MANAGING FINANCIAL PRINCIPLES AND TECHNIQUES
Aim
This unit provides the learner with the skills to apply financial principles relevant to strategic management in an organizational context, including forecasting, capital appraisal, budgeting, financial appraisal and analysis.
Summary of Learning Outcomes
To achieve a pass learners must demonstrate the ability to deal with each of the following outcomes:
1 Be able to apply cost concepts to the decision-making process
2 Be able to apply forecasting techniques to obtain information for decision making
3 Be able to participate in the budgetary process of an organisation
4 Be able to recommend cost reduction and management processes for an organisation
5 Be able to use financial appraisal techniques to make strategic investment decisions for an organisation
6 Be able to interpret financial statements for planning and decision making
Assignment Brief
Tata Motors Limited
Tata Motors Limited is India’s largest automobile company and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. It is the world’s fourth largest truck and bus manufacturer.
Established in 1945, Tata Motors’ presence indeed cuts across the length and breadth of India. The company’s manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand), Sanand (Gujarat) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains.
Tata Motors is the first company from India’s engineering sector to be listed in the New York Stock Exchange (September, 2004). It has, through its subsidiaries and associate companies, operations in the UK, South Korea, Thailand, Spain and South Africa. The company’s commercial and passenger vehicles are also being marketed in several countries in Europe, Africa, the Middle East, South East Asia, South Asia, CIS, Russia and South America.
With over 4,500 engineers and scientists, the company’s Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India’s first Sports Utility Vehicle and, in 1998, the Tata Indica, India’s first fully indigenous passenger car.
In January 2008, Tata Motors unveiled its People’s Car, the Tata Nano, which India and the world have been looking forward to. The Tata Nano has been subsequently launched, as planned, in India in March 2009. A development, which signifies a first for the global automobile industry, the Nano brings the comfort and safety of a car within the reach of thousands of families.
Tata Motors is equally focussed on environment-friendly technologies in emissions and alternative fuels. It has developed electric and hybrid vehicles both for personal and public transportation. It has also been implementing several environment-friendly technologies in manufacturing processes.
Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations.
With the foundation of its rich heritage, Tata Motors today is etching a refulgent future.
Official Website: http://www.tatamotors.com/know-us/company-profile.php
Task 1
1.Explain the importance of costs in the pricing strategy of Tata Motors Limited. (A.C: 1.1)
2.Design a costing system for use within Tata Motors Limited. (A.C: 1.2)
3.Propose improvements to the costing and pricing systems used by Tata Motors Limited presently, keeping in view the future contingencies. (A.C: 1.3)
Task 2
1.Apply forecasting techniques to make cost and revenue decisions in Tata Motors Limited. (A.C: 2.1)
2.Assess the sources of funds available to Tata Motors Limited. (A.C: 2.2)
Task 3
1. Explain the advantages and disadvantages of Zero based budgets and its relevance/appropriateness to the Tata Motors Limited. (A.C: 3.1)
2. Kumar Ltd. wished to arrange overdraft facilities with the bankers during the period May to July 2014. Prepare a cash budget for the above period from the following data, indicating the extent of the bank facilities the company will require at the end of each month. You are also required to show clearly any necessary workings. (A.C: 3.2)
Month Sales (Rs.) Purchase (Rs.) Wages (Rs.)
March 148000 134000 11000
April 156000 136000 12000
May 152000 170000 13000
June 144000 180000 12000
July 136000 150000 11000
Notes:
(i) 50% of the credit sales are realized in the month following the sales and the remaining in the second month following. Creditors are paid in the month following the month of purchase.
(ii) Cash at bank on 1.05.2014 is Rs.23,000.
(iii) Assume that payments are made in the month in which the costs are incurred.
3. Using a flexible budgeting approach, redraft the control statement below based on ‘Absorption’ and ‘Marginal’ costing methods. Assume Selling Price as Rs.150. (A.C: 3.3)
Original Budget Actual Results
Sales units 1400 1500
Costs: Rs. Rs.
Direct Materials 11200 12400
Direct Labour 14800 23800
Variable Overheads 30000 33600
Fixed Overheads 42000 38800
Total Cost 98000 108600
4. Evaluate the differences between the flexed budget and the actual results in Task-3.3. (A.C: 3.4)
Task 4
1. Recommend processes that could manage cost reduction in Tata Motors Limited. (A.C: 4.1)
2. Evaluate the potential for the use of Activity Based Costing (ABC) in Tata Motors Limited. (A.C: 4.2)
Task 5
1. Allwin Ltd. is considering two different projects for investment purpose. The anticipated cash flows of both the projects are given below. The cost of capital of the firm is 10%. You are required to calculate the NPV and IRR of both the projects and interpret the results assuming that the projects Alpha and Beta are (i) independent, (or) (ii) mutually exclusive. (A.C: 5.1)
Particulars Expected Cash Flows
Period Project Alpha Project Beta
0 (50000) (50000)
1 11000 15000
2 13000 14500
3 14000 13000
4 14500 12000
5 15000 11000
2. Novotel Ltd. is considering a new investment alternative Project-X which incurs an initial investment of Rs. 100,000. The expected cash flows from the project for its life period of 5 years are given below. The cost of capital of the company is 12% and it expects an inflation rate of 10% which affects the cash flows associated with the new investment alternative. Calculate the NPV and IRR of Project-X adjusting inflation factor to the cash flows and interpret the results accordingly. (A.C: 5.2)
Period Expected Cash Flows
0 (100000)
1 24000
2 25000
3 27000
4 32000
5 34000
3. Tango Ltd. is considering a new investment alternative Project-X which incurs an initial investment of Rs.70,000. The expected cash flows from the project for its life period of 5 years are given below. The company is planning to raise debt capital of Rs.100,000 for proposed project at 10% rate of interest. The cost of capital of the company is 15% and the tax rate applicable is 35%. Calculate the NPV and IRR of Project-X with adjusting the tax advantage on interest payment to the cash flows and interpret the results accordingly.
Period Expected Cash Flows
0 (70000)
1 15000
2 16000
3 17600
4 20000
5 21000
Task 6
1. You are required to calculate the following financial ratios from Balance Sheet(s) and Profit and Loss Account(s) of Sunfeast Ltd. which are provided below and interpret the results. (A.C: 6.1)
(i) Current ratio
(ii) Quick ratio
(iii) Interest coverage ratio
(iv) Gross profit ratio
(v) Net profit ratio
(vi) Debt-equity ratio
Balance Sheet(s) of Sunfeast Ltd. as on 31 March, 2013 and 2014
Year 2013 2014 2013 2014
Liabilities Amount (Rs.) Amount (Rs.) Assets Amount (Rs.) Amount (Rs.)
Share Capital 400,000 400,000 Fixed Assets:
Bonds/Debentures 200,000 220,000 Equipment 660,000 700,000
Bank Loans 120,000 100,000 Less: Depreciation 80,000 100,000
Sub-Total 720,000 720,000 Sub-Total 580,000 600,000
Current Liabilities: Current Assets:
Creditors 320,000 280,000 Cash 128,000 100,000
Wages Outstanding 80,000 60,000 Debtors 210,000 150,000
Overdraft 100,000 75,000 Stock 242,000 200,000
Loans and Advances 80,000 65,000 Marketable Securities 140,000 150,000
Total 1,300,000 1,200,000 Total 1,300,000 1,200,000
Profit and Loss A/c of Sunfeast Ltd. for the year(s) ended 31 March, 2013 & 31 March, 2014
Year 2013 2014
Particulars Amount (Rs.) Amount (Rs.)
Sales 235,000 285,000
Cost of goods sold 132,000 135,000
Gross profit 103,000 150,000
Operating expenses 53,000 66,000
Profit before interest and taxes 50,000 84,000
Interest 20,000 24,000
Profit before taxes 30,000 60,000
Tax@35% 10,500 21,000
Profit after taxes 19,500 39,000
2. Using the information below, carry out a performance audit of the organisation and suggest ways in which the ratios can be improved. (A.C: 6.2)
Particulars 2013 2014 Industry Average
Gross profit margin 22.50% 23.50% 22.50%
Quick ratio 1.33 1.32 1.32
Return on equity 22.50% 22.50% 23.50%
Return on capital employed 13.15% 13.25% 13.25%
Earnings per share 12 13 12
Debtors collection period 30 days 28 days 30 days
3. Use the Balanced scorecard by Kaplan and Norton to assess the performance of a company of your choice. (AC-6.3)
Submission Guidelines:
• Your submission should be in a report format (500) words for each task. (6) task *500=3000
• Abstract should be in a report format (150) words.
• Introduction should be in a report format (100) words.
• Conclusion should be in a report format (250) words.
• References.
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