Download MS-41 Solved Assignment 2015

Download MS-41 Solved Assignment 2015

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IGNOU MS-41 (Working Capital Management) Solved Assignment January 2015 Preview

Course Code : MS-41
Course Title : Working Capital Management
Assignment Code : MS-41/TMA/SEM-I/2015
Coverage : All Blocks

Note: Attempt all the questions and submit this assignment on or before 30th April, 2015 to the coordinator of your study center.

Q1. Distinguish the different working capital financing strategies. Under the present capital and money market conditions which of these would you recommend to a consumer durable manufacturing firm. Explain with reasons & list out your assumption, if any.

Ans: There are broadly 3 working capital management strategies / approaches to choose the mix of long and short term funds for financing the net working capital of a firm viz. Conservative, Aggressive, Hedging (Or Maturity Matching) approach. These strategies are different because of their different trade-off between risk and profitability. Another remarkable difference is the extent or proportion of application of long and short term fund to finance the working capital.

The terms methods of working capital management, strategies and approaches to working capital management are interchangeably used in general parlance. But, ultimately the concept is important. We need to understand the following relationship in depth for understanding the concept in its true sense.

SHORT TERM vs. LONG TERM FINANCING VIS A VIS RISK AND PROFITABILITY TRADEOFF

Profitability Standpoint: In general, short term interest rates are cheaper to long term interest rates because of the term premium. That means short term has lower interest cost and higher profitability whereas long term has higher interest cost and lower profitability. Especially, when the long term funds are utilized to finance the working capital, unnecessary interest is paid for the periods when the funds are not utilized. In essence, the short term financing wins the race if profitability is the concern. Let’s now look at the risk concern.

Risk Standpoint: There are two risks involved in short term financing viz. Refinancing Risk and Risk of Interest Rate Fluctuations with Refinancing. Refinancing is very uncertain and if the lender denies it for any reason, the options left to the borrower for making payment is either to sell off the assets and pay or file for liquidation if failed to realize the assets. Risk of adverse change in interest rate while refinancing may increase the cost of financing and this risk leads to low profitability. On the contrary, long term financing neither have refinancing risk nor the risk of change of interest rate frequently. Here, the long term financing wins the race...

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