Capital Budgetig aid iisk Aialyisiis

Problem-1
The expected cash flos lf a prlject are as fllllos:
Year Cash flo(Tk.)
0 -28,000
1 6,000
2 7,000
3 10,000
4 11,000
5 9,000
The certainly equivalent factlr behaves as per the flllloing equatln : @ 1 0.05t. Calculate the
net present Value lf the prlject if risk free rate lf return is 8%.

Problem-2
Green Ltd. Is clnsidering tol mutually exclusive prljects. The expected cash flos lf each prlject
are given Bello:
Year Prlject-A Certainty equivalent Prlject-B Certainty equivalent
0 (3,00,000) 1 (3,00,000 1
1 1,00,000 0.95 2,00,000 0.9
2 2,00,000 0.9 2,00,000 0.8
3 2,00,000 0.85 2,00,000 0.7
4 3,00,000 0.8 3,00,000 0.6
5 3,00.000 0.75 4,00,000 0.5
The clmpany has decided tl evaluate these prljects using certainty equivalent methld. Clmpany’s
nlrmal Required rate lf return is 15% and afer tax risk free rate lf return is 8%.
Which prlject shluld be selected?

Problem-3
Green Ltd. Is clnsidering tol mutually exclusive prljects. The expected cash flos lf each prlject
are given Bello:
Year Prlject-A Certainty equivalent Prlject-B Certainty equivalent
0 (3,00,000) 1 (3,00,000 1
1 1,00,000 0.95 2,00,000 0.9
2 2,00,000 0.9 2,00,000 0.8
3 2,00,000 0.85 2,00,000 0.7
4 3,00,000 0.8 3,00,000 0.6
5 3,00.000 0.75 4,00,000 0.5
The clmpany has decided tl evaluate these prljects using certainty equivalent methld. Clmpany’s
nlrmal Required rate lf return is 10% and afer tax risk free rate lf return is 8%.
Required:
a) What is the net present value(unadjusted flr risk)?
b) What is the Certainty equivalent net present value?
c) Clmpute the Internal rate lf return (IRR).
d) Which prlject shluld be selected?

Hlme olrk 1) 2014 2)Acc 2016(11) 3)Acc 2019(11) 4)Acc 2018(14) 5)Mgt 2019

Problem-4

1
Priya Ltd. Is clnsidering investment in lne lf the mutually exclusive prljects P & Q. The frms clst lf
Capital is 15% and the risk-free rate is 10%. The flllloing data are available :
Prlject-P Prlject-Q
Inital investment Tk. 12,000 Tk. 18,000
Cash inflos:
Year 1 Tk. 6,000 Tk. 4,000
2 Tk. 4,000 Tk.6,000
3 Tk. 5,000 Tk. 8,000
4 Tk. 3,000 Tk.11,000
Risk index 1.00 0.60
Required:
a. Find the Net present value lf each prlject using the frms clst lf capital. In this situatln
ohich prlject is Preferred?
b. Determine the RADR using CAPM.
c. Clmpare ylur fndings in (a) and (b) ohich prlject dl ylu reclmmend flr the frm?
d. What is the value lf Mr. Rly plrtllil if the partcipate in the right lfering?

Hlme olrk 1) 2012 2)Acc 2017

Problem-5
Star Restaurant Ltd. Is clnsidering tol mutually exclusive investment prlplsals. Their expected cash
Fllo streams are given bello:
Prlject NCO CEBT per year Life Tax
A 15,000 5000 5 40%
B 18,000 5500 6 40%
Afer clmputng PBP the clmpany clmpares RADR as fllllos
Less than lne year 5%
1 tl 3 years 8.5%
3 tl 5 years 12.5%
Ablve S years 15%
Required : Find lut the prlftable flr the restaurant acclrding tl NVP.

Problem-6
Supplse there is a prlject ohich invllves inital clst lf Tk. 20,000 (clst at t@0). It is expected tl
generate net Cash-flos during the frst 2 years oith the prlbability as shlo in the flllloing table:
Year Year
Prlbability Net cash-flo Prlbability Net cash-flo
0.1 4,000 0.1 6,000
0.25 6,000 0.25 8,000
0.3 8,000 0.3 10,000
0.25 10,000 0.25 12,000
0.1 12,000 0.1 14,000
a) Calculate expected value lf net cash flos flr diferent perilds.
b) Calculate the standard deviatln lf plssible net cash-flos flr diferent perilds.
c) Calculate NPV if disclunt rate is 11%.
d) Calculate the standard deviatln lf NPV.

Problem-7
The flllloing inflrmatln lf Mlln Clmpany are given bello

2
 Prlbability 0.15 0.15 0.3 0.2 0.2
Return(%) 12 16 20 25 8
a. Clmpute the expected return ln this clmpany.
b. Clmpute the standard deviatln ln this clmpany.
c. Clmpute the cl-efcient lf variatln flr this clmpany.

Problem-8
There are tol securites and three states lf eclnlmy tl Mr. Khlndlker
State lf eclnlmy Prlbability Stlck A Return(%) Stlck B Return(%)
Recessiln 0.2 -10 20
Nlrmal 0.3 20 25
Bllm 0.5 40 30
Supplse, Mr. Khlndlker has Tk. 5,00,000. If he puts Tk. 3,00,000 in stlck A and remainder in stlck
B, ohat oill be the expected return and standard deviatln lf his plrtllil.

Problem-9
The rate lf return and prlbabilites lf tol stlcks are as fllllos:
Prlbabilites Rate lf Return
Stlck-A Stlck-B
0.12 25% 35%
0.14 28% 25%
0.16 26% 30%
0.18 30% 28%
Calculate :
(a) Expected rate lf return lf each stlck.
(b) Standard deviatln lf each stlck.
(c) Variance lf each stlck
(d) Clvariance lf tol stlcks.
(e) Clrrelatln lf tol stlcks.

Problem-10

Return lf tol securites flr last fve years are as fllllos:

3
 Capital Structure/Cost of Capital
Problem 1
LPTON Trading company's earnings before interest and taxes (EBIT) Tk. 4,00,000. The equity
capitalization rate (Ke) is 12%, 16% interest is on a bond involving a total interest of Tk. 1,60,000. The
number of shares of the company is 10,000.
Required : (using NI approach)
a) Total Market value of share (s) b) Total Market value of debt (B)
c) Total Market value of firm (v) d) Overall capitalization rate (Ko)
e) Market price per share. (Po) f) Earnings per share (EPS)
g) Dividend per share (DPS) h) Percentage of financial leverage.

Problem 2
Sun Limited with operating earnings (EBIT) of Tk. 4,00,000 to evaluate a number of possible capital
structures given' below. Which of the capital structure will you recommend. According to net income
approach
Ca ital Structure Level of debt Cost of debt Cost Ofe uit
1 2,00,000 11% 13%
2 3,00,000 1 1% 14.50%
3 4,00,000 12% 15.50%
4 5.00.000 13% 17%

Problem 3
In Considering the most desirable capital structure of XY Ltd. The following debt and equity capital
(after tax) have been made at various investment plan. You are required to determine optimum
debt- equity mix for the company by calculating the composite cost of capital.
investment Ian % of debt Cost of debt % Cost Of equity %
A 0 0 12
B 10 5 12
c 20 5.2 12.5
D 30 6 13
E 40 6.5 14
F 50 7 15.0)
G 60 7.5 16

Problem 4
Beximco pharmacuticals Ltd has 68200 of common stock outstanding. Beximco employes Tk.
55,80,000 of Debt capital carrying 10% interest charge. The overall cost of capital is 12.50%. Its net
operating income (EBIT) Tk. 15,50,000 in the year-2004.
Required: (Using NOI Approach)
1. Total Market value of Beximco. Pharmacuticals (v) 2. Total Market value of share cpaital (s)
3. Total Market Price per share (Mkt. per share). 4. Earnings per share (EPS).
5. Equity capitalization rate (Ke). 6. Degree of financial leverage (DFL)
7. Percentage of financial leverage 8. Dividend per share (DPS).
9. Verify the validity of WACC.

অনলাইননর সবনেনে জনপ্রিে প্রবপ্রবএ এর প্রিক্ষক অপ্রল সযানরর হ্যান্ডননাট থেনক মাত্র ৫ টট অংক
কনর প্রিনে প্রনন অধ্যানের সব প্রনেম। সানজিন প্রিনে সংগ্রহ্ করনে কল করুন 01750044826
Problem 5
A Ltd. And B Ltd. Are two different concerns and both of them have an annual operating income of
Tk. 1,20,000. Cost of equity (k.) of A is 10% has got no debt, while B has got a 5% debt of Tk.
6,00,000. Corporate Tax rate 50%. Following M-M approach you are required to find out:
1. Total market value of both the firm. 2. Total market value of share both the firm.
3. Cost of equity of both the firm, 4. WACC of both the firm,

Problem 6
The following information are given to you
Firm U Firm L
EBIT 250000 250000
10% Debt - 7,50,000
Keu 15% -
Corporate tax rate 40% 40%
Personal tax rate 10% 10%
Required
a) Value of unlevered firm (Vu); b) Gain from leverage;
c) Cost of equity of levered firm (Kel). d) Value of Levered firm (VL);
e) Cost of equity of unlevered firm;

Problem 7
The following is the data regarding two companies Sun and Moon belonging to the same risk class
Details SUN MOON
EBIT/NOI Tk. 3,00,000 Tk. 3,00,000
6% Debt Tk. 10,00,000
Cost of Equity 10% 15%
Requirement:
1. Value of the firms. 2. Overall cost of capital.
3. Assume that an investor owns 10% of SUN Company’s share. Using Arbitrage Process show that,
how can he obtain same return at a lower cost.

Problem 8
The two companies, U and L,belong to an equivalent risk class. There two firms are identifiable in every respect
that U company is Unlevered while company L has 10 percent debentures of Tk.40 lakh. The other relevant
information regarding their valuation and capitalization rates are as follows.
Details Firm U Firm L
Net operating income (EBIT) 6,50,000 650,000
Interest on debt 400000
Earning to equity holders (NI) 650,000 250,000
Equity capitalization rate 0.15 0.2
Market value of equity (S) 50,00,000 12,50,000
Market value of debt 40,00,000
Total value of the firm (S+B) 50,00,000 52,50,000
Implied overall capitalization rate (ko) 0.15 0.143
Debt - equity ratio (k) 0 1.33
1) An investor owns 20 percent equity share of company L. Show the arbitrage process and
the amount by which he could reduce his outlay through the use of leverage.
2) According to Modigliani and Miller, when will this arbitrage process come to an end?

অনলাইননর সবনেনে জনপ্রিে প্রবপ্রবএ এর প্রিক্ষক অপ্রল সযানরর হ্যান্ডননাট থেনক মাত্র ৫ টট অংক
কনর প্রিনে প্রনন অধ্যানের সব প্রনেম। সানজিন প্রিনে সংগ্রহ্ করনে কল করুন 01750044826
Problem 9
ABC Ltd has the following capital structure.
Equity (Tk. 100 per share) Tk. 10,00,000
12% Debt Tk. 5,00,000
The company wishes to raise Tk. 5,00,000 for expansion program. The following alternatives are
available
i. 100% equity.
ii. 50% equity and 50% debt @ 12%
iii. 100% debt @ 12%.
The expected EBIT is Tk. 20,00,000 the tax rate is 40%. Calculation the EPS and which one would you
prefer. Calculate the indifference point between (i) and (ii).

Problem 10
The capital structure of PQS Company Ltd. Are as follows:
Common stock Tk. 40,00,000
10% debenture Tk. 20,00,000
The Co. needs additional financing of Tk. 20,00,000, this can be financed by the following
alternatives :
(A) Fully equity stock of Tk. 100 each.
(B) Fully 12% preferred stock.
(C) Fully 10% debenture.
If the company's expected EBIT is Tk. 10,00,000 and tax rate 50%.

Problem 11
The capital structure of IDLC is given below:
12% Debenture Taka 12,00,000
10% Preferred stock Taka 10,00,000
Common stock (Tk. 100 per) Taka 8,00,000
The company needs additional financing of Tk. 12,00,000. This can be financed in the following ways
(i) Fully by common stock of Tk. 100 each;
(ii) Fully by 12% debenture;
(iii) Fully by 13% preferred stock.
If the company’s expected EBIT is Tk. 8,00,000 and corporate tax rate is 25%.
Required:
(a) Which alternative method of financing should be selected and why?
(b) Calculate the indifference point of EBIT of alternative method (i) and method (ii).

Problem-12
MRS Co. Ltd. has present capital structure as follows
Equity share capital (10,000 shares) 10,00,000
10% Debt capital 5,00,000
The firm is thinking to raise capital of Tk. 5,00,000 for its expansion. It has two alternative financing
methods.
(i) Issue of 12% debenture.
(ii) Issue of 13% preference share capital of Tk. 2,00,000 and equity capital of Tk. 3,00,000.
Determine the indifference point of EBIT and EPS between these two financing methods. Tax rate is
30%

অনলাইননর সবনেনে জনপ্রিে প্রবপ্রবএ এর প্রিক্ষক অপ্রল সযানরর হ্যান্ডননাট থেনক মাত্র ৫ টট অংক
কনর প্রিনে প্রনন অধ্যানের সব প্রনেম। সানজিন প্রিনে সংগ্রহ্ করনে কল করুন 01750044826
 4 Dividend Policy

Problem 1
The following data relate of Imtiaz company Ltd.
Earning per share Tk. 20
Capitalization rate 11%
Dividend Tk. 12
It the internal rate of return is: 12%, 11% and ৪%
Determine the price per share under walter model and Gordon model

Problem 2
From the following data of XYZ Ltd. You are required to calculate the –
(i)Market price per share (Po)
(ii) Market value of firm
Using Walter and Gordon model:
Earning per share Tk. 20,
Capitalization rate 12%
Retention ratio 40%
No of share 50,000
Internal rate of return 10%, 12% , 15%

Problem 3
The earning per share of a company is Tk. 30. It has an internal rate of return 25% and the
capitalization Rate of its risk class is 20%.
Instruction:
Using Walter Model find out-
a) What would be the optimum payout ratio of the firm?
b) What should be the price of the share at this stage?

Problem 4
The following information is available in respect of a firm:
Capitalization rate = 10%
Earnings per share (E) = Tk. 10
Rate of return on Investment (R) = 12% 10% and 8%
Required:
a) Show the effect of dividend policy on the price of the share under Walter Model and
Gordon model.
b) What would be the optimum payout ratio of the firm?

অনলাইননর সবনেনে জনপ্রিে প্রবপ্রবএ এর প্রিক্ষক অপ্রল সযানরর হ্যান্ডননাট থেনক মাত্র ৫ টট অংক
কনর প্রিনে প্রনন অধ্যানের সব প্রনেম। সানজিন প্রিনে সংগ্রহ্ করনে কল করুন 01750044826
Problem 5
Following information are available for a company :
Market price per share Tk. 200. EPS-Tk. 12.50; DPS-Tk. 5 price earning ratio (P/E) 4 times.
Required (using Walter model) :
(a) Cost of equity (Ke);
(b) Dividend payout ratio;
(c) Retention ratio(b);
(d) Internal rate of reinvestment(r)

Problem 6
Surma Limited has a cost of equity of 12%, current market value of the firm (V) is Tk. 25,00,000 @ Tk.
25 per Share. Assume values for I (new investment), E (earnings) and D (dividends) at the end of the
years as I = Tk. 7,00,000, E= Tk. 3,00,000 and D = Tk. 2.00 per share. Show that under MM
assumptions the payment of Dividend does not affect the value of the firm.

Problem 7
Rafi ltd. Has the following stockholders account
Common stock (tk. 10 per share) 10,00,000
10%. Preferred stock 8,00,000
Retained earning 700 000
Requirement: What Would happen to the accounts if-
1) A 10% stock dividend
2) A 2 for 1 stock split
3) A 1 for 2 reverse stock split.

Problem 8
Jain Company Ltd. Has 20,00, 000 common stock outstanding in the market and present market
price in the 125.
Equity structure of the Co. is as follows:
Common stock (Tk. 50 each) Tk. 10,00,00,000
Paid in Capital Tk. 15,00,00,000
Retained earnings Tk. 40,50,00,000
Total Tk. 65,00,00,000
Required: What would happen to the accounts if
a) Declares 10% stock Dividend?
b) Declares 3 for a stock split?
e) Declares Reverse stock split of 1 for 4?

অনলাইননর সবনেনে জনপ্রিে প্রবপ্রবএ এর প্রিক্ষক অপ্রল সযানরর হ্যান্ডননাট থেনক মাত্র ৫ টট অংক
কনর প্রিনে প্রনন অধ্যানের সব প্রনেম। সানজিন প্রিনে সংগ্রহ্ করনে কল করুন 01750044826
 Capital Market Financing
Problem 01
Hilary Inc. is proposing a right offring. Prfsfntly thfy havf 2,40,000 sharfs outstanding at Tk. 8
fach. Thfrf will bf 60.000 nfw sharfs offrfd at Tk 60 fach.
Rfquirfd:
(a) What is thf nfw markft valuf of thf company?
(b) How many rights nffdfd to purchasf onf nfw sharf?
(c) What is thf fx-right pricf?
(d) What is thf valuf of a right?
(f) Why might a company havf a right offrings rathfr than a gfnfral cash offr?

Problem 02
Roky company has announcfd a rights offr to raisf a fund of Tk 500 000. Thf stock of thf company
currfntly sflls for tk 40 pfr sharf and thfrf arf 50000 sharfs out standing.
(a) what is thf maximum and minimum possiblf valuf of 5?
(b) Numbfr of nfw sharfs to bf issufd. (If subscripton pricfe25)
(c) Numbfr of rights nffdfd to buy a nfw sharf of stock
(d) valuf of right bfforf fx- right.
(f) What is thf fx-right pricf?
(f) You hold thf 1000 sharfs of thf company. Show thf valuf of your Invfstmfnt affr and bfforcf
thf offr portolio.

Problem 03
Mr. Roy own fvf sharfs of XYZ Ltd. Common Stock Markft valuf of Stock is Tk. 70. Mr. Roy also havf
to Tk. 58 cash. Hf has just rfcfivfd word of a right offring. nf nfw sharf can bf purchasfd at Tk.
58 for fach 5 sharfs currfntly ownfd (basfd on 5 rights.)
Rfquirfd:
a. What is thf valuf of rights?
b. What is thf valuf of affr right pfr sharf?
c. What is thf valuf of Mr. Roy portolio bfforf thf offring?
d. What is thf valuf of Mr. Roy portolio if hf partcipatf in thf right offring?
f. What is thf valuf of Mr. Roy portolio if hf salfs his right?
f. What is thf valuf of Mr. Roy portolio if hf dosf not fxfrcisf his right ?

অনলাইননে সবনচনয়য় ননপয়য় নবনবি িে নশিক্ অনল সস্ানেে র স্াাননাননোট থথন্ মাত র নননোট অ ্ ্নে নশনখ
ননন অ্স্ানয়য়ে সব ননয়য়ম। সান শন নফ্রিনতে স গ্রর ্েনতে ্ল ্রন ০১৮১৩-০১৯৩৮র
Problem 04
A Company is considfring a rights offring to raisf funds to fnancf nfw projfcts which rfquirf Tk
45,000,000. Thf fotaton cost will bf 10% of fund raisfd. Thf Company currfntly has 20,00,000
sharfs outstanding and currfnt markft pricf its shfar is Tk. 100. Thf subscripton pricf has bffn Tk
50 pfr shfar.
a. How many sharfs should bf sold to raisf thf funds rfquirfd for fnancing thf nfw projfct?
b. How many rights arf rfquirfd to buy onf nfw sharf?
c. What is thf valuf of onf right?
d. Show thf impact on sharf holdfrs wfalth who holds2 sharfs and rfquirfd rights to buy onf
nfw sharf If
1. Hf fxfrcisfs rights.
2. Hf sflls his rights.
3. Dofs not fxfrcisf rights?

Problem 05
Thf Digital Co. has Just gonf Public Undfr a frm Commitmfnt agrffmfnt, Digital rfcfivfd Tk. 15.05
for fach of 50,00.000 sharfs sold. Thf inital offring pricf was Tk. 16 pfr sharf, and stock rosf Tk.
19.50 pfr sharf in thf frst ffw minutfs of trading. Digital paid Tk. 800,000 in dirfct lfgal and othfrs
costs and Tk. 2.50.000 indirfct cost.
Rfquirfmfnts:
1. Nft amount of fund raisfd
2. Total dirfct costs.
3. Total indirfct costs.
4. Total costs.
5. Pfrcfntagf of fotaton cost.

Problem 06
Thf Big Boss Corporaton has announcfd a rights offr to raisf Tk. 30,00,000 for a nfw journal, thf
journal of fnancial fxprfss. This journal will rfvifw potfntal artclfs affr thf author pays a non
rffundablf rfvifwing fff of Tk. 3,000 pfr pagf. Thf stock is sflling Tk. 60 pfr sharf currfntly and
thfrf arf 2,40,000 sharfs outstanding.
(a) If thf subscripton pricf is sft Tk. 50 pfr sharf, how many sharfs must bf sold?
(b) How many rights will it takf to buy onf sharf?
(c) What is thf fx-right pricf?
(4) What is thf valuf of a right?
(5) Show how a sharfholdfr with 1,000 sharfs bfforf thf offring and no dfsirf to buy
Additonal sharfs is not harmfd by thf right offr.

অনলাইননে সবনচনয়য় ননপয়য় নবনবি িে নশিক্ অনল সস্ানেে র স্াাননাননোট থথন্ মাত র নননোট অ ্ ্নে নশনখ
ননন অ্স্ানয়য়ে সব ননয়য়ম। সান শন নফ্রিনতে স গ্রর ্েনতে ্ল ্রন ০১৮১৩-০১৯৩৮র
 6 Lease Financing
Problem 1:
A Company needs to acquire an equipment that will cost Tk. 3,35,220. The company has two
alternatives to finance the equipment.
(A) To take lease from United Leasing Company for 5 years with an annual lease payment of Tk.
1,20,000 to be paid at the end of each year.
(B) To take loan from Janata Bank at 15 percent interest p.a. repayable annually at the end of each of
the 5 years in equal installments. The equipment will be depreciated on straight line basis, Corporate
tax rate is 40 percent.
Which offer the company should accept?

Problem-2
Canon Company is faced with a decision to purchase or acquire an equipment. The cost of the
equipment is Tk 2.50.000. It has a life of 5 years. The equipment can be obtained on lease by paying
in advance equal lease rentals annually. The leasing company desires a return of 10%, Canon Co. can
also buy the equipment by taking loan from DBBL with 15% interest. The loan is to be paid in 5 equal
installments at the end of each year. Corporate tax rate is 40%. The Company follows straight line
depreciation system.
Should it lease or buy the equipment?

Problem 3:
Mr. Rahman is thinking of acquiring a car for that purpose he is 10 to decide whether the car is to be
purchased through 12% borrowing or to be acquired on lease rent basis. The price of car is Tk.
7,00,000.Its annual maintenance costs is Tk. 45,000 per year and expected life is 5 years. It is
assumed that the straight line method of depreciation is allowable under Income Tax Act and tax
rate is 35%. The salvage value of the car is Tk. 1,00,000. In case of leasing, the lease rental Tk.
3,00,000 for 5 equal annual installment (to be paid in advance) and maintenance expenses to be
borne by lesser. Which alternative is to be selected by Mr. Rahman?

Problem 4:
Mehrin is to decide whether a computer is to be purchased through 12% borrowing or to be
acquired on lease rent basis. The price of the computer is Tk. 3,00,000. It's annual maintenance cost
Tk. 25,000 per year and expected life is 5 years. Tax rate is 40% and straight line method of
depreciation is allowable.
The salvage value of the computer is Tk. 50,000. In case of leasing, annual lease rental is Tk. 1,00,000
for 5 equal annual installment including maintenance cost Tk. 25,000 and maintenance cost to be
borne by lessor. If the installation is given at beginning of the year for both lease and buy option,
which alternative is best for Mehrin?

Problem 5
Markes Company is thinking to purchase a machine for Tk. 12,00,000. It can borrow the amount at
an interest rate of 9% to be repaid in equal annual installment of Tk. 1,86,985 or it can take the
machine for an annual lease payment of Tk. 1,86,985. Under Income Tax Act, straight line lease of
depreciation is allowed. The company pays tax @ 37%. Which alternative should the company
accept?

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Problem 6:
XYZ limited wants to lease a computer system for the purpose of color matching. The system will
cost Tk. 30 lakh and has a 5 years of life time. The applicable written-down depreciation is 25% the
annual rental is payable at the end of year for 5 years, will be Tk. 8.4 lakh. The lessor will maintain
the computer system which will be Tk. 50,000 per year. At the end of its useful life, the system can
be sold for 50% of depreciated value. The company's borrowing rate is 14% and tax rate is 35%.
Should the system be leased? Show your calculation.

Problem 7:
A company wishes to acquire and asset costing Tk. 200 lakh. The company has an offer from a bank
to lend @ 18% repayable in 3 equal year end installments. A leasing company has also submitted a
proposal to the company to acquire the asset on lease at yearly rentals of Tk. 450 per Tk. 1000 of the
asset value for 3 years payable at year ends. The leasing company shall maintain the asset during
lease period. The annual maintenance cost of the asset is estimated at Tk. 15 lakh. The rate of
depreciation allowable for tax purposes is 50% on WDV. The expected salvage value of the asset is
Tk. 35 lakh (net of tax). Tax rate is 40%. Which offer the company should accept?

Problem 8:
Mr. Byron is thinking of acquiring an equipment costing Tk. 15000 and he has the choice of
borrowing Tk. 15000 at 15% to be repaid in 5 equal installment or of leasing the machine for Tk.
4475 end of each year. It is assumed that the straight line method of depreciation is allowable under
income straight line basis and the tax rate is 40%. Which alternative better for Mr. Byron?

2
 Working Capital Management
Problem 1:
Brishti Ltd Company provides the following particulars to determine the required amount of working
capital of a company -
Elements of cost Amount per unit (Tk.)
Raw materials 8,
Direct labour 3
Overheads 6
Total cost 17
Profit 3
Selling price 20
Raw materials are in stock on an average 1 month. Materials are in process, on an average half month.
Finished goods are in stock on an average 1 month. Credit allowed by suppliers of goods is 1 month;
credit allowed to debtors is 2 month. Lag in payment of wages is one and half weeks; lag in payment of
overheadis 1 month. One-fourth of output is sold against cash. Cash in hand is expected to be TK.2,500
Annual production is expected to be 1,04,000 units.

Problem 2:
A factory produces 84,000 units during the year and sells them @ Tk. 50 per unit. Cost structure of the
product is as follows:
Raw material 55%
Labour 18%
Overhead 17%
Profit 10%
a. The following additional information is available:
b. Raw material equivalent to 12 months supply is stored in godown.
c. The production process takes 15 days.
d. Finished goods equals to one month’s production are carried in stock
e. Debtors get one month credit.
f. Creditors allow two month credit.
g. Time lag in payment of wages and overheads is one month.
h. Cash & Bank balance is to be maintained at 15% of net working capital.
i. 25% of purchases are for cash.
Draw a forecast of working capital requirement of the factory.

Problem 3:
From the following data of a company, estimate the amount of working capital needed to finance an
activity level of 50%. The capacity of the concern to product 2,40,000 units p.a.
Expected selling price Tk, 10.00 Per unit.
Cost of raw materials Tk. 3.00 Per unit.
Direct labour cost Tk. 2.50 Per unit.
Annual overhead at 50% activity level (including depreciation Tk. 50,000) 2,50,000.
Raw materials are in stock an average for one month.
Materials are in process on average for two months.

1
Finished goods are in stock on average for two months.
Credit allowed to debtors for three months and that received from suppliers of raw materials is for one
month. Lag in payment of wages half of month and Overheads one month.
Cash in hand and at bank 10% of net working capital. You may assume that production is carried on
evenlythroughout the year and overhead accrue similarly. One fourth of the output in sold against a
cash.

Problem 4:
NIPON Ltd. sells its products on a gross profit of 20% on sales. The following information is extracted
form its annual accounts,
Sales at 3 months' creditTk. 40,00,000
Raw material12,00,000
Wages paid--average time lag 15 days9,60,000
Manufactuting expenses paid--one month in arrears12,00,000
Administrative expenses paid--one month in arrears4,80,000
Sales promotion expenses-payable half yearly in advance2,00,000
The company enjoys one month's credit from the suppliers of raw materials and maintains a 2 months'
stock of raw materials and one and half month's stock of finished goods. The cash balance is maintained
at Tk.1,00,000 as a precautionary measure. Assuming a 10% margin, find out the working capital
requirements of Nipon Company Ltd.

Problem 5:
Nirmal Hridoy Ltd. has been operating 60% of his full capacity. In the year 2014 they producted 24,000
units but due to heavy demand in the local market. Management has decided to increase their
production from 60% to 90% in the next year.
Elements of cost :
Raw material per unit Tk. 30
Direct labor (40% fixed) Tk. 25
Factory overhead (80% fixed) Tk. 20
Admn. & selling overhead Tk. 5
Total cost Tk. 80
Profit sales Tk. 20
Total : Tk 100
Further related information :
(a) Raw materials are in stock 1.5 month.
(b) Materials are in process on an average 2 month.
(c) Finished goods are in stock on average 2 month.
(d) Credit allowed to purchased 3 month and suppliers 2 month.
(e) Lag payament of wages in 1 month and other expenses is. 0.5month.
f) 25% of the product is sold against cash.
(g) Keep 5% as contingencies.
(h) Expected cash balance in hand Tk. 75,000.

2
Problem 6:
Crown Cement Ltd, has been operating at 24,000 units of production per year with the following cost
structure during 2012,
Raw materials Tk. 60 P.U
Direct labour (40% fixed) 50 PU
Factory overhead (80% fixed) 40, PU
Admin. and selling Cost 10,P.U
Total 160.PU
Profit 40 PU
Selling price 200 per Unit
As an 31st December 2012, the company had the following balances:
Inventory of Raw Materialists. 3,60,000
Inventory of WIP2,20,000
Inventory of finished goods7,20,000.
It is estimated that the demand of its product will increase and the company is planning to increase
production by 50% in the next year. It is expected that because of increased volume of purchase, the
supplier of raw materials will reduce direct materials cost by 10%. Credit period allowed to debtors is 3
months andcreditors allowed 2 months. Lag in payment of wages is 15 days and other expense is one
month.
You are required to estimate the working capital requirement for the 2010 assuming minimum cash
balance requirement of Tk. 3 Lakh

Problem 7
The Board of Directors of XYZ Ltd. requests you to prepare a statement showing the requirements of
working capital for a forecast level of activity of 52,000 units in the ensuing year (25 weeks) form the
following information
made available:
Particulars Cost per Unit (Tk.)
Raw-material 400
Direct Labor 150
Overheads: Manufacturing 200
Overheads: Selling & Distribution 100
Total 850
Additional Information :
i)Selling Price Tk. 1,000 per unit
ii)Raw-material in stock Average 4 weeks
(iii) Work-in-process Average 4 weeks
(iv) Finished goods in stock Average 4 weeks
(v) Credit allowed to debtors Average 8 weeks
(vi) Credit allowed by suppliers Average 4 weeks
(vii) Cash at Bank is expected to be Tk. 50,000
(viii) 50% sales are on credit basis
(ix) All the activities are evenly spread out during the year
(x)Debtors are to be valued at sales

3
Problem 8
The cost accountant provided with the following information about production cost and other related
issues of a company. As the financial manager of the company you are required to calculate the working
capital requirement:
Expected monthly sales 32,000 units @ Tk. 10 per unit. The anticipated ratio of cost on selling price are :
Raw materials 40%, Labour 30%, Budgeted overhead Tk. 16,000 per week, Overhead expenses include
depreciation of Tk. 4,000 per week, Planned stock will include raw materials for Tk. 96,000 and 16,000
units of finished goods.
Other information :
i) Materials will stay in process for 2 weeks.
(ii) Credit period allowed to accounts receivable 5 weeks.
(iii) Credit period by suppliers 1 month.
(iv) Lag in payment of overhead 2 weeks.
(v) Cash in hand and Bank balance is expected to Tk. 25,000.
Assume that production is carried on evenly throughout the year. Wages and overheads occur similarly.
A time period of 4 weeks is equivalent to a month.

Problem 9
From the following information presented by a manufacturing company prepare a working capital
requirement forecast statement for the next year.
Expected monthly sales 64,000 units at Tk. 20 p.u. The anticipated ratios of cost to selling price are:
Raw materials 50%
Labour 30%
Budgeted overheads Tk. 40,000 per week Overhead expenses included depreciation of Tk. 8,000 per
week. Planned stock will include raw materials for Tk. 1,92,000 and 16,000 units of finished goods,
Materials will slay in process for 2 week credit allowed to customers is 5 weeks, credit allowed by
suppliers is 1 month. Lag
in payment of overhead is 2 weeks. 25% of sales may be assumed against cash and cash in hand is
experted to he TK. 1,00,000.
Assume that production is carried on evenly throughout the year and wages and overheads accrue
similarly A time period of 4 weeks is equivalent to a month.

4
 Cash Management
Problem 1:
Jamuna Company has annual sales of Tk. 5 million, cost of goods sold of 75% of sales, and purchase that
are 65% of cost of goods sold Jamuna company has an average age of inventory of 50 days, average
collection period of 30 days and an average payment period 20 days.
a. Calculate operation cycle for Jamuna;
b. Calculate cash conversation cycle for Jamuna.
c. The resources Jamuna has invested in cash conversation cycle (assuming 360-day year.)

Problem 2:
Your company has an average daily cash balance of Tk. 4,000. Total cash needed for the year is Tk.
4,80,000. The interest rate is 6% processing cost of Tk. 100 each transaction.
Calculate :
(a) Opportunity cost.
(b) Trading cost.
(c) Total cost.
(d) Comment on your company's cash strategy.

Problem 3:
Appex Ltd. estimated annual cash requirement is Tk. 30 lakhs. Annual interest rate of marketable
securities is 10%. The transaction cost of marketable securities is Tk. 50 of each time to transfer.
Required:
(a) Calculate the optimum level of cash to be maintained.
(b) Number of times the transactions should be executed in a year.
(c) Show the calculation of total cost of different levels of cash holdings (you can assume imaginary
transaction size

Problem 4:
The following details are available in respect of a firm:
(i) Inventory requirement per year 6,000 units
(ii) Cost per unit (Other than carrying and ordering costs) Tk. 5
(iii) Carrying cost per units Tk. 1
(iv) Cost of placing each order Tk. 60
(v) Alternative order sizes (units): 6,000; 3,000; 2,000;1,200; 1,000; 600; and 200

(a) Determine the EOQ. (b) Determine total inventory cost for each uint.

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Problem 5:
Jaman Co. has determined that it costs Tk. 30 to convert marketable secruities to cash and vice versa.
The marketable securities portfolio currently earn 8% annual rate of return. The variance of daily net
cash flows is estimated to be 27.000.
Requirements:
1. Return point (Z)
2. Target Balance (C)
3. Lower limit
4. Upper limit
5. Cash converted to marketable securities (upper limit)
6. Cash converted to marketable securities (lower limit).
7. Average Balance (AB)

Problem 6:
Metro Co has a policy of maintaining a minimum cash balance of Tk. 1,00,000. The standard deviation of
the company's daily cash flows is Tk. 40,000. The annual interest rate is 15%. The transaction cost of
buying on selling securities is Tk. 30 per transactions.
Required:
(a) Lower limit
(b) Upper limit
(c) Average cash balance.