Indian Institute of Technology, Kharagpur

Date: 20/09/2016 AN Time: 2 Hrs Full Marks: 40

Rajendra Mishra School of Engineering Entrepreneurship
No. of student: 55, Mid Autumn Semester Examination
Subject Number: EP60005 Subject Name: Financial & Legal Aspects of Business

1. The following are the summarized financial statements of Ambuja Co. Ltd. for 2014 and 2015:

Balance Sheet

Particulars 2015 2014

Assets:

Cash 9,000 15,000

Debtors 25,000 31,000
Stock 60,000 45,000
Fixed asset at cost 1,20,000 1,05,000
2,14,000 1,96,000
Liabilities:
Share Capital 32,500 31,500
6% Debentures due on 31‐12‐2017 50,000 70,000
Retained Earnings 38,500 27,500
Creditors 20,000 12,500
Income‐tax Payable 36,000 27,500
Accumulated Depreciation 37,000 27,000

2,14,000 1,96,000

Income Statement
(For The Year Ending 31st December)

Particulars 2015 2014

(Amount) (Amount)
Sales 4,25,000 4,50,000
Operating Expenses (including depreciation Rs. 10,000) 3,40,000 3,80,800
Interest on Debentures 3,000 4,200
Net Profit Before Tax 82,000 65,000
Income Statement 36,000 27,500
46,000 37,500
 Statement of Retained Earnings

Particulars 2015 2014

(Amount) (Amount)
Retained Earnings – Beginning 27,500 25,000
Net Profit for the year 46,000 37,500
73,500 62,500
Dividends 35,000 35,000
Retained Earnings – End 38,500 27,500

i. Prepare the cash flow statement. [10]

ii. Is the company burning or building cash? Comment. [2]

2. i. The financial information of Good Luck Limited for the year 2015 is given below:

Ratio of current assets to current liabilities 1.75 to 1

Liquidity ratio (Debtors and bank balance to current liabilities) 1.25 to 1
Issued capital (equity shares of Rs. 10 each) 1,20,000
Net current assets (as over current liabilities) 60,600
Fixed assets (net block) percentage of total equity as on the closing date 60%
Gross profit (percentage of turnover) 20%
Annual rate of turnover of stock (based on 31.12.2015) 5.26 times
Average age of outstanding debtors for the year 2015 2 months
Net profit percentage on issued share capital 16%
On 31 st December, current assets consisted of stock, debtors and bank balances

You are required to prepare trading and profit and loss account and balance sheet for the year
ending on 31st December 2015. [14]

ii. Determine a firm’s “financial policy” multiplier based on the following information: sustainable
growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times. [2]

3. (i) Mr. Pramod Roy, founder of the Pedal Pushers Company, has developed several
prototypes of a pedal replacement for children’s bicycles. The Pedal Pusher will replace existing
bicycle pedals with an easy release stirrup to help smaller children hold their feet on the pedals.
The Pedal Pusher will glow in the dark and will provide a musical sound as the bicycle is pedaled.
Pramod plans to purchase materials for making the product from others, assemble the products at
the venture’s facilities, and hire product sales representatives to sell the Pedal Pushers through
local retail and discount stores that sell children bicycles. Pramod will need to purchase plastic
pedals and extensions, bolts, washers and nuts, reflective material, and a “micro-chip” to provide
the “music” when the bicycle is pedaled.
What form of organization Pramod should choose for his new venture? In developing
your answer consider such factors as amount of equity capital needed, business liability, and
taxation of the venture. Limit your answer to maximum half a page. [3]
(ii) Mr. A who is trying to sell an unsound horse, forges a veterinary surgeon’s certificate,
starting that the horse is sound and pins it on the stable door. Mr. B comes to examine the horse
but the certificate goes unnoticed by him. He buys the horse and finds later on the horse to be
unsound. He wants to avoid the agreement under the plea that he has been defrauded by the forged
document. Will he succeed? [2]

P.S: [Limit your answer for Qn. No. 3 to maximum 1 page]

4. You have been hired as an analyst for independent assessment of a fresh food firm. Your
assistant has provided you with the following data for the firm and the industry.

2015-
Ratio 2015 2014 2013 Industry
Average
Long-term debt 0.45 0.40 0.35 0.35
Inventory Turnover 62.65 42.42 32.25 53.25
Depreciation/Total Assets 0.25 0.014 0.018 0.015
Days’ sales in receivables 113 98 94 130.25
Debt to Equity 0.75 0.85 0.90 0.88
Profit Margin 0.082 0.07 0.06 0.075
Total Asset Turnover 0.54 0.65 0.70 0.40
Quick Ratio 1.028 1.03 1.029 1.031
Current Ratio 1.33 1.21 1.15 1.25
Times Interest Earned 0.9 4.375 4.45 4.65
Equity Multiplier 1.75 1.85 1.90 1.88

i. In the annual report to the shareholders, the CEO of the firm wrote, “2015 was a good year
for the firm with respect to our ability to meet our short-term obligations. We had higher
liquidity largely due to an increase in highly liquid current assets (cash, account
receivables and short-term marketable securities).” Is the CEO correct? Explain and use
only relevant information in your analysis. [2 marks]

ii. What can you say about the firm's asset management? To answer use information about all
categories of assets as provided, but do not use any irrelevant information. [3 marks]

iii. You are asked to provide the shareholders with an assessment of the firm's profitability
and solvency. Be as complete as possible given the above information, but do not use any
irrelevant information. [2 marks]

P.S: [Limit your answer for Qn. No. 4 to maximum 1 page]