Question

and put options. (5 marks) QUESTION THREE (a) The following information relates to Supa supermarkets Ltd for the year ended 31 December, 2016 n.B Inventory Accounts receivable Accounts payable Shs million Beginning of year 2,000 600 500 End of year 2,300 800 300 Sales in the year were sh. 11.5 billion, of which 60% were on credit. Cost of goods sold to sales was 85:100. Cash purchases were 30% of credit purchases. Required 35% (0 The cash cycle for Supa during the year 2016, (11 marks) 0 The steps that Supa can take in order to reduce the operating cycle. (5 marks) (6) Briefly discuss the following types of private equity transactions: management buy- out (MBO), management buy-in (MBI), and institutional buy-out (IBO). (9 marks) QUESTION FOUR

Answer 1

answer(a)(i)

receivables turnover = net credit sales/ average receivables

credit  sales=11.5 bil = 11500 x 60% = 6900 million

average receiables= (opening receivables + closing receivables)/2 =600+800/2 = 700

receivables turnover =6900/700

=9.86

days of sales outstanding=365/ receivables turnover

=365/9.86

=37.02days

inventory turnover = cost of goods sold / average inventory

cost of goods sold= 85% of sales

85% x 11,500

=9775

average inventory= (opening inventory + closing inventory )/2

=(2000 + 2300)/2

= 2150

inventory turnover = 9775/2150  

=4.55

days of inventory in hand= 365/ inventory turnover

= 365/4.55

=80.22 days

payables turnover = credit purchases/ average trade payables

cost of goods sold = opening inventory + purchases - closing inventory

9775 = 2000 + purchases -2300

purchases =10,075

credit purchases = a

cash purchases = a x 30%

purchases = cash purchases + credit purchases

10075 = 0.3a + a

10075 = 1.3a

a =7750

credit purchases = 7750

average accounts payables = (opening payables + closing payables )/2

= (500 + 300)/2

=400

payables turnover = 7750/400

=19.38

number of days payable = 365/ payables turnover

=365/19.38

= 18.83 days

cash cycle = days sales outstanding + days of inventory in hand - number of days payables

=37.02 + 80.22 -18.83

= 98 days

(ii)

I have outlined a few best practices to do so. Here are some of their top suggestions to keep in mind:

• Analyze your cash flow and operations on a daily basis. Keeping better tabs on why things change over 24 hours and comparing your daily cash available to your weekly accounts receivable and accounts payable will give you incredible visibility into your business.
• Ask your customers to pay you sooner. You might be surprised by how willing your customers are if you just ask.
• If you ask your customers to pay faster, incentivize them. Offering a discount to those who pay in advance and sending friendly reminders will bring in cash faster. Plus, customers who are able to pay quicker will appreciate the value they receive in return.
• If possible, time your invoices to coincide with your customer’s payment cycles.
• Make your invoices easy to fill out and digestible. If your customers are paying later, that may mean that there are issues with your invoice.
• Speed up the sales and delivery cycles. Completing projects more quickly likely means you’ll get paid sooner.

(b) MANAGEMENT BUYOUT

• A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage.
• The main reason for a management buyout (MBO) is so that a company can go private in an effort to streamline operations and improve profitability.
• In a management buyout (MBO), a management team pools resources to acquire all or part of a business they manage. Funding usually comes from a mix of personal resources, private equity financiers, and seller-financing.
• A management buyout (MBO) stands in contrast to a management buy-in, where an external management team acquires a company and replaces the existing management.

MANAGEMENT BUYIN

• A management buy-in (MBI) occurs when an outside manager or management team purchases a controlling ownership stake in an outside company and replaces its existing management team.
• A company that experiences an MBI is often undervalued and experiencing difficulties in some area.
• The buyer must be careful to accurately value the target so that they do not pay more than is necessary.

INSTITUTIONAL BUYIN

A form of leveraged buyout in which an institutional investor or private equity house acquires a company. Incumbent management can be retained and may be rewarded with equity participation.