Working Capital Management

**Section A** CryptoFlow is a digital asset exchange that needs to manage its fiat currency reserves. It requires $2,000,000 in fiat cash steadily over the next year. The cost of converting digital assets to fiat (transaction cost) is $50 per conversion. The opportunity cost of holding fiat cash is 5% per annum. Using the Baumol model, what is the optimum amount of fiat cash CryptoFlow should transfer in each transaction? (Round to the nearest whole number).

**Section A** CloudSync, a rapidly growing B2B Software-as-a-Service (SaaS) startup, is experiencing cash flow constraints due to long customer payment terms. The finance director is considering either factoring or invoice discounting. Which of the following is a key difference between factoring and invoice discounting?

**Section B - Case 1: VerdiGrow** *Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics: - Receivables days: 65 days - Payables days: 40 days - Inventory days: 55 days VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year. **Question:** What is VerdiGrow's current cash operating cycle?

**Section B - Case 1: VerdiGrow** *Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics: - Receivables days: 65 days - Payables days: 40 days - Inventory days: 55 days VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year. **Question:** What is the annualized percentage cost of the early settlement discount offered by the supplier? (Round to one decimal place).

**Section B - Case 1: VerdiGrow** *Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics: - Receivables days: 65 days - Payables days: 40 days - Inventory days: 55 days VerdiGrow is considering implementing a Just-In-Time (JIT) inventory system to reduce its inventory days. **Question:** Which TWO of the following are likely consequences of successfully implementing a JIT system for VerdiGrow?

**Section B - Case 1: VerdiGrow** *Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics: - Receivables days: 65 days - Payables days: 40 days - Inventory days: 55 days Due to a sudden boom in the agri-tech sector, VerdiGrow's sales have doubled in the last six months. However, their cash balance has severely depleted, and they are struggling to pay suppliers on time. **Question:** Which financial phenomenon is VerdiGrow most likely experiencing?

**Section B - Case 1: VerdiGrow** *Scenario:* VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics: - Receivables days: 65 days - Payables days: 40 days - Inventory days: 55 days To resolve its cash flow issues, VerdiGrow decides to finance all of its fluctuating current assets and a portion of its permanent current assets using a short-term bank overdraft. **Question:** What type of working capital financing policy has VerdiGrow adopted?

Section A AgriGrow Co is an agricultural supplier facing seasonal cash flow shortages. The finance director is considering using either invoice discounting or factoring to improve liquidity. Which of the following statements correctly distinguishes between factoring and invoice discounting?

Section A CityWater is a public utility company that requires 50,000 units of a specific chemical annually for water treatment. The cost of placing an order is $100. The holding cost per unit per year is $4. Using the Economic Order Quantity (EOQ) model, what is the total annual cost of ordering and holding inventory if the company orders exactly the EOQ? (Ignore the purchase cost of the chemical).

Section B - Case 1: Zephyr Co Zephyr Co is a rapidly growing e-commerce startup specializing in bespoke furniture. Despite surging revenues, the company is experiencing severe cash flow difficulties. Current financial data: Revenue: $12,000,000 (all on credit) Cost of Sales: $8,000,000 Trade Receivables: $2,500,000 Trade Payables: $1,200,000 Inventory: $1,500,000 Assume a 365-day year. Zephyr Co is considering introducing an early settlement discount of 2% for payment within 10 days. They currently allow 60 days for payment, though customers take longer on average. What is Zephyr Co's current receivables collection period (in days)?

Section B - Case 1: Zephyr Co Zephyr Co is a rapidly growing e-commerce startup specializing in bespoke furniture. Despite surging revenues, the company is experiencing severe cash flow difficulties. Current financial data: Revenue: $12,000,000 (all on credit) Cost of Sales: $8,000,000 Trade Receivables: $2,500,000 Trade Payables: $1,200,000 Inventory: $1,500,000 Assume a 365-day year. Zephyr Co is considering introducing an early settlement discount of 2% for payment within 10 days. They currently allow 60 days for payment, though customers take longer on average (76 days). If a customer currently pays on day 76, what is the effective annualized cost to Zephyr Co of offering the 2% discount for payment on day 10?

Section B - Case 1: Zephyr Co Zephyr Co is a rapidly growing e-commerce startup specializing in bespoke furniture. Despite surging revenues, the company is experiencing severe cash flow difficulties. Which of the following are classic symptoms of 'overtrading' that Zephyr Co might be exhibiting? (Select ALL that apply)

Section B - Case 1: Zephyr Co To reduce inventory holding costs, Zephyr Co's operations director suggests implementing a Just-in-Time (JIT) inventory system for their bespoke furniture materials. Which of the following is a critical prerequisite for the successful implementation of a JIT system?

Section B - Case 1: Zephyr Co Using the original data for Zephyr Co: Revenue: $12,000,000 Cost of Sales: $8,000,000 Trade Receivables: $2,500,000 Trade Payables: $1,200,000 Inventory: $1,500,000 Calculate Zephyr Co's Cash Operating Cycle in days. (Use a 365-day year and round to the nearest whole day).

'CloudSync', a rapidly growing SaaS (Software as a Service) startup, is experiencing cash flow difficulties due to late-paying enterprise clients. The finance director is considering either factoring or invoice discounting. Which of the following statements correctly distinguishes factoring from invoice discounting?

'AgriGrow', an organic fertilizer producer, uses 10,000 tonnes of raw compost annually. The cost of placing an order is $50. The holding cost per tonne per year is $4. Calculate the Economic Order Quantity (EOQ) for the raw compost. (Enter your answer as a whole number without any units or commas)

CASE 1: AQUAHARVEST LTD AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year. Calculate the effective annualized cost of offering the early settlement discount. (Enter your answer as a percentage to one decimal place, e.g., 15.5. Do not include the % sign)

CASE 1: AQUAHARVEST LTD AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year. If the majority of customers accept the early settlement discount, what will be the primary impact on AquaHarvest's cash operating cycle?

CASE 1: AQUAHARVEST LTD AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year. Instead of a discount, the Finance Director is also evaluating non-recourse factoring. Which of the following is a specific benefit of NON-RECOURSE factoring for AquaHarvest?

CASE 1: AQUAHARVEST LTD AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year. AquaHarvest has grown its revenue by 40% over the last year without raising new long-term capital. Which TWO of the following are classic symptoms of 'overtrading' that AquaHarvest might exhibit?

CASE 1: AQUAHARVEST LTD AquaHarvest Ltd is a commercial aquaculture firm farming premium salmon. The company currently allows its wholesale customers 60 days to pay their invoices. However, due to cash flow constraints, the Finance Director is considering offering an early settlement discount of 2% if customers pay within 15 days. AquaHarvest currently finances its working capital using a bank overdraft that charges an interest rate of 8% per annum. Assume a 365-day year. AquaHarvest is considering implementing a Just-In-Time (JIT) inventory system for its salmon feed. Which of the following is a critical prerequisite for JIT to be successful?

CASE 5: MEDISUPPLY NGO MediSupply is a large non-governmental organization (NGO) specializing in healthcare logistics across developing nations. The NGO currently operates an aggressive working capital policy, holding minimal inventory of medical supplies and relying heavily on a short-term bank overdraft to fund operations. Recent supply chain disruptions have caused severe stockouts, damaging the NGO's reputation and ability to deliver critical care. The Board of Trustees has mandated a shift to a conservative working capital policy. This will involve doubling the inventory levels of essential medicines and maintaining a permanent cash buffer of $2,000,000. To fund this permanent increase in current assets, MediSupply needs to raise $5,000,000. As an NGO, it cannot issue equity. The Finance Director is considering two options: Option 1: A 10-year long-term bank loan at a fixed interest rate of 7%. Option 2: Utilizing the NGO's existing restricted endowment fund, which currently earns 4% in government bonds, by seeking legal permission to repurpose the funds. Required: (a) Discuss the advantages and disadvantages of shifting from an aggressive to a conservative working capital policy for MediSupply. (8 marks) (b) Evaluate the two financing options (Long-term loan vs Repurposing endowment funds) considering the specific context of an NGO. (8 marks) (c) Explain how the shift to a conservative policy will impact MediSupply's Current Ratio and Return on Capital Employed (ROCE). (4 marks)

**Section A** AgriGrow Co, a large agricultural cooperative, is experiencing cash flow difficulties due to late payments from major supermarket chains. The finance director is considering either factoring or invoice discounting. Which TWO of the following statements regarding factoring and invoice discounting are correct?

**Section A** RetailCorp requires $2,000,000 in cash over the next year to meet its steady operational needs. The cost of converting marketable securities into cash is $50 per transaction. The annual opportunity cost of holding cash is 5%. Using the Baumol cash management model, what is the optimal cash conversion amount (to the nearest whole dollar)?

**Section B - Case 1: AquaHarvest Ltd** *Scenario:* AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m. Ignoring the bulk discount for a moment, what is the Economic Order Quantity (EOQ) for the fish feed?

**Section B - Case 1: AquaHarvest Ltd** *Scenario:* AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m. AquaHarvest's feed supplier offers early settlement terms of 1.5% discount if payment is made within 10 days, otherwise net 40 days. Assuming a 365-day year, what is the annualized cost of not taking the early settlement discount?

**Section B - Case 1: AquaHarvest Ltd** *Scenario:* AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m. AquaHarvest is expanding rapidly and the Finance Director is concerned about 'overtrading'. Which TWO of the following are classic symptoms of overtrading?

**Section B - Case 1: AquaHarvest Ltd** *Scenario:* AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m. AquaHarvest currently finances all of its permanent current assets and a portion of its non-current assets using short-term overdrafts. Which working capital financing policy is AquaHarvest adopting?

**Section B - Case 1: AquaHarvest Ltd** *Scenario:* AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m. AquaHarvest is considering moving to a Just-in-Time (JIT) inventory system for its fish feed to reduce holding costs to near zero. Which of the following is the most significant risk of implementing JIT in this specific agricultural context?

**Section C** **MedTech Innovators** MedTech Innovators is a rapidly growing technology startup specializing in medical devices. The company currently has annual credit sales of $18,000,000. **Current Receivables Policy:** - Average collection period: 60 days. - Bad debts: 2% of credit sales. - Administration costs of the sales ledger: $150,000 per year. - MedTech finances its receivables using a short-term bank overdraft at an interest rate of 8% per year. **Proposed Factoring Arrangement:** A factoring company has offered to take over the administration of MedTech's sales ledger on a non-recourse basis (meaning the factor assumes all bad debt risk). - The factor will charge an administration fee of 1.5% of credit sales. - The factor will advance 80% of the invoiced amounts immediately at an interest rate of 10% per year. - The remaining 20% will be paid to MedTech when the customers pay the factor. - The factor guarantees to reduce the average collection period to 40 days. - If MedTech accepts the offer, it will save the $150,000 internal administration costs and eliminate bad debts. Assume a 365-day year. **Required:** **(a)** Evaluate whether MedTech Innovators should accept the factoring offer. Support your answer with a detailed financial calculation showing the net benefit or cost of the proposal. (12 marks) **(b)** MedTech is considering raising $5,000,000 for a new factory. The board is debating between issuing new equity or taking out a long-term bank loan. Discuss the factors the board should consider when choosing between debt and equity finance, making specific reference to MedTech's status as a rapidly growing startup. (8 marks)

**Section A** AeroCater Services provides specialized inflight meals to commercial airlines. The company is experiencing cash flow difficulties due to airlines taking up to 90 days to settle invoices. AeroCater is considering using either invoice discounting or factoring. Which of the following statements correctly distinguishes factoring from invoice discounting?

**Section A** AgriNutrient Co requires 50,000 tonnes of raw phosphate annually for its fertilizer production. The cost of placing a bulk order is $200 per order. The annual holding cost is $5 per tonne. Using the Economic Order Quantity (EOQ) model, what is the optimal order size for raw phosphate?

**Section B - Case 1: Verdant Yields Co** *Scenario:* Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year. **Question 1:** What is the current receivables collection period (in days)?

**Section B - Case 1: Verdant Yields Co** *Scenario:* Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year. **Question 2:** To improve cash flow, Verdant Yields is considering offering a 2% early settlement discount to customers who pay within 15 days. Currently, customers pay at 60 days. What is the effective annual cost of offering this discount? (Use the compound interest formula)

**Section B - Case 1: Verdant Yields Co** *Scenario:* Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year. **Question 3:** The finance director is concerned that the rapid expansion into new markets might lead to 'overtrading' (undercapitalization). Which TWO of the following are classic symptoms of overtrading?

**Section B - Case 1: Verdant Yields Co** *Scenario:* Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year. **Question 4:** To manage its seasonal cash balances, Verdant Yields uses the Baumol cash management model. Which of the following is a fundamental assumption of the Baumol model?

Section A VertiFarm Co operates a network of urban vertical farms. It is experiencing cash flow difficulties due to slow-paying supermarket clients. The finance director is considering either factoring or invoice discounting. Which of the following statements correctly distinguishes between factoring and invoice discounting?

Section A AlgoTrade LLC, a high-frequency trading firm, requires $2,000,000 in cash over the next year to cover operational expenses. The cost of converting marketable securities into cash is $50 per transaction. The firm can earn 5% per annum on its marketable securities. Using the Baumol model, what is the optimal cash conversion amount (the economic order quantity for cash)?

Section B - Case 1: AquaHarvest Scenario: AquaHarvest operates offshore kelp farms. The company has annual credit sales of $18 million. Currently, customers take an average of 45 days to pay. AquaHarvest finances its working capital through a bank overdraft at an interest rate of 8% per annum. Assume a 365-day year. Question: What is the current value of AquaHarvest's receivables balance? (Round to the nearest whole dollar)

Section B - Case 1: AquaHarvest Scenario: AquaHarvest operates offshore kelp farms. The company has annual credit sales of $18 million. Currently, customers take an average of 45 days to pay. AquaHarvest finances its working capital through a bank overdraft at an interest rate of 8% per annum. Assume a 365-day year. To improve cash flow, the finance director proposes offering a 2% early settlement discount to customers who pay within 15 days. It is expected that 40% of customers will take the discount, while the remaining 60% will continue to pay in 45 days. Question: What is the effective annual interest rate (cost) of offering this discount? (Use the compound interest formula)

Section B - Case 1: AquaHarvest Scenario: AquaHarvest operates offshore kelp farms. The company requires 50,000 specialized biodegradable ropes per year for its farming operations. The cost of placing an order is $200. The holding cost per rope per year is $4.00. Question: What is the Economic Order Quantity (EOQ) for the biodegradable ropes?

Section B - Case 1: AquaHarvest Scenario: AquaHarvest operates offshore kelp farms. The company requires 50,000 specialized biodegradable ropes per year. The cost of placing an order is $200. The holding cost per rope per year is $4.00. The standard purchase price per rope is $15.00. The supplier has offered a 2% bulk discount on the purchase price if AquaHarvest orders in batches of 10,000 ropes. Question: What is the total annual cost (purchase + ordering + holding) if AquaHarvest accepts the bulk discount offer?

Section B - Case 1: AquaHarvest Scenario: AquaHarvest operates offshore kelp farms. The company experiences highly seasonal sales, leading to fluctuating working capital requirements. The board is debating how to finance these fluctuating current assets. Question: If AquaHarvest adopts an 'aggressive' working capital financing policy, how will it finance its fluctuating current assets?

Section C EcoTransit is a public utility hybrid transitioning from government grants to commercial debt. It provides electric bus networks. The company has experienced rapid revenue growth over the last two years but is facing severe liquidity issues. Financial data for the last two years: | | Year 20X1 ($m) | Year 20X2 ($m) | |---|---|---| | Revenue | 45.0 | 75.0 | | Cost of Sales | 30.0 | 55.0 | | Inventory | 4.5 | 11.0 | | Receivables | 6.0 | 15.0 | | Payables | 5.0 | 14.0 | | Overdraft | 1.0 | 8.5 | Assume a 365-day year. EcoTransit is also planning a new commercial venture into electric ferry services. The current WACC of EcoTransit is 9%. However, the electric ferry industry has a different risk profile. A proxy company operating exclusively in electric ferries has an equity beta of 1.5 and a debt-to-equity ratio of 1:2 by market value. EcoTransit plans to finance the new ferry venture with a debt-to-equity ratio of 1:4. The risk-free rate is 3%, the market risk premium is 6%, and the pre-tax cost of debt for EcoTransit will be 5%. The corporate tax rate is 20%. Required: (a) Calculate the working capital ratios (Inventory days, Receivables days, Payables days, and Current Ratio) for both 20X1 and 20X2. (6 marks) (b) Based on your calculations in part (a) and the financial data provided, evaluate whether EcoTransit is exhibiting symptoms of 'overtrading' (undercapitalization). (6 marks) (c) Calculate the project-specific Weighted Average Cost of Capital (WACC) that EcoTransit should use to appraise the new electric ferry venture. (8 marks)