FINANCIAL MANAGEMENT

Past Paper Solution - 2021

Long Questions
Q 3 – Cash budget
Grenoble Enterprises
Cash Budget May June July
$ $ $
Cash receipts
Collection of sales (W1) 60,000 70,000 82,000
Receipt of other income 2,000 2,000 2,000
(A) 62,000 72,000 84,000
Less: Cash disbursements:
Cash purchases 50,000 70,000 80,000
Rent expense 3,000 3,000 3,000
Wages and salaries payment (10
(10% x previous month’s sale) 6,000 7,000 8,000
Payment of cash dividend 3,000
Payment of principal and interest 4,000
Payment of equipment 6,000
Payment of Taxes 6,000

(B) (59,000) (93,000) (97,000)

Net cash flow (A - B) 3,000 (21,000) (13,000)
Add: Beginning cash balance 5,000 8,000 (13,000)
Ending cash balance 8,000 (13,000) (26,000)
Less: Minimum cash requirement 5,000 5,000 5,000
Required total financing - 18,000 31,000
Excess cash balance 3,000 - -

(W1) Collection of sales March April May June July

$ $ $ $ $
Sales Revenue 50,000 60,000 70,000 80,000 100,000

Cash Sales - 20% of the sales 10,000 12,000 14,000 16,000 20,000
Collection from A/R
Lagged 1 month (60%) 30,000 36,000 42,000 48,000
Lagged 2 months (20%) 10,000 12,000 14,000

Collection of sales 60,000 70,000 82,000

Q 4 – Working Capital Management
ICI Company
(a) Cash Conversion Cycle (CCC)
Current Revised
Average age of inventory 35 days (35 - 5) 30 days
Add: Average collection period 40 days (40 - 10) 30 days
Less: Average payment period (30) days (30) days
= Cash Conversion Cycle (CCC) 45 30

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 Funds required to support existing CCC Rs.
Average inventory
(Rs. 50,000,000 x 35 days /365) 4,794,521
Add: Average accounts receivables
(Rs. 80,000,000 x 40 days /365) 8,767,123
Less: Average accounts payables
(Rs. 40,000,000 x 30 days /365) (3,287,671)

Funds required to support CCC 10,273,973

(b) Impact on opportuinty cost or profit of the firm due to change in CCC
Rs.
Cost of existing funds required (Rs. 10,273,973 x 10%) 1,027,397
Less: Cost of revised fuds required ( (W1) Rs. 7,397,260 x 10%) (739,726)
Reduction in opportunity cost or increase in profitability of the firm 287,671

(W1) Funds required to support revised CCC Rs.

Average inventory
(Rs. 50,000,000 x 30 days /365) 4,109,589
Add: Average accounts receivables
(Rs. 80,000,000 x 30 days /365) 6,575,342
Less: Average accounts payables
(Rs. 40,000,000 x 30 days /365) (3,287,671)

Revised Funds required to support CCC 7,397,260

Q 5 – Common Stock valuation
ABC Company
Market value of stock by using Dividend valuation model (with variable growth)

Given data
Dividend of the recent year (D0) 10 Rs. per share
Growth rate of first year (g1) 2%
Growth rate of second year (g2) 2%
Growth rate of year 3 onwards (g3) 3% per annum
Required rate of return (re) 10%

Step 1 - Future dividends of the company Rs.

Dividend after 1 year (D1) = D0 (1 + g) = Rs. 10 x (1 + 0.02) 10.20
Dividend after 2 years (D2) = D1 (1 + g) = Rs. 10.2 x (1 + 0.02) 10.40
Dividend after 3 years onwards (D3) = D2 (1 + g) = Rs. 10.40 (1 + 0.03) 10.72

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 Step 2 - Present value of future dividends at 10%
1 2 3 onwards
Future dividends per share 10.20 10.40 D3 ÷ (re - g)
Add: Terminal value of dividends - 153.09 = 10.72 ÷ (0.10 - 0.03) = 153.09
Total dividends per share 10.20 163.49
x Discount at 10% 1.10-1 1.10-2
Present value 9.27 135.12

Total present value = Market value per share (in Rs.) 144.39

(THE END)

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