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Section B : Problems (60
Marks) |
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· This section consists of questions with serial number 41 - 71. · Answer all questions. · Marks are indicated against each question. |
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Considering the following data relating to Yaksha Manufacturing Corporation: Annual sales
value =
Rs.150 lakh Accounts receivables at the end of the year = Rs.12 lakh The average collection period is, assuming 360 days in a year, a. 5 days b. 10 days c. 20 days d. 30 days e. 40 days. (1 mark) |
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The beta of equity shares of Bhartiya Chemicals Limited is 2.0 while the risk premium is 8 percent. The company is planning to issue external equity to finance an expansion program. The cost of issuing external equity as a percentage of the current market price is 2 percent. If the risk free rate of return is 6 percent, the cost of external equity capital to the company is approximately a. 12.0 percent b. 14.0 percent c. 14.3 percent d. 18.0 percent e. 22.4 percent. (1 mark) |
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Consider the following information related to Praxa Ltd.: Net sales = Rs.240 lakh Net profit margin = 12.50 percent Outstanding Preference shares = Rs.100 lakh @ 12 percent per annum Number of equity shares = 450,000 Cost of equity shares = 12 percent Retention ratio = 40 percent Return on investment = 16 percent. What should be the approximate share price as per Gordons model? (Round off your answer to the nearest integer) a. Rs.100 b. Rs.43 c. Rs.39 d. Rs.36 e. Rs.21. (2 marks) |
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The terms of a credit purchase transaction is 2/10, net 40, the implicit cost of trade credit is (assume one year is equal to 360 days) a. 36.70 percent b. 24.50 percent c. 20.99 percent d. 18.18 percent e. 14.69 percent. (1 mark) |
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American Bakers formulates its credit policy on the basis of average days sales outstanding (DSO) at the end of every quarter. The finance manager has already stipulated that the average collection period in any quarter should not exceed 45 days; else corrective measures are to be taken. The monthly sales and outstanding receivables for the year 2003 are as follows: (Sales and receivables figures are in Rs. Lakh)
In which quarters, the sales manager was required to take the corrective measure in order to reduce the average collection period? a. First quarter b. Second quarter c. Third
quarter d. Fourth quarter e. Both (b) and (c) above. (3 marks) |
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The following information is related to Beta Company: Annual Consumption of raw materials = Rs.700 lakh Inventory of Raw materials at the beginning of the year = Rs.30 lakh Inventory of Raw materials at the end of the year = Rs.50 lakh The outstanding balances for the creditors at the beginning of the year = Rs.79 lakh The outstanding balances for the creditors at the end of the year = Rs.93 lakh. The average payment period for the company (Assuming one year is equal to 360 days and all purchases are made on credit only) will be a. 39 days b. 43 days c. 47 days d. 51 days e. 55 days. (1 mark) |
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Gamma International had bank balance of Rs.100,000 on 1st January, 2004 according to both the companys account and bank pass book. From that day, it issues daily cheques for Rs.25,000 that are cleared on the 3rd working day and deposits daily cheques of Rs.18,000 which are realized on the 2nd working day. The amount of net float on 3rd January is a. Rs. 42,000 b. Rs. 38,000 c. Rs. 32,000
d. Rs.42,000 e.
Rs.32,000. (2 marks) |
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The initial outlay for a project is Rs.20 crore. The project manager projected the following annual cash flows that is expected to be generated uniformly over the years:
The pay-back period for this project will be a. 4.00 years b. 4.25 years c. 4.50 years d. 4.75 years e. 5.00 years. (1 mark) |
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The market value of debt and equity of a firm are Rs.100 lakh and Rs.200 lakh respectively while the costs of equity and debt are 12 percent and 9 percent respectively. Assume that the firm maintains 100 percent dividend payout ratio and absence of all types of taxes. What is the net operating income for the firm? a. Rs. 9 lakh
b. Rs.12 lakh c. Rs.27 lakh d. Rs.33 lakh e. Rs.36 lakh. (1 mark) |
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The following projections have been made by the project manager of Vector Technologies Ltd. with respect to the changes in their automatic systems:
The accounting rate of return for this investment will be a. 10 percent b. 15 percent c. 20 percent d.
25 percent e. 30 percent. (2 marks) |
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Miraj Engineering Co. has planned its sales during Oct-Dec 2003 as follows:
The products are sold on credit where 50 percent is realized in the month of sale whereas the rest portion is recovered by the next month. The purchases (amounting to 50% of the months sales) are paid in the following month of purchase. Wages and administrative expenses per month amount to Rs.150,000 and Rs.80,000 respectively and are paid in the following month in which they are incurred. Depreciation and amortization of preliminary expenses amount to Rs.80,000 and Rs.50,000 respectively. On October 1, a testing equipment worth of Rs.20,000 has been procured with a credit period of 45 days while on December 31, a fixed deposit will mature (maturity value Rs.150,000). If the opening cash balance at the end of October is Rs.100,000, the closing cash balance by the end of the month of November is a. Rs.300,000 b.
Rs.220,000 c. Rs.210,000 d. Rs.150,000 e. Rs.20,000. (3 marks) |
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A company requires a maximum inventory of 1000 units of a material where the carrying cost per unit is Rs.25, the cost per order is Rs.250 and there are 6 orders per year. The total costs related to the inventories is (Assume the assumptions of EOQ holds good) a. Rs.12,000 b. Rs.14,000 c. Rs.16,000 d.
Rs.18,000 e. Rs.20,000. (2 marks) |
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The cash flows from a project is estimated as follows:
The benefit cost ratio for the above project is (Assume the cost of capital as 12 percent): a. 0.25 b. 0.80 c. 1.25 d. 1.80 e. 2.25. (2 marks) |
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A firm with daily credit sales of Rs.50,000 reduced its average collection period by 5 days. What would be the annual benefit? (Assume that the cost of funds as 12 percent) a. Rs.10,000 b. Rs.15,000 c. Rs.20,000 d.
Rs.25,000 e. Rs.30,000. (1 mark) |
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The following information regarding material VIP has been collected from the stores register of Sunny Products Ltd.
If 100 units was issued on September 25, then according to the weighted average method of pricing, the value of the issue was a. Rs. 900 b.
Rs.1,050 c. Rs.1,200 d. Rs.1,250 e. Rs.1,500. (1 mark) |
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For Deluxe Furniture Ltd, the face value of the irredeemable preference share is Rs.100 where the dividend payable per annum is equal to Rs.12. If the applicable tax rate is 40 percent, the cost of the preference share to the company is a. 4.80 percent b. 7.20 percent c. 12.00 percent d. 15.00 percent e. Cannot be determined. (1 mark) |
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If the cost of an investment is Rs.25,000 and it results in a net cash inflow Rs.1800 per annum forever, the Net Benefit Cost Ratio of that investment is (Assume a discount rate of 8 percent) a. 0.072 b. 0.10 c. 0.90 d. 0.10 e. Cannot be determined. (2 marks) |
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What will be the expected normal consumption during the lead time? a. 3600 units b. 4800 units c. 5400 units d. 6400 units e. Data insufficient. (1 mark) |
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Kirmani Industries Limited is planning for a capital investment at a cost of Rs.100 lakh where the projected cash inflows are as follows: (Rs. in lakh)
The internal rate of return (IRR) of the project is a. 12.54 percent b. 13.84 percent c. 14.24 percent d. 15.84 percent e. 17.64 percent. (2 marks) |
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The following information is relating to Makkara Ltd.
If the price per share at the beginning of the fifth year is Rs.18, what would be the realized yield from an investment in that share, over the above period of 4 years? (Round off your answer to the nearest integer) a. 24 percent b. 26 percent c. 28 percent d.
30 percent e. 32 percent. (3 marks) |
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Total current assets of a company are Rs.960 lakh while the current liabilities (other than bank borrowings) are Rs.300 lakh. If the company borrowed Rs.350 lakh, what will be the amounts of maximum permissible bank finance (MPBF) under the methods I and II of the Tandon committee recommendations? a. Rs.495 lakh and Rs.420 lakh b. Rs.500 lakh and Rs.410 lakh c. Rs.505 lakh and Rs.405 lakh d. Rs.510 lakh and Rs.400 lakh e. Rs.515 lakh and Rs.395 lakh. (3 marks) |
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Analytical Engineers issued long term bonds few years back, which presently offer a return of 10 percent. The equity investors expect a risk premium of 2 percent. If 60 percent of the cost of the assets is financed by debt capital, what would be the weighted average cost of capital? (Assume the applicable tax rate is 40 percent) a. 8.20 percent b. 8.40 percent c. 8.80 percent d.
9.60 percent e. Cannot be
determined. (2 marks) |
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The probability that a customer pays for the first order is 85 percent. In case the customer pays for the first order, the probability of default in case of a repeat order is likely to be 5 percent. If the price of the product is Rs.90,000 and the associated cost is Rs.72,000, what will be the total net weighted benefit from the order? a. Rs.11,475 b. Rs.12,875 c. Rs.13,500 d. Rs.14,675 e. Rs.15,475. (2 marks) |
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Vega India Ltd. is planning to purchase a punching machine having the following details: Cost of machine Rs.30,00,000 Annual cost of operations Rs.2,50,000 for the first four years Rs.3,00,000 for the subsequent years Useful life 10 years The annual capital charge of the machine at a cost of capital of 10 percent is a. Rs.762,182 b. Rs.762,282 c. Rs.762,382 d. Rs.762,482 e. Rs.762,582. (2 marks) |
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The following information is given about the debentures issued by Darwin Ltd.: Face Value = Rs.100 Coupon Rate = 9 percent Amount realized per debenture = Rs.97.50 Corporate tax rate = 40 percent Debenture is redeemable at a premium of 5 percent after 5 years. The difference between the redemption price and the net amount realized can be written off over the life of the debenture and the amount thus written off is also tax-deductible. The cost of debenture capital to the company by the approximation method is: a. 6.12 percent b. 6.22 percent c. 6.32 percent d.
6.42 percent e. 6.52 percent. (2 marks) |
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In order to reach the sales target quickly, the sales manager of Deccan Gold contemplating to take a liberal credit standard by offering discount of 5 percent on the selling price to those who are buying against cash. He is also considering to reduce the collection effort at the same time. As a result, the sales volume is expected to go up by 40 percent from the present level of Rs.250 lakh but the average collection period will be lengthened from 36 days to 45 days. While the amount of bad debt losses will increase from 2 percent to 4 percent of the total sales value. The contribution margin is 25 percent, the cost of funds is 12 percent and 20 percent of the customers are expected to make cash purchase under the new scheme. The incremental benefit will be (Assume 360 days in a year) a. Rs. 17.875 lakh b.
Rs.14.375 lakh c. Rs.12.50 lakh d. Rs.10.625 lakh e.
Rs.8.75 lakh. (3 marks) |
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Sundar Electricals needs 60,000 pieces of aluminum bars to produce switchgears. The price of each bar is Rs.100, cost of placing an order is Rs.1200 and the carrying cost is 1 percent. The purchase manager has set the economic order quantity based on the EOQ model, as 12,000 units. Recently, a supplier has offered discounts of 3 percent against an order size of 20,000 units or more. What will be the incremental benefit to the company, if such discount is availed? a. Rs.186,100 b. Rs.183,700 c. Rs.181,200 d. Rs.178,700
e. Rs.1,300. (3 marks) |
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The following figures are collected from the annual report of Prafati Pharmaceuticals Ltd.: Net profit = Rs.30 lakh Outstanding Preference shares = Rs.100 lakh @ 12 percent per annum Number of equity shares = 300,000 Cost of equity shares = 16 percent Return on Investment = 20 percent. What should be the approximate dividend pay out ratio so as to keep the share price at Rs.42 by using Walter model? a. Zero percent b. 20 percent c. 36 percent d. 52 percent e. 68 percent. (2 marks) |
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Regarding the long term sources of finance for Shanbagh Ltd. following details are obtained from their merchant bankers:
The company is critically considering expanding its operations and needs Rs.500 lakh for the same. Its capital structure is in the proportions of Equity capital 40 percent, Preference capital 10 percent and Debt capital 50 percent. If the company actually invested an amount of Rs.600 lakh what will be the weighted marginal cost of capital of new financing? a. 10.50 percent b. 11.10 percent c. 11.60 percent d. 12.10 percent e. 12.60 percent. (2 marks) |
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The debenture of Veena Beverages Ltd. is presently trading at a premium of 5 percent on its face value. The debentures were issued at a coupon rate of 10 percent where the coupons are paid annually. The next interest will be paid one year hence. The debenture will be redeemed at its face value at the end of six years from now. What would be the implicit cost of debenture capital to the company? (Assume the tax rate applicable for the company is 40 percent) (Hint: Do not use the approximation method) a. 5.0 percent b. 5.5 percent c. 6.0 percent d. 6.5 percent e. 6.67 percent. (3 marks) |
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The average daily usage rates of an inventory, lead time and their respective probabilities are as follows:
The possible usage levels at which stock-outs can occur and the probability of stock-out respectively are a. 6000 units, 8000 units and 22.50 percent b. 9000 units, 12000 units and 30.00 percent c. 9000 units, 16000 units and 18 percent d. 12000 units, 16000 units and 30.90 percent e. 12000 units, 16000 units and 34.50 percent. (3 marks) |
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Suggested Answers
Financial Management II (142) : January 2004
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Answer : (a) |
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Answer : (d) Reason : Commercial papers are issued for a period of 15 days to one year by the reputed companies to finance their working capital requirements. Equity capital and reserves and surplus are perpetual capital with an infinite maturity period while preference shares and debentures are generally issued for a long term. Hence, (d) is the answer. |
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Answer : (c) Reason : The problem of under-trading is observed in a company, if a less amount of sales turnover is achieved by the company in comparison to the level of current assets employed by the company. It is a very risky situation, not in relation to the working capital management, but in terms of the operational efficiency of the company. |
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Answer : (e) Reason : A company generally choose the liquidity mix on the basis of the level of uncertainty in the cash flows. Nature of control with the managers, extent of leverage, marginal cost of capital and the quality of the products of the company does not play any role in this respect. |
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Answer : (c) Reason : In judging the creditworthiness of a customer, three Cs are considered. These are character (willingness to meet the obligations), capacity (ability to pay at the required time) and collateral (the quality of security offered). The contingencies faced by the customer are not at all considered. |
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Answer : (a) Reason : Whenever the lenders offer any loan to the customers, they consider the safety and security of the amount lend and stress on the repayment of the loan. Due to these factors, the lenders impose some restrictive covenants to the borrowing entity that lead to agency problem. The other reasons are not matching with the concept of agency costs. |
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Answer : (c) Reason : In cumulative preference shares, the dividends are to be paid on cumulative basis, including the situations where the dividends are unpaid in any financial year due to lack of profits. The things stated in the other options are not correct in relation to the cumulative preference shares. |
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Answer : (e) |
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Answer : (b) |
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Answer : (e) Reason : The assumptions under
Walters model are as follows: ·
Retained earnings
is the only source of finance available to a firm, with no outside debt or additional equity used ·
Cost of
capital and return on investment are constant for a firm ·
Firm has an
infinite life ·
For a given
value of the firm, the dividend per share and earnings per share remain constant Hence, the option (e) is the answer. |
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Answer : (e) Reason : All the factors given in the above options influence the composition of working capital to a business entity. |
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Answer : (d) Reason : Opportunity cost means the expenses or loss of profit for not availing an opportunity. In this case, when a firm is in situation of stock out, it suffers in two ways loss of profit due to foregone sales as well as the loss of reputation to its valuable customers. Hence, the option (d) is the right choice as the other options do not represent such a situation. |
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Answer : (e) Reason : All the given factors as given in the several alternatives in this question are the credit policy variable to a company. |
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Answer : (b) Reason : With precautionary motive, a company holds cash to meet the contingent cases while transaction motive implies the reason for holding cash to meet the day to day transactions. A motivation due to the speculative motive encourages a company to hold cash in order to make speculative profit by exploiting the opportunities due to price changes in the market. Lack of synchronization between cash inflows and outflows is also an example of precautionary situation. It is also required for the large business entities. |
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Answer : (a) Reason : Spontaneous liabilities generally occur during the normal course of business operations where a company will usually have a ready access to certain sources for financing its current assets. But a company is required to take proper initiative for the sources of finance as mentioned in the other options to finance its current assets. |
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Answer : (b) Reason : In case of non-recourse factoring, the factor offers short-term finance, sales ledger administration as well as credit protection simultaneously. It is not available in any other mode of factoring. |
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Answer : (a) Reason : The realized yield approach assumes that future expectations of investors are same as that of their past expectations. Dividend forecast approach assumes that the intrinsic value a share is equal to the sum of the present values of the dividends associated with that share. Bond yield plus risk premium approach assumes that the return required by the investors is directly related to the risk borne by them. Hence, the equity return is given by the yield on the long term bonds of the company plus risk premium. While earnings price ratio approach considers the expected EPS of the company for the next year. Lastly, capital asset pricing model helps to find out the cost of equity capital at a premium on the risk free rate of return. |
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Answer : (d) Reason : The salient features of aggressive working capital policy are as follows: · Cost of financing the current assets tends to be low · Current ratio is maintained at a very low level · Low amount of investments in the receivables · Higher risk of technical insolvency for the firm · Greater reliance on short term sources to finance the current assets. Hence, the option (d) is correct. |
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Answer : (d) Reason : The assumptions of the economic order quantities are as follows: · Constant or uniform demand of the product throughout the year · Constant unit price of the raw material · Constant carrying cost of the material · Constant ordering cost · Instantaneous delivery of the materials. Hence, the option (d) is the correct choice. |
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Answer : (a) Reason : Ageing schedule is used to monitor the status of the receivables. Outstanding creditors in the balance sheet indicate the position of accounts receivables but do not help to monitor the status of the same. Selection matrix, funs flow analysis and credit evaluation do not play any role in this respect. |
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Answer : (c) Reason : The book values of the different sources of finances may not be related to their current economic values e.g. the land price may appreciate, the machine may become obsolete, etc. The reasons stated in the other options are the advantages of using book values as the basis of the weights for the calculation of the cost of capital. |
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Answer : (d) Reason : As per Miller and Modiglianis model, there is no optimal capital structure. Other two options are not the assumptions of the Miller and Modiglianis model. Hence the statements I and III are false. |
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Answer : (c) Reason : ABC system of inventory management has the following advantages: · It leads a closer control on the costly items where a large amount of funds is blocked. · A scientific method of controlling inventories can be developed based on the ABC system that will lead to the reduction of clerical costs are reduced · ABC system also helps to maintain the optimum level of stocks. · The stock turnover rate can be maintained at a comparatively higher level through scientific control of inventories. But it cannot help the beginners to learn the different techniques of inventory management. Hence option (c) is the answer. |
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Answer : (e) Reason : If a company faces difficulties in getting prompt payments despite a rigorous collection effort, it may considers for an attractive cash discount as well as to improve the quality of the receivables. If the volume of credit disbursed is increased or the collection effort is reduced, the amount of bad debt will be piled up to a significant amount. Hence, the option (e) is the answer. |
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Answer : (d) Reason : According to the rational expectations model if dividend declared is lower than what was expected by the equity share holders then the shareholders will have a bearish feelings regarding the earnings of the company. As a result of that the share price will fall. |
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Answer : (d) Reason : According to the principles followed for the determination of the costs and benefits of a project, only the cash inflows and outflows are taken as benefits and costs. All revenues generated from the implementation of the project may not lead to the actual cash inflows while all expenses to be incurred may not result in actual cash outflows due to the project. The other statements as mentioned in the other options are correct for determining the costs and benefits of a project. |
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Answer : (d) Reason : When the net float is negative the balance in the books of bank is less than the balance in the books of the firm. Any relationship between the current asset and current liability does not play any role in the determination of the net float as it is related to the cash balance. |
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Answer : (b) Reason : Option (a) is not true because Gordons model on dividend policy does not assume the absence business risk of any business entity. Gordons model assumes that the firm finances its investments by only using its retained earnings hence the option (b) is correct. Gordon dividend capitalization model is applicable only against the all equity firms or unlevered firms having an infinite life. According to Gordons model, firms with a higher rate of return than the cost of capital, should have a higher retention ratio in order to earn a better return for its their equity shares, hence the option (d) is not true. |
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Answer : (c) Reason : It is assumed that the risk characterizing the new project under consideration is same as the risk characterizing the existing investments of the firm. Therefore, (I) is not correct. While nothing is assumed with respect to the continuity of the management of firm. Hence, (II) is not correct. It is assumed that the firm will adopt the same financing policy for the new project and so the debt-equity mix will remain same in the capital structure. Hence, (III) is correct. |
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Answer : (e) Reason : Accounting rate of return does not consider the time value of money while the other criteria as mentioned in the other options consider the time value of money. |
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Answer : (b) Reason : A firm generally employs long term sources of funds to finance its working capital margin that is the difference between the current assets and current liabilities. A negative net working capital implies that current assets are less than current liabilities and hence the option (b) is true. A current ratio of less than unity means current liabilities are more than current assets that signifies the usage of the short term funds for financing the long term assets. A company that follows a conservative working management policy generally maintains a very high current ratio in comparison to its peers while the opposite thing occurs in case of aggressive working capital management policy. |
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Answer : (b) Reason : Storing the products in the form of inventories can neither improve the quality of the inventory nor can improve the quality of the finished products. While the other purposes as mentioned in the other options are served through the maintenance of the inventories. Hence, the option (b) is the answer. |
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Answer : (a) Reason : The economic order quantity (EOQ) is directly related to the annual usage and the fixed cost per order while inversely related to the carrying cost of the inventories. An increase in the carrying cost for the inventories will decrease the EOQ for a company while the conditions as mentioned in the other options will increase the economic order quantity. Hence, the option (a) is the correct one. |
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Answer : (e) Reason : All the options collectively represent the advantages of making investment in the debentures and so all factors as mentioned in the question make the debentures attractive to investors. |
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Answer : (d) Reason : The gross operating cycle of a business entity is defined as the sum of raw material storage period, work-in-process period, finished goods storage period and average collection period. An increase in the consumption of the raw materials will reduce the raw materials storage period while synchronization of the various processes of productions for a better volume will reduce the work in process period. Incremental demand for the product of the company will reduce the finished goods storage period and the proposition for selling the products against cash payment will shorten the debtors payment period. The average payment period is to be deducted from the gross operating cycle to get the net operating cycle. Hence a decrease in the average payment period will icrease the net operating cycle. |
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Answer : (a) Reason : If cost of capital is less than IRR of a project, the NPV of the project will be positive. Similarly, the benefit cost ratio is less than unity indicates the present value of the benefits is less than the present value of costs at a given cost of capital, thereby making the NPV a negative one. Similarly, a discount rate is greater than the IRR will make the NPV a negative one and hence for a project of benefit cost ratio is less than unity. Such a project will have a positive effect on the wealth of the shareholders, not an indeterminate effect. |
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Answer : (b) Reason : Whether or not to pay for the outstanding interest on term loans depends on the financial position of the company and its willingness to pay for the same. A cash management policy may influence this but this payment is not a part of the cash management policy. |
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Answer : (d) Reason : Making the credit standards more stringent one will result in lower volume of sales turnover thereby decreasing the collection costs due to the reduced number of customers which in turn reduces the bad debt losses. As a consequence of the above event, the outstanding debtors in the balance sheet will also come down. Hence, the option (d) is correct. |
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Answer : (c) Reason : The optimal capital structure is decided on the basis of the expected income of the firm and the nature of the cash flows to meet the expectations of the stake holders. It is not at all related to the suppliers, demand for the product of the company, technology adopted and the availability of the capital to meet a sudden spurt in demands. |
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Answer : (b) Reason : Assessing the cost of equity capital is one of the most difficult and complex task because the income to the equity shareholders in the form of dividends as well as capital gains is fully uncertain and that depends on many factors, unlike the borrowed funds. The characteristics mentioned in the other options with respect to the equity capital are correct |
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Answer : (d) Reason : The amount of credit sales = Rs.150 lakh Rs.30 lakh = Rs.120 lakh Hence, the average credit sales per day will be = Rs. The average accounts receivables during the year = (8 + 12) / 2 = Rs.10 lakh So, the average collection period will be = |
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Answer : (c) Reason : The required rate of return for the shareholders = Risk-free rate of return + Risk premium = 6 + 8 = 14 percent while the cost of issuing external equity is 2 percent as a percentage of the current market price. Therefore, the cost of external equity capital to the company is approximately 14/0.98 = 14.3 percent. |
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Answer : (b) Reason : Net profit for the company = Rs.240 lakh ΄ 12.50 percent = Rs.30 lakh Profit available for the equity shareholders = Rs.30 lakh Rs.12 lakh (preference dividend) = Rs.18 lakh and the amount of EPS is Rs.4.00 According to Gordons dividend capitalization model, P = Here, E = Rs.4, b = 40 percent, kc = 12 percent and r = 16 percent. Or, P = Hence, the required market price per share = Rs.43. |
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Answer : (b) Reason : The
implicit cost of trade credit is given by :
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Answer : (e) Reason :
The sales manager is required to take corrective measures for the second and third quarters. |
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Answer : (b) Reason : The amount of raw materials purchased during the year = 700 + 50
30 = Rs.720 lakh. Average daily credit purchases made by the company = Hence,
the average payment period will be = |
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Answer : (c) Reason : Balance as per the cash book:
Balance as per the pass book:
Net float = Rs.111,000 Rs.79,000 = Rs.32,000 and positive. |
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Answer : (b) Reason : The pay back period of a project is defined as the time required generating sufficient cash flows so as to recover the initial investment made in the project, by duly ignoring the time value of money. Here the amount of cash generated for the first four years is Rs.19 crore against an investment of Rs.20 crore. This amount can be recovered by the first quarter of the fifth year as the cash flows occur uniformly. Hence, the pay back period is 4.25 years. |
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Answer : (d) Reason
: The overall capitalization rate for the company is given by, ke = kd ΄ = 9 ΄ While the overall capitalization rate is
also defined as: Ke = Here, the market value of the firm is
Rs.100 lakh + Rs.200 lakh = Rs.300 lakh ή Net operating income = Rs.300 Χ 11 percent = Rs.33 lakh. |
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Answer : (c) Reason : The average annual income for these three years = Average net book value of
investment = So, the accounting rate of
return will be = |
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Answer : (d) Reason : Cash budget for the month of November 2003
Therefore, the required closing balance by the end of the month of November will be = Rs.150,000. |
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Answer : (b) Reason : The total cost of maintaining inventory is given by: Rs. Here, the average inventory =
500 units, Carrying cost (C) = Rs.25 while the number of orders = So, total cost related to the inventories = 6 Χ 250 + 500 Χ 25 = 1,500 + 12,500 = Rs.14,000 Hence, the total cost related to the inventories = Rs.1500 + Rs.12,500 = Rs.14,000. |
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Answer : (c) Reason : The present value of all the cash flows
will be = Rs.60 lakh x 0.893 + Rs.80 lakh x 0.797 + Rs.116 lakh ΄
0.712 = 53.58 + 63.76 + 82.59 = Rs.199.932 lakh = Rs.200 lakh
(approximately). Benefit cost ratio of a project is given
by: = |
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Answer : (e) Reason : Annual benefit = Rs.50,000 ΄ 5 ΄ 0.12 = Rs.30,000. |
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Answer : (d) Reason : The
weighted average price is given by:
Hence, the value of the issue will be = Rs.12.50 Χ 100 = Rs.1250. |
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Answer : (c) Reason : Cost of irredeemable preference share = Dividend rate = 12 percent. |
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Answer : (b) Reason : The
present value of the cash flows will be = Hence, the net benefit cost ratio for that
investment will be = |
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Answer : (c) Reason : Expected daily usage of raw materials = 300 Χ 0.40 + 400 Χ 0.60 = 120 + 240 = 360 units Expected
lead time = 12 Χ 0.25 + 16 Χ 0.75 = 3 + 12 = 15 days. |
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Answer : (c) Reason : Initial Investment = Rs.100 lakh Let the IRR of the project be k So, Rs.100 lakh = 25 PVIF (k,1) + 30 PVIF (k,2) + 40 PVIF (k,3) + 48 PVIF (k,4) At k = 12 percent, the RHS = 105.243 while at k = 15 percent, the RHS = 98.206 By interpolation,
K = 12 + 3 ΄ 0.745 = 14.24 percent. |
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Answer : (e) Reason : Wealth
ratio is defined as
Now, the realized yield over the period of 4 years will be = {(1.35 ΄ 1.25 ΄ 1.308 ΄ 1.367)1/4 1}΄ 100 = (1.31797 -1) ΄ 100 = 31.797 = 32 percent (approximately). |
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Answer : (a) Reason : Method
I Total current assets = Rs.960 lakh Less: Current liabilities other than bank borrowings = Rs.300 lakh Working capital Gap = Rs.660 lakh Maximum permissible bank finance = 75 percent of the working capital gap = Rs.660 ΄ 0.75 = Rs.495 lakh Method II
Total current assets = Rs.960 lakh Less: 25 percent of the current assets that is to financed by using long term funds = Rs.240 lakh Less: Current liabilities other than bank finance = Rs.300 lakh Working capital gap = Rs.420 lakh Hence, the maximum permissible bank borrowings = Rs.420 lakh. |
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Answer : (b) Reason : The cost of equity capital to the company is = 10 + 2 = 12 percent while the cost of debt capital is given as 10 percent. As per the question, the debt equity ratio is 1.5. Therefore, the weighted average cost of capital is given by: Ke
= 12 ΄ 0.40 + 10 ΄ 0.60 ΄ (1 0.40) = 4.80 + 3.60 = 8.40 percent Hence, the required weighted average cost of capital is 8.40 percent. |
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Answer : (a) Reason : The net weighted benefit from that order is given by: 0.85{0.95 ΄ 18,000 0.05 ΄ 72,000} = 0.85 (17,100 3600) = 0.85 ΄ 13,500 = Rs,11,475. |
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Answer : (c) Reason : Present value of the costs associated with the machine will be Rs.30,00,000 + Rs.250,000 ΄ PVIFA(10 percent, 4 years) + Rs.300,000 ΄ PVIFA(10 percent, 6 years) ΄ PVIF(10 percent, 4 years) = Rs.30,00,000 + Rs.250,000 ΄ 3.170 + Rs.300,000 ΄ 4.355 ΄ 0.683 = Rs.46,84,839.50 The required annual capital charge will be = |
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Answer : (b) Reason : Face Value = Rs.100 while the redemption price is Rs.105. Coupon interest amount payable by the company is Rs.9.00 per year. So, the approximate cost of debenture capital to the company is: kd = Hence, the required cost of debentures to the company is 6.22 percent. |
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Answer : (d) Reason :
Incremental contribution = Rs.100 ΄ 0.25 = Rs.25 lakh Incremental cost of funds = Rs.250 lakh ΄ (45 36)/360 ΄ 0.12 + Rs.100 lakh ΄ 45/360 ΄ 0.75 ΄ 0.12 = Rs.1.875 lakh Net incremental benefits = 25 1.875 (14 + 3.50 - 5) = Rs.10.625 lakh. |
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Answer : (d) Reason : The economic order quantity (EOQ) may be calculated as 12,000 units by using U = 60,000 units, F = Rs.1,200 and PC = Rs.100 ΄ 1 percent = Re.1 only. Benefits due to the discounts = Rs.3 ΄ 60,000 = Rs.180,000 Benefits due to the savings in ordering costs = Rs.1200 ΄ (5 3) = Rs.2400. Incremental carrying costs =
= 9,700 6000 = Rs.3700. Hence, the net amount of benefits will be = Rs.180,000 + 2400 3700 = Rs.178,700. |
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Answer : (d) Less: Preference Dividends = Rs.12 lakh Earnings for the equity shareholders = Rs.18 lakh Therefore, earnings per share = 18/3 = Rs.6.00 Let, the dividend pay out ratio be x and so the share price will be: P = Here, D = 6x, E = Rs.6, r = 0.20 and ke = 0.16 and P = Rs.42 Hence, Rs.42 = Or, Rs.42 = 37.50 x + 46.875 (1 x) or, 9.375 x = 4.875 or, x = 0.52. So, the required dividend pay-out ratio will be = 52 percent. |
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Answer : (d) Reason : Calculation of breaking points:
Hence the required marginal cost of capital for the new financing = 15 ΄ 0.40 + 16 ΄ 0.10 + 9 ΄ 0.50 = 6 + 1.60 + 4.50 = 12.10 percent. Alternative Method: The amount of equity capital required = Rs.600 lakh ΄ 40 percent = Rs.240 lakh, preference capital = Rs.600 lakh ΄ 10 percent = Rs.60 lakh and debt capital = Rs.600 lakh ΄ 50 percent = Rs.300 lakh. In the respective ranges, the costs of funds will be = 15 percent for the equity shares, 16 percent for the preference shares and 9 percent for the debt capital. Hence, the weighted average cost of capital for the new financing will be = 15 ΄ 0.40 + 16 ΄ 0.10 + 9 ΄ 0.50 = 6 + 1.60 + 4.50 = 12.10 percent. |
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Answer : (c) Reason : Let the issue price of the debentures be Rs.100 and the realized yield be k. The amount to be invested at present is Rs.105 as the debentures are selling at 5 percent premium. So, by the condition, we get as: Rs.105 = Rs.10.00 ΄ (1 0.40) ΄ PVIFA (k, 6) + Rs.100 ΄ PVIF(k,6) At k = 6 percent, the RHS = 100.002 that may be approximately equated to 100 Hence, the cost of debenture funds to the company is = 6.00 percent. |
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Answer : (e) Reason : Expected daily usage rate = 180 ΄ 0.25 + 300 ΄ 0.45 + 400 ΄ 0.30 = 45 + 135 + 120 = 300 units and the expected lead time = 20 ΄ 0.30 + 30 ΄ 0.40 + 40 ΄ 0.30 = 6 + 12 + 12 = 30 days. Hence, the possible level of usage at which the stock out is expected to occur will be = 300 ΄ 30 = 9000 units.
Therefore, the possible usage levels at which stock-out occurs will be 12,000 units and 16,000 units. The probability of stock-out will be = 0.135 + 0.120 + 0.090 = 0.3450 or 34.50 percent. |
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= 
= Rs.42.857 = Rs.43 (approximately)
percent.
= Rs.2 lakh per day while 
= 43 days.
= Rs.21,000
= Rs.105,000
Rs.12.50
for any year. Here, the year wise wealth ratio is given by:
= Rs.762,382 (approximately)
