Q1

Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typica
amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit?

Net purchases 720000

Percentage discount 2%

cost of paying after 15th day is (2/98)% 2.04%

This is the % cost of non-free trade credit for 20 days
Hence, for 365 days .. The % will be 37.24%

Q2
Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks.
percent of the unused balance of the loan commitment. On the used portion of the loan, In
borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year.
agreement was signed and repaid the loan at the end of one year, what was the total dollar

revolving credit 10,000,000.00

annual commitment fee 0.50%
Interest for the used portion of the loan Prime rate + 1.5%
Prime rate 9%
Amount borrowed 6,000,000.00

Amount paid for the unused portion of the loan 20,000.00

Amount paid for the used portion of the loan 630,000.00

Total Cost of the loan agreement for 1 year 650,000.00

Q3
Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset inv
fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36
the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent
percent of sales. What is the difference in the projected ROEs between the restricted and r

annual sales 400,000.00

fixed assets 100,000.00
debt 50% of total assets
Equity 50% of total assets
EBIT 36,000.00
interest rate on the firm’s debt 10%
firm’s tax rate 40%
 current assets with restricted policy 15% of Sales
current assets with Relaxed policy 25% of Sales

Restricted Policy
Current Assets 60,000.00
Fixed Assets 100,000.00
Total Assets 160,000.00
debt 80,000.00
Equity 80,000.00
EBIT 36,000.00
Interest of the firms debt (10%) 8,000.00
EBT 28,000.00
Firm's tax (40%) 11,200.00
PAT ( Net Income) 16,800.00
ROE 21.00%

Difference in ROE's 5.40%

Q4 On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to on

analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?

Monthly Sales 2,000,000.00

Average Inventory 1,000,000.00
days in a year 365

Annual Sales 24,000,000.00

So. In 365 days the firm sells 24000000
so for selling 1000000 of the inventory it will take 15
Inventory Conversion period

Q5
Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000
$16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 da
for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels
receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle

annual sales 80,000,000.00

average inventory 20,000,000.00
accounts receivable 16,000,000.00
Firm buys all RM on credit Net 35 days

To reduce Cash Conversion Cycle

Inventory lowered by 4,000,000.00
accounts receivable lowered by 2,000,000.00
Days in a year 365
 Avg Accounts Payable 571,428.57

Avg sales per day 219,178.08

Avg collection period 73.00
Inventory conversion period 91.25
Cash Conversion Cycle 129.25

Now after changes to inventory and receivables

Average Inventory 16,000,000.00
Account recceivables 14,000,000.00

Avg sales per day 219,178.08

Avg collection period 63.88
Inventory conversion period 73.00
Cash Conversion Cycle 101.88

You have recently been hired to improve the performance of Multiplex Corporation, which h
Q6
your analysis, you want to determine the firm’s cash conversion cycle. Using the following
firm’s current cash conversion cycle?

• Current inventory = $120,000.

• Annual sales = $600,000.
• Accounts receivable = $157,808.
• Accounts payable = $25,000.
• Total annual purchases = $365,000.
• Purchases credit terms: net 30 days.
• Receivables credit terms: net 50 days.

•         Current inventory =
•         Annual sales = $
•         Accounts receivable = $
•         Accounts payable = $
•         Total annual purchases = $
•         Purchases credit terms: net
•         Receivables credit terms: net

Inventory holding days'

Inventory Turnover ratio
Acc. Receivable days
Acc.Payable days

CASH TO CASH CYCLE

Q-8: Quickbow Company currently uses maximum trade credit by not taking discounts on its
from its bank, using notes payable, in order to take trade discounts. The firm wants
on its net income. The standard industry credit terms offered by all its suppliers ar
days. Its net purchases are $11,760 per day, using a 365-day year. The interest rat
firm’s tax rate is 40 percent. If the firm implements the plan, what is the expected

Q 8 : Sums mail

Purchase if discount not availed 12000

Q9: Callison Airlines is deciding whether to pursue a restricted or relaxed working capit
are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and i
of total assets. EBIT is $150,000, the interest rate on the firm’s debt is 10 percen
the company follows a restricted policy, its total assets turnover will be 2.5. Under
will be 2.2.

Annula Sales 3,600,000

Fixed Assets Turnover Ratio 4
Fixed Assets 900,000

Restricted policy
Total Asset 1,440,000
Debt 720,000
Equity 720,000
EBIT 150,000
Interest ( @ 10% of debt) 72,000
EBT 78,000
Tax (@ 40 % rate) 31,200
PAT 46,800

Q 10 : ROE 6.50

Q 11: New Sales (after falling 15%) 3,060,000

New EBIT (after falling 10%) 135,000
Total Asset Turnover (Restricted policy) 2.50
TA 1,224,000
Debt 612,000
Equity 612,000
EBIT 135,000
Interest ( @ 10% of debt) 61,200
EBT 73,800
Tax (@ 40 % rate) 29,520
PAT 44,280

ROE 7.24
oes not take discounts, and it typically pays 35 days after the invoice date. Net purchases
ual cost of its non-free trade credit? (Assume a 365-day year.)

per year

ement with a group of small banks. The firm paid an annual commitment fee of one-half of one
On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually
e rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the
f one year, what was the total dollar cost of the loan agreement for one year?

of the unused balance of the loan commitment

= 9 + 1.5 10.50%

stricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its
percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and
y, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25
d ROEs between the restricted and relaxed policies?

50%
50%
 15% 60,000.00
25% 100,000.00

Relaxed Policy
100,000.00
100,000.00
200,000.00
100,000.00
100,000.00
36,000.00
10,000.00
26,000.00
10,400.00
15,600.00
15.60% =PAT/Equity

month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm
firm’s inventory conversion period?

half of manthly sales

days

keeps average inventory of $20,000,000. On average, the firm has accounts receivable of
its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching
can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts
change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day

35 & it pays on time

ce of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of
nversion cycle. Using the following information and a 365-day year, what is your estimate of the

120,000
600,000
157,808
25,000
365,000
30 days
50 days

73 Inventory / Sales per days

5 Sales / Turnover
96
25

144
it by not taking discounts on its purchases. Quickbow is considering borrowing
e trade discounts. The firm wants to determine the effect of this policy change
ms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30
a 365-day year. The interest rate on the notes payable is 10 percent and the
nts the plan, what is the expected change in Quickbow’s net income?

2/10 net 30

One day Net purchase 11,760

(Net purchase/ Cost at th purchase day)
ACC. Payable for 20 days 235200 Annual saving87600
Additional Interest cost 23520 on availing discount
( @ 10% interest rate)
0.37
Net Saving 64080

So reduction in Tax ###

(due to availing doscount)
Change in Net Income 38448

estricted or relaxed working capital investment policy. Callison’s annual sales

s turnover ratio equals 4.0, and its debt and common equity are each 50 percent
te on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. If
assets turnover will be 2.5. Under a relaxed policy, its total assets turnover

Total Asset Turnover (Restricted policy)

2.50
Total Asset Turnover (Relaxed policy)
2.20

Relaxed policy
1,636,364
818,182
818,182
150,000 Saving
81,818 9,818
68,182
27,273
40,909

5.00 1.50
5.00 2.24
No. of units sold 500
SP / unit 15000
annual sales 7,500,000.00
VC /unit 6,000
TVC 3,000,000
TFC 1,500,000

EBIT 3,000,000

Bad Debt Expense 2% 150,000

2,850,000

Restricted PolicyRelaxed Policy

Current Assets - -
Fixed Assets 1,500,000.00 1,500,000.00
Total Assets 1,500,000.00 ###
debt ### ###
Equity - -
EBIT - -
Interest of the firms debt (10%) - -
EBT - -
Firm's tax (40%) - -
PAT ( Net Income) - -
ROE #DIV/0! #DIV/0! =PAT/Equity

Difference in ROE's #DIV/0!

 3/10 net 30
525 0.75 0.25
15000 14662.5 393.75 131.25 Units sold
7,697,813 14550 15000 SP New
6,000 ### 1968750 7,697,813 Total Slaes
3,150,000
1,500,000 197,812.50
0.12 Opportunity cost
3,047,813 23,737.50 lost money
3,071,550
4% 307,913
79738.22
2,683,899

(166,101)
0.08
Total Slaes

Opportunity cost
ost money