JUDLAH SERVICES LIMITED Judlah Services Limited has been trading for the past five years. Last year they have recently r

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JUDLAH SERVICES LIMITED
Judlah Services Limited has been trading for the past five
years. Last year they have recently realized that they are
experiencing frequent cash flow issues. Their financial accountant
has suggested the tracking of the inflows and outflows of the
company’s cash.
The following information on revenue and costs were made
available to you:
Month
Sales
Purchases
($’000)
($’000)
October 2020
1 400 000
1 137 500
November 2020
1 050 000
787 500
December 2020
1 575 000
1 312 500
January 2021
875 000
612 500
February 2021
1 050 000
787 500
March 2021
1 225 000
962 500
April 2021
1 050 000
787 500
Additional notes:
i.
The cash balance on January 01st 2021 was $262 500;
ii.
20% of sales is usually attributable to cash sales while the
remainder is settled:
a.
One month after sales: 60%;
b.
Two months after sales: 20%.
iii.
2% of sales is allocated to Sales Expenses and is paid in the month
of sale;
iv. 50%
of cost of purchases is paid in the month of purchase and the next
50% in the following month;
v.
3% of purchases is allocated to Purchases Expenses and is paid in
the following month after purchase;
vi. New
equipment of $157 500 to be purchased in January and is to be paid
in three equal instalments from the same month;
vii.
Outdated equipment to be sold in February for $43 750;
viii. Salaries
are $52 500 per month;
ix.
Utilities will be $122 500 in January and is expected to increase
by 10% each month; and
x.
The firm plans to take a loan in March at an interest rate of 15%
per annum. The loan amount will be $700 000. Interest is to be paid
monthly equally, starting in March.
After proper tracking of their cash flow last year Judlah
Services Limited has found themselves in a position where they have
too much cash. The top management has established that the minimum
amount of cash to hold should be $100 000. The accountant has also
indicated that the daily cash flow for the business is $60 000. The
finance manager has indicated that the annual interest rate is
10.95% and that the cost of selling one of Judlah Services
Limited’s security is $90.
Recording cash and cash equivalents at $443 216.97 Judlah
Services Limited’s top management has decided to utilize the cash
amount over the cash return point to invest in a two-asset
portfolio. Asset 1 will be allocated 33% while asset 2 will be
allocated 67% of the excess cash. Three stocks trading on the JSE
have been identified for analysis JBM, TCL and SAG. The following
information has been given from the chief financial officer:
Economic Condition
JBM
TCL
SAG
Boom
30%
20%
8%
Neutral
10%
12%
3.5%
Recession
-3%
-4%
-2%
Asset Combinations to consider:
a.
Asset 1 JBM and Asset 2 TCL (with a correlation of .90);
b.
Asset 1 SAG and Asset 2 JBM (with a correlation of .75); or
c.
Asset 1 SAG and Asset 2 TCL (with a correlation of -.40).
Required:
As the junior financial analyst, you have been approached by the
CFO to help with the following:
i.
Lower limit
ii.
Upper limit.
iii.
Return point
d. Determine the cash amounts to be invested
in asset 1 and asset 2.
e. Calculate the expected returns and standard
deviations for each asset.
f. Calculate
the expected returns and standard deviations for each two-asset
combination taking into consideration the correlation.