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Business Finance important questions

From 3 NEB Class 12 past papers: the chapters that keep coming back and their most important questions, each with a solved model answer. No guarantees; study the whole syllabus.

Important questions with answers

From the most-tested chapters first, each with a solved model answer.

1208010 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(a) What is working capital? Write about its determinants. [5]

(b) The following information are provided of A.G. company: Sales per day 4,000 units; Selling price per unit Rs. 40; Inventory conversion period 18 days; Receivable conversion period 25 days; Payable deferred period 12 days. Required:

(i) Cash conversion cycle

(ii) Working capital. [5]

(a) Working capital and its determinants

Working capital is the capital required to finance the day to day operations of a firm. In gross terms it is the total investment in current assets, and in net terms it is the excess of current assets over current liabilities:

$$\text{Net working capital} = \text{Current assets} - \text{Current liabilities}$$

Determinants of working capital:

Nature of business: trading and manufacturing firms need more working capital than service firms.
Size and scale of operations: larger operations need more working capital.
Production cycle: a longer production process ties up more funds in inventory.
Credit policy: liberal credit to customers raises receivables and working capital needs; liberal credit from suppliers reduces them.
Business cycle and seasonality: needs rise in boom and busy seasons and fall in slack periods.
Growth and expansion: growing firms need more working capital to support higher activity.

(b) Given:

$$ \begin{aligned} \text{daily sales value} &= 4{,}000 \times 40 \ &= Rs.,1{,}60{,}000 \end{aligned} $$

ICP $= 18$ days, RCP $= 25$ days, PDP $= 12$ days.

(i) Cash conversion cycle

$$ \begin{aligned} CCC &= ICP + RCP - PDP \ &= 18 + 25 - 12 \ &= 31\text{ days} \end{aligned} $$

(ii) Working capital

$$ \begin{aligned} \text{Working capital} &= CCC \times \text{daily sales} \ &= 31 \times 1{,}60{,}000 \ &= Rs.,49{,}60{,}000 \end{aligned} $$

2208010 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

A.B. company provides the following information: Ashar: Sales Rs. 4,00,000, Purchase Rs. 1,50,000, Wages Rs. 40,000, Other expenses Rs. 10,000. Shrawan: Sales Rs. 5,00,000, Purchase Rs. 1,80,000, Wages Rs. 45,000, Other expenses Rs. 12,000. Bhadra: Sales Rs. 6,00,000, Purchase Rs. 2,20,000, Wages Rs. 44,000, Other expenses Rs. 8,000. Sales of Jestha Rs. 5,00,000. Additional information:

(a) 10% sales are for cash. 60% of credit sales collected in the same month and balance in next month.

(b) Opening cash balance of Ashadh was Rs. 20,000.

(c) Purchase, wages and other expenses are paid in the same month. Required: Cash budget for 3 months ending Bhadra. [10]

Working note: collection from sales

Cash sales $= 10%$ of the month's sales (collected in the same month). Credit sales $= 90%$; of these 60% are collected in the same month and 40% in the next month.

$$ \begin{aligned} \text{Collection} &= (0.10\times\text{current sales}) + 0.60\times(0.90\times\text{current}) + 0.40\times(0.90\times\text{previous}) \ \text{Ashar} &= 40,000 + 0.60\times 3,60,000 + 0.40\times 4,50,000\ &= 40,000 + 2,16,000 + 1,80,000 = 4,36,000\ \text{Shrawan} &= 50,000 + 0.60\times 4,50,000 + 0.40\times 3,60,000\ &= 50,000 + 2,70,000 + 1,44,000 = 4,64,000\ \text{Bhadra} &= 60,000 + 0.60\times 5,40,000 + 0.40\times 4,50,000\ &= 60,000 + 3,24,000 + 1,80,000 = 5,64,000 \end{aligned} $$

(Jestha credit sales $= 0.90\times 5{,}00{,}000 = 4{,}50{,}000$, of which 40% is collected in Ashar.)

Cash payments (purchase + wages + other, paid same month):

$$ \begin{aligned} \text{Ashar} &= 1{,}50{,}000 + 40{,}000 + 10{,}000 \ &= 2{,}00{,}000 \ \text{Shrawan} &= 1{,}80{,}000 + 45{,}000 + 12{,}000 \ &= 2{,}37{,}000 \ \text{Bhadra} &= 2{,}20{,}000 + 44{,}000 + 8{,}000 \ &= 2{,}72{,}000 \end{aligned} $$

Cash budget for 3 months ending Bhadra

Particulars	Ashar	Shrawan	Bhadra
Opening balance	20,000	2,56,000	4,83,000
Add: Cash collections	4,36,000	4,64,000	5,64,000
Total cash available	4,56,000	7,20,000	10,47,000
Less: Cash payments	2,00,000	2,37,000	2,72,000
Closing balance	2,56,000	4,83,000	7,75,000

The closing cash balance at the end of Bhadra is Rs. 7,75,000.

3207210 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(a) State the importance of working capital. [5]

(b) A company produces 1,000 units a day and incurs a cost of Rs. 72 per unit for material, labour and other expenses. The different conversion cycle of the working capital are as under: Inventory conversion period 18 days; Receivable conversion period 36 days; Payable deferred period 12 days. Required:

(i) Cash conversion cycle period

(ii) Accounts receivable

(iii) Working capital. [5]

(a) Importance of working capital 1. Smooth operations: adequate working capital keeps production and sales running without interruption by financing day to day needs. 2. Meeting short term obligations: it enables timely payment to suppl...

4207210 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

A firm sells at a term of '3/20 net 40'. The credit sale of the firm is 20,000 units at Rs. 360 per unit. 50% of the customers pay on the 20th day and take discount and the other 50% customers pay on the net date. Required:

(i) Days sales outstanding

(ii) Average amount receivable

(iii) Days sales outstanding and average receivable if the non-discount customers pay on the 50th day. [3 + 3 + 4 = 10]

Given: $$ \begin{aligned} \text{total credit sales} &= 20{,}000 \times 360 \ &= Rs.,72{,}00{,}000 \end{aligned} $$ terms 3/20 net 40. 50% pay on day 20 (with discount), 50% pay on the net date (day 40). Assume 360 days a year, so: $$ ...

5207110 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

The details for materials purchases are as given below: Annual requirement 4,500 units; Cost per order Rs. 300; Cost per unit Rs. 150; Carrying cost 20%; Safety stock 200 units; lead time 2 weeks; Weeks in a year 50 weeks. Required:

(i) Economic order quantity

(ii) total cost of EOQ

(iii) Re-order point. [3 + 4 + 3 = 10]

Given: annual requirement $A = 4,500$ units; ordering cost $O = Rs.,300$; carrying cost $C = 20%$ of Rs. 150 $= Rs.,30$ per unit; safety stock $= 200$ units; lead time $= 2$ weeks; 50 weeks a year. (i) Economic order quantity $$ \begi...

620805 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

Following information are given: Annual sales Rs. 9,00,000; Cash sales 20%; Days sales outstanding 24 days; Days in a year 360 days. Required:

(a) Average Receivable

(b) Average receivable if days sales outstanding is 30 days. [2.5 + 2.5 = 5]

Given: annual sales $= Rs.,9,00,000$, cash sales $= 20%$, so credit sales $= 80%$. Receivables arise only from credit sales. $$ \begin{aligned} \text{Credit sales} &= 0.80 \times 9{,}00{,}000 \ &= Rs.,7{,}20{,}000 \ \text{Credit sa...

720805 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

Following information of a company: Annual requirement 40,000 Kg; Ordering cost per order Rs. 400; Carrying cost per Kg per year Rs. 2. Required:

(a) Economic order quantity

(b) Number of order of EOQ. [3 + 2 = 5]

Given: annual requirement $A = 40,000$ kg; ordering cost $O = Rs.,400$; carrying cost $C = Rs.,2$ per kg per year. (a) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,000 \times 400}{2}}...

820725 marksCh 8: Working Capital and Current Assets Manag

Answer

Clarify the meaning of cash budget with suitable example. [5]

Cash budget A cash budget is a statement that shows the estimated cash receipts and cash payments of a firm over a future period, together with the resulting cash surplus or deficit. It helps the firm plan for cash needs, arrange borrowi...

920725 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

The material purchase information of a firm are as under: Annual requirement 40,000 units; Ordering cost per order Rs. 100; Purchase price per unit Rs. 100; Carrying cost per unit 10% of unit value. Required:

(i) Economic Order Quantity

(ii) Number of Economic Order Quantity

(iii) Total cost of EOQ. [2 + 1 + 2 = 5]

Given: annual requirement $A = 40,000$ units; ordering cost $O = Rs.,100$; carrying cost $C = 10%$ of Rs. 100 $= Rs.,10$ per unit. (i) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,00...

1020715 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

The information regarding working capital are as under: Inventory conversion period 40 days; Receivable conversion period 20 days; Payable deferred period 10 days; Days in year 360 days; Annual credit sale Rs. 72,00,000; Manufacturing cost per day Rs. 12,000. Required:

(i) Cash conversion cycle period

(ii) Working capital. [2 + 3 = 5]

Given: ICP $= 40$ days, RCP $= 20$ days, PDP $= 10$ days, manufacturing cost per day $= Rs.,12,000$. (i) Cash conversion cycle $$ \begin{aligned} CCC &= ICP + RCP - PDP\ &= 40 + 20 - 10 = 50\text{ days} \end{aligned} $$ (ii) Working ca...

1120715 marksCh 8: Working Capital and Current Assets Manag

Answer

State the reasons for holding adequate inventory. [5]

Reasons for holding adequate inventory

A firm holds inventory of raw materials, work in progress and finished goods for the following reasons:

Transaction motive: to ensure smooth and continuous production and sales without interruption due to shortage of materials or goods.
Precautionary motive: to guard against uncertainty in demand and supply, delays in delivery and unexpected increases in usage, by keeping a safety stock.
Speculative motive: to take advantage of expected price rises and to buy in bulk when quantity discounts are available.
To meet customer demand promptly: adequate finished goods stock helps to supply goods on time, maintain sales and customer goodwill.
To reduce ordering costs: buying in larger lots reduces the frequency of orders and associated ordering costs.

Adequate (neither excessive nor inadequate) inventory keeps production and sales uninterrupted while avoiding excessive carrying cost and risk of obsolescence.

1220715 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

The term of sales of a firm is 5/20, net 30. The firm made a credit sale of 4000 units at Rs. 50 per unit. Under this policy 40% customers pay on 20th day taking discount and the rest pay on final date. Required:

(i) Days sales outstanding

(ii) Average daily sales

(iii) Average account receivable. [2 + 2 + 1 = 5]

Given: $$ \begin{aligned} \text{credit sale} &= 4{,}000 \times 50 \ &= Rs.,2{,}00{,}000 \end{aligned} $$ terms 5/20, net 30. 40% pay on day 20 (taking discount), 60% pay on day 30 (final date). Assume 360 days a year. (i) Days sales ou...

13208010 marksNumericalCh 4: Source of Fund

Answer

Following are the two alternative credit terms offered by P. Company:

(a) 2/10 net 30

(b) 3/15 net 30. Assume 360 days in a year. Required:

(a) What is the approximate annual cost under each alternative?

(b) What would be the effective annual cost of not taking discount?

Given: 360 days a year. Cost of trade credit (cost of forgoing the cash discount):

$$\text{Cost} = \frac{d}{100 - d} \times \frac{360}{N - D}$$

(a) Approximate (nominal) annual cost of each alternative

Term (a) 2/10 net 30:

$$ \begin{aligned} \frac{2}{98} \times \frac{360}{30 - 10} &= 0.020408 \times 18 \ &= 0.3673 \ &= 36.73% \end{aligned} $$

Term (b) 3/15 net 30:

$$ \begin{aligned} \frac{3}{97} \times \frac{360}{30 - 15} &= 0.030928 \times 24 \ &= 0.7423 \ &= 74.23% \end{aligned} $$

(b) Effective annual cost of not taking discount

$$\text{EAR} = \left(1 + \frac{d}{100-d}\right)^{\frac{360}{N-D}} - 1$$

Term (a):

$$ \begin{aligned} (1 + 0.020408)^{18} - 1 &= 1.4386 - 1 \ &= 0.4386 \ &= 43.86% \end{aligned} $$

Term (b):

$$ \begin{aligned} (1 + 0.030928)^{24} - 1 &= 2.0772 - 1 \ &= 1.0772 \ &= 107.72% \end{aligned} $$

(c) Preference

If the discount is not taken, trade credit becomes a source of short term finance. Term (a) 2/10 net 30 should be preferred because its cost of forgoing the discount (36.73% nominal, 43.86% effective) is much lower than that of term (b) 3/15 net 30 (74.23% nominal, 107.72% effective). In other words, under 3/15 net 30 the discount is so valuable that it should almost always be taken, while 2/10 net 30 offers cheaper trade credit if the firm chooses to delay payment.

14207210 marksNumericalCh 4: Source of Fund

Answer

A company purchases the materials of Rs. 5,00,000 under the terms of '2/20 net 40'. Assume 365 days in a year. Required:

(i) Annual cost of loan in percentage

(ii) Effective rate

(iii) Annual cost of loan in percentage non-discounted if payment date is extended to 50 days. [3 + 4 + 3 = 10]

Given: terms 2/20 net 40, so discount $d = 2%$, discount period $= 20$ days, net period $= 40$ days; 365 days a year. The purchase amount does not affect the percentage cost of trade credit. (i) Annual (nominal) cost of trade credit $$ ...

15207110 marksNumericalCh 4: Source of Fund

Answer

A company made negotiation with a bank for one year loan of Rs. 4,00,000. The bank has offered three alternatives:

(a) A simple interest @ of 15%, with 20% compensating balance.

(b) A discount rate of 14% without compensating balance.

(c) A discount rate 12% with 20% compensating balance. Required: Annual cost of loan in percentage, for three alternatives. [3 + 3 + 4 = 10]

Given: Loan (principal) $= Rs.,4,00,000$, compensating balance $= 20% = Rs.,80,000$. The effective annual cost of a loan is: $$\text{Effective cost} = \frac{\text{Interest}}{\text{Usable funds}}$$ (a) Simple interest 15% with 20% comp...

1620805 marksCh 1: Introduction to Business Finance

Answer

What do you understand by finance? Write in brief about financial decision and investment decision. [2 + 3 = 5]

Finance Finance is the branch of study concerned with the procurement of funds and their effective utilisation to achieve the objectives of a firm. In a business it means arranging money required for the firm and using it in a way that m...

1720805 marksCh 1: Introduction to Business Finance

Answer

What do you understand by financial market? Distinguish capital market with money market. [2 + 3 = 5]

Financial market A financial market is a mechanism through which financial assets such as shares, bonds and other securities are created and traded between the suppliers and the users of funds. It brings savers and borrowers together and...

1820805 marksCh 4: Source of Fund

Answer

What do you understand by preferred stock? State its features. [2 + 3 = 5]

Preferred stock Preferred (preference) stock is a type of long term security that carries a preferential right over ordinary shares in two respects: it receives dividend before ordinary shareholders, and in the event of winding up it get...

1920805 marksNumericalCh 5: Capital Structure

Answer

The information related to the issue of Rs. 100 per share are as under: Ordinary share 4,000; Dividend per share Rs. 20; Flotation cost Rs. 5 per share. Required: Cost of equity share if these shares are

(a) Issued at 10% discount

(b) Issued at 10% premium. [2 + 3 = 5]

Given: face value $= Rs.,100$, dividend per share $D = Rs.,20$, flotation cost $F = Rs.,5$ per share. No growth rate is given, so the zero growth model applies: $$Ke = \frac{D}{\text{Net proceeds}}$$ (a) Issued at 10% discount $$ \beg...

2020725 marksCh 1: Introduction to Business Finance

Answer

Briefly write about the evolution of corporate finance. [5]

Evolution of corporate finance Corporate finance has developed through several stages along with the growth of business and the economy: 1. Traditional phase (early 1900s to 1930s): finance was viewed narrowly as the task of raising fund...

2120725 marksCh 1: Introduction to Business Finance

Answer

Define financial market. Also describe any two purposes of it. [3 + 2 = 5]

Financial market

A financial market is a market or mechanism through which financial assets (such as shares, debentures, bonds and other securities) are created and exchanged between suppliers of funds (savers) and users of funds (borrowers). It brings together those who have surplus funds and those who need funds. Financial markets are broadly classified into money markets (for short term funds) and capital markets (for long term funds).

Two purposes of financial markets

Mobilisation of savings and allocation of funds: financial markets collect scattered savings from households and channel them to businesses and government for productive investment, thereby helping in capital formation.
Providing liquidity and price discovery: they allow investors to buy and sell securities easily, giving liquidity to investments, and through the forces of demand and supply they help determine fair prices of financial assets.

2220725 marksCh 5: Capital Structure

Answer

State the different factors that affect the capital structure. [5]

Factors affecting capital structure

Cost of capital: a firm prefers the cheapest mix of funds. As debt is generally cheaper than equity (interest is tax deductible), some debt lowers the overall cost of capital.
Risk: more debt increases fixed interest obligations and financial risk. Firms with stable earnings can bear more debt than firms with fluctuating earnings.
Nature and size of business: large, well established firms with stable income can raise debt easily, whereas small or new firms depend more on equity.
Cash flow and debt servicing ability: steady and adequate cash flows allow a firm to use more debt to meet interest and principal payments.
Control: issuing new equity may dilute the control of existing owners, so promoters may prefer debt to retain control.
Flexibility: the structure should keep room for raising funds in future when needed.
Legal and market conditions: legal provisions, interest rate levels and the state of the capital market also influence the choice of sources.

2320725 marksNumericalCh 5: Capital Structure

Answer

A company issued 10,000 ordinary share of Rs. 100 each. The flotation cost was Rs. 5 per share. The company distributed dividend of Rs. 10 per share for the current year. The growth expected rate is 5%. Required: Compute the cost of equity shares for this year if these shares are

(i) Issued at par

(ii) Issued at Rs. 150 per share. [5]

Given: current dividend $D0 = Rs.,10$, growth $g = 5%$, flotation cost $= Rs.,5$ per share. Expected dividend: $$ \begin{aligned} D1 &= D0(1+g) \ &= 10 \times 1.05 \ &= Rs.,10.5 \end{aligned} $$ Cost of new equity: $$Ke = \frac{D1}...

2420715 marksCh 1: Introduction to Business Finance

Answer

Write in brief about routine finance functions. [5]

Routine (incidental) finance functions Routine finance functions are the day to day, clerical and supervisory activities carried out by the finance department to keep the flow of funds smooth. They support the managerial finance function...

2520715 marksCh 4: Source of Fund

Answer

Write in brief about Deposit Institutions. [5]

Deposit institutions Deposit institutions are financial intermediaries that accept deposits from surplus units (savers) and channel those funds to deficit units (borrowers) in the form of loans and investments. They form the core of the ...

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1208010 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(a) What is working capital? Write about its determinants. [5]

(i) Cash conversion cycle

(ii) Working capital. [5]

(a) Working capital and its determinants

$\text{Net working capital} = \text{Current assets} - \text{Current liabilities}$

Determinants of working capital:

Nature of business: trading and manufacturing firms need more working capital than service firms.
Size and scale of operations: larger operations need more working capital.
Production cycle: a longer production process ties up more funds in inventory.
Credit policy: liberal credit to customers raises receivables and working capital needs; liberal credit from suppliers reduces them.
Business cycle and seasonality: needs rise in boom and busy seasons and fall in slack periods.
Growth and expansion: growing firms need more working capital to support higher activity.

(b) Given:

\begin{aligned} \text{daily sales value} &= 4{,}000 \times 40 \\ &= Rs.\,1{,}60{,}000 \end{aligned}

ICP $= 18$ days, RCP $= 25$ days, PDP $= 12$ days.

(i) Cash conversion cycle

\begin{aligned} CCC &= ICP + RCP - PDP \\ &= 18 + 25 - 12 \\ &= 31\text{ days} \end{aligned}

(ii) Working capital

\begin{aligned} \text{Working capital} &= CCC \times \text{daily sales} \\ &= 31 \times 1{,}60{,}000 \\ &= Rs.\,49{,}60{,}000 \end{aligned}

(a) Working capital and its determinants

$$\text{Net working capital} = \text{Current assets} - \text{Current liabilities}$$

Determinants of working capital:

Nature of business: trading and manufacturing firms need more working capital than service firms.
Size and scale of operations: larger operations need more working capital.
Production cycle: a longer production process ties up more funds in inventory.
Credit policy: liberal credit to customers raises receivables and working capital needs; liberal credit from suppliers reduces them.
Business cycle and seasonality: needs rise in boom and busy seasons and fall in slack periods.
Growth and expansion: growing firms need more working capital to support higher activity.

(b) Given:

$$ \begin{aligned} \text{daily sales value} &= 4{,}000 \times 40 \ &= Rs.,1{,}60{,}000 \end{aligned} $$

ICP $= 18$ days, RCP $= 25$ days, PDP $= 12$ days.

(i) Cash conversion cycle

$$ \begin{aligned} CCC &= ICP + RCP - PDP \ &= 18 + 25 - 12 \ &= 31\text{ days} \end{aligned} $$

(ii) Working capital

$$ \begin{aligned} \text{Working capital} &= CCC \times \text{daily sales} \ &= 31 \times 1{,}60{,}000 \ &= Rs.,49{,}60{,}000 \end{aligned} $$

2208010 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(a) 10% sales are for cash. 60% of credit sales collected in the same month and balance in next month.

(b) Opening cash balance of Ashadh was Rs. 20,000.

(c) Purchase, wages and other expenses are paid in the same month. Required: Cash budget for 3 months ending Bhadra. [10]

Working note: collection from sales

Cash sales $= 10\%$ of the month's sales (collected in the same month). Credit sales $= 90\%$ ; of these 60% are collected in the same month and 40% in the next month.

\begin{aligned} \text{Collection} &= (0.10\times\text{current sales}) + 0.60\times(0.90\times\text{current}) + 0.40\times(0.90\times\text{previous}) \\ \text{Ashar} &= 40,000 + 0.60\times 3,60,000 + 0.40\times 4,50,000\\ &= 40,000 + 2,16,000 + 1,80,000 = 4,36,000\\ \text{Shrawan} &= 50,000 + 0.60\times 4,50,000 + 0.40\times 3,60,000\\ &= 50,000 + 2,70,000 + 1,44,000 = 4,64,000\\ \text{Bhadra} &= 60,000 + 0.60\times 5,40,000 + 0.40\times 4,50,000\\ &= 60,000 + 3,24,000 + 1,80,000 = 5,64,000 \end{aligned}

(Jestha credit sales $= 0.90\times 5{,}00{,}000 = 4{,}50{,}000$ , of which 40% is collected in Ashar.)

Cash payments (purchase + wages + other, paid same month):

\begin{aligned} \text{Ashar} &= 1{,}50{,}000 + 40{,}000 + 10{,}000 \\ &= 2{,}00{,}000 \\ \text{Shrawan} &= 1{,}80{,}000 + 45{,}000 + 12{,}000 \\ &= 2{,}37{,}000 \\ \text{Bhadra} &= 2{,}20{,}000 + 44{,}000 + 8{,}000 \\ &= 2{,}72{,}000 \end{aligned}

Cash budget for 3 months ending Bhadra

Particulars	Ashar	Shrawan	Bhadra
Opening balance	20,000	2,56,000	4,83,000
Add: Cash collections	4,36,000	4,64,000	5,64,000
Total cash available	4,56,000	7,20,000	10,47,000
Less: Cash payments	2,00,000	2,37,000	2,72,000
Closing balance	2,56,000	4,83,000	7,75,000

The closing cash balance at the end of Bhadra is Rs. 7,75,000.

Working note: collection from sales

Cash sales $= 10%$ of the month's sales (collected in the same month). Credit sales $= 90%$; of these 60% are collected in the same month and 40% in the next month.

(Jestha credit sales $= 0.90\times 5{,}00{,}000 = 4{,}50{,}000$, of which 40% is collected in Ashar.)

Cash payments (purchase + wages + other, paid same month):

Cash budget for 3 months ending Bhadra

Particulars	Ashar	Shrawan	Bhadra
Opening balance	20,000	2,56,000	4,83,000
Add: Cash collections	4,36,000	4,64,000	5,64,000
Total cash available	4,56,000	7,20,000	10,47,000
Less: Cash payments	2,00,000	2,37,000	2,72,000
Closing balance	2,56,000	4,83,000	7,75,000

The closing cash balance at the end of Bhadra is Rs. 7,75,000.

3207210 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(a) State the importance of working capital. [5]

(i) Cash conversion cycle period

(ii) Accounts receivable

(iii) Working capital. [5]

4207210 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(i) Days sales outstanding

(ii) Average amount receivable

(iii) Days sales outstanding and average receivable if the non-discount customers pay on the 50th day. [3 + 3 + 4 = 10]

Given: $\begin{aligned} \text{total credit sales} &= 20{,}000 \times 360 \\ &= Rs.\,72{,}00{,}000 \end{aligned}$ terms 3/20 net 40. 50% pay on day 20 (with discount), 50% pay on the net date (day 40). Assume 360 days a year, so: $$ ...

5207110 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(i) Economic order quantity

(ii) total cost of EOQ

(iii) Re-order point. [3 + 4 + 3 = 10]

Given: annual requirement $A = 4,500$ units; ordering cost $O = Rs.\,300$ ; carrying cost $C = 20\%$ of Rs. 150 $= Rs.\,30$ per unit; safety stock $= 200$ units; lead time $= 2$ weeks; 50 weeks a year. (i) Economic order quantity $$ \begi...

620805 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

Following information are given: Annual sales Rs. 9,00,000; Cash sales 20%; Days sales outstanding 24 days; Days in a year 360 days. Required:

(a) Average Receivable

(b) Average receivable if days sales outstanding is 30 days. [2.5 + 2.5 = 5]

Given: annual sales $= Rs.\,9,00,000$ , cash sales $= 20\%$ , so credit sales $= 80\%$ . Receivables arise only from credit sales. $$ \begin{aligned} \text{Credit sales} &= 0.80 \times 9{,}00{,}000 \ &= Rs.,7{,}20{,}000 \ \text{Credit sa...

720805 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

Following information of a company: Annual requirement 40,000 Kg; Ordering cost per order Rs. 400; Carrying cost per Kg per year Rs. 2. Required:

(a) Economic order quantity

(b) Number of order of EOQ. [3 + 2 = 5]

Given: annual requirement $A = 40,000$ kg; ordering cost $O = Rs.\,400$ ; carrying cost $C = Rs.\,2$ per kg per year. (a) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,000 \times 400}{2}}...

820725 marksCh 8: Working Capital and Current Assets Manag

Answer

Clarify the meaning of cash budget with suitable example. [5]

920725 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(i) Economic Order Quantity

(ii) Number of Economic Order Quantity

(iii) Total cost of EOQ. [2 + 1 + 2 = 5]

Given: annual requirement $A = 40,000$ units; ordering cost $O = Rs.\,100$ ; carrying cost $C = 10\%$ of Rs. 100 $= Rs.\,10$ per unit. (i) Economic order quantity $$ \begin{aligned} EOQ &= \sqrt{\frac{2AO}{C}} = \sqrt{\frac{2 \times 40,00...

1020715 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(i) Cash conversion cycle period

(ii) Working capital. [2 + 3 = 5]

Given: ICP $= 40$ days, RCP $= 20$ days, PDP $= 10$ days, manufacturing cost per day $= Rs.\,12,000$ . (i) Cash conversion cycle $\begin{aligned} CCC &= ICP + RCP - PDP\\ &= 40 + 20 - 10 = 50\text{ days} \end{aligned}$ (ii) Working ca...

1120715 marksCh 8: Working Capital and Current Assets Manag

Answer

State the reasons for holding adequate inventory. [5]

Reasons for holding adequate inventory

A firm holds inventory of raw materials, work in progress and finished goods for the following reasons:

Transaction motive: to ensure smooth and continuous production and sales without interruption due to shortage of materials or goods.
Precautionary motive: to guard against uncertainty in demand and supply, delays in delivery and unexpected increases in usage, by keeping a safety stock.
Speculative motive: to take advantage of expected price rises and to buy in bulk when quantity discounts are available.
To meet customer demand promptly: adequate finished goods stock helps to supply goods on time, maintain sales and customer goodwill.
To reduce ordering costs: buying in larger lots reduces the frequency of orders and associated ordering costs.

Adequate (neither excessive nor inadequate) inventory keeps production and sales uninterrupted while avoiding excessive carrying cost and risk of obsolescence.

1220715 marksNumericalCh 8: Working Capital and Current Assets Manag

Answer

(i) Days sales outstanding

(ii) Average daily sales

(iii) Average account receivable. [2 + 2 + 1 = 5]

Given: $\begin{aligned} \text{credit sale} &= 4{,}000 \times 50 \\ &= Rs.\,2{,}00{,}000 \end{aligned}$ terms 5/20, net 30. 40% pay on day 20 (taking discount), 60% pay on day 30 (final date). Assume 360 days a year. (i) Days sales ou...

13208010 marksNumericalCh 4: Source of Fund

Answer

Following are the two alternative credit terms offered by P. Company:

(a) 2/10 net 30

(b) 3/15 net 30. Assume 360 days in a year. Required:

(a) What is the approximate annual cost under each alternative?

(b) What would be the effective annual cost of not taking discount?

Given: 360 days a year. Cost of trade credit (cost of forgoing the cash discount):

$\text{Cost} = \frac{d}{100 - d} \times \frac{360}{N - D}$

(a) Approximate (nominal) annual cost of each alternative

Term (a) 2/10 net 30:

\begin{aligned} \frac{2}{98} \times \frac{360}{30 - 10} &= 0.020408 \times 18 \\ &= 0.3673 \\ &= 36.73\% \end{aligned}

Term (b) 3/15 net 30:

\begin{aligned} \frac{3}{97} \times \frac{360}{30 - 15} &= 0.030928 \times 24 \\ &= 0.7423 \\ &= 74.23\% \end{aligned}

(b) Effective annual cost of not taking discount

$\text{EAR} = \left(1 + \frac{d}{100-d}\right)^{\frac{360}{N-D}} - 1$

Term (a):

\begin{aligned} (1 + 0.020408)^{18} - 1 &= 1.4386 - 1 \\ &= 0.4386 \\ &= 43.86\% \end{aligned}

Term (b):

\begin{aligned} (1 + 0.030928)^{24} - 1 &= 2.0772 - 1 \\ &= 1.0772 \\ &= 107.72\% \end{aligned}

(c) Preference

Given: 360 days a year. Cost of trade credit (cost of forgoing the cash discount):

$$\text{Cost} = \frac{d}{100 - d} \times \frac{360}{N - D}$$

(a) Approximate (nominal) annual cost of each alternative

Term (a) 2/10 net 30:

$$ \begin{aligned} \frac{2}{98} \times \frac{360}{30 - 10} &= 0.020408 \times 18 \ &= 0.3673 \ &= 36.73% \end{aligned} $$

Term (b) 3/15 net 30:

$$ \begin{aligned} \frac{3}{97} \times \frac{360}{30 - 15} &= 0.030928 \times 24 \ &= 0.7423 \ &= 74.23% \end{aligned} $$

(b) Effective annual cost of not taking discount

$$\text{EAR} = \left(1 + \frac{d}{100-d}\right)^{\frac{360}{N-D}} - 1$$

Term (a):

$$ \begin{aligned} (1 + 0.020408)^{18} - 1 &= 1.4386 - 1 \ &= 0.4386 \ &= 43.86% \end{aligned} $$

Term (b):

$$ \begin{aligned} (1 + 0.030928)^{24} - 1 &= 2.0772 - 1 \ &= 1.0772 \ &= 107.72% \end{aligned} $$

(c) Preference

14207210 marksNumericalCh 4: Source of Fund

Answer

A company purchases the materials of Rs. 5,00,000 under the terms of '2/20 net 40'. Assume 365 days in a year. Required:

(i) Annual cost of loan in percentage

(ii) Effective rate

(iii) Annual cost of loan in percentage non-discounted if payment date is extended to 50 days. [3 + 4 + 3 = 10]

Given: terms 2/20 net 40, so discount $d = 2\%$ , discount period $= 20$ days, net period $= 40$ days; 365 days a year. The purchase amount does not affect the percentage cost of trade credit. (i) Annual (nominal) cost of trade credit $$ ...

15207110 marksNumericalCh 4: Source of Fund

Answer

A company made negotiation with a bank for one year loan of Rs. 4,00,000. The bank has offered three alternatives:

(a) A simple interest @ of 15%, with 20% compensating balance.

(b) A discount rate of 14% without compensating balance.

(c) A discount rate 12% with 20% compensating balance. Required: Annual cost of loan in percentage, for three alternatives. [3 + 3 + 4 = 10]

Given: Loan (principal) $= Rs.\,4,00,000$ , compensating balance $= 20\% = Rs.\,80,000$ . The effective annual cost of a loan is: $\text{Effective cost} = \frac{\text{Interest}}{\text{Usable funds}}$ (a) Simple interest 15% with 20% comp...

1620805 marksCh 1: Introduction to Business Finance

Answer

What do you understand by finance? Write in brief about financial decision and investment decision. [2 + 3 = 5]

1720805 marksCh 1: Introduction to Business Finance

Answer

What do you understand by financial market? Distinguish capital market with money market. [2 + 3 = 5]

1820805 marksCh 4: Source of Fund

Answer

What do you understand by preferred stock? State its features. [2 + 3 = 5]

1920805 marksNumericalCh 5: Capital Structure

Answer

(a) Issued at 10% discount

(b) Issued at 10% premium. [2 + 3 = 5]

Given: face value $= Rs.\,100$ , dividend per share $D = Rs.\,20$ , flotation cost $F = Rs.\,5$ per share. No growth rate is given, so the zero growth model applies: $Ke = \frac{D}{\text{Net proceeds}}$ (a) Issued at 10% discount $$ \beg...

2020725 marksCh 1: Introduction to Business Finance

Answer

Briefly write about the evolution of corporate finance. [5]

2120725 marksCh 1: Introduction to Business Finance

Answer

Define financial market. Also describe any two purposes of it. [3 + 2 = 5]

Financial market

Two purposes of financial markets

Mobilisation of savings and allocation of funds: financial markets collect scattered savings from households and channel them to businesses and government for productive investment, thereby helping in capital formation.
Providing liquidity and price discovery: they allow investors to buy and sell securities easily, giving liquidity to investments, and through the forces of demand and supply they help determine fair prices of financial assets.

2220725 marksCh 5: Capital Structure

Answer

State the different factors that affect the capital structure. [5]

Factors affecting capital structure

Cost of capital: a firm prefers the cheapest mix of funds. As debt is generally cheaper than equity (interest is tax deductible), some debt lowers the overall cost of capital.
Risk: more debt increases fixed interest obligations and financial risk. Firms with stable earnings can bear more debt than firms with fluctuating earnings.
Nature and size of business: large, well established firms with stable income can raise debt easily, whereas small or new firms depend more on equity.
Cash flow and debt servicing ability: steady and adequate cash flows allow a firm to use more debt to meet interest and principal payments.
Control: issuing new equity may dilute the control of existing owners, so promoters may prefer debt to retain control.
Flexibility: the structure should keep room for raising funds in future when needed.
Legal and market conditions: legal provisions, interest rate levels and the state of the capital market also influence the choice of sources.

2320725 marksNumericalCh 5: Capital Structure

Answer

(i) Issued at par

(ii) Issued at Rs. 150 per share. [5]

Given: current dividend $D0 = Rs.\,10$ , growth $g = 5\%$ , flotation cost $= Rs.\,5$ per share. Expected dividend: $\begin{aligned} D1 &= D0(1+g) \\ &= 10 \times 1.05 \\ &= Rs.\,10.5 \end{aligned}$ Cost of new equity: $$Ke = \frac{D1}...

2420715 marksCh 1: Introduction to Business Finance

Answer

Write in brief about routine finance functions. [5]

2520715 marksCh 4: Source of Fund

Answer

Write in brief about Deposit Institutions. [5]

Particulars

Ashar

Shrawan

Bhadra

Opening balance

20,000

2,56,000

4,83,000

Add: Cash collections

4,36,000

4,64,000

5,64,000

Total cash available

4,56,000

7,20,000

10,47,000

Less: Cash payments

2,00,000

2,37,000

2,72,000

Closing balance

2,56,000

4,83,000

7,75,000