Page 479 - FM Integrated WorkBook STUDENT 2018-19

Answers

Chapter 9

Question 1

Receivables financing cost

ABC Co has sales of $50m for the previous year. Receivables days are 57and
receivables are financed using an overdraft costing 6% per annum.

Calculate the receivables balance and the annual financing cost for receivables.

Receivables balance = 57 × $50m/365 = $7,808,219

Financing cost = $7,808,219 × 6% = $468,493

Question 2

Early settlement discount

A company is offering a 2% discount to receivables if they agree to pay within
30 days. The current receivables days figure is 65. Receivables are financed
using an overdraft costing 20%

Calculate the effective annual cost of offering the discount and state whether it
should be offered.

Effective annual cost = [1 + 2/98] (365/35) – 1 = 0.23452 or 23.5%

If the company offers the discount, it will save interest at a rate of 20% on its
overdraft but the discount will cost it 23.5% so the discount should not be
offered.

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