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CHAPTER 17 - Answer
CHAPTER 17 - Answer
CHAPTER 17
I. Questions
1. These are firms with relatively long inventory periods and/or relatively
long receivables periods. Thus, such firms tend to keep inventory on
hand, and they allow customers to purchase on credit and take a
relatively long time to pay.
2. These are firms that have a relatively long time between the time
purchased inventory is paid for and the time that inventory is sold and
payment received. Thus, these are firms that have relatively short
payables periods and/or relatively long receivable cycles.
3. Carrying costs will decrease because they are not holding goods in
inventory. Shortage costs will probably increase depending on how close
the suppliers are and how well they can estimate need. The operating
cycle will decrease because the inventory period is decreased.
4. Since the cash cycle equals the operating cycle minus the accounts
payable period, it is not possible for the cash cycle to be longer than the
operating cycle if the accounts payable period is positive. Moreover, it is
unlikely that the accounts payable period would ever be negative since
that implies the firm pays its bills before they are incurred.
1. C 6. A 11. C
2. C 7. B 12. B
3. B 8. D 13. D
4. C 9. C 14. B
5. D 10. B
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Chapter 17 Addressing Working Capital Policies and Management
III. Problems
The total liabilities and equity of the company are the net book worth, or
market value of equity, plus current liabilities and long-term debt, so:
This is also equal to the total assets of the company. Since total assets are the
sum of all assets, and cash is an asset, the cash account must be equal to total
assets minus all other assets, so:
We can find total current assets by using the NWC equation. NWC is equal
to:
NWC = CA CL
4,140 = CA 1,450
CA = 5,590
d. No change. The accounts payable period is part of the cash cycle, not
the operating cycle.
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Addressing Working Capital Policies and Management Chapter 17
a. Increase; Increase. If the terms of the cash discount are made less
favorable to customers, the accounts receivable period will lengthen.
This will increase both the cash cycle and the operating cycle.
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Chapter 17 Addressing Working Capital Policies and Management
We first need the turnover ratios. Note that we use the average values for all
balance sheet items and that we base the inventory and payables turnover
measures on cost of goods sold:
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Addressing Working Capital Policies and Management Chapter 17
c. The net working capital and current ratios for each strategy are shown
below:
Strategies
Current Assets as a Percent of Sales
30% 50% 70%
Current assets (CA) 300,000 500,000 700,000
Fixed assets 600,000 600,000 600,000
Total assets 900,000 1,100,000 1,300,000
*Assume that all current liabilities are in the form of short-term debt.
Strategies
Current Assets as a Percent of Sales
30% 50% 70%
Net sales 1,000,000 1,000,000 1,000,000
EBIT (18% of sales) 180,000 180,000 180,000
Interest expense
Short-term debt (10%) 18,000 20,000 26,000
Long-term debt (15%) 40,500 49,500 58,500
Earnings before taxes (EBT) 121,500 110,500 95,500
Income taxes (34%) 41,310 37,570 32,470
Net income 80,190 72,930 63,030
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Chapter 17 Addressing Working Capital Policies and Management
g. The return on equity, net working capital and current ratio for each
strategy are shown below:
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