Exam 16: Working Capital

Madura Inc.wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price.The CFO has made these projections for the upcoming year: • EBIT is projected to equal $850 million. • Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. • The tax rate is 40%. • There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

average, a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

firm 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?

Nogueiras Corp's 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.

consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is 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?

deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Whitmer Inc.sells to customers all over the U.S., and all receipts come in to its headquarters in New York City.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 is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%.If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Which of the following statements is CORRECT?

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

lockbox plan is most beneficial to firms that

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

of working capital is the amount of net operating working capital required per dollar of daily sales.

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30.The change is meant to meet competition, so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time.The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day, using a 365-day year.The interest rate on the notes payable is 10%, and the tax rate is 40%.If the firm implements the plan, what is the expected change in net income?