Corporate Finance Adm3350 Assignment 1 Fall 2012

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27.3 – Changes in the Operating Cycle

Operating Cycle = number of days in inventory + number of days in receivables a) Receivables average goes up. Operating cycle increases.
b) Credit repayment times for customers are increased. Operating cycle increases. c) Inventory turnover goes from 3 times to 6 times. Operating cycle decreases. d) Payables turnover goes from 6 times to 11 times. No change. e) Receivables turnover goes from 7 times to 9 times. Operating cycle decreases. f) Payments to suppliers are accelerated. No change.

27.6 – Calculating Cycles

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Inventory Turnover Ratio = 105817 / [(15382+16147)/2]
Inventory Turnover Ratio = 105817 / [(15382+16147)/2]
Inventory Turnover Ratio = 6.71
Number of days in inventory = 365 / Inventory Turnover Ratio Number of days in inventory = 365 / 6.71
Number of days in inventory = 54.40

Average Receivables Turnover = Credit Sales / Average Accounts Receivable *Note: assume 100% of net sales are credit sales.
Average Receivables Turnover = 143625 / [(12169+12682)/2]
Average Receivables Turnover = 143625 / 12425.5
Average Receivables Turnover = 11.56
Number of days in receivables = 365 / Average Receivables Turnover Number of days in receivables = 365 / 11.56
Number of days in receivables = 31.57

Operating Cycle = Number of days in inventory + number of days in receivables Operating Cycle = 54.40 + 31.57
Operating Cycle = 85.97

Average Payables Deferral Period = Cost of Goods Sold / Average Payables Average Payables Deferral Period = 105817 / [(13408+14108)/2] Average Payables Deferral Period = 7.69
Number of days in payable = 365 / Average Payables Deferral Period Number of days in payable = 365 / 7.69
Number of days in payable = 47.46

Cash Cycle = Operating Cycle – Days in payables
Cash Cycle = 85.97 – 47.47
Cash Cycle = 38.5

The operating cycle of this company is 85.97 days and its cash cycle is 38.5 days. This means that, on average, 85.97 days pass between the arrival of stock/raw material and the receipt of cash. On average, 38.5 days pass between paying for its stock/raw material and receiving cash from the collection of its receivables. 27.8

Input Area:|  |  |  |  |
 |  |  |  |  |
 |  |  |  |  |
Purchases (% of sales)| 75%|  |  |  |
Projected sales Q(1) next year| $ 970 |  |  |  | Expenses (% of sales)| 20%|  |  |  |
Payables period| 60 | days|  |  |
Interest & dividends per Q|  |  |  |  |
 | Q1 | Q2| Q3| Q4|
Sales| $ 830 | $ 1,050 | $ 970 | $ 860 |  |  |  |  |  |
 |  |  |  |  |
Output Area:|  |  |  |  |
 |  |  |  |  |
 |  |  |  |  |
With a payables period of| 60|  |  |  |
 |  |  |  |  |
 | Q1 | Q2| Q3| Q4|
Payment of accounts| $ 677.50 | $ 767.50 | $ 700.00 | $ 672.50 | Wages, taxes, other expenses| 166.00 | 210.00 | 194.00 | 172.00 | Long-term financing expenses| 73.00 | 73.00 | 73.00 | 73.00 | Total| $ 916.50 | $ 1,050.50 | $ 967.00 | $ 917.50 |  |  |  |  |  |

27.15 Short-Term Finance Policy

a) How are the current assets of each firm financed?
The financing of current assets can be measured as the proportion of short term debt compared to long term debt.

Calgary Compressor
Current Liabilities = $34,323
Long term debt = $22,036

Pnew Brunswick Pneumatic
Current Liabilities = $19,672
Long term debt = $0

Calgary Compressor company utilizes long term debts to finance their current assets more than their competitor Pnew Brunswick Pneumatic. Pnew Brunswick Pneumatic utilizes no long term debts and only current liabilities to finance their current liabilities.

b) Which firm has the larger investment in current assets? Why? The size of a firm’s investment in current assets can be...
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