INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

GHAZIABAD
End-Term Examinations – June 2011
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

1. Define and describe the difference between the operating cycle and cash conversion cycle for a typical
manufacturing company.
2. What is the general objective of accounts receivable management? In what ways is it similar and different
from cash balance management and inventory management?
3. What is the significance of Economic Order Quantity to the financial manager?
4. Define the following terms:
a. Permanent asset investments
b. Temporary asset investments
c. Permanent sources of financing
d. Temporary sources of financing
5. What key variable should be considered when evaluating possible changes in the firm’s credit policy? Briefly
explain the possible effects of a more restrictive credit policy on:
a. Sales volume
b. Average collection period
c. Investment in receivable
d. Bad debt costs
6. Rohit Sportswear Company sells 750 ski parkas each year, which it purchases for Rs. 25 each. It costs Rohit
Rs. 6 to place an order for parkas and 10% to carry them in inventory.
a. What is Rohit’s economic order quantity for parkas and how many orders should it place each year?
b. What is the value of Rohit’s average parkas inventory?
c. What is the total costs of this inventory policy?
7. The Zocco Corporation has an inventory conversion period of 75 days, a receivables collection period of 38
days, and a payables deferral period of 30 days.
a. What is the length of the firm’s cash conversion cycle?
b. If Zocco’s annual sales are Rs. 3,421,875 and all sales are on credit, what is the firm’s investment in
accounts receivable?
c. How many times per year does Zocco turn over its inventory?

ETE-June 2011 Page 1 of 2 IMT-07

SECTION-B (Case Study) MARKS : 14

To increase sales from their present annual $24 million, Kim Chi Company, a wholesalers, may try more liberal
credit standards. Currently, the firm has an average collection period of 30 days. It believes that, with increasingly
liberal credit standards, the following will result:

Credit Policy

A B C D

Increase in sales from previous level (in millions) $2.8 $1.8 $1.2 $0.6

Average collection period for incremental sales (days) 45 60 90 144

The prices of its products average $20 per unit, and variable costs average $18 per unit. No bad debt losses are
expected. If the company has a pre tax opportunity cost of funds of 30%, which credit policy should be pursued?
Why? (Assume a 360 day year)

ETE-June 2011 Page 2 of 2 IMT-07