- Fanaka Ltd. a large multi- national company is in the process of determining the optimal cash balance
for the year ending 31 December 2009.
The management of...(Solved)
Fanaka Ltd. a large multi- national company is in the process of determining the optimal cash balance
for the year ending 31 December 2009.
The management of the company has established the following information:
1. The company’s annual cash requirements amount to sh. 2,500 million.
2. The cost of each cash conversion transaction is sh. 500.
3. The opportunity cost of funds is 12%.
Required:
i) Optimal cash balance that the company should hold.
ii) Total cost of maintaining the cash balance determined in (b) (i) above.
Date posted: April 28, 2022. Answers (1)
- Modern Appliance Ltd. sells on average 2,000 units of product “Zed” per month. The purchase price per unit of the product is sh. 2. The...(Solved)
Modern Appliance Ltd. sells on average 2,000 units of product “Zed” per month. The purchase price per unit of the product is sh. 2. The cost of placing each order is sh. 50 and the carrying cost is 10% of the purchase price.
Required:
i) Economic order quantity.
ii) Total relevant cost per annum.
iii) Assume that the company has received a discount offer of 1% for purchases of at least 4,500 units per order
Using supporting calculations, advise the company on whether to take advantage of the discount offer.
Date posted: April 28, 2022. Answers (1)
- Kilimo Ltd. Manufactures a standard farm implement which it sells to distributors at sh. 100 per unit. The company intends to relax its credit policy...(Solved)
Kilimo Ltd. Manufactures a standard farm implement which it sells to distributors at sh. 100 per unit. The company intends to relax its credit policy which will result in an increase collection period from one month to two months.
The longer credit period is also expected to increase sales by 25%. Variable costs of production are sh. 85 per unit while annual sales are sh. 24,000,000. The increase in sales will result in additional stock of sh. 2,000,000 and additional creditors of sh. 200,000.
The company’s required rate of return is 20%.
Required:
Advise the company on whether or not to extend the credit period assuming:
i) All customers take longer credit period of two months.
ii) Existing customers do not change their payment habits and only the new customers take the full two months credit
Date posted: April 28, 2022. Answers (1)
- The following information was obtained from the financial statements of Alusa Ltd. A retail company, for the year ended 30 September 2009.(Solved)
The following information was obtained from the financial statements of Alusa Ltd. A retail company, for the year ended 30 September 2009.
Date posted: April 28, 2022. Answers (1)
- Name and explain three approaches that could be used by a company to finance its working capital requirements.(Solved)
Name and explain three approaches that could be used by a company to finance its working capital requirements.
Date posted: April 28, 2022. Answers (1)
- Mapema Ltd. manufactures and sells a product called “Rugs”. The company sells the product to its customers on credit terms. The company is considering easing...(Solved)
Mapema Ltd. manufactures and sells a product called “Rugs”. The company sells the product to its customers on credit terms. The company is considering easing the debtors collection efforts so as to increase its profitability.
The following information relates to the company:
• Average number of units sold per year 72,000,000
• Selling price per unit sh. 32.
• Variable cost per unit is sh. 28.
• Annual fixed collection expenses sh. 60,000,000.
• Average collection period is 40 day.
By easing the collection efforts. Mapema Ltd. expects to save sh. 40,000,000 per annum in collection expenses. However, this will lead to an increase in bad debts from 1% to 2% od sales and the average collection period from 40 days to 58 days. Sales will also increase by 1,000,000 units per annum. The company’s required rate of return is 24%
Assume a 360 day year.
Required:
Advice Mapema Ltd. on whether it is worthwhile to ease the collection efforts.
Date posted: April 28, 2022. Answers (1)
- Chogoria Ltd., a manufacturing company, has applied for working capital finance from Zed Commercial Bank Ltd. The bank's manager has requested for a working capital...(Solved)
Chogoria Ltd., a manufacturing company, has applied for working capital finance from Zed Commercial Bank Ltd. The bank's manager has requested for a working capital estimate from the company. The company has provided you with the following data for the next financial year.
Required
(i) A statement showing the working capital estimate.
(ii) Assume that production is carried on evenly throughout the year and wages and overheads also accrue evenly.
Date posted: April 28, 2022. Answers (1)
- The working capital policy of any business entity must address the twin issues of the level of current assets and the manner in which these...(Solved)
The working capital policy of any business entity must address the twin issues of the level of current assets and the manner in which these current assets are financed.
Required:
In relation to the above statement, explain how business entities can adopt aggressive, moderate and conservative working capital policies.
Date posted: April 28, 2022. Answers (1)
- The following data relate to Store ltd, a manufacturing company.(Solved)
The following data relate to Store ltd, a manufacturing company.
Date posted: April 28, 2022. Answers (1)
- You are given the following financial statement information for Moto Ltd. for the year ended 31 December 2010:
Required;
The operating and cash conversion cycles assuming that...(Solved)
You are given the following financial statement information for Moto Ltd. for the year ended 31 December 2010:
Required;
The operating and cash conversion cycles assuming that the year has 360 days.
Date posted: April 28, 2022. Answers (1)
- Baren Ltd projects that cash outlays of Sh.45 million will occur uniformly throughout the year.
The company plans to meet its cash requirements by selling marketable...(Solved)
Baren Ltd projects that cash outlays of Sh.45 million will occur uniformly throughout the year.
The company plans to meet its cash requirements by selling marketable securities from its
portfolio. The expected return from the company's marketable securities is 8 per cent per annum,
and the cost per transaction of converting securities into cash is Sh.30.
Required
(i) The optimal cash balance
(ii) The average cash balance
(iii) The number of transfers between cash and marketable securities per year.
Date posted: April 28, 2022. Answers (1)
- The projected monthly working capital requirements for Chasimba Ltd. for the year ending 31 December 2012 is as follows:(Solved)
The projected monthly working capital requirements for Chasimba Ltd. for the year ending 31 December 2012 is as follows:
Date posted: April 28, 2022. Answers (1)
- The finance manager of Charisma Enterprises Ltd. has given the following financial estimates for the year ending 31 December 2012:
Raw materials are 80% of cost...(Solved)
The finance manager of Charisma Enterprises Ltd. has given the following financial estimates for the year ending 31 December 2012:
Raw materials are 80% of cost of sales which are all on credit.
Required:
The cash operating cycle.
Date posted: April 28, 2022. Answers (1)
- Bahari Ltd. has the standard deviation of its daily net cash flow estimated at Sh.68, 250. The company
maintains minimum cash balance Sh.500, 000. The company's...(Solved)
Bahari Ltd. has the standard deviation of its daily net cash flow estimated at Sh.68, 250. The company
maintains minimum cash balance Sh.500, 000. The company's transaction cost is Sh.360 from the
money marker. The rate interest for the marketable securities is 9.865% per annum. The company
uses the Miller-Oir model to set its target cash balance.
Assume 365 days a year.
Required:
(i) The company's return point.
(ii) Upper cash limit.
(iii) The average cash balance.
Date posted: April 28, 2022. Answers (1)
- The following information relates to the current trading operations of Dindiri Ltd.(Solved)
The following information relates to the current trading operations of Dindiri Ltd.
In an effort to improve the liquidity position of the company, the management proposed the following
strategies aimed at reducing its operating cycle.
Strategy A
To offer a 2% cash discount to customers who pay their accounts within 10 days. This will have the
following effects:
1. 50% of the cred it customers and all cash customer, will take advantage of the discount.
2. Annual sales the percentage of credit sales and the contribution to sales ratio will not change.
3. There will be savings in debt collection expenses of Sh 4,125,000 per month.
4. Bad debts will decrease to 20% of total credit sales.
5. The average collection period will be reduced to 32 days.
Strategy B
Contract the services of a factor at a cost of 2% of total credit sales while advancing Dindiri Ltd. 90%
of total credit sales invoiced at the end of each month at an interest rate of 1.5% per month.
The effects of this strategy will be:
1. No change in the level of annual sales proportion of cred it sales and contribution margin ratio.
2. Savings on debt administration expenses of Sh.2, 100,000 per month will result.
3. All bad debt losses will be eliminated.
4. The average collection period will drop to 20 days.
Required:
(i) Evaluate the financial benefits and Costs of each strategy (assume a 60 day year)
(ii) Advise the management of Dindiri Ltd. on the viable strategy to implement.
Date posted: April 28, 2022. Answers (1)
- Magas Ltd. is coThe relaxation in the debt collection effort is expected to increase sales by sh. 5. million, increase the
average collection period to 40...(Solved)
Magas Ltd. is considering relaxing its debt collection effort. The following data is provided for Magas Ltd.
The relaxation in the debt collection effort is expected to increase sales by sh. 5. million, increase the
average collection period to 40 days and raise the bad debt ratio to 0.06.
The company’s tax rate is 30%.
Assume 360 days in a year.
Required:
Assess the effect of relaxing the debt collection effort on the net profit of Magas Ltd.
Date posted: April 28, 2022. Answers (1)
- The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period...(Solved)
The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period of 30 days. Variable cost is 80% of the annual sales. 50% of customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15 net 45 days. This relaxation of discount terms is expected to increase annual sales by Sh.10 million, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company's cost of capital is 12%.
Corporate tax rate is 30%.
Assume 360 days in a year.
Required:
Advise the management of Fredcom Ltd. on whether to relax its discount terms.
Date posted: April 28, 2022. Answers (1)
- The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity...(Solved)
The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity of 30,000 units of output for the year.
The cost structure for the company's product for the above mentioned activity level is given below:
Additional information:
1. Past experience indicates that raw materials are held in stock on average for 2 months.
2. Work in progress (100% complete in regard to materials and 50% for labour and overheads) will
be half a month's production.
3. Finished goods are in stock on average for 1 month.
4. Credit allowed to suppliers is 1 month.
5. Credit allowed to debtors is 2 months.
6. A minimum cash balance of Sh.250, 000 is expected to be maintained.
Required:
Prepare a statement of working capital requirements.
Date posted: April 26, 2022. Answers (1)
- Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is...(Solved)
Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is 12%. The transaction cost of buying and selling of marketable securities is Sh.200 per transaction. Assume
that one year has 365 days.
Required:
Using the Miller-Orr cash management model, determine:
i) The return point.
ii) Average cash balance.
iii) The upper cash limit.
Date posted: April 26, 2022. Answers (1)
- Discuss the conflicts that might arise among the objectives of working capital management.(Solved)
Discuss the conflicts that might arise among the objectives of working capital management.
Date posted: April 26, 2022. Answers (1)