MS- 41 Working capital management

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ASSIGNMENT

 

Course Code                      :               MS – 41

Course Title                       :               Working capital management

Assignment Code            :               MS- 41/TMA/SEM-I/2014

Coverage                             :               All Blocks

 

Note : Attempt all the questions and submit this assignment on or before 30th April , 2014  to   the coordinator of your study centre.    

 

 

1.a) Explain the concepts of Working Capital. Discuss the various factors that affect the 

requirement of Working Capital of a business entity.

 

Ans : Generally, there are two concepts of working capital i.e. gross concept and net concept.

 

1.Gross Concept Of Working Capital:

 

According to gross concept, working capital refers to all the current assets and represents the amount of funds invested in current assets. Thus, gross working capital is the capital invested in current assets. Current assets are those assets which can be converted into cash within the short-time period.

 

Gross Working Capital = Total current assets

 

In this way, gross working capital refers to the firm’s investment in current assets. Gross working capital represents total of current assets which includes cash in hand, cash at bank, inventory, prepaid expenses, bills receivable etc.

 

 

 

b) Explain the distinguishing features of matching, conservative and aggressive strategies for financing working capital with the help of illustrations. Under which circumstances each of these are suitable?

 

Ans :  Aggressive Working Capital:

 

An aggressive working capital policy is one in which you try to squeeze by with a minimal investment in current assets coupled with an extensive use of short-term credit. Your goal is to put as much money to work as possible to decrease the time needed to produce products, turn over inventory or deliver services. Speeding up your business cycle grows your sales and revenues. You keep little money on hand, cut slow-moving inventory and unnecessary supplies to the bone and stretch out your bill payments for as long as possible. The one payment you cannot delay is interest — your creditors can sue you, force you into bankruptcy

 

 

 

2.  Why do firms hold cash and marketable securities? Discuss the critical variables of Cash flow forecasting and the different forecasting approaches of cash flow

 

Ans :  Why do firms hold cash and marketable securities?

 

In my opinion the reasons a firm would wish to hold cash or marketable securities all have to do with a necessity for liquidity.

Some firms need to have a certain percentage of liquidity because of the regulations that their company operates under in the market like banks. Banks are regulated to the point that they need a certain amount of money to continue operations if some of their loans go bad. This requirement is established by the FDIC and they have to keep a certain level of liquidity in order to operate. Other firms need a certain level of liquidity so that they can operate from month to month, to pay employees, to pay interest costs, and to pay

 

 

3.  Explain the features of different forms of bank credit prevailing in India. Distinguish between pledge and hypothecation.  Discuss the various methods of creating charge over the assets of the borrower in favour of the lender bank. Distinguish between Legal Mortgageand Equitable Mortgage.

 

Ans :  Features of different forms of bank credit prevailing in India:

 

Due to the unequal distribution of wealth, India has arrived at a situation where the affluent class gets richer and richer and the underprivileged becomes poorer. To bridge this financial gap and to satisfy their day to day requirements, Bank plays a vital role by offering various loans to the finance seekers. Hence every borrower should have prior knowledge on the various Bank Loans in India, which are eligible for meeting their financial objectives. Personal loans , home loans and various types of credit cards are available there.

 

Distinguish between pledge and hypothecation:

 

 

 

Q. 4. What is the significance of Inventory control? Discuss the different models of inventory management.

 

Ans :  Significance of Inventory control :

 

The following discussion briefly and lucidly covers all the above-mentioned objectives, benefits or importance of inventory control.

 

1. Protects from fluctuations in demand

 

Many a times, the demand forecast of a product

 

 

 

 

5.  From the following details you are required to make an assessment of the average amount of working capital requirement of Hindustan Ltd.

                                                                                   

Particulars

 

Average period of credit Estimate for the Ist year

Rs.

Purchase of Material 6 weeks 26,00,000
Wages 1 ½ weeks 19,50,000
Overheads:    
Rent, Rates, etc. 6 month 1,00,000
Salaries 1 month 8,00,000
Other overheads 2 months 7,50,000
Sales

 

cash 2,00,000
Credit Sales 2 months 60,00,000
Average amount of stocks and works-in-progress   4,00,000
Average amount of undrawn profit   3,00,000

 

It is to be assumed that all expenses and income were made at even rate for the year.

 

Ans :

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