(b) _Gemilang Bhd. has a debt-equity ratio of 50% and is in the 40% tax bracket. The required return on the firm's levered equity is 16%. Gemilang is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow (in RM) -18 million 5.7 million 9.5 million 8.8 million 2 3 To partially finance the expansion, Gemilang has arranged a RM9.3 million debt issue. Under the loan, the company would pay interest of 9% at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of RM3.1 million per year, completely retiring the issue by the end of the third year. Using the Adjusted Present Value (APV) method, should the company proceed with the expansion? Why? (12 marks) (a) Determining the optimal investment level in short-term assets that requires an identification of the different costs of alternative short term financing policies. The objective is to trade off the costs of restrictive policies against those of the flexible ones to arrive at the best compromise. Describe flexible and restrictive short term finance policy. Please give one example for each. (5 marks) (b) Consider the following financial statement information for the Canggih Bhd. Assume: 365-day calendar. Item Inventory Accounts receivable Accounts payable Net sales Cost of goods sold Beginning Ending RM17,385 RM19,108 13,182 13,973 15,385 16,676 RM 216,384 RM 165,763 i. Compute the company's average age of inventory (AAI). (5 marks) ii. Compute the company's average collection period (ACP). (5 marks) iii. Calculate the operating cycle (OC) and cash cycles. How do you interpret your answer? (10 marks) (b) _Gemilang Bhd. has a debt-equity ratio of 50% and is in the 40% tax bracket. The required return on the firm's levered equity is 16%. Gemilang is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow (in RM) -18 million 5.7 million 9.5 million 8.8 million 2 3 To partially finance the expansion, Gemilang has arranged a RM9.3 million debt issue. Under the loan, the company would pay interest of 9% at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of RM3.1 million per year, completely retiring the issue by the end of the third year. Using the Adjusted Present Value (APV) method, should the company proceed with the expansion? Why? (12 marks) (a) Determining the optimal investment level in short-term assets that requires an identification of the different costs of alternative short term financing policies. The objective is to trade off the costs of restrictive policies against those of the flexible ones to arrive at the best compromise. Describe flexible and restrictive short term finance policy. Please give one example for each. (5 marks) (b) Consider the following financial statement information for the Canggih Bhd. Assume: 365-day calendar. Item Inventory Accounts receivable Accounts payable Net sales Cost of goods sold Beginning Ending RM17,385 RM19,108 13,182 13,973 15,385 16,676 RM 216,384 RM 165,763 i. Compute the company's average age of inventory (AAI). (5 marks) ii. Compute the company's average collection period (ACP). (5 marks) iii. Calculate the operating cycle (OC) and cash cycles. How do you interpret your answer? (10 marks)
