Working Capital Management | BBA 7th Semester Model Question Paper 2025 | TU - pdf Download

11. Differentiate between permanent current assets and temporary current assets.
12. Explain the importance of working capital management.
13. Describe the elements of credit policy.
14. Everest Bettery Company (EBC) is a leading Nepalese producer of automobile batteries. EBC turns out 1,500 batteries a day at a cost of Rs 6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. EBC allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.
a. What is the length of EBC's cash conversion cycle?
b. If EBC always produces and sells 1,500 batteries a day, what amount of working capital must it finance?
c. By what amount could EBC reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?

15. Warrior Industries projects that annual cash usage of Rs.3.75 million will occur uniformly throughout the forthcoming year. Warrior plans to meet these demands for cash by periodically selling marketable securities from its portfolio. The firm's marketable securities are invested to earn 12 percent, and the cost per transaction of converting funds to cash is Rs.40.
a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash.
b. What will be Warrior's average cash balance?
c. How many transfers per year will be required?
16. Shyam Corporation has daily cash balance of Rs. 65,000. A recent analysis of its collections indicated that customer’s payments were in the mail an average of 2.5 days. Once received, the payments are processed in 1.5 days. After payments are deposited, it takes an average of 3 days for these receipts to clear the banking system.
a. How much collection float (in days) does the firm currently have?
b. If the firm’s opportunity cost is 11 percent, would it be economically advisable for the firm to pay an annual fee of Rs. 16,500 to reduce collection float by 3 days? Explain why or why not.
17. The Homemade Bread Company buys and then sells (as bread) 2.6 million bushels of wheat annually. The wheat must be purchased in multiples of 2,000 bushels. Ordering costs, which includes grain elevator removal charges of Rs. 3,500, are Rs. 5,000 per order. Annual carrying costs are 2 percent of the purchase price of Rs.5 per bushel. The company maintains a safety stock of 200,000 bushels. The delivery time is 6 weeks.
a. What are the total inventory costs, including the costs of carrying the safety stock?
b. At what inventory level should a reorder be placed to prevent having to draw on the safety stock?

Group “C”

Long Answer Questions: Attempt any THREE questions. [3 x 10 = 30]

18. Explain the determinants of size of working capital of a manufacturing firm.
19. Suppose a firm makes purchases of Rs.3.65 million per year under terms of 2 / 10, net 30 and takes discounts.
a. What is the average amount of accounts payable net of discounts? (Assume that the Rs.3.65 million of purchases is net of discounts – that is, gross purchases are Rs.3, 724,490, discounts are Rs.74, 490, and net purchases are Rs. 3.65 million. Also, use 365 days in a year.)
b. Is there a cost of the trade credit the firm uses?
c. If the firm did not take discounts but it did pay on the due date, what would be its average payables and the cost of this non-free trade credit?
d. What would its cost of not taking discounts be if it could stretch it payments to 40 days?
20. Prepare a Cash Budget for the Asian Manufacturing Company for three months of May, June and July. The company has a policy of maintaining a minimum cash balance of Rs. 30,000. The company's cash balance as on 30 April is Rs 30,000.

	Actual Sales (Rs)		Estimated Sales (Rs)
January	75,500	May	105,000
February	75,000	June	120,000
March	90,000	July	150,000
April	90,000	August	150,000

Consider the following additional information:
a. Cash Sales are 60 percent of the total sales. The remaining sales are collected equally during the following two months.
b. Cost of goods manufactured is 75 percent of sales, 80 percent of this cost is paid after one month and
the balance is paid after two months of the cost incurrence.
c. Fixed operating expenses are Rs. 15,000 per month. Variable operating expenses are 10 percent of
sales each month.
d. Half yearly interest on 12 percent Rs 4,50,000 debentures is paid during July.
e. Rs 60,000 are expected to be invested in fixed assets during June.
f. An advance tax of Rs 15,000 will be paid in July.
You are also required to determine whether or not borrowing will be necessary during the period and if yes, when and for how much.
21. Kalika Manufacturing needs an additional Rs 100,000. The financial manager is considering two methods of obtaining this money: a loan from a commercial bank or a factoring arrangement. The bank charges 12 percent per annum interest, discount basis. It also requires a 15 percent compensating balance. The factor is willing to purchase Kalika's accounts receivable and to advance the invoice amount less a 3 percent factoring commission on the invoices purchased each month. (All sales are on 30-day terms.) A 10 percent annual interest rate will be charged on the total invoice price and deducted in advance. Also, under the factoring agreement, Kalika can eliminate its credit department and reduce credit expenses by Rs 2,000 per month. Bad debt losses of 10 percent on the factored amount can also be avoided.
a. How much should the bank loan be in order to net Rs 100,000? How much accounts receivable should be factored to net Rs 100,000?
b. What are the annual total rupee costs, associated with each financing arrangement?
c. Discuss some considerations other than cost that may influence management's choice between factoring and a commercial bank loan.

Group “D”

Comprehensive questions/Case analysis/Situation analysis question: [4 x 5 = 20]

22. Carefully read the following case and answer the questions given below:
You have just completed BBA with finance specialization. You are appointed as credit manager by the Chair Person of Delta Electronic Corporation (DEC) to advise to the Chief Financial Officer (CFO) about the credit sales and receivables management. At present, DEC expects to have sales of Rs 10 million this year under its current operating policies. Its variable costs as a percentage of sales are 80 percent, and its required rate of return is 16 percent. Currently, DEC's credit policy is net 25 (no discount for early payment). However, its DSO is 30 days, and its bad debt loss percentage is 2 percent. DEC spends Rs. 50,000 per year to collect receivables, and its marginal tax rate is 40 percent.
As the credit manager of DEC, you are considering two alternative proposals for changing DEC's credit policy to suggest to the CFO for the betterment of credit decisions.
Your first proposal is to lengthen the credit period from net 25 to net 30. Collection expenditures will remain constant. Under this proposal, sales are expected to increase by Rs 1 million annually, and the bad debt loss percentage on new sales is expected to rise to 4 percent (the loss percentage on old sales should not change). In addition, the DSO is expected to increase from 30 days to 45 days on all sales.
Your second proposal is to shorten the credit period from net 25 to net 20. Again, collection expenses will remain constant. The anticipated effects of this change are a decrease in sales of Rs. 1 million per year, a decline in the DSO from 30 days to 22 days, and a decline in the bad debt loss percentage to 1 percent on all sales.
Questions:
a. What is the net income of DEC at present credit policy?
b. What is the change in net income if DEC accept your first proposal and uses relaxed credit policy?
c. What is the change in net income if DEC accept your second proposal and follow the restricted credit policy?
d. Based on your estimation of change in net income of above your proposals, should DEC change the credit policy? Describe the role of credit manager of a firm.