Question 2

(7 Marks) Feesh Canneries Ltd wants to estimate the amount of funds they will require to fund their operations in 2023. The company has total assets of R100m, liabilities of R10m, a net profit margin of 5% on sales of R500m with a dividend pay-out ratio of 60%. All assets and liabilities are considered spontaneous and increase in line with increases in sales. It is expected that sales will grow by 30% in the coming year. Required: Estimate the amount of funds the firm will require in 2023.

Question 3 (6 Marks)

Tyres Ltd sells tyres on credit only. The management of the company estimated that it could increase sales by offering better credit terms. Currently, the days sales outstanding (or average collection period) is 11 days. It is expected that this will change to 40 days under the new standards. Sales are expected to increase from R100m to R105m. No discounts are offered and bad debts are negligible (zero). The company can borrow short term funds at a rate of 10% and has a gross profit margin of 15%. Would it be worthwhile for the company to change its credit terms? Required: Write down only the change in gross profit, the change in bad debt, the change in the investment in accounts receivable and the expected change in net profit.