Description
tybms sem 5 FM board paper with solution nov 2011
SCOrEBMS.com
FM Nov. 2011 University Paper Solution
Q.1. b) i. A Project requires an investment of 60,000. The plant and machinery required under the project will have a scrap value of 3,000 at the end of its useful life of 5 years. The profits after tax and depreciation are estimated to be as follows: Year 1 5,000 2 15,000 3 20,000 4 30,000 5 20,000 Calculate the Accounting Rate of Return. Q. 1.b i) Solution: Year 1 2 3 4 5 Total NPAT
? Avg. NPAT = 18,000
NPAT 5,000 15,000 20,000 30,000 20,000 90,000
a) ARR based on Original Investment Avg . NPAT ? x 100 O. Inv. 18,000 ? x 100 60,000 = 30% b) Avg. Investment ?
O.C ? Scrap ? Scrap ? W . Cap. 2 60,000 ? 3,000 ? ? 3,000 ? 0 2 = 28,500 + 3,000 + 0 = 31,500
ARR based on Average Investment Avg . NPAT ? x 100 Avg . Inv.
SCOrE
9833088336
SCOrEBMS.com
18,000 x 100 31,500 = 57.14% ?
ii.
The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long run level of future earning of per shares. The current price of Xavier’s shares is 55.45, floatation costs for the sale of equity shares would average about 10% of the price of the shares. What is the cost of new equity capital to Xavier Corporation?
Q. 1.b ii) Solution: Xavier Corporation Before Floatation Cost EPS1 Ke ? x 100 P0 7 ? x 100 55.45 = 12.62% After Floatation Cost 12.62 Ke ? 1 ? Floatation Cost
12.62 1 ? 0.10 = 14.02% ?
iii.
Texas Manufacturing Company Ltd. is to start production on 1st January, 2012. The prime cost of a unit is expected to be 40 out of which 16 is for materials and 24 for labour. In addition variable expenses per unit are expected to be 8, and fixed cash expenses per month 30,000. Payment for materials is to be made in the month following the purchase. One-third of sales will be for cash and the rest on credit for settlement in the following month. Expenses are payable in the month in which they are incurred. The selling price is fixed at 80 per unit. The number of units manufactured and sold are expected to be as under: January 900 February 1,200 Draw up a statement showing requirements of cash for a month of February, ignoring the question of stocks.
SCOrE
9833088336
SCOrEBMS.com
Q. 1.b iii) Solution: Texas Manufacturing Company Requirement of Cash for month of February Particulars Cash Receipt 32,000 ? Cash Sales 48,000 ? Collection from debtor (a) 80,000 Cash Payment 14,400 ? Payment for materials 28,800 ? Labour 9,600 ? Variable expenses 30,000 ? Fixed cash expenses (b) 82,800 (b – a) 2,800 ? Cash requirement W.N.1) Cash Sale Feb = (1200 Units × 80) × = 32,000 W.N.2) Collection from debtor Jan Sale (900 × 80) (-) Cash Sale @ 1/3 Credit Sale of Jan Recd. = = = 72,000 24,000 48,000 1m Feb
1 3
W.N.3) Payment for Material Jan Purchase = 900 × 16 = 14,400 1m Paid W.N.4) Labour Feb: 1200 × 8 = 28,800 Feb
SCOrE
9833088336
SCOrEBMS.com
W.N.5) Variable Expenses Feb: 1200 × 8 = 9,600 Q.2) Suhail Enterprises Ltd. is a manufacturer of high quality running shoes. Ms. Dhinchak, President, is considering computerizing the company’s ordering, inventory and billing procedures. She estimates that the annual savings from computerization include a reduction of ten clerical employees with annual salaries of 15,000 each, 8,000 from reduced production delays caused by raw materials inventory problems, 12,000 from lost sales due to inventory stockouts and 3,000 associated with timely billing procedures. The purchase price of the system is 2,00,000 and installation costs are 50,000. These outlays will be capitalized (depreciated) on a straight line basis to a zero book (salvage) value which is also its market value at the end of five years. Operation of the new system requires two computer specialists with annual salaries of 40,000 per person. Also annual maintenance and operation (cash) expenses of 12,000 are estimated to be required. The company’s tax rate is 30% and its required rate of return (cost of capital) for this project is 12%. You are required to: a) Find the project’s initial net cash outlay. b) Find the project’s operating and terminal value cash flows over its 5 year life. c) Evaluate the project using NPV method. d) Evaluate the project using PI method. e) Evaluate project’s simple payback period. Note: i. Present value of annuity of 1 at 12% rate of discount for 5 years is 3.605. ii. Present value of 1 at 12% rate of discount, received at the end of 5 years is 0.567. Q.2 Solution: Calculation of Annual CIF Particulars
Clerk : 10 × 15,000 Delay reduction Inventory stock out reduction Billing procedure
1,50,000 8,000 12,000 3,000 (a) 1,73,000 80,000 12,000 92,000 81,000 50,000
Co. Specialist : 2 × 40,000 Annual maintenance
(b) NSBDT
? (2,00,000 ? 50,000 ? 0 ? (-) Depreciation ? ? 5 ? ?
SCOrE
9833088336
SCOrEBMS.com
NSBT (-) Tax @ 30% NSAT (+) Depreciation Annual CIF a) Project’s Initial Net Cash Outlay = 2,00,000 + 50,000 = 2,50,000 b) Operating Cash Flow = 71,700 p.a.
= 71,700 × 5 = 3,58,500
31,000 9,300 21,700 50,000 71,700
Terminal Cash Flow = 0 (? No scrap value & no working capital) c) Calculation of NPV Year CIF 1–5 71,700
? NPV
Annuity @ 12% 3.605 PVCIF – PVCOF 2,58,478.50 – 2,50,000 8,478.50
PVCIF 2,58,478.50
= = =
Evaluation Select the project ? NPV is positive d) Calculation of PI PVCIF PI = PVCOF 2,58,478.50 = 2,50,000 = 1.03 Evaluation Select the project ? PI is more than 1 e) Simple Pay back Period = = =
Initial Outlay Annual CIF 2,50,000 71,700 3.49 years
SCOrE
9833088336
SCOrEBMS.com
Q.3) Company X wishes to takeover Company Y. The financial details of the two companies are as under: Company X Company Y Equity Shares ( 10 per share) Security Premium Account Profit & Loss Account Preference Shares 10% Debentures Fixed Assets Net Current Assets Maintainable Annual Profit (after tax) for Equity Shareholders Market Price per equity share Price Earning Ratio 1,00,000 -38,000 20,000 15,000 1,73,000 1,22,000 51,000 1,73,000 24,000 24 10 50,000 2,000 4,000 5,000 61,000 35,000 26,000 61,000 15,000 27 9
What offer do you think Company X could make to Company Y in terms of exchange ratio, based on (i) Net assets value; (ii) Earning per share; and (iii) Market price per share? Which method would you prefer from Company X’s point of view? Q.3) Solution: i. Calculation of NPV Particulars Market Value of Asset F.A. Net C.A. (a) Agreed Value of OL 10 % Debenture Net asset for all SH (-) Payment to PSH Net asset for ESH No. of Equity Shares ? EPS ? Exchange ratio based on NPV NAV of T arg et Co. ? NAV pf Acq. Co. 11.2 ? 13.8 (b) (a – b) (a) (b) (a ÷ b) X 1,22,000 51,000 1,73,000 15,000 1,58,000 20,000 1,38,000 10,000 13.8 Y 35,000 26,000 61,000 5,000 56,000 56,000 5,000 11.2
SCOrE
9833088336
SCOrEBMS.com
= 0.81 Or 4 ? 5
ii.
EPS ?
X Y
PAT ? PD No. of Eqquity Shares 24,000 ? ? 2.4 10,000 15,000 ? ? 3 5,000
? Exchange ratio based on EPS EPS of T arg et Co. ? EPS of Acq. Co. 3 ? 2 .4 = 1.25 Or 5 ? 4
iii.
Exchange ratio based on MPS MPS of T arg et Co. ? MPS of Acq. Co. 27 ? 24 = 1.13 Or 9 ? 8 Method to be preferred from Company X’s point of view is the one with lowest exchange ratio i.e. (i) Net Asset Value.
Q.4) Jethalal Garments Ltd. manufactures readymade garments and sells them on credit basis through a network of dealers. Its present sale is 60 lakhs per annum with 20 days credit period. The Company is contemplating an increase in the credit period with a view to increase sales. Present variable costs are 70% of sales and the total fixed costs 8 lakhs per annum. The company expected pre-tax return on investment @ 25%. Some other details are given as under:
Proposed Credit Policy
Average Collection Period (Days)
Expected annual Sales ( Lakhs)
SCOrE
9833088336
SCOrEBMS.com
I II III IV 30 40 50 60 65 70 74 75
Required: Which credit policy should the company adopt? (Assume 360 days in a year). Calculations should be made upto two digits after decimal. Q.4) Solution: Evaluation of credit proposal Particulars DCP (days) Sales (-) Variable cost (70%) Contribution (-) Fixed cost Profit (a)… Receivables VC + FC x DCP 360 Cost of AR Capital cost (Reci xROI) (b)… Net profit (a – b) Incremental NP Present Policy 20 60 42 18 8 10 42 + 8 x 20 360 = 2.78 2.78 x 25% = 0.70 9.30 Proposed Policy II III 40 50 70 74 49 51.8 21 22.2 8 8 13 14.2 = 6.33 = 1.58 11.42 2.12 = 8.31 = 2.08 12.12 2.82
I 30 65 45.5 19.5 8 11.5 = 4.46 4.46 x 25% = 1.12 10.38 1.08
IV 60 75 52.5 22.5 8 14.5 = 10.08 = 2.52 11.98 2.68
Recommendation: Select proposed policy III since it result into highest incremental net profit. i.e. 2.82 lakhs.
Q.5) From the following particulars, prepare income statement of A Ltd. and B Ltd. A Ltd. B Ltd. Degree of Combined Leverage 6 times 15 times Degree of Operating Leverage 3 times 5 times Variable Cost as a % of Sales 40% 50% Rate of Income Tax 35% 35% Number of Equity Shares 1,00,000 1,00,000 Earning Per Share 1.30 0.65 Q.5) Solution: A Ltd.
SCOrE
9833088336
SCOrEBMS.com
NPAT ? PD No. of Equity Shares NPAT ? 0 1.30 = 1,00,000 ? NPAT = 1,30,000
EPS =
?
% NPBT ? 100 (-) Tax ? 35 NPAT ? 65
? ? . 1,30,000
100 65
? NPBT = 1,30,000 x
= 2,00,000 ? DCL 6
?C
C PBT C = 2,00,000 = 12,00,000
=
?
DOL = 3
C PBIT 12,00,000 = PBIT
? PBIT = 4,00,000
?
% Sales ? 100 (-) VC ? 40 Contri ? 60
? ? . 12,00,000
100 60
? Sales = 12,00,000 ×
= 20,00,000 B Ltd. ? NPAT = = ? NPBT = 0.65 × 1,00,000 65,000 65,000 ×
100 65
SCOrE
9833088336
SCOrEBMS.com
= ? DCL 15
?C
1,00,000
C PBT C 1,00,000 15,00,000 C PBIT 15,00,000 PBIT 3,00,000
= = =
?
DOL = 5 =
? PBIT =
?
Sales = =
15,00,000 × 30,00,000
100 50
Income Statement for year ending-------Particulars Sales (-) VC * Contribution (-) FC * PBIT (-) Interest * NPBT (-) Tax * NPAT (a) Verification No. of Shares (b) (a ÷ b) ? EPS
A Ltd. 20,00,000 8,00,000 12,00,000 8,00,000 4,00,000 2,00,000 2,00,000 70,000 1,30,000 1,00,000 1.30
B Ltd. 30,00,000 15,00,000 15,00,000 12,00,000 3,00,000 2,00,000 1,00,000 35,000 65,000 1,00,000 0.65
* = bal. figure
************
SCOrE
9833088336
doc_478208868.pdf
tybms sem 5 FM board paper with solution nov 2011
SCOrEBMS.com
FM Nov. 2011 University Paper Solution
Q.1. b) i. A Project requires an investment of 60,000. The plant and machinery required under the project will have a scrap value of 3,000 at the end of its useful life of 5 years. The profits after tax and depreciation are estimated to be as follows: Year 1 5,000 2 15,000 3 20,000 4 30,000 5 20,000 Calculate the Accounting Rate of Return. Q. 1.b i) Solution: Year 1 2 3 4 5 Total NPAT
? Avg. NPAT = 18,000
NPAT 5,000 15,000 20,000 30,000 20,000 90,000
a) ARR based on Original Investment Avg . NPAT ? x 100 O. Inv. 18,000 ? x 100 60,000 = 30% b) Avg. Investment ?
O.C ? Scrap ? Scrap ? W . Cap. 2 60,000 ? 3,000 ? ? 3,000 ? 0 2 = 28,500 + 3,000 + 0 = 31,500
ARR based on Average Investment Avg . NPAT ? x 100 Avg . Inv.
SCOrE
9833088336
SCOrEBMS.com
18,000 x 100 31,500 = 57.14% ?
ii.
The Xavier Corporation, a dynamic growth firm which pays no dividends, anticipates a long run level of future earning of per shares. The current price of Xavier’s shares is 55.45, floatation costs for the sale of equity shares would average about 10% of the price of the shares. What is the cost of new equity capital to Xavier Corporation?
Q. 1.b ii) Solution: Xavier Corporation Before Floatation Cost EPS1 Ke ? x 100 P0 7 ? x 100 55.45 = 12.62% After Floatation Cost 12.62 Ke ? 1 ? Floatation Cost
12.62 1 ? 0.10 = 14.02% ?
iii.
Texas Manufacturing Company Ltd. is to start production on 1st January, 2012. The prime cost of a unit is expected to be 40 out of which 16 is for materials and 24 for labour. In addition variable expenses per unit are expected to be 8, and fixed cash expenses per month 30,000. Payment for materials is to be made in the month following the purchase. One-third of sales will be for cash and the rest on credit for settlement in the following month. Expenses are payable in the month in which they are incurred. The selling price is fixed at 80 per unit. The number of units manufactured and sold are expected to be as under: January 900 February 1,200 Draw up a statement showing requirements of cash for a month of February, ignoring the question of stocks.
SCOrE
9833088336
SCOrEBMS.com
Q. 1.b iii) Solution: Texas Manufacturing Company Requirement of Cash for month of February Particulars Cash Receipt 32,000 ? Cash Sales 48,000 ? Collection from debtor (a) 80,000 Cash Payment 14,400 ? Payment for materials 28,800 ? Labour 9,600 ? Variable expenses 30,000 ? Fixed cash expenses (b) 82,800 (b – a) 2,800 ? Cash requirement W.N.1) Cash Sale Feb = (1200 Units × 80) × = 32,000 W.N.2) Collection from debtor Jan Sale (900 × 80) (-) Cash Sale @ 1/3 Credit Sale of Jan Recd. = = = 72,000 24,000 48,000 1m Feb
1 3
W.N.3) Payment for Material Jan Purchase = 900 × 16 = 14,400 1m Paid W.N.4) Labour Feb: 1200 × 8 = 28,800 Feb
SCOrE
9833088336
SCOrEBMS.com
W.N.5) Variable Expenses Feb: 1200 × 8 = 9,600 Q.2) Suhail Enterprises Ltd. is a manufacturer of high quality running shoes. Ms. Dhinchak, President, is considering computerizing the company’s ordering, inventory and billing procedures. She estimates that the annual savings from computerization include a reduction of ten clerical employees with annual salaries of 15,000 each, 8,000 from reduced production delays caused by raw materials inventory problems, 12,000 from lost sales due to inventory stockouts and 3,000 associated with timely billing procedures. The purchase price of the system is 2,00,000 and installation costs are 50,000. These outlays will be capitalized (depreciated) on a straight line basis to a zero book (salvage) value which is also its market value at the end of five years. Operation of the new system requires two computer specialists with annual salaries of 40,000 per person. Also annual maintenance and operation (cash) expenses of 12,000 are estimated to be required. The company’s tax rate is 30% and its required rate of return (cost of capital) for this project is 12%. You are required to: a) Find the project’s initial net cash outlay. b) Find the project’s operating and terminal value cash flows over its 5 year life. c) Evaluate the project using NPV method. d) Evaluate the project using PI method. e) Evaluate project’s simple payback period. Note: i. Present value of annuity of 1 at 12% rate of discount for 5 years is 3.605. ii. Present value of 1 at 12% rate of discount, received at the end of 5 years is 0.567. Q.2 Solution: Calculation of Annual CIF Particulars
Clerk : 10 × 15,000 Delay reduction Inventory stock out reduction Billing procedure
1,50,000 8,000 12,000 3,000 (a) 1,73,000 80,000 12,000 92,000 81,000 50,000
Co. Specialist : 2 × 40,000 Annual maintenance
(b) NSBDT
? (2,00,000 ? 50,000 ? 0 ? (-) Depreciation ? ? 5 ? ?
SCOrE
9833088336
SCOrEBMS.com
NSBT (-) Tax @ 30% NSAT (+) Depreciation Annual CIF a) Project’s Initial Net Cash Outlay = 2,00,000 + 50,000 = 2,50,000 b) Operating Cash Flow = 71,700 p.a.
= 71,700 × 5 = 3,58,500
31,000 9,300 21,700 50,000 71,700
Terminal Cash Flow = 0 (? No scrap value & no working capital) c) Calculation of NPV Year CIF 1–5 71,700
? NPV
Annuity @ 12% 3.605 PVCIF – PVCOF 2,58,478.50 – 2,50,000 8,478.50
PVCIF 2,58,478.50
= = =
Evaluation Select the project ? NPV is positive d) Calculation of PI PVCIF PI = PVCOF 2,58,478.50 = 2,50,000 = 1.03 Evaluation Select the project ? PI is more than 1 e) Simple Pay back Period = = =
Initial Outlay Annual CIF 2,50,000 71,700 3.49 years
SCOrE
9833088336
SCOrEBMS.com
Q.3) Company X wishes to takeover Company Y. The financial details of the two companies are as under: Company X Company Y Equity Shares ( 10 per share) Security Premium Account Profit & Loss Account Preference Shares 10% Debentures Fixed Assets Net Current Assets Maintainable Annual Profit (after tax) for Equity Shareholders Market Price per equity share Price Earning Ratio 1,00,000 -38,000 20,000 15,000 1,73,000 1,22,000 51,000 1,73,000 24,000 24 10 50,000 2,000 4,000 5,000 61,000 35,000 26,000 61,000 15,000 27 9
What offer do you think Company X could make to Company Y in terms of exchange ratio, based on (i) Net assets value; (ii) Earning per share; and (iii) Market price per share? Which method would you prefer from Company X’s point of view? Q.3) Solution: i. Calculation of NPV Particulars Market Value of Asset F.A. Net C.A. (a) Agreed Value of OL 10 % Debenture Net asset for all SH (-) Payment to PSH Net asset for ESH No. of Equity Shares ? EPS ? Exchange ratio based on NPV NAV of T arg et Co. ? NAV pf Acq. Co. 11.2 ? 13.8 (b) (a – b) (a) (b) (a ÷ b) X 1,22,000 51,000 1,73,000 15,000 1,58,000 20,000 1,38,000 10,000 13.8 Y 35,000 26,000 61,000 5,000 56,000 56,000 5,000 11.2
SCOrE
9833088336
SCOrEBMS.com
= 0.81 Or 4 ? 5
ii.
EPS ?
X Y
PAT ? PD No. of Eqquity Shares 24,000 ? ? 2.4 10,000 15,000 ? ? 3 5,000
? Exchange ratio based on EPS EPS of T arg et Co. ? EPS of Acq. Co. 3 ? 2 .4 = 1.25 Or 5 ? 4
iii.
Exchange ratio based on MPS MPS of T arg et Co. ? MPS of Acq. Co. 27 ? 24 = 1.13 Or 9 ? 8 Method to be preferred from Company X’s point of view is the one with lowest exchange ratio i.e. (i) Net Asset Value.
Q.4) Jethalal Garments Ltd. manufactures readymade garments and sells them on credit basis through a network of dealers. Its present sale is 60 lakhs per annum with 20 days credit period. The Company is contemplating an increase in the credit period with a view to increase sales. Present variable costs are 70% of sales and the total fixed costs 8 lakhs per annum. The company expected pre-tax return on investment @ 25%. Some other details are given as under:
Proposed Credit Policy
Average Collection Period (Days)
Expected annual Sales ( Lakhs)
SCOrE
9833088336
SCOrEBMS.com
I II III IV 30 40 50 60 65 70 74 75
Required: Which credit policy should the company adopt? (Assume 360 days in a year). Calculations should be made upto two digits after decimal. Q.4) Solution: Evaluation of credit proposal Particulars DCP (days) Sales (-) Variable cost (70%) Contribution (-) Fixed cost Profit (a)… Receivables VC + FC x DCP 360 Cost of AR Capital cost (Reci xROI) (b)… Net profit (a – b) Incremental NP Present Policy 20 60 42 18 8 10 42 + 8 x 20 360 = 2.78 2.78 x 25% = 0.70 9.30 Proposed Policy II III 40 50 70 74 49 51.8 21 22.2 8 8 13 14.2 = 6.33 = 1.58 11.42 2.12 = 8.31 = 2.08 12.12 2.82
I 30 65 45.5 19.5 8 11.5 = 4.46 4.46 x 25% = 1.12 10.38 1.08
IV 60 75 52.5 22.5 8 14.5 = 10.08 = 2.52 11.98 2.68
Recommendation: Select proposed policy III since it result into highest incremental net profit. i.e. 2.82 lakhs.
Q.5) From the following particulars, prepare income statement of A Ltd. and B Ltd. A Ltd. B Ltd. Degree of Combined Leverage 6 times 15 times Degree of Operating Leverage 3 times 5 times Variable Cost as a % of Sales 40% 50% Rate of Income Tax 35% 35% Number of Equity Shares 1,00,000 1,00,000 Earning Per Share 1.30 0.65 Q.5) Solution: A Ltd.
SCOrE
9833088336
SCOrEBMS.com
NPAT ? PD No. of Equity Shares NPAT ? 0 1.30 = 1,00,000 ? NPAT = 1,30,000
EPS =
?
% NPBT ? 100 (-) Tax ? 35 NPAT ? 65
? ? . 1,30,000
100 65
? NPBT = 1,30,000 x
= 2,00,000 ? DCL 6
?C
C PBT C = 2,00,000 = 12,00,000
=
?
DOL = 3
C PBIT 12,00,000 = PBIT
? PBIT = 4,00,000
?
% Sales ? 100 (-) VC ? 40 Contri ? 60
? ? . 12,00,000
100 60
? Sales = 12,00,000 ×
= 20,00,000 B Ltd. ? NPAT = = ? NPBT = 0.65 × 1,00,000 65,000 65,000 ×
100 65
SCOrE
9833088336
SCOrEBMS.com
= ? DCL 15
?C
1,00,000
C PBT C 1,00,000 15,00,000 C PBIT 15,00,000 PBIT 3,00,000
= = =
?
DOL = 5 =
? PBIT =
?
Sales = =
15,00,000 × 30,00,000
100 50
Income Statement for year ending-------Particulars Sales (-) VC * Contribution (-) FC * PBIT (-) Interest * NPBT (-) Tax * NPAT (a) Verification No. of Shares (b) (a ÷ b) ? EPS
A Ltd. 20,00,000 8,00,000 12,00,000 8,00,000 4,00,000 2,00,000 2,00,000 70,000 1,30,000 1,00,000 1.30
B Ltd. 30,00,000 15,00,000 15,00,000 12,00,000 3,00,000 2,00,000 1,00,000 35,000 65,000 1,00,000 0.65
* = bal. figure
************
SCOrE
9833088336
doc_478208868.pdf