Q4

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were Rs 3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was Rs1,800,000. The firm had fixed assets totalling Rs 535,000. Strickler's payables deferral period is 45 days.

i.Calculate Strickler's cash conversion cycle.

ii.Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.

iii.Suppose Strickler's managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Strickler's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?

Q5

You are analysing Jilani's Jewellery (JJ) stock for a possible purchase. JJ just paid a dividend of Rs.8.25 yesterday. You expect the dividend to grow at the rate of 6% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it.

i.What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D₁, D₂, and D₃. Note that D₀ Rs.8.25.

ii.JJ stock has a required return of 13%, the rate you will use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D₁, D₂, and D₃, and then sum these PVs.

iii.JJ stock should trade for Rs.148.78 3 years from now (i.e., you expect Rs.148.78). Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of Rs.148.78.

iv.If you plan to buy the stock, hold it for 3 years, and then sell it for Rs.148.78, what is the most you should pay for it?

v.Use the constant growth model to calculate the present value of this stock. Assume that g_L 6% and is constant.

vi.Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, ? Explain your answer.