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FI515_Homework7_nancy_herrera - Nancy Herrera Homework7...

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Nancy Herrera FI515 Homework7 P 16-1 Cash Management Inventory level = Sales / inventory turnover ratio $5,000,000 = $10,000,000 / $2,000,000 If the company can improve its inventory turnover ratio to 5, then its inventory level will fall to $2,000,000 = $10,000,000 / $5,000,000 The difference of the change in inventory boosts free cash flow by $3,000,000 $5,000,000 -$2,000,000 = $3,000,000 P16-2 Receivables Investment Average A/R = credit sales per day x length of collection period $59,500 = $3,500 x 17 days P16-3 Cost of Trade Credit Nominal and Effective cost of trade credit under credit terms of 3/15 net 30 Discount percentage / (100- Discount percentage) X 365 / (Days credit is outstanding - Discount period) = Nominal cost of trade credit 3 / (100-3) x 365 / (30-15) = .75257 (multiply by 100 to get percentage) 0.030927835 x 24.33333333 = r NOM = 75.26%
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Nancy Herrera FI515 Homework7 (1 + i/n) n – 1 = Effective annual rate Where r is the effective annual rate, i the nominal rate, & n the number of compounding periods per yr (1 + 0.030927835 ) 24.333 -1.0 = 2.098376383 – 1.0 = 1.098376383 (multiply by 100 to get %) =
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