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Ballari Institute of Technology and Management Ballari Department of Management Studies Advanced Financial Management
Ballari Institute of Technology and Management Ballari Department of Management Studies Advanced Financial Management
Ballari Institute of Technology and Management Ballari Department of Management Studies Advanced Financial Management
1. The present sales level of Soumya Enterprise is Rs. 50 million. The firm classifies its
customers into 3 credit categories. The firm extends unlimited credit to customers in
Category – A, limited credit to customers in Category – B & no credit to customers in
Category – C. As a result of this credit policy, the firm is forgoing sales to the extent
of Rs. 5 millions to customers in Category – B & Rs. 10 millions to customers in
Category – C. The firm is considering the adoption of a more liberal credit policy
under which customers in Category – B would be extended unlimited credit policy &
customers in Category – C will be provided with limited credit. Such a relaxation will
increase the sales by Rs. 10 millions on which bad debt losses would be 8%, the
contribution margin ratio for the firm is 15%, average collection period is 60days & a
cost of capital is 15%. The tax rate for the firm is 40%. What will be the effect of
relaxing the credit policy on the residual income of the firm?
2. Malabar corporations currently provides 45days credit. Its present level of sales is Rs.
50 Millions. The firm’s cost of capital is 15% & ratio to variable cost to sales is 0.80.
The firm is considering extending its credit period to 60days. Such an extension is
likely to push sales up by Rs. 1.5 million. The bad debts proportion would be 5%. The
tax rate is 45%. What will be the effect of lengthening the credit period on the residual
income of the firm?
3. Present credit terms of ABC Ltd. is “1/10, net 30”. Its sales are Rs. 12 millions, its
average credit period is 24days, its variable cost to sales ratio is 0.80 & its cost of
funds is 15%. The proportion of sales in which customers currently take discount is
0.30. ABC Ltd. is considering relaxing its discount term to “2/10, net 30”. Such a
relaxation is expected to increase the sales by Rs. 1.2 million, reduce the average
collection period to 16days & increase the proportion of discount sales to 0.70. What
will be the effect of relaxing discount policy on residual income? The tax rate of the
firm is 50%.
4. Manish Ventures is considering relaxing its collection efforts. Presently its sales are
Rs. 50 millions. Its average collection period is 25days, its variable cost to sales is
0.75, its cost of capital is 15% & bad debts ratio is 0.04. The relaxation in collection
efforts is expected to push sales by Rs. 6 millions, increase the average collection
period to 40days & raise bad debts to 0.06. The Tax Rate is 30%. What will be the
effect of relaxing the collection efforts on residual income of the firm?
5. Prepare a Cash Budget for July – December from the following information:
The estimated sales, expenses, etc. are as follows: (Rs. in Lakhs)
i. 20% of the sales are on cash and the balance are on credit.
ii. 1% of the credit sales are returned by the customers; 2% debts are uncollectable;
50% of the good account receivable are collected in the month of the sales and rest
during next month.
iii. The time lag in payment of miscellaneous expenses and purchase is one month.
Wages and salaries are paid fort nightly with a time lag of 15days.
iv. The company keeps minimum cash balance of Rs. 5 lakhs. Cash in excess of Rs. 7
lakhs is invested in Govt. Securities in multiples of Rs. 1 Lakh. Short fall in the
minimum cash balance are made good by borrowing from the banks. Ignore
interest received and paid.
6. Prepare a Cash Budget for the month of May, June 7 July 2004 on the basis of the
following information: