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CHAPTER 18
SHORT-TERM FINANCE AND PLANNING
Answers to Concepts Review and Critical Thinking Questions
1. These are firms with relatively long inventory periods and/or relatively long receivables periods.
2. These are firms that have a relatively long time between the time purchased inventory is paid for and
3. a. Use: The cash balance declined by $200 to pay the dividend.
b. Source: The cash balance increased by $500, assuming the goods bought on payables credit
were sold for cash.
4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will
5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible
6. It lengthened its payables period, thereby shortening its cash cycle. It will have no effect on the
8. It is sometimes argued that large firms take advantage of smaller firms by threatening to take their
9. They would like to! The payables period is a subject of much negotiation, and it is one aspect of the
CHAPTER 18 - 2
10. BlueSky will need less financing because it is essentially borrowing more from its suppliers. Among
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this
solutions manual, rounding may appear to have occurred. However, the final answer for each problem is
found without rounding during any step in the problem.
Basic
1. a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised
from the debt offer goes immediately to shareholders.
b. No change. The real estate is paid for by the cash raised from the debt, so this will not change
the cash balance.
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2. The total liabilities and equity of the company are the value of equity, plus current liabilities and
long-term debt, so:
We have NWC other than cash. Since NWC is current assets minus current liabilities, NWC other
than cash is:
NWC other than cash = Accounts receivable + Inventory – Current liabilities
$2,750 = Accounts receivable + Inventory – $2,025
Since total assets must equal total liabilities and equity, we can solve for cash as:
Cash = Total assets – Fixed assets – (Accounts receivable + Inventory)
So, the current assets are:
3. a. Increase. If receivables go up, the time to collect the receivables would increase, which
b. Increase. If credit repayment times are increased, customers will take longer to pay their bills,
4. a. Increase; Increase. If the terms of the cash discount are made less favorable to customers, the
b. Increase; No change. This will shorten the accounts payable period, which will increase the
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c. Decrease; Decrease. If more customers pay in cash, the accounts receivable period will
d. Decrease; Decrease. Assume the accounts payable period does not change. Fewer raw materials
e. Decrease; No change. If more raw materials are purchased on credit, the accounts payable
period will tend to increase, which would decrease the cash cycle. We should say that this may
f. Increase; Increase. If more goods are produced for inventory, the inventory period will increase.
5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
Q1 Q2 Q3 Q4
Beginning receivables $365.00 $425.00 $440.00 $480.00
b. A 60-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
Q1 Q2 Q3 Q4
Beginning receivables $365.00 $566.67 $586.67 $640.00
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c. A 30-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
Q1 Q2 Q3 Q4
Beginning receivables $365.00 $283.33 $293.33 $320.00
6. The operating cycle is the inventory period plus the receivables period. The inventory turnover and
inventory period are:
Inventory turnover = COGS/Average inventory
Inventory period = 365 days/Inventory turnover
And the receivables turnover and receivables period are:
Receivables turnover = Credit sales/Average receivables
Receivables period = 365 days/Receivables turnover
So, the operating cycle is:
The cash cycle is the operating cycle minus the payables period. The payables turnover and payables
period are:
Payables turnover = COGS/Average payables
Payables period = 365 days/Payables turnover
CHAPTER 18 - 6
So, the cash cycle is:
7. If we factor immediately, we receive cash an average of 31 days sooner. The number of periods in a
year are:
The EAR of this arrangement is:
EAR = (1 + Periodic rate)m – 1
8. a. The payables period is zero since the company pays immediately. The payment in each period
is 30 percent of next period’s sales, so:
Q1 Q2 Q3 Q4
b. Since the payables period is 90 days, the payment in each period is one-third of the current
period’s sales, so:
Q1 Q2 Q3 Q4
c. Since the payables period is 60 days, the payment in each period is two-thirds of last quarter’s
orders, plus one-third of this quarter’s orders, or:
Q1 Q2 Q3 Q4
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9. Since the payables period is 60 days, the payables in each period will be:
Q1 Q2 Q3 Q4
Payment of accounts $1,351.25 $1,485.00 $1,287.50 $1,271.25
10. a. The November sales must have been the total uncollected sales minus the uncollected sales
from December, divided by the collection rate two months after the sale, so:
b. The December sales are the uncollected sales from December divided by the collection rate of
the previous months’ sales, so:
c. The collections each month for this company are:
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11. The sales collections each month will be:
Given this collection, the cash budget will be:
April May June
Beginning cash balance $121,000 $80,485 $62,980
Cash receipts
12. Item Source/Use Amount
Cash Source $1,021
Accounts receivable Use –$4,163
Accounts payable Source $1,487
Intermediate
13. a. If you borrow $40,000,000, the compensating balance will be:
Your total repayment will be based on the full amount of the loan including the compensating
balance, so at the end of the year you will owe:
CHAPTER 18 - 9
You will receive your compensating balance back at the end, so the year-end cash flow will be:
However, with the compensating balance, you will only get the use of:
This means the periodic interest rate is:
FV = PV(1 + R)
b. To end up with $13,000,000, you must borrow:
The total interest you will pay on the loan is:
14. a. The EAR of your investment account is:
b. To calculate the EAR of the loan, we can divide the interest on the loan by the amount of the
And the interest you will pay to the bank on the loan is:
So, the EAR of the loan in the amount of $30 million is:
CHAPTER 18 - 10
c. The compensating balance is only applied to the unused portion of the credit line, so the EAR
of a loan on the full credit line is:
