Working Cap.mgmt Questions Solution

Q1

Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typica amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit?

Net purchases

720000

Percentage discount

2%

cost of paying after 15th day is (2/98)% This is the % cost of non-free trade credit for 20 days Hence, for 365 days .. The % will be

Q2

37.24%

Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. percent of the unused balance of the loan commitment. On the used portion of the loan, In borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. agreement was signed and repaid the loan at the end of one year, what was the total dollar revolving credit annual commitment fee Interest for the used portion of the loan Prime rate Amount borrowed

Q3

2.04%

10,000,000.00 0.50% Prime rate + 1.5% 9% 6,000,000.00

Amount paid for the unused portion of the loan Amount paid for the used portion of the loan

20,000.00 630,000.00

Total Cost of the loan agreement for 1 year

650,000.00

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset inv fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36 the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent percent of sales. What is the difference in the projected ROEs between the restricted and r

annual sales fixed assets debt Equity EBIT interest rate on the firm’s debt firm’s tax rate

400,000.00 100,000.00 50% of total assets 50% of total assets 36,000.00 10% 40%

current assets with restricted policy current assets with Relaxed policy

15% of Sales 25% of Sales

Current Assets Fixed Assets Total Assets debt Equity EBIT Interest of the firms debt (10%) EBT Firm's tax (40%) PAT ( Net Income) ROE

Restricted Policy 60,000.00 100,000.00 160,000.00 80,000.00 80,000.00 36,000.00 8,000.00 28,000.00 11,200.00 16,800.00 21.00%

Difference in ROE's

Q4

5.40%

On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to on analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period? Monthly Sales Average Inventory days in a year

2,000,000.00 1,000,000.00 365

Annual Sales 24,000,000.00 So. In 365 days the firm sells 24000000 so for selling 1000000 of the inventory it will take 15 Inventory Conversion period

Q5

Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000 $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 da for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle annual sales average inventory accounts receivable Firm buys all RM on credit To reduce Cash Conversion Cycle Inventory lowered by accounts receivable lowered by Days in a year

80,000,000.00 20,000,000.00 16,000,000.00 Net 35 days

4,000,000.00 2,000,000.00 365

Avg Accounts Payable

571,428.57

Avg sales per day Avg collection period Inventory conversion period Cash Conversion Cycle

219,178.08 73.00 91.25 129.25

Now after changes to inventory and receivables Average Inventory Account recceivables

16,000,000.00 14,000,000.00

Avg sales per day Avg collection period Inventory conversion period Cash Conversion Cycle

Q6

219,178.08 63.88 73.00 101.88

You have recently been hired to improve the performance of Multiplex Corporation, which h your analysis, you want to determine the firm’s cash conversion cycle. Using the following 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

Inventory holding days' Inventory Turnover ratio Acc. Receivable days Acc.Payable days CASH TO CASH CYCLE

Q-8:

Quickbow Company currently uses maximum trade credit by not taking discounts on its from its bank, using notes payable, in order to take trade discounts. The firm wants on its net income. The standard industry credit terms offered by all its suppliers ar days. Its net purchases are $11,760 per day, using a 365-day year. The interest rat firm’s tax rate is 40 percent. If the firm implements the plan, what is the expected

Q 8 : Sums mail

Purchase if discount not availed

Q9:

12000

Callison Airlines is deciding whether to pursue a restricted or relaxed working capit are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and i of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10 percen the company follows a restricted policy, its total assets turnover will be 2.5. Under will be 2.2.

Annula Sales Fixed Assets Turnover Ratio Fixed Assets

Total Asset Debt Equity EBIT Interest ( @ 10% of debt) EBT Tax (@ 40 % rate) PAT Q 10 :

ROE

Q 11:

New Sales (after falling 15%) New EBIT (after falling 10%) Total Asset Turnover (Restricted policy)

3,600,000 4 900,000 Restricted policy 1,440,000 720,000 720,000 150,000 72,000 78,000 31,200 46,800 6.50 3,060,000 135,000 2.50

TA Debt Equity EBIT Interest ( @ 10% of debt) EBT Tax (@ 40 % rate) PAT ROE

1,224,000 612,000 612,000 135,000 61,200 73,800 29,520 44,280 7.24

oes not take discounts, and it typically pays 35 days after the invoice date. Net purchases ual cost of its non-free trade credit? (Assume a 365-day year.)

per year

ement with a group of small banks. The firm paid an annual commitment fee of one-half of one On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually e rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the f one year, what was the total dollar cost of the loan agreement for one year?

of the unused balance of the loan commitment = 9 + 1.5 10.50%

stricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and y, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 d ROEs between the restricted and relaxed policies?

50% 50%

15% 25%

60,000.00 100,000.00

Relaxed Policy 100,000.00 100,000.00 200,000.00 100,000.00 100,000.00 36,000.00 10,000.00 26,000.00 10,400.00 15,600.00 15.60% =PAT/Equity

month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm firm’s inventory conversion period?

half of manthly sales

days

keeps average inventory of $20,000,000. On average, the firm has accounts receivable of its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day

35 & it pays on time

ce of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of nversion cycle. Using the following information and a 365-day year, what is your estimate of the

120,000 600,000 157,808 25,000 365,000 30 days 50 days

73 Inventory / Sales per days 5 Sales / Turnover 96 25 144

it by not taking discounts on its purchases. Quickbow is considering borrowing e trade discounts. The firm wants to determine the effect of this policy change ms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 a 365-day year. The interest rate on the notes payable is 10 percent and the nts the plan, what is the expected change in Quickbow’s net income?

2/10 net 30 11,760 One day Net purchase (Net purchase/ Cost at th purchase day) ACC. Payable for 20 days 235200 Additional Interest cost 23520 ( @ 10% interest rate)

Annual saving87600 on availing discount 0.37

Net Saving

64080

So reduction in Tax (due to availing doscount) Change in Net Income

estricted or relaxed working capital s turnover ratio equals 4.0, and its te on the firm’s debt is 10 percent, assets turnover will be 2.5. Under a

### 38448 investment policy. Callison’s annual sales debt and common equity are each 50 percent and the firm’s tax rate is 40 percent. If relaxed policy, its total assets turnover

Total Asset Turnover (Restricted policy) 2.50 Total Asset Turnover (Relaxed policy) 2.20

Relaxed policy 1,636,364 818,182 818,182 150,000 81,818 68,182 27,273 40,909 5.00

Saving 9,818

1.50

5.00

2.24

No. of units sold SP / unit annual sales VC /unit TVC TFC

500 15000 7,500,000.00 6,000 3,000,000 1,500,000

EBIT Bad Debt Expense

3,000,000 2%

150,000 2,850,000

Current Assets Fixed Assets Total Assets debt Equity EBIT Interest of the firms debt (10%) EBT Firm's tax (40%) PAT ( Net Income) ROE Difference in ROE's

Restricted Policy Relaxed Policy 1,500,000.00 1,500,000.00 1,500,000.00 ### ### ### #DIV/0! #DIV/0! =PAT/Equity #DIV/0!

525 15000

14662.5 7,697,813

6,000 3,150,000 1,500,000

4%

3,047,813 3,071,550 307,913 79738.22 2,683,899 (166,101) 0.08

3/10 net 30 0.75 0.25 393.75 131.25 Units sold 14550 15000 SP New ### 1968750 7,697,813 Total Slaes 197,812.50 0.12 Opportunity cost 23,737.50 lost money

Total Slaes

Opportunity cost ost money