Structured Finance Week7

Structured Finance Week7 - $3,000,000 16-2 Receivables...

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Structured Finance Homework week 7
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16-1 Cash Management 1. Data: Inventory Turnover Ratio = cost of goods sold / average inventory. Inventory Turnover Ratio I = 2 Sales I = $10 million Sales II = Sales I = $10 million Inventory Turnover Ratio II = 5 2. Calculations: Inventory Turnover Ratio = Sales/Inventory. Because Sales is $10 million, and Inventory Turnover Ratio = 2, then the average Inventory for the year must be $5 million. (equation) We know that Inventory Turnover Ratio goes up to 5 (and Sales remains constant), so then average inventory on hand must be $2 million. (equation) Now, that means that $3 million in cash will be freed up ($5 million - $2 million = $3 million) Answer : The amount of cash that will be freed up is
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Unformatted text preview: $3,000,000 . 16-2 Receivables Investment 2. Calculations: Firms Average Investment = Daily Credit Sales x Average Collection Period. Firms Average Investment = 17 * $3,500 = $59,500. Answer: The Average Investment AR is $59,500 16-3 Cost of Trade Credit 1. Data 3/97 = 0.0309 (365/30-15) = 24.33 2. Calculations: The nominal cost of trade credit = (3/97) * (365/30-15) = 75.26% The effective cost of trade credit = (1 + 0.0309) 24.33 – 1 = 109.84% 16-4 Cost of Trade Credit Effective cost of trade credit EAR = (1 + periodic rate) N – 1 1/99 = 0.0101 N = (365/60-15) = 8.1111 EAR = (1.0101) 8.1111-1 = 8.49% 16-5 Accounts Payable Average Accounts Payable is $500,000 * 15 = $7,500,000....
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