Question 1

Pluto has a beginning cash balance of £430 on February 1^st.The firm has projected sales of £600 in January,£800 in February and £900 in March.The cost of goods sold is equal to 70% of sales.Goods are purchased one month prior to the month of sale.The trade payables period is 30 days and the trade receivables period is 15 days.The firm has monthly cash expenses of £180.What is the projected ending cash balance at the end of February? Assume that every month has 30 days.

Accepted Answer

To calculate the projected ending cash balance at the end of February, we need to first calculate the cash collections, cash disbursements, and cost of goods sold for February:

Cash collections:
- January sales: £600 x (15/30) days = £300
- February sales: £800 x (15/30) days = £400
Total cash collections = £700

Cost of goods sold:
- February sales: £800 x 70% = £560
Goods purchased in January need to be paid in February, so this adds to the cash disbursements for February.

Cash disbursements:
- Cost of goods sold (see above): £560
- Monthly cash expenses: £180
- Trade payables from January purchases: £560 x (30/30) days = £560
Total cash disbursements = £1,300

Net cash flow for February = cash collections - cash disbursements = £700 - £1,300 = -£600

This means the projected ending cash balance at the end of February is the beginning cash balance plus the net cash flow:
£430 + (-£600) = £-170

However, we need to adjust for the fact that the trade receivables period is only 15 days, meaning that only a portion of the February sales will be collected in March. Let's assume that 50% of the February sales will be collected in March, while the other 50% was collected in February. This means we can add back £400 (50% of February sales) to the net cash flow:

Net cash flow for February = cash collections - cash disbursements + (50% of February sales) = £700 - £1,300 + £400 = -£200

Projected ending cash balance at the end of February = beginning cash balance + net cash flow = £430 + (-£200) = £230

Therefore, the correct answer is C) £390, which is the only choice that is greater than the beginning cash balance of £430.

Question 2

The inventory turnover for the Lambkin Company was 8 times and its days in receivables was 55.What is the operating cycle for Lambkin given a 365-day year?

Accepted Answer

The answer of The inventory turnover for the Lambkin Company...

Question 3

Your bank offers you a £100,000 line of credit with an interest rate of 2.5% per quarter.The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Your short-term investments are paying 1.25% per quarter.What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume that both the funds you borrow and the funds you invest use compound interest.

Accepted Answer

First, calculate the amount of the compensating balance: 4% x $100,000 = $4,000.
Since the compensating balance does not earn any interest, the amount available for investment is $96,000 ($100,000 - $4,000).
Next, calculate the interest earned on the short-term investment: $96,000 x (1 + 0.0125)^4 - $96,000 = $4,138.70
Now, calculate the interest you would have to pay if you were to use the entire credit line: $100,000 x 0.025 x 4 = $10,000
Therefore, the effective annual interest rate is: ($10,000 - $4,000 + $4,138.70) / $96,000 = 0.0509 or 5.09%.

Question 4

The Babco Co.has a £200,000 line of credit with an 8% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed.What is the effective interest rate if the firm uses this source of funding to purchase a £117,000 piece of equipment? The company plans on repaying the loan in a lump sum at the end of one year.

Accepted Answer

The answer of The Babco Co.has a £200,000 line of...

Question 5

Your bank offers you a £100,000 line of credit with an interest rate of 2.5% per quarter.The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Your short-term investments are paying 1.25% per quarter.What is your effective annual interest rate if you borrow the whole £100,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

Accepted Answer

First, we need to calculate the effective interest rate (EIR) for borrowing the full £100,000 for one quarter:

Interest expense = £100,000 x 2.5% = £2,500
Compensating balance = 4% x (£100,000 - £100,000) = £0
Net proceeds (funds received) = £100,000 - £0 = £100,000
Interest income = £0.00 (since we are not investing any of the funds yet)
EIR = (Interest expense - Interest income) / Net proceeds = (£2,500 - £0.00) / £100,000 = 2.50%

Now, we need to calculate the EIR for investing the compensating balance:

Interest expense = £0 (since there is no interest charge on the compensating balance)
Compensating balance = 4% x (£100,000 - £100,000) = £0
Net proceeds (funds received) = £0 (since we are not borrowing any funds yet)
Interest income = £100,000 x 1.25% = £1,250
EIR = (Interest income - Interest expense) / Net proceeds = (£1,250 - £0) / £0 = undefined

Since we cannot divide by zero, we need to adjust our calculations. We can assume that we borrow and repay the entire line of credit each quarter, so the average funds borrowed and invested are both £50,000. With this assumption, we can calculate the EIR as follows:

Interest expense = (£100,000 x 2.5%) x 4 = £10,000
Compensating balance = 4% x (£100,000 - £50,000) x 4 = £8,000
Net proceeds (funds received) = £100,000 - £8,000 = £92,000
Interest income = (£50,000 x 1.25%) x 4 = £2,500
EIR = (Interest expense - Interest income) / Net proceeds = (£10,000 - £2,500) / £92,000 = 8.6957%

Finally, we need to convert the quarterly EIR to an effective annual interest rate (EAR):

EAR = (1 + EIR/4)^4 - 1 = (1 + 0.086957/4)^4 - 1 = 10.38%

Therefore, the best choice is C, with an effective annual interest rate of 10.38%.

Question 6

Your firm sells £2,000 worth of goods in December,£1,700 worth in January,£1,500 in February and £1,600 in March.Your cost is 60% of the retail price.You have a receivables period of 30 days and a payables period of 45 days.You buy your products one month prior to selling them.Which one of the following statements is correct given this information?

Accepted Answer

The answer of Your firm sells £2,000 worth of goods...

Question 7

Birds Unlimited has a 45 day trade payables period.The firm has expected sales of £1,800,£2,100,£2,400 and £2,800,respectively,by quarter for the next calendar year.The cost of goods sold for a quarter is equal to 65% of the next quarter sales.What is the amount of the projected cash disbursements for trade payables for Quarter 2 of the next year? Assume that a year has 360 days.

Accepted Answer

The cost of goods sold for Quarter 2 is 65% of Quarter 3 sales, which is £2,400. Therefore, COGS for Quarter 2 is £2,400 * 0.65 = £1,560. The trade payables period is 45 days, which is 1/8 of a year (45/360). Therefore, the cash disbursement for Quarter 2 is £1,560 * 1/8 = £1,462.50.

Question 8

At the beginning of the year,you have an outstanding short-term loan of £10 which was used to cover your cash needs for the previous year.During the current year,you expect to pay £2 interest and have an annual net cash inflow of -£10 (negative),excluding the interest payment.What is your anticipated loan balance at year end?

Accepted Answer

The answer of At the beginning of the year,you have...

Question 9

Your firm has a net cash inflow for the quarter of £60.The beginning cash balance is £35.Company policy is to maintain a minimum cash balance of £15 and borrow only the amount that is necessary to maintain that balance.How much does your firm need to borrow or how much can it repay on its loans to have a zero cumulative surplus?

Accepted Answer

The answer of Your firm has a net cash inflow...

Question 10

Your firm has a line of credit with your local bank for £50,000.The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed.What is the effective interest rate if you need £42,750 for one year to cover your operating expenses?

Accepted Answer

The answer of Your firm has a line of credit...

Question 11

The inventory turnover for the Lambkin Company was 8 times and its days in receivables was 55.The average payables deferral period (or turnover)was 7.5.What is the cash cycle for Lambkin given a 365-day year?

Accepted Answer

The cash cycle is the sum of the days in receivables, the average payables deferral period, and the inventory turnover period. The inventory turnover period is calculated by dividing 365 days by the inventory turnover ratio. Therefore, the inventory turnover period for Lambkin is 365 days / 8 = 45.63 days. The cash cycle is then calculated as 55 days + 45.63 days + (365 days / 7.5) = 51.96 days.

Question 12

Your bank offers you a £70,000 line of credit with an interest rate of 2.75% per quarter.The loan agreement also requires that 5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Your short-term investments are paying ½ of 1% per month.What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume that both the funds you borrow and the funds you invest use compound interest.

Accepted Answer

The answer of Your bank offers you a £70,000 line...

Question 13

Your bank offers you a £40,000 line of credit with an interest rate of 2.35% per quarter.The loan agreement also requires that 5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Your short-term investments are paying 1.75% per quarter.What is your effective annual interest rate if you borrow the whole £40,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

Accepted Answer

The answer of Your bank offers you a £40,000 line...

Question 14

Your firm has a net cash inflow for the quarter of -£30 (negative).The beginning cash balance is £15.Company policy is to maintain a minimum cash balance of £5 and borrow only the amount that is necessary to maintain that balance.How much does your firm need to borrow to have a zero cumulative surplus?

Accepted Answer

The firm has a negative net cash inflow of £30, which means it has spent more than it earned in the quarter. The beginning cash balance is £15 and the policy is to maintain a minimum cash balance of £5. Therefore, the firm needs £10 (£15 - £5) to maintain the minimum cash balance. To have a zero cumulative surplus, the firm needs to borrow an additional £20 (£10 - (-£30)) to make up for the negative net cash inflow. Therefore, the total borrowing needed is £30 (£10 + £20). The correct choice is C.

Question 15

The Jetson Co.has an £80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed.What is the effective annual interest rate if the firm needs £45,000 of cash for one year?

Accepted Answer

The answer of The Jetson Co.has an £80,000 line of...

Question 16

Weisbro and Sons purchase its inventory one quarter prior to the quarter of sale.The purchase price is 60% of the sales price.The trade payables period is 60 days.The trade payables balance at the beginning of quarter one is £27,500.What is the amount of the expected disbursements for quarter two given the following expected quarterly sales? Assume that a year has 360 days.
Quarter l$\quad\quad\quad\quad £ 31,000 $

Quarter 2$\quad\quad\quad\quad £ 34,000 $

Quarter 3$\quad\quad\quad\quad £ 42,000 $

Quarter 4$\quad\quad\quad\quad £ 51,000 $

Accepted Answer

The answer of Weisbro and Sons purchase its inventory one...

Question 17

As of the beginning of the quarter,you have a cash balance of £250.During the quarter you pay your suppliers £310.Your trade receivables collections are £420.You also pay an interest payment of £30 and a tax bill of £180.In addition,you borrow £75.What is your cash balance at the end of the quarter?

Accepted Answer

Cash balance at the beginning of the quarter: £250Payments to suppliers: £310Trade receivables collections: £420Interest payment: £30Tax bill: £180Borrowing: £75Cash balance at the end of the quarter: £250 + £420 - £310 - £30 - £180 + £75 = £225

Question 18

Your firm factors its trade receivables immediately at a 3% discount.The average collection period is 41.95 days.Assume that all accounts are collected in full.What is the effective annual interest rate on this arrangement?

Accepted Answer

The answer of Your firm factors its trade receivables immediately...

Question 19

D & F expects sales of £620,£650,£730 and £780 for the months of April through to July,respectively.The firm collects 20% of sales in the month of sale,50% in the month following the month of sale and 28% in the second month following the month of sale.The remaining 2% of sales is never collected.How much money does the firm expect to collect in the month of July?

Accepted Answer

The answer of D & F expects sales of £620,£650,£730...

Question 20

On April 1^st,your firm had a beginning cash balance of £280.Your sales for March were £460 and your April sales were £510.During April you had cash expenses of £130 and payments on your trade payables to £210.Your trade receivables period is 30 days.What is your firm's beginning cash balance on May 1^st?

Accepted Answer

The beginning cash balance on May 1st is calculated by adding the beginning cash balance on April 1st (£280) to the cash inflows from April sales (£510) and subtracting the cash expenses (£130) and payments on trade payables (£210). Therefore, £280 + £510 - £130 - £210 = £450.

Quiz 26: Short-Term Finance and Planning

The inventory turnover for the Lambkin Company was 8 times and its days in receivables was 55.What is the operating cycle for Lambkin given a 365-day year?

Your firm has a line of credit with your local bank for £50,000.The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed.What is the effective interest rate if you need £42,750 for one year to cover your operating expenses?

The inventory turnover for the Lambkin Company was 8 times and its days in receivables was 55.The average payables deferral period (or turnover) was 7.5.What is the cash cycle for Lambkin given a 365-day year?

The Jetson Co.has an £80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed.What is the effective annual interest rate if the firm needs £45,000 of cash for one year?

Your firm factors its trade receivables immediately at a 3% discount.The average collection period is 41.95 days.Assume that all accounts are collected in full.What is the effective annual interest rate on this arrangement?