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MS
- 04: ACCOUNTING AND FINANCE FOR MANAGERS
1. Explain the meaning of Generally
Accepted Accounting Principles? Discuss in brief about the Accounting Concepts
that are being followed in your organisation. Give your suggestions if any.
2. Discuss the different methods of
depreciation and how these methods differ from each other.
3. The sales and profit of ABC Ltd for
two successive years is as follows:
Previous
Year (Rs in lakhs) Current
Year (Rs in lakhs)
Number of units sold 15,000 20,500
Sales 37,500
5,125
Profit/Loss 825 1,178.75
On the basis of the information given
above you are required to determine:
(a) The amount of fixed costs incurred by
the firm.
(b) The Break Even point for the firm
(both in rupees & units).
(c) The amount of sales to earn a profit
of Rs 25 crores.
(d) Margin of Safety if actual sales of
ABC Ltd is 17.5 crores.
4. XYZ Ltd is a leading manufacturer of
decorative and industrial paints in India. The income statement (Exhibit 1) and
the balance sheet (Exhibit 2) for the current year are given. Its sales next
year are estimated to be 25 per cent higher on account of increase in demand
for paints from the housing and commercial real estate sectors. The variable
costs as percentage to sale are likely to remain constant. An increase of 12.5
per cent is estimated in fixed costs.
XYZ Ltd is planning to launch two new
brands of luxury emulsions-Supercoat and Luxurycoat. The Supercoat paint would
generate an additional Rs 600 crore sales and require an extra Rs. 400 crore
investment involving installation of manufacturing and packaging machinery.
While the additional fixed costs requirement would be Rs 150 crore, variable
cost to sales ratio would not change. For manufacturing the Luxurycoat paint
the additional investment requirement and sales generated would amount to Rs
600 crore and Rs 800 crore respectively. The variable cost ratio would remain
constant but the fixed cost are expected to increase by Rs 240 crore. The XYZ
Ltd has four alternative financing plans to choose from (Exhibit 3). Its
current debt-equity ration is 5:1.
XYZ Ltd has hired Amar as a financial
consultant to carry out the following tasks:
(1) What would its operating, financial
and total leverages be next year without the new proposal?
(2) Assuming that the XYZ Ltd finances
the projects using financing plan (A), determine the three leverages for the
two projects individually. Which new brand is better?
(3) Which financing option should XYZ Ltd
choose to if only Supercoat is to be manufactured?
(4) Calculate the financial breakeven
points of each plan.
EXHIBIT 1 Income Statement, Current Year
and Market Data (Rs crore)
Sales Rs
5,000
Variable costs (0.50) 2,500
Contribution 2,500
Fixed costs 1,000
EBIT 1,500
Interest 500
EBT 1,000
Tax (0.35) 350
EAT 650
Shares outstanding 10
EPS (Rs) 65
P/E ratio 20
Market price per share (MPS) (Rs) 1,300
EXHIBIT 2 Balance Sheet As at March 31,
Current Year (Rs crore)
Liabilities Assets
Equity capital Rs 100 Fixed assets Rs
5,850
Reserve and Surpluses 900
Current assets:
10% Debt 5,000 Inventory
Rs 550
Current liabilities 950 Receivables
300
Cash
250 1,100
6,950 6,950
EXHIBIT 3 Financing Options/Plans (Rs
crore)
Plans Debentures
Equity Shares Preference Shares P/E
Coupon Amount
Number Face Rate Amount
rate (crore) value
(1)
(2) (3)
(4) (5) (6)
(7)
(8)
A
0.12 Rs
1,000 - - - - 14
B
- - 100
Rs 10 - - 30
C
0.11 400 60 10 -
- 20
D
- - 70 10 0.11
Rs 300 28
5. In your organisation or
any other organisation of your choice try to find out the factors that are
taken into consideration while making the dividend decisions.
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