Exam 16: Working Capital Management

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Shorter-term cash budgets (such as a daily cash budget for the next month)are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year)are generally used for planning purposes.

The cash conversion cycle (CCC)combines three factors: The inventory conversion period,the receivables collection period,and the payables deferral period,and its purpose is to show how long a firm must finance its working capital.Other things held constant,the shorter the CCC,the more effective the firm's working capital management.

The cash budget and the capital budget are handled separately,and although they are both important,they are developed completely independently of one another.

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 $\$ 960$ million. Gross capital expenditures are expected to total to $\$ 360$ million versus depreciation of $\$ 120$ million, so 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 payabl accruals. ? What increase in net operating working capital (in millions of dollars)would enable the firm to meet its target increase in FCF?

Which of the following statements is CORRECT?

The 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.

If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease other things held constant.

Kirk Development buys on terms of 2/15,net 60 days.It does not take discounts,and it typically pays on time,60 days after the invoice date.Net purchases amount to $650,000 per year.On average,what is the dollar amount of total trade credit (costly + free)the firm receives during the year,i.e. ,what are its average accounts payable? (Assume a 365-day year,and note that purchases are net of discounts. )

Exhibit 15.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. 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. -Refer to Exhibit 15.1.What's the difference in the projected ROEs under the restricted and relaxed policies? Do not round intermediate calculations. ​

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique,which is particularly useful when suppliers' production plants are at full capacity .

The four primary elements in a firm's credit policy are (1)credit standards, (2)discounts offered, (3)credit period,and (4)collection policy.

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

If a firm takes actions that reduce its days sales outstanding (DSO),then,other things held constant,this will lengthen its cash conversion cycle (CCC)and cause a deterioration in its cash position.

Swim Suits Unlimited is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars): Peak Off-Peak Cash \ 50 \ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 Total assets \ 690 \ 620 ? Payables and accruals \ 30 \ 10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims \ 690 \ 620 ? From this data we may conclude that

Data on Shin Inc for last year are shown below,along with the inventory conversion period (ICP)of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done,by how much would inventories decline? Use a 365-day year.Do not round your intermediate calculations. Cost of goods sold = \ 71,000 Inventory = \ 20,000 Inventory Conversion Period (ICP) = 102.82 Benchmark Inventory Conversion Period (ICP) = 38.00 ?

Singal Inc.is preparing its cash budget.It expects to have sales of $30,000 in January,$35,000 in February,and $20,000 in March.If 20% of sales are for cash,40% are credit sales paid in the month after the sale,and another 40% are credit sales paid 2 months after the sale,what are the expected cash receipts for March?

Whittington Inc.has the following data.What is the firm's cash conversion cycle? Inventory Conversion Period = 41 days Receivables Collection Period = 25 days Payables Deferral Period = 38 days ?

Dyl Pickle Inc.had credit sales of $4,000,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance,based on a 365-day year.