Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 26, Problem 9CQ
Summary Introduction
To explain: The effect of change in payable policy on suppliers.
Operating Cycle:
Operating cycle is a time period between the sale of product and the recovery of cash from the customer. Operating cycle is also known as the business cycle, it involves every quantitative business activity of the company.
Cash Cycle:
The time period between the payment of cash to the supplier for the purchase of raw material and the receipt of cash from the customer for the sale of product is known as cash cycle of a business. If the cash cycle is shorter the amount of available cash is more and the company has no need to borrow cash from outsiders.
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Bulldogs Inc. has a normal operating cycle of 32 days and cash conversion cycle of 25 days. Which of the following must be true if the company wants to shorten its cash conversion cycle to 20 days?
Decrease the operating profit by 2%
Increase the age of inventory by 5 day
Increase the accounts payable deferral period by 2 days
Decrease the days sales outstanding by 5 days
A CARDBOARD BOX FACTORY pays its suppliers 40 days after making the purchase and receiving the goods. The average collection period is 45 days, i.e. its customers settle their debt with the company in that time; and the average inventory age is based on the inventory turnover which is 10 times a year. The company spends about $1.23 million in operating cycle investments. With this data we need to calculate:
The operating cycle.The cash conversion cycle.The cash turnover.The minimum cash balance.You plan to make modifications to your policies so that you can decrease your PPC by 10 days, and decrease your EPI by 2 times (before converting it to days). Negotiations with your supplier have been unsuccessful and the payment term has been reduced by 10 days. With these data you have to calculate:
Re-calculate the Operating Cycle, the SCC, RC and SMC introducing the proposed changes.Calculate the opportunity cost that the changes will cause, if the company's interest rate is 8%.
Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company’s average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year.
Chapter 26 Solutions
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