CRE-WCM (Session1) - B19049

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w is the data on CA & CL of BHEL for the FYs ending on 31 March 2015-2019 ( in Rs.

cr)
Current Assets 19-Mar 18-Mar 17-Mar 16-Mar 15-Mar

Inventories 8,113.49 6,258.76 7,372.38 9,602.15 10,101.66


Trade Receivables 12,009.57 22,771.49 22,075.56 22,430.12 26,223.50
Cash And Cash Equivalents 7,503.34 11,291.18 10,491.79 10,085.99 9,812.70
Short Term Loans And Advances 157.45 147.12 138.88 176.61 2,224.65
OtherCurrentAssets 10,556.04 2,719.84 2,815.35 2,830.41 175.03
Total Current Assets 38,339.89 43,188.39 42,893.96 45,125.28 48,537.50

Current Liabilities 19-Mar 18-Mar 17-Mar 16-Mar 15-Mar

Short Term Borrowings 2,457.27 0 0 0 0


Trade Payables 11,375.11 10,586.86 8,709.16 8,698.34 8,798.94
Other Current Liabilities 6,737.91 7,880.60 7,224.95 8,689.32 9,123.31
Short Term Provisions 2,485.48 3,782.77 4,191.56 3,335.90 4,285.23
Total Current Liabilities 23,055.77 22,250.23 20,125.67 20,723.56 22,207.48

Compute
19-Mar 18-Mar 17-Mar 16-Mar 15-Mar
(a)    Working Capital 15284 20938 22768 24401 26330

(b)    Working Capital as a% of Sales Revenue 52% 75% 83% 94% 89%

Sales Revenue 29,349.21 27,963.15 27,587.64 26,050.07 29,541.97

Compute
19-Mar 18-Mar 17-Mar 16-Mar 15-Mar

(a)    Non-Cash Working Capital 12,566.08 13,282.63 16,329.18 17,475.02 18,577.94

(b)    Non-Cash Working Capital as a% of Sales


43% 48% 59% 67% 63%
Revenue

Sales Revenue 29,349.21 27,963.15 27,587.64 26,050.07 29,541.97


Accrued expenses

Avg = 78%

equal to WC - cash and cash


equivalents and excluding non interest
bearning liabilities

avg=56%
1.       Assume that we are analyzing a hypothetical capital budgeting proposal (project). We expect that the working c
Compute the impact of the WC investment on the NPV of the project with the following data (Assume 10% as cost o

Revenue Working Change in Salvage


Year PVIF Present value
Capital WC value 10%
0 0 0 0 1 0 20%
1 0 0 0 0.909091 0
2 0 2000 -2000 0.826446 -1652.892562
3 10,000 2400 -400 0.751315 -300.5259204
4 12,000 2800 -400 0.683013 -273.2053821
5 14,000 3200 -400 0.620921 -248.3685292
6 16,000 4000 -800 0.564474 -451.579144
7 20,000 3800 200 0.513158 102.6316236
8 19,000 3600 200 0.466507 93.30147604
9 18,000 3400 200 0.424098 84.81952367
10 17,000 3200 200 0.385543 77.10865789
11 16,000 3000 200 0.350494 70.0987799
12 15,000 0 3000 3000 0.318631 955.8924531
-1542.719023
e expect that the working capital investment would be 20% of revenues and that the WC investments would occur at the beginning of each
data (Assume 10% as cost of capital for the project) (amount in Rs million)

Change in WC would mean increase in cash flow


Decrease in WC would result in increase in cashflow

Value destroyed 1542


Lower the working capital, higher the value of the firm (lesser the value destroyed)
ld occur at the beginning of each year in which we would anticipate a change in WC.it is also assumed that the entire WC would be salvage
the entire WC would be salvaged at the end of the project life.
Revenue 1000
Expected Estimated
WC as a Growth Cost of 1.       You are requested to
Expected
% of in capital Value of firm WC WC as a % of revenue for a
revenue revenue EBIAT 100 currently maintains a no
(%) revenues. The firm current
(%) 1000 million and after ta
0 4.5 10.9 1632.8125 0 (EBIAT) of Rs 100 million
10 5 11 1666.666667 100 growth rate in revenue on
firm’s present WACC is 1
20 5.2 11.11 1604.060914 200 manager has estimated t
30 5.35 11.23 1518.707483 300 growth rate in revenues a
40 5.45 11.36 1415.397631 400 (from 0% to
50 5.5 11.5 1300 500
60 5.54 11.65 1183.306056 600
70 5.55 11.8 1067.2 700
80 5.55 11.95 955.46875 800
90 5.55 12.1 848.8549618 900
100 5.55 12.35 736.0294118 1000

Expected Estimated
WC as a Growth Cost of Expected
% of in capital Value of firm WC
revenue revenue (b)Compute the optimal W
(%) firm under the assumption
(%) (11.11%) remains consta
0 4.5 11.11 1580.937973 quantum of investment
0
10 5 11.11 1636.661211 100
20 5.2 11.11 1604.060914 200
30 5.35 11.11 1550.347222 300
40 5.45 11.11 1477.915194 400
50 5.5 11.11 1390.374332 500
60 5.54 11.11 1298.025135 600
70 5.55 11.11 1199.640288 700
80 5.55 11.11 1099.820144 800
90 5.55 11.11 1000 900
100 5.55 11.11 900.1798561 1000

Expected Estimated
WC as a Growth Cost of Expected ( c ) Compute the opti
% of in capital Value of firm WC
revenue revenue investment for the firm
(%) assumption that the WA
(%) decreasing for every incre
quantum of investment in
firm as stated bel
( c ) Compute the opti
investment for the firm
assumption that the WA
decreasing for every incre
0 4.5 12.5 1306.25 quantum of investment in
0 firm as stated bel
10 5 11.72 1488.095238 100
20 5.2 11.11 1604.060914 200
30 5.35 10.6 1700.952381 300
40 5.45 10.2 1761.052632 400
50 5.5 9.9 1772.727273 500
60 5.54 9.7 1737.980769 600
70 5.55 9.55 1667.5 700
80 5.55 9.45 1567.948718 800
90 5.55 9.38 1451.697128 900
100 5.55 9.32 1327.586207 1000
1.       You are requested to compute the optimal
WC as a % of revenue for a hypothetical firm that
currently maintains a non-cash WC @ 20% of
revenues. The firm currently has revenues of INR
1000 million and after tax operating income
(EBIAT) of Rs 100 million and it expects 5.20%
growth rate in revenue on a perpetual basis. The
firm’s present WACC is 11.11%. The finance
manager has estimated the cost of capital and
growth rate in revenues at various levels of WC
(from 0% to 100%)

(b)Compute the optimal WC investment for the


firm under the assumption that the current WACC
(11.11%) remains constant irrespective of the
quantum of investment in WC by the firm.

( c ) Compute the optimal WC


investment for the firm under the
assumption that the WACC keeps
decreasing for every increase in the
quantum of investment in WC by the
firm as stated below.
1.       The table below presents the Inv, AR, other CA, Trade Payables & Other CL for BHEL and its peers for the latest fi
Trade
Firm Inventory AR Other CA Other CL Non-cash
Payables WC
BHEL 8,113 12,006 10,556 11,375 6738 12,562
Bharat 4,414 5,369 5,103 1,435 8,533 4,918
Elec
AIA 458 901 182 152 19 1,370
Engine
Thermax 230 837 2471 799 2434 305
NESCO 9 18 11 11 79 -52
BEML 1,702 1,613 811 762 836 2,528
Greaves 115 337 41 319 75 99
Co
Triveni 217 173 37 119 157 151
Tur
GMM 103 49 22 53 66 55
Pfau
KSB Ltd 303 291 72 218 153 295

Kirloskar 242 355 106 382 139 182


oil engine

Praj 104 228 160 189 215 88


Indust
Kirloskar 367 471 440 537 444 297
Brothers

Given the sales revenue , regress Non-Cash WC as a % of revenue against ln Sales revenue for the firms and conclu

Sales Non-cash Under/ov


Revenue WC/Rev Actual er
Firm Ln Reve Predicted WC WC invested Non-cash WC
( in Rs cr) ( in %) in WC
BHEL 29,349 10.28701375 0.428021398 14874.78836 12,562 Under 12,562
Bharat
Electronic 11,789 9.374922172 0.417168547 4827.644964 4,918 Over 4,918
s

AIA
Engineeri 2,737 7.914617709 0.500548045 694.3487351 1,370 Over 1,370
ng
Thermax 3,488 8.157083785 0.087442661 975.1082094 305 Under 305
NESCO 359 5.883322388 -0.144846797 13.26522909 -52 Under -52
BEML 3,458 8.148445666 0.731058415 963.5341896 2,528 Over 2,528
Greaves 1,985 7.593374193 0.049874055 435.5348574 99 Under 99
Co
Triveni 811 6.698268054 0.186189889 100.4871183 151 Over 151
Turbine
GMM 412 6.021023349 0.133495146 21.27699485 55 Over 55
Pfaudler
KSB Ltd 1,078 6.982862751 0.273654917 166.3046291 295 Over 295

Kirloskar 3,119 8.045267717 0.058352036 834.7381739 182 Under 182


oil engine

Praj 904 6.80682936 0.097345133 122.4817782 88 Under 88


Indust
Kirloskar 2,243 7.715569535 0.132411948 521.3881971 297 Under 297
Brothers
nd its peers for the latest financial year. Compute Non-Cash WC for the firms.

e for the firms and conclude on which firms are under/over invested in their Non-cash WC

ln Sales % NC WC
% NC WC
10.29 43% 80%
70%
9.37 42% 60%
50%
f(x) = 0.1067116422x - 0.5908320127
40% R² = 0.3185696431
7.91 50%
30%
20%
8.16 9%
10%
5.88 -14%
8.15 73% 0%
5.00 6.00 7.00 8.00 9.00 10.00 11.00
-10%
7.59 5%
-20%
0%
5.00 6.00 7.00 8.00 9.00 10.00 11.00
-10%
-20%

6.70 19%

6.02 13%

6.98 27%

8.05 6%

6.81 10%

7.72 13%
Current Net WC $ 20.00 million (20% of revenues)
Current Revenues $ 100.00 million
After Tax Op Income $ 5.00 million (5% of revenues)
Growth Rate 5%
Cost of Capital 12%
Current Value of the firm Sum (After tax operating Income - Changes in Working Capital)
= ($5 million (1.05) - ($100 million)(0.05)(0.2))/(cost of cap - growth rate)
$ 4.25 million / (12%-5%)
$ 60.71 million
Reduction in Working capi$ 8 million (20 x 0.4)
Increase in Cashflows will be equal to the reduction in Working Capital
Cash flows from cutting back WC $8 million
New Value of the Firm $ 52.71 million

Let the new revenues be X


New WC (percentage of Revenues) 12%
New After tax Op Income 0.05 x X
Change in new WC 0.05 x 0.12 x X
Value of the firm (.05X - 0.05x0.12X)/(0.12-0.05)
equals to $52.71
New Revenue (X) X equals $ 83.86 million $ 16.14

The revenues should drop by $ 16.14 million or more to negatively affect the value of the firm
You are advising a small retailing firm that is thinking about
making a significant change in inventory policy. The firm
currently has net working capital of $20 million on revenues of
$100 million. It had net after-tax operating income of $5
million. The firm is considering reducing its inventory by 40%,
but the change may adversely affect revenues. If the expected
growth rate in the firm’s revenue and operating income is 5%
and the cost of capital is 12%, how much would the revenue
have to drop for this change in inventory to negatively affect
value?

13.152
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.56442
R Square 0.31857
Adjusted R 0.256621
Standard E 0.202414
Observatio 13

ANOVA
df SS MS F Significance F
Regression 1 0.210696 0.210696 5.142515 0.044486
Residual 11 0.450686 0.040971
Total 12 0.661382

Coefficients
Standard Error t Stat P-value Lower 95%Upper 95%
Lower 95.0%
Upper 95.0%
Intercept -0.59083 0.364976 -1.61883 0.133775 -1.39414 0.212474 -1.39414 0.212474
ln Sales 0.106712 0.047057 2.267711 0.044486 0.00314 0.210283 0.00314 0.210283

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