Question

Problem # 1. Suko National Arms Corporation (SukoNACo), the leading supplier of ordnance in the Philippine Military, has an inventory conversion period of 75 days, a receivables collection period of 38 days, and a payables deferral period of 30 days (365 days/year). a. What is the length of the firm’s cash conversion cycle? b. If SukoNACo’s annual sales is Php3,421,875,000 and all sales are on credit, what is the firm’s investment in accounts receivable? c. How many times per year does SukoNACo turn over its inventory? d. Suppose SukoNACo improve its inventory turnover to 5.21, without any adverse effect on its operations, what would be its new cash conversion cycle?

Problem # 2. Please explain the following Working Capital Financing Policies. Identify which is risky, optimal and least economical. a. Moderate b. Conservative c. Aggressive

Answer 1

1-	cash conversion cycle in days	Inventory conversion cycle+ average collection period-payable deferral period	75+38-30	83
2-	accounts receivable collection period	365/accounts payable turnover ratio	accounts receivable turnover ratio = 365/38	9.61
	accounts receivable turnover ratio	sales/accounts receivables	9.61 = 3421875000/accounts receivables	accounts receivables = 3421875000/9.61	356074401.7
3-	How many times per year does SukoNACo turn over its inventory	365/inventory conversion period	365/75	4.87
4-	Inventory conversion period	365/inventory turnover ratio	365/5.21	70.06
5-	cash conversion cycle in days	Inventory conversion cycle+ average collection period-payable deferral period	70+38-30	78
6-	Moderate working capital financing policy explains that a portion of temporary working capital plus complete permanent working capital should be financed with long term sources of finance and only a portion of temporary working capital should be financed with short term sources. This policy is called moderate policy and it is least risky and economical too
	Conservative working capital policy explains that all the working capital requirement whether permanent or temporary should be financed with long term sources. This policy is very less risky but non economical
	Aggressive policy explains that all temporary working capital and a portion of permanent working capital should be financed with short term sources. It is a risk but economical policy