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Chapter 16: Working Capital Conceptual M/C Page 579
typically calculated (with sales per day = Sales for past 12
months/365) would probably be lower in October than in August.
Page 580 M/C Problems Chapter 16: Working Capital
86. Which of the following statements is CORRECT?
a. Accruals are an expensive but commonly used way to finance working
capital.
b. A conservative financing policy is one where the firm finances part
of its fixed assets with short-term capital and all of its net
working capital with short-term funds.
c. If a company receives trade credit under terms of 2/10, net 30, this
implies that the company has 10 days of free trade credit.
d. One cannot tell if a firm has a conservative, aggressive, or
moderate current asset financing policy without an examination of
its cash budget.
e. If a firm has a relatively aggressive current asset financing policy
vis-à-vis other firms in its industry, then its current ratio will
probably be relatively high.
Multiple Choice: Problems
87. Halka Company is a no-growth firm. Its sales fluctuate seasonally,
causing total assets to vary from $320,000 to $410,000, but fixed
assets remain constant at $260,000. If the firm follows a maturity
matching (or moderate) working capital financing policy, what is the
most likely total of long-term debt plus equity capital?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000
88. Cass & Company has the following data. What is the firm's cash
conversion cycle?
Inventory conversion period = 50 days
Receivables collection period = 17 days
Payables deferral period = 25 days
a. 31 days
b. 34 days
c. 38 days
d. 42 days
e. 46 days
Chapter 16: Working Capital M/C Problems Page 581
89. Romano Inc. has the following data. What is the firm's cash conversion
cycle?
Inventory conversion period = 38 days
Receivables collection period = 19 days
Payables deferral period = 20 days
a. 33 days
b. 37 days
c. 41 days
d. 45 days
e. 49 days
90. Whittington Inc. has the following data. What is the firm's cash
conversion cycle?
Inventory conversion period = 41 days
Receivables collection period = 31 days
Payables deferral period = 38 days
a. 31 days
b. 34 days
c. 37 days
d. 41 days
e. 45 days
91. Inmoo Company’s average age of accounts receivable is 45 days, the
average age of accounts payable is 40 days, and the average age of
inventory is 69 days. Assuming a 365-day year, what is the length of
its cash conversion cycle?
a. 63 days
b. 67 days
c. 70 days
d. 74 days
e. 78 days
92. Singal Inc. is preparing its cash budget. It expects to have sales of
$30,000 in January, $35,000 in February, and $35,000 in March. If 20%
of sales are for cash, 40% are credit sales paid in the month after the
sale, and another 40% are credit sales paid 2 months after the sale,
what are the expected cash receipts for March?
a. $24,057
b. $26,730
c. $29,700
d. $33,000
e. $36,300
Page 582 M/C Problems Chapter 16: Working Capital
93. Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days
sales outstanding was DSO = 35 days. What was its average receivables
balance, based on a 365-day year?
a. $335,616
b. $352,397
c. $370,017
d. $388,518
e. $407,944
94. Edwards Enterprises follows a moderate current asset investment policy,
but it is now considering a change, perhaps to a restricted or maybe to
a relaxed policy. The firm’s annual sales are $400,000; its fixed
assets are $100,000; its target capital structure calls for 50% debt
and 50% equity; its EBIT is $35,000; the interest rate on its debt is
10%; and its tax rate is 40%. With a restricted policy, current assets
will be 15% of sales, while under a relaxed policy they will be 25% of
sales. What is the difference in the projected ROEs between the
restricted and relaxed policies?
a. 4.25%
b. 4.73%
c. 5.25%
d. 5.78%
e. 6.35%
95. Data on Shick Inc. for 2012 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 $110,000
Accounts receivable $16,000
Days sales outstanding (DSO) 53.09
Benchmarks' days sales outstanding (DSO) 20.00
a. $ 8,078
b. $ 8,975
c. $ 9,973
d. $10,970
e. $12,067
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. 11.7 days
b. 13.0 days
c. 14.4 days
Chapter 16: Working Capital M/C Problems Page 583
d. 15.2 days
e. 16.7 days
97. Data on Shin Inc for 2012 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 = $85,000
Inventory = $20,000
Inventory conversion period (ICP) = 85.88
Benchmark inventory conversion period (ICP) = 38.00
a. $ 7,316
b. $ 8,129
c. $ 9,032
d. $10,036
e. $11,151
98. Data on Wentz Inc. for 2012 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 = $75,000
Payables = $5,000
Payables deferral period (PDP) = 24.33
Benchmark payables deferral period = 30.00
a. $ 764
b. $ 849
c. $ 943
d. $1,048
e. $1,164
99. Your consulting firm was recently hired to improve the performance of
Shin-Soenen Inc, which is highly profitable 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 = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
a. 120.6 days
b. 126.9 days
Page 584 M/C Problems Chapter 16: Working Capital
c. 133.6 days
d. 140.6 days
e. 148.0 days
Chapter 16: Working Capital M/C Problems Page 585
100. Dewey Corporation has the following data, in thousands. Assuming a
365-day year, what is the firm's cash conversion cycle?
Annual sales = $45,000
Annual cost of goods sold = $31,500
Inventory = $4,000
Accounts receivable = $2,000
Accounts payable = $2,400
a. 25 days
b. 28 days
c. 31 days
d. 35 days
e. 38 days
101. Desai Inc. has the following data, in thousands. Assuming a 365-day
year, what is the firm's cash conversion cycle?
Annual sales = $45,000
Annual cost of goods sold = $30,000
Inventory = $4,500
Accounts receivable = $1,800
Accounts payable = $2,500
a. 28 days
b. 32 days
c. 35 days
d. 39 days
e. 43 days
102. Zervos Inc. had the following data for 2012 (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 $110,000 $110,000
Cost of goods sold: unchanged $80,000 $80,000
Average inventory: lowered by $4,000 $20,000 $16,000
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. 34.0 days
b. 37.4 days
c. 41.2 days
d. 45.3 days
Page 586 M/C Problems Chapter 16: Working Capital
e. 49.8 days
Chapter 16: Working Capital M/C Problems Page 587
103. Edison Inc. has annual sales of $36,500,000, or $100,000 a day on a
365-day basis. The firm's cost of goods sold is 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. -26 days
b. -22 days
c. -18 days
d. -14 days
e. -11 days
104. Van Den Borsh Corp. has annual sales of $50,735,000, 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?
a. -26.6 days
b. -29.5 days
c. -32.8 days
d. -36.4 days
e. -40.5 days
105. Nogueiras Corp’s budgeted monthly sales are $5,000, 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. $1,092
b. $1,150
c. $1,210
d. $1,271
e. $1,334
Page 588 M/C Problems Chapter 16: Working Capital
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 11% 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. $29,160
b. $32,400
c. $36,000
d. $40,000
e. $44,000
107. A firm buys on terms of 3/15, net 45. It does not take the discount,
and it generally pays after 60 days. What is the nominal annual
percentage cost of its non-free trade credit, based on a 365-day year?
a. 25.09%
b. 27.59%
c. 30.35%
d. 33.39%
e. 36.73%
108. Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take
discounts, and it typically pays 60 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. 10.86%
b. 12.07%
c. 13.41%
d. 14.90%
e. 16.55%
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 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%
Chapter 16: Working Capital M/C Problems Page 589
110. Bumpas Enterprises 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%
111. A firm 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%
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 $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
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 $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
Page 590 M/C Problems Chapter 16: Working Capital
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
$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
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 $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
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 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%
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% 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 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 total dollar
annual cost of the revolver?
a. $612,750
b. $645,000
Chapter 16: Working Capital M/C Problems Page 591
c. $677,250
d. $711,113
e. $746,668
118. Soenen Inc. had the following data for 2012 (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?
Original Benchmarks’
Data Related CCC CCC
Sales $100,000
Cost of goods sold $80,000
Inventory (ICP) $20,000 91.25 38.00
Receivables (DSO) $16,000 58.40 20.00
Payables (PDP) $5,000 22.81 30.00
126.84 28.00
a. $1,901
b. $2,092
c. $2,301
d. $2,531
e. $2,784
119. Margetis Inc. carries an average inventory of $750,000. Its annual
sales are $10 million, its cost of goods sold is 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 10
days, based on a 365-day year. He 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 its cash conversion cycle?
a. $123,630
b. $130,137
c. $136,986
d. $143,836
e. $151,027
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 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
Page 592 M/C Problems Chapter 16: Working Capital
year?
a. 60.3%
b. 63.5%
c. 66.7%
d. 70.0%
e. 73.5%
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 $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
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 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
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
$125 million. What is the inventory turnover ratio?
a. 4.73
b. 5.26
c. 5.84
d. 6.42
e. 7.07
Chapter 16: Working Capital M/C Problems Page 593
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 $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 operating 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
Multiple Part:
(The following data apply to Problems 125-127.)
Zorn Corporation is deciding whether to pursue a restricted or relaxed
working capital investment policy. The firm's annual sales are expected to
total $3,600,000, 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
company follows a restricted policy, its total assets turnover will be 2.5.
Under a relaxed policy its total assets turnover will be 2.2.
125. 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
126. 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%
Page 594 M/C Problems Chapter 16: Working Capital
127. 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%
