Sept 2016 Paper Q5

We are told sales = $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range: Maximum days 120 & minimum days 90. no inventory of raw materials or no work in progress is carried. Client intends to finance permanent current assets with equity and fluctuating current assets with its overdraft. In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?

The answer is below. Why are we using 0.6? What is the rationale??

$200m x 30/360 x 0·6 = $10m