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Question 1 (a) Financial information for the year 2023-24 of two companies, N Limited and C Limited are as under: Details N Limited C Limited Equity share capital (₹ 100 each) ₹ 10,00,000 ₹ 8,00,000 Debt ₹ 5,00,000@10% ₹ 7,00,000@8% Fixed Cost 3,00,000 3,36,000 Combined Leverage 8 4.5 Financial Leverage 2 1.5 You are required to calculate: (i) Contribution for N Ltd. and C Ltd. (ii) Margin of safety in % for N Ltd. and C. Ltd. (iii) Sales of C Ltd. (5 Marks) (b) The following information is available for SK Limited for the year ended on 31st March,2024: Particulars ` Cost of production 15,48,000 Cost of goods sold 14,61,000 Average stock of work-in-progress 94,600 Average stock of finished goods 2,43,500 Administration and Selling expenses 4,14,000 Receivables collection period 36 days Raw Material Storage period 65 days Creditors payment period 63 days You are required to calculate the working capital requirement by operating cycle method. Assume a 360 days year. (5 Marks) (c) Following information relates to MNP Limited for the year ended on 31sMarch, 2024: Inventory turnover ratio (based on cost of goods sold) 7.5 times Total assets turnover ratio 2.5 times Long term debt to Shareholders’ fund 0.6:1 Debtors collection period 30 days Gross profit ratio 25% on sales Current Ratio 2.9:1 Balance Sheet as on 31st March,2024 Liabilities ` Assets ` Equity share capital 6,00,000 Fixed Assets ? Reserves & Surplus 3,00,000 Inventories ? Long term debt ? Debtors ? Creditors 3,00,000 Cash ? Total Total FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT You are required to complete the Balance Sheet of MNP Limited as on 31st March,2024. Assume a 360 days year and all sales are credit sales. (5 Marks)

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Detailed Solution & Explanation

(a) (i) Calculation of Contribution N Limited C Limited Financial Leverage (FL) = EBIT EBT or EBIT EBIT Interest − 2 = EBIT EBIT 50,000 − 1.5 = EBIT EBIT 56,000 − 2 EBIT – 1,00,000 = EBIT 1.5 EBIT – 84,000 = EBIT EBIT = ₹ 1,00,000 EBIT = ₹ 1,68,000 EBT = ₹ 50,000 EBT = ₹ 1,12,000 Combined Leverage (CL) = Contribution EBT 8 = Contribution / 50,000 4.5 = Contribution / 1,12,000 Contribution= ₹ 4,00,000 Contribution= ₹ 5,04,000 (ii) Calculation of Margin of safety (MOS) in % MOS = Contribution - Fixed Cost Contribution = EBIT Contribution N Limited C Limited MOS = 1,00,000/4,00,000 = 25% MOS = 1,68,000/5,04,000 = 33.33% Part (ii) can also be presented in following way: Calculation of Margin of safety (MOS) in % MOS = 1/operating leverage (OL) OL = CL/FL N Limited C Limited OL = 8/2 = 4 OL = 4.5/1.5 = 3 MOS = 1/4 = 25% MOS = 1/3 = 33.33% (iii) Sales of C Limited Let assume that PV ratio is 40% PV Ratio = = Contribution Contribution Sales OR Sales PV Ratio Sales = 5,04,000 0.40 = ₹ 12,60,000 Part (iii) of the solution can be solved by any alternative assumption. (b) Operating Cycle = R + W + F + D – C Where, R = Raw material storage period = 65 days W = Work-in-progress inventory* holding period F = Finished goods storage period D = Receivables (Debtors) collection period = 36 days C = Credit period allowed by suppliers (Creditors) = 63 days Work-in-progress inventory holding period (W) = AverageWork-in-progress inventory Average Cost of Production perday = ` ₹ 00 15,48,000÷360 94,6 days = 22 days Finished Goods storage period (F) = Average stock of finished goods Average Costof Goods Soldper day = ` ₹ 2,43,500 14,61,000÷360days = 60 days FINANCIAL MANAGEMENT AND STRATEGIC MANAGEMENT Net Operating Cycle = 65+22+60+36-63 = 120 days Number of Operating Cycles in a year = No. of days in a year Operating Cycle period = 360days 120days = 3 times Amount of Working Capital Required = AnnualOperating Cost Number of Operating Cycles = 3 ` ₹ 14,61,000+ 4,14,000 =₹ 6,25,000 (c) Working Notes: Long term debt to Shareholder’s fund = 0.6:1 Long term debt = 0.6 x ₹ 9,00,000 = ₹ 5,40,000 Total Assets = ₹ 17,40,000 Total Asset turnover ratio = Sales TotalAssets = 2.5 times Sales = 2.5 x ₹ 17,40,000 = ₹ 43,50,000 Current ratio = Current Assets Current Liabilities = 2.9:1 Current Assets = 2.9 x ₹ 3,00,000 = ₹ 8,70,000 Fixed Assets = Total Assets - Current Assets = ₹ 17,40,000 – ₹ 8,70,000 = ₹ 8,70,000 Gross profit ratio = 25% on sales Gross Profit (GP) = ₹ 43,50,000 x 0.25 = ₹ 10,87,500 Cost of Good Sold (COGS) = Sales – GP = ₹ 43,50,000 - ₹ 10,87,500 = ₹ 32,62,500 Inventory Turnover Ratio = Cost of Goods Sold Average Inventory = 7.5 times Inventory = ₹ 32,62,500/7.5 = ₹ 4,35,000 Debtor Collection Period = Average Accounts Receivables Average Daily Credit Sales = 30 days Receivables = 30 days x ₹ 43,50,000/360 days = ₹ 3,62,500 Balance Sheet as on 31st March 2024 Liabilities (`) Assets (`) Share Capital 6,00,000 Fixed Assets 8,70,000 Reserve and Surplus 3,00,000 Inventories 4,35,000 Long-term loan 5,40,000 Debtors 3,62,500 Creditors 3,00,000 Cash (Balancing Figure) 72,500 17,40,000 17,40,000

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.

Working Capital

The excess of current assets over current liabilities, representing the short-term liquidity available to a business for its day-to-day operations. Positive working capital indicates good short-term financial health.

Current Ratio

A liquidity ratio that measures a company's ability to pay its short-term liabilities using its short-term assets. Formula: Current Assets ÷ Current Liabilities. The ideal ratio is 2:1.

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