Answer 1

Introduction

The Weighted Average Cost of Capital (WACC) is an important financial metric that is used
to evaluate the cost of a company's capital structure. It takes into account the various sources
of financing that a company uses, such as equity, debt, and preference shares, and calculates a
weighted average of their costs to determine the overall cost of capital.

Procedure / Steps

To calculate the Weighted Average Cost of Capital (WACC), we need to calculate the cost of
each source of financing, and then weight them based on their relative proportions in the
company's capital structure.

First, let's calculate the cost of each source of financing:

Cost of external equity = cost of issuing external equity + shareholders' expected return = 5%
+ 16% = 21%

Cost of debt = 8% * (1 - 0.3) = 5.6%

Cost of preference shares = 10%

Next, let's calculate the weights of each source of financing:

Total capital = equity + debt + preference shares = (10,00,000/100)*105 + 5,00,000 +

(6,00,000/100)*125 = 10,50,000 + 5,00,000 + 7,50,000 = ₹ 23,00,000

Weight of equity = (10,00,000/100)*105 / 23,00,000 = 45.65%

Weight of debt = 5,00,000 / 23,00,000 = 21.74%

Weight of preference shares = (6,00,000/100)*125 / 23,00,000 = 32.61%

Finally, we can calculate the WACC:

WACC = (Weight of equity * Cost of equity) + (Weight of debt * Cost of debt) + (Weight of
preference shares * Cost of preference shares)

= (45.65% * 21%) + (21.74% * 5.6%) + (32.61% * 10%) = 13.89%

Therefore, the WACC for PQR Ltd. is 13.89%.

The most desirable source of funding for a company depends on several factors, including the
company's financial situation, growth prospects, and the cost and availability of different
sources of financing. In this case, it is not clear what the new equity issue is for or how it will
be used, so it is difficult to determine the most desirable source of funding. However, in general,
companies prefer to use lower cost sources of financing to minimize their cost of capital and
maximize their returns to shareholders. In this case, the retained earnings and long-term debt
have lower costs than the external equity and preference shares, so they may be more desirable
sources of funding. However, the company may still choose to issue external equity or
preference shares if they believe that the benefits of these funding sources outweigh the higher
costs.

Answer & Interpretation

Based on the information provided, we have calculated the WACC for PQR Ltd. to be 13.89%.
This means that, on average, PQR Ltd. must earn a return of at least 13.89% on its investments
in order to meet the expectations of its investors and creditors. In this case, the retained earnings
and long-term debt have lower costs than the external equity and preference shares, so they
may be more desirable sources of funding.

The WACC is an important metric because it is used as a benchmark to evaluate the financial
viability of a company's investment projects. If a company's investment project earns a return
that is less than its WACC, then it is not generating enough value to cover the cost of capital
and may not be a good investment.

Answer 2

Introduction

The cash cycle is a financial metric that measures the time it takes for a company to convert its
investments in inventory and other operating expenses back into cash from sales. It is calculated
by adding the number of days that a company's inventory and other operating expenses are
outstanding, and subtracting the number of days that its accounts receivable are outstanding. It
is an important measure of a company's operating efficiency and its ability to manage its
working capital effectively. By calculating the cash cycle, companies can identify areas for
improvement and optimize their cash flow management.

Procedure / Steps

To calculate the cash cycle using the information given, we first need to calculate the various
components of the cash cycle:

Inventory Days: This is the number of days that a company's inventory is outstanding. It is
calculated as (Average Inventory / Cost of Goods Sold) x 360.

Average Inventory = (Opening Inventory + Closing Inventory) / 2 = (1,00,000 + 2,00,000) / 2

= 1,50,000

Cost of Goods Sold = Manufacturing Costs + Excise Duty - Change in Inventory = 11,60,000
+ 18,80,000 - (2,00,000 - 1,00,000) = 29,40,000

Inventory Days = (1,50,000 / 29,40,000) x 360 = 18.37 days

Receivables Days: This is the number of days that a company's accounts receivable are
outstanding. It is calculated as (Average Accounts Receivable / Total Sales) x 360 x (1 - %
Sales on Credit).

Average Accounts Receivable = (Opening Debtors + Closing Debtors) / 2 = (6,00,000 +

5,45,000) / 2 = 5,72,500

Receivables Days = (5,72,500 / 2,01,96,800) x 360 x (1 - 0.4) = 55.57 days

Payables Days: This is the number of days that a company's accounts payable are outstanding.
It is calculated as (Average Accounts Payable / Total Purchases) x 360 x (1 - % Purchases on
Credit).

Average Accounts Payable = (Opening Creditors + Closing Creditors) / 2 = (8,60,000 +

9,75,000) / 2 = 9,17,500

Payables Days = (9,17,500 / 1,46,00,000) x 360 x (1 - 0.7) = 33.01 days

Therefore, the cash cycle can be calculated as:

Cash Cycle = Inventory Days + Receivables Days - Payables Days = 18.37 + 55.57 - 33.01 =
40.93 days
Answer & Interpretation

The cash cycle for this company is approximately 40.93 days. This means that it takes around
40.93 days for the company to convert its investments in inventory and other operating
expenses back into cash from sales. The company can use this information to manage its cash
flow and improve its operating efficiency by reducing the time it takes to collect receivables or
pay payables, or by optimizing its inventory levels.

Answer 3a

Introduction

Net Working Capital (NWC) refers to the difference between a company's current assets and
current liabilities. It represents the liquidity available to a company for day-to-day operations
and is a critical metric in assessing a company's financial health.

The elements of Net Working Capital are:

Current Assets: These are assets that can be converted into cash within a year or an operating
cycle. Examples include cash, accounts receivables, inventory, and prepaid expenses.

Current Liabilities: These are obligations that must be paid within a year or an operating cycle.
Examples include accounts payable, accrued expenses, and short-term loans.

Understanding the components of NWC is important because it helps in evaluating a company's

liquidity position. A positive NWC indicates that a company has enough liquid assets to meet
its short-term obligations, while a negative NWC suggests that a company may have difficulty
meeting its short-term obligations. In addition, NWC can also be used to determine a company's
ability to finance growth opportunities and pay dividends to shareholders.

Overall, NWC is a critical financial metric that provides insights into a company's financial
health and its ability to meet its short-term obligations.

Procedure / Steps

For calculation of net working capital, we need to first find the total current asset and total
current liability.
From the given balance sheet extract:

As on 31.03.2022,

Total Current Asset = ₹ 1,22,017.86 Crores

Total Current Liability = ₹ 87,567.48 Crores

Net Working Capital (NWC) = Total Current Asset - Total Current Liability

= 1,22,017.86 – 87,567.48

= ₹ 34,450.38 Crores

As on 31.03.2021,

Total Current Asset = ₹ 1,15,245.33 Crores

Total Current Liability = ₹ 80,704.68 Crores

Net Working Capital (NWC) = Total Current Asset - Total Current Liability

= 1,15,245.33 – 80,704.68

= ₹ 34,540.65 Crores

Answer & Interpretation

As calculated above, as on 31.03.2022, the company's NWC was ₹ 34,450.38 Crores, which
was lower than the NWC as on 31.03.2021, which was ₹ 34,540.65 Crores. This indicates that
the company's liquidity position has weakened slightly during the year.

The Total Current Assets of the company increased from ₹ 1,15,245.33 Crores in 2021 to ₹
1,22,017.86 Crores in 2022. This increase in current assets suggests that the company has been
able to generate more cash or has increased its short-term investments, which has improved its
liquidity position.

However, the Total Current Liabilities of the company also increased from ₹ 80,704.68 Crores
in 2021 to ₹ 87,567.48 Crores in 2022. This increase in current liabilities suggests that the
company has taken on more short-term obligations, which has reduced its liquidity position.
Overall, the slight decrease in NWC indicates that the company needs to manage its short-term
obligations more effectively. The increase in current assets is a positive sign, but the increase
in current liabilities offsets the positive impact. The company should focus on maintaining a
healthy NWC to ensure that it has sufficient liquidity to meet its short-term obligations and
fund its growth opportunities.

Answer 3b

Introduction

In any business, managing accounts receivable is a critical task that affects the company's cash
flow and profitability. DSO (Days Sales Outstanding) and Debtor Turnover Ratio are important
financial metrics that help businesses track their accounts receivable and identify any issues in
the collections process. DSO measures the average number of days it takes for a company to
collect payment from its customers, while the Debtor Turnover Ratio measures how frequently
a company collects payments from its customers.

Procedure / Steps

DSO Calculation: DSO (Days Sales Outstanding) measures the average number of days it
takes for a company to collect payment from its customers. It is calculated as follows:

DSO = (Receivables / Total Credit Sales) x Number of Days in the Year

Given the data:

Total Credit Sales for FY 2021-22 = 60% of 1,01,000 = ₹ 60,600 Crores

Number of Days in the Year = 365

Therefore, DSO = (36,347 / 60,600) x 365 = 218.9 days (approx.)

Debtor Turnover Ratio Calculation: The Debtor Turnover Ratio measures the number of
times a company collects its average accounts receivable during a year. It is calculated as
follows:

Debtor Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Given the data:

Net Credit Sales for FY 2021-22 = Total Sales - Cash Sales

= 1,01,000 - (40% of 1,01,000)

= ₹ 60,600 Crores

Average Accounts Receivable = (Opening Receivables + Closing Receivables) / 2

= (33,331 + 36,347) / 2

= ₹ 34,839 Crores

Therefore, Debtor Turnover Ratio = 60,600 / 34,839 = 1.74 times

Importance and Inferences

DSO and Debtor Turnover Ratio are important financial metrics that can help companies
manage their accounts receivable more effectively. DSO helps companies determine how
efficiently they are collecting payments from their customers. A high DSO indicates that the
company is taking a longer time to collect payments, which can lead to cash flow problems. In
this case, the DSO of approximately 219 days indicates that the company is taking more than
seven months to collect payments from its customers, which may be a cause for concern.

The Debtor Turnover Ratio measures how frequently a company is collecting payments from
its customers. A high debtor turnover ratio indicates that the company is collecting payments
more frequently, which is a good sign as it indicates a healthy cash flow. In this case, the debtor
turnover ratio of 1.74 times suggests that the company is collecting its average accounts
receivable 1.74 times a year, which is a positive sign.

Overall, the high DSO indicates that the company needs to improve its collections process,
while the high debtor turnover ratio indicates that the company has a healthy cash flow. The
company may consider taking steps to reduce its DSO and improve its collections process, such
as offering discounts for early payments or improving its credit policies.