Question 3

Sheldon plc typically adopts an aggressive working capital policy with no long-term debts. The following are the account details of the firm :

	m
Credit Sales	20.00
Earnings Before Interest & Tax (EBIT)	4.00
Annual Interest Payments	1.00
Equity (consist of 2 million issued equity capital, face value 50pence and 2 million reserves)	4.00
Accounts Receivables	0.80
Inventory	1.40
Accounts Payables	3.00
Overdrafts From Banks	6.00

A large supplier which represents 60% of Sheldons cost of goods (COGs) sold is seriously concerned that Sheldon is prolonging its payment of its accounts payables. The supplier offers Sheldon the chance to settle its debts by 10 days in return for a 10% discount on the value of the invoice. Sheldon does not hold any cash reserves. However, it is able to obtain a bank overdraft from its banker with an interest charge of 10%. Corporate tax is 35%.

Required:

1. Critically discuss the costs and benefits for Sheldon with respect to its supplier arrangement. Your analyses need to incorporate the influences upon the following :

1. The cycle of working capital (3 marks)
2. Times-interest coverage (3 marks)
3. Profits after corporate tax payments (4 marks)
4. Earnings per share (EPS) (2 marks)

2. Provide your recommendations whether Sheldon plc should take up its suppliers offer or not based upon your analyses in 3(a). (3 marks)

3. Explain what a statement of financial position is and critically discuss whether it shows the worth of a business such as Sheldon plc. (10 marks)

[Total : 25 Marks]