(a) Write a short note on :

(i) the costs associated with inventory management.

(ii) Credit Policy

(b) Birla and Ambani Company Ltd., has the total capital structure of ` 80,00,000 consisting of:

Ordinary Shares (2,00,000 shares) = 50.0%

10% Preference Share Capital = 12.5%

14% Debentures = 37.5 %

The share of the Company sells for ` 20. It is expected that the Company will pay next year a dividend of ` 2 per share which will grow at 7% forever. Assume tax rate of 50%.

(i) Compute a Weighted Average Cost of Capital based on the existing capital structure.

(ii) Compute the new Weighted Average Cost of Capital if the Company raises an additional ` 20,00,000 debt by issuing 16% debentures. This would result in increasing the expected dividend to ` 3 per share and leave the growth rate unchanged, but the price of the share will fall to

` 15 per share.

OR

(a) What is management of working capital? State briefly the repercussions if a firm has:

(i) Paucity of working capital.

(ii) Excess of working capital.

(b) Estimate the working capital requirement from the particulars given below:

Production for the year 48,000 units Finished Goods Stock 3 months Raw Material in Stock 2 months Credit allowed by Suppliers 2 months Credit allowed to Debtors 3 months Selling Price per unit ` 50 Raw Material cost 50% of Selling price Direct Wages 10% of Selling price Manufacturing Overheads 16% of Selling price Selling Overheads 4% of Selling price Credit Sales 75% of total Sales There is a regular production and sales cycle and wages and overhead accrue evenly. Wages are paid with a time lag of one month. Keep a contingency margin of 10%