Description
MARS Limited is a manufacturer of toys and other goods for children and has a good reputation for the quality of its products.
Focus on financial management
R. Srinivasan
A Case study
MARS Limited is a manufacturer of toys and other goods for children and has a good reputation
for the quality of its products. It is a closely-held public limited company with about 500
shareholders but with a substantial percentage of the equity being held by five promoter-directors,
all of whom are involved in the business on a full-time basis.
The company has had a consistent record of growth in turnover and profitability and enjoys a
good share of the maret in the organi!ed sector. "hile there are diversification plans on hand,
the company for the present feels that staying with the e#isting product-range will help generate
adequate internal accruals so that it may approach the capital maret at a more appropriate time
for raising capital for any diversification that may be considered opportune.
The company$s finance manager has the following information available with the help of which
an e#ternal consultant has been ased to advise the company on its options in the medium-term.
i%&ales and cost of sales are e#pected to increase by '0 per cent in each of the financial years
ending (ecember )', '**+, '**, and '***. -perating e#penses are e#pected to increase by 5 per
cent each years during this period.
ii%The company e#pects to be liable for income-ta# at the present rate of .0 per cent. /ssume ta#
is paid or refunded '0 months after the year-end.
iii%The ratios of debtors to sales and creditors to cost of sales will remain the same for the ne#t
three years.
iv%The fi#ed assets are land and buildings which are not depreciated in the company$s boos. /ll
other assets used by the company 1machinery, cars and so on% are rented.
v%(ividends will grow at 05 per cent in each of the financial years '**+, '**, and '*** as per
the company$s objectives.
vi%The company intends to e#pand capacity by purchasing new machinery worth 2s.',00,00,000
during '**+, although an investment appraisal has not been carried out. It will be depreciated
straight-line over '0 years. The company charges a full year$s depreciation in the first year of
purchase of its assets.
3ii0/dditional stoc was purchased for 2s.+,00,000 at the beginning of '**+. The value of stoc
after this purchase is liely to remain at 2s.+0,00,000 for the foreseeable future.
viii%4o decision has been made on the type of finance to be used for the e#pansion programme.
5owever, the company$s directors are confident that they can raise new medium-term, secured
debt, if necessary.
i#%The average 678 ratio of listed companies in the same industry as 9ars :imited '5. The
company$s main objectives as set out in its mission statement accompanying the annual report for
the financial year ended (ecember, )', '**;, are as follows<
=to earn a pre-ta# return on the closing boo value of shareholders$ funds of )5 per cent each
year>
=to increase dividends per share by 05 per cent each year over that for the previous year>
=to list the company$s shares on one or more stoc e#changes so as to provide liquidity for
some of the non-promoter shareholders who have been with the company since its incorporation.
The summari!ed profit and loss 16?:% account and balance-sheet of 9ars :imited as on
(ecember )', '**;, are shown in Tables ' and 0 below<
2s.$000
Turnover )',000
@ost of sales '*,000
Gross profit '0,000
-perating e#penses ;,500
Interest ;00
Income-ta# 0,0.0
Net profit after tax ),0;0
(ividends declared ',.00
Table 0
Ai#ed /ssets 1net boo value% '5,000
@urrent /ssets<
&toc ;,500
(ebtors ),,.0
@ash and ban ',000
Total @urrent /ssets '',);0
:ess< @urrent :iabilities<
Trade creditors 0,+00
-ther creditors 1ta# and dividends% ),..0
4et @urrent /ssets 5,000
Total assets 00,000
Ainanced by<
8quity share capital 1'0,00,000 shares of 2s.'0 each fully paid% '0,000
2etained profits B to )' (ecember, '**5 0,5;0
2etained profits B to )' (ecember, '**; ',;;0
'0C 4on-@onvertible debentures redeemable in 00'0 ;,000
Total financing 00,000
The directors would lie the consultant to e#amine and report on the company$s ability to
maintain growth in turnover and profitability after the e#pansion in '**+, on the means of
financing the acquisition of the machinery costing 2s.',00,00,000, the adequacy of the earnings
per share for servicing the equity at the desired growth levels, the need for listing of its shares on
the stoc e#changes, the financing of any diversification proposals to be taen up after (ecember
)', '***, and the pricing of its shares should the company resort to equity as a means of
financing its diversification.
Solution
The requirements of the directors from the consultant would entail the maing of financial
projections B a 6?: account, a balance-sheet and a cash flow B for each of the three years,
namely, '**+, '**, and '*** so as to assess the effect of the e#pansion of capacity on the
company$s profitability. The projections of profits and balance-sheet and the cash flow forecasts
B for the years '**+ to '*** B are given in Tables ), . and 5 below<
Table ) All figures are in Rs.!"""s#
Actual$
%&&'
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
&ales )',000 ).,)00 )+,+;0 .',500
@ost of sales '*,000 00,*00 0),000 05,0,0
Dross 6rofit '0,000 '),.00 '.,+;0 ';,0.0
(epreciation ',000 ',000 ',000
-ther e#penses ;,500 ;,,00 +,';0 +,500
-perating 6rofit 5,+00 5,;00 ;,;00 +,+00
Interest ;00 ;00 ;00 ;00
6rofit before ta# 5,'00 5,000 ;,000 +,'00
Ta#ation 0,0.0 0,000 0,.00 0,,.,
6rofit after ta# ),0;0 ),000 ),;00 .,0+0
(ividends ',.00 ',+50 0,',, 0,+)5
2etained earnings ',;;0 ',050 ',.'0 ',5)+
Ta*le +
Actual$
%&''
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
Ai#ed /ssets 14et% '5,000 0.,000 0),000 00,000
&toc ;,500 +,000 +,000 +,000
(ebtors ),,.0 .,000 .,;.0 5,'00
@ash at ban ',000 -- -- --
@reditors 10,+00% 10,*,0% 1),0,0% 1),;00%
Total Assets ,-.''" -,.+'" -%./)" -".(+"
Ainanced by<
8quity share capital '0,000 '0,000 '0,000 '0,000
2etained earnings .,000 5,.+0 ;,,,0 ,,.'*
&hareholders$ funds '.,000 '5,.+0 ';,,,0 ',,.'*
(ividends ',..0 ',+50 0,',, 0,+)5
Ta# provision 0,0.0 0,000 0,.00 0,,.,
Eorrowings B 8#isting ;,000 ;,000 ;,000 ;,000
Eorrowings - /dditional -- +,0.0 .,''0 +),
Total ,-.''" -,.+'" -%./)" -".(+"
Ta*le /
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
-perating 6rofit 5,;00 ;,;00 +,+00
Ai#ed /ssets 14et% *,000 1',000% 1',000%
&toc +00 -- --
(ebtors ),0 .00 .,0
1@reditors% 10,0% 1)00% 1)00%
4et generation71utili!ation% 1.,000% +,.,0 ,,5;0
(isbursals<
1Interest% 1;00% 1;00% 1;00%
1Income-ta#% 10,0.0% 10,000% 10,.00%
1(ividends% 1',.00% 1',+50% 10,',,%
4et cash flow 1,,0.0% ),')0 ),)+0
-pening balance B Eorrowings 14et%== 15,000% 1'),0.0% 1'0,''0%
@losing borrowings B 8#isting 1;,000% 1;,000% 1;,000%
@losing borrowings B /dditional 1+,0.0% 1.,''0% 1+),%
==/fter setting off the favourable cash balance of 2s.',000
-ther financial information and the calculations of pre-ta# return on shareholders$ funds are given
in Tables ; and + below<
Table ;
Ainancial information 1in 2s.% %&&' %&&( %&&) %&&&
8arnings per share 186&% ).' ).0 ).; ..)
(ividends per share '.. '.+5 0.0 0.+
Eoo 3alue '..0 '5.5 ';.* ',..
Ta*le (
%&&' %&&( %&&) %&&&
6rofit before ta# 1F000% 5,'00 5,000 ;,000 +,'00
&hareholders$ funds< '.,000 '5,.+0 ';,,,0 ',,.'*
2eturn per annum )5.*C )0.)C )5.5C ),.;C
@onsultant$s observations of the financial projections<
i%The company will generally be able to achieve its objective of ensuring a 05 per cent growth in
the dividend rate each year and, also, achieve )5 per cent per annum return of profit before ta# on
the closing shareholders$ funds each year. It should, however, be borne in mind that by paying
out an increasing proportion of post-ta# profits, the dividend cover will be reduced>
ii%In maing the financial projections, a realistic estimate of the maret si!e and the liely
pressure on margins will have to be taen into consideration as also tolerances put on the figures
such as the best and the worst liely figures>
iii%"hile the company will have to borrow the funds required to go in for the acquisition of
machinery, the projected cash flows will indicate that the additional facility availed for this
purpose will be run down quicly and has been brought down to 2s.+,),,000 by the end of '***
and could, indeed, be repaid fully in 0000>
iv%If and when the company wants to raise capital from the maret, it will be able to do so but
will have to tie up the additional funding to a diversification project as the company$s present
total involvement in a single line of business activity may not appeal to investors who would lie
to Gspread their rissH>
v%6ricing of the company$s shares at the time of a public issue will have to be a balance between
its boo value and the rate which the industry is able to command at an average 678 ratio>
vi%The boo value of the company$s share in '*** will be around 2s.',.50 while based on its
86& and the 678 it will be around 2s.;0. Eut the post-equity issue 86& will remain diluted until
after the full impact of profitability from diversification is reali!ed. Denerally, the value that
outsiders put on a business is usually significantly lower than that put on it by the promoters and
it is difficult to find a price which has acceptability in the maret>
vii%(iversification should be considered only in areas where the company has core competence as
there are innumerable cases of companies embaring into unrelated areas often with disastrous
effect even on the e#isting line of activity> and
viii%(iversification by acquisition7merger is another option which will be worth the company$s
while in planning for the long-term growth of the company, especially in industries involving
long gestation periods.
Article pu*lis0ed on Novem*er %". %&&( in 1usiness Line
doc_111736582.doc
MARS Limited is a manufacturer of toys and other goods for children and has a good reputation for the quality of its products.
Focus on financial management
R. Srinivasan
A Case study
MARS Limited is a manufacturer of toys and other goods for children and has a good reputation
for the quality of its products. It is a closely-held public limited company with about 500
shareholders but with a substantial percentage of the equity being held by five promoter-directors,
all of whom are involved in the business on a full-time basis.
The company has had a consistent record of growth in turnover and profitability and enjoys a
good share of the maret in the organi!ed sector. "hile there are diversification plans on hand,
the company for the present feels that staying with the e#isting product-range will help generate
adequate internal accruals so that it may approach the capital maret at a more appropriate time
for raising capital for any diversification that may be considered opportune.
The company$s finance manager has the following information available with the help of which
an e#ternal consultant has been ased to advise the company on its options in the medium-term.
i%&ales and cost of sales are e#pected to increase by '0 per cent in each of the financial years
ending (ecember )', '**+, '**, and '***. -perating e#penses are e#pected to increase by 5 per
cent each years during this period.
ii%The company e#pects to be liable for income-ta# at the present rate of .0 per cent. /ssume ta#
is paid or refunded '0 months after the year-end.
iii%The ratios of debtors to sales and creditors to cost of sales will remain the same for the ne#t
three years.
iv%The fi#ed assets are land and buildings which are not depreciated in the company$s boos. /ll
other assets used by the company 1machinery, cars and so on% are rented.
v%(ividends will grow at 05 per cent in each of the financial years '**+, '**, and '*** as per
the company$s objectives.
vi%The company intends to e#pand capacity by purchasing new machinery worth 2s.',00,00,000
during '**+, although an investment appraisal has not been carried out. It will be depreciated
straight-line over '0 years. The company charges a full year$s depreciation in the first year of
purchase of its assets.
3ii0/dditional stoc was purchased for 2s.+,00,000 at the beginning of '**+. The value of stoc
after this purchase is liely to remain at 2s.+0,00,000 for the foreseeable future.
viii%4o decision has been made on the type of finance to be used for the e#pansion programme.
5owever, the company$s directors are confident that they can raise new medium-term, secured
debt, if necessary.
i#%The average 678 ratio of listed companies in the same industry as 9ars :imited '5. The
company$s main objectives as set out in its mission statement accompanying the annual report for
the financial year ended (ecember, )', '**;, are as follows<
=to earn a pre-ta# return on the closing boo value of shareholders$ funds of )5 per cent each
year>
=to increase dividends per share by 05 per cent each year over that for the previous year>
=to list the company$s shares on one or more stoc e#changes so as to provide liquidity for
some of the non-promoter shareholders who have been with the company since its incorporation.
The summari!ed profit and loss 16?:% account and balance-sheet of 9ars :imited as on
(ecember )', '**;, are shown in Tables ' and 0 below<
2s.$000
Turnover )',000
@ost of sales '*,000
Gross profit '0,000
-perating e#penses ;,500
Interest ;00
Income-ta# 0,0.0
Net profit after tax ),0;0
(ividends declared ',.00
Table 0
Ai#ed /ssets 1net boo value% '5,000
@urrent /ssets<
&toc ;,500
(ebtors ),,.0
@ash and ban ',000
Total @urrent /ssets '',);0
:ess< @urrent :iabilities<
Trade creditors 0,+00
-ther creditors 1ta# and dividends% ),..0
4et @urrent /ssets 5,000
Total assets 00,000
Ainanced by<
8quity share capital 1'0,00,000 shares of 2s.'0 each fully paid% '0,000
2etained profits B to )' (ecember, '**5 0,5;0
2etained profits B to )' (ecember, '**; ',;;0
'0C 4on-@onvertible debentures redeemable in 00'0 ;,000
Total financing 00,000
The directors would lie the consultant to e#amine and report on the company$s ability to
maintain growth in turnover and profitability after the e#pansion in '**+, on the means of
financing the acquisition of the machinery costing 2s.',00,00,000, the adequacy of the earnings
per share for servicing the equity at the desired growth levels, the need for listing of its shares on
the stoc e#changes, the financing of any diversification proposals to be taen up after (ecember
)', '***, and the pricing of its shares should the company resort to equity as a means of
financing its diversification.
Solution
The requirements of the directors from the consultant would entail the maing of financial
projections B a 6?: account, a balance-sheet and a cash flow B for each of the three years,
namely, '**+, '**, and '*** so as to assess the effect of the e#pansion of capacity on the
company$s profitability. The projections of profits and balance-sheet and the cash flow forecasts
B for the years '**+ to '*** B are given in Tables ), . and 5 below<
Table ) All figures are in Rs.!"""s#
Actual$
%&&'
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
&ales )',000 ).,)00 )+,+;0 .',500
@ost of sales '*,000 00,*00 0),000 05,0,0
Dross 6rofit '0,000 '),.00 '.,+;0 ';,0.0
(epreciation ',000 ',000 ',000
-ther e#penses ;,500 ;,,00 +,';0 +,500
-perating 6rofit 5,+00 5,;00 ;,;00 +,+00
Interest ;00 ;00 ;00 ;00
6rofit before ta# 5,'00 5,000 ;,000 +,'00
Ta#ation 0,0.0 0,000 0,.00 0,,.,
6rofit after ta# ),0;0 ),000 ),;00 .,0+0
(ividends ',.00 ',+50 0,',, 0,+)5
2etained earnings ',;;0 ',050 ',.'0 ',5)+
Ta*le +
Actual$
%&''
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
Ai#ed /ssets 14et% '5,000 0.,000 0),000 00,000
&toc ;,500 +,000 +,000 +,000
(ebtors ),,.0 .,000 .,;.0 5,'00
@ash at ban ',000 -- -- --
@reditors 10,+00% 10,*,0% 1),0,0% 1),;00%
Total Assets ,-.''" -,.+'" -%./)" -".(+"
Ainanced by<
8quity share capital '0,000 '0,000 '0,000 '0,000
2etained earnings .,000 5,.+0 ;,,,0 ,,.'*
&hareholders$ funds '.,000 '5,.+0 ';,,,0 ',,.'*
(ividends ',..0 ',+50 0,',, 0,+)5
Ta# provision 0,0.0 0,000 0,.00 0,,.,
Eorrowings B 8#isting ;,000 ;,000 ;,000 ;,000
Eorrowings - /dditional -- +,0.0 .,''0 +),
Total ,-.''" -,.+'" -%./)" -".(+"
Ta*le /
Actual$
%&&(
Forecast$
%&&)
Forecast$
%&&&
-perating 6rofit 5,;00 ;,;00 +,+00
Ai#ed /ssets 14et% *,000 1',000% 1',000%
&toc +00 -- --
(ebtors ),0 .00 .,0
1@reditors% 10,0% 1)00% 1)00%
4et generation71utili!ation% 1.,000% +,.,0 ,,5;0
(isbursals<
1Interest% 1;00% 1;00% 1;00%
1Income-ta#% 10,0.0% 10,000% 10,.00%
1(ividends% 1',.00% 1',+50% 10,',,%
4et cash flow 1,,0.0% ),')0 ),)+0
-pening balance B Eorrowings 14et%== 15,000% 1'),0.0% 1'0,''0%
@losing borrowings B 8#isting 1;,000% 1;,000% 1;,000%
@losing borrowings B /dditional 1+,0.0% 1.,''0% 1+),%
==/fter setting off the favourable cash balance of 2s.',000
-ther financial information and the calculations of pre-ta# return on shareholders$ funds are given
in Tables ; and + below<
Table ;
Ainancial information 1in 2s.% %&&' %&&( %&&) %&&&
8arnings per share 186&% ).' ).0 ).; ..)
(ividends per share '.. '.+5 0.0 0.+
Eoo 3alue '..0 '5.5 ';.* ',..
Ta*le (
%&&' %&&( %&&) %&&&
6rofit before ta# 1F000% 5,'00 5,000 ;,000 +,'00
&hareholders$ funds< '.,000 '5,.+0 ';,,,0 ',,.'*
2eturn per annum )5.*C )0.)C )5.5C ),.;C
@onsultant$s observations of the financial projections<
i%The company will generally be able to achieve its objective of ensuring a 05 per cent growth in
the dividend rate each year and, also, achieve )5 per cent per annum return of profit before ta# on
the closing shareholders$ funds each year. It should, however, be borne in mind that by paying
out an increasing proportion of post-ta# profits, the dividend cover will be reduced>
ii%In maing the financial projections, a realistic estimate of the maret si!e and the liely
pressure on margins will have to be taen into consideration as also tolerances put on the figures
such as the best and the worst liely figures>
iii%"hile the company will have to borrow the funds required to go in for the acquisition of
machinery, the projected cash flows will indicate that the additional facility availed for this
purpose will be run down quicly and has been brought down to 2s.+,),,000 by the end of '***
and could, indeed, be repaid fully in 0000>
iv%If and when the company wants to raise capital from the maret, it will be able to do so but
will have to tie up the additional funding to a diversification project as the company$s present
total involvement in a single line of business activity may not appeal to investors who would lie
to Gspread their rissH>
v%6ricing of the company$s shares at the time of a public issue will have to be a balance between
its boo value and the rate which the industry is able to command at an average 678 ratio>
vi%The boo value of the company$s share in '*** will be around 2s.',.50 while based on its
86& and the 678 it will be around 2s.;0. Eut the post-equity issue 86& will remain diluted until
after the full impact of profitability from diversification is reali!ed. Denerally, the value that
outsiders put on a business is usually significantly lower than that put on it by the promoters and
it is difficult to find a price which has acceptability in the maret>
vii%(iversification should be considered only in areas where the company has core competence as
there are innumerable cases of companies embaring into unrelated areas often with disastrous
effect even on the e#isting line of activity> and
viii%(iversification by acquisition7merger is another option which will be worth the company$s
while in planning for the long-term growth of the company, especially in industries involving
long gestation periods.
Article pu*lis0ed on Novem*er %". %&&( in 1usiness Line
doc_111736582.doc