ACFI3422 Liquidity and Risk assessment Simulated assessment centre un-seen material (includes pre-seen) Pre-seen element Keller Ltd (Keller) is a UK company that manufactures calculators, it is one of the largest suppliers of these calculators in the UK, today. It has a year-end of 30th of November. Its liquidity ratios have been calculated for the previous 2 years: - 2020 2019 Industry Average Current Ratio 2.3: 1 1.8: 1 2.0 Quick Ratio 1.1: 1 1.2: 1 1.2 Inventory Days 69 64 65 Receivables Days 65 61 63 Payables Days 78 70 68 Gross Profit Margin 21% 20% 20% Operating Profit Margin 11% 10% 12% Keller has forecast the following for the year ended 30th of November 2021 :- Credit management Sales to increase to 4 million for the year to come. Receivables forecast to be 1,150,000. The cost of financing receivables is covered by an overdraft at the interest rate of 5% p.a. Keller is now considering offering a cash discount of 0.5% for payment of debts within 20 days. It is expected that 25% of customers will take up the discount. Inventory management Keller is also trying to find the optimum order quantity for its inventory. Monthly demand for its inventory which costs 2.30 per unit is 80,000 units per month. The cost per order is currently 1.25. The holding cost of 1 unit p.a. is 1. Kellers suppliers have offered a discount of 0.5% per unit for orders of 2,000 units or more. Cash management Keller has a constant demand for cash totalling 5,000,000 p.a. It can replenish its current account by selling a constant amount of gilts which are held as an investment earning 3% p.a. The cost per sale of gilts is a fixed 8 per sale. The management of Keller have also considered using the Miller-Orr model of cash management. They have considered a lower limit of 1,000,000, the standard deviation of the daily cash flows is 40,000 and it will cost 12 per transaction to transfer money to or from the bank. The interest rate is 3% p.a. Unseen material It is now December 2021 and the financial results for Nov 30th 2021 have been published. 2021 2020 Industry Average Current Ratio 2.2: 1 2.3: 1 2.1 Quick Ratio 0.9:1 1.1: 1 1.2 Inventory Days 81 69 64 Receivables Days 87 65 62 Payables Days 90 78 69 Gross Profit Margin 22% 21% 20% Operating Profit Margin 10% 11% 12% Credit management Sales are forecast to be 5.2m for the year ahead. Receivables forecast to be 1,100,000. The cost of financing receivables remains the same. Inventory management Monthly demand for its inventory remains the same but the cost has increased to 2.75 per unit. The cost per order has increased to 1.47. The storage cost of 1 unit p.a. is 0.55. Cash management All details remain the same, except the annual demand for cash is now 6,200,000. Tasks for evaluation The managers of Keller want you to evaluate the companys liquidity position to help you do this, calculate the following: -

c) Calculate the lower limit, upper limit and return point for Keller if the standard deviation of cash flows is 45,000 per day.