roblem 16-1 Cash Management
Williams & Sons last year reported sales of $18 million and an inventory turnover ratio of 2.2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 6.2 while maintaining the same level of sales, how much cash will be freed up? Round your answer to the nearest dollar.
Problem 16-2 Receivables Investment
Medwig Corporation has a DSO of 23 days. The company averages $7,750 in credit sales each day. What is the company’s average accounts receivable? Round your answer to the nearest dollar.
Problem 16-5 Accounts Payable
A chain of appliance stores, APP Corporation, purchases inventory with a net price of $650,000 each day. The company purchases the inventory under the credit terms of 1/15, net 30. APP always takes the discount, but takes the full 15 days to pay its bills. What is the average accounts payable for APP? Round your answer to the nearest dollar.
Problem 16-10 Effective Cost of Trade Credit
The D.J. Masson Corporation needs to raise $600,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts. However, it could forgo discounts, pay on the 90th day, and get the needed $600,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.
Problem 16-11 Cash Conversion Cycle
Negus Enterprises has an inventory conversion period of 68 days, an average collection period of 43 days, and a payables deferral period of 23 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.
a. What is the length of the firm’s cash conversion cycle? days
b. If Negus’s annual sales are $3,421,975 and all sales are on credit, what is the firm’s investment in accounts receivable? Round your answer to the nearest dollar. $
c. How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.
Problem 16-13 Working Capital Policy
Payne Products’s sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $3 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a tight policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes is expected to be 13% of sales. Payne’s tax rate is 35%.
What is the expected return on equity under each current asset level? Round your answers to two decimal places.
Tight policy %
Moderate policy %
Relaxed policy %