Question

In: Accounting

5. Following information is available for two companies. Analyze the information and answer the questions: a....

5. Following information is available for two companies. Analyze the information and answer the questions: a. M G Industries manufactures various types of industrial chemicals. The company had a total asset turnover of 2.5 times for the year ended 31st March 2019. The sales for the year were ₹ 35,50,000. Total assets were ₹ 12,35,890 as on 31st March 2018. Assume that compared to 31st March 2019, total assets were projected to increase by 12% by 31st March 2020. The company projected a total asset turnover of 2.8 times for the year ending 31st March 2020. Given this information, what are the projected sales for year ending 31st March 2020? b. An airline company has taken many aircrafts on lease. Its EBIT for the year ended 31st March 2019 was ₹124.68 crores. Interest coverage ratio was impressive at 5.6 times. However its fixed charges coverage ratio was only 1.4 times. The fixed charges were lease rentals for the aircrafts. Given this information, calculate the lease rentals for the year.

Solutions

Expert Solution

5. Given, Total asset turnover ,yr. ended 2019= 2.5 times
ie. Sales/Av.Total Assets=2.5
Sales for the year = ₹ 35,50,000
TA 2018 1235890
Substituting in the above formula,
3550000/((1235890+x)/2)=2.5
So, TA 2019 1604110
So,
TA 2020
1604110*1.12= 1796603
Given,ATO, 2020=
ie. Sales/Av.TA(2020)=2.8
Sales/((1604110+1796603)/2)=2.8
Sales 2020=4761000
ANSWER:
Projected sales for year ending 31st March 2020= 4761000
b..
Fixed charges coverage ratio=(EBIT+Fixed charges Before taxes)/(Fixed chages before taxes+Interest)
So,
first, we need to find the interest , by using the interest coverage ratio
ie. Interest coverage ratio=EBIT/Interest expense
ie. 5.6=124.68/Interest expense
Interest expense=124.68/5.6=
22.26428571
Now, substituting in the FC Coverage ratio
1.4=(124.68+FCBT)/(FCBT+22.26429)
Solving the above, we get the fixed charges before taxes(ie. Lease rentals)
233.75
crores
ANSWER:
Lease rentals for the year --- 233.75 cr.

ekkarill92 answered 4 months ago
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