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The finance director of Widnor Co has been looking to improve the company’s working capital management. Widnor Co has revenue from credit sales of $26,750,000 per year and although its terms of trade require all credit customers to settle outstanding invoices within 40 days, on average customers have been taking longer. Approximately 1% of credit sales turn into bad debts which are not recovered.

Trade receivables currently stand at $4,458,000 and Widnor Co has a cost of short-term finance of 5% per year.

The finance director is considering a proposal from a factoring company, Nokfe Co, which was invited to tender to manage the sales ledger of Widnor Co on a with-recourse basis. Nokfe Co believes that it can use its expertise to reduce average trade receivables days to 35 days, while cutting bad debts by 70% and reducing administration costs by $50,000 per year. A condition of the factoring agreement is that the company would also advance Widnor  Co 80% of the value of invoices raised at an interest rate of 7% per year. Nokfe Co would charge an annual fee of 0.75% of credit sales.

Assume that there are 360 days in each year.

Requirements:

a

Advise whether the factor’s offer is financially acceptable to Widnor Co.

Marks: 7
b

Briefly discuss how the creditworthiness of potential customers can be assessed.

Marks: 3
c

Discuss how risks arising from granting credit to foreign customers can be managed and reduced.

Marks: 10

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
10/28/2020 - 14:31
a
9944
7 / 7
Rakhi Gupta's picture
Rakhi Gupta
10/28/2020 - 14:37
b
9946
3 / 3
Rakhi Gupta's picture
Rakhi Gupta
10/28/2020 - 15:11
c
9948
8 / 10
Rakhi Gupta's picture
Rakhi Gupta
10/10/2020 - 17:03
a
9776
6 / 7
Rakhi Gupta's picture
Rakhi Gupta
10/10/2020 - 17:29
b
9778
1 / 3
Rakhi Gupta's picture
Rakhi Gupta
10/10/2020 - 17:42
c
9780
6 / 10
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/14/2020 - 07:01
a
9694
7
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/14/2020 - 07:13
b
9696
3
MD. Mayan Ahmmad's picture
MD. Mayan Ahmmad
09/14/2020 - 08:02
c
9698
10
Abhro Gourab Das's picture
Abhro Gourab Das
09/10/2020 - 19:45
a
9676
7
Lokonath Debnath's picture
Lokonath Debnath
08/20/2020 - 18:17
a
9456
7
Lokonath Debnath's picture
Lokonath Debnath
08/20/2020 - 18:29
b
9458
3
Lokonath Debnath's picture
Lokonath Debnath
08/20/2020 - 18:52
c
9460
10
Apurba nandy's picture
Apurba nandy
03/03/2020 - 15:42
a
9000
5 / 7
Kamrunnahar Takia's picture
Kamrunnahar Takia
02/16/2020 - 14:20
a
8634
7
Kamrunnahar Takia's picture
Kamrunnahar Takia
02/16/2020 - 14:20
b
8636
3
Kamrunnahar Takia's picture
Kamrunnahar Takia
02/16/2020 - 14:21
c
8638
10