Please answer the following problems and give detailed answers.
1-1) p.479 Ch 14
The Grass Ridge Company has the following current asset accounts.
Cash $1,900,000
Accounts receivable $4,600,000
Inventory $5,500,000
Its current ratio is 2.5:1. The bank is willing to lend the company enough to finance its working capital needs under a $10 million revolving credit arrangement at a base rate of 12% with a 3/8% commitment fee on the unused balance. If the current accounts stay relatively constant throughout the year, what will Grass Ridge pay the bank for working capital financing?
2-Southport Inc. has an inventory turnover of 10X , an ACP of 45 days, and turns over its payables once a month. How long are Southport's operating and cash conversion cycles? (Use a 360-day yea(
3-Southern Fabrics lnc. factors all of its receivables. The firm does $150 million in business each year and would have an ACP of 36.5 days if it collected its own receivables. The firm's gross margin is 35%. The factor operates without recourse and pays immediately upon taking over the accounts. It discounts the gross amount factored by 10% and pays Southern immediately. Because the factor doesn't collect from customers until they pay, it charges interest at 10% in the interim.
A) Calculate the gross cost of factoring to Southern Fabrics if all receivables are collectible.
B) What interest rate is implied by the arrangement?
C) Suppose Southern is considering giving up the factoring arrangement and handling its own collections. Should the firm do it if bad debt losses arc expected to average 3% of gross sales and running a collections department will cost about $1.5 million per year?
D) What is the implied interest rate in the factoring arrangement if the costs in part C are taken into account?
4-The Hadley Motor Company is located in Florida but has a number of customers in the Pacific Northwest. Sales to those customers are $30 million a year paid in checks that average about $1,500. The checks take an average of nine days to clear into Hadley's Florida bank. A bank in Oregon will operate a lock box system for Hadley for $8,000 a year plus $.50 per check. The system can be expected to reduce the clearing time to six days.
A. Is the lock box system worthwhile if Hadley borrows at 13.5%?
B. What is the minimum number of days of float time the system has to save (to the nearest tenth of a day) to make it worthwhile?