Name: Mampusti, Valeria M.

Date: April 21, 2021

Course & Section: BSA-204A Professor: Romel R. Cayabyab, CPA
JOSE RIZAL UNIVERSITY
Financial Management
Working Capital Problems: Please answer the following problems.

1. Optimal Cash Transfer (or Optimal Cash Balance)

Antok Corporation has gathered the following data from its Treasury Department at
the end of 2014:

Annual cash need in 2014 P54 million

Cost per transaction P800
ROI on marketable securities 6%

Required:
A. Optimal Cash Balance / Transfer

=
√2 x annual cash x cost per transaction
carrying cost rate
2 x 54,000,000 x 800
= √
6%
√ 86,400,000,000
=
6%
= P1,200,000

B. The Average Cash Transfer

Optimal Cash Balance

=
2
1,200,000
=
2
= P 600,000

C. Total Cash Costs

At the optimal cash balance

Transfer
Transaction Cost (P54,000/ 1,200,000) x 800 36,000
Opportunity Cost (P1,200,000 / 2) x 6% 36,000
Total Cash Costs P72,000
 P2,000,000 denominated cash transfer
Optimal cash balance / transfer: 2,000,000
Transaction cost 21,600
Opportunity cost 60,000
Total Cash Costs P81,600

P200,000 denominated cash transfer

Transaction Costs
(P54,000,000 / 200,000) * P800 216,000
Opportunity cost
(P200,000 / 2) * 6% 6,000
Total Cash Costs P222,000

2. Cash float

A. Maximizing deposit float

Options Corporation has an average daily collection of P20 million. The
company is considering to accelerate its collections by 3 days by spending an
annual amount of P24,000 in a new system. The effective interest rate of
marketable securities is 8%. How much would the company benefit from
accelerating the collections?

Saving on daily collection

P 20,000,000 x 3 x 8% P4,800,000
Less: Expenditure (24,000)
Net Savings P4, 776,000

B. Optimizing payment float

Songbird and Chirp Company is considering the option of stretching its payment
period to suppliers by issuing checks on every Friday of the month instead of its
current practice of issuing checks twice a week. This option would delay
payment by 3 days on the average. The company average daily payment is
P400,000 and the prevailing benchmark rate of the 90-day T-Bills is 8%. How
much is the net benefit the company may generate from the alternative?

Company’s Float P1,200,000

P 400,000 x 3
Saving of Interest on above X 8%
P1,200,000 x
Net Savings P96,000
3. Annual effective interest rate
Francia Inc., is shopping for a P80 million financing to support its working capital
requirements. The following data were gathered from several local banks with
respect to interest terms, compensating balances, and other matters:

Bank 1 Bank 2 Bank 3 Bank 4 BB Bank 5

Nominal interest 12%, 14%, not 15%, not 16%, 14.5%,
rate discounted discounted discounted discounted discounted
Interest payment Annually Annually Annually Annually Annually
Compensating 1% 0.5% 5% None 1.5%
Balance
Present none none P1.2million P2 million P1.2 million
compensating
balance
Interest income on
incremental 7% none 5% none none
compensating
balance
Net interest 9,600,000 11,200,000 11,860,000 12,800,000 11,600,000
expense
Net proceeds 80,000,000 80,000,000 77,200,000 80,000,000 80,000,000

Annual effective 12% 14% 15.36% 16% 14.5%

interest rate

Compounded 12% 14% 15.36% 16% 14.5%

annual EIR

Required:
a. Complete the table above and determine the effective interest rates for each of
the lending banks. Which bank offers the most economical interest costs? Bank 1
= 12%

What is Bank 1’s effective interest rate if the interest payment is made on a
monthly basis?

EIR (80,000,000 x 1%) 800,000

80,000,000 – 800,000 79,200,000

80,000,000 x 12% 9,600,000

LESS: 800,000 x 7% (56,000)
Net Interest Expense 9,544,000

EIR (9,544,000 / 79,200,000) 12.0505%

/ 12
PEIR 1.0042%
Effective interest rate [(1 + 0.01004) ^12 – 1] 12.7389%
BANK 1

EIR (80,000,000 x 1%) P800,000

80,000,000 – 800,000 79,200,000

Net Interest Expense (80,000,000 x 12%) 9,600,000

EIR (9,600,000 / 80,000,000) 12%

CAEIR [(1 + 0.12) ^1 – 1] 12%

BANK 2

EIR (80,000,000 x 5%) 400,000

Net Interest Expense (80,000,000 x 14%) 11,200,000

EIR (11,200,000 / 80,000,000) 14%

CAEIR [(1 + .14) ^1 – 1] 14%

BANK 3

Compensating Balance (80,000,000 x 5%) P4,000,000

Less: Present Compensating Balance (1,200,000)
Excess 2,800,000
Net Proceeds (80,000,000 – 2,800,000) 77,200,000

EIR (80,000,000 x 15%) 12,000,000

Less: (2,800,000 x 5%) (140,000)
Net Interest Expense (80,000,000 x 14%) 11,860,000

EIR (11,860,000 / 77,200,000) 15.36%

CAEIR [(1 + .1536) ^1 – 1] 15.36%

BANK 4

EIR (80,000,000 x 16%) 12,800,000

Net Interest Expense 80,000

EIR (12,800,000 / 80,000,000) 16%

CAEIR [(1 + .16) ^1 – 1] 16%

BANK 5
 Compensating Balance (80,000,000 x 1.5%) 1,200,000
Net Interest Expense (80,000,000 x 14.5%) 11,600,000

EIR (11,600,000 / 80,000,000) 14.5%

CAEIR [(1 + .145) ^1 – 1] 14.5%

4. Change in credit policy.

Black Eye Peas Corporation, which has idle capacity, provides the following data:
Selling price per unit P80
Variable cost per unit P50
Fixed cost per unit P10
Annual credit sales 300,000 units
Collection period 60 days
Rate of return 16%
Bad debts losses 1%
Tax rate 40%

Black Eyes Peas is considering a change in credit policy that would relax its credit
standards. The following information applies to the proposal:
a. Sales will increase by 20%.
b. Collection period will increase to 90 days.
c. Bad debts losses will increase to 2% of sales.
d. Collections costs are expected to increase by P200,000.
e. The company uses the 360-day year factor.

Required:

Should the company change its credit policy? Its best of interest for the
Corporation to change their credit policy in order to increase profit by
P451,200.

See computation below:

 BEFORE AFTER CHANGE +
(-)
Net Credit Sales 24,000 28,800 4,800
Collection Period 60 90
Receivable Turnover 6 4
Ave. A/R balance 4,000 7,200 3,200
Bad debts expense 240 576 336
Collection expenses 200

CHANGE + (-)
Contribution Margin P 4,800,000 x 37.5% P1,800,000
Bad Debts (336,000)
Collection Expenses (200,000)
Opportunity Costs P 3,200,000 x 16% (512,000)
PBT 752,000
ATR 60%
Profit P451,200

5. Annual Effective discount rate.

The following suppliers of SSS Corporation provide the following credit terms:

Terms Amount
A Company 2/10, n/30 1,200,000
B Company 3/15. n/45 450,000
C Company 3/25, n/90 900,000

Required:
a. The annual EDR per supplier if the credit is treated as a:
1. Single transaction (e.g., simple EDR)

A Company
PEDR (P 24,000 / 1,176,000) 2.0408%
No. of periods (360 days / 20 days) X 18
SAEDR 36.73%

B Company
PEDR (P 13,500 /436,500) 3.0928%
No. of periods (360 days / 30 days) X 12
SAEDR 37.11%
 C Company
PEDR (P 27,000 /873,000) 3.0928%
No. of periods (360 days / 65 days) X 5.54
SAEDR 17.13%

2. Continuing transaction (e.g., compounded EDR)

A Company
PEDR 2.0408%
No. of periods 18

CAEDR [(1 + 0.020408) ^18 – 1] 43.86%

B Company
PEDR 3.0928%
No. of periods 12

CAEDR [(1 + 0.030928) ^12 – 1] 44.13%

C Company
PEDR 3.0928%
No. of periods 5.54

CAEDR [(1 + 0.030928) ^5.54 – 1] 18.38%

b. The annual weighted average EDR of SSS Corporation.

A Company
Adjusted Net Purchases P23,520,000
(P 1,200,000 x 98% x 20)
WAEDR
(23,520,000 / 93,360,000) 9.25%

B Company
Adjusted Net Purchases
(P450,000x 97% x 30) P13,095,000
WAEDR
(13,095,000 / 93,360,000) 5.21%
 C Company
Adjusted Net Purchases
(P900,000x 97% x 65) P56,745,000
WAEDR
(56,745,000 / 93,360,000) 10.41%

TOTAL
Adjusted Net Purchases P93,360,000

WAEDR 24.87%

6. Fill in the blank. Use the data provided in each case to solve for the unknown. Use
360 days.

Free Non-free No. of Periodic Annual

Cas Credit credit credit periods EDR EDR
e terms days days
A 2/20, 20 20 18 2.0408 36.73
n/40 % %
B 3/20, 20 30 12 3.0925 37.11%
n/50 %
C 4/10, 10 20 18 4.1667 75.00%
n/30 %
E

7. The Electra Car Company purchases 20,000 units of a major component part each
year. The firm’s order costs are P200 per order and the carrying cost per unit is P2 per
year.
a. Compute the total inventory costs associated with placing orders of 20,000,
10,000, 5,000, 1,000.

Total ordering costs Total carrying costs TOTAL SIC

OS No. of CPO Orderin Average CCPU Carryin
orders g Cost Inventor g Cost
y
20,00 1 200 200 10,000 25 250,00 250,200
0 0
10,00 2 200 400 5,000 25 125,00 125,400
0 0
5,000 4 200 800 2,500 25 62,500 63,300

1,000 20 200 4,000 500 25 12,500 16,500

 b. Determine the EOQ for the component parts.
2 ( 20,000 ) (200)
EOQ =
√
EOQ = 2,000
2

8. Ever Company is considering switching from level production to seasonal production in

order to lower very high inventory costs. Average inventory levels would decline by
P300,000 but production costs would rise about P40,000 because of additional start-ups
and other inefficiencies. The firm’s cost of financing inventory balances is 15%.
a. Should the firm switch to seasonal production?

= (300,000 x 15%) – 40,000

= 5,000

Yes, they should switch to the seasonal production since it will yield to a 5,000-
cost savings

b. At what interest rate would the cost of financing additional inventory under level
production be equal to the added production costs of seasonal production?

= 40,000 / 300,000
= 13.33%

c. Answer (A) and (B) if the applicable income tax rate is 40 percent.

= (300,000 x 40%) – 40,000

= 80,000

No, they should not switch to the seasonal production as it results to bigger
expenditures.

= 40,000 / 300,000
= 13.33%