Also prepare cash budget for one year
ZIP ZAP ZOOM CAR COMPANY
The methodology undertaken is as follows :
Q1. Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.
Q2. Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable),most probable and maximum adverse) for all the factors.
Q3. Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow. Assuming a normal distribution of the expected behaviour, the mean expected value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore. Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions. Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy. To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside. Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore) Analyse the debt capacity of the company.
COOKING LPG LTD
DETERMINATION OF WORKING CAPTIAL
Q1. Purchases : The company purchases LPG in bulk from various importers ex-Mumbai and Kandla, @ Rs. 11,000 per MT. This is transported to its Bottling Plant at Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual contract basis. The average transportation cost per bullet ex-either location is Rs. 30,000. Normally, 2 bullets per day are received at the plant. The company make payments for bulk supplies once in a month, resulting in average time-lag of 15 days.
Q2. Storage and Bottling : The bulk storage capacity at the plant is 150 MT (2 x 75 MT storage tanks) and the plant is capable of filling 30 MT LPG in cylinders per day. The plant operates for 25 days per month on an average. The desired level of inventory at various stages is as under.
LPG in bulk (tanks and pipeline quantity in the plant) – three days average production / sales.
Filled Cylinders – 2 days average sales.
Work-in Process inventory – zero.
Q3. Marketing : The LPG is supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder. The rate of applicable sales tax on the invoice is 4 per cent. A commission of Rs.15 per cylinder is paid to the distributor on the invoice itself. The filled cylinders are delivered on company’s expense at the distributor’s godown, in exchange of equal number of empty cylinders. The deliveries are made in truck-loads only, the capacity of each truck being 250 cylinders. The distributors are required to pay for deliveries through bank draft. On receipt of the draft, the cylinders are normally dispatched on the same day. However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on one truck-load.
Q4. Salaries and Wages : The following payments are made :
Direct labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the month.
Security agency – Rs. 30,000 per month paid on 10th of subsequent month.
Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last working day.
Q5. Overheads :
Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on the 10th of subsequent month.
Power (including on DG set) – Rs. 1,00,000 per month paid on the 7th Subsequent month.
Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum paid at the beginning of the year.
Insurance – Rs. 5,00,000 per annum to be paid at the beginning of the year.
Housekeeping etc – Rs. 10,000 per month paid on the 10th of the subsequent month.
Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every month to the vendors. This includes expenditure on account of lubricants, spares and other stores.
Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum – paid on monthly basis on the 15th of the subsequent month.
All transportation charges as per contracts – paid on the 10th subsequent month.
Sales tax as per applicable rates is deposited on the 7th of the subsequent month.
Q6. Sales : Average sales are 2,500 cylinders per day during the year. However, during the winter months (December to February), there is an incremental demand of 20 per cent.
Q7. Average Inventories : The average stocks maintained by the company as per its policy guidelines:
Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh. This amounts to 15 days consumption.
Maintenance spares – Rs. 1 lakh
Lubricants – Rs. 20,000
Diesel (for DG sets and fire engines) – Rs. 15,000
Other stores (stationary, safety items) – Rs. 20,000
Q8. Minimum cash balance including bank balance required is Rs. 5 lakh.
Q9. Additional Information for Calculating Incremental Working Capital During Winter.
No increase in any inventories take place except in the inventory of bulk LPG, which increases in the same proportion as the increase of the demand. The actual requirements of LPG for additional supplies are procured under the same terms and conditions from the suppliers.
The labour cost for additional production is paid at double the rate during winters.
No changes in other administrative overheads.
The expenditure on power consumption during winter increased by 10 per cent. However, during other months the power consumption remains the same as the decrease owing to reduced production is offset by increased consumption on account of compressors /Acs.
Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies during winter.
No change in time schedules for any payables / receivables.
The storage of finished goods inventory is restricted to a maximum 5,000 cylinders due to statutory requirements.
M/S HI-TECH ELECTRONICS
Q1. As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.
Q2. Also prepare cash budget for one year of operation of the firm, ignoring interest. The minimum desired cash balance & Rs. 30,000, which is also the amount the firm, has on January 1. Borrowings are possible which are made at the beginning of a month and repaid at the end when cash is available.
SMOOTHDRIVE TYRE LTD
Q1. Automotive industry analysts expect automobile manufacturers to have a production of 4,00,000 new cars this year and growth in production at 2.5 per year onwards. Each new car needs four new tyres (the spare tyres are undersized and fall in a different category) Smoothdrive Tyre expects the HyperTread to capture an 11 per cent share of the OEM market. The industry analysts estimate that the replacement tyre market size will be one crore this year and that it would grow at 2 per cent annually. Smoothdrive Tyre expects the Hyper Tread to capture an 8 per cent market share. You also decide to consider net working capital (NWC) requirements in this scenario. The net working capital requirement will be 15 per cent of sales. Assume that the level of working capital is adjusted at the beginning of the year in relation to the expected sales for the year. The working capital is to be liquidated at par, barring an estimated loss of Rs. 1.5 crore on account of bad debt. The bad debt will be a tax-deductible expenses. As a finance analyst, prepare a report for submission to the CFO and the Board of Directors, explaining to them the feasibility of the new investment.
COMPUTATION OF COST OF CAPITAL OF PALCO LTD
Q1. From the facts outlined above, what report would Neha submit to the Board of Directors of palco Ltd?
Q1. Analyse the financial viability of the two options. Which option would you recommend? Why?
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