Question 2c, d
Extracts from the recent financial statements of Bold Co are given below.
| $000 | ||
| turnover | 21300 | |
| cost of sales | 16400 | |
| ------- | ||
| gross profit | 4900 | |
| ------- | ||
| $000 | $000 | |
| non-current assets | 3000 | |
| current assets | ||
| inventory | 4500 | |
| trade receivables | 3500 | |
| ------- | ||
| 8000 | ||
| ------- | ||
| total assets | 11000 | |
| ------- | ||
| current liabilities | ||
| trade payables | 3000 | |
| overdraft | 3000 | |
| ------- | ||
| 6000 | ||
| equity | ||
| ordinary shares | 1000 | |
| reserves | 1000 | |
| ------- | ||
| 2000 | ||
| non-current liabilities | ||
| bonds | 3000 | |
| ------- | ||
| 11000 | ||
| ------- |
A factor has offered to manage the trade receivables of Bold Co in a servicing and factor-financing agreement. The factor expects to reduce the average trade receivables period of Bold Co from its current level to 35 days; to reduce bad debts from 0·9% of turnover to 0·6% of turnover; and to save Bold Co $40,000 per year in administration costs.
The factor would also make an advance to Bold Co of 80% of the revised book value of trade receivables. The interest rate on the advance would be 2% higher than the 7% that Bold Co currently pays on its overdraft. The factor would charge a fee of 0·75% of turnover on a with-recourse basis, or a fee of 1·25% of turnover on a non-recourse basis.
Assume that there are 365 working days in each year and that all sales and supplies are on credit.
Required:
(c) Calculate the value of the factor’s offer:
(i) on a with-recourse basis;
(ii) on a non-recourse basis. (7 marks)
(d) Comment on the financial acceptability of the factor’s offer and discuss the possible benefits to Bold Co of factoring its trade receivables.