c) DOGGI Ltd has annual sales of K20million. Customers currently take credit as follows: Days %'age 30 20% 60 50% 90 30% DOGGI Ltd is considering offering a discount of 1% for payment within 30 days. It is estimated that 60% of customers will take advantage of the discount (and that the remainder will take a full 90 days). The company's bank overdraft rate is 15% p.a. Assume 365 days in a year. i) Calculate the net cost or benefit of the change of policy. ii) Should they offer the discount? d) Next year DOGGI Ltd forecasts a cash requirement of K1.6milion, the use being constant throughout the year. The company has investments in excess of this amount which are earning 10.5% p.a. The company earns interest of 6% on their current account bank balance. The cost of selling investments is K150 per transaction i) If the company sells K150,000 of investments each time, calculate the total cost p.a. to the company. ii) What is the optimal economic quantity of cash to transfer each time in order to minimise costs?
c) DOGGI Ltd has annual sales of K20million. Customers currently take credit as follows: Days %'age 30 20% 60 50% 90 30% DOGGI Ltd is considering offering a discount of 1% for payment within 30 days. It is estimated that 60% of customers will take advantage of the discount (and that the remainder will take a full 90 days). The company's bank overdraft rate is 15% p.a. Assume 365 days in a year. i) Calculate the net cost or benefit of the change of policy. ii) Should they offer the discount? d) Next year DOGGI Ltd forecasts a cash requirement of K1.6milion, the use being constant throughout the year. The company has investments in excess of this amount which are earning 10.5% p.a. The company earns interest of 6% on their current account bank balance. The cost of selling investments is K150 per transaction i) If the company sells K150,000 of investments each time, calculate the total cost p.a. to the company. ii) What is the optimal economic quantity of cash to transfer each time in order to minimise costs?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:c) DOGGI Ltd has annual sales of K20million. Customers currently take credit as follows:
Days
%'age
20%
30
60
50%
90
30%
DOGGI Ltd is considering offering a discount of 1% for payment within 30 days. It is
estimated that 60% of customers will take advantage of the discount (and that the
remainder will take a full 90 days). The company's bank overdraft rate is 15% p.a. Assume
365 days in a year.
i) Calculate the net cost or benefit of the change of policy.
Should they offer the discount?
ii)
d) Next year DOGGI Ltd forecasts a cash requirement of K1.6milion, the use being constant
throughout the year. The company has investments in excess of this amount which are
earning 10.5% p.a. The company earns interest of 6% on their current account bank
balance. The cost of selling investments is K150 per transaction
c)
i)
If the company sells K150,000 of investments each time, calculate the total
cost p.a. to the company.
ii)
What is the optimal economic quantity of cash to transfer each time in order to
minimise costs?
Explain how the financing of working capital can be arranged in terms of short and
long term sources of finance. In particular, make reference to:
i) The financing of working capital or net current assets when short term sources
of finance are exhausted
ii) The distinction between fluctuating and permanent current assets.
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