Question Three The current assets and current liabilities of Cisco Ltd at the en
ID: 2721630 • Letter: Q
Question
Question Three The current assets and current liabilities of Cisco Ltd at the end of December 2014 are as follows: $000 $000 Inventory 5,700 Trade receivables 6,575 12,275 Less: Trade payables 2,137 Overdraft 4,682 6,819 Net current assets 5,456 For the year to end of December 2014, Cisco Ltd 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 December 2015, Cisco Ltd 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. Cisco Ltd also plans to achieve the following target working capital ratio values for the year to the end of December 2015: • Inventory days: 60 days • Trade receivables days: 75 days • Trade payables days: 55 days • Current ratio: 1·4 times You are required to: i. Calculate the working capital cycle (cash collection cycle) of Cisco Ltd at the end of December 2014 and discuss whether a working capital cycle should be positive or negative. ii. Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of Cisco Ltd at the end of December 2015. iii. Analyse and compare the current asset and current liability positions for December 2014 and December 2015, and discuss how the working capital financing policy of Cisco Ltd would have changed iv. Briefly discuss THREE internal methods which could be used by Cisco Ltd to manage foreign currency transaction risk arising from its continuing business activities
Explanation / Answer
Hedging, currecy cover and currency swap to cover the foreign trns risk.
CCC = DIO + DSO - DPO DIO = Average inventory/COGS per day DSO = Average AR / Revenue per day DPO = Average AP/COGS per day DIO inventory 5700 sales 40,000,000.00 cost of sales 24,000,000.00 cost of sales per day 65,753.42 DIO 0.09 DSO AR 6575 revenue per day 109,589.04 DSO 0.06 DPO Avg AP 2137 DPO 0.03 CCC 0.18 Quick ratio (CA-inventory)/CL 5.74 CR 2014= (5700+6575)/(2137+4682) 1.80 CR 15= 1.4 the CR has fallen indicates that either CA is reduced or CL has increased.Related Questions
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