FINANCIAL MANAGEMENT

Ratios and Leverages Prof. Nomita Agrawal

1. The following is the Balance Sheet of a limited company as on 31
st
March 2010
Liabilities Rs. ssets Rs.
Share !apital 200"000 Land # Bldg 1$0"000
%&L a&c 30"000 %lant # Machinery 3'0"000
(eneral Reser)e $0"000 Stoc*+in+trade 200"000
12, -ebent.res $20"000 S.ndry -ebtors 100"000
S.ndry !reditors 100"000 Bills Recei)able 10"000
Bills %ayable '0"000 !ash at Ban* $0"000
Total /$0"000 Total /$0"000
!on)ert the Balance Sheet into )ertical form and calc.late !.rrent ratio" 0.ic* ratio" 1n)entory to
wor*ing capital ratio" -ebt to 23.ity ratio" %roprietory ratio" !apital (earing Ratio.
2. !o. has drawn .p the following %&L a&c for the year ended 31
st
March 2010
%artic.lars Rs. %artic.lars Rs.
To 4pening Stoc* 25"000 By Sales 150"000
To p.rchases /0"000 By !losing Stoc* 3/"000
To 6ages 2$"000
To Man.fact.ring 27penses 15"000
To (ross %rofit '2"000
Total 18/"000 Total 18/"000
To S # - 27penses $"000 By (ross %rofit '2"000
To dministration 27penses 22"/00 By !ompensation for
ac3.isition of Land
$"/00
To (eneral 27penses 1"200
To 9.rnit.re lost by fire /00
To :et %rofit 2/"000
Total '5"/00 Total '5"/00
!on)ert the abo)e acco.nt in )ertical format and comp.te 4perating ratio" 4perating :et %rofit ratio"
(ross %rofit ratio" :et %rofit ratio" Stoc*+ t.rno)er ratio.
3. The following is the Balance Sheet of %rashant Ltd as on 31st March 2010
Liabilities Rs. ssets Rs.
Share !apital 9i7ed ssets less -epreciation 510"000
23.ity Shares of Rs. 10 each $00"000 Stoc* 150"000
1000 12, %ref Shares of Rs. 100
each
100"000 S.ndry -ebtors 120"000
Reser)e # S.rpl.s 100"000 Bills Recei)able 2'"000
12, -ebent.res 200"000 !ash on hand # ban* 3'"000
!reditors 120"000
Ban* o)erdraft 30"000
Total 8'0"000 Total 8'0"000
Re)en.e statement for the year ended 31
st
March 2010
%artic.lars Rs. Rs.
:et Sales ; !redit < =30"000
!ost of (oods Sold 520"'00
(ross %rofit 108"'00
dministrati)e 27penses 1/"2'0
Selling # -istrib.tion 27penses 35"'00 '$"='0
4perating profit before ta7 '$"='0
Ta7ation 2'"''0
4perating profit after ta7 28"200
9rom the abo)e information" comp.te !.rrent Ratio" Li3.id Ratio" (ross %rofit Ratio" -ebtors >elocity"
:et %rofit Ratio" !apital (earing Ratio" %roprietory Ratio" Stoc* 6or*ing !apital Ratio" dministrati)e
27pense Ratio" -ebt 23.ity Ratio.
$. M&s Ra? # Sons Ltd. present yo. the following@
Balance Sheet as on 31
st
March 2010
Liabilities Rs. ssets Rs.
23.ity share !apital '0"000 9i7ed ssets /="'00
/, %ref. share !apital 10"000 1n)estments 2'"000
Reser)e 9.nd $0"000 Stoc* 30"000
5, -ebent.res 20"000 S.ndry -ebtors 13"'00
S.ndry !reditors 30"000 Ban* Balance ="000
%rofit and Loss a&c %reliminary 27penses /"000
2008 1"000
2010 before appropriation 20"000 21"000
Total 1"=1"000 Total 1"=1"000
The -irectors intend to transfer a s.m of Rs.'"000 o.t of the c.rrent yearAs profit to pro)ision for
ta7. Bo. are re3.ired to calc.late the ret.rn on capital employed ratio" c.rrent ratio" 3.ic* ratio"
proprietory ratio" debt to e3.ity ratio" ret.rn on e3.ity capital ratio" and ret.rn on proprietorsA
f.nds.
'. !.rrent Ratio is 2.' @1 and 6or*ing !apital is 50"000. !alc.late the amo.nt of c.rrent assets and
c.rrent liabilities.

5. 9rom the following information" calc.late the stoc* at the end
4pening stoc* Rs. 52"000 Rate of (ross %rofit on cost 33 1&3 ,
%.rchases Rs. $20"000 Sales Rs. 500"000
=. C ltd has a li3.id ratio of 1.'. 1ts net wor*ing capital is Rs. 120"000 and its stoc* is Rs. /0"000.
!alc.late the )al.e of c.rrent assets. ss.me there are no prepaid e7penses and ban* o)erdraft.
/. !omp.te the amo.nt of gross profit and sales if opening stoc* is Rs. 50"000" closing stoc* Rs.
100"000" stoc* t.rno)er rate / times and the goods are sold at a profit of 20 , on sales.
8. C ltd has a c.rrent ratio of $@1 and its li3.id ratio is 3@1. 1f its in)entory is Rs. 35"000" find o.t
the )al.e of total c.rrent assets" total 3.ic* assets and total c.rrent liabilities.
10. companyAs stoc* t.rno)er is ' times. Stoc* at the end is Rs. $000 more than the stoc* at the
beginning of the year. Sales d.ring the year ; all credit< were Rs. 300"000. Rate of (% on sales is
20,. !.rrent liabilities at the end of the year were Rs. 50"000. 0.ic* ratio is 1@1. !alc.late the
c.rrent ratio at the end of the year. ss.me there are no prepaid e7penses and ban* o)erdraft.
11. 9rom the following details prepare a statement of wor*ing capital with as many details as
possible@
Stoc* t.rno)er ratio 5 (% ratio 20 ,
-ebtors >elocity 2 months !reditors )elocity =3 days
(ross profit Rs. 50"000
!losing stoc* was Rs. '000 in e7cess of 4pening Stoc*
12. !alc.late detailed wor*ing capital from the following information@
!.rrent ratio 2.' @1 Li3.id Ratio 1.' @1
Stoc* t.rno)er ratio ; ta*e !ost of Sales & !losing Stoc* < 5 times
-ebtors collection period 2 months
(% Ratio 20 , :et wor*ing capital Rs. 300"000
There is no ban* o)erdraft or prepaid e7penses.
L2>2R(2S + %roblem Set
Illustration 1.
%ramila !ompany is capitaliDed with Rs.10"00"000 di)ided in 1"000 common shares of Rs.1"000 each. The
management wishes to raise another Rs.10"00"000 to finance a ma?or programme of e7pansion thro.gh
one of o.r possible financing plans. The management may finance the company with E ;1< all common
stoc*" ;2< Rs. ' la*hs in common ctoc* and Rs. ' la*hs in debt at ' percent interest" ;3< all debt at 5
percent interest" or ;$< Rs. ' la*hs in common stoc* and Rs. ' la*hs in preferred stoc* with ' percent
di)idend. The companyAs e7isting earnings before interest and ta7es ;2B1T< amo.nted to Rs.1"20"000.
!orporation ta7 is ass.med to be '0 percent.
6hich option wo.ld yo. recommend.
Illustration
6o.ld yo.r decision change in ill.stration 1" if the company had an 2B1T of Rs. 2$0"000.
Illustration !
6hat if the company was ma*ing a loss of Rs. 50"000.
Illustration "
Fem*.nt !hemicals Ltd. is operating with a total capitalisation of Rs./"00"000 incl.ding debt of
Rs.$"00"000 obtained at / percent interest. The company is prod.cing 15"000 .nits of o.tp.t. The selling
price of the prod.ct is Rs.'0 a .nit" )ariable cost Rs.2' a .nit and ann.al fi7ed costs are Rs.1"00"000. The
management is contemplating to increase prod.ction by 10 percent. Before ta*ing final decision in this
regard the management wants to st.dy the combined effect of operating and financial le)erage on 2%S
both at the present prod.ction le)el of 15"000 .nits and at proposed 1="500 .nits. ss.me that the ta7 rate
is '0 percent and the n.mber of common stoc* o.tstanding is 10"000 shares.
Illustration #
The Faldia Man.fact.ring !ompany Ltd. has to ma*e a choice between debt iss.e and e3.ity iss.e for
financing its e7pansion programme.
The e7isting positon of the !ompany is gi)en below@
-ebt ', $0"000
23.ity Share !apital ;Rs.10 per share< 1"00"000
Reser)es and S.rpl.s 50"000
+++++++++++
Total !apital 2"00"000
Sales 5"00"000
Less@ Total !ost '"3/"000
+++++++++++
1ncome before 1nterest and Ta7es 52"000
Less@ 1nterest 2"000
+++++++++++
50"000
Less@ 1ncome Ta7 G '0, 30"000
+++++++++++
1ncome after Ta7es 30"000
+++++++++++
The e7pansion programme wo.ld re3.ire Rs.1"00"000. 1f this is financed thro.gh debt" the rate of new
debt will be = percent and the price earning ratio will be 5 times. 1f the e7pansion programme is financed
thro.gh e3.ity" new shares can be sold to net Rs.2' per share" and the price+earning ratio will be = times.
The e7pansion will generate additional sales of Rs.3"20"000" with a ret.rn of 10 percent on sales before
interest and ta7es.
1f the !ompany is to p.rs.e a policy of ma7imiDing the mar*et )al.e of its shares" which form of
financing sho.ld it chooseH ss.me '0, company ta7 rate.