YOUR FINAL REQUIREMENTS 3 of 3

INSTRUCTION: Complete the working capital and financing portfolio by indicating the
ratios and other requirements, applying concepts in working capital and long-term
financing.

WORKING CAPITAL AND FINANCING PORTFOLIO Kòkò

Business Status:

Working Capital

Currently, Kòkò has an average age of inventory of 90 days, an average collection period of 30 days, and
an average payment period of 20 days.

It is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to
increase 15 percent from 300 units per year to 345 units per year. The average collection period is
expected to increase to 40 days from 30 days and bad debts are expected to double the current 1
percent level. The price per product is P850, the variable cost per unit is P650 and the average cost per
unit at the 300 unit level is P700. The Kòkò’s required return on investment is 20 percent.

It uses 300 units of a product per year on a continuous basis. The product has carrying costs of P1 per
unit per year and order costs of P1.50 per order.

Short-term liabilities

A bank lends Kòkò P500,000 for one year at 8 percent and requires compensating balances of 10 % of
the face value of the loan for use in its operation.

Moreover, a supplier offered a discount to Kòkò with terms of sale 5/20 net 60 which the finance and
accounting is currently contemplating to avail.

Long-term liabilities – cost of capital

A Kòkò has determined its optimal structure which is composed of the following sources and target
market value proportions.
Source of Capital Target Market Proportions
Long-term debt 60%
Common stock equity 40

Debt: The Kòkò can sell a 15-year, P1,000 par value, 8 percent bond for P1,050. A flotation cost of 2
percent of the face value would be required in addition to the premium of P50.

Common Stock: A Kòkò’s common stock is currently selling for P75 per share. The dividend expected to
be paid at the end of the coming year is P5. Its dividend payments have been growing at a constant rate
for the last five years. Five years ago, the dividend was P3.10. It is expected that to sell, a new common
stock issue must be underpriced P2 per share and the Kòkò must pay P1 per share in flotation costs.
Additionally, the Kòkò has a marginal tax rate of 40 percent.
Page 1 of 12
 Cash Management
Financial Ratio Computation
Operating Cycle
Ans.:
Cash Conversion cycle/ CCC
Ans.:
Guiding Formula
Operating Cycle= average age
of inventory+ average
collection period
CCC= average age of
inventory+ average collection
period - average payment
period

Accounts Receivable Management

Current policy Proposed policy Net Advantage or
30 days 40 days Disadvantage
Sales
Variable cost
Contribution Margin
Bad debts
Opportunity Cost
Total

Inventory Management
Financial Ratio Computation Guiding Formula
EOQ= √[(2 x Annual Demand
Economic Order Quantity/
X Ordering Cost)/ Carrying
EOQ
Ans. cost]
Average inventory in units =
Average inventory in units EOQ/2
Ans.
Number of orders per year =
Number of orders per year Annual Demand/ EOQ
Ans.
Total Ordering Cost =
Total Ordering Cost No. of order per year x Order
Ans. cost per unit
Total Carrying Cost =
Total Carrying Cost Average inventory x carrying
Ans. cost per unit

Short-term liabilities Management

Financial Ratio Computation Guiding Formula
Cost of bank loan = interest
Cost of bank loan expense/ Net proceeds
Ans.
Cost of giving up cash
Cost of giving up cash
discount=[D%/100-d%] x [360
discount
Ans. /(credit period-discount
(from the supplier)
period)]

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 Cost of Capital
Financial Ratio Computation Guiding Formula

The Kòkò’s before-tax

cost of debt is
Ans.
The Kòkò’s after-tax
cost of debt is
Ans.
The Kòkò’s cost of a
new issue of common k = (D /P ) + g
S 1 0
stock is
Ans.

The Kòkò’s cost of k = (D /P ) + g

S 1 0
retained earnings is
w/out floatation cost
Ans.
The weighted average
cost of capital up to
the point when Refer to module
retained earnings are Ans.
exhausted is

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APPENDIX A

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