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BBAE CBEB2102 Tutorial Questions for W 12 & W13

1. Bulat Stadium Inc. has annual sales of RM80,000,000 and keeps average inventory of RM20,000,000. On average, the firm has accounts receivable of RM16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firms 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 RM4,000,000 and accounts receivable lowered by RM2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day. 2. 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 firms cash conversion cycle. Current inventory = RM120,000. Annual sales = RM600,000. Accounts receivable = RM157,808. Accounts payable = RM25,000. Total annual purchases = RM365,000. Purchases credit terms: net 30 days. Receivables credit terms: net 50 days.

a. Using the following information and a 365-day year, what is your estimate of the firms current cash conversion cycle? b. Outline some of the actions that Multiplex can take in order to solve its severe cash shortage. c. If sales can be maintained at existing levels but inventory can be lowered by RM50,000 and accounts receivable lowered by RM15,000, what will be the net change in the cash conversion cycle? (Use a 365-day year.)

3. RD Corp requires a RM100,000 annual loan in order to pay his employees. RD borrows on a discount interest basis at a nominal annual rate of 11 percent. If RD must actually receive RM100,000 net proceeds to finance its crop, then what must be the face value of the note?

4. You have just taken out a loan for RM75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. You currently have RM20,000 in your checking account, and you 1

plan to maintain this balance. The loan is an add-on installment loan that you will repay in 12 equal monthly installments, beginning at the end of the first month. a. How large are your monthly payments? b. What is the nominal annual add-on interest rate on this loan? 5. Gifts Galore Inc. borrowed RM1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9 percent a year from 3 months. A 20 percent compensating balance requirement raised the effective interest rate. a. The normal interest rate on the loan was 11.25 percent. What is the true effective rate? b. What would be the effective cost of the loan if the note required discount interest? c. What would be the nominal annual interest rate on the loan if National City Bank required Gifts Galore to repay the loan and interest in 3 equal monthly instalments?