Financial management revision question and answer

CPA-Financial-Management-Section-3 Revision kit

The management of Afro Quatro Ltd. want 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:

Net fixed assets Sh.‟000‟
124,800
Stock 38,400
Debtors 28,800
Cash 7,200
Total assets 199,200
Financed by:
Ordinary share capital 84,000
Retained earnings 35,200
12% long-term debt 20,000
Trade creditors 36,000
Accrued expenses 24,000
199,200

For the year ended 31 December 2001, sales amounted to Sh.240,000,000. The firm projects that the sales will increase 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 pay out 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.

Required:
(a) Determine the amount of external financial requirements for the next two years.

(b) (i) A proforma balance sheet as at 31 December 2003.
(ii) State the fundamental assumption made in your computations in (a) and b(i) above.
ANSWER


(ii) No change in value of money (inflation) during the forecasting period.

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