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Chapter 3
Example 4
The Finance Director of CP has calculated that the company needs to raise
some additional long term funds to provide finance for the following three
proposals.
CP’s trade payables are currently $3.15 million. Suppliers have
expressed dissatisfaction that the company currently takes 45 days to
pay. They would like to be paid 10 days quicker.
The bank overdraft has been close to its limit for the last 6 months, and
the bank is putting pressure on CP to reduce the overdraft from its
current level of $2.2 million to $2 million.
Over the past three years the annual revenue of CP has stagnated, so
the directors are considering expanding operations. Capital expenditure
of $1 million would be required to expand the existing distribution
facilities.
How much finance needs to be raised in total to fund these three
proposals?
A $1.90 million
B $3.65 million
C $4.35 million
D $6.35 million
Solution
The answer is (A).
Financing requirement is:
Reduction in payables = ($3,150,000 × 10/45) = $700,000
Reduction in overdraft = (2,200,000 – 2,000,000) = $200,000
New capital expenditure = $1,000,000
Therefore, total = $1,900,000
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