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Ms-41 june 2008

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MS-41   june-2008

MS-41 : Working capital management

1, Explain the concepts of gross and net working capital. How would you plan the working capital requirements of a firm in the long term ?

2. Why do firms hold cash and marketable securities ? Discuss the various methods through which firms recognise and manage the uncertainty associated with cash flow variation.

3. XYZ Ltd. is evaluating a project casting Rs. 96 lakhs interest @ 10%o p.a. payable every month}. Find out the worrking capital requirement of the project based on the follorving information :

i Sales : Rs. 25,00,000 per month (20% cash 80%  on one month credit)

{ii) Cost structure : Rs . 17,00,000 Per month consisting of

a) 30%  material cost (Payable after 30 days)

b) Wages 15% (Payable in the beginning of a month)

(c) Fixed overheads 55o/o including depreciation @ 10% on project cost. The remaining fixed overheads ar€ payable uniformly every month.

iii) Selling costs : Rs. 3,00,000 Per month.

iv) Inventory required : Finished Goods - 45 days sale.

                                        Materials - 15 days requirement.

(v) There is a working capital limit of Rs' 7,50,000 sanctioned by the bank.

4. (a) Describe the terms and commercial paper may be India. Also explain the commercial paper. conditions on which issued by companies in procedure for issuing commercial paper

(b) What do you understand by factoring of receivables ? Discuss its mechanism and advantages.

5. Briefly discuss the following statements :

(i) Overextension of trade credit is a major factor responsible for financial difficulties of most companies that fail.

(ii) Credit policy can also be used to change the product life cycle and investment pattern.

(iii) The hedging principle provides on important guide regarding the appropriate use of short term credit for working capital financing.

(iv) The basic challenge before a finance manager in the management of working capital is that of Liquidity vs. Profitability.

6. A company's requirements of an item costing Rs' 10 per unit is 6,300 units per annum. The ordering cost is Rs. 10 per order and the carrying cost is Re' 0'26 per unit per annum. The following is the schedule of discount applicable to the company :

Order size

% discount









5000 and above


Determine the economic order quantity without discount and with discount.


7 .Discuss the relationship between the 'profitability' and liquidity, and its impact on the working capital decisions, with the help of an example.

8. Distinguish between the foliowing :

(a) Permanent working capital and Variable working capital

(b) secured advances and Guaranteed advances

(c) Legal mortgages and Equitable mortgages

{d} Eurodoilar market and Eurobond market

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