d.
rate of interest on borrowed funds
95. Renfro Industries balance sheet for December 31, 20x3 is as follows:
Assets ($000)
Liabilities and Equity ($000)
Cash
$ 8,000
Accounts Payable
Marketable Securities
4,000
Notes Payable
Accounts Receivable
60,000
Other Current Liabilities
Inventories
100,000
Long-term debt
Plant & Equip.
220,000
Preferred Stock
Less: Deprec.
64,000
Common Stock
Net Plant & Equip.
156,000
Paid-in Surplus
Retained Earnings
Total Assets
$328,000
Total Claims
What is Renfro’s net working capital at the end of 20×3?
a.
-$8 million
b.
$36 million
c.
$92 million
d.
$172 million
96. What is the inventory conversion period for O’Brian’s if it has sales of $320,000, an average inventory
of $5,333, and a cash conversion cycle of 20 days? Assume that the cost of sales is 55 percent of sales.
a.
6 days
b.
11 days
c.
13.5 days
d.
15 days
97. What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an
inventory conversion period of 35 days, and a payables deferral period of 25 days.
a.
0 days
b.
25 days
c.
10 days
d.
15 days
98. Tefft Industries has an average inventory of $170,000, sells on terms of 2/10, net 30, and its cost of
sales is $540,000. What is Tefft’s inventory conversion period?
a.
85 days
b.
115 days
c.
105 days
d.
cannot be determined from the data given
99. If Swatch’s inventory conversion period is 45 days, its payables deferral period is 35 days, and its
receivables conversion period is 50 days, then its cash conversion cycle must be ____ days.
a.
60
b.
90
c.
30
d.
cannot be determined from information given
100. Runners Ink, Inc. had sales last year of $700,000 and 35 percent of its sales are for cash, with the
remainder buying on terms of net 30 days. If the receivables conversion period is actually 38 days,
what is Runners Ink’s accounts receivable?
a.
$72,877
b.
$25,507
c.
$47,370
d.
$12,465
101. Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year. If Sherwood’s
inventory averaged $0.4 million last year, what was the length of the inventory conversion period?
a.
130.4 days
b.
70.2 days
c.
195.5 days
d.
45.6 days
102. Last year Bizmart had credit sales of $32 million and a net profit margin of 8%. If Bizmart had
accounts receivable of $4.5 million, what was the length of the receivables conversion period?
a.
51.3 days
b.
56.3 days
c.
54.9 days
d.
47.2 days
103. Linear Technology had sales (all on credit) of $36 million and a gross profit margin of 30% last year.
If Linear Technology’s inventory averaged $3.9 million, and its accounts receivable were $5.0 million,
what was the length of its operating cycle?
a.
90.2 days
b.
128.9 days
c.
111.9 days
d.
107.2 days
104. Crystal Oil has $9 million in accounts payable, $1.8 in salaries and taxes payable, and $10.4 in other
current liabilities. If Crystal Oil had a cost of sales of $54 million and selling, general, and
administrative expense of $18 million, what is the length of its payables deferral period?
a.
107.47 days
b.
73.02 days
c.
54.75 days
d.
45.63 days
105. Laserscope has an inventory conversion period of 45 days, a receivables conversion period of 42 days,
and a payables deferral period of 51 days. What is the length of its cash conversion cycle?
a.
54 days
b.
36 days
c.
48 days
d.
cannot determine with the information provided
106. The Essex Company found that an average of 10 days elapses between when customer payments are
received and the deposited funds clear the customer’s bank and become usable by the firm. Essex’s
annual sales are $240 million. (Assume 365 days per year when converting from annual data to daily
data or vice versa.) What is the increase in Essex’s average cash balance assuming that it can reduce
the time required to process customer payments by 3 days through more efficient payment processing
methods?
a.
$666,667
b.
$120,000,000
c.
$1,972,603
d.
$270,000
107. The Essex Company found that an average of 10 days elapses between when customer payments are
received and the deposited funds clear the customer’s bank and become usable by the firm. Essex’s
annual sales are $240 million (Assume 365 days per year when converting from annual data to daily
data or vice versa.) Suppose that Essex is able to reduce the time required to process customer
payments by 4 days through more efficient payment processing methods. Given that these additional
funds can be used to reduce the firm’s outstanding bank loans (10% interest rate), what is the annual
pretax savings in interest expense?
a.
$263,014
b.
$96,000,000
c.
$66,667
d.
$2,630,149
108. Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its
customers in New York and California. If the firm deposits these checks in its local bank, two business
days are required for the checks to clear and the funds to become usable by the firm. However, if
Osborne sends an employee to New York or California and presents the check for payment at the bank
upon which it is drawn, the funds are available immediately to the firm. The firm can earn 8% per
annum on short-term investments and the cost of sending an employee to New York or California to
present the check for payment is $500. What is the net benefit to the firm of employing this special
handling technique for a $5 million check received on Tuesday (assume 365 days per year)?
a.
$2,192
b.
$1,692
c.
$2,000
d.
$1,096
109. Zycad has sales of $110 million a year. If Zycad reduces their processing float by 3 days, what is the
increase in the firm’s average cash balance? Assume 365 days per year.
a.
$916,667
b.
$904,110
c.
$872,180
d.
$409,110
110. MLX has annual sales of $320 million per year and has calculated that the collection float is 12 days.
If MLX is currently paying 9.35 percent on its line of credit, what amount of interest expense could be
saved if the collection float is reduced by 3 days? Assume 365 days per year.
a.
$249,333
b.
$573,808
c.
$299,200
d.
$245,918
111. Pronet has annual sales of $724 million from its 600 retail stores. Pronet can reduce its mail float by 2
days through the use of wire transfers. The annual cost of the wire transfers is expected to be
$105,610. If Pronet’s cost of short-term funds is 9.75 percent, should the change to wire transfers be
made? Assume 365 days per year.
a.
No, loss of $247,340
b.
Yes, savings of $281,185
c.
Yes, savings of $474,582
d.
No, loss of $105,610
112. Tocor is considering the implementation of a lockbox collection system for its mid-western and
western sales regions. Sales in those two regions are 30 percent of Tocor’s annual sales of $560
million. The lockbox system will cost $187,000 a year and reduce collection time by 3 days. If Tocor
could invest any released funds at 10.85 percent, should it use the lockbox system? Assume 365 days
per year.
a.
Yes, savings of $149,819
b.
Yes, savings of $312,397
c.
No, loss of $37,181
d.
No, loss of $35,100
113. Average daily sales for Sierra are $140,000. The financial manager can reduce the float by 4 days
using a lockbox system that will cost $33,000. If the opportunity cost of any funds released is 11
percent, what is the annual savings from this system?
a.
$28,600
b.
$14,520
c.
$61,600
d.
$17,600
114. Lexicon has a daily average check collections of $180,000 and it takes the firm 5 days before it can
completely process those checks. An automated lockbox system that costs $33,000 a year would
reduce the processing time by 2 days. Should Lexicon invest in this system if the opportunity cost of
short-term funds is 12.3 percent?
a.
Yes, savings of $44,280
b.
Yes, savings of $33,420
c.
Yes, savings of $11,280
d.
No, loss of $10,860
115. Marcos Company annual sales are $730 million. Suppose Marcos is able to reduce the time required to
process customer payments by 3 days through more efficient payment processing techniques. Given
that any funds released by these methods can be invested elsewhere in the company to yield a 15%
pretax rate of return, determine the annual increase in pretax returns. (Assume 365 days per year in all
calculations.)
a.
$900,000
b.
$300,000
c.
$6,000,000
d.
cannot be determined with information provided
116. Jester, Inc. has annual sales of $434 million. An average of 12 days elapses between the time a
customer mails its payment and the funds are available to Jester. What is the increase in the average
cash balance if the use of a lock box system is believed to reduce the collection time by 4 days?
a.
$4.76 million
b.
$49.6 million
c.
$633,640
d.
$9.5 million
117. Galway’s sales average $12 million per day. If Galway could reduce the time between customer’s
mailing date and when these payments are available to Galway by 3 days, what would be the resulting
annual increase in earnings if the opportunity cost of funds in 9.25%?
a.
$1.11 million
b.
$98,630
c.
$3.33 million
d.
$9,123
118. Mace Auto Parts Company sells to retail auto supply stores on credit terms of “net 60”. Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm’s variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting
from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace’s average
collection period.
a.
88 days
b.
44 days
c.
74 days
d.
60 days
119. Mace Auto Parts Company sells to retail auto supply stores on credit terms of “net 60”. Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm’s variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting
from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace’s average
investment in receivables.
a.
$ 821,918
b.
$ 3,409,091
c.
$72,328,767
d.
$616,438
120. Mace Auto Parts Company sells to retail auto supply stores on credit terms of “net 60″. Annual credit
sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue.
The firm’s variable cost ratio is 0.75 (i.e. variable costs are 75 percent of sales). When converting from
annual to daily data or vice versa, assume there are 365 days per year. Suppose that Mace’s sales are
expected to increase by 20 percent next year and, through more effective collection methods, the firm
is able to reduce its average collection period by 20 days. Determine the firm’s average investment in
receivables for next year under these conditions.
a.
$67,068,493
b.
$56,666,667
c.
$5,294,118
d.
$73,972,602
121. Warren Motor Company sells $30 million of its products to wholesalers on terms of “net 30.”
Currently, the firm’s average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills
within 10 days. The firm expects 50 percent of it’s customers to take the discount and it’s average
collection period to decline to 30 days. The firm’s required pretax return (i.e. opportunity cost) on
receivables investment is 16 percent. Determine the cost of the cash discounts to Warren.
a.
$300,000
b.
$ 60,000
c.
$ 40,000
d.
$ 48,000
122. Warren Motor Company sells $30 million of its products to wholesalers on terms of “net 30.”
Currently, the firm’s average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills
within 10 days. The firm expects 50 percent of it’s customers to take the discount and it’s average
collection period to decline to 30 days. The firm’s required pretax return (i.e. opportunity cost) on
receivables investment is 16 percent. Determine Warren’s pretax earnings on the funds released from
the reduction in receivables. (Assume a 365 day year)
a.
$1,479,452
b.
$236,712
c.
$266,667
d.
none of the above
123. Warren Motor Company sells $30 million of its products to wholesalers on terms of “net 30.”
Currently, the firm’s average collection period is 48 days. In an effort to speed up the collection of
receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills
within 10 days. The firm expects 50 percent of it’s customers to take the discount and it’s average
collection period to decline to 30 days. The firm’s required pretax return (i.e. opportunity cost) on
receivables investment is 16 percent. Determine the net effect on Warren’s pretax profits of offering a
2 percent cash discount.
a.
$ 300,000
b.
$236,712
c.
-$63,288
d.
none of the above
124. Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of
being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million
annually. Based on past experience with these types of customers, the firm estimates that the average
collection period would be 90 days and that the bad-debt loss ratio would be 6 percent. The firm’s
variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries’ required
pretax return (i.e., opportunity cost) on receivables investments is 20 percent. When converting from
annual to daily or vice versa, assume there are 365 days per year. If Bluegrass Distilleries extends
credit to these (previously delinquent) customers, determine the increase in the investment in
receivables.
a.
$27,397
b.
$2,465,753
c.
$111,111
d.
$125,000
125. Whirlewind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are
$182,500,000 spread evenly throughout the year and its accounts average 20 days overdue. The firm’s
variable cost ratio is 0.70. Determine Whirlewind’s average investment in receivables. (Assume 365
days per year an all calculations.)
a.
$17,500,000
b.
$25,000,000
c.
$15,000,000
d.
cannot be computed with the information provided
126. Gates Industries balance sheet and income statement for the year ending December 31, 200X are as
follows:
Balance Sheet ($ million)
Cash
$10.0
Accounts payable
$15.0
Accounts receivable
15.0
Salaries, benefits, & payroll taxes payable
3.0
Inventories*
12.0
Long-term debt
15.0
Fixed assets (net)
30.0
Stockholders’ equity
34.0
Total assets
$67.0
Total liab. & stock. equity
$67.0
Income Statement ($ million)
Net sales (all credit)
$125.0
Cost of sales
75.0
Selling, general, & admin. expenses
30.0
Other expenses
13.0
Earnings after tax
$ 7.0
*Note: Average inventories also equal $12.0 (million).
Determine the length of the firm’s cash conversion cycle.
a.
102.2 days
b.
29.2 days
c.
39.6 days
d.
cannot be computed with the information provided
127. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its
St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los
Angeles bank to process payments from its customers in 10 western states. With the lockbox system,
average mailing time for customers from this region would be reduced from 3 days to 1.5 days. Check
clearing time would also be reduced from 4 days to 2.5 days. Annual collections from the western
region are $150 million. Establishment of this lockbox system would reduce the compensating balance
requirement at the firm’s St Louis bank by $600,000 and reduce annual payment processing costs at the
St. Louis office by $30,000. Funds released by the lockbox arrangement can be invested elsewhere in
the firm to earn 12 percent before taxes. The Los Angeles bank has agreed to process Fagins’ customer
payments for an annual fee of $100,000. What are the annual net pretax benefits to Fagins of
establishing a lockbox system with the Los Angeles bank (assume 365 days per year)?
a.
$222,000
b.
$130,000
c.
$1,832,877
d.
$149,945
128. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its
St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los
Angeles bank to process payments from its customers in 10 western states. Average mailing time for
customers from this region would be reduced from 3 days to 1.5 days. In addition, check processing
and clearing time would be reduced from 4 days to 2.5 days. Annual collections from the western
region are $150 million. Establishment of this lockbox system would reduce the compensating balance
requirement at the firm’s St. Louis bank by $600,000 and reduce annual payment processing costs at
the St. Louis office by $30,000. Funds released by the lockbox arrangement can be invested elsewhere
in the firm to earn 12 percent. The Los Angeles bank has agreed to process Fagins’ customer payments
“free of charge” provided that the firm maintains a minimum compensating balance of $1,500,000 in
its account at the bank. What are the annual net benefits to Fagins of establishing a lockbox system
with the Los Angeles bank (assume 365 days per year)?
a.
$630,000
b.
$332,877
c.
$ 69,945
d.
none of the above
129. A Delaware bank has offered to set up a lock-box arrangement to process Union Oil Company of
California’s (UNOCAL) credit card payments from customers in 8 mid-Atlantic states for an annual
fee of $150,000 plus $0.05 per payment. Total collections from this area are $547.5 million annually —
consisting of an average of 10 payments per year from 1,100,000 credit card customers. Average
mailing time for customers from this region would be reduced from 3.5 days currently to 2 days with
the lock-box system. Check processing and clearing time also would be reduced from 5 days presently
to 1.5 days with the lock-box arrangement. Establishment of the lock-box system would reduce annual
payment processing costs at its Los Angeles headquarters by $250,000 and reduce the compensating
balance at its Los Angeles bank by $500,000. The Delaware bank will not require UNOCAL to
maintain a compensating balance if it establishes a lock-box system. Funds released by the lock-box
arrangement can be invested elsewhere in the firm to earn 15% per annum pretax. Determine the net
pretax benefits to UNOCAL of establishing the lock-box system with the Delaware bank. (Assume
365 days per year in the calculations.)
a.
$675,000
b.
$750,000
c.
$500,000
d.
$650,000
130. Lone Star Technologies has annual sales of $336 million. Management has determined that an average
of 8 days elapses between the time customers mail their payments and when the funds are available to
the firm. The cost of reducing the float 3 days will be $60,000. Should Lone Star work to reduce the
float if the increase in cash can be invested to earn 7.5% per annum?
a.
Yes-savings of $9,041
b.
Yes-savings of $147,123
c.
Yes-savings of $78,080
d.
No-loss of $18,080
131. Currently Nemonix is using a decentralized collection system whereby customers mail their checks to
one of the firm’s eight regional locations. Its annual sales are $95 million. Checks are deposited each
business day in a local bank and the amount of the deposit is sent to the firm’s concentration bank in
Dallas. The average time between deposit in the local bank and the availability of those funds, in
Dallas, to Nemonix is 6 days. Nemonix has determined that the use of wire transfers would reduce the
float by four days, but the transfer will cost $7.50. If transfers will be made on the 250 days that banks
are open each year, should Nemonix switch to the wire transfer system? Assume that Nemonix can
earn 8% on the funds released through this more efficient transfer.
a.
Yes-savings of $106,600
b.
Yes-savings of $61,388
c.
Yes-savings of $68,288
d.
No-loss of $6,671
132. Tritonic is considering switching from depository transfer checks to using wire transfers for sending
funds from its local banks to its bank in Chicago. The cost of the wire transfer is $5.25 more than the
cost of depository transfer checks. The change would reduce the total float by 3 days. Tritonic can earn
8.5% on the funds released through the more efficient transfer. If Tritonic has 30 local banks, what
annual sales level would the firm require before the change to wire transfers would be profitable?
Assume there are 250 business days each year.
a.
$391,544,118
b.
$ 56,360,294
c.
$ 84,286,029
d.
$20, 671,875
Sales level =
= $56,360,294
133. Slimware is considering establishing a zero-balance system for its payroll account. Currently, the firm
pays its hourly employees every week on late Friday afternoon and puts a check for $750,000 in the
bank to cover the payroll each Monday morning. Slimware has determined that the checks clear its
bank as follows:
Day
Percent clearing
Monday
26%
Tuesday
51%
Wednesday
14%
Thursday
7%
Friday
2%
What is the annual pretax return to Slimware if the firm can earn 9% on any funds released from
employing the zero-balance system? Assume the company has 52 weekly pay periods each year.
a.
$10,374
b.
$199.72
c.
$24,601
d.
$17,488
Solution:
Mon.
$750,000(0.74)(0.09/365) =
Thur.
$750,000(0.02)(0.09/365) =
134. Amazon’s CFO is considering the fees charged by two banks at trying to determine which is best for
her firm. First American charges a flat $0.11 per payment and First Western requires a minimum
compensating balance of $500,000 plus $0.05 per payment. If Amazon’s cost of funds is 8.50%, and
the expected number of payments per year is 900,000, which bank should be chosen?
a.
FW, savings = $54,000
b.
FA, savings = $23,000
c.
FW, savings = $11,500
d.
FW, savings = $18,500
135. Dupree Funds is considering the fees charges by two banks. First America charges a flat rate of $0.11
per payment and First Western requires a minimum compensating balance of $500,000, plus $0.05 per
payment. What is the number of payments per year where the costs of the two banks will be equal?
Assume Dupree’s costs of funds is 9%.
a.
281,250
b.
750,000
c.
900,000
d.
409,091
ESSAY
1. How does the operating cycle influence the size of the current asset balance of a firm?
2. What are permanent current assets and how are they financed?