BBA/B.Com Corporate Finance June 2024

Description

Corporate Finance

June 2024 Examination

 

 

Q1. The following information is available of material X purchased by a company for its manufacturing operations.

1. Annual requirement 60,000 units
2. Purchase price per unit Rs.80
3. Inventory carrying cost per unit per annum Rs.10
4. Cost of placing an order Rs.1000
5. Alternate order sizes (in units)

(i) 60,000 (ii) 30,000 (iii) 15,000 and (iv) 5000

Determine the total of ordering cost and inventory carrying cost for ordering in each of the lot sizes.

Using EOQ formula determine the EOQ of this item.  (10 Marks)

Ans 1.

Introduction

Corporate finance often involves the management of a company’s finances, ensuring that every operational facet is optimized for cost-effectiveness and efficiency. One crucial area in this realm is inventory management, where the key objective is to minimize the total costs associated with ordering and holding inventory. The Economic Order Quantity (EOQ) model is a fundamental tool used in this process. It provides the most cost-effective quantity of stock to order, considering factors like total demand, order costs, and carrying costs. In the provided scenario, a company needs to evaluate its inventory management strategy for material X by calculating the ordering and carrying costs for different order sizes and determining the

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Q2. From the following information calculate the duration of the operating cycle for each of the two years

Particulars	2022-2023 (Rs.)		2023-2024 (Rs.)
Stocks of Raw			2,70,000
Materials             work-in-	2,00,000	1,20,000	1,50,000  1,75,000
process     Finished Goods	2,50,000
Purchase of raw materials on	15,00,000		18,00,000
Credit
Cost of goods sold	18,00,000		19,00,000
Credit Sales	25,00,000		27,00,000
Debtors	5,00,000		6,00,000
Creditors	1,00,000		1,50,000

 

All figures to be rounded off to the nearest whole number    (10 Marks)

 Ans 2.

Introduction

The duration of the operating cycle is a vital measure in business finance, illustrating the total time taken by a company to convert its investments in inventory and other resources into cash flows from sales. This metric is particularly important as it helps in assessing the liquidity and efficiency of a company’s operational processes. For the purpose of this analysis, we will compute the operating cycle for two fiscal years, 2022-2023 and 2023-2024, based on the provided financial data. The data includes inventories (stocks of raw materials, work-in-

 

 

Q3a. The earnings per share of a company which is capitalized at 15% is Rs.8.  Its return on investment is 18%. According to Walter’s Model what would be the market price per share if the company pays a dividend of Rs. 4 per share? According to Walters what should be optimum dividend payable in this situation and what wouldbe the market price per share in that situation?   (5 marks)

Ans 3a.

Introduction

The question provided offers a scenario to explore the impact of dividend policies on a company’s market price per share using Walter’s Model. This model, created by Professor James E. Walter, evaluates how dividends affect the company’s value based on its return on investment (ROI) and cost of equity (ke). By applying this model, we can determine the optimum dividend policy and its corresponding market price, which is particularly valuable for financial

 

Q3b.A Company sells its product to its regular customers on 60 days credit. The Finance Manager has suggested that they should offer to their customers a cash discount of 2% if payment is made within 10 days. The company finances its working capital requirement from a bank at 14% interest. Should the advice of theFinance Manager be accepted? Further, should a customer of the company who finances his working capital requirement at 12% interest accept the offer?        (5 marks)

Ans 3b.

Introduction

Evaluating the Finance Manager’s proposal to offer a 2% cash discount for early payments involves analyzing the financial implications for both the company and its customers. The decision revolves around the cost of financing and the benefits derived from improved cash flow. This analysis will provide insights into whether such a discount is beneficial from a corporate finance perspective.

Concept and