Question

(b) Suppose in a market the average return on common stock is 10 percent, while the return on government bond is 6 percent. Find out the cost of capital using CAPM if: (i) risk associated with the firm in question B = 1, (ii) B=0.5. 4+2 8. (a) What is Economic Order Quantity (EOQ)? (b) Company XYZ faces an annual demand of 5,40,000 units. The purchase price of stock is Rs. 24 per thousand units, with a cost of ordering of Rs. 4. The cost of holding stock is 20 percent of average stock value. Find the optimum order quantity and minimum acquisition cost. 2+4 9. Describe briefly the Japanese model of governance. What are its merits and demerits? How does it differ from the Anglo-American model? 2+2+2

Please solve 8b)

Answer 1

8(b).

A = Annual demand ie. 540,000 units per annum.
P = Purchase Price ie. Rs 24/unit
O= Ordering Cost ie. Rs 4
C = Inventory carrying cost = ₹24× 20% = Rs 4.8

Economic Order Quantity (EOQ) =  √(2AO/C)

Ie. √(2×5,40,00×4/4.8)

=〉 √(43,20,000/4.8)

=〉 √9,00,000

=〉 Therefore, EOQ= 948.68 ≈ 949.

Hence optimum order quantity = 949 units

Calculation of Minimum Acquisition cost:

Minimum acquisition Cost = Total Purchase Cost + Total Ordering Cost + Total Inventory Carrying cost.

Total Purchase Cost = A × Purchase Cost per unit

Ie. =〉 5,40,000 × 24

=〉 ₹1,29,60,000.

Total Ordering Cost = (A/EOQ)×O

Ie. =〉 (5,40,000/949)×4

=〉 596 × 4

=〉 ₹2,276.

Total Inventory Carrying Cost = (EOQ+0/2)×C

Ie. =〉 (949+0/2)×4.8

=〉 474.5 × 4.8

=〉 ₹2,277.6 ≈ ₹2,278

Therefore Minimum Acquisition cost = ₹(1,29,60,000 + 2,276 + 2,278)

₹1,29,64,554.

Hence minimum cost of Acquisition = ₹1,29,64,554.