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Van Den Borsh Corp. has annual sales of $50,735,000 an average inventory level of $15,012,000 and average accounts receivable of $10,008,000. The...
""2. Van Den Borsh Corp. has annual sales of $50,735,000 an average inventory level of $15,012,000 and average accounts receivable of $10,008,000. The firm’s cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?3. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts and it typically pays on time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much “free” trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)4. Ingram Office Supplies, Inc. buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit-free credit) the firm receives during the year? (Assume a 365-day year and note that purchases are net of discounts.)5. Affleck Inc.’s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20 and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm’s owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)6. Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of .5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above the prime for the funds actually borrowed on a simple interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?7. Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; its target capital structure class for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10% and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROE’s between the restricted and relaxed policies?
