Section A (20 Marks)

Write short notes on any four of the following

1. Capital Rationing
2. Decision Tree Analysis
3. Operating Cycle and Cash Cycle
4. Conservative Approach
5. Modes of Payment

Section B (30 marks)

(Attempt any three)

1. Define the credit policy . Explain the variables and types of Credit Policy also.
2. What is working capital? Discuss the components  and importance of working capital.
3. Honey Well Company is contemplating to liberalize its collection effort. Its present sales are ` 10 lakhs, its average collection period is 30 days, its expected variable cost to sales ratio is 85 per cent and its bad debt ratio is 5 per cent. The Company's cost of capital is 10 per cent and tax rate is 40 per cent. The proposed liberalisation in collection effort increases sales to ` 12 lakhs, increases average collection period by 15 days, and increases the bad debt ratio to 7 per cent. Determine the change in net profit. 
4. From the following data, state which project is preferable:

 Riskless discount rate is 5%. Project A is less risky as compared to project B and so, the management considers risk premium rates at 5% and  10% respectively as appropriate for discounting the cash inflows.

Note: The discount factors at 10% and 15% are:

Section C (50 marks)

(Attempt all questions. Every question carries 10 marks)

Read the case “Economic Value Added” and answer the following questions

Case Study: Economic Value Added

In economics, the value addition is calculated by the following formula:

Value Added = Value of sales less the cost of bought-in goods and services.

In this formula, only cost of bought-in goods and services has been accounted for. It completely ignores labour cost, depreciation, markup etc. In fact, they are factors of production (land, labour and capital). They provide "services" which raise value of "inputs" to a much higher realized value. The difference would be shared among them.

Calculate the value added & the value distributed in the below case.

Indus Machine Tools Ltd is a Private Ltd Company at Multan, a city in Punjab, Pakistan. Its Balance Sheet is given below.

Indus Machines Tools Ltd. Balance Sheet as on 31st Dec08

Additional Information

Taxes accounts for Rs.685, 440/-, Total costs is Rs.1148, 400/-, effective returns on debt- 7.5 %, equity- 20% & bank loan is 10.8%.

Questions:

1. Calculate the NOPAT & total capital.
2. What is the return on capital?
3. From the given details, calculate the cost of capital.
4. Analyse the financial position of the company by calculating the EVA.

Do you think the company will be getting the desired equity investment if it plans to go for expansion? Why?