Questions -
Q1. Cash conversion cycle Hurkin Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40 days. The firm currently has annual sales of about $18 million and purchases of $14 million. The firm is considering a plan that would stretch its accounts payable by 20 days. If the firm pays 12% per year for its resource investment, what annual savings can it realize by this plan? Assume a 360-day year.
Q2. Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.)
a. What amount of cash will be made available for other uses under the lockbox system?
b. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?
Q3. Cost of giving up cash discounts Determine the cost of giving up the cash discount under each of the following terms of sale. (Note: Assume a 365-day year.)
a. 2/10 net 30
b. 1/10 net 30
c. 1/10 net 45
d. 3/10 net 90
e. 1/10 net 60
f. 3/10 net 30
g. 4/10 net 180
Q4. Aggressive versus conservative seasonal funding strategy - Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.
|
Month
|
Amount
|
Month
|
Amount
|
|
January
|
$2,000,000
|
July
|
$12,000,000
|
|
February
|
2,000,000
|
August
|
14,000,000
|
|
March
|
2,000,000
|
September
|
9,000,000
|
|
April
|
4,000,000
|
October
|
5,000,000
|
|
May
|
6,000,000
|
November
|
4,000,000
|
|
June
|
9,000,000
|
December
|
3,000,000
|
a. Divide the firm's monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs.
c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances.
d. Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.