ACC501 Assignment no 01 Spring 2013 Solution required

  SEMESTER SPRING 2013 BUSINESS FINANCE                                            (ACC501) ASSIGNMENT NO. 01 DUE DATE:                                                           2^nd MAY 2013 MARKS:                                                                  20 Topic:                                                                      Ratio Analysis Learning objectives:   After attempting this assignment, the student would be able to:

1. calculate and interpret different financial ratios.
2. understand how the decisions may affect liquidity position of a company.

Assignment:   ABC Company is engaged in manufacturing of electronic products since many years. It is listed at Regional Stock Exchange (RSE) and its shares are traded at Rs. 37 each currently. Capital structure of electronics industry is highly relying on debt. So, the industry average for debt to equity ratio is 60:40. Following financial statements relate to ABC:

			ABC Company
			Balance Sheet
			As on December 31, 2012
	Assets		Rs. In	Liabilities & Owner’s Equity	Rs. In
			Millions		Millions
Current Assets				Current Liabilities
Cash			60	Accounts Payable	375
Accounts Receivable			50	Notes Payable	300
Inventory			450	Total Current Liabilities	675
Total Current Assets			560	Long-term Debt	545
				Stockholders’ Equity
Fixed Assets				Common    Stock    and    Paid-in-	535
				surplus
Plant	and	Equipment	2,980	Retained Earning	1,785
(Net)
				Total Stockholders’ Equity	2,320
Total Assets			3,540	Total Liabilities & Equity	3,540

ABC CompanyIncome Statement For the year ended 31^st December, 2012

Particular	Rs. In
	millions
Net Sales	2,450
Cost of Goods Sold	(1,400)
Depreciation	(270)
Earnings before interest and taxes (EBIT)	780
Interest	(145)
Taxable Income	635
Taxes	(216)
Net Income	419
Dividends (40% of Net Income)	167.6
Retained Earnings	251.4

Additional information:  v Management of the company is planning to take loan of Rs. 51 million from a local financial institution to purchase new plant for expansion in its existing plant. v A & N Company – a buyer of ABC Company has recently made an agreement to purchase electronic products for Rs. 20 million on credit basis. The inventory for this deal will cost Rs. 11 million for ABC Company. v Share price of the company will be increased by Rs. 3 owing to good expectations perceived by stock market investors.   Required   1.   Compute current ratio of ABC Company before and after the credit sales have been

	made to A & N Co.	(3+4=7 Marks)
2.	Analyze how the liquidity position of ABC Company will be affected after making
	credit sales to A&N Co.	(3 Marks)
3.	Calculate   Debt-Equity   Ratio   of   ABC   Company   before   and   after   taking   loan.
		(3+4=7 Marks)

1. Comment on as how the change in Debt to Equity Ratio would affect the decision of the financial institution if the company requests for a further loan. (3 Marks)

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