Module 5- Practice Questions
Question #01
Use following information to calculate current and quick ratio:
Current Assets Rs. 500,000
Inventory Rs. 50,000
Prepaid expenses Rs. 30,000
Account payables Rs. 80,000
Current Liabilities Rs. 350,000
Current ratio = Current Assets / Current Liabilities
Current ratio = 500,000 / 350000
Current ratio = 1.43 times
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Current Assets - Inventory - Prepaid Expenses = 500000 - 50000 - 30000 =
Rs. 420,000
Quick Ratio = 420000 / 350000= 1.2 times
Question #02 (5 Marks)
What will be the firm's gross working capital and net working capital if following
information is available to you?
Particular Amount (Rs.)
Accounts Payables 150,000
Accounts Receivable 250,000
Plant and Machinery 65,00,000
Cash and Cash Equivalents 200,000
Inventory 150,000
Long-Term Debt 450,000
Marketable Securities 350,000
Short-term debt 260,000
Solution:
Gross Working Capital (Current Assets) = Account Receivable+ Cash and cash equivalents+
Marketable securities +Inventory
Gross Working Capital=250,000+200,000+350000+150,000
Gross working capital=950,000
Net working Capital= Current Assets – Current Liabilities
Current Liabilities = Accounts Payable+ Short term debt
Current Liabilities =150000+260000
Current Liabilities =410,000
Net Working Capital= Current Assets –Current Liabilities
Net Working Capital=950000-410,000
Net working capital= Rs. 540,000
Question #03 (3 Marks)
Calculate Receivables Turnover in Days if:
Credit sales = Rs. 565,000
Average Accounts receivables = Rs. 50,000
Average Inventory = Rs. 80,000
Number of days in Year = 360
Solution:
Receivables Turnover in Days = Credit sales / Average Accounts receivables
Receivables Turnover = 565000 / 50000 = 11.3 times
Receivables Turnover in Days = number of days in year /Receivables turnover
Receivables Turnover in Days = 360 /11.3 = 31.85 Days
Question #04 (5 Marks)
Using given information, calculate trade cycle, assume 360 days in a year.
Item Amount in Rs.
Average Accounts Receivable 50,000
Average Inventory 70,000
Average Accounts Payables 60,000
Cash Sales 300,000
Cost of Goods Sold 350,000
Credit Sales 500,000
Trade Cycle = Receivable Turnover Days + Inventory Turnover Days
Receivable Turnover (RT): Credit Sales/Average Receivables
Receivable Turnover = 500000/50000 =10 times
Receivable Turnover Days = 360/10= 36 Days
Inventory Turnover (IT) =Cost of Goods Sold /Average Inventory
Inventory Turnover =350000/70000=5times
Inventory Turnover days = 360/5= 72 Days
Trade cycle = Receivable Turnover Days + Inventory Turnover Days
Trade cycle = 36+72
Trade cycle =108 Days
Question #05 (3 marks)
Calculate Interest Coverage Ratio from following information:
Earning before interest and taxes = Rs. 550,000
Net profit = Rs. 243,750
Tax rate = 35%
Interest charges = Rs. 175,000
Solution:
ICR = EBIT/ Interest
ICR = 550000/ 175000
ICR = 3.14 times
Question #06 (5 marks)
Calculate Cash Conversion Cycle from given information:
Accounts Balances (in
Rs.)
Credit Sales 500,000
Cash Sales 300,000
Average Accounts Receivable 50,000
Average Inventory 50,000
Average Account Payables 25,000
Cost of Goods Sold 300,000
Credit Purchases 250,000
Number of Days in Year 360
Solution:
Cash conversion cycle = (Receivable Turnover Days+ Inventory Turnover Days - Payable
Turnover Days
Receivable Turnover Days= Average Receivables/ Credit Sales*360
Receivable Turnover Days =50000/500000*360= 36 Days
Inventory Turnover Days = Average Inventory/ Cost of Goods Sold *360
Inventory Turnover Days = 50000/300000*360 =60 Days
Payable Turnover Days= Average Payables/ Credit Purchases*360
Payable Turnover Days=25000/250000*360= 36 Days
Cash conversion cycle = Receivable Turnover Days+ Inventory Turnover Days -Payable
Turnover Days
Cash conversion cycle = 36+60 -36
Cash conversion cycle = 60 days
Question #7 (3 Marks)
Calculate debt to equity ratio of a company with following information:
Long term debt = Rs. 500,000
Equity = Rs. 250,000
Total Assets = Rs. 15,00,000
Solution:
Debt to equity Ratio = Long term debt / Equity
Debt to equity Ratio = 500000 / 250000
Debt to equity Ratio = 2 times
Question #08 (5 Marks)
Following information has been extracted from financial statements of Alpha Textiles:
Sales = Rs. 200,000
Gross Profit = Rs. 35,000
Income Tax Rate = 35%
Profit before interest and tax = Rs. 15000
Profit after tax = Rs. 9,000
Total Assets = Rs. 450,000
Equity= Rs. 150,000
Calculate:
1. Gross profit margin
2. Net profit Margin
3. ROA
Solution:
Gross Profit Margin = Gross Profit/Sales
Gross Profit Margin = 35000/200000
Gross Profit Margin = 17.5%
Net Profit Margin = Net profit/Sales
Net Profit Margin = 9000/200000
Net Profit Margin = 4.5%
Return on Assets= Net profit /Total Assets
Return on Assets= 9000 /450000
Return on Assets= 2%
Question # 9 (3 Marks)
Calculate EPS, and DPS from following information:
Net Profit = Rs. 350,000
Number of shares outstanding = 100,000
Dividend payout ratio= 10% of net profit
Solution:
EPS = Net profit / Number of shares outstanding
EPS = 350000 / 100000
EPS = Rs. 3.5 per share
DPS = Dividend / Number of shares outstanding
Dividend = 10% of net profit
Dividend = 10% of 350000 = 35000
DPS = 35000 / 100000
DPS = Rs. 0.35 per share
Question # 10 (3 Marks)
What will be Return on Capital Employed if:
Investment = Rs. 500,000
Profit before Tax = Rs. 50,000
Long term debt = Rs. 600,000
Interest = Rs. 15,000
Solution:
Return on Capital Employed = (Profit before Tax +Interest)/Total Investment
Return on Capital Employed =(50000+15000)/500000 =0.13
Return on Capital Employed= 13%