Part 1 - FM & ECO - 27145216 PDF

PART – 1
FM & ECO
(TOTAL MARKS 50)
QUESTION NO : 1 (5 MARKS)
Cello Limited is considering buying a new machine which would have a useful economic life of
five years, a cost of Rs.1,25,000 and a scrap value of Rs.30,000, with 80 per cent of the cost being
payable at the start of the project and 20 per cent at the end of the first year. The machine would
produce 50,000 units per annum of a new product with an estimated selling price of Rs.3 per
unit. Direct costs would be Rs.1.75 per unit and annual fixed costs, including depreciation
calculated on a straight- line basis, would be Rs.40,000 per annum.
In the first year and the second year, special sales promotion expenditure, not included in the
above costs, would be incurred, amounting to Rs.10,000 and Rs.15,000 respectively.
ANALYSE the project using the NPV method of investment appraisal, assuming the company’s cost
of capital to be 10 percent.
The following data have been extracted from the books of LM Ltd :
Sales – Rs. 100 lakhs
Interest payable per annum – Rs. 10 lakhs
Operating leverage – 1.2
Combined leverage – 2.16
You are required to calculate :
(i) The financial leverage,

(ii) Fixed cost and
(iii) P/V ratio
A Company earns a profit of Rs. 3,00,000 per annum after meeting its Interest liability of Rs.
1,20,000 on 12% debentures. The Tax rate is 50%. The number of Equity Shares of Rs. 10 each
are 80,000 and the retained earnings amount to Rs. 12,00,000. The company proposes to take
up an expansion scheme for which a sum of Rs. 4,00,000 is required. It is anticipated that after
expansion, the company will be able to achieve the same return on investment as at present.
The funds required for expansion can be raised either through debt at the rate of 12% or by
issuing Equity Shares at par.
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Required:
(i) Compute the Earnings per Share (EPS), if:

 The additional funds were raised as debt
 The additional funds were raised by issue of equity shares.
(ii) Advise the company as to which source of finance is preferable.
The ABC Company currently sells on terms ‘net 45’. The company has sales of Rs. 37.50 Lakhs a
year, with 80% being the credit sales. At present, the average collection period is 60 days. The
company is now considering offering terms ‘2/10, net 45’. It is expected that the new credit
terms will increase current credit sales by 1/3rd. The company also expects that 60% of the
credit sales will be on discount and average collection period will be reduced to 30 days. The
average selling price of the company is Rs. 100 per unit and variable cost is 85% of selling price.
The Company is subject to a tax rate of 40%, and its before-tax rate of borrowing for working
capital is 18%. Should the company change its credit terms to ‘2/10, net 45’? Support your
answers by calculating the expected change in net profit. (Assume 360 days in a year)
The capital structure of MNP Ltd. is as under:
9% Debenture Rs. 2,75,000
11% Preference shares Rs. 2,25,000
Equity shares (face value : Rs. 10 per share) Rs. 5,00,000
Rs. 10,00,000
Additional information:
(i) Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of
maturity. The market price per debenture is Rs. 105.
(ii) Rs. 100 per preference share redeemable at par has 3% floatation cost and 10 years of
maturity. The market price per preference share is Rs. 106.
(iii) Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. The next year
expected dividend is Rs. 2 per share with annual growth of 5%. The firm has a practice
of paying all earnings in the form of dividends.
(iv) Corporate Income-tax rate is 35%.
Required : Calculate Weighted Average Cost of Capital (WACC) using market value weights.
Day Ltd., a newly formed company has applied to the Private Bank for the first time for
financing it’s Working Capital Requirements. The following information are available about the
projections for the current year :
Estimated Level of Activity Completed Units of Production 31200 plus unit of work
in progress 12000
Raw Material Cost Rs. 40 per unit
Direct Wages Cost Rs. 15 per unit
Overhead Rs. 40 per unit (inclusive of Depreciation Rs. 10 per unit)
Selling Price Rs. 130 per unit
Raw Material in Stock Average 30 days consumption
Work in Progress Stock Material 100% and Conversion Cost 50%
Finished Goods Stock 24000 Units
Credit Allowed by the supplier 30 days
Credit Allowed to Purchasers 60 days
Direct Wages (Lag in payment) 15 days
Expected Cash Balance Rs. 2,00,000
Assume that production is carried on evenly throughout the year (360 days) and wages and
overheads accrue similarly. All sales are on the credit basis. You are required to calculate the Net
Working Capital Requirement on Cash Cost Basis.

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PART – 1

Sales – Rs. 100 lakhs

Interest payable per annum – Rs. 10 lakhs

Operating leverage – 1.2

Combined leverage – 2.16

You are required to calculate :

(i) The financial leverage,

QUESTION NO : 3 (10 MARKS)

(i) Compute the Earnings per Share (EPS), if:

QUESTION NO : 4 (10 MARKS)

QUESTION NO : 5 (10 MARKS)

The capital structure of MNP Ltd. is as under:

9% Debenture Rs. 2,75,000

11% Preference shares Rs. 2,25,000

Equity shares (face value : Rs. 10 per share) Rs. 5,00,000

QUESTION NO : 6 (10 MARKS)

Raw Material Cost Rs. 40 per unit

Direct Wages Cost Rs. 15 per unit

Overhead Rs. 40 per unit (inclusive of Depreciation Rs. 10 per unit)

Selling Price Rs. 130 per unit

Raw Material in Stock Average 30 days consumption

Work in Progress Stock Material 100% and Conversion Cost 50%

Finished Goods Stock 24000 Units

Credit Allowed by the supplier 30 days

Credit Allowed to Purchasers 60 days

Direct Wages (Lag in payment) 15 days

Expected Cash Balance Rs. 2,00,000

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