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Hi tutor,
FLG Co has annual credit sales of 4.2 m and cost of sales of 1.89 m. Current assets consist of inventory and accounts receivable. Current liabilities consist of accounts payable and an overdraft with an average interest rate of 7% per year. The company gives two months credit to its customers and is allowed, on average, one month credit by trade suppliers. It has an operating cycle of three months.Current ratio is 1.4
Cost of long term finance is 11%(C) Calculate the size of the overdraft, net working capital of the company and total cost of financing its current assets.
I got only the “total cost of financing it’s current assets” part wrong, the model answer is:
(Size of overdraft x 0.07) + (net working capital x 0.11)Why is net working capital financed by the long term finance? Is this just an assumption? The question didn’t mention anything about it. Hope you could help me on this, thanks 🙂
But net working capital is always financed by long-term finance. How else can it be financed?
I do suggest that you watch my free lectures on working capital.
(Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)
I’m sorry tutor, completely deserve a tight slap in the face for not remembering net working capital is current assets – current liabilities (short term finance) ?
I have watched some of your lectures and they are indeed great, thanks for your help 🙂
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