CHAP HA PTER 1
1.
As a rule rule of of thumb thumb,, real real rates rates of of inte intere rest st are are calc calcula ulated ted by subtr subtrac actin ting g the the inflat inflatio ion n rate from the nominal rate. What is the error from using this rule of thumb for calculating calculating real rates of return in the following cases? Nominal rate (%) "nflation rate (%)
7 #
1 $
1! !
1
Solution:
Nominal Nominal rate(%)(N&)
7
1
1!
"nflation rate(%) ( "&)
#
$
!
1
&eal rate by the rule of thumb(%)
'
$
1
1
orrect rate(%)(1*N&)+(1*"&)1
.! ! .1
-.$ $ .' #
. $ .7 #
1. 1 1.
/rror from using the rule of thumb(%) .
As a rule rule of of thumb thumb,, real real rates rates of of inte intere rest st are are calc calcula ulated ted by subtr subtrac actin ting g the the inflat inflatio ion n rate from the nominal rate. What is the error from using this rule of thumb for calculating calculating real rates of return in the following cases? Nominal rate (%) "nflation rate (%)
# 1
! '
11
1 #
Solution:
Nominal Nominal rate(%)(N&)
#
!
11
1
"nflation rate(%) ( "&)
1
'
#
&eal rate by the rule of thumb(%)
'
-
1-
orrect rate(%)(1*N&)+(1*"&)1
. 7 . '
#.! .1 -
!.! .1 !
1#.# .!
/rror from using the rule of thumb(%)
1.
At the the end end of 0arch 0arch,, $ $ the the balan balances ces in the the 2ario 2arious us acc accoun ounts ts of 3hon 3honii 4 om5any are as follows6 Rs. in million Accounts Accounts Balance /uity ca5ital 8reference ca5ital 9i:ed assets (net) &eser2es and sur5lus ash and ban; 3ebentures (secured) 0ar;etable securities
1 ' 17 '1 1! 7 1 $ 1
&euired6 8re5are the balance sheet of 3honi 4 om5any as 5er the format s5ecified by the om5anies Act. Solution:
Balance Sheet Sheet of Dhoni & Company As on March 31, 20 !
Liabilities =hare ca5ital
Assets 9i:ed assets
/uity 8reference &eser2e 4 sur5lus
=ecured loans 3ebentures
1Net fi:ed assets ' "n2estments 0ar;etable securities urrent assets, loans 4 ad2ances 1 Pre-paid expenses
>nsecured loans "n2entories =hort term ban; borrowing 7 &ecei2ables urrent liabilities 4
1 7
1 8
1 0 1 $
1.
At the the end end of 0arch 0arch,, $ $ the the balan balances ces in the the 2ario 2arious us acc accoun ounts ts of 3hon 3honii 4 om5any are as follows6 Rs. in million Accounts Accounts Balance /uity ca5ital 8reference ca5ital 9i:ed assets (net) &eser2es and sur5lus ash and ban; 3ebentures (secured) 0ar;etable securities
1 ' 17 '1 1! 7 1 $ 1
&euired6 8re5are the balance sheet of 3honi 4 om5any as 5er the format s5ecified by the om5anies Act. Solution:
Balance Sheet Sheet of Dhoni & Company As on March 31, 20 !
Liabilities =hare ca5ital
Assets 9i:ed assets
/uity 8reference &eser2e 4 sur5lus
=ecured loans 3ebentures
1Net fi:ed assets ' "n2estments 0ar;etable securities urrent assets, loans 4 ad2ances 1 Pre-paid expenses
>nsecured loans "n2entories =hort term ban; borrowing 7 &ecei2ables urrent liabilities 4
1 7
1 8
1 0 1 $
.
At the the end end of 0arc 0arch, h, 7 7 the the balanc balances es in the the 2ario 2arious us acco account untss of =ania =ania imi imited ted are as follows6 Rs. in million Balance
Accounts Accounts /uity ca5ital 8reference ca5ital 9i:ed assets (net) &eser2es and sur5lus ash and ban; 3ebentures (secured) 0ar;etable securities
- ! '! '- 1 1 ' 1 # 11 '1 7
&euired6 8re5are the balance sheet of =ania imited as 5er the format s5ecified by the om5anies Act. Solution:
Balance Sheet Sheet of Sania "imite# as on March 31, 20 $ Liabilities
Assets
=hare ca5ital /uity 8reference &eser2e 4 sur5lus
=ecured loans 3ebentures
9i:ed assets -Net fi:ed assets ! '- "n2estments 0ar;etable securities urrent assets, loans 4 ad2ances 1 1 8re5aid e:5enses
>nsecured loans "n2entories =hort term ban; borrowing 11 &ecei2ables urrent liabilities 4
'!
3 0
2 0 '1 1$
'.
'(ners) *+uity an# "iailities =hare ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowings
%Rs. in s on 7 ! !7 #1-
As on 31.3.20! 7 # ! ! # 1 '
1 $ '
1 $' 1#1st
(Rs. in million) Proft & Loss Account or the Period 1.4.20X6 to 31.3.20X
Net sales ost of goods sold =toc;s Wages and salaries @ther manufacturing e:5enses
7- - 111 #-
ross 5rofit @5erating e:5enses =elling, administration and general 3e5reciation
1'1 1-
@5erating 5rofit Nono5erating Nono5erating sur5lus or deficit /B"< "nterest 8rofit before ta:
11 () $1- 1 #
&euire &euired6 d6
(a) 8re5are 8re5are the classifie classified d cash cash flow statemen statementt for for the 5eriod 5eriod 1.#.$ 1.#.$ to '1.'.7 (b) 3e2elo5 the cash flow identity for the 5eriod 1.#.$ 1.#.$ to '1.'.7
Solution:
A.
Cash flow from operating activities Net 5rof 5rofit it before before ta: ta: and e:trao e:traord rdina inary ry item itemss
AdCus Custmen tmentts for
B.
.
"nterest 5aid 3e5reciation @5erating @5erating 5rofit 5rofit befo before re wor;in wor;ing g ca5ital ca5ital changes changes AdCustments for - AdCustments "n2entories 3ebtors
!11-
Cash flow from financing financing activities "ncrease in loans
3i2idends 5aid "nterest 5aid Net cash flow from financing acti2ities acti2ities 3.
et increase in cash an! cash e"uivalents ash and cash eui2alents as on '1.'.$
ash and cash eui2alents as on '1.'.:7 Note
"t has been assumed that Dother assetsE re5resent re5resent Dother current assetsE.
(-) (-) ' 1 1 1 (1 1 ( 1' (1
1(1 ( ( '
(b) A
B
Cash flow from assets @5erating cash flow Net ca5ital s5ending 3ecrease in net wor;ing ca5ital ash flow from assets
(1-) '
Cash flow to cre!itors "nterest 5aid &e5ayment of long term debt ash flow to creditors
(1-) 1
. Cash flow to sharehol!ers 3i2idends 5aid
1
Net new euity raised
ash flow to shareholders
1
We find that (A)
(B) * ( )
i.e., ash flow from assets
ash flow to creditors * ash flow to shareholders
#.
'(ners) *+uity an# "iailities =hare ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowings
As on 31.3.20! 1 ' 11
1 #
%Rs. in s on ' 1! 11! 111
-1 ! 7 11
(Rs. in million) Proft & Loss Account or the Period 1.4.20X6 to 31.3.20X
Net sales ost of goods =toc;s Wages and salaries @ther manufacturing e:5enses
1# '1!
ross 5rofit @5erating e:5enses =elling, administration and general 3e5reciation
# -
@5erating 5rofit Nono5erating sur5lus or deficit /B"< "nterest 8rofit before ta:
11 1$ # 1 1 !
&euired6
(a) 8re5are the classified cash flow statement for the 5eriod 1.#.$ to '1.'.7 (b) 3e2elo5 the cash flow identity for the 5eriod 1.#.$ to '1.'.7
Solution :
A.
Cash flow from operating activities Net 5rofit before ta: and e:traordinary items AdCustments for "nterest 5aid 3e5reciation @5erating 5rofit before wor;ing ca5ital changes
-
AdCustments for "n2entories 3ebtors
11 #
(1 ( '
"ncrease in other assets
()
ash generated from o5erations
1#
"ncome ta: 5aid
()
ash flow before e:traordinary items
1
/:traordinary item B.
C.
1
Net cash flow from o5erating acti2ities
1'
Cash flow from investing activities 8urchase of fi:ed assets
()
()
Net cash flow from in2esting acti2ities
Cash flow from financing activities # "ncrease in euity
10
&e5ayment of term loans
(-)
3i2idend 5aid
()
"nterest 5aid
(#)
Net cash flow from financing acti2ities 3.
Note (b) A
B.
.
(1)
et increase in cash an! cash e"uivalents ash and cash eui2alents as on '1.'.$
' -
!
ash and cash eui2alents as on '1.'.:7
"t has been assumed that Dother assetsE re5resent Dother current assetsE.
Cash flow from assets @5erating cash flow Net ca5ital s5ending 3ecrease in net wor;ing ca5ital ash flow from assets Cash flow to cre!itors "nterest 5aid &e5ayment of long term debt ash flow to creditors Cash flow to sharehol!ers 3i2idends 5aid Net new euity raised ash flow to shareholders
We find that
(A)
i.e., ash flow from assets
1 () () 1 # (1) (!)
(B) * ( )
ash flow to creditors * ash flow to shareholders
CHAPTER $
1.8remier om5anyFs net 5rofit margin is ! 5ercent, total assets turno2er ratio is .- times, debt to total assets ratio is .$. What is the return on euity for 8remier? Solution:
!et "roft Return on e#uit$ % #uit$ !et "roft!et s'les % !et s'les
ot'l 'ssets 1
%0.0*2.+% 0.+ or +0 "er cent 0.4 ,e-t#uit$ !ote % 0.6/o% 1 0.6 % 0.4 ot'l 'ssetsot'l 'ssets ence ot'l 'ssets#uit$% 10.4 .
'1.1. 1 ratio?
Solution:
urrent assets urrent liabilities : 1. 1 : 1.- 1- Guic; assets
urrent liabilities : 1. 1 : 1. 1
"n2entories
' '-
"n2entory turno2er ratio '.
11.7
'
- 1.# 1.
What is the le2el of current liabilities?
ot'l 'ssets #uit$
Solution: "n2entory -+- 1
urrent assets urrent ratio
1.# urrent liabilities urrent assets H "n2entories
Acid test ratio
1. urrent iabilities
.A 1 1. A
1
1.
1
1.#
1. 1
.#
-
#.
=afari "nc. has 5rofit before ta: of &s. million. "f the com5anyFs times interest co2ered ratio is #, what is the total interest charge?
Solution:
P%Rs.0
million
P5 imes interest coered % % 4 5nterest /o P5 % 4 5nterest P % P5 7 interest % 4 interest interest % 3 interest % 0 million hereore interest % 03 % Rs.30 million
-.
A has 5rofit before ta: of &s.# million. "f its times interest co2ered ratio is $, what is the total interest charge?
Solution:
8B<
&s. # million -B/
$ "nterest
=o -B/ $ : "nterest -B/ H "nterest -B/ &s.# million $ : "nterest H "nterest &s. # million - : "nterest
&s.# million
Ience "nterest &s.! million $.
0cill "nc. has 5rofit before ta: of &s.$' million. "f the com5anyFs times interest co2ered ratio is !, what is the total interest charge? Solution:
8B<
&s.$' million -B/
! "nterest
=o -B/ ! : "nterest -B/ H "nterest -B/ &s.$' million ! : "nterest H "nterest 7 : "nterest &s.$' million Ience "nterest 7.
&s. million
&s.,
=ales
&s.$,,
# 5er cent
3008000 /o8Proft -eore t' % %
Rs.+008000
(1.4) 5nterest ch'r9e% Rs.2008000 /o Proft -eore interest 'nd t'es % Rs.008000 ence008000 imes interest coered r'tio %% 3.+ 2008000
!.
&s.-,
=ales
&s.',
- 5ercent
Net 5rofit margin
' 5ercent
What is the firmFs times interest co2ered ratio? Solution:
=ales &s.', Net 5rofit margin ' 5er cent Net 5rofit &s.', : .' ,
- 5er cent ,
=o,
8rofit before ta:
&s.1, (1.-)
"nterest charge
&s.-,
=o 8rofit before interest and ta:es &s.$, Ience
$, 1.# -,
.
&s.1,, &s.!,, - 5ercent 1 5ercent
What is the firmFs times interest co2ered ratio?
Solution:
=ales &s.!,, Net 5rofit margin 1 5er cent Net 5rofit &s.!,, : .1 !,,
A firmFs current assets and current liabilities are -, and 1!, res5ecti2ely. Iow much additional funds can it borrow from ban;s for short term, without reducing the current ratio below 1.'-?
Solution:
A -, 1!, et BB stand for ban; borrowing ABB
1.'-
BB -,*BB
1.'-
1!,*BB 1.'-: 1!, * 1.'- BB -, * BB .'-BB -, #,' 7 BB 7+.'- , 11.
NJs current assets and current liabilities are , and 1#, res5ecti2ely. Iow much additional funds can it borrow from ban;s for short term, without reducing the current ratio below 1.''?
Solution:
A , 1#, et BB stand for ban; borrowing
ABB
1.''
BB ,*BB 1.'' 1#,*BB 1.'' : 1#, * 1.''BB , * BB .'' BB , 1!$, 1',! 1.
Na2neetJs current assets and current liabilities are 1,, and 7,, res5ecti2ely. Iow much additional funds can it borrow from ban;s for short term, without reducing the current ratio below 1.#? Solution:
:A % 1080008000 :L % 800088000 Let st'nd or -'n; -orro
1'.
A firm has total annual sales (all credit) of -,, and accounts recei2able of !,,. Iow ra5idly (in how many days) must accounts recei2able be collected if management wants to reduce the accounts recei2able to $,,? Solution:
2+80008000 Aer'9e d'il$ credit s'les % % 6*843 36+ 5 the 'ccounts recei'-le h's to -e reduced to 680008000 the A:P must -e 680008000 % *.6 d'$s 6*843
1#.
A firm has total annual sales (all credit) of 1,, and accounts recei2able of -,. Iow ra5idly (in how many days) must accounts recei2able be collected if management wants to reduce the accounts recei2able to ',?
Solution:
182008000 Aer'9e d'il$ credit s'les % % 32*.6 36+ 5 the 'ccounts recei'-le h's to -e reduced to 3008000 the A:P must -e 3008000 % 1.3 d'$s 32*.6
1-.
A firm has total annual sales (all credit) of 1,, and accounts recei2able of ,,. Iow ra5idly (in how many days) must accounts recei2able be collected if management wants to reduce the accounts recei2able to 1-,,?
/olution 10080008000 Aer'9e d'il$ credit s'les % % 2382.6 36+ 5 the 'ccounts recei'-le h's to -e reduced to 1+80008000 the A:P must -e 1+80008 % +4.* d'$s 2382.6
1$.
1. 1.1 1
Solution:
:urrent 'ssets % :urrent li'-ilities :urrent r'tio %20001.2+% 2+00 Acid test :urrent 'ssets 5nentories% :urrent li'-ilities r'tio 1.10% 2200 %2000
5nentories%300 /'les%5nentories 300 5nentor$ turnoer r'tio % 10 % 3000
17.
1.'' .! #, $
Solution:
:urrent 'ssets % :urrent li'-ilities :urrent r'tio %408000 1.33% +38200 :urrent 'ssets 5nentories%:urrent li'-ilities Acid test r'tio %408000 0.*0% 328000
1!.
5nentories
%218200
/'les
% 5nentories 5nentor$ turnoer r'tio % 218200 6 %128200
1.$
Acidtest ratio
1.
urrent liabilities "n2entory turno2er ratio
,, -
What is the sales of the firm? Solution:
:urrent 'ssets % :urrent li'-ilities :urrent r'tio %2800080001.6% 382008000 :urrent 'ssets 5nentories%:urrent li'-ilities Acid test r'tio % 280008000 1.2% 284008000 5nentories =ales
%
*008000
"n2entories : "n2entory turno2er ratio !, : #,,
1.
om5lete the balance sheet and sales data (fill in the blan;s) using the following financial data6 3ebt+euity ratio .! Acidtest ratio 1.1
=ales
8lant and eui5ment "n2entories Accounts recei2able ash
.. .. .. .. ..
.... ....
ost of goods sold
KK..
Solution:
3ebt+euity .! /uity !, * -, 1', =o 3ebt =hortterm ban; borrowings .! : 1',
1#, Ience
: ' '$ #$!,
: '
',
'$ ost of goods sold "n2entory turno2er ratio
'7,$
$ "n2entory
"n2entory
/o 5nentor$ % +48600 As shortterm -'n; -orro
#uit$ c'"it'l Ret'ined e'rnin9s
*08000 Pl'nt & e#ui"ment 6+8000 +08000 5nentories Accounts recei'-le :'sh +48600 38000 /hortterm -'n; -orro
2348000
46*8000 328600
om5lete the balance sheet and sales data (fill in the blan;s) using the following financial data6 3ebt+euity ratio .# Acidtest ratio
.
. - days - 5ercent
"n2entory turno2er ratio
! %alance sheet
/uity ca5ital 1$,, &etained earnings ',, =hortterm ban; borrowings . . . KK
8lant and eui5ment "n2entories KKK Accounts recei2able K.. . . . ash ....
....
....
=ales
....K.
ost of goods sold
KK.
,e-te#uit$ % 0.40 Solution: = 3080008000 % 1080008000 #uit$ % 16080008000 /o ,e-t % /hortterm -'n; -orroross "roft m'r9in % 2+ "er cent /o :ost o 9oods sold % 0.+ 66+80008000 % 4*8+08000 ,'$?s s'les outst'ndin9 in 'ccounts recei /'les /o Accounts recei'-le % 2+ 360 66+80008000 % 2+% 4681*08++6 360 :ost o 9oods sold4*8+08000 5nentor$ turnoer r'tio %%% * 5nentor$5nentor$ /o 5nentor$ % 6283438+0 As shortterm -'n; -orro
% 26680008000 6283438+0 4681*08++67 228218444 % 13+82+682+0 Puttin9 to9ether eer$thin9
1$,, ',, 7$,,
Balance Sheet
8lant 4 eui5ment "n2entories Accounts recei2able
:'sh /'les :ost o 9oods sold
26680008000 66+80008000 4*8+08000
22821844 2668000800
1.
om5lete the balance sheet and sales data (fill in the blan;s) using the following financial data6 3ebt+euity ratio
1.-
Acidtest ratio
.'
1. - days
ross 5rofit margin
! 5ercent
"n2entory turno2er ratio
7 %alance sheet
/uity ca5ital $, &etained earnings 1, =hortterm ban; borrowings . . .
8lant and eui5ment "n2entories Accounts recei2able ash
.... =ales
. . . K..
ost of goods sold
KKK
.... .... .... .... ....
Solution:
,e-te#uit$ % 1.+ #uit$ % 6008000 = 1008000 % 008000 /o ,e-t % /hortterm -'n; -orroross "roft m'r9in % 2* "er cent /o :ost o 9oods sold % 0.2 3832+8000 % 28348000 ,'$?s s'les outst'ndin9 in 'ccou /'les /o Accounts recei'-le %2+
%
360 3832+8000 2+ 360
% 230803
:ost o 9oods sold28348000 5nentor$ turnoer r'tio % % % 5nentor$5nentor$ /o 5nentor$ % 3428000
As shortterm -'n; -orro
Pl'nt &e#ui"ment 18038000 5nentories 3428000 /hortterm -'n; -orro
#uit$ c'"it'l Ret'ined e'rnin9s
6008000 1008000
18+08000
18+08000
/'les3832+8000 :ost o 9oods sold28348000 .
om5ute the financial ratios for Acme td. /2aluate AcmeFs 5erformance with reference to the standards. Acme "imite# Balance Sheet, March 31, 20$ "iailities an# *+uity /uity ca5ital &eser2es and ongterm debt =hortterm ban; borrowing
&s.$,, 7,, #,, ',, 1-,, $,,
Assets 9i:ed assets (net)
&s.11,,
urrent assets ash and ban;
',,
&ecei2ables
#-,,
"n2entories 8re5aid e:5enses @thers
$1,, 1,,
$,,
Acme "imite# -rofit an# "oss Account for the ear *n#e# March 31, 20$ Net sales ost of goods sold ross 5rofit @5erating e:5enses @5erating 5rofit Nono5erating sur5lus 8rofit before interest and ta: "nterest 8rofit before ta:
&s.',, 11$,, -,, $$,, #,, 7,, 1,, -!,, ,, '!,, #,, '#,, Acme
urrent ratio Acidtest ratio 3ebteuity ratio
Stan#ar# 1.' .7 . #.-. #- days 1.!% % 1! %
Solution:
@or "ur"oses o r'tio 'n'l$sis8
.$,, #-,, 7,, #,,
17,,
Assets @ied 'ssets (net) :urrent 'ssets ash and ban; &ecei2ables "n2entories 8re5aid e:5enses @thers ess6 urrent liabilities
',, #-,, $1,, 1,, $,,
',, 1-,,
ot'l
11080008000
1-,,
#-,, 17,,
2180008000
:urrent 'ssets (i) :urrent r'tio % :urrent li'-ilities 1+280008000 %%1.* *+80008000 (:urrent li'-ilities here includes shortterm -'n; -orro
:ost o 9oods sold 20480008000 () 5nentor$ turnoer "eriod% % % 3.34 5nentor$6180008000
36+ (i) Aer'9e collection "eriod % !et s'les Accounts recei'-le 36+ %%+1.3 d'$s 320800080004+80008000 (ii) ot'l 'ssets %#uit$ = ot'l de-t %( 6080008000 = 4+80008000 ) =(280008000=4080008000) % 2180008000 !et s'les32080008000 ot'l 'ssets turnoer r'tio%%% 1.+ ot'l 'ssets2180008000
(i) !et "roft m'r9in
Proft 'ter t'3*80008000 %%% 11.C !et s'les32080008000
P5
080008000 () 'rnin9 "o
urrent ratio Acidtest ratio 3ebteuity ratio
'.
Acme 1.! 1.1 1.1 -.! '.' -1.' 1.11. % '.' % '$. %
Stan#ar# 1.' .7 . #.-. #- days 1.!% % 1! %
om5ute the financial ratios for Nainar td. /2aluate NainarFs 5erformance with reference to the standards.
ainar "imite# Balance Sheet, March 31, 20$ "iailities an# *+uity /uity ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowing
&s.1,, $-,, 1#,, 7,, #,,
#1!,,
Assets 9i:ed assets (net) urrent assets ash and ban; &ecei2ables "n2entories 8re5aid e:5enses @thers
&s.$,, -,, 7,, !-,, ,, 1,, #1!,,
ainar "imite# -rofit an# "oss Account for the ear *n#e# March 31, 20$ Net sales ost of goods sold ross 5rofit @5erating e:5enses @5erating 5rofit Nono5erating sur5lus 8rofit before interest and ta: "nterest 8rofit before ta:
&s.7#,, ,, 1,, 11!,, 1,, 1',, ,, 1!,, #$,, $,, ,, #,, aina
urrent ratio Acidtest ratio 3ebteuity ratio
Stan#ar# 1.7 1. 1.# -.$. # days . !% ' % '- %
@or "ur"oses o r'tio 'n'l$sis8
Li'-ilities 'nd #uit$
/uity ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowing
1,, $-,, 1#,, 7,,
Assets 9i:ed assets (net) urrent assets ash and ban; &ecei2ables "n2entories 8re5aid e:5enses @thers ess6 urrent liabilities
-,, 7,, !-,, ,, 1,,
#,, 1,,
ot'l
'7-,, $,,
1,,
#',, 1$,,
3+80008000
:urrent 'ssets (i) :urrent r'tio % :urrent li'-ilities 21280008000 %%1. 11380008000 ( :urrent li'-ilities here includes shortterm -'n; -orro
:urrent 'ssets 7 5nentories 1280008000 Acidtest r'tio %%% 1.1 :urrent li'-ilities11380008000 ( :urrent li'-ilities here includes shortterm -'n; -orro
14080008000 = 080008000 %% 1.3 10080008000 = 6+80008000 Proft -eore interest 'nd t' imes interest coer'9e r'tio 5nterest
%
13080008000 %% +. 2280008000 :ost o 9oods sold+2080008000 5nentor$ turnoer "eriod%%% 6.1 5nentor$*+80008000 36+ Aer'9e collection "eriod %
!et s'les Accounts recei'-le 36+ % % 34.+ d'$s 4080008000080008000 (ii) ot'l 'ssets %#uit$ = ot'l de-t %(10080008000 = 6+80008000 ) =(14080008000=080008000) % 3+80008000 !et s'les ot'l 'ssets turnoer r'tio%
4080008000 % % 2.0 ot'l 'ssets3+80008000
8rofit after ta: (i:) Net 5rofit margin
$,,
Net sales
!.# % 7#,,
13080008000 () 'rnin9 "o
#uit$ e'rnin9 6280008000 (i) Return on e#uit$ % % % 3.6 C !et
ainar urrent ratio Acidtest ratio 3ebteuity ratio
#.
Stan#ar#
1. 1.1 1.' -. $.1 '#.. !.# % '#.7 % '7.$ %
1.7 1. 1.# -.$. # days . !% ' % '- %
%Rs. in million
20X3
20X4
20X5
20X6
20X7
=hare ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowing urrent liabilities
1.$ 1. 1.# 1.' 1.1
1.$ 1.$ 1.1.1.'
1.! .# 1.! 1.7 1.-
1.! .' 1.$ 1.1.$
' 1.# 1. 1.!
Total
$.#
7.-
.
!.!
.#
Assets Net fi:ed assets urrent assets ash and &ecei2ables "n2entories
1.
1.#
1.7
0.3 1.8 1.8
0.3 2.1 2.2
0.2 2.5 2.8
0.4 2.4 2.4
.' ..!
@ther assets
1.3
1.5
1.7
1.9
1.!
Total
$.#
7.-
.
!.!
.#
Comparatie -rofit an# "oss Accounts, alar "imite# %Rs. in million
20X3
Net sales ost of goods sold ross 5rofit @5erating e:5enses @5erating 5rofit Nono5erating sur5lus deficit 8rofit before interest and ta: "nterest 8rofit before ta:
20X4
3.8 2.6 1.2 0.3 0.9 0.1 1 0.1 0.9 0.05 0.85
4.2 3.1 1.1 0.3 0.8 . 1 0.1 0.9 0.08 0.82
20X5
20X6
5.3 3.9 1.4 0.4 1 .1 1.1 0.2 0.9 1 -0.1
6.5 4 2.5 0.6 1.9 .' 2.2 0.1 2.1 1.2 0.9
20X7
7 # 3 2 2 2 1 1
&euired6 om5ute the im5ortant ratios for Nal2ar imited for the years '7. Lou may assume that other assets in the balance sheet re5resent other current assets. M urrent ratio M 3ebteuity ratio M
M
Net 5rofit margin
M
/arning 5ower
M
&eturn on euity
Solution:
We will rearrange the balance sheets as under for ratio analysis. "t is assumed that @ther assetsJ are other current assets "iailities an# *+uity =hare ca5ital &eser2es and sur5lus ongterm debt =hortterm
0. 1.
&'( 1.$ 1 1.#
&'( 1.$ 1.$ 1.-
&'( 1.! .# 1.!
&'( 1.! .' 1.$
&'( ' 1.#
1.'
1.-
1.7
1.-
1.
-.'
$.
7.7
7.
7.$
1.
1.
1.7
0. 2.
0. 2.
0. 2.
. .
"n2entories @ther current assets ess6 urrent liabilities @ther current liabilities Net current assets
1. 1. 1.
-.
2. 1.
1.1
1.
4. 5.
203 2. 1. 0. 22. 18. 32.
$.1
2. 1.
1.'
1.
4. 6.
20 4
0. 0. 19. 16. 25.
7.
2. 1.
1.-
1.
5.7 7.7
205 2. 0. 0. 14. -
7.1
. 1.
7.#
1.$
1.
1.!
5.5 7.2
20!
20$ 2 0 1 17 35 28
2. 0. 0. 13. 30. 22.
$.
=hare ca5ital &eser2es and sur5lus ongterm debt =hortterm ban; borrowing urrent liabilities Total
Assets Net fi:ed assets urrent assets ash and &ecei2ables "n2entories @ther Assets Total
20X3
20X4
20X5
20X6
#1 1$ ! '#
- '$ ' !
- 7 ' '$ '
- 11! '! '
1##
1$
1!
$-
7
!
7-
1
! # '-
' # !
1- -1#
1 $ 71#
1##
1$
1!
$-
20X7
5.6 7.6
Comparatie -rofit & "oss Account of Somani "t# (&s. in million) 20X3
20X4
! 1$ 1 $ ' $ ! 1 '
' 117 $ 1
Net sales ost of goods sold ross 5rofit @5erating e:5enses @5erating 5rofit Nono5erating sur5lus deficit 8rofit before interest and ta: "nterest 8rofit before ta:
# 1 $ 1 7
20X5
20X6
'$ 17 1 $! 1 # 1$ 1 11$ ' !$
20X7
'- 1717$! 17 ' 11 1 ! $ 7
' 1 1 $# 1 ' 1 1 1 7
om5ute the following ratios for years '76 M
urrent ratio
M
3ebteuity ratio
M
M
Net 5rofit margin
M
/arning 5ower
M
&eturn on euity 9or ratio analysis 5ur5ose, we will rearrange the balance sheet as under. "t is assumed that @ther assetsJ are other current assets '
#
-
$
7
=hare ca5ital
#1
-
-
-
--
&eser2es and sur5lus
1$
'$
7
11!
1-
ongterm debt
!
-
'
=hortterm
ban;
borrowing
'-
'
'$
'!
'!
Total
1
1#1
1!!
'-
$-
!
7-
1
1'
Assets Net fi:ed assets
7
urrent assets ash and ban;
!
1-
1
11
&ecei2ables
#
'
-
$
!-
"n2entories
'-
#
--
7-
7
@ther assets
-
7
!
!
1#
1#'
1#
1$'
1
1!7
#
#
!
!
'
'
'
'
-
-
ess 6 urrent liabilities Net current assets
#!
$1
11'
1''
1$
Total
1
1#1
1!!
'-
$-
urrent ratio 3ebteuity ratio
1. . . '. 7$. !!.
. . 1. '. $7. 7.
. . 1. . #$. #.
' 1 #'!
$.
(&s. in million) :$ -$ $ 1-$ 1 #1 #7 ' '' 11 71 #1 #7#
8rofit 4 oss Accounts
(&s. in million) :$
:7
Net sales
$'
71
ost of goods sold
#7-
--
ross 5rofit
1#!
1#
8B"<
1-
!
"nterest
1
8B<
!'
$!
#1
'#
8A<
#
'#
Solution:
ommon =iPe statements6
8rofit and oss Account &egular ( in &s. million)
Net sales ost of goods sold ross 5rofit 8B"< "nterest 8B<
: $ #7 1# 1 ! # #
:7 71 -- 1# ! 1 $! '# '#
Balance =heet &egular ( in million) :$ =hareholdersF funds oan funds
:7
ommon =iPe(%) :$ 1 7$ # 17 # 1' 7 7
1 7 1 1' ' 1 -
ommon =iPe(%) :$
:7
-$ 1-
$ 1
$ '!
-#-
#1 ' 1
#7# '' 1-
1 7! #
1 7 '
7
1
1!
7
#1
#7#
1
1
7.
'l'nce /heet 206 *+ /h'reholders? und 12+ Lo'n unds ot'l 210 @ied 'ssets 5nestments 12 !et current 'ssets ot'l * + 210
20 *+ 1*0 26+ 10 10 *+ 26+
Proft & Loss Account Net sales ost of goods sold ross 5rofit 8B"< "nterest 8B<
:$ #- ' 1' !1 7' -1
:7 -$ #1 1- ! 17 !1 '! #'
&egular (&s. in million) :$ :7 !!11! 1 $17 17 ! 1 7!1 $-
omm on =iPe( %) # $ 1 $ # '$ 1
&egular (&s. in million) :$ :7 ' #1 1' 1- !! 1 17 7' !1 '! -1 #'
omm on =iPe( %) 71 1 ' 1$ 11
Solution:
Balance =heet funds oan funds
ommon base year statements Balance =heet
&egular (&s. in million) :$ :7
=hareholdersF oan funds
!11 17 ! 71
ommon base year (%) :$ :7
!1! $17 1 !$-
1 1 1 1 1 1 1
8rofit 4 oss Account
&egular (&s. in million) :$ :7
Net sales ost of goods sold ross 5rofit 8B"< "nterest 8B<
#- ' 1' !1 7' -1
1 1 1 1 1 1 1
ommon base year (%) :$ :7
-$ #1 1- ! 17 !1 '! #'
1 1 1 1 1 1 1 1
1 1 1 1 1 1 1
CHAPTER *
1.
sing the 5ercent of sales method, 5re5are the pro forma 5rofit and loss account for year '. Assume that the sales will be '- in year '. "f di2idends are raised to #, what amount of retained earnings can be e:5ected for year '? ear
1
2
Net sales
2300
2700
ost of goods sold
17$
2000
ross 5rofit
-#
7
=elling e:5enses eneral and administration e:5enses
1-
180
1
124
3e5reciation
#
84
@5erating 5rofit
17$
'1
Nono5erating sur5lus deficit
1
10
/arnings before interest and ta: "nterest /arnings before ta:
1!! ' 1-! -$ 1 '$7
' 3 9 1 3 1
Solution:
ear
Net sales ost of goods sold ross 5rofit =elling e:5enses eneral and administration 3e5reciation @5erating 5rofit Nono5erating sur5lus deficit /arnings before interest and ta: "nterest /arnings before ta:
A2era ge 5erce nt of sales
8roforma 8rofit 4 oss account for year ' assuming
1
' 17$ -# 1-
7 7 1!
1 7-.' #.7 $.-
'- $'-.#' !$#.-7 '.!
1 # 17
1 !# '1
#. '.$ .$
171.$7 1-.7 ''$.1#
1
1
.#
1-.$1
1! ' 1-$ 1 '$7
' '! ! $ 1! '1-
1. 1.' !.$ '. -.7
'-1.7#7.#$ '#. 1#.!' 1.#$ # 1-.#$
2.
sing the 5ercent of sales method, 5re5are the pro forma 5rofit and loss account for year '. Assume that the sales will be $, in year '. "f di2idends are raised to -, what amount of retained earnings can be e:5ected for year' . ear Net sales ost of goods sold ross 5rofit =elling e:5enses eneral and administration e:5enses 3e5reciation @5erating 5rofit Nono5erating sur5lus deficit /arnings before interest and ta: "nterest /arnings before ta:
Solution:
1 1!,' 1',1 - ! 1 '! $1! 1' 7- $! $! 7! 1!! ' $!
,# 1$1 $'$ ! 11 '$ '! ! '7 ! '! ! 1 #1$-
ear
Net sales ost of goods ross 5rofit =elling e:5enses eneral and administrati on e:5enses 3e5reciation @5erating 5rofit
1 1!,' 1',1 - !
,#$ 1$1 $'$ !
A2era ge 5erce 1 7. 7. #.
1 '! $1!
11 '$# '!$
-. 1.! 1-.!
8rofor ma 8rofit 4 oss accoun t for year ' assumi $ 1!7'!. 7$1. 1.!
1--$. #!'. #11.-
Non o5erating /arnings before "nterest /arnings before ta:
1'
!
.-
1#1.-
7- $!
'7! !
1$.# '.!
#$'.-11.#!
$! 7! 1!! ' $!
'!! ! 1! #- 1$-!
1.#.' !.
'$.7 11'.#$ 1'!.$1 - 1$'!.$1
&ewor; 5roblem 1 assuming the following budgeted amounts6 eneral and administration e:5enses =elling e:5enses "nterest 3i2idends
1' # #
Solution:
ear
Net sales ost of goods sold ross 5rofit =elling e:5enses eneral and administration e:5enses 3e5reciation @5erating 5rofit Nono5erating sur5lus deficit /arnings before interest and ta: "nterest /arnings before ta:
1 ' 17$ -# 1-
,7 7 1!
1 # 17$
1# !# '1
1
1
1!! ' 1-! -$ 1 '$7
' '! !# $ 1!! '1-'
A2erage 5ercent of 1 7-.' #.7 Budgeted Budgeted '.$ .$ .#1.Budgeted !.$ '. -.7 Budgeted
8roforma 8rofit 4 oss account for year ' assuming sales of ',- '- $'-.#' !$#.-7 . 1'-. 1-.7 ''$.1# 1-.$1 '-1.7#. '#. 1#.!' 1.#$ # 1-.#$
#.
&ewor; 5roblem assuming the following budgeted amounts6 eneral and administration e:5enses 3e5reciation "nterest 3i2idends
1$ 1 -
Solution:
ear
Net sales ost of goods sold ross 5rofit =elling eneral and administrati on e:5enses 3e5reciation @5erating 5rofit Non o5erating /arnings before "nterest /arnings before ta:
A2era ge 5erce 1
8roforma 8rofit 4 oss account for year ' assuming $
1 1!,'
,#$
1',1 - !
1$1 $'$ !
7.7 7.' #.'
1!7'!.! 7$1. 1.!
1 '! $1!
11 '$# '!
Budgete Budgete 1-.!-
1$. -. #11.-
1'
!
.-#
1#1.-
7- $!
'7 !
1$.# Budgete
#$'.-1.
$! 7!
'! !
1.-#.'
'$.7 11'.#$
1!! '
1 #-
!.' Budgete
1'!.$1 -$
$!
1$-
1-7!.$1
"n2estments 11 8re5aid e:5enses ! >nsecured ban; borrowings 1
Net sales ost of goods sold ross 5rofit =elling e:5enses eneral and administration e:5enses 3e5reciation @5erating 5rofit Nono5erating sur5lus deficit /arnings before interest and ta: "nterest /arnings before ta:
$ ' 17$ -# 1-
,7 7 1!
1 # 17$ 1 1!! ' 1-! -$ 1 '$7
1# !# '1 1 ' '! !# $ 1!! '1-'
Balance =heets
Lear
9i:ed assets (net "n2estments
1#$ 7
1-
$ #' $
-1 71
7
!
urrent assets, loans and Q ash and ban; Q &ecei2ables Q "n2entories Q 8re5aid e:5enses
0iscellaneous
e:5enditures 4 losses
' 77
# '1
"iailities =hare ca5ital /uity
-#
-#
8reference &eser2es and sur5lus
! #$
! -
=ecured loans 3ebentures Ban; borrowings
$ -!
$# $
1
1 77
' ! '1
>nsecured loans Ban; borrowings urrent liabilities and 5ro2ision
ear
Net sales ost of goods sold ross 5rofit =elling e:5enses eneral and administration 3e5reciation @5erating 5rofit Nono5erating sur5lus deficit /arnings before interest and ta: "nterest on ban; borrowings "nterest on debentures /arnings before ta:
$ ' 17$ -# 1- 1 # 17$ - $ 77 ' 11 -$
A2era ge 7 5erce 8roCecte ,7 1 Budgete 7 7 1! $.$ 1# Budgete !# Budgete '1 R 7 Budgete '! R !.'. 7.7 R $ '.
Befor After e iterati 8rofor 8rofor ma ma 5rofit 5rofit and and loss loss ' ' 7# 7# 1 1 111 1 $. ! ! '7 '7 ! 1
/arnings after ta: 3i2idends(gi2en) &etained earnings Balance =heets 9i:ed assets (net
11 '! 1#
7 '1#1 1-
. .1 -
7-
.
Q ash and ban;
$1
-!
Q &ecei2ables Q "n2entories Q 8re5aid e:5enses
# $ 7!
$ 7 !#
0iscellaneous e:5enditures 4
'!
#
7
'1
-
-
!
! 1
=ecured loans 3ebentures
Ban; borrowings
-
$
Ban; borrowings
1
urrent liabilities and 5ro2isions
1
' !
7
'1
"n2estments
R Budgete R
11
1 -
17!
17!
11
11
.#
7
7
$' 7 !
$' 7 !
#
#
'-1
'-1
No
-#
-#
No R
! 11$
! 11
-
$#
No
$
$
Budgete
1
1
'1 1
'1 1
'-1
'-1
Budgete
urrent assets, loans and ad2ances
/uity 8reference &eser2es and sur5lus
.
Budgete No
>nsecured loans
1 '.$
Solution:
7.
Solution:
1
"n2entories
#
'$
&ecei2ables
''
=hortterm Ban; Borrowings ' Accounts 8ayable 8ro2isions
ash
1 ! 1-7
1-7
a. /stimate the e:ternal funds reuirement for the year !. b. 8re5are the following statements, assuming that the e:ternal funds reuirement would be raised eually from term loans and short term ban; borrowings6 (i) 5roCected balance sheet and (ii) 5roCected 5rofit and loss account.
Solution:
' A @R %
L
/ 7 m /1 (1d) // 1+020 %1120 7 0.0* 320 (10.3) 2*002*00
% Rs.22 -. (i) ProDected 5ncome /t'tement or Ee'r ndin9 31 st F'rch 8 200* /'les Profts -eore t' 'es Proft 'ter t' (*C on s'les) ,iidends Ret'ined e'rnin9s
3820 +23 20 314 4 220
(ii) ProDected 'l'nce /heet 's 't 31.12 2001 Li'-ilities /h're c'"it'l Ret'ined e'rnin9s Assets erm lo'ns (360=146) /hortterm -'n; -orro
21*
.
#, ,#! ', ,# 1,# 7! 1-,11
9i:ed assets "n2entories &ecei2ables ash
!,!7 ',#! ,-! 1!
1-,1
Solution:
'. @R %
A L / / 7 m /1 (1d) /
1+8110 %
318410
2020 8423 7 0.0 408*33 (10.+) 318410
% 24* -.(i) ProDected 5ncome /t'tement or Ee'r ndin9 31 st F'rch 8 200* =ales 8rofits before ta:
#,!'' #,'' 1,#7 ,!-! 1,# 1,#
(ii) ProDected 'l'nce /heet 's 't 31.3 200* Li'-ilitiesAssets =hare ca5ital &etained earnings
#, ', #,7 #,1-
9i:ed assets "n2entories &ecei2ables ash
1,$1 1,1
18643
1.
11,#,- ',''
18643
1,!7 '$ -,-#
-,-#-
AL @R %
/ 7 m /1 (1d) //
Solution:
2+8+4+ %
+*8436
28*0 2821*7 0.10 *86+4 (10.4+) +*8436
% Rs.68+4 ProDected 5ncome /t'tement or Ee'r ndin9 31 st F'rch 8 200*
=ales 8rofits before ta:
!7,$ 1', #,'17 !,7$ ',# #,!
ProDected 'l'nce /heet 's 't 31.3 200*
"iailities =hare ca5ital &etained earnings
11.
$,-! 11,$1 -,' 1,-
Assets 9i:ed assets "n2entories &ecei2ables ash
,! 1,## '!,'17
',-!1 !,7$ -,'7 '!1
'!,'17
#,
What is the ma:imum sales growth rate that can be financed without raising e:ternal funds?
@R
A
L
m (1=9) (1d)
% ///9 >ien A/% 0.* 8 L/% 0.4 8 m% 0.0* 8 d% 0.+ 'nd @R % 0
.7
8re2ious yearJs sales
#-,'$
What is the ma:imum sales growth rate that can be financed without raising e:ternal funds? Solution:
@R
A
L
m (1=9) (1d)
% ///9 >ien A/% 0. 8 L/% 0.+ 8 m% 0.11 8 d% 0. 'nd @R % 0
1,
What is the ma:imum sales growth rate that can be financed without raising e:ternal funds? Solution:
@R
A
L
m (1=9) (1d)
% ///9 >ien A/% 0.+ 8 L/% 0.2 8 m% 0.06 8 d% 0.1 'nd @R % 0
Solution:
A (')@R %
L
//
/ 7 m/1 (1d)
