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2 (c) (i) Total cost of factoring the accounts receivables ledger The cost to factor the receivables balance is 5% of the total value factored, therefore Estuary will only receive 95% of the receivables that they factor. \$25m x 95% = \$23,750m \$23,750m - \$25m = \$1,250,000 This means that \$1,250,000 will be an expense for factoring the receivables ledger. The fee to factor the accounts receivables balance is 1% of the total amount factored: \$25m x 1% = \$250,000. Therefore \$250,000 is the fee to factor the receivables ledger Total cost of factoring: \$ million Cost 1,250,000 Fee 250,000 Total cost 1,500,000 (1of) (4 marks) (ii) (iii) Overdraft costs \$20,000,000 x 8% = \$1,600,000 per year (1 mark) The directors of Estuary should choose to factor their receivables ledger to pay off the overdraft. The reason for opting to factor is that the overall cost of factoring the receivables is lower than the annual cost for the overdraft, thereby saving Estuary \$100,000 Total cost for factoring the receivables ledger \$1,500,000 Total cost for annual overdraft (\$1,600,000) Total savings 100,000 1 mark for stating that factoring costs are lower than overdraft costs 1 mark for recommending factoring the receivables ledger to pay off overdraft ½ mark for referring to previous calculations ½ mark for referring to the figure of \$100,000 ASE20084/SAMPLE/MS Page 2 of 7

3 QUESTION 2 (a) Treasury bills Bank deposits Certificates of deposit Money-market accounts Local authority deposits Commercial paper Local authority bonds Corporate bonds Government bonds Treasury bills are issued by central banks, they are guaranteed by the government of the country of issue. No interest is paid as such, but they are issued at a discount and redeemed at par after a fixed period, for example, UK Treasury Bills are 91 days. They are negotiable, so the bills can be sold on the discount market at any time before their maturity date. There is an implied rate of interest in the price at which Treasury bills are traded. A wide range of interest-earning investment opportunities are available from the banks. A term deposit offers a fixed rate of interest for a fixed period, usually from 1 month to 6 years. For shorter periods, typically up to 3 months, the interest may be at a variable rate based on money-market rates. Certificates of deposit (CDs) are issued by the banks at a fixed interest rate for a fixed term (usually between 3 and 5 years). CDs are negotiable documents for which there is an active secondary market, meaning that the holder of a CD can realise the investment on the discount market at any time. Most major financial institutions offer schemes for investment in the money market at variable rates of interest. There is a large money market in the UK for inter-bank borrowing and lending, with terms ranging from overnight to 12 months or more. Large entities will be able to lend surplus cash directly to a borrowing bank on the inter-bank market. Local authorities have a requirement for short-term cash, with terms ranging from overnight to 12 months or more. Interest would be payable on these deposits Large entities may issue unsecured short-term loan notes, referred to as commercial paper. These loan notes will generally mature within 9 months, typically between a week and 3 months. Commercial paper is negotiable, so the bills can be sold on the discount market at any time before their maturity date. There is an implied rate of interest in the price at which the commercial paper is traded. These bonds are issued by local authorities and may be purchased with their remaining maturity. They are tradable, but have a lower level of marketability than most marketable securities, although this is dependent upon the size of the particular local authority. These are bonds issued by entities to raise debt finance. They are long term, but are tradable and thus can be sold in money markets at any time. The level of liquidity depends on the cumulative volume issued by the entity. The level of risk depends on the individual entity and on the terms of the bond, but a credit score is available from credit rating agencies. These are bonds issued by a government. They normally have lower default risk than corporate bonds (depending upon the government that issued them). They are tradable in money markets and tend to be more liquid than corporate bonds as they are issued in higher volumes. 1 mark for method 1 mark for explanation (maximum of 4 methods) (8 marks) ASE20084/SAMPLE/MS Page 3 of 7

4 (b) (i) Loan \$500,000 x ( = \$717,815 total cost including the loan and interest. 2 Operating lease \$150,000 x 5 years = \$750,000 1 (ii) The option that company B should take is for the 5 year loan. 1 The loan is the cheaper option available to them 1 With the loan option the company will own the asset at the end of the load 1 Operating lease will cost more and the asset would return to the leasing company at the end of the agreement. 1 (4 marks) (c) An example of a central bank is the Bank of England in the UK. 1 mark for giving an example of a central bank (1) A central bank is a public institution that usually issues currency and regulates the money supply (2) A central bank can control interest rates in their country (i.e. price fixing) (3) Central banks can oversee the commercial banking system within their respective countries (4) A central bank possesses a monopoly on printing the national currency, which usually serves as the nation's legal tender (5) A central bank acts as a lender of last resort to the banking sector during times of financial crisis (e.g. bailouts) (6) A central bank may have supervisory powers to prevent banks and other financial institutions from reckless or fraudulent behaviour (7) Central banks in most developed nations are independent in that they operate under rules designed to render them free from political interference. 1 mark for each explanation, to a maximum of 4 (5 marks) ASE20084/SAMPLE/MS Page 4 of 7

6 Calculation of option 2 Using the forward rate of \$1.47 and a fee of 10,000 the costs for Monks Ltd will be: \$2,500,000= 1,700, ,000 = 1,710,680 1 \$1.47 (i) Option 2 is recommended as using the forward rate of \$1.47 and paying the bank fee of 10,000 will cost Monks ltd 25,431 less than using the spot rate of \$1.44. (ii) 1 mark recommendation and 1 mark for reason 1 1 Option 1 is a spot rate, Option 2 is the forward rate (4 marks) (f) (1) A bank will be able to offer an individual a bureau de change service. This is where an individual can change their home currency into a currency of their choice. For example if an individual was going on holiday to Singapore and was based in the UK. The individual would be able to go to the bank and change the sterling they were wishing to take with them to Singapore into Singapore dollars. (2) Bank is also able to offer an individual the opportunity to transfer money to an individual or company outside their home country. There are a number of ways the transfers can be made. The individual is able to transfer the money though online bank accounts, phoning the branch and arranging the transfer over the phone and also by attending a branch whereby they can arrange the transfer. Accept other reasonable services and examples 1 mark for stating the service, 1 mark for explanation of the service ASE20084/SAMPLE/MS Page 6 of 7

7 QUESTION 4 (a) Cash budget for Camp components for 1st January th June Cash inflow Jan Feb March April May June Cash sales Cash from receivables Total receipts Cash outflow Direct costs Electricity Telephone admin salaries New machine Total Payments Net cash flow Cash b/fwd Cash c/fwd (14 marks) (b) Actions that could be taken to raise funds to purchase the new machine as budgeted, include raising new cash or re-examining the forecast and implementing actions to improve the current forecast. It must also be borne in mind that sufficient working capital needs to be available to run BB after the new machine has been purchased. Actions could include: (1) Arranging a long-term loan with a bank, or other financial institution, for \$37,000, to provide additional working capital. (2) Issuing new equity to cover the non-current asset purchase and provide additional working capital, a minimum of \$37,000. (3) Negotiating an increase in the overdraft facility from \$5,000 to \$37,000. (4) Considering increasing selling price of components to generate more income. (5) Investigating the possibility of acquiring the machine by hire purchase or lease. (6) Checking the accuracy of the forecast opening bank balance and the likelihood of it being significantly different to forecast (6 marks) 1 mark for stating the action and 1 mark for providing an explanation (maximum of 3 actions) ASE20084/SAMPLE/MS Page 7 of 7 Education Development International plc

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