Ch.

26: Financial Planning & Strategy

CHAPTER 6

FINANCIAL PLANNING AND STRATEGY

Problem 1

Bajaj Auto Ltd.

% of sales 2001 2000 1999 1998 1997 Average
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
PBDIT 15.7% 31.5% 30.2% 31.8% 30.4% 27.9%
Depreciation 5.9% 4.7% 4.5% 5.4% 4.5% 5.0%
Interest 0.2% 0.1% 0.2% 0.3% 0.3% 0.2%
Other Income 12.1% 16.5% 12.8% 13.5% 11.3% 13.2%
PBT 9.6% 26.7% 25.6% 26.1% 25.7% 22.7%
Tax Provision 0.9% 6.8% 7.3% 8.5% 9.0% 6.5%
Net Profit 8.7% 19.9% 18.2% 17.6% 16.7% 16.2%
Equity Dividend 2.7% 3.9% 3.2% 3.6% 3.0% 3.3%
Retained Profit 6.0% 16.0% 15.0% 13.9% 13.7% 12.9%
Current Assets 68.2% 76.8% 74.2% 68.5% 51.7% 67.9%
Net Fixed Assets 45.1% 36.1% 31.1% 25.8% 22.9% 32.2%
Other assets 39.7% 63.2% 49.3% 43.3% 37.7% 46.6%
Current Liabilities 48.8% 56.3% 51.6% 47.7% 37.5% 48.4%
Secured Loans 1.9% 3.3% 1.4% 1.0% 0.8% 1.7%
Unsecured Loans 15.1% 12.8% 10.4% 8.7% 7.3% 10.9%
Total Liabilities 153.0% 176.1% 154.6% 137.6% 112.3% 146.7%
Net Worth 87.2% 103.7% 91.2% 80.1% 66.7% 85.8%

2001 2000 1999 1998 1997

Sales growth (historical) -2.1% 4.3% 12.1% 0.2% -
Assumptions: 2006 2005 2004 2003 2002
Sales growth 10.0% 7.5% 5.0% 2.0% 0.0%
Net margin 9%
Equity dividend 3%
Net fixed assets 45%
Current assets 68%
Other assets 45%
Current liabilities 49%
Secured loan 2%
Unsecured loan 15%

Note: The Company’s sales have shown fluctuation. It was as high as 12% in 1999. It showed drop in 2001. We are
assuming that the company will achieve a growth rate of 10% over 5-year period. We are assuming that the company
will maintain its profitability, assets utilisation etc. at the level of year 2001. In the Excel file, you can change these
assumptions and see the effect on the funds required. Note that other current assets as a per cent of sales has been
calculated as total liabilities (total liabilities = total assets) minus current assets and net fixed assets.
I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Financial Forecasts 2006 2005 2004 2003 2002

Sales 3,828.65 3,480.59 3,237.76 3,083.58 3,023.12
Net profit 333.09 302.81 281.69 268.27 263.01
Equity dividend 114.86 104.42 97.13 92.51 90.69
Retained earnings 218.23 198.39 184.55 175.76 172.32
Net fixed assets 1,722.89 1,566.27 1,456.99 1,387.61 1,360.40
Current assets 2,603.48 2,366.80 2,201.68 2,096.84 2,055.72
Other assets 1,722.89 1,566.27 1,456.99 1,387.61 1,360.40
6,049.27 5,499.34 5,115.66 4,872.06 4,776.53
Net worth 3,585.79 3,367.56 3,169.16 2,984.61 2,808.85
Current liabilities 1,876.04 1,705.49 1,586.50 1,510.96 1,481.33
5,461.83 5,073.05 4,755.67 4,495.57 4,290.18
Funds needed (borrowings) 587.44 426.29 360.00 376.49 486.35
6,049.27 5,499.34 5,115.66 4,872.06 4,776.53

Problem 2

Coeff.
2001 2000 1999 1998 1997 1996 1995 Avg. Var.
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Net Sales % % % % % % % % 0.0%
Other Income 4.8% 7.3% 7.2% 4.6% 6.2% 6.4% 8.1% 6.4% 18.8%
104.8 107.3 107.2 104.6 106.2 106.4 108.1 106.4
Total Income % % % % % % % % 1.1%
PBDIT 27.2% 35.4% 38.2% 36.9% 37.8% 41.5% 41.9% 37.0% 12.3%
Depreciation 7.7% 9.5% 9.8% 8.5% 8.0% 8.0% 7.2% 8.4% 10.8%
PBIT 19.5% 25.9% 28.3% 28.4% 29.8% 33.5% 34.7% 28.6% 16.3%
Interest 5.9% 7.5% 8.4% 6.4% 3.3% 2.6% 7.2% 5.9% 34.1%
PBT 13.6% 18.4% 19.9% 21.9% 26.5% 30.9% 27.5% 22.7% 24.5%
Tax 0.7% 0.4% 0.3% 0.8% 0.9% 0.0% 0.0% 0.4% 74.5%
PAT 12.9% 17.9% 19.6% 21.1% 25.6% 30.9% 27.5% 22.2% 25.7%
Additional Information
Equity Dividend 2.2% 2.9% 4.0% 4.2% 5.8% 6.5% 5.1% 4.4% 32.8%
Preference Dividend 0.0% 0.3% 0.3% 0.1% 0.0% 0.7% 0.0% 0.2% 110.8%
Corporate Dividend
Tax 0.2% 0.3% 0.5% 0.8% 0.0% 0.0% 0.0% 0.3% 106.9%

RELIANCE INDUSTRIES LTD: BALANCE SHEET AS AT 31 MARCH

(%)
2001 2000 1999 1998 1997 1996 1995 Avg. Coeff. Var.
CAPITAL & LIABILITIES
Total Shareholders Funds
Equity Share Capital 5.2% 7.9% 10.7% 11.9% 8.9% 10.9% 11.8% 9.6% 23.7%
Preference Capital Paid Up 0.0% 2.2% 2.9% 2.4% 0.0% 4.7% 0.1% 1.8% 94.6%
134.5
Reserves & Surplus 67.1% 94.3% 128.6% 138.8% 155.3% 183.6% 173.9% % 28.9%
145.9
72.2% 104.4% 142.3% 153.1% 164.2% 199.2% 185.8% % 28.4%
Borrowings
Term Loans – Institutions 0.3% 1.2% 0.5% 0.7% 16.7% 9.8% 7.4% 5.2% 111.7%
Term Loans – Banks 0.0% 10.5% 17.6% 2.6% 18.4% 14.4% 4.1% 9.6% 71.9%
Non Convertible
Debentures 18.4% 28.2% 41.2% 30.8% 39.0% 42.2% 32.9% 33.2% 23.5%
Working Capital Advances 1.2% 4.8% 3.8% 0.8% 8.3% 14.0% 10.5% 6.2% 73.6%
Other Loans 29.7% 41.3% 59.9% 70.4% 65.5% 31.5% 21.1% 45.6% 39.6%
Ch. 26: Financial Planning & Strategy

Total Borrowings 49.6% 86.0% 122.9% 105.4% 147.8% 111.9% 75.9% 99.9% 30.0%
Current Liabilities & Provisions
Creditors 18.9% 22.1% 38.4% 39.5% 46.3% 30.9% 28.9% 32.1% 28.4%
Provisions 4.2% 2.0% 6.3% 6.1% 6.8% 6.7% 5.2% 5.3% 30.1%
Other 1.2% 4.8% 14.0% 7.5% 13.6% 7.7% 2.0% 7.3% 65.0%
Total Current Liabilities 24.3% 28.9% 58.7% 53.1% 66.7% 45.3% 36.1% 44.7% 32.6%
290.6
Total Liabilities 146.1% 219.2% 323.8% 311.6% 378.8% 356.5% 297.8% % 25.9%
ASSETS
Fixed assets
180.2
Gross Block 124.0% 181.6% 214.5% 228.1% 212.4% 163.2% 137.3% % 20.8%
Less: Accum. Depreciation 57.9% 68.8% 77.0% 63.2% 67.7% 50.8% 46.6% 61.7% 16.0%
118.5
Net Block 66.1% 112.8% 137.5% 164.9% 144.7% 112.5% 90.7% % 26.3%
Capital Work in Progress 2.5% 2.5% 39.5% 26.4% 71.9% 106.4% 79.4% 47.0% 79.0%
165.4
Total Fixed assets 68.6% 115.3% 177.1% 191.3% 216.6% 218.8% 170.1% % 30.8%
Investments 32.9% 45.3% 49.4% 54.7% 86.4% 46.3% 51.5% 52.4% 29.2%
Current Assets 44.6% 58.6% 97.4% 65.6% 75.8% 91.3% 76.2% 72.8% 23.3%
290.6
Total Assets 146.1% 219.2% 323.8% 311.6% 378.8% 356.5% 297.8% % 25.9%

Net sales growth (historical) 52.6% 54.1% 11.1% 51.7% 22.3% 9.0% -

Forecasts assumptions:
Sales growth 15%
Net profit margin 13%
Equity dividend 2.20%
Corporate dividend tax 0.20%
Fixed assets 69%
Investments 33%
Current assets 45%
Current liabilities 24%

Note: The Company’s sales have shown high growth rate – over 50%- in the recent years. Such a high growth may not
be sustainable in the future. Hence, we have assumed an average sales growth of 20%. We are assuming that the
company will maintain its profitability, assets utilisation etc. at the level of year 2001. In the Excel file, you can change
these assumptions (particularly with regard to sales growth) and see the effect on the funds required.

2006 2005 2004 2003 2002

Net sales 41,122.72 35,758.89 31,094.68 27,038.86 23,512.05
Net profit 5,345.95 4,648.66 4,042.31 3,515.05 3,056.57
Equity dividend 904.70 786.70 684.08 594.85 517.27
Corporate dividend tax 82.25 71.52 62.19 54.08 47.02
Retained earnings 4,359.01 3,790.44 3,296.04 2,866.12 2,492.28

2006 2005 2004 2003 2002

Net fixed assets 28,374.68 24,673.63 21,455.33 18,656.81 16,223.31
Investment 13,570.50 11,800.43 10,261.25 8,922.82 7,758.98
Current assets 18,505.22 16,091.50 13,992.61 12,167.49 10,580.42
Total assets 60,450.40 52,565.56 45,709.19 39,747.12 34,562.71
I. M. Pandey, Financial Management, 9th Edition, New Delhi: Vikas.

Net worth 31,569.25 27,210.24 23,419.80 20,123.77 17,257.65

Current liabilities 9,869.45 8,582.13 7,462.72 6,489.33 5,642.89
Borrowings (balancing figure) 19,011.69 16,773.19 14,826.66 13,134.03 11,662.17
Total liabilities 60,450.40 52,565.56 45,709.19 39,747.12 34,562.71

Problem 3

Mason Industry
Net margin 25.0%
Retention ratio 1
Leverage, (1 + D/E) 1.6
Assets/sales 2.79
Sustainable growth 16.7%

The following formula is used to calculate the sustainable growth:

net margin × retention × leverage

gs =
assets / sales − (net margin × retention × leverage)
Assumptions:
No taxes are paid
No dividends are distributed

Problem 4

Debt ratio 45%

Equity ratio 55%
Payout 60%
Retention 40%
After-tax interest rate 5%
Required growth 20%
Require after-tax ROI 29.8%

The firm will have to earn an after-tax return of 29.8% to sustain growth of 20%.

The formula for sustainable growth is:

g s = b[r + (r − i )D / E]
g D
r =  s + i  × E /(D + E)
b E
r = [(.2/.4) + .05 × .45/.55] × .55/(.45+.55) = 29.8%

r = after-tax return; i = after-tax interest rate; b = retention ratio; D = debt; E= equity