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Numerical Questions 5

This document contains 10 numerical questions regarding short term financing options for companies. It provides calculations for annual percentage costs and effective annualized costs for different credit terms, loan options, commercial paper issuances, and factoring arrangements. The questions analyze which short term financing options provide the lowest costs for companies needing access to funds.

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nabin bk
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401 views

Numerical Questions 5

This document contains 10 numerical questions regarding short term financing options for companies. It provides calculations for annual percentage costs and effective annualized costs for different credit terms, loan options, commercial paper issuances, and factoring arrangements. The questions analyze which short term financing options provide the lowest costs for companies needing access to funds.

Uploaded by

nabin bk
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Unit 5

Short Term Financing


Numerical Questions+
5.1. Hetauda Cement Company has a twice a month payroll of Rs 3, 00,000. The firm is considering changing
monthly payroll to reduce the cost of writing checks and similar expenses which Rs 2,000 per payroll. The firm
has a 9 percent opportunity cost.
Required:
a. What are average accruals under present payroll system?
b. What is a total annual payroll expense under present payroll system?
c. What will be average accruals under proposed plan?
d. What will be total annual payroll expense under proposed plan?
e. What will be total annual saving if wages were paid monthly instead if twice a month?
(Ans: a. Rs. 1,50,000 b. Rs. 48,000 c. Rs. 3,00,000 d. Rs. 24,000 e. Rs. 37,500)

5.2. Anjali Traders buys under terms of 2/10 net 50. Compute annual percentage cost under each of the
following condition assuming 365 days in a year.
a. If company does not take discount and pays on due date.
b. If company does not take discount and pays on 40th day.
C If company stretches the credit period by 10 days.
d. If company actually pays on 15th day and still takes the discount, what is the cost of its non-free trade credit?
(Ans: a. 18.62% b. 24.83% c. 14.90% d. 21.28%)

5.3. Determine the annual percentage cost and effective annualized cost of financing for the following
credit terms, assuming that (I) discounts are not taken, (II) accounts are paid at the end of the credit period,
and (III)A year has 365 days.
A. 2/10, net 30
B. 3/ 20, net 60
(Ans: a. 37.25%; 44.59% b. 28.22%; 32.04%)

5.4. Nepal Textile Company is in need of Rs. 20,00,000 in cash to finance its current assets
requirement. Mr. Subigya is a treasurer of the company, believes that they have three alternatives in
raising the funds:
a. Forego cash discounts on terms of 2/10 net 25.
b. Borrow on discount basis from the Everest Bank at a 15% rate of interest for a period of one
year.
c. Borrow from the Himalayan Bank at a 16% rate of interest for a period of one year.
Which are the least costly sources of funds?
(Ans: a. 49.66% b. 17.65% c. 16%)

5.5. Mr. Anup, an entrepreneur of Pokhara Departmental Store, is negotiating with Nepal
Investment Bank for a Rs. 30,00,000 , 1-year loan. Nepal Investment Bank has offered the
following alternatives and as a financial manager, you need to evaluate each alternative and
provide the best decision while financing through short term financing.
a. A 15% annual rate on a simple interest loan, with no compensating balance required and
interest due at the end of the year.
b. A 10% annual rate on a simple interest loan, with a 15% compensating balance required and
interest again due at the end of the year.
c. A 9% annual rate on a discounted loan with a 15% compensating balances.
d. Interest is figured as 10% of the Rs. 30,00,000, payable at the end of the year but with the Rs.
30,00,000 repayable in monthly installments during the year.
(Ans: a. 15% b. 11.76% c. 11.84% d. 20%)

5.6. Commercial paper has no stipulated interest rate. It is sold on a discount basis and the amount
of the discount determines the interest cost to the issuer. On the basis of the following
information, determine the percentage interest cost on an annual basis for each of the following
issues:
Issue Face Value Price Time to Maturity
a Rs.25,000 Rs.24,500 60 days
b 1,00,000 96,500 180
c 50,000 48,800 90
d 75,000 71,300 270
e 1,00,000 99,100 30
(Ans: a. 12.24% b. 7.25% c. 9.84% d. 6.92% e. 10.9%)

5.7. The Fox Company is able to sell Rs 1 million of commercial paper every three months at a
rate of 10% and placement of Rs 3,000 per issue. The dealers require Fox to maintain bank lines
of credit demanding Rs 1,00,000 in bank balances, which otherwise would not be held. Fox has a
40% tax rate. What do the fund from commercial paper cost Fox after taxes?
(Ans: 12.44%; 7.46%)

5.8. Determine the annual percentage interest cost for each of the following terms of sales,
assuming the firm does not take the cash discount but pays on the final day of the net period
(assume a 365- days in a year)
a. 1/10, net 30 (Rs. 500 invoice)
b. 2/30, net 60 (Rs. 1,000 invoice)
c. 2/5, net 10 (Rs. 100 invoice)
d. 3/10 net 30 (Rs. 250 invoice)
(Ans: a. 18.43% b. 24.83% c. 148.98% d. 56,44%)
5.9 Rapti paper industries has just acquired a large account. As a result, it needs to additional Rs
75000 in working capital immediately. It has been determined that there are three possible
source of funds.
1. Trade credit: The company buys about 50000 of materials as per month on term of 3/30
net 90. Discounts are taken.
2. Bank Loan: The firm’s bank will lend Rs 100000 at 13 percent. A 10 percent
compensating balance will be required. Which otherwise should not be maintained by
company.
3. Factoring : A factor will buy companies receivables (100000 per month), which have a
collection period of 60 days. The factor will advance upto 75 percent of the face value of
receivables at 12 percent on annual basis. The factor will also charge a 2 percent fee on
all receivable purchased. It has estimated that the factor’s services will save the company
credit department expenses and bad debt expenses for Rs 1500 per month.
On the basis of annual percentage cost which alternative should RP industry select? (18.81,
14.44, 20)

5.10. Nepal manufacturing company is considering obtaining funds through advances against
receivables. The total credit sales are 12 million, terms are net 30 days and the payment is
made on the average of 30 days. Citizen bank will advance funds under a pledging
arrangement for 15 percent annual interest and requires 20 percent reserve. Friendly
finance offers factoring on a non recourse basis for a 2.5 percent factoring commission,
charging 1 percent per month on advance and requiring a 20 percent factors reserve. Under
this plan, the firm would factor all accounts and close its credit and collection department
saving Rs 300000 per year.
What is the effective interest rate and the average amount of funds made available under
pledging and under factoring? (15, 12.12, 16.08, 12.82)

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