Principles of Finance 6e Chapter 15
Besley/Brigham
15-1
CHAPTER 15
ANSWERS
15-1 A manufacturing firm will order and then receive the materials it needs to produce its product.
Typically, this purchase is on a credit basis, so an account payable is created for the credit
15-2 The cash conversion cycle focuses on the length of time between when the company makes
payments, or invests in the manufacture of inventory, and when it receives cash inflows, or realizes
15-3 If an asset’s life and returns can be positively determined, the maturity of the asset can be matched
to the maturity of the liability incurred to finance the asset. This matching will insure that funds are
15-4 The two principal reasons for holding cash are for transactions and compensating balances.
15-5 Float is the difference between the checking balance reported by the bank and the balance
15-6 A lockbox probably makes more sense for a firm that operates nationwide because such
Chapter 15 Principles of Finance 6e
15-2
15-7 If it can be accomplished without harming customer relationships, a firm would like to speed up
15-8 No, most treasurers are risk averse with regard to their marketable securities portfolios. Remember,
15-9 The four elements in a firm’s credit policy are (a) credit standards, (b) credit terms, (c) collection
15–10 An aging schedule is a report that shows how long accounts receivable have been outstanding. An
15–11 Raw materials are represented by new inventory purchased from suppliers. As long as the firm
15–12 According to the assumptions of the EOQ model presented in this chapter, the model would be
──────────────────────────────────────
SOLUTIONS
15-1 a.
=== 25.11
000,400$
000,500,4$
Inventory
sold goods of Cost
tunrnover Inventory
Principles of Finance 6e Chapter 15
Besley/Brigham
15-3
b.
days 0.32
500,12$
000,400$
360
$4,500,000
$400,000
360
sold goods of Cost
Inventory
period conversion Inventory ==
=
=
15-2 a.
days 0.45
8
360
turnover Inventory
360
period conversion Inventory ===
15-3 a.
=== 0.30
000,80$
000,400,2$
ceivablesRe
Sales
tunrnover ceivablesRe
15-4 a.
days 0.30
12
360
turnover ceivablesRe
360
DSO ===
Sales
Sales
Chapter 15 Principles of Finance 6e
Besley/Brigham
000,180$
000,180$
Payables
0.14
turnover Payables
15-6 a.
days 0.18
20
360
turnover ayablesP
360
DPO ===
15-7 a. Disbursement float = 5 days x $70,000 = $350,000
$1,500
$1,500
A/R
Principles of Finance 6e Chapter 15
Besley/Brigham
15-5
15-10 a.
%54.444454.0
2045
360
97
3
APR ==
−
=
15–11 Accounts payable:
%.213.91392.0 = 4.5)(0.03093)( =
10 – 90
360
0.97
0.03
= cost .Approx =
15–12 a. The quarterly interest rate is equal to 11.25%/4 = 2.8125%.
15–13 a. Cash conversion cycle = 60 + 36 – 24 = 72 days.
Chapter 15 Principles of Finance 6e
Besley/Brigham
15-6
15–14 a. DSO = 0.4(10) + 0.6(40) = 28 days.
b. $900,000/360 = $2,500 sales per day.
15–15 Analysis of change:
Current Proposal
Annual amounts:
Sales $ 3,000,000 $ 2,600,000
Current Policy:
(5,833) 8,333
0
60
0.0306%
Principles of Finance 6e Chapter 15
Besley/Brigham
Proposed Policy:
15–16 a.
2 $25 100,000
EOQ = = 2,500 bags per order
0.20 $4.00
d. Average inventory = (2,500/2) + 1,200 = 1,250 + 1,200 = 2,450 bags or $9,800
15–17 a. Firm’s Bank’s
checkbook records
Day 1 Deposit $1,200,000; write check for $1,600,000 –$ 400,000 $1,200,000
c. Garvin should try to maintain a balance on the bank’s records of $1,200,000. On its own books
it will have a balance of –$5,200,000.
d. For any level of sales, the firm probably will have a higher rate of return on assets and equity if
Chapter 15 Principles of Finance 6e
15-8
Principles of Finance 6e Chapter 15
Besley/Brigham
15-9
Daily amounts:
Sales = (Annual sales)/360 $ 5,556 $ 6,111
Current Policy:
( )
1
360
12.0
+
Proposed Policy:
15-21 a. DSO0ld = (0.40)(15) + (0.30)(30) + (0.30)(40) = 27.0 days.
0
30
r = 0.0333%
45
0
r = 0.0333%
Chapter 15 Principles of Finance 6e
Besley/Brigham
15–10
d. Analysis of change:
Current Proposal
Annual amounts:
Sales $ 2,000,000 $ 2,600,000
Operating expenses (75%) $(1,500,000) $(1,950,000)
Current Policy:
197,1$617,1$621,1$126,2$)167,4$(
=+++=
Proposed Policy:
(5,417) 3,433* 1,769** 1,769**
0
30
0.025%
15
40
0
30
10
40
Principles of Finance 6e Chapter 15
Besley/Brigham
15–11
15-22 Order size (dozen) 250 500 1,000 2,000 13,000 26,000
Number of orders 104 52 26 13 2 1
Average inventory 125 250 500 1,000 6,500 13,000
15-23 a.
units 5,200 = 27,040,000 =
$60.20
338,000$482
=
PPC
TO2
= EOQ
Q
0$16,224,00
+ Q($0.6) =
Chapter 15 Principles of Finance 6e
Besley/Brigham
15–12
Number Average Carrying Ordering Total
Order Size of Orders Inventory Costs Costs Costs
15–24 a. Average daily cost of goods sold = $1.83 million.
b. Average daily sales = $2.29 million
c. Average daily cost of goods sold = $1.83 million
d. Cash conversion cycle on 9/30 = 112 + 55 – 25 = 142 days.
15-25 a. Cash conversion cycle = 22 + 40 – 30 = 32 days.
Principles of Finance 6e Chapter 15
Besley/Brigham
15–13
15–26 a. Effective rate = 12%.
)15.00875.01(000,50$
−−
15-27 (a) Simple interest: rEAR = 12%.
15–28 a. Alternative 1—Discount loan:
Interest – amount Loan
Interest
rate eEffectiv 1 Alt
=
15–14
Alternative 2—Simple interest loan:
Alternative 3—Revolving line of credit:
)0025.0)(000,450$000,000,1($)0925.0(000,450$
amount Loan
fee Commitment Interest
rate eEffectiv 3 Alt
−+
+
=
Principles of Finance 6e Chapter 15
Besley/Brigham
15–15
15–29 Integrative Problem
a. Because cash is a nonearning asset, the goal of cash management is to reduce the amount of
cash held to the minimum necessary to conduct business.
e. A firm can synchronize its cash flows by arranging to bill customers and to pay their own bills
f. SSP’s disbursement float is the amount of funds tied up in checks that have been written but
g. To speed up collections a lockbox plan can be used. A firm arranges to have its customers
send payments to post office boxes in local areas. A local bank picks up the checks, has them
cleared in the local area, and then transfers the funds by wire to the company’s concentration