Cf Tutorial 4 Final

8/9/2019 Cf Tutorial 4 Final

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Question 1

• The different strategies a company may follow in financing its cumulative working capitalrequirements are the aggressive funding p

olicy and the conservative funding policy.

• Aggressive policy on level of working capital

will have lower levels of investment compared to that of a conservative policy.


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•3 different types of a company’s assets:

1. on!c rrent assets

"ong!term assets from which a company e#pectsto derive $enefit over several periods

%eg: factory $uildings & production machinery'

(. )ermanent c rrent assets

*ore level of investment needed to sustain

normal levels of $usiness or trading activity

%eg: investment in inventories & in the average

level of a company’s trade receiva$les.3. +l ct ating c rrent assets

*orrespond to the variations in level of current

assets arising from normal $usiness activity.


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•Aggressive funding policy ses short!termf nds to finance fluctuating current assets a

nd some permanent current assets. ,t carriesthe greatest risk of insolvency- $ut also offers the highest profita$ility and increases shareholder value.

•*onservative funding policy ses long!term f nds to finance non!current assets- per

manent current assets as well as some fluctuating current assets. There is less reliance onshort!term funding- thus the risk of such policy is lower. owever- the higher cost of long!term finance means that profita$ility is also r


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• A company having an aggressive policy will $e a$le to increase its profita$ility as less cas

h is tied up in current assets. owever- higherrisk is involved due to the higher possi$ility ofrunning out of inventory or cash shortages.

• A company having a conservative policy would $e associated with maintaining a larger cash$alance- for instance investing in short!term s

ecurities- offering more generous credit termsto customers and holding higher levels of inventory. "ower risk of financial or inventory pro$lems is involved- however at the e#pense of re

ducing profita$ility.


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•2ays to alleviate cash flow pro$lems:

1. )ostpone non!essential capital e#penditure

2. Accelerate the rate at which cash flows into the $usiness

.eg: offer discounts to customers for early pa

yment- chase overdue accounts- have a saleto clear unwanted inventory- sell investments $ought from an earlier period

3. Take longer time to pay suppliers/ eschedu

le loan repayments

4. "ast resort: educe or pass a dividend payment 5usually seen $y capital markets as sign

of financial weakness6


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Question 3

• There are several ways in which a company might invest its short term cash surplus- which include fi#ed deposits- certificates of deposit and Treas ry $ills.

• 7nder fi#ed deposits- cash can $e put on deposit with a $ank to earn interest- with the interest r

ate depending on the si8e of the deposit- its maturity and the notice required for withdrawals. Toma#imise return- company should o$tain quotati

on from several $ank $efore making a deposit since interest rates var $etween $anks as the co


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•*ertificates of deposit are negotia$le $earer securities issued $y $anks and $uilding societies. They a

re for amounts ranging from 199-999 to 1m and£ £

have maturities ranging from ( days to ; years. Atmaturity- the holder of a certificate of deposit is entitled to receive $oth principal and interest.

•Treas ry $ills of two- three and si#!month maturities are issued on a discounted $asis $y the 7< gover

nment. They are $ought and sold on the discount market. The yield on Treasury $ills is lower than on other money market instrument $ecause of the lowerdefault risk associated with government $orrowing.


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=esides that- there are some factors which should$e considered when choosing an appropriate inve

stment method for short!term cash surplus are:• The si8e of the surplus- as some investment met

hods have minimum amounts

• The ease with which an investment can $e realised

• 2hen the investment is e#pected to mature

•The risk and yield of the investment• Any penalties which may $e incurred for early liquidation.


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11/20

New level of ba) )ebts RM1,725,000 X -% RM&9,00

0"urrent level of ba) )ebts RM1,500,000 X 1% RM15,00

0ncrease in ba) )ebts RM&9,000 /

RM15,000

RM5-,00

0))itional nancin3 costs RM1&0,27- X 12% RM19,2

4avin3s b+ intro)ucin3

c$an3e in (olic+

RM90,000/

RM5-,000 /

RM19,2

RM1&,7&

7

"onclusion $e (ro(ose) (olic+ c$an3ewill increase t$e sale,

contribution an) ba) )ebt of

t$e co#(an+.


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RMCurrent debtors 15 mil x 45/365 1,849,315

New level of

debtors

!"ose t#$in%

dis&ount

4'( x 15 mil x 3'/365 493,151

!"ose not t#$in%

dis&ount

6'( x 15 mil x 45/365 1,1'9,589

!ot#l 1,6'),*4'

C"#n%e in level

of debtors

1,849,315 + 1,6'),*4' )46,5*5

Question 5

#

-i i )46 5*5 9( )) 19)


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-in#n&e s#vin%s

on debtors

)46,5*5 x 9( )),19)

.e&re#se in b#d

debts

6','''

#vin%s in

#dministr#tion

&osts

15,'''

9*,19)Cost of dis&ount 15 mil x 4'( x 105 ( 9','''

Net benefit of

roos#l

9*,19) + 9',''' *,19)

Con&lusion !"e roosed oli&2 &"#n%e will

in&re#se t"e rofit#bilit2 of t"e

&om#n2 but t"e benefit is ver2

sm#ll0 !"us, it is not #dvis#ble to

undert#$e t"e &"#n%e0


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b

n overdr#ft is #n #%reement b2 # b#n$ to #llo

w # &om#n2 to borrow u to # &ert#in limit wit"o

ut t"e need for furt"er dis&ussion0 n overdr#ft is

# flexible sour&e of fin#n&e in t"#t # &om#n2 onl2 uses it w"en t"e need #rises0 n overdr#ft is te&

"nill2 re#2#ble on dem#nd, even t"ou%" # b#n

$ is li$el2 in r#&ti&e to %ive w#rnin% of its intenti

on to wit"dr#w #%reed overdr#ft f#&ilities0


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"ortterm sour&es #re ris$ier t"#n lon%term sou

r&es from t"e borrowers oint of view in t"#t t"e2 m

#2 not be renewed #n overdr#ft is, #fter #ll, re#2#ble on dem#nd or m#2 be renewed on less f#vour#ble

terms e0%0 w"en s"ortterm interest r#tes "#ve in&re

#sed0 not"er ris$ is t"#t interest r#tes #re more vol

#tile in t"e s"ort term t"#n in t"e lon% term #nd t"is r is$ is &omounded if flo#tin% r#te s"ortterm debt s

u&" #s #n overdr#ft is used0 !"us, Menende7 n fin

#n&e its wor$in% it#l needs from #n overdr#ft but

not #dvis#ble to over rel2 on it0


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& C#s" &onversion &2&le

- sum of inventor2 &onversion eriod inventor2 d#2#nd t"e tr#de re&eiv#bles &onversion eriod tr#de

re&eiv#bles d#2s, less t"e tr#de #2#bles deferr#l

eriod tr#de #2#ble d#2s0

- nvestment in wor$in% it#l must be fin#n&ed #nd

t"e lon%er t"e s" &onversion &2&le, t"e more it#l

is tied u #nd "i%"er t"e &ost0 &om#n2 &ould

redu&e t"e wor$in% it#l tied u b2 otimi7in% t"e

&omonents of s" &onversion &2&le0 o, for

ex#mle, s"ortenin% t"e inventor2 &onversion eriod

&ould redu&e t"e wor$in% it#l reuirement #nd

in&re#se rofit#bilit20


17/20


18/20

"urrent level of tra)e RM RM197 2&0"urrent level of tra)e RM197 2&0


19/20

"urrent level of tra)e

receivables

RM RM197,2&0

'ro(ose) level of tra)e receivablesNot tain3 t$e

)iscount

RM11!,5&

ain3 t$e )iscount RM17,5-

otal RM11!,5& 8

RM17,5-

RM15,!90

"$an3e in level of

tra)e receivables

RM197,2&0 /

RM15,!90

RM&1,70

"urrent level of tra)e

receivables

RM197,2&0

'ro(ose) level of tra)e receivablesNot tain3 t$e

)iscount

RM11!,5&

ain3 t$e )iscount RM17,5-

otal RM11!,5& 8

RM17,5-

RM15,!90

"$an3e in level of

tra)e receivables

RM197,2&0 /

RM15,!90

RM&1,70


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4avin3s in nancin3

costs

RM&1,70 !% RM-,910

)#inistrative cost

savin3s

RM-,-50

otal savin3s RM-,910 8 RM-,-50 RM9&0 "alculation of #ai#u# )iscount

:ence #ai#u#)iscount

RM9,&0

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Cf Tutorial 4 Final