Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Textbook Question
Chapter 21, Problem 15P
Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts.
- a. What is the average amount of accounts payable net of discounts? (Assume the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.)
- b. Is there a cost of the trade credit the firm uses?
- c. If the firm did not take discounts but did pay on the due date, what would be its average payables and the cost of this nonfree trade credit?
- d. What would be the firm’s cost of not taking discounts if it could stretch its payments to 40 days?
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Zane Corporation has an inventory conversion period of 90 days, an average collection period of 34 days, and a payables deferral period of 48 days. Assume 365 days in year for your calculations.
a. What is the length of the cash conversion cycle? Round your answer to two decimal places.
days
b. If Zane's annual sales are $3,454,540 and all sales are on credit, what is the investment in accounts receivable? Do not round intermediate calculations. Round your answer to the nearest cent.
$
c. How many times per year does Zane turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio. Do not round intermediate calculations. Round your answer to two decimal places.
2) What is mark-to-market accounting?
a. Hint: Use an example to demonstrate the type of accounting Enron was engaging in.
The following sequence of cash flows will be helpful. Assume a 10% discount rate.
t = 0
t = 1
4,950.00
t = 2
9,680.00
t = 3
(25,000.00)
16,637.50
First, calculate the accounting income for each year (i.e., use historical cost
accounting). Second, calculate the income using Enron's method (i.e., fair value
accounting).
(16-15)
Cash Discounts
Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and
takes discounts.
a. What is the average amount of accounts payable net of discounts? (Assume the
$3.65 million of purchases is net of discounts-that is, gross purchases
are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.)
b. Is there a cost of the trade credit the firm uses?
c. If the firm did not take discounts but did pay on the due date, what would be its
average payables and the cost of this nonfree trade credit?
d. What would be the firm's cost of not taking discounts if it could stretch its payments
to 40 days?
Chapter 21 Solutions
Intermediate Financial Management
Ch. 21 - a. Working capital; net working capital; net...Ch. 21 - Prob. 2QCh. 21 - Is it true that, when one firm sells to another on...Ch. 21 - What are the four elements of a firm’s credit...Ch. 21 - Prob. 5QCh. 21 - Prob. 6QCh. 21 - Prob. 7QCh. 21 - Is it true that most firms are able to obtain some...Ch. 21 - What kinds of firms use commercial paper?Ch. 21 - Prob. 1P
Ch. 21 - Medwig Corporation has a DSO of 17 days. The...Ch. 21 - What are the nominal and effective costs of trade...Ch. 21 - A large retailer obtains merchandise under the...Ch. 21 - A chain of appliance stores, APP Corporation,...Ch. 21 - Prob. 6PCh. 21 - Calculate the nominal annual cost of nonfree trade...Ch. 21 - Prob. 8PCh. 21 - Grunewald Industries sells on terms of 2/10, net...Ch. 21 - The D.J. Masson Corporation needs to raise...Ch. 21 - Negus Enterprises has an inventory conversion...Ch. 21 - Strickler Technology is considering changes in its...Ch. 21 - Dorothy Koehl recently leased space in the...Ch. 21 - Suppose a firm makes purchases of $3.65 million...Ch. 21 - The Thompson Corporation projects an increase in...Ch. 21 - The Raattama Corporation had sales of $3.5 million...Ch. 21 - Karen Johnson, CFO for Raucous Roasters (RR), a...Ch. 21 - Prob. 2MCCh. 21 - Prob. 3MCCh. 21 - Prob. 4MCCh. 21 - Prob. 5MCCh. 21 - Prob. 6MCCh. 21 - Prob. 7MCCh. 21 - Prob. 8MCCh. 21 - What is the impact of higher levels of accruals,...Ch. 21 - Prob. 10MCCh. 21 - Prob. 11MCCh. 21 - Prob. 12MCCh. 21 - Prob. 13MCCh. 21 - Prob. 14MCCh. 21 - Prob. 15MCCh. 21 - Prob. 16MC
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