Fi515 Week 7

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Week 7

16-1 Cash Management
Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. 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 5 while maintaining the same level of sales, how much cash will be freed up? Inventory = Sales / inventory turnover ratio

=10 mil/2 = 5 mil
Inventory = Sales / inventory turnover ration
= 10 mil / 5 = 2 mil
Freed up cash= 5 mil– 2 mil = 3 mil

16-2 Receivables Investment
Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day. What is the company’s average account receivable? AR= Credit sales per day x length of collection period

$3,500 x 17 = $59,500

16-3 Cost of Trade Credit
What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30? 30 days, 3% discount is available if paid within 15 days, 365 days a yr Nominal cost of trade credit = ( 3/97) x [365/(30-15)

= 0.0309 ^24.33 = 0.7526 = 75.26% Effective cost of trade credit = (1.03093)24.33 - 1.0 = 1.0984 = 109.84%

16-4 Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer’s effective cost of trade credit? Effective cost of trade credit = (1 + 1/99)8.11 - 1.0

= 0.0849 = 8.49%

16-5 Accounts Payable
A chain of appliance stores, APP Corporation, purchases inventory with a net price of $500,000 each day. The company purchases the inventory under the credit terms of 2/15, net 40. APP always takes the discount but takes the full 15 days to pay its bills. What is the average accounts payable for...
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