Question

CASH CONVERSION CYCLE Parramore Corp has $12 million of sales, $2 million of inventories, $4 million of receivables, and $2 million of payables. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 9% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. ________ days If Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places. ________ days How much cash would be freed up, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000. $ ________    By how much would pretax profits change, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000. $ ________

2.

Click here to read the eBook: The Cash Conversion Cycle RECEIVABLES INVESTMENT Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $2.4 million. Assume 365 days in year for your calculations. What is Leyton's DSO? Round your answer to two decimal places. ________ days What would DSO be if all customers paid on time? Round your answer to two decimal places. ________ days How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000. $ ________

3.

Click here to read the eBook: Accounts Payable (Trade Credit) Click here to read the eBook: Bank Loans Problem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through COST OF TRADE CREDIT AND BANK LOAN Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 35; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations. If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $ ________ What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places. ________ % What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places. ________ % If the company could get the funds from a bank at a rate of 11%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places. ________ % Should Lancaster use bank debt or additional trade credit? _________________

4.

Click here to read the eBook: The Cash Conversion Cycle Click here to read the eBook: Accounts Receivable WORKING CAPITAL INVESTMENT Pasha Corporation produces motorcycle batteries. Pasha turns out 1,100 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 24 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. Assume 365 days in year for your calculations. What is the length of Pasha's cash conversion cycle? Round your answer to two decimal places. ________ days At a steady state in which Pasha produces 1,100 batteries a day, what amount of working capital must it finance? Round your answer to the nearest dollar. $ ________ By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 39 days? Round your answer to the nearest dollar. $ ________ Pasha's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 15 days and to increase its daily production to 2,100 batteries. However, the new process would cause the cost of materials and labor to increase to $11. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Round your answers to two decimal places. Cash conversion cycle ________ days Working capital financing $ ________

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