PURBANCHAL UNIVERSITY

Time-bound Home Exam-2020

Bachelor of Business Administration/Seventh Semester/Final
Time: 03:00 hrs. (+2 hours for submission) Full Marks: 70/Pass Marks: 28
FIN172: Working Capital Management (New Course)
Instructions:
Dear Students!
• This model of examination is for you as the end of your current semester. This examination allows you
to write answer from your own place of residence. Follow the following instructions without fail.
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received your question paper.
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instructed by the Office of the Examination Management.
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means to answer the questions.
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Group A
Compulsory Question 1×15=15
1. Prepare Cash budget for Himal Company for three months from April to June. The company's cash
balance at end of march is Rs.400,000.
Months January February March April May June
Sales Rs.12,00,000 Rs.14,00,000 Rs.16,00,000 Rs.6,00,000 Rs.800,000 Rs.800,000
Additional Information:
(a) Cash sales are 25 percent and credit sales are 75 percent. The credit sales are collected in three
months consisting 60 percent, 25 percent and 10 percent respectively in next, 2nd next and 3rd
next months.
(b) The purchases are Rs.640,000 in April, Rs.640,000 in May and Rs.960,000 in June. Lag period is
½ month.
(c) The wages and salaries payment are; Rs.120,000, Rs.160,000 and Rs.200,000 in April, May and
June respectively.
(d) Rent paid Rs.8,000 per month.
(e) Quarterly interest payment on Debentures of Rs.2,000,000 @ 6% p.a. is due in June.
(f) The company has policy of maintaining minimum cash balance Rs.400,000 and defect. (if any) is
managed by 10% bank loan.
Group B
Answer TWO questions. 2×10=20
2. What is collection policy? How does this affect the level of sales, bad debt losses, collection expenses
and investment in receivables? Explain.
3. Mechi Sugar Mills has Rs.5,000,000 revolving credit agreement with NABIL bank, The bank charges
10 interest on used funds where as 0.5 percent commitment fee on unused funds.
(a) If company uses 60 percent of the committed amount, calculate rupee cost and percent cost of the
financing.
(b) If company uses 20 percent the committed amount, calculate rupee cost and percent cost of the
financing
(c) Differentiate line of credit from revolving credit.
4. Sagarmatha and Siddharth companies had following balance sheet on December, 2010. The earnings
before interest and tax is Rs.60,000 and tax rate is 40 percent.
Companies Sagarmatha Siddharth
Current Assets Rs. 100,000 Rs. 80,000
Contd. ...
 (2)
Fixed Assets Rs.100,000 Rs. 120,000
Total Assets Rs.200,000 Rs.200,000
Current Liabilities Rs.20,000 Rs.80,000
Long-term Debt Rs.80,000 Rs.20,000
Common Stock Rs.50,000 Rs.50,000
Retained Earnings Rs.50,000 Rs.50,000
Total Liabilities &equity Rs.200,000 Rs.200,000
(a) Determine the ROE for both companies if interest rate on short term and long term debts are 8
percent and 10 percent respectively.
(b) If interest rate on short term debt rises to 10 percent and long term debt rise to 15 percent, how
would the ROE change?
(c) Which company is in riskier position and why?
Group C
Answer SEVEN questions. Q. (12) is Compulsory 7×5=35
5. What are the alternative current assets investment policies? Explain.
6. What do you understand price break? How EOQ is determined in price break?
7. The Shikhar company plans to have Rs. 1000,000 in steady cash outflows for the next year. The firm
believes that it will face an opportunity interest rate of 10 percent and will incur a cost of Rs. 100
each time it borrows and withdraws. Using inventory management model;
(a) Determine optimal cash transaction size.
(b) What will be the cash cycle for the firm?
(c) What would be the average cash balance for the firm?
8. The firm has sales of Rs.360,000 this year (80 percent on credit) having receivable of Rs.50,000. The
cost of goods sold represents 60 percent of the selling. Furthermore the firm has Rs.60,000 in
inventories and Rs.30,000 of payables.
(a) Determine the cash conversion cycle.
(b) Determine the financing need to support operations.
(c) What is the working capital turnover of the firm?
(d) How can the firm reduce its cash conversion cycle?
9. Delta company has sales of Rs.200,000 with 12 percent profit margin before interest and taxes. The
tax rate is 45 percent. To generate this sales firm maintains a fixed assets of Rs. 120,000 currently
the firm maintains Rs.70,000 in current assets. Determine total assets turn over and return on
assets for this company.
10. Nepal power corporation spends Rs.220,000 in collection department. The company has Rs.12
million in credit sales, its average collection period of 2.5 months, and bad debt of 4 percent. The
company believes that if it were to double its collection personnel, it could bring down the collection
period of 2 months with 3 percent bad debt losses. The added cost is Rs. 180,000 in collection
department. If opportunity cost is 20 percent, evaluate the change in collection policy.
11. A company has Rs.4 per year carrying cost inventory, an annual usage of 50,000 units and an
ordering cost of Rs.100 per order. The purchase price of the inventory is Rs.12 per unit. Assume 360
days in a year.
(a) Calculate the optimal order quantity.
(b) Calculate total cost including acquisition cost.
(c) If lead time is 14 days determine reorder level.
Or,
Discuss the concept of Inventory Management. Point out the uses of inventory management to
trading company.
12. Answer the following questions in single sentence:
(a) Cash conversion cycle.
(b) Re-order point
(c) Treasury Bill
(d) Net working capital
(e) Days sales outstanding.
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