PART II : FINANCIAL MANAGEMENT 1. Answer the following ...

More documents

Recommendations

Info

12. Differentiate between the following: (a) Traditional Phase and Modern Phase of Financial Management (b) Liquidity Ratios and Activity Ratios (c) Debt Financing and Equity Financing (d) Financial Lease and Operating Lease. 13. Write short notes on the following: (a) Role of Chief Financial Officer (CFO) (b) Composition of ROE using Du Pont (c) Trading on Equity (d) External Commercial Borrowings (ECBs). SUGGESTED ANSWERS/HINTS 1. (a) The requirement is to determine the false statement regarding working capital management. Answer (iv) is correct because financing permanent inventory buildup with long-term debt is an example of a conservative working capital policy. Answers (i), (ii), and (iii) are all accurate statements about working capital management. (b) Calculation of the Conversion Cycle Cash Conversion Period = Inventory Conversion Period + Receivables Collection Period – Payable Deferral Period Inventory Conversion Period = Rs. 50,00,000/Rs. 100,000 = 50 days Receivable Conversion Period = Rs. 20,00,000 / Rs. 100,000 = 20 days. Therefore, Cash Conversion Cycle = 50 days + 20 days – 30 days = 40 days (c) Determination of Optimal Cash Balance according to William J. Baumol Model The formula for determining optimum cash balance is: 2U�P C � S Where, C = Optimum cash balance U = Annual (or monthly) cash disbursement P = Fixed cost per transaction. S = Opportunity cost of one rupee p.a. (or p.m.) 116
C = = 2�2 , 62, 500�12�25 0. 075 15, 75, 00, 000 0. 075 = 2, 10, 00, 00, 000 Optimum cash balance, C, = Rs. 45,826 (d) The requirement is to identify the advantages of debt financing. Answer ( iii) is correct because the fixed obligation of interest and principal is an advantage to debt financing. Answers (i), (ii), and (iv) are incorrect because they are all disadvantages of debt financing. (e) Calculation of Estimated Cost of Equity using Dividend-yield-plus-growth-rate Approach Estimated cost of equity = ( Dividend / Price of the Share) + Growth rate = [(Rs. 5 ÷ Rs. 60) + 6%] = 14.3% 2. (a) Determination of Order Point for Material A When safety stock is maintained, the order point is computed as follows: Order Point = Daily demand × Lead time in days + Safety stock Daily demand = 20,000 units ÷ 250 days = 80 units Order Point = [(80 × 30) + 800] = 3,200 units (b) Calculation of Cost of Not taking a Trade Discount The formula for computing the interest is as under : Interest = Discount percent 360 days � 100% �Discount percent Total pay period �Discount period 3% 360 days = � �31. 81% 100% �3 % 45 days �10 days Cost of Not taking a Trade Discount = 31.81% 3. (a) Calculation of Payback Period The payback method evaluates investments on the length of time until total amount invested are recouped in the form of cash inflows or cash outflows avoided. Payback Period = Initial investment ÷ Annual cash inflow of a project 117
Page 1 and 2: PART II : FINANCIAL MANAGEMENT 1. A
Page 3 and 4: Direct wages 10% of works cost Stoc
Page 5 and 6: Other current assets 254 170 Total
Page 7 and 8: Interest expense (37) (28) (21) Int
Page 9: (b) Suppose Adit has borrowed a 3-y
Page 13 and 14: 4. (a) Calculation of Weighted Aver
Page 15 and 16: Long term loan 2 � � Long term
Page 17 and 18: Less: Initial Investment 400.00 400
Page 19 and 20: F = Face value of preference shares
Page 21 and 22: (Rs. 19,802 �Rs. 18,082) � 2 =
Page 23 and 24: Current assets include cash and cas
Page 25 and 26: Machinery Account Rs. Rs. Balance b
Page 27 and 28: 11. (a) Computation of Effective Co
Page 29 and 30: Hence, the raw material consumption
Page 31 and 32: These are some of the benefits from
Page 33: onds, preference shares or any othe

PART II : FINANCIAL MANAGEMENT 1. Answer the following ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?