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FINANCIAL
MANAGEMENT
NO. 1
ZIP ZAP ZOOM CAR COMPANY
The methodology undertaken is
as follows :
(a) Important factors that
affect cash flows (especially contraction of cash flows), like sales
volume, sales price, raw
materials expenditure, and so on, are identified and the analysis is
carried out in terms of cash
receipts and cash expenditures.
(b) Each factor’s behaviour
(variation behaviour) in adverse conditions in the past is studied and
future expectations are
combined with past data, to describe limits (maximum favourable),
most probable and maximum
adverse) for all the factors.
(c) Once this information is
generated for all the factors affecting the cash flows, Mr.
Longsighted comes up with a
range of estimates of the cash flow in future recession periods
based on all possible
combinations of the several factors. He also estimates the probability of
occurrence of each estimate of
cash flow.
Assuming a normal distribution
of the expected behaviour, the mean expected
value of net cash inflow in
adverse conditions came out to be Rs. 220.27 crore with standard
deviation of Rs. 110 crore.
Keeping in mind the looming
recession and the uncertainty of the recession behaviour, Mr.
Arthashastra feels that the
firm should factor a risk of cash inadequacy of around 5 per cent even in
the most adverse industry
conditions. Thus, the firm should take up only that amount of additional
debt that it can service 95 per
cent of the times, while maintaining cash adequacy.
To maintain an annual dividend
of 10 per cent, an additional Rs. 35 crore has to be kept aside.
Hence, the expected available
net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Analyse the debt capacity of
the company.
NO. 2
COOKING LPG LTD
DETERMINATION OF WORKING
CAPTIAL
1) Purchases : The company
purchases LPG in bulk from various importers ex-Mumbai and
Kandla, @ Rs. 11,000 per MT.
This is transported to its Bottling Plant at Gurgaon through 15
MT capacity tank trucks (called
bullets), hired on annual contract basis. The average
transportation cost per bullet
ex-either location is Rs. 30,000. Normally, 2 bullets per day are
received at the plant. The
company make payments for bulk supplies once in a month,
resulting in average time-lag
of 15 days.
2) Storage and Bottling : The
bulk storage capacity at the plant is 150 MT (2 x 75 MT storage
tanks) and the plant is capable
of filling 30 MT LPG in cylinders per day. The plant operates
for 25 days per month on an
average. The desired level of inventory at various stages is as
under.
LPG in
bulk (tanks and pipeline quantity in the plant) – three days average production
/ sales.
Filled
Cylinders – 2 days average sales.
Work-in Process inventory – zero.
3) Marketing : The LPG is
supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per
cylinder. The rate of
applicable sales tax on the invoice is 4 per cent. A commission of Rs.
15 per cylinder is paid to the
distributor on the invoice itself. The filled cylinders are
delivered on company’s expense
at the distributor’s godown, in exchange of equal number of
empty cylinders. The deliveries
are made in truck-loads only, the capacity of each truck being
250 cylinders. The distributors
are required to pay for deliveries through bank draft. On
receipt of the draft, the
cylinders are normally dispatched on the same day. However, for
every truck purchased on pre-paid
basis, the company extends a credit of 7 days to the
distributors on one truck-load.
4) Salaries and Wages : The
following payments are made :
Direct
labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the
month.
Security agency – Rs. 30,000 per month paid on 10th of subsequent month.
Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly
basis on the
last working day.
5) Overheads :
Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on
the 10th of
subsequent month.
Power
(including on DG set) – Rs. 1,00,000 per month paid on the 7th Subsequent
month.
Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000
per annum paid
at the beginning of the year.
Insurance – Rs. 5,00,000 per annum to be paid at the beginning of the year.
Housekeeping etc – Rs. 10,000 per month paid on the 10th of the subsequent
month.
Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every
month to the
vendors. This includes
expenditure on account of lubricants, spares and other stores.
Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum –
paid on
monthly basis on the 15th of
the subsequent month.
All
transportation charges as per contracts – paid on the 10th subsequent month.
Sales
tax as per applicable rates is deposited on the 7th of the subsequent month.
6) Sales : Average sales are
2,500 cylinders per day during the year. However, during the winter
months (December to February),
there is an incremental demand of 20 per cent.
7) Average Inventories : The
average stocks maintained by the company as per its policy guidelines
:
Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh. This amounts to
15 days
consumption.
Maintenance spares – Rs. 1 lakh
Lubricants – Rs. 20,000
Diesel
(for DG sets and fire engines) – Rs. 15,000
Other
stores (stationary, safety items) – Rs. 20,000
8) Minimum cash balance
including bank balance required is Rs. 5 lakh.
9) Additional Information for
Calculating Incremental Working Capital During Winter.
No
increase in any inventories take place except in the inventory of bulk LPG,
which
increases in the same
proportion as the increase of the demand. The actual requirements of
LPG for additional supplies are
procured under the same terms and conditions from the
suppliers.
The
labour cost for additional production is paid at double the rate during wintes.
__________No changes in other administrative overheads.
The
expenditure on power consumption during winter increased by 10 per cent.
However,
during other months the power
consumption remains the same as the decrease owing to
reduced production is offset by
increased consumption on account of compressors /Acs.
Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies
during winter.
No
change in time schedules for any payables / receivables.
The
storage of finished goods inventory is restricted to a maximum 5,000 cylinders
due to
statutory requirements.
NO. 3
M/S HI-TECH ELECTRONICS
(a) As a financial consultant,
advise the proprietor whether he should go for the extension of
credit facilities.
(b) Also prepare cash budget
for one year of operation of the firm, ignoring interest. The
minimum desired cash balance
& Rs. 30,000, which is also the amount the firm, has on
January 1. Borrowings are
possible which are made at the beginning of a month and repaid at
the end when cash is available.
NO.4
SMOOTHDRIVE TYRE LTD
Automotive industry analysts
expect automobile manufacturers to have a production of 4,00,000 new
cars this year and growth in
production at 2.5 per year onwards. Each new car needs four new tyres
(the spare tyres are undersized
and fall in a different category) Smoothdrive Tyre expects the Hyper
Tread to capture an 11 per cent
share of the OEM market.
The industry analysts estimate
that the replacement tyre market size will be one crore this year
and that it would grow at 2 per
cent annually. Smoothdrive Tyre expects the Hyper Tread to capture
an 8 per cent market share.
You also decide to consider net
working capital (NWC) requirements in this scenario. The
net working capital requirement
will be 15 per cent of sales. Assume that the level of working capital
is adjusted at the beginning of
the year in relation to the expected sales for the year. The working
capital is to be liquidated at
par, barring an estimated loss of Rs. 1.5 crore on account of bad debt.
The bad debt will be a
tax-deductible expenses.
As a finance analyst, prepare a
report for submission to the CFO and the Board of Directors,
explaining to them the
feasibility of the new investment.
No. 5
COMPUTATION OF COST OF CAPITAL
OF PALCO LTD
From the facts outlined above,
what report would Neha submit to the Board of Directors of
palco Ltd?
NO. 6
ARQ LTD
Analyse the financial viability
of the two options. Which option would you recommend? Why?
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