Finance Numericals

Cash credit: It is a short term loan provided by bank to the borrower. The borrower must have an account in bank. The bank charges interest on running balance of cash credit account not on loan limit. The amount is used to fulfil the working capital requirement of a company. Overdraft: The overdraft facility is provided by bank to its customers. This facility is provided to current account holders only. Under this facility the customers are allowed to withdraw amount more than the credit balance in his account. The bank charges some interest on amount withdrawal from bank. The interest amount is decided by bank according to the customer’s repaying capability. The duration of the cash credit loan and bank overdraft is same that is approximately one year. Both cash credit loan and bank overdraft provided by bank to meet the financial need of a customers. Let’s find out the difference between cash credit and overdraft: Point of difference Cash Credit

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12%. The earning

Example: The budgeted expenses of 4000 units are given below and only 50% capacity is used: Fixed expenses: ·          Overhead expenses Rs. 10, 000 ·          Factory expenses Rs. 38, 500 ·          Administrative expenses Rs. 40, 000 Variable Expenses: ·          Repair and maintenance charges Rs. 15 000 ·          Labour cost @ Rs.3 per unit ·          Raw material cost @Rs.0.60 per unit Semi-variable expenses: ·          Selling and distribution expenses Rs. 20, 000 ·          Salary and wages Rs.16,800   Fixed expenses do not change with changes in unit level. If 70% capacity is used then the expenses increases by 10% and if 100% capacity is used then variable expenses increases by 30%. Prepare flexible budget with the help of above information. Solution: Particulars 50% production capacity 70% production capacity 100% production capacity Fixed expenses: Overhead expenses 10, 000