FIN3 : WORKING CAPITAL MANAGEMENT

SEMESTER III PLEASE ANSWER ANY FIVE ( 5x10)

1. (a) Explain the concept of working Capital management .Discuss the dangers of having

insufficient or excess working capital in business(5) (b)The following data of Mukesh Ltd. and Anil Ltd is available: Particulars Current Assets Net Fixed Assets EBIT Sales Mukesh Ltd.( 350 50 75 3500 ) Anil Ltd.( 50 350 75 3500 )

Please calculate the Working Capital leverage for these two company at given % change in current assets and comment on the result. (5)
2. (a)What are the determinants of working capital?(4)

(b) RPG Ltd. Has been operating its manufacturing facilities till 31.12.11 on a single shift working with the following cost-price structure: Cost of material: Wages (40% Fixed): Overheads ( 80% fixed): Profit : Sales Price: 6 5 5 2 18 648000 as at company held:

Sales During the year 2011 amounted to Stock of Raw Material at cost: WIP at cost : Finished Goods at cost: Sundry debtors: 54000 33000 108000 162000

In the view of increasing demand , it is proposed to double production by working n additional shift. It is expected that a 20% discount will be available from suppliers of raw materials in view of the increased volume of business. No change in the selling price is allowed. Credit availed from the suppliers will continue to remain 2 months. Credit allowed to customers will remain unchanged. Lag in payment of wages and expenses will continue to remain at month. Please calculate the working capital requirement for single shift as well as double shift. (6)

3. (a)What are the different Inventory classification techniques? ( just mention their names and basic strategy of classifying with in two sentences for each category) (b) You have the following information of ABC Ltd.: Annual demand: 160000 units Price per unit: 20

Carrying Costs: 5% of the inventory value Cost per order: 50

Determine the optimum economic quantity by using EOQ formula and develop the following table: Size of Order No. of order Average inventory carrying cost Order cost Total Cost

10

20

40

80

100

(4+6)
4. (a).What are the factors to be considered before granting credit to a customer?

(b).A companys credit sales amount to 60,00,000 with the variable cost to sales ratio of 60 % and annual fixed cost of 12,00,000. Its credit policy is 60 days or two months. It proposes to introduce cash discount @ 2% if paid within 30 days. It is also estimated that 50% of the debtors will be recovered within one month. The required rate of return on investment in debtors may be taken at 20% before tax. Please evaluate the proposal. (4+6)

5. Prepare a cash budget for the six months ending December 2011 from the monthly budgeted operating results of the company and other additional information given below: in lakh
Month Sales

in lakh
Material purchase d and consume d

in lakh
Wage s

in lakh
Productio n

in lakh
Administratio n

in lakh
Sellin g

in lakh
Distrib n

in lakh
R&D

March April May June

8.00 12.00 9.60 6.40

3.60 6.00 5.20 3.36

0.80 1.28 1.20 0.56

0.48 0.64 0.62 0.30

0.40 0.56 0.48 0.20

0.20 0.29 0.25 0.11

0.10 0.14 0.10 0.06

0.11 0.16 0.12 0.06

July Aug Sep Oct Nov dec

8.00 8.80 11.20 12.80 14.40 16.00

3.84 4.00 4.96 6.00 6.40 8.00

0.80 0.96 1.20 1.04 1.36 1.52

0.44 0.49 0.62 0.54 0.72 0.74

0.32 0.40 0.52 0.40 0.56 0.58

0.16 0.21 0.26 0.20 0.29 0.0

0.08 0.10 0.12 0.10 0.15 0.16

0.10 0.12 0.13 0.12 0.16 0.17

A new machinery which was installed in April at a cost of 1.20 lakh is to be paid in the month of August. An extension to the research and development department amounting to 8.00lakh in total, was contemplated from September at the rate of 1.60 lakh per month. 2.40 lakhs per month are to be paid under a hire purchase scheme agreement. The sales commission of 4% on sales not included in selling overheads is to be paid within the month following actual sales. The period of credit allowed by suppliers is four months, and that allowed to customers is three months. The delay in the payment of overheads is two months and that in payment of wages is of a month. Preference share dividend of 8% on the capital of December. 8% call on equity share, at the rate of November. 160.00 lakh is payable on 1st

9.60 lakhs are due on 1st July, 1st September and 1st

Taxation of 8.00 lakhs is payable on 1st November. Dividends on investment amounting to 2.40 lakhs are expected on 1st July and 1st December respectively. Cash sales of 0.80 ls lakh per month are expected on which no commission is payable. This cash sales is not included in the details for sales given in the above table. Cash balance on 1st July was expected to be 2.00 lakh (10)

6. Explain E. W. Walkers four principles of Working Capital Management. (10)

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ANSWERS

Ans1. a)
The concept of working capital has been a matter of great controversy among the financial wizards. Different views on working capital can be classified into two groups, Viz. Gross working capital concept and Net working capital concept.

Gross Working Capital: According to this concept, working capital refers to the sum total of all current assets of the enterprise employed in the business process. This is a going concern concept, since the finance manager is highly concerned with the management of assets with a view to bringing about productivity from other assets. Net Working Capital: This concept represents excess of current assets over current liabilities. It is also that portion of a firms current assets which is financed by long term funds. Thus, the gross concept is in the nature of a quantitative definition that focuses attention on the levels of current assets for given activity. Whereas the Net working capital is in the nature of a qualitative definition which highlights the character of the sources from which the funds have been procured to support that portion of current assets which is in excess of current liabilities. In conclusion we can say that working capital management includes both the management of current assets and management of current liabilities.

Ans. 3.a) Different Inventory classification techniques are: ABC Analysis One of the widely used techniques for control of inventories is the ABC (always better control) analysis. The objective of ABC control is to vary the expenses associated with maintaining appropriate control according to the potential savings associated with a proper level of such control.

Ans. 4 a) The factors seen before giving credit are: i) ii) iii) iv) v) The income of the customer. The creditability of the customer. His previous business. His previous financial condition. The viability of paying back the loan.

Ans 6)