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Graded Discussion Board

Corporate Finance (FIN622)

Concept to be tested: “Working Capital Management”

Discussion Question

SMH Company uses short term financing to finance its current assets. Company is facing high risk due to fluctuation in market interest rate. In the month of June, its current assets were Rs.25,035,000 (Permanent assets = Rs.7,000,000 and seasonal assets = Rs.18,035,000) and current liabilities were Rs.25,000,000. Now in the month of July, current assets are Rs.25,005,000 (Permanent assets = Rs.7,000,000 and seasonal assets = 18,005,000) and current liabilities are Rs.25,000,000. Company was using the credit policy of 2/15 net 30 but now it intends to change its policy to 3/10 net 30. Keeping in view that debtors are always interested in availing discounts, how this new credit policy will affect cash conversion cycle if there is no change in inventory turnover and sales. Also explain which working capital policy is being used here.

(Note: Your discussion should not exceed 150 words. No calculation is needed; you are only supposed to discuss the scenario.)

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