Chapter 5: Working Capital Management - Ibrahim … · Chapter 5: Working Capital Management 2017 1 Ibrahim Sameer Masters of Business Administration (FM – AVID College) Financial

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











































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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.



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.



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



Question 10

Question 11



Question 12

Question 13



Question 14

Question 15



Question 16

Question 17



Question 18

Question 19



Question 20

Question 21

Question 21



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.



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



Question 26

Question 27



Question 28

Documents

Chapter 5: Working Capital Management - Ibrahim … · Chapter 5: Working Capital Management 2017 1 Ibrahim Sameer Masters of Business Administration (FM – AVID College) Financial