Homework 12 Fin 607

  1. ABC Resources last year reported cost of goods sold of $125 million and an inventory turnover ratio of 3.5. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 4.5 while maintaining the same level of sales, how much cash will be freed up?


  1. Englander Electronics sells on terms of 3/10, net 30. Total sales for the year are $3,250,000. Thirty-five percent of customers pay on the 10th day and take discounts; the         other 65% pay, on average, 44 days after their purchases.


  1. What is the days sales outstanding?
  2. What is the average amount of receivables?
  3. What would happen to average receivables if Merva toughened its collection policy with the result that all nondiscount customers paid on the 32th day?


  1. Barry’s Bicycles is considering changes in its working capital policies to improve its cash flow cycle. Barry’s sales last year were $7,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 7.5 times during the year, and its DSO was 39 days. Its annual cost of goods sold was $3,200,000. The firm had fixed assets totaling $785,000. Barry’s payables deferral period is 41 days.


  1. Calculate Barry’s cash conversion cycle.
  2. Assuming Barry’s holds negligible amounts of cash and marketable securities,

calculate its total assets turnover and ROA.

  1. Suppose Barry’s managers believe the annual inventory turnover can be raised to 8.5 times without affecting sales. What would Barry’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.5 for the year?


  1. Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume that payment is made either on the discount date or on the due date.


  1. 2/15, net 35
  2. 1/10, net 30
  3. 2.5/15, net 45
  4. 3/ 10, net 50
  5. 2/15, net 40


Some videos you may find helpful.


Short Term Financing


Cash Budgets


Operating and Cash Cycle


Cash Conversion Cycle


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