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Subject: Finance Management. Marks: 100
N.B.: 1) Attempt any Four cases
2) All questions carry equal marks.
NO. 1
COOKING LPG LTD
DETERMINATION OF WORKING CAPTIAL
Introduction
Cooking LPG Ltd, Gurgaon, is a priat! s!ctor "ir# d!a$ing in t%! &ott$ing
and supp$' o" do#!stic LPG "or %ous!%o$d consu#ption sinc! ())*+ T%!
"ir# %as a n!t,ork o" distri&utors in t%! districts o" Gurgaon and
Farida&ad+ T%! &ott$ing p$ant o" t%! "ir# is $ocat!d on Nationa$ -ig%,a' .
/ 0N!, D!$%i . 1aipur2, appro3+ (4 k#s "ro# Gurgaon+ T%! "ir# %as &!!n
consist!nt$' p!r"or#ing ,!+5 and p$ans to !3pand its #ark!t to inc$ud!
t%! ,%o$! Nationa$ Capita$ R!gion+
T%! production proc!ss o" t%! p$ant consists o" r!c!ipt o" t%! &u$k
LPG t%roug% tank trucks, storag! in tanks, &ott$ing op!rations and
distri&ution to d!a$!rs+ During t%! &ott$ing proc!ss, t%! c'$ind!rs ar!
su&6!ct!d to pr!ssuri7!d "i$$ing o" LPG "o$$o,!d &' 8ua$it' contro$ and
sa"!t' c%!cks suc% as ,!ig%t, $!akag! and ot%!r d!"!cts+ T%! c'$ind!rs
passing t%roug% t%is proc!ss ar! s!a$!d and dispatc%!d to d!a$!rs
t%roug% trucks+ T%! supp$' and distri&ution s!ction o" t%! p$ant pr!par!s
t%! inoic! ,%ic% go!s a$ong ,it% t%! truck to t%! distri&utor+
9tat!#!nt o" t%! Pro&$!# :
Mr+ I+ M+ 9#art, DGM0Financ!2 o" t%! co#pan', ,as ana$'7ing t%! "inancia$
p!r"or#anc! o" t%! co#pan' during t%! curr!nt '!ar+ T%! arious
pro"ita&i$it' ratios and para#!t!rs o" t%! co#pan' indicat!d a !r'
Subject: Finance Management. Marks: 100
satis"actor' p!r"or#anc!+ 9ti$$, Mr+ 9#art ,as not "u$$' cont!nt;sp!cia$$'
,it% t%! #anag!#!nt o" t%! ,orking capita$ &' t%! co#pan'+ -! cou$d
r!ca$$ t%at during t%! past '!ar, in spit! o" sta&$! d!#and patt!rn, t%!' %ad
to, ti#! and again, r!sort to &ank o!rdra"ts du! to non;aai$a&i$it' o"
cas% "or #aking arious pa'#!nts+ -! is a,ar! t%at suc% a&!rrations in
t%! "inanc!s %a! a cost and ad!rs!$' a""!cts t%! p!r"or#anc! o" t%!
co#pan'+ -o,!!r, %! ,as una&$! to pinpoint t%! caus! o" t%! pro&$!#+
-! discuss!d t%! pro&$!# ,it% Mr+ <+R+ K!!nku#ar, t%! n!,
#anag!r 0Financ!2+ A"t!r critica$$' !3a#ining t%! d!tai$s, Mr+ K!!nku#ar
r!a$i7!d t%at t%! ,orking capita$ ,as %it%!rto !sti#at!d on$' as
appro3i#ation &' so#! ru$! o" t%u#& ,it%out an' prop!r co#putation
&as!d on sound "inancia$ po$ici!s and, t%!r!"or!, sugg!st!d a r!,orking
o" t%! ,orking capita$ 0WC2 r!8uir!#!nt+ Mr+ 9#art assign!d t%! task o"
d!t!r#ination o" WC to %i#+
Pro"i$! o" Cooking LPG Ltd+
(2 Purc%as!s : T%! co#pan' purc%as!s LPG in &u$k "ro# arious
i#port!rs !3;Mu#&ai and Kand$a, = Rs+ ((,>>> p!r MT+ T%is is
transport!d to its ?ott$ing P$ant at Gurgaon t%roug% (* MT capacit'
tank trucks 0ca$$!d &u$$!ts2, %ir!d on annua$ contract &asis+ T%!
a!rag! transportation cost p!r &u$$!t !3;!it%!r $ocation is Rs+
@>,>>>+ Nor#a$$', 4 &u$$!ts p!r da' ar! r!c!i!d at t%! p$ant+ T%!
co#pan' #ak! pa'#!nts "or &u$k supp$i!s onc! in a #ont%,
r!su$ting in a!rag! ti#!;$ag o" (* da's+
42 9torag! and ?ott$ing : T%! &u$k storag! capacit' at t%! p$ant is (*>
MT 04 3 A* MT storag! tanks2 and t%! p$ant is capa&$! o" "i$$ing @> MT
LPG in c'$ind!rs p!r da'+ T%! p$ant op!rat!s "or 4* da's p!r #ont%
Subject: Finance Management. Marks: 100
on an a!rag!+ T%! d!sir!d $!!$ o" in!ntor' at arious stag!s is as
und!r+
• LPG in &u$k 0tanks and pip!$in! 8uantit' in t%! p$ant2 . t%r!! da's
a!rag! production B sa$!s+
• Fi$$!d C'$ind!rs . 4 da's a!rag! sa$!s+
• Work;in Proc!ss in!ntor' . 7!ro+
@2 Mark!ting : T%! LPG is supp$i!d &' t%! co#pan' in (4 kg c'$ind!rs,
inoic!d = Rs+ 4*> p!r c'$ind!r+ T%! rat! o" app$ica&$! sa$!s ta3 on
t%! inoic! is C p!r c!nt+ A co##ission o" Rs+ (* p!r c'$ind!r is paid
to t%! distri&utor on t%! inoic! its!$"+ T%! "i$$!d c'$ind!rs ar!
d!$i!r!d on co#pan'Ds !3p!ns! at t%! distri&utorDs godo,n, in
!3c%ang! o" !8ua$ nu#&!r o" !#pt' c'$ind!rs+ T%! d!$i!ri!s ar!
#ad! in truck;$oads on$', t%! capacit' o" !ac% truck &!ing 4*>
c'$ind!rs+ T%! distri&utors ar! r!8uir!d to pa' "or d!$i!ri!s t%roug%
&ank dra"t+ On r!c!ipt o" t%! dra"t, t%! c'$ind!rs ar! nor#a$$'
dispatc%!d on t%! sa#! da'+ -o,!!r, "or !!r' truck purc%as!d on
pr!;paid &asis, t%! co#pan' !3t!nds a cr!dit o" A da's to t%!
distri&utors on on! truck;$oad+
C2 9a$ari!s and Wag!s : T%! "o$$o,ing pa'#!nts ar! #ad! :
• Dir!ct $a&our . R!+ >+A* p!r c'$ind!r 0?ott$ing !3p!ns!s2 . paid on
$ast da' o" t%! #ont%+
• 9!curit' ag!nc' . Rs+ @>,>>> p!r #ont% paid on (>
t%
o" su&s!8u!nt
#ont%+
• Ad#inistrati! sta"" and #anag!rs . Rs+ @+A* $ak% p!r annu#, paid
on #ont%$' &asis on t%! $ast ,orking da'+
*2 O!r%!ads :
Subject: Finance Management. Marks: 100
• Ad#inistrati! 0sta"", car, co##unication !tc2 . Rs+ 4*,>>> p!r #ont%
. paid on t%! (>
t%
o" su&s!8u!nt #ont%+
• Po,!r 0inc$uding on DG s!t2 . Rs+ (,>>,>>> p!r #ont% paid on t%! A
t%
9u&s!8u!nt #ont%+
• R!n!,a$ o" arious $ic!ns!s 0po$$ution, "actor', $a&our CCE !tc+2 .
Rs+ (*,>>> p!r annu# paid at t%! &!ginning o" t%! '!ar+
• Insuranc! . Rs+ *,>>,>>> p!r annu# to &! paid at t%! &!ginning o"
t%! '!ar+
• -ous!k!!ping !tc . Rs+ (>,>>> p!r #ont% paid on t%! (>
t%
o" t%!
su&s!8u!nt #ont%+
• R!gu$ar #aint!nanc! o" p$ant . Rs+ *>,>>> p!r #ont% paid on t%! (>
t%
o" !!r' #ont% to t%! !ndors+ T%is inc$ud!s !3p!nditur! on
account o" $u&ricants, spar!s and ot%!r stor!s+
• R!gu$ar #aint!nanc! o" c'$ind!rs 0statutor' t!sting2 . Rs+ * $ak% p!r
annu# . paid on #ont%$' &asis on t%! (*
t%
o" t%! su&s!8u!nt #ont%+
• A$$ transportation c%arg!s as p!r contracts . paid on t%! (>
t%
su&s!8u!nt #ont%+
• 9a$!s ta3 as p!r app$ica&$! rat!s is d!posit!d on t%! A
t%
o" t%!
su&s!8u!nt #ont%+
E2 9a$!s : A!rag! sa$!s ar! 4,*>> c'$ind!rs p!r da' during t%! '!ar+
-o,!!r, during t%! ,int!r #ont%s 0D!c!#&!r to F!&ruar'2, t%!r! is an
incr!#!nta$ d!#and o" 4> p!r c!nt+
A2 A!rag! In!ntori!s : T%! a!rag! stocks #aintain!d &' t%! co#pan'
as p!r its po$ic' guid!$in!s :
• Consu#a&$!s 0caps, c!i$ing #at!ria$, a$!s !tc2 . Rs+ 4 $ak%+ T%is
a#ounts to (* da's consu#ption+
Subject: Finance Management. Marks: 100
• Maint!nanc! spar!s . Rs+ ( $ak%
• Lu&ricants . Rs+ 4>,>>>
• Di!s!$ 0"or DG s!ts and "ir! !ngin!s2 . Rs+ (*,>>>
• Ot%!r stor!s 0stationar', sa"!t' it!#s2 . Rs+ 4>,>>>
/2 Mini#u# cas% &a$anc! inc$uding &ank &a$anc! r!8uir!d is Rs+ * $ak%+
)2 Additiona$ In"or#ation "or Ca$cu$ating Incr!#!nta$ Working Capita$
During Wint!r+
• No incr!as! in an' in!ntori!s tak! p$ac! !3c!pt in t%! in!ntor' o"
&u$k LPG, ,%ic% incr!as!s in t%! sa#! proportion as t%! incr!as! o"
t%! d!#and+ T%! actua$ r!8uir!#!nts o" LPG "or additiona$ supp$i!s
ar! procur!d und!r t%! sa#! t!r#s and conditions "ro# t%!
supp$i!rs+
• T%! $a&our cost "or additiona$ production is paid at dou&$! t%! rat!
during ,int!s+
• No c%ang!s in ot%!r ad#inistrati! o!r%!ads+
• T%! !3p!nditur! on po,!r consu#ption during ,int!r incr!as!d &'
(> p!r c!nt+ -o,!!r, during ot%!r #ont%s t%! po,!r consu#ption
r!#ains t%! sa#! as t%! d!cr!as! o,ing to r!duc!d production is
o""s!t &' incr!as!d consu#ption on account o" co#pr!ssors BAcs+
• Additiona$ a#ount o" Rs+ @ $ak% is k!pt as cas% &a$anc! to #!!t
!3ig!nci!s during ,int!r+
• No c%ang! in ti#! sc%!du$!s "or an' pa'a&$!s B r!c!ia&$!s+
• T%! storag! o" "inis%!d goods in!ntor' is r!strict!d to a #a3i#u#
*,>>> c'$ind!rs du! to statutor' r!8uir!#!nts+
Subject: Finance Management. Marks: 100
9uppos! 'ou ar! Mr+K!!n Ku#ar, t%! n!, #anag!r+ W%at st!ps ,i$$ 'ou
tak! "or t%! gro,t% o" Cooking LPG Ltd+F
NO+ 4
MB9 -I;TEC- ELECTRONIC9
MBs+ -i . t!c% E$!ctronics, a consu#!r !$!ctronics out$!t, ,as op!n!d t,o
'!ars ago in D,arka, N!, D!$%i+ -ard ,ork and p!rsona$ att!ntion s%o,n
&' t%! propri!tor, Mr+ 9on', %as &roug%t succ!ss+ -o,!!r, &!caus! o"
insu""ici!nt "unds to "inanc! cr!dit sa$!s, t%! out$!t acc!pt!d on$' cas%
and &ank cr!dit cards+ Mr+ 9on' is no, consid!ring a n!, po$ic' o"
o""!ring insta$$#!nt sa$!s on t!r#s o" 4* p!r c!nt do,n pa'#!nt and 4*
p!r c!nt p!r #ont% "or t%r!! #ont%s as ,!$$ as continuing to acc!pt cas%
and &ank cr!dit cards+
Mr+ 9on' "!!$s t%is po$ic' ,i$$ &oost sa$!s &' *> p!rc!nt+ A$$ t%!
incr!as!s in sa$!s ,i$$ &! cr!dit sa$!s+ ?ut to "o$$o, t%roug% a n!, po$ic',
%! ,i$$ n!!d a &ank $oan at t%! rat! o" (4 p!rc!nt+ T%! sa$!s pro6!ctions
"or t%is '!ar ,it%out t%! n!, po$ic' ar! gi!n in E3%i&it (+
E3%i&it ( 9a$!s Pro6!ctions and Fi3!d costs
Subject: Finance Management. Marks: 100
Mont% Pro6!ct!d sa$!s ,it%out
insta$#!nt option
Pro6!ct!d sa$!s ,it%
insta$#!nt option
1anuar' Rs+ E,>>,>>> Rs+ ),>>,>>>
F!&ruar' C,>>,>>> E,>>,>>>
Marc% @,>>,>>> C,*>,>>>
Apri$ 4,>>,>>> @,>>,>>>
Ma' 4,>>,>>> @,>>,>>>
1un! (,*>,>>> 4,4*,>>>
1u$' (,*>,>>> 4,4*,>>>
August 4,>>,>>> @,>>,>>>
9!pt!#&!r @,>>,>>> C,*>,>>>
Octo&!r *,>>,>>> A,*>,>>>
No!#&!r *,>>,>>> (*,>>,>>>
D!c!#&!r /,>>,>>> (4,>>,>>>
Tota$ 9a$!s C/,>>,>>> A4,>>,>>>
Fi3!d cost 4,C>,>>> 4,C>,>>>
-! "urt%!r !3p!cts 4E+EA p!r c!nt o" t%! sa$!s to &! cas%, C> p!r c!nt &ank
cr!dit card sa$!s on ,%ic% a 4 p!r c!nt "!! is paid, and @@+@@ p!r c!nt on
insta$#!nt sa$!s+ A$so, "or s%ort t!r# s!asona$ r!8uir!#!nts, t%! "i$#
tak!s $oan "ro# c%it "und to ,%ic% Mr+ 9on' su&scri&!s = (+/ p!r c!nt p!r
#ont%+
T%!ir succ!ss %as &!!n du! to t%!ir po$ic' o" s!$$ing at discount
pric!+ T%! purc%as! p!r unit is )> p!r c!nt o" s!$$ing pric!+ T%! "i3!d
costs ar! Rs+ 4>,>>> p!r #ont%+ T%! propri!tor &!$i!!s t%at t%! n!,
po$ic' ,i$$ incr!as! #isc!$$an!ous cost &' Rs+ 4*,>>>+
T%! &usin!ss &!ing c'c$ica$ in natur!, t%! ,orking capita$ "inanc! is
don! on trad! . o"" &asis+ T%! propri!tor "!!$s t%at t%! n!, po$ic' ,i$$
$!ad to &ad d!&ts o" ( p!r c!nt+
0a2 As a "inancia$ consu$tant, adis! t%! propri!tor ,%!t%!r %! s%ou$d go
"or t%! !3t!nsion o" cr!dit "aci$iti!s+
Subject: Finance Management. Marks: 100
0&2 A$so pr!par! cas% &udg!t "or on! '!ar o" op!ration o" t%! "ir#,
ignoring int!r!st+ T%! #ini#u# d!sir!d cas% &a$anc! G Rs+ @>,>>>,
,%ic% is a$so t%! a#ount t%! "ir# %as on 1anuar' (+ ?orro,ings ar!
possi&$! ,%ic% ar! #ad! at t%! &!ginning o" a #ont% and r!paid at
t%! !nd ,%!n cas% is aai$a&$!+
NO+@
9MOOT-DRIHE TIRE LTD
Subject: Finance Management. Marks: 100
9#oot%dri! T'r! Ltd #anu"actur!rs t'r!s und!r t%! &rand na#! J9up!r
Tr!adD "or t%! do#!stic car #ark!t+ It is pr!s!nt$' using A #ac%in!s
ac8uir!d @ '!ars ago at a cost o" Rs+ (* $ak% !ac% %aing a us!"u$ $i"! o" A
'!ars, ,it% no sa$ag! a$u!+
A"t!r !3t!nsi! r!s!arc% and d!!$op#!nt, 9#oot%dri! T'r! Ltd
%as r!c!nt$' d!!$op!d a n!, t'r!, t%! K-'p!r Tr!adD and #ust d!cid!
,%!t%!r to #ak! t%! in!st#!nts n!c!ssar' to produc! and #ark!t t%!
-'p!r Tr!ad+ T%! -'p!r Tr!ad ,ou$d &! id!a$ "or dri!rs doing a $arg!
a#ount o" ,!t ,!at%!r and o"" road driing in addition to nor#a$ %ig%,a'
usag!+ T%! r!s!arc% and d!!$op#!nt costs so "ar tota$ Rs+ (,>>,>>,>>>+
T%! -'p!r Tr!ad ,ou$d &! put on t%! #ark!t &!ginning t%is '!ar and
9#oot%dri! T'rs !3p!cts it to sta' on t%! #ark!t "or a tota$ o" t%r!!
'!ars+ T!st #ark!ting costing Rs+ *>,>>,>>>, s%o,s t%at t%!r! is
signi"icant #ark!t "or a -'p!r Tr!ad t'p! t'r!+
As a "inancia$ ana$'st at 9#oot%dri! T'r!, Mr+ Mani ask!d &' t%!
C%i!" Financia$ O""ic!r 0CFO2, Mr+ T'r!,a$a to !a$uat! t%! -'p!r;Tr!ad
pro6!ct and to proid! a r!co##!ndation or ,%!t%!r or not to proc!!d
,it% t%! in!st#!nt+ -! %as &!!n in"or#!d t%at a$$ pr!ious in!st#!nts
in t%! -'p!r Tr!ad pro6!ct ar! sunk costs ar! on$' "utur! cas% "$o,s
s%ou$d &! consid!r!d+ E3c!pt "or t%! initia$ in!st#!nts, ,%ic% occur
i##!diat!$', assu#! a$$ cas% "$o,s occur at t%! '!ar;!nd+
9#oot%!dri! T'r! #ust initia$$' in!st Rs+ A4,>>,>>,>>> in
production !8uip#!nts to #ak! t%! -'p!r Tr!ad+ T%!' ,ou$d &!
d!pr!ciat!d at a rat! o" 4* p!r c!nt as p!r t%! ,ritt!n do,n a$u! 0WDH2
#!t%od "or ta3 purpos!s+ T%! n!, production !8uip#!nts ,i$$ a$$o, t%!
co#pan' to "o$$o, "$!3i&$! #anu"acturing t!c%ni8u!, t%at is &ot% t%!
&rands o" t'r!s can &! produc!d using t%! sa#! !8uip#!nts+ T%!
Subject: Finance Management. Marks: 100
!8uip#!nts is !3p!ct!d to %a! a A;'!ar us!"u$ $i"! and can &! so$d "or Rs+
(>,>>,>>> during t%! "ourt% '!ar+ T%! co#pan' do!s not %a! an' ot%!r
#ac%in!s in t%! &$ock o" 4* p!r c!nt d!pr!ciation+ T%! !3isting #ac%in!s
can &! so$d o"" at Rs+ / $ak% p!r #ac%in! ,it% an !sti#at!d r!#oa$ cost
o" on! #ac%in! "or Rs+ *>,>>>+
Op!rating R!8uir!#!nts
T%! op!rating r!8uir!#!nts o" t%! !3isting #ac%in!s and t%! n!,
!8uip#!nt ar! d!tai$!d in E3%i&its ((+( and ((+4 r!sp!cti!$'+
E3%i&it ((+( E3isting Mac%in!s
• La&our costs 0!3p!ct!d to incr!as! (> p!r c!nt annua$$' to account
"or in"$ation2 :
0a2 4> unski$$!d $a&our = Rs+ C,>>> p!r #ont%
0&2 4> ski$$!d p!rsonn!$ = Rs+ E,>>> p!r #ont%+
0c2 4 sup!rising !3!cuti!s = Rs+ A,>>> p!r #ont%+
0d2 4 #aint!nanc! p!rsonn!$ = Rs+ *,>>> p!r #ont%+
• Maint!nanc! cost :
I!ars (;* : Rs+ 4* $ak%
I!ars E;A : Rs+ E* $ak%
• Op!rating !3p!ns!s : Rs+ *> $ak% !3p!ct!d to incr!as! at * p!r c!nt
annua$$'+
• Insuranc! cost B pr!#iu# :
I!ar ( : 4 p!r c!nt o" t%! origina$ cost o" #ac%in!
A"t!r '!ar ( : Discount!d &' (> p!r c!nt+
E3%i&it ((+4 N!, production E8uip#!nt
• 9aings in cost o" uti$iti!s : Rs+ 4+* $ak%
Subject: Finance Management. Marks: 100
• Maint!nanc! costs :
I!ar ( . 4 : Rs+ / $ak%
I!ar @ . C : Rs+ @> $ak%
• La&our costs :
) ski$$!d p!rsonn!$ = Rs+ A,>>> p!r #ont%
( #aint!nanc! p!rsonn!$ = Rs+ A,>>> p!r #ont%+
• Cost o" r!tr!nc%#!nt o" @C p!rsonn!$ : 04> unski$$!d, (( ski$$!d, 4
sup!risors and ( #aint!nanc! p!rsonn!$2 : Rs+ ),)>,>>>, t%at is
!8uia$!nt to si3 #ont%s sa$ar'+
• Insuranc! pr!#iu#
I!ar ( : 4 p!r c!nt o" t%! purc%as! cost o" #ac%in!
A"t!r '!ar ( : Discount!d &' (> p!r c!nt+
T%! op!ning !3p!ns!s do not c%ang! to an' consid!ra&$! !3t!nt "or
t%! n!, !8uip#!nt and t%! di""!r!nc! is n!g$igi&$! co#par!d to t%! sca$!
o" op!rations+
9#oot%dri! T'r! int!nds to s!$$ -'p!r Tr!ad o" t,o distinct #ark!ts :
(+ T%! origina$ !8uip#!nt #anu"actur!r 0OEM2 #ark!t : T%! OEM
#ark!t consists pri#ari$' o" t%! $arg! auto#o&i$! co#pani!s ,%o
&u' t'r!s "or n!, cars+ In t%! OEM #ark!t, t%! -'p!r Tr!ad is
!3p!ct!d to s!$$ "or Rs+ (,4>> p!r t'r!+ T%! aria&$! cost to produc!
!ac% -'p!r Tr!ad is Rs+ E>>+
4+ T%! r!p$ac!#!nt #ark!t : T%! r!p$ac!#!nt #ark!t consists o" a$$
t'r!s purc%as!d a"t!r t%! auto#o&i$! %as $!"t t%! "actor'+ T%is
#ark!ts a$$o,s %ig%!r #argins and 9#oot%dri! T'r! !3p!cts to s!$$
t%! -'p!r Tr!ad "or Rs+ (+*>> p!r t'r!+ T%! aria&$! costs ar! t%!
sa#! as in t%! OEM #ark!t+
Subject: Finance Management. Marks: 100
9#oot%dri! T'r! !3p!cts to rais! pric!s &' ( p!rc!nt a&o! t%!
in"$ation rat!+
T%! aria&$! costs ,i$$ a$so incr!as! &' ( p!r c!nt a&o! t%! in"$ation rat!+
In addition, t%! -'p!r Tr!ad pro6!ct ,i$$ incur Rs+ 4,*>,>>> in #ark!ting
and g!n!ra$ ad#inistration cost in t%! "irst '!ar ,%ic% ar! !3p!ct!d to
incr!as! at t%! in"$ation rat! in su&s!8u!nt '!ars+
9#oot%dri! T'r!Ds corporat! ta3 rat! is @* p!r c!nt+ Annua$
in"$ation is !3p!ct!d to r!#ain constant at @+4* p!r c!nt+ 9#oot%dri!
T'r! us!s a (* p!r c!nt discount rat! to !a$uat! n!, product d!cisions+
T%! T'r! Mark!t
Auto#oti! industr' ana$'sts !3p!ct auto#o&i$! #anu"actur!rs to %a! a
production o" C,>>,>>> n!, cars t%is '!ar and gro,t% in production at 4+*
p!r '!ar on,ards+ Eac% n!, car n!!ds "our n!, t'r!s 0t%! spar! t'r!s ar!
und!rsi7!d and "a$$ in a di""!r!nt cat!gor'2 9#oot%dri! T'r! !3p!cts t%!
-'p!r Tr!ad to captur! an (( p!r c!nt s%ar! o" t%! OEM #ark!t+
T%! industr' ana$'sts !sti#at! t%at t%! r!p$ac!#!nt t'r! #ark!t si7!
,i$$ &! on! cror! t%is '!ar and t%at it ,ou$d gro, at 4 p!r c!nt annua$$'+
9#oot%dri! T'r! !3p!cts t%! -'p!r Tr!ad to captur! an / p!r c!nt #ark!t
s%ar!+
Iou a$so d!cid! to consid!r n!t ,orking capita$ 0NWC2 r!8uir!#!nts
in t%is sc!nario+ T%! n!t ,orking capita$ r!8uir!#!nt ,i$$ &! (* p!r c!nt o"
sa$!s+ Assu#! t%at t%! $!!$ o" ,orking capita$ is ad6ust!d at t%!
&!ginning o" t%! '!ar in r!$ation to t%! !3p!ct!d sa$!s "or t%! '!ar+ T%!
,orking capita$ is to &! $i8uidat!d at par, &arring an !sti#at!d $oss o" Rs+
(+* cror! on account o" &ad d!&t+ T%! &ad d!&t ,i$$ &! a ta3;d!ducti&$!
!3p!ns!s+
Subject: Finance Management. Marks: 100
As a "inanc! ana$'st, pr!par! a r!port "or su&#ission to t%! CFO and
t%! ?oard o" Dir!ctors, !3p$aining to t%!# t%! "!asi&i$it' o" t%! n!,
in!st#!nt+
No+ C
COMP<TATION OF CO9T OF CAPITAL OF PALCO LTD
In Octo&!r 4>>@, N!%a Kapoor, a r!c!nt M?A graduat! and n!,$'
appoint!d assistant to t%! Financia$ Contro$$!r o" Pa$co Ltd, ,as gi!n a
$ist o" si3 n!, in!st#!nt pro6!cts propos!d "or t%! "o$$o,ing '!ar+ It ,as
%!r 6o& to ana$'s! t%!s! pro6!cts and to pr!s!nt %!r "indings &!"or! t%!
?oard o" Dir!ctors at its annua$ #!!ting to &! %!$d in (> da's+ T%! n!,
pro6!ct ,ou$d r!8uir! an in!st#!nt o" Rs+ 4+C cror!+
Pa$co Ltd ,as "ound!d in ()E* &' Lat! 9%ri A+ H+ 9in%a+ It gain!d
r!cognition as a $!ading produc!r o" %ig% 8ua$it' a$u#inu#, ,it% t%!
#a6orit' o" its sa$!s &!ing #ad! to 1apan+ During t%! rapid !cono#ic
!3pansion o" 1apan in t%! ()A>s, d!#and "or a$u#inu# &oo#!d, and
pa$coDs sa$!s gr!, rapid$'+ As a r!su$t o" t%is rapid gro,t% and
r!cognition o" n!, opportuniti!s in t%! !n!rg' #ark!t, Pa$co &!gan to
di!rsi"' its products $in!+ W%i$! r!taining its !#p%asis on a$u#inu#
production, it !3pand!d op!rations to inc$ud! uraniu# #ining and t%!
production o" !$!ctric g!n!rators, and "ina$$', it ,!nt into a$$ p%as!s o"
!n!rg' production+ ?' 4>>@, Pa$coDs sa$!s %ad r!ac%!d Rs+ (C cror! $!!$,
,it% n!t pro"it a"t!r ta3!s attaining a r!cord o" Rs+ EA $ak%+
As Pa$co !3pand!d its products $in! in t%! !ar$' ())>s, it a$so
"or#a$i7!d its caita$ &udg!ting proc!dur!+ <nti$ ())4, capita$ in!st#!nt
pro6!cts ,!r! s!$!ct!d pri#ari$' on t%! &asis o" t%! a!rag! r!turn on
Subject: Finance Management. Marks: 100
in!st#!nt ca$cu$ations, ,it% indiidua$ d!part#!nts su&#itting t%!s!
ca$cu$ations "or pro6!cts "a$$ing ,it%in t%!ir diision+ In ())E, t%is
proc!dur! ,as r!p$ac!d &' on! using pr!s!nt a$u! as t%! d!cision
#aking crit!rion+ T%is c%ang! ,as #ad! to incorporat! cas% "$o,s rat%!r
t%an accounting pro"its into t%! d!cision #aking ana$'sis, in addition to
ad6usting t%!s! "$o,s "or t%! ti#! a$u! o" #on!'+ At t%! ti#!, t%! cost o"
capita$ "or Pa$co ,as d!t!r#in!d to &! (4 p!r c!nt, ,%ic% %as &!!n us!d
as t%! discount rat! "or t%! past * '!ars+ T%is rat! ,as d!t!r#in!d &'
taking a ,!ig%t!d a!rag! cost Pa$co %ad incurr!d in raising "unds "ro#
t%! capita$ #ark!t o!r t%! pr!ious (> '!ars+
It %ad origina$$' &!!n N!%aDs assign#!nt to updat! t%is rat! o!r t%!
#ost r!c!nt (>;'!ar p!riod and d!t!r#in! t%! n!t pr!s!nt a$u! o" a$$ t%!
propos!d in!st#!nt opportuniti!s using t%is n!,$' ca$cu$at!d "igur!+
-o,!!r, s%! o&6!ct!d to t%is proc!dur!, stating t%at ,%i$! t%is
ca$cu$ation ga! a good !sti#at! o" Jt%! past cost5 o" capita$, c%anging
int!r!st rat!s and stock pric!s #ad! t%is ca$cu$ation o" $itt$! a$u! in t%!
pr!s!nt+ N!%a sugg!st!d t%at curr!nt cost o" raising "unds in t%! capita$
#ark!t &! ,!ig%t!d &' t%!ir p!rc!ntag! #ark;up o" t%! capita$ structur!+
T%is proposa$ ,as r!c!i!d !nt%usiastica$$' &' t%! Financia$ Contro$$!r o"
t%! Pa$co, and N!%a ,as gi!n t%! assign#!nt o" r!ca$cu$ating Pa$coDs
cost o" capita$ and proiding a ,ritt!n r!port "or t%! ?oard o" Dir!ctors
!3p$aining and 6usti"'ing t%is ca$cu$ation+
To d!t!r#in! a ,!ig%t!d a!rag! cost o" capita$ "or Pa$co, it ,as
n!c!ssar' "or N!%a to !3a#in! t%! cost associat!d ,it% !ac% sourc! o"
"unding us!d+ In t%! past, t%! $arg!st sourc!s o" "unding %ad &!!n t%!
issuanc! o" n!, !8uit' s%ar!s and int!rna$$' g!n!rat!d "unds+ T%roug%
con!rsations ,it% Financia$ Contro$$!r and ot%!r #!#&!rs o" t%! ?oard
Subject: Finance Management. Marks: 100
o" Dir!ctors, N!%a $!arnt t%at t%! "ir#, in "act, ,is%!d to #aintain its
curr!nt "inancia$ structur! as s%o,n in E3%i&it (+
E3%i&it ( Pa$co Ltd ?a$anc! 9%!!t "or I!ar Ending Marc% @(, 4>>@
Ass!ts Lia&i$iti!s and E8uit'
Cas%
Accounts
r!c!ia&$!
In!ntori!s
Tota$ curr!nt
ass!ts
N!t "i3!d ass!ts
Good,i$$
Tota$ ass!ts
Rs+
)>,>>,>>>
@,(>,>>,>>
>
(,4>,>>,>>
>
*,4>,>>,>>
>
(),@>,>>,>>
>
A>,>>,>>
>
4*,4>,>>,>>
>
Accounts
pa'a&$!
9%ort;t!r# d!&t
Accru!d ta3!s
Tota$ curr!nt
$ia&i$iti!s
Long;t!r# d!&t
Pr!"!r!nc!
s%ar!s
R!tain!d
!arnings
E8uit' s%ar!s
Tota$ $ia&i$iti!s
and !8uit'
s%ar!%o$d!rs
"und
Rs+ /,*>,>>>
(,>>,>>>
((,*>,>>>
(,4>,>>,>>>
A,4>,>>,>>>
C,/>,>>,>>>
(,>>,>>,>>>
((,>>,>>>
4*,4>,>>,>>>
9%! "urt%!r d!t!r#in!d t%at t%! strong gro,t% patt!rns t%at Pa$co %ad
!3%i&it!d o!r t%! $ast t!n '!ars ,!r! !3p!ct!d to continu! ind!"init!$'
&!caus! o" t%! d,ind$ing supp$' o" <9 and 1apan!s! do#!stic oi$ and t%!
gro,ing i#portanc! o" ot%!r a$t!rnati! !n!rg' r!sourc!s+ T%roug%
"urt%!r in!stigations, N!%a $!arnt t%at Pa$co cou$d issu! additiona$ !8uit'
s%ar!, ,%ic% %ad a par a$u! o" Rs+ 4* pr! s%ar! and ,!r! s!$$ing at a
curr!nt #ark!t pric! o" Rs+ C*+ T%! !3p!ct!d diid!nd "or t%! n!3t p!riod
,ou$d &! Rs+ C+C p!r s%ar!, ,it% !3p!ct!d gro,t% at a rat! o" / p!rc!nt p!r
'!ar "or t%! "or!s!!a&$! "utur!+ T%! "$otation cost is !3p!ct!d to &! on an
a!rag! Rs+ 4 p!r s%ar!+
Subject: Finance Management. Marks: 100
Pr!"!r!nc! s%ar!s at (( p!r c!nt ,it% (> '!ars #aturit' cou$d a$so &!
issu!d ,it% t%! %!$p o" an in!st#!nt &ank!r ,it% an in!st#!nt &ank!r
,it% a p!r a$u! o" Rs+ (>> p!r s%ar! to &! r!d!!#!d at par+ T%is issu!
,ou$d ino$! "$otation cost o" * p!r c!nt+
Fina$$', N!%a $!arnt t%at it ,ou$d &! possi&$! "or Pa$co to rais! an
additiona$ Rs+ 4> $ak% t%roug% a A . '!ar $oan "ro# Pun6a& Nationa$ ?ank
at (4 p!r c!nt+ An' a#ount rais!d o!r Rs+ 4> $ak% ,ou$d cost (C p!r c!nt+
9%ort;t!r# d!&t %as a$,a's &!!n us!sd &' Pa$co to #!!t ,orking capita$
r!8uir!#!nts and as Pa$co gro,s, it is !3p!ct!d to #aintain its proportion
in t%! capita$ structur! to support capita$ !3pansion+ A$so, Rs+ E> $ak%
cou$d &! rais!d t%roug% a &ond issu! ,it% (> '!ars #aturit' ,it% a ((
p!rc!nt coupon at t%! "ac! a$u!+ I" it &!co#!s n!c!ssar' to rais! #or!
"unds ia $ong;t!r# d!&t, Rs+ @> $ak% #or! cou$d &! accu#u$at!d t%roug%
t%! issuanc! o" additiona$ (>;'!ar &onds so$d at t%! "ac! a$u!, ,it% t%!
coupon rat! rais!d to (4 p!r c!nt, ,%i$! an' additiona$ "unds rais!d ia
$ong;t!r# d!&t ,ou$d n!c!ssari$' %a! a (> . '!ar #aturit' ,it% a (C p!r
c!nt coupon 'i!$d+ T%! "$otation cost o" issu! is !3p!ct!d to &! * p!r c!nt+
T%! issu! pric! o" &ond ,ou$d &! Rs+ (>> to &! r!d!!#!d at par+
In t%! past, Pa$co %ad ca$cu$at!d a ,!ig%t!d a!rag! o" t%!s!
sourc!s o" "unds to d!t!r#in! its cost o" capita$+ In discussion ,it% t%!
curr!nt Financia$ Contro$$!r, t%! point ,as rais!d t%at ,%i$! t%is s!r!d as
an appropriat! ca$cu$ation "or !3t!rna$ "unds, it did not tak! into account
t%! cost o" int!rna$$' g!n!rat!d "unds+ T%! Financia$ Contro$$!r agr!!d
t%at t%!r! s%ou$d &! so#! cost associat!d ,it% r!tain!d !arnings and
n!!d to &! incorporat!d in t%! ca$cu$ations &ut didnDt %a! an' c$u! as to
,%at s%ou$d &! t%! cost+
Pa$co Ltd is su&6!ct!d to t%! corporat! ta3 rat! o" C> p!r c!nt+
Subject: Finance Management. Marks: 100
Fro# t%! "acts out$in!d a&o!, ,%at r!port ,ou$d N!%a su&#it to t%!
?oard o" Dir!ctors o" pa$co Ltd F
NO+ *
ARL LTD
ARL Ltd is an Indian co#pan' &as!d in Gr!at!r Noida, ,%ic%
#anu"actur!s packaging #at!ria$s "or "ood it!#s+ T%! co#pan'
#aintains a pr!s!nt "$!!t o" "i! "iat cars and t,o Cont!ssa C$assic cars
"or its c%air#an, g!n!ra$ #anag!r and "i! s!nior #anag!rs+ T%! &ook
a$u! o" t%! s!!n cars is Rs+ 4>,>>,>>> and t%!ir #ark!t a$u! is
!sti#at!d at Rs+ (*,>>,>>>+ A$$ t%! cars "a$$ und!r t%! sa#! &$ock o"
d!pr!ciation = 4* p!r c!nt+
A G!r#an #u$tinationa$ co#pan' 0MNC2 ?IR Ltd, %as ac8uir!d ARL
Ltd in a$$ cas% d!a$+ T%! #!rg!d co#pan' ca$$!d ?IR India Ltd is
proposing to !3pand t%! #anu"acturing capacit' &' "our "o$ds and t%!
organi7ation structur! is r!organi7!d "ro# top to &otto#+ T%! G!r#an
MNC %as t%! po$ic' o" proiding transport "aci$it' to a$$ s!nior !3!cuti!s
0442 o" t%! co#pan' &!caus! t%! #anu"acturing p$ant at Gr!at!r Noida
,as #or! t%an (> k#s outsid! D!$%i ,%!r! #ost o" t%! !3!cuti!s ,!r!
sta'ing+
Pric!s o" t%! cars to &! proid!d to t%! E3!cuti!s %a! &!!n as "o$$o,s :
Subject: Finance Management. Marks: 100
Manag!r 0(>2 9antro King Rs+ @,A*,>>>
DGM and GM 0*2 -onda Cit' E,A*,>>>
Dir!ctor 0*2 To'ota Coro$$a ),4*,>>>
Managing Dir!ctor 0(2 9onata Go$d (@,*>,>>>
C%air#an 0(2 M!rc!d!s &!n7 4@,*>,>>>
T%! co#pan' is !a$uating t,o options "or proiding t%!s! cars to
!3!cuti!s
Option ( : T%! co#pan' ,i$$ &u' t%! cars and pa' t%! !3!cuti!s "u!$
!3p!ns!s, #aint!nanc! !3p!ns!s, dri!r a$$o,anc! and insuranc! 0at t%!
'!ar . !nd2+ In suc% cas!, t%! o,n!rs%ip o" t%! car ,i$$ $i! ,it% t%!
co#pan'+ T%! d!tai$s o" t%! propos!d a$$o,anc!s and !3p!nditur!s to &!
paid ar! as "o$$o,s :
a2 Fu!$ !3p!ns! and #aint!nanc! A$$o,anc!s p!r #ont%
Particu$ars Fu!$ !3p!ns!s Maint!nanc!
a$$o,anc!
Manag!r
DGM and GM
Dir!ctor
Managing Dir!ctor
C%air#an
Rs+ 4,*>>
*,>>>
A,*>>
(4,>>>
(/,>>>
Rs+ (,>>>
(,4>>
(,/>>
@,>>>
C,>>>
&2 Dri!r A$$o,anc! : Rs+ C,>>> p!r #ont% 0On$' C%air#an, Managing
Dir!ctor and Dir!ctors ar! !$igi&$! "or dri!r a$$o,anc!+2
c2 Insuranc! cost : ( p!r c!nt o" t%! cost o" t%! car+
T%! us!"u$ $i"! "or t%! cars is assu#!d to &! "i! '!ars a"t!r ,%ic%
t%!' can &! so$d at 4> p!r c!nt sa$ag! a$u!+ A$$ t%! cars "a$$ und!r t%!
sa#! &$ock o" d!pr!ciation = 4* p!r c!nt using ,ritt!n do,n #!t%od o"
d!pr!ciation+ T%! co#pan' ,i$$ %a! to &orro, to "inanc! t%! purc%as!
"ro# a &ank ,it% int!r!st at (C p!r c!nt r!pa'a&$! in "i! annua$ !8ua$
insta$#!nts pa'a&$! at t%! !nd o" t%! '!ar+
Subject: Finance Management. Marks: 100
Option 4 : ORIM, T%! "$!!t #anag!#!nt co#pan' %as o""!r!d t%! 44 cars
o" t%! sa#! #ak! at $!as! "or t%! p!riod o" "i! '!ars+ T%! #ont%$' $!as!
r!nta$s "or t%! cars ar! as "o$$o,s 0assu#ing t%at t%! tota$ o" #ont%$'
$!as! r!nta$s "or t%! ,%o$! '!ar ar! paid at t%! !nd o" !ac% '!ar+
9antro Ming Rs+ ),(4*
-onda Cit' (E,@4*
To'ota Coro$$a 4A,(A*
9onata Go$d @),4*>
M!rc!d!s ?!n7 E(,4*>
<nd!r t%is $!as! agr!!#!nt t%! $!asing co#pan', ORIM ,i$$ pa' "or
t%! "u!$, #aint!nanc! and dri!r !3p!ns!s "or a$$ t%! cars+ T%! $!ssor ,i$$
c$ai# t%! d!pr!ciation on t%! cars and t%! $!ss!! ,i$$ c$ai# t%! $!as!
r!nta$s against t%! ta3a&$! inco#!+ ?IR India Ltd ,i$$ %a! to %ir! "u$$ti#!
sup!risor 0at #ont%$' sa$ar' o" Rs+ (*,>>> p!r #ont%2 to #anag! t%! "$!!t
o" cars %ir!d on $!as!+ T%! co#pan' ,i$$ %a! to &!ar additiona$
#isc!$$an!ous !3p!ns! o" Rs+ *,>>> p!r #ont% "or proiding %i# t%! PC,
#o&io! p%on! and so on+
T%! co#pan'Ds !""!cti! ta3 rat! is C> p!r c!nt and its cost o" capita$
is (* p!r c!nt+
Ana$'s! t%! "inancia$ ia&i$it' o" t%! t,o options+ W%ic% option ,ou$d 'ou
r!co##!nd F W%' F