QUESTION 1

a) Cash Budget for East View Estate:

RECEIPTS January (K) February (K) March (K) April (K)

Cash fees 18,000 27,000 45,000 54,000
Credit fees 36,000 36,000 54,000 90,000
Sale of assets 20,000
TOTAL 54,000 63,000 99,000 164,000
PAYMETS
Salaries 26,250 26,250 26,250 26,250
Bonus 6,300 12,600
Expenses 9,000 13,500 22,500 27,000
Fixed overhead 4,300 4,300 4,300 4,300
Taxation 95,800
Interest 3,000
Total Payments 39,550 44,050 62,350 165,950
Net cash flow 14,450 18,950 36,650 (1,950)
Opening (40,000) (25,550) (6,600) (30,050)

Balance
Closing (25,550) (6,600) (30,050) (28,100)

Balance

The workings;
 Month December January February March April
Unit sold 10 10 15 25 30
Sales value 1800 1800 2700 4500 5400

($000
Cash fees at 18 000 18 000 27 000 45 000 54 000

1% (k)
Credit fees at 36 000 36 000 54 000 90 000 108 000

2% (k)
Variable cost at 9 000 13 500 22 500 27 000

0.5% (k)

Monthly salary cost = (35,000 × 9)/12 = K26, 250

Bonus for March = (25 - 20) × 140 × 9 = K6, 300 Bonus for April = (30 - 20) × 140 × 9 =

K12, 600.

(b) From the property sales of each month, it is clear that East view estates experiences

drifting trends in its commerce. An indication show that sales of property are low level during

winter and gradually rise in spring. A proportion of any cash surplus is therefore likely to be

short-term in nature, since some cash will be required when sales are at a low level. Despite a

positive forecast on cash flow in January, the month with lowest property sales levels,

indicating from negative opening cash shows a possibility of month prior to December had

lower sales.

There must be no risk of capital in short-term cash surplus invested. To this restraint signifies

that appropriate investments will hold things not limited to bank deposits, certificates of

deposits, public authority bonds, and treasury bills. To decide between such instruments East

View estates will put into consideration time for surplus existing for, the size of surplus, the

yield offered, the risk associated with each instrument, and any penalties for early
withdrawal. Thus a small institution like East view estates having annual turnovers of little

excess of k1m per year is likely to find bank deposits the most expedient method for

investing short-term cash surpluses.

It is important that the company considers methods for investing in longer term surplus. East

view estate being a new company may consider investing surplus funds to ensure its business

expansion, but it may also likely to find new fund sources as regard to bank debt and retained

earnings. Thus the need to guard against capital loss for cash investments directed toward

fund expansion in future. Because retail market properties are very competitive, there is need

to choose with consideration investment opportunities.

(c) It is realise that East view estates had cash deficit, of highest being opening balance at k40

000 in its two of the four months. The cash deficit thus is likely to finance by overdrafts

despite the loan of the company, which stands at K200 000. However the one only advantage

of overdraft is that it provides for flexible financial source, as it may be readily available

when need but must not be exceeded. Positively East view estates will only consider interest

paying of the overdraft, of which varies at variable rates, and the interest rate is then likely to

be lower considering to long-term debt if interest is paid in full.

Aside this, one merit of overdraft is that it is repayable on demand, with time, interest may

increase, due to company risk exposure to increase of interest rates, thus banks will insist on

form of securities like floating charge of asserts or a guarantee from a company's owners, so

as to minimise associated risk of lending.

(d) The Baumol model generates from the EOQ model, it may be applied in incidences where

constant demand for cash exists or cash is disbursed. The Baumol model considers the annual

demand for cash (D), the cost of each cash transfer (C), and the interest difference between
the rate paid on short-term investments (r1) and the rate paid on a current account (r2), in

order to calculate the optimum amount of funds to transfer (F). The model is as follows.

F = ((2 × D × C)/(r1 - r2))0·5

By optimising the amount of funds to transfer, the Baumol model reduces cost cash holding

opportunity for current accounts, thus minimizing cost of cash management.

Despite so, the Baumol model is unlikely to be of assistance to East view estates due to the

assumptions underlying its formulation. Assumptions for constant annual demand can be

made, but East view estates cash budgets recommend otherwise, a varying demand for cash.

This model thus has an assumption that every interest rate and each cash transfer cost is

constant and known with certainty. In real life, transaction costs and interest rates are not

constant values and change with time. A cash management model which then may house a

changeable demand for cash, such as the Miller-Orr model thus may be more suited to the

needs of the company.

e) Drawbacks of the Baumol model

 Assumes a constant disbursement rate; in reality cash outflows occur at different

times, different due dates etc.

 Assumes no cash receipts during the projected period, obviously cash is coming in

and out on a frequent basis

 No safety stock of cash is allowed for, reason being it only takes a short amount of

time to sell marketable securities

QUESTION 2

A. Due to future predictions, organizations need to have proper financial planning and

forecasting methods. These mentions are use as they assist an organization keep track

of the financial planning system and its operations. Some of the financial planning

and forecasting methods include:

The quantitative forecasting methods that take into accountability a direct approach

towards generating forecast determined on concrete information. This system is more

effective when dealing with future sales and taxes. It must however be understood that

this model may be limited to human expertness (Long, 2020).

Another method is what is known as the strategy line method, which initially the

simplest to put across as it requires basic mathematic and need logical estimates for its

application of any foreseen business. This is commonly applied when commerce is

estimating growth in revenue in the future.

Market research too can be used as a very useful tool for financial planning and

forecasting. This is efficient when a business is starting up or when tests its market

package for new items. Market research bring up a lot of information vital for the

decision making process and is hugely a reliable method (Long, 2020).

B. To find the additional funds needed by Bobli Plc we use the formula below;

Additional Funds Needed = Increase in Assets − Increase in Liabilities – Increase in Retained

Earnings
Increase ∈Assets=2015 assets × sales growth rate

¿ K 30 , 000,000× 15 %

¿ K 4,500,000

Increase ∈Liabilities=2015liabilities × sales growth rate

¿ K 17,000,000× 15 %

¿ K 2,550,000

Incr ease∈Retained Earnings=2016 sales × profit margin× retention rate

¿ 2015 sales ×(1+ sales growth rate)× profit margin× retention rate

¿ K 40,000,000 ×(1+ 15 %)× 5 % ×30 %

= K690, 000

Additi onal Funds needed =K 4 , 500,000 – K 2,550,000−K 690,000

¿K1, 260,000

Therefore Bobli Plc have to mobilise an amount of K1, 260,000 to finance the increased

level of sales.

C. From time to time, organization usually restructure and this can be alluded to various

factors such as climate change, new trends in the market or ways of doing business,

political factors to mention but a few. Below then are some of the reasons

organizations restructure.

Changes in strategy: it is the climatic condition of the business that deters changes in

an organization structure. So then organization then will restructure their strategies so

as to accommodate market shifts. This can be seen in companies then creating new

divisions or increasing or reducing staff (Springs, 2017).

 Aside this, another factor is changes in structure types of organizations. With time

organization rearrange their strategies and structure to follow suit recent applied

models of business. A service organization small in sales may change to production

once it realizes growth in its operations and employees. Management may be shifted

from local management style to regional to suit fit the new ways of conducting

business and , divisions or departments may be merges (Springs, 2017)

Other the hand, organizations restructures to accommodate corporate expansion. This

means creation of new department, room for more financing, bring in new products

and employees, thus the strategy toward and organization approach and operation will

have to change and restructure.

Yes indeed the coming of COVID-19 would have an effect of how business will be

conducted going forward. Other companies will reduce whereas other will increase on

production and services. Strategic decision towards employees and department

operation will have to be restructured so as to adhere to health policies, a case which

mean mainly having minimum employees or number of people per given time

Other organizations downsize just so as to remain function during revenue loss, such

as this COVID-19 pandemic. Organizations may come up with skeleton model of

management of essential personnel, materials and operations.

QUESTION 3

A. An analysis of the financial performance for the Lafarge Cement Plc using the

financial ratios in are summarized as below;

SOLVENCY RATIOS

Current Ratio = 1.99 (2017) and 1.86 (2016)

Quick Ratio = 1.91 (2017) and 1.02 (2016)

 PROFITABILITY RATIOS

Gross profit ratio = 47.66% (2017) and 50.84% (2016)

Net profit ratio = 1.87% (2017) and 8.70% (2016)

EFFICIENCY RATIOS

Asset turnover ratio = 0.51 (2017) and 0.45 (2016)

Stock turnover ratio = 1.94 (2017) and 1.33 (2016)

Debtors turnover ratio = 32 days (2017) and 35 days (2016)

SHAREHOLDERS RATIO

Earnings per share = 0.09 (2017) and 0.39 (2016)

CAPITAL STRUCTURE RATIOS

Net worth to Total Asset ratio = 0.76 (2017) and 0.66 (2016)

Interest coverage ratio = 26.1 (2017) and 255.3 (2016)

B. A REPORT ON THE PERFORMANCE OF LARFAGE ZAMBIA FOR THE

YEAR 2017.

This report to the Managing Director will highlight the performance of Larfage

Zambia Plc for the year 2017 using the summarised financial ratios outlined above in

part (a). The workings of the ratios are found in the appendix to this report.

SOLVENCY RATIOS
These are the ratios which are mostly used by the prospective lenders to the business

to determine if it can meet its debt obligations. Solvency ratios are also used to show

weather an enterprise cash flow is sufficient to cover its short-term as well as the

long-term liabilities.

The current ratio for Larfage Zambia Plc in 2017 was 1.99 which was a slight increase

from 2016 with the ratio of 1.86.

In principle the Current ratio of more than 1 preferred as the current assets can cover

the current liabilities in that year. On the other, the quick ratio is more strict measure

of solvency or liquidity. Quick Ratio which is greater than 1 means that liquidating all

current assets except inventory will generate enough cash to cover all debt obligation.

The Quick Ratio for 2017 was 1.91 which is greater than 1 and also slightly higher

than of 2016. Liquidity in 2017 increased and therefore, safe to take on extra

liabilities.

PROFITABILITY RATIOS

These are ratios which are employed to determine to the Larfage Zambia Plc its

ability to generate income relative to its sales, operating costs and assets over time. A

higher profitability ratio relative to the same ratio in the past shows that the

cooperation is operating well.

The Gross profit margin for the year 2017 was 47.66% which was lower that recorded

in 2016 at 50.84%. On the other hand the Net profit margin in 2017 (1.87%) were also

low compared to the operating year of 2016 (8.70%). Therefore, in the year 2017

Larfage Zambia Plc generated less income as compared to the year 2016.

EFFICIENCY RATIOS
These are the ratio which helps a cooperation to assess how well it is using its assets

and managing its liabilities with the greatest of efficiency in the short term. To see

how well Larfage Zambia utilised its assets and manage its liabilities in the short term

we will use three ratios.

Asset turnover ratio which measures the cooperation’s ability to efficiently generate

sales from its assets. A higher asset turnover indicate that management is utilising its

assets efficiently. In the year 2017 the asset turnover ratio was 0.51 compared 0.45 in

2016, which means that it was more efficient in 2017.

Stock turnover ratio which measures how well the firm manages its inventory. The

ratio for 2017 is 1.94 compared to that of 2016 which was 1.33. The ratio of 1.94

means that for every K1 of inventory the firm holds it will generate K1.94 in sales,

therefore, in 2017 the firm performed better.

Debtor turnover ratio measures the number of days before a firm’s sales made today

will be collected. The collection period for 2017 was 32 days compared to 35 days in

2016. Therefore, the collection period in 2017 improved by 3 days from 2016.

SHAREHOLDERS RATIO

These ratios are used to determine the level of return of the shareholders of Larfage

Zambia Plc. The ratio used for this report is the Earnings per share ratio which is the

portion of profit assigned to each outstanding share of equity. The Earnings per share

ratio in 2017 reduced from 0.39 in 2016 to 0.09. Therefore, shareholders received less

returns in 2017.

CAPITAL STRUCTURE RATIO

 The ratios used for this part of report are net worth to asset ratio and the interest

coverage ratio. The net worth to asset ratio is used to show the proportion of the

Larfage Zambia Plc is tied to assets. The ratio for 2017 was 0.76 compared to 0.66 in

2016. Therefore, Larfage Zambia Plc acquired more assets in 2017 from 2016.

On the other hand, the Interest coverage ratio measures the number of times that profit

before interest and tax can cover the interest obligations. The EBIT for 2017 covers

26.1 times the interest as compared to 255.3 times in 2016. Therefore, the increase in

assets in the year 2017 can be explained by such a huge reduction in the interest

payment increase as the company acquired funds to purchase assets.

APPENDIX
RATIO FORMULAR CALCULATION CALCULATION
2017 (K’000) 2016 (K’000)

Solvency Current ratio (CR) = Current asset = 413,956 = 459,990

ratio Current liabilities 208,125 247,001
= 1.99 = 1.86

Solvency Quick ratio (QR) = Current asset-Inventory = 413,956- 164,345 = 496,990- 216,296
ratio Current liabilities 208,125 274,001
= 1.91 = 1.02

Profitabil Gross profit ratio= Gross profit x 100 = 480,542 x 100 = 452,342 x 100
ity ratio Sales 1,008,232 889,673
= 47.66% = 50.84%

Profitabil Net profit ratio= Net profit x 100 = 18,938 x 100 = 77,395 x 100
ity ratio Sales 1,008,232 889,673
 = 1.87% = 8.70%
Efficienc
y ratio Stock turnover ratio= Cost of goods sold = 527,690 = 437,331
Average stock 164,345+216,296/2 216,296+225,800
= 1.94 = 1.33

Efficienc Debtors turnover ratio = Sales

y ratio Average debtors

= Av debts x 365 =87,752+90,057 /2 x =90,057+81,166x

Sales 365 365
1,008,232 889,673
= 32 days = 35 days
Efficienc = 1,008,232 = 889,673
y ratio Asset Turnover ratio = sales 1,977,385 1,972,770
Total Assets = 0.51 = 0.45

Capital
Interest coverage ratio=
structure
= 66,714 = 145,023
Earnings before interest + tax
ratio
Interest 2,555 568
= 26.1 = 255.3
Capital Net worth to Total Assets = Net worth = 1,511,169 = 1,302,663
structure Total assets 1,977,385 1,972,770
ratio = 0.76 = 0.66

Sharehol Earnings/ share=

ders ratio Net profits available to equity shareholders = 18,938,000 0.39 was the Earnings
Number of equity share 200,039,904 per share as provided
= 0.09 in the income
statement.