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BFW2631

FINANCIAL MANAGEMENT

TUTORIAL SET 7 WEEK 7 WORKING CAPITAL MANAGEMENT

IMPORTANT: The questions that we encounter within the tutorial set throughout the

semester are an indication of the standard that you will face in the final examination. You are

required to attempt all tutorial questions on your own prior to attending class.

Question 1 (Parino Q14.1)

Malcolms Masonry estimates that it takes the company 27 days on average to pay off its suppliers. It also knows that it has days sales in inventory of 64 days and days sales outstanding of 32 days. How does Malcolms cash conversion cycle compare with the industry average of 75 days?

Question 2 (Parino Q14.5)

NetSpeed Technologies is a telecom component manufacturer. The company typically has a

collection period of 44 day and days sales in inventory of 29 days. What is the operating cycle for

NetSpeed?

Question 3 (Parino Q14.7)

Juggs Ltd sells its goods with terms of 4/10 EOM, net 60. What is the implicit cost of this trade

credit?

Question 4 (Parino Q14.12)

Blackwell Automotive reported the following information for the last financial year.

Blackwell Automotive

Balance Sheet

As at 31 March 2011

Assets Liabilities and Equity

Cash and Marketable Securities $ 23015

Accounts Receivable $ 141258

Inventories $ 212444

Other Current Assets $ 11223

Accounts Payable and Accruals $163257

Notes Payable $ 21115

Total Current Assets $ 387940 Total Current Liabilities $184372

Net Sales $912332

Cost of Sales $547400

Calculate the companys Cash Conversion Cycle and Operating Cycle.

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Question 5 (Parino Q 14. 23)

A partial ageing of accounts receivable for Keatring Cleaning Services is given in the

accompanying table. Determine the companys effective days sales outstanding. How does it compare with the industry average of 35 days?

Age of Account ( days) Value of Account % of Accounts

10 $271000

30 145220

45 87773

60 53980

75 31245

Total $589218 100%

Question 6 (Parino Q14.27)

What impact would the following have on the operating and cash conversion cycles? Would the

cycles increase, decrease or remain unchanged?

a. More raw materials than usual is purchased. b. The company enters into an off season and inventory builds up. c. Better terms of payment are negotiated with suppliers. d. The cash discounts offered to customers are decreased. e. All else remaining the same an improvement in manufacturing technique decreases the cost

of sales.

Question 7 (Parino Q14.30)

McBreen Electricals, one of the largest generator dealers in Port August, sells about 2000

generators a year. The cost of placing an order with its supplier is $750 and the inventory carrying

costs are $170 for each generator. McBreen likes to maintain safety stock of 15 at all times.

a. What is the companys EOQ b. How many orders will the company need to place this year? c. What is the average inventory for the season?