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of $115,000. Average daily collections are $380,000. The lockbox system will reduce float time by

2 days. The rate of return is 16 percent. Should the lockbox system be implemented?

Geller Corporation provides the following data:

7.

Current annual credit sales $30,000,000

Collection period 2 months

Terms ne t/30

Rate of return 15%

The business is considering offering a 3/10, net/30 discount. It is expected that 25 percent of

the customers will take advantage of the discount. The collection period is anticipated to decrease

to 1month. Is it financially feasible to implement the discount policy?

8. William Company provides the following information: Usage is 300 units per month, cost per order

is $15, and carrying cost per unit is $8.

Determine: (a) economic order quantity; ( b )the number of orders required each month; and

(c) the number of days that should elapse between orders.

9. What is the opportunity cost of not taking a discount when the terms are 4/10, net/60?

10. Scott Corporation makes an $80,000 loan having a nominal interest rate of 18percent. Interest is

payable in advance and there is a required compensating balance of 10 percent. What is the

effective interest rate of the loan?

11. Remsen Corporation's factor charges a 5 percent monthly fee. It lends Remsen up to 90 percent

of receivables purchased for an additional 2 percent per month. Monthly credit sales are $400,000.

With the factoring arrangement, there is a savings in corporate credit checking costs of $3,600 per

month and in bad debts of 3.5 percent on credit sales.

156 EXAMINATION I

Service Bank offers to lend the company up to 90 percent of the receivables.The bank's interest

charge will be 2.5 percent per month plus a 4 percent processing charge on receivable lending. 'The

collection period is 30 days, the company borrows the maximum allowed each month.

Is it less expensive to finance with the factor or bank?

Answem to Examination I

1 The prime functions of the financial manager are: ( a ) obtaining financing; (6) investing funds; (c) managing

.

assets; (4paying out the appropriate amount of dividends; and (e) financial forecasting.

net credit sales $800,000

(4 - 6.4 times

Accounts receivable turnover = =

=

2. average accounts receivable $125,000

365 -- 365 57 days

-=

Collection period =

(b) accounts receivable turnover 6.4

cost of goods sold -

(4 9.47 times

--=

Inventory turnover = $4507000

average inventory $47,500

365 - 365 38.5 days

--=

Age of inventory =

inventory turnover 9.47

The operating cycle is:

(e)

57.0 days

Collection period

-days

38.5

Age of inventory

-days

95.5

Operating cycle

II Not

uperarln

Purchased land X

Sold corporate plant X

Declared a stock dividend X

Appropriated retained

earnings X

Issued common stock X

Payment for material

purchase X

5. The cash collections forecast for December is:

$ 800

October sales ($10,000 X 0.08)

November sales

Discount ($20,000 X 0.70 X 0.98) $13,720

No discount ($20,000 X 0.20) 4.000 17.720

Total cash collections $18,520

157

EXAMINATION I

6. The proposed lockbox arrangement for Wise Corporation is:

cost $115,000

Return on freed cash (0.16 X 2 X $380,000) 121,600

$ 6,600

The lockbox system would save the company $6,000 and should be implemented.

Current average accounts receivable

7.

balance ($30,000,000/6) $5,000,000

Average accounts receivable

balance-after change in policy

($30,0OO,0OO/12) 2,500,000

Reduction in average accounts

receivable $2,500,000

Rate of return X0.15

Dollar return $ 375,000

Cost of discount

(0.25 X $30,000,000X 0.03) $ 225,000

Advantage to discount policy

($375,000 - $225,000) $ 150,000

The discount policy is financially feasible.

9(rounded)

300

-=-=

EOQ 34

31

- = every 3 days (rounded)

(4 9

discount percent 360

4

x -360

=- -= 30.0%

Opportunity cost of not taking discount =

9.

100 - discount percent N 96 50

interest rate X principal

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