QUESTION 4 DF is a manufacturer of sports equipment. All of the shares of DF are heid by the Wone family. The company has recently won a majot 3 year contract to supply FF with a range of sports equipment. FF is a latge company with over 100 sports shops. The contract may be renewed after 3 years. The new contract is expected to double Df's exsting total annual sales, but demand from FF will vary considerably from month to month. The contract will, however, mean a significant additional investment in both non-current and current assets. A loan from the bank is to be used to finance the additional non-current assets. as the Wong family is currently unable to supply any further share capitat. Aso, the Wong famiy does not wish to raise new copital by issuing shares to non-family members. The financing of the additional current assets is yet to be decided. In particular, the contract with FF will require orders to be delivered within two days. This delivery period gives of insulficient time to manufacture items, thus significant inventories need to be held at all times. Aso, FF requires 90 days' credi from its suppliers. This will result in a signiticant additional investment in accounts receivable by DF. If the company borrows from the bank to finance current assets, either using a loan or an overdraft, it expects to be charged annual interest at 12k. Consequentiy, DF is considering alternative methods of financing current assets. These include debt factoring. invoice discounting and offering a 3 * cash discount to FF for settiement within 10 days rather than the normal 90 days. Required (a) Calculate the annual equivalent rate of interest implicit in offering a 3\% discount to FF for settlement of debts within 10 days father than 90 days. Briefly explain the factors, other than the rate of interest, that DF would need to consider before deciding on whethet to offer a cash discount. (b) Write a report to the Wong family shareholders explaining the various methods of financing available to Df to finance the additional current assets arising from the new fF contract. The report should include the following heading: I8 Bank loan : Overdraft QUESTION 4 DF is a manufacturer of sports equipment. All of the shares of DF are heid by the Wone family. The company has recently won a majot 3 year contract to supply FF with a range of sports equipment. FF is a latge company with over 100 sports shops. The contract may be renewed after 3 years. The new contract is expected to double Df's exsting total annual sales, but demand from FF will vary considerably from month to month. The contract will, however, mean a significant additional investment in both non-current and current assets. A loan from the bank is to be used to finance the additional non-current assets. as the Wong family is currently unable to supply any further share capitat. Aso, the Wong famiy does not wish to raise new copital by issuing shares to non-family members. The financing of the additional current assets is yet to be decided. In particular, the contract with FF will require orders to be delivered within two days. This delivery period gives of insulficient time to manufacture items, thus significant inventories need to be held at all times. Aso, FF requires 90 days' credi from its suppliers. This will result in a signiticant additional investment in accounts receivable by DF. If the company borrows from the bank to finance current assets, either using a loan or an overdraft, it expects to be charged annual interest at 12k. Consequentiy, DF is considering alternative methods of financing current assets. These include debt factoring. invoice discounting and offering a 3 * cash discount to FF for settiement within 10 days rather than the normal 90 days. Required (a) Calculate the annual equivalent rate of interest implicit in offering a 3\% discount to FF for settlement of debts within 10 days father than 90 days. Briefly explain the factors, other than the rate of interest, that DF would need to consider before deciding on whethet to offer a cash discount. (b) Write a report to the Wong family shareholders explaining the various methods of financing available to Df to finance the additional current assets arising from the new fF contract. The report should include the following heading: I8 Bank loan : Overdraft