| 1. |
Patel Enterprise Ltd. is in the business of Agarbati and has prepared the following forecast of its Income and Expenses for the year ending 31st March,2004. You are required to revise this forecast in the light of various possibilities the management is considering.
Forecast for the financial year ending 31st March,2004 |
20 |
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| | Rs. |
| Sales | | 13,000,000 |
| Interest income | | 1,000,000 |
| 14,000,000 |
| Operating costs: |
Material
Production Labour
Production Overheads
Increase in stock
Administration Overheads
Marketing Overheads | | 5,000,000
1,000,000
2,000,000
(2,000,000)
800,000
1,500,000 |
| Depreciation | | 11,100,000 |
Operating profit
Interest Expenses
Provision for taxes
Profit after Tax
Dividends
Retainable Earnings | | 2,900,000
1,500,000
800,000
600,000
400,000
200,000 |
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Various assumptions have been made with arriving at this forecast which may not necessarily materialize. The company relies heavily on the rural market, the prosperity where of depends on the monsoon level. The management has therefore, decided to categorize the possibilities in to two: Good Monsoon and bad Monsoon. |
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Selling price per packet of Agarbati has been taken at Rs.13 which could increase to Rs.14, if the monsoon is good. And could decline to Rs.12, if the monsoon is bad. Volume could be better than forecast by 10%, if the monsoon is good, and down by 10%,if the monsoon is bad. |
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The average investment surplus available with the company is Rs.1 crore on which interest income at 10% has been estimated. It is however, believed that in a bad monsoon the interest rate might decline to 7%, while in a good monsoon the interest rate might still decline to around 8%. On interest expense area, the borrowing rate is assumed at 15% which might remain the same in both types of monsoons. |
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You may assume that production volume would remain in the same n both the monsoon situations. There were no opening stock at the beginning of the year. |
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In a good monsoon, company will advertise heavily. Advertising considered in the initial estimates provided above is Rs.15 lakhs which would increase by 40% in this scenario. In a bad monsoon, the current assumed level of advertising will be decreased by 10%. Other marketing costs are of a fixed nature |
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The management has experienced both types of monsoons in their past 15 years and believed that, while a good monsoon witness fast off take of products, collections from customers are generally delayed resulting in more funds requirements for working capital. The current working capital is financed 50% from debt and 50% from equity, while long term needs are entirely funded by equity. In a good monsoon, working capital will rise by 20%. The incremental working capital will be funded entirely by debt. In a bad monsoon, working capital requirements will remain the same. The effective tax rates will remain in same in both the situations, in case the company generates profits. |
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The dividend amount will remain same, even if profits are better than the current estimates. No dividend shall be paid, if profits are lower than current estimates or, if the company were to generate a loss. |
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Prepare revised income and profit forecast for the both situations, viz., Good monsoon and Bad monsoon, in the same format as above. Attach working notes for detailed calculations. |
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| 2. |
(a) |
Ramesh & Co. Ltd. manufactures water filters. The current ratio at the end of the last year was 3:1 which appeared to be comfortable. However, the cash flow position, in reality , is rather weak and the company finds it difficult to effect payments to the suppliers and workers on time.
The composition of working capital as per the balance sheet is provided here. |
6 |
| |
| Rs. |
Current Assets:
Inventories
Receivables
Cash and Bank Balances
Loans and Advances
Current Liabilities |
1,800,000
1,200,000
100,000
2,000,000
5,100,000
1,700,000 |
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Mention specific possibilities of which might be causing cash flow difficulties in this context. Suggest any better rations which the company might use to gauge its liquidity in future. |
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