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    ADM3350 - A8

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    aba broha
    This document contains 10 questions related to corporate finance concepts such as cash cycle, working capital, accounts receivable, accounts payable, inventory, and credit terms. The questions assess understanding of calculating cash cycle, net working capital, cost of trade credit, impact of changing collection float, steps in credit policy, average collection period, and decisions around taking early payment discounts or obtaining loans.

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    ADM3350 - A8

    Uploaded by

    aba broha
    15 views2 pages
    This document contains 10 questions related to corporate finance concepts such as cash cycle, working capital, accounts receivable, accounts payable, inventory, and credit terms. The questions assess understanding of calculating cash cycle, net working capital, cost of trade credit, impact of changing collection float, steps in credit policy, average collection period, and decisions around taking early payment discounts or obtaining loans.

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    ADM3350 - a8 (1)

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    This document contains 10 questions related to corporate finance concepts such as cash cycle, working capital, accounts receivable, accounts payable, inventory, and credit terms. The questions assess understanding of calculating cash cycle, net working capital, cost of trade credit, impact of changing collection float, steps in credit policy, average collection period, and decisions around taking early payment discounts or obtaining loans.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15 views2 pages

    ADM3350 - A8

    Uploaded by

    aba broha
    This document contains 10 questions related to corporate finance concepts such as cash cycle, working capital, accounts receivable, accounts payable, inventory, and credit terms. The questions assess understanding of calculating cash cycle, net working capital, cost of trade credit, impact of changing collection float, steps in credit policy, average collection period, and decisions around taking early payment discounts or obtaining loans.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    ADM3350 – Corporate Finance

    DGD – Week 8

    Q1. Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash
    poorly?

    Q2. Aberdeen Outboard Motors is contemplating building a new plant. The company
    anticipates that the plant will require an initial investment of $2.02 million in net working
    capital today. The plant will last nine years, at which point the full investment in net
    working capital will be recovered. Given an annual discount rate of 5.5%, what is the net
    present value of this working capital investment?

    Q3. The Greek Connection had sales of $30.3 million in 2018, and a cost of goods sold of $12.1
    million. A simplified balance sheet for the firm appears below:

    a. Calculate The Greek Connection’s net working capital in 2018.


    b. Calculate the cash conversion cycle of The Greek Connection in 2018.
    c. The industry average accounts receivable days is 30 days. What would the cash
    conversion cycle for The Greek Connection have been in 2018 had it matched the
    industry average for accounts receivable days?

    Q4. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate
    the cost of the trade credit if your firm does not take the discount and pays on day 30.

    Q5. The Fast Reader Company supplies bulletin board services to numerous hotel chains
    nationwide. The owner of the firm is investigating the benefit of employing a billing firm
    to do her billing and collections. Because the billing firm specializes in these services,
    collection float will be reduced by 20 days. Average daily collections are $1250, and the
    owner can earn 7% annually (expressed as an APR with monthly compounding) on her
    investments. If the billing firm charges $300 per month, should the owner employ the
    billing firm?

    1
    Q6. What are the three steps involved in establishing a credit policy?

    Q7. The Manana Corporation had sales of $60 million this year. Its accounts receivable balance
    averaged $2 million. How long, on average, does it take the firm to collect on its sales?

    Q8. Simple Simon’s Bakery purchases supplies on terms of 1.7/10, Net 25. If Simple Simon’s
    chooses to take the discount offered, it must obtain a bank loan to meet its short-term
    financing needs. A local bank has quoted Simple Simon’s owner an interest rate of 11.8%
    on borrowed funds. Should Simple Simon’s enter the loan agreement with the bank and
    begin taking the discount?

    Q9. Use the financial statements supplied on the next page for International Motor Corporation
    (IMC) to answer the following questions.
    a. Calculate the cash conversion cycle for IMC for both 2018 and 2019. What change has
    occurred, if any? All else being equal, how does this change affect IMC’s need for
    cash?
    b. IMC’s suppliers offer terms of Net 30. Does it appear that IMC is doing a good job of
    managing its accounts payable?

    Q10. Ontario Valley Homecare Suppliers, Inc. (OVHS) had $17 million in sales in 2018. Its cost
    of goods sold was $6.8 million, and its average inventory balance was $1.7 million.
    a. Calculate the average number of inventory days outstanding for OVHS.
    b. The average days of inventory in the industry is 73 days. By how much would OVHS
    reduce its investment in inventory if it could improve its inventory days to meet the
    industry average?

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