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Tuesday, April 19, 2011

SUGGESTED ANSWER - Costing Model Exam – May-2011

 

 

SUGGESTED ANSWER

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

(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)    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

 

= = = = **** = = = = 

3 comments:

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...

sir can i have the suggested answers of final costing paper

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