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 Title Name Amity Solved Assignment MFM 3rd Sem for Working Capital Management University AMITY Service Type Assignment Course Master-in-Finance-Management-(MFM) Semester Semester-III Course: Master-in-Finance-Management-(MFM) Session 2016-2017 Short Name or Subject Code Working Capital Management Commerce line item Type Semester-III Course: Master-in-Finance-Management-(MFM) Product Assignment of Master-in-Finance-Management-(MFM) Semester-III (AMITY) Price PRICE INR Click to View Price

# Solved Assignment

Questions :-

Working Capital Management

ASSIGNMENT A (FIVE ANALYTICAL QUESTIONS)

Q1. Find out working capital by operating cycle method, taking 360 days in a year:-

Sales 8000 units                                             Rs. 120 per unit

Material cost                                      Rs. 40 per unit

Labor cost                                                      Rs. 20 per unit

Customers are given 45 days credit and 50 days credit is taken from suppliers. Raw materials for 30 days and finished goods for 25 days are kept in stock. Production cycle is of 20 days.

Q2. A company has an expected usage of 50000 units of a commodity during the coming year. The cost of placing an order is Rs. 100 and carrying cost per unit is Rs. 2.50, Lead time of an order is 5 days and company will keep a reserve of two days usage. You are required to calculate:-

a). Economic Order Quantity

b). Re-order Level

Assume 250 working days in a year.

Q3. After inviting tenders, two quotations are received as follows:-

Rs. 1.20 per unit;

Rs. 1.10 per unit plus Rs. 3000 fixed charges to be added irrespective units ordered.

Advice with your argument, to whom order should be placed and for what quantity?

Q4. From the information given below, calculate the working capital requirements:-

Budgeted sales                                                                       Rs. 650000

Percentage of net profit on cost of sales                              25%

Average credit allowed to customers                                               10 weeks

Average credit allowed by suppliers                                                4 weeks

Average stock (for sales requirements)                               8 weeks

Add 10% to computed figure for contingencies.

Q5:- Calculate the estimate of working capital required by an organization:-

Expected annual production                                                            2600 tons

Stock of raw materials                                                                      3 weeks

Processing period                                                                              2 weeks

Stock of finished goods                                                                     5 weeks

Credit period to customers                                                   8 weeks

Credit allowed by the suppliers                                                       5 weeks

Price of raw material                                                                        80% of sales

Wages and overheads                                                                       25% of sales

Selling price                                                                                       Rs. 200 per ton

Cash balance needed                                                            Rs. 30000

ASSIGNMENT B - THREE ANALYTICAL QUESTIONS + 1 CASE STUDY)

Q1. From the following figures calculate the period of operating cycle and estimate the amount of working capital required:-

Rs.                               Rs.

31-3-05

Stock of raw material                                   35000                          55000

Stock of work in progress                10000                          30000

Stock of finished goods                                 30000                          10000

Sundry debtors                                              50000                          50000

Purchase of materials                                   ---                                200000

Wages and manufacturing expenses           ---                                80000

Administrative & selling expenses   ---                                40000

Sales                                                                ---                                500000

The company obtains credit of 60 days from its creditors. All the sales is on credit. Assume 360 days in a year.

Q2:- B Limited gives the following information about its liquidity.

Interest on securities 14.4% per annum

Fixed cash on sale of securities Rs. 900.

Standard deviation of change of daily cash balance Rs. 4000.

Management wants to maintain a minimum cash balance of Rs. 10000.

Calculate Return Point and Upper control level according to Miller –Orr-Model. Assume 360 days in a year.

Q3. Annual sales of Modern company is 16000 units @ Rs. 50 per unit. Its variable cost is Rs. 30 per unit and fixed cost Rs. 160000 per year. The company is considering to relax its credit policy. This will increase its sales by 20% and average collection period will increase from 30 days to 45 days. Bad debts are expected at 3% on increase in sales and collection charges will increase by Rs. 20000. If required rate of return on investments is 15% after tax and rate of tax is 40%. Will it be fair to relax the credit policy?

CASE STUDY

Ques. A company wants to fix its credit policy. It is considering on three alternatives as under:-

sale on 15 days credit at 5% cash discount, or

sale on 1 month credit without cash discount, or

sale on 2 months credit without cash discount

In (1) above additional sales would be Rs. 100000; in (2) Rs. 300000 and in (3) Rs. 700000.

Collection charges will be in (1) 2%, (2) 5% and (3) 10% of sales. Bad debts are expected at 2%, 4%, and 10% respectively. Assuming interest on investment @ 12% per annum, state which policy should be adopted.

ASSIGNMENT C (MULTIPLE CHOICE OBJECTIVE QUESTIONS)

Question No.  1          Marks - 10

Working capital management is mainly concerned with:

Options

1. the placement of the firm´s debt and equity issues
2. the financing and management of the firm´s current assets
3. inventory management
4. management of the firm´s capital assets

Question No.  2          Marks - 10

A collection center:

Options

1. involves using geographically disbursed centers to collect from non- paying customers
2. utilizes local banks to clear local payments made to the collection center
3. is lower in cost to the firm than a lockbox system
4. results in cheques being forwarded to a P.O. box and clearing through local bank branches

Question No.  3          Marks - 10

The concept of float is best defined as:

Options

1. cheques written by the corporation that are still outstanding
2. cheques written to the corporation that are still outstanding
3. the difference between the firm´s recorded cash balance and the amount credited to the firm´s account by the bank
4. what a boat does in water

Question No.  4          Marks - 10

Using a lockbox system to improve collections:

Options

1. is more expensive than the use of collection centers
2. utilizes local banks to clear local payments made to the collection center
3. provides more float than collection centers
4. results in cheques being forward to a P.O. box and clearing through local banks

Question No.  5          Marks - 10

Firm´s strive to hold _____ cash balances.

Options

1. average
2. low
3. high
4. bank determined

Question No.  6          Marks - 10

Deposit float is the __________.

Options

1. total time between the mailing of the check by the customer and the availability of cash to the receiving firm
2. time consumed in clearing the check through the banking system
3. time the check is in the mail
4. time during which the check received by the firm remains uncollected

Question No.  7          Marks - 10

Which of the following statements hold true for safety stock?

Options

The greater the risk of running out of stock, the larger the safety stock needed.

1. The lower the opportunity cost of the funds invested in inventory, the smaller the safety stock needed.
2. The greater the uncertainty associated with forecasted demand, the lower the level of safety stock needed.
3. The higher the profit margin per unit, the lower the safety stock necessary
4. The higher the profit margin per unit, the higher the safety stock necessary

Question No.  8          Marks - 10

Which of the following is not a technique to speed up collections?

Options

1. Expedite the preparing and mailing of the invoice to customers.
2. Replace a lockbox system with the direct mailing of payments to the firm.
3. Reduce the time it takes payments received from customers to be available as usable funds to the firm.
4. Accelerate how quickly customers mail payments to the firm.

Question No.  9          Marks - 10

Collection float is the __________.

Options

1. total time between the mailing of the check by the customer and the availability of cash to the receiving firm
2. time consumed in clearing the check through the banking system
3. time the check is in the mail
4. time during which the check received by the firm remains uncollected

Question No.  10        Marks - 10

The Term “Working Capital” refers to which one of the following assets of a company?

Options

1. Total of current assets + Intangible assets
2. Total of current assets + Fixed assets
3. Total of current assets
4. Total of current assets +fixed assets+ Intangible assets.

Question No.  11        Marks - 10

“Gross working capital means-

Options

1. Total of current assets
2. Total of current assets- current liabilities
3. Total of current assets - inventories
4. None of the above

Question No.  12        Marks - 10

The term circulating capital means

Options

1. Fixed capital or core capital
2. Working capital
3. Fixed capital +working capital
4. Capital investments in building up intangible assets

Question No.  13        Marks - 10

Among the various components of working capital, which one of the following is subtracted to arrive a quick ratio?

Options

1. Cash
2. Sundry debtors
3. Inventory
4. Book debts

Question No.  14        Marks - 10

Excess of long term sources over long term uses or long term surplus is

Options

1. Gross working capital
2. Net working capital
3. Fixed capital
4. None of the above

Question No.  15        Marks - 10

Bank finance for working capital is

Options

1. Term liabilities
2. Current liabilities
3. Deferred liabilities
4. Stop gap arranged

Question No.  16        Marks - 10

Name the study group appointed by RBI to frame guidelines for follow up of bank credit.

Options

1. Chore committee
2. Tandon committee
3. Nayak committee
4. Rangarajan committee

Question No.  17        Marks - 10

Which one of the following committee suggested norms for inventory and receivables for 15 major industries.

Options

1. Chore committee
2. Tandon committee
3. Nayak committee
4. Rangarajan committee

Question No.  18        Marks - 10

Prepaid expenses and advance payment of tax are shown in the balance sheet on:

Options

1. Liability side
2. Asset side
3. As intangible assets
4. As a book note in the balance sheet

Question No.  19        Marks - 10

Ideally, which of the following types of assets should be financed with long-term financing?

Options

1. Fixed assets only
2. Fixed assets and temporary current assets
3. Fixed assets and permanent current assets
4. Temporary and permanent current assets

Question No.  20        Marks - 10

Normally, permanent current assets should be financed by

Options

1. long-term funds.
2. short-term funds.
3. borrowed funds.
4. internally generated funds.

Question No.  21        Marks - 10

Which of the following would be consistent with a more aggressive approach to financing working capital?

Options

1. Financing short-term needs with short-term funds.
2. Financing permanent inventory buildup with long-term debt.
3. Financing seasonal needs with short-term funds.
4. Financing some long-term needs with short-term funds

Question No.  22        Marks - 10

_______________ varies inversely with profitability.

Options

A). Liquidity

B).Risk

C).Blue

D). False

Question No.  23        Marks - 10

Spontaneous financing includes

Options

1. accounts receivable.
2. accounts payable.
3. short-term loans.
4. a line of credit.

Question No.  24        Marks - 10

Marketable securities are primarily

Options

1. short-term debt instruments.
2. short-term equity securities.
3. long-term debt instruments.
4. long-term equity securities.

Question No.  25        Marks - 10

Time consumed in clearing a check through the banking system.

Options

1. Processing float
2. Deposit float
3. Collection float
4. Availability float

Question No.  26        Marks - 10

Commercial paper is essentially

Options

1. another term for a junk bond.
2. a short-term unsecured corporate IOU.
3. an intermediate-term corporate bond.
4. a certificate that may be exchanged for a share of common stock at a specified future date.

Question No.  27        Marks - 10

Concentration banking

Options

1. increases idle balances.
2. moves excess funds from a concentration bank to regional banks.
3. is less important during periods of rising interest rates.
4. improves control over corporate cash.

Question No.  28        Marks - 10

Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?

Options

1.    A long-term Aaa-rated corporate bond with a current annual yield of 9.4 percent.
2. A 30-year Treasury bond with a current annual yield of 8.7 percent.
3. Ninety-day commercial paper with a current annual yield of 6.2 percent.
4. Common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5 percent annual yield.

Question No.  29        Marks - 10

Which of the following marketable securities is the obligation of a commercial bank?

Options

1. Commercial paper
2. Negotiable certificate of deposit
3. Repurchase agreement
4. T-bills

Question No.  30        Marks - 10

Options

1. EFT
2. EDI
3. SWIFT
4. CHIPS

Question No.  31        Marks - 10

That portion of a firm´s total marketable securities portfolio held to take care of probable deficiencies in the firm´s cash account.

Options

1. Free cash segment
2. Controllable cash segment
4. None of the above

Question No.  32        Marks - 10

The most basic requirement for a firm´s marketable securities.

Options

1. Safety
2. Yield
3. Marketability
4. New York.

Question No.  33        Marks - 10

A non-negotiable check payable to a company account at a concentration bank

Options

1. Payable through draft (PTD)
2. Depository transfer check (DTC)
3. ACH transfer
4. Repo

Question No.  34        Marks - 10

Accounts receivable conversion (a.k.a., check conversion) is the conversion of a paper check to

Options

1. an electronic check image
2. a "substitute check"
3. an ACH debit transaction
4. a foreign currency

Question No.  35        Marks - 10

If EOQ = 360 units, order costs are \$5 per order, and carrying costs are \$.20 per unit, what is the usage in units?

Options

1. 129,600 units
2. 2,592 units
3. 25,920 units
4. 18,720 units

Question No.  36        Marks - 10

Costs of not carrying enough inventory include:

Options

1. lost sales.
2. customer disappointment.
3. possible worker layoffs.
4. all of these.

Question No.  37        Marks - 10

Which of the following relationships hold true for safety stock?

Options

1. the greater the risk of running out of stock, the smaller the safety of stock.
2. the larger the opportunity cost of the funds invested in inventory, the larger the safety
3. the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
4. the higher the profit margin per unit, the higher the safety stock necessary.

Question No.  38        Marks - 10

Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:

Options

1. an increase in the average collection period.
2. a decrease in bad debt losses.
3. an increase in sales.
4. higher profits.

Question No.  39        Marks - 10

The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?

Options

1. Lower than the present level.
2. No change from the present level.
3. Higher than the present level.

Question No.  40        Marks - 10

An increase in the firm´s receivable turnover ratio means that:

Options

1. it is collecting credit sales more quickly than before.
2. cash sales have decreased.
3. it has initiated more liberal credit terms.
4. inventories have increased.

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January 29, 2015