FIN622 Assignment 1 Solution fall 2017

fin622 ASSIGNMENT 1 SOLUTION FALL 2017

Dear VU (VirtualUniversity of Pakistan) Students, here you read and download FIN622 (CorporateFinance) Assignment No.1 Solution Fall–2017. Assignment Total Marks 10. You can download easily Assignment Solution click the download button and get Assignment Solution. Assignment Open Date 19th January 2018 and Assignment Closing Date 24th January 2018. You can also like for latest update our Facebook page, YouTube channel and follow on Google+.

Important Instructions:

• It is necessary to provide complete working of the numeric portion.
• Before attempting the assignment, it is advised to consult the relevant lectures, recommended book(s) and the additional material. This additional material has also been provided on VULMS in different lessons. You can view these supplements on VULMS under the link of “lessons” along with PPTs.

Deadline:

• Make sure that you upload the solution file before the due date. No assignment will be accepted through e-mail after due date once the solution has been uploaded by the instructor.

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• Use the font style “Times New Roman or Arial” and font size “12”. It is advised to compose your document preferably in MS-Word.
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Note related to load shedding: Please be proactive

Dear students!

• As you know that semester activities have started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, It is requested to all of you to manage to post your

activities as early as possible and don’t wait for the due date. For your convenience activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.

• Topic:Debtors Management

Learning outcome:

• This activity will help students to understand how companies select best strategy for efficient management of different components of working capital.

Assignment Question:

A manufacturing company is planning to reduce its debtor administration cost by revising its debtor management policy. Management of the company has two different plans to work on this idea.

Under first plan, discount policy can be applied by offering discount to existing customers on early payments. This policy will be selected only if it will reduce debtors cost more than the cost of discount.

Under second plan, the company can seek the services of factor to reduce its debtor administration cost.

Current sales level of the company is Rs.10,00,000 and existing credit term with customers is two months.

Following information is pertinent to proposed plans:

Discount policy:

Under this plan, the company can offer 1.5% discount to customers if they make payment within 15 days. This discount offering is only intended to reduce the credit terms of existing customers. According to management estimates, 70% of customers will avail this opportunity. The company requires 16% return on investment (ROI).

Employing the Factor:

Currently, the company is bearing Rs. 60,000 as total cost of debtor administration including financing cost and cost of bad debts. The company expects that factor will reduce average collection period from two months to 15 days at the cost of 5% of sales as factor’s service fee. Factor will provide 70% on invoice value of sales and will charge 12% interest rate. For rest of 30%, the company can borrow short term loan at interest rate of 10% from a bank.

Requirement:

1. You are required to find net saving under each proposed policy. (Provide complete working)
2. Based on your findings in part (a), suggest which policy should be selected by the company and why?

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