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The Indian Institute Of Business Management & Studies Subject: Finance & Cost Accounting Marks: 100

Case 1: Zip Zap Zoom Car Company Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment. It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability. Its financial statements are shown in Exhibits 1 and 2 respectively. The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year. Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector. The company has never defaulted on its loan payments and enjoys a favourable face with its lenders, which include financial institutions, commercial banks and debenture holders. The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries. The small car segment

especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer. The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition. Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures. recession. The industry indicators predict that the economy is gradually slipping into

The Indian Institute Of Business Management & Studies Subject: Finance & Cost Accounting Marks: 100

Exhibit 1 Balance sheet as at March 31,200 x (Amount in Rs. Crore) Source of Funds Share capital 350 Reserves and surplus 250 Loans : Debentures (@ 14%) 50 Institutional borrowing (@ 10%) Commercial loans (@ 12%) 250 Total debt Current liabilities


100 400 200 1,200

Application of Funds Fixed Assets Gross block Less : Depreciation Net block Capital WIP Total Fixed Assets Current assets : Inventory Sundry debtors Cash and bank balance Other current assets Total current assets

1,000 250 750 190 940 200 40 10 10 260 -1200

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x (Amount in Rs. Crore) Sales revenue (80,000 units x Rs. 2,50,000) Operating expenditure : Variable cost : Raw material and manufacturing expenses 2,000.0


The Indian Institute Of Business Management & Studies Subject: Finance & Cost Accounting Variable overheads Total Fixed cost : R&D Marketing and advertising Depreciation Personnel Total Total operating expenditure Operating profits (EBIT) Financial expense : Interest on debentures Interest on institutional borrowings Interest on commercial loan Earnings before tax (EBT) Tax (@ 35%) Earnings after tax (EAT) Dividends Debt redemption (sinking fund obligation)** Contribution to reserves and surplus * 100.0 1,400.0 20.0 25.0 250.0 70.0 365.0 1,765.0 235.0 7.7 11.0 33.0 Marks: 100

51.7 183.3 64.2 119.1 70.0 40.0 9.1

Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).


The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year. The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology. Capital investment up to a maximum of Rs. 100 crore is required. The problem areas are three-fold.  The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.   The company does not want to issue new equity...
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