SAMPLE CASE STUDIES – FINANCE

Case Study 1

M/s Vithal Enterprises

1) Introduction:

Shri Vishal Shantilal Hajeri is the Sole Proprietor of M/s Vithal Enterprises. [Link]
has passed BE Electronics from Pune University, in first class in the year 2002. He has
also passed his MBA from Pune University in the year 2005. He started his own
manufacturing unit in July 2006 under the firm name and style of M/s Vithal Enterprises.

2. Scope for Business:

He is on the approved list of manufacturers for supply of spare parts to ordinance factory
of the Defence Department since 2006. The department has to purchase the spare parts
only from the approved list. To that extent the competition is limited.
3. Constitution: The business is a proprietary concern
4. Infrastructure:
a) Premises: He is doing business in rented premises at Pune at the following
address: Opposite Dhayareshwar Mangal Karyalaya, Dhayari
Phata, Sinhagad Road, Pune-51. His father has purchased land at
Ambegaon Budruk for Rs. 3.00 lacs admeasuring 10 R ( [Link])
on 26-10-2004. Since the present rented premises his very small,
Mr. proposes to build a factory shed admeasuring 1200 sq. feet on
the plot. The project report is for the purpose of loan for
constructing the premises.
b) Suppliers of raw materials: Raw materials viz. Ferrous and Non ferrous Metals
required by him are available at Pune and Mumbai.
c) Employees: There are 7 employees with a minimum service of 2 years. Two
are DME and the rest are ITI qualified.
d) Electricity: He needs 20 HP connection for which he will submit the
application as soon as the construction starts.
e) Machinery: He has purchased necessary machinery out of his funds.
f) Furniture: Necessary furniture is already purchased.

5. a) Cost of the Project:

[Link] Particulars Amount in Lacs
1 Land 3.00
2 Construction of premises and electricity 8.00

1
3 Margin money for working capital 1.00
Total 12.00

b) Means of Finance:

[Link] Particulars Amount (Lacs)

1 Margin Money ( 58% of the project cost) 7.00
2 Term Loan from Bank (42% of the cost)* 5.00
Total 12.00

6. Profitability Estimates:
Amount In lacs
Profit and Loss A/c for 31-3-07 31-3-08 31-3-09
1 Sales 9.46 11.70 13.46
2 Interest/other income 0.00 0.00 0.00
3 Total income 9.46 11.70 13.46
4 Manufacturing expenses 6.14 7.97 9.29
5 Selling and Administrative expenses 0.52 0.59 0.77
6 Depreciation 1.37 1.28 1.25
7 Total Interest 0.34 0.78 0.72
8 Profit before tax 1.09 1.08 1.43
9 Provision for tax 0.01 0.01 0.04
10 Net profit 1.08 1.07 1.39

7. Projected balance sheet:

As on 31-3-07 31-3-08 31-3-09

Liabilities Actual Estimated Projected
Capital and Reserves 6.90 7.12 7.44
Total Term loans 5.26 4.80 4.29
Total current liabilities 1.62 1.63 1.64
Total Liabilities 13.78 13.55 13.37
Assets 31-3-07 31-3-08 31-3-09
Actual Estimated Projected
Total Fixed assets 11.85 10.57 10.32
Total Non current assets 0.00 0.50 0.20
Debtors 0.45 0.65 0.75
Inventory 1.42 1.76 2.02
Cash and Bank Balance 0.06 0.07 0.08
Other Current Assets 0.00 0.00 0.00
Total Assets 13.78 13.55 13.37

2
Questions

1) Evaluate whether the firm can convert itself into a Private limited Co.

2) Advise the firm about different sources of finance available to them.

3) Calculate the capital mix and cost of capital of the firm.

4) Advise the firm about the Marketing Strategy to be adopted.

5) Assess the working capital requirements of the firm.

Possible Solutions

1) The project is relative small. Conversion into a Private limited Co. results in avoidable
expenditure. The firm will have to comply with several provisions of Indian Companies’
Act. At present there is no need to convert itself into a Private limited Co.

2) Since this entity is a proprietary firm, it generally raises two types of funds —
proprietor’s savings and loans from banks, non–banking financial corporations, friends,
and relatives. However, a public limited company can raise funds through various
sources, such as issue of equity and preference shares, issue of debentures, term loans
from banks, and retained earnings. Amongst the Banks they should negotiate with banks
and choose the bank which offers comparatively lowest cost.

3) M/s Vithal Enterprises had bought a term loan of Rs. 5 lacs from a bank at a rate of
12.25%, which was to be repaid in five years. They have incurred the following expenses
in connection with the loan:
Mortgage expenses : 10,000
Processing fees of the bank: 5,000
Consultant’s charges : 5,000
Stamp Duty : 5,000
Miscellaneous expenses : 5,000
Total : 30,000

12.25% + 30,000/5 X 100 = 12.25 + 2.4 = 14.65%

(5,00,000/2)

A company calculates the cost of equity, cost of preference cost of debenture and cost of
term loans to compare them and to choose the most optimum mix of the capital. The mix
of capital when the weighted average cost of capital is the lowest is the optimum mix.

Cost of Equity = PAT/Equity = 1.08/6.9 =15.65%

Weighted Average Cost of Capital = Proportion of equity x cost of equity + Proportion of

debt x cost of debt = (6.8/12.16) X .1565 + (5.26/12.16) X .1465 = 15.08%

3
4) In the present case of M/s Vithal Enterprises, Market analysis is comparatively easy
because they are supplying products to only one customer. Various methods of Market
analysis are not applicable here. M/s Vithal Enterprises have collected and analysed the
data in respect of budget allocation for defence expenditure, the amount spent by
Ammunition Factory in the last 3 years and their budget for the next year. Since, the
customer is a Govt. Organisation, this information can be obtained by using the right to
information act also.

M/s Vithal Enterprises are facing limited competition compared to normal projects,
because their customers purchase the goods only from the short listed suppliers. Since,
there are only few short listed suppliers, Vithal Enterprises can collect information about
them by liasoning with his clients. Moreover, ammunition factory first invites quotations
from the short listed suppliers and opens them in the presence of all suppliers. So, there is
transparency in the system and one can get the information about the competitors. Hence,
M/s Vithal Enterprises need not go for Market Survey and for general advertising and
marketing strategies. He can only beat the competition by quoting lesser price and this
can be done by reducing cost of manufacturing and going for lesser profit margin.
Moreover, he has to maintain cordial relations with his clients. He can use the Delphi
method, by getting the opinion of the officials working in the ammunition factory. He can
repeatedly collect the information from them till some consensus is arrived at about the
quality of the product they require.

5) a) As per Tandon Committee Recommendations

SN Particulars 31-3-07 31-3-08 31-3-09

1 Current Assets 1.93 2.48 2.85
2 Other Current Liabilities 0.12 0.13 0.14
3 Working Capital Gap (3=1-2) 1.81 2.35 2.71
4 Net Working Capital 0.31 0.85 1.21
5 25% of WCG 0.45 0.59 0.68
6 MPBF.1 (6=3-4) 1.50 1.50 1.50
7 MPBF.2 (7=3-5) 1.36 1.76 2.03
8 MPBF lower of 6 and 7 1.36 1.50 1.50

b) As per Nayak Committee Recommendations

31-3-07 31-3-08 31-3-09

1 Projected sales 11.70 13.46 15.47
2 Working Capital required (25%) of above 2.92 3.36 3.87
3 Margin money 5% of Sales 0.58 0.67 0.77
4 Working Capital Limit from Bank ( 4= 1-2) 2.34 2.69 3.10

***

4
 Case Study 2

Details of the Project M/s Swarupa Bamboo

Works
M/s Swarupa Bamboo Works was started on 27-3-2007 with the manufacturing of
Bamboo Furniture and Articles.

Cost of Project Cost of Land and Building: Rs. 13.00 lacs

Plant and Machinery: Rs. 2.30 lacs
Others: Rs. 1.44 lacs
Margin Money for Working Capital: Rs. 1.26 lacs
Total Cost : Rs. 18.00 lacs
Means of Finance Capital: Rs. 5.00 lacs
Term Loan from Bank : Rs. 13 .00 lacs
Total: Rs. 18.00 lacs
Cash Credit Limit: Rs. 05.04 lacs

Projected Balance Sheet

Projected Balance Sheet of M/s. Swarupa Bamboo Works (Figures in lacs)

Particulars As on As on Particulars As on As on
31-3-08 31-3-09 31-3-08 31-3-09
Liabilities Fixed Assets
Capital 5.00 5.78 Land and Building 11.70 10.53

Profit 3.78 3.98 Furniture and Fixtures 0.45 0.41

Drawings -3.00 -3.00 Plant and Machinery 2.07 1.86

Net Worth 5.78 6.76 Total Fixed assets 14.22 12.80

Term loans from 13.00 11.00 Preliminary Expenses 1.08 0.81

Bank
Cash Credit 4.00 4.10 Debtors 6.30 6.93
Creditors 0.30 0.33 Inventory 1.01 1.11
Other Current 0.00 0.02 Cash and Bank Balance 0.37 0.46
Liabilities
Total Current 4.30 4.45 Other Current Assets 0.10 0.11
Liabilities

5
 Total Current Assets 7.78 8.61

Total Liabilities 23.08 22.22 Total assets 23.08 22.22

Profitability Estimates

Income 31-3-08 31-3-09

Sales 25.20 27.72
Interest Income/Other Income 0.00 0.10
Total income 25.20 27.82
Opening Stock 0.00 1.01

Purchase of Raw Materials 6.05 6.68

Labour Charges 7.56 8.32

Other Direct Expenses 0.50 0.55

Less Closing Stock 1.01 1.11
Cost of Goods Sold 13.10 15.44
Gross Profit 12.10 12.38
Expenses 31-3-08 31-3-09
Salary and Staff Expenses 1.44 1.58
Rent, Taxes, Insurance 0.10 0.11
Electricity and Water 0.76 0.84
Travelling 0.10 0.11

Other Administration Expenses 0.81 0.89

Total Expenses 3.21 3.53
Profit before DIT 8.89 8.85
Depreciation 1.58 1.42
Profit before Interest and Tax 7.31 7.43
Interest on Loans 1.95 1.80
Interest on Cash credit 0.63 0.61
Total Interest 2.58 2.41
Profit Before Tax 4.73 5.02
Provision for Tax 0.95 1.04
Net Profit 3.78 3.98

6
Questions

1) Analyse important Financial Ratios.

2) Prepare a Projected Cash Flow for 2008-09.

Possible Solutions

1)

Name of the Ratio 31-3-08 31-3-09 Observations

Debt-Equity Ratio is 2.25.:1 in the

beginning which is better than the
desirable ratio of 3:1. It improves further
Debt-Equity Ratio 2.25 1.63 due to repayment of the loan instalments.
Net Profit to Sales Net profit to Sales ratio ranges from 14%
Ratio 15.00 14.37 to 18% which is acceptable.
Retained profit to Net 7% to 25% of the profit is retained in the
profit ratio 20.66 24.67 business.
Return on Equity 65.40 58.88
Return on Assets 16.38 17.92
Current Ratio ranges between 1.57 and
1.93 which is acceptable and better than
Current Ratio 1.81 1.93 desirable 1.33
Stock to Sales Ratio Stock is about 4% of sales which is
% 4.00 4.00 reasonable.
Debtors to Sales Debtors to sales ratio is about 25% which
Ratio % 25.00 25.00 is as per 25% norm
Creditors to Creditors to purchases ratio is 4% which
Purchases Ratio% 3.89 3.88 is very meager.
As against a desirable ratio of 1.5, the
Debt Service average DSCR is 2.41. It ranges between
Coverage Ratio 3.75 1.90 1.90 to 2.96

2)

Particulars 31-3-09
1 Profit Before Interest and Tax PBIT 7.43

7
 2 Increase in Capital 0.00
3 Depreciation 1.42
4 Increase in Term Loans 0.00
5 Increase in Unsecured Loan 0.00
6 Increase in Cash Credit 0.10
7 Sale of Fixed Assets 0.00
8 Decrease in Investments 0.00
9 Preliminary Expenses Written Off 0.27
10 Others (Increase in Current Liability) 0.05
A Total sources 9.27

Disposition of funds
Preliminary and Pre-Operative
1 Expenses 0.00
2 Increase in Capital Expenditure 0.00
3 Increase in Current Assets 0.74
4 Decrease in Long Term Loans 2.00
5 Decrease in Unsecured Loan 0.00
6 Increase in Investments 0.00
7 Interest 2.41
8 Taxation 1.04
9 Dividend/ Drawings 3.00
10 Others (Decrease in Current Liability) 0.00
B Total Disposition 9.18
C Net Surplus(+) or Deficit(-) 0.08
D Opening Cash and Bank Balance 0.37
E Closing Balance 0.46

***