x. working capital finance (student).doc

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X. Working Capital FinanceMAS Review, 2nd Semester, SY20!"20#

$%$ & College o' Acco(ntanc)Fe*r(ar) +, 20#

THEORY

. Compared to oter 'irms in te ind(str), a compan) tat maintains a conservative working capital polic) will tend to ave aa. -reater percentage o' sort"term 'inancing.*. -reater risk o' needing to sell c(rrent assets to repa) de*t.c. iger ratio o' c(rrent assets to 'i/ed assets.d. iger total asset t(rnover.

2. A 'irm 'ollowing an aggressive working capital strateg) wo(lda. old s(*stantial amo(nt o' 'i/ed assets.*. Minimie te amo(nt o' sort"term *orrowing.c. Finance 'l(ct(ating assets wit long"term 'inancing.d. Minimie te amo(nt o' '(nds eld in ver) li1(id assets.

+. e working capital 'inancing polic) tat s(*3ects te 'irm to te greatest risk o' *eing (na*le to meet te 'irm4s mat(ring o*ligations is te polic)tat 'inancesa. Fl(ct(ating c(rrent assets wit long"term de*t.*. $ermanent c(rrent assets wit long"term de*t.c. $ermanent c(rrent assets wit sort"term de*t.d. Fl(ct(ating c(rrent assets wit sort"term de*t.

5. 6etermining te appropriate level o' working capital 'or a 'irm re1(iresa. 7val(ating te risks associated wit vario(s levels o' 'i/ed assets and te t)pes o' de*t (sed to 'inance tese assets.*. Canging te capital str(ct(re and dividend polic) 'or te 'irm.c. Maintaining sort"term de*t at te lowest possi*le level *eca(se it is ordinaril) more e/pensive tan long term de*t.

d. 8''setting te pro'ita*ilit) o' c(rrent assets and c(rrent lia*ilities against te pro*a*ilit) o' tecnical insolvenc).e. Maintaining a ig proportion o' li1(id assets to total assets in order to ma/imie te ret(rn on total investments.

!. Starrs Compan) as c(rrent assets o' 9+00,000 and c(rrent lia*ilities o' 9200,000. Starrs co(ld increase its working capital *) te A. $repa)ment o' 9!0,000 o' ne/t )ear:s rent.;. Re'inancing o' 9!0,000 o' sort"term de*t wit long"term de*t.C. $(rcase o' 9!0,000 o' temporar) investments 'or cas.6. Collection o' 9!0,000 o' acco(nts receiva*le.

#. A lock"*o/ s)stem A. Red(ces te need 'or compensating *alances.;. $rovides sec(rit) 'or late nigt deposits.C. Red(ces te risk o' aving cecks lost in te mail.6. Accelerates te in'low o' '(nds.

<. =gnoring cost and oter e''ects on te 'irm, wic o' te 'ollowing meas(res wo(ld tend to red(ce te cas conversion c)cle>

a. Maintain te level o' receiva*les as sales decrease.*. ;() more raw materials to take advantage o' price *reaks.

c. ake disco(nts wen o''ered.

d. Forgo disco(nts tat are c(rrentl) *eing taken.

?. Wic o' te 'ollowing is not a ma3or '(nction in cas management>a. Cas 'low control c. Ma/imiing sales*. Cas s(rpl(s investment d. 8*taining 'inancing services

@. A preca(tionar) motive 'or olding e/cess cas isa. o ena*le a compan) to meet te cas demands 'rom te normal 'low o' *(siness activit).*. o ena*le a compan) to avail itsel' o' a special inventor) p(rcase *e'ore prices rise to iger levels.c. o ena*le a compan) to ave cas to meet emergencies tat ma) arise periodicall).d. o avoid aving to (se te vario(s t)pes o' lending arrangements availa*le to cover pro3ected cas de'icits.

0. e amo(nt o' cas tat a 'irm keeps on and in order to take advantage o' an) *argain p(rcases tat ma) arise is re'erred to as its A. ransactions *alance. C. $reca(tionar) *alance.;. Compensating *alance. 6. Spec(lative *alance.

. All o' te 'ollowing are valid reasons 'or a *(siness to old cas and marketa*le sec(rities e/cept to A. Satis') compensating *alance re1(irements.;. Maintain ade1(ate cas needed 'or transactions.C. Meet '(t(re needs.6. 7arn ma/im(m ret(rns on investment assets.

2. Wic o' te 'ollowing actions wo(ld not *e consistent wit good management>a. =ncreased s)ncroniation o' cas 'lows.*. Minimie te (se o' 'loat.c. Maintaining an average cas *alance e1(al to tat re1(ired as a compensating *alance or tat wic minimies total cost.d. %se o' cecks and dra'ts in dis*(rsing '(nds.

+. Wen managing cas and sort"term investments, a corporate treas(rer is primaril) concerned wit

A. Ma/imiing rate o' ret(rn.;. Minimiing ta/es.C. =nvesting in reas(r) *onds since te) ave no de'a(lt risk.6. i1(idit) and sa'et).

5. e economic order 1(antit) B78D 'orm(la can *e adapted in order 'or a 'irm to determine te optimal mi/ *etween cas and marketa*lesec(rities. e 78 model ass(mes all o' te 'ollowing e/cepta. e cost o' a transaction is independent o' te dollar amo(nt o' te transaction and interest rates are constant over te sort r(n.*. An opport(nit) cost is associated wit olding cas, *eginning wit te 'irst dollar.c. e total demand 'or cas is known wit certaint).d. Cas 'low re1(irements are random.

!. e 'ollowing are desira*le in cas management e/ceptEa. Cas is collected at te earliest time possi*le.*. Most sales are on cas *asis and receiva*les are aged c(rrentGc. $ost"dated cecks are not deposited on time (pon mat(rit).

d. All sales are properl) receipted and promptl) deposited intact.

#. e one item listed *elow tat wo(ld warrant te least amo(nt o' consideration in credit and collection polic) decisions is te A. (alit) o' acco(nts accepted. C. Cas disco(nt given.;. (antit) disco(nt given. 6. evel o' collection e/pendit(res.



<. Wic o' te 'ollowing investments is not likel) to *e a proper investment 'or temporar) idle cas>a. =nitial p(*lic o''ering o' an esta*lised pro'ita*le conglomerate.*. Commercial paper.c. reas(r) *il ls.d. reas(r) *onds d(e witin one )ear.

?. e goal o' credit polic) is toa. 7/tend credit to te point were marginal pro'its e1(al marginal costs.*. Minimie *ad de*t losses.c. Minimie collection e/penses.d. Ma/imie sales.

@. =t is eld tat te level o' acco(nts receiva*le tat te 'irm as or olds re'lects *ot te vol(me o' a 'irm4s sales on acco(nt and a 'irm4s creditpolicies. Wic one o' te 'ollowing items is not considered as part o' te 'irm4s credit policies>a. e minim(m risk gro(p to wic credit so(ld *e e/tended.*. e e/tent Bin terms o' mone)D to wic a 'irm will go to collect an acco(nt.c. e lengt o' time 'or wic credit is e/tended.d. e sie o' te disco(nt tat will *e o''ered.

20. =n assessing te loan val(e o' inventor), a *anker will normall) *e concerned a*o(t te portion o' inventor) tat is work"in"process *eca(sea. W=$ inventor) is relativel) eas) to sell *eca(se it does not represent a raw material or a 'inised prod(ct.*. W=$ inventor) (s(all) as te igest loan val(e o' te di''erent inventor) t)pes.c. W=$ generall) as te lowest marketa*ilit) o' te vario(s t)pes o' inventories.d. W=$ represents a lower investment *) a corporation as opposed to oter t)pes o' inventories.

2. Wen a compan) anal)es credit applicants and increases te 1(alit) o' te acco(nts re3ected, te compan) is attempting to A. Ma/imie sales. C. =ncrease te average collection period.;. =ncrease *ad"de*t losses. 6. Ma/imie pro'its.

22. A ig t(rnover o' acco(nts receiva*le, wic implies a ver) sort da)s"sales o(tstanding, co(ld indicate tat te 'irm A. as a rela/ed BlenientD credit polic).;. 8''ers small disco(nts.C. %ses a lock*o/ s)stem, s)ncronies cas 'lows, and as sort credit terms.6. as an ine''icient credit and collection department.

2+. Acco(nts receiva*le t(rnover will normall) decrease as a res(lt o'a. e write"o'' o' an (ncollecti*le acco(nt Bass(me te (se o' te allowance 'or do(*t'(l acco(nts metodD.*. A signi'icant sales vol(me decrease near te end o' te acco(nting period.c. An increase in cas sales in proportion to credit sales.d. A cange in credit polic) to lengten te period 'or cas disco(nts.

25. e credit and collection polic) o' Amargo Co. provides 'or te imposition o' credit *lock wen te credit line is e/ceeded andHor te acco(nt is pastd(e. 6(ring te mont, *eca(se o' te campaign to acieve vol(me targets, te general manager as waived te credit *lock polic) in a n(m*er o' instances involving *ig vol(me acco(nts. e likel) e''ect o' tis move isa. 6eterioration o' aging o' receiva*les onl).

*. =ncrease in te level o' receiva*les onl).c. 6eterioration o' aging and increase in te level o' receiva*les.d. 6ecrease in collections d(ring te mont te move was done.

2!. An increase in sales res(lting 'rom an increased cas disco(nt 'or prompt pa)ment wo(ld *e e/pected to ca(se A. An increase in te operating c)cle.;. An increase in te average collection period.C. A decrease in te cas conversion c)cle.6. A decrease in p(rcase disco(nts taken.

2#. =' a 'irm ad *een e/tending trade credit on a 2H0, netH+0 *asis, wat cange wo(ld *e e/pected on te *alance seet o' its c(stomer i' te 'irmwent to a net cas +0 polic)>a. =ncreased pa)a*les and increased *ank loan.*. =ncreased receiva*les.c. 6ecreased receiva*les.d. 6ecrease in cas.

2<. e level o' acco(nts receiva*le will most likel) increase asa. Cas sales increase and n(m*er o' sa)s sales.*. Credit limits are e/panded, credit sales increase, and credit terms remain te same.c. Credit limits are e/panded, cas sales increase, and aging o' te receiva*les is improving.d. Cas sales increase, c(rrent receiva*les ratio to past d(e increases, credit limits remain te same.

2?. A cange in credit polic) as ca(sed an increase in sales, an increase in disco(nts taken, a red(ction o' te investment in acco(nts receiva*le, anda red(ction in te n(m*er o' do(*t'(l acco(nts. ;ased on tis in'ormation, we know tatEa. Iet pro'it as increased.*. e average collection period as decreased.c. -ross pro'it as declined.d. e sie o' te disco(nt o''ered as decreased.

2@. A strict credit and collection polic) is in place in Star Co. As Finance 6irector )o( are asked to advise on te propriet) o' rela/ing te creditstandards in view o' sti'' competition in te market. Yo(r advise will *e 'avora*le i'a. e competitor will do te same ting to prevent lost sales.*. tere is a decrease in te distri*(tion level o' )o(r prod(ct, and a more aggressive stance in necessar) to retain market sare.c. e pro3ected margin 'rom increased sales will e/ceed te cost o' carr)ing te incremental receiva*les.d. e acco(nt receiva*le level is improving, so te compan) can a''ord te carr)ing cost o' receiva*les.

+0. Merkle, =nc. as a temporar) need 'or '(nds. Management is tr)ing to decide *etween not taking disco(nts 'rom one o' teir tree *iggest s(ppliers,or a 5.<!J per ann(m renewa*le disco(nt loan 'rom its *ank 'or + monts. e s(ppliers: terms are as 'ollowsE

Fort Co. H0, net +0Rile) Man('act(ring Co. 2H!, net #0Sad, =nc. +H!, net @0

%sing a +#0"da) )ear, te ceapest so(rce o' sort"term 'inancing in tis sit(ation is A. e *ank. C. Rile) Man('act(ring Co.;. Fort Co. 6. Sad, =nc.

+. A compan) o*taining sort"term 'inancing wit trade credit will pa) a iger percentage 'inancing cost, ever)ting else *eing e1(al, wen A. e disco(nt percentage is lower.;. e items p(rcased ave a iger price.C. e items p(rcased ave a lower price.

6. e s(pplier o''ers a longer disco(nt period.



PROBLEMS

. 7nert, =nc.:s c(rrent capital str(ct(re is sown *elow. is str(ct(re is optimal, and te compan) wises to maintain it.6e*t 2!J$re'erred e1(it) !JCommon e1(it) <0J

7nert:s management is planning to *(ild a 9<! million 'acilit) tat will *e 'inanced according to tis desired capital str(ct(re. C(rrentl), 9! million o' cas is availa*le 'or capital e/pansion. e percentage o' te 9<! million tat will come 'rom a new iss(e o' common sares is A. !0.00J. ;. !#.2!J. C. <0.00J. 6. !#.00J.

2. ;o*o C:s as an asset *ase o' 9 million. A'ter a dividend pa)ment o' 950,000, ;o*o added 9!0,000 to retained earnings. Wat is ;o*o:sinternal growt rate> A. J ;. 5J C. !J 6. @J

+. =t is te polic) o' Fran Corp. tat te c(rrent ratio cannot 'all *elow .! to .0. =ts c(rrent lia*ilities are $500,000 and te present c(rrent ratio is 2to . ow m(c is te ma/im(m level o' new sort"term loans it can sec(re wito(t violating te polic)>a. $500,000 *. $+00,000 c. $2##,##< d. $?00,000

5. Wildting Am(sement Compan)4s total assets 'l(ct(ate *etween 9+20,000 and 950,000, wile its 'i/ed assets remain constant at 92#0,000. =' te'irm 'ollows a mat(rit) matcing or moderate working capital 'inancing polic), wat is te likel) level o' its long"term 'inancing>a. 9 @0,000 *. 92#0,000 d. 950,000 e. 9+20,000

!. Karrett 7nterprises is considering weter to p(rs(e a restricted or rela/ed c(rrent asset investment polic). e 'irm4s ann(al sales are 9500,000Lits 'i/ed assets are 900,000L de*t and e1(it) are eac !0 percent o' total assets. 7;= is 9+#,000, te interest rate on te ' irm4s de*t is 0 percent,and te 'irm4s ta/ rate is 50 percent. Wit a restricted polic), c(rrent assets will *e ! percent o' sales. %nder a rela/ed polic), c(rrent assets will *e2! percent o' sales. Wat is te difference in te pro3ected R87s *etween te restricted and rela/ed policies>a.. .#J *. #.2J c. +.?J d. !.5J

#. ;(ll) Corporation p(rcases raw materials on K(l) . =t converts te raw materials into inventor) *) Septem*er +0. owever, ;(ll) pa)s 'or tematerials on K(l) 20. 8n 8cto*er +, it sells te 'inised goods inventor). en, te 'irm collects cas 'rom te sale mont later on Iovem*er +0.

=' tis se1(ence acc(ratel) represents te average working capital c)cle, wat is te 'irm:s cas conversion c)cle in da)s> A. @2 da)s. ;. ++ da)s. C. 2+ da)s. 6. !+ da)s.

<. K(mpdisk Compan) writes cecks averaging 9!,000 a da), and it takes 'ive da)s 'or tese cecks to clear. e 'irm also receives cecks in teamo(nt o' 9<,000 per da), *(t te 'irm loses tree da)s wile its receipts are *eing deposited and cleared. Wat is te ' irm4s net 'loat in dollars>a. 92#,000 *. 9 <!,000 c. 9 +2,000 d. 9 25,000

?. Wat is te opport(nit) cost o' keeping a cas *alance o' 92 million, i' te dail) interest rate is 0.02J and te average transaction cost o' investingmone) overnigt is 9!0> A. 9!0 ;. 9+!0 C. 9500 6. 950,000

@. ak(na =nc. sells on terms o' +H0, net +0 da)s. -ross sales 'or te )ear are $2,500,000 and te collections department estimates tat +0J o' tec(stomers pa) on te 0t da) and take disco(ntsL 50J pa) on te +0t da)L and te remaining +0J pa), on te average, 50 da)s a'ter tep(rcase. Ass(ming +#0 da)s per )ear, wat is te average collection period.a. 50 da)s. *. ! da)s. c. 20 da)s d. 2< da)s.

(estions 0 and are *ased on te 'ollowing in'ormation. A compan) as a 0J cost o' *orrowing and inc(rs 'i/ed costs o' 9!00 'or o*taining a loan. =t as sta*le, predicta*le cas 'lows, and te estimated totalamo(nt o' net new cas needed 'or transactions 'or te )ear is 9<!,000. e compan) does not old sa'et) stocks o' cas.

0. Wen te average cas *alance o' te compan) is iger, te ist AN te cas *alance is ist ;N.ist A ist ;

A. 8pport(nit) cost o' olding iger ;. otal transactions costs associated wit o*taining iger C. 8pport(nit) cost o' olding ower 6. otal costs o' olding ower

. =' te average cas *alance 'or te compan) d(ring te )ear is 920,@#.!0, te opport(nit) cost o' olding cas 'or te )ear will *e A. 92,0@.#! ;. 95,?+.+0 C. 9?,<!0.00 6. 9<,!00.00

2. CMR is a retail mail order 'irm tat c(rrentl) (ses a central collection s)stem tat re1(ires all cecks to *e sent to its ;oston ead1(arters. Anaverage o' ! da)s is re1(ired 'or mailed cecks to *e received, 5 da)s 'or CMR to process tem and O da)s 'or te cecks to clear tro(g its*ank. A proposed lock*o/ s)stem wo(ld red(ce te mail and process time to + da)s and te ceck clearing time to da). CMR as an average

dail) collection o' 900,000. =' CMR so(ld adopt te lock*o/ s)stem, its average cas *alance wo(ld increase *)a. 92!0,000. *. 9500,000. c. 9#!0,000. d. 9?00,000.

+. Wat are te e/pected ann(al savings 'rom a lock*o/ s)stem tat collects 200 cecks per da) averaging 9!00 eac, and red(ces mailing andprocessing times *) 2.0 and 0.! da)s, respectivel), i' te ann(al interest rate is #J> A. 92!0,000 ;. 92,000 C. 9#,000 6. 9!,000

5. A compan) as dail) cas receipts o' 9!0,000. e treas(rer o' te compan) as investigated a lock *o/ service were*) te *ank tat o''erstis service will red(ce te compan)4s collection time *) 'o(r da)s at a montl) 'ee o' 92,!00. =' mone) market rates average 5J d(ring te )ear,te additional ann(al income BlossD 'rom (sing te lock *o/ service wo(ld *ea. 9#,000. *. 9B#,000D. c. 92,000. d. 9B2,000D.

!. A *anker as o''ered to set (p and operate a lock *o/ s)stem 'or )o(r compan). 6etails are given *elow. Average n(m*er o' dail) pa)ments +2! Average sie o' pa)ments 9,2!06ail) interest rate 0.02JSaving in mailing time .+ da)sSaving in processing time 0.@ da)s;ank carges 90.+0

7stimate te ann(al savings. Ass(me 2!0 processing da)s per )ear. A. 9+,2<+ ;. 922,#<! C. 92+,!00 6. 95<,000

#. RS makes large cas pa)ments averaging $<,000 dail). e compan) canged 'rom (sing cecks to sigt dra'ts wic will permit it to old(nto its cas 'or one e/tra da). =' RS can (se te e/tra cas to earn 5J ann(all), wat ann(al peso ret(rn will it earn>a. $#!2.0 *. $#,!2.00 c. $#.!2 d. $2,+?0

<. Si/t) percent o' ;aco:s ann(al sales o' 9@00,000 is on credit. =' its )ear"end receiva*les t(rnover is 5.!, wat is te average collection period andte )ear"end receiva*les, respectivel) Bass(me a +#!"da) )earD> A. ? da)s and 920,000. C. <+ da)s and 90?,000.;. <+ da)s and 920,000. 6. ? da)s and 9200,000.

?. ;est Comp(ters *elieves tat its collection costs co(ld *e red(ced tro(g modi'ication o' collection proced(res. is action is e/pected to res(lt ina lengtening o' te average collection period 'rom +0 to +! da)sL owever, tere will *e no cange in (ncollecti*le acco(nts, or in total credit

sales. F(rtermore, te varia*le cost ratio is #0J, te opport(nit) cost o' a longer collection period is ass(med to *e negligi*le, te compan):s*(dgeted credit sales 'or te coming )ear are 95!,000,000, and te re1(ired rate o' ret(rn is #J. o 3(sti') canges in collection proced(res, teminim(m ann(al red(ction o' costs B(sing a +#0"da) )ear and ignoring ta/esD m(st *e A. 9+<!,000 ;. 9+<,!00 C. 92!,000 6. 922,!00

(estions @ and 20 are *ased on te 'ollowing in'ormation.



Sno*i, =nc. as 92 million invested in reas(r) *ills )ielding ?J per ann(mL tis investment will satis') te 'irm:s need 'or '(nds d(ring te coming )ear.

@. =' it costs 9!0 to sell tese *ills, regardless o' te amo(nt, ow m(c so(ld *e witdrawn at a time> A. 9!0,000 ;. 900,000 C. 92!0,000 6. 9!00,000

20. =' Sno*i, =nc. needs 9#<,000 a mont, ow 're1(entl) so(ld te CF8 sell o'' reas(r) *ills> A. A*o(t ever) + da)s. C. A*o(t ever) ! da)s.;. A*o(t ever) @ da)s. 6. A*o(t ever) ? da)s.

2. en 4s =nc. as an inventor) conversion period o' #0 da)s, a receiva*le conversion period o' +! da)s, and a pa)ment c)cle o' 2# da)s. =' its sales'or te period 3(st ended amo(nted to $@<2,000, wat is te investment in acco(nts receiva*le> BAss(me +#0 da)s a )ear.Da. $?!,200 *. $<2,5!0 c. $@5,!00 d. $<@,#00

22. Sim*a Corp., wose gross sales amo(nted to $,200,000 sold on terms o' +H0, net +0. e collections manager estimated tat +0J o' tec(stomers pa) on te 0t da) and take disco(ntsL 50J on te +0t da)L and te remaining +0J pa), on te average, 50 da)s a'ter te p(rcase.=' management wo(ld to(gen on its collection polic) and re1(ire tat all non"disco(nt c(stomers pa) on te +0t da), ow m(c wo(ld *e tereceiva*les *alance>a. $#0,000 *. $?0,000 c. $<0,000 d. Pero

2+. $rest Corp. plans to tigten its credit polic). ;elow is te s(mmar) o' cangesE8ld Iew

Average n(m*er o' da)s collection <! !0Ratio o' credit sales to total sales <0J #0J

$ro3ected sales 'or te coming )ear is $00 million and it is estimated tat te new polic) will res(lt in a !J loss i' te new polic) is implemented. Ass(ming a +#0"da) )ear, wat is te e''ect o' te new polic) on acco(nts receiva*le>a. 6ecrease o' $+ million. c. 6ecrease o' $! million.*. Io cange. d. 6ecrease o' $ #.#< million.

25. I(mero Co.4s *(dgeted sales 'or te coming )ear are $@# million, o' wic ?0J are e/pected to *e credit sales at terms o' nH+0. e compan)

estimates tat a proposed rela/ation o' credit standards wo(ld increase credit sales *) +0J and increase te average collection period 'orm +0da)s to 5! da)s. ;ased on a +#0"da) )ear, te proposed rela/ation o' credit standards wo(ld res(lt to an increase in acco(nts receiva*le *alanceo'a. $#,??0,000 *. $,@20,000 c. $2,??0,000 d. $#,0?0,000

2!. $illips -lass Compan) *()s on terms o' 2H!, net +0. =t does not take disco(nts, and it t)picall) pa)s +0 da)s a'ter te invoice date. Ietp(rcases amo(nt to 9<20,000 per )ear. 8n average, ow m(c 'reeG trade credit does $illips receive d(ring te )ear> BAss(me a +#0"da))ear.Da. 9+0,000 *. 950,000 c. 9!0,000 d. 9#0,000

2#. Slippers Mart as sales o' $+ million. =ts credit period and average collection period are *ot +0 da)s and J o' its sales end as *ad de*ts. egeneral manager intends to e/tend te credit period to 5! da)s wic will increase sales *) $+00,000. owever, *ad de*ts losses on teincremental sales wo(ld *e +J. Costs o' prod(cts and related e/penses amo(nt to 50J e/cl(sive o' te cost o' carr)ing receiva*les o' !J and*ad de*ts e/penses. Ass(ming +#0 da)s a )ear, te cange in polic) wo(ld res(lt to incremental investment in receiva*les o'a. $25,<05. *. $#!,000. c. $<0,!<+ d. $@,<!0.

2<. e i*eral Sales Co. *(dgeted sales 'or te coming )ear are $+0 million o' wic ?0J are e/pected to *e on credit. e compan) wants tocange its credit terms 'rom nH+0 to 2H0, nH+0. =' te new credit terms are adopted, te compan) estimates tat cas disco(nts wo(ld *e taken on50J o' te credit sales and te new (ncollecti*le amo(nt wo(ld *e (ncanged. e adoption o' te new credit terms wo(ld res(lt in e/pecteddisco(nt availed o' in te coming )ear o'a. $#00,000 *. $2??,000 c. $5?0,000 d. $@2,000

2?. Mr. S. Mart ass(med te presidenc) o' Rices Corp. e instit(ted new policies and wit respect to credit polic), *elow is a s(mmar) o' relevantin'ormationE

8ld Credit $olic) Iew Credit $olic)

Sales $,?00,000 $,@?0,000 Average collection period +0 da)s +# da)s

e compan) re1(ires a rate o' ret(rn o' 0J and a varia*le cost ratio o' #0J. %sing a +#0"da) )ear, te pre"ta/ cost o' carr)ing te additionalinvestment in receiva*les (nder te new polic) wo(ld *ea. $5,?00 *. $2,??0 c. $+,000 d. $5,0?0

2@. e Sales 6irector o' Can Can Co. s(ggests tat certain credit terms *e modi'ied. e estimates te 'ollowing e''ectsE Sales will increase *) at least 20J.

Acco(nts receiva*le t(rnover will *e red(ced to ? times 'rom te present t(rnover o' 0 times.

;ad de*ts, now at J o' sales will increase to .!J. Sales *e'ore te proposed canges is at $@00,000. Qaria*le cost ratio is !!J and

desired rate o' ret(rn is 20J. Fi/ed e/penses amo(nt to $!0,000.So(ld te compan) allow te revision o' its credit terms>a. Yes, *eca(se income will increase *) $#?,?!0.*. Yes, *eca(se losses will *e red(ced *) $<?,?00.c. Io, *eca(se income will *e red(ced *) $+,000.d. Io, *eca(se losses will increase *) $2?,000.

+0. Wasting Reso(rce Co. as ann(al credit sales o' $5 million. =ts average collection period is 50 da)s and *ad de*ts are !J o' sales. e creditand collection manager is considering instit(ting a stricter collection polic), were*) *ad de*ts wo(ld *e red(ced to 2J o' total sales, and teaverage collection period wo(ld 'all to +0 da)s. owever, sales wo(ld also 'all *) an estimated $!00,000 ann(all). Qaria*le costs are #0J o' salesand te cost o' carr)ing receiva*les is 2J. Ass(ming a ta/ rate o' +!J and +#0 da)s a )ear, te incremental cange in te pro'ita*ilit) o' tecompan) i' stricter polic) wo(ld *e implemented wo(ld *ea. Pero as te positive and negative e''ects o''set eac oter.*. A red(ction in net income *) $<0,000.

c. A red(ction in net income *) $+?,+!0.d. A red(ction in net income *) $+!,500.

+. $ranklin $arms =nc. p(rcases mercandise 'rom a compan) tat gives sales terms o' 2H!, net 50. $ranklin $arms as gross p(rcases o' 9?00,000 per )ear. Wat is te maximum amo(nt o' costl) trade credit $ranklin co(ld get, ass(ming te) a*ide *) te s(ppliers credit terms>BAss(me a +#0"da) )ear.Da. 9?<,.20 *. 9+2,###.<0 c. 9!5,555.!0 d. 9!2,2##.#<

+2. Crest Co. as te opport(nit) to increase ann(al sales *) $ million *) selling to new riskier c(stomers. =t as *een estimated tat (ncollecti*lee/penses wo(ld *e !J and collection costs !J. e man('act(ring and selling costs are <0J o' sales and corporate ta/ is +!J. =' it p(rs(estis opport(nit), te a'ter ta/ pro'it willa. =ncrease *) $+!,000. c. =ncrease *) $#!,000.*. =ncrease *) $@<,!00. d. Remain te same.

++. A 'irm c(rrentl) sells 9!00,000 ann(all) wit +J *ad de*t losses. wo alternative policies are availa*le. $olic) A wo(ld increase sales *) 9!00,000,*(t *ad de*t losses on additional sales wo(ld *e ?J. $olic) ; wo(ld increase sales *) an additional 920,000 over $olic) A and *ad de*t losseson te additional 920,000 o' sales wo(ld *e !J. e average collection period will remain at #0 da)s B# t(rns per )earD no matter te decisionmade. e pro'it margin will *e 20J o' sales and no oter e/penses will increase. Ass(me an opport(nit) cost o' 20J. Wat so(ld te 'irm do> A. Make no polic) cange.;. Cange to onl) $olic) A.C. Cange to $olic) ; Bmeans also taking $olic) A 'irstD.6. All policies lead to te same total 'irm pro'it, t(s all policies are e1(al.



+5. A 'irm tat o'ten 'actors its acco(nts receiva*le as an agreement wit its 'inance compan) tat re1(ires te 'irm to maintain a #J reserve andcarges J commission on te amo(nt o' receiva*les. e net proceeds wo(ld *e '(rter red(ced *) an ann(al interest carge o' 0J on temonies advanced. Ass(ming a +#0"da) )ear, wat amo(nt o' cas Bro(nded to te nearest dollarD will te 'irm receive 'rom te 'inance compan) atte time a 900,000 acco(nt tat is d(e in @0 da)s is t(rned over to te 'inance compan)> A. 9@+,000 ;. 9@0,000 C. 9?+,<00 6. 9@0,#<!

(estions +! tro(g +< are *ased on te 'ollowing in'ormation.Fleser, =nc.:s credit manager st(died te *ill"pa)ing a*its o' its c(stomers and 'o(nd tat @0J o' tem were prompt. Se also discovered tat 22J o' te slow pa)ers and !J o' te prompt ones s(*se1(entl) de'a(lted. e compan) as +,000 acco(nts on its *ooks, none o' wic as )et de'a(lted.+!. Calc(late te total n(m*er o' e/pected de'a(lts, ass(ming no repeat *(siness is on te orion.

A. <@! ;. 20 C. +! 6. ##

+#. -iven average reven(es 'rom sales o' 9,200 and te cost o' sales o' 9,00, wat is te average e/pected pro'it or loss 'rom e/tending credit toslow pa)ers> A. 900 pro'it. ;. 9#5 loss. C. 9220 loss. 6. 92#5 loss.

+<. -iven reven(es 'rom sales o' 9,200 and te cost o' sales o' 9,00, wat wo(ld te average level o' reven(es tat makes it wortwile to e/tendcredit to slow pa)ers> A. 9,+#5.00 ;. 9,+?@.<5 C. 9,50.2# 6. 9,!0.2#

+?. 8n cas disco(nts, all o' te 'ollowing statements do not appl) e/cepta. =' a 'irm *()s $0,000 o' goods on terms o' H0, net +0 and pa)s witin te disco(nt period, te amo(nt paid wo(ld *e $@,000.*. e cost o' not taking a cas disco(nt is alwa)s iger tan te cost o' a *ank loan.c. Wit trade terms o' 2H!, net #0, i' te disco(nt is taken te *()er receive 5! da)s o' credit.d. e cost o' not taking te disco(nt is iger 'or terms o' 2H0, net #0 tan 'or 2H0, net +0.

+@. Yo(r 'irm *()s on credit terms o' 2H0, net 5!, and it alwa)s pa)s on 6a) 5!. =' )o( calc(late tat tis polic) e''ectivel) costs )o(r 'irm 9!<,!00eac )ear, wat is te ' irm4s average acco(nts pa)a*le *alance>

a. 9,2+5,000 *. 9#2!,000 c. 9<!0,000 d. 9!<,!00

50. S(ppose te credit terms o''ered to )o(r 'irm *) )o(r s(ppliers are 2H0, net +0 da)s. 8(t o' convenience, )o(r 'irm is not taking disco(nts, *(t ispa)ing a'ter 20 da)s, instead o' waiting (ntil 6a) +0. Yo( point o(t tat te nominal cost o' not taking te disco(nt and pa)ing on 6a) +0 is aro(nd+< percent. ;(t since )o(r 'irm is not taking disco(nts and is pa)ing on 6a) 20, wat is te effective ann(al cost o' )o(r 'irm4s c(rrent practice,(sing a +#0"da) )ear>a. +#.<J *. 5+.#J c. 0#.@J d. <+.5J

5. Wat is te e''ective ann(al interest rate on a @J ann(al percentage rate a(tomo*ile loan tat as montl) pa)ments> A. @J ;. @.+?J C. @.?J 6. 0.@5J

52. Cor*in, =nc. can iss(e +"mont commercial paper wit a 'ace val(e o' 9,000,000 'or 9@?0,000. ransaction costs will *e 9,200. e e''ectiveann(alied percentage cost o' te 'inancing, *ased on a +#0"da) )ear, will *e A. ?.5?J. ;. ?.##J. C. ?.00J. 6. 2.00J.

5+. A;C Compan) 'inances all o' its seasonal inventor) needs 'rom te local *ank at an e''ective interest cost o' @J. e 'irm4s s(pplier promises to

e/tend trade credit on terms tat will matc te @J *ank credit rate. Wat terms wo(ld te s(pplier ave to o''er Bappro/imatel)D>a. 2H0, nH#0. *. 2H0, nH00. c. 2H0, nH@0. d. +H0, nH#0.

55. A compan) as acco(nts pa)a*le o' 9! million wit terms o' 2J disco(nt witin ! da)s, net +0 da)s B2H! net +0D. =t can *orrow '(nds 'rom a *ankat an ann(al rate o' 2J, or it can wait (ntil te +0t da) wen it will receive reven(es to cover te pa)ment. =' it *orrows '(nds on te last da) o' te disco(nt period in order to o*tain te disco(nt, its total cost will *e A. 9!,000 less. ;. 9<!,!00 less. C. 900,000 less. 6. 925,!00 more.

5!. 7ver) ! da)s a compan) receives 90,000 wort o' raw materials 'rom its s(ppliers. e credit terms 'or tese p(rcases are 2H0, net +0, andpa)ment is made on te +0t da) a'ter eac deliver). (s, te compan) is considering a ")ear *ank loan 'or 9@,?00 B@?J o' te invoice amo(ntD.=' te e''ective ann(al interest rate on tis loan is 2J, wat will *e te net dollar savings over te )ear *) *orrowing and ten taking te disco(nton te materials> A. 9+,#25 ;. 9,<# C. 95,?00 6. 9,225

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