FM09-CH 27

CHAPTER 27
Principles of Working Capital

Problem 1
(Rs crore)
19X1 19X2
(1) Raw material consumed
24.0 32.7
(2) Raw material inventory
6.8
7.6
(3) Raw material conversion period (days)
102.0 84.0
(4) Cost of production
36.9 49.2
(5) Work-in-process inventory
2.0
3.1
(6) Work-in-process conversion period (days)
20.0 23.0
(7) Cost of goods sold
37.3 48.4
(8) Finished goods inventory
2.8
3.6
(9) Finished goods conversion period (days)
27.0 27.0
(10) Cost of sales
38.6 50.3
(11) Debtors
10.8 14.9
(12) Debtors conversion period (days)
101.0 107.0
(13) Purchases
25.6 33.5
(14) Creditors
4.6
8.0
(15) Payment deferral period (days)
65.0 86.0
Gross operating cycle (days)
Net operating cycle (days)
249.0 240.0
185.0 154.0
19X3
44.0
9.2
75.0
66.2
4.6
25.0
66.9
2.9
16.0
69.0
20.5
107.0
45.6
12.0
95.0
223.0
128.0
Problem 2
Weeks
Current assets:
Stock of finished goods
Stock of stores, materials etc.
Debtors
Inland sales
6.0
Export sales
1.5
Advance payment for sundry exp. Quarterly
Months Annual Average

(Rs)
(Rs)
5,000
5,000
8,000
8,000
312,000
78,000
8,000
Total current assets

Current liabilities:
Wages
Stocks, materials, etc.
Rent, royalties etc.
Clerical staff
Manager
Misc.
Total current liabilities
Working capital
36,000
2,250
2,000
53,250
1.5
1.5
6.0
0.5
0.5
1.5
260,000
48,000
10,000
62,000
4,800
48,000
7,500
1,385
5,000
2,583
200
6,000
22,668
30,582
Problem 3
Raw material
Direct labour
Overheads
Per unit
80
30
60
Total
8,320,000
3,120,000
6,240,000
Total cost
Profit
170 17,680,000
30 3,120,000
Selling price
200 20,800,000
Units produced & sold

Cash sales
Credit sales
Raw material consumption
Cost of production
Current assets:
Raw material inventory
Materials in process
Finished goods
Debtors
Cash balance
104,000
5,200,000
15,600,000
8,320,000
17,680,000
Days
30
15
30
60

Creditors
Wages
Overheads
Amount
693,333
736,667
1,473,333
2,946,667
25,000
5,875,000
30
10
30
693,333
86,667
520,000
1,300,000
Add: 10% contingencies
4,575,000
457,500
Net working capital
5,032,500
Problem 4
Per unit
Raw material
Direct labour
Overheads
Total cost
Profit
Selling price
Units produced & sold
Sales
Raw material consumption
Cost of production
42.4
15.9
31.8
90.1
15.9
106
100,000
10,600,000
4,240,000
9,010,000
Total
4,240,000
1,590,000
3,180,000
9,010,000
1,590,000
10,600,000
Current assets:
Weeks
Raw material inventory

Materials in process
Finished goods
Debtors
Cash balance (given)
Amount
4
2
4
8
326,154
346,538
693,077
1,630,769
125,000
3,121,538
Creditors
Wages
4
1 1/2
326,154
45,865
372,019
Add: 10% contingencies
2,749,519
274,952
Net working capital
3,024,471
Problem 5
(Rs 000)
CA/FA Cost of liquidity Cost of illiquidity Total cost
0.10
138
2,200
2,338
0.25
275
1,650
1,925
0.40
550
1,100
1,650
0.70
1,100
830
1,930
1.00
2,200
690
2,890
1.50
4,140
550
4,690
2.50
6,890
276
7,166
Cost tradeoff
8,000
Costs
7,000
Total cost
6,000
5,000
4,000
Cost of liq
3,000
2,000
1,000
0
0.10
Cost
Costofofilliq
illiq
0.25
0.40
0.70
CA/FA
1.00
1.50
2.50
Problem 6
Net
Month
January
February
March
April
May
June
July
August
September
October
November
December
Long-term interest rate: annual
Long-term interest rate: monthly
Inter-corporate lending rate: annual
Inter-corporate lending rate:
monthly
Month
January
February
March
April
May
June
July
August
September
October
November
December
Short-term interest rate: annual
Short-term interest rate: monthly
WC
72.65
58.13
29.06
24.22
33.90
43.60
58.12
72.66
82.30
87.19
92.02
87.17
LTD
Int. exp. Invst. Int. inc. int.
92.02
1.07 19.37
0.19 0.88
92.02
1.07 33.89
0.34 0.73
92.02
1.07 62.96
0.63 0.44
92.02
1.07 67.80
0.68 0.40
92.02
1.07 58.12
0.58 0.49
92.02
1.07 48.42
0.48 0.59
92.02
1.07 33.90
0.34 0.73
92.02
1.07 19.36
0.19 0.88
92.02
1.07 9.72
0.10 0.98
92.02
1.07 4.83
0.05 1.03
92.02
1.07 0.00
0.00 1.07
92.02
1.07 4.85
0.05 1.03
12.88
3.63 9.25
14.00%
1.17%
12.00%
1.00%
Short-term Interest
WC Borrowing expense
72.65
72.65
0.97
58.13
58.13
0.78
29.06
29.06
0.39
24.22
24.22
0.32
33.90
33.90
0.45
43.60
43.60
0.58
58.12
58.12
0.77
72.66
72.66
0.97
82.30
82.30
1.10
87.19
87.19
1.16
92.02
92.02
1.23
87.17
87.17
1.16
9.88
16.00%
1.33%
Net interest payment is lower when the company goes for long-term debt.
Problem 7
Current assets
Fixed assets
Total assets
Current liabilities
Short-term debt
Long-term debt
Total debt
Equity
Total capital
Projected sales
Expected EBIT
Interest on short-term debt
Interest on long-term debt
Profit before tax
(a) Before-tax ROE
(b) Current assets/Total assets
Current assets/Current liabilities
(d) Net working capital
Long-term interest rate
Short-term interest rate
Aggressive Moderate Conservative

252
270
288
180
180
180
432
450
468
150
150
150
216
162
108
43
108
173
259
270
281
23
30
37
432
450
468
531
540
549
53
54
55
35
26
17
8
19
31
11
9
7
46.8%
28.8%
17.8%
0.58
0.60
0.62
1.68
1.80
1.92
102
120
138
18%
16%
The company has highest current ratio (thus low risk) and lowest before-tax ROE under conservative policy. To have
increased ROE, the company will have to reduce its current assets and thus sacrifice some liquidity.

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CHAPTER 27

Principles of Working Capital

Months Annual Average

Total current assets

Units produced & sold

Total current assets

Add: 10% contingencies

Net working capital

Raw material inventory

Total current assets

Add: 10% contingencies

Net working capital

Aggressive Moderate Conservative

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