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IMT-07: Working Capital Management-MT3

IMT-07: Working Capital Management-MT3



Question 1: Write short notes on the following:

a) Playing the float

b) Commercial Paper

Question 2: Explain the factors affecting the size of working capital.

Question 3: Differentiate between:

a) ABC Analysis and VED Analysis

b) Gross Working Capital and net working capital

Question 4: Explain the purpose of holding cash. Explain briefly the factors determining the cash balance.

Question 5: Discuss the preconditions for developing an efficient money market.



Question 1: A small firm has total credit sales of Rs 80 lakhs and its average collection period is 80 days. The past experience indicates that bad debt losses are around 1 percent of credit sales. The firm spends about Rs 120000 per annum on administering its credit sales; this cost includes salaries of one officer and two clerks who handle credit checking & collection. A factor is prepared to buy the firms receivables by charging 2 percent commission and interest at the rate of 18 percent after withholding 10 percent as reserve. What should the firm do?

Question 2: The varying ratio between fixed assets and current assets has an impact on profitability/liquidity of a firm. Discuss

Question 3: A firm disburses Rs 30 lakh every year. The conversion charge is Rs 50 per conversion. The current risk free interest rate is 9%. Find out the optimal cash balance using Baumol model.

Question 4: A manufacturer buys casting equipment from outside suppliers @ 30 per unit. Total annual needs are 800 units, annual return on investment is 10%, Rent and insurance per year is Re 1 per unit & cost of placing an order is Rs 100 per order. Determine the economic order quantity

Question 5: Explain the benefits and cost of maintaining receivables.



Question 1: Enumerate the functions of the Money Market. Which institutions act as facilitator to the money market?

Question 2: What are the different forms of bank credit? Explain different modes in which collateral is placed.

Question 3: Explain the norms suggested by the Tandon Committee for providing bank credit. How did the recommendation of Chore Committee bring modification to then existing norms?

Question 4: A firm sells goods worth Rs 100,000 every month. 20% of the sale is made on cash, 40% on net 30 and the remaining 40% on net 60. If the sale begins in January, find out the cash balance with the firm in the sale account during January, February and March.

Question 5: Explain the procedure adopted for selecting a customer to whom credit facilities are provided.



You are required by A P Paper Mills Ltd. To estimate working capital required for the level of activity of 6,24,000 units of production. Add 5% for safety. You may assume that production is carried on evenly throughout the year and wages and overhead expenses accrued similarly and a time period of four weeks is equivalent to a month. It provides the following information:


Description Amount

(per unit)

Raw Material


Direct Labour




Total Cost




Selling Price


Additional Information:

Raw material in stock: one month; Material in process: half month; Finished goods in stock: four weeks; Credit allowed by suppliers: one month; Credit allowed to customers: eight weeks; lag in payment of wages: one and a half week; Overheads: one week; 20% of sales are cash sales and cash at bank is expected to be Rs 60,000.



The Udar Ltd. sells goods on credit. Its current annual credit sales amounts to Rs 900 lakh. The variable cost ratio is 80%. The credit terms are 2/10, net 30. On the current level of sales , the bad debts are 0.75%. The past experience has been that 50% of the customers avail of the cash discount, the remaining customers pay on an average 50 days after the date of the sale. The book debts of the firm are presently being financed in the ratio of 2:1 by a mix of bank borrowings and owned funds which cost 25% and 28% per annum respectively. As an alternative to the in house management of receivables, Udar Ltd. is contemplating use of full advance non]recourse factoring deal with the Indbank Factors Ltd. The main elements of such a deal structured by the factor are:

·         Factor reserve 15%

·         Guaranteed payment date 24 days after the purchase

·         Discount charge 22%

·         Commission of other services 4% of the receivables.


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