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Hi John
FLG in Kaplan book from June 2008 part C.
The financing costs are not clear as to how they are arrived at. We are told the OD interest is 7% and long term financing is 11%. However in the solution (Kaplan exam kit) Net working capital is financed at 11% which is the long term financing amount. As WC is current assets – current liabilities, how come the entire amount is not being funded at the 7% OD rate….as they are all current balance sheet items?
What have I missed here. Very confused.
If you ignore the overdraft for a moment, the total current assets are 1,015,000 and the payables are 157,500.
This gives a net figure of 857,500 which has to be funded from somewhere.567,500 is being funded by the overdraft (the cost of which is 7%)
This leaves 857,500 – 567,500 = 290,000 which has to be funded by long-term borrowing (the cost of which is 11%).I do suggest that you watch the very first of the lectures on working capital management – I think it will help you.
Thank you John.
I will watch this one again this evening. I do not understand why the AP is taken from the current liability figure of 725k for determining the overdraft. Are we assuming that trade AP is not funded by the OD or is not part of current liabilities?
In my mind the entire current assets should be funded by short term borrowing (matching concept). I have watched the lectures on F9, but obviously I have missed a point on this area.
Thank you very much for the help John. I really appreciate it.
PS – Do you lecture P4? If so, it may make my option picks a little easier 🙂
Current liabilities = payables + overdraft
It is the net working capital (excluding the overdraft) that has to be funded – it can be funded either by having an overdraft, or by long-term finance, or by a combination of the two. Here it is a combination – part overdraft and part long-term.
And yes, I do lecture P4, although it is a very tricky exam. Wait until you have finished F9 and then decide on the basis of how easy or difficult you found F9 overall 🙂
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