Introduction to Business Finance

MAX MARK -15

CASE STUDY FOR ASSIGNMENT

1. Solve the questions of two case study ,questions have been provided at the end of case study 2. Submit hard copies before the initiation of final exam CASE STUDY -1

Company Alpha The company Alpha was established in the year 1996 as private ltd company . In the year 2002 it was listed in the stock exchange .After the conversion into public limited company , the company achieved steady growth rate . The board of directors of the company consist of independent and executive directors . Financial Position The company Alpha primary chemical product is Zinc 1 and NASH 6 . At present company Alpha share is 40% of the market . In the recent years Zinc 1 market share has declined by the introduction of the same product by company BMO . Company BMO is selling the same product under the title of Zinc Fast .The company directors of Alpha has attributed increase in sales of Zinc Fast to better marketing strategy . Nash 6 has relatively a very small market share .It is a premium chemical which is use in the manufacturing of high valued fabric . Balance Sheet for the year 2011 Rs. In thousand Non current assets Current assets Total 000 38,000 3,000 41,000 2010 000 38,000 5,000 43,000

Current Liabilities Share Capital 10 % Long term loan Net loss Total

14,000 25,000 10,000 (8,000) 41,000

9,000 25,000 10,000 (1,000) 43,000

The deficit in the year 2011 has forced the company to undertake financial restructuring . Its share of Rs. 10 ( face value ) at this time trading in the stock exchange at Rs. 9 ( Market Value ).The company has paid dividend Rs. 1 per share in 2009. Interest rate on bank loan is 10% per annum . Corporate tax at present is 20%.

Summary of profit and loss account 2011.

Profit before tax Tax Zero percent Profit after tax

(7,000) Nil (7,000)

Strategy At present the bank which has advance long term loan has imposed two restriction 1. Further borrowing cannot be undertaken without sanction from the bank 2. The bank for observation of the affairs of the company has name , one of its nominee as Director in BOD 3. Maintain current ratio 1.1

The management is of the opinion that machineries which were purchase in the early years have now worn out and it is the time for replacement of these machines ,although few machines have been replaced .-delay in production / product standards are not achieved regularly because of machine fault . The production department has requested Finance section for arrangement of finance for capital budget . The marketing department has also requested for enhancement of its budget and maintenance of quality for increase in sales . The Finance section is evaluating options to accommodate these demands but the financial indicators of 2009 are depressing .

Q-1 Prepare cash flow statement for the year 2011. Q-2 Calculate cost of capital Q-3 Advice company ,using your assumption , what kind of financial decision should be undertaken

CASE STUDY 2

Company FTY Company FTY is a private limited company under the leadership of Mr. Kim , who started business in the year 2005. Mr. Kim has a strong influence in the decision making of the company . In the last two years 2008 & 2009 , company product Wood Furniture has captured 22% of the market share . Financial Position The increase in the sales in the year 2010 & 2011 has increase revenue but has also added pressure in the working capital. Since no immediate option was available , 70% increase in working capital demand was finance by long term loan and 30% by investment from Mr. Kim who in return has demand that 90% of profit earned should be distributed as divided . Finance Director has privately expressed deep concern over the Issuance of dividend. Balance Sheet for the year 2011 000 14,000 9,000 23,000

Non current assets Current assets Total

Current Liabilities Long term Loan Share Capital Net profit Total

4,000 5,000 10,000 4,000 23,000

Glimpse of cash flow statements - 2011 Increase in Inventory Increase in receivable Increase in Payable 2,000 8,000 1,000

Repayment of long term loan Further issuance of shares

(550) 2,000

Strategy

Director Finance is of the opinion that the company needs further finance for expansion And in the first step it needs to overcome its overtrading indicators . The company must evaluate options for financing working capital and should a long term strategy to pursue growth with sales increase .

Q-1 Explain taking long term loan for operational activity is right choice Q-2 What should be the growth strategy of the firm ( you are allowed to use your own assumptions )

Secretary appraised the trustees that a written communication has been received from HBL which states that as a matter of policy, mark up of 11% on short term deposit scheme for one year is applicable on investment of Rs. 30 million and above. The University has invested Rs. 15 million on short term deposit scheme of 1 year which is short of above specified amount, therefore bank is proposing a revised mark up of 10.25% for the aforesaid scheme pertaining to 1year. There was consensus of opinion among trustees that mark up rate of 10.25% per annum as proposed by HBL is not competitive and there is need for withdrawal of amount from the scheme. The Secretary further informed the trustees that contact has been established with the officials of Bank Metropolitan Bank Ltd yesterday and officials have confirmed that no zakat will be deducted on investment.

After deliberation , following resolution was passed : Resolved that the investment of Rs. 15 million is to be withdrawn from Habib Bank Ltd and deposited in the short term deposit scheme of Habib Metroplitan Bank for one year .

Mr. Shamim A .Zuberi pointed out that provident fund accounts has been audited till June 30, 2008. As per decision undertaken in the 3rd meeting of the committee held on ,Mr. Ijaz Hussain qualified for sanction of exgratia on completion of the said task of provident fund account. Secretary added that Mr. Ijaz Hussain will continue to perform regular duties in the role of Accountant apart from maintaining books of provident fund accounts. The should be