Finance Management

Topics: Net present value, Corporate finance, Discounted cash flow Pages: 21 (6186 words) Published: June 29, 2013

Masters Program in Business Administration (MBA 4 SEM)
(Semester II)

Note.: 1)Attempt any Four Cases.
2)All Cases carry equal marks.

Case NO. 1
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. The industry indicators predict that the economy is gradually slipping into recession.

Exhibit 1 Balance sheet as at March 31,200 x
(Amount in Rs. Crore)

Source of Funds
Share capital 350
Reserves and surplus250600
Loans :
Debentures (@ 14%) 50
Institutional borrowing (@ 10%)100
Commercial loans (@ 12%)250
Total debt 400
Current liabilities 200

Application of Funds
Fixed Assets
Gross block 1,000
Less : Depreciation 250
Net block 750
Capital WIP 190
Total Fixed Assets 940
Current assets :
Inventory 200
Sundry debtors 40
Cash and bank balance 10
Other current assets 10
Total current assets 260

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) 2,000.0
Operating expenditure :
Variable cost :
Raw material and manufacturing expenses1,300.0
Variable overheads 100.0
Total 1,400.0
Fixed cost :
R & D 20.0
Marketing and advertising 25.0
Depreciation 250.0
Personnel 70.0
Total 365.0
Total operating expenditure 1,765.0
Operating profits (EBIT) 235.0
Financial expense :
Interest on debentures7.7
Interest on institutional borrowings 11.0
Interest on commercial loan 33.051.7
Earnings before tax (EBT) 183.3
Tax (@ 35%) 64.2
Earnings after tax (EAT) 119.1
Dividends 70.0
Debt redemption (sinking fund obligation)** 40.0
Contribution to reserves and surplus 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....
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