Financial Management Slide

PAN African eNetwork Project
Master of Finance & Control

Financial Management Semester - II
Dr. Adarsh Arora

Copyright Amity University 1
Topics Covered
Holding Receivables Management of creditors Different current Liabilities Current Liabilities management Working capital cycle Credit risk Letter of Credit Elements of Letter of Credit Inventory management Features of inventory Functions of inventory Types and importance of inventory
Copyright Amity University
Inventory management Objectives of inventory management Techniques of inventory management WCM & small business Sources of funding Capital budgeting Capital structure Importance of capital structure decisions Factors affecting capital structure Theories of capital structure MCQs
HANDLING RECEIVABLES (DEBTORS) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. Slow payment has a crippling effect on business, in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt.
PRACTICAL QUESTIONS:Illustration 1 Prakash Ltd. sells goods to its customers of A, B and C categories and its current sales is Rs. 10,00,000 per year. If sale is made to customer of D category for 1.5 months credit, additional sales of Rs. 10,00,000 per year can be made. In such a case 10% bad debtors are expected. The company earns the contribution of 15% on the sales and collection cost is expected at 4%.if its cost of capital is 10%, should it make sales to customers of D category?
Solution: Rs. Contribution 15% on additional sales of Rs. 10,00,000 150000 Less expected bad debts (10% of Rs. 10,00,000) 1,00,000 Balance 50000 Less collection charges (4% of Rs. 10,00,000) 40000 Balance 10000 Less cost of capital (10% of Rs. 106250) Expected loss 10625 Investment in receivables = (1000000*1.5/12)*(85/100) = Rs. 106250
Illustration 2: From the following data ascertain the average collection period of Jai Prakash and brothers: Rs. Total annual sales 800000 Cash sales (include in above) 60000 Sales return during the year 10000 Sundry debtors (all the end of the year) 86000 Bills receivables 44000 Provision for doubtful debts 6500
Solution: Annual credit sales =Total annual sales Cash sales sales return =800000-60000-10000=730000 Average collection period = Debtors + B/R/Annual credit sales *365 = 86000+44000/730000*365 =130000/730000*365=65 Days
Illustration 4: Calculate average collection period of a firm: Rs. Receivables on 1-1-2005 45000 Receivables on 31-12-2005 51000 Annual credit sales 438000 Solution: Average receivables =45000+51000/2 Rs. 48000 Average daily credit sales =438000/365 = Rs. 1200 Average collection period =Average receivables/Average daily credit Sales = 48000/1200 =40 days
MANAGEMENT OF CREDITORS MANAGEMENT OF CURRENT LIABILITIES Balance sheet is an indicator of the financial position of a business concern in terms of assets and liabilities. Balance sheet is always prepared in such a way that the true and fair financial position of a business is revealed, which will be easily readable and more quickly understood form. Balance sheet represents the nature and value of assets of the business, the nature and value of all liabilities and residual in the form of owners fund. The Balance sheet of each and every organization or enterprise includes various types of assets on one side
and liabilities on the other side. Current assets and current liabilities of each organization play an important role in forming the working capital. Each organization is liable to pay its current liabilities within a year, so the organization has to manage its current liabilities and its payment in an effective manner.
CURRENT LIABILITIES In accounting, current liabilities are considered liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle, whichever period is longer. An operating cycle is the average time that is required to go from cash to cash in producing revenues. For example, accounts payable for goods, services or supplies that were purchased for use in the operation of the business and payable within a normal period of time would be current liabilities. Bonds, mortgages and loans that are payable over a term exceeding one year would be fixed liabilities or long-term liabilities.
DIFFERENT CURRENT LIABILITIES Current Liability Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be classified as: Trade creditors, which is the name we give to amounts owed to suppliers. Accruals, which is the name we give to amounts still owed at the year end and not yet recorded in the books of account. Proposed items such as Dividends proposed, which means amounts the business promises to pay in the
coming year. Payable items such as Tax payable which is payable within the coming year. Overdraft, which is amounts owed to the bank. Short term loans.
Other Current Liabilities Depending on the company, you will see various other current liabilities listed. Sometimes they will be lumped together under the title "other current liabilities. If a business lists "Commercial Paper" or "Bonds Payable" as a current liability, you can be fairly confident the amount listed is what will be paid out to the company's bond holders in the short term.
TESTS OF A COMPANY'S FINANCIAL STRENGTH AND LIQUIDITY The strength of every company depends upon many factors. Following methods of its valuation are as under:1. Working Capital: Current Assets - Current Liabilities 2. Working Capital per Dollar of Sales: Working Capital Total Sales 3. Current Ratio: Current Assets Current Liabilities 4. Quick / Acid Test / Current Ratio: Current Assets minus inventory called "Quick Assets) Current Liabilities 5. Debt to Equity Ratio: Total Liabilities Shareholders' Equity Copyright Amity University
CURRENT LIABILITIES MANAGEMENT Spontaneous Liabilities Spontaneous liabilities arise from the normal course of business. The two major spontaneous liability sources are accounts payable and accruals. As a firms sales increase, accounts payable and accruals increase in response to the increased purchases, wages, and taxes. There is normally no explicit cost attached to either of these current liabilities.
WORKING CAPITAL CYCLE & ROLE OF CREDITORS IN WORKING CAPITAL CYCLE The working capital cycle can be defined as: The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer.
The diagram below illustrates the working capital cycle for a manufacturing firm:-
Working capital is clearly not the only aspect of a business that affects the amount of cash: The business will have to make payments to government for taxation Fixed assets will be purchased and sold Lessors of fixed assets will be paid their rent Shareholders (existing or new) may provide new funds in the form of cash Some shares may be redeemed for cash Dividends may be paid Long-term loan creditors (existing or new) may provide loan finance, loans will need to be repaid from time to time, and Interest obligations will have to be met by the business. Copyright Amity University
CREDIT RISK IN A BUSINESS Credit risk is the risk of a loss resulting from the debtor's failure to meet its obligations to the Bank in full when due under the terms agreed. Credit risk has the highest weight among risks taken by the Bank in the course of its banking activities. Credit risk management in the Bank is carried out using the following main procedures: putting in place limits for operations to limit credit risk; putting in place indicative limits for credit risk concentration and the share of unsecured loan portfolio; creation of security for credit operations; setting value conditions for operations with respect to payment for risks taken;
permanent monitoring of risks taken and preparation of management reporting for the Credit Committee, the Bank's management and units concerned.
LETTERS OF CREDIT Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically of two types:A. Commercial and B. Standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.
ELEMENTS OF A LETTER OF CREDIT A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place
FEATURES OF LETTER OF CREDIT 1. Negotiability 2. Revocability 3. Transfer and Assignment 4. Sight and Time Drafts
INVENTORY MANAGEMENT INTRODUCTION Inventory is the main component of working capital. Inventory is also known as stock and merchandise. The inventory means and includes the goods and services being sold by the firm and the raw materials or other components being used in the manufacturing of such goods and services. It also means the stock that has been kept for sale or consumption in the business. For the business concerns whose business is only purchase and sale of goods, the stock of goods kept for sale is called inventory and for the manufacturing concern the stock of raw materials, stock of work in progress and the stock of finished goods
all are included in the inventory. In addition the other consumable material needed for production purposes known or stores, are also included in inventory.
CHARACTERISTICS OF INVENTORY The Characteristics of inventory are as follows :(i) Inventory ensure to maintaining undisturbed production and employment rates. (ii) Inventory provides production economies. (iii) Inventory requires valuable space and consumes taxation and insurance charges. (iv) Inventory as the physical stock of items of tangible assets. (v) Inventories are the result of Many interrelated decisions and policies with in an organization. (vi) Inventories are used in the Production process for the purpose of sale in the business.
FUNCTIONS OF INVENTORY The important functions of inventories are as follows: (i) It ensure continuity of supply of uniform quality goods. (ii) Inventories helps to achieve the objectives of the company. (iii) Inventories ensure optimum investment in materials. (iv) Inventories activised the market. (v) Inventories help to prevent the excessive investment in material. (vi) It ensure continuous flow of production without any interruption (vii) It provide maximum services and satisfaction to the customers.
(viii) It helps in avoiding unnecessary wastage and losses. (ix) Inventories make sure of the availability of all types of materials.
PURPOSE OF INVENTORY The purpose of holding Inventories is to allow the firm to separate the processes of purchasing, manufacturing, and marketing of its primary products. The goal is to achieve efficiencies in areas where costs are involved and to achieve sales at competitive prices in the market place. Within this broad statement of purpose, we can identify specific benefits that accrue form holding inventories.
TYPES OF INVENTORY Every business concern may have different types of inventories. The import types of inventory are as follows :i Inventory of raw materials ii Inventory of stores & spare parts iii Inventory of work in progress iv Inventory of finished goods v Safety Inventory vi Flabby Inventory vii. Normal Inventory viii. Profit making Inventory
ix. Excessive Inventory x. Consumables
IMPORTANCE OR BENEFITS OF INVENTORY Inventory is an important part of any business and is an urgent asset which is used for sale and for producing goods. It contains and includes all goods and materials that are used in the production and distribution process. To smoothly run the business concern, we require some inventory on the other hand financial institutions and other service industries hold less inventory in their business. Generally inventory is stored in order to have goods available for sale or raw material for production specially in retail business inventory is vary important because it attracts the customers means if goods ready for sale are
not kept in the business the business concern could loose the opportunity to sell the product.
The business concern will not suffer with the problem of shortage of stock if sufficient quantity of stock is kept. The importance or benefits of inventory are:(i) Inventory provides the favorable and good returns on the investments. (ii) Inventory allows the buyer to get the advantage of higher discount. (iii) Inventory protects the manufacturer of goods against fluctuations of stock. (iv) It protects from shortage of stock at the time of production process. (v) Inventory protects from fluctuations in demand, delayed supply of goods from the supplier, and in case of fluctuations.
NEED TO HOLD INVENTORIES Inventories are typically not end in themselves. What are then the main purposes which they serve? There are three needs or motives for holding inventories. i. Transaction Motives ii. Precautionary Motives iii. Speculative Motives
INVENTORY MANAGEMENT Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarelyused spare parts in case somebody needs them.
OBJECTIVES OF INVENTORY MANAGEMENT If inadequate inventory is there, it may result in shortage of sale, on the other hand the excessive quantity of inventory may block up our investment which will reduce the amount of working capital. In an effective management in terms of inventory is what requires in the business, so it is very important for every business concern to have experts in this particular field so that it can easily be analyzed about inventory management. Following are the main objectives of Inventory Management:(i) To minimize the fund in inventory. (ii)To ensure that raw material is available on time or at the
time of production. (iii) Sufficient quantity is available at the time of production. (iv) To ensure that the goods is available which is finished goods for delivery to its customers. (v) Sufficient quantity of finished should be available to company with the demand of its customers immediately. (vi) To protect with the delay in production process due to short age of material.
IMPORTANCE OF INVENTORY MANAGEMENT From the following point of view the efficient management of inventory is essential:i. To check the misuse of capital ii. Continuity in production iii. Proper storage of materials iv. Maximum profits
TECHNIQUES OF INVENTORY MANAGEMENT Techniques of inventory management to can be explained in two approaches :i. Traditional approach ii. Modern or scientific approach The following techniques under scientific approach method are being used to manage the inventory properly:ii.- (a) Economic Order Quantity Analysis. ii.- (b) Re order Point. ii.- (c) Safety Stock ii.- (d) A.B.C. Analysis ii.- (e) F.S.N. Analysis.
ii.- (f) H.M.L. Analysis. ii.- (g) V.E.D. Analysis.
ECONOMIC ORDER QUANTITY (EOQ) The Economic Order Quantity (EOQ) refers to the optimal order size that will result in the lowest total of ordering and carrying costs for an item of Inventory given its expected usage. By calculating an economic order quantity, the firm attempts to determine the order size that will minimize the total inventory costs. Total inventory Cost = Ordering Cost + Carrying Cost Total ordering Costs = Number of Orders X Cost per Order = U/Q (X) F Where U = Annual Usage Q = Quantity Ordered
F = Fixed Cost per Order The total carrying costs = Average Level of Inventory (X) Price per unit (X) Carrying Cost Therefore, Total Carrying Cost = Q/2 (X) P (X) C Where Q = Quantity Ordered P = Purchase Price per Unit C = Carrying Cost
SAFETY STOCK Once it is realized that higher the quantity of safety stock, lower will be the stock-out costs and higher will be the incidence of carrying costs, the formula for estimating the reorder level will call for estimating the reorder level will call for a trade-off between stock-put costs and carrying costs. The reorder level will then become one at which the total stock out costs and the carrying costs will be at its minimum.
PRACTICAL QUESTIONS:Illustration 1: From the following information, calculate re-order level, minimum stock level, maximum stock level, average stock levelRe-quantity 4000 units Minimum usage per day 200 units Maximum usage per day 300 units Average usage per day 250 units Minimum delivery period 4 days Maximum delivery period 6 days Normal delivery period 5 days
Solution: Re-order level =maximum usage *maximum delivery period = 300*6= 1800 units Minimum level = re-order level-(normal consumption * normal delivery period) =1800- (250*5) =550 units Maximum level = (ordering level +re-order quantity)(minimum usage*minimum delivery period) =(1800+4000)-(200*4)= 5000 units Average stock level = minimum level +ordering quantity/2 =550+4000/2 =2550 units
Illustration 3:A firm requires 2400 units per annum of a material. Annual storing cost per unit is Rs. 4 and ordering cost per order is Rs. 75. What quantity should be ordered in one time? How many orders will be placed in a year? What will be the time interval between two orders? Solution:Ordering cost = Rs. 75 per order (O) Annual consumption = 2400 units (A) Carrying cost = Rs. 4 per unit per annum ( C)
= 300 units
WORKING CAPITAL MANAGEMENT AND SMALL BUSINESS SMALL BUSINESS A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies by country and by industry. In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition.
Examples of Small Business Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc. The smallest businesses, often located in private homes, are called micro businesses (term used by international organizations such as the World Bank and the International Finance Corporation) or SoHos.
SOURCES OF FUNDING Small businesses use several sources available for start-up capital: Self-financing by the owner through cash, equity loan on his or her home, and or other assets. Loans from friends or relatives Grants from private foundations Personal Savings Private stock issue Forming partnerships Angel Investors Banks
SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans
Capital Budgeting Illustration.1 A company is considering a new project for which the investment data are as follows: Capital outlay Rs 2,00,000 Depreciation 20% p.a. Forecasted annual income before charging depreciation, but after all other charges are as follows: Year 1 Rs 1,00,000 Year 2 1,00,000 Year 3 80,000 Year 4 80,000 Year 5 40,000 400000
On the basis of the available data, set out calculate calculation, illustrating and comparing the following methods of evaluating the return: (a) Payback method. (b) Rate of return on original investment, and (c) IRR.
Solution: Since there is no tax, the annual income before depreciation and after other charges is equivalent to Cash flows (CF). (a) Capital outlay of Rs.2,00,000 is recovered in the first two years, Rs. 1,00,000 (year 1) + Rs 1,00,000 (year 2), therefore, the payback period is two years. (b) Rate of return on original investment:-
Year 1 2 3 4 5
CF (Rs) 1,00,000 1,00,000 80,000 80,000 40,000
Depreciation (Rs) 40,000 40,000 40,000 40,000 40,000
Net income (Rs) 60,000 60,000 40,000 40,000
2,00,000
Average Income = Rs. 2,00,000/5 = Rs. 40,000
Factors closest to PB value of 2.5 corresponding to 5 years (life of the project) are 2.532 (28%) and 2.436 (30%). Since the actual cash flow stream is higher in initial years than average cash flows, higher discount rate of 33% may also be tried along with 30%.
Year
CF (Rs.)
PVF at Total PV (Rs.)
30% 1 2 3 4 5 1,00,000 1,00,000 80,000 80,000 40,000
33%
30%
33%
0.769 0.592 0.455 0.350 0.269
0.752 0.565 0.425 0.320 0.240
76,900 59,200 36,400 28,000 10,760
75,200 56,500 34,000 25,000 9,600
2,11,260
2,00,900
The IRR of a project is the rate of discount at which the NPV is 0. Since the NPV at 33% is Rs. 900 only (i.e., Rs. 2,00,900 Rs. 2,00,000), the IRR is 33% (approx).
Capital Structure MEANING OF CAPITAL STRUCTURE The capital structure of a company refers to the mix of the long-term finances used by the firm. It is the financing plan of the company. Let us take a look at the capital structure of a company that has recently gone in for public issue. Pennar Aluminium Company Limited has gone in for a project to manufacture Aluminium Rolled Products, Alloy Conductors and Aluminium Alloys. For raising finance, the company went in for a public issue of 1,93,45,000 equity shares of Rs.10 each at par and 28,25,000 secured PCDs of Rs.200 each.
The capital structure of the company including the present issue as per the prospectus of the company was:
A. Authorized Capital 9,00,00,000 Equity shares of Rs.10 each 9,000.00
B. C.
Issued, subscribed and paid-up capital Present Issue Equity Shares at par 16% Secured PCDs
825.50
1934.50 5,650.00 5,060.00 1,350.00 14,820.00
D. E.
Rupee Term Loan from Institutions and Banks Buyers Credit
IMPORTANCE OF THE CAPITAL STRUCTURE DECISION The objective of any company is to mix the permanent sources of funds used by it in a manner that will maximize the companys market price. In other words companies seek to minimize their cost of capital. This proper mix of funds is referred to as the Optimal Capital Structure. The capital structure decision is a significant managerial decision which influences the risk and return of the investors. The company will have to plan its capital structure at the time of promotion itself and also subsequently whenever it has to raise additional funds for various new projects.
Wherever the company needs to raise finance, it involves a capital structure decision because it has to decide the amount of finance to be raised as well as the source from which it is to be raised. The capital structure decision process can be represented diagrammatically as:-
Figure 1 : Process of Capital Structure Decisions
FACTORS AFFECTING THE CAPITAL STRUCTURE Leverage: The use of fixed charges sources of funds such as preference shares, debentures and term loans along with equity capital in the capital structure is described as financial leverage or trading on equity. The term trading on equity is used because it is the equity that is used as a basis for raising debt. Financial Institutions while sanctioning long-term loans insist that companies should generally have a debt-equity ratio of 2:1 for medium and large-scale industries and 3:1 for small-scale industries. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity the company has, it can raise 2 units of debt. The ratio is calculated using the formula
Increased use of leverage increases the fixed commitments of the company in the form of interest and repayments and thus increases the risk of the equity shareholders as their returns are affected. The other factors that should be considered whenever a capital structure decision is taken are: Cost of capital Cash flow projections of the company Size of the company Dilution of control Floatation costs.
FEATURES OF AN OPTIMAL CAPITAL STRUCTURE An optimal capital structure should have the following features: Profitability The company should make maximum use of leverage at a minimum cost. Flexibility The capital structure should be flexible to be able to meet the changing conditions. The company should be able to raise funds whenever the need arises and also retire debts whenever it becomes too costly to continue with that particular source. Control The capital structure should involve minimum dilution of control of the company. Solvency The use of excessive debt threatens the solvency of the company. In a high interest rate
environment, Indian companies are beginning to realize the advantage of low debt. Companies are now launching public issues with the sole purpose of reducing debt. The recent equity issue of more than Rs.30 crore by Ballarpur Industries was purely aimed at repaying term loans and retiring debentures.
THEORIES OF CAPITAL STRUCTURE Equity and debt capital are the two important sources of long-term finance for a firm. What should be the proportion of equity and debt in the capital structure of a firm, i.e. how much financial leverage should a firm employ? The answer is quite difficult and is based on an understanding of the relationship between the financial leverage and firm valuation or financial leverage and cost of capital. First of all, one should know whether there is any relationship between the financial leverage and firm valuation. To understand this, many approaches have been propounded, some say that there exists a relationship between the two and some state that there is no relation.
Assumptions and Definitions The following are some of the common assumptions made to understand the relationship between financial leverage and cost of capital. There is no income tax, corporate or personal. The firm has a policy of paying its earnings as dividend, i.e. a 100% dividend pay-out ratio is assumed. Investors have identical subjective probability distributions of net operating income (earnings before income and taxes) for each company. The net operating income is not expected to grow or decline over time. Without incurring transaction costs, a firm can change its capital structure instantaneously.
Net Income Approach According to this approach, the cost of equity capital (ke) and the cost of debt capital (kd) remain unchanged when B/S, the degree of leverage varies. This means that ko, the average cost of capital, measured as ko = kdB/(B + S) + keS/(B + S) declines as B/S increases. This happens because when B/S increases, kd, which is lower than ke, receives a higher weight in the calculation of ko. The following is the graphical representation of net income approach. B/S, the degree of leverage is plotted on the x-axis, ke, kd, and ko are plotted on the y-axis.
Net Operating Income Approach The net operating income approach, the overall capitalization rate and the cost of debt remain constant for all degrees of leverage. Therefore, in the following equation ko and kd are constant for all degrees of leverage. ko = kdB/(B + S) + keS/(B + S) Therefore, the cost of equity can be expressed as: ke = ko + (ko kd)(B/S) ......(11)
Traditional Approach The traditional approach has the following propositions: The cost of debt capital, kd, remains more or less constant up to a certain degree of leverage but rises thereafter at an increasing rate. The cost of equity capital, ke, remains more or less constant or rises only gradually up to a certain degree of leverage and rises sharply thereafter. The average cost of capital, ko, as a consequence of the above behavior of ke and kd (a) decreases up to a certain point; (b) remains more or less unchanged for moderate increases in leverage thereafter, and (c) rises beyond a certain point.
MCQs
Q1. Which of the following costs is not associated with the extention of credit and accounts receivables? a. Cost of investments tied up in accounts receivables b. collection cost c. Cost of measure initiated to collect blocked finds beyond expiry dates d. all are associated
Q2. Which of the following is not a cost linked with maintaining receivables:a. Cost of funds b. Discount costs c. Collection costs d. None of the above
Q3. The variable associated with credit policy are:a. Credit standards b. Credit periods c. Cash discount d. All of the above
Q4. Which of the following is not used for credit evaluation:a. Ratio analysis b. Bank references c. Past experiences with the customers d. None of the above
Q5. Which of the following is not a cost of marinating receivables:a. Administrative costs b. Collection costs c. Defaulting costs d. Marketing costs
Q6. Which of the following is not the Cs for judgeing credit worthiness of a customer a. Collateral b. Capacity c. Credibility d. Character
Q7. Which of the following is/are spontaneous liability? a. Sundry creditors b. Salary accrued but not due c. Provision for payment of bonus d. All a, b and c
Q8. With terms of 4/15, net 45, what is the implied interest rate foregoing a cash discount and paying at the end of the perioda. 25.63% b. 39.29% c. 50% d. 64.32%
Q9. Shelf stock refers to a. Perishable goods b. Items that are to be packaged and sold c. Items that are stored by the firm and sold with little or no modification d. Accessories which are not part of the standard equipment
10. If the material is priced at the value that is realizable at the time of issue such pricing method is referred to as a. Standard price method b. Replacement method c. LIFO methods d. Weighted average cost methods
Q11. Which of the following are sub-systems of inventory management system? a. EOQ sub system b. Stock level sub system c. Reorder point sub system d. All of the above
Thank You
Please forward your query To: aarora@amity.edu CC: manoj.amity@panafnet.com
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PAN African eNetwork Project

Master of Finance & Control

Dr. Adarsh Arora

Copyright Amity University

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ix. Excessive Inventory x. Consumables

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ii.- (f) H.M.L. Analysis. ii.- (g) V.E.D. Analysis.

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CF (Rs) 1,00,000 1,00,000 80,000 80,000 40,000

Depreciation (Rs) 40,000 40,000 40,000 40,000 40,000

Net income (Rs) 60,000 60,000 40,000 40,000

Average Income = Rs. 2,00,000/5 = Rs. 40,000

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PVF at Total PV (Rs.)

30% 1 2 3 4 5 1,00,000 1,00,000 80,000 80,000 40,000

0.769 0.592 0.455 0.350 0.269

0.752 0.565 0.425 0.320 0.240

76,900 59,200 36,400 28,000 10,760

75,200 56,500 34,000 25,000 9,600

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1934.50 5,650.00 5,060.00 1,350.00 14,820.00

Rupee Term Loan from Institutions and Banks Buyers Credit

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Figure 1 : Process of Capital Structure Decisions

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