Description

Corporate Finance

September 2024 Examination

 

 

1. M/s Anuradha Ltd. has a long-term fund requirement of Rs. 45 lacs for putting up a new manufacturing unit.

The following options of funding are available.

1. a) It can raise a perpetual debt @ an interest rate of 9% p.a.
2. b) It can issue bonds of Rs. 100 each, at a discount of 10%. Coupon rate of 6%. Bonds have a term of 5 years.
3. c) Issue Preference shares at a discount of 5%, redeemable at par after 6 years. Rate of Dividend is 8%
4. d) Invest retained earnings to the extent of 50% and take a loan from the bank for the balance at 8.5% interest rate for a period of 4 years. Equity holders expect a return of 15% from the business. Corporate Tax rate is 30%.

Which option would the firm choose? What should be some of the factors that a company should consider while raising Debt from the market (mention any 4 factors) (10 marks)

Ans 1.

Introduction

Corporate finance management is pivotal for companies seeking to expand or enhance their operations through strategic funding options. M/s Anuradha Ltd. faces a decision regarding the optimal source of funding for a new manufacturing unit, requiring a substantial sum of Rs. 45 lacs. The decision involves evaluating different financing methods, each with unique implications on the company’s financial health and operational flexibility. This analysis will delve into the nuances of each available funding option, namely perpetual debt, bond issuance, preference shares, and a mix of retained earnings and bank loans. It will also explore the key factors that influence the choice of debt financing in the market. By assessing the cost-effectiveness and strategic impact of each option, this paper aims to recommend the most

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2. Calculate the Cash Cycle for M/s ABC Traders Ltd. which is in the business of buying and selling garments. The following information is available for the firm.

Opening Balances	Amt. Rs.
Inventory	10,000
Debtors	40,000
Creditors	10,000
Closing Balances
Inventory	30,000
Debtors	60,000
Creditors	20,000
Costs Incurred during the year
Total Purchases (50% on credit)	12,00,000
Selling Expenses	80,000
Administrative Expenses	25,000
Total Sales (80% on credit)	15,00,000

 

Assume 360 days in a year.

The average cash cycle in the same industry is around 10 days. Comment on the cash cycle of M/S ABC Ltd. The Finance Manager is looking at the cash collection process critically and wants to reduce the Cash Cycle. What steps would you suggest her as her assistant? (10 marks)      

Ans 1.                                                        

Introduction

The cash conversion cycle (CCC) is a fundamental financial metric that measures the time span between a company’s outlay on raw materials and the receipt of cash from sales of the finished goods. For a trading company like M/s ABC Traders Ltd., which deals in garments, optimizing the CCC is crucial for maintaining liquidity and ensuring operational efficiency. This analysis will calculate the CCC for M/s ABC Traders Ltd. by assessing the duration of inventory holding, debtor collection, and creditor payment periods. The goal is to determine how the company’s current cash management compares to industry norms and to suggest actionable strategies to enhance cash flow management. This will help in identifying potential inefficiencies in the cash collection process and proposing measures to streamline operations and reduce the cash cycle duration, thereby improving the financial health and agility of the

3a.  Mr. Ramesh wants to plan to fund for his son’s education. He estimates that once his son is 21 years of age, he shall require to make a provision of about Rs. 5,00,000 for his college fees. His son is now 15 years of age. How much shall Mr. Ramesh invest today to make adequate provisions? He is also contemplating to make a fixed investment every year instead of a total investment today. How much should he invest each year to get the same amount of fees?

The current rate of interest is around an average of 8%.    (5 marks)

Ans 3a.

Introduction

Planning for future expenses, such as a child’s education, is a crucial financial goal for many families. Mr. Ramesh, anticipating his son’s college fees of Rs. 5,00,000 when he turns 21, is considering two investment strategies: a lump sum investment today or annual investments. With the current interest rate averaging 8%, Mr. Ramesh needs to determine the appropriate amount to invest under each plan to ensure sufficient funds are available when needed.

Concept and Application

In financial planning, understanding the time value of money (TVM) is essential, especially

 

 

1. Prepare cash budget of M/s Nirma Ltd. with the following information available.

	Jan. 23	Feb. 23	Mar. 23
Sales	200,000	150,000	265,000
Raw Materials Purchase	160,000	135,000	190,000
Manufacturing Expenses	22,000	15,000	35,000
Selling & Other Expenses	10,000	9,000	10,000

 

Opening Cash balance was Rs. 15000 for Jan. 23. Opening Debtors were Rs. 52500. Sales are typically 75% in cash and 25% credit, which are received in next month. There was a scheduled loan repayment of Rs. 25000 in Feb. 23. All expenses are assumed to be paid for in cash.   (5 marks)

Ans 3b.

 

Introduction

A cash budget is essential for M/s Nirma Ltd. to anticipate and manage its cash flows efficiently across the first quarter of 2023. By assessing monthly sales, purchases, and other operational expenses, this budget will help ensure that the company maintains adequate liquidity to meet its obligations, including a significant loan repayment in February.

Concept and Application

The cash conversion cycle is a fundamental concept in managing a company’s liquidity. It