Kolopa.Com plans to expand its business operations by opening several new outlets at a cost of ZMW8m,
Question:
Kolopa.Com plans to expand its business operations by opening several new outlets at a cost of ZMW8m, financed by an issue of loan notes. The company generates credit sales of ZMW80.768m before Cost of sales of ZMW27.700m. All sales are on credit. The current statement of financial position of Kolopa.Com is as follows:
Assets ZMW'000
Non-current assets 54,070
Current assets
Inventory 4,000
Trade receivables 12,320
Cash 800
Total current assets 17,120
Total assets 71,190
Equity and liabilities
Equity 6,000
Reserves 34,000
Total equity 40,000
Non-current liabilities 18,000
Current liabilities
Trade payables 9,690
Overdraft 3,500 Total current liabilities 13,190
Total equity and liabilities 71,190
Kolopa.Com expects that the expansion will increase credit sales by 18.7%, with cost of sales being 33% of credit sales and profit after tax being ZMW6.818m. Non-current assets will increase by 11%.
The bank has demanded that Kolopa.Com's overdraft be reduced to ZMW3m, and the company expects its cash balance to be ZMW700,000 after the expansion.
Kolopa.Com has been receiving complaints from its suppliers about late payment and the company plans to improve its working capital management as part of its expansion: it expects that the following working capital ratios will result:
Inventory holding period 50 days
Trade receivable collection period 60 days Trade payables payment period 60 days
The finance manager of Kolopa.Com wishes to investigate how the expansion will change the Following ratios:
- trade payables payment period
- current ratio: and
- revenue/net working capital ratio (defining net working capital as inventory plus trade receivables less trade payables).
Assume there are 360 days in a year.
Required
Using the information provided:
- Prepare a forecast statement of financial position for Kolopa.Com; and
- Calculate the effect of the proposed expansion on the working capital ratios listed by the finance manager.
(b) Discuss the ways in which implementing the proposed changes in working capital represent:
- Changes in working capital investment policy for Kolopa.Com;
- Changes in working capital funding policy for Kolopa.Com.
Introduction To Federal Income Taxation In Canada
ISBN: 9781554965021
33rd Edition
Authors: Robert E. Beam, Stanley N. Laiken, James J. Barnett