(a) From the following information as contained in the Trading and Profit & Loss Account and Balance Sheet of X Ltd., you are…

(a) Operating Cycle Period Method used: Net Operating Cycle = Raw Material Storage Period + Work-in-Process Period + Finished Goods Period + Debtors Collection Period − Creditors Payment Period. All periods are in days. Assuming a 360-day year, as is conventional in working capital management.

First compute cost figures (₹ in lakh):

• Raw material consumed = Opening RM + Purchases − Closing RM = 28 + 480 − 32 = 476.
• Cost of production = RM consumed + Wages + Manufacturing expenses + Opening WIP − Closing WIP = 476 + 50 + 30 + 60 − 80 = 536.
• Cost of goods sold = Cost of production + Opening FG − Closing FG = 536 + 40 − 60 = 516. Check: Sales − Gross Profit = 640 − 124 = 516.

From additional information: (i) Closing debtors = Opening debtors + 8, so Opening debtors = 104 − 8 = ₹96 lakh. (ii) Opening creditors = ₹24 lakh. (iii) Purchases and sales are credit only; hence credit purchases = ₹480 lakh and credit sales = ₹640 lakh.

Now calculate periods:

• Raw material storage period = Average RM / RM consumed × 360 = [(28 + 32) / 2] / 476 × 360 = 30 / 476 × 360 = 10800 / 476 = 22.689 days ≈ 22.69 days.

• WIP period = Average WIP / Cost of production × 360 = [(60 + 80) / 2] / 536 × 360 = 70 / 536 × 360 = 25200 / 536 = 47.015 days ≈ 47.01 days.

• Finished goods period = Average FG / COGS × 360 = [(40 + 60) / 2] / 516 × 360 = 50 / 516 × 360 = 18000 / 516 = 34.884 days ≈ 34.88 days.

• Debtors collection period = Average debtors / Credit sales × 360 = [(96 + 104) / 2] / 640 × 360 = 100 / 640 × 360 = 36000 / 640 = 56.25 days.

• Creditors payment period = Average creditors / Credit purchases × 360 = [(24 + 84) / 2] / 480 × 360 = 54 / 480 × 360 = 19440 / 480 = 40.5 days.

Gross operating cycle = 22.689 + 47.015 + 34.884 + 56.25 = 160.838 days. Net operating cycle = 160.838 − 40.5 = 120.338 days ≈ 120 days.

With a 365-day year the same ratios give a net operating cycle of about 122 days. Opening debtors (₹96 lakh) and opening creditors (₹24 lakh) are used to form averages.

(b) Role of Commercial Banks in Economic Development Commercial banks play a central role in economic development by mobilising savings and channelling them into productive investment. They collect small, scattered deposits and convert them into larger loans for agriculture, industry, trade, infrastructure, and services. This financial intermediation reduces the cost of capital and promotes capital formation.

They provide short-term, medium-term, and long-term credit to entrepreneurs, MSMEs, and corporate houses, thereby supporting production, employment, and innovation. Bank finance helps new enterprises overcome initial capital shortages and enables existing firms to expand capacity and adopt modern technology.

Banks also promote balanced regional development through branch expansion, rural credit, priority-sector lending, and financial inclusion. Schemes such as SHG-bank linkage, Kisan Credit Card, and MUDRA loans support agriculture, small business, and weaker sections. They facilitate trade and commerce through bills discounting, letters of credit, remittances, foreign exchange, and export finance.

As agents of monetary policy, commercial banks transmit central bank decisions to the real economy by adjusting lending and deposit rates. They also support government development programmes, infrastructure financing, and digital payments. Their developmental role depends on balance-sheet health: the gross NPA ratio of Indian scheduled commercial banks fell from about 11.2% in March 2018 to 2.3% in March 2025 (RBI Financial Stability Report, June 2025), after recapitalisation, the IBC and the asset quality review, which restored their capacity to lend.

(c) Arbitrage Process under the M&M Model The M&M arbitrage process explains why, under perfect capital markets and no taxes, a firm’s value is independent of its capital structure. According to M&M Proposition I, V_U = V_L, where V_U is the value of an unlevered firm and V_L is the value of a levered firm with identical operating income and risk.

Suppose two firms have the same expected EBIT, X, but one is unlevered (U) and the other is levered (L) with debt D and interest rate r. If the market temporarily values the levered firm more, so V_L > V_U, an investor can use “home-made leverage” to earn a higher return without extra risk.

Let an investor hold α fraction of L’s equity. His investment is αE_L = α(V_L − D). His return is α(X − rD). He sells these shares, borrows αD personally at the same rate r, and buys α fraction of U’s equity. Since V_L > V_U, he has surplus α(V_L − V_U), which he invests in risk-free securities.

His new return = αX − αrD + rα(V_L − V_U). This exceeds the old return α(X − rD) by rα(V_L − V_U). Thus, investors shift from L to U, raising U’s price and lowering L’s price until V_L = V_U.

The reverse arbitrage works if V_U > V_L. The process assumes perfect markets, homogeneous risk classes, no taxes, no bankruptcy costs, and equal borrowing rates for firms and investors. Hence, arbitrage restores equilibrium and makes capital structure irrelevant to firm value.