Question

1) What is the operating cycle and inventory turnover ratio?

Balance sheet:

Assets

cash 60

A/R 100

Inventory 80

Fixed Asset 100

(Accum Depr) -25

Total 315

Liabilities

AP 40

Accruals 10

Notes Pay 15

L-T Debt 150

Total Debt 215

Equity 100

Total Liab & Equity 315

Income Statement:

Sales $700

COGS $315

Gross Profit $385

Operating Expense 125

Depreciation 30

EBIT $230

Interest 20

Taxes 75

Net Profit $135

Dividends 30

2) The sum of the delays in collecting cash from customers is known as

a) Disbursement float

b) Cash conversion period

c) Working capital cycle

d) Liquidity requirement

e) Collection float

3) The current ratio of a firm would be increased by which of the following?

a) Land held for investment is sold for cash

b) Equipment is purchased, financed by a long-term debt issue

c) Inventories are sold for cash

d) Inventories are sold on a credit basis

4) LETU Inc, is considering modifying its credit terms from net 30 to net 45. They believed that although DIH (50 days) and DPO (60 days) will not change, it will result in a 5% increase in sales. LETU's annual sales is $500 million and COGS equal 60% of sales. LETU's annual cost of capital is 10%. How much more is the company worth switching to the new terms?

a) $125.22 M

b) $95.70 M

c) $76.49 M

d) $64.19 M

5) A company's marketing manager is worried about _________ stock-outs while production manager is concerned with _________ stock-outs.

a) raw material, work-in-process

b) work-in-process, raw material

c) work-in-process, finished goods

d) finished goods, raw material and work-in-process

e) $57.03 M

Answer 1

Formulas used for 1)

operating cycle = inventory days + days receivable

inventory days = 365/inventory turnover ratio

days receivables = 365/Accounts receivables turnover ratio