Unity University

Department of Accounting & Finance

Financial Management II
Examples – Ch 1
Instructor: Meskerem B.

1. Consider the following data for Moon Company.

Jan. Year 2 Dec.31 year 2
Inventory Br 20,000 Br 38,000
Accounts Receivable 44,000 29,000
Accounts Payable 10,000 12,000
Additional Information ( Take 360 days for the year)
Net credit sales ……………………………….. Br 50,000
Costs of goods sold ……………………….. 40,000
a) Calculate the OC and CCC for the year b) Interpret the result
2. Target Company has an inventory conversion period (ICP) of 125 days, a receivable
collection period of 45 days and a payable deferral period of 20 days. Assume 360 days per
year.
a) What is the length of the firm’s CCC?
b) If the Companies annual sales are Br 4 million of which 85% is on credit, what is the
firm’s investment in accounts receivable?
c) How many times per year does the company turnover its inventory?
d) Calculate the average investment in inventory.
3. Zoom Company has current assets of Br 50 million and current liabilities of Br 25 million .
Boom Company has current assets of Br 70 million and current liabilities of Br 45 million .
For both firms, calculate
a) GWC c) NWC
b) Current Ratio d) NWC Ratio
4. A firm’s total assets consists of fixed assets and current assets . It has fixed assets of Br 77
million. The firm has financed its total assets by total funds of Br 155 million which
comprises shareholders’’ funds, borrowings and current liabilities. The shareholders’’ funds
are Br 50 million . The current ration of the firm is 1.8. Calculate
a) CATO ratio c) FATO ratio

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 b) Current liabilities to total funds ratio
5. Firm X has CATO ratio of 1.20 and Current liabilities to total funds of 0.60 . Firm Y has CATO
ratio of 0.90 and current liabilities to total funds of 0.78 which firm has a less working
capital risk and why?
6. A Company has raw material inventory of Br 120 million . During the year, company’s
consumption of material was Br 480 million . What is the company’s raw material
conversion period?
7. A firm has a closing WIP inventory of Br 60 million . The cost of production is Br 540 million.
Calculate the firm’s WIP conversion period.
8. A firm has FG inventory of Br 150 million . The firm’s CGS is Br 560 million. What is the firm’s
FG inventory conversion period?
9. A firm sells 70% of its goods on account. The firm’s sales are Br 10 million. It has outstanding
debtors of Br 1.2 million . What is the firm’s debtors’ conversion period?
10. A manufacturing company has credit purchases of Br 6 million , its outstanding ( bills
payable ) are Br 2.3 million. Calculate the firm’s creditors’ payable period.
11. Smooth Company sells on terms of 3/10 ,net 30. Total sales for the year are Br 900,000. 40%
of customers pay on the 10th day and take discount ; the other 60% pay , on average, 40
days after their purchases. Assume 360 days per year. ( Assignment )
a) What is the DSO?
b) What is the average amount if receivables?
c) What would happen to average receivables if Smooth tightened its collection policy
with the result that all non-discount customers paid on the 30th day
12. Zoom Company is trying to determine the effect of its inventory turnover ratio and DSO on
its cash flow cycle. Zoom’s year 6 sales ( all on credit ) were Br 150,000 and it earned a net
profit of 6% or Br 9,000. It turned out its inventory 6 times during the year and its DSO was
36 days. The firm had fixed asset totaling Br 40,000. Zoom’s payables deferral period is 40
days. Assume 360 days per year.
a) Calculate Zoom’s CCC
b) Assume Zoom holds negligible amounts of cash and marketable securities, calculate
its TATO and ROA

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 c) Suppose Zoom’s managers believes that the ITO can be raised to 8 times. What
would Zoom’s CCC, TAO & ROA have been if the ITO had been 8 times for Year 6
13. A Company estimates is total funds requirements to be Br 150,000 of which Br 10,000 is the
average seasonal funds requirements, Br 120,000 is investment in FA and the remaining is
permanent investment if CA. If the annual cost of short- term funds needed by the company
is 8% and the annual cost of long-term financing is 14A%, determine the total cost of
financing under
a) Aggressive financing strategy (Assume relative aggressiveness)
b) Maturing matching approach
c) Conservative approach
14. Discuss the determinants of working capital.
15. What is the basic idea of zero working capital?
16. How does a firm reduce its ACP& ICP? How does it increase DPO?
17. How does a manager reduce CCC or OC?
18. Discuss basic issues in working capital management.
19. What are factors involved in the assessment of the quantum of working capital required?
20. What is the fundamental trade- off managers face when managing working capital?
21. How is working capital affected by
a) Sales
b) Technology
c) Production policy
d) Inflation. Explain each in detail
22. How would you determine the optimum level of current assets? Illustrate your answers.
23. Merely increasing and the level of current assets holding does not necessarily reduce the
riskiness of the firm. Rather, the compost of current assets , whether highly liquid or
illiquid , is the important factor to consider. Explain your position.
24. Explain the merit of a match financing plan relative to ta financing plan that extensively
uses
a) Long term financing
b) Short term financing
25. Explain the risk – return trade off of current asset financing.

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