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External Fund Requirement Analysis

The document outlines a financial policy and corporate strategy using the SSS Model for simplified, short, and standard solutions. It presents a case study involving Mr. Sanjay Bakshi Ltd., detailing the company's balance sheet, sales projections, and the calculation of external fund requirements (EFR) along with the amounts to be raised from short-term, long-term, and equity funds. The document emphasizes the importance of adhering to specific financial ratios while determining funding needs.

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yogeshdevkar86
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27 views3 pages

External Fund Requirement Analysis

The document outlines a financial policy and corporate strategy using the SSS Model for simplified, short, and standard solutions. It presents a case study involving Mr. Sanjay Bakshi Ltd., detailing the company's balance sheet, sales projections, and the calculation of external fund requirements (EFR) along with the amounts to be raised from short-term, long-term, and equity funds. The document emphasizes the importance of adhering to specific financial ratios while determining funding needs.

Uploaded by

yogeshdevkar86
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Finance Acharya Jatin Nagpal 1.

1 Krivii Eduspace

Ch 1 – Financial Policy
& Corporate Strategy
SSS Model for Ques Solutions → "Simplified, Short & Standard" Solutions
Simplified Solutions - Easy to understand (No more anxiety due to complex solutions)
Short Solutions - Ques are solved in the shortest possible manner (Finish exam in time :D)
Standard Solutions - Ques are solved in a consistent manner (no more confusing treatments)

Index - Main Questions Ques Number


External funding requirement 1
Simplified AFM Ques Bank 1.2 Financial Policy & CS

Main Questions
External fund requirement

# Ques 1 - Sanjay Bakshi {M23 MTP 1}


The Balance Sheet of Mr. Sanjay Bakshi Ltd. as on 31-03- 2020 is follows:
Liabilities ₹ in lacs Assets ₹ in lacs
Share Capital 300 Fixed Assets 600
Reserves 200 Inventory 500
Long Term Loan 400 Receivables 240
Short Term Loan 300 Cash 60
Payable & Provisions 200
Total: 1400 1400

Sales for the year was ₹600 lacs. The sales are expected to grow by 20% during the year. The profit
margin and dividend pay-out ratio are expected to be 4% and 50% respectively.
The company further desires that during the current year Sales to Short Term Loan and Payables
and Provision should be in the ratio of 4 : 3. Ratio of fixed assets to Long Term Loans should be 1.5.
Debt Equity Ratio should not exceed 1.5.
You are required to determine:
(i) The amount of External Fund Requirement (EFR)
(ii) Amount to be raised from Short Term, Long Term and Equity funds.
Note The below solution is directly taken from Suggested answer. The author is not satisfied with the below
solution. However, alternative solution is intentionally not given here to avoid confusion.
Ans: Part A – Calculation of External Fund requirement (EFR)
• Expected sales = 600 x 1.2 720
• Profit = 720 x 4% 28.8
A. Amount ploughed back into business = 28.8 x 0.5 14.4
B. Additional funds required = (1400 – 200*) x 0.2 240
C. EFR = B – A 225.6
* As current liabilities shall also be increased proportionately with increase in sales.
Finance Acharya Jatin Nagpal 1.3 Krivii Eduspace
Part B – Amount to be raised from different sources

1. Amount to be raised from short term funds: ₹ in Lacs


• Condition: Sales to short term loans and payables & provisions should be 4:3
• New amount = 3/4 x 720 540
• Less: Existing Amount = 200 x 1.2 + 300 540
» Amount to be raised from short term funds Nil

2. Amount to be raised from long term funds: ₹ in Lacs


Condition: Ratio of fixed assets to long term loans should be 1.5
• New fixed assets = ₹600 x 1.2 720
• Total long-term loans can be = ₹720/1.5 480
• Less: Existing long-term loans 400
» Amount to be raised from long term funds 80

3. Amount to be raised from equity funds: ₹ in Lacs


Condition: Debt equity ratio should not exceed 1.5.
• Amount to be raised from external sources 225.60
• Less: Amount to be raised from short term funds -
• Less: Amount to be raised from long term funds 80.00
» Balance amount to be raised from equity funds 145.60

• Note: Checking new Debt to Equity Ratio


• DER = Debt = 480 = 0.727
Equity Shareholder’s funds 300 + 200 + 14.4 + 145.6

• Thus, required condition is satisfied.

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