Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 5CRCT
Operating and Cash Cycles [LO1] Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not.
Use the following information to answer Questions 6–10: Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The increased payables period will be in effect for all of the company’s 4,000 suppliers.
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Chapter 18 Solutions
Fundamentals of Corporate Finance
Ch. 18.1 - What is the difference between net working capital...Ch. 18.1 - Prob. 18.1BCQCh. 18.1 - List five potential sources of cash.Ch. 18.1 - Prob. 18.1DCQCh. 18.2 - Prob. 18.2ACQCh. 18.2 - Prob. 18.2BCQCh. 18.2 - Prob. 18.2CCQCh. 18.3 - What keeps the real world from being an ideal one...Ch. 18.3 - What considerations determine the optimal size of...Ch. 18.3 - Prob. 18.3CCQ
Ch. 18.4 - Prob. 18.4ACQCh. 18.4 - Prob. 18.4BCQCh. 18.5 - Prob. 18.5ACQCh. 18.5 - Describe two types of secured loans.Ch. 18.6 - Prob. 18.6ACQCh. 18.6 - In Table 18.6, what would happen to Fun Toys...Ch. 18 - Prob. 18.1CTFCh. 18 - A firm has an operating cycle of 64 days and a...Ch. 18 - Prob. 18.4CTFCh. 18 - Prob. 18.5CTFCh. 18 - Operating Cycle [LO1] What are some of the...Ch. 18 - Prob. 2CRCTCh. 18 - Prob. 3CRCTCh. 18 - Cost of Current Assets [LO2] Loftis Manufacturing,...Ch. 18 - Operating and Cash Cycles [LO1] Is it possible for...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Prob. 8CRCTCh. 18 - Use the following information to answer Questions...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Changes in the Cash Account [LO4] Indicate the...Ch. 18 - Prob. 2QPCh. 18 - Changes in the Operating Cycle [LO1] Indicate the...Ch. 18 - Prob. 4QPCh. 18 - Calculating Cash Collections [LO3] The Morning...Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - Calculating Payments [LO3] Sedman, Corp., has...Ch. 18 - Calculating Payments [LO3] The Torrey Pine...Ch. 18 - Calculating Cash Collections [LO3] The following...Ch. 18 - Calculating the Cash Budget [LO3] Here are some...Ch. 18 - Prob. 12QPCh. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Calculating the Cash Budget [LO3] Wildcat, Inc.,...Ch. 18 - Prob. 16QPCh. 18 - Costs of Borrowing [LO3] In exchange for a 400...Ch. 18 - Prob. 18QPCh. 18 - Prob. 1MCh. 18 - Prob. 2MCh. 18 - Prob. 3M
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- 15. A company is considering increasing the period of credit allowed to customers from 30 days to 45 days. Annual sales are currently £1,200,000, and annual profits are £100,000. It is anticipated that allowing extended credit would increase sales by 15%, while net profit margins would be unchanged. The working capital is financed by using an overdraft costing 10% per annum. Assume that there is no change in the absolute level of the inventory or account payable. What is the financial effect of the proposal (assume a year is 360 days)? A Reduction in profit of £10,000 B Increase in profit of £10,000 C Increase in profit of £15,000 D Increase in profit of £7,750arrow_forwardThe Mitchem Marble Company has a target current ratio of 2.1 but has experienced some difficulties financing its expanding sales in the past few months. At present, the firm has a current ratio of 2.8 and current assets of $2.69 million. If Mitchem expands its receivables and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ratio standard is reached? Question content area bottom Part 1 The additional amount of receivables and inventories (short-term debt) is $enter your response here million. (Round to two decimal places.)arrow_forward4. Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50days. The company wants to reduce its DSO to the industry average of 32 days by pressuring more ofits customers to pay their bills on time. The company’s CFO estimates that if this policy is adopted thecompany’s average sales will fall by 10 percent. Assuming that the company adopts this change andsucceeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level ofaccounts receivable following the change? Assume a 365-day year.arrow_forward
- 2. Harrelson Inc. currently has $750,000 in accounts receivable. Its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to the industry average of 35 days by pressuring customers to pay on time. The Chief Financial Officer (CFO) estimates that average sales will fall by 15% if the policy is adopted. Assuming the firms achieves the DSO of 35 days and suffers the 15% sales decline, what will be the new level of accounts receivable? Assume 1 year =365 daysarrow_forwardWhich of the following is the MOST correct? In reference to the time value of money, the present value is always labeled as t=1 Negative MVAs indicate that a company's executives are managing its expenses well nominal rates, or annual percentage rates, are always equal to the effective annual rate A strong ROE always indicates a strong year for the firm A firm should generally seek to minimize their days' sales outstanding values in order to access their receivables at a faster ratearrow_forward14. A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales would be 5% less if the proposed new credit policy were implemented. The firm's short-term interest cost is 10%. Projected sales for the coming year are P100 million. Assume a 360-day year, the increase (decrease) on A/R of this proposed change in credit policy is A. PO B. (P5,000,000) c. (P6,666,6667) D. (P13,000,000)arrow_forward
- 5. Your marketing staff encourages you to increase your NOW account rate from 0.10% to 0.25% in order to obtain an increase from $1 billion to $1.15 billion in deposits. The branch managers express concern that the service costs on the new deposits will be $140 per account with an average balance of $1200 per account and service charge revenue will be only $2 per month per account. They argue that CDs at 6% are a cheaper source of funds. If the reserve requirement on interest checking is 11% and on CDs is 2%, which source of deposits is cheaper? (Fed's Interest on reserves is 0.50%)arrow_forward(Efficiency analysis) ALei Industries has credit sales of $143 million a year ALef's management revwed ts anddei t is the maximum level of accounts receivable that ALei can carry and have a 45-day average colledtion period? Leis current accounts receivable collection period is 55 days, how much would it have lo reduce its level of accounts recelvable in oander to adi a. What is the maximum level of accounts receivable that ALei can carry and have a 45-day average collection period? b. The maximum level of accounts receivable vilbe smillion Round to one decimal place) The maximum level of accounts receivable will be S million.arrow_forwardLockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.) a. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?arrow_forward
- 5. A. Anthony & Sons Concrete Company has been offered by its bank to manage its cash at a cost of $35,000 per year. Under the proposed cash management, the firm can reduce the cash required on hand by $180, 000, Since the bank is also doing a lot of record keeping, the firm's administrative cost would decrease by $2, 000 per month. What recommendation would you give the firm with respect to the proposed cash management assuming the firm's opportunity cost is 12 percent?arrow_forwardP15-15 Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.) What amount of cash will be made available for other uses under the lockbox system?arrow_forward2. Your company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%. a) What is the NPV of the switch? Part 1: Incremental cash flow = (P – V)(S' – 5) Incremental cash flow = ($49 – $20)($110 – 100) Incremental cash flow = $29 * $10 = $290 t 2: Incremental cash flow Cost of capital Incremental cash flow Incremental cash flow =02 $290 = $14500 Part 3: Switch Cost = (P + S) + V(S' – 5) Switch cost = ($49 + 100) + $20($110 – $100) Switch cost = $4900 + $200 = $5100 Therefore: NPV of Switch = $14500 – $5100 = $9400arrow_forward
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