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Ms-41 dec 2009

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MS-41   Dec-2009

MS-41 : Working capital management


1. As the difference between the cost of short term financing and long term financing becomes smaller, which financing plan aggressive as conservative becomes more attractive ? Would the aggressive or conservative approach be preferable if the costs were equal ? Why ?

2(a) Explain the role of Cash Forecasting in cash management. Describe briefly any two methods of cash forecasting.

(b) Explain the Miller-Orr model with the help of a suitable example.

3. Discuss the different methods of creating a charge over the assets of the borrower which could be used by banks for safeguarding their interests.

4. Distinguish between the following :

a) Permanent working capital and variable working capital.

b) Options and warrants.

c) VED Analysis and F-S-N Analysis.

d) Public deposits and certificate of deposits.

5. Alpha company's present annual sales amount to Rs. 30 lacs at sale price of Rs. 12 per unit. Variable costs are Rs. 8 per unit and fixed costs amount to Rs. • 2.50 lacs per annum. Its present credit period is one month which is proposed to be extended to eithër 2 or 3 months, whichever appears to be more profitable. The following estimates are made for the purpose :

Credit policy

1 month

2 months

3 months

Increase in sales (%)




% of bad debts to sale




Fixed cost will increase by Rs. 50,000 annually after any increase in sales above 25% over the present level. The company requires a pre tax return on investment of at least 20% for the level of risk involved. What will be the most rewarding credit policy in case of Alpha company under the above circumstances ?

6. (a) What do you understand by Commercial Paper ? Explain the important guidelines

issued by Reserve Bank of India for the issuance of Commercial Paper.

(b) What is the meaning of the term factoring ? Explain its significance and mechanism and distinguish between with recourse factoring from without recourse factoring.

7. What do you understand by Trade Credit ? Is Trade Credit a free of cost source of financing working capital requirements ? Give reason. Discuss the different factors that determine the availability of Trade Credit to a firm.

8. Write short notes on any four of the following :

a) Decision tree model

b) Selective credit controls

(c) Gross profit ratio

d) Baumol model

e) C's to determine creditworthiness of a customer

(f) Euro Currency Market

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