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Mb0045 Financial Management Solved Assignments 2015 Movies

MB0045: Given the following information in terms of per unit costs, prepare a statement showing the working capital requirement.

Raw material            60

Direct labour            22

Overheads                44

Total cost                 126

Profit                        18

Selling price             140

The following additional information is available:

Average raw material in stock              one month

Average materials in process                15 days

Credit allowed by suppliers                  one month

Credit allowed to debtors                     two months

Time lag in payment of wages             15 days

Time lag in payment of overheads       one month

Sales on cash basis                               20%

Cash balance to be maintained            80,000

You are required to prepare a statement showing the working capital required to finance a level of activity of 100,000 units of output. You may assume production is carried out evenly throughout the year and payments occur similarly. Assume 360 days in a year.

Solution:

Estimation of Working Capital

 a)      Investment in inventory

1.      Raw material                        =          RMC x RMCP

 360

=          100,000 x 60 x 30

360

=          500,000

2.      Work in process inventory =          COP x WIPCP

 360

=          100,000 x 126 x 15

360

=          525,000

3.      Finished goods inventory     =          COS x FGCP

 360

=          100000 x 126 x 60

360

=          2,100,000

b)     Investment in debtors                 =          Cost of credit sales x DCP

360

=          80,000 x 126 x 60

360

=          1,680,000

c)      Cash Balance                               =          80,000

d)     Total Current Asset (A+B+C)   =          4,885,000

e)      Current Liabilities

1.      Creditors                                =          Purchase of raw materials x PDP

360

=          100,000 x 60 x 30 / 360 = 500,000

Wages                                     =          100,000 x 22 x 15 / 360 =91,667

3.      Overheads                              =          100000 x 44 x 30/360 = 366,667

f)       Total Current Liabilities             =          958334

                                    Net Working Capital (D – F)           =          3,926,666      

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Tags: Business, Capital IQ, Finished good, Fiscal year, Inventory, Raw material, Trailing twelve months, Working capital

 

Q1. Why wealth maximization is superior to profit maximization in today¶s context?Justify you answer?Answer:

Superiority of Wealth Maximization over Profit Maximization:1.

It is based on cash flow, not based on accounting profit.

2.

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hrough the process of discounting it takes care of the quality of cash flows. Distantuncertain cash flows into comparable values at base period facilitates better comparison of projects.

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here are various ways of dealing with risk associate withcash flows.

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hese risk are adequately considered when present values of cash of any project.

3

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In today¶s competitive business scenario corporate play a key role. In company fromof organization, shareholders own the company but the management of the companyrests with the board of directors. Directors are elected by shareholders and henceagents of the shareholders. Company management procures funds for expansion anddiversification from Capital Markets. In the liberalized set up-, the society expectscorporate to tap the capital market effectively for their capital requirements.

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hereforeto keep the investors happy through the performance of value of shares in the market,management of the company must meet the wealth maximization criterion.

4.

W

hen a firm follows wealth maximization goal, it achieve maximization of marketvalue of share.

W

hen a firm pact wealth maximization goal, it is possible only when procedures quality goods at low cost. On this account society gains became of thesociety welfare.

5.

Maximization of wealth demands on the part of corporate to develop new products or render new services in the most effective and efficient manner.

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his helps theconsumers all it will bring to the market the products and services that consumer¶sneed.

6.

A

nother notable features of the firms committed to the maximization of wealth is thatto achieve this goal they are forced to render efficient service to their customers withcourtesy.

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his enhance consumer and hence the benefit to the society.

7

.

F

rom the point of evaluation of performance of listed firms, the most remarkablemeasure is that of performance of the company in the share market. Every corporateaction finds its reflection on the market value of shares of the company.

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herefore,shareholders wealth maximization could be considered a superior goal compared to profit maximization.

8

.

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ince listing ensures liquidity to the shares help by the investors shareholders can reapthe benefits arising from the performance of company only when they sell their shares.

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herefore, it is clear that maximization of the net wealth of shareholders.

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herefore we can conclude that maximization of wealth is the appropriate of goal of financialmanagement in today¶s context.

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