1.Answer the following:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal?
2.Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?
3.Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will last 10 years, at which point the full investment in net working capital will be recovered. Given an annual discount rate of 6%, what is the net present value of this working capital investment?
4.The Greek Connection had sales of $32 million in 2009, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
a. Calculate The Greek Connection’s net working capital in 2009.
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average for accounts receivable days?
5.Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.
6.Your supplier offers terms of 1/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?
7.The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the benefit of employing a billing firm to do her billing and collections. Because the billing firm specializes in these services, collection float will be reduced by 20 days. Average daily collections are $1200, and the owner can earn 8% annually (expressed as an APR with monthly compounding) on her investments. If the billing firm charges $250 per month, should the owner employ the billing firm?
8.The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system would decrease its collection float by as much as five days. The new bank would require a compensating balance of $30,000, whereas its present bank has no compensating balance requirement. Saban’s average daily collections are $10,000, and it can earn 8% on its short-term investments. Should Saban make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest-earning account.)