Financial ManagementSubjectiveQuestion 6267 of 222
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Question 1 (a) KP Ltd. has provided the following information: (i) Estimated monthly sales: Month ` in Lakh April-2024 10 May-2024 12 June-2024 15 July-2024 10 August-2024 13 September-2024 14 (ii) Gross Profit Ratio is 20%. (iii) Cost of Goods sold is paid in next month. (iv) Sales are in credit and credit period is allowed for 2 months. (v) Indirect Expenses are paid in the same month. Monthly indirect expenses are as follows: Month ` in Lakh June-2024 1.0 July-2024 1.2 August-2024 1.0 September-2024 1.3 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT (vi) Dividend amounting September 2024, 3 Lakh will be paid in the month of September 2024 (vii) Cash Balance on 01/07/2024 was 1.5 Lakh. (viii)The company has to maintain minimum cash balance of 1 Lakh. If there is cash balance deficit in any month, company would take a temporary short term loan and if cash balance exceed 2 Lakh, then company would invest for short term excess amount of 2 Lakh. (ix) Ignore the interest on short term loans and short term investment. You are required to prepare Cash Budget for three months starting from July 2024. (5 Marks) (b) Following is the Balance Sheet of EXIM Ltd. as on 31stMarch, 2024: Liabilities ` Assets ` Equity Share Capital of ₹ 100 each 20,00,000 Fixed Assets 50,00,000 Retained Earnings 4,00,000 Current Assets 30,00,000 12.5% Debenture 40,00,000 Current Liabilities 16,00,000 80,00,000 80,00,000 The additional information is given as under: Fixed costs per annum (exclusive interest) : ₹ 16,00,000 Variable operating cost ratio : 70% Total Assets turnover ratio : 2.5 Income tax rate : 30% You are required to calculate: (i) Earnings Per Share (ii) Operating Leverage (iii) Financial Leverage (iv) Combined Leverage (2 + 1 + 1 + 1 = 5 Marks) (c) Following information have been provided by LP Ltd.: Profit before Tax ₹ 40 Lakh Tax Rate 30% Equity Share Capital (₹ 10) ₹ 40 Lakh Return on Investment 18% Cost of Equity 15% Dividend Payout Ratio 50% You are required: (i) to determine the price of Equity Share of the company as per Walter's Model; (ii) to determine the Dividend Pay-out Ratio by applying Walter's Model assuming the price of equity share of the company is ₹ 48. (3+2=5 Marks)

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Detailed Solution & Explanation

(a) Cash Budget (` in lakh) Particulars July August September Opening Balance 1.5 1 2 Add: Receipts Collection from debtors 12 15 10 Total cash available (A) 13.5 16 12 Less: Payments Payment of COGS 12 8 10.4 Payment of indirect exp 1.2 1 1.3 Payment of Dividend - - 3 Total payments (B) 13.2 9 14.7 Closing Balance before adjustment 0.3 7 -2.7 Minimum cash balance desired 1 1 1 FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT Less: Temporary Investment - 5 - Add: Temporary Borrowing 0.7 - 3.7 Cash Closing Balance 1 2 1 W.N. 1 COGS payment June July Aug Sept Sales 15 10 13 14 COGS (80%) 12 8 10.4 11.2 Paid in 12 8 10.4 (b) Workings: Total Assets = ₹ 80 lakhs Total Asset Turnover Ratio = 2.5 Hence, Total Sales = 80 × 2.5 = ₹ 200 lakhs Computation of Profit after Tax (PAT) (`) in lakhs Sales 200.00 Less: Variable Operating Cost @ 70% 140.00 Contribution 60.00 Less: Fixed Cost (other than Interest) 16.00 EBIT 44.00 Less: Interest on Debentures (12.5% × ₹ 40 lakhs) 5.00 PBT 39.00 Less: Tax @ 30% 11.70 PAT 27.30 (i) Earnings per Share EPS = PAT Number of Equity Shares = 27.30 lakhs 20,000 ` = ₹ 136.5 (ii) Operating Leverage Operating Leverage = Contribution EBIT = 60 lakhs 44 lakhs ` ` = 1.363 (iii) Financial Leverage Financial Leverage = EBIT PBT = 44 lakhs 39 lakhs ` ` = 1.128 (iv) Combined Leverage Combined Leverage = Contribution EBIT × EBIT PBT Or, = Operating Leverage × Financial Leverage = 1.363 x 1.128 = 1.538 (c) (i) Price per share as per Walter’s Model ` in lakhs Profit before tax 40 Less: tax @ 30% 12 Earning for equity shareholders 28 Earning per share 28/4 = ₹ 7 P = e e E-D) K r D+ ( K Where, P = Market Price of the share. E = Earnings per share. = ₹ 7 D = Dividend per share. = ₹ 3.5 Ke = Cost of equity/ rate of capitalization/ discount rate. = 15% r = Internal rate of return/ return on investment = 18% Applying the above formula, price per share FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT P = -3.5) 0.18 3.5+ (7 0.15 0.15 Or, P = 3.5+4.2 0.15 = ₹ 51.33 (ii) Let, the dividend per share be D to get share price of ₹ 48 e e r D+ (E-D) K P = K ₹ 48 = -D) 0.18 D+ (7 0.15 0.15 7.2 = 0.15D +1.26-0.18D 0.15 0.03D = 1.26-1.08 D = ₹ 6 D/P ratio = DPS ×100 EPS = 6 ×100 7 = 85.714%

Key Concepts to Understand

Balance Sheet

A statement showing the financial position of a business at a particular date, listing all assets on one side and all liabilities and capital on the other side. It is not an account but a statement.

Gross Profit

The profit earned from the core trading activities of a business, calculated as Net Sales minus Cost of Goods Sold (COGS). It reflects how efficiently a company uses its direct resources.

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