ACCA FM Syllabus C. Working Capital Management - WC Funding Policies - Past Papers ^{4 / 5}

Pop Co is switching from using mainly long-term fixed rate finance to fund its working capital to using mainly short-term variable rate finance.

Which of the following statements about the change in Pop Co’s working capital financing policy is true?

A. Finance costs will increase
B. Re-financing risk will increase
C. Interest rate risk will decrease
D. Overcapitalisation risk will decrease

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7·50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1·00 per component per year.

The supplier has offered a discount of 3·6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2·20 per component per year due to the need for a larger storage facility.

Required:
(a) Discuss briefly the factors which influence the formulation of working capital policy. (6 marks)

The current assets and current liabilities of CSZ Co at the end of March 2014 are as follows:

For the year to end of March 2014, CSZ Co had domestic and foreign sales of $40 million, all on credit, while cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.

For the year to end of March 2015, CSZ Co has forecast that credit sales will remain at $40 million while cost of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the company’s overdraft.

CSZ Co also plans to achieve the following target working capital ratio values for the year to the end of March 2015:

Required:

(c)Analyse and compare the current asset and current liability positions for March 2014 and March 2015, and discuss how the working capital financing policy of CSZ Co would have changed.(8 marks)