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## Tuesday, April 19, 2011

### SUGGESTED ANSWER - Costing Model Exam – May-2011

Model Exam Qtn – May-2011

COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question no.1 is compulsory.

Answer any five from the remaining six questions.

Working notes should form part of the answer.

(Time allowed = 3 hours)                                                                               (Maxi. Marks= 100)

Question 1

a.   Explain Post Costing and Continuous Costing.

b.   Explain cost accounting treatment of unsuccessful research and development cost

c.  What are all the practical difficulties while installing a costing system

d. Difference between implicit costs& explicit costs

e.  Explain the purposes for computing product costs:

f. The following information is available from the cost records of vatika & co for the month of March-

 Material purchased 24,000 kg   Rs.1,05,600 Material consumed 22,800 kg Actual wages paid for 5,940 hours Rs.29,700 Units produced      2160 units Standard rates and prices are: Direct material rate is Rs.4.00 per unit Direct labour rate is Rs.4.00 per hour Standard input is 10 kg for one unit Standard requirement is 2.5 hours per unit

Calculate all material and labour variances for the month of March.

Solution:

1. Material Variance

 SQ x SP (1) AQ x AP (2) AQ x SP (3) Material Variances Cost (1)-(2) = Rs.13,920 A   Price (3)-(2)   usage (1) – (3)   = Rs.9,120 A   = Rs 4,800 A (2,160 uts X 10 kg) X Rs 4 per kg = Rs.86,400 22,800 kgs X Rs..4.40 per kg = Rs.1,00,320 ( Refer Note 1) 22,800 kgs X Rs.4 per kg = Rs.91,200

Note: 1. Actual purchase price of materials = Rs.1,05,600 / 24,000 kg = Rs.4.40 kg

2. Material purchase price variance = purc qty X (std price – actual price)

= 24,000 X (4-4.40)

= Rs.9,600 A

2. Labour Variance

 SHxSR (1) AHX AR (2) AHX SR (3) Labour Variances Cost (1) – (2) = Rs.8,100 A     Rate(3)-(2)     Efficiency (1)-(3) = Rs.5,940 A   = Rs.2,160A (2,160 utsX2.5 hrs) X Rs.4ph = Rs.21,600 5,940 hrs X Rs.5 ph = Rs.29,700 (given) 5,940 hrs X Rs.4 ph = Rs.23,760

(3+3+3+3+2+6=20 Marks)

Question 2

a. A company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margin per unit is Rs.40 for J and Rs.20 for K. Fixed costs are Rs.6,16,000 per month. Compute the break even point.

Solution:

Particulars                                  J                           K

1. Sales mix                                 4                            3

2. Contribution p.u                   Rs.40                    Rs.20

3. Ratio of (1X2)                        160                         60

4. To achieve BEP , Required contribution = Fixed cost, Rs.6,16,000, to be apportioned in the above ratio . Hence, the amount is Rs.4,48,000 for J and Rs.1,68,000 for K.

5. BEQ = (4/2)                        11,200 units           8,400 units

b. Standard time for a job is 90 hours. The hourly rate of guaranteed wages is Rs.50. Because of saving in time , worker A gets an effective hourly rate of Rs.60 under Rowan premium Bonus system. For the same saving in time, calculate the hourly rate of wages that worker B will get under Halsey premium Bonus System, assuming 40% to worker.

Solution:

Let actual hours worked be H hours.

• Basic wage rate is Rs.50 per hour, while effective hourly rate (under Rowan Scheme) is Rs.60 per hour.
• Hence, the additional  Rs.10 per hour is attributed to bonus under Rowan scheme.
• So, Rowan Bonus = (Actual hrs / std hrs) X Time saved X Rate ph = Rs.10 X H hours
• On substitution , we have, H/90 X (90-H) X 50 = 10H

H = 72 hours

·              Total wages under Halsey Scheme= ( Hours Worked X Rate ph) + (Given 40% X time saved X rate ph)

= (72 hours X 50 ph) + [ 40% X (90-72) X Rs.50 ph] = Rs.3,960.

·              Effectively hourly rate under Halsey scheme = Rs.3,960 / 72 hours = Rs.55/hour

C) Discuss the process of estimating profit or loss on incomplete contracts.

d) A manufacturing company has disclosed a net loss of Rs.2,13,000 as per their cost accounting records for the year ended March 31, 2009. However, their financial accounting records disclosed a net loss of Rs.2,58,000 for the same period. A scrutiny of data of both the sets of books of accounts revealed the following information:

(i)      Factory overheads underabsorbed                                                     5,000

(iii)    Depreciation charged in financial accounts                                     70,000

(iv)    Depreciation charged in cost accounts                                            80,000

(v)     Interest on investments not included in cost accounts                    20,000

(vi)    Income-tax provided in financial accounts                                      65,000

(vii)   Transfer fees (credit in financial accounts)                                        2,000

(viii)  Preliminary expenses written off                                                       3,000

(ix)  Over-valuation of closing stock of finished goods in cost accounts   7,000

Solution:

Memorandum Reconciliation Account

 Particulars Rs. Particulars Rs. To  Net loss as per costing Books 2,13,000 By   Administrative overhead over absorbed in costs 3,000 To  Factory overheads under absorbed 5,000 By   Depreciation over charged in cost books (80,000 – 70,000) 10,000 To  Income tax not provided in cost books 65,000 By   Interest on investments not included in cost books 20,000 To  Preliminary expenses written off in financial books 3,000 By   Transfer fees not considered in cost books 2,000 To Over-valuation of Closing Stock of finished goods in cost books 7,000 By   Net loss as per financial Books 2,58,000 2,93,000 2,93,000

(3+4+4+5=16 marks)

Question 3

a.         2 hours allowed to a worker to produce 5 units and wages has been paid at Rs.25 per hour. In a 48 hour week , the worker produced 170 units. Calculate the total earnings and effectively hourly rate of earning of the worker under the following incentive wage systems- (a) Halsey 50% system, (b) Rowan system, (c) Emerson's Efficiency system, and (d) Barth system.

Solution:

1. Computation of wages under Halsey and Rowan systems

Note: Standard hours for 170 units = (170 units X 2/5) (since 2 hrs for 5 units)    68 hours

Less: Actual hours (given)                                                                             48 hours

Timed saved                                                                                         20 hours

 Particulars Halsey Rs. Rowan Rs. (a)    Basic = Hrs Worked X Rate ph (b)   Bonus: 48X25= 1,200 50% X Time saved X Rate ph = 50% X 20 X 25= 250 48X25=1,200 (Actual hrs/ std hrs)X Timed saved X Rate ph = 48/68X20X25 = 353 Total Earnings 1,450 1,553 (c) Effective rate of earnings ph Rs.1,450 /48= 30.21 Rs.1,553/48=32.35

2. Emerson's Efficiency System

 (a) Efficiency = Standard Hours/Actual Hours = 68 hours/48 hours 141.67% (b) Wages under Emerson's system = 120% of Time Rate + 1% increase for every 1% efficiency above 100%= [(48hrsXRs.25)X120%]+ [(48hrsXRs.25)X42%]= (1,440+504) Rs.1,994 (c) Effective Rate of Earnings per hour = Rs.1,994 / 48 hours Rs.40.50

3. Barth System

 (a) Total wages = Rate per hour X √(standard Hours X Actual hours) = Rs.25X√(68X48)= Rs.1,428 (b) Effective rate of earnings per hour = Rs.1,428 / 48 Rs.29.75

b) A company earned contribution of Rs.450,000 in its margin of safety & its variable cost ratio is 52.5% find out profit.

In Margin of safety sales, fixed cost is equal to zero & hence contribution is itself profit.

Therefore proft = Rs. 450,000.

C)                                Sales                Profit

Period I           Rs.14,433        Rs.385

Period II          Rs.18,203        Rs.1,139

Find -  P/V Ratio & -Fixed Cost

Solution:

P/V Ratio =     Change in Profit  X 100

Change in Sales

1139 - 385  X 100

18,203 – 14,433

= 20%

Fixed Cost = (Sales X PVRatio) – Profit

(14,433 X 20%) – 385

= Rs.2502

d) The following information relating to a type of raw material is available:

Annual demand           2,000 units                      storage cost             2% p.a

Unit price                     Rs.20                              interest rate             8% p.a

Ordering cost /order     Rs 20                              Lead time               ½ month

Calculate EOQ and total annual inventory cost of the raw material.

Solution:

EOQ is calculated as under:

 1. EOQ =  2AB/C, where A = Annual requirement of RM = 2,000 units (given) B= Buying cost per order = Rs. 20 per order (given) C= carrying cost per unit per annum = Rs.20 X 10% (i.e. 2%+ 8%) = Rs.2.p.u.p.a   On substitution, EOQ = 200 units 2. Inventory carrying cost per unit per annum = Average Inventory (i.e. ½ of EOQ) X carrying cost/unit/annum = 100 units X Rs.2.p.u.p.a = Rs.200 3. Associated costs p.a = Buying cost p.a + carrying cost p.a = Rs.200 (see note) + Rs. 200 = Rs.400.   Note: At EOQ, buying cost p.a = carrying cost p.a

e) Explain the categories of an activity centre of a business organisation entrusted with a special task.

(4+2+3+4+3=16 marks)

Question 4

1. Difference between Absorption Costing and Marginal Costing
2.  A Pharmaceutical company produces formulations having a shelf life of one year.  The company has an opening stock of 15,000 boxes on 1st January and expects to produce 65,000 boxes as was in the previous year.  Expected sale for the current year would be 75000 boxes.

Costing dept. has worked out escalation in cost by 25% on VC and 10% on FC for the current year.  FC for the current year  is estimated at Rs.14,30,000.  New price announced for the current year is Rs.50 per box.  VC of the opening stock is Rs. 20 per box.

Estimate the profits that would be realized on the sale during the current year under marginal costing approach and absorption costing approach.

Solution:

Statement of computation of profit – Marginal Costing Approach

 Particulars Op.stock Cl. Stock Sales Qty 15000 60000 SP 50 50 VC 20 25 Cn 30 25 Tot. Cn (SQ * Cn) 450,000 1500,000 Total 1950,000 Less: FC 1430,000 Profit 520,000

Statement of computation of profit – Absorption Costing Approach

 Particulars Previous Yr Current Yr Production Qty 65000 65000 Tot. VC @20/25 per unit 1300,000 1625,000 Tot. FC 1300,000 1430,000 Tot. Cost 2600,000 3055,000 Cost per Unit 40 47 SP 50 50 Profit per unit 10 3 Sales Qty out of op stock / current yr stock 15000 60000 Tot. Profit 150,000 180,000 Total 330,000

c. The following is the capital structure of a Company:

 Source of capital Book Value (Rs.) Market Value (Rs.) Equity Share @Rs.100 each 80,00,000 1,60,00,000 9% cumulative preference Shares @ Rs.100 each 20,00,000 24,00,000 11% debentures 60,00,000 66,00,000 Retained earnings 40,00,000 ---

The current market price of the company's equity share is Rs.200. for the last year the company had paid equity dividend at 25 per cent and its dividend is likely to grow 5 per cent every year. The corporate tax rate is 30 per cent and share holders personal income tax rate is 20 per cent.

You are required to calculate:

(i)     Cost of capital for each source of capital.

(ii)   Weighted average cost of capital on the basis of book value weights.

(iii)  Weighted average cost of capital on the basis of market value weights.

(4+7+5=16 marks)

Solution:

(i) Calculation of cost of capital for each source of capital:

1. Cost of Equity Share Capital:

Ke = DPS(1+g)  X 100 + g

MP

= 25(1+0.05) X 100 +5

200

= 26.25 X 100 +5

200

= 13.125 +5

= 18.125%

2. Cost of preference Share Capital or Kp is 9%.

3. Cost of Debentures : Kd ( after tax ) = r(1-T)

= 11(1-0.3)

= 7.7%

4. Cost of Retained earnings: Kr = Ke ( 1-Tp)

= 18.125(1-0.2)

= 14.5%

(ii) Weighted Average Cost of Capital:

(on the basis of Book value weights)

 Source Amount (Book Value) (Rs) Weights Cost of Capital (after tax)(%) WACC (%) (1) (2) (3) (4) (5) = (3) X (4) Equity Capital   Preference Capital   Debentures   Retained earnings 80,00,000     20,00,000     60,00,000     40,00,000 2,00,00,000 0.4       0.1       0.3       0.2    1.00 18.125     9     7.7    14.5 7.25          0.90          2.31          2.90 13.36

Hence , WACC on the basis of book value weights = 13.36%.

(iii) Weighted Average Cost of Capital

(On the basis of market value weights)

 Source Amount (Market Value) (Rs) Weights Cost of Capital (after tax) (%) WACC (%) (1) (2) (3) (4) (5)= (3) x (4) Equity Capital   Preference Capital   Debentures   Retained earnings 1,60,00,000      24,00,000      66,00,000          ----     2,50,00,000 0.640       0.096       0.264       ----   1.000 18.125        9           7.7       ---- 11.600         0.864         2.033         ------      14.497

Hence, WACC on the basis of market value weights = 14.497%

Question 5

a.   A firm has a total sales of Rs. 12,00,000 and its average collection period is 90 days. The past experience indicates that bad debt losses are 1.5% on sales. The expenditure incurred by the firm in administering receivable collection efforts are Rs. 50,000. A factor is prepared to buy the firm's receivables by charging 2% commission. The factor will pay advance on receivables to the firm at an interest rate of 16% p.a. after withholding 10% as reserve. Calculate effective cost of factoring to the firm. Assume 360 days in a year.

Solution:

Computation of Effective Cost of Factoring

Average level of Receivables = 12,00,000 X 90/360                                     3,00,000

Factoring Commission = 3,00,000 X 2/100                                                         6,000

Factoring Reserve = 3,00,000 X 10/100                                                            30,000

Amount Available for Advance = Rs. 3,00,000-(6,000+30,000)                   2,64,000

Factor will deduct his interest @ 16% :- 10,560

Advance to be paid = Rs. 2,64,000 – Rs. 10,560 = Rs. 2,53,440

Annual Cost of Factoring to the Firm:

Factoring Commission (Rs. 6,000 X 360/90)                                                   24,000

Interest Charges (Rs. 10,560 X 360/90)                                                           42,240

Total                                                                                                                  66,240

Firm's Savings on taking Factoring Service:

Cost of Administration Saved                                                                          50,000

Cost of Bad Debts (Rs. 12,00,000 x 1.5/100) avoided                                    18,000

Total                                                                                                                  68,000

Net Benefit to the Firm (Rs. 68,000 – Rs. 66,240)    1,760

Effective Cost of Factoring = Rs. 66,240 X 100

2,53,440

= 26.136%

b.         Following information is forecasted by CS Limited for the year ending 31st March-

Take 1 year = 365 days

 Particulars Opening Balance(Rs.) Closing Balance(Rs.) Raw materials Work-in-progress Finished goods Debtors Creditors 45,000 35,000 60,181 1,12,123 50,079 65,356 51,300 70,175 1,35,000 70,469

 Other Particulars Rs. Other Particulars Rs. Annual purchase of Raw material (all credit) Annual cost of production Annual cost of goods sold 4,00,000   7,50,000 9,15,000 Annual operating cost Annual sales (all credit) 9,50,000 11,00,000

Calculate – (a) Net operating cycle, (b) Number of operating cycles in a year, & (c) amount of working capital required.

Solution:

 Item Opg bal (given) Clg.bal(given) Avg.bal Relevant Numerator for calculating T/O ratio Turnover ratio (times) No. of Days Column (a) (b) C=(a+b)/2 (d) E=(d/c) 365/e Raw materials 45,000 65,356 55,178 RM consumed= 45,000+4,00,000-65,356=3,79,644 6.89 53 days Work-in-progress 35,000 51,300 43,150 (see Note) 5,65,822 13.09 28 days Finished goods 60,181 70,175 65,178 (Given) COGS = 9,15,000 14.04 26 days Debtors 1,12,123 1,35,000 1,23,562 (Given) sales = 11,00,000 8.90 41 days Creditors 50,079 70,469 60,274 (Given) purchases= 4,00,000 6.64 -55 days Operating cycle 93 days

 Note: (a) annual cost of production= Given =Rs.7,50,000 (b)RM consumed as calculated above = Rs.3,79,644 (c)    Other costs = (a-b) Rs.3,70,356 (d)   Avg WIP cost p.a =RM+50% of other cost = 3,79,644+50% of 3,70,356 = Rs.5,64,822 Number of cycles in a year = 365/93 =3.93 times Working capital required = operating cycle p.a X93/365 = Rs.2,42,055 9(approx) Rs.9,50,000/3.93 times = Rs.2,41,730

C)    Diagrammatically present the DU PONT CHART to calculate return on equity.

D)    The impact of double shift working on various components of working capital

(4+6+3+3=16 marks)

Question 6

a.            A doctor is planning to buy an X-ray machine for his hospital. He has two options. He can either purchase it by making a cash payment of Rs.5 lacs or Rs.6,15,000 are to be paid in six equal annual installments. Which option do you suggest to the doctor assuming the rate of return is 12%? Present value of Re.1 at 12% rate of discount for 6 years is 4.111.

Solution:

 1.present value of 6 installments = Annual installment X Annuity factor @12% = (Rs.6,15,000/6years)X 4.111 =Rs.1,02,500X4.111 Rs.4,21,378 2. present value of lump- sum payment Given Rs.5,00,000 3. Conclusion Installment option is preferable, since PV of outflows is lower

b.         PR engineering Ltd is considering the purchase of a new machine which will carry out some operations which are at present performed by manual labour. The following information related to two alternative models- 'MX' and 'MY' are available:

 Particulars Machine 'MX' Machine 'MY' Cost of machine Expected value Scrap value Rs.8,00,000      6 years Rs.20,000 Rs.10.20.000    6 years Rs.30,000

Estimated Net Income before Depreciation and taxes are as under:

 Year1 Year2 Year3 Year4 Year5 Year6 Machine 'MX' Machine 'MY' 2,50,000   2,70,000 2,30,000   3,60,000 1,80,000   3,80,000 2,00,000   2,80,000 1,80,000   2,60,000 1,60,000   1,85,000

Corporate tax rate this company is 30% and the company's required rate of return on investment proposals is 10%. Depreciation on straight line basis. You are required to:

1. Calculate the pay back period on each proposal.
2. Calculate the net present value on each proposal, if the PV factor at 10% is 0.909, 0.826, 0.751, 0.683, 0.621, and 0.564.
3. Which proposal would you recommend and why?

Solution:

1. Computation of NPV for machine MX

 Y Income Deprn PBT Tax@30% PAT CFAT PVF 10% DCFAT Cum CFAT (a) (b) c=a-b d=cX30% e=c-d F=e+b g=given H=f X g (based on f) 1 2 3 4 5 6 6 2,50,000 2,30,000 1,80,000 2,00,000 1,80,000 1,60,000 1,30,000 1,30,000 1,30,000 1,30,000 1,30,000 1,30,000 1,20,000 1,00,000 50,000 70,000 50,000 30,000 36,000 30,000 15,000 21,000 15,000 9,000 84,000 70,000 35,000 49,000 35,000 21,000 Salv.val 2,14,000 2,00,000 1,65,000 1,79,000 1,65,000 1,51,000  20,000 0.909 0.826 0.751 0.683 0.621 0.564 0.564 1,94,526 1,65,200 1,23,915 1,22,257 1,02,465    85,164    11,280 2,14,000 4,14,000 5,79,000 7,58,000 9,23,000   10,94,000 Total DCFAT                                                                                     Less: Initial Investment 8,04,807 8,00,000 Net Present Value 4,807

Note: Depreciation = (cost-salvage value)/No. of years = Rs.8,00,000-Rs.20,000)/6 years=Rs.1,30,000

2. Computation of NPV for machine MY

 Y Income Deprn PBT Tax@30% PAT CFAT PVF 10% DCFAT Cum CFAT (a) (b) c=a-b d=cX30% E=c-d F=e+b g=given H=f X g (based on f) 1 2 3 4 5 6 6 2,70,000 3,60,000 3,80,000 2,80,000 2,60,000 1,85,000 1,65,000 1,65,000 1,65,000 1,65,000 1,65,000 1,65,000 1,05,000 1,95,000 2,15,000 1,15,000    95,000    20,000 31,500 58,500 64,500 34,500 28,500 6,000 73,500 1,36,500 1,50,500 80,500 66,500 14,000 Salv.val 2,38,500 3,01,500 3,15,500 2,45,500 2,31,500 1,79,000 1,30,000 0.909 0.826 0.751 0.683 0.621 0.564 0.564 2,16,797 2,49,039 2,36,941 1,67,676 1,43,761 1,00,956 16,920 2,38,500 5,40,000 8,55,500 11,01,000 13,32,500   15,41,500 Total DCFAT                                                                                     Less: Initial Investment 11,32,090 10,20,000 Net Present Value 1,12,090

Note: Depreciation = (cost-salvage value)/No. of years = Rs.10,20,000-Rs.30,000)/6 years=Rs.1,65,000

3. Simple pay back period is computed as under:

For MX: 4 years + 8,00,000-7,58,000  X 12

9, 23,000-7, 58,000

Similarly, for MY, it is 3 Years, 8 months

4. Conclusion: Machine MY is preferable due to shorter payback period, and higher NPV.

c) Write short notes on Debt securitization

d) Z ltd is considering the installation of a new project costing Rs.80,00,000. Expected annual sales revenue from the project is Rs.90, 00,000 and its variable costs are 60% of sales. Expected annual fixed cost other than interest is Rs.10,00,000. corporate tax rate is 30%. The company wants to arrange funds through issuing 4,00,000 equity shares of Rs.10 each and 12% debentures of Rs.40,00,000. You are required to:

1. Calculate the operating, financial and combined leverages and earnings per share (EPS).
2. determine the likely level of EBIT, if EPS is – (a) Rs.4, (b) Rs.2 , and (c) Rs.0

Solution:

Income statement is as under:

 Particulars Given situation For Rs.4 EPS For Rs.2 EPS For Rs.0 EPS Sales (given) Less: variable cost@ 60% 90,00,000  (54,00,000) Contribution Less: fixed cost (given) 36,00,000 (10,00,000) EBIT Less: Interest (Rs.40,00,000 @12%) 26,00,000   (4,80,000) 27,65,714   (4,80,000) 16,22,857   (4,80,000) 4,80,000   (4,80,000) EBT Less: Tax @30% 21,20,000 (6,36,000) 22,85,714 (6,85,714) 11,42,857 (3,42,857) Nil Nil EAT = Residual earnings (no of pref dividend) 14,84,000 16,00,000 8,00,000 Nil Number of equity shares 4,00,000 4,00,000 4,00,000 4,00,000 EPS= Residual earnings/ No. Of Eq.share Rs.3.71 Given Rs.4 Given Rs.2 Given Nil

Note: For required EPS of Rs.4,Rs.2 and Nil, the calculations are made by reverse working starting backwards from EPS. Since tax is 30%, EAT =70% of EBT. Hence, EBT = EAT/70%. The other calculations are made accordingly.

 1. DOL = Contribution/EBIT = Rs.36,00,000/Rs.26,00,000 = 1.38 times. 2. DFL = EBIT/EBT = Rs.26,00,000/Rs.21,20,000 = 1.23 times. 3. DCL = Contribution/EBT = Rs.36,00,000/Rs.21,20,000 = 1.70 times

(2+5+3+6=16 marks)

Question 7

a. From the following information, prepare a summarized balance sheet as at 31st March, 2008:

Working capital                                      Rs.2,40,000

Bank overdraft                                        Rs 40,000

Fixed assets to proprietary ratio              0.75

Reserves and surplus                              Rs. 1,60,000

Current ratio                                            2.5

Liquid ratio                                             1.5

Solution:

BALANCE SHEET

 Liabilities Rs. Assets Rs Share capital R&S Bank OD Creditors 800,000 160,000 40,000 120,000 Fixed Assets Stock Current Assets 720,000 160,000 240,000 1120,000 1120,000

b.   What is seed capital assistance?

c.   There are two firms P and Q which are identical except P does not use any debt in its capital structure, while Q has Rs.8,00,000, 9% Debentures in its capital structure. Both firms have EBIT of Rs.2,60,000 p.a and the capitalization rate is 10%. Assuming corporate tax 30%, calculate the value of these firm according to M&M hypothesis.

Solution:

 Particulars Computation Rs. 1. value of unlevered firm(P) = EAT/ capitalisation rate [ Rs.2,60,000 X (100%-70%)] / 10% 18,20,000 2. Tax shield of Levered Firm = Debt X Tax Rate Rs.8,00,000 X 30% 2,40,000 3. Value of Levered Firm (Q) = Value of unlevered firm + Tax shield (1+2) 20,60,000

d.      Three companies A,B &C are in the same type of business and hence have similar operating risks. However, the capital structure of each of them is different and the following are the details:

(A)                       (B)                    (C)

Equity share capital                       Rs. 4,00,000      Rs.2,50,000        Rs.5,00,000

(face value  Rs.10 per share)

Market value per share                  Rs. 15                Rs. 20                 Rs.12

Dividend per value                       Rs  2.70             Rs.4                    Rs.2.88

Debentures                                    Rs.  Nil              Rs.1,00,000        Rs.2,50,000

(face value per debenture)

Market value per debenture         Rs   ___              Rs.125                Rs.80

Interest rate                                     ___                   10%                    8%

Assume that the current levels of dividend are generally expected to continue indefinitely and the income tax rate at 50 %.

You are required to compute the weighted average cost of capital of each company.

Solution:

 Particulars A B C Mkt Value of Shares 600,000 500,000 600,000 Mkt Value of  Debentures - 125,000 200,000 %  of shares 100% 80% 75% %  of Debentures - 20% 25% Ke (DPS/MPS) 18% 20% 24% Kd       = (Int *(100-Tax) NP - 4% 5% WACC 18% 16.8% 19.25%

(5+4+3+4 = 16 marks)

 Ans for Theory Qtns – plz refere the our Theory Books

= = = = **** = = = = Anonymous said...

Tks a lot sir SANDESH said...

SIR THNX ALOT....JUST WANTED TO ASK U THAT QUICK RATIO IS CONSIDERED DIFFERENT IN DIFFERNT SUGGESTED WHICH FORMULA IS TO B USED

subru said...

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