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TMM Limited is a company operating in North-Western Province of Zambia. The company deals in mining and agricultural equipment. The following is an extract of the company’s current assets and current liabilities as at 31 December, 2022.

Inventory                 K250, 000

Accounts receivables         K 500,000

Cash                       K350, 000

Accounts payables  K250, 000

Sales K 3,000,000

Purchases K3, 000,000

The company’s operating expenses per month are assumed to be constant and are composed of the following:

Salaries and wages                     K2, 500,000

Factory expenses              K1, 500,000

Stationery and meetings    K500, 000

Travel expenses                K 600,000

Loan interest                     K850, 500

Forecasted sales for year 2017 for the month of July 2018 are K5, 200,000.

The company policy is to sale 80% on credit and balance on cash basis. Disbursement of cash shall done as follows: 60% of cash available to operations and the remaining cash to payables.

The options available to the financial manager to finance short fall of funds in the short-term are:

Treasury bills with domination of K5, 000,000 and K2, 000,000 with Discount rate of 25% and number of days to maturity 270 days.

Commercial paper

Face value of K5, 000,000, rate of interest of 25% and maturity period of 90 days

Short-term loan

Rate of interest of 25%, maturity period 1 year. Interest to be compounded semi-annually.

NB: Assume that TMM Limited is a government corporation managed by the central government.

Required:

a)    Calculate the following:

i.         Inventory turnover days (5 marks)

ii.         Accounts payable payment days (5marks)

iii.         Accounts receivable payment days (5 marks)

iv.         Cash deficit/surplus ( 5marks)

v.         Comment whether or not the company will meet obligations as they fall due (5 marks)

b)    Consider the options available to the company to finance short-term cash shortfalls. Select with relevant calculations the option which may be suitable for the company (7 marks)

c)    Define commercial paper and six benefits and two limitations of commercial paper (8 marks)

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