MAF 503 (FINANCIAL MANAGEMENT)

QUESTION 2

B. Effective annual cost @ Effective annual rate (EAR)

Amount Receive (AR) = RM500,000 x 0.75 = RM375,000
Amount Borrow (AB)
Interest (I)
Compensating Balance (CB)
Bank Balance (B)

Alternative 1
AR = AB – I – (CB –B)
375,000 = AB – (0.08AB x 9/12) – (0.12AB – 5000)
375,000 = AB – 0.06AB – 0.12AB + 5000
AB = 370,000 / 0.82
AB = 451,219.51 @ 451,220

EAR = (451,220 x 8% x 9/12) x 12/9

375,000
= 27,0732.20 x 12/9
375,000
= 9.63%

Alternative 2
Utilized RM375,000 x 10% (2% + 8%) x 9/12 RM28,125
Unutilized RM125,000 x 4% RM 5,000
Total interest RM33,125

EAR = 33,125 / 375,000 x 12/9

= 11.78%

1
Alternative 3
Interest for 150-day = 375,000 x 9% x 150/360
= RM14,062.50

EAR = (Interest + Other costs) x 360/150

(Value - Interest - Other costs)

EAR = (14,062.50 + 2,750) x 360/150

(375,000 – 14,062.50 – 2,750)

EAR = 16,812.50 x 360/150

358,187.50 @ 358,187

= 11.27%

XXY Berhad should choose alternative 1 because the EAR is the lowest.

2
C. Flaxy Berhad
Cash Conversion Cycle (CCC)
Average age of inventories @ Inventory conversion period (ICP)
Receivables Collection Period (RCP)
Payables Deferral Period (PDP)

CCC = ICP + RCP – PDP

i. ICP = CCC – RCP + PDP

= 70 – 40 + 20
= 50 days

ii. New CCC = ICP + RCP – PDP

= 55 (50+5) + 40 – 45
= 50 days

iii. Old CCC = 70 days

New CCC = 50 days
Days saving = 70-50 = 20

Daily Expenditure = RM5,000,000 / 360 = RM13,888.89

Annual cost savings = RM13,888.89 x 20 x 7%

= RM19,444.44