Financial Management - Important Factors That Affect Cash Flows Especially Contraction of Cash Flows Like Sales Volume, Sales Price, Raw Materials Expenditure, and so on, Are Identified and the Analysis Is

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FINANCIAL MANAGEMENT

NO. 1

ZIP ZAP ZOOM CAR COMPANY

The methodology undertaken is as follows :

(a) Important factors that affect cash flows (especially contraction of cash flows), like sales

volume, sales price, raw materials expenditure, and so on, are identified and the analysis is

carried out in terms of cash receipts and cash expenditures.

(b) Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and

future expectations are combined with past data, to describe limits (maximum favourable),

most probable and maximum adverse) for all the factors.

(c) Once this information is generated for all the factors affecting the cash flows, Mr.

Longsighted comes up with a range of estimates of the cash flow in future recession periods

based on all possible combinations of the several factors. He also estimates the probability of

occurrence of each estimate of cash flow.

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard

deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr.

Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in

the most adverse industry conditions. Thus, the firm should take up only that amount of additional

debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.

Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Analyse the debt capacity of the company.

NO. 2

COOKING LPG LTD

DETERMINATION OF WORKING CAPTIAL...