Exam 15: Working Capital Management

Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.

If the current ratio is equal to four and we double the current liabilities and half the current assets, what will the new current ratio equal?

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?

Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover, management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.02 per box if the company buys tablets in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

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

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

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?

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)?

The inventory conversion period is the length of time from the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product.

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.

Porta Stadium, Inc.has annual sales of $50,000,000.Its cost of goods sold equals 80 percent of sales, and the company keeps $10,000,000 of inventory on hand.On average, the firm has accounts receivable of $7,500,000.The firm buys all raw materials on credit, its trade credit terms are net 30 days, and it pays on time.The firm's managers are searching for ways to shorten the cash conversion cycle.If sales can be maintained at existing levels, but inventory can be lowered by $2,000,000 and accounts receivable lowered by $833,333, what will be the net change in the cash conversion cycle? Use a 360-day year.

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Many start-up firms never make it past the first few months of business, primarily because they lack formal working capital policies.