SCOrEbms.

com 9833088336
FM PAPER SOLUTION
October - 2012

Q.1) b]
(i) The following data is furnished to you regarding two companies Ajanta and Barley operating
in the industry.
Ajanta Barley
Raw material in stock in terms of days 80 73
Work in Progress (No. of days) 42 25
Finished Goods Stock (No. of days) 49 45
Average Collection Period (No. of days) 65 50
Average Payment Period (No. of days) 62 55
On basis of above calculate the Operating Cycle and Cash Cycle of business for each of the two
companies.

Solution:
Operating Cycle = R + W + F + D
Ajanta = 80 + 42 + 49 + 65
= 236 days

Barley = 73 + 25 + 45 + 50
= 193 days

Cash Cycle = R + W + F + D C
Ajanta = 80 + 42 + 49 + 65 62
= 174 days

Barley = 73 + 25 + 45 + 50 55
= 138 days


(ii) A Company Meenu Ltd. has issued 10% debentures of face value 100 each which are
redeemable at par after 10 years. Assuming that tax rate applicable is 40% and the floatation cost
of debentures is 5%, calculate the Cost of debentures for the company.

Solution:
Kd = 100 ) 1 (
2
x t x
NP FV
N
NP FV
I

|
.
|

\
| +
|
.
|

\
|
+

= 100 ) 4 . 0 1 (
2
95 100
10
95 100
10
x x
|
.
|

\
| +
|
.
|

\
|
+

SCOrEbms.com 9833088336
= 100 6 . 0
5 . 97
5 . 0 10
x x
+

= 6.46%

NP = FV + Premium Discount Floatation Cost
= 100 + 0 0 5
= 95


(iii) Determine the Operating and Financial Leverage from the following data:
A B C
Contribution 600000 100000 500000
10% Debentures 50000 40000 80000
Fixed Overheads 10000 20000 30000

Solution:
Particulars A B C
Contribution
(-) Fixed O/H
6,00,000
10,000
1,00,000
20,000
5,00,000
30,000
PBIT
(-) Interest
5,90,000
5,000
(50,000 x 10%)
80,000
4,000
(40,000 x 10%)
4,70,000
8,000
(80,000 x 10%)
PBT 5,85,000 76,000 4,62,000
Operating Leverage
PBIT
on Contributi
=

= 1.02

= 1.25

= 1.06
Financial Leverage
PBT
PBIT
=

= 1.01

= 1.05

= 1.02


Q.2) Company Maharaja Private Limited is planning an investment in new project. The
investment budget of the company is 30,00,000. The company has following two investment
alternatives:
Project A Project B
Investment 30,00,000 30,00,000
Useful Life 5 Years 6 Years
Cost of Capital 12% 12%
Cash inflows at the end of the year
Year 1 7,00,000 8,00,000
Year 2 10,00,000 8,00,000
Year 3 9,00,000 8,00,000
Year 4 8,00,000 8,00,000
Year 5 4,00,000 6,00,000
Year 6 - 2,00,000
SCOrEbms.com 9833088336
Find which project the company should select on basis of (a) Payback Period Method (b) Net
Present Value Method.
Discount factor @ 12%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0.893 0.797 0.712 0.636 0.567 0.507

Solution:
Project A PC = COF = 30,00,000
Year CIF CCIF PV@12% PVCIF
1 7,00,000 7,00,000 0.893 625100
2 10,00,000 17,00,000 0.797 797000
3 9,00,000 26,00,000 0.712 640800
4 8,00,000 34,00,000 0.636 508800
5 4,00,000 38,00,000 0.567 226800
PVCIF 27,98,500

Project B PC = COF = 30,00,000
Year CIF CCIF PV @ 12% PVCIF
1 8,00,000 8,00,000 0.893 714400
2 8,00,000 16,00,000 0.797 637600
3 8,00,000 24,00,000 0.712 569600
4 8,00,000 32,00,000 0.636 508800
5 6,00,000 38,00,000 0.567 340200
6 2,00,000 40,00,000 0.507 101400
PVCIF 2872000
a) Payback Period
Project A =
800000
2600000 300000
3

+ years
= 3 years + 0.5 years
= 3.5 years

Project B = 3 years +
800000
2400000 300000

= 3 years + 0.75 years
= 3.75 years


Advise/recommendation
On the basis of payback period method select project A, since it has lower payback period.

b) NPV = PVCIF PVCOF
Project = 27,98,500 30,00,000 = (2,01,500)
Project B = 28,72,000 30,00,000 = (1,28,000)

Advice/Recommendation
On the basis of NPV Method reject both project since it has negative NPV.
SCOrEbms.com 9833088336
Q.3) Kanchanjanga Industries Ltd. is currently having annual sales of 30,00,000. Out of
which, 20% is Cash Sales and remaining are Credit Sales. The Company is currently
experiencing 1% bad debts on their credit sales. The present age of accounts receivables is one
month. The variable cost of the company is 50%. Mr. Limye, the newly appointed Sales
manager, has plans to increase the sales of the Company. Mr. Limye has put forward following
two proposals in front of the Company; (a) To increase the credit period allowed to debtors to 4
months. He expects that sales under such condition will increase up to 40,00,000. However, at
the same time the bad debt will become 4% of the credit sales. (b) To give cash discount of 5%
on the sales. He expects that sales under such condition will increase up to 35,00,000 and the
credit period will go down to 20 days. The expected bad debts will be 0.5% of the credit sales.
Assume that the cost of funds is 15% per annum. As Vice President of Finance Operations,
which option of Mr. Limye will you accept? Assume 360 days in a year.

Solution:
Kanchanjanga Industries Ltd.
Existing Policy Proposed Policy
(a) (b)
DCP (days) 30
(1m)
120
(4m)
20
Sales
(-) V.C. @ 50%
30,00,000
15,00,000
40,00,000
20,00,000
35,00,000
17,50,000
Contribution (a) 15,00,000 20,00,000 17,50,000
Receivables
DCP x
x Sales
360
% 80
=

2,00,000

10,66,667

1,55,556
Cost of A.R.
Capital Cost (Recv x 15%)
Bad debt (Sales x 80% x x%)
Cash discount

30,000
24,000
-

1,60,000
1,28,000
-

23,333
14,000
35,000
(Sales x
20% x 5%)
(b) 54,000 2,88,000 72,333
Net Profit (a b) 14,46,000 17,12,000 16,77,667
Incremental NP - 2,66,000 2,31,667

Note: In absence of information of Fixed Cost, receivable is valued at Sales.

Recommendation:
As vice president of finance operation, Mr. Limye I will accept proposal (a) since it results into
highest incremental NP 2,66,000.


Q.4) Amartax Ltd. is going produce and sell 5,000 unit per month in the year 2011. The material
required per unit is 550/-. The direct labour is 12,00,000/- per month. The other direct
expenses are 1,26,00,000/- per annum. The selling price is fixed by calculating profit at 20%
on cost price.
SCOrEbms.com 9833088336
Calculate requirement of working capital for 2011 by taking into consideration following
information:-
(a) Stock or raw material will be for two months.
(b) Process time is one month.
(c) Stock is finished goods will be for 1.5 months.
(d) Credit allowed to customer is two months.
(e) Time lag in payment of wages is one month and the direct expenses in arrear of 15 days.
(f) 20% of material is purchased on cash basis and suppliers of 80% material give 2 months
credit.
(g) Cash required is 15% of net working capital.

Solution:
Amar Tax Ltd.
Statement of Estimation of Working Capital
Particulars W.N.

Current Assets
Stock
Raw Material
WIP
Finished Goods
Debtors


2
3
4
5


55,00,000
38,75,000
75,00,000




1,68,75,000
1,20,00,000
(a) 2,88,75,000
Current Liabilities
Creditors
O/s Wages
O/s Direct Expenses

6
7
8

44,00,000
12,00,000
5,25,000
(b) 61,25,000
(a b)
(+) Cash Balance
85
15
2,27,50,000
40,14,706
Net Working Capital
(+) Safety Margin
100 2,67,64,706
-
Estimated Working Capital 2,67,64,706

W.N.1) Cost statement for 5000 units (1 months)
Other direct expenses per month =
12
000 , 00 , 26 , 1

= 10,50,000

C.P.U.
Material 27,50,000 550
Direct Labour 12,00,000 240
Other direct expenses 10,50,000 210
Total Cost 50,00,000 1000
(+) Profit @ 20% 10,00,000 200
SCOrEbms.com 9833088336
Sales 60,00,000 1200

W.N. 2) R.M. (2M)
= 27,50,000 x 2 = 55,00,000

W.N. 3) WIP (1M)
M 27,50,000 x 1 x 100% = 27,50,000
DL 12,00,000 x 1 x 50% = 6,00,000
ODE 10,50,000 x 1 x 50% = 5,25,000
38,75,000
Note: In WIP valuation, material is taken at 100% & labour, ODE at 50%

W.N. 4) F.G. (1.5M)
= 50,00,000 x 1.5 = 75,00,000

W.N. 5) Debtors (2M)
= 60,00,000 x 2 = 1,20,00,000
Note: Debtors have been valued at sales. Alternatively it can be valued at cost.

W.N. 6) Creditors (2M)
= 27,50,000 x 80% x 2
= 44,00,000

W.N. 7) O/s Wages (1M)
12,00,000 x 1 = 12,00,000

W.N. 8) O/s Direct expenses (15 days = 0.5M)
= 10,50,000 x 0.5 = 5,25,000



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