1. What are the company’s inventory period, receivables period, and payables period? (Round all periods to nearest integer.)
2. What are the company’s operating and cash cycles?
3. How do the company’s operating and cash cycles compare to the industry average of 30 and 20 days, respectively?
4. If the company’s customers’ ...
1.What are the company’s inventory period, receivables period, and payables period? (Round all periods to nearest integer.)
2.What are the company’s operating and cash cycles?
3.How do the company’s operating and cash cycles compare to the industry average of 30 and 20 days, respectively?
4.If the company’s customers’ average cash cycle and operating cycle are 30 and 40 days, respectively, what can we say about the company’s credit management policy of net 30?
5.What is the company’s average daily collection float? Their average daily disbursement float? (Note #1: Use average mail float to calculate collection delay. Note #2: Use average daily cost of goods sold to calculate average daily disbursement float, and use average daily credit sales to calculate average daily collection float.)
6.What is their net float?
7.What is the effective annual interest rate on the company’s line of credit? What is the company’s annual short-term interest expense based on this effective annual rate?
8.What will be the net float if they take up the Bank of Mount Royal’s offer for same-day deposit of their cheques?
9.What amount of additional cash will be made available if they take up the Bank of Mount Royal’s offer for same-day deposit of their cheques? (Assume that on average, sales will remain at $3,500,000 each year.)
10.How much does the company have to borrow from its bank to cover net float if they take up the same-day deposit offer?
11.Should the partners accept the same-day deposit offer from its bank?
1.Cash management case
Ms. Amanda Truly is the new chief financial officer of Mind and Body, Inc., which produces popular yoga and Pilates videos. Ms. Truly is concerned about cash flow management at the company and would like to get a better "feel" for the way cash flows are managed at Mind and Body, Inc. The CEO of the company, Mr. Lawrence Jackson, is worried about the state of the company’s cash situation. Even though the company has produced positive net income consistently, the level of its short-term borrowing is worrying. Mr. Jackson would like Ms. Truly to construct a cash budget for next year so that they can devise a short-term financial policy that would best suit the company’s cash flows.
To accomplish this task, Mr. Jackson has provided Ms. Truly with the following disparate information, as well as the company’s most recent Income Statement, Balance Sheet, and Cash Budget:
Purchases from suppliers = 70% of predicted sales for next month
Accounts Payable Period = 30 days
Wages and other expenses = 20% of predicted sales
Capital Expenditures in the form of a computer system purchase = $500,000 in June
Long-term debt Interest expense = $50,000
Dividends = $30,000 per quarter
Minimum cash balance = $200,000
Short-term cost of borrowing = 13% APR compounded monthly
Long-term cost of borrowing = 10% APR compounded monthly
Income taxes from last year’s income will be paid monthly in this year
Interest expense on accumulated short-term expense must be paid in the following month
50% of customers pay in the month of sales, 30% pay in the month after sales, and the rest pay two months after sales. Bad debt is estimated to be 2% if the customers have not made payment after 60 days.
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