Finance Questions
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1- What do you think happens to the ABL Line of Credit (i.e., the ABL Loan Balance) if you are using the arrangement to sell goods that consistently lose money? (i.e., the products have a negative contribution margin).
2- Asset-Based Lending
Asset-based lending is usually provided by a bank or other financial institution that lends money to a business based on collateral under a formula. I'm familiar with the situation where for every dollar of accounts receivable that is newly recognized, the company can borrow 75% of that amount. When the cash is received by the company, the funds are deposited directly in the lender's account and the lender keeps it's 75% and credits the company for the other 25%. (There are also formulas available to borrow against raw materials inventory as well).
Keep in mind that with many sales and deposits, the ins and outs are flowing all of the time.
what are your observations on this arrangement. Do you see advantages and disadvantages to taking on a credit facility like this?
3- Account Receivables Open Account: Does your firm sell its goods and/or services on open account? If so, what are its credit terms? If not, why not?
4- Do you think WC Management takes more effort when times are good for a company or when times are bad? Please support your view.
5- what is days sales outstanding (DSO)? What is the value of it? Can you think of other ways to calculate it other than the way the book explains it? (Hint: What if we are only 1/4th of the way done with the year, how might you calculate DSO? What if sales are highly seasonal, how might you adjust for the receivables balance)?
Problems:
1-William & Son's last year reported sales of $10 millions and inventory turnover ratio
of 2. The company now adopting a new system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 5, While maintaining the same level of sales, how much cash will be freed up?
2-Meddwing Corporation has a DSO of 17 days, the Company averages of $3,500 in credit sales each day. What is the Company's averages account receivable.
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1- what do you think happens to the ABL Line of Credit (i.e., the ABL Loan Balance) if you are using the arrangement to sell goods that consistently lose money? (i.e., the products have a negative contribution margin).
Asset-based loan (ABL) Line of Credit is granted by using fixed assets, accounts receivable, and inventory as the collateral based on their value. Although the products have a negative contribution margin, the ABL Line of Credit or the ABL Loan Balance will remain the same because the value of accounts receivable and inventory, which are the collateral, will remain the same.
2- Asset-Based Lending
Asset-based lending is usually provided by a bank or other financial institution that lends money to a business based on collateral under a formula. I'm familiar with the situation where for every dollar of accounts receivable that is newly recognized, the company can borrow 75% of that amount. When the cash is received by the company, the funds are deposited directly in the lender's account and the lender keeps it's 75% and credits the company for the other 25%. (There are also formulas available to borrow against raw materials inventory as well).
Keep in mind that with many sales and deposits, the ins and outs are flowing all of the time.
What are your observations on this arrangement? Do you ...
Purchase this Solution
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