Redemption exercise (finance management) - Essay Example

(c)Oak plc uses a ‘moderate matching policy’ for the financing of its non-current assets and working capital. Using the diagram below, which shows a moderate matching policy explain the meaning of the term ‘moderate ‘in relation to financing of assets and distinguish a moderate matching policy from (i) an aggressive policy and (ii) a conservative policy. (10 marks). Moderate matching policy calls for matching assets and liabilities maturity. That is all of the fixed assets plus the permanent current assets are financed with long term capital, but temporary current assets are finance with short term debt (Brigham & Ehrhardt, 2013).

It is policy that enables firms to finance some of its permanent assets with short term debt. That is, all of the current assets – fluctuating and permanent current assets- and part of non-current assets are financed with short term credit. a) Factoring is a means of utilizing accounts receivables to generate cash flow by selling them to a factor and thereby effectively converting credit sales to cash sales. The buyer of the goods is notified to make payments to the factor. Invoice discounting is the provision of finance against the security of a certain percentage of receivables.

The title to the invoice and the rights to the proceeds remain with the seller. The financier will purchase a company’s invoice at a discount but the management of receivables and collection will remain with the company (Brigham & Ehrhardt, 2013). (c)Describe the effect overtrading would have on the main accounting ratios. (You may wish to consider the following ratios: acid test ratio, inventory days, trade receivable days, trade payable days and current ratio) (10 marks) The growth in sales volume increases the inventory and receivables.

This will affect the working capital management efficiency leading to an increase in the trade receivable and