YPC INTERNATIONAL COLLEGE

BSc (Hons) Accounting and Finance

Group Assignment

Corporate Finance
6002AFYPC
Sir Liew Wenn Hing

NAME YPC ID LJMU ID

1 AZIZUL BIN ADNAN BAF2009057 937282
2 MOHAMAD ZAINI BIN MOHD ZAIN BAF2009012 935879
3 MUHAMMAD ADAM AIMAN BIN MAHFUD BAF2009046 937284
 Group assignment

6002AFYPC – Corporate Finance

Name: ......................................................................... Lecturer: …………………...

Intake: ......................................................................... Date: ..................................

For comparison purpose, choose two PLCs in similar industry and refer to their Financial
Statements for year 2021. Briefly introduce the PLCs you have chosen.

Answer the following, using the Financial Statements:

(a) Calculate the operating cash cycle, and comment in it, especially in the significant
component. Suggest what steps may be taken to improve it.
(8 marks)
(b) Discuss the company implemented either relaxed, moderate or aggressive working
capital policy. Show the supporting calculations and explanations.
(9 marks)

(c) In looking to reduce the working capital funding requirement for accounts receivable, the
financial controller of the firm is considering 2% cash discount to reduce the current
average receivables collection periods (in (a) by one quarter. Evaluate the proposal of
cash discount by comparing the existing receivable collection costs and offering the
discount. (Use year 2020 fixed deposit interest as the average cost of capital).
(8 marks)
 6002AFYPC Corporate Finance

1 Introduction

1.1 Hup Seng Industries Berhad

Hup Seng Industries Berhad is a Malaysia-based investment holding company as well as one
of the leading biscuits manufacturers in Malaysia. It was incorporated on 4 October, 1991 and
was later listed on the Main Board of Bursa Malaysia Securities Berhad on 2 November, 2000
(Hup Seng Industries Berhad, n.d). It has three wholly owned subsidiaries: Hup Seng
Perusahaan Makanan (M) Sdn Bhd; In-Comix Food Industries Sdn Bhd; and Hup Seng Hoon
Yong Brothers Sdn Bhd. Hup Seng’s biscuits has been brand guaranteed for more than 60
years. The products are distributed to cities and towns in the country and became a household
name as well as has won the love of all ethnic groups (Bursa Malaysia, 2022).

The Company's segment includes biscuit manufacturing, beverage manufacturing and trading
division. The biscuit manufacturing segment is the business of manufacture and sales of
biscuits while the beverage manufacturing segment is the business of manufacture and
wholesale of coffee mix and all kinds of foodstuff. Lastly, the trading division segment is the
business of sales and distribution of biscuits, confectionery and other foodstuffs (Reuters,
n.d.b).

1.2 Apollo Food Holdings Berhad

Apollo Food Holdings Berhad is an investment holding company that has established itself as
one of the leading manufacturers of chocolate confectionery products and layer cakes in
Malaysia. Currently, it has two wholly owned subsidiaries: Apollo Food Industries (M) Sdn
Bhd, that engaged in manufacturing and trading in compound chocolates, chocolate
confectionery products and layer cakes in overseas markets; and Hap Huat Food Industries
Sdn Bhd, that engaged in distributing and marketing of compound chocolates, chocolate
confectionery products and layer cakes in local market (Bursa Malaysia, 2021).

The Company’s products are mainly divided into two main categories: Chocolate Wafer
products; and Layer cake, Chocolate Layer Cake and Swiss roll products. The Company’s
segments include manufacturing, marketing and distribution, and investment holding. Its

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 6002AFYPC Corporate Finance

products are distributed in Malaysia and other overseas market which are the Middle East,
Mauritius, Maldives and most of the countries in South East Asia (Reuters, n.d.a).

Financial Statement for the year ended 30 April 2021

Apollo Food Holdings Berhad Notes 2021 2020 Change (%)

Sales (Revenues) 19 190,387,376 174,934,531 8.83
Cost of Sales 145,774,835 129,041,516 12.97
Inventories 11
Raw Materials 7,633,770 6,214,630 22.84
WIP 935,858 955,486 (2.05)
Finished Goods 3,295,397 3,644,593 (9.58)
Trade Receivables 12 25,172,287 23,013,836 9.38
Trade Payables 18 2,974,931 3,731,132 (20.27)

Cash Conversion Cycle (CCC) formula:

CCC = SCP + DCP − CCP

SCP Stock Conversion Period

DCP Debtor Conversion Period

CCP Credit Conversion Period

 
Raw Material
Raw Material Stock Period = × 365 days
COS
 
Less Trade Payables
Creditor Period = × 365 days
COS
 
Add WIP
WIP Period = × 365 days
COS
 
Add Finished Goods
Finished Goods Period = × 365 days
COS
 
Add Debtor Period = Trade Receivables × 365 days

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 6002AFYPC Corporate Finance

Sales
 

Apollo Calculation 2021

Raw Material Period 7,633,770

×365 days
145,774,835 19 days

Creditor Period 2,974,931

×365 days
145,774,835 7 days

WIP Period 935,858

×365 days
145,774,835 2 days

Finished Goods Period 3,295,397

×365 days
145,774,835 8 days

Debtor Period 25,172,287

×365 days
190,387,376 48 days

CCC 2021 = 19 – 7 + 2 + 8 + 48 = 70 days

Apollo Calculation 2020

Raw Material Period 6,214,630

×365 days
129,041,516 18 days

Creditor Period 3,731,132

×365 days
129,041,516 11 days

WIP Period 955,486

×365 days
129,041,516 3 days

Finished Goods Period 3,644,593

×365 days
129,041,516 10 days

Debtor Period 23,013,836

×365 days
174,934,531 48 days

CCC 2020 = 18 – 11 + 3 + 10 + 48 = 68 days

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 6002AFYPC Corporate Finance

Financial Statement for the year ended 31 December 2021

Hup Seng Industries Berhad Notes 2021 2020 Change (%)

Sales (Revenues) 4 295,832,845 327,325,449 (9.62)
Cost of Sales 5 214,159,313 222,748,978 (3.86)
Inventories 15
Raw Materials 13,342,408 14,043,331 (4.99)
WIP 279,608 304,222 (8.09)
Finished Goods 5,538,306 7,347,060 (24.62)
Trade Receivables 16 30,790,346 31,740,876 (2.99)
Trade Payables 18 33,210,572 30,831,481 7.72

Cash Conversion Cycle (CCC) formula:

CCC = SCP + DCP − CCP

SCP Stock Conversion Period

DCP Debtor Conversion Period

CCP Credit Conversion Period

 
Raw Material
Raw Material Stock Period = × 365 days
COS
 
Less Trade Payables
Creditor Period = × 365 days
COS
 
Add WIP
WIP Period = × 365 days
COS
 
Add Finished Goods
Finished Goods Period = × 365 days
COS
 
Add Trade Receivables
Debtor Period = × 365 days
Sales
 

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 6002AFYPC Corporate Finance

Hup Seng Calculation 2021

Raw Material Period 13,342,408

×365 days
214,159,313 23 days

Creditor Period 33,210,572

×365 days
214,159,313 57 days

WIP Period 279,608

×365 days
214,159,313 0 day

Finished Goods Period 5,538,306

×365 days
214,159,313 9 days

Debtor Period 30,790,346

×365 days
295,832,845 38 days

CCC 2021 = 23 – 57 + 0 + 9 + 38 = 13 days

Hup Seng Calculation 2020

Raw Material Period 14,043,331

×365 days
222,748,978 23 days

Creditor Period 30,831,481

×365 days
222,748,978 51 days

WIP Period 304,222

×365 days
222,748,978 0 day

Finished Goods Period 7,347,060

×365 days
222,748,978 12 days

Debtor Period 31,740,876

×365 days
327,325,449 35 days

CCC 2020 = 23 – 51 + 0 + 12 + 35 = 19 days

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 6002AFYPC Corporate Finance

a) Summary comparison cash conversion cycle (CCC) between Apollo and Hup Seng.
Companies 2021 2020

Apollo Food Holdings Bhd 70 days 68 days

Hup Seng Industries Bhd 13 days 19 days

Comment

A longer CCC from 68 days to 70 days means the Apollo’s company takes a longer time
to generate cash.

A shorter CCC from 19 days to 13 days means the HSIB’s company is healthier as it
can then be used to make additional purchases or pay down outstanding debt.

The goal is to minimize the length of the cash conversion cycle, which minimizes
negotiated liabilities. This goal can be realized with steps that can be taken to improve
it:

i. Turn over inventory as quickly as possible without stock-outs that result in

lost sales.
ii. Collect account receivable as quickly as possible without losing sales
from high-pressure collection techniques.
iii. Manage mail, processing, and clearing time to reduce them when
collecting from customers and to increase them when paying suppliers.
iv. Pay accounts payable as slowly as possible without damaging the firm’s
credit rating or its relationships with suppliers.

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 6002AFYPC Corporate Finance

b) Working Capital
Apollo Food Holdings Berhad

Despite sales revenue drop 7.36% in FY2020. However, Apollo's management

estimates an increase in sales of around 6% after the economy gradually recovers from
the covid-19 pandemic. Therefore sales projection for FY2021 will be:

Sales projection 2021=RM 174,934,531× 106 %=RM 185,430,603

COS for FY2020 drop 9.17% to RM 129,041,516 from RM 142,067,922. The total cost
of inventory for raw materials, WIP and finished goods are RM 10,814,709. The input
costs of COS are 6.18% of sales and there is turnover of RM 185,430,603.

RM 10,814,709
Input cos= ×100=6.18 %
RM 174,934,531

Calculation RM
Stock 6.18% × RM185,430,603 × 31/ 365 937,282
(+) Debtor RM185,430,603 × 48/ 365 24,385,394
(−) Creditor 6.18% × RM185,430,603 × 11/ 365 (345,358)
Total Working Capital Requirement for 2021 24,977,318

Sales revenue increase 8.83% in FY2021, Apollo's management estimates an increase

in sales of around 9% after the economy is expected to grow in 2022. Therefore, sales
projection for FY2022 will be:

Sales projection 2022=RM 190,387,376 ×109 %=RM 207,522,240

COS for FY2020 drop 12.97% to RM 145,774,835 from RM 129,041,516. The total cost
of inventory for raw materials, WIP and finished goods are RM 11,865,025. The input
costs of COS are 6.23% of sales and there is turnover of RM 207,522,240.

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 6002AFYPC Corporate Finance

RM 11,865,025
Input cos= × 100=6.23 %
RM 190,387,376

Calculation RM
Stock 6.23% × RM207,522,240 × 29/ 365 1,027,207
(+) Debtor RM207,522,240 × 48/ 365 27,290,596
(−) Creditor 6.23% × RM207,522,240 × 7/ 365 (247,946)
Total Working Capital Requirement for 2022 28,069,857

Hup Seng Industries Berhad (HSIB)

Sales revenue rose by 5.75% in FY2020, HSIB's management estimates an increase in

sales of around 6% after the economy gradually recovers. Therefore sales projection for
FY2021 will be:

Sales projection 2021=RM 327,325,449 ×106 %=RM 346,964,976

COS for FY2020 rose by 9.06% to RM 222,748,978 from RM 204,250,655. The total
cost of inventory for raw materials, WIP and finished goods are RM 21,694,613. The
input costs of COS are 6.63% of sales and there is turnover of RM 346,964,976.

RM 21,694,613
Input cos= × 100=6.63 %
RM 327,325,449

Calculation RM
Stock 6.63% × RM346,964,976 × 35/ 365 2,205,842
(+) Debtor RM346,964,976 × 35/ 365 33,270,614
(−) Creditor 6.63% × RM346,964,976 × 51/ 365 (3,214,227)
Total Working Capital Requirement for 2021 32,262,229

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 6002AFYPC Corporate Finance

Sales revenue decline by 9.62% in FY2021. Nevertheless, HSIB's management

estimates an increase in sales of around 9% after the economy is expected to grow in
2022. Therefore sales projection for FY2022 will be:

Sales projection 2022=RM 295,832,845 ×109 %=RM 322,457,801

COS for FY2020 drop to 3.86% to RM 214,159,313 from RM 222,748,978. The total
cost of inventory for raw materials, WIP and finished goods are RM 19,160,322. The
input costs of COS are 6.48% of sales and there is turnover of RM 322,457,801.

RM 19,160,322
Input cos= × 100=6.48 %
RM 295,832,845

Calculation RM
Stock 6.48% × RM322,457,801 × 32/ 365 1,831,194
(+) Debtor RM322,457,801 × 38/ 365 33,570,949
(−) Creditor 6.48% × RM322,457,801 × 57/ 365 (3,263,096)
Total Working Capital Requirement for 2022 32,139,047

Summary comparison Working Capital Requirement between Apollo and Hup Seng.

Companies 2022 2021 Policy

(RM) (RM)
Apollo Food Holdings Bhd 28,069,857 24,977,318 Moderated

Hup Seng Industries Bhd 32,139,047 32,262,229 Moderated

Apollo Food Holdings Berhad implement the moderate working capital dynamic as no
significance changes with the period from the previous year with the current year,
similar to Hup Seng Industries Berhad. The numbers of days for debtor conversion
period remain the same while the number of days for both stock conversion period and
creditor conversion period decreases by 2 days and 4 days respectively.

Hup Seng Industries Berhad implement the moderate working capital dynamic as no
significance changes with the period from the previous year with the current year. The
numbers of days for stock conversion period decreases slightly by 3 days while the
number of days for both debtor conversion period and creditor conversion period
increases by 3 days and 6 days respectively.

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 6002AFYPC Corporate Finance

c) Account Receivable Management

Apollo Food Holdings Berhad

2021
Account Receivable (AR) RM 25,172,287
Revenue RM 190,387,376
Average Collection Period 48 days
Reduction of Current Average Collection Period AFTER 0.25
Discount 2%
WACC 2.85%

STEP 1: Calculate overall average AR = 48 days

STEP 2: Calculate AR requirement = 48/ 365 × RM 190,387,376

= RM 25,037,244

STEP 3: Calculate Cost of Financing AR = 0.0285 × RM 25,037,244

= RM 713,561

PROPOSAL EFFECT OF DISCOUNT 2% FOR EARLY SETTLEMENT OF DEBT

Proposed collection period (AFTER GIVEN 2%) = (100 – 0.25) × 48 days

= 36 days

Calculate AR requirement = 36/ 365 × RM 190,387,376

= RM 18,777,933

Calculate Cost of Financing AR = 0.0285 × RM 18,777,933

= RM 535,171

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 6002AFYPC Corporate Finance

Credit sales = 0.5 × RM 190,387,376

= RM 95,193,688

Discount = RM 95,193,688 × 2%

= RM 1,903,874

SUMMARY Existing Discount

COST OF FINANCING RM 713,561 RM 535,171
DISCOUNT COST RM 1,903,874
TOTAL COST RM 713,561 RM 2,439,045

Based on comparison above, Apollo should choose to maintain the existing

proposal.

Hup Seng Industries Berhad (HSIB)

2021
Account Receivable (AR) RM 30,790,346
Revenue RM 295,832,845
Average Collection Period 37 days
Reduction of Current Average Collection Period AFTER 0.25
Discount 2%
WACC 2.85%

STEP 1: Calculate overall average AR = 37 days

STEP 2: Calculate AR requirement = 37/ 365 × RM 295,832,845

= RM 29,988,535

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 6002AFYPC Corporate Finance

STEP 3: Calculate Cost of Financing AR = 0.0285 × RM 30,790,346

= RM 877,525

PROPOSAL EFFECT OF DISCOUNT 2% FOR EARLY SETTLEMENT OF DEBT

Proposed collection period (AFTER GIVEN 2%) = (100 – 0.25) × 37 days

= 28 days

Calculate AR requirement = 28/ 365 × RM 295,832,845

= RM 22,694,026

Calculate Cost of Financing AR = 0.0285 × RM 22,694,026

= RM 646,780

Credit sales = 0.5 × RM 295,832,845

= RM 147,916,423

Discount = RM 147,916,423 × 2%

= RM 2,958,328

SUMMARY Existing Discount

COST OF FINANCING RM 877,525 RM 646,780
DISCOUNT COST RM 2,958,328

TOTAL COST RM 877,525 RM 3,605,108

Based on comparison above, HSIB should choose to maintain the existing proposal.

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 6002AFYPC Corporate Finance

References
Bursa Malaysia, (2021). Apollo Food Holdings Berhad Annual Report 2021. [Online]
Available at: https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?
id=210633&name=EA_DS_ATTACHMENTS
[Accessed 30 November 2022].

Bursa Malaysia, (2022). Hup Seng Industries Berhad Annual Report 2021. [Online]
Available at: https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?
id=215383&name=EA_DS_ATTACHMENTS
[Accessed 30 November 2022].

Hup Seng Industries Berhad, n.d. About Us. [Online]

Available at: https://www.hsib.com.my/about-us
[Accessed 3 December 2022].

Reuters, n.d.a. Apollo Food Holdings Bhd. [Online]

Available at: https://www.reuters.com/markets/companies/AFHB.KL
[Accessed 3 December 2022].

Reuters, n.d.b. Hup Seng Industries Bhd. [Online]

Available at: https://www.reuters.com/markets/companies/HSIB.KL/#:~:text=Hup
%20Seng%20Industries%20Berhad%20(HSIB,manufacture%20and%20sales%20of
%20biscuits.
[Accessed 3 December 2022].

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