Intermediate Financial Management FIN 390 Assignment Spring 2015

WORKING CAPITAL MANAGEMENT

Self Study:
1. What is a cash conversion cycle?
2. What are the advantages and disadvantages of matching the maturities of assets and liabilities?
3. What is the purpose of a cash budget?
4. What are the disadvantages of an aggressive short-term financing policy?
5. What is the advantage of using an uncollected balances schedule (payments pattern approach)?
6. What is a discount interest loan?
Extend the Basics:
Working capital management overview (Chapter 21)
Analyzing changes to credit policy (Chapter 22)
Cost of bank loans (Chapters 19 and 22)
Assignment:
Overview
1. Chadmark Corporations budgeted monthly sales are $3,000. Forty percent of its customers pay in the
first month and take the 2 percent discount. The remaining 60 percent pay in the month following the
sale and dont receive a discount. Chadmarks bad debts are very small and are excluded from this
analysis. Purchases for next months sales are constant each month at $1,500. Other payments for
wages, rent, and taxes are constant at $700 per month. Construct a single months cash budget with
the information given. What is the average cash gain or (loss) during a typical month for Chadmark
Corporation?
2. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment
policy. The firms annual sales are $400,000; its fixed assets are $100,000; debt and equity are each
50 percent of total assets. EBIT is $36,000, the interest rate on the firms debt is 10 percent, and the
firms tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under
a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected
ROEs between the restricted and relaxed policies?
Credit Policy Changes
Use the following information to complete the next three questions:
The projected sales for Princess Staircases are as follows (in millions):
November
$ 400 March
$ 300
December
500 April
200
January
500 May
200
February
300 June
200
Thirty percent of the companys customers pay in cash, 65 percent pay in the month following the sale,
and the remainder pay in the second month following the sale. The company has no bad accounts.
3. Calculate the days sales outstanding for the first and second quarters (Assume a 90 day quarter)
4. Complete an aging schedule for the first and second quarters.
5. Complete an uncollected balances (payments pattern) schedule for the first and second quarters.

Intermediate Financial Management FIN 390 Assignment Spring 2015

Use the following information to answer the next six questions:
Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present
terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent.
Also, Berkeleys cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Berkeley
wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within
10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by
$500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days,
and the bad debt loss percentage on all sales would fall to 4 percent. (Assume a 365-day year)
6. Using the Income Statement Approach, calculate the incremental bad debt losses.
7. Using the Income Statement Approach, calculate the incremental cost of carrying receivables.
8. Using the Income Statement Approach, calculate the incremental pre-tax profits.
9. Using the Incremental Analysis Approach, calculate the incremental bad debt losses.
10. Using the Incremental Analysis Approach, calculate the incremental cost of carrying receivables.
11. Using the Incremental Analysis Approach, calculate the incremental pre-tax profits.

Cost of Bank Loans & Trade Credit

12. Kinky Toys is planning to borrow $122,000 from the bank. The bank offers the choice of a 9.9
percent discount interest loan or a 9.75 percent add-on, one-year installment loan, payable in 4 equal
quarterly payments. What is the effective rate of interest for each loan?
13. White Manufacturing, Inc. purchases supplies from a single supplier on terms of 0.5/10, net 30. The
firm needs an additional $75,000 to support an expansion of fixed assets. This amount could be
raised by making greater use of trade credit or by arranging a bank loan. The bank has offered to loan
the money at 9 percent interest but also requires a compensating balance of 5 percent of the loan
amount. What is the effective rate of each alternative?
14. Viking Farms has been borrowing to finance its harvests using 365-day bank notes on which the firm
pays 6 percent discount interest and is required to maintain a 3 percent compensating balance. If the
firm requires $160,000 in proceeds from each note, what must be the face value of each note?
15. Go to the website for the National Federation of Independent Business and read the article entitled,
Extending Credit to Customers.
http://www.nfib.com/article/extending-credit-to-customers-19949/
Answer the following questions based on article information.
a. After obtaining a credit application from a customer, what must a business do with it?
b. Name one tactic for making sure that accounts receivable stays current.
c. In order to accept credit cards, what must a business do?