Exam 15: Working Capital Management

If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter,this is a clear indication that your firm's credit policy has weakened.

Because the use of short-term debt to finance fixed assets is a working capital decision variable in the current period,it does not need to be taken into account when managers assess the firm's ability to meet its current obligations using expected cash inflows.

Determining the appropriate amount of total current assets and the amount in specific asset accounts,as well as their financing,are basic elements of working capital policy.

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,but interest is prepaid (a discounted loan),then what is your effective annual rate?

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 would be the incremental bad debt losses if the change were made?

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

A lockbox plan is

Generally,ordering costs are the single most important cost element in inventory management,because they are greater in magnitude than carrying costs.

Short-term financing might be riskier than long-term financing because,during periods of tight credit,the firm might not be able to rollover (renew)its debt.

Berkeley Prints Berkeley Prints 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. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. -Refer to Berkeley Prints.What would be the incremental cost of carrying receivables if the change were made?

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The payables deferral period is the average length of time required to convert the firm's receivables into cash.

Jumpdisk Company writes checks averaging $15,000 a day,and it takes 5 days for these checks to clear.The firm also receives checks in the amount of $17,000 per day,but the firm loses three days while its receipts are being deposited and cleared.What is the firm's net float in dollars?

Berkeley Prints Berkeley Prints 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. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. -Refer to Berkeley Prints.What are the incremental pre-tax profits from this proposal?

Dixie Tours Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 35 days after the invoice date.Net purchases amount to $720,000 per year.What is the approximate percentage cost of its non-free trade credit?

Ski Lifts Inc.is a highly seasonal business.The following summary balance sheet provides data for peak and off-peak seasons (in thousands of dollars): From this data,we may conclude that

The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____,which forecasts cash inflows and outflows.

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

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.What is its average inventory level?

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.after the fact)sense even though it is possible to maturity match on an expected basis.