QUESTION THREE

Shopfree Ltd is a retail company based in Lusaka. An Intern Analyst has extracted the following information for your review relating to the financial plan for the year ending 31^st March, 2021.

Sales (Km) 160

Gross Profit mark-up (%) 35

The operating cycle for the retail trading industry has been calculated as follows:

Inventory 64 Days

Receivable 88 Days

Payables 110 Days

Quick ratio 1.2 times

Required:

1. Calculate the expected investment in the following:
   1. Inventory [3 Marks]
   2. Receivables [2 Marks]
   3. Payables [2 Marks]
2. Calculate the target current ratio. [3 Marks]
3. Determine the working capital requirement expected over the period. What would be the cost of financing the requirement if short term bank loans were at 8%? [5 Marks]
4. Advise when overdraft financing would be advisable as compared to receivables factoring.

[10 Marks]