QUESTION-CASH BUDGET –WORKING CAPITAL-FMP Athar Iqbal

WORKING CAPITAL MANAGEMENT

Q1) Amtek Company currently has total assets of Rs 3.2

million, of which current assets comprise Rs 0.2 million. Sales
are Rs 10 million annually, and the before-tax net profit
margin (the firm currently has no interest-bearing debt) is 12
percent. Given renewed fears of potential cash insolvency, an
overly strict credit policy, and imminent stock outs, the
company is considering higher levels of current assets as a
buffer against adversity. Specifically, levels of Rs 0.5 million
and Rs 0.8 million are being considered instead of the Rs 0.2
million presently held. Any addition to currents assets would
be financed with new equity capital.
a. Determine the total asset turnover, before-tax return on
investment, and before-tax net profit margin under the three
alternative levels of current assets.

b. If the new additions to current assets were finance with long-

term debt at 15 percent interest, what would be the before-
tax interest “cost” of the two new policies?
Q2) Ace Metal Specialties, Inc. has a seasonal pattern to its business. It borrows under a line of
credit from Central Bank at 1 percent over prime. Its total asset requirements now (at year end) and
estimated requirements for the coming year are (in millions):
Now 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Total asset Rs 4.5 Rs 4.8 Rs 5.5 Rs 5.9 Rs 5.0
requirement
Assume that these requirements are level throughout the
quarter. At present the company has Rs 4.5 million in equity
capital plus long-term debt plus the permanent component of
current liabilities, and this amount will remain constant
throughout the year.

The prime rate currently is 11 percent, and the company

expects no change in this rate for the next year. Ace Metal
Specialties is also considering issuing intermediate-term debt
at an interest rate of 13.5 percent. In this regard, three
alternative amounts are under consideration: zero, Rs
500,000, and Rs 1 million. All additional funds requirements
will be borrowed under the company’s bank line of credit.
a. Determine the total rupee borrowing costs for short-and
intermediate-term debt under each of the three alternatives
for the coming year. (Assume that there are no changes in
current liabilities other than borrowings.) Which alternative
is lowest in cost?
Q3)
– Level of Activity = 1,040,000 units
– Selling Price = PKR 20 per unit
– Raw Material Cost = PKR 8 per unit
– Labor Cost = PKR 3 per unit
– Overhead Cost = PKR 6 per unit
– Raw Material in Stock = 4 weeks
– Processing Time = 2 weeks
– Finished Goods in stock = 3 weeks
– Credit received from customer is 8 weeks
– Credit received from supplier is 6 weeks
– Delay in payment of wages is 4 weeks
– Delay in payment of overheads is 5 weeks
– Prepaid Expenses = PKR 20,000
– Outstanding Expenses = PKR 50,000
– Contingency is 5% of Gross Working Capital
Required:
– Calculate GWC, NWC and length of the Working Capital
Cycle?
Q No.4
A company has a cash balance of Rs.27000 at the beginning of March
and you are required to prepare a cash budget for March, April and
May having regard to the following information.

Creditors give 1 month credit

Salaries are paid in the current month
Fixed costs are paid one month in arrears and include a charge for
depreciation of Rs.5000 per month.
Credit sales are settled as follows:
40% in month of sales
45% in next month and 12% in the following month. The balance
represents bad debts.

Month Cash Credit sales purchases Salaries Fixed

sales expense
Jan 74000 55200 9000 30000
Feb 82000 61200 9000 30000
March 20,000 80000 60000 9500 30000
April 22000 90000 69000 9500 32000
May 25000 100,000 75000 10000 32000

Q No.5
The opening cash balance on 1st Jan was expected to be Rs. 30,000.
The sales budget were as follows:
November Rs.80,000
December 90,000
January 75,000
February 75000
March 80000

Analysis of records shows that debtors settle according to the

following pattern:
60% within the month of sales, 25% the month following, 15% the
month following.
Extracts from the purchases budget were as follows:
December Rs.60000
January 55000
February 45000
March 55000
All purchases are on credit and past experience shows that 90% are
settled in the month of purchases and the balance settled the month
after.
Wages are Rs.15000 per month and overheads of Rs.20,000 per month
( including Rs.5000 depreciation) are settled monthly.
Taxation of Rs.8000 has to be settled in February and company will
receive settlement of an insurance claim of Rs.25000 in March.

Required: Prepare cash budget for Jan, Feb and March

Q No.6
In the fourth quarter of 2003, Casey Wholsalers ahd the following net
income.

Sales Rs.500,000
Less: Cost of goods sold 250,000
Gross Profit 250,000
Selling and administrative exp 200,000
Income before tax 50,000
Income tax 17,500
Net income 32,500

Purchases in the fourth quarter amounted to Rs.300,000.

Estimated data for Casey Wholsalers, Inc. for 2004 are as follows:

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Sales Rs. 600,000 Rs.700,000 Rs.800,000 Rs.900,000
Cost of sales 300,000 350,000 400,000 450,000
Purchases 350,000 400,000 450,000 485,000
Selling and Adm. 200,000 200,000 200,000 200,000

Taxes are 35% of pretax income. 60% of sales re collected in the quarter
of sales and 40% in the nextr quarter. 80% of purchases are paid in the
quarter of purchase and 20% in the next quarter. Selling and
administrative expenses are paid in the quarter incurred except for
Rs.10,000 of depreciation included in selling and administrative
expense. A capital expenditure for Rs.50,000 is planned for the fourth
quarter of 2004.

Requried

Prepare cash receipts and disbursements budget for each quarter of

2004.