Trade debtors 1 x 240000000 sh 20000000 12 additional

This preview shows page 176 - 180 out of 187 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Business: Its Legal, Ethical, and Global Environment
The document you are viewing contains questions related to this textbook.
Chapter 1 / Exercise 9
Business: Its Legal, Ethical, and Global Environment
Jennings
Expert Verified
Trade debtors = 1 x 240,000,000 = sh 20,000,000 12 Additional working capital sh.M Additional debtors (50,000,000 20,000,000) 30 Additional stock 10 Additional creditors (2) Additional working capital 38 % 7 . 23 % 100 38 9 x m m ROI ROI > required rate of return of 20% therefore the proposal is acceptable . ii) Existing customers take 1 month credit and the new customers take 2 months credit Additional sales = sh.60,000,000
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Business: Its Legal, Ethical, and Global Environment
The document you are viewing contains questions related to this textbook.
Chapter 1 / Exercise 9
Business: Its Legal, Ethical, and Global Environment
Jennings
Expert Verified
CFM 101: BUSINESS FINANCE 175 000 , 000 , 10 12 000 , 000 , 60 2 x Debtors Additional Additional working capital sh.M Additional debtors 10 Additional stock 10 Additional creditors (2) Additional working capital 18 ROI = 9m x 100% = 50% 18m ROI > RRR of 20% = Proposal acceptable Alternatively Sales of new customers sh.60M - 2 months - 0.2 Sales of old customers sh.240M - 1 month - 0.8 Total sales sh.300M 1.0 The average collection period = 0.2 x 2 months + 0.8 x 1 month = 1.2 months 000 , 000 , 30 12 000 , 000 , 300 2 . 1 x Debtors Trade Additional working capital Sh.M Additional debtors (30m 20m) 10 Additional stock 10 Additional creditors 2 Additional working capital 18 % 50 % 100 18 9 x m m ROI This is greater than the required rate of return of 20% and is therefore acceptable.
CFM 101: BUSINESS FINANCE 176 7.3.8 MANAGEMENT OF SHORT-TERM FINANCING Short-term finance is any liability originally scheduled for payment within a period of one year. The major sources of short-term finance will include:- Accruals Creditors or accounts payable Bank overdraft Commercial paper a) Accruals These are continuously recurring short-term liabilities e.g. salaries and wages, rent, electricity etc They increase spontaneously as the company’s operations increases. This source of finance is considered to be a free source of finance because no interest is paid on accruals. However, the company does not have control over its accruals because the payment of accruals is determined by economic forces, industrial norms and government policy. b) Creditors or Accounts payable This occurs when the company purchases on credit. It’s the largest source of short - term financing to the company. Creditors increase spontaneously as the company’s operation increases. For example if the company doubles its purchases, then its accounts payable will also double. Companies that sell on credit will normally have a credit policy which will include certain terms e.g. 2/10 net 30. This means that the list price is sub-divided into two components. List price =True price + Finance charge Therefore in this case the additional credit period will be 20 days while the free period is 10 days. Hence, the additional credit period is costly because of the finance charge. Therefore the cost of accounts payable is the opportunity cost of the discount forgone. The cost of foregoing the discount is calculated using the following formula:- 100 % 1 % x peorid Discount period Credit year a in days of Number x Discount Discount
CFM 101: BUSINESS FINANCE 177 c) Bank overdrafts A bank overdraft is the permission granted by the bank to its customers to issue cheques even when the customer has insufficient funds to meet the cheques.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture