The finance director of Menendez is trying to improve the company's slack working capital management. Although Menendez's
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It has been suggested that the average settlement period could be reduced if an early settlement discount were offered and the finance director is considering a reduction of 1.5 per cent of the face value of invoice for payment within 30 days. It is expected that 40 per cent of customers would use the discount, but that the average time taken by the remaining customers would not be affected. It is also expected that, if the new credit terms are introduced, bad debts will fall by £60,000 per year and administration costs will fall by £15,000 per year.
(a) If total sales are unchanged and if working capital is financed by an overdraft at 9 per cent per year, are the new credit terms of any benefit to Menendez?
(b) Discuss whether Menendez should finance its working capital needs from an overdraft.
(c) It has been suggested by the managing director of Menendez that the way to optimize the company's overall level of working capital is by minimising its cash conversion cycle. Critically discuss whether the finance director should follow this suggestion.
(d) Briefly discuss ways in which Menendez could use its trade receivables as a source of finance.
Cash Conversion Cycle
Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers,... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Corporate Finance Principles and Practice
ISBN: 978-1292103037
7th edition
Authors: Denzil Watson, Antony Head
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