首 页 课程负责人情况 教师队伍 课程描述 教学效果 教学录像 网络教学 第二课堂 在线测试 师生互动 申请书
  教学大纲
  电子教案
  样 卷
  作 业
  习题集
  参考书目
  教学案例
 
 
Chapter 7

Questions and Problems

Discussion Questions

7-1.

In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

 

 

7-2.

Briefly explain how a corporation may use float to its advantage. 

 

 

7-3.

Why does float exist and what effect do electronic funds transfer systems have on float?

 

 

7-4.

How can a firm operate with a negative cash balance on its corporate books? 

 

7-5.

Explain the similarities and differences of lockbox systems and regional collection offices.

 

 

7-6.

Why would a financial manager want to slow down disbursements? 

 

 

7-7.

Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-3. Which security would you choose for a short-term investment? Why?

 

 

7-8.

Why are Treasury bills a favorite place for financial managers to invest excess cash? 

 

 

7-9.

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration? 

 

 

7-10.

What are three quantitative measures that can be applied to the collection policy of the firm? 

 

 

7-11.

What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid? 

 

 

7-12.

What does the EOQ formula tell us? What assumption is made about the usage rate for inventory? 

 

 

7-13.

Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

 

 

7-14.

If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers? 


Problems

7-1.

Porky's Sausage Co. shows the following values on its corporate books. 

 

Corporate Books 

 

Initial amount

$10,000

 

Deposits

+80,000

 

Checks

50,000

 

Balance

$40,000

 

The initial amount on the bank's books is also $10,000. However, only $70,000 in deposits have been recorded and only $25,000 in checks have cleared. Fill in the table below and indicate the amount of float. 

 

Banks Books 

 

Initial amount

$10,000

 

Deposits

 

 

Checks

_______

 

Balance

 

 

Float 

 

 

7-2.

Oscar's checkbook shows a balance of $600. A recent statement from the bank (received last week) shows that all checks written as of the date of the statement have been paid except numbers 423 and 424, which were for $62and $40, respectively. Since the statement date, checks 425, 426, and 427 have been written for $32, $70, and $44, respectively. 

There is a 75 percent probability that checks 423 and 424 have been paid by this time. There is a 40 percent probability that checks 424, 426, and 427 have been paid. 

a.   What is the total value of the five checks outstanding?

b.   What is the expected value of payments for the five checks outstanding?

c.   What is the difference between parts a and b? This represents a type of float. 

 

7-3.

Beth's Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursements time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6 percent per annum.

a.   If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

b.   How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash? 

 

7-4.

Neon Lights Company of Kansas City shops lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by 1.5 days. Furthermore, the cash management of her bank has indicated to her that she can defer her payments on her accounts by ? a day without offending suppliers. The bank has a remote disbursement center in Florida. 

a.   If Neon Light Company has $2 million per day in collections and $1 million per day in disbursements, how many dollars will the cash management system free up?

b.   If Neon Light Company can earn 9 percent per annum on freed up funds, how much will the income be?

c.   If the total cost of the new system is $375,000, should it be implemented? 

 

7-5.

Sanders' Prime Time Lighting Co. has annual credit sales of $1,800,000 and accounts receivable of $210,000. Compute the value of the average collection period. 

 

 

7-6.

Barney's Antique Shop has annual credit sales of $1,080,000 and an average collection period of 40 days in 1996. Assume a 360-day year. 

What is the company's average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period. 

 

7-7.

In Problem 6, if accounts receivable change in 2001 to $140,000, while credit sales are $1,440,000, should we assume the firm has a more or a less lenient credit policy? Hint: Recompute the average collection period. 

 

7-8.

Mervyn's Fine Fashions has an average collection period of 40 days. The accounts receivable balance is $80,000. What is the value of its credit sales? 

 

 

7-9.

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

Age of Receivables, April 30, 2001 

 

(1)

Month
of Sales

 

(2)

Age of

Account

(3)

 

Amounts

(4)

Percent of Amount Due

 

April

0-30

$105,000

________

 

March

31-60

60,000

________

 

February

61-90

90,000

________

 

January

91-120

  45,000

________

 

     Total receivables 

$300,000

100%

 

a.   Fill in column (4) for each month.

b.   If the firm had $1,440,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period. 

c.   If the firm likes to see its bills collection in 30 days, should it be satisfied with the average collection period?

d.   Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

e.   What additional information does the aging schedule bring to the company that the average collection period may not show? 

 

 

7-10.

Midwest Tires has expected sales of 12,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per tire.

a.   What is the economic ordering quantity?

b.   How many orders will be placed during the year?

c.   What will the average inventory be? 

 

7-11.

Fisk Corporation is trying to improve its inventory control system and has installed an on-line computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of $8 per order, and carrying costs of $12.0 per unit. 

a.   What is the economic ordering quantity?

b.   How many orders will be placed during the year?

c.   What will the average inventory be?

d.   What is the total cost of ordering and carrying inventory? 

 

7-12.

(See Problem 11 for basic data.) In the second year, Fisk Corporation finds that it can reduce ordering costs to $2 per order but that carrying costs stay the same at $1.20. Also, volume remains at 75,000 units. 

a.   Recompute a, b, c, and d in Problem 9 for the second year.

b.   Now compare years one and two and explain what happened. 

 

7-13.

Diagnostic Supplies has expected sales of 135,000 units per year, a carrying cost of $3 per unit, and an ordering cost of $4 per order. 

a.   What is the economic order quantity?

b.   What is average inventory? What is the total carrying cost?

c.   Assume an additional 80 units of inventory will be required as safety stock. What will the new average inventory be? What will the new total carrying cost be? 

 

7-14.

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $30,000, but inventory costs would increase by $250,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent. 

a.   Should the company go ahead and switch to level production?

b.   How low would interest rates need to fall before level production would be feasible? 

 

7-15.

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 40 percent tax bracket. 

a.   Compute the incremental income after taxes.

b.   What will Johnson's incremental return on sales be if these new credit customers are accepted?

c.   If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be? 

 

 

7-16.

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 8 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales; production and selling costs are 78 percent; and accounts receivable turnover is five times. Assume income taxes of 30 percent and an increase in sales of $60,000. No other asset buildup will be required to service the new accounts. 

a.   What is the level of accounts receivable to support this sales expansion?

b.   What would be Henderson's incremental aftertax return on investment?

c.   Should Henderson liberalize credit if a 15 percent aftertax return on investment is required? 

Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is four times. 

d.   What would be the total incremental investment in accounts receivable and inventory to support a $60,000 increase in sales?

e.   Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms? 

 

7-17.

Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $15,700 in additional collection expense. Production and marketing costs represent 70 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of 5 times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return. 

a.   Should Comiskey Fence Co. extend credit to these customers?

b.   Should credit be extended if 15 percent of the new sales prove uncollectible?

c.   Should credit be extended if the receivables turnover drops to 1.5, and 12 percent of the accounts are uncollectible (as in part a)? 

  

7-18.

Reconsider problem 17. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended? 

 

 

(Problems 19-22 are a series and should be taken in order.) 

7-19.

Dome Metals has credit sales of $144,000 yearly with credit terms of net 30 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 30 days to pay. 

What is the average receivables balance? Receivables turnover? 

 

 

7-20.

If Dome offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $144,000 for your calculation of receivables. 

 

7-21.

If Dome reduces its bank loans, which cost 10 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm (don't forget the 2 percent discount)? Should it offer the discount? 

 

7-22.

Assume that the new trade terms of 2/10, net 30 will increase sales by 15 percent because the discount makes Dome's price competitive. If Dome earns 20 percent on sales before discounts, should it offer the discount? (Consider the same variables as you did for problems 17 through 19 as well as increased sales.)