Book: Financial Management and Policy - 12th Edition

Author: James C. Van Horne

Chapter 12 – Financial Ratio Analysis
In-class practice
Self-correction problems ---
Problems 5, 7, 8

Book: Financial Management (Text, Problems and Cases) - 6th Edi

Authors: M Y Khan and P K Jain
Chapter 6 – Financial Statement Analysis
In-class practice
Problems 6.2, 6.3, 6.8

Book: Financial Management (Theory and Practice) - 13th Edition

Authors: Eugene F. Brigham and Michael C. Ehrhardt
Chapter 3 – Analysis of Financial Statements
In-class practice
Self-Test Problems ---
Problems ---
 and Policy - 12th Edition

Self-practice by students
All self-correction problems
All Remaining problems, except problem 10

(Text, Problems and Cases) - 6th Edition

Self-practice by students
All Remaining problems

(Theory and Practice) - 13th Edition

and Michael C. Ehrhardt

Self-practice by students
ST-1 and ST-2
3-8 to 3-12

Past Examination Questions

In-class Students # Code

ü 1 S5
ü 2 S5
ü 3 C3
ü 4 C3
ü 5 C3
ü 6 AF-503
ü 7 AF-503
ü 8 AF-503
ü 9 S-601
ü 10 S-601
11 S-601
12 S-601
13 S-601
14 S-601
15 S-601
Questions
Year Session Question Marks Part Item sub-item

2019 Summer Q1 10 A 3 a to d
2018 Winter Q1 15 A 3 a to d
2018 Summer Q1 15 A 3 c
2017 Extra Q1 15 A 3 a
2016 Fall Q1 15 A 3 c
2013 Extra Q2 12 A 3 c
2013 Spring Q2 15 A 3 a to d
2012 Fall Q2 15 A 3 c
2011 Winter Q2 18 A 3 a to d
2011 Extra Q2 11 A 3 a to d
2010 Spring Q3 (a) 12 A 3 a to d
2008 Fall Q2 15 A 3 c
2008 Spring Q5 18 A 3 c
2007 Fall Q6 15 A 3 c
2007 Fall Q5 17 A 3 a to d
 Part Title Description

Forecasting and Analysis ROE under various current assets funding alternatives
Forecasting and Analysis Forecast Financial Statements; Performance Analysis
Forecasting and Analysis Forecast Statement of Financial Position
Forecasting and Analysis Performance Analysis of two businesses
Forecasting and Analysis Forecast Financial Statements (including Cash Flows)
Forecasting and Analysis Complete Financial Statements using Ratios
Forecasting and Analysis Prepare Financial Statements; Performance Analysis
Forecasting and Analysis Forecast Financial Statements
Forecasting and Analysis ROA Components; Preparing Balance sheet using Ratios
Forecasting and Analysis Forecast Financial Statements
Forecasting and Analysis Forecast Balance sheet and Restrictive Covenants of Debt
Forecasting and Analysis Forecast Financial Statements
Forecasting and Analysis Computation of Ratios and Performing Financial Analysis
Forecasting and Analysis Forecast Balance sheet
Forecasting and Analysis ROE under Different Financing Plans
 Session

Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
Session 03
 Book: Financial Management and Policy - 12th Edition
Author: James C. Van Horne
Chapter 12 – Financial Ratio Analysis

Problem 5

Interest or Finance Charge Cover (in Times)

= (Profit before Interest & 𝑇𝑎𝑥𝑒𝑠 (𝐸𝐵𝐼𝑇))/(Interest Expense)

$'000
Interest Expense
9.25% mortgage bonds 231.25
12.375% second mortgage bonds 185.63
10.25% debentures 102.50
14.5% subordinated debentures 145.00
664.38

EBIT 1,500

a) Overall interest coverage 2.26 times

b) Coverage for each issue

using cumulative deduction method

1) 9.25% mortgage bonds - Interest cover 6.49 times

2) 12.375% second mortgage bonds - interest cover 3.60 times
3) 10.25% debentures - interest cover 2.89 times
4) 14.5% subordinated debentures - interest cover 2.26 times
Problem 7

Balance Sheet
As at 31 December 20X2 - (in $'000)

Cash and marketable securities 500

Account receivables 1,000
Inventory 1,800
Current assets 3,300

Net fixed assets 4,200

Total Assets 7,500

Income Statement
For the year ended on 31 December 20X2 - (in $'000)

Credit sales 8,000

Cost of goods sold 5,400
Gross profit 2,600
Selling and Admin expenses 1,200
Interest expense 400
Profit before taxes 1,000 100%
Taxes @ 44% 440 44%
Profit after taxes 560 56%

Working Notes
1) Profit after taxes 560
2) Taxes 440
3) Profit before taxes 1,000
0.40 = (Net Profit+Depreciation)/(Long te
4) Long-term debt 2,650
5) Total liabilities 3,750
6) Current liabilities 1,100
7) Bank loan 500
8) Total Assets 7,500
9) Current assets 3,300
10) Net fixed assets 4,200
11) Accounts receivable 1,000 Current ratio= (Current assets )/(Current
12) Inventory 1,800
13) Cost of goods sold 5,400
12) Selling and Admin expenses 1,200
Accounts payable 400
Bank loan 500
Accruals 200
Current liabilities 1,100

Long-term debt 2,650

Equity 3,750

Total liabilities and equity 7,500

include depreciation of $500 ….... Balancing figure

Ratios used

Net profit margin= (Net Profit after Taxes )/Sales ×100

 Net profit margin= (Net Profit after Taxes )/Sales ×100

0.40 = (Net Profit+Depreciation)/(Long term debt)

1 = (Total Liabilities)/Equity

Total Liabilities =Long term debt+Current liabilities

Current ratio= (Current assets )/(Current liabilities)

Receivable Turnover = Receivables/(Net Credit Sales) ×360

Inventory Turnover = (Cost of Goods Sold)/Inventory

Problem 8

(a): P/E ratio = Market Price per share / EPS 20.59 times
EPS = EAT / Number of ordinary shares $ 2.87

(b): Dividend yield = DPS / Market price per share 1.14%

DPS = Total ordinary dividend / Number of ordinary shares $ 0.67

(c): M/B ratio = Market price per share / book value per share 2.66 times
Book value per share = Shareholder Equity / Number of ordinary shares $ 22.20

(d): High P/E and M/B ratios.

Low Dividend Yield.
High value of the share is based on firm's growth potential.
Growth option (as opposed to physical assets) receive the greater emphasis by the market
 Book: Financial Management (Text, Problems and Cases) - 6th Edition
Authors: M Y Khan and P K Jain
Chapter 6 – Financial Statement Analysis

Problem 6.2

Calculate Average Collection Period from the following information:

PKR '000
Total gross sales 100,000
Cash sales (included in the above amount) 20,000
Sales return ….. all from credit customers 7,000
Total debtors at the end 9,000
Bills receivable 2,000
Provision for doubtful debts at the end of the year 1,000
Total creditors at the end 10,000

Solution

Average Collection Period= (Receivables+Bills Receivables)/(Net Credit Sales) ×365

Receivables + Bills Receivables 11,000

Net Credit Sales 73,000

Average Collection Period 55 days

ases) - 6th Edition

Problem 6.3

The capital structure of ABC Limited is as follows:

9% Preference shares of Rs. 10 each

Ordinary shares of Rs. 10 each

Additional information
Profit after taxes
Tax rate
Depreciation for the year
Ordinary dividend paid @
Market price per ordinary share

Required
Calculate the followings:
1) Dividend yield
2) Dividend cover for preference shares
3) Dividend cover for ordinary shares
4) Earnings per share

Solution
1) Dividend yield = DPS / Market price per share
DPS = Total ordinary dividend / Number of ordinary shares
Total ordinary divi
Number of ordinary shar

2) Dividend cover (Preference shares) = Profit after tax / Preference dividend

Profit after taxes
Preference Dividend
3) Dividend cover (Ordinary shares) =
Profit after tax less Preference dividend / Total ordinary dividend
Profit after taxes
Preference Dividend
Profit available for ordi
Total Ordinary dividend

4) EPS = Profit after taxes less preference dividend / Number of ordinary shares
Profit after taxes
Preference Dividend
Profit available for ordi
Number of ordinary shar
 Problem 6.8

As the manager of a financial services company, you have recei

from a firm planning an investment in fixed assets of Rs. 500,00
Rs. three annual instalments commencing from the end of the seco
300,000
800,000 The following information is relevant to the proposed project:
1,100,000

Particulars
270,000 Rs.
35%
60,000 Rs, Gross profit (before depreciation)
20% Depreciation
40 Rs. Interest on term loan
Working capital borrowing (interest)
Provision for tax

Required
Compute appropriate financial ratio which would guide the fina
computed and give your views on the proposal.

Solution
Debt service coverage ratio (DSCR) is the most appropriate rati
relationship between the total cash funds available with the bo
5.00% of both principal repayment and interest.
2.00 Rs.
160,000 Rs.
80,000 Debt Service Coverage Ratio (DSCR) (in Times)

= (EAT +𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 +𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝑂𝑡ℎ𝑒𝑟 𝑛𝑜𝑛 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝

10.00 times
270,000 Rs.
27,000 Rs.

Particulars
 Particulars

1.52 times

270,000 Rs. Gross profit (before depreciation)

27,000 Rs. Less: interest on working capital
243,000 Less: Provision for tax
160,000

3.04 Rs. Debt service obligation

270,000 Rs. Interest on term loan
27,000 Rs. Principal repayment
243,000
80,000
DSCR (in times) ….... A ÷ B

The firm's DSCR is very unsatisfactory as it is less than one for a

paid. The firm will not have enough cash to service instalment a
proposal is not financially viable and term loan should not be sa
company, you have received a proposal seeking a term loan of Rs. 300,000
fixed assets of Rs. 500,000 in a new project. The loan will be repaid in
from the end of the second year.

o the proposed project:

Years (Rs. in thousands)

1 2 3 4

75 100 150 150

50 45 40 35
25 45 30 15
10 15 20 20
- - 10 30

hich would guide the financing decision, and interpret briefly the ratio so
proposal.

he most appropriate ratio for the lending company as it indicates

nds available with the borrowing firm to service debt instalment consisting
st.

n Times)

𝑜𝑛 + 𝑂𝑡ℎ𝑒𝑟 𝑛𝑜𝑛 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠)/(Loan Instalment (including Interest))

Debt Service Coverage Ratio (DSCR)

Years (Rs. in thousands)
 1 2 3 4

75 100 150 150

10 15 20 20
- - 10 30
65 85 120 100

25 45 30 15
- 100 100 100
25 145 130 115

2.60 0.59 0.92 0.87

as it is less than one for all the three years in which instalments are to be
sh to service instalment and is likely to default on its payments. The
rm loan should not be sanctioned by the financial services company.
Book: Financial Management (Theory and Practice) - 13th Edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Chapter 3 – Analysis of Financial Statements

Refer to PDF files

Debt Service Coverage Ratio (DSCR) (in Times)

= (EAT +𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 +𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝑂𝑡ℎ𝑒𝑟 𝑛𝑜𝑛 𝑐𝑎𝑠ℎ

3th Edition

) (in Times)

𝑎𝑡𝑖𝑜𝑛 + 𝑂𝑡ℎ𝑒𝑟 𝑛𝑜𝑛 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠)/(Loan Instalment (including Interest))

Past Examination Questions
Summer 2019
Question 1

Expected Return on Equity (ROE)

Rs. '000
Current Asset Financing Alternatives
Tight Moderate Relaxed

Sales 100,000 100,000 100,000

EBIT @ 20% of sales 20% 20,000 20,000 20,000
Interest @15% of debt 15% 8,550 9,450 10,800
Earnings before taxes (EBT) 11,450 10,550 9,200
Taxes @30% of EBT 30% 3,435 3,165 2,760
Earnings after taxes (EAT) A 8,015 7,385 6,440
Equity B 38,000 42,000 48,000
Return on Equity (ROE) A÷B 21.09% 17.58% 13.42%

Workings
Fixed Assets 50,000 50,000 50,000
Current Assets as % of sales 45,000 55,000 70,000
Total Assets 95,000 105,000 120,000

Debt @60% of total assets 60% 57,000 63,000 72,000

Equity 40% 38,000 42,000 48,000
Total Liabilities and Equity 100% 95,000 105,000 120,000
Past Examination Questions
Winter 2018
Question 1

Masroor Limited
Forecast Profit & Loss Statement
For the next financial year
Rs. in '000

Sales 100% 17,808

Cost of sales 13,000
Gross Profit 27% 4,808
Operating expenses 1,781
Operating profit (EBIT) 17% 3,027
Interest Expense 740
Earnings before taxes (EBT) 2,287
Tax @31% 31% 709
Earnings after taxes (EAT) 1,578
Dividend for the year 30% 473
Retained Earnings 1,105
Masroor Limited
Forecast Statement of Financial Position
As at end of next financial year
Rs. in '000

Current assets Current liabilities

Account receivables 3,215 Bank overdraft
Inventory 3,972 Trade payables
7,187
Non-Current assets Non-Current liabilities
Net fixed assets 37,000 6% Long-term debt

Equity
Share capital
8,605 Retained earnings

Total Assets 44,187

Account receivables Account payables

Sales 17,808 Cost of goods sold
Receivable period (in days) 65 payable period (in days)
Working days in a year 360 Working days in a year
Closing receivables 3,215 Closing receivables

Inventory
Cost of goods sold 13,000
Inventory turnover (in days) 110
Working days in a year 360
Closing inventory 3,972
 Masroor Limited
Performance Analysis
For the next year
Rs. in '000 Last year
Rs. in '000

17,874 Sales 16,500

2,708 Cost of sales 10,130
20,582 Gross Profit 6,370
Operating expenses 1,440
10,000 Operating profit (EBIT) 4,930

5,000 Gross profit ratio 38.61%

8,605 EBIT to sales 29.88%
13,605
Current ratio 1.122
44,187 Quick ratio 0.5366

Inventory turnover (days) 85

Trade receivable period (days) 48
13,000 Trade payable period (days) 68
75
360
2,708
Current year
Rs. in '000

17,808
13,000
4,808
1,781
3,027

Change % change

27.00% Declines 11.61%

17.00% Declines 12.88%

0.3492 deteriorated
0.1562 deteriorated

110 deteriorated 25
65 deteriorated 17
75 Improved 7
Past Examination Questions
Summer 2018
Question 1

EFG Herms Limited

Forecast Statement of Financial Position
As at December 31, 2017
Rs. in '000

Current assets
Account receivables 36,000
Inventory 25,000
Bank
61,000

Non-Current assets
Property, Plant and Equipment 150,000
Accumulated Depreciation 55,000
95,000

Total Assets 156,000

Rs. in '000

Workings
1) Property, Plant & Equipment 150,000
2) Sales 300,000
3) COGS (40 + 25 +10 + 5)% of sales 240,000
4) Average inventory 20,000
5) Closing inventory 25,000
6) Depreciation 15,000
7) Trade receivable 36,000
8) Trade payable 24,000
9) Dividend paid 5,000
10) Material purchases 130,000
 Rs. in '000

Current liabilities
Bank overdraft 1,300
Trade payables 24,000
Provision for income tax 8,010
33,310
Non-Current liabilities
12% TFCs 27,500

Equity
Ordinary shares 50,000
14% Preference shares 25,000
General Reserve 10,000
Retained earnings 10,190
95,190

156,000

Rs. in '000

Bank account Income Statement

Opening balance 01-Jan-2017 5,000 Sales
Add: Receipts Cost of Goods Sold
12% TFCs 12,500 Gross Profit
Collection from customers 284,000 Office and selling expenses
 296,500 Profit before interest and taxes
Less: Payments Interest on TFCs @12%
Payment for PPE 25,000 Profit before tax
Payment for purchases 131,000 Provision for tax @30%
Payment for labour 75,000 Profits after tax
Payment for manufacturing expenses 30,000 Preference Dividend
Payment for office expenses 30,000 Ordinary Dividend
Interest on TFCs 3,300 Transfer to Retained Earnings
Payment for preference dividends 3,500
Payment for ordinary dividends 5,000
302,800

Closing balance 31-Dec-2017 - 1,300

Rs. in '000

300,000
240,000
60,000
30,000
30,000
3,300
26,700
8,010
18,690
3,500
5,000
10,190
Past Examination Questions
Extra Attempt 2013
Question 2

Gamma Limited
Forecast Statement of Financial Position
As at …...........
Rs.
Cash 201,515
Accounts Receivables 250,000
Inventory 566,667
Net Fixed Assets 800,000
1,818,182

Gamma Limited
Statement of Profit and Loss
For the year ended on
Rs.
Sales 5,000,000
Cost of Goods sold 4,250,000
Gross Profit 750,000
Operating Expenses 365,385
Earnings before Tax 384,615 100%
Tax @ 35% 134,615 35%
Net Profit 250,000 65%

Workings
1) Gross Profit margin 750,000
2) Net Profit margin 250,000
3) Earnings before tax 384,615
4) Operating Expenses 365,385
5) Total assets 1,818,182
6) Number of ordinary shares 50,000
7) Share capital 500,000
8) Long-term Loan 397,576
9) Inventory 566,667
10) Receivable 250,000
11) Cash 201,515
12) Current liabilities 814,545
 Rs.
Current Liabilities 814,545
Long Term Loan 397,576
Common Stock (Rs. 10/- each) 500,000
Retained Earnings 106,061
1,818,182
Past Examination Questions
Spring 2013
Question 2

XYZ Limited
Statement of excess/short fall in the funds

Current Year Year 1 Year 2

Revenues 20,000 21,200 22,800

Earnings after tax (EAT) 2,000 2,120 2,280

Dividend payout 1,000 1,060 1,140
Retained Earnings 1,000 1,060 1,140

Total assets less current liabilities 25,000 26,500 28,500

Maximum debt @30% of (debt + equity) 7,500 7,954 8,443
Equity 17,500 18,560 19,700
25,000 26,514 28,143

Excess/short fall in funds 0 14 -357

Financial objectives of the company are incompatible and need adjustments.

1) Company may need to issue new shares or raise additional debt (i.e., increase its gearing in excess of 30%) to bridg

2) For years 2 and 3, company may fund the gap by reducing dividend and retaining higher proportion of earnings. Ho
and 5, reducing dividend won't be enough to bridge the funding gap.

3) Company may also bridge the funding gap by improving earnings either by increasing net assets turnover or by con
and other expenses.
 Rs. In '000
Year 3 Year 4 Year 5

24,800 27,200 30,000

2,480 2,720 3,000

1,240 1,360 1,500
1,240 1,360 1,500

31,000 34,000 37,500

8,974 9,557 10,200
20,940 22,300 23,800
29,914 31,857 34,000

-1,086 -2,143 -3,500

its gearing in excess of 30%) to bridge the funding gap.

ning higher proportion of earnings. However, for years 4

creasing net assets turnover or by controlling operation

Past Examination Questions
Fall 2012
Question 2

ABC Limited
Forecast Statement of Financial Position
As at 30 June 2013
Rs. in '000

Current Assets
Receivables 150,000
Inventory 42,000
192,000
Non-current Assets
Buildings 48,800
Accumulated Depreciation 10,800
38,000

Plant and Machinery 189,800

Accumulated Depreciation 58,600
131,200

361,200
 Rs. in '000

Current Liabilities
Bank overdraft 7,350
Trade Payables 48,000
Tax Payable 12,600
Dividends Payable 11,700
79,650

Long Term Debt 93,850

Equity
Ordinary Shares (Rs. 10/- each) 40,000
Retained Earnings 147,700
187,700

361,200
ABC Limited
Forecast Income Statement
For the year ended on 30 June 2013
Rs. in '000

Sales 600,000
Cost of goods sold 420,000

Gross profit 180,000

Other Expenses including interest 109,200
Depreciation 34,800
Profit before tax 36,000
Tax @35% 12,600
Profit after tax 23,400
Dividend for the year 11,700
Retained profits for the year 11,700
Workings
1) Sales 600,000
2) Gross profit 180,000
3) Plant & Machinery - Cost 189,800
4) Receivables - last year turnover 30 days
5) Receivable at end 150,000
6) Inventory at end 42,000
7) Purchases for the year 384,000
8) Payables ate end 48,000
9) Depreciation - Building 2,000
10) Depreciation - Plant & Equipment 32,800
11) Retained Earnings 147,700
12) Total Equity 187,700
13) Long-term debt at end 93,850
14) Repayment of loan 20,150
Bank
Opening balance 16,600
Receipts
Collection from customers 490,000
Long-term debt 114,000
604,000
Payments
Machinery 114,000
Payments for purchases 360,000
Payments for other expenses 109,200
Last year's tax payments 9,000
Last year's dividend payments 15,600
Loan repayment 20,150
627,950

Closing balance - 7,350