Question 1 a. Critically differentiate between the three main models of working capital management.

b. Is it possible to use financial ratios to determine the model of working capital management applied at a company? If yes, which ratio will be more useful and provide an interpretation of how the ratio can be used to determine what model of working capital management is applied at a particular firm.

c. Determine which of the three working capital management approaches will be more appropriate for a construction company that specializes in the building of domestic and commercial buildings. Provide reasonable justification for your response.

Question 2 Over the past decade, the Pixie Company has expanded its activities by the profitable reinvestment of retained earnings. But despite a significant increase in turnover and a history of Balance Sheet solvency, it is now beset by liquidity problems. The CEO Mr. Francis has convened a Board Meeting to establish what is wrong with its working capital position. The following snapshot data taken from the company accounts has been itemised as a basis for discussion. Last Year This Year (GH Million) (GH Million) Raw Materials 200 270 Work in progress 140 180 Finished goods 160 240 Debtors 320 480 Creditors 160 195 Sales 1,600 2,000 Purchases 960 1,300 Cost of goods sold 1,400 1,800 Required:

a) Reformulate the data, using ratio analysis and the derivation of the companys operating and financing (cash conversion) cycles to interpret any possible mismanagement of working capital. Justify your response with an explanation of the ratios calculated.

b) Critically evaluate alternative strategic options for how the companys future liquidity position might be improved.

Question 3 Al-Jebreel Company Limited deals in the retail and wholesale of electrical appliances. The company sources for its products directly from manufacturers. Under current trade agreements, the company is allowed access to credit purchases. The terms of the purchases have been set as 5/20, net 60. On their most recent purchase, the company bought appliances to the tune of GH1,000,000 subject to the same terms of trade. Use the following details to answer the following questions:

a) If the company decides to forego the discount as set out in the terms of trade, calculate the relative cost in terms of Annual Percentage Rate and Annual Percentage Yield.

b) With respect to your calculations in (a) above, Al-Jebreel has spotted a business opportunity where it stands to make a return of 25.7% should it choose to forego the discount and invest the discounted amount to be paid to its suppliers in this business opportunity. What will be your recommendation to Al-Jebreel? Justify your response.

c) Al-Jebreel is contemplating taking advantage of the discount; however, this can only be possible if the company takes up one of two loan options that have been agreed upon as substantial lines of credit for the company. The table below provides the respective terms of the loan: Bank Loan Amount (GH) Duration Rate (p.a.) Interest Payment Compensating Balance Absa 950,000 3 months 35% Arrears N/A Fidelity 950,000 3 months 27.5% Advance 10% Advice Al-Jebreel as follows:

i) Is it advisable for the company to take advantage of the discount? Give reason(s).

ii) Which of these two loan options will you recommend for the company given your response in (i) above? Justify your response