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Chapter 15: Working Capital Management
d.
$79,781
e.
$93,589
114. Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off
the discount) are $675,000 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.
$41,684
b.
$51,198
c.
$48,027
d.
$38,965
e.
$45,308
Chapter 15: Working Capital Management
115. Kirk Development 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 $650,000 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.
$106,849
b.
$125,014
c.
$117,534
d.
$123,945
e.
$107,918
Chapter 15: Working Capital Management
116. Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of
1/10, net 20, and it currently takes the discount. One way of acquiring the needed funds would be to forgo the discount,
and the firm's owner believes she could delay payment to 60 days without adverse effects. What would be the effective
annual percentage cost of funds raised by this action? (Assume a 365-day year.)
a.
9.14%
b.
6.24%
c.
7.61%
d.
7.23%
e.
8.98%
117. Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual
commitment fee of 0.5% on 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 9% 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
Chapter 15: Working Capital Management
total dollar annual cost of the revolver?
a.
$715,950
b.
$793,350
c.
$645,000
d.
$735,300
e.
$703,050
118. Soenen Inc. had the following data for last year (in millions). The new CFO believes that the company could improve
its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the
benchmark companies' level without affecting either sales or the costs of goods sold. Soenen 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?
Chapter 15: Working Capital Management
Data
Related CCC
Benchmarks' CCC
Sales
$99,000
Cost of goods sold
$80,000
Inventory (ICP)
$20,000
91.25
38.00
Receivables (DSO)
$16,000
58.99
20.00
Payables (PDP)
$5,000
22.81
30.00
127.43
28.00
a.
$1,467
b.
$1,906
c.
$1,810
d.
$2,058
e.
$1,849
Chapter 15: Working Capital Management
119. Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold are
75% of annual sales, and its receivables 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. Its new CFO wants to decrease the cash conversion cycle by 18 days,
based on a 365-day year. He believes he can reduce the average inventory to $605,885 with no effect on sales. By how
much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle?
a.
$300,997
b.
$234,778
c.
$249,828
d.
$325,077
e.
$310,027
Chapter 15: Working Capital Management
120. Suppose the credit terms offered to your firm by its suppliers are 2/10, net 30 days. Your firm is not taking discounts,
but is paying after 22 days instead of 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.
88.3%
b.
70.4%
c.
77.2%
d.
78.9%
e.
84.9%
121. Aggarwal Inc. buys 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 $350,000. What is the firm's average accounts payable balance? Assume a 365-day
year.
a.
$425,250
b.
$504,000
c.
$525,000
d.
$556,500
e.
$514,500
Chapter 15: Working Capital Management
122. Gonzales Company currently 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 38 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.
32,803
b.
36,084
c.
33,787
d.
32,147
e.
38,052
Chapter 15: Working Capital Management
Chapter 15: Working Capital Management
123. Zarruk Construction’s DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance
sheet shows inventory of $170 million. What is the inventory turnover ratio?
a.
4.98
b.
3.86
c.
4.29
d.
5.20
e.
3.22
124. Madura Inc. wants to increase its free cash flow by $180 million during the coming year, 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 $960 million.
·
Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net
Chapter 15: Working Capital Management
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 operating working capital (in millions of dollars) would enable the firm to meet its target increase in
FCF?
a.
$176
b.
$156
c.
$117
d.
$161
e.
$137
Exhibit 15.1
Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's
annual sales are expected to total $4,400,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are
each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the
Chapter 15: Working Capital Management
125. Refer to Exhibit 15.1. If the firm adopts a restricted policy, how much lower would its interest expense be than under
the relaxed policy?
a.
$13,320
b.
$14,520
c.
$12,000
d.
$11,400
e.
$13,920
Chapter 15: Working Capital Management
126. Refer to Exhibit 15.1. What's the difference in the projected ROEs under the restricted and relaxed policies?
a.
1.52%
b.
0.97%
c.
1.23%
d.
1.25%
e.
1.26%
Chapter 15: Working Capital Management
127. Refer to Exhibit 16.1. 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.
1.83%
b.
1.88%
c.
2.21%
d.
1.55%
e.
2.12%
Chapter 15: Working Capital Management
