Question [1]. Jarrett Ente

29 Jun Question [1]. Jarrett Ente

Question
[1]. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

a. 0.0%

b. 6.2%

c. 5.4%

d. 1.6%

e. 3.8%

[2]. On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?

a. 365.0 days

b. 182.5 days

c. 30.3 days

d. 15.2 days

e. 10.5 days

[3]. Biondi Manufacturing Company (BMC) has an average accounts receivable balance of $1,250,000, an average inventory balance of $1,750,000, and an average accounts payable balance of $800,000. Its annual sales are $12,000,000 and its cost of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year. What is BMC’s cash conversion cycle?

a. 84.15 days

b. 53.23 days

c. 72.28 days

d. 100.55 days

e. 60.83 days

[4]. Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.

a. +105 days

b. -105 days

c. +27 days

d. -27 days

e. -3 days

[5]. You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is your estimate of the firm’s current cash conversion cycle?

· Current inventory = $120,000.

· Annual sales = $600,000.

· Accounts receivable = $157,808.

· Accounts payable = $25,000.

· Total annual purchases = $365,000.

· Purchases credit terms: net 30 days.

· Receivables credit terms: net 50 days.

a. 49 days

b. 193 days

c. 100 days

d. 168 days

e. 144 days

[6]. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day basis). On average, the company has $12,000,000 in inventory and $8,000,000 in accounts receivable. The company is looking for ways to shorten its cash conversion cycle, which is calculated on a 365-day basis. Its CFO has proposed new policies that would result in a 20 percent reduction in both average inventories and accounts receivables. The company anticipates that these policies will also reduce sales by 10 percent. Accounts payable will remain unchanged. What effect would these policies have on the company’s cash conversion cycle?

a. -40 days

b. -22 days

c. -13 days

d. +22 days

e. +40 days

ANSWER: E
[7]. Gaston Piston Corp. has annual sales of $50,735,000 and maintains an average inventory level of $15,012,000. The average accounts receivable balance outstanding is $10,008,000. The company makes all purchases on credit and has always paid on the 30th day. The company is now going to take full advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels but inventory can be lowered by $1,946,000 and accounts receivable lowered by $1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days in the year.)

a. -14.0 days

b. -18.8 days

c. -28.0 days