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Exam 16: Supply Chains and Working Capital Management

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Question 31

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Andrews Corporation buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

A) 14.34%
B) 15.10%
C) 15.89%
D) 16.69%
E) 17.52%

F) All of the above
G) B) and C)

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Question 32

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Kiley Corporation had the following data for the most recent year (in millions) .The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000,and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore,she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made,by how many days would the cash conversion cycle be lowered? $\begin{array}{lrrr} & \underline{\text { Original }} & & \underline{\text { Revised }} \\\text { Annual sales: unchanged } & \$ 110,000 & & \$ 110,000 \\\text { Cost of goods sold: unchanged } & \$ 80,000 & & \$ 80,000 \\\text { Average inventory: lowered by } \$ 4,000 & \$ 20,000 & & \$ 16,000 \\\text { Average receivables: lowered by } \$ 2,000 & \$ 16,000 & &\$ 14,000 \\\text { Average payables: increased by } \$ 2,000 & \$ 10,000 & &\$ 12,000 \\\text { Days in year } & 365 & & 365\end{array}$

A) 34.0
B) 37.4
C) 41.2
D) 45.3
E) 49.8

F) D) and E)
G) A) and E)

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Question 33

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If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease,other things held constant.

If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Blueroot Inc.is considering a change in its financing policy.Currently,it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income?

Krackle Korn Inc.had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance,based on a 365-day year?

Freeman Builders,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Fairweather Corporation purchases merchandise on terms of 2/15,net 40,and its gross purchases (i.e.,purchases before taking off the discount) are $800,000 per year.What is the maximum dollar amount of costly trade credit the firm could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

The aging schedule is a commonly used method for monitoring receivables.

Because money has time value,a cash sale is always more profitable than a credit sale.

Arnold Inc.purchases merchandise on terms of 2/10 net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year.)

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 = $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\$ 75,000$ Payables $=$$\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\quad$ $\quad$ $\quad$$\$ 5,000$ Payables deferral period $(\mathrm{PDP}) =$ $\quad$$\quad$$\quad$ $\quad$$24.33$ Benchmark pavables deferral period = $\quad$ $\quad$ $\quad$$30.00$

Brothers Breads has the following data.What is the firm's cash conversion cycle? Inventory conversion period = $\quad$ $\quad$ $\quad$ 50 days Average collection period $=$ $\quad$ $\quad$ $\quad$ 17 days Payables deferral period = $\quad$ $\quad$ $\quad$ $\quad$ 25 days

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Newsome Inc.buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

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