FINAL %_ FIN3702 MAY/JUNE 2014 WORKING CAPITAL MANAGEMENT asserts ———F l im IDENTITY NUMBER, Question No 7 2 FOR USE BY EXAMINATION INVIGILATOR B | 1 T 2 tT | Subject Number of paper t —|—}-— ~ [ Date of examination t Examnaton cone | Total I WARNING 1 Acandidate who without authonsation takes into the examination venue any book, document or object which Could assist him in the examination, and does not hand over such material fo the invgilator before the offciat commencement of the examination, will be guilty of infringing the University’s examination regulations and wil be lable to punishment as determined by Council rough work may be done only on the examination question paper and must be labelled as such No notes may be made on any part of the body, such as the hands, or on any garment This pagelpaper is the property of the University and under no circumstances may the candidate retam it or take t out of the examination venue NB PLEASE COMPLETE THE ATTENDANCE REGISTER ON THE BACK PAGE, TEAR OFF AND HAND TO THE INVIGILATOR [TURN OVER]UNIVERSITY EXAMINATIONS, UNIVERSITEITSEKSAMENS Oe my UNISA Ison FIN3702 (473821) Mayldune 2014 Working Capital Management Duration 2 Hours 70. Marks EXAMINERS FIRST MR JS KASOzI MR MA PHENYA EXTERNAL PROF HP WOLMARANS Use of a non-programmable pocket calculator ts permissible Closed book examination. ‘This examunation question paper remains the property of the University of South Africa and may not be removed from the examination venue This paper consists of 18 pages including 4 pages for rough work (pp 15-18), and instructions for the completion of a mark-reading sheet Answer SECTION A and SECTION B SECTION A consists of 30 multiple-choice questions worth 30 marks and SECTION B consists of 2 essay-type questions totalling 40 marks Your final mark will be expressed as a percentage mark, out of 702 FIN3702 May/June 2014 SECTION A: MULTIPLE-CHOICE QUESTIONS [30 MARKS] Global Furnitures Ltd wants to sharply reduce its cash conversion cycle (CCC) Which one of the following steps would help reduce its cash conversion cycle? 1 The company increases its average mventory without increasing its sales 2 The company reduces its average collection period (ACP) 3 The company starts paying its bills sooner, which reduces tts average accounts payable period without reducing its sales 4 Statements 1 and 2 are correct ‘A lock box plan 1s most beneficial to firms which send payables over a wide geographical area have a large marketable securities account to protect hold inventory at many different sites make collections over a wide geographical area RON For the year end 2013, a company had cash flows from operating activities of R12 000, cash flows from investment activities of -R10 000 and cash flows from financing activities of R4 000 The statement of cash flows for this company will show a net in cash and marketable secunties Increase of R2 000 Increase of R6 000 decrease of R6 000 decrease of R18 000 Rene Which one of the following might be attributed to efficient inventory management? 1 Ahigh inventory turnover ratio 2 A low incidence of production schedule interruptions 3 Ahigh total asset turnover 4 Allstatemenis above are correct The following information applies to questions 5 and 6. ‘Anglo World expects to order 126 000 memory chips of inventory dunng the coming year and it will use this inventory at a constant rate Fixed ordering costs are R200 per order, the purchase price is R25, and the firm's inventory carrying costs equal to 20% of the purchase price (Assume a 360-day year for this company ) 5 What is the estimated economic order quantity for the chips? 1 3175 2 6243 3 8124 4 13675 [TURN OVER]10 " 3 FIN3702 May/June 2014 Approximately how many orders should Anglo World place during the year? 1 12 2 2 3 30 4 40 Given the financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one a shorter depreciable life is preferred to a longer one the manager is not concerned with depreciable lives, because depreciation is a non-cash expense 4 the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost on The pnmary purpose in preparing pro forma financial statements 1s. 1 forcash planning 2 toensure the abilty to pay dividends 3 fornsk analysis, 4 for profit planning A firm has actual sales in November of Ri 000 and projected sales in December and January of R3 000 and 4 000 respectively The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale The firm's total expected cash receipts in January are 1 R700. 2 R1900 3 2100 4 R6 100 ‘The projected excess cash balance for a given month may be .. 1 financed with short-term securities 2 financed with long-term securities 3 invested in marketable securities 4° invested in long-term secunties Global Trends Ltd has prepared the coming year's pro forma balance sheet resulting in a “plug figure” (external financing required) of -R230 000 This firm should prepare to invest in marketable secunties totalling R230 000. repurchase ordinary shares totalling R230 000. arrange for a loan totalling R230 000. do nothing, the balance sheet balances poe [TURN OVER]12 13 14 15 16 17 4 FIN3702 May/June 2014 A firm's permanent financing requirement 1s financed with under the aggressive financing strategy 1 2 3 4 long-term sources short-term sources retained earnings accounts payable A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment penod of 30 days The firm's operating cycle Is 1 2 3 4 70 days 110 days 120 days 130 days A firm purchased raw matenals on account and paid for then within 30 days The raw materials were used in manufacturing finished goods which were sold on account 100 days after the raw materials were purchased The customer paid for the finished goods 60 days later This firm's cash conversion cycle (CCC) is 1 2 3 4 10 days 70 days 130 days 190 days, In theory, the conservative financing strategy ignores 7 2 3 4 the spontaneous forms of short-term financing the high nisk associated with this strategy all current abilities, current assets A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed with a loan ‘The most likely consequence of this action 1s RON a decrease in the current ratio an increase in the long-term debt a decrease in the risk of technical solvency an increase in the net working capttal The economic order quantity (EOQ) is the order quantity method which minimizes Rowe the order cost per order the total inventory costs the carrying costs per unit per period order quantity in units, (TURN OVER]18 19 20 at 5 FIN3702 May/June 2014 Stee! Works Inc is required to carry a minimum of 40 days’ raw steel, which 1s 250 tons It takes 15 days between order and delivery At what level of steel would Steel Works reorder? 1 344 tons. 2 600 tons 3 667 tons 4 3750 tons As credit standards are tightened, sales are expected to and the investment in accounts recewvable 1s expected to Increase, increase Increase, decrease decrease, decrease decrease, increase Rana When a firm initiates or increases a cash discount, sales are expected to, the investment in accounts receivable 1s expected to, the bad debt expense 1s expected to, and the profit per unit 1s expected to 1 decrease, increase, increase, increase 2 decrease, decrease, increase, increase 3 increase, decrease, decrease, decrease 4 increase, increase, decrease, decrease When a firm stretches its accounts payable without hurting ts credit rating, the cost of foregoing the cash discount 1s reduced increased unaffected immaterial ROW ‘firm purchased goods with a purchase price of 1 000 000 and credit terms of 1/10 net 30. The firm paid for these goods on the Sth day after the date of purchase The firm must pay for the goods (Assume 360 days in a year ) 1 R 900000 2, R 990000 3 1000000 4, 1100000 [TURN OVER]23 24 25 26 27 6 FiN3702 May/June 2014 A firm ts offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount The firm has a credit line available at a local bank at an interest rate of 12 percent Assuming a 360 day year, the firm should give up the cash discount, financing the purchase with the line of credit take the cash discount and pay on the 45th day after the date of sale take the cash discount and pay on the first day of the cash discount period take the cash discount, financing the purchase with the line of credit, the cheaper source of funds Rona The cost of giving up a cash discount under the terms of sale 6/20 net 120, assuming a 360-day year is 1 15.00% 2 15.80% 3 18.90% 4 20.00% Stanbic Bank lends a firm R1 600 000 for one year at 12% on a discounted basis and requires compensating balances of 10% of the face value of the loan The effective annual interest rate associated with this loan is. 12 00% 13 30% 13 60% 15 40% aons A mining magnate was extended credit terms of 3/15 net 30 EOM The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period and assuming a 60-day year, would be 45 65% 60 56% 74 23% 75 25% Rone What is the highest effective annual rate attainable with a 12 percent nominal rate if Interest 1s compounded annually? 12 00% 12 55% 12 75% 12 95% RONe (TURN OVER]7 FIN3702 May/June 2014 The information provided below applies to the next three questions. Diksy, a financial analyst with the Madikwe Forest Reserve, has prepared the following sales and cash disbursement estimates for the period August to December of the current year Month Sales Disbursements August R400 R300 September R500 R500 October R500 R700 November ‘R600 R400 December R700 R500 Ninety percent of sales are made for cash, while the remainder is collected one month later All disbursements are on cash basis The firm wishes to maintain a minimum balance of R50 The ending cash balance in September was A250 28 What are the total cash receipts for October, November and December respectively? R500, A590 and R690 R610, R640 and A690 R750, R770 and R790 R810, R850 and R890 hon 29 What are the net cash flows for October, November and December respectively? R(200), R190 and R190 F300, R(300) and R190 F200, R(400) and R190 R190, (190) and R200 Bons 30 What is the required financing or excess cash for the month of November? Excess cash of RO Required financing of R190 Excess cash of R190 Excess cash of F380 aon [TURN OVER]8 FIN3702 May/June 2014 SECTION B ESSAY-TYPE QUESTIONS [40 MARKS] QUESTION 1.1 [15 MARKS] Hope Ltd has annual sales amounting to R12 000 000 Their cost of goods sold account for 75 percent of sales while their purchases account for 65 percent of their cost of goods sold It takes the company approximately 100 days to produce and receive cash from their finished products because debtors usually settle their accounts within 45 days The company pays its suppliers within 35 days of purchase and negotiates for borrowed funds al 16 percent per annum (Assume a 360-day year) REQUIRED (a) Calculate the amount of funds invested in the company’s cash conversion cycle (10) [TURN OVER]9 FIN3702 May/June 2014 (b) Calculate the daily saving in the cash conversion cycle operations if the company decided to pay its suppliers within 45 days (5) {TURN OVER]10 FIN3702 May/June 2014 QUESTION 1.2 [10 MARKS] The Lavendar Company is analyzing the performance of its cash management department The firm has inventory which turns 7 2 times per year, an average payment period of 40 days, and an average collection period of 60 days The firm's total annual outlays are F2 500 000 (Assume a 360-day year) REQUIRED (a) Calculate the firm's operating cycle (OC) 8) (b) Calculate the firm's cash conversion cycle (CCC) @) [TURN OVER]“4 FIN3702 May/June 2014 {c) Calculate the amount of resources required to support the firm's cash conversion cycle (ccc) (4) [TURN OVER}12 FIN3702 May/June 2014 QUESTION 2 [15 MARKS] Protea Manufacturers Ltd produced and sold on credit 30 000 units during the financial year 2008 Their sales and vanable costs amounted to R3 000 000 and R2 100 000 respeciively ‘The company now plans to tghten their credit standards which will result in a decline of 5 percent in their unit sales, a reduction of 15 days in their current accounts receivable period of 45 days and an improvement in their bad debts collection from 2 to 1 percent for 2009 Assume their unit costs and sales remain stable dunng the 360 days of 2009 and that the company’s required return on equal investments is 15 percent REQUIRED: 21 Calculate the additional profit contribution from sales 3) [TURN OVER]13 FIN3702 May/June 2014 22 Calculate the cost of marginal investment in accounts receivable 7) [TURN OVER]14 FIN3702 May/June 2014 23 Calculate the cost of marginal bad debts (6) [TURN OVER]15 FIN3702 May/June 2014 ROUGH WORK: [TURN OVER]16 FIN3702 Mayhlune 2014 [TURN OVER]FIN3702 Mayhlune 2014 [TURN OVER)18 FIN3702 May/June 2014 © UNISA 2014UNIVERSITY OF SOUTH AFRICA U N ] SA EXAMINATION MARK READING SHEET NERAL/ eqiguagmaeton 0: ¥ Stason viru (Fo: onéroneay a UNIVERSITEIT VAN SUID-AFRIKA EKSAMEN-MERKLEESBLAD Cao = = = = os = = os o S = = = = = =] a = = = = a = a = =] = = = = = = = = oa = = = = = = = = = = Jos eos eas e030 con cos caf o> «o> en cos var ca he es ests ets sets ets eta] aft to ets ets ot en Spe Qed d ail clases eer aa Jess £93 edo ggomge 130.) oP 2 |ids eas GRR cs eb eas Ho wae seb ef, ie ab ab ssi 9 2s es es [neds eas cho ds seas (Hb Gs eas Meh eb 6 pene cn cs] 3 eB eg: eo Eo eds eds et 8 In eban en 6] ety eds es ots] eeese Sng cece By ttegecge cerca Sees eq ti il im re Seay es Shred oh cts eb Brio eas sale] Bets do cds ch Wd Gees yas as es Beds eg ctr ef Ey 49 932s cancun obi meen ce cs Mies co cay ified MO dscean ale theabasie a i diesen ees sp miaeco cpa wana co elas Hpebenea sh] @ Gags ey a ey fo ss a & (ease a Mp epee bo & ara ae sil tebe aol Bo dre eg chs bane wo olas Tp chr ca pep momma wale guass aude hen M2 drench pen Ma dies real ie Me dred el? bee MS ube Geass Hise ides foe ase ty sede ear eas if rf coeds Gea el fo chet es Hae en co co Seg gs ets eae = mM amare BMS me % isan eecela Ooi ace cfleg| ae aa seas Mesos Me Soi as cy segs ete ts eof] ae ca canes ca i@barel eal im darasen a cana he aanaca sy Pebbles) Be Gigs cg] Mae awed wy aaa ce ee reps seep BME] ag) ays ezs as ew ed HBSS See WB ben ese] is Gudsarcs a Sibir olathe) Be Shepway SEG Sg I GES ieee 23231 co B/E] ag cts eases coc WG eae Be QUE gUe Se Oo Gia ca ieee] te Gig aices! 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