FINANCIAL MANAGEMENT

EXERCISE 1: AGGRESSIVE Vs. CONSERVATIVE FINANCING STRATEGIES

JACKIE CORPORATION's permanent financing requirement is P 300,000 per quarter, composed of
P 200,000 for fixed assets, and P 100,000 for current assets. However, the financing requirements for
current assets are expected to increase by P 30,000 in the first quarter, P 20,000 in the second quarter,
P 40,000 in the third quarter, and P 10,000 in the fourth quarter

REQUIRED: Determine the amount of working capital to maintain under:

A AGGRESSIVE financing strategy

SOLUTION: Permanent CA + Temporary CA = Total CA
100,000 + 0 = 100,000

B MODERATE financing strategy

SOLUTION:
100,000 + [(30,000+20,000+40,000+10,000)/4] = 125,000

C CONSERVATIVE financing strategy

SOLUTION:
100,000 + 40,000 = 140,000

EXERCISE 2
A COST OF TRADE CREDIT
ABC Trading Company purchases merchandise for P 200,000, 2/10, n/30

REQUIRED:
A The annual cost of credit
SOLUTION:
COST = 2%/(100-2%) x (360/(30-10)
= 2%/98% x 360/20
= .0204 x 18
= 36.73%

B The annual cost of trade credit if term is changed to 1/15, n/20

SOLUTION:
COST = 1%/(100-1%) x (360/(20-15)
= 1%/99% x 360/5
= .0101 x 72
= 72.73%

B COST OF BANK LOANS

ABC Trading Co. was granted a P 200,000 bank loan with 12% stated interest

REQUIRED: The effective annual rate, under the following cases:

A ABC receives the entire amount of P 200,000
1. NOT DISCOUNTED
SOLUTION:
COST = 24,000
200,000
= 12%

C COST OF BANK LOANS

B ABC was granted a discounted loan
SOLUTION:
COST = 24,000
200,000-24,000
 = 13.63%

C ABC is required to maintain a compensating balance of P 10,000 under the non-discounted loan
SOLUTION:
COST = 24,000
200,000-10,000
= 12.63%

D ABC is required to maintain a compensating balance of 10% under a discounted loan

SOLUTION:
COST = 24,000
(200,000-20,000-24,000)
= 15.38%

D COST OF COMMERCIAL PAPERS

ABC Co. plans to sell P 100,000,000 in 180-day maturity paper, which it expects to pay discounted
interest at an annual rate of 12%. Due to this commercial papers, ABC expects to incur P 100,000 in
dealer placement fees and paper issuance costs:

REQUIRED: The effective cost of ABC's credit

SOLUTION: COST = (100M x 12% x 180/360) + 100,000 x 360/180

(100M - 6M - 100,000)
= 6,100,000
93,900,000
= .06496 x 360/180
= 12.99%

E COST OF FACTORING RECEIVABLES

ABC Co. has P 200,000 in receivabl that carries 30-day credit term, 2% facto's fee, 6% hold-back reserve,
and an interest of 12% per annum on advances.

REQUIRED: Determine the following:

1 Cash proceeds from factoring receivable

SOLUTION:
Face value 200,000
Holdback -12,000
Fee -2,000
Net proceeds before Int. 184,000
Interest (184,000x12%x30/360) -1,840
Net proceeds 182,160

2 The effective annual financing cost of factoring the receivable

SOLUTION:
COST = (1,840 + 2,000)
X 360/30
182,000
= 0.0210 x 360/30
= 25.30%