ABC Industries Ltd, a listed company, is a renowned player in the pharmaceutical sector. The company has availed various credit facilities from X…

CA Intermediate · Financial Management and Strategic Management · RTP · January 2026
ABC Industries Ltd, a listed company, is a renowned player in the pharmaceutical sector. The company has availed various credit facilities from X bank, namely, Cash Credit Facility, Term Loan(s), Working Capital Demand Loan, Bank Guarantee(s) / Letter of Credit. This strategic mix of various credit facilities showcases the company's balanced approach to leveraging and risk management. The company has totally 1 Lakh Equity Shares of 10 each outstanding. The company's shares are traded at a premium of 20%. The company's capital yields a healthy return rate, indicative of its operational efficiency and market competitiveness. However, it operates in a high-tax environment with an income-tax rate of 50%, which significantly impacts its net earnings and available reinvestment capital. At the beginning of the year 2024-25, the company went in for re-organisation of capital structure, with share capital remaining the same as follows: (a) Share capital - 40%, (b) 12% Preference Share Capital – 10% (c) Other Shareholders' funds - 15% (d) 15% Term Loan - 10% (e) Current Liabilities - 25% Term Loan is repayable in 5 instalments starting from 31.03.2025. Since the first instalment is not yet paid, as part of periodic review by the Bank and in order to ensure compliance with their internal and regulatory requirements, the Bank requested the company to furnish a Financial Soundness Report duly certified by your Chartered Accountant/Auditor. The report should inter alia cover various Ratios that: estimates whether the business can pay short term debts.measures the ability to meet current debt immediately.measures the ability to meet the commitment of various debt services like interest, instalment etc.measures the ability of business to meet the interest obligations.measures the ability of business to pay the preference dividend.shows how many times the cash flow before interest and taxes covers all fixed financing charges. The Chief Executive officer asked the Statutory auditor to prepare a reply letter quoting the proper ratio that covers the issues raised by the bank in this format: Issue Ratio Numerator Denominator Ideal Ratio/ Range Ratio of the Company Favourable/ Adverse

Suggested Answer and Working Notes:

Working Notes: Particulars Amount (₹) Equity Share Capital 40% of Total = Given 10,00,000 Total Liabilities 10,00,000 / 40% 25,00,000 Preference Share Capital 25,00,000 x 10% 2,50,000 Other Shareholders' funds 25,00,000 x 15% 3,75,000 15% Term Loan 25,00,000 x 10% 2,50,000 Current Liabilities 25,00,000 x 25% 6,25,000 Total Assets Total Liabilities 25,00,000 Fixed Assets 60% of Total 15,00,000 Depreciation 15,00,000 x 20% / 80% 3,75,000 Current Assets 40% of Total 10,00,000 Receivables 1/5 th of Current Assets 2,00,000 Stock, Advance Tax & Prepaid Insurance Balance 8,00,000 Quick Assets Only Receivables 2,00,000 Total Sales Receivables / 2 x 12 12,00,000 EBIT 12,00,000 x 15% 1,80,000 Interest 2,50,000 x 15% 37,500 EBT 1,42,500 PAT 1,42,500 x 50% 71,250 Preference dividend 2,50,000 x 12% 30,000 PAES 41,250 EPS (ratio measures overall profits generated for each share in existence) 41,250 / 1,00,000 0.41 Debt Equity ratio (indicates composition of capital structure in terms of debt and equity) 2,50,000 / 16,25,000 0.15 MPS FV 10 + 20% Premium 12 Market value to Book value (indicates market response of the equity shareholders' investment) 12 Lakhs / 13.75 Lakhs 0.87 PE Ratio (indicates expectations of the equity investors about the earnings of the firm) 12 / 0.41 29.27 times Earnings available for Debt services PAT + Interest + Depreciation + Instalments 5,33,750 Issue Ratio Numerator Denominator Ideal Ratio/ Range Ratio of the Company Favourable/ Adverse 1 Current Ratio Current Assets Current Liabilities 2 1.6 Adverse 2 Quick Ratio Quick Assets Current Liabilities 1 0.32 Adverse 3 DSCR Earnings available for Debt services Interest & Instalments ≥ 2 6.1 Favourable 4 Interest coverage ratio EBIT Interest > 1 4.8 Favourable 5 Preference Dividend coverage ratio PAT Preference dividend > 1 2.375 Favourable 6 Fixed charges coverage ratio EBIT + Depn Interest + Repayment of loan > 1 6.34 Favourable

Topics: Part-A: Financial Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic