KPP Ltd.

started its operations to manufacture Product A on 1st April 2021 with

an authorized capital of INR 15 million. The 4 promoters of the company
contributed INR 400,000 each for 20,000 shares issued to each one of them. In
addition to the contributed capital, KPP Ltd raised INR 12,00,000 @14% per
annum from State Bank on 1st April 2021. The interest rate will jump to 16% in
case the interest coverage ratio falls below 8.50x. The management and bank
have agreed to a contract where KPP Ltd is exempted from making any
payments of debt in the first year of operations. The terms of the loan require
the company to repay a minimum of 20% of the outstanding debt (at the start
of the year), starting from its second year of operations
For manufacturing Product A, KPP Ltd spent INR 21,00,000 for buying two
machines on the second day of the year 2021. The yearly Capex is estimated
to INR 100,000 for the 2nd and 3rd year and INR 120,000 for the year 4th and
5th. Depreciation is chargeable @12% of the yearly written down value.
KPP Ltd is expecting to achieve a capacity utilization ratio of 50%, while 72% of
the available goods are expected to be sold in the year 2021-2022. KPP Ltd. Is
selling all of its goods through a commission agency, which will be paid 8% of
the selling price for each unit sold. The yearly indirect expenses (rent, salaries,
office exp. Etc.) are estimated to be INR 11,60,000
The goods are sold on credit and the company is expecting to recover the
receipts from debtors in 35 days in the initial year, which gradually is expected
to come down to 31 by the 5th year of the operations. On the other hand, KPP
Ltd takes about 60 days to make payments to creditors (from whom Raw
material is purchased to manufacture products). KPP Ltd. has plans to give
dividends to shareholders @30% in any year when the net margin is above 10%.
Product A
▪Production Capacity of 100,000 Units, with utilization ratio of 50%, 52%, 54%,
55% and 56% for year 1, 2, 3, 4, 5 respectively
▪Sales of 72%, 74%, 76%, 78% and 80% of total available units for sale
▪The selling price of INR 125 per unit is expected to grow @6%
▪ Raw material costs INR 45 per unit, labor expenses @ INR 20 per unit; expected growth
of 4% and 10% respectively

Others:
▪ SG&A to grow @15% for year 2 and 3 and 12% for year 4 & 5
▪ Tax @ 30%
▪ Creditor’s days to come down to 55 in year 4 and 50 in year 5
▪ Outstanding expenses account for 1.25 months
▪ Debt repayment @25% in year 3 & 4 and 33% in year 5

You are supposed to make a dynamic financial model and assess the
efficiency and profitability of the business by calculating various ratios.