financial management slide

8/6/2019 FINANCIAL MANAGEMENT SLIDE

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Copyright © Amity University1

PAN African eNetwork

ProjectMaster of Finance & Control

Financial Management

Semester - II

Dr. Adarsh Arora



Copyright © Amity University

Topics CoveredHolding ReceivablesManagement of creditorsDifferent current Liabilities

Current Liabilities managementWorking capital cycleCredit riskLetter of Credit

Elements of Letter of CreditInventory managementFeatures of inventoryFunctions of inventory

Types and importance of inventory




Inventory managementObjectives of inventory managementTechniques of inventory managementWCM & small business

Sources of fundingCapital budgetingCapital structureImportance of capital structure decisions

Factors affecting capital structureTheories of capital structureMCQ¶s




HANDLING RECE IVABL ES ( D EB TORS)Cash flow can be significantly enhanced if the amountsowing to a business are collected faster. Every businessneeds to know.... who owes them money.... how much isowed.... how long it is owing.... for what it is owed.Slow payment has a crippling effect on business, inparticular on small businesses who can least afford it.If you don't manage debtors, they will begin tomanage your business as you will gradually lose

control due to reduced cash flow and, of course, youcould experience an increased incidence of bad debt.




P RA CT ICAL QUEST ION S:-Illustration 1

Prakash Ltd. sells goods to its customers of A, B and Ccategories and its current sales is Rs. 10,00,000 per year. If sale is made to customer of D category for 1.5months credit, additional sales of Rs. 10,00,000 per year can be made. In such a case 10% bad debtors areexpected. The company earns the contribution of 15%on the sales and collection cost is expected at 4%.if its

cost of capital is 10%, should it make sales to customersof D category?




Solution:Rs.

Contribution 15% on additional sales of Rs. 10,00,000150000

Less expected bad debts (10% of Rs. 10,00,000)1,00,000

B alance 50000Less collection charges (4% of Rs. 10,00,000) 40000

B alance 10000Less cost of capital (10% of Rs. 106250)

Expected loss 10625Investment in receivables = (1000000*1.5/12)*(85/100) =

Rs. 106250




Illustration 2:From the following data ascertain the average collection

period of Jai Prakash and brothers:Rs.

Total annual sales 800000Cash sales (include in above) 60000Sales return during the year 10000Sundry debtors (all the end of the year) 86000Bills receivables 44000Provision for doubtful debts 6500




Solution:

Annual credit sales =Total annual sales ±Cash sales ±sales return =800000-60000-10000=730000

Average collection period = Debtors + B/R/Annual creditsales *365

= 86000+44000/730000*365=130000/730000*365=65 Days




Illustration 4:Calculate average collection period of a firm: Rs.Receivables on 1-1-2005 45000Receivables on 31-12-2005 51000

Annual credit sales 438000Solution:

Average receivables =45000+51000/2Rs. 48000

Average daily credit sales =438000/365= Rs. 1200

Average collection period =Average receivables/Averagedaily credit Sales = 48000/1200 =40 days




M ANAG EM EN T OF CRE DI TORS

M ANAG EM EN T OF CURRE N T LIABILI TIESBalance sheet is an indicator of the financial position of abusiness concern in terms of assets and liabilities.Balance sheet is always prepared in such a way that thetrue and fair financial position of a business is revealed,which will be easily readable and more quicklyunderstood form.

Balance sheet represents the nature and value of assetsof the business, the nature and value of all liabilities andresidual in the form of owner¶s fund.The Balance sheet of each and every organization or

enterprise includes various types of assets on one side




and liabilities on the other side. Current assets and currentliabilities of each organization play an important role informing the working capital.

Each organization is liable to pay its current liabilities withina year, so the organization has to manage its current

liabilities and its payment in an effective manner.




CURRE N T LIABILI TIESIn accounting, current liabilities are consideredliabilities of the business that are to be settled in cashwithin the fiscal year or the operating cycle, whichever period is longer.

An operating cycle is the average time that is required togo from cash to cash in producing revenues. For example, accounts payable for goods, services or supplies that were purchased for use in the operation of

the business and payable within a normal period of timewould be current liabilities.Bonds, mortgages and loans that are payable over aterm exceeding one year would be fixed liabilities or long-term liabilities.




DI FFERE N T CURRE N T LIABILI TIESCurrent L iability

Amounts owed (within one year) for goods and servicespurchased on credit terms. This means payment for goods and services is due at a date later than the date of

sale.Current liabilities can be classified as:-

Trade creditors , which is the name we give to amountsowed to suppliers.

Accruals, which is the name we give to amounts stillowed at the year end and not yet recorded in the booksof account.Proposed items such as D ividends proposed , which

means amounts the business promises to pay in the




coming year.Payable items such as Tax payable which is payablewithin the coming year.Overdra f t, which is amounts owed to the bank.Short term loans.




Other Current L iabilitiesDepending on the company, you will see various other current liabilities listed. Sometimes they will be lumpedtogether under the title "other current liabilities.If a business lists "Commercial Paper" or "BondsPayable" as a current liability, you can be fairly confidentthe amount listed is what will be paid out to thecompany's bond holders in the short term.




TESTS OF A CO MP ANY 'S F INAN C IAL STRE NG TH AND LI QU IDI T Y

The strength o f every company depends upon manyf actors. Following methods o f its valuation are asunder:-

1. Working Capital: Current Assets - Current Liabilities2. Working Capital per D ollar o f Sales: Working Capital ÷

Total Sales3. Current Ratio: Current Assets ÷ Current Liabilities

4. Quick / A cid Test / Current Ratio: Current Assetsminus inventory called "Quick Assets) ÷ CurrentLiabilities

5. D ebt to Equity Ratio: Total Liabilities ÷ Shareholders'

Equity




CURRE N T LIABILI TIES M ANAG EM EN TSpontaneous L iabilitiesSpontaneous liabilities arise from the normal course of business.The two major spontaneous liability sources areaccounts payable and accruals .As a firm¶s sales increase, accounts payable andaccruals increase in response to the increasedpurchases, wages, and taxes.

There is normally no explicit cost attached to either of these current liabilities.




WORK ING CA P ITAL C Y CL E & RO L E OF CRE DI TORS IN WORK ING CA P ITAL C Y CL E

The working capital cycle can be defined as:-The period o f time which elapses between the pointat which cash begins to be expended on theproduction o f a product and the collection o f cashf rom a customer.




The diagram below illustrates the working capital cycle for a manufacturing firm:-




Working capital is clearly not the only aspect o f abusiness that a ff ects the amount o f cash:-

The business will have to make payments to governmentfor taxation

Fixed assets will be purchased and sold Lessors of fixed assets will be paid their rent Shareholders (existing or new) may provide new funds in

the form of cash Some shares may be redeemed for cash Dividends may be paid Long-term loan creditors (existing or new) may provide

loan finance, loans will need to be repaid from time totime, and

Interest obligations will have to be met by the business.




CRE DI T R ISK IN A B US IN ESSCredit risk is the risk of a loss resulting from the debtor's

failure to meet its obligations to the Bank in full when dueunder the terms agreed.

Credit risk has the highest weight among risks taken by theBank in the course of its banking activities.

Credit risk management in the B ank is carried outusing the f ollowing main procedures:-putting in place limits for operations to limit credit risk;

putting in place indicative limits for credit riskconcentration and the share of unsecured loan portfolio;creation of security for credit operations;setting value conditions for operations with respect to

payment for risks taken;




permanent monitoring of risks taken and preparation of management reporting for the Credit Committee, theBank's management and units concerned.




L ETTERS OF CRE DI TLetters of credit accomplish their purpose by substituting

the credit of the bank for that of the customer, for thepurpose of facilitating trade.

There are basically of two types:- A. Commercial andB. Standby.The commercial letter of credit is the primary payment

mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.




EL EM EN TS OF A L ETTER OF CRE DI TA payment undertaking given by a bank (issuing bank)On behalf of a buyer (applicant)To pay a seller (beneficiary) for a given amount of moneyOn presentation of specified documents representing thesupply of goodsWithin specified time limitsDocuments must conform to terms and conditions setout in the letter of creditDocuments to be presented at a specified place




FE A TURES OF L ETTER OF CRE DI T1. Negotiability2. Revocability3. Transfer and Assignment

4. Sight and Time Drafts




INV EN TOR Y M ANAG EM EN TIN TRO D UCT ION

Inventory is the main component of working capital.Inventory is also known as stock and merchandise.The inventory means and includes the goods andservices being sold by the firm and the raw materials or other components being used in the manufacturing of such goods and services.It also means the stock that has been kept for sale or

consumption in the business. For the business concernswhose business is only purchase and sale of goods, thestock of goods kept for sale is called inventory and for the manufacturing concern the stock of raw materials,stock of work in progress and the stock of finished goods




all are included in the inventory. In addition the other consumable material needed for production purposesknown or stores, are also included in inventory.




CHA RA CTER IST ICS OF INV EN TOR Y

The Characteristics of inventory are as follows :-(i) Inventory ensure to maintaining undisturbed production

and employment rates.(ii) Inventory provides production economies.(iii) Inventory requires valuable space and consumes

taxation and insurance charges.(iv) Inventory as the physical stock of items of tangible

assets.(v) Inventories are the result of Many interrelated decisions

and policies with in an organization.(vi) Inventories are used in the Production process for the

purpose of sale in the business.




FU N CT ION S OF INV EN TOR Y The important functions of inventories are as follows: -(i) It ensure continuity of supply of uniform quality goods.(ii) Inventories helps to achieve the objectives of the

company.(iii) Inventories ensure optimum investment in materials.(iv) Inventories activised the market.(v) Inventories help to prevent the excessive investment in

material.(vi) It ensure continuous flow of production without any

interruption(vii) It provide maximum services and satisfaction to the

customers.




(viii) It helps in avoiding unnecessary wastage and losses.(ix) Inventories make sure of the availability of all types of

materials.




P UR P OSE OF INV EN TOR Y

The purpose of holding Inventories is to allow the firm toseparate the processes of purchasing, manufacturing,and marketing of its primary products.The goal is to achieve efficiencies in areas where costsare involved and to achieve sales at competitive prices inthe market place.Within this broad statement of purpose, we can identifyspecific benefits that accrue form holding inventories.




T Y P ES OF INV EN TOR Y

Every business concern may have different types of inventories.

The import types of inventory are as follows :-i Inventory of raw materialsii Inventory of stores & spare partsiii Inventory of work in progressiv Inventory of finished goodsv Safety Inventoryvi Flabby Inventoryvii. Normal Inventoryviii. Profit making Inventory




ix. Excessive Inventoryx. Consumables




IMP ORT AN CE OR B EN EF ITS OF INV EN TOR Y

Inventory is an important part of any business and is anurgent asset which is used for sale and for producinggoods.It contains and includes all goods and materials that areused in the production and distribution process.To smoothly run the business concern, we require someinventory on the other hand financial institutions andother service industries hold less inventory in their

business.Generally inventory is stored in order to have goodsavailable for sale or raw material for production speciallyin retail business inventory is vary important because itattracts the customers means if goods ready for sale are




not kept in the business the business concern could loosethe opportunity to sell the product.




The business concern will not suffer with the problem of shortage of stock if sufficient quantity of stock is kept.

The importance or bene f its o f inventory are:-(i) Inventory provides the favorable and good returns on the

investments.(ii) Inventory allows the buyer to get the advantage of

higher discount.(iii) Inventory protects the manufacturer of goods against

fluctuations of stock.

(iv) It protects from shortage of stock at the time of production process.

(v) Inventory protects from fluctuations in demand, delayedsupply of goods from the supplier, and in case of

fluctuations.




N EE D TO H OLD INV EN TOR IESInventories are typically not end in themselves. What are

then the main purposes which they serve?There are three needs or motives for holding inventories.i. Transaction M otivesii. P recautionary M otivesiii. Speculative M otives




INV EN TOR Y M ANAG EM EN TManaging inventory is a juggling act. Excessive stockscan place a heavy burden on the cash resources of abusiness. Insufficient stocks can result in lost sales,delays for customers etc.

The key is to know how quickly your overall stock ismoving or, put another way, how long each item of stocksit on shelves before being sold. Obviously, averagestock-holding periods will be influenced by the nature of the business.For example, a fresh vegetable shop might turn over itsentire stock every few days while a motor factor wouldbe much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.




OBJ ECT IV ES OF INV EN TOR Y M ANAG EM EN TIf inadequate inventory is there, it may result in shortageof sale, on the other hand the excessive quantity of inventory may block up our investment which will reducethe amount of working capital.

In an effective management in terms of inventory is whatrequires in the business, so it is very important for everybusiness concern to have experts in this particular fieldso that it can easily be analyzed about inventorymanagement.

Following are the main objectives o f InventoryM anagement:-

(i) To minimize the fund in inventory.(ii)To ensure that raw material is available on time or at the




time of production.(iii) Sufficient quantity is available at the time of production.(iv) To ensure that the goods is available which is finished

goods for delivery to its customers.(v) Sufficient quantity of finished should be available to

company with the demand of its customers immediately.(vi) To protect with the delay in production process due to

short age of material.




IMP ORT AN CE OF INV EN TOR Y M ANAG EM EN TFrom the following point of view the efficient management

of inventory is essential:-i. To check the misuse of capitalii. Continuity in productioniii. Proper storage of materialsiv. Maximum profits




TEC HNI QUES OF INV EN TOR Y M ANAG EM EN TTechniques of inventory management to can be explained

in two approaches :-i. Traditional approachii. Modern or scientific approach -The following techniques under scientific approach method

are being used to manage the inventory properly:-ii.- (a) Economic Order Quantity Analysis.ii.- (b) Re order Point.ii.- (c) Safety Stockii.- (d) A.B.C. Analysisii.- (e) F.S.N. Analysis.




ii.- (f) H.M.L. Analysis.ii.- (g) V.E.D. Analysis.




ECO N OM IC OR D ER QU AN TIT Y (EOQ)The Economic Order Quantity (EOQ) refers to theoptimal order size that will result in the lowest total of ordering and carrying costs for an item of Inventory givenits expected usage.

By calculating an economic order quantity, the firmattempts to determine the order size that will minimizethe total inventory costs.

Total inventory Cost = Ordering Cost + Carrying Cost

Total ordering Costs = Number of Orders X Cost per Order

= U/Q (X) FWhere U = Annual Usage

Q = Quantity Ordered




F = Fixed Cost per Order The total carrying costs = Average Level of Inventory (X)

Price per unit (X) Carrying CostTherefore, Total Carrying Cost = Q/2 (X) P (X) C

Where Q = Quantity OrderedP = Purchase Price per UnitC = Carrying Cost




S A FET Y STOCKOnce it is realized that higher the quantity of safetystock, lower will be the stock-out costs and higher will bethe incidence of carrying costs, the formula for estimating the reorder level will call for estimating the

reorder level will call for a trade-off between stock-putcosts and carrying costs.The reorder level will then become one at which the totalstock out costs and the carrying costs will be at itsminimum.




P RA CT ICAL QUEST ION S:-Illustration 1:From the following information, calculate re-order level,

minimum stock level, maximum stock level, averagestock level-

Re-quantity 4000 unitsMinimum usage per day 200 unitsMaximum usage per day 300 units

Average usage per day 250 unitsMinimum delivery period 4 daysMaximum delivery period 6 daysNormal delivery period 5 days




Solution:

Re-order level =maximum usage *maximum delivery period= 300*6= 1800 units

Minimum level = re-order level-(normal consumption *normal delivery period)

=1800- (250*5) =550 unitsMaximum level = (ordering level +re-order quantity)-

(minimum usage*minimum delivery period)=(1800+4000)-(200*4)= 5000 units

Average stock level = minimum level +ordering quantity/2=550+4000/2 =2550 units




Illustration 3:-

A firm requires 2400 units per annum of a material. Annualstoring cost per unit is Rs. 4 and ordering cost per order is Rs. 75. What quantity should be ordered in one time?How many orders will be placed in a year? What will bethe time interval between two orders?

Solution:-Ordering cost = Rs. 75 per order (O)

Annual consumption = 2400 units (A)

Carrying cost = Rs. 4 per unit per annum ( C)

= 300 units




WORK ING CA P ITAL M ANAG EM EN T AND S M ALL B US IN ESS

S M ALL B US IN ESSAsmall business is a business that is privately ownedand operated, with a small number of employees and

relatively low volume of sales.Small businesses are normally privately ownedcorporations, partnerships, or sole proprietorships. Thelegal definition of "small" varies by country and by

industry.In addition to number of employees, other methods usedto classify small companies include annual sales(turnover), value of assets and net profit (balance sheet),alone or in a mixed definition.




Examples o f Small B usinessSmall businesses are common in many countries,depending on the economic system in operation.Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen),

hairdressers, tradesmen, lawyers, accountants,restaurants, guest houses, photographers, small-scalemanufacturing etc.The smallest businesses, often located in private homes,

are called micro businesses (term used by internationalorganizations such as the World Bank and theInternational Finance Corporation) or SoHos.




SOURCES OF FU NDING

Small businesses use several sources available for start-upcapital:-Self-financing by the owner through cash, equity loan onhis or her home, and or other assets.

Loans from friends or relativesGrants from private foundationsPersonal SavingsPrivate stock issueForming partnershipsAngel InvestorsBanks




SME finance, including Collateral based lending andVenture capital, given sufficiently sound businessventure plans




Capital B udgetingIllustration.1 A company is considering a new project for

which the investment data are as follows:Capital outlay Rs 2,00,000Depreciation 20% p.a.Forecasted annual income before charging depreciation,

but after all other charges are as follows:Year 1 Rs 1,00,000Year 2 1,00,000Year 3 80,000Year 4 80,000Year 5 40,000

400000




On the basis of the available data, set out calculatecalculation, illustrating and comparing the followingmethods of evaluating the return:

(a) Payback method.(b) Rate of return on original investment, and

(c) IRR.




Solution:Since there is no tax, the annual income beforedepreciation and after other charges is equivalent toCash flows (CF).

(a) Capital outlay of Rs.2,00,000 is recovered in the first

two years, Rs. 1,00,000 (year 1) + Rs 1,00,000 (year 2),therefore, the payback period is two years.

(b) Rate of return on original investment:-




Year CF (Rs) D epreciation (Rs) N et income (Rs)

12345

1,00,0001,00,000

80,00080,00040,000

40,00040,00040,00040,00040,000

60,00060,00040,00040,000

2,00,000

Average Income = Rs. 2,00,000/5 = Rs. 40,000




Factors closest to PB value of 2.5 corresponding to 5 years (life of the project)are 2.532 (28%) and 2.436 (30%). Since the actual cash flow stream ishigher in initial years than average cash flows, higher discount rate of 33%

may also be tried along with 30%.




Year CF (Rs.) PVF at

Total PV (Rs.)

30% 33% 30% 33%

12345

1,00,0001,00,00080,00080,00040,000 0.769

0.5920.4550.3500.269

0.7520.5650.4250.3200.240

76,90059,20036,40028,00010,760

75,20056,50034,00025,0009,600

2,11,260 2,00,900




The IRR of a project is the rate of discount at which theNPV is 0. Since the NPV at 33% is Rs. 900 only (i.e., Rs.2,00,900 ± Rs. 2,00,000), the IRR is 33% (approx).




Capital StructureM EANING OF C A P ITAL STRUCTURE

The capital structure of a company refers to the mix of the long-term finances used by the firm. It is thefinancing plan of the company. Let us take a look at the

capital structure of a company that has recently gone infor public issue.Pennar Aluminium Company Limited has gone in for aproject to manufacture Aluminium Rolled Products, Alloy

Conductors and Aluminium Alloys.For raising finance, the company went in for a public issueof 1,93,45,000 equity shares of Rs.10 each at par and28,25,000 secured PCDs of Rs.200 each.




The capital structure of the company including the presentissue as per the prospectus of the company was:

A. Authorized Capital 9,00,00,000 Equity shares of Rs.10 each 9,000.00

B. Issued, subscribed and paid-up capital 825.50

C. Present Issue

± Equity Shares at par 1934.50

± 16% Secured PCDs 5,650.00

D. Rupee Term Loan from Institutions and Banks 5,060.00

E. Buyers Credit 1,350.00

14,820.00




IMP ORT AN CE OF T H E C A P ITAL STRUCTURED EC IS ION

The objective of any company is to mix the permanentsources of funds used by it in a manner that willmaximize the company¶s market price.

In other words companies seek to minimize their cost of capital. This proper mix of funds is referred to as theOptimal Capital Structure.The capital structure decision is a significant managerial

decision which influences the risk and return of theinvestors. The company will have to plan its capitalstructure at the time of promotion itself and alsosubsequently whenever it has to raise additional fundsfor various new projects.




Wherever the company needs to raise finance, it involves acapital structure decision because it has to decide theamount of finance to be raised as well as the sourcefrom which it is to be raised.

The capital structure decision process can be represented

diagrammatically as:-




Figure 1 : P rocess o f Capital Structure D ecisions




FA CTORS A FFECT ING TH E C A P ITAL STRUCTUREL everage: The use of fixed charges sources of fundssuch as preference shares, debentures and term loansalong with equity capital in the capital structure isdescribed as financial leverage or trading on equity.

The term trading on equity is used because it is the equitythat is used as a basis for raising debt. FinancialInstitutions while sanctioning long-term loans insist thatcompanies should generally have a debt-equity ratio of 2:1 for medium and large-scale industries and 3:1 for small-scale industries.

A debt-equity ratio of 2:1 indicates that for every 1 unit of equity the company has, it can raise 2 units of debt. Theratio is calculated using the formula




Increased use of leverage increases the fixed commitmentsof the company in the form of interest and repaymentsand thus increases the risk of the equity shareholders astheir returns are affected.

The other factors that should be considered whenever a

capital structure decision is taken are:-Cost of capitalCash flow projections of the companySize of the company

Dilution of controlFloatation costs.




FE A TURES OF AN OP TIM AL CA P ITAL STRUCTURE An optimal capital structure should have the following

features:-P ro f itability ± The company should make maximum useof leverage at a minimum cost.

Flexibility ±The capital structure should be flexible to beable to meet the changing conditions. The companyshould be able to raise funds whenever the need arisesand also retire debts whenever it becomes too costly tocontinue with that particular source.Control ± The capital structure should involve minimumdilution of control of the company.Solvency ±The use of excessive debt threatens thesolvency of the company. In a high interest rate




environment, Indian companies are beginning to realize theadvantage of low debt. Companies are now launchingpublic issues with the sole purpose of reducing debt. Therecent equity issue of more than Rs.30 crore byBallarpur Industries was purely aimed at repaying termloans and retiring debentures.




TH EOR IES OF C A P ITAL STRUCTUREEquity and debt capital are the two important sources of long-term finance for a firm. What should be theproportion of equity and debt in the capital structure of afirm, i.e. how much financial leverage should a firm

employ? The answer is quite difficult and is based on anunderstanding of the relationship between the financialleverage and firm valuation or financial leverage andcost of capital.

First of all, one should know whether there is anyrelationship between the financial leverage and firmvaluation. To understand this, many approaches havebeen propounded, some say that there exists arelationship between the two and some state that there

is no relation.




A ssumptions and D e f initionsThe following are some of the common assumptions made

to understand the relationship between financialleverage and cost of capital.There is no income tax, corporate or personal.

The firm has a policy of paying its earnings as dividend,i.e. a 100% dividend pay-out ratio is assumed.Investors have identical subjective probabilitydistributions of net operating income (earnings before

income and taxes) for each company.The net operating income is not expected to grow or decline over time.Without incurring transaction costs, a firm can change itscapital structure instantaneously.




N et Income A pproachAccording to this approach, the cost of equity capital (ke)and the cost of debt capital (kd) remain unchanged whenB/S, the degree of leverage varies. This means that ko,the average cost of capital, measured as

ko = k dB/(B + S) + k eS/(B + S)declines as B/S increases. This happens because whenB/S increases, kd, which is lower than ke, receives ahigher weight in the calculation of ko.

The following is the graphical representation of netincome approach. B/S, the degree of leverage is plottedon the x-axis, ke, kd, and ko are plotted on the y-axis.




N et Operating Income A pproachThe net operating income approach, the overallcapitalization rate and the cost of debt remain constantfor all degrees of leverage. Therefore, in the followingequation ko and kd are constant for all degrees of

leverage.ko = kdB/(B + S) + keS/(B + S)Therefore, the cost of equity can be expressed as:ke = ko + (ko ± kd)(B/S) ......(11)




Traditional A pproachThe traditional approach has the following propositions:

The cost of debt capital, k d, remains more or lessconstant up to a certain degree of leverage but risesthereafter at an increasing rate.

The cost of equity capital, k e , remains more or lessconstant or rises only gradually up to a certain degree of leverage and rises sharply thereafter.The average cost of capital, k o, as a consequence of the

above behavior of k e and k d (a) decreases up to a certainpoint; (b) remains more or less unchanged for moderateincreases in leverage thereafter, and (c) rises beyond acertain point.




M CQ¶sQ1. Which of the following costs is not associated with the

extention of credit and accounts receivables?a. Cost of investments tied up in accounts receivablesb. collection costc. Cost of measure initiated to collect blocked finds beyond

expiry datesd. all are associated




Q2. Which of the following is not a cost linked withmaintaining receivables:-

a. Cost of fundsb. Discount costsc. Collection costsd. None of the above




Q3. The variable associated with credit policy are:-a. Credit standardsb. Credit periodsc. Cash discountd. All of the above




Q4. Which of the following is not used for credit evaluation:-a. Ratio analysisb. Bank referencesc. Past experiences with the customersd. None of the above




Q5. Which of the following is not a cost of marinating

receivables:-a. Administrative costsb. Collection costsc. Defaulting costs

d. Marketing costs




Q6. Which of the following is not the C¶s for judgeing credit

worthiness of a customer -a. Collateralb. Capacityc. Credibility

d. Character




Q7. Which of the following is/are spontaneous liability?

a. Sundry creditorsb. Salary accrued but not duec. Provision for payment of bonusd. All a, b and c




Q8. With terms of 4/15, net 45, what is the implied interest

rate foregoing a cash discount and paying at the end of the period-

a. 25.63%b. 39.29%

c. 50%d. 64.32%




Q9. Shelf stock refers to

a. Perishable goodsb. Items that are to be packaged and soldc. Items that are stored by the firm and sold with little or no

modification

d. Accessories which are not part of the standardequipment




10. If the material is priced at the value that is realizable at

the time of issue such pricing method is referred to asa. Standard price methodb. Replacement methodc. LIFO methods

d. Weighted average cost methods




Q11. Which of the following are sub-systems of inventory

management system?a. EOQ sub systemb. Stock level sub systemc. Reorder point sub system

d. All of the above



Thank You

Please forward your query

To: [email protected]: [email protected]