b) The monthly cash requirement forecast by Encik Azman, the finance manager is RM6,000,000. Given that the cost of converting securities into cash is RM560 per transaction. Encik Azman has the opportunity cost of 8% per annum. Calculate : i) ii) iii) iv) v) vi) The amount of cash it obtains each time it sells the securities. The frequency the firm will sell the securities. Average cash balance Annual opportunity cost of funds Transactions costs Total costs (12 marks) Solutions - Question a) Answer:- Calculation of Inventory Conversion Period. Inventory Conversion Period = (Stocks / COGS) 365 = (5,000,000/ 32,000,000) * 365 =57.03125 Inventory Conversion Period = 57 Days. Question b) Answer:- Calculation of Debtors Collection Period. Debtors Collection Period = (Debtors / Revenue) 365 = (6,200,000 / 67,000,000) * 365 = 33.776 Debtors Collection Period = 34 Days Question c) Answer:- Calculation of Payables Credit Period. Payables Credit Period = (Creditors / Revenue) * 365 = (2,200,000 / 67,000,000) 365 = 11.985 Payables Credit Period =12 Days Question d) Answer:- Calculation of Cash Conversion Cycle Cash Conversion Cycle = Inventory Conversion Period + Debtors Collection Period - Payables Credit Period = 57 days + 34 Days - 12 Days Cash Conversion Cycle = 79 Days b) The monthly cash requirement forecast by Encik Azman, the finance manager is RM6,000,000. Given that the cost of converting securities into cash is RM560 per transaction. Encik Azman has the opportunity cost of 8% per annum. Calculate : i) ii) iii) iv) v) vi) The amount of cash it obtains each time it sells the securities. The frequency the firm will sell the securities. Average cash balance Annual opportunity cost of funds Transactions costs Total costs (12 marks) Solutions - Question a) Answer:- Calculation of Inventory Conversion Period. Inventory Conversion Period = (Stocks / COGS) 365 = (5,000,000/ 32,000,000) * 365 =57.03125 Inventory Conversion Period = 57 Days. Question b) Answer:- Calculation of Debtors Collection Period. Debtors Collection Period = (Debtors / Revenue) 365 = (6,200,000 / 67,000,000) * 365 = 33.776 Debtors Collection Period = 34 Days Question c) Answer:- Calculation of Payables Credit Period. Payables Credit Period = (Creditors / Revenue) * 365 = (2,200,000 / 67,000,000) 365 = 11.985 Payables Credit Period =12 Days Question d) Answer:- Calculation of Cash Conversion Cycle Cash Conversion Cycle = Inventory Conversion Period + Debtors Collection Period - Payables Credit Period = 57 days + 34 Days - 12 Days Cash Conversion Cycle = 79 Days