TUI Valucu QUESTION 2 In December 2019, Magwenzi Ltd was considering raising $250.000 in short term finance for the next half year. The firm's bank has indicated that it is prepared to provide a six-month loan from January up to June 2020 at an interest rate of 28% on a simple interest basis. The other two options available were using trade credit or factoring. If the firm used credit financing on its $300 000 monthly purchases it would have to forgo the 2% discount that it was receiving from suppliers for paying all purchases by the end of the month of purchases. The forgoing of the discount will result in thirty days additional period for payment. The firm sells S400 000 of goods per month with the average collection period of 30days after the end of the month sale. A Finance house has agreed to advance the company 80% of the value of the invoice and pay the balance after 30 days. The firm could start factoring at the end of 12:32 - Forwarded December 2019. The Factor charges interest of 30% of the amount advanced and a collection fee of 1% of total value of invoices. Both costs are payable immediately on advancement of funds. The factoring of debtors will result in decrease in bad debts of 0.5% of the gross amount factored by the firm. Any amount in excess of the required $250 000 financing can be invested in a savings account earning 18% per annum. Required: Determine the least cost method of financing that the company should use. Total: 20 marks 12:32 ESTION 3 TUI Valucu QUESTION 2 In December 2019, Magwenzi Ltd was considering raising $250.000 in short term finance for the next half year. The firm's bank has indicated that it is prepared to provide a six-month loan from January up to June 2020 at an interest rate of 28% on a simple interest basis. The other two options available were using trade credit or factoring. If the firm used credit financing on its $300 000 monthly purchases it would have to forgo the 2% discount that it was receiving from suppliers for paying all purchases by the end of the month of purchases. The forgoing of the discount will result in thirty days additional period for payment. The firm sells S400 000 of goods per month with the average collection period of 30days after the end of the month sale. A Finance house has agreed to advance the company 80% of the value of the invoice and pay the balance after 30 days. The firm could start factoring at the end of 12:32 - Forwarded December 2019. The Factor charges interest of 30% of the amount advanced and a collection fee of 1% of total value of invoices. Both costs are payable immediately on advancement of funds. The factoring of debtors will result in decrease in bad debts of 0.5% of the gross amount factored by the firm. Any amount in excess of the required $250 000 financing can be invested in a savings account earning 18% per annum. Required: Determine the least cost method of financing that the company should use. Total: 20 marks 12:32 ESTION 3
