Teacher

FI515 Week 7 Homework
Managerial Finance
Jalil Musah

Problems (pgs. 681-682) 16-1 to 16-5
16-1 Cash Management

Current Inventory = Sales/Current Inventory Turnover Ratio
X = $10,000,000 / 2 = $5,000,000 in Current Inventory

New Inventory = Sales/New Inventory Ratio
X = $10,000,000 / 5 = $2,000,000 in New Inventory

$5,000,000 – 2,000,000 = $3,000,000
The company will free up $3 million in free cash flow.

16-2 Receivables Investment

Receivables = (DSO) * (Average Daily Sales)
X = (17 days) ($3,500)
X = $59,500 is the average accounts receivable

16-3 Cost of Trade Credit

Nominal Cost of Trade Credit = (Discount %) / (100-Discount %) x (365) / (Days Credit is outstanding – Discount Period)
X = 3 / (100 - 3) * 365 / (30-15)
X = 3 / 97 * 365 / 15
X = .0309278350515464 * 24.3333333333333 = .73 or 73%
X = .7525773195875258 or 75.26% is the Nominal Cost of Trade
Effective Cost of Trade = 1 + (Discount %) / (100-Discount %) * [(365) / (DCO-Discount %)] -1
X = 1 + 3 / (100-3) * [365 / (30-15)] -1
X = 4 / 97 * [365 / 15] – 1
X = .0412371134020619 * 24.333333333333333 – 1
X = .0412371134020619 * 23.333333333333333

X = 1.003436426116701 - 1
= 109.84% is the Effective Rate

16-3 part 2 | 0.030928 | | 24.33333 | | 1.030928 | | 2.098398 | | 1.098398 | or 109.84% |

16-4 Cost of Trade Credit

Effective Cost of Trade = 1 + (1 / 100-1) * [365 / (60-15)] -1
X = 1 + (1 / 99) * [365 / 45] -1
X = 1 + .0101010101010101 * 8.1111111111111 – 1
X = 1 + .01010101010101 * 7.1111111111111
X = 1 + .0718294051627378
X = 8.18%
Effective Cost of Trade = 8.49%

16-4 | | 0.010101 | | 8.111111 | | 1.010101 | | 1.084934 | | 0.084934 | or 8.49% |

16-5 Accounts Payable

Average Accounts Payable = (Net Price) (Days of Credit)
X = $500,000 * 15
X = $7,500,000 is the average accounts