Bec 225 Assignment

Question 1
(a).
Expansion is a motive for capital expenditure that entails increasing the productive capacity
of the firm, usually through the building or acquisition of major fixed assets. It aims at
increasing market share through additional sales capacity. The cash flows associated with
expansion motive are the net operating cash flows. These are cash flows generated by the
project after the initial outlay has been made and the project is up and running.
Replacement is a motive for capital expenditure that entails replacing existing assets with
new or more advanced assets which provide the same function. It is a motive associated with
the objective of reducing cost of production rather than enhancing sales. The relevant cash
flows associated with replacement are the net operating cash flows and the terminal value
cash flows. Terminal value cash flow is the cash flow resulting from liquidation of the project
at the end of its forecasted life.
(b).
In terms of inventory management, Adam and Adams may implement the just in time
procurement technique this will enable the company to release its cash tied up in inventory
thereby improving its cash flow in the business.
In terms of cash flow management Adam and Adams may implement the following methods
of easing cash shortages such as postponing capital expenditure, accelerating cash inflow by
offering discounts, selling assets previously acquired in times of severe cash shortage and
negotiating a reduction in cash outflows, longer credit from supplier and further supplies
refused, loan repayment rescheduled with bank, deferral of paying corporation tax such as
interest will be charged, dividend payments reduction
Question 2
2.1
Profitability ratios
i. Gross profit margin = (Gross profit / net sales) *100
= (254 500/1 607 500) *100 =15.83%
 It means for every rand of revenue generated Hardware computer limited retains 16
cents as gross profit
ii. Net profit margin = (Net profit after tax / net sales) * 100
= (32760 / 1 607 500) *100 = 2.04 %
 It means for every rand of revenue generated Hardware computer limited retains 2
cents as gross profit
iii. Return On Investment = (Net profit after tax / Total assets) * 100
= (32760 / 947 500) *100 = 3.46%
 It means for every rand invested Hardware computer limited is gaining 3.46 cents
iv. Return On Equity = (Net profit after tax / Equity) * 100
= (32760 / 361 000) = 9.07%
 It means that every rand of Hardware computer Limited’s common stockholders'

equity generates 9.07 cents of net income.
Liquidity ratios
i. Current ratio = Current assets / Current liabilities
= 675 000 / 330 000 = 2.05 times
 It means Hardware computer limited is able to cover its current liabilities at least 2
times from its current assets.
ii. Acid test ratio = (Current assets- inventory) / current liabilities
= (675 000 – 241 500) / 330 000 = 1.31 times
 It means Hardware computer limited is able to pay its current liabilities at least 1.31
times from its most liquid assets.
Activity ratios
i. Average collection period = (Accounts receivables / credit sales) * 360
= (336 000 /1 607 500 ) * 360 = 75.25 days = 75 days
 It means Hardware computer Limited’s debtors are taking at most 75 days to pay their
credits.
ii. Inventory turnover = Cost of goods sold / Inventory
= 1 353 000 / 241 500 = 5.6 times
 It means Hardware computer Limited is able to convert their inventory into sales at
least 5.6 times per year.
iii. Total asset turn over = Net sales / total assets
= 1 607 500 / 947 500 = 1.7 times
 It means every rand invested by Hardware computer Limited’s in assets is able to

generate at least 1.7 times of its revenue
Debt ratios
i. Debt to Equity ratio = (Total Debt / Equity)*100
= (586 500 / 361 000)*100 = 162.47%
 It means that Hardware computer limited have 1.62 rands of debt for every rand in
equity.
ii. Debt to total assets = (Total Debt / total assets)*100
= (586 500 / 947 500)*100 = 61.90 %
 It means that Hardware computer limited have 62 cents of debt for every rand
invested in assets.
iii. Interest coverage = EBIT / interest charges
= 70 000 / 24 500 = 2.86 times
 It means Hardware computer limited is able to pay its interest charges at least 2.86
times from its profit before interest and tax.
2.2.
Comparatively to the industry’s debt ratios , Hardware computer limited has a weak solvency
in the sense that its assets are highly financed by debt. This means that is Hardware computer
is more susceptible to downturns in the economy and the business cycle. This is because
Hardware computer limited have higher leverage have higher amounts of debt compared to
shareholders' equity. Therefore, this will affect its financial performance in the long term
because it will spend most of its income paying the obligations and in the case the company
fails to meet its financial obligations in the future this is likely to pose a risk of liquidation.
Comparatively to industry’s activity ratios, it shows that Hardware computer Limited’s

accounts receivable are taking too long to pay their debts. This has an implication on the
company’s ability to meet its future obligations as its working capital is being tied up in
debts. This will affect the future financial performance as it will force the company into
bankruptcy and liquidity problem.
Based on the foregoing, Hardware computer limited should not expand their capacity.

Bec 225 Assignment

Uploaded by

Copyright:

Available Formats

Bec 225 Assignment

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bec 225 Assignment

Uploaded by

Copyright:

Available Formats

Question 1

i. Gross profit margin = (Gross profit / net sales) *100

= (254 500/1 607 500) *100 =15.83%

= (32760 / 1 607 500) *100 = 2.04 %

= (32760 / 947 500) *100 = 3.46%

= (32760 / 361 000) = 9.07%

 It means that every rand of Hardware computer Limited’s common stockholders'

i. Current ratio = Current assets / Current liabilities

= 675 000 / 330 000 = 2.05 times

= (675 000 – 241 500) / 330 000 = 1.31 times

i. Average collection period = (Accounts receivables / credit sales) * 360

= (336 000 /1 607 500 ) * 360 = 75.25 days = 75 days

= 1 353 000 / 241 500 = 5.6 times

= 1 607 500 / 947 500 = 1.7 times

 It means every rand invested by Hardware computer Limited’s in assets is able to

i. Debt to Equity ratio = (Total Debt / Equity)*100

= (586 500 / 361 000)*100 = 162.47%

= (586 500 / 947 500)*100 = 61.90 %

= 70 000 / 24 500 = 2.86 times

Comparatively to industry’s activity ratios, it shows that Hardware computer Limited’s

You might also like