MANAGEMENT PROGRAMME
Term-End Examination
June, 2005
MS-41 : WORKING CAPITAL MANAGEMENT
Time : 3 hours
Maximum Marks : 100
(Weightage 70%)
Note : There are three Sections A, B and C.
Section A is meant only for the students, who have registered for MS-41 prior to July, 2004, i.e. upto January, 2004 semester.
Section B is meant only for the students registered for MS-41 from July, 2004 semester onwards.
Section C is compulsory for all the students.
SECTION A
Note : Attempt only two questions. All questions carry 20 marks each.
1. Explain what is a Letter of Credit (LC). How is it different from bank guatantee ? Also, discuss the role of LC in promoting trade and provide non-fund based source of finance for working capital.
2. (a) 'Working Capital decisions deal with decisions ensuring an optimum mix and level of current assets and current liabilities.' Elucidate the statement.
(b) What is a credit policy ? Why does a firm need it ? How is it evaluated ?
3. Distinguish between the following :
(i) Liquidity and Profitability in Working Capital Decisions
(ii) Operating Cycle and Cash Conversion Cycle
(iii) ABC Analysis and VED Analysis as methods of inventory classification
(iv) Public Deposits and Certificate of Deposits
SECTION B
Note : Attempt any two questions. All questions carry 20 marks each.
1. 'Ratio Analysis is an effective tool used by the management of a firm for better planning and control of working operations.' Discuss in the light of the above statement the importance of Ratio Analysis in Working Capital Management. AIso explain the difference between Current Ratio and Acid-test Ratio.
2. (a) Discuss about Commercial Paper as a source of financing working capital requirement of a firm.
(b) Explain the role of Cash Forecasting in Cash Management. Describe briefly any two methods of cash forecasting.
3. Ting Tot Limited furnished the following Balance Sheets as on 31st December for the years 2003 and 2004.
Balance Sheet as on December 31
(Rs. in lakh)
Liabllities 2003 2004
Equity Share Capital 10,000 10,000
General Reserve 1,400 1,800
Profit and Loss A/c 1,600 1,300
Sundry Creditors 800 540
Outstanding Expenses 120 80
Provision for Taxation 1,600 1,800
Provision for Bad Debts 40 60
15,560 15,580
(Rs. in lakh)
Assets 2003 2004
Patent Rights 1,200 1,100
Land 4,000 3,700
Building 3,700 3,600
Investments 1,000 1,100
Inventories 3,000 2,340
Receivable 2,000 2,220
Bank Balance 660 1,520
15,560 15,580
Following additianal information has also been supplied : (i) A piece of land sold for Rs 400 lakhs during 2004.
(ii) Depreciation amounting to Rs 700 lakhs charged on building during 2004.
(iii) An interim divided proposed and distributed during the year 2004 was Rs. 200 lakhs.
You are required to prepare a Cash Flow Statement.
SECTION C
Note : Attempt any three questions. All questions carry 20 marks each.
4. (a) Explain the objectives of Receivables Management.
(b) Briefly explain the purposes of the following models :
(i) Baurnol Model
(ii) Miller and Orr Model
5. Mr. A.K. Seth is supposed to develop a plan for the effective cash management of M/s South-North Textile Limited. The company adopts a six-month time span, subdivided into monthly intervals for its cash budget. Mr. Seth has collected the following relevant information in this regard :
(A) The following information is available in respect of the operations of the company :
Months (Rs.in lakhhs)
1 2 3 4 5 6
1. Sales 40 50 60 60 60 60
2. Purchases 1 15 2 2 2 1
3. Direct Labour 6 7 8 8 8 6
4. Mainufacturing Overheads 13 13.5 14 14 14 13
5. Administrative Expenses 2 2 2 2 2 2
6. Distribution Expenses 2 3 4 4 4 2
7. Raw Materials (30 days credit) 14 15 16 16 16 15
(B) The following financial flows are expected during the period of six-months :
(Inflows) :
(i) Interest received in month 1 and month 6, Rs. 1 lakh each.
(ii) Dividend received during months 3 and 6, Rs. 2 lakhs each.
(iii) Sale of shares in month 6, Rs. 160 lakhs.
(Outflows) :
(i) Interest paid in monrh 1, Rs. 0.4 lakh.
(ii) Dividend paid during months 1 and 4, Rs. 2 lakhs each.
(iii) Instalment payment on machine in month 6, Rs. 20 lakhs.
(iv) Repayment of loan in month 6, Rs. 80 lakhs.
(C) Assume that 10% of each month's sales are for cash; the balance 90% are on credit. The terms and credit experience of the company are
(i) No cash discount.
(ii) 1% of credit sales is returned by the customers.
(iii) 1% of total accounts receivables is bad debts.
(iv) 50% of all accounts that are going to pay, do so within 30 days.
(v) 100% of all accounts that are going to pay, do so within 60 days.
Assume that you are Mr. Seth. You are required to prepare a cash budget for the next 6 months.
6. (a) A firm has lead time demand distribution which is given below. It has astimated carrying cost 20% p.a. of price, which is Rs. 100. Shortage cost is also estimated at Rs. 25 per unit per period of time.
Lead time
demand 20 30 40 50 60
Probabiliiy 0.20 0.25 0.15 0.30 0.10
Determine the optimum reorder level.
(b) A processing plant has a requirement of a particular chemical which is 40 kg per week. The cost of ordering is Rs. 150 per order, holding cost is Re. 100 per kg per week, and no shortages are permitted. Vendor A will supply the chemical at Rs. 1100 per kg. Vendor B quotes the following price schedule (where X is the order quantity) :
kgs Price per kg
0 ≤ X < 100 Rs. 11.50
100 ≤ X < 200 Rs. 11.20
200 ≤ X < 400 Rs. 10.80
400 ≤ X Rs. 10.50
Which source would you prefer and what will be the minimum cost order size ?
7. The details of XYZ Company's product, costs, stock and plans, liabilities are as follows :
Activity Level
Produce 10,000 units of Product 'X' in a period of four weeks. There is no opening stock for the product.
Cost Structure of Product
Raw material = Rs. 75 per unit
Labour costs = Rs. 60 per unit
Variable Overheads= Rs. 25 per unit
Fixed Overheads= Rs. 16,00,000 per 4 weeldy period
Selling price = Rs. 500 per unit
Levels of Stock Planned
(i) Raw materials : 2 weeks consumption
(ii) Work-in-Process : 4 weeks
(iii) Finished Goods : 2 weeks supply
(iv) Debtors settle the bills six weeks after supply
Current Liabilities Structure
(i) Raw materials paid for at the end of the month in which delivery is made.
(ii) Expense creditors allow an average of six weeks credit.
You are required to estimrate the level of working capital needed for the year. You may assume 48 weeks in a year and 4 weeks in a month for computation purposes.
8. Write short notes on any four of the following :
(i) Current Assets and Fixed Assets
(ii) Terms of credit
(iii) Euromarkets as a source of financing
(iv) Maximum Permissible Bank Finance
(v) Motives of holding Cash in a firm
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