Ecom 410

Assignment 2. 20% Due October 18 2004




Part A Zahra industries study (10 Marks)

Working Capital

No growth and growth stages

Managing inventory and cash (seasonal sales) planning production volumes.

Long term to short term matching assets and financing

Asset liquidity and type of financing


Zahra Industries is a manufacturer of UAE heritage style camping equipment specifically for the gulf and UAE market.  This is an industry with highly seasonal sales.  i.e sales occur in the months October to March with peak sales in November and December.

Zahra used to be in a no growth situation where assets at the end of the year were roughly equal to assets at the start of the year.  Happily Zahra has been able to increase it’s sales substantially in the last year due to increased interest in tourism in Dubai area. This has raised some challenges for Zahra as it now has to consider how it finances this increase in “permanent current assets”


To make the most efficient use of manufacturing plant and labor, Zahra has implemented a level or constant production schedule during the whole year. ( Except in July where most employees go on holiday and production actually ceases for one month)


A sales forecast and production schedule are shown below as is the cash budget.


  • Discuss how Zahra could use long term or short term financing and the different effects these would have. (2 marks)


  • Discuss the many financing options that Zahra has and describe how a choice might be made.  You might find a diagram useful in helping you with this. (2 marks)


  • From the data given (cash budget etc) produce graphs to illustrate the nature of asset growth for Zahra industries.  Comment on the growth of current assets and the financing effects of this. (4 marks)


  • Discuss how interest rate structure (Long term and Short Term rates) might affect the financing decision of Zahra industries. (4 marks)


Part B Cash and Accounts Receivable Management

Managing cash and accounts receivable

·          Floats

·          Faster collects

·          Delayed disbursements

Managing cash levels and AR

·          Credit standards

·          Terms of trade

·          collection


  • Discuss how Zahra industries can manage its float to its benefit.

In your answer be sure to mention; collections, disbursements, electronic funds transfer. (2 marks)


  • Given that Zahra industries has a return of 16% on it is accounts receivable (after taking into account bad debts) and that Zahra can loan money at 6% from the bank and that Accounts Payable have as cost of 8%, that Zahra can invest in short term securities and that inventory return 12%, devise a policy for managing Accounts receivable, in your answer discuss each of the following , credit standards, terms of trade, and collection policy and consider these on coming to a decision on a credit policy for Zahra.  (4 marks)


  • Consider factoring as an accounts receivable management strategy and comment on the benefits or disadvantages of Zahra using factoring.  (2 marks).


  • Calculate the economic order quantity for Zahra based on order cost and carry cost to be given you  by your teacher.  Comment on hour Zahra can use this to help manage inventory.  How could the use of e-business solutions including possibly JIT management be used to improve this? (2 marks)



Chapter 6, 7, 8 Block and Hirt, Foundations of Financial Management