Problems with Solutions for Practice in Factoring - by Rahul Krishna

Topics: Debt, Money, Cost Pages: 7 (1604 words) Published: January 20, 2012

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2. A company is considering engaging a factor, the following information is available: i) The current average collection period for the Company’s debtors is 80 days and ½% of debtors default. The factor has agreed o pay money due after 60 days and will take the responsibility of any loss on account of bad debts. ii) The annual charge for the factoring is 2% of turnover payable annually in arrears. Administration cost saving is likely to be Rs.1,00,000 per annum. iii) Annual sales, all on credit, are Rs.1,00,00,000. Variable cost is 80% of sales price. The Company’s cost of borrowing is 15% per annum. Assume the year is consisting of 365 days. Should the Company enter into a factoring agreement?


3. MSN Ltd. has total sales of Rs.4.50 crores and its average collection period is 120 days. The past experience indicates that bad debt losses are 2 percent on sales. The expenditure incurred by the company in administering its receivable collection efforts are Rs.6,00,000. A Factor is prepared to buy the company’s receivables by charging 2 percent commission. The factor will pay advance on receivables to the company at an interest rate of 18 percent per annum after withholding 10 percent as reserve. You are required to calculate effective cost of factoring to the company. [pic]


4. The turnover of PQR Ltd. is Rs. 120 lakhs of which 75 per cent is on credit. The variable cost ratio is 80 per cent. The credit terms are 2/10, net 30. On the current level of sales, the bad debts are 1 per cent. The company spends Rs. 1,20,000 per annum on administering its credit sales. The cost includes salaries of staff who handle credit checking, collection etc. These are avoidable costs. The past experience indicates that 60 per cent of the customers avail of the cash discount, the remaining customers pay on an average 60 days after the date of sale.

The Book debts (receivable) of the company are presently being financed in the ratio of 1 : 1 by a mix of bank borrowings and owned funds which cost per annum 15 per cent and 14 per cent respectively. A factoring firm has offered to buy the firm’s receivables. The main elements of such deal structured by the factor are:

(i) Factor reserve, 12 per cent

(ii) Guaranteed payment, 25 days

(iii) Interest charges, 15 per cent, and

(iv) Commission 4 per cent of the value of receivables.

Assume 360 days in a year. What advise would you give to PQR Ltd. - whether to continue with the in house management of receivables or accept the factoring firm’s offer?


5. A firm has a total sales of Rs. 12,00,000 and its average collection period is 90 days. The past experience indicates that bad debt losses are 1.5% on sales. The expenditure incurred by the firm in administering receivable collection efforts are Rs. 50,000. A factor is prepared to buy the firm’s receivables by charging 2% commission. The factor will pay advance on receivables to the firm at an interest rate of 16% p.a. after withholding 10% as reserve. Calculate effective cost of factoring to the firm. Assume 360 days in a year.


6. The credit sales and receivables of M/s M Ltd. at the end of the year are estimated at Rs. 3,74,00,000 and Rs. 46,00,000 respectively. The average variable overdraft interest rate is 5%. M Ltd. is considering a proposal for factoring its debts on a non-recourse basis at an annual fee of 3% on credit sales. As a result, M Ltd. will save Rs. 1,00,000 per year in administrative cost and Rs. 3,50,000 as bad debts. The factor will maintain a receivables collection period of 30 days and advance 80% of the face value thereof at an annual interest rate of 7%. Evaluate the viability of the proposal. Note: 365 days are to be taken in a year for the purpose of calculation of receivables[pic][pic] 7. Junio Limited is a small manufacturing company which is suffering cash flow problems. The...
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