Exam 15: Working Capital Management

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 360-day year.The 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?

The economic order quantity (EOQ)is that order quantity that results in the minimum ordering cost and the minimum carrying cost;that is,the EOQ minimizes both of these cost components individually.

Do not use the APR formula for this problem.Coverall Carpets Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?

Analyzing days sales outstanding (DSO)and the aging schedule are two common methods for monitoring receivables.However,they can provide erroneous signals to credit managers when

When a firm factors its accounts receivable,the factor normally performs the functions of risk bearing,credit checking,and lending.

Which of the following might be attributed to efficient inventory management?

When deciding whether or not to take a trade discount,the cost of borrowing funds should be compared to the cost of trade credit to determine if the cash discount should be taken.

East Lansing Appliances East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Because ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent. -Refer to East Lansing Appliances.What are the incremental pre-tax profits from this proposal?

If Hot Tubs Inc.had sales of $2 million per year (all credit)and its days sales outstanding was equal to 35 days,what was its average amount of accounts receivable outstanding (assume a 360-day year)?

A firm purchases raw materials on June 1st.It converts the raw materials into inventory by the last day of the month,June 30th.However,it pays for the materials on June 15th.On July 31st,it sells the finished goods inventory.Then the firm collects cash from the sale one month later on August 31st.If this sequence accurately represents the firm's average working capital cycle,what is the firm's cash conversion cycle in days?

Firms generally choose to finance temporary assets with short-term debt because

The economic ordering quantity will rise due to an increase in which of the following variable(s)?

A conservative approach to working capital will result in all permanent assets being financed using long-term securities.

Ace Hardware's EOQ is 100 widgets,and it maintains a 50 unit safety stock.Which of the following is Ace's average inventory?

The accounts of Weston Inc.indicate the following changes in long-term assets and capital for the past year: (1)Fifty thousand (50,000)shares of common stock were sold at $25 per share. (2)Two million dollars ($2 million)in bonds matured and were retired. (3)Dividends of $1 million were paid. (4)Net fixed assets declined by $200,000. (5)Net income was calculated to be $2 million. (6)Depreciation expense was $1.5 million. What was the increase or decrease in net working capital? (Hint: Changes in net fixed assets incorporate changes in both gross fixed assets and accumulated depreciation. )

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan,and items such as collateral and other terms and conditions.

Inventory financing can take the form of a

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 360-day year,what is your estimate of the firm's current cash conversion cycle? Current inventory= $120,000 Annual sales= $600,000 Accounts receivable= $160,000 Accounts payable= $25,000 Total annual purchases= $360,000 Purchases credit terms:net 30 days Receivables credit terms:net 50 days

A firm is offered trade credit terms of 2/8,net 45.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost. )