Exam 21: Supply Chains and Working Capital Management

Mark's Manufacturing's average age of accounts receivable is 45 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Net operating working capital is defined as operating current assets minus operating current liabilities..

The facts (1)that no explicit interest is paid on accruals and (2)that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

The relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year).The company carries average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold is 75% of annual sales,and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days.Your firm is not taking discounts,but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date,what is the effective annual percentage cost (not the nominal cost)of its costly trade credit,using a 365-day year?

The company you just started has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

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.

Which of the following statements is CORRECT?

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.

During the coming year,Gold & Gold wants to increase its free cash flow by $180 million,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?

Which of the following statements is CORRECT?

Which of the following is NOT commonly regarded as being a credit policy variable?

Which of the following statements is CORRECT?

Fireside Inc.has the following data.What is the firm's cash conversion cycle? Inventory conversion period = 38 days Average collection period = 19 days Payables deferral period = 20 days

When 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.

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.