Based on a number of operational challenges experienced over the last few years, Mitsubishi Technology is considering a review of its working capital policy. This will improve its cash flow cycle. Mitsubishi’s sales for last year were R3 250 000 (all on credit), and the net profit margin was at 7%. It had an inventory turnover of 6.0 times during the year and a DSO of 41 days. Its annual cost of goods sold was R1 800 000. Mitsubishi had a fixed assets of R535 000 and a payables deferral period of 45 days.

1. Calculate Mitsubishi’s cash conversion cycle.

2. Assuming Mitsubishi holds negligible amount of cash and market securities, calculate its total assets turnover and ROA.

3. Suppose Mitsubishi’s managers believe the annual inventory turnover can be raised to 9 times without affecting sales or profit margins. What would Mitsubishi’s cash conversion cycle, total assets turnover, and ROA have been if inventory turnover had been 9 times for the year?

Question 2

Natref is looking into the acquisition of Marine Oils. Marine Oils has 1 (one) million shares outstanding and a target capital structure of 30% debt, its beta is 1.4. Marine Oils has R10.82 million in debt trading at par value and pays 8% interest. Marine Oils free cash flow (FCFo) is R2 million per year and it is expected to grow at constant rate of 5% a year. Marine Oils pays 40% corporate tax. The risk free rate of interest is 5% and the market risk premium is 6%. Natref needs to estimate intrinsic value of Marine Oils before making a final decision on this proposed acquisition. 2B.1. What are Marine Oils’ cost of equity and weighted average cost of capital?

2. What is Marine Oils’ intrinsic value of operations?

3. What is the current intrinsic value of Marine Oils’ stock?

Question 2

Mergers fail to produce value for shareholders of acquirers in many cases. Describe and explain some reasons for mergers failure. Use existing case to illustrate your point.