1 What is a certificate of deposit? 2 What is a cash budget? 3 Ronsons plc, the jewellery retailer,.

1 What is a
certificate of deposit?

2 What
is a cash budget?

3 Ronsons plc, the
jewellery retailer, has a highly seasonal business with peaks in revenue in
December and June. One

of Ronsons banks has offered the firm a 200,000
overdraft with interest charged at 10 per cent p.a. (APR) on the

daily outstanding balance, with 3,000 payable as an
arrangement fee. Another bank has offered a 200,000 loan with

a fixed interest rate of 10 per cent p.a. (APR) and
no arrangement fee. Any surplus cash can be deposited to earn 4%

APR. The borrowing requirement for the
forthcoming year is as

1 What is a
certificate of deposit?

2 What
is a cash budget?

3 Ronsons plc, the
jewellery retailer, has a highly seasonal business with peaks in revenue in
December and June. One

of Ronsons banks has offered the firm a 200,000
overdraft with interest charged at 10 per cent p.a. (APR) on the

daily outstanding balance, with 3,000 payable as an
arrangement fee. Another bank has offered a 200,000 loan with

a fixed interest rate of 10 per cent p.a. (APR) and
no arrangement fee. Any surplus cash can be deposited to earn 4%

APR. The borrowing requirement for the
forthcoming year is as follows:

Which offer should the firm accept?

Q125;

1 Snowhite plc has
taken delivery of 50,000 units of Dwarf moulds for use in its garden ornament
business. The supplier

has sent an invoice which states the following:

50,000 is payable if the purchaser pays
in 30 days. However, if payment is within 10 days, a 1 per cent

discount may be applied.

Snowhite has an unused overdraft facility in place,
on which interest is payable at 12 per cent annual percentage rate

on the daily outstanding balance. If Snowhite paid
after 10 days the overdraft facility would have to be used for the

entire payment.

a Calculate whether to pay on the 30th day or on the
10th day, on the basis of the information provided.

b Despite the 30-day credit limit on the contract
Snowhite is aware that it is quite normal in this industry to pay on the 60th
day without incurring a penalty legally, financially or in terms of reputation
and credit standing. How does this alter your analysis?

Q126;

1 (Examination
level)
Gordons plc has an annual turnover of 3m and a pre-tax profit of 400,000. It
is not quoted on

a stock exchange and the family owning all the shares
have no intention of permitting the sale of shares to outsiders

or providing more finance themselves. Like many small
and medium-sized firms, Gordons has used retained earnings

and a rolled-over overdraft facility to finance
expansion. This is no longer seen as adequate, especially now that

the bank manager is pushing the firm to move to a
term loan as its main source of external finance.

You, as the recently hired finance director, have
been in contact with some financial institutions. The Matey hire

purchase company is willing to supply the 1m of
additional equipment the firm needs. Gordons will have to pay for

this over 25 months at a rate of 50,000 per month
with no initial deposit.

The Helpful leasing company is willing to buy the
equipment and rent it to Gordons on a finance lease stretching

over the four-year useful life of the equipment, with
a nominal rent thereafter. The cost of this finance is virtually

identical to that for the term loan, that is, 13 per
cent annual percentage rate.

Required

Write a report for the board of directors explaining
the nature of the four forms of finance which may be used to

purchase the new equipment: hire purchase, leasing,
bank term loan and overdraft. Point out their relative advantages

and disadvantages.

Q127;

1 The Biscuit
company has taken delivery of 10,000 of flour from its long-established
supplier. Biscuit is in the habit of

paying for flour deliveries 50 days after the
invoice/delivery date. However, things are different this time: the supplier

has introduced an early settlement discount of 2 per
cent if the invoice is paid within 10 days. The rate of interest being

charged on Biscuits overdraft facility is 11 per
cent per annum. You may assume no tax to avoid complications.

Required

Calculate whether Biscuit should pay on
the 10th day or the 50th day following the invoice date.

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