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Question 3a

TGA Co, a multinational company, has annual credit sales of $5·4 million and related cost 
of sales are $2·16 million. Approximately half of all credit sales are exports to a European country, which are invoiced in euros. Financial information relating to TGA Co is as follows:

TGA Co plans to change working capital policy in order to improve its profitability. This 
policy change will not affect the current levels of credit sales, cost of sales or net working capital. As a result of the policy change, the following working capital ratio values are expected:

Required:

For the change in working capital policy, calculate the change in the operating cycle, the effect on the current ratio and the finance cost saving. Comment on your findings.

(8 marks)

Calculate the dollar income from a forward market hedge and a money market hedge, and indicate which hedge would be financially preferred by TGA Co.

(4 marks)