H

Assignment For
Business Finance
Subject code: FIN 201

Prepared For:

Md.Al-Mamun
Senior Lecturer
Department of Business
Administration

Prepared By:
Md. Aziz Bin Anwar
ID#2007-2-10-060
Submission date: 27-07-2009

Homework: Managing Short Term Financing Problem

Problem 1. The company can buy raw material on credit with 5/15 net 60days term.

Here,
360 Days
n= = 8times
(60 −15 ) Days

.05
∴Periodic cost = 1 −.05
= 0.053

EIR = (1 + Periodic cos t ) n −1 = (1 + 0.053 ) 8 −1 = 0.5115= 51.15%

Problem 2. The company can buy raw material on credit with 5/15 net 70 days term.

Here,
360 Days
n= = 6.5times
(70 −15 ) Days

.05
∴Periodic cost = 1 −.05
= 0.053

EIR = (1 + Periodic cos t ) n −1 = (1 + 0.053 ) 6.5 −1 = 0.3988= 39.88%

Problem 3. The company can issue commercial paper (CP) with 180days maturity of
Tk. 10, 00,000 at a discount of 5%. The issue manager will charge a 1.5% commission
on the face value of the CP. Additional 1.25% will be used for printing and stamp duty
purpose for each CP.

Given,

Face Value= Tk 10,00,000

Discount = Tk 10,00,000 × 5% = Tk 50,000

Sale Value = Face Value – Discount = Tk ( 10,00,000 – 50,000) = Tk 9,50,000

Net Sale Value = Sale Value – Other charges

= 9,50,000- ( 10,00,000 × 1.5%) – (10,00,000 × 1.25%)

= Tk 9,22,500

360 360 Days

n= = = 2times
Maturity 180 Days

Face value - Sale value 10 ,00 ,000 −9,50 ,000

∴Periodic cost = NSV
=
9,22 ,500
= 0.54

EIR = (1 + Periodic cos t ) n −1 = (1 + 0.54 ) 2 −1 = 0.1109 = 11.09%

Problem 4. The company can borrow Tk 10, 00,000 from IFIC bank for a period of 1
year and pay a 6% interest rate. The payment should be made on quarterly installment.

Interest = Tk 10,00,000 × 6% = Tk 60,000

 2 ×N ×i 2 × 4 × 60 ,000
EIR = = = 0.096 = 9.6%
A( N +1) 10 ,00 ,000 (4 +1)

Problem 5. The company can borrow Tk 10, 00,000 Janata Bank Ltd. With 12%
compensating balances and at 6% interest for a period of 3 months under discount
basis. However, the company actually borrowed 90% of the usable fund. The bank
charges 3% commitment fee on the unused part of the loan.

Total Amount = Tk 10, 00,000

Compensative Balance = Tk 10, 00,000 × 12% = Tk 1, 20,000

Usable Fund = Tk (10, 00,000 – 1, 20,000) = Tk 8, 80,000

Used Fund = Tk 8, 80,000 × 90% = Tk 7, 92,000

Unused fund = Tk 8, 80,000 × 10% = Tk 88,000

Cost = (7, 92,000 × 6%) + (88,000 × 3%) = Tk 50,160

2 ×N ×i 2 ×3 × 50,160
EIR = = = 0.095 = 9.5%
A( N +1) 7,92 ,000 (3 +1)

Problem 6. The company has annual credit sales of Tk 40 Lakhs with average A/R
balance of Tk 10 Lakhs. The company is considering to factor their A/R balance with
6% annual interest rate with 5%reserve requirement. Assume a factoring commission
of 4% and a historical bad debt experience of 3% for the company.

Calculation of Effective fund used:

Total Credit Sales = 40 Lakhs

Average A/R Balance = 10 Lakhs

 40 Lakh
Average turnover = = 4Time
10 Lakh

Reserve amount= Tk (10, 00,000 × 5%) = Tk 50,000

Factoring commission= Tk (10, 00,000 × 4%) = Tk 40,000

Fund available = Tk (10, 00,000-50,000-40,000) = Tk 9, 10,000

1
Interest we paid = Tk 9, 10,000 × 6% = = Tk 13,650
4

Net fund received = Tk (9, 10,000-13,650) = Tk 8, 96,350

Calculation of Net cost:

Reserve amount =50,000

Commission =40,000

Interest =13,650s

Total cost =1, 03,650

(-) Savings
Bad debt experience
(10, 00,000 × 3%) = (30,000)

Net cost =Tk 73,650

Now,

Net cos t 73,650

EIR = Netfund × 100 = 8,96,350 × 100 = 0.082=8.2%
Case: ACI Short Term Liability Management Problem

Problem (a) The company can issue commercial paper (CP) with 180days maturity at a
face value of Tk. 200,000 each at a discount of 5%. The issue manager will charge a
2.7% commission on the face value of the CP additional 1.5% will be used for printing
and stamp duty purpose for each CP.

Given,

Face Value= $2, 00,000

Discount= $ 2, 00,000 × 5% = $ 10,000

Sale Value = Face Value – Discount = $ (2, 00,000 – 10,000) = $ 1, 90,000

Net Sale Value = Sale Value – Other charges

= 1, 90,000- (2, 00,000 × 2.7%) – (2, 00,000 × 1.5%)

= $1, 81,600

360 360 Days

n= = = 2 Time
Maturity 180 Days

Face value - Sale value 2,00 ,000 −1,90 ,000

∴Periodic cost = NSV
=
1,81 ,600
= 0.0551 = 5.51%
 EIR = (1 + Periodic cos t ) n −1 = (1 + 0.0551 ) 2 −1 = 0.113= 11.3%

Problem (b) The Company can borrow Tk 200,000 from HSBC bank Limited for a
period of 1 year. The bank will charge 6%interest. The compensating balance is 5%
and commitment fee is 2% on unused part. The bank uses 80% of usable fund.

Total Amount = $ 2, 00,000

Compensative Balance = $ 2, 00,000 × 5% = $ 10,000

Usable Fund = $ (2, 00,000 – 10,000) = $ 1, 90,000

Used Fund = $1, 90,000 × 20%= $ 38,000

Unused fund = $ 1, 90,000 × 80% = $ 1,52,0000

Cost = (38,000 × 6%) + (1, 52, 0000 × 2%) = $ 5,320

2 ×N ×i 2 ×1 × 5,320
EIR = = = 0.14 = 14 %
A( N +1) 38 ,000 (1 +1)

Problem (c) The company has annual credit sales of $15, 00,000 with average A/R
balance of $500,000. The company is considering to factor their A/R balance with 6%
annual interest rate with 10%reserve requirement. Assume a factoring commission of
2.5% a historical bad debt experience of 4% for the company.

Calculation of Effective fund used:

Total Credit Sales = $15, 00,000

Average A/R Balance = $5, 00,000

15 Lakh
Average turnover = = 3 Time
5 Lakh
 Reserve amount= Tk (5, 00,000 × 10%) = $ 50,000

Factoring commission= Tk (5, 00,000 × 2.5%) = $ 12,500

Fund available = Tk (5, 00,000-50,000-12,500) = $ 4, 37,500

1
Interest = Tk 4, 37,500 × 6% × = = $ 8,749
3

Net fund received = Tk (4, 37,500-8,749) = $ 4, 28,751

Calculation of Net cost:

Reserve amount = $50,000

Commission = $12,500

Interest = $ 8,749

Total cost = $ 71,249

(-) Savings

Bad debt experience

(5, 00,000 × 4%) = (20,000)

Net cost =$51,249

Now,

Net cos t 51,249

EIR = Netfund × 100 = 4,28,751 × 100 = 0.1195=11.95%
Question: Which method of working capital financing the company should choose?