Question

3. A firm (‘000 = K) is currently generating cash flow from operations of $200/yr. This is expected to grow by 7% next year. It has mandatory capex (i.e. needed to replace existing production capacity) of $67K. Existing long-term debt (LTD) is $600K repaid over 6 years in equal installments. To achieve the 7% growth, the firm needs to invest $300K in extra output capacity and wants to borrow a further $250K repayable over 5 years (it has enough surplus liquidity for the $50K down-payment). Will the firm have repayment capacity next year to handle new debt?: *

a $57K surplus

b $21K shortfall

c $3K shortfall

d $16K surplus

4. A firm has total A/R of $560K which is pledged to a bank. 20% of debts are less than $300; 50% of debts are between $300 and $5,000 with historical recovery rates of 50% after collection costs; the balance is from 3 large hypermarkets who were buying on LT contracts, none of which were under dispute. 2 unpaid suppliers to the firm (owed $14.6k and $13.4K) are included in the A/R. Past experience indicates that administration costs (legal, court etc.) are 15% of “collectible” A/R. What is the recovery rate on the pledged collateral: *

a 78%

b 43%

c 67%

d 28%

Answer 1

Answer - 3

Cash inflow given - $ 200,000

Growth 7% -   $14,000

Expected Cash inflow next year - $ 214,000 (A)

Cash Outflow required next year :

Mandaroty Capex $ 67,000

Repayment of existing debt $100,000

Repayment of extra borrowing $ 50,000   

( 300 K - 50 K)/5

Total Cash outflow    $ 217,000 (B)

Shortfal ( A - B) $ 3000

The firm will not have repayment capacity next year to handle new debt.

Note : Down payment of 50K not considered as outflow because firm is paying it from surplus fund.

Answer- 4

A/R $ 560

Less : unpaid suplliers $ 28

Collectible A/R $ 532

Category of A/R Amount Recoverable Adm. cost Net recovery

1. 20 % of 560 - 112 112 17 95

2. 50% of 560 - 280 140 - 140

3. balanceLarge hyper market 140 140 21 119

Total Net recovery 354

Recovery rate on Pledged colletoral = ( 354 x 100 )/532 = 67%