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Q 1.5
H Co’s share price is $3.50 at the end of 20X1 and this includes a capital gain of $0.75 since the beginning of the period. A dividend of $0.25 has been declared for 20X1.
What is the shareholder return?
A 21.4%
B 23.6%
C 28.6%
D 36.4%-> I could understand the solution of the book; pls kindly explain, sir.
The share price at the start of the year must have been 3.50 – 0.75 = 2.75
The returns during the year are a dividend of 0.25 and a capital gain of 0.75 – a total of 1.00.
So the shareholder return over the year is 1.00/2.75 = 36.4%
Q 10.1
The following has been calculated for BB Co:
Receivables days: 58
Inventory turnover: 10 times per annum
Payables days: 45
Non-current asset days: 36
What is the length of the cash operating cycle?
A 23 days
B 49.5 days
C 85.5 days
D 139.5 days
-> i have understood the question & know how to calculate operating cycle. The only thing i am confused in this question is how to calculate inventory days?Inventory turnover is the number of times inventory is used over the year. If it is used 10 times, and if there are 365 days in a year, then it means there is enough inventory to last 365/10 = 36.5 days – this is the inventory days.
I do not have the BPP Revision Kit so I cannot help you.
Have you watched the free lecture here on the relevant topic??
Q 17 (b)
Discuss the relationship between working capital management and business solvency, and explain the factors that influence the optimum cash level for a business. (7 marks)-> the answer is given in the revision kit but i shall be grateful if you will be kind enough to make it more simpler. your explanation make me feel more comfortable.
For the first part of the question, a company is solvent if it is able to pay its bills in the short-term.
So the company needs to make sure that it has enough current assets to be able to pay its current liabilities.
However, things like receivables and inventories do not actually earn profits for the business (it is the non-current assets – the machines etc. – that actually earn the profits). So although they will have cash and to hold inventories and they will have to have receivables, then don’t want them to be too high.
With regard to the second part (the optimum level of cash) this is a very “text book” question (transactions motive, precautionary motive, speculative motive) and best is for you to watch the free lecture on cash management where I explain the three (rather than me type out the whole lecture here).
Q 18
(c)
How the financing of working capital can be arranged in terms of short and long term sources of finance ?
-> I am struggling with this question, please help sir.You need to watch the free lecture on working capital management (and read the free Lecture Notes that go with the lecture).
I cannot simply type out the notes and lecture again here!!
Q 23
Discuss how risks arising from granting credit to foreign customers can be managed and reduced. (10 marks)
With all due respect, you might have noticed that i struggling with theoretical part rather than the numerical parts.
With all due respect, have you listened to all of the lectures??
I do not have the BPP Revision Kit so you will have to tell me the name of the question for me to find it (I do not work for BPP 🙂 )
Does the answer in the BPP Revision Kit not make sense? If not then tell me which bit and I will try and explain in better English 🙂
RGH Co (6/09, amended)
->Risks arising from granting credit to foreign customers
Foreign debts raise the following special problems. When goods are sold abroad, the customer might ask for
credit. Exports take time to arrange, and there might be complex paperwork. Transporting the goods can be slow, if
they are sent by sea. These delays in foreign trade mean that exporters often build up large investments in
inventories and accounts receivable. These working capital investments have to be financed somehow.
The risk of bad debts can be greater with foreign trade than with domestic trade. If a foreign customer refuses to
pay a debt, the exporter must pursue the debt in the debtor’s own country, where procedures will be subject to the
laws of that country.
How risks can be managed and reduced
A company can reduce its investment in foreign accounts receivable by insisting on earlier payment for goods.
Another approach is for an exporter to arrange for a bank to give cash for a foreign debt, sooner than the exporter
would receive payment in the normal course of events. There are several ways in which this might be done.
Where the exporter asks his bank to handle the collection of payment (of a bill of exchange or a cheque) on his
behalf, the bank may be prepared to make an advance to the exporter against the collection. The amount of the
advance might be 80% to 90% of the value of the collection.
Negotiation of bills or cheques is similar to an advance against collection, but would be used where the bill or
cheque is payable outside the exporter’s country (for example in the foreign buyer’s country).
Discounting bills of exchange is where a bank buys the bill before it is due and credits the value of the bill after a
discount charge to the company’s account.
Export factoring could be considered where the exporter pays for the specialist expertise of the factor in order to
reduce bad debts and the amount of investment in foreign accounts receivable.
Documentary credits provide a method of payment in international trade, which gives the exporter a secure risk free method of obtaining payment. The buyer (a foreign buyer, or a UK importer) and the seller (a UK exporter or a
foreign supplier) first of all agree a contract for the sale of the goods, which provides for payment through a
104 Answers
documentary credit. The buyer then requests a bank in his country to issue a letter of credit in favour of the
exporter. The issuing bank, by issuing its letter of credit, guarantees payment to the beneficiary.
Counter trade is a means of financing trade in which goods are exchanged for other goods.
Export credit insurance is insurance against the risk of non-payment by foreign customers for export debts. If a
credit customer defaults on payment, the task of pursuing the case through the courts will be lengthy, and it might
be a long time before payment is eventually obtained.
Premiums for export credit insurance are however very high and the benefits are sometimes not fully appreciated.-> I am not taking any Formal class of F9. It is only because of the opentuion lecture that i am comfortable in solving the question of the BPP revision kit. I have passed F5 also in my last attempt only with the help of your lecture and your support through ask the tutor forum. I hope you remember me. I am hopeful to pass F9 as well because i am very comfortable with the way you teach. Even in other subject which you teach i wont take any formal class because i am confident to pass the paper with your lecture and support through ask the tutor forum.
You didn’t need to type out the whole question – just the name of it would have let me find it (since it is a past exam question it is on the ACCA website) 🙂
I am guessing that you are happy with some parts of the answer.
For example, getting foreign customers to pay early will certainly reduce the risk of bad debts. Also using a factor who specialises is foreign debts will make it more certain that they will get the money.Discounting a bill of exchange is really the same sort of thing as invoice discounting – you sell the invoice to the bank and then they have the responsibility of collecting the money.
Counter-trading is where instead of requiring the customer to pay cash, you agree for them to pay you in goods.
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