Question 1

Whaley & Whaley has the following data.What is the firm's cash conversion cycle?

Accepted Answer

11ea1b84_8bce_56b4_a54a_d7ae07db6773_TB3581_00 CCC = Inv.conv.period + Avg.coll.period - Pay.def.period = 34 days

Question 2

Frosty Corporation has the following data, in thousands.Assuming a 365-day year, what is the firm's cash conversion cycle?

Accepted Answer

11ea1b84_8bcf_4126_a54a_7ff1196f51f7_TB3581_00 CCC = Inv.conv.period + Avg.coll.period - Pay.def.period = 34.76 days

Question 3

Data on Liu Inc.for the most recent year are shown below, along with the inventory conversion period (ICP)of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done, by how much would inventories decline? Use a 365-day year.

Accepted Answer

11ea1b84_8bce_f2ff_a54a_9bca81c670b8_TB3581_00

Question 4

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15, 000, what pre-tax net annual savings would be realized?

Accepted Answer

11ea1b84_8bcf_dd70_a54a_7f90f6d6d565_TB3581_00 11ea1b84_8bd0_0481_a54a_cb760086020e_TB3581_00

Question 5

The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Accepted Answer

11ea1b84_8bd0_2b94_a54a_81453664658f_TB3581_00 Nom.% cost = Disc.%/(100 - Disc.%)×(365/(Actual days - Disc.days)= 16.90%

Question 6

Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done, by how much would receivables decline? Use a 365-day year.

Accepted Answer

11ea1b84_8bce_cbec_a54a_5b2bb3a6f0a6_TB3581_00

Question 7

Data on Mertz Co.for the most recent year are shown below, along with the payables deferral period (PDP)for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done, by how much would payables increase? Use a 365-day year.

Accepted Answer

11ea1b84_8bcf_1a11_a54a_21ca1bbab776_TB3581_00

Question 8

Marshall Inc.recently hired your consulting firm to improve the company's performance.It has been highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis, you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year, what is the firm's present cash conversion cycle?

Accepted Answer

11ea1b84_8bcf_4123_a54a_3d9d903d51b4_TB3581_00 11ea1b84_8bcf_4124_a54a_a5588121dcc9_TB3581_00

Question 9

Newsome Inc.buys on terms of 3/15, net 45.It does not take the discount, and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

11ea1b84_8bd0_0482_a54a_4bfe432934b5_TB3581_00 
Nom.% cost = Disc.%/(100 - Disc.%)×(365/(Actual days - Disc.days)
Nom.% cost = 3.09% ×8.11 = 25.09%
The effective discount % is earned N times per year; the product is the nominal annual cost rate.

Question 10

Krackle Korn Inc.had credit sales of $3, 500, 000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance, based on a 365-day year?

Accepted Answer

11ea1b84_8bce_a4d8_a54a_d7a7cc069d21_TB3581_00 Receivables = (Sales per day)(DSO)= Sales/365 ×DSO = $335, 616

Question 11

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days.Assuming a 365-day year, what is the length of its cash conversion cycle?

Accepted Answer

CCC = Inv.conv.period + Avg.coll.period - Pay.deferral period
 11ea1b84_8bce_7dc5_a54a_fbdd0f4952f4_TB3581_00 CCC = Inv.conv.period + Avg.coll.period - Pay.def.period = 74 days

Question 12

Baltimore Baking is preparing its cash budget and expects to have sales of $30, 000 in January, $35, 000 in February, and $35, 000 in March.If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?

Accepted Answer

11ea1b84_8bce_7dc6_a54a_5d940c3f75ca_TB3581_00 11ea1b84_8bce_7dc7_a54a_6d495ee2a4db_TB3581_00

Question 13

Tierney Enterprises is constructing its cash budget.Its budgeted monthly sales are $5, 000, and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments, " which include wages, rent, and taxes, are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average net cash flow during the month.

Accepted Answer

11ea1b84_8bcf_b65d_a54a_dfc931895ae1_TB3581_00 
 11ea1b84_8bcf_dd6e_a54a_2112e33bc4b8_TB3581_00 11ea1b84_8bcf_dd6f_a54a_d1cabf64830f_TB3581_00

Question 14

Thornton Universal Sales' cost of goods sold (COGS)average $2, 000, 000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Accepted Answer

11ea1b84_8bce_f2fd_a54a_57689ed2996e_TB3581_00 Inv.conv.period = Inv./COGS per day = Inv./(Annual COGS/365)= 15.2 days

Question 15

Kiley Corporation had the following data for the most recent year (in millions).The new CFO believes (1)that an improved inventory management system could lower the average inventory by $4, 000, (2)that improvements in the credit department could reduce receivables by $2, 000, and (3)that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2, 000.Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made, by how many days would the cash conversion cycle be lowered?

Accepted Answer

11ea1b84_8bcf_8f4a_a54a_e12f7159f3d2_TB3581_00 Change = 34.01

Question 16

Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400, 000; its fixed assets are $100, 000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35, 000; the interest rate on its debt is 10%; and its tax rate is 40%.With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

Accepted Answer

11ea1b84_8bce_a4d9_a54a_dbfdc97b5c8e_TB3581_00 
 11ea1b84_8bce_a4da_a54a_2da307d0e67a_TB3581_00 Difference in ROE = 5.25%

Question 17

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36, 500, 000, or $100, 000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average, the company has $9, 000, 000 in inventory and $8, 000, 000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Accepted Answer

11ea1b84_8bcf_8f4b_a54a_995f19bca7f3_TB3581_00 
Cash conversion cycle = Inv.conversion period + Avg.collection period - Pay.deferral period
CCCO??g = 120.00 + 80.00 - 35.00 = 165.00
CCCN?w = 106.67 + 71.11 - 35.00 = 142.78
CCCN?w - CCCO??g = 142.78 - 165.00 = -22.22 days

Question 18

Freeman Builders, Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 60 days after the invoice date.Net purchases amount to $720, 000 per year.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

11ea1b84_8bd0_2b93_a54a_7d7cc2c68491_TB3581_00 
Nom.% cost = Disc.%/(100 - Disc.%)×(365/(Actual days - Disc.days)
Nom.% cost = 2.04% ×8.11 = 16.55%
The effective discount % is earned N times per year; the product is the nominal annual cost rate.

Question 19

Shulman Inc.has the following data, in thousands.Assuming a 365-day year, what is the firm's cash conversion cycle?

Accepted Answer

11ea1b84_8bcf_6838_a54a_070736e24ba5_TB3581_00 CCC = Inv.conv.period + Avg.coll.period - Pay.def.period = 38.93 days

Question 20

Pascarella Inc.is revising its payables policy.It has annual sales of $50, 735, 000, an average inventory level of $15, 012, 000, and average accounts receivable of $10, 008, 000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1, 946, 000 and accounts receivable by $1, 946, 000.What will be the net change in the cash conversion cycle, assuming a 365-day year?

Accepted Answer

11ea1b84_8bcf_b65c_a54a_1363a9f4a91e_TB3581_00 
Cash conversion cycle = Inv.conversion period + Avg.collection period - Pay.deferral period
CCCO??g = 127.06 + 72.00 - 30.00 = 169.06
CCCN?w = 110.59 + 58.00 - 40.00 = 128.59
CCCN?w - CCCO??g = 128.59 - 169.06 = -40.47 days

Quiz 16: Supply chains and working capital management