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Manaaement Accountancy MAY2010
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Course P,~rt..!Examination
G.I-P.2 Financial Mnagement
Roll No...............................
Total No. of Questions-5] [Total No. of Printed Pages-8
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Time Allowed-3 Hours Maximum Marks~100
CEL
Answer all questions.
Marks
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1. (a) The Shiba Electrical Supply Company is in the business ofsupplying transformers .
to Government and Private Power Plants. The CFO ofthe company has designed
an equation, which, he says, will forecast the sales almost accurately. This
equation has been based on soI?e research and the past pattern of monthly
sales (in Rs.)
Equation is Rs. 1,00,000 + (Rs. 2,000 x orders received in previous month)
Following data are presented regarding actual and forecast number of
orders:
August (actual) 300
September (forecast) 400
October 600
November 750
December 900
In the first week of September the Sales Manager would like the forecast of
sales and income for upto January next year. The Cost Accountant has informed
that cost of goods sold is 50% of sales, variable cost is 20% of sales and the
fixed cost per month is Rs. 2,00,000.
Prepare a budgeted income statement for the month of September to January.
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(b) Mis Rapid Ltd. has the followi~g data for projection for the next 5 years. 8
'It has an existing Term Loan of Rs, 360 lakhs, repayable over next 5 years
and has got sanction for a new Term Loan for Rs. 500 lakhs repayable in
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5 years. .
(Rs. in Lakhs)
Particulars 1 2 3 4 5
Profit after tax 480 575 635 650 685
Depreciation 155 150 140 135 120
Taxation 125 203 254 275 299
. Interest on'Term Loan 162 125 87 50 16
Repayment of Term Loan 178 178 178 178 148
You are required to calculate Debt service coverage ratio, Interest service
coverage ratio for each year and average of 5 years.
Also comment on the trend and implications.
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(c) Following information have been collected in an ongoing basis as on
31st December, 2009 :
(Rs. in Lakh)
150
Budgeted cost of work schedule
1.40
Budgeted cost of work pedormed
Actual cost of work performed 44
Budgeted cost of total work 400
Additional cost of Completition 166
Determine:
(a) 'Performance variance
(b) Efficiency variance
(c) Performance index
(d) Efficiency index
(e) Estimated cost performance index.
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2. (a) Astha Ltd. wishes to raise additional resources of Rs. 10 lakhs for financing 8
its investment plan. It has a retained earnings of Rs. 2,10,000 available to
finance this investment plan. Following details are available:
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Debt/equity mix 30 : 70
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Cost of Debt
upto Rs. 1,80,000 10% before tax
beyond Rs. 1,80,000 15% before tax
Earnings per share Rs.5
Dividend Payout ratio 40% of earnings
Expected rat'e of growth of Dividend 10%
Current market price 'Per share Rs.50
Tax rate 40%
You are required to :
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(a) determine the pattern of raising additional finance,
(b) determ~ne the past tax average cost of additional debt,
(c) determine the cost of retained earnings and cost of equity, and
(d) compute the overall weighted average cost (after tax) of additional
finance.
(b) Following financial data have been furnished by XYZ Ltd. and AB'C Ltd. for 6
the year ending on 31st March, 2010 :
XYZ Ltd. ABC Ltd.
Operating leverage 3 : 1 4:1
Financial leverage 2 : 1 3:1
Interest charges per annum (Rs.) 12 lakh 10 lakh
Corporate tax rate 40% '. 40%
Variable Cost as % of sales 60% 50%
Prepare Income statement ofthe two Companies. Also comment on the financial
position and structure of two companies.
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(c) Mis Transformers Ltd. are the manufacturer of transformers. The details of 6
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their operations for the current year are as follows:
Average monthly market demand (transformers) 2,000
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Ordering cost (per order) Rs. 100 ..
Inventory carrying cost (% p.a.) 20
Cost of transformer (per transformer) Rs. 500
Nonnal usage (per week) 100
Minimum usage (per week) 50
Maximum'usage (per week) 200
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Lead supply time 6-8 weeks
Calculate:
(i) EOQ. If the supplier is prepared to supply a quarterly 1,500 units at a
discount of 5%, is it acceptable?
(ii) Maximum level of Stock
(iii) Minimum level of Stock
(iv) Re-order level.
3. ABC Ltd. is engaged in the business of three products P, Q and R Products P 20
and Q are manufactured by the company while product R is procured 'from outside
and sold as a combination with either product P or Q. The volume of Sales budgeted
for three products for the current year are, as under:
Prod uct Rs. in lakh
P 1,200
Q 500
R 400 (Dec. to March previous year) ;Rs. 20 lakh per month
(April to July current year) Rs. 25 lakh per month
(August to November) Rs. 30 lakh per month
(December to March)
Rs. 45 lakh per manth
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Ba.sed on the budgeted sales, the cash flow forecast for the company is prepared
on the basis of the following assumptions:
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(i) Realisation of sales is considered at .
50% current month
25% second month
25% third month
(ii) Production programme for each month is based on the sales value of the
next month
(iii) Raw material consumption of the company is put at 59% of the month's
production
(iv) 81% of raw materials consumed are components
(v) Raw material and components to the extent, at 25% are procured through
import
(vi) The Purchases budget is as follows:
(a) Indigenous raw materials are purchased two months before the actual
(b) Components are procured in the month of consumption
(c) Imported raw materials and components are bought three months
prior to the month of consumption.
(vii) The company avails of the following credit terms from supplier's:
(a) Raw materials are paid for the month of purchases
(b) Company gets one month's credit for its components
(c) For imported raw material and components payments are made one
month prior to the dates of purchases. ..
(viii) Currently, the company has a cash credit facility of Rs.140.88 lakhs
(ix) Expenses are given below and are expected to be cohstant throughout
the year:
Wages and Salaries Rs. 312 lakhs
Administrative Expenses Rs. 322 lakhs
Selling and Distribution Exp. Rs. 53 lakhs
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(x) Dividend of Rs. 58.03 la}ch to be paid in October
(xi) Tax of Rs. 23.92 lakh will be paid in four equal quarterly instalments in
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January, April, July and October
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(xii) The Term Loan of Rs. 237.32 ~akh is repayable in two equal investments
of 6 months in June/December
(xiii) Capital expenditure of Rs. 292.44 lakhs for the year is expected to be
spreaded equally during 12 months period.
You are required to prepare a Cash Flow statement for the current year period of
June. to November.
4. (a) Following details are available for a project: 8
(Rs. in crores)
Value of tradeable inputs at domestic prices 700
Value of non-tradeable inputs at domestic prices 180
Value of tradeable inputs at world prices 560
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Sales realisation at domestic prices 1,000
Sales realisation at world prices 800
Calculate effective rate of protection of the project and if exchange rate is
1$ = Rs. 48, what is the domestic resources cost of the project?
(b) PCL Limited is engaged in the manufacturing of power inteI)sive products. As 12
part of its diversification plans, the company proposes to,put ,up a windmill
to generate eJectricity. The details are as follows:
(a) Cost of the windmill Rs. 300 lakh
Cb) Cost of land Rs. 15 lakh
(c) Subsidy from State Government to be received at the end of first year of
installation Rs. 15 lakhs
(d) Cost of electricity will be Rs. 2.25 per unit in year L This will increase
by Re. 0.25 per unit every year till year 7. After that it will increase by
Re. 0.50 per unit.
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(e) Maintenance cost will be Rs. 4 lakh in the year 1 and the same will
increase by Rs. 2 lakh every year
CD Estimated life 10 years ~
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(g) Cost of Capital 15%
(h) Residual value of windmill will be zero. Ho:vever, land value will go up
to Rs. 60 lakh at the end of year 10
(i) Depreciation will be 100% of the cost of the windmill in the year 1 and
the same will be allowable for tax purpose
(j) As 'windmills are expected to work based on wind velocity, the efficiency
is expected to be an average 30%. Gross electricity generated at this level
will be Rs. 25 lakh units per annum, 4% of this electricity generated will
be committed free to the state as per the agreement
(k) Tax rate 50%.
From the above, you are required to :
(a) Calculate the net present value (ignore tax on capital profits)
(b) List down two non-financial factors that should be considered before
taking this decision.
You can use following discount factors:
Year 1 2 3 4 5 6 7 8 9 10
Discount
factors 0.87 0.76 0.66 0.57 0.50 0.43 0.38 0.33 i 0.28 0.25
5. (a) Following ~egression line is available for the stock of XYZ Ltd. 10
r. (%) = a. + AT + e.
1t 1 fJ1 illt 1t
The regression line explains only 80% of the variation in the return on XYZ
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Ltd.'s stock. The variance in market return is 95(%)2. The covariance of stock
return with that of market is 110(%)2.
(a) Find out systematic and unsystematic risk of XYZ Ltd. stock
(b) Whether the stock is defensive or aggressive?
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(b) Mr. Akhtar is holding two bonds A and B which pay an annual coupon of 6%
and 8% and their terms of maturity are 4 and 5 years respectively. The face
value and maturity value of the bonds is Rs. 100. Spot rates prevailing in the
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market as indicated by yield curve are
Maturity (years) Spot rates (%)
1 4.00
2 ,5.00
3 5.60
4 6.10
5- 6.75
You are required to calculate:
(i) The expected change in the prices of bonds A and B ~sing the duration
concept for a 0.40% change in yield to maturity
(ii) The one year holding period on the bonds assuming that spot rates will
rise in twelve month's time by 0.15%, across the maturity spectrum.
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