QUESTION THREE SKM Company is a local successful manufacturing company involved in producing assorted plastic containers,...

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QUESTION THREE SKM Company is a local successful manufacturing company involved in producing assorted plastic containers, which are later used by other companies for packaging. The annual sales are K560 millions of which 30% represents cash sales. Its current assets comprise accounts receivable and inventory while the current liabilities comprises accounts payable and an overdraft with interest rate of 15% per year on average. The company credit policy is to give customers three months credit; however, its trade suppliers only allow two months credit on average. Other relevant Information Annual cost of sales: K240 million. Cost of Long-term finance of SKM Company: 21% Current ratio: 1.58 Operating Cycle: 4 months Required: (0) (ii) Discuss the two (2) main objectives of working capital management and the conflicts that might arise between them. [6 Marks] From the above details, calculate the following: 1. The size of the overdraft: [4 Marks] [4 Marks] [4 Marks] 2. The net working capital; and 3. The total cost of financing SKM Company's current assets. SKM Company owes one of its major supplier K60 million. The company has been offered credit terms cash discount 3% if payment is made within 15 days of the invoice (paying before day 15 would be irrelevant), and payments must be made within 60 days of the Page 3 of 4 invoice. SKM has the choice of accepting the discount or to invest 97 ngwee per Kl for the additional days and eventually pay the supplier K1 per KI. SKM can invest cash at an annual return of 29%. Required: Evaluate whether SKM should accept the discount offered from the supplier. [7 Marks] QUESTION THREE SKM Company is a local successful manufacturing company involved in producing assorted plastic containers, which are later used by other companies for packaging. The annual sales are K560 millions of which 30% represents cash sales. Its current assets comprise accounts receivable and inventory while the current liabilities comprises accounts payable and an overdraft with interest rate of 15% per year on average. The company credit policy is to give customers three months credit; however, its trade suppliers only allow two months credit on average. Other relevant Information Annual cost of sales: K240 million. Cost of Long-term finance of SKM Company: 21% Current ratio: 1.58 Operating Cycle: 4 months Required: (0) (ii) Discuss the two (2) main objectives of working capital management and the conflicts that might arise between them. [6 Marks] From the above details, calculate the following: 1. The size of the overdraft: [4 Marks] [4 Marks] [4 Marks] 2. The net working capital; and 3. The total cost of financing SKM Company's current assets. SKM Company owes one of its major supplier K60 million. The company has been offered credit terms cash discount 3% if payment is made within 15 days of the invoice (paying before day 15 would be irrelevant), and payments must be made within 60 days of the Page 3 of 4 invoice. SKM has the choice of accepting the discount or to invest 97 ngwee per Kl for the additional days and eventually pay the supplier K1 per KI. SKM can invest cash at an annual return of 29%. Required: Evaluate whether SKM should accept the discount offered from the supplier. [7 Marks]

Answer rating: 100% (QA)

Answer i The two main objectives of working capital management are to ensure the efficient use of resources and to maintain financial stability The ef... View the full answer