Q1. Dr. King Company (DKC) is a shoes manufacturer in Hong Kong. The firm has grown rapidly in recent years, causing a need for short-term financing. Regarding its sales, a majority are for credit although the rest of them are for cash. The credit sales are financed with short-term borrowings.

As a financial manager of DKC,

a.) Your boss tells you that he wants to re-assess the firm's current policy for managing cash. You are asked to explain FOUR possible ways of shortening the cash conversion cycle. (10 marks)

b.) You are told that DKC has a $900,000 line of credit with a 18% compensating balance requirement with BOA Bank. It means that 18% of the amount borrowed must be left in a non-interest-bearing account. The quoted interest rate is 8%. It is reported that DKC needs $270,000 to purchase inventory. What interest rate is DKC effectively paying? (7 marks)

C.) You are also told that DKC had an average of $90,000 in accounts receivable last year. Credit sales were $900,000 per year. DKC factors its receivables by discounting them at 2.5%. Assume 365 days a year. What is the effective interest rate on this source of short-term financing? (8 marks)

Q.2 You are considering an investment in either individual stocks or a portfolio of stocks in the Hong Kong market. The two stocks you are researching, JPM and BAC, have the following historical returns:

Year Annual Return (JPM) Annual Return (BAC)

2016 -10.00% -2.50%

2017 21.00% 7.50%

2018 10.00% -6.50%

2019 -4.00% 25.00%

2020 12.50% 6.00%

(a) Calculate the average return for each stock during the 5-year period. (2 marks)

(b) Suppose you have held a portfolio consisting of 60% of JPM and 40% of BAC, what would be the realized return on the portfolio in each year? What is the average return on the portfolio during the 5-year period? (6 marks)

(c)Compute the standard deviation of returns for each stock and for the portfolio. (9 marks)

(d)When you compare the risk for JPM, BAC, and the portfolio, what would you find? Discuss. (4 marks)

(e)If you are allowed to hold JPM, BAC, or the portfolio, which one would you choose? Explain. (4 marks)