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Chapter 15: Working Capital Management
95. Data on Shick Inc. for last year are shown below, along with the days sales outstanding of the firms against which it
benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the
benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.
Sales
$111,000
Accounts receivable
$16,000
Days Sales Outstanding (DSO)
52.61
Benchmarks' Days Sales Outstanding (DSO)
20.00
a.
$9,124
b.
$8,331
c.
$12,100
d.
$9,918
e.
$7,538
Chapter 15: Working Capital Management
96. Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its
monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?
a.
15.2 days
b.
14.0 days
c.
15.7 days
d.
13.7 days
e.
14.8 days
Chapter 15: Working Capital Management
97. Data on Shin Inc for last year are shown below, along with the inventory conversion period (ICP) of the firms against
which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP
to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.
Cost of goods sold =
$71,000
Inventory =
$20,000
Inventory Conversion Period (ICP) =
102.82
Benchmark Inventory Conversion Period (ICP) =
38.00
a.
$12,608
b.
$14,752
c.
$11,221
d.
$11,347
e.
$12,482
Chapter 15: Working Capital Management
98. Data on Wentz Inc. for last year are shown below, along with the payables deferral period (PDP) for the firms against
which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to
the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year.
Cost of goods sold =
$77,000
Payables =
$5,000
Payables Deferral Period (PDP) =
23.70
Benchmark Payables Deferral Period =
30.00
a.
$1,036
b.
$1,382
c.
$1,342
d.
$1,648
e.
$1,329
99. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable
Chapter 15: Working Capital Management
but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine
the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash
conversion cycle?
Average inventory =
$75,000
Annual sales =
$775,000
Annual cost of goods sold =
$465,000
Average accounts receivable =
$160,000
Average accounts payable =
$25,000
a.
128.4 days
b.
121.5 days
c.
87.1 days
d.
114.6 days
e.
88.2 days
100. Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash
conversion cycle? Round your answer to the nearest day.
Annual sales =
$53,000
Annual cost of goods sold =
$37,100
Inventory =
$4,000
Accounts receivable =
$2,000
Accounts payable =
$2,400
Chapter 15: Working Capital Management
a.
29 days
b.
25 days
c.
30 days
d.
36 days
e.
33 days
101. Zervos Inc. had the following data for last year (in millions). The new CFO believes (1) that an improved inventory
management system could lower the average inventory by $4,000, (2) that improvements in the credit department could
reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby
increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs
of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
Original
Revised
Annual sales: unchanged
$117,000
$117,000
Cost of goods sold: unchanged
$80,000
$80,000
Average inventory: lowered by $4,000
$20,000
$16,000
Chapter 15: Working Capital Management
Average receivables: lowered by $2,000
$16,000
$14,000
Average payables: increased by $2,000
$10,000
$12,000
Days in year
365
365
a.
40.3 days
b.
37.6 days
c.
39.7 days
d.
33.6 days
e.
32.6 days
102. Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion
cycle? Round to the nearest whole day.
Annual sales =
$45,000
Annual cost of goods sold =
$22,500
Inventory =
$4,500
Accounts receivable =
$1,800
Accounts payable =
$2,500
Chapter 15: Working Capital Management
a.
47 days
b.
56 days
c.
52 days
d.
54 days
e.
58 days
103. Edison Inc. has annual sales of $41,610,000, or $114,000 a day on a 365-day basis. The firm's cost of goods sold are
75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is
looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20%
reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales
by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on
the company's cash conversion cycle? Round to the nearest whole day.
a.
–16 days
Chapter 15: Working Capital Management
b.
–21 days
c.
–17 days
d.
–19 days
e.
–22 days
104. Van Den Borsh Corp. has annual sales of $68,735,000, an average inventory level of $15,012,000, and average
accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on
credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its
suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be
lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle,
assuming a 365-day year? Round to the nearest whole day.
a.
–34 days
Chapter 15: Working Capital Management
b.
–27 days
c.
–31 days
d.
–25 days
e.
–32 days
105. Nogueiras Corp’s budgeted monthly sales are $10,500, and they are constant from month to month. 40% of its
customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale
and do not receive a discount. The firm has no bad debts. Purchases for next month’s sales are constant at 50% of
projected sales for the next month. "Other payments", which include wages, rent, and taxes, are 25% of sales for the
current month. Construct a cash budget for a typical month and calculate the average cash gain or loss during the month.
a.
$2,007
b.
$2,236
c.
$2,998
Chapter 15: Working Capital Management
d.
$2,541
e.
$1,931
106. Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The
firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 6.75% annual
interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this
would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be
realized?
a.
$22,313
b.
$16,313
c.
$18,750
Chapter 15: Working Capital Management
d.
$21,375
e.
$20,438
107. A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 85 days. What is the
nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
a.
17.58%
b.
15.00%
c.
18.55%
d.
16.13%
e.
13.22%
Chapter 15: Working Capital Management
108. Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 65 days after the
invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade
credit, based on a 365-day year?
a.
16.83%
b.
14.90%
c.
11.17%
d.
12.51%
e.
14.60%
Chapter 15: Working Capital Management
109. Your company 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 145 days after the purchase? (Assume a 365-day year.)
a.
14.81%
b.
15.74%
c.
13.22%
d.
11.77%
e.
13.89%
110. Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 55. 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.
24.49%
b.
20.24%
c.
19.03%
Chapter 15: Working Capital Management
d.
18.62%
e.
17.00%
111. A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 85 days. What is the
effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
a.
10.05%
b.
10.55%
c.
7.84%
d.
8.64%
e.
9.55%
Chapter 15: Working Capital Management
112. Buskirk Construction 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 $500,000 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.
$24,863
b.
$19,315
c.
$16,644
d.
$20,548
e.
$18,699
113. Ingram Office Supplies, 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 $800,000 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.
$91,288
b.
$76,712
c.
$83,616
