Question

Question 3                               (Marks: 15)

The Rhodium division has prepared its budget for 2020 and its working capital requirements are summarised below:

MONTH Rand

January 8 450 000

February 9 150 000

March   6 250 000

April 3 750 000

May 2 850 000

June 10 500 000

July 2 925 000

August 10 625 000

September 5 200 000

October 4 600 000

November 7 300 000

December 8 100 000

The division is deciding whether to adopt an aggressive funding strategy or a conservative funding strategy. Short‐term funds can be borrowed at a rate of 16,25% per annum and long‐term funds at a rate of 19% per annum.

REQUIRED:

Q.3.1 Determine the permanent component of the division’s monthly working capital funding requirements.(1)

Q.3.2 Determine the seasonal component and average of the division’s monthly working capital funding requirements. Round off your final answer to the nearest Rand.(7)

Q.3.3 Calculate the total average monthly cost if the Rhodium division adopts an aggressive funding strategy. Round off all calculations to the nearest Rand. (7)

Answer 1

Solution;

Month	Total fund requirement	Permanent fund requirement	Seasonal fund requirement
January	8450000	2850000	5600000
February	9150000	2850000	6300000
March	6250000	2850000	3400000
April	3750000	2850000	900000
May	2850000	2850000	0
June	10500000	2850000	7650000
July	2925000	2850000	75000
August	10625000	2850000	7775000
September	5200000	2850000	2350000
October	4600000	2850000	1750000
November	7300000	2850000	4450000
December	8100000	2850000	5250000
Total			45500000

Q.1 Permanent component of working capital requirement is Rand 2850000 because the amount which is lowest among all the months is treated as permanent working requirement which means this is the amount of working capital which must always remain in business.

Q.2 Total seasonal component of working capital requirement is 45500000. and average seasonal monthly capital requirement is Rand 3971666.67 or 3971667 (45500000/12).

Q3 Aggressive funding requires that part of permanent capital to be financed through short term funds. Here average requirement for long term financing is Rand 2850000 which will also be financed through short term funds along with average seasonal requirement financing of 3971667.

Total average monthly cost of financing under aggressive approach = 6821667 * .1625 = 1108521

(here 2850000+3971667= 6821667 and .1625 is cost of short term borrowing)