Fin 3000 – Managerial Finance

September 2012/2012

Problems:

14-1 Net Working Capital Requirements JohnBoy Industries has a cash balance of $45,000, accounts payable of $125,000, inventory of $175,000, accounts receivable of $210,000, notes payable of $120,000, and accrued wages and taxes of $37,000. How much net working capital does the firm need to fund? (LG2)

NWC = CA – CL = ($45,000 + $210,000 + $175,000) – ($125,000 + $120,000 + $37,000) = $148,000.

14-3 Days’ Sales in Inventory Dabble, Inc., has sales of $980,000 and cost of goods sold of $640,000. The firm had a beginning inventory of $36,000 and an ending inventory of $46,000. What is the length of the days’ sales in inventory? (LG3)

Days’ sales in inventory = (Inventory × 365 days) / Cost of goods sold = ($46,000 × 365 days) / $640,000 = 26.23 days.

14-5 Average Payment Period If a firm has a cash cycle of 67 days and an operating cycle of 104 days, what is its average payment period? (LG3)

Using equation 14-2: 14-7 Payables Turnover If a firm has a cash cycle of 73 days and an operating cycle of 127 days, what is its payables turnover? (LG3)

Using equation 14-2:

Payables turnover will be 365 days / 54 days = 6.76 times

14-11 Collection Float CM Enterprises estimates that it takes, on average, three days for their customers’ payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and two more days for the check to clear once they are deposited. What is their collection float? (LG9)

Collection float = 3 days + 1 day + 2 days = 6 days

Intermediate Problems:

14-13 Operating Cycle Suppose that Dunn Industries has annual sales of $2,300,000, cost of goods sold of $1,650,000, average inventories of $1,116,000, and average accounts receivable of $750,000. Assuming that all of Dunn’s sales are on credit, what will be the firm’s operating cycle? (LG3)

Using equation 14-1: 14-15 Cash Cycle Suppose that LilyMac