DSActEd Semester 2

F.Y.B.Sc. (Actuarial Science) Actuarial Finance - 1

PRACTICAL 1: SHORT TERM COMPANY FINANCE

Q1 Company ABC Ltd sends out the invoices to some customer for the following amount
Name of customer Amount Date
Sheena Private Ltd Rs. 20,000/- 1st Jan 2007
Presha Private Ltd Rs.15000/- 16th Jan 2007
Zehnab Private Ltd Rs.50000/- 1st Mar 2007
Vanita Private Ltd Rs.25000/- 1st May 2007
Sophia Private Ltd Rs.5000/- 1st Jun 2007
At the same time it sends a copy of these invoices to its factor, Peera Ltd, in return for a
fixed percentage (%) i.e. 90% of invoice amount. Company ABC Ltd receives the money from
its customers on following dates –

Name of customer Amount Date

Sheena Private Ltd Rs.5000/- 31st Jan 2007
Presha Private Ltd Rs.10000/- 28th Feb 2007
Presha Private Ltd Rs.5000/- 31st Mar 2007
Zehnab Private Ltd Rs.20000/- 31st Mar 2007
Sheena Private Ltd Rs.15000/- 31st Mar 2007
Zehnab Private Ltd Rs.20000/- 30th Apr 2007
Vanita Private Ltd Rs.20000/- 31st May 2007
Zehnab Private Ltd Rs.10000/- 30th Jun 2007
Sophia Private Ltd Rs.5000/- 30th Jun 2007
Vanita Private Ltd Rs.5000/- 30th Jun 2007

Company ABC Ltd then sends the money to Peera Ltd. Upto 30th June 2007, simple interest
@ 3% per month has been incurred on the loan amount from Peera Ltd. Demonstrate with
the help of calculations, how will Peera Ltd settle its accounts with ABC Ltd upto 30th June
2007 under the scheme of RECOURSE FACTORING.

[Assume 100% of invoice amount for the calculation of interest amount]

Q2 A trader whose current sales are Rs. 15 lakhs per annum and average collection period is 30
days wants to persue a more liberal credit policy to improve sales. A study made by
consultant firm reveals the following information.

Credit policy Increase in collection period Increase in sales

A 15 days 60000
B 30 days 90000
C 45 days 150000
D 60 days 180000
E 90 days 200000
Selling price per unit is Rs.5
Average cost per unit is Rs.4
Variable cost per unit is Rs.2.75
The required rate of return on additional investment is 20%
Assume 360 days a year
There are no bad debts
Which of the above policy would you recommend for adoption?
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DSActEd Semester 2
F.Y.B.Sc. (Actuarial Science) Actuarial Finance - 1

Q3 Waste Co is a waste management company, with one sole shareholder/director, Mr Trusty.

It collects two types of waste from businesses – recyclable waste and confidential waste.
Since companies have increasingly become aware of both the need for recycling and the
need to protect confidential information, Waste Co’s client base has expanded rapidly over
the past two years.

As the business has expanded, Mr Trusty has had less time available to focus on credit
control. This has resulted in a steady deterioration in accounts receivable collection and a
rapid increase in Mr Trusty’s overdraft, despite high profits. Mr Trusty’s bank has now
refused to extend his overdraft any further and has suggested that he either employ a credit
controller or factor his accounts receivable.

The following information is available:

1. Credit sales for the year ending 30 November 2007 were $2,550,000, and average
accounts receivable days were 60. Sales are expected to increase by 25% over the next
year.

2. If Mr Trusty employs a good credit controller, the cost to the business will be $47,000
per annum. It is anticipated that the accounts receivable days can then be reduced to
40.

3. A local factoring organisation has offered to factor the company’s accounts receivable
on the following terms:

 An advance of 80% of the value of sales invoices (which Mr Trusty would fully
utilise).
 An estimated reduction in accounts receivable days to 35.
 An annual administration fee of 1.3% of turnover.
 Interest charge on advances of 12% per annum.

4. Current overdraft rates are 10% per annum.

5. Assume there are 365 days in a year.

Calculate whether it is financially beneficial for Waste Co to factor its accounts receivables for
the next year, as compared to employing a credit controller.

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