ACC501 – Business Finance

Practice (Numerical) Questions (Solution)

(Lesson # 19 – 45)
1. The nominal rate is 12%, and the inflation rate is 5%. Find out the real rate according to
Fisher’s formula.

Solution:
1 + R = (1 + r) x (1 + h)
1 + 0.12 = (1 + r) x (1 + 0.05)
(1 + r) = 1.12/1.05
(1 + r) = 1.066
r = 1.066 – 1 = .066 * 100
r = 6.6%

2. Suppose XYZ Company issues a 3-year zero coupon bond with a face value of Rs. 5,000.
The initial price is set at Rs. 3,043 with a yield to maturity of 18%. What will be the value
of implicit interest expense in each year?

Solution:
Beginning Ending Implicit interest
Year
value value expense (18%)
1 3043 3591 548
2 3591 4237 646
3 4237 5000 763

3. Estimate the real rate with the help of the Fisher effect equation if: the nominal rate is 11%
and the inflation rate is 4%.

Solution:
(1 + Nominal Rate) = (1 + Real Rate) x (1 + Inflation Rate)
1 + 0.11 = (1 + r) x (1 + 0.04)
(1 + r) = 1.11/1.04
r = 1.0673 – 1
r = 6.73%

4. Calculate the price of a share of stock of ABC Corporation if it pays Rs.25 per share
dividend every year. This policy continues indefinitely, and the required rate of return is
20%.

Solution:
Po = D/R
Rs. 25/ 0.20
Rs. 125 per share
5. In both the cases given below, what will be the current price of stock?
a) If ABC company on its shares is giving a fixed dividend of Rs. 16 per share per annum
which will continue indefinitely with a required rate of return of 24%.
b) If XYZ Company on its shares is giving a dividend of Rs. 13 per share with 26%
required rate of return; it is expected that after one year these shares will be worth Rs.
120.

Solution:
a) P0 = D / R
P0 = 16 / 0.24
P0 = Rs. 66.66

b) P0 = (D1 + P1) / (1 + R)
P0 = (13 + 120) / (1 + 0.26)
P0 = 133 / 1.26
P0 = Rs. 105.55 or Rs. 106

6. Suppose Ali Corporation has a policy for paying Rs. 70 as a dividend per share each year.
If the policy seems to be continued for an infinite period, what would be the value of share
stock with the required rate of return of 45%?

Solution:
Po = D1/R
= 70/0.45
= Rs. 156 per share

7. Ali Corporation has just paid a dividend of Rs.3 per share. The dividend of this company
grows at a steady rate of 7% per year. What will be the dividend in 5 years?

Solution:
Dt = D0 x (1 + g)t
= 3 x 1.075
= 3 x 1.4025
= 4.2075 Rs.

8. Ali Corporation pays a Rs. 9 per share dividend a year from today. If the dividend grows at
a steady rate of 5% per year, what will be the dividend per share at the end of each of the
first two years? (Note: Dividend is paid at the end of the first year)

Solution:
Dt = D0 x (1 + g)t
D1 = 9
D2 = D1 x (1 + g)
= 9 x (1+0.05)
= Rs. 9.45

9. Suppose that the current dividend is Rs.3.5, the discount rate is 11% and the dividend grows
at a constant rate of 4%. What is the current price of this stock?
Solution:
P0 = D0 x (1 + g)/(R – g)
= 3.5 x (1+0.04) / 0.11 -0.04
= 3.64 /0.07
= Rs. 52

10. In case, a current dividend is Rs. 3.20, the discount rate is 11% and the growth rate is 4%.
Calculate the dividend and stock price in 5 years.

Solution:
D0 = Rs. 3.20
R = 11 %
G=4%
Dividend in 5 years:
D5 = D0 x ( 1 + g ) t
= 3.20 x (1.04) 5
= 3.20 x 1.21665
= Rs. 3.893
Stock Price in 5 years:
P5 = [ D5 (1 + g)] / ( R – g )
= (3.893 x 1.04) / (0.11 – 0.04)
= 4.0487 / 0.07
= Rs. 57.83

11. If a firm’s common stock currently pays an annual dividend of Rs. 2.10 per share, while
the required return on the common stock is 11 percent. Estimate the value of common stock
when:
a) Dividends are expected to grow at an annual rate of 0 percent to infinity.
b) Dividends are expected to grow at a constant annual rate of 6 percent to infinity.

Solution:
As there is a growth rate of 0 percent, so D1 = D0
P0 = D1 / KS
= 2.10 / 0.11
= Rs. 19.09
Constant Growth, g = 6%
P0 = D0 (1+g) / (KS – g)
= (2.10 x 1.06 ) / ( 0.11 – 0.06 )
= 2.226 / 0.05
= Rs. 44.52

12. Calculate the current stock price (Po) and stock price after one year (P1) of Ali Corporation
with the help of the following information:
D1 g R
For current period 8 5% 13%
For future period (after 1 year) 8 8% 15%

Solution:
Current Stock Price:
P0 = [D1/ (R– g) ]
 = 8/(0.13-0.05)
= 8/0.08
= Rs. 100
Stock Price next year:
P1 = [D1 (1 + g)] / (R – g)
= (8 x 1.08) / (0.15 – 0.08)
= 8.64 / 0.07
= Rs. 123.42

13. The stock of Ali Corporation is selling for Rs.25 per share. The next dividend is Rs.1.7 per
share and it is expected to grow by 11% indefinitely. Compute the return offered by this
stock.

Solution:
R = D1/P0 + g
= 1.7/25 + 11%
= 6.8% + 10%
= 16.8%

14. Ali Corporation is selling its stock for Rs. 25 per share. The next dividend is Rs.1.5 per
share and the required rate of return is 16%. Compute the capital gains yield.

Solution:
R = D1/P0 + g
0.16 = 1.5/25 + g
g = 0.16-0.06
g = 10%

15. If a stock is selling for Rs. 30 per share; the next dividend is Rs. 1.5 per share; and it is
expected to grow by 11% more or less indefinitely. What dividend yield, capital gain yield,
and total return this stock can offer?

Solution:
Next Dividend = D1 = Rs. 1.5
Current Price = P0 = Rs. 30
Growth rate = g = 11%

Total Return = R = D1 / P0 + g = (1.5 / 30) + 0.11 = 0.05 + 0.11

Total Return = R = 0.16 or 16%

P1 = [D1 x (1 + g)] / (R – g) = 1.5 x (1.11) / (0.16 – 0.11) = 1.665 / 0.05

P1 = Rs. 33.30

Dividend yield = D1 / P0 = 1.5 / 30

Dividend yield = 0.05 or 5%

Capital gain yield = (P1 – P0) / P0 = (33.30 – 30) / 30 = 3.30 / 30

Capital gain yield = 0.11 or 11%

Total Return = Dividend Yield + Capital Gain Yield = 0.05 + 0.11

 Total Return = 0.16 or 16% (As calculated above directly through formula)

16. If a project will generate cash flows of Rs. 10,000 for next 7 years; for which initial
investment is required of Rs. 40,000. What will be the Net Present Value (NPV) of the
project at a discount rate of 12%? Is it feasible to invest in this project?

Solution:
PV of Cash Flows = 10,000 x {1 – (1 / (1+0.12)^7)} /0.12
= 10,000 x (1 – 0.4523) / 0.12
= 10,000 x 4.5642
= Rs. 45,642
NPV = – Initial Investment + PV of Cash Flows
= – 40,000 + 45,642
NPV = Rs. 5,642

Yes! The project is feasible because of positive NPV.

17. The expected cash flows over the 3-year life of a Project are Rs.2,500, Rs.4,500, and
Rs.6,000 respectively. The project cost is Rs.7,000. Compute NPV given that the discount
rate is 10%.

Solution:
PV = 2,500 (1.10)1 + 4,500 (1.10)2 + 6,000 (1.10)3
PV = 2500/1.10 + 4,500 /1.10^2 + 6000 / 1.10^3
PV = 2,272.73 + 3,719.01 + 4,507.21
PV = Rs.10,498.95
Hence NPV=10,498.95 – 7,000 = 3,498.95

18. If a project has a total up-front cost of Rs.70,000; while the cash flows are Rs.35,000 in the
1st year, Rs.25,000 in the 2nd year, and Rs.30,000 in the 3rd year. What would be the NPV
of the project at a discount rate of 10%? Is the project feasible?

Solution:
NPV= Initial Cost + [CF1 (1+IRR)1] + [CF2(1+IRR)2] + [CF3(1+IRR)3]
NPV=−70,000 + [35,000 (1 + 0.10)1] + [25,000 (1 + 0.10)2] + [30,000 (1 + 0.10)3]
NPV=−70,000 + 31,818.18 + 20,661.16 + 22,536.82
NPV=−70,000 + 75,016.16
NPV=Rs. 5,016.16
Since NPV is positive, it is feasible to invest in this project.

19. Compute the Average Accounting Return for the project having a cost of Rs. 600,000 with
a life of 5 years and zero salvage value. Revenues are given below:
Years 1 2 3 4 5
Net Income (Rs.) 160,000 200,000 150,000 120,000 100,000

Solution:
Average Income = (160,000 + 200,000 + 150,000 + 120,000 + 100,000) / 5 = 146,000
Average Book Value = (600,000 + 0) / 2 = 300,000
Average Accounting Return = 146,000 / 300,000 * 100 = 0.4867 or 48.67%
20. Calculate the IRR for the project which has an initial investment of Rs. 90 million and is
followed by the cash flow of Rs. 35 million in year 1, Rs. 45 million in year 2, and Rs. 25
million in year 3. Also, specify whether the project is feasible or not if the required rate of
return is 12%. (Note: Show complete working of the trial-and-error method with interpolation formula.)

Solution:
Trial & Error Method
NPV @ 12%:
NPV = (90) + [35/(1.12)] + [45/(1.12)^2] + [25/(1.12)^3]
= (90) + 31.25 + 35.83 + 17.80
= Rs. (5.12m)
NPV @ 8%:
NPV = (90) + [35/(1.08)] + [45/(1.08)^2] + [25/(1.08)^3]
= (90) + 32.41 + 38.57 + 19.84
= Rs.0.82m
IRR= Lower discount rate + Difference between the two discount rates ×
(NPV at lower discounted rate / Absolute difference between the NPVs of the two discount rates)
= 8 + (12−8) × [(0.82 / − (0.82−5.12)]
= 8 + 0.548
IRR = 8.548
The project is not feasible as the Internal Rate of Return (IRR) is lesser than the
project's required rate of return.

21. A project generates cash flows of Rs. 600, Rs. 800, and Rs. 1,000 for year 1, year 2, and
year 3 respectively. What is the payback period for the project if there is an initial cost of
Rs. 2,400?

Solution:
Payback Period = 2 Years + (1,000 / 1,000)
Payback Period = 2 Years + 1
Payback Period = 3 Years

22. An investment costs $75 and the present value of future cash flows is $150. Compute and
interpret the Profitability Index (PI) for this investment.

Solution:
PI = Present value of future cash flows / Initial investment
= $150 / $75
=2
This means that the firm will obtain 2 dollars for every dollar invested.

23. Calculate the projected operating cash flows of a project if EBIT, Depreciation, and Taxes
are given as Rs. 30,000, Rs. 15,000, and Rs. 10,000 respectively.

Solution:
Operating cash flows = EBIT + Depreciation – Taxes
= 30,000+15,000−10,000
= 35,000
24. If the following information is available regarding XYZ Company:
• Sales are 25,000 units/year @ Rs. 8/unit.
• Variable cost/unit is Rs. 5.
• Fixed costs are Rs. 15,000/year.
• Project life is 6 years, and the project has no salvage value.
• Project cost is Rs. 35,000. Depreciation is Rs. 7,000/year.
• Investment in net working capital is Rs. 15,000.
• The tax rate is 30%.
You are required to prepare its Projected Income Statement.

Solution:
Sales = 25,000 × 8 = Rs. 200,000 (25,000 units/year @ Rs. 8 per unit)
Variable costs = 25,000 × 5 = Rs. 125,000 (Rs. 5 per unit)
Gross Profit = 200,000 − 125,000 = Rs. 75,000
EBIT = Gross Profit - Fixed Cost - Depreciation
EBIT = 75,000 − 15,000 − 7,000 = Rs. 53,000
Tax = 53,000 × 0.30 =Rs. 15,900
Net Income = 53,000 − 15,900 = Rs. 37,100

25. Suppose there is an operating cash flow of Rs. 150,000. Net working capital has declined
by Rs. 30,000 and there was no capital spending during the year. Calculate total cash flow.

Solution:
Total cash flow = Operating CF – change in NWC – Capital Spending
= 150,000 – (–30,000) – 0
= Rs.180,000

26. Suppose the total cash flow is Rs. 120,000. Net working capital has increased by Rs. 40,000
and there is net capital spending of Rs. 20,000 during the year. You are required to calculate
the Operating Cash Flow.

Solution:
Total cash flow = Operating CF – Change in NWC – Capital Spending
Operating CF = Total cash flow + Change in NWC + Capital Spending
= 120,000 + 40,000 + 20,000
= Rs.180,000

27. A company purchased equipment (classified as 5-year property for MACRS) for Rs.
100,000. What would be the book value of the equipment at the end of the second year
using the MACRS depreciation percentage table?
Years 1 2 3 4 5 6
MACRS 20% 32% 19.20% 11.52% 11.52% 5.76%

Solution:
Depreciation for 1st year = 100,000 * 0.20 = Rs. 20,000
Depreciation for 2nd year = 100,000 * 0.32 = Rs. 32,000
Book value at the end of year 1 = 100,000 – 20,000 = Rs. 80,000
Book value at the end of year 2 = 80,000 – 32,000 = Rs. 48,000
28. Star Company purchased research equipment (classified as 3-year property for MACRS)
for Rs. 400,000. MACRS rates over the life of the property are 33.33%, 44.44%, 14.82%,
and 7.41% respectively. You are required to calculate the depreciation under the MACRS
method. Also, calculate its book value at the end of the first year.

Solution:
Years Depreciation
1 400,000 * 33.33% = Rs. 133,320
2 400,000 * 44.44% = Rs. 177,760
3 400,000 * 14.82% = Rs. 59,280
4 400,000 * 7.41% = Rs. 29,640

Depreciation for 1st year = 400,000 * 33.33% = Rs. 133,320

Book value at the end of year 1 = 400,000 – 133,320 = Rs. 266,680

29. Suppose a stock had an initial price of Rs. 80 per share one year ago. It paid a dividend of
Rs. 12 per share during the year. What was the dividend yield?

Solution:
Dividend Yield = Dividend/beginning price
Dividend Yield = 12 / 80
= 0.15
= 15%

30. A particular investment had returns of 9%, 15%, 6%, and -5% over the last four years. Find
out the variance and standard deviation for the returns of the investment.

Solution:
Average return = (9 + 15 + 6 - 5) / 4 = 25 / 4 = 6.25%

Years Actual Average Deviation Squared

Return Return from the Mean Deviation
1 0.09 0.0625 0.0275 0.00075625
2 0.15 0.0625 0.0875 0.00765625
3 0.06 0.0625 (0.0025) 0.00000625
4 (0.05) 0.0625 (0.1125) 0.01265625
Total 0.021075

Variance = 0.021075 / (4 - 1) = 0.021075 / 3 = 0.007025

Standard Deviation = √0.007025 ≈ 0.0838

31. A particular stock expects 15% rate of return. What will be the risk premium if risk free
rate is (i) 7% and (ii) 11%?

Solution:
(i) Risk Premium = Expected Rate of Return – Risk free Rate
= 15% – 7%
Risk Premium = 8%
 (ii) Risk Premium = Expected Rate of Return – Risk free Rate
= 15% – 11%
Risk Premium = 4%

32. Suppose stock “A” gives returns of 12%, 10%, 42% and -22% over the period of four years.
You are required to calculate average return on the stock.

Solution:
Average Return = R = (X1 + X2 + X3 + X4) / n
= (0.12 + 0.10 + 0.42 – 0.22) / 4
= 0.42 / 4
Average Return = R = 0.105 = 10.5%

33. The following data pertains to stocks X and Y. Which stock will you prefer for investment
if the probability of boom and recession is 50% for each?
Expected Return Expected Return
Stock
(Boom) (Recession)
X 40% 28%
Y -10% 8%

Solution:
Stock X Stock Y
P R P*R P R P*R
Boom 0.50 0.40 0.20 0.50 0.28 0.14
Recession 0.50 -0.10 -0.05 0.50 0.08 0.04
E(R)X 0.15 E(R)Y 0.18

Stock Y would be preferred as its expected return is greater than that of stock X.

34. Considering the following expected returns during the different states of economy, calculate
expected return on portfolio:
State of Portfolio
P
Economy Return
Boom 0.35 27%
Normal 0.40 18%
Recession 0.25 8%

Solution:
E(R)P = (0.35 * 0.27) + (0.40 * 0.18) + (0.25 * 0.08)
= 0.0945 + 0.072 + 0.02
= 0.1865
E(R)P = 18.65%

35. A stock gives returns of 18%, 24%, 32% and -22% from year 1 to 4 respectively. You are
required to calculate Average Return, Variance and Standard Deviation.

Solution:
 Average Return = R = (0.18 + 0.24 + 0.32 – 0.22) / 4
= 0.52 / 4
Average Return = R = 0.13 = 13%

Actual Average Squared

Year Deviation
Return Return Deviations
1 0.18 0.13 0.05 0.0025
2 0.24 0.13 0.11 0.0121
3 0.32 0.13 0.19 0.0361
4 -0.22 0.13 -0.35 0.1225
0.1732

Variance = Sum of Squared Deviations / (n – 1)

= 0.1732 / 3
Variance = 0.0577

Standard Deviation = √ Variance [Square root of Variance]

= √ (0.0577)
Standard Deviation = 0.2402 or 24.02%

36. Mr. Nadeem invests 55% of his funds in Security A and the balance in Security B. The
expected returns on A and B are 20% and 15% respectively. You are required to calculate
the expected return on the portfolio.

Solution:
WA = 55% = 0.55 WB = (1-0.55) = 0.45
RA = 20% = 0.20 RB = 15% = 0.15

RP = (WA x RA) + (WB x RB)

= (0.55 x 0.20) + (0.45 x 0.15)
= 0.11 + 0.0675
RP = 0.1775 or 17.75%

37. A company has borrowed Rs. 850,000 at an interest rate of 12%. Considering the tax rate
of 35%, you are required to calculate After-tax Interest Bill.

Solution:
Total Interest Bill = 850,000 x 0.12
= Rs. 102,000

Tax deduction = Rs. 102,000 x 0.35

= Rs. 35,700

After-tax Interest Bill = Rs. 102,000 – Rs. 35,700

After-tax Interest Bill = Rs. 66,300

38. A Company paid a dividend of Rs. 7 per share last year. The stock’s current price is Rs. 45
per share. Find out the cost of the capital if dividends are estimated to grow steadily at 9%
per year.
Solution:
RE = [D1 / P0] + g
= [D0 (1 + g) / P0] + g
= [7 (1.09) / 45] + 0.09
= 0.1696 + 0.09
RE = 0.2596 or 25.96 %

39. Preferred stocks of a company have paid an annual dividend of Rs. 3.50 per share and sold
for Rs. 40 per share. Calculate the cost of preferred stock.

Solution:
RP = D / P0
= 3.50 / 40
RP = 0.0875 or 8.75%

40. Star Inc. has 35% debt and 65% equity in its capital structure, the firm’s estimated after-tax
cost of debt is 13% and cost of equity is 16%. Determine the firm’s weighted average cost
of capital (WACC).

Solution:
WACC = WE x RE + WD x RD
= 0.65 x 0.16 + 0.35 x 0.13
= 0.104 + 0.0455
WACC = 0.1495 or 14.95%

41. A company has a target capital structure of 60 percent common stock and 40 percent debt.
Its cost of equity is 16% and the cost of debt is 9%. Determine weighted average cost of
capital (WACC) if the tax rate is 35%.

Solution:
WACC = WE x RE + WD x RD (1 – T)
= 0.60 x 0.16 + 0.40 x 0.09 (1-0.35)
= 0.096 + 0.0234
WACC = 0.1194 or 11.94%

42. Calculate the weighted average cost of capital (WACC) for both Firm A and Firm B.
a) Capital structure of Firm A has 25% equity and 75% debt; while its cost of equity is
17% and its cost of debt is 13% with a 35% tax bracket.
b) Capital structure of Firm B has 30% debt and 70% equity; while firm’s estimated after-
tax cost of debt is 12% and cost of equity is 16%.
Solution:
a) WACCA = E/V x RE + D/V x RD x (1 – TC)
= 0.25 x 0.17 + 0.75 x 0.13 x (1 – 0.35)
= 0.0425 + 0.0633
WACCA = 0.1058 or 10.58%

b) WACCB = E/V x RE + D/V x RD

= 0.70 x 0.16 + 0.30 x 0.12
= 0.112 + 0.036
WACCB = 0.148 or 14.8%
43. AST Inc. has 2 million shares of common stock outstanding and the current market price
per share is Rs. 25. The market value of total debt is Rs. 50 million. The cost of equity is
estimated as 16 percent while the after-tax cost of debt is 8 percent. Calculate the capital
structure weights and WACC (Weighted Average Cost of Capital) of the company.

Solution:
Total Equity = 2 million x Rs. 25 = Rs. 50 million
Total Debt = Rs. 50 million

Total Value of the Firm = Total Equity + Total Debt

= 50 + 50 = Rs. 100 million

Weight of Equity = WE = 50 / 100 = 0.5

Weight of Debt = WD = 1 – WE = 1 – 0.5 = 0.5

WACC = WE x RE + WD x RD
= 0.50 x 0.16 + 0.50 x 0.08
= 0.08 + 0.04
WACC = 0.12 or 12%

44. Calculate the Payable Turnover and Payable Period of a company from following
information.
Balance Sheet information (in rupees):
Item Beginning Ending Average
Inventory 4,000,000 5,000,000 4,500,000
Accounts Receivable 1,400,000 2,000,000 1,700,000
Accounts Payable 800,000 1,000,000 900,000

Income Statement information (in rupees):

Net Sales 10,500,000
Cost of Goods Sold 9,000,000

Solution:
Payable Turnover = Cost of Goods Sold/ Average Payables
= 9,000,000/ 900,000
= 10 times
Payable Period= 365 days/ Payable Turnover
= 365/ 10
= 36.5 or 37 days

45. If a company inventory period is 107days and receivable turnover is 8.69 days; what will
be firm’s receivable period and operating cycle? Assume year of 365 days.

Solution:
Receivable Period = 365 / Receivable turnover
= 365 /8.69
= 42 days
Operating Cycle = Inventory Period + Receivable Period
= 107 + 42
 = 149 days

46. Calculate company’s operating cycle and cash cycle from given information.
Inventory turnover = 7 times
Receivable turnover = 21 times
Payable turnover = 8 times
(Note: Show formulas and complete working by assuming year of 365 days.)

Solution:
Inventory Period = 365 days/ Inventory Turnover
Inventory period = 365/7 = 52.14 days

Receivable Period = 365 / Receivable turnover

Receivable period = 365/21 = 17.38 days

Payable Period = 365 / Payable turnover

Payable period = 365/8 = 45.63 days

Operating Cycle and Cash Cycle:

Operating cycle = Inventory period + Receivable period

= 52.14 + 17.38 = 69.52 days
Cash cycle = Operating cycle – Payable period
= 69.53– 45.63= 23.9 days

47. A company has receivable period is 19.8 days and payable period is 30 days. The Cost of
Goods Sold of Rs. 2,000,000 and Average Inventory is of Rs. 450,000. Calculate the
company’s operating cycle and cash cycle?
(Note: Show formulas and complete working by assuming year of 365 days.)

Solution:
Inventory Turnover = Cost of Goods Sold/ Average Inventory
= 2,000,000/ 450,000
= 4.44 times
Inventory Period = 365 days/ Inventory Turnover
= 365/4.44
= 82.2 days
Operating Cycle and Cash Cycle:
Operating cycle = Inventory period + Receivable period
= 82.2 + 19.8 = 102 days
Cash cycle = Operating cycle – Payable period
= 102 – 30 = 72 days

48. ABC Company has following financial information regarding cash budget of first quarter
of accounting period:
Month-1 Month-2 Month-3
Particulars
(Rs.) (Rs.) (Rs.)
Beginning Receivables 1,500 1,200 Blank (2)
Sales 5,700 7,900 7,800
Cash collection 6,000 6,900 8,300
 Ending Receivables Blank (1) 2,300 Blank (3)
Calculate values for the blanks (1), (2) and (3)?

Solution:
Month-1 Month-2 Month-3
Particular
(Rs.) (Rs.) (Rs.)
Beginning Receivables 1,500 1,200 2,200
Sales 5,700 7,900 7,800
Cash collection 6,000 6,900 8,300
Ending Receivables 1,200 2,200 1,700

49. ABC Company has following information regarding its forecasted sales:
Particular Month-1 Month-2 Month-3
Sales (Rs.) 6,700 7,900 9,100
Cash collection policy:
1/3 in the month of sales; and
2/3 in the following month of sales
What will be the amount of cash collection in Month-2 and Month-3?

Solution:
Cash collection in Month-2
Description Amount
1/3 in the month of sale (7,900 x 1/3) Rs. 2,633
2/3 in the following month of sale (6,700 x 2 / 3) Rs. 4,467
Total in the month-02 Rs. 7,100
Cash collection in Month-3
Description Amount
1/3 in the month of sale (9,100 x 1/3) Rs. 3,033
2/3 in the following month of sale (7,900 x 2 / 3) Rs. 5,266
Total in the month-03 Rs. 8,300

50. Regarding cash budget a company has following financial information.

Ending Cash Balance = Rs. 3,500
Net Cash Inflow = Rs. 6,900
Total Cash Disbursement = Rs. 7,300
You are required to calculate the opening cash balance of the company.

Solution:
Opening balance of cash = Ending cash balance - Net cash inflow + total cash disbursement
Ending balance of cash = 3,500 - 6,900 + 7,300
Ending balance of cash = Rs. 3,900

51. Regarding cash budget a company has following financial information.

Ending Cash Balance = Rs.2,500
Net Cash Inflow = Rs.6,800
Total Cash Disbursement = Rs. 7,900
Minimum Cash Balance Required = Rs. 2,200
What will be the amount company needs to borrow to maintain minimum cash balance?
Solution:
Ending Balance of Cash = Op. balance + Net cash inflow – total cash disbursement
Ending Balance of Cash = 2,500 + 6,800 - 7,900
Ending Balance of Cash = Rs. 1,400
Required Minimum Cash Balance Required = Rs. 2,200
Amount Need to Borrow = Minimum Cash Balance – Ending Balance
Amount Need to Borrow = 2,200 – 1,400
Amount Need to Borrow = Rs. 800

52. A company has following information regarding its book balance and cash transactions:
Book Balance (Bank column) = Rs. 10,000
August 01, 2023, deposited a cheque into bank = Rs.3,000
August 01, 2023, write a cheque to make a payment = Rs.1,500
You are required to calculate the net float of company.

Solution:
Net float = Disbursement float + Collection float
Net float = Rs. 1,500 + (- Rs. 3,000)
Net float = Rs. (-1,500)

53. Mr. Abrar placed an order amounting to Rs. 45,000 on August 01, 2023, and supplier gives
credit terms 3/10 net 30. How much amount he must pay if payment is made on (i) August
09, 2023, and (ii) August 11, 2023?

Solution:
On August 11, 20X1
Credit amount = Rs. 45,000
Credit term = 3/10 net 45.
Discount amount = 45,000 x 3%
Discount amount = Rs. 1,350
Cash payment on August 11, 20X1 = Rs. 45,000 – 1,350
Cash payment on August 11, 20X1 = Rs. 43,650
Mr. Ahmad paid within the discount period so he will pay Rs. 43,650.
On August 15, 20X1
Mr. Abrar will have to pay full amount Rs. 45,000 because discount period has been
expired.

54. Following information has been extracted from the books of a company:
Annual Sales requirement = 50,000 Units
Carrying cost per unit per year = Rs. 2
Fixed cost per order = Rs. 60
Calculate Economic Order Quantity (EOQ) of the company.

Solution:
EOQ = √2 x annual sales x ordering cost per order / carrying cost per unit
EOQ = √2 x 50,000 x 60 / 2
EOQ = 1732 Units

55. Following information has been extracted from the books of a company:
 Annual Sales =86,400 Units
Economic Order Quantity (EOQ) = 3,000 Units
Carrying cost per unit per year = Rs. 3.5
You are required to calculate total carrying cost of the company.

Solution:
Total carrying cost = Average Inventory x carrying cost per unit
Total carrying cost = (EOQ / 2) x carrying cost per unit
Total carrying cost = (3,000 / 2) x 3.5
Total carrying cost = Rs. 5,250

56. Following information has been extracted from the books of a company:
Annual Sales =40,000 Units
Economic Order Quantity (EOQ) = 2,500 Units
Fixed cost per order = Rs. 250
You are required to calculate total ordering cost of the company.

Solution:
Total Ordering cost = Fixed cost per order x Number of order in a year
Total Ordering cost = Fixed cost per order x (Annual Sales requirement / EOQ)
Total Ordering cost = 250 x (40,000 / 2,500)
Total Ordering cost = 250 x 16
Total Ordering cost = Rs. 4,000

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Dear Students,

As per course announcement regarding Final-term syllabus, the paper

will include the contents covered from Lesson # 19 to 40. It is,
therefore, advised to practice all the numerical questions relevant to the
topics covered in the above-mentioned lessons (19-40).

Good Luck,
Instructor ACC501
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