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P. V. Ratnam

THE balance-sheet and P&L account of Jaycee Ltd for the year ended March 31, 2002, are shown in Tables 8 and 9.

The ratios for the years 1999-2000 and 2000-01 and their industry ratios are given in Table 10. Calculate ratios for 2002 and evaluate the company's financial position. Will you sell goods on credit to Jaycee? If so, why? Will you buy shares of Jaycee at a premium of 20 per cent?

The ratio calculations for 2002, that is, 2001-2002, are presented in Table 11.

i) Liquidity has come down in 2001-2002 as compared to the previous two years;

ii) Realisation from debtors has come down, that is, debtors turnover has fallen from 6 to 4.8 and to 3.2. This means longer time to receive money from debtors;

iii) The stock turnover has come down from 3.05 to 1.71. This is not good;

iv) The long-term debt has risen from 42 per cent to 120 per cent. That is, the debt-equity has become 1.2:1. This is not bad so long as the profits are good;

v) The net profit margin, though, has fallen from 18 per cent to 16 per cent and to 10 per cent in 2001-2002. This is not good; and

vi) The return on total assets has come down from 7 per cent to 6.8 per cent and to 5.87 per cent.

It is better not to sell goods on credit to Jaycee, as its liquidity position has been worsening from year to year.

Assumption: The face value of equity share is Rs 10 at a premium of 20 per cent, that is, the subscription price is Rs 12 per equity share. The shares of Jaycee can be bought at a premium of Rs 2.

Justification: i) the book value of equity share is Rs 30 (4,20,000 / 14,000 shares); though the net profit margin has been coming down, the company has been earning profits on a continuous basis; iii) it is a dividend-paying company — 18 per cent paid in 2001-2002.

25,200 / 14,000 x 100 = 18 per cent, that is, a DPS of Rs 1.80

1,23,200 / 14,000 shares = Rs 8.8 EPS, which is very good.

Note: Because the net profit margin is coming down, it is better to sell the shares after waiting for a short period.

(Concluded)

(Suggested answers to the December 2002 CS (Final) paper on financial management.)

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