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:
|
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
- 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 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:
- 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=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:
- 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 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:
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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