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Problem 1

Cash 585.00
Other current assets 3,555.00
Fixed assets 15,190.00
Total Assets 19,330.00

Current liabilities 1,450.00


Long-term debt 7,500.00
Equity 10,380.00
Total Liabilities and Equity 19,330.00

Working capital 2,105.00

Total current assets 4,140.00

Problem 2

a. I
b. I
c. D
d. N
e. D
f. N

Problem 3

Operating Cycle
a. I
b. N
c. D
d. N
e. N
f. I

Problem 4

Operating Cycle = AAI + ACP

AAI = 360/ ITO


ITO = CGS / Ave. Inv.
ITO 8.51
AAI 42.31

ACP = 360/ARTO
ARTO = Sales / Ave. A/R
ARTO 4.07
ACP 88.35
Operating Cycle 130.67

Inventory, beg 1,273.00


Purchases 11,503.00
CGS - 11,375.00
Inventory, end 1,401.00

CCC = OC - APP

APP = 360/APTO
APTO = Purchases / Ave. A/P
APTO 6.02
APP 59.78

Cash Conversion Cycle 70.89

Problem 5

a.
Working Capital (CA) 400,000.00
Net Working Capital (CA - CL) 200,000.00
Current Ratio (CA / CL) 2.00

Current Assets 400,000.00


Current Liabilities 200,000.00

b.
Return on Equity (NI / SHE) 12.54%

EBIT 160,000.00
Interest - 65,000.00
EBT 95,000.00
Taxes (34%) - 32,300.00
Net Income 62,700.00

Shareholder's equity 500,000.00

c.
Current Strategy (CA@50% of sales)
Net working capital 280,000.00
Current ratio 2.27

Current assets 500,000.00


Current liabilities 220,000.00

Current assets 500,000.00


Non-current assets 600,000.00
Total assets 1,100,000.00

Total liabilities 550,000.00


Total equity 550,000.00
Total liabilities and equity 1,100,000.00

d.
By maintaining the amount of current assets at a higher level relative to sales, the entity will have higher liquidity. Howeve
Current liabilities are in turn 20% of the total assets (both current and non-current), and as more current assets are requi
Long-term debt and equity on the other hand comprises 80% of the total assets, and as more assets are financed with long

e.
Current Strategy (CA@50% of sales)
Return on Equity 13.02%

Current liabilities 220,000.00


Non-current liabilities 330,000.00
Total equity 550,000.00
Total liabilities and equity 1,100,000.00

EBIT 180,000.00
Interest - 71,500.00
EBT 108,500.00
Taxes (34%) - 36,890.00
Net Income 71,610.00

f.
There is an inverse relationship between liquidity and profitability.
For assets, current assets present higher liquidity, but has lower profitability potential compared to fixed assets.
For liabilities, current liabilities present lower liquidity, but has lower cost of capital compared to long-term debt and equ

g.
Restricted
Return on equity 17.23%
Net working capital 200,000.00
Current ratio 3.00

EBIT 180,000.00
Interest - 62,500.00
EBT 117,500.00
Taxes (34%) - 39,950.00
Net Income 77,550.00

Shareholder's equity 450,000.00

Current assets 300,000.00


Current liabilities 100,000.00
Long-term liabilities 350,000.00

Again, above information shows an inverse relationship between liquidity and profitability.
Cash Conversion Cycle
I
I
D
D
D
I
Alt. Strategy 1 (CA@30% of sales) Alt. Strategy 2 (CA@70% of sales)
120,000.00 440,000.00
1.67 2.69

300,000.00 700,000.00
180,000.00 260,000.00

300,000.00 700,000.00
600,000.00 600,000.00
900,000.00 1,300,000.00

450,000.00 650,000.00
450,000.00 650,000.00
900,000.00 1,300,000.00

ative to sales, the entity will have higher liquidity. However, this will incur opportunity costs on the working capital requirements.
nt and non-current), and as more current assets are required, more current liabilities will also be used to maintain this level.
the total assets, and as more assets are financed with long-term financing, this shows a trade-off that favors low risk at the price of lower profitab

Alt. Strategy 1 (CA@30% of sales) Alt. Strategy 2 (CA@70% of sales)


17.82% 9.70%

180,000.00 260,000.00
270,000.00 390,000.00
450,000.00 650,000.00
900,000.00 1,300,000.00

180,000.00 180,000.00
- 58,500.00 - 84,500.00
121,500.00 95,500.00
- 41,310.00 - 32,470.00
80,190.00 63,030.00

profitability potential compared to fixed assets.


lower cost of capital compared to long-term debt and equity financing, and therefore has higher profitability.

Compromise Flexible
18.70% 19.80%
- - 150,000.00
1.00 0.67

180,000.00 180,000.00
- 52,500.00 - 45,000.00
127,500.00 135,000.00
- 43,350.00 - 45,900.00
84,150.00 89,100.00

450,000.00 450,000.00

300,000.00 300,000.00
300,000.00 450,000.00
150,000.00 -

n liquidity and profitability.


the price of lower profitability.
Problem 1
Annual Credit Sales 912,500.00
Daily Credit Sales 2,500.00
ACP 60 days
Average A/R Balance 150,000.00

Problem 2
ARTO 14.60
Annual Sales 600,000.00
Daily Sales 1,643.84
Ave A/R Balance 41,095.89
Ave. inv. In A/R 32,876.71

Problem 3

Risk Class A
Present Proposed
Sales 750,000.00 800,000.00
VC 637,500.00 680,000.00
CM 112,500.00 120,000.00
Additional collection cost
Additional bad debts
Ave. A/R balance 187,500.00 200,000.00
Ave. A/R investment 159,375.00 170,000.00 10,625.00
Net advantage (disadvantage)

Risk Class B
Present Proposed
Sales 800,000.00 840,000.00
VC 680,000.00 714,000.00
CM 120,000.00 126,000.00
Additional collection cost
Additional bad debts
Ave. A/R balance 200,000.00 210,000.00
Ave. A/R investment 170,000.00 178,500.00 8,500.00
Net advantage (disadvantage)

Risk Class C
Present Proposed
Sales 840,000.00 860,000.00
VC 714,000.00 731,000.00
CM 126,000.00 129,000.00
Additional collection cost
Additional bad debts
Ave. A/R balance 210,000.00 215,000.00
Ave. A/R investment 178,500.00 182,750.00 4,250.00
Net advantage (disadvantage)

Problem 4
Present Proposed
Sales 400,000.00 400,000.00
VC 300,000.00 300,000.00
CM 100,000.00 100,000.00
Reduction in collection costs
Reduction in bad debts 12,000.00 10,000.00
Average collection period 42.00 38.00
Average A/R balance 46,666.67 42,222.22
Average A/R investment 35,000.00 31,666.67
Earnings on freed up WC
Discounts given 1,800.00 4,800.00
Net effect in profit

Problem 5

a.
Annual requirement 12,000.00
OC/ order 50.00
CC/u 0.10
EOQ 3,464.10

b.
Average inventory 1,732.05

c.
OC 173.21
CC 173.21
Total inventory cost 346.41

d.
Daily Usage 400.00
EOQ 3,464.10
Optimal inventory cycle (days) 8.66

e.
No. of orders 3.46 *3 or 4 orders

Problem 6

a.
Annual requirement 36,000.00
OC/ order 100.00
CC/u 5.00
EOQ 1,200.00

b.
Average inventory 3,600.00 (EOQ/2 + SS)

c.
No. of orders 30.00
d.
Total inventory cost
Ordering cost 3,000.00
Carrying cost 18,000.00
Total 21,000.00

e.
Reorder point
Lead time * daily usage 493.15
Safety stock 3,000.00
Total 3,493.15

Problem 7

Present Proposed
Sales 220,000.00 240,000.00
VC (same, irrelevant) - -
Bad debts - 9,600.00
Average A/R investment - 240,000.00

If only half the customers take the offered credit:


Present Proposed
Sales 220,000.00 230,000.00
VC (same, irrelevant) - -
Bad debts - 4,800.00
Average A/R investment - 120,000.00

Problem 8

Present Proposed
Sales 20,400,000.00 21,480,000.00
VC (same, irrelevant) - -
Bad debts - 644,400.00
Average A/R investment - 21,480,000.00

Problem 9

a.
Payment within discount period 90.00
Payment beyond discount period 91.84
Percentage of discount 2.00%

Terms: 2/15, n/30

b.
If all customers do not avail of the discount
Average A/R balance 303,072.00

If all customers avail of the discount


Average A/R balance 148,500.00
c.
Since quantity sold is same under old and new policy, it is irrelevant in decision making.

d.
Insufficient information: what portion of customers avail and forego the cash discount?

Break-even credit price:


Payment within discount period 90.00
Payment beyond discount period 102.13
Percentage of discount 11.88%

Problem 10

Present Proposed
Sales - 17,100.00 17,100.00
Variable costs - - 11,400.00 - 11,400.00
Additional A/R balance - 17,100.00
Additional A/R investment - 11,400.00
Opportunity cost on WC requirement - 228.00
Provision for bad-debts (20%) - 3,420.00
2,052.00

Present Proposed
Sales - 17,100.00 17,100.00
Variable costs - - 11,400.00 - 11,400.00
Additional A/R balance - 17,100.00
Additional A/R investment - 11,400.00
Opportunity cost on WC requirement - 228.00
Provision for bad-debts (squeeze for break-even) - 5,472.00
Net impact on profit -

Cash Price 1,090.00 more favorable


Credit Price * Default Probability 912.00

Problem 11

a.
Refuse Credit Grant Credit
SP/unit 71.00 75.00
Cost/unit 32.00 33.00
Quantity sold 6,200.00 6,900.00
Sales 440,200.00 517,500.00 77,300.00
Variable costs - 198,400.00 - 227,700.00 - 29,300.00
Provision for bad-debts - - 51,750.00 - 51,750.00
Opportunity cost on WC requirement - - 11,643.75 - 11,643.75
Net impact on profit - 15,393.75

b.
Refuse Credit Grant Credit
SP/unit 71.00 77.54
Cost/unit 32.00 33.00
Quantity sold 6,200.00 6,900.00
Sales 440,200.00 535,042.74 94,842.74
Variable costs - 198,400.00 - 227,700.00 - 29,300.00
Provision for bad-debts - - 53,504.27 - 53,504.27
Opportunity cost on WC requirement - - 12,038.46 - 12,038.46
Net impact on profit 0.00

c.
Refuse Credit Grant Credit
SP/unit 71.00 75.00
Cost/unit 32.00 34.50
Quantity sold 6,200.00 6,210.00
Sales 440,200.00 465,750.00 25,550.00
Variable costs - 198,400.00 - 214,245.00 - 15,845.00
Provision for bad-debts - - -
Opportunity cost on WC requirement - - 10,479.38 - 10,479.38
Net impact on profit - 774.38
7,500.00
-
- 2,500.00

- 2,125.00
2,875.00 Accept

6,000.00
-
- 3,200.00

- 2,040.00
760.00 Accept

3,000.00
-
- 2,400.00

- 1,275.00
- 675.00 Decline
-
-
2,000.00

600.00
- 3,000.00
- 400.00

OC CC
3 orders 150.00 200.00 350.00
4 orders 200.00 150.00 350.00
20,000.00
-
- 9,600.00
- 4,800.00
5,600.00

10,000.00
-
- 4,800.00
- 2,400.00
2,800.00

1,080,000.00
-
- 644,400.00
- 537,000.00
- 101,400.00
Accept

32.00%

Do not grant credit


*note that we will not be selling to customers with unsatisfactory credit reports

*note also that there will no longer be a provision for bad debts as credit reports are perfectly reliable

Do not grant credit

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