Week 7 Problem Set

Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_7_Problem_Set.docx (where flastname is your first initial and your last name), and submit it to the appropriate Dropbox.

Chapter 26 (page 903):

1. Answer the following questions:

a.What is the difference between a firms cash cycle and its operating cycle?

b.How will a firms cash cycle be affected if a firm increases its inventory, all else being equal?

c.How will a firms cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal?

4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:

THE GREEK CONNECTION

Balance Sheet

As of December 31, 2012 (in $ thousand)

Assets

Liabilities and Equity

Cash

Accounts receivable

Inventory

$ 2,000

3,950

1,300

Accounts payable

Notes payable

Accruals

$ 1,500

1,000

1,220

Total current assets

$ 7,250

Total current liabilities

Long-term debt

$ 3,720

3,000

Net plant, property,

and equipment

$ 8,500

Total liabilities

Common equity

$ 6,720

9,030

Total assets

$ 15,750

Total liabilities and equity

$ 15,750

a.Calculate The Greek Connections net working capital in 2012.

b.Calculate the cash conversion cycle of The Greek Connection in 2012.

c.The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?

5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.

Chapter 27 (page 925):

1. Which of the following companies are likely to have high short-term financing needs? Why?

a.A clothing retailer

b.A professional sports team

c.An electric utility

d.A company that operates toll roads

e.A restaurant chain

2. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firms seasonal working capital needs the greatest? When does it have surplus cash?

Month

($000)

0

1

2

3

4

5

6

Net Income

$10

$12

$15

$25

$30

$18

Depreciation

2

3

3

4

5

4

Capital Expenditures

1

0

0

1

0

0

Levels of Working Capital

Accounts Receivable

$2

3

4

5

7

10

6

Inventory

3

2

4

5

5

4

2

Accounts Payable

2

2

2

2

2

2

2