Financial Daily from THE HINDU group of publications
Monday, Jul 21, 2003
Financial Daily from THE HINDU group of publications Monday, Jul 21, 2003 |
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Mentor
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Accountancy ABCs of cash flows in XYZ P. V. Ratnam
THE comparative balance-sheet and income statement of XYZ Ltd for 2002 are presented in Tables 20 and 21. Additional information: i) a dividend of Rs 48 crore was paid in 2002;
ii) the loss on sale of equipment of Rs 4 crore reflects a transaction in which equipment with an original cost of Rs 12 crore and accumulated depreciation of Rs 5 crore were sold for Rs 3 crore in cash.
Required: i) Using the indirect method, determine the net cash provided by operating activities for 2002 and construct a statement of cash flows.
Working notes: The plant and equipment account, the accumulated depreciation account, the equipment sold account and the deferred income-tax provision are presented in Tables 22 to 25.
Solution: The net cash provided by operating activities for 2002 and the cash-flow statement for 2002 is given in Table 26 (the figures in brackets indicate cash outflow).
The retained earnings account is given in Table 27.
Working capital
AN ENGINEERING company is considering its working capital investment for the year 2003-04. The estimated fixed assets and current liabilities for the next year are Rs 6.63 crore and Rs 5.967 crore respectively.
The sales and earnings before interest and taxes (EBIT) depend on investment in current assets — particularly inventory and receivables. Calculate the following for each policy: i) rate of return on total assets; ii) net working capital position; iii) current assets to fixed assets ratio; and iv) discuss the risk-return trade-off of each working capital policy.
The rate of return on total assets is shown in Table 29.
Cost of capital
THE book-value capital structure of JKL Ltd as on March 31, 2003, is shown in Table 30. The equity share of the company sells for Rs 20. It is expected that the company will pay next year a dividend of Rs 2 per equity share, which is expected to grow at 5 per cent per annum forever. Assume a 35 per cent corporate tax rate.
Required: i) compute the weighted average cost of capital (WACC) of the company based on the existing capital structure; ii) compute the new WACC, if the company raises an additional Rs 20 lakh debt, by issuing 12 per cent debentures. This would result in increasing the expected equity dividend to Rs 2.40 and leave the growth rate unchanged, but the price of equity share will fall to Rs 16 per share; iii) comment on the use of weights in the computation of WACC.
The statements of WACC and new WACC are presented in Tables 31 and 32. The weightage may be according to the book or market value of each type of source of funds. But the book value is an appropriate method.
It is the weighted average cost of capital which is relevant in calculating the overall cost of capital and not the simple average. Further, in all cases of sources of finance, after-tax cost only (income-tax, surcharge and tax on dividends) is considered in financial decision-making. (Concluded)
(Suggested answers to the May 2003 CA (PE II) paper on cost accounting and financial management.)
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