Ques 1 From the following data compute the duration of operating cycle

Particular Year 1
Raw Material 20,000
Work in Progress 14,000
Finished Goods 21,000
Purchases 96,000
Cost of Goods Sold 140,000
Sales 160,000
Debtors 32,000
Creditors 16,000

Assume 360 days in a year for computional purpose

Particular Year 1
Raw Material 20,000
Work in Progress 14,000
Finished Goods 21,000
Purchases 96,000
Cost of Goods Sold 140,000
Sales 160,000
Debtors 32,000
Creditors 16,000
Days in a year 360

Average Raw Material /

Raw Material
Purchases * No. of Days

Average Creditors /
Creditors Period
Purchases * No. of Days

Average WIP / COGS * No.

Work-In-Progress
of Days

Average Finished Goods /

Finished Goods
COGS * No. of Days

Average Debtors / Sales *

Debtors
No. of Days

Net Operating Cycle = Inventory period + Account Receivable - Accounts Payble Period
 Net Operating Cycle

Increase in length of Operating Cycle is due to

Debtors taking longer time to pay
Creditors receiving earlier payment
Lower Finished Goods Turnover
Lower Raw Material Turnover
Increase In Operating Cycle

Ques 2 XYZ Ltd. Supplied the following information

Sales & Production for the year
Finished Goods in Store
Raw Material in Store
Production Process
Credit allowed by Creditors
Selling Price Per Unit
Raw Materials
Direct Wages
Overheads

20% of sales are on cash basis and credit sales allowed to customers for 1 month. Overhead includes 5 as depre
There is a regular production and sale cycle and wages and overheads accrue evenly. Wages are paid in the nex
of accrual and overheads are paid 15 days in arrears. Materials are Introduced in the beginning of production c
in progress involves use of full units of raw materials in the beginning of the manufacturing process and other c
costs equivalent to 50%

You are required to calculate the working capital requirement on cash cost basis

Answer 2 Sales & Production for the months

Finished Goods in Store
Raw Material in Store
Production Process
Credit allowed by Creditors
Selling Price Per Unit
Raw Materials
Direct Wages
Overheads

Cash Cost

Current Assets
Raw Material 287,500
WIP
Raw Material 143,750
 Direct Wages 14,375
Overheads 14,375
Finished Goods 603,750
Debtors 161,000
Gross Working Capital 1,224,750

Current Liabilites
Creditors 287,500
Outstanding Wages 28,750
Outstanding Overheads 14,375
Total Current Liabilites 330,625

Net Working Capital 894,125

Ques 3 The following information for a particular year has been extracted from the books of m
Particulars Opening
Raw Material 150,000
Work in Progress 160,000
Finished Goods 300,000
Debtors 300,000
Creditors 200,000
Calculate the Operating Cycle, Cash Cycle and WCR

Answer 3 Particulars In days

Raw Material 48
Work in Progress 20.16
Finished Goods 45
Debtors 35
Creditors 56.25

Operating Cycle 148.16

Cash Cycle 91.91
Total Number of OC in 1 year 3.917
Amount of Working Capital Requirement 765,917

Ques 4 Raw Material 150

Direct Labour 60
Overheads 70
Selling and Distribution Expenses -
Selling Price 350
Cash at Bank expected to maintain 20% of working capital

Additional Information
Total Production 2,08,000 units
Raw Material 10 weeks
Work in Progress 3 weeks
Finished Goods 4 weeks
 Creditors allowed by suppliers 5 weeks
Creditors allowed to debtors 8 weeks
Lag in payment of wages 4 weeks
Lag in payment of overheads 3 weeks
Credit Sales 85%

Answer 4 Raw Material ₹ 150.00

Direct Labour ₹ 60.00
Overheads ₹ 70.00
Selling and Distribution Expenses -
Selling Price 350
Total Production 208,000
Raw Material 10
Work in Progress 3
Finished Goods 4
Creditors allowed by suppliers 5
Creditors allowed to debtors 8
Lag in payment of wages 4
Lag in payment of overheads 3
Credit Sales 85%

Total Production in 1 weeks 4000

Current Assests
Raw Materials ₹ 6,000,000.00
WIP
Raw Materials ₹ 1,800,000.00
Direct Wages ₹ 360,000.00
Overheads ₹ 420,000.00
Finished Goods ₹ 4,480,000.00
Debtors ₹ 7,616,000.00
₹ 20,676,000.00
Cash Balance ₹ 5,169,000.00
Gross Working Capital / Total Current Assests ₹ 25,845,000.00

Current Liabilities
Creditors ₹ 3,000,000.00
Outstanding Wages ₹ 960,000.00
Outstanding Overhead ₹ 840,000.00
Total Current Liabilties ₹ 4,800,000.00

Net Working Capital Requirement ₹ 21,045,000.00

 ng cycle
Year 2
27,000
18,000
24,000
135,000
180,000
200,000
50,000
18,000

se

Year 2
27,000
18,000
24,000
135,000
180,000
200,000
50,000
18,000
360

Year 1 (in days) Year 2 (in days)

75 72

60 48

36 36

54 48

72 90

ble - Accounts Payble Period

 177 198

In days
18
12
6
3
21

69000 units
3 months
2 months consumption
1 month
2 months
50
50% of selling price
10% of selling price
20% of selling price

onth. Overhead includes 5 as depreciation.

e evenly. Wages are paid in the next month
ed in the beginning of production cycle. Work
manufacturing process and other conversion

basis

5750
3
2
1
2
50
25
5
5

35
been extracted from the books of manufacturing company
Closing Amount
250,000 Purchases 1,600,000
120,000 Consumption 1,500,000 è Applied a formula
400,000 Total Production Cost 2,500,000
400,000 Total Cost of goods sold 2,800,000
300,000 Total Cost of sales 3,000,000
Sales 3,600,000

è Raw Material + WIP + Finished Goods+ Debtors

è Raw Material + WIP + Finished Goods + Debtors - Creditors
è 360/Cash Cycle
è Total Cost of Sales / Number of OC in 1 year
Ques 1 In A Ltd.
IRR(R) 15%
Ke 10%
EPS 20

Using Waltor Model, calculate the effect of dividend payment on the value of share A
Dividend Payout Ratio 0% 20% 40% 60% 80% 100%

Waltor Model Formula

D/Ke+((r/ke)*(E-D))/Ke

EPS 20 20 20 20 20 20
D 0 4 8 12 16 20

Price Per Share 300 280 260 240 220 200

Ques 1 In A Ltd.
R 15%
Ke 12%
EPS 15

Using Waltor Model, calculate the effect of dividend payment on the value of share A
Dividend Payout Ratio 30% 40% 50% 70% 90%

Gordon Approach
(E*(1-b))/(Ke-B*r)

EPS 15 15 15 15 15 15
B=(1-payout) 70% 60% 50% 30% 10% 0%

Price of Share 300 200 166.6667 140 128.5714 125

e of share A
100%
EPS 10
P/E Ratio 10 è Ke 10%
No. of Outstanding Shares 50,000
Expected Dividend 8
Expected Net Income 500,000
New Investment 1,000,000
As per MM Approach show the payment of the dividend does not affect the value of firm.

MM Approach Formula
P1 = (P0*(1+Ke)) - D1

When Dividend is paid

D1 8
P0 100 è EPS * P/E Ratio
P1 102 è Applied Formula

EBIT 500,000
Dividend Paid 400,000
100,000
Investment 1,000,000
Amount to be arranged 900,000
Equity shares to be arranged 8823.53 Value of firm 6,000,000

When Dividend is not to be paid

D1 0
P0 100 è EPS * P/E Ratio
P1 110 è Applied Formula

EBIT 500,000
Dividend Paid 0
500,000
Investment 1,000,000
Amount to be arranged 500,000
Equity shares to be arranged 4545.45 Value of firm 6,000,000
alue of firm.

è Applied Formula

è Applied Formula
Ques 1 Year
Cost of Asset 100,000 1
Installation Charges 10,000 2
Scrap VaLue 20,000 3
Life 5 4
Working Capital 30,000 5

Calculate Initial Outflows, CFAT & Inflows of the last year

Terminal Outflow Initial Outflow Cost of Asset + Installation Charges + WC

Depreciation (Cost of Asset + Installation Charges - Scrap Value)/Life

Year Cash flow Before Depreciation & Taxes

1 30,000
2 70,000
3 40,000
4 50,000
5 40,000

Terminal Inflow Inflow of the last year

Terminal Outflow Terminal Inflow

Particulars Particulars
Cost of Machinery xxx Cash Inflow
Installation Charges xxx Scrap Value
Working Capital xxx Working Capital
Income Tax Paid (gain) xxx
Income Tax (loss) (xxx)
Old Machinery (sold) (xxx)
 Cash flow Before Depreciation & Taxes Tax Rate 30%
30,000
70,000
40,000
50,000
40,000

lows, CFAT & Inflows of the last year

st of Asset + Installation Charges + WC 140,000

Asset + Installation Charges - Scrap Value)/Life 18,000

ash flow Before Depreciation & Taxes Dep PBT PAT Cash Flow After Tax
30,000 18,000 12,000 8,400 26,400
70,000 18,000 52,000 36,400 54,400
40,000 18,000 22,000 15,400 33,400
50,000 18,000 32,000 22,400 40,400
40,000 18,000 22,000 15,400 33,400

83,400 è CFAT of last year + Scrap Value + Working Capital

xxx
xxx
xxx
Ques 1 Cost of Asset 300000 Year Inflows
Installation Charges - 1 120000
Scrap Value - 2 120000
Life 5 3 120000
Working Capital - 4 120000
5 120000
Initial Outflow 300000 Avg Cash Inflow 120000
Pay Back Period 2.5

Ques 2 Cost of Asset 400000 Year Inflows Cumalative Inflows

Installation Charges - 1 80000 80000
Scrap Value - 2 120000 200000
Life 5 3 140000 340000
Working Capital - 4 120000 460000
5 180000 640000

Initial Outflow 400000

Payback Period 3.5
 Ques 1 Year Inflows
Cost of Asset 400000 1 80000
Installation Charges - 2 120000
Scrap Value - 3 130000
Life 5 4 120000
Working Capital - 5 160000

Discount Rate 14%

Calculate NPV and PI

Answer Initial Outflow 400000

Year Inflows PV of Inflows ₹ 404,406.46
1 80000 PV of outflows ₹ 400,000.00
2 120000 PI 1.011016147
3 130000
4 120000
5 160000
NPV ₹ 4,406.46 Project is profitable

Ques 2 Cost of Asset 400000 Year Inflows

Installation Charges - 1 80000
Scrap Value - 2 120000
Life 5 3 130000
Working Capital - 4 120000
5 160000
Discount Rate 14%
Calculate IRR

Answer 2 Initial Outlfow 400000

Year Inflows
0 -400000
1 80000
2 120000
3 130000
4 120000
5 160000

IRR 14.42%
Ques 1 A Ltd. B Ltd.
Sales 7,500,000 10,000,000
Variable Cost 3,000,000 3,000,000
Contribution 4,500,000 7,000,000
Fixed Costs 2,250,000 4,000,000
EBIT 2,250,000 3,000,000
Interest 750,000 1,000,000
EBT 1,500,000 2,000,000

Operating Leverage
Contribution /EBIT 2.00 2.33

Financial Leverage
EBIT / EBT 1.50 1.50

Combined Leverage
Contirbution / EBT 3.00 3.50
 ESC 5000 SH 100 500000
9% Preference Sh 200000
10% Debentures 300000

P0 102
D1 9
g 5%
Tax Rate 30%

(i) Source No. of units Price Amount Cost of Capital

ESC 5000 100 500000 13.82%
Preference Share 200000 9.00%
Debentures 300000 7.00%
1000000

Ke 13.82%
Kp 9%
Kd 7%
Kl

Source No. of units Price Amount Cost of Capital

ESC 5000 100 500000 14.37%
Preference Share 200000 9.00%
Debentures 300000 7.00%
Loan 500000 8.40%
1500000
ke D1 9
P0 96
g 5%

kl Interest 12% 60000

Tax 30%
Weight Weighted Cost
0.5 6.91%
0.2 1.80%
0.3 2.10%
10.81%

Weight Weighted Cost

0.33 4.79%
0.13 1.20%
0.20 1.40%
0.33 2.80%
10.19%
 Ques 1 Principal 10000
Time 3
Rate 12%
No. of periods in the year 4
Amount ₹ 14,257.61

Ques 2 Cost of Machinery 1,000,000

Scrap Value 80,000
Time 5

Year PAT Depreciation Cash Flows after Tax

1 50000 184000 234000
2 75000 184000 259000
3 125000 184000 309000
4 130000 184000 314000
5 80000 184000 264000

Avg PAT 92000

ARR= Avg PAT/ Investment 9.20%

Ques 3 Year Machine A Machine B

0 80000 80000
1 24000 8000
2 32000 24000
3 40000 32000
4 24000 48000
5 16000 32000

Discount Rate 10%

Machine A Year Cash Flow Cumalative Cash Flow Machine B

0 -80000
1 24000 24000
2 32000 56000
3 40000 96000
4 24000 120000
5 16000 136000

Payback Period 2.60

IRR 22%

Computation of Net Present Value

Year Cash Flow Cumalative Cash Flow
0 80000
1 24000 24000
2 32000 56000
 3 40000 96000
4 24000 120000
5 16000 136000

NPV ₹ 24,644.12

Ques 4 Debt 104000

ESC (Face Value - 100) 180000
Equity Shares 1800
General Reserve 36000
EBIT 27000
Interest Rate 8%
Tax Rate 30%
P0 120

Source No. of Units Price Amount Cost of Capital

Equity Shares 1800 120 216000 12.50%
Debentures 104000 5.60%
Retained earnings 36000
356000
Ke = D1/Po+g 0.125
Dividend = EBIT/ Equity Shares 15

Interest 8320
Kd= I*(1-t)/NP 0.056

Ques 5 IRR 15%

Ke 10%
EPS 20

EPS 20 20 20 20
Payout Ratio 0% 20% 40% 60%
Dividend 0 4 8 12

Waltor Model
(D/Ke) +((r/ke)*(E-D))/Ke 300 280 260 240

Ques 6 Production 5000

Selling Price 5
Raw Materials 3
Wages 0.5
Overheads 1
Raw Materials (in weeks) 2
Work In Progress (in weeks) 1
Finished goods storage period 3
Credit allowed by suppliers 2
 Credit allowed to customers 3
Minimum cash balance desired 20000
Wages and overheads payment 1

A Current Assets
Raw Materials 30000
WIP
Raw Materials 15000
Wages 1250
Overheads 2500
Finished Goods 67500
Debtors 67500
Cash 20000
Gross Working Capital 203750

B Current Liabilites
Creditors 30000
Wages 2500
Overheads 5000
Current Liabilities 37500

Net Working Capital 166250

 Year Cash Flow Cumalative Cash Flow
0 -80000
1 8000 8000
2 24000 32000
3 32000 64000
4 48000 112000
5 32000 144000

Payback Period 3.33

IRR 19%

Computation of Net Present Value

Year Cash Flow Cumalative Cash Flow
0 80000
1 8000 8000
2 24000 32000
 3 32000 64000
4 48000 112000
5 32000 144000

NPV ₹ 23,803.64

Weights Weighted Cost

0.60674157303 7.58%
0.29213483146 1.64%
9.22%

20 20
80% 100%
16 20

220 200