INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD
End-Term Examinations – December 2010
Subject Code : IMT-07 Time Allowed : 3 Hours
Subject Name: Working Capital Management Max. Marks : 70

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

SECTION-A MARKS : 56

Q.1 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.

Q2 Write short notes on the following:

a. Gross Operating cycle

b. Certificate of Deposit
c. Forfaiting

Q3 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.

a) Calculate the EOQ

b) Calculate the total cost of the plan suggested by the EOQ
c) Determine the total number of orders suggested by this plan.
d) 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.

Q4 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 companys 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?

Q5 A firm is considering changing its credit policy from net 20 to 2/10 net 30. Its sales should increase from Rs 5
lakh to Rs 7 lakh, its cost of goods sold will go from 55% to 50% of sales. Miscellaneous administrative cost
will remain steady at Rs 40000, but collection cost will increase from Rs 20,000 to Rs30000 and bad debt
losses will go from 5 to 10% of its average accounts receivables, 40% of the customers are expected to take
the discount. This firm currently has debt of Rs 2 lakh at 6%, which include the financing costs for the funds
currently tied up in receivable. If the balance in receivables increases or decreases with the new policy, the
extra costs of funds tied up will be calculated at the 10% estimated cost of the firm’s new debt.

a) What is the likely receivable balance with each policy?

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

Q6 What is money market? Explain why there is a critical need for money market instruments.

Q7 What is conservative approach to financing firm’s funds requirement? What kind of profitability-risk-tradeoff is
involved?

ETE-Dec. 2010 Page 1 of 2 IMT-07

SECTION-B (Case Study) MARKS : 14

A Performa cost sheet provides the following particulars:

Particulars Amount per unit (Rs)

Elements of cost
Raw material 80
Direct Labour 30
Overhead 60
Total Cost 170
Profit 30
Selling Price 200

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.

ETE-Dec. 2010 Page 2 of 2 IMT-07