CA IPCC - FM CA Mayank Kothari May 2017 Exam List of Important Questions Covered in this file Answers Slides Click Here Click here Imp. Questions FM Charts I N D E X O F I M P O R T A N T Q U E S T I O N S Chapter Name No. of Questions Page Scope and Objectives of Financial Management 10 1-5 Time Value of Money 16 6-8 Ratio Analysis 14 9-15 Cash Flow Statement 5 16-20 Funds Flow Statement 5 21-25 Cost of Capital 21 26-31 Capital Structure Decisions 9 32-34 Leverages 13 35-40 Capital Budgeting 17 41-48 Working Capital Management 33 49-63 143 *NOTE THAT IT S NOT NECESSARY TO SOLVE ALL THE QUESTIONS. IF YOU ARE ABLE TO SOLVE 100 QUESTIONS OUT OF ABOVE LIST, THAT WILL SOLVE THE PURPOSE FOR YOUR EXAM COVERING THE MAXIMUM CONCEPTS
Scope and Objectives of Financial Management Q1 What is Financial Management? Answer: Financial Management means the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It includes how to create more wealth, generate more cash for the business and plough back any profits to grow the business more. Not only about long term budgeting but also how to allocate the short term resources like current assets. It also deals with the dividend policies of the share holders. Q2 What are the two aspects of the financial management? Answer: The two aspects of the financial management are a) Procurement of funds Funds can be procured from any of the following sources i) Equity ii) Debentures iii) Funding from banks iv) International Funding b) Utilization of funds Funds may be utilized for the following purposes i) For investment in fixed assets ii) For further expansion of the business iii) For working capital purposes Q3 What is the scope of the financial management? Answer: In order to achieve the objectives of the financial management, the financial manager of the business concern, has to manage various aspects of finance function which lay down the scope of his duty. These aspects are discussed as under: 1. Determining the structure of capitalization. 2. Investment decision. 3. Choice of sources of finance. 4. Estimating the financial requirement: 4. Management of cash flow. 5. Earnings Management Q4 What is the objectives of the financial management? [1 Mark, Time: 1 Minute] Answer: There are two major objectives of the financial management 1) Profit maximization 2) Wealth/ Value Maximization 2 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Q5 What is the difference between profit maximization and wealth maximization? [Nov 2010/ 4 Marks, Time: 6 Minutes] Answer: Aspects Profit Maximisation Wealth Maximisation Short/Long term gain Emphasizes on the short term gain Emphasizes on the long term gain Risk or Uncertainty Ignores risk or uncertainty Recognizes risk or uncertainty Timing of returns Ignores the timing of returns Recognizes the timing of returns Link to financial decisions Easy to determine the link between financial decisions and profits. Offer no clear relationship between financial decisions and share price. Management experiences Easy to calculate profits. Can lead to management anxiety and frustration. Q6 What is the role of a chief financial officer? [May 2010/3 Marks, Nov 2011/ 4 Marks, Time: 6 Minutes] Answer: chief financial officer of an organization plays an important role in the company s goals, policies, and financial success. His responsibilities include: (a) Financial analysis and planning: Determining the proper amount of funds to employ in the firm, i.e. designating the size of the firm and its rate of growth. (b) Investment decisions: The efficient allocation of funds to specific assets. (e) Risk management: Protecting assets (d) Management of financial resources (such as working capital). (c) Capital structure decisions: Raising funds on favorable terms as possible i.e. determining the composition of liabilities. Q7 The profit maximization is not an operationally feasible criterion. Comment on it. [May 2012/ 4 Marks, Time: 6 Minutes] Answer: The above statement is true because Profit maximisation can be a short-term objective for any organization and cannot be its sole objective. Profit maximization fails to serve as an operational criterion for maximizing the owner's economic welfare. It fails to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency. It suffers from the following limitations: (i) Vague term: The definition of the term profit is ambiguous. Does it mean short term or long term profit? Does it refer to profit before or after tax? Total profit or profit per share? (ii) Timing of Return: The profit maximization objective does not make distinction between returns received in different time periods. It gives no consideration to the time value of money, and values benefits received today and benefits received after a period as the same. (iii) It ignores the risk factor. Answers are available in slides Download the zip file from the link on the first page of this document 3 P a g e
Q8 The financial management includes three types of decisions. What are they? Explain? Answer: a. Financing Decisions These decisions relate to acquiring the optimum finance to meet financial objectives and seeing that fixed and working capital are effectively managed. The financial manager needs to possess a good knowledge of the sources of available funds and their respective costs and needs to ensure that the company has a sound capital structure, i.e. a proper balance between equity capital and debt. Financing decisions also call for a good knowledge of evaluation of risk, e.g. excessive debt carried high risk for an organization s equity because of the priority rights of the lenders. b. Investment Decisions These decisions relate to the selection of assets in which funds will be invested by a firm. Funds procured from different sources have to be invested in various kinds of assets. Long term funds are used in a project for various fixed assets and also for current assets. The investment of funds in a project has to be made after careful assessment of the various projects through capital budgeting. A part of long term funds is also to be kept for financing the working capital requirements. Asset management policies are to be laid down regarding various items of current assets. The inventory policy would be determined by the production manager and the finance manager keeping in view the requirement of production and the future price estimates of raw materials and the availability of funds. c. Dividend Decisions These decisions relate to the determination as to how much and how frequently cash can be paid out of the profits of an organisation as income for its owners/shareholders. The owner of any profit-making organization looks for reward for his investment in two ways, the growth of the capital invested and the cash paid out as income; for a sole trader this income would be termed as drawings and for a company the term is dividends. The dividend decision thus has two elements the amount to be paid out and the amount to be retained to support the growth of the organisation, the latter being also a financing decision; the level and regular growth of dividends represent a significant factor in determining a profit-making company s market value, i.e. the value placed on its shares by the stock market. Q9 Write short note on the issues or priorities affecting role of CFO or future role of CFO. Answer: 1. Regulation: Regulation requirements are increasing and CFOs have an increasingly personal stake in regulatory adherence. 2. Globalisation: The challenges of globalisation are creating a need for finance leaders to develop a finance function that works effectively on the global stage and that embraces diversity. 3. Technology: Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through big data and analytics. 4 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
4. Risk The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate ethos. 5. Transformation There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero cost impact. Stakeholder Management Stakeholder management and relationships will become important as increasingly CFOs become the face of the corporate brand. 6. Strategy There will be a greater role to play in strategy validation and execution, because the environment is more complex and quick changing, calling on the analytical skills CFOs can bring. 7. Reporting Reporting requirements will broaden and continue to be burdensome for CFOs. 8. Talent and Capability A brighter spotlight will be shine on talent, capability and behaviours in the top finance role. Q10 Difference between financial management and accounting. Basis Financial Accounting Financial Management Definition Preparation of accounting Efficient and productive records. management of assets and Purpose Measuring, preparation, analyzing, and interpretation of financial statements. To collect and present financial information. Goal To see how the company is performing, to monitor day to day accounting operations, and for taxing. Tools Balance sheets, profit and loss ledgers, positional declarations, and cash flow Determination funds of statements. Revenue is acknowledged at the point of sale and not when it was collected. Expenses are acknowledged when they are incurred than when they are paid. liabilities. Decision making regarding working capital issues such as level of inventory, cash holding, credit levels, financial strategy, managing and controlling cash flow. To forecast the future performance of the business. Performance reports, ratio analysis, risk analysis, estimating break evens, returns on investment, etc. Revenues are acknowledged during the actual receipt in cash as in cash flow and the expenses are acknowledged when the actual payment is made as in cash outflow. Answers are available in slides Download the zip file from the link on the first page of this document 5 P a g e
6 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Time Value of Money 1. A person is required to pay four equal annual payments of `4500 each in his deposit account that pays 10% interest per year. Find out the future value of annuity at the end of 4 years. [May 2007/3 Marks] 2. A company offers a fixed deposit scheme whereby `10000 matures to `12,625 after 2 years, on a half yearly compounding basis. If the company wishes to amend the scheme by compounding interest every quarter, what will be the revised maturity value? [Nov 2008/ 2 Marks] 3. Determine the compound interest for an investment of `7500 at 6% compounded half yearly. Given that (1 + i) n for i=0.03 and n = 12 is 1.42576. 4. `2000 invested at annual rate of interest of 10%. What is the amount after 2 years if the compounding is done a. Annually b. Semi annually c. Monthly d. Daily 5. A person opened an account on April, 2009 with a deposit of `800. The account paid 6% interest compounded quarterly. On October 1,2009 he closed the account and added enough additional money to invest in a 6 month time deposit for `1000 earning 6% compounded monthly. a. How much additional amount did the person invest on October 1? b. What was the maturity value of his time deposit on April 1, 2010? c. How much total interest was earned? Given that (1 + i) n is 1.03022500 for i= 1.5%, n 2 and is 1.03037751 for i=0.5% and n= 6. 6. Ramanuj has taken a 20 month car loan of `6,00,000. The rate of interest is 12% p.a. what will be the amount of monthly loan amortization? 7. If the interest is 10% payable quarterly, find the effective rate of interest 8. Mr. X has made real estate investment for `12,000 which he expects will have a maturity value equivalent to interest at 12% compounded monthly for 5 years. If most savings institutions currently pay 8% compounded quarterly on a 5 year term, what is the least amount for which Mr. X should sell his property? Given that (1 + i) n = 1.81669670 for i=1% and n= 60 and that (1 + i) n =0.67297133 for i=2%, n=20 9. `200 is invested at the end of each month in an account paying interest 6% per year compounded monthly. What is the amount of this annuity after 10 th payment? Given that(1.005) 10 = 1.0511. 10. Find out the present value of a 4 year annuity of `20000 discounted at 10% Answers are available in slides Download the zip file from the link on the first page of this document 7 P a g e
11. Y bought a TV costing `13000 by making a down payment of `3,000 and agreeing to make equal annual payment for 4 years. How much would be each payment if the interest on unpaid amount be 14% compounded annually? 12. Ramesh wants to retire and receive `3000 a month. He wants to pass this monthly payment to future generations after his death. He can earn an interest of 8% compounded annually. How much will he need to set aside to achieve his perpetuity goal? 13. Assuming that the discount rate is 7% per annum, how much would you pay to receive `50, growing at 5%, annually forever? 14. XYZ Company is creating a sinking fund to redeem its preference capital of `10 lakhs issued on April 6, 2010 and maturing on April 5, 2021. The first annual payment will be made on April 6, 2010. The company will make equal annual payments and expects that the fund will earn 12 percent per year. How much will be the amount of sinking fund payment? 15. Bank of Delhi pays 8 per cent interest, compounded quarterly, on its money market account. The managers of Bank of Gurgaon want its money market account to equal Bank of Delhi s effective annual rate, but interest is to be compounded on monthly basis. What nominal, or quoted, or rate must Bank of Gurgaon set? 16. A doctor is planning to buy an X-Ray machine for his hospital. He has two options. He can either purchase it by making a cash payment of `5 lakhs or `6,15,000 are to be paid in six equal annual installments. Which option do you suggest to the doctor assuming the rate of return is 12 percent? Present value of annuity of Re. 1 at 12 percent rate of discount for six years is 4.111. 8 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Ratio Analysis 1. From the following information, prepare a summarised Balance Sheet as at 31st March, 2002: Working Capital `2,40,000 Bank overdraft `40,000 Fixed Assets to Proprietary ratio 0.75 Reserves and Surplus `1,60,000 Current ratio 2.5 Liquid ratio 1.5 2. With the help of the following information complete the Balance Sheet of MNOP Ltd.: Equity share capital `1,00,000 The relevant ratios of the company are as follows: Current debt to total debt 0.40 Total debt to owner s equity 0.60 Fixed assets to owner s equity 0.40 Total assets turnover 2 times Inventory turnover 8 times 3. Using the following data, complete the balance sheet given below: Gross Profits `54000 Shareholders Funds `6,00,000 Gross profit margin 20% Credit sales to total sales 80% Total Assets Turnover 0.3 times Inventory Turnover 4 times Average collection period (a 360 days year) 20 days Current Ratio 1.8 Long Term debt to equity 40% Balance Sheet Creditors Cash Long Term Debt Debtors Shareholders fund Inventory Fixed Assets Answers are available in slides Download the zip file from the link on the first page of this document 9 P a g e
4. JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005: Balance Sheet ` in lakhs March 31, 2006 March 31, 2005 Sources of Funds Shareholders Funds 2,377 1,472 Loan Funds 3,570 3,083 5,947 4,555 Application of Funds Fixed assets 3,466 2,900 Cash and Bank 489 470 Debtors 1,495 1,168 Stock 2,867 2,407 Other Current Assets 1,567 1,404 Less: Current Liabilities (3,937) (3,794) 5,947 4,555 The Income statement of the JKL Ltd. for the year ended is as follows: ` in lakhs March 31, 2006 March 31, 2005 Sales 22,165 13,882 Less: Cost of goods sold 20,860 12,544 Gross Profit 1,305 1,338 Less: Selling, General and Administrative expenses 1,135 752 Earnings before Interest and Tax (EBIT) 170 586 Interest Expense 113 105 Profit before tax 57 481 Tax 23 192 Profit after tax (PAT) 34 289 Required: (i) Calculate for the year 2005-06 a. Inventory turnover ratio b. Financial leverage c. Return on investment(roi) d. Return on Equity(ROE) e. Average collection period (ii) Give a brief comment on the financial position of JKL Limited.[May 2006, 10+2 Marks] 5. From the information given below calculate the amount of Fixed assets and proprietors fund. [Nov 2009, 2 Marks] Ratio of fixed assets to proprietors fund = 0.75 Net working capital = `6,00,000 10 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
6. The following figures and ratios are related to a company [May 2010, 11+4 marks] (i) Sales for the year (all credit) `30,00,000 (ii) Gross profit ratio 25% (iii) Fixed assets turnover (based on cost of goods sold) 1.5 (iv) Stock turnover (based on cost of goods sold) 6 (v) Liquid ratio 1:1 (vi) Current ratio 1.5:1 (vii) Debtors collection period 2 months (viii) Reserves and surplus to share capital 0.6:1 (ix) Capital Gearing Ratio 0.5 (x) Fixed assets to net worth 1.2:1 You are required to prepare: (a) Balance sheet of the company on the basis of above details. (b) The statement showing working capital requirement, if the company wants to make a provision for contingencies @ 10% of net working capital including such provision. 7. MNP Limited has made plans for the next year 2010-11. It is estimated that the company will employ total assets of `25,00,000; 30% of assets being financed by debt at an interest cost of 9% p.a. The direct costs for the year are estimated at `15,00,000 and all other operating expenses are estimated at `2,40,000/ The sales revenue are estimated at `22,50,000. Tax rate is assumed to be 40%. Required to calculate: (i) Net Profit Margin (ii) Return on Assets (iii) Asset Turnover (iv) Return on equity 8. The financial statements of a company contain the following information for the year ending 31 st March 2011 Particulars ` Cash 1,60,000 Sundry Debtors 4,00,000 Short term investments 3,20,000 Stock 21,60,000 Prepaid Expenses 10,000 Total Current Assets 30,50,000 Current Liabilities 10,00,000 10% Debentures 16,00,000 Equity Share Capital 20,00,000 Retained Earnings 8,00,000 Statement of Profit for the year ended 31 st March 2011 Particulars ` Sales (20% Cash Sales) 40,00,000 Less: Cost of goods sold 28,00,000 Profit before interest and tax 12,00,000 Less: Interest 1,60,000 Profit before tax 10,40,000 Answers are available in slides Download the zip file from the link on the first page of this document 11 P a g e
Less: Tax @ 30% 3,12,000 Profit after tax 7,28,000 Calculate: (a) Quick Ratio (b) Debt-Equity Ratio (c) ROCE and (d) Average Collection Period (assuming 360 day year) 9. The following accounting information and financial ratios of M Limited relate to the year ended 31 st March,2012: Inventory Turnover Ratio 6 Times Creditors Turnover Ratio 10 times Debtors Turnover Ratio 8 times Current Ratio 2.4 Gross Profit Ratio 25% Total sales `30,00,000; cash sales 25% of credit ; cash purchases `2,30,000; working capital `2,80,000; closing inventory is `80,000 more than opening inventory. You are required to calculate: i. Average inventory ii. Purchases iii. Average debtors iv. Average creditors v. Average payment period vi. Average collection period vii. Current assets viii. Current liabilities 10. In a meeting held at Solan towards the end of 2009, the Directors of M/s HPCL Ltd. have taken a decision to diversify.at present HPCL Ltd. sells all finished goods from its own warehouse.the company issued debentures on 01.01.2010 and purchased fixed assets on the same day.the purchase prices have remained stable during the concerned period.following information is provided to you: Income Statements 2009 (`) 2010(`) Cash Sales 30,000 32,000 Credit Sales 2,70,000 3,00,000 3,42,000 3,74,000 Less: Cost of goods sold 2,36,000 2,98,000 Gross Profit 64,000 76,000 Less: Expenses Warehousing 13,000 14,000 Transport 6,000 10,000 Administrative 19,000 19,000 Selling 11,000 14,000 Interest on Debenture - 49,000 2,000 59,000 Net Profit 15,000 17,000 12 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Balance Sheet 2009 (`) 2010(`) Fixed Asset (Net Block) - 30,000-40,000 Debtors 50,000 82,000 Cash at Bank 10,000 7,000 Stock 60,000 94,000 Total Current Assets 1,20,000 1,83,000 Creditors 50,000 76,000 Total Current Liabilities 50,000 76,000 Working Capital (CA-CL) 70,000 1,07,000 Total Assets 1,00,000 1,47,000 Represented by: Share Capital 75,000 75,000 Reserves and Surplus 25,000 42,000 Debentures - 30,000 1,00,000 1,47,000 You are required to calculate the following ratios for the years 2009 and 2010 i. Gross Profit ratio ii. Operating Expenses to sales ratio iii. Operating Profit Ratio iv. Capital Turnover Ratio v. Stock Turnover Ratio vi. Net Profit to Net Worth Ratio and vii. Debtors collection period Ratio relating to capital employed should be based on the capital at the end of the year. Give the reasons for change in the ratios for 2 years. Assume opening stock of `40,000 for the year 2009. Ignore taxation. 11. Following is the abridged balance sheet of Alpha Ltd. Liabilities ` Assets ` Share Capital 1,00,000 Land and Buildings 80,000 Profit and Loss Account 17,000 Plant and Machineries 50,000 Current Liabilities 40,000 Less: Depreciation 15,000 35,000 1,15,000 Stock 21,000 Debtors 20,000 Bank 1,000 42,000 Total 1,57,000 Total 1,57,000 Answers are available in slides Download the zip file from the link on the first page of this document 13 P a g e
With the help of the additional information furnished below, you are required to prepare Trading and Profit and Loss account and a balance sheet as at 31 st March, 2010 (i) The company went in for reorganization of capital structure, with share capital remaining the same as follows: Share capital 50% Other shareholders funds 15% 5% Debentures 10% Trade Creditors 25% Debentures were issued on 1 st April, interest being paid annually on 31 st March. (ii) Land and buildings remained unchanged. Additional plant and machinery has been bought and a further `5,000 depreciation written off. (Total fixed assets then constituted 60% of total gross fixed and current assets.) (iii) Working capital ratio was 8:5 (iv) Quick assets ratio was 1:1 (v) The debtors (four fifth of the quick assets) to sales ratio revealed a credit period of 2 months. There were no cash sales. (vi) Return on net worth was 10% (vii) Gross profit was at the rate of 15% of selling price. (viii) Stock turnover was eight times for the year. Ignore taxation. 12. X Co. has made plans for the next year. It is estimated that the company will employ total assets of `8,00,000; 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at `4,80,000 and all other operating expenses are estimated at 80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. You are required to calculate: (i) net profit margin; (ii) return on assets; (iii) asset turnover and (iv) return on owners equity. 13. The following accounting information and financial ratios of PQR Ltd. relate to the year ended 31st December, 2009: 2009 I. Accounting Information Gross Profit 15% of Sales Net Profit 8% Sales Raw Materials Consumed 20% of works cost Direct Wages 10% of works cost Stock of raw materials 3 months usage Stock of finished goods 6% of works cost Debt collection period 60 days All sales are on credit II. Financial Ratios: Fixed assets to sales 1:3 Fixed assets to current assets 13:11 Current Ratio 2:1 Long Term loans to current liabilities 2:1 Capital to Reserves and surplus 1:4 14 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
If value of fixed assets as on 31 st December, 2008 amounted to `26 lakhs, prepare a summarized profit and loss account of the company for the year ended 31 st December, 2009 and also the balance sheet as on 31 st December, 2009. 14. Shree Limited has furnished the following ratios and information relating to the year ended 31st March, 2014. Sales `60,00,000 Return on Net worth 25% Rate of Income tax 50% Share Capital to Reserves 7:3 Current Ratio 2 Net Profit to Sales 6.25% Inventory Turnover (based on cost of goods sold) 12 Cost of Goods Sold `18,00,000 Interest on Debentures `60,000 Sundry Debtors `2,00,000 Sundry Creditors `2,00,000 You are required to: (a) Calculate the operating expenses for the year ended 31st March, 2014. (b) Prepare a draft balance sheet as on 31st March in the following format: Draft Balance Sheet as on 31st March, 2014 Liabilities ` Assets ` Share Capital Fixed Assets Reserve and Surplus Current Assets 15% Debentures Stock Sundry Creditors Debtors Cash Answers are available in slides Download the zip file from the link on the first page of this document 15 P a g e
Cash Flow Statement 1. The balance sheet of JK Limited as on 31 st March 2005 and 31 st March 2006 are given below: Balance sheet as on (` in 000) Liabilities 31.03.05 30.03.06 Assets 31.03.05 31.03.06 Share Capital 1440 1920 Fixed Assets 3840 4560 Capital Reserve - 48 Less: Depreciation 1104 1392 General Reserve 816 960 2736 3168 Profit and Loss account 288 360 Investment 480 384 9% Debentures 960 672 Cash 210 312 Current Liabilities 576 624 Other Current Assets 1134 1272 Proposed Dividend 144 174 (Including stock) Provision for Tax 432 408 Preliminary Expenses 96 48 Unpaid Dividend - 18 4656 5184 4656 5184 Additional Information: a) During the year 2005-2006, Fixed assets with a book value of `2,40,000 (accumulated depreciation of `84,000) was sold for `1,20,000. b) Provided `4,20,000 as depreciation. c) Some investments are sold at a profit of `48000 and profit was credited to capital reserve. d) It is decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10%. The stock was `2,59,000 as on 31.03.2005. the stock as on 31.03.2006 was correctly valued at `3,60,000. e) It is decided to write off fixed assets costing `60,000 on which depreciation amounting to `48,000 has been provided. f) Debentures are redeemed at `105. You required to prepare a cash flow statement. 16 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
2. The balance sheet of X Limited as on 31 st March 2007is as follows: Liabilities `( 000) Assets ` ( 000) Equity share capital 6,000 Fixed Assets (at cost) 16250 8% preference share capital 3,250 Less: Depreciation written off 5200 11,050 Reserve & Surplus 1,400 Stock 1,950 10% Debentures 1,950 Sundry Debtors 2,600 Sundry Creditors 3,250 Cash 250 Total 15,850 15,850 The following additional information is available: i. The stock turnover ratio based on cost of goods sold would be 6 times. ii. The cost of fixed assets to sales ratio would be 1.4 iii. Fixed assets costing `30,00,000 to be installed on 1 st April, 2007, payment would be made on March 31, 2008. iv. In March, 2008, a dividend of 7% on equity capital would be paid. v. `5,50,000 11% debentures would be issued on 1 st April 2007. vi. `30,00,000 Equity shares would be issued on 31 st March, 2008. vii. Creditors would be 25% of materials consumed. viii. ix. Debtors would be 10% of sales. The cost of goods sold would be 90% of sales included material 40% and depreciation of 5% of sales. x. The profit is subject to debenture interest and taxation @ 30%. Required: a. Prepare the projected balance sheet as on 31 st March 2008 b. Prepare projected cash flow statement in accordance with AS-3 3. Balance sheets of a company as on 31 st March 2007and 2008 were as follows: Liabilities 31.03.07 30.03.08 Assets 31.03.07 31.03.08 Equity share capital 10,00,000 10,00,000 Goodwill 1,00,000 80,000 8% preference share 2,00,000 3,00,000 Land and building 7,00,000 6,50,000 capital General Reserve 1,20,000 1,45,000 Plant and Machinery 6,00,000 6,60,000 Securities Premium - 25,000 Investments (non-trading) 2,40,000 2,20,000 Profit and Loss A/c 2,10,000 3,00,000 Stock 4,00,000 3,85,000 11% Debentures 5,00,000 3,00,000 Debtors 2,88,000 4,15,000 Creditors 1,85,000 2,15,000 Cash and Bank 88,000 93,000 Provision for tax 80,000 1,05,000 Prepaid Expenses 15,000 11,000 Proposed Dividend 1,36,000 1,44,000 Premium on Redemption of - 20,000 Debentures 24,31,000 25,34,000 24,31,000 25,34,000 Additional Information i. Investments were sold during the year at profit of `15000. ii. During the year an old machine costing `80,000 was sold for `36,000. Its written down value was `45,000. iii. Depreciation charged on plants and machinery @ 20% on the opening balance. iv. There was no purchase or sale of Land and Building. v. Provision for tax made during the year was `96,000. vi. Preference shares were issued for consideration of cash during the year. Answers are available in slides Download the zip file from the link on the first page of this document 17 P a g e
You are required to prepare: a. Cash flow statement as per AS-3 b. Schedule of changes in working capital. 4. The summarized balance sheets of a XYZ Ltd as on 31 st March 2010and 2011 are as follows: Liabilities 31.03.10 30.03.11 Assets 31.03.10 31.03.11 Preference share 4,00,000 2,00,000 Plant and Machinery 7,00,000 8,20,000 capital Equity share capital 4,00,000 6,60,000 Long term investments 3,20,000 4,00,000 Share premium A/c 40,000 30,000 Goodwill - 30,000 Capital Redemption - 1,00,000 Current Assets 9,10,000 11,41,000 Reserve General Reserve 2,00,000 1,20,000 Short term investment 50,000 84,000 P&L A/c 1,30,000 1,75,000 (less than 2 months) Current Liabilities 6,40,000 9,00,000 Cash and Bank 1,00,000 80,000 Proposed Dividend 1,60,000 2,10,000 Preliminary Expenses 40,000 20,000 Provision for tax 1,50,000 1,80,000 21,20,000 25,75,000 21,20,000 25,75,000 Additional Information During the year 2011 the company: i. Preference share capital was redeemed at a premium of 10% partly out of proceeds issue of 10000 equity share of `10 each issued at 10% premium and partly out of profits otherwise available for dividends. ii. The company purchased plant and machinery for `95,000. It also acquired another companies stock for `25,000 and plant and machinery `1,05,000 and paid `1,60,000 in Equity share capital for the acquisition. iii. Foreign exchange loss of `1600 represents loss in value of short term investments. iv. The company paid tax of `1,40,000. You are required to prepare cash flow statement. 5. The following is the income statement XYZ Company for the year 2004: (` ) Sales 1,62,700 Add.: Equity In ABC Company s earning 6,000 1,68,700 Expenses Cost of goods sold 89,300 Salaries 34,400 Depreciation 7,450 Insurance 500 Research and development 1,250 Patent amortisation 900 Interest 10,650 Bad debts 2,050 Income tax: Current 6,600 Deferred 1,550 8,150 Total expenses 1,54,650 18 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Net income 14,050 Additional information s are: a. 70% of gross revenue from sales were on credit. b. Merchandise purchases amounting to `92,000 were on credit. c. Salaries payable totaled `1,600 at the end of the year. d. Amortisation of premium on bonds payable was `1,350. e. No dividends were received from the other company. f. XYZ Company declared cash dividend of `4,000. g. Changes in Current Assets and Current Liabilities were as follows: Increase Decrease) ` Cash 500 Marketable securities 1,600 Accounts receivable (7,150) Allowance for bad debt (1,900) Inventory 2,700 Prepaid insurance 700 Accounts payable (for merchandise) 5,650 Salaries payable (2,050) Dividends payable (3,000) Prepare a statement showing the amount of cash flow from operations. Answers are available in slides Download the zip file from the link on the first page of this document 19 P a g e
20 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Fund Flow Statement 1. The following are the balance sheets of Gama Limited for the year ended March 31, 2004 and March 31, 2005 Balance Sheet As on March, 31 2004 2005 Capital and Liabilities Share capital 6,75,000 7,87,500 General Reserves 2,25,000 2,81,250 Capital Reserves (Profit on sale of investment) - 11,250 Profit and Loss Account 1,12,500 2,25,000 15% debentures 3,37,500 2,25,000 Accrued Expenses 11,250 13,500 Creditors 1,80,000 2,81,250 Provision for dividends 33,750 38,250 Provision for taxation 78,750 85,500 Total 16,53,750 19,48,500 Assets Fixed Assets 11,25,000 13,50,000 Less: Accumulated Depreciation 2,25,000 2,81,250 Net Fixed Assets 9,00,000 10,68,750 Long Term Investments (at cost) 2,02,500 2,02,500 Stock (at cost) 2,25,000 3,03,750 Debtors (net of provision for doubtful debts of 2,53,125 2,75,625 Rs. 45,000 and Rs. 56,250 respectively for 2004 and 2005) Bills Receivable 45,000 73,125 Prepaid Expenses 11,250 13,500 Miscellaneous Expenditure 16,875 11,250 Total 16,53,750 19,48,500 Additional Information: (a) During the year 2004-05, fixed assets with a net book value of `11,250 (accumulated depreciation, `33,750) was sold for `9,000. (b) During the year 2004-05, investments costing `90,000 were sold, and also investments costing `90,000 was purchased. (c) Debentures were retired at a premium of 10%. (d) Tax of `61,875 was paid for 2003-04. (e) During the year 2004-05, bad debts of `15,750 were written off against the provision for doubtful debt account. (f) The proposed dividend for 2003-04 was paid in 2004-05. Required: Prepare a funds flow statement (statement of changes in financial position on working capital basis) for the year ended March 31, 2005. Answers are available in slides Download the zip file from the link on the first page of this document 21 P a g e
2. Balance sheets of RST Ltd. as on 31 st March 2008and 2009 were as follows: Liabilities 31.03.08 30.03.09 Assets 31.03.08 31.03.09 Equity share capital 10,00,000 12,00,000 Land & Building 6,00,000 7,00,000 (`10 face value per share) General Reserve 3,50,000 2,00,000 Plant & Machinery 9,00,000 11,00,000 9% Preference share 3,00,000 5,00,000 Investments (Long term) 2,50,000 2,50,000 capital Share premium A/c 25,000 4,000 Stock 3,60,000 3,50,000 Profit and Loss A/c 2,00,000 3,00,000 Debtors 3,00,000 3,90,000 8% Debentures 3,00,000 1,00,000 Cash & Bank 1,00,000 95,000 Creditors 2,05,000 3,00,000 Prepaid expenses 15,000 20,000 Bills Payable 45,000 81,000 Advance tax payment 80,000 1,05,000 Provision for tax 70,000 1,00,000 Preliminary expenses 40,000 35,000 Proposed Dividend 1,50,000 2,60,000 26,45,000 30,45,000 26,45,000 30,45,000 Additional Information a. Depreciation charged on building and plant and machinery during the year 2008-09 were `50,000 and `1,20,000 respectively. b. During the year an old machine costing `1,50,000 was sold for `32,000. Its written down value was `40,000 on date of sale. c. During the year, income tax for the year 2007-08 was assessed at `76,000. A cheque of `4,000 was received along with the assessment order towards refund of income tax paid in excess., by way of advance tax in earlier years. d. Proposed dividend for 2007-08was paid during the year 2008-09. e. 9% Preference shares of `3,00,000 which were due for redemption, were redeemed during the year 2008-09 at a premium of 5% out of the proceeds of fresh issue of 9% preference shares. f. Bonus shares were issued to the existing equity shareholders at the rate of one share for every 5 shares held on 31.03.2008 out of general reserves. g. Debentures were redeemed at the beginning of the year at a premium of 3%. h. Interim dividend paid during the year 2008-09 was `50,000 Required: a. Schedule of changes to working capital b. Fund flow statements for the year ended March 31, 2009 22 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
3. Balance sheets of a ABC Ltd as on 31 st March 2009and 2010 were as follows: Liabilities 31.03.09 30.03.10 Assets 31.03.09 31.03.10 Equity share capital 40,00,000 40,00,000 Land and building 30,00,000 28,00,000 General Reserve 8,00,000 9,00,000 Plant and Machinery 36,00,000 35,00,000 Profit and Loss A/c 5,00,000 7,20,000 Investments (Long term) 8,00,000 7,44,000 10% Debentures 20,00,000 16,00,000 Stock 9,60,000 17,00,000 Bank Loan (long term) 10,00,000 12,00,000 Sundry Debtors 12,00,000 15,96,000 Creditors 8,00,000 11,60,000 Prepaid Expenses 1,00,000 80,000 Outstanding expenses 40,000 50,000 Cash & Bank 2,80,000 1,70,000 Proposed Dividend 6,00,000 7,20,000 Provision for tax 2,00,000 2,40,000 99,40,000 1,05,90,000 99,40,000 1,05,90,000 Additional Information i. New machinery for `6,00,000 was purchased but an old machinery costing `2,90,000 was sold for `1,00,000 and accumulated depreciation thereon was `1,50,000. ii. 10% Debentures were redeemed at 20% premium. iii. Investments (long term) were sold for `90,000 and its profit was transferred to general reserve. iv. Income tax paid during the year 2009-10 was `1,60,000. v. An interim dividend of `2,40,000 has been paid during the year 2009-10. vi. Assume the provision for taxation as current liability and proposed dividend as non-current liability. vii. Investments (long term) are non trade investments. Required: a. Schedule of changes in working capital b. Funds flow from operations for the year ended March 31, 2010. 4. Following are the summarized balance sheets of JKM ltd. as on 31 st march 2011 and 2012 (`in lacs) Liabilities 31.03.11 30.03.12 Assets 31.03.11 31.03.12 Equity share capital 50.00 55.00 Goodwill 5.00 4.20 Capital Reserve - 2.50 Land and Building 20.00 18.00 General reserve 4.00 6.00 Plant and Machinery 22.00 31.00 Profit and loss a/c 5.30 6.70 Investment 2.00 3.50 Proposed dividend 8.00 11.00 Stock 8.60 12.70 Bills payable 2.00 1.80 Sundry debtors 10.20 13.00 Sundry creditors 3.50 4.60 Bills receivable 1.00 0.70 Provision for tax 4.00 5.00 Cash and bank 7.20 8.90 Share issue exp. 0.80 0.60 76.80 92.60 76.80 92.60 Answers are available in slides Download the zip file from the link on the first page of this document 23 P a g e
Additional Information: i. A machine (original cost `2,80,000; book value `1,70,000) was sold during the year for Rs.1,50,000. ii. Depreciation for 2011-12 was amounted to `3,00,000 on plant and machinery and `50,000 on land and building. iii. A piece of land had been sold out on 01-11-11 and the profit on the sale has been credited in capital reserve. iv. `40,000 is received as dividend including `15,000 pre-acquisition profit, which is credited to investment account. v. An interim dividend of `2,50,000 has been paid during the year 2011-12 vi. Income tax paid during the year 2011-12 amounted to `3,80,000. Required: a. Prepare a schedule of changes in working capital. b. Prepare funds flow statement as on 31 st March, 2012. 5. The following are the Balance Sheet of Peacock Limited as on 31 st March, 2009 and 31 st March, 2010. Liabilities 31 st March, 2009 31 st March, 2010 Share capital 44,00,000 66,00,000 Reserves and Surplus 27,50,000 38,50,000 Depreciation 8,80,000 13,20,000 Bank Loan 17,60,000 8,80,000 Sundry Creditors 13,20,000 14,85,000 Proposed dividend 4,00,000 6,00,000 Provision for taxation 4,00,000 5,50,000 1,19,10,000 1,52,85,000 Assets Land 33,00,000 44,00,000 Plant and Machinery 50,60,000 59,30,000 Inventories 19,80,000 22,00,000 Sundry Debtors 11,00,000 17,05,000 Cash and Bank Balances 4,70,000 50,000 1,19,10,000 1,52,85,000 Additional Information: i. The machine which was purchased earlier for `6,00,000 was sold during the financial year 2009-2010 for `40,000. The book value of the machine was `60,000. A new machinery was purchased during the financial year. ii. The company had issued new shares to the extent of `22,00,000. You are required to prepare: You are required to prepare 1. Statement showing changes in the Working Capital; 2. Statement of Sources and Application of funds. 24 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
Answers are available in slides Download the zip file from the link on the first page of this document 25 P a g e
Cost of Capital Cost of Debt 1. Five years ago, Sona Limited issued 12% irredeemable debentures at `103, a `3 premium to their par value of `100. The current market price of these debentures is `94. If the company pays corporate tax at a rate of 35% what is its current cost of debenture capital? 2. A company issued 10000, 10% debentures of `100 each on 1.4. 2010 to be matured on 1.4.2015. The company wants to know the current cost of its existing debt and the market price of the debentures is `80. Compute the cost of existing debentures assuming 35% tax rate. 3. A company issues `10,00,000, 12% debentures of `100 each. The debentures are redeemable after the expiry of fixed period of 7 years. The company is in 35% tax bracket. Required (i) Calculate the cost of debt after tax, if debentures are issued at a. Par b. 10% discount c. 10% premium (ii) If brokerage is paid at 2%, what will be the cost of debentures, if issue is at par? Cost of Preference Shares 4. If Reliance Energy is issuing preferred stock at `100 per share, with a stated dividend of`12, and a floatation cost of 3% then, what is the cost of preference share? 5. XYZ & Co. issues 2,000 10% preference shares of `100 each at `95 each. Calculate the cost of preference shares. 6. Referring to the earlier question but taking into consideration that if the company proposes to redeem the preference shares at the end of 10 th year from the date of issue. Calculate the cost of preference share? Cost of Equity 7. A company has paid dividend of `1 per share (of face value of `10 each) last year and it is expected to grow @ 10% next year. Calculate the cost of equity if the market price of share is `55. 8. Calculate the cost of equity of H Ltd. whose risk free rate of return equals 10%. The firms beta equals 1.75 and the return on the market portfolio equals to 15%. Cost of Retained Earnings 9. ABC Co. provides the following details D 0 = Rs. 4.19 P 0 = Rs. 50 G= 5% Calculate the cost of retained earnings based on DCF method 26 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
10. ABC Company provides the following details R f = 7% b=1.20 R m R f = 6% Calculate the cost of retained earnings based on CAPM method. Weighted Average Cost of Capital 11. Calculate the WACC using the following data by using a. Book value weights b. Market value weights The capital structure of the company is as under: ` Debentures (`100 per debenture) 5,00,000 Preference shares (`100 per share) 5,00,000 Equity shares (`10 per share) 10,00,000 20,00,000 The market prices of these securities are: Debenture: `105 per debenture Preference: `110 per preference share Equity: `24 each Additional Information (1) `100 per debenture redeemable at par, 10% coupon rate, 4% floatation costs, 10 year maturity. (2) `100 per preference share redeemable at par, 5% coupon rate, 2% floatation cost and 10 year maturity. (3) Equity share has `4 floatation cost and market price `24 per share. The next year expected dividend is `1 with annual growth of 5%. The firm has practice of paying all earnings in the form of dividend. Corporate tax rate is 50% 12. Determine the cost of capital of Best Luck Limited using the book value (BV) and market value (MV) weights from the following information: Sources Book Value Market Value (`) (`) Equity shares 1,20,00,000 2,00,00,000 Retained earnings 30,00,000 Preference shares 9,00,000 10,40,000 Debentures 36,00,000 33,75,000 Additional information : i. Equity: Equity shares are quoted at `130 per share and a new issue priced at `125 per share will be fully subscribed; flotation costs will be `5 per share. ii. Dividend: During the previous 5 years, dividends have steadily increased from `10.60 to `14.19 per share. Dividend at the end of the current year is expected to be `15 per share. iii. Preference shares: 15% Preference shares with face value of `100 would realize `105 per share. iv. Debentures: The company proposes to issue 11-year 15% debentures but the yield on debentures of similar maturity and risk class is 16%; flotation cost is 2%. v. Tax: Corporate tax rate is 35%. Ignore dividend tax. Answers are available in slides Download the zip file from the link on the first page of this document 27 P a g e
13. Answer the followings: SK Limited has obtained funds from the following sources, the specific cost are also given against them: Source of funds Amount (`) Cost of Capital Equity Shares 30,00,000 15% Preference Shares 8,00,000 8% Retained Earnings 12,00,000 11% Debentures 10,00,000 9%(before tax) You are required to: Calculate the WACC. Assume that corporate tax rate is 30%. Marginal Cost of Capital 14. ABC Ltd. has the following capital structure which is considered to be optimum as on 31st March, 2010. ` 14% debentures 30,000 11% Preference shares 10,000 Equity (10,000 shares) 1,60,000 2,00,000 The company share has a market price of `23.60. Next year dividend per share is 50% of year 2010 EPS. The following is the trend of EPS for the preceding 10 years which is expected to continue in future. Year EPS (`) Year EPS (`) 2001 1.00 2006 1.61 2002 1.10 2007 1.77 2003 1.21 2008 1.95 2004 1.33 2009 2.15 2005 1.46 2010 2.36 The company issued new debentures carrying 16% rate of interest and the current market price of debenture is `96. Preference shares `9.20 (with annual dividend of `1.1 per share) were also issued. The company is in 50% tax bracket. a. Calculate after tax: i. Cost of new debt ii. Cost of new preference shares iii. New equity share (consuming new equity from retained earnings) b. Calculate marginal cost of capital when no new shares are issued. c. How much can be spent for capital investment before new ordinary shares must be sold. Assume that retained earnings for next year s investment are 50 percent of 2010. d. What will the marginal cost of capital when the fund exceeds the amount calculated in (C), assuming new equity is issued at `20 per share? 28 P a g e Answers are available in slides Download the zip file from the link on the first page of this document
15. XYZ Ltd. has the following book value capital structure: Equity capital (in shares of `10 each, fully paid up at par) `15 crores 11% Preference Capital (in shares of `100 each, fully paid up at par) `1 crore Retained Earnings `20 crores 13. 5% Debentures (of `100 each) `10 crores 15% Term Loans `12.5 crores The next expected dividend on equity shares per share is `3.60; the dividend per share is expected to grow at the rate of 7%. The market price per share is `40 Preference stock, redeemable after ten years, is currently selling at `75 per share. Debentures, redeemable after six years, are selling at `80 per debenture. The Income tax rate for the company is 40% (i) Required Calculate the weighted average cost of capital using: (a) Book value proportions and (b) Market value proportions (ii) Define the weighted marginal cost of capital schedule for the company, if it raises `10 crores next year, given the following information: (a) the amount will be raised by equity and debt in equal proportions (b) the company expects to retain `1.5 crores earnings next year (c) the additional issue of equity shares will result in the net price per share being fixed at `32 (d) the debt capital raised by way of term loans will cost 15% for the first `2.5 crores and 16% for the next `2.5 crores. 16. Z Ltd s operating income (before interest and tax) is `9,00,000. The firm s cost of debt is 10% and currently employs `30,00,000 of debts. The overall cost of capital of the firm is 12% Required: Calculate cost of equity. 17. Y Ltd. retains `7,50,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 10%. The brokerage is 3% and the shareholders come in 30% tax bracket. Calculate the cost of retained earnings. 18. ABC Ltd. wishes to raise additional finance of `20 lakhs for meetings its investment plans. The company has `4,00,000 in the form of retained earnings available for investment purposes. The following are the further details: Debt equity Ratio 25:75 Cost of debt at the rate of 10% (before tax) upto `2,00,000 and 13%(before tax) beyond that. Earning per share `12 Dividend payout 50% of earnings. Expected growth rate in dividend 10% Current Market price per share, `60 Company s tax rate is 30% and shareholder s personal tax rate is 20% Required: i. Calculate the post tax average cost of additional debt. ii. Calculate the cost of retained earnings and cost of equity. iii. Calculate the overall weighted average (after tax) cost of additional finance. Answers are available in slides Download the zip file from the link on the first page of this document 29 P a g e
19. Masco Limited wishes to raise additional finance of `10 lakhs for meeting its investment plans. It has `2,10,000 in the form of retained earnings available for investment purposes. Further details are as following: Debt/equity mix 30%/70% Cost of debt - Upto `1,80,000 10% (before tax) - Beyond `1,80,000 16% (before tax) Earnings per share `4 Dividend payout 50% of earnings Expected growth rate in dividend 10% Current market price per share `44 Tax rate 50% You are required: (a) To determine the pattern for raising the additional finance. (b) To determine the post-tax average cost of additional debt. (c) To determine the cost of retained earnings and cost of equity, and (d) Compute the overall weighted average after tax cost of additional finance. 20. The following is the capital structure of Simons Company Ltd. as on 31.12.2015: ` Equity shares : 10,000 shares (of `100 each) 10,00,000 10% Preference Shares (of `100 each) 4,00,000 12% Debentures 6,00,000 20,00,000 The market price of the company s share is `110 and it is expected that a dividend of `10 per share would be declared for the year 2016. The dividend growth rate is 6%: (i) If the company is in the 50% tax bracket, compute the weighted average cost of capital. (ii) Assuming that in order to finance an expansion plan, the company intends to borrow a fund of`10 lakhs bearing 14% rate of interest, what will be the company s revised weighted average cost of capital? This financing decision is expected to increase dividend from `10 to `12 per share. However the market price of equity share is expected to decline from `110to `105 per share. 21. ABC Limited has the following book value capital structure: Equity Share Capital (150 million shares, `10 par) `1,500 million Reserves and Surplus `2,250 million 10.5% Preference Share Capital (1 million shares, `100 par) `100 million 9.5% Debentures (1.5 million debentures, `1000 par) `1,500 million 8.5% Term Loans from Financial Institutions `500 million The debentures of ABC Limited are redeemable after three years and are quoting at `981.05 per debenture. The applicable income tax rate for the company is 35%. The current market price per equity share is `60. The prevailing default-risk free interest rate on 10-year GOI Treasury Bonds is 5.5%. The average market risk premium is 8%. The beta of the company is 1.1875. The preferred stock of the company is redeemable after 5 years is currently selling at `98.15 per preference share. Required: (i) Calculate weighted average cost of capital of the company using market value weights. 30 P a g e Answers are available in slides Download the zip file from the link on the first page of this document