a: The financial manager of Kyrenia Ltd wants to improve the working capital management of the company
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?
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.
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.
Accounting for Governmental and Nonprofit Entities
ISBN: ?978-0073379609
15th Edition
Authors: Earl R. Wilson, Jacqueline L Reck, Susan C Kattelus