STRATEGIC FINANCE ISSUES

COURSE CODE: MBA 556

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 QUESTION ONE
Total Petroleum Ghana Limited (known as Oil Marketing Companies listed on the Ghana stock

exchange working’s capital management for the 2015–2019 financial years.

i. Calculation of Relevant Ratios

Formula Total Petroleum Ghana Limited

Working Capital 2016 GH¢’000 2015 GH¢’000

Management
Ratios
Trade receivables Trade Receivables/credit 165,549/ 1,661,615*365 158,911/ 1,793,752*365
collection period sales *365 days days days
= 36 days =32 days

Trade payables Trade payables/credit 265,508/1,499,083 *365 202,607/ 1,635,731*365

period purchases 365 days days days
=65 days =45days
Inventory holding Inventory/Cost of sales 69588/1,499,083 *365 84,683/1,635,731 *365
period *365 days days days
= 17 days =19 days
Inventory cost of sales / Inventory 1,499,083/69588 1,635,731/84,683
Turnover = 21.54 times =19.32 times

Working Capital 2018 GH¢’000 2017 GH¢’000

Management
Ratios
Trade receivables Trade Receivables/credit 297,802/2,381,106*365 218,734/1,858,478*365
collection period sales *365 days days days
=46 days =43 days
Trade payables Trade payables/credit 413,434/2,156,637*365 330,128/1,677,236 *365
period purchases 365 days days days
=70 days = 72 days
Inventory holding Inventory/Cost of sales 79,720/2,156,637*365 82,378/1,677,236*365
period *365 days days days
= 13 days = 18 days
Inventory cost of sales / Inventory 2,156,637/79,720 1,677,236/82,378
Turnover =27.05 times =20.36 times

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Working Capital 2019 GH¢’000
Management
Ratios
Trade receivables Trade Receivables/credit 288,749/2,628,610 * 365 = 40days
collection period sales *365 days

Trade payables Trade payables/credit 402,211/2,346,176 *365= 63 days

period purchases *365 days

Inventory holding Inventory/Cost of sales 73,233/2,346,176 *365 = 11 days

period *365 days

Inventory cost of sales / Inventory 2,346,176/73,233 = 32.04 times

Turnover

ii. RESULTS DISCUSSING TRENDS

Introduction

Total Petroleum Ghana Limited's five most recent income statements and balance sheets,

spanning the years 2015 to 2019, were used to produce these working capital management ratios.

The computations in the appendix are used in the ratio analysis that displays the trends..

Working Capital Management Ratios:

Trade receivables collection period
In terms of accounts receivable, the average collection period is the time it takes for a business to
obtain payments owing by its customers. The average collection period is used by businesses to
ensure that they have enough cash on hand to fulfill their financial obligations. In general, a
shorter average collecting duration is preferable than a longer average collecting duration. An
organization with a short average collection period collects money more quickly (Kenton, 2021).
Since 2015, Total Petroleum Ghana Limited has had a poor performance, with periods of 32
days, 36 days, 43 days, 46 days, and now 40 days in 2019. Although this is based on Total

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Petroleum Ghana Limited's historical default rates, the increasing trade receivables collection
period indicates a lack of credit control. The Group and Company assess that the credit risk has
increased significantly if a financial asset is more than 90 days past due, according to Total
Petroleum Ghana Limited's 2019 Annual Report. The Group and Company consider a financial
asset to be in default when the debtor is unlikely to meet its credit obligations to the Group and
Company in full due to bankruptcy; there are adverse developments in the payment status of
debtors. Total Petroleum Ghana Limited should enhance its cash reserves and sustain consistent
creditworthiness as a result of this, promoting excellent deleveraging.

Trade payables period

When the turnover ratio rises, the business pays its suppliers more quickly than in previous
periods. A growing ratio indicates that the corporation has enough cash on hand to pay down its
short-term debt on schedule. As a result, a rising accounts payable turnover ratio may indicate
that the company is effectively managing its debts and cash flow (Murphy, 2021). According to
the creditors' collection time, Total Petroleum Ghana Limited took 45 days, 65 days, 72 days, 70
days, and 63 days to pay its creditors over a five-year period. Total Petroleum Ghana Limited's
creditor has an abnormally long collecting period. As a result, creditworthiness may deteriorate,
and credit facilities may be limited or terminated. According to Total Petroleum Ghana Limited's
2019 Annual Report, the risk that the Group would either lack the financial means to meet all of
its obligations and commitments when they become due, or will only be able to access them at a
high expense. Total Petroleum Ghana Limited could benefit from its creditworthiness by
shortening the time it takes for creditors to recover payments.

Inventory holding period

This metric evaluates the company's ability to sell off its inventory quickly. The longer the
duration, the better for the entity. Over a five-year period, Total Petroleum Ghana Limited
performed poorly, with inventory holding times of 19 days, 17 days, 18 days, 13 days, and 11
days. This is due to the fact that inventories were designated as an exempt item. This is because
the Company reported inventory of GH1, 431,287,000 as an expense during the year in 2018.
The cost of these items is included in the purchase price. Inventory has been reduced by GH4,

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202,000 as a result of the write-down to net realizable value. The write-down was reported as an
expense in 2019.

Inventory Turnover
This metric evaluates the company's ability to sell off its inventory quickly. The shorter the
duration, the better for the entity. A lengthier inventory turnover period may indicate a lack of
demand for the company's products as well as insufficient inventory management. Total
Petroleum Ghana Limited's ratios (19.32 times, 21.54 times, 20.36 times, 27.05 times, and 32.04
times) over the last five years. The company's overdraft arrangements must be effectively
negotiated and renewed by the Board of Directors. So that the Group and the Company can
utilize their revolving credit lines from their banks.

Conclusion
Despite the company's statistics show a small gain in recent years, Total Petroleum Ghana
Limited's working capital management is bad due to notably larger Trade receivables collection
duration, shorter Trade payables period, smaller Inventory holding duration, and greater
Inventory Turnover. The five-year financial accounts of Total Petroleum Ghana Limited have
aroused a number of questions.

iii. Discounted Cash Flows

In a study by (CFI, 2021), The sum of the cash flows in each period divided by one plus the
discount rate (WACC) raised to the power of the period number equals the discounted cash flow
(DCF) formula. DCF analysis evaluates the present value of expected future cash flows using a
discount rate. Investors can use the concept of present value of money to determine whether
future cash flows from an investment or project are equal to or greater than the initial investment.
The opportunity should be pursued if the DCF value is larger than the current investment cost.
 
Given the current Bank of Ghana 364 day bill T-bill rate and a discount rate of 14.15 percent, the
discounted cash flows of the expected values of Total Company Limited's provided statement of
cash flows over a five-year period are shown below

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 2019 GH¢’000 2018 GH¢’000 2017 GH¢’000 2016 GH¢’000 2015 GH¢’000

Cash and cash (20,162) (20,820) (50,587) (33,141) (51,851)

equivalents at
31 December
Discount Rate 0.8760 0.7674 0.6723 0.5890 0.5160
(14.15%)
Net Present (17661.912) (15977.268) (34009.6401) (19520.049) (26755.116)
Value

Total Net Present Value = GH¢’000 (113,923.9851)

Comments:
Total Petroleum Ghana Limited has a negative net present value of GH'000 (113,923.9851) over
the next five years, which should be ignored due to negative cashflows. As a result, investors
will be unable to invest their funds.

QUESTION TWO
Stock Expected Return Standard deviation

Manufacturing Company 15% 30%

Financial Company 10% 20%

i. Portfolio Expected Return

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WORKINGS;

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References
Murphy, C. (2021). Accounts Payable Turnover Ratio Definition. Corporate Finance &

Accounting.https://www.investopedia.com/terms/a/accountspayableturnoverratio.asp

Fernando, J. (2021). Discounted Cash Flow (DCF). How to calculate Net Present Value.

https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/

Total Petroleum Limited Annual Report. https://africanfinancials.com/document/gh- total-

2019/2018/2017/2016/2015-ar-00/