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Extracts from the recent financial statements of Bold Co are given below.

 

  $'000
Revenue 21300
Cost of sales 16400
Gross profit 4900

 

       $'000      $'000
Non-current assets   3100
     
Inventory 4500  
Trade receivables 3500  
    8000
Total assets   11000
     
Equity    
Ordinary shares 1000  
Reserves 1000  
    2000
     
Non-current liabilities    
Bonds   3000
     
Current liabilities    
Trade payables 3000  
Overdraft 3000  
    6000
Total equity and liabilities   11000

 

A factor has offered to manage the trade receivables of Bold Co in a servicing and factor-financing agreement. The factor expects to reduce the average trade receivables period of Bold Co from its current level to 35 days; to reduce bad debts from 0.9% of revenue to 0.6% of revenue; and to save Bold Co $40,000 per year in administration costs. The factor would also make an advance to Bold Co of 80% of the revised book value of trade receivables. The interest rate on the advance would be 2% higher than the 7% that Bold Co currently pays on its overdraft. The factor would charge a fee of 0.75% of revenue on a with-recourse basis, or a fee of 1.25% of revenue on a nonrecourse basis. Assume that there are 365 working days in each year and that all sales and supplies are on credit.

Requirements:

a

Explain the meaning of the term 'cash operating cycle' and discuss the relationship between the cash operating cycle and the level of investment in working capital. Your answer should include a discussion of  relevant working capital policy and the nature of business operations. 

Marks: 8
b

Calculate the cash operating cycle of Bold Co. (Ignore the factor's offer in this part of the question).

Marks: 4
c

Calculate the value of the factor’s offer:

  1. on a with-recourse basis;
  2. on a non-recourse basis.
Marks: 8

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/11/2020 - 20:15
c
10088
8
Rakhi Gupta's picture
Rakhi Gupta
11/09/2020 - 10:33
a
10084
8
Rakhi Gupta's picture
Rakhi Gupta
11/09/2020 - 10:36
b
10086
4
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/16/2020 - 11:39
a
9710
8
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/16/2020 - 06:31
b
9706
4
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/16/2020 - 07:04
c
9708
8
Abhro Gourab Das's picture
Abhro Gourab Das
09/11/2020 - 02:11
c
9678
8
Rakhi Gupta's picture
Rakhi Gupta
08/21/2020 - 15:34
b
9476
4 / 4
Apurba nandy's picture
Apurba nandy
03/03/2020 - 03:02
c
8984
8
Apurba nandy's picture
Apurba nandy
03/03/2020 - 03:03
c
8390
8
Masum Billah's picture
Masum Billah
12/03/2019 - 01:46
a
8346
8
Masum Billah's picture
Masum Billah
12/03/2019 - 01:56
b
8348
4
Apurba nandy's picture
Apurba nandy
11/30/2019 - 03:26
c
8292
8
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/29/2019 - 20:24
c
8296
8
Sohel Miah's picture
Sohel Miah
10/02/2019 - 11:07
a
7500
8
Abhro Gourab Das's picture
Abhro Gourab Das
09/02/2019 - 03:06
b
7160
4
Abhro Gourab Das's picture
Abhro Gourab Das
09/02/2019 - 03:55
c
7162
8