FIN3702
Assignment 2 Semester 1 2025
Unique #:
Due Date: 10 April 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
1.1.
Option 1: Revolving Credit Facility
Interest cost per year: R1 150 000 × 10% = R115 000
Option 2: Long-Term Loan
Interest cost per year: R1 200 000 × 8% =R96 000
The long-term loan is the better option. Reasons:
1. Lower Interest Cost: The long-term loan's 8% interest rate results in an
annual interest cost of R96 000, which is R19 000 less than the revolving
credit facility.
2. Higher Funding Amount: The loan covers R1 200 000, which is more than
the required R1 000 000, providing a buffer for additional needs.
3. No Immediate Capital Repayments: The long-term loan allows the
company to use funds without worrying about repaying capital each year,
improving cash flow management.
4. Revolving Credit is More Expensive: The 10% rate on the credit facility is
higher, and since it operates like a credit line, it may require frequent
repayments that could strain operations.
1.2.
Possible effects on Beta Mine Ltd.’s Financial Statements:
1. Statement of Financial Position (Balance Sheet)
Decrease in Current Assets (Inventory):
With reduced tyre inventory levels, Beta Mine Ltd.’s investment in inventory will
decrease, thus reducing total current assets.
Increase in Short-Term Liabilities:
Shifting to an aggressive short-term financing strategy means financing working
capital with more short-term debt, causing current liabilities to increase.
Varsity Cube 2024 +27 81 278 3372
Assignment 2 Semester 1 2025
Unique #:
Due Date: 10 April 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
1.1.
Option 1: Revolving Credit Facility
Interest cost per year: R1 150 000 × 10% = R115 000
Option 2: Long-Term Loan
Interest cost per year: R1 200 000 × 8% =R96 000
The long-term loan is the better option. Reasons:
1. Lower Interest Cost: The long-term loan's 8% interest rate results in an
annual interest cost of R96 000, which is R19 000 less than the revolving
credit facility.
2. Higher Funding Amount: The loan covers R1 200 000, which is more than
the required R1 000 000, providing a buffer for additional needs.
3. No Immediate Capital Repayments: The long-term loan allows the
company to use funds without worrying about repaying capital each year,
improving cash flow management.
4. Revolving Credit is More Expensive: The 10% rate on the credit facility is
higher, and since it operates like a credit line, it may require frequent
repayments that could strain operations.
1.2.
Possible effects on Beta Mine Ltd.’s Financial Statements:
1. Statement of Financial Position (Balance Sheet)
Decrease in Current Assets (Inventory):
With reduced tyre inventory levels, Beta Mine Ltd.’s investment in inventory will
decrease, thus reducing total current assets.
Increase in Short-Term Liabilities:
Shifting to an aggressive short-term financing strategy means financing working
capital with more short-term debt, causing current liabilities to increase.
Varsity Cube 2024 +27 81 278 3372
