_
Sedion:_
XMAFINIF$2
lndleE
whethet
fre stuteneot b nue 6
fabe.
_
1.
Uncedalntyabouttheqadlivesdassetsprevenbpre.tsemiludtymathinSlnanexpoet(i.€.,aft€rthehd)
senreewn
though it ts
p$lbl€
to match maturitl€son an ex ane{exFded)
bast.
-
2.
the maturity mat€iin& or
"serliqudatins"
approach
t;
nnanclnS inrclres obtaining
the tunds tur
pemanent
clrent
a*tswth a ombination ol longierm captal 3nd
shodrem 6pibl that wdes dep€nding on the level
of lnterest rates. When
shod-tem Etes a.€ relatively hi8h, shod{em asts will h
finan.ed wfrh lonS+erm
debt td r€do...osts.
_
3.
A f[m that
follils
an agressiw
wdkhg
capiEl
fihancins apprba.h uses
primarily
shod-tem
credit and thus is
nore
exposed
b
an unexpected
increa* in in&rest rates san ts a im that lst
long-term capisl and thus
follows a conserudive frnanclry
poliry.
_
4.
Ihe relative
pbftabllity
of a
frm thd emploF
an
a$resive
worki4 .ap[al llnancinS
poll.Y
will
imprcve f
th€
yl€ld
cure
changes frcB uryard dopingto dowmard doping.
-
5. Long{erm
loan aEreements alMyr conhin
provtsions,
or covenanb,
that @n*Ein the ftm! fuiure actions,
Sho^lem credit agemenB
are
iun
as
re$ridre
in order
to
prct€d
Se int€rest
of tk
lender.
6.
A f[m construdinS a rew
marufaduing
pl.nt
and
financing it with shod-term loans, whlch are scheduled to be
.onEded b nd
modgage hnds vhen the
plant
ts completed,
would went to
sep.r.t€
the construdion loan
from
its
cureni
liabillties
asrociatedw[h
worklnS
aplblwhen
calculatln8
nd wo*lng captal.
_
7. The lonS€r iB cufomeE normally hold inventory, $e looger the crcdit
perid
supplier
frrmt nomally
oftr.
still, sopplieE
hde some flexibiliv in the credit tems they
oftr.
lf a supplier lenghens the crdit
period
otrerd,thlsfrll shodenthe cu*omilk esh 6nve6lon
rycle
but len8lhenthe suppllerffmk own CC.
_
8.
The
Glh @Ne6ion
cycle
(CCC)
.ombin.s three
koB:
Tk inrentory
@nvetsion
p€ilo4
th€ receiEbles
colldion
pedod
and the
pavables
dderd
Fdd,
and
jB
purpose
b to show how bnSa
ffm
mu*flnance lts
wo*iry capltal. Other things held .onshni the shoter the CCC, the more dedive tto fim's wortins capital
man6gement,
_
9-
A itm!
p6k
hrtuwing
needs will
pbbably
be
G4ldgd
if it
ba*5
its
mnthly €sh budg€t on the a$umption
that
bth 6sh reeipB and cash
paymeds
o€cur unitumly over the
month
but in
reality
mments
are
concenfat€d at the beginninS of ea€h
month.
_
10. Afrm'tpeakborrowingneedswillprobablybeoversbiediftbasesitsmonthlycashbudgetontheassumption
that both
cash
rcc€lpb
and cash
payments
occur
unifomly ow. the month but in reality receipb
are
conc€ntEted at the bqinning of each month,
_
11. Synchrontdion of cash flows ts an imptunt 6sh manas€ment
t€chnique, ar
proper
synchrcnLatlon can
reduce the rquled cash balance and
in!rcase
a f[mt
proflubiliry.
_
U.
ror
a 2ero-grodh
firh,
fr h
po$ible
to
increase
th€
perc€ntase
ot
saier
that
arc made on credit .nd still keep
a€counts receivable
at
their
curenl
level,
pmvlded
th€ fih car sho6€n
the length of
is collection
Eilod
sutriciently.
_
13. A
firm! @ildion
Fliry,
1.e., the
prcdures
t rollows to colled aaou.B
receiEble,
plays
an
imFdant
rcie
in
keeping
ib
average @lledion
peiod
sho( attuugh
too
fild
a @lledlon r€duce
prda
due to lost
_
14. lf
a
prcfitable
flm finds that
it
simply must
,stretch"
its
accounts
Fyabl€,
then this su&ests that
it
is
undercaptalired,
i.e.,
thil
it
f,eds mre rc*ingcapihlto
suppod lts
oErationr.
_
15. A revoLing credit agreement
h fohal llne
of credit.
fte fim must
sen€rally
pay
a fe on the unused balance
of the @mmited
tonds to comp€nsteih€ bank forthe commhentto
enend those tunds,
ilULIIPTECHOICE:
-
16.
Dab on Shick lnc. for 2ffi
are
shM
belN,llong
with
the
daF sales outsbndlng of the flms agalnd whlch t
benchma*r.
fte frm! ns
CrO bdi€ves that the @mpary
could redu@ its receivables enough to reduce it!
DSO to the &nchmarkj
aveEge. lfthts were donq by how much would receivables decline? Ure
a 365-day
$!es
59q000
[email protected]@ivable
t15,000
Days$lesouBtandinS(0$)
62.13
B€nchmarkJDaF5alesoGtandiG{oso)
20.m
a.
59,873
b.S&788 c.911,283 d-S10,e9
e.
S11,3e2
_
17.
Data on shin lnc tor 2008 arc shown below alonS with the
iwenbry
coNeuion
period
(lCP)
of the frms aSaln$
which it beEhmark'
Tk
frmS
new CFO
believe that the 6mBny 6uld rcduce its lnv€ntory enoueh
to
redu.e ts
ICP
io the benrhmarks'
aErage. lf this were done,
by
how much would invenbries
tuine?
Use a
355iayyear.
conofsoodssold=
S78,m
rnv€ntorv=
S20,@0
hvenbry
tunreEion Peilod
{lcP}=
93.s9
&nchmak lnventoryConreEion
Pedod
(lCP)=
38.@
a.
511,285
b.
Sr0,33s
c.
514612
d.
$10,216
e.S11,879
_
18. Data on wentz lnc. for 2m8 are shown below, .lons with the
payabler
defetral
pedod
{PDP)
for the frrms
again*
t
benchma*s.Ihe fimt new believ€sthat the @uld delay
payments
enough to
increase its PDP b the benchharkl average. lf
thL
were
donq by bw much would
paFbles
lncrae?
Use a
365{ayyear.
co* of
goods
sold
=
S70,m0
Payabl€s=
S5,m
PayablesDeferalPeriod(PDP)= 26.07
enchma*PayabiesDeferGlPeriod= 30.00
a. s738 b-s693 .-
5663 d.5776
e. S7s3
_
19. Edton hc.
has anhual
$les of
549,@0,0@,
or
544,100,m
a day on a 355{ay bast. the
fmt
@sr of
8ods
rold
are 75%
of sales. On averag€,
the .ompany
has
S9,m,000
in inventory and
58,@0,@
in
acmunb
recetoable. The ftm ts lookingfor
yaF
toshonen ts cash onv€Eioncycb. ItsCFO
has
prcposed
n€w
@licies
thitwouldresultina20%redudionlnbothaveEs€lnv€ntoriesandaccounsre@ivable.
Sheaboanticipates
thatthese
plicies
would reduce
saks
by 10%, while
the
Fyables
def€iral
Eriod
would remain
unchanged at
3s days. what €ffet would
ihe*
policies
hry€ on the cohpany's cash o.ve6ion
ry.le?
Round
to th€ nearest
a.
-18days
b.
-20dav
c,
-19days
d.-17daw
e.-16daE
_
20. NoSuetas CorCs budSetd monthly
$les are
56,000,
and th€y ar€ consant from month
to month. {% of
ib
customeB
payintheiut
month andtakethe 2%dtcount, whilethe remaining60%
paytnrhe
mo.thtottowing
the
sale and do not
rseive
a dlount.
fte
frm has no bad debts. Purchases for next
montht $les are
connant at 50%
of
prcjeded
salesforlhe net month.
"other
prymenB"
whth inclode
wager, rent, and
taxes,
are 25% of sal€s for the curent month.
Construd a esh budg€r for a typlcat nonth
and elutate the average
cash
Sain
or
los duri4
the month.
3.
S1,ss
b.
51,423
€.
S1,321
d.
51.452
e.
51,350
_21
_x4
_
25.
_
26.
_
21.
Whitmer ln..
slls to c6bme6ail w€rthe U,5.,
and all
reeipts 6me
in to
ib
headqu.ners in NewYork
Cfty.
The frm's
awrag€ accoub rrcMble balance
b
S2.5
milrlon, andthey are flnanced by a bank loan atan 6.5%
annual
inbrest
6te.
Ihe ltm
ts considedn8 s€ting up a regional lockbox sy$em
ro speed up colledions, and
I
b€li4€s this would reduce reetoau6
by 2%.
lf
the annual co$ of the swt€m
is
515,@,
what
pre-bx
ner
annual svlngs would be rcalted?
a.S21,87s b.520,5S
c.
S17r5@
d.
518,375
e.
S21,175
A fim bry on ems of 3/r5, net 45, lt
&es
not
bke the dis@ud, and it
sen€r.lly
pays
aft€r 75 drys. What is
a-27.&* b.20 51q
c-11-49%
d.18.a1*
^.7.7)%
b 7 69*
6.6.s8%
d.9.41%
e.6.66%
BlmFs Enterpri*s
purchas€s
S4562,5@
ln
s@ds
per year
fiom ib
sole supplier on terms of 2/15, nd
115.
(
theffm choossto
ryontime
butdoesnd
hkethe dbcount,what bthe eftdive
annual
percenb.e
cod ot
iEnon+eetiadecrcdltt
lAsumea365{avvear.l
hg€m Otrc€ supplies, lnc., buys
on terms of 2/15, net s0 days. tt
doer
nor
tab discouds,
a.d
r
rypi€lly
pays
on
time,
50 days
afte.
Se
invoie
dde. N€t
purchases
aruunt to
$7@,0@
p€r
year.
On averagq whar b the
dollar amount
of
!9$U
t6d€ credit
{toral
credit
-
free
credtt) the fih receives
during the
year? (Asume
a
36s-
day
Fa.r
ad
.ote
that
purchares
are nd of discdn6.)
a.
563,@5
b.
S62123
..
S7!,15!
d.
57&534
e.
S69,137
Robn
lnc-
purchass
merchandbe
on Ems of 2/1s, nd
4, and fts
ercs
purch.res (i.€.,
purchrres
kfore
taklng ofl th€ dis@unt) arc
S@,0@
Fr
year.
whd
b the mattmum dottar
amount of
!g!I
t6de crcdt
the
frmcouldtet,a$umingnabldesbythesupplie/screditterms? (A$umea365{avyear.)
a.ss2,@8
b.550,477
..
s43,4%
d.545.@
e.
Ss3,699
{ilk
Derelorent brys on tems
of
V15,
net @ daF- tt
dGs not tate dircounE,
and r typiGly
pays
on time,
il
daF aft.r
invoice
date. N.r
pur.h.ss
amount
to
S575,@O
Fr
year.
On ave6ge, what ts the
doilar
amouil of dal vade crcdt
(costly
+
free)
the lfm r€ceives
during rhe
Far,
i.e.,
whar ar€ it5
averate aaounts
paFble?
{A$ume
a 355iayy€ar, and nde
that
purchases
are
netofdtscounE.)
a.594,527
b.576,562
c.S103,027
d.
5116260
e.
SUO,589
Atreck lnc.\
busine$ Bbooming,.nd it nredsto
rai* morecptbt.
ThercmFnypu.chasessupplesonterms
of
V10,
net 20, and it clrentlytakes
the discolnt.
One way ofgerinSthe
n€ded funds
woutd be ro forgo the
dbcouni and the
fiml
owner bellwes sh€ could
delay
payment
to 90
days wthut
adv€rse effe*.
what
would bethe
eff€dive annual *rcenbqe @*offunds
6E€d
by thb adion?
(A$ume
a t65{ay
year_)
a.
3.85% b.4.93%
c.4.69%
d.5.54%
e.357%
-
28.
Wetss lnc.
atranged
a
Sg,M,@
rryolvinS
ciedit
agrcem€nt with
a
group
of bnkr. The
frrm
paid
an.nnuat
commtmentfeof0.5%oftheunusedbalanc€ofthetoan@mmfrment.
OntheusedFdionoftherewhr,t
paid
1.5% ahw
pime
forthetunds adually
borowed on
a
simple
inreres basb.
The
pime
6re wasg%
during
the
year.
lf the flm borowed
$6,0m,000
immediat€ly
af*r
the agrcement
was rigned
and
rep.id
the
toan
d
the end ofone
year,
whatwas
thetel
dollarannuat
co*ofihe rerclver?
a.S657,9@
b.
Sss4,7@
c.
S&5,OOO
d.
Ss28,m
e.
5786,S
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