问答题
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 creditcustomers to settle outstanding invoices within 40 days, on average customers have been taking longer. Approximately1% 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 tomanage the sales ledger of Widnor Co on a with-recourse basis. Nokfe Co believes that it can use its expertise toreduce average trade receivables days to 35 days, while cutting bad debts by 70% and reducing administration costsby $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% ofcredit sales.
Assume that there are 360 days in each year.
Required:
问答题
(a)Advise whether the factor’s offer is financially acceptable to Widnor Co.(7 marks)
【正确答案】The factor’s offer will be financially acceptable to Widnor Co if it results in a net benefit rather than a net cost.
【答案解析】
问答题
(b)Briefly discuss how the creditworthiness of potential customers can be assessed.(3 marks)
【正确答案】The creditworthiness of potential customers can be assessed from a range of different sources of information. References areuseful in this respect, and potential customers should supply a bank reference and a trade or other reference when seekingcredit on purchases. Another source of information is the credit rating of the potential customer, which can be checked by acredit rating agency or credit reference agency. For larger potential customers, a file can be opened where additionalinformation can be located, evaluated and stored, such as the annual report and accounts of the potential customer, pressreleases and so on.
【答案解析】