Awami Supermarkets Ltd (ASL) was formed as a public limited company in 2000 and commenced

its commercial operations on 1 January 2001. It is essentially engaged in retail trade and operates

a number of general supermarkets (large grocery stores) all over the country. In the first year of

its operations it bought off a number of running stores and converted them into its branded

supermarkets. However, from 2002 onwards, instead of buying existing stores and converting

them into supermarkets, the company is concentrating on buying pieces of land in suitable

locations and building supermarkets according to its own specifications. It aims to have at least

one supermarket in each major township of Pakistan within the first five years of its life.

The company acquires its goods direct from manufacturers. Some of the manufacturers are tied

to them, i.e. they manufacture goods only for ASL, which it sells under its own brand name in its

stores. The directors expect that within a reasonable period they will get up to 75% of the items

sold in the stores manufactured under their own brand names. The company however does not

have any plans to set up its own manufacturing facility for any of its products.

While the company has been profitable in its first three years of operations, it has not met the

level of success it had originally expected. However, the directors attribute this to teething

problems and are quite optimistic about the company's future. Given below are company's Income

Statements and Balance Sheet for first three years:

Summarized Income Statements

2001 2002 2003

Rs. Million Rs. Million Rs. Million

Sales 1,200 1,280 1,540

Cost of Goods Sold 720 780 942

Gross Profit 480 500 598

Less Administrative Overheads 108 128 164

Marketing Overheads 180 170 165

Financial Overheads 72 72 84

Total Overheads 360 370 413

Profit before Tax 120 130 185

Less Corporation Tax 48 52 74

Profit after Tax 72 78 122

Retained Earnings brought forward 0 30 33

Profit available for appropriation 80 108 155

Dividends 50 75 122

Retained Earnings carried forward 30 33 33

Number of Supermarkets, at the end of the year 80 100 130

Notes on Income Statement:

o 50% of the sales are against cash; 30% are made against credit cards while the balance is made

on credit to corporate clients and up-country retailers.

o All purchases are made on credit. Any cash discount offered by suppliers for earlier settlement

of bills is generally ignored.

Summarized Balance Sheets, at the end of

2001 2002 2003

Rs. Million Rs. Million Rs. Million

Paid Up Share Capital (Rs 10 ordinary shares) 200 300 400

Retained Earnings 30 33 33

Equity 230 333 433

11% Callable Preference Shares 0 200 200

12% Debentures 600 600 700

Trade Payables 80 120 265

Bank Overdraft (average cost 15%) - 40 260

Proposed Dividends 50 75 122

Corporation Tax 40 42 64

1,000 1,410 2,044

Land and Buildings 336 618 982

Vehicles, Furniture & fittings & Equipment 314 412 496

Stocks 240 300 440

Trade Receivables 50 80 126

Cash at Bank 60 - -

1,000 1,410 2,044

Notes on the Balance Sheets

The company had made a rights issue in April 2002. In March 2003, it made a direct

placement of shares with an institutional investor, Venture Equity Bank Ltd., who has

nominated two directors on the company's board.

Preference Shares were sold to general public at par at the end of 2002; hence were not

entitled to any dividend for 2002.

Moreover, Awami Supermarkets Ltd (ASL) is considering to make either of two investments at

time 0. The relevant after-tax incremental operating cash flows

END OF YEAR PROJECT A CASH FLOWS

0 1 2 3

Cash flows $404,424 $86,890 $106,474 $91,612

4 5 6 7 8

Cash flows $84,801 $84,801 $75,400 $66,000 $92,400

END OF YEAR PROJECT B CASH FLOWS

0 1 2 3

Cash flows $504,464 $98,890 $125,474 $90,612

4 5 6 7 8

Cash flows $80,000 $80,000 $80,000 $60,000 $95,400

Required:

The Company has hired you, on the advice of Venture Equity Bank Ltd., to:

1. Evaluate the performance of the company over the first three years of its operations. This

should cover all areas of operations including pricing policy, expansion strategy, credit

control, stock control, return on capital employed as well as on equity, etc. You may want to

use the relevant ratios as studied during the course to evaluate the company. Do you think

company is investing its capital wisely? How would you comment on the performance of the

company as shown in the ratio analysis? What recommendations would you make to rectify

it?

2. Assuming a required rate of return of 14 percent, as considered by Awami Supermarkets Ltd

(ASL), determine for each project A and B (a) the payback period, (b) the net present value,

(c) the profitability index, and (d) the internal rate of return.

3. Awami Supermarkets currently have an "aggressive" working capital policy with regard to the

level of current assets it maintains (relatively low levels of current assets for each possible level of output). It has decided to move towards a more "conservative" working capital policy.

a) What effect will this decision probably have on the firm's profitability and risk?

b) Awami Supermarket is also considering to finance their permanent working capital with

short-term liabilities (commercial paper and short-term notes). Explain the impact of this

decision on the profitability and risk of Awami Supermarket.

c) The finance team of Awami Supermarket is also concerned about, how a "margin of safety" is

provided for in working capital management?

d) Awami Supermarket is also considering to outsourcing its cash management process. Why

might a company outsource some or all of its cash management processes? What is business

processing outsourcing (BPO)?