FEEDBACK TUTORIAL LETTER ASSIGNMENT 2 SECOND SEMESTER 2018 MANAGERIAL FINANCE 4B [MAF412S] 1
MANAGERIAL FINANCE 4B Assignment 2 Feedback Dear Student, FEEDBACK TO ASSIGNMENT AND GUIDELINE TO THE EXAMINATION I am impressed with the performance on this assignment. Please go through your work and work on your mistakes. For the first time, I have decided to focus less on what has been done i.e. the assignment, but the future, the examination in November. To this end I have done two things: To attach with this tutorial two tests written this semester to guide you in your exam preparation and to detail below the structure of your examination in November. 1. B 2. C 3. C 4. B 5. A 6. D 7. C 8. E 9. C 10. A 11. D 12. E SECTION B Marks not awarded for evasive and vague explanations. 1. (a) Factoring: Refers to a financial transaction in which a company sells its receivables or portion of its receivables to another company, called a factor, at a discount. The factor advances cash to the company and assumes the credit risk on assumed accounts. The factor therefore takes over the right to receive payment 1
made by the debtor for the full invoice amount and bears the loss arising (only) from the debtor failing to pay the invoice. Students should not confuse factoring with bank loans and accounts receivable financing. Such confusion should not be entertained. (b) Conservative working capital policy: refers to a policy of financing the firm s total assets requirements using a greater proportion of long term debt than short term debt. The strategy involves using long term debt to finance permanent and seasonal current asset requirements. The firm therefore has excess cash in periods of slumps and buys marketable securities which are then disposed seasonal peaks. (c) Early resolution of uncertainty: Is a term which supports dividends relevancy, that is the view that dividend policy affect share value. According to Gordon and Lintner, shareholders prefer current dividends than future dividends and capital gains as these current dividends immediately resolve the uncertainty associated with unknown future capital gains. As a result of their preference for dividends, shareholders apply a lower discount rate to the firm s earnings and thereby placing a higher value on the firm s stock and conversely, if the dividends were to be reduced, uncertainty would increase and shareholders would require a higher rate thus lowering the share value. Students can also support relevancy by stating or explaining the DDM. However key to earning marks should be mention of dividend relevancy else no marks should be awarded. (d) Homemade leverage: The term, attributed to Modigliani and Miller, disqualifies the view that capital structure relevant to return and risk to shareholders. Homemade leverage means that the shareholders can through borrowing and lending on their own, adjust the amount of financial leverage. A shareholder who is displeased by a firm s leverage / debt to equity ratio can borrow or lend so as to achieve the leverage he desires. A shareholder can therefore change an unlevered firm to levered and do the converse. (e) Cash Conversion Cycle: Is the time it takes from paying for inventory acquired to collecting cash from receivables. It is a function of the firm s operating cycle (IP and ARP) and its accounts payable period. 2
2.1 We determine the effective cost of the alternatives: Khula enterprise: Kula buys 99% pays for receivables. Therefore, he charges 1c in for 99c. The effective cost = 1/99 = 0.0101 or 1.01% per month. This is an EAR of: (1 + 0.0101) 12-1 = 12.81% Bank Whk alternative: The bank charges 9.7% per annum. This translates effectively to: (1 + 0.097/12) 12-1 = 10. 1% Therefore it cheaper for Namibia Construction cc to borrow from the Development Bank. 2.2 Each point should state: - The technique, e.g. cash discounts. - Effect on CCC, and - A limitation Any four points to earn 12 marks. The management of working capital is based on shortening the cash conversion cycle. Some of the acceptable techniques are below: (NB Students should state the limitations of each technique). Offer cash discounts to customers. This reduces the ARP but however also reduces the company s margins. Shorten the credit period given to customers. This will also reduce the ARP and hence the CCC, but may exploited by competitors. Streamline the production process. This will reduce the inventory period and hence the CCC. However improvements in the production process will come at a cost. Adopt better systems such as JIT inventory systems. This will reduce the IP and hence the CCC. However, JIT systems have limitations such as stock out risks if suppliers are not efficient. Producing for advance orders from customers instead of producing for inventory. This reduces the Inventory period. 3
Take longer to pay suppliers. This will increase the APP and reduce the CCC. However, the credit worthiness of the firm and the relations with suppliers may be damaged. ----------------------------------------------END OF FEEDBACK------------------------------------------ 4