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knowledge bank -basic learning Working Capital Management

Q1.What does working capital management encompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process?

Q2.A firm is currently employing an “aggressive” working capital policy with regard to the level of current assets it maintains(relatively low level of current assets for each possible level of output). The firm has decided to switch to a more “conservative” working capital policy. What decision will this decision probably have on the firm’s profitability and risk?

Q3.Some firms finance their permanent working capital with short term liabilities. Explain the impact of this decision on the profitability and risk of these firms.

Q4.ABC Ltd currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before tax net profit margin (the firm currently has no interest bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to the current assets should be financed with new equity capital. a. Determine the total asset turnover, before tax return on investment , and before tax net profit margin under the three alternative levels of current assets. b. If the new additions to current assets were financed with long term debt at 15 percent interest, what would be the before tax interest “cost” of the two new policies?

Q5.S Ltd currently offers its customers 50 day payment terms, but to improve its cash flow is considering a 2% discount for payment within 10 days. What is the cost of this proposed action?

Q6.Is depreciation a source of fund? Under what circumstances does this source dry up?

Q7.Explain why a decrease in cash represents a source of fund while a increase in cash is a use of fund in the sources and uses of funds statement

Q8.Zeta Ltd requires Rs 1.5 million in cash for meeting its transaction needs for the next three months , its planning period for liquidity.This amount is available in the form of marketable securities which can be sold in lot values of Rs 1,00,000 or its multiples , not beyond Rs 5,00,000.Every transaction so effected entails a fixed cost of Rs 500 per transaction.The cash payments are made evenly throughout the three months projected period and Zeta can earn 16 % annual yield on its marketable securities. How much marketable securities should Zeta Ltd convert in the beginning of the planning period? Use Baumol Model.

Q9.Beta Ltd provides the following information on its liquidity, The annual yield available on marketable securities is 12 percent. Fixed cost per transaction is Rs 160.The standard deviation of the daily changes in cash balance is Rs 5,000.The management of Beta would like to maintain a minimum cash balance of Rs 50,000.Compute the upper control limit and the return point of Beta Ltd as per Miller and Orr Model.

Q10.What is treasury management? What are the functions of a treasury manager?

Q11.ABC Ltd currently gives credit terms of net 30 days. It has Rs 60 million in credit sales, and its average collection period is 45 days. To stimulate demand, the company may give credit terms of net 60 days. If it does instigate these terms, sales are expected to increase by 15 percent. After the change , the average collection period is expected to to be 75 days, with no difference in paying habits for old and new customers.Variable costs are Rs 0.80 for every Rs 1.00 of sales, and the company’s before tax required rate of return on investment in receivables is 20 percent. Should the company extend its credit period?(Assume a 360 day year).


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