CHAPTER 27

1. What is the annual percentage interest cost associated with the following credit
terms?

(a) 2/15 net 30 (b) 3/10 net 30 (c) 2/10 net 45 (d) 1/5 net 15

Assume that the firm does not avail of the cash discount but pays on the last day of
the net period.
Solution:
Annual interest cost is given by ,
Discount % 360
x
1- Discount % Credit period – Discount period

Therefore, the annual per cent interest cost for the given credit terms will be as
follows:

a. 0.02 360
x = 0.4898 = 48.98 %
0.98 15

239
 b. 0.03 360
x = 0.5567 = 55.67 %
0.97 20

c. 0.02 360
x = 0.2099 = 20.99 %
0.98 35

d. 0.01 360
x = 0.3636 = 36.36 %
0.99 10

2. Calculate the annual percentage interest cost of various terms in problem 1 above,
assuming that it is possible to stretch payment 20 days beyond the net period.

Solution:

a. 0.02 360
x = 0.2099 = 20.99 %
0.98 35

b. 0.03 360
x = 0.2784 = 27.84 %
0.97 40

c. 0.02 360
x = 0.1336 = 13.36 %
0.98 55

d. 0.01 360
x = 0.1212 = 12.12 %
0.99 30

3. Consider the data for Kanishka Limited.

Current assets Rs (in million)
Raw material 40
Work-in-process 8
Finished goods 25
Other current assets 3

76
Current liabilities
Trade creditors 30
Bank borrowing (including Bills

Discounted) 10
240
 Other current liabilities 4

44

What is the maximum permissible bank finance for Kanishka Limited under the
three methods suggested by the Tandon Committee? Assume that the core current
assets for Kanishka Limited are Rs.15 million.

Solution:

The maximum permissible bank finance under the three methods suggested by
The Tandon Committee are :

Method 1 : 0.75(CA-CL) = 0.75(76-44) = Rs.24 million

Method 2 : 0.75(CA)-CL = 0.75(76)-44 = Rs. 13 million
Method 3 : 0.75(CA-CCA)-CL = 0.75(76-15)-44 = Rs.1.75 million

4. Consider the data for Smartlink Corporation.

Current assets Rs (in million)

Raw material 280
Work-in-process 58
Finished goods 240
Other current assets 68

646
Current liabilities
Trade creditors 160
Bank borrowing (including Bills

Discounted) 200
Other current liabilities 42

402

What is the maximum permissible bank finance for Smartlink Corporation under
the three methods suggested by the Tandon Committee? Assume that the core
current assets for Smartlink Corporation are Rs.100 million.

241
Solution:

The maximum permissible bank finance under the three methods suggested by
The Tandon Committee are:

Method 1 : 0.75(CA-CL) = 0.75(646 -402) = Rs.183 million

Method 2 : 0.75(CA)-CL = 0.75(646) - 402 = Rs.82.5 million.
Method 3 : 0.75(CA-CCA)-CL = 0.75(646 -100)- 402 = Rs.7.5 million

242