HACC421/HSPAC424 FINANCIAL MANAGEMENT GROUP ASSIGNMENTS

(additional)

GROUP SIX

(a) What would you expect to be the elements of an efficient credit control policy?
Indicate the likely consequences of a policy which is (i) too tight, and (ii) not tight
enough.
(b) A company needs to hold stock of item X for sale to customers. Although the item is
relatively small value per unit, the customers’ quality control requirements and the
need to obtain competitive supply tenders at frequent intervals result in high
procurement costs.
Basic data about item X are as follows:
Annual sales demand over 52 weeks = 4 095 units
Cost of placing and processing a purchase order = $48,46
Cost of holding one unit for one year = $4,00
Normal delay between placing purchase order and receiving goods = 3 weeks
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REQUIRED:
(a) Calculate (i) the Economic Order Quantity (EOQ)
(ii) the frequency at which purchase orders would be placed;
(iii) the total annual procurement costs and the total annual holding costs
when the EOQ is used.
(b) Explain why it might be unsatisfactory to procure a fixed quantity of item X at
regular intervals if it were company policy to satisfy all sales demands from stock
if:
(i) The rate of sales demand could vary between 250 and 350 units
per four-week period or
(ii) The delivery delay on purchases might vary between 3 and 5
weeks suggesting in each case what corrective actions might be
taken.
(c) Describe briefly a fully-developed stock control system for item X (or other fast-
moving items), designed to ensure that stock holdings at all times are adequate but
not excessive.

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GROUP SEVEN

a) The following data are available for Paramount (Pvt) Ltd:

Share capital

500 000 ordinary shares of $1 each fully paid

150 000 6% preference shares of 50 cents each fully paid

Reserves:

Share premium account $100 000

Profit and loss account $240 000

Loan capital

$125 000 10% debentures

In the stock market Paramount’ shares and debentures are currently quoted as follows:

Ordinary shares $1,30 each

Preference shares $0,40 each

Debentures $167%

Paramount distributes all of its profits, which have been constant for some time, and the
current ordinary dividend is 20%.

REQUIRED: Calculate the average cost of capital. Ignore costs of issuing securities.

(b) Portfolio theory was originally developed to explain the behaviour of an investor in stock
market securities. The development into the capital asset pricing model for evaluating real
investment projects has been criticised as relying on assumptions which, whilst valid for
stock market securities, are not valid for real investments.

REQUIRED: Comment on the important distinctions between the capital asset pricing
model and pure portfolio theory and argue for or against the underlying assumptions.

(c) Discuss the factors that are likely to influence the desired level of cash balance of a
company.

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