SUGGESTED ANSWER
Model Exam Qtn – May2011
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:

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 (44.40)
= 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 (90H) 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 (9072) 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
(ii) Administration overheads overabsorbed 3,000
(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) Incometax provided in financial accounts 65,000
(vii) Transfer fees (credit in financial accounts) 2,000
(viii) Preliminary expenses written off 3,000
(ix) Overvaluation 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 Overvaluation 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
 Difference between Absorption Costing and Marginal Costing
 A Pharmaceutical company produces formulations having a shelf life of one year. The company has an opening stock of 15,000 boxes on 1^{st} 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(1T)
= 11(10.3)
= 7.7%
4. Cost of Retained earnings: Kr = Ke ( 1Tp)
= 18.125(10.2)
= 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 31^{st} March
Take 1 year = 365 days
Particulars  Opening Balance(Rs.)  Closing Balance(Rs.) 
Raw materials Workinprogress 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+4,00,00065,356=3,79,644  6.89  53 days 
Workinprogress
 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 = (ab) 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 Xray 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:
 Calculate the pay back period on each proposal.
 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.
 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=ab  d=cX30%  e=cd  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 = (costsalvage value)/No. of years = Rs.8,00,000Rs.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=ab  d=cX30%  E=cd  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 = (costsalvage value)/No. of years = Rs.10,20,000Rs.30,000)/6 years=Rs.1,65,000
3. Simple pay back period is computed as under:
For MX: 4 years + 8,00,0007,58,000 X 12
9, 23,0007, 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:
 Calculate the operating, financial and combined leverages and earnings per share (EPS).
 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 31^{st} 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 *(100Tax) 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 
= = = = **** = = = =
3 comments:
Tks a lot sir
SIR THNX ALOT....JUST WANTED TO ASK U THAT QUICK RATIO IS CONSIDERED DIFFERENT IN DIFFERNT SUGGESTED WHICH FORMULA IS TO B USED
sir can i have the suggested answers of final costing paper
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