Q.1. The following figures relate to two companies.

P LTD. Q LTD.

(In Rs. Lakhs)

Sales 500 1,000

Variable costs 200 300

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Contribution 300 700

Fixed costs 150 400

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150 300

Interest 50 100

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Profit before Tax 100 200

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You are required to:

(i) Calculate the operating, financial and combined leverages for the two companies; and

Comment on the relative risk position of them

Q.2. b. The following items have been extracted from the liabilities side of the balance sheet of XYZ Company as on 31st December 2005.

Paid up capital: Rs.

4, 00,000 equity shares of Rs each 40, 00,000

Loans:

16% non-convertible debentures 20, 00,000

12% institutional loans 60, 00,000

Other information about the company as relevant is given below:

31st Dec 2005 Dividend per share earning per share average market price per share

7.2 10.50 65

You are required to calculate the weighted average cost of capital, using book values as weights and earnings/price ratio as the basis of cost of equity. Assume19.2% tax rate

Q. 3. The preform of cost-sheet of HLL provides the following data:

Cost (per unit): Raw materialsDirect labourOverheads Total cost (per unit):ProfitSelling price

Rs.52.019.539.0110.519.5130.0

The following is the additional information available:

Average raw material in stock: one month; Average materials in process: half month; Credit allowed by suppliers: one month; Credit allowed to debtors: two months; Time lag in payment of wages: one and half weeks; Overheads: one month. One-fourth of sales are on cash basis. Cash balance expected to be Rs. 12,000.

You are required to prepare a statement showing the working capital needed o finance a level of activity of 70,000 units of output. You may assume that production is carried on evenly throughout the year and wages and overheads accrue similarly.

CASE STUDY

Brown Metals Ltd.

Please read the case study given below and answer the questions given at the end:

Brown Metals Ltd. is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its product. The company is faced with two alternatives:

a) To buy machine A which is similar to the existing machine Or

b) To go in for machine B which is more expensive and has much greater capacity.

The cash flows at the present level of operations under the two alternatives are as follows:

Cash flow (Rs in lakhs) at the end of year

Yrs. 0 1 2 3 4 5

Machine A -25 - 5 20 14 14

Machine B -40 10 14 16 17 15

The Company’s cost of capital is 10%. The Finance Manager tries to evaluate the machines by calculating the followings for both the machines:

1. Net Present Value

2. Profitability Index

3. Pay Back Period

4. Discounted Payback Period.

At the end of his calculations, however, the finance manager is unable to make up his mind as to which machine to recommend.

Q. You are required to make these calculations and in the light thereof, advise the finance manager about the suitability, or otherwise, of machine A or machine B.