Question

QUESTION 5: Torrence Inc. has the following data Capital budget % Debt Net income (NI) a) If Torrence Ine, uses the rest $1.000.000 60% ence Inc. uses the residual dividend model how much total dividends in S) will it pay out and what is its dividend payout ratio? S625,000 (8 marks) the Torrence follow the 40% constant payout dividend policy, does it have sufficient retained earnings to finance the equity portion of its capital budget? (7 marks) [Total: 15 marks QUESTION 6: KK Ng Stationeries Supplies average age of accounts receivable is 60 days, average age of accounts payable is 45 days; and the average age of inventory is 75 days. (Assume a 365-day year) a) What is the length of the firm's cash conversion cycle? (4 marks) b) Based on the cash conversion cycle calculated in (a) above, what is KK Ng's working capital requirement if forecasted sales is $5 million? (4 marks) c) What should the firm do to reduce its working capital requirement? [Hint: Provide you answer with an illustration/s] (2 marks) [Total: 10 marks]

Answer 1

5- A	total dividend pay out =net income*(1-equity portion of financing)	625000*(1-.6)	250000
	dividend payout ratio	250000/625000	40.00%
5- B
	Dividend payment-40% of net income	625000*40%	250000
	profit left for finance the project after dividend payment	625000-250000	375000
	no he does not have sufficient fund for financing the equity financing - shortage of 25000	(1000000*40%)-375000	25000
6-A	cash conversion cycle	average age of accounts receivable +average age of inventory -average age of payables	60+75-45	90
6-b	working capital requirement = estimated sales*(days in cash conversion cycle/365)+bank and cash balance	5*(90/365)+0		1.23
6-c	to reduce its working capital requirement company should tries to early recovery of accounts receivable and fast conversion of inventory and as well as late payment of creditors would reduce the over all cash conversion cycle which will reduce the cash conversion cycle. for example average age of receivables has reduced to 50, and average age of inventory has reduced to 60 while average age of accounts payable has increased to 50, these changes will reduce the cash conversion cycle (50+60-50) =60 which will reduce the overall working capital requirement.