Question a: The financial manager of Kyrenia Ltd wants to improve the working capital management of the company which ha
Posted: Wed May 04, 2022 6:23 am
Question a: The financial manager of Kyrenia Ltd wants to
improve the working capital management of the company which has
revenue from credit sales of €25,000,000 per year and although its
terms of trade require all credit customers to settle outstanding
invoices within 60 days, on average customers have been taking
longer. Trade receivables currently stand at €4,500,000 and the
company has a cost of short-term finance of 9% per year and 5 % of
credit sales turn into bad debts which are not recovered. The
financial manager is considering a proposal from a factoring
company, which was invited to tender to manage the sales ledger of
Kyrenia Ltd on a with-recourse basis. The factoring company
believes that it can use its expertise to reduce average trade
receivables days to 45 days, while cutting bad debts by 75% and
reducing administration costs by €35.000 per year. A condition of
the factoring agreement is that Kyrenia Ltd would also advance the
factoring company 75% of the value of invoices raised at an
interest rate of 7% per year and the factoring company would charge
an annual fee of 1.5% of credit sales. Required: Based on your
calculations, advise whether the factoring offer is financially
acceptable to Kyrenia Ltd. (8 marks)
Question b: Why must companies take into consideration the
inflation in their decision making for investments? (2 marks)
Question c: The minimum cash balance of White Ltd is €10.000 and
the variance of daily cash flows is 5.000.000, equivalent to a
standard deviation of €3.000 per day. The transaction cost for
buying or selling securities is €75. The interest rate is 0,03% per
day. Required: Formulate a decision rule using the Miller-Orr
model. (5 marks)
Question d: The demand for a commodity is 50.000 units a year,
at a steady rate. It costs €25 to place an order and 50 cents to
hold a unit for a year. Required: Find the order size to minimize
inventory costs, the number of orders placed each year and the
total costs of holding inventory for the year. (3 marks
improve the working capital management of the company which has
revenue from credit sales of €25,000,000 per year and although its
terms of trade require all credit customers to settle outstanding
invoices within 60 days, on average customers have been taking
longer. Trade receivables currently stand at €4,500,000 and the
company has a cost of short-term finance of 9% per year and 5 % of
credit sales turn into bad debts which are not recovered. The
financial manager is considering a proposal from a factoring
company, which was invited to tender to manage the sales ledger of
Kyrenia Ltd on a with-recourse basis. The factoring company
believes that it can use its expertise to reduce average trade
receivables days to 45 days, while cutting bad debts by 75% and
reducing administration costs by €35.000 per year. A condition of
the factoring agreement is that Kyrenia Ltd would also advance the
factoring company 75% of the value of invoices raised at an
interest rate of 7% per year and the factoring company would charge
an annual fee of 1.5% of credit sales. Required: Based on your
calculations, advise whether the factoring offer is financially
acceptable to Kyrenia Ltd. (8 marks)
Question b: Why must companies take into consideration the
inflation in their decision making for investments? (2 marks)
Question c: The minimum cash balance of White Ltd is €10.000 and
the variance of daily cash flows is 5.000.000, equivalent to a
standard deviation of €3.000 per day. The transaction cost for
buying or selling securities is €75. The interest rate is 0,03% per
day. Required: Formulate a decision rule using the Miller-Orr
model. (5 marks)
Question d: The demand for a commodity is 50.000 units a year,
at a steady rate. It costs €25 to place an order and 50 cents to
hold a unit for a year. Required: Find the order size to minimize
inventory costs, the number of orders placed each year and the
total costs of holding inventory for the year. (3 marks