Skip to content

CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Mehta Industries needs ₹12,00,000 of working capital for one year. Option A: a cash credit at 11% p.a. interest. Option B: issue commercial paper (face value ₹12,00,000 for 12 months) at a discount of 9% of face value, with additional issue expenses of 1% of face value, so net proceeds are less than face value. Ignoring other costs, the effective annual cost of Option B on the net proceeds is closest to:

The effective annual cost is 11.11%. Discount of ₹1,08,000 plus expenses of ₹12,000 gives a total cost of ₹1,20,000. Net proceeds are ₹10,80,000, so the cost on the amount actually received is 1,20,000 divided by 10,80,000, which equals 11.11%.

  1. A11.11%Correct
  2. B10.00%
  3. C9.00%
  4. D12.50%

Explanation

Discount = 9% of 12,00,000 = ₹1,08,000 and expenses = ₹12,000, total cost ₹1,20,000. Net proceeds = 12,00,000 - 1,20,000 = ₹10,80,000. Cost = 1,20,000/10,80,000 = 11.11%. The 10% option divides by face value, the wrong base, and 9% ignores both the base and expenses. Hence B costs 11.11%, marginally above A's 11%.

Did you get it right without looking?

One question tells you little. A timed set on Financing of Working Capital shows your real accuracy, how long you take and where you lose marks.

Practise Financing of Working CapitalFree diagnostic mock

More Financing of Working Capital questions