Financial management questions

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A:Primrose Corp has $18 million of sales, $1 million of inventories, $4 million of receivables, and $1 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 7% rate. Assume 365 days in year for your calculations. Round intermediate steps to 2 decimal places.

  1. What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places.
     days

  2. If Primrose could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places.
     days

  3. How much cash would be freed-up? Round your answer to the nearest cent.


    By how much would pre-tax profits change? Round your answer to the nearest cent.
B:

Lamar Lumber Company has sales of $9 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $1.35 million. Assume 365 days in year for your calculations.

  1. What is Lamar's DSO? Round your answer to two decimal places.
     days

  2. What would DSO be if all customers paid on time? Round your answer to two decimal places.
     days

  3. How much capital would be released if Lamar could take actions that led to on-time payments? Round your answer to the nearest cent.
C: 

Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 35; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. Assume 365 days in year for your calculations. 

  1. If Lamar decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

  2. What would be the nominal cost of that credit? Round your answer to two decimal places.
    %

  3. What would be the effective cost of that credit? Round your answer to two decimal places.
    %

  4. If the company could get the funds from a bank at a rate of 12%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to two decimal places.
D: 

Zocco Corporation has an inventory conversion period of 66 days, an average collection period of 27 days, and a payables deferral period of 44 days. Assume 365 days in year for your calculations.

  1. What is the length of the cash conversion cycle? Round your answer to two decimal places.
     days

  2. If Zocco's annual sales are $3,424,835 and all sales are on credit, what is the investment in accounts receivable? Round your answer to the nearest cent.

  3. How many times per year does Zocco turn over its inventory? Assume that cost of goods sold is 75% of sales. Round your answer to two decimal places.
E:

McDowell Industries sells on terms of 3/10, net 40. Total sales for the year are $1,226,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases. Assume 365 days in year for your calculations.

  1. What is the days' sales outstanding? Round your answer to two decimal places.
     days

  2. What is the average amount of receivables? Round your answer to the nearest cent.

  3. What is the percentage cost of trade credit to customers who take the discount? Round your answer to two decimal places.
    %

  4. What is the percentage cost of trade credit to customers who do not take the discount and pay on Day 70? Round your answers to two decimal places.
    Nominal cost: %

    Effective cost: %

  5. What would happen to McDowell’s accounts receivables if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 40th day? Round your answers to two decimal places.
    DSO =  days

    Average receivables = $ 
F: 

Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,700 batteries a day at a cost of $4 per battery for materials and labor. It takes the firm 23 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. Assume 365 days in year for your calculations.

  1. What is the length of Prestopino's cash conversion cycle? Round your answer to two decimal places.
     days

  2. At a steady state in which Prestopino produces 1,700 batteries a day, what amount of working capital must it finance? Round your answer to the nearest cent.

  3. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 47 days? Round your answer to the nearest cent.

  4. Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 15 days and to increase its daily production to 1,950 batteries. However, the new process would cause the cost of materials and labor to increase to $11. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Round your answers to two decimal places.

    Cash conversion cycle days
    Working capital financing

G: 

Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie's 2012 sales (all on credit) were $134,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $4,020. It turned over its inventory 7 times during the year, and its DSO was 36.5 days. The firm had fixed assets totaling $40,000. Christie's payables deferral period is 45 days. Assume 365 days in year for your calculations.

  1. Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
     days

  2. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.

    Total assets
    ROA%

  3. Suppose Christie's managers believe that the inventory turnover can be raised to 8.2 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.2 for 2012?

    Cash conversion cycle days
    Total assets
    ROA%

H: 

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short-term and longer-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current asset level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 11% of total sales, and the federal-plus-state tax rate is 40%.

  1. What is the expected return on equity under each current asset level? Round your answers to two decimal places.

    Restricted policy%
    Moderate policy%
    Relaxed policy%
I: 

Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit; and it keeps its central billing system there. On average, it takes 4 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days-bringing it down to 1 day. HGC receives an average of $2,100,000 in payments per day.

  1. How much free cash would HGC generate if it implemented the lockbox system? Round your answer to the nearest cent.


    Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow?


    How would growth affect your answer?
    If the firm grows, cash flow 

  2. If HGC has an opportunity cost of 6%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest cent.

  3. What is the maximum monthly charge HGC should pay for the lockbox system? Round your answer to the nearest cent.

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