Question 5 The accounting team of Crinkle plc (Crinkle) are preparing the cash flow budget for the year ending 31 May 2021 and have identified the following: Quarters Cash Inflows (HK$) Cash Outflows (HK$) June - August 27,000,000 30,000,000 September - November 29,000,000 31,000,000 December - February 33,000,000 29,000,000 March - May 35,000,000 29,000,000 At 31 May 2020 Crinkle had a bank overdraft of HK$1.5M and a gearing ratio (long ter debt to long term debt and equity) of 35%. Crinkle has granted a first security charge to the bank over all its properties. The Finance Director has approached the bank to discuss how to manage the company's funding requirements and has been offered: i. an overdraft costing bank base rate plus 7% per annum, or ii. a twelve-month term loan costing a fixed rate of 10% per annum. The Managing Director thinks that the interest rates being offered on the two funding options are too high and has asked the Finance Director to meet with the bank to negotiate on these. The current bank base rate is 1% but economic forecasts suggest this is likely to increase. The Finance Director is confident that any surplus funds can be invested to earn 1.5% a quarter. Required: a) Using the information above calculate which of the two options above is the best option for Crinkle to deal with the cash position on a purely financial basis. (8 marks) b) Evaluate the two options offered by the bank and advise Crinkle on the one you think is most suitable (you must justify your choice) (5 marks) c) Discuss fully how the Finance Director might be able to negotiate lower interest rates on the overdraft and term loan. (7 marks) (Total: 20 marks) Question 5 The accounting team of Crinkle plc (Crinkle) are preparing the cash flow budget for the year ending 31 May 2021 and have identified the following: Quarters Cash Inflows (HK$) Cash Outflows (HK$) June - August 27,000,000 30,000,000 September - November 29,000,000 31,000,000 December - February 33,000,000 29,000,000 March - May 35,000,000 29,000,000 At 31 May 2020 Crinkle had a bank overdraft of HK$1.5M and a gearing ratio (long ter debt to long term debt and equity) of 35%. Crinkle has granted a first security charge to the bank over all its properties. The Finance Director has approached the bank to discuss how to manage the company's funding requirements and has been offered: i. an overdraft costing bank base rate plus 7% per annum, or ii. a twelve-month term loan costing a fixed rate of 10% per annum. The Managing Director thinks that the interest rates being offered on the two funding options are too high and has asked the Finance Director to meet with the bank to negotiate on these. The current bank base rate is 1% but economic forecasts suggest this is likely to increase. The Finance Director is confident that any surplus funds can be invested to earn 1.5% a quarter. Required: a) Using the information above calculate which of the two options above is the best option for Crinkle to deal with the cash position on a purely financial basis. (8 marks) b) Evaluate the two options offered by the bank and advise Crinkle on the one you think is most suitable (you must justify your choice) (5 marks) c) Discuss fully how the Finance Director might be able to negotiate lower interest rates on the overdraft and term loan. (7 marks) (Total: 20 marks)
