MB20202 CORPORATE FINANCE

UNIT: V [APPLICATION] QUESTIONS

Working Capital Management
Estimating/Forecasting of Working capital requirements:
1. Percentage of sales method
XYZ Ltd. has achieved a turnover of Rs.85 Crores for the financial year 2020–2021. It is
anticipated that the turnover of the company will reach Rs.110 Crores for the year 2021-2022.
The financial position of the company as on 31-03-2021.
Liabilities Rs. in Crores Assets Rs. in Crores
Equity share capital 10 Buildings 4
Reserves & Surplus 4 Machine 5
Secured loans 5 Inventories 11
Unsecured loans 3 Receivables 7
Sundry creditors 6 Cash & Bank 3
Provision for taxation 2
30 30
Estimate the working capital requirement for the year 2021-2022.

2. Regression Analysis Method

The sales and working capital of ABC Ltd. for a period of 5 years.
Years 2016 2017 2018 2019 2020
Sales [Rs. in Crores] 128 176 208 228 276
Working capital [Rs. in Crores] 66 81 95 130 135
Estimate the working capital requirement for the year 2021 if anticipated sales are Rs.290
Crores.

3. Operating Cycle Method

From the following data, compute the duration of the operating cycle for each of the two years
and comment on the increase/decrease. Assume 360 days per year for consumption purposes.
Particulars Year I [Rs.] Year II [Rs.]
Raw materials 20,000 27,000
Work in progress 14,000 18,000
Finished goods 21,000 24,000
Purchase of raw materials 96,000 1,35,000
Cost of materials consumed 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000

4. VSM Ltd is engaged in large scale retail business from the following information you are
required to forecast their working capital requirements. [i] Projected annual sales Rs.130 lakhs
[ii] Percentage of net profit on cost of sales25% [iii] Average credit period allowed to debtors 8
weeks [iv] Average credit period allowed by creditors 4 weeks
[v] Average stock carrying 8 weeks [in terms of sales requirements] [vi] Add 10% to computed
figures to allow for contingencies.
5. NMK brothers desire to purchase a business and have consulted you and one point on which
you are asked to advise them is the average amount of working capital which will be required in
the first year. You are given the following estimates and are instructed to add 10% to your
computed figures to allow contingencies.
Particulars Amount [Rs.] for the year
Average amount locked up in stocks:
Stock of finished goods 5,000
Stock of stores and materials 8,000
Average credit given:
In land sales: 6 weeks 3,12,000
Export sales: 1.5 weeks 78,000
Lag in payment of wages and others:
Wages: 1.5 weeks 2,60,000
Stores, materials: 1.5 months 48,000
Rent, Royalties: 6 months 10,000
Clerical staff: 0.5 month 62,400
Manager: 0.5 month 4,800
Miscellaneous expenses: 1.5 months 48,000
Payments in advance:
Sundry advances [Paid in quarterly in advance] 8,000
Undrawn profits on the average throughout the year 11,000
Set up your calculations for the average amount of working capital required.
6. Determine the working required to finance a level of activity of 6,00,000 units output for a
year. The cost structure is as under.
Particulars Costs [Rs. Per unit]
Raw material 10.00
Direct labour 2.50
Overheads [ including depreciation of Rs.0.25 per unit] 7.50
Total cost per unit 20.00
Profit 5.00
Selling price 25.00
Additional information: [i] Minimum desired cash balance is Rs.25,000. [ii] Raw materials
are held in stock on an average for 2 months. [iii] Work in progress [assume 50% completion
stage] will approximate to half a month’s production. [iv] Finished goods remain in warehouse,
on an average for a month. [v] Suppliers of materials extend a month’s credit and debtors are
provided 2 months credit. The cash sales are 25% of total sales. [vi] There is a time lag in
payment of wages of a month and half a month in the case of overheads.
7. A Proforma cost sheet of a company provides the following data:
Particulars %
Material 40
Direct labour 20
Overheads 20
[i] It is proposed to maintain a level of activity of 2,00,000 units [ii] Selling price Rs.12 per unit
[iii] Raw materials are expected to remain in store for an average period of one month. [iv]
Materials will be in process on an average half a month [v] Finished goods are required to be in
stock on average period of 1 month [vi] Credit allowed to debtors is 2 months [vii] Credit
allowed by suppliers is 1 month. Estimate the working capital required.
 Cash Management
1. Prepare a cash budget for the 3 months ending June to August.
Month Sales [Rs.] Purchases [Rs.] Wages [Rs.] Overheads [Rs.] Expenses [Rs.]
June 72,000 25,000 10,000 6,000 5,500
July 97,000 31,000 12,100 6,300 6,700
August 86,000 25,500 10,600 6,000 7,500
Additional information: (1) Period of credit allowed by suppliers is 1 month (2) 50% of sales
is for cash and the period of credit allowed to customers for credit sales is 1 month. (3)A fixed
assets has to be purchased for Rs.8,000 in July. (4) Sales commission @3% on sales is paid to
sales man each month. (5) Cash in hand on 1st June Rs.72,500.

2. The following information is available in respect of a trading firm.

[a] On an average, debtors are collected after 45 days, inventories have an average holding
period of 75 days and creditors payment period on an average is 30 days.
[b] The firm spends a total of Rs.120 Lakhs annually at a constant rate.
[c] It can earn 10% on investments.
From the above information compute [i] Cash cycle [ii] Cash turnover [iii] Minimum amount of
cash to be maintained to meet payments as they become due [iv] Savings by reducing the
average inventory holding period by 30 days.

Receivables Management
1. ABC Co wants to relax its credit policy on sales from the current level of 1 month to 2
months. Due to this, sales would increase to Rs.72,00,000 from the present level of
Rs.60,00,000 p.a. but the percentage of bad debts losses is likely to go up by 2% of sales
which is now @3% of sales. The company’s variable cost is 75% of sales and fixed expenses
are Rs.12,00,000 p.a. The firm’s required rate of return is 10%. Advice the company on the
implications of revising the credit policy.

2. The present credit terms of B company are “1/10 Net 30”. Its sales are Rs. 12, 00,000, its
average collection period is 24 days, its variable cost to sales ratio is 0.80 and its cost of funds
is 15%. The proportion of sales on which customers currently take discount is 0.3. B Company
is considering relaxing its discount terms to “2/10 Net 30”. Such relaxation is expected to
increase the sales by Rs.1, 20,000, reduce the average collection period to 16 days and increase
the proportion of discount sales to 0.7. What will be the effect of relaxing the discount policy
on profit? Assume 360 days in a year.

Inventory Management
1. A factory consumes 60 units of material per day which is supplied by a vendor in lots of 240
units each at Rs.2,400 per lot. The factory works for 300 days per annum.
Each order involves handling charges of Rs.120 and Freight charges of Rs.380. The storage
cost is Re.0.50 per unit per annum. The interest cost to carry inventory works out at 1.25% per
month.
Ascertain [a] Number of units to be ordered [EOQ] each time to minimise the overall inventory
cost. [b] Number of orders per year [c] Time between two consecutive orders.

2. Annual demand 2400 units; unit price Rs.2.40; Ordering cost per order Rs.4; Storage cost 2%
p.a. interest rate 10% p.a.; Lead time ½ month. Calculate EOQ and Total inventory cost.
3. Maximum usage in a month 600 units; Minimum usage in a month 400 units; Average usage
in a month 450 units; Maximum Reorder period 6 months; Minimum reorder period 2 months;
Reorder quantity 1500 units; Maximum reorder period for emergency purchases 1 month.
Calculate: [a] Reorder level [b] Maximum stock level [c] Minimum stock level [d] Average
stock level [e] Danger stock level.

4. XYZ Ltd. used raw material ‘AB’ during the year Rs.8,00,000. The value of opening stock
Rs.80,000 and closing stock Rs.1,20,000. Calculate Inventory turnover ratio.

5. If 1,000 units of materials are introduced into the process and yield of final product is 800
units. Calculate Input – Output ratio.