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Q1-4 Ass 1

The document provides financial information for Afro Quatro Ltd as of December 2001 and projections for 2002-2003, including sales increases of 15% and 20% respectively and an after-tax profit rate of 8% each year. It asks to determine the external financial requirements for the next two years and provide a pro forma balance sheet for December 2003, stating any fundamental assumptions. It also provides sales and advertising/price data for another company and asks to determine a regression equation and projected sales. Finally, it provides historical financial information for Baraka Ltd and asks to prepare a cash budget for January-March 2007.

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27 views3 pages

Q1-4 Ass 1

The document provides financial information for Afro Quatro Ltd as of December 2001 and projections for 2002-2003, including sales increases of 15% and 20% respectively and an after-tax profit rate of 8% each year. It asks to determine the external financial requirements for the next two years and provide a pro forma balance sheet for December 2003, stating any fundamental assumptions. It also provides sales and advertising/price data for another company and asks to determine a regression equation and projected sales. Finally, it provides historical financial information for Baraka Ltd and asks to prepare a cash budget for January-March 2007.

Uploaded by

korirenock764
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Question 1

The management of Afro Quatro Ltd. wants to establish the amount of financial needs for the next two
years. The balance sheet of the firm as at 31 December 2001 is as follows:
Sh’000’

Net fixed assets 124,800


Stock 38,400
Debtors 28,800
Cash 7,200
Total assets 199,200
Financed by: 84,000
Ordinary share capital 35,200
Retained earnings 20,000
12% long-term debt 36,000
Trade creditors 24,000
Accrued expenses 199,200
• For the year ended 31 December 2001, sales amounted to
Sh240,000,000. The firm projects that the sales will increase by 15% in year 2002 and 20% in year
2003.
• The after tax profit on sales has been 11%, but the management is pessimistic about future operating
costs and intends to use an after-tax profit on sales rate of 8% per annum.
• The firm intends to maintain its dividend payout ratio of 80%. Assets are expected to vary directly
with sales while trade creditors and accrued expenses form the spontaneous sources of financing.
Any external financing will be effected through the use of commercial paper.

a. Determine the amount of external financial requirements for the next two years. (7 marks)
i. A proforma balance sheet as at 31 December 2003. (10 marks)

ii. State the fundamental assumption made in your computations in (a) and b (i) above. (1 mark)

Question 2
Mr Orina, the marketing manager of Laingu Limited, is concerned about the sales behavior of his
product. He realizes that there are many factors that may help explain the sales behavior but believes that
advertising and prices are the major determinants. He has collected the following data;
Sales in units 33 61 70 82 17 24
Advertising (No of
3 6 10 13 9 6
adverts)
Prices (Sh) 125 115 140 130 145 140
Required;
a. Determine the regression equation to predict sales from advertising and prices
b. If advertising is 15 and price is 142 how many units would be sold?

Question 3
You are a trainee in the finance department of Baraka Ltd. The head of department has requested you to
assist in the preparation of the cash budget for the months of January, February, March and April 2007.
The actual revenues and costs for the months of September to December 2006 and January to April
2007 are shown below:
Month sales wages Material purchases Overheads
year 2006 Sh000 Sh000 Sh000 Sh000
September 3,000 600 2,000 1,000
October 4,000 800 3,000 1,200
November 6,000 1,000 2,500 1,600
December 5,000 900 3,500 1,400
year 2007

January 7,000 1,200 3,000 1,800


February 6,000 1,000 2,500 1,600
March 5,000 900 2,500 1,400
April 5,000 900 3,000 1,400
Additional information
1. It is expected that the cash balance on 31 December 2006 will be Sh2,200,000.
2. Overdraft facilities will be available as and when required.
3. The company pays wages the last day of the month in which they accrue.
4. It is the company policy to pay creditors three months after the receipt of the supplies.
5. 10% of the monthly sales are for cash while the balance are sold on credit. Debtors are expected to
pay two months after delivery of goods.
6. Included in overheads Sh200,000 per month representing depreciation on motor vehicles. There is a
one month delay in paying overhead expenses.
7. A commission of 5% is paid to sales agents on all sales on credit. The payment of commission is
made in the month following that of sale. This commission has not been included in the overhead
expenses above.
8. Delivery is expected in February 2007 of a new machine costing Sh4,500,000 of which Sh1,500,000
will be paid on delivery and Sh1,500,000 in each of the following two months.

Required
A cash budget for the months of January, February and March 2007.

Question 4

I. State the main sources of finance available to small and medium-sized companies.
II. Stock exchange placing is a common method of issuing shares by companies. Define the term
stock exchange placing and state its advantages and disadvantages.
III. Share capital of a company may consist of ordinary share capital and preference share capital.
Define and state the advantages of each of these sources of finance to companies.
IV. State the main classifications of debentures and state the advantages and disadvantages of using
debentures as a source of finance.
V. Sale and lease back is a common technique of financing the activities of firms with financial
difficulties. Define the term sale and lease back clearly stating its advantages and disadvantages.

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