Working capital management

August 2025

2 Questions

Question 2a

(i) Explain the term “overtrading” in relation to working capital management.

(ii) Identify THREE signs that could indicate that a firm is overtrading.

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Question 2b

Elimika Limited maintains a minimum cash balance of Sh.500,000. The firm’s standard deviation of its daily cash changes is Sh.200,000. In the current financial year, the annual interest rate is 14% and the transaction cost of buying and selling securities in the money market is Sh.150 per transaction.

Assume 365 days in a year.

Required:

Using Miller-Orr cash management model, determine: .

(i) The upper cash limit (H).

(ii) The average cash balance.

(iii) The return point (Z).

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April 2025

1 Questions

Question 4c

The following data relates to Emaro Ltd., a manufacturing company, for the year ended 31 December 2024:

Turnover	Sh.3,000,000
Costs as percentages of sales	(%)
Direct materials	30
Direct labour	25
Variable overheads	10
Fixed overheads	15
Selling and distribution	5

Additional information:

On average:

1.	Accounts receivables take 2.5 months before payment.
2.	Raw materials are in inventory for 3 months.
3.	Work-in-progress represents two months of half produced goods.
4.	Finished goods represent one-month production.
5.	Credit is taken as follows: Direct materials 3 months Direct labour 1 week Variable overheads 1 month Fixed overheads 1 month Selling and distribution 0.5 months
Note:	Assume that all direct materials are allocated to work-in-progress when production starts, that is, work-in-progress and finished goods are valued at materials, labour and variable expense cost.

Required:

Compute the working capital requirement of Emaro Ltd. assuming that their labour force is paid for 50 working weeks a year.

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December 2024

1 Questions

Question 4c

Nyota Ltd. is a firm operating in the manufacturing industry. The firm currently adopts a very stringent credit policy but is considering relaxing its terms of sale. The firm currently sells goods on credit on terms of net 60. However, the management is considering offering terms of 3/10 net 75. The current average collection period is 45 days. This period is expected to increase to 60 days after the change of terms. All credit customers will take the discount offer.

The firm’s current level of sales is Sh.15,000,000 per annum but is expected to increase by 25% after the change of terms. The variable costs are usually 40% of sales and 80% of sales are on credit basis.

The bad debts are 5% of credit sales and debt collection expenses are expected to increase by 10% from the current level of Sh.300,000.

The corporate tax rate is 30% and the cost of capital is 18%.

Assume 360 days in a year.

Required:

Advise on whether the firm should change its current terms of sale or not.

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August 2024

3 Questions

Question 5c

Bamboo Limited is contemplating reviewing its credit policy by introducing a cash discount of 2% for payment made within 10 days of purchase.

Additional information:

The firm’s current average collection period is 30 days.
The company makes an annual credit sales of 120,000 units at a unit price of Sh.10.
Variable cost per unit is Sh.6 and average cost per unit is Sh.8.
If the cash discount is initiated, 70% of sales will be on discount and sales will increase by 10%.
The average collection period will drop to 15 days.
Bad debt expenses currently at 2% of sales will fall to 1%.
Total working capital needed will not be affected by the cash discount.
The firm’s required return on investment is 12%. Assume no additional capital investment will be necessary.

Required:

(i) Compute the net benefit or net loss arising from review of the credit policy.

(ii) Advise Bamboo Limited on whether or not to introduce a cash discount to its customers

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Question 3a

Remi Limited anticipates to spend Sh.150 million cash outlay to install a new production line in their factory. The cash outlays are expected to occur equally throughout the year. The company’s treasurer reports that the firm can invest in marketable securities yielding 8% per annum. The cost of shifting funds from marketable securities portfolio to cash is Sh.7,500 per transaction.

Assume the company will meet its cash demands by selling marketable securities.

Required:

Using the Baumol cash management model:

(i) Determine the optimal size of the company’s transfer of funds from marketable securities to cash.

(ii) Compute the company’s average cash balance.

(iii) Determine the number of transfer from marketable securities to cash during the year.

(iv) Compute the total cost associated with the company’s cash requirements.

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Question 4c

Faidika Enterprises is in the process of preparing a cash budget for the four months starting 1 September 2024. The business produces and sells a single product branded “K” whose details are as follows:

Direct materials is Sh.5 per unit.
Direct labour cost is Sh.10 per unit.
Variable overheads is Sh.6 per unit.
The selling price per unit is Sh.40.

Additional information:

1.	Projected sales and production units information is provided as follows:

1.				2024
	Details	July	August	September	October	November	December
	Sales (units)	130,000	150,000	170,000	190,000	180,000	180,000
	Production (units)	140,000	150,000	180,000	200,000	220,000	220,000

2.	Variable overheads are paid in the month that they are incurred.
3.	Fixed overheads are budgeted at Sh.700,000 per month which includes depreciation of Sh.100,000.
4.	Wages are paid 75% during the month in which they are earned and 25% in the following month.
5.	Material costs are paid 2 months in arrears.
6.	A tax liability of Sh.1,400,000 to be settled in the month of October 2024.
7.	A new van will be purchased in the month of September 2024 for Sh.2,000,000. The current motor vehicle shall be sold in the month of November 2024 and it is expected to fetch Sh.300,000 from a prospective buyer.
8.	The cash balance at the end of the month of August 2024 is expected to be Sh.1,000,000.
9.	The business makes a monthly cash sale of 5% of total sales in a specific month while the remainder is on credit which is settled one month after the month of sale.

Required:

Prepare a cash budget for the months commencing 1 September 2024 to 31 December 2024.

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April 2024

1 Questions

Question 2c

Madarax Ltd. is an e-business company that trades solely over the internet. In the year 2023, the company made sales worth Sh.15,000,000.

All sales were on 30 day’s credit to commercial customers.

Extracts from the company’s most recent statement of financial position relating to working capital are as follows:

	Sh."000"
Trade receivables	2,466
Trade payables	2,220
Bank overdraft	3,000

Additional information:

In order to encourage customers to pay on time, Madarax Ltd. proposes introducing an early settlement discount of 1% for payment within 30 days while increasing its normal credit period to 45 days.
It is expected that on average, 50% of customers will take the discount and pay within 30 days, 30% of customers will pay within 45 days and 20% of customers will not change their current paying behaviour and will pay within 60 days.
Madarax Ltd. currently orders 15,000 units per month of product P, demand for which is constant. There is only one supplier of product P. The cost of product P purchases over the last year was Sh.540,000.
The supplier has offered a 2% discount for orders of product P of 30,000 units or more. Each order costs Madrax Ltd. Sh.150 to place and the holding cost is Sh.0.24 per unit per year.
Madrax Ltd. has an overdraft bank facility charging interest at the rate of 6% per year.

Assume a 365 days-year.

Required:

(i) Calculate the net benefit or cost of the proposed changes in trade receivables policy and comment on your findings.

(ii) Using suitable computation, determine whether the bulk purchase discount offered by the supplier is financially acceptable. Comment on the assumptions made in your computation.

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December 2023

1 Questions

Question 5c

Merip Ltd. expects to make payments of Sh.9,000,000 in the coming year. The firm’s investment in marketable securities generates an annual return of 20%. The minimum cash balance maintained by the firm at all times is Sh.300,000. The firm incurs a cost of Sh.30 per transaction when converting marketable securities into cash.

Assume a year has 360 days.

Required:

Using Baumol’s model of cash management, determine:

(i) The optimal cash balance.

(ii) Total relevant cost incurred in each year.

(iii) The average cash balance.

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August 2023

2 Questions

Question 2a(i)

Distinguish between “temporary working capital” and “permanent working capital” in relation to working capital management.

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Question 2a(ii)

The monthly working capital requirement for Mbuni Ltd. are given as follows:

Month	Total working capital requirement
	Sh."000"
January	3,000
February	2,500
March	2,000
April	1,500
May	1,500
June	1,700
July	1,800
August	2,800
September	3,200
October	3,500
November	3,600
December	3,800

The short term cost of financing working capital is 15% per annum whereas the long-term financing cost is 20% per annum.

The firm adopts an aggressive policy in financing its working capital needs. 80% of the firm’s permanent working capital are financed using short term funds and the balance is financed using long term funds.

Required:

Determine the total cost of financing the working capital needs of the firm.

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April 2023

1 Questions

Question 5c

The following financial statement data relates to Bamaco Ltd. for the year ended 31 December 2022:

	Sh.“000”
Inventory - Opening balance	4,000
Inventory - Ending balance	4,600
Trade receivables	5,000
Trade payables	3,400
Credit sales	50,000
Cost of goods sold	40,000

Number of days in a year is 365 days.

Required:

Compute the net operating cycle of Bamaco Ltd.

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December 2022

2 Questions

Question 4c

The following are the summary statement of profit and loss and statement of financial position for Miranda Ltd. for the year ended 31 October 2022.

Summary Statement of profit and loss
	Sh.“000”
Sales (150,000 units)	15,000
Variables costs	(13,500)
Fixed costs	(600)
Profit	900

Statement of financial position
	Sh.“000”	Sh.“000”
Non-current assets		22,500
Current assets:
Trade receivables	3,000
Inventory	1,200
Bank	360
Trade payables	(900)	3,660
		26,160
Financed by:
Equity capital		15,000
12% long- term debt		3,840
6% preference share capital		7,320
		26,160

Additional information:

1. Return on investment (ROI) is 4.8%.

2. All sales are on credit and the company operates a very strict credit control system.

3. A suggestion has been made that a relaxation of credit policy would increase sales by 40%, if the company were to introduce a 2% discount (at present no discount is given) on accounts paid within 10 days.

4. It is envisioned that 70% of the customers would take advantage of the discount and the average collection period of the remainder would be half of what it is at present.

5. Bad debts would remain at 2% of firm’s credit sales. 6. Investors required rate of return is 10%. Assume 360 days in a year.

Required:

(i) The current average collection period.

(ii) The new level of profits after change in credit policy.

(iii) Explain the effect of the new level of investment in account receivable.

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Question 3b

Baraka Traders Ltd. has a minimum cash balance limit of Sh.100,000. The standard deviation of the daily cash flows is Sh.25,000. The interest rate of the marketable securities is 9.2% per annum. The transactional cost for each sale or purchase of security is Sh.200. Assume a 365-day year.

Required:

Using Miller-Orr cash management model, determine:

(i) Target cash level.

(ii) Upper cash limit.

(iii) Average cash balance.

(iv) The spread.

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August 2022

2 Questions

Question 2b

Distinguish between the following terms as used in finance:

(i) “Agency cost” and “agency problem”.

(ii) “Intrinsic value” and “market value”.

(iii) “Liberal credit policy” and “conservative credit policy”.

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Question 4b

The following information relates to inventory relationship of QZ Ltd.:

Annual purchases of Sh.2,160,000.
Purchase price per unit is Sh.60.
Carrying cost is 15% of the purchase price per unit.
Cost per order placed is Sh.240.
Desired stock levels is 300 units. This stock level was in hand initially.
Lead time is 7 days.

Assume a 365-day year.

Required:

(i) The economic order quantity (EOQ) for the company.

(ii) The optimal number of orders to be placed in a year.

(iii) The re-order level.

(iv) Assuming that for any orders of at least 2,000 units, the firm will get 5% discount on the purchase price.

Analyse whether the company should take advantage of the discount or not.

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April 2022

1 Questions

Question 2b

The following information relates to Triplex Ltd:

The company has annual sales revenue of Sh.6,000,000 and all sales are on 30 days credit, although customers on average take 10 days more than the recommended 30 days to pay.
Contribution represents 60% of sales and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%.
Triplex Ltd. plans to offer an early settlements discount of 1.5% for payment within 15 days and to extend the maximum credit offered to 60 days.
The company expects that these changes will increase annual credit sales by 5% while also leading to additional incremental costs equal to 0.5% of sales revenue.
The discount is expected to be taken by 30% of customers, while the remaining customers would take an average of 60 days to pay.

Required:

Evaluate whether the proposed changes in credit policy will increase the profitability of Triplex Ltd.

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Pilot December 2021

2 Questions

Question 4c

Merchant Sport Club uses 100 replacement lamps for its street lights. Each lamp costs the Club Sh.8. Ordering costs are estimated at Sh.27 per order. Holding costs are at 25% of the cost of each lamp. The Club currently orders according to the EOQ basis.

The supplier has now offered the club a 2% discount if the Club will buy 600 lamps at a time.

Required:

Using suitable calculations, advise the club on whether to accept the discount offer or not.

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Question 4b

Briefly explain three factors that might influence working capital requirements of a firm.

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December 2021

1 Questions

Question 5c

Jasmine Limited generates Sh.100,000 per month excess cash which it intends to invest in short-term securities. The interest rate it can expect to earn on its investment is 10% per annum. The transaction costs associated with each separate investment of funds is constant at Sh.500.

Required:

(i) The optimal amount of cash to be invested in each transaction.

(ii) The number of transactions per annum.

(iii) The total cost of making the transactions in (c) (ii) above.

(iv) The opportunity cost of holding cash per annum.

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September 2021

1 Questions

Question 4c

Upesi Wholesalers Ltd. deals in sale of foodstuffs to retailers. Owing to economic depression, the firm intends to relax its credit policy to boost productivity and sales.

The firm's current credit policy is "net 30" and the average debt collection period is 45 days.

The current annual credit in amount to Sh.60 million. The firm intends to change to "net 60" where sales are expected to increase by 25%. Credit and debt analysis costs will increase from the current 2% to 2.5% of credit sales. Bad debts will also increase from the current 1.5% to 2% of credit sales, variable costs account for 75% of sales and return on assets is 12%. Assume a 360 day year.

Required:

Advise the company on whether to adopt the new credit policy.

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May 2021

3 Questions

Question 5b

Phoenix Ltd. is considering amendments to its current inventory management policy.

The following information relates to the proposed ordering policy:

The current policy is to order 200,000 units when the inventory level falls to 70,000 units.
Forecast demand to meet production requirements during the next year is 1,250,000 units.
The cost of placing and processing an order is Sh.500, while the cost of holding a unit is Sh.1 per unit per year. Both costs are expected to be constant during the next year.
Orders are received two weeks after being placed with the supplier.
Assume one year has 50 weeks.

Required:

(i) The cost of the current ordering policy.

(ii) Determine the savings that could be made by using the economic order quantity (EOQ) model.

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Question 5a

Discuss four factors that a firm should consider in formulating a working capital policy on the management of trade receivables.

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Question 3c

ABC Limited's current annual sales are Sh.1.8 million with a cost of sales of 80% and bad debts average 1% of total sales.

The current debt collection period is one month and the management considers that if credit terms were eased (Option A), the effects would be as follows:

	Present Policy	Option A
Additional sales (%)	-	25%
Average collection period	1 month	2 month
Bad debts (% of sales)	1%	3%

Additional information:

1. The company requires a 20% return on its investments.

2. The cost of sales are 75% variable and 25% fixed.

Required:

Advise the management on whether or not to ease the credit terms.

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November 2020

1 Questions

Question 2b

Nderu Suppliers Ltd. is reviewing its working capital commitments for enhanced efficiency.

The following information relating to the period ended 31 March 2020 is provided:

Turnover for the year	Sh.15,000,000
Costs as percentages of sales	(%)
Direct materials	30
Direct labour	25
Variable overheads	10
Fixed overheads	15
Selling and distribution	5

Additional information:

1. On average:

Account receivables take two and a half months before payment.
Raw materials are in inventory for three months.
Work in progress represents two months worth of half produced goods
Finished goods represent one month's production.

2. Credit is taken as follows:

Direct materials 2 montlis
Direct labour 1 week
Variable overheads 1 month
Fixed overheads 1 month
Selling and distribution Half a month

3. Work in progress and finished goods are valued at material, labour and variable expenses cost.

4. Labour force is paid for 50 working weeks a year.

Required:

Assess the working capital requirements for the conmpany.

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November 2019

2 Questions

Question 2b

Maua Horticultural Ltd. runs a flower export business. The company has two sources of funds at different interest rates. The finance cost for short-term funds is 20% while the cost of long-term funds is 25%. These costs are expected to remain constant in the next two years.

The following are the projected monthly working capital requirements of the company for the year ending 31 December 2020:

Month	Working capital required (Sh."000")
January February March April May June July August September October November December	35,000 35,000 52,500 70,000 105,000 157,500 210,000 242,500 157,500 87,500 70,000 52,500

Required:

(i). The average monthly permanent and seasonal working capital requirements for the company.

(ii). Total cost of working capital finance for the company under an aggressive financing policy, conservative financing policy and matching financing policy.

(iii). Advise the company on the appropriate working capital financing policy to adopt.

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Question 1b

Sasumua Ltd. is considering a review of its credit policy as a way of enhancing its working capital management:

The following information relates to the company:

Annual sales amount to Sh.6,000,000.
Credit sales are 80% of all sales.
Bad debts average 3% of all credit sales.
Average collection period for debtors is 45 days.
Gross profit on sales is 75%.
The company's cost of capital is 12% per annum.
Terms of credit sales are net 60 days.

Annual sales amount to Sh.6,000,000. Credit sales are 80% of all sales. Bad debts average 3% of all credit sales. Average collection period for debtors is 45 days. Gross profit on sales is 75%. The company's cost of capital is 12% per annum. Terms of credit sales are net 60 days.

Increase in total sales by 40%.
Credit sales will be 60% of all sales.
Average collection period will decrease to 30 days.
Bad debts will increase to 5% of credit sales.
An additional part-time credit consultant will be hired at Sh.500,000 per annum.
Gross profit margin will increase to 80%.
Terms of credit sales will be 5/15 net 45.All credit customers will enjoy the 5% cash discount subject to the terms.
No change is expected in the firm's cost of capital.
The tax rate is 30%.

Required:

Advise the company on whether to adopt the revised credit policy.

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May 2019

1 Questions

Question 2c

In an effort to lower its accounts receivable balances, Chizingo Manufacturing Limited is considering to switch from its existing no discount policy to a 2% cash discount for payment done by 15 day after sale.

It is estimated that 60% of the customers would take the discount and the average collection period is expected to decline from 60 days to 45 days.

The company's management projects an increase of 20,000 units in annual sales to 220,000 units at the existing price of Sh.2,500 per unit.

Additional information:

1. The variable cost per unit is Sh.2, 100 and the average cost per unit is Sh.2,300.

2. The company requires a 15% return on investment (ROI).

3. The corporate tax rate is 30%.

4. All sales are on credit basis.

Assume 365 days in a year.

Required:

Advise the management of Chizingo Manufacturing Limited on whether to offer the cash discount to customers.

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November 2018

1 Questions

Question 3d

Bahati Enterprises is considering amendments to its current credit policy. The firm's current annual credit sales amount to Sh.6,000,000.

The current credit terms are net 30 with debtors collection an average period of 45 days.

The following information relates to the proposed credit policy:

1. The credit period to be extended to net 60.

2. Annual sales are expected to increase by 20%.

3. Bad debts are expected to increase from 2% to 2.5% of the annual credit sales.

4. Credit analysis and debt collection costs are expected to increase by Sh.84,000 per annum.

5. The return on investment in debtors is 12%.

6. For every Sh.100 of sales, Sh.75 is the variable cost.

7. Assume one year has 360 days.

Required:

Advise the management of Bahati Enterprises on whether to adopt the proposed credit policy.

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May 2018

2 Questions

Question 1c

Maandani Enterprises maintains a minimum cash balance of Sh.10,000. The standard deviation of the daily cash flows is Sh. 2,500. The transaction cost of each marketable security is Sh.20. The interest rate of a marketable security is 9.2% per annum. Assume 365 days in a year.

Required:

Using the Miller-Orr model of cash management, determine:

(i) The optimal cash balance.

(ii) The upper cash limit.

(iii) The average cash balance.

(iv) The spread.

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Question 1a

Explain three working capital financing policies and their implications in an organisation.

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November 2017

3 Questions

Question 1a

Explain four factors that might be considered when establishing an effective credit policy in an organisation.

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Question 1d

The management of Gumbo Ltd, intends to change the company's credit policy from 'net 30 to 3/10 net 60. If this change is effected, annual sales are expected to increase by 25% from the current level of Sh.12 million. The proportion of bad debts is also expected to increase from 10% to 15% of the credit sales.

A new credit assistant officer will also have to be employed at a salary of $500,000 per annum. If there is a change in the firm's credit policy, it is expected that 60% of the credit customers will benefit from the cash discount offer.

The inventory level and variable costs are however expected to remain constant at 20% and 40% of the annual sales respectively. The firm's rate of return on investment is 14% per annum.

The corporate tax rate is 30%

All sales are on credit.

Assume a 360-day financial year

Required:
Advise the management of Gumbo Ltd. on whether to adopt the new credit policy.

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Question 5d

Chitsaka Limited estimates that it requires Sh.12,000,000 for its operations during the following year.

The company will sell marketable securities and deposits into a cost-free no-interest bank account.

The marketable securities currently provide an interest yield of 5% per year.

The cost of selling marketable securities is Sh.60 per transaction regardless of the size of the transaction.

Assume a 365-day financial year.

Required:
Using the Baumol cash management model, determine:
(i). The optimal size of transaction for selling the marketable securities.
(ii). The frequency with which the securities should be sold.

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May 2017

1 Questions

Question 3a

The following information relates to Tsuma Enterprises Ltd. for the four months given below:

		Sh."Million"
Sales:	September	60
	October	60
	November	70
	December	90

All sales will be made on credit.

Half of the debtors are expected to pay within the month of sale and are also expected to claim a 2% cash discount. The remaining debtors are expected to pay by the beginning of the following month.

Raw materials purchases	Sh."Million"
September	20
October	40
November	40
December	30

The firm plans to pay its creditors in full in the month following that of purchase.

Wages and salaries:	Sh."Million"
September	12
October	15
November	17
December	13

Additional information:

1. All employees are paid in the month in which the wage or salary is earned.

2. Rent of Sh.10 million for each quarter is paid in March, June, September and December.

3. Other cash overheads of Sh.2 million per month are payable.

4. A new plant due for delivery in September will be paid in November at a cost of Sh.25 million.

5. On 1 October, the firm plans to have Sh.10 million in the bank.

Required:

A cash budget for the three months ending in December.

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November 2016

1 Questions

Question 3b

The following information was extracted from the financial statements of a manufacturing company:

	Sh.
Average total debtors outstanding	48,000
Raw materials consumption	440,000
Total production cost	1,000,000
Total cost of sales	1,050,000
Sales for the year	1,600,000
Value of average stock maintained:
Raw material	32,000
Work in progress	35,000
Finished goods	26,000
Number of days in a year	365
Average period of credit allowed to suppliers	16 days

Required:

(i) The operating cycle in days.

(ii) The amount of working capital required.

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May 2016

2 Questions

Question 3b

Manjewa Limited maintains a minimum cash balance of Sh.2,000,000. The standard deviation of its daily net cash flow is estimated at Sh.22.000. The transaction cost of buying and selling of marketable securities is Sh.60 per transaction. The rate of interest for the marketable securities is 5% per annum.

Assume 365 days in a year.

Required:
Using the Miller-Orr cash management model, determine:

(i) The spread.

(ii) The upper cash limit.

(iii) The return point.

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Question 2d

Mwatata Ltd. currently operates with terms of net 80 days. The firm's average investment in accounts receivable amount to Sh.4,400,000 per annum. Eighty per cent of the firm's sales are always on credit. The company is considering introducing terms of 2 / 20 net 90 days.

The relaxation of terms of sale will increase the firm's total sales bv 60%. All cash customers and 40% of the credit customers will take advantage of the cash discount. The average collection period will increase to 80 days up from the current average collection period of 72 days. Bad debts are expected to remain at 3% of credit sales.

Inventory levels are estimated to be 5% of the firm's turnover and creditors will increase by Sh. 1,000,000.

Gross margin on sales is 40%. The cost of capital is 16%. Corporate tax rate is 30%.

Assume 360 days in a year.

Required:
Advise the management of Mwatata Ltd. on whether to switch to the new credit policy.

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November 2015

2 Questions

Question 4b

The following information was extracted from the financial statements of Tana Enterprises Ltd. for the year ended 31 December 2013 and 31 December 2014:

Statement of financial position
	2014	2013
Assets:	Sh.million"	Sh.million"
Non-current assets	1,850	1,650
Depreciation	(350)	(225)
Net non-current assets	1,500	1,425
Intangible assets	150	150
Current assets
Inventory	330	230
Accounts receivable	220	170
Cash	100	90
Total current assets	650	490
Total assets	2,300	2,065
Equity and liabilities:
Ordinary share capital (Sh.2 par value 100 million shares issued)	200	200
Additional paid in ordinary share capital	325	325
Retained earnings	550	470
Ordinary shareholders' equity	1,075	995
Preference share capital (10%, Sh.100 par value)	150	150
Long-term liabilities:
Long-term debt	625	540
Deferred tax	100	80
Total long-term liabilities	725	620
Current liabilities:
Accounts payable	85	105
Accruals	65	85
Current portion of long-term debt	75	-
Short-term bank notes	125	110
Total current liabilities	250	300
Total equity and liabilities	2,300	2,065

Statement of comprehensive income
	2014 Sh."million"	2013 Sh."million"
Net sales	3,500	2.990
Cost of goods sold	2,135	1,823
Selling. general and administrative expenses	1,107	974
Operating profit	258	193
Net interest expense	74	64
Income from operations	184	129
Income taxes	55	38
Net income	129	91
Preference dividends	15	15
Net income available for ordinary shareholders	114	76
Dividends deciared	40	30

Assume that a year has 365 days.

Required:

Compute and interpret the following ratios for the year ended 31 December 2014:

(i). Cash conversion cycle.

(ii). Equity turnover.

(iii). Fixed charge cover.

(iv). Return on capital.

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Question 2c

Cindy Ltd. currently gives credit terms of net 30 days. The company's average annual sales amount to Sh.120 million. The average collection period is 45 days. The management intends to increase the credit period to net 60 days. This plan is expected to increase sales by 15 per cent. After the change in credit terms, the average collection period is expected to be 75 days. Variable costs are 80% of sales. The company's required rate of return on receivables is 20%.

Corporate tax rate is 30%.

Assume a 360 days year.

Required:
Advise the management of Cindy Ltd. on whether to relax its credit terms.

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Question 4b

Shafana Ltd. currently operates with terms of net 72 days. The firm's average investment in accounts receivable is Sh.2,400,000 per year. Eighty percent of the firm's sales are always on credit. The company is considering introducing terms of 2/20 net 90 days

The firm's total sales per annum will increase by 50%. All cash customers and 40% of credit customers will take advantage of the cash discount.

Average collection period will increase to 80 days. Gross margin on sales is 40% while the cost of capital is 16%.

Required:
Advise the company on whether to switch to the new credit policy (Assume a year has 360 days).

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Working capital management

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