MBOF 912-1

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Centre for Continuing Education Executive MBA (OIL & GAS Management) Batch: __________________________ Semester: _______________________ Name: __________________________ Sap No/Regn No: _______________________ Assignment – 1 For FINANCIAL MANAGEMENT MBOF 912 University of Petroleum & Energy Studies Last Date of Submission:-15th April 2012 Note: All sections are compulsory. Section A – Short Notes on 4 topics/questions (5 marks each) – Total 20 marks Q1. Why are Dividend Decisions important? What
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  Centre for Continuing Education Executive MBA(OIL & GAS Management) Batch: __________________________   Semester: _______________________Name: __________________________   Sap No/Regn No: _______________________Assignment  –  1ForFINANCIAL MANAGEMENTMBOF 912University of Petroleum & Energy Studies Last Date of Submission:-15 th April 2012 Note: All sections are compulsory.Section A  –  Short Notes on 4 topics/questions (5 marks each)  –  Total 20 marks Q1. Why are Dividend Decisions important? What are the factors determining the dividenddecisions?Q2. What is Weighted Cost of Capital (WACC)? What is its significance in investmentdecisions? Q3. “Working Capital Management plays a vital role in the smooth running of day to day operations of a bu siness.” Discuss. Q4. What do you understand by Mutually Exclusive Projects? Section B  –  Long Notes on 3 topics/questions (10 Marks each)  –  Total 30 marks Q5. “NPV is always a better measure of project financial feasibility evaluation”. Discuss the statement in light of other methods of investment decisionsQ6. Grow More Ltd. is presently operating at 60% level, producing 36,000 units per Annam.In view of favorable market condition, it has been decided that from Ist January 2012, thecompany would operate at 90% capacity.  The following information are available:(i) Existing cost price structure per unit is given below:Raw Material Rs.4Wages 2Overheads (variable) 2Overhead (Fixed) 1Profit 1(ii) It is expected that the cost of raw material, wage rate, expenses and sales per unit willremain unchanged in 2012.(iii) Raw material remain in store for 2 months before these are issued to production. Theseunits remain in production process for 1 month.(iv) Finished goods remain in Godown for 2 months(v) Credit allowed to debtors is 2 months.(vi) Credit allowed by creditors is 3 months(vii) Lag in wages and overhead payment is 1 month. It may be assumed that wages andoverhead accure evenly throughout the production cycle.You are required to:(a) Prepare profit statement at 90% capacity level; and(b) Calculate the working capital requirement on an estimated basis to sustain the increasedproduction level.Assumptions made if any; should be clearly indicated.Q7 . Suppose a firm has a capital structure exclusively comprising of ordinary sharesamounting to Rs. 20,00,000. The firm now wishes to raise an additional amount of Rs.20,00,000 for expansion. The firm has four (4) alternative financial plans:1.   It can raise the entire amount in the form of Equity share capital.2.   It can raise 50% of the capital from Equity and rest from 5% Debentures.3.   It can raise the entire amount by issuing 6% Debentures.4.   It can raise 50% as equity and 50% as 5% Preference share capital. EBIT for all levels is Rs.2,40,000; Tax rate 35%.Outsatanding Equity shares are 20,000 andMarket Price/ share is Rs.100 under all the four alternatives. Which financing plan shouldfirm select? Give reason for your answer.  Section C  –  Case Studies/Caselets/Situational questions (25 Marks each)  –  Total 50marks Q8. (Determination of working capital) Cooking LPG Ltd.Introduction Cooking LPG Ltd., Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a netweork of distribution in the districts of Gurgaon and Faridabad. The bottling plant of the firm is locatedon national highway-8 (New Delhi-Jaipur), approx.12 kms. From Gurgaon. The firm hasbeen consistently performing well and plans to expand its market to include the wholeNational Capital Region.The production process of the plant consist of receipt of the bulk LPG through tank trucks,storage in tanks, bottling operations and distribution of dealers. During the bottling process,the cylinders are subjected to pressurized filling of LPG followed by quality control andsafety checks such as weight, leakage and other defects. The cylinders passing through thisprocess are sealed and dispatched through trucks. The supply and distribution section of theplant prepares the invoice which goes along with the truck to the distributor. Statement of the problem Mr. I.M.Smart, DGM(Finance) of the company, was analyzing the financial performance of the company during the current year. The various profitability ratios and parameters of thecompany indicated a very satisfactory performance. Still, Mr. Smart was not fully content-specially with the management of the working capital by the company. He could recall thatduring the past year, in spite of stable demand pattern, they had to time and again resort tobank overdraft due to non-availability of cash for making various payments. He is aware thatsuch aberrations in the finances have a cost and adversely affects the performance of thecompany. However, he was unable to pinpoint the cause of the problem.He discussed the problem with Mr. U.R.Keenkumar, the new manager (Finance). Aftercritically examining the details, Mr. Keenkumar realized that the working capital washitheroto estimated only as approximation by some rule of thumb without any propercomputation based on sound financial policies and therefore suggested a reworking of theworking capital (WC) requirement. Mr.Smart assigned the task of determination of WC tohim.Profile of Cooking LPG Ltd.1. Purchases: The company purchases LPG in bulk from various importers ex-mumbai andkerala, @ Rs. 11000 per MT. This is transported to its bottling plant at gurgaon through 15MT capacity tank trucks (called bullets), hired on annual contract basis. The averagetransportation cost per bullet ex-either location is Rs.30000. Normally, 2 bullets per day arereceived at the plant. The company makes payment for bulk supplies once in a month,resulting in average time  –  lag of 15 days.  2. Storage and Bottling: The bulk storage capacity at the plant is 150 MT (2*75 MT storagetank) and the plant is capable of filling 30 MT LPG in cylinders per day. The plant operatedfor 25 days per month on an average. The desired level of inventory at various stages is asunder :· LPG in bulk (tanks and pipelines quantity in the plant)-three days average production/ sales.· Filled cylinders -2 days average sales· Work in progress inventory  –  zero.3. Marketing : The LPG is supplied by the company in 12 kg cylinder, invoiced @ Rs.250 percylinder. The rate applicable sales tax on the invoice is 4%. A commission of Rs.15 percyclinder is paid to the distributor on the invoice itself. The filled cylinders are delived on company’s expense at the distributors godown, in exch ange of equal number of emptycycliders. The deliveries are made in trucks  –  loads only, the capacity of each truck being 250cyclinders. The distributors are required to pay for deliveries through bank draft. On receiptof the draft, the cylinders are normally dispatched on the same day. However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on onetruck load.4. Salaries & Wages: The following payments are made:· Direct Labour-Re. 0.75 per cylinder (Bottling expenses)-paid on the last day of the month· Security agency-Rs.30000 per month paid on 10 th of subsequent month· Administrative staff and managers-Rs.3.75 lakhs per annum, paid on monthly basis on thelast working day.5. Overheads:· Administrative (staff car, communication etc.)-Rs.25000 per month-paid on the 10 th of subsequent month· Power (including on DG set)  –  Rs.100000 per month paid on the 7 th of subsequent month· Renewal of various licenses (pollution, factory, labour, CCE etc.)  –  Rs. 15000 per annum-paid at the beginning of the year.· Insurance- Rs.500000 per annum to be paid at the beginning of the year.· Housekeeping, etc.-Rs.10000 per month paid on the 10 th of the subsequent month.· Regular Maintenance of the plant-Rs.50000 per month paid on the 10 th of every month tothe vendors. This included expenditure on account of lubricants, spares and other stores.· Regular maintenance of cyclinders (statutory testing)-Rs.5 lakhs per annum-paid onmonthly basis on the 15 th of the subsequent month.
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