Q3c – June 2008 FLG Co

Dear Mr Moffat,

I understand the first two requirements on this but the third requirement on this of calculating financing cost of the current assets. I don’t understand what the examiner has done. He has taken the net working capital and multiplied it by the cost of long term finance 11% to get 31,900 but what is the logic and rationale behind this? Also for the overdraft he has just taken the overdraft as it is 567500*7%, but this doesn’t give the cost of financing current assets.

You see, for me, the current assets 1015 which are funded by current liabilities of 725, so this is an aggressive funding policy whereby 71% of current assets are funded by short term finance sources. So to get the cost of financing current asset I did two things:

71% * 1015*7% to get = 50 and then 29* (proportion of long term finance used) * 1015*11% = 32 so total cost 82000. Why is this incorrect?

Please explain the logic behind the examiner’s calculations.

Also, when calculating the figures for inventory and receivables, I used 365 days (i.e. I converted the months given in the question into equivalent days but then I got wrong figures using days, why is this so?)

Thanks,

Gabriel.