Chapter 15 - Chapter 15 Solutions to End-of-Chapter...

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Unformatted text preview: Chapter 15 Solutions to End-of-Chapter Problems 15-1 1. Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P = $1,000,000; COGS = 0.8(Sales); Interest on bank loan = 8%; CCC = ? CCC = Inventory conversion period + Average collection period – Payables deferral period. Inventory conversion period = day per sold goods of Cost Inventory = 365 / )] 000 , 000 , 15 )($ 8 . [( 000 , 000 , 2 $ = 7123 . 876 , 32 $ 000 , 000 , 2 $ = 60.83 days. Average collection period = Sales/365 s Receivable = 365 / 000 , 000 , 15 $ 000 , 000 , 3 $ = 73 days. Payables deferral period = sold/365 goods of Cost Payables = 7123 . 876 , 32 $ 000 , 000 , 1 $ = 30.42 days. CCC = 60.83 + 73 – 30.42 = 103.41 days. 2. Lower inventories and receivables by 10% each and increase payables by 10%. Sales and COGS remain the same. Inventory = $2,000,000 × 0.9 = $1,800,000. A/R = $3,000,000 × 0.9 = $2,700,000. A/P = $1,000,000 × 1.1 = $1,100,000. Calculate new CCC: Inventory conversion period = 7123 . 876 , 32 $ 000 , 800 , 1 $ = 54.75 days. Average collection period = 365 / 000 , 000 , 15 $ 000 , 700 , 2 $ = 65.70 days. Payables deferral period = 7123 . 876 , 32 $ 000 , 100 , 1 $ = 33.46 days. New CCC = 54.75 + 65.70 – 33.46 = 86.99 days ≈ 87 days. 3. Cash freed up: ∆ Inventory = (60.83 – 54.75) × $32,876.7123 = $199,890.41. ∆ Receivables = (73 – 65.70) × $41,095.8904 = $300,000. ∆ Payables = (33.46 – 30.42) × $32,876.7123 = $99,945.2055. Cash freed up = $199,890.41 + $300,000 – $99,945.2055 = $399,945.2045 ≈ $400,000. $400,000 × 0.08 = $32,000 increase in pre-tax profit. 15-2 Sales = $10,000,000; A/R = $2,000,000; DSO = ? DSO= Sales/365 s Receivable = 365 / 000 , 000 , 10 $ 000 , 000 , 2 $ = 73 days. If all customers paid on time (assuming that it makes no sense for customers to pay earlier than 30 days), then the firm’s DSO = 30 days. If customers paid on time, the firm’s A/R = 30 × $10,000,000/365 = $821,917.81. Cash freed up = $2,000,000 – $821,917.81 = $1,178,082.19. 15-3 Purchases = $8,000,000; terms = 3/5 net 60; currently pays on Day 5 and takes discounts. Forgoes discounts; additional credit = ? $8,000,000/365 × 55 days = $1,205,479.45. Nominal cost of trade credit = 55 5 36 97 3 × = 3.09% × 6.6364 = 20.52%. Effective cost of trade credit = (1 + 3/97) 365/55 – 1 = 1.2240 – 1 = 22.40%....
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This homework help was uploaded on 04/07/2008 for the course FNBSLW 344 taught by Professor Bocksteigle during the Spring '08 term at Wisc Whitewater.

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Chapter 15 - Chapter 15 Solutions to End-of-Chapter...

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