Fundamentals of Financial Management

1.How will you relate ‘Profit Maximisation’ and ‘Wealth Maximisation’ objectives of financial
management?
2. What is Wealth Maximisation as the Objective of Financial Management? Why is profit maximization,
not an operationally feasible criterion? State briefly Interrelationship between Investment, Financing and
Dividend Decisions.
 RISK AND RETURN
1. Prepare a list of different types of systematic risks
2. Correlation Coefficient of Portfolio with market 0.8. Variance of Market Portfolio is 4/9th
of Variance of Security. Cost of Equity 20%. Average Return on Market Portfolio 17.5%
Calculate the Risk -Free Rate of Interest on Govt. Treasury Bonds.
3. Risk in an investment asset may be d ivided into Systematic Risk and Unsystematic Risk. You are
required to discuss the types of risks in this context
4. Distinguish between Hedge Funds and Mutual Funds.
 Financial Institutions
1. Demonstrate the features of hedge fund
2. List any four Alternative Investment Funds (AIF) and four Credit Rating Agencies in India. List any
Money Market Instruments Traded. List any four features of Treasury bills. How is Yield on Treasury Bills
calculated?
3. Explain the regulatory role of RBI.
4. Briefly discuss the functions of a Commercial Bank.
5. State the statutory functions of the Insurance Regulatory & Development Authority (IRDA).
 CAPITAL MARKET AND MONEY MARKET
1.How are primary market and secondary market related to each other?
2. Examine the difference between Primary Market and Secondary Market
3. Prepare a list of various the features of Treasury bills
4. Demonstrate the features of certificate of deposits
5. List the different types of Money Mark et Instruments.
 TOOLS FOR FINANCIAL ANALYSIS
1. Presented below are revenue and expense data for the XYZ Company
2022 2021
(`) (`)
Sales 8,16,000 6,56,500
Sales returns and allowances 16,000 6,500
Cost of goods sold 4,00,000 3,12,000
Selling Expenses 2,00,000 1,30,000
General Expenses 1,20,000 78,000
Miscellaneous Income 6,400 6,500
Income Tax 32,000 67,600

You are required to prepare a comparative statement for the year 2022 and 2021 for the company and also
comment on the relationships revealed in the comparative income statement
2. From the following income statement, prepare a common size statement and also interpret the results
Income Statement for the year ended 31st March
Particulars 2021 ( ) 2022 ( )
Net Sales 10,50,000 13,50,000
Less: Cost of Goods Sold 5,70,000 6,45,000
Gross Profit 4,80,000 7,05,000
Less: Other Operating Expenses 1,50,000 2,16,000
Operating Profit 3,30,000 4,89,000
Less: Interest on Long-term Debt 60,000 51,000
Profit Before Tax (PBT) 2,70,000 4,38,000

3.The following data relate to some important items of a company disclosing its development during the last
five years

2018 (₹) 2022 (₹)

Working Capital 2,33,53,010 3,82,50,955
Plant and Equipment 99,78,420 2,41,76,835
Long – Term Debts 72,80,000 1,40,00,000
Net Tangible Assets 2,80,80,230 4,98,76,090

By computing the trend ratios, evaluate the changes in the financial position (soundness / weakness) of the
company
4. Prepare a Common Size Income Statement from the following figures extracted from the Statement of
Profit and Loss of XYZ Ltd. and offer your comments on its profitability position
2021-22 2022-23
Particulars
(₹) (₹)
Net Sales 5,25,000 6,75,000
Less: Cost of Goods sold 2,85,000 3,22,500
Gross profit 2,40,000 3,52,500
Less: Operating Expenses 75,000 1,08,000
Operating profit 1,65,000 2,44,500
Less: Interest on debentures 30,000 25,500
Profit before Tax 1,35,000 2,19,000

5. From the following information, prepare a summarized Statement of Assets and Liabilities as on 31st
March, 2024:
(i) Working Capital `1,20,000
(ii) Reserves & Surplus ` 80,000
(iii) Bank Overdraft ` 20,000
(iv) Proprietary Ratio 0.75
(v) Current Ratio 2.50
(vi) Liquid Ratio 1.50

Your workings should form a part of your answer

6. From the following balance sheet, prepare a common size statement and commen t
Particulars Amount (`) Amount (`)
31.03.2023 31.03.2024
Shareholders’ Fund:
Equity Share Capital (`10 each) 7,20,000 7,20,000
Reserve & Surplus 2,88,000 5,46,000
Non-current Liabilities:
Long-term debt 5,46,000 5,08,000
Current Liabilities:
Current Liabilities & Provisions 2,40,000 1,75,500
Total 18,00,000 19,50,000
Non-current Assets:
Fixed Assets 12,06,000 11,70,000
Current Assets:
Inventory 2,52,000 3,51,000
Debtors 1,80,000 1,95,000
Bank 1,62,000 2,34,000
Total 18,00,000 19,50,000
 RATIO ANALYSIS
1. Using the following data, find as many items as possible to prepare the Balance Sheet as at the end of the
year

Gross profits ₹ 5,40,000

Shareholders’ Funds ₹ 40,00,000
Gross Profit Margin 30%
Credit Sales to Total Sales 80%
Total Assets Turnover Ratio (based on Sales Value) 0.3 times
Inventory Turnover Ratio (Based on cost) 4 times
Average collection period (360 days in a year) 20 days
Current ratio 1.8
Long-term Debt to Equity 40%

2. From the information given below relating to Distress Ltd., Calculate Altman’s Z - score and comment:
(i) Working Capital to Total Assets = 30%
(ii) Retained Earnings to Total Assets = 40%
(iii) EBIT to Total Assets = 25%
(iv) Market Value of Equity Shares to Book Value of Total Debt = 130%
(v) Sales to Total Assets = 1.5 times

3. Current Ratio 8:5, Quick Ratio 6:5, Inventory Velocity 4 months, Gross Profit @ 331/3% on Cost was ₹
10,00,000, Inventory at the end was 3 times more than that in the beginning. Calculate Working Capital
Turnover Ratio

4. 10% Debt-Equity Ratio 2:l, Net Profit (after Tax) Ratio 16.8%. Operating Profit Ratio 30%. Operating
Expenses Ratio 10%, Inventory Velocity 1 mo nth, Tax Rate 30%. Land & Building ₹6,75,000. Plant &
Machinery ₹ 6,00,000. Capital Work in Progress ₹ 3,00,000. Inventory (including Raw Materials ₹ 15,000.
Work in Progress ₹ 20,000 and Stores and Spares ₹ 5,000) ₹ 1,40,000. Trade Receivables ₹ 2,20,000.
Provision for doubtful debts ₹ 20,000. Credit Sales are ₹ 2,00,000 more than Cash Sales.

5. Following are the ratios to the trading activities of National Traders Ltd:

Debtors velocity 3 months

Stock velocity 8 months
 Creditors velocity 2 months
Gross profit ratio 25%

Gross profit for a year ended 31st December, 2022 amounts to ` 4,00,000
Closing stock of the year is ` 10,000 above the opening stock.
Bills receivable amount to ` 25,000 and Bills payable to ` 10,000
Compute:
(A)Sales
(B)Sundry Debtors
(C)Closing stock &
(D)Sundry creditors

6. From the following details, prepare statement of proprietary Funds with as many details as possible

a. Stock velocity 6
b. Capital Turnover ratio (on cost of sales) 2
c. Fixed Assets Turnover ratio (on cost of sales) 4
d. Debtors velocity 2 months
e. Gross profit turnover ratio 20%
f. Creditors velocity 73 days

The gross profit was ₹60,000. Reserves and surplus amounts to ₹20,000. Closing stock was ₹5,000 in excess
of opening stock
7. M Ltd. provides you the following information:

Current Ratio 2.5

Liquid Ratio 1.5
Proprietary Ratio (Fixed Assets/Proprietors’ Funds) 0.75
Working Capital ₹ 60,000
Reserves and Surplus ₹ 40,000
Bank Overdraft ₹ 10,000

There is no long-term loan or fictitious assets. Similarly, there is no prepaid expenses and bank overdraft.
Calculate Current Assets, Current Liabilities and value of Stock
8. From the following Balance Sheet and additional information, you are required to calculate:
(i) Return on Total Resources
(ii) Return on Capital Employed
(iii) Return on Shareholders’ Fund
 Particulars ` Particulars `

Share Capital(`10) 8,00,000 Fixed Assets 10,00,000

Reserves 2,00,000 Current Assets 3,60,000

8% Debentures 2,00,000
Creditors 1,60,000
1,360,000 13,60,000
Net operating profit before tax is `2,80,000. Assume tax rate at 50%. Dividend declared amounts to
`1,20,000/-
9.VRP provides you with the following information : Calculate Return on equity shareholders funds (DEC
22 PAST PAPER 2016)
Operating profit (before tax) Ratio 50%
Capital Turnover ratio 2 times
15% Debt shareholders fund ratio 2:1
Capital gearing ratio 3:1
18% Preference share capital ?
Tax rate 30%

FUND FLOW AND CASH FLOW STATEMENT

1. The Balance Sheets of A, B, & C Co. Ltd. as at the end of 2021 and 2022 are given below:

LIABILITIES 2021 2022 ASSETS 2021 2022

Share capital 100000 1,50,000 Freehold land 1,00,000 1,00,000
Share premium 5,000 Plant at cost 1,04,000 1,00,000
General Reserve 50,000 60,000 Furniture at cost 7,000 9,000
Profit & Loss 10,000 17,000 Investments 60,000 80,000
Account
6% Debentures 70000 50,000 Debtors 30,000 70,000
Provision for 50,000 56,000 Stock 60,000 65,000
Depreciation on Plant
Provision for Dep. on 5000 6000 Cash 30000 45000
Furniture
Provision for taxation 20000
Sundry creditors 86000
3,91,000 469000 391000 469000

A Plant purchased for ` 4,000 (Depreciation ` 2,000) was sold for Cash for ` 800 on September 30, 2022. On
June 30, 2022 an item of furniture was purchased for ` 2,000. These were the only transactions concerning
fixed assets during 2022. A dividend of 22½ % on original shares was paid
You are required to prepare Funds Flow Statement and verify the results by preparing a schedule of changes
in Working Capital
2. The following information is provided by K Ltd. regarding its Retained earnings
Particulars ₹ ₹
Balance of retained earnings, 1st April 2022 3,25,600
Add: Net Profit after taxes 6,48,480
Tax Refund 25,470
9,99,550
Less: Loss on Sale of Plant and Machinery 14,460
Goodwill written off 95,370
Dividends paid 4,70,350
5,80,180
Balance of retained earnings, 31st March 2023 4,19,370

Additional Information:
1. Plant and machinery having a written down value of ₹ 54,360 was sold in October, 2022.
2. Depreciation of ₹ 68,250 has been deducted while arriving at net profit for the year.
3. Plant and machinery were purchased during the year at a cost of ₹ 1,60,000 but the payment was
made in the form of 8% Debentures of ₹ 100 each for the s ame.
4. ₹ 72,800 debentures have been redeemed during 2022
Prepare a Statement of Sources and Application of Funds for the year ended 31st March, 2023.

3. Identify whether the following items are inflows or outflows and place them under appropriate categorie s
in the cash flow statement under Ind AS 7:
Item Description Inflow Outflow Category
Normal income tax refund
Proceeds of a share issue
Interest received by a financial enterprise
Decrease in debtors
Dividend received by a manufacturing company

4. The following information has been provided by XYZ Ltd.

Balance Sheet of XYZ Ltd
Note No. As on As on
Particulars
31.03.2021 31.03.2020
I Equity and Liabilities
1. Shareholders’ fund
(a) Share Capital 18,40,000 18,40,000
(b) Reserves and Surplus 1 6,64,000 6,08,000
2. Share application money pending allotment Nil Nil
3. Non-Current Liability
(a) Long Term Borrowings (10% Debentures) 5,60,000 7,20,000
4. Current Liabilities
 (a) Trade Payables 7,68,000 8,24,000
(b) Short term Provisions (Provision for Tax) 96,000 1,04,000
Total 39,28,000 40,96,000
I Assets
I
1. Non-current Assets
(a) Fixed Assets
(i) Tangible Assets 2 14,08,000 12,96,000
(b) Non-current Investment 5,92,000 8,80,000
2. Current Assets
(a) Inventories 8,48,000 6,56,000
(b) Trade Receivables 3,44,000 5,36,000
(c) Cash and Cash Equivalent 7,20,000 7,20,000
(d) Short term loan and advances (Prepaid Expenses) 16,000 8,000
39,28,000 40,96,000

Notes to Accounts:
As on As on
Particulars
31.03.2021 31.03.2020
1. Reserve and Surplus
Balance of Profit 1,84,000 1,28,000
General Reserve 4,80,000 4,80,000
6,64,000 6,08,000
2. Tangible Assets
(a) Land 12,00,000 12,00,000
Machinery (Gross Block) 5,60,000 4,16,000
Provision for depreciation 3,52,000 3,20,000
(b) Machinery (Net Block) 2,08,000 96,000
(a)+(b) 14,08,000 12,96,000

Additional information:
1. 10% dividend was paid during the year.
2. Machinery for ₹ 24,000 was purchased and old machinery costing ₹ 96,000 (accumulated
depreciation ₹ 48,000) was sold for ₹ 32,000.
3. ₹ 1,60,000, 8% debentures were redeemed by purchase from open market at ₹ 96 for a Debenture of
₹ 100. Redemption was carried out on 31.03.20 21.
4. Investments worth ₹ 2,88,000 were sold at a loss of ₹ 8,000
5. Actual income tax liability for the year amounted to ₹ 80,000

Prepare a Cash Flow Statement of XYZ Ltd. for the year ended 31.03.2021.
5. From the following relevant extracts of the Balance Sheets of Oreo Ltd., calculate Cash Flow from
Financing Activities to be disclosed in the Cush Flow Statement as per AS -3 issued by ICAI
 31/03/2023 31/03/2022
Particulars
(in ) (in )
Equity Share Capital (Shares of ₹ 10 each) 10,55,000 6,00,000
5% Pref. Share Capital (Shares of ₹ 100 each) 2,00,000 4,00,000
General Reserve 1,40.000 4,40,000
Profit and Loss A/c 6.42.000 (13.000)
Securities Premium 52,500 20,000
Capital Redemption Reserve 1,50,000
Non-Current Liabilities 12% Debentures) 2,75,000 1,50,000
Current Liabilities
Outstanding Interest on Debentures 10,000 -
Outstanding Underwriting Commission 5,000 -
Unclaimed Dividend on Equity Shares 20.000 -
Non-Current Assets (Machine) 30,000 -

Additional Information:
1. On 1st April 2022, Dividends (including an Equity Dividend @ 35%) were paid.
2. On 1st May 2022, 20,000 Equity Shares of ₹ 10 each were issued to the public @ ₹ 15 to redeem
Pref. Shares at a 5% premium.
3. On 1st October 2022. 1,000 Pref Shares o f ₹ 100 each were issued to the p ublic @ ₹ 150 to buy
back 15,000 equity shares @ ₹ 15. On the same date, 50% of Debentures were redeemed at a 10%
premium by converting into Equity Shares of ₹ 10 each @ ₹ 15 each and some New Debentures of ₹
100 each were issued to the public
4. Underwriters were entitled to Commission on all public issues of securities at a maximum rate as per
The Companies Act, 2013.
5. On 31st March 2023, a Machine costing ₹ 30,000 was purchased by the issue of Equity Shares of ₹
10 each at premium of 20%.

6. Following information is available from the books of Standard Company Ltd.

Particulars 2021 (₹) 2022 (₹)
Profit made during the year 2,50,000
Income received in advance 500 600
Prepaid expenses 1,600 1,400
Debtors 80,000 95,000
Bills Receivable 25,000 20,000
Creditors 45,000 40,000
Bills Payable 13,000 15,000
Outstanding expenses 2,500 2,000
Accrued Income 1,500 1,200

Calculate cash flow from operations.

7.From the following Summarised Statement of Assets and Liabilities of XYZ Ltd., prepare a Statement of
Changes in the Working Capital
 31st March 31st March
Liabilities 2023 (`) 2024 (`) Assets 2023 (`) 2024 (`)
Equity Share 3,00,000 4,00,000 Goodwill 1,15,000 90,000
Capital
8% Preference 1,50,000 1,00,000 Land & 2,00,000 1,70,000
Share Capital Buildings
Profit & Loss 30,000 48,000 Plant & 80,000 2,00,000
Account Machinery
General Reserve 40,000 70,000 Debtors 1,60,000 2,00,000
Proposed 42,000 50,000 Stock 77,000 1,09,000
Dividend
Creditors 55,000 83,000 Bills 20,000 30,000
Receivable
Bills Payable 20,000 16,000 Cash in hand 15,000 10,000
Provision for 40,000 50,000 Cash at Bank 10,000 8,000
Taxation
6,77,000 8,17,000 6,77,000 8,17,000

Following additional information are available:

(i) Depreciation of ` 10,000 and ` 20,000 have been charged on Plant & Machinery and Land &
Buildings respectively in 2024.
(ii) Interim dividend of ` 20,000 has been paid in 2024.
(iii) Income tax of ` 35,000 has been paid in 2024

8.ADON LTD Has furnished the following information for preparation of Cas h flow statement
Amount in lakhs
Net profit 305
Dividend (including interim div)paid 95
Provision for income tax 75
Income tax paid during the year 60
Loss on sale of asset (net) 2
Book value of asset sold 10
Depreciation charged to P/L account 250
Loss on sale of investments 3
Interest paid during the year 145
Increase in working capital excluding cash 505
Purchase of fixed assets 18
Investment in joint venture 105
Opening cash and cash equivalents 12
Closing cash and cash equivalents 30

Required:
Analyze the Cash Flows from
(i) Operating Activities
(ii) Investing Activities
(iii) Financial Activities as per AS -3 (Revised)
8. ABC Ltd. Company’s Comparative Balance Sheet for 2023 and the Company’s Income Statement for the
year are as follows:
ABC Ltd.
Comparative Balance Sheet March 31, 2023 and 2022
(₹ in crores)

Particulars 2023 2022

Sources of funds:
Shareholder’s funds
Share Capital Retained 140 140
earnings Loan funds 110 250 92 232
Bonus payable
135 40
Total 385 272
Application of funds
Fixed Assets
Plant and Equipment 430 309
Less: Accumulated (218) 212 (194) 115
depreciation
Investments 60 75
Current Assets
Inventory 205 160
Accounts receivable 180 270
Pre-paid expenses 17 20
Cash 26 428 10 460
Less : Current liabilities and
provisions
Accounts payable 230 310
Accrued liabilities 70 60
Deferred income-tax 15 315 113 8 378 82
provision
Total 385 272

ABC Ltd.
Income Statement for the year ended March 31, 2023
(₹ in crores)

Sales 1,000
 Less : Cost of goods sold 530
Gross margin 470
Less : Operating expenses 352
Net operating income 118
Non-operating items:
Loss on sale of equipment (4)
Income before taxes 114
Less : Income-taxes 48
Net Income 66

Additional information:
(i) Dividends of `48 crores were paid in 2023.
(ii) The loss on sale of equipment of `4 crore reflects a transaction in which
equipment with an original cost of `12 crore and accumulated depreciation
of `5 crore was sold for `3 crore in cash.
Required:
Using the indirect method, determine the net cash provided by operating activities for 2023 and
construct a statement of cash flows.

COST OF CAPITAL
1. The WONDERLAND LTD. has the following Book Va lue Capital Structure as on March 31, 2022:
(Amount in Thousand)
600000 Equity Share at ₹ 10 each fully paid 6,000
10000, 9% Preference Shares of ₹ 100 each 1,000
30000, 12% Debentures of ₹ 100 each 3,000
10,000

The equity share of the Company sells at ₹ 20 per share. The dividend expected next year is ₹2.5 per share,
which is expected to grow at 5% per annum. Corporate tax rate is 30%.
You are required to determine the Weighted Average Cost of Capital (WACC) of Wonderland Ltd. based on
the existing Capital Structure

2. Given below is the Statement of Assets and Liabilities of a company as at 31st December, 2016
Liabilities Assets
 Equity share capital 4,00,000 Fixed Assets 6,00,000
40000 shares of ₹ 10 each Investments 1,00,000
Reserve and surplus 2,60,000 Current assets 2,80,000
8% debentures 1,70,000
Current Liabilities
Short term loans 1,00,000
Trade creditors 50,000
9,80,000 9,80,000

Calculate the company’s weighed average cost of capital using balance sheet valuations. The following
additional information are also available.
1. 8% Debentures were issued at par.
2. All interests payments are up to date and equity dividend is currently 12%.
3. Short term loan carries interest at 18% p.a.
4. The shares and debentures of th e company are quoted on the Calcutta Stock Exchange and current
Market Prices are as follows: Equity Shares at ₹ 14 each and 8% Debentures at ₹ 98 each.
5. The rate of tax for the company may be taken at 50%.

3. Kaloo Ltd requires additional finance of ₹ 20 lakhs for meeting its investment plans. The company has ₹
4,00,000 in the form of retained earnings available for investment purposes. Target Dcbt -Equity Ratio
25:75. Cost of debt is 10% (before tax) for the first ₹ 2,00,000 and 13% (before tax) beyond tha t. Earning
per share ₹ 12 Dividend Payout Ratio 50%. P/E Ratio 5. The company wants to offer the issue of Equity
Shares at a premium of 20% of the market price The flotation cost is expected to be ₹ 6 per share.
Company’s tax rate is 30% and the shareholde r’s personal tax rate is 20%
Calculate the overall weighted average (after tax) cost ot additional Finance

4. Mamon Ltd. is expected to earn ₹ 30 per share. Company follows fixed pay -out ratio of 40%. The market
price of its share is ₹ 200. Find the c ost of existing equity if dividend tax of 15 % is imposed on the
distributed earnings when:
1. current level of dividend amount is maintained.
2. dividend to the shareholders is reduced by the extent of dividend tax

5. Calculate the weighted average cost of cap ital using (i) book value weights; and (ii) market value
weights based on the following information
Book value structure: ₹
Debentures (₹100 per debenture) 8,00,000
Preference share (₹100 per share) 2,00,000
Equity shares (₹10 per share) 10,00,000
20,00,000

Recent market prices of all these securities are:

Debentures: ₹110 per debenture; Preference share: ₹120 per share; and Equity shares: ₹22 per share
External financing opportunities are:
1. ₹100 per debenture redeemable at par, 10 year maturity, 13% coupon rate, 4% flotation cost and sale
price ₹100;
2. ₹100 per preference share redeemable at par, 10 year maturity, 14% dividend rate, 5% flotation cost
and sale price ₹100; and
Equity share – ₹2 per share flotation costs and sale price ₹22 D ividend expected on equity share at the end
of the year is ₹2 per share; anticipated growth rate in dividend is 7%. Company pays all its earnings in the
form of dividends. Corporate tax rate is 50%.

6. T Ltd, provides you the following information

Particulars
No. of Equity Shares (₹ 10 each) 1,50,000
No. of 17% Preference Shares (₹ 100 each) 20,000
Retained Earnings ₹ 5,00,000
No. of 7.5% Debentures (₹ 100 each) 30,000
10% Long-term Loan ₹ 10,00,000

Additional Information:
1. The Current market price of the company’s equity share is ₹ 30. Expected Dividend per Equity Share
for the year is ₹ 1.20 which is expected to grow @ 5%. The flotation cost on issue of new equity
shares is expected to be ₹ 5 per share
2. The Preference shares of the company which are redeemable at par after 5 years are currently selling
at ₹ 90 per Preference Share.
3. The Debentures of the company which are redeemable at 10% premium after 5 years are currently
quoted at ₹ 90 per debenture.
4. The corporate tax rate is 20%

Calculate Weighted Average Cost of Capital using (a) Book Value Weights (b) Market Value Weights

7. Given below is the Statement of Assets and Liabilities of a company as at 31st December, 2023
Liabilities ` Assets `
Equity share capital 4,00,000 Fixed Assets 6,00,000
40000 shares of ` 100 each
Reserve and surplus 2,60,000 Investments 1,00,000
8% debentures 1,70,000 Current assets 2,80,000
Current Liabilities
Short term loans 1,00,000
Trade creditors 50,000
9,80,000 9,80,000
Calculate the company’s weighed average cost of capital using balance sheet valuations. The following
additional information are also available:
(i) 8% Debentures were issued at par.
(ii) All interests’ payments are up to date and equity dividend is currently 12%.
(iii) Short ter m loan carries interest at 18% p.a.
(iv) The shares and debentures of the company are quoted on the Calcutta Stock Exchange and current
Market Prices are as follows:
Equity Shares at ` 14 each and 8% Debentures at ` 98 each.
(v) The rate of tax for the com pany may be taken at 50%

8. Aries Limited wishes to raise additional finance of `10 lacs for meeting its investment plans. It has
₹2,10,000 in the form of retained earnings available for investment purposes.
The following are the further details:
(i) Debt/equity mix 30% / 70%
(ii) Cost of debt up to `1,80,000 10% (before tax) beyond `1,80,000 16% (before tax)
(iii) Earnings per share `4
(iv) Dividend pay-out 50% of earnings
(v) Expected growth rate in dividend 10%
(vi) Current market price per share `44
(vii) Tax rate 50%

You are required to:

a. determine the pattern for raising the additional finance.
b. determine the post-tax average cost of additional debt.
c. determine the cost of retained earnings and cost of equity, and Compute the overall weighted
average after tax cost of additional finance

9.HDR LTD requires additional finance of Rs 20 lakhs for meeting its investment plans .The following
information is given :-
1. Company has Rs 400000 in the form of retained earning available for investment purpo se
2. Target debt equity ratio is 25:75
3. Cost of debt is 10% (before tax) for the first Rs 200000 and 13% (before tax ) beyond that
4. EPS Rs 12
5. Dividend payout ratio 50%
6. P/E ratio 5
7. The company wants to offer the issue of equity share at a premium of 20% of the market price The
floatation cost is expected to be RS 6/share
 8. Company’s tax rate is 30%and shareholder personal tax rate is 20%

Calculate the overall weighted average (after tax )cost of capital for additional finance

(dec 2023 past paper 2016)

10) Calculate the Marginal Cost of Capital for the company if it requires additional capital of 20 lakhs for a
new project. It plans to have a target Debt of 331/3% of Equity. The debt will carry an interest rate of 10 %
(before tax) for the first 2,00,000 a nd 13% (before tax) beyond that. The prevailing default -risk free
interest rate on 10-year GOI Treasury Bonds is 5%. The average market risk premium is 12.5%. The beta of
the company is 1.2. Company's tax rate is 30% ( JUNE 2023 PAST PAPER 2016)
 CAPITAL BUDGETING
1. ELROND LTD. (EL) has just installed MACHINE A at a cost of ₹ 2,00,000. This machine has 5 years life
with no residual value. The annual volume of production is estimated at 150000 units, which can be sold at
₹ 8 per unit. Annual operating costs are esti mated at ₹ 2,00,000 (excluding depreciation) at this output
level. Fixed costs are estimated at ₹ 4,50,000 per annum for the same level of production. The company has
just come across another model called MACHINE B capable of giving the same output at an a nnual
operating costs of ₹ 1,50,000 (excluding depreciation). There will be no change in fixed costs. Capital cost
of this machine is ₹ 2,50,000 and the estimated life is 5 years with no residual value. The company has an
offer for sale of MACHINE A at ₹ 1 ,00,000. But the cost of dismantling and removal will amount to ₹
30,000. As the company has not yet commenced operation, it wants to sell MACHINE A and purchase
MACHINE B. ELROND LTD. will be zero -tax company for 7 years in view of several incentives and
allowances available. The cost of capital is 14%.
Required:
Based on the NPV Criterion, advise the Company whether it should opt to replace MACHINE A by installing MACHINE B. [Given:
PVIFA (14%, 5 years) = 3.433 and PVIF (14%, 5 years) = 0.519] (Solve the problem by an incremental cash flow
approach.)

2. ZZZ Co. has three potential projects all with an initial cost of ₹ 15,00,000. The capital budget for the
year will only allow the company to take up only one of the three projects. Given the discount rat es and the
future cash flows of each project, advise which project should they accept
Annual Net Cash Flows per year for
PROJECT Discount Rates
five years ( )
A 3,50,000 4%
B 4,00,000 8%
C 5,00,000 10%

3. A firm proposes to market a cheaper variety of its existing brand to be sold for ₹20 per unit, estimated
product-life being five years. The sales volume for the five years has been estimated to be 30,000 units for
the first year, 40,000 units for each o f the next two years and 20,000 units for each of the last two years.
The variable cost p.u. is ₹10. Production of the cheapest brand will entail an initial expenditure of
₹4,50,000 in purchasing and installing a new plant with estimated economic life of f ive years and scrap
value of ₹50,000. The fixed cost of ₹2,00,000 per annum including depreciation on the plant on straight -
line basis will be needed for producing and marketing the cheaper brand. Introduction of this cheaper
variety is also likely to have an adverse impact on the demand of the existing dearer brand resulting in loss
of contribution estimated at ₹20,000 per annum. Assuming cost of Capital to be 10% and marginal tax rate
to be 40%.
You are required to evaluate proposal and give your reasoned recommendation as to its acceptance or rejection.
The PV factors at 10% for five years are 0.909, 0.826, 0.751, 0.683 and 0.62
4. X Ltd. is considering a project with following Cash Flow pattern

Year 1 2 3 4 5
CIAT (₹) 10,000 15,000 20,000 25,000 20,000

Initial investment of the project is ₹ 60,000 and Cost of Capital is 10% p.a. Calculate DPBP.
5. Nona Ltd. provides you with the following information
Particulars Machine X Machine Y
1. Purchase Price of Machine ₹ 6,00,000 ₹ 10,00,000
2. Working Capital ₹ 3,00,000 ₹ 5,00,000
3. Useful Life of the machine 5 years 8 years
4. Estimated Salvage Value at the end of useful life ₹ 1.00,000 ₹ 2,00,000
5. Actual Salvage Value realised at the end of useful life ₹ 1,20,000 ₹ 80,000
6. Method of Depreciation Straight Straight
line line
7. Tax Rate 30% 30%
8. Annual Earning before Tax ₹ 4,00,000 ₹ 4,00,000
9. Annuity Factor for 5/8 yrs @ 10% 3.791 5.335
10. PV Factor for 5th/8th year @ 10% 0.621 0.467

Required:
Which of the above machines Should be purchased?

6. HONEY Ltd. having limited funds of ₹ 1,00,000 and cost of capital 10% is evaluating the desirability of
following projects having useful life of 10 years
A B C D E F
Initial cash outflow 50000 1,00,000 1,50,000 2,00,000 2,50,000 6,00,000
Net present value 4,50,000 8,00,000 10,50,000 12,00,000 13,75,000 32,40,000
Ranking asper NPV 6 5 4 3 2 1
Ranking as per 1 2 3 4 5 6
profitability index

Required:
1. Which projects should be selected assuming that the projects are divisible and there is no
alternative use of money allocated for capital budgeting. \
2. Which projects should be selected assuming that the projects are indivisible and unutilised funds
can be invested for a period of 10 years at a risk -free interest rate of 5%.

7. A project requires an initial investment of ` 2,25,000 and is expected to generate the following net cash
inflows:
Year 1 (2019): ` 95,000;
Year 2 (2020): ` 80,000;
Year 3 (2021): ` 60,000;
Year 4 (2022): ` 55,000
Assess and compute net present value of the project if the minimum desired rate of return is 12%

8. United Industries Ltd. has an investment budget of ` 100 lakhs for 2023 -24. It has short listed two
projects A and B after completing the market and technical appraisals. The management wants to complete
the financial appraisal before making the investment. Further particulars regarding the two projects are
given below
(` Lakhs)
Particulars A B
Investment required 100 90
Average annual cash inflow before depreciation and tax (estimate) 28 24
Salvage value: Nil for both projects. Estimate life – 10 years for both projects.
The company follows straight line method of charging depreciation. Its tax rate is 50%

You are required to calculate:

i) Payback period and ii) IRR for the 2 projects.
Note: P.V of an annuity of ` 1 for ten years at different discount rate is given below:

Rate % 10 11 12 13 14 15
Annuity Value of return 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188

9. Parrot Ltd. is the manufacturer of a low -end consumer durable N. In order to modernize the
manufacturing facility, Parrot Ltd. wants to buy a new machinery costing ₹ 10,00,000 at cash price. The
annual cash flow before tax over the entire life span of the company is ₹ 3,00,000 p.a. The marginal rate of
tax is 30% and cost of capital is 10% p.a. The scrap value at the end of the useful life of the machinery is
negligible. The company is currently following a straight -line method of charging depreciation on
machineries. Do you think the project is financially vi able?
The company has an alternative to charge accelerated depreciation @ 30% of the depreciable amount each
for the first three years and @ 10% for the fourth year. Does it change your suggestion?

10. Both Net Present Value (NPV) and Internal Rate of Ret urn (IRR) are sound analytical tools of capital
budgeting. Write down the contrasts i.e. point of differences between these two methods

11. Electromatic Excellers Ltd. specialise in the manufacture of novel transistors. They have recently
developed technology to design a new radio transistor capable of being used as an emergency lamp also.
They are quite confident of selling all the 8,000 units that they would be making in a year. The capital
equipment that would be required will cost ₹25 lakhs. It will ha ve an economic life of 4 years and no
significant terminal salvage value.
During each of the first four years promotional expenses are planned as under:

1st Year 1 2 3 4
Advertisement 1,00,000 75,000 60,000 30,000
Others 50,000 75,000 90,000 1,20,000
Variable cost of production and selling expenses: ₹250
per unit

Additional fixed operating costs incurred because of this new product are budgeted at ₹75,000 per year.
The company’s profit goals call for a discounted rate of return of 15% after taxes on investments on new
products. The income tax rate on an average works out to 40%. You can assume that the straight line
method of depreciation will be used for tax and rep orting.
Assess the initial selling price per unit of the product that may be fixed for obtaining the desired rate of
return on investment. Present value of annuity of ₹1 received or paid in a steady stream throughout 4 years
in the future at 15% is 3.0079

12. Assume a business that is considering a given project. Below are some selected data from the
discounted cash flow model created by the company’s financial analysts:
A project requires an initial investment of ₹1,91,315 and is expected to generate the following net cash
inflows:
Year 1 (2019): ₹95,000; Year 2 (2020): ₹80,000; Year 3 (2021): ₹60,000; Year 4 (2022):
₹55,000. Assess the discounted payback period of the project if the appropriate discount rate for this
project is 12%.
13.Company A wants to invest in a project, the life of which is expected to be 4 years. The actual net profit
is expected to be ₹ 20,000 after charging yearly depreciation of ₹ 16,000 in order to write -off the capital
cost of ₹ 64,000. Out of the capital cost, ₹ 40,000 is payab le immediately (Year 0) and the balance in the
next year end. Stock amounting to ₹ 12,000 (to be invested in year 0) will be required throughout the
project and for debtors a further sum of ₹ 16,000 will have to be invested at the end of year 1. The workin g
capital will be recouped at the end of yea r 5. It is expected that the machinery will fetch a scrap value of ₹
4,000 at the end of 4th year. Income tax is payable @ 40% and the Depreciation equals the taxation writing
down allowan ces of 25% per annum. In come tax is paid after 9 months after the end of the year when profit
is made. The residual value of ₹ 4,000 will also bear tax @ 40%. Since the tax paid is in the next year and
the working capital is recouped in the fifth -year cash inflow, calculations wi ll be required up to 5 years
Taking discount factor of 10%, calculate NPV of the project and give your comments regarding its
acceptability
PV of ₹ 1.00 at 10% p.a.
Year 1 2 3 4 5
PV 0.9091 0.8264 0.7513 0,6830 0.6209

14. A company has to replace one of its machines, which has become unserviceable. Two options are
available to the company:
(i) A more expensive machine (Premium) with 12 years life.
(ii) A less expensive machine (Standard) with 6 years life.
If Standard machine is chosen, it will be repl aced at the end of 6 years by another Standard machine. The
pattern of maintenance, running costs and prices is as under
Premium (₹) Standard (₹)
Particulars

Purchase price 40,00,000 28,00,000

Scarp value at end of life 6,00,000 6,00,000
Overhauling is due at the end of 8th Year 4th Year
Overhauling cost 8,00,000 4,00,000
Annual repairing expenses 4,00,000 5,60,000

Cost of capital is 14%.

You are req uired to recommend which of the machines should be purchased. Given, Present Value Interest Factor,
PVIF (14%)

Year 4 6 8 12
PV Factor 0.5921 0.4556 0.3506 0.2076

Present Value Interest Factor for an Annuity, PVIFA (14%)

Year 1 to 6 Years 1 to 12 Years
PV Factor 3.8899 5.6600

14. ZZZ Co. has four potential projects all with an initial cost of ` 15,00,000. The capital budget for the
year will only allow the company to take up only one of the three projects. Given the discount rates and the
future cash flows of each project, evaluate which project should they accept.
Project Annual Net Cash Flows per Discount Rates
year for five years (`)
A 3,50,000 4%
B 4,00,000 8%
C 5,00,000 10%

15. Anurag Mills Ltd. has number of machines that were used to make a product that the firm has phased
out of its operations. An existing machine was originally purchased six years ago for ` 5,00,000 and is
being depreciated by the straight line method; its re maining useful life is 4 years. No salvage value is
expected at the end of the useful life. It can currently be sold for `1,50,000. The machine can also be
modified to produce another product at a cost of `2,00,000. The modifications would not affect the u seful
life, or salvage value, and would be depreciated using the straight line method.
If the firm does not modify the existing machine, it will have to buy a new machine at a cost of ` 4,40,000,
(no salvage value) and the new machine would be depreciated over 4 years. The engineers estimate that the
cash operating costs with the new machine would be ` 25,000 per year less than with the existing machine.
Cost of capital is 15 per cent and corporate tax rate is 35 per cent.
Advise the company whether the new machine should be bought, or the old equipment modified. Assume
straight line method of depreciation for tax purposes and loss on sale of existing machine can be claimed as
short-term capital loss in the current year itself.
[Given: PVIFA (15% 4 years) = 2.855]

16. ENGON Ltd., is considering the purchase of a new computer system for its research and development
division, which would cost 35 lakh. The operation and maintenance costs (excluding depredation) are
expected to be 7 lakh per annum. It is estimated that the useful life of the System would be 6 years, at the
end of which the disposal value is expected to be 1 lakh.
The tangible benefits expected from the system in the form of reduction in design and craftsmanship costs
would be 12 lakh per annum. The disposal of used drawing and drawing office equipment and furniture
initially is anticipated to net 9 lakh.
As Capital expenditure in research and development, the proposal would attract a 100 per cent writ e-off
for tax purposes. The gains arising from disposal of used assets may be considered tax -free. The Corporate
tax rate is 35%. The average cost of capital of the company is 12 per cent. Ignore tax on Salvage value.
(Calculation should be made upto three decimal Points)
Given [PVIF (12%, 6 years) = 0.507 and PVIFA (12%, 6 years) = 4.111] Required:
(i) Assess the Net Present Value (incremental) from the computer System.
(ii) As a financial adviser, what would your recommendation to the Company in respect o f purchase of
Computer System.

17.Annu Ltd. is examining two mutually exclusive investment proposals. The management uses Net Present
Value Method to evaluate new investment proposals. Depreciation is charged using Straight -line Method.
Other details rela ting to these proposals are

Particulars Proposal X Proposal Y

Annual Profit before tax (`) 13,00,000 24,50,000

Cost of the Project (`) 90,00,000 180,00,000

Salvage Value (`) 1,20,000 1,50,000

Working Life 4 years 5 Years

Cost of capital 10% 10%
Corporate Tax Rate 30% 30%

The present value of `1 at 10% discount rates at the end of first, second, third, fourth and fifth year are
0.9091; 0.8264; 0.7513; and 0.6209 respectively. You are required to advise the company on which
proposal should be taken up by it.

18.Given below are the data on a capital project M

Annual cost of savings 60,000
Profitability index 1.064
Useful life 4 years
Salvage value 0
Interest rate of return 15%
You are required to calculate : -
1. Cost of project
2. Payback period
3. Cost of capital
4. NPV (DEC 2022 PAST PAPER 2016)

19.HDR Ltd provides you with the following information

Purchase Price of machine Rs 600000
Working capital Rs 300000
Useful life 5 years
Estimated salvage value Rs 100000
Actual salvage value realised Rs 120000
Depreciation Straight line
Tax Rate 30%
Annual Earning before tax 200000
Cost of capital 10%
Annuity factor at the rate 10% 3.791\

You are required to calculate : -

1. Payback period
2. ARR
3. NPV
4. Discounted payback period
5. Profitability Index (Past paper 2016 syllabus JUNE 23)
 WORKING CAPITAL MANAGEMENT
1. GOLDILOCKS LTD. sells goods to domestic market on a gross profit of 25% on sales without
considering depreciation. Its estimates for the year 2023 -24 are as follows:
Amount in lakhs

Sales:
Domestic Market at 2 months’ Credit 1,600
Export (Selling price 10% below home price) (Exports at 3 months’ Credit) 540
Cost:
Materials used (Suppliers extend 2 months’ Credit) 600
Wages paid (1/2 month in Arrear) 400
Manufacturing Expenses (Paid 1 month in Arrear) 600
Sales Promotion (Payable quarterly in advance) 80
Administration Expenses (Paid 1 month in Arrear) 200

The company maintains one month’s stock of each raw material and finished goods. A cash balance of ₹ 20
lakh is also maintained. There is no Work -in-Progress (WIP). All expenses and incomes are made evenly
throughout the year
Required:
Prepare a statement of Working Capital Requirements of the Company for 2023 -24 on Cash Cost basis

2. The management of CAMELLIA LTD. has called for a statement showing the working capital needed to
finance a level of activity of 3,00,000 units of output for the year ended March 31, 2022. The cost
structure for the company’s product, for the above -mentioned activity level, is detailed below:
Cost per unit ( )
Raw materials 20
Direct labour 5
Overheads 15
Total cost 40
Profit 10
Selling price 50

Past trends indicate that the raw materials are held in stock, on an average, for two months. Work -in-
process (50 per cent complete) will approximate to ½ month’s production. Finished goods remain in
warehouse, on an average, for 1 month. Suppliers of materials extend 1 month’s credit. Two months’ credit
is normally allowed to debtors. A minimum cash balance of ₹ 25,000 is expected to be maintained. The
production pattern is assumed to be even during the year (12 months)
Analyse the working capital requirement o f the company

3. Oli Ltd provides you with following information:

Estimated Level of Activity: Completed Units of Production 1,04,000 plus units of WIP

Raw material 19.6% of the selling price

Wages 10.6% of the celling price
Production Overheads (including depreciation of ₹15 per unit at 17.6% of the selling price
the budgeted level of activity)
Selling Price ₹ 500 per unit
Average raw material in stock 3 weeks
Average work-in-progress of completion with respect to Material 2 weeks
- 75%. Conversion Cost- 70%)
Finished goods in stock 4 weeks
Credit allowed to debtors 2½ weeks
Credit allowed by creditors 3½ weeks
Time lag in payments of labour 2 weeks
Time lag in payments Production Overheads 1½ weeks
Cash Sales and Cash Purchases 25%
The company believes in keeping ₹ 3.00,000 available to it including the overdraft limit of
₹75,000 not yet utilized by the company.
Provision for contingencies is required @ 4% of the working capital requirement including
that provision.
Assume that production is earned on evenly throughout the year (52 weeks) and wages and
overheads accrue similarly.

You are required to calculate the Net Working Capital Requirement on Cash Cost Basis if Oli Lid is an
existing company
4. The board of Directors of Nanak Engineering Company Private Ltd. request you to prepare a statement
showing the Working Capital requirements forecast for a level of activity of 1,56,000 units of production.
The following information is available for your calculation:
A.
Per unit (`)
Raw materials 90
Direct labour 40
Overheads 75
205
Profits 60
Selling price per unit 265
 B.
1. Raw materials are in stock on average one month.
2. Materials are in process, on average 2 weeks.
3. Finished goods are in stock, on average 1 month.
4. Credit allowed by supplier one month
5. Time lag in payment from debtors two months.
6. Lag in payment of wages 1½ week
7. Lag in payment of overheads is one month.
20% of the output is sold against cash. Cash in hand and at bank is expected to be ` 60,000. It is to be
assumed that production is carried on evenly throughout the year, wages and overheads accrue similarly
and a time period of 4 weeks is equivalent to a month.

5. Too high or too low working capital of a business or two extremes of working capital are equal ly
dangerous to the existence of the business enterprise itself – State the consequences of danger of too high
amount of Working Capital and problems of inadequate or low amount of Working Capital

6. A company has prepared its annual budget, relevant deta ils of which are reproduced below:

(1) Sales ₹ 46.80 lakhs (25% cash sales and balance on 78,000 units
credit)
(2) Raw material cost 60% of sales value
(3) Labour cost ₹ 6 per unit
(4) Variable overheads ₹ 1 per unit
(5) Fixed overheads ₹ 5 lakhs (including ₹ 1,10,000 as
depreciation)
Budgeted stock levels:
Raw materials 3 weeks
Work-in-progress 1 week (Material 100%, Labour &
Overheads 50%)
Finished goods 2 weeks
Debtors are allowed credit 4 weeks
Creditors allow credit 4 weeks
Wages are paid by-weekly, i.e., by the 3rd week and by the 5th week for the 1st & 2nd weeks and
the 3rd & 4th weeks respectively
Lag in payment of overheads 2 weeks
Cash-in-hand required ₹ 50,000

Prepare the working capital budget for a year for the company, making whatever assumptions that you may
find necessary

8.Q Ltd sells goods at a uniform rate of gross profit of 20% on sales including depreciation as part of cost
of production. Its annual figures are as under
₹
 Sales (at 2 months credit) 24,00,000
Materials consumed (suppliers credit 2 months) 6,00,000
Wages paid (Monthly at the beginning of the subsequent month) 4,80,000
Manufacturing expenses (cash expenses are paid – one month in arrear) 6,00,000
Administration expenses (cash expenses are paid – one month in arrear) 1,50,000
Sales promotion expenses (paid quarterly in advance) 75,000

The company keeps one month stock each of raw materials and finished goods. A minimum cash balance of
₹80,000 is always kept. The company wants to adopt a 10% safety margin in the maintenance of Working
Capital.
The company has no work -in-progress
Compute the requirements of Working Capital of the company on cash cost basis.

9. A firm is considering pushing up its sales by extending credit facilities to any one of the following
categories of customers: (i) Customers with a 10% risk of non - payment, and (ii) Customers with a 25%
risk of non-payment. The incremental sales expected in category (i) is ₹ 2,40,000 and in category (ii) is ₹
6,50,000. The cost of production and selling costs are 60% of sales while the collection costs amount to
5% of sales in case of category (i) and 10% of sales in case of category (ii). You are required to analyse
the profitability of the proposals of extending credit facilities to the two categories of customers. (Use
sale value for bad debts).

10. GOLDEN GARMENT LTD. manufactures readymade garments and s ells them on credit through a
network of dealers. Its present sale is ₹60 lakh per annum with 20 days credit period. The company is
contemplating an increase in the credit period with a view to increasing sales. Present variable costs are
70 per cent of sales and the total fixed costs ₹8 lakh per annum.
The company expects pre -tax return on investment @25per cent. Some other details are given as under
Average collection Expected annual sales
Proposed credit policy
period (days) (Amount in lakh)
I 30 65
II 40 70
III 50 74

Required:
Advise the management as to which credit policy should the company adopt? Present your answer in a
tabular form. Assume 360 -day a year. Calculations should be made up to two digits after decimal. Ignore
taxation

11. Surya Industries Ltd. is marketing all its products through a network of dealers. All sales are on credit
and the dealers are given one -month time to settle bills. The company is thinking of changing the credit
period with a view to increase its overall profits. The marketing department has prepared the following
estimates for different periods of credit
 Present
Particulars Plan I Plan II Plan III
Policy
Credit period (in 1 1.5 2 3
months) Sales (` 120 130 150 180
Lakhs) 30 30 35 40
Fixed costs (` Lakhs) 0.5 0.8 1 2
Bad debts (% of sales)

The company has a contribution/sales ratio of 40% further it requires a pre -tax return on investment at
20%.
Examine each of the above proposals and recommend the best credit period for the company

12. A company manufactures a special product which requires a component ‘Alpha’. The following
particulars are collected for the year 2021.
1. Annual demand of Alpha 8,000 units
2. Cost of placing an order ₹ 200 per order
3. Cost per unit of Alpha ₹ 400
4. Carrying cost % p.a. 20%
The company has been offered a quantity discount of 4% on the purchase of ‘Alpha’ provided the order
size is 4,000 components at a time.
Required:
(A) Compute the economic order quantity.
(B) Advise whether the quantity discount offer can be accepted

13. X Ltd. buys its annual requirement of 36,000 units in six installments. Each unit cost ₹1 and the
ordering cost is ₹25. The inventory carrying cost is estimated at 20% of unit value. Find the total annual
cost of the existing inventory policy. Examine how much money can be saved by using E.O.Q?

14. P Ltd. has received an offer of quantity discounts on its order of materials as under:
Ordering quantities (Kgs) Price per kg. (₹)
Less than 500 12.00
500 but less than 1600 11.80
1,600 but less than 4000 11.60
4,000 but less than 8,000 11.40
8,000 and above 11.20

The annual requirement for the material is 8,000 kgs. The ordering cost per order is ₹ 12.00 and the stock
holding cost is estimated at 20% of material cost per annum. As a Cost an d Management Accountan t you
have to comp ute the mos t economical ordering quantity
15. TULSI Ltd. provides the following information:
The company maintains minimum cash balance of ₹ 10,00,000. The Standard deviation of the company’s
daily cash flow if ₹ 3,60,000. The annual interest rate is 12%. The transaction cost of buying & selling
securities in ₹ 180 per transaction. (Assume 360 days in a year)
Required :
Calculate the upper limit, return point, and Average Cash Balance as per the Miller -Orr model

16. From the following information you are required to estimate the net working capital requirement:
Particulars
Cost per unit (₹)
Raw Materials 40
Direct labour 15
Overheads (excluding depreciation) 30
Total Cost 85
Additional Information:
Selling-Price ₹ 100 per unit
Output 52,000 units per annum
Raw Material in stock average 4 weeks
Work-in-process: average 2 weeks
(Assume 50% completion stage with full material consumption)
Finished goods in stock average 4 weeks
Credit allowed by suppliers average 4 weeks
Credit allowed to debtors average 8 weeks
Cash at bank is expected to be ₹ 50,000

Assume that production is sustained at an even pace during the 52 weeks of the year. All sales are on
credit basis. State any other assumption that you might have made while computing.

17. The management of Camellia Ltd. has called for a statement showing the working capital needed to
finance a level of activity of 3,00,000 units of output for the year ended March 31, 2024. The cost
structure for the company's pro duct, for the above mentioned activity level, is detailed below
Cost per unit (`)
Raw materials 20
Direct labour 5
Overheads 15
Total cost 40
Profit 10
Selling price 50

Past trends indicate that the raw materials are held in stock, on an average, for two months. Work -in-
process (50 per cent complete) will approximate to ½ month's production. Finished goods remain in
warehouse, on an average, for 1 month. Suppliers of materials extend 1 month's credit. Two months’ credit
is normally allowed to debto rs. A minimum cash balance of ` 25,000 is expected to be maintained. The
production pattern is assumed to be even during the year (12 months).
Required:
Prepare a statement of Working Capital determination

18. The annual demand for an item is 3,200 units. The unit cost is `6 and inventory carrying charges is
25% p.a. If the cost of one procurement is `150, determine:
(A) E.O.Q (B) No. of orders per year (C) Time between two consecutive orders

19. From the following data, compute the value of each firm and value of each equity share as per the
Modigliani-Miller approach:

X (`) Y (`) Z (`)

EBIT (`) 13,00,000 13,00,000 13,00,000
No. of shares 3,00,000 2,50,000 2,00,000
12% debentures (`) 9,00,000 10,00,000
Every firm expect 12% return on investment.

20. A proforma cost sheet of BOSM Ltd., a manufacturing Company provide the following particulars
Particulars AMOUNT
Raw materials cost 100
Direct labour cost 37.5
Overheads cost 75
Total Cost 212.50
Profit 37.50
Selling price 250

The Company keeps raw material in stock, on an average for one month; work -in- progress, on an average
for one week; and finished goods in stock on an average for two weeks. The credit allowed by suppliers is
three weeks and company allows for six weeks credit to its debtors. The lag in payment of wages is one
week and lag in payment of overhead expenses is two weeks.
The Company sells one-fifth of the output against cash and maintains cash -in-hand and at bank put
together at Rs. 37,500.
Required:
Prepare a statement showing estimate of working capital needs to finance an activity level of 1,30,000
units of production. Assume that production is car ried on evenly throughout the year, and wages and
overheads accrue similarly. Work -in-progress stock is 80% complete in all respects.

18.A proforma cost sheet of a Company provides the following data:

Particulars `
Raw material cost per unit 117
Direct Labour cost per unit 49
Factory overheads cost per units (includes depreciation of `18 per 98
unit at budgeted level of activity)
Total cost per unit 264
Profit 36
Selling price per unit 300

Following additional information is available:

Average raw material in stock : 4 weeks

Average work-in-process stock : 2 weeks

(% completion with respect to
Materials : 80% ;
Labour and Overheads : 60%)
Finished goods in stock : 3 weeks
Credit period allowed to debtors : 6 weeks
Credit period availed from sup pliers : 8 weeks
Time lag in payment of wages : 1 week
Time lag in payment of overheads : 2 weeks
The company sells one-fifth of the output against cash and maintains cash balance of ` 2,50,000.
Required:
Prepare a statement showing estimate of working capital needed to finance a budgeted activity level of
87,000 units of production. You may assume that production is carried on evenly throughout the year and
wages and overheads accrue similarl y

21.Tulsian ltd ,is considering changing in credit terms fro m 1/35 net 60 to 2/10,net 60.As a result the
credit sales will increase from 150 crores to 105% ,the average collection period will decline by 5 days
and default percentage will increase from 0.5% to 1%.Collection expense will increase from 35000 to
40500.At present Selling price is Rs 300 per unit .Contribution to sales ratio 20% Average cost is Rs 270
per unit and 60% of the credit customers avail cash discount.Should the credit terms be changes if the
required rate of return is 24% (Pre -tax) and the rate of tax is 25% (take 360 days)
 (Dec 2022 Past paper 2016 syllabus)

22. ALC Ltd. provides you with the following information: (JUNE 2023 PAST PAPER 2016 SYLLABUS)
Estimated Level of Activity: Completed Units of Production 1,04,000 plus units. WI P.
Raw-material 19.6% OF the selling price
Wages 10.6% of the selling price
Production Overheads (including depreciation of 15 per unit 17.6% of the selling price
at the budgeted level of activity)
Selling Price 500/unit
Average raw material in stock 3 weeks
Average work-in-progress 2 weeks
(% of completion with respect to 2 weeks Material -75%, Conversion Cost- 70%)
Finished goods in stock 4 weeks
Credit allowed to debtors 2.5 weeks
Credit allowed by creditors 3.5 weeks
Time lag in payments of labour 2 weeks
Time lag in payments of Production Overheads 1.5 weeks
Cash Sales and Cash Purchases 25%
The company believes in keeping 3,00,000 available to it including the overdraft limit of 75,000 not yet
utilized by the company.
Provision for contingencies is required @ 4% of working capital requirement including that provision.
Assume that production is carried on evenly throughout t he year (52 weeks) and wages and overheads
accrue similarly.
You are required to calculate the Net Working Capital Requirement on Cash Cost Basis if ALC Ltd. is a
newly formed company.

23. A garment trader is preparing a cash forecast for the first three months of the calendar year 2023. His
estimated sales for the forecasted periods are as below: (JUNE 2023 PAST PAPER 2016)
Particulars JAN FEB MAR (rs in 000`)
Total sales 600 600 800
(i) The trader sells directly to the public against cash payments and to other entities on credit. Credit sales
are expected to be four times the value of direct sales to the public. He expects 15% of customers to pay in
the month in which credi sales are made, 25% to pay in the next month and 58% to pay in the next to 1538
month. The outstanding balance is expected to be written off.
(ii) Purchases of goods are made in the month prior to sales and it amounts to 90% of sales and are made
on credit. Payments of these occur in the month after the purchase. No inve ntories of goods are held.
(iii) Cash balance as of 1st January 2023 is 50,000.
(iv) Actual sales for the last two months of the calendar year 2022 are as below:
Particulars November December
Total sales 640 880
You are required to prepare a monthl y cash budget for the three months fro to March, 2023.

FINANCING DECISIONS OF A FIRM

1. Assuming no taxes and given the earnings before interest and taxes (EBIT), interest (I) at 10% and
equity capitalisation rate (Ke) below, calculate the total market value of each firm under Net Income
approach
FIRMS EBIT INT KE
X 2,00,000 20,000 12%
Y 3,00,000 60,000 16%
Z 5,00,000 2,00,000 15%
W 6,00,000 2,40,000 18%

Also determine the weighted average cost of capital for each firm
ANSWER :-
Computation of Value of each firm and WACC
 X Y Z W
EBIT 2,00,000 3,00,000 5,00,000 6,00,00
Interest @ 10% (20,000) (60,000) (2,00,000) (2,40,000)
EBY/EAT 1,80,000 2,40,000 3,00,000 3,60,000
Ke 12.0% 16.0% 15.0% 18.0%
 EAT 
Value of equity
  15,00,000 15,00,000 20,00,000 20,00,000
 Ke 
 Interest 
Value of Debt
  2,00,000 6,00,000 20,00,000 24,00,000
 Kd 
Value of Firm
17,00,000 21,00,000 40,00,000 44,00,000

ko
11..764% 14.28% 12.5% 13.63%

2. Mention the criticism/ limitation of the Modigliani-Miller (M-M) Hypothesis in the context of the
capital structure theories.

3. Company L and company U are in the same risk class and identical in all respects except that L uses
debt while U does not. Levered company has ₹ 18,00,000 debentures, carrying 10% rate of interest. Both
the companies earn 20% before interest and taxes on their total assets of ₹ 30,00,000. Assume perfect
capital market, tax rate of 50% and capitalization rate of 15% for an all -equity company
Compute the value of both the companies using NI approach and NOI approach and overall Cost of Capital
of Company L using NI approach
ANSWER :-
Value of the Firm and Overall Cost of Capital (K0) under NI Approach:
Particulars L U
Value of the firm (₹) 32,00,000 20,00,000
Overall cost of capital (K0) 9.375% –

Calculation for Value of the Firm under NOI Approach:

Particulars L U
Market value of the firm (₹) 20,00,000 20,00,000
 Leverage
1. Suppose, PQR Ltd. which is expecting the EBIT of ₹ 1,50,000 per annum on an investment of ₹
5,00,000, is considering the finalisation of the Capital Structure or the financial plan. The company has
access to raise funds of varying amounts by issuing equity share capital, 12% preference share and 10%
debenture or any combination thereof. Suppose, it analyses the following four options to raise the required
funds of ₹5,00,000:
1. By issuing equity share capital at par.
2. A total of 50% funds by equity share capital and 50% funds by preference shares.
3. A total of 50% funds by equity shar e capital, 25% by preference shares and 25% by issue of 10%
debentures.
4. A total of 25% funds by equity share capital, 25% as preference share and 50% by the issue of 10%
debentures
Assuming that PQR Ltd. belongs to 50% tax bracket, analyse the four options based on EPS.
2. Olio Ltd. needs to raise ₹ 10,00,000 for the construction of a new plant and provides you the following
information

Financing Plan A 40% Equity and Balance in 10% Debt

Financing Plan B 30% Equity. 60% in 10% Debt and Balance in 15% Pref. Shares

1. Equity Shares of the face value of ₹ 10 each will be issued at a premium of 110%. Flotation cost ₹ 1
per share, 15% Pref. Shares of a face value of ₹ 100 each will be issued at a premium of 110%.
Rotation cost ₹ 10 per share.
2. Expected Capital Turnover Ratio 1, Expected Sales to Variable Cost Ratio 156.25%, Fixed Cost ₹
60,000, Tax Rate: 25%.
Required: Calculate the Indifference point and Financial Break Even Point

3. The following are the extracts from the financial statements of ABC Ltd.
(` In lakhs)
 Operating profit 105
Less: Interest on debenture 33
72
Less: Income-tax 36
Net Profit 36
Equity share capital (share of ` 10 each) 200
Reserves ad surplus 100
15% Non-convertible debentures 220
520

The market price per equity share is ` 12 and per debenture is ` 93.75.
You are required to calculate:
(A) the earnings per share.
(B) the percentage of cost of capital to the company for the debenture fund and the equity
4. Calculate the degree of operating leverage (DOL), degree of finan cial leverage (DFL) and the degree of
combined leverage (DCL) for the following firms and interpret the results.
Firm K Firm L Firm M
1. Output (Units) 60,000 15,000 1,00,000
2. Fixed costs (`) 7,000 14,000 1,500
3. Variable cost per unit (`) 0.20 1.50 0.02
4. Interest on borrowed funds (`) 4,000 8,000 —
5. Selling price per unit (`) 0.60 5.00 0.10

5. A firm’s sales, variable costs and fixed cost amount to ₹75 lakh, ₹42 lakh and ₹6 lakh respective - ly. It
has borrowed ₹45 lakh at 9% and its equity capital totals ₹55 lakh.
(i) Calculate the firm’s ROI.
(ii) Does it have favorable financial leverage?
(iii) If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset
leverage?
(iv) Compute the operating, financial and co mbined leverages of the firm.
(v) If the sales drop to ₹50 lakh what will the new EBIT be?
(vi) At what level will the EBT of the firm equal to zero

6. The balance sheet of a company for the year 2022 -23 is given below (in ₹ Crore):
Amount Amount (₹)
Liabilities Assets
(₹)
Equity share capital (₹ 10) 1,20,000 Fixed Assets 3,00,000
Retained Earnings 40,000 Current Assets 1,00,000
10% Long term debt 1,60,000
 Current Liabilities 80.000
4,00,000 4,00,000

The company’s total assets turnover ratio is 3, its fixed operating costs are ₹ 2,00,000 and its variable
operating cost ratio is 40%. The income tax rate is 30%.
Calculate Degree of Operating leverage, Degree of Financial leverage and Degree of Combined leverage of
the company

7. The operating i ncome of Hypothetical Ltd amounts to `1,86,000. It pays 35% tax on its income. Its
capital structure consists of the following:
14% Debentures 5,00,000
15% Preference shares 1,00,000
Equity shares (`100 each) 4,00,000

Determine:
(i) the firm’s EPS;
(ii) the percentage change in EPS associated with 30% change (both increase and decrease) in EBIT;
(iii) the degree of financial leverage at the current level of EBIT;
(iv) the additional data do you need to compute operating as well as combined leverage

8. Find out Financial Leverage from the following data

Net Worth `50,00,000
Debt/Equity 3:1
Interest Rate 12%
Operating Profit `40,00,000

9.TCP ltd needs to raise Rs 10,00,000for the construction of a new plant and provides you with the
following information
1. Plan A :- 40% Equity and balance through 10% debt
Plan B :- 30% Equity ,60% through 10% Debt and balance through 12% Preference shares
2. Equity shares of the face value of Rs 10 each will be issued at a premium of 110%.Floatation cost
Rs 1 per sh are .15% preference shares of the face value of Rs 100 each will be issued at a premium
110%.floatation cost Rs 10/share
3. Expected capital turnover Ratio : -
Expected sales to variable cost Ratio : - 156.25%
Fixed cost Rs 60000
Tax rate 25%

Required Calculat e the indifference Point A and B plans and suggest which plan has more financial
risk
 DIVIDEND DECISIONS
1. XYZ Ltd. has 1,00,000 outstanding shares of ₹10 each. The company earns a rate of 24% on its
investments and retains 50% of earnings as a policy. If Cost of Capital is 18%, calculate price of the share
according to Gordon’s Model. The company has total inv estment of around ₹10,00,000 in assets. If payout
ratio changes to 10%, 90%
How will share price change? Also comment on the optimal dividend policy for XYZ Ltd. as per Gordon’s
Model.

2. The following figures are collected from the annual report of XYZ Ltd.:
Net profit ₹30 Lakhs
Outstanding 12% preference shares ₹100 Lakhs
Number of equity shares 3 Lakhs
Return on Investment 20%
Cost of Capital 16%
What should be the approximate dividen d payout ratio so as to keep the share price at ₹ 42 by using
Walter’s Model

3. SL Ltd. provides you with the following information:

Equity Share Capital (₹ 50 each) ₹ 100 lakhs

12% Preference Share Capital ₹ 50 lakhs
10% Debentures ₹ 50 lakhs
Return on Capital Employed 18.75%
Total Dividend (including dividend on Preference Shares) paid ₹ 18 lakhs
Theoretical Market Price of an equity share under Gordon's Model ₹ 300
Tax Rare 20%. Market Pnce of an equity share in the beginning of the year was * 100

Required:
Determine the theoretical market price of an equity share under Walter’s Model and M M. Model. Are you
satisfied with the current dividend policy of the company? If not. what should be the optimum payout ratio

4. A Company pays a dividend of ₹2.00 per share with a growth rate of 7%. The risk free rate is 9% and the
market rate of return is 13%. The Company has a beta factor of 1.50. However, due to a decision of the
Finance Manager, beta is likely to increase to 1. 75.
Determine the present as well as the likely value of the share after the decision.

5.BHT provides you with the following

Equity share capital RS 100 lakhs
12% Preference share capital Rs 50 lakhs
10% debentures Rs 50 lakhs
Return on capital employed 18.75%
Dividend paid 12 lakhs
Theorectical MPS under Gordon model 300
Tax rate 20%

Require determine the theoretical market price of an equity share under Walters model .Are you satisfied
with the current dividend policy of the company ?If Not what should be optimum payout ratio
(DEC 2022 Past paper 2016)