120. The company you just started has been offered credit terms of 4/30, net 90 days. What will be the
nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase?
(Assume a 365-day year.)
a.
16.05%
b.
16.90%
c.
17.74%
d.
18.63%
e.
19.56%
121. Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If
the firm chooses to pay on time but does not take the discount, what is the effective annual percentage
cost of its non-free trade credit? (Assume a 365-day year.)
a.
20.11%
b.
21.17%
c.
22.28%
d.
23.45%
e.
24.63%
122. Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays
after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day
year.)
a.
14.34%
b.
15.10%
c.
15.89%
d.
16.69%
e.
17.52%
123. Safety Window and Door Co. buys on terms of 2/15, net 60 days. It does not take discounts, and it
typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On
average, how much “free” trade credit does the firm receive during the year? (Assume a 365-day year,
and note that purchases are net of discounts.)
a.
$18,493
b.
$19,418
c.
$20,389
d.
$21,408
e.
$22,479
124. Taylor Textbooks Inc. buys on terms of 2/15, net 50 days. It does not take discounts, and it typically
pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average,
what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during the
year? (Assume a 365-day year, and note that purchases are net of discounts.)
a.
$43,151
b.
$45,308
c.
$47,574
d.
$49,952
e.
$52,450
125. Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e.,
purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount
of costly trade credit the firm could get, assuming it abides by the supplier’s credit terms? (Assume a
365-day year.)
a.
$53,699
b.
$56,384
c.
$59,203
d.
$62,163
e.
$65,271
126. Hinkle Corporation buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays
on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what
is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are
its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
a.
$90,411
b.
$94,932
c.
$99,678
d.
$104,662
e.
$109,895
127. Noddings Inc. needs to raise more capital because its business is booming. The company purchases
supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed
funds would be to forgo the discount, and the firm’s owner believes she could delay payment to 40
days without adverse effects. What would be the effective annual percentage cost of funds raised by
this action? (Assume a 365-day year.)
a.
10.59%
b.
11.15%
c.
11.74%
d.
12.36%
e.
13.01%
128. Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks. The
firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the
used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple
interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately
after the agreement was signed and repaid the loan at the end of one year, what was the total dollar
annual cost of the revolver?
a.
$285,000
b.
$300,000
c.
$315,000
d.
$330,750
e.
$347,288
129. Fontana Painting had the following data for the most recent year (in millions). The new CFO believes
that the company could improve its working capital management sufficiently to bring its NWC and
CCC up to the benchmark companies’ level without affecting either sales or the costs of goods sold.
Fontana finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a
365-day year. If these changes had been made, by how much would the firm’s pre-tax income have
increased?
Original
Related CCC
Sales
Cost of goods sold
Inventory (ICP)
91.25
Receivables (DSO)
58.40
Payables (PDP)
22.81
126.84
a.
1,901
b.
2,092
c.
2,301
d.
2,531
e.
2,784
Benchmark
Benchmark
Data
Sales
Cost of goods sold
Inventory = ICP(COGS/365) =
Receivables = DSO(Sales/365) =
Payables = PDP(COGS/365) =
Rate per day = 4.75%/365 =
Interest per day = (Rate per day)(Amount borrowed) =
Interest per year = (Interest per day)(365) =
$285,000
Cost of unused portion: Unused balance Fee =
Total annual cost of loan agreement =
$300,000
130. Monar Inc.’s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day
year). The company carries average inventory of $750,000. Its annual sales are $10 million, its cost of
goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory
conversion period. The firm buys on terms of net 30 days, and it pays on time. The CFO believes he
can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also
reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?
a.
$123,630
b.
$130,137
c.
$136,986
d.
$143,836
e.
$151,027
131. Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not
taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the
nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your
firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost
(not the nominal cost) of its costly trade credit, using a 365-day year?
a.
60.3%
b.
63.5%
c.
66.7%
d.
70.0%
e.
73.5%
132. Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The
CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm’s
average accounts payable balance? (Assume a 365-day year.)
a.
$458,160
b.
$482,273
c.
$507,656
d.
$534,375
e.
$562,500
133. Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit
by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers
are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank,
using short-term notes payable, and then taking discounts. The firm wants to determine the effect of
this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The
interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what
is the expected change in net income?
a.
$32,964
b.
$34,699
c.
$36,526
d.
$38,448
e.
$40,370
134. Famous Farm’s payables deferral period (PDP) is 50 days (on a 365-day basis), accounts payable are
$100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover
ratio?
a.
4.73
b.
5.26
c.
5.84
d.
6.42
e.
7.07
135. During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which
should result in a higher EVA and stock price. The CFO has made these projections for the upcoming
year:
•
EBIT is projected to equal $850 million.
•
Gross capital expenditures are expected to total to $360 million versus depreciation of
$120 million, so its net capital expenditures should total $240 million.
•
The tax rate is 40%.
•
There will be no changes in cash or marketable securities, nor will there be any changes in
notes payable or accruals.
What increase in net working capital (in millions of dollars) would enable the firm to meet its target
increase in FCF?
a.
$72
b.
$90
c.
$108
d.
$130
e.
$156
Gross capital expenditures
Tax rate
= $90
136. Refer to Exhibit 21.1. If the firm adopts a restricted policy, how much lower would its interest expense
be than under the relaxed policy?
a.
$8,418
b.
$8,861
c.
$9,327
d.
$9,818
e.
$10,309
137. Refer to Exhibit 21.1. What’s the difference in the projected ROEs under the restricted and relaxed
policies?
a.
1.20%
b.
1.50%
c.
1.80%
d.
2.16%
e.
2.59%
138. Refer to Exhibit 21.1. Assume now that the company believes that if it adopts a restricted policy, its
sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate,
and tax rate will all remain the same. In this situation, what’s the difference between the projected
ROEs under the restricted and relaxed policies?
a.
2.24%
b.
2.46%
c.
2.70%
d.
2.98%
e.
3.27%