IMT – 07: WORKING CAPITAL MANAGEMENT-MT2

PART - A

Q1. Explain the concept of working capital and factors affecting the working capital requirements. 

Q2. A firm is considering changing its credit policy from 20 to 2/10 net 30, its sales should increase from Rs 5,00,000 to Rs 7,00,000, its cost of goods sold will go from 55% to 50% of sales. Miscellaneous administrative cost will remain steady at Rs 40,000, but collection cost will

increase from Rs 20,000 to Rs 30,000 and bad debt losses will go up from 5% to 10% of its

average accounts receivables, 40% of the customers are expected to take discount. The firm

currently has debt of Rs 2,00,000 at 6%, which include the financing cost for funds currently

tied up in receivables. If the balance in receivables increase or decreases with the new policy,

the extra cost of funds tied up will be calculated at @ 10% estimated cost of the firms new debt.

a. What is the likely receivables balance under each policy?

b. What will be the forecasted net income after taxes with each policy?

Q3. Current assets are financed through a mix of short term and long term funds. Discuss the

statement and explain the various approaches in this context.

Q4. What is money market? Explain why there is a critical need for money market instruments.

 Q5. What is factoring? What are the types of factoring? Explain how factoring is different from bill discounting. 

PART – B 

Q1 Discuss the following

·         Impact of inflation on working capital requirement

·         Commercial paper 

Q2 Sadhan Nitro Company currently maintains a centralized billing system to handle average daily collections of Rs 4,50,000. The total time for mailing , processing, and clearing has been estimated at 4 days.

a) If the company’s opportunity cost on short term funds is 15%, how much this time lag of 4

days costing the company?

b) If management has designed a system of lock boxes with regional banks that would have reduced the float by 1.5 days & centralized billing system expense by Rs52000 annually, what is the largest total amount of required compensating balance that the firm would be willing to accept with the lock box management? 

Q3 Discuss the following tools of inventory management:

·         FNSD analysis

·         VED analysis

·         Pareto analysis

·         GOLF analysis 

Q4 Explain the procedure adopted for selecting a customer to whom the credit facilities are

provided.

Q5 Write short notes on:

·         Letter of credit

·         Collection experience matrix 

PART – C

Q1 Differentiate between

ü  Payment float and receivable float

ü  Budgeting and forecasting 

Q2 Raina Paint Company uses 60,000 gallons of pigment per year. The cost of ordering is Rs400 per order, and the cost of carrying the pigment in inventory is Rs 2 per gallon per year. The firm uses pigment at a constant rate every day throughout the year.

Calculate the EOQ

ü  Calculate the total cost of the plan suggested by the EOQ

ü  Determine the total number of orders suggested by this plan.

ü  Assuming that it takes 20 days to receive an order once it has been placed, determine the reorder point in terms of gallons of pigment by using 360 day in a year. 

Q3 Explain the norms suggested by Tandon Committee for providing bank credits.

Q 4 From the following data compute the duration of operating cycle for two years & comment on the increase/decrease:

You can assume 360 days in a year

Q5 What is meant by budgetary control system? What are the objectives & requisites of successful budgetary control system?

CASE STUDY – I

A Performa cost sheet provides the following particulars:

The following further particulars are available: 

Raw Material in stock, on average, one month; Material in process ( completion stage 50%), on

average, half a month; Finished goods in stock, on average , one month.

Credit allowed by suppliers is one month; credit allowed to debtors is two months; average time lag in payment of wages is 1.5 weeks and one month in overhead expenses; one fourth of the output is sold against cash ; cash in hand & cash at bank to be maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed to finance a level of activity of 1,04,000 units of production. You may assume that production is carried on evenly through out the year , and wages and overheads accrue similarly. For calculation purpose , 4 weeks may be taken as equivalent to a month.

CASE STUDY – II

Prepare the cash budget for April-October from the following information supplied by Shah Agencies Ltd.

Balance Sheet as at 31st March 2010

Sales and expenditure on salaries are expected to be as under:

The other expenses per month are : Rent 1000/-,Depreciation 1000/-,Miscellaneaous expenses 500/- and commission 1 percent of sales. Out of the total sales , 80 percent is on credit and 20 percent of cash ; 70 percent of credit sales are collected in the first month following sale and the balance in second month. There are no bad debt losses. Gross margin on sales on an average is 30 percent . Purchases equal to the next month sale are made every month & they are paid during the month in which they are made . The firm maintains a minimum cash balance of Rs 10000/-. Cash deficiencies are made up by the bank loans whish are repaid at the earliest opportunity available and cash in excess of Rs 15000/- in securities (ignore interest on bank loan & securities). Outstanding liabilities remain unchanged. Debtors pertain to credit sales of March .