Case $1$: Mohit Adhesives Ltd$.$ Proposed adhesives project. Projected financial statements.

Cost of project and means of finance of the proposed adhesive project of Mohit adhesives

Ltd$.$ are as under:

$1.$ Cost of project

$`$ In lakh

$1$ Land $75\mathrm{.}00$

$2$ Buildings $275\mathrm{.}00$

$3$ Plant & machinery and other fixed assets $1170\mathrm{.}00$

$4$ Preliminary and public issue expenses $100\mathrm{.}00$

$5$ Margin money for working capital $250\mathrm{.}00$

Total... $1870\mathrm{.}00$

$2.$ Means of finance

$`$ In lakh

$1$ Equity capital $($Promoters$`500$ lakh$).......$FV $`10$ per share $800\mathrm{.}00$

$2$ Term loan $1070\mathrm{.}00$

Total... $1870\mathrm{.}00$

$3.$ Further information $($projected$)$

$`$ In lakh

Operating years... Year $1$ Year $2$

$1$ Sales $5000\mathrm{.}005500\mathrm{.}00$

$2$ Cost of sales $($other than depreciation, other write$-$offs and interest$)$

$($see assumptions below$)$

$3$ Dividend $($including dividend tax$)12\%12\%$

$4$ Repayment of loan....at year end $107\mathrm{.}00107\mathrm{.}00$

$5$ Current assets $($other than cash$)1000\mathrm{.}001050\mathrm{.}00$

$6$ Trade credit $120\mathrm{.}00132\mathrm{.}00$

$7$ Bank borrowings for working capital $630\mathrm{.}00655\mathrm{.}00$

$4.$ Assumptions regarding cost of sales:

The following costs have to be assumed at the respective given rates with reference to sales:

Operating years............. Year $1$ Year $2$

Costs Rates

$1$ Raw materials consumed $50\%50\%$

$2$ Power $2\%2\mathrm{.}31\%$

$3$ Wages and factory salaries $4\%4\mathrm{.}50\%$

$4$ Factory overheads $2\mathrm{.}50\%2\mathrm{.}80\%$

$5$ Office salaries $6\mathrm{.}50\%7\mathrm{.}25\%$

$6$ Administrative expenses $4\%4\mathrm{.}50\%$

$7$ Selling expenses $15\%15\%$

Chapter $12$The Process of Projected Financial Statements $323$

Other Assumptions:

$1.$ Interest on term loan has to be paid @ $12\mathrm{.}50\%$ pa$.$

$2.$ Interest on bank borrowings for working capital has to be paid @ $12\mathrm{.}75\%$ pa$.$

$3.$ The bank borrowings shown above will be raised in the beginning of the respective

year and will remain utilized all through the year.

$4.$ The depreciation rates under the SLM for company law purposes are as follows:

Building $3\mathrm{.}34\%$

Plant & machinery and other fixed assets $4\mathrm{.}75\%$

$5.$ The depreciation rates for income tax purposes under the WDV method are as

follows:

Building $10\%$

Plant & machinery and other fixed assets $15\%$

$6.$ Preliminary and public issue expenses have to be written off equally over $5$ years.

$7.$ Income tax provision is to be made @ $30\%.$ Ignore surcharge and minimum alternate

tax $($MAT$).$

Required:

Prepare the following projected financial statements:

$1.$ Profitability estimates for first $2$ operating years.

$2.$ Balance sheets as at the end of gestation period and first $2$ operating years.

$3.$ Cash flow statements for the gestation period and first $2$ operating years