Working Capital Management - Questions and Answers
17
Q1 Net purchases 720000 Percentage discount 2% cost of paying after 15th day is (2/98)% 2.04% This is the % cost of non-free trade credit for 20 days Hence, for 365 days .. The % will be 37.24% Q2 revolving credit $10,000,000.00 annual commitment fee 0.50% Interest for the used portion of the loan Prime rate + 1.5% Prime rate 9% Amount borrowed $ 6,000,000.00 Amount paid for the unused portion of the loan $ 20,000.00 Amount paid for the used portion of the loan $ 630,000.00 Total Cost of the loan agreement for 1 year $ 650,000.00 Q3 annual sales $ 400,000.00 fixed assets $ 100,000.00 debt 50% of total asse Equity 50% of total asse EBIT $ 36,000.00 Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not purchases amount to $720,000 per year. What is the nominal annua Inland Oil arranged a $10,000,000 revolving credit agreement with one percent of the unused balance of the loan commitment. On the actually borrowed on an annual, simple interest basis. The prime after the agreement was signed and repaid the loan at the end of Jarrett Enterprises is considering whether to pursue a restricted $400,000; its fixed assets are $100,000; debt and equity are each debt is 10 percent, and the firm’s tax rate is 40 percent. With policy, current assets will be 25 percent of sales. What is the
Transcript
Q1
Net purchases 720000 per year
Percentage discount 2%
cost of paying after 15th day is (2/98)% 2.04%This is the % cost of non-free trade credit for 20 daysHence, for 365 days .. The % will be 37.24%
Q2
revolving credit $ 10,000,000.00 annual commitment fee 0.50% of the unused balance of the loan commitmentInterest for the used portion of the loan Prime rate + 1.5% = 9 + 1.5Prime rate 9%Amount borrowed $ 6,000,000.00
Amount paid for the unused portion of the loan $ 20,000.00 Amount paid for the used portion of the loan $ 630,000.00
Total Cost of the loan agreement for 1 year $ 650,000.00
Q3
annual sales $ 400,000.00 fixed assets $ 100,000.00 debt 50% of total assets 50%Equity 50% of total assets 50%EBIT $ 36,000.00
Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)
Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar cost of the loan agreement for one year?
Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
interest rate on the firm’s debt 10%firm’s tax rate 40%current assets with restricted policy 15% of Sales 15%current assets with Relaxed policy 25% of Sales 25%
Monthly Sales $ 2,000,000.00 Average Inventory $ 1,000,000.00 half of manthly salesdays in a year 365
Annual Sales $ 24,000,000.00 So. In 365 days the firm sells 24000000so for selling 1000000 of the inventory it will take 15.21 daysInventory Conversion period
Q5
annual sales $ 80,000,000.00 average inventory $ 20,000,000.00 accounts receivable $ 16,000,000.00 Firm buys all RM on credit Net 35 days 35
On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?
Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day
To reduce Cash Conversion CycleInventory lowered by $ 4,000,000.00 accounts receivable lowered by $ 2,000,000.00 Days in a year 365
Avg Accounts Payable $ 571,428.57
Avg sales per day $ 219,178.08 Avg collection period 73.00Inventory conversion period 91.25Cash Conversion Cycle 129.25
Now after changes to inventory and receivablesAverage Inventory $ 16,000,000.00 Account recceivables $ 14,000,000.00
Avg sales per day $ 219,178.08 Avg collection period 63.88Inventory conversion period 73.00Cash Conversion Cycle 101.88
Q6
120,000600,000157,808
25,000365,000
3050
Inventory holding days' 73Inventory Turnover ratio 5
You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. 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 your estimate of the firm’s current cash conversion cycle?
• Current inventory = $120,000.• Annual sales = $600,000.• Accounts receivable = $157,808.• Accounts payable = $25,000.• Total annual purchases = $365,000.• Purchases credit terms: net 30 days.• Receivables credit terms: net 50 days.
· Current inventory = · Annual sales = $· Accounts receivable = $· Accounts payable = $· Total annual purchases = $· Purchases credit terms: net · Receivables credit terms: net
Acc. Receivable days 96Acc.Payable days 25
CASH TO CASH CYCLE 144
Q-8:
Q 8 : Sums mail 2/10 net 30
One day Net purchase(Net purchase/ Cost at th purchase day)
Purchase if discount not availed 12000 ACC. Payable for 20 daysAdditional Interest cost( @ 10% interest rate)
Net Saving
So reduction in Tax(due to availing doscount)Change in Net Income
Q 9 :
Annula Sales 3,600,000Fixed Assets Turnover Ratio 4Fixed Assets 900,000
Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases. Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of this policy change on its net income. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10 percent and the firm’s tax rate is 40 percent. If the firm implements the plan, what is the expected change in Quickbow’s net income?
Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison’s annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy, its total assets turnover will be 2.2.
of the unused balance of the loan commitment10.50%
Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What
Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar cost
Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed
$ 60,000.00 $ 100,000.00
=PAT/Equity
& it pays on time
On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a
Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle?
daysdays
Inventory / Sales per daysSales / Turnover
You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. 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 your estimate of the firm’s current cash conversion cycle?
One day Net purchase 11,760(Net purchase/ Cost at th purchase day)ACC. Payable for 20 days 235200 Annual sav 87600Additional Interest cost 23520 on availing discount
0.37244964080
25632(due to availing doscount)Change in Net Income 38448
Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases. Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of this policy change on its net income. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10 percent and the firm’s tax rate is 40 percent. If the firm implements the plan, what is the expected change in Quickbow’s
Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison’s annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy, its total
1.50
2.24
No. of units sold 500SP / unit 15000annual sales $ 7,500,000.00 VC /unit $ 6,000 TVC $ 3,000,000 TFC $ 1,500,000
