PANCHAKSHARI’S PROFESSIONAL ACADEMY PVT LTD
CS Professional
FM
XYZ Ltd. has the
1.
following book value capital structure:
(Rs. Crores)
Equity capital
11% Preference capital
(in shares of Rs. 10 each, fully paid-up
at par)
(in shares of Rs. 100 each, fully paid-up
at par)
Retained earnings
13.5% Debentures
15
1
20
(of Rs. 100 each)
15% Term loans
10
12.5
The next expected dividend on equity share per share is Rs. 3.60 and the dividend per share is
expected to grow at the rate of 7%. The market price per share is Rs. 40.
Preference stock, redeemable after ten years, is currently selling at Rs. 75 per share.
Debentures, redeemable after six years, are selling at Rs. 80 per debenture.
The income-tax rate for the company is 40%.
i)
Required to calculate the weighted average cost of capital using:
a. Book value proportions
b. Market value proportions.
ii)
Define the weighted marginal cost of capital schedule for the company, if it raises Rs. 10
crore next year, given the following information:
a. The amount will be raised by equity and debt in equal proportions.
b. The company expects to retain Rs. 1.5 crores earnings next year.
c. The additional issue of equity shares will result in the net price per share being fixed
at Rs. 32.
The debt capital raised by way of terms loans will cost 15% for the first Rs. 2.5 crores and 16% for
the next 2.5 crores.
2. A company needs Rs. 5,00,00,000 for construction of a new plant. The following three
financial plans are feasible:
(i)
The company may issue 50,00,000 ordinary shares at Rs. 10 per share.
(ii)
The company may issue 25,00,000 ordinary shares at Rs. 10 per share and 2,50,000
debentures of Rs. 100 denominations bearing a 8% rate of interest.
PANCHAKSHARI’S PROFESSIONAL ACADEMY PVT LTD
CS Professional
(iii)
The company may issue 25,00,000 ordinary shares at Rs. 10 per share and 2,50,000
preference shares at Rs. 100 per share bearing a 8% rate of dividend.
If the company’s earnings before interest and taxes are Rs. 10,00,000, Rs. 20,00,000, Rs.
40,00,000, Rs. 60,00,000 and Rs. 1,00,00,000, what are the earnings per share under each of the
three financial plans? Which alternative would you recommend and why? Determine the
indifference points between

Financial plan (i) and (ii) and

Financial plans (i) and (iii).
Assume a corporate tax rate of 35%.
3. The following information has been extracted from the records of a company:
Product Cost sheet
Rs./unit
Raw materials
45
Direct labour
20
Overheads
40
Total
105
Profit
15
Selling price
120
-
Raw materials are in stock on an average of two months.
-
The materials are in process on an average for 4 weeks. The degree of completion is 50%.
-
Finished goods stock on an average is for one month.
-
Time lag in payment of wages and overheads is VA weeks.
-
Time lag in receipt of proceeds from debtors is 2 months.
-
Credit allowed by suppliers is one month.
-
20% of the output is sold against cash.
-
The company expects to keep a Cash balance ofRs. 1, 00,000.
-
Take 52 weeks per annum.
The company is poised for a manufacture of 1, 44,000 units in the year.
You are required to prepare a statement showing the working Capital requirements of the
company
PANCHAKSHARI’S PROFESSIONAL ACADEMY PVT LTD
CS Professional
4. Tata Ltd. Manufacturers readymade garments and sells them on credit basis through a
network of dealers. Its present sale is Rs. 90 lakh per annum with 20 days credit period.
The company is contemplating an increase in the credit period with a view to increasing
sales. Present variable costs are 70% of sales and the total fixed costs Rs. 8 lakh per
annum. The company expects pre-tax return on investment @ 25%. Some other details are
given as under.
Proposed
Credit Average
collection
Period Expected Annual sales (Rs.
Policy
(Days)
Lakh)
I
30
95
II
40
120
III
50
130
IV
60
135
Required: which credit policy should the company adopt? Present your answer in a tabular form.
Assume 360-days a year. Calculations should be made upto two digits after decimal.
Calculate
5.
the
operating leverage, financial leverage and combined leverage from the following data under
Situation I and II and Financial Plan A and B.
Rs.
Installed Capacity
Actual Production and Sales
5,000 units
80% of the capacity
Selling Price
Rs. 40 per unit
Variable Cost
Rs. 15 per unit
Fixed Cost:
Under Situation I
20,000
Under Situation II
25,000
Capital Structure:
Finance plan
A
B
Rs.
Rs.
Equity
50,000
30,000
Debt (Rate of interest at 20%)
20,000
40,000
70,000
70,000