Reference no: EM132954635

Questions -

Q1. What are the trade-offs involved in the decision of how much inventory the firm should carry? In what way does the cash manager face a similar trade-off?

Q2. Company X sells on a 1/30, net 60 basis. Customer Y buys goods invoiced at $ 1,000.

a. How much can Y deduct from the bill if Y pays on day 30?

b. What is the effective annual rate of interest if Y pays on the due date rather than on day 30?

Q3. How would you expect payment terms to change if:

a. The goods are perishable.

b. The goods are not rapidly resold.

c. The goods are sold to high-risk firms.

Q4. The lag between the purchase date and the date on which payment is due is known as the terms lag. The lag between the due date and the date on which the buyer actually pays is the due lag, and the lag between the purchase and actual payment dates is the pay lag. Thus,

Pay lag = terms lag + due lag

State how you would expect the following events to affect each type of lag:

b. The company imposes a service charge on late payers.

c. A recession causes customers to be short of cash.

d. The company changes its terms from net 10 to net 20.

Q5. The Branding Iron Company sells its irons for $ 50 apiece wholesale. The production cost is $ 40 per iron. There is a 25% chance that wholesaler Q will go bankrupt within the next year. Q orders 1,000 irons and asks for six months' credit.

Should you accept the order?

Assume that the discount rate is 10% per year, there is no chance of a repeat order, and Q will pay either in full or not at all.

Q6. As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4%.

If the cost of goods sold is 80% of the selling price, should Mr. Procrustes adopt the more stringent policy?

Q7. Axle Chemical Corporation's treasurer has forecasted a $ 1 million cash deficit for the next quarter. However, there is only a 50% chance this deficit will actually occur. The treasurer estimates that there is a 20% probability the company will have no deficit at all and a 30% probability that it will actually need $ 2 million in short-term financing. The company can either take out a 90-day unsecured loan for $ 2 million at 1% per month or establish a line of credit, costing 1% per month on the amount borrowed plus a commitment fee of $ 20,000.

If excess cash can be reinvested at 9%, which source of financing gives the lower expected cost?