INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD
End-Term Examinations – December 2008
Subject Code : IMT-07 Time Allowed : 3 Hours
Subject Name: Working Capital Management Max. Marks : 50

Notes: (a) Answer any FOUR questions choosing from SECTION-A. SECTION-B (CASE STUDY) is compulsory. Each Question
(SECTION-A) carries 9 MARKS and (SECTION-B) Case Study carries 14 MARKS.
(b) No doubts/clarifications shall be entertained. In case of doubts/clarifications make reasonable assumptions and proceed.
(c) For students enrolled in January 2008 and July 2008 batches, the Question Paper would be treated for 70 marks
instead of 50 marks.

SECTION-A MARKS : 36

1. ”Liquidity & profitability are competing goals for a finance manager”. Comment.
2. Write short notes on any three of the following:
a) Collection Matrix
b) With Recourse Factoring
c) Certificate of Deposit
d) Bill Discounting
3. Differentiate between:
a) Safety stock and Danger Level
b) Gross Operating cycle and net operating cycle
c) Mail Float and Availability Float
4. Explain the concept of working capital and factors affecting the working capital requirements.
5. a) What are the different forms of bank credit ? Explain different modes in which a collateral is placed.
b) Explain the mechanism of forfaiting.
6. A firm has several items of inventory. The average number of each of these as well as their unit cost is listed
below:
Item Avg. No. of units in Avg. Cost per unit Item Avg. No. of units in Avg. Cost per unit
No. inventory No. inventory
1 4000 1.96 11 1800 25.00
2 200 10.00 12 130 2.70
3 440 2.40 13 4400 9.50
4 2000 16.80 14 3200 2.60
5 20 165.00 15 1920 2.00
6 800 6.00 16 800 1.20
7 160 76.00 17 3400 2.20
8 3000 3.00 18 2400 10.00
9 1200 1.90 19 120 21.00
10 6000 0.50 20 320 4.00
The firm wishes to adopt ABC inventory system. How should the item be classified into A, B and C categories?
7. a) A firm has current sales of Rs 720000. It is considering offering the credit terms “2/10 net 30” instead of
“net 30”.It is expected that sales will increase by Rs20000, and the average collection period will reduce
from 30 days to 20 days. It is also expected that 50 percent of the customers will take discounts and pay
on 10th day and remaining 50 percent will pay on 30th day. Bad Debt losses will remain at 2 percent of
sales. The firms variable cost ratio is 70 percent, corporate tax rate is 50 percent and opportunity cost of
investment in receivables is 10 percent . Should the company change its credit terms ?
b) Sonal Hand Tools Limited has annual sales of Rs 2.65 crore. The company has investment opportunities
in the money market to earn return of 16 percent per annum. If the company could reduce its float by 2
days, what would be the company’s total return.
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SECTION-B (Case Study) Marks : 14

An engineering company is considering its working capital investment for next year. Estimated fixed assets and
current liabilities for the next year are 2.6 crore & 2.34 crore. Sales and profit before interest and taxes depend on
current assets investments particularly inventories and book debts. The company is examining the following
alternative working capital policies:

WC policy CA Estimated Sales EBIT (Rs in crores)

(Rs in crores)
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00

Calculate:

¾ Rate of return on total assets

¾ Net working capital position
¾ Current ratio
¾ Current asset to Fixed asset ratio
¾ Also discuss risk return trade off

After analysis management decided to go for the moderate policy. The company is now examining the use of long
term & short term borrowings for financing its assets. The company will use 2.50 crore of equity funds. The
corporate tax rate is 35%. The company is considering the following debt alternatives:

Financing Policy Short term Debt Long Term Debt

Conservative 0.54 1.12
Moderate 1.00 .66
Aggressive 1.50 .16

Effective interest rate are : short term debt 12%

Long term debt 16%

Determine the following for each of the alternative policy

¾ Rate of return for equity shareholders
¾ Net working capital position
¾ Current ratio
¾ Discuss the risk return trade off

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