Punjab Rubber Products LTD

Submitted by:
Zafar Ullah Gondal (BBA.F13.24)

Muhammad Adrees (BBA.F13.28)

Mohsan Hussain (BBA.F13.35)

Sohail Bilal (BBA.F13.34)

Submitted to:
Syed Zagham Abbas
Session:
2013-2017

Department of Business Administration

UNIVERSITY OF THE PUNJAB

JHELUM CAMPUS
Question # 1:

Calculate the Return on Equity for the company under the present policy and the
proposed policy. Which one yields the higher return on equity? (Assume that the
present interest is 9% is paid on the total amount of long term debt that is the total
amount of current Assets currently financed with borrowed funds is 140 million. Any
new financing pattern will total the same amount. Assume also that the change from
long-term debt to short term debt, for a portion of total debt. Is frictionless, which
means there are no penalties or fees attached to retirement of a portion of the long term
debt.

Present Policy:

Punjab Rubber Product

Balance Sheet as at 31st Dec.2003

ASSET Rupees(in millions) Liability + Equity Rupees(in millions)

Fixed Assets, net 205.00 Equity
Current Assets Paid up share 180.00
capital
Inventories 105.00 Reserves 225.00
Receivables 75.00 Long term debt 140.00
Cash & short term 15.00 Current liabilities
investment
Trade creditors 28.00
Other payables 7.00
Total 400.00 Total 400.00
Net profit = (Net Profit Margin x sale) = (0.075 x 720) = 54

Sale 720

C.G.S 666

EBIT 54

Interest (9% of 140) 12.6

EBT 41.4

Tax (35% of 401.4) 14.49

Net Profit 26.91

ROE = Net Profit / equity * 100

26.91 / 225 * 100 = 11.96%

Proposed Policy:

Punjab Rubber Product

Balance Sheet as at 31st Dec.2003

ASSET Rupees(in millions) Liability + Equity Rupees(in millions)

Fixed Assets, net 205.00 Equity
Current Assets Paid up share 180.00
capital
Inventories 105.00 Reserves 225.00
Receivables 75.00 Long term debt 39.2
Cash & short term 15.00 Current liabilities
investment
Short-term debt 100.8
Trade creditors 28.00
Other payables 47.00
Total 400.00 Total 400.00

Net profit = (Net Profit Margin x Sale) = = (0.075 x 720) = 54

Sales 720

C.G.S 666

EBIT 54

Interest

Long term (9.5% of 39.2) = 3.528

Short term (8% of 1000.8) = 8.064 11.592

EBT 42.408

Tax (35% of 42.408) 14.840

Net Profit 27.56

ROE = Net Profit / equity * 100

27.56 / 225 * 100 = 12.25%

The present policy gives 11.96% return on equity to the share holder among their investment.
But on the other hand proposed policy gives 12.25% among their investment. It shows that
proposed policy has higher yield on the return on equity.

Question # 2:

Consider increased or decreased risk related to the change in policy, and also relative to
change in ROE. Should Shahid Illahi recommend the change in policy?

Base on the finding of question no 1, we can reach in this result that due to change in policy
the risk is decrease. Because in present policy we pay 9% interest on long term debt that is
140. Now we can pay 9.5% interest on long term debt that is 39.2 and pay 8% on short term
debt that is 100.8. Now we can pay less interest than the present policy.

There is change in return on equity. In present policy the return on equity is 11.96%. But in
proposed policy the return on equity is 12.25%. In proposed policy the return on equity is
higher than the present policy.

Yes, shahid Illahi should recommend the change in policy. Because in proposed policy the
return on equity is higher than present. It is in the benefit of the share holders. Because in this
policy they get high return.
Question # 3:

Considering that companys trade payable arising out of purchase of raw material are
not significant in terms of its total liabilities, what form of short term borrowings other
than an overdraft, may the company obtain at a cost less than its current long term debt
cost?

The company trade payable is just 20% of the total liability. Whenever company can pay
interest on the total liability. Its mean that company can pay more interest than their usage, so
company can use other short term borrowing like;

Credit line:

A credit line is not a loan; it is a very favorable method of securing a loan. In short term
financing the company should go for credit line because in credit line we have to pay the
interest only that amount which we have to use.

Suppose that a company is considering expansion plans or a major expenditure, to take place
sometime within the next six months. The companys balance sheet is strong, and its need for
the loan is uncertain, or at least not immediate. The company can go to the bank and arrange
for a credit line. This is an advance reservation that makes sure that the funds are available,
and used when it is needed.

So in this way company can less there cost, because in this way company can pay cost only
that loan which they can be used no extra interest should pay by the company.

Question # 4:

What advantage does the company seem to have concerning the relationship between
inventory and sales? That is, what has likely caused the inventory-to-sales ratio to
remain at a desired level in recent time?

Firms must finance their investments in inventories and accounts receivable. Inventory
control is backbone of companys financial and management situation as well as sales comes
into this category of benefits for the company. The investment company makes in inventory
covers by sales of that inventory, sales and inventory runs parallel for the growth of
companys financial situation. If company low in inventory it will affect its production and
then sales and customer relations, similarly if company holds sufficient inventory but low
number of sales it will be a negative impact on companys financial situation and overall
reputation.

The reason to remain inventory-to-sales ratio at a desired level to make a company profitable.
If any one of them are imbalance that will effect the financial situation.

Question # 5:

What are the elements of a firms cash conversion cycle? How do these elements
interrelate to provide information concerning the ability of a firm to pay its debts?
What is the cash conversion cycle for PRP? What are the implications of a longer
conversion cycle?

The elements of cash conversion cycle are:

Convert raw material into WIP.

Convert WIP into finished goods.
Convert finished good into debtors.
Convert debtor into cash.

These elements are interrelated with each other in concerning the information to pay its debt.
If you will take notice of these elements than you can easily understand that first step is
conversion of raw material into WIP. Second step is conversion of WIP in process to finished
good. Third step is conversion finished goods into debtors and the last step is conversion of
debtor into cash. If these steps are working properly on their time than the company can
easily

pay its debts. If there is any problem in their conversion cycle that will affect the company in
paying the debt.

The cash conversion cycle of Punjab rubber product is:

Average inventory conversion period was 42 days.

Average collection period for receivables was 45 days.
Average credit received period was 60 days.
Now calculate the working capital cycle

Average retention period for finished good 42

Add: Average credit allow period 45

Sub-total 87

Less: Average credit receive period 60

Working capital cycle 27

You will notice that it takes this company 87 days to actually convert its raw material into
cash. When we deduct credit receive period from them we arrive at the net operating cycle
that is 27 days. It means that company will take 27 days to get its cash back, i.e. it receives
cash from its trade debtors 27 days after it pays its creditors for raw material.

If the cash conversion cycle of the company is longer that will affect the sale of the company.
This mean that the company will not be able to fulfill of it target to sale on time. If product is
not delivered on time to the customers that will affect the sale of the company as a result
profit will decrease. So it will decrease the trading efficiency of the company.
Question # 6:

If a downturn in the companys sales should occur, what adjustments would

management want to make quickly and accurately, relative to working capital?

If the downturn occur in the sale of the company then management should decrease their
working capital. Its mean that company should decrease their expenses. Company can
decrease there long term expenses in that situation. Because company have to pay interest on
that long term debt.

For example:

Company can purchase raw material for their special order in advance. For that company can
bear extra carrying charges. Company should purchase the raw material at the time of order
received, for that company can take short term loan to fulfill their requirement.

The one reason to occur downturn is that company trading efficiency is not good. Its mean
that company didnt fulfill their duty on time. So company should make efficient their team
and also their trading efficiency.