Prime Shoes Ltd manufactures various types of shoes. The company is now considering its working capital...

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Prime Shoes Ltd manufactures various types of shoes. The company is now considering its working capital policy for 1994. Fixed assets are projected at Kshs 30 million and current liabilities at Kshs 27 million. Sales and Earnings before interest and Taxes (EBIT) are partially a function of the company's investment in working capital particularly its investment in stocks and debtors. Prime Shoe Ltd is considering the following three different working capital investment policies: small investment in current assets large investment in current assets moderate investment in current assets Aggressive policy Conservative policy Moderate policy The following information relates to three policies: Aggressive Moderate Conservative Kshs'000' Kshs'000' Kshs'000' Investment in: Current Assets Projected Sales EBIT 42,000 88,500 8,500 45,000 90,000 9,000 48,000 91,500 9,150 Required: a) Determine the working capital investment policies for each of the following: (i) Rate of return on total assets (4marks) (4 marks) (ii) Current ratio b) Describe the profitability-risk trade-offs of these three policies. (3 marks) Prime Shoes Ltd manufactures various types of shoes. The company is now considering its working capital policy for 1994. Fixed assets are projected at Kshs 30 million and current liabilities at Kshs 27 million. Sales and Earnings before interest and Taxes (EBIT) are partially a function of the company's investment in working capital particularly its investment in stocks and debtors. Prime Shoe Ltd is considering the following three different working capital investment policies: small investment in current assets large investment in current assets moderate investment in current assets Aggressive policy Conservative policy Moderate policy The following information relates to three policies: Aggressive Moderate Conservative Kshs'000' Kshs'000' Kshs'000' Investment in: Current Assets Projected Sales EBIT 42,000 88,500 8,500 45,000 90,000 9,000 48,000 91,500 9,150 Required: a) Determine the working capital investment policies for each of the following: (i) Rate of return on total assets (4marks) (4 marks) (ii) Current ratio b) Describe the profitability-risk trade-offs of these three policies. (3 marks)

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