Ans to question no:1(a)

a)What do you mean by working capital management? Narrate the importance of sound
working capital management in an organization.
Working capital management refers to how a business handles its short-term assets and liabilities.
It's essentially about ensuring a company has enough cash on hand to cover its day-to-day
operational needs while also using its resources effectively.

Here's why sound working capital management is crucial for any organization:

● Liquidity: A company needs to have sufficient liquid assets, like cash, to pay its bills and
operating expenses. Effective working capital management ensures smooth cash flow and
avoids situations where a business might default on its obligations due to a cash crunch.
● Profitability: Resources tied up in excessive inventory or slow-to-collect receivables aren't
generating returns. Working capital management helps optimize these areas, freeing up
cash that can be invested in growth or profit-generating activities.
● Financial Health: A company's working capital is a key measure of its short-term financial
health. Investors and creditors use working capital ratios to assess a company's ability to
meet its financial commitments. Strong working capital management demonstrates
financial stability and creditworthiness.
● Growth: Efficient working capital management can unlock resources that can be used for
expansion, research and development, or strategic acquisitions. By optimizing cash flow,
businesses can position themselves for future growth.

In essence, sound working capital management is like a tightrope walk for businesses. They need
to strike a balance between having enough resources readily available and not having too much
capital tied up in unproductive areas.

Ans to question no:1(b)

b)State the factors that determine the levels of working capital.

Several factors influence the level of working capital a company needs:

● Business Size and Scale of Operations: Larger businesses and those with wider
operations typically require more working capital to support their activities.
● Operating Cycle Length: The time it takes to convert raw materials into inventory, sell
that inventory, and collect customer payments (operating cycle) affects working capital
needs. A longer cycle typically requires more working capital.
● Sales Growth: Growing businesses generally need to increase their working capital to
support expanding sales volume.
 ● Inventory Management: Companies that hold high levels of inventory need more
working capital to finance those stocks. Efficient inventory management can help reduce
working capital requirements.
● Credit Policy: Offering generous credit terms to customers (allowing them extended
payment periods) can tie up cash in accounts receivable, increasing working capital needs.
● Seasonality: Businesses with seasonal sales fluctuations might require more working
capital during peak periods to cover expenses and maintain inventory levels.
● Production Technology: Complex production processes that involve large upfront
investments in raw materials or specialized equipment can lead to higher working capital
requirements.
● External Factors: Economic conditions, industry practices, and government regulations
can also influence working capital needs.

By understanding these factors, businesses can develop strategies to optimize their working capital
management and ensure they have the financial resources necessary for smooth operations and
growth.

Ans to question no :1(c)

Step 1 Calculation of Stock of Raw material, Work in process, and Finished goods.

Annual output = 3,00,000 units

Year in weeks 12 months × 4 weeks = 48 weeks

Therefore, weekly output= 3,00,000/48= 6,250 units

● Calculation of Average stock of materials

Average stock of materials = Output × Cost per unit × Time period

Thus, Avg stock of materials = 6,250 × 105 × 4 weeks = Rs. 26,25,000.

● Calculation of average stock of work in process

Working Process consists of direct materials, direct labour and overhead.

Therefore, Avg direct material= Output × cost per unit × time period

Avg direct material = 6,250 × 105 × 2 = Rs. 13,12,500

Avg. direct labour = 6,250 × 45 × 2 = Rs. 5,62,500

Avg. Overheads=6,250 × 70 × 2 = Rs. 8,75,000

Total stock of work in process = 13,12,500 + 5,62,500 + 8,75,000 = Rs. 27,50,000

● Calculation of average stock of finished goods

Avg. direct material = 6,250 × 105 × 4 = Rs. 13,65,000

Avg. direct labour = 6,250 × 45 × 4 = Rs. 11,25,000

Avg. overheads=6,250 × 70 × 4 = Rs. 17,50,000

Total stock of finished goods 13,65,000+11,25,000+17,50,000 = Rs. 42,40,000

Thus, Total Stock = 26,25,000+ 27,50,000 + 42,40,000 = Rs 96,15,000

Step 2 Calculation of average debtors

Average Debtors Output weekly × Unit Cost × Debtors Period × Portion of Credit Sales

Portion of credit sales is 80% or 4/5 of the sales. As 20% of the output sold against cash. Avg.

Debtors= 6,250 × 220 × 8 × 4/5 = Rs 88,00,000.

Step 3 Calculation of average current assets

Average current assets = Total stock + Avg. debtors + Cash
Average current assets = 96,15,000 + 88,00,000 + 70,000 = Rs 1,84,85,000

Step 4 Calculation of average current liabilities

Avg. Creditors = 6,250 × 105 × 4 = Rs. 26,25,000

Avg. Wages payable= 6,250 × 45 × 3/2 = Rs. 4,21,875
Avg. overheads payable = 6,250 × 70 × 4 = Rs. 17,50,000
Average current liabilities= 26,25,000+4,21,875+17,50,000= Rs. 47,96,875

Step 5 Calculation of working capital required

Working capital required = Average current assets - Average current liabilities
Working capital required = 1,84,85,000 - 47,96,875 = Rs. 1,36,88,125

Thus, Working capital required= Rs. 1,36,88,125

Ans to question no :2(a)

Define the term:
(i) cash and near cash assets and ii) Cash Management

(i) Cash and Near-Cash Assets

● Cash: This includes physical currency, coins, and demand deposit accounts like checking
and savings accounts where you can withdraw money immediately.
● Near-Cash Assets: These are financial instruments that are highly liquid (almost as good
as cash) but are not actual cash. Examples include:
○ Money market accounts
 ○ Short-term government bonds (treasury bills)
○ Certificates of Deposit (CDs) approaching maturity (short remaining time until you
can withdraw the money)
○ Marketable securities (easily tradable stocks with high liquidity)

(ii) Cash Management

Cash management refers to the strategies and practices a company uses to handle its cash inflows
and outflows. The goal is to maintain an optimal level of cash on hand to meet current and
upcoming financial needs.

Here are some key aspects of cash management:

● Cash Flow Forecasting: Predicting future cash inflows and outflows to avoid running out
of cash or having too much sitting idle.
● Optimizing Account Balances: Balancing the amount of cash held in different accounts
to maximize returns while ensuring easy access.
● Collection and Disbursement Management: Ensuring timely payments are received
from customers and managing bill payments efficiently.
● Investing Excess Cash: Investing any surplus cash in low-risk, near-cash assets to earn a
slight return.
Ans to question no :2(b)
Arguments For and Against Holding Excessive Cash:

(i) Arguments in Favor of Keeping Excessive Cash:

● Security and Liquidity: Cash offers immediate access to funds and is not subject to
market fluctuations like stocks or bonds. This can be crucial during emergencies or
economic downturns when other assets might be difficult to sell without a loss.
● Peace of Mind: Having a large cash buffer can provide a sense of security and financial
independence. It allows you to weather unexpected expenses or job loss without immediate
financial stress.
● Bargaining Power: Cash on hand can be advantageous when making large purchases.
Some sellers might offer discounts for cash payments.
● Control Over Investments: Holding more cash allows you to be more selective when
investing. You can wait for the right opportunity to enter the market at a lower price point.

However, there are also downsides to consider:

● Lost Opportunity Cost: Cash earns very little interest compared to other investments like
stocks or bonds. Over time, inflation can erode the purchasing power of excessive cash.
● Security Risks: Keeping large amounts of physical cash at home can be risky due to theft
or loss.
(ii) Arguments in Favor of Keeping Less Cash:

● Growth Potential: Investing your money in assets like stocks or bonds can offer the
potential for higher returns compared to holding cash. This can help you grow your wealth
over time and achieve your financial goals faster.
● Diversification: By keeping less cash and investing in different asset classes, you can
diversify your portfolio and potentially reduce overall risk.
● Earning Interest: Investing your money in interest-bearing accounts or bonds allows you
to earn a return on your money, helping it keep pace with inflation.

However, there are also potential drawbacks to consider:

● Market Volatility: Investments can fluctuate in value, leading to potential losses. Keeping
less cash on hand may mean you have less readily available funds to weather market
downturns.
● Liquidity Needs: If you have upcoming expenses or require immediate access to cash,
having too little on hand might lead to problems.

Ans to question no:2(c)

Brownstein, Inc., expects sales of $100,000 during each of the next 3 months. It will make
monthly purchases of $60,000 during this time. Wages and salaries are $10,000 per month
plus 7% of sales. Brownstein expects to make a tax payment of $22,000 in the next month
and a $13,000 purchase of fixed assets in the second month and to receive $8,000 in cash from
the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash
and the minimum cash balance are assumed to be zero.

a. Construct a cash budget for the next 3 months.

b. Brownstein is unsure of the sales levels, but all other figures are certain. If the most
pessimistic sales figure is $80,000 per month and the most optimistic is $120,000 per month,
what are the monthly minimum and maximum ending cash balances that the firm can expect
for each of the 1- month periods?

Cash Budget

1 2 3

Cash Sales 1,00,000 1,00,000 1,00,000

Asset Sale 8,000

Total Cash Received 1,00,000 1,00,000 1,08,000

 Purchase 60,000 60,000 60,000

Wages & Salaries 17,000 17,000 17,000

Tax 22,000

Fixed Asset 13,000

Total Cash Paid 99,000 90,000 77,000

Net Cash Flow 1,000 10,000 31,000

Notes for cash received:

● Expected sales in each month is $ 100,000
● In 3rd month there is sale of asset for $ 8000
Notes for cash paid:
● Purchase in each is $ 60,000
● Wages & salaries is $15,000 ($10,000+ 7% * $ 100,000 = $ 17,000)
● Tax in 1st month is $ 22,000
● Fixed asset purchase of $ 13,000
Notes:
● Net cash flow is total cash received minus total cash paid
● Net cash flow is cash balance at the end of each month

b)Cash Budget if pessimistic sales:

Cash Budget(Pessimistic Sales)

1 2 3

Cash Sales 80,000 80,000 80,000

Asset Sale 8,000

Total Cash Received 80,000 80,000 88,000

Purchase 60,000 60,000 60,000

Wages & Salaries 15,600 15,600 15,600

 Tax 22,000

Fixed Asset 13,000

Total Cash Paid 97,600 88,600 75,600

Net Cash Flow (17,600) (8,600) 12,400

Cash Budget if Optimistic sales:

Cash Budget(Optimistic Sales)

1 2 3

Cash Sales 1,20,000 1,20,000 1,20,000

Asset Sale 8,000

Total Cash Received 1,20,000 1,20,000 1,28,000

Purchase 60,000 60,000 60,000

Wages & Salaries 18,400 18,400 18,400

Tax 22,000

Fixed Asset 13,000

Total Cash Paid 1,04,000 91,400 78,400

Net Cash Flow 16,000 28,600 49,600

Summary (Maximum & Minimum cash balance)

Pessimistic Sales (17,600) (8,600) 12,400

Optimistic Sales 16,000 28,600 49,600

 Ans to question no :3(a)
a)Shortly describe Baumol Model and Miller-Orr Model.
Cash Management Models: Baumol vs. Miller-Orr

Both Baumol and Miller-Orr models are used in cash management to determine optimal cash levels
for a company. Here's a quick comparison:

Baumol Model:

● Simpler model, often called the "inventory model" of cash management.

● Assumes a constant cash outflow rate.
● Focuses on minimizing the total cost of:
○ Fixed costs: Associated with buying or selling securities to adjust cash levels.
○ Opportunity cost: The lost interest earned on cash held (since cash isn't invested).
● Helps determine the optimal amount of cash to order at each reorder point.
● Limitations: Doesn't account for random fluctuations in cash flow.

Miller-Orr Model:

● More complex and realistic than Baumol.

● Recognizes that cash flows fluctuate randomly.
● Sets upper and lower control limits for cash balances.
● Company buys securities when cash reaches the upper limit (excess) and sells when it falls
below the lower limit (deficiency).
● Aims to minimize the sum of:
○ Transaction costs: Associated with buying and selling securities.
○ Holding cost: Opportunity cost of keeping cash.
● Provides a framework for managing cash within a defined range.

In essence:

● Baumol helps find the optimal amount to order at once, assuming constant cash flow.
● Miller-Orr helps establish a buffer zone for cash levels, considering fluctuations.
Ans to question no :3(b)
b)Discuss the strategies that a firm can use in effectively managing cash inflows and cash
disbursements.
Here are some key strategies a firm can use to effectively manage cash inflows and cash
disbursements:

Optimizing Inflows (Receivables Management):

 ● Early Payment Incentives: Offer discounts for early payments to encourage customers to
settle invoices faster. This accelerates cash collection and improves cash flow.
● Strict Credit Policies: Implement clear creditworthiness checks before extending credit
to customers. This helps minimize bad debts and late payments.
● Efficient Invoicing: Ensure invoices are accurate, timely, and contain clear payment
instructions. Automate invoicing processes whenever possible to avoid delays.
● Multiple Payment Options: Provide customers with convenient payment options like
online portals, credit card processing, etc., to facilitate faster settlements.

Optimizing Outflows (Payables Management):

● Negotiate Payment Terms: Negotiate extended payment terms with suppliers whenever
possible. This frees up cash for the firm in the short term. However, ensure it doesn't
negatively impact creditworthiness.
● Early Payment Discounts: If financially viable, consider taking advantage of early
payment discounts offered by suppliers. This can save money on purchases while managing
cash flow strategically.
● Streamline Bill Payments: Automate bill payments using electronic methods to ensure
timely payments and avoid late fees.
● Centralize Payables Management: Consolidate bill payments through a centralized
system to gain better control over cash disbursements and identify potential savings
opportunities.
Ans to question no :3(c)
Slap Shot Corporation has a fixed cost associated with buying and selling 05
marketable securities of $40. The interest rate is currently .021 percent per day. and
the firm has estimated that the standard deviation of its daily net cash flows is $70.
Management has set a lower limit of $1,500 on cash holdings. Calculate the return
point and upper limit using the Miller-Orr model.

Slap shot Corporation's target cash balance or return point are computed as:
C = $1500+(3/4×$40×$70^2/0.00021)^⅓
= $2,388
Calculating Upper Limit:
Upper Limit = 3C - 2L
= 3×2,388 - 2×1500
 = 7,164 - 3000
=$4,164

Ans to question no :4(a)

a)What is meant by competitive position? Describe the factors that affect the competitive
position as describe by Michael E. Porter. How can working policies be used to strengthen
the competitive position of a firm?
Competitive position refers to a company's standing in relation to its competitors within a
particular market. It's all about how a company differentiates itself and the value it delivers to
customers compared to its rivals.

According to Michael E. Porter, five key forces influence a firm's competitive position:

1. Threat of New Entrants: This considers how easy or difficult it is for new companies to
enter the market and compete with existing players. Factors like start-up costs, brand
loyalty, and regulations can influence this threat.
2. Bargaining Power of Suppliers: This force analyses how much power suppliers have in
influencing prices and terms. The number of suppliers, availability of substitutes, and the
importance of switching costs all play a role.
3. Bargaining Power of Buyers: Similar to suppliers, this force examines the power buyers
hold in negotiating prices, demanding quality, and playing competitors against each other.
Factors like buyer concentration, volume of purchases, and presence of substitute products
influence this.
4. Threat of Substitutes: This considers the existence of alternative products or services that
can satisfy the same customer needs. The closer the substitutes are, the more significant
the threat.
5. Competitive Rivalry: This is the most direct form of competition. The number and
strength of competitors, product differentiation, and switching costs all affect the intensity
of this rivalry.

By understanding these forces, a company can identify its strategic positioning and implement
strategies to strengthen it.

Working policies can be a powerful tool to enhance a firm's competitive edge. Here's how:
 ● Innovation Policies: Policies that encourage research and development, employee
creativity, and adaptation to changing market trends can lead to a competitive advantage
in features, technology, or efficiency.
● Quality Management Policies: Implementing strict quality control measures and focusing
on continuous improvement can lead to a reputation for superior products and services,
attracting and retaining customers.
● Customer-Centric Policies: Policies that prioritize customer satisfaction, loyalty
programs, and responsive after-sales service can differentiate a company from competitors
who may not be as focused on customer needs.
● Cost-Effectiveness Policies: Streamlining operations, optimizing resource allocation, and
implementing cost-saving measures can improve a company's pricing strategy and
profitability compared to less efficient competitors.

By implementing effective working policies that address these areas, a firm can position itself
more competitively within its market.

b)Describe how the working capital level of firms is affected by the following terms:
i.Differences across countries
ii.Monetary constraints
iii.Inflation
iv.Financial distress of firms

How Working Capital Levels are Affected By:

i. Differences Across Countries:

● Institutional Framework: Developed economies with strong legal and financial systems
often allow companies to manage working capital more efficiently. Easier access to short-
term financing and efficient collection processes can lead to lower working capital needs.
● Industry Practices: Working capital practices can vary by industry across countries. For
example, longer credit terms in certain industries might be common in one country but not
another, impacting inventory levels and receivables.
● Economic Conditions: Economic growth can lead to higher sales and a need for increased
working capital. Conversely, slower economic growth might prompt companies to hold
less inventory and tighten credit terms, reducing working capital needs.

ii. Monetary Constraints:

● Interest Rates: Higher interest rates make it more expensive for firms to borrow money
to finance working capital needs. This can incentivize companies to manage working
capital more efficiently by reducing inventory levels and collecting receivables faster.
● Access to Credit: Limited access to credit markets, especially for smaller firms, can force
them to maintain higher working capital levels as a buffer. This is because they may need
to rely on internal funds or slower payment cycles to cover short-term needs.
iii. Inflation:

● Rising Prices: Inflation increases the cost of raw materials, inventory, and accounts
receivable. Companies may need to hold higher levels of working capital just to maintain
the same level of operations.
● Hedging Strategies: Firms might implement strategies like purchasing in advance or using
derivatives to manage price fluctuations caused by inflation, potentially impacting working
capital levels.

iv. Financial Distress of Firms:

● Reduced Creditworthiness: Companies experiencing financial distress may find it

difficult to obtain credit to finance working capital needs. This can force them to sell
inventory at a discount or delay payments to suppliers, which can further strain their
financial health.
● Increased Risk Aversion: Firms in financial distress might become more risk-averse and
hold higher levels of working capital as a safety net. This can come at the expense of
profitability.

In conclusion, working capital levels are a complex interplay of various factors. Understanding the
impact of these factors is crucial for companies to optimize their working capital management
strategies and achieve financial stability.

Ans to question no :5(a)

a)Describe the costs related to inventory.
Inventory costs encompass all the expenses incurred throughout the lifecycle of goods, from
acquiring them to storing and managing them until they are sold. There are three main categories
of inventory costs:

1. Ordering Costs: These are the costs associated with placing and receiving orders for
inventory. They include:
○ Purchase cost: The actual price paid to acquire the inventory from suppliers.
○ Transportation costs: The cost of shipping the inventory from the supplier to the
warehouse.
○ Ordering fees: Any administrative costs associated with placing an order, like
processing paperwork.
○ Expediting fees: Costs incurred for rush orders or special handling.
2. Carrying Costs: These are the expenses associated with storing and holding inventory.
They include:
○ Storage costs: Rent, utilities, and maintenance costs for the warehouse space.
○ Handling costs: Labor costs associated with receiving, storing, managing, and
picking inventory.
○ Insurance costs: The cost of insuring the inventory against theft, damage, or loss.
 ○ Taxes: Property taxes or other taxes levied on the value of the inventory.
○ Capital cost: The opportunity cost of the money tied up in unsold inventory, as it
could be invested elsewhere for a return.
○ Obsolescence costs: The potential loss in value of inventory that becomes outdated
or unsellable due to changes in technology, customer preferences, or spoilage.
3. Stockout Costs: These are the costs associated with not having enough inventory to meet
customer demand. They include:
○ Lost sales: Revenue lost due to the inability to fulfill customer orders because of
stockouts.
○ Backordering costs: The cost of processing customer backorders and potentially
expediting shipments.
○ Customer dissatisfaction: Loss of customer goodwill and potential future sales
due to stockouts.

By understanding these costs, businesses can develop strategies to optimize their inventory levels.
The goal is to find the balance between minimizing ordering costs and carrying costs while also
avoiding stockouts. This can be achieved through techniques like implementing just-in-time
inventory systems, using forecasting methods to predict demand, and negotiating better terms with
suppliers.

Ans to question no :5(b)

b)A local distributor for a national tire company expects to sell approximately 19,600 steel-
belted radial tires of a certain size and tread design next year. The annual carrying cost is
$160 per tire, and the ordering cost is $175. The distributor operates 278 days a year.
i) What is the EOQ?
ii)How many times per year does the store reorder?
iii)What is the length of an order cycle (time between orders)?
iv)What is the total annual cost if the EOQ quantity is ordered

i)Calculating EOQ:
D = 19,600 tires per year
Annual Carrying Cost(H) = $160
Ordering Cost (S) = $175

EOQ = √(2×19,600×175) ÷ 160

= 207.06 tires
ii) Number of Reorder per year:
D÷EOQ
= 19,600 ÷ 207.06
= 95.65 tires
iii) Length of Order Cycle :
= Days in a year ÷ Number of Reorder per year
= 278 ÷ 95.65
= 2.90 days
iv) Total cost at EOQ:
Total ordering cost = (D/EOQ)×S
= (19600/207.06)×175
= $16,565
Total carrying cost = (EOQ/2)×H
= (207.06/2)×160
= $16,565
So, Total Annual Cost at EOQ = 16,565+16,565 = $33,130
Ans to question no :5(c)
The maintenance department of a large hospital uses about 1816 cases of liquid cleanser
annually. Ordering costs are $112, carrying costs are $14 per case a year, and the new price
schedule indicates that orders of less than 500 cases will cost $20 per case, 500 to 799 cases
will cost $18 per case, 800 to 1499 cases will cost $17 per case, and larger orders will cost $16
per case. Considering the prices at different quantities, determine the optimal order
quantity and the total cost.

D = annual demand = 1,816 cases/ year

S = ordering cost = $112
H = carrying cost = $14 per case per year

Calculating Common EOQ:

√(2×1816×112)÷14
=170.45 cases

Total cost at EOQ (0-500):

(EOQ/2)×H + (D/EOQ)×S + PD
=(170.45/2)×14 + (1816/170.45)×112 + (20×1816)
=1193+1193 + 36,320
=$38,706

For 500 ≤ Q < 799

Total cost when (Q=500 cases and cost SR=18)
(Q/2)×H + (D/Q)×S + PD
=(500/2)×14 + (1816/500)×112 + (18×1816)
=3,500+407+ 32,688
=$36,595

For 800 ≤ Q < 1499

Total cost when (Q=800 cases and cost SR=17)
(Q/2)×H + (D/Q)×S + PD
=(800/2)×14 + (1816/800)×112 + (17×1816)
=5,600+254 + 30,872
=$36,726

For Q ≥ 1500
Total cost when (Q=1500 cases and cost SR=16)
(Q/2)×H + (D/Q)×S + PD
=(1500/2)×14 + (1816/1500)×112 + (16×1816)
=10,500+136 + 29,056
= $39,692
Therefore; the total cost is minimum for an order quantity of 500 ≤ Q < 799
Ans to question no :6(a)
a)State the sources of short-term funds.
The main sources of short-term financing are
(1) trade credit,
(2) commercial bank loans,
(3) commercial paper, a specific type of promissory note, and
(4) secured loans.

Ans to question no :6(b)

b)Effective loan management is essential to obtain a high credit rating. What policies should
a firm follow in effectively managing credit?
Effective loan management is key to a good credit rating. Here are some policies a firm can follow
to effectively manage credit:

Strong underwriting:

● Thorough borrower assessment: Analyze credit scores, income stability, debt-to-income

ratio, and employment history to assess creditworthiness. This helps identify high-risk
borrowers and avoid defaults.
Clear communication and loan terms:

● Transparent communication: Ensure borrowers understand loan terms, interest rates,

fees, and repayment schedules.
● Loan options: Offer a variety of loan products with different terms and rates to cater to
diverse borrower needs and risk profiles.

Efficient loan servicing:

● Automated systems: Utilize technology for streamlined billing, payment processing, and
delinquency tracking.
● Customer support: Provide clear communication channels and responsive customer
service to address borrower inquiries and concerns.

Risk management:

● Monitoring loan performance: Track key metrics like delinquency rates and repayment
patterns to identify potential problems early on.
● Proactive approach: Develop strategies to address delinquencies, such as early
intervention programs or workout plans.
Ans to question no :6(c)
Erica Stone works in an accounts payable department. She has attempted to convince her boss to
take the discount on the 3/10 net 45 credit terms most suppliers offer, but her boss argues that
giving up the 3% discount is less costly than a short-term loan at 14%. Prove to whoever is wrong
that the other is correct. (Note: Assume a 365-day year.)

We know,
Cost of giving up cash discount = (CD/100-CD) × (365/CP-DP)
Cost of giving up cash discount = (0.03 0.97) x (365÷35) = 32.25%
Since the cost of giving up the discount is higher than the cost of borrowing for a short-term loan,
Erica is correct; her boss is incorrect.

Ans to question no :6(d)

Weathers Catering Supply, Inc., needs to borrow $250,000 for 6 months. State Bank has
offered to lend the funds at a 10% annual rate subject to a 10% compensating balance. On
the other hand, Frost FinanceCo. has offered to lend the funds at a 9.5% annual rate with
discount-loan terms. The principal of both loans would be payable at maturity as a single
sum.
i)Calculate the effective annual rate of interest on each loan.
ii)What could Weathers do that would reduce the effective annual rate on the State Bank
loan?
In this problem, we are required to calculate the effective annual interest rate of each offered loan
by State Bank and Frost Finance Co. to Weathers Catering Supply, Inc., amounting to $2,50,000
for 6 months.

The effective annual rate of interest on the State Bank loan with a compensating balance of 10%
can be calculated as 10% / (1 - 10%) = 11.11%

For Frost FinanceCo. loan:

Since Frost FinanceCo. offers a discount-loan, we'll calculate the EAR using the formula:
EAR = (1 + (Discount rate / (1 - Discount rate)))^(365 / n) - 1
=1+(.095/1-.095)))^(365/180)-1

Ans to question no :7(a)

a)What are the three key issues related to the management of receivables? Shortly discuss
those issues.
Here are three key issues related to the management of receivables:

1. Slow payment cycles: This is a major concern because it means companies are waiting
longer than ideal to collect cash from customers for goods or services sold. This can strain
cash flow and limit a company's ability to invest in growth or meet financial obligations.
2. Inaccurate or inefficient data management: Manual processes or poorly integrated
systems can lead to errors in invoices, customer information, and payment tracking. This
makes it difficult to get a clear picture of outstanding receivables and can delay collection
efforts.
3. Lack of clear credit policies or ineffective collections processes: Without proper
guidelines for extending credit to customers, companies risk taking on high-risk clients
who are more likely to default on payments. Additionally, weak collections strategies can
leave them without a clear path to recover overdue invoices.

Ans to question no :7(b)

Toyota Automobiles is manufacturing heavy vehicles and presently offering a credit period
of 45 days. In order to increase sales from its current level of TK. 4000 crore., it is
contemplating to increase thecredit period to 60 days. This is expected to bring additional
sales of TK. 400 crore. There is no change in the collection and bad debt cost. The company
is likely to earn a contribution margin of 20%. The short-term borrowing cost is 12%.
Evaluate the new credit period and its impact on profitability.

To evaluate the new credit period and its impact on profitability, we'll calculate the incremental
profit from the additional sales and compare it with the increased cost of financing the extended
credit period.
1. Incremental Profit from Additional Sales:
Additional sales = TK. 400 crore
Contribution margin = 20%
Incremental profit = Additional sales × Contribution margin
= TK. 400 crore × 20%
= TK. 80 crore

2. Increased Cost of Financing:

Short-term borrowing cost = 12%
Increase in credit period = 60 days - 45 days = 15 days
Cost of financing = (TK. 4000 crore / 365 days) × 15 days × 12%
= TK. (4000 crore / 365) × 15 × 0.12
= 10.95 × 1.8
= TK. 19.71 crore

3. Impact on Profitability:
Net Impact = Incremental Profit - Increased Cost of Financing
= TK. 80 crore - (TK. (4000 crore / 365) * 15 * 0.12)
= TK. 80 crore - 19.71 crore
= TK. 60.29 crore

By comparing the incremental profit with the increased cost of financing, we can determine
whether extending the credit period to 60 days is beneficial for profitability.
Ans to question no : 7(c)

Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:
● A = working capital ÷ total assets= 530 ÷ 1900 = .279
● B = retained earnings ÷ total assets=130÷1900= .068
● C = earnings before interest and tax ÷ total assets= 150 ÷ 1900 = .079
● D = market value of equity ÷ total liabilities = 2200 ÷ 1370 = 1.60
● E = sales ÷ total assets = 1000 ÷ 1900 = .526
So,Altman Z score = 1.2×. 279 + 1.4×.068 + 3.3×0.079 + 0.6×1.60 + 1.0×.526
= 2.18
It’s in grey zone that means it is stable or bankruptcy cannot be predicted