CASE STUDY OF

TUMKUR WATCH
COMPANY


SUBMITTED BY:
Prateek Goyal
Dinesh Jindal
Anshul Bansal
Prince Mandeep
Manish Meena

HIGHLIGHTS OF THE CASE
Set up in 20X4 to manufacture Quartz watches.
The company had taken a loan from National Industrial Bank and the
bank stipulates that, the company should maintain the following ratios at
all times
Total Liabilities to Shareholders equity-1.60(maximum)
Long term Liabilities to Shareholders equity 1.00(maximum)
Current assets to Current Liabilities -1.20(minimum)

Note: Loan amount =14000 and Interest = 12% p.a.

HIGHLIGHTS Continued.....
Company is negotiating with a manufacturer and a finance company
for taking an equipment costing 20 million on lease.
The company will have the right to use the equipment for 6 years on
an annual payment of 4.5 Million.
During this period the lease cannot be cancelled by either of the
parties.
BALANCE SHEET, SEP 30 20X4
PARTICULARS
IN THOUSANDS
EQUITY AND LIABILITITES
SHAREHOLDERS FUNDS 17000
Share capital 12000
Reserves and surplus
NON CURRENT LIABILITIES
LONG TERM BORROWINGS 25000
CURRENT LIABILITIES
Trade payables 16000
70000
ASSETS
NON CURRENT ASSETS
Fixed assets 47200
NON CURRENT INVESTMENTS 1700
BALANCE SHEET Cont......
CURRENT ASSETS
INVENTORIES 10200
RECEIVABLES 9600
CASH 1300
70000
Q. COMPUTE THE THREE RATIOS SPECIFIED. RE-
COMPUTE THE RATIOS IF THE PROPOSAL FOR
LEASE CAPITALIZATION IS ACCEPTED.
COMMENT.


TOTAL LIABILITIES TO SHAREHOLDER'S EQUITY = 41000/17000= 2.41
NON CURRENT LIABILITIES TO SHAREHOLDERS EQUITY =25000/29000=
.862
CURRENT ASSETS TO CURRENT LIABILITIES = 21100/16000= 1.31


The company is obtaining an equipment costing 20 millions, having a life of 10 years, @
lease rental of 4.5 million per annum for 6 years.
CHANGES IF THE LEASE IS TAKEN:-
Total Long term Liability = 23320 + 15500 = 38830
Current liabilities = 17680+ 4500 = 22180
Fixed Assets = 47300 + 20000 = 67300




New Ratios

TOTAL LIABILITIES TO SHAREHOLDER'S

EQUITY = 61000/29000= 2.10

NON CURRENT LIABILITIES TO

SHAREHOLDERS EQUITY =38830/29000= 1.33

CURRENT ASSETS TO CURRENT LIABILITIES =

21100/22180= 0.95



The company has violated the norms of the bank and ratios by which
they have exceeded the limits are: -
Current assets to current liabilities
Non current liabilities to shareholders equity
Total liabilities to shareholder's equity








Q. WHAT ARE THE LIKELY CONSEQUENCES OF
THE COMPANY VIOLATING THE STIPULATIONS.
HOW CAN IT AVOID THEM ?


A decreasing trend in the current ratio suggests a
deteriorating liquidity position of the business.
It also suggests that the company may not be able to pay for
its liabilities by selling all its current assets.
Increase in the long term liability company has led to the increase in
debt which is harmful as it affects the credibility of the company.
Investing in the company has become more risky due to changes in
the above 2 factors.
In order to avoid such ratios the company should have maintained
the ratios above the desired level.


Q. HOW CAN NATIONAL INDUSTRIAL BANK PROTECT
ITSELF FROM SIMILAR VIOLATIONS?

The total liabilities to shareholder's equity ratio was not within required
criteria .The bank should have kept a check on it.
The bank should keep a check on the solvency ratios of the borrower
companies from time to time so that there is low chances of fault in
payment.
The loan must be given to those borrowers whose solvency ratios is as per
the standards or above the standards.
There should be a provision regarding the cancellation of lease in case
the borrowing partys solvency is in bad position. Such case should be
strictly defined.
And lastly the policies regarding the loan must be very strict .
If the solvency ratio is not increased then analysts must figure out the
reason for it.