Kajairo Mercantile is planning to expand its operations during the coming year. Its financial position and the results of its operation for the year are shown below in summary form.

Kajairo Mercantile

Statement of Financial Position

As at December 31, 2018

	Ksh'000'
Assets
Non-current assets
Property, plant and equipment	178,000
Current assets
Inventory	19,800
Accounts receivable, net	21,400
Cash	11,600
	52,800
Total assets	230,800
Equity and liabilities
Owner's equity	203,600
Accounts payable	27,200
Total equity and liabilities	230,800

Kajairo Mercantile

Income statement

For the year ending December 31, 2019

Ksh.000 Ksh.000

Sales 260,000

Less expenses:

Cost of goods sold 161,200

Depreciation 1,500

Other expenses 74,400 237,100

Net income 22,900

A planned expansion during 2019 will result in the following

1. Cash increase of Ksh.3,400,000

2. Accounts receivable increase of Ksh.3,000,000

3. Inventory increase of Ksh.6,500,000

4. Property, plant and equipment increase, net of depreciation of Ksh.10,400,000

5. Accounts payable increase of Ksh.3,300,000

6. Sales increase of 30 percent.

7. Cost of goods sold increase to 68 percent of sales.

8. Depreciation increase to Ksh.1,800,000

9. Other expenses increase to Ksh.76,800,000

Required:

a) Compute the following ratios for Kajairo Mercantile for 2018 and 2019 as projected.

i) Current ratio

ii) Quick ratio

3. Accounts receivable
4. Number of days in the collection period
5. Inventory turnover
6. Number of days in the selling period.
7. Debt to equity ratio
8. Proprietary ratio
9. Debt to assets ratio
10. Return on equity ratio

Assume, where applicable, that the year end balances in the statement of financial position are representative of averages. (30 marks)

b) Do you recommend the expansion? Why or why not? (5 marks)

Total: 35 marks

Total: 85 MAR