Financial Statement Analysis by Nawaz

FINANCIAL STATEMENT ANALYSIS
POSTGRADUATE ENGINEERING AND MANAGEMENT

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Centre Name: MSRSAS

Course Name: MBA IN ENGINEERING OPERATIONS
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Name of the Student : Syed Muthaher Nawaz
Student Registration No : HEB0909013
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FULL TIME 2009 BATCH
M. S. Ramaiah School of Advanced Studies

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Module Title FINANCIAL STATEMENT ANALYSIS
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MBA-503 FINANCIAL STATEMENT ANALYSIS Page 2

M. S. Ramaiah School of Advanced Studies

Postgraduate Engineering and Management Programme- Coventry University (UK)
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Department Management Studies
Course MBA in Engineering Operations Batch Full-Time 2009
Module Code MBA 503 Module Title Financial Statement Analysis
Module Completion
Module Leader Mr. Praveen 16-01-2010
Date
Student Name Syed Muthaher Nawaz ID Number HEB0909013
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Abstract

Table of contents
Abstract.....................................................................................................................03
List of figures............................................................................................................05
Part A
1.1 Study of literature and key
findings....................................................................05
1.2 Discussion and
interpretations.............................................................................06
1.3 Conclusions and
recommendations......................................................................07
1.4 View on future
directions.....................................................................................08
Part B
2.1.1Data collection and review of literature on current issues..................................09
2.1.2 Tactics employed by predator and Target Company.........................................13
2.2.1 Rationale and the background study of selected company...............................20
2.2.2 Inference from the income statement with emphasis on numbers talk..............21
2.3.1 Background study of combination of securities................................................23
2.3.2 Concurrence to Indian share market for benefit o share holders........................23
Part C
3.1 Calculation of Economic Order Quantity.............................................................30
3.1 Cash flow satement preparation using indirect method........................................32
3.3 Calculation of NPM, ROA, Asset turnover and Return on owner’s equity.........34
3.4 Selection of appropriate cases...............................................................................35
Part-D
Remarks on module learning outcomes......................................................................37

References..................................................................................................................39

PART-A
Problem statement:
“Major initiatives taken up by the government and reserve bank

of India in order to contain the global recession has had a positive
impact on indian financial markets”.
Critically debate and justify your arguments by assessing

financial status of business organisations during global recession.
In what factors the business organisations should lay thrust, to
consistently perform and adopt different pricing, economic and
financial strategies to prevent the effect of global recession and the
government policies adopted.
Definition of recession - A drastic slowing of the economy, where gross national or domestic
product has fallen in two consecutive quarters. A recession would be indicated by a slowing
of a nation's production, rising unemployment and falling interest rates, usually following a
decline in the demand for money. An economy, which grows over a period of time, tends to
slow down the growth as a part of the normal economic cycle. A recession normally takes
place when consumers lose confidence in the growth of the economy and spend less. This
leads to a decreased demand for goods and services, which in turn leads to a decrease in
production, lay-offs and a sharp rise in unemployment. Investors spend less; as they fear
stocks values will fall and thus stock markets fall on negative sentiment.
http://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=888, Summary of the

Annual Report of RBI for the year ended June 2009, Date: 27/08/2009
The Indian economy witnessed moderation in growth in 2008-09 in comparison with the
robust growth performance in the preceding five years. The deceleration in growth was broad
based across three major constituent segments of GDP, i.e. agriculture, industry and services.
Government consumption demand increased by 20.2 per cent, and the contribution of
government consumption expenditure to overall growth accordingly increased to 32.5 per cent

from an average contribution of 5.9 per cent in the preceding five years. Corporate
performance remained dampened, with significant fall in sales growth in the second half of
the year, and decline in profits in last three consecutive quarters of the year. In 2009-10 so far,
emerging signs of recovery are yet to indicate any clear trend, and the deficient monsoon and
the depressed export performance have to be seen along with the improving growth in core
infrastructure sector, recovering industrial production and more optimistic business outlook.
Recognizing the balance of risks to growth, the First Quarter Review of Monetary Policy for
2009-10 placed the projection for GDP growth at 6.0 per cent, with an upward bias. The
inflation environment remained highly volatile during 2008-09
For enhancing the availability of domestic liquidity, besides the usual reduction in Cash
Reserve Ratio, greater access under the Liquidity Adjustment Facility (LAF) through repose,
and unwinding of the MSS (Managed Security Service) securities, several other conventional
as well as unconventional instruments were also used depending on the nature and expected
magnitude of the demand for liquidity, such as a second LAF window providing access to
liquidity in the afternoon as against the normal LAF access in the morning, special 14 days
report facility using Statutory Liquidity Ratio (SLR) eligible securities up to 1.5 per cent of
Net Demand and Time Liabilities (NDTL) for meeting the liquidity needs of Non Banking
Financial Company (NBFCs), housing finance companies and mutual funds, advance release
of money at the request of the Government to the banks towards Agricultural Debt Waiver
and Debt Relief Scheme, increase in export credit refinance limit for commercial banks, and
special refinance facilities for specialized financial institutions such as the SIDBI, NHB and
EXIM Bank. The additional liquidity that was made available exceeded Rs.4, 00,000 crore
(by the end of the year), which is unprecedented and amounted to 7.9 per cent of GDP.
Discussion and interpretation of effect of recession on Indian economy
Article- Arab News, The Middle East's Leading English Language Daily, Tuesday 7
October 2008, Indian economy ‘faces slowdown not recession’ by, Mahmood Rafique I
(http://www.arabnews.com/?page=6&section=0&article=115219&d=7&m=10&y=2008)
The Indian economy is immune to the global mortgage crisis, failures of banks in the West
and liquidity crisis. "Indian economy is based on robust fundamentals and enjoys the status of
one of the most dynamic and growing economies in the world with over 9 percent GDP last
year." India itself is a biggest consumer market with 300 million of middle classes and the

lowest debt ratio of 22 percent of the GNP. The country enjoys the highest savings rate of 28
percent of the GDP."
Money week magazine, article titled- India can't escape the global recession, By Cris
Sholto Heaton Nov 24, 2008
Though India will not be directly impacted largely by the US recession, simply because India
is not which it was in the '80s-'90s.Although it will be immature to say that India will not be
impacted by the US recession at all the truth is that it will not get impacted adversely in the
magnitude of what everyone feels, However the fact that India is dependent on the foreign
money cannot be neglected The impact on companies could be substantial: around 40% of
new corporate debt was raised from foreign sources this year, twice as much as three years
ago. So even if local banks continue to lend, companies face something of a credit crunch.
And it's by no means certain that local banks will be lending as freely as before.
Outlook business fully loaded magazine, November 14 2009 article title- A Majority Of One
Everybody wants the liberal monetary policy regime to continue. But the RBI wants to
increase interest rates. And it calls the shots by- JOHN SAMUEL RAJA D
Some of the direct impacts of the US recession on the Indian Market are,
• Reduced liquidity in the Indian economy
• Reduced industrial output
• Reduced job opportunities
• Stock Market is lingering in the bottom
• Real estate market has started to take a beating
• Inflation has increased
• GDP has come down and the GPD forecast for the next two quarters are only average.
Views on future direction
The following measures can be adopted to tackle the recession:

• Government should hike its spending to create more jobs and boost the manufacturing
sectors in the country.
• Government should try to increase the export against the initial export.
• The way out for builders in real estate is to reduce the unrealistic prices of property to
bring back the buyers into the market.
• The falling rupees against the dollar will bring a boost in the export industry. Though
the buyers in the west might become scarce.
• Government must aim at raising finances for the incomplete projects that they are
developing.
• The oil prices decline will also have a positive impact on the importers.
• Dependence of the Indian economy on the outsourcing industry must minimize as
much as possible.
PART-B
2.1 Examine a hostile acquisition in the US/Indian and discuss the
tactics employed by both the predator and the target companies.
Do you think that the management of the target firm was trying to
defeat the bid or to secure the highest price for its stockholders?
How did each announcement by the protagonists affect their stock
prices?
2.1.1 Data collection and review of literature and current issues.
This article has been published in ‘Sanhita’ - a corporate issues magazine - by the Pune
Chapter of The Institute of Company Secretaries of India (ICSI) in July 2008
http://www.caclubindia.com/mobile/articles/display_article_list_mobile.asp?article_id=1455
A hostile takeover is an acquisition in which the company being purchased doesn’t want to be
purchased, or doesn’t want to be purchased by the particular buyer that is making a bid.

How can someone buy something that’s not for sale? Hostile takeovers only work with
publicly traded companies. That is, they have issued stock that can be bought and sold on
public stock markets.
The two primary methods of conducting a hostile takeover are the tender offer
and the proxy fight.
http://www.taxguru.in/company-law/meaning-reason-and-legal-provisions-related-to-hostile-
takeover.html
A tender offer is a public bid for a large chunk of the target’s stock at a fixed price, usually
higher than the current market value of the stock. The purchaser uses a premium price to
encourage the shareholders to sell their shares. The offer has a time limit, and it may have
other provisions that the target company must abide by if shareholders accept the offer.
In a proxy fight, the buyer doesn’t attempt to buy stock. Instead, they try to convince the
shareholders to vote out current management or the current board of directors in favor of a
team that will approve the takeover. The term “proxy” refers to the shareholders’ ability to let
someone else make their vote for them, the buyer votes for the new board by proxy.
http://money.howstuffworks.com/hostile-takeover.htm/printable
Ways of opposing a hostile acquisition
http://www.investopedia.com/articles/stocks/08/corporate-takeover-defense.asp
• Targeted company can prevent predator from hostile take over by buying back their
own stock from individual holders to increase their majority shares. Ideally owning
51% would ensure that no one could succeed in a hostile take over attempt.
• The Golden Parachute- It’s a provision in a CEO’s contract. Which states that he
will get a large bonus in cash or stock if the company is acquired. This makes the
acquisition more expensive, and less attractive.

• Another option is staggered board of director’s drags out the takeover process by
preventing the entire board from being replaced at the same time. The terms are
staggered, so that some members are elected every two years, while others are elected
every four.
• Dual-class stock- this will allow the targeted company to hold onto voting stock,
while the company issues stock with little or no voting rights to the public. That way
investors can purchase stocks, but they can’t purchase control of the company.
• The crown jewels defense - Sometimes a specific aspect of a company is particularly

valuable. For example, a telecommunications company might have a highly regarded
research and development (R&D) division. This division is the company's "crown
jewels." It might respond to a hostile bid by selling off the R&D division to another
company, or spinning it off into a separate corporation working separately
• Flip-in - This common poison pill is a provision that allows current shareholders to
buy more stocks at a steep discount in the event of a takeover attempt. The provision
is often triggered whenever any one shareholder reaches a certain percentage of total
shares (usually 20 to 40 percent). The flow of additional cheap shares into the total
pool of shares for the company makes all previously existing shares worth less. The
shareholders are also less powerful in terms of voting, because now each share is a
smaller percentage of the total.
• The people pill - High-level managers and other employees threaten that they will all
leave the company if it is acquired. This only works if the employees themselves are
highly valuable and vital to the company's success.
Who Benefits from a Hostile Takeover?
http://money.howstuffworks.com/hostile-takeover.htm/printable
While companies fight tooth and nail to prevent hostile takeovers, it isn't always clear why

they're fighting. Because the acquiring company pays for stocks at a premium price,
shareholders usually see an immediate benefit when their company is the target of an
acquisition. Conversely, the acquiring company often incurs debt to make their bid, or pays
well above market value for the target company's stocks. This drops the value of the bidder,
usually resulting in lower share values for stockholders of that company.
Some analysts feel that hostile takeovers have an overall harmful effect on the economy, in
part because they often fail. When one company takes over another, management may not
understand the technology, the business model or the working environment of the new
company. The debt created by takeovers can slow growth, and consolidation often results in
layoffs.
Another cost of hostile takeovers is the effort and money that companies put into their
takeover defense strategies. Constant fear of takeover can hinder growth and stifle innovation,
as well as generating fears among employees about job security.
Ultimately, we must measure the costs of mergers and acquisitions on a case-by-case basis.
Some have been financial disasters, while others have resulted in successful companies that
were far stronger than their predecessors were.
2.1.2 Tactics employed by predator and Target Company.
http://money.cnn.com/2004/12/13/technology/oracle_peoplesoft/
http://www.oracle.com/corporate/press/2004_dec/acquisition.html

One of the examples that can best explain a hostile acquisition is the hostile takeover of
peoplesoft by oracle, Oracle Corporation .on 13-DEC-2004 03:20 AM announced that it has
signed a definitive merger agreement to acquire PeopleSoft, Inc., for $26.50 per share
(approximately $10.3 billion). The transaction was approved by the boards of directors of
both companies and was closed by early January.
The following were the corner stone events for the battle of acquisition
• June 2 2003 PeopleSoft declares its intention to acquire JD Edwards in a $1.7bn stock-
based friendly acquisition. PeopleSoft's decision to swallow J.D. Edwards led Oracle
to launch its hostile takeover of the business software maker, according to many
analysts.
• June 6 2003 Promoted by PeopleSoft's action, Oracle launches a hostile $5.1bn cash-
based takeover bid for PeopleSoft.
• June 9 2003 the trio trade legal threats and Oracle claims PeopleSoft has threatened to
sue.
• June 10 2003 PeopleSoft says it will not sue Oracle.
• June 12 2003 PeopleSoft board of directors officially rejects Oracle's offer; JD

Edwards launches into a lawsuit against Oracle maintaining that the Oracle offer is
"illusory" and its sole aim is to disrupt the PeopleSoft/JD Edwards merger.
• June 13 2003 PeopleSoft launches its own anti-Oracle lawsuit on the grounds that
Oracle's bid is nothing but a scheme to damage PeopleSoft's sales.
• June 16 2003 in an attempt to accelerate its merger with JD Edwards, PeopleSoft

alters the terms of its agreement, converting the all-stock offer to a part cash/part stock
alternative, removing the requirement for shareholders to vote on the transaction.

• June 18 2003 Oracle increases its offer to $19.50 per share and goes to the courts in an
effort to prevent the PeopleSoft/JD Edwards acquisition going ahead.
• June 19 2003 PeopleSoft exchange offer for JD Edwards share commences;

PeopleSoft board of directors recommends that stockholders reject Oracle's revised
offer.
• June 22 2003 PeopleSoft formally rejects the revised offer from Oracle Corp.
• June 23 2003 PeopleSoft announces it would entertain bids from rival companies in an
effort to block Oracle takeover.
Business week magazine, DECEMBER 13, 2004 NEWS ANALYSIS By Jim

Kerstetter Finally, Oracle Nails PeopleSoft, Eighteen months after it began, the bitter and
bizarre takeover battle is over. The new challenge: Make this $10.3 billion deal work
The deal, which was 65% above Oracle's initial offer, was closed on January 2005. The board
of directors of both companies approved it, just three weeks after PeopleSoft had rejected a
$24-per-share offer. Oracle also won a resounding vote of confidence from PeopleSoft's
shareholders three weeks ago, when more than 60% of them decided to tender their
PeopleSoft shares to Oracle. Even so, until Dec. 13, PeopleSoft's board stood firm. It had
control of a so-called poison pill that would have allowed PeopleSoft to flood Wall Street
with new shares if Oracle gained a 20% stake, making the company too rich to acquire, even
for cash-heavy Oracle. A proxy fight at PeopleSoft's next shareholders' meeting in March
2005 had seemed likely.
The companies had also been due in Delaware court on Dec. 13 for a hearing on PeopleSoft's
poison pill. Oracle had planned to ask a judge to remove the anti-takeover provision. All
litigation between the two companies will now be dropped.
In many ways, the merger agreement was a sad ending for PeopleSoft and it’s ferociously
Loyal customers and a quiet ending to a spirited fight. Ellison & Co. showed remarkable
tenacity for a year and a half. They overcame an antitrust challenge by the U.S. Justice Dept.,

which attempted to block the takeover on grounds that it would be anticompetitive, warded
off scrutiny by the European Commission, and overcame skepticism that all they really
wanted to do was muck with PeopleSoft's planned acquisition of another software maker, J.D.
Edwards & Co.
http://www.icmrindia.org/casestudies/catalogue/Business%20strategy/Oracle%20Acquisition
%20of%20Peoplesoft-excerpts1.htm#THE_DEFENSE_STRATEGIES_
On June 30, 2003, the DOJ started its investigations into Oracle's acquisition bid. It filed a
suit on February 26, 2004, to challenge the proposed merger pursuant to Section 7 of the
Clayton Act. The trial began in June 2004. From the DOJ's viewpoint, Oracle's bid was an
attempt to eliminate its major competitor. The DOJ expressed concern that Oracle could raise
prices of its software while spending less money on product improvements. Oracle, on its
part, supported its bid as an important measure to compete with archrivals -Microsoft and
IBM.
After EC's approval, the hurdles that still remained for Oracle were PeopleSoft's poison pill
and the company's Customer Assurance Plan. PeopleSoft had instituted its poison pill defence
in 1995. The defence allowed the company's existing shareholders to purchase the company's
stock at half price in an event of a hostile takeover bid in which the acquirer had acquired 20
percent of the company's stock. The Customer Assurance Plan (CAP) was adopted in June
2003 after Oracle had made its first takeover bid. The provisions under CAP guaranteed pay
back to PeopleSoft's customers between two and five times the software licensing fees if the
company was taken over within two years or if the product support declined within four years.
Learning outcomes form the acquisition case study
From the above case study we can converse that though peoplesoft tried to defeat the bid by
tactfully using techniques like

2.2 Compare the income statements of two proprietary concerns

and critically comment on the “numbers talk” in the income
statement of the selected concerns.
2.2.1 Rationale and the background study of selected company.
http://en.wikipedia.org/wiki/Income_statement
Income statement, also referred as profit and loss statement (P&L), earnings statement,
operating statement or statement of operations, is a company's financial statement that
indicates how the revenue (money received from the sale of products and services before
expenses are taken out, also known as the "top line") is transformed into the net income (the
result after all revenues and expenses have been accounted for, also known as the "bottom
line").
It displays the revenues recognized for a specific period, and cost and expenses charged
against these revenues, including write-offs and taxes.
The purpose of the income statement is to show managers and investors whether the company
made or lost money during the period being reported. The important thing to remember about
an income statement is that it represents a period of time. This contrasts with the balance
sheet, which represents a single moment in time. Charitable that are required to publish
financial statements do not produce an income statement. Instead, they produce a similar
statement that reflects funding sources compared against program expenses, administrative
costs, and other operating commitments. This statement is commonly referred to as
the statement of activities. The donor restrictions on the funds received and expended further
categorizes revenues and expenses in the statement of activities.
The income statement can be prepared in one of two methods. The Single Step income
statement takes a simpler approach, totaling revenues and subtracting expenses to find the
bottom line. The more complex Multi-Step income statement (as the name implies) takes
several steps to find the bottom line, starting with the gross profit. It then calculates operating
expenses and, when deducted from the gross profit, yields income from operations. Adding to
income from operations is the difference of other revenues and other expenses. When
combined with income from operations, this yields income before taxes. The final step is to
deduct taxes, which finally produces the net income for the period measured.
Below given are profit and loss accounts of two proprietary concerns and evaluation of their
number talk.
In the books of Dominic

Trading and Profit & Loss Account
For the year ended 31st March 2009
To Opening Stock 95000 By Sales 10500000

To Purchases 9000000 By Closing Stock 110000
To Gross Profit c/d 1515000
1061000
0 10610000
By Gross Profit
To Salaries 180000 b/d 1515000
To Electricity, Water 32000
To Misc Office Expenses 20000
To Transportation Charges 55000
To Interest and Bank Charges 32000
To Depreciation 9900
To Net Profit 1186100
1515000 1515000

In the books of Cork

Trading and Profit & Loss Account
For the year ended 31st March 2009
To Opening Stock 95000 By Sales 10500000

To Purchases 9000000 By Closing Stock 110000
To Gross Profit c/d 1515000
1061000
0 10610000
By Gross Profit
To Salaries 195000 b/d 1515000
To Electricity, Water 48000
To Transportation Charges 60000
To Interest and Bank Charges 27000
To Depreciation 7500
To Net Profit 1177500
1515000 1515000
Calculation of profitability ratios from the given profit and loss accounts
1. Gross profit ratio
The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of
goods sold. It is a very simple idea and it tells us how much gross profit per RS 1 of turnover
our business is earning.
Gross profit is the profit we earn before we take off any administration costs, selling costs and
so on. So we should have a much higher gross profit margin than net profit margin.
2. Net Profit ratio
Net Profit ratio is used to measure the overall profitability and hence it is very useful to
proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be
able to achieve a satisfactory return on its investment
3. Operating ratio

Operating ratio shows the operational efficiency of the business. Lower operating ratio shows
higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is
generally considered as standard for manufacturing concerns. This ratio is considered to be a
yardstick of operating efficiency but it should be used cautiously because it may be affected
by a number of uncontrollable factors beyond the control of the firm. Moreover, in some
firms, non-operating expenses from a substantial part of the total expenses and in such cases
operating ratio may give misleading results.
4. Inventory turnover ratio
Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a
high inventory turnover/stock velocity indicates efficient management of inventory because
more frequently the stocks are sold, the lesser amount of money is required to finance
the inventory. A low inventory turnover ratio indicates an inefficient management
of inventory. A low inventory turnover implies over-investment in inventories, dull business,
poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods
and low profits as compared to total investment. The inventory turnover ratio is also an index
of profitability, where a high ratio signifies more profit; a low ratio signifies low profit.
Sometimes, a high inventory turnover ratio may not be accompanied by relatively high
profits. Similarly a high turnover ratio may be due to under-investment in inventories.
It may also be mentioned here that there are no rule of thumb or standard for interpreting
the inventory turnover ratio. The norms may be different for different firms depending upon
the nature of industry and business conditions. However the study of the comparative or trend
analysis of inventory turnover is still useful for financial analysis.
5.Expense ratios
Expense ratios indicate the relationship of various expenses to net sales. The operating reveals
the average total variations in expenses. But some of the expenses may be increasing while
some may be falling. Hence, expense ratios are calculated by dividing each item of expenses
or group of expense with the net sales to analyse the cause of variation of the operating ratio.

While interpreting expense ratio, it must be remembered that for a fixed expense like rent, the
ratio will fall if the sales increase and for a variable expense, the ratio in proportion to sales
shall remain nearly the same.
Domnic
1. Gross profit ratio = (gross profit/ net sales) * 100
=(1515000/10500000) * 100
=14.42%
2. Net profit ratio = (Net profit/net sales) * 100
=(1186100/10500000) * 100
= 11.29%
3. Net operating profit ratio = (Gross profit – All operating expenses) / (Sales)
={(1515000 –(18000-2000-5500-9900)} / (10500000)
=0. 11: 1
4. Operating ratio = (cost of goods sold + operating expenses) / (net sales)
Where, Cost of good sold= sales – gross profit
Cost of goods sold = 10500000-1515000= 8985000
Operating ratio = (985000 + 264900) / (10500000)
= 0.88: 1
5. Operating expenses ratio = (Total operating expenses) / (net sales)

=(264900) / (10500000)
= 0.025:1
6. Inventory turnover ratio = (cost of goods sold) / (average inventory)
Where, average inventory = (opening inventory + closing inventory) / 2
= (95000+11000) / 2
= 102500
Inventory turnover ratio = (8985000) / (102500)
= 87.65:1
Cork
Gross profit ratio = (gross profit/ net sales) * 100
=(1515000/10500000) * 100
=14.42%
Net profit ratio = (Net profit/net sales) * 100
=(1177500/10500000) * 100
= 11.21%

Net operating profit ratio = (Gross profit – All operating expenses) / (Sales)
={(1515000 –(195000-60000-7500)} / (10500000)
= 0. 11: 1
Operating ratio = (cost of goods sold + operating expenses) / (net sales)
Where, Cost of good sold= sales – gross profit
Cost of goods sold = 10500000-1515000= 8985000
Operating ratio = (985000 + 262500) / (10500000)
= 0.88: 1
Operating expenses ratio = (Total operating expenses) / (net sales)
=(262500) / (10500000)
= 0.025:1
Inventory turnover ratio = (cost of goods sold) / (average inventory)
Where, average inventory = (opening inventory + closing inventory) / 2
= (95000+11000) / 2
= 102500
Inventory turnover ratio = (8985000) / (102500)
= 87.65:1

2.2.2 Inference from the income statement with emphasis on numbers talk.

2.3 “Financial managers try to find the combination of

securities… That maximizes the market value of the firm”. Why
does pursuit of this goal benefit the shareholders?
2.3.1 Background study of combination of securities.
The ultimate aim of any individual or a firm is to maximize the profits or rate of returns or in
other words market value of one’s investment. Thus investment management is as an ongoing
process, which needs to be constantly monitored, by the way of information as this may affect
the value of rate of security or rate of return on such security.
The primary function of corporate finance is resource acquisition, refers to the

generation of funds from both internal and external sources at the lowest possible cost to the
corporation. There are two main categories of resources are equity (shares) and liability
(Borrowings). The equities are proceeds from the sale of stock, returns from investments and
retained earnings. Liabilities include bank loans or other debts, accounts payable, product
warranties and other types of commitments from which an entity derives value. The second
function of corporate finance is resources allocation and investment of funds with the intent of
increasing shareholders wealth over a period of time. There are two basic categories
investments are current assets and fixed assets. Current assets include cash, inventory and
accounts receivable. The fixed assets are buildings, real estate and machinery. In addition, the
resource allocation function is concerned with intangible assets such as goodwill, patents and
brand names.
It is the duty of financial manager of a corporation to conduct the above functions in a

manner that maximizes shareholders wealth or stock price and he must balance the interests of
owners or shareholders and creditors including banks and bondholders and other parties, such
as employees, suppliers and customers. For example a corporation may choose to invest its
resources in risky ventures in an effort to offer its shareholders the potential for large profit.
However, risky investments may reduce the perceived security of the companies bond, thus
decreasing their value in the firm must pay to borrow money in the future. Conversely, if the
corporation invests too conservatively, it could fail to maximize the value of its equity. If the
firm performs better than other companies its stock price will rise, in theory, enabling it to
raise additional funds at a labour cost, among other benefits. Practical issues and factors

influenced by corporate finance include employee’s salaries, marketing strategies customer

credit and the purchase of new equipment.
Diana R. Harrington-Corporate Financial Analysis- (2008).
The Financial decision affects both the profitability and risk of a firm’s operation. An
increase in cash holdings, for instance risk, but because of cash is not an earning asset,
converting other types of assets to cash reduces the other firm’s profitability. Similarly, the
issue of additional debt can raise the profitability of a firm, but more debt means more risk.
Striking a balance between risk and profitability that will maintain the long-term value of a
firm’s securities in the large of finance
Hence it is very important for a firm to establish a fair combination of securities by which the
market value of the firm increases. Therefore a finance manager needs to have a basic
knowledge and understanding of time value of money and risk return relationship. Hence,
while making valuation judgment about securities, the analyst constantly applies a process,
which may achieve the following.
a. A true picture of a company over a representative time span.
b. An estimate of current normal earning power and dividend payout.
c. Estimation of future profitability and growth and the reliability of such expectation.
d. Translation of all these elements into valuation of company and its securities.
The concept of time value of money provides a fundamental background for the valuation of
bonds and stocks. Therefore it is essential for a financial manager to evaluate the value of the
securities based on the available methods, which could be
• Valuation concept
• Bond value
• Equity valuation: Dividend capitalization approach or ratio approach

• Debenture evaluation
• Loan evaluation
2.3.2 Concurrence to Indian share market for benefit of shareholders.

PART C
1) Calculate the Economic Order Quantity from the following information.

Also state the number of orders to be place in a year:
Consumption of materials per annum: 10,000 Kg.
Order Placing Cost per order: Rs. 50
Cost Per Kg. of raw materials: Rs. 2
Storage Costs: 8% on average inventory
Solution:
Given that, Consumption of material: 10,000 Kg.
Order Placing Cost: Rs. 50
Cost Per Kg: Rs.2 (Cost per Kg of raw materials include Inventory cost)
Storage Cost: 8% on average inventory,
i.e. 8% of Rs.2
i.e. 0.08*2 = 0.16
Economic Order Quantity (EOQ) = √ (2*Consumption of material*order placing cost)/0.16
Hence Simplifying (2*10,000*50)/0.16
= 6,250,000
Hence √6, 250,000
= 2500
Hence EOQ=2,500 Number of orders to be placed in a year = 10,000/2,500 = 4

2)
Solution for cash flow statement
Cash Flow statement as per 31st December 2008

Particulars Amount Amount
Cash from Operating activities
Net profit as per profit and loss account 165,000.00

Add: Decrease in Debtors 30,000.00
Decrease in BR 5,000.00
Increase in creditors 25,000.00
225,000.00
Less: Increase in Stock (10,000.00)
Cash from Operations 215,000.00
Cash from Investing activities
Purchase of Fixed assets (150,000.00)
Cash from Financing activities
Purchase of Long term loan 30,000.00

Dividends paid (90,000.00)
5,000.00
Opening Cash balance 30,000.00
Closing cash balance 35,000.00

3. X Co. has made plans for the next year. It is estimated that the company will
employ total assets of Rs. 8,00,000, 50 per cent of the assets being financed by
borrowed capital at an interest cost of 8 per cent per year. The direct costs for
the year are estimated at Rs. 4,80,000 and all other operating expenses are
estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of
the direct costs. Tax rate is assumed to be 50 per cent. You are required to
calculate: (i) net profit margin; (ii) return on assets; (iii) asset turnover and (iv)
Return on owners’ equity.

SOLUTION:
The net profit is calculated as follows: -
Particulars Amount in (Rs) Amount in (Rs)
Sales(150% of Rs 4,80,000) 7,20,000
(+) Direct costs 4,80,000
GROSS PROFIT 2,40,000
Operating expenses 80,000
(+)Interest {8% of Rs 4,00,000} 32,000 1,12,000
PROFIT BEFORE TAX(PBT) 1,28,000
Tax @ 50% 64000
NET PROFIT AFTER TAX(PAT) 64000
1. Net profit margin= PAT

Sales
= 64000
720000 = 0.89 =8.9%
Net profit margin = EBIT (1-T)
SALES
=1,60,000(1-0.5)
720000 =0.111 = 11.1%
2. Return on assets = EBIT(1-T)

ASSETS
= 160000(1-0.5)

800000 =0.10 =10%
3. Asset turnover = SALES

ASSETS
= 720000
800000 = 0.09 Time
4. Return on equity = Net profit after taxes

Owner’s equity
= 64000
50% of 800000 = 64000
400000 = 0.16 = 16%

Financial Statement Analysis by Nawaz

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FINANCIAL STATEMENT ANALYSIS

POSTGRADUATE ENGINEERING AND MANAGEMENT

Centre Name: MSRSAS

FULL TIME 2009 BATCH

M. S. Ramaiah School of Advanced Studies

Date Stamp from

Course MBA in Engineering Operations Batch Full time 2009

Module Code MBA 503

Module Title FINANCIAL STATEMENT ANALYSIS

Module Start Date 21-12-2009 Submission Date 16-01-2010

Module Leader Mr. Praveen

Late submission Penalties

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 2

M. S. Ramaiah School of Advanced Studies

Written Examination – Marks – Sheet (Assessor to Fill)

Signature of Reviewer with date Signature of Module Leader with date

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 3

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 4

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 5

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 6

“Major initiatives taken up by the government and reserve bank

Critically debate and justify your arguments by assessing

http://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=888, Summary of the

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 7

Discussion and interpretation of effect of recession on Indian economy

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 8

• Reduced liquidity in the Indian economy

• Reduced industrial output

• Reduced job opportunities

• Stock Market is lingering in the bottom

• Real estate market has started to take a beating

• Inflation has increased

Views on future direction

The following measures can be adopted to tackle the recession:

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 9

2.1.1 Data collection and review of literature and current issues.

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 10

Ways of opposing a hostile acquisition

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 11

• The crown jewels defense - Sometimes a specific aspect of a company is particularly

Who Benefits from a Hostile Takeover?

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 12

2.1.2 Tactics employed by predator and Target Company.

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 13

• June 10 2003 PeopleSoft says it will not sue Oracle.

• June 12 2003 PeopleSoft board of directors officially rejects Oracle's offer; JD

• June 16 2003 in an attempt to accelerate its merger with JD Edwards, PeopleSoft

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 14

• June 19 2003 PeopleSoft exchange offer for JD Edwards share commences;

Business week magazine, DECEMBER 13, 2004 NEWS ANALYSIS By Jim

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 15

Learning outcomes form the acquisition case study

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 16

2.2 Compare the income statements of two proprietary concerns

2.2.1 Rationale and the background study of selected company.

In the books of Dominic

To Opening Stock 95000 By Sales 10500000

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 18

In the books of Cork

To Opening Stock 95000 By Sales 10500000

1. Gross profit ratio

2. Net Profit ratio

MBA-503 FINANCIAL STATEMENT ANALYSIS Page 19

Economic Order Quantity (EOQ) = √ (2Consumption of materialorder placing cost)/0.16

Hence Simplifying (210,00050)/0.16