Working Capital

Finance
1. Luke Company has an inventory conversion
period of 60 days, a receivables conversion
period of 45 days, and a payments cycle of 30
days. What is the length of the firm’s cash
conversion cycle?
A. 90 days C. 54 days
B. 75 days D. 105 days
 Cash Conversion Cycle
• Measures how long a firm will be deprived of
cash if it increases its investment in inventory.
• CCC=Days sales outstanding PLUS days sales of
inventory outstanding MINUS Days of
payables outstanding;
– where DSO plus DIO=Operating cycle
2. Simile Inc. has a total annual cash requirement of
P9,075,000 which are to be paid uniformly.
Simile has the opportunity to invest the money
at 24% per annum. The company spends, on the
average, P40 for every cash conversion to
marketable securities.
What is the optimal cash conversion size?
A.P60,000C. P45,000
B.P55,000D. P72,500
3. Hyperbole Corporation estimates its total annual cash
disbursements of P3,251,250 which are to be paid
uniformly. Hyperbole has the opportunity to invest the
money at 9% per annum. The company spends, on the
average, P25 for every cash conversion to marketable
securities and vice versa.
What is the opportunity cost of keeping cash in the
bank account?
A.P3,825.00 C. P4,190.00
B.P1,912.50 D. P 188.55
4. What are the expected annual savings from a
lock-box system that collects 150 checks per
day averaging P500 each, and reduces mailing
and processing times by 2.5 and 1.5 days
respectively, if the annual interest rate is 7%?
A.P 5,250 C. P 21,000
B.P 13,125 D. P300,000
 LOCK-BOX SYSTEM
A lockbox is a bank-operated mailing address to
which a company directs its customers to send
their payments. The bank opens the incoming
mail, deposits all received funds in the
company's bank account, and scans the
payments and any remittance information.
Lockbox banking is a service provided by banks
to companies for the receipt of payment from
customers.
5. The Camp Company has an inventory conversion period
of 60 days, a receivable conversion period of 30 days,
and a payable payment period of 45 days. The Camp’s
variable cost ratio is 60 percent and annual fixed costs of
P600,000. The current cost of capital for Camp is 12%.
If Camp’s annual sales are P3,375,000 and all sales are
on credit, what is the firm’s carrying cost on accounts
receivable, using 360 days year?
A.P281,250 C. P 20,250
B.P168,750 D. P 56,250
• 6. Palm Company’s budgeted sales for the coming year
are P40,500,000 of which 80% are expected to be credit
sales at terms of n/30. Palm estimates that a proposed
relaxation of credit standards will increase credit sales by
20% and increase the average collection period from 30
days to 40 days. Based on a 360-day year, the proposed
relaxation of credit to standards will result in an expected
increase in the average accounts receivable balance of
A.P 540,000C. P2,700,000
B.P 900,000D. P1,620,000
 Nos. 7 to 9
Sonata Company is considering changing its credit terms from 2/15,
net 30 to 3/10, net 30 in order to speed collections. At present, 40
percent of Sonata Company‘s customers take the 2 percent
discount. Under the new term, discount customers are expected to
rise to 50 percent. Regardless of the credit terms, half of the
customers who do not take the discount are expected to pay on
time, whereas the remainder will pay 10 days late. The change
does not involve a relaxation of credit standards; therefore bad
debt losses are not expected to rise above their present 2 percent
level. However, the more generous cash discount terms are
expected to increase sales from P2 million to P2.6 million per year.
Sonata Company’s variable cost ratio is 75 percent, the interest rate
on funds invested in accounts receivable is 9 percent, and the firm’s
income tax rate is 40 percent.
7. What are the days sales outstanding
(DSO) before and after the change of
credit policy?
A. 27.0 days and 22.5 days, respectively
B. 22.5 days and 27.0 days, respectively
C. 22.5 days and 21.5 days, respectively
D. 21.5 days and 22.5 days respectively
8. The incremental carrying cost on
receivable is
A. P 843.75 C. P 643.75
B. P8,889.00 D.P6,667.00
 
9. The incremental after tax profit from
the change in credit terms is
A. P68,493 C. P60,615
B. P65,640 D.P57,615
10. What is the economic order quantity
for the following inventory policy: A firm
sells 32,000 bags of premium sugar per
year. The cost per order is P200 and the
firm experiences a carrying cost of P0.80
per bag.
A. 2,000 bags C. 8,000 bags
B. 4,000 bags D. 16,000 bags
 Economic Order Quantity
The Economic Order Quantity (EOQ) is the number
of units that a company should add to inventory
with each order to minimize the total costs of
inventory—such as holding costs, order costs,
and shortage costs. The EOQ is used as part of a
continuous review inventory system in which
the level of inventory is monitored at all times
and a fixed quantity is ordered each time the
inventory level reaches a specific reorder point. 
 EOQ
• Appropriate reorder point and
• the optimal reorder quantity

• Reorder Point = (Average Daily Usage

x Average Lead Time in Days) + Safety
Stock
11. For Raw Material L12, a company
maintains a safety stock of 5,000 pounds.
Its average inventory (taking into account
the safety stock) is 12,000 pounds. What
is the apparent order quantity?
A. 18,000 lbs. C. 14,000 lbs.
B. 6,000 lbs. D. 24,000 lbs
 Optimal Safety Stock

• The optimal safety stock level

represents the level that gives the
lowest sum of stock out costs and
additional carrying costs.
13. Diesel Fashion estimates that 90,000 zippers will be
needed in the manufacture of high selling products for the
coming year. Its supplier quoted a price of P25 per zipper.
Diesel planned to purchase 7,500 units per month but its
supplier could not guarantee this delivery schedule. In
order to ensure availability of these zippers, Diesel is
considering the purchase of all these 90,000 units on
January 1. Assuming Diesel can invest cash at 12%, the
company’s opportunity cost of purchasing the 90,000 units
at the beginning of the year is
A.P127,500 C. P123,750
B.P135,000 D. P264,000
14. If a firm is given a trade credit terms of
2/10, net 30, then the cost to the firm
failing to take the discount is:
A. 2.0%. C. 36.7%
B. 30.0%. D. 10.0%.
15. The cost of discounts missed on
credit terms of 2/10, n/60 is
A. 2.0 percent C. 12.4 percent
B. 14.9 percent D.21.2 percent
16. You plan to borrow P10,000 from your bank,
which offers to lend you the money at a 10
percent nominal, or stated, rate on a one-year
loan. What is the effective interest rate if the
loan is a discount loan?
A.10.00% C. 12.45%
B.11.11% D. 14.56%
17. What is the effective rate of a 15%
discounted loan for 90 days, P200,000,
with 10% compensating balance?
Assume 360 days per year.
A. 20.0% C. 17.4%
B. 15.0% D. 22.2%
18. The Premiere Company obtained a short-term bank
loan for P1,000,000 at an annual interest rate 12%.
As a condition of the loan, Premiere is required to
maintain a compensating balance of P300,000 in its
checking account. The checking account earns
interest at an annual rate of 3%. Premiere would
otherwise maintain only P100,000 in its checking
account for transactional purposes. Premiere’s
effective interest costs of the loan is
A.12.00% C. 16.30%
B.14.25% D. 15.86%
19.An invoice of a P100,000 purchase has
credit terms of 1/10, n/40. A bank loan
for 8 percent can be arranged at any
time. When should the customer pay the
invoice?
A.Pay on the 1st. C.Pay on the 40th
B.Pay on the 10th D.Pay on the 60th
20.The Peninsula Commercial Bank and Island
Corporation agreed to the following loan proposal:
Stated interest rate of 10% on a one-year discounted
loan; and 15% of the loan as compensating balance
on zero-interest current account to be maintained by
Island Corporation with Peninsula Commercial Bank.
The loan requires a net proceeds of P1.5 million. What
is the principal amount of loan applied for as part of
the loan agreement?
A. P1,666,667 C. P1,764,706
B. P2,000,000 D. P1,125,000