Assignment – 2
For
Financial
Management
Section A (20 Marks)
Write short notes
on any four of the following:
1.
Concept of EOQ and lot size
measurement
2.
Cash Before Delivery (CBD) and
Cash After Delivery (COD)
3.
Aircraft asset management tools
4.
Liquidity management
5.
Inventory orders
Section B (30 marks)
(Attempt any three)
- XYZ Company sells goods on a gross
profit of 25% depreciation is taken into account as a part of cost
production. The following are the annual figures given to you:
Sale (Two month’s Credit) 18,00,000
Materials consumed (One month’s credit) 4,50,000
Wages paid (One month lag in payment) 3,60,000
Cash manufacturing expenses (One month
lag in payment) 4,80,000
Administration expenses (One month lag
in payment) 1,20,000
Sales promotion expenses (Paid
quarterly in advance) 60,000
Income tax payable in four installments
of which one lies in the (next year) 1,50,000
The company keeps one month’s stock of both raw-materials and finished
goods. It also keeps Rs. 1,00,000 in cash. You are required to estimate the
working capital requirements of the company on cash cost basis assuming 10%
safety margin.
2. KSBS
Ltd. is planning to install a captive generator set at its plant. Its finance
manager is asked to evaluate the alternatives either to purchase or acquire
generator on lease basis.
- How does corporate disclosure and credit education contribute to success of credit rating of aviation industry?
- Explain the legal framework of hire purchase in aviation industry?
Section C (50 marks)
(Attempt all questions. Every question carries 10 marks)
Read the case “RNS MOTORS LTD”
and answer the following questions:
RNS MOTORS LTD
RNS
Adwani, an ITI diploma holder had been working with M/s. RNS and
workshop for the last ten years. He had joined as a technician. He was
recognized as the best mechanic of Supreme Garage. A good number of clients
preferred to get their cars repaired by RNS Adwani . In three years time, he
was promoted as a supervisor. RNS Adwani
then joined distance education programme of IGNOU and completed his graduation.
He studied accounts and would assist the owner Mr. Gupta in maintaining the
accounts. Mr. Gupta liked him very much and two years back, RNS Adwani was promoted as the manager of RNS and
Workshop.
Gupta had set up this business about
18 years back when he had retired from the Indian Army due to a leg injury. Due
to good customer relations and quality service, RNS and workshop had earned a
very good reputation and was known as the best motor garage in the district. A
large number of clients form the neighboring
district would bring in their vehicles to Supreme Garage. The workshop
was known for engine overhauling. It had an electrical section for auto
electrical and an agency for Exide batteries. RNS specialized in denting and
painting and maintained good relations with insurance companies. It maintained
its own tow truck and did good business during accidents and break-downs. It
presently employed ten full time mechanics, one supervisor besides RNS Adwani and Gupta who were manager and the
owner respectively. During the rush season the workers worked overtime and
additional casual labour was also employed to meet the delivery schedules.
Since past one year, Mrs. Gupta was not keeping well. Six months ago, she had
a minor heart attack. Mrs. and Mr. Gupta
decided to shift to USA and join their daughter, who was a heart specialist at
Los Angles, USA. Gupta had no one to succeed him, he decided to sell the
business. He wanted the buyer to run the business on similar lines and maintain
its reputation.
He called RNS Adwani and made him an offer to sell his
business. The initial offer was for Rs. 57.50 lakh. He also proposed to assist
RNS in financing the purchase.
Gupta provided him with the
information on past earnings with projections for five years. He also provided
him with the Balance Sheet and Profit and Loss Accounts of RNS Motors as on
31st March 2000. He informed RNS that based upon the business flow, he had
valued the goodwill as Rs. 15 lakh.
RNS
was excited about the offer. He knew that the business was very
profitable and its profits had been increasing over the years. It had never
been at loss. He consulted a friend who was a banker and also a Chartered
Accountant. He advised him differently. He knew there was a scope of
negotiation over the price of the business. Now RNS now needs assistance.
Sales and Profit of Previous Years
Summary of
Projected sales and earnings
RNS MOTORS
Balance sheet
(As on 31.03.2000)
Liabilities Rs.
Capital 16,00,000
Retained
profits 18,10,880
Building
loan 26,99,200
Term
loan 12,16,000
Current
liabilities 8,14,400
Total
liabilities 81,40,480
Assets
Gross
block 66,56,000
Depreciation 14,22,720
Net
blocks (at the end) 52,33,280
Current
assets
Stocks 6,65,600
Receivables 13,31,200
Cash
in hand 9,10,400
Total
current assets 29,07,200
Total
assets 81,40,440
Depreciation
Schedule
Asset Gross Block Depreciation Net Block
Land Building 38,40,000 6,16,000 32,24,000
Plant Eqpt. 26,24,000 7,34,720 18,89,280
Other Assets 1,92,000 72,000 1,20,000
Total 66,56,000 14,22,726 55,33,280
RNS
MOTORS
Profit
& Loss Account (for the year ending 31.03.2000)
Rs.
Net Sales 99,64,800
Direct Wages 30,78,400
Contract Materials 18,83,200
Supplies 2,36,800
Mix Costs 4,24,000
Cost of Sales 56,22,400
Gross Profit from Operation 43,42,400
Operating Expenses 26,35,200
Total Depreciation for the Year 3,76,272
Net Income before Interest and Taxes 13,30,928
Interest 4,97,440
Profit Before tax 8,33,488
Income tax 1,58,240
Net Profit after tax 6,75,248
Questions
1.
Evaluate the value of RNS
Motors using discounted cash flow and multiple earning method (Assume 20%
required rate of return).
2.
How do you think the banker
will value this business? Discuss the method and calculate the value.
3.
If you were the banker, will
you finance?
4.
How would you evaluate the good
will of RNS Motors.
5.
As a consultant would you
advice Mr. RNS Adwani to buy RNS Motors
or not? Explain with reasons.
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