Ex10 - Working Capital Management With Solution

MANAGEMENT ADVISORY SERVICES

EXERCISES Working Capital Policy 1 . Real Real Compa Company ny a! a! "#$%%% "#$%%%$%% $%%%% in &'rrent &'rrent a!!et!$ a!!et!$ "($)% "($)%%$% %$%%% %% o* +i& &  are &on!i, &on!i,ere ere,, permanent &'rrent a!!et!. In a,,ition$ te *irm a! "-$%%%$%%% "-$%%%$%%% ine!te, in *i/e, a!!et!. Real Company +i!e! to *inan&e all *i/e, a!!et! an, permanent &'rrent a!!et! pl'! al* o* it! temporary &'rrent a!!et! +it long0term *inan&ing &o!ting 1) per&ent. per&ent. Sort0term *inan&ing &'rrently &'rrently &o!t! 1% per&ent. per&ent. Real Company! Company! earning! earning! 2e*ore 2e*ore intere!t intere!t an, ta/e! are "3$3%%$%%%. In&ome ta/ rate i! 4% per&ent.

Working Capital Management A. Wat +a! +a! Amore= Amore=! total ,e2t ,e2t in 3%%36 3%%36 @. 5o+ m'& ne+$ ne+$ long0term long0term ,e2t ,e2t *inan&ing ng +ill 2e nee,e, nee,e, in 3%%(6 3%%(6 4

.

Te RAM Compan Companyy a, te *ollo+ing lo+ing ,ata *or te &'rren &'rrentt year$ 3%%4B 3%%4B Sale!$ 3%%4 Sale!$ 3%%) Item! tat ary ,ire&tly +it !ale!B A!!et! ia2ilitie! Net pro*it margin "ayo't ratio

5o+ m'& +o'l, Real Company! earning! a*ter ta/e! 'n,er ti! *inan&ing plan6 3

.

A *irm tat i! in te pro&e!! pro&e!! o* preparing preparing it! *inan&ial *inan&ial plan plan *or te 'p&oming 'p&oming year a! a! e!timate, e!timate, te *ollo+ing &'rrent a!!et! 7in "%%%$%%%8 *or te year. Mont CA Mont CA Mont CA 9 an 1:.3 May (-.Sept 3-.: ;e2 31.9'ne 4(.# O&t 3).) Mar 34.) 9'l 4%.) No 3(.4 Apr ((.4 A'g (4.4 De& 3%.<

1. Comp'te Comp'te te proe&te, e&te, a,,itio a,,itional nal *inan&ing *inan&ing nee,e, nee,e, *or 3%%). 3%%). 3.

Comp'te te proe&te, a,,itional a,,itional *inan&ing nee,e, *or 3%%) 'n,er 'n,er ea& a!!'mptionB a!!'mptionB A. "ayo' "ayo'tt ratio ratio i! ))?

1. 5o+ m'& +illll te *irm=! *irm=! permanent permanent leel leel o* a!!et! a!!et! 2e *or te &oming &oming year6 year6

C. Sale! ne/t ne/t year i! ")$%%%$% ")$%%%$%%% %% an, te payo' payo'tt ratio i! 4%?. 4%?.

@. Net pro*it pro*it margin margin i! 1%? an, an, payo't payo't ratio i! (%?

)

.

Te 3%%( 3%%( !ale! o* Reign Reign Co. amo'nte, amo'nte, to "# million. on. Te ,ii,e ,ii,en, n, payo't payo't ratio i! (%?. Te Te per&ent o* !ale! in ea& 2alan&e !eet item tat arie! ,ire&tly +it !ale! are e/pe&te, to 2e a! *ollo+!B Ca! #? Re&eia2le! 1)? Inentorie! 1-? Net *i/e, a!!et! (%? A&&o'nt! paya2le 13? A&&r'e, e/pen!e! -? Net pro*it rate :?

(. Comp'te Comp'te te ma/im'm m'm temporary temporary *inan&ing *inan&ing re>'irem re>'irement ent o* te *irm.

External Financing Needed . At year0en, year0en, 3%%3$ total total a!!et! *or Amore Amore In&. +ere "1.3 "1.3 million an, an, a&&o'nt! a&&o'nt! paya2le paya2le +ere "('ire, to !'pport te *irm=! &a! &oner!ion &y&le.

@. Wat +o'l, appen to &apital re>'irement i* Reign &an in&rea!e it! !ale! 2y 4%? an, te payo't ratio i! in&rea!e, to 4%?6

D. 5o+ &o'l, management re,'&e te &a! &oner!ion &y&le6 #

A *irm tat a! an ann'al opport'nity &o!t o* 13? i! &ontemplating in!tallation o* a lo&k2o/ !y!tem at an ann'al &o!t o* ":%$%%%. Te !y!tem i! e/pe&te, to re,'&e mailing time 2y 3 ,ay!$ re,'&e pro&e!!ing time 2y 1.) ,ay!$ an, re,'&e &e&k &learing time 2y 1 ,ay. I* te *irm &olle&t! "(%%$%%% per ,ay$ +o'l, yo' re&ommen, te !y!tem6

:

Calma Company '!e! a &ontin'o'! 2illing !y!tem tat re!'lt! in aerage ,aily re&eipt! o* "'ity i! *ore&a!t to 2e "3) million. Working &apital poli&y re>'ire! tat )%? o* ma/im'm &'rrent a!!et! 2e *inan&e,  +it permanent *inan&ing.

3. Comp'te Comp'te te permane permanent nt *inan&ing *inan&ing re>'irem re>'irement ent o* te *irm. *irm.

"4$%%%$%%% )$)%%$%%%

C. I* te lo&k02o/ !y!tem &o'l, 2e arrange, at an ann'al &o!t o* "4)$%%%$ +at +o'l, 2e te net gain *rom in!tit'ting te !y!tem6 1%

. Syl Company proe&t! tat &a! o'tlay! o* "4) million +ill o&&'r 'ni*ormly tro'go't te year. Syl plan! to meet it! &a! re>'irement! 2y perio,i&ally !elling marketa2le !e&'ritie! *rom it! port*olio. Te *irm=! marketa2le !e&'ritie! are ine!te, to earn 13 per&ent$ an, te &o!t per tran!a&tion o* &onerting !e&'ritie! to &a! "(%. A. Wat i! te optimal tran!a&tion !iFe *or tran!*er *rom marketa2le !e&'ritie! to &a!6

A22ey "ro,'&t! i! &on&erne, a2o't managing &a! e**i&iently. On te aerage$ inentorie! t'rn! oer ) time!$ an, a&&o'nt! re&eia2le are &olle&te, in -% ,ay!. A&&o'nt! paya2le are pai, appro/imately (% ,ay! a*ter tey ari!e. Te *irm! !pen,! "(% million on operating &y&le ine!tment! ea& year$ at a &on!tant rate. A!!'ming a (-%0,ay year. A. Cal&'late te *irm=! operating &y&le @. Cal&'late te *irm=! &a! &oner!ion &y&le

@. Wat +ill 2e Syl=! aerage &a! 2alan&e6 C. Comp'te te ann'al &o!t o* &a! 2a!e, on optimal tran!a&tion !iFe

ReceivalesManagement 11 . M&"an Company !ell! on term! o* (1%$ net (%. Total !ale! *or te year! are ":%%$%%%. ;orty per&ent o* te &'!tomer! pay on te 1%t ,ay an, take ,i!&o'nt!H te oter -% per&ent pay$ on aerage$ 4% ,ay! a*ter teir p'r&a!e!. A!!'me (-% ,ay! per year.

E/er&i!e!  "ro2lem!

"age 3 o* :

MANAGEMENT ADVISORY SERVICES A. Wat i! te ,ay! !ale! o't!tan,ing6

Working Capital Management 1-

. Te Ele&tra Car Company p'r&a!e! 3%$%%% 'nit! o* a maor &omponent part ea& year. Te *irm! or,er &o!t! are "3%% per or,er an, te &arrying &o!t per 'nit i! "3 per year.

@. Wat i! te aerage amo'nt o* re&eia2le!6 A. Comp'te te total inentory &o!t! a!!o&iate, +it pla&ing or,er! o* 3%$%%%$ 1%$%%%$ )$%%%$ 1$%%%.

C. Wat +o'l, appen to aerage re&eia2le! i* M&"an to'gene, 'p on it! &olle&tion poli&y  +it te re!'lt tat all no0,i!&o'nt &'!tomer! pai, on te (%t ,ay6

@. Determine te EO *or te &omponent part!. 13

. S Mart a! !ale! o* "( million. It! &re,it perio, an, aerage &olle&tion perio,! are 2ot (% ,ay!$ an, 1.)? o* it! !ale! en, a! 2a, ,e2t!. Te manager inten,! to e/ten, te &re,it term to 4) ,ay! +i& +ill in&rea!e !ale! to "(.( million. 5o+eer$ 2a, ,e2t lo!!e! on te

1<

. Eer Company i! &on!i,ering !+it&ing *rom leel pro,'&tion to !ea!onal pro,'&tion in or,er to lo+er ery ig inentory &o!t!. Aerage inentory leel! +o'l, ,e&line 2y "(%%$%%% 2't

MANAGEMENT ADVISORY SERVICES

Working Capital Management

A. S'ppo!e tat in 3%%4 !ale! in&rea!e, 2y 3)? oer 3%%( !ale!. 5o+ m'& a,,itional 7e/ternal8 &apital +ill 2e re>'ire,6

C. Cal& 'late te amo'nt o* negotiate, *inan&ing re>'ire, to !'pport te *irm=! &a! &oner!ion &y&le.

@. Wat +o'l, appen to &apital re>'irement i* Reign &an in&rea!e it! !ale! 2y 4%? an, te payo't ratio i! in&rea!e, to 4%?6

D. 5o+ &o'l, management re,'&e te &a! &oner!ion &y&le6 #

A *irm tat a! an ann'al opport'nity &o!t o* 13? i! &ontemplating in!tallation o* a lo&k2o/ !y!tem at an ann'al &o!t o* ":%$%%%. Te !y!tem i! e/pe&te, to re,'&e mailing time 2y 3 ,ay!$ re,'&e pro&e!!ing time 2y 1.) ,ay!$ an, re,'&e &e&k &learing time 2y 1 ,ay. I* te *irm &olle&t! "(%%$%%% per ,ay$ +o'l, yo' re&ommen, te !y!tem6

:

Calma Company '!e! a &ontin'o'! 2illing !y!tem tat re!'lt! in aerage ,aily re&eipt! o* "'ire, an, intere!t ,'e at te en, o* te year.

Working Capital Management -%. @arangay @ank a! agree, to len, te money at a 13? rate +it a 1)? &ompen!ating 2alan&e re>'irement. To+n2ank +ill len, at a 1(? intere!t rate on a ,i!&o'nte, loan *rom tree mont!. A. Wat i! te e**e&tie rate o* intere!t &arge, 2y ea& 2ank6 @. Wat i! te &o!t o* *oregoing te ,i!&o'nt6 C. 5o+ m'& +o'l, Tyler ae to 2orro+ *rom ea& 2ank in or,er to take te ,i!&o'nt6

@. A :.3) per&ent ann'al rate on a !imple intere!t loan$ +it a 3% per&ent &ompen!ating

MANAGEMENT ADVISORY SERVICES

Working Capital Management 1-

A. Wat i! te ,ay! !ale! o't!tan,ing6

. Te Ele&tra Car Company p'r&a!e! 3%$%%% 'nit! o* a maor &omponent part ea& year. Te *irm! or,er &o!t! are "3%% per or,er an, te &arrying &o!t per 'nit i! "3 per year.

@. Wat i! te aerage amo'nt o* re&eia2le!6 A. Comp'te te total inentory &o!t! a!!o&iate, +it pla&ing or,er! o* 3%$%%%$ 1%$%%%$ )$%%%$ 1$%%%.

C. Wat +o'l, appen to aerage re&eia2le! i* M&"an to'gene, 'p on it! &olle&tion poli&y  +it te re!'lt tat all no0,i!&o'nt &'!tomer! pai, on te (%t ,ay6

@. Determine te EO *or te &omponent part!. 13

. S Mart a! !ale! o* "( million. It! &re,it perio, an, aerage &olle&tion perio,! are 2ot (% ,ay!$ an, 1.)? o* it! !ale! en, a! 2a, ,e2t!. Te manager inten,! to e/ten, te &re,it term to 4) ,ay! +i& +ill in&rea!e !ale! to "(.( million. 5o+eer$ 2a, ,e2t lo!!e! on te in&remental !ale! +o'l, 2e (?. Co!t! o* pro,'&t! an, relate, e/pen!e! amo'nt to 4%?$ e/&l'!ie o* te &o!t o* &arrying re&eia2le! o* 1)? an, 2a, ,e2t e/pen!e!. A!!'ming (-% ,ay! a year$ +at in&remental &o!t o* ine!tment i! re>'ire, to !'pport te &ange in poli&y6

1<

. Eer Company i! &on!i,ering !+it&ing *rom leel pro,'&tion to !ea!onal pro,'&tion in or,er to lo+er ery ig inentory &o!t!. Aerage inentory leel! +o'l, ,e&line 2y "(%%$%%% 2't pro,'&tion &o!t! +o'l, ri!e a2o't "4%$%%% 2e&a'!e o* a,,itional !tart'p! an, oter ine**i&ien&ie!. Te *irm! &o!t o* *inan&ing inentory 2alan&e! i! 1)?. A. So'l, te *irm !+it& to !ea!onal pro,'&tion6 7ignore in&ome ta/e!8

1(

. De!!a$ In&. &'rrently a! !ale! o* "3.) million. It! &re,it perio, an, ,ay! !ale! o't!tan,ing 7DSO8 are 2ot (% ,ay!$ an, 1 per&ent o* it! !ale! en, 'p a! 2a, ,e2t!. Te &re,it manager e!timate! tat$ i* te *irm e/ten,! it! &re,it perio, to 4) ,ay! !o tat it! ,ay! !ale! o't!tan,ing in&rea!e! to 4) ,ay!$ !ale! +ill in&rea!e 2y "3)%$%%%$ 2't it! 2a, ,e2t lo!!e! on te in&remental !ale! +o'l, 2e 3.) per&ent. Varia2le &o!t! are -% per&ent$ an, te &o!t o* &arrying re&eia2le!$ k$ i! 13.) per&ent. A!!'me a ta/ rate o* 4% per&ent an, (-% ,ay! per year. A. Comp'te te in&remental ine!tment re>'ire, to *inan&e te in&rea!e in re&eia2le! i* te &ange i! e**e&te,.

@. At +at intere!t rate +o'l, te &o!t o* *inan&ing a,,itional inentory 'n,er leel pro,'&tion 2e e>'al to te a,,e, pro,'&tion &o!t! o* ! ea!onal pro,'&tion67ignore in&ome ta/e!8 C. An!+er 7A8 an, 7@8 i* te appli&a2le in&ome ta/ rate i! 4% per&ent.

!rade Credit 1# . Ca! ,i!&o'nt De&i!ion!. Te &re,it term! *or ea& o* tree !'pplier! are !o+n 2elo+B

@. Wat +o'l, 2e te in&remental &o!t o* &arrying re&eia2le!6

S'pplier A S'pplier @ S'pplier C S'pplier D

C. Wat +o'l, 2e te e**e&t o* to!e &ange! in net in&ome6

Inventory Management 14 . Wil2'r Co. la!t year reporte, !ale! o* "1%$%%%$%%% an, an inentory t'rnoer ratio o* 3. Te &ompany i! no+ a,opting a '!t0in0time inentory !y!tem. I* te ne+ !y!tem i! a2le to re,'&e te *irm! inentory leel an, in&rea!e te *irm! inentory t'rnoer to )$ +ile maintaining te !ame leel o* !ale!$ o+ m'& &a! +ill 2e *ree, 'p6

31% n)) (1% n)) 31) n4) 31% n(%

A. Determine te ann'al appro/imate &o!t o* giing 'p te &a! ,i!&o'nt *rom ea& !'pplier. @. A!!'ming tat te *irm nee,! !ort0term *inan&ing$ re&ommen, +eter it +o'l, 2e 2etter to gie 'p te &a! ,i!&o'nt or take te ,i!&o'nt an, 2orro+ *rom a 2ank at 3%? ann'al intere!t. Eal'ate ea& !'pplier !eparately '!ing yo'r *in,ing! in 'e!tion A.

1)

. Tri Company! *inan&ial plan *or ne/t year0 !o+! !ale! o* "'ire, an, intere!t again ,'e at te en, o* te year.

Re,o re>'irement 7A8 to 7;8 a!!'ming te loan i! *or *o'r 748 mont!.

Short"term Financing $lternatives 3% . an&e 5ar,+are &an 2'y e>'ialent material! *rom t+o0,i!tri2'tor!. S'pplier A o**er! term 11%$ net (% +erea! S'pplier @ proi,e! term! o* 31)$ net -%.

C. An #.'ire, an, intere!t ,'e at te en, o* te year.

@. Wat i! te &o!t o* *oregoing te ,i!&o'nt6 C. 5o+ m'& +o'l, Tyler ae to 2orro+ *rom ea& 2ank in or,er to take te ,i!&o'nt6

@. A :.3) per&ent ann'al rate on a !imple intere!t loan$ +it a 3% per&ent &ompen!ating 2alan&e re>'ire, an, intere!t again ,'e at te en, o* te year.

D. S'ppo!e tat Tyler normally 2ank! +it @arangay @ank an, maintain! ,epo!it 2alan&e o* "1)$%%%$ +at amo'nt +o'l, ae to 2e 2orro+e, an, +at +o'l, te e**e&tie intere!t rate 2e6

C. A #.'ire! a 3%? &ompen!ating 2alan&e *or te loan$ !o'l, te *irm *orego te ,i!&o'nt6 31

. Tyler Company nee,! "1%%$%%% to take a,antage o* a ,i!&o'nt 2a!e, on term! o* (1%$ net

E/er&i!e!  "ro2lem!

"age 4 o* :

MANAGEMENT ADVISORY SERVICES

Working Capital Management

M%#!IP#E C&'ICE 1. May Co. a! total *i/e, a!!et! o* "1%%$%%% an, no &'rrent lia2ilitie!. Te ta2le 2elo+ ,i!play! it! +i,e ariation in &'rrent a!!et &omponent!. 1!t 'arter 3n, 'arter (r, 'arter 4t 'arter Ca! " 3%$%%% " 1%$%%% " 1)$%%% " 3%$%%% A&&o'nt! re&eia2le --$%%% 3)$%%% 4'ire, ne+ *inan&ing 7RN;8 to *inan&e te e/pan!ion i! A. "4$#)%$%%% C. "3$-)%$%%% @. "($%%%$%%% D. ")$%%%$%%% 4. Te Gol, Company a! an inentory &oner!ion perio, o* 'irement o* ":$%