QUESTION 2 (20 Marks)

2.1. Using the information provided below, answer the question that follows.

INFORMATION

Lambda Distributors (LD) is a regular supplier of branded beauty products to Edgemead Stores (ES) subject to normal credit terms of 30 days. Today, LD supplied R200 000 worth of merchandise to ES on credit. The manager of LD is prepared to shave R3 000 off the receivable on condition that ES settles the account within 10 days. The cost of the overdraft facility available to ES is 30%.

REQUIRED:

Calculate the cost to Edgemead Stores of not accepting the discount and state whether Edgemead Stores should accept the discount offered.

2.2. Study the information provided below and answer the following questions.

INFORMATION

Croesus Enterprises is considering using the Miller-Orr model to manage its cash flows. The minimum cash balance would be R300 000 and the variance of its daily cash flows is R1 800 000 000 (i.e., the standard deviation is approximately R42426). The cost of buying/selling securities is R50, and the daily interest rate is 0.25%.

REQUIRED:

Answer the following questions:

2.2.1. Calculate the spread. (4 marks)

2.2.2. Calculate the Miller-Orr model upper limit and return point (4 marks)

2.2.3. Explain how the upper limit and return point would be used to manage the cash balances of WHG Enterprises. (4 marks) .

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2.3. Study carefully the following company information and answer the following question. (5 marks)

COMPANY INFORMATION

Frontier Bauxite Mining (FBM) is a bauxite mining business in a West African country. It owns and operates three mines. A bauxite mine takes on average two years to develop before it can produce ore and the revenue from the mine is split (25:75) between selling the ore under fixed price contracts over five years and selling on the spot market. The bulk of the businesss production is exported. A bauxite mine has an average working life of about 20 years before all the profitable ore is extracted. It then takes a year to decommission the site and return the land to a useable form for agriculture or other developments.

REQUIRED:

A junior management accountant employed as a mining analyst is currently analysing FBMs life cycle. As part of the life cycle analysis, the analyst is contemplating using Altmans Z-score failure prediction model to predict the financial stability of FBM.

Using your understanding of life cycle costing and Altmans Z-score failure prediction model, critically discuss the potential effects of a mines lifecycle (i.e., mine development, production and decommission) on FBMs Z-score and FBMs probability of failure.