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Working Capital

The document presents Don's Sons Company with a proposed cash management program from its bank that would reduce the required cash on hand by $180,000 and lower administrative costs by $2,000 per month, but cost $35,000 annually. It asks for a recommendation on whether to accept based on

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cmverma82
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3K views

Working Capital

The document presents Don's Sons Company with a proposed cash management program from its bank that would reduce the required cash on hand by $180,000 and lower administrative costs by $2,000 per month, but cost $35,000 annually. It asks for a recommendation on whether to accept based on

Uploaded by

cmverma82
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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1.

Minny Fishing Products is analyzing the performance of its cash


management. On the average, the firm holds inventory 65 days, pays its
suppliers in 35 days, and collects its receivables in 15 days. The firm has a
current annual outlay of $1,960,000 on operating cycle investments. Minny
currently pays 10 percent for its negotiated financing. (Assume a 360 day
year.)

(a) Calculate the firm’s cash conversion cycle.


(b) Calculate the firm’s operating cycle.
(c) Calculate the daily expenditure and the firm’s annual savings if the
operating cycle is reduced
by 15 days.

2. Don’s Sons Company has been offered by its bank to manage its cash at a
cost of $35,000 per year. Under the proposed cash management, the firm
can reduce the cash required on hand by $180,000. Since the bank is also
doing a lot of record keeping, the firm’s administrative cost would decrease
by $2,000 per month. What recommendation would you give the firm with
respect to the proposed cash management assuming the firm’s opportunity
cost is 12 percent?

3. A firm has arranged for a lockbox system to reduce collection time of


accounts receivable. Currently the firm has an average collection period of 43
days, an average age of inventory of 50 days, and an average payment
period of 10 days. The lockbox system will reduce the average collection
period by three days by reducing processing, mail, and clearing float. The
firm has total annual outlays of $15,000,000 and currently pays 9 percent for
its negotiated financing.
(a) Calculate the cash conversion cycle before and after the lockbox system.
(b) Calculate the savings in financing costs from the lockbox system.

4. Krug Gold Coin, Inc. is considering shortening its credit period from 30
days to 20 days and
believes, as a result of this change, its average collection period will decrease
from 36 days to 30
days. Bad debt expenses are also expected to decrease from 1.2 percent to
0.8 percent of sales. The firm is currently selling 300,000 units but believes
as a result of the change, sales will decline to 275,000 units. On 300,000
units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed
costs are $300,000. The firm has a required return on similar-risk
investments of 15 percent. Evaluate this proposed change and make a
recommendation to the firm.
5.For the Cook County Company, the average age of accounts receivable is 60 days, the average age of
accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what
is the length of the firm’s cash conversion cycle?

6.Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are $10 million and the firm
estimates its receivables conversion period to be twice as long as its inventory conversion period. The firm pays
its trade credit on time; its terms are net 30 days. The firm wants to decrease its cash conversion cycle by 10
days. It believes that it can reduce its average inventory to $863,000. Assume a 365-day year and that sales will
not change. By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day
reduction in its cash conversion cycle?

* Calculate Inventory Holding period


* Receivable holding period
* Pay – 30
CC Cycle currently
• Calculate new IHP (Inventory Holding Period)
• New cash conversion cycle (CCC) i.e. Old cycle – 10 days
• Pay -30

7. Wicker Corporation is determining whether to support $100,000 of its permanent working capital with a
bank note or a short-term bond. The firm’s bank offers a two-year note for which the firm will receive
$100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market
rates. Alternatively, Wicker can sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000
par value at a price of $973.97. How many percentage points lower is the interest rate on the less expensive
debt instrument?

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