) Finished Goods Storage Period (F)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠
Finished Goods Storage Period = 𝐷𝑎𝑖𝑙𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑆𝑜𝑙𝑑

(20,80,000 +24,00,000) / 2
= 1,20,00,000 / 365
₹
Cost of Goods Sold
Opening Stock of Finished Goods 20,80,000
Add: Production Cost 1,23,20,000

1,44,00,000
Less: Closing Stock of Finished Goods (24,00,000)
1,20,00,000
(4) Receivables Collection Period (D)
Receivables Collection Period = 𝐷𝑎𝑖𝑙𝑦 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
(12,00,000+16,00,000)/2
= 1,60,00,000/365
= 31.94 Days
(5) Payables Payment Period (C)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Payables Payment Period = 𝐷𝑎𝑖𝑙𝑦 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒
(16,00,000+19,20,000)/2
= 88,00,000/365
= 73 days
(6) Duration of Operating Cycle (O)

O = R+W+F+D–C
= 64.21 + 18.96 + 68.13 + 31.94 – 73
= 110.24 days
Computation of Working Capital
(i) Number of Operating Cycles per Year
= 365/Duration Operating Cycle = 365/110.24 = 3.311
(ii) Total Operating Expenses ₹
Total Cost of Goods sold 1,20,00,000
Add: Administration Expenses 14,00,000
Add: Selling Expenses 6,00,000
1,40,00,000
(iii) Working Capital Required
𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Working Capital Required = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
1,40,00,000
= 3.311
= ₹ 42,28,329.81
Solution 8:
Evaluation of Credit Policies
Particulars 1.5/15 net 45 2/20 net 50
A Sales ₹50,00,000 ₹55,00,000
B Variable Cost (65%) ₹32,50,000 ₹35,75,000
C Fixed Cost (20% in 1st Case) ₹10,00,000 ₹10,00,000
D Bad Debts (5% and 10%) ₹2,50,000 ₹5,50,000
E Discounts
(₹5000000x30%x1.5%) ₹22,500 -
(₹5500000x50%x2%) - ₹55,000
F PBT (A-B-C-D-E) ₹4,77,500 ₹3,20,000
G Tax @ 35% ₹1,67,125 ₹1,12,000
H PAT ₹3,10,375 ₹2,08,000
I Opportunity Cost
(₹3250000 + ₹1000000) x 30/360x10% ₹35,417 -

(₹3575000 + ₹1000000) x 25/360 x - ₹31,771

10%
J Net Benefit ₹2,74,958 ₹1,76,229
The new policy leads to lower net benefit for the company. Hence it should not be implemented.
Solution 9:
Cost Structure
2021-22 2022-23
Particulars Calculations P.U. Amount (p.u. X Calculations P.U. Amount (p.u. X
units) units)
Direct 40% of SP ₹24 ₹28,80,000 Same as PY ₹24 ₹43,20,000
Material
Direct Given ₹20 ₹24,00,000 20*1.1 ₹22 ₹39,60,000
labour
Direct bal. fig. ₹4 ₹4,80,000 4*1.5 ₹6 ₹10,80,000
Expenses
Total Cost SP - Profit ₹48 ₹57,60,000 ₹52 ₹93,60,000
Profit (SP/125x25) ₹12 ₹14,40,000 52*25% ₹13 ₹23,40,000
Sales 3 x ₹60 ₹72,00,000 ₹65 ₹1,17,00,000
Direct
Labour p.u.
*units= ₹72,00,000 / ₹60 1,20,000/60 x
=1,20,000 90=1,80,000
Operating Cycle
Raw material holding period 1 month
Finished Goods holding period 2 months
WIP conversion period 2 months
Creditor Payment Period 2 months
Receivables Collection Period 2/3 months
Estimation of Working Capital

Particulars Calculation Amount
Current Assets
Stock of Raw Material 43,20,000 x 1/12 ₹3,60,000
Stock of WIP
RM cost ₹43,20,000
Labour cost ₹19,80,000
Direct Exp cost ₹5,40,000
Total WIP Cost ₹68,40,000
Stock of WIP 68,40,000 x 2/12 ₹11,40,000
Stock of Finished Goods 93,60,000 x 2/12 ₹15,60,000
Receivables (on sales)
A 1,17,00,000 x 50% x 2/12 ₹9,75,000
B 1,17,00,000 x 30% x 3/12 ₹8,77,500
C NIL -
Cash Balance Given ₹1,11,000
Total Current Assets ₹ 50,23,500
Current Liabilities
Payables *₹44,40,000 x 2/12 ₹7,40,000
Net Working Capital ₹ 42,83,500
Opening RM stock = 28,80,000 x 1/12= ₹2,40,000
* RM purchased = RM consumed – Opening Stock + Closing Stock
= ₹43,20,000 – ₹2,40,000 + ₹3,60,000
= ₹44,40,000
Computation of Maximum Permissible Bank Finance

Method Formula Calculation ₹

I 75% x (Current Assets- 75% x (₹50,23,500 - ₹7,40,000) ₹32,12,625

Current Liabilities)
II 75% x Current Assets- 75% x ₹50,23,500 - ₹7,40,000 ₹30,27,625
Current Liabilities
III 75% x (Current 75% x (₹50,23,500- ₹18,57,625
Assets-Core CA)- ₹15,60,000) -
Current Liabilities ₹7,40,000
Solution 10:
Statement showing the Evaluation of Accounts Receivable Policies
(Amount in ₹)
Particulars Present Proposed Proposed
Policy Policy 1 Policy 2
A Expected Profit:
(a) Credit Sales 55,00,000 65,00,000 70,00,000
(b) Total Cost other than Bad Debts:
(i) Variable Costs (75%) 41,25,000 48,75,000 52,50,000
(c) Bad Debts 2,00,000 3,50,000 5,00,000
(d) Expected Profit [(a) – (b) – (c)] 11,75,000 12,75,000 12,50,000
B Opportunity Cost of Investments in Accounts 1,23,750 1,82,813 2,62,500
Receivable (Working Note)
C Net Benefits (A – B) 10,51,250 10,92,187 9,87,500
Recommendation: The Proposed Policy 1 should be adopted since the net benefits under this policy are higher
as compared to other policies.
Working Note:
Calculation of Opportunity Cost of Average Investments
Opportunity Cost = Total Cost × Collection period/12 × Rate of Return/100
Present Policy = ₹ 41,25,000 × 2.4/12 × 15% = ₹1,23,750
Proposed Policy 1 = ₹ 48,75,000× 3/12 × 15% = ₹ 1,82,813
Proposed Policy 2 = ₹ 52,50,000× 4/12 × 15% = ₹ 2,62,500
Solution 12:
i) Bank Loan: As the minimum average balance more than ₹ 50,000 need not be kept if loan is not
undertaken, the incremental money made available by bank through bank loan is
₹ 2,30,00,000- (15% x ₹ 2,30,00,000-₹ 50,000) = ₹ 1,96,00,000. Real annual cost of bank loan = (₹ 2.3
crores x 12%) / ₹ 1.96 crores = 14.08%.
(ii) Trade Credit: The real annual cost of trade credit will be 2/98 x 360/60 x 100 = 12.24%.
(iii) Factoring:
Commission charges per year = 2% x 2.5 crores x 12 = ₹ 60,00,000 Savings per year =
(1,75,000+2,25,000) x 12 = ₹ 48,00,000
Net Factoring cost per year = ₹ 60,00,000 – ₹ 48,00,000 = ₹12,00,000 Annual cost of
1,87,50,000×14%+ 12,00,000
borrowing ₹ 2.5 crores x 75% i.e.₹1,87,50,000 will be 1,87,50,000
= 20.4%
Conclusion: The company should select trade credit as a preferred mode of financing the working capital
requirement as it results in lowest cost on an annual basis.

06 Challenger Series Solutions

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FM Challenger Series Solutions

𝑅𝑒𝑠𝑒𝑟𝑣𝑒 & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠

𝑅𝑒𝑠𝑒𝑟𝑣𝑒 & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠

(ii) Calculation of Value of Stock:

(iii) Calculation of Debtors:

(iv) Calculation of Current Liabilities:

(v) Calculation of Cash Balance:

CA Nitin Guru | www.edu91.org 1

Cash Balance ₹11,00,000

(ii) Net Operating Profit margin

(iv) Return on owner’s equity

Cost of Goods Sold = Sales – Gross Profit

CA Nitin Guru | www.edu91.org 2

Debtors’ velocity is 3 months or Debtors’ collection period is 3 months,

Or, Sundry Debtors + Bills receivable = ₹ 12,00,000

Sundry Debtors = ₹ 12,00,000 – ₹ 75,000 = ₹ 11,25,000

(ii) Determination of Closing Stock

(iii) Determination of Sundry Creditors:

So, Sundry Creditors + Bills Payable = ₹ 6,05,000

Or, Sundry Creditors = ₹ 5,75,000

(iv) Determination of Fixed Assets

Or, Fixed Asset = ₹ 9,00,000

CA Nitin Guru | www.edu91.org 3

₹ 36,00,000 = ₹ 23,85,000 + Purchases – ₹ 24,15,000

(i) Calculation of Sales

(ii) Calculation of Current Assets

(iii) Calculation of Raw Material Consumption and Direct Wages

Raw Material Consumption (20% of Cost of Goods Sold) ₹ 66,30,000 Direct

(v) Calculation of Stock of Finished Goods (= 6% of Cost of Goods Sold)

(i) Calculation of Current Liabilities

(ii) Calculation of Debtors

(iii) Calculation of Long-term Loan

CA Nitin Guru | www.edu91.org 4

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐿𝑜𝑎𝑛 2

(iv) Calculation of Cash Balance

Current assets 1,10,00,000

(v) Calculation of Net worth

Fixed Assets 1,30,00,000

Current Assets 1,10,00,000

Balance Sheet of ASD Ltd. as at 31st March, 2022

CA Nitin Guru | www.edu91.org 5

(i) Sales ₹ 21,00,000

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑆𝑡𝑜𝑐𝑘 +𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐶𝑎𝑠ℎ

CA Nitin Guru | www.edu91.org 6

(v) Long term Debt = 45% of Net Worth

CA Nitin Guru | www.edu91.org 7

(i) Long term Debt

Total assets = Total liabilities and Equity = 32,50,000

(iii) Sales and Cost of Goods sold

CA Nitin Guru | www.edu91.org 8

CA Nitin Guru | www.edu91.org 9

(i) Calculation of Cost of Preference Shares:

CA Nitin Guru | www.edu91.org 10

Market Price of Equity shares = ₹39

Ke (given) = 19% or 0.19

Debentures 120 6,000 7,20,000 0.2461 0.07 0.0172

WACC = 0.1547 or 15.47%

= 0.1094 (or) 10.94%

(ii) After tax cost of New Preference share capital:

CA Nitin Guru | www.edu91.org 11