SU_FIN3030_W5_A2 _Toussaint_E

# SU_FIN3030_W5_A2 _Toussaint_E - Part One Working Capital...

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Part One: Working Capital Analysis Capers, Inc. has just promoted you to Chief financial officer. Since this is a new office in the company, you are The first task you have been assigned concerns the cash conversion cycle. Your boss has asked that you exami 1. Inventory conversion period is 60 Days 2. Payables deferral period is 30 days 3. Receivables collection period of 40 days The second task concerns the cost of bank loans under differing conditions. Specifically: 1. The company needs \$1,500,000 for a new project. 2. The loan will cost 10% simple interest, for 4 months, with a 20% compensating balance. Required: CC= IHP+DSO-DPO Where: CC= Cash conversion cycle IHP represents Inventory holding period DSO represents days sales outstanding DPO represents day’s payable outstanding CC= 60+40-30 =70 days Inventory turnover = 360/ Inventory conversion period =360/60 6 times Average Investment in receivables= Sales/365* Receivable conversion period =4000000/365*40 438356.2 Here Nominal Interest rate= 10%. Effective interest rate= Nominal Interest/( Principal-Compensatory balance) =150000/(1500000-20%*1500000) 0.125 1. What is the firm’s cash conversion cycle? 2. How many times per year is the firm’s inventory turnover, if sales are \$4,000,000 per year?

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