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Jessica Schmitt

Finance Module 7
15-1:
a.
b.
c.
d.

Operating Cycle: 90 days + 60 days = 150 days


Cash Conversion Cycle: 150 days 30 days = 120 days
Resources Needed: (30,000,000/365) x 120 = $9,863,013.70
Management can reduce the cash conversion cycle by shortening the
average age or inventory or the average collection period. They could also
lengthen the average payment period.

15-4:
a.
Month
January
February
March
April
May
June
July
August
September
October
November
December

Total Funds
Requ.
$2,000,000
$2,000,000
$2,000,000
$4,000,000
$6,000,000
$9,000,000
$12,000,000
$14,000,000
$9,000,000
$5,000,000
$4,000,000
$3,000,000

Permanent
Requ.
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000

Seasonal
Requ.
$0
$0
$0
$2,000,000
$4,000,000
$7,000,000
$10,000,000
$12,000,000
$7,000,000
$3,000,000
$2,000,000
$1,000,000

b. 1. With an aggressive funding strategy, the firm would borrow anywhere from
$1,000,000 to $12,000,000 based on the season requirement schedule for
short term financing, and would borrow $2,000,000 (which is the permanent
portion of requirements) for long-term financing.
2. With a conservative funding strategy, the firm would borrow $14,000,000
c.

Aggressive = (2,000,000 x .17) + (4,000,000 x .12) = $820,000


Conservative = (14,000,000 x .17) = $2,380,000

d.
The aggressive strategy appears to be more attractive based on the
difference in financing costs, and as always, higher risks can lead to higher
returns. The conservative strategy requires the firm to pay interested on funds
that arent needed and so the cost is higher.

15-15
a. Cash made available: 3,240,000/365 = 8,877 x 3 = $26,631
b. Net benefit: 26,631 x .15 = $3995. The firm should not adopt the proposed
lockbox system because the cost exceeds the benefit.
16-2:
a.
b.
c.
d.
e.
f.
g.

(.02/.98)
(.01/.99)
(.02/.98)
(.03/.97)
(.01/.99)
(.03/.97)
(.04/.96)

x
x
x
x
x
x
x

(365/20) = 37.24%
(365/20) = 18.43%
(365/35) = 21.28%
(365/35) = 32.25%
(365/50) = 7.37%
(365/20) = 56.44%
(365/170) = 8.95%

Integrative case 7
a. Operating Cycle: 110 days + 75 days = 185 days
Cash Conversion Cycle: 185 days -30 days = 155 days
Resources needed: (26,500,000/360) x 155 = $11,409,722
b. Industry OC: 83 days + 75 days = 158 days
Industry CCC: 158 days -39 days = 119 days
Industry resources needed: (26,500,000/360) x 119 = $8,759,722
c. Cost of inefficiency: 11,409,722 8,759,722 = 2,650,000 x .15 = $397,500
d. 1. Reduction in collection period: 75 days x (1-.4) = 45 days
Operating cycle: 83 days + 45 days = 128 days
Cash Conversion Cycle: 128 days 39 days = 89 days
Resources needed: (26,500,000/360) x 89 = $6,551,389
Additional Savings: 8759,722 6,551,389 = 2,208,333 x .15 = $331,250
2. Reduction in sales: 40,000,000 x.45 x .03 = $540,000
3. Average investment in accounts receivable assuming no cash discount:
Net average collection period = 45 days
(40,000,000 x .80) + (360 +45) = $4,000,000
Average investment in AR assuming no cash discount: (40,000,000 x .80)
+(360 + 75) =
$6,666,667
Reduction in investment in AR: $6,666,667 -$4,000,000 = $2,666,667

Annual savings: $2,666,667 x .15 = $400,000


4. Reduction in bad debt expense: 40,000,000 x (.02 -.015) = $200,000
5. Savings due to cash discount: -540,000 + 400,000 +200,000 = $60,000
e. The recommendations I would offer to her include offering the proposed cash
discount and bringing the working capital measures in line with the industry.
f. The

key unsecured sources of short term financing include:


Single payment bank loans
Lines of credit
Short term self-liquidating loans
Revolving credit agreement

The key secured sources of short term financing include:


Pledging accounts receivable
Factoring accounts receivable
Warehouse receipt loans
Trust receipt inventory loans