Question
Assume a special project a company known as Kase Stores Limited want to embark on it due to thenew knowledge the Project FinancialManager has gauged
Assume a special project a company known as Kase Stores Limited want to embark on it due to thenew knowledge the Project FinancialManager has gauged as a consequence of studying this module. Kase Stores Limited operating in Arusha region sells stationery and office supplies on a wholesale basis. The company has an annual turnover of TZS4,000,000,000/= per annum. Kase Stores Ltd employs four people in its sales ledger and credit control section at an annual salary of TZS12,000,000/= each. All company sales are on 40 days credit with no discount for early payment. The company bad debts represent 3% of turnover and Kase Stores Ltd pays annual interest of 9% on its overdraft facility. The published financial statements of the company most recent had the following financial information:
Kase Stores Ltd Statement of financial position as at 31st December 2022
Non-Current Assets 17,500
Current assets:
Stock of goods for resale 900
Debtors 550
Cash 120
Total current assets 1,570
Creditors: amounts falling due within one-year
Trade creditors 330
Overdraft 1,200 1,530
40
17,540
Creditors: amounts falling due after more than one year
12% Debentures due 2028 (2,400)
15,140
Equity
Ordinary shares 3,500
Reserves 11,640
15,140
Kase Stores Ltd is planning to offer a discount of 1% to customers paying within 14 days, which the company believes will reduce bad debts to 2.4% of turnover. It also expects that offering a discount for early settlement will reduce the average credit period taken by its customers to 26 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. Two- thirds of customers are expected to take advantage-of the discount.
Required:
- Referring to the information in this specific question, assess whether a discount for early settlement of one per cent (1%) will lead to an increase in profitability for Kase Stores Ltd.
- Examine the relative merits of short-term and long-term debt sources for the financing-of working capital.
- Critically examine the different policies that may be adopted by a company towards the financing of working capital needs and indicate which policy has been adopted by Kase StoresLtd.
- Outline the advantages to a company of taking steps to improve its working capital management, giving examples of steps that might be taken in this case.
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