Exam 16: Supply Chains and Working Capital Management

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.

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

Hinkle Corporation 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 $550,000 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. )

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

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.

Short-term marketable securities are held for two separate and distinct purposes: (1)to provide liquidity as a substitute for cash and (2)as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

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.

Tierney Enterprises is constructing its cash budget.Its 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.

The longer its customers normally hold inventory,the longer the credit period supplier firms normally offer.Still,suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered,this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Data on Mertz Co.for the most recent year are shown below,along with the payables deferral period (PDP)for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done,by how much would payables increase? Use a 365-day year. Cost of goods sold = $75,000 Payables = $5,000 Payables deferral period (PDP)= 24)33 Benchmark payables deferral period = 30)00

Which of the following statements is NOT CORRECT?