BBA Hon’s 1st & 2nd Year (New Syllabus) Kalam Vai

01717524482
Dept. of Accounting, Finance, Management & Marketing
Principle of Finance / Fundamental of Finance
Chapter: 03/08/12: Short term Financing/ Current Liabilities Management
Private Exam-2015

1. a) Let. a business man has purchased some goods at a term of 3/10, net 30. Determine the cost of trade credit
in this term of the purchaser does not accept the cash discount.
b) A company needs Tk. 80,000 to meet working capital requirement. It has three alternative sources:-
(i) The company can buy Tk. 1,00,000 of materials on therms of 3/30, net 90.
(ii) A bank will lend Tk. 1,00,000 at 13 percent interest rate with 20 percent compensating balance
requirement.
(iii) A factor will buy company’s accounts receivables (Tk. 1,00,000 per month) and will advance at 12
percent interest p.a up to 80 percent of the face value. Average collection period is 60 days. The factor
will charge 2 percent commission. It has been estimated that the factor’s service will save the company’s
A/R administration cost of Tk. 1,000 per month and 1 percent bad debt loss. Which alternative should
be select?
2. a) DIPA Company sells goods on cash as well as credit. The following particulars are extracted from the
books of account for the current year ended.
Total gross sales Tk. 1,00,000
Cash sales (Included above) 20,000
Sales returns 7,000
Total accounts receivable at the end 9,000
Notes receivables 2,000
Allowance for doubtful debts at the end of the year 1,000
Total accounts payable at the year ended 10,000
Calculate:
i) Account receivable turn over. (ii) Average collection period.
b) Boishakh Corporation has just acquired a large account. As a result, it will soon need an additional Tk. 95.000 in
working capital. It has been determined that there are three feasible sources of funds.
a) Trade credit: The firm buys about Tk. 50,000 of materials per month on terms of 3/30 net 90. Discount
are not taken.
b) Bank Loan: The firm’s bank will loan Tk. 1,06,000 at 13%. A 10% compensating balance will be
required.
c) Factoring: A factor will buy the firm’s receivables Tk. 1,50,000 per month, which have an average
collection period of 30 days. 12% interest rate up to 75% advance of receivable. The factor will charge a
2% fee on all receivables purchased. It has been credit department expenses and bad-debts expenses Tk.
2500 per month.
Required:
(i) Calculate the effective annual interest rate of all alternatives.
(ii) Which mode of financing should be accepted by the company?
3. a) You are purchasing furniture on terms of 2/10, Net 60. If you are unable to pay by the 10th days, what is the
annual rate you are paying for trade credit if,
(i) You pay on the 20th days
(ii) You pay on the 60th days.
b) Lotus Co. Ltd. needs working capital of Tk.5,00,000. There are three alternative methods of financing.
(1) To forgo cash discount granted on the basis 3/10, Net 60.
(2) The Co. has a revolving credit of Tk. 5,00,000 at an interest of 13% with Sonali Bank. It average borrowing
was Tk. 3,00,000 for the year. A commitment fee of 2.5% is to be paid. Compute EIR.
(3) The Co. issue a 120 days commercial paper of a face value of Tk. 5,00,000 and its sales value Tk.4,50,000.
The credit rating expense are 0.5% of the size of issue, agent charge being 0.25% and stamp duty 0.5%. What is
the cost of commercial paper?
Which alternative should the company choose and why?
4. a) If a firm buys under terms 2/10; net 30, but actually pays on 10th days, what is the cost of free trade credit here? But
if it pays on 20th days still takes discount, what is the cost of its non free trade credit?

b) The city company needs to increase its working capital by Tk. 4,40,000. The following three alternatives are
available.
3
(i) Forgo cash discount and pay on the final due data. (Basis net 30);
10
(ii) Borrow Tk. 5,00,000 from a bank at 15%. This alternative would necessitate maintaining a 12%
compensating balance.
(iii) Issue Tk. 4,70,000 of six months commercial paper to net Tk. 4,40,000. Assume that the new paper
would be issued every six months. (Commercial paper has no stipulated interest rate. It is sold at a
discount, and the amount of discount determines the interest cost to the issuer).
The firm assumes that the year consists of 365 days. It is also assumed that the firm would prefer the flexibility
of bank financing provided the additional cost of this flexibility was more than 2% per annum, which
alternative should city select? Why?

5. a) The Co. issue a 120 days commercial paper of a face value of Tk. 5,00,000 and its sales value Tk.4,50,000. The
credit rating expense are 0.5% of the size of issue, agent charge being 0.25% and stamp duty 0.5%. What is the cost of
commercial paper?

b) Lily Chemicals needs, working capital of Tk. 5,00,000. There are three alterative methods of financing.

i) To forgo cash discount granted on the basis of 3/15, net 30.

ii) To borrow from a bank at 14% rate per annum. The bank requires 25% compensating balance on loan
amount.
iii) To issue commercial paper at 15%. The cost of issuing the commercial paper would be Tk. 6,000 in
each 6 month period. Which method should the company choose?

6. a) A company extended credit facility for tk. 10,00,000 on terms of.

(i) 2/15, Net 45; (ii) 2.5/20, Net 60; (iii) 3/10, Net 60(iv) 2/20, Net 90;
Find out the cost of trade credit and effective interest rate. Which terms of sales is the best to the buyer?
b) A company needs Tk. 8,00,000 t meet working capital requirements immediately. It has the following
alternative sours:
(i) The company can buy Tk. 10,00,000 of raw materials on terms of 3/30, net 90.
(ii) A bank will lend Tk. 10,00,000 at 13% interest with, 20% compensating balance requirement.
Interest are paid in advance.
(iii) To issue commercial paper Tk. 10,00,000 of six months period and net sales value is Tk. 9,50,000.
Required: Which alternative should the company choose? And why?

7. a) The Co. has a revolving credit of Tk. 5,00,000 at an interest of 13% with Sonali Bank. It average borrowing was Tk.
3,00,000 for the year. A commitment fee of 2.5% is to be paid. Compute EIR.

b) The credit terms for some alternatives are given bellow:

Alternative Credit terms
X 2/10, Net 60
Y 3/15, Net 80
Z 2/20, Net 70

(i) Determine the cost of foregoing cash discount for each alternative.
(ii) The firm has an another option to raise short-tem bank loan @ 13% interest. Should the firm accept the cash
discount offer or not?
(iii) What would be the decision in (ii) if accounts payables are stretched by 30 days?