Chapter 27: Working Capital Management Principles

Problem 1
(Rs crore)
19X1 19X2 19X3
(1) Raw material consumed 24 32.7 44
(2) Raw material inventory 6.8 7.6 9.2
(3) Raw material conversion period (days) 102 84 75
(4) Cost of production 36.9 49.2 66.2
(5) Work-in-process inventory 2 3.1 4.6
(6) Work-in-process conversion period (days) 20 23 25
(7) Cost of goods sold 37.3 48.4 66.9
(8) Finished goods inventory 2.8 3.6 2.9
(9) Finished goods conversion period (days) 27 27 16
(10) Cost of sales 38.6 50.3 69
(11) Debtors 10.8 14.9 20.5
(12) Debtors conversion period (days) 101 107 107
(13) Purchases 25.6 33.5 45.6
(14) Creditors 4.6 8 12
(15) Payment deferral period (days) 65 86 95

Gross operating cycle (days) 249 240 223

Net operating cycle (days) 185 154 128

Problem 2

Weeks Months Annual Average

Current assets: (Rs) (Rs)
Stock of finished goods 5,000 5,000
Stock of stores, materials etc. 8,000 8,000
Debtors
Inland sales 6 312,000 36,000
Export sales 1.5 78,000 2,250
Advance payment for sundry exp. Quarterly 8,000 2,000
Total current assets 53,250
Current liabilities:
Wages 1.5 260,000 7,500
Stocks, materials, etc. 1.5 48,000 1,385
Rent, royalties etc. 6 10,000 5,000
Clerical staff 0.5 62,000 2,583
Manager 0.5 4,800 200
Misc. 1.5 48,000 6,000
Total current liabilities 22,668
Working capital 30,582

Problem 3

Per unit Total

Raw material 80 8,320,000
Direct labour 30 3,120,000
Overheads 60 6,240,000
Total cost 170 17,680,000
Profit 30 3,120,000
Selling price 200 20,800,000
Units produced & sold 104,000
Cash sales 5,200,000
Credit sales 15,600,000
Raw material consumption 8,320,000
Cost of production 17,680,000

Current assets: Days Amount

Raw material inventory 30 693,333
Materials in process 15 736,667
Finished goods 30 1,473,333
Debtors 60 2,600,000
Cash balance 25,000
Total current assets 5,528,333

Current liabilities:
Creditors 30 693,333
Wages 10 86,667
Overheads 30 520,000
Total current liabilities 1,300,000
4,228,333
Add: 10% contingencies 422,833
Net working capital 4,651,167

Problem 4

Per unit Total

Raw material 42.4 4,240,000
Direct labour 15.9 1,590,000
Overheads 31.8 3,180,000
Total cost 90.1 9,010,000
Profit 15.9 1,590,000
Selling price 106 10,600,000
Units produced & sold 100,000
Sales 10,600,000
Raw material consumption 4,240,000
Cost of production 9,010,000

Current assets: Weeks Amount

Raw material inventory 4 326,154
Materials in process 2 346,538
Finished goods 4 693,077
Debtors 8 1,630,769
 Cash balance (given) 125,000
Total current assets 3,121,538

Current liabilities:
Creditors 4 326,154
Wages 1 1/2 45,865
Total current liabilities 372,019
2,749,519
Add: 10% contingencies 274,952
Net working capital 3,024,471

Problem 5
8,000
(Rs 000) 7,000
CA/FA Cost of Cost of Total cost 6,000
liquidity illiquidity 5,000

Costs
0.10 138 2,200 2,338 4,000
0.25 275 1,650 1,925 3,000
0.40 550 1,100 1,650 2,000
0.70 1,100 830 1,930 1,000
1.00 2,200 690 2,890 0
1.50 4,140 550 4,690 0.10 0.25
2.50 6,890 276 7,166

Problem 6

Month Cost of illiq WC LTD Int. exp. Invst.

January 72.65 92.02 1.07 19.37
February 58.13 92.02 1.07 33.89
March 29.06 92.02 1.07 62.96
April 24.22 92.02 1.07 67.80
May 33.90 92.02 1.07 58.12
June 43.60 92.02 1.07 48.42
July 58.12 92.02 1.07 33.90
August 72.66 92.02 1.07 19.36
September 82.30 92.02 1.07 9.72
October 87.19 92.02 1.07 4.83
November 92.02 92.02 1.07 0.00
December 87.17 92.02 1.07 4.85
12.88
The maximum amount of working capital is Rs 92.02 in November. This is assumed as long-term borrowing.
Long-term interest rate: annual 14.00%
Long-term interest rate: monthly 1.17%
Inter-corporate lending rate: annual 12.00%
Inter-corporate lending rate: monthly 1.00%

Short-term Interest
Month WC Borrowing expense
January 72.65 72.65 0.97
February 58.13 58.13 0.78
March 29.06 29.06 0.39
April 24.22 24.22 0.32
May 33.9 33.9 0.45
June 43.6 43.6 0.58
July 58.12 58.12 0.77
August 72.66 72.66 0.97
September 82.3 82.3 1.10
October 87.19 87.19 1.16
November 92.02 92.02 1.23
December 87.17 87.17 1.16
9.88
Short-term interest rate: annual 16.00%
Short-term interest rate: monthly 1.33%
Net interest payment is lower when the company goes for long-term debt.

Problem 7

Aggressive Moderate Conservati

ve
Current assets 252 270 288
Fixed assets 180 180 180
Total assets 432 450 468
Current liabilities 150 150 150
Short-term debt 216 162 108
Long-term debt 43 108 173
Total debt 259 270 281
Equity 23 30 37
Total capital 432 450 468
Projected sales 531 540 549
Expected EBIT 53 54 55
Interest on short-term debt 35 26 17
Interest on long-term debt 8 19 31
Profit before tax 11 9 7
(a) Before-tax ROE 46.5% 28.8% 17.8%
(b) Current assets/Total assets 0.58 0.60 0.62
© Current assets/Current liabilities 1.68 1.80 1.92
(d) Net working capital 102 120 138

Long-term interest rate 18%

Short-term interest rate 16%
 Cost tradeoff
8,000
7,000
Total cost
6,000
5,000
Costs

4,000
3,000 Cost of liq

2,000
Cost of illiq
1,000
0
0.10 0.25 0.40 0.70 1.00 1.50 2.50
CA/FA

Net
Int. inc. int.
0.19 0.88
0.34 0.73
0.63 0.44
0.68 0.40
0.58 0.49
0.48 0.59
0.34 0.73
0.19 0.88
0.10 0.98
0.05 1.03
0.00 1.07
0.05 1.03
3.63 9.25