Himalaya Herbal $($Pvt$.)$ Ltd$.$ is a private company incorporated to farm the medicinal herbs and collect the wild herbs from local farmers in Magdi District. It started plantation of medicinal herbs $5$ years ago. Now most of herbs have fully grown up and company is harvesting them. But it has come across about the problems of marketing of raw herbs. So$,$ its annual general meeting of shareholders recently passed the resolution to establish herbal processing units in Beni Bazar. The expert team appointed to prepare the detail project report $($DPR$)$ reported that Herbal Processing Unit will require land and building, plant and equipment, laboratory equipments and office furniture and machines. Altogether, this will cost Rs $3,500,000.$ In addition, expert team has reported the three scenarios of level of current assets. In the first scenario, it advises the management to maintain current assets as low as possible. Specifically, it has mentioned in its report that company should maintain cash: $5$ percent, receivable: $15$ percent, inventory: $20$ percent, and other current assets $2$ percent of sales. In the second scenario it advises management of company to be a little bit lenient on the investment in working capital. So$,$ it advises to increase the level of all components of current assets by $20$ percent of current assets to be maintained in the first scenario. Further, expert team advises the management that if it wants to be more liberal in the investment of working capital, it should increase its investment in different components of working capital. Specifically, it has mentioned in its report that investment in working capital can be increased up to $50$ percent of the current assets to be maintained in the first scenario. But management will increase the working capital level by $20$ percent relative to the level of working capital of second scenario in the third scenario. The company has already raised Rs $2,000,000$ equity funds and it will not issue new share but it will plough back cent percent surplus of the processing unit for next $5$ years.

Similarly, expert team advises the management to hold up the payment to the farmers for $30$ days. Further it has reported that annual purchase of herbs will be $50$ percent of the sales. In addition to raw herbs, company will purchase packaging materials and chemicals from local traders. It will grant credit for $30$ days. Annual purchase of packaging materials and chemical will be $10$ percent of sales. Other current liabilities exclusive to bank loan will be Rs $200,000.$

The projected annual sales of the company will be Rs $5,000,000$ in the first scenario and Rs $6,000,000$ in the second scenario and Rs $6,500,000$ in the third scenario. Earnings before interest and tax will be $20$ percent of sales. It will borrow Rs $2,000,000$ long term bank loan at $15$ percent annual interest and it will arrange the credit line for short term bank loan at $12$ percent annual interest rate. So$,$ it will borrow short term bank loan whenever other available sources fall short. Corporate tax applicable to this company will be $30$ percent.

$1.$ Discuss the importance of working capital management.

$2.$ You are required to calculate the return on equity. Which working capital policy should be opted by Himalaya Herbal $($Pvt$.)$ Ltd$?$

$3.$ In which scenario, company is advised to follow aggressive current assets policy?

$4.$ What financing policy of working capital expert team has advised to the management of Himalaya Herbal $($Pvt$.)$ Ltd$.?$

$5.$ How does size of working capital affect riskiness of the company? Which scenario is more risky for Himalaya Herbal $($Pvt$.)$ Ltd$.?$