INTERMEDIATE
Chapter Wise Test Series
Chapter Names Dividend decision & Suggested Answers
Working capital Marks:- 40
1 2 3 4 5
c c b b d
1.
(i) Bank loan: Since the compensating balance would not otherwise be maintained, the real annual cost of taking bank loan
would be:
15
= x 100 = 16.67% p.a.
90
(ii) Trade credit: Amount upto ` 1,50,000 can be raised within 2 months or 60 days. The real annual cost of trade credit would
be:
3 360
= x x 100 = 18.56% p.a.
97 60
(iii) Factoring:
Commission charges per year = 2% x (` 2,00,000 x 12) = ` 48,000
Total Savings per year = (` 1,250 + ` 1,750) x 12 = ` 36,000
Net factoring cost per year = ` 48,000 - ` 36,000 = ` 12,000
Annual Cost of Borrowing ` 1,50,000 receivables through factoring would be:
12% x 1,50,000 + Rs.12,000
= x 100
Rs. 1,50,000
= Rs.18,000 + Rs.12,000 x 100
Rs.1,50,000
= 20% p.a.
Advise: The company should select alternative of Bank Loan as it has the lowest annual cost i.e. 16.67% p.a.
2. Computation of Operating Cycle
(1) Raw Material Storage Period (R)
Average Stock of Raw Material
Raw Material Storage Period (R) = Daily Average Consumption of Raw material
(14,40,000 + 16,00,000) / 2
= = 64.21 days
86,40,000 /365
Raw Material Consumed = Opening Stock + Purchases – Closing Stock
= ` 14,40,000 + ` 88,00,000 –` 16,00,000 = ` 86,40,000
(2) Conversion/Work-in-Process Period (W)
Average Stock of WIP
Conversion/Processing Period =
Daily Average Production
= (4,80,000 + 8,00,000) /2
1,23,20,000 / 365
= 18.96 days
Production Cost: Opening
4,80,000
Stock of WIP
86,40,000
Add: Raw Material Consumed
24,00,000
Add: Wages
16,00,000
–––––––––––––––––––
Add: Production Expenses 1,31,20,000
Less: Closing Stock of WIP 8,00,000
–––––––––––––––––––
Production Cost 1,23,20,000
(3) Finished Goods Storage Period (F)
Average Stock of Finished Goods
Finished Goods Storage Period =
Daily Average Cost of Goods Sold
= (20,80,000+24,00,000)/2 = 68.13 days
1,20,00,000/365
Cost of Goods Sold
Opening Stock of Finished Goods 20,80,000
Add: Production Cost 1,23,20,000
1,44,00,000
Less: Closing stock of FG (24,00,000)
1,20,00,000
(4) Receivables Collection Period (D)
Average Receivables
Receivables Collection Period =
Daily average credit sales
(12,00,000 + 16,00,000) / 2
= = 31.94 Days
1,60,00,000 / 365
(5) Payables Payment Period (C)
Average Payables
Payables Payment Period =
Daily average credit purchase
(16,00,000 + 19,20,000) / 2
= =73 Days
88,00,000 / 365
(6) Duration of Operating Cycle (O)
O =R+W+F+D–C
= 64.21 + 18.96 + 68.13 + 31.94 – 73
= 110.24 days
Computation of Working Capital
(i) Number of Operating Cycles per Year = 365/Duration Operating Cycle = 365/110.24 = 3.311
(ii) Total Operating Expenses
Total Cost of Goods sold 1,20,00,000
Add: Administration Expenses 14,00,000
Add: Selling Expenses 6,00,000
––––––––––––––––––––
1,40,00,000
(iii) Working Capital Required
Total Operating Expenses
Working Capital Required =
Number of Operating Cycles per year
= 1,40,00,000 = ` 42,28,329.81
3.311
3. CASE 1: Value of the firm when dividends are not paid.
Step 1: Calculate price at the end of the period Ke = 15%,
P₀ = `100, D₁ = 0
Pₒ = P1 + D
1 + Ke
P1 + 0
`100 =
1+ 0.15
P₁ = `115
Step 2: Calculation of funds required for investment
Earning ` 40,00,000
Dividend distributed Nil
Fund available for investment ` 40,00,000
Total Investment ` 50,00,000
Balance Funds required ` 50,00,000 - ` 40,00,000 = ` 10,00,000
Step 3: Calculation of No. of shares required to be issued for balance funds
No. of shares = Funds required/P1
∆n = `10,00,000/`115
Step 4: Calculation of value of firm
nPₒ = [(n+∆n) P1 - I+E]/(1+Ke)
nP₀ = [(1,00,000 +10,00,000/ `115) ` 115 - ` 50,00,000 + ` 40,00,000]/(1.15) = `1,00,00,000
CASE 2: Value of the firm when dividends are paid.
Step 1: Calculate price at the end of the period
Ke= 15%, P₀= ` 100, D₁= ` 10
Pₒ = P1 + D1
1+ Ke
P1 + 10
`100 =
1+ 0.15
P₁ = ` 105
Step 2: Calculation of funds required for investment
Earning ` 40,00,000
Dividend distributed 10,00,000
Fund available for investment ` 30,00,000
Total Investment ` 50,00,000
Balance Funds required ` 50,00,000 - ` 30,00,000 = ` 20,00,000
Step 3: Calculation of No. of shares required to be issued for balance fund
No. of shares = Funds Required/P1
∆n = ` 20,00,000/`105
Step 4: Calculation of value of firm
nPₒ = [(n+∆n) P1 – I+E]/(1+Ke)
nP₀ = [(1,00,000 + 20,00,000/`105) `105 – ` 50,00,000 + ` 40,00,000]/(1.15)= ` 1,00,00,000
Thus, it can be seen from the above calculations that the value of the firm remains the same in either case.
.
4. Computation – Collections from Debtors
Particulars Feb Mar Apr May Jun Jul Aug Sep
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Total Sales 1,20,000 1,40,000 80,000 60,000 80,000 1,00,000 80,000 60,000
Credit Sales (80% of total Sales) 96,000 1,12,000 64,000 48,000 64,000 80,000 64,000 48,000
Collection (within one month) 72,000 84,000 48,000 36,000 48,000 60,000 48,000
Collection (within two months) 24,000 28,000 16,000 12,000 16,000 20,000
Total Collections 1,08,000 76,000 52,000 60,000 76,000 68,000
Monthly Cash Budget for Six Months: April to September, 2019
Particulars April May June July August Sept.
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Receipts:
Opening Balance 20,000 20,000 20,000 20,000 20,000 20,000
Cash Sales 16,000 12,000 16,000 20,000 16,000 12,000
Collections from Debtors 1,08,000 76,000 52,000 60,000 76,000 68,000
Total Receipts (A) 1,44,000 1,08,000 88,000 1,00,000 1,12,000 1,00,000
Payments:
Purchases 48,000 64,000 80,000 64,000 48,000 80,000
Wages and Salaries 9,000 8,000 10,000 10,000 9,000 9,000
Interest on Loan 3,000 ----- ----- 3,000 ----- -----
Tax Payment ----- ----- ----- 5,000 ----- -----
Total Payment (B) 60,000 72,000 90,000 82,000 57,000 89,000
Minimum Cash Balance 20,000 20,000 20,000 20,000 20,000 20,000
Total Cash Required (C) 80,000 92,000 1,10,000 1,02,000 77,000 1,09,000
Surplus/ (Deficit) (A)-(C) 64,000 16,000 (22,000) (2,000) 35,000 (9,000)
Investment/Financing:
Total effect of
(Invest)/ Financing (D) (64,000) (16,000) 22,000 2,000 (35,000) 9,000
Closing Cash Balance (A) + (D) - (B) 20,000 20,000 20,000 20,000 20,000 20,000
