- 20 Marks
FM – L2 – Q117 – Working Capital Management
Question
(A) A good working capital policy should facilitate successful achievement of the key short-term financing objectives of an organisation.
Required:
Identify the three types of working capital policies of an organisation.
(B) Sunyani Farms Ltd is preparing a business plan to apply for a grant from GDAIF for an expansion of its rice production. Current production is 20,000 bags at a variable cost per bag of GH₵12.00 and contribution sales ratio is 25%. Variable cost is for purchases. Current receivable days is 30 days and inventory turnover is 12 times. Suppliers allow 15 days credit and the company maintains absolute cash ratio of 1:1.
The funding support from GDAIF is expected to double the production capacity of the company. Inventory and absolute cash ratios would be maintained but receivables and payables days will increase to 45 days and 30 days respectively. GDAIF policy is to support only the extra working capital needs of applicants.
Required:
Determine the amount that should be applied from GDAIF.
(C) Kumasi Ventures Ltd has a dividend cover of 4 times and recorded the following earnings after tax.
| Year | Earnings (GH₵) |
|---|---|
| 20X4 | 100,000 |
| 20X5 | 120,000 |
| 20X6 | 180,000 |
| 20X7 | 220,000 |
| 20X8 | 300,000 |
Required:
Calculate the average dividend growth rate for Kumasi Ventures Ltd.
Answer
(A) Restrictive or aggressive approach
With a restrictive policy, current assets are financed through short-term funds. Firms with restrictive working capital policies demonstrate the following:
- Keeping low cash balances and making little investment in marketable securities;
- Making small investments in inventory;
- Allowing few or no credit sales, thereby minimizing accounts receivable.
Flexible or conservative approach
Firms that adopt a flexible or conservative approach to the management of working capital have a higher investment in current assets. The objective is to reduce the risk of stock out and to maintain high liquidity. Flexible or conservative approach to working capital management results in the following:
- Keeping large balances of cash and marketable securities;
- Granting liberal credit terms, which results in a high level of accounts receivable;
- Making large investments in inventory.
Moderate approach
This is the middle ground between the conservative and the aggressive approach.
(B)
| Working capital needs | Current | Future |
|---|---|---|
| Production | 20,000.00 | 40,000.00 |
| Selling Price GH₵ (12/(1-0.25)) | 16 | 16 |
| Sales (GH₵) | 320,000.00 | 640,000.00 |
| Purchases GH₵ (12) | 240,000.00 | 480,000.00 |
| Working capital needs | ||
| Inventory | 20,000.00 | 40,000.00 |
| Receivables | 26,301.37 | 78,904.11 |
| Cash | 9,863.01 | 39,452.05 |
| Current assets | 56,164.38 | 158,356.16 |
| Payables | (9,863.01) | (39,452.05) |
| Working capital | 46,301.37 | 118,904.11 |
Amount required from GDAIF = 118,904.11 – 46,301.37 = 72,602.74
Sankofa dividend growth rate
| Year | Earnings (GH₵) | Dividend |
|---|---|---|
| 20X4 | 100,000 | 25,000.00 |
| 20X5 | 120,000 | 30,000.00 |
| 20X6 | 180,000 | 45,000.00 |
| 20X7 | 220,000 | 55,000.00 |
| 20X8 | 300,000 | 75,000.00 |
- Tags: Dividend Growth, Earnings, Financial analysis, Payout Ratio
- Level: Level 2
- Topic: Dividend policy
- Uploader: Samuel Duah