chap020solutions

# chap020solutions - Solutions to Chapter 20 Working Capital...

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Solutions to Chapter 20 Working Capital Management 1. a. The discount is: 1% of \$1,000 = \$10 b. The customer gains an extra 40 days of credit. c. With the discount, the customer pays \$990. Without the discount, the customer pays \$1,000. The difference is: \$10/\$990 = 1.01% A rate of 1.01% per 40 days of extra credit is equivalent to an annual rate of: (1.0101) 365/40 1 = 0.0960 = 9.60% 2. open account commercial draft trade acceptance the customer’s banker’s acceptance 3. a. Perishable goods (bread) call for a shorter credit period. b. Rapid inventory turnover (higher turnover ratio) calls for a shorter credit period. c. The firm selling to customers with the more tangible and saleable assets will grant a longer credit period. This is the firm selling to electric utilities. 4. a. The service charge discourages late payment. The due lag decreases and, therefore, pay lag decreases. b. Companies might be forced to stretch payables. Due lag and, therefore, pay lag increase. c. Terms lag increases and, therefore, pay lag increases. 20-1

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5. The current terms allow a 3% discount if the customer gives up an extra 40 – 20 = 20 days of credit. The effective annual rate is: [1 + (3/97)] (365/20) 1 = 0.7435 = 74.35% a. The implicit rate increases because the discount is higher: [1 + (4/96)] (365/20) 1 = 1.1064 = 110.64% b. The implicit rate increases because the extra days of credit ‘bought’ by forfeiting the discount decrease to: 40 – 30 = 10 days [1 + (3/97)] (365/10) 1 = 2.0397 = 203.97% c. The implicit rate increases because the extra days of credit "bought" by forfeiting the discount decreases to: 30 – 20 = 10 days [1 + (3/97)] (365/10) 1 = 2.0397 = 203.97% 6. Ledger balance = starting balance – payments + deposits
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## This note was uploaded on 03/04/2009 for the course FNCE 125 taught by Professor Gani,marcel during the Winter '08 term at Santa Clara.

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chap020solutions - Solutions to Chapter 20 Working Capital...

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