Question 11.I.19: The Hypothetical Manufacturers Ltd (HML) enters into a facto......
The Hypothetical Manufacturers Ltd (HML) enters into a factoring arrangement with the Hypothetical Factors Ltd (HFL). According to the agreement, the HFL would pay, in advance, 80 per cent of the value of factored receivables at 25 per cent interest, compounded quarterly, the balance is retained as factor reserves for disputes and deductions. It also provides for guaranteed payment after 3 months from the date of purchase of the receivables. The factoring commission would be 2 per cent of the value of factored receivables. It is stipulated that interest and commission would be collected in advance.
Assuming an advance payment of Rs 42 lakh, compute:
(A) Advance payable to HML;
(B) Effective cost of funds and
(C) Effective cost of funds on the assumption that interest is collected in arrears while the commission is collected in advance.
(A) Advance Funds to HML (Rs lakh)
(A) Advance Funds to HML (Rs lakh)
| 52.50
|
Value of factored receivables (42 ÷ 0.80) |
| 42.00 | Maximum advance (52.50 × 0.80) |
| 1.05
|
Less commission (0.02 × 52.50) |
| 40.95 | |
| 2.62
|
Less discount/interest charge (42 × 0.25 × 90/360) |
| 38.33 |
(B) Effective Cost of Funds to HML (Rs lakh)
| 6.40 | Discount/interest charge as percentage of funds [(2.62 ÷ 40.95) × 100] |
| 6.40 | Effective rate (%) of interest per quarter |
| 28.16 | Annualised rate of interest/cost of funds (%) [(1.064)^4 – 1)] × 100 |
(C) Effective Cost of Funds to HML (Rs lakh)
| 42.00 | Maximum advance |
| 0.84
|
Less commission on advance |
| 41.16 | Funds available to HML |
| 2.62 | Interest charge in arrears (42 × 0.25 × 90/360) |
| 6.37 | Interest charge, per quarter, as percentage of funds [2.62 ÷ 41.16 × 100] |
| 28.02 | Annualised interest cost (%) [(1.0637)^4 – 1] × 100 |