Solution 7
Profit after tax 252
Gross up for tax 30% 360 252/70%
Add back Interest 120
PBIT 480
Current Case 1 Case 2
PBIT 480 480 480
Interest on Loan (120) (200) (60)
Profit before tax 360 280 420
Tax @ 30% (108) (84) (126)
PAT and Dividends 252 196 294
Cost of Equity (Ke) 18.00% 19.400% 16.800%
9% + 6.5% x 1.385 9%+6.5%x1.6 9%+6.5%x1.2
MV of Equity 1,400 1,010 1,750
252 / 18% 196 / 19.4% 294/16.8%
Cost of Debt (Kd) 10.00% 10.00% 10.00%
MV of Debt 1,200 2,000 600
(1,200+800) (1,200-600)
Total Market Value 2,600 3,010 2,350
1,400 + 1,200
WACC 12.923% 11.162% 14.298%
480x70%/2,600 480x70%/3,010 480x70%/2,350
Best
Value of Equity 1,400 1,400 1,400
Repurchase (800) -
Further issuance 600
Equity Balance that should have been 1,400 600 2,000
Equity Balance is 1,400 1,010 1,750
Gain / Loss - 410 (250)
The best option is to take a loan of Rs 800 million to buy back some equity shares. This would
lower the total dividend payout, but the overall cost of equity wouldn’t rise significantly based
on the given data. As a result, the market value per share is expected to increase.
Solution 8
Profit and loss account for next year
Sales (w1) 11,008,600
Material (w2) (4,931,156)
Labour Cost (w3) (2,145,000)
Variable POH (w4) (750,600)
Fixed POH (w4) (340,080)
Variable SOH (w5) (560,520)
Fixed SOH (w5) (1,226,500) (9,953,856)
Net Profit 1,054,744
Working 1
Products A B C
Weight of selling price 1.00 1.50 1.80
(1x150%) (1.5x120%)
Units sold last year 5,000 2,500 1,500
Weighted avg units 5,000 3,750 2,700 11,450
Sales amount last year 8,702,000
Selling price 760.00
Selling price every product 760 1,140 1,368
760x1.5 1140x1.2
Next year planing
Hours required per unit 6.00 7.50 7.50
Total Hours 30,000 18,750 11,250 60,000
(5,000x6) (2,500x7.5) (1,500x7.5)
Last year hours 60,000
Last year capacity 80%
Hours at full capacity 75,000
(60,000 / 80%)
Next year production Units Hours
Product C new demand 1500x2 3,000 22,500 3000x7.5
Product B new demand 2500x1.4 3,500 26,250 3500x7.5
48,750
Total Hours avaiable (75,000)
Remaining product A 26,250 / 6 4,375 26,250
Next year sales A B C
Units 4,375 3,500 3,000
Selling price 760 1,140 1,231
Sales for the next year 3,325,000 3,990,000 3,693,600 11,008,600
Material Cost (Working 2)
Last year A B C
Units 5,000 2,500 1,500
Material per unit 2.40 3.60 3.60
Grossed up for losses 2.50 4.00 4.00
Total material used 12,500 10,000 6,000 28,500
Cost of Material 3,420,000
Cost per Kg 120.00
Next year
Units 4,375 3,500 3,000
Consumption per unit 2.50 4.00 4.00
Total Usage 10,938 14,000 12,000 36,938
Rate per kg 133.50
Cost of Material 1,460,156 1,869,000 1,602,000 4,931,156
Labour Hours (Working 3)
Last year A B C
Units 5,000 2,500 1,500
Hours per unit 6.00 7.50 7.50
Total Hours 30,000 18,750 11,250 60,000
Total labour cost last year 1,560,000
Hourly rate 26.00
Next year (as above) 22,500 26,250 26,250
Hourly rate 28.60 28.60 28.60
Labour cost next year 643,500 750,750 750,750 2,145,000
VOH (Working 4) A B C
Last year Units 5,000 2,500 1,500
Weight 1 2 2
Weighted Units 5,000 5,000 3,000 13,000
VOH Last year cost 520,000
VOH per common unit 40.00
VOH per unit 40 80 80
Next year units 4,375 3,500 3,000
VOH per unit (8% inflation) 43.20 86.40 86.40
Next year VOH 189,000 302,400 259,200 750,600
FOH (Working 4)
Last year 312,000
Next year after inflation (9% inflation) 340,080
Variable Selling OH (Working 5)
Last year units 5,000 2,500 1,500
VSOH per unit 24.00 36.00 96.00
(96 / 4) 24x1.5
Last year VSOH cost 120,000 90,000 144,000 354,000
Total Selling OH 1,204,000
Fixed Selling OH 850,000
Next year units 4,375 3,500 3,000
VSOH per unit (8% inflat) 25.92 38.88 103.68
Next year VSOH 113,400 136,080 311,040 560,520
Next year Fixed SOH (Working 5)
Inflated amount of last year 926,500
Marketing campaign 300,000
Total FSOH next year 1,226,500
Units of common price
120 x ( 1 + 15% x 9/12)
(62.5% of overheads)
832,000 x 37.5%
1204k-354k
850k x 1.09
Solution 9
Since payment is to be made on 31 April so 31 March futures would not be used.
Amount required (Rs in million) 17.50
Loan tenure (months) 5.00
Futures available for (months) 3.00
Equivalent Amount (Rs in million) 29.17 17.5/3x5
Contract Size (Rs in million) 1.25
Contracts 23.33 Rounded off to 23
Converage in 23 contracts 28.75
Demonstaration of Hedge
(a) Future market operations
Furture Sell (1 Feb) 87.10
Future but (31 April) (86.28)
Gain per contract 0.82
Future price prediction
1 Feb 30 Apr
Spot 8.40 12.60
Futures 12.90 13.73 86.28
Gap 4.50 1.13
Months 4.00 1.00
Per month 1.13
(b) Effective Interest cost
Amount Rate Months Interest
Spot Loan 17.50 13.15 5.00 958,854
Futures 28.75 0.82 3.00 (59,297)
Effective Interest cost 899,557
Solution 10
Solution 11
Permanen Current Assets A B
Minimum Stock 73,500 102,600
Permanent Customers 84,000 90,000
Other PCA 14,000 47,880
Total Permanent CA 171,500 240,480
Fixed Assets 500,000 840,000
Total PCA and FA 671,500 1,080,480
Long Term Finance 780,000 905,000
Short Term Finance 70,000 744,280
850,000 1,649,280
Conclusion
Company A has utilized long-term sources of finance to fund all its non-current assets, permanent
current assets, and a portion of its fluctuating current assets. This reflects a conservative funding
approach, ensuring strong liquidity. However, this strategy may impact profitability, as long-term
financing typically carries a higher cost, while a portion of it is allocated to fluctuating current
assets that do not generate significant returns.
In contrast, Company B has financed its fluctuating current assets and part of its permanent current
assets using short-term sources of finance, indicating an aggressive working capital strategy. This
approach enhances profitability by leveraging lower-cost or cost-free short-term financing for a
portion of permanent current assets. However, it poses a risk to liquidity, as reliance on short-term
funds may create financial strain.
Summary: Company A follows a conservative funding policy, prioritizing liquidity at the ex
profitability, whereas Company B adopts an aggressive working capital policy, enhancing
profitability while increasing liquidity risk.
iquidity at the expense of
