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TRANSCRIPT
Chapter 5: Working Capital Management 2017
1 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Financial Management
Masters of Business Administration
Study Notes & Tutorial Questions
Chapter 5: Working Capital Management
Chapter 5: Working Capital Management 2017
2 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
3 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
4 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
5 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
6 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
7 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
8 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
9 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
10 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
11 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
12 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
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Chapter 5: Working Capital Management 2017
23 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Practice Questions
Question 1
The following are the total loan by Zeeniya Company throughout the year.
Month Total (MVR)
January 12,000
February 13,000
March 9,000
April 8,000
May 9,000
June 7,000
July 6,000
August 5,000
September 6,000
October 5,000
November 7,000
December 9,000
a) Calculate the average total loans of Zeeniya Company.
b) Calculate the annual loan costs of the company at the interest rate of 15%.
Question 2
Yuin Company has obtained a loan from the bank for MVR10,000 for a period of 90 days at the
interest rate of 15% payable on the maturity date of the loan. Assume that there are 360 days in a
year.
(a) How much is the total interest (in rufiya) that must be paid by Yuin Company for this loan?
(b) Calculate the effective cost for this loan.
Chapter 5: Working Capital Management 2017
24 Ibrahim Sameer Masters of Business Administration (FM – AVID College)
Question 3
Commercial papers are usually sold at a discounted rate. Mausooma Company has just sold its
commercial papers that had been issued for a period of 90 days at the face value of MVR1
million. The company receive as much as MVR978,000.
(a) What is the effective annual interest rate that must be paid to finance the commercial
papers?
(b) If the broker’s fee is MVR9,612 and had been paid at the beginning of the issuance of
these commercial papers, how much is the annual effective rate that must be paid by the
company?
Question 4
Didi Company intends to get an advance from the factoring account for MVR100,000 and will
mature in a period of 30 days. The factor holds 10% of the total account that will be factorised
(reserves). There is also a 2% fee on factoring and a prepayment interest rate of 15% per year.
(a) Calculate the maximum amount (in MVR) of the interest that must be paid.
(b) What is actual amount that will be obtained by the company?
(c) What is the annual cost factor (in percentage) for this transaction?
Question 5
Tholsooma Company’s ventures in a teakwood furniture business. Its supplier, Mr. Bolsooma
had been given a 20 days period to settle his payments for the inventory ordered.
Sales MVR450,000
Average inventory MVR50,000
Account receivables MVR15,000
Based on the information above, calculate the:
(a) Inventory conversion period
(b) Account receivable conversion period
(c) Deferred payments period
(d) Cash conversion cycle period
Assume that there are 360 days in a year.
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Question 6
Shaheem Company offers the term of 3/10 net 30 to all the customers who purchase its goods.
Assume that 60% of its customers take the discount while the rest pays on the 30th day. The
annual sales of Shaheem Company is MVR500,000. Calculate the average account receivables of
Shaheem Company with the assumption that there are 360 days in a year.
Question 7
Aayaan Grocery Store ordered goods totalling MVR3,000 every 3 months. The credit term sets
by the supplier is 2/10 net 30. If it takes the discount offered by the supplier, calculate the
savings that can be obtained in a year. Assume that there are 360 days in a year.
Question 8
Mrs. Maheera buys supplies for her bakery for RM3,500 from Hashfa Supplier Company with
the credit term of 2/15 net 30 on 15 June 2001. What is the payment amount made by Mrs
Maheera if she makes payment on 27 June 2001?
Question 9
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Question 10
Question 11
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Question 12
Question 13
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Question 14
Question 15
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Question 16
Question 17
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Question 18
Question 19
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Question 20
Question 21
Question 21
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Question 23
You are required to prepare a statement showing the working capital required to finance the level
of activity of 18,000 units per year from the following information:-
Particulars MVR.
Raw material Per Unit 12
Direct labor Per Unit 3
Overheads per Unit 9
Total cost Per Unit 24
Profit per Unit 6
Selling price Per Unit 30
Additional Information:
1. Raw material is in stock on an average for 2 months.
2. Materials are in process on an average for half-a- month.
3. Finished goods are in stock on an average for two months.
4. Credit allowed by creditors is two months in respect of raw materials supplied.
5. Credit allowed to debtors is three months.
6. Lag in payment of wages is half month. Cash on hand and at bank is expected to be MVR
7,000.
7. You are informed that all activities are evenly spread out during the year.
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Question 24
Didi Ltd. had annual sales of 50,000 units at MVR100per unit. The company works for 50 weeks
in the year. Cost details of the Company are as given below:
Particulars MVR
Raw material Per Unit 30
Labour Per Unit 10
Overheads per Unit 20
Total cost Per Unit 60
Profit per Unit 40
Selling price Per Unit 100
Additional Information:
1. The Company has the practice of storing raw materials for 4weeks requirements.
2. The wages and other expenses are paid after a lag of 2 weeks.
3. Further the debtors enjoy a credit of 10 weeks and Company gets a credit of 4 weeks from
suppliers.
4. The processing time is 2 weeks and finished goods inventory is maintained for 4 weeks.
From the above information prepare a working capital estimate, allowing for a 15%
Contingency.
Question 25
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Question 26
Question 27