QUESTION 2 Velm Co Velm Co sells stationery and office supplies on a wholesale basis and has an annual revenue of $4,000

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Question 2 Velm Co Velm Co Sells Stationery And Office Supplies On A Wholesale Basis And Has An Annual Revenue Of 4 000 1 (52.97 KiB) Viewed 10 times

QUESTION 2 Velm Co Velm Co sells stationery and office supplies on a wholesale basis and has an annual revenue of $4,000,000. The company employs four people in its sales ledger and credit control department at an annual salary of $12,000 each. All sales are on 40 days' credit with no discount for early payment. Bad debts represent 3% of revenue and Velm Co pays annual interest of 9% on its overdraft. The most recent accounts of the company offer the following financial information: Velm Co: Statement of financial position as at 31 December 20X2 Non-current assets Tangible non-current assets Current assets Inventory of goods for resale Receivables Cash Total assets Equity and liabilities Ordinary shares Reserves Non-current liabilities 12% Loan notes due 20Y0 Current liabilities Trade payables Overdraft $'000 900 550 120 3,500 11.640 330 1,200 $'000 17,500 1,570 19,070 15,140 2,400 1.530 19,070 Total equity and liabilities Velm Co is considering offering a discount of 1% to customers paying within 14 days, which it believes will reduce bad debts to 2.4% of revenue. The company also expects that offering a discount for early Discuss the different policies that may be adopted by a company towards the financing capital needs and indicate which policy has been adopted by Velm Co. payment will reduce the average credit period taken by its customers to 26 days. The consequent reduction in the time spent chasing customers where payments are overdue will allow one member of the credit control team to take early retirement. Two-thirds of customers are expected to take advantage of the discount. Required (a) (b) (c) Using the information provided, determine whether a discount for early payment of 1% will lead to an increase in profitability for Velm Co. (5 marks) Discuss the relative merits of short-term and long-term debt sources for the financing of working capital. (8 marks) of working (7 marks) (Total 20 marke